Technical efficiency of rice production in vietnam

INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS TECHNICAL EFFICIENCY OF RICE PRODUCTION IN VIET NAM BY LE HOANG VIET PHUONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2012 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 TECHNICAL EFFICIENCY OF RICE PRODUCTION IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LE HOANG VIET PHUONG Academic Supervisor: DR PHAM KHANH NAM DR PHAM LE THONG HO CHI MINH CITY, DECEMBER 2012 • DECLARATION I declare that "Technical efficiency of rice production in Vietnam" is my own works, it has not been submitted to any degree at other universities I confirm that I have made by effort and applied all knowledge for finishing this thesis in the best way HCMC, December 2012 LE HOANG VIET PHUONG i I ACKNOWLEDGEMENTS When working on this thesis, I had been given much valuable help and encouragement which is a strong motivation for me to go through difficulties and finish the thesis First of all, I kindly give my sincere thanks to Dr Pham Khanh Nam and Dr Pham Le Thong who wholeheartedly helped and guided me through the thesis I would like to give my thanks to Associate Prof Dr Nguyen Trong Hoai- Vice Principal of the University of Economics & Director of Vietnam - Netherlands Programme for MA in Development Economics who facilitated me when I was doing the thesis as well as in the past two year Postgraduate Program I would like to give my thanks to Dr Do Thi Loan - Deputy Chairwoman & Secretary General of HCMC Real Estate Association who wholeheartedly guided me to the thesis and allowed me to have valuable time to finish the thesis I would like to extend my thanks to: Dr Nguyen Huu Dung for his comments related to my TRD Dr Hay Sinh, Dr Nguyen Quynh Hoa, Dr Nguyen Ngoc Vinh, Dr Tran Tien Khai, Dr Le Van Chon, MA Truong Quang Hung, MDE Phung Thanh Binh and MBA Hoang Tuyet Thu who always encourage and support me during my study and my doing this thesis; 11 , MBA Nguyen Khanh Duy and MDE Nguyen Ngoc Danh for their proposal and guides related to my subject; Lecturers of Economics Development Faculty, HCMC University of Economics and other lecturers having participated in Vietnam- Netherlands Programme forMA in Development Economics who shared their precious experiences which I could apply to the thesis as well as to my work Lastly, I would like to express my heartfelt thanks to my family, my friends and my colleagues in HCMC Real Estate Association who are always by my side Ho Chi Minh City, December 2012 111 •, ABSTRACT This study estimates the technical efficiency of the rice farmers in Vietnam from the stochastic frontier production function using Vietnam Access to Resources Household Survey (2008) This study finds that the labour, machine, seed, fertilizer, pesticide and herbicide strongly affect rice productivity The mean technical efficiency of farmers is 60.28% The technical efficiency level of sampled farmers ranges from 17.79% to 89.38% Number of household members, age of farmer, experience, education, credit access, training program are predictors of technical efficiency Finally, joining associations or groups which is proxy variable of social capital also strongly affect technical efficiency However, the result is very interesting and different with my expectation In my study, the farmers who join more in Farmers' Union, Union and other groups will produce less than that in the other farmers lV TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENTS ii ABSTRACT iv TABLE OF CONTENTS v LIST OF TABLES vii LIST OF FIGURES viii LIST OF ABBREVIATIONS ix CHAPTER I INTRODUCTION 1.1 Problem statement 1.3 Research questions 1.4 Scope of study and data Thesis structure CHAPTER II LITERATURE REVIEW 2.1 Literature review on economic efficiency 2.1.1 Technical efficiency 2.1.2 Allocative efficiency 2.1.3 Graph explanation for technical efficiency, allocative efficiency and economic efficiency 2.2 Stochastic frontier analysis framework 2.2.1 Stochastic frontier model and technical efficiency measurement 2.2.2 Graph explanation for stochastic frontier model and technical efficiency 2.3 Social capital concepts 10 2.4 Empirical review 11 2.5 Chapter remark 21 CHAPTER III RESEARCH METHODOLOGY 22 3.1 Data 22 3.2 Empirical framework 23 v 3.3 Models Specification 24 3.3.1 Stochastic frontier production model 24 3.3.2 Technical efficiency model 31 3.4 Chapter remark 40 CHAPTER IV ANALYSIS AND RESULTS 41 4.1 Descriptive statistics 41 4.1.1 Descriptive statistics of rice production 41 4.1.2 Descriptive statistic of inputs contribution 43 4.1.3 Descriptive statistic of variables in technical efficiency model 44 4.1.4 Descriptive statistics of credit access 45 4.1.5 Descriptive statistic of social capital 46 4.2 Estimations results and discussions 47 4.2.1 Stochastic frontier production model 47 4.2.2 Discussion of stochastic frontier production model 49 4.3 Technical efficiency level and discussions 50 4.3.1 Technical efficiency level 50 4.3.2 Discussion of technical efficiency level 52 4.4 Technical efficiency model and discussions 52 4.4.1 Correlation matrix of independent variables 52 4.4.2 Technical efficiency model 53 4.4.3 Discussion oftechnical efficiency model 55 4.5 Chapter remark 58 CHAPTER V CONCLUSION AND POLICY IMPLICATION 59 5.1 Conclusion 59 5.2 Policy implication 60 5.3 Limitation and further research 61 REFERENCES 63 APPENDIX 67 VI LIST OF TABLES Table 2.1 Summary of empirical review 16 Table 3.1 List ofVariables in Stochastic Frontier Production Function 28 Table 3.2 List ofVariables in Technical Efficiency Model 37 Table 4.1 Rice production of the farmers in 12 months 41 Table 4.2 Descriptive statistics of inputs contribution .43 Table 4.3 Descriptive statistics of variables in technical efficiency model 44 Table 4.4 Descriptive statistics of credit access .45 Table 4.5 Descriptive statistics of joining groups .46 Table 4.6 Maximum Likelihood Estimation of Stochastic Frontier Production Function 47 Table 4.7 Frequency distribution of technical efficiency for rice farming 51 Table 4.8 Correlation matrix of independent variables 52 Table 4.9 OLS and FGLS estimation results of Technical efficiency model 53 Vll LIST OF FIGURES Figure 2.1 Input Oriented Efficiency Measures Figure 2.2 Technical efficiency of production Figure 2.3 Stochastic Frontier Production Function Figure 3.1 Empirical framework 23 Figure 3.2 OLS, MOLS, COLS and MLE deterministic production frontiers 30 Figure 4.1 Pie chart shows the structure of sellers 42 Figure 4.2 Pie chart shows the structure of buyers 43 Figure 4.3 The distribution oftechnical efficiency 51 vm From the results of technical efficiency model, the number of household size (HSIZE) suggests that the technical efficiency and productivity of rice increase with more people in a household because they contribute farm's work together The older farmers can hardly adapt with process for producing rice than young farmers Thus, the technical efficiency will decrease by older farmers My study proves that the farmers who have more experience will have more advantage and knowledge about agriculture than others That is reason why the farmers who have more experience will produce with higher technical efficiency The education always plays an important role in rice farming in Vietnam but results show that the education does not influence the technical efficiency because the quality of our education is not good The credit access gives an unexpected result because the farmers use loans with the wrong purpose The result from training program is positive and follows with my expectation Joining in the training program will help improve the technical efficiency However, the result from social capital differs from other studies My study shows that the farmers who join more in Farmers Union, Union and other Groups will produce less than the others Group discussion and decision-making is the choice of most of these groups in Vietnam And I prove this way of decision-making is not appropriate since it leads to the less technical efficiency and rice output 5.2 Policy implication I have some recommendation with regards to the technical efficiency Upon my abovementioned analysis, the household size positively affects the technical efficiency It does not mean that each farmer must have lots of babies It means that the farmers have to encourage more people to join and support each other in rice production to increase output An interesting result is that the age affects the technical efficiency The older farmers can hardly adapt with process for producing rice than young farmers At same time, the farmer who had more experience will produce with higher technical efficiency Thus, the households should not let the old farmers work in rice fields directly The old farmers can guide the young farmers and share their experience to help increase the technical efficiency and rice output From my analysis in Sector 4.4.2 and Appendix 8, most of farmers have low education levels 60 Therefore, education factor does not affect technical efficiency However, we cannot say that the education does not play an important role in the economics and rice farming Therefore, the government has to encourage the farmers go to school They must support more school fee for the farmers Particularly, the government should completely sponsor school frees for the poor farmers They should create more appropriate programs for supporting the farmers to finish as many classes as possible Moreover, the most important is that government needs to reform education system, increase quality of education and make theory close to reality When the farmer get high education, I believe that education strongly affect technical efficiency with positive sign In addition, the rice production knowledge of the farmers is limited Hence, the government needs to organize more training programs Based on that, the farmers can reduce the costs of pesticide, inputs, enhancing their heath, agricultural knowledge, creating the better environment and increasing the technical efficiency Finally, in relation to the social capital factors, I think the government must assign talented people to lead the farmers The leader will ask the group members for their opinions make decisions This is the best way to avoid "herd behaviour" among the farmers The talented leader will make better decision and helped the farmers reduce conflicts, increase the productivity, increase water management ability, choose collective actions and improve the technical efficiency Another important factor is the credit access variable, it gives an unexpected result because the farmers use loans with the wrong purpose The government is advised to guide and control the farmers in using credit The government should make sure that the farmers use the loans with the right purpose At the same time, government has to carry on propagandas for farmers, helping them to understand the importance of participating in organizations and group working From the recommendations above, I think the technical efficiency and rice output of farmers absolutely mcrease 5.3 Limitation and further research The VARHS 2008 provided much information about the farmers and agriculture in Vietnam However, the data missed a lot of variables such as: experience of the farmers by years, environments, Therefore, the results in the research model were not as expected I hope that 61 VARHS in the following years will include more information related to the farmers Based on that, the stochastic frontier model and technical efficiency will research more in Vietnam and get more positive outcome In addition, the interviewees did not answer a lot of questions Thus, I had to drop too much observation which led to the lack of information Besides, I think VARHS 2008 was out of date The General Statistical Office of Vietnam finished VARHS 201 but I cannot access it Stochastic frontier production function and technical efficiency help us understand the determinants of rice production and determinants of technical efficiency Based on that, the government and the farmers can increase the rice output and technical efficiency Therefore, the better model is run, the better efficiency will be In my technical efficiency model, I use only OLS method and FGLS method I not have enough time to compare them with other methods such as: Tobit, Rubust regression, Thus, I think the result is not the best From my study, researchers can use my limitation for further research about the stochastic frontier production function We can find the affect of environments and climate change on the technical efficiency 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