What is behind Vietnam’s economic success story?

The World Bank has forecast Vietnam will show the strongest growth out of emerging economies in Southeast Asia.

In a new forecast from the World Bank, Vietnam’s economic growth is expected to reach 6.1% by the end of 2024 and 6.5% in 2025.

Both forecasts are higher than what was estimated in April, with the increase in growth down to a rebound in manufacturing exports, tourism and investment, the report said.

This shows that Vietnam could have a bigger growth in 2025 compared to other emerging economies like Thailand, Cambodia, Malaysia, Indonesia and the Philippines.

“Vietnam certainly faces some serious challenges, not least the ailing domestic sector and over-reliance on the [foreign direct investment] sector, but compared to other Southeast Asian countries, its economic prospects remain bright,” Nguyen Khac Giang, researcher and visiting fellow at the ISEAS Institute, told DW.

What is driving growth?

Vietnam, like other Southeast Asian countries, relies heavily on foreign direct investment.

Between 2021 and 2023, FDI inflows into Vietnam, Thailand, Indonesia, Malaysia, Singapore and the Philippines averaged about $236 billion a year, according to the ASEAN Investment Report 2024.

As Western investors try to diversify away from China amid geopolitical tensions between the Washington and Beijing, Southeast Asian countries are becoming a top choice for foreign investment from the US, Japan and the EU.

Nguyen Khac Giang said Vietnam is taking advantage of those tensions.

“I think Vietnam can maintain its growth momentum due to its domestic advantage of a 100-million population with a rising middle class, while also optimizing the benefits of its geopolitical position in the great power competition between China and the US,” he said.

China has also been investing in Southeast Asia, with Beijing and Hanoi establishing their “comprehensive strategic partnership” in 2008.

‘China plus one’

Like China, Vietnam’s economic growth comes under the stewardship of a one-party system, with the Communist Party having complete controlover the state’s functions, social organizations and media.

“China is Vietnam’s biggest trade partner, but more importantly, it plays a crucial role in Vietnam’s manufacturing sector, as most of its inputs come from China. I don’t think that will change in the foreseeable future,” Nguyen Khac Giang said.

“China Plus One” is a global economic business strategy for investors to reduce sole reliance on market and supply chain operations in China, aiming to expand into other countries while maintaining presence in the Asian giant.

Countries in Southeast Asia are seen as suited alternatives.

Bich Tran, an adjunct fellow at the Center for Strategic and International Studies (CSIS), said Vietnam is a top choice.

“Vietnam is one of the top choices for many companies’ China plus one policy because of the geographical proximity and similar culture,” she told DW.

“For those who have been operating in China, moving to Vietnam is much easier, and dealing with the Vietnamese would be more familiar than dealing with Indonesia or Malaysia,” she said.

“That being said, Vietnam is much smaller than China, so it can only absorb a small number of companies who want to relocate. India, if they open up their economy, would have much better chance of competing with China than Vietnam,” she added.

Vietnam attracts Western economies

The US is Vietnam’s second biggest trade partner and largest export market.

In September 2023, Washington and Hanoi upgraded their diplomatic relations, signing a “Comprehensive Strategic Partnership for Peace, Cooperation and Sustainable Development.” Analysts say the agreement was largely to boost economic benefits.

The US is one of Vietnam’s growing list of strategic partners, including Australia, China, India, Russia, South Korea, and more recently France.

But huge investment from Washington is key to economic opportunities for Vietnam.

Apple, the US tech giant, was again named the most valuable company in the world this year.

Vietnam has become a key manufacturing location for the company, with Apple investing over $15 billion in the country in the last five years.

Apple CEO Tim Cook seen during a visit to Hanoi in 2024
© NHAC NGUYEN/AFP

Vietnam has low labor costs, and a young and large workforce, with 58% under 35-years-old, out of a population of almost 100 million, making the country an attractive bet for investment.

More structural reforms needed

However, strong growth is also encountering domestic issues. Although Vietnam has one of the fastest growing economies in the region, it has a poor reputation on corruption, political censorship, human rights and civic society.

Domestically, local small to medium companies are struggling to become as competitive as manufacturers exporting to international markets.

Prices are also increasing for essentials such as food production due to climate change events, such as the recent Typhoon Yagi. Vietnam faces frequent electricity shortages, and experts say it must increase the use renewable energy.

Sebastian Eckardt, a practice manager for East Asia at the World Bank, said structural reforms are needed.

“During the first half of the year, Vietnam’s economy benefitted from the rebound in export demand. To sustain growth momentum not only for the rest of the year but over the medium term, the authorities should deepen structural reforms, step up public investment while carefully managing emerging financial risks,” Eckard said.

Edited by: Wesley Rahn

Author: Tommy Walker (in Bangkok)