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Executive summary

Since the launch of the Ðổi Mới economic reforms in 1986, Viet Nam has achieved tremendous economic and social progress. Today, it is one of the most open economies in the world (by trade-to-GDP ratio) with one of the strongest growth rates among Southeast Asian countries. Viet Nam has also performed well in human development and social inclusion, including a remarkable reduction in poverty, a reasonably equitable increase in living standards and a good education system.

Viet Nam now has an opportunity to leverage past successes and climb the development ladder. The country’s openness to trade and investment and its recent success in improving its fiscal situation have put it in a good position to benefit from current changes in trade and investment patterns in the region. However, the pressure for action is mounting: economic progress will see society continue to evolve at a fast pace, with demographic change, a growing middle class and urbanisation creating new opportunities but also new demands. The low-cost appeal to investors will run its course, as Viet Nam continues to become richer and prices and wages increase. At the same time, Viet Nam’s impressive natural capital will require greater care to ensure its preservation. Institutions will need to evolve to accompany Viet Nam’s transformation from a society playing catch-up to a modern creative economy.

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Creating an integrated and transparent market economy with a strong skills system and high performance state-owned enterprises

A more integrated economy with equal opportunity for all firms and workers and a balance between orientations towards exports and a competitive domestic market can help Viet Nam avoid the risk of becoming stuck in a dualistic economic structure typical of the middle-income trap. With a middle class with consumption power forecast to reach over 40 million in the 2030s, there is potential for domestic demand to counterbalance global uncertainty. However, today, foreign investors often receive incentives not available to local firms, while many State-owned enterprise (SOEs) continue to enjoy special access to financing, factors of production and protective regulation. Local firms (other than large national champions) face unequal treatment and obstacles. In spite of the recent numerous laws and regulations in this area, implementation is often weak. The recent push for e-government platforms raises hope for future improvements.

Agriculture holds significant potential for transformation and improving citizens’ lives. Completing cadastres and removing restrictions on land use and transactions could help solve land fragmentation, create efficiency gains as well as more environmentally sustainable forms of land use. Better integration of smallholders into agricultural supply chains may help Viet Nam gain a competitive edge on global markets and improve incomes in rural areas.

Viet Nam’s prospects for further foreign direct investments (FDI) look excellent in the near term. The country can afford to focus on attracting investments that offer opportunities to integrate deeper into value chains and create new capabilities at low environmental costs. A single strategic investment promotion framework would be useful to chart common goals for FDI attraction, streamline incentives and national and subnational efforts to reach out to foreign investors. Investment promotion agencies should complement match-making with proactive development of the skills that multinationals seek in domestic suppliers.

Reforming the governance of SOEs would contribute significantly to productivity gains and equal opportunity. A conservative estimate suggests that SOE reform in Viet Nam would bring about 2.5% of GDP annually in efficiency gains alone, without even considering the longer-term gains from creating opportunities for new market entrants. The creation of the Commission for the Management of State Capital was an important step in this regard. A crucial next step will be to define a State-ownership policy and financial and non-financial performance objectives for all SOEs. These should be transparent and annually reported on by SOEs on an online platform.

Viet Nam should continue to upgrade its tertiary education sector to provide the labour force and firms with the skills for a modern economy. The right links between universities, technical colleges and firms could encourage skills upgrading and innovation ambitions. Teachers need support to develop the knowledge and skills that students require to succeed in the labour market. Also, a stronger information system may help guide student choice and tailor educational offer.

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Ensuring environmental, social and financial sustainability

Environmental sustainability must become a priority of Viet Nam’s future strategy to use available natural resources efficiently and to ensure a high level of quality of life for citizens. The annual mean concentration of fine particles in the air continues to rise, water quality is deteriorating, and the consequences of extreme water-related events are dramatic. Better data, better co-ordination between agencies and ministries, as well as effective monitoring are key to improving environmental quality. Sustainability also requires a more forward-looking and dynamic power development plan, energy efficiency and efficient capital markets to finance energy diversification.

Viet Nam’s health care and social security systems need improvements to ensure continued social inclusion in the face of a fast changing society. Services and insurance should expand in coverage and be placed on a more sustainable footing. A single policy framework would help enhance the current fragmented system.

Financing Viet Nam’s future development will require better mobilisation of domestic resources through taxes and better-structured and efficient capital markets. A thorough review of Viet Nam’s current tax structure and collection process is advisable. For a more diversified financial system, long-term investors such as insurance companies would be important.

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Implementation is everything

Without implementation, any policy, law or strategy will remain just proof of good intentions. Lagging co-ordination among public actors, blurred reporting lines between levels of government, and a legislative process that lacks transparency and coherency threaten implementation capacity. Poor implementation creates scope for gift-giving in return of favours between civil servants and the private sector. Overlapping and unclear laws and regulations undermine the implementation of reforms across all the strategic themes in this report. Going forward, a reorganisation of territorial administrative units could enhance co-ordination and accountability. Rulemaking should be streamlined and the judiciary should be granted greater independence to help the market economy reach its full potential. A rationalisation of the public administration and payroll could create the space to reward merit and improve salaries to minimise the need for rent seeking. Finally, Viet Nam should strengthen its commitment to fight against corruption through a single and autonomous anti-corruption law and body.

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Coronavirus COVID-19

This report is based on information and data available up to February 2020. The analysis presented does not consider any potential environmental and socio-economic effects of the COVID-19 epidemic.

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