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.