Vietnam vs. US in the most current recession
Those of us who are currently residing in the US know that the American financial crisis had led the US and a major part of the European continent into a major recession – largest since the Great Depression of the 1929-1933. The 2007 recession started in the 4th quarter of 2007 until the 3rd quarter of 2009 – 18 months total. This recession brought about an approximately 10% unemployment (25% during Great Depression) and a significant negative GDP growth rate for the US. The main cause of this recession is the failure of the sub-prime mortgages.
But why does the sub-prime mortgages fail?
Many economists blame the heavy subsidization of mortgage financing by the government’s agencies (Fannie Mae and Freddy Mac) that allow buyers to purchase homes at a lower than normal interest rate (hence the sub-prime). These economists also went further to blame the government regulation of requiring banks to approve a portion of their loans to the local community (including many low income communities) which is why we see clusters of foreclosures in many community instead of evenly distributed losses.
I, however, hold a different view of the cause of this crisis. As pointed out by assistant economic professor Jeffery G. Hummel of San Jose State University, the significant economic growth of developing countries (China, India, Vietnam) caused a significant amount of their savings to flow into developed countries, especially the US. The reason is because the US securities has the lowest default risk in the world, thus it becomes the safest place to store wealth for nations. The enormous flow of funds lower the interest rate and create a bubble in the real estates market as we saw.
There is also an amazing fact about this recession that is overlooked: the US recession no longer causes a world wide recession. In fact, the Asian economies are insignificantly affected. Let’s take a look at the US vs. Vietnam GDP growth rate in the past decade:
The US recession only brought about a slower GDP growth rate in Vietnam due to a decline of import and consumption from the US’s side. A closer look at the GDP per capita will further confirm the notion that Vietnam was not heavily affected the current recession:
As can be observed, the recession brought about a negative growth GDP per capita in the US but only slow down the positive growth of Vietnam’s GDP per capita.
The most fascinating thing for me is the response of the Vietnam central bank to this recession. Many people have a negative outlook toward positive inflation rate. This is, of course, natural because positive inflation rate will erode everyone’s real wealth and reduce any debt amount. However, in my view, Vietnam has been growing significantly (averaging 7% annually for the last decade), the enormous increase in output will cause a fall in all prices that would cause problems in trade and labor contracts that would eventually lead to an increase in unemployment. A positive inflation rate is an attempt of the Vietnam central bank to keep the price level stable. However, to point out how the Vietnam central bank has done a great job during recession, let us look at the inflation rates of the US and Vietnam for the past decade:
We can see from the above graph that Vietnam has experienced an a spike in the inflation rate during the recession. This inflation can be interpreted as a surprise inflation which is caused by the Vietnam central’s sudden increase in the money supply. This surprise raise the prices of many products causing the producers to think that demand is increasing therefore it is profitable to increase their outputs. This surprise offsets the effect of the recession in the short run and therefore is one of the major contributor to why Vietnam’s GDP growth rate did not fall to the negative level like that of the US.
The presented graphs are good indicators of how robust is the Vietnam’s economy. Also, we can observe that Vietnam’s banking system is becoming more sophisticated. Vietnam is on the way to catchup with developed countries. Now, only if the Vietnamese communities around the world connect through OneVietnam Network to contribute to this amazing growth in their own ways, we can see a really bright future for Vietnam coming real soon!
(data source: International Monetary Fund)
Neil is a mechanical engineer who aspires to make his own robot so he no longer needs to do house chores. At UC Berkeley, Neil studied in South Korea and Japan where he did research on the post-war development processes of Japan and Vietnam.
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