Last week, the Prime Minister of Vietnam, told a meeting of government leaders that continued high GDP growth was key to avoid becoming bogged down in the ‘middle-income trap’, elucidating a strategy which seems to follow a more literal interpretation of the phrase. Specifically, that by simply building up enough momentum Vietnam’s economy will be able to plough through middle-income status altogether.
That said, whereas this might technically be true it will be the underlying policy and structural reform powering that growth that will be the real determinant as to whether Vietnam can succeed where many others are now struggling.
With this in mind, this article looks at what the middle-income trap is in terms of policy and structural reform, how countries become stuck, how they free themselves, and finally, where Vietnam is currently situated in its journey toward high-income status.
What exactly is the middle-income trap?
The middle-income trap is a concept used to define a country that experiences rapid economic growth from a low-income to a middle-income country (defined by the World Bank as a country with an income per capita between US$1,136 and US$13,845) but then sees growth stagnate before it can reach high-income status.
This can be for a number of reasons.
For one, as an economy develops wages rise and firms that only require low-skilled labour shift their operations to lower-wage jurisdictions. Notably, at least part of Vietnam’s strong economic growth in recent years can be attributed to rising wages in China which has seen brands that utilise low-skilled labour move their operations south of the border. Nike and Adidas, for example.
On that note, competition between emerging economies may also be a factor in why countries become trapped.
China’s rise as a manufacturing powerhouse and as a major competitor for low-cost manufacturing work, over the last two decades, for example, hoovered up a lot of the manufacturing work that might otherwise have gone to other emerging economies. Moreover, by flooding global markets with cheap goods in recent years, China has left local firms in other emerging markets struggling to compete and build their own domestic industries.
Thirdly, there is also some suggestion that as incomes rise in developing economies a wealthy elite emerges that pushes for policies that: 1, favour a stronger currency in order to make imports cheaper; and 2, favour lower wages to ensure manufactured exports remain cheap. This prohibits the growth of a strong middle-class consumer base likely to spend higher wages on more locally produced goods which theoretically should facilitate a shift from export-led to consumption-led growth.
That said, there is not a one-size-fits-all factor, with each country experiencing its own unique economic development journey.
How do countries get out of the middle-income trap?
Just like there are a lot of theories as to how a country becomes stuck in the middle-income trap there are a lot of theories as to how they get out too.
The World Bank in its World Development Report 2024 lays out a three-stage process of development which it surmises as investment, infusion, and innovation.
Under this model, foreign firms invest in factories infusing the local economy with new equipment and upskilling local workers who, theoretically, can then go out with those skills and start their own firms growing a country’s domestic private sector. As this private sector develops it should theoretically start to innovate creating its own new technologies to both increase its own productivity but also to export to other parts of the world. In South Korea, for example, Samsung started out making televisions for Japan’s Sanyo back in the 60s only to become one of the biggest mobile phone producers in the world with research and development spending upwards of US$24 billion in 2024.
For this to work, however, there generally needs to be structural reform.
Firstly, government intervention in the economy needs to be scaled back.
Part of Poland’s escape from the middle-income trap was the government pulling excessive support for state-owned enterprises–its SOEs–and opening up its economy to greater imports. This in turn created greater competition for its SOEs and went on to facilitate a shift in their operations from focusing on reaching production targets to growing their market share and profitability, according to the World Bank report.
Moreover, businesses, including SOEs, need to be allowed to fail.
Anything that has become outdated or redundant, be it a job, a policy, or an entire business, needs to be allowed to disappear in order to make way for innovative, new ideas and businesses that are better run and more efficient. For example, allowing satellite internet services to replace traditional broadband.
Finally, political freedom plays a big role in how economies develop more efficiently and effectively.
There are just a handful of examples of countries escaping the middle-income trap as single-party states, mostly major oil producers in the Middle East. For almost every other country it has generally taken a significant transition to a socio-economic structure that promotes greater accountability through mechanisms like a free and open media and democratic institutions.
Where is Vietnam on its middle-income journey?
Firstly, the World Bank estimates that a country generally finds its growth begins to slow when its gross national income per capita reaches about 11 percent of GDP per capita in the United States. That was about US$9,104 as of the end of 2023 with Vietnam currently sitting at about half of that. With this in mind, there is still a lot of mileage left in the low-wage, export-growth led tank and this discussion may be somewhat premature.
That said, generally speaking, it’s currently a bit of a mixed bag.
Privatisation of SOEs has been slow and limited. Of 19 SOEs approved for privatisation between 2022 and 2025, as of June last year, none had been, nor were any really anywhere close to seeing this actually happen. Furthermore, the US Department of Commerce in its Change Circumstances Review for Vietnam found that SOEs account for somewhere between 20.6 and 30.2 percent of Vietnam’s GDP. Notably, this was down from a self-reported 40 percent in 2002, however, for comparison, for Poland, which is widely considered a middle-income-trap-escaping success story (on a purely economic level), SOEs accounted for just 15 percent of GDP last year.
Also, the government is still heavily involved in propping up both SOEs and private sector businesses. At least four banks have been put under ‘special administration’ by the State Bank of Vietnam at one point or another over the last decade, none of which have been declared bankrupt. Vietnam Airlines has also received extensive government support, most recently back in July when a US$157 million interest-free loan to the airline was extended. Moreover, enterprises that rely on imports have benefit from interventions in the local currency markets by the State Bank of Vietnam which has used various means to stop the dong from devaluing.
Finally, some political freedoms do exist though they are limited.
Vietnam has elections and generally affords voting rights to just about every one of age. However, that is about the extent of participation of most Vietnamese in the political process with various mechanisms used to ensure the status quo is maintained. That said, this does show that the basic processes and procedures are in place and may serve as a foundation on which to build a more inclusive political process. Moreover, Singapore is a high-income country but is scored only ‘partly free’ on the Freedom House democracy index so it doesn’t necessarily need to be perfect.
Furthermore, whereas there are a lot of takedown requests made of social media operators, quite a few journalists imprisoned for political speech, and several major international news sites blocked, a broad range of underground forums and news sites as well as social media groups exist that are filled with very open and earnest policy and political discussions. These unofficial forums for public discussion could very well be the beginnings of a more effective, open, and inclusive media apparatus.
All of that is to say, that there is a lot of systemic reform to be done but there does seem to be the bare bones of a middle-income-trap-escaping economy in place. Whether Vietnam will use this foundation to fuel reform and subsequently growth powerful enough to avoid the middle-income trap, however, is difficult to say this far out. That there is broad acknowledgement that there may be a problem, however, is promising, it’s now just a matter of developing a fuller understanding of what that problem might be and how it might most effectively be avoided.