Credit Misallocation and Economic Growth in Vietnam

The legacy of non-performing loans and high opportunity cost of government financing ofbank recapitalization impeded the efficiency of financial intermediation and are an importantpolicy issue in Vietnam. This paper presents a theoretical and empirical analysis of the issue.An empirical analysis using corporate data indicates credit misallocation between stateowned enterprises and private firms in Vietnam. On the theoretical side, a micro-foundedbanking model is embedded in a political economy setting to assess the factors determiningthe size of bank recapitalization and its effects on the efficiency of financial intermediation,economic growth and welfare. The analysis suggests that recapitalization depends on anarray of factors, including the tightness of the government budget and the decision maker'sconcern for the favored sector.