1 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 2 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 3 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. 4 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 5 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 6 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 7 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? 8 - 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 9 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 10 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 [...]... LIBERALIZATION IN VIETNAM 2.1 OVERVIEW OF THE DOOR OPENING AND INTERNATIONAL INTEGRATION PROCESS IN VIETNAM The bilateral and multilateral relations of Vietnam are increasingly developing stronger upon the integration into the world and the regional economy 2.2 CURRENT SITUATION OF THE FINANCIAL LIBERALIZATION IN VIETNAM 2.2.1 The liberalization of interest rates 2.2.1.1 For Vietnam dong interest rates... 2.2.1.1 For Vietnam dong interest rates The process of interest rate liberalization of Vietnam dongs took place in the following order (i) The first phase (starting from 6/199 2- 12/1995), (ii) the second stage (from 1/199 6-8 /2000 (iii) The third phase (from 8/200 0-5 /2002), (iv) The fourth phase (from 6/1/200 2-5 /2008): VND interest rate is totally liberalized According to which, credit organizations... and exchange rates) 3.2 ROADMAP FOR FINANCIAL LIBERALIZATION IN VIETNAM Roadmap for financial liberalization in bilateral trade agreements between Vietnam - United States: Roadmap for financial liberalization in commitments of Vietnam upon joining the World Trade Organization: Suggestions on financial liberalization roadmap in Vietnam for each specific content Regarding Interest rate: Strengthen policies... For the input capital flows: The long-term capital inflow is often the safest input capital form when starting the liberalization process Thus, usually, the countries will liberalize the long-term capital before the liberalization of short-term capital flows For output flows: In fact, most countries only lift capital controls after implementing the liberalization of domestic interest rates and the budget... major financial institutions in the financial system in Vietnam, there remain a number of issues of institution, structure, finance and techniques Chapter 3 SOLUTION TO PROMOTE FINANCIAL LIBERALIZATION IN VIETNAM 3.1 VIEWPOINTS FOR FINANCIAL LIBERALIZATION ORIENTATION IN VIETNAM UP TO 2020 3.1.1.Financial liberalization viewpoints The socio-economic development Strategy up to 2020 specifies that we... towards financial liberalization in Vietnam Strategic orientation of financial liberalization in Vietnam is as follows: First, continue to implement the roadmap which was launched in Vietnam's commitments to integration into the global economy, such as the commitments to joining the World Trade Organization (WTO) Second, the degree of financial liberalization in Vietnam in the coming period is unable to... market 1.3 INTERNATIONAL EXPERIENCE ON FINANCIAL LIBERALIZATION 1.3.1 An overview of the global financial liberalization the process The period from 1973 to the mid-1980s: The period from the mid-1980s to mid-1990s: The period from the mid-1990s to present: 1.3.2 Experience of financial liberalization in some countries 1.3.2.1 Korea's Experience 1.3.2.2 Thailand’s Experience 1.3.2.3 China's Experience... CONCERNING THE THESIS CONTENT RELEASED 1 / Ma Bui Thi Thanh Tinh (2007), Organizing accounting operation at Vietnam’s securities companies, Banking Science & Training Review No.58, March 2007 2 / Ma Le Ngoc Lan, Ma Bui Thi Thanh Tinh (2011), A review on SBV’s Inspection and Supervision , Banking Science & Training Review No.110, July 2011 3 / Ma Bui Thi Thanh Tinh, Ma Le Ngoc Lan (2012), A theoretical view... limitations and causes 2.3.3.1 The limitations - Regarding liberalization of interest rates: (i) Although nominally interest rates were fully liberalized, but the free state of interest rate is not intrinsic (ii) Operation of interest rate is still insufficient, so it can not be said that interest rate in Vietnam has really followed market principles - Regarding liberalization of exchange rates: (i)... of exchange rates: (i) the current exchange rate is controlled, limited by an amplitude and rate despite improved towards the currency basket, but still pretty closely anchored to the dollars, thus the pricing of Vietnam dongs in foreign currency must use cross rate method not accurately reflecting the 18 value of exchange between currencies (ii) The base on average exchange rate on interbank foreign . LIBERALIZATION IN VIETNAM 2.2.1. The liberalization of interest rates 2.2.1.1. For Vietnam dong interest rates The process of interest rate liberalization of Vietnam dongs took place in the. conditions, do the developed, developing economies implement financial liberalization the same or not? 8 - Analyze and determine the extent of financial liberalization in Vietnam over time. - Propose. liberalization the process The period from 1973 to the mid-1980s: The period from the mid-1980s to mid-1990s: The period from the mid-1990s to present: 1.3.2. Experience of financial liberalization