Vietnam's Economic Transformation and Future Challenges

Vietnam has transformed from a struggling, war-torn nation to a vibrant, fast-growing economy, making significant progress in poverty reduction and attracting foreign investment.

### Vietnam's Path to Prosperity: From Poverty to Potential
* 📈 Vietnam's economy has grown by **6.1% over the last decade**, making impressive progress in **poverty reduction** and **improving living standards**.
* 🛠 In 1986, the Communist Party introduced Doi Moi reforms, shifting from a centrally planned to a market-oriented economy, leading to **GDP per capita growing from $300 to $4,000 today**.
* 🌏 Since 2000, Vietnam's economy has been growing at an average annual rate of **6.2%**, attracting **significant foreign investment** and becoming a **hub for multinational companies**.
* 🏭 Electronics, which accounted for **40% of Vietnam's exports in 2022**, have become a major driver of growth, with companies like Apple's suppliers setting up **large factories in the country**.
* 🛣 ️ Vietnam's economy is highly trade-intensive, with goods trade surpassing **185% of its GDP**, and it has strong ties to global supply chains, similar to Singapore.
* 🏦 To achieve its goal of becoming a high-income nation by 2045, Vietnam needs to **boost jobs, income, and exports**, address challenges in the **state-owned enterprise sector**, and tap into the potential of its **startup ecosystem**.
* 👥 Vietnam's young population is rapidly aging, with the share of people over 60 expected to rise from **12% to 21% by 2040**, posing challenges for the **labor force and social security**.
* 🌐 In the long run, Vietnam will need to move away from an export-led, low-cost economy, invest in **more productive and knowledge-based sectors**, and address issues like **corruption, censorship, and human rights violations** to avoid the **middle-income trap**.

Not so long ago, when people heard Vietnamese, 
they often thought of the boat people — refugees who left Vietnam in large numbers 
after the fall of Saigon in 1975. For twenty years, this was the common image: 
desperate people escaping hardship. But times have changed dramatically. Many former refugees have returned to seek new careers and 
start businesses in a transformed Vietnam. Today, Vietnam is among the fastest-growing 
economies in Asia, with a growth rate of 6.1% over the last decade. While this growth 
rate does not surpass that of China and India, Vietnam has made more impressive progress in 
cutting poverty than both. In other words, despite not achieving the same level 
of economic growth, Vietnam has been more effective 
in addressing poverty and improving living standards for its population.

Vietnam's cities are bright and bustling, while the countryside, home to about 60% of the population, is not far behind the development levels of richer Thailand. Walking around Hanoi, Vietnam’s capital, you can feel boundless energy everywhere. People whiz by on scooters, buy and sell everything from phones to food in countless small shops, and rush to and fro to get to school or work. Vietnam is young, growing, and anything feels possible. It wasn’t always thus. A mere 35 years ago, the country was one of the poorest in the world. When the 20-year Vietnam War ended in 1975, Vietnam's economy was among the world's weakest, and growth under the government’s five-year plans was slow. By the mid-1980s, per capita GDP was stuck between $200 and $300. Then, in 1986, the Communist Party introduced

reforms called Doi Moi, or renovation, 
shifting from a centrally planned economy to a market-oriented one. This shift resulted 
in GDP per capita growing from $300 in that year to $4,000 today. When oversimplified, this 
story becomes a narrative of a top-down process, showcasing Communist intelligence and bravery. 
It was the Communist Party of Vietnam (CPV) that lifted the people out of poverty; it was 
the Communists who took the initiative. The real credit, though, goes to the Vietnamese 
people, who through their own efforts pushed the communist authorities belatedly to accept these 
market changes. It was the Vietnamese who lifted themselves out of poverty, mostly in spite of 
communist policy. Today, Vietnam's social and economic progress has made it the poster child 
of multilateral institutions like the World Bank. It's now a top choice for multinational companies 
and tourists seeking vibrant destinations.

Since 2000, Vietnam's economy has been on a fast track, growing even quicker than most other Asian countries, except China and India, with an average annual growth rate of 6.2%. This growth has attracted numerous big foreign firms. Initially, it started with apparel giants like Nike and Adidas, drawn by the availability of low-skilled labor. However, the landscape has since shifted towards electronics, offering higher-value products and better-paid jobs for more skilled workers. By 2022, electronics accounted for a whopping 40% of Vietnam's exports, a significant jump from just 14% of a much smaller pie in 2010. The trade tensions between the U.S. and China, beginning in 2018, have helped. In 2019, Vietnam produced nearly half of the $31 billion-worth of American imports that moved from China to other low-cost Asian countries.

On top of all that, with the increasing tensions 
between major powers and China's strict pandemic measures, along with rising labor costs, 
it's no surprise that many large companies are shifting their focus to Vietnam. Apple's 
biggest suppliers, like Foxconn and Pegatron, responsible for making Apple Watches, MacBooks, 
and more, are constructing large factories in Vietnam, poised to become the largest employers 
in the country. Other big names such as Dell, HP, Google, and Microsoft are also relocating 
parts of their production from China to Vietnam. These changes have the potential to bring even 
more growth and improve the lives of millions of Vietnamese people. That, in turn, could 
boost the popularity of the Communist Party, which has governed Vietnam as a single-party 
state since the war ended in 1975. Though trade and foreign investment 
helped Vietnam emerge from extreme poverty, can they make the country rich?

The economy of Vietnam is a developing mixed socialist-oriented market economy. It is often compared to China in the 1990s or early 2000s, and there are valid reasons for this. Both countries, under a one-party political system, shifted towards capitalism and prioritized export-driven growth. However, there are significant differences as well. While Vietnam is often labeled as export-oriented, this doesn't fully capture the extent of its foreign sales. Its goods trade surpasses a whopping 185% of its GDP. Few economies, aside from the most resource-rich nations or city-states heavily reliant on maritime trade, have ever been as trade-intensive. What sets Vietnam apart from China isn't just the volume of its exports, but also the nature of its exporters. Its strong ties to global supply chains and substantial foreign investment make it more akin to Singapore in some ways.

Since 1990, Vietnam has consistently attracted significant foreign direct investment, averaging around 6% of its GDP annually—more than twice the global average and surpassing China or South Korea over a sustained period. In 2023, investors from 111 countries and territories put their money into Vietnam, with Singapore leading the pack, investing over $6.9 billion, making up 18.6% of the total FDI inflow, a rise of 5.4% year on year. Japan followed closely in second place with nearly $6.57 billion, while Hong Kong ranked third with $4.68 billion. Relying too much on foreign direct investment (FDI) could leave Vietnam's economy vulnerable. Sure, FDI can bring in capital, technology, and expertise, but an overreliance on it exposes Vietnam to vulnerabilities such as sensitivity to external shocks. If there are big swings in the global economy or if the countries investing

in Vietnam change their FDI policies, it 
could hit Vietnam's economy pretty hard. With wages increasing in other parts of 
East Asia, global manufacturers found Vietnam appealing because of its low labor 
costs and steady exchange rate. This sparked a massive export boom, which now makes up 
93% of Vietnam's GDP. Over the last decade, 
exports from domestic firms have gone up by 137%, while those from foreign-owned companies 
have shot up by 422%. But the growing difference 
in performance between foreign and domestic companies is becoming a problem for Vietnam's 
growth. The country has become overly reliant on investment and exports from foreign companies, 
while domestic firms have lagged behind. Another significant factor dragging down 
Vietnam's growth is the performance of state-owned enterprises (SOEs), which make up 
one-third of the GDP but don't grow as fast as other companies. Despite reducing the number 
of fully state-owned enterprises by over 90%

since 2001, Vietnam still has work to do. The 
sector remains inefficient. To address this,   targeted equitizations, sustainable 
divestments, and transformation programs   could be implemented to make SOEs more 
competitive domestically and globally. Moreover, the country could tap the significant 
unrealized potential of its start-up ecosystem.   In 2019, only $741 million was invested 
in Vietnamese startups, while Indonesia   attracted $2.38 billion. It's not shocking that 
Vietnam has produced just one unicorn company,   compared to Indonesia's six. By fostering 
a more comprehensive ecosystem, Vietnam can   eliminate barriers to private entrepreneurship, 
make funding accessible for promising projects,   and create supportive environments for 
high-growth businesses to flourish. There are also some underlying challenges 
that raise doubts about Vietnam's ability to   continue expanding its manufacturing 
sector and attracting investments. Firstly, its labor productivity remains 
a concern. While there has been gradual

improvement in recent years, Vietnam still lags 
behind some of its Asian counterparts. In 2021, Vietnam ranked 136th out of 185 countries 
in terms of labor productivity. One reason for this is that 
the relatively low labor costs that once attracted investors have increased as Vietnam has developed, and the available workforce has started to 
shrink. Investors are now considering alternative destinations like Cambodia, Myanmar, and 
Bangladesh, where labor costs are a top priority. This is having an impact on Vietnam's 
manufacturing sector. Even though the sector's exports and foreign investment have increased, 
the value kept within the country hasn't risen accordingly. In simple terms, Vietnam is producing 
more goods over time, but it's not increasing the share of added value captured in the country. 
So, despite the manufacturing sector’s growing contribution to the overall economy, the value 
added by this sector remains flat. In fact,

in 2023, it even decreased by 0.37% compared 
to 2022. This is partly because of a fragmented   supply chain in various industries—Vietnam still 
relies heavily on imported goods for its exports. In recent years, investors highlight 
lingering concerns that can prevent   them from continuing to invest, 
especially in high-value-added,   high-tech industries. Although Vietnam has done 
a lot to improve the “ease of doing business,”.   These concerns range from a shortage of 
skilled labor for research and development,   or technical activities to language efficiency, 
potential uncertainty relating to labor rights,   and onerous applications that expatriates 
who want to work in Vietnam have to make. Despite its challenges, Vietnam, a country of 100 
million people, maintains friendly ties with the   world’s biggest economies. Thanks to its strategic 
position next to China and a long coastline,   both the U.S. and China are keen to strengthen 
their relationships with Vietnam. Last year,  

it was the only nation to host state visits 
from both Xi Jinping and Joe Biden. This careful balancing act could bring 
significant political and economic benefits. Eager to become wealthier, Vietnam is looking to strengthen diplomatic ties 
with affluent countries and encourages firms from South Korea and the U.S. to expand 
their production bases there. Recently, South Korea became a 
comprehensive strategic partner, joining a select group of Vietnam’s 
closest allies like China and Russia. The Communist Party of Vietnam needs to boost jobs, income, and exports to reach its goal of becoming 
a high-income nation by 2045, no easy task when its gross domestic product per capita is around 
$4,000, compared with $80,000 for the U.S. Although Vietnam is getting old before it gets 
rich, its demographic trends are shifting. The median age is currently only 26, yet the 
population is aging rapidly.

Currently, 12% of the population is over 60, but this is expected to rise to 21% by 2040, one of the fastest increases globally. This trend is partly due to rising life expectancy, which has improved from 60 years in 1970 to 76 years today, thanks to better living standards. Additionally, prosperity has led to a lower fertility rate, dropping from about seven children per woman to fewer than two over the same period. In the 1980s, the ruling Communist Party started to enforce a one-child policy. Although less strict than China's, it has hastened the decline. Demographic changes similar to what's happening in Vietnam are also occurring across many Asian countries, but Vietnam's situation is unique because it's still relatively poor. When countries like South Korea and Japan reached their peak share of the working-age population,

their GDP per person was at $32,500 and $31,700, respectively, adjusted for purchasing power. Even China was at $9,500. But when Vietnam reached this demographic peak in 2013, the average income was only $5,000. In comparison, Indonesia and the Philippines are expected to hit this demographic milestone soon, but at much higher income levels than Vietnam experienced. As countries usually progress economically, they tend to move from farming to more productive sectors like services. Compared to its neighbors, Vietnam is a bit behind in this shift. When its working-age population was at its peak in 2013, farming still made up 18% of its economy. In comparison, when China was at a similar point, agriculture only represented 10% of its GDP. Furthermore, farming productivity often declines with age, unlike professions such as management.

This heavy reliance on agriculture could be 
why three-quarters of Vietnamese workers are in jobs where productivity decreases as they 
age, compared to only about half in Malaysia. Boosting productivity will help to get rich 
quickly, but it won't be easy. The government still strongly supports statism, and issues like 
corruption, censorship, environmental problems, and human rights violations remain significant 
concerns. Vietnam ranks poorly in international assessments of civil liberties, press freedom, and 
religious and ethnic minority rights. Vietnam only began to thrive after its Communist leaders 
acknowledged that capitalism, free markets, and free trade were the best paths to wealth.  
Like South Korea, Taiwan, and China, Vietnam has proven that it's possible to lift a nation out 
of poverty under an authoritarian regime. However, it's worth noting that most of the world's 
richest countries are liberal democracies.

Back in the late 1990s, Malaysia 
and Thailand were on a path similar to Vietnam's today. However, they fell 
into what's known as the middle-income trap—a situation where countries struggle to move 
from being a low-cost economy to a high-value one, making it tough to compete with both low- and 
high-income nations. As Vietnam's economy expands, wages will go up too, meaning it can't rely on 
its low-cost approach forever. Dependence on export-led growth would leave it vulnerable 
to the volatile global trading environment. In the long run, Vietnam will need to use its 
current growth to invest in more productive, knowledge-based sectors to reach its 2045 
goal. Key services like finance, logistics, and legal services create skilled jobs 
and add value to existing industries. The excitement around Vietnam's 
business potential is warranted, but there's still a lot of work needed to turn 
today's promising trend into lasting prosperity.

Is Vietnam's Economy Truly Set to Become Rich? | Economy of Vietnam | Econ

Econ

Vietnam has undergone a dramatic transformation from a war-torn country to one of the fastest-growing economies in Asia, with a 6.

The nation has been more successful in reducing poverty and improving living standards compared to China and India, despite not matching their economic growth.

The credit for lifting Vietnam out of poverty is mostly attributed to the Vietnamese people's efforts in embracing market changes, leading to the country's social and economic progress.

Vietnam's Rapid Economic Growth and Shifting Foreign Investment

Vietnam's economy has been growing at an average annual rate of 6.

2%, attracting major foreign firms initially in apparel and later in electronics.

By 2022, electronics made up 40% of the country's exports, with many large companies shifting their production from China to Vietnam.

This transition has the potential to bring further growth and improve the lives of millions of Vietnamese people, similar to China's shift towards capitalism in the 1990s.

Vietnam's Foreign Direct Investment and Economic Challenges

Vietnam has been consistently attracting high levels of foreign direct investment, with Singapore, Japan, and Hong Kong being the top investors in 2023.

However, overreliance on FDI leaves the country vulnerable to external economic shocks.

The significant growth in exports, driven mainly by foreign-owned companies, has led to a disparity with the performance of domestic firms, posing a challenge for Vietnam's overall growth.

The country also faces obstacles in the performance of state-owned enterprises and the development of its startup ecosystem, which could be addressed through targeted programs and increased investment.

Vietnam's Economic Challenges and Diplomatic Efforts

Vietnam's labor productivity ranks 136th globally, as labor costs rise and the workforce shrinks.

The manufacturing sector's contribution to the economy is growing, but the added value remains stagnant, partly due to a fragmented supply chain and reliance on imported goods.

Despite its challenges, Vietnam is strategically strengthening its relationships with the U.

, China, and South Korea, aiming for significant political and economic benefits.

The country aims to become a high-income nation by 2045, but faces the challenge of an aging population and the need to boost jobs, income, and exports.

Vietnam's population aged over 60 is projected to increase from 12% to 21% by 2040, driven by improved life expectancy and a declining fertility rate.

The country's one-child policy, though less strict than China's, has also contributed to this demographic shift.

Vietnam's unique situation is characterized by its relatively low income levels when it reached the peak working-age population, in contrast to other Asian countries.

This demographic change is further impacted by Vietnam's slower transition from farming to more productive sectors compared to its neighbors, leading to potential challenges in farming productivity.

Vietnam has a high reliance on agriculture, leading to lower productivity as workers age, in contrast to Malaysia.

The country faces challenges such as corruption, censorship, and human rights violations, resulting in poor rankings in civil liberties and press freedom.

Despite being under an authoritarian regime, Vietnam has recognized the importance of capitalism and free trade for wealth, similar to other successful Asian nations.

However, it must avoid the middle-income trap and transition to more productive and knowledge-based sectors for lasting prosperity.