Vietnam’s shift toward a new economic model

In WB's view, Vietnam should shift its growth model toward more efficiency, following the successful structural change in countries such as the Republic of Korea between the 1980s and 1990s.

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The Vietnamese government and the WB together have been studying how this new model might be structured in the future. Between 2016 and 2020, three major diagnostics were produced: the Systematic Country Diagnostics, the Vietnam 2035 report, and the Vibrant Vietnam report. The government, with the support of the development partners community, in 2020 produced the country’s Socio-Economic Development Strategy (SEDS) for 2021–2030, which was endorsed by the Vietnam Communist Party Congress in February 2021. The main common message of these studies is that Vietnam should shift its growth model toward more efficiency, following the successful structural change in countries such as the Republic of Korea between the 1980s and 1990s.

This international experience has demonstrated that the road from low to middle income occurs mainly through the accumulation of physical and human capital and the use of natural resources, but the transition from middle to high income is driven by the efficient use of new and existing assets and resources, including human resources. Further efficiency will help generate the necessary productivity gains in outputs and will lead to improvements in quality that are expected by a more sophisticated middleclass population. These studies also give greater emphasis to more efficient uses of natural capital and strengthening market-based institutions.

There are multiple ways to analyze how the Vietnamese economy can become more efficient, but the wealth asset framework, which was used in the recent Vibrant Vietnam report, provides a simple organizational framework. It defines national wealth accumulation as the combination of a country’s productive, physical, human, and natural capital.

There is near consensus among the government and development partners on what Vietnam’s priorities should be to optimize its wealth accumulation over time. WB said the objective is to improve the efficiency of each of the four categories of capital mentioned above, starting with productive capital. Efficiency gains should be derived from the entry or development of competitive firms and the exit of noncompetitive ones, as this mechanism will ensure the allocation of resources to the most productive and innovative firms. This can only happen in a supportive business environment that facilitates access to infrastructure and public services, access to finance, and innovation, and that provides transparent regulations and legal protection to ensure healthy competition.

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"Improving physical capital, beyond the development of new and modern infrastructure, will require improvements in the efficiency of public investment management, including in the operation, maintenance, and use of existing public assets." This will raise the quality of services that the infrastructure provides. Better public investment planning and coordination are also necessary to optimize synergies between sectors and across regions, including between urban and rural areas and between domestic and global markets. WB said that priority should be given to the provision of quality infrastructure through partnerships with the private sector and more efficient state-owned enterprises (SOEs)", WB said.

With regard to human capital, Vietnam scores well on basic education, but advanced university level and vocational- technical skills and social protection policies are underdeveloped for a middle-income economy. Further efficiency in human capital will also be achieved by removing barriers faced by those entering the labor market or suffering from discrimination or limit ed information during their education and job search, including ethnic minorities and women- not just for reasons of equity but also for economic efficiency as the relative size of the labor pool shrinks. While Vietnam has almost achieved universal health coverage, the quality of health care requires greater attention by the authorities, especially in view of the rapidly aging population (about 15 percent of the total population is projected to be over 65 by 2030 compared to only 8 percent in 2020).

According to the WB, achieving efficiency gains in natural capital would necessitate significant progress in both sustainability and resilience, as Vietnam lags behind many of its peers.Sustainable development involves a shift from liquidating natural assets for short-term growth to using these resources far more efficiently. It will also require a transition toward a low-carbon economy, with many opportunities for more effective natural resource management, stricter pollution control, and preparing for inevitable climate change impacts.

"Vietnam’s private sector will need to play a strong role in mobilizing finance to fund the country’s evolution towards a more sustainable growth model and help drive innovative solutions to de-carbonize business activities and adapt to the changing climate", WB stressed. According to the 2018 World Bank report, The Changing Wealth of Nations, countries that manage these natural assets carefully are able to move up the development ladder—investing more and more in manufactured capital, infrastructure, and "intangible capital," such as human skills and education, strong institutions, innovation, and new technologies.