Uncaging the Dragon: Vietnam and the Middle-Income Trap

Abstract

Abstract : Vietnam embarked on a path of economic renovation in 1986 that has been remarkably successful. Its economy rapidly expanded from the poorest country in the world in 1993 to a middle-income manufacturer by 2010. Meanwhile, Vietnam has become a significant trading partner of the United States. However, there are signs that not all is well with Vietnam's economy and that the strategy it has employed towards a socialist-oriented market economy may be starting to falter. Slowing Gross Domestic Product (GDP), rising inflation, and falling foreign investment point to the possibility that Vietnam is becoming caught in the middle-income trap. The middle-income trap describes the challenge developing economies face after they rapidly grow into a middle-income economy by providing inexpensive low-skilled labor for manufacturing, but then cannot compete with high-income advanced economies because it lacks the institutions necessary to continue economic growth. The author suggests that strengthening the Vietnamese private enterprise sector is the way to escape the middle-income trap and recommends that Vietnam adjust its current socio-economic strategy to address the core issues that will limit further economic growth. The author recommends eliminating the competitive advantages of Vietnam's large state-owned enterprises, improving private enterprise access to capital, and liberalizing access to the Internet and advanced education in order to develop both the fiscal and human capital necessary to become a high-income economy. Finally, the author concludes with recommendations on how USPACOM may be able to build a closer relationship with Vietnam by assisting its private enterprises.