Vietnam Global Economic Business Environment

Vietnam global economic business environment means, among other things, a certain liberalization in terms of the workforce availability in the world. In other words, a more permissive approach towards workforce migration meant that this enabled people to work in different locations other than their national ones. Quite often, the trend reflects a migration from the third world and less developed countries to developed ones, as these are the types of economies that require cheaper labor in an ever more competitive business environment.

One of the best examples in this sense is Vietnam and the Vietnamese economy. According to official data, in July 2000, 118,756 labor migrants were working in over 40 nations and this figure will most likely increase in the years to come, as the globalization and liberalization processes move forward. The main destinations to date were Malaysia and Taiwan, that is rapidly growing economies in need of cheap labor to maintain their profitability and competitive advantage in the international arena. The proximity factor, the fact that these countries are near Vietnam, most likely contributes as well to making these countries a preferred alternative.

We have talked above about workforce migration, however, this is just one of the categories of Vietnamese individuals working abroad and sending money to relatives back home. The second category we need to refer to are Vietnamese expats, either those who have settled for good in foreign countries or those working in Vietnamese embassies etc. We can acknowledge that these individuals send money back home to local relatives as well.

It is time to turn to the macroeconomic effects on the Vietnamese economy provided by the phenomenon of foreign currency being send into Vietnam by Vietnamese individuals living and working in other countries. First of all, we need to analyze the currency/foreign exchange segment, in terms of how the currency exchange rates varied for the Vietnamese Dong for a representative period of time. Theoretically, we would expect an appreciation of the Vietnamese national currency with respect to foreign currencies, most notably to those carrying a bigger weight among those send home (Taiwanese Dollar, for example).

The reason for this is related to economics principles of supply and demand. Indeed, we are to assume that the foreign currency sent home would have been transformed in the national currency, which could be further on used to purchase products and services. Transforming foreign currency into national currency by a large number of individuals would be equivalent to an overall increase in demand for the Vietnamese Dong, which would mean an increase in the price of the Vietnamese currency, as compared to the foreign ones. This would explain an appreciation of the national currency compared to foreign ones.

If we look at the data for relevant currencies, we notice this is more a theoretical premise that is not necessarily translated into reality. We examined the case of the Taiwanese Dollar, for example, and noticed a reasonable variation between 458 and 535 with an average of 487 Vietnamese Dong for 1 Taiwanese Dollar on the period from 30.11.2002 to 12.06.2006. If we look at the starting and ending dates of this period, we can say that the Vietnamese Dong actually depreciated over this 4-year period, as the current value has reached 510, close to the historical minimum for this period.

Another effect we would expect to find on the Vietnamese economy would refer to the overall level of consumption. A higher purchasing power for the population means that more products and services are available for the Vietnamese. This in turn means that demand for products and services in Vietnam will increase and this will lead, according to economic theory, to higher consumption levels.

Such an increased demand, brought about by higher purchasing power, determined by the foreign currency sent back home by Vietnamese living abroad, encourages an increase in production output. The reason for this is the fact that higher demand on the market means that there is a significant debouche available for products and services. Companies are encouraged to produce and to come with products and services to satisfy this demand, benefiting from increased revenues and from higher sales figures.

This overall increase in output figures will generate an increase in GDP. Further more, a higher purchasing power and higher income overall means that Vietnamese would be able to build more houses, purchase more flats etc. thus encouraging the construction industry and further contributing to the growth of Gross Domestic Product.

The growth of GDP is clear in figures for the period from 2000 to 2005 and is, as previously shown, partially encouraged and determined by the level of consumption. As such, if in 2000, the GDP ranked at 2% real growth, in 2004, it reached a maximum of 11%, only to slightly decrease in 2005 to 9%.

On the other hand, an increase in GDP growth, together with the stimulation of the national economy, is a good sign for foreign investors in Vietnam. The GDP growth, generated by higher consumption and confidence in the national economy shows a foreign investor that purchasing assets in Vietnam can be a sound economic move and that it can bring long-term profit.

Despite all these positive aspects, there are also negative issues to consider. First of all, an increase in demand, correlated and determined by an increase in the national individual purchasing power, also leads to higher inflation and this is clearly shown by the inflation figures in Vietnam's case. In October 2004, inflation figures reached 10.3% and 2004 ended at a 9.5%, while in 2005, inflation stabilized around 8.3%.

Certainly, an increase in national purchasing power levels is not the sole explanation for this. Some sources blame the inflation increase on factors such as the bird flu. However, higher demands for products and services, determining higher levels of price, also impacts the inflation levels in Vietnam.

Inflation and consumption rates, determined, as previously described, by an increase in purchasing power, brought about by foreign currency sent back home by Vietnamese expats, also related to the level of interest rates in Vietnam. Interest rate partially acts the level of inflation and consumption, because the population will either be encouraged to place their money in a bank (high interest rate) rather than spend it for purchases on the market or be discouraged in this sense, with low interest rates.

The interest rate levels do reflect the level of inflation, in the sense that the increase in inflation was acted upon with a subsequent increase in interest rates, with the focused goal of targeting inflation levels. Real interest rate increased from a low of 6.7% in 2004 (corresponding to the period of high inflation, with figures up to 10%) to 7.1% in 2005, which had an immediately felt impact on inflation levels as well (we have seen this decreasing to 8.3% in 2005).

Interest rates are not the only tool used to regulate inflation levels. Another one that the public institutions have direct access to and can manipulate in order to decrease inflation is the level of governmental spending. We are expecting to see a small decrease of governmental spending in Vietnam, partially triggered by the higher consumption levels we now see in the country.

The reason for this is quite simple. Governmental spending encourages public projects, higher national income through a higher number of jobs. A high governmental spending is the type of tool that encourages an economic boom. However, at this point, despite not yet reaching it, Vietnam is approaching a "hot" economy in terms of growth, an economy that needs to be tempered down through such actions that will limit inflation. In this sense, we can say that the amount of foreign currency received by Vietnamese nationals from the outside also impacts the level of governmental spending in Vietnam.