Institutional Reform - Driving Force for Private Sector Development

The private sector currently contributes over 50% of the country’s GDP

Eliminating institutional bottlenecks

According to the recently released “Vietnam 2045: Breaking Through – Institutions for a High-Income Future” report by the World Bank, Vietnam is undergoing a large-scale institutional reform - a rare, generational shift. The consolidation of ministries and sectors, along with plans to downsize the state apparatus, marks a major change for a country long known for its cautious approach to reform. Building on the momentum of a major anti-corruption campaign, these institutional changes reflect a clear commitment to removing bottlenecks that could slow the country’s development.

At the Government’s special law-making session in May 2025, Prime Minister Pham Minh Chinh once again called for focusing resources and determination to essentially eliminate legal “bottlenecks” by the end of 2025. He also stressed the need to fundamentally renew the approach to law-making - shifting from a “management” mindset to a “service-oriented” one, and from passive to proactive, flexible thinking to support development.

Since the Doi Moi (Renewal process), Vietnam has made steady progress in areas such as access to information, citizen participation, property rights, decentralization, governance institutions, private sector growth, and accountability mechanisms. The economy has moved closer to market-based institutions, though the state still plays a large role in some sectors. While these institutional changes have driven investment in infrastructure and improvements in human capital, they have also revealed signs of inertia, limiting their capacity to support future growth. The report highlights that many of Vietnam’s most urgent challenges are institutional. Despite many reform efforts, businesses still face burdensome pre-audit administrative procedures. Public investment processes, though more orderly, remain slow, rigid, and difficult to adapt to changing conditions. Decentralization has increased local control over public spending, but it can also result in wasteful competition between provinces and imbalances in infrastructure provision.

Significant efforts to improve the law-making process have delivered some positive outcomes, but progress remains slow and incomplete. Meanwhile, anti-corruption measures - though increasingly routine and shifting public perception - have also made many decision-makers cautious, leading to delays in making necessary decisions.

The World Bank assesses that Vietnam needs another Doi Moi - a major institutional push to reshape the State’s role toward setting rules and providing public goods that support business development. The momentum for this transformation already exists; the challenge now is to maintain that momentum and advance reforms to sustain growth at levels needed to realize Vietnam’s long-term ambitions.

The Government has supported businesses by reforming institutions and improving the investment environment

Reducing transaction costs for businesses

According to the World Bank, Vietnam’s institutions must adapt to the growing influence of private sector enterprises in the economy. Over the past 20 years, the share of fixed assets held by state-owned enterprises (SOEs) has fallen from 51% to 14%, while the non-state sector’s share has tripled from 20% to 61%. Private and foreign-invested enterprises have expanded rapidly, significantly contributing to the country’s investment assets and driving impressive economic growth. They have also increasingly shouldered the responsibility of financing government operations. In 2005, SOE revenues were three times those of the non-state sector, but by 2023, they had fallen to half.

The report notes that market-making institutions - including those for property rights and contract enforcement - have developed over decades. While some challenges persist, such as in land administration, these generally do not hinder market operations. Likewise, market-stabilizing institutions, like those for monetary and fiscal policy, have largely maintained macroeconomic stability. Strengthening their independence and capacity remains essential, as all economies can face instability. Market-legitimizing institutions, such as social safety nets to protect vulnerable groups in a market-driven economy, are in place but need to be reinforced for long-term sustainability. Complementary market institutions deliver public goods the private sector typically cannot, while market regulatory institutions address policy goals such as managing externalities.

To continue supporting growth, the report argues that the state should focus more on setting clear rules - the regulatory environment - and providing public goods, rather than directly influencing economic decisions. Public investment is hindered by complex processes, long lead times, poor preparation quality, and cumbersome procedures for project adjustments. Many regulatory systems emphasize pre-audited administrative procedures; for example, the national database lists over 5,000 procedures for business licensing, which obstructs business development.

Therefore, Vietnam needs to improve the efficiency of public investment in both scale and quality, covering project selection, implementation, and monitoring. Completing the legal and regulatory framework will also make the business environment more transparent, stable, and predictable. Additionally, local governance should be enhanced through decentralization, greater accountability, and better coordination between provinces and cities.

In particular, Vietnam needs to build an effective, accountable civil service that is appropriately sized, better compensated, and backed by institutions ensuring due process, transparency, and independent oversight. International experience shows that countries escaping the middle-income trap and reaching high-income status have done so by consistently improving the quality of their institutions.