Rice production, trade and the poor regional effects of rice export policy on households in vietnam

AbstractAnalysing Vietnam’s rice export policy and recent export ban in the context of ris-ing food prices, this study combines insights from a regionally-disaggregated or ‘bottom-up’ CG

Rice Production, Trade and the Poor: Regional Effects of Rice Export Policy

on Households in Vietnam

Pham Van Ha, Hoa Thi Minh Nguyen, Tom Kompas,

(Original submitted September 2013, revision received August 2014,

accepted September 2014.)

AbstractAnalysing Vietnam’s rice export policy and recent export ban in the context of ris-ing food prices, this study combines insights from a regionally-disaggregated or

‘bottom-up’ CGE model and a micro-simulation using household data Three mainconclusions are drawn First, although there is little impact on GDP, there are sub-stantial distributional impacts across regions and households from different exportpolicies and market conditions Second, both rural and urban households, includingpoor households, benefit from free trade, even though domestic rice prices arehigher Finally, under free trade, relatively large gains accrue to rural households,where poverty is most pervasive in Vietnam

production; trade and welfare; Vietnam

1 Introduction

Recent dramatic increases in the price of staple foods have raised concerns over foodsecurity and the vulnerability of the poor World food prices reached their peak in thesecond quarter of 2008, with wheat and maize three times and rice five times moreexpensive than at the beginning of 2003 (Von Braun, 2008) Several exporting countrieswith food security concerns responded to these price increases by imposing export con-trols and, in some cases, total bans This further fuelled world food price increases (He-adey and Fan, 2008; Timmer, 2008; Childs and Kiawu, 2009; Timmer and Dawe, 2010).Along with a desire to ensure domestic supplies, the export controls were often

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Pham Van Ha, Hoa Thi Minh Nguyen, Tom Kompas and Tuong Nhu Che are all at theCrawford School of Public Policy, Lennox Crossing, National University, Canberra, Australia.E-mail: tom.kompas@anu.edu.au for correspondence Bui Trinh is with the General StatisticsOffice, Hanoi, Vietnam The authors are grateful to the Editor in Chief and two anonymousreferees for valuable comments and suggestions

doi: 10.1111/1477-9552.12087

rationalised by a need to protect the poor from increases in domestic food prices, sincestaple foods account for a large proportion of their consumption bundle Further ten-sions occurred in exporting countries, many of which were (and still are) developingeconomies, since changes in the price of staple foods differentially impact rural andurban households, with relatively poor food producers in rural areas benefiting fromhigher world and domestic food prices at the expense of urban households.

We focus on Vietnam’s rice production and trade as a case study Vietnam is theworld’s second largest rice exporter, with exports of 6 million tons, equivalent to 16%

of the world trade volume in rice (Shigetomi et al., 2011) Its export revenue is mately 3 billion USD, contributing roughly 3% to Vietnam’s GDP (World Bank,2009) Vietnam is also a poor developing country with about 15% of the population, ortwelve million people, living below the poverty line Although a relatively small compo-nent of GDP, trade and trade policy in the rice sector is very important for the Viet-namese since as much as 66% of rural households and 77% of the poorest quintile inVietnam are rice producers Rice is also the dominant staple food in Vietnam, repre-senting 33% of total household expenditure among the poorest quintile households(using the Vietnam Household Living Standard Survey in 2006, or VHLSS, 2006).Given the importance of rice, the Government of Vietnam has maintained strictcontrol over rice exports by setting an annual rice export target It also delegates (ornearly so) monopoly-like power to state-owned enterprises (SOEs) in the rice exportmarket and allows them to be heavily involved in rice export policy and management

approxi-In addition to the control of SOEs, the inherent divide between the north and south

of Vietnam, geographically and as a remnant from the war years, contributes to thelack of integration between domestic rice markets across the country (Minot andGoletti, 1998; Luu, 2003; Baulch et al., 2008)

In 2008, in the face of rising world prices for rice, Vietnam imposed an export banfrom March 25th to the end of June over concerns for food security and a desire tostabilise the domestic price of rice Together with a ban imposed by India, the world’sthird largest rice exporter, and near-panic purchases by rice importers, especially inthe Philippines, Vietnam’s rice export ban helped push the world rice price to its peak

in May of 2008 (Timmer, 2008)

This paper analyses Vietnam’s rice export policy in the context of rising world riceprices In particular, we investigate both national and sub-national impacts as well asthe distributional and welfare implications of different policy scenarios To do so, webring together insights from a regionally-disaggregated or ‘bottom-up’ single-countrycomputable general equilibrium (CGE) model and a micro-simulation on householddata At the economy-wide level, our bottom-up CGE model is a combination of eightinteracting CGE models, representing eight regions in Vietnam To this end, it allowsboth national and sub-national assessments of a change in the world price of rice onGDP, domestic prices and employment under different policy scenarios Sub-nationalchanges in domestic producer and consumer prices of both food and non-food items,

as well as changes in factor prices including wages for both skilled and unskilledlabour generated from the bottom-up CGE model, are then used as an input to ahousehold model for a further disaggregated analysis of different policy options

We consider three policy scenarios in this paper The first is where Vietnam tains the status quo with a rice export control designed to mimic the imposed exportban in 2008, along with the prevailing and market-segmenting powers of the SOEs indomestic rice and export markets In the second scenario, Vietnam still controls riceexport quantities, but liberalises the rice export market domestically – a WTO

main-commitment Vietnam has promised to deliver on since 2011 In the last scenario, weassume that Vietnam has a free rice export policy, with no export controls or bans,and a competitive domestic rice market.

We use a time-relevant Vietnam interregional input–output table for 2005 (or RIO 2005) for the CGE model and household survey data (VHLSS, 2006) for themicro-simulation Our study shows that if Vietnam pursues a free trade policy in itsrice sector, it will be beneficial not only to world rice markets and food security con-cerns, as seen elsewhere (Dawe, 2010; Timmer, 2010), but also to household livingstandards in Vietnam This result is important given the fragility in the world ricemarket; a fragility which stems from a market which is controlled by only a few coun-tries, including Vietnam

VI-This research is the first on Vietnam that uses a fully regionally-disaggregated or

‘bottom-up’ CGE model despite numerous and other recent modelling exercises of

There are very few examples of bottom-up CGE approaches in the literature, due tothe enormous data requirements and computational complexity needed to run suchmodels The work by Horridge et al (2003) and Naqvi and Peter (1996) on the model-ling of the regional Australian economy are notable exceptions, and set the benchmarkfor this type of work For us, with its disaggregation, the bottom-up model is able tocapture important regional dimensions of the Vietnamese economy under differentmarket conditions The latter is important since fully integrated market conditions arenot a realistic assumption for the domestic rice market in Vietnam, making an aggre-gate or national CGE model for the country inappropriate (Baulch et al., 2008).The combination of CGE modelling with micro-simulation on households to ana-lyse the effects of world price shocks on the national economy is also not new A goodexample, close to our own work, is Cororaton and Orden (2008), who use a nationalCGE model integrated with a household survey to analyse the inter-sectoral and pov-erty implications of an increase in the world price of cotton lint and yarn on the Paki-stani economy Our own contribution stems from adding a micro-simulation to thebottom-up CGE modelling, where regional effects drive national outcomes In partic-ular, this methodology allows us to capture the distributional impacts from differentexport polices in Vietnam, along with price and employment effects, across the regionsand for different households Most of the existing literature on food policies and theirdistributional impacts, on the other hand, use partial equilibrium methods, with afocus on analysing data at the household level One study for Vietnam, for example,shows that rice export liberalisation would increase food prices and average realincome, making urban households worse off while rural households would be better

off (Minot and Goletti, 1998) These findings are generally corroborated by otherstudies on the impact of higher food prices in Vietnam (Vu and Glewwe, 2011; Phung

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See World Bank (2005) and Abbott et al (2009, 2007) for critical reviews of modelling cises quantifying the impact of Vietnam’s global integration into world trade

exer-3

The impact of higher food prices in other lower-income countries has been studied widely, with

a variety of conclusions For example, see Bourguignon et al (2005); Deaton (1989) and Warr(2008) for Thailand; Cockburn (2006) for Nepal; Budd (1993) for Cote d’Ivoire; Barrett andDorosh (1996) for Madagascar; and Friedman and Levinsohn (2002), Warr (2005) and Raval-lion and Van de Walle (1991) for Indonesia; Valero-Gil and Valero (2008) for Mexico, amongothers

important insights, they are done in isolation from economy-wide impacts, thus ing the connections between a change in the price of rice and changes in the price of

wage rate, in particular, is important for understanding the effects of different exportpolicies on urban welfare, or for those who do not necessarily grow rice

2 The Rice Market in Vietnam

Vietnam has made remarkable progress in rice production over the last 30 years, withroughly 8.5 million hectares of rice planted area, equivalent to more than 4 million ha

of land, producing approximately 43 million tons of rice per year (General StatisticsOffice, 2009) Although the country is divided into eight regions with 63 provinces,more than 50% of rice output is produced in the Mekong River Delta region (MRD)alone, and more than 90% of exported rice comes from this area (Government ofVietnam, 2008) For our purposes, there are three special aspects of rice production inVietnam worth highlighting: (1) the Vietnamese government’s control of export quan-tities and the role of SOEs; (2) the lack of integration between rice markets in thenorth and the south; and (3) the details of how the Vietnamese government responded

to the food crisis of 2008

2.1 Quantity controls and market power in Vietnam’s rice export market

Vietnam has declared three objectives in its management of rice exports: the ability of farmers, with attempts to guarantee a minimum return over costs, food secu-rity or ‘adequate domestic supplies under any circumstances’, and stable domesticprices (Government of Vietnam, 2008) A recent decree by the Prime Ministerreplaced the food security objective by one of ‘implementing international trade com-mitments and ensuring efficient export supplies’ (Government of Vietnam, 2010).One of Vietnam’s key measures used to achieve its objectives is to control the quan-tity of rice exports Since 1992, 3 years after Vietnam began exporting rice, the Gov-ernment has controlled rice exports by setting annual rice export targets This target isset in consultation with the Ministry of Agriculture and Rural Development(MARD), the Ministry of Industry and Trade (MIT) and the Vietnam Food Associa-tion (VFA), which includes the SOEs It is based on estimates of domestic supply anddemand As a result, within a given year, the targeted annual export volume can, inprincipal, vary, subject to changes in domestic conditions, although in practice thetarget and the policy surrounding it is often binding and restrictive Evidence suggeststhat the policy results in both rice production and exports being below their optimallevels (Nielsen, 2003)

profit-Export quantity controls were initially carried out through an export licensing tem At one point, SOEs had a complete legal monopoly over rice exports, with each

sys-of a limited group sys-of 15 to 40 SOEs granted a quota that specified the amount sys-of rice

it could export (Minot and Goletti, 2000) In 1998, reforms allowed for some privateand foreign-shared companies to engage in rice exports, followed by a simplification

of the approval system for export businesses, which was in turn replaced by the

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Ivanic and Martin (2008) is the only study on the impact of higher food prices in Vietnamwhich takes into account changes in wages, but only for unskilled labour

current registration system On May 1, 2001, the export quota system was formallyabolished with the view to promoting competition among rice exporters in expandingtheir share in the world market.

Despite abolishing the export quota system, the government’s overall control of thetotal quantity of rice exports has remained virtually unchanged At its discretion, theVietnamese government can suspend or limit rice exports whenever it is deemed neces-sary, and even without export bans being imposed, no further rice export contractscan be implemented whenever the total quantity of contracted rice exports reaches thegovernment’s annual target

In addition, there has also been little diminution of the market power of riceexporting SOEs in the face of reforms Rice exporting SOEs are dominated bytwo national companies: the Vietnam Northern Food Corporation (usuallyreferred to as ‘Vinafood 1’), based in Hanoi, and the Vietnam Southern FoodCorporation (‘Vinafood 2’), based in Ho Chi Minh City, along with a few pro-vincial SOEs Vinafood 1 and Vinafood 2 were established in 1995 to strengthenthe state capability of food market control and provide an instrument for domes-tic price stabilisation (Dang and Tran, 2008) As of 2008, Vinafood 2 accountedfor a 36% market share, Vinafood 1, 11%, and all other provincial SOEs (mostlylocated in the South) together controlled 35% of the rice market (Tsukada,2011)

Another key measure of the government to achieve its rice market objectives,especially in terms of ensuring a reasonable profit for farmers, is to set a ‘floorprice’ for rice This floor price serves as the basis for negotiation between riceexporters and foreign importers As a result, the domestic rice market price,especially in the MRD, is more or less conditioned by this floor price (Luu,2003) Until recently, the floor price was set by the Ministry of Finance (MOF)based on recommendations from MIT, MARD, Vinafood 1 and Vinafood 2,and the VFA Since 2011, the floor price has been set by the VFA directly,based on guidelines promulgated by the MOF However, given the control ofVFA by food SOEs and the lack of representation by rice farmers, concernshave been raised over the conflict of interest in SOEs setting floor prices (e.g.,Phap Luat, 2010)

It is important to note that we do not model the price floor in our CGE bottom-upapproach Instead, we construct a scenario that mirrors both the change in rice pricesand the extent and effects of export controls, market power and fragmentation inVietnam In the modelling of the free trade case, of course, we naturally assume thatthere is no price floor The actual price floor in Vietnam remained unchangedthroughout the period of time relevant to our study in any case

2.2 Lack of integration between domestic rice markets in the north and the southDomestic market integration in Vietnam has lagged considerably despite extensivemarket liberalisation in agricultural production after the embarkment of reforms in

1986 This is partly explained by substantial constraints to transportation generated

by geographical conditions associated with an elongated country, coupled with poorinfrastructure due to long-lasting wars in the last century Bureaucratic rigiditiesbefore 1997, where the procedures to buy and transport rice from the south to thenorth resembled those for trade with another country, also created considerable mar-ket segmentation (Minot and Goletti, 2000)

Recent evidence suggests that the poor integration between markets in the northand the south continues (Minot and Goletti, 2000; Baulch et al., 2008), whereasmarkets within a region seem highly integrated (Luu, 2003; Baulch et al., 2008).This is largely explained by the position and power of the SOEs Long distancetrade tends to be dominated by the SOEs simply because they are well-resourced,supported by the government and, under the framework of the national food secu-rity policy, they are directly tasked with transferring rice from surplus to deficitregions, albeit under often market-distorted pricing Only a few large private trad-ers, miller-polishers and polishers can compete with SOEs in inter-regional trade.Given the small number of players and the reported inefficiency of SOEs, improve-ment in the north–south market integration is unlikely By contrast, operating inmarkets within a region is seen as a distinct advantage for private traders giventheir local knowledge In these markets, competition and the large number of par-ticipants often results in efficient outcomes and little remaining opportunity forarbitrage (Luu, 2003).

2.3 The 2007–08 food crisis in Vietnam

Spikes in the price of rice in 2007–08 generated two official responses from theGovernment of Vietnam The first was a recommendation by the VFA in July of

2007 for a ban on the signing of new export contracts beyond the annual exporttarget, effectively imposing a binding and upper-limit on exports The governmentgave official approval for this action in September 2007 This ban was removed inJanuary 2008

The second and more dramatic action occurred in 2008, as indicated above, whenthe government imposed an export ban from the 25th March until the end of June,during the peak of the global food crisis, when international prices for rice rose rap-idly from 400 USD in January to roughly 1,000 USD per ton in May (see Figure 1).The ban was rationalised on the grounds of maintaining domestic food security andthe control of domestic prices, with the latter objective, in large part, designed to pro-tect the poor and urban consumers

It is clear from the evidence that these objectives were not achieved In terms

of food security, due partly to panic hoarding by consumers and speculativedelays in sales by rice wholesalers, domestic supplies of rice in stores effectively

retail shops were closed throughout provinces in the MRD For those stores thatremained open, both here and in the northern cities in particular, rice pricesincreased by the hour and many stores sold out of rice completely, or sold only

in limited quantities (e.g limits of 10 kg per customer in Ho Chi Minh City werecommon) (Tuoi Tre, 2008) Domestic prices were also not stabilised Across thecountry, prices of staple foods increased by 6.1 and 22.19 over the 2 month per-iod, as compared to 2.2% and 2.28% for non-staple foods in April and May(General Statistics Office, 2008)

The food ‘shortage’ was brought under control only after the Prime Minister, vincial heads and relevant city representatives requested SOEs to release rice from

pro-5

Much of volatility in rice prices throughout the world was attributed to hoarding behaviour(Timmer, 2010 2012)

their warehouses and threatened to punish speculative behaviour The ultimate effect

on producers in the MRD, in particular, was clear The export ban prevented cant sales of rice in international markets at high world prices Rice farmers, many ofwhom are poor, also experienced sharp falls in returns over costs, from an estimated85% for their winter–spring season to a fall of only 20% for their summer–autumnharvest (Government of Vietnam, 2008) Indeed, toward the end of 2008, the govern-ment had to support SOEs to guarantee returns to farmers with additional rice pur-chases and subsidies due to the sharp fall in international demand and substantialdomestic excess supplies

signifi-3 Method, Model and Simulation

Our goal is to examine the impact of an average 30% increase in the world price ofrice on Vietnam’s economy and households in order to mimic (often dramatic)changes in world rice prices The overall price change is similar to the change in worldrice prices from 2005 to 2007, but less than the price-spike that occurred in mid-2008(Ivanic and Martin, 2008; Croser et al., 2010) The percentage change in rice pricescan easily be scaled in the model to generate contrasting and magnified effects.Along with our bottom-up CGE model, we choose to do the simulation on house-holds in a sequential manner instead of integrating all households from the surveyinto the CGE model Admittedly, the latter approach, called an integrated micro-sim-ulation-CGE approach, is methodologically attractive since it allows instant feedbackfrom households (Cockburn, 2006) However, we do not have adequate information

on the relative contribution of household production to the whole economy to porate this feature into the model

incor-The following sub-sections describe the bottom-up CGE model, the measurement

of distributional impacts and changes in household welfare in the micro-simulationmodel and the different policy scenarios used in the modelling

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 100

International FOB price

Average price in MRD

Imposed export ban

Lifted export ban

Figure 1 Monthly International Free-On-board (FOB) and MRD prices of riceNotes:Data on retail rice prices of the MRD from Vietnam’s General Statistics Office; data onFOB rice price of Vietnam from IRRI (2014)

3.1 The bottom-up CGE model

3.1.1 Overview

The bottom-up CGE model used in this paper is based on the ORANI-G model forthe Australian Economy (Horridge, 2003) To generate bottom-up and multi-regionalcharacteristics, the top-down regional extension in the ORANI-G model has beenreplaced with a fully bottom-up regional model In basic terms, our bottom-up CGEmodel can be viewed as a combination of eight interacting ORANI-G models, repre-senting eight regions in Vietnam

We use VIRIO 2005 to construct the regional characteristics of the CGE model RIO 2005 is a database that covers eight regions (denoted R), representing the Red RiverDelta (RRD), the North East (NE), the North West (NW), the North Central Coast(NCC), the South Central Coast (SCC), the Central Highlands (CH), the South East(SE), and the MRD (Trinh et al., 2008) The RRD and especially the MRD are the majorrice growing regions, although rice is grown in almost every province of Vietnam The SE

VI-is largely industrial, the CH VI-is dominated by coffee production and other industrial crops,and the NCC and SCC are clearly coastal areas The poorest regions are the NW and CHwhere many of the ethnic minorities live (Nguyen et al., 2012) The terrain in theseregions is hilly and often mountainous and far less suitable for wet rice production.VIRIO 2005 has 28 industries (I) which produce 28 commodities (C), namely:paddy, other crops, livestock and poultry, forestry, fish farming, fisheries, oil and gas,mining, processed seafood, processed rice, other agricultural processing, textiles,paper, wood, rubber, nonmetallic mineral products, transport equipment, metal prod-ucts, other manufacturing, electricity and water, construction, transport (margins),communication, trade (margins), financial services, public administration, hotels andrestaurants, and other services

While our bottom-up CGE model has features similar to a typical ORANI-Gmodel, it differs in at least three important ways to incorporate regional features.First, regional indices are added to every variable and coefficient, increasing thedimension of the model considerably Second, whereas the basic flow of goods and/orservices in a typical ORANI-G database maps from two sources/destinations (i.e thedomestic economy and the rest of the world), in our bottom-up CGE model, the map-ping is from R + 1 sources/destinations to include all R regions and the rest of theworld Similar regional identifiers are applied to the usual ORANI-G structure of des-ignated ‘Margins’, ‘Taxes’, ‘Labour’, ‘Capital’, ‘Land’, ‘Other Costs’ and a ‘Produc-tion Tax’ Finally, instead of having a C 9 I ORANI-G dimension, the ‘make matrix’

in our model is a C 9 R 9 I matrix to capture regional features For simplicity, weassume that every industry is ‘local’ in the sense that it can produce goods and services

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There can be a potential problem with ‘small shares’ in the ORANI-G model set-up Thisproblem is significant if, as one example, volumes of trade are small due to a trade restrictionbeing in place, causing underestimation of the impact of trade liberalisation (Kuiper and vanTongeren, 2006) However, this is not a problem in our case The small shares that do exist inour model are not the result of explicit trade restrictions and our simulation, starting with a freetrade scenario, followed by the introduction of a producer tax and export quota, does notdepend on this issue There are cases where some goods are not traded between regions (e.g theMRD does not import more expensive rice of poorer quality from the NW), and our simulationdoes not alter this outcome

3.1.2 Model description

The model itself consists of four agents: the household (urban and rural), the ment, the investor and the foreign sector (exports and imports) It has five blocks: pro-duction, demand, market clearing, price linkages and miscellaneous blocks

govern-The production block in each region is made up of a set of Constant Elasticity ofTransformation (CET) and Leontief production functions Apart from the differencesmentioned in the previous sub-section, the production structure is the same as that of

a typical ORANI-G model That is, composite intermediate commodities, primaryfactors and other costs are combined in fixed proportions (i.e Leontief functions) into

R 9 I output (activity) levels

The demand block comprises demands for productive factors (skilled and unskilledlabour, capital and land) and demands for commodities (intermediate, household,investment, export, government, inventory and margin demands) The demand forproductive factors is given by a set of Constant Elasticity of Substitution (CES)demand functions, as are the intermediate demands for each commodity This CESfunctional form implies that commodities demanded can be substituted for oneanother depending on their prices and the elasticities of substitution between them.Given constant returns to scale, which characterises the model’s production technol-ogy, the competitive ‘Zero Pure Profits’ condition is imposed to equate output price

to its marginal cost of production In brief, each of the C commodities at the base ofthe regional production structure is generated by using the commodities bought fromthe other R regions and abroad with a CES and Leontief technology These outputsare then transformed into C goods and sold in R regions and abroad based on theCET function, which is employed to model trade flows among regions and the rest ofthe world

Household demand is a combination of a Stone-Geary and a CES function, ing the assumption that households always consume a basic subsistence bundleregardless of their budget and the prices of the bundle, following Dixon and Rimmer(2005) At the base of the household demand structure, each of the 28 compositegoods are created by goods bought from each R region or abroad with CES technol-ogy, and then combined into final consumption goods for households in each region

reflect-by the Stone-Geary utility function transformation Parameter values for the hold demand are drawn from the Vietnamese Monash model (VIPAG)(Giesecke andTran, 2008)

house-Investment demand is constructed by a combination of Leontief and CES tions Each of the 28 composite goods is created by goods bought from each R regionand abroad with CES technology, in a manner similar to household demands Theyare then combined into capital for I industries in regions R using Leontief productionfunctions

func-Export demand for each region and the world is assumed to have the followingspecification:

ð1Þwhere for each good C in region R, Export is real export volume; QF and PF are

export demand elasticity; and e is the exchange rate For the export demand schedule

equation (1) looks similar to a demand equation in a typical ORANI-G model, herethere are C9R export demand equations with regional indices R being incorporated

to model trading flows between each of the eight regions and the rest of the world.The flow of domestic goods among eight regions, as usual, follows typical demand,supply and market clearing conditions

Other demand components maintain their corresponding ORANI-G setup, exceptfor basic regional designations Government expenditure is tied to private consump-tion, and inventory demands for each region depend on its production volume or itsimports Margins incorporate transportation and trade services, where margindemands depend on commodity flows and are linked to intermediate, investment, pri-vate and government demands There are no margins for inventory demand Apartfrom adding the usual regional index to all the original ORANI-G equations, we alsoassume that the region that uses a margin is also the one that delivers the margin,reflecting the fact that trade services are largely local

The market clearing block has standard equations to ensure market clearing tions in each market, but with regional balance For example, in the commodity mar-ket, the usual condition that commodities produced in each region are equal to theirdemand is strengthened to ensure that the production of any good in each region must

condi-be equal to its use in that region and in all other regions and exports Likewise, thetotal imports of any good must be equal to its use in all regions combined

In the labour market, the labour supply curve is upward sloping, thereby allowingthe possibility that both employment and real wage can change Depending on thechange of real wages in each region and across regions, the regional employment levelcan rise or fall Therefore, additional labour in each region can be mobilised from itscurrent pool of unemployment or from other regions This labour market specifica-tion reflects a typical feature of the labour market in Vietnam where there is a notablelevel of unemployment and underemployment particularly of unskilled workers inrural areas (Abott et al., 2008)

As in other standard models, labour is allowed to be mobile across industriesand regions so that output in industries can vary subject to price changes.Returns to labour, or wages, are indexed to the CPI to reflect short-run condi-tions in the labour market In the capital market, on the other hand, capital isassumed fixed across industries to concentrate on short run effects of a change inrice prices

The price-linkage block maintains the link between the producer and the consumerprices The gap between the two prices is taxes, by definition, which include excise,value-added taxes, duties and margins, which include wholesale and retail charges andtransportation Finally, the miscellaneous equations block includes reporting andequations for recursive dynamics simulations, which are not needed in our study.Interested readers are encouraged to consult Horridge (2003), for example, for furtherdetails on all of these equations

3.2 Measurement of household welfare impacts

To measure the change in household welfare, we use a method based on Deaton(1989) as implemented in Minot and Goletti (1998) Since a household can be a con-sumer, or a producer, or both, its net welfare change is a combination of both con-sumer and producer surpluses For an individual household, the change in consumersurplus (DCS) associated with the change in the consumer price of a good is simply

price This first-order approximation reflects only the immediate impact of the pricechange as it does not take into account a consumer’s response The consumer’sresponse is included in the second-order approximation, given by:

Likewise, the second-order approximation for a change in producer surplus (DPS)associated with the change in the producer price of a good is:

various studies on Vietnam and other countries (see the Supporting Information fordetails) Finally, we define the sum of DCS and DPS to give a measure of net benefit(NB):

As indicated above, we use the VHLSS 2006, carried out by the General StatisticsOffice (GSO) in Vietnam, for the micro-simulation The time of the survey, which was

in May and September of 2006, is the closest to the time frame of VIRIO 2005 Bothincome and expenditure information was collected from 9,189 of households, orroughly 0.05% of all households in Vietnam VHLSS 2006 is a multi-stage stratifiedrandom sample, split by urban and rural households

We follow Deaton (1989) in using non-parametric kernel regressions in our analysis

of household demand and supply patterns for rice, as well as household welfareimpacts as a result of an increase in the world price of rice This approach places aflexible curve on an (x, y) scatterplot with no parametric restrictions on the form ofthe curve (Cameron and Trivedi, 2005), thereby providing easily comprehensibledescriptions of data across the population

Throughout this study, we use household expenditure per person as our measure ofhousehold living standards It could be argued that income, rather than expenditure,

is a better measure of welfare However, income can be difficult to measure in a oping country like Vietnam, given its large amount of unreported income By con-trast, household expenditures can be measured in an internationally accepted way andcan be deflated by region-specific cost of living indices Another advantage of usingexpenditure as a measure of welfare is that consumption tends to be smoothed inresponse to income fluctuations over a relatively long period of time (Deaton, 1997).Based on per capita household expenditure, we define households in the lowest quin-tile, the highest quintile and the middle quintiles as poor, rich and middle expenditurehouseholds

devel-3.3 Policy scenarios

We consider three policy scenarios The first, termed ‘Quota Monopolist’, resemblesVietnam’s current situation where both rice export controls and the market power ofSOEs are in place The model under this scenario is designed with an administrativerice export limit and a producer tax of 15% to mimic the super-profits of food andrice export SOEs with an export ban In terms of closure, the ‘rents’ generated by thistax accrue to government In the second scenario, designated simply as ‘Quota’, Viet-nam still controls rice export quantities, but liberalises the rice export market Themodel under Quota is similar in design to Quota Monopolist but it does not have aproducer tax and the rice market is otherwise competitive so that rice can shiftthroughout the country in response to price signals and excess supplies and demands.This is indeed a special case of Quota Monopolist when the producer tax is zero sothat no rent accrues to SOEs due to market power Finally, under the last policy sce-nario, ‘Free Trade’, Vietnam allows free exports, without control, and competitivedomestic markets for rice Free Trade thus differs from Quota in having no exportban In all scenarios, prevailing fragmentation of markets between the North and theSouth (see section 2.2) is taken into account by the regional dimension of our CGEmodel

A sensible question could be raised as to why the producer tax under QuotaMonopolist is 15% As the producer tax is the rent accrued to rice exporting SOEsdue an export ban and the actual world rice price increase is 30%, it must be in therange of 0–30% Indeed, the producer tax is equal to zero under Quota At the otherextreme, when the producer tax approaches 30%, the producer will not have anyincentive to expand production as all extra profit due to higher prices is retained by

SOEs This was not the case in Vietnam in 2008 since famers did expand their tion as described in section 2.3 This supply response suggests that the SOEs did not

produc-or could not exhaust all possible profits due to their market power At the risk of plification, we assume that the producer tax is 15% which is roughly the average ofthe two extreme cases: Quota with and without complete monopoly power

sim-4 Results

In this section, we first present basic results for household rice demand and supply inVietnam, followed by model results for both the national and sub-national economiesdrawn from the bottom-up CGE model We then analyse the distributional and wel-fare impacts on households via the micro-simulation

4.1 Household rice demand and supply

To analyse household demand and supply patterns for rice, relative to living dards, and how these vary by region, we first calculate rice shares in total expenditureand estimate the probability of being a rice producer and a net rice seller A rice pro-ducer implies that a household produces rice, but may or may not produce enoughrice for its own consumption Later, in section 4.3., we classify households as simply

Figure 2 Rice share regressionsNotes:Rice share is the share of rice in a household expenditure Two solid vertical lines are atthe 20th and 80th percentiles of the lnexpc distribution Kernel: epanechnikov; degree = 0; band-width = 0.2 for urban and 0.16 for rural

net buyers or sellers of rice, based on the difference between household consumptionand production of rice.

Figure 2 shows the non-parametric regressions of rice shares on the logarithm ofhousehold per capita expenditure, or lnexpc Here, the rice share is the share of rice inhousehold total expenditure The logarithmic transformation is chosen to reduceskewness of household per capita expenditure (Deaton, 1989) The analysis revealsthat rice is an important staple, and the poorer the household the more important isrice in household consumption For example, poor households spend between 20%and 50% of their expenditure on rice, while rich households spend from less than 1–10% Rice also accounts for a larger share of rural household expenditure than is thecase for urban households, since rural households are generally poorer than theirurban counterparts On these results alone, increases in rice prices will differentiallyharm poorer households, whether rural or urban, but especially so for rural house-holds As there is no apparent difference among regions in terms of rice consumption

in the data, we do not include an illustration of this result

It is also possible to show (details are available from the authors) the estimatedprobability densities of rural and urban households producing rice and those that arenet sellers of rice as functions of lnexpc Rice production is this case is clearly an activ-ity of rural households, and especially so for poor households It is also clear that thedifference between the expected probability of being a net rice seller and that of being

a rice producer gets smaller as living standards increase for both rural and urbanhouseholds

Probability densities can also be constructed for regions (details also available fromthe authors) Results show that households in the RRD are much more likely to pro-duce and sell rice than those in the MRD, and these probabilities fall as their livingstandards increase Furthermore, the gap between the estimated probabilities of sell-ing and producing rice is smaller in the MRD This probably reflects the remnants ofland policy in Vietnam over the last three decades: small and non-contiguous plots ofland were allocated to households in the rural North, including the RRD, after thedismantling of agricultural collectives, to ensure equity, thus hindering land consoli-dation and accumulation and leading to rice production largely on a small scale oreven at subsistence levels Rice farms in MRD, on the other hand, are larger and moreconsolidated, allowing for mechanisation (Kompas et al., 2012)

The results also show that Vietnam’s richest and most industrialised region, theSouth East (SE), is in stark comparison with the poorest and the most remote region

in the North West (NW), near the border with China Almost all poor households inthe NW produce rice, compared to 30–50% of poor households in the SE House-holds in the SE have access to manufacturing jobs in factories and small industries,throughout the region, while their counterparts in the NW have almost no off-farmjob opportunities Although many NW households produce rice, a large number can-not produce enough rice to meet their own household demands, largely due to the factthat the soil in this region is the least suitable for wet rice production

4.2 Results from the bottom-up CGE model

The model results presented in Table 1 show the impact of a 30% increase in theworld price of rice on national and regional GDP in Vietnam under the different tradescenarios At the national level, the impact is small In particular, GDP falls slightlyunder Free Trade, by 0.06%, it increases by 0.6% under Quota and falls by 0.37%