In the past few years, the Vietnamese economy has experienced a significant decline in growth. It is no longer a star performer among neighbouring countries. And this declining performance has its origins in productivity growth. The country’s labour productivity growth declined from 5.3 per cent in 1990–2000 to 4.4 per cent in 2000–12, while this productivity growth was driven more by a shift of labour from agriculture to other sectors and less from technological progress within each sector. In the manufacturing, services and construction sectors productivity growth has been below China, Indonesia and the Philippines. There has also been a sharp decline in total factor productivity (TFP) growth. TFP has fallen from a sizable 2.5 per cent (during 1990–2000) to a meagre 0.1 per cent (during 2000–12).

This worsening productivity performance at the sectoral level, especially in driving sectors, demonstrates that Vietnam’s current development strategy is inadequate. It is heavily biased toward expansion and government intervention, sacrificing industrial upgrading and private sector development. To a large extent, the decline of TFP was the product of an unsound government-led industrialisation strategy that relied heavily on poorly managed SOEs. As a result, Vietnam became increasingly reliant on capital accumulation to promote growth. Between 2000–12, capital accumulation contributed 5.2 per cent to Vietnam’s average annual GDP growth, compared to 3.5 per cent in the decade prior.

It is imperative for the Vietnamese government to embark on another wave of bold reforms to reverse these growth patterns. Productivity should be the main focus for the country’s reform initiatives for three reasons.

First, Vietnam’s current labour productivity — a key measure of standard of living and competitiveness — still lags behind its Asian peers considerably. According to World Bank data, Vietnam’s labour productivity (measured in purchasing power parity) in 2012 was lower by a factor of 18 than that of Singapore, 11 than South Korea, 3.2 than China, and 1.8 than Indonesia and the Philippines. Moreover, Vietnam’s recent labour productivity growth in key sectors was well below peer countries. If these average growth rates of the past five year hold constant into the future, Vietnam’s labour productivity will remain below the Philippines for the next 20 years and Indonesia for the next 50 years.

Second, Vietnam currently enjoys a favourable labour supply, but this advantage will disappear as the country faces the challenges of an ageing population. In 2010, Vietnam entered the demographic dividend stage of development, in which the shares of children (aged 0–14) and the elderly (aged 65 and over) account for less than 30 per cent and 15 per cent of the total population, respectively. This stage is projected to endure for 30 years before the country’s population rapidly ages. By the mid-2040s, Vietnam’s population will be as old as Japan’s in 2010. This projection underscores the urgency of development, as it will be difficult (if not impossible) for Vietnam to realise fundamental economic progress with an ageing population.

The next three decades present the greatest potential for Vietnam to use its demographic advantage to boost productivity and record outstanding growth. But it may be tempted to continue exploiting the dividend for expansion-driven growth (through intensive low-skilled labour projects). Vietnam now faces an important choice: seize the golden opportunity of the demographic dividend to generate an economic miracle or confront the challenge of getting old before getting rich.

Finally, focusing on promoting productivity will enable Vietnam to accelerate growth and strengthen its foundation of prosperity and competitiveness. This requires decisive reform efforts to foster productivity growth through three channels: structural change, labour quality, knowledge diffusion and innovation.

Structural change requires a competitive, fair and enabling business environment with a growing private sector and strong entrepreneurship. Labour, land and capital should be shifted from low productivity firms (such as SOEs) to high productivity firms (such as successful private companies) and from low value to high value products. Market distortions that encourage speculation and commercially unviable investments should be removed. Upgrading labour quality needs a strong education and training system with close links between universities and businesses. Strengthening the links between the education system and businesses requires strategic support of the government, especially at the local level. Promoting knowledge diffusion and innovation needs more policy initiatives and incentive schemes to foster technology acquisition, knowledge diffusion and experiential learning across sectors and firms. This also requires a strong productivity movement that incentivises workers and managers to learn and to work together.

Vietnam has achieved significant progress in the last three decades since the launch of the 1986 Doi Moi reforms. But it may not be able to escape the middle-income trap and become a successful high-income country in the next three decades. As a country that has experienced considerable loss and sacrifice in finding the way to build a prosperous nation, Vietnam should not be complacent. Bold reforms are needed.

Vu Minh Khuong is an Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. This article draws on themes from his recent book The Dynamics of Economic Growth: Policy Insights from Comparative Analyses in Asia.