VietNamNet Bridge – Every
time when the consumer price index CPI increased, policy makers hastily
concluded this was the high inflation and hurriedly tightened the monetary
policies and raised interest rates. However, this is not the right move,
according to Bui Kien Thanh, a well known economist in Vietnam.

VietNamNet’s
Vietnam Economic Forum would like to introduce the opinions of the economist
Bui Kien Thanh which he shared at the workshop discussing the financial risks
and opportunities in 2011.

The
first reaction of the policy makers when they see the CPI increasing is to
tighten the monetary policy and raise the interest rates. However, the high CPI
does not always mean high inflation.

The
CPI represents a “basket” of consumer goods, of which cooking products account for
39 percent. Every month, the General Statistics Office, after considering the
changes of the prices of the goods in the “basket” calculates an average index.

In
fact, whether the CPI increases or decreases depends on many other factors
apart fromthe monetary policies, for example, the exchange rate policy, fiscal
policy, the public investment and the decision by the Government on
electricity, coal and petroleum pricing. Besides, the speculation, “underground
fees”, corruption, and ineffective public investment also can put pressure on
the prices.

Therefore,
it is unreasonable to start panicing and crying out “inflation!” whenever the
CPI increasing, and then to blaming the inflation on the monetary policies.

In
developed economies, consumer credit accounts for a big proportion of the total
credit. In the US,
for example, consumer credit accounts for 70 percent. In principle, when the
national economy becomes too “hot”, enterprises increase their size too
sharply, which makes raw materials and labor force  scarcer and causes increases in prices,. Then
the State has to tighten the monetary policies and raise interest rates in order
to limit investments and consumption.

In
Vietnam,
the consumer credit is not developed yet, accounting for less than 10 percent
of total credit. Therefore, the high interest rates would not have big
influence on the consumption and prices. High interest rates mostly affect
businesses.

The
question is if Vietnam’s
national economy is too “hot” now, why have the raw materials and labor force
have not become scarce yet?

Official
statistics show that the labor force in Vietnam is superfluous. The
National Assembly has decided that the annual GDP should be 7-8 percent, and
the CPI should be curbed at 7 percent. This means that the national economy
still needs to develop rapidly but in a sustainable way

So,
is it reasonable to tighten monetary policy, if this will cause difficulties
to  businesses’ development?

In
Vietnam,
in the context of the low consumer credit, high interest rates will not help
reduce the consumption, but will push up the production costs.

A
perfect monetary policy is the one which ensures a big enough volume of money
in circulation, to help the national economy develop sustainably.

“We
need to use the interest rates to force the prices down. We do not base the
interest rates on the CPI,” Prime Minister Nguyen Tan Dung stressed at the
Government’s conference on December 30-31, 2010.

Tran Dong