HouseHolds earned income in vietnam evidence from VHLSS 2008

While wage employment still constitutes I the backbone of the urban economy, non-farm activities and income diversification are increasingly significant for rural households.. Key Words:

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

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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

t~acher His noble example is still inspiring me to further learning and going forward in my life

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

I 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

~ignificant determinants in increasing their earned income

Key Words: earned income; household; semi-log model; poverty; inequality, Vietnam

TABLE OF CONTENTS

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CHAPTER 1: INTRODUCTION 7

1.1 Problem statement 7

1.2 Research objectives and research questions 9

1.3 Scope of study 1 0 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 income 24

CHAPTER 3: RESEARCH METHODOLOGY 30

3.1 The data 30

3.2 Methodology 30

3.2 Specification ofvariables 32

CHAPTER4: RESULTS 38

4.1 Overview of earned income in Vietnam 38

4.2 Regression Results 48

CHAPTER 5: CONCLUSION, RECOMMENDATION AND LIMITATION 58

5.1 Conclusion and Recommendation 58

5.2 Limitation 60

REFERENCES 62

APPENDIX

• Appendix 1 The Vietnam Development Goals 66

Appendix 2: Map and economic regions ofVietnam 69 Appendix 3: Expenditure poverty rate using the World Bank and

GSO poverty line 70 Appendix 4: New poverty lineofthe Government, period 2006-2010 70 Appendix 5: Poverty rate using the new poverty line of the Government,

period 2006-2010 70

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- - - - - - - - - - -

-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 4 7 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 7

I 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 3 8 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 ofmonthly 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

Millennium Development Goals Ministry of Education and Training Not Applicable

Organization for Economic Co-operation and Development Random-effects

Swedish International Development Cooperation Agency System of National Accounts

United Nations Development Program Vietnam Development Goals

Vietnam Household Living Standard Survey Vietnam Living Standards Survey

Vietnam Dong World Bank

CHAPTER!: INTRODUCTION

~ince 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 1 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 of2010 and the poverty rate at national poverty line has dropped remarkably from 58.1 percent to 14.5 as figure 1.1 below Five ofMDG 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

Nevertheless, policy makers have realized that results of some poverty reduction programs are not sustainable because the ratio of household falling back under the pbverty line remains high, especially in some rural and remote areas I Moreover,

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there is very high rate of household closely above the poverty line in accordance with the new poverty criterion Since early 2008, Vietnam has faced some economic difficulties due to the global financial crisis, thus many new obstacles rise from the present poverty reduction programs Consequently, the government has to consider how to reach a more balanced achievement in all of VDG, economic regions and social communities to improve the sustainable development In another word, rural poverty reduction must be evaluated as an effectiveness measure and a vital section

of any poverty reduction strategy, as well as rural development policy

Any policy that focused on subsidy package was already proved as band - aid solution having less impact on sustainable rural development and its resources should be diverted to pro-poor policy Every government's pro-poor policy, directly or indirectly, seeks to create employment opportunities for the poor or improve productivity and earning capability on a sustainable basis, especially in the sectors employing most of the poor.2 Both elements raise the incomes of the poor and hence speed up the pace of poverty reduction

The strategies which households often use to strengthen income have been a topic for research in recent times (Ellis, 2000) Studies on rural income growth suggests that diversification of income sources is a key strategy which individuals and households use to strengthen their income sources and thus this way reduces poverty (Minot et al 2006) Among the sources of households' income, earned income (comprising wages or salary and net revenue from both agricultural and non-agricultural self-employment) is the most important component of sustainable development and engine to higher living standards However, there is an increasing

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Rural area is "a local community with a population density below 150 habitants/ km2 (500 in the case of Japan) Typology of regions according to the share of rural population: "predominantly rural" = more than 50%; "significantly rural"= I5-50%; "predominantly urbanized"= below 15%" (OECD, 1994)

tendency of income inequality and living standards' difference between regions, between rural and urban areas and between the rich and poor Fast urbanization, iJdustrialization and high unemployment rate in rural areas of Vietnam has led to increasing internal migration since the last decade of the 20th century The role of remittances has become more and more important in improving households' living standards because of its immediate impact on households' well-being (Pfau and Giang, 2008) GSO of Vietnam estimated that mean domestic remittance is about 38% of households' wage income in the period of 2002 to 2006 For "economic motive" (e.g, investment and savings) as well as family support, households' members send remittances directly to their family for starting self-employment and enhancing the performance of the existing businesses Moreover, if domestic remittances can stimulate the· formation of household businesses in rural areas, the problems of rural unemployment and city's overcapacity can be gradually reduced; and nationwide rural-urban migration flow can be mitigated

1.2 Research objectives and research questions

The general objective of my paper is to investigate the determinants of households' earned income in the whole of Vietnam Specifically, my thesis will focus on investigating the difference between household's earned income in rural and urban areas Moreover, this study will investigate the determinants of earned income with regard to domestic remittance My thesis questions are as follows:

• What factors determine Vietnamese household's earned income nationwide?

• What factors determine household's earned income in rural areas and urban areas of Vietnam respectively?

• What are the determinants of earned mcome with regard to domestic remittance?

1.3 Scope of study

My paper draws on data from the Vietnam Household Livings Standards Survey (VHLSS) conducted in 2008 to examine the determinants of households' earned income The survey was divided into two phrases in 2008 and carried out nationwide by direct interviews with household heads and key commune officials VHLSS 2008 has a sample size of 45,945 households in 3,063 communes or wards,

in which the income survey for 36,756 households and both income and expenditure surveys for 9,189 households My focus is on studying determinants of earned income by linear regression method with the support of Stata software and the backup of VHLSS 2008 data on income survey Data will be classified as pooled, urban, and rural respectively with interest in domestic remittance

SUMMARY

Vietnam has gained significant results in the execution of the Millennium Development Goals (MDG) and the poverty reduction program since 1986 However, there is very high rate of household closely above the poverty line in accordance with the new poverty criterion, so the results of some poverty reduction programs are not sustainable because the ratio of household falling back under the poverty line remains high, especially in some rural and remote areas Government policies on creating employment opportunities for the poor or improving productivity and earning capability on a sustainable basis, especially in the sectors employing most of the poor will raise their incomes and hence speed up the pace of poverty reduction Among the sources of households' income, earned income (comprising wages or salary and net revenue from both agricultural and non-agricultural self-employment) is the most important component of sustainable development and engine to higher living standards My paper draws on data from the Vietnam Household Livings Standards Survey (VHLSS) conducted in 2008 to examine the determinants of households' earned income on urban, rural, nationwide scale of Vietnam respectively

CHAPTER2: LITERATURE REVIEW

This chapter begins at definition overview and conceptual problems that arise when ahalyzing income such as household, classification and components of both income and income generating activities After that, the relation between income, inequity and poverty will be noticed Then it reviews the framework for livelihoods and income analysis Finally, my study focuses attention on method of finding the causes of low income by undertaking regression analysis to identify the effects of each of "region-level characteristics", "community-level characteristics", and

"household and individual characteristics" on earned income per capita

2.1 Definition and concept review

2.1.1 Household

As the survey's coverage of the population and the data analysis are governed by the definition of household, so finding the criteria to identify household are critical and they must be suitable to the local circumstance The most commonly used criteria are members having family ties or emotional connection, living together in the same house, making contribution in income and resources, and sharing expenses

on living necessities In my opinion, it is interesting to introduce the first definition

of a household drawn from the System of National Accounts 1993 (UN, 1993), and

as follow:

A household may be defined as a small group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food

It is clear view of SNA93 that household is a unit of consumption having income sources from wages, property earning and transfers However, this definition absolutely is not complete because household is also a production unit as the case of agricultural households On the other hand, SNA/ESA definition of household includes also some units which are non-family and do not correspond with the

notion of the target group for agricultural policy The irrelevant units are

"communal living units (hostels and monasteries) and other institutions such as universities" As the result, the notion of household for developing countries is not the same with that for OECD countries, thus it is considered as one of the basic elements of a national statistics system or a useful sample unit in survey task In

1998, the United Nations developed the definition of a household used for population censuses as follows:

"The concept of household is based on the arrangements made by persons, individually or in groups, for providing themselves with food or other essentials for living A household may be either (a) a one-person household, that is to say, a person who makes provision for his or her own food or other essentials for living without combining with any other person to form part of

a multi-person household, or (b) a multi-person household, that is to say, a group of two or more persons living together who make common provision for food or other essentials for living The persons in the group may pool their incomes and may, to a greater or lesser extent, have a common budget; they may be related or unrelated persons or constitute a combination of persons both related and unrelated" (UN, 1998, paragraph 1.324)

The concept pointed out that there may be more than one household living in a house, but a household may occupy more than one house For example, different families having a common household head live in separate houses, or extended families living in more than one house having contribution of food together It is obvious to understand the concept of a "family" more easily than a "household", but two concepts are quite different The major point is that "a family may include people living in other households in other places"

Regarding the concept of household members, definition which is within the

framework ofVHLSS, as well as GSO guideline and applied for this paper is as following:

Household members were defined generally to include all people who normally live and eat their meals together in a house and have done so for 6

or more months out of the past year (GSO, 2008) 3

In summary, it is critical to acknowledge household as a social unit because it is really immersed in the larger society It is true that household head's social status can partly determine household members' welfare In addition, every household member can decide to choose his job, directly earns his living and selects his expenditure patterns A conceptual framework to study household's decision on its resource allocation is needed as we are considered household as a social unit making decision There are two key issues in the study of household as a decision-making unit Firstly, household has the role of both production and consumption unit, while the firm is assumed to be producing unit and household to be consuming unit in orthodox economic theory Secondly, decision-making process within household has been addressed because conflicts of interest between its members are common Such household's decisions can jointly be agreed by all the members, by dominant group or individually determined by the householder, so a relevant topic

of interest is a "household welfare function" In many studies, the first assumption

is that household comprises of individuals having the same preferences based on

"identical tastes", and then household is considered as a single individual who can make its own decision Household is assumed as group of people having emotional ties or the same goals so together set up a family This pattern is called the "glued-together household" (Sen, 1983) In another theoretical point of view, we have

"despotic household" in which the householder is the primary decision maker, thus the head's preferences definitely represent the household behaviors In short, there

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'There are 7 exceptions regarding household members: (1) A head of household is always considered as household member even he or she does not live and eat in the household more than 6 months (2) People who are going to live in the household for a long time such as daughter-in-law, son-in-law, relatives who come back from military service are considered as household members even they were staying at the household less than 6 months (3) Students who are living outside the household but still being supported by the family are considered as household member (4) Guests or relatives who living in the household for more than 6 months and take their meals together are considered as household member (5) Hired workers, servants, lodgers or guests if they are members of any households elsewhere are not the household members ( 6) Individuals who passed away in the last 12 months or moved out of the household and do not intend to come back are not considered as household members (7) Infant of less than 6 months year old is considered as household member" (GSO, 2008)

are two extreme types All household's members are assumed to have identical preferences in the former type, and the householder's preferences dominantly rule

in the latter

2.1.2 Income and earned income

2.1.2.1 Components of potential income sources

Household welfare or living standard is typically measured by income aggregate including many different sources of income such as wage or non-wage, employed or self-employed, and earned or unearned incomes over a defined period As consumption-based measures with money metric are evaluated more precise and convenient to get in any typical household survey, such an approach is used in welfare analysis more universally On the other hand, income-based measures and their components, particularly if properly measured, will have an important function, as they allow for the meaningful analysis of every household's livelihood strategies and poverty condition

Income is the critical factor to influence households' living standard In principle, a practical definition of income must embrace a "measure of well-being" within an accounting period Almost researches have considered annual income which is compatible with guidelines for data collection of both household surveys at micro level and national accounts at macro level It is very important to comprehend the potential sources of income and their components Bright et al (2000) suggest three potential sources of income, specifically of rural households, as followings:

unearned income, such as interest, pensions, and dividends, can be very significant and has an important impact on personal goal and crucial decisions as retirement

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plan or choice of cultivation method although it is generally neglected

Figure 2.1: The components of potential sources of income

Farm Income

ricultural production ctivities on own farm

gricultural mployment on other's arm(s)

Another key household income component is from migratory activity with the following income raising strategy: (1) Rural-urban migration (private domestic transfers or "domestic remittances"), and (2) Overseas migration (private transfers from abroad or "abroad remittances") Both domestic and abroad remittances are classified as "migrant remittances" and different from "income transfers" In the scope of household's earned income, remittances generally are earnings from family members who temporarily and seasonally migrate to work but are still household members Otherwise, "transfer income" is receipts transferred by government, former household members and relatives

Core study of the effect of remittance concentrates on describing the typical process

of labor migration and then the delivery of remittance to home Regarding studies about remittances in Vietnam, Le and Nguyen (1999) study the data of 1992/93 VLSS to investigate both domestic and international remittance flows and they conclude that households with female head are more likely to receive remittances Friedman et al (2003) relate gender differences with elderly well-being, and take into account the support for the old from family members in Vietnam By controlling for some determinants such as marital status and age, their findings show that gender does not matter so much on transfers between generations Babied (2006) uses both the 1999 Census sample and VLSS 1997 - 1998 sample to analyze 'domestic remittances' between the elderly and their children by applying a regression model to verify what factors influence the flow of remittances The paper specifically tests whether the increasing trend of migration during the economic reform is leading to the failure of support between family generations in Vietnam It comes to the conclusion that parents continuously have got their children support and that "geographic distance between adult children and their elderly parents should not be interpreted as a sign of indifference" Moreover, the paper points out that old women aged 60 and older receive more remittances from their children than men of the same age do

2.1.2.2 Earned income

National accounting defines earned income is obtained through the individual's own efforts, while unearned income requires no physical activity by the recipient and is usually in the form of a pension, benefit or compensation For any household surveys, analysts see earned income as the most familiar and easily measured one and they usually classify it as follows:

(I) Money wage or salary income: the total earning received for work done

as an employee of another person or firm during a defined period such as a year, or

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(2) Net income from non -farm self- employment: the net earnings (gross

receipt minus expenses) gained through self-employment when the individual gives substantial services in connection with the enterprise: own business, professional enterprise, or partnership, before tax

(3) Net income from farm self- employment: the net earnings (gross receipt

minus expenses) from the operation of a farm by a person on their own account, as an owner, tenant farmer, or sharecropper, before tax

Regarding the guidelines for VHLSS 2008, actual income can be received from different sources, including monetary income or income in kind Based on its sources, income is classified into four types: (i) income earned from agriculture, forestry, livestock, and fishery; (ii) income earned from self-employment in non-farm activities such as industry, transportation, construction, and services, (iii) income earned from formal or informal wage, including salary, allowance, bonus, dividend, and other kinds of remuneration, and (iv) other non-productive incomes, such as pensions, transfers, grants/subsidies, rents, and financial income (GSO, 2008) As the result, earned income should be productive incomes, which come from production activities and individual's effort, and definitely are calculated as the sum

of the first three types of actual income

2.1.3 Classification of income generating activities

It is important to have a consistent terminology of literature on poverty and inequality policies because all the terms "off-farm", "non-farm", or "non-agricultural", "earning", and "income" etc routinely appear in a confusing way In

my opinion, this research has to make clear distinctions among activities and incomes so readers can easily understand the terms in usage Barrett et al (200 1) suggest such distinctions have to be performed along both sectorial and spatial categories However, sectorial classifications as guidelines of national accounting standard must be complied with to maintain a conformity with both micro and macro level

Local Migratory Local Migratory

Local Migratory Local Migratory

Table 2.1 describes the components of household income by "sector" which

includes farm versus nonfarm, "function" which includes wage versus

self-employment, and "space" which involves local versus migratory As sectorial distinctions of national accounting systems, we can classify into primary sector which embraces agriculture, mining, and other extractive industries), secondary

sector which includes manufacturing, construction, and tertiary sector which is

service - related industries At this stage, we can know clearly the distinction between "agricultural" or "farm" income and "nonagricultural" or "nonfarm" income So "Farm" incomes are derived from the production or gathering of unprocessed crops or livestock or forest or fish products from natural resources, while "nonfarm" incomes are from mining, manufacturing, utilities, construction, commerce, transport and a full system of financial, personal and government services On the other hand, it is necessary to know the term "agro-processing" is the transformation of raw agricultural products by milling, packaging, bulking or transporting, which forms a vital part of the rural nonfarm economy

Consequently, it is only the types of production factors used in process and the nature of output determine sectorial classification of farm or nonfarm income Other elements such as location (for example, at home, on the farm, in a city, or abroad), scale (for example, activity by a single man or a large factory), technology, and

function of participants (for example, managing a private enterprise to earn profit or working for salary) do not matter at all

Concerning functional classifications as two separate rows in table 2.1, there are two polar cases from "clearly wage-employment" which is accompanied by wage or salary contract to "clearly self-employment" or entrepreneurial activity, but there should be matching area between wage or self-employment activities Finally, regarding spatial classification, there will be two broad categories as follows:

"local" and "migratory" labor forces or activities Firstly, the "local" activities include two sub-categories: (a) "at-home" or "on farm"; and (b) "local away-from-home" which takes place in (1) "countryside or strictly rural", (2) "nearby rural town", and (3) "intermediate city" Secondly, "migratory" activity can be described

as "distant away-from-home" with three subcategories: (a) "domestic rural" or migration between rural zone, (b) "domestic urban" e.g, to a distant metropolitan area, and (c) "foreign" or located outside the home country

2.2 Review of framework for livelihoods and income analysis

Definition of well-being as the control over resources is one popular approach in poverty and income analysis, so people have better lives if they have a greater control power over commodities According to the WB (2000), "poverty 1s pronounced deprivation in well-being", so the objective of poverty analysis 1s answering the question if households or individuals have enough goods to meet their needs As the basic point in poverty analysis, poverty typically is considered in monetary terms and thus is measured by comparing individuals' income or consumption with some well-defined threshold or level Such individuals or households having income below already mentioned threshold are considered to be poor

The concept of livelihoods approach (Ellis 2000) is now used extensively in poverty and income analysis According to this concept, livelihood is defined as ways to earn one' living or to reach one's well-being Along the ways, assets and activities are supportive tools and using methods to achieve one's well-being The

intervention of government, economy, society and institutions can induce acting effect which can facilitate or confine individual or family's standards of

Hrunan capital: education, skills, experience

Financial capital: savings, credit

Social capital: ethnic ties, membership of

organisation

D

TR.4.NSFOR.\flli,'G SIRUCIVRES &

D

Reflected in: income consumption assets and

expendinu·e:

Source: Adapted from Ellis (2000)

Firstly, regarding the definition of assets, it is commodities and property owned by households to be utilized to secure their living Basically, Ellis emphasizes the traditional meaning of asset referring to natural, physical and financial capital, but

he extends the concept to take human capital and social capital, such as household members' skills, experience and social relations into consideration In addition, assets can be classified as productive and non-productive if we see the way from which income is generated or earned Productive assets such as live-stocks, human capital, or equipment which generate "earned" income only indirectly through their allocation to activities such as farming, employment or production In the other

' hand, non-productive assets generate "unearned" income directly For example,

households can deposit their money in some banks and get monthly income from saving interest Secondly, activities are defined as methods in which households allocate their members' time budget to attain expected livelihoods, thus households may apply the following methods: employment or private enterprise, farm or non-farm, production or trade Households are required to have some level and some types of asset to choose their activities and such movement possibly increase household's asset stock In reality, households' assets are not homogeneous, so naturally diversification of their income generating activities is almost the best strategy to improve household's living standard As the result, almost individuals have more than one income source (Barrett et al, 2001 ) In short, engagement in activities and possession of assets together decide household's well-being

The studies of income diversification are the main issue of poverty reduction policy for rural areas and also one of antipoverty solutions proposed by the UN, while focus of interest for urban areas are wage income studies In most studies on rural household's income diversification, the increasing importance of non-farm income which comprises of off-farm wage and earning from non-farm self-employment (or non-farm enterprise operations) are realized Bright et al (2000) differentiate between "enterprise diversification" and "income diversification" in conjunction with non-farm economy To protect household against risk, enterprise diversification is self-insuring strategy including establishment of both on-farm and off-farm businesses out of major agricultural productions, while income diversification covers all of enterprise diversification activities and also embraces any resource allocation relating to non-farm employment

Factors which foster households and individuals to diversify their income sources can be classified into two groups: "push factors" and "pull factors" The first group

of factors concerns household behaviors in a passive way of response to risks, market constrains, weak or incomplete financial institutions and "diminishing factor returns" in order to stabilize their income inflows in any given household 's

economic condition For example, households have to make self-provision of some goods and services due to high transactions costs on the market The second group comprises of active reaction after realization of strategic combinations between economic activities, and comparative-advantage based specialization originated by higher technologies or more abundant endowments and resources At macro-level point of view, it is important to develop "local engines of growth" such as agriculture promotion center, complete financial system, and connection to urban areas Such engines for rural development will create opportunities for income diversification by fostering production and service activities (Barrett et al., 2001 )

2.2.1 Income diversification

As paper from Bales et al (200 1) concludes that an increase in earnings in all sectors has caused the poverty reduction of over 90%, but not an increasing movement into high-wage sectors has done The remaining 10% largely reflects the move out of agriculture, which accounted for 66% of principal jobs in 1993 and 62% in 1998 The movement from agricultural to wage employment appears to occur in stages There is considerable occupational multiplicity, with fully 37% of workers holding more than one job It appears that typically farmers early pick up some part-time wage work, or move into self-employment Only once these subsidiary activities prove profitable results, they eventually break the link with agriculture

Van de Walle and Cratty (2004) examined off-farm income diversification in Vietnam and found a positive association between rural income diversification and standards of living They used cross-sectional data to prove that diversification into wage and self-employment activities can reduce poverty Rural households having income from farming activities as the major source are among the poorest, while others having some types of off-farm activities can get out of the poor

Minot, Epprecht, Tran and Le (2006) studied income diversification in the Northern Uplands of Vietnam by calculating the impact of each income source on income growth They analyzed income diversification into two processes The first, income

This standard assesses the proportion of income held by the 40% poorest people in the population Ifthis pro~o~i~~~~i~

less than 12%, there is a high income inequality If it ranges from 12%-17%, income inequality is medium and if the proportion is over 17%, relative equality is considered to have been reached" (GSO, 2008)

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diversification happens within agriculture sector as the move from farming to higher-return activities such as animal husbandry, fisheries, and forestry The second, diversification transfers from agriculture to non-farm enterprises and wage employment These two processes represent 16 percent and 27 percent of the growth in overall income respectively Following the trend of wage income and farm income, non-farm self-employment is playing a considerable role in both rural and urban areas (Minot et al., 2006)

2.2.2 Income and inequality

There is relation between poverty and inequality because individuals' well-being has depended on their economic position relative to others in society On the background of poverty analysis, inequality study concentrates on mcome distribution throughout the whole population, while poor households generally stay

in bottom quintiles

Helbergs (2003) applied regression method on the dataset ofVLSS in period

1992-1993 and 1997-1998 to examine the effect of household characteristics on inequality Their result reveals that spatial inequality (e.g regional characteristic and urban factors) and returns to higher education are two significant factors of inequality during Vietnam's economic reform stage For another study on urban -rural inequality, Nguyen et al (2006) concluded that urban-rural gap at the bottom quintile was mainly caused by the differences between urban and rural assets For the top quintile of the income distribution, the gap was enlarged by the differences

in returns to those assets

Income inequality is also the problem of big concern in Vietnam recently As the result ofVHLSS 2008, the income gap between the richest and poorest quintiles has

an increasing trend, from 8.1 times (2002) to 8.9 times (2008) Also, the result showed that the national Gini coefficient4 was climbing from 0.418 (2002) to 0.43

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"The Gini coefficient ranges from 0 to I There is no inequality value of 0 The level of inequality is higher, the higher the value ofthe Gini coefficient and when the Gini coefficient is I, there is absolute inequality" (GSO, 2008)

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2.3.1 Income and "region-level characteristics"

Using the dataset ofVLSS in period 1992-1993 and 1997-1998, Hoang et al (2001) concludes that geographic or regional characteristics have a strong influence on earned income per capita, earned income per hour and the working hours of households

Also with the VLSS datasets in period 1992-1993 and 1997-1998, Gallup (2002) examined labor market in the 1990s and studied the relation of wage employment with income growth and especially inequality He found out that Ho Chi Minh City and Hanoi which are the two cities with only 8% of the country's population, but occupied fully 25% of all wage jobs in Vietnam Wage grew rapidly but had positive influence to decrease overall wage inequality, because the wage growth of the poor was annually 14%, while that of the rich and middle class was 10% per year Moreover, income component from agricultural activities lowered overall inequality because inequality level between households getting involved in agricultural operations was a great deal lower than that between households taking non-agricultural activities Nguyen and Tran (2006) further focused on the effect of

"trade liberalization" on both urban and rural households Using the same VLSS datasets, they concluded that whole economy has got significant benefit from this process, but urban households were in better position to gain more than rural households from the "trade liberalization" because they have more access to imported commodities Nguyen, Tran, Ghosh& Whalley (2005) and Jensen& Finn Tarp (2005) also investigated the impact of trade liberalization on income difference between urban and rural households and concluded that households in urban sector gained more benefit than their counterpart in rural sector

Nguyen, Albrecht, Wroman and Westbrook (2006) studied the marketization associated with economic reforms in Vietnam from 1993 to 1998 Endowment possession is an important factor of household earning Typically, urban households

in bottom quintile own better initial property than rural ones of the same quintile,

thus they gain more Among the rich, urban households not only have better initial endowments but also higher returns to their assets than rural counterparts

2.3.2 Income and "community-level characteristics"

Besides regional characteristics, many community-level characteristics may be associated with for households' poverty At any community, infrastructure is a vital determinant of income, so earned incomes can be increased by constructing roads to connect rural areas with urban areas or by investing in roads to connect remote villages with its rural towns

The government must consider investing infrastructure in their rural development policy because it is beneficial for the whole socio-economic situation in rural areas Other expenditures on education, vocational training, and research program are positively more effective than farm subsidizing package on both farm and non-farm activities "Despite challenges to agriculture and the need to promote non-agricultural activities in rural areas, many policies and investments that support agricultural growth also support growth of the non-agricultural rural economy Investments in transport and communication infrastructure, education, health, and improvements in factor and output markets can help stimulate agricultural and non-agricultural activities in rural areas" (Siegel, 2005) For agriculture, investment in irrigation is very crucial for productivity increment Adequate irrigation services have in the past contributed substantially to productivity improvement of rice and other crops and enabled more rapid rotation of crops and harvests from 1.3 up to 2-2.7 harvests during the year (Poverty Task Force 2002) Regarding research and development aspect, returns to investment in agricultural research are very high world-wide, and its impact on poverty reduction is substantial Fan, Hazell and Thorat (2000) showed that agricultural research and development expenditures had ranked second (in terms of poverty reduction through greater agricultural output) after road construction and education in India and China respectively As the result,

higher yield created higher income for farmers, stronger decrease in consumer's food prices, and improved wages in non-farm economy

Putnam (1995) emphasized the importance of "social capital" in poverty reduction, especially the mutual trust within poor community The first thing in building such mutual trust is to remove any existing "social barriers" Other dimensions of social capital are information centers, relative systems, local associations, and networks of poor households, and thus must be set up and developed extensively

Kozel and Parker (2000) analyzed the crucial role of social groups in lowering risk and protecting basic needs of the poor villages in north India Another study of Fafchamps and Minten (1998) on agricultural traders in Madagascar proved the central role of social relations Transaction costs between traders can be reduced if close relationships exist, while long-term trading connection is vital making lender feel secure about their credit granting

Moreover, Wandschneider (2003) concluded wider community-level factors determining more income earning from off-farm activities, from efficient usage of natural resource endowment, from investment on agricultural development, public services, rural town development and from promotion of business environment and economic infrastructure

2.3.3 Income and household characteristics

Many papers using data from the two surveys VLSS 1992-1993 and VLSS

1997-1998 explore the major determinants of earned income are household characteristics such as size, head's gender, age or occupation, and average characteristics of household members such as education or experience Earned incomes could be increased by reasonable household size; by more education, especially the university or college level Bui et al (200 1) uses VLSS 1998 and argues that education has an important effect on income, in two ways First, more education allows people to choose to pursue more remunerative lines of activity, for example

wage employment rather than farming And second, it raises the return within any activity

Labor market has strong impact on the choice of income generating activities of household members Regarding the occupation of the household head, it also affects earned income of household members substantially Vilverberg and Haughton (2004) prove that "non-farm self-employment" or non-agriculture enterprises are playing an important role in supplying jobs and contributing more income sources

As Vietnam economy as well as labor market are developing, there are a great number of worker without qualified education and skills, while there is low labor-demand in "fonnal sector" or "wage employment" Consequently, the only choice for households is operating non-agriculture enterprises to find other income sources besides farming activities

There is causality between education and income, as well as poverty income In the words of a WB report, "education improves the living standard of population, especially the poor, by increasing the productivity of labor, by reducing fertility and improving health, and by equipping people to participate fully in the economy and society" (WB 1995, p.l9) Specifically, education confers skills, knowledge and attitudes that create opportunities for educated persons to improve their productivity and to have better opportunities to gain access to jobs both in the formal and informal sectors The result is higher income, which in tum implies a better standard ofliving (WB 1, 1995, p.l9)

In a broader context, education should be seen as an investment in human capital, providing the key to better jobs and higher incomes for individuals, while at the same time lifting national production and raising the level of output per head There

is a massive literature on the returns to education; for instance, in a careful study of twins, Arias et al (2001) estimate rates of return of between 9% and 13% on the investment in education, in the United States Watkins (1995, p 25) focuses on the converse; he attributes low incomes to low education, and makes the case that "the low incomes of poor people are partly a consequence of their low levels of skills

• and literacy Education will increase their eammg capabilities and employment

prospects, while bringing wider benefits for society" Regarding Vietnam context, the VLSS 1997-98 result indicated people with a lower secondary education or below make up almost 90 percent ofthe poor

SUMMARY

It is important to comprehend all definition, framework, and conceptual problems when analyzing income Inequality, poverty, and income are three different issues but related to each other At the starting point of poverty analysis, poor households conventionally are defined as such households having income under some well-predefined threshold However, explaining the causes of low income is this paper's principal objective, thus it is consequently crucial to tackle the roots of poverty and satisfactorily explain why some people have low income The key reasons of low income are from the difference in "region-level characteristics", "community-level characteristics", and "household characteristics" Firstly, some typical region-level characteristics are remoteness, region, urban or rural area Secondly, commune characteristics such as the existence of a road, handicraft industry or local market are also clear factors affecting households' outcomes Finally, when household characteristics are considered, demographic, economic and social characteristics such as religion, ethnicity, sex and occupation of the household head are very important factors

•

This chapter has three sections: data review, methodology, and specification of variables The data are extracted from VHLSS 2008 and classified as pooled, urban and rural Then it is vital to discuss the current methods of evaluating the factors effecting households' earning level Finally, all variables will be classified, described in details, and then hypothesis of explanatory variables' impact on households' earned income per capita will be proposed

3.1 The Data

For policymaking of socio-economic development strategy, the GSO with financial support from SIDA and UNDP; and with technical support from WB, conducts VHLSS from 2002 to 2010 The VHLSS was performed biannually to monitor the welfare of the whole Vietnam population, to assess the execution of Comprehensive Poverty Reduction as well as the achievement of the MDGs

My paper draws on data from the VHLSS conducted nation-wide in two periods of

2008 The survey encloses 45,945 representative households from 3,063 communes

or wards in which 9189 householders were interviewed directly on both income and expenditure sections Moreover, VHLSS 2008 surveyed 2300 rural communes to gather information on community-level characteristics, such as: property of surveyed communes, non-farm employment and opportunities, current agricultural production and promoting programs, local infrastructure, education system, health care, savings and micro finance (GSO, 2008) In addition, this research uses other data extracted from the website of the Statistics Documentation Centre - GSO of Vietnam

3.2 Methodology

For those typical researches on earned income, two types of regression models are used to analyze the determinants of earned incomes One type of model is a direct

model, in which the logarithm of earned income is regressed on household characteristics and locational factors plus regional dummies to see what determines income levels The second type of regression model decomposes earned income into three components: earned income per hour, average working hours per worker, and share of household's labor force Consequently, we can examine the determinants of each of these three components

In order to make comparisons between households, researchers used annual earned income per capita as a measure of welfare This indicator may be separated into three components:

and N is the proportion of the household members who are working

Hoang and Baulch (200 1) used both direct and indirect approaches The direct approach makes regression the log of earned income per capita on geographic, commune, and household characteristics The indirect approach examines the determinants of each of the three components of earned income (earnings per hour, working hours and the proportion of household working members) in tum by regressing them on the same set of explanatory variables

The direct approach model:

where a, bj are parameters to be estimated, ui is a random error term, and the xi are

a set of n independent variables comprising region, community-level and household

characteristics

3.3 Specification of variables

Generally, the earned income per capita and per hour variables are highly skewed to the left We therefore use a logarithmic transformation to bring these closer to a normal distribution before using them in the regression The first group of explanatory variables represents geographic characteristics These are included in the above models as a series of regional dummies (see appendix 2), in which rural and urban areas are considered separately and the Red River Delta (dominated by HaNoi city) is the omitted base case The second group of explanatory variables relates to commune characteristics6 and is associated with access to the market, or job opportunities Dummy variables are included for whether there is a road to the

6

"According to the VHLSS 2008, 99% of communes have commune health stations, of which 56% meeting national standard; 98% and 92% of communes have a primary school and lower secondary school respectively, 97% of communes with roads accessible by car to the Commune People's Committee; 99% of communes have electricity, 98% of communes are connected to the national electricity network; nearly 90% of communes have post offices, 43% have a commune cultural center, 80% have a commune broadcasting station and 63% have a commune/inter-commune market" (GSO, 2008)

I

village in which the household lives and whether there is irrigation system in the commune, or local industry or handicraft operations in the commune The third group of explanatory variables relates to household characteristics and include two sub-groups: common characteristics of household (such as religion, ethnicity, household size, numbers of children and adult-dependents); and the characteristics

of the head of household (such as gender, occupation, age or education)

Table 3.1: Variable description

Variables Expected

si n Explained variable

Explanation

Natural logarithm of earned income per capita

Explanatory variables: Independent variables are classified into 3 characteristic

These are 08 regional dummy variables representing eight economic regions: Red River Delta, North East, North West, North Central Coast, South Central Coast, Central Highlands, South East and Mekong Delta to measure the region effects on earned income When a region has value

of one, the others will take zero The expected sign may be positive or negative upon each region With Stata

software, I have generated 07 dummy variables and kept Red River Delta as the base case

(2) Community characteristics

market (+) Access to market is a binary variable; market = 1 for

I

having access to market; 0 otherwise Higher earned income is expected for household having market access Availability of traditional or handicraft operations in the

tradition (+) commune is a binary variable; tradition = 1 if available; 0

otherwise Traditional or handicraft operations are expected to have positive relationship with earning

Availability of agriculture expansion operations in the

(+) commune is a binary variable; tradition = 1 if available; 0

improvement programs are expected to have positive relationship with earning

Availability of irrigation system in the commune is a

irrigation (+) binary variable; value of 1 if available; 0 otherwise

Investment in irrigation systems are expected to have positive effect on household earning

Availability of radio station in the commune is a binary variable; value of 1 if available; 0 otherwise Investment in radio sta (+)

communication systems are expected to have positive effect on household earning

Availability of hospital in the commune is a binary variable; value of 1 if available; 0 otherwise Investments hospital (+)

in health facility are expected to increase household earning

Access to public transportation in the commune is a binary pub_trans (+) variable; value of 1 if having access; 0 otherwise

Households having access to public transportation are