Vietnam’s economic development is on the clock. Its golden population, and its demographic dividend, are set to come to an end around 2041, less than two decades away.
If its performance between now and then reflects its performance over the preceding twenty years (an average GDP growth rate of about 6.25 percent), its GDP would grow by about US$6,800 per capita, reaching roughly US$11,020–not accounting for inflation–when its population becomes dominated by dependents instead of workers (READ: higher government spending and fewer workers to shoulder the tax burden).
This is well known too and has created a sense of urgency among key decision-makers who, looking to see growth that exceeds these expectations, have set very ambitious targets on some very tight timeframes. That said, they are not unachievable, but they will require swift and significant economic reforms.
What might those reforms look like?
It’s difficult to say at this juncture, however, there is generally a tendency to look for economic development ideas regionally. The Four Asian Tigers in particular are often cited as models of growth in which Vietnam might find the key to sustained, rapid, economic development.
These advanced Asian economies, however, were founded on free-market principles (even if there was still significant intervention by their governments) whereby demand would dictate production. Vietnam’s economy, however, was not.
Vietnam was for a long time a command economy with the means of production almost entirely controlled by the state which would choose what was made, by whom, and when. It has since opened up significantly, however, it still has a long way to go (a changed circumstances review by the United States last year found that the state was still too involved in the economy for it to be considered a market-economy by US standards).
That is to say, that the big-picture economic growth Vietnam needs can at least partially be coloured in with a more substantial, faster shift from a command to a market economy, and the best example of a quick shift in this respect, is arguably Poland.
Specifically, from 1990 to 2023 Poland added US$20,325 to its GDP per capita. For comparison, Vietnam, over the same period, added just US$4281.10, according to World Bank data.
So what did Poland do that allowed for such a rapid change in its fortunes and can Vietnam do the same?
The Balcerowicz Plan
Colloquially known as ‘shock therapy’ Poland’s transition from a command to a market economy was crystallised by the speed at which it deregulated its economy and privatised state assets.
This was part of the Balcerowicz Plan devised by its namesake Leszek Balcerowicz, an economist and technocrat who believed that the best way to make the transition was to do it quickly. He rationed that a slow gradual transition would allow the old elites to adapt and breed corruption and malfeasance.
In practice, that speed saw the Polish parliament pass 10 acts on December 31, 1989, that, among other things, made the Polish currency convertible, deregulated most prices, slashed subsidies to many state-owned enterprises and allowed them to go bankrupt, and opened up the economy to foreign investment. These acts all came into effect just one day later on January 1, 1990.
Moreover, this was just the beginning of a significant restructuring of the Polish economy. Over the following years as the economy stabilised, a second wave of reforms took place. In a quest for greater operational and allocative efficacy in the country’s state-owned enterprises (SOEs), Poland began work on the task of privatising much of its state-owned sector.
To do this, it set up a number of investment funds each controlling a group of SOEs. These funds were given performance-based financial incentives with the view to motivating fund managers to most effectively manage their assets.
Perhaps, more importantly, however, was that shares in these funds were then distributed among the adult population. This gave the public a vested interest in the success of the privatization scheme.
As a result, by 1998 the number of former SOEs generating a profit reached 64 percent, up from 40 percent in 1995. Moreover, by 2004 Poland officially met the stringent entry requirements for accession to the EU and subsequently was admitted to the bloc.
The conditions that made it possible
The collapse of the USSR saw free elections in Poland that led to a change of government with a huge majority. This gave the new leadership broad powers to make significant changes.
Moreover, the writing had been on the wall for some time which had allowed technocrats and economists, like Balcerowicz, to strategize and plan.
Poland was also experiencing significant economic withdrawals from the USSR with inflation in 1989 over 500 percent.
That is to say, that Poland was in a state of turmoil with a lot of distractions everywhere and as a result the new government was able to push through the Balcerowicz Plan with limited opposition.
Those conditions, of course, are a far cry from where Vietnam is today.
That said, the recent leadership shake-up may discourage internal dissent, enabling the leadership to implement reforms more decisively than in the past. Moreover, as a one-party state public support isn’t really needed.
The economy is also in a state of flux with the dong now being allowed to devalue after heavy foreign reserve interventions last year. That’s not to mention uncertainty around US trade policy under the Trump administration–a potentially serious risk for an economy as dependent on the US market as Vietnam.
In fact, the only thing really missing seems to be a comprehensive plan for the kind of major reforms Vietnam needs. However, there is copious amounts of analysis and advice available from a myriad of intergovernmental institutions collected over the decades so putting a plan together may not be all that difficult to do.
Financing a transition
Putting SOEs up for sale is one thing, however, finding buyers can be quite another.
For Poland, neighbouring the European Union, it was only natural that it would see huge inflows of foreign capital from the bloc.
Conversely, for Vietnam, whereas joining the EU might not be a practical option, it is worth noting that the EU is in the process of ratifying the EU-Vietnam Investment Protection Agreement (EVIPA) which would provide significant investor protections strengthening Vietnam as an investment location for EU investors.
That’s not to mention the investor protections built into a broad number of Vietnam’s other free trade agreements: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the Vietnam-Japan Economic Partnership Agreement, and the ASEAN Comprehensive Investment Agreement, for example.
The point being, that the conditions are ripe for foreign investment to flow into a more liberal private sector and newly privatized state assets.
All of that said, the Balcerowicz Plan has not been without its critics.
Unemployment for one skyrocketed in those early days as inefficient state-owned enterprises went out of business or laid-off workers in order to become profitable.
Moreover, inequality increased substantially. Poverty jumped with the bigger impacts often felt harder in rural regions that had been mostly dependent on SOEs and lacked the diversity in their economies to absorb sacked workers.
Some of this was foreseeable, some of it was not.
Either way, Poland opted for the short-term pain in exchange for the promise of long-term gains sooner rather than later and this paid off in terms of rapid economic growth. The kind of growth Vietnam needs.
So, is a version of the Balcerowicz Plan the answer to Vietnam’s pending demographic crunch? Maybe, maybe not. That said, it does show that quick transitions are possible when the conditions are right and that there are lessons to be learned outside of Asia for Vietnam to build a solid, productive economy.