Vietnamese government role in economic management during crises

''
UPPSALA UNIVERSITY (SWEDEN) &
Viei iNaiii
jf-*
iSITY
OF ECONOMICS AND BUSINESS, VNUH
liR
PROGRAMME OF PUBLIC MANAGEMENT
Swe<*
Nguyen Tai Thu
MPPM-Uppsala
- Intake 1
VIETNAMESE
GOVERNMENT'S
ROLE IN
ECONOMIC MANAGEMENT DURING CRISES
Supervisor:
Prof»&
Dr. Lars-Torsten Eriksson
Local
Supervisor:
Dr.
Nguyen
Manh Hung
Hanoi, Mav
2011
I
ABSTRACT
Title: Vietnamese Government's role in economic management during crises.
Level: Final assignment for Master Program in Public Management.
Authors: THU NGUYEN TAI

Viet Nam Supervisor: Dr. HUNG NGUYEN MANH
Sweden Supervisor:
Prof.
Dr. LARS-TORSTEN ERIKSSON
Date when the thesis is presented:
2011
-May
Aim: The study has objective to
identify the
connection between state mechanism and
ways to resolve crisis, from which apply to Vietnam in order to enhance
effectiveness
of preventing and
overcoming
crisis.
Method: After collecting data from
sccondar\
sources,
the writer use
the method of
statistics, data
analyzing,
comparing, etc to make clear the research problem. Four
countries is chosen to
analyzed,
in which 2 countries apply
market-based
socialist
economy, one applies
free

market-based
econom>
and one applies developed state,
which are: US.
.Japan,
China and Vietnam.
Result & Conclusions: Effect of Keynes
theor>
in saving economy from crisis is not
denied; and one of the most important factors for demand stimulus package
accordino
to Keynes
theor>'
to reach success is the role of State in
econom\.
According to
analysis, the economy that appreciates the role of State in managemeni will be
eas>
to
put policies of
Kcwnes
theor>'
into
realit\
to get good results. Such Slates will have
lower density of economic stimulus package (compared to Governmental spendins)
compared to States with the economy appreciating the role of market.
Such analysis will give the fact that
ahhough
economic models have their own

weaknesses and strengths, patient following market
econom\
according to socialist
orientation is the right
wa).
Howe\er,
in
term
of
pre\enting economic
crisis
prevention, apart from focusing on sustainable de\elopment. \'iet Nam must focus on
harmonizing the management of the State and the role of market manipulation. This is
the best
alternati\e
to raise the role of Vietnamese State in preventing
economic
crisis.
Suggestions for future research: Within the limits
of
the
thesis,
research the
relationship bciween the opening of
the
econom\
in the state models and its
1
, •
v

^^wventing
economic crisis has not been studied. In the
future, the thesis can find out the policy of the problems in preventing and
controlling economic crisis.
Contribution of the thesis: The conclusions of the thesis showed the importance
of harmonizing the management of the State and the role of market manipulation in
preventing and controlling economic crisis. If the management role of the state in
the economy are overlooked, the application of the economic stimulus packages
according to the theories of Keynes would be very difficult and expensive when
the economic crisis happened.
Key words: Role of Keynesian theory, the relationship between the state model
and method of handling the crisis, economic stimulus package
TABLE OF CONTENTS
INTRODUCTION 4
CHAPTER I : THEORY ON CRISIS AND CRISIS PREVENTION 8
1.1
What is economic crisis ?
j
1.2 Keynes' theory on crisis and crisis prevention
(
1.3
Market economy models in the world
K
1.3.1
Feature of free market economy
1.3.2 Features of social market economy
1.3.3 Economic institution
of
developed government model
1.4

Government'
role in crisis and measure to overcome crisis I
CHAPTER 2 : GOVERNMENT'S POLICIES IN CRISIS 13
2.1
Policy of
US
Government
1
2.2 Policy of Japanese Government
1-
2.3 Policy of Chinese Government
I
2.4 Policy of Vietnamese
Governineiil 1
CHAPTER 3 : THE ROLE OF STATE AND METHOD TO SOLVE CRISIS 22
3.1 The role of the State in crisis
2!
3.2 Relation between the role of the State and
method
to treat crisis 2.
CHAPTER 4 :
IMISING
THE ROLE OF STATE IN MANAGING TO
PREVEP
CRISIS IN VIET NAM
i3
CHARTS AND TABLES
Table
2.1:
Structure of US' stimulus package

Table 2.2: Structure of Japan's stimulus package
Table 2.3: Structure of
China'
stimulus package
Table 2.4: Summary of
Vietnam's
stimulus
package
number
Tabic 2.5:
Effectiveness
of demand stimulus policies
Table 2.6: Policy on cutting basic
interest
rate and reality of 2008 saving-lending
intere
rate
Table 2.7: Structure of
Vietnam's
stimulus package number 1
Table 2.8: Scale of national budge expense in comparison with
Vietnam's
GDP and son
Asian countries
Tabic
3.1:
Relation
between
state regime and features of economic stimulus packages
Table 3.2: Comparison of some

governments'
stimulus packages
Table 3.3: Percentage comparison of economic stimulus packages
Table 3.4: Comparison of some
countries'
demand stimulus
packages'
component
Figure
3.1:
Relation between government's role and economic stimulus package
Figure 3.2: Structure of US' demand stimulus package
iMgure
3.3: Structure of
Japan'
demand stimulus packages
Figure 3.4: Structure of China' demand stimulus
packages
Figure
3.3:
Structure of Vietnam's demand stimulus packages
ABBREVIATIONS
MBS Mortgage Backed Securities
CDS Credit Default Swap
GDP Gross Domestic Product
CPI
Consumer Price Index
FED Federal Reserve System
VAT Value Added Tax
lARP Troubled

Asset Relief Program
ODA Official Development Assistant
FDI
Foreign Direct
hiveslment
CPI Consumer Price Index
CIT
Corporate Income Tax
INTRODUCTION
L Background to the study:
The issue of economic crisis is always a hotly debatable one because of it substanti
influence on the whole society.
The economic crisis since
late
2008 has given adverse impact on global
economy,
leadir
the world economy to the most ever serious recession since World War II.
This economic depress has its roots in real estate and the subprime lending crisis in the
L
and Wall Street financial institutions have institutionalized the lending in the form of re
estate bonds to issue to foreign countries. The kinds of bond are Mortgage Back(
Securities
-
MBS and Credit Default Swap -CDS. which
lead
to the situation that in US
22,000 billion of US real estate value, over USD
12,000
billion is debt able in which US

4,000 billion is bad debt'. It is estimated that
he
tolal of CDS is approximately US
35,000 billion and around USD 54,600 all over the world". The other countries al:
imitate the US to sell MBS in the financial markets. Il is this
latent
reason,
along wilh tl
bankruptcy of Lehman Brothers Bank and then of
AIG
as well as hundreds of banks th
has trigger the crisis, affecting a series of countries.
It is realiable that from the Greal Depression in the 1930s to the economic crisis in 200;
many things need to be considered. Although countries' financial crises are basicall
similar and collaboration of
goxernments
is essential lo pre\enl global
crisis'',
il is
simih
to the Cireal Depress in the 1930s,
there
are many differences in measures and policies
I
deal with
crisis of each
Go\enimenl.
In the Great Depression, in spile of
all
countries'

acknowledgement
of
coordination'
necessity to overcome crisis,
the)
also
intenlionalK
found interest for their own countrie
by laking
ad\
antage of other's losses.
Moreover, in this period, each
countr)'
measures were different and because they did nc
have good eooperalion to deal with common economic problems, all countries
ha\e I
incur disastrous losses in the Greal Depression.
The reasons were not identified
clearh'.
' '^Vietnam ccononn
recovers from
L'S
tlnancial
crisis'^".
VNEconomy.
6 October 2008
"
International Swap and Derivatives
Association.2008.
"Summaries of Market survey results"

'
John
2009,
pp 7
5
The UK Prime Minister at that time, Ramsay
MacDonald
assumed that the
problei
originated from capitalism.
The German argued that the crisis had il polilical root and resulted from big
\\i
compensation.
The French claimed that the UK's irresponsible
monetar>
policy and the
US
"unemployment exportation" policy were
reasons'^.
The economic idea dominating in this period is the
Theor\^
on self-adjusting economy
claiming that supply will automatically generate demand, market mechanism will stabili:
all
aspect of capitalist economy, no need to government's inter\ention in economy
ai
freely floating, competing, producing and trading
econom>
should be encouraged.
It

w
this idea that cause economic crisis
1929-1933
to be more serious.
In the financial crisis 2008, each country had its own policies beside the cooperation
handling crisis.
Besides
the clear identification of reason, the fact that countries and
go\emments
to(
timely and wise actions as well as the applicalion of Keynes
lheor>
in handling crisis wc
conducive to the more stable condition
oflhe
global
eeonom\.
Ob\iousl_\.
there is a connection
between
cach
ct)untr\'s
features which affected
the
measures to deal with crisis and the idenlification of this connection will
help
people
understand the nature of those measures, from which enhances effecti\eness in
prevenlii
and handling crisis.

2.
Reason of the study and
objective
of the study
In general, the writer realize that there is a close relation
beUveen
state's role ar
governments' current measure to crisis
Therefore. 1 choose to do research on: Victnatncse
Governtnent's
role in econom
mana^etnerit during
crises.
The
stud\
has
objeclixe
to
idenlif>
the connection bciween slate mechanism and ways
i
resolve
crisis,
from which apply to Vielnam in order to enhance effectiveness
(
pre\'cnling
and o\
ereoming
crisis
3.

Situation of
research
'
John
2009,
pp
10
6
Relating to the issue of economic crisis, a
lot
of researches have been done under differen
aspects. Vietnam's government and Ministries
also
have special documents
an<
conferences on this issue.
The researches have various objective of study and draw many remarkable conclusions
Within the scope of this study, I recommend the following conclusions:
- Vietnam's demand stimulus policy is essential but it has not completely achieved the
aii
of demand stimulus packages-in the study
'The
problems of the demand stimulus packag
number one - lesson for
Vielnam\s
demand stimulus package" written by Vo Thi Thu
Anh
(2010)
focuses on the effectiveness of the demand stimulus package number one. Th
writer points out 10 limitations in demand stimulus package and proposes lesson f(

Vietnam's demand stimulus.
- Many countries such as US. UK, China and Vietnam are implementing econom
stimulus package which tend lo eorreel the mistake and do not tend to stimulus accordir
lo the Keynes
theory,
which is shown in the research
''Vietnam's
current polic\ to
prc\ei
crisis.
Research number 1: Demand stimulus policy". Writer Ngu\en
Due
Ihanh ar
other aulhors (2008) demand stimulus packages research on the feasibility of measures
i
mobili/e
capital for demand stimulus policy and measure according to components of tl
economy.
- Keynes
lheor>-
is the most important
theor>'
in pre\enling
depression.
Writer
Nguye
Hoang Bao, Ho Hoai Anh, Doan Kim Thanh
(2008)
in the
stud> "Ke>nes

theor
arguments and
pre\enlion
of economic crisis in Vietnam" have analyzed Keynes' theor
arguments aboul this
ihcor>
and propose theoretical suggestion to stimulus demand
Vietnam.
- State role in the market-based
eeonom>-
is shown in
man>
economic
theorii
(Neoclassical economies, Keynes, New liberlarianism ) and in the
smd>
"Role of stale
the
market-based
econom>
in some modern and
conlemporar>-
economic theories
ai
applicalion to Vietnam", author Pham Thi Hong Diep (2008) asserts that the govemme
in the market-based socialist
econom> o(
X^ieinam
has an important role in
anii-cris

policies.
7
- In the study "Global Economic Crisis and Developing Countries: Impact and Response'
of Duncan Green, Richard King, and May Miller-Dawkins
(2010),
the authors do researcl
on crisis' impact on Vietnam and some Asean countries in terms of
work,
social
stabilit>
food, etc and forecast potential elements which might affect the recovery such as
economic structure, government role, etc
According to the writers, researches on the relation between state mechanism - role
c
government and way to handle crisis have not been done before. Therefore. I would
lik
to do a research on the issue of economic crisis in Vietnam.
4.
Research tasks
In order lo achieve that goal, the study has the following specific tasks:
- Systematizing theoretical questions aboul economic crisis, measures lo deal will
economic crisis in the world, theory on state role in the economy.
- Analyzing policies to overcome crisis and effectiveness of economic stimulus policy
ii
Vietnam, China, US and Japan
- Analyzing, commenting and make assessment
oflhe
relation belween State mechanism
- government role and policies preventing crisis of those countries
- Proposing some solutions to enhance the

effecti\eness
of prevent and deal with crisis
ii
Vielnain
5. Research Questions:
The study aims to find out answers for the follow ing questions:
- Does State mechanism affect measures to deal
w
ith crisis?
-
llow
to enhance the role of Vietnamese Go\emment in crisis period?
6. Object and scope of the study
Objects and scope of the study is the role of government in some economic mode
in Vietnam. China, US and Japan, these
govemmenls'
policies in crisis and
stud\
tht
relation between
oo\crnmcnr
role - policies to
prc\ent
crisis. The
scope
propose:
8
comments on state mechanism, role of the state within the issues related to economic
crisis.
7.

Methodology
After collecting data from secondary sources, the writer use the method of
statistics,
date
analyzing, comparing, etc to make clear the research problem. Four countries is chosen
t».
analyzed, in which 2 countries apply market-based socialist economy, one applies
frcf
market-based economy and one applies developed state, which are: US, Japan, China an(
Vietnam
8. Design of Study :
The Study is divided in lo four chapters:
Introduction
Chapter
1:
Theory on crisis and crisis prevention
Chapter 2:
Governments'
policies in crisis
Chapter 3: Stale role and measures to handle crisis
Chapter 4: Enhancing role of state in preventing and overcoming crisis in Vietnam
Conclusion
Reference
CHAPTER
1
: THEORY ON CRISIS AND CRISIS PRE\
ENTIOI>
1.1
H'hat
is economic crisis ?

Economic crisis is
the the
downturn
of economic actixities
of a
countr>
or globs
econoniN,
brouglit
on
bs
a financial crisis and is
likeh
happens
uhen
the econom;
experiences
sudden
downturn.
ihe possible signals of economic crisis is the falling
CiDP in
2 continuous quarters or i
the whole year, a drying up of
liquidity,
rising falling price
due
to inflation or
deflat.or
out
How

inu of
foroiun
currenc),
etc
9
1.2
Keynes'
theory on crisis and crisis prevention
John Maynard Keynes (J.M.Keynes) is the proponent of "visible hand"
theor>
whicl"
mentions the necessity of Government intervention into the
econom\.
With its adjustment
the government can prevent or limit the likelihood of economic crisis and even when
th*
economy reveals the signals of crisis, the government can implement policies to recove
the economy.
According to
Keynes^
theory, with the Aggregate demand model: Y
-
C
^ 1 +
G
+
NX
ii
which Y is the total demand quantity on a product of an economy. C is consumption, I i:
investment, G is government spending, NX is net export.

According to this
model,
in order lo handle
crisis,
it is essential to increase Y
b^
increasing variables in the aggregate
demand,
however, when crisis
happens,
the variable:
C, I, NX will not increase
automatically,
they needs the
inter\enlion oflhe
govemmen
through macro policies. Demand stimulus in Keynes'
model
is lo stimulus 3 factors o
aggregate demand: consumption, investment, government spending.
The important research of Keynes in preventing crisis is in 1932 when he wrote the boot
"General theory on employment, interest rate and money", it was not until
the
beginnin;
of 1936 was it published and he assumed that "this
theor>
helps prc\cnl
downturn,
lead:
the economy recover quickly, creating a more balance and stable capital

system"^
According to Keynes, a recession results from the situation in which the
econom\
ha:
abundant production
capacitx,
supply surplus causes price lo reduce in all markets
consumers are not encouraged to consumer, which leads to the lower demand
quantity
ir
comparison with
suppK
quantit).
After all, the
econom>
gets stuck in crisis and unable tc
overcome.
Therefore,
in order to
sohe
the problem, an
adequate!}-
big demand
quantit\
is
required.
On the other hand, according to Keynes, while the households, corporate tend to save
monc\
and consumers less than their income, government is the
onh

unil ha\ ing ability tc
consume all or even more
ihen
ils income. In the normal economy, financial
intermediaries will help transfer money lo corporate to invest, bul in the crisis period,
because of
low
profit, the corporate might not want to invest.
•
Luong Thai Bao:
'^Keynes
and measure to overcome
crisis
!0
Because of these 2 basic arguments, Keynes suggests the basic measure to prevent crisis
i
stimulus the demand on the basis of transferring buying
abilit>
from private, household:
to government to increase demand, helping the economy to get over from crisis.
1.3 Market economy models in the
worI(f*
The market-based economy is the popular economy model in most countries in the
worl
It might be divided into the 3 following types:
- Free market economy
- Social market economy
- Developed state economy
1.3.1 Feature of free market economy
- Has a freer market mechanism than olher economies. In this market economy,

ih
economic relations are solved Ihrough
market,
state intervention is limited.
Therefore, all problems and failures
oflhe
economy mainly originates from
breakdown or incomprehensive
oflhe
market.
- In this
model,
the labor market has high fiexibility and rules on labor market ten
to protect the capitalists rather than the
emploxees
1.3.2 Features of social market economy
- Social market economy is derivatives of free market econom>. Bul its content,
fact, is the reasonable combination between
social,
economic and polilical aspects
- It considers markets as necessary condition, not sufficient condition and conside
law, stale, ethnic, etc no less important than economic, financial policies. This
model appreciates government "stimulus
role
in
inter\ention
and social welfare.
1.3.3 Economic institution of developed government model
- The main function
oflhe

government in this model is to impulse long-term
economic growth and development.
Therefore,
the
go\emmeni
has to implcmen
*'
Hoang Ngoc Hoa.
'^Market-based
economy institution model and the market-based socialist economy
in
Vietnam"
policies on economic restructuring basing on the achievements of
industrialization and re-industrialization based on knowledge to adapt the quick
change of market requirements to create competitive advantage to enhance
competitiveness.
- The government does not
only
care about
rule
of the market economy but also
instructs, directs, adjusts the direction and content of the economic activities to
fulfill government' development function.
1.4
Government'
role in crisis and measure to
overcome
crisis
Government and market are the two close entities in the market economy. According to
Keynes, the government's intervention in crisis is essential to overcome crisis.

Although the government always has to respect operating regime of the market, Adam
Smith's ^invisible
hand" theory can also lead to market to operale
effectixely
when the
asymmetric information is handled well. When crisis happens, almost all the markets are
asymmetric information market and the
governmenl\s
inler\ention is not merely in sectors
refused by private or attractive sector, it is in all sector all
o\er
the
counlr>'.
Hence,
how
can the government do to deal wilh crisis?
Obviously, depending on cach nation's
economic
situation,
public
response
and polilical
context, its own government will ha\e
different
choices showing it priorities. However,
according to demand stimulus
theor)
of Keynes, the solution groups include:
-*-
Implementing high

salar\*
policx
lo restructure sectors for the purpose of focusing on the
highest productivity sector, prohibiting or discouraging the
low
produclivit}'
and high cost
sector.
+
Increasing government spending (along with adjusting
monetar>
polic\:
reducing
interest
rale),
from which
gi\e companies
condition lo
in\est.
hire more
workers,
increase
output for the purpose of expanding market. Government invests in project producing
necessary goods.
+
In the period of crisis, companies do not want to in\est but keep cash or buy short-term
securities to make
profit,
rhercforc.
on

one
hand,
goxcrnmcnl
should impose tax on
income before investment
ol^
companies and go\emment uses that sum ot money to
expand market and cause companies to sohe.
12
+ Trade protection: in this period, each nation tries to encourage export to boost growth,
therefore, to some extent trade protection will help domestic companies produce and not
cut labor.
Those solutions will be adopted in the form of
2
main policies:
monetar\
policy (to adjust
money supply in the economy) and fiscal policy (including lax policy, government
spending impulse policies and demand stimulus policies, etc)
However, in consideration of
Keynes'
limitation pointed out by Classic Economy or
Austrian
school.
Neoclassical Economics such as: demand stimulus policy might generate
interest group related to government, policies need lo much power abuse, etc
all
governments need to consider when implementing the policies:
+
When choosing demand stimulus

measures,
measure that can generate the highest
multiplier (k) must be prioritized, which means those measures
ha\e
lo boost maximum
consumption
+
Implementing in short-term until the economy is stable, government's
inter\
enlion must
be stopped, if continued it might
be barrier
against natural selection of market economy
+
Demand stimulus is lo lead the
econom\
to ils normal orbit, regard of nation and
companies'
competitiveness enhancement issue.
Compelitixeness
is the issue needs paid
high attention even before or after economic crisis. Il must not
onh
implement within the
orbit but also comply with competitiveness. The opinion of changing
technologx
to
enhance
competitixeness
in crisis is opposite to Kexnes as importing machines to change

technology will increase import and reduce multiplier
(k)
in the economy
In addition, according lo many economists' opinion such as
Laxvrenee
Summers . the
solution lo deal xvilh crisis through the demand stimulus package must assure al least 3
criteria: timely (the measures must hax'e prompt
effect,
increasing economic spending
promptly), right object (the objects will consume and consume almost all of their the
demand
stinnilus
quantity) and short-term (implement
demand
stimulus in
short-iemi
to
improxe effectiveness of demand stimulus package and haxe no effect on
long-lenn
budget)
Aceordinu
lo the analvsis on measures to handle crisis in 4 countries including US. Japan,
China and
Vietnam,
it can be seen that the main idea is Keynes'
theorx
by government's
' Nguyen
Hoang Iiao. el al.

"Kc\ncs's
theor\.
arguments
and
prc\ention
of X'ietnam economic crisis".
' liurence
Summers : economic professor,
fomier
principal
o^Har^ard,
economic counselor for
LS
president Obama
13
intervention through increasing aggregate demand (by government
spending,
encouraging
consumption, investment, etc) which is economic stimulus packages.
Although there are many ways to
deal
with crisis using
Keynes^
theor>
and
government'
role
is undeniable, in fact, not all countries totally agree with Keynes' solutions.
Consequently, does state nature affect the implementation of solution according to
Keynes' theory to different extents?

CHAPTER 2 :
GOVERNMENT'S
POLICIES IN CRISIS
The writer classifies government's policies inlo the objects that receive benefit from
policies and view on demand stimulus criteria according to Keynes'
Iheorx'.
The writer chooses 4 countries to analyze, in which 2 countries pursue the social market
economy, one pursues free market
eeonoiny
and one pursues developed slate model.
Analyses
xvill
focus on Vielnam for the purpose of proposing solutions to overcome
crisis for this country. US, Japan and China
will
be analyzed some main and brief points.
2.1 Policy of US Government
The US government has carried out 2 actions lo prevent economic crisis:
a.
Stabilizing financial market
With the particular reason from the national financial sxstem, US government has taken
action to rescue the tlnancial market such as:
equitx
purchase program xalued USD 700
billion made in October 2008 to
bux
shares of
manx
US banks. In March 2009, pour USD
750 billion into Fannie va Freddie Mae, spend USD 300 billion to

bux
long-term bonds
b.
Stitnulating
detnand
US government implement 2
demand
stimulus
packages,
the first one in
Februarx'
13
2008 after the crisis signal in 2007, valued USD 152 billion ihrough Economic Demand
Stimulus Act 2008. The second one in
Januarx
2009 valued USD 787 billion
The first demand stimulus package focus on 2 solution groups: the first is to encourage
people's consumption by assisting low income people and children such as repay personal
income tax, subsidize for children under
17
xears old
($300^
child), assist those xvho get
14
trouble from subprime lending. The second group is to support companies' investment
cost such as give tax treatment for companies, allow quick depreciation.
The second package focuses on the 2 solution groups to increase government spending
(making up 2/3 value of the demand stimulus package) and reduce tax. The particular
solutions are as follows"
- Assisting companies to create job for 2.5 million workers by lending companies tax

about $ 3000 for each newly hired employee, removing tax on profit from capital
for small and medium enterprises
- Assisting citizens: house owners, reducing tax for
individual,
households and
increasing unemployment insurance
-
Investing
in public work such as hospital, roads
Table
2,1:
Structure
of US' demand stimulus package
Unit: USD
Order
1
2
3
4
5
6
7
Fields
Reducing tax
Education
Health care
Social
welfare
Building infrastructure
Energ)'

Other
Total
Plan
237 billion
141.6 billion
111.1
billion
102 billion
90 billion
58 billion
47.3 billion
787 billion
Proportion of
demand stimulus
package
30.2
18
14
13
11.4
7.4
6
100%
(Source: Boris Sobolev. Obama: Change to come)
We ean
reali/e
that American Government has used the advices of Kexnes
theorx
and two
stimulus packages to stabilize total

demand;
hoxxever
xvhile Keynes theorx just focuses on
raising total demand then American Government has tbcused more on the collapse of
financial system xvhen spending a considerable amount of money to cope
xxiih
this
problem,
2.2
Policy of Japanese Government
In
8/2008
Japanese
Goxernment
has
gixen
demand stimulus package of
7,
2 thousand
billion Yen equivalent to 81 billion USD. On 12/12 2008 Japan has declared nexv plan to
stinnilale
economy xvith the value of
26,
9 thousand billion Yen equivalent to 302 billion
USD.
15
Japanese policies are as foUoxvs:
Support small and medium-sized enterprises
Individual support
:

12000 Yen/person
Tax exemption for labors, house buyer xvith difficulties due to economic recession
\
Support directly to households
Money supply to financial system
Tax exemption of roads
Melhods to encourage enterprise to employ and use labors.
Together xvith demand stimulus package, Japan also proposes policy to save financial
market xvith
10
thousand billion Yen (equivalent to about
112
billion USD) for the market
of forex and banking.
Table 2.2 : Japanese demand stimulus package
structure^
Unit: JPV
No.
1
2
3
4
5
Sectors
Tax support for localities
Solve employment
Environment
Credit
for small and medium-sized
enterprises

Consumption support and other
supports
Total
Plan
3500 billion
600 billion
800 billion
1200 billion
1100
billion
7200 billion
Density'
in
demand stimulus
package (%)
48,6
8,3
11,1
16,7
15,3
100%
(Source: China daily: Japan unveils
stitnulus
package)
We can see that Japan also has the similarity xvith the US
xxhen
using demand stimulus
policy together xvith saving financial market. In the detail of demand stimulus
policx
implementation, Japanese Government also follows Kexnes

theorx',
out of xvhich:
Solutions to stimulate consumption of
people:
including individual support (the
elderly) of 12 thousand Yen (il is considers lo be failed due lo polilical purpose); direct
support to
households,
tax exemption for
labor,
support lo buy house.
Solutions to stimulate spending lo invest in enierprises: encourage enierprises to employ
and use
labors,
support small and medium-sized enierprises xia supporting credit capital
2.3 Policy of Chinese Government
Chinese Government has approved economic stimulus package
x\
ith the \ alue ot 586
billion USD (4000 billion Yuan) on
9.11.2009
after industrial
gro\xih
of China reduced
from
16%
in 6.2009 to 8.2% in
10,
xvhich xvas the loxvesl
xx iihin

7 past years and export
in 10.2009 just slightly increases 19.2% compared to the same term.
Chinese economic policy before global recession in 2008 is: to maintain
groxxlh
and
hinder
infiate.
I loxxever
xvhen Chinese economy gets trouble, Chinese Government has
transferred to the policy of stable economic dexelopmenl.
**
The
writer
extracts the data of
the
first demand stimulus package of 7200 billion
Xen
to consider due to the
limitation of information of the second demand stimulus package of Japanese Government.
16
Chinese stimulus package occupies about
12.7%
GDP ( according to adjusted GDP in
2008) xvhich xvill be implemented xvithin 2 years xvith three groups of demand stimulus
methods.
People-oriented consumption stimulus:
Chinese Government considers the demand from 800 million rural people is one of factors
that actively use domestic products and increase real demand for the economy; it is the
demand stimulus method to create high effect then the Government has basic policies to
improve

people's
living standards via increasing social
welfares,
constructing
distinguishing support programs for farmers; encourage spending by reducing tax;
spending for rural area occupies 700 billion Yuan.
Stimulus to invest in enterprise :
Encourage the banks to lend small and medium-sized enterprises; tax exemption for such
enterprises; implement financial melhods such as loosening credit, loxvering basic interest.
Besides, with regard to export enterprises. China also has private polcies such as
increasing import and export lax refunding for textile, electronic sectors; encourage
enterprises that uses many labors.
We can realize that China is also very clear xvhen orienting the target into small and
medium-sized enterprises which have about 4.3 million enterprises, 95% export activities.
which contributes 60% total
CJDP,
50% lax income, 68% export source and solve 75%
new
jobs each year.
This policy has reached three criteria of
Keyness,
especially the norm of right object.
Solution via investment spending of Government:
Chinese Government focuses on spending lo support natural calamity (earthquake in Tu
Xuyen province - this item occupies
1000
billion
Yuan,
equal lo 25% tolal demand
stimulus package), to invest infrastructure especially traffic infrastructure. According to

statistical data, spending to dexelop infraslruclure is
1500
billion Yuan,
occupxing
38%
lotal demand
stimulus package.
Besides, Chinese Government also has many policies to increase spending to invet in
education xvhich focuses on vocational Iraining.
Table 2.3 : Chinese demand stimulus package structure
Unit:
\
uan
No.
1
2
3
4
5
6
6
Sectors
Adjust consequence of natural
calamity in Tu Xuyen province
Housing for rural area
Raise
capacity for rural area
Social welfare
Construct
infrastructure

Sustainable development and other
support
New
technolog)
and industry
Total
Plan
1000 billion
400 billion
370 billion
150 billion
1500 billion
210 billion
370 billion
586 billion
Density in
demand stimulus
package (%)
25
10
9
4
38
1
1
5
1
1
9
100%

(Source; Report of Zhang Ping al Conference on national dexelopmenl and innovation of China)
17
We can see that, in spite of following the principle of demand stimulus of
Ke>-nes.
the real
amount of money is not much. Chinese Government has spent most of money to save
natural calamity (25%), infrastructure investment (38%) (mainly to develop highxvay
system - this investment not meet the fast criteria), investment in rural area to improve
development difference (9%). And it seems that Chinese Government has combined wilh
many other problems (not merely to save economy urgently) via stimulus package of 4000
billion Yuan.
2.4 Policy of Vietnamese Government
Crisis reality in Viet Nam and
influences
of crisis
Viet Nam does not receive internal impacts from banking system as other nations in the
world due to uneomprehensive integration and participation into MBS and CDS like the
US and European countries, however just like other nations, influence of intemational
marker, especially from American market has impacted on financial and currency market
of Viet Nam.
Such impact has made economic groxvth rate slow. At the beginning
oflhe
year 2008,
growth rale of GUP expected to be 8.5 - 9%, hoxvever in 2008, GDP of Viet Nam just
increases 6,23 % and in 2009 il increases 5,32%
,
which is the lowest level within
10
recent years.
The crisis has impacted on Vietnamese export inlo the US xxhich is one

oflhe
biggest
market of many Vietnamese products such as
textile,
leather
shoes,
seafood cuiTcnlly,
American market occupies aboul
21-22%
Vietnamese export
tumoxer
( data in 2008).
Besides, the next export markets of Viel Nam are
l^U
and Japan which arc also
impacted
then export turnover of such nations also reduces.
Crisis also impacts on capital market of Viel Nam; security market also reduces strongly;
foreign investors oecupx' aboul 20% capital which are ready to
x\ithdraxv
capital then
capital mobilization from foreign banks is more difficult then capital of domestic
enterprises is also narroxved doxvn, and interest is increased highly.
ODA and FDI are also reduced because foreign enterprises or
goxernments
get ditficullies
in their oxvn nations.
Under the impacts of global financial
crisis,
right al the first quarter of

2008,
Vietnamese
Government has quickly given many solutions to prevent.
Policy of Vietnamese Government
On 11/12/08, the Government has promulgated Resolution No. 30 2008 NQ-CP on 12
solutions to
prexent
recession, maintain economic growth rate and ensure social security,
including 8 solutions lo promote the rale of Governmental spending.
On 13/01/09. financial ministry had promulgated Circular no.
03/2009TT-BTC
on
reducing 30% CIT in quarter 4/2008 and in 2009 tor enterprises
w
ith charier capital of not
more than
10
billion dong or enierprises with contract labors of above three months of
quarter 4/2008 not more than 300 people. Besides, the Goxernment also implements other
methods such as loosening currencx' poliex' (reducing interest; increasing
monex supplx
via reducing
compulsorx
slore rate ); adjusting exchange rate of
VND'USD
to stimulate
export.
We can synthesize policies of Viet Nam Government via the tblloxving table:
Table 2.4 : Synthesize policies of the first demand stimulus package of Viet Nam
Financial policy

Currency policy
Social policy
Reduce 30% CIT.
Extend 9 more months for paid tax in 2009.
Refund 90% VAT for exported products.
From
1.2008
to
1.2009,
Viet Nam
State's
Bank has reduced basic
interest rate 6 times lower, from 14% to 7%.
Compulsory store reduces 1% for VND and 2% for foreign
currency.
Expand exchange rate fluctuation of VND/USD to 2% in
11.2008,
to 3% in 3.2009 and then lo 5%.
Support 4% interest rate for credit items issued within 8 months
maximum from
1.2.2009
lo
31.12.2009
Unemployment insurance since
1.1.2009.
Support loans
w
ilhoul interest tor enierprises to pay salary,
insurance and unemplovment benefit for labors.
Then with regard to Viet

Nam.
we have the following conclusions:
Viet Nam has used three groups of demand stimulus:
People-oriented consumption stimulus:
With this melhod. Vietnamese Government has divided clearly two groups of method
applied to two different groups of object: the poor and the whole people in general.
- Policy for the poor:
This is fragile object when economic crisis happens. Risks of such object are
salan.
debt,
salar\'
reduction and
unempknment.
The outstanding
polic)'
for this group of object is uncmplo>ment benefit.
Until
1.1.2009
unemployment benefit is officially implemented and one
\ear
later,
when
labors and go\ernment contribute enough 1%
salar> within
at least
12
months then
spelldin^
items from
unemplo\

nient
benefit can promote its own effect.
According to a study on the
effect
of demand stimulus policies then unemplo\ment
benefit is to create a maximum demand on one dollar of stimulated demand.
On the other
hand,
this
polie>
has helped Vietnamese
Go\
emment to create equal factor,
ensure social
securitN
then create stable
psycholog\
for people.
With
rcard
to
de\
eloped
nations,
the
sNstem
of
unemplo>menl benetit is
considered as a
tool of

iuitomatie
absorption for the
cconom>.
it means that when the
econom>
develops
strongiN
and
unempkn nient
rate
reduces,
funded
cash flow is higher than spent cash fiow
then it will reduce total demand.
On the contrarv, when the
econom>
gets
recession,
the unemploxed
receives
mone>
from
budget then it can reduce their difficulties and
picN cnl
total
demiind
from fast reducing .
'" "unemployment
benefit skips the chance to change". Sai Gon
Marketmg.

12
I 2009.
19
Table 2.5 : Stimulated effect of demand stimulus
policies''
Fiscal Stimulus
Unemployment benefit
Exemption of budget income for the States
Tax refund for once
Increase tax credit for family with children
Adjust minimum tax level
Reduce tax
Elastic tax for small enterprises
Reduce tax for dividend and interest on
capital
Reduce property tax
Demand on one stimulated dollar
$1.73
$1.24
$1.09
$1.04
$0.67
$0.59
$0.24
$0.09
$0.00
- Policy
for the
whole people:
Vietnamese Government

has
implemented
the
policy
of
elastic individual income
lax (to
the
end of
5.2009). This
is the
private policy which
is
implemented
by
financial
ministr\';
although
the
system
of
individual income
tax of
Viet
Nam is not
completed
and
elastic
tax
is

noi Ihe
direct form
of
consumption stimulus, this policy
has
crealed positive
psychological effect
and
people
can
increase spending.
Vietnamese Govemmenl
has
applied
Ihe
policy
of
delayed income
tax
from securities.
This policy
has
impacted
on
securities investors,
at the
same time
it is
also
the

solution
for
stimulating capital market.
Besides,
the
policy
to
reduce
VAT for 19
groups of products from
1/2/2009 to
31/12/2009
is also
a
Governmental method
lo
encourage consumption.
Stimulate
lo
invest
in
enterprise
Vietnamese Government
has
spent most
of
stimulus package
for
in\eslmenl
in

enterprise;
according
to
statistics
via
table then supporting interest rale
for
credit loans occupies
17.000
billion, implementing
tax
reduction policy: 28.000 billion
and
increasing debt
balance
of
credit guarantee
for
enterprise occupies 17.000 billion.
Such policies
are
implemented
\
ia
reducing
tax by
many forms
lor
enterprise,
at the

same
time encourage enterprises
to
implemenl
new
invested
projects,
increase
emplo\
ment
of
workers
via
supporting interest rate.
Currencv
poliev
:
Table
2.6 :
Policy
to
reduce basic interest
and
realistic interest rate
of
saving
and
lending in
2008
II

The center
to
study policy
and
development
2009.
"Demand
stimulus policy
in
Vietnamese
background"
20
29\
14«
10H
•29%
3«
OH
/
X/.X/.^.^^'^/X/
-Bisir Rjif
RcOiiaDcioglDicrfM Rcdiicoaot iDtcrfii me
Dc^Mit rair —Baiit
rate
Utdifis riif
«*-<?.«?
Basic rate is lowered
wheo
the
ecooomic don-ntum

Deposit rate and
Lendise
rate have
Tallen
( Source : Report on market study of Habubank securities in 2009)
When currency policies are done, investment channel for depositing in 2008 was not
attractive any more then people and enterprises have implemenied olher replaced
investment channels.
When basic interest reduces (6 limes of adjusted reduction), interest for lending (for
people) and investment lending (for
enterprise)
in Viet Nam have also reduced. This will
support people to spend more, enterprise will be encouraged to expand production and
recruit more labors.
Policy lo support
¥%
interest rate:
This policy is less applied by nations due to the
worr}'
of infiate and direct interference
into exchange rale.
Such solution has well implemented two principles
of'Tast
and short term" although the
supporting 2% interest rale in the second stimulus package has made this solution lasted
one more year. The
principle
of right object in this solution has not shown the right spirit
of Lawrence Summers - right spending and spending all demand stimulus
quanlit).

If the
loans come to the enterprises that really need capital and use
man\'
labors then it can reach
high effect,
"but
if
enterprises,
especially big enterprises wilh capital deficit that use old
debt reversion for loans wilh high interest to
enJo\
lower interest then the profit of such
solution is to save but not stimulate
demand"
Fituwcialpolicy:
reduce tax and extend
the
lime to pay tax for enterprises. This is a useful
melhod which can help enterprise to maintain or expand production. However, this policy
has reduced income for
State's
budget which can impact on other spending of
Government.
On the olher hand, supporting without selection for
all
enierprises can make
effect of such policy reduced.
Policy to encourage export support:
Viclnamese
export

has big mechanism in GDP ( occupying 77% GDP in 2007) which
had
stronu
reduction in 2()()8 and 2009:
Go\ernment
has implemented one more solution
for
enterprises
which is to
refuiKl
tax temporarily 90% for exported products.
According to
Keynes,
niethods to encourage export should focus on sectors
\\
ith the
highest
domestic
rate (such as seafood ) to have the highest total
demand''(according
to
the following lormula of
Ke>nes
k = 1/[(1 -
c) + {e
- m)] ) . Although Vietnamese
Government has not indicated
this.
Governmental agencies also implement methods to
i:

- va Ttij Thuy
Anh. "Problems of the first demand
stimukis
package - experiences for demand stimulus
polic) in
Vict Nam". •
,,• vi
"
Ngu>en Hoang
Hao.ct
al. "Keynes
theory,
arguments and prevent economic recession
in Viet
Nam
21
encourage export support such
as
support
to
look
for new
export market
.especially
export
of
seafood
and
agricultural products.
Besides, some other methods

to
help enterprises reduce labor dismissal such as: reducing
contribution
of
enterprise
in
social insurance, unemployment
benefit to
reduce labor cost
for enterprise.
Solutions
to
stimulate investment spending
oflhe
Government
Vietnamese economic stimulus package focuses
on the
method
to
stimulate Governmental
investment spending such
as
deposit
of
Staters
budget
for
urgent project:
37.100
billion.

Such policy
is
implemented
for :
•
Spending
lo
invest
in
rural infrastructure: this policy
can
reach
3
criteria: fast
(Government gives priority
to
invest
in
small
projects,
especially rural traffic
and
system
of agricultural irrigation
to
quickly implement
and
fulfill), right object
(
support

to'
improve competitiveness
of
agricultural products)
and
short term (projects will
be
finished
after
a
year
of
implementation).
Together with this policy, Government supplemented
one
solution
to buy
agricultural
store
for
national store,
at the
same time, reach
the
target
of
Governmental spending
and
promote rural labor market.
Spending

for
education: applied methods such
as
increasing
infraslRiclure
for
schools,
especially difficult areas, raising salary
for
teachers, increasing scholarship
This policy will help enlerprisc
to
ensure
the
time
of
economic stimulus
and
ensure long
term personnel vision.
Table
2.7 :
Structure
of
Vietnamese first demand stimulus package
No.
1
2
3
4

5
6
7
8
Sectors
Support interest rate for credit loan
Temporarily withdraw capital for
basic construction in\ cstmcnt
Deposit State's budget to
implement
some urgent projects
Transfer capital from 2008 to 2009
Issue Governmental bond
Implement the policy to reduce ta.\
Increase debt balance for credit
guarantee lor enterprise
Other items of demand stimulus to
ensure social security
Total
Plan
17.000 billion
3.400
billion
37.200 billion
30.200 billion
20.000 billion
28.000 billion
17.000
billion
7.200

billion
160.000 billion
Density in
demand stimulus
package (%)
10,7
2,1
23.2
18.9
12,5
17.5
10,6
4.5
100%
( Source: Report
of
ANZ bank)
Wilh expected
GDP in
2009
of
1.600.000
billion,
the
rate
of
stimulus package value
compared
to
CJDP

of
Viet
Nam
occupies
10%
which
is
\er>^
high compared
to
other
nations.
Table
2.8 :
Scale
of
budget spending compared
to
GDP
of
\
iet Nam and
some Asian
nations
22
Unit: %
Nation
China
Hong Kong
Korea

Taiwan
Indonesia
Malaysia
Philippine
Singapore
Thailand
Viet Nam
1990
18,5
14,28
15,54
14,48
19,6
27,68
20,4
21,3
13,94
21.89
1995
12,18
16,42
15,76
14,39
14,68
22,07
18,17
16,1
15,35
23,85
2000

16,29
17,71
18,91
15.41
15.83
22,89
19.27
18.84
17.33
23.36
2006
19,2
15,83
23,6
15,9
20.07
24.92
17.31
15.8
16.38
27.79
(Source: Report of
ADB
in 2007)
We can realize that Vietnamese budget spending is about 30% GDP, which is two times
higher than Singapore and the highest within
10
nations in statistics.
Stimulus package spending occupied
10%

GDP (the first stimulus package) will make
budget decifit of Viet Nam more complex and lose balance in economy.
According to experiences from economic recession in
1930s
indicated by H.W.Amdt in
the book so-called
"'
economic lesson of
1930s"
which was published in 1944 then "the
recession had made lolal national income from lax reduce at the lime when the authority
must spend more to save
unemploN nient
and olher objects. Although budget decifit will
happen,
nations still try lo maintain their own income and reduce spending lo the lowest
level to balance
budget"'^
then we can sec that losing balance in economy via losing
budget is really a trouble.
CHAPTER 3 : THE ROLE OF STATE AND METHOD TO
SOLVE CRISIS
3.1 The role of the State in crisis
In Keynes
theoiy,
the role of the State in
sohing
crisis is very important which cannot be
denied.
The role of

the
State is mentioned in two aspects: positi\e participation of
the
Government
and Governmental spending.
a.
Positive participation of the Government
Unlike the viewpoint in
uhich
the role of the State just hinders the process of natural
purification of
technology,
management
capacity,
production and allocation scale of
invisible hand; market
econom> just
keeps enterprises with effective trading:
realit)
of
two crisis (economic recession in 1930s and economic crisis in 2008) has
proved
that:
when the economy loses balance, active and positive
interference
of the State in economic
"John
2009,
p24