Income diversification and the role of non farm activities a case of rural vienam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR MA IN DEVELOPMENT ECONOMICS INCOME DIVERSIFICATION AND THE ROLE OF NON-FARM ACTIVITIES: A CASE OF RURAL VIETNAM By LE VINH HOA MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, MAY 2011 ' UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR MA IN DEVELOPMENT ECONOMICS INCOME DIVERSIFICATION AND THE ROLE OF NON-FARM ACTIVITIES: A CASE OF RURAL VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS Academic Supervisor: Dr HA THUC VIEN HO CHI MINH CITY, MAY 2011 ACKNOWLEDGEMENTS First of all, I appreciate and sincere gratitude to the Vietnam Netherlands Program for granting me an academic course to pursue the Master of Art in Development Economic I would like to give my sincere thank to my supervisor professor Dr Ha Thuc Vien, who has straight accepted to guide me in this thesis He supervised me with enthusiasm, efficiency and pragmatism, and always provided me with ideas and guidance During my thesis, I have benefited from the assistance of Mr Nguyen Trung Hieu, Mrs Nguyen Thi Kim Cuc (Vietnam - Netherlands Programme for M.A in Development Economics) I want to thank Mrs Nguyen Thi Kim Cue for her very pertinent comments and frankness I’ve really appreciated Mr Nguyen Trung Hieu availability for technical help as well as for guiding me towards a higher level in econometrics Professor Peter Calkins has also commented on an earlier version of this thesis I would also like to express my sincere thanks to all of you HCMC, Summer 2011 LE VINH HOA declare that “INCOME DIVERSIFICATION AND THE ROLE OF NONACTIVITIES: CASE OF VIETNAM” is my own work, that it has not been to any degree or examination at any other universities, and that all the used or quoted are indicated and acknowledged by complete references HCMC, April 20 11 LE VINH HOA ABSTRACT \“his thesis examines how diversification level of household income in Vietnam The results show a trend in increasing number of income resources The fact that one third ‹›f the households in the studied have not engaged yet in any form of economic diversification (if exclude money transfer), both wage and non-farm activities :ontribute to an increased average total household income Increasing rural income Strongly relies upon the development of non-farm activities, including the development of a local rural industry, tourism as well as migration Non-farm activities are a part of rural economy in Vietnam today and it is a significant income contributor for many rural households Non-farm income has good impacts on household income and agricultural sector is not the leading employment sector , anymore TABLE OF CONTENTS TION OF FIGURES .vii I: INTRODUCTION , Problem statement l The objectives of study .3 Research question Structure of thesis .3 II: LITERATURE REVIEW Definitions: Factors effect to income diversification Household non—farm activities .7 3.1 Declining a share of agriculture in GDP and labor 3.2 Increasing role of non-farm activities in household economy Empirical Literature 11 III: RESEARCH METHODOLOGY 18 Model specification-dependent variable 18 Model specification-independent variables 21 Econometric Model .22 IV: DATA ANALYSIS AND DISCUSSIONS .26 Data description 26 LIST OF TABLE Table 1: Structure of family income in the 2008 survey .26 Table 4.2: Descriptive statistics (N = 9189) .28 Table 4.3: Structure of employed population by kind of economic activity 30 Table 4.4 Trends in income diversification, by the number of income sources 32 Table 4.5: Trends of income diversification, by income shares Table 4.6: Income of household with and without non-farm income 38 Table 4.7: Detailed non-farm activities of household .39 Table 4.8: Status of Training and Education of household 39 Table 5.1: Regression results of diversification index 41 Table 5.2: Regression result of household income 40 LIST OF FIGURES Figure 1: Share of labor and GDP in agriculture Figure I : Distribution of the Shannon equitability index .21 Figure 1: Family income and the number of family income sources 31 Figure 4.2: Number of households and number of income sources 31 CHAPTER I: INTRODUCTION Problem statement A renovation process of Vietnam, commonly known as “Doi Moi”, was officially launched in 1986 and has spent about two and halt decades The country has transformed from an economy centrally planned economy to a dynamic market One of the fundamental reforms was the legalization of most forms of private economic activities (including households and businesses), and the removal of price controls on almost all products and services Most of the reforms affected the rural sector, where farmers were given a greater freedom in the choice of their production, and price distortions were slowly diminished Agriculture directly benefit to the majority of Vietnam's population whose livelihoods are closely dependent on small-scale agricultural self-sufficiency in rural areas (Benjamin and Brandt, 2004) Higher yields of rice and other crops after have allowed Vietnam to become the second largest rice exporter without expansion in rice area and reduction in domestic consumption while it had been a rice importer in the mid-eighties (Minot and Goletti, 2000) As farmers were given the choice of their agricultural production with new exporting possibilities, other kind of crops started to be grown, such as pepper or rubber Vietnam has become the second largest coffee producer in the world, and production and export of fruits and vegetables have risen dramatically over this period And part of the income growth is undoubtedly due to diversification activities such as aquaculture, livestock, and non-farm activities structural changes towards more industry and services into othe with substantia additional member in a household increases the probability of undertaking c iversification by a factor of 0.09 Table 5-1 Probit Regression results of diversification index none diver age age2 distance edu edulev numedu gender dependency house size land c training vi llage dens Coef 0.065174 -0.00066 -0.00175 -0.02551 0.032327 -0.0489 -0.06102 -0.21442 106196 -6.74E-06 0.283 806 4.79E-05 Robust Std Err.0.011991 0.000109 0.000936 0.03272 0.015563 0.044223 0.072228 0.094159 0.024204 4.72E-06 0.106385 6.17E-05 Z 5.44 -6.02 -1.87 -0.78 2.08 -1.11 -0.84 -2.28 4.39 -1.43 2.67 0.78 0.069143 0.241 109 0.535129 0.46881 0.368943 0.370325 -0.33365 0.157093 0.114777 0.163011 0.173362 0.130965 0.10504 0.342819 0.44 2.1 3.28 2.7 2.82 3.53 -0.97 [95% Interval l Conf 0.041673 0.088675 -0.00087 -0.00044 0.061 -0.00359 8.04E-05 0.436 -0.08964 0.038621 0.038 0.001825 0.062829 0.269 -0.13557 0.037778 0.398 -0.20258 0.080548 0.023 -0.39897 -0.02987 0.058756 0.153635 0.154 -1.6E-05 2.52E-06 0.008 0.075294 0.492317 0.438 -7.3E-05 0.000169 P>|z| 0.66 0.036 0.001 0.007 0.005 0.33 -0.23875 0.016151 0.215634 0.129026 0.112257 0.16445 -1.00556 0.377039 0.466067 0.854624 0.808595 0.625629 0.576201 0.338265 econd, household with members has training in non-farm work is associated with a uch higher probability of diversification index with the factor of 0.28 These results can be explained by increasing returns to scale in household chores for households with a larger size and more labor availability that makes it easier for them to let some members engage in others activities Studies of Dercon and Krishnan (1996) in thiopa and of Tanzania and Micevska and Rahut (2008) in India find similar results Third, the presence of old members strongly reduces the likelihood of households to participate in migration (and to a lesser extent to engage in diversification): a higher 41 dependency ratio of the household reduces the labor availability for migration As for he decision to diversify agricultural production, more arable land per adult also ncreases the likelihood of farm diversification As a general rule, local non-farm decision is driven by households’ asset position rather than by human/social capital or household composition Results of Liner regression on diversification index is shown in Table 5-2 (see Appendix for more details) Basing on these results, several discussions might be presented as following: Table 5-2 Liner Regress for results Of diversification index diver index age age2 distance edu edulev numedu gender dependency house size land c training village dens Coef 0.496044 -0.0039 -0.03639 -0.28528 0.682239 0.237208 0.407125 -2 10355 0.393301 -0.00062 4.976478 0.000159 Robust Std Err 0.132329 0.001229 0.00843 0.306865 0.155369 0.349843 0.720861 0.907021 0.183138 0.00012 0.791587 0.000419 t 3.75 -3.18 -4.32 -0.93 4.39 0.68 0.56 -2.32 2.15 -5.15 6.29 0.3 region cons -5.01766 -10.7401 -1.86441 1.071866 -5.28486 -4.38463 -5.64842 28.55018 0.986004 1.567864 0.943379 1.072059 1.349849 1.184064 0.967929 3.567531 -5.09 -6.85 -1.98 l -3.92 -3.7 -5.84 (1) Demographic factors: Household [95% Conf 0.236635 -0.00631 -0.05292 -0.88684 0.377663 -0.4486 -1.00601 -3.88162 0.034288 -0.00085 3.424696 -0.00066 Interval] 0.755454 -0.00149 -0.01986 0.316281 0.986816 0.92302 1.820259 -0.32548 0.752315 -0.00038 6.52826 0.000981 -6.95057 -13.8136 0.048 -3.71376 0.317 -1.02974 -7.93103 -6.7058 -7.54589 21.55659 -3.08475 -7.66652 -0.01506 3.17347 -2.63869 -2.06346 -3.75095 35.54377 P>|t| 0.002 0.353 0.498 0.572 0.02 0.032 0 0.705 size has a positive effect on the diversification index The larger household size, diversify trend of household 42 increase Gender of household head have not significant on diversification index and cannot give any comment about it Age of household head is significant and show that when the header older, they had more experience in life and lead household to have more income resource (2)Education: Education lever of household member which have a statistically significant effect plays a key role in household diversification, the higher level of education they are, the more diversification trend This finding is similar to results of other studies conducted by Corral and Reardon (2001), Yunez and Taylor (2001) and de Janvry and Sadoulet (2001) Form their empirical studies, they come to conclusions that that more educated households earn more overall income but not more farm income The overall impact of education on income is positive and large The decrease in the share of income from wage employment is explain by the higher level of education, people had trend to go to big city and find a better job or join in non-farm activities to get more income More education they attain, the more total income they earn Thus, better education enables them with more opportunities of highly paid jobs Datt and Jolliffe (2005) suggest that education variable is a strong determinant of household living standards, in both rural and urban areas They find some substitutability between education and land ownership Furthermore their results show that adult’s education has a strong positive effect on household welfare in rural and urban areas Likewise El-Laithy, Lokshin and Banerji (2003) find that education is the factor that mostly affects households’ escape from poverty (3) Household assets and community variables: Per capita landholding very small reduces diversification index With regard to community level variables, 43 village population density increases diversification index This is a reasonable and easy to understand when density of village increase, not enough land for agriculture and then villager need to find new source of income The variable distance from village to nearest urban center not have significant but still indicated that households living far from urban center, income of household in village decrease 44 HAPTER V: CONCLUSIONS AND RECOMMENDATIONS Conclusions and recommendations his study was motivated to review current status of diversification level of household i icome and examine the role of non-farm income in total income of Vietnam’s h ousehold The analysis reported here was based on cross-section drew on a framework that conceptualized diversification as a product of household capacity x ariables and “incentives to diversify” First, the fact that one third of the households i a the studied have not engaged yet in any form of economic diversification (if ‹xclude money transfer), both wage and non-farm activities contribute to an increased r verage total household income The empirical evidence in chapter showed that over time there is an increasing movement in number of household income’s source, ‹ specially in richest household Second, non-farm activities are a part of rural ‹ conomy in Vietnam today and it is a significant income contributor for many rural households, especially in many parts of Vietnam, where villages in mountainous i egions are characterized by land scarcity, increasing household income strongly relies ipon the development of non-farm activities, including the development of a local iiral industry, tourism as well as migration The income quintiles results also show hat despite the vast differences in the levels of development, in geographical conditions and in the institutional structure, non-farm income is importance source ielps to increase total household income Non-farm income has positive impacts on household income and agricultural sector is not the leading sector anymore in order to increase family income, households follow two strategies, in some cases this is a mixture of both First, they increase number of income sources, primarily 45 f om the self-employment activities Second, family members can increase family i icome more if they work in different sectors of rural economy Conditions for s access are based on the ability to increase access to non-farm activities for all households, particularly for households with little human, land The econometric analysis shows that key determinant of success is well functioning labor markets in I oth rural and urban areas, including education which most affect wage income and I aining for non-farm income I egarding education and training, government intervention through the lowering of education and training costs is also required Although the average level of education ttainment has increased over time, Vietnam is lagging far behind of its Asian eighbors in terms of both investment in rural education and educational attainment nd remains quite low in skill labor The results confirm that better educated people re able to take more wages earning jobs and having training make them get more ’ncome from non-farm activities People in the rural area can be learning and training n job skill for increased wage opportunities as well as non-farm activities that leads to mproved social well-being, household income and satisfactory livelihoods Together vith the need for higher investment in rural education, the results also suggest that on he supply side, efforts must be done in urban areas to give better access to skilled obs to migrant people If migrants were to be given an equal access to urban skilled obs as compared to urban residents, higher expected returns to education and training would probably pull more educated people out of farm jobs Limitations This thesis has some limitations With respect to the analytical parts of this thesis scrutinizing the existing studies, the limitations are research methodological: The 46 ii come diversification index is the key variable in this study but it actually using in s ime thesis, not to be using widely in income diversification research Other limitation is data set had social capital variables like access to credit but it not mention how easy to access it Rather the analysis is aimed at increasing our understanding of some of the underlying key assumptions, weaknesses and strengths of these approaches 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Northern Ethiopia”, Food Policy, Volume 26, Issue 4, page 351 — 365 51 APPENDIX • * summarize age age2 edu edulev numedu gender dependency land_p_c training vi11age_dens distance diver_index Std Dev Min Max 49.46817 2635.376 1.337946 6.9B6716 8085793 13.72242 1485.211 1.345635 2.966165 1.085226 16 256 97 9409 12 house_Size | 6504 6504 6504 6504 6504 2021833 2946816 39.25969 41.94158 4.198493 4016591 316826 35.70457 23.47788 1.681861 99.85677 15 1and_p_c | training | llage_dens | 6504 6504 6504 1897.226 4340.304 126675 3461 15661.4 Variable | age | age2 | edu | edulev | numedu | gender | dependency | distance | diver_index Obs Mean 6504 6504 6504 6]04 6504 1646679 661.8885 3709091 749.9889 0 446 none_diver age age2 distance edu edulev numedu land_p_c training village_dens i.region , vce • * 0: 1: 2: 3: 4: log log log log log pseudolikelihood pseudolikelihood pseudolikelihood pseudolikelihood pseudolikelihood = = = = = dependency -1017.5992 -937.15031 -933.84164 -933.83116 -933.83116 regression Number of obs Wald chi2(19) Prob > chi2 Pseudo R2 pseudolikelihood = -933.83116 = = = = 6504 138.09 0.0000 0.0823 0651739 -.0006555 -.0017534 -.025508 0323269 -.0488981 -.0610157 -.2144217 Robust Std Err .0119907 0001089 0009356 0327197 0l55627 0442234 0722278 0941592 5.44 -6.02 -1.87 -0.78 2.08 -1.11 -0.84 -2.28 0.000 0.000 0.061 0.436 0.038 0.269 0.398 0.023 0416725 -.0008689 -.0035871 -.0896374 0018245 -.1355743 -.2025795 -.3989703 0886753 -.0004421 0000804 0386214 0628293 0377781 0805482 -.0298731 land_p_c | -6.74e-06 training | 2838056 lage_dens | 0000479 4.72e-06 1063852 0000617 -1.43 2.67 0.78 0.154 0.008 0.438 -.000016 0752944 -.0000731 2.52e-06 4923169 0001688 0305174 0691426 2411086 5351287 4688104 3689429 3703253 1040685 1570926 1147765 1630106 1733624 1309648 1050403 0.29 0.44 2.10 3.28 2.70 2.82 3.53 0.769 0.660 0.036 0.001 0.007 0.005 0.000 -.173453 -.2387532 0161507 2156337 1290263 1122566 1644502 2344879 3770385 4660665 8546236 8085945 6256292 5762005 _cons | -.3336476 3428187 -0.97 0.330 -1.00556 3382648 none_diver | age age2 distance edu edulev numedu gender dependency | | | | | | | | house_s i z e ! ’ gender region | | | | | | | | Coef 10 195 0242044 [95% Conf Interval] 4.39 0.000 87 5 153 regress diver_index age age2 distance edu edulev hcuse_size land_p_c training village_dens i.region if > none_diver ==1 , vce(robust) L near regression numedu gender Number of ol›s = Root MSE = F( 19, 6247) = Prob > F = R-squared = Jiver_index | age age2 distance edu edulev numedu gender dependency house_size land_p_c training illage_dens | | region Coef Robust dependency 67 29.19 0.0000 0.0890 21.439 [95% Conf Interval] Std Err | | | | | | | | | 4960444 -.0039031 -.0363908 -.2852792 6822394 2372084 4071246 -2.103547 3933013 -.0006172 4.976478 0001589 1323285 0012292 0084304 3068649 1553687 3498427 7208607 9070205 183138 0001199 7915866 0004191 3.75 -3.18 -4.32 -0.93 4.39 0.68 0.56 -2.32 2.15 -5.15 6.29 0.38 0.000 0.002 0.000 0.353 0.000 0.498 0.572 0.020 0.032 0.000 0.000 0.705 236635 -.0063128 -.0529173 -.8868399 3776633 -.4486035 -1.00601 -3.881619 0342879 -.0008524 3.424696 -.0006627 7554537 -.0014933 -.0198642 3162814 9868156 9230203 1.820259 -.3254753 7523147 -.0003821 6.52826 0009805 | | | | | | | | -5.017661 -10.74007 -1.864411 1.071866 -5.28486 -4.38463 -5.648417 9860037 1.567864 9433789 1.072059 1.349849 1.184064 9679286 -5.09 -6.85 -1.98 1.00 -3.92 -3.70 -5.84 0.000 0.000 0.048 0.317 0.000 0.000 0.000 -6.950567 -13.81363 -3.713758 -1.029739 -7.931028 -6.705803 -7.54589 -3.084754 -7.666521 -.0150639 3.17347 -2.638691 -2.063458 -3.750945 28.55018 3.567531 8.00 0.000 21.55659 35.54377 54 ... development and the total lost rate of farm land caused by urbanization and climate change is about 1%, annually As a result, farm land per capita has been rapidly decreasing; average agriculture land area... three income sources It is a difficult indicator to measure, requiring an accurate accounting of the level of income from all farm and non- farm sources The share of non- farm income as a measure of. .. upon the development of non- farm activities, including the development of a local rural industry, tourism as well as migration Non- farm activities are a part of rural economy in Vietnam today and