By David Brunnell
One of the major contributing factors to Vietnam’s macroeconomic instability has been the massive growth of credit inflows and its often inefficient allocations. Vietnam is in a state of economic transition from state-planned to open market based. The private sector has grown very rapidly but private firms’ demand for credit is still largely crowded out by the state sector. This paper specifically focuses on the use and impact of political connections by private firms to gain access to bank loans. More generally, this is one issue resulting from, and contributing to, the inequality of credit distribution across the Vietnam’s economy. Using individual company level data from 2007 to 2009 inclusive, this paper finds that exercising political connections increases a private firm’s probability of accessing a loan by 4.7%. In testing the effect of political connections on loan terms, this analysis found that firms with political connections also paid a price in the form of higher interest rates. Indeed private firms trying to access bank credit apparently pay a premium to their Vietnamese bankers in return for their privileged relationship. This suggests that the benefit of political connections translates into an extra financial advantage to both the lender and borrower.
Advisor: Michelle Connolly