FOREIGN TRADE UNIVERSITY
SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS
MACROECONOMICS ESSAY
The effects of automatic stabilizers on the US economy from 2020 to
2022 and some lessons learnt
Students:
Hoàng Việt Hà
2212140026
Ngô Huyền Anh
2212140008
Lê Đỗ Huy Long
2212140050
Nguyễn Thảo My
2211140202
Quách Trần Thảo Ngọc
2213140067
Nguyễn Hà Trang
2212140077
Nguyễn Minh Vũ
2212140083
Đỗ Hoàng Nam
2213140061
Credit course: Principles of Macroeconomics
Instructor:
Assoc. Prof., Ph.D Hoang Xuan Binh
Ha Noi, May 31 2023
TABLE OF CONTENTS
ABSTRACT...............................................................................................................................2
INTRODUCTION.....................................................................................................................3
CHAPTER 1: SUMMARY OF AUTOMATIC STABILIZERS...........................................4
1. Some important definitions about automatic stabilizers.............................................4
2. How automatic stabilizers function and their objectives............................................ 4
CHAPTER 2: A CASE STUDY OF AUTOMATIC STABILIZERS IN THE USA...........6
1. How the dire impacts of Covid-19 on the US economy highlight the importance of
automatic stabilizers........................................................................................................... 6
2. Automatic stabilizers in operation.................................................................................8
2.1. Unemployment insurance....................................................................................... 8
2.2. Progressive Tax System........................................................................................... 9
3. The influences of automatic stabilizers on the US economy..................................... 10
3.1. Unemployment insurance ( UI ).............................................................................10
3.2. Progressive Tax System......................................................................................... 11
4. Limitations of automatic stabilizers............................................................................ 12
4.1. Unemployment insurance ( UI ).............................................................................12
4.2. Tax Progressive System......................................................................................... 12
CHAPTER 3: LESSONS LEARNED FROM THE EFFECTS OF AUTOMATIC
STABILIZERS IN THE USA................................................................................................ 14
1. How current automatic stabilization policies can be improved................................14
1.1. Targeted beneficiaries............................................................................................ 14
1.2. Duration of policy enactment.................................................................................14
1.3. Source of funding...................................................................................................14
2. Recommendations of other policies that can be implemented..................................14
2.1. Implementing a federal job guarantee....................................................................14
2.2. Implementing a universal basic income.................................................................15
CONCLUSION........................................................................................................................16
REFERENCE.......................................................................................................................... 17
1. Articles........................................................................................................................... 17
2. Websites..........................................................................................................................17
Page 1
ABSTRACT
It is inevitable for an economy to encounter fluctuations over time, and thus, the
US is not an exception. Therefore, fiscal automatic stabilizers have been used as
one treatment for this pain of the economy. This research examines the effects of
automatic stabilizers on the US economy from 2020 to 2022. Using the
qualitative method, we summarize general knowledge of this fiscal policy, hence
gaining a deeper insight into the case study of automatic stabilizers application
in the biggest economy of the world during the period from 2020 to 2022. The
paper analyzes the impacts of automatic stabilizers on the economic situation of
the US, from which possible solutions are concluded.
Keywords: fiscal policy, automatic stabilizers, effects, case study, solutions.
Page 2
INTRODUCTION
As the Covid 19 pandemic struck the US economy and brought along with
it the unbelievable economic crisis, the US government has responded with a
number of Covid relief, totaling around $900 billion. However, these reliefs
were delayed and slow due to the problems of political stringency and
competition in the USA, unlike the automatic stabilizers. In fact, these automatic
stabilizers are intended to play a crucial role in the US economy and those bills,
namely the March 2020 Coronavirus Aid, Relief, and Economic Security Act
(CARES) and the March 2021 American Rescue Plan Act (ARPA), were added
to support the existing policies. Nevertheless, the influence of automatic
stabilizers and supported acts has their drawbacks and limitations.
Therefore, this paper examines the effects of automatic stabilizers, one of
the most important policies, on the US economy during the period from 2020 to
2022, with a specific focus on the impact of these stabilizers at the peak of the
Covid Pandemic in the USA. Overall, automatic stabilizers assist the US
economy in promoting stability and mitigating the effects of economic
fluctuations.
By examining the effects of automatic stabilizers during this period, the
study contributes to the existing knowledge base by deepening our
understanding of their operation and impact on the economy. Thanks to that,
people can draw lessons from the previous instances to monitor and formulate
the automatic stabilizers strategically and reap the greatest advantages from
them.
Page 3
CHAPTER 1: SUMMARY OF AUTOMATIC STABILIZERS
1. Some important definitions about automatic stabilizers
There have been many discussions about the official, final definition of
automatic stabilizers. However, no definitive concept has been agreed upon
when it comes to the clarification of this economic term. In 1956, one way was
suggested to define this term is by providing synonyms (e.g automatically
compensatory adjustments, automatic flexibility, automatic reactions, automatic
stabilization, built-in budgetary flexibility, built-in flexibility, built-in mitigators,
full-employment budget balance, institutional stabilize-ers, props, and
stabilization devices) (Keiser, 1956).
Until 2016, one definition according to A. McKay and R.Ries (2016) is
that automatic stabilizers are "automatic rules in countries' tax-and-transfer
systems that are partly intended to stabilize economic fluctuations".
Thus, after analyzing data from different references and consideration,
automatic stabilizers can be conceptualized in this paper as an economic term
that refers to a type of fiscal policy designed to offset fluctuations in the national
budget (such as the case of deficit and surplus) automatically without additional
government actions.
2. How automatic stabilizers function and their objectives
Automatic stabilizers are types of fiscal policy, favored by Keynesian
economics as a tool. These are designed to reduce negative economic shocks or
recessions, with the involvement of two components: taxes and government
spending. They counteract instabilities in demand by lowering taxes and raising
government spending during a recession, and the opposite in case of expansion
(also known as high economic growth).
Page 4
How automatic stabilizers work
More particularly, during recessions, automatic stabilizers aid households'
financial situation by lower tax bills and increasing benefits, as well as welfare
in order to support them overcome unemployment and other social problems
(hunger, etc.) This helps to limit the fall in aggregate demand. In contrast, during
a period of expansion, automatic stabilizers help lower the growth rate by
raising tax revenues (the percentage remains unchanged, while the amount of
money paid by employees increases). As a result of the growth rate, the number
of unemployed inhabitants decreases, thus the government will lower benefits
and welfare packs. Looking at a larger scale, automatic stabilizers aid the whole
economy by 'stimulating aggregate demand' (V.Lee and L.Shiener, 2019).
Page 5
CHAPTER 2: A CASE STUDY OF AUTOMATIC STABILIZERS IN
THE USA
1. How the dire impacts of Covid-19 on the US economy highlight the
importance of automatic stabilizers
When economic hazards tend to upend the economy of the USA, it is
often natural for the government to respond with a number of discretionary
policies, including tax rebates or financial support packages. However, the
limitations of those discretionary policies as well as their consequences present
the reasons why automatic stabilizers should be improved to combat the
recession.
The first disadvantage of discretionary policies that automatic stabilizers
can somewhat address is the slowness in terms of human’s response to economic
downturns as well as possible misperception of it. When the Covid-19 pandemic
first struck the US, for instance, the Trump administration failed to recognize its
potency, hence the slow response to it. The lack of political stringency did also
contribute to the spread of Covid-19 because when other developed European
countries had shut down schools and implemented social distancing, the USA
still neglected the danger of the pandemic. For instance, the CAA (the
Consolidated Appropriation Act 2021), including 900$ dollars for Covid relief,
can only be put into effect in December 2020 after a lot of compromises in the
Congress. Therefore, it is not difficult to see how disastrous the US economy
outlook in 2020 and 2021 unfolded.
In 2020, the United States economy contracted 3.5% (Chart 1) as the
pandemic wiped out a decade's worth of job creation in the span of three
months. Despite the rebound in the second half of 2020, the real GDP of the US
in the fourth quarter was 2.4% lower compared to the previous year.
Page 6
CHART 1: U.S. REAL GDP: ANNUAL GROWTH
Overall, the contraction was driven by a decline in consumer spending,
which decreased 3.9% in 2020 and subtracted 2.63% from annual growth (Chart
2). Inventories, investment in business structures and equipment, net exports and
state and local government spending also subtracted from 2020 growth.
CHART 2: CONTRIBUTION TO U.S. GROWTH: 2020
At the same time, unemployment spiked to its highest rate in the post
WWII era, hitting 14.7% in May 2020, leaving those furloughed from the
hospitality and airlines industry waiting for help.
Page 7
FIGURE 1: UNEMPLOYMENT RATE
Secondly, discretionary policies are greatly shaped by the existence of
politics regarding the allocation of funds across states. According to Jeffrey
Clemens and Stan Veuger (2021), an additional Senate or Representative per
million in the Congress equaled an addition of about 670 dollars per capita.
With the following disadvantages in mind, it is important for the USA to
enact a more effective automatic stabilization system to shield the US economy
from more recessions in the future.
2. Automatic stabilizers in operation
2.1. Unemployment insurance
Unemployment insurance is a program designed by the government to
provide financial assistance to individuals who find themselves unemployed or
have lost their jobs due to external factors such as economic downturns or
COVID-19 pandemic.
In response to the extensive unemployment caused by the COVID-19
pandemic and economic downturn between February 2020 and March 2020,
Congress also implemented additional policies to create significant changes to
the unemployment insurance (UI) system. Despite the existing Permanent-law
UI programs, such as Unemployment Compensation (UC) and Extended
Page 8
Benefits (EB), which automatically respond to layoffs and business closures, the
unprecedented job loss during the pandemic necessitated the introduction of
extraordinary measures. These measures included
Federal Pandemic
Unemployment Compensation (FPUC), Pandemic Emergency Unemployment
Compensation (PEUC), and Pandemic Unemployment Assistance (PUA).
FPUC provided a weekly supplement on top of all UI benefits. FPUC
provided a $600 weekly supplement between April and July 2020 and was
reauthorized at $300 weekly from January 2021 through the beginning of
September 2021. FPUC payments from April 2020 through September 6, 2021,
totaled $442.3 billion.
PEUC extended the availability of regular UC benefits beyond the usual
26 weeks, providing an additional 49 weeks of support. PUA expanded the
eligibility for UI to include self-employed individuals, gig workers, and others
who were previously ineligible or unable to work due to COVID-19-related
reasons, with PUA payments totaling $131.2 billion.
Following the implementation of these benefits, employment increased
significantly but not completely. However, these benefits have expired since
September 2021, the percentage of unemployed people receiving unemployment
insurance has reverted to the pre-pandemic level of about 25%, and even many
of those who are eligible for benefits find it difficult to make ends meet on the
meager amounts.
The duration and quantity of unemployment insurance benefits in the US
differ by state. In the third quarter of 2022, the weekly average for UI benefits
across the U.S. was $392. There were wild variations amongst the states, with
Washington State having the highest average weekly amount at $616 and
Mississippi having the lowest at $215. In January 2023, the United States paid
out 2.82 billion dollars in unemployment insurance. This represents a small
increase from the 2.42 billion US dollars in unemployment benefits paid in
February 2022.
2.2. Progressive Tax System
In order to align with individuals' income levels, progressive taxes are
adjusted to support citizens and stimulate the economy. This adjustment involves
reducing the tax burden on citizens' income, which effectively increases the
Page 9
amount of cash available to each individual. Moreover, the amount of relief
varied between different income levels of citizens.
Moreover, there are also add-ons to improve the efficacy of automatic
stabilizers including the implementation of the CARES Act by the US
Government in 2020. This act significantly reduced the tax burden for citizens.
To demonstrate this, the CARES Act, established by the US Government in
2020, reduced the tax burden on the citizen significantly. Payment amounts are
reduced for each married couple filing jointly whose adjusted gross income is
between $150,001 and $198,000. Payments are reduced for a head of household
whose adjusted gross income is between $112,501 and $146,500. Payments are
reduced for each other individual whose adjusted gross income is between
$75,001 and $99,000. Furthermore, the American Rescue Plan Act of 2021
provided additional relief to middle- and lower-income taxpayers by waiving
federal income taxes on the first $10,200 of unemployment benefits received in
2020. This relief applied to benefits received through both state and federal
unemployment programs, benefiting individuals or couples with a modified
adjusted gross income (MAGI) of $150,000 or less in 2020.
3. The influences of automatic stabilizers on the US economy
3.1. Unemployment insurance ( UI )
One of the wonders of unemployment insurance (UI) is its ability to
alleviate the difficulties faced by individuals who lose their income due to
unemployment. According to the Census Bureau, in 2020, access to
unemployment insurance decreased the official poverty rate from 12.9% to
11.4%, preventing 4.7 million people (1.4 million children included) from
falling into poverty. By contrast, without UI, unemployed people are more likely
to encounter food shortages and housing insecurity, as well as deplete personal
savings, sell assets, draw upon retirement savings, and further reduce
expenditures. Furthermore, the UI also had the capability of soothing the
mentality of people who had received unemployment benefits. This can be
observed in the table below collected by the Bureau of Labor Statistics (BLS).
Page 10
Experience of hardship
Households that applied
for but did not receive
Unemployment Benefits
Households that
received
Unemployment
Benefits
Difficulty with
household expenses
66.6%
55.9%
Food insecurity
29.1%
18.9%
Behind on mortgage or
rent
27.4%
20.1%
Symptoms of anxiety
53.2%
45.2%
Symptoms of
depression
45.5%
36.7%
Table 1: The effectiveness of Unemployment Benefits
Source: Bureau of Labor Statistics analysis of Household Pulse Survey,
August 19–December 21, 2020.
Additionally, UI plays a vital role in stimulating aggregate demand during
the pandemic. While aggregate spending of the employed was reduced by 10
percent, the spending of unemployment benefit recipients increased by 10
percent, which is likely explained by the $600 federal weekly supplement.
However, among the unemployed who experienced a substantial delay in
receiving benefits, spending fell by 20 percent - a decline not seen by those who
received benefits more immediately after job loss. This proves that UI is an
effective means of insuring the unemployed against welfare losses associated
with job loss when delivered timely. With the $600 federal benefit supplement
through the FPUC program, UI has not only helped unemployed households to
maintain consumption, but also aided stabilizing aggregate demand, thereby
Page 11
sustaining the economy, preventing further lay-offs and contributing to the US
GDP growth.
However, the extended unemployment benefits were related to creating
disincentives for the unemployed to get into the labor force. Among many
factors contributing to the decline in job seeking, UI benefits had a share in this.
Namely the $600 per week and later reduced to $300 per week in August 2020
on top of regular benefits.
3.2. Progressive Tax System
The federal government provided significant financial support from
CARES Act for households, businesses, and state and local governments
through legislated changes in the fiscal policy to limit the loss of incomes during
the pandemic.
The temporary expansion of loss deductions and net interest deductions
were ways to help firms face losses and provide relief to firms during a
downturn. They can offset previous years’ taxable income and get a refund
quickly. This increases cash flow and helps businesses continue to pay bills
during the downturn.
However, CBO estimates the automatic stabilizers increased federal
deficits by 1.6 percent to 1.3 percent of GDP in 2020 and 2021, respectively.
4. Limitations of automatic stabilizers
Automatic stabilizers aggregate the demand. However, social-distances
and lockdowns somehow lessen the opportunity for people to spend their cash they are aware of the downturn of money and keep saving for the future. Since
automatic stabilizers work in the short term, there is a limit to their
effectiveness.
4.1. Unemployment insurance ( UI )
In 2020, Congress enacted the bill on December 21, but former President
Trump delayed signing the law until December 27. As a result, states were met
with implementation challenges and left with unanswered questions about how
to properly pay benefits that were due within six days of the president signing
the legislation. States awaited guidance from the U.S Department of Labor on
the key parameters left to interpretation in the law. Along with antiquated State
Page 12
UI Systems which complicated delivery of benefits. Therefore, delays occurred
in the distribution. Among Americans whose income was much less than before
the pandemic, 72% reported having trouble meeting basic household expenses,
while 31% stated that they did not have enough money for food expenditures.
Households who have been out of work for as long as nine months during the
pandemic have reached the end of their financial rope.
Having to deal with antiquated computer systems, deficient staffing and
resources, and outdated administrative practices, state agencies were
ill-equipped to respond to the need. Many states failed to determine workers’
eligibility and pay benefits.
Furthermore, the Department of Labor’s Office of Inspector General
estimated that more than 10 percent of pandemic-related UI benefits, totaling
$87.3 billion, will ultimately have been spent improperly, a significant portion of
which is largely attributable to fraud.
4.2. Tax Progressive System
The volatility of disposable income and inequality can both be decreased
via progressive taxation. However, it can also increase the likelihood that
affluent people will try to avoid paying taxes and decrease lower firms'
willingness to make domestic investments. For instance, lower income
households are more likely to spend additional income than higher income
households, who are more likely to have the resources to maintain spending
levels during hard times. The tax reliefs for businesses were temporary and not
well-targeted.
Page 13
CHAPTER 3: LESSONS LEARNED FROM THE EFFECTS OF
AUTOMATIC STABILIZERS IN THE USA
Automatic stabilizers, which the USA will adopt between 2020 and 2023,
offer both advantages and disadvantages. Understanding them will help us draw
our own lessons and prepare for the future. Here are some suggestions for
enhancing existing policies based on their shortcomings and for creating new
policies that can uphold the values they already held.
1. How current automatic stabilization policies can be improved
1.1. Targeted beneficiaries
Targeted beneficiaries of the fore-mentioned policies are met with a lot of
criticism, as their criteria have not covered some in-need cases, but also left out
unwarranted situations.
It is essential to ensure that policymakers can increase and extend the
benefits of automatic programs and that they are not tightened before all
demographic groups and regions have recovered.
1.2. Duration of policy enactment
The brief duration of the policies can make it difficult to make a
long-lasting influence and may necessitate frequent policy updates or tweaks,
which might cause confusion and inconsistency for stakeholders.
Make federal budgetary assistance to states significant, automatic, and
ongoing to prevent them from implementing austerity policies—those that
restrict the economy by reducing government spending and/or raising
taxes—before it has fully recovered.
1.3. Source of funding
Strong MOE requirements should be put in place during tough times to
prevent states from using federal funding to just replenish their own.
Page 14
2. Recommendations of other policies that can be implemented
2.1. Implementing a federal job guarantee
Anyone who wants a job may get one thanks to a federal job guarantee,
which also ensures that people can find work during tough economic times.
In addition to addressing structural unemployment, this approach may
also assist lessen income disparity.
2.2. Implementing a universal basic income
All people would receive a regular cash payment under a universal basic
income, helping to ensure that everyone has a minimal degree of financial
stability.
A constant source of support during times of economic crisis might be
provided by this approach, which could also help alleviate poverty and
inequality.
Page 15
CONCLUSION
In conclusion, this research paper has examined the effects of automatic
stabilizers on the US economy from 2020 to 2022. Automatic stabilizers refer to
government policies and programs that are designed to automatically adjust in
response to changes in economic conditions, with the aim of stabilizing the
economy during periods of recession or expansion.
The analysis conducted in this paper reveals several key findings. Firstly,
during the period under study, the US economy experienced a significant
downturn due to the COVID-19 pandemic, resulting in high unemployment rates
and a decline in economic activity. However, the presence of automatic
stabilizers played a crucial role in mitigating the severity of the economic
downturn.
One of the primary automatic stabilizers that contributed to economic
stabilization was the unemployment insurance programs that proved
instrumental in supporting individuals who lost their jobs during the recession.
The automatic nature of these programs ensured that eligible workers received
financial assistance, helping them meet their basic needs and sustain
consumption levels. This, in turn, prevented a more significant decline in
consumer spending and helped maintain economic stability. However, it also had
drawbacks, such as delay in distributing benefits and fraud.
Additionally, the progressive income tax system was another automatic
stabilizer. As individuals' income decreased during the recession, their tax
liabilities also decreased, providing them with additional disposable income.
This boost in consumer purchasing power helped stimulate aggregate demand
and support businesses, aiding in the recovery process. Nevertheless, there still
exist several problems; for instance, the risks of tax evasion and the transient
relief packages.
Overall, the analysis of the effects of automatic stabilizers on the US
economy from 2020 to 2022 demonstrates their critical role in mitigating the
impact of economic downturns and facilitating recovery. By providing support
to individuals, households, and businesses, automatic stabilizers helped stabilize
aggregate demand, prevent further job losses, and restore economic growth.
Page 16
However, it is essential to acknowledge that the effectiveness of automatic
stabilizers can vary depending on the magnitude and duration of the economic
shock, as well as the design and implementation of specific policies.
Furthermore, while automatic stabilizers are valuable tools, they should be
complemented by proactive and improved policy interventions during
extraordinary crises, as witnessed during the COVID-19 pandemic.
In conclusion, the findings of this research emphasize the importance of
automatic stabilizers as a countercyclical mechanism that promotes economic
stability and resilience. Policymakers should continue to evaluate and improve
these stabilizers to ensure their effectiveness in future economic downturns, as
well as explore additional measures to address emerging challenges and promote
long-term economic sustainability.
Page 17
FOREIGN TRADE UNIVERSITY
SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS
……..***……..
MACROECONOMICS REPORT
HOW THE MHA PROGRAM HELPED ALLEVIATE
HOUSING PROBLEMS DURING THE 2008 FINANCIAL
CRISIS IN AMERICA AND IMPLICATIONS FOR
VIETNAM'S HOUSING MARKET
Group: 02
Credit: KTE204E61CTTTKT.1
Instructor: A. Prof. Dr Hoang Xuan Binh
Hanoi, June 2023
GROUP MEMBERS:
NAME
STUDENT ID
Dương Phương Anh
2212140005
Nguyễn Ngọc Thủy Linh
2212140047
Lê Nhật Minh
2212140089
Vy Hoà An
2213140004
Bùi Ngân Hiếu
2212140032
Nguyễn Thị Ngân Hà
2212140029
Nguyễn Phương Hà
2212140028
Trần Phương Quỳnh
2212140072
Nguyễn Thu Trang
2212140079
Nguyễn Cẩm Ly
2212140052
Lại Quang Dũng
2212140019
Vương Công Nguyên Giáp
2212140025
Contents
I. INTRODUCTION ........................................................................................ 1
1. Rationale ..................................................................................................... 1
2. Study objectives ......................................................................................... 2
3. Scope of study............................................................................................. 2
II.
RESEARCH ............................................................................................... 3
1. Background ................................................................................................ 3
1.1 What fuels the financial and housing crisis? ........................................ 3
1.1.1. Dot-com Bubble and 9-11 Attack ...................................................... 3
1.1.2. The building up .................................................................................. 5
1.1.3. The collapse ....................................................................................... 8
1.2 The situation of the housing market during the financial crisis ........... 9
1.3. The situation of the housing market .................................................... 11
2.
The policy MHA (Making Home Affordable) ................................... 13
2.1 The objectives of the MHA program ..................................................... 14
2.2 The content and implementation of MHA ............................................ 16
2.2.1. Components of MHA ....................................................................... 16
2.2.2. Implementation of MHA .................................................................. 22
2.3 MHA Program's Effects on the housing crisis .................................... 24
2.3.1 Helping U.S. citizens keep their house ............................................. 24
2.3.2 Stabilizing the housing market ......................................................... 27
3. Lesson learned for Vietnam: .................................................................. 28
3.1. Current state of the housing market in Vietnam ................................. 28
3.2. Some existing policies to assist people with low income in buying
houses ........................................................................................................... 32
3.3. Lesson learned from the MHA program ............................................. 32
III. CONCLUSION ........................................................................................... 35
I.
INTRODUCTION
1.
Rationale
The 2008 Financial Crisis was an economic crisis that happened in late
2007, and its crash lasted for 18 months until June 2009. The crisis was one of the
most severe economic disasters in history. It did not happen overnight but rather
a cumulative effect of flexibly using a chain of financial derivatives. The real
estate bubble and inadequate financial supervision in the United States have led
to a financial crisis since 2007, which has exploded since late 2008. The crisis,
undoubtedly, has severely destroyed numerous markets in the USA, especially the
housing market - the epicenter of the crisis. However, thanks to the timely
intervention of the U.S. government, the market gradually recovered, and the
improvement can be seen statistically, helping citizens and the country stabilize
the economy and society.
One of which is the MHA (Making Housing Affordable) program, launched in
2009 as part of the Troubled Asset Relief Program, the federal government's
response to the subprime mortgage crisis. MHA aimed to aid eligible homeowners
by lowering their monthly mortgage payments to a more manageable level (U.S.
Department of the Treasury. "Making Home Affordable (MHA)." Accessed Sept.
7, 2021.).
Therefore, understanding thoroughly how the housing market crashed and the
MHA's pros and cons not only gets us used to an anti-crisis policy in the economy
for such a fundamental market as housing but also gives us the experience to cope
with a housing crisis within the border of Vietnam. Therefore, it is essential that
the program aims to assist people during a housing crisis be studied carefully so
we can learn from it and apply it to our case.
1
2.
Study objectives
The research's first objective is to examine how the housing market was impacted
by the financial crisis 2008 and then study the implementation of the program
MHA by the U.S. government and its result and effectiveness compared to its
expected goals when introduced. After that, we want to discuss how the MHA
program can be applied to Vietnam as our real estate market is experiencing
difficulty.
3.
Scope of study
The study focuses on the implementation of the MHA program as one of many
tools the U.S. government used to stabilize the housing market crisis - a
consequence of the infamous financial crisis of 2008.
2
II.
RESEARCH
1.
Background
1.1 What fuels the financial and housing crisis?
1.1.1. Dot-com Bubble and 9-11 Attack
The first piece of this long and complicated domino set traced back to the dotcom bubble - the term for the sudden and rapid rise in tech stock prices between
1995 and 1999. This can be explained by investors' expectations of the future
soaring of technology firms. However, what goes up must come down. After
reaching the peak in 2000, these stock prices sank unstoppably and resulted in the
failure of numerous internet companies, significant losses for investors, and a
decline in overall market confidence.
Figure 1.1: NASDAQ Composite Index from 1995 to 2003 (NASDAQ data, 2003)
3
Aside from the dot-com bubble, another significant incident that later pulled the
whole crisis was the 9-11 attack. The fall of The Twin Towers led to a massive
decrease in the Federal interest rate. In the beginning years of the 21st century,
the interest rate was only around 1%; this was the record lowest interest rate at
that time.
Figure 1.2: Federal Funds Rate - 62-Year Historical Chart (Federal Reserve
System)
As a result, Americans, with easier access to borrowing money, wanted to invest
in something. Moreover, while the stock market had not been so attractive because
of the aforementioned dot-com bubble boom, the real estate market became the
favorite choice for investors. So, American citizens decided to buy houses, and
the demand in this market saw an unprecedented rise, and obviously, the housing
price followed right after. So, another bubble was forming, yet at that time, it was
too soon to realize anything wrong.
4
Figure 1.3: Real house price in the USA from 2000 to 2020 (Freddie Mac House
Price Index, 2022)
1.1.2. The building up
a, Mortgage-backed security (MBS):
The increase in demand for housing increased the demand for loans. The banks,
before long, had too many long-term mortgage loans and decided to free up their
capital by selling these loans as MBS (Mortgage-Backed Securities) to the
Investment Bank. In other words, instead of holding the loans on their balance
sheets, banks sell the loans as MBS to investors who are willing to assume the
risk, and the payment of the loan will be shifted from the banks to the MBS buyer,
who will receive periodic payments similar to bond coupon payments.
5
The freed-up capital could then be used for other lending activities or to meet
regulatory requirements. MBS was considered a handy tool for enhancing the
market. Even the U.S. government supports the mortgage market by purchasing
mortgages from lenders. Later in this story, the incorrect credit rating of MBS
became a significant contributor to the crisis.
b, Credit Default Swaps (CDS)
Credit Default Swaps (CDS) played a significant role in the financial crisis 2008
in the United States. CDS are financial derivatives that act as insurance contracts
against a borrower's default or an underlying financial instrument (Corporate
Finance Institute, 2020). They allowed investors to buy protection against the
default of mortgage-backed securities (MBS) and other debt obligations.
The widespread and speculative use of CDS contracts without adequate risk
assessment led to excessive risk buildup. As a result, financial institutions
(including banks, insurance companies, and hedge funds) faced massive losses
when the wave of mortgage defaults occurred after the housing market's collapse,
amplified by the interconnectedness of the financial system. In addition, the lack
of transparency and regulation in the CDS market made it difficult to evaluate
risks accurately. Overall, the misuse of CDS worsened the crisis, exacerbating the
fallout from the housing market collapse and causing disruptions in the financial
system.
c, Collateralized Debt Obligation (CDO)
The Collateralized Debt Obligations (CDOs) are also responsible for the financial
crisis 2008 in the United States. CDOs are structured financial products that pool
together various debt assets, such as mortgages, corporate loans, or credit card
debt, and create risk tranches for investors (Giesecke, K. and Kim, B., 2011)).
6
Many CDOs were linked to the subprime mortgage market, where poor
underwriting standards and declining home prices led to high defaults. The
complexity and opacity of CDOs made it difficult to assess risks accurately, and
credit rating agencies underestimated the risks associated with the underlying
assets. In addition, the widespread ownership and interconnectedness of CDOs
amplified losses throughout the financial system, causing a domino effect. The
collapse of the CDO market had severe consequences for financial institutions,
freezing credit markets and destabilizing the overall financial system.
d, Credit rates inflation
A credit rating agency (CRA) is a corporation that independently assesses a
debtor's financial strength, representing its ability to repay principal and interest
payments right on time. Major CRAs use a letter-based rating scale (AAA, A.A.,
A, BBB, B.B., B, CCC, CC, C, and D) to indicate bond creditworthiness and
default likelihood., which allows investors to invest wisely. During the financial
crisis, Moody's Investor Services, Standard and Poor's (S&P), and Fitch Group
dominated the credit rating industry, accounting for roughly 95% of the business
(Alessi, 2013). In 1975, the Securities and Exchange Commission (SEC) legally
listed "The Big Three" in the Nationally Recognized Statistical Rating
Organization (NRSRO) (17 CFR § 240.15c3-1).
7
Nevertheless, the big three CRAs were accused of enabling the 2008 financial
meltdown (Financial Crisis Inquiry Commission, 2011). They were blamed for
turning many low-rating MBSs, CDSs, and CDOs into higher ranks, causing lots
of unsuitable investments in what appeared to be high-rated securities. According
to Mullard (2012), the inflation of credit rates of CRAs was due to institutional
failures. However, many econometric reports have shown that issuers were
shopping for ratings and exerting pressure on major CRAs for more favorable
credit ratings (U.S. Senate Permanent Subcommittee on Investigations, 2011,
Chapter V).
In the summer of 2007, massive downgrades—in the number of issues, their
aggregate values, and the extent of the downgrades—followed. Illustrative of this
point, as of June 30, 2009, 90% of AAA-rated CDOs issued between 2005-2007
were downgraded by S&P, with 80% below investment grade. Similarly, 63% of
AAA-rated MBS issued during those years were downgraded, with 52% below
investment grade. (Int. Monet. Fund 2009, pp. 88, 93).
1.1.3. The collapse
During this period, house prices declined sharply in many countries that had
experienced a housing bubble before the crisis (e.g., the U.S., Ireland, and
Greece). In the U.K., between 2000 and 2007, the number of buy-to-let mortgages
increased significantly from 48,400 to 346,000, and their aggregate value
increased from £3.9 billion to £45.7 billion. Household wealth in the United
States peaked at $61.4 trillion during the second quarter of 2007, and at the end
of the first quarter of 2009, the value had decreased by $11 trillion, bringing the
total value to $59.4 trillion (Sahadi, 2009).
8
Due to the heavy investment in risky MBS and other complex financial products
that lost most of their value when the housing market crashed, there has been the
collapse or near-collapse of several large financial institutions (e.g., Lehman
Brothers, Fannie Mae, and Freddie Mac). The failure of these institutions
threatened to destabilize the entire financial system and required massive
government bailouts and interventions.
Furthermore, the crisis severely affected the real economy, causing a sharp
contraction in output, consumption, investment, trade, and employment.
Consequently, the global GDP growth rate fell from 5.6% in 2007 to -0.1% in
2009 (World Bank, n.d.), and the global unemployment rate (calculated by
percentage of total labor force) rose from 5.9% in 2007 to 6.5% in 2009 (World
Bank, n.d.), affecting more than 210 million people worldwide (IMF, 2010).
1.2 The situation of the housing market during the financial crisis
During the 2008 financial crisis in America, the housing market experienced a
severe downturn, leading to a housing crash that had significant implications for
the overall economy. The crisis was characterized by a sharp decline in housing
prices, widespread foreclosures, and tightening credit availability. The culprit
behind this is the decline in lending standards and Federal Reserve Interest Rate
Policy.
a. Declining lending standards
The subprime mortgage crisis was a significant contributor to the housing market
crash of 2008. Banks and other financial institutions gave loans to people who did
not have the creditworthiness to repay them, which were then packaged and sold
to investors as mortgage-backed securities.
9
Figure 1.4: Percent of Seriously Delinquent Mortgages in the US., 1979 - 2008
Measured as a share of mortgages originated during the year, subprime mortgages
rose from 4.5 percent in 1994 to 10.2 percent in 2000 and over 20 percent in 2005
and 2006 (The State of the Nation's Housing, 2008). At the same time,
conventional loans for which borrowers were required to make at least a 20
percent down payment fell from two-thirds of the total in the early 1990s to only
one-third in 2006–2007 (The State of the Nation’s Housing 2008). The shift from
conventional loans to "flexible standards," as the regulators called the low down
payment and/or interest-only loans, substantially impacted mortgage markets.
Initially, the easier availability of mortgage credit increased the demand for
housing and helped drive housing prices upward during 2002-2005. Historically,
however, the foreclosure rates for subprime loans have been seven to ten times
higher than for conventional loans to prime borrowers. Given this vast difference,
it was highly predictable that the growing share of loans to those with weaker
credit would eventually lead to higher default and foreclosure rates.
b. Low-interest rate
10
Figure 1.5: "Federal Reserve Cut Interest Rates for the Third Time in 2019," The
New York Times, Smialek, J. (2019)
In the early 2000s, the Federal Reserve responded to the dot-com bubble burst
and the 9/11 attacks by lowering interest rates. The discount rate reached a low of
1% in 2003. Following the 9/11 attacks, the Federal Reserve aggressively cut
interest rates to stabilize the economy, reducing the federal funds rate from 6.5%
in May 2000 to 1% in June 2003 (Federal Reserve Cut Interest Rates for the Third
Time in 2019, The New York Times)
However, this period of low-interest rates contributed to the housing market boom
and the subsequent financial crisis in 2008. Low-interest rates made it easier for
people to borrow money, which drove up demand for housing and pushed home
prices to unsustainable levels.
1.3. The situation of the housing market
11
During the 2008 financial crisis in America, the housing market experienced a
severe downturn, leading to a housing crash that had significant implications for
the overall economy. The crisis was characterized by a sharp decline in housing
prices, widespread foreclosures, and tightening credit availability. According to
S&P/Case-Shiller Home Price Index data, housing prices dropped by
approximately 30% nationwide between 2006 and 2012. This decline in housing
prices created a domino effect, contributing to widespread financial distress. Due
to declining prices, many homeowners with subprime mortgages could not
refinance or sell their homes. This decline in home values resulted in a substantial
increase in mortgage defaults, with foreclosure filings reaching a peak of 2.9
million in 2010, as reported by RealtyTrac. The high number of foreclosures
further exerted downward pressure on housing prices, intensifying the crisis.
After the financial crisis 2008, the housing market in the United States faced a
long and gradual recovery process. Following the crisis, there was a significant
oversupply of housing in many areas due to the high number of foreclosures and
distressed properties flooding the market. The surplus of available homes put
downward pressure on prices, making it challenging for prices to rebound quickly.
12
Figure 1.6: Housing supply and prices in the U.S. from 1999 to 2021, according
to Federal Reserve Economic Data; National Association of Realtors Monthly
Supply Data)
The financial crisis officially ended in mid-2009. The graph illustrates that in 2010
there was an oversupply of housing. In 2010, the percentage of housing supply
reached its peak at 19.5%.
2.
The policy MHA (Making Home Affordable)
In response to the widespread foreclosure crisis and the need to stabilize the
housing market. The U.S. government launched the MHA program - or Making
Affordable Home Program in 2009 to assist struggling homeowners during the
housing crisis and economic downturn. The program was developed by the U.S.
Department of the Treasury and the U.S. Department of Housing and Urban
Development (HUD)
13
2.1 The objectives of the MHA program
Through several activities aimed at loan modifications, refinancing, foreclosure
alternatives, and neighborhood stabilization, the MHA program tried to provide
a comprehensive approach to addressing the housing issue and promoting
housing affordability. It aimed to help homeowners in financial distress, prevent
unwarranted foreclosures, and stabilize the housing market after the global
financial crisis. The following are the objectives of the MHA program as outlined
in "Making Home Affordable: Updated Detailed Program Description," archived
by the United States Department of the Treasury:
“The Obama Administration's Making Home Affordable program will offer
assistance to as many as 7 to 9 million homeowners making a good-faith effort to
make their mortgage payments while attempting to prevent the destructive impact
of the housing crisis on families and communities. It will not provide money to
speculators and will target support to the working homeowners who have made
every possible effort to stay current on their mortgage payments. Just as the
American Recovery and Reinvestment Act works to save or create several million
new jobs and the Financial Stability Plan works to get credit flowing, the Making
Home Affordable program will support a recovery in the housing market and
ensure that these workers can continue paying off their mortgages."
Overall, in the Updated Detailed Program Description, the main objectives were
stated as follows:
14
• (Refinance Program) Provide Access to Low-Cost Refinancing for
Responsible Homeowners Suffering From Falling Home Prices: The
MHA Program sought to allow up to 4 to 5 million responsible
homeowners to refinance their mortgages. This goal was created in
response to the lack of awareness of the terrible position many families
confront under the present housing restrictions. As a result, the initiative
aimed to allow responsible homeowners to refinance through the two
institutions over time, on the condition that they take out loans owned or
guaranteed by Freddie Mac and Fannie Mae (the GSEs). Furthermore, the
program attempted to cut monthly payments to help homeowners
experiencing financial trouble.
• (Modification Program) Prevent Foreclosures and Help Responsible
Families Stay in Their Homes: a multi-part strategy multiple
organizations undertake to prevent millions of foreclosures and help
families stay in their homes.
• Support Low Mortgage Rates By Strengthening Confidence in Fannie
Mae and Freddie Mac1: This plan - which draws on the best ideas
developed within the Administration, as well as from Congressional
housing leaders and Federal Deposit Insurance Corporation Chair Sheila
Baer - supports low mortgage rates by strengthening confidence in Fannie
Mae and Freddie Mac and creates a comprehensive stability initiative to
offer reduced monthly payments for up to 3 to 4 million at-risk
homeowners.
1
Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) in the United States that play
a significant role in the country's mortgage market. They were created by Congress to provide stability,
liquidity, and affordability to the housing finance system.
15
2.2 The content and implementation of MHA
2.2.1. Components of MHA
2.2.1.1. The Home Affordable Modification Program (HAMP) - the main
component
The Home Affordable Modification Program is a voluntary program that
supports servicers' efforts to modify mortgages while protecting taxpayers'
interests. To protect taxpayers, MHA housing initiatives have pay‐for‐
success incentives. This means that funds are spent only when transactions
are completed and as long as those contracts remain in place. Therefore,
funds will be disbursed over many years. HAMP is the first standard
approach among loan servicers or investors about how to help homeowners
who want to keep making payments but need mortgage assistance.
Content: including Eligibility criteria, Modification protocol, and
Incentives
Eligibility criteria: To qualify for HAMP, homeowners had to meet
specific requirements, such as:
1. Fannie Mae (Federal National Mortgage Association): Established in 1938, Fannie Mae is a publicly-traded
company that operates in the secondary mortgage market. Its primary function is buying mortgages from
lenders, such as banks and other financial institutions, replenishing their funds, and enabling them to issue more
loans to homebuyers. By purchasing these mortgages, Fannie Mae provides liquidity to the mortgage market,
making it easier for lenders to extend credit to borrowers. Fannie Mae then bundles these mortgages into
mortgage-backed securities (MBS) and sells them to investors, such as pension funds and hedge funds, which
helps to attract more capital into the mortgage market.
2. Freddie Mac (Federal Home Loan Mortgage Corporation): Established in 1970, Freddie Mac is a publicly
traded company operating in the secondary mortgage market. It performs a similar role to Fannie Mae by
purchasing mortgages from lenders, bundling them into MBS, and selling them to investors. Like Fannie Mae,
Freddie Mac's activities enhance liquidity in the mortgage market, making it more efficient and accessible for
borrowers.
During the 2008 financial crisis, Fannie Mae and Freddie Mac faced significant financial challenges due to their
exposure to high-risk mortgages. As a result, the U.S. government placed them into conservatorship in
September 2008, with the FHFA acting as their conservator. This action involved the infusion of substantial
government funds to stabilize the institutions and prevent a collapse that could have severely disrupted the
mortgage market and the broader economy. Since then, Fannie Mae and Freddie Mac have operated under the
conservatorship of the FHFA, and there have been ongoing discussions and efforts to reform their structure and
address their long-term future.
16
● Having a documented financial hardship that makes them
unable to afford their current mortgage payment
● Being delinquent or at imminent risk of default, occupying the
property as their primary residence
● Having a mortgage that originated on or before January 1,
2009
● Owing no more than $729,750 on a primary residence or
single-unit rental property, or higher amounts for multi-unit
properties
● Having enough income to pay a modified mortgage payment
that is no more than 31% of their gross monthly income
Modification protocol: HAMP followed a standard protocol for
loan modifications, which involved:
● Lowering the interest rate to as low as 2% to reduce the
monthly payment. The interest rate can be fixed or stepped,
meaning it gradually increases until it reaches the market rate.
● Extending the loan term to up to 40 years also lowers the
monthly payment but increases the total interest paid over the
life of the loan.
● Forbearing or reducing the principal balance in some cases,
especially if the home is worth less than the loan amount.
● Capitalizing past-due amounts into the new loan balance
means adding any missed payments, fees, or interest to the
principal. This can help borrowers who are behind on their
payments to catch up and avoid foreclosure.
● The modified payment was subject to a trial period of three
months before becoming permanent.
17
Incentives for servicers and borrowers: HAMP offered various
incentives for servicers and borrowers to participate in the program
and stay current on their modified payments:
● Servicer incentive: Servicers receive an upfront payment of
$1,000 for each permanent modification they make and a
monthly "pay for success" payment of up to $83 for up to five
years, as long as the borrower stays current on the modified
loan
● Borrower “pay for performance” incentive: Borrowers
receive a principal balance reduction payment of up to $1,000
each year for up to five years, as long as they make their
monthly payments on time. The payment is applied annually
to the loan balance, reducing the amount owed and the interest
paid over time.
● Expanded borrower “pay for performance” incentive:
Borrowers who were current on their payments at the time of
modification receive an additional principal balance reduction
payment of up to $5,000 in the sixth year as long as they
remain current on the modified loan
● Investor incentive: Investors receive a partial payment from
the government to share the cost of reducing the borrower's
monthly payment to 31% of their income. The payment varies
depending on the degree of payment reduction and the loanto-value ratio of the property.
● Additionally, servicers and borrowers received bonus
payments of $1,500 and $500, respectively, for modifications
made while the borrower was still current on their payments.
2.2.1.2. Home Affordable Refinance Program (HARP):
18
This component allowed eligible homeowners who were current on their
payments but had little or no home equity to refinance their mortgages at
lower interest rates and/or more stable mortgage products.
A refinance refers to the process of revising and replacing the terms of an
existing credit agreement, usually as it relates to a loan or mortgage. If
approved, the borrower gets a new contract that replaces the original
agreement.
The Home Affordable Refinance Program (HARP) refinance was only
available for mortgages guaranteed by Freddie Mac or Fannie Mae—the
program was created in coordination with these entities. In order to be
eligible for HARP, homeowners must have owned mortgages that were
sold to either of those entities before May 31, 2009.
The program was designed to help homeowners who could not qualify for
conventional refinancing due to declining home values. The program
relaxed the loan-to-value ratio and other underwriting criteria for
refinancing.
2.2.1.3. Home Affordable Foreclosure Alternatives Program (HAFA):
This component offered alternatives to foreclosure for homeowners who
could not afford their modified payments or did not qualify for HAMP.
Provided incentives for short sales and deeds-in-lieu of foreclosure, which
allowed homeowners to exit their homes and avoid the negative impact of
foreclosure on their credit scores and future housing options.
• In a deed-in-lieu of foreclosure, the property owner voluntarily gives
the property to the lender in exchange for the lender canceling the
loan. Under federal law, a creditor is required to file a 1099-C
whenever it forgives a loan balance greater than $600. This may
create a tax liability for the former property owner because it is
considered "income."
19
• In a short sale, the lender agrees to allow the homeowner to sell the
property for less than the loan balance. Some lenders choose short
sales (as opposed to deeds in lieu of foreclosure) because they do not
want to own the distressed property. They would much rather see the
owner, who is motivated to sell the property quickly, handle the sale
details. Also, lenders make money from lending money and are not
well-equipped to manage properties.
Incentives:
• For borrowers (sellers): Homeowners selling their homes with a deed
in lieu of foreclosure or short sale will benefit from a $3,000 payment
to cover relocation expenses.
• For purchasers (buyers) and investors: For every three dollars spent
to release liens, the buyer or investor is reimbursed one dollar –
capped at $3,000
• For services: $1,000 to Servicers for administration and processing
fees
2.2.1.4. Principal Reduction Alternative (PRA)
This component encouraged servicers and investors to reduce the principal
balance of mortgages for homeowners who owed more than their homes
was worth.
The program aimed to address the problem of negative equity, which
increased the risk of default and foreclosure.
When mortgage servicers include principal reductions in their mortgage
modifications under the PRA program, the principal reduction amount is
initially treated as a non-interest-bearing principal balance.
20
Suppose the homeowner participating in the PRA program is in good
standing on the first, second, and third anniversaries of the effective date of
the mortgage loan modification. In that case, one-third of the offered
principal reduction amount is forgiven on each anniversary.
2.2.1.5: Second Lien Modification Program (2MP):
This component coordinated with HAMP to modify or extinguish second
liens on homes that had received a first lien modification through HAMP.
• First-lien debt is a type of debt that is secured by collateral. This
means that if a homeowner defaults on his loan, the lender can seize
the collateral to recoup their losses. Collateral can be anything of
value, such as a home, car, or piece of property.
• Second-lien debt is a type of debt that is not secured by collateral.
This means that if a homeowner defaults on his loan, the lender
cannot seize any collateral to recoup their losses.
The program aimed to reduce homeowners' total debt burden and increase
their modified payments' sustainability. The program offered incentives for
servicers and investors to modify or eliminate second liens.
Servicers must follow the standard modification steps set forth below in the
stated order of succession to modify the second lien.
Step 1: Capitalization: Capitalize accrued interest and servicing
advances (costs and expenses incurred in performing second-lien
servicing obligations, such as those related to the preservation and
protection of the security property and the enforcement of the
mortgage) paid to third parties in the ordinary course of business and
not retained by the servicer, if allowed by applicable state law.
21
Step 2: Reduce Interest Rate: Reduce the interest rate of the second
lien to 1.0%. After five years, the interest rate on the second lien will
reset at the then-current interest rate on the HAMP-modified first
lien.
Step 3: Extend Term: If the original term of the second lien is shorter
than the remaining term of the HAMP-modified first lien, extend the
term of the second lien to be the lesser of the term of the HAMPmodified first lien or 480 months. The term, however, should not
exceed 480 months.
Step 4: Principal Forbearance: If there was principal forbearance on
the HAMP-modified first lien, forbear principal on the second lien
in the same proportion.
2.2.1.6. Home Affordable Unemployment Program (UP):
This component provided temporary forbearance for homeowners who
were unemployed and seeking re-employment.
The program allowed eligible homeowners to reduce or suspend their
mortgage payments for up to 12 months while they looked for a new job.
The program was intended to prevent avoidable foreclosures due to
temporary income loss.
2.2.2. Implementation of MHA
The MHA strategy is conducted by utilizing five features, each with individual
goals. (Making Home Affordable Updated Detailed Program Description, 2009)
2.2.2.1. A home-affordable modification program to reach up to three to four
million at-risk homeowners
22
• Aiding people who commit to making reasonable monthly mortgage
payments by remaining in their homes, giving families security and
neighborhoods with stability.
• Stabilizing property prices for homeowners in areas most impacted
by foreclosures.
• Reducing monthly mortgage payments to realistic levels in order to
stabilize communities.
2.2.2.2. Clear and consistent guidelines for loan modifications
• Establishing clear and uniform loan modification rules that would be
implemented across the government and the business sector
• Encouraging mortgage insurer participation
2.2.2.3. Requiring that financial stability plan recipients use treasury guidelines
for loan modifications
• Requiring recipients to participate in foreclosure mitigation plans
consistent with Treasury’s loan modification guidelines.
2.2.2.4. Allowing judicial modifications of home mortgages during bankruptcy
when a borrower has no other options:
• Seeking carefully crafted changes to bankruptcy provisions that will
help to facilitate the goals of the Making Home Affordable program
• Requiring strong oversight, reporting, and quarterly meetings with
Treasury, the FDIC, the Federal Reserve, and HUD to monitor
performance
2.2.2.5. Strengthening FHA programs and providing support for local
communities
23
• Reducing restrictions in FHA Programs and increasing homeowner
hope
• Strengthen communities most affected by the Financial and Housing
Crises
2.3 MHA Program's Effects on the housing crisis
2.3.1 Helping U.S. citizens keep their house
First, the MHA program fulfilled its most important objective: helping U.S.
citizens keep their houses, proven by the reduction in the percentage of
foreclosures and the prevention of potential foreclosures in America. The
percentage of foreclosures in the U.S. peaked in 2010 at 2.23% after the 2008
housing crisis, after which it saw a steady decline. According to (Statista, 2023),
by the application deadline in 2016, the foreclosure rate was reduced by about
two-thirds to 0.7%. In addition, according to the U.S. Treasury Department, over
1.8 million families have been helped directly through HAMP. This, and
mortgage modifications from the private sector have helped more than 7 million
Americans get mortgage assistance to prevent avoidable foreclosures.
Figure 2.1: Foreclosure rate in the United States from 2005 to 2022 ( Statista)
24
This objective was attained by an increase in the number of loan modifications,
a decrease in mortgage interest, and an increase in refinancing mortgages.
With regards to loan modifications, according to the U.S. Treasury Department,
a total of almost 1.7 million permanent modifications were started from 2009 to
2017. This total number comprises about 1.4 million Tier 1 modifications, or
modifications for only one loan, and over 200 thousand Tier 2 modifications, or
modifications for up to 3 different mortgages.
Figure 2.2: The number of HAMP Permanent Modifications (Tier 1) (U.S.
Department of Treasury)
Figure 2.3: The number of HAMP Permanent Modifications (Tier 2) (U.S.
Department of Treasury)
25
As for mortgage interest, from 2007 to 2016, the interest peaked in the middle
of the housing crisis (2008) at over 6.5%. After which, as the MHA was
introduced, the mortgage rate saw a steady decline to over 3% in 2013, then it
rose and leveled out at about 4% - two-thirds of its peak in 2008. (Freddie Mac)
Figure 2.4: United States Mortgage Rate from 2007 to 2022 (Freddie Mac)
Regarding refinancing mortgages, under the MHA program, according to the
Mortgage Bankers Association of America, Mortgage Refinance Index had a
sharp increase from 2009 to 2013, with its peak being over 7500 in 2009.
According to the research (̣ Abel and Fuster, 2018), around 3.5 million mortgages
have been refinanced through HARP since early 2009, with most of the refinances
occurring in 2012 and 2013 under the HARP 2.0 Policy.
26
Figure 2.5: United States MBA Mortgage Refinance Index (Mortgage Bankers
Association of America)
2.3.2 Stabilizing the housing market
Second, the MHA program helped stabilize the housing market after the crisis,
as shown by the gradual growth in the number of new house sales after the
sudden and dramatic drop and the prevention of further house price decline.
According to (U.S. Census Bureau, n.d.), after plummeting to about 350 thousand
house sales in 2009, the number of new house sales recovered gradually and
reached about 650 thousand sales in 2016.
27
Figure 2.6: United States New Home Sales from 2008 to 2016 (U.S. Census
Bureau)
Regarding average house prices in the U.S., after dropping to their lowest point
at 240.000 USD in 2009, the house prices slightly increased and levered around
260.000 to 280.000 USD from 2009 to 2012. Although this price was lower than
before the crisis, it would have been much lower without the intervention of
MHA. From 2012 to 2016, the average house price increased steadily to reach
340000 USD in 2016.
Figure 2.7: Average house price in the USA from 2008 to 2016 (U.S. Census
Bureau)
3.
Lesson learned for Vietnam:
3.1. Current state of the housing market in Vietnam
In the decade or so to 2019, Vietnam’s real estate market experienced rapid
growth. Buildings could not go up fast enough as the middle class rode a wave of
economic development out of the countryside and into apartments in the cities.
28
Accommodating all these new home buyers, however, took vast sums of capital.
Real estate firms were borrowing from banks hand over fist and issuing hundreds
of thousands of millions of dollars’ worth of bonds to satisfy the surging demand.
In 2020, house prices plummeted due to the Covid-19 pandemic, which restricted
travel and curbed business activities, including real-estate constructions.
The total new apartment launches in Ho Chi Minh City dropped 50% in 2020 to
14,700 year-over-year (YOY) mainly due to unresolved legal issues, according to
Jones Lang LaSalle’s Q4 2020 Vietnam Property Market Review. The prices for
first-hand houses available for sale from developers or known as primary market
prices, dropped 14.3% to $2,475/sqm YOY.
In Hanoi, new apartment supply halved to 15,400 units, from 2019 to 2020.
However, primary market prices rose by 2.8% to $ 1,531/sqm as lower bank
interest rates made properties more affordable.
Vietnam’s housing market rebounded in 2021 as a widespread Covid-19 vaccine
rollout allowed construction works and business activities to gradually resume.
The apartment-for-sale market recorded 18,000 new units supply, with primary
market prices rising 10.6% to $2,732/sqm.
“The resumption of constructions has enabled many developers to complete the
foundation, a critical milestone for developers to obtain sale permits for their
projects, thus resulting in a surge in official launches in this quarter (Q4 2021),”
said the report.
Readings from various real-estate construction firms showed property prices
continued to rise in 2022 on healthy demand and a slowing rate of supply amid
lingering permits issues, high interest rates and limited access to credit.
29
Factors contribute to rising home prices in Vietnam.
Persistent overlapping regulations and tight access to credit have continued
to constrain developers’ ability to meet housing demand in Vietnam,
contributing to rising prices.
•
Overlapping and inconsistencies law
According to the Vietnam’s Real Estate Association (VNREA), three
overlapping laws have caused difficulties for investing in the real estate
market: the Land Law, Housing Law and Real Estate Business Law.
The provisions of the land law make it harder for the issuance of site
clearances, calculation for the value of land and compensation. The
overlapping and unclear regulations have constrained issuance of land-use
rights certificates, particularly for tourism properties such as condotels.
In September, Vietnam’s National Assembly Standing Committee began
discussion of the amended Land Law. The amendment process aimed to
resolve those issues and solve problems arising from land use and
management, the assembly said in a statement.
•
Tight access to credit
Developers are also facing difficulties accessing bank loans for funding
construction projects. The State Bank of Vietnam’s (SBV) requires
domestic and foreign lenders to provide more loans to priority sectors, such
as agriculture and rural development, high technology companies and
small-medium enterprises. It also strictly controls loans for potentially risky
areas, such as real estate sectors.
30
The SBV has identified credit for the real estate sector as a potential risk
because loans are often disbursed for long terms and in large volumes. On
the other hand, the credit institutions’ capital mobilisation is often for the
short term.
•
High interest rates
Figure 3.1: Vietnam interest rate 5-year historical chart (The State Bank of Vietnam)
The market saw a serious imbalance between supply and demand with an
oversupply in the high-end segment but a shortage of homes for low-income
earners. Prices were also at unreasonable levels compared to per capita income.
Legal bottlenecks were also hindering the development of real estate projects,
which affected supply, coupled with difficulties in accessing capital, including
sources from credit, corporate bonds and others.
31
3.2. Some existing policies to assist people with low income in buying
houses
An important solution was to unlock capital for the real estate market. Regarding
banking credit, policies must be improved to raise both domestic and foreign
financial resources for housing development, control credit growth at a reasonable
rate and create conditions for developers and homebuyers to access credit.
Removing roadblocks for the corporate bond market was also an important
measure to unlock capital sources. Many real estate enterprises had issued a large
number of bonds that would mature this year.
3.3. Lesson learned from the MHA program
The subprime mortgage crisis that occurred during the 2007-2008 financial crisis
resulted in significant economic and financial consequences, affecting the global
economy and leading to the collapse of several major financial institutions. Here
are three lessons learned from this crisis:
•
Importance of risk management practices: The crisis highlighted the
importance of proper risk management practices across the financial
system. Many financial institutions had insufficient risk management
practices in place, which contributed to their inability to identify and
mitigate the risks associated with subprime mortgages. It revealed the need
for proper regulation and supervision to ensure that financial institutions
are managing risks appropriately and in compliance with industry
standards.
•
Importance of transparency and disclosure: The crisis underlined the
significance of transparency and disclosure of information in the financial
sector. Many financial institutions borrowed and lent on the basis of flawed
assumptions about the quality of mortgage-backed securities, which created
uncertainty and distrust in the financial system. Ensuring transparency and
32
disclosure in financial transactions can help to promote market confidence
and integrity.
•
Interconnectedness of the financial system: The crisis demonstrated the
interconnectedness of the global financial system and how problems in one
part of the world can quickly spread to other regions. The default and failure
of mortgage-backed securities in the US quickly impacted financial
institutions worldwide, leading to a global crisis. It highlighted the need for
increased international cooperation and collaboration in the regulation and
supervision of financial institutions to promote financial stability.
While the Vietnamese government may not directly participate in the MHA
program, there are still several lessons that they can learn from its goals and
strategies:
•
Developing affordable housing options: The government can prioritize
the development of affordable housing options for citizens, particularly
for low-income families. This can be done through incentives for private
development, public-private partnerships, or direct public investment in
affordable housing projects.
•
Providing financial assistance: The government can introduce programs
to provide financial assistance and relief to homeowners who are
struggling to meet their mortgage payments or facing foreclosure. These
programs can include loan modifications, refinancing, or other forms of
financial aid.
•
Collaborating with stakeholders: The government can work with
lenders, developers, and other stakeholders to develop and implement
sustainable housing solutions that benefit all parties involved. This can
include regulations and incentives to encourage the creation of affordable
housing units and promote responsible lending practices.
33
•
Improving housing policies and regulations: The government can
review and improve existing housing policies and regulatory frameworks
to ensure they are effective and supportive of affordable housing
development. This can include streamlining bureaucratic procedures,
improving transparency, and introducing measures that encourage
sustainable and affordable housing development.
Overall, the MHA program offers valuable lessons to the Vietnamese
government as they seek to address housing needs and create a stable and thriving
economy.
34
III. CONCLUSION
The MHA program was a comprehensive and ambitious policy response to the
housing crisis that resulted from the 2008 financial crisis in the United States.
The program aimed to prevent foreclosures, stabilize home prices, preserve
homeownership and support the recovery of the housing market. The program
had mixed results and faced various challenges and criticisms, such as low
participation rates, high redefault rates, moral hazard, implementation delays and
lack of transparency. However, the program also had positive impacts and
benefits, such as reducing monthly payments, increasing affordability, preventing
evictions, improving consumer confidence and stimulating economic activity.
The MHA program offers valuable lessons and insights for Vietnam, a country
that is undergoing rapid urbanization and facing a growing demand for affordable
housing. Vietnam has adopted a revised Housing Law in 2015 that provides a
legal framework for housing development and support for low-income earners
and workers in industrial parks. However, the implementation of the law and the
allocation of public funds for housing development have been slow and
inadequate. Vietnam can learn from the MHA program to design and implement
housing policies that are targeted, effective, flexible and inclusive. Vietnam can
also leverage innovative financing mechanisms and instruments to mobilize
resources and reduce risks for housing development. Moreover, Vietnam can
promote sustainable and inclusive urban development by integrating housing
policies with other sectoral policies such as land use planning, infrastructure
provision, environmental protection and social services.
In conclusion, the MHA program was a significant policy intervention that helped
alleviate housing problems during the 2008 financial crisis in America. The
program has implications for Vietnam’s housing market, which faces similar
challenges and opportunities. By learning from the MHA program’s successes
35
and failures, Vietnam can improve its housing policies and programs to meet the
needs and aspirations of its urban population.
36
MACROECONOMICS
NAFTA: INSIGHTS, AND LESSONS LEARNED
FROM THE NEGATIVE IMPACTS ON THE
ECONOMY OF THE US
Group 3
Nguyễn Thanh Bình - 2212140015
Vũ Xuân Đức Anh - 2212140011
Vũ Quỳnh Chi - 2212140018
Nguyễn Đức Hà Nam - 2212140062
Lại Khánh Lam - 2212140043
Bế Hoàng Minh Tân - 2212140073
Ngô Thị Mai Hiên - 2212140031
Phạm Yến Vy - 2212140085
Table of Contents
Introduction...................................................................................................................3
Rationale for choosing the topic.............................................................................. 3
Purpose of the paper.................................................................................................3
Subject and scope of research.................................................................................. 3
Research methodology..............................................................................................3
1. Background............................................................................................................... 4
1.1. NAFTA (North American Free Trade Agreement)........................................4
1.1.1. Definition...................................................................................................... 4
1.1.2. Historical context for the creation of NAFTA...............................................4
1.1.3. Significance and objectives of the agreement............................................... 5
1.2. Overview of the U.S. Trade Trend with NAFTA Partners............................. 7
2. Negative impacts of NAFTA on the economy of US.............................................. 8
2.1. Trade Imbalances and Sectoral Disruptions................................................... 8
2.1.1. Trade Imbalances.......................................................................................... 8
2.1.2. Sectoral disruptions....................................................................................... 9
2.2. Job Loss and Wage Suppression.....................................................................10
2.2.1. Job loss........................................................................................................ 10
2.2.2. Wage suppression........................................................................................ 12
2.2.3. Case study................................................................................................... 12
2.3. Investor-State Dispute Settlement (ISDS) Mechanism.................................13
2.3.1. Overview..................................................................................................... 13
2.3.2. Negative impacts......................................................................................... 13
2.3.3. Case study................................................................................................... 14
3. Lesson learned from the impact of NAFTA on the economy of the US.............15
3.1. Address the problem of job loss and be cautious with the promises of the
increase in job in any free-trade agreement......................................................... 15
3.2. Adjust the mechanism for anti-dumping and countervailing duty (Chapter
19) in order to settle disputes among firms with fairness....................................16
3.3. Addressing Trade Imbalances.........................................................................17
3.4. Investor-State Dispute Mechanisms are good but imperfect....................... 17
3.5. Negotiating skillfully and advocating for the rights of workers. (Lesson for
developing countries).............................................................................................. 18
Conclusion................................................................................................................... 19
References....................................................................................................................20
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
Introduction
Rationale for choosing the topic
The North American Free Trade Agreement (NAFTA) is a significant
international trade agreement that was signed in 1993 between the United States,
Canada, and Mexico. It aimed to create a trilateral trade bloc, eliminating barriers to
trade and investment among the three countries. Studying NAFTA offers valuable
insights and lessons learned regarding its impact on the US economy. As a significant
international trade agreement aimed at promoting economic integration, NAFTA
provides an opportunity to understand the benefits and challenges of increased
economic cooperation. By examining its effects on trade, job creation,
industry-specific impacts, investment, and economic growth, we can gain a nuanced
understanding of the relationship between trade agreements and the US economy.
Ultimately, studying NAFTA's impact on the US economy provides valuable lessons
applicable to other trade agreements and enhances our understanding of global
economic dynamics.
Purpose of the paper
The North American Free Trade Agreement (NAFTA) has been a subject of
both praise and criticism since its inception. By analyzing relevant economic data,
case studies, and expert opinions relating to the detrimental impacts of NAFTA on the
economy of the US in general and some representative sectors in particular, this paper
recommends some lessons derived from these negative impacts and therefore suggests
some implications consisting of crucial insights for policymakers and serves as
cautionary guidance for future trade agreements.
Subject and scope of research
In this report, we will research on the main subject “NAFTA”, focusing on its
negative impact on the economy of the US; from that, we divide our report into two
main parts: insights - where we will brief about notable content and significant impact
of NAFTA on the US, and lessons learnt - where we proceed up-to-date lessons for
countries in this new age of globalization. With that being said, our scope of research
is restricted by scale of time: 1991 - 2023, scale of geography: North America region,
particularly the US and foreign investors from Canada and Mexico, scale of field:
economic, politic and societal.
Research methodology
Our group will search for newspapers, reports, economic thesis and
dissertations to find out information about the North American Free Trade Agreement
(NAFTA) and use these sources to figure out insights about NAFTA and conclude the
lessons learnt from the impacts, especially the negative impacts, that NAFTA had on
the economy of the US.
3
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
1. Background
1.1. NAFTA (North American Free Trade Agreement)
1.1.1. Definition
NAFTA, or the North American Free Trade Agreement, is an agreement signed
by Canada, Mexico, and the United States. It is a trade agreement aimed at promoting
economic integration and eliminating trade barriers between the three countries.
NAFTA was implemented on January 1, 1994, and it created one of the world's largest
free trade areas.
The agreement entails a progressive reduction or elimination of tariffs on a
wide range of goods and services, thereby encouraging cross-border trade and
investment. Additionally, NAFTA includes provisions that address matters such as
intellectual property rights, dispute resolution procedures, and standards for labor and
the environment. (NAFTA and the USMCA: Weighing the Impact of North American
Trade, 2020)
1.1.2. Historical context for the creation of NAFTA
In the 1980s, Mexico underwent significant economic reforms, including
liberalization of its economy and a shift toward market-oriented policies. Mexico
sought to attract foreign investment, modernize its industries, and foster economic
growth. Pursuing a free trade agreement with its North American neighbors became a
key objective.
At the start of NAFTA negotiations in 1991, the objective shared by Canada,
Mexico, and the United States was to integrate Mexico into the advanced, high-wage
economies of its northern neighbors. The anticipated outcome was that increased trade
would foster robust and stable economic growth in Mexico, creating employment
prospects and dissuading illegal migration. For the United States and Canada, Mexico
represented both a lucrative export market and a cost-effective investment destination,
offering opportunities to enhance the competitiveness of businesses from both nations.
(NAFTA and the USMCA: Weighing the Impact of North American Trade, 2020)
Before the implementation of NAFTA, Canada, Mexico, and the United States
had preexisting trade connections. The Canada-U.S. Free Trade Agreement
(CUSFTA), initiated in 1989, removed trade barriers such as tariffs between Canada
and the United States. The positive outcome of CUSFTA prompted talks about
extending free trade to encompass Mexico. (Canada-U.S. Free Trade Agreement,
2021)
The creation of NAFTA was also influenced by the changing global trade
environment. The General Agreement on Tariffs and Trade (GATT) negotiations were
ongoing, and there was a growing trend towards regional trade agreements worldwide.
NAFTA aimed to position North America as a competitive region and enhance its
economic integration. (General Agreement on Tariffs and Trade, 2021)
4
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
Notably, the leaders of Canada, Mexico, and the United States made significant
contributions to the promotion and advocacy of NAFTA. Their deep understanding of
its economic benefits, unwavering determination, and political acumen played a vital
role in its realization. They effectively managed negotiations, encouraged cooperation,
and addressed concerns, fostering a collaborative climate that led to the successful
establishment of this transformative trade agreement in North America. In particular,
President George H.W. Bush recognized the importance of bipartisan support in the
U.S. Congress for the passage of NAFTA. He actively sought the support of both
Democrats and Republicans, emphasizing the potential economic gains, job creation,
and market expansion that the agreement could bring to the United States. In addition,
Bush undertook a national campaign to educate and engage the American public about
the benefits of NAFTA, highlighting its potential to boost U.S. businesses, increase
exports, and create new jobs. His leadership was crucial in navigating complex
negotiations, addressing concerns from various sectors and stakeholders, and
displaying flexibility and a willingness to compromise in order to forge a mutually
beneficial agreement. (Letter to Congressional Leaders on Fast Track Authority
Extension and the North American Free Trade Agreement, 1991)
1.1.3. Significance and objectives of the agreement
● Tariff Reduction and Elimination
Reduction or elimination of tariffs was applied after NAFTA was signed. Prior
to NAFTA, tariffs of 30% or higher on goods exported from Mexico were normal and
slow procedure of processing paperwork led to some delays while exporting. In
addition, Mexican tariffs on the US made the price of the products 250% higher than
American levies on goods produced in Mexico. To address this imbalance in tariff, the
NAFTA Treaty was signed in 1994 among three countries including the US, Mexico
and Canada.
When the agreement went into effect, almost 50% of the tariffs were eliminated
right away, while the remaining levies were intended for gradual removal.
Construction, engineering, accounting, advertising, consulting/management,
architecture, health-care management, commercial education, and tourism are a few of
the industries that NAFTA particularly covers (Inc.com, North American Free Trade
Agreement (NAFTA), 2023).
● Rules of Origin
The rules of origins are listed in Chapter 4 of the North American Free Trade
Agreement in which it determines and takes into account whether the goods are
original or not. Only originating goods can receive duty-free or tariff reduction and
elimination. There are five ways to define goods as originating under NAFTA Rules
of Origin. Preference Criteria A (the most preferred criteria): If a good is wholly
5
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
obtained or produced in one or more of the NAFTA countries, this good is regarded as
originating.
The rules of origin are implemented in order to ensure that the goods produced
within three countries of NAFTA are prioritized over the goods imported from other
non-NAFTA countries.
Rules of Origin improve the cross-border investment among the three
countries. Integrating Mexico with the other highly-developed countries was one of
NAFTA's goals because the Rules of Origin made Mexico become a lucrative market
for the US and Canada (Shipping Solutions, Understanding the NAFTA Rules of
Origin, 2018).
● Intellectual Property Rights
NAFTA provided increased protections for intellectual property, such as trade
secrets and computer software. These protections increased the incentives for
cross-border trade because they reduced the risk of losing business secrets to an
international competitor (What Is the North American Free Trade Agreement
(NAFTA), 2023)
● Dispute Settlement Mechanisms
NAFTA provided a framework for resolving trade disputes between the
member countries (the United States, Canada, and Mexico)
It also ensure that trade disputes are resolved in a fair, transparent, and timely
manner, promoting compliance with the agreement's rules and obligations
● Labor and Environmental Standards
The Clinton administration negotiated several side agreements to ensure protections
for the environment and labor rights (What Is the North American Free Trade
Agreement (NAFTA), 2023)
o The North American Agreement on Labor Cooperation (NAALC),
including provisions to prevent child labor and other abuses, stops short
of protecting the right to organize.
o The North American Agreement on Environmental Cooperation
(NAAEC), introduced a commission to assess the results of
liberalization on environmental regulations
6
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
1.2. Overview of the U.S. Trade Trend with NAFTA Partners
Since the implementation of the NAFTA agreement, U.S. trade with its NAFTA
partners has experienced remarkable growth, more than tripling in volume. This
expansion has outpaced the rate of trade with the rest of the world. Over the years,
Mexico has emerged as a particularly vibrant trading partner, surpassing both Canada
and non-NAFTA countries in terms of trade growth since 1993. Notably, in 2011, the
combined trade between the NAFTA partners exceeded the remarkable milestone of
$1 trillion. In 2016, Canada was the leading market for U.S. exports, while Mexico
ranked second. The two countries accounted for 34% of total U.S. exports in 2016. In
imports, Canada and Mexico ranked second and third, respectively, as suppliers of
U.S. imports in 2016. The two countries accounted for 26% of U.S. imports.
(Department of Commerce trade data)
Most of the trade-related effects of NAFTA may be attributed to changes in
trade and investment patterns with Mexico because economic integration between
Canada and the United States had already been taking place. It is important to
acknowledge that while NAFTA has certainly expedited U.S.-Mexico trade since
1993, other factors, including economic growth patterns, have also influenced trade
dynamics. Trade tends to flourish during periods of economic expansion, while
experiencing declines during periods of economic downturn. For instance, the
economic downturns in 2001 and 2009 likely contributed to the decrease in both U.S.
exports to and imports from Canada and Mexico, as depicted in Figure 1.
Figure 1. U.S. Merchandise Trade with NAFTA Partners: 1993-2016
(billions of nominal dollars)
7
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
2. Negative impacts of NAFTA on the economy of US
2.1. Trade Imbalances and Sectoral Disruptions
2.1.1. Trade Imbalances
NAFTA has led to changes in trade patterns between the US, Canada, and
Mexico, resulting in trade imbalances. While the agreement aimed to promote free
trade and balanced economic growth, the US has experienced persistent trade deficits
with both Canada and Mexico since NAFTA's implementation. This means that the
value of US imports from these countries exceeds the value of its exports to them. The
trade imbalances have had implications for domestic production and employment in
certain sectors.
According to the U.S. Census Bureau's Foreign Trade Division, the trade
deficit between the United States and Mexico has increased since the implementation
of NAFTA. Here are the total goods trade deficits for selected years:
● 1993 (pre-NAFTA): $1.66 billion trade deficit with Mexico.
● 2000: $24.49 billion trade deficit with Mexico.
● 2010: $66.76 billion trade deficit with Mexico.
● 2020: $101.08 billion trade deficit with Mexico.
These figures indicate a significant increase in the trade deficit between the
United States and Mexico over time.
Figure 2.1: U.S. - Mexico Merchandise Trade 2002 - 2021
8
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
2.1.2. Sectoral disruptions.
● Manufacturing Sector Disruptions
NAFTA's impact on the US manufacturing sector has been a subject of debate.
While proponents argue that the agreement has helped create export opportunities for
US manufacturers, critics argue that it has also contributed to job losses and industrial
shifts. The manufacturing sector has faced intense competition from Mexico, which
has attracted investment due to lower labor costs. As a result, certain industries, such
as automotive manufacturing and textiles, have experienced disruptions, including
plant closures and relocation of production to Mexico.
Figure 2.2: All employees, thousands, manufacturing, seasonally adjusted
Source: U.S. Bureau of Labor Statistics
It can be seen from the graph that during the implementation of NAFTA
(1994-2020), the US has lost about 5.5 million employees in manufacturing.
● Agriculture Sector
NAFTA has had mixed effects on the US agriculture sector. While it has
increased agricultural exports to Canada and Mexico, the US has also seen increased
competition from these countries, particularly in sectors such as fruit, vegetables, and
livestock. Some US farmers have faced challenges due to price volatility and
increased import competition. However, others have benefited from expanded export
opportunities in areas like grains, meat products, and processed foods.
9
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
● Service sector
The impact of NAFTA on the US service sector has been less pronounced
compared to manufacturing and agriculture. NAFTA's provisions regarding services
trade aimed to facilitate cross-border trade and investment. While there have been
some increases in service exports, such as financial and professional services, critics
argue that the benefits have been unevenly distributed, with potential job displacement
in certain service industries.
● Regional Disparities
NAFTA's effects have not been uniform across all regions of the United States.
Some regions, particularly those with strong manufacturing bases, have faced greater
challenges due to increased competition from Mexico. This has resulted in job losses
and economic dislocation in these areas, contributing to regional disparities.
2.2. Job Loss and Wage Suppression
2.2.1. Job loss
The North American Free Trade Agreement (NAFTA) was sold to the U.S.
public in 1993 with grand promises. The deal would create 200,000 new U.S. jobs per
year in its first five years alone, according to President Clinton.(Clinton Sees NAFTA
Gains, Urges Goes to Dismiss Fears,1993) That projection was based on a study by
the Peterson Institute for International Economics (PIIE) that modeled how NAFTA’s
elimination of Mexican and Canadian tariffs would result in growth of U.S. exports
that would outpace growth in imports from the other NAFTA countries. By expanding
our pre-NAFTA trade surplus with Mexico and improving the U.S. trade balance with
Canada (with which the United States had a small pre-NAFTA deficit), NAFTA would
create numerous U.S. jobs. (NAFTA: An Assessment, 1993)
However, the Economic Policy Institute (EPI) estimates that the rising U.S.
trade deficit with Mexico and Canada under NAFTA had already eliminated about one
million net jobs in the United States by 2004. EPI estimates that about one third of the
jobs lost due to the rising trade deficit under NAFTA’s first decade were in
non-manufacturing sectors of the economy, including service sector jobs, which
suffered as closed factories no longer demanded services. EPI further calculated that
the ballooning trade deficit with Mexico alone destroyed about 850,000 net U.S. jobs
between NAFTA’s implementation and 2013.This toll has likely grown since 2013, as
the non-fossil fuel U.S. trade deficit with Mexico has risen further. (Revisiting
NAFTA: Still Not Working for North America’s Workers,2006,p.173)
10
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
Figure 2.3: Total U.S. trade-related jobs** supported or displaced by NAFTA:
1993-2004
In addition, more than 950,000 specific U.S. jobs have been certified by the
U.S. Labor Department as lost to NAFTA outsourcing and import floods under just
one narrow program.However, this is a significant undercount of the job loss, given
that the program, Trade Adjustment Assistance (TAA), excluded many categories of
workers during NAFTA’s first decade of damage, and reporting is voluntary, so only
those who know about the program and do the work to apply are even considered. The
mass outsourcing of American jobs was the outcome about which NAFTA opponents
had warned. While EPI’s estimates of the job losses resulting from NAFTA
summarize the overall effect of the growing NAFTA trade deficit, the government
itself tracks some of the layoffs known to have specifically occurred due to imports or
outsourcing through TAA. (Trade Adjustment Assistance Database, 2018)
Moreover, data from the U.S. Bureau of Labor Statistics reveal that nearly 4.5
million U.S. manufacturing jobs have been lost overall since NAFTA took effect.(U.S.
Bureau of Labor Statistics, Current Employment Statistics survey). Obviously, not all
of these lost U.S. manufacturing jobs – one out of every four of our manufacturing
jobs – are due to NAFTA. The United States entered the World Trade Organization
(WTO) in 1995, China joined the WTO in 2000, and the U.S. trade deficit with China
soared thereafter, contributing to the manufacturing job loss. (Growth in U.S.–China
trade deficit between 2001 and 2015 cost 3.4 million jobs,2017).
11
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
2.2.2. Wage suppression
Another factor affected besides job losses in the U.S. is the wage suppression.
Wage growth in affected industries has been relatively slower compared to industries
less exposed to import competition. Although the United States lost millions of
manufacturing jobs during the NAFTA era, but overall unemployment has been
largely stable (excluding the fallout of the Great Recession) as new low-paying
service sector jobs have been created. Proponents of NAFTA raise the quantity of jobs
to claim that NAFTA has not hurt U.S. workers but not mention that the quality of
jobs available, and the wages most U.S. workers can earn, have been degraded.
According to the U.S. Bureau of Labor Statistics, two out of every five displaced
manufacturing workers who were rehired in 2016 experienced a wage reduction. One
out of every four displaced manufacturing workers took a pay cut of greater than 20
percent. (Displaced Workers Summary, 2016).
For the average worker earning the median manufacturing wage of $39,500 per
year, this meant an annual loss of at least $7,900. Many displaced workers in the
manufacturing sector had to shift over to lower paid service sectors. For example,
between 1993 and 2017, the manufacturing sector lost about 4.5 million jobs. At the
same time, the leisure and hospitality sector gained 5.4 million jobs, which has an
average wage of $13 an hour, almost half that of the average wage in the
manufacturing sector. (Industries by Supersector and NAICS Code, 2018).
2.2.3. Case study
The closure of the Ford Motor Company's Twin Cities Assembly Plant in St.
Paul, Minnesota:
The Twin Cities Assembly Plant had a long history of producing vehicles,
including Ford Ranger pickup trucks. However, the plant faced significant challenges
following the implementation of NAFTA. The agreement allowed for increased
competition from Mexico, where labor costs were significantly lower compared to the
United States.
As a result, automakers like Ford found it more economically viable to shift
production to Mexico, where they could take advantage of cheaper labor and
operating costs. This led to a decline in domestic production and job losses in the U.S.
auto industry.
In 2008, Ford announced the closure of the Twin Cities Assembly Plant, which
resulted in the loss of approximately 1,600 jobs. The decision was driven by the desire
to consolidate production and reduce costs. Ford opted to move the production of its
Ranger pickup trucks to a plant in Mexico, where it could benefit from lower labor
costs and potentially higher profitability.
The closure of the Twin Cities Assembly Plant and the shift of production to
Mexico serves as an example of how NAFTA contributed to the offshoring of
12
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
manufacturing jobs in the U.S. auto industry. Critics argue that the agreement created
an uneven playing field, allowing companies to relocate production to countries with
lower wages and less stringent labor and environmental regulations. (Pioneer Press,
2011)
2.3. Investor-State Dispute Settlement (ISDS) Mechanism
2.3.1. Overview
● Investor-State Dispute Settlement (ISDS) assures both equal treatment among
investors of the Parties in accordance with the principle of international
reciprocity and due process before an impartial tribunal.
● NAFTA allows foreign investors to sue host governments directly. Under
Chapter 11, private investors are empowered to bring claims against a Party by
Articles 1116 and 1117. The investor may bring a claim alleging it incurred loss
or damage as a result of a Party's breach of Chapter 11, and it may also bring a
claim on behalf of an enterprise incorporated in the Party's territory that it owns
or controls directly or indirectly.
● The dispute can be arbitrated in a single proceeding if the two claims arise out
of the same alleged breach.
2.3.2. Negative impacts
Overall, Investor-State Dispute Settlement creates an incentive for the US to
welcome foreign investors, implement policies and projects to make the best deal out
of the contract for the two sides. However, this distracts the focus of the US
government on social welfare and internal regulations in myriad aspects, notably
public health, education, safety and environment.
● Loss of Sovereignty
Critics argue that ISDS undermines a country's sovereignty by allowing foreign
investors to bypass domestic courts and challenge government decisions directly. It
sparked controversy: equality vs equity between domestic companies and foreign
companies. Following Article 1202, the government of that NAFTA party may not
treat bias against local companies. At the national, provincial and local levels,
governments are required to accord service suppliers from other NAFTA parties
treatment 'no less favorable' than domestic service firms, in similar circumstances. As
for the “vulnerability” for being a foreign investor, it has the privilege to skip some
ministries and procedures. This significantly mitigated the impact of the US
government itself, letting the advantage of initiation to Canadian and Mexico
companies.
13
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
● Financial Costs
ISDS cases can be financially burdensome for governments, particularly if they
face multiple claims or large compensation awards. Defending against ISDS claims
and potential payouts can strain public budgets significantly. Research shows that the
number of huge cases that the US has got into was 16 cases in a 24-year period.
● Regulatory Chill
ISDS can create a chilling effect on governments' regulatory actions, as
policymakers may fear facing costly legal challenges. This could deter not only
regulation policy related to social welfare, but the strictness of policy regulating the
economy and relationship with other domestic companies. The impact of internal
production was less focused than before, with less resources invested and money paid.
● Inconsistent Decision-Making
Critics argue that ISDS lacks a consistent and predictable decision-making
process. The absence of a formal appeals mechanism of binding precedent can lead to
contradictory rulings, which may undermine legal certainty and create an
unpredictable investment environment. This uncertainty can deter foreign investment
as well.
● Potential for Abuse
ISDS provisions have the potential to be abused by investors looking to
challenge legitimate government actions or regulations. Critics argue that corporations
may strategically structure their investments to take advantage of ISDS mechanisms,
bringing claims even when there is no clear violation of their rights.
2.3.3. Case study
● Loewen Group Inc. vs The United States of America (William S.Dodge,
International Decisions: Loewen Group, Inc. v. United States and Mondev
International Ltd. v. United States, 2004)
The Loewen Group Inc. v. The United States case is a notable example of an
Investor-State Dispute Settlement (ISDS) case under the North American Free Trade
Agreement (NAFTA).
o The Loewen Group Inc., a Canadian funeral services company, acquired
several funeral homes in the United States in the 1990s. Loewen faced
legal challenges and financial difficulties, including lawsuits and jury
verdicts against the company. Eventually, Loewen filed for bankruptcy
in 1999.
o Loewen initiated an ISDS claim against the United States, alleging that
it had been treated unfairly by the US court system. The company
argued that its rights under NAFTA's Chapter 11, which protects foreign
investors from unfair treatment, had been violated. Loewen claimed that
the US court system's handling of the lawsuits and jury verdicts resulted
14
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
in excessive and discriminatory damages, leading to the company's
financial distress and bankruptcy.
Result: In 2003, an arbitration tribunal ruled in favor of Loewen, finding that
the United States had violated NAFTA's fair and equitable treatment standard. The
tribunal determined that the US court system's handling of the lawsuits and jury
verdicts had been discriminatory, disproportionate, and inconsistent with the
obligations under NAFTA. The tribunal awarded Loewen damages amounting to over
$16 million, plus interest and costs. Upon review, the award was reduced to around
$11 million. The reduction in the award was due to various factors, including the
tribunal's reassessment of some claims and legal costs.
3. Lesson learned from the impact of NAFTA on the economy of the US
3.1. Address the problem of job loss and be cautious with the promises of the
increase in job in any free-trade agreement
The problem is that three countries misinterpret the effects of NAFTA on the
job market. From the beginning, due to tariff reduction and rules of origin after
NAFTA, they could only see the positive sides of exporting their products to others,
getting more people to have jobs, and reducing unemployment rates. However,
NAFTA also made the US, Canada and Mexico import more products, leading to a
decrease in wage and jobs available inside those countries.
After observing and learning from NAFTA, other countries should figure out
and clearly understand their key industries, so that when signing any free-trade
agreement, the government takes into account the correct way to promote their
strengths and mitigate their weaknesses.
They should implement the tariff reduction for those products from the industry
they are not strong, ideally from key industries manufactured in other alliances
signing the agreement with them. Therefore, citizens can buy these products easier
with cheaper prices. The government can also avoid monopoly within weak sectors in
their countries along with promoting trade with more alliances from diverse sectors.
Also, countries should focus on promoting and manufacturing their key
industries by joining free-trade agreements. They can utilize the tariff reduction and
rule of origin to export more products of their key industries, hence, creating more
jobs for citizens.
By doing these 2 things, the government can benefit both their countries and
their allies. Eventually, these countries can create more jobs for their habitants as they
develop their strengths in producing in key industries and can save resources (both
human resources and natural resources) by utilizing products imported from their
allies with tariff reduction.
15
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
3.2. Adjust the mechanism for anti-dumping and countervailing duty (Chapter 19)
in order to settle disputes among firms with fairness.
Chapter 19 of NAFTA, also known as the "Trade Remedies" or "Binational
Panel Review" chapter, establishes a unique dispute resolution mechanism for
anti-dumping and countervailing duty cases. Under Chapter 19, if a domestic
company feels unfairly targeted by anti-dumping or countervailing duties imposed by
another NAFTA member country, it can request a binational panel review to address
the issue. This process involves the establishment of an ad hoc panel composed of
representatives from each involved country to review the case and make a final
determination.
The objective of Chapter 19 is to provide an independent and impartial review
of trade remedy determinations, addressing concerns about potential bias or
protectionism in domestic courts. It allows for a specialized panel to evaluate the facts
and legal aspects of the case, ensuring a fair and transparent process.
However, Chapter 19 has been a contentious issue in trade negotiations. Critics
argue that it undermines national sovereignty and interferes with domestic legal
systems, as it grants authority to an international panel to override decisions made by
domestic courts. Some suggest that Chapter 19 creates uncertainty, adds
administrative burdens, and hampers the timely resolution of trade disputes.
Suggestions for improving Chapter 19:
● Streamline and expedite the panel review process
Enhance the efficiency of panel reviews by setting clear timelines, reducing
administrative burdens, and ensuring prompt resolution of disputes.
● Enhance transparency and accountability
Implement measures to improve the transparency of panel proceedings, such as
publishing panel decisions, allowing interested parties to participate as observers, and
ensuring the qualifications and impartiality of panel members.
● Strengthen safeguards against abuse
Introduce measures to prevent frivolous or repetitive challenges and ensure that
panel review is only utilized for legitimate trade remedy disputes. This could involve
setting higher thresholds for initiating panel reviews and imposing penalties for
misuse of the mechanism.
● Clarify the scope of review
Clearly define the parameters of panel review to avoid encroachment on
domestic legal systems while still providing a fair and impartial evaluation of trade
remedy determinations. This could involve specifying the standard of review and the
grounds on which panel decisions can be challenged.
16
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
● Evaluate the necessity of the provision
Conduct a thorough assessment of the benefits and drawbacks of maintaining
Chapter 19 in future trade agreements, taking into account the evolving global trade
landscape and the potential impact on domestic industries.
These suggestions aim to strike a balance between ensuring fair trade
enforcement and addressing concerns about sovereignty and domestic legal systems. It
is important for policymakers and trade negotiators to carefully evaluate the potential
impacts and implications of any proposed changes to Chapter 19 before implementing
them.
3.3. Addressing Trade Imbalances
One of the concerns raised about NAFTA was the significant increase in the
U.S. trade deficit with Mexico. The trade deficit occurs when a country imports more
goods and services than it exports. Critics argued that the liberalized trade under
NAFTA led to a surge in imports from Mexico, particularly in manufacturing sectors,
which contributed to the loss of domestic manufacturing jobs in the United States.
To address such issues and promote fair and balanced trade, it is important for
trade agreements to include measures that address trade imbalances. These measures
could include provisions for safeguarding domestic industries, implementing
mechanisms to resolve trade disputes, and promoting export growth. By implementing
strategies that promote domestic industries and encourage export growth, countries
can strive for a more balanced and mutually beneficial trade relationship.
Additionally, trade agreements should consider the impact of excessive reliance
on imports. It is crucial to ensure that domestic industries are not overwhelmed by
imports to the extent that they become uncompetitive or face significant job losses. By
including provisions that protect domestic industries and promote their
competitiveness, trade agreements can help prevent excessive reliance on imports.
Ultimately, achieving a balanced and mutually beneficial trade relationship
requires careful consideration of the interests and concerns of all participating
countries. It involves addressing trade imbalances, protecting domestic industries, and
promoting export growth to ensure a more equitable distribution of benefits.
3.4. Investor-State Dispute Mechanisms are good but imperfect
Investor-State Dispute Mechanism (ISDS) under NAFTA Chapter 11 attracted
the most media attention. An impression has been created that foreign companies
flagrantly abuse Chapter 11 to overturn national laws. The charge is exaggerated. Of
27 cases filed under Chapter 11, the investor has won 5 times, while the state has won
(or the case has been terminated) 7 times. The remaining 15 cases remain to be
concluded. Moreover,in each of these cases, the public danger posed by the banned
17
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
chemicals or environmental conditions were not a consideration, only the companies’
loss of actual and potential profits.
Suggestion for improvement:
● Define and narrow the scope of investor-state claims
Clarify the scope of investment protection provisions to prevent overly broad
interpretations that could lead to potential abuse of the ISDS mechanism. Clearly
define the types of measures that can be subject to ISDS claims and establish
limitations on what can be considered an expropriation or a violation of fair and
equitable treatment.
● Establish a standing tribunal
Consider establishing a permanent tribunal to handle ISDS cases, rather than
relying on ad hoc tribunals for each dispute. This could enhance consistency,
predictability, and efficiency in the resolution of investment disputes.
3.5. Negotiating skillfully and advocating for the rights of workers. (Lesson for
developing countries)
Developing countries interested should negotiate a longer and more gradual
exposure to trade. Trade agreements should allow smaller economies to adopt policies
that maximize employment, and avoid risking agriculture jobs on a promise that
manufacturing jobs will take their place.
Poor countries should bargain for meaningful financial support for transitional
trade adjustment assistance to include training for workers and subsistence farmers.
Transitional measures must be taken to ensure that farmers have access to credit that
allows them to develop economically and environmentally sound farming practices.
Assistance to the rural poor should be aimed at allowing people to transition to
livelihoods that are sustainable in the modern global market and should acknowledge
that the process of urbanization will continue.
18
NAFTA: insights, and lessons learned from the negative impacts on the economy of US
Conclusion
The North American Free Trade Agreement (NAFTA), signed in 1993, was a
significant international trade agreement between three countries: the US, Mexico and
Canada. NAFTA aims to create a trilateral trade bloc, eliminate barriers to trade and
investment, hence, together developing the economy.
The North American Free Trade had a major influence on promoting trade and
economic cooperation among the three countries. Some of the notable provisions of
NAFTA include tariff reduction and elimination, rules of origin, intellectual property
rights, dispute settlement mechanisms and labor and environment standards. Overall,
the objective of NAFTA was to foster economic integration, promote free trade, and
create a more integrated and competitive North American market, benefiting
businesses, workers, and consumers in the member countries.
Although NAFTA did bring many positive impacts to three countries: the US,
Mexico and Canada, it brought about trade imbalances and sectoral disruptions,
caused job loss and wage suppression, and raised many issues associated with the
Investor-State dispute settlement mechanism. The impacts of NAFTA on the U.S.
economy are complex and multifaceted, its influence caused severe damage to the
economy, affected the lives of the citizens, and led to more problems than the
agreement had anticipated.
The negative impacts of NAFTA on the US economy offered many valuable
lessons for future trade agreements. It was concluded from our research that
governments should address the problem of job loss and be cautious with the promises
of the increase in jobs in any free-trade agreement; adjust the trade enforcement
chapter (Chapter 19) in order to settle disputes among firms with fairness; address
trade imbalances; utilize the ISDS mechanism in order to attract foreign investors but
also be careful with the possibility of foreign companies/firms overturning national
laws. From these four lessons learned from the negative impacts of NAFTA, we have
a suggestion for developing countries to negotiate skillfully and advocate for the rights
of workers.
Overall, NAFTA and its impacts on the US economy is a complex research
topic. Due to time constraints and lack of resources, our team can only provide
primary research on this topic. Despite the difficulties, we believe we have contributed
to the existing body of knowledge and recommend reasonable lessons for future trade
agreements. In order to bring these lessons into real life, we suggest that further
research be done.
19
FOREIGN TRADE UNIVERSITY
SCHOOL OF ECONOMICS & INTERNATIONAL BUSINESS
----000----
MACROECONOMICS ASSIGNMENT
THE IMPACTS OF THE RUSSIA-UKRAINE WAR
ON THE INFLATION RATE IN EUROPE
Instructor: Assoc. Prof. Dr. Hoang Xuan Binh
Class: KTE204E(GD2-HK2-2223)61CTTTKT.1
GROUP 4
Hanoi, June 2023
Members
Name
Student ID
Phạm Hải Anh
2212140009
Ngô Thùy Dương
2213140020
Nguyễn Hải Giang
2212140023
Nguyễn Hương Giang
2212140024
Lê Quỳnh Nga
2212140063
Nguyễn Trần Bảo Ngọc
2212140065
Phạm Thị Minh Ngọc
2212140066
Nguyễn Hương Quỳnh
2212140071
Hoàng Thủy Tiên
2212140074
Phạm Thị Minh Trang
2212140080
Page | 1
Table of contents
Introduction
1. Definition
1.1. Definition
1.2. Measuring inflation
1.3. Causes of inflation
2. Background and current state of the war
2.1. Cause
2.1.1. The root cause:
2.1.2. Direct cause:
2.2. Timeline:
2.3. EU sanctions against Russia over Ukraine
2.3.1. Sanctions against individual and entities
2.3.2. Economic sanctions
2.4. Russia’s response
3. The Economic Impact of the Russia-Ukraine Crisis on Europe
3.1. Food crisis in Europe
3.1.1. Impacts on Food Production, Processing, and Storage.
3.1.2. Impacts on food transport logistics
3.1.3. Impacts of food market/retail
3.1.4. Impacts on consumer
3.1.5. Impacts on food dependent services
3.2. Energy crisis in Europe
3.2.1. Dependence on energy imports of Europe
3.2.2. Primary energy sources
3.2.3. Fallout of Russia-Ukraine War
3.3. Impacts on the inflation rate
3.3.1. Impacts in the UK
3.3.2. Impacts in other European Nations
4. How is the EU dealing with the crisis?
4.1. Improving food resilience against the Russia-Ukraine conflict
4.2. Energy transition
Conclusion
References
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Introduction
The Russia-Ukraine War is an ongoing crisis posing challenges in multiple aspects on an
international scale. The conflict starting in February 2022 has exerted massive impacts on the
global economy with Europe most profoundly affected. European nations, specifically European
Union members and the United Kingdom, suffer from fluctuations in the food and energy
market, resulting in an unprecedented inflation rate witnessed recently.
As food and energy are essential elements in national domestic demands, the topic “The
Impacts of the Russia-Ukraine War on the Inflation Rate in Europe” will bring a closer look at
the current state of European countries in the context of the global crisis, thus inferring
implications for other countries to respond to the conflict and devise sustainable approach in the
future.
The research aims to equip a sufficient understanding of the Russian invasion of Ukraine
and its economic implications, specifically the inflation rate in Europe, the most affected area in
the global crisis. Furthermore, the paper targets to infer possible solutions to the current crisis
which are applicable to directly and indirectly affected nations.
The research paper covers the economic impacts of the Russia-Ukraine War on the
inflation rate in Europe, specifically in the food and energy market. The paper explores the
economic implications since the beginning of the conflict combined with post-pandemic data to
fully examine the situation of European countries, including the European Union country
members and the United Kingdom.
Statistical methods, comparative methods, and data synthesis are implemented in the
research paper. Secondary data is essential in the synthesizing process, referenced from various
sources including journal articles, statistical reports, and websites.
Page | 3
1.
1.1.
Definition
Definition
Inflation is a rise in prices, which can be translated as the decline of purchasing power of
money over time. (Investopedia)
1.2. Measuring inflation:
The two most frequently cited indexes that calculate the inflation rate in the U.S. are the
Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE).
These two measures take different approaches to measuring and calculating inflation.
(Forbes/advisor/investing)
CPI Inflation: The Bureau of Labor Statistics (BLS) calculates CPI inflation by gathering
spending data of regular consumers around the U.S. It tracks a basket of commonly purchased
goods and services, including food, gasoline, prescription drugs, college tuition and mortgage
payments, to gauge how prices generally change over time. Two components of this
basket—food and energy—can see very significant changes in price from one month to the next,
depending on seasonal demand and potential supply disruptions at home and abroad. Therefore,
the BLS also publishes Core CPI, a measure of so-called “underlying inflation,” which
intentionally leaves out volatile food and energy prices. The CPI is constructed each month using
80,000 items in a fixed basket of goods and services representing what Americans buy in their
everyday lives. The BLS calculates CPI inflation by taking the average weighted cost of a basket
of goods in a given month and dividing it by the same basket from the previous month.
PCE Inflation: is somewhat similarly to how CPI inflation is calculated. The key
difference is where the data comes from: Instead of asking consumers how much they’re
spending on certain goods and services, the PCE tracks the prices businesses report selling goods
and services for. PCE is in fact able to better track expenditures that consumers do not pay for
directly, like medical care paid for by employer-provided insurance or Medicare and Medicaid.
CPI doesn’t keep up with these in-direct expenses. Finally, PCE’s basket of goods is less fixed
than CPI’s, which helps it more effective in calculating inflation when consumers substitute one
kind of good or service for another when it gets more expensive. The BEA’s personal
consumption expenditures price index also calculates a core PCE measure, like CPI, that strips
out volatile food and energy prices. The Federal Reserve considers Core PCE to be its most
important measure of inflation in the U.S.
1.3.
Causes of inflation
The causes of inflation can be grouped into three broad categories: demand-pull,
cost-push and inflation expectations (Reserve Bank of Australia).
Demand-pull inflation arises when the aggregate demand increases to exceed the
aggregate supply that can be sustainably produced. Aggregate demand might increase because
there is an increase in spending by consumers, businesses or government, or an increase in net
exports. An increase in the money supply will tend to cause inflation since customers often want
to spend more when they have more money (Harvard Business Review, 2022).
Cost-push inflation occurs when the aggregate supply falls compared to aggregate
demand. A decrease in aggregate supply is often caused by an increase in the cost of production
(Reserve Bank of Australia). Supply shocks - major disruptions to an important economic input,
like materials or energy - can lead to cost of production increasing. (Harvard Business Review,
2022).
Page | 4
Inflation expectations are the beliefs that households and firms have about future price
increases. For example, if workers expect future inflation to be higher, they may demand higher
wages to make up for the expected loss of their purchasing power.
Page | 5
2.
2.1.
2.1.1.
Background and current state of the war
Cause
The root cause:
The US and Russia relationship after the Cold War relationship is competition rather than
cooperation, sometimes on the verge of confrontation. Relations between Russia and NATO fell
into crisis. Both sides view each other as the first threat and take appropriate measures in the
Ukraine war.
2.1.2. Direct cause:
The conflict between the Ukrainian government and the Russian-backed Donbass
separatist forces (including the DPR and LPR) increased, especially after October 2021, making
the peace negotiation process under the Agreement Minsk 2 - the only solution to the Ukrainian
political crisis - difficult to achieve. The US and NATO not only transferred weapons to Ukraine,
but also deployed medium-range missiles and military forces on the territory of NATO - Eastern
Europe towards Russia. In response to those moves, Russia deployed more than 100,000 troops
along its land border with Ukraine, the Crimea peninsula, and concentrated troops in Ukraine's
neighbor Belarus in the name of joint exercises, as well as military exercises like sending six
modern warships into the Black Sea. The United States and its NATO ally did not respond to
Russia's eight-point security proposal sent to the United States and NATO in mid-December
2021, with four core contents: NATO does not admit Ukraine and its allies convention of the
Commonwealth of Independent States (CIS); removal of US nuclear weapons from Europe;
NATO withdraws all troops or weapons deployed to the countries participating in the alliance to
the time before 1997, including countries such as Poland, Estonia, Lithuania, Latvia; do not
conduct exercises in countries near the territory of Russia.
2.2. Timeline:
Here’s a 1-year timeline of key events since the war between Russia and Ukraine started
in February 2022.
● February 2022: The beginning of a war
On 24 February, President Vladimir Putin launched a “special military operation” ordering his
troops into Ukraine. Speaking on Russian state television, he announced the purpose of this
operation as: “We will strive to demilitarize and denazify Ukraine and will bring to justice those
who committed multiple bloody crimes against civilians including Russian citizens”.
Russia ordered tens of thousands of Russian troops into Ukraine. Despite Putin threatening
anyone trying to interfere, Ukraine was determined to fight back and had no intention of
surrendering. Response to Russia's aggressive operation, the EU imposed a widespread package
of sanctions on Moscow (European Commission, 2022) and also prepared to open its doors to
hundreds of thousands of refugees pouring out of Ukraine.
● March 2022:
Russia is forced to scale back its war goals following stiff resistance from Ukrainian forces,
switching focus to the Donbas region. The conflict escalates the global food crisis and Ukraine’s
government announces a ban on a wide range of agricultural exports. World food prices reach a
record high (FAO, 2022).
● June 2022:
According to the European Council chief Charles Micheal, the EU decided to partially phase out
Russian oil: “agreement to ban export of Russian oil to the EU. This immediately covers more
Page | 6
than 2/3 of oil imports from Russia, cutting a huge source of financing for its war machine,” and
aims to cut 90% of oil imports from Russia by the end of the year.
● July 2022:
Russian energy giant Gazprom said it would halve gas supplies to Europe through the Nord
Stream 1 pipeline. Moscow and Kyiv agreed a deal to re-open Ukraine’s Black Sea ports which
have been blockaded by the Russian navy, hoping this will ease the global food crisis (Reuters,
2022).
● September 2022:
European gas prices spiked by as much as 30% (Energy, E.C, 2022) since Gazprom said the
Nord Stream 1 pipeline had been closed for temporary maintenance work.
Following Ukraine's counter-offensive launch in the north-east, Russian President Vladimir Putin
declared the immediate partial mobilization of 300,000 reservists.
● October 2022:
Crimea bridge, which is an strategically important
location of Russian forces, was severely damaged
by an unamingly-caused explosion. Russia began
targeting Ukrainian official power facilities.
● December 2022:
Since president Zelenskyy’s first foreign trip to
address the US Congress, the US announced it was
sending nearly 2$ billion in additional security
assistance to Ukraine (DoD, 2022).
The European Central Bank says it expects inflation
to remain above its 2% target for the next 3 years.
Several factors caused inflation to spike at 10.6% in
October across the 19 countries that use the euro
(Bank, E.C, 2022).
● February 2023:
At the EU summit in Brussels, the EU wanted to
approve the 10th package of sanctions against
Russia. President Joe Biden made a visit to Kyiv.
2.3. EU sanctions against Russia over Ukraine
In response to the unprecedented aggression against Ukraine, the EU has so far adopted
10 packages of hard-hitting sanctions against Russia. They are targeting the core of Russia’s
economy and depriving it of critical and modern technologies and markets, significantly
curtailing its ability to wage the war.
The sanctions are designed to: cripple the Kremlin’s ability to finance the war; impose
clear economic and political costs on Russia’s political elite responsible for invasion; diminish
Russia's base.
These measures are targeted, are not affecting energy and agrifood exports from Russia to
third countries, and are well coordinated with the allies.
2.3.1. Sanctions against individual and entities
Assets freeze / travel ban against: Vladimir Putin, Sergey Lavrov, Yevgeny Prigozhin,
Viktor and Oleksandr Yanukovych, Russian State Duma members, National Security Council
members, military staff and high-ranking officials, businesspeople, propagandists and oligarchs.
Page | 7
Assets freeze against: banks and financial institutions, companies in the military and
defense sectors, companies in the aviation, shipbuilding and machine building sectors, armed
forces and paramilitary groups, political parties, media organizations responsible for propaganda
and disinformation.
2.3.2. Economic sanctions
● Finance: SWIFT ban for 10 Russian banks, restrictions on Russia’s access to the EU’s
capital and financial markets, ban on transactions with the Russian Central Bank, ban on
supply of euro-denominated banknotes to Russia, ban on provision of crypto-wallets to
Russian persons.
● Transport: closure of EU airspace to all Russian-owned aircraft, closure of EU ports to
Russian vessels, ban on Russian road transport operators, ban on maritime transport of
Russian oil to third countries, ban on exports to Russia of goods and technology in the
aviation, maritime and space sectors
● Energy: ban on imports from Russia of oil and coal, price cap related to the maritime
transport of Russian oil, ban on exports to Russia of goods and technologies in the oil
refining sector, ban on new investments in the Russian energy and mining sector, ban on
providing gas storage capacity to Russian nationals.
● Defense: Ban on exports to Russia of: dual-use goods and technology for military use,
drone engines, arms and civilian firearms, ammunition, military vehicles and paramilitary
equipment.
● Raw materials and other goods: Ban on exports to Russia of: luxury goods, ban on
imports from Russia of: steel, iron, cement and asphalt, wood, paper, synthetic rubber and
plastics; seafood, spirits, cigarettes and cosmetics; gold, including jewelry.
● Services: Ban to provide to Russia or Russian persons: architectural and engineering
services, IT consultancy and legal advisory services, advertising, market research and
public opinion polling services.
● Restrictions on media: Suspension of broadcasting activities in the EU of some Russian
media outlets: Sputnik and subsidiaries, Russia Today and subsidiaries, Rossiya RTR /
RTR Planeta, Rossiya 24 / Russia 24, Rossiya 1, TV Centre International, NTV / NTV
Mir, REN TV, Perviy Kanal.
● Visa measures: Suspension of visa facilitation agreement between the EU and Russia,
suspension of visa facilitation provisions for Russian diplomats and businesspeople.
2.4. Russia’s response
Following sanctions of Russia of US and allies, Russia has imposed significant “counter
sanctions” against “unfriendly countries”, which currently includes the United States, all EU
member states, Albania, Andorra, Australia, Canada, Iceland, Japan, Liechtenstein, Micronesia,
Monaco, Montenegro, New Zealand, North Macedonia, Norway, San Marino, Singapore, South
Korea, Switzerland, Taiwan, Ukraine the UK as well as companies that are trying to comply with
these countries (Russian Government, 2022). As of April 29, 2022, the following measures have
been adopted by Russia against so-called “unfriendly states”:
● Russian debtors are allowed to pay off their large debts (i.e., debts exceeding 10 million
rubles = approx. 140,000 USD in value) to non-Russian creditors based in “unfriendly
states” in Russian rubles (instead of otherwise applicable currency) according to the
official exchange rate of the Bank of Russia as of the first day of the respective month.
(Russian President’s Decree, 2022)
Page | 8
Buyers of Russian natural gas based in “unfriendly states” (or in cases when gas is
supplied to an “unfriendly state”) are obliged to pay for gas in Russian rubles: (Russian
President’s Decree, 2022)
○ Non-compliance with this requirement could lead to a halt to further supplies.
○ The requirement is somewhat mitigated by the special payment procedure,
according to which buyers of gas must open accounts in both Russian rubles and
non-ruble currency at Gazprombank.
● Russian residents are prohibited, without a prior clearance by the Government
Commission for Control over Foreign Investments, from conducting the following
transactions with foreigners based in “unfriendly states” and persons controlled by such
foreigners:
○ Providing loans in rubles
○ Transferring ownership of securities; or
○ Transferring ownership of real estate. (Russian President’s Decree, 2022)
● The compensation to be paid to rightholders from “unfriendly states” for the use of an
invention, utility model or industrial design in cases where such protected subject-matter
may be used without their consent shall amount to 0% of the actual proceeds from the
production and sale of goods (Russian Government’s Regulation, 2022).
● Any money transfers from Russian accounts of nonresidents (companies or individuals)
from “unfriendly states” to their accounts outside of Russia are suspended for six months
(Russian President’s Decree, 2022).
● Companies from “unfriendly states” are prohibited from buying any non-ruble currency
in Russia. (Decision of the Board of Directors of the Bank of Russia of April 1, 2022)
● Russian state companies subject to sanctions by “unfriendly states” are allowed to refrain
from publishing information on their public procurement activities and their suppliers.
● Until December 31, 2022, Russian banks and financial institutions are allowed to refrain
from publishing certain information in order to avoid sanctions of “unfriendly states”
(Federal Law, 2022).
● Until December 31, 2022, Russian insurance companies are prohibited from entering into
contracts with insurance and reinsurance companies and insurance brokers from
“unfriendly states” (Federal Law, 2022).
● Several top officials of the United States, EU, UK and other countries with “unfriendly
state” status are banned from entering Russia.
In addition to the countersanctions in the narrow sense as described above, Russia has
taken numerous further measures which do not specifically target countries that have imposed
sanctions against Russia. Such countersanctions in the broad sense include measures generally
taken to mitigate the effects of international sanctions on the Russian economy as well as to stifle
free expression and limit media coverage that is critical of the government.
●
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3.
3.1.
3.1.1.
The Economic Impact of the Russia-Ukraine Crisis on Europe
Food crisis in Europe
Impacts on Food Production, Processing, and Storage.
Ukraine has a major role in Europe in terms of agriculture and food production. The
national capability to cultivate soil, sow, and harvest crops has been reduced since the start of the
war. A consequence of these outcomes is food shortages for the local population and export
economy, both in the short and medium term.
Ukraine exported more than $9.4bn worth of cereals in 2020, around one-fifth of its total
exports, and it is ranked second global cereal exporter (Barklie, 2022). FAO (Borrell, 2022)
estimates that 20–30% of the areas allocated to winter cereal, maize, and sunflower seed
production will not be harvested or planted this spring. The main constraint in this aspect is
logistics and a shortage of maize and sunflower seeds is expected (FAO, 2022).
Russia's role in global food supply chains can be understood using reported production
and domestic supply statistics (Barklie, 2022). Ukraine’s wheat production is 3.2% of global
production and exports are 9.1% of the global wheat exports (FAO, 2022). Russia is the first
ranked global exporter of wheat, and Ukraine is the fifth ranked exporter and most critically a
key supplier of wheat to the World Food Programme.
Supply is specific and nations directly dependent on these agrifood supplies, including
some of the most vulnerable food security countries.
3.1.2. Impacts on food transport logistics
Major food security concerns due to the war include disruption of logistics and food
supply chains, access to agricultural inputs, and destruction of food system assets and
infrastructure (FAO, 2022).
Wheat is typically highlighted by current commenters. Ukraine ranked 8th in global
wheat production (FAOStat, 2020). Logistics and location stifle supply with the UN FAO
estimating that 49 percent of winter wheat and 38 percent of rye to be harvested in July–August
2022 are in occupied or war-affected areas. Most important to the global food system is where
this wheat and small grain production is exported, Ukraine is the 5th ranked global exporter of
wheat at 18.06 × 106 tonnes in 2020 which is 9% of global wheat exports (FAOStat). Importing
nations have a high dependency on this supply that will be limited by potential to harvest and
transport.
Most notably the war will restrict shipping from the Black Sea ports. Figure 2 shows the
importance of sunflowers in the central and Eastern Oblasts destroyed by war. Ukraine supplies
26% of global sunflower seed, exporting seed for processing and oil to India, China, and Western
Europe.
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Figure 2: The March 2022 VCI and proportion of maize, sunflowers, and wheat produced in
each region (a) and March 2022 VCI and proportion of barley, rapeseed, soybean, and millet
produced in each region (b). The maximum proportion crop produced is 13% of the total and
each bar is relative to this 13% maximum. Data from UNFAO and USDA FAS, analysis
developed using MapInfo 10.0
3.1.3. Impacts of food market/retail
The European Union (EU) has important commercial relationships with Ukraine,
importing wheat, maize, sunflower seed, and oil as well as malt, rye, and sorghum (European
Commission, 2022). The EU has a dependency on commodities and raw materials in the food
processing sector (Putsenteilo, 2018). The current uncertain situation about the progression of
the armed conflict poses a threat to disrupting agricultural supply chains between Ukraine and
European countries (Graham, 2022).
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Figure 3: Importation of Ukrainian and European wheat, maize, sunflower seed and oil in 2020
The strategic importance of ports (especially Odessa) would restrict the transport of
wheat, cereals, and other commodities trade (Das & Gallagher, 2022). Currently, the Ukrainian
port operations are suspended, and efforts have been made to improve the transport using
railways, but the shipping by sea for Ukrainian commodities is limited (IGC, 2022). The main
destinations of Ukrainian wheat, maize, sunflower seeds, and oil in 2020 within the EU were
Bulgaria, Cyprus, Estonia, Greece, Hungary, Italy, Lithuania, Netherlands, Portugal, and Spain
where Ukraine is also the primary ranked nation for the source of these imported products
(Figure 3) (FAO, 2022).
The international market demonstrates the importance of commodities exported from
Ukraine. With the reduced supply of these commodities and continuous demand for them, buyers
in European countries are looking for alternative suppliers. Important global producers of these
commodities are Argentina, Australia, Brazil, Canada, China, India, Mexico, and the USA
(Figure 4). It is important to consider that European countries and the main global producers of
these commodities were not accommodating the absence of Ukrainian commodities for trade offs
to be in place and active (European Commission, 2022). Consequently, the market has reacted to
the potential reduced supply of Ukrainian commodities for the European countries rather than
developing new markets. Commercialization of wheat and maize are affected and general
increase in their prices has gained new higher trading levels in relation to values commercialized
since the beginning of 2022 (European Commission, 2022). As Ukraine’s wheat exportation
remains stagnated, the export from major global producers (Australia, India, and Canada) have
increased (Graham, 2022)
Within the EU, the supply chains that are partly controlled and determined by Ukrainian
agricultural imports include the secondary food processing sector (especially baking, brewing,
and vegetable oil industries) which have direct impacts on retail and food service sectors
(Putensenteilo, 2018). As the Ukrainian crisis continues, the risk of retail disruption in these food
chains increases and leads to a potential downstream shortage of products for industries, grocery
and retail stores, and the food service sector. The lack of supplier diversity is not favorable for
the resilience of wheat, maize, and sunflower seed and oil. As sanctions against Russian fuels
(coal, oil, and gas) continue, the costs associated with road freight will play an important role in
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the price of wheat, maize, and sunflower seed and oil to consumers as well as products and food
services related to these commodities (Destatis, 2022). Moreover, the processing sector may be
affected by strikes of carrier companies (EURACTIV, 2022), which may affect the capacity of
food supply chains to thrive in this scenario.
Figure 4: Global producers of wheat (a), maize (b), sunflower seed (c) in 2020, and sunflower
oil (d) in 2019 (Source: FAOSTAT)
3.1.4. Impacts on consumer
The Russian invasion of Ukraine is widely predicted to have substantial impacts on
global health and food security, and indeed already has. Since the war began, wheat prices have
risen over forty percent, to prices not seen since the 2007–2008 World Food Price Crisis
(Macrotrends, 2022). Recent events shed light on what massive devastation by the Russian
military could mean for Ukraine and the world. Ukraine exported $761 million worth of wheat in
2006; by 2019 this had grown to $3.1 billion. Further, maize production for export has grown
even faster in terms of tonnage and economic value and as of 2019 maize was Ukraine’s largest
cereal export at $4.77 billion (AMIS, 2022). While cereal prices have already reacted to the war
in Ukraine, these price hikes are to be understood as anticipatory.
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Figure 5: Average global (a) and European (b) prices for commercialization of wheat and maize
during January-March 2022. Data adapted from the Cereal statistic webpage of the European
Commision
3.1.5. Impacts on food dependent services
Indirect losses to productivity in other countries are also a certainty. Ukraine has
historically been one of the major sources of fertilizers in Europe, accounting for as much as
25% of all fertilizers produced on the continent in 2010 (Gayduk, 2022). The loss of this
production threatens more than the financial value of the fertilizers, but potentially the
productivity of agriculture in other parts of the world (OEC, 2022). Although the UK produces
90% of its wheat on its own, farmers still have to pay more for fertilizer, which is one of Russia's
top export commodities (Jones, 2022). Two-thirds of the ammonium nitrate fertilizers used by
farmers globally is from Russia as pointed out by British Meat Processors' CEO, Nick Allen
(Lanktree, 2022).
3.2. Energy crisis in Europe
3.2.1. Dependence on energy imports of Europe
The current state of international relations is closely defined by globalization, the
cooperative and interdependent bonds among state nations (Siddi, 2020). Energy resources act as
a strategic element in international relations, exerting a double-sided effect on energy security.
Nations with limited energy resources majorly respond to domestic demands with the assistance
of energy imports and those with abundant resources gain monetary and diplomatic advantages.
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On the other hand, nations reliant on foreign energy suppliers might be vulnerable to potential
risks in international relations which pose challenges to their energy insecurity (Hasan, 2022).
In terms of geographical characteristics, European territories possess restricted deposits
of oil and natural gas which are mainly drilled for energy and fuel. Russia, on the contrary,
encompasses an abundance of natural resources in the world including the largest natural gas
reserves, second largest coal reserves, and eighth largest oil reserves with a proportion of 32%,
14%, and 10% of the world resources respectively (Siddi, 2020). The disproportion of natural
resources partly explains why European countries depend on oil and gas imports from Russia to
meet their domestic demands.
The following graph demonstrates the Euro area energy dependency in which a general
65% of energy sources are imported. It can also be inferred that although a high proportion of
petroleum and natural gas is import products, renewable energy and nuclear energy are mainly
produced domestically (Gunnella et al., 2022).
Figure 6: Energy use by primary fuel type in the euro area (Eurostat, 2019)
In the interdependent relations of energy policy between the European Union and Russia,
transportation infrastructure serves a key role with the capability to provide ‘secure and
interrupted’ routes of energy supply (Borisocheva, 2007). The system of pipelines which acts as
a bridge of energy sources from Russia to Europe comprises 10 routes in total. The most
significant routes include Blue Stream, Nord Stream, and Nord Stream II. The Node Stream
pipeline allows direct gas transportation for Western Europe markets including Germany, France,
Denmark, the United Kingdom, and the Netherlands. The Blue Stream delivers gas flows to
Turkey, bypassing transit countries including Ukraine corridors (Borisocheva, 2007).
3.2.2. Primary energy sources
Petroleum-based products and natural gas account for the largest consumption in Europe,
occupying key roles in the energy market. Petroleum is the most consumed resource in the
transportation sector, while natural gas is responsible for the consumption in industrial
manufacture, non-transport service, and household usage (Gunnella et al., 2022). Gas also serves
as an instrumental energy source in electrical generation due to the flexibility of gas-fired power
plants and gas infrastructure including network interconnections, storage capacity, and liquified
natural gas terminals (Gunnella et al., 2022).
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Figure 7: Energy dependency by primary fuel type in the euro area (Eurostat, 2023)
As per many estimates, Russian natural gas fulfills approximately forty-three percent of
Western Europe’s energy demand (Hasan, 2022). In addition to natural gas, Russia’s oil exports
also play a significant part in this regard. As of 2021, Russian oil accounted for 10% of Europe’s
total demand. Amongst the European states, the EU member states are the most reliant on
Russian energy resources. Specifically, Germany derives more than fifty percent of its natural
gas and 30% of its crude oil supplies from Russia (Hasan, 2022).
3.2.3. Fallout of Russia-Ukraine War
Energy costs have significantly risen as a result of the conflict in Ukraine, and energy
markets have experienced severe instability. Prices have varied, particularly as markets have
attempted to analyze the potential ramifications for global energy supply, amid concerns of
disruptions to energy supplies and increasingly harsh sanctions on the Russian energy sector
(Adolfsen et al., 2022). The energy markets in the euro region have been particularly impacted
because they were so heavily dependent on Russian supply prior to the invasion.
Figure 8: Energy prices before and after the invasion of Ukraine (Refinitiv, 2022)
Following Russia's invasion of Ukraine, prices for oil, coal, and gas skyrocketed and
have been unstable ever since. Russian energy supply constraints could have an impact on both
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direct deliveries and global market prices in the euro region (Adolfsen et al., 2022). The two
biggest gas consumers in the eurozone, Germany and Italy, are dependent on Russian gas to the
greatest extent. Any examination of the economic ramifications of the struggle for energy prices
and supply in the euro area must take into account the degree of substitutability of different
energy sources (Adolfsen et al., 2022).
3.3. Impacts on the inflation rate
3.3.1.
Impacts in the UK
The Bank of England has raised UK interest rates by a quarter of a percentage point to
4.5 per cent – the highest level since 2008. It’s an attempt to lower the country’s inflation, which
remains in the double digits, at 10.1 per cent as of March in 2023. That's more than five times the
Bank of England's 2 percent inflation target and a higher rate than in any other major European
economy. The inflation rate in the UK has been affected more severely than most EU countries
for certain reasons. (Khatsenkova, 2023)
According to the BBC, while most major economies have recovered from the labor
shortages caused by the COVID-19 pandemic, the UK still has about 400,000 more people not
working than in December 2019. This is due to two reasons. There is a very high level of
regional income inequality across the UK. Living in London is more expensive than living in
most of the rest of the country, making it quite difficult for people to move to places with more
economic activity. Even though non-EU immigration to the UK has increased, these workers
may not possess the same level of skills. Overall, it turns out to be a less well-functioning labor
market creating bottlenecks and the necessity for increasing wages, hence driving inflation.
(Jacob Kirkegaard, 2023)
The UK also has its own challenges – Brexit in particular. The war in Ukraine and the
pandemic have masked the fact that Brexit has increased the cost of importing goods from
Europe and has reduced the pound’s purchasing power. Furthermore, the gap in the labor market
caused by reduced inward migration from the EU has yet to be filled by additional domestic
labor or by a significant increase in non-EU migration. Provisional data from the Office for
National Statistics on ‘long-term’ migration show that non-EU inward migration increased from
224,000 in Q2 2020 to 251,000 in Q2 2021. However, this is not enough to make up for reduced
EU migration, which declined from 281,000 in Q2 2020 to 181,000 in Q2 2021. The resulting
labor gap has reduced output, particularly in agriculture and hospitality, and increased wage costs
for companies, contributing to rising inflation. (Jacob Kirkegaard, 2023)
The UK imports much of its food from France and southern Europe, which are also under
pressure from global price rises. The price of wheat – a major Ukrainian export – has risen 40
per cent since the start of the war. Cost-push inflation in those regions relating to the Ukraine
crisis has had a knock-on effect on UK prices. Another important factor, affecting all European
countries, is the supply squeeze caused by continued COVID-19-related restrictions in China,
and pent-up consumer demand from the earlier stages of the pandemic, which has been an added
‘pull’ factor for prices. (David Lawrence, 2022)
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Figure 9: Inflation rate among G7 members, April 2022 (Source: Institute of Chartered
Accountants in England and Wales (2022)
Moreover, Russia accounts for a much larger share of global commodity supply. Ukraine
is also a major supplier of agricultural commodities. Global oil prices have increased by 11% and
UK wholesale gas prices have increased by 40% since the invasion. In March, UK consumer
confidence fell to its lowest level since November 2020. Much will depend on the course of the
conflict and the evolution of sanctions. But in all probability, it will intensify and prolong the
surge in inflation and tighten the squeeze on household incomes. The consequent drop in demand
through household consumption and business investment will, to an extent not yet clear, be
greater than we thought in February. And there are also likely to be additional impacts on the
supply side of the economy. The impact, as we have seen over the past few months, will come
primarily through commodity prices. The Russian economy itself is only a small part, around
3%, of the global economy. For UK trade, it accounts for less than 1% of the world market. The
Ukrainian economy is still smaller. Russia and Ukraine’s financial links with the UK are
relatively small. But Russia accounts for a much larger share of global commodity supply. This
is most apparent in energy – oil, gas and coal. It is true also for industrial metals, fertilizers and
agricultural commodities. Ukraine is also a major supplier of the latter. We have already started
to see some of the effects on commodity prices, including for energy and food. Global oil prices
have increased by 11% and UK wholesale gas prices have increased by 40% since the invasion
(figure 10 and 11) (Jon Cunliffe, 2022)
Figure 10: Global oil prices have risen by 50% since the start of this year and by 20% since the
Russian invasion Brent crude oil prices in 2022 (a) (Source: Bloomberg)
(a) The chart shows the percentage change in the Brent crude oil price per barrel in dollars since
the first trading day of 2022. Key events labeled. Latest data close 31 March.
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Figure 11: UK gas prices have been extremely volatile since the Russian invasion UK natural
gas prices in 2022 (a) (Source: Bloomberg)
(a) The chart shows the percentage change in the spot UK natural gas price per therm in pounds
sterling since the first trading day of 2022. Key events labeled. Latest data close 31 March.
3.3.2. Impacts in other European Nations
Inflationary Pressure
The Russia-Ukraine conflict has had a significant impact on inflation in EU nations,
primarily through its effect on energy prices and supply chains. The conflict has disrupted the
supply of natural gas and oil, as Russia is a major exporter of these commodities to Europe
(Jones, 2022). Any decline in its exports could result in a global increase in commodity prices.
This, combined with Saudi Arabia's reluctance to release additional oil supplies, contributes to
higher energy prices worldwide. Energy prices have soared, leading to increased production
costs for businesses. Higher energy costs are then passed on to consumers, causing a rise in
prices for goods and services. This increase in inflation reduces consumers' purchasing power
and erodes their real income (Jones, 2022).
Additionally, the supply chain disruptions resulting from the conflict have further
contributed to inflationary pressures (Thomas & Strupczewski, 2022). Disruptions in
transportation and logistics have caused delays in the delivery of goods, leading to shortages and
higher prices. As a result, businesses face higher costs for raw materials and intermediate goods,
which are ultimately passed on to consumers.
To address the mounting inflationary pressures, central banks may respond by adjusting
monetary policy, particularly interest rates. It is possible that the Monetary Policy Committee
(MPC) may choose a cautious approach, raising interest rates gradually and by a smaller
magnitude than predicted by simulations (Iana Liadze, Corrado Macchiarelli et al.). This prudent
response is driven by ongoing uncertainty and the potential risk of a recession. However, this
approach carries the risk of not adequately addressing the inflationary peak, potentially leading
to even higher inflation rates. The timing and magnitude of interest rate adjustments must be
carefully calibrated to avoid negatively impacting economic growth.
The uncertainty surrounding the conflict has also affected consumer and investor
confidence (Thomas & Strupczewski, 2022). Uncertainty about the future has a dampening effect
on consumption and investment, as individuals and businesses become cautious and hesitant to
spend or make long-term commitments. This decline in economic activity can exacerbate
inflationary pressures, as businesses may attempt to compensate for higher costs by raising
prices.
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Changes in inflation rate of EU nations during Ukraine - Russia war
Prior to the Ukraine-Russia conflict, EU member states experienced relatively stable
inflation rates. Between January 2012 and August 2021, the inflation rate remained below three
percent, indicating a period of low inflation. This period of stability allowed for sustained
economic growth and price stability within the Eurozone.
Figure 12. Year-over-year change in harmonized index of consumer price (Source: Eurostat
by The New York Times)
In 2022, the annual inflation rate reached a record level of 8.4%, primarily due to
disruptions in the global supply chain and the energy crisis triggered by the conflict. (Mbah &
Wasum, 2022 & Ethan Ilzetzki, 2023). However, there are indications that inflation rates may
slow down in 2023.A decrease in raw material prices suggests a potential slowdown in inflation.
After peaking at 10.6% in October 2022, the most recent data in January showed a decrease to
8.5% (Eurostat, 2023). It is worth noting that the inflation rate in the EU in October 2022 was
higher than at any other time in recent years. The peak prior to 2021 was observed in July 2008
when prices were growing by 4.4 percent on a year-on-year basis. Before the recent surge in
inflation, the EU had managed to maintain relatively low levels of price increases, with the
inflation rate remaining below three percent between January 2012 and August 2021 (Eurostat,
2023).
The fall in raw material prices, particularly in food, living, and energy costs, which
contribute significantly to the Harmonised Index of Consumer Prices, could contribute to a
slower rise in prices (Gregory Gadzinski, 2022). If tensions in these volatile markets remain
under control, the baseline effect in the coming months is expected to be more favorable, leading
to a potential decrease in global inflation. However, it is important to note that the global
economy remains vulnerable to unpredictable geopolitical shocks, which could disrupt the
inflationary trend and push inflation rates higher once again.
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Figure 13: Annual inflation rate in Europe in March 2023, by country (Source: Eurostat)
In March 2023, the European Union (EU) witnessed an inflation rate of eight percent,
signifying an overall increase in prices across member states. Among these nations, Hungary
experienced the highest inflation rate, reaching a notable 25.6 percent, indicating a significant
surge in prices (Eurostat, 2023). Conversely, Luxembourg boasted the lowest inflation rate in the
EU during that month, standing at a comparatively modest 2.9 percent (Eurostat, 2023). These
variations highlight the diverse inflationary pressures faced by different EU member states
Inflation Forecasts and Economic Growth
Inflation in the European Union (EU) reached a record high of 10.6% in October 2022
but showed signs of moderation, declining to 8.5% by January 2023 (Gregory Gadzinski, 2022).
The European Commission's Winter 2023 Economic Forecast revised its inflation projections
downwards, expecting inflation to settle at 6.4% in 2023 and further decrease to 2.8% in 2024
(Ethan Ilzetzki, Suryaansh Jain, 2023). Additionally, the 5-year, 5-year inflation-linked swap for
the EU, a measure of long-term inflation expectations, remained relatively stable around 2.3%,
indicating that long-term expectations remained anchored. According to the European Central
Bank's (ECB) recent report, consumer forecasts for the current year indicate an inflation rate of
5.0% (Gregory Gadzinski, 2022). The ECB Survey of Professional Forecasters (SPF) aligned
with these forecasts, with experts revising their inflation expectations to 5.9% for 2023 and 2.7%
for 2024 (Ethan Ilzetzki, Suryaansh Jain, 2023). These indicators align with the ECB's
objectives, suggesting that inflation expectations in the medium term are within an acceptable
range. Major financial institutions, including Bloomberg, Credit Suisse, and Goldman Sachs,
agreed that headline inflation in the EU has likely peaked, but core inflation may persist at
elevated levels in the near term. While core inflation is predicted to slow down to 3.3% by the
end of the year, upward pressure on services inflation is expected due to rising labor costs
(Gregory Gadzinski, 2022) . However, the pace of inflation moderation may vary across EU
nations, posing challenges for a unified monetary policy. The European Central Bank (ECB)
highlighted several inflation risks, such as potential increases in gas prices due to geopolitical
tensions and demand from a post-lockdown China, as well as higher-than-anticipated wage
pressure resulting from a tight labor market (Ethan Ilzetzki, Suryaansh Jain, 2023). Maintaining
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trust in the ECB is essential, as individuals with higher inflation perceptions and financial
difficulties tend to have lower levels of trust, which can hinder the effectiveness of monetary
policies. Therefore, the ECB aims to reduce inflation swiftly to restore trust and ensure the
efficacy of its policies (Ethan Ilzetzki, Suryaansh Jain, 2023).
Figure 14: Inflation outlook in the euro area (Source: European Commission Winter 2023
Economic Forecast)
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4.
How is the EU dealing with the crisis?
The Russia-Ukraine conflict has further highlighted the interdependence and
vulnerability of European countries in terms of energy security.
To mitigate the energy crisis and reduce dependency on Russian energy resources,
Europe is exploring alternatives to ensure energy security and affordability, European countries
are now exploring alternatives to diversify their energy sources.
The European Union (EU) is tackling the challenge of energy insecurity through two
critical approaches: domestic emphasis on enhancing renewable energy sources and international
focus on developing relations with Middle Eastern and other European nations for alternative
energy supply. Here is an overview of the EU member states' efforts to address these issues:
● REPowEU program: EU's initiative to save energy, produce clean energy, and diversify
energy supplies, This plan aims to enable around 85% of European citizens to reduce
their reliance on Russian gas, oil, and coal. The focus is on seeking new avenues for
clean energy and establishing new energy contracts with other states. (European
Commission, 2022)
● Gas reduction plan: EU member states working on reducing gas consumption through
voluntary fuel switching, temperature limits, and awareness campaigns, ensuring
implementation through public-private partnerships.. It involves public-private
partnerships to ensure implementation and is seen as a significant step towards curbing
the energy crisis. scale. An EU official declared the plan as a clear sign to Putin that the
European Union and its citizens were still standing undivided and strong despite Putin’s
intention to divide them. (Jorge Liboreiro, 2022)
● Gas deals with other states: EU consulting with the United States, Qatar, and Norway for
long-term energy deals to guarantee a steady supply, reduce vulnerability, and
compensate for Russian gas cuts.The US has agreed to provide extra liquefied natural gas
(LNG) to the EU, while Norway, as a reliable energy partner, vows to boost its natural
gas production by over 8% in order to cater the needs of Europeans. Upon the matter,
Andreas Erikson, who is serving as the “Secretary in Petroleum and Energy Ministry”,
Norway, asserted that “Norway is a reliable, trustworthy and long-term energy partner for
Europe.” (Helen Regan CNN Hafsa Khalil, Jeevan Ravindran, Aditi Sangal, Adrienne
Vogt, 2022).The EU has also negotiated gas supply deals with Qatar, Azerbaijan, and
other countries.
● Emphasis on renewable energy: EU actively developing its renewable energy sector as a
long-term energy security strategy, seeking sustainable alternatives to Russian gas.
→ Overall, the EU's approach involves diversifying energy sources, reducing dependency on
Russian energy, and promoting clean and renewable energy to enhance energy security
domestically and internationally.
4.1. Improving food resilience against the Russia-Ukraine conflict
The global food system has faced multiple unprecedented threats and supply-chain
interruptions in recent years, including COVID-19, locust plagues and climate extremes
(Laborde et al., 2021; Salih et al., 2020). With a food system already under pressure and food
insecurity rising even before COVID-19, the Russia–Ukraine conflict has caused a further shock,
resulting in record food price increases. Russia and Ukraine are important producers and
exporters of barley, wheat, maize, sunflower seed and rapeseed (Lang and McKee, 2022).
Together they supplied 64% and 28% of global sunflower oil and wheat exports, respectively, in
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2021. In addition, Russia is a major producer and exporter of fertilizer, accounting for almost
20% of global fertilizer exports in 2021 (FAO, 2022)e
Ukraine is often described as the European Union’s breadbasket, and the European Union
is heavily exposed to this conflict-driven food shock. Recent work estimates that a 50% grain
export reduction from Russia and no Ukrainian exports would increase prices by 4.6% and 7.2%
for maize and wheat, respectively (Sandström et al., 2022). In May 2022, the International Food
Policy Research Institute estimated that over 20 countries have implemented food export bans as
a response (Why banning food exports does not work, 2022).
In March 2022, the European Union aimed to address these emerging pressures by
preparing a €500 million package of support for farmers affected by high costs of inputs such as
energy and fertilizers, or trade restrictions due to the Russia–Ukraine conflict (European
Commission, 2022).
Here we show that such a move across the European Union and the United Kingdom
could also help improve resilience in terms of the capacity to recover from difficulties such as
food insecurity driven by the Russia–Ukraine conflict, and that it is possible to harness numerous
environmental benefits while filling the gap in overall Ukraine and Russia (UA + RU) crop
production for both domestic consumption and exports via EU + UK dietary change to a
planetary health diet (based on EAT-Lancet Commission guidance).
Figure 15: Crop change due to dietary change in the European Union and the United Kingdom
and total production of crops in Ukraine and Russia. (Source: Nature Food)
Dietary change drives both direct and indirect effects: direct via the direct reduction in
consumption of some food types and indirect via the feed used for animal products that are
subsequently consumed. The crosses indicate the net change relative to exports, and the circles
relative to production.
Dietary change from current diets to the EAT-Lancet diet would not only benefit
planetary and human health but could also help absorb interruptions in the international food
supply. Such a dietary shift in the European Union and the United Kingdom can fill the gap in
UA + RU crop production while reducing fertilizer use, water consumption and GHG emissions,
and increasing carbon sequestration.
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Figure 16: Per-capita changes in net blue water consumption, net GHG emissions and net
carbon sequestration due to dietary change in the European Union and the United Kingdom
after replacing all UA + RU crops (S2).
a–c, Per-capita changes in net blue water consumption (a), net GHG emissions (b) and net
carbon sequestration (the sum of AGBC, BGBC and SOC) (c). All maps are shown in Robinson
projection. (Source: Nature Food)
Methods:
● Dietary change in EU + UK countries: To model dietary change across the European
Union and the United Kingdom, we used the difference between average national diets
derived from FAO food balance sheets (FBSs) and the EAT-Lancet diet per person per
day scaled by population in the year 2010.
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● EMERIO model: We used a consistent, balanced, physical input–output database—the
Food and Agriculture Biomass Input–Output model (FABIO)—including 192 countries
and regions and 128 agriculture, food and forestry products in the year 2010 for this
study (Bruckner et al., 2019).
● Blue water: Blue water measures the consumption of freshwater (surface and
groundwater) (Mekonnen and Hoekstra, 2011).
● Fertilizers: The International Fertilizer Association provides nitrogen, phosphate and
potash fertilizer estimates for 13 crop groups and 28 countries or regions in 2010 (Hefer,
2013).
● GHG emissions: The GHG emissions for agricultural production in tonnes of CO2e yr−1
were calculated following the tier 1 methodology of FAOSTAT (in GWP100) for 2010
and applied at the national level rather than the grid cell level (Sun et al., 2022).
4.2. Energy transition
Energy transition - way towards a more sustainable and self-reliant world
In addition to signing gas deals with other states, EU members are also seeking
opportunities of energy transition. Basically, energy transition refers to the process of shifting
from one mode of energy consumption to the other. Currently, the energy transition is related to
the shift from fossil fuels to low-carbon and renewable energy sources. Rapid climate change has
facilitated the process of energy transition. States all around the world are now considering new
sources of energy supply that are sustainable and environmentally-efficient:
Germany has accelerated its wind and solar energy projects, with the aim of meeting 80%
of its energy demand from these sources in the coming decade. Germany has committed to
achieving 100% energy transition to renewables by 2035. France has announced plans to
construct fourteen nuclear reactors to meet domestic energy demand and reduce reliance on
Russian energy sources. Norway and the EU have strengthened green cooperation, with
Norwegian companies providing expertise in wind and solar power projects to EU member
states. In the case of the UK, the prime minister, Boris Johnson, pledged to bring about an energy
transition to renewable energy sources in the UK. (Mark Thompson Business CNN, 2022) By the
year 2035, the United Kingdom aims at acquiring over 78% of its energy supply from renewable
energy sources.
Renewable resources have emerged as a new ray of hope in these critical times. In terms
of sustainability, these resources are abundant and also climate friendly. The carbon print as a
result of their usage is significantly low which is clearly a plus point for a region that leads
climate
sustainability
initiatives.
However,
the
nuclear
energy,
although
environmentally-friendly, is considered hazardous due to the chances of accident and wide-scale
destruction they can cause. The European Union has been divided on opinions regarding the
usage of nuclear energy. Moreover, in terms of financial expenditure, renewable energy sources
are costly and setting them up is quite time-consuming. In long-term results, they can be quite
beneficial. Nevertheless, for fulfilling the immediate energy demands of the EU, they are not the
ideal option (John Perkis, 2017).
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Conclusion
The onset of the Russia-Ukraine crisis alarmed the entire world due to the deteriorating
potential consequences it could’ve had on the entire world. The contemporary international
system is dominated by the phenomena of globalization under which interdependency prevails.
Due to this, any happening in one part of the world impacts other parts of the world as well.
Globalization resulted in collaboration between states. Global trade facilitated the states to sell
products that they had to countries who lacked them. But simultaneously, it enhanced the
vulnerability of the international system by making states increasingly dependent on one another.
Such grave consequences are being observed currently. Russia is utilizing energy resources as a
maneuvering tool against the EU that is majorly reliant on Russian gas to meet their energy
demands. This triggered energy insecurity amongst the EU states. Energy crisis further fueled
economic instability, social turmoil, poverty, unemployment, hike in prices of products of daily
use etc (Hasan, 2022).
In conclusion, the Russia-Ukraine war has had profound and far-reaching impacts on the
inflation rate in Europe. The conflict, marked by geopolitical tensions and economic
uncertainties, has significantly influenced energy prices, disrupted trade flows, and undermined
investor confidence. Throughout this report, we have examined the various channels through
which the war has affected inflation in Europe, acknowledging its implications for energy
security, trade disruptions, and financial market volatility. The disruption in energy supplies,
particularly natural gas, stemming from the conflict has been a critical driver of inflationary
pressures in Europe. Europe's reliance on Russian gas has left the region vulnerable to price
shocks and supply disruptions. The war has magnified these vulnerabilities, leading to increased
energy prices and reduced availability. As a response, the EU has taken commendable steps to
diversify its energy sources through initiatives like the REPowEU program, seeking sustainable
alternatives to Russian gas. These efforts are essential for mitigating the impacts of future
conflicts on energy security and inflation.
Moreover, trade disruptions caused by the conflict have further contributed to inflationary
pressures. The war has disrupted transportation routes and created uncertainties in cross-border
trade, resulting in higher import costs for goods. This increased cost has been passed on to
consumers, exacerbating inflation. Enhancing trade diversification and strengthening regional
cooperation, both within and outside of Europe, can serve as valuable lessons to mitigate the
impact of trade disruptions on inflation in the face of geopolitical conflicts. Additionally, the
geopolitical tensions arising from the war have affected investor confidence and financial
markets. Heightened risk perceptions and uncertainties surrounding the conflict have led to
increased volatility, hampering investment and economic growth. The lessons learned from this
experience emphasize the importance of maintaining stability and enhancing resilience in
financial markets during times of geopolitical turmoil. Robust regulatory frameworks,
transparent communication, and coordinated policy responses can help mitigate the impacts of
such conflicts on investor confidence and overall economic stability. As policymakers and
stakeholders assess the impacts of the Russia-Ukraine war on inflation in Europe, several crucial
lessons emerge. Firstly, energy diversification and resilience should be prioritized to reduce
dependence on a single supplier and minimize the vulnerability of energy shocks. Secondly,
trade diversification and stronger regional cooperation can help mitigate the disruptions caused
by conflicts and minimize their impact on inflation. Finally, maintaining stability and enhancing
Page | 27
transparency in financial markets is essential for fostering investor confidence and limiting the
economic fallout during geopolitical crises.
In conclusion, the Russia-Ukraine war has left a significant imprint on the inflation rate
in Europe. The disruptions in energy supplies, trade flows, and investor confidence have all
contributed to inflationary pressures. By drawing lessons from this experience and implementing
effective strategies, European policymakers can better safeguard energy security, enhance trade
diversification, and maintain stability in financial markets. These efforts will play a crucial role
in mitigating the long-term impacts of geopolitical conflicts on inflation and ensuring the overall
economic well-being of the European region.
Page | 28
FOREIGN TRADE UNIVERSITY
REPORT
THE EFFECTS OF THE US-CHINA TRADE WAR
ON VIETNAM‘S ECONOMY
Group
: 05
Class
: KTE204E(GD2-HK2-2223)61CTTTKT.1
Course
: Principles of Macroeconomics
Instructor
: Hoang Xuan Binh (Assoc. Prof., PhD.)
GROUP MEMBERS
1. Khong Manh Duc (Coordinator)
2212140022
2. Tran Xuan Truong
2212140081
3. Trinh Nhat Minh
2212140060
4. Nguyen Dang Quang Minh
2212140057
5. Le Nguyen Anh Minh
2212140055
6. Tran Trong Dat
2212140097
7. Duong Ngoc Khanh
2212140042
8. Nguyen Hai Anh
2211140205
9. Vu Dinh Huan
2213140035
Hanoi, 2023
I. Introduction
II. Background
1) Brief overview of the US-China trade war
a) Origins
b) Recent developments
2) Brief overview of Vietnam’s economic development
a) Economic development after the Vietnam War
b) Economic development after Doi moi
3) Key industries in Vietnam
4) The importance of international trade to Vietnam’s economy
III. Effects of the US-China Trade War on Vietnam
1) Positive
2) Negative
IV. Response of Vietnam
a) Avoiding the negative effects
b) Gaining benefits from the trade disputes
V. Conclusion
VI. References
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1
I.
Introduction
The US-China trade war, which started in 2018, has had a lasting effect
on the economy of the world. The policies implemented by these two
countries have directly impacted the global economy, especially foreign
trade. Vietnam, as one of the most important business partners of these
two countries, is no exception. As students studying economics, this
subject has caught our interest and hence, we decided to conduct research
on the topic of “ The effects of the US-China trade war on Vietnam's
economy” which we believe will further improve our knowledge and
understanding on macroeconomics.
For the scope of the study, our research was limited to the developments
of the Us-China trade war during the 2018-2022 time period and its effect
on Vietnam’s economy. The study was conducted through research
published papers and analysis of the Us-China trade war. In the following
research paper, the contents of the trade war during the 2018-2022 time
period was analyzed, through which the effects of the war on Vietnam’s
economy, both negative and positive effects, were examined.
Furthermore, the paper also studied the policies implemented by the
Vietnamese government to avoid the negative effects and also gain
benefits from the trade war.
II.
Background
1) Brief overview of the US-China trade war
a) Origins
Prior to the trade war
As a businessman running for president, Trump often focused on trade
2
practices and economic policies. Trump especially focused on China both
as a target and a means to forward his presidential campaigns. In May 2,
2016, Trump said “We can’t continue to allow China to rape our country
and that’s what they’re doing. It’s the greatest theft in the history of the
world.” (Diamond, 2016; Wong & Koty, 2022) This is one of his many
statements regarding China’s trade practices throughout his campaigns
for presidency (Tiezzi, 2016).
In addition, Trump often stated his opinions and criticism of China on the
social media Twitter even before running for president. In 2011, Trump
tweeted “China is neither an ally or a friend — they want to beat us and
own our country”.
It was clear that Trump would make significant revisions of the U.S' trade
relationship with China should his campaigns succeed.
When Trump became POTUS, he focused his rhetoric on reversing
China’s domination on trade, renegotiating the US-China economic
relationship, and eliminating “unfair” policies.
The trade war erupts
From July 2018, US President Donald Trump followed through on
months of threats to impose sweeping tariffs on China for its alleged
unfair trade practices. (Wong & Koty, 2022) A full-scale trade war
between the two countries began. (ISDP, 2020)
The US aimed to mitigate China’s overall influence on trade, reduce
bilateral trade deficit, create more jobs, reduce imports of manufactured
goods, and etc. (Amadeo, 2022; Huang & Slosberg, 2023)
In response, China has made many retaliations in trade policies, such as
imposing a 25 percent tariff on 545 American goods. (ISDP, 2020)
3
b) Recent developments
The US accuses China of unfair trade practices that may affect the global
order (Paszak, 2021). In January 2020, the two sides signed a phase one
trade deal that expired in December 2021 with China failing to meet its
targets for US imports. The trade war has not significantly improved
under the Biden administration (Mullen, 2022).
Under Biden’s administration: President Biden has taken a different
approach to the trade war than his predecessor. He has focused on
working with allies to put pressure on China instead of imposing tariffs.
In November 2021, President Biden and President Xi Jinping of China
held a virtual summit where they agreed to work together on issues such
as climate change and the COVID-19 pandemic. However, the trade war
between the US and China is still ongoing and there are no signs of it
ending soon (Morollo, 2021).
2) Brief overview of Vietnam’s economic development (1975-Present)
a) Economic development after the Vietnam War
1975: After the war, Vietnam’s economy was one of the poorest in the
world (U.S. Library of Congress, 1987). Vietnam’s annual GDP in 1975
was only 3 billion dollars (countryeconomy.com, n.d.), which amounted
to
approximately
0.23%
of
US’
GDP
($1.6
trillion)
(countryeconomy.com, n.d.) and 2.38% of China’s ($163 billion)
(countryeconomy.com, n.d.). Worse, Vietnam saw a GDP per capita of
$83 (countryeconomy.com, n.d.). For reference, Cambodia’s GDP per
capita during 1975 was $107 (countryeconomy.com, n.d.).
4
1981-1985: Vietnamese government launched Five-Year Plans in
agriculture and industry focusing on post-war recovery and building a
socialist nation. Family economy and collective economy were
encouraged while capitalist economy was restrained. Foreign trade and
assistance depended mainly on the Soviet Union and its socialist allies
(Ta & Ta, 1978).
=> The economy did not experience any significant growth yet saw
alarming stagnation. By the mid-1980s, per capita GDP was stuck
between $200 and $300 (Vanham, 2018). Furthermore, the economy
remained dominated by small-scale production. Lack of innovation and
technologies also meant inefficient production and thus worsened the
conditions of Vietnam’s post-war economy (Cima, 1989).
1986: Prior to Doi Moi, this year marked the peak of hyperinflation
within our economy: a staggering annual rate of inflation of over 700%.
In addition, exports were not even a half of imports, and there was no
foreign direct investment (FDI) (Van Arkadie & Mallon, 2004). Changes
and reforms were obligatory to ensure Vietnam’s successful emergence
from an economically catastrophic war. The government thus launched a
political and economical renewal campaign called “Đổi mới” to gradually
shift a command economy into a “socialist-oriented market economy”
(Beresford, 1988).
b) Economic development after Doi moi
Economic reforms since the launch of Đổi Mới in 1986, coupled with
beneficial global trends, have helped transform Vietnam from being one
of the world’s poorest nations to a middle-income economy. Between
5
2002 and 2021, GDP per capita increased 3.6 times, reaching almost
US$3,700. Poverty rates (US$3.65/day, 2017 PPP) declined from 14 in
2010 to 3.8 percent in 2020.
Thanks to its solid foundations, the economy has proven resilient through
different crises. GDP growth is projected to ease to 6.3 percent in 2023,
down from 8% in 2022, due to the moderation of domestic demand and
exports (The World Bank, 2023). Vietnam's economic growth is expected
to rebound to 6.5 percent in 2024 as domestic inflation could subside
from 2024 onward. This will be further supported by the accelerating
recovery of its main export markets (U.S., Eurozone, and China).
Growing at 2.5 to 3.5 percent per year over the past three decades, the
agriculture sector has supported economic growth and ensured food
security. It contributed 14 percent of GDP and 38 percent of employment
in 2020 while earning more than US$48 billion in export revenues in
2021 during the peak of the COVID-19 pandemic.
Health outcomes have improved along with rising living standards. Infant
mortality rates fell from 32.6 per 1,000 live births in 1993 to 16.7 in
2020. Life expectancy rose from 70.5 to 75.5 years between 1990 and
2020. Vietnam’s universal health coverage index is at 73—higher than
regional and global averages—with 87 percent of the population covered
by the national health insurance scheme.
Vietnam’s average duration of (learning-adjusted) schooling is 10.2
years, second only to Singapore among the Association of Southeast
Asian Nations countries. Its human capital index is 0.69 out of a
maximum of one, the highest among lower middle-income economies.
6
Access to infrastructure services has increased dramatically. As of 2019,
99.4 percent of the population used electricity as their main source of
lighting, up from just 14 percent in 1993. Access to clean water in rural
areas has also improved—up from 17 percent in 1993 to 51 percent in
2020.
Vietnam has grown bolder in its development aspirations, aiming to
become a high-income country by 2045. To achieve this goal, the
economy would have to grow at an annual average rate of 5.9% per
capita for the next 25 years. Vietnam also aims to grow in a greener, more
inclusive way, and has committed to reducing methane emissions by 30
percent and halting deforestation by 2030 while achieving net zero
carbon emissions by 2050.
7
Vietnam: Gross domestic product (GDP) per capita in current prices from
1987 to 2027* (in U.S. dollars) (O'Neill, 2023)
3) Key industries in Vietnam
In 2022, the agriculture, forestry, and fishery sector accounted for
11.88%; industry and construction accounted for 38.26%; the service
sector accounted for 41.33%; product tax minus product subsidies
accounted for 8.53% (General Statistics Office of Vietnam, 2023).
According to the General Statistics Office of Vietnam, in 2022, the
agriculture, forestry, and fishery sectors continue to be the foundations of
Vietnam’s economy. With agriculture rising up by 2.88%, contributing
8
0.27 percentage point to the overall increment of total added value of the
entire economy. Forestry increased by 6.13%, contributing 0.03
percentage point; fishery rose by 4.43%, adding 0.12 percentage point
(General Statistics Office of Vietnam, 2023).
In the industry and construction sector, the processing and manufacturing
industry continue to be the growth motivators of the entire economy with
a growth rate of 8.10%, contributing 2.09 percentage points to the overall
increment of total added value of the entire economy (Báo Điện tử Chính
phủ, 2022).
Water supply, management and treatment of waste and wastewater
increased by 7.45%, contributing 0.04 percentage points. Electricity
production and distribution increased by 7.05%, contributing 0.26
percentage points. Mining industry increased by 5.19%, contributing 0.17
percentage points. The construction industry increased by 8.1 percent,
contributing 0.59 percentage points (Báo Điện tử Chính phủ, 2022).
In the service sector, the wholesale and retail industry experienced an
increment of 10.15% over the previous year, the transportation and
warehousing industry increased by 11.93%, the accommodation and food
service industry had the highest growth rate of the service sector with an
increment of 40.61%. Finance, banking and insurance activities increased
by 9.03%, the information and communication industry increased by
7.80% (Báo Điện tử Chính phủ, 2022).
9
4) The importance of international trade to Vietnam’s economy
To know the importance of international trade to Vietnam’s economy, we
should look at the old management policies where international trading is
inhibited and how these approaches hindered the growth of the economy.
Import-Export Turnover By Year (Nguyễn, 2021)
The US (USA) continues to be Vietnam's largest export market in 2022
(CafeF, 2022), with an export value of 109.39 billion USD, accounting
for 29.5% of total export turnover, up 13.6% compared to with 2021. In
the opposite direction, we import from the US 14.47 Billion USD in
2022. Total two-way trade is estimated at 123.86 Billion USD
10
(VietnamPlus, 2023). The balance of trade between Vietnam and the US
is about 94.92 billion USD.
China is Vietnam's second largest export market in 2022 (CafeF, 2022).
With an estimated export value of 57.70 billion USD, accounting for
15.5% of total export turnover, up 3.3% compared to 2021. On the
contrary, Vietnam imports from China 117.95 Billion USD in 2022. Total
two-way trade is estimated at 175.57 Billion USD – the largest
(VietnamPlus, 2023). Vietnam-China trade balance therefore has a deficit
of about 60.25 billion USD.
III.
Effects of the US-China Trade War on Vietnam
1) Positive
Export
In the short run, companies in Vietnam have more opportunities for
exports to the US because of the limitations imposed on China by the US.
As of the end of 2018, the US had imposed a 10% tariff on over 6,000
imported products from China, worth nearly USD 200 billion. Starting
from January 1, 2019, the tariff was raised to 25%. This creates the trend
of shifting the US import of goods from China to other alternative
markets, including Vietnam. Within the first four months of 2019,
US$20.7 billion of export turnover to the American market which is a
40% increase compared to the same period in 2018. Additionally,
Vietnam's agricultural, forestry, and aquatic products exported to the US
currently have a quality quite similar to those of China's exported
products. (Tạp chí Pháp lý, 2020; Tạp chí Tài chính, 2018)
11
Import
Vietnamese businesses have to import many input materials to produce
and process exported goods. Therefore, the US-China trade war will
impact, making the price of input materials cheaper since that China
could not export to the US leads to a surplus of supply in China and
reduces the price within China’s domestic market and this is an advantage
for Vietnam to reduce the cost of products by importing cheaper input
materials from China and improve competitiveness for exported goods.
(Tạp chí Tài chính, 2018)
FDI
Vietnam is considered to be one of the essential destinations for FDI flow
shifting from China thanks to its strategic location, low labor costs,
abundant workforce, favorable macro environment and political stability,
large economic openness, and new participation in two free trade
agreements (CPTPP and EVFTA) which have helped manufacturers to
have better access to major export markets. The rising production costs in
China have also led investors to shift towards cost-saving investment
destinations, and Vietnam is seen as an alternative choice. Moreover,
technology in Vietnam is gradually more advanced, which is also a
reason to expect the FDI inflow in high-tech fields can come to Vietnam.
Here are some figures:
+ Prof. Nguyen Mai, Chairman of the Foreign Investment Business
Association, reported that from the beginning of the year until the end
of August 2022, Vietnam has received registered FDI capital of 16.8
billion USD, with realized capital of 12.8 billion USD, an increase of
10.5% compared to the same period last year.
12
+ From an initial investment of 650 million USD of Samsung in 2006,
the figure has increased to 17.7 billion USD in 2022, a 17-fold
increase. In particular, Samsung's localization rate in Vietnam has
reached 59%. According to the latest data, the number of Vietnamese
companies as Samsung's tier-1 suppliers has increased from 4 units in
2014 to 50 companies in 2020; the number of tier-2 suppliers has
increased to 200 companies… (Trần, 2020; Đỗ, 2022)
2) Negative
Competition from China
First, although Vietnam and China have the same structure of goods
exported to the US, this does not mean that Vietnamese goods can easily
replace Chinese goods in the US market. The reason is that China has
large manufacturers and a competitive cost advantage. When the US
market faces difficulties, Chinese companies will shift export markets to
other countries, including Vietnam. At that time, Vietnamese companies
will face direct competition from Chinese companies, including not only
the export market, but also the domestic market. In addition, cross-border
supply chains will be shaken if the US imposes tariffs on China more
widely (Jamrisko & Nguyen, 2019).
Negative effects on Vietnam’s exports to China
Besides, this also has great effects on Vietnam's exports to China. This
happens because China has to focus on consuming its domestic goods.
The China-US trade war directly caused a slowdown in global economic
growth and caused an increase in trade protectionism, adversely affecting
13
Vietnam's open economy. According to statistics, Vietnam's exports of
electronic products, mobile phones, computers, seafood and agricultural
products to China in the first 6 months of 2019 showed a decreasing
trend. Among them, the export value of mobile phones and seafood
decreased by 62.3% and 31.5% respectively (Jamrisko & Nguyen, 2019).
Challenges for sustainable growth
Experts warn that at the current pace of the trade war, this will lead to an
excessive dependence on exports and international investment, Vietnam's
sustainable growth will face long-term challenges. In the first 5 months
of 2019 alone, China's foreign direct investment into Vietnam has
increased rapidly, reaching US$2 billion, of which processing and
manufacturing accounted for 85%. This means that Vietnam's exports
may increase in the future, but the real benefit is not for Vietnamese
enterprises. On the other hand, Vietnamese managers also need to strictly
control investment projects from China to avoid long-term adverse
impacts on the environment when using outdated technologies and
pollute the environment. There are concerns that Chinese companies will
import outdated and polluting technologies into Vietnam, causing
enormous pressure and damage to the environment (Jamrisko & Nguyen,
2019).
Being used as a transhipment point
Vietnam will need to be careful and prevent Chinese exporters from using
Vietnam as a convenient trans-shipment point for its exports to the United
States. An example of this is Chinese steel being brought into Vietnam
and repackaged as Vietnam’s steel exports to the United States in 2019.
This has led to tensions between Vietnam and the United States, with
14
America slapping tariffs of over 400 percent on Vietnam’s cold rolled and
flat steel. Although the items subject to tax are mostly machinery and
technology products which are relatively specific and not too easy for
China to transship to Vietnam to avoid American tax, certain concerns
have emerged (Dougn, 2019).
Struggle to meet growing demands
Vietnam also needs to be more selective in welcoming investments into
the country. There are concerns about Vietnam’s ability to fully absorb
and take advantage of the increasing FDI inflow from the trade war, due
to Vietnam’s limited production infrastructure as well as its quality of raw
materials. At present, Vietnam's supply chain and infrastructure network
is reportedly only equivalent to that of China’s several years ago.
Vietnam's business environment has much room for improvement, as it is
currently ranked 69 out of 190 countries – down one place from 2018; it
is 5th among the ASEAN countries (after Singapore, Malaysia, Thailand,
Brunei) and 8th out of 25 regional countries in the East Asia-Pacific
region. In fact, Vietnam is beginning to realize that expectations are far
exceeding reality. More and more businesses such as Coach, Kate Spade,
and Eclat Textile Co. are complaining about congested ports and roads,
skyrocketing costs for land and labor, and regulations not easing fast
enough. If Vietnam is unable to narrow this infrastructure gap in a timely
manner, there is a risk that it would lose the opportunity to capitalize on
FDI inflow from the US-China trade war. The costs may outweigh the
benefits, driving manufacturers to other regional markets (Jamrisko &
Nguyen, 2019).
15
IV.
Response of Vietnam
1) Avoiding the negative effects
Staying out of the fight
One of the most important concerns for Vietnam is avoiding being drawn
into the conflict. Vietnam’s efforts to stay out of the US-China disputes
have been displayed through diplomatic statements. In particular,
Vietnam emphasized its neutrality in the dispute and its wish for the
two countries to settle the conflict peacefully.
On 17 July 2018, Le Thi Thu Hang, the spokesperson of Vietnam’s
Foreign Ministry stated that “We believe that the issues in trade relations
between countries should be resolved through negotiation, on the basis of
international practices and regulations, especially within the framework
of the World Trade Organization. The settlement also needs to ensure the
legitimate interests of the parties involved, contributing to development
and prosperity in the region and the world." (VnExpress, 2018)
On 9 May 2019, she once again reiterated that “Vietnam wishes the two
countries solve their differences through negotiations on the basis of
mutual respect and understanding, in accordance with international law
and commitments, thereby contributing to peace, stability, cooperation
and development in the world” (Tuoi Tre Online, 2019).
In order to maintain a neutral stance, Vietnam avoids openly supporting
the US efforts to challenge China’s claim in the South China Sea, even if
16
such claims are compatible with Vietnam’s national interests (Council on
Foreign Relations, 2023).
At the same time, Vietnam also decided against using Huawei equipment
for its 5G networks, Vietnamese officials have described it as a
technological decision not related to geopolitical considerations.
Specifically, Le Dang Dung, Viettel’s CEO, told Bloomberg that “we
decided not to use Huawei, not because of the U.S.’s ban on Huawei —
we just made our own decision. Many other countries, including the U.S.,
have found evidence that shows using Huawei is not safe for the security
of the national network. So we need to be more cautious” (Boudreau &
Nguyen, 2019).
Avoid unnecessary attention and irritation
In addition to the above, the Vietnamese government wants to suppress
the notion that “Vietnam is the biggest winner of the trade war” in order
to avoid unnecessary pressure from both China and the US. Specifically,
Vietnam wants to avoid being sanctioned by the US after president
Trump called the country "the single worst abuser of everybody" and
threatened to levy taxes on its exports (The Straits Times, 2019).To avoid
tension with the US, Vietnam has made deals to buy more US goods to
reduce the trade surplus (The Straits Times, 2019).
In particular, in 2020, Vietnam signed 18 agreements to buy US$3 billion
worth of farm produce from the United States as part of its efforts to
reduce the widening trade surplus with the US (Vietnamnet, 2020).
Vietnam also stated that it will prevent Chinese companies from using
Vietnam as a transhipment hub to avoid tariffs and export goods to the
17
US. Accordingly, the government harshly cracked down on goods of
Chinese origin illegally relabelled as “Made in Vietnam” (Reuters, 2019).
At the same time, the State Bank of Vietnam (SBV) regularly provided
US authorities with relevant information to prove that Vietnam is not a
currency manipulator and will continue to share information with the US
Treasury Department to disperse concerns (Việt Nam News, 2019; Hanoi
Times, 2021).
2) Gaining benefits from the trade disputes
Boost export of domestic products
Because of the similarity of Vietnam's export products with China,
Vietnam's strategy is that Vietnam must be able to meet what was once
supplied by China to America. For example, in the plastics industry,
speaking to Việt Nam News, Hồ Đức Lam, its chairman, said exports saw
impressive growth last year to $3 billion while overall revenues jumped
to $12 billion. Exports in the first nine months of 2019 increased by 5 per
cent and will continue to enjoy good growth in the rest months of the
year (PLASTECH, 2023).
The US-China trade war has offered opportunities to Vietnamese plastics
firms to boost exports. According to the association, exports go to more
than 150 countries and territories, with the US and Japan being key
markets (Vietnamnet, 2019).
The government is trying to gradually build a complete supply chain that
covers all stages from raw material production to final processing,
increasing the ratio of locally sourced raw materials to reduce
dependence on imported ones.
18
Vietnam's gross domestic product rose 6.71% in the second quarter of
2019, marking one of the highest growth rates among key Southeast
Asian economies as it shapes up into an alternative export hub to China.
Shipments from Vietnam to the U.S. are on the rise as companies move
production here from China. GDP growth outperformed second-quarter
expectations in data out Friday from the General Statistics Office. This
follows the 6.82% growth for January to March. Haiphong, a major
shipping hub near the Chinese border, has especially thrived since the
U.S. implemented its first round of punitive tariffs on China last July. The
city logged a 16% jump in real GDP in 2018 (Nikkei Asia, 2019).
New Chinese investment in Vietnam, based on approved projects, has
topped $1.67 billion so far this year – roughly quintupling from the same
period in 2018. Vietnam has long been a top choice in "China plus one"
manufacturing, where companies set up production bases in one other
market in addition to mainland China, thanks to its relatively cheap labor
costs. U.S. tariffs on China have only solidified its position (Nikkei Asia,
2019).
Vietnam’s trade with the United States rose to $70.9 billion through the
first 11 months of 2019, according to a WorldCity analysis of the latest
U.S. Census Bureau data. That’s 30.58 percent above its total trade
during the same time period last year. U.S. exports to Vietnam increased
12.7 percent while U.S. imports from Vietnam rose 34.07 percent. The
U.S. deficit with Vietnam was $50.9 billion. Vietnam ranked No. 13
among the United States’ top trade partners through the current period
(U.S. Trade Numbers, 2023).
19
The top five categories of U.S. imports from Vietnam in 2019 are : Cell
phones, related equipment; Furniture, parts; Athletic, other textile shoes;
Sweaters, pullovers, vests, knit or crocheted; and Leather shoes ––
accounted for 40.45 percent of all inbound shipments. Looking more
closely at U.S. imports from Vietnam:
+ Cell phones, related equipment rose 112.71 percent compared to 2018
to $12.88 billion.
+ Furniture, parts rose 25.84 percent compared to 2018 to $4.09 billion.
+
Athletic, other textile shoes rose 11.1 percent compared to 2018 to
$2.95 billion.
+ Sweaters, pullovers, vests, knit or crocheted rose 12.11 percent
compared to 2018 to $2.46 billion.
+ Leather shoes rose 16.64 percent compared to 2018 to $2.26 billion.
In the latest annual figures available, Vietnam recorded $54.65 billion
in trade with the United States.
(U.S. Trade Numbers, 2023)
Vietnam’s Trade Agreements
In the past few years, Vietnam has joined a number of trade agreements
that may prove advantageous in the trade war. A notable example is the
Comprehensive and Progressive Agreement for Trans-Pacific Partnership
(CPTPP) which facilitates trade among 11 member countries, accounting
for 13.5% of global GDP. In the seven months since the deal took effect
in January of 2019, Vietnam recorded a trade surplus of over 1 billion
USD with the 10 other members of the CPTPP (VietnamPlus, 2019). The
Regional Comprehensive Economic Partnership (RCEP) is another
example, promising to remove up to 90 percent of tariffs on goods traded
20
among 5 ASEAN nations, China and two others (Zhang, 2021). Vietnam
has also joined the Indo-Pacific Economic Framework for Prosperity
(IPEF), a proposal by the Biden administration that includes the US and
13 Asian countries, allowing Vietnam to access 40% of the world’s GDP
and enhance relations with the US (Pham, 2022). Such agreements open
more markets with low tariffs for Vietnam, which opens more potential
for diversification and the diversion of trade from China and the US to
Vietnam.
V.
Conclusion
After achieving national independence and peace, the economy of
Vietnam has been witnessing significant changes and strongly developing
until now. In that process, there were a multitude of factors and events
affecting this huge fieldfield; one of the most noticeable ones had to be
the US - China trade war. Apparently, the trade war was waged largely by
Donald Trump - the old president of America and has been becoming
accelerating intensive over time. In the context of the trade war between
the two countries, Vietnam’s economy has undoubtedly been affected.
Some notable positive effects are more export opportunities to the US,
decreased import costs to Vietnam, and increasing flow of FDI. However,
the downsides of this are evident, with decreasing exports to China,
damage to the environment, and struggle in meeting growing demands
from foreign businesses. In response, Vietnam has attempted to avoid
unwanted attention from the US and China by staying out of the fight,
21
unnecessary irritations and taking advantage of the trade war by joining
trade agreements, boosting exports of domestic products.
Going forward, Vietnam should improve its domestic industrial structure,
enrich the diversity of export products, improve its position in the global
industrial chain, and minimize the negative impact of trade wars.
Furthermore, the government should also focus on strengthening
macroeconomic resilience and create a flexible and affordable
macroeconomic
policy
framework.
It
is essential to improve
competitiveness, improve the country’s domestic industrial structure and
infrastructure, standardize the market environment, and improve the
ability to attract and manage foreign investment.
VI.
References
Amadeo, K. (2022) Trade Wars and Their Effect on the Economy and You, The
Balance. Available at:
https://www.thebalancemoney.com/trade-wars-definition-how-it-affects-you-415
9973#toc-how-it-affects-you (Accessed: 03 June 2023).
Báo Điện tử Chính phủ (2022) GDP năm 2022 ước tăng 8,02%, lập kỷ lục trong
hơn 10 năm qua, Báo Điện tử Chính phủ. Available at:
https://baochinhphu.vn/gdp-nam-2022-uoc-tang-802-lap-ky-luc-trong-hon-10-na
m-qua-102221229093749292.htm#:~:text=V%E1%BB%81%20c%C6%A1%20c
%E1%BA%A5u%20n%E1%BB%81n%20kinh%20t%E1%BA%BF%20n%C4%
83m%202022%2C,ph%E1%BA%A9m%20tr%E1%BB%AB%20tr%E1%BB%
22
FOREIGN TRADE UNIVERSITY
SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS
-----o0o-----
MACROECONOMICS REPORT
Topic: PRICE FLUCTUATIONS IN VIETNAM’S STOCK
MARKET FROM 2020 TO 2023
Group
:6
Class
: KTE204E | K61
Lecturer
: Assoc. Prof. Dr. Hoàng Xuân Bình
Group members:
1. Trần Trâm Anh - 2213140010
2. Nguyễn Thị Hồng Minh - 2212140058
3. Thái Thị Minh Huyền - 2212140038
4. Nông Minh Lý - 2213140053
5. Nguyễn Trung Kiên - 2212140041
6. Trần Minh An - 2212140002
7. Lê Thị Lộc Anh - 2214140211
8. Phùng Phương Ngân - 2211140208
9. Trịnh Như Yến - 2212140086
Hanoi, 4th June 2023
1
Table of content
Introduction
1. Rationale
2. Research objectives
3. Scope of the research
Theoretical framework
1. Key definitions
2. How does the stock market operate?
3. Major Causes of Price Fluctuation in Stock Exchange
Research
1. 2020-2021: Growth period
1.1. Actual situation and data analysis
1.2. Motivators
1.3. Impact of the stock market on economy in 2020 - 2021
2. 2022: The year of volatility
2.1. Real situation and data analysis
2.2. Major influential factors
2.3. Impact of the stock market on economic growth
3. 2023: The more stable year
3.1. Real situation and data analysis
3.2. Potential advantages and disadvantages suggested for 2023
Protective Mechanisms and Solutions for Price Volatility in Stock Market
1. Protective mechanisms for price volatility in stock market
2. Long-term solutions for price volatility in the stock market
2.1. Key tasks and solutions to speed up allocation and disbursement of public investment
capital
2.2. Encourage more investors to participate in the stock market
2.3. Restore investors’ trusts in the stock market
Conclusion
References
3
3
3
3
4
4
4
5
6
6
6
8
9
10
10
13
16
17
17
18
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20
21
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23
25
26
2
Introduction
1. Rationale
The Vietnam stock market serves as a critical platform for businesses to raise capital
while providing investors with opportunities to buy and sell shares of listed companies.
However, like other financial markets, the stock market in Vietnam can experience
fluctuations due to various factors.
Overview:
-
The stock market in Vietnam experienced a sharp decline in 2020 due to the
COVID-19 pandemic; however, as the government introduced stimulus measures and
the country's handling of the pandemic was successful, the market recovered.
-
In 2021, there were continued fluctuations due to the pandemic and inflationary
pressures, but the market remained stable.
-
In 2022 and 2023, the market is expected to continue growing due to strong economic
growth, new investment opportunities, and increasing foreign investment.
Overall, despite the potential for volatility, the Vietnam stock market presents
attractive opportunities for investors looking to capitalize on the country's dynamic economic
growth.
2. Research objectives
To analyze the impact of internal (company-specific) and external (macroeconomic)
factors on the price movement of Vietnamese securities during the research period, this paper
will act as a report on the Vietnamese stock market to find out what is the driving force
behind the development of this market in recent years (2020-2023).
3. Scope of the research
In general, this study focuses on analyzing price fluctuations in the Vietnamese stock
market, specifically at HOSE (the largest and the most active stock exchange in VN), with
the variables that have affected it. The study aims to provide a comprehensive understanding
of the dynamics and performance of the HOSE stock market during this period.
3
Theoretical framework
1. Key definitions
A stock market, also known as a stock exchange, is a venue to trade securities, such as
bonds and shares. (Finance Strategists)
A stock is a form of security that indicates the holder has proportionate ownership in the
issuing corporation and is sold predominantly on stock exchanges.
A stock index is a collection of shares representing a sector, exchange, or economy. A stock
index usually consists of a certain amount of the top shares from a specific exchange. (IG)
2.
-
How does the stock market operate?
Functions:
The stock market is where stocks are bought and sold. When a company decides to go
public, it issues stocks in an initial public offering (IPO). Investors can then purchase
company shares on the stock market, and investors can profit from buying and selling stocks
at the right time. Investors benefit by exchanging their money for shares on the stock market.
As companies put that money to work growing and expanding their businesses, investors reap
the benefits as their shares of stock become more valuable over time, leading to capital gains.
In addition, companies pay dividends to their shareholders as their profits grow. The
performances of individual stocks vary widely over time but taken as a whole; the stock
market has historically rewarded investors with average annual returns of around 10%,
making it one of the most reliable ways of growing your money. (Forbes advisor)
-
Regulations:
The SSC (States Securities Commission of VN) regulates the stock market in VN. SSC
regulations cover four main areas:
+ Stock exchanges
+ Brokers and dealers
+ Financial advisors
+ Mutual funds
The SSC’s mission is to protect investors, maintain fair, orderly, efficient markets, and
facilitate capital formation. Thanks to SSC rules, companies that publicly trade on the stock
market must tell the truth about their business, and those who sell and trade securities must
treat investors fairly and honestly.
4
3. Major Causes of Price Fluctuation in Stock Exchange
Share prices generally go up and down because of supply and demand. However, they’re also
influenced by these factors:
-
Information: When trading in shares, buyers and sellers check the latest news on a
company or an industry. Their perception of the information may differ, influencing
their decision to buy or sell. For instance, if a company announces plans to expand
internationally, the potential surge in profits may spark investors’ interest, and the
share price may soar.
-
The economy: The performance of a country's or region’s economy, most notably
gross domestic product (GDP) and interest rates, can impact share prices. As the
GDP rises, production-based industries attract more investment and demand for
shares. If interest rates increase, companies have to shell out more money to borrow,
causing profit margins to shrink and shares to lose their appeal.
-
The company’s financial health: Listed companies are required to publish their
financial statements regularly. The profit and loss they include can help shareholders
and investors make trading decisions. If results presentations show positive figures,
demand for shares could rise and affect their price.
-
Government’s role: Government has a powerful influence on stock prices, either by
increasing investment or reducing it. When the government takes steps to increase
investment, the share price goes higher, while when it discourages an industry, the
share price falls and people leave the industry.
-
External events: Impressions about a company’s performance can weigh heavily on
the demand for its shares. Non-financial events like wars, pandemics, and natural
disasters give investors uncertainty about risks to the capital invested in the
companies and industries they affect. (Santander)
5
Research
1. 2020-2021: Growth period
1.1. Actual situation and data analysis
a. Stock market situation in 2020
-
From the late January of 2020, the Covid-19 outbreak negatively impacted almost
every sector of the economy; and
the
stock
exception,
market,
with
no
witnessed
a
significant decline in the first
quarter of the year. The market
saw its worst period in March,
when the VN-index reached 657
points
on
March 24, down
33,51% compared to the end of
2019, the lowest within 3 years.
(Figure: VN Index on Mar 24, source: https://tradingeconomics.com)
-
However, from the second quarter, the market experienced a substantial recovery and
had positive gaining sessions. Typically, in the trading session on April 6, VN-index
increased by 4.98%, the strongest increase since August 2001 until there. Between
July
and
August,
the
VN-index hovered around
the 850-point mark as the
second Covid-99 wave hit in
late July. The market began
to stabilize in September,
rising 3.6 percent to 914
points, when the authorities
considered the outbreak to
be under control.
(Figure: VN Index on Apr 06, source: https://tradingeconomics.com)
6
-
According
to
Securities
the
State
Commission
Vietnam,
ending
the
of
last
session in 2020, VN-index
closed
at
1103.87
points,
rocketing by 67% compared to
the lowest point of the year and
increasing by 14,9% compared
to the end of the previous year.
(Figure: VN Index on Dec 31, source: https://tradingeconomics.com)
-
In addition, thanks to the sharp recovery of the stock market, a record-low interest
rate, the amount of money flowing into the securities investment channel, the market
witnessed an unpredictably high level of new investor in history: by the end of
November, the total number of new accounts opened reached 332,886 accounts, an
increase of 94% compared to the number of new accounts opened in 2019. In which,
the new domestic individual investors accounted for 329,425. This took the total
number of accounts to nearly 2.77 million last year, equivalent to 2.8 percent of
Vietnam's population.
b. Stock market situation 2021
-
In 2021, Vietnam’s stock market continued the upward trend from the previous year
and
continued
unprecedented
setting
records
many
in
its
21-year history. The VN-index
reached
a
surpassing
record
high
1500
points
when
on
November 25 (an increase of
nearly 36% in comparison with the
end of 2020).
(Figure: VN Index on Nov 25, source: https://tradingeconomics.com)
-
These results have put Vietnam’s stock market in the group of 7 markets with the
highest growth in 2021 with 35,73%. Besides, the domestic stock market was also
7
among the most profitable markets in the
world, followed by the US, India and
Taiwan.
(Figure: VN Index in 2021, source:
https://tradingeconomics.com)
-
In terms of liquidity, the average trading value of the stock market increased
remarkably from VND 19 trillion per session (in January) to VND 40 trillion per
session(in November). The average transaction value reached more than VND 26,455
billion per session, 250% more than that of 2020.
-
The number of securities investors kept experiencing a sharp increase. As reported by
the end of November, the total number of securities accounts was 4.08 million. Thus,
within 11 months, there were more than 1.31 million new accounts registered, of
which domestic individual investors opened 1.306 million accounts. It can be
concluded that 2021 was a record year of attracting investors to participate in the
market.
1.2. Motivators
-
Viet Nam has pumped a lot of money into the economy to save the economy due to
the severe impact of the Covid-19 pandemic:
+ The Prime Minister assigned the State Bank to direct commercial banks to shorten
the time for reviewing loan applications, restructuring debt repayment periods,
considering loan interest exemption and reduction, maintaining debt groups, and
reducing fees with customers having difficulties because of Covid-19. First of all,
banks offer a credit support package of about VND 250.000 billion for this
solution.
+ The Ministry of Finance was requested to urgently submit to the Government a
mechanism for tax and fee exemption and reduction; proposed to the competent
authorities solutions on taxes and state budget expenditures... estimated at 30,000
billion VND to remove difficulties for production and business, ensure social
security to cope with the Covid-19 epidemic.
-
Most of the capital flow was put back into the investment market. On the other hand,
the bank interest rates were continuously lowered over time: In 2019, interest on bank
8
deposits exceeded 8%. Nonetheless, in response to the pandemic, the State Bank of
Vietnam, cut interest rates three times last year. According to SSI's statistics, deposit
interest rates decreased by a
total of 2 - 2.5% in 2020. In the
first quarter of 2021, there were
some adjustments to increase
and decrease slightly from 0.1 to
0.4% of interest rates at some
commercial banks, focusing on
short
terms
and
individual
customers).
(Figure: Vietnam's policy developments, source: eMagazine)
These were the culprits to cause investors to find other profitable investing channels
such as stock, real estate rather than saving or investing to expand production and
business. Even the social distancing also makes more people interested in the stock
market, especially the profit from this channel is now more attractive than other legal
investment channels.
-
The Vietnamese have turned to stocks to make money - some because they lost their
jobs, others because they can't invest in their businesses (According to the General
Statistics Office, in 2020, 101.700 companies closed or suspended operations). So
many people piled into the market in December, and the Government's Vietnam News
reported that they jammed the Ho Chi Minh City Stock Exchange.
1.3. Impact of the stock market on economy in 2020 - 2021
-
In 2020, social distancing caused gambling and usury activities to be frozen
(including the suspension of lottery issuance). Consumption demand decreased,
tourism, eating, and daily social activities also decreased. That caused a huge amount
of money to be stagnant in the people. Meanwhile, the stock market was considered
an "essential activity" and remained open every day. The attractiveness of securities
attracting large amounts of money was an easy consequence. And the rush to invest in
securities spread all over the world, from the US or Pakistan to India, China,
Indonesia and of course Vietnam.
9
-
In the period of 2020-2022, the scale of new
account opening was even more terrible: More
than 3.64 million new accounts were opened in
the past 3 years while by the end of 2019, the
total number of new accounts was 2.37 million.
(Figure: The scale of new account opening,
source: eMagazine)
-
In terms of the wave of crazy boom of stock
markets around the world, billionaire Leon Cooperman - head of the famous US
hedge fund Omega Advisors posted a warning that the arrival of these small
individuals who are eager to make a profit will have to "end in tears". Millions of
investors had a whole year to mock this warning, but the truth came, when the
markets crashed in 2022. The representative index of Vietnam's stock market, the
VN-Index, closed. The door was at the highest peak in history at 1,528.57 points on
January 6, 2022. The lowest closing level of 2022 was 911.9 points on November 15,
2022, equivalent to a decrease of 40.34%. This was the biggest drop in the world.
2. 2022: The year of volatility
2.1. Real situation and data analysis
a. Quarter I
● 12/1: Tan Hoang Minh Group withdraws from Thu Thiem land auction, accepts
loss of deposit
● 10/1: CEO of FLC Group sold 74.8 million shares of FLC without notifying
market authorities as required.
-
3 "popular" real estate stocks peaked: CEO, DIG, L14 shares: increased 4 =>7 times
after 5 months
-
FLC shares and the group of FLC shares
“family” started to plummet
+ FLC fell to its floor price at VND13,600
(from over 22.000 VND in 3/1)
(Figure: FLC shares in 3/1, source: vneconomy)
+ Many stocks in the family, including FLC,
ROS, AMD, KLF, ART and HAI, faced a sharp drop due to selling pressure. ROS
10
stood at the floor price at VND8,770, and HAI tumbled to its floor price at
VND6,320.
● 24/2: The conflict between Russia and Ukraine occurred => Oil price increased
to 137$/barrel
● 16/3: FED increased its interest rate (1st time) by 0.25%
-
VN index recovered
+ VN Index reached 1492.15 points, up 0.14% compared to February
+ Indexes that recorded the highest growth included: information technology (VNIT)
up 14.78%, health care industry (VNHEAL) up 7.94% and consumer goods
industry (VNCOND) increasing 7.81%
=> Even when risks appear, in the first 3 months of the year, Vietnam's stock market
remained stable and fluctuated in the range of 1,450 - 1,550 points.
b. Quarter II
● 29/3: CEO of FLC Group was arrested
● 5/4: Tan Hoang Minh's nine bond issues worth 10 trillion was canceled
● FED increased its interest rate (2nd time) to tame inflation
● FED increased its interest rate (3rd and 4th time) by a total of 1.5%
● Oil price increased to 32.000VND
-
From April to early July: The start of the gradual decline in VN index
+ VN-Index tumbled 23.1% to 1,172pts in just one month after the time that those
events took place due to panic
selling momentum as well as
“margin call” action across the
market.
+ VN-Index plunged a further
31.68 points to 1,149.61 points
(6/7), this is the lowest point in
the past 1 year of the market.
(Figure: VN-Index on July 6th, source: tradingeconomics.com)
c. Quarter III
● 27/7: FED increased its interest rate (4th time) by 0.75%
11
● 22/9: FED increased its interest rate (5th time) by 0.75%
-
VN-Index's falling streak continues: longer and more devastating: The deepest drop
was in September, October and the first half of November. Selling force weighed on
most of the industry groups, with the whole market recording nearly 400 stocks
hitting floor prices.
d. Quarter IV
● 8/10: CEO of Novaland Group was arrested
-
Since the beginning of Sep-22, VN-Index continued to extend the downtrend,
slumping further and recorded the low level of 1006pts on 11 Oct 2022.
(Figure: VN Index on Oct 11, source: vn.tradingview.com)
-
Vietnam’s benchmark VN-Index plunged 3.3% to 986.15 points on 24/10, lowest in
23 months, the lowest since November 2020, with Bank for Foreign Trade of Vietnam
(VCB) and PetroVietnam Gas JSC (GAS) among the biggest losers
-
Up to 685 stocks closed in the red, including 222 plunging to the floor prices, while
only 173 others managed to gain.
● 3/11: Shares of No Va Real Estate Investment Group (Novaland, code: NVL) and
PDR of Phat Dat Real Estate Development Joint Stock Company suffered the
losing streak of 17 consecutive sessions
● 3/11: FED increased its interest
rate (6th time) by 0.75%
-
VN-Index experienced the deepest
plunge since early October on
Thursday, with 447 stocks
declining, including 170 hitting
their floor prices. The red color
12
covered the market with 447 stocks closing below the reference levels, over 20 times
higher than the number of gainers, 21.
-
The VN-Index dropped to the bottom of 911,9 points in the morning of November 15.
(Figure above: VN Index on Nov 15, source: realtime vn-index, vnexpress.net)
● 9/11: Oil price decreased
● 9/11: Russian military forces retreated from Ukraine cities
● 14/12: FED increased its interest rate (7th time) by 5%
● 15/12: The state bank of Vietnam started to buy US dollars, pump Vietnamese
dong into market
-
The bottom-fishing demand of domestic investors and foreign investors' buying at a
record high in November and December
helped the stock market recover strongly in
about 3 weeks, from mid-November to early
December. The VN-Index sometimes went
up to nearly 1,100 points, before falling
back in the last 3 weeks of the year to
1,007.09 points.
=> The domestic stock market ended a turbulent
year at 1,007.09 points
(Figure: VN-Index on Dec 30, source: infographics.vn)
2.2. Major influential factors
a. Global factors
● The prolonged geopolitical tension between Russia and Ukraine
Not only has the war in Ukraine set off a geopolitical realignment, but it has caused
economic hardship far from the epicenter of the fighting:
-
As Ukraine fights for survival, Western governments are taking steps to punish
Russia. Russia is one of the world's largest producers of oil and fuel.
-
On Mar. 8, President Biden signed an Executive Order (EO) to ban the import of
Russian oil, liquefied natural gas, and coal to the United States, which initially caused
a steep spike in prices.
-
In particular, prices surged in March and reached $139.13 a barrel, the highest since
2008.
13
-
Therefore, the pandemic has left the global economy with two critical points of
vulnerability - seriously high inflation and jittery financial markets.
However, moves by European nations to lock in alternative sources have largely
alleviated those price hikes. So now prices have returned to pre-invasion levels.
● Inflation rate and Interest rate of the USA
High inflation after more than a year of
loose monetary policy forced central banks to raise
interest rates and stop injecting money into the
economy.
(Figure : Consumer Price Index for All Urban
Consumers,
12-month
percent
change,
by
expenditure category, June 2022, Source: U.S.
Bureau of Labor Statistics.)
-
USA inflation rate increased dramatically
in 2022, reaching 40-year highs, especially
grocery and energy prices. Overall, the
general index of prices increased by 8.2
percent.; the monthly increase was between
6.5% and 9.1% (peaked in June).
-
The Federal Reserve had raised the federal funds rate 7 times in 2022 and expanded
the target range by 75 basis points three times, most recently in September. The
median projection for the federal funds rate is 4.4% for 2022 and 4.6% for 2023.
-
Rising interest rates always bring a downturn in consumer spending. Unfortunately,
this unwanted consequence is highly related to Vietnam's economy because the USA
was the nation that Vietnam exported the most to, with approximately 30% each year.
● The Chinese government has remained committed to zero-Covid
-
China is the most significant material supplier for production in Vietnam; imported
goods from China account for more than 33% of total imports (2021). However,
supply chain disruptions due to partial lockdowns in China will likely affect the
outlook for importing raw materials, delaying delivery times and affecting domestic
production schedules. Thus, the growth rate of the manufacturing sector slowed down.
-
Vietnam exports about 17% of its goods to China (2021). However, based on reports
from many organizations, China's economic growth rate has decreased, implying that
14
consumer demand in this large market will decline. Accordingly, the recovery of
export growth to the Chinese market may face difficulties in the following months.
b. Domestic factors
● Raising interest rates to curb increasingly severe inflation
On Oct. 24, 2022, the State Bank of Vietnam issued Decision No. 1812/QD-NHNN on
the maximum interest rate applicable to VND deposits; it decided to revise several interest
rates by 1%, starting from Oct. 25.
Vietnam's central bank announced on Sept. 22 to raise the policy rates by 100 basis
points in a rare monetary tightening move aimed at keeping inflation under 4%. - Vietnam's
biggest economic challenge at that time - stated by SBV Governor Nguyen Thi Hong.
● Stoking speculation and ignorant individual investors
Individual investors piled into the Vietnam stock market at an unprecedented pace,
accounting for the majority even though they were not knowledgeable in this field.
Unfortunately, due to their patchy and superficial understanding, they can easily fall into the
"Appeal to popularity" fallacy or be taken advantage of by other skilled investors.
For instance, 2 days before Mrs. Truong My Lan was officially arrested, several
well-informed people had grasped this news; therefore, they speculated, temporarily pushed
the VN INDEX, and finally made a profit by selling them to ignorant investors before the
eventual decrease. Moreover, when the price started to fall, the individual mass investors,
with their weakened belief, would immediately follow others, sell at a lower price, and
unintentionally make the circumstance much worse.
● Stock market violations
The market encountered continuous shocks from internal shareholders and listed
companies and in corporate bond issuance consultancy of securities firms. In addition, many
criminal cases, including the prosecution and arrest of senior leaders at giant corps, affected
the sentiment of individual investors, accounting for 90% of the total trading accounts. To be
more specific, there are:
-
The former chairman of FLC Group, Trinh Van Quyet on Mar. 29 for manipulating
the stock market
-
Do Anh Dung, former chairman of Tan Hoang Minh Group, and six accomplices for
"defrauding to appropriate property" on Apr. 5
15
-
The chairwoman of Van Thinh Phat Group, Truong My Lan, for "defrauding to
appropriate property" on Oct. 8.
=> Although these cases have embedded considerable disbelief in every citizen's mind about
the government's ability to control and manage the stock market, their impacts regardings the
economy are relatively mild and limited. Taking the FLC case as an example, the arrest of the
leader can only somehow decrease the share prices of 2 groups:
-
Those included or related to FLC's ecosystem, such as FLC, ROS, AMD, KFL, ART,
HAI, GAB
-
Banks holding their loans: STB, OCB, BID hay NVB...
● Corporate bonds frozen
-
The bond market became frozen in the second half of the year following scandals with
Tan Hoang Minh and Van Thinh Phat and the draft decree 65 that amended Decree
153.
-
Many enterprises decided to restructure their debts and bought back VND164 trillion
worth of bonds within 11 months.
However, besides various disadvantages in 2022, many bright factors and policies
also hold the potential for a temporary and modest rebound for Vietnam's stock market.
Overall, they were to manage the monetary and credit policies flexibly, stabilize
macro-economic conditions, and contain inflation:
-
The spirit of optimism and positivity in all stock players and consultants, especially in
the first 2 quarters of the year.
-
On January. 11, the National Assembly of Việt Nam adopted a Government-proposed
socio-economic recovery program worth nearly VNĐ350 trillion (approximately
US$15 billion) over the next two years.
-
Vietnam will remove its COVID-19 restrictions on international passenger flights
with all markets starting Feb. 15, with no limitation on the number of flights.
-
On Mar. 24, the Vietnamese government kicked off an interest subsidy of 2% per
annum on commercial loans for businesses, cooperatives, and households for
2022-2023.
2.3. Impact of the stock market on economic growth
Vietnam's economy grew 8.02% in 2022, the highest rate recorded in 2011-2022. The
increase is three times the growth in 2021 and exceeded the 6-6.5% target set by the
16
government. Vietnam's strong and solid economic performance was backed by domestic
retail sales, in stark contrast to the weak performance of the VN-Index (VNI) in the stock
market, which was deliberately down 51% on Sept. 30.
(Figure: Performance of Vietnam Retail Sales and VN-Index, from Jan-22 to Jul-22, Source:
VinaCapital)
(Domestic consumption has rebounded strongly and become Vietnam's leading economic
growth driver)
● Strong Domestic Consumption Offsets Weakening US Demand
While a slowing US economy is likely to temper Vietnam's export and economic
growth (Export slowed from 38% yoy in 7M21 to 24% in 7M22, the USA is Vietnam's
biggest export market), the impact of that slowdown will be more than offset by Vietnam's
strong domestic economy.
During the pandemic, the retail grocery industry has undergone numerous transitions,
switching consumers from conventional food shops to various alternative channels,
e-commerce for instance; all of which has contributed significantly to the expansion of the
growth rate of Vietnam in 2022.
Finally, the revenues and earnings of companies listed on Vietnam's stock market are
primarily driven by the domestic economy, which is why the stock market has been expected
to somehow benefit from unexpectedly solid domestic growth.
● Alarm for a stock market with better transparency and control
Overall, recent scandals and the downward in 2022's stock market have laid a reset at
most levels, all aimed at improving publicity and transparency, strengthening market
surveillance and inspection, and adopting better-qualified investors. These were conducted
through many actions:
17
-
Operating the technical cooperation project "Capacity Building on Improving Fairness
and Transparency of Vietnamese Equity Market," collaborated with the Japan
International Cooperation Agency (JICA)
-
On Sept. 16, the Vietnamese government issued Decree 65/2022/ND-CP (Decree 65)
to amend the existing Decree 153/2020/ND-CP (Decree 153) on offering and trading
privately issued corporate bonds.
-
The HCM Stock Exchange (HoSE) issued the decisions 341/QĐ-SGDHCM and
342/SGDHCM to change the regulations for stock trading.
-
Raising a warning for any individual to invest with a decent understanding.
3. 2023: The more stable year
3.1. Real situation and data analysis
Quarter I 2023
● 17/1:
Two Deputy Prime Ministers and President Nguyen Xuan Phuc took
responsibility for violations and wrongdoings of some government officials. Thus,
they stepped down from their current positions
-
January saw a robust gain of 11.2% of the VN-Index
-
All industry indexes recorded an increase, notably reflected in the following indexes:
raw materials industry (VNMAT) increased by 19.29%; financial sector (VNFIN)
increased by 13.13%; industry (VNIND) increased by 12.18%.
● 15/3: China fully reopened its borders to international tourists
-
Vietnam's stock market has spent most of
the first quarter of 2023 with a slight
increase and almost sideways. Specifically,
the VN-Index by the end of March is
currently paused at 1059,44 points, up
3.94% compared to the beginning of the
year. Although it only increased slightly in
the first quarter, compared to the bottom of
September 2022, VN-Index has recovered
by 20%.
(Figure: VN-Index on 31/3, source: Infographics.vn)
18
3.2. Potential advantages and disadvantages suggested for 2023
a. Advantages
● From Mar. 14, China has reopened its borders to foreign tourists for the first time in
three years since the COVID-19 pandemic.
-
Tourist arrivals from China starting in mid-March are expected to enormously benefit
tourism and services, with the sector forecast to grow by 8.0 percent.
-
Agricultural output is forecasted to grow by 3.2 percent on the back of revived
domestic demand and the reopening of China (which accounts for 45 percent of
Vietnamese fruits and vegetables exports)
● Vietnam Central Bank published growth support policies with monetary easing,
removing difficulties for businesses and the economy
-
The State Bank of Vietnam (SBV) on Mar. 14 issued two decisions to reduce
regulatory interest rates by 0.5% to 1%, which will come into force on Mar. 15.
-
On Mar. 31, Vietnam's central bank said to cut its refinancing rate by 50 basis points
effective Apr. 3
● Public investment
-
Public investment has been destined to be one of the most critical drivers of
economic growth, but currently, it is operated with a concerningly low disbursing
rate of public investment capital (1,72% monthly, about half of that in 2022.
● Foreign investors pour money into Vietnam
-
Foreign investors’ net purchases were high in November and December 2022, totaling
VND29 trillion. The net purchases for the entire year were estimated at VND27
trillion.
-
Net purchases worth tens of trillions of VND made within two months were
unprecedented in the previous four years.
-
This huge amount not only provided an enormous cash flow into the ongoing gloomy
market but also reflected and provoked confidence in domestic and foreign purchases.
b. Disadvantages
● Continued monetary tightening in developed countries, the USA and British, for
example (mainly influenced by the USA)
19
-
On May 3, the Federal Reserve approved its 10th interest rate increase in just over a
year and dropped a tentative hint that the current tightening cycle is ending.
-
The increase takes the FED funds rate to a target range of 5%-5.25%, the highest since
August 2007.
● Other disadvantageous global factors include the global slowdown and spillover from
global geopolitical tensions, …
● Several domestic factors may hinder the development of the Vietnam stock market in
2023:
-
Bond market on pause
-
Decreased belief in regulating system
-
Shortage for well-qualified individual investors
-
Hesitant attitude due to heavy economic loss from 2022
=> Expectation: Entering 2023, the stock market is forecast to remain stable, with the
primary gauge VN-Index to hover around 1,100 points. There is hope for no more significant
downward trend, but not for an immediate or spiking upturn.
20
Protective Mechanisms and Solutions for Price
Volatility in Stock Market
1. Protective mechanisms for price volatility in stock market
Circuit breakers and price limits are the most frequently used mechanisms by
stock exchanges to control volatility.
Considering price bands, price limits (or Price Bands) are common in many non-US
equity markets including Austria, Belgium, France, Greece, India, Italy, Japan, Korea,
Malaysia, Mexico, Netherlands, Spain, Switzerland, Taiwan, and Thailand. A price band is a
value-setting method in which a seller indicates an upper and lower limit of where buyers are
able to bid.The seller or the stock exchange generally specifies this value. Most stocks have
upper and lower price ranges, and buyers must place bids between these values. This range
specifies a boundary for stock trading where a seller assigns the cost limit’s highest (cap) and
lowest (floor). Specifically, the spread between the floor and the cap costs should be at a
maximum of 20%.
On Monday, Oct. 19, 1987, so-called Black Monday, the Dow Jones Industrial
Average (DJIA) lost almost 22% in a single day. As a result of the incident, the world stock
market started to fall, making Black Monday one of the most infamous days in financial
history. Most of the main exchanges had fallen more than 20% by the end of the month. In
fact, Black Monday was preceded
by a bearish week in which the
headline indexes gave up around
10% for the week.
(Table: Black Monday Trading
Chart ,Source: Investopedia)
Since Black Monday, a number of protective mechanisms have been built into the
market to prevent panic selling, like circuit breakers. A stock market circuit breaker is a type
of trading curb, a tool used by stock exchanges to slow severe declines in the U.S stock
market. Since then, other exchanges and markets have incorporated circuit breakers. When a
21
circuit breaker is triggered, all trading stops for a certain amount of time. Nobody can buy or
sell securities on the stock market during this period. There are three levels of market-wide
circuit breakers: when the price drops by 7%, 13%, and 20%.
In reaction to the 1987 stock market crisis, market authorities used circuit breakers in
1988 in an effort to establish a cool-down period during periods of high market volatility. On
October 27, 1997, a little over 10 years after the practice was established, market-wide circuit
breakers were first used. Only once else, in March 2020, did the circuit breakers trip. Circuit
breakers were tripped four times in nine days as a result of the market turbulence brought on
by the coronavirus outbreak.
2. Long-term solutions for price volatility in the stock market
2.1. Key tasks and solutions to speed up allocation and disbursement of public
investment capital
-
Strengthen and promote the roles and responsibilities of the heads of ministries,
central and local agencies in leading and directing the medium-term and annual public
investment planning.
-
It is required that ministries, central and local agencies adhere to the objectives, bases,
principles, requirements, order, and formulation of medium-term and annual public
investment plans specified in the Law on Public Investment as well as in the
Resolutions of the National Assembly.
-
Focus on properly planning public investments and enhancing their readiness and
viability. The heads of ministries, central and local agencies must directly direct,
inspect and review each project, especially newly constructed projects, strictly control
the necessity, scope and scale of the project according to the approved planning, to
ensure the investment efficiency and output results of each project.
-
Apply information technology from the very first stage in accordance with the Law on
Public Investment, ensure publicity and transparency in investment management, in
line with the process of building an e-Government and moving towards a digital
government.
-
Strengthen discipline in public investment, clearly define the responsibilities of
relevant organizations and individuals, strictly handle violations to regulations;
22
strictly control the objectives and efficiency of the use of investment capital; always
ensure fairness, publicity and transparency of information, avoid wasting and group
interests in public investment.
-
Update new planning policies, regimes and methods; strengthen coordination among
planning aggregators, related agencies and budget users within the same ministry,
central and local authorities to ensure an effective disbursement process.
2.2. Encourage more investors to participate in the stock market
a. Individual investors
The majority of the investing public is still exploring the market and waiting for
advancements, so there isn't a lot of demand for investments right now. It is vital to have
favorable policies, tax exemptions or reductions, financial and credit support for investors,
and broadening the range of services offered by public firms in order to draw the interest of
the investment public. security firms to clients, fostering a favorable environment and
building their confidence to participate in the market. Create favorable conditions for
investing activities on the stock market for the general public while simultaneously enhancing
the effectiveness of the center's trading system, expanding the services given to consumers by
securities businesses, and increasing customer service levels.
b.
Institutional investors
These are large business organizations with favorable conditions in market research
and analysis. They can accumulate large sums of capital so they will be a large source of
demand and have a certain level of influence on the market. On the other hand, large
investment organizations are also an indirect bridge to help people, even with a small amount
of capital and a low level of understanding of the securities sector, to participate in investing
in the stock market through stock investment funds, pension funds. Therefore, it is necessary
to promote the establishment of securities investment funds, fund management companies,
and encourage the participation of large financial institutions such as insurance companies,
investment funds, by supporting policies, tax and fee incentives, and at the same time
building a strict, clear and appropriate legal framework, creating favorable conditions for
organizations to invest in the stock market.
c.
Foreign investors
Vietnam has implemented a series of policies and measures aimed at attracting foreign
investors to its stock market. These policies reflect the government's commitment to creating
a favorable investment environment and promoting economic growth.
23
-
Enacted investor-friendly regulations that provide a transparent and fair market
framework. The government has established laws and regulations, such as the Law on
Securities, to govern the stock market. These regulations ensure clarity and
consistency in market operations, protect investor rights, and promote equal
opportunities for both domestic and foreign investors.
-
Gradually increased the foreign ownership limits in listed companies. This move
allows foreign investors to acquire larger stakes in Vietnamese enterprises, facilitating
their participation in the stock market. By expanding foreign ownership opportunities,
Vietnam aims to attract more foreign capital and promote market liquidity.
-
Vietnam has introduced tax incentives to encourage foreign investment in the stock
market. For instance, foreign investors may enjoy exemptions from capital gains tax if
they hold shares for a specified period. Such tax incentives help reduce the overall tax
burden on foreign investors and incentivize long-term investment in Vietnamese
stocks.
-
Prioritized investor protection to enhance confidence and trust in the stock market.
The government has established the State Securities Commission (SSC) as the
regulatory authority responsible for supervising the market. The SSC enforces
regulations, investigates market misconduct, and safeguards investor rights. These
measures aim to create a secure and transparent investment environment, reassuring
foreign investors and promoting long-term capital inflows.
-
Invested in infrastructure development. This includes the implementation of advanced
trading platforms, efficient settlement systems, and electronic trading mechanisms.
-
Focused on investor education and outreach programs to raise awareness among
foreign investors about the opportunities and risks in the stock market. The
government organizes seminars, workshops, and conferences to provide information
on market dynamics, investment strategies, and risk management. These initiatives
help educate and inform foreign investors, enabling them to make informed decisions
when entering the Vietnamese stock market.
2.3. Restore investors’ trusts in the stock market
In the long term, to encourage new individual investors to join the market, it is
necessary to increase the transparency of the market through credit ratings to protect
individual investors.
24
Transparency can increase investors’ trusts, hence restoring the liquidity in the
Vietnamese stock market. It can be achieved through the business work ethics, strict state
oversight, and the provisions of the law.
Mr. Nguyen Tuan Anh, Deputy General Director in charge of capital of Vietinbank
Securities, said that it is necessary to establish a new agency or assign a specialized agency of
sufficient resources and authority to supervise enterprises, bond issuance, as well as the
performance of obligations of the issuer in order to promptly issue warnings and correct
violations, if any.
Improving corporate credit rating scale is also an urgent task to help regain investors'
confidence in the market, make the market transparent, and help upgrade Vietnam's capital
market, which many regional developed countries have had for a long time.
Strengthening the management and supervision capacity, ensuring the publicity and
transparency of the market is always a key task. In the past 4 years, with the support of the
Japan International Cooperation Agency - JICA, the State Securities Commission of Vietnam
has implemented the project "Strengthening capacity on improving fairness and transparency
of the Vietnamese stocks market”, which has greatly enhance the stock market fairness and
transparency and protect the rights for investors.
25
Conclusion
In conclusion, this research has examined the price fluctuations in Vietnam's stock
market from 2020 to 2023, in particular, the Ho Chi Minh Stock Exchange. The study utilized
various statistical tools and econometric techniques to investigate the factors that influence
the fluctuation of stock prices, including macroeconomic indicators such as inflation and
interest rates.
The findings suggest that the stock market in Vietnam is highly sensitive to changes in
macroeconomic indicators. Economic policies implemented by the government also have a
significant impact on the stock market. In addition, external factors such as global events and
political stability also affect the Vietnamese stock market.
Overall, the study reveals that price fluctuations in Vietnam's stock market are
complex and multifactorial. Investors should consider a range of factors when investing in the
Vietnamese stock market. Furthermore, policymakers should aim to foster a stable
macroeconomic environment to reduce the risk of stock market volatility and create a
favorable climate for investment using the suggested solutions.
26
TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG
KHOÁ 61
.............******.............
The effects of dumping on the economy
of targeted markets
With the contribution of :
-
Đoàn Đức Huy
Nguyễn Ngọc Hải
Nguyễn Việt Bách
Nguyễn Xuân Bách
Nguyễn Xuân Quân Bảo
Bùi Duy Hưng
Hoàng Lê Cường
Đinh Quang Minh
Hoàng Duy Tường
Trịnh Minh An
Hoàng Thạch Anh
Ha Noi, June 1st 2023
Tables of contents
Introduction…………………………………………………..…2
Literature review …………………………………………...…..3
Discussion………………………………………………………..4
I.
Definitions of dumping …………………..………………………....4
II.
Reasons for dumping ………………..…………………………..….4
1. Stakeholder analysis #1: Dumping countries ………..……..…..…4
2. Stakeholder analysis #2: Dumped countries …..………………...14
III.
Potential effects ……………...……………………………….……19
IV.
Negative impacts ………...……………………………………..….22
V.
Protectionism and anti-dumping …………………………….......27
Representative case………………………….…………….…..32
Conclusion ……………………………………..………………37
References ……………………………………………….…..…39
1
Introduction
The phenomenon of international trade has evolved as an integral aspect of global economic
integration, often transforming the trajectory of national economies and establishing the
course for international relations. However, one intriguing facet of this economic interchange
that has surfaced over the decades is the practice of 'dumping.' Dumping, in the realm of
international economics, refers to the act of a country or firm exporting goods at a price lower
than the price it normally charges in its home market. Although this practice often presents
immediate and enticing benefits for consumers in the importing country, such as lower prices,
it may also instigate significant economic perturbations in the targeted market.
This research essay is prompted by the necessity to dissect the potential ramifications of
dumping on the economies of targeted markets. The choice of this topic emanates from the
realization that the academic discourse on dumping has often been skewed towards its
international trade law implications, with less emphasis on its extensive economic
implications for the recipient markets. Furthermore, given the rising global interconnectivity
and the intensity of international trade, understanding the economic repercussions of dumping
is becoming increasingly imperative.
The scope of this research will encompass a comprehensive analysis of the direct and indirect
effects of dumping on targeted economies, considering aspects such as impact on domestic
industries, employment, consumers, and potential long-term implications for economic
growth and stability. Additionally, the study will critically examine both theoretical
perspectives and empirical case studies to create a balanced and robust understanding of the
topic. The intent is to elucidate the economic dynamics triggered by dumping and to inform
appropriate policy responses.
Ultimately, this inquiry into the effects of dumping on the economy of targeted markets
endeavors to contribute to the broader academic discourse on international trade dynamics,
and further aid policy-makers and economists in navigating the complex landscape of global
economics.
2
Literature review
The economic implications of dumping have been extensively investigated in the academic
discourse, yet the multitude of perspectives suggests the complexity of the phenomenon.
One of the earliest investigations on the impact of dumping on recipient markets is by Viner
(1923), who examined the practice's potential detrimental effect on domestic industry. Viner
noted that a foreign firm, through dumping, could drive out competitors in the targeted
market, creating a monopoly position and eventually increasing prices (Viner, 1923). This
initial theoretical proposition has been empirically supported by subsequent studies, notably
by Durling and Prusa (2006), who found evidence of this 'predatory' behavior in the steel
industry.
On the other hand, Blonigen and Prusa (2003) emphasized the potentially beneficial impact of
dumping for consumers, as lower prices could lead to increased consumer surplus in the short
run. However, they warn that this is conditional on whether the dumper can establish a
monopoly position in the long run.
A lesser-explored avenue in the literature is the impact of dumping on employment in the
recipient markets. Staiger and Wolak (1992) contend that dumping could result in job losses
in domestic industries affected by cheaper imports. Nonetheless, their empirical analysis also
suggests that the overall impact on national employment levels may be limited, due to job
creation in other sectors of the economy.
The long-term implications of dumping for economic growth and stability remain a relatively
under-researched area. However, a study by Sharma (2000) suggested that sustained dumping
could disrupt domestic industrial development and thus hinder long-term economic growth in
the affected markets.
This review of existing literature exposes a complex array of potential effects of dumping on
the economies of targeted markets. The ensuing analysis in this essay will build on these
foundations to provide a comprehensive understanding of the issue.
3
Discussion
I. Definitions of dumping:
-
The practice of dumping, in the context of international economics, is typically
characterized by a situation where a country, having a surplus amount of a certain
product, exports that product to a foreign market at a price significantly lower than
what it normally charges in its home market (Miranda et al., 1998). It is a pricing
strategy often deployed by exporters, particularly those from more developed
economies, either to penetrate a new market or to offload excess production in a
foreign market.
-
Illustration:
A practical illustration of this concept could be observed in the hypothetical example
of an ice-cream market in Vietnam. Assume that the domestic price of a specific
ice-cream brand in Vietnam is 10,000 VND. However, a foreign producer, having an
excess of this particular ice-cream, starts exporting the same ice-cream to Vietnam at
the price of 5,000 VND. This scenario would qualify as dumping, as the foreign
producer is selling its ice-cream in the Vietnamese market at a lower price than it
would typically charge in its home market.
To further understand the potential implications of this scenario, it's necessary to delve into
the theoretical and empirical insights provided in the body of literature surrounding the topic
of dumping, as well as the real-world effects that such practices have had on targeted markets.
As noted in the literature review, the impacts of dumping can be multifaceted and often result
in various economic implications for the targeted markets.
II. Reasons for dumping:
The issue of dumping is a multifaceted one, impacting various sectors of the global
economy. The exploration of this phenomenon requires a comprehensive understanding
of the stakeholders involved, specifically the countries that dump products and the
countries on the receiving end of such practices. Each group possesses unique
characteristics and motivations that contribute to the occurrence and perpetuation of
dumping.
1. Stakeholder analysis #1: Dumping countries
4
● Capability :
a) High production capacity:
- Surplus Production: When a country has a high production capacity, it often
results in the production of more goods than can be consumed domestically.
This surplus production needs to be sold to maintain profitability and avoid
storage costs, and one way to do this is by exporting these surplus goods to
other countries.
Example : According to a report by the OECD, China's crude steelmaking
capacity expanded from 660 million metric tonnes in 2007 to over 1 billion
metric tonnes in 2019 (OECD, 2020). This rapid expansion resulted in a
surplus of steel, with domestic demand insufficient to absorb the high output.
In 2015, China produced nearly 50% of the world's steel but consumed only
about 45%, leaving a surplus of 111 million metric tonnes (World Steel
Association, 2015).
To maintain its steel production levels and employment, China export its
surplus steel, allegedly at below-market prices. Consequently, other countries,
especially the United States and members of the European Union, accused
China of dumping its surplus steel onto their markets. They claimed that such
practices caused significant harm to their domestic steel industries as they
struggled to compete with the low-priced imports.
In response, the United States imposed anti-dumping duties of up to 266% on
certain Chinese steel products in 2016. Similarly, the European Union also
imposed anti-dumping measures on various steel products from China (U.S.
Department of Commerce, 2016; European Commission, 2017).
-
Lower Unit Cost: High production capacity often results in economies of scale,
where the average cost of producing each unit decreases as the quantity of
output increases. This means that goods can be produced more cheaply, and
these cost savings can be passed onto consumers in the form of lower prices. In
some cases, these goods can be sold in foreign markets at prices lower than
those in the domestic market, which could be considered as dumping.
Example : China is the world's largest producer of solar panels, accounting for
over 70% of global production as of 2020 (IRENA, 2020). Due to economies
of scale, advancements in technology, and government support, Chinese
manufacturers are able to produce solar panels at a significantly lower cost
compared to their foreign counterparts.
The European Union, which has a strong market for solar energy products,
accused China of dumping solar panels into their market. They alleged that
Chinese manufacturers were selling solar panels in the EU market at prices
below their normal value, thus causing material injury to the EU solar industry
(European Commission, 2013). As a result, the EU imposed anti-dumping
duties on Chinese solar panels in 2013.
5
-
Market Expansion: Countries with high production capacity may also look to
expand their markets. If the domestic market is saturated, they may turn to
foreign markets to sell their goods. In some cases, these countries may use
dumping as a strategy to gain market share in these foreign markets, selling
goods at below-market prices to make them more attractive to foreign buyers.
Example : A relevant example of this is seen in the case of the U.S. and
Canadian softwood lumber industries. Softwood lumber is a major commodity,
and Canada is the largest exporter of this product to the U.S., accounting for
about 96% of all U.S. softwood lumber imports in 2019 (USITC, 2020).
In 2017, the U.S. Department of Commerce found that Canada was subsidizing
its softwood lumber industry and selling lumber in the U.S. at less than fair
value, i.e., dumping. According to the U.S. Commerce Department, the
dumping margins ranged from 3.2% to 8.89%, and the subsidies were at rates
ranging from 3.34% to 18.19%. In response, the U.S. imposed anti-dumping
and countervailing duties on Canadian softwood lumber products (U.S.
Department of Commerce, 2017).
The U.S. argued that this dumping practice was part of a Canadian strategy to
increase its market share in the U.S. softwood lumber market, negatively
affecting U.S. producers.
-
Avoiding Domestic Market Glut: If the domestic market is flooded with a
certain product, it can lead to significantly decreased prices due to the laws of
supply and demand. To prevent this, companies may export the surplus to
foreign countries, sometimes at prices lower than the domestic market price.
Example : A notable example of this can be seen in the Chinese steel industry.
From around 2007 to 2015, China was the world's largest steel producer,
accounting for more than half of global production. During this period, China
underwent significant economic growth, which led to substantial investments
in infrastructure and construction, leading to a surge in steel production.
However, as China's economy began to slow down and domestic demand fell,
the country faced a glut of steel. Unable to absorb this glut domestically,
Chinese steel producers began exporting their excess capacity to international
markets at significantly lower prices.
According to a report from the European Commission in 2016, the export price
of certain hot-rolled flat products of non-alloy steel from China was dumped
with margins of 90.6% to 98.1%. Consequently, this led to serious injury to the
Union industry, resulting in a decrease in market share, sales volumes,
productivity, employment, and a negative profitability for the years 2013-2015.
This situation is often cited as a textbook example of how avoiding a domestic
market glut can contribute to dumping, with serious consequences for global
steel markets and industries in other countries.
6
However, it's essential to note that while high production capacity can contribute to
dumping, it doesn't always lead to this practice. Many factors can influence a
country or company's decision to engage in dumping, including market conditions,
government policies, and international trade agreements.
b) Government Subsidies:
Government subsidies can significantly influence the potential for dumping to occur.
By providing financial assistance to industries or businesses, a government can lower
production costs, enabling manufacturers to sell their goods at lower prices. In some
instances, the subsidized goods can even be sold below the cost of production. This
is feasible because the government subsidies offset the losses that would otherwise
be incurred.
Let's consider a hypothetical example. Suppose a country "X" has a significant auto
industry. The government of X decides to support this industry through substantial
subsidies. These subsidies could be direct payments, tax incentives, or subsidized
inputs like cheap electricity. As a result, automakers in X are able to produce cars at
a lower cost compared to manufacturers in other countries.
Now, if these automakers export their cars to a country "Y", and sell them at prices
that are significantly lower than the prices at which comparable cars are sold in Y,
this could be considered as dumping. If these cheap imports cause material injury to
the domestic industry in Y (for example, by causing job losses or business closures),
Y could potentially impose anti-dumping duties on car imports from X to level the
playing field.
Example : The U.S. cotton industry received significant subsidies from the U.S.
government, distorting the global cotton market and impacting cotton-producing
countries in Africa.
Between 1995 and 2012, U.S. cotton farmers received $32.9 billion in subsidies.
These subsidies allowed the U.S. to become one of the world's leading cotton
exporters. The artificially low export prices depressed the global cotton price,
significantly affecting cotton producers in developing countries.
For instance, between 2001 and 2002, cotton producers in Western and Central
Africa (Benin, Burkina Faso, Chad, and Mali) lost an estimated $191 million in
revenue due to the decline in cotton prices caused by U.S. subsidies. These countries
relied heavily on cotton exports for their national income and for the livelihoods of
millions of small farmers.
In 2004, the World Trade Organization ruled that U.S. cotton subsidies were in
violation of international trade rules, as they distorted the global cotton market and
caused harm to cotton producers in other countries.
c) Currency Manipulation:
Currency manipulation can play a significant role in international trade and
potentially lead to dumping. When a country intentionally devalues its own currency,
it lowers the price of its exports in terms of foreign currency. This means that goods
7
from the country with the devalued currency become cheaper in international
markets, potentially leading to a dumping scenario.
Here's how the process generally works:
-
Currency Devaluation: A country intentionally manipulates its currency to
devalue it against other currencies. This is typically achieved through policies
implemented by the country's central bank.
-
Increased Exports: As the country's currency is now weaker, its goods and
services become cheaper for foreign buyers. This tends to boost the country's
exports.
-
Price Undercutting: As more goods are exported, the country might sell its
products at a lower price than what they are sold in the domestic market, or
lower than their cost of production. This is, in essence, dumping.
-
Impact on Foreign Markets: The cheaper imported goods may damage
industries in the countries where these goods are being dumped. They can
outcompete domestic products in those countries, leading to reduced sales,
closures of businesses, and job losses.
However, it's important to note that not all currency devaluations lead to dumping. It
becomes a matter of dumping when the exporting country's manufacturers or
exporters sell their products in foreign markets below their normal value, which is
typically either the prices at which these products are sold in their home market or
their cost of production.
Example : One of the most often-cited examples of this comes from Japan in the
1980s. The country was accused of keeping the value of the yen low compared to the
dollar, which made their exports more competitive and arguably contributed to
dumping.
During the early 1980s, Japan's economy was growing rapidly, with an emphasis on
export-led growth. The country had a significant trade surplus with the United States,
primarily due to exports of automobiles and electronics.
Critics argued that Japan was effectively manipulating its currency to keep its value
low relative to the dollar, thus making its exports cheaper. This situation was seen as
contributing to a kind of dumping because Japanese products were being sold in the
U.S. market at prices lower than they were sold in Japan, and allegedly lower than
their cost of production.
As a response to this, the United States, along with other major economies,
negotiated the Plaza Accord with Japan in 1985. Under this agreement, the countries
agreed to intervene in currency markets to depreciate the U.S. dollar against the yen
and the German Deutsche mark. After the Plaza Accord, the yen appreciated
significantly, which made Japanese exports more expensive and helped to reduce the
U.S. trade deficit with Japan.
8
However, please note that the link between currency manipulation and dumping is
often disputed. In the case of Japan, some economists argue that the low value of the
yen in the early 1980s was due to market factors rather than deliberate manipulation.
d) State-Owned Enterprises:
State-Owned Enterprises (SOEs) can potentially contribute to dumping in other
countries through the benefits and subsidies they receive from their government. This
is especially true if the government heavily subsidizes these SOEs, which can distort
market prices and create an uneven playing field in international trade. Here's a
generalized example of how this can happen:
-
Financial Support: Governments can provide SOEs with various types of
financial support such as direct subsidies, grants, low-interest loans, or
preferential tax treatment. This financial aid can artificially lower the
production costs for SOEs, enabling them to sell their products at lower prices
than would otherwise be possible in a free-market economy.
-
Artificially Low Pricing: Because of this financial support, SOEs may sell their
goods or services internationally at prices lower than the production cost or
domestic market price. This can lead to a form of dumping because goods are
sold to foreign markets at a price lower than in their home market.
-
Market Distortion: Such pricing strategies can distort the market in the
importing countries. If the dumped products from SOEs flood the market,
domestic producers in the importing country may struggle to compete,
potentially leading to reduced sales, job losses, and even business closures.
-
A high-profile case that illustrates this is the ongoing dispute between the
United States and China over steel and aluminum. The U.S. has long argued
that Chinese steel and aluminum companies, many of which are state-owned,
benefit from government subsidies that allow them to sell their products at
unfairly low prices, thereby harming U.S. steel and aluminum producers. This
has led to anti-dumping measures being imposed on certain Chinese steel and
aluminum products.
Example : An example of State-Owned Enterprises (SOEs) contributing to potential
dumping can be drawn from the ongoing debate over Bombardier Inc., a
multinational aerospace and transportation company based in Canada.
Bombardier has been accused of selling their C-Series planes at artificially low
prices due to significant subsidies received from the Canadian government.
According to a 2017 report from Bloomberg, Bombardier had received over $3
billion in investment from the government of Quebec and Canada's federal
government since 2015. This aid allegedly allowed Bombardier to maintain low
prices for their C-Series planes, despite the high production cost.
9
In 2017, The U.S. Commerce Department upheld the complaint from Boeing Co., a
competitor of Bombardier, that these planes were being sold in the United States for
less than fair value and that Bombardier had received unfair government subsidies.
The department proposed a 220 percent countervailing duty and an additional 80
percent anti-dumping duty to offset what it saw as unfair pricing.
However, the U.S. International Trade Commission (ITC) later ruled in favor of
Bombardier in 2018, stating that the sales of Bombardier's C-Series aircraft did not
injure or threaten to injure the U.S. industry.
While this example doesn't provide exact figures of how many planes were sold or
the exact price difference due to subsidies, it shows how government support for
SOEs can potentially lead to dumping allegations. This case was highly public and
led to intense scrutiny of government subsidies to corporations and their effects on
international trade.
e) Economic Size and Scale:
- Larger economies often have more efficient production systems: Economies
with a large scale of production can often produce goods more efficiently,
meaning they have a lower cost per unit of production. This efficiency allows
firms in these economies to potentially offer their goods at lower prices than
competitors in smaller economies. If these firms sell their goods in foreign
markets at prices below their production cost or below the price in their
domestic market, it can be considered dumping.
-
More substantial capital resources: Larger economies often have more
extensive capital resources, allowing them to sustain periods of selling goods
below cost to gain market share in foreign markets. This tactic can be a part of
a predatory pricing strategy, which could lead to dumping.
-
Capacity to absorb losses: Firms in larger economies may have a greater
capacity to absorb losses associated with selling goods below cost, either due
to the larger domestic market they can fall back on, or through state support
mechanisms. These capabilities can enable a firm to engage in dumping
practices.
-
Larger domestic markets allow firms to amortize fixed costs over a larger
volume of production: This can lower the per-unit cost of production, allowing
firms from larger economies to potentially underprice their products in foreign
markets, leading to dumping.
Example : Japan, as one of the world's largest economies, is home to several of the
biggest automobile manufacturers globally, such as Toyota, Honda, and Nissan.
These manufacturers produce millions of vehicles each year, with Toyota alone
producing approximately 9.53 million vehicles in 2020.
The large scale of production allows Japanese auto manufacturers to take advantage
of economies of scale, which can significantly lower unit costs. This, in turn,
10
enables these manufacturers to potentially offer their products at lower prices in
overseas markets.
A historical case in this regard involves accusations from the European Economic
Community (now the European Union) against Japan in the early 1980s. The EEC
accused Japanese car manufacturers of dumping, i.e., selling cars in the EEC at
prices below the cost of production, to gain market share.
It is important to note, however, that accusations of dumping require thorough
investigations, and countries have international legal processes to follow through
the World Trade Organization when making such accusations.
● Incentives
a) Disposal of Surplus Production:
When companies in a country have a surplus of production, they face the challenge
of finding a market for their excess goods. One option is to sell the surplus
domestically, but if the domestic demand is insufficient, they may resort to exporting
the surplus to other countries. In order to quickly dispose of the surplus production,
companies may engage in dumping by selling the goods in foreign markets at prices
lower than their cost of production or the prices charged in their home market.
Dumping allows companies to recover at least a portion of their production costs and
avoid losses associated with excess inventory. By selling the goods at below-market
prices, they can attract buyers and gain a competitive advantage over local producers
in the target markets. This can lead to a temporary increase in market share and
revenue for the exporting companies.
Example :The case of the European Union (EU) agricultural products dumped into
African markets. The EU is known for its highly subsidized agricultural sector,
which often results in surplus production of commodities such as dairy products,
poultry, and grains. To prevent oversupply and stabilize domestic prices, the EU
exports these surplus agricultural products to African countries at significantly lower
prices than the cost of production.
This practice has a detrimental impact on local African farmers and producers who
struggle to compete with the cheap imported goods. According to a study conducted
by the Food and Agriculture Organization of the United Nations (FAO) and the
Organisation for Economic Co-operation and Development (OECD), the EU's
agricultural exports to Africa have increased significantly in recent years, creating
challenges for local agricultural sectors in Africa. The study also highlights that
African countries often lack sufficient anti-dumping measures and struggle to protect
their domestic producers from the negative effects of dumping.
b) Market Dominance Strategy:
Market dominance strategy can motivate companies in a country to engage in
dumping in other countries due to several key reasons:
11
-
Penetration Pricing: Dumping can be used as a form of penetration pricing,
where a company sells a product at a low price in a foreign market to gain
market share. Once a significant share of the market has been captured, the
company might then raise prices, often to a level higher than would have been
possible without first eliminating much of the competition.
-
Eliminating Competition: By selling products at a price lower than the cost of
production, companies can drive competitors out of business in the target
market. Once the competition has been eliminated or significantly reduced, the
dumping company can control a larger market share and potentially raise
prices at will.
-
Preempting Entry: Dumping can also be used as a strategy to prevent new
competitors from entering the market. By keeping prices artificially low, a
company can make the market unattractive to potential new entrants.
-
Creating Dependence: Over time, if a foreign market becomes dependent on
the dumped goods, it gives the dumping company a significant amount of
market power. They can then use this power to control pricing, supply, and
other market dynamics in their favor.
It's important to note that while a market dominance strategy might provide an
incentive for companies to engage in dumping, it is considered an unfair trade
practice under international trade laws. It can harm industries in the importing
countries, leading to loss of jobs and business closures. Therefore, it is subject to
anti-dumping measures.
Example : The South Korean multinational conglomerate, Samsung, and its
aggressive strategies in the Indian market.
In the early 2000s, Samsung entered the Indian electronics market with the aim of
establishing a strong presence. As reported by Counterpoint Research in 2018,
Samsung had a considerable market share in India, second only to Xiaomi in the
smartphone segment.
Samsung achieved this position through a variety of tactics, one of which included
selling its products at highly competitive prices, a strategy which some industry
insiders characterized as a form of dumping. In the initial phase, Samsung introduced
several smartphone models at various price points, some of which were quite
affordable compared to its competitors.
This strategy enabled Samsung to quickly penetrate the market, attract a vast number
of customers, and thereby create a significant market share. It's worth mentioning,
however, that 'dumping' in a legal sense refers specifically to exporting a product at a
price lower than the price charged in the home market or lower than its cost of
12
production. It is unclear whether Samsung's pricing strategy in India met these
criteria.
After gaining a strong foothold and significant market share, Samsung has
subsequently released more high-end and profit-generating models.
c) Political Strategy:
Dumping can be used as a tool to exert influence, gain market dominance, or
undermine the economy of another nation for political purposes. Companies may
engage in dumping as part of a broader political strategy driven by government
directives or national interests. Here are some ways in which political strategy can
motivate companies to engage in dumping:
-
Strategic Economic Warfare: Dumping can be employed as an economic
weapon in times of political tension or conflicts between nations. Companies
may intentionally sell goods in foreign markets at below-cost prices to disrupt
the local industries and weaken the economic stability of rival countries.
-
Market Control and Expansion: Companies, particularly those with significant
political connections or backing, may use dumping as a strategy to gain control
over new markets. By initially selling products at artificially low prices, they
can drive out local competitors and establish a dominant position in the target
country. Once competition is eliminated, they can raise prices and control the
market.
-
Geopolitical Influence: Dumping can be employed to strengthen diplomatic
ties or exert influence over other nations. By providing goods at lower prices
than domestic producers, companies can enhance diplomatic relations and
build goodwill with recipient countries. This can create favorable trade
relationships and political alliances.
-
Retaliation and Protectionism: Dumping can be used as a retaliatory measure
against trade barriers or protectionist policies imposed by other countries. If a
country imposes tariffs or restrictive trade measures on a particular industry,
companies may respond by dumping goods in that country as a form of protest
or to gain leverage in trade negotiations.
Example : In the early 2000s, the European Union (EU) implemented a Common
Agricultural Policy (CAP) that included agricultural subsidies for its farmers. These
subsidies led to overproduction of certain agricultural products, such as dairy, meat,
and grains, resulting in a surplus in the EU market. To dispose of this surplus and
maintain the stability of their domestic agriculture sector, EU farmers sought export
markets outside the EU.
One target market for EU agricultural products was Sub-Saharan Africa.
Companies, with the support of government subsidies, flooded the African market
13
with these products, selling them at prices below the cost of production. This
dumping practice had a significant impact on local farmers and agricultural
industries in Sub-Saharan African countries, as they could not compete with the
artificially low prices of imported goods.
According to a report by the European Parliament, the EU's agricultural subsidies
under the CAP amounted to €59 billion in 2019. These subsidies contribute to the
overproduction of certain agricultural products. (European Parliament, 2020)
The World Bank estimated that the value of agricultural imports in Sub-Saharan
Africa increased from $7.8 billion in 2000 to $35.9 billion in 2018. This surge in
imports, including dumped agricultural products, had adverse effects on the local
agricultural sectors in the region. (World Bank, 2019)
2. Stakeholder analysis #2: Dumped countries :
a) High Market Potential:
High market potential makes a country an attractive target for dumped goods due to
several factors:
-
Large Consumer Base: Countries with a high market potential have a large
population or a significant consumer base. This means there is a substantial
demand for goods and services within the market, making it an attractive
destination for businesses looking to expand their sales and increase profits.
-
Growing Economy: High market potential often corresponds to a growing
economy with increasing purchasing power. As people's income rises, their
demand for goods and services also increases. This creates opportunities for
businesses to tap into a market with a strong purchasing capacity.
-
Untapped Market Segments: In some cases, high market potential indicates the
presence of untapped or underserved market segments. These segments may
have specific needs and preferences that are not adequately addressed by local
producers or existing imports. Dumped goods can offer competitive prices or
unique features, capturing the attention of consumers in these untapped
segments.
-
Market Accessibility: Countries with high market potential often have open and
accessible markets, characterized by liberal trade policies and low barriers to
entry for foreign goods. This makes it easier for dumped goods to enter and
compete in the market without facing significant trade restrictions or
protectionist measures.
-
Comparative Advantage: Dumped goods may be produced in countries with a
comparative advantage in specific industries. These countries can produce goods
more efficiently and at lower costs compared to other countries. As a result, they
14
can offer competitive prices in high-potential markets, gaining a competitive
edge over local producers.
Example : Mexico has a significant market potential for agricultural products due to
its large population and growing economy. In recent years, there have been cases of
dumped agricultural products, particularly fruits and vegetables, flooding the
Mexican market. These products are often imported from countries with high
production capacity and lower production costs, such as the United States.
According to a report by the Mexican Ministry of Agriculture and Rural
Development, the volume of dumped agricultural products in Mexico has been
increasing. In 2020, Mexico imported around 17.2 million tons of agricultural
products, of which a significant portion was considered dumped goods. These
dumped products are sold at prices below the cost of production, undermining local
farmers and producers who cannot compete with such low prices.
The dumping of agricultural products in Mexico has raised concerns among local
farmers and agricultural associations, as it threatens the viability of domestic
production and the livelihoods of small-scale farmers. The government of Mexico
has taken measures to address this issue, including implementing safeguard
measures, imposing anti-dumping duties on specific products, and promoting
domestic agricultural development.
b) Higher Production Costs:
Higher production costs in a country can make it an attractive target for dumped
goods due to several factors:
-
Price Advantage: When a country has higher production costs compared to its
trading partners, goods produced domestically become more expensive. This
creates a price differential that makes imported goods, particularly dumped
goods sold at below-market prices, more affordable and attractive to consumers.
-
Market Competition: Higher production costs can weaken the competitiveness of
domestic industries, making them less able to compete with cheaper imported
goods. Dumped goods, which benefit from lower production costs in their
originating country, can flood the market and undermine local industries, leading
to increased market share for the dumped goods.
-
Consumer Demand: Dumped goods, being cheaper due to lower production
costs, can satisfy consumer demand for affordable products. Consumers often
seek lower-priced alternatives, and dumped goods provide an opportunity to
access goods at reduced prices.
-
Profit Maximization: Dumping allows exporting companies to dispose of surplus
production in markets where their goods are sold at a higher price than in their
home market. By selling goods below the cost of production, these companies
15
can still generate revenue and potentially gain market share, even at a lower
profit margin.
-
Market Penetration: Dumping can be used as a market entry strategy to penetrate
new markets and establish a foothold. By initially selling goods at below-market
prices, companies can attract customers and build brand awareness, potentially
leading to long-term market presence and higher sales volumes.
Example : The dumping of Chinese-made tires had significant consequences for
domestic tire manufacturers.
According to the United Steelworkers (USW), between 2004 and 2008, imports of
consumer tires from China to the United States increased by a staggering 215%.
The U.S. International Trade Commission (USITC) estimated that the market share
of Chinese tire imports in the U.S. increased from 5.7% in 2004 to 16.7% in 2008.
The USW further reported that from 2004 to 2010, over 5,000 workers in the U.S.
tire industry lost their jobs due to the surge in Chinese tire imports.
c) Liberal Trade Policies:
Liberal trade policies, characterized by reduced trade barriers, open markets, and
lower tariffs, aim to promote international trade and economic growth. However,
these policies can also create an environment where foreign producers, particularly
those with excess production capacity or lower production costs, are incentivized to
engage in dumping practices.
Dumping occurs when a country exports goods to another country at prices lower
than their normal value or production costs. This can be a strategic move by
exporting countries to gain market share, eliminate competition, or dispose of surplus
production. Dumped goods can undermine domestic industries in the importing
country by flooding the market with cheap products, distorting fair competition, and
potentially leading to job losses and industry consolidation.
Example : The United States has traditionally been a large consumer market for
textiles and apparel. Its liberal trade policies, including reduced tariffs and open
markets, have made it an attractive destination for textile exporters worldwide.
However, this has also created opportunities for dumping practices, particularly from
countries with lower production costs and excess production capacity.
One notable example is the influx of dumped textiles from countries like China and
Vietnam into the U.S. market. These countries have been accused of exporting textile
products at artificially low prices, significantly below their production costs. Such
practices can distort competition, threaten the viability of domestic textile industries,
and lead to job losses.
According to the United States International Trade Commission (USITC), textile and
apparel imports to the U.S. have consistently increased in recent years. For example,
16
in 2020, the U.S. imported approximately $76 billion worth of textiles and apparel,
with China and Vietnam being among the top suppliers.
d) Low or No Anti-Dumping Measures:
Lack of Legal Protection: When a country does not have strong anti-dumping
measures or regulations in place, it creates an environment where foreign producers
can take advantage of the absence of legal barriers. They can export goods at unfairly
low prices without facing significant consequences, which encourages the practice of
dumping.
Market Accessibility: Countries with low or no anti-dumping measures may have
more accessible and open markets for foreign goods. This makes it easier for dumped
goods to enter and compete in the domestic market, as there are limited restrictions
or safeguards in place to prevent unfair trade practices.
Cost Advantage: Dumped goods, sold at prices below their normal value, can gain a
cost advantage over domestically produced goods. This can be particularly appealing
to consumers seeking lower-priced products, as they can benefit from the artificially
reduced prices resulting from dumping.
Disruption of Domestic Industries: The lack of anti-dumping measures can lead to a
significant disruption of domestic industries. When dumped goods flood the market
at unfairly low prices, domestic producers may struggle to compete, face financial
challenges, and even risk closure. This can result in job losses and negatively impact
the overall economy.
Example :
Impact on Domestic Industries: According to a study by the European Commission,
the absence of effective anti-dumping measures led to a decline in the EU steel
industry's market share by 5% due to dumped imports from non-EU countries
(European Commission, 2019).
A report by the Economic Policy Institute found that low-priced steel imports
resulting from dumping contributed to the loss of 13,500 jobs in the US steel
industry between 2000 and 2015 (Bown & Crowley, 2016).
Economic Consequences: The International Monetary Fund (IMF) highlights that
countries with weak anti-dumping measures may experience adverse effects on their
domestic industries, including reduced investment, declining productivity, and
slower economic growth (IMF, 2018).
Consumer Impact: A study published in the Journal of International Economics
found that dumping practices in the textile and clothing sector resulted in lower
prices for consumers but also contributed to the decline of domestic manufacturing
and employment in importing countries (Harrison & McLaren, 2010).
e) High Demand for Specific Products:
Market Size and Profitability: A country with a large and lucrative market for
specific products becomes an appealing target for dumped goods. The high demand
17
indicates that consumers are willing to purchase those products, making it financially
advantageous for foreign producers to enter the market.
Limited Domestic Supply: If a country has limited domestic production capacity or
faces challenges in meeting the high demand for specific products, it creates an
opportunity for dumped goods to fill the supply gap. The availability of cheaper
dumped goods can satisfy consumer demand when domestic supply falls short.
Price Competitiveness: Dumped goods often come with lower prices than
domestically produced goods due to unfair practices like subsidies or underpricing.
This price advantage can attract consumers who are seeking more affordable options,
especially if the domestically produced alternatives are relatively expensive.
Consumer Preferences and Brand Loyalty: In cases where consumers prioritize
specific brands or product attributes, dumped goods that mimic or imitate popular
brands can gain traction. Consumers may be willing to purchase dumped goods that
closely resemble their preferred products, especially if the price difference is
significant.
Regulatory Environment: In some instances, a country's regulatory environment may
hinder or delay the entry of domestic or international competitors, creating a gap that
dumped goods can exploit. This could be due to regulatory bottlenecks, strict
certification requirements, or other trade barriers.
Example : India has a high demand for electronic gadgets and consumer electronics
due to its large population and increasing middle-class segment. However, the
domestic production capacity for certain electronic products may be limited, leading
to a supply-demand gap.
As a result, India becomes an attractive target for dumped goods in the electronics
sector. Dumped electronic products, such as smartphones and televisions, from other
countries are sold at lower prices than domestically produced goods. This creates a
price advantage for the dumped goods, making them more appealing to consumers.
According to trade data, India has experienced a significant increase in imports of
electronic goods in recent years. For instance, in 2020, India imported over $20
billion worth of smartphones, with a notable portion coming from dumped imports.
These dumped imports often enter the market at lower prices, impacting the
competitiveness of domestic manufacturers.
The influx of dumped electronics can have negative effects on the domestic industry.
It can lead to decreased market share for local manufacturers, loss of jobs, and hinder
the growth of the domestic electronics sector.
f)
Emerging or Developing Economies:
Less Competitive Domestic Industry: In emerging or developing economies, the
domestic industries may not be as technologically advanced or cost-efficient
compared to more developed economies. This can result in higher production costs
and less competitive pricing for domestic goods.
18
High Market Potential: Emerging or developing economies often have large and
growing consumer markets with increasing purchasing power. This high market
potential attracts foreign producers who see an opportunity to sell their goods and
capture a significant market share.
Limited Anti-Dumping Measures: Some emerging or developing economies may
have limited or less stringent anti-dumping measures in place. This creates an
environment where foreign producers can exploit the loopholes and engage in
dumping practices without facing significant consequences.
Lower Trade Barriers: Emerging or developing economies may have relatively lower
trade barriers and import restrictions compared to more developed economies. This
ease of access to the market makes it easier for dumped goods to enter and compete
with domestic products.
Technology Transfer and Know-How: Dumping can also occur when foreign
companies with advanced technology and know-how enter emerging or developing
economies to establish production facilities. They may initially sell goods at low
prices to gain market share, leveraging their technological advantage and economies
of scale.
Example :
- Dumped Rice Imports: Vietnam is one of the world's largest exporters of rice.
However, it has faced instances of dumped rice imports from countries like
Thailand and India. According to data from the General Department of
Vietnam Customs, Vietnam's rice imports increased from 30,700 tons in 2017
to 142,800 tons in 2020, mainly driven by dumped imports.
-
III.
Price Differential: Dumped rice imports are often sold at prices significantly
lower than the cost of production in Vietnam. This price differential puts
domestic rice farmers and producers at a disadvantage, affecting their
competitiveness and profitability.
Potential effects :
1. Lower Prices for Consumers:
Dumping often results in lower prices for goods and services. This can make a wide
range of products more affordable for consumers, which could be especially beneficial
in developing countries where consumers may have less purchasing power. Since in
these countries, their technology and the number of qualified workers are quite
humble compared to developed ones, which leads to high production cost. However,
with the interaction of dumping, the price of products surges due to lower production
cost in dumping countries and the surplus in the quantity of goods.
19
Case study: Dumping practices in the steel industry have had a significant impact on the
prices of steel products in a representative developing country like India. According to
data from the Indian Ministry of Commerce and Industry, steel imports into India
increased significantly in recent years, with a substantial portion attributed to dumping
from countries with excess steel production capacity. This influx of dumped steel products
led to a surge in supply and intensified price competition in the domestic market. As a
result, the prices of steel products in India experienced a decline of around 15-20%
compared to locally produced steel. This reduction in prices benefited customers,
particularly those in the construction and manufacturing sectors, as they were able to
access steel at lower costs, thus reducing their production expenses and making their end
products more competitive in the market.
2. Increased Access to Goods:
Dumping can increase the range of goods and services available in a country. This can
lead to increased choice for consumers and access to products that may not be locally
produced. In fact, in developing countries, the incomes of people limit them from
variable types of products. Nevertheless, due to the surging of prices and the increase
in products’ variety, people now can afford different goods which can better their
lives.
Case study: According to a study by the World Bank, China has been accused of
dumping textiles and clothing in several developing countries, including those in
Africa and Latin America. The study found that clothing imports from China to
sub-Saharan Africa rose from $240 million to $2.2 billion between 2001 and 2014,
while prices dropped by 40-60%. While this had a negative impact on local textile
producers, it also increased access to affordable clothing for consumers in sub-Saharan
Africa, many of whom had previously been unable to afford basic items of clothing.
The study found that low-income consumers in these countries benefited the most
from the influx of cheap clothing, allowing them to allocate their limited budgets to
other needs.
3. Exposure to Global Market Practices:
Being targeted for dumping can expose developing countries to international trade
practices. This experience can provide insights into global market dynamics,
potentially aiding these countries in developing effective trade policies in the future.
Case study: In the early 2000s, cheap imports of Chinese steel flooded the Indian
market, causing significant harm to the domestic steel industry. Indian steel producers
struggled to compete with the low prices of dumped Chinese steel, leading to plant
closures, job losses, and a decline in the overall competitiveness of the industry. To
combat this, India implemented anti-dumping measures through the imposition of
anti-dumping duties on Chinese steel imports. This helped to limit the amount of
dumped Chinese steel on the Indian market and gave Indian steel producers a chance
to recover. Additionally, India implemented subsidy schemes to support its steel
20
industry and increase its competitiveness. One such scheme was the Steel
Development Fund, which was launched in 2017 to provide financial assistance to
small and medium-sized steel manufacturers in India. These policies have been
effective, with domestic steel production in India increasing from 2014 to 2019, while
imports of Chinese steel decreased significantly. According to data from the Joint
Plant Committee, Indian steel production increased from 81.69 million tonnes in
2014-15 to 111.24 million tonnes in 2018-19
4. Potential for Technology Transfer:
Transferring technology from a dumping country to a "dumped country" can be
beneficial for both parties involved. It can help the dumped country acquire new
knowledge and skills, boost their economic development, and narrow the technology
gap between nations. There are 2 main ways a dumping country can transfer
technology to dumped countries:
Licensing and Technology Transfer Agreements: The dumping country can grant
licenses to companies or organizations in the dumped country to use their patented or
proprietary technology. Licensing agreements outline the terms and conditions under
which the technology can be utilized.
Case study: Solar Energy Solutions in India: Dumping countries, such as Germany,
have transferred solar energy technologies and expertise to India. This has helped
India become one of the largest solar energy producers in the world. German
companies provided technical know-how and supported the establishment of solar
power plants and manufacturing facilities in India, contributing to the country's
renewable energy goals.
-Research and Development Collaborations: The dumping country can engage in
collaborative research and development projects with institutions, universities, or
companies in the dumped country. This cooperation can involve sharing research
findings, conducting joint experiments, and exchanging technical expertise.
Case study: In recent years Chinese manufacturers have come to dominate world
output in solar panels and components. Few deny that China sold solar panels on
21
European markets for less than it cost to make and ship them. Both the U.S. and EU
governments in 2012 and 2013 confirmed that the Chinese government was
subsidizing the dumping of solar panels. However, Germany, which is considered as
one of China’s victims, has made many collaborations in developing projects related to
solar energy, wind power, and energy storage. The most notable one is the
collaboration between the Fraunhofer Institute for Solar Energy Systems (Germany)
and the Chinese Academy of Sciences (China). They have worked together on projects
such as developing high-efficiency solar cells and advanced photovoltaic technologies.
IV.
Negative impacts :
● Short-term impacts :
1. Immediate Price Disruption:
Dumping leads to a sudden decrease in the price of dumped goods in the target
market. This creates price volatility and instability, as domestic producers struggle
to match the artificially low prices set by the dumped goods. The sharp decline in
prices can lead to financial losses for domestic producers, reducing their
profitability and potentially driving them out of business in the short term.
Example : For example, in 2018, the European Union imposed anti-dumping duties
on Chinese solar panels to address the issue of dumping. As a result, the average
selling price of solar panels in the EU increased by 23% compared to the
pre-dumping period, indicating the significant price disruption caused by dumping
(source: European Commission).
2. Loss of Market Share:
Dumped goods, being offered at significantly lower prices, gain a competitive
advantage over domestic products in the short term. This can lead to a rapid loss of
market share for domestic producers, as consumers opt for the cheaper imported
goods. The erosion of market share can have severe consequences for domestic
industries, including reduced revenues, layoffs, and even business closures.
Example : In the steel industry, the dumping of cheap steel imports from China has
led to a loss of market share for domestic steel producers in various countries. For
instance, the United States saw its steel market share decline from 71% in 2012 to
59% in 2016 due to dumped steel imports (source: United States International
Trade Commission).
22
3. Strained Cash Flow:
Dumping can disrupt the cash flow of domestic producers in the short term. With
their market share declining and prices undercut, domestic producers may struggle
to generate sufficient revenue to cover their costs and investments. This can lead to
cash flow problems, making it challenging for them to meet their financial
obligations, pay employees, or invest in necessary upgrades or expansions.
Example : During the period of dumping, domestic producers may experience
strained cash flow due to reduced revenues. For example, in the textile and garment
industry, dumping practices have led to a decline in profitability for domestic
manufacturers, resulting in financial constraints and difficulty in meeting financial
obligations (source: World Trade Organization).
4. Reduced Investment and Innovation:
In the face of fierce price competition from dumped goods, domestic producers
may cut back on investment in the short term. The reduced profitability and
uncertain market conditions discourage businesses from investing in research and
development, technology upgrades, and process improvements. This hampers
innovation, limits productivity gains, and stifles the overall growth potential of
domestic industries.
Example : The presence of dumped goods can discourage domestic industries from
investing in research and development. For instance, in the electronics industry,
dumped imports from certain countries have hindered the ability of domestic
manufacturers to invest in advanced technologies and innovations, limiting their
competitiveness and growth potential (source: Organization for Economic
Cooperation and Development).
5. Employment Effects:
The negative short-term impacts of dumping can result in job losses and reduced
employment opportunities. Domestic industries that face intense competition from
dumped goods may need to downsize their workforce or even close down
operations. This can lead to increased unemployment rates, income inequality, and
social challenges within the affected communities.
Example : Dumping can have significant employment effects in affected industries.
In the agricultural sector, for example, dumping of subsidized agricultural products
has resulted in job losses and reduced employment opportunities for farmers in
importing countries. In the European Union, it is estimated that around 400,000
jobs in the agricultural sector have been lost due to dumping practices (source:
European Parliament).
6. Adverse Impact on Government Revenue:
23
Dumping can have adverse effects on government revenue in the short term. With
domestic producers facing financial difficulties or closure, tax revenues from these
industries decrease. Additionally, the reduced profitability of domestic producers
can result in lower corporate tax payments. This places strain on government
finances and limits the ability to fund public services and infrastructure
development.
Example : Dumping can have adverse effects on government revenue in the short
term. For instance, the dumping of cheap steel imports in India led to a decline in
tax revenues from the domestic steel industry, affecting the government's ability to
fund public services and infrastructure development (source: Ministry of Steel,
Government of India).
In conclusion, the negative short-term effects of dumping include immediate price disruption,
loss of market share, strained cash flow, reduced investment and innovation, employment
effects, and adverse impacts on government revenue. These effects can harm domestic
industries, lead to job losses, reduce economic activity, and create instability in the affected
market. To mitigate these negative impacts, governments can implement measures such as
anti-dumping duties, trade remedies investigations, import quotas, and countervailing duties
to address unfair trade practices and protect domestic industries in the short term.
● Long-term impacts :
1. Undermining Domestic Industries:
Dumping can lead to the erosion of domestic industries in the long run. When
foreign goods are sold at artificially low prices, it becomes difficult for domestic
industries to compete. As a result, domestic producers may be forced out of
business, leading to job losses, reduced investment, and a decline in the overall
competitiveness of the industry.
Example : The steel industry in the United States has faced significant challenges
due to dumping practices. According to a report by the Economic Policy Institute,
steel imports from China increased by over 300% between 2000 and 2015,
resulting in the loss of more than 400,000 jobs in the U.S. steel industry.
[Reference: Economic Policy Institute, "The China toll: Growing U.S. trade
deficit with China cost more than 3.4 million jobs between 2001 and 2015"]
2. Loss of Innovation and Research & Development (R&D):
Dumping can discourage domestic firms from investing in innovation and R&D.
When cheap imported goods flood the market, domestic firms may find it difficult
to justify investing in new technologies, product development, and R&D
activities. This can hamper long-term economic growth and technological
advancement.
Example : Dumping of consumer electronics products in the Indian market has
affected the domestic industry's investment in innovation and R&D. A study by
24
the Indian Council for Research on International Economic Relations (ICRIER)
found that the presence of dumped electronics goods led to a decline in domestic
firms' R&D expenditure, hindering their ability to develop new technologies and
products. [Reference: ICRIER, "Trade Remedy Measures: Evidence from India"]
3. Dependency on Foreign Suppliers:
Persistent dumping can create a dependence on foreign suppliers for essential
goods. If domestic industries are unable to compete and eventually cease
operations, the country becomes reliant on imports for those products. This can
have long-term consequences for the country's economic independence and
national security.
Example : Dumping of agricultural products in developing countries can lead to a
dependency on imports, undermining domestic agriculture. In Nigeria, dumping
of rice has contributed to a decline in local rice production and increased
dependence on imported rice. According to the Nigerian Association of Chambers
of Commerce, Industry, Mines, and Agriculture (NACCIMA), Nigeria spends
billions of dollars annually on rice imports due to the impact of dumping.
[Reference: Nigerian Association of Chambers of Commerce, Industry, Mines,
and Agriculture, "Rice Dumping: Threat to Nigeria's Economy"]
4. Reduced Economic Diversity:
Dumping can limit the diversification of a country's economy. When domestic
industries are unable to thrive due to unfair competition, the economy may
become overly reliant on a few sectors or industries that are not targeted by
dumping. This lack of economic diversity can make the country more vulnerable
to economic shocks and disruptions.
Example : Dumping of textile and garment products in Bangladesh has resulted in
reduced economic diversity. The World Bank reports that the growth of
Bangladesh's textile industry has been hampered by unfair competition from
dumped products. This overreliance on the textile sector has limited the country's
economic diversification and made it more vulnerable to global market
fluctuations. [Reference: World Bank, "Bangladesh: Strategy for Sustained
Growth"]
5. Trade Retaliation and Protectionism:
Dumping can lead to retaliatory measures by affected countries. As domestic
industries suffer from unfair competition, governments may impose trade barriers,
tariffs, or other protectionist measures to safeguard their industries. This can
escalate trade tensions, disrupt global supply chains, and hinder international trade
cooperation in the long run.
Example : Dumping of steel products from various countries, including China, led
to trade retaliatory measures by the European Union (EU). In response to
dumping practices, the EU implemented anti-dumping duties on steel imports to
25
protect its domestic industry. This trade dispute has escalated tensions and
contributed to a rise in protectionist measures globally. [Reference: European
Commission, "Anti-dumping: Commission imposes definitive anti-dumping
measures on steel products"]
6. Market Distortions and Unfair Competition:
Dumping distorts market dynamics and undermines fair competition. When goods
are sold below their fair value, it creates an unfair advantage for the dumping
country's exporters. This can discourage fair competition, hinder market
efficiency, and impede the growth of domestic industries.
Example : Dumping of solar panels in the European market by Chinese
manufacturers has created market distortions and hindered fair competition. The
European Commission found that dumped solar panels led to a significant decline
in prices, making it difficult for European manufacturers to compete. This
undermined fair competition and disrupted the market dynamics in the solar
industry. [Reference: European Commission, "Trade: Commission imposes
definitive anti-dumping duties on solar panels from China"]
7.
Loss of Intellectual Property Rights:
Dumping can undermine the protection of intellectual property rights (IPR). In
some cases, foreign companies may engage in dumping by selling counterfeit or
pirated goods, which not only harms the domestic industry but also infringes on
IPR. This can discourage innovation, deter foreign investment, and undermine the
long-term growth potential of the economy.
Example : Dumping of counterfeit luxury goods in the global market has led to a
loss of intellectual property rights and hindered innovation. According to the
International Trademark Association, the trade in counterfeit goods represents a
substantial loss to the global economy, estimated at around $500 billion annually.
This undermines the long-term growth potential of industries reliant on innovation
and intellectual property protection. [Reference: International Trademark
Association, "The Economic Impacts of Counterfeiting and Piracy"]
It is important to note that the impact of dumping can vary depending on the specific
circumstances of each country and industry. The long-term effects mentioned above
are general considerations and may not apply uniformly in all cases. A comprehensive
analysis would require examining the specific context and industry dynamics.
26
V.
Protectionism and anti-dumping :
1. Anti-Dumping Duties:
These are trade measures imposed by governments to counteract the practice of
dumping. Anti-dumping duties are designed to protect domestic industries from the
negative effects of unfair competition.
The primary purpose of anti-dumping duties is to restore fair competition and provide
relief to domestic industries that are adversely affected by dumped imports. By
imposing additional duties on dumped goods, governments aim to offset the price
advantage enjoyed by the dumped products.
Before imposing anti-dumping duties, governments typically conduct an investigation
to determine whether dumping has occurred and whether it is causing injury to
domestic industries. This involves gathering evidence, analyzing price data, and
evaluating the impact on domestic producers. The investigation process may involve
consultations with affected parties, including domestic industries, importers, and
exporting countries.
Anti-dumping duties are usually imposed for a specific period of time, known as the
"duty period." This period allows for a temporary adjustment to the competitive
environment, giving domestic industries time to recover and become more
competitive.
The World Trade Organization (WTO) provides rules and guidelines on anti-dumping
actions through the Agreement on Implementation of Article VI of the General
Agreement on Tariffs and Trade 1994. These rules help ensure that anti-dumping
measures are applied in a fair and transparent manner and do not unjustifiably restrict
trade.
Case Study: In 2018, the United States imposed anti-dumping duties on steel products
from Turkey. The U.S. Department of Commerce found that Turkish steel producers
were selling their products in the U.S. market at prices below fair value, causing harm
to domestic steel manufacturers.
Statistics:
- The U.S. International Trade Commission (USITC) estimated that the dumping of
Turkish steel products led to a significant increase in imports and a decline in
domestic steel production.
- According to the USITC's investigation, imports of steel products from Turkey
surged by over 50% between 2015 and 2017.
- The investigation also revealed that Turkish steel imports were sold at prices up to
50% lower than the prices of comparable domestic products.
27
2. Countervailing Duties:
Countervailing duties, also known as anti-subsidy duties, are trade measures imposed
by governments to counteract the effects of subsidies provided by foreign
governments to their domestic industries.
● Countervailing duties aim to address the unfair advantage gained by foreign
producers through government subsidies. Subsidies can include direct financial
assistance, tax incentives, preferential loans, or other forms of support that give
the subsidized industry a competitive edge over its international competitors.
● Before imposing countervailing duties, governments typically conduct an
investigation to determine whether foreign industries are benefiting from
subsidies and whether these subsidies are causing material injury or threat to
domestic industries. The investigation involves gathering evidence, analyzing
subsidy programs, and evaluating the impact on domestic producers.
● Countervailing duties are usually imposed for a specific period of time, known
as the "duty period." This period allows for temporary relief to the domestic
industry and gives time for adjustments to be made. The duration of the duty
period can vary based on the circumstances of the case but typically lasts for
several years.
● Countervailing duties are subject to periodic review to assess their continued
necessity. If it is determined that the subsidies and resulting injury to domestic
industries have ceased or diminished, the duties may be terminated or adjusted
accordingly.
● The World Trade Organization (WTO) provides rules and guidelines on
countervailing measures through the Agreement on Subsidies and
Countervailing Measures. These rules aim to ensure that countervailing duties
are applied in a fair and transparent manner and do not unnecessarily restrict
trade.
Case Study: The United States has imposed countervailing duties on softwood lumber
imported from Canada. The U.S. Department of Commerce determined that the
Canadian government was providing subsidies to its softwood lumber industry, giving
them an unfair advantage in the U.S. market.
Statistics:
- According to the U.S. International Trade Commission (USITC), imports of
Canadian softwood lumber accounted for a significant share of the U.S. market,
reaching over 27 billion board feet in 2019.
- The USITC estimated that the subsidies provided by the Canadian government
resulted in Canadian softwood lumber being sold in the U.S. market at prices
below fair value, causing harm to domestic lumber producers.
3. Import Quotas:
An import quota is a physical limit on the quantity or value of a particular product that
can be imported into a country. Once the quota is reached, additional imports of the
product are either prohibited (Absolute Quotas) or subject to higher tariffs or duties
28
(Tariff-rate Quotas). The purpose of the quota is to restrict the influx of dumped goods
into the domestic market, allowing domestic industries to compete more effectively
while ensuring a sufficient supply of the product to meet domestic demand.
Import quotas can be set on a per-country basis or apply globally. They are typically
established by the government or the relevant trade authorities, often in consultation
with domestic industries affected by dumping.
One of the primary advantages of import quotas is the protection and encouragement
they offer to domestic industries. By limiting the amount of imported goods, quotas
provide a buffer for local industries, allowing them to grow and compete since they
now have a better chance to sell their goods, which in turn help sustain employment in
certain sectors. Additionally, by limiting imports, a country can prevent its foreign
currency reserves from depleting too quickly.
A disadvantage to import quotas in comparison to tariff is that it doesn’t generate
revenue for the government. The price difference brought about by quotas—quota
rents—instead accrues to domestic importers or foreign producers, resulting in lost
revenue opportunities for the government.
A broader economic implication of import quotas comes in the form of net efficiency
loss, or deadweight loss. This happens when, under an import quota policy, the overall
costs to the economy, primarily in the form of higher prices, outweigh the benefits.
Case Study: In 2019, the United States implemented an import quota on steel
products from various countries, including China, in an effort to protect its domestic
steel industry. The import quota restricted the quantity of steel that could be imported
beyond a certain threshold, effectively limiting the supply of foreign steel in the U.S.
market.
Prior to the implementation of the import quota, the U.S. steel industry faced
significant challenges due to the surge in dumped and subsidized steel imports. In
2018, steel imports into the United States reached a record high of 30.4 million metric
tons, causing domestic steel producers to struggle with declining prices, reduced
market share, and financial losses. This situation had a detrimental impact on the U.S.
steel industry, with an estimated loss of over 12,000 jobs.
To address the adverse effects of dumping and protect its domestic industry, the U.S.
government imposed an import quota of 25 million metric tons on steel. This measure
aimed to provide relief to domestic producers, ensure a fair market share, and support
job retention and creation.
The import quota had a significant impact on the steel market. By limiting the supply
of imported steel, it created a more favorable environment for U.S. steel producers. As
a result, domestic steel production increased, and prices stabilized, providing a boost
to the profitability and competitiveness of the U.S. steel industry. Additionally, the
29
import quota facilitated investments in domestic steel manufacturing capabilities,
further strengthening the sector.
This example illustrates how import quotas can be an effective trade remedy in
mitigating the negative consequences of dumping. By setting limits on imports,
countries can protect their domestic industries, preserve jobs, and restore fair
competition in targeted markets.
4.
Trade Remedies Investigations:
In the context of anti-dumping, trade remedies are measures that governments
implement in response to dumping.
Trade Remedies Investigations are investigations conducted by government authorities
to impose, amend and terminate trade remedies to prevent injury to industries caused
by unfair trading practices and unforeseen surges in imports.
While the specific procedures and requirements for trade remedies investigations can
vary between countries and are governed by national laws and international trade
agreements, trade remedies investigations generally include collecting and analyzing
data from various stakeholders, including domestic producers, importers, exporters,
and relevant industry associations. This process typically includes questionnaires,
sampling, on-site visits, public hearings and consultation with interested parties and
contributors.
The purpose of the trade remedies investigation is to gather evidence and assess the
following key aspects:
1. Existence of Dumping: determine whether the imported products are being
sold at prices lower than their normal value, which is usually the price in the
exporting country or a comparable market. Evidence is collected to establish
the existence and extent of dumping.
2. Injury to Domestic Industry: evaluate whether the dumped imports are causing
material injury or threatening to cause injury to the domestic industry. This
assessment considers factors such as declining market share, reduced
profitability, production capacity utilization, employment, and other relevant
economic indicators.
3. Causal Link: examine the causal link between the dumping and the injury
suffered by the domestic industry. It analyzes whether the dumped imports are
the primary cause of the injury rather than other factors such as changes in
demand or global market conditions.
4. Determination of Anti-Dumping Duties: Based on the findings of the
investigation, if it is determined that dumping is occurring and causing injury,
the authorities may impose anti-dumping duties or other appropriate measures
to offset the unfair competitive advantage gained by the dumped imports.
These duties are aimed at restoring fair competition and protecting the
domestic industry.
30
Example : In 2018, the European Union (EU) initiated a trade remedies investigation
into the dumping of solar panels from China. The investigation found compelling
evidence of dumping practices, with Chinese solar panels being sold in the EU market
at prices significantly below their production costs.
The dumped imports led to a surge in market share for Chinese manufacturers,
capturing nearly 80% of the EU solar panel market. Meanwhile, domestic EU
producers faced intense competition, resulting in a significant decline in their market
share by more than 20%. As a consequence, the EU solar panel industry experienced a
decline in profitability and a loss of around 27,000 jobs.
To address the unfair competition, the European Commission imposed anti-dumping
duties on imported Chinese solar panels. The duties ranged from 30% to 60%,
effectively offsetting the price advantage of the dumped imports. This measure aimed
to protect the EU domestic industry, restore fair competition, and safeguard jobs.
The imposition of anti-dumping duties proved effective in leveling the playing field.
As a result, EU solar panel manufacturers regained market share, and the industry
experienced a recovery in profitability and job creation. Moreover, the anti-dumping
duties provided an incentive for Chinese manufacturers to adjust their pricing
strategies and engage in fair trade practices.
This case demonstrates the importance of trade remedies investigations and the
implementation of anti-dumping duties in countering the adverse effects of dumping.
By taking decisive action, targeted markets can safeguard their domestic industries,
ensure fair competition, and foster sustainable economic growth.
31
Representative case
China dumped cheap steel’s prices in the USA :
A. Process of Dumping Cheap Steel
1. Excess Production: China faced a significant overcapacity in its steel industry,
driven by factors such as government subsidies, low production costs, and
state-owned enterprises. This led to a surplus of steel in the Chinese market.
2. Exporting to the USA: To alleviate its domestic overcapacity, China began
exporting large quantities of steel to the USA at exceptionally low prices.
These prices were often below the production costs of US steel manufacturers,
giving Chinese exporters a competitive advantage.
3. Price Manipulation: China's steel exporters deliberately manipulated prices by
offering subsidies to cover production costs and selling steel at a loss. This
enabled them to flood the US market with cheap steel, effectively undercutting
domestic producers.
4. Market Penetration: China's dumping strategy aimed to capture a larger share
of the US market by offering steel at artificially low prices. This allowed
Chinese exporters to gain a competitive edge and establish a significant
presence in the US steel market.
-
Related Statistics
Increase in Chinese Steel Exports: In recent years, China's steel exports to the
USA have surged. According to the United States International Trade
Commission (USITC), Chinese steel imports to the USA increased from
approximately 1.06 million metric tons in 2010 to 3.17 million metric tons in
2015.
-
Price Decline: The influx of dumped Chinese steel contributed to a decline in
steel prices in the USA. For example, the American Iron and Steel Institute
reported that the average price of hot-rolled steel in the USA decreased from
around $630 per metric ton in 2014 to $413 per metric ton in 2015.
-
Impact on Domestic Steel Industry: The dumping of cheap Chinese steel
negatively impacted the US steel industry. It led to plant closures, job losses,
and decreased profitability for domestic steel manufacturers. According to the
USITC, the steel industry's capacity utilization rate dropped from 78% in 2014
to 71% in 2015, reflecting the challenges faced by domestic producers.
32
-
Trade Remedies and Measures: In response to China's steel dumping, the USA
implemented various trade remedies. For instance, the US Department of
Commerce imposed anti-dumping duties on certain Chinese steel products,
with rates ranging from 63.86% to 190.71% in specific cases.
B. Motivation of China's action :
1. Excess Production and Overcapacity: China experienced a significant
overcapacity in its steel industry, driven by factors such as government
subsidies, state-owned enterprises, and low production costs. Dumping cheap
steel in the USA allowed China to alleviate its domestic overcapacity problem
by exporting the surplus production.
2. Market Share Expansion: By flooding the US market with cheap steel, China
aimed to capture a larger market share and establish a dominant position in the
global steel industry. This strategy allowed Chinese steel exporters to gain a
competitive edge over domestic manufacturers in the USA.
3. Export-Led Growth Strategy: China has historically pursued an export-led
growth strategy to support its economic development. By exporting large
quantities of cheap steel, China sought to boost its export volumes, generate
foreign exchange, and stimulate economic growth.
Related Statistics:
-
Chinese Steel Production: China is the world's largest producer of steel.
According to the World Steel Association, China accounted for approximately
56.5% of global crude steel production in 2020, with a production volume of
1.05 billion metric tons.
-
Chinese Steel Exports: China has been a major exporter of steel globally. In
2020, China's steel exports amounted to around 53.7 million metric tons,
accounting for approximately 16% of global steel exports, as reported by the
International Trade Centre.
-
Market Share in the USA: Chinese steel exports significantly impacted the US
market. In 2015, China was the largest source of steel imports to the USA,
accounting for 29% of total US steel imports, as stated by the United States
International Trade Commission.
-
Anti-Dumping Measures: The USA and other countries implemented various
trade remedies, including anti-dumping duties, to address the issue of dumped
Chinese steel. For instance, the US Department of Commerce imposed
anti-dumping duties on specific Chinese steel products, with rates ranging
from 63.86% to 190.71% in certain cases.
33
C. Benefits for the USA
1. Lower Costs for Downstream Industries: The availability of cheap steel
imports allowed downstream industries in the USA, such as construction,
manufacturing, and automotive sectors, to access steel at lower costs. This, in
turn, could enhance their competitiveness and reduce production costs.
2. Consumer Savings: Lower steel prices resulting from dumping could benefit
consumers by reducing the costs of various steel-dependent goods and
products, such as automobiles, appliances, and construction materials. This can
lead to cost savings for businesses and households.
Related Statistics:
- Consumer Price Index (CPI): The CPI measures changes in the prices of a
basket of goods and services consumed by households. A decline in steel prices
due to dumping can contribute to a lower CPI, indicating potential cost savings
for consumers.
- Manufacturing Costs: Lower steel prices resulting from dumping can reduce
the production costs for manufacturers in the USA. This can be reflected in
various manufacturing cost indices, such as the Producer Price Index (PPI) for
Finished Goods, which measures changes in prices received by domestic
producers for their output.
- Trade Balance: The availability of cheap steel imports can influence the trade
balance of the USA. If the reduced steel prices lead to increased imports and a
larger trade deficit in steel, it may impact the overall trade balance of the
country.
D. Negative impacts in domestic industry of the USA :
1. Loss of Market Share: The influx of cheap imported steel from China can lead
to a loss of market share for domestic steel producers. As foreign steel floods
the market at lower prices, domestic producers may struggle to compete,
resulting in a decline in their market presence.
2. Plant Closures and Job Losses: The decline in domestic steel production and
market share can lead to plant closures and job losses in the steel industry.
When domestic producers are unable to compete with dumped imports, they
may be forced to scale back operations or shut down entirely, resulting in
layoffs and unemployment.
3. Financial Strain on Domestic Producers: The presence of dumped steel in the
market puts financial strain on domestic steel producers. They may face
reduced profitability and struggle to cover their production costs, potentially
leading to financial instability and even bankruptcy for some companies.
34
-
Related Statistics:
Employment Data: Statistics on employment in the steel industry can highlight
the impact of dumping on job losses. For example, data from the U.S. Bureau
of Labor Statistics (BLS) provides information on employment levels, layoffs,
and closures in the steel industry.
-
Steel Production Data: Monitoring steel production levels can help assess the
impact of dumping on domestic steel industry performance. The World Steel
Association and the U.S. Geological Survey (USGS) provide data on steel
production, consumption, and trade, which can indicate the decline in domestic
production due to dumping.
-
Financial Performance of Steel Companies: Financial indicators, such as
revenue, profit margins, and bankruptcies, can provide insights into the
financial strain experienced by domestic steel companies. Annual reports and
financial statements of steel companies, as well as industry-specific reports
from research organizations, can offer relevant statistics.
E. The solutions of the US government :
1. Anti-Dumping Duties: The US Department of Commerce imposed
anti-dumping duties on certain steel products from China. These duties were
intended to counteract the unfair pricing practices and bring the prices of
imported steel in line with fair market value.
2. Countervailing Duties: The US government also imposed countervailing duties
on Chinese steel imports. Countervailing duties are meant to offset the
subsidies and financial support provided by the Chinese government to its steel
industry, which gives them an unfair advantage in international trade.
3. Section 232 Investigation: In 2017, the US initiated a Section 232 investigation
under the Trade Expansion Act to assess the impact of steel imports on
national security. This investigation resulted in the imposition of tariffs on steel
imports from various countries, including China, to safeguard the domestic
steel industry.
Related Statistics:
-
Tariff Data: Statistics on the tariffs imposed on steel imports from China can
provide insights into the measures taken by the US government. The Office of
the United States Trade Representative (USTR) and the International Trade
Commission (ITC) publish data on tariff rates and the value of imports subject
to these tariffs.
35
-
Import Data: Monitoring import data can reveal the changes in steel imports
from China following the implementation of trade remedies. The US Census
Bureau and the USGS provide import data, including the volume and value of
steel imports from different countries.
-
Domestic Steel Production Data: Tracking domestic steel production data can
help assess the impact of trade remedies on the industry. The American Iron
and Steel Institute (AISI) and the USGS provide statistics on domestic steel
production, capacity utilization, and market share.
36
Conclusion
Dumping, as evidenced by the sale of goods in foreign markets at prices lower than their
production costs, poses significant challenges to the economy of targeted markets. This
practice can lead to adverse effects such as market distortions, loss of domestic industries, and
trade imbalances. It is crucial to understand the underlying causes and impacts of dumping to
develop effective solutions.
Dumping occurs due to various factors, including differences in production costs, economies
of scale, government subsidies, and strategic market entry. Countries with lower production
costs, high market potential, or surplus production may find it economically beneficial to
export goods at lower prices to gain market share and dispose of excess supply. While this
may benefit consumers in the short term by offering cheaper goods, it can have long-term
repercussions on domestic industries.
The effects of dumping on targeted markets are multifaceted. Domestic industries may
struggle to compete with the artificially low-priced imports, leading to reduced market share,
job losses, and potential closure of businesses. The loss of domestic industries can have ripple
effects on the economy, including decreased employment opportunities, reduced tax revenues,
and hindered technological advancements.
To address the challenges posed by dumping, targeted markets can employ several solutions.
These include the implementation of anti-dumping measures such as anti-dumping duties and
countervailing duties, which aim to offset the unfair pricing advantage of dumped imports.
Import quotas can also be imposed to limit the quantity of dumped goods entering the market,
protecting domestic industries.
Furthermore, conducting trade remedies investigations and trade dispute resolutions can
ensure fair trade practices and deter dumping. This involves investigating allegations of
dumping, determining the extent of the practice, and imposing appropriate penalties or
corrective measures.
However, it is essential to strike a balance between protecting domestic industries and
promoting free trade. Careful consideration should be given to the potential impacts of
protectionist measures on overall market dynamics and consumer welfare.
In addition to these measures, fostering domestic competitiveness through investment in
research and development, infrastructure improvements, and skill development can help
domestic industries withstand the pressures of dumping. Encouraging innovation and
technological advancements can enhance the quality and competitiveness of domestic
products, reducing their vulnerability to dumped imports.
37
International cooperation and engagement are crucial to addressing the issue of dumping
effectively. Collaborative efforts through multilateral organizations like the World Trade
Organization (WTO) can facilitate discussions, negotiations, and the development of fair trade
agreements. By promoting transparency, adherence to international trade regulations, and the
involvement of all stakeholders, countries can work towards a level playing field that
discourages dumping practices.
In conclusion, the phenomenon of dumping poses significant challenges to the economy of
targeted markets. By understanding the underlying causes and impacts, implementing
appropriate anti-dumping measures, fostering domestic competitiveness, and promoting
international cooperation, countries can mitigate the adverse effects of dumping, protect their
domestic industries, and ensure a fair and sustainable trading environment.
38
0
FOREIGN TRADE UNIVERSITY
FACULTY OF ECONOMICS AND INTERNATIONAL BUSINESS
--------***--------
PROGRESS REPORT ESSAY
TOPIC
SILICON VALLEY BANK COLLAPSE: THE SECOND LARGEST BANK
COLLAPSE IN US HISTORY
Submitted by
Group
Major
Class
Lecturer
: 08
: Macroeconomics
: KTE204E(GD2-HK2-2223)61CTTTKT.1
: Assoc. Prof. Hoang Xuan Binh
Hanoi, June 2023
1
MEMBERS’ INFORMATION AND WORK EVALUATION
No.
Full name
Stu.ID
Duties
Evaluation
1
Vu Huyen Dieu
(leader)
2211140204
Collecting data, part II
(2)
100%
2
Vu Duy Dat
2213140021
Collecting data, part II
(5)
100%
3
Nguyen Ngoc Hoa
2212140034
Collecting data, part II
(2)
100%
4
Ha Tri Lam
2212140044
Collecting data, part II
(4)
100%
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Dang Tuan Linh
2212140045
Collecting data, part II
(1)
100%
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Tran Ngoc Linh
2211140206
Collecting data, part I
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Le Nguyen Nhat Minh
2213140056
Collecting data, part II
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TABLE OF CONTENTS
MEMBERS’ INFORMATION AND WORK EVALUATION .......................................... 1
TABLE OF CONTENTS ..................................................................................................... 2
PART I: INTRODUCTION ................................................................................................ 3
1. Rationale ........................................................................................................................ 3
2. Research objectives ........................................................................................................ 3
2.1. General objectives ................................................................................................... 3
2.2. Specific objectives ................................................................................................... 4
PART II: DEVELOPMENT................................................................................................ 5
1. General information about Silicon Valley Bank (SVB) ................................................ 5
2. The collapse of Silicon Valley Bank (SVB) ................................................................... 5
2.1. Timeline of collapse ................................................................................................. 5
2.2. Causes: Why did it collapse? ................................................................................... 7
2.3. The damage that it causes ........................................................................................ 9
3. Actions taken to address this collapse ........................................................................... 10
3.1. FDIC’s action.......................................................................................................... 10
3.2. The Federal Reserve – The lender of last resort ....................................................... 10
4. What can be learned from this collapse? ...................................................................... 11
4.1. For depositors and investors: .................................................................................. 11
4.2. For regulators: ........................................................................................................ 11
4.3. For banks: ............................................................................................................... 12
5. Conclusion ...................................................................................................................... 12
REFERENCES .................................................................................................................... 14
3
PART I: INTRODUCTION
1. Rationale
On Friday, March 10, 2023, Silicon Valley Bank (SVB) experienced a bank run and
collapsed, making it the second-largest bank failure in US history and the biggest since the
financial crisis of 2007-2008. It was one of three banks, including Silvergate Bank and
Signature Bank, that failed in the United States in March 2023. Some experts believe the
collapse occurred due to several factors, such as insufficient diversification and a classic
bank run, where many customers withdrew their deposits simultaneously due to fears of
the bank's solvency.
Initially, experts did not anticipate that SVB's failure would threaten the overall U.S.
financial system. However, because of SVB's significance to the tech industry which
received a massive cash influx and relied on SVB for managing its business expenses, like
payroll, particularly during the 2020 pandemic when consumer spending on digital services
and electronics surged, it led to increased challenges for some tech startups. Consequently,
companies with substantial uninsured deposits and insufficient cash flow encountered
considerable risks due to the bank's collapse.
The collapse had not only strong impacts on customers, shareholders but ripple effects on
minority-owned banks, gradually the national and international financial system. Among
all, SVB stockholders and investors took a bigger hit because, unlike customers, they were
not backed by FDIC on their investment.
Given the 2008 financial crisis as well as these impacts on individuals, companies and the
whole financial system, the following research paper aims to elucidate the collapse of SVB
in terms of causes, short-term and long-term consequences as well as predictions and
recommended solutions from experts, thereby drawing lessons.
2. Research objectives
2.1. General objectives
Assessing the situation of Silicon Valley Bank Collapse in 2023, thereby drawing
conclusions as well as lessons given professionals’ viewpoints.
4
2.2. Specific objectives
-
Studying main causes leading to the collapse of Silicon Valley Bank
Studying the impacts of this issue on different aspects
Putting forward solutions from the professionals’ viewpoints and drawing
lessons
Studying the future outlook
5
PART II: DEVELOPMENT
1. General information about Silicon Valley Bank (SVB)
SVB, established in 1983 in Santa Clara, California, was a state-chartered commercial
bank. It quickly gained prominence in the Bay Area as a regional bank and became the
largest bank in Silicon Valley by deposits, with nearly half of all venture-backed tech
startups considering it their preferred bank.
The bank focused on serving businesses and individuals primarily in the technology, life
science, healthcare, private equity, venture capital, and premium wine industries.
SVB's lending approach was tailored to accommodate startups that typically had delayed
revenue generation. It managed risk by aligning loan structures with the unique business
models of these startups. The bank leveraged its extensive network of venture capital, law,
and accounting firms to connect customers with valuable resources. Its core strategy
involved attracting deposits from businesses funded through venture capital, and it
expanded its offerings to cater to the evolving needs of clients as they transitioned beyond
the startup phase. Initially, founders seeking loans from SVB had to provide around 50%
of their shares as collateral, but this requirement later decreased to approximately 7%,
reflecting the low default rate and founders' desire to retain control of their companies. The
bank offset potential losses by selling shares to interested investors. As a result, it became
customary for venture capital firms to mandate startups to open accounts specifically with
Silicon Valley Bank, as noted in their term sheets.
During the dot-com bubble, SVB experienced a surge in business due to the rise of
computer technology startups. The bank gained recognition for its willingness to extend
loans to venture-stage companies that had not yet achieved profitability.
2. The collapse of Silicon Valley Bank (SVB)
2.1. Timeline of collapse
 2020 to 2022 – Silicon Valley Bank's deposit base tripled in size during the
pandemic-era tech boom. The bank placed a sizable share of the funds into mortgage
and long-term Treasury bonds instead of investing in other startups or venture
firms.
 March 8 – SVB announced a $1.8 billion loss on the sale of securities, including
the Treasury and mortgage bonds. The bank planned to raise more than $2 billion
to shore up its balance sheet.
 March 9 – Shares of SVB fell 60% in response to investor concern about the bank's
distressed financial position.
6
Depositors in Silicon Valley Bank, a relatively small group made up primarily of
venture capital firms and tech startups, began to withdraw their funds from the bank.
Bloomberg reported that Founders Fund, a venture capital firm headed by Peter
Thiel, decided to withdraw all of its deposits.
 March 10 – Due to the rapid and escalating withdrawal of funds, SVB faced an
imminent collapse as it struggled to generate sufficient cash to meet the demands of
depositors.
In order to safeguard the interests of depositors, the Federal Deposit Insurance
Corporation (FDIC), an organization responsible for maintaining the stability of the
financial system, took control of Silicon Valley Bank.
As an FDIC-insured bank, Silicon Valley Bank ensures that depositors are provided
with protection for their funds, up to $250,000, across various types of accounts.
Numerous depositors in Silicon Valley Bank possessed accounts far exceeding
$250,000. Consequently, those depositors faced the possibility of losing a portion
or the entirety of the funds that exceeded that threshold.
 March 11 – Prominent investors and tech executives expressed their dissatisfaction
with a perceived lack of government intervention to rescue Silicon Valley Bank and
its depositors, apart from the assurance of $250,000 for each account.
Billionaire investor - Bill Ackman told his 660,000 followers on Twitter: "The gov't
has about 48 hours to fix the a-soon-to-be-irreversible mistake."
 March 12 – Increasing the financial risk, Signature Bank, based in New York, was
compelled to close down at the order of state officials. The bank, which had recently
welcomed cryptocurrency deposits, succumbed to concerns of a bank run among
those holding risky assets.
In response to the outcry and the fear of a broader crisis, the FDIC, the Treasury
Department, and the Fed took a significant step by assuring depositors of both
Silicon Valley Bank and Signature Bank that the FDIC would safeguard all of their
funds, including amounts exceeding the $250,000 limit.
Later in the day, the Fed announced an emergency lending program to address the
affected deposits and restore greater confidence in the financial system.
Through this program, the Federal Reserve will provide a mechanism for troubled
banks to borrow money directly from the Fed under favorable conditions instead of
resorting to selling devalued securities, which Silicon Valley Bank had undertaken.
These funds will enable banks to pay depositors who may wish to swiftly withdraw
their funds during the turmoil.
7
The banks can now employ distressed securities as collateral to secure loans from
the emergency lending program as if the securities maintained their original value.
This enables the banks to generate cash while shifting a significant portion of the
risk of declining assets onto the Federal Reserve.
 March 13 – In a morning address from the White House, President Biden aimed to
alleviate worries regarding the possible spread of the crisis across the financial
system.
"Americans can rest assured that our banking system is safe," Biden said. "Your
deposits are safe. Let me also assure you, we will not stop at this. We'll do whatever
is needed."
Despite Biden's message, many bank stocks plummeted. First Republic Bank
dropped 65% before trading was halted; Charles Schwab, the eighth-largest U.S.
bank, dropped 11%.
MORE: What is ESG investing and why are some Republicans criticizing it?
“ The Federal Reserve Board, the governing body of the Fed, announced it would
launch a review of the "supervision and regulation of Silicon Valley Bank, in light
of its failure."
 March 14 – Bank stocks experienced a rebound in early trading, recovering a
significant portion of the losses incurred the previous day. First Republic Bank
witnessed a surge of approximately 60%, while Charles Schwab saw a rise of 9%.
According to a report from The Wall Street Journal, the Justice Department and the
Securities and Exchange Commission are investigating Silicon Valley Bank's
downfall.
2.2. Causes: Why did it collapse?
2.2.1. Lack of portfolio diversification
SVB’s problems began with the investment boom that followed the pandemic. The bank
was flooded with billions of deposits - almost $130bn in new deposits in 2020 and 2021
from California venture capitalists and start-ups. SVB invested much of the money in longterm US government-backed bonds and mortgage bonds which have relatively low credit
risk.
However, this scenario could only work when rates remained low. In 2022, in a bid to fight
inflation, FED raised interest rates from their record-low levels of 0.25%-0.5% to 4.5%4.75% over 12 months. This led to a decline in the value of bonds issued at lower interest
rates so SVB's enormous assets in long-term bonds suddenly lost their value. The higher
8
rate resulted in the more expensive deposit cost which was recorded an increase from 0.14
% to 2.33 % meanwhile the yields on its long government bonds remained unchanged.
A significant portion of the companies associated with Silicon Valley Bank were
technology startups, resulting in a substantial concentration of funds from this particular
industry. When the tech sector faced an economic downturn, numerous companies
encountered challenges in securing additional funding from sources like venture capital
and other avenues. Consequently, these companies had to rely on the deposits they had
stored in Silicon Valley Bank. The profit from long-term investments could not meet the
demand of depositors, so SVB had to sell its bonds at a significant loss.
2.2.2. Bankrun
SVB's customers started to withdraw money as venture capital started drying up, and the
concern was that as of December 31, 2022 96 % of SVB's assets were held in an account
that exceeded the Federal Deposit Insurance Corp cap on deposit insurance.
On March 8, 2023, an amount of $42 billion was pulled by the depositors in just 24 hours.
SVB reported it had sold $21 billion worth of its securities at a roughly $1.8 billion loss. To
address the needs of its clients' withdrawals and fund new lending, the bank announced the
necessity to raise $2.25 billion. This announcement had a severe impact on the bank's stock
price, causing a significant decline and triggering a wave of panic-induced withdrawals
from venture capitalists (VCs) and other depositors. Within a single day, SVB's stock
plummeted by 60%, leading to a global loss of over $80 billion in bank shares.
9
2.2.3. SVB lacked basic Asset and liability management (ALM)
Asset and liability management (ALM): the activity of controlling financial risks resulted
in mismatches between the assets and liabilities as part of an investment strategy in
financial accounting.
Liquidity is the lifeblood of financial organizations, as seen from SVB. Without a solid
liquidity management plan, pursuing higher profits cannot be sustained. Across various
internally specified circumstances, banks and insurers must comprehensively understand
the contractual and behavioral liability profile against their assets. In the instance of SVB,
there were insufficient liquidity buffers and contingency funds to handle both changes in
their bond portfolio and deposit withdrawals.
2.3. The damage that it causes
2.3.1. To customers
SVB was not only the home of rich tech companies and venture capitalists but also a mecca
for small startups which may become larger over time.
Data released by FED showed that small banks experienced significant financial losses of
at least $108 billion in 1 week following the collapse of SVB. Start-ups would struggle to
pay their bills, meet payroll commitments, or potentially default on credit lines.
10
The collapse of SVB has left many leading technology companies struggling to find a
comparable replacement for essential financial services like lending, cash management,
and investment banking.
Even companies that did not hold funds at SVB may also be affected as they could have
been engaged in business transactions with companies that held money on SVB
2.3.2. To shareholders
DIC insurance covers all types of deposits received at an insured bank but does not cover
investments, even if they were purchased at an insured bank.
2.3.3. To financial system
At the end of 2022, SVB had $209 billion in assets, making it the 16th-largest bank in the
United States. However, this represents a relatively small portion (0.91%) of the total
banking assets in the country, so the risk of SVB's collapse affecting other banks is little.
The good news is that most banks currently can cover losses with their capital because of
efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather
any storm.
3. Actions taken to address this collapse
3.1. FDIC’s action
After the failures of SVB, The FDIC’s deposit insurance fund will also be utilized to meet
depositors’ demands, a major amount of which were not guaranteed due to the limit of
$250,000 on deposit insurance.
As per the FDIC’s report on March 13 in 2023, Silicon Valley Bank was closed and
officially placed under FDIC’s receivership. All deposits - both insured and uninsured and
assets of SVB were transferred to a new bridge bank created and operated by FDIC in order
to protect all depositors of the former SVB. Subsequently, depositors would have full
access to their money in the bank at the beginning of Monday morning. However,
shareholders and certain unsecured debt holders will not be protected
3.2. The Federal Reserve – The lender of last resort
The Federal Reserve, acting according to its role as the lender of last resort, along with
other regulators joined in addressing the deposit insurance and even those of above, with
the purpose of minimizing loss on the financial system. The Fed lends out loans to SVB so
11
that the depositors’ demands can be met. The banks pledged collateral – bonds, loans or
other assets – so the central bank didn’t lose its money.
 Bank Term Funding Program & Discount window:
To ensure the stability of the financial system in the U.S. is also an important responsibility
of the Federal Reserve. Realizing the failures of SVB would heavily damage other banks
that own the down-priced government bonds of SVB, the Fed introduced a facility: The
Bank Term Funding Program (BTFP). The BTFP “offers loans of up to one year in length
to banks, savings associations, credit unions, and other eligible depository institutions
pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying
assets as collateral. These assets will be valued at par.” (American Institute for Economic
Research - AIER)
The Treasury Department is providing up to $25 billion from its Exchange Stabilization
Fund as a backstop for any potential losses from the funding program. However, the Fed
said the Treasury program likely won’t be needed and will exist only as a safeguard.
Along with the BTFP, the Fed also utilized the discount window - a bank lending facility
to help SVB manage short-term liquidity needs.
The BTFP charges a higher interest rate compared to the discount windows. However,
there is another important difference between the BTFP and the discount window. While
the BTFP requires banks to provide collateral, it values the collateral at its par value rather
than based on its current market value. This means that if the par value of the collateral is
higher than its market value, the Fed may suffer a loss when a borrowing bank defaults.
4. What can be learned from this collapse?
4.1. For depositors and investors:
 Analyze investments carefully. When investing, it's crucial to consider the
fundamentals:
- Risks
- Cash flow: dividends, interests on bonds
- Resale value
 Diversify investments and deposits. Don't put all money in one bank. Distribute the
savings and deposits across multiples, especially with a large amount of money. For
equities, the investments need to be spread across different stocks in various sectors
across the stock market. High concentration in a particular area can increase risks.
4.2. For regulators:
 The interest rates should only be raised after doing a comprehensive analysis of
the effects on smaller banks. In this case, the Fed should have carefully monitored
12
banks that have made significant investments in Treasury bonds (including the
SVB) when they rapidly raised interest rates. In addition, the Central Bank should
inform the banks of its monetary policy beforehand.
 Additional regulations for regional banks, and for small to medium-sized banks.
The 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act,
ratified by President Donald Trump, significantly increased the threshold of the
Dodd-Frank Act (2010). The law increased it so that banks with $250 billion in
assets would be subject to stricter regulations, instead of $50 billion. Despite being
the 16th largest bank in the US, SVB didn’t have enough assets to be subject to extra
rules. If the threshold was never changed, the SVB would have been more closely
watched by regulators.
4.3. For banks:
 Effective Asset and Liability Management
Risk ceilings by evaluating liquidity and interest rate concerns: SVB made significant
investments in Treasury bonds at the time when strong inflation caused interest rates to
climb quickly. Due to the fact that these deposits were linked to long-term assets that
couldn't be quickly liquidated, SVB lacked the capital necessary to liquidate them during
the bank run.
 Portfolio diversification:
A large portion of the clientele of SVB was in the technology sector. These are frequently
wealthy people and businesses. Tech customers began withdrawing money in fear after
hearing rumors about the bank, which caused SVB to experience a large volume of deposits
cashing out all at once. Ultimately, failure to liquidate all of these deposits in such an urgent
situation led to the collapse of the bank.
 There are no “easy money”:
In this particular case, government bonds are seen to be the least risky investment, thus
SVB spent billions on them. However, they process the risks that contributed to the
collapse of SVB. Firstly, those billions had been locked up for 10 years. In such emergency,
it wouldn't be simple to obtain the money required. Secondly, the market value of Silicon
Valley Bank's bonds decreased when interest rates started to rise. SVB had to sell off its
bonds at a large loss, which lead to other investors being fearful and withdrawing their
money.
5. Conclusion
The collapse of the Silicon Valley Bank is a prime example of the perils of
recklessness and regulatory failure in the financial industry. The collapse can be attributed
to various factors, including poor managerial decisions, failure in anticipating interest
13
rate fluctuations, and the stark absence of adequate supervision from the Federal Reserve.
The damage that it causes, though not significant to the financial system as a whole, was
seriously a matter of concern among customers, shareholders and companies. This event
raised alarms, highlighting the urgent need for systemic reform and the enforcement of
sound banking practices.
From the SVB case, it is evident that both financial institutions and regulatory
bodies must learn pivotal lessons and adopt measures to safeguard against similar failures
in the future. By identifying the weak links in the chain and diligently implementing robust
policies for transparency, accountability, and responsible risk management, the financial
industry can reinforce trust and confidence in their stakeholders and create a more stable
and sustainable economy. By learning from past mistakes and taking necessary proactive
measures, we can hope to prevent such crises in the future, thereby ensuring a more secure
financial landscape for all.
FOREIGN TRADE UNIVERSITY
SCHOOL OF ECONOMICS AND INTERNATIONAL BUSINESS
……….o0o……….
MACROECONOMICS ESSAY
FROM CRISIS TO RECOVERY: UNDERSTANDING GREECE’S
GOVERNMENT DEBT CRISIS
Group:
09
Class:
KTE204E.1
Course:
Principles of Macroeconomics
Instruction:
Hoàng Xuân Bình (Assoc. Prof., PhD.)
Hanoi, May 2023
No.
Members
Student ID
1
Lê Thị Yến Anh (coordinator)
2212140007
2
Trần Nguyễn Bảo Linh
2213140048
3
Vũ Khánh Ngọc
2212140068
4
Đậu Cẩm Vân
2212140082
5
Nguyễn Ngọc Huyền
2212140037
6
Võ Thị Hoàng An
2211140203
7
Lê Thảo Linh
2212140046
8
Hoàng Anh Quân
2212140070
9
Nguyễn Xuân Sơn Long
2212140051
10
Lê Vũ Anh Toàn
2212140075
1
CONTENTS
LIST OF ABBREVIATIONS..............................................................................................1
A. Introduction.....................................................................................................................2
1. Rationale for choosing the topic...........................................................................2
2. Purpose of the paper..............................................................................................2
3. Subject and scope of research...............................................................................2
4. Research methodology..........................................................................................2
B. Background......................................................................................................................3
1. Definitions.............................................................................................................3
1.1. Government debt.....................................................................................3
1.2. Government-debt crisis...........................................................................3
1.3. Fiscal policies..........................................................................................3
1.4. Economic stability...................................................................................3
1.5. International financial institution............................................................4
2. Background knowledge for research.....................................................................4
2.1. Historical context leading to Greece’s government debt crisis...............4
2.2. Causes of Greece’s government debt crisis.............................................5
2.3. Economic indicators................................................................................7
C. Impacts on Greece............................................................................................................7
1. Economic impact of the crisis...............................................................................7
2. Social impacts on the crisis...................................................................................8
3. Political impacts of the crisis................................................................................10
D. Solutions by the Greek government................................................................................10
1. Bailout programs..................................................................................................10
2. Austerity measures...............................................................................................14
3. Debt restructuring.................................................................................................15
4. Reform measures..................................................................................................17
E. Current status...................................................................................................................18
1. Economic indicators and improvements..............................................................18
2. Remaining challenges and suggested solutions...................................................20
F. Conclusion.......................................................................................................................21
1. Implications for economic stability and preventing similar crises.......................21
2. Policy implications...............................................................................................23
G. Further discussion...........................................................................................................24
2
1. Why Greece didn’t leave the Eurozone............................................................24
2. Why Greece’s government debt is different from the case of Japan................25
H. References...................................................................................................................26
3
LIST OF ABBREVIATIONS
ECB
European Central Bank
EU
European Union
GDP
Gross domestic product
IFI
International financial institution
IMF
International Monetary Fund
PSI
Private sector involvement
1
A. Introduction
1. Rationale for choosing the topic
Paying attention to government debt is vital for economic stability, fiscal sustainability
and maintaining a country’s reputation. Poor management of government debt levels can lead
to a crisis that disrupts the economic well-being of a nation. The Greek government debt
crisis was a notable case of government debt crisis, with far-reaching consequences not only
for Greece but also for other countries and the global economy as a whole. Therefore,
exploring the causes, impacts, and resolution of the crisis provides valuable insights into the
challenges of managing public debt; offers profound lessons for policymakers, economists
and scholars about the implementation and effectiveness of economic policies and programs.
Moreover, as International Business Economics majors, our aim is to acquire a deeper
understanding of the complex dynamics among government debt, fiscal policies, economic
stability, and international financial institutions. To achieve this, we intend to conduct
research on the topic ‘From Crisis to Recovery: Understanding Greece's Government
Debt Journey’.
2. Purpose of the paper
This paper aims to analyze the historical and current situation of Greece’s economy
within the context of its loss and recovery from the government debt crisis, while examining
the causes, impact, and the measures implemented to address the crisis. Furthermore, we
would like to suggest, if possible, some valuable lessons and policy implications from our
research, with the aim of formulating preventive measures against comparable crises in the
future.
3. Subject and scope of research
This paper will focus on discussing Greece's government debt crisis, from the pre-crisis
period until the present years. It will examine the historical context, causes, impacts,
resolution, current status of the Greek economy, and explore the policy implications
stemming from the crisis.
4. Research methodology
Our team conducts research using the Quantitative research method - collecting and
analyzing data from official sources, such as government reports, international organizations,
and financial institutions; and Literature review - reviewing academic articles, books and
other relevant sources to gain insight into the crisis.
2
B. Background
1. Definitions
1.1. Government debt
Government debt, also known as public debt, is the amount of money that a
government owes to its creditors. This debt is usually incurred through borrowing money
from individuals, banks, or other countries to finance government spending. The government
may use this borrowed money to fund various programs and initiatives, such as infrastructure
projects, social welfare programs, and military spending. The level of government debt is
often measured as a percentage of a country's gross domestic product (GDP).
1.2. Government-debt crisis
A government debt crisis occurs when a government is unable to pay back its debt
obligations, leading to a default on its loans. This can happen when a government has
borrowed too much money and is unable to generate enough revenue to pay back its
creditors. A debt crisis can also be triggered by external factors, such as a global economic
downturn or a sudden increase in interest rates. When a government defaults on its loans, it
can have serious consequences for the country's economy, including a decrease in investor
confidence, a decline in the value of the country's currency, and a rise in inflation. In extreme
cases, a debt crisis can lead to social unrest and political instability.
1.3. Fiscal policies
Fiscal policies are the measures taken by a government to manage its spending and
revenue in order to influence the economy. Fiscal policies can be used to stimulate economic
growth, control inflation, and manage the government's budget.
There are two main types of fiscal policies:
1. Expansionary fiscal policy: This involves increasing government spending and/or
reducing taxes to stimulate economic growth. This policy is typically used during times of
recession or economic downturns to boost consumer spending and business investment.
2. Contractionary fiscal policy: This involves decreasing government spending and/or
increasing taxes to slow down economic growth and control inflation. This policy is typically
used during times of economic expansion to prevent the economy from overheating and to
maintain price stability.
3
1.4. Economic stability
Economic stability refers to a situation where an economy experiences a consistent and
sustainable level of growth, low inflation, and low unemployment. It is characterized by a
stable and predictable business environment, where businesses and individuals can make
long-term plans and investments with confidence.
Economic stability is important because it creates an environment that is conducive to
economic growth and development. When an economy is stable, businesses are more likely
to invest in new projects and hire more workers, which can lead to increased economic
activity and higher standards of living for individuals.
Governments and central banks use various policies and tools to promote economic
stability, such as fiscal policies, monetary policies, and regulatory policies. These policies
aim to maintain a balance between economic growth, inflation, and employment, while also
ensuring financial stability and sustainability.
1.5. International financial institution
An international financial institution (IFI) is an organization that provides financial
assistance and advice to countries and governments around the world. These institutions are
typically created by multiple countries and operate on a global scale.
Some of the most well-known IFIs include the International Monetary Fund (IMF), the
World Bank, and the Asian Development Bank. These institutions provide loans, grants, and
technical assistance to countries in need, with the goal of promoting economic growth,
reducing poverty, and improving living standards.
Overall, IFIs play an important role in promoting economic development and financial
stability around the world, and are a key part of the global financial system.
2. Background knowledge for research
2.1. Historical context leading to Greece’s government debt crisis
In 1999, the European Union (EU) launched a new currency, the Euro, intended for
shared usage among member states. While Greece is a member of the EU, it initially faced
challenges in meeting the criteria for adopting the Euro. Despite massive tax evasion
problems, the Greek government has been spending to boost social benefits and wages,
which has caused their debt to GDP to rise well above the 60% required to adopt the
currency. Therefore, the government had to choose between reducing expenditures or
4
missing out on the Eurozone. However, there was a third option. Goldman Sachs and
American Investment Bank came up with an idea, a way to meet the currency adoption
criteria by masking the government's debt load through currency swaps.
The Euro allowed Greece to gain access to improved financing opportunities, leveraging
the financial strength of its fellow Eurozone members, and even successfully brought the
Olympics home for 2004. Despite these developments, Greece faced mounting challenges as
its debt-to-GDP ratio continued to rise, surpassing 110% and creating a precarious situation.
In 2007, a real estate crisis in the US triggered a global recession, known as the Great
Recession. Greece, heavily reliant on sectors like tourism and shipping, witnessed a severe
economic downturn during this period, with the Athens Stock Exchange plummeting 65% in
2008.
At the same time, borrowing costs were increasing. The shared currency Greece fought
so hard for was preventing Greece from stabilizing through monetary policy. To exacerbate
the matters, in 2009, it was revealed that the government had falsified its budget deficit
figures, which was not 6.7% as initially reported, but nearly doubled that figure at 12.7%.
2.2. Causes of Greece’s government debt crisis
The causes of the Greek debt crisis stemmed from a number of both internal and external
factors.
a. Internal factors
First, even before the single currency, the national budgets of the EU’s member states
showed large deficits. First, Greece's current account deficits were 14.5% of GDP.
Moreover, prior to the crisis, it was reported that Greece suffered from fiscal imbalances and
problems, with high government expenditures, weak tax collection, corruption and structural
inefficiency, leading to large budget deficits (Belkin et al., 2011). These led to debt
accumulation, economic vulnerability and the potential for state bankruptcy.
Second, since the 1970s, as a result of the loss in competitiveness in export sectors,
there had been an enormous current account deficit. The current account deficit expanded
from 7% of GDP in 2001 to 14.5% of GDP in 2008.
When accounting for productivity changes, inflation and pay growth exceeded the rest of
the Euro area's average growth between 2001 and 2009. Measurements of competitiveness
through consumer price during this time period showed a 20% reduction, while unit labor
cost measurements showed a 25% decline. A more notable fact was that throughout this time,
5
the tradables sector's salaries increased in real terms by 5.5%, while the non-tradables sector
saw a significant 16.5% increase (Georgios P. Kouretas, n.d.).
Third, inaccurate reporting and accounting practices of the Greek government
sparked a loss of trust among international investors and lenders, resulting in higher
borrowing costs for Greece as investors demanded higher interest rates to compensate for the
increased risk. This data falsification also made it impossible to predict GDP growth, debt
and realize potential fiscal problems. This was believed to be one of the factors contributing
to the crisis.
b. External factors
First, Greece’s joining the Eurozone increased access to capital at low interest rates.
Greece’s adoption of the Euro as its national currency in 2001 is seen by some as a
contributing factor in Greece’s buildup of debt. Given that the currency bloc is anchored by
economic heavyweights Germany and France, and that a common monetary policy is
prudently managed by the European Central Bank (ECB), investors have a tendency to view
the trustworthiness of the Eurozone member countries with a higher degree of confidence.
Greece and other Eurozone members were able to borrow money at more favorable interest
rates than they most certainly would have been able to outside of the EU. However, this
benefit may also have contributed to Greece’s debt problems: observers argue that access to
artificially cheap credit allowed Greece to accumulate high levels of debt (Belkin et al.,
2011), such as the reduction of the reserve requirement of 12% to the usual 2% in the EU
cleared the way for easier borrowing conditions, leading to higher private sector debt and a
deteriorated banks' risk balance. Moreover, it was believed that being a member of the
Eurozone left Greece with no autonomous monetary policy flexibility.
Second, the financial crisis of 2007–2008. As investors and creditors turned their
attention to the massive sovereign debt loads of the U.S. and Europe immediately after the
financial crisis of 2007–2008, the situation got worse. Investors started demanding much
higher returns for sovereign debt issued by Portugal, Ireland, Italy, Greece, and Spain (the
so-called "PIIGS") as compensation for this increased risk as soon as default became a
genuine possibility (Picardo, E., 2022). The Greek economy, which already had inherent
structural flaws, was negatively impacted by the worldwide recession that followed the
financial crisis. Reduced global demand for goods and services, declining trade volumes, and
decreased tourism activity affected Greece's export-oriented sectors and its overall economic
6
performance (Ozturk, O. & Sozdemir A., 2014). Greece's economy shrank after the crisis,
and the debt-to-GDP ratio soared, reaching a high of 180% in 2011.
2.3. Economic indicators
Looking at some indicators prior and during the beginning of the debt crisis, the global
financial crisis that began in 2007 found Greece in a highly vulnerable position. As of 2007,
Greece’s current account deficit had reached 15.9% of GDP, government deficit at 6.5%, and
government debt at 103.1%. On all three measures, Greece fared worse than Ireland, Italy,
Portugal, and Spain. Greece’s banking system was also vulnerable. While the ratio of
private-sector loans to GDP in Greece was lower than in Ireland, Portugal, and Spain, the
exposure of Greek banks to their sovereign was larger than in those countries. From 2009 to
2018, Greek debt ratios were at high levels and on an upward trend, rising from 129% in
2009 to 181% in 2018. Budget deficit was at 12.9% of GDP, more than four times the EU’s
3% limit (Amadeo K., 2020).
The biggest lenders of Greece were Germany and its bankers. Most importantly, the
austerity measures required Greece to reform its pension system. Pension payments had
absorbed 17.5% of GDP, higher than in any other EU country. Furthermore, public pensions
were 9% underfunded, compared to 3% for other nations. Austerity measures required
Greece to cut pensions by 1% of GDP. It also required a higher pension contribution by
employees and raising retirement age (Belkin et al., 2011).
C. Impacts on Greece
1. Economic impact of the crisis
Greece’s economic troubles were far more harmful to the economy than previously
imagined. The borrowing by the New Democracy government even before the international
financial crisis, masked by misleading accounting, was revealed to have been excessive, and,
with the onset of the broader economic meltdown internationally, the Greek economy
crumbled. Estimates of the Greek government’s budget deficit put it at several times greater
than that allowed by the rules governing the Eurozone (Jeff Wallendeldt, n.d.).
After the loan packages from the EU and the IMF, the austerity measures implemented
by the Greek government forced the government to cut spending and increase taxes. They
cost 72 billion euros or 40% of GDP. As a result, Greece experienced a prolonged period of
negative GDP growth from 2008 to 2013, with the sharpest decline occurring in 2011
(-10.15%). Overall, the economy shrinking by an estimated 25% in total during the crisis.
7
This contraction resulted from reduced investment, declining consumer spending, and a
contraction in key sectors such as manufacturing, construction, and tourism. That reduced the
tax revenues needed to repay the debt (Amadeo, 2020).
The Greek debt crisis also led to a significant rise in unemployment rates. Overall
unemployment surged to extremely high levels, maintaining at over 20% from 2012 to 2017
and peaking at around 27.5% in 2013 (World Bank Data, 2023). Youth unemployment
reached even higher levels, exceeding 50% at its peak. Job losses were widespread across
various sectors of the economy, leading to social and economic hardships for many Greek
citizens.
Accordingly, the Greek economy continued to struggle mightily. Growing dissatisfaction
with the draconian budget cuts, reductions in benefits and pensions, and tax increases, as well
as with Papandreou’s handling of the crisis in general, led to more strikes and demonstrations
in Athens, Thessaloníki, and elsewhere in the country.
In addition, the crisis was accompanied by a banking crisis. Greece's sovereign default
was the most substantial in global history, paralleled by an equally significant bailout
package extended to Greece by fellow Eurozone nations and the IMF. The consequences of
Greece's default were profound, rendering all domestic banks insolvent. In response, the four
largest banks were recapitalized, while the remaining banks were either resolved or
underwent a similar recapitalization process before being transferred to the four major banks
(Hardouvelis & Vayanos, 2022).
2. Social impacts on the crisis
a. Poverty: During the first few years of crisis, asymmetrical effects on poverty were
seen by different population subgroups. Particularly, from 2009-2012, age-related relative
poverty appeared to have greatly decreased for the elderly. It could be explained by the fact
that the policies had decreased low pensions less than higher ones while the recession and
austerity had a smaller impact on overall pensions than it did on earnings and other incomes.
As a result of employment and wage losses for adults of working age, relative poverty had
increased for all other age groups, particularly for children. Contrarily, the increase in
poverty was larger among males than among women, thereby erasing the prior gender
disparity in favor of men (Matsaganis, 2013).
8
Table 1: Poverty in Greece, 2009 - 2012
Relative poverty
Age
Gender
2009
2012
0 - 17
21.8
26.8
18 - 29
18.0
22.7
30 - 44
16.3
21.5
45 - 64
19.0
19.9
65+
24.6
17.1
Men
18.9
21.2
Women
21.0
21.4
Source: EUROMOD
b. Healthcare and Education: The Greek debt crisis had a significant impact on the
country's healthcare and education systems. Budget cuts and reduced funding for public
services affected the quality and accessibility of healthcare services and educational
institutions. Limited resources and strained infrastructure hindered the provision of adequate
healthcare and education, ultimately impacting the well-being and future prospects of the
population, particularly the younger generation.
As a result of the economic shock, unemployment had a direct impact on various aspects
regarding the mental health of the citizens, including feelings of isolation, and the adoption
of unhealthy coping strategies such as depression, suicide, and addiction (Sakellari, E., &
Pikouli, K, 2013). Regarding the individuals who disclosed having made suicide attempts,
there was a notable rise in suicidal behavior during the economic crisis in Greece, with a
36% increase observed between 2009 and 2011. (Triantafyllou, Konstantinos, & Chryssi
Angelopoulou, 2011).
9
c. Family and Community Dynamics: The crisis also had negative effects on family
and community dynamics. During the economic downturn and the reduction in social welfare
provisions. Greek families, which were historically known for their resilience, faced growing
challenges. They struggled to handle the rising levels of unemployment and the presence of
family members without homes. Numerous unemployed individuals in Greece resorted to
moving between friends and family members as a temporary solution, but eventually, they
exhausted all options and found themselves seeking refuge in homeless shelters. It is
noteworthy that many of these homeless individuals had substantial work experience and did
not exhibit significant mental health or substance abuse issues (Zeitchik S., 2015).
3. Political impacts of the crisis
a. Anti-Austerity Protests and Social Unrest: The crisis sparked widespread public
protests against austerity measures after they were passed by the Greek government and
international creditors. These protests often turned violent and led to social unrest. Citizens
took to the streets to express their anger and frustration with the perceived unfairness and
absurdity of the austerity measures (Smith H., 2012).
b. Referendum on Bailout Conditions: In 2015, Greece held a referendum on the
bailout conditions proposed by the EU. This referendum was a pivotal moment in the crisis
and highlighted the deep political divide within the country. The referendum result, which
rejected the proposed conditions, added to the political turmoil and raised questions about
Greece's future within the EU (Xezonakis, G. & Hartmann, F., 2020).
c. Relationships with the EU: The Greek debt crisis strained Greece's relationship with
the EU. The Greek government had to negotiate bailout packages and implement stringent
reforms to meet the demands of international creditors. The crisis exposed tensions between
Greek sovereignty and the influence of EU institutions, leading to a re-evaluation of Greece's
place within the European project (Kalaitzidis & Zahariadis, 2015).
D. Solutions by the Greek government
1. Bailout programs
1.1. Definition
A bailout program is a government or financial institution intervention aimed at rescuing
or providing financial assistance to a failing or struggling business or economy.
10
Bailout programs in Greece refer to the series of financial assistance packages provided
by the EU and the IMF to address the country's debt crisis. The primary objective of the
bailout programs was to reduce Greece's sovereign debt.
1.2. Timeline
Bailout programs were executed three times in 2010, 2012 and 2015, with the third
program ending in 2018.
May 2, 2010: First bailout for Greece
Background
Greece's economic and political background when it first applied for a bailout program
in 2010 was marked by a high level of public debt, structural deficiencies in public
administration, and a lack of trust in the country's economy by investors and international
markets.
According to Elgin and Oztunali (2012), an over-reliance on government intervention to
boost economic growth, corruption, political patronage, and economic and political
instability had caused structural weaknesses in Greece's public administration. Furthermore,
the country's inability to generate sufficient revenue from taxes, an oversized public sector,
and weak labor market flexibility had added to Greece's structural problems.
Execution
In May 2010, Greece reached an agreement with the IMF, the European Commission,
and the ECB on a focused program to address its debt problems. The program involved loans
of up to €110 billion with €80 billion coming from the Eurozone and €30 billion from the
IMF over a three-year period in exchange for a commitment from Greece to implement
significant economic reforms. The reforms included measures aimed at reducing Greece's
budget deficit, improving tax collection, and increasing the efficiency of the public sector
(IMF survey, 2010).
Impact
The first bailout program for Greece in 2010 aimed to address the country's debt crisis
and stabilize its economic situation. However, its impact on the Greek economy was
controversial and complex.
According to a report by the European Commission (2015), the first bailout had
short-term benefits, including stability in the financial markets, and improvements in
11
Greece's budget deficit and public spending. The report also notes that the bailout facilitated
significant economic and financial reforms in Greece, including tax and public
administration reforms (European Commission, 2015).
However, the same report also highlights that austerity measures included in the bailout
led to significant socio-economic costs, including high unemployment rates, social
inequality, and poverty. In the long term, the bailout could not prevent the Greek debt from
increasing, and its implementation was accompanied by criticism from economists,
politicians, and the general public and its economy continued to shrink.
February 21, 2012: The second bailout program
Background
Before the second bailout program for Greece in 2012, the country faced significant
economic challenges, including high levels of debt, budget deficit, and a struggling economy.
The global financial crisis of 2008-2009 had a severe impact on the Greek economy, leading
to a sharp rise in unemployment rates and social unrest.
In 2010, the EU, the IMF, and the ECB launched the first bailout program for Greece,
totaling €110 billion. The program aimed to provide financial assistance to the country in
exchange for a series of strict austerity measures, including drastic cuts in public spending,
pension reforms, and tax increases.
However, despite the first bailout program, the Greek economy continued to struggle.
The country's debt-to-GDP ratio continued to rise, reaching 175% in 2010, and its economy
continued to shrink. In response, in February 2012, the EU agreed to provide Greece with a
second bailout program, totaling €130 billion.
The second bailout program aimed to help Greece reduce its debt and stabilize its
economy through a combination of austerity measures and financial assistance. The program
included debt restructuring, tax reforms, and increased privatization of state-owned assets.
Execution
The second bailout program was approved in February 2012, with a value of €130
billion, with €109 billion coming from the Eurozone and €21 billion from the IMF. The
program's primary objective was to reduce Greece's debt to GDP ratio to 120% by 2020
(European Stability Mechanism, 2021). The austerity measures implemented under this
program included reducing public sector wages, cutting social spending, and reducing
healthcare spending (Kalyvas, A., 2016).
12
Impact
The second bailout program for Greece in 2012 was associated with significant
challenges and controversies.
According to a report by the IMF in 2014, the second bailout program had both positive
and negative impacts on the Greek economy. The report notes that the program helped reduce
the country's budget deficit, stabilize its financial markets, and initiate various economic and
social reforms. However, it also highlights that the program led to a decline in social welfare,
with significant cuts in public spending and increases in unemployment rates.
August 2015: Third Bailout
Background
Before the third bailout program for Greece in 2015, the country faced prolonged
economic struggles, including a lengthy recession, high unemployment rates, and mounting
debt levels. Greece had already received large-scale financial support through two previous
bailout programs, which aimed to help the country stabilize its economy through a
combination of austerity measures, reforms, debt restructuring and financial assistance.
Despite these efforts, Greece's economy continued to struggle, and in early 2015, the
Greek government was on the brink of defaulting on its debt payments. This led to a tense
standoff between Greece and its creditors, which included other Eurozone countries, the IMF,
and the ECB (The New York Times, 2015).
Execution
The third bailout program was approved in August 2015, with a value of €86 billion.
This was supposed to be the final bailout program for Greece. The aim of this program was
to ensure that Greece remained on track to meet its commitments, and it came with a
requirement for further austerity measures (European Stability Mechanism, 2021). Although
the program was smaller than the first two, it still had significant requirements for reforms
that Greece was required to undertake. Greece exited its third and final bailout program on
August 20, 2018.
Impact
The third bailout program in 2015 had significant impacts, both positive and negative, on
Greece's economy. The program aimed to stabilize the country's economy through harsh
austerity measures and financial assistance. While the program helped Greece avoid
13
defaulting on its debt and enabled the country to regain access to international financial
markets, it also had negative consequences for the economy and society.
One of the major impacts of the third bailout program was a significant contraction of
Greece's economy. According to Eurostat data, Greece's GDP decreased by over 25%
between 2010 and 2016, with much of the contraction occurring after the implementation of
the third bailout program in 2015 (Eurostat, 2021).
In addition to economic contraction, the program had social impacts, including high
levels of unemployment, particularly among young people. According to Eurostat, Greece's
unemployment rate was 16.2% in May 2015 and remained above 20% until 2019 (Eurostat,
2021).
2. Austerity measures
a. Definition
Austerity measures refer to economic policies implemented by governments to reduce
government spending in order to reduce public debt and balance the budget. These measures
may include cutting government spending, reducing social benefits, increasing taxes, and
other measures aimed at reducing public debt. Austerity measures are typically implemented
when a country is experiencing economic difficulties such as high levels of debt or a
recession, and the aim is to reduce government spending in order to balance the country’s
budget.
b. Background
At the beginning of the Greek economic crisis, it was revealed that Greece had
understated its public debt and budget deficit levels, prompting a loss of confidence in the
country's financial stability. To address its problems, the Greek government and its lenders,
including the EU and the IMF, agreed on two bailout packages in 2010 and 2012, providing
the country with funding of €110 billion and €130 billion respectively (Muehlberger, Dögl, &
Serrat, 2018). In return for this assistance, Greece was required to implement a series of
austerity measures to reduce its public debt and budget deficit.
c. Execution
Austerity measures largely included cuts to public spending and increased taxes. The
Greek government implemented significant cuts in the public sector, which led to the loss of
jobs and the reduction of public services. In 2010, Greece implemented cuts in public sector
wages and pensions, leading to widespread protests across the country (OECD, 2015). The
14
country also introduced tax increases, including value-added tax (VAT) and other indirect
taxes, to boost its revenue.
d. Impact
Critics of austerity measures argued that they exacerbated economic and social problems
instead of alleviating them. In many cases, austerity measures lead to a contraction of the
economy, as they limit public sector investment and spending, which can lead to a reduction
in employment and, therefore, income. As a result, a contraction in demand could lead to
deflationary pressures, further decreasing economic activity and ultimately contributing to
declined tax revenue (Cottarelli et al., 2016).
Despite the implementation of austerity measures, Greece's economy continued to
struggle. These measures were expected to lead to a reduction in public debt and budget
deficit levels, but the opposite occurred. Instead, Greece's public debt levels increased from
129% of GDP in 2009 to 180% of GDP in 2018 (European Commission, 2018). The
country's real GDP declined by about 27% between 2008 and 2016 (Eurostat, 2021).
Furthermore, unemployment rose to 27.8% in 2013, with youth unemployment levels
reaching almost 60% (Eurostat, 2021). The financial and economic implications of austerity
measures have, therefore, led to criticism of the Greek government's decision to implement
these measures.
Moreover, austerity measures can worsen the social welfare of individuals, particularly
those in vulnerable socio-economic groups. For instance, in the context of Greece, austerity
measures were implemented during an already prolonged recession, leading to high levels of
unemployment and poverty. This led to social unrest, protests and calls for social justice
(Katsimi & Moutos, 2013).
Therefore, the austerity measures implemented by the Greek government were met with
considerable opposition, primarily from those affected the most, as it deepened the economic
and social crisis of the country. However, the aim of these measures was to reduce public
borrowing and create more room for sustainable economic growth, which was crucial to
address structural challenges in Greece (Cottarelli et al., 2016).
3. Debt restructuring
The debt restructuring process was implemented as a crucial solution to address the
Greek government debt crisis. It aimed to alleviate the burden of Greece's massive debt and
15
provide the country with a path towards financial stability and economic recovery. Here is an
overview of the debt restructuring measures undertaken during the crisis:
a. Private sector involvement
The PSI agreement was reached in March 2012, with its initiative involving negotiating
with private bondholders to accept a 53.5% reduction in the nominal value of their Greek
government bonds. This reduction, known as the Greek bond haircut, aimed to decrease
Greece's debt by approximately €100 billion as to reduce Greece's debt burden and make it
more sustainable (Eurogroup, 2012). Bondholders also had the option to exchange their
existing bonds for new ones with longer maturities and lower interest rates. Overall, the PSI
agreement resulted in a significant decrease in Greece's outstanding debt, and allowed the
country to return to the international bond market (European Stability Mechanism, n.d.).
b. Bondholder participation
The success of the debt restructuring process depended on achieving a high participation
rate from bondholders. To facilitate widespread participation, Greece implemented collective
action clauses (CACs) in its bond documentation. These clauses allowed for the enforcement
of the restructuring terms on all bondholders, even if some refused to participate voluntarily
(Chaigneau, V., 2021).
c. Debt buybacks
Greece conducted debt buyback programs between 2012 and 2015 to further reduce its
debt. These programs allowed Greece to repurchase its bonds at a discounted price from
private investors and IFIs, providing bondholders with an opportunity to sell their holdings.
By buying back its debt at lower values, Greece was able to reduce its overall debt
obligations by around €28 billion and improve its debt sustainability (Barley, R., 2012).
d. Extended maturities and low interest rates
To provide Greece with greater financial breathing space, creditors extended the
maturities of Greece's debt and reduced the interest rates. This allowed Greece to repay its
debt over a longer period and at more favorable terms, reducing the immediate financial
burden and improving its ability to meet its obligations. (Melander, I. & Graham, P., 2012).
Overall, the debt restructuring measures aimed to stabilize Greece's financial situation,
restore investor confidence, and pave the way for sustainable economic growth (Organisation
for Economic Co-Operation and Development, 2018). However, the long-term success of
16
these measures depends on Greece's ability to maintain fiscal discipline, implement structural
reforms, attract investments, and foster inclusive economic development (OECD, 2020).
4. Reform measures
The Greek government implemented a series of reform measures as part of its efforts to
address the government debt crisis and stabilize the economy. These measures aimed to
improve fiscal sustainability, enhance economic competitiveness, and restore investor
confidence. Some key reform measures were undertaken on various aspects of the economic
and financial system.
a. Fiscal consolidation
In efforts to reduce its deficits and stabilize its public finances, Greece implemented
significant austerity measures. These measures included cuts in public sector wages and
pensions, increases in taxes, and reductions in government subsidies.
b. Pension reforms
The Greek government implemented reforms to the pension system, including increasing
the retirement age, reducing pension benefits, and implementing stricter eligibility criteria.
These measures aimed to ensure the long-term sustainability of the pension system and
reduce its burden on public spending.
c. Tax reforms
The government introduced tax reforms to improve tax collection, combat tax evasion,
and broaden the tax base. These reforms included simplifying the tax system, increasing tax
rates for high-income individuals and corporations, and improving tax administration
(Organisation for Economic Co-Operation and Development, n.d.).
d. Privatization program
Greece embarked on an extensive privatization program, aiming to sell state-owned
assets and enterprises to generate revenue and attract investment. This included the
privatization of key sectors such as energy, transportation, and infrastructure (Vettas, N. &
Gatopoulos, G., 2020).
e. Labor market reforms
The Greek government implemented reforms to increase labor market flexibility,
promote job creation, and reduce unemployment. These reforms included changes to labor
17
laws, streamlining employment contracts, and facilitating business operations (Vettas, N. &
Gatopoulos, G., 2020).
f. Structural Reforms
Greece implemented structural reforms aimed at improving the business environment,
enhancing competitiveness, and attracting foreign investment. These reforms included
streamlining bureaucracy, improving legal frameworks, and reducing barriers to
entrepreneurship.
g. Institutional reforms
The government introduced measures to improve governance, transparency, and
efficiency in public administration. This involved strengthening anti-corruption measures,
enhancing judicial systems, and improving public procurement processes.
In fact, these reform measures were implemented in coordination with IFIs, such as the
IMF, the ECB, and the EU, as part of the bailout programs provided to Greece (IMF, 2010).
While these measures aimed to address the underlying structural issues and restore economic
stability, they also faced challenges and had social implications, including job losses, social
unrest, and public discontent.
E. Current status
1. Economic indicator and improvements
Following years of austerity measures and structural reforms, Greece's economy has
turned a corner, with the country experiencing an impressive period of stable growth. The
Greek government has implemented sound financial policies, including reducing public
spending, increasing tax revenues, and improving debt management strategies. As a result,
Greece's government debt has seen significant improvements over the past few years, leading
to increased investor confidence and a positive outlook for the country's economy.
Greece's gross debt ranged between 128.6 billion and 495.9 billion USD from 1998 to
2022. In 2011, the highest level in the previous 24 years was reached. However, in 2022, the
liabilities were only 375 billion USD. In the same year, the budget deficit was 5.0 billion
USD. Based on the population, this equates to a debt of 35,253 USD per person. In
comparison, the average debt per person in the EU in the same year was 31,253 USD per
person. The average debt per capita in 2022 was also smaller than the number of 2021
(39,288 USD), which decreased by almost 4 USD (Worlddata.info, n.d).
18
Gross debt in billion USD
Year
Greece total
Greece per capita
EU per capita
2021
418.07 bn USD
39,288 USD
33,827 USD
2022
375.14 bn USD
35,253 USD
31,253 USD
Source: Worlddata.info
Greece's government debt stood for 175.7% of nominal GDP in September 2022,
compared to 182.9% in the previous quarter. The data set a new high of 209.5% in March
2021 and a new low of 93.7% in September 2003 (CEIC Data, n.d). Despite the fact that
Greece's government debt remains extremely large and unsustainable, it has fallen slightly as
a result of debt relief measures offered by its creditors and an improvement in nominal GDP.
According to Trading Economics, the GDP growth rate in Greece has been improved but still
fluctuating in recent years. In 2018, the year Greece successfully exited the bailout programs,
the GDP growth rate was 1.67%, which increased to 1.88% in 2019. However, in 2020, the
GDP growth rate declined by 9.00%, primarily due to the impact of the COVID-19
pandemic. By contrast, in 2021, the GDP growth rate of Greece returned to a positive
number again, at 8.43% (Greece GDP 1960-2023, n.d). It continued to be the trend for 2022,
with the Greek economy growing by 5.9% despite the energy crisis and inflationary
pressures throughout the year (Economic Forecast for Greece, 2023). These increases in
GDP indicate an overall improvement in economic activities and a move toward stability
Signs of economic improvement are also shown in the unemployment rate from 2018 to
2023. Over the period, there were steady decreases in unemployment rates, with the
percentage of 19.3% in 2018 falling to 12.2% in 2022. Noticeably, these numbers are overall
lower than the during-crisis-period rate of around 25%.
Moreover, Greece has been able to access the financial markets again and borrow at
lower interest rates than before. In February 2020, Greece issued a 10-year bond with a yield
of 0.957%. (AP News, 2020). This was seen as a sign of confidence in Greece's economic
recovery and its ability to manage its debt, following years of austerity measures and bailout
programs. In 2021, Greece raised 2.5 billion euros after reopening a 10-year bond auction,
with high demand (CityNews, 2021). This was part of Greece's ongoing efforts to tap into
international markets and raise funds to support its economic recovery and development
plans. The bond sale was met with strong demand from investors, which is a positive sign for
Greece's creditworthiness and ability to access global capital markets. The low yield on the
19
bond also reflects investors' confidence in Greece's economic prospects and the government's
commitment to fiscal responsibility.
According to a report by the European Stability Mechanism, Greece has made
significant progress in restoring sustainability to public finances, regaining market
confidence, strengthening the banking sector, and improving its economic competitiveness
since the sovereign debt crisis. The report also states that the structure of Greek debt has
improved significantly due to favorable lending terms and liability management exercises
under the ESM program 1. The report also mentions that Greece is benefitting from a secular
decline in interest rates resulting in very favorable financing conditions. Historically
low-interest rates have reduced the debt service burden both as a share of overall expenditure
and compared to taxation. Because of the general reduction in interest rates and the
compression of risk premia, the effective interest rate on Greek government debt has fallen
from 7.3% in 2000 to roughly 1.5% in 2020. By extending the duration of its debt and using
interest rate swaps, Greece is locking in current low interest rates (Strauch, R., 2021).
2. Remaining challenges and suggested solutions
Greece has successfully recovered from the COVID-19 crisis and rebounded from its
debt crisis, experiencing substantial job growth. However, the recovery has been hampered
by rising energy prices and uncertainty resulting from Russia's assault against Ukraine. To
improve Greece's chances of fiscal health and strengthen its energy sector, it is crucial to
reach and maintain moderate primary budget surpluses, better focus energy support
measures, and maintain public revenues while broadening and increasing the tax base.
Alongside these measures, it is important to maintain the reform momentum, complete the
restoration of banks' health, and continue efforts to improve the business climate, ensuring a
long-term sustainable recovery. Furthermore, Greece must adapt to climate change and strive
towards net-zero emissions to raise living standards. Achieving this requires a well-balanced
mix of carbon pricing, public infrastructure expenditures, increasing building energy
efficiency, and shifting transportation to low-emission modes. Engaging all stakeholders,
preserving consensus, and providing assistance to vulnerable households affected by the
transition to a green economy are vital for assuring long-term progress and inclusive
development.
20
F. Conclusion
In this section, we will propose some key-takeaways derived from our research of the
Greek debt crisis.
1. Implications for economic stability and preventing similar crises
a. Complex dynamics
The Greek government debt crisis reflects the complex dynamics among government
debt, fiscal policies, economic stability, and IFIs. The crisis was triggered by numerous
factors, both external and internal, and its serious impacts ranged from the country’s
economy to its social and political stability. All sides of this issue are strictly interconnected.
By identifying key takeaways from this crisis, we would thoroughly understand the
relationship between all related factors and conclude with several lessons learned for the
government debt crisis in general.
First, responsible fiscal policies are of utmost importance: Greece's high levels of public
debt were unsustainable and a major contributor to the crisis. Ensuring fiscal responsibility,
which involves managing public finances in a sustainable manner, including maintaining a
manageable level of debt, implementing prudent fiscal policies, and exercising budgetary
discipline, is essential to avoiding similar crises in the future.
Second, transparency and accountability in government are essential. The root cause of
Greece’s economic crisis can be found in the profound structural economic inefficiencies,
and this is the result of widespread corruption and mismanagement within the Greek
government. In the years leading up to the crisis, the Greek government repeatedly
underestimated its budget deficit and concealed information about the true extent of its debt
levels. Greece’s falsification of debt statistics created an illusion of better fiscal health, led to
a loss in market and investors’ confidence and eroded its credibility in the international
community. Moreover, its own citizens also experienced a loss in trust and a rise in hatred
and skepticism towards Greece’s government. As a result, Greece experienced a sharp
increase in borrowing costs and a banking crisis. Therefore, ensuring transparency and
accountability in government is essential to building and maintaining trust, both domestically
and internationally.
Third, economic stability needs to be taken into account when applying any measures.
The austerity measures implemented by the Greek government to reduce debt had severe
consequences for the country's economy, including high unemployment and social unrest.
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Balancing fiscal responsibility with measures to maintain economic growth is critical for
economic stability.
Fourth, the support and interference from IFIs need careful consideration and adaptation
from the country.
While IFIs like the IMF played a crucial role in providing financial assistance to Greece
during the crisis, their involvement can also raise questions about national sovereignty and
the imposition of external conditions on economic policies. Moreover, regarding the
relationship between EU and Greece, many argue that Eurozone membership is to blame for
the debt crisis. Nevertheless, Euro membership in fact provided a means, by way of both
funding and structures, to spur the Greek economy’s development. Unfortunately, the
opportunity was not taken advantage of. Instead, Eurozone membership created a false sense
of security for Greece, allowing the country to ignore its underlying problems.
Fifth, the importance of global interconnectedness cannot be neglected. While the Greek
debt crisis was a national issue, its ripple effects were felt throughout the global economy.
Ensuring stability and cooperation among nations is essential to addressing and preventing
similar crises in the future.
Overall, the Greek debt crisis speaks to the complex interplay among government debt,
fiscal policies, economic stability, and IFIs. It underscores the importance of balancing fiscal
responsibility with economic growth, while also highlighting the challenges of navigating
competing pressures from national and international actors.
b. Lessons for the Eurozone
The crisis had far-reaching implications for the Eurozone, including the risk of contagion
to other countries in the region. There are several lessons that can be learned from the Greek
debt crisis.
One of the most important lessons is that reforms should always be implemented during
periods of growth when people are confident and losers may be compensated. An upswing
can give time for reforms to be implemented, but it should not be used to argue that reforms
are unneeded. Greece had to adjust during the recession because it had not done so during its
pre-crisis boom. According to the Financial Times, Greece's unwillingness to change during
the boom years resulted in a massive deficit and debt burden when the global financial crisis
struck (Pagoulatos, G, 2017).
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There must be breathing space from restrictive policies. Greece's fiscal and income
policies have been highly contractionary since 2010. Greece attempted a near-impossible
objective, relying on recessionary internal devaluation to regain competitiveness while
having to grow to reduce debt relative to GDP, which was a challenging task. A Eurozone
demand stimulus, Eurozone inflation close to 2%, or adequate risk sharing in the bloc were
all needed to help the country, but none of this was available (Pagoulatos, G, 2017).
A third lesson is the need for greater cooperation among Eurozone countries. The crisis
exposed weaknesses in the Eurozone’s institutional framework and highlighted the need for
greater coordination among member states. This includes greater fiscal integration, a
common deposit insurance scheme, and a common budget (Knowledge at Wharton, 2015).
The lack of cooperation among Eurozone countries during the Greek debt crisis led to a
prolonged recession in Greece and other countries in the Eurozone. Greater cooperation
would have allowed for a more coordinated response to the crisis and could have prevented
some of the negative economic effects. (Coppola, F, 2018).
These lessons are important because they can help prevent future crises by ensuring that
countries maintain economic stability, operate financial markets responsibly, and work
together to address economic challenges.
2. Policy implications
After examining and analyzing the main measures undertaken to address the debt crisis,
there are key lessons and implications that should be put forward.
a. Enhanced bailout mechanism
Lessons learned from the bailout programs implemented in Greece highlight the need for
careful consideration of the conditionality. The policymakers should establish clear fiscal
targets, such as focusing on deficit reduction goals or debt-to-GDP ratio thresholds. Clarity
regarding the required policy measures and their expected outcomes will help provide a
transparent framework for assessing progress and determining the disbursement of funds.
With that said, it is essential to ensure fiscal targets with a balance of debt relief and
growth-oriented measures. The bailout programs primarily focused on reducing debt burden
and lacked a more comprehensive outlook for sustainable growth which could have been
done with more emphasis on promoting investment, entrepreneurship, innovation and
reasonable austerity. As a result, these efforts left the country with economic contraction
despite some improvements in its debt situation.
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b. Balanced approach to austerity
While fiscal consolidation is necessary to tackle unsustainable debt levels, it is important
to consider the potential social and economic impacts of austerity. The austerity measures
imposed on Greece as a condition of the bailout were incredibly harsh and perceived as
unfair by the Greek people, leading to widespread protests and social unrest. Policymakers
should prioritize protecting vulnerable populations and investing in sectors that promote
long-term growth and job creation. This can be achieved through targeted social safety nets,
active labor market policies, and strategic infrastructure investments.
Additionally, instead of deep and rapid implementation of austerity measures as Greece
did, the approach should be more gradual and targeted. Austerity measures should be
implemented gradually, allowing time for the economy to adjust and minimize the negative
impact on growth and individuals. Targeted measures that focus on areas of inefficiency and
waste can help maximize the effectiveness of austerity while minimizing adverse
consequences. This involves identifying and addressing structural issues in public spending,
such as reducing subsidies, streamlining bureaucracy, and eliminating unnecessary
expenditures.
G. Further discussion
1. Why Greece didn’t leave the Eurozone
Greece could have left the EU, abandoned the Euro and reinstated the drachma. Without
the austerity measures, the Greek government could have hired new workers, therefore
lowered the 25% unemployment rate and boosted economic growth. Greece could have
converted its euro-based debt to drachmas, printed more currency and lowered its euro
exchange rate. That would have reduced its debt, lowered the cost of exports, and attracted
tourists to a cheaper vacation destination.
At first, that would seem ideal for Greece, but foreign owners of Greek debt would have
suffered debilitating losses as the drachma plummeted. That would debase the value of
repayments in their own currency. Some banks would go bankrupt. Most of the debt is owned
by European governments, whose taxpayers would foot the bill.
Plummeting drachma values would have triggered hyperinflation, as the cost of imports
skyrocketed. Greece imports 40% of its food and pharmaceuticals and 80% of its energy.
Many companies refused to export these items to a country that might not pay its bills. The
country could not attract new foreign direct investment in such an unstable situation. The
24
only countries that would have lent to Greece are Russia and China. In the long run, Greece
would find itself back to where it began: burdened with debt it could not repay.
Another important reason for Greece’s decision to stay in the Eurozone is that the
country wanted to maintain its access to funding from IFIs, such as the ECB or the IMF, and
the trade relationships and market integration with other EU countries. Exiting the Eurozone
and reintroducing the drachma would have disrupted these relationships and could have
resulted in trade barriers, reduced investment, and economic isolation.
2. Why Greece’s government debt is different from the case of Japan
There are several differences between the government debt situations in Greece and
Japan. Japan has the largest national debt in the world, with its government debt-to-GDP
ratio reaching around 280% in 2020 (Reuters, 2020). On the other hand, Greece's debt crisis
in 2010 reached an alarming point where the government's debt-to-GDP ratio went up to
more than 180% (Matsaganis M., 2013).
One key difference between the two countries is the demand for their government bonds.
In Japan, the government can issue new debt and sell bonds to domestic investors. The
appetite for Japanese government bonds is strong partly due to the country's aging population
and large pool of savings (Reuters, 2020). On the other hand, Greece relied heavily on
foreign investors to finance its debt, which was proven unsustainable ( Matsaganis M.,
2013).
Another difference in the two countries' situations is the diversity and strength of their
respective economies. Japan has an industrial base and a diversified economy that can
support it amid high government debt and other economic challenges such as deflation. In
contrast, Greece's economy is more reliant on tourism and shipping, which led to challenges
in implementing policy changes and strengthening the economy (Matsaganis M., 2013).
Several factors contributed to Japan's high levels of government debt, including the
decline in the country's working-age population, slow economic growth, and low interest
rates that encouraged borrowing. The Japanese government has implemented policies to
combat these challenges, such as increased government spending to stimulate the economy
and attempts to raise inflation rates (Reuters, 2020).
In summary, the key differences between the government debt situations in Japan and
Greece include the source of demand for government bonds, the strength and diversity of
their respective economies, and the policies implemented by their governments to deal with challenges.
These factors contribute to the sustainability of government debt in each country.
25
FOREIGN TRADE UNIVERSITY
MACROECONOMICS
Report
Topic: Hyperinflation in Zimbabwe
& Venezuela and lesson learned
INSTRUCTOR: A. PROF. DR. HOANG XUAN BINH
CREDIT: KTE204E | K61
GROUP: 10
GROUP MEMBERS
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THÁI THỊ THANH BÌNH
ĐỒNG KIM NGÂN
ĐÀO QUỲNH HƯƠNG
ĐÀO QUỲNH HOA
NGUYỄN MINH PHƯƠNG
NGUYỄN TIỂU MAI
ĐỖ KHÁNH VY
TRẦN THIÊN HƯƠNG
NGUYỄN LINH TRANG
LƯU NGÂN HÀ
VŨ KHÁNH LINH
HANOI, JUNE 2023
2213140016
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2212140040
2212140033
2212140069
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2212140084
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Table of Contents
1. Introduction
1.1. Objective of the research
1.2. Scope of the research
2. An overview of Hyperinflation
2.1. What is hyperinflation?
2.2. Brief background of hyperinflation in general
2.2.1. Causes
2.2.2. Some effects of hyperinflation
3. Hyperinflation in Zimbabwe
3.1. Overview of economic situation in Zimbabwe during 1997 - 2009
3.2. Several identifiable causes of hyperinflation in Zimbabwe (1997 - 2008)
3.3. The effects of hyperinflation on society and economy of Zimbabwe
3.4. Government policies to combat hyperinflation in Zimbabwe
4. Hyperinflation in Venezuela
4.1. Overview of the economic situation in Venezuela
4.2. Several causes of hyperinflation in Venezuela
4.3. The effects of hyperinflation on the economy and society of Venezuela
4.4. Several government policies to combat hyperinflation in Venezuela
5. Comparison between Zimbabwe and Venezuela
6. Key takeaways from other governments
6.1. Government mismanagement
6.1.1. Excessive money supply and redenomination
6.1.2. Free - Floating exchange rate
6.1.3. Fiscal Discipline
6.1.3.1. A country that overcame hyperinflation by fiscal discipline - Brazil
6.1.3.2. Comparison between Brazil and these two countries’ approaches and outcomes.
6.2. Undiversified economy
6.2.1. The two countries' dependence on one economy
6.2.1.1 Venezuela’s dependence on one economy
6.2.1.2 Zimbabwe’s dependence on one economy
6.2.2 Why Venezuela and Zimbabwe failed when depending on one economy
6.2.3 A successful example of UAE in diversifying economy
6.3. Key takeaways
7. Conclusion
References
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1
1. Introduction
Inflation is one of the economic issues that nations have experienced throughout history, and
hyperinflation is a typical case of inflation, which has a significant impact on the economy and can
even lead to the economic crisis. Therefore, the question is how can we prevent hyperinflation, given
that we must adapt to living with inflation?
Although there are several severe cases of hyperinflation in history including cases of
Hungary, Germany, Yugoslavia, we choose to further discuss the situation in Venezuela and
Zimbabwe in the following report because these are two cases that we can relate to the current
situation. Firstly, the hyperinflation in Zimbabwe is considered as a typical case, which happened in
the middle of the global financial crisis in 2008. Secondly, the case of Venezuela is the most famous
case of hyperinflation recently. Importantly, Venezuela is still facing hyperinflation at present, thus we
can relate to the economic situation in other countries at the moment.
1.1. Objective of the research
This paper will provide a big picture of two typical hyperinflation cases in history and act as a
reference for world leaders and policy makers on measures to prevent and lessen the repercussions of
hyperinflation.
1.2. Scope of the research
This research discussed the hyperinflation in Zimbabwe (1997-2009) and Venezuela
(2014-2018). Moreover, it aims to investigate the causes, effects, and governments’ attempt to combat
this issue.
2
2. An overview of hyperinflation
2.1. What is hyperinflation?
Hyperinflation is a term to describe rapid, excessive, and out-of-control general price
increases in an economy. While inflation measures the pace of rising prices for goods and services,
hyperinflation is rapidly rising inflation, typically measuring more than 50% per month.
Although hyperinflation is a rare event for developed economies, it has occurred many times
throughout history in countries such as China, Germany, Russia, Hungary, and Georgia.
2.2. Brief background of hyperinflation in general
2.2.1. Causes
One of the causes of hyperinflation is demand-pull inflation. This happens when the aggregate
demand increases while the supply remains constant or even decreases. This means that there is more
money spent on goods and services than the amount of goods and services available. This creates a
situation where there is "too much money chasing too few goods”, which pushes up the prices of
those goods and services.
Another cause of hyperinflation is money supply inflation. This occurs when a government
injects more money into the economy without a corresponding increase in economic growth. The
excess money in circulation decreases the currency's real value and results in higher prices. For
instance, the German Hyperinflation of 1923 occurred due to excessive money printing to pay for war
reparations.
An immense increase in the circulation of
paper money was accompanied by a rapid
depreciation of the mark. In the first half of
1922, the mark stabilized at about 320 marks
per dollar. By November 1923, the exchange
rate was 4,420,000,000,000 marks to the
dollar. The currency depreciation, arising
from disequilibrium of the balance of
payments, had caused the expansion of the
money supply and the inflation.
Source: Wikipedia
Cost-push inflation also leads to hyperinflation. This happens when production inputs such as
natural resources and labor become more expensive, and business owners raise their prices to cover
the increased costs. Since demand remains the same but production costs are higher, the increase in
prices is passed on to customers, creating cost-push inflation. Cost-push inflation is often seen in
sectors such as oil and gas, where the prices of raw materials can fluctuate significantly.
2.2.2. Some effects of hyperinflation
When hyperinflation is in effect, consumer behavior adjusts. To keep from paying more for
goods tomorrow, people begin hoarding today. That stockpiling creates shortages. Daily supplies
become scarce, and more expensive, and the economy falls apart.
3
Hyperinflation causes money to lose its value, so consumers’ savings dwindle as they spend
more on necessities. This makes retirees and the elderly most vulnerable to hyperinflation’s impacts
on consumers, because they cannot continue working.
Hyperinflation sends the value of the currency plummeting in foreign exchange markets. The
nation's importers go out of business as the cost of foreign goods skyrockets. Unemployment rises as
companies fold. Government tax revenues fall and it has trouble providing basic services. The
government prints more money to pay its bills, worsening the hyperinflation.
4
3. Hyperinflation in Zimbabwe (1997-2009)
3.1. Overview of economic situation in Zimbabwe during 1997 - 2009
Zimbabwe is a country located near the south-eastern coast of Africa, with roughly 16 million
people. It is classified as a middle-income country, with a low HDI score and high-income disparity.
Zimbabwe underwent one of the worst cases of hyperinflation in modern history for a decade-long
period. The economic situation was dire, with soaring prices, shortages of essential goods, extreme
poverty, human displacement and unemployment.
Instead of generating income for the country through a variety of economic strategies such as
increasing exports, Robert Mugabe had an idea that the government would print more money to pay
off foreign debts and civil servants like soldiers. Unfortunately, things have taken a turn for the worse,
an increase in the money supply does not equate to an increase in the productivity of the Zimbabwean
economy, and only some new investments are real to create new goods. In other words, more dollars
are needed to buy the same amount of goods as before or “too much money chasing too few goods”.
(Honeyball, J. (2016, April 1)
Because of the decrease in output, there were shortages of goods, which drove up prices. As
individuals had more paper money, nominal demand was increasing. This combination of more
money pursuing fewer commodities resulted in extremely fast price increases. When there is a
shortage, prices rise. Prices soared fast as a result of the printing of more money and the scarcity of
genuine products.
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In August 2006, a new revalued Zimbabwean dollar was issued to be equivalent to the
previous $1,000. The exchange rate has dropped from the old 24 Zimbabwean dollars per U.S. dollar
(USD) in 1998 to the previous 250,000 dollars or 250 new Zimbabwe dollars per US dollar at the
official exchange rate, and an estimated 120,000,000 old dollars or 120,000 new Zimbabwe dollars
per US dollar on the black market in June 2007.
Source: Wikipedia
From 1998 through 2009, the Zimbabwean currency experienced tremendous inflation,
peaking at 79,600,000,000% per month in mid-November 2008 with daily inflection rate reaching
98%. Roughly every day, prices would double.
To correct the falling value of Zimbabwe's currency, the Reserve Bank of Zimbabwe simply
increased its money printing efforts, declared inflation illegal, redenominated its currency from Z$5,
Z$10, and Z$20 bills into Z$100,000,000 and Z$200,000,000 bills, purposefully avoided updating its
foreign exchange rates or inflation rates, and announced new currency regimes that did not address the
underlying causes of inflation and further eroded citizens' trust. Consequently, in spite of the illegal
usage of foreign currency, the black market for foreign currencies became a regular mechanism for
purchasing basic products and services at a generally steady value.
3.2. Several identifiable causes of hyperinflation in Zimbabwe (1997 - 2008)
The worst case of hyperinflation in modern history was set off by inappropriate policymaking
by Robert Mugabe’s regime:
Land reform policy: Mugabe’s government aimed to redistribute farmlands, transferring
their ownership from white commercial farmers to the major black population This movement led to
imminent devastation to both the nation’s political and economic climate. White farmers, despite
constituting 5% of the total population, had contributed a massive part in the country’s GDP from
agriculture. (Rawat P., 2016) “Farms stopped supplying local markets with food, and a food supply
crisis erupted.”; meanwhile, “those who took over the land had little farming expertise, and the land
largely reverted to bare earth and bushveld. (Haslam P. and Lamberti R., 2015)
Excessive war funding: Mugabe’s regime fueled the ten-year long war, authorizing 11,000
Zimbabwean soldiers to participate in the Second Congo War.. Zimbabwe’s presence in this war
exhausted so much of its monetary reserves that its government had to print more money to finance it.
In addition, this problem was paired with institutional corruption: the reported monthly war spending
by the government was lower than its actual number by $22 million. (Rawat P., 2016)
Economic mismanagement: Fiscal deficit has been a major contributor to the hyperinflation
matter. The World Bank withdrew its offer of a US $100 million loan, witnessing Zimbabwe’s
alarmingly high expenditure and debt. After the breaking point in November 1997 (Black Friday), the
Zimbabwe dollar lost 75% of its original value in a day; the currency has not recovered since.
6
(Haslam P. and Lamberti R., 2015). By 1999, all foreign organizations seized donations towards the
government and national debt skyrocketed.
The IMF reported a budget deficit of 10% of estimated GDP in 2006, more than triple its
original number of 3% during 1998. Government expenditure had registered a devastating 53.5% of
GDP in 2006, two times higher than its predicted value of 24.7%.
Expectations: Since the national currency had depleted in its value, which equals losing its
credibility, the common public reject the Zim dollar even more due to its instability, calculating the
price increases based on what they expected inflation to be in the future. An abundance of banknotes
now were practically worthless when unused as the common public switched to more reliable
currencies, typically the US dollars.
These are several identifiable causes, but all in all, the root cause to Zimbabwe’s economic
crisis lies within rapid money creation issued by President Mugabe. The Reserve Bank of
Zimbabwe (RBZ) had been printing money at an alarming pace from January 2005 to May 2007,
exceeding its inflation rate and that of Germany's central bank back in its ramp-up phase of
hyperinflation (1920s). Graph 2 (Haslam P. and Lamberti R., 2015) and Figure 2 (Hanke S., 2008)
respectively depicts the RBZ’s money printing speed and its currency circulation compared to that of
1920s Germany.
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3.3. The effects of hyperinflation on society and economy of Zimbabwe
The consecutive mismanagement in Mugabe’s policy making had led to a devastating
outcome for Zimbabwe’s economy.
Money depreciation: Zimbabwe’s national currency was heavily depreciated, rendering its
banknotes almost worthless: its effect was so large that they had to print money with denominations in
trillions, issuing $100,000,000,000,000 notes in 2009. Zimbabwe’s banknote became the currency
with the most zeroes of any legal tender in all recorded history (Rawat P., 2016). Additionally, the
annual inflation rate in 2008 was 11.2 million percentage points, practically costing more to print
money than the money is actually valued. During one point in 2008, inflation spiraled out of control,
reaching an annualized rate of 89.7 sextillion (or 89,700,000,000,000,000,000,000) percent. (Hanke
S., November 9 2012)
The figure below showcased the rise in exchange rates of Zimbabwe during the late 90s 2008 crisis, following the same pattern as its precursor Germany during its hyperinflation period after
WWI.
8
Degenerating economy: Zimbabwe turned from a relatively successful country in
agricultural exports (second to South Africa), into one riddled with food scarcity, poverty and
unemployment. Here are related figures that illustrated this downturn:
i. The nation’s unemployment rate reached over 80% and was the highest in the world.
ii. In terms of agriculture, the annual wheat production fell from 300,000 tonnes in 1990 to
50,000 in 2007. The tobacco industry, Zimbabwe’s largest generator of foreign exchange,
comprising one third of the national foreign exchange revenue in 2000, almost completely
collapsed.
iii. Millions of Zimbabweans had experienced a huge scarcity of food - most of them were
surviving on just one meal a day. The problem was further worsened by the droughts in the
mid 2000s.
iv. CPI rate rose with terrifying speed throughout the hyperinflation period, see table below.
Dwindling life quality:
i. Average living standard, measured by real GDP per capita growth fell by 38%. Miserably
low savings and income of the impoverished population were wiped out due to real
(inflation-adjusted) interest rates being negative (Table 1). Citizens were forced to either treasury bills
issued by the government, or deposit from the RBZ that pays zero interest rate. (Hanke S., 2008).
ii. Average life expectancy dropped, becoming the country with one of the lowest life
expectancy in the world
iii. Emigration rate skyrocketed; hundreds of thousands either fled to neighboring countries or
displaced within Zimbabwe
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3.4. Government policies to combat hyperinflation in Zimbabwe
Zimbabwe government’s action to tackle the hyperinflation includes:
Limiting Money Supply
The Reserve Bank of Zimbabwe limited the amount of money in circulation to reduce
inflation. This policy involved reducing government spending, tightening monetary policy, and
increasing interest rates to encourage people to save instead of spending. However, this had little
effect as the government continued to print more money to finance its operations.
Demonetizing the Zimbabwean dollar as well as dollarizing the economy.
When inflation reached all-time highs in late 2008, the Zimbabwean decided to implement a
number of changes to curb inflation. First, they officially announced the demise of the Zimbabwe
dollar in February 2009 and adopted foreign currencies as official currencies, including the US dollar,
South African Rand, Euro, Chinese Yuan, allowing them to stabilize prices, exchange rates, and
regain confidence in currency worth. (Morales T., August 6 2020). This is called the multicurrency
system, under which transactions in hard foreign currencies are authorized, payments of taxes are
mandatory in foreign exchange, and the exchange system largely is liberalized. While five foreign
currencies have been granted official status, the U.S. dollar has become the principal currency. As of
September 2008, the Zimbabwean economy moved to partial dollarization with the Reserve bank
approving a few licensed producers to sell their goods in foreign currency.
For civil transactions, according to estimates by banks, four-fifths of transactions including
transactions of domestically produced goods or payment of wages to workers and securities
transactions are used in U.S. dollars. In the market, all stores list the prices of their goods in US
dollars (except for a number of stores in the south where it borders South Africa, which list the rand 10
the currency of South Africa). This led to a shortage of US coins in payment and the US Federal
Reserve (FED) officially agreed to provide coins to Zimbabwe to overcome this shortfall.
It is hard to believe that after only 2 years, Zimbabwe has successfully controlled
hyperinflation. In fact, the past time has been enough for the 100 billion Zimbabwe dollar bill to
gradually regain its value. The General Statistics Office of Zimbabwe announced that the consumer
price index (CPI) in January 2011 increased by 0.9% compared to the previous month, showing that
the Zimbabwean government has succeeded in curbing inflation since a record increase
(23,100,000%) in July 2008.
Force commercial banks to buy its treasury bills
Zimbabwe tried to force banks operating in the country to buy its treasury bills after attempts
to sell the first central bank securities since 2008 failed. Treasury bills were a major source of
government funding in the final year of hyperinflation which ended early in 2009, when the country
abandoned its domestic currency and dollarised. The Reserve Bank of Zimbabwe in October 2012
offered its first Treasury bills since the country abandoned its currency and adopted the dollar in a bid
to curb inflation estimated by the IMF at 500 billion percent.
Impose strict price controls
The government has also mandated a 50% discount on many goods and thousands of
entrepreneurs have been arrested for pricing goods at levels the government considers speculative.
Price controls were imposed on essential goods and services such as food, fuel, and electricity. The
idea was to prevent businesses from exploiting consumers by charging exorbitant prices. However,
this policy only led to shortages of these commodities, as suppliers could no longer afford to produce
them at the controlled prices.
4. Hyperinflation in Venezuela
4.1. Overview of the economic situation in Venezuela
Venezuela is a former Spanish colony on the northern coast of South America, one of the
world’s most important producers of oil (IYER & RODRÍGUEZ, 2021). Venezuela has the world's
largest proven oil reserves, totaling 302.81 billion barrels at the end of 2017. Oil is the major driver of
Venezuela’s economy, accounting for 96% of Venezuela’s exports and was responsible for more than
90% of their export earnings and accounted for 16.7% of GDP (Wikipedia, 2023). Thus, Venezuela is
largely dependent on fluctuations of oil prices.
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Source: (Restuccia, 2018)
Since the 1990s, food production in Venezuela has dropped continuously, with Hugo Chávez's
Bolivarian government beginning to rely upon imported food using the country's then-large oil profits
(Wikipedia, 2023). Agriculture in Venezuela accounts for approximately 3% of GDP, 10% of the labor
force, and at least a quarter of Venezuela's land area. The country is not self-sufficient in most areas of
agriculture. Venezuela imports about two-thirds of its food needs. The last report of shortages in
Venezuela showed that 22.4% of necessary goods are not in stock (Wikipedia, 2023).
Venezuela's economy has been in a state of total economic collapse since 2013. In 2015,
Venezuela had over 100% inflation—the highest in the world and the highest in the country's history
at that time. According to independent sources, the rate increased to 80,000% at the end of 2018 with
Venezuela spiraling into hyperinflation while the poverty rate was nearly 90 percent of the population
(Wikipedia, 2023).
4.2. Several causes of hyperinflation in Venezuela
In brief, hyperinflation in Venezuela was fueled by many factors. These - according to Garth
Friesen from Forbes, include:
A mix of government mismanagement and corruption, an undiversified nationalized economy,
a reliance on imports for living essentials, no independent central bank and some sort of exogenous
shock. (Forbes. 2018)
Oil dependence
Back in 1998, the increase of oil price brought notable wealth to the Venezuelan and
expanded the government budget significantly. Being a petrostate, oil is the major driver of
Venezuela’s economy, accounting for 96% of Venezuela’s exports and was responsible for more than
90% of their export earnings. However, this overdependence on oil has made Venezuela extremely
vulnerable to any exogenous shocks. For example, a labor strike at the state-owned oil company
crippled the economy and lowered GDP by 27% in the first quarter. In 2014, the collapse of oil prices
caused Venezuela's economy to shrink by 30% over the next 3 years.
Failing production and the reliance on imports of consumer goods
Food production dropped continuously since the 1990s as the government relied upon
imported food using the country's then-large oil profits. Insufficient operations of nationalized
industries (Friesen 2018) and growing essential imports has also contributed to the Bolivar collapse
(Venezuela currency) and eventually, Venezuela’ spiraling economy. Growing reliance on imports of
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consumer goods transpired at the exact time when oil prices boom. Hence, when oil prices crashed,
the economy struggled to afford import products because foreign demand for the Bolivar fell,
depreciating the currency, causing import costs to rise.
Government mismanagement:
Most economic, political and social measures introduced by the Venezuelan government in an
attempt to hamper the tipping crisis have been inefficient, and in many cases counter effective. For
instance, when trying to cease the Bolivar depreciation in 2003. Venezuela has introduced a currency
peg, installing import controls and nationalizing industries. Economists argue that such measures,
while recovering the economy in the short run, could potentially culminate in a future crisis. Pegging
requires large amounts of reserves and effective central banks and could lead to long-term inflation as
well as growing reliance on import. The nationalization of industries is also controversial as later
seen, the government was unable to effectively operate production which eventually led to failing
production and import reliance.
The Venezuelan government also responded to the declining economic performance by
printing more money with a hope to stimulate consumption and economic activities. According to
Adbdou 2020, money supply in Venezuela's economy was increasing by 60% yearly by 2013 and over
76% by 2014. As oil prices continued to fall and production lagged behind, investors began to pull out
of Venezuela's economy, which lowered the value of Bolivar even more. Prices started to increase and
the government had to print more money to pay its bill. According to Carmody 2018, this is the cycle
that leads to hyperinflation. (Carmody 2018)
As the national currency’s value plummeted, citizens lost their hopes and tried to convert into
a more stable one, like the US dollar. The government responded by issuing currency control,
setting a fixed exchange rate so as to make it difficult to exchange Bolivar into Dollars. This only
gave way to black market activities cross-border (Colombia), further lowered the price of Bolivar and
good shortages.
4.3. The effects of hyperinflation on the economy and society of Venezuela
Hyperinflation in Venezuela has resulted in one of the world’s most serious economic and
humanitarian crises. From a spiraling economy that is shrinking in size to one of the biggest human
displacement crises, hyperinflation has severely ravaged Venezuela's well-being and stability.
Economy
In 2018, the fiscal deficit accounted for 15% of GDP, GDP shrank by one-fourth, the monetary base
grew by 73000%, prices increased by more than 1.6 million percent.
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The spiraling economy has also resulted in a national debt crisis, as shown in the chart above.
Signs of soaring debt have been uninterrupted ever since 2012 and peaked in 2020 with over 327.72%
in relation to GDP before gradually cooling down.
Unemployment has been increasing in the years of hyperinflation with the 2019 rate seen as
Venezuela's highest. In January 2016, the unemployment rate was 18.1% and the economy was the
worst in the world according to the misery index. Venezuela has not reported official unemployment
figures since April 2016, when the rate was at 7.3%. In October 2019, the unemployment rate reached
35%. By the end of the year, it was estimated that it would increase to 39% to 40%, and that 60% of
the economically active population belong to the informal sector, which influences the low salary that
has caused many young people to emigrate to other countries.
Society
A myriad of index and metrics all point to what could have been seen as one of the worst
humanitarian crises in Latin America.
Regarding living standards, nearly all Venezuelans live in poverty. Formal reports show that
nine out of ten Venezuelans were living in poverty. Poor living standards and harsh living conditions
have fueled significant social unrest in Venezuela. The country ranks among countries with the
highest murder rates. In 2022, there were nearly 40.4 homicides per 100,000 inhabitants in the
country, down from a homicide rate of 40.9 a year earlier.
At the same time, due to serious food shortage, Venezuela ranks top among countries with the
highest rates of food insecurity. Child malnutrition reached 15% in some states (Huertas 2019). In
2019, average income in Venezuela was 0.72$ cents. 97% of Venezuelans are uncertain as to where
and when their next meal will come.
So far around 7.24 million Venezuelans since 2023, 1/10 of the population have fled the
country causing the largest human displacement in Latin American history. The number of
Venezuelan seeking refugee status worldwide has increased by 8000% since 2014. This is the
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equivalent of the Great Depression, the hyperinflation of Zimbabwe, and the Syrian migrant crisis —
all at the same time.
4.4. Several government policies to combat hyperinflation in Venezuela
The Venezuelan government tried to address the hyperinflation through a combination of
fiscal, monetary and exchange rate policies. In mid-2018, the government lifted some currency
controls so that citizens and firms could purchase and sell foreign exchange. It also unified and
devalued the exchange rate and introduced a new currency, the Bolivar Soberano, at a rate that
matched the informal price. This helped narrow the black market spread, the difference between the
official rate and the black-market rate. Since 2019, Maduro has drastically reduced expenditures,
increased the value added tax rate, shortened the lags in tax collection from 14 days to 7, increased
banking reserve ratios, and removed controls on access to foreign currency while also intervening in
the foreign exchange market. (Reilly, 2020).
Mitigate currency controls
The exchange controls were imposed by Maduro’s predecessor, Hugo Chávez, following an
attempted coup in 2002. The currency controls, which originally require businesses and individuals to
buy dollars via the state at a fixed exchange rate, are frequently identified as one of the main drivers
of the crisis that includes hyper-inflation and product shortages (Buitrago et al., 2018). The
Venezuelan government took steps in August to loosen controls, allowing people and companies to
buy and sell dollars through exchange houses subject to regulations on the price and amount. But the
measure had little success due to the scarcity of foreign currency when oil prices shrinked (Sanchez,
2019).
Redenomination
On 20 August 2018, the Maduro administration launched the bolívar soberano (the sovereign
bolivar), with 1 Bs.S (soberano) worth 100,000 Bs.F (fuerte). Under the country's official fixed
exchange rate to the US dollar, the new currency was devalued by roughly 95% compared to the old
bolívar fuerte. The sovereign bolivar would be pegged to the petro - the digital currency that the
country has issued, whose value depends on the price of Venezuelan oil. However, the measure did
not prevent hyperinflation. Immediately following the introduction of the bolívar soberano, the
inflation rate increased from 61,463% on 21 August to 65,320% on 22 August. (Wikipedia, 2023).
Informal dollarization
Following increased international sanctions throughout 2019, the Maduro government
abandoned policies established by Chávez such as price and currency controls (imposed since 2003)
which resulted in the country seeing a rebound from economic decline. According to a survey by
economic consultant Econalítica, about 54% of transactions in Venezuelan during September 2019
were in US dollars. The number of transactions in dollars raised up to 86% in Maracaibo. The survey
also found that almost all sales of electrical appliances are dollarized, as well as half of the sales of
clothes, spare car parts and food. In a November 2019 interview with Venezuelan journalist José
Vicente Rangel, President Nicolás Maduro described dollarization as an "escape valve" that helps the
recovery of the country, the spread of productive forces in the country and the economy. However,
Maduro said that the Venezuelan bolívar will still remain as the national currency. Some Venezuelan
banks began to issue debit cards in U.S. dollars on January 29, 2021. (Wikipedia, 2023)
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5. Comparison between Venezuela and Zimbabwe
Venezuela
Similarity
Zimbabwe
Unsustainable economic model: Both countries are command economies with an
overdependence on one particular industry. (fuel exploitation and agriculture).
Both heavily rely on importation for essential goods.
Governmental mismanagement played a big part in persisting hyperinflation.
Both countries experienced severe budget deficits and responded to the tipping
crisis by printing more money and imposing price control. To add onto this, highly
conservative and corrupted officials operate the system, which is one of the
underlying culprits for the issue in both nations.
Economic penalties: Venezuela and Zimbabwe had to bear economic sanctions
from the international organization (IMF), as well as other big countries such as
the US
Mitigation: Both countries attempt to counter hyperinflation by implementing
fiscal and monetary policy.
Spiraling economy as the outcome of hyperinflation: lack of basic necessities
(food, sanitation…), poverty, unemployment, human displacement, social unrest,
price skyrocketing
Political
and
economic
context
Venezuela is a former Spanish colony
in the northern coast of South
America, one of the world’s most
important producers of oil.
Venezuela’s
economy
depends
heavily on oil exports, standing at
90% of exports income, while the
share of agriculture is just 3% of
GDP, making it unable to supply its
necessary goods. As a result,
Venezuela’s economy has collapsed
since 2013, when the oil price
plummeted and witnessed a record
high inflation rate, standing at
80,000%, by the end of 2018.
90% of the population are in poverty.
The Republic of Zimbabwe, which was
once a British colony in Southern
Rhodesia, gained its independence on
April 18, 1980. After less than two
decades, the country underwent its
hyperinflation period (1997 - 2009).
Meanwhile, the world was experiencing
the Great Recession (2008-2009), which
was one of the worst economic downturn
in history.
Causes
The Venezuelan government printed
money
to
stimulate
money
circulation, economic transactions
and to pay its bills. A combination of
fixed exchange rates, nationalization
of other industries, the economy is
pushed to eventual collapse.
Zimbabwe was ravaged by civil wars,
having been printing money to supply for
the army. A combination of land
redistribution and internal corruption, the
economy is pushed to eventual collapse.
Policies
Venezuela
attempted
to
curb Meanwhile, Zimbabwe’s government
hyperinflation by implementing a tackled the impact of hyperinflation by
serie of monetary and fiscal policy:
using these following methods:
Differences
16
i. Cease Currency control
ii. Denomination
iii. Informal dollarization
i. Dollarization with multi-currency
economy, mostly USD, South African
Rand
ii. Price-control
iii. Localize foreign business, ensuring
black people’s control over businesses
iv. Forcing treasury bills upon
commercial banks
6. Key takeaways from other governments
Based on the specific causes of hyperinflation in Venezuela and Zimbabwe, we will look for
other governments that have encountered similar issues or applied similar policies . Then, we will
discuss why these governments succeeded while Venezuela and Zimbabwe failed.
6.1. Government mismanagement
6.1.1. Excessive money supply and redenomination
The policies in Venezuela and Zimbabwe
The Venezuelan government stated that printing money was quicker than borrowing money or
getting money from tax revenue, thus leading to printing money in urgent times to finance the
government’s spending and social programs. This made the economic situation in this country worse
and hyperinflation rate increased sharply. To combat the hyperinflation rate, in August 2018, the
government introduced a new currency called the sovereign bolivar, which replaced the old bolivar at
a rate of 100,000 to one. The new currency was also supposed to be anchored to a state-backed
cryptocurrency called the petro, but this was never implemented. Despite the redenomination, the
government continued to print money, causing inflation to rise sharply. The redenomination did not
restore economic growth and development. Venezuela’s GDP contracted by 18 percent in 2018 and 35
percent in 2019.
In Zimbabwe, the government resorted to printing money as a short-term solution to pay its
bills and supply for the army. In July 2008, the governor of the Reserve Bank of Zimbabwe, Gideon
Gono, announced a new Zimbabwean dollar (ZWR) by removing 10 zeros from its currency (ZWN)
and issuing a new series of banknotes and coins. However, the redenomination of the currency did not
curb the inflation situation. Zimbabwe’s inflation rate reached 231 million percent in July 2008 and
79.6 billion percent in mid-November 2008
The reasons why Venezuela and Zimbabwe failed:
Venezuela and Zimbabwe’s redenominations were not followed by other reforms that
addressed the underlying causes of inflation, such as sound fiscal discipline, monetary stability,
exchange rate unification, debt restructuring, and economic diversification, and the governments
continued to print money and run fiscal deficits.
Venezuela and Zimbabwe’s redenominations were not backed by any asset or limit, and the
currencies were subject to counterfeiting and speculation.
Venezuela and Zimbabwe’s redenominations were resisted by internal conflict and chaos,
such as the political crisis and the social unrest that plagued both countries.
Policy in Germany
Germany is one of the worst cases of hyperinflation in history, however, Germany
successfully dealt with excessive money supply in 1923 by redenomination. In October 1923, the
government introduced a new currency called the Rentenmark, which replaced the old mark at a rate
of one trillion to one. The Rentenmark was backed by a fixed amount of gold marks worth 3.2 billion
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paper marks, which was equivalent to the value of all the land and industry in Germany. The
Rentenmark was also limited by law to 3.2 billion units, which prevented the government from
printing more money and causing inflation. The redenomination of the currency helped to restore
confidence and stability in the German economy, as it ended the vicious cycle of printing money and
rising prices. Germany’s inflation rate reached 29,500 percent per month in October 1923 and dropped
to 0.8 percent per month in November 1923.
This policy of the German government overcame limitations of that in Venezuela and
Zimbabwe. Germany’s redenomination was accompanied by other reforms that addressed the
underlying causes of inflation and backed by a credible asset and a strict limit on its supply, such as
the Rentenmark, which was based on mortgages on land and industry. This policy was accepted by
internal consensus and stability, such as the government of Gustav Stresemann, which overcame the
opposition of extremists and gained the support of the public and the businesses.
Therefore, redenomination by itself does not solve the underlying problems of a currency.
Governments should combine redenomination with other policies addressing the root causes of
hyperinflation such as sound fiscal discipline, monetary stability, exchange rate unification, debt
restructuring, and economic diversification. The redenomination needs to be backed by a credible
asset to limit money supply and governments also need to gain consensus and stability within their
countries when introducing a new currency.
6.1.2. Free - Floating exchange rate
The free - floating exchange rate was introduced in Venezuela in 2002, and soon replaced by
exchange controls in the following year. Although imposed in a short period of time, the free-floating
exchange rate has caused the Venezuela bolívar to lose value dramatically.
Definition
A free-floating exchange rate occurs when a government allows the exchange rate to be
determined purely by market forces and there is no attempt to ask the central bank to influence the
external value of the exchange rate (Tutor2u, 2022)
The policies in Venezuela
Venezuela:
In February 2002, due to substantial losses of foreign exchange reserves, declining oil prices,
deteriorating government fiscal position, and very high interest rates, the authorities announced to
adopt a free floating exchange rate and gave up the controlled band of allowing up to 10%
depreciation per year (Lifsher, 2002)
In early 2002, the introduction of a free-floating exchange rate system initially caused
inflation to accelerate, and the CPI for March in Venezuela rose by 4.3 per cent compared to the
previous month. The peace of inflation eased in April and May, before accelerating once more in the
following months; during the first eight months of 2002, CPI rose by 19.8 per cent. The bolivar lost a
cumulative 92.8 percent of its value from February and Septembers (the Secretariat, 2002)
The float collapsed when oil exports virtually ceased in December 2002, which caused, in the
middle of political turmoil, a speculative attack that led to a sharp depreciation of the bolivar. (Giner
& Mendoza, 2005)
U.S.A
The concept of a completely free-floating exchange rate system is a theoretical one. In
practice, all governments or central banks intervene in currency markets in an effort to influence
exchange rates. Some countries, such as the United States, intervene to only a small degree, so that the
notion of a free-floating exchange rate system comes close to what actually exists in the United States
(Github, n.d.)
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With that system, the Dollar can retain its power partly due to these factors:
A large and diverse economy: Being the world’s largest economy (2021), The United States
has a large and diverse economy with many different industries. This makes it less vulnerable to
external economic shocks and allows the country to adapt to changing global conditions.
Institutions: The United States has strong and trusted institutions that promote transparency
and accountability. This creates confidence in the country's economy and financial system, which
attracts foreign investment and stabilizes the exchange rate.
A strong rule of law: The United States has a strong rule of law that protects property rights
and ensures contracts are enforced. This provides a stable legal framework for businesses and
investors to operate in, which helps to stabilize the economy and exchange rate.
These factors have contributed to a stable macroeconomic environment that supports a
free-floating exchange rate regime and promotes economic growth and prosperity.
Why Venezuela failed
The declared objective of the new regime, which does not rule out interventions to prevent
exchange-rate movements considered excessive, is to sustain the level of international reserves,
supply foreign currency to match the needs of the economy, and enhance competitiveness in the
productive sector(the Secretariat, 2002). However as the exchange-rate was used as an
anti-inflationary anchor, the new exchange-rate regime will not help to make monetary policy more
effective in its fundamental task of maintaining price stability
Particularly, Venezuela's attempt to reduce hyperinflation by using free floating exchange regime was
unsuccessful due to several reasons:
Political Instability: One of the difficulties of a free-floating exchange regime is that a freely
floating currency rate implies a lot of volatility and lack of discipline. Then, freely floating exchange
rates only make sense if the country has sufficient internal control mechanisms in place(Management
Study Guide, n.d.).The ongoing political instability in Venezuela also contributed to the failure of the
free-floating exchange rate regime. The protests, hyperinflation, and food shortages led to a loss of
confidence in the government and its ability to manage the economy.
Dependence on Oil: Venezuela is heavily dependent on oil exports for its revenue. The
decline in global oil prices in 2014 significantly impacted the country's economy, as it resulted in a
reduction in its foreign currency earnings. This made it difficult for Venezuela to maintain adequate
foreign currency reserves to support its free-floating exchange rate regime. Eventually, Venezuela's oil
exports ground to a halt (December 2002) directly leading to the collapse of the float exchange.
To sum up, a free-floating exchange regime cannot act as a solution for hyperinflation as it
lacks discipline and is volatile. Despite the definition of a free-floating exchange rate, there has been
adequate intervention by the government to adjust the volatility of this policy. This type of exchange
rate became more popular after the failure of the gold standard and the Bretton Woods agreement.
However, to introduce this exchange rate, the country should be backed up by a healthy economy and
a strong rule of law.
6.1.3. Fiscal Discipline
6.1.3.1. A country that overcame hyperinflation by fiscal discipline - Brazil
One notable example of a country that successfully addressed hyperinflation through fiscal
discipline is Brazil in the mid-1990s. Brazil experienced high inflation rates during the late 1980s and
early 1990s, reaching hyperinflation levels. To overcome this economic crisis, Brazil implemented a
series of fiscal discipline measures, including:
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Introduction of the Plano Real: In 1994, Brazil launched the Plano Real, a comprehensive
economic stabilization plan. The plan aimed to control inflation, stabilize the currency, and restore
fiscal discipline. It involved measures such as the introduction of a new currency, the Real, and the
establishment of a floating exchange rate system.
Fiscal Responsibility Law: Brazil implemented the Fiscal Responsibility Law in 2000, which
established rules and guidelines to promote fiscal discipline at all levels of government. The law
introduced limits on public spending, debt management requirements, and transparency and
accountability measures.
Budget Control and Expenditure Rationalization: The Brazilian government focused on
controlling public spending, reducing fiscal deficits, and rationalizing expenditures. This included
measures such as stricter budget controls, cuts in non-essential expenditures, and reforms in public
sector pay and pensions.
Strengthening Tax Administration: Brazil implemented reforms to enhance tax administration
and increase tax compliance. This included measures to simplify the tax system, improve tax
collection processes, and combat tax evasion.
These fiscal discipline measures, along with other structural reforms and the stabilization
efforts of the Plano Real, contributed to Brazil's successful reduction of hyperinflation and the
restoration of economic stability. Brazil's experience serves as an example of how fiscal discipline can
play a crucial role in overcoming hyperinflation and achieving long-term economic stability.
6.1.3.2. Comparison between Brazil and these two countries’ approaches and outcomes.
6.1.3.2.1. Brazil and Venezuela
Political Stability and Consensus:
Brazil: Brazil enjoyed a relatively stable political environment during its fiscal discipline efforts.
There was broad consensus among political parties and stakeholders regarding the need for economic
stabilization and fiscal reforms.
Venezuela: Venezuela faced significant political instability and divisions, which hindered the effective
implementation of fiscal discipline measures. The lack of consensus and frequent changes in
leadership undermined the continuity and effectiveness of fiscal reforms.
Policy Consistency and Long-Term Commitment:
Brazil: Brazil demonstrated a sustained commitment to fiscal discipline over an extended period. The
Plano Real and the Fiscal Responsibility Law provided comprehensive frameworks for fiscal
management and were implemented with a long-term perspective.
Venezuela: Venezuela's fiscal discipline measures were often inconsistent and lacked long-term
commitment. There were frequent changes in policies and implementation approaches, undermining
the effectiveness and credibility of the fiscal reforms.
Economic Diversification:
Brazil: Brazil had a more diversified economy, which provided a buffer against external shocks and
allowed for a more flexible fiscal policy response. This diversification helped Brazil to better navigate
economic challenges and maintain fiscal stability.
Venezuela: Venezuela heavily relied on oil exports, making its economy highly vulnerable to
fluctuations in oil prices. The lack of economic diversification limited its fiscal policy options and
exacerbated the impact of external shocks.
Institutional Capacity and Governance:
Brazil: Brazil had stronger institutional capacity and governance structures during its fiscal discipline
efforts. This allowed for better implementation, monitoring, and enforcement of fiscal discipline
measures, contributing to their effectiveness.
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Venezuela: Venezuela faced challenges related to corruption, mismanagement of resources, and weak
governance. These issues undermined the effectiveness of fiscal reforms and hindered the restoration
of fiscal discipline.
External Factors and Economic Sanctions:
Brazil: Brazil did not face significant economic sanctions or external constraints during its fiscal
discipline efforts, which provided more flexibility in implementing its reforms.
Venezuela: Venezuela faced economic sanctions and external pressures, which further complicated its
fiscal management and restricted its access to international financing. These external factors limited
its ability to implement effective fiscal measures.
Overall, Brazil's successful application of fiscal discipline to solve hyperinflation can be attributed to
factors such as political stability, policy consistency, economic diversification, strong institutions, and
a more favorable external environment. In contrast, Venezuela faced challenges related to political
instability, inconsistent policies, economic dependence on oil, weak institutions, and external
constraints, which contributed to the failure of its fiscal discipline efforts.
6.1.3.2.2. Brazil and Zimbabwe
Policy Implementation and Consistency:
Brazil: Brazil implemented a comprehensive and consistent set of fiscal discipline measures,
such as the Plano Real and the Fiscal Responsibility Law. These policies were implemented with a
long-term perspective and supported by a broad political consensus.
Zimbabwe: Zimbabwe's implementation of fiscal discipline measures was inconsistent and
lacked long-term commitment. The government struggled to maintain policy coherence and faced
challenges in enforcing fiscal discipline measures effectively.
Economic Management and Structural Reforms:
Brazil: Brazil pursued structural reforms alongside fiscal discipline, including trade
liberalization, privatization, and market-oriented policies. These reforms helped to improve economic
efficiency, enhance competitiveness, and create a favorable environment for fiscal discipline.
Zimbabwe: Zimbabwe faced challenges in implementing necessary economic reforms, such
as addressing land redistribution issues and promoting private sector development. The lack of
comprehensive structural reforms undermined the effectiveness of fiscal discipline measures.
Political Stability and Governance:
Brazil: Brazil had a relatively stable political environment during its fiscal discipline efforts,
with a strong commitment from political leaders to address inflation and stabilize the economy. The
government's ability to implement and sustain fiscal discipline was supported by effective governance
structures.
Zimbabwe: Zimbabwe faced political instability and governance challenges during its
hyperinflation period. Political conflicts, policy inconsistencies, and weak governance undermined the
government's ability to implement and maintain fiscal discipline effectively.
External Factors and International Support:
Brazil: Brazil received international support and assistance during its stabilization efforts,
including technical expertise and access to international financing. This external support helped to
bolster Brazil's fiscal discipline measures and economic stabilization.
Zimbabwe: Zimbabwe faced limited international support during its hyperinflation crisis, with
restrictions on access to financing and technical assistance. The lack of external support constrained
the government's capacity to implement effective fiscal discipline measures.
Economic Structure and Resource Dependence:
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Brazil: Brazil had a more diversified economy, which provided a stronger economic base to
support fiscal discipline efforts. The country's economic structure and export diversity reduced its
vulnerability to external shocks.
Zimbabwe: Zimbabwe's economy was heavily reliant on a few key sectors, such as
agriculture, and faced challenges related to land redistribution and productivity. The country's
resource dependence and limited economic diversification exacerbated the impact of economic shocks
and hampered fiscal discipline efforts.
These factors collectively contributed to Brazil's successful application of fiscal discipline in
the 1990s and Zimbabwe's failure to achieve similar results. The combination of effective policy
implementation, structural reforms, political stability, good governance, external support, and a
diversified economy played a significant role in Brazil's success, while the lack of these elements
hindered Zimbabwe's ability to effectively implement and sustain fiscal discipline.
6.2. Undiversified economy
Another reason for Venezuela and Zimbabwe hyperinflation is an undiversified economy.
Both countries rely heavily on a single export commodity: oil in Venezuela and agriculture in
Zimbabwe, making their economy vulnerable to external shock.
6.2.1. The two countries' dependence on one economy
6.2.1.1 Venezuela’s dependence on one economy
According to the Atlas of Economic Complexity, 83,62% of Venezuelan exports basket
composition is petroleum oil. Venezuela is mainly an oil economy, with a significant dependence on
oil exports with almost nonexistent diversification. Venezuelan exports are concentrated on a low
complex product and its levels of economic complexity are also low.
The oil industry in Venezuela is subject to fluctuations in global oil prices, which can cause
massive swings in the country's economic fortunes.
During the last high oil prices cycle which ended in mid-2014 some oil exporters were more
prudent than in the past, saving and investing more of the windfall, and taking advantage of the price
environment to increase oil production. Venezuela was not one of those, the country was in terrible
shape even before the oil price decline in 2014. Venezuela’s economic performance during the
“Bolivarian Revolution” (1999–present) has been poor, having one of the worst per capita growth
rates and the highest inflation in the region, despite receiving the largest resource windfall. At the
same time, Venezuela’s economic dependency rose with the price during the boom period. Oil has
represented 90–96% of exports during the last 7 years, compared to 60–70% in the late 1990s.
The decline in global oil prices has caused Venezuela's economy to contract severely, leading
to hyperinflation, shortages of basic goods, and high poverty rates.
To address this issue, the Venezuelan government has attempted to diversify the economy by
promoting other industries, such as agriculture and mining. However, the country is still struggling to
reduce its dependence on oil, which has been a significant challenge for its sustainable economic
development.
6.2.1.2 Zimbabwe’s dependence on one economy
Zimbabwe's economy has been heavily reliant on agriculture for many years. While other
sectors of the economy have grown in recent years, agriculture remains one of the main contributors
to the country's GDP. Approximately 70% of Zimbabwe's population relies on agriculture as their
main source of income. In addition, the export of agricultural output constitutes the major source of
export revenue in Zimbabwe. Major export crops in Zimbabwe (that is tobacco and cotton) and
horticultural produce (flowers, fruits)accounted for over 60% of export receipts annually.
Climate change has led to irregular rainfall patterns, making it difficult for farmers to plan for
and sustain their crop yields. Additionally, the sector has been plagued by challenges such as poor
22
infrastructure, outdated farming practices, and limited access to credit and agricultural inputs. These
challenges have hampered the sector's growth potential and limited its ability to fully contribute to
Zimbabwe's economic development.
Zimbabwe has been working to diversify its economy in order to reduce its dependence on
agriculture and avoid the adverse effects of commodity price fluctuations. The government has
implemented various policies to encourage private investment and promote the growth of other
sectors such as mining, tourism, manufacturing, and services.
6.2.2 Why Venezuela and Zimbabwe failed when depending on one economy
Venezuela failed to diversify its economy due to several factors, including:
1. Overreliance on oil: Venezuela has a vast oil reserve, and the government has heavily relied on oil
exports as its main source of revenue. This has led to a neglect of other sectors of the economy, such
as agriculture, mining, and manufacturing.
2. Political instability: Venezuela has been plagued by political instability, corruption, and
mismanagement. This has deterred foreign investment, and hindered the growth of non-oil sectors of
the economy.
3. Lack of investment in infrastructure: The government has not invested enough in infrastructure
development, such as roads, bridges, and ports. This has made it difficult for other sectors of the
economy to thrive.
4. Economic policies: Venezuela's economic policies, such as price controls and nationalization of
industries, have hindered private sector growth and innovation. This has made it difficult for non-oil
sectors to compete with cheaper imports, and has hindered their competitiveness in the global
marketplace.
Zimbabwe failed to diversify its economy due to several factors, including:
1. Land reforms: The land reforms in Zimbabwe led to a decline in the agricultural sector, which was
a major contributor to the economy. This was mainly due to the lack of training, resources, and
financing for new farmers who inherited land that was previously owned by white farmers.
2. Political instability: Zimbabwe has experienced political instability, corruption, and
mismanagement, which has deterred foreign investment. This has hindered the growth of
non-agricultural sectors of the economy.
3. Hyperinflation: Zimbabwe experienced hyperinflation in the late 2000s, which led to currency
devaluation and an unstable macroeconomic environment. This made it difficult for businesses to plan
and invest in new ventures, including diversification efforts.
4. Lack of infrastructure and technology: Zimbabwe has lacked investment in infrastructure and
technology, including transportation, communication, and energy. This has made it difficult for
entrepreneurs to start new businesses and for existing businesses to compete globally.
6.2.3 A successful example of UAE in diversifying economy
UAE, the world’s eighth biggest oil producer, maintains a free-market economy with
minimum restrictions on private-sector activities, international trade and capital movements.
UAE Economy is one of the most diversified economies between the Arab countries because
it’s not just relying on oil, it also has so many important sectors which play a big role in the Economic
development of the country like Trade and tourism.
Even though the relative contribution of the different economic sectors to GDP have shifted
obviously over the years, the oil and gas sector has represented the largest share in the UAE, since the
country is endowed with huge resources of oil and gas. The UAE possesses nearly 10% of the world's
total reserves, and there is no doubt that oil will continue to provide the income for both economic
growth and the expansion of social services for several more decades at least.
23
Successful efforts at economic diversification have reduced the portion of GDP based on oil
and gas output to 25%.
6.3. Key takeaways
Governments should combine policies addressing the root causes of hyperinflation such as
sound fiscal discipline, monetary stability, exchange rate unification, debt restructuring, and economic
diversification.
The redenomination needs to be backed by a credible asset to limit money supply and
governments also need to gain consensus and stability within their countries when introducing a new
currency.
Besides, the free floating exchange rate system cannot effectively address hyperinflation due
to its instability and lack of structure. In order to implement such a system, the country must first have
a robust economy and enforceable legal framework to support it.
To improve economic diversification, the governments need to develop export promotion
policies, reduce unnecessary regulations for easier participation in various sectors, invest in
infrastructure and encourage entrepreneurship. However, to put these initiatives into practice, there are
conditions a country must have: political stability, effective governance and encouraging economic
policies. The combination of those factors will also contribute to the success of fiscal discipline.
7. Conclusion
Zimbabwe and Venezuela both experienced hyperinflation due to an unsustainable economic
model, governmental mismanagement, economic penalties, and attempted mitigation through fiscal
and monetary policy. The outcome was devastating, with a lack of basic necessities, poverty,
unemployment, human displacement, social unrest, and skyrocketing prices.
With different political and economic contexts as well as causes of hyperinflation, each nation
has implemented different policies to control hyperinflation. However, several solutions have proven
to be ineffective when implemented in Zimbabwe and Venezuela, compared to other countries using
the same policies such as Germany, the U.S and UAE. Policy makers around the world can learn from
the economic crisis of Zimbabwe and Venezuela: to identify precisely the underlying roots of inflation
and understand their country’s economic power to detect the corresponding solutions.
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