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

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  • Jayant Menon

    (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.

Suggested Citation

  • Jayant Menon, 2009. "Managing Success in Viet Nam: Macroeconomic Consequences of Large Capital Inflows with Limited Policy Tools," Working Papers on Regional Economic Integration 27, Asian Development Bank.
    • Handle: RePEc:ris:adbrei:0027
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    References listed on IDEAS

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    1. Nguyen, Anh Ngoc & Nguyen, Thang & Le, Dang Trung & Pham, Quang Ngoc & Nguyen, Dinh Chuc & Nguyen, Duc Nhat, 2008. "Foreign direct investment in Vietnam: Is there any evidence of technological spillover effects," MPRA Paper 7273, University Library of Munich, Germany.
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    6. Emmanuel K. K. Lartey, 2008. "Capital Inflows, Resource Reallocation and the Real Exchange Rate," International Finance, Wiley Blackwell, vol. 11(2), pages 131-152, August.
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    Cited by:

    1. Robert Rigg & Lotte Schou-Zibell, 2009. "The Financial Crisis and Money Markets in Emerging Asia," Working Papers on Regional Economic Integration 38, Asian Development Bank.
    2. Duc Pham-Hi, 2014. "Shadow banking dynamics and learning behaviour," EcoMod2014 6920, EcoMod.
    3. Mustapha K. Nabli, 2011. "The Great Recession and Developing Countries : Economic Impact and Growth Prospects," World Bank Publications - Books, The World Bank Group, number 2539, April.
    4. Mai, Nhat Chi, 2016. "Monetary policies and the macroeconomic performance of Vietnam," OSF Preprints akzy4, Center for Open Science.
    5. Warwick J. McKibbin & Waranya Pim Chanthapun, 2009. "Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis," Working Papers on Regional Economic Integration 36, Asian Development Bank.
    6. Jayant Menon, 2021. "ASEAN’s newer member countries in two financial crises: Impact, response and lessons," Departmental Working Papers 2021-27, The Australian National University, Arndt-Corden Department of Economics.
    7. Lotte Schou-Zibell & Srinivasa Madhur, 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.
    8. Md Gyasuddin Ansari & Rudra Sensarma, 2022. "What Explains Excess Liquidity of Banks? Empirical Evidence from India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 21(4), pages 477-503, December.
    9. Srinivasa Madhur & Ganeshan Wignaraja & Peter Darjes, 2009. "Roads for Asian Integration: Measuring ADB's Contribution to the Asian Highway Network," Working Papers on Regional Economic Integration 37, Asian Development Bank.

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    More about this item

    Keywords

    capital inflow; macroeconomic adjustment; FDI; real exchange rate; Viet Nam;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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