Economics Higher Level Internal Assessment

Session: May 2022

Word Count: 855

 The article dated December 28, 2021 revolves around the loan being provided to Vietnam by the

World Bank. They have signed an agreement of the amount $221.5 million to finance to the

recovery of the country from the COVID pandemic. The loan is a form of a tied aid. Tied aid is

money, food or resource lent by one country to another (or from a non-governmental organisation to

a country, for example World Bank) provided that the funds are used to buy imports from the donor

country or linked to a specific project, like the recovering from the pandemic in this case.

The goal for any form of aid is to

Y2
support economic growth as shown
Y1

in Fig 3.1. When there is a certain

level of injection into an economy

(investment/loan in this case) there

will be an increase in household

income of Vietnam that would

X1 X2
display a certain increased ability

for the economy to spend more on

goods and services, as a consequence of which there would be an increase in the production of

goods and services, shifting the maximum efficiency point from ‘B’ to ‘Y’. This indicates and

increased spending on capital goods by the World Bank such as buildings and equipment to

facilitate the health and environmental sectors of the Vietnamese economy. Capital goods are one of

the factors of production and one of the makings of a countries GDP. By this effect, the loan would

increase the potential output of the economy. However, in reality, it is not possible for the

Vietnamese economy to produce at the maximum efficiency point wholly, rather the point would

fall somewhere under the curve, like at point B. This is a consequence of unemployment of the

 factors of production, which would likely happen even when the loan is given due to some natural

inefficiencies in the economy.

The consumption of the loan is

intended to have positive

externalities as it is being spent on

capital goods that has an an

increased social benefit compared

to the private benefits, i.e., when the

government uses the loan to build

more hospitals and advocate for

gender equality at the workforce,

the benefits of it should be felt on the other sectors of the economy as a cascading effect. Typically,

in a free market economy, there would be an under consumption of the goods which would cause a

market failure. Even though the Vietnamese government is receiving the loan, there would be

natural willingness to use the loan in effect. Thus, the demand for the loan stays at D=MSB instead

of MSB as in Fig 3.2 and the equilibrium point stays at B. Meanwhile, the supply stays at S = MSC

= MPC. As a result of this reluctance, there is a social welfare loss depicted by the triangle ABC

because the market is not functioning at the socially efficient level of equilibrium point C. However,

this underconsumption can be avoided as Vietnam follows a communist regime, therefore their

market policies involve heavy government intervention, the solution to underconsumption. The

government can make effective behavioural nudges towards the social optimum level such as

Keynesian demand side policies with a focus on spending on public programs and subsidising

industries.

 One of the advantages of the loan is the intention of economic growth. The loan increases the net

household income and an increased disposable income means an increased spending on goods and

services which increases the standard of living for the average citizen for a seemingly long term.

The increased spending also stimulates the economy as more goods and services are being

consumed, more labour is needed to produce them, thus reducing unemployment in the long run. An

added benefit to the resolution of unemployment is that it gives the poor an opportunity to break out

of the poverty cycle as the increased income would mean that they can now spend on basic goods.

There would also be a natural inclination to spend more on the health and education sectors as that

is the purpose of the loan.

Some disadvantages still stand as the economy would not be able to come back to the equilibrium

level in the short run. There would be short-term unemployment as Vietnam tries to reallocate its

resources. There is always the possibility of the country not being able to pay back its loan, which

can be consequential as their national debt already stands at $160.1 billion, resulting in devastating

market failure in the near future similar to the Greek government-debt crisis of 2009. Situations like

these can give opportunities to predatory organisations that want to benefit from the economic

crisis.

In conclusion, there are short term gains with include economic growth, increased tax revenue and

employment opportunities. However, in the long term, the loan may not be a viable way forward for

Vietnam to recover from the pandemic and they should not solely rely on it. Other means of

economic growth and recovery should be sought after such as monetary policies that focus on

relaxing the interest rates so that business entities can take out more loans internally.

References:

Ani. “World Bank Loans $221 MN to Vietnam for Economic Recovery from Covid-19.” Business
Standard, Business-Standard, 28 Dec. 2021, https://www.business-standard.com/article/
international/world-bank-loans-221-mn-to-vietnam-for-economic-recovery-from-
covid-19-121122800158_1.html.

O'Neill, A. (2021, December 8). Vietnam - national debt 2016-2026. Statista. Retrieved January 7,
2022, from https://www.statista.com/statistics/532529/national-debt-of-vietnam/