The hustle is everywhere. Vietnam is one of Southeast Asia’s fastest-growing economies, powered by manufacturing exports, a young workforce, and rising foreign investment. Yet beneath the formal growth story lies a massive “grey economy”: economic activity not fully regulated, taxed, or protected by law. Estimates suggest that over two-thirds of Vietnam’s workers are employed informally, with the sector contributing more than one-fifth of national output.
Understanding the scale of Vietnam’s grey economy, the drivers behind it, the impact on workers and the state, and potential policy options are critical to understanding directional choices the government will have to make, and the possible consequences.
How Big Is Vietnam’s Grey Economy?
- Informal employment: In 2021, about 33.6 million workers in Vietnam were in informal employment. That accounted for 68.5% of the total employed workforce (Economica Vietnam, 2021).
- Share of GDP: The informal economy has been estimated to represent between 14% and 30% of official GDP, depending on methodology. A widely cited figure places it at around 21.5% of GDP (World Economics, 2023).
- By sector:
- Agriculture remains overwhelmingly informal, with few workers covered by contracts or social insurance (ILO, 2021).
- Manufacturing has seen steady progress: informality has declined significantly since 2013 as more factories adopt formal contracts.
- Urban vs. rural: Informality is more concentrated in rural areas, while services and industry in cities are somewhat more formalized (ILO, 2021).
These numbers show that Vietnam’s growth narrative is inseparable from its informal sector: tens of millions of livelihoods still depend on it.
Why Is the Informal Sector So Large?
Several structural and institutional factors sustain Vietnam’s grey economy:
- Agricultural dominance: Rural communities still rely heavily on farming, where regulatory and tax systems are difficult to enforce.
- High cost of formality: Registration, tax compliance, and social insurance contributions impose costs that micro-enterprises and low-margin businesses struggle to bear.
- Gaps in labour protection: Many workers,even in formal firms, lack contracts or benefits, leaving them outside official labour statistics.
- Migration and temporary work: Rural-urban migrants often take on casual jobs in construction, retail, or services, usually informal.
- Tax avoidance and weak enforcement: Some firms deliberately stay informal to evade taxes; monitoring small-scale retail or service providers is resource-intensive for the state.
Consequences of Informality
Risks
- Reduced fiscal capacity: With a quarter of GDP outside the tax net, the state loses significant revenue needed for infrastructure and welfare.
- Vulnerable workers: Informal employees lack health insurance, pensions, or legal recourse. This leaves them exposed to poverty during illness, accidents, or economic shocks.
- Lower productivity: Informal businesses often operate at small scale, with limited access to credit and technology, holding back productivity growth.
- Weaker standards: Safety, environmental, and labour standards are harder to enforce in informal workplaces.
Benefits
- Flexibility: Informal work absorbs shocks, providing fallback income when formal jobs are scarce.
- Livelihood access: Millions rely on small trading, repair, and service businesses for survival.
- Economic contribution: Despite being outside regulation, the sector still fuels local consumption and supply chains.
Trends Over Time
- Declining informality in manufacturing and services: As Vietnam industrializes, more workers are moving into jobs with formal contracts and benefits.
- Rising urbanization and education: Better schooling and migration to cities gradually reduce reliance on informal livelihoods.
- Government attention: Programs like labour law reform and digital business registration are importabt, and aimed at nudging workers and businesses into the formal economy.
Policy Responses
Vietnam’s government, often with support from international partners, has taken steps to address informality:
- Expanding social insurance: Extending coverage to more workers, including self-employed and gig workers.
- Simplifying business registration: Reducing red tape and compliance costs for micro-enterprises.
- Tax reform: Introducing lighter or progressive tax obligations for very small businesses to incentivize formalization.
- Improved measurement: Labour force surveys and statistical efforts now track informal employment more precisely.
- Access to finance: Expanding microfinance and SME credit programs to help informal businesses invest and scale.
Still, progress is slow. For many households, the costs of formality outweigh the perceived benefits.
Challenges Ahead
- Economic costs: Formalizing the grey economy risks burdening micro-entrepreneurs who survive on thin margins.
- Trust and enforcement: Workers may resist formalization if they distrust government institutions or fear arbitrary inspections.
- Embedded informality: In rural and remote areas, informality is deeply woven into daily economic life.
- Implementation gaps: Extending labour protections requires administrative infrastructure, enforcement, and public awareness.
Outlook
With 68.5% of its workforce informal and about 21.5% of GDP outside the tax net, Vietnam’s grey economy is both a challenge and an opportunity. On one hand, it constrains productivity and fiscal strength; on the other, it provides livelihoods to millions.
The country’s trajectory is clear: industrialization, urbanization, and policy reforms are gradually formalizing more jobs and businesses. Yet for the near term, the grey economy will remain a defining feature of Vietnam’s growth story.
Balancing the flexibility it provides with the protections and revenues of a formal economy will be one of Vietnam’s central policy dilemmas over the next decade. Vietnam’s social services and proximate economic equality are one of its core strengths as a country and taxation must suppprt that.
