HRD Responses to the Economic Crisis: Summary of the Viet Nam Case Study

From APEC HRDWG Wiki

In support of the Jakarta conference relating to the Human Resource Impacts of the Economic Crisis, Viet Nam has submitted a case study draft of the impacts of and their responses to the economic crisis. 

In 2007, just before the crisis, GDP growth exceeded 8 percent. Domestic investment and private consumption was robust and non-oil exports experienced impressive growth. Foreign direct investment (FDI), boosted by Viet Nam’s accession to the World Trade Organization (WTO), soared. FDI commitments surged to 20.3 billion in 2007, well above its 2006 level of US$ 10.2 billion in 2006 and 2005 level of 2005 level of US$ 6.2 billion.

During the first part of 2007, Viet Nam’s economy was obviously confronted with the overheating created by massive capital inflows, resulting in spiralling inflation, a ballooning trade deficit and a real estate bubble. The world economic recession started to wreck havoc on Viet Nam’s economy in 2008. The GDP growth rate of Viet Nam decelerated remarkably in 2008 and 2009. After reaching its peak of 8.46 percent in 2007, the growth rate of Viet Nam’s GDP fell by 2.28 percentage points to 6.18 percent in 2008. In 2009, it continued declined by another 0.86 percentage points to 5.32 percent.

Government responses to the crisis

Viet Nam suffered from two major economic problems in just only a very short period of time. Viet Nam had experienced a huge credit expansion in 2007. But conditions changed so quickly after the global crisis unfolded in the second half of 2008, with the dramatic fall in global demand for goods and services churned out by Vietnamese companies. The government reacted by different set of policies to address these problems.

• Stabilization policy package to counter overheating: It took several months of overheating elapsed before the government reacted. Only in February 2008 did the government decide to shift its policy and give priority to macroeconomic stability over rapid growth. As part of the stabilization package announced in March 2008, the State Bank of Viet Nam (SBV) adopted a tight monetary policy. As for fiscal policy, the government cut back its expenditure by US$ 2.6 billion or 4.2 percent of GDP in 2007, by reducing general government expenditure (excluding salaries and some social entitlements), and canceling or postponing inefficient or non urgent public investment projects. The GDP growth target for 2008 was revised downwards, from 8.5-9 percent to 7 percent.
• Moving from fiscal restraint to fiscal stimulus : However, the international economic environment continued to deteriorate dramatically. The world economy was entering a major downturn, caused by the most dangerous shock in mature financial markets since the 1930s. In that context, by the end of 2008, the policy of the Government was quickly shifted from addressing the domestic overheating to global crisis. Policy emphasis was moved from fiscal restrain to fiscal stimulus. Since 2009 national budget was approved, additional stimulus measures were approved and came into rounds. The first one costing US$ 1 billion focused on cuts and delays in tax payment, the interest rate subsidy and more social spending. A much bigger one was announced also at the end of Q1 of 2009 and costed US$ 8 billion (VND 143 trillion).

Impacts on the labor market

The world economic recession had adverse impacts on the labor market in Viet Nam. Below are some of the major impacts:

• Capacity to create new jobs were hindered. In 2007, 1.68 million new jobs were created. The figure just fell dramatically to 1.61 million in 2008. In 2009, only 1.51 million new jobs were created, falling far from the official target set for the year of 1.7 million
• Job losses were widespread. The Ministry of Labor and Social Affairs (MOLISA) estimated that over 80,000 workers nationwide were laid off in 2008. In 2009, more than 133,000 workers lost their job. Also in 2009, in rural areas more than 40,000 jobs were wiped off and 100,000 people became underemployed. However, the situation was short-lived.
• Demand for Vietnamese workers in overseas market slumped. Faced by the economic hardships, the demand for Vietnamese workers just froze in major labor markets for Vietnamese labor. In 2009, the number of workers sent abroad dropped sharply to 75,000.
• Total remittances lost by overseas Vietnamese workers, whose families were very poor and had to rely mostly on these remitted income, were estimated to reach 130 million USD in 2009.
• The labor productivity surged from 4.13 percent in 2001 to 5.58 percent in 2007. The average annual growth rate of labor productivity in this period was 4.95 percent. The economic recession has badly affected the economy's productivity, causing it to nosedive to 3.21 percent in 2008 and further to 2.89 percent in 2009.
• The economic crisis and corresponding decline in production has resulted in a shift away from more formal, higher value-added wage employment to lower-productivity and informal economic activities in Viet Nam.
• During the recession, job losses in export manufacturing have affected the rural-to-urban migrants and their income support to their rural families. Some ten thousands of retrenched workers who are not able to find new urban employment, seeking rural work opportunities is often their only remaining option. However, the reverse migration has not been that severe and obvious as one might see in some other Asian countries during the peak of the recession.
• Underemployment rate also increased from 5.10 percent in 2008 to 5.61 percent in 2009. The unemployment rate rose from 2.4 percent in 2007 to 2.90 percent in 2009 and much of the surge occurs in the rural areas.
• The number of strike rose from 350 in 2006 to 541 in 2007 an hit the peak of 762 in 2008 when the world demand for Vietnamese exports plummeted, many orders were cancelled and worker lay-off was imminent in major industrial provinces.

Interventions in response to the labor market impacts

Key interventions by the Government in response to the impacts to the labour market include the following:

• With labour market stability being the cornerstone of its policies, key responses of the Government were started with a stabilization package to stabilize the economy in early 2008 to prevent a burst and then with the fiscal stimulus programme to prevent a recession and to counter the overall impact of the global economic crisis.
• To support enterprises to sustain production and to avoid mass lay-off, the Government introduced a combination of measures related to rebates and payment delay on corporate income tax and VAT.
• Introduce a controversial subsidy interest rate loan schemes. The total amount spent by the Government for this programme reached US$ 2 billion.
• A loan programmed was introduced to support many enterprises in industrial parks which encountered difficulties in complying with social insurance and the new system of unemployment insurance.
• The economy's 2.4 million poor people and those who lost their jobs and had their income reduced obviously were the one who suffered the most. In an effort to relieve the pain, the Government introduced a direct transfer program which amounted to US$ 190 million.
• In an effort to help workers to increase their disposable incomes and strengthen the social security net, the Government has worked out a roadmap to gradually increase the minimum wage. The roadmap was consistently implemented during the crisis hit period.