financial liberalization in vietnam current stuation and solutions

Vietnam is in the process of international economic integration, its financial liberalization cannot be done, especially after Vietnam joined the WTO in 2007.. The study of this issue be

MINISTRY OF THE STATE BANK OF VIETNAM EDUCATION AND TRAINING

BANKING ACADEMY

******************

BUI THI THANH TINH

FINANCIAL LIBERALIZATION IN VIETNAM CURRENT STUATION AND SOLUTIONS

MAJOR: FINANCE - BANKING CODE 62.34.02.01

SYSNOPSIS OF DOCTORAL THESIS ON ECONOMICS

Hanoi – 2013

This thesis was completed in Banking Academy

Scientific Instructor:

1 Asso.Prof Dr To Kim Ngoc

2 Dr Dao Minh Tu

Opponent 1: Prof Dr Nguyen Dinh Huong

Opponent 2: Dr Le Xuan Nghia

Opponent 3: Dr Le Van Luyen

The thesis will be defended before the Academy-level thesis marking council held in Banking Academy

at day month year

INTRODUCTION

1 The urgency of the research

Through decades of severe fiscal restraint, the country is aware of the costs, at the same time, with the new conditions of the global environment, countries try to choose for themselves the financial liberalization measures to increase competition in the financial system, thereby improving allocative efficiency and resource utilization

The countries have certain differences, such as fundamentals

of macroeconomics, the development level of the financial system; degree of perfection of the legal system; management capability, governance etc are the issues to consider when selecting and sequencing measures financial liberalization The main purpose is to maximize the benefits of financial liberalization while minimizing the damage that financial liberalization brought The liberalization of financial help create an environment of transparency, flexibility and efficiency to the financial system, attract investment, stimulate healthy competition, bring development dynamics as well as the opportunity to use of diversified financial services at high quality The potential benefits of financial liberalization are great, but there are also downsides to the cause of collapse, financial crisis

In early 20th century, the financial liberalization has appeared, but it only really became strong wave after World War II ended The developed economies of North America and Europe conducted strong financial liberalization in the years of 1960 - 1970, the economies of Latin America and Japan implemented it vigorously

in the 1980s while the economy developing countries in Asia promote this process in the 1990s

However, since financial liberalization became popular in the world, many people saw the financial crisis occurred in many countries in the regions such as Latin America in the 1980s or the Asian financial crisis in 1997 and currently is global financial crisis originating in the U.S in 2008

In the context of the world economy which are so volatile now, when the financial crisis originating from the U.S in 2008 spread to other countries, the world economy is not showing signs of recovery with debt problems the common European currency area (EUROZONE), has made economic experts, researchers recognize the problem of financial liberalization As these countries are increasingly having close relationship with each other, the volatility

in the financial system of a country will have strong impact on other countries How suitable the level of financial liberalization with each country is for each particular stage? That is a question that should be considered

There is the notion that it is because the process of financial liberalization that the financial crises had a chance to happen Then there are other arguments that financial liberalization is good but the manner and conditions to conduct the new liberalization is the culprit causing the crises

Vietnam is in the process of international economic integration, its financial liberalization cannot be done, especially after Vietnam joined the WTO in 2007 Having a deep understanding of the process of financial liberalization is essential to be able to contribute to the success of the financial liberalization process in Vietnam in particular and the integration of the whole economy into the global economic system in general The study of this issue becomes more significant in terms of the young financial system of Vietnam, with the background context of the current international economy, in order to be able to take advantage of the great benefits

of financial liberalization and limit its negative impact on the economy The key issue is choosing a financial liberalization route with appropriate levels in each stage Starting from these requirements, the author selected the topic "Financial liberalization in Vietnam – current situations and solutions" to study

2 Research situation

Overview of the foreign study situations

Financial liberalization has attracted the attention of many research scientists and organizations around the world such as the World Bank and the International Monetary Fund The research content of financial liberalization is very wide, but can be roughly divided the work into the following groups:

- The theoretical and experimental aspects of financial liberalization: the nature, benefits and costs, the preconditions, the level of financial liberalization are mentioned in a number of studies

of J Stieglitz (2000), Gerard Caprio, Patrick Honohan and Joseph E Stiglitz (2004), Abdul Abiad, Enrica Detragiache, and Thierry Tressel (2008) Specifically: Gerard Caprio, Patrick Honohan and

Joseph E Stiglitz (2004), Financial Liberalization: How Far? How Fast?, Joumal of Comparative Economics, 2004, vol 32, indicating

the nature of financial liberalization and the extent of financial

liberalization Ronald McKinnon (1993), The Order of Economic Liberalization: Financial Control in the Transition to a Market Economy, Baltimore, Johns Hopkins University Press, 1993 states on

the order of financial liberalization

- Study of the experience of nations on financial liberalization: the choice of methods and routes; analyze the causes

of success and failure The typical authors are Akira Ariyoshi, Karrl Habermeier, Bernard Laurens, Inci Otker-Robe (in the research program of the IMF, the World Bank conducted after the Asian financial crisis in 1997), John Williamson and Molly Mahar (1998) Barry Eichengreen and Michael Mussa (1998), Bernhard Fischer and Helmut Reisen (1992), Ronald McKinnon (1993) In the study by Barbara Stallings (2004), it clearly points out the lesson about success and failure from Latin America and Eastern Asia while conducting financial liberalization

- Research on the relationship between financial liberalization and crises includes a number of well-known researchers: Krugman, Obstfeld Krugman (1979) was the first scholar to explain the outbreak of financial crisis policy derived from

capital account liberalization He said that the nations with exchange rate regime which is not rationally managed may lead to crisis when foreign investors withdrew capital massively leading to the depletion

of foreign exchange reserves Obstfeld (1996) argued on the basis of the Krugman model and pointed out that, although the mechanism of directing exchange rates is reasonable, the financial crisis could still break out if the market's expectations sudden changed associated with the attack of speculators

Overview of research in the country

The domestic research on this topic may include a number of authors and works such as the ministerial-level scientific theme of

Trinh Quang Long (2006), Financial liberalization and risk arising: International Experience and propose a roadmap for Vietnam's deep

research on financial liberalization associated with the risk involved;

The special study code QG.04.25, National University of

Hanoi, Tran Thi Thai Ha (2006) Financial Liberalization: Theory, international experience and the problems posed to Vietnam study

mainly about financial restraint towards financial liberalization and

the experience of some countries Bui Ngoc Son (2010), Financial Liberalization - A global trends, a ministerial-level scientific research

theme, this topic has shown promising trend of financial liberalization globally, this is still the problem persists despite the volatility in the global business environment over time Nguyen Toan

Thang (2010), Theory and practice of liberalization of capital transactions and the stability of the financial sector of Vietnam: Policy Framework up to 2020, the state-level scientific research

project, this topic refers to the issue of liberalization of capital transactions in relation to the stability of the financial sector in Vietnam Referring to the relationship between financial liberalization and economic growth with studies by Tran Anh Tuan

(2002), The impact of financial liberalization to economic growth theory & practice in Vietnam, Institute of Development Studies, Ho

Chi Minh City Some studies by the Ministry of Planning and

Investment - The United Nations Development Program, VlE/02/009

Project, Research the competitiveness and the impact of liberalization of financial services: the case of the banking industry, December 2005; Nguyen Dai Lai, Financial liberalization - Trends and policy solutions for Vietnamese banks in post-WTO era Also

some of the content of financial liberalization is also mentioned in the papers presented at the scientific conferences of banking, finance and universities

However, the above-mentioned works have not reflected the full generalization, namely the status of the financial liberalization process in Vietnam, not pointed out the roadmap and financial liberalization solutions in Vietnam in the events of large fluctuations

in the economic environment both at home and abroad today In particular, the period from 2008 to date, when the world economic context has many changes deriving from the financial crisis in the U.S., Vietnam also has unavoidable impacts and is facing difficulties Under these circumstances, the opinions referring to financial liberalization matter at this stage is somewhat more cautious There are experts who question: Do we need to conduct financial liberalization or not? And after the crisis, what level of financial liberalization is suitable, especially with small economies, dependent

on foreign countries?

With a desire to meet the learning needs, research and policy planning related to such a vast and complex topic of financial

liberalization, the author selected the topic "Financial Liberalization

in Vietnam - Current situation and Solutions " to research

3 Objectives of the study

The research objective of the thesis is:

- Pointing out the principle of financial liberalization, the degrees as well as the implementation conditions of financial liberalization Countries have different conditions, do the developed, developing economies implement financial liberalization the same or not?

- Analyze and determine the extent of financial liberalization

in Vietnam over time

- Propose a roadmap and solution conditions for the financial liberalization so that the financial liberalization is most effective with Vietnam

4 Object and scope of research

- The object of the thesis research is financial liberalization, the implementation conditions of financial liberalization, the index measuring the level of financial liberalization

- Scope of the Study: In terms of time, the thesis focuses on

the period after the reform in Vietnam, especially the period from

2006 to 2011

5 Research methodology

The dissertation uses a combination of measures in economic science to analyze the issue Statistical methods, comparisons applicable to look for the salient features of the financial liberalization process in countries around the world At the same time, the thesis uses the method of analysis, synthesis, and systematization and generalization

6 The scientific meaning and practice of the thesis

The thesis systematize, contributing to developing basic theoretical issues of financial liberalization Especially clarifying the benefits and risks of financial liberalization, the necessary conditions, the issue of principle quality to ensure making full advantage of the benefits and minimize the risks of this process

Situation analysis of the financial liberalization in Vietnam, from which working out the roadmap, the solutions and conditions that promote the financial liberalization in the context of international economic integration in Vietnam today

Besides, the thesis can be used as teaching materials, research, education and policy proposals

7 Structure of the thesis

Besides the introduction, conclusion and list of references, the content of the thesis is divided into three chapters as follows:

Chapter l: Theoretical basis of financial liberalization Chapter 2: Current situation of financial liberalization in Vietnam

Chapter 3: Solutions to promote financial liberalization in Vietnam

Chapter 1 THEORETICAL BASIS OF FINANCIAL LIBERALIZATION 1.1 CONTENT AND PRINCIPLES OF FINANCIAL LIBERALIZATION

1.1.1 The concept of financial liberalization

According to IMF: Financial Liberalization is the process of reducing and eventually canceling the control of the State for the operation of the national financial system, making this system operate freely and more efficient than the market rules

1.1.2 Contents of financial liberalization

1.1.2.1 Liberalization of interest rates

Concept: The liberalization of interest rates is an important

part of financial liberalization The liberalization of the exchange rate

is to delegate to the market to fully determine the equilibrium interest rate, the central bank only uses indirect intervention tools to adjust to suit the objectives and strategies set out in each period of economic development

Expression of interest rate liberalization: Liberalization of

interest rate is nuclear of the FL (financial liberalization) process Liberalization of interest rate is shown by allowing commercial banks (CBs), credit institutions (CIs) to freely determine the capital mobilization and borrowing interest rates; the Central Bank (CB) uses the indirect interest operating mechanism instead of the direct interest rate operating mechanism

1.1.2.2 The liberalization of the exchange rate

Exchange rate is the cost of money and reflecting the total harmonic correlation of the social general price level in the domestic market society compared to overseas markets

Concept: Exchange rate liberalization is a process towards

allowing the exchange rate to be determined based on the market supply and demand relationship

Expression of exchange rate liberalization: Exchange rate

liberalization is expressed in a number of aspects such as: Remove the fixing of exchange rates, the administrative measures on foreign currency are eliminated and the tools bearing market characteristic are used; exchange rate is determined based on demand and supply of foreign currencies

1.1.2.3 Liberalization of the activities of credit institutions and other financial institutions in the financial markets

Concept: Liberalization of the activities of credit institutions

and financial institutions means to remove the direct intervention of the Government in the course of operation of these organizations, so that these organizations operate under market rules

Expression of the liberalization of the activities of credit institutions and other financial institutions: (i) removal of interest

rate control, (ii) reducing reserve requirement, (iii) reduction of State intervention towards the lending decisions of banks, removal of directed credit to commercial banks, (iv) privatization of state-owned banks, (v) further expansion of the domestic financial institutions and the entry of foreign financial institutions increases

1.1.2.4 Liberalization of capital transactions

Capital transactions are transactions related to capital movements between residents and non-residents of a country

Concept: Capital liberalization is a process to gradually lift

the restrictions applied to these transactions Liberalization of capital transactions allow the capital inflows - outflows are freely moved under the market rules (the capital lines freely flow from a low yielding place to high return rate) These activities take place

naturally, not limited by national boundaries but in the trend to minimize the direction of state intervention to market

Expression of liberalization of capital transactions:

(i) Allowing non-residents to own the domestic financial assets in the form of debt or stock papers, (ii) Allow the residents to hold foreign financial assets, (iii) Allow both residents and non-residents to freely hold and exchange financial assets in the domestic market, this is the highest degree of liberalization of capital transactions, as well as the highest level of financial liberalization

1.1.3 Measuring the level of financial liberalization

There are a number of indicators measuring financial liberalization for reference

(1) KAOPEN index measuring financial openness (openness of the capital account)

(2) Method of measuring integration by quantitative real flows

(3) Schindler index to measure the degree of liberalization

of capital transactions

(4) The financial liberalization index: Measuring the level

of financial liberalization by giving marks to the components of financial liberalization

This measure can be widely applied to all countries and covers quite wide, to different parts of the financial liberalization not only of capital transactions thus should be selected for use in the thesis

1.1.4 Principles and procedures for financial liberalization

1.1.4.1 Principles of procedures for financial liberalization

Principle 1: Financial liberalization is best done in the context of

healthy macroeconomy

Principle 2: Financial liberalization should be closely associated with

the establishment of an institutional infrastructure possibly to reduce the risk of financial uncertainty

Principle 3: To have appropriate financial liberalization speed, from

time to time, it is necessary to review the financial conditions and the soundness of financial institutions as well as the time needed to re- structure these institutions (if needed)

1.1.4.2 Some views on financial liberalization procedure

In fact, there may not be a unified sequence of financial liberalization for all nations, due to the problems of national characteristics, the time of financial liberalization as well as the international context There have been many different views on the order of financial liberalization

a McKinnon and Shaw's view

b Rules for financial liberalization roadmap of OECD

c The integrated approach of the IMF

d ADB's approach

1.1.5 The impact of financial liberalization on the economy 1.1.5.1 The positive impact

a Allocate resources effectively on national and global scope

b Increasing credit scale

c Promoting economic growth

d Promote reform in countries, improving the quality of growth

e Avoid the costs of capital controls

1.1.5.2 The negative impact

a FL can increase the likelihood of financial crisis

b Exacerbate the issue of information asymmetry

c FL can lose the ability to regulate the financial markets of the Government

1.2 IMPACT FACTORS AND NECESSARY CONDITIONS OF THE FINANCIAL LIBERALIZATION PROCESS

1.2.1 Factors affecting the process of financial liberalization

Considering the objective aspect: The economic globalization trend

is the factor that promotes financial liberalization