Analyst’s Pick

Late last week, the General Statistics Office of Việt Nam announced that the country’s Gross Domestic Product (GDP) growth in the first half of the year reached 5.73 per cent.

Given that this is the second highest H1 growth rate since 2011, one would think that it is a good sign for the economy.

However, when compared with the annual growth target of 6.7 per cent, the H1 growth seems to fall far short. It is estimated that our GDP must leapfrog by 7.4 per cent in the second half of the year to meet the ambitious annual growth target.

Historically, Việt Nam has never seen an H2 GDP increase of 7.4 per cent. The growth rate in the first quarter of this year was 5.1 per cent, the lowest in the last three years. It is worth noting that the country also missed the 6.7 per cent growth target last year, reaching only 6.21 per cent.

That this target is taken very seriously is evident from the fact that the Government issued a resolution on the very first day of this year (because the target was approved by the National Assembly late 2016) in which a series of tasks and solutions were mapped out for ministries and agencies to improve their management and deal more effectively with existing problems of the economy.

Never before has GDP growth received so much attention and never before has the Government been so determined and peremptory that it did not lower the target despite several economists’ saying it was not feasible.

As late as June 02, the Prime Minister Nguyễn Xuân Phúc issued Directive No 24/CT-TTg to remind ministries and agencies to focus on taking both short and long-term measures to make the target achievable.

Why is GDP a big deal?

Generally, the GDP is one of the primary indicators used to gauge the health of an economy. It represents the total value of goods and services produced within a country’s borders within a specific period of time – monthly, quarterly or annually. In economics, income, expenditure and production are equal to each other, meaning that one individual’s spending is another’s income.

So a higher GDP shows an increase in production value added and a rise in the income of people, which would translate into higher living standards, because with higher disposable income, people can spend more on quality goods and services like education and healthcare.

For developing and lower-middle-income countries like Việt Nam, a high GDP growth is indispensable for catching up with developed and high-income countries.

Furthermore, GDP growth carries greater import this year because 2017 is an important transitional year in implementing the 2016-2020 socio-economic development plan, which sets average growth for the period at 6.5-7 per cent per year.  A failure to reach this year’s target would put much greater pressure on the remaining years.

In addition, over the past year, the current administration has shown its determination and efforts to build a constructive, trustworthy Government.

Thus, it is understandable that the Government wants its efforts to achieve specific, positive and practical results. Without a doubt, leaders always want to make their mark during their tenure at the helm.

However, GDP is not a target that can be achieved merely on a Government’s aspirations. It depends on business and investment decisions of households and enterprises in both State-owned and private sectors, foreign and domestic. These decisions, in turn, depend on internal and external economic factors that are to some significant extent beyond the State’s control. 

In other words, the Government’s management cannot directly yield an increase in GDP, though it is undeniable that its economic policies have impact on promoting growth.

Not if, but how

With this rationale in mind, there is no point in debating whether or not the year’s target of 6.7 per cent is too high, as it has happened recently. Instead, it is worthwhile discussing how this goal can be achieved.

As mentioned above, the Government has mapped out several short-term solutions. Now, let’s see whether they suit the long-term plans, targets and directions that Việt Nam wants to follow to ensure sustainable, inclusive growth.  

One of the measures is to increase the output of crude oil beyond the plan originally assigned by the Prime Minister. This is expected to be the fastest way to shorten the distance to the 6.7 per cent goal.

The Ministry of Industry and Trade has calculated that if an extra million tonnes of oil were exploited, it would contribute an additional 0.25 percentage points to the GDP growth rate.

However, this measure is inconsistent with a growth model that is less dependent on natural resource exploitation, a long-term plan that the Government wants to realise. 

It also does not create more jobs. It would probably have a negative impact on the environment. Especially important, with the current low global oil prices, selling crude oil abroad would not earn much profit.

The second measure is to boost credit growth. Some studies have suggested that as core inflation is still far below 2 per cent, the Government has more room to increase money supply without causing high inflation. But this would send a wrong message to the market. Loosening monetary policies could trigger macro-economic instability in the future, particularly when bad debt is still a lingering obstacle.

Thirdly, the Government wants to increase the public investment. But this is not an easy assignment because of the budget deficit and high rate of public debt. So it is necessary to have specific plans and studies to choose which area/sector would be prioritised for public investment, given the limited State Budget capacity. More importantly, supervision of public investment projects must be strengthened. Otherwise, the money would be used inefficiently, deepening the budget deficit, causing more wastefulness, and hiking public debt further.

Clearly, short-term administrative interventions, if not carried out thoroughly, might be counter to long-term efforts of the Government to stabilise and restructure the macro-economy, and might end up diminishing stakeholders’ confidence in policy messages.   

Of course, there are some jobs that the Government is doing well to promote growth, like improving the investment environment, encouraging private investment, opening export markets based on free trade agreements.

But focussing too much on short-term targets and taking measures that are inconsistent with long-term goals can hurt market confidence and might make the economy suffer in the long run.

Economist Milton Friedman, who won a Nobel Prize in 1976, famously said: “One of the great mistakes is to judge policies and programmes by their intentions rather than their results.”

The Government should avoid this mistake by focusing on measures to stabilise the macro-economy and to be consistent with long-term goal of more sustainable, inclusive growth, rather than just on yearly GDP figures. — VNS

* Võ Trí Thành is a senior economist at the Central Institute for Economic Management (CIEM) and a member of the National Financial and Monetary Policy Advisory Council. A doctorate holder in economics from the Australian National University, Thành mainly undertakes research and provides consultation on issues related to macroeconomic policies, trade liberalisation and international economic integration. Other areas of interest include institutional reforms and financial systems. He authors Việt Nam News’s new column, “Analyst’s Pick.”