Medium- and Long-Term: Outlook

Considerable economic progress has been made during the past decade. Significant structural reforms have resulted in impressive economic growth in the past decade, as well as a notable increase in living standards. Exports rose more than 25-fold between 1991 and 2008, and per-capita income increased eight-fold, leading the United Nations Development Program to name Vietnam "the most successful transition economy of the past decade." As part of its reform
efforts, Vietnam has been nurturing closer trade relations with its neighbors in the Association of Southeast Asian Nations, as well as Europe and the United States. Negotiations to join the World Trade Organization (WTO) were successfully completed in November 2006. Favorable medium-term growth outlook assumes re-acceleration of reforms. Over the longer term, political stability and effective reform implementation are critical to Vietnam's growth profile. Temporary stumbles and slowdown of the reform momentum may occur, but the evident benefits of economic opening suggest that the political will to continue the process should be found. We are therefore confident about Vietnam's long-term economic performance, and expect real GDP growth to average 7.0% annually during 2010–15. Natural resources, such as oil and gas, fisheries, phosphates, significant agricultural and hydroelectric potential, and the country's large and well-educated labor force are bound to attract significant investor interest in the future. Furthermore, China's experience with macroeconomic reform provides a real-life case study of transition from a controlled economy to a market-based economy, which might help avoid costly policy mistakes. Near-term risks to growth remain elevated, however. Near-term risks center on high inflation and ballooning trade deficits, which could threaten macroeconomic stability, particularly the exchange rate. Longer-term issues relate to the state's still-significant economic presence (accounting for some 40% of GDP) and its dominance of the financial sector,
which undermines the quality of bank lending, crowds out private investment, and poses challenges to banking-sector sustainability. Infrastructure development has not kept up with economic growth, leading to costly bottlenecks and pushing operating costs higher than in other countries in Asia. In addition, reform of state-owned enterprises remains inhibited by
concerns over associated socioeconomic dislocations and their impact on the legitimacy of the Communist Party. Growing regional economic disparities are another source of potential discontent. Increased trade openness following the WTO accession and the Association of Southeast Asian Nations/China free-trade agreement, will expose efficiency shortfalls in
state enterprises, causing corporate bankruptcies and mounting layoffs, which could trigger a popular backlash against