What is behind Vietnam's economic success story?

According to a new forecast from the World Bank, economic growth in Vietnam is expected to reach 6.1% by the end of 2024 and?6.5% in 2025.

Both forecasts are higher than what was estimated in April, with the increase in growth attributed to a rebound in manufacturing exports, tourism and investment, according to the report.?

This shows that Vietnam could have bigger growth in 2025 than other emerging economies such as Thailand, Cambodia, Malaysia, Indonesia?and the Philippines.?

"Vietnam certainly faces some serious challenges, not least the ailing domestic sector and overreliance on the [foreign direct investment] sector, but, compared to other Southeast Asian countries, its economic prospects remain bright," Nguyen Khac Giang, researcher and visiting fellow at the ISEAS Institute, told DW.

What is driving growth?

Vietnam, like other Southeast Asian countries, relies heavily on foreign direct investment.

Between 2021 and 2023, FDI inflows into Vietnam, Thailand, Indonesia, Malaysia, Singapore and the Philippines averaged about $236 billion a year, according to the ASEAN Investment Report 2024.

As Western investors try to diversify away from China amid?geopolitical tensions between the Washington and Beijing, Southeast Asian countries are?becoming a top choice for foreign investment from the US, Japan and the EU.

Nguyen said Vietnam was taking advantage of those tensions.?

"I think Vietnam can maintain its growth momentum due to its domestic advantage of a 100 million population with a rising middle class, while also optimizing the benefits of its geopolitical position in the great power competition between China and the US," he said.

China has also been investing in Southeast Asia, with Beijing and Hanoi establishing their "comprehensive strategic partnership" in 2008.?

'China plus one'

Like China, Vietnam's economic growth comes under the stewardship of a one-party system, with the? Communist Party having complete control over the state's functions, social organizations?and media.

"China is Vietnam's biggest trade partner, but, more importantly, it plays a crucial role in Vietnam's manufacturing sector, as most of its inputs come from China. I don't think that will change in the foreseeable future," Nguyen said.

"China Plus One" is a global economic business strategy for investors to reduce sole reliance on market and supply chain operations in China, aiming to expand into other countries while maintaining presence in the Asian giant.?

Countries in Southeast Asia are seen as suited alternatives.?

Bich Tran, an adjunct fellow at the Center for Strategic and International Studies (CSIS), told DW that Vietnam is a frequent option.?

"Vietnam is one of the top choices for many companies' China-plus-one policy because of the geographical proximity and similar culture," Tran said.

"For those who have been operating in China, moving to Vietnam is much easier, and dealing with the Vietnamese would be more familiar than dealing with Indonesia or Malaysia," she said.

?"That being said, Vietnam is much smaller than China, so it can only absorb a small number of companies who want to relocate. India, if they open up their economy, would have much better chance of competing with China than Vietnam," she added.?

Vietnam attracts Western economies

The United States is Vietnam's second-biggest trade partner and largest export market.?

In September 2023, Washington and Hanoi upgraded their diplomatic relations, signing a "Comprehensive Strategic Partnership for Peace, Cooperation and Sustainable Development." Analysts say the agreement was largely to boost economic benefits.?

The United States is one of Vietnam's growing list of strategic partners, including Australia, China, India, Russia, South Korea and more recently France.?

But huge investment from Washington is key to economic opportunities for Vietnam.?

Apple, the US tech giant, was again named the most valuable company in the world this year.

Vietnam has become a key manufacturing location for the company, with Apple investing over $15 billion (€13.76 billion) in the country in the past five years.

Vietnam has low labor costs and a young and large workforce, with 58% of the population of almost 100 million younger than 35 years old, making the country an attractive bet for investment. ?

More structural reforms needed?

The strong growth is encountering domestic hurdles, however. Although Vietnam has one of the fastest growing economies in the region, it has a poor reputation on corruption, political censorship, human rights?and civic society.?

Small to midsize companies within Vietnam are struggling to become as competitive as manufacturers that export to international markets.?

Because of climate change events, such as the recent Typhoon Yagi, prices are also increasing for essentials such as food production. Vietnam faces frequent electricity shortages, and experts say it must increase the use renewable energy.

Sebastian Eckardt, a practice manager for East Asia at the World Bank, said structural reforms were needed.?

"During the first half of the year, Vietnam's economy benefited from the rebound in export demand. To sustain growth momentum not only for the rest of the year but over the medium term, the authorities should deepen structural reforms, step up public investment, while carefully managing emerging financial risks," Eckardt said.