Vietnam: Selected Issues

This Selected Issues paper analyzes inefficiencies in Vietnam’s labor and capital markets that hinder productivity growth and discusses possible reforms to close the structural gaps and improve resource allocation and productive efficiency including from technological advancements including artificial intelligence (AI). Vietnam's productivity growth has been sluggish, with a decline in total factor productivity (TFP) since 2015, driven by a decrease in firms' technology. To enhance labor productivity and address skill mismatches, a comprehensive strategy is needed. This includes closing data gaps for skill diagnostics, investing in transferable skills and on-the-job training, fostering lifelong learning, and improving collaboration between industry and education providers. Additionally, enhancing the quality and market value of tertiary education is crucial. Policies to encourage business dynamism, such as reducing entry barriers and facilitating the exit of unproductive firms, can improve TFP. Removing resource misallocation, which has worsened since the pandemic, could boost TFP by over 50 percent. This involves leveling the playing field, improving credit access for productive sectors, and phasing out distortionary credit policies. Preparing for AI adoption is also vital, as it could lead to significant growth gains. However, AI may widen wage inequality and displace workers, necessitating up-skilling programs, strengthened social safety nets, and active labor market policies to mitigate these impacts.