Vietnam’s economy has come a long way since the Vietnam war ended 50 years ago, leaving an already poor country in ruins. At first the victorious communist regime tried to “liquidate” the private sector. Shortages, rationing and hunger followed. In the 1980s the Soviet Union’s economic troubles meant less aid for Vietnam, exacerbating the malaise. Annual inflation reached 454% and half of Vietnamese were living in poverty. The death of one of Mr Lam’s predecessors in 1986 paved the way for a new general secretary to legalise private enterprise and embrace market forces.
Renewing the renewal
Doi moi or “renovation” has been an astonishing success. Over the past 40 years GDP per person has increased 18-fold and poverty has plummeted. Foreign investors, attracted by Vietnam’s cheap labour, political stability (it is a single-party, authoritarian state), proximity to Asian suppliers and generous incentives for manufacturing, have built lots of factories assembling consumer goods for export. A trade deal with America, accession to the World Trade Organisation and, more recently, multinationals’ desire to diversify away from China have provided further reasons to invest.
Yet the forces that have propelled Vietnam’s boom are slowing or reversing. The pool of cheap workers is dwindling and wages are rising. Instead of largely free trade with America, Donald Trump is threatening tariffs of 46%. It is getting harder to maintain good relations with both America and China, Vietnam’s second-biggest trading partner. And there has been relatively little spillover from the foreign-owned factories to the rest of the economy. Vietnam risks becoming stuck as an assembly hub, adding little value to components manufactured elsewhere. Shifting onto a more promising developmental path will not be easy—and Mr Lam is staking his tenure on it.
Foreign factories are the linchpins of Vietnam’s recent prosperity. Annual foreign direct investment (FDI) reached $19bn in 2023. Foreign enterprises accounted for a fifth of GDP that year, up from 6% in 1995. The biggest is Samsung, whose complex in Pho Yen, a factory town near Hanoi, employs some 160,000 workers, who assemble the bulk of Samsung’s smartphones. The FDI boom, in turn, has produced a surge in exports, which have risen eight-fold since 2007, to $385bn a year. Foreign firms account for just 10% of employment and 16% of investment, but 72% of exports. Samsung alone accounts for 14%.
Yet Vietnamese workers are simply assembling parts made, by and large, in China or South Korea. Even as export volumes have ballooned, the average unit value has stagnated (see chart 1). Vietnam adds less value to its exports than do nearby Malaysia and Thailand. Because final assembly is labour-intensive, productivity is low. Vietnam’s output per hour worked is 37% below the average for upper-middle-income countries in Asia. Over 90% of jobs in manufacturing require few or no skills.
Local firms struggle to meet the standards necessary to take part in global supply chains. Multinationals in Vietnam source the lowest share of local inputs of any country in East and South-East Asia. Despite Samsung Electronics’ huge presence in Vietnam, none of its core suppliers is a homegrown Vietnamese firm, noted a recent article in Guancha, a Chinese news outlet, that was widely read among the Vietnamese elite. The small number of Vietnamese firms that do supply global manufacturers mainly provide simpler materials, such as cardboard and plastics.
Meanwhile, Vietnam has reached the “Lewis turning point”, at which developing economies exhaust their rural labour surpluses and wages begin to rise swiftly. Between 2014 and 2021, over 1m agricultural jobs disappeared each year despite a growing labour force; in 2022-23 the pace decelerated to 200,000. Labour costs in manufacturing are already higher than in India or Thailand and are set to climb by a further 48% by 2029, according to the Economist Intelligence Unit, our sister company. Vietnam could soon end up too expensive for labour-intensive manufacturing yet too technologically unsophisticated to do much else—a classic middle-income trap.
Other obstacles to growth loom. It is not just unproductive rural workers that Vietnam is running short of: the total workforce aged 15-64 will peak around 2030, according to Vu Thanh Tu Anh and Dwight Perkins, two economists. Ho Chi Minh City and Hanoi, which together generate over a quarter of Vietnamese output, are among the most flood-prone cities in the world. The rich farmland of the Mekong Delta, Vietnam’s breadbasket, is shrinking by 500 hectares a year. Most threatening of all are Mr Trump’s tariffs: Michael Kokalari of VinaCapital, an investment firm in Ho Chi Minh City, estimates that they would reduce long-run growth by 2.5 percentage points a year.
Mr Lam evinces a keen understanding of these challenges. “Do not let Vietnam become an assembly-processing base… while domestic enterprises learn nothing,” he urged in January. He wants to make local firms more innovative and productive. Earlier this month the Politburo approved a big tax break for spending on research and development. It also adopted special incentives for local firms working with foreign investors. The private sector, Mr Lam says, is “the most important driving force of the national economy”. He wants to lift its share of output to 70%, from around 50% today.
Life is not easy for Vietnam’s private sector, doi moi notwithstanding. Regulations are complex, enforcement is opaque and the state dominates banking and so controls access to credit, too. All this tends to benefit big, politically connected businesses. Rigged bids for public procurement, sweetheart land deals and cut-price loans are rife. Successful businessmen, in turn, are expected to contribute to society. Moving capital outside Vietnam is frowned upon. In 2021 Nguyen Thi Phuong Thao, the billionaire founder of Vietjet, a private airline, promised Linacre College at Oxford University £155m ($215m at the time) to rename itself Thao College. The donation never materialised, presumably because the government blocked it.
Pham Nhat Vuong, Vietnam’s richest man, made his first fortune hawking instant noodles in Ukraine in the 1990s. He sold his restaurant business to Nestlé and invested the proceeds in Vietnam’s luxury property market. His company, Vingroup, soon became the country’s biggest developer. It then parlayed that business into a sprawling conglomerate, which does everything from designing smartphones to setting up schools. A subsidiary called VinFast is South-East Asia’s biggest homegrown electric-vehicle maker. It sold nearly 100,000 EVs in 2024.
Vietnam’s politicians admire South Korea’s chaebols and would like local conglomerates to evolve in a similar manner. But though the state showered chaebols with largesse, its support was time-bound and tied to success in export markets. In 1999 politicians allowed Daewoo Group, then the third-biggest chaebol, to collapse.
None of Vietnam’s conglomerates, in contrast, is globally competitive, in part because the state holds rivals at bay. Vietnam’s EV charging network is compatible only with VinFast’s cars. Yet VinFast has lost $9bn since 2021 producing EVs, many of which are sold to other businesses owned by Vingroup. The government is considering shoring up Vingroup by giving another subsidiary, VinSpeed, a $60bn contract to build a high-speed railway.
As well as exposing conglomerates to more competition, Mr Lam will have to find ways to invigorate Vietnam’s smaller firms. Lacking the political clout of state-owned enterprises, conglomerates and foreign investors, they have trouble getting access to land, credit and permits. Banks tend to insist on property or durable-goods inventory as collateral for loans, says Chad Ovel of Mekong Capital, a private-equity firm in Ho Chi Minh City. Few are willing to lend against projected future cashflows.
Small businesses also face a shortage of talent. Partly this is because the state hoovers it up: over half of state employees have tertiary degrees, versus around 15% at foreign-invested firms and 5% at domestic firms. But the bigger reason is the education system. Attainment lags behind other countries in Asia (see chart 2). Unlike China, Singapore or South Korea, Vietnam has no world-class universities, and its best institutions rank below their counterparts in India or Malaysia. Most Vietnamese universities are state-run and the curriculum is watched closely by communist apparatchiks. Even engineering students must spend as much as a quarter of their time taking mandatory classes on Marxism-Leninism and Ho Chi Minh thought, complains a Vietnamese academic.
Despite ambitions to build a semiconductor industry, Vietnam has only 5,000 or so chip engineers. By 2030 it will need 15,000 chip designers and 10,000 assembly engineers, according to a recent forecast. There are also too few linkages between universities and industry, such as internship programmes, says Thomas Vallely, the founder of Fulbright University Vietnam.
Improving life for small businesses will also require a leaner, more capable state. This is where Mr Lam has been boldest. He has abolished five ministries and eliminated an entire layer of the bureaucracy, at the level of Vietnam’s 705 districts. He is reducing the number of provinces from 63 to 34. All this is eliminating 100,000 jobs from the civil service. He has decreed that there should be a 30% reduction in red tape.
At the same time Mr Lam wants to build administrative capacity. He has called for higher pay for capable civil servants. Some of his changes seek to reverse the legacy of “blazing furnace”, an anti-corruption campaign initiated by his predecessor. Over 330,000 party members were prosecuted or punished and tens of thousands resigned. The effect was to make bureaucrats drastically risk-averse. Mr Lam has instead sought to engender an atmosphere of tolerance of mistakes.
Stepping back to get ahead
Deeper political questions remain unanswered. For Vietnam to grow quickly, the state must become not just more efficient, but also less controlling. Take the digital economy, one of Mr Lam’s highest priorities. Despite a shortage of software engineers, Vietnam has a surprisingly peppy startup scene. Yet the government censors the internet and keeps tech firms on a tight leash. The state-owned firm that dominates power generation struggles to supply reliable electricity. Construction began in April on Vietnam’s first “hyperscale” data centre. But it is not being built by a giant of the industry like Amazon or Alibaba. Instead Viettel, another state firm, is in charge. A new R&D centre for AI and semiconductors in Danang has been set up by FPT, a conglomerate that will soon be majority-owned by Vietnam’s Ministry of Public Security, which Mr Lam used to lead. It is hard to imagine Vietnam becoming a digital powerhouse with the government so firmly in control of so much of the digital economy.
For now, Mr Lam’s position seems secure. He has elevated allies to important posts and is pushing through sweeping reforms with little discernible resistance. A party conference in January, at which he will seek to extend his tenure, may give dissenters a chance to weaken his position, however. Mr Lam has shown he understands the task ahead of him. He has yet to prove he is capable of completing it.
