Header Page of 166 INTRODUCTION - The thesis has systematized the theory of the impact of capital account liberalization to economic growth, especially for developing countries and analyze the preconditions to capital account liberalization - The thesis has shown that there are two schools in empirical research (supporters and opponents of the positive effect of capital account liberalization on economic growth The thesis also shows the cause of the difference in the results of previous studies Base on theoretical and experimental studies, the research model is selected in line with the conditions of Vietnam The necessary of the thesis Capital account liberalization is an inevitable trend of the countries in the integration process Economic theory indicates that capital account liberalization can promote investment and economic growth However, in practice a number of developing countries such as East Asian countries before the crisis period (1997) has to face to the massive withdrawal of indirect investors and financial speculators Many economists have raised questions about the real benefits of capital account liberalization for countries, especially developing countries Vietnam is a developing country in the Associaltion of Southeast Asian Nations ASEAN Becoming a member of the World Trade Organization (WTO) in 2007 and joining Trans-Pacific Partnership Agreement (TPP) and the Asean Economic Community (AEC) shows that Vietnam is integrating into the international economy deeper and wider In fact, Vietnam has been implementing capital account liberalization with increasingly high level Derived from the difference in the results of the previous studies on the relationship between capital account liberalization and economic growth as well as the research gaps, the topic “The effect of capital account liberalization on economic growth in Vietnam” was selected to research Objectives, subjects and scope of research Research objectives This study was conducted to assess the effect of capital account liberalization on economic growth in Vietnam in the period 2000-2014 At the same time, the study also assess the preconditions of capital account liberalization in Vietnam Research subjects : Research subjects are capital account liberalization and the effect of capital account liberalization on economic growth in Vietnam Scope of research: The thesis studies the effect of capital account liberalization on economic growth in Vietnam in the period 2000-2014 Research methodology The thesis has incorporated the following methodologies: Statistical Methods; Comparative Methods; Combining qualitative research in determining whether or not the ability to have impact channels and quantitative research with Auto-Regression Distribution Lag Model Scientific value of the thesis - Theoretical aspects: Footer Page of 166 - The thesis has evaluated the degree of capital account liberalization, the effect of capital account liberalization on economic growth in Vietnam The thesis has also identified the preconditions of capital account liberalization process in Vietnam includings financial development, institution quality, macroeconomic policy and the degree of trade liberalization Pratical aspects: - Practically, the thesis has significant in the context of Vietnam is integrating deeper into the world economy, the degree of capital account liberalization is increasing and the studies about the effect of capital account liberalization on economic growth in Vietnam is still limited - Based on the research findings, some recommendations have been proposed to policy makers, economic managers can make appropriate policy solutions CHAPTER THEORETICAL BASIS AND OVERVIEW OF THE EFFECT OF CAPITAL ACCOUNT LIBERALIZATION ON ECONOMIC GROWTH 1.1 Theoretical basis about the effect of capital account liberalization on economic growth 1.1.1 Capital account liberalization 1.1.1.1 Concept and classification of capital account Capital account and current account are the two most basic components of international balance of payment While current account reflects the net income of the country, capital account reflects the net change in ownership of national assets Capital account can be classified according to the investment function, the direction of capital flows or the duration of capital transactions Header Page of 166 1.1.1.2 The concept of capital account liberalization Capital account liberalization is the result of higher financial integration level into the world economy According to Henry (2007), capital account liberalization was the decision by a country’s Government in transition from a closed capital account mechanism to an open capital account system in which capital flows can move in or out of the country freely Also introduced the concept of capital account liberalization, Prasad and Rajan (2008) argue that capital account liberalization means the removal of restrictions on capital flows and allow domestic investors model and the exogenous growth model of Rober M Solow The Harrod-Domar emphasized the role of capital and capital efficiency for growth Application of this model in the developing countries, when the ability of domestic capital accumulation is low, Government has to rely on external capital in the form of foreign direct investment, foreign loan and foreign aid to have enough capital for economic development The neoclassical model assumes that output Y is produced by capital K, labor L and labor productivity A The economy will reach steady state when the ratio of capital to effective labor is constant As capital market in a developing country is opened up, investment in foreign assets freely In summarize, capital account liberalization can be interpreted as a decision of a country’s Government in the removal of restrictions capital inflows increase, investment increase, the economy reached a new steady state According to the neoclassical growth model, capital account liberalization for a small on capital transactions in balance of payment The transactions on capital account in the thesis includes foreign direct investment, portfolio investment, foreign loan and investment abroad and developing countries will achieve the following benefits: (i) inflows of foreign capital raise; (ii) investment increase suddenly leading to increasing suddenly of output growth, then decrease over time; (iii) this process will push the ratio of output to labor to higher level in the long time 1.1.2.2 The effect of capital account liberalization on economic growth through financial development Capital inflows to the financial sector including capital inflows to the banking sector and capital market Capital inflows to the banking sector is in forms such as: (i) the entry of foreign banks; (ii) foreign loan of domestic banks; (iii) raising capital of domestic banks on international capital market; Capital inflows to capital market in the form of portfolio investment Meanwhile, capital account liberalization can promote financial development as follows: (i) capital account liberalization increases size of banking sector; (ii) contributing to improve the quality of financial services; 1.1.1.3 The degree of capital account liberalization and the indicators The researchers divided the indicators into two groups to measure the extent of openness in capital account transactions The de jure index: The de jure index are determined by relying on the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) Some indicators are belong to the de jure index are Share, Quinn and KAOPEN The de facto index: The two most common indicators to measure actual capital flows are: (i) Stock of Gross capital flows (Foreign assets and liabilities as a percent of GDP) ; (ii) Capital inflows (Foreign liabilities as a percent of GDP) 1.1.2 The effect of capital account liberalization on economic growth 1.1.2.1 The effect of capital account liberalization on economic growth through investment channel (iii) promote capital market development; (iv) improving the quality of the inspection, testing, surveillance and strengthen financial discipline In terms of macro economy, investment affects economic growth on both sides: aggregate demand and aggregate supply On the aggregate demand side, investment is a factor of aggregate demand function in the form Y = C + I + G + X-M In which, C is final consumption of households; I is investment (includings domestic and foreign investment); G is 1.1.2.3 Capital account liberalization promotes economic growth through spillover effects of foreign direct investment There are four types of spillover effects of foreign direct investment on the domestic economic sector as follows: (1) the impact related to the structure of output – input of enterprises; (2) the impact related to the technology transfer; (3) the impact government spending, X is export, M is import When a developing country liberize capital account, foreign investment increase, investment (I) increase and GDP increase On the aggregate supply side, the growth models also emphasized the role of capital for growth includings the Harrod-Domar growth model, the neoclassical growth related to the domestic market share or competition and (4) the impact related to labor skills or human capital Footer Page of 166 1.1.3 Thresholds in the process of capital account liberalization (Conditions to capital account liberalization has a positive impact to economic growth) Header Page of 166 Firstly, financial sector development: The developing countries in terms of capital account liberalization will attract large amounts of foreign capital inflows These capital inflows were absorbed by domestic financial systems, after that be allocated to areas in need of capital If these capital inflows exceed the absorption capacity of the financial system, they will allocated inefficiently This will limit the positive impact of capital account liberalization to economic growth Secondly, institutional quality: The developing countries liberize their capital account to attract large amounts of foreign capital and promote economic growth Edwards (2001)’s research pointed out that, in countries that GDP growth is low, opening capital market not only not promote growth but that decrease GDP growth Research by Eichengreen et al (2011) also pointed out the positive effect of capital account liberalization on economic growth but this is only right in countries with developed financial system, standard accounting system, the interests of creditors and shareholders are guaranteed as well as strong legal system Honig (2008) supported a positive effect of capital account liberalization on economic growth, but this is only significant for countries with good institutional quality However, a country with a low institutional quality will not be able to attract foreign investors Even in case of foreign capital flows in due to a large gap between Besides these studies support that capital account liberalization promotes economic growth, there are still some researchers that are doubt or refute this hypothesis domestic and international interest rates, a low institutional quality will also reduce the effective management and use of foreign capital, thereby limiting the positive impact of capital account liberalization to economic growth Thirdly, the suitability of the macro-economic policies: Capital account liberalization will be success if the countries build up suitable macroeconomic policies Conversely, when the macro-economic policies is weak or inappropriate may increase the risk of crisis in case of capital account liberalization Milesi-Ferretti and Grilli (1995), Rodrik (1998) and Kraay (1998) did not find any link between economic growth and capital account liberalization 1.1.4 Sequence for capital account liberalization in the opinion of IMF IMF recommended three phases in capital account liberalization process for the countries as follows Stage 1: Liberalizing foreign direct investment; Stage 2: 1.2.2 Experimental studies used time series data Time series data is often applied to the studies on individual countries Law and Singh (2013) examine the effect of capital account liberalization on economic growth in Malaysia during the period 1970-2004 The result indicate that the relationship between capital account liberalization and economic growth depends on the measurement method Egbuna et al (2013) have examined the relationship between liberalization and growth through ARDL model for East Africa countries over the period 1980-2012 The results showed that’s long-term relationship is positive and significate in Ghana and Sierra Leone Long-term relationship is not found in the remaining countries This implies that an unsuitable policy for capital account liberalization process made an unclear relationship Adnanhye and Wizarat Liberalizing direct investment abroad and other long term capital flows, while limiting short term capital flows; Stage 3: Liberalizing capital account fully IMF also offer the (2013) also used ARDL technique to analyze both short-term and long-term relationship between financial liberalization index (FLI) and economic growth in economic reform programme that is suitable with each stage 1.2 Literature review on the effect of capital account liberalization on economic growth 1.2.1 Experimental studies used panel data or cross data By using cross data analysis in research, Quinn et al (1997, 2008), Klein and Pakistan from 1971 to 2007 Result indicates that FLI have a positive impact to economic growth in short-term, while this relationship is not significant in the longterm Studies on the impact of capital account liberalization to economic growth in Vietnam Nowaday in Vietnam, the studies of capital account liberalization in general Olivei (2000, 2005), Edwards (2001), Arteta et al (2001) all gave evidence to support a positive impact of capital account liberalization to economic growth Besides, Klein and Olivei (2000, 2005) stressed the role of financial development as a channel connection between capital account liberalization and economic growth Results of and the impact of capital account liberalization to economic growth in particular is very limited Most of studies are about the effect of foreign direct investment on economic growth such as the studies of Le Thanh Thuy (2007), Athukorala and Tien (2008), Anwae and Nguyen (2010), Nguyen Thi Tue Anh et al (2010), Pham Thi Fourthly, the degree of trade liberalization Trade liberalization contributes to reduce the risk of crisis and reduces cost of crisis if that actually happens when liberizing capital account Footer Page of 166 Header Page of 166 Hoang Anh and Le Ha Thu (2014), Nguyen Thi Lien Hoa and Le Nguyen Quynh Phuong (2014) Most point of these studies indicate the positive impact of foreign direct investment to Vietnam’s economic growth Besides, there are some authors such as Pham Thi Hoang Anh (2011) and Hauskrecht Le (2005) studies on the process of capital acoount liberalization in Vietnam However, the results just analysis policies of State on foreign capital inflows and outflows Nguyen Toan Thang (2010) in the scientific research project at the State level “Capital account liberalization and financial sector stability in Vietnam” also have in depth study of No.05//2014/TT-NH In this circular, all indiret investment activities of foreign investors in Vietnam must be made in Vietnam dong and through an indirect investment account that is opened in bank The indirect investment account balance is not transferred to term deposits and savings deposits in credit institutions and branches of foreign banks 2.1.1.3 The legal provisions for foreign debt According to changes in the State’s policy for foreign borrowing and repayment over the years, conclusions are drawn as follows: Firstly, the policy of the capital account liberalization in Vietnam but focus on the relationship between capital account liberalization and financial sector stability The effect of capital account State for foreign debt has been relaxed; Secondly, the State management for foreign borrowing and repayment is more and more scientific and methodical; Thirdly, liberalization on economic growth have not been addressed in the analysis of both qualitative and quantitative foreign debt activities must still comply with limits and registration to avoid excessive foreign borrowing, beyond control CHAPTER CAPITAL ACCOUNT LIBERALIZATION IN VIETNAM 2.1 The policy of liberalizing capital transactions in Vietnam 2.1.1 Legal provisions for capital inflows 2.1.1.1 Legal provisions for foreign direct investment (FDI) Since 1992, foreign direct investment in Vietnam has gradually been liberalized, so far has been liberalized at a very high level This has created a favourable legal framework to attract investment for Vietnam’s development 2.1.1.2 Legal provisions for foreign indirect investment (FII) Compared to FDI, the liberalization of foreign indirect investment has taken steps to be more cautious due to the sensitive and the extent of the impact of this capital flow on macro-economic stability So far, the legal provisions for FII as follows: The ownership percentage of foreign investors for unconditional business in public companies raised to 100% For conditional business, the ownership percentage of foreign investors was stipulated in Investment Law, specialized Law and Company Charter (is approved by General Meeting of Shareholders) The total amount of shared owned by foreign investors in credit institutions in Vietnam is not exceed 30% of charter capital of bank Foreign exchange management for activities of foreign investors on Vietnam stock market changes over the years and so far is prescribed in Circular Footer Page of 166 2.1.2 The legal provisions for capital outflows 2.1.2.1 The legal provisions for direct investment abroad The legal provisions especially Investment Law 2005, 2015 has reflected the policy of the State in encouraging direct investment abroad It comes with the legal documents to provide information and to guide process for domestic investment It shows the level of liberalization direct investment abroad in Vietnam is quite high and this is also one of the most impotant reasons leading to the rise of Vietnamese enterprises ’s direct investment activities on the international market 2.1.2.2 The legal provisions for portfolio investment abroad Investment Law 2015 stipulates: ”Investors may invest abroad in the form below: Trading securities and other valuable papers; Investing through securities investment funds, financial institutions and other itermadiaries in foreign countries Foreign Exchange Ordinance allowed residents who are not credit institutions invest indirecly abroad However, there were not regulations on approval authority for these residents ’portfolio investment activities in this ordinance SBV has issued guidelines indirect investment activities abroad for credit institutions But, so far there are only a few banks investing indirectlly abroad on a small scale The residents who are not credit institutions have no sufficient legal basis to invest indirectly abroad 2.1.2.3 The legal provisions for foreign investment in the form of deposits There are restrictions on investment activities abroad in the form of deposits in Vietnam The law only allows some residents opening and using foreign currency accounts abroad Header Page of 166 10 2.2 Transactions on the capital account in Vietnam in the period 2000-2014 2.2.1 Foreign direct investment flows in Vietnam’s capital account FDI flows into Vietnam increased with slow speed in the period of 2000-2006, but after Vietnam became the 150th member of the World Trade Organization (WWTO) in 2007, FDI flows have raised up rapidly and reached a record high in the period of 2007-2008 The word economic crisis occurred in the second half of 2008 has led to an adjustment in the investment policy of the multinational corporations, global investment flows decrease so FDI flows to Vietnam also decrease strongly in particular, in 2009, direct investment abroad of Vietnam spiked with total registered capital of $ 7.2 billions and 457 projects in more than 50 countries andterritories Although total registered capital was high from 2000 to 2014, the actual capital outflow of Vietnam was low According to the Ministry of planning and investment, the growth of direct investment abroad of Vietnam was not commensurate with potential: the number and scale of projects are small compared with the similar countries Many enterprises have to face to many difficulties without the support from the authorities 2009 After that, FDI flows into Vietnam tends to increase in the period of 20102014 Despite decrease in some periods due to the global economic crisis, 2.2.5 Investment flows abroad in form of deposits in Vietnam’s capital account In Vietnam, the flows of investment abroad in form of deposits mainly are basically,the high degree of FDI liberalization has led to the increase trend in FDI flows into Vietnam in the period of 2000-2014 deposits of credit institutions in foreign banks These flows have high liquidity and depend on interest rate changes in the international market In period of 2000-2008, deposits abroad of Vietnam were low, even years organizations and individuals withdrawal However, in the post-crisis period of 2009-2014, deposits abroad have increased rapidly and reached a record high in 2013 to $ 12.87 billions This situation shows the imbalance in Vietnam’s capital account While Vietnam have to borrow from the other countries on a large scale, a not small amount of foreign currency are sent abroad in form of deposits by organizations and individuals 2.2.2 Foreign indirect investment flows in Vietnam’s capital account Similar to FDI flows, FII flows into Vietnam reached a record high in 2007 ($ 6,243 millions) and then dropped sharply in 2008 The negative impact from the global economic crisis has led to capital withdrawal of portfolio investors from the Vietnam market with the scale of $578 millions in 2008 FII flows have returned to Vietnam since 2009, but with a very small scale ($128 millions) Along with allowing foreign individuals and organizations to hold more than 49% of shares of public joint stock companies, FII flows into Vietnam have increased substantially in 2010, reaching $ 2,383 millions But then there are signs of decline again in the period of 2011-2014 In particular, in 2014, FII flows into Vietnam reached only $93 millions This shows that, FII flows are not only sensitive with the change in the State’s regulations, but also sensitive with the change in domestic and foreign enviroment 2.2.3 Foreign debt flows in Vietnam’s capital account Data on foreign debt flows in Vietnam ’s capital account in the period of 20002014 shows that the volatility of these capital flows has not depended on international market volatility In the period of 2008-2009, although the global economic crisis affected most countries including Vietnam, foreign debt flows into Vietnam have increased and reached $ 5146.19 millions in 2009 In 2012, foreign debt flows into Vietnam raised up at record highs $5,770 millions 2.2.4 Direct investment flows abroad in Vietnam’s capital acount After the 2005 Investment Law was enacted, the number of projects and the scale of registered capital of direct investment abroad has increased significantly In Footer Page of 166 2.3 Assessing the degree of capital account liberalization in Vietnam This section assesses the degree of capital account liberalization in Vietnam through two groups of indicators: (1) the index based on legal (de jure) - KAOPEN and (2) the index based on actual capital flow (de facto) – The total of foreign assets and liabilities as a percentage of GDP There are some conclusions as follow: - Firstly, in terms of legal, Vietnam implemented capital account liberalization with increasing level Especially in the period of 2007-2014, the degree of capital account liberalization in Vietnam was moderate (Kaopen = 0,4090) and higher than countries such as Malaysia, Thailand and China - Secondly, although in terms of legal, the degree of capital account liberalization in Vietnam was high (shown in the relaxing policies of the State in managing foreign capital flows), this is not the only factor affecting the actual capital flows The actual capital flows are influenced by other factors such as investment enviroment, region or global economic crisis v.v CHAPTER Header Page of 166 11 12 THE EFFECT OF CAPITAL ACCOUNT LIBERALIZATION ON ECONOMIC GROWTH IN VIETNAM the Vietnam economy Besides the direct contribution of foreign investment in total invested capital, FDI enterprises promoted two remaining sectors especially the private sector FDI enterprises also contribute to economic growth in Vietnam through increasing export Foreign direct investment in recent years is one of the important capital for promoting economic growth in Vietnam But, FDI also had some problems as follows: (1) the effect of FDI was not high; (2) the structure of these flows was not reasonable and (3) some FDI project caused the polluted enviroment These had negative effect on economic growth 3.1 Overview of economic growth in Vietnam in the period of 2000-2014 Vietnam’s economic growth can be divided into three stages as follows: Stage 1: From 2000 to 2007 In this stage, Vietnam economy gained outstanding achievements in various fields In particular, the growth rate reached 6.79% of GDP in 2000 After that, GDP growth continued to increase and reached 8.48% in 2007 Stage 2: From early 2008 to 2010: the global economic crisis had an effect on Vietnam economy strongly E aveage GDP growth rate was 5.44%, lower than the average growth of Asean in 2012 (5.7%), lower than the target for the 5-year plan (6.5-7%) In 2014, economic growth has exceeded the plan, reaching 5.98% a year 3.2 Impact analysis of capital account liberalization to economic growth of Vietnam in the period of 2000-2014 3.2.1 Qualitative analysis of the impact of capital account liberalization to economic growth in Vietnam 3.2.1.1 The impact of capital account liberalization to economic growth through increasing the total social invested capital for the economy The effect of capital account liberalization on economic growth through increasing the total social invested capital can be analyzed as follows: Firstly, the correlation between foreign capital inflows (measuring the degree of capital account liberalization) and real GDP growth rate Overall, it can be seen high correlation between foreign capital inflows and real GDP growth rate during the period 2000-2014 (although from 2011 to 2013, these two indicators were in the opposite movement) From which, we can draw conclusion about the positive impact of capital account liberalization to economic growth in Vietnam Secondly, the proportion of invested capital and foreign debts in the total social invested capital Total foreign investment and foreign debts increased constantly over the years in the period of 2000-2014 The contribution of foreign investment to economic growth: The contribution of foreign investment to economic growth in Vietnam is shown throuth an increase in the proportion of foreign investment compared to the total social invested capital This percentage tends to increase over years and reached the highest level in 2008 (30%), then decreasing due to the effect of the global economic crisis and the slow recovery of Footer Page of 166 The contribution of foreign debts on economic growth Besides foreign investment, foreign debts also increased the total social invested capital, thereby contribuing to economic growth The disbursed foreign debts as a percentage of the total social invested capital tends to increase during the period 2006-2014 and reached 14% in 2014 However, the short-term debt is raising and the efficiency of using foreign debts is not high Thus, when liberalizing foreign debts, it is neccessary to strengthen management for short-term debts and improve the efficiency of using foreign debts 3.2.1.2 The effect of capital account liberalization on economic growth through financial development Firstly, capital account liberalization affect on the financial depth Capital account liberalization had a strong and clear impact to financial depth in the period of strong volatile foreign capital flows (2006-2008) However, this can also cause overheated credit growth (when foreign capital inflows was so much) or credit tightening (when foreign capital outflows was so much) This can affect the stability of the domestic financial sector For the remaining periods, the effect of capital account liberalization on financial depth was not clear Financial depth still has increased rapidly and strong due to the operation of the domestic banking system as well as the donduct of monetary policy of the State Bank in Vietnam Secondly, the participation of foreign banks to promote the level of competition in the banking sector, to motivate banks in Vietnam enhancing public and transparency, improving the quality of operation and service delivery Since Vietnam joined to the WTO in 2007, the number of foreign banks in Vietnam has increased The participation of the joint venture banks, banks with 100% foreign capital in the domestic financial market has increased the level of competition for market share in the entire banking system This is reflected in the annual increase in market share of Header Page of 166 13 14 deposits and credits from foreign banks Moreover, foreign banks are pioneers in development and application of modern technologies, new products in the market Besides joint venture banks, banks with 100% foreign capital, branches and representative offices of foreign banks, foreign capital in the banking sector is also in the form of foreign strategic investors’ capital With strong financial ability, modern technology, management experience and diversified products, the participation of foreign strategic shareholders motivated banks in Vietnam enhancing public and transparency, improving the quality of the data series is seasonal adjustment using the moving average method before executing the next step in the process of estimation operation and service delivery However, the rate of participation has been limited by law This can decrease the positive effect of foreign strategic shareholders on the 3.3.2.2 Estimation process - We can use the PP test to check the stationary of the series after seasonal activities of banks in Vietnam adjustment - Formulate the special ARDL model as follow: 3.3 Quatitative analysis of the effect of capital account liberalization on economic growth in Vietnam in the period of 2000-2014 3.3.1 Variables and data 3.3.1.1 Selection of variables for models Economic growth (Y): Real GDP growth rate Capital account liberalization (CAL): To suitable with quarterly data, the thesis use two indicators: (i) The total foreign capital inflows and outflows: is measured by the total foreign assets and liabilities as percentage of GDP; (ii) Foreign capital inflows: is measured by foreign liabilities as percentage of GDP Financial developmentt (FD): FD is measured by two indicators: (i) domestic credit from banking sector as a percentage of GDP – FD1); (ii) The money supply as a percentage of GDP (M2/GDP) These two indicators measure financial depth of the size of financial intermediary sector Control: The control variables affect economic growth includings: domestic investment as a percentage of GDP (INV); trade openness as a percentage of GDP (OPEN) Interactive variable CALFD is calculated by the product of two variables CAL and FD1 Interative variable is used to assess the role of financial development in the relationship between capital account liberalization and economic growth 3.3.1.2 Data and describe the varibables in the model Data is the quarterly date that is collected from International Financial Statistic, the General Statistics Office in the period of 2000-12014 It is necessary to remove seasonal factor for quarterly time series Therefore, Footer Page of 166 3.3.2 Research methodology 3.3.2.1 Auto regression distribution lag model (ARDL) The simple ARDL model in form of: Yt = β0 + β1yt-1 + ….+ βpyt-p + α0xt + α1xt-1 + α2xt-2 +….+ αqxt-q + єt In which, Y is a regression from the lag values of Y variable and X variables X variables follow Var model s m n p q i =1 i =0 i =0 i =0 ∆yt=βo+ ∑ α i ∆y t −i + ∑ β i ∆CALt −i + ∑ γ i ∆FD1t −i + ∑ δ i ∆FD2 t −i + ∑ µ i ∆INVt −i + i =0 r ∑ ρ ∆OPEN i t −i +θ0yt-1+ θ1CALt-1+ θ2 FD1t-1+ θ3FD2t-1+θ4INVt-1 +θ5OPENt-1+єt (+θ6CALFDt-1) i =0 - Determine the appropriate lag structure of variables for the model in step by Schwarz Criterion criteria - Make sure that the errors of this model are serially independent and the model is stable - Perform a “Bounds Test” to see if there is evidence of a long run relationship between the variables - Estimate long-run coefficients of ARDL model 3.3.3 Research results 3.3.3.1 Check the stationary of the series and determine the appropriate lag structure To make sure that none of variables are I(2), as such data will invalidate the methodology, the thesis used PP test to check the stationary of the series The result shows that all variable in the model are I(1) The result of determining the appropriate lag structure as follow: Table 3.6: Lag structure is selected by SC criteria Model Lag structure by SC criteria Model 1: (Y/CAL1, FD1,FD2, INV, OPEN) ARDL (8,0,3,3,4,4) Model 2: (Y/CAL2, FD1,FD2, INV, OPEN) ARDL (8,0,3,3,4,4) Source: Synthesis of author from the result in Eview 9.0 Header Page of 166 15 16 3.3.3.2 Test long run relationship using a Bounds Test The lower and upper bounds for F-test statistic at 5% significance level in model 1&3 and model 2&4 are [2,62; 3,79] and [2,45; 3,61] respectively The value of F-statistic in all model exceed the upper bound at the 5% significance level, so we can counclude that there is evidence of a long-run relationship between the series 3.3.3.3 Estimation long-run coefficients of ARDL model The interaction variables in all four model are statistically significant and marked negative shows financial development is the necessary precondition in the process of capital account liberalization in Vietnam However, financial development is currently a factor that obstructs the positive impact of capital account liberalization on economic growth Table 3.8: Long-run coefficients of ARDL model Variable C CAL FD1 FD2 INV OPEN Variable C CAL FD1 FD2 INV OPEN CALFD Model (CAL1) Model (CAL2) ARDL (8,0,3,3,4,4) ARDL (8,0,3,3,4,4) Coefficient p-value Coefficient p-value 0,0271*** 0,0001 0,0279*** 0,0000 0,0059** 0,0447 0,0114* 0,0506 -0,0051*** 0,0000 -0,0049*** 0,0000 -0,0022* 0,0836 -0,0026*** 0,0048 0,0959*** 0,0007 0,0945*** 0,0000 0,0106*** 0,0003 0,0115*** 0,0000 Model (CAL1&CALFD) Model (CAL2&CALFD) ARDL (8,0,3,3,4,4) ARDL (8,0,3,3,4,4) Coefficient p-value Coefficient p-value 0,1160*** 0,0012 0,1142*** 0,0007 0,0122** 0,0222 0,0272*** 0,0086 -0,0037*** 0,0000 -0,0030*** 0,0009 -0,0031** 0,0151 -0,0032*** 0,0092 0,0744*** 0,0006 0,0761*** 0,0004 0,0125*** 0,0003 0,0117*** 0,0004 -0,0006* 0.0852 -0,0018** 0,0429 Source: Synthesis of author from the result in Eview 9.0 3.3.3.4 Testing series correlation and stability of models: The thesis used LM test to check series correlation and CUSUM test to check the stability of these models The results show that the errors of these models are serially independent and all models are stable Conclusion: In all four models, capital account liberalization variable, financial development variable, domestic investment variable, trade openess variable and interaction variable are statistically significant In which, the coefficients of financial development variable and interaction variable are negative, the coefficients of the remaining variables are positive This shows that, capital account liberalization is measured by both indicators: the total capital inflows and outflows and capital inflows have a positive impact on economic growth in Vietnam for the long term Footer Page of 166 Analyzing the meaning of the variable cofficients in the model: According to estimated results of long-term coefficients in table 3.8, the thesis analyzes the meaning of variable coefficients in the model after adding interactive variable CALFD (similar to model 4) Model 3: + The coefficient of CAL variable is 0.0122 indicating that when the total foreign assets and liabilities as a percentage of GDP increases 1%, real GDP growth rate increases 0.0122% + The coefficient of FD1 variable is 0.0037 indicating that when domestic credit from banking sector as a percentage of GDP increases 1%, real GDP growth rate decreases 0.0037% The coefficient of FD2 variable is 0.0031 indicating that when M2/GDP increases 1%, real GDP growth rate decreases 0.0031% + The coefficient of INV variable is 0.0744 indicating that when domestic investment as a percentage of GDP increases 1%, real GDP growth rate increases 0.0744% + The coefficient of OPEN variable is 0.0125 indicating that when the total of export and import as a percentage of GDP increases 1%, real GDP growth rate increases 0.0125% The meaning of the coefficients in the model and shows that: (i) The effect of capital inflows (measured by foreign liabilities/GDP) is higher than the effect of the total capital inflows and outflows (measured by total foreign assets and liabilities/GDP) on real GDP growth rate; (ii) Among the variables have a positive impact on economic growth, the coefficient of domestic investment variable is highest; (iii) Financial developement made slow the growth of real GDP however the coefficient of this variable is lower than the others 3.4 Analysis of liberalizing conditions for a positive impact on economic growth in Vietnam 3.4.1 Financial development The banking sector is currently dominating financial systems in Vietnam with Header Page of 166 17 18 total assets equivalent to 183% of GDP and account for 92% of financial institutions’ assets Therefore, in this section, the thesis will focus on analyzing the status of commercial banking system development in Vietnam The development of banking system in the period of 2000-2014 can be assessed by the following indicators: financial depth, credit risk, liquidity and profitability Some conclusions are drawn as follows: financial depth of the banking sector at a high level is not commensurate with the credit quality, diversification of products and services, financial infrastructure and supervisory ability This increased to GDP was about to exceed the safety threshold Besides, the budget deficit also has caused difficulties for State Bank of Vietnam in the implementation independent monetary policy instability as well as decreased probitability of whole banking system Therefore, the effectiveness of foreign capital absorbtion, using and allocation decreased and then CHARTER 4: CONCLUSIONS AND RECOMMENDATIONS affect the relationship between capital account liberalization and economic growth negatively 3.4.2 Institutional quality Institutional quality in Vietnam at a low level has reduced the effectiveness of management for foreign capital flows in terms of capital account liberalization The effectiveness of FDI, foreign debts attraction and using at a low level had a negative impact of the growth quality The spillovers of FDI to domestic enterprises were also limited Therefore, institutional quality is one of the factors that has a negative effect on the relationship between capital account liberalization and economic growth in Vietnam 4.1 Conclustions about research results 4.1.1 The effect of capital account liberalization on economic growth in Vietnam Both results of qualitative and quantitative analysis in Chapter are the positive impact of capital account liberalization to economic growth in Vietnam in the period of 2000-2014, in which the main channel is through invested capital It shows that the process of capital account liberalization in Vietnam is quite consistent and brings benefits to economic growth However, the unefficiency in attracting and using foreign direct investment and foreign debts, the inappropriate investment and debt structure and polluted environment problem v.v… will decrease the sustainability of economic growth for a long time 3.4.3 The degree of trade liberalization Vietnam has strided in the process of trade integration with the signing of the Free Trade Agreement FTA in Asean, Asean+3 and in particular the WTO joining in 4.1.2 Liberalizing conditions for a positive impact on economic growth in Vietnam Regarding to financial development: financial depth of the banking sector at a high level is not commensurate with the credit quality, diversification of products and 2007 In the period of 2007-2014, Vietnam continues negotiating the new generation FTAs with important partners such as TPP, Vietnam-EU, and joining the Asean services, financial infrastructure and supervisory ability This increased instability as well as decreased probitability of whole banking system Therefore, the effectiveness of foreign capital absorbtion, using and allocation decreased and then affect the relationship between capital account liberalization and economic growth negatively Regarding to institutional quality: the results show that, the quality of public services, government effectiveness, regulatory quality, voice and accountability, the rule of law, the control of corruption are still at low levels These have reduced the effectiveness of foreign investment and foreign debts management Regarding to macro-economics policies: the results show that, the independence of monetary policy is still at low level, foreign exchange rate policy is not flexible, the effectiveness of fiscal policy is low These status have caused many economic Community It can be said that, trade liberalization at a high level have supported the process of capital account liberalization which made Vietnam become an attractive destination for foreign investors 3.4.4 Macroeconomic policy Exchange rate policy: Exchange rate policy is not flexible in terms of capital account liberalization has caused many difficulties for State Bank of Vietnam in the implementation independent monetary policy to stabilize inflation Fiscal policy: Vietnam has also faced to seriously budget deficit The budget deficit for a long time has made public debt rising rapidly and the rate of public debt Footer Page of 166 Header Page 10 of 166 19 20 difficulties for State Bank in interventing, stabilizing market when foreign capital goes in or goes out with large scale Quantitative analysis results also show that, domestic financial development has obstructed the positive impact of capital account liberalization to economic growth in Vietnam maxium ownership percentage of foreign investors on the stock market, building bylaws guiding investing abroad activities of individuals and organizations At the same time, the State managment agencies should strengthen managing foreign capital flows to raise up the effeciveness of financial resourses With proposed capital account liberalization roadmap, some recommandation are as follows: 4.1.3 The degree of capital account liberalization in Vietnam According to capital account liberalization process of IMF, it can be seen that, Vietnam is in the second period (liberalizing foreign investment abroad and other long term capital flows, controling short term capital flows) Besides, the degree of 4.3.2 Restructuring, innovation and modernization the commercial bank system Firstly, continueing restructuring commercial bank system capital account liberalization in Vietnam is higher than that of some countries such as Malaysia, Thailand and China Secondly, innovation and diversification banking products and services Thirdly, allowing foreign banks buying shares of domestic banks especially the state 4.2 Viewpoint about capital account liberalization and economic growth in Vietnam Firstly, economic growth and development rapidly associated with economic development sustainablely, macroeconomic and economic security stability Secondly, building an economy more independent and autonomy in the context of international integration deeper Thirdly, the capital account liberalization in Vietnam must be consistent with the policy of the Party and the State on international economic integration, should contribute to promoting economic growth and development of the domestic financial market Capital account liberalization in Vietnam should be done with caution, flexibility, consistent with economic conditions in each period to promote the specific benefits while limiting risk with the economy owned bank with higher level 4.3 Recommendation 4.3.3 Improving institutions quality Firstly, strengthening the control of corruption: (i) Request publicity and transparency in the activities of the agencies, organizaitons and units; (ii) Strethen inspection and supervision of the State authorities, strengthen the supervision of the society especially through the press Secondly, improving the efficiency of government such as: (i) improving the quality of public services, (ii) accelerating the reform of administrative procedures at all stages, all fields; (iii) upgrading the quality of existing legislation; (iv) developing the quality of staffs Thirdly, establishing an economic institutions towards the market: The State should create a fare playing field for all economic entities that has a clear seperation between trade, management activity and government’s regulatory Need to 4.3.1 Capital account liberalization process in Vietnam At the current stage: In this period, Vietnam shoud focus on improving the reduce the State ’s control of business organizations, enabling these organizations operating independent and enhancing the role of local authorities in monitoring worse conditions instead of continueing to increase the degree of capital account liberalization Some recommendation are as follows: Reforming financial system especially banking system; Improving institutional quality, Strengthening macroeconomic policy These solutions will aim at ensuring safety for domestic financial system and attracting high quality foreign investment Besides, need to strengthen the guarantee of property rights and ensure free and equality competition for all economic entities After that: Depending on the results of financial system, institution and marco-economic policy reforms in the first period as well as the adaptable ability of the economic entities in the context of joining TPP and APEC, capital account liberalization will continue to be carried out with appropriate steps such as raising the managed floating foreign exchange rate regime Thirdly, Operating fiscal policy is effective to decrease budget deficit Footer Page 10 of 166 4.3.4 Strengthening macro-economic policies coordination Firstly, strengthening the independence of monetary policy Secondly, Thứ hai, developing foreign exchange market coordinates to 4.3.5 Increasing the effectiveness of FDI and foreign debts attracting and using With foreign direct investment Header Page 11 of 166 21 22 Firstly, restructuring FDI that is suitable with the overall planning of country, the planning of zones and industry Secondly, the local should be more proactive in selecting FDI projects Monitoring, supervising and evaluating being implemented projects regularly Stopping ineffecient projects Thirdly, The FDI attraction of local need to in the overall strategy to the FDI attraction of country Fourthly, in the long term, continueing to improve the transparency, openness should retain the degree of capital account liberalization and focus on the restructuring, innovating and modernizing the banking system, improving institutional quality, improving and strengthening the coordination of macroeconomic policies After that, depending on the results of financial system, institution and macro-economic policy reforms as well as the adaptable ability of the economic entities in the context of joining TPP and APEC, capital account liberalization will continue to be carried out with appropriate steps such as raising the maxium ownership percentage of foreign investors on the stock market, building bylaws and stability of legal enviroment For foreign debts guiding investing abroad activities of individuals and organizations Firstly, need to identify feasible projects and disburse for these projects Secondly, strengthening monitoring the process of capital using 4.3.6 Strengthening managent for foreign indirect investment Firstly, monitoring the activities of foreign investors on the stock market carefully Secondly, continueing management these flows Thirdly, building the coordinated regulation between SBV and Financial Ministry (Securities Commission) in managing these flows to create the transparency of information Fourthly, developing the domestic stock market in order to diversify capital sources for enterprises and create more efficient management environment Fifthly, appling capital controls flexiblely and suitable to economic conditions CONCLUSION In Vietnam, capital account liberalization is being implemented with increasing level Both results of quanlitative and quantitative analysis express a positive impact of capital account liberalization on economic growth in Vietnam This implies, the opening of capital market in recent years is relatively suitable However, the positive impact is decreased by some factors such as financial development, institutions quality and marco-economic policies Based on the research results The thesis gives some recommendations focus on two major issues: (i) recommendation on the sequence of capital accounnt liberalization in Vietnam; (ii) recommendation on the preconditions of capital account liberalization process in Vietnam Accordingly, at the current stage, Vietnam Footer Page 11 of 166  ... stability in Vietnam” also have in depth study of No.05//2014/TT-NH In this circular, all indiret investment activities of foreign investors in Vietnam must be made in Vietnam dong and through... It comes with the legal documents to provide information and to guide process for domestic investment It shows the level of liberalization direct investment abroad in Vietnam is quite high and... Foreign direct investment flows in Vietnam’s capital account FDI flows into Vietnam increased with slow speed in the period of 2000-2006, but after Vietnam became the 150th member of the World