April 29, 2020

Dr. Vu Thanh Tu Anh: Trade-offs in the fight against the COVID-19 pandemic

April 29, 2020

More than 500 viewers participated to the virtual policy webinar by Dr. Vu Thanh Tu Anh, Dean of Fulbright School of Public Policy and Management discussing “Government responses to the Covid-19 pandemic”. This first seminar kicks off an online policy series on Covid-19 by FSPPM faculty from April to June 2020.

As the leading public policy education and research institution in Vietnam, FSPPM faculty closely observes all new developments of the Covid-19 situation, producing insightful and timely observations and analysis as basis for effective policy recommendations.

Pandemic taking a toll on the Vietnamese economy

Dr. Tu Anh presents at first a panoramic view of the global consequences of the pandemic. It is evident from empirical data that the outbreak is catastrophe facing human beings unprecedented since pre-modern times.

He argued that Covid-19 is a global crisis but the extent of its effects is heavily dependent on the context and specific responses in distinct countries. Within the same country, those effects also play out differently by industries and is mostly determined by each industry’s capability – and decisiveness – to adapt.

Vietnam’s economy is a relatively more open, and smaller in scale. It comes as no surprise that external shocks can cause immediate and serious consequence to the domestic economy. Vietnam’s greater dependence on foreign investment (FDI accounting for more than 70% of export value and nearly 50% of industrial outputs) renders the economy more susceptible to external disruptions.

In addition, manufacturing industries in Vietnam depend heavily on imported inputs due to the weakness of domestic supporting industries. It is common in Vietnam that production marked for exports also require substantial imports. Interruptions to the global supply chain result in sudden and great difficulty for enterprises to find the necessary inputs to continue or resume production.

Other aspects of Vietnam’s economy also aggravate the inherently disastrous effects of Covid-19. In particular, the service sector concurrently represents a large share of the economy and was hit most brutally by the outbreak and imminent recession.

Serious consequences are evident when looking at the statistical data of Q1 2020. GDP growth is down to only 3.82%, falling nearly half year on year. Both industrial production and retail consumption are plummeting dramatically with the Index of Industrial Production at 50% compared to 2018.

GDP declines heavily during COVID-19

Export growth rate is only 0.5%, a record low, while imports hit negative 2%, as firms exhaust the scarce inputs available for production. Forecasted exports growth for Q2 are even lower, while major economies and importers of Vietnam exports are going to suffer from pandemic (see the graph).

In terms of foreign investment, this is the first year growth of registered and disbursed capital decreased significantly (negative 20,9% and negative 6.6% respectively)

Particularly, enterprises – the pivot of the economy – are under great pressure. Newly registered enterprises increased 4.4% but the scale of capital and labor both plunged; to be specific, labor fell nearly one quarter year on year. The number of enterprises hibernating for recovery signs or in the process of bankruptcy have also risen to 26%.

A quick survey from the Private Sector Development Commission in early March on 1200 firms found out that if the pandemic prolongs over 6 months, 60% of firms will lose more than 50% revenue, and 30% of firms will lose 20-50% revenue. That said, about 90% of firms in the survey suffer huge losses in revenue and 74% are at risk of bankruptcy.

Dr. Tu Anh warned that without an efficient, effective and timely response from the government, many firms and even whole industries, will be wiped out, resulting in serious consequences to economic growth and employment, with its accompanying negative social consequences.

Policy responses to the pandemic

Dr. Tu Anh emphasized that countries need to come up with quick yet effective strategies to contain the outbreak given available resources should be the highest priority, if we are to prevent this medical crisis from devolving into an economic recession, the fuel that would ignite the next financial and public debt crisis.

However, although strategies to fight back the contagion adopted by countries have seen varying success in containing the spread of the disease, the same lockdown strategies result in greater recessions as production, retail and supply chains stall. Economic downturns are an unavoidable cost of the fight against the disease.

This trade-off is a necessary cost every country must be willing to pay. Dr. Tu Anh suggests, in this context, that GDP should not be the ultimate goal of any government, overlooking the severity of the situation. International organizations such as ADB recently forecasted Vietnam’s growth reaching 4.8% this year, a figure seen as too optimistic by the policy expert.

“Sustaining high growth should not be the priority at such times. The goal should be  to preserve resources and prepare to step out of the recession once the outbreak is effectively controlled. Resources, in this case, are people’s lives, the resilience of corporations, banking and financial industries, and the citizens’ trust in the government.

Ending containment strategies too early in order to score some percentage point in GDP growth could be more costly than expected,” Dr. Tu Anh warned.

Government responses to the Covid-19 outbreak, therefore, should satisfy five goals: (1) flattening the curve, (2) protecting corporate health, (3) reinforce social trust, (4) building a foundation propitious to recovery, (5) limit future harm.

Dr. Tu Anh especially emphasized the importance of the two objectives “building a foundation propitious to recovery” and “limiting future harm”. “Every crisis will come to an end one day. What matters is how we step out from the crisis. Either completely devastated, or prepared to soar like a phoenix from the ashes,” stated by Dean Tu Anh.

As a result, policies addressing immediate problems without long term vision cannot develop the resources necessary for recovery and expose themselves to further precarity in the future.

Without careful considerations, policy makers could for example overreact to the crisis, creating moral hazard or adverse selection in their decisions, particularly when one group has better access to information or can benefit more from policies than others. Consequently, new interest groups or institutions may emerge and hinder the recovery process or healthy development of the economy when the pandemic recedes.

The proposal to suspend rice exports by the Ministry of Industry and Trade is an example of overreaction in policy making, potentially causing long term damages. Despite lower output than last year, domestic rice production remains stable and poses no threat to food security. Meanwhile, a ban on exports may destroy opportunities to export rice at a premium. This was the lesson learned during the 2008-2009 financial crisis.

 “This ban is unfair to the agriculture sector, to farmers and rural communities – the foundation of the Vietnamese economy in all crises, past and present. Urban dwellers currently experiencing unemployment due to the pandemic have also returned to rural areas seeking temporary shelter. Combined with adverse weather conditions and salinity drought in the delta, the ban on rice exports may place greater burden on farmer shoulders. We should not deprive our farmers of financial opportunities,” Dr. Tu Anh elaborates.

Selected intervention due to resource constraints

Besides clear and appropriate priorities, policy making in this special context must adhere to three principles: the intervention must be targeted, timely and with clear duration.

Firstly, intervention must be directed at targeted priorities. Although no industry can stay immune to the pandemic, given constraints in the government’s financial, administrative and implementation resources, support must be directed towards those who need it most. Dr. Tu Anh suggests the Vietnamese government should set its priority to supporting laborers, employers and industries most susceptible to the pandemic, for instance in the tourism, hotel, restaurant and manufacturing industries. Moreover, firms of a certain scale and size are more vulnerable to the effects of the pandemic than others. The central government should also allocate more resources to urban centers such as Hanoi and HCMC, at the frontline of the battle against the virus.

Secondly, in times of crisis, timeliness and speed matter more than ever. Given the slow transmission mechanism and low efficiency of Vietnam policymaking, policies must be more responsive and efficient to address the realities of a complicated problem.

To some extent, speed, effectiveness and fairness must be compromised. For example, we try to minimize rent-seeking from policy, and yet tolerate the fact that not everyone equally benefits from effected policies.

Thirdly, in times of crisis, the government should resort to the administrative apparatus when necessary. Yet this should not become the norm: market principles should always take precedence where they are applicable.

Moreover, situational emergency measures should be associated with clear timelines and durations. For example, if one policy is issued to address the pandemic situation over the course of 2 quarters, the effective duration of the policy must be set to apply for 2 quarters. In case the pandemic lasts longer than the expected duration, extensions can of course be considered. But unclear effective policy durations invariably result in overreaction and rent-seeking behaviors.

Concentrating resources for healthcare and subsidizing underprivileged groups

Dr. Vu Thanh Tu Anh analyzed in detail fiscal, monetary, and public investment – conventional policy tools to control recession.

In terms of fiscal policies, Dr. Tu Anh reaffirmed healthcare and disease control as the most critical priority for public expenditure. The medical crisis, if not handled well, will cascade into aggravated economic shocks. Withstanding an economic downturn temporarily means the economy is more likely to recover after the pandemic is effectively controlled. Medical failures lead to further economic and financial crises with even more devastating consequences.

On the other hand, policies should be implemented to exempt, reduce, and defer taxes (VAT, corporate income taxes) for firms severely affected by the virus. Tax breaks and delayed tax payments can be applied to firms and employees on items such as social, medical, and unemployment insurance, as well as labor union fees.

“More expenditure should be deployed for social welfare, subsidies and basic social services. If the Government does not support near poor and poor segments of the population, they are more likely to turn into penury groups, running the risk of social upheaval,” he explains.

Among many social welfare measures, the Government should consider directly reducing fixed amounts, such as 100.000 VND, from utility charges on electricity, water and other basic services payable on household bills. Compared to percentage subsidies (e.g. 10% as recently proposed), fixed charge subsidies are proven to be most beneficial to the poor, without imposing a greater burden on the public budget.

In terms of monetary policies, Dr. Vu Thanh Tu Anh argued that providing liquidity for commercial banking sector and firms negatively affected by the pandemic remains the most critical consideration at the moment.

“Many recommendations to lower interest rates have been put forward. Although not wrong, such recommendations remain impractical, and the state bank of Vietnam has failed to act on this advice for a long time. The interest rates can only be lowered using administrative commands, which are not sustainable in the long term. On the other hand, lowered rates do not necessarily mean that discounted credits will be available to firms. Under such circumstances, it is better to allow firms access to credits with high cost. That’s why the priority should be on providing liquidity not on cutting interest rates,” explained the presenter.

In addition, corporate and consumer debts can be restructured, for example rescheduling or deferring interest payments or delaying the categorization of at-risk loans to non-performing debts. In our current situation, most default risks come from unavoidable circumstances, not from the wrongdoings of firms or borrowers.

In regards to exchange rates, Dr. Tu Anh believes the country should be more decisive and flexible in adjusting exchange rates to secure an export advantage, as many countries see their currency significantly depreciated.

Investing in vaccine production to proactively “flatten the curve”

The government’s public investment strategy should focus on vaccine research and production to proactively flatten the curve, rather than depend on the market or mercy of outsiders. “If a vaccine can be produced, we can control the immunity curve, not only the infection curve,” our expert explained.

Dr. Tu Anh noted that public investments should be a two-fold strategy: providing economic stimulus, and concentrating resources for recovery. Accordingly, priorities should be on telecommunications (5G), renewable energy, important infrastructure projects which have been delayed or postponed due to underfunding, virtual educational and remote healthcare platforms, cashless payment systems and e-commerce.

However, any macro policies, while technically sound, should be supported with public trust in the government, posing both challenges and opportunities for the Vietnamese administration.

“One of the top priorities of the government now is to persuade citizens that the government has acted timely and effectively to secure the welfare interests of citizens and firms. Only then will the Vietnamese government step out of this crisis with full composure, strengthening subsequent policies with the trust of the people,” emphasized Dr. Tu Anh.

 

 

 

 

 

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