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Managing Success in Viet Nam: Macroeconomic Consequences of Large Capital Inflows with Limited Policy Tools

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  • Menon, Jayant

    ()
    (Asian Development Bank)

Abstract

Viet Nam has experienced spectacular economic growth over the past decade, in part the result of massive foreign direct investment (FDI) inflows. Although much has been written on the impacts of FDI in developing countries, previous studies have generally ignored macroeconomic consequences in cost-benefit assessments. These macroeconomic aspects can be particularly important in transitional economies like Viet Nam, where some of the tools for macroeconomic stabilization may be blunt or unavailable. First, capital inflow growth needs to be accommodated by real exchange rate appreciation. In dollarized economies like Viet Nam, the nominal exchange rate cannot be relied upon to deliver it, so inflation usually results. In these economies, it is also difficult for the central bank to conduct open market operations to sterilize large capital inflows or mop up excess liquidity. Again, this could feed inflation. The combination of a young and inexperienced banking system and an investment-hungry state-owned enterprises (SOE) sector only exacerbates the situation, and increases the risk of imbalances that could result in crisis.

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Bibliographic Info

Paper provided by Asian Development Bank in its series Working Papers on Regional Economic Integration with number 27.

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Length: 36 pages
Date of creation: 01 Apr 2009
Date of revision:
Handle: RePEc:ris:adbrei:0027

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Keywords: capital inflow; macroeconomic adjustment; FDI; real exchange rate; Viet Nam;

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References

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  1. Nguyen Thanh Xuan & Yuqing Xing, 2008. "Foreign direct investment and exports," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(2), pages 183-197, 04.
  2. Anh Ngoc Nguyen & Nguyen Thang & Le Dang Trung & Ngoc Quang Pham & Chuc Dinh Nguyen & Nhat Duc Nguyen, 2008. "Foreign Direct Investment in Vietnam: Is There Any Evidence Of Technological Spillover Effects," Working Papers 18, Development and Policies Research Center (DEPOCEN), Vietnam.
  3. Menon, Jayant, 1996. "The Degree and Determinants of Exchange Rate Pass-through: Market Structure, Non-tariff Barriers and Multinational Corporations," Economic Journal, Royal Economic Society, vol. 106(435), pages 434-44, March.
  4. Andreas Hauskrecht & Nhan Le, 2005. "Capital Account Liberalization for a Small, Open Economy," Working Papers 2005-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  5. Emmanuel K. K. Lartey, 2008. "Capital Inflows, Resource Reallocation and the Real Exchange Rate," International Finance, Wiley Blackwell, vol. 11(2), pages 131-152, 08.
  6. Premachandra Athukorala & Jayant Menon, 1995. "Developing with Foreign Investment: Malaysia," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 28(1), pages 9-22.
  7. Emmanuel K. K. Lartey, 2008. "Capital Inflows, Dutch Disease Effects, and Monetary Policy in a Small Open Economy," Review of International Economics, Wiley Blackwell, vol. 16(5), pages 971-989, November.
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Cited by:
  1. McKibbin, Warwick J. & Chanthapun, Waranya Pim, 2009. "Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis," Working Papers on Regional Economic Integration 36, Asian Development Bank.
  2. Madhur, Srinivasa & Wignaraja, Ganeshan & Darjes, Peter, 2009. "Roads for Asian Integration: Measuring ADB's Contribution to the Asian Highway Network," Working Papers on Regional Economic Integration 37, Asian Development Bank.
  3. Rigg, Robert & Schou-Zibell, Lotte, 2009. "The Financial Crisis and Money Markets in Emerging Asia," Working Papers on Regional Economic Integration 38, Asian Development Bank.
  4. Mustapha K. Nabli, 2011. "The Great Recession and Developing Countries : Economic Impact and Growth Prospects," World Bank Publications, The World Bank, number 2539.
  5. Schou-Zibell, Lotte & Madhur, Srinivasa, 2010. "Regulatory Reforms for Improving the Business Environment in Selected Asian Economies - How Monitoring and Comparative Benchmarking Can Provide Incentive for Reform," Working Papers on Regional Economic Integration 40, Asian Development Bank.

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