IMF to Vietnam: Raise Taxes

It appears that Vietnam, which has been one of the world’s economic success stories in the new century, has put itself in peril. We, echoing the sentiments of IMF employees, observed awhile back that the strong global economic growth of recent years had raised some doubts about the the IMF’s future. That doubt appears to be receding, as inflationary and currency management pressures mount on many emerging economies, thanks to a Federal Reserve that is committed to preventing recession in the U.S. no matter what the cost in global inflation.

Unfortunately, the IMF’s is dishing out the same questionable advice that got it into trouble in the first place (which was nothing compared to the trouble that many of their clients have landed in over the years). In a speech by the IMF’s representative in Vietnam in early June, several key points were outlined. Some of their advice is perfectly sound. The main problems with it are: (1) the IMF continues to believe that any country can ably manage a domestic currency and an external exchange rate regardless of its size relative to the regional and global economies; and (2) that in addition to stricter monetary policy, a heavier tax burden is a desirable means of lowering inflation. As an IMF economist, Nobel laureate Robert Mundell demonstrated the fallacy behind such a ‘policy mix’ in 1961. That’s 47 years ago!

Should Vietnam choose to follow IMF advice, it will quickly become a less attractive destination for capital, and at the margin, domestic activity will be chased from the above ground economy at the margin–a situation that will only aggravate the fiscal and monetary crises that their economy is encountering.