Vietnam’s economic rise over the past four decades has been nothing short of extraordinary. The country has undergone a rare “triple transition”: from central planning to a market economy, from import substitution to export-led integration, and from one of the world’s poorest nations to lower-middle-income status.
Few developing economies have moved with such speed and scale. From 1990 to 2020, Vietnam’s GDP grew at an average rate of 6.5 percent annually, lifting more than 40 million people out of poverty and turning the nation into one of Asia’s most dynamic exporters. The streets of Hanoi and Ho Chi Minh City, once marked by ration cards and shortages, now bustle with motorbikes, high-rise cranes, and the global symbols of consumption — from Nike shoes to Samsung smartphones, many of which are made within Vietnam’s borders.
But beneath this impressive story lies a growth model showing signs of fatigue. Bank credit, public investment, and foreign exports — the three engines that powered Vietnam’s leap forward — are now generating diminishing returns, greater instability, and structural vulnerabilities. As Vietnam pushes for 8 percent growth in 2025 and dreams of joining the high-income club by 2045, the foundations of its success appear increasingly fragile.
This article examines the pressures building within Vietnam’s economy: from the fragility of its banking sector to the limits of foreign-led exports, from the weakness of its private sector to the fiscal strains on the state. At the center lies a pivotal question: can Vietnam escape the development trap before the momentum of its extraordinary rise runs out?
Vietnam’s growth miracle has been inseparable from an aggressive expansion of bank lending. Between 2007 and 2010, credit grew by as much as 36 percent annually, peaking at an eye-watering 53.8 percent in 2007. This torrent of cheap money lubricated investment, boosted consumption, and helped Vietnam recover quickly from the global financial crisis.
But the price soon became clear. Inflation spiked to 23 percent in 2008 and 18.7 percent in 2011, eroding household savings and triggering public anxiety. Beneath the surface, banks were increasingly saddled with bad loans. By 2012, non-performing loans officially accounted for 4.9 to 8.8 percent of total lending, though independent estimates suggested much higher levels.
To contain the crisis, Hanoi created the Vietnam Asset Management Company (VAMC) in 2013 to mop up toxic assets. Reforms stabilized the sector, but at a cost: the system remains heavily state-dominated, credit allocation is often politically influenced, and financial discipline is weak.
The deeper issue is structural. Credit expansion has repeatedly been used as a shortcut to growth, but the productivity of capital is falling. The Incremental Capital-Output Ratio — which measures how much investment is needed to generate an additional unit of output — rose from 7.6 in 2016–20 to 8.5 in 2021–24. In plain terms, Vietnam is investing more to get less.
Today, as growth targets climb, policymakers are once again loosening monetary levers. Credit quotas are being relaxed, reserve requirements cut. The short-term effect will be to boost lending. The long-term risk is déjà vu: mounting bad debt, weakened banks, and the kind of systemic fragility that has derailed other emerging economies.
Vietnam’s financial markets remain in their adolescence. Beyond bank lending, the country has sought to diversify through bonds, equities, and insurance. Yet each of these pillars is either underdeveloped or unstable.
The most dramatic case was the corporate bond boom of 2018–22. Companies, particularly property developers, raised vast sums from retail investors amid weak oversight and absent domestic credit-rating agencies. When scandals erupted and defaults multiplied in 2023, confidence collapsed. Thousands of middle-class savers saw their wealth evaporate, underscoring the fragility of Vietnam’s financial architecture.
The stock market, though growing in visibility, remains classified as a “frontier market,” a reminder of its limited openness and liquidity compared to regional peers. The insurance sector contributes less than 1.5 percent of GDP, and private pensions or mutual funds — vital for long-term capital formation — barely exist.
Microfinance, which in countries like Bangladesh or Cambodia has empowered millions of small entrepreneurs, is strikingly underdeveloped. For Vietnam’s vast informal sector, this lack of access to capital is a choke point, trapping firms in low-productivity cycles.
In short, Vietnam’s financial ecosystem is not yet capable of supporting the sophisticated, innovation-driven economy it aspires to become.
If finance is one weak link, the private sector is another. Nearly 97 percent of Vietnam’s one million registered firms are micro or small enterprises. Medium-sized corporations — the firms most likely to scale up, innovate, and integrate into global value chains — are conspicuously scarce. Economists call this the “missing middle.”
The informal sector, employing millions, has been expanding but suffers from chronic low productivity, weak worker protections, and limited upward mobility. Meanwhile, state-owned enterprises (SOEs) retain dominant positions in strategic sectors, often enjoying preferential access to credit and land. This skews competition, discourages private investment, and perpetuates inefficiency.
Despite government pledges to prioritize private sector development, reform momentum has been selective. The current agenda sidelines SOE reform — arguably the most important step for leveling the playing field. Without deeper changes, Vietnam risks a dual economy: a vibrant but foreign-dominated export sector alongside a stagnant domestic private sector unable to pull its weight.
Vietnam’s global economic image rests on its export dynamism. Electronics, textiles, and footwear stream out of industrial parks to markets worldwide. In 2025, exports account for over 100 percent of GDP, an astonishing level even by Asian standards.
But here too lies a paradox. Roughly 72 percent of Vietnam’s exports come from foreign-invested enterprises (FIEs). Giants like Samsung, Foxconn, and Intel have made Vietnam a manufacturing hub, but the domestic content of these exports remains low. Local firms are largely confined to low-value tasks such as packaging, assembly, or logistics.
This dependency raises two risks. First, it exposes Vietnam to global shocks — from COVID-19 disruptions to geopolitical tensions that could reshape supply chains overnight. Second, it limits domestic value creation. Without stronger linkages between FIEs and Vietnamese firms, technology transfer and innovation remain elusive.
Vietnam has attracted record levels of foreign direct investment, but unless more domestic firms can climb the value chain, the benefits may plateau. Export growth alone will not guarantee resilience or inclusiveness.
One might expect that Vietnam’s rapid growth has translated into robust state finances. Yet the fiscal picture is fragile. A large share of government revenue comes from land-related taxes and fees, alongside excise taxes. Both sources are vulnerable to market fluctuations and cannot provide stable, long-term funding.
Meanwhile, current expenditures — particularly salaries, pensions, and subsidies — are rising. Attempts at institutional reform have focused on trimming payrolls, but without deeper reductions in state control over the economy, fiscal sustainability remains in doubt.
Vietnam’s foreign reserves have already dipped below the standard threshold of covering three months of imports, adding pressure on the dong, which continues to depreciate even as the US dollar weakens. The risk of a sudden external shock destabilizing fiscal and monetary stability is growing.
Despite these warning signs, Vietnam’s leadership has set an ambitious goal: sustaining 8 percent growth in 2025 and reaching double-digit growth in subsequent years. This pursuit of speed risks amplifying underlying weaknesses.
Monetary expansion is already fuelling bubbles in property and equity markets. Urban centers like Hanoi and Ho Chi Minh City are grappling with worsening air quality, traffic congestion, and environmental degradation. Industrial zones strain local ecosystems. These “costs of growth” are no longer peripheral; they are undermining quality of life and long-term competitiveness.
What Vietnam faces is not simply a cyclical slowdown but the deeper challenge of a development trap. For decades, the country’s formula — mobilizing capital, expanding exports, and leveraging cheap labor — delivered miracles. Today, diminishing returns are evident. Investment efficiency is falling, debt risks are rising, and environmental pressures are mounting.
The danger is that Vietnam becomes stuck in the middle-income trap: too wealthy to compete on ultra-cheap labor, but too underdeveloped to innovate, move up value chains, and build a resilient domestic economy.
The rise in the Incremental Capital-Output Ratio captures this reality. Each new dollar invested produces less growth than before. Without productivity gains — from innovation, education, governance, and institutional reform — growth targets will be met with more debt, more stress, and more fragility.
If the old model has run its course, what comes next? Economists point to three pillars Vietnam must prioritize:
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Strengthening the Private Sector
Vietnam needs to nurture its “missing middle.” That means reducing barriers to finance and land access, investing in R&D capacity, and leveling the playing field against SOEs. Small firms should have pathways to become medium, and medium firms to become large, creating a healthy ecosystem of competitive domestic enterprises. -
Deepening Financial Markets
Banking cannot remain the sole driver of growth. Vietnam needs credible credit-rating agencies, stronger regulatory oversight, and more developed capital markets. Insurance, pensions, and mutual funds can mobilize long-term savings for investment in infrastructure, green energy, and innovation. - Sustainability and Resilience
Growth targets should be recalibrated. Instead of chasing double digits, Vietnam should aim for stable, sustainable growth that balances economic dynamism with environmental stewardship and social equity. Renewable energy, urban planning, and green industries could become new drivers if properly incentivized.
At the heart of this transformation is a simple shift: from growth at all costs to quality growth. High-income status will mean little if Vietnam remains dependent on foreign firms, saddled with bad debt, or trapped in a polluted, low-productivity economy.
Vietnam’s extraordinary rise is a story of resilience, ambition, and policy pragmatism. But success has bred new challenges. The model that worked for decades now risks locking the country into fragility rather than freedom.
The crossroads is clear. One path continues the old playbook — cheap credit, foreign exports, high growth at any cost. The other demands harder choices: empowering domestic firms, deepening financial markets, reforming state enterprises, and embracing sustainability.
If Vietnam can muster the political will to walk the second path, it could not only escape the development trap but also chart a new model for emerging economies. If it clings to the first, the miracle may fade into memory.
