UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS HOUSEHOLDS’ EARNED INCOME IN VIETNAM: EVIDENCE FROM VHLSS 2008 BY TRƯƠNG NGỌC QUANG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, JANUARY 2013 UNIVERSITY OF ECONOMICS HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES THE HAGUE VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS HOUSEHOLDS’ EARNED INCOME IN VIETNAM: EVIDENCE FROM VHLSS 2008 A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By TRƯƠNG NGỌC QUANG Academic Supervisor Dr PHẠM KHÁNH NAM HO CHI MINH CITY, January 2013 ACKNOWLEDGEMENT First of all, I would like to thank you to all professors in the teaching board of MDE program, who have helped me accumulate valuable knowledge to complete this study I would like to express my thanks to Mr Phung Thanh Binh, Mr Nguyen Khanh Duy, Mr Truong Thanh Vu, and all other scholars participated for arranging and conducting training on the quantitative research with STATA & VHLSS 2008 Also, I would like to say thank you to Mr Nguyen Van Phuong for his earlier comments on my paper I would like to express my gratitude to Prof Dr Nguyen Trong Hoai, who has inspired me to greater effort of thesis writing I would like to express my sincere appreciation to Dr Pham Khanh Nam, my current supervisor, who provides me directive suggestions, helpful advices and precious supports during my thesis writing To all my dear friends of MDE class 16, who give me sincere encouragement and support, I would like to express my heartfelt thankfulness Finally, I would like to express my deeply appreciation to my dear parents, to my wife - also my best friend, and my family for their spiritual and physical supports In particular, I dedicate this thesis to my grand-father, who used to be a teacher His noble example is still inspiring me to further learning and going forward in my life ABSTRACT The most considerable element of households’ income structure on average is earned income which is one of the main drivers to improve the living standard of most Vietnamese households in recent years However, there is an increasing tendency of income inequality and living standards’ difference between regions, rural and urban areas as well as between the richest and poorest households This paper contributes to the understanding of the effects of Region-level characteristics, Community-level characteristics and Household and individual characteristics on household’s earned income The determinants of earned income are considered at household, commune and regional levels While wage employment still constitutes the backbone of the urban economy, non-farm activities and income diversification are increasingly significant for rural households It is recognized that households’ physical capital (housing), human capital (education), and local infrastructure are significant determinants in increasing their earned income Key Words: earned income; household; semi-log model; poverty; inequality, Vietnam TABLE OF CONTENTS CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research objectives and research questions 1.3 Scope of study 10 CHAPTER 2: LITERATURE REVIEW .11 2.1 Definition and concept review 11 2.2 Review of framework for livelihood and income analysis 19 2.3 Understanding the determinants of incomeError! Bookmark not defined.4 CHAPTER 3: RESEARCH METHODOLOGY 30 3.1 The data 30 3.2 Methodology 30 3.2 Specification of variables 32 CHAPTER 4: RESULTS .38 4.1 Overview of earned income in Vietnam 38 4.2 Regression Results 48 CHAPTER 5: CONCLUSION, RECOMMENDATION AND LIMITATIONError! Bookmark not defined.8 5.1 Conclusion and Recommendation 58 5.2 Limitation .60 REFERENCES 62 APPENDIX Appendix The Vietnam Development Goals 66 Appendix 2: Map and economic regions of Vietnam 69 Appendix 3: Expenditure poverty rate using the World Bank and GSO poverty line 70 Appendix 4: New poverty line of the Government, period 2006-2010 70 Appendix 5: Poverty rate using the new poverty line of the Government, period 2006-2010 70 LIST OF TABLES Table 2.1: Classication of activities: sectorial, functional, spatial activities 18 Table 3.1: Description of the variables 33 Table 4.1: Wilcoxon rank-sum (Mann-Whitney) test for earned income per capita (without remittance): rural vs urban 42 Table 4.2: Wilcoxon rank-sum (Mann-Whitney) test for earned income per capita (with remittance): rural vs.urban 42 Table 4.3: T-test for equality of means of earned income per capita 45 Table 4.4: Correlation coefficient between log of earned income per capita and other exploratory variables .47 Table 4.5: Regression result of Logarithm of Earned Income without remittances 51 Table 4.6: Regression result of Logarithm of Earned Income with remittances 55 LIST OF FIGURES Figure 1.1: Vietnam poverty headcount ratio at national poverty line Figure 2.1: The components of potential sources of income 15 Figure 2.2: Conceptual framework for livelihoods analysis .20 Figure 4.1: Monthly average income per capita, period 2002 – 2008 38 Figure 4.2: Monthly earned income per capita by urban and rural sectors, period 2002 – 2008 39 Figure 4.3: Monthly earned income per capita by region, period 2002 – 2008 40 Figure 4.4: Monthly income per capita by quintile, period 2002 – 2008 41 Figure 4.5: Structure of monthly income per capita by quintile in 2008 .41 Figure 4.6: Histograms for log of earned income per capita without remittances .43 Figure 4.7: Histograms for log of earned income per capita with remittances 44 Figure 4.8: Histograms for log of earned income per capita: rural vs urban 44 Figure 4.9: Histograms for log of earned income per capita with remittances: rural vs urban 45 LIST OF ABBREVIATIONS GDP: Gross Domestic Product GSO: General Statistics Office HH: Household MDG: Millennium Development Goals MOET: Ministry of Education and Training NA: Not Applicable OECD: Organization for Economic Co-operation and Development RE: Random-effects SIDA: Swedish International Development Cooperation Agency SNA: UNDP: System of National Accounts United Nations Development Program VDG: Vietnam Development Goals VHLSS: Vietnam Household Living Standard Survey VLSS: Vietnam Living Standards Survey VND: Vietnam Dong WB: World Bank CHAPTER 1: INTRODUCTION Since the economic reforms initiated in 1986, the United Nations and Vietnam’s other international institutions and partners have been recognizing the significant results in the execution of the Millennium Development Goals (MDG) and the poverty reduction program in Vietnam The goal number on reducing the percentage of poor and hungry households is the most vital and critical foundation for the successful implementation of other MDG For better integration into Vietnam’s national and provincial socio-economic development strategies and programs, eight MDGs have been translated into Vietnam Development Goals (VDG) (see appendix 1) to bring them closer to the country’s situation 1.1 Problem statement As one of the poorest countries in the world 25 years ago, Vietnam proudly became a lower middle income country with per capita income of $1,130 in the end of 2010 and the poverty rate at national poverty line has dropped remarkably from 58.1 percent to 14.5 as figure 1.1 below Five of MDG targets has already achieved and most of social welfare indicators have been improved, thus Vietnam is making progress in attaining two more targets by 2015 (World Bank, 2008) Figure 1.1: Vietnam poverty headcount ratio at national poverty line Source: World Bank (2008) R-squared 0.3373 0.2952 Note: * significant at 10% level , **significant at 5% level, *** significant at 1% level; Std Err = Standard Error Source: Author’s calculation using data from VHLSS 2008 0.3192 SUMMARY Firstly, regional effect really matters households’ earning, especially in North Central, South East, and Mekong River Delta Secondly, households’ characteristics (number of members or size, adult dependents, and children) and householders’ characteristics (age, ethnicity, and education) are statistically factors of earned income While wage employment still constitutes the backbone of urban household‘s income, non-farm activities and income diversification are increasingly significant for rural households’ earning Moreover, investment in local infrastructure significantly affects rural households’ earned income Finally, the role of domestic remittances has become more and more important in improving households’ living standards and inequality between regions CHAPTER 5: CONCLUSION, RECOMMENDATION AND LIMITATION Due to the importance of earned income in sustainable poverty reduction, government pro-poor policies directed at the household level therefore should aim to improve earning capability of the poor, to concentrate resources to investment in household’s human capital, social capital, and essential infrastructure; development of employment opportunity; and promotion of private sector, research and development especially in agriculture, and income diversification 5.1 Conclusion and Recommendation The final goal of recommendations is to enhance rural livelihoods and catalyze new energies for advancing rural development Some main conclusions and recommendations are as follows: First, per capita earning change considerably between regions South East region had highest mean income per capita, which is times higher than the lowest mean income of Northwest region Income rises markedly as labor force moves from north to south, from mountainous to coastal provinces The growing earnings gap helps explain the continued migration of people from the countryside to the cities due to fast urbanization, industrialization and high unemployment rate in rural areas of Vietnam On other hand, if domestic remittances can stimulate the formation of household businesses in rural areas, the problems of rural unemployment and large cities’ congestion can be gradually reduced; and nationwide rural-urban migration flow can be mitigated Second, it is important for local economy to be connected to the nationwide economy, especially rural households living in areas that had routine information update and access to public transportation were somewhat better off than those that were isolated from the rest of the country Rural development policy is recommended to focus on agricultural extension and communication of community For the competitiveness of rural areas, policies to improve physical infrastructure such as electricity, road, irrigation, communication can contribute to increasing the access of the poor to markets Physical isolation caused by remoteness and poor infrastructure reduces economic opportunities, and makes access to markets, basic social services, credit, information and mass media more difficult Poor infrastructure creates major obstacles for agricultural diversification and results in the underdevelopment of off- farm activities Good infrastructure is also crucial for improving the welfare of the poor in many other economic and social aspects, such as nutrition, health, literacy, political and social exclusion, and vulnerability Third, education is a vital driving force in boosting income, particularly at the college level This emerges clearly from my research, although the analysis is based on households rather than individuals With more education, adults are more likely to be working, and tend to earn more However, the most efficient solution is developing local human resources through vocational training for the poor households who had to work very early without going to school Policies to enhance the human capital of the poor through providing basic services such as health care, clean water, education, training and retraining, and technology transfer through agricultural extension activities so that the poor have knowledge, intellectual and physical capability to seize opportunities from economic reforms Education and training to acquire necessary skills, and general and functional knowledge usually provide good opportunities of securing stable jobs, and understanding and applying new techniques Education also helps households take advantage of other infrastructure services such as irrigation, communication, electricity and transport Better health care will improve health status of the poor, which in its turn will reduce the costs incurred by illness and diminish the risk of loss of earnings Fourth, agriculture is main source of earned income for rural area, so policy should be focused on forming business support center, and enhancing research & development institutes to popularize new skills and technologies Policies to promote research and development, especially in agriculture, can significantly raise productivity because higher agriculture outputs will result in higher farmers’ earnings, lower goods price to consumers, and more wages in non-farm sector Moreover, it is recommended to improve the “competitiveness” of rural areas by developing and commercializing natural and cultural advantage, specifically tourism closely accompanied by friendly services, and local handicraft operations Finally, ethnicity is correlated with earning Chinese and Kinh households are better off than the rest of our society, while other ethnic minorities are noticeably poorer than society at large, although this appears to be due to low educational levels and remoteness than to ethnicity A special targeted program for ethnic minority development is needed to help upland people and ethnic minorities to escape from poverty People belonging to ethnic minorities often face not only physical, but also social isolation from the world outside their community This isolation is associated to a significant extent with their linguistic, cultural and educational differences as well as differences in cultivation practices These impede their interaction with the civilized world, and limit their access to new information, improved techniques and ideas Again, the regional dimension should be accorded with greater importance in both macro- and household- level policies There is a trade-off in resource allocation between areas with the highest financial returns and those with the greatest needs Evidence from many countries suggests that resource allocation under pro-poor policies should be directed more towards poorer regions with greater needs, rather than serving to reinforce current regional disparities 5.2Limitations My paper could be extended and get deeper because of the following reasons: First, the limitation of using current cross-sectional data of VHLSS 2008 in linear regression definitely proposes weaker conclusions than using panel data With panel data, I could find not only relationship between characteristics-related variables and earned income, but also verify the causal effects as well as control other unobservable factors Second, Vietnam is a developing country with low productivity, so significant difference in working hours and mean salary are the major reasons of income gap between to top and bottom quintiles My paper can be enhanced its in-depth study by examining the components of earned income per capita, such as earning per hour, the amount of hours worked per household member, and the share of the working household members Third, social capital is an important asset of household as described in the conceptual framework for livelihoods analysis However, the impact of social capital cannot be determined by this paper Four, it should be noticed that in last three months of 2008, the government or other organizations implemented projects or programs in approximately 80% of rural communes to enhance population living14 However, my paper cannot point out the effect of such government intervention and programs Finally, agriculture is still an important source of income to improve household livelihood The VHLSS 2008 reports that the main income source of 97.2% surveyed communes are from agriculture, while the North West and the Central Highlands regions both have agriculture income absolutely in all surveyed communes As survey result, most households 87% of communes acknowledge that the first reason of their living standards’ improvement was increase in farm income In addition, efficiency of cultivation methods, expanding of irrigated agricultural areas and marketing of high-yield agricultural product are vital sources of crop productivity In short, agriculture is still playing a vital role in promoting rural livelihood and should be an area for further research 14 “Projects or programs of the Government or of other organizations: Hunger alleviation and poverty reduction (72% of communes), economic and infrastructure development (70% of communes), job creation (34% of communes), culture and education (31% of communes), environment and clean water (26% of communes)” (GSO, 2008) REFERENCES Arias, O., Hallock, K.F and Sosa, W (2001) Individual heterogeneity in the returns to schooling: Instrumental variables quantile regression using twins’ data Empirical Economics 26(1): 7-40 Babieri, M., (2006) Doi moi and the Elderly: Intergenerational Support under Strain of Reforms Paper prepared for presentation at the 2006 Population of America Association Meeting, Los Angeles, March 30 - April 1, 2006 Bales, S., Phung Duc Tung, & Ho Si Cuc (2001) Sectoral changes and poverty In D Haughton, J Haughton, and Nguyen Phong (Eds), Living standards during an conomic boom (pp 47-58) Hanoi: Statistical Publishing House Barrett, C B., Reardon, T & Webb, P (2001) Non-farm income diversification 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poverty line between 2001 and 2010 • Target 2: Reduce by 75 percent the number of people living under the international food poverty line by 2010 Goal 2: Universalize education and improve education quality • Target 1: Increase net enrolment in primary school to 97 percent by 2005 and to 99 percent by 2010 • Target 2: Increase the net enrolment rate in junior secondary school to 80 percent by 2005 and 90 percent by 2010 • Target 3: Eliminate the gender gap in primary and secondary education by 2005, and the gap for ethnic minorities by 2010 • Target 4: Increase literacy to 95 percent for under-40-year-old women by 2005 and 100 percent by 2010 • Target 5: By 2010 improve the quality of education and increase full-day schooling at primary level (exact target depends on funding) Goal 3: Ensure gender equality and women empowerment • Target 1: Increase the number of women in elective bodies at all levels • Target 2: Increase the participation of women in agencies and sectors [includes ministries, central agencies and enterprises] at all levels by 3-5 percent in the next 10 years • Target 3: Ensure that the names of both husband and wife appears on the landuse right certificates by 2005 • Target 4: Reduce the vulnerability of women to domestic violence Goal 4: Reduce child mortality, child malnutrition and reduce the birth rate • Target 1: Reduce the infant mortality rate to 30 per 1000 live births by 2005 and 25 by 2010 and at a more rapid rate in disadvantaged regions (see below) • Target 2: Reduce the under-5 mortality rate to 36 per 1000 live births by 2005 and 32 by 2010 • Target 3: Reduce under-5 malnutrition to 25 percent by 2005 and 20 percent by 2010 Goal 5: Improve maternal health • Target 1: Reduce the maternal mortality rate to 80 per 100,000 live births by 2005 and 70 by 2010 with particular attention to disadvantaged areas Goal 6: Reduce HIV/AIDS infection and eradicate other major diseases • Target 1: Slow the increase in the spread of HIV/AIDs by 2005 and halve the rate of increase by 2010 Goal 7: Ensure environmental sustainability • Target 1: Extend forest cover to 43 percent by 2010 (from 33 percent in 1999) • Target 2: Ensure that 60 percent of the rural population has access to clean and safe water by 2005 and 85 percent by 2010 Access to clean and safe water should be provided for 80 percent of urban people by 2005 • Target 3: Ensure there are no slums and temporary houses in all towns and cities by 2010 • Target 4: Ensure that all waste-water in towns and cities is treated by 2010 • Target 5: Ensure that all solid waste is collected and disposed of safely in all towns and cities by 2010 • Target 6: Air and water pollution must attain national standards by 2005 Vietnam Development Goals and Targets, not directly based on MDGs Goal 8: Reducing vulnerability • Target 1: By 2005, increase the average income of the lowest expenditure quintile to 140 percent of that in 2000 and to 190 percent of that by 2010 • Target 2: Reduce by half the rate of poor people falling back into poverty due to natural disasters and other risks by 2010 Goal 9: Improving governance for poverty reduction • Target 1: Effectively implement grass-roots democracy • Target 2: Ensure budget transparency • Target 3: Implement legal reform agenda Goal 10: Reducing ethnic inequality • Target 1: Preserve and develop the reading and writing ability of ethnic languages • Target 2: Ensure entitlement of individual and collective land-use rights in ethnic minority and mountainous areas • Target 3: Increase the proportion of ethnic minority people in authority bodies at various levels Goal 11: Ensuring pro-poor infrastructure development • Target 1: Provide basic infrastructure to 80 percent of poor communes by 2005 and 100 percent by 2010 • Target 2: Expand the national transmission grid to 900 poor commune centers by 2005 Source: Socialist Republic of Vietnam (2002) Appendix 2: Map and economic regions of Vietnam Source: Ministry of Planning and Investment of Vietnam (2006) Appendix 3: Expenditure poverty rate using the WB15 & GSO poverty line (unit: %) 1998 2002 2004 2006 2008 Whole country 37,4 28,9 19,5 16 14,5 Urban 95 6,6 3,6 3,9 3,3 Rural 44,9 35,6 25 20,4 18,7 Source: GSO (2008) Appendix 4: New poverty line of the Government, period 2006-2010 (unit: thousand VND; updated for price changes) 2004 2006 2008 Urban 218 260 370 Rural 168 200 290 Source: GSO (2008) Appendix 5: Poverty rate using the new poverty line of the Government, period 2006-2010 (unit: %) 2004 2006 2008 Whole country Urban 18,1 8,6 15,5 7,7 13,4 6,7 Rural 21,2 17,0 16,1 Source: GSO (2008) 15 The poverty lines developed by the WB and the GSO in 1993 for calculating the expenditure poverty rate in 2004, 2006 and 2008 respectively were 173, 213 and 280 thousand VND per capita per month (updated for price changes)