Cyclists ride past a large poster advertising luxury cars on a road in Hanoi. Vietnam joined the lower-middle income bracket in 2009. Photo: AFP
Vietnamese coffee farmer Le Thi Do looks up at the five-meter-high (16-foot) ceiling of her six-bedroom, yellow house and then points to a small, squat building next door: "We used to live in that tiny one."
Do, 71, has been a barometer of Vietnam's fortunes. As the economy opened in 1986, she switched from growing vegetables to coffee and prospered as the rate of economic growth tripled in five years.
She was able to build a VND160 million home and put nine children through school, two of them going to college.
Then, the boom that benefited Do and millions of others started to slow. Prices of fuel, raw materials and labor soared. Bad debts rose. Growth fell below 7 percent in 2008 for the first time in seven years and could drop to 5.2 percent this year, the government estimates, the slowest since 1999.
"This year has been very difficult for everyone," said Do, who had to raise pay by 20 percent for harvest pickers to VND120,000 (US$5.75) a day. "We need funds for cultivation, but we have limited access to bank lending. You can get a loan if you have good connections."
After two decades of development, Vietnam risks falling into the so-called middle-income trap, where rising earnings and costs outpace productivity.
"Moving through the middle-income bracket is risky and requires time, political will, perseverance and luck," said Jonathan Pincus, an economist in Ho Chi Minh City with the Harvard Kennedy School's Vietnam program. "The government needs to do more to reform the economy and get back to a sustainable higher rate of growth. You have to do the hard part of building institutions, building a legal system, enforcing the rules governing financial institutions."
Government efforts to curb rising prices and stabilize the dong slowed growth to 4.7 percent in the first nine months of 2012. Inflation eased to a year-on-year pace of 6.48 percent in September from more than 23 percent in August 2011. The currency has risen about 0.9 percent this year against the dollar, after falling more than 7 percent in 2011.
The slowdown has hurt stocks, with the benchmark VN-Index, Asia's worst performer in 2011, down 18 percent since its peak this year on May 8.
The country faces a challenge that other economies have struggled to overcome. Of 101 middle-income economies in 1960, just 13 attained the World Bank's high-income bracket by 2008, including Japan, Hong Kong, Singapore, South Korea and Taiwan, according to a report this year from the Washington-based development lender.
Vietnam joined the lower-middle income bracket in 2009, with gross national income (GNI) per capita rising to $1,260 last year, from $110 two decades earlier, according to the bank's website. The World Bank classifies lower-middle-income economies as those with GNI per capita of $1,026 to $4,035 and upper-middle income from $4,036 to $12,475.
Once Southeast Asia's fastest-rising destination for foreign investment, Vietnam risks losing out as other nations in the region become more attractive to investors.
Pledged foreign direct investment to Vietnam fell 28 percent in the first nine months of 2012 from a year earlier, the government says. FDI inflows rose more than 31 percent in Malaysia and Indonesia in 2011 and an estimated 89 percent in neighboring Myanmar, compared with a 7 percent drop in Vietnam, according to the United Nations Conference on Trade and Development.
"The appetite that a lot of global investors have for Myanmar in particular now, but also countries like Indonesia and the Philippines, is based in part on disillusionment about Vietnam's performance relative to its promise," said Mark Gillin, a director of AIM Capital Management Ltd. in Ho Chi Minh City. "Given the work ethic and the dynamism of the people here, Vietnam should be doing far better."
Vietnam dropped 10 places to 75 on the World Economic Forum's Global Competitive Index this year, swapping places with the Philippines, which rose 10 slots to 65.
Vietnam is still attractive to some external investors, especially as China is getting more expensive, said Pincus at the Harvard Kennedy School. Intel Corp. opened a $1 billion assembly and testing plant in 2010 in Saigon Hi-Tech Park that Rick Howarth, general manager of Intel Products Vietnam, said last month was "ramping up smoothly."
"˜Bite the bullet'
Vietnam isn't the only country in the region facing a slowdown as Europe's debt crisis erodes trade. Growth in developing East Asia, excluding Japan and India, will probably ease to an 11-year low of 7.2 percent, from 8.3 percent last year, the World Bank said in an October 8 report.
Still, Vietnam is only at the bottom rung of the middle-income ladder, and must first catch more advanced neighbors, such as Thailand, where GNI per capita last year was $4,420.
"Will Vietnam grow from $1,500 to $5,000 per capita income uninterrupted or will it have to go through the boom and bust cycles?" said Deepak Mishra, World Bank lead economist for Vietnam in Hanoi. "If it wants a smooth transition to an upper- middle-income status, it will have to bite the bullet and credibly restructure its economy."
In her yellow house in Dak Lak, Do retains the optimism that characterizes many Vietnamese who've seen their lives improve since 1986.
"The situation will gradually get better in the next few years when the global economies recover and the government sorts out problems like the bank lending," she said. "I've seen so many things here improve in the past few decades."