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Vietnam's Economic Hiccups

Introduction

On January 11, 2007, Vietnam marked a major step in its economic journey when it became the 150th member of the World Trade Organization (WTO). At the time, the Vietnamese economy was flying high. The country had just wrapped up a year in which it registered gross domestic product (GDP) growth of 8.2 percent and was commonly cited as one of emerging Asia's shining examples. But the honeymoon that followed Vietnam's WTO accession was short-lived. After peaking in March 2007, Vietnam's main stock index plunged; by November 2008, it had lost over 70 percent of its value. The country's GDP growth was projected to drop below 7 percent for the year. Vietnam's cycle of boom and bust and its underlying financial vulnerabilities highlight the challenges that may lie ahead for emerging markets as the global financial crisis spreads.

A Reliance on Exports

Vietnam's downturn comes as a result of the interplay of several economic factors, some specific to Vietnam and others that are unfolding more broadly. In 2007, more than $6 billion in foreign direct investment (FDI) poured into Vietnam, according to statistics from the World Bank and the Economist Intelligence Unit. James Riedel, who teaches international economics at Johns Hopkins' School of Advanced International Studies, says the economic turbulence in late 2007 and 2008 was due to the inability of the country's fledgling financial framework to accommodate rapid growth. "Because Vietnam's financial system is weak--the banks are weak, the bond market is very small and not liquid, there's no secondary market, the stock market is very thin and dominated by state enterprises--massive inflows of foreign capital have the potential to destabilize the Vietnamese economy," he says. This instability took the form of runaway inflation and a short-term currency crisis, prompted by rumors...

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