Return of Depression Economics

(ĐTTCO) - Paul Robin Krugman, an American economist who was awarded the Nobel Memorial Prize in Economic Sciences wrote his bestseller “The Return of Depression Economics” in 1999, whose contents served as a precursor to what happened in 2008 when the US economy fell into a severe economic recession and the subsequent domino effect reverberated across all world economies.

Return of Depression Economics

In 2020 the world has come a full cycle in facing a severe spiral down trend in all global economies with the sudden and virulent spread of the Covid-19 pandemic, with all economies worldwide grounded and facing serious threats of total collapse with no cure in sight. Both the International Monetary Fund (IMF) and the World Bank believe that the global economy will move slowly and negatively in 2020, and even worsen by 2021 if the pandemic is not brought under control, for which the discovery of a vaccine is crucial to reach out to billions of people worldwide.

Imminent recession

It is still a bit early and there is not enough data to say whether the Vietnamese economy will fall into a recession, but one thing is for sure that we have never coped with an economic downturn of this magnitude in living history. In other words, policy makers in Vietnam and in the world do not have much experience in dealing with such a severe global economic recession this time around. All patterns of international trade and geographic distribution of economic activity has come crashing down upon us, as explained by Paul Robin Krugman.

For nearly 100 years, and since the Great Depression of the 1930s, we have not seen a recession like this. Supply and demand for diverse goods and services are seeing no balance, many individuals do not have enough income to meet basic needs, all global economies are now so badly affected that they have no way of predicting even a recovery any time soon.

There is a view that Vietnam has good experience in dealing with a global financial crisis as it once faced in 2008, and even succeeded in restoring a momentum in the economy. However, the context at that time was quite a different story, and what we successfully dealt with were internal issues of a macro-economic structure, dealing mainly with finances and the banking sector. Two economic stimulus packages worth more than VND 230,000 bn at that time supported interest rates for businesses, partially rescued the real estate market, supported the stock market and reduced the vulnerability of the banking system. This was followed by a strong restructuring of the banking and financial system, which basically resolved all the fundamental weaknesses in the economy, removed many bottlenecks, and created momentum for later growth.

The situation now cannot be compared to any past experience though. Like in many countries, the Vietnamese economy is facing unknown and unpredictable exogenous shocks, stemming from global economic distancing orders that the IMF calls “The Great Lockdown”. Therefore, if we want to prevent an economic downturn this time, the solutions must be phenomenally breakthrough. Historical experience has shown that traditional policies do not work as expected.

As trade and consumption are unlikely to provide a breakthrough, although atleast not for a long time, exports will continue to face many difficulties due to the spread of the disease, currently impacting all world markets, which include important trade partners of Vietnam.

Consumption will find it difficult to recover because the demand for our domestic goods is not large enough to compensate for the loss from exports, which is now reducing day by day to nil. Efforts to stimulate domestic demand, such as by stimulating domestic tourism, is being actively promoted across all localities, but the initial results so far have been quite unsatisfactory. Shopping malls and retail stores are constantly launching promotions, but sparse attendance of customers is evidence that domestic consumption will need a strong thrust to be able to revive the economy.

State initiative 

Therefore, only a fiscal stimulus policy, through promoting public investment at a  scale of upto VND 700,000 bn, which amounts to about USD 30 bn and approximately 10% of Vietnam's GDP, is a promising factor in having a positive effect on aggregate demand, by creating jobs and income for people, output for many industries and thereby stimulating or at least maintaining the growth rate for the coming six months of the year. Moreover, there is also the factor that the Government must take this initiative.

As long as public investment is properly promoted, impact will come soon enough to support the economic recovery momentum. Stimulating economic activities by public investment also has two great advantages, that the pumped money will certainly be spent, and that public assets like bridges and roads will be formed and service the people.

In order to ensure the effectiveness of the fiscal easing policy through public investment, the monetary policy also needs to take appropriate steps to spread credit flow. An important characteristic of our economy is the relatively positive correlation between GDP growth and credit growth. Therefore, when considering the drivers of growth, attention should be paid to this correlation and it is necessary to focus on addressing the bottlenecks of the current credit capital flow in the economy. There is even a humorous view that when the economy is in recession, the appearance of a new asset bubble will be a great opportunity to escape the onslaught of a coming recession.

Asso. Prof. Dr. Nguyen Khac Quoc Bao, Head of UEH Finance Department

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