Inflation soars in Vietnam and cripples economy

A vendor offering goods in an old quarter of Hanoi. Vietnam is suffering its first serious downturn since it moved to an open market economy nearly two decades ago. (Justin Mott for The New York Times)

A vendor offering goods in an old quarter of Hanoi. Vietnam is suffering its first serious downturn since it moved to an open market economy nearly two decades ago. (Justin Mott for The New York Times)

Tuesday, August 19, 2008

HANOI: Even the ghosts are suffering from inflation in Vietnam this year.

August is the month when Buddhists provide the hungry ghosts of the dead with food and wine and cigarettes and paper offerings that represent the good things in life – cars, houses, motorbikes, stereo sets, fancy suits of clothes.

But like everything else in Vietnam, these brightly colored offerings have risen steeply in price and shopkeepers say people are buying fewer gifts to burn for the dead than ever before.

With inflation rising to 27 percent last month – the highest in Asia – and food prices rising to 74 percent above those a year ago, Vietnam is suffering its first serious downturn since it moved from a command economy to an open market nearly two decades ago.

Last month, the government raised the price of gasoline by 31 percent to an all-time high of 19,000 dong, or $1.19, a liter. Diesel and kerosene prices rose still higher. The country’s fledgling stock market, which had been booming a year ago, has fallen in volume by 95 percent and is at a virtual standstill.

Squeezed on all sides, people are cutting back on food, limiting travel, looking for second jobs, delaying major purchases and waiting for the cost of a wedding to go down before getting married.

Some village women who traveled to Hanoi to sell special homemade candies for the hungry ghost festival say they have not earned enough this year to return home.

Given this slowdown, Asia’s youngest tiger, which had been growing by about 8 percent a year for the past decade, is scaling back its plans for economic development.

Last month, the Asian Development Bank forecast that growth would slow to 6.5 percent this year. Some economists say even that figure is probably too high.

The mood in Vietnam, after years of upward mobility, is tense, said Kim Ninh, country representative of The Asia Foundation.

“I think people are pessimistic,” she said. “You sense a tougher environment, a more restricted environment, a more pessimistic environment. It’s a moment of turmoil, I think.”

People are losing confidence in the ability of the government to manage the economy, several people said. Rumors of price rises have caused panic buying of fuel and rice.

“The government seems confused how to deal with the difficulties and they have been making some mistakes in running the economy,” said a young lawyer who spoke on condition of anonymity when criticizing the government.

Hundreds of strikes at the factories that have been an engine of Vietnam’s growth are one of the sharpest signs of discontent.

Some of the factory workers who are leading Vietnam’s emergence from poverty are returning to the countryside, according to the local press, unable to sustain an urban life on a factory wage.

“Some people who have been moving from rural areas to seek jobs in industrial zones are deciding that it is not worth it, and people are moving home,” said Ben Wilkinson, associate director of the Vietnam Program of the John F. Kennedy School of Government at Harvard University.

After a steep reduction in the poverty rate from 58 percent of the population in 1993 to around 15 percent last year, some people – those who have bought their first motorbike or mobile telephone – are slipping back again below the poverty line.

Prime Minister Nguyen Tan Dung told the National Assembly in May that the number of households going hungry had doubled in one year.

Everywhere they turn these days, people in Vietnam see higher prices.

A shoeshine has gone from 19 cents to 25 cents; a good haircut from $1.25 to $1.87; a tiny cup of tea on the street from 3 cents to 6 cents; a one-time-use rain coat from 12 cents to 37 cents, a massage from $4.37 to $6.25. It now costs 12 cents to park your motorbike on the sidewalk, and if you get a flat tire, it costs 12 cents to get it pumped, double the prices of a few months ago.

The costs of housing and construction materials have risen by 24 percent, driving up the price of real estate and rents. High fuel prices have led some fishermen to keep their boats onshore, and the government has stepped in to subsidize them.

As the local currency, the dong, drops in value, people say they are moving their money into dollar-based bank accounts.

Nguyen Minh Phong, an expert on inflation with the Institute of Socioeconomic Development Research who dabbles in real estate, said his personal woe was that he had 13 brothers and sisters who missed the real estate bubble and now come to him for loans.

In part, economists say, Vietnam is suffering from the worldwide economic downturn and from high inflation that has spread through Southeast Asia.

But they say the problems are also self-inflicted, the result of an overheated economy as Vietnam raced forward with inadequate safeguards.

Too much capital, particularly from foreign investment, has collided with bottlenecks in infrastructure and capacity.

Trade and current-account deficits have widened.

The education system is producing too few skilled and semi-skilled workers for Vietnam to move up quickly into more complex manufacturing industries.

In the longer term, most economists agree, Vietnam will continue the transformation it began in the early 1990s with a new policy of economic restructuring called “doi moi” that was decreed in 1986.

Private enterprise was sanctioned and then encouraged, agriculture was freed from government controls, hyperinflation was tamed and Vietnam became, like China, a largely capitalist nation under the control of a Communist government.

Foreign investment boomed as new regulations and tax laws were introduced, business law was formulated and capital market reforms were put in place. The changes were consolidated with accession to the World Trade Organization in 2006.

Vietnam’s leaders, with their ambitious targets for growth, are in a hurry to surpass their neighbors and to become, as they put it, a modern and prosperous nation.

With a growing population of more than 80 million – three-fourths of whom are under the age of 35 – this is a nation looking into the future, with ever dimmer memories of its wartime past.

Throughout the years of strict Communist rule, when religion was banned, the ghosts of the ancestors languished, uncared-for and unappeased.

Religion returned to Vietnam along with free commerce and the festival of the hungry ghosts was revived. The two have flourished in tandem, and now they are feeling the pinch of inflation together.

“It’s terrible right now,” said Dinh Vu Hung, 54, who sells paper offerings in the Ancient Quarter of Hanoi. “We make these beautiful things, but the prices have gone up and fewer people are buying them. It’s not just us, though. It’s the whole country.”

Inflation soars in Vietnam and cripples economy – International Herald Tribune

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