by
Ms. Mai Ngoc Lan
(PhD Candidate, Graduate School of Economics, Shiga University)

  "Quantitative Assessment of Sensitivity to Exchange Rate Fluctuations for Vietnam: The Sectoral Approach"   

Summary

The first workshop of VDF Tokyo in 2005 took place on January 15. Ms. Mai Ngoc Lan, PhD candidate at Shiga University, presented her empirical study on the sensitivity of Vietnam’s trade flows using disaggregated data. This was to be one of the core chapters of her dissertation.

The author started by reviewing Vietnam’s international trade performance during the 1990s. It was shown that both the real exports and imports had increased during the period. However, the relationship between the real effective exchange rate (REER) and the trade balance (as a percentage of GDP) contradicted the theory, namely, the trade balance improved while REER appreciated. This required deeper investigation into this relationship with attention on different domestic industries.

A theoretical model explaining the effect of exchange rate changes on the quantity of exports and imports was proposed. Under the assumption of imperfect competition, the model suggested that a real depreciation of the domestic currency would lead to a decrease in the export price and an increase in its respective quantity.

The author then presented an econometric fixed effect model that employed the panel data from 1991 to 2000. It covered 20 different sectors (industries) and 18 leading trading partners. The model also included the concentration ratio, an indicator of imperfect competition which was thought to be an important feature of the Vietnamese industries. It was argued that the concentration level should influence the product’s sensitivity to currency fluctuation.

Empirical estimates showed that the coefficients related to exchange rate sensitivity varied across sectors. While a real appreciation of the Vietnamese dong might increase imports for most sectors, it did not decrease exports considerably. It was also found that the concentration ratio had a significant influence on the behavior of export suppliers, but not that of import demanders. The author also highlighted the role played by the share of imported inputs in generating different responses in export volume to exchange rate fluctuation. Based on these findings, she concluded that one of the sources of export competitiveness had been the rising import content of inputs. Thus, the Vietnamese dong’s real appreciation in the 1990s did not mean that Vietnam had lost her export competitiveness.

The presentation was followed by discussion as usual. Participants highly appreciated the author’s effort in dealing with a large set of data. Then a number of questions were raised regarding the author’s methodology and model specification. It was argued that some special characteristics of developing countries in the early process of industrialization, such as an FDI boom unrelated to exchange rate movement or the results of export quota negotiation, might strongly affect the economy in general and trade performance in particular. The role of the income variable, which was a standard variable in trade equations but omitted from this model, was also pointed out. Finally, there was an opinion that the results might not be so robust if some dummy variables reflecting the economy’s structural changes in the mid 1990s had been added.

Abstract |  Slides (PDF1,871KB) 

  (by Nguyen Duc Thanh)