Toward 2045: How Viet Nam Can Reform Institutions to Escape the Middle-Income Trap

Research by the World Bank, developed under the Vietnam 2045 vision initiative. Supported by Australian Aid and enriched by inputs from Vietnamese and international institutions such as CIEM (Central Institute for Economic Management), VIDS (Vietnam Institute for Development Strategies), the Ho Chi Minh Academy, and Fulbright University Vietnam, the study offers a clear and urgent roadmap for institutional reform. The message is unambiguous: Vietnam’s path to high-income status hinges not on tweaking existing systems, but on fundamentally reimagining how its institutions function. As the country undergoes the largest public administration reorganization since the Doi Moi reforms of the 1980s, this report serves as both a diagnosis and a call to action.

From Gradualism to a Necessary “Big Push”

For decades, Vietnam’s strategy of gradual reform brought success, poverty declined dramatically, GDP grew fivefold, and human development soared. However, the country is now approaching a ceiling. To reach high-income status by 2045, a “Big Push” is required, an overhaul of the institutions that once enabled growth but now hinder progress. Since August 2024, sweeping reforms have been launched: ministries have merged, provinces are being consolidated, and an entire tier of government is being eliminated. These are not symbolic moves. They represent a recognition that existing structures are too slow, too fragmented, and too risk-averse for the demands of a modern, innovation-driven economy. The goal is not just to streamline, but to empower the government to deliver services efficiently and regulate markets fairly.

Breaking Institutional Bottlenecks in Investment and Regulation

Among the most critical institutional failures lies in public investment. Despite ambitious allocations, only 77 percent of the public investment budget was disbursed in 2024, far below the 95 percent seen in upper-middle-income and high-income countries. The process is tangled in overlapping laws, multiple approval layers, and inconsistent delegation. Reforms have begun: joint provincial projects are now streamlined, and some responsibilities have been shifted from the National Assembly to ministries. But deeper change is needed. The report recommends aligning capital and recurrent budgeting, improving project appraisal systems, modernizing procurement, and investing in early-stage land planning to reduce bottlenecks.

Equally problematic is Vietnam’s regulatory system. While progress has been made in streamlining administrative procedures, the sheer volume of rules, over 5,000 business licensing steps, is stifling. Firms report spending substantial time navigating bureaucracy, and regulations are often applied inconsistently. The study urges a shift from input-focused regulation (such as premises size or capital minimums) to outcome-focused, risk-based oversight. This would not only reduce costs but also foster innovation and investment. Moreover, the current “Law on Laws,” intended to rationalize legislative drafting and improve impact assessments, is often observed only superficially. Stronger analysis of economic and gender impacts, supported by trained teams and a reformed National Assembly, is essential to improve regulatory quality.

Motivating Civil Servants and Enhancing Accountability

Vietnam’s public sector remains large, but the civil service is increasingly demotivated. Wages have lagged behind the private sector, particularly since the COVID-era wage freezes, leading to resignations and difficulties attracting talent. Though recent pay increases have narrowed the gap, issues persist. The report calls for performance-linked compensation, flexible pay structures in high-demand provinces, and the closure of gender wage gaps. In parallel, efforts to reduce the number of state employees by up to 20 percent must be managed carefully through early retirement and attrition.

Crucially, the anticorruption campaign, while successful in shifting public perception, has led to excessive caution among officials. The report highlights a worrying trend: decision paralysis stemming from vague laws and fears of punitive enforcement. To mitigate this, Vietnam must invest in due process safeguards, build independent audit institutions, and create a culture of transparency through open data and stronger media and civil society participation. Independent mechanisms of oversight, not just internal disciplinary systems, are essential for sustainable accountability.

Building Institutions for a Green, Integrated, High-Income Future

As Vietnam looks to the future, the demands on its institutions will only intensify. Infrastructure needs for transport, energy, and digital services are growing faster than GDP. At the same time, fiscal and monetary institutions must evolve to handle volatility and support countercyclical policy. The State Bank of Vietnam remains overly reliant on administrative levers, with limited use of modern monetary tools like policy rates. The report recommends strengthening the central bank’s independence and upgrading its policy toolkit to better manage inflation and liquidity.

On the fiscal side, Vietnam’s current framework is rigid and often procyclical. Overcollection of revenues and underdisbursement of investments create inefficiencies. More flexibility and better alignment of spending with economic conditions will allow the country to respond more effectively to shocks. Furthermore, interprovincial competition has led to redundant infrastructure projects, airports, ports, and industrial zones built with little coordination or demand forecasting. The study proposes fiscal incentives for regional cooperation, asymmetric revenue-sharing based on economic realities, and mechanisms to encourage environmental sustainability through tools like ecological fiscal transfers and payments for ecosystem services.