Vietnam rising: Does being a ‘currency manipulator’ matter?

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Raul V. Fabella-125



The great buzz in the COVID-19 pandemic era apart from the COVID-19 crisis itself, and one that we will recall long after the COVID-19 crisis has receded, is how Vietnam is doing it. R. Sharma writes in the New York Times (Oct. 13, the rhetorical question, “Is Vietnam the Next ‘Asian Miracle’?” In 2020, Vietnam is set to grow at 3% while the Philippines is set to contract at 7-9% along with other countries. But there is no mystery about how Vietnam is doing it. Sharma states it plainly: “For now, Vietnam looks like a miracle from a bygone era, exporting its way to prosperity.” Bygone because Vietnam’s recipe for success is the very same one that was ridden by the East Asian miracle economies: the East Asian model. In the wake of the 1998 Asian Financial Crisis, western pundits and the Western thinking-dominated multilaterals, notably the IMF and the World Bank, silently rejoicing at the stumble of East Asian exceptionalism, had declared it dead.

Now multinational corporations of every stripe and color are flocking to Vietnam’s export processing zones. Chinese multinational corporations (MNCs) — fleeing both the higher labor cost and US trade sanctions on China — have joined the frenzy. Ironic that Chinese MNCs are hardly a presence in the Philippines after all the courting of Xi by Malacañang. Vietnam knows China is the template and that means going big on slipstream industrialization as an export platform. Vietnam’s exports grew on average 16% a year for decades now, twice the growth of Philippine exports of 8.6%. Today about 80% of Vietnam’s exports come from companies with FDI elements. As late as 2005, about 50% of China’s own exports were produced by foreign investors finding export platform comfort in the People’s Republic of China! Salient among them was, and still is, Foxconn Corp., then a fledgling Taiwanese original equipment manufacturer that located in China in 1988 which is now the largest manufacturing company in the world. Even multinationals with a presence in Philippine economic zones are finding it congenial to expand in Vietnam. Philippine FDI contracted 33% from January to October while Vietnam’s rose by $9 billion from January to June this year!

More indications that the East Asian Model is alive and kicking: Vietnam’s infrastructure spending is 8% of GDP, which dwarfs the Philippines’ at hardly 5%. Foreign capital pouring into Vietnam largely finances durable export factories creating durable jobs in Manufacturing, rather than fickle portfolio capital and debt instrument-based dollar inflows often celebrated as newsworthy in the Philippines. Vietnam is rapidly growing while exhibiting a growing trade surplus — the unfailing footprint of East Asian miracle economies! Never had a trade surplus graced the Philippine economy in recent memory.

In the past, Western developed countries took offence over growing trade deficits against other developed countries but hardly against poor countries. Now, in the twilight of the West’s economic hegemony, retaliation is foisted even against poor countries. The US State Department has launched a currency manipulator inquiry against Vietnam (Financial Times, Oct. 3, because of its persistent trade surplus against the USA. Proof unfailing that Vietnam is doing right by its people. Would that someday the Philippines too will earn the coveted mantle of currency manipulator! Judging by the monetary and fiscal policies being laid down in 2020, it will be a long wait.

We now have the longest COVID-19-related lockdown; we are now top of the heap in prospective economic contraction between 2019 and 2025; our farm sector is top of the region in producing poverty. We were the worst performing country in the last PISA (Program for International Student Assessment) math and science ranking. We seem to get great comfort from being top of the heap in the wrong things! Look at our exchange rate.


The Philippine peso leads the region in currency appreciation even as the economy confronts the worst economic contraction in history. Figure 1 shows the peso-dollar exchange rate falling from P52 per US$ in late 2019 to P48.5 per US$ in September 2020. The government spins this as spelling confidence in our economy. But it is just a simple case of the collapse in demand for dollars falling faster than its supply and resulting in a rising forex reserve (now at $100 billion): imports have collapsed but foreign borrowing has risen.

The stronger the domestic currency of an emerging economy, the weaker is its economic prospect. The stronger peso makes our exports less competitive; heftily rewards importers and smugglers, especially of basic products (chicken, luya (ginger), fruits); makes foreign investors sneer at our export platform drive.

By way of contrast, Figure 2 from the same source gives the trajectory of the Vietnamese Dong against the US$ during the same period. Despite the burgeoning trade surplus, the Vietnamese monetary authority not only kept the appreciation pressure of the Dong in check but even had a depreciation spell in April 2020. Reminiscent of what the Chinese did for the Yuan during much of the last two decades! Vietnam, following its mentor China, has now earned the “currency manipulator” label from the US — much coveted since it seems to predict subsequent success. Past currency manipulators according to the US State Department are South Korea, Taiwan, China, and India. Not for Vietnam is our Bangko Sentral’s and the US State Department’s beloved mantra: “market-determined exchange rate.” Like us, Vietnam enjoys monetary independence; but unlike us, it is aggressively deploying it to lift its poor from poverty!

Moreover, our economic authorities are about to hit foreign investors with higher income tax with the mandatory shift to corporate income taxation of 25% in CREATE for Philippine Economic Zone Authority (PEZA) locators: the equivalent of the 5% gross income tax currently enjoyed by PEZA locators is 17% corporate income tax (CIT). The noise from the political center on the rule of law only makes matters worse: the Philippine government keeps foisting expropriation threats upon private companies who, though playing by agreed rules, do not fit its arbitrary definition of populist corporate behavior.

Indeed the Vietnamese and Chinese successes with relatively fixed exchange rates may not be the exception. New evidence now strongly suggests that “less flexibility” in exchange rate regimes does better for long-term growth than the so-called “market determined exchange rate.” J. Frenkel et al. (2019, reports that relatively fixed exchange rate regimes perform better than more flexible regimes in economic growth for a large panel data starting from Bretton Woods era.

How sad that the Philippines will soon be huffing and puffing in Vietnam’s dust reprising the breathing problem we had when we moved into the rear-view mirror of Thailand and Indonesia. We still haven’t learned our lesson!


Raul V. Fabella is a retired professor of the UP School of Economics, a member of the National Academy of Science and Technology and an honorary professor of the Asian Institute of Management. He gets his dopamine fix from bicycling and tending flowers with wife Teena.