VIETNAMESE TRADE AND ECONOMIC DEVELOPMENT - POST WTO ACCESSION

Philip Abbott Finn TarpCe Wu

Purdue University University of Copenhagen

CIEM, Hanoi July 2009

July 15, 2009

WTO Accession Impacts?

Fundamental (initial) Goal of Danida project was to predict impacts of WTO Accession on Vietnam Many existing models have badly predicted impacts of prior trade

agreements Controversy persists on the relationship between trade and

development

Performance following past bilateral trade agreements suggested trade matters, and Vietnam is an excellent case to examine trade-growth linkages Better models would include mechanisms that relate trade to

development – i.e. investment dynamics

We can now look at Vietnamese trade and development after WTO accession – some effects seem already evident

Lessons Learned – Prior research Trade Agreements have had big impacts

Models grossly underestimated impacts WTO impacts likely to be larger than most predictions

Investment drives output and trade Roles of state, FDI important, but…

Domestic private sector is expanding Model with exogenous investment predicts trade well Difficult to relate investment allocations to trade

liberalization or even rates of return Rates of return vary substantially across sectors, firm types Market access may matter

Trade Liberalization - Lessons

Tariff reductions have small direct effect on trade through prices and demand Biggest impacts for Ag imports and services Very small impacts on manufacturing

Increased investment to “tariff reform” (sensitive)and positive return sectors has much bigger impacts Trade impacts biggest on agriculture, services Manufacturing exports and ag imports expand more with ∆I

to “tariff reform sectors” (e.g. clothing!) Investment in high return sectors key when rates of

return vary across sectors WTO reforms targeted services

Investment and Trade - Lessons

Strong institutional biases in investment allocation Government invests in infrastructure, SOE equity

Targets specific sectors, mobilizes savings State impacts biggest for energy

Foreign invested firms emphasize manufacturing, ag exports Private firms emphasize agriculture, services

Differing economic impacts SOEs show somewhat greater GDP impact Private firms demand more unskilled labor, generate more wage

income SOEs have lowest labor demand impact (energy) FI firms generate lowest wage income increases, least labor

intensive

Outline of presentation

Recent Events and Economic Performance

Research objectives since last year Base model evaluation to 2007 Parameters and economic behavior

ICORs, Labor requirements and TFP growth Price Transmission Investment allocation

Alternative scenarios Removing WTO impacts – Tariffs, FDI & Financial

account

Recent Events and Economic Performance

Background

Recent relevant events

WTO Accession Approved by WTO – November, 2006 Joined January, 2007 Modest tariff cuts Significant opening to Services, FDI – institutional reforms Imports surged, faster than exports FDI and other foreign investment surged

Global Recession and Financial Crisis Effects evident since September, 2008 Export demand weak, FDI slowing GDP projected to grow more slowly –

8.5% in 2007, 6.25% in 2008, 4.8% in 2009 Undoing WTO benefits?

GDP and growth

Growth accelerated from 2000-2004 at 7.2% To 8.4% from 2005 to 2007 Slowing to 6.2% in 2008, projected 4.8% in

2009 Inflation increased over decade to over 8%

from 2005, 21% in 2008 Recession has reduced inflationary

pressures, 4.8% in 20092000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Growth rate (Real GDP) 6.79 6.89 7.08 7.34 7.79 8.44 8.23 8.48 6.2 4.8GDP per capita ($) 402 440 492 553 636 722 835 1041 1035Inflation 1.9% 4.0% 6.7% 8.2% 8.2% 7.3% 8.2% 21.7 4.8

Trade

Exports grew over 20% per year through 2008, but expected to decline in 2009

Imports surged much faster than exports in 2007 – 38% Grew rapidly, but no faster than exports, in 2008 Also projected to decline in 2009

Current account deficit large in 2007-08, slight decline in 2009

(in $ billions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Exports 17.2 17.8 19.7 23.4 30.4 36.6 44.9 54.6 69.2 58.7Imports 17.3 17.9 21.5 26.8 33.5 39.4 47.7 65.8 83.8 67.6

Trade Balance -0.2 -0.1 -1.8 -3.4 -3.2 -2.7 -2.8 -11.3 -12.3 -7.1Current Account Deficit -1.1 0.0 0.7 1.9 1.6 0.5 0.2 7.0 9.2 7.3

Growth Rates Exports 4.0% 10.2% 19.2% 29.6% 20.7% 22.7% 21.5% 26.8% -15.2% Imports 3.5% 19.7% 24.8% 25.1% 17.4% 21.2% 38.0% 27.3% -19.3%

Balance of payments

Current account deficit expanded in 2007 and 2008 Some saw this as reason to devalue dong?

Financial Account Surplus increased faster! Huge Inflows of FDI, Portfolio investment and foreign borrowing in

2007 FDI increased but other foreign capital sources slowed in 2008

Reserves accumulated until 2008, supporting dong exchange rate

Bigger Current account deficit, less FDI, declining reserves projected for 2009 Now greater pressure for dong to devalue?

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Current Account Deficit -1.11 0.00 0.68 1.94 1.57 0.50 0.16 6.99 9.24 7.32

Financial Account Surplus -0.32 0.37 2.09 3.28 2.81 3.09 3.09 17.54 9.18 5.02 Net FDI Inflows 0.50 0.43 1.61 1.30 1.34 1.89 2.32 6.55 7.80 4.00

Reserves (Increase) 0.79 0.37 1.41 1.34 1.24 2.59 2.92 10.55 -0.06 -2.29

Exchange Rate 14,170 14,725 15,280 15,510 15,746 15,859 15,994 16,105 16,302

Government

Public savings for investment (revenue minus current expenditure) was growing until 2007, falls in half in 2009

Fiscal deficit expanded in 2007 and 2008

Projected to double in 2009 (stimulus?) Cuts in government spending to control fiscal

deficits would limit infrastructure and SOE investment

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Revenue 90.7 103.9 121.7 153.0 191.3 228.2 279.5 315.9 401.6 389.5Expenditures 102.7 117.3 129.4 160.4 184.8 229.0 268.4 341.4 425.3 456.6Current 70.1 77.0 84.2 102.5 121.2 149.9 180.1 229.3 307.5 343.8Capital 32.6 40.2 45.2 57.8 63.6 79.2 88.3 112.2 117.8 112.8Off Budget 9.9 10.6 17.7 32.1 26.6 37.1 21.8 35.4 45.6 71.6

Public saving 20.6 26.9 37.5 50.5 70.1 78.3 99.4 86.6 94.1 45.7Fiscal Deficit 21.9 24.0 25.4 39.5 20.0 37.9 10.8 60.9 69.2 138.7

Labor

Employment was growing much more slowly than GDP Urban unemployment rate falling Most rapid growth in foreign invested sector SOE employment stagnant

Wages increasing rapidly, especially in state sector

GDP slowdown will ultimately impact employment

2000 2001 2002 2003 2004 2005 2006 2007Employment growth 2.5% 2.5% 2.7% 2.5% 2.3% 1.9% 1.9% State 2.9% 4.1% 7.6% 1.8% -1.7% -2.2% 0.7% Private 2.3% 1.9% 1.7% 2.1% 2.3% 1.9% 1.6% FI 20.0% 31.6% 31.4% 22.8% 18.9% 17.7% 15.5%

Urban unemployment 6.42 6.28 6.01 5.78 5.6 5.31 4.82 4.64

State Wages 1.0 1.12 1.26 1.47 1.67 1.93 2.28 2.43 Agriculture 1.0 0.87 1.09 1.45 1.84 1.66 1.80 2.06 Manuafcturing 1.0 1.10 1.23 1.38 1.62 1.82 2.11 2.20 Service (trade) 1.0 1.09 1.28 1.50 1.66 2.05 2.21 2.40

WTO related changes?

Imports growing faster than exports Current account worsens

Surge in foreign borrowing and FDI Financial account improves

Small tariff changes Adjustments via price mechanisms

Results consistent with broad expectations Apparently larger impacts than tariff changes

predict Bigger changes for foreign investment than trade

Data, Model, Parameters, Scenarios

Research objectives since last year

Research objectives since last year Data

Updated data from GSO on investment by sector of destination, by firm type (SOE, FI, Private) to 2007

Updated all data to implement model through 2007 limited Macro data for 2008, 2009

Parameters and economic behavior Labor biased technical change (“LFP”) Price transmission Investment allocation

Modeling Simplifications to specification Base model projects 2001 through 2007 Alternative scenarios to explore WTO impacts

Base model evaluation to 2007

Base Model Predictions

Underlying Concepts – Investment and Trade Model

Trade policy and institutional reform influence capacity additions (via incentives to invest )

Savings – Investment balance, paying attention to public investment, SOE’s and FDI, determines growth Growth dynamics modeled – recursive annual models Foreign savings – financial account in SAM

Focus on exports, determined by capacity additions and market access opportunities

Simplify economic specifications

Investment Patterns

Foreign investment briefly fell, then rose substantially after WTO accession (2007) Foreign Borrowing (already in 2005), as much or

more than FDI Foreign savings important to overall investment

State investment falling, Public savings falling faster

Private investment had been rising rapidly, big increase in 2007 of Foreign I cut its share a bit Household and firm savings shares falling

Savings Investment Balance

Billion Dong Shares of I

2000 2003 2005 2007 2000 2003 2005 2007

Investment 131,479 231,616 343,215 521,700

State 89,419 125,125 161,635 208,100 68% 54% 47% 40%

Foreign Invested 27,171 37,801 51,183 129,301 21% 16% 15% 25%

Private 34,593 68,690 130,397 184,300 26% 30% 38% 35%

Saving

Public 14,287 16,919 -4,846 -27,701 11% 7% -1% -5%

Private 117,192 214,697 348,061 549,401 89% 93% 101% 105%

Household 61,091 91,613 118,548 172,193 46% 40% 35% 33%

Firm 56,793 61,302 70,842 122,909 43% 26% 21% 24%

Foreign -692 61,783 158,671 254,300 -1% 27% 46% 49%

FDI 7,085 20,225 29,957 105,488 5% 9% 9% 20%

Trade performance

High sectoral correlation holds through 2007

Underestimating exports – 10% in 2007 Imports very close Current account deficit overestimated

Bigger errors in 2005, 2006 on imports and CA Biggest errors for energy

Services and manufacturing export sectors Financial account, reserves mirror current

account

Trade performance

Actual Trade Prediction errors Growth Rates

2000 2003 2005 2006 2007 2003 2005 2006 2007 2000-03 2000-05 2005-07Sectoral Net Trade

Agr E 52.7 65.0 95.3 130.2 153.8 11% 24% 0% 2.0% 7.2% 12.6% 27.1%

Agr M -6.1 -15.7 -21.8 -28.0 -40.3 -41% -20% -16% -7.1% 37.1% 29.0% 36.0%

Manf E 46.4 91.8 114.2 146.2 176.3 -21% -8% -17% -24.2% 25.5% 19.7% 24.2%

Manf M -134.0 -217.3 -282.0 -371.9 -516.8 -1% 14% 2% -9.6% 17.5% 16.0% 35.4%

Energy 20.5 36.2 55.8 75.1 83.9 41% 102% 39% 133.4% 20.9% 22.1% 22.6%

Services -2.0 -17.9 -5.8 -12.8 -23.5 -67% -59% -61% -28.8% 109.0% 24.3% 101.0%

Exports 242 364 528 717 878 -2% -5% -11% -10.2% 14.5% 16.9% 29.0%

Imports 253 415 564 765 1,032 5% 14% 6% -0.6% 17.8% 17.3% 35.3%

35 sector correlation 93.1% 95.7% 94.3% 92.4%

Balance of payments

2000 2001 2002 2003 2004 2005 2006 2007

Current Account Deficit

Actual -15,672 -10,043 10,329 30,011 24,642 7,882 2,623 112,607

Predicted -692 15,636 23,090 57,222 95,610 103,857 135,319 168,153

Financial Account Surplus

Actual -4,478 5,463 31,934 50,860 44,199 48,956 49,390 282,483

Predicted -11,563 -913 7,349 30,636 23,068 18,999 12,364 176,995

Reserves (Increase)

Actual 11,194 15,506 21,605 20,849 19,557 41,075 46,767 169,877

Predicted -3,786 -10,173 8,844 -6,362 -51,411 -54,900 -85,929 114,330

Exchange Rate

(VN Dong/$) 14170 14725 15280 15510 15746 15859 15994 16105

GDP projections

GDP predictions within 10% 2.7% low in 2007

Consumption closer than GDP Investment exogenous

E-M reflects current account, trade errors Why GDP underestimated

GDP projections

2000 2001 2002 2003 2004 2005 2006 2007

GDP

Actual 442 481 536 613 715 839 974 1144

Predicted 442 469 531 605 688 785 891 1113

Error 0.0% -2.5% -0.9% -1.4% -3.8% -6.5% -8.6% -2.7%

Consumption

Actual 294 312 349 406 466 533 617 742

Predicted 276 293 339 414 498 528 605 759

Error -5.8% -6.2% -2.8% 1.8% 6.9% -0.9% -2.0% 2.3%

Labor demand

“LFP” assumptions critical to getting this close Assumed firms reduce use of unskilled labor

more so than skilled labor Pressure seems greatest after LFP on

educated workers, before LFP on unskilled labor demand

Base excess skilled labor demand persists Rural income shares declining

Urban wage income shows biggest increase

Labor demand

2000 2001 2002 2003 2004 2005 2006 2007

Employment (GSO)

37,610

38,563

39,508

40,574

41,586

42,527

43,339

44,172

Labor demand

42,358

42,538

43,287

44,961

46,663

46,885

46,904

48,887

Educated 1,636

1,712

1,807

1,924

2,057

2,157

2,261

2,449

Technical 5,633

5,880

6,202

6,615

7,044

7,367

7,680

8,363

Unskilled 35,088 34,945 35,279 36,422 37,562 37,360 36,963 38,075

Labor Supply

40,417

47,144

Educated 1,741

2,228

Technical 5,995

8,894

Unskilled 32,680

36,022

Income Distribution (Shares)

Rural Urban

Farm Informal Wage Farm Informal Wage

2000 37.8% 11.9% 7.1% 4.0% 21.9% 17.3%

2003 37.4% 11.4% 7.3% 4.4% 21.0% 18.5%

2005 36.4% 10.9% 7.1% 4.5% 21.3% 19.8%

2007 36.0% 10.7% 6.7% 4.5% 22.4% 19.8%

ICORs, Labor requirements and TFP growth

Price Transmission Investment allocation

Parameters and economic behavior

ICORs, Labor requirements and TFP growth

ICOR based on GSO output and investment data Labor-output ratio based on employment data ICOR is erratic but falling, after rising

Surge in 2007 investment may lead to final jump

Both Labor and Capital requirements falling TFP growth W/R increasing less labor intensive techniques (to 2004) Literature has been inconclusive on extent of TFP growth Labor biased technical change, also intermediate demands?

Price Transmission

Domestic and world prices diverge LOP violated Divergence becomes large in a few sectors

Lagged domestic prices better predict current domestic prices

Estimated price transmission elasticities low No special effect of trade policy

Price Transmission Models

1) For exporters:

ln (domestic price)t, i = β0 + β1 ln (domestic price)t-1, i

+ β2 ln (world price)t, i + εt, i

2) For importers:

ln (domestic price)t, i = β0 + β1 ln (domestic price)t-1, i

+ β2 ln (world price)t, i + β3 ln (import tariff)t, i + εt, I

t: time period

i: sector

32

Price Transmission Variables

Variable Definition

Domestic price(dependent

variable)

Producer price index (GSO)

Lagged domestic price

Producer price index in the previous year

World price

Import and export price index (GSO) - including tariff and

exchange rate

Import tariff1+percentage import

tariff

33

Methods and Data

Data pooled over 87 sectors from 2001-2007 Disaggregated into

agriculture and manufacturing, imports and exports

Fixed-effects models are used

β2 is short run price transmission elasticty

β 2 / (1-β1) is long run price transmission elasticty 1/ (1-β1) approximate lag length

34

Regression Estimates

SectorLagged domestic price

Worldprice

Import

tariffR2

Within

Between

Overall

AgriculturalExporte

r0.97**

0.10*+

+ 0.71 0.60 0.63

(0.10) (0.05)

Importer

0.98**0.04**

++ 0.09 0.80 0.68 0.73

(0.06) (0.01) (0.13)

Manufacturing

Exporter

0.67** 0.67* 0.76 0.96 0.88

(0.13) (0.27)

Importer

0.92**0.04**

++ 0.10 0.74 0.82 0.77

(0.04) (0.02) (0.08)Notes: Numbers in parentheses are standard errors. ** significantly different from zero at 1 percent level; * significantly different from zero at 5 percent level; and ++ significantly different from one at 1 percent level.

35

Results of the Price Transmission Models Price transmission models can explain both cross-

sector and within-sector variations reasonably well Lags slow, critical to model success

Last years price predicts this year’s price well Price transmission elasticities statistically

significant, but very low Except for the manufacturing export sector

(0.67), the price transmission elasticities are very small (0.04)

Significantly different from 1 at 1 percent, LOP violated

Import tariff is not a significant explanatory variable for importing sectors – but tariffs are included in Pw

36

Investment allocation

Rates of return influence investment Vary by sector, firm type

Trade policy? No special role beyond influencing rates of

return for tariffs Market access, proxied by lagged exports,

influenced manufacturing sector allocations Explaining ∆I across sectors, not over time

Returns to capital and Firm Type shares of ΔI (new investment) – Last year

SectorReturns to

capital

Share of Investment (%)Foreign Invested

State Owned

Private

Agricultural Exports 1.246 0.184 0.353 0.463Agricultural Imports 0.850 0.201 0.420 0.380

Manufacturing Exports 0.481 0.499 0.170 0.331

Manufacturing Imports 0.022 0.407 0.352 0.241Energy 0.837 0.116 0.761 0.123Services 0.193 0.247 0.261 0.492Average 0.445 0.202 0.428 0.370

Note: Share of investment calculated over period 2000-2005. Averages are across the 35-sector aggregation.

Investment Allocation Models

1) ln (investment share)t, i = β0 + β1 ln (investment share)t-1, i

+ β2 ln (rent to capital)t, i + β3 ln (gross output)t, i

+ β4 ln (variance of rates of return)t, i + εt, i

2) ln (investment share)t, i = β0 + β1 ln (investment share)t-1, i

+ β2 ln (rent to capital)t, i + β3 ln (export)t-1, i

+ β4 ln (variance of rates of return)t, i + εt, i

t: time periodi: sector

39

Investment Allocation Variables

Variable Definition Justification

Investment share (dependent variable)

Investment in sector iTotal investment

Lagged investment share

Investment in sector i in t-1Total investment in t-1

Persistence

Rent to capital Returns

Gross outputScale/ Engle

Effects

ExportExport in sector i

Total exportMarket access

Variance of rates of return

Variance(rates of return) Risk

Import tariff Percentage import tariffLost protection - Never matters

40

iit

iit

it

it

outputGross

KfromIncome

outputGrossKfromIncome

,

,

,

,

_

)__(

_)__(

( _ ) ( _ )

( _ ) ( _ ), ,

, ,

G ross ou tpu t G ross ou tpu t

G ross ou tpu t G ross ou tpu tt i t i

t i t iii

1

1

Methods and Data

Data pooled 112 sectors from 2001-2007 Disaggregated into

agriculture, manufacturing and services Sometimes imports and exports

Random-effects models are used. Chow tests show that it is okay to pool

the data for total investment, state investment, and private investment in the agricultural sector at 5 percent level.

41

Regression Estimates of Agricultural Sector

Type of I

LaggedI

share

Rent to K

Gross outpu

t

Variance of RR

R2

Within

Between

Overall

Total 0.79**0.12

*0.17** -0.06** 0.18 0.99 0.90

(0.04)(0.06

)(0.05) (0.02)

State 0.74** 0.14 0.18** -0.07** 0.03 0.97 0.75

(0.05)(0.11

)(0.07) (0.02)

Private 0.77**0.16

*0.21** -0.07** 0.14 0.99 0.87

(0.04)(0.07

)(0.05) (0.02)

Foreign

Exporter

0.66** -0.21 0.22* -0.04 0.22 0.98 0.73

(0.09)(0.19

)(0.11) (0.06)

Importer

0.63** 0.19 0.30* -0.01 0.09 0.91 0.56

(0.08)(0.23

)(0.15) (0.05)

Notes: Numbers in parentheses are standard errors. ** significantly different from zero at 1 percent level; and * significantly different from zero at 5 percent level.

42

Regression Estimates of Manufacturing Sector

Type of I

LaggedI

share

Rent to K

Gross outp

ut

Lagged

export

Variance of RR

R2

WithinBetwee

nOvera

ll

TotalExporte

r

0.05(0.18)

2.22**

(0.66)

0.22**

(0.09)

-1.04**(0.22)

0.21 1.00 0.91

Importer

0.56**(0.05)

0.20**(0.09)

0.36**(0.05)

-0.20**(0.03)

0.09 0.99 0.84

StateExporte

r

-0.24(0.16)

4.87**

(0.94)

0.36**(0.12)

-1.84**(0.27)

0.17 0.99 0.88

Importer

0.45**(0.06)

0.50**(0.17)

0.52**(0.08)

-0.27**(0.05)

0.04 0.93 0.63

PrivateExporte

r

-0.21(0.22)

4.27**

(0.88)

0.39**(0.11)

-1.04**(0.21)

0.10 1.00 0.86

Importer

0.75**(0.06)

0.15(0.15)

0.24**(0.07)

-0.07(0.04)

0.18 0.94 0.68

Foreign

Exporter

-0.02(0.20)

0.75(0.63)

0.13(0.09)

-1.10**(0.23)

0.04 0.99 0.84

Importer

0.56**(0.05)

0.07(0.12)

0.32**(0.06)

-0.18**(0.03)

0.04 0.95 0.72

Notes: Numbers in parentheses are standard errors. ** significantly different from zero at 1 percent level; and * significantly different from zero at 5 percent level.

43

Regression Estimates of Service Sector

Type of I

LaggedI

share

Rent to K

Gross outpu

t

Variance of RR

R2

Within

Between

Overall

Total 0.83** 0.140.16*

*-0.05* 0.37 0.99 0.90

(0.04)(0.10

)(0.06) (0.02)

State 0.89** 0.10 0.10 -0.05* 0.37 0.98 0.89

(0.04)(0.12

)(0.07) (0.03)

Private 0.67**0.60*

*0.39*

*-0.10** 0.15 0.98 0.77

(0.06)(0.19

)(0.11) (0.04)

Foreign 0.46** 0.73* 0.16 -0.04 0.07 0.89 0.42

(0.08)(0.30

)(0.11) (0.04)

Notes: Numbers in parentheses are standard errors. ** significantly different from zero at 1 percent level; and * significantly different from zero at 5 percent level.

44

Results for Investment Allocation The investment allocation models do a good job in

explaining cross-sector variations, but not over time Rates of return generally positive, sometimes

significant Magnitude of effect varies by sector and firm type

Elasiticities low Insignificant for foreign invested firms

Risk important – captured by variance Lags matter – last year predicts this year, except

manufacturing exports Market access

Gross output is replaced by lagged exports for manufacturing exporters – works better, captures market access

Lagged exports does not work well for agricultural exports

Tariffs FDI and Foreign savings

Investment, Devaluation

Alternative scenarios –WTO Impacts

Tarifffs

Average tariffs – 10.9% in 2000, 4.6% in 2005, 2.4% in 2007 Small changes in applied tariffs Some bigger changes for Manufacturing exports (clothing, wood)

Price transmission mutes tariff changes 0.04 except manufacturing export sectors: 0.67 (cannot raise export prices due to tariffs!)

Price changes alter sectoral rents Effects somewhat bigger on rents than prices

Scenarios: Tariff MAX – full pass through to prices, consumption adjusts Tariff PTE – pass through muted by price transmission elasticities RENT MAX – effects on sectoral rents capital allocations and output adjusted,

full pass through RENT PTE – effects on sectoral rents capital allocations and output adjusted,

price transmission mutes effects

Tariff Scenarios – Trade Outcomes Import quantities down, especially for agriculture

(sugar) Import Cost in domestic currency after tariffs

generally up slightly – inelastic demand for imported goods

Price transmission mutes effects significantly Rent effects on output only somewhat larger

Scenario: Tariff MAX Tariff PTE Rent MAX Rent PTEActual Predicted Diff. Diff. Diff. Diff.

Net Trade Agr E 153.8 156.8 159.0 1.4% 156.8 0.0% 159.8 1.9% 156.8 0.0% Agr M -40.3 -37.4 -29.3 -21.6% -37.1 -0.9% -26.7 -28.6% -36.9 -1.2% Manf E 176.3 133.7 134.3 0.4% 133.7 0.0% 132.0 -1.3% 133.6 -0.1% Manf M -516.8 -467.2 -458.2 -1.9% -466.8 -0.1% -453.7 -2.9% -466.6 -0.1% Energy 83.9 195.8 200.8 2.6% 195.8 0.0% 206.5 5.5% 195.8 0.0% Services -23.5 -16.7 -16.1 -4.0% -16.7 0.0% -15.4 -7.6% -16.7 0.0%

Exports 878 789 799 1.3% 789 0.04% 795 0.8% 789 0.00%Imports 1,032 1,026 1,038 1.2% 1,026 0.01% 1,029 0.3% 1,026 -0.02%

2007

Tariff Scenarios – Macro Outcomes GDP only falls slightly with higher tariffs Effects smaller with price transmission muting

signals GDP, current account effects ambiguous, very

small Labor market effects very small, only with output

effects WTO impacts from FDI, foreign savings impacts,

not price changes – even with output mix adjustments

Scenario: 2007 Tariff Max Tariff PTE Rent Max Rent PTEActual Predicted Diff. Diff. Diff. Diff.

GDP 1144 1113 1108 -0.5% 1114 0.0% 1116 0.2% 1114 0.0%Consumption 742 759 756 -0.4% 759 0.0% 758 -0.1% 759 0.0%Current account -113 -168 -171 1.5% -168 -0.1% -165 -1.9% -168 -0.1%Labor demand 46,114 48,887 48,887 0.0% 48,887 0.0% 48,981 0.19% 48,885 -0.003%

FDI & Foreign Savings

Both FDI and Foreign savings surged ∆K Share in FI sector increased I increased in all sectors

2007 early for output effects of FDI, Foreign Borrowing - ∆K2006 Q2007

2008 effects would be larger, smaller in 2009 Without foreign savings pressure for

devaluation much stronger Devaluation impacts depend on price

transmission, much stronger if fully passed through

FDI & Foreign Savings - Scenarios

Scenarios: FDI – 2006 ∆KFI, 2007 Q reduced; 2007 FDI reduced

∆KFI from 65 to 58 trillion dong FDI from 105 to 37 trillion dong

INV - 2006 ∆KSOE and PRIV also reduced ∆KSOE from 185 to 182 ∆KPRIV from 154 to 148 I 2008 from 522 to 445

DEV – dong devalued from 16105 to 17500 (20%) DEV pte – devaluation muted by low price

transmission

FDI & Foreign Savings – Trade Outcomes

Biggest FDI, Foreign investment impacts on Manf imports Small effect on services, even smaller on agriculture Imports fall more than exports – intermediate demand effects Next years’ investment down means much less demand for

construction – biggest effect on intermediates Devaluation expands exports

Much less so if muted by low price transmissionScenario: FDI INV DEV DEV pte

Actual Predicted Diff. Diff. Diff. Diff.Net Trade Agr E 153.8 156.8 156.6 -0.2% 155.8 -0.6% 171.3 9.2% 156.7 -0.1% Agr M -40.3 -37.4 -37.3 -0.2% -37.3 -0.4% -23.3 -37.7% -37.2 -0.5% Manf E 176.3 133.7 132.2 -1.1% 132.1 -1.2% 136.5 2.1% 135.0 0.9% Manf M -516.8 -467.2 -435.0 -6.9% -427.4 -8.5% -400.1 -14.4% -426.6 -8.7% Energy 83.9 195.8 192.6 -1.6% 192.3 -1.8% 199.2 1.7% 192.1 -1.9% Services -23.5 -16.7 -16.6 -0.8% -16.8 0.3% -16.9 1.3% -17.0 1.9%

Exports 878 789 786 -0.3% 785 -0.5% 897 13.7% 808 2.4%Imports 1,032 1,026 992 -3.3% 984 -4.1% 1,048 2.1% 992 -3.3%

2007

FDI & Foreign Savings – Macro Outcomes Large GDP declines with lost investment

Much smaller impact on consumption Current account improves, but not as much as financial

account declines Realistic devaluation scenario has GDP reduction cut in half

Labor impacts small, bigger for INV than FDI, especially for unskilled labor FI sectors used least labor

Scenario: FDI INV DEV DEV pteActual Predicted Diff. Diff. Diff. Diff.

GDP 1144 1113 1079 -3.1% 1071 -3.9% 1144 2.7% 1091 -2.0%Consumption 742 759 758 -0.2% 756 -0.4% 780 2.8% 762 0.3%Current account -113 -168 -137 -18.5% -130 -22.6% -82 -51.4% -115 -31.5%Financial account 282 282 214 -24.2% 56 -80.2% 56 -80.2% 56 -80.2%Labor demand 46,114 48,887 48,759 -0.26% 48,589 -0.61% Educated 2,154 2,449 2,442 -0.28% 2,435 -0.60% Technical 8,490 8,363 8,337 -0.31% 8,310 -0.63% Unskilled 35,470 38,075 37,980 -0.25% 37,844 -0.61%

2007

Tariffs and Price TransmissionInvestment and Foreign SavingLabor

Conclusions

Lessons Learned – Tariffs and Price Transmission

Price transmission and rents Some big gaps between border and domestic

prices Low transmission elasticities, lags matter Seriously mutes impacts of any price mechanisms

(tariffs, devaluation) WTO Tariff adjustments have very small effects

Even when output response is considered Biggest effect on agricultural imports, if full pass-

through Low price transmission negates even small effects

Lessons Learned - Investment and Trade

Investment allocation? Difficult to show investment following trade policy

Mechanism through rates of return and price transmission Market access does matter for manufacturing

Patterns do differ by firm type, so FDI change alters capacity composition

Foreign investment and foreign savings changes due to WTO have large effects on GDP Consumption much less affected But increased current account deficit substantially Demand effect of new investment felt on construction,

intermediates

Lessons Learned – Labor and Income Labor –output ratios declining significantly

Vietnam wants to “move up value chain” Biased technical change a critical adjustment – “LFP”

Need better information on this Labor surpluses not yet exhausted, but…

Expected skilled labor demands to become tighter sooner than unskilled labor

Wages growing faster than productivity & inflation FDI change had smaller labor effects than overall

investment changes Very small changes in income distribution

WTO helped urban wage labor, hurt rural areas

Next Steps

Push model to 2008, 2009 Bigger WTO impacts in 2008 Recent macroeconomic problems – undo WTO benefits

Inflation, trade deficits, excessive FDI? Then.. Recession, fiscal deficits, less foreign investment

Does trade performance stand up? Keynesian Closure?

Labor demand tightening? Refine econometric investigation of investment and trade

incentives, price transmission Low price transmission estimates critical to results now

Labor market impacts, intermediate requirements (energy) Need better production functions by firm type