Vietnam’s Path to Becoming a High-Income Economy by 2045

Vietnam stands on the brink of a transformative economic journey, targeting the ambitious goal of becoming a high-income nation by 2045. With a remarkable success story rooted in global trade over the past three decades, the country finds itself in a critical phase—one where merely riding the wave of export-driven growth will no longer suffice. Over the next twenty years, Vietnam must triple its income per capita, necessitating structural reforms and substantial investments to elevate its position in global value chains (GVCs).

The Role of Global Trade in Vietnam’s Economy

One of the striking attributes of Vietnam’s economy is its notable reliance on global trade. The country’s export growth is unparalleled among emerging markets, benefitting significantly from foreign investments and a rapidly growing consumer market. In 2021, exports accounted for a staggering 73% of Vietnam’s GDP, a testament to its integration into the world economy. However, as domestic firms capture a decreasing share of this pie, with local participation plummeting from 35% to 18% since 2009, it becomes imperative for Vietnam to strategize how it connects its economy to the larger global marketplace.

Strategic Policy Reforms

Achieving its lofty ambition requires five interconnected policy reforms aimed at enhancing participation in GVCs.

1. Deepening Trade Integration

Vietnam has established a network of trade agreements covering nearly 90% of the world’s GDP, yet it faces risks from global trade tensions. The focus must shift towards not just reducing tariffs but also addressing non-tariff barriers, liberalizing services trade, and leveraging the growing Asian middle class. Key initiatives include:

• Going beyond tariff reduction to tackle non-tariff obstacles.
• Strengthening regional services trade and commitments on digital trade.
• Actively participating in shaping trade frameworks to reflect Vietnam’s interests.

2. Connecting Domestic Value Chains

With foreign firms dominating exports, only a small fraction of Vietnam’s economic output is retained domestically. To combat this, Vietnam must create stronger links between domestic and export-oriented firms. Key strategies include:

• Enhancing the business environment through reduced compliance costs and digital transformation.
• Implementing supply chain finance to support local businesses.
• Developing supplier programs to stimulate domestic capacity.

3. Upgrading to High-Value Activities

The current focus on final assembly limits Vietnam’s ability to diversify its exports. Services represent a mere 12% of total exports, starkly contrasting with countries like South Korea. Vietnam needs to transition towards higher value-added activities. Essential actions include:

• Removing barriers to services trade, including enhancing access to capital.
• Rationalizing data flow regulations to facilitate international transactions.
• Strengthening protections for intellectual property to encourage innovation.

4. Developing a High-Skilled Workforce

As Vietnam’s economy evolves, so does its need for skilled labor. A predominance of low-skilled workers could become a constraint as high-skilled roles gain prominence. Currently, only 5% of the manufacturing workforce falls into the high-skilled category. To rectify this, Vietnam should focus on:

• Expanding high-skilled manufacturing roles critically.
• Boosting tertiary education levels and investments in STEM fields.
• Strengthening collaborations between industry and academia to align educational outcomes with market needs.

5. Transitioning to Low-Carbon and Resilient Production

Vietnam’s manufacturing sector has a troubling reliance on carbon-intensive production processes. As climate change escalates, so too do the risks associated with Vietnam’s concentrated manufacturing base in vulnerable geographic areas. A shift toward greener practices is essential and requires:

• Reducing non-tariff barriers to environmental goods.
• Investing in green energy infrastructure.
• Implementing electricity tariff reforms alongside carbon pricing mechanisms.

Ensuring Inclusive Opportunities in Growth

For Vietnam to transition equitably to a high-income economy, it is crucial that opportunities are accessible to all segments of the population. This means:

• Enhancing labor mobility and reforming the residency systemfor more fluid workforce movements.
• Increasing access to vocational training and information for job seekers.
• Supporting disadvantaged groups to facilitate skills acquisition and adaptation to market changes.

The Way Forward

Drawing on its historical context, from the Doi Moi reforms to its admission into the WTO, Vietnam possesses the capacity for radical change. Realizing its goal of high-income status by 2045 will necessitate a bold commitment to the outlined reforms, guided by an inclusive vision that enables every Vietnamese citizen to partake in the newfound prosperity. Through decisive action and effective implementation, Vietnam stands poised to unlock its full economic potential, ensuring a prosperous future for its people.