Growth success hinges on reforms

Between 1990 and 2023, per capita incomes rose almost sixfold, outpacing regional peers. Poverty fell sharply, life expectancy increased from 69 to 75 years, and Vietnam attained lower-middle-income status in 2011.

Jens Matthias Arnold

Capital deepening and a massive reallocation of labour from farms to factories drove the take-off. Manufacturing expanded on the back of foreign direct investment, which averaged 4.8 per cent of GDP over 2015-2023, more than in other ASEAN economies, and more than in India or China. Foreign-invested enterprises have propelled Vietnam into global markets, producing nearly three-quarters of the country’s exports.

The country’s share of world trade rose from 0.1 per cent in 1996 to 1.5 per cent in 2023, making it the world’s 19th-largest exporter. The export basket has evolved in step with this rise. Agriculture gave way to textiles, and electronics and machinery now account for almost half of exports, signalling a gradual move up the value chain.

Vietnam’s ambitions remain high. Official targets called for growth of 8 per cent in 2025, which has been achieved, and double-digit expansion over 2026-2030, reaching high-income status by 2045. Delivering this trajectory will require a decisive shift in policy emphasis, as the Organisation for Economic Co-operation and Development (OECD) noted in its latest economic survey of Vietnam. As demographic tailwinds fade and labour force growth slows, productivity, not factor accumulation, must become the main engine of growth to avoid the middle-income trap. Yet productivity gains have been modest. Capital productivity has fallen by 36 per cent since 1996, pointing to persistent inefficiencies in resource allocation.

Vietnam’s bank-dominated financial system channels credit to non-financial corporations equivalent to around 130 per cent of GDP, well above the ASEAN average. But competition in banking is constrained by administrative credit targets and interest rate controls, which weaken market discipline and distort lending decisions. State-owned banks still account for about 40 per cent of banking assets.

A deep banking sector reform would also require revisiting Vietnam’s current monetary policy framework. Moving towards a price-based approach where monetary authorities control the interest rate rather than credit targets would not only improve the effectiveness and transparency of monetary policy. It would also remove one of the most salient barriers to competition in the banking sector and promote a more efficient allocation of capital. Banks serve established borrowers well enough, but they are less well-suited to funding riskier, fast-growing firms with little collateral, short track records and less established relationships with banks. Market-based finance remains underdeveloped. Equity and corporate bond markets together amount to roughly 25 per cent of GDP, compared with about 85 per cent in other ASEAN economies.

Strengthening them would help diversify funding and improve capital allocation. That, in turn, requires a clearer and more predictable legal framework for equity finance, not only for the stock market, but also for newer, more innovative forms of equity. Venture capital has expanded since its emergence in 2004, but most funds operating in Vietnam are incorporated abroad, often in Singapore, to harness more developed regulatory frameworks.

The case for boosting competition to raise productivity extends well beyond finance. In services such as telecommunications and energy, easing entry barriers and foreign investment restrictions, and levelling the playing field between state-owned and private firms, would lift productivity. Services are critical inputs into manufacturing and, being largely non-tradable, exert an outsized influence on downstream manufacturing competitiveness. The importance of competitive services sectors for productivity growth can hardly be underestimated.

Reforming state-owned enterprises is also central to any competition agenda. Many retain significant market power, dampening competitive pressures and slowing innovation. Accelerating equitisation would yield efficiency gains, but meaningful progress can also be made through better governance, greater transparency and reduced political interference in operational decisions.

Separating the state’s roles as owner and regulator, by establishing independent regulators in sectors such as transport, telecoms and postal services, has paid dividends in many OECD economies. A strong and effective competition authority is also essential, provided state-owned enterprises are not excluded from their remit.

Human capital will also shape Vietnam’s next phase. The country performs strongly in lower-secondary education and in OECD PISA assessments. Higher up the ladder, progress is slower. Only about half of young people enrol in upper-secondary education, and tertiary enrolment is among the lowest in the region. High tuition fees constrain access, suggesting a case for increased public financing, better-targeted student support and closer alignment between tertiary education and labour market needs if skills are to keep pace with ambition.

Finally, sustaining high growth will require a more capable and better-resourced public sector. Rising incomes will increase demand for higher-quality public services, expanded social protection and credible investment in low-carbon energy. Meeting these expectations will require improvements in public sector efficiency and better economic governance, but also stronger revenue mobilisation to address future spending needs without undermining macroeconomic stability.