Vietnam Development Report (VDR) 2012: Market Economy for A Middle-income Country

January 12, 2012

The theme of this VDR is strengthening the market economy for a middle-income Vietnam. Vietnam can use the power of the market and the facilitating role of the state to chart a new course of development that is more efficient and equitable. This can be done by strengthening institutions, improving incentives and providing adequate information—labeled as the three “I’s” of the market economy.


Vietnam’s transition from a centrally planned economy to a market economy and from an extremely poor country to a lower-middle-income country in less than 20 years—is now a case study in many development textbooks. But Vietnam’s other transition—to becoming an industrialized and modern economy by 2020—has barely begun. The latest Socio-Economic Development Strategy (2011-2020) goes on to identify the country’s key priorities to meet this ambitious target: stabilize the economy, build world-class infrastructure, create a skilled labor force, and strengthen market-based institutions.

Meeting these aspirations will not be easy. The country has experienced bouts of macroeconomic turbulence in recent years—double-digit inflation, depreciating currency, capital flight, and loss of international reserves—eroding investor confidence. Rapid growth has revealed new structural problems. The quality and sustainability of growth remain a source of concern, given the resource-intensive pattern of growth, high levels of environmental degradation, lack of diversification and value addition in exports, and the declining contribution of productivity to growth. Vietnam’s competitiveness is under threat because power generation has not kept pace with demand, logistical costs and real estate prices have climbed, and skill shortages are becoming more widespread.

Though challenging, these aspirations can be achieved. The VDR 2012 argues that the root causes of the current problems lie in the country's incomplete transition to a market economy. Specifically, the report focuses on weak institutions, distorted incentives and inadequate information—labeled as the three “I’s” of the market economy—as the explanation for Vietnam's current tribulations. The report provides a number of ideas and suggestions to address these problems which can help to create a foundation to sustain rapid growth for Vietnam in the next 10 years. read more


A reading of the various resolutions of the Party Congress and the Party Central Committee suggests that Vietnamese leaders did not necessarily see a contradiction between the existence of a large state economic sector and a market-oriented economy. But in recent years, as the country appears to have veered toward a model of state capitalism in which the Economic Groups have enjoyed privileged access to factor inputs and a high level of operational autonomy, more questions have been raised about their usefulness. As a result, the National Assembly in one of its resolutions indicated that restructuring the SOEs will be a top priority of the government in the next Socio-Economic Development Plan, spanning 2011 to 2015.

The VDR 2012 discusses 10 reasons for reforming the SOEs sector and suggest a framework (called DREAM) as a remed. read more


Vietnam’s successful growth story has been driven primarily by rapid factor accumulation—physical and human capital—with productivity growth playing a secondary role. Equally important has been Vietnam’s ability to translate the high level of investment into basic infrastructure services, making the development process extraordinarily inclusive. But Vietnam’s investment regime, especially its public investment component, is being increasingly viewed in the last few years as unaffordable, inefficient and, therefore, unsustainable.

The VDR 2012 proposes four ideas to strengthen the effectiveness of public investment. read more


Vietnam has come a long way in the last 15 years in promoting the public availability of economic data and information. However, progress has been slower than expected due to the absence of a generalized law on access to information. The impact of weak transparency has been costly for Vietnam’s development.

Fiscal transparency plays a particularly critical role in Vietnam’s economic transition, given the public sector’s relatively big role in the economy. Fiscal management in Vietnam has become more complex over time. The government has made a good start in establishing the legal and institutional framework for fiscal transparency. However, with increased decentralization in recent years, the transparency of intergovernmental fiscal relations has gradually been strengthened.

Greater compliance with fiscal transparency principles could further improve fiscal management and analysis. read more