Thirty years after the launch of the economic reforms known as Doi Moi, Vietnam is considered a development success story — marked by remarkable poverty reduction and economic growth. Vietnam reached middle income status in 2009, achieved most Millennium Development Goals (MDGs) — many of them ahead of time — and has adopted the Sustainable Development Goals (SDGs). The economy has developed from being largely closed and centrally planned to dynamic and market - oriented, integrated and connected to the global economy. Furthermore, growth has been inclusive, translating into tangible gains for the Vietnamese people, economically and in broader welfare terms, with significant increases and improvements in access and quality of services.

Notwithstanding notable achievements, development challenges persist. Poverty gains are fragile, with remaining poverty concentrated in rural areas and among ethnic minorities. Vietnam is highly vulnerable to climate change and natural disasters, and natural assets are exploited unsustainably. Weak institutions, often with overlapping mandates and responsibilities, and inadequate processes for coordination, impede state effectiveness. There are rising fiscal pressure and vulnerabilities in the banking sector, the domestic private sector is developing below potential, and labor productivity growth is diminishing. Needed investments in infrastructure exceed resources available, and the ability to mobilize private sector resources for such investments remains weak. Vietnam’s demographic and economic evolutions are also putting new demands on service delivery and social protection systems.

Government actions influence a country’s economic performance. However, the debate about the effects of government budget deficit on economic growth remains unsettled. On the one hand, deficit is believed to trigger high tax rates, which can decrease productivity and deter private investment. On the other, deficit spending is assumed to complement business investment and stimulate economic productivity. This article assesses the probability of such claims for the Vietnamese government’s fiscal policy between 1989 and 2011. After the introduction of the Doi Moi reform policy in the late 1990s, Vietnam has witnessed high economic growth. Yet, its government’s deficit pattern is among the highest in Southeast Asia. The findings demonstrate that in the case of Vietnam, government deficits had no direct effects on the country’s economic productivity between 1989 and 2011. Instead, the article discovers that foreign direct investment (FDI) played an important role in Vietnam’s economic productivity over the same period, while real interest rates adversely affect growth. This article concludes that rather than an expansion of the public sector through government spending deficit, Vietnam requires administrative and regulatory reforms to ensure an efficient use of government resources, a continuous flow of foreign capital, and consistent economic growth.