Vietnam’s economy continues to post strong growth, but the International Monetary Fund ( IMF ) urges the country to “move fast on deep structural reforms” to sustain momentum and achieve its ambition of becoming a high-income economy by 2045.

While the export-led model that has powered Vietnam’s rise over the past two decades “has achieved remarkable successes”, the economic conditions that supported its success are “becoming less conducive to strong growth”, finds the IMF’s recently released Vietnam: Selected Issues report.

“Labour and capital accumulation have been the main growth engines so far,” states the 45-page report by the Washington-based financial institution, “but productivity has contributed negatively to economic growth on average over the last two decades.”

Demographic changes, the fund warns, could soon slow economic momentum. “With demographic trends projected to reverse,” it notes, “labour factors will increasingly become a drag on growth.”

To stay on course towards its 2045 vision, Vietnam must, the IMF argues, focus squarely on improving productivity. “A comprehensive set of structural reforms and public investment in infrastructure could help boost productivity and medium-term economic growth,” the report adds, citing inefficiencies in labour and credit markets and the need to harness emerging technologies like artificial intelligence ( AI ).

Productivity, skills gap

Labour productivity in Vietnam has grown quickly, but remains well below that of many regional peers, shares the fund, which identified skill mismatches, limited vocational training and high informality as major obstacles.

“Vietnam’s labour market,” the report highlights, “faces a dual problem – a shortage of high-skill workers and a growing number of overqualified workers unable to find suitable jobs.”

About 18% of workers were overqualified for their current jobs in 2022, finds the IMF analysis of Vietnam’s Labor Force Survey. “High-skilled workers in tradable sectors,” the fund states, “are 21 percentage points more likely to be overqualified compared with low-skilled workers.”

Large-scale investment in upskilling, vocational programmes and industry–university partnerships are needed, according to the fund, to align training with market demand.

“Vietnam must transition from labour-intensive assembly towards higher value-added, technology-driven activities,” IMF economists say. “Without a major upgrade in human capital, the country risks falling into a middle-income trap.”

Fixing capital distortions, financing growth

Concerns about declining total factor productivity – a measure of how efficiently an economy uses labour and capital – are also raised in the report, as this has been on a downward trend since 2015, despite higher labour output.

“Capital accumulation alone is not enough to sustain growth,” the IMF report notes. “Distortions in capital and credit markets are preventing firms from reaching the frontier of efficient resource allocation.”

Foreign-invested enterprises have become Vietnam’s most productive and best-paying employers, accounting for nearly 40% of jobs and more than 50% of total wages in 2022. However, “higher productivity in the FDI [foreign direct investment] sector,” the report notes, “has not translated into catch-up growth among domestic firms.”

Reducing resource misallocation to levels seen in advanced economies, according to the IMF, could lift aggregate productivity by around 60%. Vietnam’s state-owned enterprises ( SOEs ) enjoy lower borrowing costs than private firms, the report also finds, adding that “preferential treatment for SOEs remains a key contributor to capital misallocation [… and] undermines fair competition.”

Vietnam’s infrastructure plans – including the Long Thanh International Airport just outside Ho Chi Minh City and new railways and metro systems – are projected to require about US$185 billion in investment between 2025 and 2035. Such projects could lift growth by roughly 0.8 of a percentage point a year, if executed efficiently, the IMF points out, but it warns that weak implementation could increase public debt without sufficient returns.

Using the IMF’s Dignar ( debt, investment, growth and natural resources ) macroeconomic model, the fund estimates that a reform package combining higher investment efficiency, SOE privatization, stronger tax collection, greater labour participation and reduced credit distortions could raise Vietnam’s growth by more than two percentage points and expand output by about 9% by 2030, while keeping debt stable.

“Implemented together, these reforms,” the report states, “would markedly strengthen debt dynamics and reduce inequality.”

The long-term role of AI in Vietnam’s economy is also assessed by the report, which calls the technology a “potential game-changer”, if the country can overcome its structural constraints. “AI adoption presents an opportunity for Vietnam to transition into more technology-intensive production. [However] informal and female workers are relatively more exposed to displacement risks,” the report shares, while urging policies that promote digital skills and inclusive training.

Vietnam, the IMF warns in the report’s conclusion, now stands at a turning point. “The country’s growth model must evolve from quantity to quality. Harnessing technology, improving governance and building a skilled workforce are essential for Vietnam to sustain high growth and achieve its high-income aspirations.”