Vietnam’s Political Economy in Transition: From Efficiency to Innovation as a One-Party State

Business & Economics 2025-2026 High School Essay Contest Winner

Vietnam’s efficiency-driven economy, grounded in low-cost labour and low-value exports, has grown considerably over the past decades. However, to transition to a mature, innovation-led economy and reach high-income status, political and economic reforms are necessary. This article recommends that, as an authoritarian state, Vietnam introduce a meritocratic bureaucracy, strategic R&D investments, and intentional civic engagement to foster innovation without compromising political stability.

Introduction

Vietnam has emerged as a leading export-led economy, achieving a real GDP growth rate of approximately 8% in 2025. Exports, including primarily electronic equipment, machinery, and textiles, accounted for over 90% of Vietnam’s GDP in 2024. Driven by a labor force of approximately 56 million people and annual foreign direct investment (FDI) inflows exceeding

$20 billion, Vietnam’s economy has rapidly industrialised, integrated into global supply chains, and is highly reliant on international trade.

The United Nations Development Programme forecasted that Vietnam is on track to become an “upper-middle-income economy” by 2030; however, to meet the target of achieving “high-income status by 2045,” it must maintain approximately a 6% GDP growth rate for the next two decades. Sustaining this level of growth will be challenging. Historically, efficiency-driven economies reliant on low-cost labour and low-value exports are subjected to the “middle-income trap,” vulnerability to external demand shocks and intensifying regional competition. For instance, Thailand’s export-oriented economy recorded double-digit growth for much of the 1990s and 2000s, yet experienced sharp drops in demand for manufactured exports during the 2008 global financial crisis and China-led 2013 slowdown. Political instability further eroded investor confidence, causing Foreign Direct Investment (FDI) to be lost to more stable neighbours. In short, dependence on exports and FDI without in-time innovation to move up the value chain has left Thailand’s economy trapped—a fate Vietnam’s economy may be set to follow.

As other emerging economies develop and their labour cost advantage erodes, transition toward an innovation and knowledge-driven economy becomes an imperative. The key question is to what extent such a transition necessitates social and political reforms, and whether Vietnam’s political economy can accommodate such changes. The future of Vietnam’s economy will depend less on radical democratisation, but rather on its capacity to institutionalise technocratic governance and recalibrate state-society relations.

Historical Background: The Politics of Reforms

“Doi Moi”—a political-economic reform launched in the 1980s—marked Vietnam’s transition from a centrally planned economy to a “socialist-oriented market economy,” opening it to private enterprise and international trade. Liberalisation, nonetheless, was not full-scale. Vietnam’s communist leaders adopted gradual market reforms to restore economic performance and reinforce legitimacy. 

The legitimacy of the Communist Party of Vietnam until 1975 was primarily rooted in its leadership in the country’s military struggle for national independence and reunification. Following the end of the Vietnam War in 1975, however, the country’s legitimacy shifted to its ability to deliver socio-economic development. Yet the inefficiencies of Vietnam’s centrally planned, collectivised economy led to stagnation and culminated in famine in the mid-1980s, with roughly one-third of the population suffering from malnutrition. At the same time, the decline of communist regimes in the Soviet Union and Eastern Europe undermined the credibility of traditional communist economic policies based on centrally planned economies.

However, institutional and economic reforms were deliberately curtailed amid heightened fears of political risks. As noted by Secretary of State Madeleine K. Albright in her 1997 visit, Vietnam did not ‘permit organized political opposition and a free press, … observe fully the right to religious expression fully…[or] release prisoners of conscience.’ Nevertheless, the lack of full-scale political liberalization did not necessarily preclude continued economic growth.

Authoritarian Governance and Economic Growth

Contrary to classical economic theory, which assumes free markets naturally generate wealth, authoritarian governance and meritocratic bureaucracies drove export-led growth in East Asian newly industrialised countries (NICs). Political instability, driven by labour movements, populist mobilization, and interest–group pressures, harms productivity growth and needed economic development in these young economies. As such, to contain such high-risk forces to the economy, NICs such as South Korea and Singapore maintained top-down state-labour relations in the second half of the 20th century.

Historically, these relationships resulted in wage-suppressed and politically stable East Asian economies that secured substantial foreign investment. However, the same authoritarian system that facilitated export-led growth now constrains Vietnam’s transition towards an innovation-driven economy. Defining characteristics of authoritarian regimes, including information control and weak checks and balances, hinder entrepreneurship and technological innovation. Suppression of free speech limits people’s ability to illuminate problems and exchange ideas that drive innovation, while weak checks and balances enable rampant corruption, which in turn erodes trust in state institutions and stifles entrepreneurship.

Lessons can be drawn from comparative experiences. South Korea’s ‘Miracle on the Han River,’ driven by export-oriented industrialization policies under Park Chung Hee, ultimately produced a rising middle class whose post-materialist values led to successful democratization movements

in the 1980s. China, by contrast, introduced the ‘reform and opening up’ policy in 1979 to strengthen performance legitimacy. Gradual reforms were made to shift some state-owned assets to private ownership, welcome foreign trade and investment, and grant provincial governments more independence to keep and reinvest their own tax revenue. The results are commendable: an 810% increase in overall trade volume from 2001 to 2020, an increase in GDP of over 9182% from 1980 to 2021, and more than 800 million Chinese people lifted out of poverty. Yet Beijing continues to maintain tight political control, expanding party cells in private sectors, community levels, and other parts of daily life.

Vietnam shares more structural similarities with China than South Korea. South Korea’s postwar development was heavily influenced by the United States. Although the United States backed South Korean authoritarian leaders in the 1960s, its foreign policy later shifted toward supporting democratic governance in South Korea. On the other hand, communist China and Vietnam were largely insulated from Western influences following their economic reforms, with international relations largely under the centralized communist government’s control. China’s strategic path of becoming a high-value, knowledge-based economy suggests that Vietnam can pursue similar reforms without systemic political rupture, the fear of which has historically constrained the scope of reforms.

Nevertheless, it is critical to highlight disparities between Vietnam and China’s development trajectories. While both embraced similar reforms under communist rule, China excelled in economic growth due to differences in government effectiveness. Its bureaucratic governance model facilitated industrial restructuring and strategic R&D investments to drive entrepreneurship and skills upgrading. 

However, Vietnam’s political leadership often prioritizes political loyalty over technocratic merit, potentially constraining the effectiveness of the civil service. This compounds the risks of capital misallocation from corruption and rent-seeking tied to political access. In early 2023, for example, the state president and two deputy prime ministers were forced to resign over corruption scandals involving overpriced COVID-19 test kits and overpriced repatriation flights for Vietnamese citizens stranded overseas. Despite their resignations and the evidence against them, none face criminal trials. Still, there are grounds for optimism. According to the 2021 Provincial Competitiveness Index (PCI) survey, the percentage of firms that viewed bribes as a necessary part of doing business in Vietnam has decreased from 70% in 2006 to 41.1% in 2021, because of a decade-long anti-corruption campaign, freeing up capital for firms to invest in innovation.

Vietnam’s current leadership thus faces a delicate dilemma: a full regime change is highly unlikely, yet slowing economic growth attributed to its current governance structure risks compromising governmental approval and political support. As such, it appears that the ‘third way’ solution is to prioritize cultivating meritocracy and transparency within the civil service.

Rethinking State-Society Relations for Policy Reforms

The case of China is an instructive example of the ‘third way.’ Its example suggests that while democratisation is not a prerequisite for economic transition, a meritocratic bureaucracy is. To build a thriving innovation landscape, access to information, regulatory approvals, and state subsidies must be allocated according to performance criteria rather than political connections. Depoliticising economic opportunities can foster institutional trust and entrepreneurial risk-taking.

In addition to fostering a more transparent business environment, Vietnam must embrace structural reforms in human capital development. Brain drain and educational migration reflect the limitations of domestic higher education. Higher education reforms similar to China’s 985 and 211 projects and Singapore’s autonomous universities would thus promote greater innovation-led economic growth. This includes granting greater fiscal and academic autonomy to leading universities for research funding and faculty recruitment, in order to address the concerning fact that only 12% of Vietnam’s 57.5 million workers are highly skilled. Ultimately, a higher quality education system will provide the skilled workforce and research capacity Vietnam needs to move up the value chain and sustain further innovation-led growth.

However, changes in state-society relations are inherently bi-directional. The Doi Moi experience suggests that Vietnam’s reforms have often been driven by extrinsic and legitimacy pressures rather than pure economic interests. To drive changes necessary for economic transition, Vietnam should strengthen public consultation mechanisms to enhance policy responsiveness without destabilising the one-party rule. Singapore offers an example of such consultative authoritarianism. State-sponsored social feedback platforms, such as weekly

“Meet-the-People” sessions by Members of Parliament and the REACH online channel, facilitate intentional public engagement. Fostering public accountability and effective policy feedback facilitates the industrial and legislative reforms needed to support Vietnam’s transition towards a mature economy.

As Vietnam advances towards high-income status, the core challenge lies not in the zero-sum game between economic growth and political liberalisation, but in strengthening state capacity and reengineering state-society relations. The government should introduce a more meritocratic bureaucracy within its authoritarian regime structure to ensure fair business regulations and long-term entrepreneurship. In addition, greater investment in higher education and research is essential to cultivate the innovation capacity needed to move up the value chain and escape the trap of low-value-added, export-dependent growth. Finally, structured public consultation and policy feedback should be more open to enhance policy responsiveness and institutional trust without undermining the one-party rule. Ultimately, Vietnam’s transition to a high-income economy will depend less on radical political reforms than on whether its institutions can flexibly adapt to facilitate an innovation-led economy. 

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Linh H. is a high school student from Singapore. She has written extensively on politics, governance, and economics, particularly in the context of Southeast Asia.