Title page 1

Contents 5

Foreword 4

Basic statistics of Viet Nam, 2023 8

Executive Summary 9

1. Strengthening the macroeconomic foundations for growth 18

1.1. Growth has returned to its pre-pandemic pace 19

1.2. Looking ahead, growth is projected to weaken 21

1.3. Keeping inflation low while improving the monetary policy framework 24

1.3.1. Monetary policy should remain vigilant to potential inflationary pressures 25

1.3.2. Improving the monetary policy framework 26

1.4. Addressing financial-sector risks and improving resource allocation 29

1.5. Fiscal challenges include revenue mobilisation and a better fiscal framework 34

1.5.1. Moving towards a neutral stance while standing ready to provide support if needed 34

1.5.2. Upcoming spending needs will challenge longer-term debt sustainability 35

1.5.3. Raising government revenues to meet increasing spending needs 39

1.5.4. Strengthening the fiscal framework and budget process 42

References 46

2. Towards more inclusive growth 48

2.1. Viet Nam has reduced poverty and contained inequality, but several groups lag behind 49

2.2. Access to social protection could be further improved 52

2.2.1. Expanding pension coverage could further reduce old-age poverty 53

2.2.2. Improving cash transfers to protect vulnerable households 55

2.3. Reducing barriers to formal employment 55

2.3.1. High social security contributions likely encourage informality 58

2.4. Access to public services could be improved 60

2.4.1. Primary education is nearly universal, but secondary access remains incomplete 61

2.4.2. Access to healthcare is almost universal, but with high out-of-pocket payments 62

2.5. Women participate actively in the labour market, but not in senior positions 63

2.6. Achieving an equitable transition to a low-carbon economy 64

References 67

3. Unlocking low-carbon economic growth 70

3.1. Viet Nam is acting to mitigate and adapt to climate change 71

3.2. The energy mix is changing, but not enough to reduce emissions 72

3.3. Climate actions include both price-based and regulatory measures 74

3.3.1. Decarbonisation efforts would benefit from more effective coordination 74

3.3.2. Carbon prices implied by current environmental protection taxes could be raised 75

3.3.3. The implementation of domestic carbon markets should be accelerated 77

3.3.4. Environmental regulations should be more stringent to complement carbon markets 78

3.4. Decarbonising electricity generation will be key for emission reductions 79

3.4.1. Coal remains the main source of electricity generation 80

3.4.2. Stronger competition in renewable electricity markets 84

3.4.3. Renewable investment incentives could be strengthened 84

3.4.4. Green finance mechanisms can help to finance massive investment needs 85

3.5. Reducing emissions from ground transportation 87

3.6. Adaptation investments are needed to reduce environmental damages 89

References 92

4. Harnessing trade and investment flows to boost productivity 96

4.1. Viet Nam aims to achieve high-income status in two decades 97

4.2. The positive impact of FDI and trade on the Vietnamese economy 99

4.3. Productivity growth in Viet Nam has outpaced its peers, but the level remains relatively low 102

4.4. Sustaining inflows of foreign direct investment to Viet Nam 105

4.4.1. Easing restrictions on foreign direct investment 106

4.4.2. Improving infrastructure 108

4.4.3. Easing the burden of licenses and regulation on foreign firms 109

4.5. Better leveraging foreign direct investment and international trade to boost productivity 109

4.5.1. The positive impact of FDI is limited by the low domestic content of exports 110

4.5.2. Policies to strengthen the links between foreign-owned firms and local firms 110

4.6. Scaling up domestic firms to boost connections with MNEs 125

4.6.1. Addressing the shortage of SME financing 126

4.7. Improving the allocation of resources 128

4.7.1. Reducing the role of state-owned enterprises and improving their governance 129

4.8. Improving economic governance and fighting corruption 131

References 135

Tables 7

Table 1. Growth has held up well 11

Table 1.1. Macroeconomic indicators and projections 22

Table 1.2. Low-probability events that could lead to major changes in the outlook 24

Table 1.3. Indicative fiscal costs (-) and revenues (+) over a horizon of 3-5 years 37

Table 1.4. Illustrative impact of selected structural reforms on GDP per capita 38

Table 1.5. Past Recommendations on macroeconomic policies and the financial sector 44

Table 1.6. Recommendations on macroeconomic policies (Key recommendations in bold) 45

Table 2.1. Past Recommendations on Inclusive Growth 52

Table 2.2. Social insurance, health insurance and unemployment insurance rates 58

Table 2.3. Recommendations on more inclusive growth (Key recommendations in bold) 66

Table 3.1. Past recommendations on green growth 72

Table 3.2. Viet Nam's environmental protection tax has been reduced 76

Table 3.3. Policy recommendations from this chapter (Key recommendations in bold) 91

Table 4.1. Past recommendations on policies to boost productivity and actions taken 129

Table 4.2. Past recommendations on anti-corruption policies and actions taken 131

Table 4.3. Table of Recommendations (Key recommendations in bold) 134

Figures 6

Figure 1. Viet Nam's growth has outperformed peers 10

Figure 2. Reducing high social security contributions would encourage formal jobs 13

Figure 3. Carbon emission from coal-fired power plants are increasing with electricity demand 14

Figure 4. Viet Nam's share in world goods trade has risen 15

Figure 1.1. Recent macroeconomic developments 19

Figure 1.2. Exports of goods by destination and products 21

Figure 1.3. Headline and core inflation have fallen 21

Figure 1.4. The number of foreign tourists to Viet Nam is approaching the pre-COVID 19 peak 23

Figure 1.5. Viet Nam is deeply integrated into the international trading system 24

Figure 1.6. Domestic credit to the private sector has risen sharply while the policy interest rate has fallen 25

Figure 1.7. Vietnam's exchange rate has depreciated while the capital balance has turned negative 26

Figure 1.8. Viet Nam's external debt is not high while reserves cover three months of imports 27

Figure 1.9. Viet Nam's private debt has grown rapidly, led by the corporate sector 30

Figure 1.10. The property and construction sector accounts for a third of corporate sector debt 31

Figure 1.11. Viet Nam's non-performing loans have risen to high levels 32

Figure 1.12. Capital adequacy ratios remain weak, especially in state-owned commercial banks 33

Figure 1.13. Bond issuance has slowed sharply, while real estate companies have high default rates 34

Figure 1.14. Viet Nam has reduced government spending and its budget deficit since the mid-2010s 35

Figure 1.15. The elderly dependency is currently low, but will rise sharply by mid-century 36

Figure 1.16. Government spending in Viet Nam is less than half of the OECD average 36

Figure 1.17. Government debt is below ASEAN peers and has declined since 2015 37

Figure 1.18. The expected rise in public social spending calls for offsetting fiscal measures 38

Figure 1.19. Viet Nam's tax revenue has remained steady at close to 20% during the past 20 years 39

Figure 1.20.The composition of Viet Nam's tax revenue differs from the OECD average 40

Figure 2.1. Poverty indicators 49

Figure 2.2.Income inequality has retreated 50

Figure 2.3. The tax system does little to reduce poverty 51

Figure 2.4. Labour force participation rates have remained high, with more youths in education 53

Figure 2.5. Informality is gradually declining 56

Figure 2.6. Informal employment is high in agriculture and retail trade, 2023 57

Figure 2.7. Social security contributions generate sizeable government revenues, 2022 59

Figure 2.8. Informality in Colombia declined in the aftermath of a reduction in payroll taxes 60

Figure 2.9. People with low education and those living in rural areas receive lower incomes 61

Figure 2.10. Full enrolment in primary education, rising enrolment in secondary education 62

Figure 2.11. Viet Nam's gender pay gap is low 64

Figure 3.1. Viet Nam's conditional pathway implies a lower carbon footprint 71

Figure 3.2. Electricity generation is the main source of GHG emissions 73

Figure 3.3. Fossil fuels continue to dominate Viet Nam's energy mix 73

Figure 3.4. CO₂ emission intensity is declining in many countries, but not in Viet Nam 74

Figure 3.5. Environmental regulations remain less stringent than in OECD economies 79

Figure 3.6. Coal-fired powerplant generation and emissions keep on rising fast 80

Figure 3.7. Viet Nam's consumption of coal exceeds its production 81

Figure 3.8. Viet Nam has a considerable renewable energy potential 81

Figure 3.9. Viet Nam has elaborated concrete plans to expand low-carbon electricity generation 83

Figure 4.1. Rapid development was supported by FDI inflows and international trade 97

Figure 4.2. Viet Nam's ambitious target to achieve "high-income status" by 2045 98

Figure 4.3. The stock of inward FDI has increased at a rapid pace since 2007 99

Figure 4.4. Wages remain relatively low compared to ASEAN peers 100

Figure 4.5. China accounted for the largest share of investment projects in 2023 100

Figure 4.6. Participation in international trade and GVCs boost firms' productivity and wages 101

Figure 4.7. FDI inflows have helped to boost the share of manufacturing in the economy 102

Figure 4.8. Buoyant investment has accounted for most of output growth since 1985 103

Figure 4.9. Labour productivity growth exceeds peer countries but the level remains relatively low 105

Figure 4.10. The positive demographic dividend recorded during 1995-2020 will disappear 105

Figure 4.11. Viet Nam's FDI restrictions are significantly above the OECD average but close to other ASEAN countries 107

Figure 4.12. Private investment in transportation infrastructure is relatively low in Viet Nam 109

Figure 4.13. Foreign value-added in exports is high but participation in global value chains is low 110

Figure 4.14. Production workers account for about 85% of employees in the export sector 111

Figure 4.15. Vietnamese students performed well in the 2022 OECD PISA test 112

Figure 4.16. Workers' average years in school rose rapidly but remain low 113

Figure 4.17. The share of tertiary graduates and enrollment is low 114

Figure 4.18. Government spending on education is relatively low 115

Figure 4.19. Viet Nam is the 10th-largest global exporter of semiconductors 117

Figure 4.20. Increased employer-based training and R&D could promote innovation 118

Figure 4.21. Intellectual property rights protection in Viet Nam is relatively low 121

Figure 4.22. Domestic services' value added embedded in exports remains low 122

Figure 4.23. Barriers to trade in services remain very high in Viet Nam 123

Figure 4.24. Small firms in Viet Nam are less likely to participate in global value chains and export 126

Figure 4.25. Access to finance is a major concern for Vietnamese firms 127

Figure 4.26. The significant fall in the productivity of capital indicates resource misallocation 128

Figure 4.27. State-owned enterprises play a large role in Viet Nam 130

Figure 4.28. Corruption measures show improvements but also scope for further progress 133

Boxes 7

Box 1.1. The transformation of monetary and foreign exchange frameworks in Poland and Czechoslovakia 29

Box 1.2. Improving tax expenditure transparency 42

Box 2.1. Viet Nam's statistics on labour, income and household welfare 51

Box 2.2. Colombia's 2012 tax reform and non-wage labour costs 60

Box 3.1. Climate Change Councils 75

Box 3.2. Interplay between mandatory and voluntary carbon markets 78

Box 3.3. UK restrictions on the use of polluting vehicles 89

Box 4.1. Viet Nam and Samsung: developing a synergistic and symbiotic relationship 104

Box 4.2. Viet Nam's semiconductor industry 117

Box 4.3. Meister schools in Korea 118

Box 4.4. Innovation vouchers in the Netherlands 119

Box 4.5. Viet Nam's Programme on the Development of Supporting Industry for 2016-25 124

Box 4.6. Supplier development programmes in Chile and Costa Rica 125