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INTRODUCTION Rationale of the study In Vietnam, the parallel existence of Budget deficit (BD) and Trade deficit (TD) is clear, but the fact that which deficit is the cause and which deficit is the result is still doubtful and controversial because this relationship is very complicated It changes over time and research space, and is closely related to many macro variables, creating interwoven relationships Even in the world's research system, there are many similar arguments about the impact of this relationship Therefore, it is necessary to understand the relationship between these two types of deficit because that will be the basis for policymakers to develop measures to deal with the root of the problem precisely and in line with marketability Stemming from the reality and aforementioned urgent goals, the researcher has selected the issue: "Relationship between budget deficit and trade deficit of Vietnam" as a research title for my doctoral thesis in economics Research aim and questions The overarching aim of the study is to understand the relationship between the two types of deficit in Vietnam and to perfect solutions for managing these two types of deficit in the future To achieve this goal, the thesis aims to answer the following research questions: + Question 1: Is the relationship between BD and TD in Vietnam a twin deficit? + Question 2: What is the transmission mechanism of this relationship? + Question 3: What should the Vietnamese government to improve the status of BD and TD nationwide? Research Methods The thesis is made on the basis of combining two research methods, which are qualitative and quantitative methods, to complement each other, helping the thesis to answer research questions in a scientific way, thereby achieving the stated research objectives Object and scope of research - Research object: The relationship between BD and TD - Research scope: + Content: The thesis studies the relationship between BD and TD through testing the hypothesis of twin deficits for Vietnam to indicate the transmission channel of this relationship (if exists) Consequently, the study will propose solutions to control two types of deficit in line with the goal of sustainable development + Space: Thesis studies the relationship between BD and TD in Vietnam + Time: The thesis studies the relationship between BD and TD in Vietnam in the period 2005-2017 New points of research Compared with the previous studies on this topic for Vietnam, the thesis has the following new points: - Comparing the basis of symmetric and asymmetric analysis in quantitative analysis - In addition to the two main variables of budget balance and trade balance, the control variables used in this study are all real variables - The selected research period is from the first quarter of 2005 (2005Q1) to the fourth quarter of 2017 (2017Q4) This is a period when Vietnam has had many changes in trade and fiscal policies to cope with the constantly changing economic situation, but there have been no empirical studies for this period with an asymmetric model Dissertation layout In addition to the introduction and conclusion, the thesis is divided into chapters: -Chapter 1: Research overview and theoretical basis of research on the relationship between BD and TD -Chapter 2: Research Methods -Chapter 3: The relationship between BD and TD in Vietnam in the period 20052017 -Chapter 4: Some scenarios on the relationship between budget balance, trade balance and policy suggestions for Vietnam in the period 2018-2030 CHAPTER 1: OVERVIEW AND THEORETICAL BASIS OF RESEARCH 1.1 Research overview 1.1.1 Foreign studies 1.1.1.1 Classical view: BD is the cause of TD The studies that confirm this relationship to be positive (twin deficits) are mainly empirical with typical developing countries such as the work of Milne (1977), Bernhem (1987), Bryan et al 1988), Ziet and Pemberton (1990), Kouassi et al (2004), Abbas et al (2011), Asrafuzzaman et al (2013), Suliková et al (2014), Lwanga and Mawejje (2014), Ye (2007), Arize and Malindretos (2008 ), Adnan and Asghar (2010) There are also studies that have found this relationship to be inverse, such as Seyfettin and Çagri (2014) There are many studies that achieve a more specific level, explaining the mechanism of interaction between the two types of deficit such as studies by Lau and Hock-Ann (2002), Baharumshah and Lau (2007), Mehmet and Filiz (2013), Eldemerdash et al et (2014), Bakarr (2014), Tosun et al (2014) The above works share the common feature of using a symmetric model Since 2010, the method of asymmetric analysis has been gradually introduced into the research as the work of Antonakaris et al (2016), Javed and Naresh (2018) 1.1.1.2 Viewpoint 2- TD is the cause of BD Several quantitative studies using symmetric analysis have come to the conclusion that this relationship is either positive or negative Typical covariate detection group is Datta et al (2012) combining simple multivariable regression model with co-integration and causality test, Magazino (2012) using VAR model, Ngakosso (2012) using VAR mode Research shows that the relationship is inverse with Uỗal and Bolukbas (2013), or Turan and Karakas (2018) tested by the NARDL asymmetric model These studies have not shown the transmission channel of the relationship and are mainly performed with symmetric models 1.1.1.3 Viewpoint - BD and TD interact with each other (two-way relationship) Not many studies have shown this relationship Darrat (1988) used a combination of tools such as 2-variable regression, 3-variable regression, maximum reasonable estimate, Granger causality test After that, there are studies using VAR model such as Kouassi et al (2004), Asrafuzzaman et al (2013) 1.1.1.4 Perspective - Ricardo's equilibrium theory: BD and TD exist in parallel but not interact (independently of each other) Typically, there are the works of Kouassi et al (2004), Datta and Mukhopadhyay (2010), Mumtaz, K and Munir (2016) The cause is determined to be that the fiscal policy and the foreign exchange market management policy are different and are implemented independently of each other 1.1.2 Studies on Vietnam 1.1.2.1 Classical view: BD is the cause of TD Typically, the work of the University of Economics Ho Chi Minh City (2011 ) using the VAR model, with variables BD, current account balance (CA), government saving, private saving, government investment, private investment, real GDP, nominal GDP and growth rate Nguyen Hoang Nhu Thuy (2012) uses the variables current balance, BD, short-term interest rate, exchange rate Using the VECM model to test, the researcher concludes that the variables used have a longrun relationship with a lag of years, in which, investment, interest rates, and exchange rates are relational transmission channels 1.1.2.2 Viewpoint 2- TD is the cause of BD The study from point of view include the work by Trinh Thi Trinh et al (2013 ) applying the VAR model, the variables used are BD and CA and by Nguyen Lan Anh (2018) using VAR with variables: BD, CA, interest rates, and exchange rates All of these works are done with VAR, which is a symmetric model 1.1.2.3 Perspective - Ricardo's equilibrium theory: BD and TD exist in parallel but not interact (independently of each other) Truong Thi Nguyet Hang et al (2010) used the dataset from 1995Q1 2009Q4, the model used is structural VAR (structural VAR), which is also a symmetric model The research variables include GDP, BD (in % of GDP), CA (in % of GDP), 3-month interest rate, and real effective exchange rate 1.2.3 Conclusion from the study review and identification of research “gaps” 1.2.3.1 Conclusion Research results show that the relationship is very diverse due to the diverse responses of transmission channels Since 2010, new research methods have appeared on the basis of asymmetry 1.2.3.2 Research gap + Research variables: Many studies on Vietnam conducted only use two basic variables, namely BD and TD (or CA), other variables (if any), most of them are nominal variables + Research methods: Up to the time of the researcher’s thesis, there have been no studies applying the asymmetric factor to the research for the case of Vietnam + Research period: The selected research period is from 2005Q12017Q4 This is a period when Vietnam has had many changes in trade and fiscal policy It is likely that the relationship between BD and TD has changed a lot on the basis of old background and the appearance of new elements The relationship between the two types of deficit needs to be reassessed according to a new method called asymmetric analysis 1.2 Theoretical background of the relationship between Budget deficit and Trade deficit 1.2.1 Deficit classification There are many ways of classifications: cyclical deficits, structural deficits, full-employment budget deficits, actual budget deficits and cyclical budget deficits In this thesis, BD is calculated according to the primary deficit 1.2.2 The factors affecting the size of the deficit and the impact of the deficit on the economy are summarized in the following diagram: Factors affecting BD - Output (Y) Budget expenditure (G) Tax (t) Inflation Other objective reasons Other subjective reasons BUDGET DEFICIT - Impact of BD Factors affecting TD Debts increase CA imbalance Interest rate increase Trade deficit Inflation Growth pace - Exchange rate - Comparative price between imports and exports - Trade policies - Interest - Income - Geography distance - Production resources - Consumption preference - Economy health - economy scale - Budget expenditure Figure 1.1 Synthesis of factors affecting BD and the influence of BD on the economy Source: Researcher’s synthesis from macroeconomic theories 1.2.3 Theoretical background of trade deficit 1.2.3.1 The background of international trade There are two principles that explain the basis of exchange: the Principle of Absolute Advantage and the Principle of Comparative Advantage 1.2.3.2 Factors affecting trade According to Salvartore and Diulio (1996), exports and imports are both affected by a number of similar factors such as: exchange rate, relative price of imported goods in terms of export (term of trade), policies trade policy, income level of importing country, interest rate Feenstra and Taylor (2008) emphasize geographical distances between economies, production resource, technology, people 's preferences of consumer goods , status (growth or decline) of economy According to Colander (2004 ), the influencing factors include the level of competition , the size of the economy and the economies of scale 1.2.3.3 Trade deficit The factors that affect the trade market and the effects of the deficit on the economy are summarized as follows: Impact of TD TRADE DEFICIT - Wage loans - Current account deficit - Economic growth - Exchange rate - Budget deficit Figure 1.2 Summary of the factors affecting TD and the influence of TD on the economy Source: Researcher's synthesis from macroeconomic theories in the open economy 1.2.4 Theoretical background of the relationship between budget deficit and trade deficit 1.2.4.1 Classical view: BD is the cause of TD (1a) BD (G↑) Y↑ AD↑ (1b) AD ↑ Interes rate ↑ IM↑ Currency increase TD ↑ Figure 1.4: Diagram of the mechanism of BD impacting on TD Note: (1a) is a Keynesian mechanism; (1b) is Mundel-Fleming's mechanism) (Source: Researcher’s synthesis from macro theory) 1.2.4.2 Perspective - Ricardo's view BD and TD exist in parallel but not interact (independently of each other) BD (G↑) (2a) Bonds issued Individual savings↑ Unchanged national savings Source: Researcher's synthesis from experimental research results Case 2: TD causes BD Kearney and Monadiani (1990) assert that the cause of this relationship is due to the change in population's inflation expectations The view of Kim and Kim (2006) that external capital and public expenditure will be the factor that stops the recession and aggravates low income (a) Ucal and Bolukabas (2013) argue that an increase in low-income households can also narrow low-income households if budget revenue depends heavily on import tax (inverse relationship (b)) Unchanged TD TD ↑ Currency increase Monetary supply ↑ Unchanged exchange rate Currency depreciation Figure 1.5: BD and TD exist independently of each other Note: (2a) is a mechanism from Ricardo's point of view; (2b) is the mechanism according to Mundel-Fleming Source: Researcher's synthesis from macro theory 1.2.4.3 Some other points of view, drawn from empirical research Case 1: An increase in BD causes a decrease in TD is called the twin divergence hypothesis Cavallo (2006) and Kim and Roubini (2008) suggest that the mechanism by which the opposing dual occurs is due to the crowding out effect of investment and the shock to output or productivity BD ↑ Interest rate ↑ Figu AD TD BD ↑ BD ↓ Import tax ↑ (2b) Losen Fiscal policy Y↓ Figure 1.7: The impact of TD on BD Source: Researcher's synthesis from on experimental research results Case 3: Bidirectional relationship (mutual interaction) between two types of deficit Kearney and Monadjani (1990), Anorou and Ramchander (1998), Khalid and Teo (1999) found that the relationship between the two types of deficits is bidirectional (interacting with each other) which is caused by the feedback of the transmission channels such as interest rates, exchange rates, GDP BD (G↑) Government expenditure↑ Savings↓ Foreign Capital ↑ TB ↑ GDP ↓ Currency depreciation Figure 1.8: Interrelationship of BD and TD Source: Researcher's synthesis from experimental research results Figure 1.6: BD causes TD (twin divergency) CHAPTER RESEARCH METHODS Analysis of viewpoints on relationship of BD and TD 2.1 An overview of Research methodology 2.1.1 Qualitative Analytical Methods -Statistical methods Statistical methods are used in the process of collecting information about the research topic, collecting theory and secondary data for the research The main sources that the researcher exploits to get data are books, specialized journals, periodical reports of domestic and foreign research institutions, related ministries and industries, the internet and other sources -Methods of table analysis and descriptive statistics This is the method used in the research overview, systems of theoretical background, situation analysis and solution research 2.1.2 Quantitative methods Quantitative research is carried out after analyzing the situation by qualitative method Quantitative analysis will help quantify the level of impact between research variables, thereby re-testing the hypotheses drawn from the qualitative analysis With this method, the study uses time series analysis technique to evaluate the interaction relationship between BD and TD by both symmetric analysis (VAR model) and asymmetric analysis (NARDL model) 2.2 Analytical framework of the thesis Experimental research One-way relationship, negative Interactive Two-way relationship (((postivive ) Fundamental theory 1.Classical view (one-way, positive) Ricardo’s view (non-relationship) Analysis of situation drawn from untested hypotheses Scenario 2: Relationship Scenario 1: Non-relationship Managing independent policies, no need to concern interrelationship Interaction -BD TD ? -TD BD ? -BD TD ? Buiding scenario of impact - forecast of BD and TD in middle terms - establishing view and scenario of impact Transmission channel - Interest rate? - GDP? - exchange rate Impact volume - symmetrical? - asymmetrical Solution - short terms - long terms: Figure 2.1 Analytical framework of the thesis Source: Researcher’s own construction 2.3 Research model of the thesis 2.3.1 Basis of research model After 2010, nonlinear impact-based analysis began to be applied in practice Along with the emergence of many new methods based on analysis taking into account asymmetry, the NARDL (nonlinear autogressive redistribution model) proposed by Shin et al (2014) is evaluated as one of the methods It is known to be simple, effective but very flexible 2.3.2 Data source The thesis uses quarterly secondary data (from the first quarter of 2005 to the fourth quarter of 2017) The main source of the data is from the database of two organizations World Bank (WB) and CEIC 2.3.3 Research variables and scales 2.3.3.1 Basis of research variables 10 The study will use variables according to Mundel-Fleming model including: budget balance, trade balance, interest rate, exchange rate and GDP These are the variables that are commonly used in research on this topic internationally and are accepted by the fundamental theory 2.3.3.2 Variables and scales The study uses variables: budget deficit (NS), trade deficit (TM), interest rate (LS), exchange rate (TG) and logarithm of gross national income (LGDP) The variables are defined as follows: (1) = ܁ۼ LSt=ߙଷ + ∑ ߙଷଵ (݅ሻܶܯ௧ି + ∑ ߙଷଶ (݅ሻܰܵ௧ି + ∑ ߙଷଷ (݅ሻܵܮ௧ି + ∑ ߙଷସ (݅ሻܶܩ௧ି + ∑ ߙଷହ (݅ሻܲܦܩ௧ି + ߔ(@ܳ݅ = ݎ݁ݐݎܽݑሻ + u3t (2.3) TGt=ߙସ + ∑ ߙସଵ (݅ሻܶܯ௧ି + ∑ ߙସଶ (݅ሻܰܵ௧ି + ∑ ߙସଷ (݅ሻܵܮ௧ି + ∑ ߙସସ (݅ሻܶܩ௧ି + ∑ ߙସହ (݅ሻܲܦܩ௧ି + ߔ(@ܳ݅ = ݎ݁ݐݎܽݑሻ + u4t (2.4) GDPt=ߙହ + ∑ ߙହଵ (݅ሻܶܯ௧ି + ∑ ߙହଶ (݅ሻܰܵ௧ି + ∑ ߙହଷ (݅ሻܵܮ௧ି + ∑ ߙହସ (݅ሻܶܩ௧ି + ∑ ߙହହ (݅ሻܲܦܩ௧ି + ߔ(@ܳ݅ = ݎ݁ݐݎܽݑሻ + u5t (2.5) ்௧ ௩௨௦ (௫௨ௗௗ ௪௦ି்௧ ௫ௗ௧௨ (௫௨ௗௗ ௬௧,௨ௗ ௧௦௧ 2.3.4.2 Model NARDL ீ In which, budget revenues and expenditures and nominal GDP are in billions of VND ࡱ࢚࢞࢘ିࡵ࢚࢘ (2 ) = ۻ܂ ࢇ ࡳࡰࡼ In which: Value of exported goods (FOB price), value of imported goods (CIF price) (in million USD), nominal GDP in million USD ( 3) GDP = Real GDP in billions of VND, based on 2010 constant prices ( 4) LS: adjusted for inflation as follows: + ࢚ࢋ࢘ࢋ࢙࢚ ࢘ࢇ࢚ࢋ − = ܁ۺ + ࢌࢇ࢚ In which: nominal interest rate is the monthly deposit interest rate, averaged quarterly Inflation is the % change of CPI this quarter compared to the same period last year Thus LS is the actual variable (5) Exchange rate: The real multilateral exchange rate (index), averaged during the period, announced by the World Bank 2.3.4 Experimental model 2.3.4.1 VAR model The VAR model in this study will include equations written in general form as follows: TMt=ߙଵ + ∑ ߙଵଵ (݅ሻܶܯ௧ି + ∑ ߙଵଶ (݅ሻܰܵ௧ି + ∑ ߙଵଷ (݅ሻܵܮ௧ି + ∑ ߙଵସ (݅ሻܶܩ௧ି + ∑ ߙଵହ (݅ሻܲܦܩ௧ି + ߔ(@ܳ݅ = ݎ݁ݐݎܽݑሻ + u1t (2.1) Variables of NARDL: On the basis of variables of the VECM model, the number of variables of NARDL will be developed to 10 including: TM + , TM - , NS + , NS - , TG + , TG, LS + , LS - , LGDP + , LGDP - The estimated equations are as follows: NSt ୮ ୯ ି ି ି ି ା ା ା = ∑୨ୀଵ ϕ୨ NS୲ି୨ + ∑୨ୀ(θା ୨ TM୲ି୨ + θ୨ TM୲ି୨ + θ୨ LS୲ି୨ + θ୨ LS୲ି୨ + ି ି ି ି ା ା ା θା ୨ TG୲ି୨ + θ୨ TG୲ି୨ + θ୨ GDP୲ି୨ + θ୨ GDP୲ି୨ + ߠ (@ Quarter = iሻሻ + Ɛ୲ TMt ୮ ୯ ା ା ା ି ି ି ି = ∑୨ୀଵ ϕ୨ TM୲ି୨ + ∑୨ୀ(θା ୨ NS୲ି୨ + θ୨ NS୲ି୨ + θ୨ LS୲ି୨ + θ୨ LS୲ି୨ + ି ି ି ି ା ା ା θା ୨ TG୲ି୨ + θ୨ TG୲ି୨ + θ୨ GDP୲ି୨ + θ୨ GDP୲ି୨ + ߠ (@ Quarter = iሻሻ + Ɛ୲ LSt = ∑୮୨ୀଵ ϕ୨ LS୲ି୨ + ା ∑୯୨ୀ(θ୨ା NS୲ି୨ 11 (2.2) (2.13) ୮ ୯ ା ି ି ା ା ି ି = ∑୨ୀଵ ϕ୨ TG୲ି୨ + ∑୨ୀ(θା ୨ NS୲ି୨ + θ୨ NS୲ି୨ + θ୨ TM୲ି୨ + θ୨ TM୲ି୨ + ି ି ି ି ା ା ା θା ୨ LS୲ି୨ + θ୨ LS୲ି୨ + θ୨ TG୲ି୨ + θ୨ TG୲ି୨ + ߠ (@ Quarter = iሻሻ + Ɛ୲ (2.14) 2.4 Estimated procedure and method of shock transmission analysis 2.4.1.Estimation Process Unit root test NSt=ߙଶ + ∑ ߙଶଵ (݅ሻܶܯ௧ି + ∑ ߙଶଶ (݅ሻܰܵ௧ି + ∑ ߙଶଷ (݅ሻܵܮ௧ି + ∑ ߙଶସ (݅ሻܶܩ௧ି + ∑ ߙଶହ (݅ሻܲܦܩ௧ି + ߔ(@ܳ݅ = ݎ݁ݐݎܽݑሻ + u2t (2.12) ୮ ୯ ି ି ି ି ା ା ା = ∑୨ୀଵ ϕ୨ TG୲ି୨ + ∑୨ୀ(θା ୨ NS୲ି୨ + θ୨ NS୲ି୨ + θ୨ TM୲ି୨ + θ୨ TM୲ି୨ + ି ି ି ି ା ା ା θା ୨ LS୲ି୨ + θ୨ LS୲ି୨ + θ୨ GDP୲ି୨ + θ୨ GDP୲ି୨ + ߠ (@ Quarter = iሻሻ + Ɛ୲ GDPt (2.11) ି ି ି ା + θ୨ି NS୲ି୨ + θା ୨ TM୲ି୨ + θ୨ TM୲ି୨ + ା ି ି ା ା ି ି θା ୨ TG୲ି୨ + θ୨ TG୲ି୨ + θ୨ GDP୲ି୨ + θ୨ GDP୲ି୨ + ߠ (@ Quarter = iሻሻ + Ɛ୲ TGt (2.10) Lag selection 12 Model estimation Diagnostic test Figure 2.2 Model estimation process Source: Researcher’s source on the theory of VAR and NARDL For analysis, the study uses Wald's coefficient test, Bound-Test and asymmetric dynamic multiplier graph analysis CHAPTER BUDGET DEFICIT, TRADE DEFICIT AND THE RELATION BETWEEN TWO TYPES OF DEFITCITS IN VIETNAM PERIOD 2005-2017 3.1 Macro-economic context of the world and Vietnam in the period 2005-2017 3.1.1 The context of the world and Vietnam in the period 2001-2010 3.1.1.1 World context In the 2001-2010 period, in general, the world economy was heavily affected by the financial crisis, so it faced many difficulties The average growth rate for the whole period reached 3.2%, only slightly higher than the average 3.1% of the previous 10 years Developed countries still account for over 70% of the world's GDP The powerful countries still contribute over 70% of total global import and export turnover China has risen to become the leading exporter of goods, while the United States continues to be the largest import market Trade protectionism is increasingly reduced 3.1.1.2 Domestic context a Economic development strategy The mainstream spirit in the Development Strategy at this stage is still the priority to promote quantitative growth to quickly get out of the crisis That ideology is in line with the thinking from the central planning period to promote quantitative growth, leading to the growth in breadth, with less emphasis on efficiency economic results as the growth model chosen in this period b Real economy 13 -High growth rate: Growth has always been positive and has maintained an average of 7.26% over the entire period, although from 2008 onwards, due to the negative impact of the global financial crisis, demand, the growth scale of Vietnam is somewhat reduced and less stable than in the previous period -International integration, expanded trade activities Total import-export turnover increases by an average of 18%/year, reaching approximately 157 billion USD in 2010, 5.2 times higher than in 2000 (of which, exports reach 72.2 billion USD, fivefold increase; import $ 84.8 billion, an increase of nearly 5.4 times), becoming one of the countries with high economic openness in the region -The agricultural economy: With agriculture accounting for 20.6% of GDP in 2001, it proves that the economy is still heavily dependent on the agricultural sector -Economic growth on capital: Total investment capital in the period 2001-2010 is times higher than in the previous 10 years, accounting for 41.6% of GDP on average (compared to 36.5 % of GDP for the previous 10 year period) In economy, the state is still the largest "investor", accounting for about 42% of the total investment capital of the whole society The biggest contributor to GDP growth is still capital (52.7%), TFP (28.2%) and the least belongs to labor (19.1%) Using a large amount of capital, but its efficiency is decreasing -Vietnam's high growth rate, but unsustainable: During most of the period, the inflation rate is always in an uptrend, peaking in 2008, up to 23% causing many disturbances Some balance indicators are in bad condition The budget balance in 10 years has always been in a state of overspending to stimulate demand and maintain growth The low income (excluding principal repayment) of Vietnam has increased rapidly The public debt ratio is much higher than that common in developing countries 3.1.2 The context of the world and Vietnam in the period 2011-2020 3.1.2.1 World context This is the period when the development trend towards environmentally friendly, also known as "green economic development" The growing influence of some emerging economies such as China, India or the ASEAN region continues to reduce the role of "old" powers such as the US, UK, Germany, and Japan However, with the return of protectionist policies of major countries, international trade becomes more and more tense Economic crises (US-China trade war, currency wars ), natural disasters (epidemics, environmental pollution, climate change ) are becoming more and more serious 3.1.2.2 Domestic context a Development strategy 14 This 10-year socio-economic development strategy is “Transforming the growth model into a harmonious development between width and depth; gradually implement green growth, low-carbon economic development Use all resources economically and efficiently …” It can be seen that this transformation comes from both objective and subjective sides b Real economy -Slower growth rate: In the period 2011-2020, due to the impact of the global recession and inadequacies in the economy, the average growth rate is only 6.03%, lower than the average rate The average income of the previous period is 7.26% Per capita income reaches USD 2,365, but still lower than many countries in the region - Strongly economic restructure: By 2016, continuing to follow the policy of industrialization and modernization, the economy continues to successfully transform with the proportion of agricultural decrease to 16.32% and services breakthrough to become the main industry contributing more than 40% of GDP, the structure of economic sectors has also changed a lot with the growth of the private sector - Unsustainable Growth factors: Vietnam has not yet come out of the growth model based on physical and labor capital because in 2017, TFP's contribution is estimated at only 39%, growing at a constant rate of 39% The domestic value added of exports is also very low In 2017, the budget deficit (excluding principal repayment) increases to 3.48% of GDP, public debt nearly reaches the ceiling set by the National Assembly 3.2 Movements of the trade balance in goods and the budget balance of Vietnam in the period 2005-2017 3.2.1 Evolution of the trade balance in goods 3.2.1.1 Evolution of exports The proportion of total export turnover increases from 59.97% of GDP (in 2005) to more than 93.1% of GDP (in 2017) Export scale at 31.73 billion USD in 2005 increases by 6.6 times reaching 208.2 billion USD in 2017, with an average growth rate of approximately 17.5%/year The proportion of processed goods (in the total value of exported goods) has increased rapidly from 50% in 2005 to 81% in 2015 However, by 2016 there is a decline, staying at only 50% The group of preliminarily processed goods in this period is recorded to decrease gradually and in 2016 it recovers and increases In the total export turnover of both goods and services, the proportion of goods as the mainstream role increases from 88.6% (2005) to 94.23% (2017) while processed goods and machinery continuously rise from 50.4% to 81.3% 3.2.1.2 Evolution of imports In the import structure, the import of goods as the leading position with the increase from 89% (in 2005) to 92.5% (in 2017) of the total import value Vietnam is always in a increasing state of goods from 36.4 billion USD in 2005 to 211.3 billion USD (5.8 times increase) with an average growth rate of 15.23%/year, accounting for 94.46 % GDP (in 2017) In the import structure, the group of processed goods accounts for the largest proportion (70-80%) followed by the group of raw and semiprocessed goods 3.2.1.3 Evolution of Vietnam's merchandise trade balance in the period 2005 2017 In the period 2005-2017, the trade balance in goods is mainly a deficit However, from 2012 onwards, the balance of goods fluctuates erratically, surplus and deficit are intertwined 3.2.2 Revenue and expenditure situation and budget balance 3.2.2.1 State of budget revenue In the period 2005 -2017, total budget revenue increases from VND 238,686 billion to VND 128,8664 billion (an increase of 5.4 times in 13 years) with an increase in revenue approximately equal to that of nominal GDP The average share of total revenue is 26.5% of GDP (with the highest being 29.7% in 2010 and the lowest being 21.93% in 2014) It can be seen very clearly that in the period 20052011, the total revenue remains quite high (from more than 28% to more than 29%) but then it declined to 21%-22% during 2012 - 2014 before regaining momentum continued to increase in the years 2015-2017 Total revenue structure In the revenue structure, the proportion of taxes and fees is quite stable, always fluctuating at 91% - 93% of total revenue From 2011 to now, the proportion of revenue from aid has been decreasing Accounting for 80% of total tax revenue includes import and export taxes, corporate income, personal income, value added tax Import and export tax revenue has decreased from 13% (in 2005) to 10% (in 2017) The share of domestic revenue (excluding crude oil) has increased from 52% of GDP (in 2005) to 80% of GDP (2016) 3.2.2.2 State of budget expenditure Total expenditure has an average growth rate of 16.5%/year, approximately equal to the growth rate of revenue According to Tran Tho Dat and To Trung Thanh (2019), by 2017, Vietnam has become the country with the highest public expenditure ratio (relative to GDP) in the region with an average budget expenditure of 27.8% GDP Recurrent expenditures increase fastest with an average growth rate 15 16 of 16.9%, higher than the average growth of total expenditure of 15.8% and average growth of investment spending is only 11.9% - Expenditure structure With the rate always standing at a high level in total expenditure (from 66% in 2005, after 11 years increasing to 78% in 2016), recurrent spending has an increasingly serious level of excess of the estimate The share of development investment spending in total expenditure decreases from 30.15% to 19.7% respectively Status of loan and interest repayment The rate of interest payment in total recurrent expenditure is constantly increasing At the beginning of the period it is 4.4%, but at the end of the period it increases to 9.3%, more than times In absolute terms, this is a very high increase from VND 6,621 billion in 2005 and has increased more than 13 times to VND 86,882 billion in 2016 Such rapid increase in interest payment shows that the debt repayment burden is creating great pressure to the state budget 3.2.2.3 State of the budget balance The majority of budget years are in deficits Before 2012, the budget balance had some surplus years with the highest level of 22,925 billion VND, equivalent to 1.6% of GDP (in 2008) However, since 2012, the deficit has been persistent with a gradually decreasing level from 178,464 billion (in 2012) to 115,170 billion (in 2015) A year later, the deficit increases to 191,632 billion (equivalent to 5.5% of GDP) and then decreases to 140,985 billion, equivalent to 2.8% (in 2017) 3.2.3 Status of control variables 3.2.3.1 Deposit interest rate Vietnam has had to go through two fierce competition on interest rates by credit institutions during this period, causing inflation to increase to double digits since 2007 and peak at nearly 20% in 2008 Real interest rates at many time points are very low, even negative From 2012 onwards, interest rates remain quite stable from an average of 13.65% at the beginning of 2012 to 4.78% at the end of 2017 The real interest rates gradually regain a positive value 3.2.3.2 Multilateral real exchange rate While the nominal exchange rate has been in an uptrend throughout the years, real effective exchange rate (REER) has fluctuated more The REER is continuously undervalued (relative to the value of the equilibrium real exchange rate) Then, from the beginning of 2008 until the end of 2017, REER was always overvalued compared to the equilibrium value It is overvalued because the Vietnamese dong was pegged to the USD 3.2.3.3 Actual total output In the 2005-2007 period, quarterly GDP grows at a high rate (from 7% to 9%) compared to the same period last year The value of total output increases from 1,411,436 billion VND to 1,656,758 billion VND (1.2 times higher) However, from the first quarter of 2008 to the end of 2006, the growth rate decreases significantly, there are periods of deep decline such as the first quarter of 2009 and 2012 reaching only 3.4% and 4.7%, respectively with the same period last year In 2017, total output reaches VND 3,262,548 billion (1.8 times higher than in 2008), while, before the crisis, in just years (2005-2007), GDP increases by 1.2 times 3.3 Some assessments of trade and fiscal policy responses for the period 2005-2017 3.3.1 Trade policy In the period 2005-2017, in general, Vietnam's orientation is to actively integrate, consider export as the driving force of growth, so all trade policy operations are directed to this goal In the face of fluctuations in the world economy as well as in the region, the Government's way of operating trade policies has also become more flexible when it is determined to control trade deficit 3.3.2 Fiscal policy In the 2005-2017 period, Vietnam's fiscal policy has always been changed to suit the socio-economic situation in each period The policy of relying on public spending to accelerate growth for a long time (from 2000-2007) has led to excessive monetary accumulation, pushing up inflation rapidly along with more increasingly serious public debt burden, causing many disturbances to the macro-economy In addition, even when prices remain stable, the impatience in monetary expansion to regain growth rate continues to be the cause of high inflation again (period 20092011) 3.3.3 Coordination between fiscal, trade and other related macro policies The coordination between policies has become more flexible, but the effectiveness is still limited, and sometimes even wobbles for the economy In the period 2000-2006, both fiscal and monetary policies are in favor of expansion During the period of the world financial crisis, macro policies sometimes turn into tightening but immediately followed by stimulus packages from fiscal policy, plus cautious easing from monetary policy, which lead to early recovery signs of the economy since the end of 2009 The period after the financial crisis (since 2010), these two important policies are operated in two different directions, and then double-digit inflation returns 3.4 Relationship between Vietnam's budget deficit and trade deficit in the period 2005-2017 3.4.1 Qualitative analysis of relationships 3.4.1.1 The relationship between budget deficit and trade deficit 17 18 Calculations from statistics show that in the period 2005-2017, the situation of the budget balance and the trade balance of Vietnam is quite complicated, sometimes the two balances move in the same direction but mainly is in the opposite In general, the volatility of the trade balance is stronger with a higher frequency than the budget balance 3.4.1.2 Relationship between budget balance, multilateral real exchange rate, real interest rate and GDP The budget balance and the interest rate can have a reciprocal effect (the budget affects the interest rate indirectly; the interest rate affects the budget directly) Between the budget balance and GDP there can be an interaction (direct relationship) The exchange rate is likely to have no impact on GDP In the opposite direction, GDP can affect the exchange rate (through inflation) 3.4.1.3 Relationship between trade, exchange rate, interest rate and GDP Trade balance and interest rates can interact in both direct (trade affects interest rates) and indirect (interest rates affect trade through impacts on investment, savings) The exchange rate may affect the balance of trade indirectly, but it is not clear what the transmission channel is The relationship between GDP and trade balance is expected to be reciprocal (in both direct and indirect ways) 3.4.1.4 Hypothesis on the relationship between BD and TD in Vietnam + Hypothesis 1: Budget balance affects trade balance (negative relationship) + Hypothesis 2: Interest rate is the unique variable that conveys the impact from the budget balance to the trade balance + Hypothesis 3: The relationship between budget balance and trade balance is asymmetrical 3.4.2 Quantitative results of the relationship between budget balance and trade balance 3.4.2.1 Results with the first model, the VAR model - Testing for stationary, lag determining, and testing VAR diagnosis The VAR model is defined with variables, namely TM, NS, LS, TG, GDP, the lag is - Testing the model’s diagnosis: The model has no autocorrelation, the residuals are normal, and there is no variable variance The model guarantees stability - Results of determining long-term and short-term relationships according to VAR 3.4.2.2 Results with model 2, model NARDL - Determination of the variables, stationary testing and lag determination of the model The number of variables used in the NARDL model is 10 variables including: NS_POS; NS_NEG; TM_POS,TM_NEG; GDP_POS,GDP_NEG; LS_POS, LS_NEG; TG_POS, TG_NEG The variables are both I(0) and I(1) The optimal lag is - Long-term relationship There exists a reciprocal relationship between TM and NS, which is reciprocal, inverse and asymmetrical (in the NS TM dimension), and symmetric (in the TM NS dimension) The effects of control variables on the two main balances are asymmetric 19 20 Long run Short run NS TM NS TG GDP TM GDP TG LS Source: Author made - Conclusion on experimental results by VAR model The test results from the VAR model indicate that in both the short run and the long run, there exists a one-way relationship between trade and budget (trade is the cause of budget change) This effect takes place in both direct and indirect ways GDP and exchange rate are transmission channels in the long run mean while GDP and interest rates are transmission channels in the short run .8 0.4 0.2 0.0 -0.2 -0.4 -.2 -0.6 -.4 -0.8 -.6 -1.0 -.8 -1.2 11 13 15 Multiplier for TG(+) Multiplier for TG(-) Asymmetry Plot (with C.I.) Figure 3.22: Impact map of variables in the long run (according to NARDL) 11 13 15 Multiplier for LS(+) Multiplier for LS(-) Asymmetry Plot (with C.I.) Source: Author made - Relationship in the short term The budget affects trade in the short run in both direct and indirect ways with the transmission channels being GDP, interest rates and exchange rates .1 -.1 -.2 TG -.3 -.4 LS TM GDP 11 13 15 Multiplier for NS(+) Multiplier for NS(-) Asymmetry Plot (with C.I.) NS Figure 3.24 Graph of trade response to the impact of the budget balance, interest rate, exchange rate (by NARDL) Source: Researcher’s source with Eviews 12 Figure 3.23: Impact map of variables in the short run (according to NARDL) Source: Researcher’s source with Eviews 12 The response of TM and NS over time from the initial equilibrium back to the new equilibrium is shown in the dynamic multiplier graph 21 22 1.0 0.5 0.0 -0.5 -1 -1.0 -2 -1.5 -3 -4 -2.0 11 13 15 Multiplier for TM(+) Multiplier for TM(-) Asymmetry Plot (with C.I.) 11 13 15 Multiplier for LS(+) Multiplier for LS(-) Asymmetry Plot (with C.I.) + In the short run, the relationship between the two balances occurs in both direct and indirect ways With the indirect form, two variables TG, LS and GDP all act as transmission channels for shock effects between NS and TM This relationship is transmitted through a channel consisting of one intermediate variable or two intermediate variables as follows: -NS GDP TM and NS TG TM -TM GDP NS and TM LS NS Thus, hypothesis 2: "The interest rate is the only intermediate variable that transmits the impact from the budget balance to the trade balance" is rejected + Finally, the results of experiental analysis show that: "The relationship between the balance of budget and trade is an asymmetrical relationship ", so hypothesis is accepted CHAPTER SOME SCENARIOS ON THE RELATIONSHIP BETWEEN BUDGET BALANCE, TRADE BALANCE AND POLICY IMPLICATIONS FOR VIETNAM PERIOD OF 2018 - 2030 08 06 04 02 00 -.02 -.04 11 13 Multiplier for GDP(+) Multiplier for GDP(-) Asymmetry Plot (with C.I.) Figure 3.25 Graph of the budget response to the impact of trade balance, interest rates and GDP (according to NARDL) Source: Researcher’s source with Eviews 12 + Thus, the empirical analysis shows that in both the short and the long run, the relationship between TM and NS is inverse, interacting with each other Therefore, hypothesis 1: "The budget balance has a negative effect on the trade balance" is rejected in the short run 23 4.1 Forecast of Vietnam's macroeconomic situation in the period and scenarios for Vietnam's budget balance and trade balance in the period 20182045 4.1.1 Forecasting global and regional economic trends The world economy will grow by an average of 3.2% per year, with the main development trends being international economic integration, urbanization and application of technological advances The major countries of Asia, especially ASEAN will rise above and become the growth engine of the world China plays an important role in international trade and investment However, the world economy will face difficulties: inequality in income distribution between groups of countries and within each country will also become more serious, the Covid epidemic, the US trade war - China, climate change 4.1.2 Forecast of advantages and disadvantages for Vietnam With the motto of dynamism and active integration, Vietnam is expected to have many advantages from participating in new generation FTAs, attracting investment thanks to macroeconomic stability, favorable geographical location, etc Meanwhile, Vietnam will also face many challenges: the labor aging rate is the highest in the world, the management of macro policies is not really flexible in line with the increasingly fierce international competitive market mechanism In 24 addition, the risk of falling into the "middle income trap", increasing public debt , climate change are also taken into account 4.1.3 Basic economic policy objectives of the Government - The growth rate of per capita income must reach 6%/year, the average GDP growth rate must reach 6.95%/year Industry and services account for over 90% of GDP, and these two industries employ 70% of the economy's workforce The private sector contributes at least 80% of GDP - By 2025: To be a developing country with modern industry, surpassing the low-middle income level; - By 2030 : To be a developing country with modern industry and high average income; 4.1.4 Some scenarios for solutions to control the budget deficit and trade in the coming period of Vietnam Scenario 1: Focus on improving the budget deficit Scenario 2: Focus on improving trade deficit Based on Vietnam's income target as from the perspective of strategic leadership, the scenario has more advantages 4.2 Some proposals to manage the budget deficit and trade deficit in Vietnam for the period 2018-2030 4.2.1 Group of solutions in the short and medium term The government should focus on the impact of control variables on BD Specifically, they include: - Reducing interest rates and maintain positive GDP growth to ensure income target - Improving budget and limit spending pressure, domestic currency devaluation pressure due to investors' expectations 4.2 Long-term solution group - Transforming growth model: Continue to accelerate the process of changing growth model from breadth to depth: - Reforming the budget sector: a The group of solutions to fiscal policy: The budget management must be more proactive and flexible, improve discipline, transparency of information, increase the application of technology in budget processes; strictly manage public debt b The group of solutions to the revenue and expenditure structure: + For budget revenue: continue to increase the proportion of domestic revenue, expand taxable areas, issue a number of new taxes 25 + For budget expenditure: reduce the proportion of recurrent expenditure to less than 64%; further improve the efficiency of public spending through strengthening spending discipline, speed up the progress of public investment, take measures to recover inefficient investments, arrears in capital construction, increasing autonomy, limited allocation to public non-business units - Reforming the trade area a Solutions to trade policy Vietnam needs to accelerate the development of supporting industries in order to gradually reduce the dependence of exports on imports, and gradually shift to a processing and service economy Vietnam should rely on non-price competition, encourage research and development, promote the application of science and technology to production, focus on products with high added value b Solutions to changing import-export structure + For exports: continue to restructure export products towards increasing the proportion of high value-added products, limit exports in raw and preliminary items, and promote exports of processed products + For import: Limit the import of consumer goods, restrict the import of domestically produced materials; Actively adjust the growth rate of goods imports, strictly control the import of goods that are not encouraged to be imported, contributing to reducing the trade deficit in the long term; Meeting the requirements of importing high-tech machinery and equipment, suitable with resources, domestic production level and saving energy and materials CONCLUSION The period 2005-2017 is a period of great changes in the economy of Vietnam and in the world The Vietnamese government has had to resort to multiple and constantly changing macroeconomic policy responses related to the fiscal and trade sectors to run the economy These policy responses, although brought about many positive results, also reveal many shortcomings, even at times causing the economy to "wobble" as some researchers state Faced with the need for in-depth studies, which can indicate the nature and main macroeconomic variables behind this relationship, the thesis has chosen a research topic on the relationship between fiscal deficit and trade deficit in Vietnam From there, the study make recommendations to resolve the relationship between the two balances in order to successfully implement the orientation of sustainable economic development in the new context of the 2018-2030 period 26 After performing the theoretical system and research overview, the researcher selects research variables for Vietnam on the basis of Mundel-Flemming model, compares the analysis on the basis of using VAR (symmetric) and NARDL (asymmetrical) Combining qualitative and quantitative analysis, especially with the new quantitative method of asymmetric analysis, the thesis has solved the proposed research objectives including: (i) determining the type of relationship, channels of shock transformation between the deficits, and the impact of the control variables on the two balances and propose a direction to control the two deficits in the period 2018-2030 The limitations of the thesis are unavoidable The data series are not so big, and over a short period of the time, the impact of some new factors has not been taken into account and the reasonable deficit threshold for the two regions has not been calculated 27 28 ... and disadvantages for Vietnam With the motto of dynamism and active integration, Vietnam is expected to have many advantages from participating in new generation FTAs, attracting investment thanks... solution research 2.1.2 Quantitative methods Quantitative research is carried out after analyzing the situation by qualitative method Quantitative analysis will help quantify the level of impact... asymmetric factor to the research for the case of Vietnam + Research period: The selected research period is from 2005Q12017Q4 This is a period when Vietnam has had many changes in trade and fiscal policy
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