Determinants of non farm household in come in rural vietnam

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 DETERMINANTS OF NON-FARM HOUSEHOLD INCOME IN RURAL VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By BUI THANH GIANG Academic Supervisor: Dr NGUYEN NGOC THUY HO CHI MINH CITY, SEPTEMPER 2012 ACKNOWLEDEMENTS This is the very means that gives me a chance to formally express my appreciation to people who have really created the concepts and methodology expressed in this research I always keep in my mind the gratefulness to professors ofMDE Programme, executive programme administrations in Vietnam Their enthusiasm about the experience and what they were teaching, was the most meaningful encouragement of mine I would like to express my deep and sincere gratitude to my supervisor, Doctor Nguyen Ngoc Thuy His knowledge, logical way of thinking and encouragement has provided a good basic for the thesis presentation I would like to express my great thanks to Professor Nguyen Trong Hoai, MDE programme who have eagerly supported during my study BUI THANH GIANG ii DECLARATION I declare that "Determinants of non-farm household income in rural Vietnam" is my own work, that it has not been submitted to any degree or examination at any other universities, and that all the sources used or quoted are indicated and acknowledged by complete references • Ho Chi Minh City, Septemper 2012 BUI THANH GIANG iii ABSTRACT Vietnam has made considerable progress in improving the living standards of its people since the reforms implemented under doi moi However, the reform progress has made problems of society such as the pressure in rural - urban migration, an increase in unequal income distribution between different regions and unstable economy Therefore, a development strategy should be more focused on promotion of rural non-farm sector in order to create more employment and income opportunities for rural populations This paper estimated the non-farm income function of households in rural of Vietnam and evaluated the importance of rural non-farm activities in generating employment and income opportunities The econometric analysis is based on the primary data from Vietnam Household Living Standard Survey 2008 With 2117 observations (in rural area), the regression results show that the factors such as household characteristics, regions, infrastructure, occupation of household head had strong impact to non-farm household income in rural area From the regression results, this study gives some solutions to promote rural non-farm activities in Vietnam in the coming years iv TABLE OF CONTENTS Page Chapter 1: INTRODUCTION 1.1 Problem statement 1.2 Research Objectives 1.3 Research Questions 1.4 Research Methodology 1.5 Research Structure Chapter 2: LITERATURE REVIEW 2.1 Concepts and definitions 5 2.2 The role of non-farm sector 2.2.1 The Push- Pull factor 2.2.2 The importance of rural non-farm sector 2.2.3 The experience in the development of rural non-farm sector 2.3 Theoretical basis of the determinants of non-farm household income 13 2.3.1 Theoretical framework 13 2.3 Empirical Studies 17 2.4 Chapter remark 20 Chapter 3: METHODOLOGY AND MODEL SPECIFICATION 3.1 Model Specification 25 25 3.2 Data Definition 26 3.3 Data Collection 31 v 3.4 Data Analysis 3.5 Chapter Remark 31 32 Chapter 4: DETERMINANTS OF NON-FARM HOUSEHOLD INCOME IN RURAL VIETNAM 33 4.1 Non- farm activities in rural Vietnam 33 4.1.1 The participation ofhousehold into non-farm activities 34 4.1.2 The contribution of non-farm activities in employment 40 and household income 4.2 Determinants of non-farm household income in rural Vietnam 46 4.2.1 Descriptive analysis 46 4.2.2 The models for comparison 47 4.2.3 The result ofthe model and the explanation 50 4.3 Chapter remark 58 Chapter 5: CONCLUSIONS AND RECOMMENDATIONS 5.1 Summarize main finding 60 60 5.2 Recommendations 63 5.3 Limitation 66 5.4 Future research 66 REFERENCE APPENDICES 67 72 vi LIST OF TABLES Table 2.1: Classification of farm and non- farm activities Table 2.2: The schemes for development of non-farm sector in India Page 14 Table 4.1: Participation of household into non-farm activities by income groups in nation 35 Table 4.2: Participation ofhousehold into non-farm activities by income groups in rural 35 Table 4.3: The participation ofhousehold into non-farm activities • by regions and ethnic groups 36 Table 4.4: Business sectors participation by areas 38 Table 4.5: Business sectors participation by income groups 39 Table 4.6: Business sectors participation by ethnicity 40 Table 4.7: The distribution of sources of income to household income in 2008 41 Table 4.8: The result in urban and rural 42 Table 4.9: The result of income classified by ethnicity and gender 43 Table 4.10: Labor market participation by age and schooling level, 2008 44 Table 4.11: Labor market participation by income groups 45 Table 4.12: Definitions of variables used in the regression model 46 Table 4.13: Result of OLS model 48 Table 4.14: Result of Robust model 51 vii • LIST OF FIGURES Page Figure 2.1: The framework of determinants of household income Figure 1: The framework of determinants of rural non- farm household income 17 25 Figure 4.1: The participation of household into non-farm activities 34 Figure 4.2: The participation of household into non-farm activities by education of head household 37 Figure 4.3: Labor shares by income sources in 2008 45 Figure 4.4: Histogram of residuals 50 APPENDICES Page Appendix : Model V- Regression without Age2 to remove Multicollinearity Appendix 2: Applying Robust Method to remove Het for Model V 72 74 Appendix 3: Applying Robust Method with standardized Beta for Model V 75 viii Chapter 1: INTRODUCTION The determinants of rural non-farm household income in Vietnam will be investigated in this chapter In particular, this chapter includes five sections The first section will raise the problem necessary to make clear for the case of Vietnam The second section will present the research objectives of this thesis The next section will raise the questions to obtain the proposed objectives The fourth section will briefly describe the research methodology And the structures of the thesis will be described in this chapter 1.1 Problem Statement For nearly 25 years, the government of Vietnam has been looking for the direction of socio-economic development in order to escape the rural from deprivation, poverty and backwardness Government has many programs to promote the new rural construction to improve people's living standards Economic reform in Vietnam in the last two decades, characterized by the economic policy reform, opening and operating economy towards a market economy According to Vietnam Economic Times (20 11 ), the average economic growth increased from 7.5 % in the period 1991 - 2002 to 8% in period 2002-2007 The economic structure has changed the direction towards industrialization and modernization The proportion of agriculture in total GDP of the country declining from 27.18% in 1995 to 24.53% in 2000 and to 21% in 2008 The poverty rate fell consistently from 58% in 1993 to 29% in 2002 and to 14,5% in 2008 (Vietnam Academy of Social Sciences - 201 0) Economic growth and the stability of the macroeconomic environment has confirmed the correctness of innovation policy In rural areas, the process of economic restructuring also has changed significantly Due to the success of diversified occupations strategy, the leading position of agriculture in the rural household economy have no meaning as before The program of mechanization, modernization of irrigation has reduced labor time in agriculture significantly Because of the longer leisure time, the rural household can participate in the non-farm activities on a regular basis Any economic activity which has effective may become the main activity of household economy in rural The rural economy shifted towards increasing industries, services and other activities of non-farm sector The development of non-farm sector has contributed to creating jobs, increasing incomes, improving living standards for a certain part of residents, and creating a new face for rural area This suggests that non-farm activities play the important role in the living of households and development of economy and society ofVietnam The non-farm activities contributed to the improvement and diversification of people's income This has been widely recognized Especially in rural Vietnam, the development of non-farm sector has great meaning in solving the poverty, underemployment and seasonal unemployment which are still the phenomenon of the rural area Vietnam has gained remarkable achievements in improving people's living standards since the reforms implemented under doi moi However, the reform progress has created problems of society such as the pressure in rural - urban migration, an increase in unequal income distribution between different regions Furthermore, the rural - urban gap has widened considerable Therefore, an effective development strategy should be more focused on promotion of rural non-farm sector in order to create more employment and income opportunities for rural populations and improve other problems of society It is widely recognized that income from non- farm activities likely to play increasingly significant role in the household income in rural This study investigates the participation of rural households into non-farm activities to have an overview of non-farm activities in rural Vietnam; identifies the contribution of non-farm activities on household income; analyzes determinants of income of rural non-farm household to identify the important determinants of rural non-farm household education of household head, the better opportunities to increase non-farm income of households Non-farm activity is a type of operation that need the experience and knowledge Then, easy to recognize the important role of education for this activity when you want to develop non-farm activities on a large scale The analysis also showed that households with large household size will have higher non-farm mcomes - Local market index variable has relatively strong impact to non-farm income This suggests that the development of the market exchange of goods and services, trading will create favorable conditions for the products of nonagricultural activities to consumers and creating favorable conditions for increasing of household income from this activity - Infrastructure variable impact to non-farm income of households because of high statistical significance Electricity, roadindex, factory combined with market index gives us more insight on the effects of infrastructure elements Infrastructure improvement will impact the income of rural households in general In particular, elements of infrastructure have important implications for households in the highlands, the northern mountainous and Central if this factor was be improved the households in these areas would preferred to engage in non- farm activities rather than agriculture In general, infrastructure is critical for poverty reduction and nonfarm development in rural areas -Migration affects non-farm income and has negative impacts Households with many migrant labors, the non- farm income of households tend to decrease This suggests the creation of non-farm income or participation in non- farm activities depends on the number of members in household With fewer migrant workers, the opportunity for non-farm income of households increased - The appearance of traditional handicraft villages in commune has the statistical significant But it belongs the group of weakest effect to non-farm income 62 of the household This suggests that programs to encourage job creation through the development of handicraft villages is not yet effective for the development of nonagricultural activities As discussed, handicraft villages have more meaning when shifting labor from agriculture to wage employment than from agricultural to selfemployment activities of households - In the group of the occupation of household head, only few variables are statistically significant The variables represent the household which the occupation of household head are Leader, High- level Professionals, Staff, Skilled Workers in Agriculture or Unskilled Workers not have significant at 25% The occupations of household head are Mid-level Professionals and Armed forces have negative impacts to non-farm income of the household Based on the data, the households with head of household have occupations: Skilled worker in Personal Services, Skilled handicraftsmen, Assemblers & machine operators have the highest non-farm i income This demonstrates that Skilled handicraftsmen and other works relating skilled manual workers (such as skilled miners and builders, food processing, woodworking, textiles and garment, leather and shoemaking workers ) are easy to create high non-farm income for households than in other industries In conclusion, this study found that non-farm income of household in rural areas affected by key factors such as geographic region, household characteristics and infrastructure ofthe local 5.2 Recommendations Thesis found that non-farm activities play an important role in creating opportunities for employment and income, poverty reduction, development of intersectoral linkages with the agricultural sector Promoting non-farm sector in rural areas is a necessary option Here are some recommendations to stimulate non-farm activities in rural Vietnam: 63 • From the meaning of education factor in the restructuring of labor, we need to improve the quality of rural labor forces to create the ability to capture investment opportunities in no-farm activities The school systems and teachers in rural and remote areas should be increased the investment to consolidate The strategy and plan of training for rural labors should be made in detail and be suitable for local In particular, the industries have practical significance to the development of the local should be focus; While encouraging the development of handicraft industry and the traditional villages, should focus on improving educational level and skills of other job for labor to increase flexibility and the ability to switch when the market for products of these activities has fluctuation • Because the significant effect of age of the labors (represented by the ratio of household members in aged classes) for non-farm income of the household (increasing from 16-45) The support policies for youth employment in rural areas such as cultural issues, education, vocational training is needed The role of information technology, measures to support rural employment for these labors should be concerned Agriculture and non-farm affiliated closely together Therefore, the expansion of agricultural services will also help for the development of non-farm activities • With the important implication of the infrastructure for ability and speed of the restructuring of rural labor The policies to promote the upgrading and improving rural infrastructure on the basis of a scientific planning is very importance to develop the non- farm activities In other words, the sustainability of the infrastructure is to be considered This factor is very important to make the rural market development, reducing the gap with urban areas and create stronger linkages with urban areas The improvement of infrastructure in rural areas especially in the Northern 64 mountainous region, North Central and North Central Coast is necessary to promote non-farm activities and reduce the rate of poor in rural areas • The population of rural continued to increase and created the large pressure on employment in rural areas Therefore, the appearance of migratory flows from rural to urban areas is a common phenomenon when the strategy of urbanization, large-scale industrialization of the developed countries can not absorb a labor force developing The mass migration flow is likely to disrupt the economy, increasing poverty in urban So, many countries were interested in economic development in rural areas to encourage people stay in countryside This has implications for nonagricultural income of the household The programs that support in finding and creating employment as well as economic - social conditions is necessary to attract labors in the local • The households with household head who have occupations are Skilled worker in personal services, Skilled handicraftsmen, Assemblers & machine operators have the highest non-farm income Strongest effect is Skilled handicraftsmen This demonstrates that Skilled handicraftsmen and other relating skilled manual workers (such as skilled miners and builders, food processing, woodworking, textiles and garment, leather and shoemaking workers ) are easy to create high non-farm income for households than in other industries According to general assessment, the products made from handicrafts, traditional crafts created superior value compare to agriculture The policies should focus on supporting and developing non-farm activities that is the advantage of local (such as skilled handicraft) This will attract people to participate and create product with high value 65 Surely, there should be more coordinated policy to encourage nonagricultural activities in rural Vietnam These are some recommendations are based on only the results of the thesis In fact, the comprehensive coordination of different policies for non-farm activities in rural areas in particular and the country in general achieve the best performance is needed 5.3 Limitation Thesis attempted to analyze the factors affecting non- farm income of households in many different aspects to be able to evaluate and make the best recommendations for the development of 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0.2068 0518846 3.99 0.00 0.1050 0.3085 Persons aged 16-25 years 0.5297 2109954 2.51 0.01 0.1159 0.9435 Persons aged 26-35 years 1.5837 3618522 4.38 0.00 0.8741 2.2933 Persons aged 36-45 years 2.1106 3617815 5.83 0.00 1.4011 2.8201 Persons aged 46-55 years 1.3325 3466077 3.84 0.00 0.6527 2.0122 Persons aged 56-65 years 0.5681 3790953 1.50 0.13 -0.1754 1.3115 -0.2581 2625269 -0.98 0.33 -0.7729 0.2567 Number of women aged >=16 years Persons aged over 65 years 0.4131 2123817 1.95 0.05 -0.0034 0.8296 Landsize 0.0000 1.80e-06 -4.64 0.00 0.0000 0.0000 Migration -0.3605 0903993 -3.99 0.00 -0.5378 -0.1832 Roadindex 1.1514 2222506 5.18 0.00 0.7155 1.5872 Marketindex 0.5042 1136483 4.44 0.00 0.2813 0.7271 Electricity 0.5796 1804822 3.21 0.00 0.2257 0.9336 Factory 0.2573 0567737 4.53 0.00 0.1460 0.3686 Red River Delta 1.2280 1460289 8.41 0.00 0.9416 1.5144 Northeast 1.0712 1426261 7.51 0.00 0.7915 1.3509 North Central Coast 1.0330 1550615 6.66 0.00 0.7289 1.3371 South Central Coast 1.3794 1578752 8.74 0.00 1.0697 1.6890 Central Highlands 1.1716 1720293 6.81 0.00 0.8343 1.5090 South East 2.0497 1550278 13.22 0.00 1.7457 2.3537 Mekong river Delta 1.8022 1416143 12.73 0.00 1.5245 2.0799 72 Traditional handicraft ~ • I Leaders High-level professionals I Mid-level professionals Staff Skill workers in personal services Skill workers in agriculture Skill handicraftsmen Assemblers & machine operators • I 0.1206 0767466 1.57 0.12 -0.0299 0.2711 -0.1635 2279628 -0.0544 4273716 -0.72 -0.13 0.47 0.90 -0.6106 -0.8925 0.2836 0.7837 -0.2783 2520663 -1.10 0.27 -0.7727 0.2160 0.1681 3228867 0.52 0.60 -0.4651 0.8014 0.7031 1708274 4.12 0.00 0.3681 1.0381 -0.1225 1861405 -0.66 0.51 -0.4876 0.2425 0.3732 1504346 2.48 0.01 0.0782 0.6682 2.19 0.03 0.0447 0.7952 0.91 -0.2759 0.2448 0.02 -5.3044 -0.5496 0.00 2.4987 4.1257 0.4200 1913627 Unskilled workers -0.0155 132749 Armed forces -2.9270 1.212283 3.3122 4148194 cons • 73 -0.12 -2.41 7.98 Aooendix 2: A "' t 2.18 P>t 0.03 [95% Con f 0.0007 Interval] 0.0138 -0.0886 0.0753 -1.18 0.24 -0.2362 0.0591 Years schooling Hhsize Dependency ratio 0.0639 0.1074 0.2068 0.0086 0.0227 0.0490 7.43 4.72 4.22 0.00 0.00 0.00 0.0471 0.0628 0.1106 0.0808 0.1520 0.3030 Persons aged 16-25 years 0.5297 0.2172 2.44 0.02 0.1037 0.9557 Persons aged 26-35 years 1.5837 0.3667 4.32 0.00 0.8645 2.3028 Persons aged 36-45 years 2.1106 0.3607 5.85 0.00 1.4032 2.8179 Persons aged 46-55 years 1.3325 0.3148 4.23 0.00 0.7150 1.9499 Persons aged 56-65 years 0.5681 0.3557 1.6 0.11 -0.1295 1.2657 -0.2581 0.2442 -1.06 0.29 -0.7369 0.2207 Number of women aged >=16 years 0.4131 0.2143 1.93 0.05 -0.0072 0.8335 Landsize 0.0000 0.0000 -4.51 0.00 0.0000 0.0000 Migration -0.3605 0.0843 -4.28 0.00 -0.5259 -0.1951 Roadindex 1.1514 0.2670 4.31 0.00 0.6277 1.6751 Marketindex 0.5042 0.1345 3.75 0.00 0.2403 0.7680 Electricity 0.5796 0.2923 1.98 0.05 0.0064 1.1528 Factory 0.2573 0.0558 4.61 0.00 0.1479 0.3667 Red River Delta 1.2280 0.2169 5.66 0.00 0.8025 1.6534 Northeast 1.0712 0.2162 4.95 0.00 0.6472 1.4952 North Central Coast 1.0330 0.2216 4.66 0.00 0.5984 1.4675 South Central Coast 1.3794 0.2322 5.94 0.00 0.9240 1.8347 Central Highlands 1.1716 0.2527 4.64 0.00 0.6760 1.6673 South East 2.0497 0.2203 9.3 0.00 1.6176 2.4818 Mekong river Delta 1.8022 0.2136 8.44 0.00 1.3834 2.2210 Traditional handicraft 0.1206 0.0687 1.76 0.08 -0.0141 0.2552 Leaders -0.1635 0.2487 -0.66 0.51 -0.6512 0.3242 High-level professionals -0.0544 0.4357 -0.12 0.90 -0.9089 0.8001 Mid-level professionals -0.2783 0.2151 -1.29 0.20 -0.7002 0.1435 Staff 0.1681 0.2614 0.64 0.52 -0.3444 0.6807 Skill workers in personal services 0.7031 0.1558 4.51 0.00 0.3975 1.0087 Skill workers in agriculture -0.1225 0.1722 -0.71 0.48 -0.4603 0.2152 0.3732 0.1436 2.6 0.01 0.0915 0.6548 0.4200 0.1844 Skill handicraftsmen Assemblers & machine operators • = 0.3182 1.1978 Std Err 0.0033 Persons aged over 65 years • = Prob> F R-squared RootMSE Coef 0.0073 Genderhead • 2117.0000 Robust log(non-farm income) Agehead • Number of obs F( 35, 2080) Unskilled workers Armed forces cons 2.28 0.02 0.0584 0.7815 -0.0155 0.1264 -0.12 0.90 -0.2634 0.2323 -2.9270 3.3122 0.1906 4777 -15.36 6.93 0.00 0.00 -3.3008 2.3754 -2.5532 4.2490 74 A,ppen d"IX A •PPlvine: Robust Method with standardized Beta for Model V log(non-farm income) Coef Agehead Genderhead Years schooling Hhsize Dependency ratio 0.0073 -0.0886 0.0639 0.1074 0.2068 0.0033 0.0753 0.0086 0.0227 0.0490 2.18 -1.18 7.43 4.72 4.22 0.03 0.24 0.00 0.00 0.00 0.0620 -0.0240 0.1614 0.1185 0.0980 0.5297 1.5837 0.2172 0.3667 2.44 4.32 0.02 0.00 0.0571 0.1207 2.1106 1.3325 0.5681 -0.2581 0.4131 0.3607 0.3148 0.3557 0.2442 0.2143 5.85 4.23 1.6 -1.06 1.93 0.00 0.00 0.11 0.29 0.05 0.1730 0.1064 0.0390 -0.0297 0.0493 0.0000 0.0000 -4.51 0.00 -0.3605 1.1514 0.5042 0.5796 0.2573 1.2280 1.0712 1.0330 0.0843 0.2670 0.1345 0.2923 0.0558 0.2169 0.2162 0.2216 -4.28 4.31 3.75 1.98 4.61 5.66 4.95 4.66 0.00 0.00 0.00 0.05 0.00 0.00 0.00 0.00 -0.0926 -0.0764 0.1062 0.0854 0.0612 0.0878 0.3718 0.2583 0.2248 1.3794 1.1716 2.0497 1.8022 0.1206 0.2322 0.2527 0.2203 0.2136 0.0687 5.94 4.64 9.3 8.44 1.76 0.00 0.00 0.00 0.00 0.08 0.2768 0.1769 0.4315 0.5047 0.0308 Leaders High-level professionals Mid ;level professionals Staff -0.1635 -0.0544 -0.2783 0.1681 Skill workers in personal services Skill workers in agriculture 0.7031 -0.1225 0.2487 0.4357 0.2151 0.2614 0.1558 0.1722 -0.66 -0.12 -1.29 0.64 4.51 -0.71 0.51 0.90 0.20 0.52 0.00 0.48 Skill handicraftsmen Assemblers & machine operators Unskilled workers 0.3732 0.4200 -0.0155 Armed forces cons -2.9270 3.3122 0.1436 0.1844 0.1264 0.1906 0.4777 2.6 2.28 -0.12 -15.36 6.93 0.01 0.02 0.90 0.00 0.00 -0.0162 -0.0025 -0.0243 0.0104 0.1108 -0.0161 0.0895 0.0554 -0.0053 Persons aged 16-25 years Persons aged 26-35 years Persons aged 36-45 years Persons aged 46-55 years Persons aged 56-65 years Persons aged over 65 years Number of women aged >=16 years Landsize r Robust Std Err Migration Roadindex Marketindex Electricity Factory Red River Delta Northeast North Central Coast South Central Coast Central Highlands South East Mekong river Delta Traditional handicraft 75 t P>t Beta -0.0442 ... participation ofhousehold into non- farm activities 34 4.1.2 The contribution of non- farm activities in employment 40 and household income 4.2 Determinants of non- farm household income in rural Vietnam. .. on household income; analyzes determinants of income of rural non- farm household to identify the important determinants of rural non- farm household income; and gives some solutions to promote rural. .. supporting role in promoting economic growth in Vietnam 2.3.2.2 The model for determinants ofnon -farm income in Nigeria In the study: "Determinant of Non farm income among farm households in South East