VIET NAM RISING Pathways to a High-Income Future 2 VIET NAM RISING Pathways to a High-Income Future ©2025 The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations and conclusions expressed in this work do not necessarily reflect the views of the World Bank and its Board of Executive Directors. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations and other information shown on any map in this work do not imply any judgement on the part of the World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of the World Bank, all of which are specifically reserved. 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Cover design by Le Bros, photo credit ©shutterstock.com CONTENTS ABBREVIATIONS i ACKNOWLEDGMENTS iv OVERVIEW 1 Viet Nam’s high-income ambitions require accelerating growth beyond its strong historical performance 2 To achieve high-income status, Viet Nam needs to revive the drivers of growth 3 Falling investment rates need to be reversed 4 Rapid aging will increase the non-working age population share while increasing care responsibilities for the working-age population, particularly women 5 Greater productivity will be central to higher growth, driven in large part by higher skills 7 Institutions need to be modernized to better support economic growth 10 Viet Nam must also effectively respond to a fast-changing global context 11 This report proposes a comprehensive reform agenda of five connected policy packages: 13 A) Policy package 1: Supporting Private Sector Development 15 B) Policy package 2: Investing in Resilient Infrastructure 19 C) Policy package 3: Increasing Skills, Participation and Resilience 21 D) Policy package 4: Ensuring Everyone Gains from the HIC Transition 24 E) Policy package 5: Modernizing Institutions 27 INTRODUCTION 33 Chapter 1: Ever Soaring Ambitions: From Đổi Mới to a New Era of National Rise 33 1.1. Four decades of extraordinary progress since Đổi Mới 33 1.2. New development ambitions and the challenge of reaching high-income by 2045 34 1.3. Growing in a changing context: global and domestic megatrends 38 1.4. The framework 40 1.5. Taking stock 42 1.5.1. Evolution of growth drivers 42 1.5.2. Progress in implementing reforms 49 1.6. The Report 51 PART 1: PRODUCTIVITY AND COMPETITIVENESS 54 Chapter 2: GVC Upgrading and Private Sector Development 55 2.1. Backward analysis: Past achievements and emerging constraints of Viet Nam’s export model 55 2.1.1. Concentration in low value-added exports 56 2.1.2. A dual economy with limited linkages between FDI and domestic firms 57 2.1.3. Limited supply of high skills is an increasingly binding constraint 58 2.1.4. Emerging infrastructure bottlenecks threaten the competitiveness of Viet Nam’s manufacturing sector 60 2.2. Forward looking diagnostic: Trading up in a changing world 61 2.3. The reform agenda 63 Chapter 3: Strengthening Skills, Labor Productivity, and Tertiary education 67 3.1. Backward diagnostic 68 3.1.1. Skills and jobs 68 3.1.2. Tertiary education 73 3.2. Forward diagnostic 76 3.2.1. Skills of the future 76 3.2.2. Tertiary education 79 3.3. Reform agenda 84 Chapter 4: Fostering Firm Innovation 91 4.1. Backward diagnostic 92 4.2. Forward diagnostic 96 4.3. Reform agenda 99 Chapter 5: Green Energy Transition 101 5.1. Backward diagnostic 103 5.2. Forward diagnostic 105 5.3. Reform agenda 107 PART 2: LABOR AND HOUSEHOLDS 108 Chapter 6: Aging and care 109 6.1. Backward diagnostic 110 6.2. Forward diagnostic 114 6.3. Reform agenda 117 Chapter 7: Social protection 121 7.1. Backward diagnostic 122 7.2. Forward diagnostic 127 7.3. Reform agenda 132 PART 3: INFRASTRUCTURE AND RESOURCES 136 Chapter 8: Spatial and digital connectivity 137 8.1. Backward analysis 138 8.1.1. Physical connectivity 138 8.1.2. Digital connectivity 144 8.2. Forward Analysis 146 8.2.1. Physical connectivity 146 8.2.2. Digital Connectivity 149 8.3. Reform agenda 152 Chapter 9: Adapting to Climate Change 159 9.1. Backward diagnostic 160 9.2. Forward diagnostic 162 9.3. Reform agenda 166 Chapter 10: Resource mobilization 168 10.1. Backward diagnostic 169 10.1.1. Capital market development 169 10.1.2. Fiscal revenue mobilization 171 10.2. Forward diagnostic 174 10.2.1. Capital market development 174 10.2.2. Fiscal revenue mobilization 175 10.3. Reform agenda 176 10.3.1. Unlocking the potential of Viet Nam’s capital markets 176 10.3.2. Modern fiscal revenue mobilization 177 PART 4: INSTITUTIONS 179 Chapter 11: Institutions 179 11.1. Backward diagnostic 181 11.1.1. Market-complementing institutions: Public investment 181 11.1.2. Market-regulating institutions: Legal and regulatory framework 183 11.1.3. Institutions for a capable and accountable state: Central and local governance 185 11.1.4. Institutions for a capable and accountable state: Civil service 187 11.2. Forward diagnostic 188 11.2.1. Market-complementing institutions: Public investment 188 11.2.2. Market-regulating institutions: Legal and regulatory framework 189 11.2.3. Institutions for a capable and accountable state: Central and local governance 191 11.2.4. Institutions for a capable and accountable state: Motivated and accountable civil service 192 11.3. Reform agenda 193 PART 5: EQUITY 197 Chapter 12: Equity 198 12.1. More equal opportunities to develop and use skills 200 12.1.1. Gaining skills 200 12.1.2. Using skills 200 12.1.3. Protecting incomes and assets 201 12.1.4. Ethnic minorities and rural workers 204 12.2. Fiscal equity: backward diagnostic 207 12.3. Fiscal equity: forward diagnostic 210 12.4. Fiscal equity: policy reform agenda 210 12.4.1. VAT reforms 212 12.4.2. Social protection 213 12.4.3. Distributional implications of carbon taxes and the energy transition 216 References 219 FIGURES Figure 0.1. Achieving HIC status by 2045 would require growing faster than Viet Nam has grown in the past 3 Figure 0.2. Viet Nam’s investment levels were once the highest among comparators at a similar level of income but have since declined to around average 4 Figure 0.3. Viet Nam’s demographic transition is taking place at an earlier stage of economic development and income per capita compared to other countries 7 Figure 0.4. Increasing both capital accumulation and productivity growth is key to reach high-income status by 2045 8 Figure 0.5. More than 90 percent of manufacturing jobs are low-skilled 9 Figure 0.6. Public investment budgets suffer from chronic under-execution 10 Figure 0.7. Viet Nam has the highest share of trade-related employment in the world 11 Figure 0.8. Without action, climate change will reduce GDP by an estimated 11 percent by 2045 13 Figure 0.9. Viet Nam has the highest relative export-related emissions among major middle-income exporters 13 Figure 0.10. Five policy packages to drive fast, resilient and inclusive growth 15 Figure 0.11. The likelihood of innovation decreases as firms wait longer to obtain an operating license 17 Figure 0.12. Viet Nam has relatively low export value-added per capita 18 Figure 0.13. Viet Nam’s trade infrastructure has improved significantly over the last 15 years and has recently surpassed UMIC benchmarks but still lags regional peers and is far from HIC and OECD levels 19 Figure 0.14. An increasing number of firms cannot find enough skilled labor, particularly exporters 21 Figure 0.15. Viet Nam’s social assistance coverage is low relative to LICs and far behind MICs and HICs 23 Figure 0.16. Similarly, SA adequacy is a fraction of that in other countries 23 Figure 0.17. Secondary enrollment gaps across income groups have closed over time but tertiary gaps have widened 25 Figure 0.18. Taxes and spending in Viet Nam reduce inequality by less than the middle-income country average 27 Figure 0.19. Viet Nam’s due process and independence scores fall short of UMIC and HIC averages 29 Figure 1. National income has grown more than twice as fast as other countries that were low- or lower-middle-income in 1987 34 Figure 2. Significant improvements in child mortality were achieved rapidly 34 Figure 3. Many East Asian peers are struggling to make the high-income transition 35 Figure 4. Income of middle-income countries relative to the US has been stagnant for decades 35 Figure 5. Many MICs must engineer two successive transitions to move to HIC status 36 Figure 6. As economies develop, capital accumulation brings diminishing returns and must be replaced by higher productivity 36 Figure 7. Achieving HIC status by 2045 would require growing faster than Viet Nam has grown in the past 38 Figure 8. Viet Nam is closing the income gap to the US significantly more slowly than China 38 Figure 9. Viet Nam’s income is growing more slowly than that of South Korea from the same starting point 38 Figure 10. Drivers of growth 41 Figure 11. Building on the conceptual framework proposed, the report’s chapters are organized into four parts 42 Figure 12. Viet Nam’s fixed capital accumulated quickly at earlier income levels but has since fallen back 43 Figure 13. Marginal returns to capital are expected to decrease 43 Figure 14. Viet Nam has high labor force participation, driven by strong female participation… 44 Figure 15. …but the working-age share of population has already started to decline 44 Figure 16. While Viet Nam’s labor productivity has been improving, it lags peers… 45 Figure 17. …and its traditional drivers of growth are losing steam 45 Figure 18. Meeting high-income ambitions will require higher productivity growth and higher investment 46 Figure 19. Countries that advanced to HIC status faster improved the implementation of laws 47 Figure 20A. Viet Nam’s inequality has remained relatively low and stable for the last three decades but had recently begun to creep up before the pandemic 48 Figure 20B. At current levels of inequality, 62 percent of Vietnamese would be below high-income level in 2045 even if the country makes it 48 Figure 21. Rapid export growth was driven by quantity, not quality, of exports 57 Figure 22. The share of firms with GVC linkages in Viet Nam has halved in the last 15 years and is low compared to peers 58 Figure 23. More than 90 percent of manufacturing jobs are low-skilled… 59 Figure 24. …while high-skilled workers are in short supply 59 Figure 25. Electricity demand has been growing at an average of 8.5 percent per year 60 Figure 26. Growing infrastructure needs have outpaced GDP growth 60 Figure 27. Viet Nam’s relatively low export value-added per capita 61 Figure 28. Servicification of exports remains limited in Viet Nam 62 Figure 29. Viet Nam’s output per worker has been increasing but is still much lower than all major regional peers 69 Figure 30. Viet Nam has the second largest gap among MICs between levels of human capital and the productivity of jobs this capital is used in 69 Figure 31. Nearly one third of the self-employed switched to wage work between 2013 and 2019… 70 Figure 32. … but informal jobs represent around one third of all wage employment and are becoming more prevalent 70 Figure 33. Nearly 60 percent of workers in Viet Nam are overeducated or undereducated compared to the level required for their jobs 71 Figure 34. An increasing number of firms cannot find enough skilled labor, particularly exporters 71 Figure 35. Basic digital skills are prevalent in Viet Nam, but intermediate and advanced skills are not 72 Figure 36. Viet Nam has to catch up with the rest of the region in the development of tech and disruptive digital skills 72 Figure 37. Viet Nam achieves one of the highest learning-adjusted years of schooling among middle-income countries… 74 Figure 38. …yet, very few students in Viet Nam go on to tertiary education compared to its peers 74 Figure 39. Secondary enrollment gaps across income groups have closed over time but tertiary gaps have widened 75 Figure 40. Poor high school completion rates are as important as lower tertiary entry rates in terms of reducing tertiary education gaps 75 Figure 41. Software development and creative multimedia make up the majority of the demand for workers by firms in most OECD countries 77 Figure 42. Digital skills are required in jobs in OECD countries 78 Figure 43. More than a quarter of OECD jobs will be strongly impacted by the net-zero transition 79 Figure 44. Reskilling is key for moving away from emission-intensive occupations 79 Figure 45. Viet Nam’s secondary enrolment rates are relatively strong 80 Figure 46. …yet, its higher education output is far below what would be expected given its basic education output 80 Figure 47. Viet Nam has no universities ranked in the global top 500; all HIC comparators have at least 10, while 20 percent are in the United States 81 Figure 48. Viet Nam spends much less on tertiary education than regional MIC peers, let alone HIC and OECD countries 83 Figure 49. Viet Nam has low exposure to both automation and task complementarity 83 Figure 50. Domestic private firms lag foreign firms in both employment and turnover… 92 Figure 51. …value-added and profitability… 92 Figure 52. …and productivity 92 Figure 53. Firm productivity has been held back by resources going to less productive firms 93 Figure 54. Access to finance remains a key challenge for the Vietnamese private sector 94 Figure 55. Viet Nam’s venture capital markets have dramatically increased in size… 97 Figure 56. …but still receive far less investment than the major markets in the region 97 Figure 57. Energy contributes the vast majority of emission reductions in Viet Nam’s climate strategy 102 Figure 58. Viet Nam has the highest relative export-related emissions among major middle-income exporters 102 Figure 59. Viet Nam’s electricity demand is forecast to grow faster than other major MICs and OECD countries 103 Figure 60. Viet Nam’s power grid is more emissions intensive than regional peers and much more so than OECD countries 103 Figure 61. PDP8 envisions a backloaded scale-up of renewable energy by 2050 104 Figure 62. Viet Nam has the lowest-cost solar… 106 Figure 63. …and wind energy in ASEAN due to its geography and high technical potential 106 Figure 64. Co-benefits means a net-zero transition could have a net positive effect on growth 106 Figure 65. Viet Nam’s female labor force participation is one of the highest in the world, although it has fallen by six points over the last 30 years 109 Figure 66. Viet Nam’ s demographic dividend that coincided with its economic boom is now ending 110 Figure 67. Viet Nam is the fastest aging country in East Asia and the world 112 Figure 68. A quarter of the population is projected to be age 55 to 74 by 2045, but current employment rates are considerably lower for those age over 60 112 Figure 69. The number of elderly living alone or with just their spouse has increased to over a quarter of all elderly, although 72 percent still live with others 113 Figure 70. Aging is a natural consequence of development; generally, a quarter or more of the population is elderly in HICs 114 Figure 71. If current unpaid care responsibilities remain constant as Viet Nam ages, female labor force participation would be reduced by 8-12 points… 116 Figure 72. …avoiding this could boost growth by 3-5 points, or 11-16 percent of the HIC gap 116 Figure 73. Only half of workers switching occupations move to a higher-paying job 123 Figure 74. Viet Nam’ s share of working-age population contributing to pensions is low but in line with other countries at its income level 124 Figure 75. Pension spending is in line with its elderly population share 124 Figure 76. The majority of poorer households do not receive social assistance due to the low national coverage… 125 Figure 77. …while the value of benefits for those who do receive them is small 125 Figure 78. Viet Nam’s social assistance coverage is low relative to MICs and far behind HICs but social insurance is high 126 Figure 79. Similarly, social insurance adequacy is a fraction of that in other countries 126 Figure 80. Viet Nam’s pension framework provides low benefits and covers little of the population as compared to peers 128 Figure 81. As in most EAP countries, pension spending levels will need to increase considerably to reach international benchmarks 128 Figure 82. Viet Nam’s social assistance coverage of the poorest quintile is less than a third that of HICs 129 Figure 83. Social assistance benefit adequacy is nearly one-tenth as low as in HICs 129 Figure 84. Many MICs have used flagship social assistance programs to achieve much higher levels of coverage, allowing for rapid scaling of their coverage during COVID-19 130 Figure 85. An integrated social protection information system strengthens service delivery and enables quick responses during a crisis 131 Figure 86. Viet Nam’s shift out of agriculture has been more rapid than peers 137 Figure 87. Viet Nam has not urbanized as much as other East Asian and MICs 137 Figure 88. Viet Nam’s shipping connectivity has improved rapidly although still lags China’s significantly 139 Figure 89. Viet Nam’s trade infrastructure has improved significantly over the last 15 years but still lags regional peers 139 Figure 90. Viet Nam’s road network expanded rapidly, increasing in total length by 4.5 times between 1992 and 2016 … 140 Figure 91. …and overall road quality improved similarly 140 Figure 92. Ha Noi and Ho Chi Minh City are among the more congested cities in the region 141 Figure 93. Worker productivity increases when they are within 10km but decreases after that in 142 Figure 94. Viet Nam’s rail network is old, more expensive and less extensive than a number of regional peers 143 Figure 95. Fixed broadband has grown faster in Viet Nam than any other Asian country than China… 144 Figure 96. …but it lags most major regional peers on the more prevalent mobile broadband 144 Figure 97. Viet Nam once led the region in mobile phone connections, but the market has now become saturated in most countries 144 Figure 98. Broadband usage and speeds lag regional peers 145 Figure 99. Digital connectivity is relatively more affordable in Viet Nam compared to most other countries in the region 146 Figure 100. Although Viet Nam’s shipping connectivity lags China’s significantly, it is on a par with Japan and is catching South Korea 147 Figure 101. Viet Nam’s trade infrastructure surpasses UMIC benchmarks but is far from HIC and OECD levels 147 Figure 102. Economic accessibility of digital connectivity relative to aspirational peers 150 Figure 103. Most Vietnamese now have internet access, but the country is far from the levels of access to broadband that characterize high-income countries 151 Figure 104. Viet Nam would rank in the lower quarter of high-income countries on the Network Readiness Index, performing most poorly on the governance component 152 Figure 105. Investments in transportation infrastructure can drive greater economic growth 154 Figure 106. Businesses are reporting climate impacts and risks across a range of dimensions 161 Figure 107. The threat of rising sea levels and extreme temperatures could make agriculture extremely difficult in much of the Mekong Delta 163 Figure 108. Climate impacts are projected to reduce Viet Nam’s GDP by 11.2 percent by 2045. 164 Figure 109. The majority of economic losses will come from reduced labor productivity due to heat stress 164 Figure 110. Climate change will reduce economic growth by adaptation measures can mitigate nearly half of the impact 165 Figure 111. Adaptation measures deliver additional benefits far beyond those of just reducing climate-related damages 165 Figure 112. FDI has been historically high but needs to be sustained and is not as large as… 169 Figure 113. …domestic investment, where Viet Nam does not stand out… 169 Figure 114. Public capital remains low in Viet Nam 169 Figure 115. Viet Nam’s capital markets are smaller than most peers 170 Figure 116. The size of Viet Nam’s institutional investors remains low, at 19 percent of GDP, below regional MICs 171 Figure 117. High volatility in equity prices is an example of a lack of reliable price signals in Viet Nam 171 Figure 118. Revenues are declining and significantly lag structural and aspirational peers… 172 Figure 119. …driven by particularly low tax revenues 172 Figure 120. Tax revenues have recently declined 173 Figure 121. Tax collection has been less dynamic than economic growth 173 Figure 122. Viet Nam has significant potential to increase property tax collection 173 Figure 123. Significant tax potential in Viet Nam 175 Figure 124. Tax productivity and efficiency 176 Figure 125. Tax rates 176 Figure 126. The increasing importance (and acceptance) of the private sector 180 Figure 127. Average months from original PFS to latest FS for projects 183 Figure 128. Laws and regulations are applied less consistently in Viet Nam than in peers 184 Figure 129. Admin procedures and changes in regulations are major challenges to running a business 184 Figure 130. Previous reforms have reduced costs and uncertainty for firms but also led to an increase in new procedures 184 Figure 131. Fiscal decentralization is high while subnational autonomy is lower 186 Figure 132. At the same time, the high level of fiscal decentralization means inadequate budget for national investment 186 Figure 133. Viet Nam has a larger public sector than other middle and high-income countries 188 Figure 134. State workers generally earn less than private sector counterparts 188 Figure 135. Viet Nam has been improving on both quantity and quality of public investment but need to maintain this progress to reach HIC 189 Figure 136. Countries that advanced to high-income status faster improved implementation of laws 190 Figure 137. China significantly increased regulatory enforcement during its transition through UMIC status 190 Figure 138. Countries that advanced to high-income status faster built more impartial public administrations 191 Figure 139. South Korea placed greater checks on the executive during its period of rapid UMIC growth 193 Figure 140. Viet Nam’s due process and independence scores fall short of UMIC and HIC averages 193 Figure 141. Income and ethnic gaps in access to tertiary education have been widening significantly 202 Figure 142. Being able to use smartphones and computers is a near universal requirement in high skill jobs 202 Figure 143. The urban-rural internet gap is closing but remains 203 Figure 144. Very few low- and semi-skilled jobs can be done from home but many high skill jobs can, making access to affordable and quality child and elderly care even more important for less-skilled women 203 Figure 145. Shocks affecting many households are play a greater role in Viet Nam than in many other countries in the region 205 Figure 146. The Mekong Delta is particularly exposed to climate change and will need investments in resilient infrastructure 206 Figure 147. Viet Nam’s social spending is far below middle-income country averages 212 Figure 148. Taxes and spending in Viet Nam reduce inequality by less than the middle-income country average 213 Figure 149. Taxes and spending in Viet Nam increase poverty slightly, a good performance for LMICs but slightly below the UMIC median 214 Figure 150. Most HICs reduce inequality through health and education spending 215 Figure 151. Most HICs reduce poverty through direct transfers 215 Figure 152. Viet Nam spends much less than HICs in all social categories 215 Figure 153. Change in VAT burden relative to market income. Removing all exemptions and reduced rates 218 Figure 154. Change in VAT burden relative to market income. Removing all exemptions and reduced rates and raising base rate to 12 percent 218 BOXES Box 1. Lessons from international experience on reskilling or retraining programs 50 Box 2. Innovation-Led Growth: Korea’s Policy Framework for Scaling Innovation and Startups 97 Box 3. Private and foreign companies in the elderly care sector in China 117 Box 4. Case study: Integrating multimodal transport and urban form – The Ngoc Hoi station masterplan 148 TABLES Table 0.1. Policy packages 29 Table 1. Implementation of the Viet Nam 2035 recommendations has been slow 63 Table 2. GVC upgrading reform agenda 64 Table 3. Policy reform agenda for skills and tertiary education 88 Table 4. Firm innovation reform agenda 99 Table 5. Green growth adaptation reform agenda 107 Table 6. Policy reform agenda for aging 119 Table 7. The objectives, policy pillars and programs of a Social Protection System 122 Table 8. Policy reform agenda for social protection 135 Table 9. Policy reform agenda for connectivity 156 Table 10. Green growth adaptation reform agenda 166 Table 11. Resource mobilization reform agenda 178 Table 12. Legal framework for public investment management 182 Table 13. Institutional Reform Priorities 194 Table 14. Policy reform agenda for enhancing equity beyond broader skills, connectivity and protection agendas 210 Table 15. Marginal contribution and cost-effectiveness of inequality reduction by tax and spending 216 Table 16. Simulated impacts of cash transfers expansion 219 Table 17. Social pension baseline and reform scenario impacts 221 Table 18. Carbon tax policies would have almost no impact on inequality but could result in small increases in poverty without mitigating measures 222 Table 19. Fiscal equity reform agenda 223 ABBREVIATIONS ADLs Activities of Daily Living ADS Accelerated Decarbonization Scenario AI Artificial Intelligence ALTC Aged and Long-term Care APCA Administrative Procedure Control Agency ASEAN Association of Southeast Asian Nations ASP An Adaptive Social Protection ASPIRE Atlas of Social Protection Indicators of Resilience and Equity BAU Business As Usual B2B Business-to-business BRT Bus Rapid Transit CBAM Carbon Border Adjustment Mechanism CIT Corporate Income Tax CMT Cut-Make-Trim CO2 Carbon Dioxide CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership ECED Early Childhood Education EFT Ecological Fiscal Transfers EPT Environmental Protection Tax ESCOs Energy Service Companies ETS Emissions Trading System EU European Union FDI Foreign Direct Investment FLFP Female Labor Force Participation FOLs Foreign Ownership Limits FTE Full Time Equivalent GCF Gross Capital Formation GDP Gross Domestic Product GHG Greenhouse Gas GNI Gross National Income GSO General Statistics Office of Viet Nam GVCs Global Value Chains HCI Human Capital Index HGFs High-Growth Firms HIC High-Income country HVDC High-Voltage Direct Current Pathways to a High-Income Future I i I ICT Information and Communications Technology ID Identification IFRS International Financial Reporting Standards ILO International Labour Organization IP Intellectual Policy IPAs Investment Promotion Agencies IPOs Initial Public Offerings ISCO International Standard Classification of Occupation LCOE Levelized Cost of Electricity LFDCs Land Fund Development Centers LIC Low-Income Country LMIC Lower-Middle-Income Countries LTC Long-Term Care LTGM The Long-Term Growth Model MIC Middle Income Country MNCs Multinational Companies MNEs Multinational Enterprises MOET Ministry of Education and Training MOF Ministry of Finance MOIT Ministry of Industry and Trade MOST Ministry of Science and Technology MPI Ministry of Planning and Investment MVP Minimum Viable Product NAPAS National Payment Corporation of Viet Nam NEDS National Economic Development Strategy NSCC National Strategy on Climate Change NTM Non-tariff Measures OECD Organization for Economic Co-operation and Development OOG Office of Government PDP8 Power Development Plan 8 PES Payments for Ecological Services PIM Public Information Management PIT Personal Income Tax PLBC National Program for Local Bridge Construction QCD Quality, Cost, and Delivery standard R&D Research and Development RCEP Regional Comprehensive Economic Partnership I ii I Viet Nam Rising ROA Return Of Assets RR Revenue Recycling SA Social Assistance SCF Supply Chain Finance SDP Supplier Development Program SOE State-owned Enterprises STEM Science, Technology, Engineering, and Mathematics STI Science, Technology, and Innovation TABMIS Treasury and Budget Management Information System TDR The Total Dependency Ratio TFP Total Factor Productivity TOD Transit-Oriented Development TVET Technical and Vocational Education and Training UHC Universal Health Coverage UHCI Utilization-adjusted HCI UIS UNESCO Institute for Statistics UK United Kingdom UMIC Upper-Middle Income Country UN United Nations UNCTAD United Nations Conference on Trade and Development US United States VAT Value-Added Tax VC Venture Capital VET Vocational and Education Training VETI VET institutions VHLSS Viet Nam Household Living Standard Survey VNEEP3 The National Energy Efficiency Plan VNEPS National Electronic Procurement System VSS Viet Nam Social Security fund WB The World Bank WDI World Development Indicators WDR World Development Report WTO World Trade Organization Pathways to a High-Income Future I iii I ACKNOWLEDGMENTS This report was prepared by a World Bank team including Andrea Coppola (Lead Economist), Matthew Wai-Poi (Lead Economist), Sacha Dray (Economist), Mariano Sosa (Consultant), Thu Ha Thi Nguyen (Research Analyst) and Hoa Thi Thanh Nguyen (Program Assistant). The team benefitted from contributions by James Anderson (Lead Governance Specialist), Ludovic Bequet (Consultant), Rafal Chomik (Consultant), Paul Corral (Senior Poverty Specialist), Vinh Quang Dang (Senior Private Sector Specialist), Dung Viet Do (Senior Country Officer), Victor Frebault (Transport Specialist), Elena Glinskaya (Lead Economist), Ketut Kusuma (Senior Financial Sector Specialist), Hrishi Madabushi (Consultant), Dorsati Madani (Senior Economist), Sean Michaels (Senior Transport Specialist), Harry Moroz (Senior Economist), Mani Muthukumara (Lead Environmental Specialist), Hoa Chau Nguyen (Program Assistant), Nga Thi Nguyen (Social Protection Specialist), Phuong Anh Nguyen (Senior Public Sector Management Specialist), Thu-Ha Thi Nguyen (Research Analyst), Robert Palacios (Lead Economist), Steven Rubinyi (Senior Disaster Risk Management Specialist), Abla Safir (Senior Economist), Huong Thi Lan Tran (Senior Development Specialist), Nguyet Thi Anh Tran (Education Specialist), Quyen Hoang Vu (Senior Governance Specialist), Deborah Winkler (Senior Trade Specialist). We are grateful to Duong Tran (Senior External Affair Officer) and Anh Thi Quynh Le (External Affairs Officer) for the communication support. The report was edited by Oliver Balch. The team is grateful for overall guidance from Sebastian Eckardt (Practice Manager, Economic Policy), Benu Bidani (Practice Manager, Poverty and Equity), Mariam J. Sherman (Country Director, Viet Nam, Cambodia and Lao PDR), Lalita M. Moorty (Regional Director, East Asia and Pacific), and Manuela V. Ferro (Regional Vice President, East Asia and Pacific). Financial support from the Australian Aid is gratefully acknowledged. The report benefited from invaluable comments from Aaditya Mattoo (Chief Economist, EAPCE) and World Bank Peer Reviewers Omar Arias (Lead Economist), Richard Record (Lead Economist) and Obert Pimhidzai (Lead Economist). I iv I Viet Nam Rising OVERVIEW Viet Nam has set itself the goal of becoming a high-income country (HIC) by 2045. This ambitious target will require accelerating growth beyond its strong historical performance (5.1 percent growth per annum in real per capita GDP over the last four decades) to 6.0 percent annually for the next two decade. Achieving faster growth will mean passing and implementing new policies addressing all three drivers of growth: capital investment, labor and especially productivity. Many growth-promoting policies promote equity but other complementary policies will also be needed to ensure the entire population benefits from the HIC transition. Viet Nam once had the highest rate of capital investment of any country at a similar income level, but capital accumulation has since plateaued and is closer to average. A rapidly aging population will increase the share of non-working age population while increasing the care responsibilities for those of working age, particularly women. Besides the need to address capital and labor, greater productivity will need to be at the heart of higher growth; this has been the experience of countries who have escaped the middle-income trap and successfully become high-income. Viet Nam’s productivity has been hampered by incomplete structural transformation, with a large remaining share of employment in agriculture, a concentration of manufacturing and service jobs in low value-added final assembly and low productivity, and often informal services with limited technology adoption and innovation. While contenting with these domestic challenges, Viet Nam must also effectively respond to a fast-changing global context. Geoeconomic fragmentation is creating both risks and opportunities for growth and job creation in Viet Nam. Technological progress is unpredictable and can be productivity-enhancing by both augmenting and displacing jobs. Viet Nam’s development and climate challenges are deeply interlinked, with the country being one of the most vulnerable in the world to climate change and with a development model that is highly carbon-intensive. Moreover, poorer workers and households are often the most vulnerable to these global shocks. This report proposes a comprehensive reform agenda of five connected policy packages. The first two packages aim to support private sector development and competitiveness and, as a result, promote the creation of productive jobs. Package 1 seeks to strengthen the enabling environment for the private sector while Package 2 acknowledges both the importance of infrastructure to Viet Nam’s growth as well Pathways to a High-Income Future I 1 I as its vulnerability to climate change. The next two packages look to create a more skilled workforce, with everyone having equal opportunities to develop such skills. Package 3 recognizes the central role for a skilled workforce but also the need for complementary policies addressing care responsibilities and resilience while Package 4 advances policies for equity to ensure that all households benefit from Viet Nam’s transition towards high-income. Finally, Package 5 responds to the changing role of the state in Viet Nam as well as implementation impediments by modernizing institutions. This foundational set of institutional policies underpins the effectiveness of the other four packages. Viet Nam’s high-income ambitions require accelerating growth beyond its strong historical performance Viet Nam has committed to become a high-income economy by 2045, requiring ambitious reforms to reinvigorate its export-led growth model in a fast-changing global context. This report examines Viet Nam’s growth through the lens of three main drivers: investment, labor and productivity. It analyzes the country’s performance in recent years and compares it with peers and high-income countries it aspires to join, to identify challenges and solutions to achieve the country’s development ambitions. The analysis considers the impact of global megatrends and external shocks and pays particular attention to the critical role that institutions can play in supporting Viet Nam’s development journey. Achieving this goal means that Viet Nam would have to surpass its own historical achievements and escape the middle-income trap that has befallen many. Viet Nam’s robust economic growth since the mid-1990s has been rightly lauded as one of the most rapid in history. Centered around an export-driven growth model and strong participation in global value chains (GVCs), the country has enjoyed average annual per capita GDP growth of 5.1 percent over the past four decades. Reaching high-income country (HIC) status by 2045 would require an even faster growth over the next two decades (Figure O.1), accelerating to a sustained 6.0 percent. Moreover, completing the transition from middle-income into high- income would mean that Viet Nam would have to succeed where few others have. Only 34 countries and territories have transitioned to HIC since 1990, most of them through European Union (EU) accession or natural resource windfalls. I 2 I Viet Nam Rising Figure O.1. Achieving HIC status by 2045 would require growing faster than Viet Nam has grown in the past GDP per capita (2023 $) +6.0% p.a. 15584 +5.1% p.a. 4347 2310 682 1986 2010 2023 2045 Low-Income Lower Middle- High-Income Income Source: World Bank calculations using World Development Indicators. Equitable prosperity will also be important to achieve sustained growth. Consumption inequality in Viet Nam has remained relatively stable over the last three decades, but there are signs that it has begun to increase recently and might rise further as population aging and shocks related to climate and technology are expected to have a larger impact on poorer households without policy measures. Even if inequality were to stay at current levels, achieving high-income status by 2045 would mean that only 38 percent of the population would earn at or above high-income level with the remaining 62 percent of the population projected to live on less. Beyond income, rising or high inequality can undermine social and political cohesion. Inequality can damage trust and lead to waste in the use of common resources and the provision of public services. It can also undermine motivation and aspirations for those who perceive that skills and hard work do not matter. A majority of Vietnamese say they are concerned about disparities in living standards, rising to 76 percent of those living in urban areas, a sentiment more widely shared among younger people. To achieve high-income status, Viet Nam needs to revive the drivers of growth Traditional drivers of growth may lose steam before Viet Nam reaches high-income status. According to the Solow-Swan model of production, economic growth is driven by changes in capital and labor inputs, and by changes in total factor productivity (TFP), which measures how efficiently resources are being used. Since Viet Nam’s transition to market economy, economic growth has been mainly driven by capital accumulation (which explained about 70 percent of economic growth during the Pathways to a High-Income Future I 3 I last fifteen years), with productivity and labor playing a smaller but important role. Going forward, capital accumulation may lose steam and the contribution of labor to economic growth is expected to gradually decrease until it becomes negative in the 2040s due to one of the most rapid population aging in the world. In this context, it is key for factors of production to be used in a more efficient manner to boost productivity growth and sustain fast economic growth. Falling investment rates need to be reversed Capital accumulation – the first engine of growth - has recently plateaued and there is room to further increase investment. Viet Nam accumulated fixed capital at very high rates at earlier income levels. In the earlier stages of its development, when it was still a low-income country, Viet Nam rapidly accumulated physical capital. Between 2000 and 2010, gross capital formation (GCF) from public and private investment increased from 30 percent to 37 percent of GDP. At that time, Viet Nam had the highest rate of investment among comparator countries at a similar income level (Figure O.2). However, GCF has fallen back to around 32 percent of GDP between 2010 and 2015 (even as other countries at the same stage of development were accelerating investment) and it remained constant at these levels since then. Despite the capital accumulation registered during the last decades, Viet Nam’s capital stock is still relatively low, at 187 percent of GDP (compared to about 300 percent of GDP in Indonesia and Thailand). This suggests that investment will remain a key driver of growth during the next years. The government is supporting efforts to simplify business regulations to improve the business environment and attract private investment. Figure O.2. Viet Nam’s investment levels were once the highest among comparators at a similar level of income but have since declined to around average Gross capital formation as a percent of GDP, selected countries 50 VNM PHL IDN THA 45 40 35 30 25 20 15 10 5 0 2000 4000 6000 8000 GDP per capita (2015 constant USD) Source: World Development Indicators. I 4 I Viet Nam Rising A significant acceleration of public investment is needed to close the infrastructure gap due to four complementary reasons. First, the demand for energy and transport services is growing faster than the country’s GDP. Between 2000 and 2022, real GDP grew by 3.8 times, while energy consumption grew sixfold and freight volume by tenfold. Second, both physical and digital connectivity need to be further strengthened to expand goods and services trade and move towards high-income standards. Third, the urbanization rate is lagging the rest of the region and middle-income countries benchmarks, with untapped potential for market expansion and domestic consumption from increased connectivity. For instance, both Japan and Korea exemplify transit-oriented development (TOD) with high-density, mixed-use development that combine integrated intracity and intercity transport systems. Fourth, Viet Nam’s vulnerability to climate change and associated adaptation challenges, including the need for climate-smart infrastructure, further increases investment demands. Addressing these infrastructure gaps, given the very large financing needs, will require complementing public finance with private finance, for example through public-private partnerships (PPPs). Following years of conservative fiscal management and a significant decrease of the public debt to GDP ratio (currently at about 37 percent), authorities plan to boost public investment but this will require addressing procedural impediments that have led to chronic under-execution of public investment in recent years (see also further below on institutional reforms). Capital allocation in the financial system does not effectively cater to infrastructure and long-term financing needs. Viet Nam’s financial system is overly relying on the banking sector. On one hand, domestic credit to private sector provided by banks is about 130 percent of GDP, higher than most comparator countries. On the other hand, the institutional investor base is underdeveloped, and it is not effectively financing long-term projects. The Viet Nam Social Security Fund is the largest domestic institutional investor with assets of about USD 35 billion. However, it is mandated to invest only in government bonds, apart from depositing funds in banks. About 86 percent of its assets are invested in government bonds. Life insurers hold about USD 20 billion in assets, also concentrated in government bonds and bank deposits. Private pension funds are held back by the lack of sufficient incentives for long-term savings (e.g., taxes) and by various regulatory limitations. Since institutional investors are better placed than banks to finance long-term projects (due to the short-term nature of bank deposits), a rebalancing of the financial system would improve the efficiency of capital allocation and support the financing of long-term projects, including in infrastructure. Rapid aging will increase the non-working age population share while increasing care responsibilities for the working-age population, particularly women Labor accumulation – the second engine of growth – is affected by fast population aging and a projected decline in labor force growth. Viet Nam has a young population, with a median age of 33 years. However, with falling fertility rates and rising life expectancies, Viet Nam became an “aging” society in 2015, with 7 percent of the population aged 65 years or more. This is projected to reach 14 percent - or “aged” – in 2035, making Viet Nam one of the fastest-aging countries in the world. The number of older people (65 years and older) in Viet Nam reached 6.3 million (6.7 percent of Pathways to a High-Income Future I 5 I the population) in 2014 and is projected to increase sharply to 19.6 million by 2049 accounting for approximately 18.1 percent of the population. Due to the fast aging of the population, the contribution of labor accumulation to economic growth is expected to gradually decrease until it becomes negative in the 2040s. Demographic transition would affect not just the share of working-age population but also labor force participation. With almost no formal aged and long-term care (ALTC) in Viet Nam, the majority of elder care is provided by family members, such as female spouses and adult children. Given this, labor force participation for prime age working females could fall as the broader population ages, with current childcare impacts on labor force participation serving as a guide. Women with children work fewer hours than those without, are 8.1 percentage points less likely to have a wage job, 3.3 points less likely to have a formal job and 6.1 points less likely to have a skilled occupation. Moreover, the importance of access to affordable and quality child and eldercare increases for less- skilled women. Not only do higher skills help earn higher wages, they also mean workers are more likely to be able to work from home, increasing job flexibility and desirability for women with children or elderly care responsibilities. Over one-third of technician and associate professional jobs in Viet Nam can be done at home, increasing to nearly two-thirds for professionals. Meanwhile, very few low- or even semi-skilled jobs can be done at home, limiting the options for female workers with less education and skill. Viet Nam is going through this demographic transition at an earlier stage of economic development and lower level of per capita income than other countries, which also poses a fiscal challenge. The working-age population share peaked in 2014, when Viet Nam per capita income was about 10 percent of US per capita income. In comparison, South Korea peaked at about 70 percent, and Philippines, Malaysia and India are projected to peak at 70, 60, and 50 percent, respectively (Figure O.3). As a result, Viet Nam will have to manage the impacts of a shrinking working-age population even as it has considerably less economic and technical capacity than previous countries going through the same transition had. The fiscal impacts will be felt in terms of both lower revenues and higher expenditures. As more workers retire and no longer pay income tax, revenues will fall. The aging population will increase demands on healthcare and pension systems. Moreover, greater investments in education and infrastructure may be needed to boost productivity to offset the declining workforce. I 6 I Viet Nam Rising Figure O.3. Viet Nam’s demographic transition is taking place at an earlier stage of economic development and income per capita compared to other countries GDP per capita relative to the United States at peak share of working age population 2008 1987 1993 2009 1987 1950 2009 1992 2014 2009 2056 2020 2031 2039 2011 2014 100 GDP per capita (constant USD, 2017 PPP) Year of peak as a share of US GDP per capita (%) 80 share of working-age population 60 100 86 85 88 86 40 82 80 74 68 68 62 50 20 32 30 21 10 0 Canada Korea, Rep. New Zealand Malaysia Indonesia Thailand China Viet Nam France United States Germany Italy United Kingdom Australia Japan Source: IMF WEO (2017). Philippines Notes: The year at the top of each bar indicates when the working-age population, as a share of the total population, reached or is projected to reach its peak. Greater productivity will be central to higher growth, driven in large part by higher skills Productivity growth – the most underused engine of growth - is currently not fast enough to sustain the fast economic growth required to become a high-income economy by 2045. Total factor productivity (TFP) growth averaged 0.9 percent per annum during the last decade. Assuming the total investment to GDP ratio remains constant at the level observed during the last fifteen years, and given the estimated impact of the demographic transition, achieving high-income status by 2045 requires doubling the pace of productivity growth to 2.0 percent. Alternatively, a combination of greater investment and higher productivity growth would achieve the high-income target, but even with a return to GCF investment levels of 37 percent of GDP, annual productivity growth of 1.5 percent would still be needed (Figure 0.4). Productivity growth must be accelerated significantly to balance projected slowing in labor force and decreasing marginal return of capital. While an ambitious task, other countries in the region have achieved similarly high productivity growth in their journey towards high-income status. South Korea achieved 2.3 percent productivity growth during the 1990-2010 period and Singapore reached an impressive 3.3 percent productivity growth rate between 1970 and 1980. Pathways to a High-Income Future I 7 I Figure O.4. Increasing both capital accumulation and productivity growth is key to reach high-income status by 2045 3.5% 3.5% Singapore 3.0% 3.0% 1970-80 Korea 2.5% %) Korea (annual %) 2.5% 1990-00 (annual Thailand 2000-10 2000-20 2.0% 2.0% growth growth Philippines 2000-20 1.5% 1.5% Indonesia Productivity Malaysia 2000-20 Productivity 2000-20 1.0% 1.0% China High-income Viet Nam 2000-20 Bangladesh reached by 2045 2000-20 0.5% 0.5% Turkiye High-income 2000-20 not reached by 2045 0.0% 0.0% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% Investment ratio (% of GDP) Source: World Bank staff calculations. Notes: HIC means High-income country, which represents a GNI per capita of 13,845 USD or more in 2022. Firm-level data on productivity of Vietnamese firms show that there is considerable scope to increase productivity growth. Data from the General Statistics Office of Viet Nam (GSO) Enterprise Survey – a representative sample of more than 400,000 individual Vietnamese firms – show that, on average, Vietnamese firms are four times less productive than foreign firms based in Viet Nam and engaged in international trade. After controlling for firm size, the productivity differential remains significant at 70 percent. A sectoral assessment shows that productivity differential in the manufacturing sector is similar to that estimated for the full sample of firms. However, within the manufacturing sector, there is substantial sub-sectoral heterogeneity. Advanced manufacturing sectors, such as chemicals, transport, and electrical equipment show higher premia than labor-intensive sectors, such as leather, wearing apparel, and wood products. Faster productivity growth is hampered by several factors, including incomplete sectoral transformation and the concentration of the relatively more productive manufacturing jobs in low value-added final assembly. Over the last three decades, Viet Nam benefited from the reallocation of its labor force away from low productive agriculture into more productive manufacturing and services. However, there is still considerable room to benefit from continued sectoral transformation in Viet Nam as 30 percent of the workforce is still employed in the agriculture sector and about 50 percent of the workforce is employed in low productivity services. While labor productivity in the manufacturing sector is significantly higher than in the agriculture and services sector (four times higher and 1.5 times higher, respectively), it is still relatively low compared to higher income countries due to the concentration of the manufacturing sector in low value-added final assembly. Ninety percent of the five million new jobs created in the export sector since 2010 are low-skilled (Figure O.5). I 8 I Viet Nam Rising Figure O.5. More than 90 percent of manufacturing jobs are low-skilled Number of manufacturing jobs by skill (millions) High-skilled Low-skilled Unskilled 12 11.4 11.2 11.0 10 9.7 9.3 8.9 8.3 8 7.6 7.1 7.0 7.1 7.3 7.0 6.3 6 4 2 0 2007 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Sources: ILO and World Bank (2024a). Notes: Skills levels are based on the International Standard Classification of Occupation (ISCO) 08 and the skills requirement of these occupations. High-skilled occupations correspond to managers, professionals, technicians and associate professionals (ISCO skills levels 3 and 4). Low-skilled occupations correspond to clerical support workers, service and sales workers, skilled agricultural, forestry and fishery workers, craft and related trades workers, and plant, and machine operators, and assemblers (ISCO skills level 2). Unskilled jobs correspond to elementary occupations (ISCO skills level 1). Low demand for high skill jobs in Viet Nam is the result of the dynamic interplay between economic opportunities and workforce capacities. Skills demand is shaped by what a country produces, which is the result of the country’s comparative advantage, including the skills of its workforce. During the last decades, favorable demography and low labor costs led Viet Nam to specialize in labor intensive low value-added final assembly. Skills supply responded to skills demand and millions of low-skilled jobs were created. During the last fifteen years, the lack of demand for higher skill labor has led to occupational downgrading, particularly for younger tertiary-educated workers and TVET graduates. The share of tertiary graduates working in high-skill non-manual jobs has fallen by about 30 percentage points for TVET graduates and by 11 percentage points for university graduates (down around 20 points). This affected incentives of the workforce to develop the higher- level skills demanded by firms seeking to climb the value chain. Firms are increasingly reporting that inadequate skills supply is a major constraint. Six percent of exporters cited a major problem with an inadequate skilled workforce in 2009; by 2023 this had risen to 20 percent. Other key factors hampering productivity growth include limited technology adoption and innovation. Knowledge transfers and technology adoption are limited by the weak linkages between Vietnamese firms and foreign firms. Only 18 percent of Vietnamese firms are linked to GVCs, down from 35 percent in 2009 and lower than the 24 percent in Türkiye and 31 percent in Cambodia. Entry and growth of innovative start-ups that could support productivity growth are constrained by a burdensome regulatory environment and access to finance. In the 2023 World Bank Innovative Pathways to a High-Income Future I 9 I Startups Survey, 69 percent of respondent firms reported difficulties in accessing financing during their development. Institutions need to be modernized to better support economic growth These challenges are compounded by the fact that Vietnamese institutions could support economic growth more effectively. Despite waves of reform, firms in Viet Nam continue to report ex-ante administrative procedures as a particular burden. Public investment processes are more organized than in the past but are slow and rigid and do not adjust effectively to changing circumstances and suffer from chronic under-execution (Figure O.6). A recent review of selected large-scale transport projects found an average delay of five years. Decentralization means that provinces are now responsible for 80 percent of total public investment. This has given them more control over their spending but has also led to wasteful competition between provinces, underproviding some infrastructure and overproviding other infrastructure. For example, Viet Nam developed 47 seaports across different provinces despite 95 percent of cargo traffic goes through only the three seaports in Haiphong, Ho Chi Minh City and Ba Ria. Despite the strong reform drive in recent years, the impact of lawmaking efforts is affected by a relatively weak upstream analysis of economic and social impact of laws and slow implementation. For example, six years after the Law on Access to Information took effect, fewer than 13 percent of provinces publicize information on the focal point for information provision. Other institutional advances have similarly met implementation challenges. Efforts to reduce corruption, long known to be a problem, have taken hold and shifted perceptions but have also left many decision makers reluctant to make decisions. Figure O.6. Public investment budgets suffer from chronic under-execution Actual / Budget Ratio (%) General Government Central Government Provincial Governments 90 85 80 75 70 65 60 2017 2018 2019 2020 2021 2022 2023 Sources: MPI (mpi.gov.vn) and MoF (mof.gov.vn) websites and World Bank staff estimates. Notes: Public investment plan refers to the Prime Minister’s plan. I 10 I Viet Nam Rising Viet Nam must also effectively respond to a fast-changing global context External shocks and rapidly emerging trends, both at the global and domestic level, pose significant development challenges for Viet Nam. The report selectively focuses on the four megatrends that are expected to have the greatest impact on Vietnamese economy and society: a) geoeconomic fragmentation; b) rapid technological progress; c) climate change; and d) demographic transition (aging). Geoeconomic fragmentation is creating both risks and opportunities for growth and job creation in Viet Nam. COVID-19 disrupted economies and societies in every country around the world, while also exposing fragilities in the globalized economy and exacerbating pre-existing social and economic disparities within countries. Compounding this, geopolitical tensions are deepening. Recent years have seen a surge in trade tensions between the world’s largest economies and a marked increase in protectionist measures has had a negative impact on global trade. Viet Nam’s economy relies deeply on international trade, with nearly half of GDP coming from domestic value-added in exports, more than China, Indonesia, Malaysia, Philippines, South Korea or Thailand. Trade-related jobs make up 54 percent of total employment, the highest rate in the world (Figure O.7). So far, it has been able to weather this global trade storm by strategically positioning itself between China and United States and benefiting from investment diversion from China. As a result, Viet Nam has been able to emerge as a connector country between the world’s two largest economies and has experienced the largest increase in world export share in the region in the last six years. However, increasing trade tensions at the global level may affect Viet Nam’s trade potential going forward. Figure O.7. Viet Nam has the highest share of trade-related employment in the world Share of domestic employment embodied in foreign final demand 60 Developing EAP HIC EAP Non-EAP 50 40 30 20 10 0 ng m in ul lta T a g d m e Cr nia tia h ru a 5 one an u ia i A ia r c Eg a rt n t un a e al i cl ha ia Eu uss l io P ro ia un es Re unt a Eu of) pe 0 me s es Cy 15 Uk rus Br a k ) pl 8 c en ) bl s) M aipe R zi No o yp za ies eo (2 rg es G2 h A trie or Ro ain e ri ric (2 hilip are e’s o tin bi co ric in an co s ud nd ex T ays pu rie ut Pe Si Na a co pin tri ro Ch B Ma oa n Ind hst es ga EU a ra (P n A ntri p ap ic Ka tr Af ud il r I et u Vi So Sa 7 be (1 em n io a io 28 m Un Un in Un EU CD an an Ch an OE pe pe pe ro ro ro Eu Eu Eu Source: Trade in Employment (TiM) 2023 Note: Includes employment directly and indirectly driven by trade. Pathways to a High-Income Future I 11 I Technological progress is unpredictable and can be productivity-enhancing by both augmenting and displacing jobs. Adopting technology from high-income countries can quickly increase the productivity of developing countries such as Viet Nam. Rapid robot adoption in Viet Nam in high value- added exporting industries is associated with increases in employment and labor incomes of around 10 percent in computers and electronics and 5 percent in automotives. However, this has benefited medium- and high-skilled workers while low-skilled workers engaged in routine tasks are more likely to have been displaced into informal jobs. The rapid advance of artificial intelligence (AI) is expected to have a broad impact on all sectors and economies, bringing both benefits and disruptions. Unlike robotics, the impacts are more likely to be on skilled workers, with those who perform routine cognitive tasks vulnerable to displacement while those who perform non-routine cognitive tasks can benefit from using AI as complementary tools. In Viet Nam, there are four times more workers vulnerable to displacement by AI than stand to benefit from it. Moreover, forecasting which skills are more likely to be displaced and which augmented is difficult given the rapid and unpredictable nature of technological change. This puts more of an emphasis on developing technical skills that are fungible across technologies, problem solving and analytical thinking skills that are fungible across sectors and jobs, and resilience and flexibility that lend themselves to learning new technologies as they develop. Viet Nam’s development and climate challenges are deeply interlinked. Viet Nam is not only one of the most vulnerable countries to climate change but is also reliant on an emissions-intensive development model. With over 3,260 kilometers of coastline, low-lying river deltas, and a tropical climate, the country is on the front line of climate risk. In fact, Viet Nam ranked 13th among nations most directly affected by weather-related losses from 2000-19. Heat waves, floods, storms, and rising sea levels are not just environmental challenges; they also threaten the lands that feed communities and the workers who farm them, the factories and cities that drive growth, and the infrastructure that connects people and markets. Without action, climate change could have a significant impact on economic growth over the coming decades. Simulations from macroeconomic modelling suggest that climate impacts could reduce Viet Nam’s output by at least 12.5 percent relative to the baseline by 2050 (Figure O.8). Furthermore, poorer households are more likely to be affected as they have fewer coping mechanisms. Moreover, poorer households in Viet Nam are more likely to be pushed into poverty due to regional disasters or economic shocks than households in other East Asian countries. Those living in the Mekong Delta are particularly at risk with the region the most vulnerable to climate change. Extreme heat events expected to double in frequency by 2030 while it is estimated that around 1.5 percent of Viet Nam’s GDP would be needed over the five years to make the Mekong’s infrastructure climate resilient. The country’s development is still heavily tied to carbon emissions. Viet Nam has the highest relative export-related emissions among major middle-income exporters, with net export-related carbon dioxide emissions reaching 36 percent of production in 2021, even as they have been falling in other countries (Figure O.9). In addition, coal makes up 32 percent of the energy mix, while energy efficiency is relatively low. Therefore, Viet Nam emits 45 percent more carbon per unit of output than the average middle- income economy. With the price of renewable energy continuing to fall, a green energy transition will reduce long-term energy costs, helping firms and industries stay competitive, while also meeting its net- zero emissions goal. However, short-term costs must be managed to sustain competitiveness. I 12 I Viet Nam Rising Figure O.8. Without action, climate Figure O.9. Viet Nam has the highest change will reduce GDP by an relative export-related emissions estimated 11 percent by 2045 among major middle-income exporters Cumulative impact of climate change on Viet Nam’s Net export-related CO2 emissions as a percent of GDP relative to no climate change baseline production Optimistic Optimistic Most likely Pessimistic China Indonesia Malaysia Return Pessimistic South Korea Philippines Mexico 1-in-5 Thailand Turkey Viet Nam 1-in-1 -8.0% 40% -10.0% 20% -12.0% 0% 4 39% -14.0% -20% -16.0% 15% 2045 2050 2030 2035 2040 2045 2050 -40% 10% -60% 1990 Coastal f 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: World Bank (2025a). Greening Growth in Viet Nam: Source: World Bank (2025a) based on staff calculations. Adaptation and Mitigation Challenges and Opportunities. This report proposes a comprehensive reform agenda of five connected policy packages: This report discusses the main implications of these megatrends on Viet Nam’s economy and policy agenda. How can Viet Nam upgrade its GVC participation to create more and better jobs in a context of increasing geoeconomic fragmentation? How does technological progress affect an economy and labor market that has been relying on labor-intensive exports and on low-cost, low-skill labor? How should Viet Nam best manage the demographic transition that will lead to fewer workers and soaring health care and pension costs? What is the impact of climate change in a country where 70 percent of the population lives in coastal areas or low-lying river deltas? How should institutions be modernized to promote sustainable growth while effectively responding to a changing world? What policies and programs are needed to ensure that growth is shared widely and that disadvantaged workers and households are not left behind by changing labor markets or disproportionately hurt by increasingly frequent shocks? The report tries to address these questions and define a policy agenda to maximize opportunities and mitigate risks associated with these global and domestic developments. Revamping Viet Nam’s growth drivers while addressing the challenges associated with significant global and domestic shifts requires implementing a comprehensive reform agenda. This report proposes a series of reform options organized around five complementary policy packages as presented in Figure O.10. The first two packages aim to support private sector development and competitiveness and therefore the creation of productive jobs. Package 1 seeks to strengthen the Pathways to a High-Income Future I 13 I enabling environment for the private sector, for example, by streamlining business regulations and licensing based on risk assessment and supporting FDI linkages with local firms to promote technology adoption and productivity growth. Package 2 acknowledges the importance of infrastructure to Viet Nam’s growth, investing in greater spatial and digital connectivity, while addressing its vulnerability to climate change, such as through the use of improved planning and building codes. The next two packages look to create a more skilled workforce, with everyone having equal opportunities to develop such skills. Package 3 recognizes the central role for a skilled workforce but also the need for complementary policies addressing care responsibilities to promote greater employment of that skill and social protection to boost worker and household resilience to shocks. Package 4 advances policies for equity to ensure that all households benefit from Viet Nam’s transition towards high- income, such as helping make tertiary education accessible by all and boosting rural productivity. Finally, Package 5 responds to the changing role of the state in Viet Nam as well as implementation impediments by modernizing institutions. This foundational set of policies underpins the effectiveness of the other four packages. These five policy packages have a high degree of interdependence, as Figure O.1 indicates. At the sectoral, regional and national level, investment in higher value-added activities and sectors depends upon the availability of skilled workers. At the same time, young people will only invest in tertiary education and developing higher skills if there are commensurate jobs to reward this investment. At the policy level, productive job creation will require infrastructure both soft (e.g., a helpful not hindering regulatory framework under Package 1) and hard (e.g., cheap, plentiful and green energy under Package 2). In a similar fashion, creating a large skilled workforce means strengthening the system that creates skills (e.g., improving tertiary education under Package 3) and ensuring that all young people can take advantage of it (making tertiary education more affordable for poorer students under Package 4). Finally, implementing all of the policies of Packages 1-4 (and beyond) requires an effective institutional landscape. For example, a stronger legal framework that passes and implements good laws and regulations is needed for Package 1 to strengthen the business environment, while more effective public investment management is needed to boost public infrastructure and draw in private sector investment under Package 2. I 14 I Viet Nam Rising Figure O.10. Five policy packages to drive fast, resilient and inclusive growth Fast, resilient and inclusive growth: 2045 high-income Viet Nam More and better jobs Skilled workforce PP1: Supporting private PP3: Increasing skills, sector development participation and resilience PP2: Investing in resilient PP4: Ensuring everyone gains infrastructure from the HIC transition PP5: Modernizing institution Source: World Bank illustration. A) Policy package 1: Supporting Private Sector Development Enabling private sector development is vital to achieve high-income status. In April 2025, the Politburo issued a Resolution (Resolution No. 68-NQ/TW) emphasizing that the private sector is the most important driver of the Vietnamese economy. The Resolution focus on the importance of rapid, sustainable and high-quality development of the private sector to drive growth, job creation and national competitiveness in Viet Nam. It sets a clear link between private sector development and 2045 high-income ambitions and set precise targets such as increasing the number of private sector enterprises from nearly 1 million at present to 3 million by 2045. Besides quantitative targets, the Resolution sets the ambition of developing a highly competitive private sector that participates in global production and supply chains. Policy Package 1 identifies a series of interlinked priorities to empower the private sector to effectively cater the growing domestic demand and upgrade its participation in GVCs. As Viet Nam keeps climbing the income ladder, domestic demand for consumption and investment grows. A domestic market with more than 100 million potential customers creates opportunities and requires the private sector to evolve to be able to respond to the growing demand for quality goods and services. In parallel, Viet Nam’s high-income ambitions call for reshaping Vietnamese firms’ contribution to global trade by moving from labor-intensive final assembly to technology-intensive high value-added activities. To empower the private sector to achieve these objectives, policy package 1 includes options to strengthen the enabling environment for the private sector; foster technology adoption and innovation; and upgrade Viet Nam’s participation in GVCs. Pathways to a High-Income Future I 15 I The enabling environment for the private sector can be strengthened by streamlining business regulations. A WB assessment identified 1,584 ex-ante authorizations required before Vietnamese businesses can start to operate (World Bank, 2024e). This included different types of ex-ante controls such as announcements, approvals, assessments, certifications, declarations, licenses, permits, registrations, ex-ante inspections, and evaluations. Businesses often need to obtain approvals from several agencies, and many administrative procedures for businesses still require paper documents and in-person visits to government offices. Businesses also often need to return to government offices to pick up the hard-copy version of the license. To achieve effective simplification for businesses, it is recommended to implement a risk-based approach to business licensing and inspection. The main function of licensing is the management of risk that products and services may pose (e.g. to consumers, workers, and the environment). With this objective, future simplification efforts could follow a risk-based methodology to calibrate the type of ex-ante controls (e.g., notification, approval, ex-ante inspection), and the documentation requirements (e.g., studies, permits, certificates), based on the risks posed by each economic activity. This is an approach commonly used in mature licensing systems in high-income economies. For example, Greece introduced a streamlined risk-based licensing and inspections regime over the last decade that protects the public interest but reduces unnecessary burdens on businesses. Complex licensing requirements for low-risk activities were replaced by a simple notification. Strengthening the regulatory framework through simplification would foster innovation. The positive role of streamlined regulations for innovation is shown in Figure O.11 which illustrates a significant negative correlation between the number of days needed to obtain an operating license and the introduction of a process innovation; the lower the waiting time, the higher the innovation rates. In this context, to improve the enabling environment for Vietnamese firms, the risk-based licensing system described above could be complemented by a digitalization of government to business (G2B) services. The Administrative Procedure Control Agency (APCA) in the Office of Government (OOG) could collaborate with ministries to develop a detailed digitalization program and action plan, including the elimination of physical document requirements and enhancement of the data sharing framework (government interoperability). Besides innovation, knowledge transfers between firms and technology adoption are key given the productivity differential among firms in Viet Nam. I 16 I Viet Nam Rising Figure O.11. The likelihood of innovation decreases as firms wait longer to obtain an operating license Correlation between process innovation and business regulations Days to obtain -1.5 import license Days to obtain -1.6 operating license Days to obtain construction permits -.17 -3 -2 -1 0 1 Coefficient in regression on: introduced process innovation Source: Improving Business Regulations to Support Productivity Growth in Viet Nam (WB, 2024e). Notes: Each bar represents the coefficient of the variable of interest on a linear regression model with a binary dependent variable equals 1 if the firm introduced a process innovation, 0, otherwise. All regressions account for firm size, sector, location fixed effects, and firm age. Promoting innovation and technology adoption by leveraging FDI linkages would boost Vietnamese firms’ productivity growth. Given the significant productivity differential between foreign firms operating in Viet Nam and domestic firms, there is scope to better leverage FDI linkages and spillovers to promote knowledge transfers to domestic firms. This could be achieved by supporting measures to strengthen connections between multinational enterprises (MNEs) and local firms such as: (i) leveraging Investment Promotion Agencies (IPAs) to strengthen the connection between high potential local suppliers and new or existing foreign investors; and (ii) establishing a Supplier Development Program (SDP) to enhance local firms’ capabilities and understanding quality, cost, and delivery (QCD) standards. Viet Nam’s ability to upgrade its participation in GVCs is critical to shape the country’s economic future. The current export-led growth model based on low value-added products and tasks will not be sufficient to deliver the productivity growth required to become a high-income country. Despite much higher exports relative to GDP and domestic value-added from exports than other countries in the region, Viet Nam’s export value-added per capita is low, only 39 percent of Thailand’s, 52 percent of Mexico’s and 77 percent of Türkiye’s (Figure O.12). Upgrading GVC participation would also lead to the creation of more productive jobs, higher incomes and ultimately better living standards. To achieve this upgrade, Viet Nam will need to gradually shift towards higher value-added manufacturing and services. Increasing the services component of manufacturing products and embedding more services in agriculture and agro-foods (such as quality inspection and processing Pathways to a High-Income Future I 17 I services, and machinery, irrigation and other technical services) would help increase value-added in both sectors. This transition could be supported by reducing barriers to services trade in backbone service sectors such as finance and transportation services. For example, by (i) relaxing stringent foreign exchange rules in finance to enhance the banking sector’s access to capital and opportunities for collaboration with foreign banks and investors; (ii) eliminating discriminatory regulations against foreign service providers in the transport sector to lower costs; and (iii) reducing barriers in legal services to foster cooperation between Vietnamese and foreign legal professionals. Figure O.12. Viet Nam has relatively low export value-added per capita Domestic value added in exports per capita ($), 1995-2020 China South Korea Malaysia Mexico Thailand Turkiye Viet Nam 10,000 8,000 6,000 4,000 2,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Sources: WDI, UNCTAD, and World Bank staff estimates from World Bank (2024a). Deepening trade integration, including at the regional level, will help to support Viet Nam’s export-led growth model at a time when the global trading system is undergoing profound changes. Non-tariff policy barriers to trade could be reduced by: (i) encouraging compliance with international and regional standards; (ii) streamlining border management; and (iii) reducing foreign equity restrictions. If the current global geo-economic context makes full-fledged multilateral cooperation difficult, then regional and pluri-lateral agreements may be more fruitfully pursued in the near term. Regional integration could be further strengthened by reducing policy barriers to trade and investment flows across the region and by strengthening connectivity to reduce costs, within Southeast Asia as well as with China and South Asia, working with partners in the Association of Southeast Asian Nations (ASEAN), Regional Comprehensive Economic Partnership (RCEP), Comprehensive and Progressive Agreement for Trans- Pacific Partnership (CPTPP). The energy transition could support the competitiveness of Vietnamese products in the medium term but challenges associated with higher energy costs need to be carefully managed in the short term. Vietnamese exports’ carbon intensity is high and increasing. At the same time, international consumers and investors are increasingly favoring “green” products while the European Union has I 18 I Viet Nam Rising introduced a Carbon-based Adjustment Mechanism to tax “dirty” imports. Moreover, clean energy is getting cheaper; by the end of the decade, solar power paired with battery storage systems are expected to become cost-competitive with new coal and gas plants in Viet Nam. These many factors suggest that a green energy transition will support Viet Nam’s longer-term competitiveness. Yet, in the short run, higher energy costs during the transition may harm competitiveness. It is therefore important to provide longer-term forward guidance to market participants on the expected price trajectory to allow for sufficient time for firms to adapt, including through investments in energy- saving and low carbon technologies. B) Policy package 2: Investing in Resilient Infrastructure The implementation of the infrastructure masterplan is a critical step in Viet Nam’s journey towards high-income status. Viet Nam’s trade-related infrastructure has improved significantly in recent years but still lags regional peers and is far from HIC and OECD levels (Figure O.13). Thus, the 2021-2030 National Masterplan, with a Vision to 2050, has established an ambitious agenda to improve connectivity, ranging from extending the network of expressways and creating high-speed rail routes to constructing deep- water ports and building new international airports. Effective implementation of the plan will facilitate connectivity and reduce freight costs. Given Viet Nam’s vulnerability to climate change, the upgrading of existing infrastructure and construction of new infrastructure will need to meet climate-resilient design standards, particularly in the most exposed regions such as the central coastal areas. Figure O.13. Viet Nam’s trade infrastructure has improved significantly over the last 15 years and has recently surpassed UMIC benchmarks but still lags regional peers and is far from HIC and OECD levels Quality of trade- and transport-related infrastructure (1=low, 5=high) 2007 2010 2012 2014 2016 2018 2022 5 4 3 2 1 0 LMIC Viet Nam India Indonesia China Malaysia Thailand EAP Japan Korea OECD HIC Philippines UMIC LMIC UMIC HIC Source: World Bank Logistics Performance Index. Pathways to a High-Income Future I 19 I To enhance resilience in infrastructure, risk-based strategies need to be effectively informed by data. In the short term, establishing and strengthening an interministerial data-sharing regime is essential. This regime should integrate diverse data sets, including economic, natural, climatic, transport, and physical asset data, to form a robust foundation for assessing criticality and risk. In the medium term, the focus should shift towards developing geospatial, data-driven, and risk-based asset management systems. These systems must be integrated with resource allocation and budgeting processes to ensure efficient and effective management of assets. Connectivity in major cities such as Hanoi and Ho Chi Minh City can be enhanced through targeted investments in multi-modal transport centers that integrate and expanded metro and bus rapid transit (BRT) systems alongside expressways and other modes of transportation. This would help relieve the congestion that puts both cities in the top third of Asian cities in terms of travel time during rush hour. In turn, this contributes to the constrained urban agglomeration benefits that arise in Ho Chi Minh City for a distance up to 10km but then become negative after that. Investments in city transport infrastructure must be complemented by careful spatial planning policies that encourage higher urban densities near transit hubs, mixed land uses, and the development of multiple economic and residential centers within metropolitan areas. Accelerating investment in power infrastructure is needed to meet increasing demand for electricity. Fast tracking of priority investment in power generation and transmission infrastructure is essential to ensure energy security – particularly in the north of the country. Accelerating project approval processes to enable the rapid rollout of four 500kV backbones included in the Eight National Power Development Plan (PDP8) will increase the power transfer capacity from the south, which benefits from a surplus, and scale-up of installed capacity in the north. Adopting well-known technologies, such as high-voltage direct current (HVDC), will help to maximize energy transfer over longer distances, while reducing the physical footprint. Enabling access to long-term financing for the power sector – both domestic and international – will better match investment repayment profiles with the operational life of the assets. Significant new financing will be needed for the large infrastructure and other critical investments required to promote sustainable and resilient growth. In the past, prudent macro-fiscal management allowed the expansion of fiscal space that can help to fund infrastructure and promote the modernization of the economy, through incentives to support innovation, research and development (R&D), workforce upskilling, and FDI linkages. However, the investment needs to underpin the 2045 target are considerable and require even greater resources, both public and private. Leveraging capital markets will help to finance the large infrastructure needs and other critical investments required to promote sustainable and resilient growth. Developing capital markets is key to support Viet Nam’s journey towards high-income status. A fundamental issue to be addressed is the underdevelopment of the institutional investor base – at 19 percent of GDP, well below most regional middle-income countries – including the underutilization of the Viet Nam Social Security fund (VSS), whose portfolio is almost exclusively placed in government bonds. I 20 I Viet Nam Rising Boosting resource mobilization will also help fill the financing gap. Besides developing capital markets, domestic revenue mobilization will need to be boosted. A broader tax base will require an updated tax policy design for corporate and personal income taxes as well as VAT, while an expanded tax base will also incorporate the digital economy. Tax administration reforms should encourage further digitalization and improved enforcement strategies, including the implementation of a risk- based approach to audits and controls. Although greater taxation will create a burden for poorer households, especially through indirect taxes, this can be more than offset by the increased social spending included in Policy Package 4 on equity. C) Policy package 3: Increasing Skills, Participation and Resilience Upskilling the labor force and reducing skills mismatches would be key to boost productivity growth. 25 percent of the workforce is overeducated relative to the level required by their job. Part of this can be caused by a lack of jobs requiring better education. However, an increasing number of firms report not being able to find enough skilled labor, particularly among exporters. In 2009, 5 percent of exporters said that identifying an adequately educated workforce was a constraint; by 2023 this had risen to 20 percent (Figure O.14). The skills shortage has been particularly acute in tech-intensive manufacturing industries, leading to a rising wage premium. This undersupply of the right skills and mismatch with skills being acquired could be addressed by: (i) intensifying efforts to develop the workforce for high-technology industries (for example, the semiconductors sector); (ii) revamping TVET programs to develop a broad set of skills for the current and future workforce; (iii) adopting a market-driven, competency-based approach for tertiary education by establishing skills councils bringing together training institutions and private sector employers. Figure O.14. An increasing number of firms cannot find enough skilled labor, particularly exporters Percent of firms identifying an adequately educated workforce as a major constraint All Manufacturing Exporters 25 20 15 Percent 10 5 0 2009 2015 2023 Source: World Bank (2024b). Pathways to a High-Income Future I 21 I Viet Nam will also need to implement an aging reform agenda. The full productivity gains of a more skilled workforce will not be realized if they do not work as they age. Additional policies are needed to encourage workers, skilled or unskilled, to continue participating in the economy. To support aging workers and help them be productive for a longer time, policy options include: (i) encouraging life- long learning and subsidized retraining for older workers; (ii) promoting flexible work arrangements considering older workers’ physical capacity; and (iii) enforcing anti-age discrimination laws. Helping older people remain more productive and working can also provide significant income support for poorer households, with wage employment income representing over half of all household income. In addition, Viet Nam should continue recent reforms to increase the retirement age at which people can draw pensions (and equalize it for men and women). The relatively young pension eligibility ages have meant that the employment rate for older cohorts drops rapidly, from 89 percent for those aged 50-54 years to 71 percent for those aged 60-64 years to 55 percent for those aged 65-69 years. It would also be important to develop a well-functioning market for elderly care services, including by encouraging private sector participation. In addition, in a context characterized by change, uncertainty and shocks, strengthening the safety net is essential. Workers’ productivity depends upon having jobs that match their skills, increase their skills and experience over time by staying with that job, and quickly finding another one that matches if they lose one or seek a better one. Social protection can help workers and households navigate the employment shocks that are a likely outcome of all four major megatrends considered in this report: geoeconomic fragmentation could displace those employed directly or indirectly in exports; rapidly changing technology could displace those working in routine cognitive or physical jobs; the transition to green energy and exports could displace miners and others working in fossil fuel-intensive industries; and aging workers may find their skills losing relevance and their savings insufficient to retire on. Social protection can promote the acquisition of skills to keep or find new jobs (such as reskilling and upskilling programs), adequate income support so that they can take the time to find a good job match rather than accept a poor one out of financial necessity (social assistance and unemployment insurance), and facilitate adequate savings for old age and income support when these are not enough (social insurance and pensions). A social protection system befitting a high-income Viet Nam would need to become universal over time, effectively covering all those in need, beginning with the poorest and most vulnerable. A universal system is accessible to the entire population, regardless of employment formality, age, or disability status. Preventive programs should be available to all who choose to participate. Social assistance should be available to all those in need due to poverty, unemployment, or specific vulnerabilities such as disability or very old age. Currently, Viet Nam’s social assistance covers just 13 percent of the population and 24 percent of the poorest fifth of the population, below the low- income average and far behind that of middle-income peers let alone high-income aspirations (Figure O.15). The value of benefits relative to income are just a fraction of international benchmarks (Figure O.16). Expansion can be initially achieved through consolidation of the currently fragmented programs into a smaller number of better designed flagship poverty reduction programs, with adequate benefit levels along with harmonized and rationalized delivery systems. This will require greater coordination between ministries and harmonization of eligibility and benefit levels across programs. I 22 I Viet Nam Rising Modern social protection systems are also flexible, capable of adapting to new shocks with flexible policies with delivery systems able to scale up and down quickly as crises occur. Such an approach would focus on both increasing the resilience of those households that are most vulnerable to shocks while at the same time responding rapidly to households’ changed needs after such shocks have materialized. The existing system in Viet Nam struggled to scale out during the pandemic. Such a system requires sufficient financing; it is estimated that an additional 2.5 to 4.5 percent of GDP will be needed by the 2030s. This degree of increased spending does not have to happen overnight. Progressive Universalism endorses the notion of universal social protection while also acknowledging that fiscal and capacity constraints mean that this may need to be achieved over time, the poorest and most vulnerable representing the priority for expansion. Thus, the delivery system should be strengthened through improved program efficiency and targeting. The introduction of the new national ID, government portal, and data sharing platform, along with the rapidly evolving digital payments system can facilitate more efficient social protection delivery systems. In this respect, technology can play a critical role in supporting an effective social protection system. Figure O.15. Viet Nam’s social Figure O.16. Similarly, SA adequacy is assistance coverage is low relative to a fraction of that in other countries LICs and far behind MICs and HICs Social assistance benefits as a percent of Social assistance (percent) beneficiaries’ welfare 30 90 80 25 70 20 60 50 15 40 30 10 20 5 10 0 0 LIC LMIC Viet Nam UMIC HIC LIC LMIC Viet Nam UMIC HIC LIC LMIC Viet Nam UMIC HIC LIC LMIC Viet Nam UMIC HIC Population Q1 Population Q1 Source: World Bank (2025c), The State of Social Protection Source: World Bank (2025c), The State of Social Protection Report: the 2-Billion-Person Challenge. Report: the 2-Billion-Person Challenge. Notes: Coverage of quintile 1 or population, benchmarks are Notes: Beneficiary welfare is income or consumption for 2022. depending on country. Benchmarks are for 2022. Pathways to a High-Income Future I 23 I D) Policy package 4: Ensuring Everyone Gains from the HIC Transition Much of the first three policy packages directly support equity. Policy Package 3 on supporting household and worker resilience includes a significant focus on strengthening social assistance targeted to poorer households and expanding social insurance to protect all vulnerable households. The pension reforms are central to ensuring aging and retired workers have adequate incomes to live on. In addition, Policy Packages 1, 2 and 3 include additional elements that promote equity. Integrating domestic firms more closely into GVCs and the export growth model is likely to be equity-enhancing, benefiting smaller, less productive domestic firms with poorer and less skilled workers (Package 1).The spatial connectivity reforms of Package 3 directly help reduce income and welfare gaps between Ha Noi and Ho Chi Minh and other cities and regions, and between urban and rural areas. Moreover, to the extent these reforms also promote individual household and worker mobility, they can also aid occupational mobility. However, additional policies are needed to ensure that all Vietnamese share in the country’s transition to high-income. Addressing income inequality means focusing on both how initial incomes are distributed and how inequities can be addressed through redistribution. Income inequality arises from the initial distribution of market incomes – the income households receive from wages and salaries, rents and dividends, as well as private transfers and remittances. For most households, income from labor dominates, with 90 percent of total household income on average coming from wage employment, family farms and non-farm family businesses. For households in the richest ten percent, non-labor market income increases to just over 15 percent. Given this, the first part of this policy package focuses on policies that influence a more equitable initial distribution of labor incomes, with a particular focus on ensuring equality of opportunity, so that every worker and household can participate in the higher productivity jobs and economy that the rest of this report envisages. However, income inequality is also driven by redistributive policies, such as taxes and transfers. The second part of this policy package focuses on making Viet Nam’s fiscal policy – its system of taxes and public spending – more equitable. Increasingly wider skills gap for disadvantaged children is of great concern. There are wide tertiary access gaps across the population, with the tertiary gap widening significantly over time, from 34 to 68 percentage points between the poorest quintile of households (Q1) and the richest quintile (Q5) (Figure O.17) and from 13 to 34 points between the Kinh and Hoa majority and ethnic minorities. Given the central role of education and skills in both economic growth and inequality reduction, closing these gaps should be a critical policy priority. Not only must access to tertiary education be made more affordable but all children need to first complete high school with a good quality education to take advantages of these opportunities. This requires making upper secondary school compulsory and increasing investments in equitable access to and quality of upper secondary education. In addition, exposure to modern technology and the development of digital literacy will be vital given its near universal requirement for professionals and technicians. For disadvantaged children who do not gain familiarity with these essential skills at home, more will need to be done in the classroom to help them acquire them. I 24 I Viet Nam Rising Figure O.17. Secondary enrollment gaps across income groups have closed over time but tertiary gaps have widened Education access by level and expenditure percentile, 2006 and 2018 Basic education 2006 Tertiary education 2006 Upper secondary 2018 Upper secondary 2006 Basic education 2018 Tertiary education 2018 100 90 80 70 60 Access rate 50 40 30 20 10 0 0 20 40 60 80 100 Expenditure percentile Source: Parajuli, Vo, Salmi, and Tran (2020). Authors’ estimates using Viet Nam Household Living Standard Survey (VHLSS) 2006 and 2018 data on individual member education and household consumption expenditures. Notes: Access rate for a given education level is defined as proportion of individuals in the reference age-group who ever had access to the particular education level. Reference age-groups are ages 6-14 for basic education (grades 1-9), ages 15-17 upper secondary (grades 10-12) and ages 18-24 for tertiary education level (post-secondary). The graphs show averages using second order polynomial smoothing. With a rapidly aging population increasing care responsibilities for working women, increased access to quality and affordable child and eldercare is key, especially for less-skilled women. Higher skills help earn higher wages but also mean workers are more likely to be able to work from home, increasing job flexibility and desirability for women with children or elderly care responsibilities. Over one-third of technician and associate professional jobs can be done at home, increasing to nearly two-thirds for professionals. Meanwhile, very few low- or even semi-skilled jobs can be done at home, limiting the options for workers with less education and skill. However, formal aged and long-term care is nearly nonexistent in Viet Nam while licensed childcare faces key barriers including cost, quality and hours. Moreover, current childcare is more likely to benefit educated and wealthier women in formal jobs. Thus, equity considerations will be key when expanding public support for expanded and affordable child and elderly care. The impacts of aging on rural and ethnic workers can be mitigated with policies to boost livelihoods of aging workers. In addition to the pension reforms of Policy Package 3, complementary policies can focus on boosting productivity for older rural workers. This segmented rural workforce can be supported by continuing agricultural restructuring to maximize productivity and returns for farming and extending Intergenerational Self-Help Clubs to increase economic development and income Pathways to a High-Income Future I 25 I generation among older workers in rural communities. Labor market transitions to sectors that show increasing productivity over the lifespan can be encouraged by providing skills development for workers to move up the rural value chain into the knowledge economy. Rural-urban migration of ethnic minorities can be supported by reducing the costs of `finding a good job. This begins with skills development and TVET learning that can be delivered digitally to those living in remote communities. Then, job search and matching for ethnic minorities would benefit from stronger Active Labor Market Policies (ALMP), information systems and public centers. Poorer households are particularly vulnerable to climate and environmental shocks, making the focus on resiliency of particular benefit to poorer households. Many poor live in districts with high exposure to climate shocks while having fewer coping strategies and safety nets to weather them. In addition, compared to peer countries, there is a higher risk in Viet Nam that natural disasters will drag more households into poverty. As with technology, geoeconomic and aging shocks, well-targeted and adequate social assistance (Package 3) will be an essential part of the policy response to shocks arising from climate change. Since these shocks disproportionately affect the poor, the reforms to make infrastructure more climate change resilient (Package 2) will also directly benefit the poor. A particular focus will be needed in the Mekong Delta, considered the most vulnerable region in Viet Nam to climate change. Viet Nam’s fiscal redistribution is less progressive than other middle-income countries and far from that of high-income ones. Fiscal redistribution can be assessed by looking at its patterns of taxes and spending. Low levels of social spending on education, health and social protection – considerably lower than LMIC and UMIC averages – limit how much fiscal policy reduces income inequality in Viet Nam compared to peer countries. After accounting for the income and consumption taxes households pay as well as the benefits from social spending on transfers, subsidies and public health and education, income inequality is reduced in Viet Nam by 4.4 points on the Gini Index. This is slightly below the average degree of inequality reduction among LMICs of 6.2 points and even further below the 8.7 point average of UMICs (Figure O.18). Meanwhile, despite tax revenue levels in high- income countries that are more than double Viet Nam’s, their much stronger spending on education, health and social protection means they reduce inequality by average of 12 points. I 26 I Viet Nam Rising Figure O.18. Taxes and spending in Viet Nam reduce inequality by less than the middle-income country average Impact of taxes and spending on inequality (points of Gini Index reduction) HIC UMIC LMIC LIC EAP Viet Nam 0 -5 Viet Nam -10 -15 -20 -25 Source: Rodriguez and Wai-Poi. 2024. Drawing on the lessons from other middle-income countries, Viet Nam could reduce both poverty and inequality through a combination of higher taxes and spending. Transfer spending is the most cost-effective at reducing inequality but their cash nature also helps offsets the burden of indirect taxes for poorer households. A fiscal reform package could center around greater revenue collection through both direct and indirect taxes that would finance greater investments in health and education (promoting both growth and equity) and social protection (promoting equity and offsetting the impact of higher indirect taxes on poorer households). This would increase fiscal space while reducing inequality by: (i) rationalizing VAT rates to remove exemptions, raising the base rate over the medium-term to raise additional revenues; (ii) improving targeting of social assistance to enhance its effectiveness; (iii) using targeted social assistance to mitigate the negative impacts on poor households of revenue raising reforms; and (iv) increasing coverage and adequacy of social pensions. Meanwhile, if carbon taxes are used to accelerate the green energy transition, the revenues can be recycled to reduce the impact of the energy transition on poor households and vulnerable workers by: (i) providing top-up cash transfers through existing social assistance programs; and (ii) investing in retraining and job matching for workers in sectors at risk to the energy transition. E) Policy package 5: Modernizing Institutions The legal and regulatory framework must be strengthened. The lawmaking process can be strengthened by building capacity at the lawmaking agencies (i.e., the ministries or agencies in charge of drafting the laws) to undertake real analysis, especially of the economic and gender impacts of the laws. The efforts to control administrative procedures have been commendable and have brought some improvements to the business environment in which Vietnamese firms operate, and these efforts Pathways to a High-Income Future I 27 I should continue. A more fundamental change reflecting an evolved role of the state in Viet Nam would be to also shift away from regulating inputs – such as the minimum size of premises –and instead focus regulations only on cases where there is a compelling social objective – such as controlling pollution or fraudulent behavior. Address the inefficiencies that have hindered the public investment program. The recent revisions of the Public Investment Law brought some important improvements. Certain powers and responsibilities are now delegated in some cases, reducing the need to go to the National Assembly or to the Prime Minister. The recent merger of the Ministry of Finance and the Ministry of Planning and Investment may help align investment planning and budgeting processes further. More could be done to improve systems and capacity for project appraisal, public procurement, and public asset management. Numerous laws and decrees are not always consistent and provide parallel preparation and approval tracks for different types of project or different funding streams. While capital budget allocation follows the Public Investment Law, recurrent budget allocation follows the State Budget Law. The investment planning needs to be aligned with the fiscal framework, with the newly merged MoF and MPI playing a strong gatekeeping function. Rationalize public administration and intergovernmental fiscal arrangements. The current wave of institutional reform includes a reduction in the number of provinces and removal of one layer of government, the district. While focused on streamlining administration, the reforms also have the effect of jurisdictional integration and alignment of incentives within the larger merged provinces. This reform presents the opportunity to optimize incentives for cooperation among provinces, for example, by providing fiscal incentives (e.g., matching grants) for regional infrastructure development and joint province-province (public-public) partnerships. The transfer rules (or transfer allocation formula) could also be adjusted to respond to the greater needs of the metro centers and large secondary cities, reward stronger local performance (including on green and climate actions) and efficiency. More can be done to strengthen due process, independence and professionalism of oversight institutions, and the preventive side of anticorruption. The current anticorruption drive needs to be complemented with attention to prevention. The Law on Access to Information was a major step forward, but more effort needs to be placed on capacity and socializing the obligations of the state under the law. Viet Nam needs to build greater confidence in truly independent approaches to due process for those accused of wrongdoing (Figure O.19). I 28 I Viet Nam Rising Figure O.19. Viet Nam’s due process and independence scores fall short of UMIC and HIC averages Due process and independence of the criminal justice system, Viet Nam and income category averages Due process of the law and rights of the accused Criminal justice system is free of improper government influence 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 Low-Income Lower Middle- Viet Nam Upper Middle- High-Income Income Income Source: World Justice Project. To achieve high-income status by 2045, the foundations for fast and inclusive growth need to be set now. On current trends, Viet Nam’s growth will fall short of achieving high-income in the period targeted. Strengthening its growth drivers is therefore essential. This will require the country’s capital- labor-productivity model of growth to be revamped in the face of emerging or accelerating shocks. The recommendations in this report are designed to strengthen Viet Nam’s market economy, encourage private-sector growth, and position the country more advantageously in today’s fast-changing global value chains. Forty years after the Đổi Mới, the discussions at the upcoming XIV Party Congress presents a once-in-a-generation chance to lay the foundations for such a transformation. Table 0.1 Policy packages Time Frame Policy packages Policy recommendations (ST, MT) 1. Supporting Streamline business regulations by adopting a risk-based approach to ST Private Sector business licensing and inspection: calibrate the type of ex-ante controls Development (e.g., notification, approval, ex-ante inspection), and the documentation requirements (e.g., studies, permits, certificates), based on the risks posed by each economic activity to consumers, workers and the environment. Foster technology adoption and innovation through a stronger business ST/MT environment by: (i) strengthen connections between MNEs and local firms by leveraging Investment Promotion Agencies and Suppliers Development Programs; (ii) digitizing administrative procedures. Upgrade GVC participation by: (i) shifting towards higher value-added ST/MT manufacturing and services; (ii) upskilling the workforce; (iii) deepening trade integration by reducing non-tariff barriers; and (iv) deepening regional trade integration. Pathways to a High-Income Future I 29 I Time Frame Policy packages Policy recommendations (ST, MT) 1. Supporting Move to cheaper, greener energy by: (i) adopting carbon tax to accelerate ST/MT Private Sector transition; (ii) implementing energy efficiency standards; (iii) introducing green Development subsidies; (iv) implementing PDP8; strengthening energy service companies (ESCOs) for efficient implementation. 2. Investing Enhancing capital market mobilization by: (i) developing the institutional ST in Resilient investor base including mutual and pension funds and insurance; (ii) diversifying Infrastructure the Viet Nam Social Security investment portfolio; and (iii) supporting diversified and professionalized investor base for corporate securities. Boosting domestic revenue mobilization by: (i) expanding the tax base to ST incorporate the digital economy; (ii) implementing a risk-based approach to audits and controls; (iii) updating the policy design for corporate and personal income taxes as well as value-added tax. Accelerate investment in power infrastructure by: (i) fast tracking priority ST/MT investments in both generation and transmission; (ii) accelerating project approval processes of PDP8 backbones; (iii) adopting technologies to maximize energy transfer at distance; and (iv) enabling access to long-term financing. Strengthen connectivity in Ha Noi and Ho Chi Minh City through targeted ST/MT investments in multi-modal transport centers, integrating and expanding metro and BRT systems. Investments in city transport infrastructure must be complemented by careful spatial planning policies that encourage higher urban densities near transit hubs. Enhance infrastructure resilience to climate change by: In the short term, ST/MT developing an interministerial data-sharing regime to integrate economic, natural and climatic, transport, and physical asset data as a basis for criticality and risk assessment. In the medium term, establishing a geospatial, data- driven, and risk-based asset management system, integrating it with resource allocation and budgeting processes. 3. Increasing Upskill the labor force and reduce skill mismatches by through an ST/MT Skills, integrated higher education and science-technology-innovation system Participation and by: (i) aligning the education and training system with market needs through Resilience close partnership with industry; (ii) strengthening the research and innovation capacity of universities; (iii) modernizing vocational education and creating lifelong learning pathways for all; (iv) improving the quality of higher education and ensuring it remains relevant to development needs; (v) integrating governance and strategic vision; and (vi) ensuring sustainable financing and investment. Help and encourage aging workers to be productive for a longer time by: ST/MT (i) supporting life-long learning and subsidized retraining for older workers; (ii) promoting flexible work arrangements considering older workers’ physical capacity and enforcing anti-age discrimination laws; (iii) continuing to increase the pensionable age and equalize by gender. I 30 I Viet Nam Rising Time Frame Policy packages Policy recommendations (ST, MT) 3. Increasing Develop a well-functioning market for elderly care services by: (i) developing MT Skills, a strategy for aged and long-term care (ALTC); (ii) adopt good practice from Participation and neighboring countries of community-based provision of care; (iii) develop Resilience an action plan to diversify the types of available care services providers; (iv) strengthen government oversight of public and private service providers; (v) encourage private sector participation; (vi) improve coordination between the social care system and other relevant government entities; (vii) train volunteers and professionals to staff the ALTC network; (viii) monitor government support for coverage and financing. Promote “aging in place” by drawing on international best practices to design MT cities that allow for aging in place. Expanding coverage and benefits of social protection by: (i) consolidating ST and harmonizing fragmented programs into a smaller number of flagship programs with adequate and indexed benefits; and (ii) ensuring sufficient financing. Make social protection more effective and more flexible by: (i) moving ST towards Adaptive Social Protection through flexible programs, policies and systems that protect those vulnerable before shocks while expanding to affected during shocks; (ii) using technology to strengthen targeting and delivery systems such as national IDs, government portals, data sharing platforms and digital payments. 4. Ensuring Ensure more equitable access to skill development by: (i) closing ethnic and MT Everyone Gains urban-rural human capital gaps through stronger early childhood nutrition, from the HIC health and sanitation, social assistance that promotes human capital and skills Transition development for ethnic minorities; (ii) ensuring all children finish high school with a good quality education that prepares them for tertiary education through compulsory and better quality upper secondary school; and (iii) increasing exposure to modern technology and digital literacy for disadvantaged children in formal education. Boost income-generation for rural and ethnic minority workers by: ST/MT (i) supporting the rural workforce through improvements in agricultural productivity and greater use of self-help groups for older workers in rural communities; and (ii) encouraging labor market transitions higher productivity sectors through skills development for workers to move up the rural value chain into the knowledge economy and support of rural-urban migration of ethnic minorities by reducing costs. Increase fiscal space while reducing inequality by: (i) rationalizing VAT rates ST/MT to remove exemptions, raising the base rate over the medium-term to raise additional revenues; (ii) improving targeting of social assistance to enhance its effectiveness; (iii) using targeted social assistance to mitigate the negative impacts on poor households of revenue raising reforms; and (iv) increasing coverage and adequacy of social pensions. Pathways to a High-Income Future I 31 I Time Frame Policy packages Policy recommendations (ST, MT) 4. Ensuring Minimize the impact of aging on women and promote greater labor Everyone Gains participation by women by: (i) providing improved/subsidized childcare and from the HIC elder care services with attention to greater utilization by poorer and less Transition educated women; ST/MT Recycle carbon tax revenues to reduce the impact of the energy transition on poor households and vulnerable workers by: (i) providing top-up cash transfers through existing social assistance programs; and (ii) investing in retraining and job matching for workers in sectors at risk to the energy MT transition. 5. Modernizing Strengthen the legal and regulatory framework by: (i) building capacity at ST institutions lawmaking agencies on analysis of the impact of laws; (ii) continue efforts to streamline business administrative procedures; (iii) shift away from regulating inputs to regulations focused on compelling social objectives. Address inefficiencies hindering public investment programs by: (i) ST improving systems for project appraisal, public procurement and public asset management; (ii) harmonize laws and decrees covering project preparation and approval; (iii) align investment planning needs with fiscal framework. Rationalize public administration and intergovernmental fiscal arrangements ST by building on current consolidation reforms to: (i) increase incentives for cooperation between provinces for regional infrastructure development; and (ii) adjust transfer allocation rules to respond to the greater needs of larger cities and rewards local performance and efficiency. Strengthen due process and professionalism of oversight institutions ST/MT complement anticorruption efforts with attention to prevention by: (i) investing on capacity building and socializing the obligations of the state under the law.; (ii) address implementation weaknesses in the system of income and assets declarations; (iii) strengthen the system of codes of conduct and prevention of conflicts of interest. I 32 I Viet Nam Rising INTRODUCTION CHAPTER 1 EVER SOARING AMBITIONS: FROM ĐỔI MỚI TO A NEW ERA OF NATIONAL RISE 1.1. Four decades of extraordinary progress since Đổi Mới In the nearly four decades since the Đổi Mới economic reforms, Viet Nam has experienced remarkable growth and poverty reduction. GDP per capita has expanded by six times in real terms, more than twice the average of all other countries that were also low-income at the time of Đổi Mới (Figure 1). This has helped lift millions out of poverty, reducing the extreme poverty rate from around half of the population to less than one percent today, one of the fastest rates in history.1 Human capital outcomes have also improved: life expectancy has increased, maternal and child mortality has declined sharply, and years of schooling have doubled. Life expectancy at birth increased from 68 years in 1986 to 75 years in 2022. Maternal, neonatal, infant, and child mortality all fell considerably. For example, the under-5 mortality rate in Viet Nam was 59 deaths per 1,000 live births, already only one-third of the low-income country (LIC) average in 1987, yet they still declined much faster. In 2022, at 20 deaths per 1,000 live births, it is two-thirds lower than it was four decades ago, having also fallen faster than countries that were lower-middle-income countries (LMIC) at the time (Figure 2). In 1985, the average length of schooling for those aged 15 years and above was 4.6 years; by 2024, the average had more than doubled, to 9.6 years.2 1 World Bank (2024), Viet Nam 2045: Trading Up in a Changing World. 2 2024 Population and Housing Survey (General Statistics Office). Pathways to a High-Income Future I 33 I Figure 1. National income has grown Figure 2. Significant improvements in more than twice as fast as other child mortality were achieved rapidly countries that were low- or lower- middle-income in 1987 GDP per capita, Viet Nam, LMIC and LIC average Under-5 mortality rates, Viet Nam, LMIC and LIC average 700 Low income Viet Nam Lower middle income 180 Low income 600 Viet Nam 160 Lower middle income Deaths per 1,000 live births 140 500 120 1987=100 400 100 300 80 60 200 40 100 20 0 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 Source: World Development Indicators Source: World Development Indicators Notes: LIC and LMIC averages are unweighted average of all Notes: LIC and LMIC averages are unweighted average of all low-income (lower-middle-income) countries in 1987 (first low-income (lower-middle-income) countries in 1987 (first year of classification). year of classification). New development ambitions and the challenge of 1.2. reaching high-income by 2045 Now a confident middle-income country, Viet Nam has set itself the goal of becoming high-income by 2045. On 13 August 2024, Party Secretary General To Lam called for a unified understanding of “the new historical starting point, the new era, and the rising era of the Vietnamese nation” and framed the period until 2030 as a decisive “sprint period” for Viet Nam to build solid foundations to achieve its two major economic goals: attaining upper-middle-income status before 2030; and reaching high-income country (HIC) status by 2045, the 100th anniversary of the Socialist Republic of Viet Nam. Reaching HIC status would provide higher levels of wellbeing for Vietnamese people. High- income countries are characterized by low poverty rates, high levels of formal employment, longer and healthier lives (bringing life expectancy to above 80 years old), better-educated children (about 80 percent tertiary education enrollment ratio), high levels of urbanization (more than 80 percent of the population living in cities), and economies dominated by the service sectors (about 70 percent of GDP value added). These characteristics are supported by robust social welfare systems, advanced healthcare and education systems, well-developed infrastructure, and a strong emphasis on human capital development. I 34 I Viet Nam Rising In parallel, Viet Nam is also striving to decarbonize the economy by 2050. In late 2021, Viet Nam committed to a target of reducing emissions to net zero by 2050 at the UN Climate Change Conference (COP26). The 2022 National Strategy on Climate Change includes a net-zero emissions commitment. Achieving this high-income ambition requires succeeding where many others have failed in the last half-century. Only 34 countries and territories have transitioned to HIC since 1990, most of them through European Union (EU) accession or natural resource windfalls.3 Many East Asian peers have struggled to make the transition, with South Korea representing a notable exception (Figure 3). Data since 1970 show that, at the global level, the average income per capita in middle-income countries has consistently remained below 10 percent of that in the United States (Figure 4). Figure 3. Many East Asian peers are Figure 4. Income of middle-income struggling to make the high-income countries relative to the US has been transition stagnant for decades GNI per capita relative to HIC threshold, selected East GNI per capita relative to United States, MIC average Asian countries and selected HICs Middle-income countries Middle-income countries, excluding China 30,000 Korea 2015 55 27,500 50 25,000 Korea Share of US GNI per capita (%) 45 GNi per capita (2015 $) 22,500 High-income threshold 40 20,000 35 17,500 30 15,000 Viet Nam Poland 2045 25 12,500 Upper middle- China 2022 20 10,000 income threshold MYS 2022 Chile 7,500 THA 2022 15 Viet Nam 5,000 2023 10 PHL 2022 2,500 IDN 2022 5 0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 T T+3 T+6 T+9 T+12 T+15 T+18 T+21 T+24 T+27 T+30 T+33 T+36 T+39 T+42 T+45 T+48 T+51 T+54 Source: World Development Indicators Source: World Development Report 2024 team using data Notes: GNI is gross national income. from World Development Indicators. Notes: The plotted lines indicate the trend of average income per capita in MICs and MICs excluding China, relative to income per capita of the US. Country definitions are based on the first WDR (1978), in which LICs have GNI per capita of $250 or less; MICs have GNI per capita of more than $250 and HICs consist of OECD members, except for Greece, Portugal, Spain, and Turkiye (classified as MICs). 3 World Bank (2024b). World Development Report 2024: The Middle-income Trap. Pathways to a High-Income Future I 35 I Many countries have become stuck in the middle-income trap as factor accumulation alone no longer sustains high growth. The World Development Report (WDR) published by the World Bank in 2024 analyzes what developing economies can do to avoid the middle-income trap. It sets out three stages of development as countries move from low- to high-income status: Investment, Infusion, and Innovation (Figure 5). Poorer countries can grow rapidly simply through accumulating capital (Phase 1: Investment). However, diminishing returns to capital means that investment must be augmented by increasing productivity to sustain growth as countries become middle-income. The easiest way to increase productivity for countries that are far from the technological and economic frontier is by adopting existing technology from richer countries (Phase 2: adding Infusion to Investment). As countries near the frontier and have largely adopted existing technologies, they not only need to rely upon capital accumulation and technology adoption to drive growth, but they must also begin to innovate and develop new technologies themselves (Phase 3: adding Innovation to Investment and Infusion). This shift in emphasis from growth driven by capital to growth driven by productivity can be seen in Figure 6; LICs receive about 40 percent more growth from physical capital than they do from total factor productivity, but this has completely reversed for HICs. Figure 5. Many MICs must engineer Figure 6. As economies develop, two successive transitions to move to capital accumulation brings HIC status diminishing returns and must be replaced by higher productivity Contribution to growth of capital and productivity Contribution to growth of capital and productivity (stylized) (empirical) Total factor productivity Contribution to growth (% of GDP per capita growth) 60 Physical capital per worker 1/ 2/ 3/ Investment Investment + Infusion Investment + Infusion + innovation 50 Relative contribution to growth 40 30 Capital Productivity 20 10 0 e e e e Proximity to the frontier om om m m co co c c -in in in -in e- e- w gh dl dl Lo Hi id id -m -m er er w p Up Lo Source: WDR 2024 team. Source: WDR 2024 team using data from Lange, Wodon, and Notes: The curves illustrate the relative contributions of capital Carey (2018): Penn World Table database v10.1. and productivity to economic growth (y-axis), according to Notes: The figure uses World Bank country income countries’ proximity to the frontier (represented by the leading classifications. economies). Countries farther out on the x-axis are closer to the frontier. I 36 I Viet Nam Rising For Viet Nam, attaining HIC status by 2045 would mean growing even faster than it has in the past by accelerating productivity growth. Viet Nam enjoyed strong and sustained growth for nearly four decades, averaging annual growth in per capita GDP of 5.1 percent. However, reaching HIC status by 2045 would require that growth accelerates to about 6 percent on average for the next two decades (Figure 7). Despite Viet Nam’s impressive growth to date, the gap to the global economic frontier (represented by the United States) remains large. In 1995, Viet Nam’s income per capita was only 2.3 percent of that in the United States; by 2023, it had increased to 5.4 percent (Figure 8). This progress confirms that income per capita in Viet Nam has been growing faster than income per capita in United States. It has also closed the gap to the US more quickly on average than the countries who were low-income, lower middle-income and upper middle-income in 1995 as well. However, in China, income per capital increased from 4.4 percent to 26.0 percent of US income per capita over the same period. To achieve fast growth in a sustainable manner, Viet Nam needs to fully take advantage of the “infusion stage” and gradually transition towards the “innovation stage” to deliver the productivity growth required to offset the expected impact of a rapidly aging population and decreasing returns to investment (see section 1.5.1 below). South Korea has demonstrated that fast productivity and economic growth is possible, although Viet Nam is significantly behind at a comparable point in time and rapid acceleration is needed. Comparing income growth between South Korea and Viet Nam starting from the point they had approximately the same level of low-income (1960 in South Korea, 2000 in Viet Nam), the former grew by 4.1 times in the first 23 years, whereas the latter grew by a respectable but lower 2.8 times (Figure 9). South Korea achieved these remarkable results leveraging fast productivity growth, which averaged 2.3 percent during the 1990-2010 period, namely the two decades that witnessed South Korea’s fastest growth. During the last decade, average productivity growth in Viet Nam has been significantly lower (0.9 percent). Pathways to a High-Income Future I 37 I Figure 7. Achieving HIC Figure 8. Viet Nam is Figure 9. Viet Nam’s status by 2045 would closing the income gap to income is growing more require growing faster the US significantly more slowly than that of than Viet Nam has grown slowly than China South Korea from the in the past same starting point Share of US GNI per capita, GDP per capita (2023 $) selected countries GNI per capita, ($ 2015) Upper middle income in 1995 Korea, Rep. China Viet Nam 6000 Lower middle income in 1995 +6.0% Viet Nam Low income in 1995 (excl. China) 5000 p.a. 30 Percent of US GNI per capita 15584 4000 +5.1% 20 3000 p.a. 2000 4347 10 2310 1000 682 0 0 1986 2010 2023 2045 1 4 7 10 13 16 19 22 25 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 Low Income Lower Middle High Income Income Synchronised Time (years) Source: World Bank calculations using Source: World Bank calculations using Source: World Bank calculations World Development Indicators. World Development Indicators using World Development Notes: Income category country Indicators members based on income category Notes: Year 1 set such that GNI per in 1995. China was low-income in 1995 capita are approximately equivalent and is excluded from the low-income ($1,175 in 1960 for South Korea, category average. Category estimate is $1,169 in 2000 for Viet Nam). total GNI (constant 2015 USD) across member countries divided by total population. Growing in a changing context: global and domestic 1.3. megatrends New external and domestic challenges have emerged, particularly with regard to geoeconomic fragmentation, disruptive technology, climate change and rapidly evolving demographic trends. In recent years, the world has seen rapid and significant changes that have created new challenges and opportunities that will be salient for many years to come. This report discusses the implications for Viet Nam of four key megatrends. First, geoeconomic fragmentation resulting from significant changes in the relations between major economies. Second, disruptive technological change has been accelerating, with robotics and automation altering specific industries and jobs. Third, the effects of climate change are becoming unmistakable, and are affecting both physical and natural capital stocks as well as worker productivity. Fourth, the demographic transition: in East Asia broadly, as in Viet Nam specifically, rapidly aging societies threaten slower growth, greater fiscal pressures along with higher demand for elderly and health care, greater old age poverty, and increasing gender inequalities.4 4 World Bank (2016). Live Long and Prosper: Aging in East Asia and the Pacific. I 38 I Viet Nam Rising Geoeconomic fragmentation is creating new risks and opportunities for Viet Nam.5 Since 2008, the expansion of world trade has been decelerating, in part due to the plateauing of offshoring activities. In addition, geoeconomic tensions are leading to the fragmentation of global value chains (GVCs), especially in strategic sectors. Recent years have seen a marked increase in protectionist measures and bilateral trade tensions between the United States and China have affected merchandise trade volumes which, after growing from 29 percent to 44 percent of global GDP between 1995 and 2015, stagnated at about 45 percent of global GDP during the last decade. In addition, major economies have intensified industrial policy efforts, especially in strategic sectors such as semi-conductors and green tech, which have tilted the playing field in favor of onshoring key supply chains in these sectors. These shifts in the trade landscape offer some opportunities for Viet Nam. The relocation of several value chains from China in recent years—often described as the ‘China Plus One’ strategy—provides one such example. However, while creating opportunities, Viet Nam’s position at the heart of critical regional and global supply chains also makes the economy vulnerable. Viet Nam’s exports to the United States include a significant proportion of intermediate inputs from China, which are now at risk due to potential trade restrictions. At the same time, the global demand shift to Asia creates opportunities for Viet Nam to diversify its export markets; with rising incomes, coupled with the emergence and rapid growth of the middle class, Asia is projected to become the largest source of final demand in the medium term. Disruptive technological change has accelerated shifts to digital service trade and automation.6 Digital technologies are making services more tradable and cross-border trade in services—especially digital services—continues to expand even as manufacturing trade slows down. Future trade growth is expected to rely more heavily on tradeable services, including high value-added innovator sectors such as information and communications technology (ICT), financial services, and insurance. Digital trade, in the form of goods and services transacted or delivered through digital networks, is quickly becoming a central element of GVC production. At the same time, the rise of trade-in-tasks, or “servicification” in production, means that the manufacturing sector increasingly relies on services. These may comprise inputs, activities within firms, or output sold bundled with goods. Meanwhile, technological advances could potentially shorten GVCs or trigger reshoring of production systems, presenting both risks and opportunities. Rapid and disruptive technological changes fueled by automation and related processes are transforming production. On average, the global number of robots installed for industrial production has grown by 18 percent annually over the last decade, with Asia emerging as the world’s largest market. Some of these technologies may enable technological leapfrogging and increase the productivity of developing countries such as Viet Nam, while also creating new and higher skilled jobs in maintenance and management. Yet, automation can also act as a double-edged sword by negatively affecting jobs and competitiveness for economies that rely on labor-intensive exports and on low-cost, low-skill labor. Viet Nam’s development and climate challenges are deeply intertwined.7 With over 3,260 kilometers of coastline, low-lying river deltas, and a tropical climate, the country is on the front line of climate risk. Heat waves, floods, storms, and rising sea levels are not just environmental challenges; they 5 World Bank. (2024a). Trading Up in a Changing World: Pathways to a High-Income Future. 6 Ibid. 7 World Bank (2025a). Greening Growth in Viet Nam: Adaptation and Mitigation Challenges and Opportunities. Pathways to a High-Income Future I 39 I also threaten the farms that feed communities, the factories and cities that drive growth, and the infrastructure that connects people and markets. Without action, climate could have a significant impact on economic growth over the coming decades, threatening Viet Nam’s ability to reach its 2045 target. At the same time, the country’s development is still heavily tied to carbon emissions. Coal makes up 32 percent of the energy mix, while energy efficiency is relatively low. As a consequence, Viet Nam emits 45 percent more carbon per unit of output than the average middle-income economy. To achieve its net-zero emission goal, it must find ways to reduce emissions while ensuring energy remains affordable and industries stay competitive. Concurrently, Viet Nam is undergoing significant social changes. The country is on the cusp of a dramatic aging of the population that is taking place at a faster pace and at an earlier level of development than most other countries in the world.8 By 2049, Vietnamese citizens age 65 years or older will have more than tripled in number since 2014 and will make up nearly one fifth (18 percent) of the population. The sheer speed of aging means that Viet Nam will have less time to adapt policies to an older society than many advanced economies have had. Furthermore, the shrinking labor force and costs of an aging population will create a significant drag on growth, while public spending is estimated to increase significantly (by 1.4 to 4.6 points of GDP – compared the 12.1 percent of GDP currently dedicated to total current expenditure).9 1.4. The framework Economic growth has long been understood as driven by investment, labor, and productivity. Many of the basic ideas that appear in modern theories of growth—such as the accumulation of physical capital and labor, and their diminishing returns—were introduced by classical economists as far back as Adam Smith in the late 1700s.10 The now canonical production function was introduced in 1956 and models growth as the product of capital, labor, and technological progress (or productivity).11 The explosion of research into growth theory since then still augments and extends this basic framework, which remains a very useful way to think about the drivers of growth. The report builds on the framework provided by the production function by considering how growth can be diverted by shocks, while at the same time recognizing the fundamental role of institutions in enabling growth. This report expands the basic production function of capital, labor and productivity by incorporating shocks—specifically geoeconomic fragmentation, technological disruption, climate change, and fast demographic changes—that can affect all three drivers. It also acknowledges the fundamental role that institutions play throughout the growth process. At the sectoral level, institutions 8 World Bank (2021a). Viet Nam: Adapting to an Aging Society. 9 This range spans three projection scenarios based on: (i) demographic changes with current pensions (1.4 percent of GDP expenditure increase); (ii) demographic changes with expanded pension coverage (2.4 percent); and (iii) demographic changes with expanded pension coverage and higher unit costs (4.6 percent). See World Bank (2021a). 10 Barro and Sala-i-Martin (1999). Economic Growth. 11 Solow (1956). “A Contribution to the Theory of Growth”, Quarterly Journal of Economics 70(1): 65-94; Swan (1956). “Economic Growth and Capital Accumulation”, Economic Record 32: 334-361. I 40 I Viet Nam Rising can affect the accumulation of assets, the returns to those assets, and their exposure resilience to shocks. At a more general level, institutions fundamentally influence how these factors combine together to achieve greater productivity and faster growth (Figure 10). Figure 10. Drivers of growth Growth is driven by the ways in which capital and labor are accumulated and effectively combined to produce goods and services. Factor accumulation and their effective combination (productivity) can be affected by shocks and shaped by a country’s institutions Institutions Capital Labor Productivity OUTPUT Shocks Shocks Shocks Source: Authors’ illustration. This conceptual framework is used to frame the analysis and the policy options proposed int the report. The report leverages the production function to understand how Viet Nam has grown historically, and to explore how it can sustain and even accelerate its growth over the next two decades. It also asks how growth drivers will be affected by longer-term trends, and how the country’s growth model can be made both more resilient to expected shocks and flexible enough to cope with unexpected shocks. The conceptual framework is not applied in a formal quantitative manner but instead used as a qualitative guide to frame analysis and policy recommendations. The report is divided into five parts, with Part 1 focusing on Productivity and Competitiveness, Part 2 on Labor and Households, Part 3 on Infrastructure and Resources, Part 4 on Institutions and Part 5 on Equity. The impacts of the different shocks are considered in each part. The stocktaking of each driver that follows next suggests particular issues meriting their own chapter under each part. 12 For a summary discussion, see: World Development Report 2024. For detailed exposition, see: Barro and Sala-i-Martin (1999); Aghion and Howitt (1999). Endogenous Growth Theory; Acemoglu (2009). Introduction to Modern Economic Growth. Pathways to a High-Income Future I 41 I Figure 11. Building on the conceptual framework proposed, the report’s chapters are organized into four parts Part 1: Productivity Part 2: Labor and Part 3: Infrastruture Part 4: Institutions Part 5: Equity and competiviveness households and resources l Chapter 2: GVC l Chapter 6: Aging l Chapter 8: Spatial l Chapter 11: l Chapter 12: Equity upgrading and care and digital Institutions l Chapter 3: Skills and l Chapter 7: Social connectivity higher education protection l Chapter 9: Adapting l Chapter 4: Fostering to Climate Change firm innovation l Chapter 10: Resoure l Chapter 5: Energy mobilization transition Source: Authors’ illustration. 1.5. Taking stock 1.5.1. Evolution of growth drivers Viet Nam accumulated fixed capital at very high rates at earlier income levels; but capital accumulation has decelerated since 2010. In the earlier stages of its development, when it was still a low-income country, Viet Nam rapidly accumulated physical capital. Between 2000 and 2010, gross capital formation (GCF) increased from 30 percent to 37 percent of GDP. At that time, Viet Nam had the highest rate of investment among comparator countries at a similar income level (Figure 12). However, GCF has fallen back to around 32 percent of GDP between 2010 and 2015 (even as other countries at the same stage of development were accelerating investment) and it remained constant at these levels since then. Capital accumulation is expected to continue going forward. Despite the capital accumulation registered during the last decades, Viet Nam’s capital stock is still relatively low, at 187 percent of GDP (compared to about 300 percent of GDP in Indonesia and Thailand). This suggests that investment will remain a key driver of growth during the next years. The government is supporting efforts to simplify business regulations to improve the business environment and attract private investment. Moreover, following years of conservative fiscal management and a significant decrease of the public debt to GDP ratio (currently at about 37 percent), authorities plan to boost public investment. In parallel, marginal returns to capital may decrease. Past international experience suggests that marginal returns to capital decrease as countries reach a certain level of capital stock. Viet Nam’s total output per hour worked relative to the capital stock per hour worked has increased at around the same speed as other East Asian countries when they were at the same level of capital stock. However, as these peer countries continued to increase their capital stock from the point at which Viet Nam is now, their additional output per hour worked began to decline (Figure 13). I 42 I Viet Nam Rising Figure 12. Viet Nam’s fixed capital Figure 13. Marginal returns to capital accumulated quickly at earlier income are expected to decrease levels but has since fallen back Grossed fixed capital formation versus GDP per Real GDP per hour worked versus capital stock per capita, selected countries hour worked, selected countries Grossed fixed capital formation (% of GDP) 15 Real GDP per hour worked (2017 USD) 60 10 40 5 20 0 0 100 1000 10000 100000 0 10 20 30 40 GDP per capita (constant 2015 $) - log scale Capital stock per hour worked (2017 USD) China Thailand Brazil Viet Nam Viet Nam Viet Nam Malaysia Korea, Rep India (Fitted, baseline) (Fitted, avg comparators) Philippines Indonesia Turkey Indonesia China Philippines Japan Mexico Viet Nam Chile Uruguay Korea Thailand Malaysia Upper middle income Lower middle income Source: World Bank using World Development Indicators. Source: Author’s calculation based on World Development Indicators and PWT10.1. Labor force participation has been very high, driven by strong female participation. Viet Nam has one of the highest labor force participation rates in the world across all development levels. This is primarily because so many women in Viet Nam work. Its female labor force participation (FLFP) rates far exceed the UMIC average and are higher than those in China and Thailand, which are themselves among the highest in the region and the world (Figure 14). However, as Chapter 6 examines, participation rates drop rapidly for both men and women as workers reach the age of social insurance pension eligibility. Over nine out of ten of 50-54 year-olds work, but this falls to seven out of ten 60-64 year-olds. However, the population has begun to age, reducing the share of workers and becoming a drag on growth. The size of the working age population has been declining for a decade. This means that there are fewer workers to support the young and there are an increasing number of elderly. In fact, by around 2040, it is forecast that young and elderly dependents will outnumber people of working age, signaling the end of Viet Nam’s demographic dividend (Figure 15). This is projected to reduce annual growth by one percentage point by 2050.13 13 World Bank (2021a). Pathways to a High-Income Future I 43 I Figure 14. Viet Nam has high labor Figure 15. …but the working-age share force participation, driven by strong of population has already started to female participation… decline Female labor force participation versus GDP per Viet Nam share of population by age group, capita, selected countries 1990-2050f China Malaysia Philippines 0-14 (%) 15-64 (%) Thailand Korea, Rep Indonesia 65+ (%) Dependency ratio (%) Mexico 90 80 Declining share of working-age ... 70 80 Labor force participation rate (%) China 60 End of population bonus 70 50 60 Korea, 40 Rep 30 50 20 40 10 30 0 200 2000 20000 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 GDP per capita (constant 2015 $) - log scale Source: World Development Indicators. Source: World Bank calculations using World Population Prospect. Demographic trends underscore the importance of accelerating productivity growth to sustain rapid economic growth. The fading demographic dividend leads to a decline in labor force growth. To sustain faster economic growth, faster productivity growth is required to offset the impact associated with the demographic transition. Viet Nam’s current output per worker is significantly lower than other middle-income countries in the region, which suggests significant room for catch- up growth (Figure 16). If growth drivers continue on current trends, Viet Nam’s growth will slow and high-income status will not be reached by 2045. Future growth can be projected by extrapolating current trends in capital stock, labor force, human capital, and productivity.14 If these underlying trends continue for each driver, annual rates of growth are projected to decline, even as they need to accelerate if the 2045 target is to be achieved (Figure 17). By 2041-45, growth at current driver trends is projected to be just 4.3 percent, 1.7 points short of the rate required; this would mean that reaching high-income status would take an additional seven years (i.e., being achieved in 2052). 14 The long-term growth model (LTGM) is a World Bank model based on a Solow-Swan production function calibrated to fit the features of the Vietnamese economy. More details can be found in World Bank (2024). I 44 I Viet Nam Rising Figure 16. While Viet Nam’s labor Figure 17. …and its traditional drivers productivity has been improving, it of growth are losing steam lags peers… Output per worker 1990-2020, selected countries Future growth decomposition (projected) Viet Nam Malaysia Thailand Capital stock Labor Force Indonesia China Philippine Human capital TFP Output (GDP) per hour worked (2017 PPP US$/h) 25 6% 5.6% 20 4.9% 5% 4.3% 15 4% 3% 10 2% 5 1% 0 0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 -1% 2024-30 2031-40 2041-45 Source: World Development Indicators. Source: World Bank calculations using World Population Prospect. Meeting high-income ambitions will require reinvigorating Viet Nam’s growth drivers. With traditional growth drivers losing their momentum, Viet Nam’s 2045 target will not be met unless the country finds a way to accelerate productivity growth while continuing to attract investment. As the WDR notes, the path to a high-income economy generally requires moving from capital accumulation alone to additional drivers of growth, including greater productivity. Figure 18 shows Viet Nam’s current position in the productivity-investment space, coupled with the corresponding levels of both productivity and investment that would need to be reached by 2030 in order for it to become a high-income economy by 2045. Boosting both productivity growth and investment will help Viet Nam to achieve high-income status. Viet Nam’s historical average productivity growth of 0.9 percent over the last twenty years is below most comparators, while its total (public and private) investment rate of 32 percent of GDP is higher than that of Thailand and Malaysia but below that of China (43 percent of GDP). If Viet Nam were to solely rely on higher productivity, it would need to sustain a much higher annual productivity growth of 2 percent every year by 2030 in order to achieve its high-income ambitions – a path similar to the one followed by Korea and Singapore when these countries were at Viet Nam’s current per capita income level. On the other hand, relying solely on higher investment would require an unsustainable investment ratio of 49 percent of GDP, which is even higher than China’s exceptionally high investment. An illustrative pathway to high-income status by 2045 would require reaching a combined 1.8 percent annual productivity growth and an investment ratio of 36 percent by 2030, which represents an ambitious but reachable goal. Pathways to a High-Income Future I 45 I Figure 18. Meeting high-income ambitions will require higher productivity growth and higher investment Productivity-Investment space to achieve high-income status by 2045 3.5% 3.5% Singapore 3.0% 3.0% 1970-80 Korea 2.5% %) Korea (annual %) 2.5% 1990-00 (annual Thailand 2000-10 2000-20 2.0% 2.0% growth growth Philippines 2000-20 1.5% 1.5% Indonesia Productivity Malaysia 2000-20 Productivity 2000-20 1.0% 1.0% China High-income Viet Nam 2000-20 Bangladesh reached by 2045 2000-20 0.5% 0.5% Turkiye High-income 2000-20 not reached by 2045 0.0% 0.0% 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% Investment ratio (% of GDP) Source: World Bank staff calculations. See Appendix 2 for details of the growth model. Notes: HIC means High-income country, which represents a GNI per capita of 13,845 USD or more in 2022. To facilitate faster productivity growth and attract greater investment, it is key for Viet Nam to modernize its institutions. Many of Viet Nam’s most pressing problems are institutional in nature. The country has undergone a series of policy reforms over decades that have brought improvements across many dimensions. Nonetheless, it still struggles with institutional constraints. Firms continue to complain about the burden of administrative procedures, while public investment processes remain slow and rigid. In addition, decentralization has given provinces more control over their spending, but it has also led to wasteful competition and uneven infrastructure investment. Resolving these issues and further strengthening Vietnamese institutions will be fundamental to achieving high-income status within the desired timeframe. It is notable, for example, that strengthening the implementation of laws is a common feature among all the countries that transitioned to high-income status faster in the past (Figure 19). The on-going institutional reform provides a once-in-a-generation opportunity. Viet Nam is in the midst of major institutional changes, a transformational reorganization of the central government and realignment of subnational government systems. These changes help address some of the country’s most pressing challenges, with a focus on improving efficiency of public administration at the central and local levels and enhancing government accountability. At the same time, the spirit of institutional reform could be harnessed to go much further.15 For instance, removing procedural 15 World Bank (2025), “Viet Nam 2045: Breaking Through - Institutions for a High-Income Future”. I 46 I Viet Nam Rising bottlenecks to public investment is a first step, but rethinking responsibilities among central and local authorities would go deeper. Efforts to clamp down on corruption need to be complemented by efforts to strengthen the systems of prevention and external oversight. Right-sizing the public administration and improving incentives, including compensation, are needed, but strengthening motivation of civil servants will be more challenging. Perennial programs to cut red tape and administrative procedures help, but deeper reforms to the regulatory system and processes still lay in the future. Figure 19. Countries that advanced to HIC status faster improved the implementation of laws Predictability of implementation of laws by year as UMIC before becoming HIC 0.9 EST CHL Implementation of Laws (5 year moving average) 0.8 LVA CZE POL Assessment of Predictability of 0.7 SVK LTU 0.6 HRV BUL 0.5 0.4 VNM 0.3 0.2 0.1 Year 35 Year 36 Year 34 Year 31 Year 32 Year 33 Year 29 Year 30 Year 28 Year 25 Year 26 Year 27 Year 23 Year 24 Year 21 Year 22 Year 18 Year 19 Year 20 Year 16 Year 17 Year 14 Year 15 Year 13 Year 10 Year 11 Year 12 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Source: World Bank staff calculation based on for Democracy and Electoral Assistance, 2023; World Bank, 2024. Notes: Solid line are countries which achieved high-income status in around 20 years. Dotted lines are those which either are still UMICS or took 30+ years to reach HIC status. Viet Nam’s position is shown for illustration. Even if Viet Nam succeeds in becoming a high-income country by 2045, an unequal distribution of income means that nearly two-thirds of its people will still be below high-income. Viet Nam has maintained relatively stable inequality over the last three decades, below the level defined by the World Bank as “high”,16 even as it has sustained remarkable economic growth (Figure 20A). However, there are some signs that inequality has been increasing recently. In parallel, the aging, climate and technology shocks are expected to have a larger impact on poorer households in absence of policy 16 The Gini coefficient is a common measure of income inequality among the population ranging from 0 (perfect equality) to 1 (perfect inequality). Additionally, the World Bank has introduced measures of shared prosperity focusing on the share of income and income growth rate of the bottom 40% of the population. Pathways to a High-Income Future I 47 I measures addressing these shocks. Moreover, even if inequality stays at current levels and Viet Nam achieves high-income status by 2045, then only 38 percent of the population are projected to also achieve this level.17 That is, the country will have sufficient income on average for everyone to be high- income but because this income is not distributed equally, the majority – 62 percent – of Vietnamese will be below this level (Figure 20B). At current levels of growth that will leave Viet Nam short of HIC status in 2045, 78 percent of the population would be below high-income levels of consumption. Figure 20A. Viet Nam’s inequality has Figure 20B. At current levels of remained relatively low and stable for inequality, 62 percent of Vietnamese the last three decades but had recently would be below high-income level in begun to creep up before the pandemic 2045 even if the country makes it Gini Index, income, 1992-2022 Share of population with consumption below high- income country equivalent 40 HIC growth Baseline growth 100 39 38 90 37 80 36 35 70 34 60 33 32 50 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 Source: World Development Indicators. Source: World Development Indicators. 17 To estimate household incomes and the share who attain high-income status, the following projection is made. First, household consumptions are projected forward under the assumption that Viet Nam achieves HIC status in 2045. To do this, the required growth rate in GDP per capita is applied to households with a passthrough of 0.87 to reflect differences between national accounts and the VHLSS survey. Different assumptions are made on how this growth will be distributed across the population. Initial assumptions assume that everyone will benefit equally from this growth, while others assume that this growth may be accompanied by worsening inequality levels. Second, the HIC threshold is adjusted to apply for households in the VHLSS. The HIC threshold of USD 13,205 in 2022 is converted to VND 4,020 at the 2022 exchange rate of 23,271 VND to 1 USD. This is then adjusted for the difference in mean income in the VHLSS household survey and GNI. The ratio of Viet Nam’s GNI per capita to mean VHLSS consumption per capita is 0.49. So, the HIC threshold in VND of 23,271 is adjusted downwards by multiplying by this ratio. The percentage of population living in households below this adjusted HIC threshold is the share who will not have attained HIC income levels even when the country has. I 48 I Viet Nam Rising 1.5.2. Progress in implementing reforms The 13th National Party Congress in 2021 recognized the importance of addressing implementation challenges as a key priority of its socio-economic development strategy. While Viet Nam has made significant economic and social progress over recent decades, as well as exceeding expectations in trade openness, it has not fully achieved its development objectives due to inconsistencies in policy implementation. The Congress’s official reports highlighted that uneven execution of reforms across different regions and sectors has led to disparities in growth, efficiency, and the realization of strategic goals. For example, while major urban centers like Ha Noi and Ho Chi Minh City have thrived with infrastructure improvements and foreign investment, rural areas and certain industries have lagged behind due to bureaucratic inefficiencies and lack of policy coordination. Additionally, reforms in key areas such as state-owned enterprise restructuring, digital transformation, and sustainable development have progressed at varying speeds, which has weakened their overall impact on national development targets. A major issue raised during the 2021 Congress was the gap between policy formulation and practical implementation. While Viet Nam has established ambitious economic and social targets (including those outlined in the Socio-Economic Development Strategy 2021–2030), inconsistent application at local and provincial levels has created bottlenecks. Factors such as limited administrative capacity, overlapping regulations, and fragmented governance structures have hindered the effective execution of key initiatives. The Congress emphasized the need for stronger institutional reforms, improved monitoring mechanisms, and greater accountability to address these challenges. Without more uniform and effective policy enforcement, Viet Nam risks falling short of its long-term aspirations for becoming a high-income country and maintaining sustainable economic growth. Many past reforms are only weakly implemented. Six years after the Law on Access to Information took effect, fewer than 13 percent of provinces publicize information on the focal point for information provision, and only 16 percent have set up an access to information section. Other institutional advances have similarly met implementation challenges. Seventeen years after the first introduction of requirements for upstream analysis of the impacts of laws, and ten years after specific assessments for gender, economic, and social impacts, pro forma adherence to the legal requirement is high, but the depth of the analysis is often weak. Viet Nam’s path-breaking requirement to conduct gender impact assessments when introducing new or amended legislation remains ineffectively implemented, despite concerted efforts to do so. Despite reforms to the lawmaking process, the translation of policy recommendations into action has been slow. A review of the implementation of reforms proposed by the Viet Nam 2035 report after five years highlighted the slow pace of implementation. A simple quantitative analysis of the percentage of policy recommendations implemented shows that only 45 of the 182 specific recommendations—about one quarter—have been included in policy documents during this time period (Table 1). More progress was made implementing reforms related to economic modernization Pathways to a High-Income Future I 49 I and private sector development (33 percent implementation), building innovation capacity (30 percent), and institutional reforms (36 percent). Reforms related to urbanization (5 percent), climate change (14 percent), and social inclusion (19 percent) showed the least progress. Consensus-style decision-making takes time, especially for major changes, and this also explains the slower-than-expected implementation. Most of the reforms adopted following the publication of Viet Nam 2035 were technical in nature, with the most challenging changes left on the table for debate. The review of implementation of measures proposed by the Viet Nam 2035 report also highlighted other factors contributing to slow implementation including the low quality of legislation, the legislative process in which related ministries are responsible for their own legislation, and the lack of effective mechanisms to protect officials willing to take action (Thang, 2023). Table 1. Implementation of the Viet Nam 2035 recommendations has been slow Number of Recommendations Recommendations In Total included in policy policy docs documents (%) 1 Enabling economic modernization and private sector development 30 10 33% 2 Building national innovation capacity 30 9 30% 3 Managing urbanization for greater efficiency 19 1 5% 4 Achieving sustainable and climate-resilient growth 35 5 14% 5 Promoting equity and social inclusion 26 5 19% 6 Building modern institutions for an effective state 42 15 36% TOTAL 182 45 25% Source: Australia World Bank Strategic Partnership Program – World Bank Group - Viet Nam 2035: From Strategy to Action. Report on Viet Nam 2035 and Renovation of economic institutions in Viet Nam for the period 2016-2020; June 2021; p. 520. Notes: Review and evaluation of the implementation of recommendations in the Viet Nam 2035 report until the beginning of 2021. Viet Nam’s slow implementation and (until recently) its slow institutional reforms are primarily hindered by a lack of autonomy and efficiency in public administration. Policy execution is constrained by a lack of autonomy and efficiency in public administration, particularly at the subnational level. Decentralization efforts have increased delegation of responsibilities, but local governments still have limited fiscal and decision-making autonomy, leading to fragmented policy implementation. Bureaucratic paralysis, driven in part by excessive layers of approval and risk aversion due to anticorruption campaigns,18 has further slowed public investment projects. Less than 80 percent of 18 Tartaski’s 2022 Asia Society Magazine article that concludes “Officials are now in self-preservation mode — delaying important decisions in order to avoid being held responsible in the future if a mistake is made “ and quotes local and overseas-based academics (https://asiasociety.org/magazine/article/unintended-consequence-vietnams-anti-corruption-drive). See also Nguyen’s 2024 Fulcrum articles that note “Since 2016, a mass exodus of public employees has coincided with growing fears among those remaining of being caught in anti-corruption investigations, leading to widespread reluctance to fulfil their responsibilities” (https://fulcrum.sg/ cooling-the-blazing-furnace-of-vietnams-anti-corruption-drive/). I 50 I Viet Nam Rising public investment allocations were effectively implemented between 2017 and 2022.19 Major transport projects, for example, faced average delays of five years and incurred an average cost overrun of double the original figure at the design and budget allocation stage due to inefficiencies in execution.20 Limited participation and public engagement affect policy effectiveness and compliance. A lack of in-depth engagement with businesses, civil society, local communities, and other stakeholders creates inefficiencies and inconsistencies. In addition, weak regulatory consultation processes have led to inconsistent application of regulations, with businesses frequently citing difficulties in navigating administrative procedures and policy inconsistencies.21 Strengthening institutionalized mechanisms for public input, such as open consultations, and promoting evidence-based decision-making can also create more effective and widely accepted policies. Poor oversight and dispute resolution mechanisms hinder institutional reform by reducing accountability and trust in governance. The National Assembly, while playing a role in legislative oversight, remains constrained by structural limitations and a lack of independent authority. Additionally, dispute resolution mechanisms, particularly in commercial and property rights cases, remain slow and unpredictable, thus discouraging both domestic and foreign investment.22 Strengthening institutional oversight requires clearer enforcement of transparency measures, judicial reforms to improve legal predictability, and enhanced independence of oversight bodies to ensure impartial monitoring of policy implementation. The recent “New Era” changes represent a significant shift in attitude toward institutional reform. Recent reforms come with a willingness to change mindsets, rather than remaining wedded to existing institutional arrangements. The momentum for an “institutional Big Push” is there; if it can be harnessed to address some of the bottlenecks outlined above, it would be a major step forward for Viet Nam. 1.6. The Report The rest of the report examines selected issues in greater depth, given the organizing framework. Achieving Viet Nam’s growth target—and ensuring that this growth is sustainable and equitable— requires successfully addressing the key issues under the growth framework identified above. First, productivity needs to increase and contribute more to overall growth. As the WDR’s 3i framework emphasizes,23 Viet Nam’s transition to a high-income status will require productivity to increasingly contribute to growth. Upgrading Viet Nam’s participation in GVCs is one key means of delivering the 19 World Bank (2021). Systematic Country Diagnostic. 20 World Bank (2023). Regional Investments in Viet Nam: Challenges and Opportunities. Review sample included 14 transport projects which accounts for 13 percent of transport investment budget during 2011-20 (sourced from MOT). 21 World Bank (2021). Systematic Country Diagnostic. 22 World Bank (2021). 23 World Bank (2024d). Pathways to a High-Income Future I 51 I labor productivity growth required to achieve the country’s high-income objective. This is the focus of the chapter on ‘GVC Upgrading’. Not only can this increase growth directly, but greater integration of domestic firms into GVCs will also accelerate technology infusion. At the same time, strengthening the business environment will support a more efficient allocation of resources in the economy and higher firm productivity. In particular, the chapter on ‘Fostering Firm Innovation’ looks at how resources can be directed to more innovative startups that, in turn, can help increase productivity. A further chapter looks at the importance of the green energy transition in Viet Nam. A green energy transition will reduce long-term energy costs, helping firms and industries stay competitive, while also avoiding trade barriers to high emission intensity exports, such as the EU’s Carbon Border Adjustment Mechanism. However, short-term costs must be managed to sustain competitiveness. Supporting technology infusion and promoting competitiveness will require a strong local skill base, which will also make FDI and domestic investment more attractive. Ensuring this skill base is broad will not only boost the growth-enhancing dimension of skills; it will also help make that growth more inclusive. The chapter on ‘Skills and Tertiary Education’ discusses the necessity of strengthening Viet Nam’s tertiary education system and the skills that workers will need to succeed in a rapidly changing economy and labor market. Second, reforms are needed to support labor force participation and to protect the workforce from shocks. This means making it easier and more appealing for women to stay in the workforce and secure employment in productive jobs. It also means ensuring that workers (especially those who are older) continue developing new skills as technology changes, and that they can continue to contribute even as they age. At the same time, a strong social protection system suited to Viet Nam’s growing middle class is needed. Such a system would: (i) promote human capital accumulation; (ii) allow workers to find suitable employment as technological and structural change eliminate some existing jobs; (iii) encourage labor mobility, both in terms of sectors and occupations, as well as regions and locations; (iv) provide adequate support as workers age and retire while being financially sustainable; and (v) be flexible enough to adapt to the many shocks that will buffet workers, households, and the country as a whole in the coming years. The chapters on labor and households examine various themes, including: aging; elder care; the evolving social protection system; and equity-related issues. Third, even as Viet Nam needs to rebalance growth towards higher productivity, investment nonetheless needs to be sustained, particularly in critical infrastructure: The chapter on ‘Spatial and Digital Connectivity’ examines how Viet Nam can strengthen its physical connectivity at multiple levels; namely, on the global stage, between regions within the country, and within cities and rural areas. It also looks at the country’s digital infrastructure, a critical foundation for taking advantage of many current and emerging technologies. Investments must also be made in climate-resilient infrastructure if the increasing impacts of climate change are not to undermine growth. The chapter on ‘Adapting to Climate Change’ examines Viet Nam’s vulnerability to climate change and how it can adapt critical transport, energy, and agricultural infrastructure so as to be more climate resilient. The reforms envisaged in this report will require financing, both private and public, particularly for infrastructure but also to strengthen skills and sustain an aging population and workforce. This means I 52 I Viet Nam Rising increasing private domestic investment and FDI and developing capital markets for effective financial intermediation while also expanding the domestic revenue base and improving the quality of public spending. The chapter on ‘Resource Mobilization’ examines these sources of financing in more depth. Finally, Viet Nam needs the institutional capacity to implement the policies needed to drive these outcomes. Stronger institutions are needed that can: design and implement the right policies; foster a capable, motivated, and accountable civil service; and support a government structure that promotes growth and delivers quality public services. These are the focus of the critical last chapters on ‘Institutions’ and ‘Implementation’. Figure 10 in section 1.4 shows how each of these elements are brought together across four parts of the framework, with selected sections within each part relating to how shocks affect that driver and how policies can make Viet Nam more resilient. Part 1 of the report is on ‘Productivity and Competitiveness’ and contains the chapters on GVC upgrading, skills and tertiary education, fostering firm innovation, and the green energy transition. Part 2 focuses on ‘Labor and Households’, with chapters on aging and care as well as on social protection and policies to help more people enjoy the benefits of Viet Nam’s growth. Part 3 on ‘Infrastructure and Resources’ starts with the chapter on physical and digital infrastructure, followed by a second chapter on how to make Viet Nam more resilient to climate change. The final chapter in this part is on resource mobilization and how the significant investments needed not just in infrastructure but also in human capital and social systems can be financed. Finally, Part 4 and Part 5 focus on ‘Institutions’ and ‘Equity’, respectively, and ask what is needed to strengthen Viet Nam’s ability to implement the wide range of policy reforms presented in the report and ensure that economic growth is inclusive. Each chapter adopts a common structure. The first section is a backward diagnostic in which Viet Nam’s current status is assessed by examining its historical trends and performance relative to peers on key measures to the extent that the data allow. The second section is a forward diagnostic that examines the gap on these measures to the HIC frontier as well as the likely impact of global trends such as technological change, geoeconomic fragmentation, and climate change. The final section of each chapter outlines a reform agenda, asking what is needed to close the HIC gap on each key dimension and identifies a policy agenda, with a focus on the next five years. Pathways to a High-Income Future I 53 I PART 1 PRODUCTIVITY AND COMPETITIVENESS Part 1 of the report, “Productivity and Competitiveness”, examines selected key factors driving Viet Nam’s economic growth and its ability to achieve high-income status by 2045. This section of the report explores the importance of upgrading Viet Nam’s participation in Global Value Chains (GVCs), fostering firm innovation, developing a highly skilled workforce through tertiary education reform, and transitioning to a cleaner energy model. Each element is vital for boosting Viet Nam’s productivity and competitiveness: GVC upgrading into higher value-added products and tasks will help Viet Nam to deliver the productivity acceleration required to achieve high-income status; a strong tertiary education system provides the skilled labor needed for both GVC participation and technological adoption and innovation; firm innovation drives technological advancement, competition and a more productive allocation of resources; and a green energy transition ensures Viet Nam’s competitiveness in a global market increasingly focused on sustainability. For each one of these areas, the report identifies complementary policy options for overcoming current constraints and maximizing opportunities for sustained productivity growth and enhanced competitiveness in the face of global economic shifts. I 54 I Viet Nam Rising CHAPTER 2 GVC UPGRADING AND PRIVATE SECTOR DEVELOPMENT Viet Nam’s economic future will largely depend on its ability to transition to higher-value manufacturing and services at a time when the global trading system is undergoing profound changes. While a driver of past success, Viet Nam’s current export-driven growth model—based largely on labor-intensive but relatively low value-added final assembly— will be insufficient to deliver the labor productivity growth necessary to achieve this objective. Moreover, it will need to move up the GVCs at the same time as economics, geopolitics, and technology are rapidly reshaping global trade and investment flows, as discussed in Chapter 1. Backward analysis: Past achievements and emerging 2.1. constraints of Viet Nam’s export model Over the last three decades, foreign investment and trade were major drivers of Viet Nam’s rapid structural transformation, exceptional growth, and fast rise in living standards. By attracting substantial FDI, Viet Nam transformed itself into an export powerhouse. Most notably, export volumes surged from less than 4 percent of GDP in 1988 to nearly 100 percent in 2023, a trend driven in recent years partly by the ongoing reconfiguration of global supply chains. Viet Nam’s trade-to-GDP ratio, which includes both exports and imports, is now around 200 percent of GDP, making it one of the world’s most open economies. Today, domestic value-added from exports accounts for about half of GDP in Viet Nam, with the country now the second-largest smartphone exporter globally.24 The rise of export volumes was underpinned by fast diversification of the export basket towards increasingly more complex electronic products. Viet Nam started as a major exporter of agricultural and food products, such as rice, shrimp, cashew nuts, and coffee (41 percent of exports in 1995 including 14 percent from coffee alone). Later, it diversified into more labor-intensive manufacturing sectors, such as apparel cut-make-trim (CMT) operations in textile and footwear (28 percent of exports in 2010). Following a rapid transition, Viet Nam is now increasingly focused on electronics final assembly for mobile phones, semi-conductors, and other consumer electronics (38 percent of exports in 2022). Today, close to half of the export basket is derived from electronics and machinery, and one in four exported products by traded value consist of telephones, semiconductors integrated circuits, and broadcasting equipment such as cameras. 24 World Bank (2020). Trading for Development in the Age of Global Value Chains. Pathways to a High-Income Future I 55 I In the process, Viet Nam’s export sector has created millions of jobs. In 1989, export-related jobs accounted for about 15 percent of all employment in Viet Nam, with around five million workers.25 By 1995, this proportion had increased to 23 percent, representing eight million jobs. Over the next six years, the rate of growth for export-driven employment was 13.4 percent annually, reaching 43 percent of total employment by 2001.26 Export-driven employment grew more slowly after that, albeit still at 2.8 percent per year; by 2020, it represented over half (54 percent) of total employment, equivalent to 28.6 million workers. However, Viet Nam’s past success led to the emergence of constraints that hamper the transition towards higher value-added exports. Relatively low wages created a strong comparative advantage in labor-intensive GVC segments, attracting significant FDI. However, this has led to a high concentration of economic activity in low value-added final assembly, which in turn has created a strong demand pull for low-skilled workers. This trend has benefitted poorer households in particular, but it has simultaneously dampened the relative returns to higher education and discouraged private investment in human capital. In addition, it has driven the emergence of a dual economy with an over-reliance on the FDI sector for exports but limited participation of domestic enterprises to exports. Similarly, low energy costs supported competitiveness, especially in manufacturing, but also induced a relatively high carbon intensity of the export sector. 2.1.1. Concentration in low value-added exports Despite the rapid transition into high-tech manufacturing, Viet Nam’s export growth is still largely driven by quantity rather than quality. Viet Nam’s average value per unit of exports (a measure of the quality of exports) has doubled over the last two decades, reflecting the shift into higher-value electronics exports. Over this same period, however, the main driver of export growth was quantity, with export volumes surging nearly tenfold (Figure 21). As a result, the domestic value contribution in key exports is low. While Viet Nam exports today relatively high-technology goods, its domestic value added in some of these key exports is relatively shallow. Manufacturing represents about two-thirds (65 percent) of the total domestic value added from exports. However, this share is lower when looking at high-value sectors within manufacturing, such as electronics (which comprises about 15 percent of total domestic value- added compared to 18 percent for textiles). Most export activities rely heavily on imported content, including of components and parts, many of which originate in China. This implies that Viet Nam captures only a fraction of the overall value embedded in the goods that it exports. In part, this reflects the nature of cross-border supply chains. However, it also points to a dual track economy with limited supply linkages. 25 World Bank (2018). 26 Inclusion of job contribution through indirect links to supplying sectors (Winkler, Aguilar-Luna, Kruse and Maliszewska, 2023). I 56 I Viet Nam Rising 2.1.2. A dual economy with limited linkages between FDI and domestic firms Underlying Viet Nam’s current export model is a dual economic structure with export activity concentrated within FDI firms and limited participation of domestic firms. FDI firms, while representing only 3 percent of the total 900,000 enterprises operating in Viet Nam, employ a significant number of people—i.e., 17.8 million workers, or 35 percent of the country’s formal workforce.27 These firms are crucial to the export sector, particularly in specific subsectors. For example, majority-owned foreign affiliates accounted for over three-quarters of Viet Nam’s exports in machinery and equipment, and around half of the exports in the computer, electronics, and telecom and IT services sectors. On the other hand, domestic firms are largely involved in traditional sectors, such as construction, repairs, and hospitality. In addition, they are generally inward-looking and focus on servicing the domestic market.28 As such, the FDI sector largely operates in isolation rather than as a catalyst for economy- wide growth. This leads to limited spillovers from FDI firms to the domestic private sector in the form of increased demand for inputs, access to new technology, managerial skills, demonstration effects, or agglomeration benefits. Figure 21. Rapid export growth was driven by quantity, not quality, of exports Export Volume and Unit Value (Index 2000=100) ls Fuel anufacturing, excl. medium/high-tech Volume Unit value Total exports (% of GDP) 1000 900 800 700 600 500 400 300 200 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: WDI, UNCTAD, and World Bank staff estimates. Notes: Export unit value indices come from UNCTAD’s trade database, using data reported by national statistical authorities based on export merchandise trade data. Changes in unit value indices reflect changes in both prices and composition. Higher unit values are generally considered as an indication of higher product quality (see: Bykova, Ghodsi, and Stehrer [2018] for a review). 27 World Bank (2024). Trading Up in a Changing World: Pathways to a High-income Future. 28 World Bank (2020). Pathways to a High-Income Future I 57 I Weak linkages between domestic firms and GVCs limit productivity growth. Firms—both foreign or domestic—that are engaged in trade are on average 70 percent more productive than Vietnamese firms that are not engaged in imports or exports. However, spillovers from GVC firms to the rest of the economy are limited compared to higher-income countries. In comparison to Malaysia or Türkiye, for example, Vietnamese firms are notably less connected internationally (Figure 22, right panel). Moreover, and perhaps more worryingly, the share of firms with GVC linkages declined over time despite Viet Nam’s rapid expansion of trade. Only 18 percent of firms have GVC linkages in 2023, a decline of 17 percentage points compared to 2009 (Figure 22, left panel). The fact that GVC linkages are concentrated in fewer firms limits the scope for productivity spillovers. Figure 22. The share of firms with GVC linkages in Viet Nam has halved in the last 15 years and is low compared to peers A. Share of firms with GVC linkages by size and year B. Share of firms with GVC linkages, select countries 31% 62% 24% 19% 18% 35% 15% 20% 20% 18% 12% Small Medium Large 2009 2015 2023 Cambodia Türkiye Malaysia Viet Nam Indonesia Firm Size Year 2023 2019 2019 2023 2023 Source: World Bank staff computations. Data: World Bank Enterprise Survey 2023. Notes: Figures show average for each bar. A firm is considered to have GVC linkages if it has at least one of the following characteristics: more than 10% foreign equity, using foreign-licensed technology, involved in export (10% or more of sales), involved in imports. Imports are only defined for firms in the manufacturing sector. Firm size is defined following the definition used by the World Bank Enterprise Surveys (WBES) data, which is small (5-19 employees), medium (20-99 employees), and large (100+ employees). The WB Enterprise Surveys are stratified by sector of activity, firm size, and geographical location. 2.1.3. Limited supply of high skills is an increasingly binding constraint Viet Nam’s global integration into GVCs capitalized on its comparative advantage and endowment with abundant but relatively low-skilled labor. Viet Nam attracted significant foreign investment in labor-intensive production, leading to a high concentration in low value-added final assembly, as is reflected in its current labor demand. Although the manufacturing sector has generated nearly five million jobs in the past 15 years, about 90 percent of all manufacturing jobs are low-skilled or unskilled (Figure 23). Meanwhile, high-skilled positions such as electrical engineers, specialized technicians, programmers, and managers remain scarce, comprising less than 6 percent of all manufacturing jobs I 58 I Viet Nam Rising in 2021. This is the lowest percentage among peer countries. In part, this reflects the country’s lack of high-skilled workers; Viet Nam’s rates of tertiary education attainment are behind all main regional peers, except for Indonesia (Figure 24). Figure 23. More than 90 percent of Figure 24. …while high-skilled manufacturing jobs are low-skilled… workers are in short supply Number of manufacturing jobs by skill (millions) Tertiary education completion rates, 2022 High-skilled Low-skilled Unskilled Vocational Bachelor's degree or higher 12 11.011.411.2 9.7 10 9.3 8.9 8.3 8 7.6 7.0 7.1 7.0 7.1 7.3 16% 6.3 12% 6 4% 4 5% 8% 29% 32% 2 3% 24% 1% 12% 16% 8% 10% 0 2007 2009 Indonesia Viet Nam Malaysia Thailand Philippines Korea Singapore 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: LFS, GSO, and ILO. Source: WDI, UNESCO Institute for Statistics (UIS). Notes: Skills levels are based on the International Standard Classification of Occupation (ISCO) 08 and the skills requirement of these occupations. High-skilled occupations correspond to managers, professionals, technicians and associate professionals (ISCO skills levels 3 and 4). Low-skilled occupations correspond to clerical support workers, service and sales workers, skilled agricultural, forestry and fishery workers, craft and related trades workers, and plant, and machine operators, and assemblers (ISCO skills level 2). Unskilled jobs correspond to elementary occupations (ISCO skills level 1). The limited supply of skilled workers significantly constrains Viet Nam’s ability to upgrade into more skill-intensive, higher value-added activities. One third of employers encounter a dearth of applicants for open positions,29 while around one fifth (22 percent) of managers cite finding workers with appropriate education as their greatest challenge.30 Already today, nearly 80 percent of manufacturing companies face difficulties in hiring skilled workers.31 Additionally, more than one third of employers perceive the limited capacity of their workforce as the principal impediment to technology adoption. The example of the semiconductor industry—one of the key strategic opportunities for Viet Nam—offers a cautionary tale as to how the limited availability of skill poses a risk to seizing opportunities from key industries and markets. There are currently an estimated 5,000 semiconductor chip design engineers 29 World Bank (2018) 30 World Bank (2021) 31 Enterprise & Innovation Survey (2020). Pathways to a High-Income Future I 59 I in Viet Nam, in stark contrast to the 50,000 engineers (including 15,000 chip design engineers) needed by 2030 to meet expected demand.32 2.1.4. Emerging infrastructure bottlenecks threaten the competitiveness of Viet Nam’s manufacturing sector Insufficient energy and transport infrastructure could constrain growth in the future. Viet Nam’s trade and manufacturing-led growth has been both energy- and transport-intensive. The growth of both energy demand and freight volumes has outpaced the growth of GDP, placing significant demand on infrastructure assets and services (Figure 25 and Figure 26). Recent power blackouts and growing road congestion are concrete manifestations of the emerging challenges; if not addressed, these risk becoming a constraint to future growth. Meeting the steep increase in energy demand will require doubling the existing installed capacity (78 gigawatts in 2021) every ten years and expanding the associated transmission infrastructure.33 The estimated investment requirements in power generation and grid infrastructure in this decade alone stand at $135 billion ($15 billion per year) including private (80 percent) and public (20 percent) investments. Figure 25. Electricity demand has been Figure 26. Growing infrastructure growing at an average of 8.5 percent needs have outpaced GDP growth per year Load growth by costumer bracket, 2010-2023, and Cumulative growth in energy consumption, 2023 breakdown GDP and freight transport volume, 2004-2022 Other Agro-aqua-forestry Freight volume Energy consumption Commercial & Services Household Real GDP Industrial & Construction 1000 300 Cumulative growth (2000=100) 251.3 250 800 214.3 200 600 143.5 TWh 150 400 85.7 100 200 50 0 0 2010 2015 2020 2023 2000 2006 2012 2018 Source: EVN and NLDC annual reports (left figure); WDI, Statistical Review of World Energy, GSO (right figure). Notes: Each series shows the cumulative growth over the period 2000-2020. Energy consumption is measured as the primary energy consumption in terawatt-hours (TWh). Real GDP is measured in constant 2015 US dollars. Freight transport measures the volume of total cargo traffic carried across all modes of transport in millions of ton-km. Freight volume growth for 2000- 2004 is derived from the growth of air and rail freight. 32 World Bank (2024). Trading Up in a Changing World: Pathways to a High-income Future. 33 Adding 12,300 km of 500 kV transmission lines and 16,300 km of 220 kV transmission lines by 2030, introducing HVDC lines 5,200 – 8,300 km by 2050 and dedicated lines for offshore wind after 2030; and improved grid interconnection in the Mekong region and in ASEAN. I 60 I Viet Nam Rising 2.2. Forward looking diagnostic: Trading up in a changing world Viet Nam’s exports are much lower value-added than high-income countries or China. While scale and specialization in low-cost final assembly was a positive driver of Viet Nam’s integration into GVC so far, it may not be enough to provide the labor productivity growth and value addition from trade observed in high-income economies such as Korea (Figure 27). As the experience of Japan, Korea, Singapore, and now China shows, Viet Nam will need to continue to move up the value chain, shifting into higher value- added manufacturing and services using improved technology, skills, and innovation. Figure 27. Viet Nam’s relatively low export value-added per capita Domestic value added in exports per capita ($), 1995-2020 China South Korea Malaysia Mexico Thailand Turkiye Viet Nam 10,000 8,000 6,000 4,000 2,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: WDI, UNCTAD, and World Bank staff estimates. The supply of skilled labor is limited compared to higher-income economies. Creating a skilled labor force is key to support Viet Nam’s transition towards high value-added exports. High-income countries invested in tertiary education to create high-skilled occupations in fields such as engineering, science, and management. As Figure 24 indicates, Viet Nam significantly lags behind its aspirational peers on tertiary education. To match the labor force profile of upper-middle-income countries in 2022—i.e., with 15.3 percent of the workforce holding higher education by 2030-2035—Viet Nam must increase the number of workers with tertiary education entering the labor market every year by 200,000, to 430,000 above current projections.34 A more highly-skilled workforce in turn can help the transition from labor-intensive final assembly to skill- and technology-intensive high-value activities. Viet Nam’s past export model has focused 34 World Bank (2023). Pathways to a High-Income Future I 61 I mostly on final assembly. The next phase should focus on seizing higher value-added activities, including from services. The overall share of services embedded in its total exports is only 12 percent. It is even lower in manufacturing exports, at 7 percent, while there is also significant scope to embed processing, logistics and marketing services more deeply in agricultural exports. By comparison, in aspirational peers such as Korea, embedded services account for at least twice as much of the export value. Meanwhile, Viet Nam also trails its peers in imports of knowledge services, including business services and royalties, which can facilitate technology upgrades. High-value segments of GVCs often have a significant services component. By promoting stronger “servicification,” Viet Nam can simultaneously upgrade to more advanced products and tasks within GVCs, and capture higher value added per worker. However, Viet Nam’s services sector faces significant trade and investment barriers. These not only hinder entry of foreign service providers but also ease competitive pressures on domestic providers, with SOEs being dominant players in key service sectors, such as energy, finance, and telecommunications. Figure 28. Servicification of exports remains limited in Viet Nam Domestic services value added in exports (%), by export category, 2018 Mexico Türkiye Indonesia Thailand Philippines Cambodia Malaysia Viet Nam 100 90 80 70 56 60 50 40 30 20 12 10 7 4 7 0 Business sector Manufacturing Mining and Agriculture, Total services quarrying forestry and fishing Source: WB staff computations using WTO TiVA 2023 release. However, Viet Nam’s manufacturing and exports face twin risks from climate change. The country’s past manufacturing and export expansion was powered by an increasingly carbon-intensive energy mix. The future will need to focus on cleaner, low-carbon production, partly so that Viet Nam can achieve its own climate goals and partly as a matter of competitiveness given the accelerating global shift towards low carbon products and services (as discussed in Chapter 5). At the same time, a large part of Viet Nam’s export manufacturing capacity is concentrated in disaster-prone areas. Strengthening the resilience of infrastructure, firms, and workers against climate shocks is therefore paramount (an issue taken up in more detail in Chapter 9). I 62 I Viet Nam Rising 2.3. The reform agenda While Viet Nam is well positioned to seize new trade opportunities, success cannot be taken for granted. As with its past achievements, Viet Nam’s potential will only be realized through continued structural reforms and strategic investments in human capital and infrastructure. To upgrade its participation in GVCs, overcome emerging domestic constraints, and mitigate global risks, five complementary policy packages are recommended in detail in World Bank (2024b). These are summarized in Table 2. These include policies to ensure that the benefits of GVC upgrading are available to all Vietnamese and to support those whose livelihoods are disrupted in the process. Three of these packages are explored in more depth in later chapters (a high-skilled workforce in Chapter 3; clean energy supply and green exports in Chapter 5; and policies to make GVC-driven growth and job creation more inclusive in Chapter 12); the other three are lightly discussed below. From tariffs reduction to deep (regional) trade integration. Viet Nam’s past trade policies have achieved major tariff liberalization and have incorporated the country into a wide network of bi-lateral and multi-lateral trade agreements, covering almost 90 percent of the world’s GDP. The next phase should focus on leveraging the existing and new trade agreements to reduce significant non-tariff barriers, liberalize trade in services, and deepen regional integration, especially since the rapidly growing middle class and consumer markets across Asia offer significant opportunities. As one of the most export-dependent economies in the world, Viet Nam has high stakes in preserving a global and regional trading and investment system that is both rules-based and open. At the same time, its growing economic stature as a dynamic middle-income economy can create opportunities to shape mutually beneficial regional and global cooperation. If the current global political context makes full- fledged multilateral cooperation difficult, then regional and pluri-lateral agreements may be more fruitfully pursued in the near term. Working with international partners within Association of Southeast Asian Nations35 (ASEAN), Regional Comprehensive Economic Partnership36 (RCEP), Comprehensive and Progressive Agreement for Trans-Pacific Partnership37 (CPTPP) and the World Trade Organization (WTO) and other settings, Viet Nam could pro-actively pursue the deepening of commitments around key common agendas, such as digital trade, harmonization of standards, power trade, and connectivity. From a dual economy to integrated domestic value chains. Viet Nam’s past trade integration was largely driven by foreign firms. The future should focus on strengthening linkages and productivity spillovers between export firms and the rest of the economy. This would have significant positive impacts on productivity growth while also entrenching supply chains more deeply in the domestic economy. Today foreign firms account for almost three-quarters (73 percent) of total exports. In contrast, most domestic firms tend to focus on non-tradable sectors such as traditional services, construction, or real 35 An intergovernmental organization of Southeast Asian countries including Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Viet Nam. 36 A free trade agreement among the Asia-Pacific countries of Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Viet Nam. 37 A free trade agreement among the Indo-Pacific region: Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Viet Nam. The UK joined the in 2024. Pathways to a High-Income Future I 63 I estate. Moreover, they typically lack the capabilities to participate in GVCs, either directly or indirectly as suppliers. Fewer than one fifth (18 percent) of firms have GVC linkages in 2023, a decline of 17 percentage points compared to 2009. As a result, Viet Nam captures only a fraction of the overall value embedded in the goods it exports. Policies to transition towards integrated domestic value chains should focus on strengthening the business environment, better connecting GVC firms with local firms, implementing supply chain finance mechanisms, and setting up a supplier development program. From final assembly to high-value activities. The next phase of Viet Nam’s export model should move from its historic focus on low-value final assembly activities to higher-value-added activities, such as services. Such “servicification” would enable Viet Nam to upgrade to more advanced products and tasks within GVCs, while also increasing the value added per worker. This requires policies to remove current trade and investment barriers. Potential measures include: (i) removing barriers to trade in backbone services sectors such as telecom, finance, and transportation; (ii) rationalizing the regulation of cross-border data flows by revising regulation requiring data localization and the establishment of a commercial presence for foreign firms offering online services; and (iii) facilitating the implementation of the intellectual policy framework by ensuring that the Vietnamese enforcement agencies have effectively adapted to the new framework. Table 2. GVC upgrading reform agenda Policy package Key recommendations 1. From tariffs Reduce non-tariff policy barriers to trade by: (i) promoting compliance with international reduction to deep and regional standards; (ii) streamlining border management; and (iii) reducing foreign (regional) trade equity restrictions. integration Enhance regional connectivity by: (i) reducing policy barriers to trade and investment flows across the region; (ii) strengthening physical and digital connectivity to reduce costs, within Southeast Asia as well as with China and South Asia. Shape the regional integration agenda by: working proactively with international partners within ASEAN, RCEP, CPTPP and other settings to deepen commitments around key agendas such as digital trade, harmonization of standards, power trade, and connectivity. 2. From a dual Continue strengthening the business environment: the Administrative Procedure Control economy to Agency (APCA) in the Office of Government (OOG) should collaborate with ministries integrated to develop a detailed digitalization program and action plan. This includes eliminating domestic value physical document requirements and enhancing the data sharing framework (government chains interoperability) with unified web-based application forms. Moreover, improve the licensing and inspecting framework by adopting a risk-based approach. Connect MNEs and local firms by: (i) leveraging Investment Promotion Agencies (IPAs) to strengthen the connection between high potential local suppliers and new or existing foreign investors; (ii) organizing “Meet the Buyer” events or suppliers’ forums to help potential suppliers to better understand quality, cost, and delivery (QCD) standards as well as technology and skills gaps; (iii) publishing online “live” databases and directories of local suppliers in English to reduce search costs for foreign firms; and (iv) establishing a Supplier Development Program (SDP) to enhance local firms’ capabilities and linkages, including both demand-driven horizontal support and sector-specific vertical measures. I 64 I Viet Nam Rising Policy package Key recommendations 2. From a dual Implement supply chain finance (SCF) mechanisms between FDI and domestic firms to economy to optimize working capital, convert receivables and inventories to cash, and obtain lower-cost integrated financing, thereby smoothing transactions between FDI firms and local suppliers. domestic value chains 3. From final Reduce barriers to services trade in backbone services sectors such as telecom, finance, assembly to and transportation services by: (i) addressing restrictive telecom regulations to boost high-value competition; (ii) relax stringent foreign exchange rules to enhance Vietnamese banking activities sector’s access to capital and opportunities for collaboration with foreign banks and investors; (iii) eliminating discriminatory regulations against foreign service providers in transport to lower costs; and (iv) reducing barriers in legal services to foster cooperation between Vietnamese and foreign legal professionals. Prevent conflict of interest and ensure fair treatment of State-owned enterprises (SoEs) and private sector by: establishing independent regulatory authorities for key services sectors like telecommunications, postal services, and transportation. Rationalize cross-border data flow regulations by: revising regulation requiring data localization and the establishment of a commercial presence, such as representative or branch offices for foreign firms offering online services. Implement the comprehensive intellectual policy (IP) framework by: strengthening the Vietnamese enforcement agencies that have encountered difficulties in adapting to new regulations, leading businesses to seek alternative protective strategies, such as contractual clauses and market monitoring. 4. From strong Develop the workforce for high technology industries by: (i) developing curricula and basic education training faculty to enhance industry-aligned education and skills: (ii) providing targeted to a high-skilled financial and non-financial incentives (scholarships) for potential students; and (iii) workforce investing in upgrading training and R&D facilities in STEM higher education institutions and research institutes. Adopt a market-driven, competency-based approach for tertiary education by: (i) establishing sector skills councils involving private sector employers and training institutions to ensure that educational offerings meet the evolving needs of employers and prepare workers for emerging jobs and skills; and (ii) implementing a results-oriented and evidence- based approach using data and feedback loops to continuously improve outcomes and ensure alignment with labor market dynamics. Revamp TVET programs to develop a broad set of skills for current and future workforce by: (i) expanding certification bootcamps and apprenticeships, co-developing curricula with industry partners to ensure relevance, and focusing on both cognitive, behavioral, and technical skills development; (ii) overhauling training quality and market relevance in vocational education to align with the evolving economic needs. Such an overhaul would include a stronger focus on outcomes rather than outputs, including through results-based financing, and a stronger commitment to quality. 5. From carbon- Move towards cost-reflective electricity tariffs and carbon pricing to support the intensive decarbonization of the economy while mitigating impacts on competitiveness by: (i) manufacturing providing forward guidance to market participants on the expected price trajectory to allow to clean energy for sufficient time for firms to adapt, including through investments in energy-saving and low supply and green carbon technologies; and (ii) providing targeted financial support to firms, including through exports green finance programs, to encourage wider adoption of and investment in low carbon technologies. Pathways to a High-Income Future I 65 I Policy package Key recommendations 5. From carbon- Accelerate investment in power infrastructure by: (i) accelerating project approval intensive processes to enable the rapid rollout of four 500kV backbones listed in PDP8 to increase the manufacturing power transfer capacity from the South, which benefits from a power surplus, and scale-up to clean energy installed capacity in the North; (ii) adopting well known technologies, such as high-voltage supply and green direct current (HVDC), will help to maximize energy transfer on longer distances, while exports reducing the physical footprint impact; and (iii) enabling access to long-term financing for the power sector – both domestic and international - will better match the investments’ repayment profile with the operational life of the assets . Reduce NTMs limiting trade in environmental goods by: streamlining the large number of technical barriers to trade targeting renewable energy products and the management of solid and hazardous waste. Develop a coastal resilience investment program for main urban centers, industrial zones, and connecting infrastructure by: (i) mitigating flood-related risks by upgrading critical road and power assets to climate-resilient design standards; (ii) developing financial mechanisms and making them available before, during, and after disasters to secure financial protection of firms and channel investment in resilient infrastructure; and (iii) companies should systematically assess the vulnerability of their trading environments to natural disasters and consider alternative locations when climate-vulnerability is particularly high. 6. Policies to make Enhance labor mobility to take advantage of new opportunities by: (i) providing career GVC-driven guidance and job search support especially for students and workers from vulnerable growth and job backgrounds; (ii) using the unemployment insurance fund effectively to support workers in creation more upskilling on the job or transitioning to new employment opportunities; (iii) expanding active inclusive labor market policies to include job search and vocational and education training (VET) systems; and (iv) providing VET institutions with increased autonomy and capacity to prepare workers in ways that meet industry demand. Key policies to indirectly promoting labor mobility are: (v) increasing affordable childcare and strengthening the aged and long-term care system; and (vi) strengthening local capacity and financing around the ho khau reforms. Develop active labor market programs targeted to those losing jobs as the economy evolves by: i) expanding the Labor Market Programs focus beyond unemployment insurance to include job search and matching services and training for job seekers; (ii) building a labor market Information System to inform training and job matching functions of the public employment services and vocational and educational training (VET) system; and (iii) increase VET provider linkages to employers. Ensure skill upgrading benefits all by: (i) reducing human capital gaps across the lifecycle, including a focus on stunting and Early Childhood Education (ECED), secondary school dropout for poorer children, and the affordability and access of tertiary education; and (ii) encouraging more females to go into STEM fields. I 66 I Viet Nam Rising CHAPTER 3 STRENGTHENING SKILLS, LABOR PRODUCTIVITY, AND TERTIARY EDUCATION Upskilling the Vietnamese workforce and boosting labor productivity is critical if Viet Nam is to increase incomes and achieve high-income status. As Chapters 1 and 2 note, Viet Nam can drive productivity gains through greater GVC integration and higher value-added activities, but this will require it to first upskill its workforce. In the past, successful integration into GVCs was driven by abundant low wage labor with basic skills. Going forward, upgrading Viet Nam’s participation in GVCs will depend on high-skilled workers. Stronger skills will also help make the workforce and the wider country more adaptable to changing technology and an aging population, while providing a key pathway to economic mobility. Better and more general skills will help workers and the country be more resilient in the face of shocks. In particular, stronger skills are necessary to take advantage of today’s emerging technologies as well as to help workers and firms navigate technological changes in the future. This means developing general skills that can apply across different technologies and sectors. In addition, it necessitates the ability to adapt and gain new skills in the future – namely, “learning to learn.” Moreover, the higher the skills of Viet Nam’s aging workers, the more their consequent greater productivity is able to offset the effects of their shrinking numbers. However, ensuring a skilled workforce tomorrow means training them well today; hence, this chapter’s focus on tertiary education. Finally, higher skills are perhaps the most important channel for individuals and households to enjoy greater economic mobility. They lead to higher incomes while making workers better able to adapt to technological change; as discussed later in this chapter, AI and automation threaten the employment of many lower skilled workers but augment the productivity of their more skilled peers. This chapter looks at higher education and how it can increase the stock of tertiary educated workers in Viet Nam with the skills needed to move up the value chain. Historically, increases in labor productivity were achieved in Viet Nam in large part by lower-skilled workers moving from low- productivity jobs in agriculture to low-skill but higher-productivity jobs in manufacturing and services. However, future increases in labor productivity will require higher skill workers doing higher skilled, higher-value-added work. How higher-value jobs can be created is discussed elsewhere, notably in Chapter 2 on GVC upgrading. This chapter focuses on ensuring that there are more workers who have higher skills, and that these skills synchronize with those needed by firms. Pathways to a High-Income Future I 67 I 3.1. Backward diagnostic 3.1.1. Skills and jobs Viet Nam’s labor productivity has been increasing but lags the country’s peers. Viet Nam’s output (GDP) per hour worked has increased from $1.27 per hour in 1990 in real purchasing power adjusted terms to around $6.73 per hour by 2019. Despite this nearly fivefold increase, on this measure of labor productivity, Viet Nam continues to lag all major regional peers. In many cases, the margin of these lags is very wide. China’s growth in productivity, by comparison, has been significantly higher (Figure 29). While Viet Nam’s workers have high human capital, many of them are stuck in low-productivity jobs. Viet Nam has the second highest Human Capital Index (HCI) score among middle-income countries; at 0.69, it is just behind Belarus’s score of 0.70.38 It performs particularly well with respect to access and quality of general education. However, when adjusted for the jobs that people do, Viet Nam’s Utilization-adjusted HCI (UHCI) falls to 0.37.39 The UHCI applies a penalty for the share of people who are working in the typically least-productive sectors, such as subsistence agriculture and own-account self-employment.40 This 32 basis point gap is the second largest among 84 middle- income countries, behind only Albania’s score of 33 basis points. The wide disparity in how high Viet Nam’s HCI is and how far it is from fully utilizing it stands out clearly in Figure 30, where the dashed line shows full HCI utilization; that is to say, Viet Nam is overachieving in developing human capital but lagging in creating good jobs. This suggests that job quality and job matching remain well below desired levels.41 38 The HCI is a measure of how productive a child will be when they grow up compared to if they enjoyed complete education and full health. At 0.69, the average Vietnamese child is expected to be 69 percent as productive as a fully productive worker at the world frontier. This far above the average for the East Asia and Pacific region (59 percent). For more details on the HCI, see World Bank (2018) The Human Capital Project and World Bank (2020) The Human Capital Index 2020 Update: Human Capital in the Time of COVID-19. 39 The UHCI adjusts the HCI for labor-market underutilization of human capital, based on fraction of the working age population who are employed in the types of jobs where they might be better able to use their skills and abilities to increase their productivity (“better employment”). “Better employment” is defined as non-agricultural employees plus employers, which excludes the lowest-productivity jobs in developing countries where human capital could have less effect on productivity: subsistence own-account/family agriculture, non-farm self-employment (which is often working in household microenterprises, as own-account workers or contributing family workers), and landless agricultural laborers. See: Pennings (2020). The Utilization-adjusted Human Capital Index (UHCI). 40 Moreover, working in these sectors and jobs is an indication that workers are not in the best jobs. While the lowest-paying occupations are a mix of those with a significant share of formal workers and some with a high share of informal workers, jobs in the highest-paying occupations are overwhelmingly formal. See: Bequet, Giles, and Safir (2024). Work, Jobs and Occupational Mobility in Urban Viet Nam. 41 Bequet, Giles, and Safir (2024). I 68 I Viet Nam Rising Figure 29. Viet Nam’s output per Figure 30. Viet Nam has the second worker has been increasing but is largest gap among MICs between levels still much lower than all major of human capital and the productivity of regional peers jobs this capital is used in Output per hour worked (2017 PPP$) Utilization-adjusted HCI versus HCI Viet Nam Malaysia Thailand HIC LIC LMIC UMIC Indonesia China Philippines 25 1.0 20 0.8 15 0.6 UHCI 10 0.4 5 0.2 0 0.0 0.0 0.2 0.4 0.6 0.8 1.0 1994 1996 1990 1992 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 HCI Source: Penn World Table (v10.01). Source: HCI and UHCI data from Pennings (2020). Notes: Red dot represents Viet Nam Moreover, while wage employment has been increasing, not all of these jobs are good quality. According to the UHCI, Viet Nam’s performance was higher in the decade prior to the Covid-19 pandemic, as the share of wage workers (a UHCI driver) increased from 38 percent to 50 percent of the working-age population between 2013 and 2019 (an increase of 3.8 million wage jobs), as people moved out of self-employment (Figure 31). However, not all wage jobs are of the same quality and the increase in wage jobs was mainly driven by informal wage jobs (without contracts) increasing to nearly one third of all wage employment in 2019, up 7 percentage points. The share of formal wage jobs decreased by 7 points (Figure 32). Pathways to a High-Income Future I 69 I Figure 31. Nearly one third of the Figure 32. … but informal jobs self-employed switched to wage work represent around one third of all wage between 2013 and 2019… employment and are becoming more prevalent Share of employment by job type, 2013-21 Share of wage employment by job quality Not working Wage job Great wage jobs (> 2x minimum wage) Self-employment Good wage jobs (> Minimum wage) Other formal wage jobs 0.6 0.5 Informal wage jobs 0.4 0.5 0.4 0.4 0.3 0.3 0.3 0.2 0.2 0.2 0.1 0.1 0.1 0.0 0.0 2013 2015 2017 2019 2021 2013 2015 2017 2019 2021 Source: Bequet, Giles, and Safir (2024). Source: Bequet, Giles, and Safir (2024). Employment mismatches indicate that it is not just a lack of good jobs that undermines labor productivity but also a lack of tertiary education and the right skills. Nearly six out of ten Vietnamese work in positions for which they are either over- or under-educated. Less than half of workers in Viet Nam (42 percent) have the right level of education for their work, a problem common to the region (Figure 33). The most common mismatch is undereducation, which affects around one third (33 percent) of the workforce. This highlights the need for more students to enter tertiary education. Nonetheless, 25 percent of the workforce is overeducated relative to their job. Part of this can be caused by a lack of jobs requiring better education. However, the simultaneous high rates of overeducated and undereducated workers suggest that many workers are getting high levels of education but are not acquiring the right skills needed by firms. This is reinforced by firms reporting lack of skills as a constraint, particularly those who export (Figure 34). Increasing the quality of tertiary education is therefore equally as important as increasing the quantity. I 70 I Viet Nam Rising Figure 33. Nearly 60 percent of Figure 34. An increasing number of workers in Viet Nam are overeducated firms cannot find enough skilled labor, or undereducated compared to the particularly exporters level required for their jobs Match between workers’ education levels and that Percent of firms identifying an inadequately educated required by their jobs workforce as a major constraint Matched Overeducated Undereducated All Manufacturing Exporters 25 100 20 80 15 Percent 60 10 40 5 20 0 0 Thailand 2009 2015 2023 Viet Nam Mongolia Cambodia Philippines Laos Indonesia Source: World Bank staffs calculations based on ILO data. Source: World Bank (2024b). Notes: Latest year for each country from 2021 and 2023. Mismatch categories as produced by ILO. In particular, Viet Nam finds itself in a nascent stage of digital skills development, with notable progress on the basic level but lagging on intermediate and advanced levels. Basic digital skills such as mobile app development, fin-tech, and software testing are more prevalently used in Viet Nam than the global average (Figure 35, Panels A and B). Notably, Viet Nam is on par with the world on AI, web development, and human computer interaction. Conversely, Viet Nam is behind on business-skills and technical skills (Figure 36, Panels A and B). Pathways to a High-Income Future I 71 I An 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Co m im pu at io 0.5 1.0 1.5 2.0 0.0 An te n 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 Co rG m im Co Mobile Application Development m ra FinTech pu at io 0.5 1.0 1.5 2.0 0.0 pu ph te rG n te ic Software Testing Co m ra Co rH s Mobile Application Development Artificial Intelligence (AI) m FinTech Web Development Source: World pu ph ar te ic Software Testing Human Computer Interaction Viet Co rH s pu te dw Artificial Intelligence (AI) Development Tools m ar Web Development Digital Literacy ar rN e Human Computer Interaction Bank pu te dw et Development Tools Data Science Nam rN ar e w Digital Literacy Data Storage Technologies et or Data Science Digital Marketing Viet Nam w Data Storage Technologies Graphic Design Da kin g Digital Marketing (2021), or Advertising I 72 I Viet Nam Rising kin ta Graphic Design Da g Architecture ta St Advertising Game Development Architecture China or St Di ag Game Development Computer Hardware China or e Customer Service Systems gi Computer Hardware average Di ag ta gi e lL Customer Service Systems Computer Networking ta En Computer Networking Social Media En lL te Social Media Digital skills ite Cybersecurity te ite rp ra Cybersecurity rp ra Electronics Electronics ris cy ris cy e Animation Animation e Electronic Control Systems Electronic Control Systems Ga So Ga So m m System Administration System Administration Indonesia ftw Indonesia ftw e e ar ar Software Development Life Cycle (SDLC) Software Development Life Cycle (SDLC) e Robotics Robotics De De e ve ve Scientific Computing Scientific Computing lo lo Video In p m Video Technical Support in a digitalizing fo Gr In pm Technical Support Structural Analysis ap en fo Gr rm Structural Analysis t A. Skill penetration in Viet Nam relative to global hi rm ap en Machining at io c hi t Information Management Machining n De at c Computer Graphics Information Management Malaysia M M s io n De ig Affiliate Marketing Computer Graphics Malaysia ob an n M M s ile ig Bookkeeping Affiliate Marketing Viet Nam. ag ob n Ap em ile an Enterprise Software Bookkeeping p ag Telecommunications en Ap em Earth Science Enterprise Software Telecommunications De ve t p Sc ie lo De en Earth Science nt pm Sc ve t 0.0 1.0 2.0 3.0 4.0 5.0 ifi lo Philippines c en t ie nt pm Co 0.0 1.0 2.0 3.0 4.0 5.0 m ifi Philippines tu c en t advanced skills are not pi Co Viet Nam So ng m Philippines ci tu al M Advertising pi Viet Nam ed So ng Philippines ia ci Singapore al China M Advertising So SD ed Singapore ftw LC ia Singapore Sy ar China st e Systems em Te So SD development of tech and disruptive digital skills (General) st Singapore Ad in ftw LC g Customer Service Thailand m A. Tech digital skills penetration in Viet Nam and selected comparators Sy ar Thailand ini st e Indonesia Te st T Systems ch ra em es ni tio Ad tin ca n g Customer Service Thailand l m USA USA Digital W Thailand Su i Indonesia Marketing eb pp Te ni Malaysia or st ch ra Figure 36. Viet Nam has to catch up with the rest of the region in the De ve t ni tio lo ca n l USA pm USA Digital en W Su Marketing t B. Skill penetration relative to Viet Nam: Business Figure 35. Basic digital skills are prevalent in Viet Nam, but intermediate and eb pp Malaysia De or ve t lo pm en t B. Disruptive digital skills penetration in Viet Nam and selected comparators Viet Nam China Indonesia Malaysia Philippines Singapore Thailand USA 6.0 5.0 4.0 3.0 2.0 1.0 0.0 AI Data Science Development FinTech HCI Robotics Tools Source: World Bank (2021), Digital skills in a digitalizing Viet Nam. 3.1.2. Tertiary education Viet Nam excels at general education but translation into tertiary education is poor compared to peer countries. As noted earlier, Viet Nam has the highest HCI among middle-income countries. It performs particularly well with respect to access and quality of general education (Figure 37). However, while Viet Nam’s HCI is high, the educational component of this reflects the country’s basic education performance measured in quality-adjusted school years. Viet Nam’s tertiary completion rate lags that of Malaysia, Thailand, and the Philippines, and is far behind that of South Korea and Singapore (Figure 38). In terms of tertiary enrolment, Viet Nam and China had around the same enrolment rate of about 10 percent in 2000; by 2017, Viet Nam’s rate had increased to 28 percent but the rate in China had jumped to 50 percent.42 The existing skills shortage in Viet Nam will only intensify in tech-intensive manufacturing sectors if in the number of workers with the needed expertise fails to expand. Moreover, rapidly changing technology is compounding this shift in skills’ demand. To move up the value chain, Viet Nam will need to move up the education and skill ladder. 42 Parajuli, Vo, Salmi and Tran (2020). Improving the Performance of Higher Education in Viet Nam: Strategic Priorities and Policy Options. Washington, DC: World Bank. Pathways to a High-Income Future I 73 I Figure 37. Viet Nam achieves one of Figure 38. …yet, very few students in the highest learning-adjusted years Viet Nam go on to tertiary education of schooling among middle-income compared to its peers countries… Tertiary education completion rates, 2022, Learning-adjusted years of schooling, all countries selected countries 14 100 Learning-adjusted school years 90 12 Viet Nam 80 10 70 8 60 50 6 40 4 30 20 2 10 0 0 .......................................................... 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 High-Income Upper Middle- Lower Middle- Low- China Indonesia Indonesia Philippines Income Income Income Republic of Korea Thailand Viet Nam Source: World Bank’s 2020 HCI database. Source: UNESCO Institute for Statistics (UIS) as reported in Parajuli, Vo, Salmi and Tran. 2020. This results in a major projected undersupply of university graduates over the next five years. To achieve the UMIC average of a labor force with 15 percent having tertiary education, Viet Nam would need to produce around 750,000 graduates each year. Even with current levels projected to increase over the next five years, the gap promises to remain large, declining from a projected annual shortfall of 370,000 in 2025 to a still high shortfall of 210,000 by 2030.43 Income and other gaps in access to tertiary education have been widening over time. Secondary enrolment gaps across incomes have narrowed in recent decades. In 2006, for example, only around one quarter (23 percent) of children in the poorest 20 percent of households enrolled in upper secondary school; by 2018, this number had doubled to around half (49 percent), closing the gap to children in the richest 20 percent of households, of whom 87 percent of whom are enrolled (Figure 39). However, tertiary gaps are wider and getting worse. Tertiary enrolment for children in the richest 20 percent more than doubled from around one third to three-quarters (34 percent to 73 percent), while enrolment for the poorest children stayed below 10 percent. There are also large and widening ethnic gaps and significant regional gaps, with the north midland and mountainous region (22 percent) and to a lesser extent Mekong river delta (33 percent) and central coastland (37 percent) regions behind the southeast (45 percent) and particularly the Red River delta (52 percent).44 Tertiary gaps are due to a combination of low high school completion rates as well as low tertiary entry rates. Policies to expand the tertiary-educated workforce while making tertiary education more 43 Tran, Dao, Banh, and Vo (2023). “Higher Education Financing in Viet Nam: Strategic priorities and policy options”, Policy Note, World Bank. 44 Parajuli, Vo, Salmi, and Tran (2020). I 74 I Viet Nam Rising accessible will be less effective without complementary policies to address limited high school graduation. For children in the poorest and second poorest 20 percent of households, just under half of the enrolment gap to children in the richest 20 percent can be explained by low secondary school completion rates (Figure 40). Female tertiary access is nearly equal to male access, but women are underrepresented in key subjects.45 Figure 39. Secondary enrollment gaps Figure 40. Poor high school across income groups have closed completion rates are as important as over time but tertiary gaps have lower tertiary entry rates in terms of widened reducing tertiary education gaps Education access by level and expenditure percentile, Decomposition of access gaps in tertiary education, 2006 and 2018 2018 Basic education 2006 Tertiary education 2006 High school completion rates Upper secondary 2006 Basic education 2018 Tertiary entry rates Upper secondary 2018 Tertiary education 2018 100 80 70 80 60 60 50 Access rate 40 40 30 20 20 10 0 0 0 20 40 60 80 100 1 2 3 4 e HS l nh ra al -Q -Q -Q -Q Ru Ki M Q5 Q5 Q5 Q5 n Expenditure percentile no e- on n- al ba -n HS m nh Ur Fe s Ki nt re Pa Source: Parajuli, Vo, Salmi, and Tran (2020). Authors’ estimates Source: Parajuli, Vo, Salmi, and Tran (2020). Authors’ using Vietnam Household Living Standard Survey (VHLSS) estimates using VHLSS 2018. 2006 and 2018 data on individual member education and Notes: Each bar represents the access rate gap between household consumption expenditures. two groups (first bar shows Q5 richest quintile minus Q1 Notes: Access rate for a given education level is defined as poorest quintile) where blue portion shows the gap due to proportion of individuals in the reference age-group who ever high school completion rates and orange shows the gap had access to the particular education level. Reference age- due to tertiary education admission (entry) rates. groups are ages 6-14 for basic education (grades 1-9), ages 15- 17 upper secondary (grades 10-12) and ages 18-24 for tertiary education level (post-secondary). The graphs show averages using second order polynomial smoothing. Closing the tertiary education gap for poorer households will also be essential for ensuring all Vietnamese are included as the country moves to high-income.46 Education is central to workers getting a better job. Tertiary educated workers are much more likely to get good jobs and choose 45 Parajuli, Vo, Salmi, and Tran (2020). 46 Bequet, Giles and Safir. 2024 Pathways to a High-Income Future I 75 I better paying occupations. Workers with vocational post-secondary education earn 38 percent more than those with primary education. This gap increases to 63 percent for those with a university education, with much of this premium coming because better educated workers enter better-paying occupations. For workers with lower or upper secondary education, education generally does not enable them to enter better-paying occupations. The exception is those with vocational upper secondary education who earn on average 30 percent more than those with primary education. This suggests that students unlikely to continue to university education could benefit from having a more vocational education, while on-the-job training or retraining for those already in the workforce could provide them with the sort of skills that would allow them to move to better-paying jobs at a later stage. In addition to getting a good job today, better education is associated with moving to a better job and higher wages tomorrow.47 For those switching occupations who have lower and upper secondary education, their new occupation pays on average 2.2 percent and 8.7 percent more than for those with primary education, respectively. Those with vocational post-secondary or university education earn 13 percent and 27 percent more, respectively, when compared to those with upper secondary education. This indicates that the higher education allows them to switch into better occupations on average. 3.2. Forward diagnostic 3.2.1. Skills of the future This section looks at what skills will be needed in the future for Vietnamese workers to get better occupations while considering the impact of technological progress and green transition. The backward-looking diagnostic section on skills noted the extent to which education alone is insufficient for workers to do productive jobs (and enjoy higher wages) in today’s economy. This section asks what skills will be needed to do better jobs in the future by looking at the state of skills and skills matching in OECD countries now. Firms in high-income countries demand high-skilled workers. Software development and technology and creative multimedia add up to more than half of the demand for workers by firms in the OECD in all but five of the 36 countries (Figure 41). These skills are particularly on demand in the least wealthy among the OECD group (i.e., Chile, Mexico, and Greece), which are those closest to the income level to which Viet Nam currently aspires. 47 Ibid. I 76 I Viet Nam Rising Figure 41. Software development and creative multimedia make up the majority of the demand for workers by firms in most OECD countries Share of project/task occupations by country of employer Software development and technology Creative and multimedia Writing and translation Clerical and data entry Sales and marketing support Professional services Greece Chile Turkey Israel Iceland South Korea Germany Poland Mexico Viet Nam Czech Republic Switzerland Italy Portugal Belgium Sweden Luxembourg Finland Estonia France Slovakia Canada Latvia Australia United States New Zealand Denmark United Kingdom Austria Japan Lithuania Ireland Spain Hungary Norway Netherlands Slovenia 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: Authors’ calculations based on data from Stephany, F., Kässi, O., Rani, U., & Lehdonvirta, V. (2021). Online Labour Index 2020: New ways to measure the world’s remote freelancing market. Big Data & Society. https://doi.org/10.1177/20539517211043240. More details on the construction of the initial Online Labour Index can be found in the following publication: Otto Kässi, Vili Lehdonvirta, Online labour index: Measuring the online gig economy for policy and research, Technological Forecasting and Social Change, Volume 137, 2018, Pages 241-248. Notes: Each bar displays employer countries’ share of projects/tasks posted online labor platforms between January and July 2018 by the occupation of project/task. For example, for projects/tasks posted online by employers based in Chile, over 50 percent of these were related to software development and technology and 20 percent to creative and multimedia. The Online Labour Index is based on tracking all protects and tasks posted on the five largest English-language platforms, which account for at least 70 percent of all traffic to online labor platforms. The occupation classification builds on that used by Upworl.com (Kassi and Lehdonvirta, 2018). Pathways to a High-Income Future I 77 I Digital skills are increasingly required in high-income countries. Half or more of workers in OECD countries use a computer, email, and internet to perform their work (Figure 42). Similarly, a recent survey in the UK shows that 70 percent of office employees use their smartphone to complete work-related tasks.48 More than 30 and 40 percent of workers use a spreadsheet and word processor, respectively. As popularity and necessity of these tools spread away from the tasks of high-skill settings, more workers will need to be digitally competent to perform their jobs. Although the rise of AI may mean the ability to use a spreadsheet or even code may decrease in significance, other important digital skills will emerge (as is the case now with AI prompt engineering). Figure 42. Digital skills are required in jobs in OECD countries Share of workers performing the activity by country Maximum Minimum Average 100 Sweden Norway 80 Singapore Netherlands Singapore 60 Turkiye 40 Turkiye Turkiye Turkiye Turkiye 20 0 Using a computer Using email at least Using the Internet in Using a work Using spreadsheet once a week order to better processor at least software at least understand issues once a week once a week related to work at least once a week Source: OECD Skills outlook 2019: Thriving in a digital world. Firms in high-income countries report difficulty in accessing not just technical skills but also soft skills.49 Skills shortages are a problem for firms in OECD countries, with firms reporting some degree of skills gap ranging from just under 30 percent in Hungary to more than 50 percent in the Slovak Republic. The largest firms are most likely to report such deficits. Firms report different types of missing skills, ranging from technical to social. The most commonly reported skill shortages across all OECD countries studied are technical or job-specific in nature or relate to problem solving and teamwork.50 This highlights that soft skills matter as much as technical ones in a modern economy. 48 2024 National Business Communications Survey. 49 OECD. 2024. Understanding Skills Gaps of Firms. 50 Employers also consider as core skills analytical thinking, resilience, flexibility and agility, leadership and social influence, creative thinking (World Economic Forum (2025) Future of Jobs). I 78 I Viet Nam Rising Looking ahead, OECD countries anticipate the challenges associated with the net-zero transition. It is estimated that around a quarter of all jobs will be significantly affected by the transition from high-emission industries to green-driven industries, with 20 percent of workers in green-driven jobs (including those that support green activities) and a further 5 percent in high-emissions industries (Figure 43). Reskilling will be key for moving away from emission-intensive occupations. Up-skilling initiatives will need to provide both low- and high-skill workers with the new skills that they will need to succeed in new jobs. However, a number of general skills are relevant across both emission-intensive jobs and new jobs arising from the green transition. For example, problem solving and social skills are relevant to both sectors and for both lower- and higher-skilled occupations (Figure 44), making transitions away from emission-intensive jobs feasible for all workers, although low-skilled adults will need more retraining. Figure 43. More than a quarter of Figure 44. Reskilling is key for OECD jobs will be strongly impacted by moving away from emission-intensive the net-zero transition occupations Share of total employment affected Required skill level for GHG-intensive and new green-driven jobs 0 10 20 30 40 Low-skill occupations Poland Problem solving Social skills Australia OECD Low-skill occupations Japan Problem solving Germany Social skills US Very low Very high Green-driven jobs GHG-intensive jobs GHG-Intensive jobs New Green-driven jobs Source: OECD (2024)- Understanding Skills Gaps of Firms. Source: OECD (2024). Understanding Skills Gaps of Firms. 3.2.2. Tertiary education Tertiary education is key to a more skilled workforce and the transition towards high-income status. Viet Nam’s HCI is not only the highest among middle-income countries, but its quality-adjusted learning years of education are equivalent to the HIC median (Figure 37). However, it fails to capitalize on this strong base of young human capital. While Viet Nam’s secondary enrolment rates are equivalent to HIC benchmarks (at 42 percent), access to tertiary education is among the lowest in the region, coming below UMIC averages and far below HIC averages (Figure 45). The country’s rates of graduation are much Pathways to a High-Income Future I 79 I lower than expected when benchmarked against the HIC average (Figure 46). By comparison, bachelor’s degree completion rates reached 32 percent and 29 percent in Singapore and Korea, respectively, compared to just 10 percent in Viet Nam (see Figure 24 earlier). Moreover, both these countries invested in technical and vocational training, and the share of workers holding a vocational degree is four to five times larger than in Viet Nam. Figure 45. Viet Nam’s secondary Figure 46. …yet, its higher education enrolment rates are relatively strong output is far below what would be expected given its basic education output Secondary and tertiary enrolment rates, 2022 Learning-adjusted school years versus gross graduation ratio for higher education, selected countries 70 Secondary Tertiary FIN 120 60 GBR KOR SGP FRA Gross graduation ratio 100 50 NLD 40 CHN ESP POL 80 THA Percent 60 30 IND IDN MEX 40 20 VNM MYS 20 10 LAO 0 0 6 8 10 12 co e- e co e- e am e rs m m m Learning-Adjusted Years of School In iddl In iddl be co N em m rm et -I n Vi m er gh pe w CD Hi Up Lo OE Source: World Development Indicators. Source: HCI data from World Bank (2018a) and GGR at higher Notes: Secondary enrolment rates are gross. education data from UIS (2017). UIS=UNESCO Institute for Statistics. Besides having a large number of tertiary graduates, high-income countries invested in the quality of their higher education. Viet Nam’s higher education quality is low in comparison to HIC comparisons when using global university rankings as a rough proxy for the quality of higher education. For example, Viet Nam has no university ranked in the global top 500 according to the Times Higher Education rankings, and only 6 in the top 1500. This is similar to Thailand, but Malaysia has 7 in the top 500 and South Korea 13. The United Kingdom and Germany have around 10 percent of the top 500 each while the United States has 20 percent (Figure 47). Japan provides a salutary lesson in quantity over quality; although it has 108 universities assessed, over half of them (57) are outside the top 1,500 and only 10 are in the top 500. I 80 I Viet Nam Rising Figure 47. Viet Nam has no universities ranked in the global top 500; all HIC comparators have at least 10, while 20 percent are in the United States Number of universities by global ranking, 2025 Top 100 101-250 251-500 501-1500 1501+ 180 160 140 120 100 80 60 40 20 0 USA UK Germany France South Korea Japan Malaysia Thailand Viet Nam Source: Times Higher Education. To upskill the labor force, reduce skills mismatches, and boost labor productivity, Viet Nam will need to improve the quality and relevance of tertiary education and strengthen links with firms.51 Curriculum development needs to shift from a traditional content-based approach with a strong focus on theoretical knowledge towards the competency-based skills required by the labor market. At present, higher education institutions place more focus on lecturing than on student-based learning and skills development. In part, this is because of weak links with employers’ work-based learning/ internships, limited faculty exchanges, and poor job placement services for students. While the number of joint programs and internationally accredited academic programs has increased in Viet Nam in recent years, the number of inbound students and faculty remains low compared to other countries in the region. It is also notable that less than one quarter (23 percent) of academic faculty have a PhD degree. Meanwhile, existing policies do not adequately encourage pedagogical innovation, performance-based promotions/pay, or the building of a pipeline of future academic talent. The tertiary education sector also needs more effective governance.52 The tertiary education system in Viet Nam is highly fragmented across many dimensions with no single body responsible for the 51 Parajuli, Vo, Salmi and Tran (2020). 52 Parajuli, Vo, Salmi and Tran (2020). Pathways to a High-Income Future I 81 I entire tertiary education and research system. Two separate ministries are responsible for managing universities and TVET, but there is little coordination between them. The two national universities, meanwhile, are directly managed by the Prime Minister’s Office. A complex regulatory framework has resulted in excessive bureaucratic control and sometimes contradicting decrees issued by different authorities. This makes university management unnecessarily complex and inefficient. Viet Nam also lacks unified national tertiary education management and labor market information systems, which hinders evidence-based decision-making by all stakeholders. The national quality assurance QA system is still emerging. As in many other sectors in Viet Nam, meanwhile, recent reforms have had significant gaps in implementation. Lastly, institutional accountability mechanisms are underdeveloped. Governance issues extend to the VET system, which follows a “culture of compliance” that is not conducive to generating results that are consistent with local labor market needs. The current governance structure relies on directives from above, with little flexibility and decision-making at the service delivery level. As a result, VET institutions (VETIs) focus efforts on complying with directives (inputs) rather than adapting services to meet the demands emerging from local employers (results). Tertiary education in high-income countries generally has a high quality of academic staff and larger funding. Despite progress in the last 20 years, Viet Nam trails peers and HICs in terms of the number and qualification of academic staff. In addition, much higher levels of public funding for tertiary education are needed to strengthen education quality; Viet Nam spends much less on tertiary education than regional and HIC comparators (Figure 48). For example, China, Malaysia, Korea, and Singapore all spend around 1 percent of GDP, compared to 0.3 of GDP in Viet Nam. At the same time, stronger financial aid is needed to make tertiary education affordable for more people. In 2018, the average cost of tertiary education represented 54 percent of the average total household spending per member.53 In addition, global technology trends increase the urgency for upskilling the workforce and reforming tertiary education. Rapid technological advances and the rise of the knowledge economy increase the demand for the advanced cognitive, digital, and socio-emotional skills required for high-value jobs.54 Lower-skilled workers who work in routine manual jobs are vulnerable to displacement by robots (and those in non-routine manual work by smart robots in the future). Meanwhile, there are four times more skilled workers in routine cognitive work vulnerable to displacement by AI compared to the small number of high skilled workers will potentially benefit from technology (Figure 49). This underlines the importance of acquiring skills that can be deployed for more complex tasks. 53 Parajuli, Vo, Salmi and Tran (2020). 54 Parajuli, Vo, Salmi and Tran (2020). I 82 I Viet Nam Rising Figure 48. Viet Nam spends much less on tertiary education than regional MIC peers, let alone HIC and OECD countries Public expenditure on tertiary education (% of GDP), selected countries 1.89 1.63 1.54 1.29 1.22 1.25 1.13 1.00 1.00 0.87 0.57 0.64 0.33 am a nd a a e a nd ce lia s d UK nd or si in re si an ra an la la ne ay Ch Ko ap N rla nl st ai Po Fr al do et Fi ng Th Au he of M Vi In Si et p. N Re Source: UIS for all countries except Viet Nam (authors’ estimates using MOF data of 2015) and China (estimate for the most recent year from World Bank’s Innovative China Report of 2019). Notes: Viet Nam MoF data on public financing on education includes tuition collected from students/households. The analysis in this report treats tuition revenue in public universities as a nonpublic resource, and this portion is excluded when estimating the real allocation from the public sector. When tuition fees from households are included, the expenditure on tertiary education would increase from 0.33 percent of GDP to 0.69 percent of GDP. Figure 49. Viet Nam has low exposure to both automation and task complementarity Employment Shares by AI Exposure and Complementarity (%) Low exposure High exposure low complementary High exposure high complementary 100 90 80 70 60 50 40 30 20 10 0 e s ji os nd a ar am lia s te Fi ie ne ag di es m go La la om bo N pi er n -L ai on ya lip et m av Th or on M Vi Ca M i m Ph P Ec EA Ti d ce an v Ad Source: World Bank (2024) East Asia and Pacific Economic Update October 2024: Jobs and Technology. Pathways to a High-Income Future I 83 I 3.3. Reform agenda Viet Nam needs to move to an integrated higher education and science–technology–innovation (STI) system that produces a high-quality workforce and drives innovation. The reform agenda addresses underlying structural constraints—fragmented governance, skills mismatches, weak university– industry linkages, and limited upskilling—while aligning with recent policy directives (such as the Politburo Resolution 57 of 2024 on STI breakthroughs, and the National Education Development Strategy to 2030 with Vision to 2045). These reforms are organized into six strategic pillars, each with concrete short-, medium-, and long-term actions (Table 3): 1. Skills, employability and industry engagement: Aligning the education and training system with labor market needs by forging close partnerships with industry—both in preparing students for employment and in upskilling the existing workforce. Industry’s role in education and training can become institutionalized through structures like sector-specific skills councils or advisory boards that co-design curricula and expand work-based learning opportunities. For example, industry-led councils can be piloted in priority sectors such as electronics, computer programming services, and advanced manufacturing where leading employers, industry associations, and training providers jointly identify skill needs, set competency standards, and develop relevant training modules. Modest public funding subsidies or tax breaks can be used to encourage companies to host interns, with the goal that practical industry experience becomes a universal component of tertiary programs over time. Such measures make higher education more relevant to the economy and boost graduates’ employability. Public–private partnerships in skills development should be facilitated and employers given incentives to invest in their workers’ training. In the short term, a pilot program can be implemented in which government matches industry co-financing for priority upskilling initiatives (for instance, in semiconductors or advanced manufacturing), leveraging the new Investment Support Fund to support these industry-led training programs. By the medium term, regulations should then be updated to formally allow companies to co-invest in public training institutions and co-deliver programs in partnership with universities and vocational colleges. Embedding workforce training into industrial and investment policies means that each wave of economic growth builds human capital. When the government launches major industry promotion or FDI attraction programs, requirements or incentives for investor companies to develop local skills can be incorporated. For instance, new investors could be asked to invest in local training centers or have tax incentives conditioned on commitments to upskill the domestic workforce – steps that are immediately feasible via investment licensing conditions. Such measures – aligned with Resolution 68’s call for a greater private-sector role in human capital development – will make on-the-job training a normal part of doing business in Viet Nam and ensure continuous upskilling of the workforce. I 84 I Viet Nam Rising 2. Research capacity and talent: Strengthening the research and innovation capacity of universities while developing a world-class base of academic talent. Universities can be elevated as hubs of R&D and innovation by establishing joint industry– university innovation centers. In the short term, co-funded innovation centers can be piloted at select leading universities (for example, in biotechnology, semiconductors, or renewable energy) that bring together researchers, students, and industry engineers to work on applied R&D and product development. Regulations that hinder the mobility of experts between academia and industry should be relaxed (for instance, allowing professors to consult for companies and enable industry researchers to teach in universities), facilitating two-way knowledge exchange. Competitive grant programs can be launched to spur collaborative research. For example, introduce a matching-grant scheme that covers up to 50 percent of project costs when a company partners with a university on R&D or technology commercialization. Such programs can be introduced within the next 1–2 years to drive innovation in priority sectors and scaled up by 2030 based on demonstrated results. Technology transfer and startup support needs to be strengthened within academia. University technology transfer offices or innovation units can be established that help faculty patent their research, incubate startups, and connect research teams with enterprise needs. Training and guidelines need to be provided to these offices and their outcomes evaluated by 2030 (e.g. patents licensed, startups launched). Aligning university incentives with commercialization will help realize Resolution 57’s vision of science and technology driving development. Academic talent can be built by leveraging global expertise. Easier pathways are needed to recruit top Vietnamese diaspora experts and foreign professors into local institutions (for example, via streamlined work permits and flexible short-term contracts), and encourage leading universities to set up visiting scholar programs that bring overseas experts to teach and mentor. This infusion of international expertise over the next decade will elevate teaching standards and research output. In parallel, domestic talent can be developed and invested in by launching a national faculty development program to sponsor current lecturers for doctoral training and industry sabbaticals, accelerating progress toward the NEDS 2030 goal of at least 40 percent of university faculty holding a PhD by 2030. 3. Modern TVET & Lifelong Learning: Modernizing vocational education while creating flexible lifelong learning pathways for all. Technical and vocational education and training (TVET) can be upgraded to meet the needs of a modern economy. The Vocational Education and Training Development Strategy 2021–2030 should be fully implemented to raise Viet Nam’s vocational training to the level of top ASEAN countries by 2030. In the short term, TVET curricula can be updated to competency-based, industry-aligned frameworks and adjust national skills certification systems accordingly. By 2030, vocational qualifications should be widely recognized and trusted by employers across the region. Pathways to a High-Income Future I 85 I Investments must be made in TVET infrastructure and instructor quality. Within the next few years, this means upgrading equipment, workshops, and digital training tools at vocational colleges to keep pace with technological change. At the same time, the quality of instructors must be improved by requiring all TVET teachers to undergo regular upskilling in new technologies or periodic industry internships. These steps will ensure training is delivered with modern techniques and remains relevant to industry practices. Improvements in governance would prioritize results over inputs. Moving from receiving directions from above to a more autonomous system would assign greater decision-making to the service providers, with public sector responsible for monitoring quality, collecting information about VETI performance, and using information to provide greater incentives for the delivery of quality TVET services. A transition should be made from a VETI-centric model to a partnership between VETIs and the private sector by: (i) strengthening the legal structures governing engagement with employers; (ii) increasing enterprise participation in shaping the TVET system; and (iii) creating a department within the government to develop strategies for enhancing employer engagement in the skills training system. Redesigning the TVET financing system to provide incentives for results would complement governance reforms. Public financing of VETIs is largely distributed according to inputs – number of teachers, buildings, etc. A more autonomous system would finance institutions based on their record of results – defined as TVET graduates who get jobs or upgrade job performance after graduation. This would encourage VETIs to enhance their efficiency and design and deliver services that are aligned with labor market demand. The transition from financing inputs to outputs can be promoted by: (i) transitioning towards performance-based budgeting; (ii) limiting funding for capital expenses; (iii) exposing VETIs to competition; and (iv) establishing national scholarships for TVET. The attractiveness and mobility of TVET should be enhanced by implementing measures to boost enrollment in vocational programs and improve their public perception. For example, scholarships or stipends can be offered to students entering high-demand trades, and skills competitions and publicity campaigns can be organized to showcase successful TVET graduates. Clear pathways must be created for top-performing vocational graduates to advance into higher education (such as degree programs), so that choosing a vocational track does not limit future opportunities. Elevating the status and outcomes of TVET will encourage more youth to pursue this route and supply industry with skilled technicians. 4. Higher Education Quality & Relevance: Improving the quality of higher education and ensuring it remains relevant to development needs. Upgrading faculty qualifications and teaching capacity is a cornerstone of quality. A national faculty development program should be launched that sponsors university lecturers for doctoral studies or industry sabbaticals, aiming to meet the NEDS 2030 target of at least 40 percent of faculty holding a PhD by 2030. By 2045, Viet Nam’s universities should have a highly qualified professoriate, and teaching staff at vocational colleges should have extensive industry experience I 86 I Viet Nam Rising – reaching standards on par with high-income countries. Having more PhD-trained faculty and industry-seasoned instructors will enhance the academic rigor of programs and keep instruction up-to-date with evolving industry practices, thereby improving graduates’ outcomes. Curricula can be strengthened by being made more international and relevant. Institutions should be encouraged to pursue international accreditation of programs, adopt modern pedagogical innovations, and integrate entrepreneurship and digital skills training across disciplines. Closer engagement with industry in curriculum design (for example, involving industry professionals in curriculum committees or as adjunct instructors) can ensure that program content keeps pace with labor market demand. By emphasizing quality teaching and industry-relevant learning, Viet Nam’s higher education system will produce graduates with the competencies required in a competitive, innovation-driven economy. 5. Integrated Governance & Strategic Vision High-performing tertiary education and innovation systems coordinate universities, vocational colleges, and research institutes under a unified strategic vision while maintaining distinct roles. Viet Nam’s recent structural shifts (for example, transferring TVET colleges to MOET in 2025 and moving the majority of research institutes under MOST) demand similar high-level coordination without sacrificing specialized oversight of each subsector. A high-level coordinating council should be established to align policies and targets across the tertiary education and STI system, especially with universities’ central roles in both of the two ecosystems and consistent with Politburo Resolution 57’s call for STI breakthroughs. However, within this framework, differentiated oversight for each subsector will be preserved: TVET colleges, though now under MOET, is managed by a dedicated department with its own administration and funding stream; majority of research institutes remain under MOST and respective line agencies, with selective mergers into universities based on strategic fit. Regulatory oversight and planning can then be consolidated under the new framework. In the short term, streamline overlapping regulations and clarify institutional roles among the ministries. In the medium term, coordinate planning and budgeting between MOF, MOET (for tertiary education), MOST (for STI ecosystem), and MOIT (for industry development), to ensure consistent policies, reduce duplication, and maintain clear lines of responsibility. 6. Sustainable Financing & Investment A dual-envelope funding model should be adopted with separate but coordinated budgets: one for STI under MOST (including a dedicated sub-budget for university-based research managed by MOET) and another for the broader tertiary education sector (universities and TVET colleges) under MOET. These funding streams could be jointly planned (with MOF oversight and in coordination MOIT) to align investments in innovation and skills and workforce development. Each envelope will have distinct management and accountability metrics – and within the education envelope, Pathways to a High-Income Future I 87 I funding formulas and performance indicators should be further differentiated for universities versus vocational colleges. This dual-budget approach, in line with global best practices and recent reforms, ensures dedicated resources for both STI and education while improving overall funding coherence. Student financial aid needs to be expanded to promote equitable access. Funding for scholarships, tuition waivers, and low-interest loans for disadvantaged students should be immediately increased so that talent from all backgrounds can pursue tertiary education. An income-contingent student loan scheme or targeted grants for poor and rural students should also be implemented. These measures will improve equity and help raise gross tertiary enrollment to roughly 45% by the 2030s (on par with regional peers), as targeted in NEDS 2030. Spending efficiency and sustainability can be improved in tandem with mobilizing new funds. Existing resources need to be used more effectively by tying a portion of public funding to performance targets to incentivize results. Faculty salaries and research funding can be gradually increased (through reallocations or efficiency gains) so public universities remain competitive in talent and research. Universities can be encouraged to diversify income through continuing education programs, consulting services, and alumni fundraising. By 2045, the aim is a financially sustainable tertiary system with robust state support complemented by significant private contributions. Table 3. Policy reform agenda for skills and tertiary education Policy package Key recommendations 1. Skills, l Institutionalize industry’s role in education and training employability l Enable public-private partnerships in skills development and industry engagement l Embed workforce training into industrial and investment policies 2. Research l Elevate universities as hubs of R&D and innovation capacity and l Launch competitive grants programs talent l Strengthen technology transfer and startup support l Leverage global expertise to build up academic talent 3. Modern TVET l Upgrade TVET by fully implementing the Vocational Education and Training Development and lifelong Strategy 2021-2030 learning l Invest in TVET infrastructure and instructor quality l Improve governance and financing to prioritize results over inputs l Enhance the attractiveness and mobility of TVET 4. Higher education l Upgrade faculty qualifications and teaching capacity quality and l Strengthen internationalization and relevance of curricula relevance 5. Integrated l Establish a high-level coordinating council by 2025 to align policies and targets across the governance and tertiary and STI system strategic vision l Consolidate regulatory oversight and planning under the new framework I 88 I Viet Nam Rising Policy package Key recommendations 6. Sustainable l Adopt a dual-envelope funding model with separate but coordinate budgets for STI and financing and the broader tertiary sector investment l Expand student financial aid to promote equitable access l Improve spending efficiency and sustainability in tandem with mobilizing new funds More must be done to develop the skills of the workforce outside the tertiary education system. Ensuring that tomorrow’s workers develop the skills needed for tomorrow’s jobs through tertiary education today is critical to helping Viet Nam ascend the value chain and transition towards a high- income economy. However, the skills development agenda extends beyond tertiary education. The majority of the workforce over the next two decades has already left tertiary education, if they ever attended at all. Ongoing skills development is therefore needed to boost the productivity of workers currently in the labor force. In particular, they need to be provided with digital and soft skills so that they can retrain and learn new jobs in the future. This is as relevant for those displaced by economic and technological shocks as it is for those seeking to move to a more productive job. Table 4 summarizes policies to strengthen the skills of existing workers, while Box 1 summarizes the lessons from international experience on reskilling and retraining programs. Meanwhile, Chapter 7 discusses the role that social assistance can play in providing financial support to displaced workers so as to give them enough time to find a job that better matches their skills and experience. This helps them avoid the temptation to take the first job they find out of financial necessity, which is bad for both their individual earnings and for aggregate productivity in the economy. Box 1. Lessons from international experience on reskilling or retraining programs While designing an effective reskilling or retraining program is complex, a review of the international experience points out the following lessons: l Short-time training within a short period after displacement may be a viable strategy to keep individuals in the labor market by transitioning to new jobs. l There must be a prior understanding of the skills requirement and needs of workers before conducting training. This will make the training program relevant to the current requirements of displaced workers. l There must be a synergistic partnership between the government and the private sector to leverage each of their strengths to mobilize resources to help workers. One important factor is the timing and intensity of retraining programs. The sooner workers are retrained after retrenchment, the higher the impact of the training program is, in terms of future wages and re- employment. In addition, the shorter and more intensive the retraining program, the greater the impact on workers in transitioning to new occupations. Early interventions for displaced workers include career advice based on existing and potential skills. Pathways to a High-Income Future I 89 I Existing studies emphasize the need for a screening or skills assessment stage prior to any retraining program to maximize its impact. At a minimum, program designers should gather information about the general characteristics of each displaced worker—for instance, skill level, occupation, education, age, and gender. This will ensure the suitability of the training program to the individual, and the core contents of the program should be understood with the existing competence of the individual. Another important aspect is the synergy and partnership between the government and private sector in providing the retraining program. This will ensure that the program will be market-oriented and cost- effectively delivered, without compromising on quality. One mechanism is to provide vouchers for training, as was done through the Workforce Innovation and Opportunity Act in the United States. These vouchers allow individuals to choose their preferred training provider, whose past program performance is published in “report cards” that the individual can assess. In addition, governments can leverage existing available grants, aids, and loans to provide quality retraining programs. Source: World Bank 2021. https://asean.org/our-communities/economic-community/integration-with-global-economy/asean-hong-kong-china-economic-relation/ 133 https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/vietnam/eu-vietnam-agreement/ 134 committees-and-dialogues_en https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/decision-group- 135 customs-decision-groupe-douanes.aspx?lang=eng 136 Furthermore, as part of updating the database for the CGE model from base year 2017, remaining trade cost changes of the following older agreements are phased in: Japan (2009), and ASEAN agreements with Australia and New Zealand (2010), India (2010), Korea (2009), Japan (2008). I 90 I Viet Nam Rising CHAPTER 4 FOSTERING FIRM INNOVATION Viet Nam’s domestic private sector is dominated by small-scale firms, mirroring a pattern observed in lower-income countries. An overwhelming majority of businesses—98 percent—are either household-owned or small, informal enterprises.55 The typical business in the country operates with approximately three workers, including those in household businesses.56 These businesses are predominantly oriented towards local markets and have a minimal presence in export markets. Only around one in six (17 percent) fully domestically owned firms are engaged in exports. Collectively, these non-state businesses contribute to around one quarter of Viet Nam’s total value added. However, they fall short of reaching the productivity levels of larger firms, including SOEs and FDI firms. For instance, manufacturing businesses with fewer than 10 employees demonstrate just 27 percent of the productivity of larger firms with 250 or more employees, highlighting their competitive disadvantage.57 Domestic firms (public or private) lag behind foreign firms on growth and productivity. FDI firms represent only 3 percent of the total 900,000 enterprises operating in Viet Nam, yet they employ a significant number of people—17.8 million workers, or 35 percent of the country’s formal workforce (Figure 50). These firms are crucial to the export sector, particularly in specific subsectors. For example, majority-owned foreign affiliates accounted for over three-quarters of Viet Nam’s exports in machinery and equipment, and around half of the exports in the computer, electronics, and telecom and IT services sectors. On the other hand, domestic firms are largely involved in traditional sectors such as construction, repairs, and hospitality, and are generally inward-looking, focusing on servicing the domestic market.58 As such, the FDI sector largely operates in isolation rather than as a catalyst for economy-wide growth, with limited spillovers from FDI firms to the domestic private sector in the form of increased demand for inputs, access to new technology, managerial skills, demonstration effects, and agglomeration benefits. 55 While Viet Nam’s share of informal labor is similar to that observed in lower-middle-income countries, upper-middle-income countries have a lower informal labor (close to 60 percent on average) compared to the 80 percent measured for Viet Nam in 2016 (ILO 2018; Loayza and Meza-Cuadra, 2018). 56 World Bank 2020. 57 World Bank 2024. 58 World Bank 2020. Pathways to a High-Income Future I 91 I Figure 50. Domestic Figure 51. …value-added Figure 52. …and private firms lag foreign and profitability… productivity firms in both employment and turnover… Share of firms, employment and Value added, return on assets Productivity growth total turnover and profits SOE FDI Non-SOE domestic SOE FDI Non-SOE domestic 0.2 100% 5 80% 4 0.1 0.156 60% 3 40% 2 0.0 20% 1 -0.08 -0.08 0% 0 -0.1 Share of firms Share of Turnover Value-added Return on Profits (% of SOE FDI Non-SOE employment per worker assets turnover) domestic Source: Authors’ calculations based on data from the General Statistics Office, OECD (2019) and World Bank (2020). Data reported in 2020. Fostering innovation is one channel for boosting domestic firm productivity. Domestic firms can increase productivity in two different ways. First, they can infuse existing technology from overseas, as outlined in the WDR’s 3i framework.59 The most effective way to do this is to integrate into GVCs and have knowledge transferred from FDI partners. This has been discussed in Chapter 2 on GVC upgrading. This current chapter focuses instead on the second option; namely, how local firms might increase productivity endogenously, with a focus on fostering innovative startups. 4.1. Backward diagnostic While Viet Nam’s domestic private sector is highly dynamic and growing rapidly, productivity remains a challenge. The country is still relatively small and young, yet it boasts a highly dynamic private sector, which produces a high share of new businesses. As such, Vietnamese firms tend to have good prospects for growth, with Viet Nam enjoying a large share of high-growth firms (HGFs)60 relative to the OECD average. HGFs are a primary driver of job creation in the country, adding more than 1.4 million jobs to the domestic economy during 2017–2020 alone, while the rest of the private sector lost 1.1 million jobs during the same period. However, HGFs tend to be less productive, less innovative, and less integrated into GVCs than the average Vietnamese firm. This lack of integration 59 Investment – infusion – innovation framework. For more details, see World Bank (2024d) 60 High-growth firms (HGFs) are defined as those firms that initially have 10 or more employees and experience average annualized employment or revenue growth of greater than 20 percent over a three-year period, as established by Eurostat and OECD (2007) and used in the World Bank’s analysis of the impacts of HGFs in developing countries in Grover, Medvedev, and Olafsen (2019). I 92 I Viet Nam Rising is largely because HGFs tend to be concentrated in less productive and lower value-added sectors, such as wholesale/retail and construction. There are few knowledge- or innovation-based startups that have the potential to disrupt incumbent firms and transform industries. Although Viet Nam’s labor productivity has grown by about two-thirds since 2010, it still stands at only about 10 percent of Singapore’s levels.61 Encouraging the entry of high-productivity firms can boost productivity growth. A decomposition of productivity drivers shows that while total factor productivity (TFP) has improved in Viet Nam, less productive firms have attracted more resources than more productive firms (Figure 53). This leads to negative between-firm growth, which in turn contributes negatively to TFP growth. This phenomenon is particularly important for manufacturing firms (Panel A) where productive firms successfully innovate and increase their own productivity (within growth), but where capital flows relatively more towards less productive firms. The overall effect is to drag productivity (between growth) and stifle growth from more productive firms. This section will focus on encouraging innovative firms for productivity growth.62 Figure 53. Firm productivity has been held back by resources going to less productive firms Decomposition of aggregate productivity growth (cumulative) Panel A: Manufacturing Panel B: Services Investment in new firms Investment in new firms Firm's upgrading investment Firm's upgrading investment Growth of more productive firms Growth of more productive firms Total Total 0.5 0.5 0.4 0.4 0.3 0.3 Cumulative log-changes Cumulative log-changes 0.2 0.2 0.1 0.1 0.0 0.0 -0.1 -0.1 -0.2 -0.2 -0.3 -0.3 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Source: World Bank staff based on data from Economic Census – General Statistics Office (GSO) using the ICA 2.0 Tool. Note: The graphs plot the decomposition of aggregate TFP growth into the contributions of the changes in the unweighted average TFP across incumbent firms (within), the changes in the allocation of employment across incumbent firms with different TFP levels (between), the differences in TFP between incumbents and new entrants (entry) and the difference in TFP between incumbents and exiting firms (exit). The analysis uses data until 2019 to provide a structural assessment of productivity dynamics, avoiding potential distortions caused by the COVID-19 pandemic from 2020 onwards. 61 Asian Productivity Organization, 2022. 62 Chapter 2 provides analysis and recommendations on strengthening linkages with FDI firms to improve factor allocation. Pathways to a High-Income Future I 93 I There are challenges within Viet Nam’s entrepreneurial ecosystem that impede entry of innovative firms and undermine their potential for high growth. The impeding factors include an outdated and burdensome regulatory environment, growing shortages of skilled workers, low rates of innovation, and difficulties in accessing finance – especially for startups outside the ICT sector. Many sectors also suffer from high entry costs and regulatory uncertainty, with financial services, health care, logistics, and education being notable in this regard.63 Access to finance remains a key challenge for the Vietnamese private sector, especially startups. In the World Bank Innovative Startups Survey in 2023, 69 percent of respondent firms reported difficulties in accessing financing during their development (Figure 54). Similarly, nearly half of private sector firms in the 2021 PCI survey—an increase from 2017—outlined such challenges. For startups, access to finance is most acute in the early stages of development with pre-minimum viable products, due to a lack of public support and investors targeting early-stage companies. This gap is most acute for hardware and intellectual property-based startups, which require more capital to develop (minimum viable products). Figure 54. Access to finance remains a key challenge for the Vietnamese private sector Share of firms with unfavorable views (percent) Access to finance 70% Business regulations 65% Collaboration among ecosystem actors 50% Access to qualified and skilled labor 45% Knowledge support services 39% Managerial capabilities 38% Access to markets 37% Access to quality infrastructure 33% Entrepreneurial mindset 26% Source: Aridi et al. (2023). 63 World Bank (2021). I 94 I Viet Nam Rising Public financial support for innovation is mostly directed at a few large multinational companies leaving little for domestic firms. An analysis of Viet Nam’s science and innovation support programs found that the country’s largest innovation program provides tax incentives for research and development (R&D) to FDI firms, while innovation and entrepreneurship support to the domestic private sector is at a much lower level than in regional peer countries.64 To illustrate the point, direct support for business innovation amounted to $237 million in the Philippines in 2017, in contrast to $69 million in Viet Nam for the same year (World Bank 2021). The overall quality and the level of other public support is low. The existing policy mix targeting innovative firms and entrepreneurs is underdeveloped, underfunded, fragmented, and not aligned with international good practices. Almost no direct financial support is provided to startups (nor to domestic firms of any kind). The quality of public entrepreneurship intermediaries (e.g., incubators, accelerators, and innovation centers) is also low. Almost no direct financial support is provided to startups (nor to domestic firms of any kind). This undermines the government’s efforts to build a pipeline of innovative startups that are ready for investment. Finding skilled talent, mid-level managers and C-Suite executives is an increasing challenge for firms. Viet Nam has a strong base of technical talent, but competition for skilled workers is increasing among domestic firms and FDI enterprises. Universities are good at producing raw programming and engineering talent, but Viet Nam’s education system does not currently have the resources to scale up its supply of technically skilled workers, which could limit the development of knowledge-based firms. Many founder teams struggle with key aspects of running a business, such as developing product- market fit, growth strategies, and team building. There is a strong need for entrepreneurship support organizations that can offer better and more tailored training, mentoring, and acceleration programs. Such support would help entrepreneurs overcome current limitations, such as developing appropriate new products and running their businesses more effectively and efficiently. Risk capital investments have grown rapidly, but funding gaps remain for early-stage companies. While Viet Nam has seen an influx of international venture capital (VC) funds and VC investment (which exceeded $1.5 billion in 2021), there are funding gaps for early-stage activities. This is especially the case for knowledge- and intellectual property (IP)-based firms that usually have a higher risk profile and therefore require larger and longer-term funding to develop a minimum viable product (MVP). Angel investors, who generally play a key role in early-stage funding, are scarce and not professionalized. The risk capital market is heavily dependent on foreign funds and investors, making it vulnerable to shocks in global capital markets, which contributed to a dramatic drop in risk capital investments in 2022. Domestic Vietnamese investors face restrictions in their activities and are not incentivized to participate in risk capital investing. 64 World Bank (2021). Pathways to a High-Income Future I 95 I 4.2. Forward diagnostic Going forward, an efficient allocation of resources can spur innovation and productivity growth at the core of the high-income transition. A dynamic reallocation process towards more productive firms, including “creative destruction,” creates powerful incentives for firms to innovate and adopt new technologies while enhancing overall economic efficiency. Countries that facilitate this process through well-functioning markets, effective competition policies, and flexible regulatory environments enable continuous productivity improvements that compound over time. Such resource allocation efficiency accounts for substantial differences in aggregate productivity between middle-income and high-income economies, as advanced economies rely more on creating new markets for their economic growth.65 Evidence exists that innovative startups drive productivity growth. Previous studies have evidenced the impact of innovative startups66 on economic growth, innovation, and productivity.67 Startups can also induce structural changes within an economy: whereas incumbent firms can suffer from lock-in effects because of the costs associated with switching economic activities, new firms can more easily enter into new areas of economic activity. If new firms are innovative, they can shift employment patterns into more knowledge- and technology-intensive, higher value-added areas of economic activity as they grow—a process known in economic literature as “creative destruction.”68 Innovative startups are especially relevant to middle-income countries, such as Viet Nam, as their future productivity growth must be increasingly driven by innovation and technology absorption. Venture capital (VC) investments in Viet Nam have grown rapidly in the last five years, a testament to the growth potential of the ecosystem. Such investments hit a record level in 2021 in terms of value of deals ($1.5 billion) and number of deals (165), both substantial increases from previous years (Figure 55). They subsequently dipped in 2022, to $634 million and 134 deals, largely because of a global capital crunch during this period. Nevertheless, the overall size of the country’s VC market remains well below the region’s more developed markets, such as Singapore and Indonesia (Figure 56). Compared to Viet Nam’s peak of 165 deals in 2021, for instance, Singapore reported 303 deals. 65 World Bank WDR (2024). 66 Innovative startups are defined as knowledge- or technology-intensive startup firms that have developed (or aim to develop) new-to- market or new-to-world products and/or services. 67 See Audretsch, Kielbach, and Lehmann (2006); Gries and Naudé (2009); Spender et al. (2017); and Aghion et al. (2009) 68 Aghion and Howitt (1992). I 96 I Viet Nam Rising Figure 55. Viet Nam’s venture capital Figure 56. …but still receive far less markets have dramatically increased investment than the major markets in in size… the region Venture investments in Viet Nam ($ millions), Distribution of VC investments in Southeast Asia 2014-2022 (percent) VC investments Number of deaths (rhs) Indonesia Singapore Malaysia Thailand Philippines Viet Nam 1600 180 100% 1400 160 140 80% 1200 120 1000 USD Millions 60% 100 800 80 600 40% 60 400 40 20% 200 20 0 0 0% 17 14 18 19 15 16 20 21 22 17 18 19 20 21 22 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: Do Ventures, NIC, and Cento Ventures Research Source: Do Ventures, NIC, and Cento Ventures Research (2022). (2022). Despite reform efforts, entrepreneurs and investors face barriers in the regulatory framework. Obtaining business sublicenses for selected economic activities is burdensome, and there is a lack of clarity on the legality of a broad range of business segments, which deters investment. For domestic investors, the legal framework for registering investment funds locally is incomplete and restrictive. Additionally, Viet Nam’s IP and technology transfer framework is not aligned with global best practices and suffers from contradictory policies and inconsistencies that inhibit technology transfer. Box 2. Innovation-Led Growth: Korea’s Policy Framework for Scaling Innovation and Startups The Republic of Korea offers a compelling case study in how targeted innovation policy can catalyze private sector dynamism and support the emergence of globally competitive technology firms. From the ruins of war in the 1950s, Korea transformed itself into one of the world’s most technologically advanced economies. While the early stages of development were led by large industrial conglomerates (chaebols), Korea’s more recent innovation-driven growth has been enabled by deliberate reforms to foster startups, scale-ups, and entrepreneurial ecosystems. Korea’s approach demonstrates how governments can actively shape innovation outcomes by creating enabling environments for firms to invest, experiment, and grow. Three key policy levers were central to this transformation. Pathways to a High-Income Future I 97 I 1. Strategic Investment in Innovation Infrastructure and Capabilities Korea laid the foundation for an innovation-driven economy through sustained public investment in digital infrastructure, R&D, and education. Between 1995 and 2014, the government invested over US$35 billion in information and communications technology infrastructure, helping to democratize access to digital tools and services. These investments supported the emergence of digitally native firms and lowered the cost of entry for new innovators. The government also directly supported private innovation by co-financing R&D through grant programs, tax credits, and public-private partnerships. Korea’s spending on R&D jumped from 0.5 percent of GDP in 1980 (close to today’s spending in Viet Nam) to 1.6 percent in ten years while Korea was still an upper-middle-income country. Private sector contributions—bolstered by government incentives— grew rapidly, and by the late 1990s accounted for more than 80 percent of total R&D expenditure. 2. Innovation Policy for Startups and Technology-Based SMEs Recognizing the limitations of a growth model reliant solely on large incumbents, Korea introduced a series of reforms beginning in the late 1990s to cultivate a more diverse innovation ecosystem. Policies shifted to actively support smaller, high-potential firms, particularly in emerging technology sectors. These efforts included: (i) Startup-specific financing instruments, such as seed capital funds, early-stage venture financing, and government-backed technology credit guarantees; (ii) Incubators and accelerators, often linked to universities or regional innovation hubs, which provided infrastructure, mentorship, and market access; (iii) Targeted innovation clusters and free economic zones, offering regulatory flexibility and access to global partners; (iv) Simplified regulatory procedures for new business formation and intellectual property registration, coupled with reforms to ease market entry for new firms. 3. Rebalancing State–Market Roles to Promote Innovation Contestability The post-1997 crisis period marked a critical shift in Korea’s innovation policy. Structural reforms reduced the dominance of established conglomerates, enhanced market competition, and created more space for entrepreneurial activity. The government strengthened competition policy and dismantled informal state support for incumbent firms, leveling the playing field for new entrants. Financial sector reforms introduced stricter prudential regulation while expanding the range of instruments available to finance innovation. New institutions were created to support commercialization of research, bridge the gap between universities and industry, and foster collaboration between large and small firms. Policies emphasized not only the generation of innovation, but also its diffusion across the economy. These reforms were reinforced by broader improvements in the institutional environment, including stronger legal protections for intellectual property, improved public procurement systems for innovative solutions, and more effective coordination mechanisms across ministries and agencies. Overall, Korea’s success illustrates how innovation-led growth is not the automatic result of market forces, but the product of carefully designed policies that remove barriers, align incentives, and invest in foundational capabilities. A deliberate pivot from a model dominated by large firms toward one that actively promotes startup activity, entrepreneurial risk-taking, and decentralized innovation has enabled Korea to sustain growth and remain competitive in a rapidly changing global economy. Source: Kim (2006); Soh, Koh, and Aridi (2023). I 98 I Viet Nam Rising 4.3. Reform agenda Policies should ensure that the entrepreneurship ecosystem supports innovation. This includes improving entrepreneurial outcomes and enabling innovative firms to enter high-growth trajectories, as detailed below with specific recommendations below and summarized in Table 4. Reorient the national flagship Program 844 on “Supporting the National Innovation Initiative to 2025” towards building a pipeline of investment-ready, innovative startups, including by: upgrading key support instruments to be in line with international good practices; attracting qualified private operators and fund managers to run entrepreneurship support intermediaries and establish early- stage funds locally; and building capacity of key stakeholders in the wider ecosystem. Address regulatory barriers through fast-track reforms, including by revising the law on the establishment of domestic investment funds (Decree 38), and simplifying procedures for making inward and outward investments, particularly for small investments in innovative firms. Increase the contribution of the public research sector to the innovative startup agenda, including by: modernizing the intellectual property (IP) and tech transfer framework; enhancing performance evaluation for commercialization of research; and building capacity for technology transfer at key universities and public research institutions. Beyond supporting the entry of new, innovative firms into the market, other policies are needed to improve the productivity and competitiveness of the Vietnamese private sector. A reform agenda will be needed to orient the enterprise support system toward upgrading the capabilities of new and existing firms. These policies can focus on the adoption of technology and digital solutions, increasing investment in research and development, supporting skills development, and improving managerial practices and access to finance. Table 4. Firm innovation reform agenda Policy package Key recommendations 1. Build a pipeline l Reorient Program 844 on “Supporting the National Innovation Initiative” towards supporting of investment- startups using international good practices ready, innovative l Attract qualified private operators and fund managers startups l Establish local early-stage funds 2. Address l Revise Decree 38 on the establishment of domestic investment funds regulatory l Simplify procedures for making investments (inwards and outward) especially for small barriers limiting investments in innovative firms firm innovation 3. Increase the l Modernize the intellectual property framework contribution of l Modernize the tech transfer framework public research l Enhance performance evaluation for the commercialization of research l Build capacity at key universities and public research institutions Pathways to a High-Income Future I 99 I Policy package Key recommendations 4. Develop a reform l Support capabilities upgrading by existing firms agenda to enhance l Encourage the adoption of technology and digital solutions the productivity the Vietnamese l Increase investment in research and development private sector l Support skills development in areas with labor demand more broadly l Improve managerial practices and access to finance (beyond innovative startups) I 100 I Viet Nam Rising CHAPTER 5 GREEN ENERGY TRANSITION Viet Nam is a very carbon-intensive economy. Despite progress in scaling up renewable energy, the Vietnamese economy is carbon-intensive. Its global impacts are relatively small: the country’s total emissions accounted for only 1 percent of worldwide GHG emissions in 2023, for instance, while its per capita emissions (5.2 tCO2e) are just below the average of middle-income economies (5.6 tCO2e). However, Viet Nam’s carbon intensity—driven by its reliance on coal for energy production and energy-intensive industrial sectors—exceeds the middle-income country average by 46 percent (based on GHG emissions per unit of GDP). Moreover, emissions continue to grow rapidly, increasing at an annual rate of 6.2 percent over the last decade. The main sources of emissions in Viet Nam are the power sector, agriculture, industrial process emissions, and transport. However, the government of Viet Nam has made an ambitious pledge to reduce carbon emissions, with the anticipated cuts coming principally from the energy sector. The 2022 National Strategy on Climate Change (NSCC) includes a net-zero emissions commitment by 2050, with an intermediate target of a 44-percent reduction in emissions by 2030. To reach these respective targets, Viet Nam would have to decouple economic growth and emissions faster and earlier (both in terms of per capita GDP and per capita emissions) than almost any other major economy.69 Nearly all of the reductions would come from the energy sector (Figure 57), making a transition to green energy essential to meeting the emissions reduction targets. Without this energy transition, Vietnamese firms risk becoming less cost competitive due to higher energy costs. The energy sector is seeing dramatic declines in the costs of clean technologies, with global innovation and the decreasing costs of alternative technologies for electricity generation set to reshape the energy sector. By the end of the decade, solar power paired with battery storage systems are expected to become cost-competitive with new coal and gas plants in Viet Nam.70 Therefore, green fuel will come cheaper for firms globally and Viet Nam risks being stuck with more expensive legacy fossil fuel energy generation. The high carbon intensity of Viet Nam’s exports poses another risk to competitiveness through higher costs to its main export markets due to the emergence of environmental trade tariffs.71 Viet Nam’s net export-related carbon dioxide (CO2) emissions have been historically higher than comparators since the early 2000s. Further, they have continued to rise in recent years even as others fell, hitting 36 percent of production in 2021 (Figure 58). This creates a tension at a time when global World Bank (2025a). 69 According to estimates from Bloomberg NEF; see: World Bank (2025a). 70 World Bank (2025a). 71 Pathways to a High-Income Future I 101 I demand is shifting towards lower emissions. In 2022, more than half of Viet Nam’s exports went to key OECD markets where new country-level climate-trade policies and the climate commitments of firms are altering import demand. In the absence of measures to reduce export carbon intensity, there is a risk that OECD-based multinational companies (MNCs) will drop Viet Nam as a supplier with potential sizable impacts. Around 70 percent of Viet Nam’s exports are to MNCs and two-thirds to OECD-based MNCs with stringent climate commitments. Moreover, export barriers for goods with higher carbon footprints are emerging. A key example is the introduction of a Carbon Border Adjustment Mechanism (CBAM) in the European Union. Although currently limited in scope, Viet Nam exposure is larger than its regional peers and CBAM’s scope is expected to expand. As a result, Viet Nam’s industries could face reduced market access and/or lower demand if they fail to transition to greener practices. As such, it is crucial for the country to align its domestic decarbonization efforts with global market trends in order to safeguard export opportunities and maintain growth. A green energy transition is therefore essential to maintain Vietnamese competitiveness globally and sustain export-driven growth. Simulation results suggest that loss of market share could have potentially sizable impacts. With a hypothetical 30-percent fall in exports to OECD countries, Viet Nam’s GDP would be around 6 percent lower than in a no-impact reference scenario by 2030.72 Figure 57. Energy contributes the vast Figure 58. Viet Nam has the highest majority of emission reductions in relative export-related emissions Viet Nam’s climate strategy among major middle-income exporters CO2 emission reduction goals of Viet Nam by sector, Net export-related CO2 emissions as a percent of 2030 and 2050 production Net zero Energy Agriculture Waste IP China Indonesia South Korea 1600 Baseline Malaysia Mexico Philippines Thailand Turkey Viet Nam 1200 0.4 Mt CO2eq Baseline 0.2 800 -27% -43.5% 0.0 2020 NDC target 2022 NDC target -0.2 400 -0.4 0 -0.6 NSCC target - Net zero emissions 2030 2030 2050 19 0 19 2 19 4 20 6 20 4 20 8 08 20 0 20 2 16 04 20 6 20 8 20 0 12 20 9 9 9 9 1 1 0 0 0 0 1 20 20 19 20 20 Source: World Bank (2025a) simulations using MANAGE Source: World Bank (2025) based on staff calculations. model. 72 World Bank (2025a). I 102 I Viet Nam Rising 5.1. Backward diagnostic Viet Nam faces rapidly growing energy consumption, coupled with emissions-intensive generation, which adds urgency to the energy transition. The energy sector accounts for about two-thirds (65 percent) of the country’s GHG emissions and electricity demand is forecast to grow more strongly than for peers (Figure 59), having already grown around twice as fast as GDP over the last two decades (Figure 26, earlier). However, it has more emission-intensive generation than those peers or HICs (Figure 60). Figure 59. Viet Nam’s electricity Figure 60. Viet Nam’s power grid is more demand is forecast to grow faster than emissions intensive than regional peers other major MICs and OECD countries and much more so than OECD countries Electricity demand growth forecast, selected Power grid emissions factor, selected countries countries, 2020-30 (annualized percentage) 7 1.2 Tonnes of CO2 equivalent per MWh 6 1.0 5 0.8 4 Percent 0.6 3 0.4 2 1 0.2 0 0.0 Viet Nam India Indonesia China OECD Viet Nam Indonesia Philippines China OECD Source: World Bank (2025a). Source: World Bank (2025a). Of the government’s five broad policy areas to realize its net-zero goals, four relate to the energy transition,73 underscoring its importance. The rapid rise of coal-based energy production means that energy sector-related emissions account for two-thirds of national GHG emissions, with 60 percent from the power sector alone. Viet Nam has committed to increase the contribution of renewable energy under the Eighth Power Sector Development Plan 2021–30 (PDP8). PDP8 outlines an ambitious shift away from coal towards renewables, which would transform the latter into the largest installed capacity category (Figure 61). 73 Two more relate to agriculture and transportation. Pathways to a High-Income Future I 103 I 1,000,000 Natural gas Coal 500,000 0 2000 2005 2010 2015 2020 Figure 61. PDP8 envisions a backloaded scale-up of renewable energy by 2050 Power mix in 2022 and as proposed under PDP8 2022 2050 Other power, Solar power, Wind power, 27% 19% Hydro power, 28% 21% Oi… Wind Hydro Coal power, 32% Gas power, 9% power, 6% Ot… Solar power, 34% Gas power, 13% power, 7% Source: PDP8 (2023). Cleaner energy would be accompanied by greater energy efficiency. The National Energy Efficiency Plan (VNEEP3) outlines ambitious improvements in energy efficiency leading to a potential decline in energy consumption of about 8–10 percent by 2030 relative to a baseline scenario.74 These targets are challenging in a rapidly growing economy like Viet Nam’s but if implemented as planned, they would help curb energy consumption growth.75 To date, incentives introduced to promote renewable energy and green production have had mixed implementation and results. To encourage investment in renewable energy sources like solar, wind, and biomass, feed-in tariffs were introduced in 2018–19. These guarantee a fixed price for electricity generated from renewable sources, thereby reducing uncertainty for investors. However, despite being generous and with success in FDI-led solar investments, sizeable investment in the transmission grid has not materialized, which has held back large-scale production and consumption.76 The lack of an effective carbon price is also a major constraint. An emissions trading system (ETS) is being developed under a roadmap for the development of a domestic carbon market by 2028. This system will provide incentives for firms especially in power, steel and cement sector to reduce emissions. Until this market is developed, the existing Environmental Protection Tax on fossil fuels and Natural Resource Tax may be expanded in coverage.77 https://vneec.gov.vn/gioi-thieu/c15/introduction.html 74 See Annex 2.2 of World Bank 2025a for further information on the energy efficiency plan and its objectives. 75 Other incentives include Corporate Income Tax reductions, import duty exemptions for renewable energy equipment, land use fee 76 reductions for renewable energy projects, and tax reductions for electric vehicle imports and production. See: World Bank (2025a). See World Bank. 2025a. 77 I 104 I Viet Nam Rising 5.2. Forward diagnostic With the energy transition as the main focus, emission reductions can be driven by price and non-price factors, with major technological changes playing a key role.78 Global innovation and the declining costs of alternative technologies are poised to significantly reshape the energy sector’s demand for various fuels. In the case of Viet Nam, solar power combined with battery storage systems79 expected to become cost-competitive with new coal and gas plants by the end of this decade. Shifts in regulations, standards, energy use practices, and price incentives outlined in Vietnamese national policies will influence energy pricing and demand among producers and consumers. The adoption of more efficient technologies, coupled with higher energy prices, is also likely to transform and reduce household energy consumption patterns. In the transport sector, meanwhile, an easing of access to finance for high performing e-motorbikes will boost their uptake compared to gasoline-fueled models. An important advantage is that Viet Nam has the greatest technical potential for wind and solar in Southeast Asia, estimated at 1,000 gigawatts per year, driven largely by its high technical wind potential (Figure 62 and Figure 63). Viet Nam has the lowest levelized cost of electricity (LCOE) from wind energy in the region, for instance, and one of the lowest for solar.80 In addition, introduction of new sources of fuel, such as biofuel and LNG, is expected to support the energy transition in the longer run. This could give Viet Nam a competitive edge and a unique opportunity to attract global or regional companies in search of green production and services facilities, including some from the 400 renewable energy (RE100) manufacturers. Implementation of its energy transition plan (currently PDP8) would be a cornerstone to Viet Nam fulfilling this economic potential. The economic costs of a net zero transition are likely to be relatively low and could even become growth positive when considering additional potential benefits. GDP could be 1.6 percent lower in 2040, primarily due to the impact of rising energy prices resulting from changes in the energy mix, and introduction of carbon pricing. This in turn will reduce household income and consumption leading t increase in poverty and inequality. This economic loss could intensify over time, reaching 2.8 percent in 2050. However, introduction of complementary policies to mitigate the impact and accounting for additional benefits from mitigation policies – such as increased labor productivity due to reduced air pollution,81 competitiveness due to transitioning to green production, and the recycling of collected carbon revenues to households and for investment – GDP could instead increase by 1.2 to 1.4 percent in 2040 and 2050 compared to BAU. These “co-benefits” highlight the potential for a green transition 78 New technologies include: (i) battery storage systems, by integrating large-scale battery storage to manage the intermittency of solar and wind energy, ensuring grid stability, (ii) green hydrogen can be used for hard-to-abate sectors like heavy industry and transport, offering a zero-emissions alternative, (iii) carbon capture, utilization, and storage (CCUS) can reduce emissions from existing fossil fuel infrastructure, enabling a smoother transition to renewable energy, (iv) smart grid technology that facilitates efficient energy distribution, better integrates renewable energy, and allows for demand-response mechanisms; and (v) advanced energy efficiency technologies, which reaches beyond basic efficiency measures by adopting advanced technologies like smart meters, by building automation systems, and by introducing high-efficiency industrial processes. 79 Photovoltaic-connected solar systems, or PVS. 80 Lee et al. (2020). 81 It is estimated that each one percent decrease in air pollution increases labor productivity by 0.1 to 0.3 percent (Fu, Viard and Zhang. 2021. “Air Pollution and Manufacturing Firm Productivity: Nationwide Estimates for China”, The Economic Journal 131(640):3241-73). Pathways to a High-Income Future I 105 I to deliver long-term economic gains despite short-term challenges (Figure 64). Moreover, taking additional steps to decarbonize the industrial sector, stimulate reforestation and increase carbon sinks will contribute significantly to reaching the net zero objective. This Accelerated Decarbonization Scenario (ADS) will lead to cost-effective energy efficiency improvements in industry and lower the cost of energy services for households and businesses, helping Viet Nam realize a 74 percent reduction in GHG emissions by 2050 relative to the BAU scenario, closer to net zero objectives. In turn, these efficiency gains and lower energy services costs will contribute to real GDP level increases of 2.8 percent in 2040 and 4.4 percent by 2050 (Figure 64) compared to the baseline. Nonetheless, to maintain firms’ global competitiveness, a sequenced and telegraphed approach with time for adjustment will be important. Adequate price signals are important as incentives for firms to improve energy efficiency and reduce carbon intensity. Yet, rising energy costs could also harm competitiveness in the short run. It is therefore important to provide longer term forward guidance to market participants on the expected price trajectory to allow for sufficient time for firms to adapt, including through investments in energy-saving and low carbon technologies. In parallel, to encourage wider adoption of and investment in low carbon technologies the government could consider targeted financial support to firms through green finance programs. Figure 62. Viet Nam Figure 63. …and wind Figure 64. Co-benefits has the lowest-cost energy in ASEAN due to means a net-zero solar… its geography and high transition could have a net technical potential positive effect on growth LCOE of solar energy, LCOE of solar energy, Impact of current and accelerated ASEAN countries ASEAN countries decarbonization policies on GDP Current mitigation policies without co-benefits Current mitigation policies with co-benefits ADS 4.41% 4% 2.82% 2.27% 1.81% 2% 1.39% 1.22% 0% -0.02% -2% -1.55% -2.76% -4% 2030 2040 2050 This map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. Source: Lee et al. (2020). Source: Lee et al. (2020). Source: World Bank (2025a) simulations using MANAGE model. Notes: ADS: Accelerated Decarbonization Scenario. I 106 I Viet Nam Rising 5.3. Reform agenda Given its ambitious net-zero transition commitments, Viet Nam must adopt a comprehensive approach that integrates nation-wide policies with incentives, regulations, and standards in key emitting sectors, such as energy and transport. Current policies have relied more heavily on planning mechanisms such as renewable energy targets in the Power System Development Plans. Shifting the policy mix towards a more market-driven approach could enhance efficiency and reduce the cost of emission abatement by leveraging the power of market forces and incentives. Market instruments, by imposing a price on carbon emissions, shift relative prices, and thereby accelerate the adoption of low-carbon technologies by making them more competitive. These will need to be complemented with investments in both physical infrastructure and regulatory systems to ensure a smooth transition and sustained progress toward net zero emissions. The following table from World Bank (2025a) provides a set of cross-cutting and sectoral recommendations for the upcoming five-year policy cycle (2026-2030). Table 5. Green growth adaptation reform agenda Cross-cutting Recommendations Adopt a carbon tax l Introduce a moderate carbon tax ($7.5–15/ton) by reforming the EPT fuel excise to accelerate the tax to reflect carbon content, starting with coal. transition to low-carbon l Feebates to encourage cleaner technology adoption in polluting industries. technologies Implement energy l Launch technical standards and sector-specific initiatives such as consumer efficiency standards awareness campaigns to improve energy efficiency in industrial, commercial, and and behavioral change residential sectors. programs Introduce green subsidies l Provide tax rebates, VAT reductions, or investment write-offs for green products like to support transition to energy-efficient machinery to stimulate demand and private sector investments. cleaner technologies Leverage voluntary l Develop clear measurement, reporting, and verification (MRV) standards, engage carbon markets to attract with global carbon markets, and partner with international stakeholders to mobilize climate investments funding for renewable energy and sustainable development projects. Sectoral Recommendations Energy: Implement revised l Adopt and start implementing the revised PDP8 PDP8 l Streamline project approvals for pdp8 implementation Energy: Adopt least- l Ensure dynamic, least-cost planning to optimize energy security and affordability. cost planning and clarify Streamline procurement methods across laws and establish clear criteria for procurement rules for selecting investors. PDP8 Energy: Strengthen l Enhance the capacity of ESCOs by improving access to financing mechanisms, energy service companies technical training, and enabling regulations to scale up energy efficiency projects. (ESCOs) for efficient implementation Pathways to a High-Income Future I 107 I PART 2 LABOR AND HOUSEHOLDS Part 2 of the report, “Labor and Households”, examines the profound impact of Viet Nam’s rapid demographic transition and other shocks on the country’s workforce and households. It explores the interconnected challenges of a rapidly aging population, declining female labor force participation due to childcare and eldercare burdens, and the need for a robust social protection system to mitigate the risks of external shocks and technological disruption. The section underscores the importance of implementing a comprehensive reform agenda to strengthen social safety nets and ensure that the benefits of Viet Nam’s economic growth are shared equitably across all segments of society, including the most vulnerable. I 108 I Viet Nam Rising CHAPTER 6 AGING AND CARE Viet Nam is rapidly aging and becoming older at a much lower income level than current HICs or even most regional peers (Figure 65). This threatens to act as a drag on growth as well as increasing fiscal pressures for health and elderly care, especially as the tax contributions of the working-age population slow. At the same time, sweeping external changes such as geoeconomic fragmentation, rapidly changing and disruptive technology and climate change pose a serious threat to lives, livelihoods, and assets. Figure 65. Viet Nam’s female labor Aging puts pressure on the remaining working- force participation is one of the highest age population to work, including Vietnamese in the world, although it has fallen by women, whose rate of work is high by global six points over the last 30 years standards but declining. As Chapter 1 discussed, Viet Nam’s strong overall labor force participation Percent of working age females employed is driven by high female participation rates, or looking for work among the highest in the world now or over the Historical high 2022 last 30 years (Figure 65). Nonetheless, in 2022, 80 it was six points lower than it was in the early 1990s. Further, China’s ten-point decline until 60 just before COVID-19 suggests this rate could fall still more, given that China is further ahead in the Percent 40 aging process than Viet Nam. 20 Childcare responsibilities reduce women’s labor 0 contributions, and an aging population could add to this burden. One reason why some women do am La na D ) a IC D IC IC IC re -D -D UM M LM i So l.H Ch Ko N rly e not work—or work part time or in less productive et xc t Ea h Vi ut (e P but more flexible jobs—is childcare responsibilities. EA Women with children are 8.1 percentage points Source: World Development Indicators Notes: Historical high is the highest FLFP from 1991-2022. less likely to have a wage job than men, 3.3 points Late-DD are countries in the late stage of the demographic less likely to have a formal job, and 6.1 points less dividend; Early-DD are ones in the early stages. likely to have a skilled occupation. Moreover, their wage income is 8.3 percent lower than women without children.82 Women with children work nearly an hour less per day.83 If eldercare responsibilities are also borne by women in the household, they could exit the workforce more quickly. 82 Buchhave, Viet, and Zumbyte (2024), Motherhood Penalty. 83 Glorieux, Rodriguez, and Wai-Poi (2024). Pathways to a High-Income Future I 109 I 6.1. Backward diagnostic Figure 66. Viet Nam’ s demographic dividend that coincided with its economic boom is now ending Key demographic indicators 0-14 (%) 15-64 (%) 65 or over (%) Young Dependency ratio (0-14) Old Dependency ratio (65 or over) 100% Population Bonus 90% Low dependency rate (2007-2042) 80% Ageing 70% 60% 50% 40% 30% 20% 10% 0% 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 Source: World Bank (2021). Authors’ calculations based on data from the United Nations and the General Office of Statistics of Viet Nam. Notes: The total dependency ratio (TDR) is the ratio of the number of dependents 0 to 14 years of age and over the age of 65 to the total population 15 to 64 years of age. The demographic window of opportunity, also called the “population bonus”, describes a demographic situation in which the working-age population—between ages 15 and 64—is greater than that of the children and the elderly. Put differently, it is when the number of working-age people is double that of dependent people and the total dependency ratio is below 50 percent. An aging population is a population in which the elderly (65 years of age and above) account for 7 to 9.9 percent of the total. See: Cowgill and Holmes, 1970; as quoted in, Andrews and Philips, 2006). An aged population is a population in which the elderly account for 10 to 19.9 percent of the total. A population in which the elderly account for 20 to 29.9 percent of the total is called “very aged”, and a population in which the elderly account for more than 30 percent of the total is called “hyper aged”. Viet Nam’s economic boom coincided with a demographic dividend that has now ended. This dividend began around 1970 as falling fertility and a growing working-age population meant that youth and overall dependency ratios began to fall rapidly (Figure 66).84 As a result, the working-age population was growing faster than the overall population, providing a strong base for the Đổi Mới reforms to take root. This bonus continued and even accelerated until the 2010s, when the working-age share of the population peaked and the population began to age. The elderly dependency ratio began to rise in 2014 and in just a decade the total dependency ratio increased from 42 to 48 percent. See notes to Figure 66 for definitions of demographic terms. 84 I 110 I Viet Nam Rising Moreover, Viet Nam is the fastest-aging country in the fastest-aging region in the world, yet it is making this transition when its income is lower than most other aging or aged countries. East Asia and Pacific is aging more rapidly than any region in history. Nearly all MICs in the region are in the midst of, or will soon experience, a pace of aging that is unprecedented, transitioning from young to old societies in 20 to 25 years—a shift that took 50 to more than 100 years in OECD countries.85 Viet Nam is now the most rapidly aging country within East Asia and the world (Figure 67). Projections suggest it will take just 15 years for it to move from aging (7 percent of the population age 65 years or older) to aged (14 percent)—an eventuality due to occur between around 2025 and 2040. This rapid aging means that Viet Nam is getting old before it gets rich; as noted earlier, it had reached only 10 percent of the GDP per capita of the United States when the working-age share of the total population peaked in the mid-2010s, the lowest in East Asia. Employment drops quickly as both men and women reach social insurance eligibility age; an aging population increases the importance of keeping older cohorts attached to the labor market. By 2045, 55-74 year-olds will increase from 16 percent of the population to 24 percent, a large potential share of workers (Figure 68). However, employment drops quickly as women and men reach the age of social insurance pension eligibility, which is 60 years for men (rising to 62 by 2028) and 55 years for women (rising to 60 by 2035). Over nine out of ten (91 percent) of 50-54 year-olds work, but only 71 percent of 60-64 year-olds do, with this number falling to 58 percent for 65-69 year-olds. These employment rates for older cohorts would likely change as society ages and pension eligibility ages increase. Policies can help encourage a slower exit for more productive older workers. Simulations project that if exit levels from the labor force were half as fast for 55-69 year-olds, GDP would be 4.4 points higher in 2045. Viet Nam, like many countries in Southeast Asia, will need to address multiple challenges brought about by an aging population. As of 2024, the share of individuals age 60 years and older reached 14 percent of the total population.86 Population projections indicate this share will be 22 percent by 2042, with the most rapid growth occurring among those age 80 years and older.87 These shifts underscore a need for a sustainable aged and long-term care (ALTC) financing strategy to meet the needs of Viet Nam’s growing elderly population; Chapter 7 addresses the need for income support for retired workers with insufficient savings. 85 World Bank (2016). Live Long and Prosper: Aging in East Asia and the Pacific. 86 General Statistics Office (2025). 87 General Statistics Office (2021). Pathways to a High-Income Future I 111 I Figure 67. Viet Nam is the fastest aging Figure 68. A quarter of the population country in East Asia and the world is projected to be age 55 to 74 by 2045, but current employment rates are Years to move from 7- to 14-percent population considerably lower for those age over 60 share of 65 years and older, and the start and end years of transition, selected countries Population share and employment rate by age, 2024-45 Share of Population Population Share by Age, 2024-45 2024 2045 Empl. rate Source: World Bank (2016) estimates based on data from Source: UN Population Projections and employment rates UN 2013 and Kinsella and He, 2009. from: World Bank (2021), Viet Nam: Adapting to an Aging Notes: Figure shows starting and ending year for transition Society, based on VHLSS 2020. from 7 percent (aging) to 14 percent (aged) of population Notes: Median projection interval for males and females, ages 65 and older. Aging and aged thresholds are based on aggregated. United Nations’ definitions. East Asia and Pacific economies rounded to five-year increments The majority of elder care in Viet Nam is provided by informal caregivers, predominantly family members such as the spouse and adult children. The majority of elderly individuals live with others, with an overwhelming proportion of caregivers being their children (44 percent) or spouse (43 percent).88 While families will continue to play a pivotal role in old-age care, changes in living arrangements have led to declining reliance on this form of care. Factors contributing to this shift include urbanization, migration of children for work, declining fertility, the transition from nuclear to extended families, and shrinking family sizes. Consequently, the proportion of older persons living alone has increased over time, rising from 9.7 percent in 2009 to 13.7 percent in 2019 (Figure 69). Elma P. Laguna (2020), Caregiving in Vietnamese Families. 88 I 112 I Viet Nam Rising Figure 69. The number of elderly living alone or with just their spouse has in- creased to over a quarter of all elderly, although 72 percent still live with others Living arrangements of older persons by residential area, 2009 and 2019 Urban Rural Total 100 80 Percentage (%) 60 40 20 0 Living alone Live with Other Living alone Live with Other spouse only spouse only 2009 2019 Source: General Statistics Office (2021), Population Ageing and Older Persons in Viet Nam. World Bank team calculations using data from 2009 and 2019 population and housing censuses. There is increasing demand for ALTC, including through formal services, which would have both fiscal and growth benefits. Demand is significant for different forms of ALTC, ranging from low-level social support to help with daily living self-care activities, with which almost half of people age 70 and over in Viet Nam report face difficulties.89 Even as this demand grows, there are also increasing expectations about the role of the state.90 Access to formal ALTC services would have two important benefits. First, greater availability of quality social care means less future spending on medical care as injury rates drop and hospital and health center admissions decline. Second, quality social care can increase labor force participation as current elderly caregivers can instead enter the labor market or increase their participation in paid employment. This increases both household earnings and aggregate economic growth. However, careful thought is required as to how new ALTC systems should interact with informal care systems and formal health and welfare systems.91 However, the current formal ALTC system fails to meet the growing needs of the elderly population. While home-based and community-based care are primary sources of support, institutional care plays a crucial role for those who cannot rely on family or community care. This emphasizes the need to strengthen the aged care system, making it more affordable, accessible, and integrated. However, as with the rest of the region, formal LTC is very underdeveloped in Viet Nam.92 It currently serves 9,600 older individuals across 142 social protection institutions, of which half are public. The system faces key challenges: less than 10 percent of the older population with care needs93 and 89 HelpAge International (2014). 90 World Bank (2019). 91 World Bank (2019). 92 World Bank (2016), Live Long and Prosper: Aging in East Asia and the Pacific. 93 Older people in need of long-term care are calculated based on their need for assistance with one or more of the three Activities of Daily Living (ADLs). Pathways to a High-Income Future I 113 I most elderly residents in public institutions come from disadvantaged households or lack family support. Additionally, the quality of care in public institutions is often poor, as these facilities serve a mix of groups, such as orphans and people with disabilities, which leads to inadequate services and insufficient resources for elderly care. This lack of specialization limits the ability to provide the personalized care needed to ensure the well-being of older individuals. Lastly, public institutions have limited capacity, and those in private nursing homes face high costs that are unaffordable for most elderly individuals. 6.2. Forward diagnostic Figure 70. Aging is a natural consequence of development; generally, a quarter or more of the population is elderly in HICs Elderly dependency ratio (percent of working-age population) 60 50 40 30 20 10 0 Japan Italy Germany France Spain United Canada Australia United Korea, New Viet Nam Kingdom States Rep. Zealand Source: World Development Indicators. Notes: The elderly dependency ratio is the ratio of the number of people over the age of 65 to the total population 15 to 64 years of age. An aged population is a population in which the elderly account for 10 to 19.9 percent of the total. A population in which the elderly account for 20 to 29.9 percent of the total is called very aged, and a population in which the elderly account for more than 30 percent of the total is called hyper aged. Aging is a natural consequence of development; HICs have a larger share of elderly and have adjusted their labor and social policies accordingly. Many OECD countries have “very aged” populations (representing 20-30 percent of the total population; European countries typically have “hyper aged” populations, or more than 30 percent of the total population, while in Japan half of the population is age 65 years or older (Figure 70). However, these economically and demographically advanced countries employ a mix of strategies to extend the productive working lives of older workers who wish to work,94 World Bank (2021). 94 I 114 I Viet Nam Rising such as: job search services for older workers and subsidies for employers; retraining schemes for those whose formal education was long ago; and subsidies to encourage retraining of older workers. Collectively, these measures serve to boost productivity. Firm-level measures can also help, such as: reducing seniority-based wage setting mechanisms; establishing flexible work arrangements such as part-time and job sharing; and making workplaces more suited to the physical capacity of older workers. Finally, extending productive working lives requires retirement age reform. International best practices also focus on lifestyle changes that promote healthy, active, and dignified aging.95 Actions can aim at tobacco and alcohol control and a healthy diet, for example. Aging in place—as opposed living in institutional settings—is seen as key to dignified aging, as well as being financially sustainable. Incorporating this approach into urban planning is important.96 In OECD countries, the familial model has come under strain, while the large private costs are borne mainly by women.97 As in Viet Nam, women are usually responsible for elderly care when there is no formal system or access.98 This leads to women forgoing income or reconciling care and paid work. However, in many OECD countries, affordable ALTC has increased women’s choices for market work and leisure. In contrast, for those experiencing high-intensity caregiving without support, there is a reduction in labor supply for paid work.99 Formal elder care options can minimize labor market non-participation of adult caregivers or even promote it. In addition, ALTC has been shown to reduce hospital admissions and the associated risks of in-patient and out-patient injuries. Medical costs for those over age 75 has been shown to account for 30 percent of the total medical budget of Viet Nam.100 The introduction of ALTC in China has demonstrated significant benefits, including a 41-percent reduction in the length of hospital stays, an 18-percent decrease in inpatient expenditures, and an 11-percent reduction in health insurance expenditures in tertiary hospitals.101 OECD ALTC models emphasize choice and government stewardship. Households have the choice of whether to provide elderly care within the family or buy in the market. The government develops the missing elderly care market, including financing models, to attract quality private resources to the sector. It also provides subsidies to qualified recipients. Care provision can then come from a combination of the private formal and semi-formal sectors as well as from family members. The emergence on formal ALTC services and public support in the mid-20th century coincided with a shift in living arrangements and an increase in female labor force participation. World Bank (2021). 95 See, for example: Center for Policy on Ageing (2016); Epstein and Boisvert (2006); and Garcia and Marti (2014) 96 World Bank (2021) 97 Across the OECD, more than one in ten adults over age 50 provides (usually unpaid) help with personal care to people with functional 98 limitations. Close to two-thirds of such caregivers are women. See: OECD (2011), “The Impact of Caring on Family Carers.” In Help Wanted? Providing and Paying for Long-Term Care. OECD (2011). 99 100 Nguyen and Nguyen (2010), “Introducing Health Information Systems to Aged Care in Viet Nam.” PACIS 2010 Proceedings, 64; Nguyen (2009), An aging population and health problem. Vietnamese Elderly Research Institute. 101 Feng, Wang, and Yu (2020), Does long-term care insurance reduce hospital utilization and medical expenditures? Evidence from China. Pathways to a High-Income Future I 115 I Formal ALTC could help arrest the decline of female labor participation in Viet Nam as the country ages, potentially boosting growth by 3-5 percentage points, or around 11-16 percent of the HIC gap. In Viet Nam, women with children are 1 percentage point less likely to work at all and to work nearly an hour less per day if they do work.102 If the impact of elderly care responsibilities were to have similar impacts as Viet Nam ages, female labor force participation could fall by as much as 8-12 percentage points (Figure 71). In turn, this would have an impact on economic growth. Instead, if eldercare was strengthened, this could allow Viet Nam to maintain female participation rates that are among the highest in the world. This would result in GDP that is higher by 3-5 points than it would have otherwise been, equivalent to 11-16 percent of the HIC shortfall under baseline growth (Figure 72). Figure 71. If current unpaid care Figure 72. …avoiding this could boost responsibilities remain constant as growth by 3-5 points, or 11-16 percent Viet Nam ages, female labor force of the HIC gap participation would be reduced by 8-12 points… Female labor force participation, demographic Baseline GDP gap to HIC, impact of small or large projections with current care effects FLFP decrease 80 4500 +16% +11% 75 4000 3500 3000 Percent 70 2500 2000 1500 65 1000 500 60 0 2022 2025 2030 2035 2040 2045 Baseline gap to Small FLFP drop Large FLFP drop HIC Source: Probability of working and working hours by Glorieux, Source: World Bank calculations based on Glorieux, Rodriguez, Rodriguez, and Wai-Poi using 2022 Viet Nam Time Use Survey. and Wai-Poi (2024). FLFP projections are World Bank calculations based on Glorieux, Rodriguez, and Wai-Poi (2024). Notes: Elderly and child coefficients are used to construct upper and lower bound estimates of FLFP. The upper bound is based on the reduction in work given by the child coefficient, the lower bound is based on the elderly coefficient. UN demographic projections are used, and the demographic structure of households is assumed to stay constant; the proportion of households that will have an elderly dependent over time is extrapolated to 2045. The baseline FLFP is the ILO estimate for women age 15-64 (78.4 percent in 2022). This is reduced by two factors: (i) extensive margin: change in households with elderly * the probability of woman not working; (ii) intensive margin: change in households with elderly * probability of woman’s hours reduction. These hours are then converted to FTE (full time equivalent) which is then a second reduction to FLFP. 102 Glorieux, Rodriguez, and Wai-Poi (2024). I 116 I Viet Nam Rising 6.3. Reform agenda As the country ages, Viet Nam will need to develop models of providing and financing elderly care, but at the same it will not want to adopt the same models of HICs.103 By 2049, the number of elderly who will need regular care due to difficulties in at least one physical or mental function will be more than 10 million, compared to 2.5 million in 2019.104 Leaving care provision to families alone will strain the shrinking labor force at a time when the familial care model is becoming increasingly strained by urbanization, migration, demography, and other economic and social factors. Moreover, as with the pension system (see Chapter 7), there is a danger that richer households buy services in the emerging private sector, while poorer households use government support, meaning the main burden of familial care falls on the middle class. At the same time, Viet Nam is becoming an aging society when income levels are only one-tenth of those in United States at a similar point. The ALTC systems of HICs, characterized by high prevalence of institutional care and broad entitlements in terms of coverage and benefits, do not suit Viet Nam’s particular economic, social, and cultural situation. The World Bank has previously outlined broad principles based on good international practices for Viet Nam to use as it develops its elderly care system based on the country’s own strengths.105 These principles include: 1. Government stewardship and increasingly private provision of elderly care (see Box 3 for an example of provision in China) 2. Eligibility rules based on functional ability needs assessment and a ‘package’ of elderly care services for those deemed eligible 3. Aging in place as the main modality and residential care as last resort 4. Continuum and coordination both within ALTC and across healthcare and ALTC 5. Adequate and sustainable financing 6. Strong workforce 7. Latest technologies Box 3. Private and foreign companies in the elderly care sector in China Chinese private companies (including real estate and insurance companies) are actively entering the senior residential market, targeting seniors with mid- to high-income. Local governments are experimenting with various modalities of a “mixed model,” and a number of commissioning models are currently being developed in China (see below). At present, management contracts and leasing are the two most common types of PPPs in institutional elder care in China. World Bank (2021). 103 MOLISA (2019), Report On Pre-Feasibility “Enhancing Services Provision And Equal Access To Aged Care System” Project. World Bank 104 and Asian Development Bank. For greater elaboration, see: World Bank (2021). 105 Pathways to a High-Income Future I 117 I Types of Public-Private Partnerships in Institutional Care in China Types Description Procurement Local municipality purchases beds from the private nursing home. Management contracts Private nursing home operators assume management responsibilities (e.g., staffing, supplies, training) for public nursing homes. Leasing Operation and management of public nursing homes by private operators. Private operators bear all risks and retain profits but do not assume ownership of nursing homes. Service contract Public nursing homes outsource a set of services such as catering, housekeeping, and laundry to the private sector. Shareholdings The ownership structure of public nursing homes is changed by selling shares to a private investor. Aged care is an area with substantial private sector interest, attracting not only domestic but also large numbers of foreign companies to the Chinese market. To facilitate matters, China’s government, among other things, adopted a resolution allowing foreign companies to receive government contracts when they serve poor clients (“Resolution number 50”). Companies from the United States, Japan, and France have entered China’s institutional care market through partnerships with Chinese firms. Most for-profit providers focus on community care services commissioned by real estate developers, targeted at mid- to high-income seniors and their families. Foreign companies provide home-based care targeting mid- to high-income seniors, with a focus on major cities. For example, Singapore-based “Active Global Ageing” is providing home care delivered by trained nurses, United States-based “Right At Home” delivers caregiving and housekeeping services through university graduate caregivers, and Pinetree offers at-home skilled caregiving to seniors who are semi-dependent or fully dependent. Source: Yu (2014), in World Bank (2021). The aging reform agenda centers around two policy packages. These two packages aim at helping aging workers stay productive for longer and be able to receive the care they need when they retire. They also seek to reduce the unpaid care burden on women that could result in them dropping out of paid employment or switching to work that is less productive but more flexible. These packages are summarized briefly below (Table 6). Retirement need not be a binary decision to work or not work (Package 1). The employment policies under this package can focus on facilitating ongoing employment by older workers.106 These include: life-long learning and retraining for those with formal education; subsidies for training older workers; the promotion of flexible work arrangements and adjustment of the workplace for older workers’ physical capacity; and job search services focused on older workers. In addition, policies can also reform retirement and hiring policies to lengthen productive lives by, for example: continuing recent reforms to increase the retirement age at which people can draw pensions (and equalize for men and For more details, see World Bank (2021), Viet Nam: Adapting to an Aging Society. 106 I 118 I Viet Nam Rising women); enforcing anti-age discrimination laws, and addressing negative attitudes to older workers. A particular focus is needed for women in manufacturing—the largest share of whom are among 30-34 year-old working females—who disproportionately have lower skills and earn less than men; over time, this cohort will need more skills and greater incentive to stay in the labor force. Systematic improvements are needed in eldercare policies (Package 2), which requires the creation of a well-functioning market for elderly care services.107 Necessary policies include: a strategy for ALTC and diverse types of care and sustainable financing mechanisms; stronger government regulatory and oversight capacity; private sector participation via, for example, the opening of existing welfare homes to self-paying patients and concessional arrangements for use of government buildings; and a well-trained cadre of volunteers and professionals to staff and manage the LTC delivery network. In addition, individuals and households need to be empowered to ensure their health though promoting healthy choices by, for example: encouraging early care health programs, screenings, and health checkups; increasing knowledge of disease symptoms; and improvement the information given to aid caregivers regarding the needs of aging individuals. Finally, “aging in place” should be promoted, drawing on international best practices to design cities that allow for aging in place.108 Table 6. Policy reform agenda for aging Policy package Key recommendations 1. Supporting l Facilitating ongoing employment by older workers aging workers - Promote life-long learning and retraining schemes targeted at those with formal education undertaken significantly in the past - Pilot subsidies and grants to encourage training to raise older workers’ productivity and help them acquire new skills - Incentivize firms to promote flexible work arrangements and to introduce adjustments in the workplace that make them more suited to the physical capacity of older workers - Develop job search services focused on older workers l Reform retirement and hiring policies to lengthen productive lives - Increase the retirement age and equalize it for men and women - Enforce laws preventing discrimination against older workers - Run awareness campaigns addressing negative attitudes on the capacity of older workers and use examples of initiatives in other countries that provide tools and information for managing an older workforce 2. Quality and l Build a well-functioning market for elderly care services affordable elder - Develop a strategy for aged LTC - Continue developing ISHCs and learning good practice examples from neighboring countries of community-based provision of care World Bank (2021). 107 See, for example, Center for Policy on Ageing (2016); Epstein and Boisvert (2006); and Garcia and Marti (2014). 108 Pathways to a High-Income Future I 119 I Policy package Key recommendations 2. Quality and - Develop an action plan to diversify the types of available care services providers affordable elder - Strengthen the government regulatory and oversight capacity to guarantee that both public and private service providers supply a high and consistent quality of social care ­ Encourage private sector participation, starting with two specific models ­ Improve coordination between the social care system and other relevant government entities - Prepare a well-trained cadre of volunteers and professionals to staff and manage the LTC delivery network - Maintain a continuous dialogue with the government regarding its responsibilities for coverage and financing l Empower individuals and households to ensure their health - Target reforms to promote healthy choices - Implement programs encouraging the population to seek early care for health programs - Increase knowledge of disease symptoms - Emphasize participation in screenings and health checkups - Aid caregivers to increase their knowledge of the needs of aging individuals l Promote “aging in place” - Draw on international best practices to design cities that allow for aging in place I 120 I Viet Nam Rising CHAPTER 7 SOCIAL PROTECTION In an economy increasingly characterized by change and uncertainty, buffered by natural and economic shocks, a modern safety net is essential.109 Social protection can help Viet Nam address low labor productivity in part through improved job matching and skills training, a topic taken up in Chapter 3 under active labor market programs and skills training. However, perhaps social protection’s key function is helping households and workers cope with the major shocks this report considers. For example, in response to the aging population, social protection will be increasingly called upon to provide income and care for a growing number of elderly people, while at the same time encouraging increased (and more productive) employment of older workers. Disaster response programs will become even more relevant as climate change increases extreme weather events. In addition, programs to help absorb climate migrants may become needed. Viet Nam will also need to brace itself for an expected increase in labor market volatility due to geoeconomic fragmentation and disruptive technology. A key role of social protection will be to provide protection from the consequences of unemployment, both in terms of income support during times of unemployment and help for retraining and finding alternative employment. A strong social protection system has three core functions: prevention, protection, and promotion.110 First, social protection should “prevent” households from suffering reduced consumption by helping them avoid, or cope with, individual shocks. These can range from illness and injury through to unemployment and inadequate income in old age. Social protection also incorporates prevention strategies against the effects of shocks that hit the entire community or country, like natural disasters and economic crises. Second, social protection should “protect” households from poverty in the short run (and help reduce inequality). This can include providing income support to help pull households above (or less far below) the poverty line. It also can mean minimizing the consequences of poverty, such as malnutrition or the withdrawal of children from school. Finally, social protection should “promote” households out of poverty in the longer run by improving opportunities, helping build human capital, and promoting access to productive jobs and livelihoods. Correspondingly, an effective social protection system has three pillars (Table 7); this chapter examines the first two. Insurance is the main focus of prevention, and this chapter examines the state of Viet Nam’s social insurance system. Protection is generally provided by social assistance programs (often called “safety nets”) and includes cash and in-kind transfers. The promotion element of the system can include a broad range of programs, such as those that help build human capital or support livelihoods. In Viet Nam the focus is primarily on labor market programs and is discussed in Chapter 3. The three pillars are underpinned by labor market policies and institutions, such as labor regulations, as well as by the delivery system, which includes payments and national identification documents (IDs). World Bank (2019), A Vision for the 2030 Social Protection System in Viet Nam. 109 World Bank (2012). Resilience, Equity and Opportunity: The World Bank’s Social Protection and Labor Strategy 2012-2022. 110 Pathways to a High-Income Future I 121 I Table 7. The objectives, policy pillars and programs of a Social Protection System System Objective System Pillar Program Examples Prevention Social Insurance Pensions, survivor, and disability benefits Help people smooth consumption Insurance-type programs, Sickness and work injury benefits in the face of shocks and across with or without public Maternity/paternity benefits the life cycle subsidies Health insurance Other social insurances (e.g., weather and disaster risk) Protection Social Assistance Cash transfers (conditional and unconditional) Reduce or mitigate poverty and Safety net and social care Social pensions inequality services Food and in-kind transfers School feeding Public works projects Targeted consumer subsidies Long-term social care services Promotion Labor Market Employment services (e.g., job brokerage, Improve people’s chances of Active and passive labor training, counselling) moving sustainably out of poverty market programs, and Labor market information systems programs to promote Passive labor programs (e.g., unemployment sustainable work insurance) Cross-Cutting Policies and Institutions Labor regulation; wage setting and industrial institutions; training systems; population identification and registration systems; financial sector Source: World Bank (2019). 7.1. Backward diagnostic The key elements of a social protection framework are already in place in Viet Nam. Social Protection has three major elements: (i) social assistance (noncontributory assistance for poor and vulnerable households); (ii) social insurance (contributory insurance against employment and health risks and an adequate income in old age); and active labor market programs (matching workers to the right jobs, and helping workers upskill and retrain for new jobs). These three elements are in place in Viet Nam, covered by Resolution 15 on Social Policies for 2012-20 (adopted in 2012 and summarized in Figure 73). Further progress was made with the approval in 2017 of the Master Plan for Social Assistance Reform and Development (MPSARD). This outlined improvements to the social assistance component of the system to make it more comprehensive and effective at addressing vulnerability and exclusion, as well as setting out coverage expansion goals. Despite these initiatives to strengthen social protection over the last decade, reform efforts have been focused primarily on incremental changes to individual parts of the system rather than on addressing the system in its totality.111 World Bank (2019). 111 I 122 I Viet Nam Rising Figure 73. Only half of workers switching occupations move to a higher-paying job Resolution 15 on social policies for 2012-2020 Social Protection Employment, Minimum Basic Social Assistance Social Insurance Incomes, and Poverty Reduction Social Services Other Productive Employment Programs Compulsory and voluntary Insurance Social Care Centers & Care Services Other Programs (Supplemental SI) Unemployment Insurance HealthInsurance& Health Public Works Programs Emergency Assistance Vocational Training Information Access Regular Allowances Clean Water Education Housing Source: Government of Viet Nam (2012) in World Bank (2019). In the last two decades, social protection coverage and spending has expanded significantly in Viet Nam. Like much of the region, social assistance in the form of health insurance fee waivers has expanded greatly in the effort to achieve universal health coverage (UHC). Cash transfers are mainly focused on the elderly. The social pension scheme introduced in 2004 has been expanded several times, including with the passage of the new Social Insurance Law of 2024. The government’s ambitious target is to cover 60 percent of the elderly by 2030, implying further coverage expansion from the 35 percent in 2023. Total social assistance spending tripled between 2006 and 2019. Social insurance was expanded to cover private sector workers starting in 1995; today, both coverage and spending are low, albeit at similar levels to peer countries (Figure 74 and Figure 75). The 2024 Social Insurance Law has further expanded the mandatory coverage of the system and— along with financial incentives to encourage voluntary participation by informal sector workers—the government is aiming to achieve its target of having 60 percent of the labor force contribute to the pension scheme by 2030 (up from the current level of 35 percent). Projections show increases in spending levels as the system matures; i.e. more workers will start qualifying for full pensions having spent their entire careers contributing into the national pension scheme. Pathways to a High-Income Future I 123 I Figure 74. Viet Nam’ s share of Figure 75. Pension spending is in line working-age population contributing with its elderly population share to pensions is low but in line with other countries at its income level Pension coverage relative to income per capita Pension spending relative to share of population age 100% 14% Pension spending as share of GDP Contributors as % of working-age 12% 80% 10% population 60% 8% 40% 6% 4% Viet Nam 20% 2% Viet Nam 0% 0% 500 5000 50000 0% 10% 20% 30% 40% Log Income per capita PPP-adjusted Share of population 60+ Source: Authors’ calculations based on Cho, Palacios and Source: Authors’ calculations based on Cho, Palacios and Wai-Poi (2024). Wai-Poi (2024). Notes: Total public and contributory spending. Coverage and spending—or financial sustainability—are the two key challenges facing social insurance in Viet Nam.112 The current pension system is primarily based on a compulsory insurance scheme (part of the Viet Nam Social Security or VSS) that covers around a quarter of the working-age population. Almost all of those covered are formal workers (totaling around 14.6 million people), with a voluntary contributory scheme bringing in only 300,000 informal workers by 2018. A non-contributory social pension covers an additional 1.6 million elderly, a combination of pension-tested people over 80 years old and means-tested people age 60-79 years. The greatest coverage challenge as Viet Nam ages will be the “missing middle,” or those who are neither poor (and covered by the social pension) nor formal (and covered by the compulsory system). If coverage is expanded significantly, this will only compound the second challenge facing the system, which is financial sustainability, given a young pension system but an aging population. On current coverage and benefit trends, the system will cross into deficit by the early 2030s; this deficit will rise to 1 percent of GDP by 2040 and 3 percent of GDP by 2050. The two main drivers of this are Viet Nam’s early retirement age and the generosity of benefits relative to contributions. The Social Insurance Law recently increased the official retirement ages from 55 years for women and 60 years for men to 60 and 62 respectively, although this remains below many MIC peers in the region and elsewhere. The social assistance system suffers from being fragmented, uncoordinated, and underfunded.113 The social assistance framework in Viet Nam is very complex, with eight Laws, one Master Plan, 14 112 World Bank (2019). 113 World Bank (2019). I 124 I Viet Nam Rising Decrees of Government, 37 Decisions of Prime Minister, and 13 Circulars of Ministries that collectively regulate issues related to social assistance. This complexity makes the system difficult to understand and access. Despite its many facets, total spending on social assistance is relatively low; at 0.9 percent of GDP in 2018, it is below the LMIC average of 1.0 percent, and less than half that of the UMIC average of 2.0 percent (see Chapter 12 on Equity for further discussion).114 Current social assistance coverage of the poorest households is relatively low and so are average benefits.115 One consequence of the system’s complexity and fragmentation is that programs are not very well targeted. Overall, cash transfers reach close to 13 percent of the population. For the bottom 2 deciles, coverage is over 20 percent of people in the decile but there is a significant number of people in the middle and top deciles who also receive benefits (Figure 76). In the middle deciles, it is around 10 percent of people in the deciles; even in the top 5 percent, people are still receiving benefits. Moreover, as a consequence of the low social assistance spending, the value of benefits for those who do receive benefits is low. The median benefit for beneficiaries in the poorest decile is 7 percent of market income, falling to 5 percent for those in the second poorest decile (Figure 77). Benefits are even less meaningful for richer households (2-3 percent of market income in the middle deciles and 1 percent at the top). On both coverage and adequacy of benefits, Viet Nam is below LIC averages and far from UMIC and LMIC averages (Figure 78 and Figure 79). Figure 76. The majority of poorer Figure 77. …while the value of benefits households do not receive social for those who do receive them is small assistance due to the low national coverage… Social assistance coverage by decile, 2018 Social assistance benefits as a percent of market income Mean Median 30% 8% 7% 25% Percent of decile population Percent of market income 6% 20% 5% 15% 4% 10% 3% 2% 5% 1% 0% 0% 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Household market income decile Household market income decile Source: Rodriguez and Wai-Poi (2024). Source: Rodriguez and Wai-Poi (2024). 114 World Bank (2025c). 115 Rodriguez and Wai-Poi (2024), “Fiscal Policy and Equity in Viet Nam 2018-2022: Building blocks for a more equitable fiscal system.” Unpublished. Pathways to a High-Income Future I 125 I Figure 78. Viet Nam’s social assistance Figure 79. Similarly, social coverage is low relative to MICs and far insurance adequacy is a fraction of behind HICs but social insurance is high that in other countries Social assistance (percent) Social assistance benefits as a percent of beneficiaries’ welfare 30 70 60 25 50 20 Percent 40 15 30 10 20 10 5 0 0 LIC LMIC Viet Nam LIC LMIC Viet Nam LIC LMIC Viet Nam LIC LMIC Viet Nam LIC LMIC Viet Nam UMIC UMIC UMIC UMIC UMIC HIC LIC LMIC Viet Nam UMIC HIC Population Q1 Population Q1 Population Q1 Social assistance Social insurance Source: World Bank (2025c), The State of Social Protection Source: World Bank (2025c), The State of Social Protection Report: the 2-Billion-Person Challenge. Report: the 2-Billion-Person Challenge. Notes: Coverage of quintile 1 (Q1) or population, benchmarks Notes: Beneficiary welfare is income or consumption are for 2022. depending on country. Benchmarks are for 2022. In 2020, Viet Nam’s COVID-19 response illustrated another important gap in the country’s social protection system; namely, its inability to cope with large shocks effectively. Without a backbone social assistance or social insurance employment program, coupled with an inability to quickly assess the welfare of households, the government failed to deliver relief in a timely fashion during the peak of the crisis. This was partly due to the dearth of digital processes needed to register people and to leverage various databases to determine eligibility. In contrast to countries like Thailand that were able to use online applications and to link different administrative databases to quickly determine eligibility, Viet Nam was muted and slow in its response, with only a small portion of allocated budget reaching millions of affected informal sector workers. Experiences from the COVID-19 response have highlighted the urgent need for developing an adaptive social protection system that is flexible and responsive, as well as being capable of quickly addressing various shocks and stresses. The social protection delivery system remains fragmented despite recent progress in data interoperability. Each program has its own processes for delivering benefits, even though the mechanics of distribution are similar across programs. Digital payment remains limited with only about 50 percent of payments made digitally. This fragmentation makes the system cumbersome and inconvenient for clients and inefficient for the overseeing ministries. Manual delivery systems, relying on weak digital infrastructure specific to ministries or programs, exacerbate this issue. I 126 I Viet Nam Rising 7.2. Forward diagnostic A social protection system for a high-income Viet Nam of the future would have four key features; universality, flexibility, financial adequacy, and effectively delivered.116 A universal system is accessible to the entire population, regardless of employment formality, age, or disability status. Preventive programs should be available to all who choose to participate, but universality does not mean all people use all elements at all times. Targeted social assistance should be available to all those in need due to poverty, unemployment, or specific vulnerabilities such as disability or very old age. Modern social protection systems are also flexible. Such flexibility comprises an increasing requirement in the face of emerging shocks from fast-changing technology and geoeconomic fragmentation, climate change, and aging. A flexible system is well-managed and coordinated. It is also capable of adapting to new shocks with flexible policies and delivery systems to scale up and down quickly as crises occur. Such a system requires sufficient financing; it is estimated that an additional 2.5 to 4.5 percent of GDP will be needed by the 2030s. Finally, the delivery system should be more dynamic and client-oriented, especially as more non-government service providers become integrated into the system under government oversight. In this respect, technology can represent not only a shock but it can also play a critical role in supporting an effective social protection system. The rapid aging of the Vietnamese population means pension spending requirements are set to soar, especially if social pension benefit adequacy is to meet international benchmarks. Even if the recent policy changes to the non-contributory and contributory parts of the pension are successful in expanding coverage, there will be a widening gap between those with relatively generous pension income and those with little or no pension income in the next two decades. To address this gap, Viet Nam could follow the lead of China and Thailand that have made their social pensions quasi-universal. However, in both of those cases, and in the current scheme in Viet Nam, benefit levels are low both by local and international benchmarks (Figure 80). Increasing social pension adequacy and coverage will lead to much higher spending. Figure 81 shows that, as elsewhere in the region, providing the same level of support as countries that have already reached this stage of the demographic transition will require very large increases in spending. Currently, HICs spend 6.2 percent of GDP on social insurance, primarily on pensions.117 World Bank (2019). 116 World Bank (2025c), The State of Social Protection Report: the 2-Billion-Person Challenge. 117 Pathways to a High-Income Future I 127 I Figure 80. Viet Nam’s pension Figure 81. As in most EAP countries, framework provides low benefits pension spending levels will need and covers little of the population as to increase considerably to reach compared to peers international benchmarks Pension beneficiary coverage and benefit value Pension spending levels required to meet international benchmarks in 2045 100% 0.16 90% Timor- Leste 0.14 80% Thailand Beneficiaries (% of pop 60+) 70% Korea 0.12 China 60% 0.10 50% Fiji 0.08 40% Philippines 0.06 30% Mongolia 0.04 20% Viet Nam 10% 0.02 Indonesia Malaysia 0% 0.00 0% 10% 20% 30% 40% 50% a do na Ja a n al s M ysia M olia Re s Vi nd am ar Th o f re ine o di si pa Ph nm Social pension (% of GDP per capita) La i la p. ne Ch bo N g a Ko lipp ai on ya et m M Ca i a In Source: World Bank (2025c), The State of Social Protection Source: World Bank (2025c), The State of Social Protection Report: the 2-Billion-Person Challenge. Report: the 2-Billion-Person Challenge. Financial pressures are exacerbated by retirement still being lower than HIC benchmarks.118 Nearly all HIC countries in Europe have increased their retirement ages to 63-65 years old, with several OECD countries already at 67 years or higher. High-income economies in East Asia such as Japan, Korea, and Hong Kong Special Administrative Region of China have set official retirement ages at 65 years old, as has the Philippines, while most others are considering raising their current age limit. A growing number of OECD and other countries are also linking retirement ages to increases in life expectancy at retirement and most have common rates for men and women. Some form of social assistance in HICs reaches two-thirds of their populations and nearly all of their poorest individuals, for whom benefits are worth around a quarter of their income. The biggest difference in social assistance between Viet Nam’s current system and HICs is in coverage and adequacy, reflecting in turn the gap in spending. HIC social assistance covers 66 percent of the population and 83 percent of the poorest quintile, three to five times higher than in Viet Nam (Figure 82). The gap in benefit adequacy is even greater; benefits are worth 26 percent of beneficiary consumption or income in HICs, but only 11 percent in Viet Nam (Figure 83). 118 World Bank (2019). I 128 I Viet Nam Rising Figure 82. Viet Nam’s social assistance Figure 83. Social assistance benefit coverage of the poorest quintile is less adequacy is nearly one-tenth as low than a third that of HICs as in HICs SA beneficiary coverage SA benefit adequacy (percent of beneficiary welfare) 80 25 20 60 15 Percent Percent 40 10 20 5 0 0 Viet Nam HIC Viet Nam HIC Viet Nam HIC Viet Nam HIC Population Q1 Population Q1 Source: Viet Nam from Rodriguez and Wai-Poi (2024). HIC Source: Viet Nam from Rodriguez and Wai-Poi (2024). HIC from World Bank (2025c). from World Bank (2025c) Notes: Adequacy is benefit as a percent of market income for Viet Nam, and a percent of income or consumption in HICs. Many MICs begin the transition to higher levels of coverage by anchoring social assistance in a flagship program, which allows for the quicker scaling of assistance during crises. In other MICs, the expansion of social assistance has been achieved in large part through years of continued investments in large flagship programs, institutions, and delivery systems.119 While such investments take time, they serve to expand coverage during normal times, as well as allow for rapid and temporary expansion during shocks. This latter point was evidenced by many flagship programs during the COVID-19 pandemic, when emergency cash transfers were often made to existing and new beneficiaries (Figure 84). Such expansions require substantial investments in social registries, payment systems, grievance and complaint mechanisms, and early warning systems.120 Social registries have nearly tripled in prevalence over the past decade,121 while digital payment mechanisms feature in at least one program in 92 percent of countries, building on the rise of mobile money. 119 World Bank (2025c). 120 World Bank (2025c). 121 Guven, Yeachuri, and Almenfi (forthcoming), cited in World Bank (2025c). Pathways to a High-Income Future I 129 I Figure 84. Many MICs have used flagship social assistance programs to achieve much higher levels of coverage, allowing for rapid scaling of their coverage during COVID-19 Coverage (of population) of flagship or emergency cash transfer programs Brazil [PBF/AE/AB/nPBF] Argentina [AUH/IFE/CT Retires and Pensioners] Colombia [MFA/SI] Pakistan [BISP/EEC] Philippines [4Ps/SAP] Indonesia [PKH/BLT DD/BLT minyak goreng] Jordan [Takaful/NAF old CT/ECT] Tunisia [PNAFN/AMEN PCT/FA/TCT)] 0.7 South Africa [CSG] Chile [Single Family Allowance/IFE] Coverage (% of total population) of flagship or 0.6 Emergency Cash Transfer 0.5 0.4 0.3 0.2 0.1 0.0 17 18 14 19 15 11 16 12 08 13 00 02 04 06 05 07 09 01 03 10 20 21 22 23 24 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Source: World Bank (2025c). Original figure based on data from World Bank country teams; Hobson et al. (forthcoming); the World Bank’s price shock tracker (Gentilini et al., 2023); the World Bank’s COVID-19 tracker (Gentilini et al., 2022); Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE) administrative data; and various other sources, including government agencies, multilateral organizations (such as the international Monetary fund, the Organisation for Economic Co-operation and Development, and the World Bank), and humanitarian agencies (United Nations global and regional agencies). Notes: 4Ps = Pantawid Pamilyang Pilipino Program; AB = Auxílio Brasil; AE = Auxílio Emergencial; AMEN Pct = AMEN Permanent Cash Transfer; AUH =Asignación Universal por Hijo para Protección Social; BISP = Benazir Income Support Programme; BLT DD = Bantuan Langsung Tunai Dana Desa; CSG = Child Support Grant; CT = Cash Transfer; ECT = Emergency Cash Transfer; EEC = Ehsaas Emergency Cash Transfer; FA = Family Allowance; IFE = Ingreso Familiar de Emergencia; LEAP = Livelihood Empowerment Against Poverty; MFA = Más Familias en Acción; NAF = National Aid Fund; nBFP = new Bolsa Familia Program; PBF = Bolsa Familia Program; PKH = Program Keluarga Harapan; PNAFN = Program me National d’Aide aux Familles Nécessiteuses; SAP = Social Amelioration Program; SI = Ingreso Solidario; and TCT = Temporary Cash Transfer. Viet Nam is at an early stage of moving toward the kinds of integrated social protection information systems that are common in other MICs and HICs (Figure 85). Many other MICs were able to respond quickly to help workers during the COVID-19 pandemic because they had digital application processes in place and national level databases linked to unique IDs that allowed them to cross-check eligibility requirements. In Brazil, Indonesia, Thailand, and Turkiye, online applications allowed their governments to provide timely and well-targeted support to millions of informal sector workers in 2020. These countries could quickly check whether the applicant was in the formal sector or not or whether they were already receiving social assistance benefits. The common element in all of these cases was interoperability and robust databases. In the absence of these digital assets, however, Viet Nam was unable to reach the targets set for making cash transfers to informal sector workers I 130 I Viet Nam Rising during the COVID-19 crisis. With the recent whole-government approach to digital transformation, the interoperability among various databases—including the social assistance database, social and health insurance databases, the birth and death registration database, the National Payment Corporation of Viet Nam (NAPAS) through the national data exchange platform using the national ID—will enhance the efficiency of identification, verification for program targeting, and payment processes. Figure 85. An integrated social protection information system strengthens service delivery and enables quick responses during a crisis Integrated social protection information system Source: Roadmap Towards an Integrated Social Protection Information System in Viet Nam (World Bank, 2023c). In addition, a modernized social protection delivery system that is responsive to shocks is critical; Viet Nam lacked the systems to respond as effectively during COVID-19 as other East Asian countries.122 During the pandemic, support to households relied on the systems and infrastructure in place, which subsequently determined the effectiveness, efficiency, and timeliness of government support measures to households. This support relied on the existence of well-functioning social protection programs, up-to-date national identification systems, and robust delivery systems before the pandemic. Countries with well-established social protection systems had greater success in delivering timely assistance to intended beneficiaries. Spending on relief measures for households in those East Asian countries with less developed social protection systems—namely, Cambodia and 122 World Bank (2023), Crisis and Recovery: Learning from COVID-19’s Economic Impacts and Policy Responses in East Asia. Pathways to a High-Income Future I 131 I Viet Nam—was limited. Viet Nam and the Philippines recorded the lowest household income support spending as a share of GDP among the six countries cited. In Viet Nam, the impacts on the economy of the pandemic-linked recession were modest, but household income losses were considerable, with 45 percent of households affected. These losses, which were associated with stringent mobility restrictions during the pandemic, were felt particularly severely by migrant and informal workers. Yet, coverage of assistance was limited because eligibility criteria were narrow, the institutions to verify eligibility were weak, and benefit levels were low. In addition, in Viet Nam and the Philippines, cash assistance to households and workers was short-lived, plus the lack of well-established identification and delivery systems led to implementation challenges that prevented the timely provision of transfers. This compares to countries with more established social protection programs and delivery systems, such as Mongolia, Malaysia, and Indonesia, which were quick to supplement benefits and expand coverage. Even Cambodia, with its nascent social protection system, was able to quickly deploy additional assistance to the chronically poor, thanks to a preexisting system of beneficiaries. 7.3. Reform agenda Strengthening social protection in Viet Nam means both strengthening each individual pillar as well as the system as a whole. The World Bank’s 2019 report on a 2030 vision for social protection in Viet Nam remains very relevant over five years later. The recommendations to make social assistance more shock-responsive proved true as the system struggled to respond to the COVID-19 pandemic in 2021. The agenda outlined below updates and builds upon the recommendations of that report, summarized below in Table 9. There are positive developments that are likely to improve Viet Nam’s social insurance policies, but more will be needed. The 2024 Social Insurance law will likely expand coverage significantly in the next five years, putting Viet Nam ahead of other countries at a similar income per capita level. Recent reforms to the compulsory VSS pension scheme mean that fiscal sustainability is no longer an immediate threat, moving the immediate focus to reducing inequities and realizing coverage goals. Parametric reforms in particular can reduce inequity in design of the scheme. Two key reforms that would promote equity and prevent long-run deficits are: (i) harmonizing retirement age between men and women to age 62 and increasing it thereafter in line with life expectancy to gradually reach 65 by age 2060;124 and (ii) moving from ad-hoc to automatic price indexation.125 However, achieving the ambitious 60-percent target by 2030 will require additional spending. Social pensions will have to be expanded even further (preferably in a targeted manner), and benefits should at least keep up with inflation over time. Recent studies suggest that relatively modest additional incentives could convince 123 World Bank (forthcoming) Long term financial projections of the VSS Compulsory Pension scheme. 124 The 2021 regulation moves the retirement age from 60 to 62 for males by 2028 and from 55 to 60 for females by 2035. The lower retirement age and vesting period for women means, all else equal, that they receive more lifetime benefits than men. Women are more likely to have maternity breaks in their career meaning the difference is unlikely to be high. Nonetheless, reducing the retirement age to compensate for a shorter career span creates other distortions. 125 A shift to automatic price indexation (instead of the current ad-hoc wage indexation) has two benefits. It make expenditures more predictable and prevent deficits from arising through 2080 as well as protect the purchasing power of pensioners. I 132 I Viet Nam Rising significantly more informal sector workers to contribute. Specifically, based on the experience of provinces that have enacted higher matching rates than the national scheme, it has been estimated that increasing contribution subsidies (incentives) from a quarter to half of the total contribution could result in a tripling of the current coverage to around 10 percent of the labor force, at a cost of around 0.08 per cent of GDP.126 As with ALTC, an appropriate pensions system for Viet Nam should not follow OECD models, but instead should be tailored the country’s social, economic, and institutional circumstances. Such as a system would consist of four parts. The first envisages a reformed contributory system for formal workers (VSS) that is financially sustainable. This involves steps such as: continuing the reforms to increase the retirement age and align this for men and women; reducing the incentives for early retirement; reforming accrual and indexation rules so that contributions and benefits are more aligned; and equalizing public and private sector worker benefits. Second, the existing matching contributory scheme needs to be redesigned into a dedicated scheme for informal workers with greater financial incentives (subsidies) to expand coverage; the global experience indicates that it is very difficult to mandate informal workers to participate in the regular formal sector scheme. A social pension will be needed to complement any contributory scheme for formal workers with an income floor. This reflects the large number of current and future elderly or near-elderly who will not accumulate enough savings to retire on an adequate income. Reducing the current 75 years for a social pension to 70 years may be required. Other potential steps would be to broaden the targeting of the benefits (i.e., through means-testing) or, as a minimum, to tier benefits by age. Finally, for those who can afford to save for old age, voluntary private pension schemes should be expanded beyond VSS, given the reforms needed to bring VSS into fiscal balance. In turn, this will require a robust supervisory model. Expanding the model to allow accessing prior to retirement in the case of hardship or shocks could make the program more attractive to informal workers, as has been the experience in Africa. Finally, VSS should be given greater flexibility to invest in a broader range of assets, to develop increased ability to monitor compliance, and to use technology to link databases such as those for social insurance and personal and corporate income tax. Social assistance needs to be expanded in terms of both coverage and benefits; this can best be achieved through consolidation and harmonization. The current collection of ad hoc programs should be consolidated into a smaller number of better designed flagship poverty reduction programs, with adequate benefit levels along with harmonized and rationalized delivery systems. This would provide a common base for supporting all poorer households, while also providing supplemental support to individual sources of vulnerability, such as those with infants, the elderly (discussed further in Chapter 6), or people with disabilities. Achieving this will require greater coordination between the ministries providing social assistance benefits and services, as well as with the wider poverty reduction system. For example, regular social assistance would continue under MOLISA, but the responsibility for delivering particular services would stay with the Ministry of Education and Training and the Other implementation improvements such as better communication and lower transaction costs could boost coverage further; see Luu, 126 Nguyen and Palascios (2025). Pathways to a High-Income Future I 133 I Ministry of Health, while the Ministry of Finance would be responsible for managing payment systems. Harmonized information and delivery systems would be required. Consolidation of programs would also entail harmonization of eligibility determination and benefit levels across programs. Currently, there is considerable variation in who is eligible for different programs and how benefit levels are set. These need to be aligned to the objectives set for the consolidated programs. Benefits then need to be indexed to inflation or average household or poor household consumption over time. Consolidation and harmonization could be phased in over time, as discussed in the Chapter on Institutions. Social assistance will also need to be made more responsive to shocks, such as pandemics or regional and global economic shocks. Given the likely increasing frequency and intensity of shocks in the modern world—whether from climate change, geoeconomic fragmentation, disruptive technology changes or aging—Viet Nam’s social assistance system needs to become more flexible and responsive to such shocks. An adaptive social protection (ASP) approach focuses on both increasing the resilience of those households that are most vulnerable to shocks while at the same time responding rapidly to households’ changed needs after such shocks have materialized. The reforms to strengthen regular social assistance can help serve the first purpose, whereas designing existing programs to “scale out” and “scale up” can help achieve the second. Scaling out—or horizontal expansion—means that existing programs can quickly expand to provide temporary support to those households who are not usually beneficiaries but are affected by a shock. Scaling up—or vertical expansion—means providing temporarily increased benefits for existing beneficiaries (usually among the most vulnerable) so that they can also better absorb the shock. The existing system in Viet Nam struggled to scale out during the pandemic. Delivery systems can be strengthened from identification to payments to responding to shocks. The introduction of the new national ID, government portal, and data sharing platform, along with the rapidly evolving digital payments system, comprise digital public infrastructure (DPI) that can facilitate more efficient social protection delivery systems. Continuing to invest in these systems will make it possible to implement sophisticated policies that integrate social assistance and social insurance, as well as enabling a quicker and more accurate response to natural disasters and shocks. The pandemic also highlighted a need to rethink social insurance in times of shock, as was done in Malaysia and Mongolia in the context of high informality.127 For example, Malaysia provided incentives to firms and the self-employed for firms to hire new formal workers and matched social contributions for self- employed and gig workers. Mongolia gave exemptions from social security contributions and waivers for late fees, lowering the cost of formality on a temporary basis. Finally, it is clear that the social sectors will need far greater financing. One clear lesson from the COVID-19 pandemic was that the social protection system’s capacity to respond during shocks will require an ability to increase fiscal spending during a crisis. However, much larger public spending will be required for the introduction of effective employment policies for aging workers, affordable and quality child and eldercare, and an adequate social protection system that is well-targeted and well- See World Bank (2023). 127 I 134 I Viet Nam Rising delivered. The current UMIC average of 2.0 percent of GDP on social assistance and 4.1 percent on social insurance provides a reasonable medium-term financing target, including private contributions from the pension system for the latter. Table 8. Policy reform agenda for social protection Policy package Key recommendations 1. A four- l Reform contributory scheme to make it financially sustainable part social - Gradually increase retirement ages and close the gender age gap ­ insurance system ­ - Reduce financial incentives for early retirement - Reform accrual, indexation, and valorization rules ­ l Reform existing matching contributory scheme with more subsidized and dedicated pension scheme for informal workers - Mechanism for informal workers to conveniently interact with the social insurance system ­ - Stronger financial incentives for workers to contribute ­ ­ - Common platforms to identify participants and manage accounts l Expand social pension for those without contributory pensions, especially from the informal sector l Expand voluntary private pensions for those able to save beyond VSS schemes l Improve government capacity to manage pension fund investments 2. Consolidated l Consolidate social assistance in smaller number of flagship programs and ­ - Combine smaller programs into a core set of flagship programs harmonized adaptive social ­ - Introduce greater coordination between ministries assistance - Unbundle program functions reflecting institutional mandates ­ l Harmonize eligibility determination and benefit levels across programs ­ - Clarify program objectives and align eligibility thresholds with them - Adjust benefit levels across programs to provide adequate support using a standard rule ­ - Implement in a two-phase approach ­ l Implement an Adaptive Social Protection design - Introduce well-designed programs with clear triggers to activate shock response ­ - Generate data information on household vulnerability and make it available ­ ­ - Effective stakeholders among different stakeholders - Make funding sources available for disaster shock response ­ 3. Strengthen l Modernize delivery systems social ­ - Enhance payment of cash transfers through digitalization protection delivery ­ - Improve program efficiency and targeting 4. Strengthen l Increase social protection funding to 6 percent of GDP in the medium term social protection funding Pathways to a High-Income Future I 135 I PART 3 INFRASTRUCTURE AND RESOURCES Part 3 of the report, “Infrastructure and Resources”, underscores the pivotal role that infrastructure plays in fostering Viet Nam’s economic growth and achieving its high- income country objective by 2045. It highlights the necessity of enhancing both physical and digital connectivity, with an emphasis on developing climate-resilient infrastructure to address the impacts of climate change. The section also stresses the importance of mobilizing resources to finance these infrastructure projects and other key development priorities, such as upskilling the labor force and tackling climate change adaptation and mitigation challenges. Effective resource mobilization strategies, including capital market development and fiscal revenue enhancement, are essential to support these critical investments and ensure sustainable economic growth. I 136 I Viet Nam Rising CHAPTER 8 SPATIAL AND DIGITAL CONNECTIVITY Structural transformation has helped drive Viet Nam’s rapid growth to date but is incomplete. Viet Nam’s shift out of agriculture has been more rapid than peers, including China (Figure 86) and is estimated to have contributed nearly half of Viet Nam’s growth between 2000 and 2019.128 However, while urbanization accelerated after Đổi Mới, it lags the rest of the region and MIC benchmarks, even when adjusting the official urbanization rate for potential underestimation (Figure 87).129 Urban density is low compared to other countries as are levels of internal migration (although recently restrictions have been relaxed).130 Figure 86. Viet Nam’s shift out of Figure 87. Viet Nam has not urbanized agriculture has been more rapid than as much as other East Asian peers and MICs Average yearly growth of value added per worker, Urbanization rate, selected countries 2000-2019 period 80 Employment in agriculture (%) 70 60 90 50 75 40 60 30 45 20 30 10 15 0 0 596 729 1571 2228 3760 7100 China (excluding high income) East Asia & Pacific High income Indonesia Lower middle income Late-demographic dividend Malaysia OECD members Philippines Thailand Upper middle income Viet Nam World Viet Nam (adjusted) Post-demographic dividend East Asia & Pacific GDP per capita (2015 US$) China Low-income Lower middle-income Upper middle-income Viet Nam Source: World Development Indicators. Source: World Development Indicators. Notes: Viet Nam (adjusted) is the official urbanization rate plus 8.6 points, based on the difference in 2013 of an OECD estimate of Viet Nam’s true level of urbanization and its official rate. See World Bank (2020). Urbanization at the Crossroads. 128 Marcin Piatkowski and Anwar Aridi (2024). Improving Business Regulations to Support Productivity Growth in Viet Nam. World Bank (unpublished). 129 There is some evidence that Viet Nam’s official urbanization estimate may be low. Based on the approximation of commuting zones around cities, an OECD report estimated Viet Nam’s true level of urbanization in 2013 as 41 percent, compared to the official rate of 32.4 percent. See: OECD (2018). OECD Urban Policy Reviews: Viet Nam 2018 and World Bank. 2020. Urbanization at the Crossroads. 130 World Bank (2020). Pathways to a High-Income Future I 137 I This chapter examines the role of connectivity and spatial economics in helping complete Viet Nam’s structural transformation. As discussed in Chapter 2, Viet Nam has shown remarkable progress in its openness to trade goods and services and technology adoption, factors that contributed to its impressive growth and poverty reduction. This examines how this growth driver can be sustained by looking at four layers: 1. Global (connecting Viet Nam with the world); 2. Regional (connecting regions within the country); 3. Local (connecting workers and firms within cities and rural areas); 4. Digital (connecting Vietnamese to each other and the world digitally). 8.1. Backward analysis 8.1.1. Physical connectivity Viet Nam has achieved substantial progress in its interconnectivity with the world in the last two decades, as evidenced by the Liner Shipping Connectivity Index,131 improving from 21 points in 2006 to 79 in 2022, the fastest growth in the region, although still lagging Malaysia and particularly China (Figure 88). Core infrastructure for trade and logistics has improved and is better than the regional and UMIC averages, although it still lags key regional peers. Infrastructure developments and expansion of logistic capacity sustain these trends in interconnectivity. Viet Nam’s index of quality of trade- and transport-related infrastructure improved from a score of 2.5 in 2007 to a 3.2 in 2022 (with 1 being low and 5 being high). This improvement puts Viet Nam above the average for both East Asia and the Pacific and for upper-middle-income countries. Nonetheless, it still ranks behind competitors like China, Thailand, and Malaysia (Figure 89). Within Viet Nam, regional connectivity has shown solid progress in reducing the cost of transportation across the country, while also boosting global and international connectivity. The 2019 Viet Nam Development Report132 introduced the Market Access Index.133 Access to markets depends on the transport costs from the production to the consumption point and on the size of the market (proxied by population) to be served. In 2009, communes around Ha Noi and Ho Chi Minh City enjoyed significantly better market access than the rest of the country, with an index in both metropolitan areas of just above 2.0. Meanwhile, most communes in Viet Nam had poor market access, scoring below 1, with 131 The Liner Shipping Connectivity Index score indicates how well countries are connected to global shipping networks based on the status of their maritime transport sector. The highest value in 2004 is 100. 132 Oh, Mtonya, Kunaka, Lebrand, Pimhidzai, Duc, Skorzus, and Jaffee (2019). Viet Nam Development Report 2019: Connecting Viet Nam for Growth and Shared Prosperity. Washington, D.C.: World Bank Group. http://documents.worldbank.org/curated/ en/590451578409008253. 133 The Market Access Index is a composite indicator that captures transport costs between consumption and production locations in all potential trading districts. I 138 I Viet Nam Rising the national average being 1.31. By 2017, the index had improved substantially throughout the country, increasing to 2.2 nationally and to more than 2.5 in Ha Noi and Ho Chi Minh City. Although access to markets remained higher around the main two cities in 2017, there was improvement in their larger peripheries. Accessibility also improved greatly for communes along the coast line and along the major transport corridors where investments have been made. Indeed, the improvements were driven almost soley by reductions in transportation costs (79 percent) rather than increases in market size (5 percent). These improvements boosted both global and intranational connectivity. Reductions in travel time were experienced both to the closest international gateway and the closest major urban market. The greatest reductions occurred in the North Central Coast.134 Figure 88. Viet Nam’s shipping Figure 89. Viet Nam’s trade connectivity has improved infrastructure has improved rapidly although still lags China’s significantly over the last 15 years but significantly still lags regional peers Liner shipping index Quality of trade- and transport-related infrastructure (1=low, 5=high) China Indonesia Cambodia 2007 2010 2012 2014 2016 2018 2022 Malaysia Philippines Thailand Viet Nam 4.5 200 4.0 maximum value in 2004 = 100 Score (1=low to 5=high) 3.5 150 3.0 2.5 100 2.0 1.5 50 1.0 0.5 0 0.0 2006 2007 Viet Nam China Malaysia Philippines Thailand Indonesia India EAP 2008 LMIC 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: UNCTAD. Source: World Bank Logistics Performance Index. Reductions in time and cost were achieved in large part from a rapid expansion in the road network followed by a greater focus on enhancements to rural connectivity. The road network in Viet Nam was 4.5 times longer in 2016 than it was in 1992 (Figure 90). However, rapid progress in accessibility and connectivity was uneven with less than 70 percent of total road length is paved in Viet Nam, compared to 80 percent in Thailand, Philippines, and Malaysia. This limited year-round connectivity in rural areas where less than half of the of the population had access to paved road, contributing to the lowest quality scores in the region (Figure 91). However, over the past decade the shortfall of paved rural roads has 134 World Bank (2019). Pathways to a High-Income Future I 139 I been partly addressed through several projects aligned with the 2020-2030 National Strategy on Rural Transport Development (NSRTD) and the 2014-2020 National Program for Local Bridge Construction to Ensure Traffic Safety in Ethnic Minority Areas (PLBC). These strategies emphasize the importance of rural accessibility and increasing maintenance budgets for local rural roads to ensure year-round access to all communes in Viet Nam and help reduce poverty. For instance, the Local Road Asset Management Program focused on improving road and bridge connectivity for 51 of the country’s 63 provinces. By project completion in 2024, over 11 million people benefited from 1,210 kilometers of rehabilitated rural roads and 54,860 kilometers of rural roads that received routine maintenance. Figure 90. Viet Nam’s road network Figure 91. …and overall road quality expanded rapidly, increasing in total improved similarly length by 4.5 times between 1992 and 2016 … Kilometers of road network by road category, Road quality 1992-2016 500 400 7 Road quality score 1 6 (low) to 7 (high) Kilometers (thousand) 300 5 200 4 3 100 2 0 1 Singapore Japan South Korea Malaysia New Zealand Brunei China Thailand Indonesia Laos Cambodia Viet Nam 1992 1997 2000 2005 2010 2016 National road Provincial road District road Special road Commune road Urban road Others (village roads…) Source: Viet Nam Development Report 2019. Source: The Global Economy based on data produced by World Economic Forum. https://www.theglobaleconomy. com/rankings/roads_quality/ Note: 1 is the lowest, 7 is the highest. Singapore is the country with highest score in the world. Viet Nam faces significant traffic congestion in its two largest cities. It takes an average of just over 30 minutes to travel 10km in rush hour traffic in both Ha Noi and Ho Chi Minh City, equivalent to 115 hours and 96 hours lost per year for each commuter.135 This puts the two cities in the top third of Asian cities that have data on travel time; it is placed behind Manila but ahead of Jakarta, two of the most notorious cities for traffic jams in the region (Figure 92).136 In fact, out of 501 cities around the world, Ha Noi’s travel time over 10km during rush hour ranks 29th slowest and Ho Chi Minh City 32nd slowest among selected major cities in the region. 135 TomTom 2024 Traffic Index. https://www.tomtom.com/traffic-index/ 136 Data on cities in China are not available. I 140 I Viet Nam Rising Figure 92. Ha Noi and Ho Chi Minh City are among the more congested cities in the region Average time to travel 10km during rush hour in 2024, selected East Asian cities 35 30 25 20 Minutes 15 10 5 0 Thailand-Bangkok Malaysia-Ipoh Thailand-Nakhon Ratchasima Taiwan-Keelung Taiwan-Hsinchu Viet Nam-Da Nang Malaysia-Klang Malaysia-Kajang Thailand-Khon Kaen Singapore-Singapore Taiwan-Taoyuan Malaysia-Joho Bahru Malaysia-Kuala Lumpur Malaysia-Seberang Perai Japan-Kyoto Malaysia-Kota Bharu Philippines - Davao City Japan-Kumamoto Indonesia-Bandung Taiwan-Tainan Thailand-Chiang Mai Japan-Osaka Taiwan-Banqiao Philippines-Manila Indonesia-Medan Japan-Fukuoka Japan-Hiroshima Philippines-Caloocan Japan-Sendai Japan-Sapporo Viet Nam-Hanoi Viet Nam- Ho Chi Minh Taiwan-Kaohsiung Taiwan-Taipei Indonesia-Palembang Japan-Naha Japan-Tokyo Indonesia-Surabaya Malaysia-George Town Japan-Naogya Indonesia-Jakarta Thailand-Hat Yai Taiwan-Taichung Source: TomTom Traffic Index. Congestion contributes to the smaller economic gains from urban agglomeration in Viet Nam.137 Viet Nam suffers from a combination of weak agglomeration economies and strong congestion forces in Ha Noi and Ho Chi Minh City, with weak agglomeration economies related to a lack of inter-firm linkages (see Chapter 2 on GVCs) and insufficiently integrated local labor markets. Strong congestion forces arise from inadequate investment to meet growing urban needs. As a consequence, Ha Noi and Ho Chi Minh City face an increasingly binding labor constraint on their growth as they struggle to easily pull labor from other regions. This challenge will only increase as the working age share of the population shrinks. Already, worker mobility data in urban areas show that the gains of agglomeration forces only happen within a 10-km radius and after that negative congestions effects emerge. An analysis of labor productivity and the size of the labor pool in Ho Chi Minh City metro districts before the COVID-19 pandemic found that districts with a bigger labor market are generally more productive but that they may not be fully exploiting the benefits of agglomeration.138 Labor productivity increases from 1.0 billion Vietnamese dong to 1.4 billion Vietnamese dong as the size of the labor pool increases (Figure 93, Panel A). However, it decreases in the areas where labor pools are largest (Panels B, C and D), with productivity improvements from agglomeration of labor occurring where workers are gathered within 137 World Bank. 2020. 138 World Bank. 2020. Pathways to a High-Income Future I 141 I a 10-kilometer radius. In the case of increased labor pools with radii widened to 20km and 30km, overall labor productivity falls at the regional level and negative congestion effects set in. The result is even starker when limited just to manufacturing, where a distinct inverted-U shape highlights the productivity costs of longer distances. These signs of agglomeration diseconomies due to congestion forces can be associated with the pressure of urban populations on basic services, infrastructure, land, housing, and the environment.139 Figure 93. Worker productivity increases when they are within 10km but decreases after that in Ho Chi Minh City Relationship between district-level productivity (y-axis) and labor pool size (x-axis), Ho Chi Minh City metro area, 2011 and 2016 A: Total employment B: Total employment 10km E: Total employment F: Total employment 10km within districts within districts C: Total employment D: Total employment G: Total employment H: Total employment within 20km within 30km within 20km within 30km Source: World Bank (2020) based on analysis of 2011 and 2016 Enterprise Censuses from the General Statistics Office. Notes: Green dots and trend lines are for 2011; purple dots and trend lines are for 2016. Metro systems have been started in Ha Noi and Ho Chi Minh City but are still far from the standard mode of transport. Ho Chi Minh City saw a new metro system inaugurated in 2024, with one line. The metro system in Ha Noi started earlier, in 2021. Public use and dependence on the public metro system is still low in the two respective cities, partly because of the short time that has passed since their introduction and partly because of their limited connectivity; only one line has been completed in each city, with another under construction. Speeding up metro development would require: (i) special planning mechanisms; (ii) specific land acquisition processes; (iii) capital mobilization at the municipal level; (iv) devolved authority; (v) strengthening industry standards; and (vi) improving human resources. A more World Bank. 2020. 139 I 142 I Viet Nam Rising holistic view of public transport will need to consider rideshare services such as Grab that are quasi- public transport. Addressing the lack of incentives in favor of public transport also requires attention, as does the introduction of measures to discourage the use of private vehicle. Figure 94. Viet Nam’s rail network is old, more expensive and less extensive than a number of regional peers Kilometers of rail per million population 2005 2010 2015 2016 2017 2018 2019 2020 2021 150 125 Kilometers per million people 100 75 50 25 0 Myanmar Thailand Malaysia Cambodia Viet Nam Indonesia Philippines Source: Asian Transport Observatory (ADB / AIIB) (2025). State of Play: Railways in the ASEAN Region. Expert Group Meeting on Strategic Plan on Enhancing Rail Interoperability in ASEAN. Estimated using International Union of Railways (2024). Railisa UIC Statistics. https://uic-stats.uic.org/; United Nations Department of Economic and Social Affairs Population Division (2022). World Population Prospects 2022. https://population.un.org/wpp/ Viet Nam’s rail network is old, more expensive and less extensive than a number of regional peers. Logistics costs in Viet Nam are 17 percent of GDP compared to a 10 percent global average.140 A major contributor is the long-term decline of the rail sector. At 32km per million people, it is already less extensive than many regional peers (Figure 94) and far below the East Asian average of 108km. Moreover, the country’s total network of around 3,000km operates at only 60-70-percent capacity, handling just 3 percent of passengers and 2 percent of freight because of low speed, low capacity, and minimal coverage. Legacy infrastructure from French colonial times is in poor condition resulting from years of underinvestment. Compounding this are limitations of Viet Nam’s inland waterways, which have navigable length of around 16,000km but only 15 percent of which are suitable for larger barges, while maintenance financing covers just 10 percent of needs.141 Viet Nam Logistics Business Association. 140 World Bank (2019) “Connecting Viet Nam for Growth and Shared Prosperity”. 141 Pathways to a High-Income Future I 143 I 8.1.2. Digital connectivity Viet Nam has rapidly expanded access to broadband connections although it lags regional peers in terms of the ubiquitous mobile connection. Both fixed and mobile broadband are important. For its part, fixed broadband provides high-performance, stable connections for heavy usage and is particularly important for e-commerce backbones and back-office operations. Mobile broadband, meanwhile, offers flexible and on-the-go internet access, and is both a main form of household access as well as vital for the app-based economy. Viet Nam’s fixed broadband subscriptions have been the second most dynamic in the region only surpassed by China (Figure 95). However, as the common axis on Figure 95 and Figure 96 indicates, mobile broadband subscriptions are much more common; in this regard, China, Malaysia, Indonesia, and Thailand have grown more quickly. Viet Nam’s once regional lead in mobile cellular subscriptions has been lost as most of the region has now caught up. In 2010, Viet Nam already had 144 mobile phone subscriptions per 100 people, the highest in the region and more than double China (Figure 97). Since then, most countries in the region have caught up and the market in East Asian countries appears to be settling at around 1.4 subscriptions per person; Thailand is a notable outlier with 1.7, while Lao’s subscriptions have remained stagnant at 0.6. Figure 95. Fixed Figure 96. …but it lags Figure 97. Viet Nam once broadband has grown most major regional led the region in mobile faster in Viet Nam than peers on the more phone connections, but any other Asian country prevalent mobile the market has now than China… broadband become saturated in most countries Fixed broadband subscriptions Mobile broadband subscriptions Mobile cellular subscriptions per 100 people Cambodia China Cambodia China Cambodia China Indonesia Lao P.D.R. Indonesia Lao P.D.R. Indonesia Lao P.D.R. Malaysia Philippines Malaysia Philippines Malaysia Philippines 140 200 200 Subscriptions per 100 people Subscriptions per 100 people Subscriptions per 100 people 0 100 -60 -200 0 2010 2012 2014 2016 2018 2020 2022 2010 2012 2014 2016 2018 2020 2022 2010 2012 2014 2016 2018 2020 2022 Source: International Telecommunication Union. I 144 I Viet Nam Rising Utilization and speed of broadband connectivity lags key regional peers. Total traffic data are below most regional peers (Figure 98 Panel A), while average upload and download speeds fall behind China and Malaysia (Panel B). Figure 98. Broadband usage and speeds lag regional peers Panel A. Mobile-broadband internet traffic Panel B. Average throughput of fixed or mobile broadband Cambodia China Indonesia Download Fixed BB Upload Fixed BB Malaysia Philippines Viet Nam Download Mobile BB Upload Mobile BB Thailand 300 250 500 Millions of Bits per second 200 400 GB per second 150 300 100 200 50 100 0 0 2018 2019 2020 2021 2022 2023 am a na a a si di i es i ay Ch bo N n al do et m M Vi Ca In Source: International Telecommunications Union Notes: 2023 data used for Panel B. There are no data available for B of fixed throughput in Indonesia. Vietnamese firms and consumers enjoy some of the lowest relative connectivity costs in the region. Taking connection costs as a percentage of gross national income (GNI) per capita, connectivity in Viet Nam is relatively cheaper than in most other countries in the region, with broadband internet costing less than a quarter of the original cost in 2010 when measured as a share of GNI per capita (Figure 99, Panel A). Similarly, mobile bundles (data and calls or data only) have remained on the low end in the region (Panels B and C). Pathways to a High-Income Future I 145 I Figure 99. Digital connectivity is relatively more affordable in Viet Nam compared to most other countries in the region Panel A. Fixed-broadband internet Panel B. Mobile data and voice Panel C. Data-only mobile basket high-consumption basket broadband basket China Indonesia Cambodia Indonesia Cambodia China Lao P.D.R. Malaysia China Lao P.D.R. Indonesia Lao P.D.R. Philippines Thailand Malaysia Philippines Malaysia Philippines Viet Nam Thailand Viet Nam Thailand Viet Nam 20 15 10 8 10 % of GNI pc % of GNI pc % of GNI pc 6 10 4 5 2 0 0 0 2010 2012 2014 2016 2018 2020 2022 2024 2018 2019 2020 2021 2022 2023 2024 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Source: International Telecommunication Union. Notes: Figures show expenditure as share of GNI per capita. 8.2. Forward Analysis 8.2.1. Physical connectivity Developments in infrastructure, logistics, and digital services over the last 20 years have helped Viet Nam strengthen its connectivity. This has helped reduce the cost of transportation of products across the country. As a consequence, the price of goods and services for the population have come down, while their availability has increased. Although gaps remain, this progress to date should serve as a strong foundation on which to build the infrastructure necessary to support Viet Nam’s path to high-income status. However, further strengthening is required in order for connectivity in Viet Nam to resemble that of HICs. Viet Nam set out a masterplan for the 2021-2030 decade to improve infrastructure. The plan ranged from extending the network of expressways and creating high-speed rail routes through to constructing deep-water ports and building new international airports. At its present half-way stage, the plan has already achieved remarkable progress, but the pace needs to be maintained. Ongoing investments in the road and rail infrastructure is required for instance, in order to reduce freight costs from producers to Viet Nam’s ports. The same is true for the country’s shipping connectivity, which, despite significant improvements over the last 15 years (Figure 100), has not advanced enough to close the large gaps in trade infrastructure with HICs, Japan, Korea, and OECD countries (Figure 101). I 146 I Viet Nam Rising Figure 100. Although Viet Nam’s Figure 101. Viet Nam’s trade shipping connectivity lags China’s infrastructure surpasses UMIC significantly, it is on a par with Japan benchmarks but is far from HIC and and is catching South Korea OECD levels Liner shipping index Quality of trade- and transport-related infrastructure (1=low, 5=high) China Japan Korea, Rep. Viet Nam 2007 2010 2012 2014 2007 2010 2012 2014 180 4.5 160 4.0 140 maximum value 2004=100 3.5 Score 1 (low) to 5 (high) 120 3.0 100 2.5 80 2.0 60 1.5 40 1.0 20 0.5 0 0.0 2006 Viet Nam Japan Korea OECD 2007 HIC UMIC 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: United Nations Conference on Trade and Source: World Bank Logistics Performance Index. Development (UNCTAD). To achieve HIC standards in urban connectivity, Viet Nam must prioritize the development of integrated intracity and intercity transport systems that efficiently move people and goods within and around metropolitan areas. Connectivity within HIC cities is characterized by robust public transportation networks, multimodal integration, reduced congestion, and effective spatial planning to maximize economic productivity and urban livability. A hallmark of urban connectivity in HICs is extensive and integrated public transit networks, including metros, bus rapid transit (BRT), and feeder bus systems that seamlessly connect with pedestrian and cycling infrastructure. For example, Seoul in South Korea has built a comprehensive public transport system comprising an extensive subway network, efficient bus services, and widespread use of smart technology to coordinate transit schedules, payments, and passenger information. Seoul’s transport success is closely linked with proactive land-use policies such as the “Seoul Metropolitan Area Readjustment Plan,” aimed at decentralizing urban functions and developing multiple economic and residential hubs, reducing congestion, and supporting efficient urban growth.142 Similarly, Tokyo’s metropolitan area exemplifies efficient intracity connectivity through its dense rail and subway networks, complemented by bus and pedestrian-friendly infrastructure. Tokyo’s transit-oriented development (TOD) strategy promotes high-density, mixed-use neighborhoods 142 Seoul Metropolitan Government (2020). Pathways to a High-Income Future I 147 I around transit hubs. In doing so, it dramatically reduces reliance on personal vehicles and minimizes congestion as well as fostering vibrant economic activity zones. For Viet Nam, enhancing intracity connectivity requires targeted investments in expanding metro and BRT systems in its major cities, such as Ha Noi and Ho Chi Minh City, while also integrating these with pedestrian and cycling infrastructure. The current metro projects in these two cities—although in their early stages—provide an important foundation, but their rapid expansion and integration with broader urban transport systems is needed to significantly shift travel behaviors away from private vehicles. Moreover, Viet Nam should consider regional connectivity models within urban agglomerations. Linking cities within dynamic economic regions through fast, reliable, and frequent public transport— such as regional rail or rapid bus services—can significantly improve labor market integration, reduce commuting times, and boost regional productivity. For instance, effective integration of neighboring urban areas like Bien Hoa and Binh Duong with Ho Chi Minh City could transform the southern economic region into a more cohesive and economically dynamic metropolitan area. Investments in city transport infrastructure must be complemented by careful spatial planning policies that encourage higher urban densities near transit hubs, mixed land uses, and the development of multiple economic and residential centers within metropolitan areas. This integrated approach would help Viet Nam emulate the successes of HIC cities, enhancing economic efficiency, sustainability, and overall urban quality of life. However, Viet Nam need look not just to Seoul and Tokyo as models to emulate; the masterplan for Ngoc Hoi station to the south of Ha Noi illustrates a successful homegrown example (Box 4). Box 4. Case study: Integrating multimodal transport and urban form – The Ngoc Hoi station masterplan As Viet Nam develops its high-speed rail network and expands urban mobility systems, the planned Ngoc Hoi station complex offers a replicable model for how transport infrastructure can improve connectivity while shaping inclusive and sustainable urban growth. Located on a 251-hectare site south of Ha Noi, Ngoc Hoi is set to become the country’s largest multimodal transit hub. The intention is for it to integrate the planned north–south high-speed rail terminus with national rail services, three metro lines, urban buses and intercity buses. These will then all be connected to major highways, ring roads, and local street networks. Cities grow around stations. Well-designed hubs can anchor density, reduce traffic, and create spaces where skilled workers and productive firms cluster. Ngoc Hoi puts these ideas into practice, increasing public capital stock with a focus on integrating physical connectivity across modes, sectors, and spatial scales, thus making infrastructure work harder and smarter. Ngoc Hoi illustrates how TOD at key nodes can promote compact land use, strengthen labor mobility, support urban regeneration, and ease congestion by reducing reliance on private vehicles. Its design I 148 I Viet Nam Rising anticipates the agglomeration benefits outlined earlier in the chapter, and serves as a tangible step toward more connected, competitive, and climate-smart cities. In addition to hosting passenger services, light freight, depots, and maintenance facilities, Ngoc Hoi was originally considered for heavy freight, rolling stock manufacturing, and industrial facilities. With support from the World Bank, Vietnamese authorities shifted towards a more compact and efficient railway layout, redistributing select functions to adjoining sites. This shift frees up land to better leverage the expected high passenger footfall through mixed-use development, economic activity, and new public spaces. The station design process is grounded in a broad analysis of local mobility needs, employment patterns, and commercial potential. It ensures that the site meets both operational and urban development goals, thereby balancing functionality with market needs. Importantly, it also opens the door to a variety of innovative funding mechanisms that allow the public sector to capture part of the financial value created by unlocking developable land in a prime connectivity location, mobilizing private capital to contribute to help deliver public transport assets. With the masterplan already incorporated into Hanoi’s regional railway plan (Decision 1668), and the National Assembly calling for replication at other railway nodes, Ngoc Hoi could serve as a national template. In particular, it demonstrates how integrated hubs can create vibrant, accessible urban centers, enable seamless regional and local connectivity, and reduce the underlying need for travel among urban dwellers. At the same time, it reveals how mobility can be unlocked for provincial residents who are attracted to higher-value economic activities located within the complex and around greater Hanoi. 8.2.2. Digital Connectivity Broadband has become far more affordable and is now in line with HIC benchmarks. When taken relative to GNI per capita, and in both fixed and mobile broadband baskets, Viet Nam prices have converged to those of Japan, Korea, and the OECD average, where affordability has been good for more than a decade now (Figure 102). Nonetheless, Viet Nam will have to continue investing in connectivity as technological advances continue if it is to ensure fast and affordable digital connectivity, which is both an increasingly essential utility and a key enabler of the digital economy and innovation. Pathways to a High-Income Future I 149 I Figure 102. Economic accessibility of digital connectivity relative to aspirational peers Panel A. Fixed-broadband internet basket Panel B. Data-only mobile broadband basket Korea (Rep.of) Japan Korea (Rep.of) Japan HIC OECD Viet Nam HIC OECD Viet Nam 10 4.0 3.5 8 3.0 6 2.5 % of GNI pc % of GNI pc 2.0 4 1.5 1.0 2 0.5 0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: International Telecommunication Union. Notes: Figures show expenditure as share of GNI per capita. However, although internet access has moved from rare to nearly universal in less than a decade, Viet Nam is far from the levels of access to broadband that characterize high-income countries. In 2017, only 27 percent of Vietnamese had access to the internet. A mere six years later this had soared to 88 percent (Figure 103, Panel A). However, in terms of the broadband connections that are essential for firms, consumers, students and community members, connectivity remains below far that of Japan and South Korea as well as other OECD countries, even if the last 15 years’ progress has closed the gap (Panels B and C). As noted earlier, improvements in both modes of broadband are important; most notably in the case of fixed broadband for heavy users, business-to-business (B2B) and back office operations, and in the case of mobile broadband for consumers and consumer- facing apps. I 150 I Viet Nam Rising Figure 103. Most Vietnamese now have internet access, but the country is far from the levels of access to broadband that characterize high-income countries A. Households with Internet B. Fixed broadband subscriptions C. Mobile broadband access at home (subscriptions per 100 people subscriptions per 100 people per 100 people) Korea (Rep.of) Japan Korea (Rep.of) Japan Korea (Rep.of) Japan HIC OECD Viet Nam HIC OECD Viet Nam HIC OECD Viet Nam 100 50 300 80 40 250 60 30 200 150 40 20 100 20 10 50 0 0 0 2010 2012 2014 2016 2018 2020 2022 2023 2010 2012 2014 2016 2018 2020 2022 2023 2010 2012 2014 2016 2018 2020 2022 2023 Source: International Telecommunication Union. More broadly, Viet Nam would rank in the lower quarter of HICs on the Network Readiness Index. The Network Readiness Index (NRI) assesses how ready countries are to use ICT for development. On this broader index of preparedness for the digital economic and social transformation, Viet Nam scores 55 out of 100, the highest score among LMICs. However, this would rank 39th out of 51 HICs, or in the bottom quarter (Figure 104, Panel A). In particular, Viet Nam lags on the governance dimension that focuses on trust, regulation, and inclusion, where it scores higher than only four HICs (Panel D). It does better on the dimensions of people and impact (Panels C and E), although it would not be in the top half of HICs.143 The NRI has four pillars, each with sub-pillars: Technology (with access, content, future technologies); People (with individuals, 143 businesses and governments); Governance (with trust, regulation and inclusion); and Impact (with economy, quality of life and SDG contribution). For more details, see: https://networkreadinessindex.org/ Pathways to a High-Income Future I 151 I Figure 104. Viet Nam would rank in the lower quarter of high-income countries on the Network Readiness Index, performing most poorly on the governance component Panel A: Network Readiness Index (2024 aggregate score) 100 80 60 40 20 0 B: NRI: technology C: NRI: people 100 100 80 80 60 60 40 40 20 20 0 0 D: NRI: governance E: NRI: impact 100 100 80 80 60 60 40 40 20 20 0 0 Source: Portulans Institute. https://networkreadinessindex.org/ Notes: Red line indicates Viet Nam. 8.3. Reform agenda Major reforms on strengthening Viet Nam’s physical connectivity have been identified as part of the 2019 Viet Nam Development Report. Since the report’s release, a number of these reforms have been acted upon. However, many remain still relevant and are summarized in Table 9.144 A number link closely to other chapters in this report, including coordination of transport and spatial planning with GVCs (Chapter 2) and reconfiguring the network of international gateways. Policies to reduce spatial inequality through lower barriers to labor mobility and better access to health and education are discussed further in Chapters 3 and 7. Reforms not discussed here include strengthening the enabling environment around Viet Nam’s logistics service providers. 144 I 152 I Viet Nam Rising Reforms focusing on Viet Nam’s global connectivity include planning orientation and international gateways. Two sets of policies look to strengthen Viet Nam’s global connectivity (specific policy recommendations for all policy sets in the short and medium term are presented in Table 9). The first does so explicitly, by seeking to reconfigure the network of international gateways. This means addressing capacity bottlenecks and demand-supply imbalances while remaining flexible to accommodate the evolving structure of its trade, which is even more critical given rapidly changing trade patterns and geoeconomic trends. Policies must increase capacity at the largest international gateways while strengthening inland connectivity at several others. The second policy affects global connectivity indirectly, by seeking to re-orient transport and spatial planning to support critical value chains; that is, transport planning and investment strategies need to be informed by value chain criticality so that connectivity can best serve Viet Nam’s further integration with the global markets. This means using trade information in policy formulation and infrastructure investment decisions, which, in turn, requires the development of an entire ecosystem of trade and transport – including systematic collection and analysis of relevant trade and transport data, and procedures to feed these analytical outputs into decision processes for planning and investment. The ongoing efforts by the Ministry of Transport (MoT) to establish the Viet Nam Logistics Statistical System need to be completed and further built upon. Regional connectivity can be strengthened through upgrading the logistics sector and the creation of “economic densities” along new corridors. Viet Nam’s newly developing high-capacity, high-speed connective infrastructure can help reduce “economic distances” while creating “economic densities” by allowing targeted development around “high value” transport nodes created around new infrastructure, such as planned multi-modal transit hubs, particularly those that incorporate concepts of transit- oriented development such as the proposed Ngoc Hoi Railway Station Complex (see Box 4). If well- coordinated with the right incentives, this infrastructure can facilitate the productive and high-density use of lands that can generate jobs and reap the benefits of good connectivity, while reducing the congestion in industrial parks (Ips) and economic zones that may be lowering agglomeration returns. Achieving these agglomeration economies requires certain conditions and corridor characteristics (Figure 105): (i) there is sufficient population along the corridor to justify investment in faster connectivity; (ii) planned growth along the corridor is ambitious and needs to be accommodated; (iii) employment patterns along the corridor are specialised in complementary sectors; (iv) prevalence of high and intermediate skill levels; and (v) reduced journey times to global trade gateways. The first-order effects of these investments improve economic performance. The second-order effects can produce additional growth but may displace economic activity from one area to another. The net effect depends on other drivers of growth and the extent to which they provide a favourable business or economic environment. It may be necessary to invest in these other factors to fully realize the benefits of the transport investment. For example, complementing the development of connective infrastructure would be a strengthening of the soft connectivity drivers (including the logistics service sector), the regulatory framework around supply chains and logistics, and the institutional framework around the logistics sector. Pathways to a High-Income Future I 153 I Figure 105. Investments in transportation infrastructure can drive greater economic growth Driving Growth First-Order Effects ion at Sharing common resources er lo m Scale and specialisation Agg Matching workers and firms Learning (knowledge spillovers) Second-Order Effects Transport Travel Time Attracting high-skilled workers Economic Improvements Savings Investing in education and skills Growth Business investment Other Drivers of Growth Rem Other infrastructure ovi ng Labour markets and skills ns Co tr Business environment ain ts Innovation & Quality of place Unlocking Growth Source: World Bank illustration. Local connectivity can be improved through overhauling market infrastructure and logistics in cities while connecting low-density communities to markets. There is a need for cities to upgrade or relocate their market infrastructure. Consideration of urban logistics is often omitted in current transport planning in major urban areas. Logistics facilities should be brought into the formal transport planning process so as to ensure the efficient movement of goods for businesses and consumers alike, and without negatively affecting the urban environment and livelihoods. At the same time, Viet Nam is continuing to enhance connectivity for remote and low-density areas of the country in order to reduce economic distance and improve market access for all localities. This can be achieved by connecting low-density areas to main economic corridors rather than adjacent localities that are similarly low-density. All of these measures rely on institutional capacity and coordination, which should be the top policy priority. Many of proposed reforms—particularly regarding international gateways and regional infrastructure—rely on more coordinated planning and investment at both the central and local government level. The top priority should be strengthening the execution capacity of implementing agencies. The slow delivery of metro projects is worrying as the Ministry of Construction embarks on an ambitious railway capex program. For example, delivering and operating a high-speed rail on the scale of Ha Noi to Ho Chi Minh City requires training and upskilling of over 200,000 workers. Moreover, Viet Nam has low capital absorption capacity, a particular worry to address before tackling connectivity megaprojects in new sectors. Other challenges include weak project screening and appraisal systems, I 154 I Viet Nam Rising underfunded maintenance, and lengthy delivery processes. These key issues are taken up in Chapter 11 on institutions. Transit-oriented development offers an example of how stronger coordination is important. Building on the Ngoc Hoi case in Box 4 are three policy reform proposals to unlock the potential of station-area development, all of which require stronger institutional capacity and improved coordination. First is the urgent need for a more supportive and flexible policy framework for TOD, which remains relevant despite recent legal reforms, including the 2024 Land Law. Pilot testing could focus on how station areas can be planned, delivered, and financed in ways that integrate real estate and transport. A well-defined framework should: clarify the roles of city and national agencies; offer flexible land development tools in partnership with private sector (including development corporation models, joint venture agreements, and/or growth zones where property tax receipts are ring-fenced, for example); and allow for phased approaches to land assembly and station-area planning. Second, inter-agency planning and delivery mechanisms are vital. Station-area development brings together multiple layers of government, each responsible for different infrastructure components. Delivering integrated hubs requires more than just technical alignment; it demands a whole-of-government approach. A steering committee or specialized delivery vehicle with a clear mandate should oversee planning and implementation across sectors and levels. Common standards and inter-operable designs are needed to ensure seamless connections across the rail system. Coordination must extend beyond construction to long-term operations, zoning, and financing. Finally, this will need to be complemented with corridor-wide business cases and spatial strategies. TOD works best when cities adopt integrated business case approaches that reflect how rail corridors shape jobs, housing, and land value. These business cases should feed directly into the statutory plans of Ha Noi, Ho Chi Minh City, and other cities to lock in densification and land-use change. This will allow public agencies to plan for complementary infrastructure, such as utilities, schools, energy, and negotiate equitable contributions from private developers. Without this joined-up approach, cities risk building costly rail infrastructure without reaping the broader benefits. To improve digital connectivity—especially the fixed broadband connectivity in Viet Nam—three key reforms are proposed, starting with infrastructure sharing (Table 9). Encouraging the sharing of existing infrastructure, such as fiber networks owned by SOEs, can significantly reduce costs and improve access to broadband services. This includes co-location in passive infrastructure and enabling cross-border connections. By employing underutilized fiber assets and allowing licensed telecommunications operators to extend access, economies of scale can be achieved and regional connectivity can be improved. Second, it is crucial to strengthen the regulatory framework that promotes competition and private sector investment in the sector. This will entail fair access to infrastructure for all market participants. It will also involve the implantation of transparent and standardized right-of-way legislation. The new telecom law that took effect in July 2024 is a strong step forward for non-Vietnamese companies that are looking to enter the market. At the same time, enforcing the law with concrete guidelines and transparent practices will be necessary to spur private investment in the sector. Pathways to a High-Income Future I 155 I Last, it is of utmost importance to leverage PPPs and create viable business models for advancing the sector. Utilizing PPPs to crowd in private investment in broadband infrastructure, such as fiber, satellite, or terrestrial network, can help bridge the investment gap and accelerate the rollout of high-speed broadband. By strategically using PPPs and creating a pro-competition framework, significant private investment can be unlocked, which can lead to improved broadband penetration and economic growth. These reforms will drive both cost and quality as well as being necessary for Viet Nam’s aspirations to develop an innovation economy. Implementing these reforms will help create a more competitive and efficient broadband market, leading to improved access, lower costs, and better service quality for consumers. More importantly, the reforms will also contribute to establishing a solid foundation to drive the research and innovation’s aspirations that have been laid out in the recent Politburo’s resolution No. 57 on science, technology, innovation, and digital transformation. Table 9. Policy reform agenda for connectivity Policy package Key recommendations 1. Global l Re-orient transport and spatial planning to support critical value chains: connectivity - Short Term (ST): Improve collection and analysis of data related to trade, value chain, logistics and transportation through mandatory data-sharing among public and private stakeholders in trade, logistics, and transport services - ST: Designate entity with capability to collate and analyze connectivity data, and to establish and assess key performance indicators (KPIs) that measure the degree to which transport and logistical connectivity serves critical value chains - Medium Term (MT): Make KPIs in trade, logistics, and transportation available - MT: Establish a legal and regulatory framework to utilize trade data, particularly value- chain information for transport infrastructure planning l Reconfigure the network of international gateways: - ST: Measures to relieve congestion at choke points around key international gateways; e.g., provision of centralized parking bays and consolidation yards - ST: Establish coordination mechanism between central, provincial, and local governments, and between provincial authorities, to coordinate implementation plans for connective infrastructure around key international gateways - MT: Conduct network-level gateway planning, rather than for an individual gateway or province, focusing on further consolidation of import and export volumes and lower trade costs - MT: Implement additional congestion mitigation measures, such as widening connecting roads and upgrading pavement and structure strength, to accommodate heavy vehicles, lane reservation, and dedicated truck corridors, including around Noi Bai airport and Vung Tau seaport 2. Regional l Create economic densities along new corridors: connectivity - ST: Regularly assess IP and EZ performance and their use of spatial agglomeration, and make the relevant information public - ST: Review relevant legislation concerning current spatial planning and define bottlenecks to integrating transport and land-use planning I 156 I Viet Nam Rising Policy package Key recommendations 2. Regional - MT: Develop mechanism of incentives for local authorities and private sector to foster connectivity productive land uses—such as for industrial agglomeration and logistics services—around high-connectivity nodes created along new or upgraded infrastructure l Upgrade the logistics sector: - ST: Legislate for scale and competitiveness of the trucking industry, by providing incentives for measures such as the creation of cooperatives, full cold chains, and pan-Viet Nam brokerages, among others - MT: Introduce financial support (e.g., growth-based lending scheme) by designating the trucking and other logistics industries as a State Bank of Viet Nam’s “priority sector” for financing - MT: Introduce incentives for investments in digital freight aggregator models through government policies that promote fundraising, research and development, FDI, mentorship, and open data sharing - MT: Promote electronic recording and transactions in inland waterway transport (IWT) 3. Local l Overhaul market infrastructure and logistics in cities: connectivity - ST: Mandate local authorities, especially in large urban areas, to include considerations for market infrastructure and urban logistics in spatial planning - ST: Dedicate truck lanes for port–city roads - MT: Construct urban consolidation centers (UCCs) in the outskirts of Hanoi and Ho Chi Minh City to consolidate and deconsolidate cargo - MT: Construct logistics centers near ports, such as Haiphong, to prevent unnecessary traffic from traveling through city centers l Connect low-density communities to markets: - ST: Increase construction cost norms for road construction in mountainous areas - MT: Evaluate the level of inclusiveness of connectivity on a regular basis by using surveys to institutionalize market access assessment in all localities at the aggregate and household levels - MT: Cooperate with logistics services providers to use National Target Programs (NTPs) to help local government subsidize logistics stations to link deliveries between cities and remote areas 4. Inclusive l Complement connectivity with social and economic support: policies - ST: Delink social health insurance from the registration location - ST: Equalize access to services for migrant workers and their families to reduce barriers to labor mobility - ST: Improve the labor market information system in lagging areas - MT: Use digital technologies to deploy agriculture market information - MT: Support vocational training to develop producer services, such as logistics services and business and accounting services, in secondary cities in the Central Highlands and Northern Mountainous regions 5. Resilient l Invest in smart resilience based on criticality and risk: infrastructure - ST: Establish and strengthen the interministerial data-sharing regime to integrate economic, natural and climatic, transport, and physical asset data as a basis for criticality and risk assessment - MT: Strengthen the geospatial, data-driven, and risk-based asset management system, integrating it with resource allocation and budgeting processes Pathways to a High-Income Future I 157 I Policy package Key recommendations 5. Resilient l Promote multimodal transport as a resilient strategy: infrastructure - ST: More automation at international gateway seaports and major inland river ports, inland container depots, and other key facilities - ST: Promote electronic recording and transactions in IWT - MT: Promote coastal shipping on north–south corridors by encouraging more shipping lines, shipping centers, reduced port-handling costs for domestic cargo, and increased roll-on/roll-off vessels that promote trucking-coastal itineraries - MT: Promote container-on-barge services to boost IWT usage by adopting fleet sizes, designs, and waterways suitable for containerization, and allocating berthing windows at maritime ports for IWT barges, along with improving container handling facilities at river ports 6. Digital l Promote infrastructure sharing connectivity l Strengthen the regulatory framework to encourage competition and private sector investment l Increase the use of PPPs and create viable business models I 158 I Viet Nam Rising CHAPTER 9 ADAPTING TO CLIMATE CHANGE Viet Nam’s population and economic base is heavily exposed to climate change. With a coastline of 3,260 kilometers that includes major cities and production sites, Viet Nam is highly exposed to sea-level rise; 70 percent of population lives in coastal areas or low-lying deltas.154 Manufacturing is concentrated in disaster-prone areas and exposed to risks of climate change. Ten percent of industrial zones are in locations that are expected to experience coastal flooding every five years; this increases to 39 percent for every fifty years, while 42 percent are exposed to riverine flooding expected every fifty years.155 The Mekong Delta, a cornerstone of Viet Nam’s agriculture and economy, also faces significant climate change risks.156 This high vulnerability threatens Viet Nam’s future economic growth, particularly through impacts on urban and transport infrastructure and agricultural productivity.157 The country’s agriculture sector has already been impacted by rising temperatures, variability in rainfall, and an increase in the frequency and intensity of storms. These phenomena have significantly reduced coffee yields, damaged rice and vegetable crops, and left extensive flood damages.158 Viet Nam’s cities are also exposed to climate risks, facing rising temperature, heat stress, and exposure to more violent storms. For example, damages from the storm Yagi in 2024 are estimated to have caused nearly $1 billion in damages to the industrial and port center Haiphong,159 as well as disrupting supply chain production due to power and communication losses. The country’s transport infrastructure and connectivity are also at risk. Flooding threatens roads and highways, while excess heat can cause road subsidence.160 Given the interconnected nature of Viet Nam’s transport network, disruptions in one location or category can quickly spread right across the network. Making the economy more resilient to climate change is therefore a critical issue for achieving Viet Nam’s 2045 HIC goal.161 Climate change will affect every part of the economic growth model in some fashion. Heat stress, for example, will reduce labor productivity. Extreme weather events, meanwhile, threaten to damage or destroy infrastructure and productive capital, as well as injuring or killing individuals and workers and undermining household savings and resilience. Production could shrink 153 A longer-term measure would be to develop landlord ports in two to three select, strategic locations to promote waterborne transport and intermodal links between land-based and waterborne transport 154 World Bank. 2025a. Greening Growth in Viet Nam: Adaptation and Mitigation Challenges and Opportunities. 155 Rentschler et al. 2020. 156 World Bank. 2022. Viet Nam Country Climate and Development Report. 157 World Bank. 2025a. 158 World Bank. 2025a. 159 Ministry of Finance, Viet Nam, September 2024. 160 Viet Nam Investment Review, June 10, 2015. 161 World Bank. 2025a. Pathways to a High-Income Future I 159 I while prices could rise, especially for food. Moreover, impacts in one sector can quickly spill over into another. The public cost of responding will increase even as tax revenues fall. 9.1. Backward diagnostic Viet Nam’s agriculture sector has already been profoundly impacted by rising temperatures, variability in rainfall, and more frequent storms.162 Increasing variability of rainfall has led to greater drought and significantly reduced coffee yields in the Central Highlands. At the same time, excessive rainfall and flooding has damaged rice and vegetable crops in the Red River Delta. The flooding from super typhoon Yagi is estimated to have caused agricultural losses of $2.5 billion163 and damaged or destroyed vast areas of rice paddy and fruit tree production, among other effects.164 More generally, over the last thirty years, it has been estimated that an increase of 1 percent in temperature resulted a long-term fall of 3 percent in the agricultural production index.165 In the Mekong Delta, many households derive livelihoods from fishery activities that face climate- related threats such as warmer waters and saline intrusion. Across the region, households having any member working in the fishery sector make up 13.4 percent of all households, rising as high as one quarter in Kien Giang, 30 percent in Bac Lieu, and nearly two-thirds in Ca Mau.166 As saltwater intrusion worsens, many households diversify into brackish agriculture and aquaculture. However, these activities are also vulnerable. Climate change also poses a major threat to transport infrastructure.167 Chapter 8 has already examined how important physical connectivity is to Viet Nam’s 2045 HIC ambitions. However, the high vulnerability of the country’s extensive transportation network168 to climate hazards should not be overlooked. Extreme flash flooding threatens highways, for instance, particularly in mountainous areas. Meanwhile, road failures from river flooding are expected to be at least 40 percent higher as soon as 2030. This is aside from the effects of extreme heat, which have already resulted in road subsidence.169 The greatest risks occur where economic activity is concentrated in regions that also have high exposure to climate hazards, such as coastal areas, the northern mountains, and the Mekong Delta. These threats are made worse by lack of maintenance and outdated design.170 Much of Viet Nam’s road network—already in lagging in quality compared to regional peers (Chapter 8)—was constructed 162 World Bank. 2025a. 163 Estimates by the Ministry of Finance and Ministry of Agriculture and Rural Development. 164 Dezan Shira and Associates (2024). Viet Nam Briefing. See: https://www.vietnam-briefing.com/news/impact-of-typhoon-yagi-on- vietnam-economic-damage-and-recovery-efforts.html/ 165 Dao Le Trang Anh, et al. (2022). Climate change and its impacts on Viet Nam agriculture: A macroeconomic perspective. 166 World Bank. Forthcoming. Life in the Mekong Delta Poverty Report. 167 World Bank. 2025a. 168 World Bank (2019). Resilient Shores. The country’s primary network comprises approximately 1,250 km of expressways, 24,300 km of national highways, 2,660 km of railways, and 5,400 km of inland waterways predominantly serving the Mekong and Red River deltas, and an extensive maritime network connecting 45 ports and nearly 200 terminals across major coastal hubs. Road transport largely remains the dominant mode for both freight and passengers. 169 Viet Nam Investment Review, June 10, 2015. 170 World Bank (2025a). I 160 I Viet Nam Rising using design standards that do not account for climate change, such as greater peak rainfall, more flooding, and more landslides. Compounding this is the incomplete maintenance of Viet Nam’s road network that arises from underfunding. For example, only half of requested maintenance funding in the sector was granted in the decade to 2020, falling to 46 percent for roads and 42 percent for railways.171 The economic costs of climate change are already affecting growth while the private sector is unprepared and faces significant investments to adapt. The economic losses due to climate change in 2020 alone have been estimated at 3.2 percent of GDP.172 Moreover, much of the private sector is already being affected, with one third to half of all businesses reporting “quite a lot” or “a lot” of impact from climate-linked disruptions, such as interruptions to production and distribution, decreases in productivity and quality, increases in costs and damages, and drops in revenues (Figure 106). It is estimated that around $300 billion in private sector assets are vulnerable to climate-related disasters, with extractives, manufacturing, agriculture, wholesale and retail, and hotels/accommodation among the most at-risk sectors. Figure 106. Businesses are reporting climate impacts and risks across a range of dimensions Climate change impacts and disaster risks observed by businesses (2019) Not at all Just a little Quite a lot A lot Business/production interruption Labor productivity reduction Revenue decline Transportation channel disruption Increased production cost Delayed distribution network Product/service quality decline Damage to facilities Manpower shortage Storage in input material supplies Source: Reproduced from Figure 3.3 in VCCI (2020), Adapting to Succeed: Assessing the Impact of Climate Change on Vietnamese Businesses. Notes: The figure summarizes the responses of more than 10,000 Vietnamese- and foreign-owned businesses to a 2019 survey described as “the largest, most comprehensive enterprise survey ever conducted in Viet Nam from the perspective of businesses on climate change.” 171 MOT DPI (2021). 172 World Bank. 2021 (unpublished). “Accelerating Clean, Green, and Climate-Resilient Growth.” Viet Nam Country Environmental Analysis. Cited in World Bank (2025a). 173 World Bank’s 2017 Catastrophe Risk Assessment for Viet Nam (unpublished, cited in World Bank (2025a). Pathways to a High-Income Future I 161 I 9.2. Forward diagnostic Temperatures will continue to rise while changes in precipitation and the frequency of extreme weather events become more uncertain. Viet Nam has already experienced mean annual temperatures rises of 0.5°C–0.7°C since 1960; this is projected to accelerate to increases of 1.5°C by 2080–2100 with emissions peaking in 2040.174 Considerable uncertainty exists around future precipitation trends and the intensity of extreme weather events. Under global high-emission scenarios, “1,000‐year” flood events may occur as frequently as every five years. Meanwhile, some regions could see increases in annual rainfall of over 20 percent, with extreme five-day rainfall events rising by up to 70 percent.175 Sea levels are expected to rise significantly, affecting both cities and rural areas. Predictions for increases in global sea level vary widely and will depend greatly on the future path of emissions and the actions taken globally in the coming years. Estimates range from low case scenarios of around 20-50 centimeters to high case scenarios of 200 centimeters.176 However, even lower levels of increase will have significant economic and social costs. As for more significant increases, these would be disastrous for much of the country; this is true even such increases fall well short of high case scenarios. For example, Ho Chi Minh City is ranked the third most-vulnerable city to sea level rise in the world,177 with nearly 45 percent of its urban area located less than a meter above sea level.178 As such, it is highly exposed to the effects of high tides, heavy rains, overflow in the Saigon and Dong Nai rivers, and land subsidence due to rapid groundwater extraction. The consequences of seal level rise could be particularly dire consequences for the Mekong Delta. An increase of 75–100 centimeters, for example, could flood nearly half the delta by 2050.179 Salinity intrusion is already high (Figure 107, Panel A) and is set to increase (Panel C), while the entire region faces very large increases in days of extreme heat (Panels B and D); the combination would make agriculture extremely difficult throughout much of the region. 174 Under the most likely climate change scenario (a Representative Concentration Pathway of 4.5 or RCP4.5). 175 World Bank (2025a). 176 For example, 20-200cm (MIT Climate Portal); 60-180cm (National Climate Assessment); and a likely range of 28-101cm (IPCC Sixth Assessment Report: The Physical Science Basis). 177 https://www.nestpick.com/2050-climate-change-city-index/ 178 https://earth.org/sea-level-rise-projections/ 179 Ministry of Natural Resources and Environment of Viet Nam, January 2022. Viet Nam’s Climate Change Scenario Updated Version in 2020. I 162 I Viet Nam Rising Figure 107. The threat of rising sea levels and extreme temperatures could make agriculture extremely difficult in much of the Mekong Delta Panel A. Salinity intrusion, present climate Panel B. Number of days of extreme heat, 1983-2016 Panel C. Salinity intrusion, change from present Panel D. Additional days of extreme hear, 2030 climate to 2050, no control measures compared to 1983-2016 This map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. Source: World Bank. Forthcoming. Life in the Mekong Delta. Climate change could slow economic growth by an annual average of 0.33 percentage points, equivalent to delaying HIC status by around two years. It is projected that real GDP growth will be half a percentage point lower on average annually in the 2020s, decelerating to an average of a 0.25 percentage point in the 2040s.180 The projected losses in real GDP levels by 2045 is 11.2 percent relative to baseline (Figure 108). Earlier in the report, it is projected that under current trends in growth drivers, Viet Nam would fall short of the HIC threshold in 2045; this estimate for additional climate change loss would increase that shortfall by a quarter and extend the time needed to achieve HIC status by another two years. The losses mainly come through reductions in labor productivity in all sectors due to heat stress, as well as damage to the infrastructure stock and loss in agricultural productivity. Temperature stress affects workers by directly causing physical or psychological discomfort, thereby reducing task productivity, especially for low-income workers in the outdoors.181 Given Viet Nam’s location at tropical 180 RCP4.5. 181 Heat stress induced by climate change will increase the occupational heat exposure of workers (Opitz-Stapleton, 2014), particularly affecting conditions for low-income outdoor workers (Dao et al., 2013). Pathways to a High-Income Future I 163 I and subtropical latitudes with a high share of agricultural and construction employment, it is highly vulnerable to such productivity losses. Projected labor productivity decreases from heat stress alone could reduce real GDP levels by 10 percent relative to the no-climate change baseline, accounting for 78 percent of total GDP losses (Figure 109). In turn, eroded labor productivity would reduce household income—and, by extension, consumption—by 10 percent compared to the baseline by 2050. The impact of river flooding, sea level rises, and typhoons on the capital stock will reduce GDP levels by a further 1.1 percent. Climate change could reduce agricultural productivity yields by 9.1 percent, resulting in an additional GDP loss of 1.7 percent. Figure 108. Climate impacts are Figure 109. The majority of projected to reduce Viet Nam’s GDP by economic losses will come from 11.2 percent by 2045 reduced labor productivity due to heat stress Real GDP levels, most likely climate change scenario Share of economic damages by channel, compared to no climate change, 2025-2045 2025-2045 Optimistic Most likely Pessimistic Heat stress Flooding Agriculture -8% 100% 80% -10% 60% 40% -12% 20% -14% 0% 2030 2035 2040 2045 2030 2035 2040 2045 Source: World Bank (2025) based on staff estimates and MANAGE Source: World Bank (2025) based on staff estimates simulations. and MANAGE simulations. However, adaptive measures can reduce economic damage by building resilience; such measures could reduce the GDP losses by nearly half, or 5 percentage points. A range of adaptation measures are considered in the following section on the reform agenda. These include: heat stress adaptation, particularly investments in indoor and outdoor spaces; climate-smart agriculture; and enhancement of the resilience and adaptability of infrastructure. If undertaken, these steps would help avoid a projected 5.2 percentage point loss in GDP—i.e., reducing the projected loss from 11.2 percent to 6.0 percent, an improvement of 46 percent (Figure 110). Moreover, climate adaptation investments can deliver high economic returns even when climate risks do not materialize. Traditional cost-benefit analysis compares to cost of adaptation investment I 164 I Viet Nam Rising to the benefits of reduced damage from climate-related events. However, there are also induced economic benefits (such as additional profits or employment created). Moreover, even if the climate risks do not materialize, there are additional environmental and social benefits. For example, an assessment of a World Bank project to increase agricultural resilience in the Mekong Delta found that additional gains accrued to the country through the project.182 In fact, the second (economic) and third (environmental and social) dividends outstripped the first dividend (reduced damages) benefit-to-cost ratio by a large margin; the new benefit-to-cost ratio ranges from 5.7 (for low carbon prices) to 8.1 (for high carbon prices), as compared to the traditional benefit-to-cost ratio returns of 1.1 (Figure 111). Figure 110. Climate change will Figure 111. Adaptation measures reduce economic growth by adaptation deliver additional benefits far beyond measures can mitigate nearly half of those of just reducing climate- the impact related damages Impacts of adaptation measures on GDP relative to Benefit-to-cost ratio of climate adaptation baseline, 2025-2045 investments Without adaptation Most likely Benefit/cost ratio returns (3rd dividend only) With adaptation - Most likely Benefit/cost ratio returns (2nd dividend only) -2% Benefit/cost ratio returns (1st dividend only) 10 8 -7% 6 5.2 ppt avoided losses 4 2 -12% 0 2030 2035 2040 2045 Ba Tri An Minh, An Phu Total (Ben Tre) An Bien (An Giang) (Kien Giang) Source: World Bank (2025) simulations using MANAGE model. Source: World Bank estimates, 2024. World Bank’s Mekong Delta Integrated Climate Resilience and Sustainable Livelihoods Project (ICRSL). However, significant public and private investments will be required. The additional investments needed for adaptation in agriculture and infrastructure and to protect human capital during 2025–50 is estimated to reach $233 billion (or an average 0.75 percent of GDP per year). Most if this investment will be directed towards the requirement to address increased heat stress (i.e., through cooling).183 182 World Bank’s Viet Nam Sustainable Agriculture Transformation Project, with a total budget of $238 million (initial amount, 2015). 183 World Bank (2025a). Pathways to a High-Income Future I 165 I 9.3. Reform agenda Adapting to climate change will take a large number of cross-cutting and sectoral policies and measures, and the role of institutions and the public sector cannot be overstated. Beyond the well- established need to green the budget cycle, the government will need to move decisively to fulfill its multiple roles: namely, as an investor in critical adaptation infrastructure and a facilitator of this transition; as a rule-setter in creating new financial and regulatory instruments to ease the transition; and as a regulator and provider of incentives to encourage changes in behavior by individuals and by private sector organizations more broadly. The table below from World Bank (2025b) proposes a select set of cross-cutting and sectoral recommendations for the upcoming five-year policy cycle (2026-2030) that require public and private sector uptake. The sector-level measures respond to the three main impact channels of heat stress identified in the report: i.e., on labor productivity, on agriculture, and on infrastructure. Table 10. Green growth adaptation reform agenda Cross-cutting Recommendations Leverage innovative l City and provincial level resilience bonds and blended finance financing tools l Financial products that blend public, private, and donor resources for investment in climate-resilient infrastructure Adopt new risk-sharing Develop risk-sharing mechanisms: mechanisms l Parametric insurance with rapid payouts and triggers l Rapid contingency financing instruments to support businesses and households in the event of climate-driven disasters Enact green fiscal rules l Green Fiscal Reforms: Adjust land or property taxes to discourage settlement in high-risk areas and reward resilience investments Develop a public l Identify and prioritize infrastructure vulnerable to climate shock (e.g., transport, investment program water supply, urban, agriculture). Integrate considerations about climate risk into adapted to climate existing and upcoming infrastructure projects. change risks Sectoral Recommendations Urban: Strengthen building l Adaptive Building Codes: Revise standards so that residential, commercial, resilience and public buildings to meet expected higher temperatures and stricter storm- resilience criteria. Urban: Build adaptive Undertake adaptative investment: urban infrastructure l Adaptative private investments that reduce heat and increase energy efficiency l Flood-resilient drainage l Proactive public maintenance of existing infrastructure at risk of extreme weather events I 166 I Viet Nam Rising Sectoral Recommendations Transport: Develop l Technical specifications for routine and emergency maintenance that include technical specifications climate vulnerability zoning to complement targeted adaptation investments / norms for maintaining l Clear protocols for maintenance prioritization, using geospatial data to help ensure existing assets that limited resources are directed to the most vulnerable and critical segments Transport: Establish l Unified risk database consolidating climate, hydrological, and infrastructure data robust adaptation planning for precise vulnerability assessments / asset management decisions Agriculture: Diversify l Support farmers to diversify to climate-resilient crops through subsidies, technical crops and livelihoods assistance, and access to markets Agriculture: Mitigate the l Alternate wetting and drying reduces water, maintains yields, and lowers emissions impacts of irregular rainfall l Efficient irrigation systems, including drip irrigation (or solar-powered drip and droughts irrigation) and rainwater harvesting, improve water conservation in drought-prone regions Pathways to a High-Income Future I 167 I CHAPTER 10 RESOURCE MOBILIZATION Achieving the 2045 high-income target will require significant resource mobilization. The country’s growing infrastructure needs have outpaced GDP growth; between 2000 and 2022, real GDP grew by 3.8 times, while energy consumption grew sixfold and freight volume by tenfold (Figure 26, earlier).184 Going forward, Viet Nam’s infrastructure needs alone are projected to grow faster than its financing ability, with a shortfall of $94 billion forecast for the period 2019-40.185 Besides upgrading the infrastructure system, large resources are needed to build the skilled workforce that would underpin the growth needed to reach the 2045 target (Chapter 3), strengthen the social protection system while supporting the country’s aging population (Chapters 6 and 7), and support climate adaptation policies (discussed in Chapter 9). Viet Nam’s capital accumulation remains below peers despite attracting significant FDI. During the last decades, Viet Nam has enjoyed one of the strongest inflows of FDI of any country, often spiking along with major reforms, representing 14 percent of investments today (Figure 112). However, due to limited domestic investment resulting in a low stock of public capital, Viet Nam’s total capital stock is relatively low, at 187 percent of GDP. This places it below countries at similar levels of development or regional peers, such as Indonesia (296 percent) or Thailand (302 percent)186 (Figure 113 and Figure 114). This chapter discusses two key resource mobilization issues: (i) developing capital markets; and (ii) fiscal revenue mobilization. The majority of investments needed to meet the 2045 high-income ambition will have to come from the private sector, although public investment and financing will play a supporting role. In this context, the first constraint to alleviate is the lack of access to credit for firms, which currently prevents them from financing their growth strategies. In parallel, fiscal revenue mobilization is needed to create the fiscal space required to finance productive public investment. 184 World Bank staff calculations based on WDI, Statistical Review of World Energy, General Statistics Office of Viet Nam. 185 Global Infrastructure Outlook. 186 Data as of 2019, the latest year available for all comparator countries (IMF, 2019). I 168 I Viet Nam Rising Figure 112. FDI has Figure 113. …domestic Figure 114. Public been historically investment, where Viet capital remains low in high but needs to be Nam does not stand Viet Nam sustained and is not as out… large as… FDI as a percent of GDP, Domestic investment as a percent Public capital stock per worker selected countries of GDP, selected countries versus per capita income China Thailand China Thailand 500 Malaysia Korea, Rep Malaysia Korea, Rep Philippines Indonesia Philippines Indonesia Japan Lower middle-income Japan Lower middle-income Public capital stock per worker Upper middle income Viet Nam Upper middle income Viet Nam Malaysia 45 45 50 China 40 40 Korea Philippines 35 35 30 30 % of GDP % of GDP 25 25 Indonesia 20 20 5 Viet Nam 15 15 10 10 Cambodia 5 5 0 0 100 1000 10000 100000 100 1000 10000 100000 1 5 50 1 Income per capita GDP per capita (constant 2015 US$) - log scale GDP per capita (constant 2015 US$) - log scale Source: World Development Indicators. Source: World Development Indicators. Source: IMF’s Investment and Capital Stock Dataset and World Bank’s World Development Indicators. Note: Data for 2019. The y-axis shows the general government capital stock per worker at constant 2017 international dollars. The x-axis shows GNI per capita, PPP at constant 2021 international $. Log scales. 10.1. Backward diagnostic 10.1.1. Capital market development Viet Nam’s capital markets, which comprise a critical element for resource mobilization, grew significantly but still run behind the country’s peers. Healthy economic growth, a stable exchange rate, improved fiscal consolidation, controlled inflation, and political stability have allowed Viet Nam’s capital markets to increase in size. However, the country’s capital market remains smaller than those of most of its regional peers, including MICs. Currently, the size of Viet Nam’s capital markets represents 93 percent of GDP, lower than most regional peers except for Indonesia (Thailand, 180 percent; Malaysia, 224 percent) (Figure 115). The country’s stock market capitalization accounted for 42 percent of GDP in 2022, higher than the UMIC average (30 percent) yet smaller than that of UMIC countries in the region, such as Indonesia (46), the Philippines (59), or Malaysia (94). Pathways to a High-Income Future I 169 I Figure 115. Viet Nam’s capital markets are smaller than most peers Capital market size (percent of GDP), selected countries 2023 Equity market Government bond Corporate bond Indonesia 86% Viet Nam 93% Philippines 116% China 176% Thailand 180% Malaysia 224% 0 50 100 150 200 250 Source: Asian Bonds Online, MoF, countries’ stock exchanges and departments of statistics. The relatively weak presence of institutional investors such as insurance companies and pension funds limits the amount of resources available for long-term investments. In recent years, the number of securities accounts held by individuals has increased, but the total size of Viet Nam’s institutional investors remains low, at 19 percent of GDP. This places it below regional MICs (Figure 116). The current untapped potential of Viet Nam’s capital markets is limiting the provision of long- term financing. Of the existing domestic institutional investors, few invest in the corporate sector; for instance, deposits and government bonds represented 80 percent of total investments by insurance companies in 2022. While there is an increasing volume of transactions and pricing data, significant gaps remain. Government bond yields and official money market rates are not used as pricing benchmarks for other assets. There are often significant differences between interbank rates and the rates published by the State Bank of Viet Nam (SBV) in the money market.187 The same imbalance is evident in prices for government bonds when issued in auctions and when traded in the secondary market. In the equity market, prices are volatile and, as a result, trades are occasionally executed at steep premiums (Figure 117). Without more reliable pricing information, allocation of economic resources will remain inefficient and more volatile than most MICs in the region.188 187 This is because refinancing and discount rates published by the SBV are seldom used as monetary policy instruments compared to other tools (such as open market operations and reserve drawdowns); as such, they do not offer an effective pricing signal. 188 ‘Yield curve’ represents interest rates at different maturities; i.e., short-term, medium-term, and long-term. I 170 I Viet Nam Rising Figure 116. The size of Viet Nam’s Figure 117. High volatility in equity institutional investors remains low, at prices is an example of a lack of 19 percent of GDP, below regional MICs reliable price signals in Viet Nam Institutional investors as percentage of GDP (2023) Volatility of equity markets in the region Mutual funds Pension funds Insurance Viet Nam Indonesia Malaysia Thailand Singapore 859 Singapore 177 50% Japan 136 40% Rep.of… 30% 130 20% Malaysia 45 10% China 0% 37 Thailand -10% 19 -20% Viet Nam -30% 17 Philippines -40% 11 -50% Indonesia 2016 2017 2018 2019 2020 2021 2022 2023 Source: Finstat, IMF, World Bank, government agenciesl. Source: Indonesia Stock Exchange, Bursa Malaysia, SET Index (Thailand), Straits Times Index, and VN Indices, WBG staff. 10.1.2. Fiscal revenue mobilization Viet Nam’s revenue collection has not kept pace with economic growth, falling below peers. While GDP increased by nearly 50 percent in the last five years (2019-2024), total revenues and tax revenues only grew by 31 and 27 percent, respectively, thus eroding revenue collection as a share of GDP (Figure 118). In 2024, tax revenues accounted for 12.4 percent of GDP, below many MICs and one of the lowest in the region (Figure 119). Pathways to a High-Income Future I 171 I Figure 118. Revenues are declining Figure 119. …driven by particularly and significantly lag structural and low tax revenues aspirational peers… Fiscal revenues as a percent of GDP Tax revenues as a percent of GDP Other revenues*** Grant revenues Commodity revenues Total taxes and contributions 35 37.7 35.7 30 31.1 40 30.3 35 24.8 25 22.3 30 18.8 20 17.0 16.9 16.3 25 14.1 12.6 12.4 12.3 12.0 15 20 10.3 10 15 10 5 5 0 0 2018 2019 2020 2021 2022 2023 2024 Viet Nam Regional Structural Aspirational Indonesia Singapore Cambodia Viet Nam Malaysia Philippines Türkiye Mexico Thailand India China South Africa South Korea Brazil Japan Poland Source: Fiscal Survey and MFMod. Source: MFMOd, Fiscal Survey, and World Bank Fiscal Notes: “Regional” peers include Cambodia, the Philippines, Datasets. Indonesia, and Thailand. “Structural” peers include India, Turkiye, Mexico, Poland, Brazil, and South Africa. “Aspirational” peers include China, South Korea, Japan, Malaysia, Singapore and Taiwan. Low VAT and personal income tax (PIT) revenue collections underpin tax revenue performance. VAT revenues declined from 4.9 to 4.1 percent of GDP between 2018 and 2024 (Figure 120), partly due to a reduction in the VAT standard rate from 10 to 8 percent since 2022. PITs have remained low, at 1.6 percent of GDP in 2024, below regional, structural, and aspirational peers (1.9, 3.6, and 3.4 percent of GDP, respectively). This is due to a high personal reduction of taxable income (11 million Vietnamese dong, equivalent to $ 475 per month) and complexity arising from the application of a different schedule based on the income source. Excise taxes also remain a relatively low source of revenue compared to peers, include regional MICs. Tax subsidies and base erosion led to a limited dynamism of tax collection, particularly for corporate income tax. Tax buoyancy measures the evolution of tax revenues compared to nominal GDP. A high buoyancy at or higher than 1 indicates a dynamic tax base that responds to economic growth. Viet Nam’s level of buoyancy is relatively low compared to peers (0.9 vs 1.1-1.5), in particular for corporate income tax (0.7) where tax incentives may reduce taxable profits (Figure 121). I 172 I Viet Nam Rising Figure 120. Tax revenues have Figure 121. Tax collection has been recently declined less dynamic than economic growth Tax revenues Percent of GDP Change in tax collection / Change in nominal GDP Other taxes** Taxes on international trade Viet Nam Regional Corporate income tax Structural Aspirational Personal income tax Excise taxes 2.5 20 General taxes on goods and services 2.0 15 1.5 10 1.0 5 0.5 0 0.0 Total CIT PIT GTGS 2018 2019 2020 2021 2022 2023 2024 Viet Nam Regional Structural Aspirational taxes Source: Fiscal Survey and MFMod. Source: World Bank staff’s estimates. Note: “Regional” peers include Cambodia, the Philippines, Note: “Regional” peers include Cambodia, the Philippines, Indonesia, and Thailand. “Structural” peers include India, Indonesia, and Thailand. “Structural” peers include Turkiye, Mexico, Poland, Brazil, and South Africa. “Aspirational” India, Turkiye, Mexico, Poland, Brazil, and South Africa. peers include China, South Korea, Japan, Malaysia, Singapore, “Aspirational” peers include China, South Korea, Japan, and Taiwan. Malaysia, Singapore, and Taiwan. Figure 122. Viet Nam has significant Property taxation is under-utilized. Property potential to increase property tax taxation is generally seen as an efficient tax collection when based on market value of property, as it encourages an efficient use of large tax Property Tax Revenues (Percent of GDP) base. Further, being based on a highly visible 2.0 1.9 asset, property tax is difficult to evade or avoid (especially compared to financial asset). It is 1.5 also an equitable tax borne by capital owners, as 1.18 well as providing important resources for local 1.0 0.8 government spending, which can encourage greater efficiency and accountability between 0.47 0.5 0.4 central and local governments. Property taxation 0.09 0.1 0.15 is under-utilized in Viet Nam, accounting for only 0.02 0.03 0.0 0.02 percent of GDP. It also generates much Japan Laos Viet Nam Cambodia Thailand Indonesia Philippines China Singapore South Korea lower revenues than in the case of the country’s peers, even MICs (Figure 122). Source: OECD (2023). Pathways to a High-Income Future I 173 I 10.2. Forward diagnostic 10.2.1. Capital market development Well-functioning capital markets are critical to mobilize resources in HICs, as part of inclusive, resilient, and modern financial markets. Healthy capital markets will be an essential element of Viet Nam’s high-income growth strategy. They help mobilize resources for long-term investments and allocate resources efficiently across industries, geographies, and moments in time. They will also help to diversify sources of finance, reducing concentrations of risks in the banking sector. Viet Nam’s equity market has strong potential to be a major source of financing for the private sector as the country develops further. To underscore its potential, in the past decade, market capitalization grew from 38 to 58 percent of GDP, even hitting a peak of 93 percent in 2021. This includes the two regulated exchanges—Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX)—with combined market capitalization of 4,740 trillion Vietnamese dong ($198 billion), accompanied by an unlisted public company market (UPCOM) of about 1,036 trillion Vietnamese dong ($43 billion). However, despite the large market capitalization, capital raising on the two main exchanges has been subdued and averaged 37 trillion ($1.5 billion) Vietnamese dong annually over the last five years, primarily through secondary offerings rather than Initial Public Offerings (IPOs).189 IPO activities were most significant in 2017–18 but have declined significantly since then; in 2023, only three IPOs took place, raising 173 billion Vietnamese dong ($7 million). Going forward, as Viet Nam aspires to become an HIC, it needs to attract significant international investment to drive its long-term growth. As the size of the domestic investor base remains small (as discussed in Section 2), the country requires additional support from international portfolio investors. Currently, Viet Nam is classified as a Frontier Market by MSCI and FTSE Russell—two of the world’s largest index providers by amounts of funds following their indices. An upgrade or reclassification to Emerging Market status would represent a significant boost for Viet Nam’s market, helping it to be recognized as investable in terms of access for foreign investors and in terms of equities of sufficient size and liquidity to be attractive. To achieve this upgrade, specific steps are required in a number of key areas, including removing foreign ownership limits (FOLs) and providing equal access to information. Viet Nam sets FOLs on its companies for reasons of national sovereignty, security, and public interest. As many FOLs are set between 30 and 50 percent, a foreign investor may be unable to find securities to buy without paying a large premium. Bank shares are particularly affected due to a relatively low FOL (30 percent), while they represent a large portion of the main stock indices (VN30), making them likely investment targets for large investors. Increasing the FOL or providing alternatives to shares that have already hit the FOL, such as through non-voting depository receipts, would help resolve this constraint. Further, to ensure a level playing field, foreign investors need access to market news and information at the same time as local investors. For the largest Equity fundraising in the UPCOM market was estimated at 32 trillion Vietnamese dong ($1.3 billion) per year on average in the past five 189 years. I 174 I Viet Nam Rising companies, this may mean mandatory English language requirements for disclosure and gradual implementation of International Financial Reporting Standards (IFRS). 10.2.2. Fiscal revenue mobilization Tax potential is significant. Using a frontier analysis, tax potential measures the optimal level of revenue collection that an economy can reach based on its GDP, openness, structure, and demographics.191 This measure captures all aspects of tax potential including both policy and compliance. Viet Nam’s tax potential is estimated to be significant, at 18.8 percent of GDP; i.e., 6.4 percent of GDP higher than its current collection. This is higher than in the case of most of its peers, meaning that there is significant additional revenue mobilization potential from improved policy design, administration efficiency, and increased compliance (Figure 123). Figure 123. Significant tax potential in Viet Nam Percent of GDP Tax revenues Tax gap 30 3.3 3.4 25 2.7 2.3 1.7 6.0 2.6 3.1 20 3.6 3.6 6.4 5.9 4.7 6.4 15 2.4 4.1 1.2 6.1 24.3 24.3 23.7 22.4 21.9 10 19.4 19.1 18.8 16.3 16.1 14.5 14.1 13.8 13.0 12.6 12.4 12.4 12.3 12.0 10.3 5 0 Indonesia Singapore Cambodia Viet Nam Malaysia China Philippines Mexico Thailand Türkiye India Japan South Korea Brazil Poland South Africa Viet Nam Regional Structural Aspirational Source: World Bank staff estimates. Note: Tax gap is measured based on estimates of tax efforts in McNabb et al. (2021) using a stochastic frontier empirical analysis. Relatively low tax productivity shows inefficiencies in tax collection. Tax productivity measures the amount of revenues collection as a percentage of GDP relative to the standard tax rate for each of the major tax instruments. A higher productivity indicates higher revenue collection at the same tax rate. In the case of Viet Nam, tax productivity is low relative compared to aspirational high-income peers, and McNabb et al. (UNU WIDER Paper 2021/170). 190 Pathways to a High-Income Future I 175 I in particular for the personal income tax where it falls behind regional, structural and aspirational peers (4.0 compared to 6.0, 12.3 and 9.0, respectively; Figure 124). While the headline PIT is higher on average in Viet Nam than among its regional peers, this is not the case for other (higher-income) peer countries (Figure 125). This indicates that low productivity is due to policy design (i.e., exemption thresholds, schedules, differences by income source, and exemptions), administration, and compliance. Figure 124. Tax productivity and Figure 125. Tax rates efficiency Tax productivity and efficiency (Percent) Selected tax rates (Percent) Viet Nam Regional Structural Aspirational Viet Nam Regional Structural Aspirational 45 90 40 80 35 70 30 60 50 25 40 20 30 15 20 10 10 5 0 0 PIT CIT VAT C- Corporate Personal Value-added productivity productivity efficiency income tax income tax tax (top bracket) Source: World Bank staff’s estimates. Source: KPMG, PwC, and OECD. 10.3. Reform agenda 10.3.1. Unlocking the potential of Viet Nam’s capital markets If Viet Nam is to unlock the potential of its capital markets, several specific hurdles need to be overcome to ensure healthy and sustainable growth. A fundamental issue in Viet Nam is the underdevelopment of the institutional investor base, including the underutilization of the Viet Nam Social Security agency (VSS), a potentially dominant force in driving capital market development. While it is larger than all other institutional investors combined, it is effectively mandated to only invest in government bonds, aside from depositing funds in banks. The absence of a large weight of institutional investors in non-government bond markets also allows individual investors to dominate, which can create volatility from herd behavior. This also contributes to the accumulation of risks within the corporate bond market and stunts the development of the equity market to play its financing role for the corporate sector. The almost exclusive placement of the VSS portfolio in government bonds not only limits investment returns, but it also creates distortions in financial markets and adversely impacts financial sector I 176 I Viet Nam Rising development. While currently low government bond yields can be a good near-term factor for the government as borrowing costs, it also means declining returns on VSS investments and restrict demand from other investors, constraining domestic borrowing capacity. Meanwhile, market inefficiencies caused by VSS investments include artificially low government bond yields at auction, irrelevance of government bond yields as price references for other financial instruments, and a narrow focus on long- tenor government bond issuances that potentially put the balance sheets of commercial banks at risk. Commercial banks requiring extra liquidity for safe instruments have little choice but to purchase these bonds, increasing the risk of maturity mismatches given their short-term source of funding (deposits). The low yields and longer average maturities of government bonds may be good for the government in the short run, but they may depress returns to VSS assets in the longer run and impede the growth of reserves needed to pay future pension liabilities. Along with the VSS, other institutional investors should add their weight to drive corporate sector development. Outside of VSS, only life insurers are relatively sizeable, but they are concentrated in government bonds and bank deposits. This means corporate securities markets are dominated by non-professional investors prone to herd behavior and vulnerable to mis-selling and abuse. This also means higher quality issuers across all economic sectors are not encouraged to come to market. In developed markets, pension funds and institutional investors are key purchasers of corporate equities, bonds, money market funds, and niche investment funds, as well as drivers of development in other instruments. To reverse this, action is needed in parallel with VSS diversification. Life insurers need to diversify into the corporate sector, for instance, while investment funds and private pension funds should be promoted, thereby allowing them to offer more niche services to individual investors. 10.3.2. Modern fiscal revenue mobilization Updating the fiscal policy framework can both increase revenue mobilization and further support growth. The authorities are encouraged to review their current macro-fiscal framework and targets to ensure that growth and fiscal objectives are aligned, as well as to guarantee that fiscal policy effectively supports GDP expansion. The ample fiscal space provides resources to implement automatic stabilizers and incentives to support the modernization of the economy (e.g., support to innovation, R&D, upskilling, and linkages between FDI and the domestic ecosystem). A multi-pronged approach to boost revenues is based on improving tax policy design, administration, and compliance. Updating the tax policy design should expand tax bases, remove distortions across instruments to reinforce the dynamism of revenue collection, and incorporate the digital economy into the tax base. Tax administration reforms should encourage further digitalization and improved enforcement strategies, including the implementation of a risk-based approach to audits and controls. Encouraging greater compliance should focus on simplicity, accountability of revenue collection authorities, and ease of payment for taxpayers, among other measures. Specific reforms to VAT, PIT, corporate income tax (CIT), and property taxes can also increase revenue collection. The low levels of revenue collected from the VAT suggests important potential Pathways to a High-Income Future I 177 I and calls for a review of exemptions and efforts to further include e-commerce as taxable items. A review of PIT can also increase revenue collection and equity, based on ensuring the absence of distortion across income sources as well as reviewing the schedular system and the allowance threshold. Low buoyancy of the CIT points to inefficiencies due to tax exemptions. As such, the authorities are encouraged to implement a systematic review of tax subsidies to rationalize them. Finally, the new Land Law provides improvements in land valuation and should be followed by further deployment of property taxation. Table 11. Resource mobilization reform agenda Policy package Key recommendations 1. Modernize l Develop the institutional investor base including mutual funds, pension funds, and insurance capital l Diversify the investment portfolio placement of the VSS (currently almost exclusively placed markets on government bonds) l Support diversification and professionalization of investor base for corporate securities 2. Modernize l Update the fiscal policy framework towards greater domestic revenue mobilization, domestic particularly from taxes (e.g., VAT, PIT, CIT) revenue l Improve tax policy design, administration, and compliance by using digitalization, further mobilization developing risk-based approaches to audits and controls, while also reviewing tax simplification and administration for greater compliance l Modernize major tax instruments, starting with VAT exemptions, PIT, CIT, and property taxes I 178 I Viet Nam Rising PART 4 INSTITUTIONS The fourth section of this report focuses on the critical role of institutions in achieving Viet Nam’s ambitious high-income country (HIC) goals by 2045. While Viet Nam has made significant economic progress, persistent institutional constraints hinder its ability to fully realize its growth potential. This section examines the need for strengthening market-regulating and market-complementing institutions, improving the efficiency and impartiality of public administration, and fostering a more motivated and accountable civil service. Furthermore, ensuring equitable distribution of the benefits of economic growth is paramount; this section of the report explores policies to address inequalities that could otherwise undermine the sustainability and social acceptance of Viet Nam’s economic transformation. Pathways to a High-Income Future I 179 I CHAPTER 11 INSTITUTIONS As Viet Nam climbed the income ladder over the last four decades, its institutions have been gradually evolving. Viet Nam’s economic and social achievements have included step-by-step improvements to it institutions – the rules, both formal and informal, that govern economic behavior. The decades since Đổi Mới have seen a gradual expansion of access to information, citizen engagement, property rights, decentralization, institutions for public sector management, and mechanisms for accountability, all of which contributed to its progress. The economy has moved to rely more on the private sector and on market-oriented production and this calls for a shift in the role of the state from one of directing economic activity to one of setting the rules and allowing the market to drive outcomes (Figure 126). Figure 126. The increasing importance (and acceptance) of the private sector Private ownership should be increased (right axis) State ownership should be increased (right axis) Revenue from non state sector Revenue from state owned enterprises 25% 50% 45% 20% 40% 35% 15% 30% 25% 10% 20% 15% 5% 10% 5% 0% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: World Bank staff calculation based on data from the General Statistics Office of Viet Nam (for revenue) and from the World Values Survey (for assessments of private and state ownership). The current report is being prepared at a time of great institutional change. The government is in the process of consolidating provinces, ministries, and agencies, as well as streamlining the civil service. Although ministerial reorganizations are common in some countries, they are rare for Viet Nam. The need for institutional change is clearly recognized as a priority to keep supporting the country’s development, as evidenced through official strategy documents. I 180 I Viet Nam Rising The country’s emphasis on institutional change is well placed, since many of Viet Nam’s most pressing problems are institutional in nature. Despite authorities’ efforts to improve the business environment, firms in Viet Nam still complain about cumbersome administrative procedures. Public investment processes are less chaotic than in the past but remain slow and rigid and do not respond well to adjustments. Decentralization has allowed provinces more control over their spending but has also led to wasteful competition between provinces, underproviding some interprovincial infrastructure and overproviding other infrastructure, such as large airports and ports. Laudable efforts to improve the lawmaking process have brought some positive results, but the process can still be slow and implementation remains a challenge. Efforts to reduce corruption, which is long known to be a problem, have taken hold and shifted perceptions. However, they have also increased risk aversion among many decision-makers, leading to inefficiencies and delays. Viet Nam has its own historical and cultural context, and this shapes the form of the country’s institutions. The impact on economic growth, however, depends on the functions of institutions, not their forms. The chapter uses a framework for institutions that centers on their functions as they relate to market development: market-creating institutions, such as property rights and contract enforcement; market-stabilizing institutions that ensure macroeconomic stability; market-regulating institutions for regulating firms to address externalities; market-complementing institutions for providing public goods; and market-legitimizing institutions, such as the social insurance system for ensuring that people are not left behind as markets become more dominant. Underpinning all of these are the institutions for a capable and accountable state. While all institutions can be important for development outcomes, this chapter examines institutions to identify those that are constraining growth and therefore deserve a deeper look. The chapter first looks comprehensively at institutions according to the framework outlined above and concludes that deeper looks are warranted for market-regulating institutions, market- complementing institutions, and the institutions for a capable and accountable state. In its examination of institutions, this chapter emphasizes the need to go beyond legal changes and to also develop capacities, organizational structures, and behaviors in order to bring institutional changes to life. 11.1. Backward diagnostic 11.1.1. Market-complementing institutions: Public investment Viet Nam’s public investment management system has delivered impressive results but currently is mired in a complex web of approvals, overlapping responsibilities, and legal disconnects. The legal framework for public investment is guided by eight different laws, creating a sometimes confusing web of approvals (Table 12). The laws assign multiple central and provincial roles and powers. In some cases, these cover the Prime Minister, National Assembly, ministries, and provincial People’s Committees. When multiple provinces are involved, the picture becomes even more fragmented and Pathways to a High-Income Future I 181 I confused. Capacities and roles are weak with respect to: investment proposals; alignment of public investments and budgets; appraisal, including coordination and contestability; adjustment process; and monitoring and evaluation (with lack of a central portfolio review). Table 2. Legal framework for public investment management Strategic Ex-ante guidance and evaluation & Selection Implemen- Ex preliminary indpendent & budget- tation and Opera- post screening review ing adjustment tions review Public Investment Law 4 4 4 4 4 State Budget Law 4 4 Planning Law 4 Environmental Protection Law 4 Construction Law 4 4 Land Law 4 4 Law on Management and Use of Public Assets 4 Public Procurement Law 4 Source: World Bank staff. Overcoming Hurdles for Good Public Investment Management in Viet Nam. (Nguyen, Groom, Kim, Le, & Vu, 2024). Time-overruns affect a majority of projects partly due to cumbersome adjustment processes. All sectors are affected, including 80 percent or more of those in sports, health, science and technology, education, IT, water and sanitation, and agriculture. The weighted average delay in delivery ranges from 30 to 50 months for all sectors, increasing to nearly 90 months for sports (Figure 127). I 182 I Viet Nam Rising Figure 127. Average months from original PFS to latest FS for projects Unweighted average months from original PFS to latest FS for projects 100 Weighted average months from orginial PFS to latest FS for projects Months from original PFS to latest FS for projects 90 80 70 60 50 40 30 20 10 0 t re y . n . th n ts t ch ch or en pl io io or tu al sp up Te Te at at m He ul Sp uc rm an on s ric n d er io an Ed Tr vir fo Ag at at In En ce W rm d en an fo i Sc In re lt u Cu Source: World Bank, 2024. Better Investment Outcomes in Viet Nam through Increased Public Investment Management Efficiency. (Nguyen, Groom, Kim, Le, & Vu, 2024). The recent revisions of the Public Investment Law brought some important improvements. Most notably, it institutionalized some special mechanisms that were previously piloted, such as allowing multi-jurisdiction projects to submit a single project investment proposal and the appointment of a single agency to act as project owner in some cases. In addition, certain powers and responsibilities became delegated, reducing the need to go to the National Assembly or to the Prime Minister, as was often the case previously. These changes address some of the most obvious and immediate needs in the public investment management system. The challenges facing public investment go deeper than just those addressed under the revised Public Investment Law. The revisions leave in place a fragmented legal basis for public investment management, weak central coordination, and ineffective independent review and approval procedures for public investment policies and feasibility studies, among others. In addition, fundamental problems of capacity—for project appraisal, for example—will take more than legislative changes to bring real effect. 11.1.2. Market-regulating institutions: Legal and regulatory framework Firms need a predictable legal and regulatory environment to grow; Viet Nam performs poorly relative to peers in terms of consistently applying regulations. In some ways, the legal and regulatory system is relatively stable in Viet Nam, but laws and regulations are inconsistently applied, reflecting Pathways to a High-Income Future I 183 I both the quality of regulations and implementation arrangements. Firms and experts both rate Viet Nam before many other large MICs in terms of consistently applying regulations (Figure 128). Previous reforms have reduced costs and uncertainty for firms but also led to an increase in new procedures. Administrative procedures have provided the central focus of multiple government-led efforts at streamlining, and these changes have successfully helped to reduce transactions costs and uncertainty for firms. Following each major effort, however, new procedures arise and these create new burdens on firms (Figure 129). Even after three waves of administrative procedures reforms, the burden on firms is as high as it was 15 years ago (Figure 130). Figure 128. Laws and Figure 129. Admin Figure 130. Previous regulations are applied procedures and changes reforms have reduced costs less consistently in Viet in regulations are major and uncertainty for firms Nam than in peers challenges to running a but also led to an increase business in new procedures LHS: Regulations are consistently Firms saying administrative and Firms spending 10 percent of applied (0=never, 10=always). policies changes are a major their time understanding and RHS: Predictability of challenge when running a business complying with regulations implementation of laws Firm's assessments that regulations are Dealing with administrative procedures consistently applied Dealing with changes in relevant policies Experts' assessements of the predictability and regulations of the implementation of laws 25 40% 23 35% 10 0.6 21 30% 0.5 19 8 25% Percent 17 0.4 6 15 20% 0.3 13 15% 4 11 0.2 10% Project 9 Resolution Resolution 2 0.1 7 5% 30 19 68 0 0.0 5 0% India Indonesia Brazil Malaysia Thailand China Nigeria Turkey 2017 Mexico Viet Nam 2018 2019 2020 2021 2022 2023 2007 2009 2011 2013 2015 2017 2019 2021 2023 Source: Global Investment Source: PCI, various years. See Source: PCI, various years. See Malesky, Competitiveness Survey of Investors Malesky, Thach, Trong, Ngoc, and Thach, Trong, Ngoc, and Nguyen (2022). (2019); Institute for Democracy and Nguyen (2022). Notes: The chart shows the percentage Electoral Assistance (2023). Notes: Percentage of firms in the of firms in the median province that said median province. they (managers) spent more than 10 percent of their time understanding and complying with regulations. I 184 I Viet Nam Rising The decade-old “Law on Laws” was a critical reform. Past institutional reforms—notably the introduction and periodic revision of the Law on the Promulgation of Legal Normative Documents (the “Law on Laws”)—have been instrumental in improving the lawmaking system. They have succeeded in bringing greater order to the process as well as improving the approach to upstream analysis and deliberation. The requirement to conduct regulatory impact assessments (now called “policy impact assessments”) helped bring some ex-ante consideration to whether regulations were needed and cost-effective, and whether they would unduly burden firms and citizens compared to alternatives. The Law on Laws has faced challenges in implementation. While the requirements under the law for upstream analysis of a law’s (or regulation’s) impact are laudable, the implementation of economic analysis and gender analysis has suffered from lack of capacity and guidelines. For instance, the January 2025 revisions to the Law streamline procedures and shorten the lead time for the preparation of laws from 22 to 12 months. This marks a significant achievement, yet the total duration remains long. Continuing to build capacity to allow for both deliberation and speed remains important. The National Assembly needs greater independence and professional support. As the represent- ative of the people and an organization with important roles for lawmaking and for oversight, the National Assembly has very little independence. This is because nearly all Deputies are Party mem- bers. Moreover, many are part-time Deputies whose other jobs are in public administration. This limits their ability to play an oversight role. Moving to a system of full-time Deputies and reserving more candidate seats for independent candidates can bring professionalism and a more critical eye to the work of the National Assembly. In addition, the recent changes to the Law on Laws gives more power to the government in the lawmaking process—changes which may speed processes along, yet which may also bring into question the ability of the National Assembly to play a mean- ingful role in the process. 11.1.3. Institutions for a capable and accountable state: Central and local governance The current wave of provincial mergers should help address some inefficiencies in the existing system. With 63 provinces and as of the start of 2025, Viet Nam’s provinces were small when compared to international standards. That said, the country’s subnational authorities collectively represent a politically powerful group. Local governments collectively work to increase their budget envelopes, especially for investment. However, as an individual level, they find themselves in competition with one another. While this competition has brought some important results, it has also generated some inefficiencies as there are few institutions supporting cooperation. Internal competition leads to dispersed development, with a proliferation of some forms of investment and a paucity of others. The result is overinvestment in big province-specific infrastructure projects, such as airports and seaports, IPs, EZs, and tourism areas, even where there is insufficient demand to sustain them. The efforts to consolidate provinces and cities will help address some of the inefficiencies as the new, larger, provinces will have more territory on which to plan infrastructure, obviating the need for cooperation for some infrastructure. Pathways to a High-Income Future I 185 I Subnational governments have been delegated considerable expenditure and investment responsibility, but they have little revenue autonomy and there are imbalances in the fiscal transfer system. Viet Nam has largely delegated spending responsibility for public investment and for provision of public services to the provinces. As a unitary state, however, the basic structure and policies are set nationally, not locally. And although spending authority has been significantly decentralized to the provinces, provinces have little space for revenue autonomy or for adjusting the mix of services to local needs. Moreover, the balancing transfer system favors poorer provinces, as it focuses primarily on equalization. As such, rapidly growing provinces tend to be starved of necessary resources. Meanwhile, the central government lacks adequate resources for multiprovince infrastructure and conditional transfers need better incentives. The large size of the provincial transfers leaves the central government starved of resources for backbone/mega infrastructure, while conditional transfers are dispersed and not results-oriented. In addition, dual subordination —whereby oversight is provided by both province and the central government—slows decision-making, especially when multiple ministries and provinces are involved. Figure 131. Fiscal decentralization is Figure 132. At the same time, the high while subnational autonomy is high level of fiscal decentralization lower means inadequate budget for national investment SNG revenue as a share of general government revenue versus self-rule index, all countries Provincial and central share of total investment Central share in total investment Provincial share in total investment 30 90% IND BIH DEU 80% FRA ITAPAK USA ESP BEL 70% CAN Self Rule Index 20 BGD PER IDN 60% JPN CHE BRAMEX 50% MYS COL AUT NPLAUSARG CHN CZE NOR SWE 40% 10 IRL NZL LKA PHL POL KOR GRC URY ECU PRT ROU BOL NLD HRV 30% PRY TURHUN SVK MMR GBR VNM CHL SRB UKR FIN 20% VEN PAN KHM DNK MKD NIC SVN MNG LVA 10% DOM SLVTHA ISR ALB BGR LTU CYP 0 HTI HND CRI JAM MLT GTM EST ISL BTN LUX MNE 0% 0 20 40 60 80 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 SNG Expenditure as a share of General Government Expenditure Source: Measures of fiscal decentralization are drawn Source: MoF (mof.gov.vn) and World Bank staff estimates. from the OECD-UCLG World Observatory on Subnational Government Finance and Investment; measures of subnational government power and authority are drawn from the Regional Authority Index. Note: The Self-rule index represents the authority exercised by a regional government over those who live in the region. I 186 I Viet Nam Rising 11.1.4. Institutions for a capable and accountable state: Civil service Viet Nam’s public sector is large and expensive. When compared to most HICs and many MICs, employment rates in Viet Nam’s public sector are large. The wage bill is also relatively large as a share of public expenditure (Figure 133).191 The size of the public sector workforce is determined, in part, by the scope of state activities; in Viet Nam, the shift in the role of the state suggests the need to gradually move toward a smaller but more highly motivated civil service. This is exactly the direction being taken in the current wave of institutional reforms, which include a significant reduction of ministries and agencies and a 20-percent reduction of civil servants. There is a significant pay gap with the private sector, undermining civil servant motivation. Motivation stems from many sources, but among them is remuneration. For many years, remuneration of public servants generally kept pace with overall economic growth. This kept the public sector competitive with the private sector, until the wage freezes associated with COVID-19. The result today is a significant gap between the pay of those working in the public administration and those in the private sector, after accounting for both individual and job characteristics (Figure 134). However, an increase in public sector salaries in 2024 will help bridge the gap. Motivation is also driven by, and reflected in, the environment of integrity with which civil servants carry out their duties. Unofficial payments have declined in Viet Nam, but they are still significant.192 The crackdown on corruption has been welcomed by Vietnamese citizens and has shifted expectations about what is accepted from public officials, but it has also shown the need to improve complementary institutions. Public officials have been very risk-averse and decision-making has slowed as an unclear legal process can leave officials vulnerable even in the case of honest mistakes. Corruption had been normalized for many years and was not seriously tackled at high levels until recently. The anticorruption campaign primarily focused on deterrence through investigations and punishment, important elements of all successful anticorruption campaigns. In an environment of ambiguous laws and little confidence in the institutions of due process, however, the changes have led many officials to be cautious about taking responsibility for decisions.193 191 For example, at 24 percent of total paid employment, the public sector is larger than the Philippines (14 percent) and Brazil (18 percent). Even though it is a similar size to South Africa (23 percent) and Indonesia (25 percent), the wage bill represents a much larger share of public expenditure (39 percent) than in these two countries (32 percent and 30 percent, respectively). 192 World Bank (2025b). 193 World Bank (2025b). Pathways to a High-Income Future I 187 I Figure 133. Viet Nam has a larger Figure 134. State workers generally public sector than other middle and earn less than private sector high-income countries counterparts Public sector employment as a share of formal Estimated income for base case by type of employer employment and wage bill as a share of public expenditure Public sector employment as a share of formal employment 0 2,500 5,000 7,500 10,000 Wage bill as a percent of public expenditure International organization (nonprofits) 60 FDI State-own enterprise 50 Private enterprise Non-state specialized agency 40 Household business (except agricultural) 30 State specialized agency Legislative, executive, judicial agency 20 Own-account worker Cooperative 10 Social organization (party, youth union…) Association (garment and 0 textile, footwear) LIC LMIC Viet Nam UMIC HIC Source: World Bank Worldwide Bureaucracy Indicators. Latest Source: World Bank (2025b) based on the Viet Nam Labor year available. Force Survey 2022. Notes: Restricted to those who are full-time “employees”. Other characteristics include age, gender, marital status, education/certification, type of position, region, and urban/ rural. Chart depicts the predicted log income, converted to income in thousands of Vietnamese dong. 11.2. Forward diagnostic 11.2.1. Market-complementing institutions: Public investment While the revisions to the Public Investment Law are laudable, more is needed to improve public investment management and public asset management. Revisions to the State Budget Law are needed to further align planning and budgeting, and changes are needed to reduce overlapping authorities that cause delays. Efforts to improve systems and capacity for project appraisal, asset management, public procurement, and similar activities are all needed. Addressing these challenges will be essential for Viet Nam to reach its high-income aspirations in 20 years. Countries that passed through UMIC status quickly managed to increase their spending on public investment, even as a share of their rapidly growing levels of production. More tellingly, however, they managed to also increase the quality of their public investment (Figure 135). Viet Nam I 188 I Viet Nam Rising has also been improving on both dimensions over the past ten years but will need to further increase the volume of public investment as a share of GDP while continuing to improve the quality of public investment to support firm growth and reach HIC status. Figure 135. Viet Nam has been improving on both quantity and quality of public investment but need to maintain this progress to reach HIC Trend in quality of roads versus trend in public capital stock as a share of GDP, 2006-2019 3.000 Trend in Quality of Roads 2006-2019 POL 2.500 2.000 1.500 BGR 1.000 TUR CZE VNM MEX SVK CHN EST 0.500 HRV CRI MUS LVA 0.000 ZAF MYS -0.500 LTU CHL BWA -1.000 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 Trend in Public Capital Stock (as a share of GDP) 2006-2019 30+ years as UMIC 25 years or less as UMIC Source: World Economic Forum Global Competitiveness Yearbook, various years; IMF Investment and Capital Stock Dataset. Notes: Countries are grouped by the time as UMIC before becoming HIC. For countries that are still UMIC, the projected number of years was used. Those in the 30+ years group are those projected to take more than 30 years as UMIC before becoming HIC. Viet Nam is in neither group but is shown for comparison. For both axes, the trend is the simple slope coefficient of a regression against time. 11.2.2. Market-regulating institutions: Legal and regulatory framework High-income countries improve the implementation of laws and regulatory enforcement, while limiting regulation to areas where it is truly needed and can be executed with as little intrusion as possible. Viet Nam needs to shift the approach to regulation to one of prohibiting truly negative behavior, well-founded on evidence, rather than the current practice of ex-ante controls and administrative procedures, as well as delegating more authority for lawmaking to the government. The culture of prohibiting what is not understood is unconducive to innovation and growth, a point that has been emphasized by Viet Nam’s leadership. A more streamlined approach to regulation can also help strengthen enforcement. Indeed, countries that completed the high-income transition more quickly tended to be those that improved the implementation of laws (Figure 136). Pathways to a High-Income Future I 189 I Figure 136. Countries that advanced to high-income status faster improved implementation of laws Assessment of predictability of implementation of laws over time, HIC transitional countries and UMICs 0.9 EST CHL Implementation of Laws (5 year moving average) 0.8 LVA CZE POL Assessment of Predictability of 0.7 SVK LTU 0.6 HRV BUL 0.5 0.4 VNM 0.3 0.2 0.1 Year 35 Year 36 Year 34 Year 31 Year 32 Year 33 Year 29 Year 30 Year 28 Year 25 Year 26 Year 27 Year 24 Year 22 Year 23 Year 21 Year 18 Year 19 Year 20 Year 16 Year 17 Year 14 Year 15 Year 12 Year 13 Year 10 Year 11 Year 9 Year 8 Year 7 Year 6 Year 5 Year 4 Year 3 Year 2 Year 1 Source: World Bank staff calculation based on for Democracy and Electoral Assistance, 2023; World Bank, 2024. Notes: Solid line are countries which achieved high-income status in around 20 years. Dotted lines are those which either are still UMICS or took 30+ years to reach HIC status. Viet Nam’s position is shown for illustration. Figure 137. China significantly increased regulatory enforcement during its transition through UMIC status Regulatory enforcement, China and Viet Nam 1.0 China Viet Nam 0.6 0.5 Percentile of the Difference Regulatory Enforcement Between UMIC and HIC 0.5 0.5 0.4 0.0 0.4 -0.5 0.3 2000 2002 2000 2004 2002 2006 2004 2008 2006 2010 2008 2012 2010 2014 2012 2016 2014 2018 2016 2020 2018 2022 2020 2022 Source: World Bank (2025b) from staff calculations based on World Bank Income Classifications, the World Development Indicators, and the World Justice Project. Notes: The top chart shows the percentile difference between UMIC and HIC thresholds for China. The light shaded area represents the period when China was between 0 and 50 percent of the difference between the thresholds. The darker shaded area shows the period when China was (and is) between 50 and 100 percent of the difference in thresholds. I 190 I Viet Nam Rising The high-income transition includes an improvement in regulatory enforcement. Although China remains a UMIC, for example, it is remarkable for the speed with which it is passing through on the way to HIC status. Among the institutional changes that have accompanied and facilitated that growth is an improvement in its regulatory enforcement (Figure 137). In its case, regulatory enforcement included not only capacity for enforcement, per se, but also improved avenues for challenging administrative decisions. Such ability to challenge decisions contributes to a feedback cycle whereby weaknesses in the quality of regulations are identified and can be corrected. In HICs, legislatures are resourced and empowered for greater independence and oversight. The longstanding challenges faced by Viet Nam’s National Assembly in both its lawmaking and oversight roles have not improved in recent years as the number of full-time deputies and independent deputies has not been increasing. A high-income Viet Nam will be one with institutions that have stronger checks and balances. 11.2.3. Institutions for a capable and accountable state: Central and local governance A high-income Viet Nam will have a more efficient and more impartial public administration. In fact, one of the factors associated with transitioning more quickly to high-income status is improving the rigor and impartiality of public administrations (Figure 138). Countries that did not improve on these dimensions, or even got worse, languished for longer in the “middle-income trap.” Figure 138. Countries that advanced to high-income status faster built more impartial public administrations Countries which transitioned from UMIC to HIC Countries still UMIC Rigorous and Impartial Administration (annual change in assessment) 0.015 EST 0.010 SVK HRV LTU POL 0.005 DOM FJI CZE MDV Improving assessment LVA MYS of rigorous and CHN CRI KAZ impartial administration 0.000 ECU CHL RUS PER BIH BWA Worsening assessment of rigorous and impartial administration BGR THA MKD - 0.005 - 0.010 MUS - 0.015 0 10 20 30 40 50 60 70 Years as a UMIC (Extrapolated for those still UMIC) Sources: Author’s calculations based on Institute for Democracy and Electoral Assistance, 2023; World Bank, 2024e. Pathways to a High-Income Future I 191 I Rationalization of ministries can help strengthen central governance. Prior to the recently announced institutional reforms, the central government system of ministries and agencies had been stable for decades. Efforts to merge ministries, including the merger of the Ministry of Planning and Investment (MPI) and the Ministry of Finance (MoF), can help remove duplication and strengthen alignment in policies and processes. The challenge of synchronizing laws for better public investment management has been generated in part by the fact that the Law on Public Investment and the State Budget Law are the purview of these two distinct ministries, and each is revised according to its own legislative schedule. The current wave of institutional reform presents the opportunity to optimize the division of powers and incentives for cooperation. These reforms promise to: improve incentives in the mechanisms for interprovincial investments; enhance revenue autonomy; adjust intergovernmental transfers to ensure that rapidly-growing provinces have the resources they need to meet that demand; and reduce the procedural formalism and ambiguity that contributes to delays in carrying out public investment projects. Institutions for a capable and accountable state: Motivated and 11.2.4. accountable civil service If done efficiently and fairly, improving accountability in the civil service and public service would both help motivation and support state capability. It is notable that South Korea, one country that transited UMIC status very quickly, saw major institutional changes aimed at putting checks on the executive at exactly the time of its most rapid growth; Viet Nam has remained unchanged on this dimension for decades (Figure 139). Moreover, assessments of Viet Nam’s systems of independent due process put the country short of both UMICs and HICs (Figure 140). Improving these systems will be essential to move to a future in which public employees are willing to carry out their jobs efficiently and with less risk aversion, alleviating the bureaucratic paralysis that has limited their effectiveness in recent years. I 192 I Viet Nam Rising Figure 139. South Korea placed Figure 140. Viet Nam’s due process greater checks on the executive during and independence scores fall short of its period of rapid UMIC growth UMIC and HIC averages Public sector employment as a share of formal Estimated income for base case employment and wage bill as a share of public by type of employer expenditure Korea Viet Nam Due process of the law and rights of the accused Criminal justice system is free of improper 7 govement influence Constraints on the Executive 6 0.8 5 0.6 4 3 0.4 2 0.2 1 0 0.0 Low- Lower Viet Nam Upper High- 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 income middle- middle- income income income Source: World Bank staff calculations based on World Bank Source: World Justice Project. Income Classifications, WDI, and Polity V Notes: The chart on the top left shows the percentile difference between UMIC and HIC thresholds for Korea. Since the income categories did not come into existence until 1987, the thresholds were extrapolated backward based on GNI per capita. The light shaded area represents the period when Korea was between 0 and 50 percent of the difference between the thresholds. The darker shaded area shows the surge from 50 to 100 percent of the difference in thresholds. 11.3. Reform agenda Viet Nam’s high-income ambitions combined with evident institutional challenges call for a new Đổi Mới, an institutional “Big Push” that lays the foundations for a role of the state as setting the rules and providing public goods that will allow firms to grow. The momentum for such a Big Push has already been established—the wave of institutional reform underway in Viet Nam has no precedent in recent decades. Many of the changes are already rationalizing public administration, strengthening motivation of civil servants, and removing bottlenecks for progress. Viet Nam’s high-income aspirations call for attention to high-level principles as well as specific technical improvements. High-level principles have been identified to help providing consistent guidance for institutional reforms: Pathways to a High-Income Future I 193 I - Diverse viewpoints help avoid missteps, while engaging with those to be regulated assists with building buy-in and, ultimately, compliance. - For institutional reforms to work, there needs to be more attention to capacity and socialization of ideas. New capacities are required, and these need to be financed and fostered, steps often omitted from legislative reforms. Further, new ideas need to be thoroughly socialized in order to lead to real behavioral change. - Accountability demands clear lines of authority and independence. Multiple lines of responsibility can dilute accountability and create confusion. Viet Nam’s hierarchical and bureaucratic culture relies on internal accountability mechanisms. External mechanisms for accountability— e.g., transparency, and oversight by independent governmental and non-governmental organizations—help address inefficiencies and corruption without leading to paralysis. - Competition is good but sometimes cooperation is better. Institutions for cooperation (especially between provinces) need to be facilitated and encouraged, but allowed to arise organically, rather than designed from above. Technical recommendations have been organized around four policy packages and the need to support policy changes, organizational changes and behavioral shifts. These institutional reform priorities are summarized in Table 3. For more details on these recommendations, please see the background report “Breaking Through: Institutions for a High-Income Viet Nam”. The momentum for institutional reform is an opportunity to prepare the ground for a more complex economy, to foster resilience to challenges that lie ahead; today’s reforms represent a once-in-a- generation chance to refine the role of the state and prepare for prosperity for the Vietnamese people. Table 13. Institutional Reform Priorities Key recommendations Policy package Policy and/or Legal Changes Capacity/Organizational Shifting Behavior/Norms Changes 1. Market- l Consolidate the legal basis Reinforce the portfolio mon- l Ensure adequate resourcing l Complementing for the core public informa- itoring and management of human and financial cost Institutions: tion management (PIM) functions and equip the re- estimation of land compen- Public system; mandate high-lev- sponsible bodies with the sation (LFDCs) and harmo- Investment el coordination to a single tools and authority to collect nize the national compen- agency. accurate and timely portfo- sation methodology with lio data. international practice. l Detailed methodological Ensure integration of the l Ensure that the cost norm l guidelines for preliminary National Electronic Pro- is at market price to derive a screening, ex-ante evalu- curement System (VNEPS) reasonable cost estimate of ation, and ex post review. with the Treasury and the project. Strengthen coordination Budget Management Infor- by a single body. mation System (TABMIS). I 194 I Viet Nam Rising Key recommendations Policy package Policy and/or Legal Changes Capacity/Organizational Shifting Behavior/Norms Changes 1. Market- l Make explicit allowance for Introduce a comprehensive l Complementing the rejection of a project capacity building strategy Institutions: by appraisal committee to foster a more profession- Public based on negative pre-fea- al procurement function Investment sibility/feasibility study within government. findings l Harmonize the Public In- Ensure adequate resourc- l vestment Law and the ing of human and financial State Budget Law to en- cost estimation of land sure efficient annual budg- compensation. eting of both capital and recurrent expenditure with- in a rolling medium-term framework 2. Market- l Revise the Investment Law Develop a Regulatory/Pol- l Make Regulatory and Pol- l Regulating to clarify and reduce the icy Impact Assessment icy Impact Assessment Institutions: number of business ac- expert team in the Ministry methodology a compulso- Lawmaking tivities subject to ex-ante of Justice (MOJ) and the ry course for civil servants and Regulatory approvals (the so-called Office of the Government and a pre-condition for pro- System “business conditions” in (OOG) to support impact motion. Viet Nam) and to specify assessment capacity in quality control process for ministries, and to provide ex-ante approvals with a independent assessments risk-based approach. to the government leaders. l Revise Decree 63 on ad- Establish a task team at the l Regularly estimate and l ministrative procedures to center of the government publish compliance costs require data and service to review existing business by sectors and/or indus- integration, plus a roadm- regulations for reducing tries to enhance transpar- ap for 100% online admin- unnecessary barriers to ency and accountability. istrative services. investment and innovation and to introduce smarter regulation based on latest technologies. l Review and revise all de- Support greater capacity in l crees on investment con- the National Assembly for ditions for business activ- both lawmaking functions ities subject to investment and oversight. conditions specified in the Investment Law with risk- based methodology. Pathways to a High-Income Future I 195 I Key recommendations Policy package Policy and/or Legal Changes Capacity/Organizational Shifting Behavior/Norms Changes 3. Institutions l Conduct a functional re- Accelerate the identification l lIdentify good practic- for State view of ministries and of job descriptions, compe- es with the system of Capability and agencies slated for merger, tencies, and requirements codes of conduct and Accountability: particularly in the areas of through the civil service. prevention of conflicts Rationalize integrative / multi-purpose of interest. Government Conduct a competency needs l infrastructure develop- assessment for staff at the or- Provide space and clar- Structure & l ment (such as transport, ganizational and department ity for civil society and Strengthen Motivation of construction, and dykes) level, forecasting the needs for media. Civil Servants and in public finance and staff in the medium term. investment management. Address l implementation Socialize sustainability l weaknesses in the system for reporting. declaring income and assets. 4. Institutions for l Amend the State Budget Adjust the tax sharing formula l lIncentivize green and State Capability Law to remove impedi- (particularly for VAT, CIT, and climate actions across and Account- ments and strengthen in- PIT) and budget allocation for- levels of government, ability: Ration- centives for vertical and mula to align with the actual such as through eco- alize Public horizontal investment co- spatial footprint of economic logical fiscal transfers Administration ordination between central activities and migration flows. (EFT) and payments and Intergov- and local budgets. for ecological services ernmental Fiscal Arrange- l Institutionalize “public in- Institutionalize a co-financing l (PES). ments vestment program” mo- mechanism—based on na- dality as stipulated in the tional and subnational fiscal Public Investment Law and capacity assessments and prioritize the 2026-2030 a well-defined formula—that targeted transfers budget integrates external and do- to promote critical agen- mestic financing into a holistic das, such as the develop- framework. ment of dynamic zones, national water security, or blue economy / coastal re- silience. l Amend the State Budget lEnable subnational govern- Law to reconsider reve- ments, particularly metropol- nue assignment, including itan cities, to adjust intra-city for own-sourced revenue finance structure to align with (such as land-related rev- the emerging metropolitan ad- enue, natural resource ministrative structure. tax, new property tax, and surtaxes on PIT and CIT), and risk-based borrowing thresholds for subnational governments. lLonger term: Consider amending the Constitution and State Budget Law to remove the nested budget system while maintaining the unitary framework. I 196 I Viet Nam Rising PART 5 EQUITY The concluding section of this report focuses on policies that can help the transition to high-income be broadly inclusive and equitable. Ensuring equitable distribution of the benefits of economic growth is paramount; this section of the report explores policies to address inequalities that could otherwise undermine the sustainability and social acceptance of Viet Nam’s economic transformation. Pathways to a High-Income Future I 197 I CHAPTER 12 EQUITY Even at Viet Nam’s relatively low level of income inequality, the majority of the population will not be high-income in 2045, while the major shocks affecting the country could wide disparities. HIC status can be achieved if Viet Nam accelerates and sustains growth over the next two decades. However, as Chapter 1 notes, if this growth is distributed at Viet Nam’s current levels of inequality, 62 percent of the population will themselves not have attained HIC levels of per capita income. This rate – nearly two-thirds of the population – will be even higher if inequality increases over the next two decades, as is possible or even likely in the face of technology and climate shocks that could disproportionately affect poorer households. Not all inequality is bad, particularly when it arises from hard work, ability and entrepreneurship. Greater rewards can provide incentives for people to study and work hard, and to take risks. This can drive innovation and growth. In fact, rising income inequality is broadly seen as acceptable in Viet Nam when it is associated with hard work and legitimate income generating activities;194 in 2014, 60 percent of those surveyed said that talent or hard work was the main reason some people were richer.195 Similar sentiments were found in a qualitative study in 2012. “Disparity and competition is natural in a market-oriented economy. If you are talented, you can be rich”, agreed one group.196 Inequality can be perceived as unfair, however, when it is due to factors beyond the control of individuals. Some income inequality can arise from hard work, risk and ability. However, some can be due to factors outside an individual’s control, such as where you are born, how educated or wealthy your parents are, and what access to public services you had access to when you were growing up. When economic inequality arises because of such ‘inequality of opportunity’ it can be considered unfair. Such sentiments have been found to hold broadly in Viet Nam as well.197 In addition, when income inequality arises through illegitimate means such as the unfair use of power and connection, corruption and nepotism, it also arouses anger.198 “There are types of illegitimate richness, and we do not accept these types, we see then as being an injustice. For example, some traders sell seedlings to us at extremely high prices. And corruption happens at all levels,” says a youth group.199 194 Oxfam. 2013. Increasing Inequality: What Do People Think? Policy Brief. 195 World Bank. 2014. Taking Stock: An Update on Viet Nam’s Recent Economic Developments. 196 World Bank. 2012. Well Begun, Not Yet Done: Viet Nam’s Remarkable Progress on Poverty Reduction and the Emerging Challenges. 197 For example, World Bank. 2012; Oxfam. 2013; World Bank. 2014. 198 Oxfam. 2013. 199 World Bank. 2012. 200 World Bank. 2014. I 198 I Viet Nam Rising Rising inequality can be of concern for many reasons, beyond the fact that some people prefer to live in a more equal society and have a preference for equality and fairness.200 Inequality can undermine social and political cohesion; in turn this can weaken collective decision-making capacity and even lead to violence and conflict.201 Inequality can damage trust and hurt cooperative problem- solving efforts, particularly in the management of common resources and the provision of public services. It can also undermine motivation and aspirations for those who perceive that hard work does not matter.202 A majority of Vietnamese are concerned about inequality. Even though inequality in Viet Nam is not high by international standards, all of these reasons are driven more by perceptions of inequality and can act to undermine growth and social cohesion. Even back in 2011, a majority of Vietnamese said they were concerned about disparities in living standards, rising to 76 percent of those living in urban areas, and with younger people being more likely to express concern than older people.203 Moreover, travel and exposure make people more concerned; those who and travelled to a different province were 24 percent more likely to be concerned about inequality than those who had not left their commune (higher rates were also reported for those who had travelled within their district or within their province). Given the rapid rise in information flows, the internet and social media since that time, it seems likely that more people understand the extent of inequality in Viet Nam and that concerns may have increased. However, many policies that reduce inequality are also good for growth and supported by most Vietnamese. There is often thought to be a trade-off between inequality and growth. However, cross- country evidence is inconclusive and does not support this.204 Moreover, there is good evidence that many of the policies that reduce inequality are good for growth.205 For example, if missing or imperfect markets mean poorer people cannot access credit, insurance against shocks or access to property rights, then efficient redistribution can help address both inequality and strengthen long- term growth.205 Moreover, most Vietnamese support the government taking action to redistribute and particularly favor cash transfers and investments in health and education.207 This chapter examines equity through the lens of distribution and redistribution. Income inequality arises from the initial distribution of market incomes – the income households receive from wages and salaries, rents and dividends, as well as private transfers and remittances. For most households, 201 Higher levels of local inequality has been associated with higher levels of crime in South Africa; Demombynes and Ozler. 2005. “Crime and Local Inequality in South Africa.” Journal of Development Economics 76(2): 265-292. The Arab Spring has been attributed in part to limited social mobility and high perceived inequality; see Verme, Milanovic, Al-Shawarby, El Tawila, Gadallah and El-Majeed. 2014. Inside Inequality in the Arab Republic of Egypt: Facts and Perceptions across People, Time, and Space. 202 Over two-thirds of Malaysians think that hard work is the most important factor determining success in life but over 40 percent think it is difficult or impossible to get ahead even if they work hard. See World Bank. 2025. A Fresh Take on Reducing Inequality and Enhancing Mobility in Malaysia. 203 World Bank. 2014. 204 See Box 4.1 in World Bank. 2016. Poverty and Shared Prosperity Report: Taking on Inequality. 205 See World Bank. 2006. World Development Report: Equity and Development. 206 World Bank. 2016. 207 Over eight in ten respondents agreed that “the government should transfer part of the income of the wealthiest/rich group to the poorest group”; World Bank. 2014. Pathways to a High-Income Future I 199 I income from labor dominates, with 90 percent of total household income on average coming from wage employment, family farms and non-farm family businesses. For households in the richest ten percent, non-labor market income increases to just over 15 percent.208 Given this, the first part of this chapter focuses on policies that influence a more equitable initial distribution of labor incomes, with a particular focus on ensuring equality of opportunity, so that every worker and household can participate in the higher productivity jobs and economy that the rest of this report envisages. However, income inequality is also driven by redistributive policies, such as taxes and transfers. The second part of this chapter examines how much Viet Nam’s fiscal policy – its system of taxes and public spending – reduce poverty and inequality. 12.1. More equal opportunities to develop and use skills Increasing labor incomes for all requires greater access to skill development, the ability to generate income from these skills and for that income to be protected from shocks. As Chapter 3 discusses in detail, skills will play an increasingly important role in both achieving Viet Nam’s high-income ambitions as well as driving upwards economic mobility for individual workers and households. Thus, this section examines how the opportunities to develop these skills can be made more equal across the population. However, there must also be more equal opportunity for people to use these skills and earn a return on them. For some, this means the ability to access job opportunities through better spatial and digital connectivity. For others, particularly women, this means greater availability and affordability of quality child and eldercare, allowing them to participate more fully in paid employment. These incomes need to be protected from shocks, so this section also recognizes the importance of resilient infrastructure and social protection to poorer households. Finally, Viet Nam’s segmented labor force is acknowledged and policies focusing on ethnic minorities and the rural workforce are also discussed. 12.1.1. Gaining skills Integrating domestic firms more closely into GVCs and the export growth model is likely to be equity-enhancing. There are two key features of Viet Nam’s export and GVC-driven growth model that have strong implications for equity. The first is the dual economy structure that sees export activity concentrated among FDI firms with limited participation from smaller, less productive domestic firms. Poorer and less-skilled workers are far more likely to work for these domestic firms.209 In turn, this means they generally face lower wages and lack formal employment status. The policies in Chapter 2 that envisage integrating domestic firms more closely into GVCs and exports are thus likely to be equity-enhancing. World Bank. 2022b. From the Last Mile to the Next Mile: Viet Nam Poverty and Equity Assessment. 208 World Bank. 2022b. 209 I 200 I Viet Nam Rising However, the increasing importance of skills but an increasingly wider skills gaps for disadvantaged children is of great concern. Chapter 2 also focuses on the importance of a stronger and more widespread skill base for Viet Nam to climb the value-added ladder as a core strategy for growth. However, as Chapter 3 notes, poorer and other disadvantaged children are much less likely to obtain tertiary education, a gap that has been widening significantly over time, from 34 to 68 percentage points between the poorest quintile of households (Q1) and the richest quintile (Q5) and from 13 to 34 points between the Kinh and Hoa majority and ethnic minorities (Figure 141). Given the central role of education and skill in both economic growth and inequality reduction, closing these gaps should be a critical policy priority. For the many low-skill workers already in the workforce, access to ongoing skill development and training will be important. Greater emphasis needs to be placed on ensuring all children finish high school with a good quality education that prepares them for tertiary education. As discussed in Chapter 3, failing to complete high school drives half of the tertiary access gap for poorer children; this increases to around two-thirds for ethnic minorities. Thus, better understanding the reasons for these children, as well as those with disabilities, failing to complete high school becomes critical, along with making upper secondary school compulsory and increasing investments in equitable access to and quality of upper secondary education. Such policies not only increase equity, they also help strengthen the pipeline of quality high school graduates ready to enter tertiary education, in turn relaxing this constraint to growth identified in Chapter 2. In addition, exposure to modern technology and the development of digital literacy will be vital. 77 percent of all jobs in Viet Nam now require the use of a smart phone.210 40 percent of all jobs require the use of a computer but this is much higher in high skill jobs. For example, it is nearly a universal requirement for professionals and technicians and associate professionals (Figure 142). However, although it is closing, the gaps in access to technology across child gender and region, parental circumstances and economic status are the largest among all indicators of opportunity in Viet Nam.211 For disadvantaged children who do not have access and gain familiarity with these essential skills at home, more will need to be done in the classroom to help them acquire them. Granata, Moroz and Nguyen (2023) Identifying Skills Needs in Viet Nam: The Survey of Detailed Skills 210 World Bank. 2022b. 211 Pathways to a High-Income Future I 201 I Figure 141. Income and ethnic gaps in Figure 142. Being able to use access to tertiary education have been smartphones and computers is a near widening significantly universal requirement in high skill jobs Tertiary education access by expenditure quintile and Share of workers reporting the use of a smartphone, ethnicity, 2006 and 2018 computer, or specialized software is required (%) Specific software is used Smartphone is used Computer is used 80 Low Elementary occupations 60 Plant and machine operators, and assembers 40 Crafts and related trades Semi workers 20 Service and sales workers 0 Technicians and Q1 Q5 Q1 Q5 EM Kinh/Hoa EM Kinh/Hoa associate professionals High Professionals 2006 2018 2006 2018 Income gap Ethnicity 0 40 80 120 Source: Parajuli, Vo, Salmi, and Tran (2020). Authors’ Source: Granata, Moroz and Nguyen (2023). estimates using Viet Nam Household Living Standard Survey (VHLSS) 2006 and 2018 data on individual member education and household consumption expenditures. Notes: Tertiary access rate is defined as proportion of individuals in ages 18-24 who ever had access to tertiary education level (post-secondary). 12.1.2. Using skills Strengthening spatial connectivity is a key equity-enhancing strategy, while a further focus will need to go on closing the urban-rural digital divide. The existing spatial connectivity reforms of Chapter 8 directly help reduce income and welfare gaps between Ha Noi and Ho Chi Minh and other cities and regions, and between urban and rural areas. Moreover, to the extent these reforms also promote individual household and worker mobility, they can also aid occupational mobility. However, a is the case in Indonesia, rural areas within Viet Nam have only recently begun to catch up to urban areas and Viet Nam lags Malaysia and Thailand in respect to both rural and urban areas (Figure 143). Increased access to quality and affordable child and eldercare is a key component of helping working-age women in an aging Viet Nam, but care expansion faces key constraints. The limitations of the nascent formal ALTC system discussed in Chapter 6 are reflected in a much larger unmet demand for formal childcare. Recent work found that around 70 percent of women with 0-2 year-olds would use formal care but cannot access it; 80 percent of infants (3-12 months) and 53 percent of toddlers (13-23 months).212 Key barriers include cost, quality and hours. Any expansion of care—for Vu, Viet, Nguyen, Buchhave, and Zumbyte (2024). Childcare Demand and Supply in Urban Viet Nam. World Bank. 212 I 202 I Viet Nam Rising the elderly or children—faces significant supply-side constraints. Survey data indicate that private providers of childcare struggle with staffing (qualifications213 and turnover) as well as instability in enrollments.214 There are also quality concerns over developmental stimulation for 0-2 year-olds and overcrowded classrooms for 3-5 year-olds (35 children per teacher). Similar constraints are likely to be an issue for expanding formal ALTC services. The importance of access to affordable and quality child and eldercare increases for less-skilled women. Not only do higher skills help earn higher wages, they also mean workers are more likely to be able to work from home, increasing job flexibility and desirability for women with children or elderly care responsibilities. Over one-third of technician and associate professional jobs can be done at home, increasing to nearly two-thirds for professionals. Meanwhile, very few low- or even semi-skilled jobs can be done at home, limiting the options for workers with less education and skill (Figure 144). Figure 143. The urban-rural Figure 144. Very few low- and semi- internet gap is closing skilled jobs can be done from home but but remains many high skill jobs can, making access to affordable and quality child and elderly care even more important for less-skilled women Households with internet access at home Share of workers reporting being able to work from home given access to a computer and internet connection (%) 2020 Rural 2023 Rural 2020 Urban 2023 Urban Elementary occupations Low 100 Plant and machine operators, 95 and assembers 90 Crafts and related trades Semi workers % of households 85 80 Service and sales workers 75 Technicians and associate 70 professionals High 65 Professionals 60 Viet Nam Indonesia Malaysia Thailand 0% 10% 20% 30% 40% 50% 60% Source: International Telecommunications Union. Source: Granata, Moroz and Nguyen (2023). 213 Similar skill shortages would be a constraint on childcare expansion in Indonesia; see Venn and Wai-Poi (forthcoming). “Are Labor and Skill Shortages a Barrier to Expanding Childcare in Indonesia?” 214 Vu, Viet, Nguyen, Buchhave, and Zumbyte (2024). Pathways to a High-Income Future I 203 I However, current licensed childcare is more likely to benefit educated and wealthier women in formal jobs.215 45 percent of mothers with lower secondary or less use formal childcare, compared to 70 percent with college education; 29 percent in the poorest quintile compared to 73 percent in richest quintile; and 37 percent of those in informal jobs compared to 74 percent in formal jobs. This makes it unclear who would benefit from government support in expanding care, which in turn would depend upon the design of the expansion. Would it lower prices for existing users (benefiting better off women) or expand the range and take-up of services to new users? And if there are new users, are they more likely to be better off like existing users or to come from the larger pool of less well-off women? These equity considerations will be key when expanding public support for expanded and affordable child and elderly care. 12.1.3. Protecting incomes and assets Poorer households are particularly vulnerable to climate and environmental shocks. Of the districts with the lowest poverty, 28-45 percent of them have exposure to one of six different environmental risk factors. This is higher is somewhat higher than those living in medium or higher poverty districts, but over 80 percent of people in all three district poverty groupings are exposed to at least one of these risks. Moreover, whether or not poor households are over-exposed, they have fewer coping strategies and safety nets to weather such shocks.216 Compared to peer countries, there is a higher risk in Viet Nam that natural disasters will drag more households into poverty. The high level of environmental risk in most districts contributes to Viet Nam having a particularly high risk of larger shocks driving households into poverty compared to other countries in the region. Households can be driven into poverty by either “idiosyncratic” shocks – shocks such as illness or accident which affect only an individual or household – or by “covariate” ones – shocks that affect whole communities, regions or countries, such as pandemics, economic shocks or natural disasters. Although idiosyncratic shocks are more likely to drive households into poverty than covariate ones in all countries, the relative importance of covariate shocks is high in Viet Nam; idiosyncratic risk is only 1.4 times more likely to drive households into poverty than covariate shocks. This is equal lowest among eight EAP countries (Figure 145). Buchhave, Zumbyte, Viet, Vu and Nguyet. Forthcoming. 215 World Bank (2022b). 216 I 204 I Viet Nam Rising Figure 145. Shocks affecting many households are play a greater role in Viet Nam than in many other countries in the region Relative importance of idiosyncratic and covariate risk, Viet Nam and selected EAP countries National Urban Rural 3.0 Idiosyncratic / coavriate risk ratio 2.5 2.0 1.5 1.0 0.5 0.0 Cambodia Indonesia Laos Malaysia Mongolia Philippines Thailand Viet Nam Source: Vinha and Tiwari (2024). The focus on resilient infrastructure will thus be of particular benefit to poorer households. An additional focus will be needed in the Mekong Delta. As with technology, geoeconomic and aging shocks, well-targeted and adequate social assistance (Chapter 7) will be an essential part of the policy response to shocks arising from climate change. Since these shocks disproportionately affect the poor, the reforms to make infrastructure more climate change resilient (Chapter 9) will also directly benefit the poor. A particular focus will be needed in the Mekong Delta, considered the most vulnerable region in Viet Nam to climate change, with the increase in poverty in the region since 2018 reflecting the multiple shocks faced in a short period of time, including recent climate and environmental shocks, coupled with COVID-19.217 The recent shocks are likely to get much worse as the impacts of climate change accelerate. Many areas in the region have both relatively high poverty rates and high drought and flood exposures (Figure 146, Panels A and B) while most of the region already suffers from salinity intrusion (Panel C) and extreme heat (Panel D) that will worsen in the coming two decades (Panels E and F). World Bank (forthcoming). Life in the Mekong Delta Poverty Report. 217 Pathways to a High-Income Future I 205 I Figure 146. The Mekong Delta is particularly exposed to climate change and will need investments in resilient infrastructure Panel A. Exposure to drought and poverty Panel B. Exposure to floods and poverty Source: World Bank, Life in the Mekong Report (forthcoming). Source: World Bank, Life in the Mekong Report (forthcoming). Panel C. Salinity intrusion Panel D. Change in salinity intrusion by 2050 with no control measures Source: World Bank, Life in the Mekong Report (forthcoming). Source: World Bank, Life in the Mekong Report (forthcoming). Panel E. Number of days of extreme heat per year Panel F. Additional number of days of extreme heat (historical) per year by 2050 Source: World Bank, Life in the Mekong Report (forthcoming). Source: World Bank, Life in the Mekong Report (forthcoming). Notes: Historical reference period is 1983-2016. Notes: SSP2-4.5 scenario. This map is for illustrative purposes and does not imply the expression of any opinion on the part of the World Bank concerning the legal status of any country or territory or concerning the delimitation of frontiers or boundaries. I 206 I Viet Nam Rising Increased resource mobilization will increase financial pressures on poorer households but can be offset with well-design public spending that also promotes growth. Chapter 10 discusses Viet Nam’s low rates of tax revenue mobilization and the limitations this places on public spending, including the many investments proposed in this report to help the country achieve its HIC aspirations. In addition to the growth-promoting reforms in the other chapters, this chapter has outlined additional policies (summarized in Table ) to ensure the HIC transition is inclusive and equity-enhancing. These in turn will require further fiscal space to implement. As Chapter 10 notes, increasing tax revenues using all available instruments will be necessary. Some instruments, such as personal income and corporate income taxes primarily affect richer households. However, some, such as increases in indirect taxes (for example, increasing the VAT base rate or removing VAT exemptions, or introducing carbon taxes) directly affect the poor. However, the true distributional impact of these revenue reforms must be considered alongside the benefits of the increased spending that they finance. The net impact on any particular household will depend upon how it pays in new taxes reduced by how much it benefits from new spending; the aggregate effect across all households in the income distribution then determines the impact on poverty and inequality. The final section of this chapter looks at how progressive fiscal policy in Viet Nam currently is and how it can be reformed to both create the fiscal space to finance the many reforms envisaged by this report while also reducing poverty and inequality. 12.1.3. Ethnic minorities and rural workers Complementary policies are needed to support ethnic minorities and rural workers. Beyond ensuring that the broader population can accumulate the right skills and access the job opportunities, there is a need for complementary policies that focus on vulnerable subgroups who do not fare as well as the majority in the labor market. These are ethnic minorities and both younger and older individuals in the rural workforce.218 Ethnic minorities Supporting ethnic minorities’ transition to higher productivity jobs is key but remoteness is a particular challenge.219 Moving into household enterprises and wage employment is the most promising route for upward economic mobility but the physical remoteness of ethnic minority communities is a constraint. Three key polices identified in the 2020 Viet Nam Jobs Report220 to address this are to: (i) integrate lagging areas into the network economy to expand their market potential (already addressed under the spatial and digital connectivity chapter); (ii) create a secondary economy supporting industries based on regional absolute advantages (discussed in part under the GVC chapter on creating closer links between exporters and domestic firms); and (iii) reduce the cost of migration to increase long-distance migration domestically. 218 World Bank (2021a). 219 World Bank (2021a) and World Bank (2019). 220 World Bank (2019). Pathways to a High-Income Future I 207 I Reducing the cost of migration is important for reducing barriers to mobility. Key challenges faced by migrants in 2015 were access to housing, lack of income and the inability to find a job.221 Housing issues have historically been difficult for minorities and migrants, along with broader access to public services.222 The ho khau system of household registration was a severe constraint on migrants accessing local services.223 Its removal in 2023 will potentially relax these constraints although many local agencies lack the digital and data infrastructure and staff capacity to fully implement the new policy.224 Increasing the chance of finding a good job is paramount, beginning with skills development. Promoting improved skills development of ethnic minorities needs to happen within the context of broader tertiary reforms of TVET institutions and universities. In addition to these reforms, discussed in the Skills chapter, TVET reforms can include new e-learning modules that can be delivered remotely in addition to face-to-face learning, which will disproportionately benefit ethnic minorities in remote areas if a baseline level of internet connectivity is also established, although online/offline approaches are also an option.225 Job search and matching for ethnic minorities would benefit from stronger ALMP, information systems and public centers.226 Labor Market Information Systems (see Social Protection chapter) can minimize the role of social networks, reduce job search costs and increase job matching by identifying and publicizing labor demand data. In parallel, given the strong social cohesion within some ethnic minority groups, ALMPs that rely on social networks—such as business development loans to a group of individuals with joint repayment responsibilities—may be appropriate. ALMPs may need to take into account specific characteristics in their design if they are to work for both those who stay and those who migrate. Better quality public employment support centers are another priority, as ethnic minorities in particular have limited information about preparing for careers, options and job vacancies. Improvements can come in database quality and the information on local job and educational opportunities, while the centers can provide career planning and job search assistance services tailored to the language and cultural needs and of different groups. In addition, ALMPs can help link remote ethnic minorities to markets.227 In Bangladesh, transportation vouchers were used to facilitate seasonal agricultural wage work in other provinces.228 Digital technologies can also connect ethnic minority communities to markets through apps and e-commerce platforms that allow those living in remote communities to buy inputs and sell final products into local and even global markets. This may particularly benefit women ethnic minorities 221 GSO and UNFPA 2016, cited in World Bank (2021a). 222 World Bank (2021a). 223 Demombynes and Vu (2016). 224 Thanh (2023), cited in Bequet, Giles and Safir (2024). Moreover, the cost of implementation (investing in capacity, providing local services to both existing migrants and new ones that might be induced to come) will be costly, so the practical impact is not yet clear (Bequet, Giles and Safir 2024). 225 World Bank (2021a). 226 World Bank (2021a). 227 World Bank (2021a). 228 Bryan, Chowdhury, and Mobarak 2014, cited in World Bank (2021a). I 208 I Viet Nam Rising who are often more closely tied to home at a young age,229 Such an intervention would require connectivity, cell phones, and technical assistance to help communities develop and implement business plans. Rural workers Greater skills will benefit both agricultural and non-farm rural workers.230 Skilled farmers are more likely to adopt modern technology and pursue emerging market opportunities. However, greater skills also allow rural workers to move to better-paid off-farm jobs such as those in agro-foods. Indeed, the share of skilled workers in the food processing industry is around 54 percent, compared to 30-40 percent in agricultural wage work, even if some of these skills are more entry level, such as simple technical and managerial training. Moving into higher-paying occupations such as jobs that manage logistics, marketing, design, and the many knowledge-intensive before- and after- assembly activities, places as an emphasis on knowledge-intensive skills. Well-educated rural young workers with skills in business development and with vocational skills are likely to benefit from the increasing knowledge-intensity of the food system, with significant opportunities in high-value agriculture and associated agro-processing.231 However, greater productivity in farm and non-farm employment is also required.232 Younger rural workers who choose not to migrate tend to work in off-farm wage jobs; they stand to benefit from policies that support rural jobs upgrading and into the knowledge economy. This means linking jobs to local, regional and global value chains (as discussed in Chapter 2), building upon existing food production chains and agricultural product exports as well as the creation of new, more lucrative jobs in services such as assembly and logistics and skills development. At the same time, agricultural productivity and returns for those reliant on farming also needs to be boosted, continuing overall policies of agricultural restructuring, strengthening land security, reducing agriculture land-use restrictions, broadening land consolidation beyond rice farming, encouraging a shift toward more farm operator-based agriculture and reducing reliance on self-financing. Targeted policies may be needed for older rural workers, some of whom may struggle to adapting to the modern economic environment. The pilot Intergenerational Self-Help Club (ISHC) has been effective in increasing income generation for these workers. A revolving fund gives members access to cash or in- kind loans for economic activity while ISHCs also train older people on appropriate activities to increase their incomes.233 Nonetheless, the pension and social assistance reforms of Chapter 7 are central to ensuring aging and retired workers have adequate incomes to live upon. 229 Weimann-Sandig et al 2020, cited in World Bank (2021a). 230 World Bank (2021a). 231 World Bank Group 2017b), cited in World Bank (2021a). 232 World Bank (2021a). 233 A 2015 evaluation by UNFPA found that members of ISHC experienced an average annual income increase of 30 percent (UNFPA 2016). See World Bank (2021a) for more details on ISCHCs. Pathways to a High-Income Future I 209 I Table 14. Policy reform agenda for enhancing equity beyond broader skills, connectivity and protection agendas Policy package Key recommendations 1. Ensuring more l Close human capital gaps between ethnic groups and urban and rural populations equitable - Ensure early childhood nutrition and access to health and sanitation access to skills - Strengthen and expand conditional cash transfers combined with behavioral change counseling to stimulate demand for maternal and child health services - Promote skills development for ethnic minorities, including entrepreneurship skills, technical skills for wage employment, and life and soft skills to promote the pursuit of livelihoods l Ensure all children finish high school with a good quality education that prepares them for tertiary education - Make upper secondary school compulsory - Increase investments in equitable access to and quality of upper secondary education l Increase exposure to modern technology and digital literacy for disadvantaged children in formal education 2. Support care l Close gender gaps in labor market outcomes responsibilities - Reduce the burdens of childcare and elderly care for working-age women by improving/ and promote subsidizing childcare and elder care services greater labor participation by - Evaluate the design of expanding child and elder care schemes to ensure greater access women and utilization by poorer and less educated women 3. Boost income- l Support a segmented rural workforce generation - Continue agricultural restructuring to maximize productivity and returns for farming for rural and ethnic minority - Extend Intergenerational Self-Help Clubs to increase economic development and income workers generation among older workers in rural communities l Encourage labor market transitions to sectors that show increasing productivity over the lifespan - Provide skills development for workers to move up the rural value chain into the knowledge economy l Support the rural-urban migration of ethnic minorities by reducing costs I 210 I Viet Nam Rising 12.2. Fiscal equity: backward diagnostic Viet Nam’s fiscal redistribution can be assessed by looking at its patterns of taxes and spending. Policies that promote more equal opportunities for human capital accumulation and income generation are generally forms of public spending that need to be financed through tax and nontax revenues. This section looks at: (i) how much Viet Nam spends on such social policies as health, education and social protection; (ii) how it finances this spending; and (iii) what the net impacts on poverty and inequality are from taxes and public spending. This provides an overall picture of the degree of fiscal redistribution in Viet Nam, which in turn can be compared to high income and other middle income countries. In addition, although the extent to which poorer households are net fiscal beneficiaries – receive more spending benefits than they pay in tax – and richer households are net fiscal contributors – pay more tax than they receive in benefits – is a good measure of fiscal redistribution, the majority of the spending included (on health and education) is actually a key driver of the human capital outcomes for poorer children and thus their future incomes tomorrow. In this sense, the fiscal redistribution finances a more equitable distribution tomorrow as well. Viet Nam’s social spending is lower than LMIC and UMIC averages. Viet Nam’s total social spending on education, health and social protection is considerably lower than LMIC and UMIC averages, closer to that of LICs (Figure 147, left panel). This is driven primarily by low levels of health and social protection spending compared to other MICs, with education spending lower than but closer to middle-income averages (right hand panels). Pathways to a High-Income Future I 211 I Figure 147. Viet Nam’s social spending is far below middle-income country averages Health, education, social protection and other Health spending, Viet Nam and income category spending, Viet Nam and income category averages averages 6 Other Pensions Social protection (ex.Pens.) 4 % of GDP Health Education 50 2 40 0 LIC LMIC Viet Nam UMIC HIC 30 % of GDP Education spending, Viet Nam and income category 20 averages 6 10 4 % of GDP 0 LIC LMIC Viet Nam UMIC HIC 2 0 LIC LMIC Viet Nam UMIC HIC Social protection spending, Viet Nam and income category averages 15 Social protection (ex. Pens) Pensions 10 % of GDP 5 0 LIC LMIC Viet Nam UMIC HIC Note: Rodriguez and Wai-Poi. 2024. Low levels of social spending affect how much fiscal policy reduces income inequality in Viet Nam compared to peer countries. After accounting for the income and consumption taxes households pay as well as the benefits from social spending on transfers, subsidies and public health and education, income inequality is reduced in Viet Nam by 4.4 points on the Gini Index. This is slightly below the average degree of inequality reduction among LMICs and even further below that of UMICs (Figure 148). I 212 I Viet Nam Rising Figure 148. Taxes and spending in Viet Nam reduce inequality by less than the middle-income country average Impact of taxes and spending on inequality (points of Gini Index reduction) HIC UMIC LMIC LIC EAP Viet Nam 0 -5 Viet Nam -10 -15 -20 -25 Sourse: Rodriguez and Wai-Poi. 2024. As in many middle-income countries, Viet Nam’s spending on social transfers is not enough to offset the burden of taxation, meaning fiscal policy does not contribute to poverty reduction. Public health and education services provide important benefits to households but are noncash and do not help meet a household’s spending needs today. When only cash benefits are considered, fiscal policy actually increases poverty in Viet Nam by 0.2 percentage points. Fiscal impoverishment is not unusual among middle-income countries,234 with this result placing Viet Nam in the top quarter of available LMIC results, albeit the bottom half of UMICs (Figure 149). See World Bank. 2022c. Poverty and Shared Prosperity Report: Correcting Course and Wai-Poi, Sosa and Bachas. 2025. “Taxes, Spending 234 and Equity: International Patterns and Lessons for Developing Countries”, Prosperity Insights, World Bank. Pathways to a High-Income Future I 213 I Figure 149. Taxes and spending in Viet Nam increase poverty slightly, a good performance for LMICs but slightly below the UMIC median Impact of taxes and cash spending on poverty HIC UMIC LMIC LIC EAP Viet Nam 10 8 6 Viet Nam 4 Percentage points 2 0 -2 -4 -6 -8 -10 Note: Rodriguez and Wai-Poi. 2024. 12.3. Fiscal equity: forward diagnostic HICs reduce poverty and inequality through fiscal policy and social spending to a greater extent than middle-income countries. Most HICs achieve the greatest inequality reduction through spending on health and education (Figure 148), rather than income taxes, direct transfers or subsidies. However, direct transfers (social assistance) are the main instrument for HICs to reduce poverty (Figure 149).235 Although HIC data including indirect taxes, subsidies and in-kind spending are only available for a limited number of countries, broader OECD data with direct taxes and transfers find that 75 percent of inequality reduction comes from transfers rather than taxes.236 Meanwhile, Viet Nam’s fiscal impact on reducing inequality (Figure 150) and poverty (Figure 151) is less than half that of the HIC average. Viet Nam’s social spending is far below HIC benchmarks. Viet Nam’s education spending is below the HIC average although not by much. However, spending on health and social protection are a quarter or less of HIC benchmarks (Figure 152). However, increases in social spending to anywhere near HIC levels will require significantly greater fiscal space and tax revenues; this is discussed further in Chapter 10 on resource mobilization. 235 The impact of direct transfers and direct taxes cannot be split out but poorer households pay relatively little in terms of direct taxes; the majority of this impact is direct transfers. 236 OECD (2019) Income redistribution through taxes and transfers across OECD countries. I 214 I Viet Nam Rising Figure 150. Most HICs Figure 151. Most HICs Figure 152. Viet Nam reduce inequality reduce poverty through spends much less through health and direct transfers than HICs in all social education spending categories Impact of taxes and spending on Impact of taxes and spending on Spending on health, education inequality, Viet Nam and HICs poverty, Viet Nam and HICs and social protection, Viet Nam and HICs Direct taxes and transfers Direct taxes and transfers Viet Nam HIC Indirect taxes and subsidies Indirect taxes and subsidies In-kind H+E HIC average 7 HIC average 6 5 5 0 5 0 % of GDP -5 4 -5 -10 3 -15 -10 2 -20 -15 Spain United States Panama Croatia Poland Mauritius Romania Spain United States Panama Viet Nam (2022) Viet Nam (2018) Viet Nam (2020) Viet Nam (2022) Croatia Poland Mauritius Romania Viet Nam (2018) Viet Nam (2020) 1 0 Education Health Social protection (ex Pens.) Source: Wai-Poi, Sosa and Bachas (2025). Source: Wai-Poi, Sosa and Bachas Source: World Development (2025). Indicators. 12.4. Fiscal equity: policy reform agenda Education and health spending do the most to reduce inequality; transfers are the most cost- effective but their relatively small size limits their impact. The impact that any given fiscal instrument has on poverty and inequality will depend on both their progressivity and their size. A very progressive but small instrument will have limited impact, as will a slightly progressive but large instrument. The cost-effectiveness in reducing inequality can be calculated by comparing progressivity and size. That is, how many points of inequality on the Gini Index are reduced (marginal contribution) for each point of GDP spent or raised (budget) by a particular expenditure or tax? These three indicators are presented in Table 15. PIT reduces inequality by much more (0.5 points) than VAT (0.1 points), despite collecting much less revenue (2.9 percent of GDP compared to 8.0 percent). Because they reduce inequality despite being much smaller, they are much more cost-effective at reducing inequality (0.57 Gini points reduced for every 1 percent of GDP in revenue raised for PIT compared to 0.03 for VAT). Transfers are even more cost-effective, reducing inequality by 0.62 Gini points per 1 percent of GDP spent. However, their limited budget of only 0.9 percent of GDP means that their overall impact on inequality reduction is limited, just 0.6 points of Gini reduced. Social pensions in particular appear to be cost effective. Health and particularly education reduce inequality significantly (by providing Pathways to a High-Income Future I 215 I public services that households would otherwise have to pay for) due to their large budgets. They are less cost-effective at reducing inequality than transfers because these services are enjoyed by broad swathes of the income distribution, but the objective is for universal access to quality services rather than being primarily targeted to poorer households. Table 15. Marginal contribution and cost-effectiveness of inequality reduction by tax and spending Marginal Budget Cost effectiveness contribution (IE) (% GDP) Taxes PIT 0.5 2.9 0.57 VAT 0.1 8.0 0.03 EPT 0.0 0.8 0.01 Direct transfers 0.6 0.9 0.62 Cash transfers 0.0 0.03 Other social assistance 0.5 0.89 Social pension 0.1 0.64 In-kind services Education 1.8 4.0 0.44 Health 0.5 1.6 0.15 Source: World Bank staff calculations from VHLSS 2018 and 2020. Notes: Marginal contribution is the points by which the Gini index is reduced between market (pre-fiscal) income and final (post- fiscal) income; a positive contribution is a reduction in Gini, negative contribution is an increase in Gini. Budget Is the admin budget for the instrument as a percentage of GDP. Cost effectiveness is marginal contribution divided by budget, using not the admin budget but that modelled in the survey for consistency of estimates. Drawing on the lessons from other middle-income countries, Viet Nam could reduce both poverty and inequality more through a combination of higher taxes and spending. As in other countries, the greatest fiscal reductions in inequality come through education and health spending, but Viet Nam achieves less because of their relatively smaller budgets. Transfer spending is the most cost-effective at reducing inequality but their cash nature also helps offsets the burden of indirect taxes for poorer households. A fiscal reform package could center around greater revenue collection through both direct and indirect taxes that would finance greater investments in health and education (promoting both growth and equity) and social protection (promoting equity and offsetting the impact of higher indirect taxes on poorer households). The rest of this chapter two elements of such a reform package in more depth, greater VAT collection and stronger social protection, before closing by assessing the distribution impacts of the carbon taxes discussed in Chapter 5 on the energy transition. I 216 I Viet Nam Rising 12.4.1. VAT reforms Higher indirect taxes would need to drive short to medium term revenue increases. Direct taxes, such as corporate and personal income taxes, property taxes, and inheritance taxes, are powerful tools for reducing inequality. They are paid largely by richer households, directly reducing the inequality arising from market incomes. Indirect taxes, such as VAT and excises, are much less progressive (as seen earlier in this chapter), representing a greater percentage of market incomes for poorer households. However, collecting personal income tax requires significant tax administrative capacity, a high degree of formal employment and incomes above taxable income thresholds. Therefore, most developing countries and even non-OECD HICs rely largely on increasing indirect taxation as they increase tax revenues as a percentage of GDP and move to a higher income level.237 For upper- middle-income countries looking to transition to high-income status, strengthening tax administrative capacity and broadening the personal income tax base is a sound way to both increase revenue collection and reduce inequality. For other developing countries, greater revenues are realistically going to be collected through indirect taxes despite them not being a very cost-effective measure to reduce inequality or poverty. A VAT rate structure with multiple exemptions and reduced rates is ineffective in solving equity issues and limits the revenue collection. The use of VAT exemptions, zero rating and reduced rates is common practice in developing countries, as it is in Viet Nam, often justified by equity concerns because of the regressivity of indirect taxation. However, this rate structure is not particularly equitable and limits the revenue collection that can be achieved. Preferential VAT rates are ill- suited to promoting equity because the items receiving preferential rates may represent a greater share of poor household consumption but are usually consumed in greater absolute quantities by richer households, meaning that more of the foregone revenues benefit them. Moreover, informal purchases represent a higher share of total consumption for poorer households than richer ones, meaning that they tend to pay a lower effective VAT rate for the same goods, reducing much of the benefit preferential VAT rates have anyway. Removing preferential VAT rates could raise around 1 percent of GDP with relatively low impacts on poorer households. The impact of removing all preferential rates (exemptions, zero and reduced rates) to make all items subject to the base rate of 10 percent can be simulated.238 Ignoring consumption informality, the additional VAT burden would increase by 1.5 percent of market incomes for poorer households, compared to less than 1 point for the richest ones. Accounting for informality, the impact of the reform would be much more even across the distribution, around 0.8-0.9 percent of market income for all deciles 1 to 9 and 0.7 for the top decile (Figure 153). The poverty increase is also minimal, only 0.65 points at the UMIC poverty line (similar to the national poverty line) and virtually no change in poverty at the LMIC poverty line. The current fiscal cost of foregone revenues from the preferential rates is about 1 percent of GDP, indicating the potential revenue gains. World Bank (2022) and Wai-Poi, Sosa and Bachas (2025). 237 Using the CEQ fiscal incidence model for Viet Nam (World Bank 2022b and Rodriguez and Wai-Poi 2024). 238 Pathways to a High-Income Future I 217 I If the currently low base rate was raised in the medium term, even more could be raised. The 10 percent statutory base rate in Viet Nam is comparable to those in other EAP countries but low by other international standards. For instance, it is 12 percent in the Philippines, 13 percent in South Asia, 15 percent in Latin America and the Caribbean, 16 percent in Sub-Saharan Africa and 20 percent in Europe and Central Asia; the only region where the base rate is lower is in North America. Simulating an increase in the base rate to 12 percent (while also removing preferential rates) is projected to raise an additional VND 117 trillion over the current baseline. The additional burden would fall on all households across the distribution, but because of consumption informality would not be regressive and amount to around 1.5 percent of market income for most households (Figure 154). The impact on poverty is estimated to be around 0.2 poverty points at the LMIC poverty line and 1.0 point at the UMIC poverty line. These poverty impacts could be more than offset by relatively modest increases in targeted social assistance. Figure 153. Change in VAT burden Figure 154. Change in VAT burden relative to market income. Removing relative to market income. Removing all exemptions and reduced rates all exemptions and reduced rates and raising base rate to 12 percent With informality Without informality With informality Without informality 3.0 2.0 2.5 Percent of market income Percent of market income 1.5 2.0 1.0 1.5 1.0 0.5 0.5 0.0 0.0 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 Household market income decile Household market income decile Source: World Bank staff calculations from VHLSS 2018. Source: World Bank staff calculations from VHLSS 2018. 12.4.2. Social protection Larger and better targeted social assistance Cash transfers in Viet Nam are one of the most cost-effective fiscal tools in reducing inequality in the country but can be improved. At the baseline, each point of GDP spent in cash transfers in Viet Nam reduces inequality by 0.6 Gini points, making them one of the most cost-effective fiscal instruments in the country. However, this effectiveness falls short of their potential impact. The I 218 I Viet Nam Rising median cost-effectiveness of cash transfers, for countries for which there is data, is 1.12 points. In the most effective systems, that can be as high as 1.4 points of inequality reduction per point of GDP spent. Better targeting would increase impact of cash transfers in Viet Nam. Combined with greater budgets, this could reduce inequality by four to five times as much as current levels. As Chapter 7 noted, coverage of the poorest households is low while some of the middle and even upper part of the income distribution are also receiving benefits. If the cost-effectiveness of the cash transfers were improved through better targeting of the benefits to reach the global median level, without changing the current budget allocation, simulations indicate that the marginal contribution of cash transfers to inequality reduction could double its current level, from 0.4 to 0.8 points. If the cost-effectiveness was further raised to reach levels among the top world performers, the marginal contribution would be 1 point of inequality (Table 16). Doubling current social assistance spending without changing the current targeting would double the impact on inequality reduction. Combining the two reforms – increasing the budget and improving the targeting – yields four to five times more inequality reduction compared to baseline levels. Table 16. Simulated impacts of cash transfers expansion Inequality impacts Fiscal impact (% of GDP % GDP CE MC Change Baseline 0.7 0.6 0.4 Improved targeting, same SA Median CE 0.7 1.1 0.8 0.4 0.0 Q3 CE 0.7 1.4 1.0 0.6 0.0 Existing targeting, double SA 1.4 0.6 0.8 0.4 -0.7 Improved targeting, double SA Median CE 1.4 1.1 1.6 1.2 -0.7 Q3 CE 1.4 1.4 2.1 1.7 -0.7 Source: World Bank staff estimates. Thus, the burden of new tax revenues on poor households can be easily mitigated through expanded and better targeted social assistance transfers. The analysis of VAT preferential and base rate reforms showed that significant additional revenues could be generated through indirect taxation but with a slight increase in poverty. A small part of the additional revenues generated could be used to expand coverage or benefit levels of current cash transfers and offset the negative impacts on poor households. For instance, if about a third of the additional revenues raised through VAT reforms were Pathways to a High-Income Future I 219 I added to the social assistance budget,239 the negative poverty impacts would be eliminated and the Gini would be brought down by 0.6 points. Of course, also improving the targeting of cash transfers would bring more significant impacts in terms of poverty and inequality reduction. Supporting expansion of social insurance To address its rapid aging, Viet Nam has targeted a coverage of old-age insurance of 60 percent of the population. Chapter 6 discussed Viet Nam’s rapid aging. To address this, the Social Insurance Law revision focuses on reducing the coverage gap in the contributory scheme, the voluntary scheme and the social allowance (social pension) component to reach a 60 percent coverage rate overall. Around a third of old people currently receive some sort of old-age income support. To achieve the 60 percent coverage target by 2030, it is estimated that the social pension component will need to cover an additional 12.5 million people approximately, or 35 percent of the elderly. Currently, 16 percent of the elderly, most of whom are over 80 years old, receive a social pension allowance. Because of universal eligibility of 80+ years old, coverage rates among this group are high, close to 90 percent, with the remaining population assumed to be in receipt of social insurance income and thus not qualifying for a social pension. The current benefit level is VND 360,000 per month, costing around VND 7.6 trillion (0.17 percent of GDP). Lowering the threshold of universal coverage of social pensions to 70 years old and to poor people aged 60-69 would achieve the desired increase in coverage.240 Increasing eligibility to all people over 70 years old while means testing benefits for those aged between 60 and 69 years old would raise the current coverage rate to 35 percent of elderly people (Table 17). Most of this increase would come from the universal 70+ component. The coverage rate among 60-69 years old would only rise to 3.9 percent of those in the age group, mainly because poverty rates are low and thus not many would pass the means test. In addition, current benefit levels are relatively low and could be increased. Expanding coverage would cost VND 38 trillion at current benefit levels. Increasing these to VND 500,000 per person would increase the budget to VND 72 trillion (0.4 percent of GDP in 2030).241 At this higher level, the poverty rate among the elderly would fall from 3.2 to 1.9 percent at the LMIC line and from 19.7 to 16.0 percent at the UMIC line. In contrast, countries like China and Thailand spend 0.3 and 0.4 percent of GDP on social pensions respectively, while still achieving twice as high a coverage rate as this scenario would achieve in Viet Nam. This indicates that the reform analyzed here would serve only as the starting point of a more comprehensive pension system in the country. In addition to further increasing coverage, benefit levels could also be further increased. These increases could also indexed to inflation and economic growth, ideally automatically to avoid abrupt changes. This would prevent the deterioration of the income assistance provided and increase the adequacy of the benefits. 239 Coverage is expanded by 150 percent to reach new households and benefits increased by 40 percent for all beneficiaries. 240 For this simulation, the 2018 VHLSS is used as a baseline, adjusted to the UN population projections for over 60 year olds in 2030. 241 Using forecast real GDP growth of 6.5 percent y-o-y growth from 2025 onwards. I 220 I Viet Nam Rising Table 17. Social pension baseline and reform scenario impacts Baseline (2019) Reform scenario (2030) Coverage Coverage social social pension VND tr Poor Poor pension VND tr Poor Poor Age (% (total/ ($3.65) ($6.85) (% (total/ ($3.65) ($6.85) group people) year) (%) (%) people) year) (%) (%) 60-64 1.0 0.2 3.0 17.0 3.9 1.3 2.2 15.7 65-75 2.4 0.4 3.0 20.2 31.7 15.2 1.6 15.4 75-80 1.7 0.1 3.0 20.0 76.3 10.1 1.4 13.8 80+ 86.6 6.9 3.0 24.7 84.8 11.3 2.5 21.1 Total 60+ 15.7 7.6 3.2 19.7 35.4 37.9 1.9 16.0 12.4.3. Distributional implications of carbon taxes and the energy transition The energy transition has the potential to affect poorer consumers and workers through higher prices and employment shocks. Moving to cleaner energy, particularly the potential role of a carbon tax, will affect different households differently. In the longer term, the impact of decarbonization on poverty and inequality is expected to be relatively limited, but the transition costs could be substantial for poor consumers and unskilled workers.242 The inequality impacts of price changes from carbon taxation could be relatively limited. Poorer and richer households devote a similar share of their budgets to direct consumption of fossil fuels and electricity, slightly higher (12 percent) for the poorest two deciles and slightly lower (8–9 percent) for the top two deciles.243 This means the impact on inequality would be small, less than 0.1 points on the Gini Index under each of the transition scenarios considered by World Bank’s (2025a) Viet Nam 2045 Green Growth report, or even all of them combined (Table 18). The impact on poverty under most scenarios is also expected to be small, although an increase of up to 1.7 points could occur in the most ambitious transition scenario. A higher cost for carbon affects not just the cost of energy but also the cost of other goods and services that use energy in their production and distribution. Broad price increases across the board will always increase poverty without mitigating measures, but it is estimated that the increase at the LMIC international $3.65 poverty line (similar to the official national poverty line)244 would be 0.1 percentage points or less in each scenario, rising to 0.5 points for the most ambitious combination of all of them (Table 18). At the higher UMIC $6.85 line, no scenario sees poverty increase by more than 0.5 points, rising to 1.7 points for the most ambitious combination of them. 242 World Bank (2022a). 243 World Bank (2025a) 244 2017 Purchasing Power Parity prices. See World Bank (2022b) for comparison of international poverty lines and the official Government Statistics Office-World Bank poverty line for Viet Nam. Pathways to a High-Income Future I 221 I However, some of the additional revenue generated by carbon taxation policies could expand social assistance and lead to a net reduction in poverty and inequality. As noted in Chapter 7, current social assistance spending is low compared to LMIC and UMIC averages. Some of the revenues from carbon taxation could easily offset small poverty impacts – and even lead to net reductions – through an expansion of cash transfers to poor and vulnerable households. The potential to achieve both net increases in fiscal revenues and reductions in poverty and inequality through fiscal policy (including indirect taxes such as VAT or carbon taxes) is discussed later in this Chapter.245 Subsidies for poorer households to invest in energy efficient houses and appliances would complement transfers. Table 18. Carbon tax policies would have almost no impact on inequality but could result in small increases in poverty without mitigating measures Inequality impact (marginal Poverty impact (marginal contribution) contribution) Gini US$3.65 US$3.65 gap US$6.85 US$6.85 gap At disposable income 35.7 5.3 1.4 22.2 6.9 Before RR EPT+ -0.03 -0.1 0.0 -0.3 -0.1 Carbon tax -0.03 -0.1 0.0 -0.5 -0.2 Power feebate 0.00 0.0 0.0 -0.1 0.0 Combined -0.03 -0.1 -0.1 -0.6 -0.2 Ambitious -0.09 -0.5 -0.2 -1.7 -0.6 Source: World Bank simulations from CPAT and VHLSS 2018, reported in World Bank (2025a). The carbon transition is expected to generate a net boost in employment but some sectors would contract and new green jobs would not necessarily go to displaced workers.246 An analysis of the employment impacts of a set of decarbonization policies focused on reducing Viet Nam’s net emissions to zero by 2050 suggests that net employment could increase by 726,000 jobs in 2030 and by close to 1 million jobs in 2040. This increase in labor demand from a shift from high- to low- emitting sectors is common in the literature.247 However, these relatively small changes (equivalent to about 60,000 new jobs per year) mask significant movements across and within sectors. Some jobs in high-emitting sectors will be eliminated without new ones being created directly (especially in energy- intensive and polluting industries), with the largest drop being in transport as taxis and motorbikes are displaced by public transport. Jobs in coal-fired power plants and highly intensive energy industries such as cement and chemicals would be replaced by new jobs in renewable industries, although the displaced workers from the former would not necessarily be beneficiaries. 245 In particular, see World Bank (2022c) and Wai-Poi, Sosa and Bachas (2025). 246 World Bank (2022a) 247 See, for example, Fankhauser, Samuel & Sehlleier, Friedel & Stern, Nicholas (2008) Climate change, innovation and jobs. I 222 I Viet Nam Rising Labor market policies and social protection are central to minimizing the employment impacts of the energy transition. For displaced workers to move quickly and easily to the new jobs being created under the energy transition, they need: (i) to already possess or be able to quickly acquire the right skills; (ii) be able to match to an appropriate job; and (iii) be able to financially afford to wait until they find an appropriate job and not take a lower-paying job out of necessity or resort to other negative coping mechanisms such as reducing investments in their children’s human capital. The skills retraining and job matching policy reforms of Chapter 3 come to the fore to facilitate (i) and (ii) while the social protection reforms of Chapter 7 permit (iii). Thus, many of the policies that promote growth in Viet Nam will also help prevent increases in inequality and make workers and households more resilient to shocks. Table 19. Fiscal equity reform agenda Policy package Key recommendations 1. Increasing l Rationalize VAT rates (remove exemptions and preferred rates), consider raising the base fiscal space rate over the medium-term to raise additional revenues while reducing l Improve targeting of social assistance benefits to enhance their effectiveness inequality l Use targeted social assistance to mitigate the negative impacts on poor households of revenue raising reforms l Increase coverage and adequacy of social assistance pension 2. Recycle carbon l Recycle carbon tax policy revenues to reduce price and employment impacts tax revenues to - Provide top-up cash transfers through existing social assistance programs reduce impact of the energy l Invest in retraining and job matching for workers in sectors at risk to the energy transition transition on poor households and vulnerable workers Pathways to a High-Income Future I 223 I REFERENCES Acemoglu, Daron. (2009). Introduction to Modern Economic Growth. 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