2009 Index of Economic Freedom

Quick Facts

Population:

• 84.1 million

GDP (PPP):

• $198.8 billion
• 8.2% growth
• 7.8% 5-year compound annual growth
• $2363 per capita

Unemployment:

• 4.3%

Inflation (CPI):

• 8.3%

FDI Inflow:

• $2.3 billion

Vietnam’s economic freedom score is 51, making its economy the 145th freest in the 2009 Index. Its score has improved by 0.6 point, reflecting moderate improvements in three of the 10 economic freedoms. Vietnam is ranked 32nd out of 41 countries in the Asia–Pacific region, and its overall score is lower than the world average.

Vietnam's integration into global trade and investment systems has facilitated its transition to a more market-oriented economy. Reducing its poverty level and undertaking efforts to modernize, Vietnam has expanded its economy at an average annual rate of almost 8 percent over the past five years. The state's role in the economy has gradually declined while a more vibrant private sector has contributed to the recent economic growth. A tax reform package, which includes rate reductions for income and corporate taxes, will come into effect in 2009.

Several key institutional challenges still limit Vietnam's overall economic freedom. In general, the regulatory and legal environment is not fully efficient and transparent. Obtaining a business license is relatively easy, but shutting down a firm can be a lengthy and burdensome process. Foreign investment is hindered by screening, non-transparent bureaucracy, and an unreliable legal system. The judiciary is weakened by widespread corruption, which inhibits the effective enforcement of contracts.

Background Back to the top

The Socialist Republic of Vietnam is a one-party authoritarian regime. Like China, Vietnam embarked on a path of economic liberalization only recently, starting with its doi moi reforms in 1986. In 2007, the country joined the World Trade Organization. Vietnam now boasts one of the fastest-growing economies in Southeast Asia, driven primarily by tourism and exports. The government is slowly liberalizing key sectors, including financial institutions.

Business Freedom 61.7 Back to the top

The overall freedom to conduct a business is limited by Vietnam's regulatory environment. Starting a business takes 50 days, compared to the world average of 38 days. Obtaining a business license takes less than the world average of 18 procedures and 225 days. Bankruptcy proceedings can be burdensome and lengthy.

Trade Freedom 63.4 Back to the top

Vietnam's weighted average tariff rate was 13.3 percent in 2006. The government continues to make progress toward liberalizing the trade regime, but import bans and restrictions, some services market access barriers, import taxes, some import licensing requirements, non-transparent regulations, state trade in some commodities, weak enforcement of intellectual property rights, corruption, and customs inconsistencies add to the cost of trade. Ten points were deducted from Vietnam's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 74.3 Back to the top

Vietnam has a high income tax rate and a moderate corporate tax rate. The top income tax rate is 40 percent, and the top corporate tax rate is 28 percent, to be reduced to 35 percent and 25 percent, respectively, when tax reforms are implemented in January 2009. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 13.8 percent.

Government Size 77.3 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 27.5 percent of GDP. Progress in the privatization or restructuring of state-owned enterprises in recent years has been modest.

Monetary Freedom67.0 Back to the top

Inflation is high, averaging 8.1 percent between 2005 and 2007. The government controls prices to stem inflation and influences prices through regulation, subsidies, state-owned enterprises, banks, and utilities. Fifteen points were deducted from Vietnam's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

All foreign investment projects must be screened and approved by the government. Foreign investment is prohibited or subject to additional restrictions in certain sectors. Other problems include an unwieldy bureaucracy, non-transparent regulations, corruption, and an unreliable and cumbersome legal system. Additionally, investment-related laws change frequently as the government continues to reform the investment regime, leading to inconsistent and non-transparent implementation of regulations. Residents and non-residents may hold foreign exchange accounts, subject to restrictions and some government approvals. Payments and transfers are subject to restrictions. Most transactions in money market and capital instruments, derivatives, commercial credits, and direct investments are prohibited or require government approval. All land is owned by the state.

Financial Freedom30.0 Back to the top

Despite reform efforts, the government remains heavily involved in the financial sector. Regulations, supervision, and transparency fall short of international standards, and the state banks' rate of non-performing loans is estimated to be far higher than reported. The central bank is not independent. The four primary state-owned banks control 70 percent of lending. Foreign banks may now open subsidiaries, branches, or representative offices and provide almost all of the services provided by Vietnamese banks. Lending by state banks is still used as an arm of government policy, particularly with subsidized interest rates and debt relief to farmers and large state-owned enterprises. Capital markets are very small.

Property Rights10.0 Back to the top

The rudiments of a system that protects and facilitates property rights have been established, but laws and enforcement mechanisms need to be developed. The judiciary is not independent. Corruption among judges and court clerks is common. Contracts are weakly enforced, and resolution of disputes can take years. All land belongs to the state. Infringement of intellectual property rights is widespread, and enforcement in IPR cases is problematic.

Freedom From Corruption26.0 Back to the top

Corruption is perceived as widespread. Vietnam ranks 123rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Foreign and domestic private-sector firms view official corruption and inefficient bureaucracy as serious problems.

Labor Freedom70.0 Back to the top

Vietnam's relatively inflexible labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is moderate, but the difficulty of firing workers creates disincentives for additional hiring.