Taking Vietnam economy to the next level

To continue on a strong GDP growth trajectory, the country should work to raise its labor productivity.

During the past quarter century, Vietnam has emerged as one of Asia’s great success stories. In a nation once ravaged by war, the economy has posted annual per capita growth of 5.3 percent since 1986—faster than any other Asian economy apart from China. Vietnam has benefited from a program of internal restructuring, a transition from the agricultural base toward manufacturing and services, and a demographic dividend powered by a youthful population. The country has also prospered since joining the World Trade Organization, in 2007, normalizing trade relations with the United States and ensuring that the economy is consistently ranked as one of Asia’s most attractive destinations for foreign investors.

The McKinsey Global Institute (MGI) estimates that an expanding labor pool and the structural shift away from agriculture contributed two-thirds of Vietnam’s 7 percent annual GDP growth from 2005 to 2010.1 The other third came from improving productivity within sectors. But the first two forces have less and less power to drive further expansion. According to official Vietnam statistics, growth in the country’s labor force will probably decline to about 0.6 percent a year over the next decade, down from 2.8 percent between 2000 and 2010. Given the past decade’s rapid rate of migration from farm to factory, it seems unlikely that the pace can accelerate further to raise productivity enough to offset the slowing growth of the labor force. 

Read the full report at McKinsey Quarterly