New Reforms Can Unlock Vietnam’s Economic Potential

Vietnam and Australia are well-placed to expand economic ties. But Vietnam’s fast-growing economy faces challenges to maintain growth unless it embarks on another generation of reform, in which Australia could play a helpful role.

Since establishing diplomatic ties in 1973, Australia and Vietnam have seen their bilateral relationship flourish, marked by deepening trust and respect across economic, political, and social realms. Economically, Australia emerged as Vietnam's 7th largest trading partner in 2022, with Vietnam ranking 10th for Australia, reflecting robust economic connections.

These ties extend to regional collaborations in forums like ASEAN and APEC, and through significant free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). Educationally, Australia is a preferred destination for Vietnamese students, with over 30,000 enrolments, making Vietnam the 5th largest source of international students in Australia.

Early projects like the My Thuan Bridge and the establishment of RMIT University in Vietnam further symbolise the strengthening ties. The relationship took a significant leap with the 2021 announcement of the Enhanced Economic Engagement Strategy (EEES), the Vietnam-Australia Centre in 2022, and other ongoing initiatives under Aus4skills and Aus4innovation programs.

Recognising the importance of this partnership, Vietnam views Australia as a priority partner, a sentiment echoed by Australian Prime Minister Anthony Albanese, who highlighted Vietnam as a top-tier partner.

This is an impressive record, especially when we consider the pace at which the relationship has expanded. But there are many more opportunities for future collaboration that should be embraced with some urgency because of the fluidity of the strategic and economic conditions both sides confront.

The Trade and Investment Opportunity

Trade between the two countries has surged, nearly doubling to USD 15.7 billion in 2022 from USD 7.9 billion in 2019, before dipping to USD 13.8 billion in 2023, reflecting global economic impacts on Vietnam's open economy. Over five years (2019-2023), bilateral trade totaled USD 58.1 billion, with Australia having a USD 13.4 billion surplus. Key exports to Australia were phones, machinery, crude oil, computers, and textiles, while imports included coal, minerals, cotton, wheat, and metals.

The potential exists in meat and wine imports to Vietnam and Vietnamese fruits in Australia. In terms of investment, Australia views Vietnam as a central focus in its Southeast Asia economic strategy up to 2040. By the end of February 2023, Australia had invested in 590 projects in Vietnam, totaling approximately 2 billion USD. Conversely, Vietnam had invested in 88 projects in Australia with a total investment capital of 592.3 million USD.

Over the next decade, Australian enterprises have the chance to capitalise on numerous emerging opportunities, particularly considering Vietnam's dedication to net-zero emissions by 2050, a goal announced at COP26. Coupled with Vietnam's dynamic digital transformation agenda and its vision for smart and sustainable urban development, these factors pave the way for synergistic partnerships.

Australia is well-positioned to contribute to Vietnam's shift towards renewable energies like solar and wind. Additionally, the development of digital infrastructure, such as international fibre optic cables, presents significant prospects. Opportunities also lie in overseeing the smart transition of agricultural practices and urban planning, further underscoring the collaborative potential between the two nations.

Vietnam's Economic Landscape: Opportunities and Challenges

During the 13th Communist Party of Vietnam congress held in early 2021, Vietnam set specific goals for its future development. By 2025, Vietnam aims to be recognised as a developing nation with a modern industry that surpasses the threshold of lower middle-income status. By 2030, the country aims to maintain its developmental trajectory, featuring a modern industry, and elevate itself to a high middle-income status. By 2045, coinciding with the centennial celebration of the founding of the Democratic Republic of Vietnam, which is now known as the Socialist Republic of Vietnam, the ambition is to transition into a developed country marked by a high-income economy.

Vietnam's emergence as a prime destination for global businesses is driven by its robust market potential and favourable conditions for offshore manufacturing. It is home to over 100 million people, has a rapidly expanding middle class, young and dynamic workforce, and extensive network of free trade agreements with key global economies such as the US, China, and the EU. These factors collectively make Vietnam a highly attractive investment destination.

Strategically positioned in Southeast Asia, Vietnam also offers unique advantages that extend beyond its geographic location to include a flourishing digital economy. This has established Vietnam as a vital hub for the manufacturing of electronics, textiles, and footwear in Asia, capitalising on its low labour costs relative to China, digitally savvy population, and business-friendly government policies. In addition to its manufacturing prowess, Vietnam is recognised as a leading agricultural force in the region, with a stronger focus on high-tech farming techniques. The country's agricultural sector's success is mirrored in the tourism and hospitality industry, which benefits from Vietnam's rich cultural, historical, and natural assets. This sector presents significant investment opportunities, particularly in the development of hotels, resorts, and related services, further enhancing Vietnam's appeal to international investors.

Vietnam is a fast-growing economy and is viewed as an outperformer, but it faces challenges in maintaining its growth. If these challenges are not addressed, Vietnam might fall into the middle-income trap.

First, government machinery is large and cumbersome compared to other countries, which can expose weaknesses in public administration. The governance issues facing Vietnam are also highlighted in studies by international agencies such as the World Bank and the UN. Although other pillars of the national digital strategy are progressing well, the digital government pillar may need more attention and effort. Efforts to implement public administration reform initiatives require more robust approaches, with digital initiatives in governance apparently yet to achieve the desired outcomes. That is why there has been a call for an 'administrative highway' to address these challenges.

Second, the development and upskilling of human capital poses a challenge for Vietnam, particularly in the digital age. Vietnam's higher education has undergone some changes in recent years, but there is still much work to be done. This includes having more internationally recognised programs, adapting to global standards, and attracting more international students to the country. Flexibility and adaptability in policymaking are crucial to avoid one-size-fits-all, and outdated, approaches when setting curriculums and other policies in higher education.

Third, Vietnam must upgrade the efficiency of its global value chains. Vietnam's transformation into a dynamic economic hub over the past 35 years is remarkable. Over $450 billion in FDI has been pumped into the economy, as multinational corporations like Samsung, Toyota, Intel and LEGO have set up major manufacturing operations. However, only a small number of Vietnamese companies have climbed the global value chain. Their activities are often limited to low value tasks and are further hindered by fragmented domestic industrial linkages.

These three challenges are interrelated. Once governance issues are addressed, the country will be in a better position to tackle the other two. The governance and legal reform focus is consistent with the experiences of other East Asian countries that experienced rapid economic growth. Furthermore, poor, and outdated, public management practices can result low productivity among State-Owned Enterprises (SOEs) and slow and inadequate infrastructure.  Expensive logistics and challenges in managing urbanisation add to the policy concerns.

Considering the strengths of Australian government and private enterprise, such as world-leading governance, digital utilisation, advanced logistics, and success in managing globalisation and energy transition, Australia can work with and support Vietnam in overcoming these weaknesses. But it will require commitment at the top in Vietnam to pursue digital or smart governance strategies at all levels of administration, enhance human capital, and improve necessary infrastructure – a tall, but necessary, order to achieve the ambitious economic development targets identified at the 13th congress.

Dr. Trung Nguyen is an Associate Professor and Head of the Management Department at RMIT Vietnam's Business School. He has a PhD in Management from Monash University.