Klein's Commentary

Go beyond the headlines

Asia Slowdown Hits Vietnam

You can’t argue with growth, until it slows, and slower it goes in parts of emerging Asia. Countries like Vietnam, long believed immune to the troubles of industrialized nations are now in the throes of their own domestic economic downturn. The culprit turns out not to be currency speculators or international financial institutions demanding draconian austerity measures, but greed, pure and simple.

The symbols of fast money were evident everywhere. Bicycles and mopeds that clogged roadways only few years ago now compete with cars. Malls sprang up in the capital city of Hanoi transforming the skyline from Stalinist heavy-slab concrete to glimmering glass. Residential and commercial real estate projects rose like plumes of mushrooms after a soaking rain.

All of this new wealth creation relied on easy money. An investment-led boom that rivaled the ages since Thailand and Malaysia took off over a decade ago now appears to be losing steam, and fast. Government officials have lowered 2012 GDP growth expectations by almost a full percentage to 5.2%. Back in 2010 growth had pushed 7%.

Many of those glimmering construction projects are left unfinished, construction companies are going broke and banks are left holding the bag. Foreign investment is dropping as well and the Ho Chih Minh stock index, has fallen nearly 25% since the beginning of 2010. The NYT’s Thomas Fuller highlighted the real costs of a slowdown:

“[Y]oung people are finding it harder to find jobs; nearly 20 per cent of small and medium-size companies have gone out of business during the past year; and municipal infrastructure projects are being delayed or cancelled.”

As with any simmering financial crisis on the verge of boiling over, warning signs were evident for years. Back in 2008 the main concern was a wave of foreign investment overflowing Vietnam’s fragile financial system, inflation and hot money running out of the country wreaking havoc with the currency. The inability of the country’s leadership to manage that situation pointed to problems at the top. The lack of monetary policy control has only grown worse over time. A lending frenzy to try and keep the good times rolling has now given way to talk of bail-outs.

In a 2008 Time magazine article Martha Ann Overland wrote:

“To tackle inflation, the government knows it needs to raise interest rates and rein in spending, particularly by state-owned enterprises that have used state financial institutions as their own piggy banks. But any sudden moves can also threaten to strangle businesses and scare away new investors, which Vietnam must avoid if it is to meet its revised 7% growth rate.” However, “Vietnam’s long-term economic outlook is good, says Tom Nguyen, head of global markets at Deutsche Bank in Ho Chi Minh City.”

That perpetual optimism may be in shorter supply these days.

Beyond Vietnam’s recent stumble the larger issue of whether the China model, long considered a rival to western free market ideals, is on the ropes as well. Top-down state-directed growth, primarily through state-owned companies or those closely associated with single party states, appear increasingly vulnerable not only to international financial crisis, but to their own lack of reform.

Of course greed and speculation was a hallmark of the global financial crisis as well. Raging free markets unhinged from regulations gave rise to the worst U.S. economic recession since the Great Depression.

At its root these problems, for both developed and developing economies, center on a misguided race to riches. All growth is not created equal. Policies need to focus first and foremost on building and sustaining a middle class which in turn drives balanced growth and stability for all.

Photo: Wikimedia Commons

Brian • September 20, 2012


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