Little China or Southeast Asian Original?

JONATHAN Pincus teaches at the Fulbright School of Public Policy and Management in Ho Chi Minh City and is based in Jakarta. A former chief economist of the UN Development Programme in Vietnam, he has studied the country’s economy for more than thirty years, with a focus on industrial policy and the middle-income trap.

The middle-income trap describes what happens when a developing country grows out of extreme poverty but fails to become a high-income nation. As wages rise, the country loses its edge in cheap manufacturing to poorer competitors; without the advanced technology and innovation of wealthy nations, it cannot compete with them either. Growth and living standards stall in between.

The Confluence: How did you first get drawn to studying Vietnam’s industrial policy and the middle-income trap?

Dr. Pincus: I first came to Vietnam more than thirty years ago. At the time I was working on rice policy with the United Nations. After some years teaching economics at university, I returned to Vietnam as Chief Economist for the UNDP (United Nations Development Programme) country office.

It was an exciting time: the reform process had picked up momentum, and the country was preparing to join the WTO (World Trade Organisation). The big issue was trade liberalisation [removing barriers such as tariffs so that goods can be traded more freely] and its impact on growth, jobs, wages, and living standards.

Since then, Vietnam has outperformed all but the most optimistic forecasts. But even at that time, and especially after the Global Financial Crisis in 2007 – 08, Vietnamese economists and policymakers were concerned that the benefits of integration would wear off, and growth would slow down. Some pointed to the experiences of other ASEAN (Association of Southeast Asian Nations) countries, where growth had tapered off in the 2000s. I’ve been tracking the issue since then.

The Confluence: What’s the biggest misconception people have about how a fast-growing economy like Vietnam’s actually builds productive capacity, versus just posting good GDP numbers?

Dr. Pincus: Many people, especially policymakers, get hung up on annual GDP growth figures without paying enough attention to the difference between short and long-term factors. Oil exporters, for example, might post high GDP growth figures when oil prices are high, but this doesn’t mean much in the long run unless these surpluses are invested in productive assets.

Countries with young populations also post high GDP growth figures for a while as young workers enter the labour force, but this effect too will wear off. One, or even five, years of rapid GDP growth do not mean much: the trick is to sustain high rates of growth over decades.

Demographics are an important factor in Vietnam too. The economy has grown quickly by moving people from low-productivity jobs in rural areas to higher-productivity jobs in cities and industrial estates, which is a one-off boost to labour productivity [how much each worker produces in an hour] and output.

The question is, to what extent is productivity increasing in these new industrial and urban jobs? This is difficult to answer, because we’re talking about a lot of different kinds of jobs producing different goods and services. The worry is that a lot of assembly-line jobs, for example sewing shirts or assembling Samsung phones, have not shown evidence of sustained productivity growth. If labour productivity growth in these jobs is slow, once the movement of underemployed workers from rural to urban areas slows down, growth will slow down too.

The Confluence: Is there a specific policy choice, on state-owned enterprises, technology transfer, or industrial strategy, where Vietnam got it right, or got it wrong, in a way that surprised you?

Dr. Pincus: Vietnam bet heavily on integration into East Asian production systems, signing up to numerous trade and investment agreements, and building industrial estates, ports, roads, and power stations to attract inward investment in manufacturing.

This proved to be a good strategy. Japanese, Korean, Singaporean, Taiwanese, and now Chinese companies have set up shop in Vietnam, and these firms have helped the country sustain export growth of more than 10% per year for decades. It has been the foundation of the country’s success. Tariffs and quotas in the US [the import duties introduced by the Trump administration in 2025] have not changed the basic story: East Asian integration will continue, and Vietnam will benefit from it.

However, two areas of policy have proven more difficult to reform: the banking system and higher education. Vietnamese banks are undercapitalised [they hold too little of their own money to absorb losses safely], carry a lot of bad debt, and cannot make long-term loans, and recent scandals [most notably the Van Thinh Phat fraud at Saigon Commercial Bank, uncovered in 2022] have shown that the system is not well regulated. Vietnamese universities are getting better, but are underfunded and can’t attract top talent, especially overseas Vietnamese faculty working in foreign universities.

One recent statistic really shocked me: apparently, Vietnamese residents, which is how we categorise people, firms, and government in financial data, bought something like $225 billion worth of cryptocurrencies in 2024 – 2025. [The blockchain analysis firm Chainalysis estimates that Vietnam received around US$220 billion in crypto transactions in the twelve months to June 2025.]

If that is true, and we don’t really know if it is, that fact spells the end of the regime of capital controls [government limits on moving money into and out of the country]. The Vietnamese dong is not a convertible currency, which means there is no meaningful market for it outside of Vietnam, and no serious futures or options markets [markets where traders agree today on the price of a future currency exchange]. But if Vietnamese are trading crypto on a large scale, the lack of a convertible currency doesn’t matter much anymore for monetary policy.

The Confluence: What would you say to someone who thinks the middle-income trap is basically inevitable once a country’s cheap-labour advantage runs out?

Dr. Pincus: There are very few things that are inevitable in the world of development policy. People have been predicting the collapse of the Chinese economy for decades. Some day they may be proven correct; as the saying goes, even a broken clock is right twice a day.

But China has already made the very difficult transition from low-productivity, labour-intensive industrial production to technology, capital, and innovation-intensive industries. If China does run into problems in future, it will not be because of the middle-income trap.

China is exceptional in many ways, because of its size, history, culture and political system, but it has shown that there is a sustainable path from low to high technology, from extensive to intensive growth [from growing by adding more workers and machines to growing by using them more productively]. Many of the lessons learned in China can be applied in other middle-income countries.

And there are other countries that have made the transition, particularly in Europe. I think countries like Ireland and Estonia have important lessons for Vietnam, some of which may even be more relevant to Vietnam than China.

The Confluence: If you could get one thing about Vietnam’s development story better understood outside the country, what would it be?

Dr. Pincus: The biggest mistake that many businesses and journalists make in Vietnam is to think of the country as Little China. They assume that because of the obvious cultural similarities, and the fact that the two countries are governed by Communist parties, everything is pretty much the same. This is a bad assumption that has landed a lot of people in trouble over the years.

Outwardly, yes, the two countries are very similar. But that is just one side of the Vietnamese story. Vietnam also shares many characteristics with its Southeast Asian neighbours. Loyalties and politics are more local in Vietnam than in China, and decision-making is decentralised and consensus-based. Institutions are more fragmented, more prone to gridlock and more cautious.

Perhaps the current leadership is trying to make Vietnam act more like China to accelerate growth and development. Only time will tell if that is a good strategy.