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

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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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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  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.
  2. 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.
  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. 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.
  5. 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.
  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, 08.
  7. 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.
  8. Prema-Chandra Athukorala & Jayant Menon, 1997. "AFTA and the Investment-Trade Nexus in ASEAN," The World Economy, Wiley Blackwell, vol. 20(2), pages 159-174, 03.
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