Like other would-be tiger economies, Vietnam faces a trifecta of new threats: a crisis-paralyzed Europe, a faltering America, and a newly spendthrift Japan. Yet the biggest risk to the nation’s future may be old-fashioned nostalgia.

It has been 27 years since Hanoi launched the “Doi Moi” reforms that allowed privately owned companies to participate in the economy and opened key sectors, such as agriculture. The rapid growth that followed propelled Vietnam toward the realm of middle-income nations, transforming the onetime war zone into a case study for development and poverty reduction. Now, though, Vietnam’s 1986 blueprint for a “socialist-oriented market economy” is looking dated. 

Recent data show the strategy that got Vietnam this far ― a China-like heavy reliance on state-owned enterprises and top-down planning ― is now holding the nation back. Vietnam is losing ground on global competitiveness league tables while growth has slowed to about 5 percent, the lowest rate since 1999. To recover, the country needs to do precisely what it has avoided doing thus far: build a truly vibrant and innovative private sector that can diversify growth and create prosperity.

“A complete recalibration of the economy would be necessary to achieve stronger growth again,” says Vaninder Singh, a Singapore-based economist at Royal Bank of Scotland Group Plc. “This is not guaranteed as it will require a significant change in the corporate structure and improvements in productivity.”

Does Prime Minister Nguyen Tan Dung’s government have the political will to modernize Vietnam’s $124 billion economy? The International Monetary Fund appears to have its doubts. The IMF recently cut its 2014 Vietnam forecast by more than it did for any other Asian country, to 5.2 percent. That may sound grand in a world in which Group of Seven nations are barely expanding. But for a 90-million-person economy at Vietnam’s stage of development, it’s nothing short of a crisis.

When they launched their reforms, leaders in Hanoi believed they were following a Chinese model that had already worked wonders. The Vietnamese approach was more gradualist and cautious than Deng Xiaoping’s. Still, the broad thrust was similar and has now begun to breed the same problems.

Like China, Vietnam is suffering from a distorted credit allocation system dominated by state-owned companies. Their reckless lending decisions have fueled dangerous property bubbles and buried banks under nonperforming loans. The gap between rich and poor is growing rapidly; so are tensions between workers seeking higher wages and industries built on cheap labor. Dodgy land seizures and privatizations that enrich only the politically connected have sparked public outrage. Rampant corruption is undermining the ruling party’s legitimacy.

The country cannot move forward without restructuring state-owned enterprises, which account for almost 40 percent of gross domestic product. Economists at McKinsey & Co., for example, estimate that Vietnam must boost labor productivity by more than 50 percent to maintain healthy growth. You don’t need a Nobel Memorial Prize in Economic Sciences to know that only a thriving private sector can do that.

In February, Deputy Finance Minister Truong Chi Trung promised that the government would unveil a plan to overhaul 52 state-owned groups by June. Yet based on past experience, there’s ample reason to believe that the reforms will lack specifics or teeth. This government has already missed a target to create an asset-management company to address bad debt in banks. Pledges to rein in runaway public investments, lending and state-owned enterprises aren’t just familiar ― they are becoming downright monotonous.

The question is whether Dung’s team can credibly implement any of these desperately needed improvements, never mind all three. Here, one shouldn’t downplay the role of corruption. Just like Xi Jinping in Beijing, Dung faces a uniquely un-communistic problem: too many party bigwigs getting rich from Vietnam’s current model. Those spoils deaden the impetus for change.

Graft has risen in inverse proportion to the economy’s standing. In Transparency International’s 2012 Corruption Perceptions Index, Vietnam fell to 123rd place out of 176 nations from 112th place in 2011, a worse standing than Sierra Leone and Belarus. Meanwhile, on the World Economic Forum’s latest Global Competitive Index, Vietnam fell 10 places to 75th, lagging behind Uruguay and Ukraine.

Vietnam’s challenge is in some ways more manageable than China’s: Its state-owned companies are smaller, its vested interests less pervasive and powerful. But gradualism is no longer an option. It’s time for the country to develop its own model, one that roots out corruption, invests more in education and key growth sectors such as technology manufacturing, and empowers businesses to move up the value-added ladder.

For years, other small Southeast Asian nations, such as Myanmar and Cambodia, have looked to Vietnam for ideas on how to reform their own economies. The country can become that kind of role model again. It just needs to look forward, not back. 

By William Pesek

William Pesek is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.