1. Key policy insights

Viet Nam has performed impressively over recent decades. A bold policy package of market-oriented reforms, known as Doi Moi, started in 1986 and unleashed Viet Nam’s economic potential. Between 1990 and 2019, real GDP growth was strong, averaging 6.8%. Moreover, the economy proved resilient to a series of shocks. While many other Southeast Asian countries experienced severe recessions during the Asian Financial Crisis in 1997-1998 and the Global Financial Crisis in 2008-2009, the Vietnamese economy continued to grow. Robust growth has been underpinned by a sustained transition from an agrarian to an industrial economy: the share of agriculture in GDP declined from around 40% in the late 1980s to nearly 10% in 2020, although Viet Nam remains one of the largest rice exporters in the world. Together with abundant labour supply, greater trade openness attracted foreign investors, accelerating this economic transformation. The trade to GDP ratio, which was just 23% in 1986, is now almost 200%, one of the highest in the world. In addition to becoming a member of ASEAN (1995) and APEC (1998), accession to the WTO in 2007 further strengthened Viet Nam’s integration into the global economy. The share of ICT goods in total merchandise exports rose from 5% in 2007 to nearly 40% in 2020. As a result, Viet Nam attained middle-income country status in 2010. Per capita GDP reached 20% of the OECD average by end-2020, up from around 8% in 2000 (Figure 1.1, Panel A). The Vietnamese people benefitted considerably from this sustained period of high economic growth, as is shown by the dramatic decline in the poverty rate (Figure 1.1, Panel B).

In recent years, while navigating the health and economic impacts of the pandemic, Viet Nam has kept its long-term aspiration to attain high economic prosperity for the people. In particular, trade integration has gained stronger momentum (OECD, 2020[1]). Following the enactment of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership in 2019, a large-scale free trade agreement across the Asia-Pacific, Viet Nam ratified the European Union-Viet Nam Free Trade Agreement and the Regional Comprehensive Economic Partnership during the pandemic. A number of necessary domestic reforms have already kicked off, such as the revised Enterprise Law to re-classify state-owned enterprises and the new Labour Code that will enhance workers’ rights. Moreover, building on the past experience of crisis management, tackling the pandemic has been highly successful so far, with Viet Nam achieving both lower COVID-19 mortality per capita than most other OECD countries and positive economic growth in 2020 (2.9%) and 2021 (2.6%). Similar to many other countries, the government mobilised a range of available monetary and fiscal policy tools, notably tax deferrals, tax cuts, loan restructuring and soft loans, to mitigate impacts on vulnerable households and businesses.

The government’s plans are detailed in the 10-year Socio-Economic Development Strategy 2021-2030 and the 5-year Socio-Economic Development Plan 2021-2025 and have a strong focus on achieving a more productive, inclusive and greener economy (Box 1.1). While the income gap compared with the OECD average is still large, Viet Nam also needs to prepare for significant population ageing. Despite rapid economic development, economic informality is high, and social protection is underdeveloped. Even before the pandemic, the expansion of Viet Nam’s international trade through opening markets faced a risk of weakening amid growing trade tensions. Moreover, the highly uncertain global environment that has arisen with the outbreak of Russia’s invasion of Ukraine has added additional headwinds to the Vietnamese economy. High energy prices are pushing up inflation, eroding the purchasing power of vulnerable households. Global trade may be undermined for a long period as a consequence of the war. Nevertheless, the government aims for an ambitious average GDP growth rate of 7% by 2030 to attain upper middle-income country status.

To achieve this, the ongoing recovery will need to be followed by robust growth that is underpinned by higher labour productivity growth. In particular, the rapidly changing external as well as domestic environment has caused the government to reframe the Vietnamese model of growth. In particular, the Prime Minister has underscored the importance of “building a resilient and strategically autonomic economy while pursuing proactive international integration” (Harvard Kennedy School, Ash Center for Democratic Governance and Innovation, 2022[2]). In particular, strengthening trade integration is key to economic stability. Further trade integration will continue to benefit Viet Nam as before, but the integration will be deepened if trading partners are more diversified and exported products, including services, have a higher share of value added. A dynamic business sector will be the main driver of this economic transformation. Therefore, improvements to the business climate for both domestic and foreign investors will become increasingly crucial. Among other things, this will require the further diffusion of digital technologies. In order to improve resilience to economic shocks and to realise the smooth implementation of bold reforms, a sounder macroeconomic policy framework and a more comprehensive social protection system will be needed. At the same time, structural reforms, such as financial market reform, can also help stabilise macroeconomic conditions and enhance economic resilience.

Bold structural reforms are also crucial to ensure a robust recovery in the wake of the COVID pandemic and to avoid the “middle-income trap”. Latin American countries experienced a long period of economic stagnation during the 1980s (i.e. the “lost decade”). These countries accumulated large amounts of external borrowing during the 1970s period of high oil prices. When the global economy subsequently entered a recession amid rising policy rates in advanced economies, this triggered a debt crisis. In response, governments in the region cut public spending such as on infrastructure and social benefits. However, less attention was paid to supply-side reforms to stimulate business dynamism. Despite strong fiscal consolidation, government subsidies to state-owned enterprises (SOEs) in these countries were not reduced. It was not until the early 1990s when privatisation of SOEs accelerated across the region. While Viet Nam’s economic growth has been strong, a number of emerging-market economies have been faced with slowing growth when they have reached middle-income status (Felipe, 2012[3]). Rising income levels make labour-intensive manufacturing exports less competitive, while nurturing high value-added sectors requires extensive structural reforms, notably deepening trade integration, reducing regulatory burdens on businesses, investing in human capital and combatting corruption (Tran, 2013[4]). These broad reforms require huge policy efforts, underpinned by high institutional capacity of governments. Viet Nam has successfully implemented bold reforms in the past, such as Doi Moi, but step-by-step reform, which allows the government to concentrate its limited resources on difficult reform areas, will ensure sustained economic convergence.

The Socio-Economic Development Strategy 2021-2030 set out a new policy orientation of a “circular economy”, where all policies should be consistent with greener growth. In addition to this, a commitment to achieving net zero greenhouse gas emissions by 2050 is bringing the climate transition into new focus. A Decision issued in July 2022 (896/QD-TTg) aims at mapping out a comprehensive climate change strategy, including more concrete policy directions to realise net zero emissions. The increase in energy prices as a result of the war in Ukraine has compounded the need for reducing the country’s reliance on fossil fuels, through accelerating the adoption of renewables, improving energy efficiency and raising the utilisation of other low carbon energy sources. The large investments needed to achieve the green transition require additional financial resources. Strong carbon reduction commitments, accompanied by the policy settings needed to achieve them, can help attract more funding for these projects, including from international sources. The further successful adoption of renewable energy sources can also attract more sophisticated FDI which is sensitive to total carbon footprints and thus promotes energy efficiency, producing a virtuous cycle to help decarbonise the domestic economy.

Against this backdrop, the main messages of this Economic Survey are:

  • Macroeconomic policies need to help enhance economic resilience. In the short run, the priority is to minimise the impact of high energy prices through targeted support for vulnerable households, rather than deploying further expansionary fiscal measures. In the medium term, it is crucial to strengthen the macroeconomic policy framework by improving fiscal sustainability through expanding the tax base. Social protection also needs to be strengthened and economic informality reduced.

  • To maintain high economic growth from the recovery, Viet Nam needs to further improve the business climate and facilitate the digital transformation. Reinvigorating business dynamism requires further streamlining regulations, increasing the transparency of regulatory processes and levelling the playing field among all market participants, including between state-owned enterprises and private entities.

  • To achieve the objective of reaching net zero emissions by 2050, sustaining high levels of investment in renewable energy and pursuing greater energy efficiency will be needed. This can be achieved through a comprehensive policy approach that prioritises effective public and private investment, conducive regulatory settings and market prices that better reflect carbon content.

Overall, Viet Nam has withstood the economic shocks entailed by the pandemic well. This has owed a lot to the flexible but bold handling of the health crisis. Viet Nam succeeded in avoiding large infections until mid-2021 thanks to swift border closures and tight but short-lived confinement measures that were targeted at infected areas early in 2020 (Figure 1.2, Panels A and B). More stringent restrictions in response to the abrupt propagation of the Delta variant caused real GDP to decline in the third quarter of 2021. Nevertheless, the restrictions were quickly eased, in consideration of the serious economic and social ramifications of these measures. Vaccination started more slowly than in other Southeast Asian countries in 2021, but progressed rapidly (Figure 1.2, Panel C). The government set a target of fully vaccinating at least half of the population aged 18 and older by end-2021. By early January 2022, 70% of the population had been administered two doses of a COVID-19 vaccine, marking a much faster rollout than initially planned. From early 2022, the government further stepped up its living-with-COVID amidst the circulation of the Omicron variant, which was considered to be more contagious but typically less harmful. This has been accompanied by a rapid increase in the share of the population that has received a booster shot (Figure 1.2, Panel D). These measures helped contain the pandemic and revive the economy.

Recent economic developments in Viet Nam are taking place against a backdrop of slowing global economic growth. Global industrial production and retail sales have been declining and survey evidence suggests notably weaker business and consumer confidence in most OECD countries. Inflation has risen steeply, reflecting a combination of factors. These include the impact of the war on energy and food prices, ongoing supply constraints and a solid global demand recovery following the onset of the pandemic. Higher prices are eroding household purchasing power and have prompted central banks around the world to raise official interest rates, weighing on investment activity. Looking forward, the OECD projects global GDP growth to slow sharply this year to 3.1%, around 1½ percentage points weaker than projected as at December 2021, and to remain weak at 2.2% in 2023.

Growth in Viet Nam has been robust since early 2020, apart from the contraction in the third quarter of 2021 (Figure 1.3, Panel A). Domestic demand has been particularly solid overall. Private consumption flattened in 2020, but did not plunge like in many other countries, and then picked up quickly in 2021 (Figure 1.3, Panel B). Retail sales data indicate that consumption continued rebounding strongly in the first half of 2022 after the huge contraction in the third quarter of 2021 (Figure 1.3, Panel C). Investment has buttressed growth. Viet Nam’s low infection rates have contributed to better business prospects for foreign investors. As a result, foreign investment (realised capital) already started increasing in the first half of 2022 (10% in January-July, year-on-year basis, in US dollar (USD) terms) following a small decline in 2020 and 2021 (-2% and -1%). Business activity has also been resilient, with industrial production recovering steadily from late 2021 (Figure 1.3, Panel C).

On the other hand, the contribution of external demand to growth was mixed. Overall, Viet Nam’s goods exports have been buoyant like in other Southeast Asian countries during the pandemic (Figure 1.3, Panel D). Exports to the United States and People’s Republic of China (hereafter China), which account for the largest share in Viet Nam’s exports (Figure 1.4), have been solid. Viet Nam imports a large amount of machinery and equipment, meaning that real imports tend to grow faster than real exports when the economy is expanding because of stronger investment demand, and vice versa (Figure 1.3, Panel B). As such, net exports contributed positively to GDP growth in 2020 amid softening investment. Volume of trade expanded strongly in the first half of 2021, but was affected in the second half of the year by the tougher sanitary restrictions and global supply chain disruptions, with exports slowing more than imports. Accordingly, the current account balance recorded deficits in 2021 (Figure 1.3, Panel E). Although it accounts for a smaller share than in other Southeast Asian countries, inbound tourism to Viet Nam grew fast before the pandemic. As the government reopened borders to most countries from April 2022, after almost two years of shutdown, the number of overseas visitors has gradually increased but still remains at very low levels (Figure 1.3, Panel F).

The external environment has become more uncertain since the beginning of 2022. Viet Nam has significantly expanded its participation in global trade over recent decades (Figure 1.5), which has contributed to its rapid economic development. Involvement in global supply chains promotes efficient use of economic resources and the adoption of new technologies through foreign investment. While over-stretched supply chains could be susceptible to shocks, Viet Nam’s expansion of trade has diversified both the composition of trading partners as well as the goods and services in trades. Viet Nam’s highly trade-dependent economy is thus not necessarily more vulnerable to external shocks. Nevertheless, recent unprecedented developments, notably the ongoing global pandemic and war in Ukraine, do pose additional challenges for the Vietnamese economy.

The war in Ukraine may affect Viet Nam’s economy through various channels, although the direct impact is limited. Trade with Russia and Ukraine is small (respectively, 0.9% and 0.1% of total goods trade in 2019), but bilateral imports of certain products are relatively important, such as coal and coal products (12% of total imports of coal and coal products were from Russia in 2021) and fertilisers (10% of total imports of fertilisers were from Russia in 2021). Exports to Russia declined sharply from March 2022 due to supply chain disruptions (Figure 1.6, Panel A). For a few agricultural products, Russia accounts for a material share of exports (for example, 5% of total exports of “coffee, tea, mate and spices” in 2021). Nevertheless, Russia’s share in Viet Nam’s total exports is small (1% of total goods exports in 2021). On the other hand, Viet Nam is one of the most popular ASEAN destinations for Russian tourists, second to Thailand (Russians accounted for 3.6% of total foreign visitors to Viet Nam in 2019).

A slowdown in the European economies would have a more significant impact on the Vietnamese economy (Figure 1.6, Panel A). Despite their declining share, European countries are important counterparts for Viet Nam’s trade (The EU’s share in goods trade was 17% in 2021). Nonetheless, the European Union–Viet Nam Free Trade Agreement, a preferential trade agreement effective from 2020, should help re-boost bilateral trade once the situation improves. Indirect impacts from the war are also being felt through rising price pressures. Already, high energy and commodity prices are putting upward pressure on inflation (Box 1.2).

China’s stringent pandemic controls have affected regional trade, but the impact on the Vietnamese economy was relatively limited. Amid the rapid propagation of the Omicron variant, China intensified its sanitary restrictions since end-2021. This included a severe lockdown from late March 2022 to end-May 2022 in Shanghai, which has the world’s largest container port. Direct impacts on trade differ between ASEAN countries depending on the composition and pattern of trade (Figure 1.6, Panel B). Some countries, in particular commodity exporting countries, maintained strong export growth in the first quarter of 2022 partly due to high prices (63% (year-on-year) for Indonesia and 28% for Malaysia). Other countries experienced softening export growth (4% in May for Thailand, following -7% in April and 4% in the first quarter of 2022). Exports rose 8% in Viet Nam both in the first and second quarter of 2022, after 4% in the fourth quarter of 2021. While some goods imports from China, which are crucial for Viet Nam’s manufacturing, such as machinery, equipment and parts, temporarily dropped (a 15% dip in March 2022 followed by a 7% decline in April and a 1% increase in May), industrial production has been less affected (Figure 1.3, Panel C). Overall, businesses managed their production using existing stocks of materials and alternative trade routes. In December 2021, due to the persistent propagation of the Delta variant in Southeast Asian countries, China tightened border controls, including the land borders with Viet Nam. The restrictions have been eased since then. Land trade accounts for around one quarter of trade between Viet Nam and China.

Nonetheless, further supply chain disruptions stemming from China’s changing public health situation may have a larger impact on Viet Nam than on other Southeast Asian countries. Viet Nam has significantly strengthened trade linkages with China over the past decade. China’s share in Viet Nam’s goods exports increased from 11% to 17% between 2012 and 2021, and from 25% to 33% for goods imports. Viet Nam has the highest share of imports from China among ASEAN-6 countries (the second highest, Indonesia was 29% in 2021). Most goods imports from China consist of machinery, equipment and parts (nearly 20% of total goods imports in 2021), which are important in the production of exported goods. Compared with other Southeast Asian countries, Viet Nam stands out for having deepened value chain linkages with China (Figure 1.8). On the other hand, some sectors would be able to benefit from supply chain disruptions in China if they managed to overcome supply constraints, as they could substitute Chinese exporters. China’s exports of textile and apparel temporarily dropped by 3% (year-on-year) in April-May 2022, while exports from Viet Nam continued growing by 19% in the first five months of 2022. The recently enforced Regional Comprehensive Economic Partnership, a large preferential trade agreement, of which China is a member, should help prop up Viet Nam’s trade once the situation is improved.

Since the onset of the pandemic, the government has adopted a series of stimulus packages to mitigate the anticipated economic impacts (Table 1.1). With its flexible and bold prevention measures for the pandemic, Viet Nam was able to avoid serious outbreaks in 2020. In 2021, following the strict lockdowns and the associated large economic contraction, the government promptly adopted several relief measures for affected households and businesses from July. Although there were some initial implementation issues for some measures, such as cash transfers to poor households, overall additional spending to affected sectors was implemented in an effective and timely manner. The government also employed revenue-side measures, such as reductions and exemptions of taxes and fees, and extensions of tax and land rent payments (tax deferrals). According to IMF estimates, above-the-line measures including additional spending and foregone revenues amounted to 1.8% of GDP by October 2021, as compared to an average of 4.6% across 142 emerging-market and low-income developing economies (IMF Fiscal Affairs Department, 2021[7]). Against this background, in early 2022, the government adopted an additional monetary and fiscal stimulus package, the Socio-Economic Recovery and Development Programme, amounting to 4.1% of GDP, allocating half of it to investment, which was appropriate. Nevertheless, the implementation of large infrastructure projects in the Programme has not yet started. By early September 2022, only 14% of the whole package had been disbursed. Off-budget measures, such as, exemption of utility bills and tuition fees for affected households, a suspension of social contribution payments, and soft loans provided by state-owned banks, also made a large contribution (0.7% of GDP for 2020-2021, excluding soft loans) compared with spending measures.

Despite the growing concerns over global trade and supply chain disruptions, the Vietnamese economy is projected to manage to keep its growth momentum from 2022 onward. Real GDP is forecast to grow by 6.5% in 2023 and maintain the speed at 6.6% in 2024 (Table 1.2). Domestic demand will keep gathering pace as sanitary restrictions are being removed. Business investment will be solid as foreign investment is resuming. Government investment, included in the latest stimulus package, is also anticipated to prop up growth. Nevertheless, high energy and food prices are weighing on economic prospects. In particular, although the poverty rate is anticipated to further decline (World Bank, 2022[8]), purchasing power of households is being affected and private consumption growth will be moderate after the strong rebound from the bottom of the third quarter in 2021. The prolonged war in Ukraine is weighing on global trade, and supply chains are being disrupted. Nevertheless, the direct impact of the war on Viet Nam is limited and external demand is expected to be stable. China’s changing COVID policy is adding further uncertainty to regional trade, but this would also help push up Viet Nam’s relative attractiveness as an investment destination. In this context, implementing structural reforms, particularly reforms to improve the business climate, is crucial to realise a robust recovery and to boost growth in the medium term (Table 1.3). However, this requires significant and ongoing efforts. For example, it took almost five years for South Africa to halve the gap with the OECD average in terms of state control, which is captured by the sub indicator of “scope of state-owned enterprises” in the OECD Product Market Regulation indicator (the 2008 and 2013 vintage). Hungary succeeded in closing the gap with the OECD average in the same index but it took almost ten years from the late 1990s.

Risks are largely tilted to the downside. The global pandemic is not yet over, and the emergence of more contagious virus variants would require re-imposition of strict sanitary restrictions, intensifying supply chain disruptions. If the global economy went into a recession due to rising inflation and the related tightening of monetary policy, as well as the prolonged war in Ukraine, this could severely affect highly trade-dependent Viet Nam. If China’s growth decelerates, external demand could become more volatile and experience periods of persistent weakness. Inflation that remains unexpectedly higher than currently anticipated could erode households’ purchasing power and stall the recovery, increasing the incidence of poverty. A more rapid monetary policy tightening in advanced economies would put downward pressure on exchange rates and would require an abrupt tightening of monetary policy in Viet Nam, harming the nascent recovery. This would also require fiscal tightening which could further weaken domestic demand. On the upside, stronger than expected growth of the US economy, owing to healthy household and corporate balance sheets, could further boost exports. Amid an increasingly uncertain external environment, foreign investors could also increasingly appreciate the stable investment climate of Viet Nam. These risk factors, both to the downside and upside, add uncertainties to the short-term economic projections. The potential impacts of some low-probability risks that are not assumed in the projection profile are summarised in Table 1.4.

In the short run, the policy priority is to prevent domestic demand from contracting, particularly household consumption which accounts for nearly 70% of GDP. As the recovery is under way and inflationary pressures are rising, further expansionary fiscal support is not required. In addition to cutting the value-added tax rate (from 10% to 8% between February and December 2022), the government cut the environmental protection tax, which is a tax on fossil fuels, by 50% from April 2022 and an additional 25% from July (effective until December 2022). The tax rate of the preferential import duty was also reduced for unleaded motor gasoline from August 2022 (from 20% to 10%). Nevertheless, as a gradual fiscal consolidation is required (see below), including through increasing the collection of government revenue, such measures are not desirable in the medium-term. If high inflation remains more persistent than currently expected, a targeted approach to fiscal support that does not encourage demand for fossil fuels would be preferable. An example would be cash transfers that are limited to vulnerable households. Viet Nam has an annually updated poverty list, “Poor List”. Previous studies suggest that, although better than in other emerging market economies, the list has some leakages (Kidd et al., 2016[10]), and this should be improved by cross-referencing different administrative information using digital technologies. A large number of people do not pay taxes (mostly due to low incomes) and this limits the use of the tax database for tightly targeting fiscal transfers, although it has already been digitised. Since the onset of the pandemic, the government has been accelerating the digitalisation of a citizenship database (i.e. personal identification). This could be linked to other databases, such as those for social security and health insurance, in order to improve targeting. Supporting the capacity building of local governments is also crucial as they are the entities of actual implementation. At present, there are considerable differences between regions in the capacity of local governments. Moreover, public investment projects should be executed as planned in order to avoid any unanticipated demand fluctuations. In particular, transportation infrastructure that supports logistics and inter-regional connectivity should be accelerated given the potential for further supply disruptions. The 2019 Law on Public Investment simplified procedures and strengthened the decentralisation of investment management, which is conducive to facilitating budget disbursement (Madani, Nguyen and Nguyen, 2021[11]). Further simplification of procedures and regulation should be considered. Nevertheless, acceleration of public investment should not come at the expense of the quality of investment projects. Budget allocation could better take into account local governments’ implementation capacity, which considerably varies between jurisdictions (Madani, Nguyen and Nguyen, 2021[11]). In this regard, a framework for ex post evaluation introduced in the previous 2014 Law on Public Investment should be applied more actively to domestically funded projects of local governments in the medium term, as it is rarely conducted (World Bank, 2018[12]).

Public healthcare capacity should also be enhanced to prepare for possible large-scale COVID-19 outbreaks. Sufficient public healthcare capacity is also crucial to avoid severe restrictions, which have implications for sentiment of households and businesses. During the pandemic, healthcare facilities were under significant strain in some areas, especially in the third quarter of 2021, and this made it inevitable for the government to adopt strict sanitary measures. As soon as the restrictions were eased in October 2021, a number of people living in urban areas (“urban migrants”) returned to their hometowns because of lockdown fatigue. Indeed, one previous study suggests that some urban migrants put more emphasis on quality of life than monetary earnings (Luong, 2018[13]). Ineffective coordination between the central and local governments in some cases caused disruptions in domestic food supply chains, and complicated procedures slowed the disbursement of cash handouts. As of mid-December 2021, approximately 2.2 million urban migrants left their living places, resulting in a shortage of labour during the initial stage of economic re-opening in the urban areas, where most industrial capacity exists.

Improving the management of budget disbursement has become increasingly important to strengthen the effectiveness of fiscal policy, notably its counter-cyclicality. In 2020, while additional fiscal spending in the stimulus packages was small, the government accelerated the disbursement of the planned budget. As a consequence, while the actual current expenditure increased less than the initial plan (the actual nominal growth was 2.5% and the planned was 12.1%; planned growth is the changes from the final budget of the previous year), government investment (“development investment”) rose much higher than planned (36.6%, while planned was 11.6%). This appropriately supported the economy. In contrast, according to the latest budget estimates, the actual spending considerably slowed in 2021, despite the adoption of additional stimulus packages. While current expenditure increased by 4.8%, government investment plummeted by 10.5%. This was partly due to a lack of labour, increasing costs of construction materials and physical constraints associated with the severe lockdowns, and the rebound from the high spending levels in the previous year. In general, budget disbursements should not be interpreted as real progress in public work and government consumption as there are always execution lags. Nevertheless, the significantly volatile fiscal spending implies inefficient management of budget disbursement. Indeed, in Viet Nam, differences between planned budget and actual spending are large (see below). The gap has been caused by various factors. Coordination not only between ministries but also between different levels of governments should be improved. In particular, budget carryovers from the previous year are still large despite government efforts to reduce them, including the introduction of the Law on State Budget 2015, which aims to narrow the scope of carryover expenditure. The quality of budget planning, including the accuracy of revenue and spending estimation, and implementation could be improved (IMF, 2022[14]).

Stimulating foreign investment is also a priority. Although its fluctuations have a small impact on overall investment trends due to its small share in total investment (approximately 20%), foreign investment is more sensitive to general economic conditions (Figure 1.9, Panel A). Some Southeast Asian countries saw a strong upsurge of foreign investment (registered capital) in 2021, more than offsetting the contraction in 2020 (Figure 1.9, Panel B). On the other hand, Viet Nam’s rebound in 2021 was rather moderate, partly due to the severe lockdown in the third quarter of 2021. Southeast Asian countries have implemented policies to improve their business climate even during the pandemic. The Philippines, where a large rebound was recorded in 2021, pledged to reduce corporate tax rates from 2021, and recently decided to open up services markets further. Viet Nam has already reduced multiple de jure barriers to foreign entry. Nevertheless, more could be done, particularly for implementation. In Viet Nam, FDI management, such as licensing, is under the remit of provincial governments. However, the administrative capacity varies between provinces, potentially creating additional costs for businesses. Coordination between central and provincial governments could also be enhanced. In addition to capacity building, more involvement of local governments in national policy-making process would be helpful (Tran, 2019[15]). Moreover, foreign investment often necessitates the cross-border flow of skilled foreign workers. While pandemic-induced border closures have been lifted, Viet Nam has scope for reducing restrictions on cross-border mobility of skilled workers as suggested by the OECD Services Trade Restrictiveness Index (see Chapter 2). Promoting foreign investment in sectors which can support decarbonisation efforts, such as the renewable energy and transport sector, can have positive effects on the green transition through various channels, including via technology spillovers (OECD, 2022[16]). This requires not only strengthening policies that provide favourable conditions for climate-friendly investment, such as investment incentives or promotion, but also setting up domestic environmental standards (e.g. fuel efficiency regulations) that are well aligned with national climate objectives.

Recent supply chain disruptions underscored the importance of trade facilitation. Trade facilitation can also help remove obstacles to economic re-opening towards full capacity. Viet Nam has made substantial progress since 2015 when the country ratified the Trade Facilitation Agreement of the World Trade Organisation (Figure 1.10, Panel A). Integrated information systems, the National Single Window and the ASEAN Single Window, were successfully introduced by the strong National Trade Facilitation Committee (UNCTAD, 2020[17]). Nevertheless, there is scope for improvement. Specialised inspection, which is a border clearance procedure conducted by line ministries for 30-35% of traded goods, is time-consuming (USAID, 2021[18]). The government is planning to issue a Decree to harmonise procedures for imported goods. To realise effective implementation, strengthening coordination and monitoring functions of the National Trade Facilitation Committee is crucial, both at the national and regional levels. Currently, the Committee is focused on the operation of Single Windows (USAID, 2021[18]). Expanding stakeholder engagement especially with SMEs, which would benefit most from trade facilitation, can make the Committee’s policy coordination and monitoring more effective, as it will give more up-to-date demand-side information to the Committee.

Moreover, compared with other trade facilitation measures, progress in cross-border coordination is slow (Figure 1.10, Panel B) (Ha and Lan, 2021[19]). Even during the pandemic, the implementation of trade facilitation advanced in a number of countries, including in the Southeast Asian region (Asian Development Bank, 2021[20]), but this did not necessarily entail greater cross-border cooperation. Regional cooperation could bring about more benefits than unilateral efforts, in particular for highly trade-dependent countries, such as Viet Nam. While infrastructure connecting countries in the region has been developed, trade facilitation measures specific to land transport between countries are still weak. In response, the Great Mekong Subregion Cross-Border Transport Facilitation Agreement (GMS-CBTA), a legal framework to facilitate cross-border land transport in the region, has been ratified by Cambodia, China, the Lao PDR, Myanmar, Thailand, and Viet Nam (Asian Development Bank, 2021[21]). The GMS-CBTA is expected to remove barriers through information exchange and policy harmonisation, and Viet Nam should be more active in implementing this programme.

Trade integration should be deepened further. Similar to other ASEAN countries, Viet Nam has actively been participating in a number of preferential trade agreements. At present, 15 agreements are in force (seven made by ASEAN) and two others are being negotiated. Viet Nam benefits greatly from pursuing free and open trade with wider regions. Vietnamese businesses now have access to markets more extensively and intensively than before. Consumers and businesses are also better off from Viet Nam's open markets with a variety of imported goods and services now available at lower prices. Indeed, previous studies suggest that the recently enforced Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, large preferential trade agreements in Asia Pacific region, will push up Viet Nam's aggregated real income by 3.4% and 1.0% respectively compared with the baseline in the next ten years – one of the largest impacts among ASEAN countries (Park, Petri and Plummer, 2021[22]).

An open, diversified and transparent trade system can also provide a basis for economic resilience. At the beginning of the pandemic, a strong surge in demand caused global shortages of personal protective equipment. However, overall global value chains (GVCs) acted to cushion the impact, as in previous catastrophic events, such as the Great East Japan Earthquake and severe floods in Thailand in 2011 (OECD, 2020[23]). For example, global production and trade of essential goods, such as face masks increased rapidly to meet demand. Indeed, previous studies suggest that localisation and re-shoring would be likely to lower the levels of real GDP and stability in the face of shocks (OECD, 2021[24]). The business sector is in an essential position to enhance its own supply chains. Stable, transparent and predictable trade and investment policy can facilitate diversification of GVCs and reduce uncertainty for businesses (see Chapter 2). Governments can also invest in critical infrastructure to secure essential flows of products, people and information.

The services sector can play a more important role in Viet Nam's international trade, not least through indirectly exporting their products through manufacturing goods. Services inputs, such as marketing and design, are important determinants of manufacturing competitiveness. Moreover, information and communication technologies have blurred the boundary of manufacturing and services. Different from traditional manufacturing goods (e.g. fabrics and steel), modern manufacturing goods contain considerable services elements (e.g. operating systems in computers). Indeed, the value-added of business services embodied in manufacturing goods accounts for nearly 30% of total value-added of manufacturing exports from OECD countries (Figure 1.11, Panel A). However, manufacturing exports from Viet Nam embody smaller amounts of services and the share of domestically produced services is much smaller. Looking forward, there is scope for Viet Nam to increase the value-added of its manufacturing exports by increasing product sophistication with domestically supplied services inputs, such as quality design and software. The digital transformation is one of the key determinants to deepen the sophistication of domestic production. In this regard, foreign direct investment in digital sectors can help promote the digital transformation of the domestic economy. To attract digital FDI, Viet Nam needs to further improve the business climate, including for the digital economy, such as privacy protection, and digital skills of workers (Matthew, 2020[25]) (see Chapter 2).

There is also the potential to increase direct exports of Vietnamese services. A number of countries have expanded their direct exports of business services, such as financial and ICT servicers, whereas Viet Nam somewhat lags behind (Figure 1.11, Panel B). Expanding direct service exports will diversify and strengthen Viet Nam’s integration to international trade. To nurture the services sector, improving the business climate is particularly crucial (see Chapter 2). In this regard, preferential trade agreements that encapsulate services can be a strong driving force for domestic services market reforms (OECD, 2020[26]). In addition, as services are more labour intensive than manufacturing, developing skills should be a priority. Some business services, such as financial and consultant services, are digitally deliverable and trade in such items has been expanding (Asian Development Bank, 2022[27]). Therefore, improving digital skills from the currently low levels will be conducive to developing business services sectors (see Chapter 2).

Viet Nam has a unique monetary policy framework together with a managed float system of currency exchange. Its central bank, the State Bank of Viet Nam, is a ministerial organisation of the central government, and its independence is not explicitly defined. The governor is a member of Cabinet appointed by the National Assembly based on the Prime Minister’s proposal. The policy objective of monetary policy is the stability of the currency denoted by the inflation rate, and the National Assembly is responsible for monetary policy, including determining policy targets based on the government’s projections. In addition to inflation, credit growth targets are also set and annually reviewed. As the policy implementation body, the central bank sets policy rates, the refinancing rate and discount rate. It also imposes credit growth ceilings to banks individually (see below). The central bank manages the exchange rate with regard to a basket of some major foreign currencies and guides its daily fluctuation within the pre-announced bands for the US dollar (USD) (currently ±5%).

From the onset of the pandemic to mid-2022, monetary policy was largely supportive of growth. The real interest rate on 10 year government bonds was 0.4% in the first seven months of 2022 compared with 1.5% in 2019. This accommodative stance of monetary policy was appropriate in the low inflation environment, with headline inflation remaining stable over the past two years. Low energy prices during 2020 offset a food price hike stemming from outbreaks of African swine fever (Figure 1.12, Panel A). While energy prices rebounded in 2021, core inflation was subdued amid weak demand constrained by sanitary restrictions, particularly through the middle of the year. Responding to the economic slowdown caused by the lockdown measures within and outside of the country in early 2020, the central bank had reduced the refinancing rate from 6% to 4% between March and October 2020 (the discount rate from 4% to 2.5%), and maintained its accommodative policy stance (Figure 1.12, Panel B). In the same period, the central bank also reduced interest payments offered to buy security instruments through open market operations (OMO) from 4% per annum to 2.5%. The stable exchange rate has also helped tame inflation. While the currencies of other Southeast Asian countries experienced a large swing between depreciation and appreciation in the foreign exchange market, the Viet Nam dong (VND) has been less volatile.

Both headline and core inflation have picked up since early 2022. In addition to economic reopening, the war in Ukraine has been pushing further up energy and commodity prices, which already started rising in 2021. Like other net importers of energy or commodities, Viet Nam’s headline inflation is susceptible to the swings of such commodities on international markets (Figure 1.13). Although less than in countries with fully floating currency regimes (i.e. where currencies weaken), rapid increases of import prices would raise input prices, affecting broader inflation. Moreover, although economic slack still remains, demand has picked up rapidly following the removal of most sanitary restrictions by early-2022. Some upstream prices have already risen. The producer price index for manufacturing increased by nearly 4% (year-on-year basis) from the fourth quarter of 2021, the highest increase since 2013. As discussed earlier, the government temporarily reduced the environmental protection tax on fossil fuels from April 2022, in addition to the already-determined cut in the value-added tax rate. In addition, the government is considering reducing the value-added tax and special consumption tax on fossil fuels. However, a more targeted approach, notably cash transfers to vulnerable households would help ensure that further support does not excessively stimulate demand. In addition, such an intervention would not encourage demand for fossil fuels to the same extent as the reductions in taxes on fossil fuels.

Food prices will be an important determinant of future overall inflation. Similar to other Southeast Asian countries, food accounts for a large share of the household consumption basket (CPI weight: Viet Nam 33.6%, Malaysia 28.4% and Thailand 40%). The current increase of inflation has mostly been led by the increase of “transportation” prices, reflecting higher energy prices, although its pace has become moderate since August 2022. Prices of other items, including “housing and construction materials” that contains energy inputs and “foods and foodstuffs” have also begun edging up, but the increase of food prices has been moderate compared with other Southeast Asian countries (Figure 1.14). In particular, while the prices of “eating outside” have been increasing (7% y-o-y in September), the increase of “foodstuff” prices (i.e. food such as perishables, that has a CPI weight 21.3%) has been moderate (3% y-o-y in September). Viet Nam’s high self-sufficiency of staples, such as rice, could contribute to more moderate price increases of foodstuff compared with some other countries. However, Thailand, whose food-sufficiency is similarly high, has already seen the price of “raw food” rising significantly (11% y-o-y in September). Prices of perishable foods are affected by local weather conditions but also costs of various inputs, such as fertilisers as well as energy which are largely determined in global markets. The war in Ukraine has been pushing up international prices of fertilisers. Prices in urban areas, which often lead price developments in the country as a whole, are picking up (foodstuff in Hanoi increased 5% y-o-y in July followed by 3% both in August and in September).

Going forward, monetary policy needs to be vigilant against upward risks to inflation, while seeking for gradual normalisation of its policy stance over the projection period. Under the assumption of continued economic recovery, the policy rates would surpass the pre-pandemic levels towards end-2023, while inflation is forecast to be 4.3% in 2023, before slightly slowing to 3.7% in 2024. The central bank already started to change its policy stance amid increasing inflationary pressures and currency depreciation. The policy rates were raised both in September and in October 2022 (the refinancing rate was raised from 4% to 6% and the discount rate from 2.5% to 4.5%). In addition, in October 2022, the central bank widened the range of daily exchange rate fluctuation from ±3% to ±5%. The uncertain external environment poses a difficult dilemma for the path of normalisation and necessitates a clearer division of labour between monetary and fiscal policies. Monetary policy should focus on price stability, while fiscal policy should support vulnerable groups in light of higher energy costs. Delaying unwinding of the highly accommodative stance of monetary policy would increase the risk of higher inflation expectations becoming embedded. As formal employees are not the majority of workers, official wage indicators are not necessarily a good indicator of impending inflation pressures in Viet Nam. Nevertheless, wages have increased rapidly partly due to the slow recovery of labour supply (the minimum wage was raised in July 2022 by 6% on average). Moreover, differences in interest rates between major trading partners may put downward pressure on the currency, further pushing up domestic inflation. However, the continued and intensified war in Ukraine will weaken external demand and high energy and food prices will erode purchasing power of households and profit margins of businesses. Although economists that participate in the Consensus Economics Survey (the sole measure of inflation expectations) expect inflation to moderate to 2.8% on average in 2024 (as of October 2022), it ranges from 2.5% to 5.5%. This suggests that the inflation outlook is highly uncertain, but monetary policy may need to tighten earlier than currently anticipated if there are signs that the upside risks materialise.

In the medium- to long-term, Viet Nam could consider reviewing the monetary policy framework and exchange rate regime to further enhance economic resilience along with its economic development. Similar to Viet Nam, a number of emerging market economies adopt integrated monetary policy frameworks that use foreign exchange intervention and/or capital flow management tools as key monetary policy instruments in addition to interest rates. Emerging market economies tend to be vulnerable to external shocks, such as swings in cross-border capital flows and this poses policy dilemmas. For example, lower policy rates to deter large capital inflows may overstimulate domestic demand and raise asset prices, increasing financial market instability. Integrated policy frameworks could mitigate these policy trade-offs under certain conditions, such as vulnerability to external shocks (Adrian et al., 2020[28]). Indeed, previous studies suggest that, under Viet Nam’s current policy framework that combines foreign exchange intervention and credit growth guidance, fluctuations of economic indicators, such as inflation, to external shocks is likely to be smaller compared with a policy framework solely relying on interest rates (Epstein et al., 2022[29]). Nevertheless, long-term potential costs of this policy framework would also need to be considered. For example, exchange rate intervention and capital controls could delay further developments in financial markets which have become important for Viet Nam (see below). Past international experience suggests that foreign exchange intervention could also affect investors’ assessment of currency risks and heighten potential vulnerabilities in the financial market. If movements in the foreign exchange market are structural, intervention would not be effective in stabilising the exchange rates.

Against this background, Viet Nam could consider modernising its monetary policy framework, narrowing policy targets, and moving to a more flexible exchange rate regime once the financial markets are liberalised and developed further. A number of eastern European countries have successfully made such a transformation in their monetary and foreign exchange frameworks. As Viet Nam’s linkages to global trade further expand, it will be particularly crucial to adopt a more flexible foreign exchange regime. A flexible exchange rate regime allows the currency to depreciate when the terms of trade worsen, which makes exports more competitive and thus can cushion the external shock, while a fixed exchange rate system cannot (Broda and Tille, 2003[30]). Moreover, under rigid exchange regimes, domestic financial conditions are more likely to be affected by global financial shocks than under flexible regimes (Obstfeld, Ostry and Qureshi, 2017[31]), and tighter fiscal discipline is required to avoid current account imbalances (Khatat, Buessing-Loercks and Fleuriet, 2020[32]). Transition to a more flexible exchange rate regime will allow the State Bank of Viet Nam to focus on narrower policy targets, notably the inflation target, which can contribute to more stable macroeconomic conditions. This policy transition should be made in tandem with enhancing central bank independence (IMF, 2019[33]). Currently, operational independence is loosely defined, as both the Prime Minister and the Governor can determine administrative tools and measures of monetary policy. To this end, establishing a collective decision-making body (i.e. monetary policy committee) which is appointed by the National Assembly and given operational autonomy independently from the Cabinet will be necessary (National Assembly Economic Committee, 2012[34]). Inflation is lower and more stable in countries where central banks conduct monetary policy independently. According to the Prime Minister’s Decision No.986/QD-TTg on the “Development Strategy of Vietnam Banking Sector to 2025, with Orientations to 2030” issued in 2018, the government considers gradually increasing the independence of the State Bank of Viet Nam in its conduct of monetary policy. Moreover, enhancing the banking sector is essential for a better functioning of transmission mechanism for monetary policy (see below). The interbank market also needs to be developed further. Currently, due to the thin trade volume, interbank rates are volatile.

Viet Nam’s banking sector was well-prepared when the pandemic hit, thanks to past efforts to improve the sector’s resilience (World Bank, 2021[35]). In the wake of the Global Financial Crisis, while the economy kept growing overall, banks suffered from a rise in bad debts following a boom and burst in the housing market. In 2012, the government adopted a roadmap to reform the banking sector, reducing the number of institutions. Although not a signatory, the government announced in 2016 that major banks would need to meet regulations similar to Basel II by January 2020 (extended to 2023 due to the pandemic). At the same time, Viet Nam stepped up its non-performing loan (NPL) resolution framework. The Viet Nam Asset Management Corporation (VAMC) was set up in July 2013, and a new bankruptcy law adopted in 2014. Resolution 42, which gives more autonomy to debt buyers, was adopted in 2017 as a pilot policy framework.

During the pandemic, the central bank introduced temporary measures to support affected households and businesses. A debt restructuring programme was adopted in 2020 (Circular 01 issued in 2020) and then extended twice (Circular 03 and 14 issued in 2021). While debt restructuring is implemented, banks do not need to change (i.e. downgrade) the classification of restructured loans. Sufficient capital buffers allowed banks to effectively implement debt restructuring without experiencing financial stress. Capital adequacy ratios have slightly declined but not deteriorated (as of March 2022, the capital adequacy rate requirement of 8%, which is compatible to Basel II, was applied to 85 institutions out of 96 commercial banks) (Figure 1.15). Nevertheless, to avoid worsening the profitability and capital buffers of the banking sector, banks have been requested to pay dividends to shareholders in shares rather than in cash. In addition, preferential loans were provided to affected sectors by state-owned banks.

As these emergency treatments, particularly debt restructuring, have been removed along with the economic recovery, enhanced supervision has become more important. The construction, trade and services sectors, which have been affected severely by the pandemic, accounted for large share of bank loans outstanding (9%, 24% and 38% respectively at the end of 2021, while manufacturing was 19%). Nevertheless, the on-balance sheet non-performing loan (NPL) ratio has been low and stable, although it edged up slightly in 2020 and early 2021(Figure 1.16, Panel A). The quick economic recovery has helped contain the NPL ratio, but the temporary measures could also conceal the worsening of asset quality. For example, estimates by the IMF suggest that the NPL ratio, which includes off-balance sheet NPLs enshrined in the Viet Nam Asset Management Corporation, would rise by around 2.5 percentage points from 2019 to 2020 if regulatory forbearance were not taken into account (IMF, 2021[36]). The temporary measures would unnecessarily help nonviable businesses survive for a longer time, deteriorating bank profitability. This could also hinder a better resource allocation in the whole economy through resources being tapped in low performing firms. As the temporary debt restructuring measure expired in June 2022, loan quality should be adequately recognised and banks need to make necessary provisions or write-offs in accordance with the debt classification applied to normal economic conditions, while avoiding a deterioration of their balance sheets. To this end, the State Bank of Viet Nam needs to enhance supervision of individual banks.

In addition, market-based solutions for NPLs could also be further strengthened. Compared with on-balance solutions, such as stringent provision or write-offs, removing NPLs from banks’ balance sheets through direct sales could avoid deterioration of bank capital and profitability (OECD, 2021[37]). Viet Nam has already moved in this direction. In April 2022, the effective period of Resolution 42 was extended from August 2022 to the end of 2023. Nevertheless, there is scope for improvement (Nguyen, 2021[38]). As asset seizure relies on bona fide cooperation of debtors, creditor rights could be further enhanced by stipulating clearly in regulation that ordinary investors can seize collateral without court arbitration (Asian Development Bank, 2021[39]). Entry of foreign investors could be more encouraged by easing restrictions related to property ownership. In addition, the Viet Nam Asset Management Corporation (VAMC) could focus more on direct purchase of NPLs, so that it would benefit from scale economies (Hoang, Nguyen and Le, 2020[40]). The VAMC can buy NPLs from credit institutions either directly at market value or in exchange for special bonds. In the latter case, the VAMC’s role is passive, just supporting NPL resolution by credit institutions, and unresolved debts will be returned to the credit institutions after five years, which means that NPLs are not permanently transferred but tentatively ring-fenced in the VAMC. To strengthen the VAMC’s leverage, its charter capital has increased from VND 500 billion to 5 trillion between 2013 and 2019, but should be further increased, as it is smaller than total NPLs in the whole banking system (VND 424 trillion as of August 2021, as identified under Resolution 42 (Nguyen, 2021[38])). The authorities should also consider reducing charter capital after a pre-determined period in order to facilitate overall NPL resolution processes.

The government could establish more enabling environments for the functioning of the NPL market. Insolvency processes should be sped up, as slower bankruptcy procedure could increase risk premiums and thus lower asset value (OECD, 2021[37]). It has been pointed out that, in Viet Nam, the process of court decision and its enforcement concerning NPL resolution is often lengthy and delayed with backlogs (Asian Development Bank, 2021[39]) (Nguyen, 2021[38]). Viet Nam could consider introducing a fast-track process and improving out-of-court procedures in the context of a more comprehensive insolvency framework for businesses and households (see Chapter 2). The current court process for bankruptcy is rarely used as it is cumbersome and time-consuming. Moreover, a number of European countries established a platform that collects NPL data and serves as a central data warehouse (OECD, 2021[37]). These platforms help improve market transparency, so that they can expand diversity of transaction assets and induce new investors. In 2021, Viet Nam launched a trading floor to nurture the secondary NPL market. The remit of this NPL exchange could be expanded to the collection and storage of debt data.

Data collection and dissemination related to real estate market conditions also need to be improved. Like in many other countries, monitoring property market developments is essential for formulating financial market policy, as there are a range of potential ramifications, including for household wealth and banks’ balance sheets. Indeed, the State Bank of Viet Nam instructed banks to watch lending quality to the real estate sector over the past years. Although there are some differences, such as availability of regional data, a number of countries publish residential property price statistics (Scatigna, Szemere and Tsatsaronis, 2014[41]). In particular, these price data provide essential information for the implementation of macroprudential policy. In Viet Nam, the government has collected information on the real estate market since 2015. Nevertheless, official statistics on property prices have not yet been compiled (IMF Statistics Department, 2019[42]), and it is crucial to develop these statistics, particularly residential property prices. The other ASEAN-6 countries regularly publish residential property price statistics (the Philippines started publishing from 2016) (Figure 1.16, Panel B). Timeliness of data will be particularly crucial. Most countries release quarterly data within three months from the reference period. Compared with residential property, commercial property price statistics are difficult to compile due to heterogeneity of market segments and scarcity of representative transaction data (Deryol et al., 2019[43]). Only a handful of countries publish these statistics, including Indonesia and Singapore. Based on Decree 117, Viet Nam gathers information of the commercial property market. It would be useful to explore the usage of administrative data related to commercial property for monitoring market developments.

In the medium term, Viet Nam could pursue a system-wide reform to the banking sector with the aim of facilitating credit allocation to more productive sectors. Currently, a number of regulations are implemented as part of prudential measures. In addition to the annual credit growth target at the national level, the State Bank of Viet Nam assigns a credit growth ceiling to individual banks based on their qualifications. Open-ended and less-than-six-month termed deposit rates and short-term lending rates for priority sectors are capped. The individual credit growth ceiling was introduced in the wake of the Global Financial Crisis, when ample liquidity associated with currency interventions caused asset overvaluation (Tran-Thi and Vu-Thanh, 2020[44]). The deposit rate cap aims at preventing excess competition among banks with thin profit margins. As capital and profitability of banks improve, these legacy regulations could be gradually removed to shift to more market-based credit allocation. At the same time, instead of the granular approach, Viet Nam could adopt macroprudential measures used in other countries, such as a countercyclical-capital buffer and a loan-to-value ratio, giving more autonomy to banks. In this regard, achieving the Basel II target by 2023 is the crucial first step. In 2020, the government launched a programme to increase the capital ratio of four state-owned commercial banks, which is a move in the right direction. Relaxing the foreign ownership limit of 30% would also help strengthen banks’ capital buffer. These reforms could pave the way to a more flexible exchange rate regime, which would strengthen the transmission of monetary policy.

Nurturing the non-bank financial sector has also become more important. Compared with other Southeast Asian countries, the recent evolution of Viet Nam's financial market has been driven mostly by banks. Despite recent evolvement of new services, such as mobile payment, overall the non-bank financial sector is still underdeveloped. Diversifying financial channels can reduce dominance of state-owned banks (which hold more than 40% of assets of all credit institutions as of end-2020) and will help promote more efficient resource allocation (World Bank Group, 2019[45]). Households would also benefit from having more diverse saving options. Recently fewer households prefer to save in the form of cash or precious metals, such as gold (Nguyen and Floro, 2019[46]). Making profits on long-term investments has become an important motivation for households to allocate savings through formal financial means (Ha, 2019[47]). Moreover, rising demand for green investments increases the need for greater access to long-term capital through diverse and deeper financial markets. Although gradually growing, the non-bank financial market is still shallow. For example, insurance premiums were 2.6% of GDP in 2021 compared with the ASEAN average of 3.5%. Thus, the development of private institutional investors, such as insurance companies and private pension funds needs to be further encouraged (the first private pension fund was launched in 2021). This should also be in tandem with enhanced consumer protection and education, in particular, financial literacy. Financial literacy can help safeguard consumers. In addition, it can help encourage consumers to become more active in adopting new financial instruments, such as Fintech (Morgan and Trinh, 2020[48]). Reinvigorating private sector dynamism through regulatory reform and market liberalisation could also facilitate new entrants into the non-bank financial market (see Chapter 2). The stock market has grown relatively fast (the market capitalisation was 69% of GDP as of end-2020, up from 32% in end-2010), but former SOEs account for the majority of listed firms (WTO, 2021[49]).

On the external front, limited exposure to international financial markets safeguarded Viet Nam from external shocks during the pandemic. Capital account regulation has been liberalised since the mid-2000s, but there are still stringent restrictions on cross-border transactions. For example, a ceiling is imposed on external borrowing by the private sector. Accordingly, the level of private sector’s external debt is contained (Figure 1.17, Panel A). Portfolio investment inflows were stable but limited before the pandemic. Accordingly, in contrast to other Southeast Asian countries, where portfolio investment by non-residents experienced large outflows in early 2020, capital outflows from Viet Nam have also been mostly subdued since the onset of the pandemic (Figure 1.17, Panel B).

In the medium term, Viet Nam should consider gradually but further liberalising its capital account. This reform should be well aligned with the transformation of both monetary and financial market policy frameworks. While volatile portfolio investment would be associated with potential risks, such as asset overvaluation, exchange rate fluctuations and sudden stops, it could also have positive effects on economic growth by providing financial resources for more dynamic firms (Working Group of Committee on the Global Financial System, 2021[50]). Improving macroeconomic fundamentals and institutional frameworks, including a sound financial sector, could help mitigate these risks together with macroprudential measures (Working Group of Committee on the Global Financial System, 2021[50]). Indeed, during the pandemic, portfolio investment by non-residents showed some differences among other Southeast Asian countries. In some countries, capital inflows regained quickly from the second quarter of 2020. This suggests that, while global financial market conditions are important factors, economic fundamentals and policy frameworks could also affect stability of investment. In particular, to move in this direction, Viet Nam needs to strengthen macroprodential measures. In contrast to measures directly managing capital flows, macroprudential measures focus on vulnerabilities of domestic financial sectors. Recently, some Southeast Asian countries have been developing macroprudential tools. For example, Indonesia intensively utilises these instruments (Working Committee on Capital Account Liberalisation, 2019[51]) (Box 1.3).

In addition, outbound portfolio investment by residents has become more important for many emerging market economics. In other Southeast Asian countries, such as Malaysia and Thailand, investment needs for the ageing population and the rise of institutional investors, have resulted in the expansion of capital outflows (McGuire et al., 2021[53]). As domestic financial markets are less developed in these countries, institutional investors, such as insurance companies, seek for investment opportunities abroad as creditors. This requires additional monitoring of non-bank financial institutions, which are exposed to currency risks. This implies that, although the non-bank financial sector is still underdeveloped in Viet Nam, monitoring of the sector will need to be strengthened in the medium term along with the liberalisation of cross-border financial transactions.

Viet Nam has improved its fiscal policy framework over the past years, contributing to the government having ample fiscal space when the pandemic hit the economy. The amended 2015 Law on State Budget provides overarching policy settings. The government needs to prepare five-year fiscal plans (“Financial Plan”), which underpin five-year Socio-Economic Development Plans. Similar to other countries’ medium-term fiscal planning, Viet Nam’s fiscal plan includes several fiscal targets, including deficit projections and debt limits. In addition to the annual budget, a three-year rolling plan (“State Budget Finance Plan”) is prepared every year to monitor consistency between medium-term planning and actual policy implementation. Among Southeast Asian countries, Viet Nam is one of the countries that has more detailed fiscal rules, such as a revenue rule and ceilings on programme expenditures (OECD/ADB, 2019[54]). Together with high economic growth, these rules helped the government deficit decline steadily from 2015.

While the policy stance is gradually being normalised, fiscal policy should be the first defence if economic conditions worsen. During the pandemic, accelerated spending and contingency measures affecting revenue temporarily or permanently (e.g. tax deferrals or tax cuts) widened the government deficit (Figure 1.18, Panel A). Nonetheless, the rise was smaller than in other Southeast Asian countries. Indeed, the government prioritised reallocation of spending from other policy areas in order to contain debt accumulation (Madani, Nguyen and Nguyen, 2021[11]). State-owned enterprises (e.g. soft loans provided by state-owned banks) and extra-budgetary funds (i.e. social security funds) were also mobilised to cover additional financial support to affected households and businesses. Together with positive economic growth, these efforts helped contain the increase of government debt to moderate levels (Figure 1.18, Panel B). Although the planned budget expects a slight reduction in the government deficit amid the steady economic recovery, the gradual return to a consolidation path could be delayed if downside risks materialise. In particular, targeted support to poor households affected by high energy and food prices should be a priority. The government lowered the government debt ceiling to 50% of GDP for 2021-2025, from 54% of GDP in 2016-2020. Nevertheless, as the level of nominal GDP rose by 25% due to statistical revisions, this implies that, according to OECD calculations, the effective debt ceiling was actually increased by approximately 7%, which gives the government more flexibility in the current uncertain environments.

In the medium term, further fiscal reform that is underpinned by a concrete consolidation plan covering both the spending and revenue sides of government accounts, as well as public debt management, will be necessary, as spending needs are expected to increase rapidly due to public investment in digitalisation, the transformation to a greener economy and an ageing population (Figure 1.19). Indeed, the old age dependency rate will increase at one of the fastest paces in Southeast Asia, from the current 11% to 33% in 2050. A number of people are not covered by social security and healthcare spending for vulnerable people, including some elderly people, is subsidised by the government. The ageing population will thus require more tax-funded government spending on healthcare, as well as social assistance benefits. In addition, further economic development will push per capita spending for healthcare higher. Fiscal reform should include strengthening the fiscal framework and increasing government revenues. The medium-term plan could also include alternative economic scenarios, which gives more transparency and accountability to the plan.

Enhancing government redistribution will become more important to improve the efficiency and efficacy of fiscal policy. Income inequality is higher than the OECD average, but lower than in most other Southeast Asian countries. The high rate of labour force participation, particularly among women, contributes to a more equal income distribution (Annex 1.A.). On the other hand, despite Viet Nam’s high level of social spending compared with other Southeast Asian countries, government redistribution is only moderate (Figure 1.20). Social spending has increased steadily thanks to the development of the social security system (social security expenditure increased from 3.1% of GDP to 5.0% between 2010 and 2019), but the difference between the market and disposable Gini coefficients has changed little over these years. In this context, social security reform, notably expanded coverage of the public pension, is crucial. Such reforms can bring about a better division of labour between social security and social assistance, helping improve efficiency of overall social spending (see below). Strengthening pension sustainability is also important to contain additional fiscal transfers from the state budget to the social security funds.

Reforming some fiscal practices, especially carryover of surplus revenue (between planned and actual) and unspent budget, is necessary for the renewed fiscal policy framework to achieve its objectives. Although it shrank during the pandemic, the discrepancy between planned budget and final settlement, both on the revenue and spending sides, has been large (Figure 1.18, Panel A). This has been attributed to various causes, such as conservative revenue estimates by local governments to obtain more fiscal transfers and land clearance processes that delay public works (e.g. disputes on compensation) (Madani, Nguyen and Nguyen, 2021[11]). On the revenue side, the gap between planned and actual tax revenues declined due to the government’s efforts, including the improvement of forecasting techniques, from an average of 8.8% for 2011-2015 to 6.5% for 2016-2020. On the other hand, carryovers can make the monitoring of fiscal policy difficult at a macro level (World Bank and Government of Viet Nam, 2017[55]), potentially detracting from fiscal transparency. Although some countries with well-established multi-year budget systems allow unused budget to be spent in the following year(s), this is not the case in most countries (Potter and Diamond, 1999[56]). In Viet Nam, unspent budget of the previous year can be used as current year revenue. Moreover, the amounts of carryover can be considerable. The 2015 Law on State Budget aimed at narrowing down the scope of carryover expenditure. Nevertheless, between 2015 and 2019, the average carryover size from the previous year was 18% of actual revenue for the central government and 21% for the local governments respectively. In principle, both differences between actual and planned revenue and unspent budget should be treated as a budget surplus. A rule should be established to return unspent budget to the national treasury, if the carryover is not used within a certain period of delay in the following year. In this regard, as strictly forbidding carryover of unspent budget may cause a spending rush towards the end of fiscal years, a limited amount of spending could be allowed to be delayed until a specified date in the following year. The current reporting of carryover spending on an accrual basis is appropriate, but carryover revenue from the previous year should not be treated as actual revenue. This should be recorded as a reduction of government assets (as it is recorded as surplus in the previous year). The 2019 Law on Public Investment made a crucial step. The Law stipulates that the disbursement period of the annual budget for public investment is up to end-January of the following year, which is shorter than the previous 12 months (moreover, the condition for further extension in the 2014 Law was laxer than in the 2019 Law).

Improving the quality of fiscal data can help implement rigorous accounting rules, but also increase the transparency of fiscal policy. This can further expedite strong fiscal discipline and evidence-based policy making. The government has strived to improve fiscal statistics over the past years. For example, delineation between current and capital revenue has been improved, such as the change in the treatment of sales of government shares in enterprises in 2015. Nevertheless, the reporting practice has scope to be further developed. Viet Nam should consider periodically publishing fiscal data in line with more recent and internationally recognised methodologies, such as the IMF Government Finance Statistics Manual 2014 (GFSM2014), as part of the budget statistics or national accounts, starting from principal tables (IMF, 2019[33]). The government has already moved in this direction. In 2020, the Ministry of Finance issued a Guide to Government Finance Statistics in Viet Nam to help government institutions prepare financial settlements aligned with international standards. In addition, the Ministry published revenue and expenditure data of the budgetary central government for 2003-2019 based on the GFSM2014 in November 2022. In particular, given the importance of social security funds in government policy, publishing general government data is most crucial. Moreover, fiscal data is conducive to reforms of state-owned enterprises. As a statutory ceiling is imposed on public debt (60% of GDP for 2021-2025), explicit government guarantees are already disclosed. Nevertheless, the government could consider disclosing contingent liabilities to state-owned enterprises.

In the medium term, a more comprehensive review of institutional frameworks would help further strengthen fiscal performance. In particular, experience of a number of OECD countries that established an independent fiscal institution after the Global Financial Crisis would be useful (von Trapp, Lienert and Wehner, 2016[57]). Independent fiscal institutions do not make policy decisions but provide assessment of economic and fiscal situations, including short- and medium-term projections, independently from policy making organisations. They are often an independent executive body (e.g. the United Kingdom) or a parliamentary organisation (e.g. the United States). Information provided by independent fiscal institutions brings additional transparency to fiscal policy, improving public debate, encouraging greater accountability of policy making organisations and enhancing government communication with financial markets. Establishment of independent fiscal institutions is often associated with fiscal rules which independent fiscal institutions are mandated to monitor, thus contributing to enhancing fiscal sustainability. Indeed, during the pandemic, these institutions in many OECD countries published near real-time assessments of economic and fiscal conditions, which were difficult for policy making organisations in the crisis time, and were able to provide adequate monitoring of government emergency spending plans (OECD, 2020[58]). In Viet Nam, the National Financial Supervisory Commission, which gives advice to the Prime Minister about financial sector development, occasionally provides its own assessments of the macroeconomic situation, although monitoring fiscal conditions is not explicitly under its mandate. The Financial and Budgetary Committee of the National Assembly also monitors conditions of government finances, but does not publish its own projections.

Additional tax revenues will be needed, especially to strengthen the social safety net and meet the obligations deriving from an ageing population. When social security contributions are taken into account, Viet Nam’s tax-to-GDP ratio is higher than in some other Southeast Asian countries, such as the Philippines and Thailand (Figure 1.21) (non-tax revenue, such as oil revenue is not included). Nevertheless, overall tax revenues are low compared with the OECD average. There is scope for increasing revenues through broadening the tax base, enhancing the role of the personal income tax, strengthening the functioning of the tax administration and introducing new taxes. While the country raises significant revenues from taxes on goods and services, including the value added tax (VAT), similar to other emerging market economies, the personal income tax makes up a small share of government revenue. A number of goods and services are subject to a reduced 5% VAT rate or not subject to the VAT (the standard VAT rate is 10%), and there may be scope for increasing the standard VAT rate. The personal income tax base raises little revenue, partly as a result of generous tax allowances that narrow the tax base. Indeed, only a small fraction of the population pay the personal income tax (Shukla et al., 2011[59]). In addition, the tax schedule has not been changed since 2014, which increases the tax burden on lower-income earners more than of high-income earners because of inflation. At the same time as streamlining deductions and allowances, the number of tax brackets (currently seven from 5% to 35%) could be reduced to three to four. Similarly, the corporate income tax (the tax rate is 20%) has a number of exemptions owing to various incentive schemes, such as tax holidays and reduced rates applied in special economic zones, accumulated over the years, some of which have little economic merit (OECD, 2018[60]). In this context, the Tax System Reform Strategy to 2030 approved in April 22 was a welcome step. In the Strategy, the government aims at introducing broad reforms, including the VAT reform. In addition, it is crucial to improve tax compliance by encouraging the adoption of proper auditing practices, enhancing inspection and simplifying tax-related procedures, including using digitalised tax administration services. The revised Law on Tax Administration effective in 2020 aims to simplify various procedures, in addition to strengthening enforcement power of the tax authorities against tax evasion. For example, issuance of tax registration certificates has been shortened from ten to three days. Accelerating digitalisation will help reduce administrative burdens on taxpayers further. Currently, filing the personal income tax requires both a tax code and a personal identification code. The government plans to use electronic personal identification cards, which have been issued since 2020, to simplify tax filing. Moreover, new taxes could be considered, as in other Southeast Asian countries. For example, Thailand recently introduced a land tax and a tourism tax, among others.

Viet Nam could strengthen recurrent taxes on immovable property. In Viet Nam, land is collectively owned by the state, but individuals and businesses can use land in exchange for payments. Vietnamese citizens and businesses can use land indefinitely by paying one-off levies and foreign investors can retain land use rights for definite periods up to 50 years by paying annual or lump-sum rental fees (the government can also lease land). Revenue from land use levies is one of the most important non-tax revenue sources of local governments. In particular, sales of land use rights increased rapidly, especially from the mid-2010s (“land use right assignment” increased from 1.3% of GDP to 2.0% between 2015 and 2019, while “rental of land” inched up from 0.3% to 0.4% in the same period). Nevertheless, one-off levies are not a sustainable revenue source as the supply of land is limited. On the other hand, compared with other countries, revenue from property taxes is moderate (0.03% of GDP in 2019). Viet Nam levies recurrent taxes on land both for agricultural and non-agricultural use (buildings on land are not subject to the tax). While increasing land levies and high property prices (see above) reflect the buoyant property market, revenue from land taxes has recently been low and stable. Indeed, there is scope for raising additional revenues by reconsidering the approach to taxing property.

The tax base of the property taxes could be expanded to include buildings on land. In general, recurrent taxes levied on the value of immovable property are considered more efficient than other types of taxes, as these taxes have a more limited impact on the decisions of households and businesses on labour supply, production and investments (Brys et al., 2013[61]). Recurrent taxes on immovable property are also difficult to evade as buildings and land are highly visible. In addition, these taxes can generate stable revenues compared with other types of taxes, such as corporate income taxes. Accordingly, many OECD countries have a recurrent immovable property tax levied both on buildings and land (Blöchliger and Kim, 2016[62]). In Viet Nam, the land use tax on non-agricultural land is levied according to land value (for example, residential land is subject to progressive rates, 0.03%, 0.07% and 0.15% of land value). Valuation is based on unit prices determined by local governments every five years under a price framework set by the central government. This valuation does not necessarily reflect the market value, making the tax base 30-70% smaller than the actual value (Asian Development Bank, 2020[63]). The revised draft Law on Land currently discussed by the National Assembly aims at removing the price framework in order to reduce the gaps between valuation and market prices. Since transactions of property on land, such as housing, are more abundant and frequent than those of land, they provide more accurate and up-to-date information for updating the tax base. Information on rents is also useful to estimate the market-based value of property. Viet Nam’s current frequency of value updates is shorter than in some OECD countries, but longer than in other Southeast Asian countries. Raising the frequency would be easier if information on property prices in the market were widely available on a regular basis (see above). More Frequent revaluation would help mitigate a sudden rise of tax burdens caused by rapid increase of immovable property prices. Some measures for low-income earners may be useful in reforming property taxes in order to offset redistributive consequences (Slack and Bird, 2014[64]). Tax deferrals for seniors, who earn little income but own valuable immovable property, could be considered. Recurrent taxes on immovable property could also be levied on property above a certain value. This could improve the progressivity of these taxes by reducing tax liabilities of low-income households. Some parts of the United States and Canada have Homestead exemptions that lower the value of taxes on owner-occupied principal residences.

The property tax system also needs to be simplified as a whole. In particular, registration fees could be reduced or abolished as the expanded recurrent taxes on immovable property would generate additional revenues. In Viet Nam, the registration fee, a stamp duty of 0.5% of the real estate value (the value of both houses and land), is imposed when a new land use right is registered, such as a change in ownership. Such levies on transactions can discourage transactions and thus deter efficient resource allocation (Boulhol, 2011[65]). The burden of the registration fee could also discourage declared transactions, making it less effective. In addition, property hoarding for speculative purposes could be reduced by imposing a tax on second houses or under-used property (Asian Development Bank, 2020[63]). Such measures have been introduced in other Southeast Asian countries and could also be considered in Viet Nam (Box 1.4). However, there are some implementation challenges that also need to be taken into account. For example, gathering accurate information on second home ownership is not easy in Viet Nam as most transactions are not recorded digitally. While this type of tax can be progressive, it may affect supply in the rental housing market, which the government considers important in its housing policy.

Enhancing public sector integrity is crucial to improve Viet Nam’s economic fundamentals, such as the rule of law, the business climate and reducing economic informality. Like other Southeast Asian countries, Viet Nam has made long-standing efforts to combat corruption. Particularly, the process of becoming a signatory of the United Nations Convention against Corruption in 2009, provided strong momentum (UNODC, 2012[66]). More comprehensive legal and institutional frameworks have been developed since then. The Law on Prevention and Combating of Corruption (the Anti-Corruption Law) was introduced for the first time in 2005 to control corruption of public sector workers through prevention, detection and handling of corrupt acts, including confiscation and recovery of corruption-related assets. An Ordinance on Anti-corruption adopted in 1998 by the National Assembly Standing Committee had existed before. The Central Steering Committee for Anti-Corruption headed by the Prime Minister was established in 2006 with the aim of enhancing coordination among government anti-corruption institutions (Tran, 2012[67]). A number of further reforms have followed. For example, in 2007, an assets declaration mechanism and regular job rotation rules for public sector workers were introduced. The National Strategy on Preventing and Combating Corruption towards 2020 was launched in 2009 to set out the concrete policy orientation, which is now under revision. In order to accelerate the adoption of international best practice, the government adopted an Implementation Plan of the United Nations Convention against Corruption in 2010.

Accordingly, people’s perception of corruption has improved over the past years, although the level of corruption risk is still high. A range of survey results suggest that the perception of corruption by the Vietnamese people has recently improved (Figure 1.22, Panel A). This is consistent with other surveys that suggest improvements in overall public sector integrity, in contrast with some other Southeast Asian countries whose scores have slipped. Efforts to tackle money laundering, which have lagged (UNCAC, 2012[68]), are now also progressing (Figure 1.22, Panel B). Nevertheless, citizens and the business community, including international stakeholders, consider that corruption is still one of the most important concerns for Viet Nam (Figure 1.22, Panel C and D). In specific risk areas, such as control of judicial corruption, the country still underperforms ASEAN peers. Consequently, there is significant scope for improving the anti-corruption framework. Doing so effectively will bring tangible benefits in improving the economic prosperity of Viet Nam.

The function of principal anti-corruption agencies, notably the Government Inspectorate, could be further strengthened. Viet Nam’s institutional anti-corruption framework is considered rather decentralised (Nguyen, 2020[69]). The Government Inspectorate is a ministerial level agency, and the other ministries have their own internal inspectors. Except for some large-scale and specific cases, these inspectors at each ministry deal with reported cases under the direction of their Ministers. While each ministry also reports to the Government Inspectorate, the role of the Government Inspectorate is to supervise the inspection activity conducted by each ministry and give guidance to them (cases are then investigated by the police and prosecuted by the Supreme People’s Procuracy of Viet Nam, if they are considered criminal). The same process is applied at the local government level. Provincial People’s Committees have their own Provincial Inspectorates, and inspections are conducted by departmental inspectors of each provincial government. Provincial Inspectorates supervise departmental inspectors, but Ministries can also give guidance to departmental inspectors. Both the Government Inspectorate and Ministries can intervene in inspection activity at the provincial level (e.g. requesting re-inspection). A decentralised self-inspection system is not always ineffective if a strong central coordination function is embedded in the system (OECD, 2020[70]). Nevertheless, an overly decentralised system has the potential risk of compromising the inspection implementation and entailing insufficient resource allocation. Indeed, previous studies on Asian countries suggest that a country giving more consolidated power to the leading anti-corruption agency is likely to be associated with a stronger perception of anti-corruption implementation, as this type of system could avoid the functional overlapping and reduce loopholes and self-leniency (Quah, 2021[71]), (Quah, 2018[72]). Moreover, compared with the principal anti-corruption agencies in other Southeast Asian countries, the Government Inspectorate in Viet Nam has less resources (Figure 1.23). Although the expansion of its mandate, such as to prosecution, is not required, further enhancements of the inspection power and resource allocation in the Government Inspectorate should be considered. In particular, the Government Inspectorate could act as a resource to provide supervision and technical support for local governments.

Strengthening and enhancing the function of the Government Inspectorate would need to be pursued in tandem with the enhancement of mechanisms of checks and balances in the overall anti-corruption system. This is also conducive to preventing corruption within anti-corruption agencies, including the Government Inspectorate itself and the police. In this regard, Viet Nam has made a significant change in its institutional framework. The independence of the Central Steering Committee for Anti-Corruption Committee has been strengthened since 2013. The Committee was transformed from an affiliate to the National Assembly to a Communist Party organisation, and is headed by the General-Secretary of the Communist Party. While its members include the heads of anti-corruption agencies as before, the Committee also consists of representatives from the National Assembly and the civil society (the Vietnamese Fatherland Front). In addition to the framework change, the strong political commitment has added more influence to its direction. Accordingly, the number of cases dealt with by anti-corruption agencies has increased since the mid-2010s (Nguyen, 2020[69]). In June 2022, Viet Nam’s Communist Party decided to establish an Anti-Corruption Steering Committee in each province with a similar structure to the Central Committee.

Strengthening anti-corruption endeavours outside the public sector is also crucial, as corruption cases often involve the private sector (UNCAC, 2021[73]), (OECD, 2016[74]). In this regard, establishing a clear and comprehensive whistleblower protection framework provides a strong preventive mechanism (OECD, 2020[70]). While whistleblower protection for public sector workers has been a strong focus of the Vietnamese authorities, involvement of private sector workers has been more limited. The 2005 Law on Prevention and Combating of Corruption introduced whistleblower protection for the first time to public sector workers, earlier than in other Southeast Asian countries. Furthermore, reporting of illegal acts became a duty of public officials in the 2008 Law on Cadres and Civil Servants. The protection mechanism has been improved since then. Although reporting persons are still required to identify themselves, the 2018 Law of Denunciations ensures legal protection for the confidentiality of the reporting persons. Following the new 2018 Anti-Corruption Law that criminalises corruptive acts of private sector workers, Circular 08 was issued in 2020 to extend whistleblower protection to private sector workers, which is a welcome step. Nevertheless, a law could be introduced to give stronger protection to private sector whistleblowers.

Enhancing overall accountability and transparency of public sector activities is also crucial to promote further engagement with the wider society in combatting corruption. Viet Nam has strived to make progress in open government reforms. The 2016 Law on Access to Information ensures that citizens have access to government information, and encourages the public sector to provide information. All documents and data which are created by government entities when they conduct their policy duties will be accessible, except for information related to state secrets (e.g. national defence), potential harm to state interests (e.g. social order) and internal documents (e.g. minutes of internal meetings). Nevertheless, robust implementation is key. In particular, considering Viet Nam’s decentralised administrative system, it would be more effective that all levels of government institutions should follow a standard framework on information provision based on the Law, rather than each government entity setting up its own guidelines. Some OECD countries have a stronger legal framework for specialised institutions to guarantee citizens’ access to information. For example, Spain has the Council for Transparency and Good Governance, an independent government body which is responsible for guaranteeing access to information and responding to administrative appeals (OECD, 2019[75]).

Despite recent progress, significant scope for improvement exists concerning anti-money laundering policies. Overall, institutional and legal frameworks have been strengthened in the past decade. In 2009, the National Steering Committee on Anti-Money Laundering headed by the Deputy Prime Minister was established to enhance intra-governmental coordination. A Law on Anti-Money Laundering was established in 2013 as Viet Nam’s first comprehensive legal setting on the topic. The Law requires licensed financial institutions to regularly submit reports on anti-money laundering to the State Bank of Viet Nam, significantly expanding the coverage of anti-money laundering obligations, which had in effect previously been limited to the banking sector. Nevertheless, shifting from a rule-based to a risk-based approach is a pressing priority (Asia/Pacific Group on Money Laundering, 2022[76]). A risk-based approach requires the strong engagement of a broad range of business entities, such as firms dealing with real estate and cross-border remittance transfers. This includes by engaging in preventive measures, such as reporting to the authorities, to avoid being involved in illicit activities unintentionally or unknowingly. At present, adoption of preventive measures is weak, outside of financial institutions which frequently conduct international transactions. Since not all sectors are under the remit of the State Bank of Viet Nam, implementing such policies also calls for effective coordination among government agencies and their strong supervision of the entities in other relevant sectors. In 2019, Viet Nam conducted the first National Risk Assessment based on international guidelines, which was an important step to address these requirements. However, supervising agencies, including the State Bank of Viet Nam, lack resources (e.g. digital tools are not widely used) and information sharing within the government is limited. Improving their capacity is an urgent need. Against this background, the government adopted a comprehensive National Action Plan on anti-money laundering and counter-terrorist financing in August 2022. In addition, a revised Law on Anti-Money Laundering was adopted in November 2022 with a view to improve overall policy effectiveness. Strong implementation of the Law is crucial to enhance the capacity of responsible agencies and improve coordination between various stakeholders.

The labour market has experienced a dynamic transformation alongside Viet Nam’s rapid economic development. The agriculture sector still accounts for a major part of employment in Viet Nam compared with other Southeast Asian countries (Figure 1.24, Panel A). Nevertheless, rapid industrialisation has raised the share of non-farm employment dramatically, much faster than in other Southeast Asian countries. This has coincided with the share of self-employed workers in total employment becoming much smaller than a decade ago. While most workers in the agriculture sector have traditionally been self-employed, namely own-account and unpaid family workers, newly created jobs in both the industry and services sector are mostly employees. Despite a slight increase in self-employed workers in the services sector, the number of self-employed workers overall declined by 1.4 million in net terms between 2009 and 2018 (Figure 1.24, Panel B). The rising share of non-farm employment and dwindling share of self-employed workers have occurred similarly for both male and female workers.

Viet Nam has maintained a high rate of labour force participation for both men and women over the course of its economic transformation. Viet Nam stands out with comparatively high rates of labour force participation of the working-age population over recent decades, for both men and women (Figure 1.25). In addition to the tradition of matriarchal society and war legacies (The Economist, 2019[77]), policy efforts since the early 1990s that provided gender equal education have helped supply a high quality labour force of both men and women (Banerji et al., 2018[78]). Together with the economic reform, Doi Moi, this facilitated labour reallocation to industry from agriculture, where many women had worked. Nevertheless, compared with other countries, the share of unpaid family workers is high (12% of total employed and one fourth of self-employed workers), and this pushes up the labour force participation rate, particularly for women (Barcucci, Cole and Gammarano, 2021[79]). While the majority of unpaid family workers can be found in the agriculture sector (approximately 70% of female unpaid family workers are in this sector), almost one in ten women in the services sector were unpaid family workers at the end of 2021. This is because family-run small businesses are prevalent in Viet Nam, which provide job opportunities for many people, especially for women.

Many workers are in precarious jobs without formal contracts, working in small businesses or self-employed. The number of employees is increasing, and employees working for enterprises (incorporated businesses) are expanding their share (from 21% of total employment in 2012 to 28% in 2019, including agriculture). Nevertheless, the rise of employees not in enterprises (mostly non-regular workers with short-term or no contracts but also include employees in unincorporated household businesses) was significant (Figure 1.26) (Box 1.5). Between 2012 and 2019, the share of this job category increased from 13% to 20% of total employment, which occurred mostly in manufacturing and construction. Although the share in total employment is small, employees in micro enterprises (with less than ten employees) have edged up (from 2% of total employment in 2012 to 3% in 2019). In the services sector, employees working for enterprises increased most between 2012 and 2017 (1.1 million), but workers in micro enterprises showed high contributions despite their small volume (0.3 million). To some extent, the upsurge of employees working for micro enterprises in the services sector may have been inflated by incorporation of household businesses (i.e. existing household businesses registered themselves as enterprises). Moreover, while most self-employed workers are in the agriculture sector, self-employed workers account for the largest share in the services sector (51% of total services employment in 2019, excluding the government sector).

The impact of the pandemic downturn on workers varied with their economic status and sectors where they worked, and those who were in precarious positions were affected more severely (Figure 1.27). The number of employees in industry fluctuated due to seasonality and occasional adoption of sanitary restrictions, but it surpassed the pre-pandemic level by the fourth quarter of 2021 amid relaxation of the restrictions (employees accounted for 84% of industry employment in 2019). The swift rebound reflected robust job creation in the sector. Self-employed workers in industry were affected in the second half of 2021 and have not yet shown a sign of recovery (self-employed workers accounted for 12% of industry employment in 2019, excluding employers). Similar to other countries, employees in services were hit hardest from the early stage of the pandemic, and the employment recovery in this sector has been weak (employees constituted 53% of services employment in 2019). A number of employees in small businesses or with non-regular contracts lost jobs, as their share is large in the services sector (25% in 2017). Although the recovery was faster than for employees, self-employed workers in services were also affected severely, especially in the third quarter of 2021 (self-employed workers, excluding employers, accounted 43% of services employment in 2019). In addition, the number of employers who are owners of household businesses declined steadily both in industry and services during the pandemic. This suggests that employees and unpaid family workers who had worked for these small businesses lost their jobs. Working conditions for many who remained in their job were also impacted, with working time declining considerably during the lockdown periods. Previous studies suggest that, in the second quarter of 2020, weekly hours worked declined approximately 5% from the pre-pandemic levels, both for employees and self-employed workers (World Bank, 2021[81]).

Tackling informality can bring multiple benefits, not only expanding social security coverage and improving tax compliance, but also stimulating entrepreneurship and helping businesses grow, eventually creating more jobs. Like in many other emerging market economies, many small businesses (smaller enterprises and household businesses, including self-employed workers) do not comply with government regulations, such as business registration, tax payments and social security contributions (Pasquier-Doumer, Oudin and Nguyen, 2017[82]). Reducing burdens on smaller businesses would help encourage them to comply with these regulations (OECD, 2015[83]), but it is also conducive to stimulating job creation, as lower regulatory and administrative burdens can remove obstacles to their business expansion. Lowering costs for small businesses also means that starting a business becomes easier for entrepreneurs. Although there was possible underreporting, the average profit of micro enterprises (less than ten employees) was negative in 2017, according to the Economic Census, while the enterprises of other sizes reported positive profits. The low level of profits makes it hard for smaller businesses to pay taxes, including social security contributions. Nevertheless, participation in social security could encourage workers staying for a longer duration in a business, investing in job specific human capital and thereby boosting profits in the medium term. Indeed, previous studies suggest that participation in social security is associated with the improvement of overall enterprise performance, although micro enterprises tend to show negative profits at the early stage after they registered for social security (Lee and Torm, 2017[84]).

In this regard, the policy should focus more on unincorporated businesses (“household businesses”) through reviewing their overall administrative and tax burdens and regulations that distinguish them from incorporated businesses (“enterprises”). As unincorporated businesses are an important source of entrepreneurship, a number of countries encourage individuals to start a business, including from this category. In Viet Nam, the policy has so far given priority to encouraging household businesses to register as an enterprise (micro or small enterprises) and this is often referred to as “formalisation”. However, a number of household businesses are reluctant to become enterprises due to additional burdens, such as high tax rates and a requirement of standard accounting. The 2015 Law of Fees and Charges defines the population groups eligible for exemptions from fees and charges, including poor households, senior citizens and ethnic minorities facing socio-economic difficulties, among others. In this context, the government helps household businesses convert into micro or small enterprises, with a range of support policies, including an exemption from licence fees for three years and a simpler bookkeeping system. In addition, successfully converted small- and medium-sized enterprises (SMEs) are entitled to receive various forms of government support, such as financial and technical support.

Smooth transition from household businesses to enterprises should certainly be further encouraged. However, less attention has been paid to the formalisation of household businesses as a household business, which could also support business growth and participation in the social security system. The importance of this “formalisation” should be given more emphasis. As the Vietnamese economy further develops, household businesses should be considered a potential growth engine rather than part of the economy which is vulnerable and needs government support. The government should encourage household businesses to play a pivotal role in the economy as formal household businesses by preparing a conducive environment to expanding businesses, creating jobs and paying taxes.

Regulations applied to household businesses and enterprises are considerably different (Central Institute of Economic Management, 2017[85]). Some regulations are applied consistently to both types of firms. For example, social security contributions are compulsory if a business hires paid workers irrespective of its number of employees. Nevertheless, differentiated regulations across the two firm types are common, which influences the incentives for business growth and the type of business registration. Under the previous 2014 Law on Enterprises, household businesses could hire less than ten paid employees, but they must convert to be an enterprise once they grew to employ ten or more workers. On the other hand, there has been no threshold for enterprises concerning the number of employees. While this employment ceiling was abolished in the new 2020 Law on Enterprises, some tax rates for household businesses are lower than those for enterprises.

Household businesses are taxed on their business incomes at the personal income tax rate (from 0.5% to 5%) whereas enterprises are taxed at the corporate income tax rate of 20%. Enterprises can pay the corporate income tax based on their turnover of these goods and services with a tax rate between 1% and 5%, if they engage in certain activities, such as the supply of some goods and services, and pay the VAT through a direct method where VAT liabilities are directly calculated from turnover. The statutory bankruptcy regime is only applied to enterprises with limited liability whilst owners of household businesses must assume unlimited liability. In addition, an individual may only register one household business in one place, but can then do business at many locations. The owner of such a sole proprietorship must not concurrently own a household business or hold the position of general partner of a partnership. In this context, other countries consider that reducing a distinction imposed on small businesses is an important policy tool to encourage their business expansion. For example, in 2019, Italy extended the flat-rate tax for self-employed workers (15%) to small businesses, which had been subject to the corporate income tax (24%), and also raised income thresholds, in order to encourage the self-employed and small businesses to grow (OECD, 2019[86]).

Household businesses are provided with some preferential treatments. While enterprises need to keep full business accounts, large-scale household businesses can follow a simplified system. Other household businesses can utilise the accounting that is used for tax payments or choose not to keep financial accounts. For example, in 2019, the government introduced a simplified accounting framework for micro-sized enterprises, which is simpler than that for small- and medium-sized enterprises. This simplified accounting is similar to another accounting framework introduced for household businesses in 2021. However, some other differences in regulations may also disadvantage household businesses. Preparing full accounting books may be burdensome for less profitable businesses, giving them adverse incentives to stay small or pretend to be small.

Easing the administrative burdens of business registration is essential to encourage the birth of more household businesses. Indeed, previous surveys suggest that many household businesses do not register although they need to do so. Registration procedures are simplified for enterprises. For instance, when establishing an enterprise, initial registration, tax and social security can be done all together. Starting a household business requires contacting tax and social security offices separately from business registration, although these processes can be done online. Simplified registration procedures for household businesses, akin to those for enterprises, should be established. This would also help improve coordination between business registration, tax and social security, including inspection, and reduce evasion. Indeed, compared with the compliance rate for business registration, only a fraction of household businesses pay social security contributions (Pasquier-Doumer, Oudin and Nguyen, 2017[82]). In this regard, the government plans to simplify both business and tax registration from 2023, making it similar to the process for enterprises, which can be conducted online.

Moreover, licence fees are still required for household businesses, but lower than those for enterprises. In Viet Nam, a licence fee exemption is provided for household businesses that have annual turnover below VND 100 million (USD 4 000) or newly registered household businesses for their first year. Enterprises that have been transformed from household businesses are provided with three years of licence fee exemption starting from the transformation date. To promote entrepreneurship, many countries do not require registration fees in starting an unincorporated business hiring less than ten employees, or the fees are much lower than for establishing an incorporated business (Figure 1.28). These are experiences by other countries that Viet Nam could consider.

Investing in human capital development of informal workers, including those working for household businesses, can also help them move into formal employment. Informal workers have less opportunities for upskilling and reskilling compared with formal workers (ILO, 2020[87]). Therefore, governments need to deploy specific measures to improve the skills of these workers. In addition to enhancing formal technical and vocational education and training (TVET) programmes tailored for informal workers, new informal (e.g. on-the-job training and apprenticeship) and non-formal TVET (i.e. services provided outside the formal education system) initiatives should be considered (Palmer, 2020[88]). In Viet Nam, access to formal and non-formal TVET programmes is limited in rural areas compared to urban areas (OECD, 2018[89]), which implies that strengthening informal training could particularly benefit marginalised workers outside of the cities. While informal TVET is diverse in quality and thus not recognised as a widely acceptable qualification, upgrading informal training to semi-formal status through the collaboration with public or private training centres could improve the quality and recognition of informal TVET (OECD/ILO, 2019[90]). For example, Jordan conducted a pilot project that combined basic skills courses, such as IT and English, with an informal apprenticeship, with 92% of participants obtaining a job after the completion (ILO; International Youth Foundation, 2014[91]).

To strengthen the social safety net, expanding the coverage of social security should be the highest priority. Viet Nam has been developing its social security system progressively as a pivot of social protection, but its coverage is still low (Box 1.6). In particular, the high level of informality in the economy means that a number of businesses and employees do not comply with compulsory contributions to social insurance, which contains a compulsory public pension programme. Reducing informality or increasing formalisation can directly expand the social security coverage, but helping businesses grow in the formal sector will also boost the creation of more formal jobs. By definition, social security aims at pooling risks by covering a large part of the population. Social security systems in economies with informal employment are often relatively ineffective, owing to gaps in coverage and high contribution rates relative to benefits (OECD, 2003[92]). The low rate of social security coverage cements the gap between insured and uninsured people, deteriorating its redistribution effect, as people from higher-income groups and with long life expectancy tend to participate more in social security (and are entitled to receive benefits) and those from lower-income groups do not.

Social assistance also needs to be further expanded to those who are not covered by social security. In many countries, self-employed workers are not insured by compulsory social security programmes. Although rapid economic advancement has increased the number of employees in Viet Nam, similar to some other Southeast Asian countries, a significant number of people still work as self-employed. Self-employed workers accounted for more than half of total employment in 2019 (the OECD average was 16%), and are not covered by the compulsory public pension programme as well as unemployment insurance. Social assistance also needs to act as a backstop for informal workers who are subject to the compulsory social security system but do not participate in it.

During the pandemic, the government provided support to affected workers by fully mobilising the existing labour market safety nets. In particular, unemployment insurance has worked as an automatic stabiliser despite its low coverage. The number of people who applied for unemployment insurance increased sharply from the first quarter in 2020 (170 thousand) to the second quarter (400 thousand). In 2020, wage subsidies were provided to workers whose contracts were suspended or who took unpaid leave for more than one month between April and June, if they were eligible for unemployment insurance. In 2021, eligibility conditions were eased. The minimum contribution period necessary to receive unemployment benefits was tentatively abolished: workers who lost jobs between January 2020 and September 2021 could receive one-off benefits, even if they had not fulfilled the usual condition of contributing to unemployment insurance more than 12 months out of the previous 24 months.

For workers not covered by unemployment insurance, the government provided additional social protection. In 2020, a special allowance (VND 1 million per month up to three months) was distributed to workers with formal contracts, but not eligible for unemployment benefits due to their shorter job tenure, if their contracts were terminated between April and June. The same amount of allowance was also provided to workers with formal contracts but who earned no income or incomes below the near-poverty line, and to workers without formal contracts who lost their jobs in certain sectors, such as tourism and street vendors. Nevertheless, the actual disbursement was slow and the scope was narrower than planned.

Improving the coverage of unemployment insurance is crucial to enhancing labour market safety nets for vulnerable employees. The reform in 2015, which expanded the statutory coverage from employers with at least ten employees to all employers, was significant progress. Nonetheless, there are still significant gaps, with only around half of employees covered by the system in 2019 (Box 1.6). In Viet Nam, the high prevalence of unstable employment and small businesses is a major obstacle to further improving social security coverage, including unemployment insurance (see below). Nevertheless, recent policy developments in OECD countries concerning unemployment benefit systems are relevant to Viet Nam’s unemployment insurance system, as there are some common underlying policy issues.

Many countries have attempted to strengthen the effectiveness of unemployment benefit systems amid the recent rise of non-standard workers, such as part-time or unstable workers, with lower eligibility for unemployment benefits due to short job tenure or discrete employment records. Adjusting eligibility conditions is the key policy option, but it should be carefully designed to minimise adverse effects. Avoiding too strict employment requirements, notably a longer minimum employment period or a shorter reference period (a period out of which the minimum contribution period is considered effective), is crucial to give more flexibility to workers with unstable job records (ILO, 2017[93]). While too short employment requirements could give incentive to creating unstable jobs, customised adjustments to the difference between minimum employment periods and reference periods would be useful (OECD, 2020[94]). In the Slovak Republic, temporary workers are given an additional 12 months for reference periods (36 months for ordinary workers; the minimum employment period is 24 months). Viet Nam’s minimum job spell (12 months) and reference period (24 months) are around the middle of other countries (OECD, 2020[94]), (Asenjo and Pignatti, 2019[95]). In addition, Viet Nam already has a 1-year extension of reference periods for seasonal workers. This reference period extension could be expanded to other unstable jobs, such as construction workers. Introducing higher contribution rates for some types of employment or firms could also be considered. A number of European countries have adopted differentiated contribution rates. For example, Spain imposes higher contribution rates on both employers and employees in fixed-term contracts than in permanent contracts (Unédic, 2020[96]). For fixed-term contracts, the share of employer contributions is higher than for permanent contracts; the employee share is lower for fixed-term contracts than for permanent contracts. This policy measure can provide financial incentives for employers and employees to choose more stable employment contracts.

Strengthening employee rights would also boost compliance among employers with unemployment insurance (OECD, 2004[97]). Some OECD countries have developed specific mechanisms. In Japan, public employment services can accept a jobseeker’s claim for unemployment benefits even if his/her former employer has not paid contributions. This is intended to prevent employers from illegally avoiding contributions, as the evasion can be revealed by the former employee’s insurance claim. In Viet Nam, labour unions could not only help employees to understand but also enact their rights. In this regard, recent reforms to strengthen overall workers’ rights is helpful. Under the new 2019 Labour Code, forming labour unions has become easier (labour unions will not need to be affiliated with the sole labour union at the national level). Nevertheless, this kind of mechanism could make some employers reluctant to hire employees, in particular, when these entitlements are specific to only some cohorts of employees (e.g. formal workers). In such a case, these employers could prefer individuals who will not make complaints, such as illegal migrants. The new Labour Code stipulates that all employees can form and participate in labour unions and prohibits discrimination and interference by employers against employees engaging in labour union activities. The government should ensure that these rights are fully enforced.

Enhancing connection between unemployment benefits and active labour market policy (ALMP) is also a priority. This would enhance the attractiveness of Viet Nam’s unemployment insurance, helping to attain higher coverage. In Viet Nam, 83 public employment services, Employment Services Centres, provide jobseekers who receive unemployment benefits with guidance and administrative support for vocational training of up to six months. Nevertheless, the participation rate is very low. Only 5% of unemployment insurance beneficiaries used it in 2019 and the rate declined to 2% by mid-2020 due to the pandemic (World Bank, 2021[81]). Currently, Employment Services Centres devote significant resources to the administration of unemployment insurance. At the same time, they do not have up-to-date labour market information to designing effective training programmes (Stienon, Cunningham and Nguyen, 2020[98]). The government needs to strengthen the functioning of Employment Service Centres, notably through the collection of labour market information in order for the Centres to provide relevant training for jobseekers. In particular, coordination among Centres in different regions, cooperation with private placement services and outreach to employers are essential.

In addition, labour market safety nets for self-employed workers could be enhanced in the medium term. Like in many other countries, in Viet Nam, compulsory social security, including unemployment insurance, does not cover self-employed workers. A number of countries have recently expanded labour market safety nets to include self-employed workers, in particular, those self-employed workers who have less autonomy about their employment conditions (“dependent” self-employed workers) (OECD, 2019[99]), (OECD, 2018[100]). Digitalisation, which has accelerated during the pandemic, has facilitated the rise of these types of workers, such as platform workers (see Chapter 2). This poses a challenge that is being tackled in different ways across countries. For example, Portugal’s compulsory unemployment insurance covers dependent self-employed workers, who receive more than half of their earnings from a single firm (OECD, 2020[101]). In Malaysia, self-employed taxi, e-hailing and bus drivers were included in mandatory employment insurance from 2017, which covers occupational injuries. Eligible self-employed workers pay contributions according to their monthly earning levels. Since 2020, an additional 19 jobs have been included, including hawkers (OECD, 2021[102]). Given the high rate of economic informality in Viet Nam, thresholds defining these workers (e.g. 50% of earnings from one source) could induce evasion (i.e. limiting earnings from a single source to be below these thresholds). Instead, a targeted approach to specific jobs, similar to Malaysia, could be applicable.

Employment Services Centres need to strengthen support to all vulnerable workers. In Viet Nam, Employment Services Centres have a mandate to serve all workers. Indeed, while approximately 1 million people claim unemployment insurance annually, around 3 million people receive advice and services from the Employment Services Centres each year. Nevertheless, for some Centres, most of their clients are claimants of unemployment insurance (80-90% of all clients (Stienon, Cunningham and Nguyen, 2020[98])). As unemployment benefit systems do not cover all workers, similar problems have been experienced in other countries. In OECD countries, less than one third of unemployed individuals receive unemployment benefits (OECD, 2018[103]), implying that labour market safety nets do not cover a number of individuals. It is therefore crucial to reach out proactively to non-claimants, who are mostly not formal employees in Viet Nam. Cooperation with relevant institutions, such as social protection services, would be effective to this end (OECD, 2021[104]). In Viet Nam, Employment Services Centres need to expand their client base extensively, cooperating with educational institutions and local communities (Stienon, Cunningham and Nguyen, 2020[98]). At the same time, focus should be on enhancing the job placement function of Employment Services Centres, which is currently weak. In particular, Employment Services Centres should focus on collecting and providing labour market information to all workers, while outsourcing some technical services, such as job search assistance, to private placement services. In 2020, Malaysia launched the MYFutureJobs portal as a one-stop shop to provide placement services for all jobseekers, which could be a good example at the national level. Since only one quarter of employed persons are covered by unemployment insurance in Viet Nam, most job seekers will not necessarily be insured people if Employment Services Centres can successfully expand their client base. It is therefore critical that these activities of Employment Services Centres are funded by the government budget as part of social assistance, not by the revenue of unemployment insurance.

As Viet Nam will become one of the most rapidly ageing societies in Southeast Asia in the coming decades, it needs to accelerate the development of social protection for elderly people (Figure 1.29). Like some other East and Southeast Asian countries, family members have traditionally supported elderly people. Nevertheless, the size of households has gradually declined and it is unlikely that the traditional model will be feasible with the changing demographics. In that context, the government will need to play a more active role in ensuring that vulnerable people are adequately supported. Moreover, population ageing tends to widen income inequality (Wang et al., 1990[105]) (Annex 1.A.). In Viet Nam, households headed by the elderly have higher poverty headcounts and the presence of an elderly person is likely to be associated with a higher risk of poverty (Evans et al., 2005[106]). In this context, enhancing social safety nets for the elderly, notably the overall public pension system, is crucial to preventing old-age poverty.

In Viet Nam, the public pension does not yet cover the majority of the population (Figure 1.30, Panel A). Similar to many other emerging market economies, this under-coverage is strongly associated with employment status. The Law on Social Insurance requires that, even if there is just one paid employee, the worker should be covered by the compulsory programme if the contract is longer than one month. Nevertheless, many small businesses, mostly micro enterprises and household businesses, do not participate in social insurance for their employees (the public pension being the major component). In addition, it is highly likely that most non-regular workers, whose number has recently increased, are also not covered by social insurance (Figure 1.30, Panel B). Some employers and employees intentionally opt for a short-term contract or underreport earnings to avoid making contribution. Uninsured workers are more susceptible to labour market disruptions than others, as was revealed by the pandemic, and vulnerability to economic shocks can increase the risk of old-age poverty in the future.

Improving the public pension coverage of non-regular workers is increasingly important. The government is stepping up its efforts in this direction. If implemented effectively, the amendment of the Labour Code in 2019 (effective January 2021) is a large step in filling one of the loopholes. In Viet Nam, short-term employment contracts are prevalent. In 2020, around 40% of employees worked with short-term contracts of less than three months or no contract. Statutorily, social insurance is compulsory for employers and employees with contracts of at least one month duration. Nevertheless, in the previous 2012 Labour Code, verbal contracts were possible for contracts of less than three month duration, which resulted in no written documents for employees with one- to three-month contracts to prove their employment records for social security. This inconsistency, which would induce intentional or unintentional evasion from public pension contributions, has now been resolved.

Introducing chief contractor responsibility would be useful to help expand the public pension coverage in some sectors, such as manufacturing and construction, where subcontracting is prevalent. Subcontracting provides flexible labour supply for businesses. However, subcontracting can entail evasion of compulsory social security contributions particularly by small subcontractors, to compress labour costs, if inspection is weak. A number of European countries have regulations that make chief contractors responsible for compliance of their subcontractors with government regulations, notably social security contributions (OECD, 2004[97]). In Viet Nam, given the importance of public investment in construction, the public sector (notably, state-owned enterprises) should be included in the framework along with the private sector.

Reviewing some eligibility conditions would also be useful. In particular, the threshold of one-month job tenure could be removed to expand the pension coverage to all workers, including unstable temporary workers (OECD, 2019[107]). In addition, the minimum contribution period of Viet Nam’s public pension (20 years) is longer than in other Southeast Asian countries (10-15 years). The current long period is considered a hurdle for workers with unstable jobs, especially for women. The government is planning to shorten the period to 15 years from 2024 and 10 years from 2028 (ILO, 2021[108]). Nevertheless, if people could get the same or a similar amount of benefits with shorter contribution period, it weakens the linkage between contributions and benefits. In Greece, a generous non-contributory minimum pension discouraged workers to contribute beyond the minimum contribution period (Kangur, Kalavrezou and Kim, 2021[109]). Moreover, if the current lump sum withdrawal is maintained for those who do not meet the minimum contribution period, the impact would be limited (ILO, 2021[108]). A number of countries increase the periods as retirement ages are raised.

Strengthening the sustainability of the public pension is also crucial to improve its attractiveness. In particular, the statutory retirement ages (60 for men and 55 for women), which are lower than in OECD countries (the average is 64 for men and 63 for women), need to be raised (Figure 1.31, Panel A). Previous studies suggest that the net revenue of the social security fund is expected to be in deficit before the mid-21st Century without this reform (World Bank, 2019[110]). The life expectancy at the age of 60 is as high as the OECD averages (Viet Nam: 19.4 years for men and 23.9 years for women, OECD: 21.9 years for men and 25.6 years for women), and are expected to increase further. By 2040-45, men at the age of 60 will live for 21.7 years on average and women for 25.6 years, which will be the same as the current OECD averages. In addition, the current statutory retirement ages also deviate from the actual situation in the labour market, where more elderly Vietnamese women stay in the labour force than in other Southeast Asian countries (Figure 1.31, Panels B and C). A number of workers do not retire early, as they do not have sufficient pension savings. Indeed, the gap between the effective retirement age (67 for men and 64 for women) and the pensionable is large for women (9 years) (Annex 1.B.). The government recently decided to increase the pensionable age for the compulsory pension gradually to 62 (men) and to 60 (women) by 2035. Nevertheless, the reform should be more ambitious and also be accelerated. The difference between men and women could be abolished (c.f. currently, the official unemployment rates are calculated differently for men and women based on the different statutory retirement ages). Most countries have the same pensionable age for men and women. Among ASEAN-6 countries, only Viet Nam has different pensionable ages.

To improve pension sustainability, early lump-sum withdrawal should be prohibited. In Viet Nam, individuals who contribute to the public pension but do not meet the minimum contribution period (20 years) can withdraw lump sums instead of receiving regular pension payments. The original intention was to pay benefits to retirees who start contributing at a later stage of working age. Nevertheless, the number of withdrawals (500-700 thousand individuals per year) has typically been much larger than the number of new pensioners (around 100 thousand individuals per year). Indeed, with individuals below the retirement age able to claim lump-sum withdrawals, their share is significant (77% of lump-sum withdrawers in 2015 (Castel and Pick, 2018[111])). Many of them temporarily or permanently quit the public pension. To some extent, this early withdrawal acts as a safety net for young workers, as a number of them withdraw lump sums when they become unemployed or lose their jobs. In Chile, a transitory early withdrawal during the pandemic served as a financial backstop for many young people (Chile has a defined contribution pension), stimulating consumption and inflation (OECD, 2021[112]). Chilean people were allowed to withdraw up to 10% of accumulated pension assets three times since July 2020. Nevertheless, the large amounts of lump-sum withdrawals significantly reduced their pension savings, raising the risk of future old-age poverty. The Chilean Congress rejected a bill for a fourth withdrawal in December 2021. In Viet Nam, amid strong opposition from the public, the government withdrew the proposed prohibition of early cash out from the draft Law on Social Insurance 2014. Nevertheless, this scheme violates the principle of a defined benefit pension, and should be abolished. As early withdrawals will reduce future pension benefits of the withdrawers, it will also increase the risk of old-age poverty considerably among them. The policy priority should be to enhance the social safety net, such as unemployment insurance, so as for young workers not to need to rely on early withdrawal.

Extending the pension coverage of self-employed workers is a challenge, as they are not covered by compulsory social insurance. Countries with voluntary programmes tend to have low participation rates (OECD, 2019[107]). In Viet Nam, in addition to low levels of incomes of self-employed workers, a significant number of unpaid family workers make the challenge more complicated. Indeed, despite recent increases, the participation rate is still very low (3.7% of total self-employed workers in 2020). In principle, exclusion of a large share of self-employed workers (in Viet Nam, it accounted for more than 50% of total employment and 30% in 2020, including and excluding agriculture respectively) from social security weakens its risk sharing function. The coverage of contributory pensions for self-employed workers varies from country to country. Not all countries have compulsory public pensions for self-employed workers. Nevertheless, recent changes in labour markets, notably the rise of dependent self-employed workers, increases the necessity of enhancing the inclusiveness of public pension systems. Indeed, more countries have come to include self-employed workers in their compulsory systems (OECD, 2019[107]). Germany has mandatory social insurance for artists, to which workers, contracting “employers” and the government contribute with the share of 50%, 30% and 20% respectively (OECD, 2018[100]).

In Viet Nam, strengthening the existing first-tier social pension with universal flat-rate benefits could serve as a more adequate public pension system for self-employed workers. Expanding compulsory coverage of the public pension to self-employed workers with subsidies to low-income individuals is one option for Viet Nam. Nevertheless, a large number of unpaid family workers (more than 25% of self-employed workers in 2020) would be left behind as they have no income. In this regard, tax-funded social assistance benefits can fill this gap (OECD, 2019[107]). In Viet Nam, currently, people aged over 80, who are not eligible for the public pension or other old-age social protection programmes, are entitled to a tax-funded old-age pension (VND 360 thousand per month). Those who are aged over 60 and poor can receive an additional allowance (the adjustment ratio is 1.5 for aged 60-80 and 2 for aged over 80). Expanding the old-age social pension for aged over 80 to all retirees who have reached pensionable ages but cannot receive the public pension needs to be considered (Tsuruga, Da Cunha and Nguyen, 2019[113]). This reform can provide social pensions for self-employed workers but will also be able to complement the whole old-age safety nets during the transition time when the compulsory pension expands its coverage to a critical mass of employees, as the social pension can provide support to retired employees who are not covered by the compulsory pension due to various reasons. Preliminary calculations suggest that the cost of this reform would be modest, while it could improve incomes of a number of elderly people (Table 1.7).

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Previous studies suggest that income inequality is determined by various economic factors (Niehues, 2010[114]). Simple empirical work was done for this report by using panel data of 192 countries and regions across the world for the period between 2009 and 2019. As income inequality changes very slowly over time, dynamic panel model was utilised similar to previous studies.

Regression results suggest that GDP per capita, ageing, social spending and the employment rate of women would be likely to be associated with levels of the Gini coefficient of disposable income, and difference between the Gini coefficients of market and disposable income would be likely to be associated with GDP per capita and social spending (Annex Table 1.A.1).

Tackling informality would be conducive to improving the efficiency of social spending. Prevalence of informal employment would require more social spending to reach out to people who are not covered by formal labour market safety nets or social security. Nevertheless, cross-section data show that social spending has negative correlation with the rate of informal employment (Annex Figure 1.A.1). This would be caused by country specific factors, such as the efficiency of government institutions or strengths of revenue collection. Revenue collection would be less efficient if the incidence of informal employment is high. Social spending itself may be affected by levels of fiscal revenues. The effect of the prevalence of informal employment on social spending was estimated by using difference-in-difference (DID) model. Estimation results suggest that a high rate of informal employment would be likely to be associated with more social spending after excluding country specific factors (Annex Table 1.A.2).

Among other parameters, such as life expectancy, the age when a person permanently leaves the labour market provides important information for pension reform. Based on the method introduced in (Scherer, 2002[115]), the average effective retirement age for some Southeast Asian countries, including Viet Nam, was calculated for this report.

An average effective retirement age is the average age of withdrawal from the labour force (for those who stayed in the labour force until then), and can be estimated by using the labour force participation rate by age group. A probability of leaving the labour force for each age group is calculated as a ratio of the labour force participation rates between two consecutive age groups (5-year band). It is assumed that no one retires at the age of 40-44, and all people withdraw from the labour force by the age of 80-84. Due to the limited data availability, “static” estimates were calculated, assuming that the age-specific labour force participation structure does not change over time.

Preliminary results suggest that those who are in the labour market retire at an older age than the statutory pensionable age. This is partly because many people are not covered by the public pension and they are likely to continue working until the later stage of their life. Indeed, Indonesia, where the pension coverage is the lowest among the four countries, has the highest effective retirement age. The effective retirement age for men is higher than women’s. The effective retirement age cannot capture the situation of those who do not enter the labour market. Low labour participation rates of working–age women in Indonesia and the Philippines suggest that there may be a large gap in old-age incomes among women.

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