Why is Vietnam Poor?

Myth-busting: “Why is Vietnam so poor?”

Photo credits: Will @ VietnamDaily

Since the Đổi Mới reforms of 1986, Vietnam went from one of the world’s poorest countries (<$100 GDP/capita) to one of the fastest growing economies in Asia (~7-8%/a). With a highly intelligent populace and new free-trade agreements, Vietnam will likely become a high-middle-income country by 2030 and a high-income developed country by 2035 (source).

However, despite these transformations, global perceptions of Vietnam remain stubbornly outdated, as evidenced by websites like Quora and Google where questions like “Why is Vietnam so poor?” are top-ranking questions.

In this article, we dispel some of the myths about the root-causes of Vietnam’s relative wealth. We use scientific studies and statistics to address the question, as well as our own personal experiences living and working in Vietnam.

To address the misinformation about “Why Vietnam is relatively so poor?” we discuss:

TL;DR: the data shows that since 1986, Vietnam is following the same rapid GDP growth as its Asian neighbours (Malaysia, S Korea, Thailand), and is therefore no different in wealth-accumulation (see the graph below ). But, due to the mathematics of exponential compounding, and because Vietnam missed 18 years of growth prior to 1986, other Asian countries have more wealth in absolute terms because they started compounding earlier.

The Main Reason: the Mathematics of Compounding

The Doi Moi free-market reforms of 1986 marked the start of Vietnam’s multi-decade boom in wealth, as shown in the figure below. The figure shows the growth in GDP per capita of Vietnam and its neighbours, from 1970 to 2019. Notice that on the log-scale, the countries’ growth-rates are almost parallel, showing that Asian countries have similar and consistent growth-rates in the range of 5-8%. Vietnam is one exception: it shows the steepest and fastest growth rate since the late 1980s.

Vietnam's GDP/capita growth since 1970
Left: GDP growth on the natural scale, among Asian countries; Right: growth plotted on the logarithmic scale. The log-scale shows that Vietnam is actually the fasttest growing among its Asian neighbours, and its wealth-disparites are due to a 18-20 period of no-growth, prior to the Doi Moi free-market reforms of 1986.

However, it is an unfortunate fact about compounding-wealth that despite similar growth-rates (i.e., parallel lines on a log-chart), a few years NOT GROWING will result in enormous disparities in wealth on the absolute scale (i.e., the left-side of the chart). The reality of exponential processes is that countries with a head-start will make even bigger gains in later years, amplifying the perception that Vietnam is somehow suspiciously poorer.

Notice that there was no GDP growth in Vietnam from 1970 until the Doi Moi policies of 1986, after which Vietnam took-off like a rocket. In those 16 years prior to Doi Moi, we can observe Vietnam’s neighbours continuing to grow at 5-8%/a. The effect of that compounding led to enormous disparities by 1986 between Vietnam and its Asian neighbours. For instance, Thailand grew by a multiple of 4.23 ($200 to $848 GDP/capita); Indonesia grew by a multiple of 7.87; South Korea grew by a multiple of 10.1. Imagine having 10x your wealth!

This is the single biggest factor to answer the question “Why is Vietnam so poor”: it is the victim of lost-compounding. Vietnam started-out with similar wealth-levels as its neighbours but did not participate in these amazing economic expansions until 1986.

The mathematics changed with the great Doi Moi reforms: after civil-war and experiments with collectivization, the Vietnamese government made the shrewd decision to transform the country into a thriving free-market economy. Farm-collectivization was reversed and farmers once again had incentives to work hard and increase their productivity. People once again could own their own land and own their own businesses.

Vietnam’s Recent Openness to Foreign Business

Studies show that foreign investment has had a strong impact on Vietnam’s economic growth (source). The benefits have only accrued relatively recently, as the country has gradually opened-up to external financing and trade. Consider the following sequence of trade liberalizations, prior to which Vietnam had prohibitively large tariffs:

  • 2007: Vietnam joins the WTO.
  • 2015: ASEAN free-trade agreements.
  • 2019: Trans-Pacific Partnerships (CPTPP), e.g., Canada, Australia, NZ, Japan)
  • 2020: Vietnam-EU Free trade agreement.
Vietnamese international trade - chart of tariffs on imports vs new free-trade agreements.

Besides the macro-economic statistics of FDI, there are large and important cultural-impacts due to Vietnamese people working closely with international mega-corporations: we have personally witnessed the transformational aspects of knowledge-transfer and adoption of international best-practices to local Vietnamese operators. What makes Vietnam so interesting is how eager the Vietnamese people are to absorb and replicate such systems, and how evident such adoptions has been across both high- and low-tech industries.

RELATED: Made in Vietnam – Famous brands that do most of their manufacturing in Vietnam.

Take H&M for example: the local Vietnamese managers are trained in highly-sophisticated operations such as forecasting demand, inventory management, logistics, and how to properly recruit employees and delegate tasks. “I can tell when a shop-owner has been trained at H&M” a Danang-based colleague notes: she observes an independent store’s layout and style and immediately recognizes the hint of H&M’s handbook. This transfer is happening across many industries, from marketing agencies, to film-editing, to manufacturing, and more.

These wealth-building best-practices contrast with the legacy ethos of command-and-control economics. This mentality is still somewhat present among some older business owners: they developed their customer-service norms during the Subsidy Era of 30 years-ago, in which the workers who ran the government-owned shops occupied high-privilege positions. Instead of fostering a culture of “the customer knows best”, it was the consumers who had to appeal to and appease the shop-operators. The operators had little incentive to innovate or grow.

This type of mentality is itself a fascinating thing to behold as a tourist in Vietnam. It contrasts sharply with the new generation of Vietnamese businesses who have more in common with their Korean or Singaporean counterparts than the Soviet-era elder generations.

Lack of Access to Information

“Vietnam is like a 1600-century old woman suddenly waking up with a smart phone”

This is a humourous metaphor we heard in Vietnam. It is not meant to be disparaging, but to emphasize how much Vietnam has changed within 30-to-20 years, in terms of internet penetration and access to information. This is important because studies show that internet penetration is a key driver of GDP growth (source).

Prior to the advent of the internet, the primary sources of information in Vietnam were public-radio and hard-copy publications. The latter were meticulously reviewed and controlled by state agencies. Regardless of whether one considers this a worthwhile government intervention, it is self-evident that such reviews created a bottleneck on the variety and accessibility of the world’s knowledge-production.

Today, the world’s expansive knowledge and IT-technology is available to nearly all Vietnamese people. Consider the accessibility of open-source IT technologies: from machine-learning (e.g. Vietnamese Pytorch models ), to computer-programming materials (e.g. Python in Vietnamese), or turn-key webhosting (e.g. WordPress in Vietnamese). The developed world has made a deliberate effort to translate its IT technologies and make them available for free on the internet, a benefit that has only recently been available to Vietnam.

What are the wealth-building and poverty-reducing benefits of this IT revolution? A Vietnamese person can now easily spin-up micro-services on cheap cloud-infrastructure (like MatBao.vn), build professional web-portals via WordPress.vn, and learn state-of-the-art computer programming from almost infinite online resources.

Legacy of War

Civil wars have strong negative effects on cultures and their economic growth (source). Such studies suggest that post-war economies can recover very quickly, but some do not. These differences are driven by what happens to a country’s capital stock and business-class during the conflict and subsequent reinvestment. In the case of Vietnam, post civil-war reinvestment and development took longer due to land-reforms like collectivization, which were later reversed. Likewise, business-owners had a lot of upheaval after re-unification.

Lack of Access to Capital

Studies suggest that a key aspect to growth of Asian small- and medium-sized businesses is access to capital and financing (source). In order for fledgling businesses to procure machinery, stock inventory, and secure rental agreements, they desperately need funding to ride-out the early start-up periods of negative profits.

This fact undergirds why a nation’s wealth compounds: wealthy people can afford to deploy their capital into risky start-up businesses. In doing so, they relieve some of the risk placed on founders and allowing start-ups to gain traction without risking their personal or families’ capital — or worse, not trying at all. This breathes life into a new entrepreneurial class.

Traditionally, it has been very difficult for Vietnamese entrepreneurs and other wealth-builders to access capital. Even with a well-functioning banking system, interests have been punitively high in Vietnam.

This has started to change recently, thanks to two innovations in the way Vietnamese people can get access to capital:

  1. the meteoric grow of alternative “fintech” lenders — these lenders use creative collateral arrangements (like motor-bikes) or p2p-models to raise funding for small businesses (e.g., Tima.vn, Interloan.vn); and
  2. the rise of Silicon-Valley-esque angel investors and start-up incubators that are native to Vietnam.

These innovations will compound: in the same way that older Asian start-ups (e.g., Alibaba, Tencent, Samsung) have become massive start-up investors and incubators themselves, there is a virtuous cycle of business-generation and wealth-creation as local hubs of innovation take root in Vietnam, share expertise, and channel their profits into the next generation of start-ups.

Why is Vietnam so poor: the Myth

The myth is that there is something intrinsically wrong with Vietnam, or that its poverty is exceptional, or that somehow “Western capitalism” (as hinted by Quora) is sucking profits away from the country. The data and studies suggest that Vietnam is on a robust growth trajectory, literally parallel to its neighbouring Asian countries (on the log-scale), like Malaysia and South Korea — albeit their absolute wealth levels are ahead by 15-20 years due to Vietnam’s no-growth period prior to the great Doi Moi free-market reforms.

Recently, there has been an explosion in the number of trade-agreements, large foreign investment, new access to open-source technologies, and the rise of an entrepreneurial ecosystem — together, these developments make Vietnam one of the fastest growing economies in the world and a darling of international investors. Likewise, multinational corporations see the good-news story and choosing Vietnam as their manufacturing base (like Samsung, Intel and Fjallraven).

Witness the Vietnamese Transformation

Travellers to Vietnam can bear witness to this transformation — which is pretty exciting as a tourist sight. For instance, in Hanoi, one can tour a variety of busy guild-streets and guild-neighbourhoods that are solely dedicated to a specific craft , or explore the back-alley warrens of small-home-businesses working in hip new knowledge-fields. The work ethic and flurry of activity is very obvious and exciting to behold.

RELATED: DIY Tour of Hanoi’s Famous Guild-Streets

The Vietnamese hustle-and-bustle is paying-off handsomely and resulting in widespread optimism. In fact, the Vietnamese youth are among the most optimistic about the future of all their Asean counterparts (source).

Vietnamese youth posing in Western fashion outside new mall in Hanoi
Vietnamese youth posing in Western fashion outside new mall in Hanoi. Photo credit Lynn @ VietnamDaily

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