A Brief History of Industrial Policy in Vietnam

News of an American aircraft carrier approaching Vietnam recalls a history of conflict. Yet as the USS Ronald Reagan pulled into port at Danang on June 25, 2023, she came as a sign of friendship. The visit, only the third by a U.S. aircraft carrier since the end of the Viet­nam War, testified to strengthening ties between the two countries. For reasons of both realpolitik and material reality, the Socialist Republic of Vietnam and the United States of America find themselves increasingly aligned.

America’s former enemy is not only a growing ally in its “strategic competition” with the People’s Republic of China but also its eighth largest import supplier, ahead of India and Taiwan.¹ Such a relationship would have been inconceivable as recently as thirty years ago, when Vietnam and the United States lacked formal diplomatic ties. This remarkable reversal has much to do with Vietnam’s record of sustained economic growth since the 1980s.

Alongside massive reductions in poverty, Vietnam’s gross domestic product (GDP) per capita has grown every year since data became avail­able for measurement. And in 2022, growth reached its fastest clip since the 1990s, when the economy, unshackled from a command economy, bounded uphill. Last year, Vietnam also notched a new record: a total trade value exceeding $700 billion.² In 1989, its top export was seafood; in 2022, it was smartphones.

To achieve this transformation, Vietnam has relied on the growth of manufacturing, the almost incomparable “engine of durable growth,” as David Oks and Henry Williams put it.³ Vietnam’s manufacturing sector now employs 23.3 percent of the country’s working population—a figure well above the 18 percent threshold that almost every now-rich, industrialized country reached at some point in its history.⁴ What has fueled the remarkable rise of Vietnamese industry?

For pure materialists, it would be easy enough to point to the country’s low labor costs—less than a third of those in China and about half of those in Malaysia.⁵ But most poor countries have low labor costs, and very few have developed like Vietnam. Some might still further attribute Vietnam’s industrial growth to its high level of foreign direct investment, which does comprise most of the new investment in manu­facturing. But going straight to FDI skips a crucial step and invites the question of how Vietnam has managed to attract so much foreign capital. Even as Communism has become little more than a reddish patina, Vietnam remains a country where political decisions have real economic consequences. So, we must ask a fundamental question: what role has the government played in Vietnam’s industrial success?

It’s not an easy question to answer. Its difficulty arises from the vague and amorphous nature of Vietnamese government policy, ex­pressed in the colorless language of its late-Communist bureaucracy. There is no comprehensive policy or strategy concerning the country’s entire manufacturing sector. Overlapping Five-Year Plans and ten-year Socio-Economic Development Strategies set in Hanoi devolve into layers upon layers of individual plans at the sectoral, regional, and even firm levels. Peeling back those layers reveals the Byzantine complexity of Vietnam’s governance structure, centralized in some ways, decentralized in many others. Though mired in bureaucracy, its government still retains much of the informality that characterizes tenuous regimes in poorer countries. These factors widen the gap between official policy and its implementation—and make analysis even harder for foreign observers, whom Vietnam has long confounded.

But worthwhile analysis is not impossible. Many scholars from Vietnam, the rest of East Asia, and the West have studied the country’s economic history. In the corpus they have produced, comparisons to China and the East Asian developmental states are pervasive. Spend long enough reading a broad selection of their work, and a rough outline of Vietnamese industrial policy begins to emerge. That outline suggests such a degree of continual revision that no analysis of the present or view of the future can be well-formed if the past is not first considered.

I thus intend to chart the evolution of Vietnam’s official industrial policies and their results, opening in the era of central planning that preceded Vietnam’s emergence on the global stage. I argue that analysts have consistently underrated Vietnam’s resiliency, adaptability, and accordingly, its prospects for continued economic growth. Still in power three decades after the epochal “Fall of Communism,” the Vietnamese Communist Party is nothing if not adaptable, and Vietnam’s growth has been sustained. A thickening through-line of industrial strategy is part of why Vietnam’s continued growth continues to surprise and amaze the world.

This historical review bears out one key conclusion. While managing Vietnam’s transition to a “socialist-oriented market economy,” its lead­ers have employed a wide range of industrial policies with wide-ranging consequences. Their long-run result has been the structural transformation of the Vietnamese economy toward manufacturing and the accu­mulation of industrial capital, the fulfillment of unfulfilled plans from Vietnam’s socialist era. This article will focus mainly on this history up to the present; in a forthcoming piece, I will look more closely at the country’s current policy challenges and explore future trajectories.

Trusting the Plan

Vietnam’s initial, ill-fated drive to industrialize began soon after Saigon fell to the armies of North Vietnam on April 30, 1975. It was a dream deferred by a nightmare. National reunification had long been the sole purpose of Vietnamese Communism. France’s colonial division of Viet­nam into three parts was among the first of Ho Chi Minh’s complaints in the 1945 declaration of independence; the American-backed partition of Vietnam after the withdrawal of the French was equally unacceptable. After debating whether to build socialism in North Vietnam or to take the South before building socialism, North Vietnamese leaders chose the latter.⁶

Winning the war thus became the primary purpose of North Vietnam’s economy, and destroying that economy was a central goal of the American war effort. The North’s industry, producing weapons and other war materials, came under the bombsights of American aircraft. Its six industrial centers did not survive.⁷ Still, military aid from the Soviet Union and small-scale production carried the People’s Army of Vietnam and its Vietcong proxies through to victory in the end.

The war took an almost incalculable toll on the postcolonial country. Attempting to measure the damage, government officials counted “20,000 bomb craters, 10 million refugees, 362,000 war invalids, 1 mil­lion widows, 880,000 orphans, 250,000 drug addicts, 300,000 prostitutes, and 3 million unemployed” in the South alone.⁸ Reunified Vietnam’s cities lay in ruins. Reuniting Vietnam had been the great challenge of a generation; rebuilding it would be even harder.

After thirty years of war, Vietnam’s leaders planned to develop the country rapidly in much the same way that Stalin had industrialized the Soviet Union. Chief among the proponents of the Soviet model was General Secretary Le Duan, who had succeeded Ho Chi Minh as North Vietnam’s paramount leader. Vietnam’s first postwar five-year plan, adopted in 1976, epitomized Duan and the Party’s optimistic model of “big push” socialist development. Collective farms, which Duan cham­pioned, would replace the rentier landlords of the South’s productive regions and feed Vietnam’s hungry, and quickly growing, population. Centrally planned state investments into heavy industry and infrastructure—the “commanding heights of the economy,” in Lenin’s term—would forge a socialist economy from the ground up. New factories would gainfully employ the honored veterans of the “American War.”⁹ Class and regional divisions would vanish, just like the border that once divided North and South. In twenty years, the Party projected, Vietnam would be a modern, industrial, and socialist state well on its way to achieving full communism.¹⁰

This vision was a Stalinist pipe dream. Heavy industry, or capital-intensive production using heavy industry, did not grow. Collectivizing agriculture was never an easy process for socialist governments, and even less frequently a fruitful one. It disrupted the long-established agrarian networks and local markets that made southern Vietnam the coveted rice bowl that it was. Farms grew less efficient and less productive, especially in the fertile Mekong River Delta. With agricultural pro­ductivity in decline, more farmers were needed to grow the same amount of food. Food output slowly rose, but not as quickly as the population was growing, and food insufficiency persisted.¹¹ Vietnam was becoming a country increasingly defined by subsistence agriculture, rather than the home of a budding industrial proletariat along classical Marxist lines.

Peace was another short-lived dream. The “Khmer Rouge,” who ruled neighboring Cambodia and presided over an unfathomable period in that country’s history in the second half of the 1970s, launched several incursions into Vietnam. In retaliation, Duan approved a plan for the People’s Army of Vietnam (PAVN) to invade Cambodia in December 1978—a war between Communist states revealing the divisions within the Eastern Bloc. A battle-hardened fighting force, equipped with Soviet tanks and aircraft, PAVN made light work of the ragtag Cambodian army. Attempting to force a Vietnamese withdrawal from Cambodia, Chinese troops crossed the border into Vietnam in 1979. Despite fierce Vietnamese resistance, the People’s Liberation Army blazed a trail of destruction through northern Vietnam, coming within eighty miles of Hanoi.¹² But when Vietnam mobilized its population, China declared victory and withdrew the PLA after a month of fighting that left much of northern Vietnam’s remaining industry in ruins.

Compounding the costs of the “Third Indochina War” were its international consequences. The Khmer Rouge, not yet known for its sanguinary approach to “governance” that had reduced Cambodia’s life expectancy to twelve years by 1976, enjoyed global recognition as the country’s legitimate rulers. Vietnam’s invasion and subsequent occupation looked like aggressive expansion to most of the world.¹³ Once-sympathetic Western countries, such as Canada, Sweden, and Denmark, suspended or reduced aid. China severed diplomatic relations and ended cross-border trade, which had hitherto provided Vietnam with food and foreign exchange. At further cost to Vietnam’s meager government budget, Vietnamese troops played the role of peacekeepers in Cambodia through the 1980s.¹⁴ The Vietnamese occupation of Cam­bodia ultimately cost as much as a fifth of the fledgling Vietnamese state’s annual GDP.¹⁵

Having lost all other sources of international aid, the Party’s eco­nomic plans, and Vietnamese Communism’s survival, depended on the largesse of the Soviet Union and its Council for Mutual Economic Assistance, the Communist trading bloc better known as Comecon. Imports from Soviet-dominated Eastern Europe made up the overwhelming share of Vietnamese trade.¹⁶ Throughout the Cold War, the Soviet Union had provided billions of dollars in aid to its allies, and this became a key source of revenue for Vietnam. Soviet aid came in the form of loans and grants used to subsidize trade and state-owned enterprises, and food aid to help the near-starving population. Technical assistance programs were limited, and Vietnam’s geographic distance, among other factors, made it cost-prohibitive for the Soviet Union to develop Viet­nam directly, as it had done in Eastern Europe. Vietnam’s geographic isolation from the rest of Comecon compounded the ill effects of its alienation from China and the Western world.

Soviet funding reinforced the Party’s drive to fund heavy industry at the expense of all else. Soviet leader Leonid Brezhnev, defying advisers who cautioned that Vietnam did not have the ability to succeed in this sector, pushed for an aid package to build more heavy industry in Vietnam.¹⁷ While the Third Five-Year Plan, beginning in 1981, ostensibly promoted labor-intensive light industry, still more resources went to the heavy industry sector.¹⁸ Output growth remained low. While the country barely exported anything, the government used Comecon and other international loans to fill inflexible import quotas.

Starting in the early 1980s, the Party began a series of reforms attempting to ameliorate their system’s obvious failures. Changes were mostly administrative in nature, aiming to afford more autonomy to state enterprises and collective farms. Instead of dismantling the Soviet-style command economy, these changes were intended to make it work better. But it still relied on prices and production quotas set by bureaucrats, meaning that imbalances in one area led to distortions somewhere else. Even the legalization of some “fence-breaking” private sector activ­ity accomplished little without markets to facilitate trade.¹⁹ No coordinating mechanism transcended the bureaucracy and the economy. Everything still ran according to the plan.

Piecemeal reforms did little to arrest falling living standards. This period came to be known as “the socioeconomic crisis.”²⁰ Food short­ages threatened the population and the survival of Communism. Viet­namese farmers could not feed themselves, and malnutrition was perva­sive: sixty Vietnamese were said to die every day from hunger.²¹ Depen­dent on agricultural imports and food aid, the country teetered on the precipice of famine. Agricultural collapse was avoided mainly because of the extraordinary fertility of southern Vietnam, and the fact that the Party, especially at local levels, did not suppress agricultural production for ideological ends, as the Khmer Rouge had.

By the mid-1980s, few could pretend that Soviet-style socialism and its approach to industrialization were improving life in Vietnam. In other countries—most prominently the nations of the former Soviet Union—programmatic socialist development at least had the virtue of rapidly forging manufacturing sectors. Yet in Vietnam, the era of rigor­ous socialist economic policy saw living standards fall and poverty in­crease. Literacy and life expectancy ticked upwards, with the improved provision of social services. But industrial production stagnated, espe­cially in the sectors that received the most government support, while subsistence agriculture grew more entrenched.²² Although many com­munist countries suffered from the economic consequences of a system geared toward overproduction, Vietnam struggled far more with under­production throughout its economy.

The Party had fought for thirty years to reunify Vietnam, and for a decade more to build socialism. Now, it presided over an undeveloped country, one of the world’s poorest, with a hopelessly backward econo­my and a population toiling in rice paddies. Had all its struggle been for this bleak outcome? Had the Vietnamese people sacrificed so much for so little in return? Such questions troubled even the most steadfast and long-suffering of Vietnamese Communists.

Crisis and Renovation

Vietnam, of course, was not the only Communist state in Asia to em­bark on a new economic course in the 1980s, as much of the Communist world fell. The Chinese transition, most associated with Deng Xiaoping, Hu Yaobang, and Zhao Ziyang, eventually transformed China into the industrial behemoth we know today. Compared to that of its far larger neighbor to the north, Vietnam’s reform process has received much less attention.

The Vietnamese transition began when Le Duan died on July 10, 1986, leaving behind a country and a party that shared an uncertain yet unmistakably bleak future. His death, however, created an opportunity for reform-minded party leaders, such as Politburo members Nguyen Van Linh and Vo Van Kiet, to initiate a decisive shift in their country’s economic system. By the mid-1980s, as these reformers came to the fore, economic performance had emerged as the only source of legitimacy for the Communist Party of Vietnam.²³

These reform-minded cadres seized the initiative at the Sixth Party Congress in December 1986. Linh and his cadres forced Duan’s geriatric successor, Truong Chinh, to step aside, and Linh became the new general secretary. The reformers resolved to develop Vietnam and save the Communist Party—at the expense of communism itself. Linh eventually became known to the West as the “Vietnamese Gorbachev,” an epithet that proved wrong when the Socialist Republic of Vietnam outlasted the Soviet Union.²⁴

Most influential among these leaders was Politburo member Vo Van Kiet, then serving as the deputy chairman of the Council of Ministers. Kiet had commanded guerrillas around the Vietcong’s southern headquarters near Saigon and had led forces into the city when it fell in April 1975. Eleven years later, Kiet led the charge for a new economic course to end the crisis and develop Vietnam. Standing in Hanoi’s Ba Dinh Hall, he declared that “there will be renovation in economic poli­cies and the management system.”²⁵ Renovation—Doi Moi, literally, “change to something new”—became the spirit of Vietnam’s new eco­nomic age.

But the reforms that followed the Sixth Party Congress were some­thing of a false start. Like earlier attempts, the reforms between 1986 to 1988 did not release prices from bureaucratic shackles, which reflected ministerial fiat more than supply and demand. Nor did they chasten the SOEs prone to excessive borrowing from the government at suppressed interest rates. Subsidies to state-owned enterprises grew as Hanoi angled to maintain some centralized control.²⁶ Relaxing some controls on wages and prices while maintaining subsidies precipitated a perfect storm of hyperinflation. Vietnam’s consumer prices rose by 400 percent through 1988.²⁷

Agriculture was the obvious near-term priority—the “foremost battle front,” in Kiet’s remarks at the Sixth Party Congress—but it remained woefully inefficient. The earliest stage of reforms did not cor­rect production shortfalls, often caused by imbalances in local markets. Resulting distortions in internal food markets further hampered agri­cultural productivity, even as other reforms ameliorated the damage done by collectivization. State revenues fell, especially as foreign aid tapered off with the decline of Soviet power, and deficits grew unmanageable. A poor harvest led to famine conditions in the winter of 1987 to 1988.²⁸

Amid this worsening crisis, Vietnam’s final break from socialist management unfolded over the final years of the 1980s. A land law promulgated in 1988 began the privatization of 80 percent of the country’s land by returning collective farms to peasant households.²⁹ The next year, direct subsidies to state-owned enterprises were massively reduced. Their long-planned autonomy finally became reality. For many smaller, unprofitable state firms, this meant prompt closure. Larger, more strategically significant firms were spared with government support. A program not of privatization, but of equitization—whereby shares in state assets were auctioned off to domestic and, eventually, select foreign buyers—would also be launched in the decades ahead. With the Vietnamese economy still reeling from hyperinflation, the gov­ernment also set a target of 0 percent growth in the money supply.³⁰ Interest rates rose, disciplining state enterprises into less reckless bor­rowing, and prices fell. Market mechanisms would now set wages, prices, interest rates, and exchange rates.

All this occurred over only a few years—a process of reform far faster, and more radical in its economic liberalism, than what Deng, Hu, and Zhao presided over in China. Price controls were removed to a much greater degree than in China, which maintained a dual-price system that favored state-owned enterprises.³¹ Trade liberalization began with laws on foreign investment and on exports and imports, which began to shift import controls to transparent tariffs. More trading entities were welcomed into the market, and the government resolved not just to condone private enterprise but encourage it.

Renovation of Vietnam’s foreign relations accompanied the economic reforms. After an expensive occupation that required constant counter-insurgency warfare, PAVN finally left Cambodia in 1989.³² The 1991 peace accords signed in Paris, symbolic as the capital of the region’s erstwhile colonizers, marked the conclusion of the Indochina Wars that had stretched nearly half a century.³³ With the conclusion of the conflict came Vietnam’s reentry onto the international stage. At the price of a neutral Cambodia, Vietnam reconciled with China. China soon became the largest source of Vietnamese imports, especially raw materials such as steel. After more than a decade of isolation, Vietnam returned to the world stage.

Political change toward democracy, however, was not forthcoming. Merely a cosmetic renovation occurred at the political system’s highest echelons. The chairman of the Council of State became the president, a title originally borne by Ho Chi Minh yet abolished in 1980.³⁴ The chairman of the Council of Ministers became the prime minister. These new titles eventually helped clarify their corresponding roles, which had been obscure in the blurry bureaucratic landscape of pre-Renovation Vietnam. The prime minister was the more powerful position, with formal authority over matters of official government policy. But the Party remained above all, and the prime minister was ultimately sub­ordinate to the general secretary, who has always held the position of primus inter pares. The Communist Party’s basic structure—and its monopoly on political and civic life in Vietnam—was undisturbed.

At the Seventh Party Congress in July 1991, the Communist Party established that the new market-based economy was compatible with Vietnamese Communism.³⁵ Its unique “socialist-oriented market econo­my” was born, its purported “socialist orientation” even vaguer than Zhao’s famous “Socialism with Chinese characteristics.” Kiet’s election as prime minister one month later confirmed that reform would only continue.

This period, from 1989 through 1992, encompassed the most radical and pivotal phase of Renovation. Growth in agricultural productivity enabled Vietnamese workers to leave the farms. With this came a phenomenon of urbanization that would ultimately provide the cheap urban labor necessary for Vietnam’s manufacturing boom. Between 1970 and 1990, the rural share of the population had been roughly flat; after 1990 it began a speedy decline that has shown no sign of slowing since.³⁶

Where Vietnam diverged from the “shock therapy” approach of post‑Communist Europe—and converged with that of China—was in the maintenance of a large state enterprise sector. Vietnam’s abandonment of smaller, unprofitable state firms closely resembled the Dengist doctrine of “keeping the big and releasing the small.”³⁷ As in China, the “commanding heights” of heavy industry were not surrendered to the markets wholesale. State firms comprised all of Vietnam’s large-scale industrial production and owned most of its fixed capital, ranging from shipyards to substations. Among other things, they managed energy resources, generated electricity, and produced construction materials. These were not assets that the Party and government wanted to sell off. And apparently, it did not have to. Rapid economic growth beginning in 1989, if not attributable to the SOEs, showed that their privatization was not necessary for Vietnam’s recovery. The country’s openness to foreign investors soon provided another source of investment for state-owned enterprises and unleashed a key driver of sustained economic growth.

Indeed, the initial success of Renovation presented the Party with a way to justify and sustain its rule. Vietnam stood in stark contrast to its former trading partners and benefactors around the Communist world. All but two others, Cuba and North Korea, collapsed when Soviet aid dried up, and both of those countries experienced severe depressions in the 1990s. The Vietnamese Communists proved much nimbler than their international comrades.

The rapid agricultural recovery proved the Party’s worth to its people, the vast majority of whom were still embedded within the folds of agrarian life and dependent on food rations. But it was not just the Vietnamese populace who were to be impressed. The stabilization program and opening of domestic markets revealed the country’s worth to potential investors, trading partners, and international institutions.

The Export-Oriented Market Economy

Vietnam leapt out of the socioeconomic crisis, and its centrally planned economy, like a starving tiger just uncaged. The agrarian reforms led to a steady, but not torrential, stream of former farmworkers into Hanoi and Saigon (rechristened Ho Chi Minh City after the American War), the populations of which grew severalfold between 1990 and 2020; the opening to the world made it an attractive destination for light industry. As foreign investment flowed into Southeast Asia, Vietnam proved an eager beneficiary—even as China, which had begun its re­forms a decade earlier, grew faster. Between 1991 and 2006, the rise of industry, including manufacturing and resource extraction, accounted for 50 percent of Vietnam’s GDP growth.³⁸ Poverty—measured at Vietnam’s national line, which is well above the metric typically used by the World Bank—dropped from 58.1 percent in 1992 to 16 percent in 2006.³⁹ During this roughly fifteen-year period, the reform-minded government of Prime Minister Vo Van Kiet (1991–97), his successor, Phan Van Khai (1997–2006), and an increasingly reform-minded Party gradually clarified state policies to support industrial development.

The most significant results of these policies were the emergence of an orientation toward export-driven growth, the qualified acceptance of high levels of foreign direct investment, and Vietnam’s integration into global trading networks. Vietnam, far removed from the days of Le Duan, was now out of the central-planning mode almost entirely. Still in undisputed control, the Party could use policy levers to guide the country’s economic transformation through the markets.

Abandoning blunt instruments of central planning, the government adopted new practices from standard, non-socialist trading systems. These included import quotas, local-content requirements, and increas­ingly tariffs. All these instruments would be relaxed when Vietnam eventually entered the World Trade Organization in 2007. As Vietnam’s industrial policy evolved from the blunt instruments of state control into one governed by carrot and stick, its focus on exports intensified. The focus on export discipline was consistent and generous: one policy enacted in 1993 enabled firms exporting to suspend their payment of import duties for ninety days; the suspension period was later extended to 275 days.⁴⁰ The government leveraged its effective monopoly on Dong-denominated credit to extend debt financing to exporters, bol­stered by such incentives as investment loans, interest subsidies, and export credit guarantees.⁴¹

Like other poor countries seeking to “climb the ladder” of industrialization, Vietnam began with light industry that depended on the one factor in which Vietnam had a comparative advantage—cheap, disciplined labor. These industries were aided by export incentives as well as direct subsidies to state-owned export industries and regulatory changes to lower production costs. Vietnam soon emerged as a competitive producer of textiles and garments, the items most synonymous with light manufacturing; in 1996, textiles and garments, along with leather products and food and beverage, made up half of its manufactured products.⁴²

The state sector thrived in the early years of Vietnam’s market economy—a crucial similarity with China and a difference with the post‑Communist states of Eastern Europe. The Vietnamese government continued to support state-owned strategic industries—such as steel­making, cement making, coal mining, and electricity—that would be needed to fuel industrial growth. By the early 1990s, SOEs grew to represent around 40 percent of Vietnamese GDP.⁴³ Their share did not decline significantly until after Vietnam’s entry into the WTO more than a decade later.⁴⁴

Vietnamese leaders—satisfied with profitable SOEs’ contributions to state revenues, conscious of the need to retain strategically important primary industries, and still loyal, in some fashion, to Marxist doctrine—remained reluctant to privatize government-owned firms. Oppo­nents of privatization had more selfish motives as well. SOE managers were political appointees, and with the considerable resources at their disposal, they could bribe both the Party’s elite and government ministers in exchange for enhanced privileges. Bound together by the reciprocity of corruption, patronage networks helped to entrench the SOEs’ position in the economy. But could this fortified position survive Vietnam’s entry into world markets?

Foreign direct investment initially aided in the state sector’s endurance while accelerating Vietnam’s recovery. Effective in 1988, the first law permitting FDI also gave preferential treatment to “joint ventures” between Vietnamese firms and foreign investors, facilitating the transfer of capital, technologies, and skills to local firms, especially state firms. This initiative quickly paid off. In 1989, a Soviet-Vietnamese joint venture discovered offshore oil deposits; on international markets, crude oil sales generated an ample reserve of foreign exchange.⁴⁵ The local partner, Petrovietnam, was a state-owned enterprise, and thus asserted national sovereignty over this most strategic of resources. Unrefined crude oil became a valuable source of export income, quickly overtaking seafood as Vietnam’s most lucrative export. The potential value of foreign direct investment became obvious.

Joint ventures proved to be versatile vehicles for mobilizing foreign investment. Between 1988 and 1994, joint ventures comprised 70 percent of all enterprises with foreign investment, and 75 percent of their capital.⁴⁶ In most of these ventures, the local partner was a state-owned firm. Unlike fledgling private firms, state firms had privileged access to local capital, land, and most importantly, valuable connections to ruling elites. These political ties were especially attractive to foreign investors who recognized the risks of investing in Vietnam during a period of rapid and uncertain change. But as Vietnam committed to its reform trajectory, foreign investors’ interest in the country grew faster than the SOEs could accommodate.

The government began permitting foreign investment outside of partnerships with local firms. In 1992, the law on foreign investments was revised to extend to fully foreign-owned enterprises the same treat­ment as joint ventures enjoyed.⁴⁷ In essence, foreign firms received preferential treatment under the law even if they had no local partners. FDI inflows soared to almost 12 percent of GDP in 1994.⁴⁸ The government soon created industrial zones with incentives that would attract foreign industrial producers. These resembled the special eco­nomic zones, such as Shenzhen, which China created during its reform process. Meanwhile, industrial zones allowed the government to direct the geographic distribution of industry and foreign investment around the hubs of Ho Chi Minh City and Hanoi (as well as its nearby major port, Haiphong). Wholly foreign-owned enterprises started to grow as a proportion of the Vietnamese economy, and continuing FDI became a decisive factor in Vietnam’s sustained economic growth.

As it welcomed more foreign investment, the government also protected the SOEs. To ensure that domestic industry was not crowded out by foreign-owned entrants, the government began consolidating the largest SOEs in their respective subsectors into dozens of business groups, so-called general corporations (GCs) in the mid-1990s.⁴⁹ These formations pooled state firms’ resources and centralized their management. This approach was ostensibly inspired by South Korea’s chaebol conglomerates, including such giants as Samsung and LG, which had been so important to the Korean economic miracle. Unlike the chaebol, however, Vietnam’s GCs were not private, nor were they expected to become competitive on the global market.⁵⁰ Many of them were never­theless profitable within Vietnam’s economic context and contributed to its growing national income, as well as the personal coffers of many Vietnamese elites.

By 1996, Vietnam’s economic growth was so rapid that the Party, projecting an average 8 percent growth out over the next thirty years, could reasonably hope to build “basically an industrialized country” by 2020.⁵¹ Growth was not always so smooth—the Asian financial crisis in 1997, and the resultant slump in many of Vietnam’s neighbors, its regional trading partners, ensured that—but an accelerating tempo of reform helped expand economic growth while solidifying the control of the Vietnamese state.

It was in this period that the Vietnamese approach to development came into full view. The influence of nearby “miracles”—Japan, Korea, Taiwan, Singapore, and most prominently China—is clear, in everything from the amalgamation of state firms to the process of a controlled opening to global markets and the preservation of state autonomy in economic affairs. Nearby failures informed the Vietnamese experiment as well. The collapse of Suharto’s authoritarian and developmental regime in Indonesia exemplified the risks of yielding too much sovereignty to international markets and institutions.⁵²

A pivotal test of this state-driven approach came in 1997. The World Bank approached the Vietnamese government with an offer: $300 million in credit in exchange for structural adjustment over time toward the Washington Consensus model, including faster privatization and a restructuring of the financial sector to lessen state control. Vietnam declined the offer. The World Bank returned with a higher offer in 1998, and Vietnam declined again. When the World Bank came again in 1999 with an even higher offer, the government issued a stern rebuke. The minister of planning and investment, Tran Xua Gia, told World Bank representatives, “You cannot buy reforms with money . . . no one is going to bombard Vietnam into acting.”⁵³

Resistance to the World Bank did not mean international isolation. In 1994, Vietnam reconciled with the United States, bringing about the end of its three-decade-long embargo that blocked international lending institutions, such as the World Bank, from operating in Vietnam.⁵⁴ Viet­nam joined the Association of Southeast Asian Nations (asean) in 1995 and the Asia-Pacific Economic Cooperation (APEC) in 1998. A bilateral trade agreement with the United States came into effect at the end of 2001. Bill Clinton made history in November 2000 when he became the first U.S. president to visit the reunified country.

Anticipating WTO accession—which came in 2007, twelve years after Vietnam’s initial application—American industry began to set up shop. In 2006, Intel announced a $300 million semiconductor assembly and testing facility in Ho Chi Minh City, the first such plant in Viet­nam.⁵⁵ While just a small part of a $6 billion Intel global investment project, the new facility would hold outsize significance for Vietnam, establishing it as a nascent manufacturing hub for electronics.

Surviving Globalization

A new stage of Vietnam’s industrial development began with its entry into the WTO in January 2007. The manufacturing sector soon swelled with a flood of FDI that brought in the higher-value industries that Vietnam had so far struggled to build on its own. But it also meant that Vietnam, having relinquished formal protections over its domestic market, was subsumed into a world market that threatened the survival of all enterprises unable to compete.

Accession required rapid adaptation to WTO rules, which Vietnam obeyed strictly to earn a “market economy” designation, guaranteeing that its exports faced lower trade barriers in other countries.⁵⁶ The payoff was obvious: Vietnam became a top destination for foreign investors and multinationals. Of course, the downside was that Viet­nam’s protected state sector was now exposed to erosion by powerful international currents. FDI, however, could provide new capital and expertise as well as vaunted spillovers to bolster local enterprises. The government created new FDI incentives and afforded new powers to provincial leaders to attract investment.

Results came quickly, especially as major Asian firms took advantage of Vietnam’s growing workforce and low relative labor costs. In 2008, Samsung made its first registered investment in Vietnam, putting $670 million into a plant in Bac Ninh province. Since then, Samsung has been the single largest driver of growth in electronics manufacturing exports and employment, investing more than $20 billion in Vietnam as of last year.⁵⁷ It now manufactures half of its smartphones in Vietnam and employs a hundred thousand people there. In 2013, electronics surpassed garments to become Vietnam’s most valuable export.⁵⁸ The country is now among the largest exporters of electronics in the world, ahead of Japan. This growth, however, did not entail the strengthening of the country’s native industries or its state sector.

When Vietnam finally met the World Bank’s standards for a “lower middle-income country” in 2008, it was a surprisingly bittersweet mo­ment. Vietnam’s journey to that point was the easy part. Driven by low labor costs and integration into the regional market after international isolation, fifteen years of catch-up industrialization had not required particularly thoughtful planning. What was to come seemed much more difficult. Analysts began to argue that Vietnam risked falling into the “middle-income trap,” into which Malaysia and Indonesia, once prospective miracles, had fallen.⁵⁹ Capital investment, not productivity gains, had driven most of the economic expansion of the 2000s; nor had the past ten years of gains put the country on track to achieve high-income status by 2020.⁶⁰ That this moment came in 2008—as the world economy faltered and Vietnam faced an all-too-familiar brush with inflation and economic slowdown—only added to the sense that a new trajectory was necessary.

Economic growth was still high and stable, averaging about 6.2 percent annually from 2007 to 2016.⁶¹ New inflows of FDI as multi­nationals opened plants across the country helped manufactured products rise from 51.2 percent of merchandise exports in 2006 to 82.2 percent in 2016.⁶² But it was becoming clear that a new strategy was needed for Vietnam to avoid the fate of its more unfortunate neighbors. Vietnam’s elites, particularly Prime Minister Nguyen Tan Dung (2006–16) and others connected to the state enterprise sector, took notice.

Prime Minister Dung—a lively and colorful politician by Vietnamese standards, as well as a veteran wounded four times in the American War—began to signal a new orientation. The initial changes were mainly superficial: Vietnam’s Ministry of Industry became the Ministry of Industry and Trade (MOIT), apparently to evoke Japan’s famous Minis­try of Industry, Trade, and Investment (MITI).⁶³ Alongside the histor­ically important Ministry of Planning and Investment, which sets the Five-Year Plans, MOIT came to occupy an expanded role in Vietnamese industrial policy by overseeing and leveraging the threatened state sector.

The government’s emphasis on the state sector proved to be more than posturing. Analysts had long called for a serious reform of the SOEs, which had become swollen and inefficient. Although still crucial for a variety of essential sectors, they were stained by associations with cronyism, mismanagement, and bribery. But their corruption had only served to deepen their ties to some sections of the Vietnamese elite, including Dung, around whom the stench of petty corruption hung heavily. The Socio-Economic Development Strategy released in 2011 promised that “the leading role of the state sector is to be enhanced.”⁶⁴

To protect their role amid heightening foreign competition and to centralize management, many state firms were soon folded into about a dozen massive conglomerates. These conglomerates, modeled even more closely after the chaebol, had little unifying identity or function, but considerable capital that they could divert toward amenities for manage­ment.⁶⁵ Vinashin, the state’s premier shipbuilder and an icon of Vietnamese heavy industry, was the most notorious conglomerate. After receiving $750 million from the government’s first sovereign bond issue in 2005, Vinashin came to hold 445 subsidiaries alongside twenty joint-ventures, including hotels and karaoke bars.⁶⁶ It exemplified how government support of state industries often diffused away from targeted investments.

The limits of this chaebol-type approach to industrial organization soon became apparent. In 2010, Vinashin defaulted on billions in corporate loans, a first in Vietnam’s history, and eventually required a government bailout costing more than $4.3 billion.⁶⁷ Vietnam’s govern­ment credit rating also took a hit. Vinashin lost some of its privileges, and its brush with bankruptcy blackened the reputation of Dung’s plans to strengthen Vietnamese SOEs to withstand globalization. The prime minister himself was inextricably linked to the mismanagement of Vinashin, whose executives he had showered with favors.

Even with a strong macroeconomic track-record, Dung could not escape the political consequences of the state enterprises’ misbehavior, which did not end with the Vinashin affair. The arrests of his business partners for a wide range of crimes preceded his own political downfall. The conglomerates he had supported were hotbeds of corruption, prone to capitalist excess that few could credibly justify in the name of the “socialist-oriented market economy.” As Dung’s SOE-based patronage networks came under investigation, his powerbase crumbled.⁶⁸

Though he survived a reprimand vote in 2012 after the Vinashin affair, Dung was vulnerable in 2016. Finally, in April 2016, Dung was removed and expelled from the Party. Though the most proximate origins lay in the Party’s widespread dissatisfaction with Dung’s flam­boyancy, ambition, and ostentatious corruption, his removal may also be understood as the Party’s rejection of yet another deficient model for industrial development. The state sector had not grown more efficient; the SOEs would not be the engine of industrial development in Vietnam.

Since Dung’s expulsion, policy has been under tight control of the Party.⁶⁹ Dung’s successor, Prime Minister Nguyen Xuan Phuc, imme­diately revised Dung’s emphasis on the state’s leading role. No longer would the state lead development, but it would enable it by removing “the barriers to development” and promoting “new drivers of economic growth.”⁷⁰ Vietnam’s new “developmental-enabling state,” in Phuc’s phrase, signified the end of Dung’s era of expanded state control and, perhaps once again, a change to something new.

Trong’s World

Industrial policy in Vietnam is changing once again. The leading player in this unfolding stage of reforms is Communist Party General Secretary Nguyen Phu Trong. A slight, mild-mannered scholar who spent many years editing Party periodicals, Trong came into his own just before his seventy-second birthday, when he and the Party succeeded in the expulsion of Dung, his long-time rival.⁷¹ To many, Trong embodies the victory of the Party’s ideological wing over its pragmatic capitalist wing. But it is clear there is more to Trong than some might suggest. He is no doctrinaire Marxist. He has redoubled efforts to reform and privatize state-owned enterprises in favor of economic efficiency, and he has championed a deregulatory agenda to make doing business easier.

Meanwhile, Trong has assumed a level of personal power not seen since the days of central planning, giving him great, if not absolute, authority over its economic direction. After President Tran Dai Quang died suddenly in 2018, Trong was elected to serve out the remainder of his term, wearing two crowns as both president and general secretary until 2021. It was a brief interlude in the former role that signified Trong’s ascent, parallel though not equivalent to that of Xi Jinping. At the Thirteenth National Congress in 2021, the Party adopted a resolution enabling Trong to seek a third term as general secretary, making him the first three-term general secretary since Le Duan. Under his aegis, the party set its new development goals: upper-middle income status by 2025, high average income by 2030, and full development by 2045.⁷²

Amid Trong’s rise to power has been another sea change. Gathering international storms—aside from the Covid-19 pandemic—have gen­erally blown strong winds into Vietnam’s sails. The most pertinent development has been its increasingly close relationship with the United States, the largest destination for Vietnamese exports. Had Covid not interfered, Trong would have visited Washington, D.C., as a guest of President Donald Trump.⁷³ He welcomed Secretary of State Antony Blinken to Hanoi in April 2023 to break ground at a new U.S. embassy in Hanoi. From 2017 to 2019, GDP grew by a remarkable 7.25 percent on average. Though growth slowed during the pandemic, Vietnam’s economy was the only one in Southeast Asia to record growth in 2020. And last year, GDP growth returned to the above-average rate of 8 percent.

Trong’s rise may be a source of optimism for Vietnam. After maintaining Vietnam’s growth during the pandemic, he may also change its industrial landscape. Resolving to purge the party of corruption, Trong has launched a probing anticorruption campaign that he has termed the “burning furnace.” Trong is, perhaps, using anticorruption prosecution as industrial policy, a hammer with which to crush still powerful yet sclerotic SOEs and reforge the Vietnamese economy. But much remains to be done. He must choose a younger successor, one strong and vital enough to pull Vietnam up the ladder in the decades to come, and—as I will relate in a future article—he may have done so.

The Fifth Tiger?

Becoming a fully developed country holds teleological significance for Vietnam’s leaders. Over the last thirty-five years, development has become the national purpose that Vietnam, frustrated in its transition to Communism, failed to achieve in the years after reunification. Now the Vietnamese Communist Party seems determined to fulfill this objective, with the same tenacity and initiative they used to secure their independence through thirty years of war. Sovereignty and development have been forged together into a single purpose. The Party’s true north points toward industry, though it may still lack a coherent plan to achieve it.

A comprehensive industrial strategy—encompassing the state sector, domestic private industry, and foreign-invested enterprises—has not yet emerged in Vietnam. That may be changing, but it is still uncertain. Industrial policy, however, has been instrumental in Vietnam’s striking transition to an export-oriented manufacturing economy. This transition has yielded tremendous benefits: economic growth, poverty reduction, a growing manufacturing sector, and a lucrative export trade.

Vietnam’s historic successes mirror those of its great northern neighbor, with which it shares a nominal ideology and a common mode of party-state governance. Beyond their avowed Communism and similar economic reforms, there are other reasons to say that Vietnam has followed China’s path over others in East Asia. And much like China—and quite unlike Japan, South Korea, or Taiwan—Vietnam has embraced FDI as a pillar of industrial development while retaining a prominent state sector. In measuring Vietnam against China, it comes up short. China’s incredible average growth rate of 9 percent a year since 1977 dwarfs Vietnam’s impressive but not record-breaking figure of 6.3 percent since 1985.⁷⁴ In the shadow of China’s monumental industrialization, one might be forgiven for seeing Vietnam as a smaller, slower-developing, and even slightly worse version.

What explains their divergence? Of course, Vietnam is a much smaller country that lacks China’s truly immense workforce and abun­dant natural resources. But it also possesses apparent differences from the Chinese model. In some ways, Vietnam looks more conservative, in the late-Communist sense, with its parochial and pernicious bureaucracy, which is only restrained by the occasional intervention of the Party itself. In other ways, it appears overly liberal, as its macroeconomic and trade policies bind its economy more closely to the ebbs and flows of world markets. Yet all these weaknesses notwithstanding, Vietnam has achieved basically uninterrupted growth and massive material improvements for its population since its reform process began.

Viewing Vietnam’s rise solely through the lens of China’s development provides a misleading image. When viewed in the full context of its troubled past—from the ravages of the American War to the Chinese invasion, the Cambodian occupation, the socioeconomic crisis, and a brush with famine little more than thirty-five years ago—the Vietnamese miracle is far more apparent. Starting without almost any industry, Vietnam has become a global manufacturing hub.

Good timing has doubtlessly played a critical role in Vietnam’s industrial success. Since the late 1980s, it has often found itself in the right place at the right time. It broke into the Southeast Asian value chain just before a period of instability, soaring inflation, and rising labor costs diminished its neighbors’ attractiveness to foreign investors. The economic conflict now emerging between the United States and China, bad news though it may be for much of Asia, might be just the dispensation Vietnam needs to sustain its growth and stability.

Of course, good timing would mean nothing without decisive leaders to act on it. Attuned to the risks and rewards of globalization, Vietnam’s leaders have successfully steered a perilous course into international markets—from refusing World Bank structural adjustment in the late 1990s to expeditiously adopting WTO rules to attract multinationals like Samsung and Intel in the late 2000s. Vietnam has reaped the benefits of globalization while avoiding the pitfalls into which other, less fortunate societies have tumbled. So far, the humanitarian benefits of its economic and industrial policies have been stunning and its development undeni­able. But its rise has never been inevitable, and it is not certain to continue. Challenges lie ahead. Though these challenges may seem less daunting than those of Vietnam’s past, there is a great filter separating the rich world and the poor world. Very few countries have passed through it in recent years, and Vietnam is still very far from the rich world.

One must have a heart of stone to be unmoved by the confluence of will, capacity, and fortune at work in the Vietnamese miracle. But will this correlation of forces be enough for Vietnam to escape the middle-income trap and break into the developed world?

This article originally appeared in American Affairs Volume VII, Number 3 (Fall 2023): 59–78.

Notes