## Credit Misallocation and Economic Growth in Vietnam

_IMF Working Papers, September 6, 2019_

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**Canonical URL:** [Credit Misallocation and Economic Growth in Vietnam](https://www.imf.org/en/publications/wp/issues/2019/09/06/credit-misallocation-and-economic-growth-in-vietnam-48606)

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## Bibliographic details
- Authors: Mitsuru Katagiri
- Published: September 6, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513511764.001

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### Summary
- The legacy of non-performing loans and high opportunity cost of government financing of bank recapitalization impeded the efficiency of financial intermediation and are an important policy issue in Vietnam.
- The paper presents both a theoretical and an empirical analysis of credit misallocation in Vietnam.
- Empirical analysis using corporate data indicates credit misallocation between state owned enterprises and private firms in Vietnam.
- Theoretical analysis embeds a micro-founded banking model in a political economy setting to assess factors determining the size of bank recapitalization and its effects on:
  - the efficiency of financial intermediation,
  - economic growth,
  - welfare.
- The analysis suggests that recapitalization depends on an array of factors, including:
  - the tightness of the government budget,
  - the decision maker’s concern for the favored sector.

### Empirical findings
- Evidence of credit misallocation between state owned enterprises and private firms in Vietnam is reported based on corporate data.

### Theoretical framework and mechanisms
- A micro-founded banking model is embedded in a political economy setting.
- The model is used to assess determinants of bank recapitalization size and its effects on financial intermediation efficiency, economic growth, and welfare.
- Recapitalization outcomes are linked to:
  - government budget tightness,
  - policymakers’ preference or concern for the favored sector.

### Policy implications and issues highlighted
- Non-performing loans and government-funded bank recapitalization carry a high opportunity cost that impedes financial intermediation efficiency.
- Recapitalization policy choices are influenced by fiscal constraints and political economy preferences, affecting growth and welfare outcomes.

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- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2019/09/06/credit-misallocation-and-economic-growth-in-vietnam-48606_