Determinants of non farm household in come in rural vietnam

Table 2.2: The schemes for development of non-farm sector in India Table 4.1: Participation of household into non-farm activities by income groups in nation Table 4.2: Participation ofho

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

DETERMINANTS OF NON-FARM HOUSEHOLD INCOME IN RURAL VIETNAM

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

BUI THANH GIANG

Academic Supervisor:

Dr NGUYEN NGOC THUY

HO CHI MINH CITY, SEPTEMPER 2012

-ACKNOWLEDEMENTS

This is the very means that gives me a chance to formally express my appreciation to people who have really created the concepts and methodology expressed in this research

I always keep in my mind the gratefulness to professors ofMDE Programme, executive programme administrations in Vietnam Their enthusiasm about the experience and what they were teaching, was the most meaningful encouragement

of mine

I would like to express my deep and sincere gratitude to my supervisor, Doctor Nguyen Ngoc Thuy His knowledge, logical way of thinking and encouragement has provided a good basic for the thesis presentation

I would like to express my great thanks to Professor Nguyen Trong Hoai, MDE programme who have eagerly supported during my study

BUI THANH GIANG

•

DECLARATION

I declare that "Determinants of non-farm household income in rural Vietnam" is my own work, that it has not been submitted to any degree or examination at any other universities, and that all the sources used or quoted are indicated and acknowledged by complete references

Ho Chi Minh City, Septemper 2012

BUI THANH GIANG

in rural area From the regression results, this study gives some solutions to promote rural non-farm activities in Vietnam in the coming years

Chapter 2: LITERATURE REVIEW

2.1 Concepts and definitions

2.2 The role of non-farm sector

2.2.1 The Push- Pull factor

2.2.3 The experience in the development of rural non-farm sector 9 2.3 Theoretical basis of the determinants of non-farm household income 13

3.4 Data Analysis 31

Chapter 4: DETERMINANTS OF NON-FARM HOUSEHOLD INCOME

4.1.1 The participation ofhousehold into non-farm activities 34

4.1.2 The contribution of non-farm activities in employment

and household income

4.2 Determinants of non-farm household income in rural Vietnam

4.2.1 Descriptive analysis

4.2.2 The models for comparison

4.2.3 The result ofthe model and the explanation

4.3 Chapter remark

Chapter 5: CONCLUSIONS AND RECOMMENDATIONS

5.1 Summarize main finding

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LIST OF TABLES

Table 2.1: Classification of farm and non-farm activities

Table 2.2: The schemes for development of non-farm sector in India Table 4.1: Participation of household into non-farm activities

by income groups in nation Table 4.2: Participation ofhousehold into non-farm activities

by income groups in rural Table 4.3: The participation ofhousehold into non-farm activities

by regions and ethnic groups Table 4.4: Business sectors participation by areas Table 4.5: Business sectors participation by income groups

Table 4.9: The result of income classified by ethnicity and gender Table 4.10: Labor market participation by age and schooling level, 2008

Table 4.11: Labor market participation by income groups Table 4.12: Definitions of variables used in the regression model

Table 4.13: Result of OLS model Table 4.14: Result of Robust model

Figure 4.2: The participation of household into non-farm activities

by education of head household Figure 4.3: Labor shares by income sources in 2008 Figure 4.4: Histogram of residuals

Chapter 1: INTRODUCTION

The determinants of rural non-farm household income in Vietnam will be investigated in this chapter In particular, this chapter includes five sections The first section will raise the problem necessary to make clear for the case of Vietnam The second section will present the research objectives of this thesis The next section will raise the questions to obtain the proposed objectives The fourth section will briefly describe the research methodology And the structures of the thesis will

be described in this chapter

1.1 Problem Statement

For nearly 25 years, the government of Vietnam has been looking for the direction of socio-economic development in order to escape the rural from deprivation, poverty and backwardness Government has many programs to promote the new rural construction to improve people's living standards Economic reform in Vietnam in the last two decades, characterized by the economic policy reform, opening and operating economy towards a market economy According to Vietnam Economic Times (20 11 ), the average economic growth increased from 7.5

% in the period 1991 - 2002 to 8% in period 2002-2007 The economic structure has changed the direction towards industrialization and modernization The proportion of agriculture in total GDP of the country declining from 27.18% in

1995 to 24.53% in 2000 and to 21% in 2008 The poverty rate fell consistently from 58% in 1993 to 29% in 2002 and to 14,5% in 2008 (Vietnam Academy of Social Sciences - 201 0) Economic growth and the stability of the macroeconomic environment has confirmed the correctness of innovation policy

In rural areas, the process of economic restructuring also has changed significantly Due to the success of diversified occupations strategy, the leading position of agriculture in the rural household economy have no meaning as before The program of mechanization, modernization of irrigation has reduced labor time

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in agriculture significantly Because of the longer leisure time, the rural household can participate in the non-farm activities on a regular basis Any economic activity which has effective may become the main activity of household economy in rural The rural economy shifted towards increasing industries, services and other activities of non-farm sector The development of non-farm sector has contributed

to creating jobs, increasing incomes, improving living standards for a certain part of residents, and creating a new face for rural area This suggests that non-farm activities play the important role in the living of households and development of economy and society ofVietnam

The non-farm activities contributed to the improvement and diversification

of people's income This has been widely recognized Especially in rural Vietnam, the development of non-farm sector has great meaning in solving the poverty, underemployment and seasonal unemployment which are still the phenomenon of the rural area Vietnam has gained remarkable achievements in improving people's living standards since the reforms implemented under doi moi However, the reform

progress has created problems of society such as the pressure in rural - urban migration, an increase in unequal income distribution between different regions Furthermore, the rural - urban gap has widened considerable Therefore, an effective development strategy should be more focused on promotion of rural non-farm sector in order to create more employment and income opportunities for rural populations and improve other problems of society

It is widely recognized that income from non-farm activities likely to play increasingly significant role in the household income in rural This study investigates the participation of rural households into non-farm activities to have an overview of non-farm activities in rural Vietnam; identifies the contribution of non-farm activities on household income; analyzes determinants of income of rural non-farm household to identify the important determinants of rural non-farm household

income; and gives some solutions to promote rural non-farm activities in Vietnam

in the coming years

1.2 Research Objectives

The overall objective of the study is to assess the contribution of non-farm activities in rural area, and then investigate the factors that may have influence on non-farm household income and give some recommendations to promote non-farm activities

Overall objective of the study are detailed m the following specific objectives:

* Objective 1: To identify the contribution of the non-farm activities on the household income in rural Vietnam

* Objective 2: To analyze the determinants of rural non-farm household income in Vietnam

* Objective 3: To gtve some recommendations to promote non-farm activities

1.3 Research questions

The thesis will focus on addressing four questions:

1 What are contributions of non-farm activities in rural Vietnam?

2 What are the major determinants of rural non-farm household income

in Vietnam?

3 What are recommendations to promote non - farm activities in rural Vietnam

non-+Regression analysis:

This study about determinants of non-farm household income can be carried out by two approaches: macro and micro approach The data about non - farm household income in rural of Vietnam at macro level is not enough Then, the micro approach is employed in this study The data from Vietnam Household Living Standard Survey (VHLSS) will be used in analysis To test the hypotheses, quantitative method applying ordinary least square (OLS) technique is employed

This study also employed the primary data and secondary data The primary data is mostly from VHLSS Secondary data come from other sources such as previous empirical studies, World Bank, General Statistical Office (GSO)

1.5 Research Structures

The content of this thesis is divided into five chapters:

I Introduction: This chapter provides the problem statement for the necessity

of analyzing the determinants of non-farm household income in rural Vietnam The research objectives, research questions and research methodology, research structures are presented in this chapter

II Literature review: This chapter presents some important concepts, various

theories about determinants of rural household income and empirical studies m order to understand the theoretical review and to form an empirical framework

III Methodology and Model Specification: The data and the methodology

are described in this chapter

IV Determinants of non-farm household income in rural Vietnam: This

chapter analyses the participation of rural household in non-farm activities from different aspects in order to have an overview of non-farm activities, identify the contribution of non-farm activities on household income in rural and analyses regression results of rural non-farm income

V Conclusions and Recommendations: Based on the data findings and

regression results, this chapter summarizes the main findings Then some recommendations are suggested in this chapter

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-Chapter 2: LITERATURE REVIEW

To conduct the analysis of the factors affecting non-farm household income

in rural area and finding solutions to improve the efficiency of this activity, we need

a platform of theory as a basis for research Chapter 2 will provide some important concepts that will be used in the theoretical review and empirical study After understanding the main concepts, various theories about determinants of non-farm household income are presented to draw a theoretical and conceptual framework for the empirical analysis in the following chapters Next, the review of empirical studies as well as the related model is presented to show the impact of factors on non-farm household income in reality

2.1 Concepts and definitions:

- Households: The Article 106, Civil Code of Vietnam 2005 stipulates that:

"Family households in which members have common property and jointly contribute their efforts and labor to their common economic activities in agricultural, forestry or fishery production or in a number of other production and/or business domains defined by law shall be subjects when participating in civil relations in such domains."

In addition, under Clause 1, Article 107, Civil Code 2005, "The head of a family household shall be the representative of the household in civil transactions for the common interests of the household The father, mother or another adult member may be the head of the household"

With these provisions, we can offer households defined as follow: households in which members have marital relationship, blood relation, common property and jointly contribute their efforts and labor to their common economic activities in agricultural, forestry or fishery production or in a number of other

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production and/or business domains defined by law shall be subjects when participating in civil relations in such domains

-Non-farm activities and farm activities:

Farm activity means agricultural activity Farm activities is directly related to the animal and the plant The non-farm activity is similar to nonagricultural activity The non-farm activities are related to construction, mining and quarrying, transport, manufacturing, handicrafts, repairs, trade, personal services etc

Classification of farm and non-farm activities in the rural areas as below:

Sector

Farm wage employment

Farm self-employment Non-farm wage employment

Own enterprise m manufacturing and/ or services

Table 2.1: Classification of farm and non-farm activities Source: Valeria Sanchez (2005)

According to Asian Productivity Organization (2004), the term "rural farm activity" is described: "There are two alternative approaches to define rural non-farm activities The first is the locative approach in which the primary criterion

non-is that an rural non-farm activity non-is performed in a location, which falls within a designated rural area The second definition is based on the linkage approach An industrial enterprise generates significant developmental linkages with rural residents."

- The rural non- farm enterprises: In the report on "Rural non-farm

enterprises, investment climate constrains, infrastructure accessibility and

household's employment" of Central Statistical Agency of Ethiopia and the World Bank, 2007, the term is defined : "An economic unit operating on its own account outside agriculture (this includes small-scale activities independent of the technological sophistication It can be full/part time formal/informal, and seasonal/episodic It may take place at home, a specific business location, or be performed by itinerant traders Processing farm products and then selling them is defined as non-farm)"

- The rural non-farm economy: "The rural non-farm economy may be defined as comprising all those non-agricultural activities which generate income to rural households (including income in-kind and remittances), either through wage work or in self- employment" (Junior R.David, 2003) Definitions of the rural non-farm economy are problematic The rural non-farm economy might include trade and processing of primary agriculture, forestry, fisheries and other goods and services The rural non-farm sector is defined: "a set of economic activities carried out in the rural areas that are not agricultural" (Sanchez, 2005)

- Income from rural non-farm activities is commonly defined as that derived from wage-employment activities and self-employment in the rural non-farm sector, and remittances However, this study will focus only on non-farm self-employment activities which are fully/partly owned or operated by households or household members in rural area

According to VHLSS, there are four mam sources of income of the household They include: income from employment, income from agricultural production activity, income from agricultural services and from non-farm self-employment activity In this thesis, the rural non-farm income of the household is calculated by earning from non-farm self-employment activity of household or household members in rural area

2.2 Role of rural non-farm sector

2.2.1 The Push- Pull factor

There are many studies proposed the models to explain the reason of why rural household can engage in non-farm activities A basic household model provide

a framework for analyzing household behavior (Hymer and Resnik, 1969; Bardhan and Udry, 1999; Singh, Squire and Strauss, 1986) It as a tool in development microeconomics to model the joint consumption and production decisions made by the rural household An other simple explanation about the reason of participation into non-farm activities of rural household is Push -Pull factor Rural household are motivated to undertake non-farm activities by either "pull" or "push" factors (Reardon, 1997; Islam, 1997)

The authors mentioned the "push" factors as follow: (1) population growth, (2) increasing scarcity of arable land and decreasing access to fertile land, (3) decreasing fertility and productivity of land, ( 4) decline of the natural resource basis, (5) declining return to farming, (6) increasing monetization of people's lives, (7) temporary events and shocks, (8) lack of access to farm input markets, (9) absence of rural financial markets The "pull" factors are mentioned: (1) higher return on labor in rural non-farm sector, (2) higher return on investments in rural non-farm sector, (3) lower risk of rural non-farm compared to farm activities, (4) generation of cash in order to meet family objectives, (5) investment opportunities

In summary, "Push" factors relate to pressure or restriction of agriculture sector that force farmers to seek income from other activities in order to improve their living conditions The "pull" factors create the attraction for farmers in order to join in non-farm activities

The non-farm activities can share the risks in agricultural activities and bring higher income for rural families Besides, the non-farm activities also creates a higher potential for diversification of income sources And the non-farm activities

also create higher productivity in agricultural production Through the impact of the

"pull" and "push" factors, we can see the importance of non-farm activities for rural households

2.2.2 The importance of rural non-farm sector

There are a large number of studies showed that the non- farm sector can absorb the surplus labor force in rural areas, narrow the gap of rural - urban, create more jobs and reduce inequality Junior R.Davis (2003) summarized the finding from more than 55 studies of rural economies and the rural non-farm economy and pressed that the rural non-farm sector providing between 40% and 60% of income and employment in rural areas Reardon et al ( 1998) have found that the non-farm activities in rural area play an important role in generating income and employment About 32% of rural incomes in Asia, 40% in Latin America and in Africa 42% came from non-farm income source and about 44% of rural labor in Asia and 25%

in Latin America join in non-farm sector, mainly from rural localities Along with the comparison between years and with many other studies, Reardon showed a positive growth of the share of non-farm income over time in sub-Saharan African, Bangladesh, China, Western Kenya, Malaysia, Mexico, Northern Nigeria, Philippines, Taiwan, Korea, India He also mentioned that small-scale non-farm activities offers the higher productivity in rural areas compared with large-scale enterprises because the cost per unit oflabor of non-farm is lower

The non-farm sector plays an important role in the rural economy In many developing countries, agriculture is not the only source of employment and income for rural households The non-farm activities accounts for a third or more of rural employment in many Asian countries (Rashidpour, 2011 ) The larger share of rural non-farm economy is services, followed by trade and business, construction activities, and transport operations The non-farm sector provides employment to different categories of skilled and unskilled labor force And this sector also

Dave, R 2012) According to Dave, the contribution in the creation of employment and the generation of income of this sector has been consistently increasing The decrease of the ratio of land per capital and an overall decline in the net cultivated land area are the reasons of this consistently increase

The rural non-farm sector is playing an important role not only in the rural but also in the national economy (Islam and Jin, 1994 ) The activities of non-farm sector can create the positive impact on economic growth, rural development and increasing potential sustainability of natural resources, food security and poverty alleviation (Pfluger, 2000)

In conclusion, the rural non-farm sector play a very importance role in providing gainful employment and sustainable income to the rural households Because of the increasing role of non-farm sector and the limited capability of the agricultural sector, the policy for the development of potential non-farm activities is very necessary

2.2.3 The experience in the development of the rural non-farm sector

In fact, the government of many countries recognized the role of non-farm sector They offered many programs and plans to promote the development of non-farm activities And they get the encouraging results The thesis will discuss about the experience of China and India in development of the rural non-farm sector in order to confirm the important role of this sector

a China

As we know, following the reform decision in late 1978, China's economy developed rapidly From 1980 to early 1996, the economic growth of China was always around 10% (with the year up to 15%) China has made breakthroughs in economic development in rural areas In this period, the development of the Township and Village Enterprises is most prominent

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China is a big country of agriculture The rural population in China accounted for nearly 80% percent in 1980s There was the heavy population pressure on the land And the agricultural labor productivity continued to stay at a very low level Because of stagnant and low rural incomes, the farmers were strongly encouraged to abandon working the land However, the government controlled the rural-urban migration with several direct or indirect measures In the early 1980s, the government's policy towards rural non-farm development changed This policy is apart of new rural development strategy The new policy was described by the slogan "leave the land but not the countryside, enter the factory but not the city" (Ho,l995) This slogan means non-farm participants work outside their land plots but do not move out of their places of origin This policy allowed to absorb local surplus labor force through the development of local non-farm sectors

The rural non-farm sectors consist essentially of the Township and Village Enterprises The Township and Village Enterprises include all the medium and small or very small enterprises in rural areas They basically constitute the rural non-farm sector in China Although operating in rural areas, but most Township and Village Enterprises operating in the industrial sector, and also in agriculture, commerce, transportation and construction Most of the Township and Village Enterprises are labor-intensive, absorbing large segments of surplus labor

Between 1981 and 1990, the total industrial output of Township and Village Enterprises grew at an average annual rate of28.1%, The GDP share ofTownship and Village Enterprises increased from 14.3% in 1980 to 37.5% in 1995 (Chenggang Xu and Xiaobo Zhang, 2010) These enterprises contributed significantly to rural economy and infrastructure development in China

The rural non-farm sector is playing an important role both in the rural and the national economy The development of the rural non-farm economy deeply transformed the structure of rural household incomes in China Non-farm activities

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gradually became an importance source of income for rural households, and served

as an engine of growth for rural areas

b India

Majority of population in India lives in rural areas and mostly depends on agriculture In the period 1951-1991, the share ofthe rural population in the national total has declined However, the rural population has more than doubled The pressure of population and employment has forced the government to make the suitable policies towards sustainable development of rural economy

The new economic policy of the government after 1991 has greater focus on market-oriented approach This created the positive impact on the growth of rural non-farm sector With the new policy, the rural economy is diversified into non-farm activities to provide employment to rural labor force Moreover, the rural people will be able to get employment in urban areas Rural non-farm economy is assumed an effective tool for eradication of poverty in rural India This is also help prevent rural-to-urban migration

According to Asian Productivity Organization (2004): "The rural non-farm sector is classified into three major sub-sectors In the first sub-sector, the enterprises are run on more or less stable basis with target on the surplus generation and growth, employing labor with certain degree of technical sophistication The second sub-sector consists of products or activities, which are often seasonal, run solely with the help of unpaid family labor, using primitive technology and catering mostly to the local market The third sub-sector consists of paid workers characterized by low earnings and disintegrated market with respect to labor supply." The above classifications show that non-farm sector play an important role

in providing employment opportunity to different categories of skilled and unskilled labor force

Government of India has launched many policies, plans and programs to promote non-farm production activities The various schemes oflndia's government for development of non-farm sector are highlighted below:

The main objective of this scheme is to create the additional wage-employment opportunities during the period of acute shortage of wage-employment through manual work The secondary objective is to create the durable community assets for sustained employment and development

The program of this scheme was launched in 1993-94 in five selected districts The objective is to generate the sustainable rural employment opportunities by providing adequate credit support for rural industrialization together with promotional measures This scheme focus on providing training and skill development of the upcommg entrepreneurs The

4 Rural Entrepreneurship contents of the training and skill development program Development Program are project management, accounting practices,

marketing information, technical guidance, motivation, and institutional support mechanism

Source: Asian Productivity Organization (2004)

Table 2.2: The schemes for development of non-farm sector in India

The schemes provided comprehensive support for the development of farm activities The program focuses on building infrastructure, credit support, skills training, ect The result of the development of non-farm sector in India is

non-remarkable According to the report of APO (2004 ), the number of workers in rural non-farm sector grew at an annual rate of 2.8% during the period 1981-1991 The share of the rural workforce of rural non-farm sector has been accounted for a steadily rising (from 15% in 1978 to 22% in 1987- 1988 and 23% in 1993-1994) And the rate of employment growth in this sector was 5% between 1987-1988 and 1993-1994 The manufacturing accounted for highest share of rural non-farm employment(31 %) in 1993-1994 Next, services 27%; trade 20%; and construction 12%

In India, rural non-farm sector is an effective tool helping to keep the poor from falling into deeper poverty, helping to lift the poor above the poverty line This sector generates activities with a high employment potential for rural workers and becomes the important sectors to focus on in order to aileviate poverty

2.3 Theoretical basic of the determinants of non-farm household income

2.3.1 Theoretical framework

From the late 1980s to present, the poverty or non-farm empirical literatures have been given by many researchers following many different ways Reardon (1997), Readom et al (1998) and Lanjouw and Lanjouw (2001) offered the literature about the trends and analysis of the determinants of non-farm employments Reardon et al (1994) and De Janvy et al (2005) offered the literature that has put on agriculture as a determinant of non-farm employments and has examined the effects of non-farm income on farm The literature focuses on the effects of non-farm income on poverty is presented by Lanjouw (2001), Lajouw and Murgai ( 2009)

Oostendorp, R H et al (2008) studied the change of role of the non-farm household enterprises (NFHEs) in Vietnam by using the VLSS 1993, VLSS1998 and VHLSS 2002 household survey data They found that NFHEs increase income

and reduce between-household inequality They proposed general framework for estimating the contribution ofNFHEs to household income:

Y;=W; + F; + NF; + R; (1)

In model (1): Yi is total household income of household i, Wi is denoted income from wage employment, Fi is income from farm, NFi is income from NFHE, Ri is income transfers

To consider the impact of non-farm income to the household income, they assumed that the income components Wi, Fi, and Ri are not only a function of household and farm characteristics capturing human capital (Hi), local employment conditions (Ei), local infrastructure (li), the migration status of relatives of the household affecting income (Mi), other regional determinants of income activities (Ri), and a number of unobservable factors that vary across households (ui), but also

of the level of NFHE income (NFi) to capture any non-separability of income sources

W; = F w (H;, E;, 1;, M;, L;, U; w, NF J F; = F F (H;, E;, 1;, M;, L;, ur, NF J R; = FR (H;, E;, 1;, M;, L;, u/, NFJ

According to the model of Oostendorp, R H et al, the factors such as age, education, gender, household size, land size, local employment conditions, local infrastructure, the migration status of relatives of the household have significant to income household And through many studies show that they are also the factors affecting non-farm income of rural area

Excluding the impact of non-farm activities to household income, the factors effect the household income include five factors as figure bellow:

The household and

The local infrastructure

The local employment

conditions

The migration status

Income from wage employment

Income from farm

Income from self- employment

Figure 2.1: The framework of determinants of household income

Income transfers

There are four main sources of household income that include: income from wage employment, income from farm, from self-employment and from transfers Non-farm income as income from non-farm self-employment includes wages and profits from business activities Existing studies also show that household wealth and composition, education level, infrastructure and regional differences are important determinants of non-farm business income

a Household Wealth and Composition

The wealth of a household is an important determinant of the level and nature of the participation of households in non-farm sector Because of the underdeveloped of credit markets to fmance non-agricultural businesses, cash flow ownership is very important to start non-farm businesses and to pay the transaction costs of obtaining non-farm employment Many studies show that households with larger land holdings to diversify often better paid non-farm sector in rural areas

Household composition also affects the kinds of jobs and businesses in farm sector Important variables include health status, family size, age, dependency

non-ratio and gender Gender also affects the non-farm businesses Gender is an important factor influencing participation patterns and trends in the rural non-farm economy (Davis, 2003 ) Women are more likely to engage in small commercial enterprises, service, and textiles and clothing, while men focus more on production, construction, and transportation The role of gender in enabling or restricting access

to economic activity also have difference between countries (Davis, 2003)

b Education

Education is a determinant of business success in non-farm wage and productivity that has been widely recognized Many studies showed that primary education and secondary education contribute to the growth of non-agricultural sector in rural areas It is associated with higher productivity in business, construction, service and manufacturing operations Literacy enhances the productivity of the workforce and make it easier with the skills provided through training on the job The high school education stimulates business capacity The success of rural non-farm business is often reported that have the correlation with education (Davis, 2003) "In developing countries, an entrepreneur with an elementary education can expect to earn an income 41 percent higher than one with

no education at all" ( Islam, 1997)

c Infrastructure

Infrastructure is also important for the development of enterprises of farm households Rural roads can allow motor vehicle to access reliable and regular This serve both the farm and non-farm economy Electrification is also important for manufacturing activities of some scale in rural Abundant supplies of water can allow some rural non-farm activities to take place "The expansion of roads, transportation, and communication leads to specialization and division of labor of the household" (Islam, 1997) When the road, transportation and communication are expanded, the development of commercial, marketing, and distribution network,

non-including subcontracting and associated farm and non-farm sector in local will be improved Improved infrastructure means lower transaction costs for market products (both agricultural and non agricultural) and availability of inputs (electricity, tractors, ) with more lower cost Therefore, the quality and quantity of infrastructure is often identified as important determinants of investment in non-agricultural business

d Regions

Region also affects the farmers to diversify their income on non-farm activities Households in an farm area with high risk will be pushed to diversify into non-farm In contrast, households in areas where farm may be less risk involved in non-farm enterprises mainly for higher profits to reduce the limited cash and credit Agricultural/farm sector tends to grow in popularity in areas where agro climatic zones are favorable

The thesis will research the determinants of non-farm household income in relation to the socio-economic factors Then, the five factors in the model of Oostendorp will be used in analyzing the factors effecting the non-farm income in this thesis

2.3.2 Empirical Studies

2.3.2.1 The Household Enterprises in Vietnam

Based on panel data from surveys of households living in Vietnam in 1993 and 1998, Vijverberg and Haughton (2002) found some evidence that operating a business lead to greater prosperity The results of their research showed that business-farm households can be operated by urban households, those with moderately good education

The authors have found that businesses in the <5outh of the country are less likely to survive, as well as smaller and younger businesses Some models are built and the results showed that in areas with poverty, lack of education, credit, and effective demand limited the development of non-farm enterprises The rich areas had the attraction with wage labor

The authors suggest that business-farm households is especially important role in the transition period, and when agriculture is declining it's importance The authors expect these enterprises continue to play a supporting role in promoting economic growth in Vietnam

2.3.2.2 The model for determinants of non-farm income in Nigeria

In the study: "Determinant of Non farm income among farm households in South East Nigeria" (Ibekwe et al, 201 0), the authors offered the model to determine the extent of relationship between socio-economic factors and the level of non-farm income The regression function is of the form:

Y = f (Xl, X2, X3,X4,X5,X6,X7, e)

Y =Non-farm income

Xl =Age of household head

X2 = Education of Household head

X3 =Farm Size

X4 =Occupation

X5 = Household size

X6 =Farm Investment

X7 = Value of farm output

e = Stochastic error term

The most important result of this model for non-agricultural income is found

to be coefficient of education variable This coefficient is positive and significant at the level of significance (0.05) This suggests a fairly strong relationship of

education to non-agricultural income The results also showed that households with higher education are more likely to seek off-farm employment in rural areas

The author has reviewed the participation of households in non-agricultural activities by reference to the personal characteristics, household characteristics such

as specific occupations, education, land size of holding families as well as agricultural production research results show that household size of land holding, number of years of education of labor, per hectare of agricultural output value, occupation and age of household head are important factors for non-income farm household level This suggests that economic factors and social importance of non-agricultural policies of Southeast Nigeria

2.3.2.3 The mode/for determinants of income of rural non-farm business

The model of Trung Tran Quoc (2002) for determinants of income of rural non-farm business activity:

Yi=F(Xi, Ei, Hi, Bi, li, Ri, u) (1)

Where Yi is income from the rural non-farm business activity i, Xi 1s a vector of family-owned inputs, Ei is a set of the characteristics of the entrepreneur,

Hi is a set of the characteristics of the household; Bi is characteristics of the business activity; Ii is a vector of infrastructure variables, and Ri indicates seven regions of Vietnam Let u is a random disturbance, capturing unmeasured determinants of and stochastic influences on rural non-farm business income

The result showed that the returns to physical capital and labor are quite high and exhibit the diminishing returns to scale In addition, education is relatively high impact to non-farm income Other findings are non-agricultural significantly related

to age and gender of an entrepreneur This implies that there is gender discrimination in the business activities of non-agricultural rural

Model results also showed that households with larger size have higher incomes Credit rates also affect household income, especially the poor have the ability to combine with higher borrowing rates So credit policy in rural areas is needed to improve farm income for rural households

2.3.2.4 The mode/for self-employment activities

Production function has been used as an important tool of economic analysis

in the neoclassical tradition The form of production function is most useful and popular is Cobb-Douglas It was proposed by Knut Wicksell (1851 - 1926), and tested against statistical evidence by Charles Cobb and Paul Douglas during 1900-

1947

Kurosaki (200 1) examined the self- employment activities by estimating the production function of value added (gross production value minus cost of intermediate input) of self-employment activities, by applying a simple Cobb-Douglas production function

Where qhj is the value-added from self-employment activities j for household h, Lhj is labor input by household h into activity j; Hhj is land input (farm) or capital input (non-farm); Xhj is a vector of household h's characteristics such as education, age, and other characteristics of household head

This study examined the specific impact of household's education on the marginal returns of labor and on productivity of selt:.employment activities The consequence of the equation showed that the marginal return of education corresponds to a simultaneous increase in education of all household members

The results of this research show that: Only male middle and upper education level have significant positive effects on non-farm wage and only production factors

(such as labor, capital) and high education have an effect on non-farm enterprise productivity

2.3.2.5 The model for determinants of rural household income

Aikaeli (20 1 0) estimated the determinants of rural household income:

Y = f (Xl, X2, X3,X4,X5,X6, e)

Y = household per capital income

Xl =level of education of the household head

X2 = household labor force

X3 = acreage of land used by the household

X4 =dependency ratio

X5 =households owning rural non-farm economic activities

X6 = gender of household head

e = the error term

This study showed that education has appositive impact on per capital income The investment in education will improve the income of household The household with larger the size of labor force and land will have higher per capita household income The household headed by men also found to have higher per capita income than those headed by women

2.4 Chapter remark

Many studies asserted that the non-farm activities play an important role in both the rural economy and the national economy The activities of non-farm sector can create the positive impact on economic growth, rural development and increasing potential sustainability of natural resources, food security and poverty alleviation (Pfluger, 2000) Specially, the non-farm activities play a very importance role in providing gainful employment and sustainable income to the rural households The experience of some countries in the development of non-farm

activities also supported the role of this sector That is the reason why determinants

of rural non-farm household income is investigate by this thesis

To provide the framework to determine the factors that impact to the farm household income, the theoretical framework and empirical studies are presented The factors such as age, education, gender, household size, dependency ratio, land size, local infrastructure, the migration status, region are the factors that have the impact to the household income The main purpose of this thesis is to find out the main determinants of non-farm household income in rural Vietnam

non-;

Chapter 3: METHODOLOGY AND MODEL SPECIFICATION

This chapter includes two main sections: model specification and data collection The specification model about determinants of rural non-farm household income is proposed base on the theoretical review and empirical studies in previous chapters Besides, this chapter will define the variables of model and steps to deal with data collection

3.1 Model Specification

Base on theoretical framework, the thesis chooses the factors that impact to the non-farm income of rural household The income from non-farm activities of rural households is affected by the factors belong to the household characteristics and community characteristics The model specification includes five factors that are presented in chapter 2 and two new factors

2 The local infrastructure

3 The local employment conditions

4 The miaration status

5 The region

6 Traditional handicraft village

RURAL NON-FARM HOUSEHOLD INCOME

Figure 3.1: The framework of determinants of rural non-farm household income

The integrated model can be expressed as follows:

In the linear model, Yi is the dependent variable is the income from non-farm activities of the household i Hi is the group of elements belonging to the demographic characteristics of households Ei represent local employment conditions Ii denotes the group of factors related to local infrastructure Mi represents the migration status Ri represents the different regions of the country Ti represents the presence of elements of traditional handicraft villages in the commune Oi denotes the occupation ofhousehold head And finally, Ui is stochastic error term

The dependent variable log(non-farm income) is generated because the distribution of log (non-farm income) is look-alike normal distribution So, the distribution of residual will also look like normal distribution The general justification is:

Log(non-farm income) = f (Household characteristics, The local infrastructure, The migration status, Occupation of household head, The local employment conditions, Traditional handicraft village, Region )

3.2 Data definition

The variables in the empirical model will be defined as below:

Non-farm income of household is calculated by earning from non-farm self-employment activity of household in rural area Log (non-farm income) is Log

of value ofyearly non-farm income (1000 VND)

Household characteristics (Hi) include variables: age, number of years in school, gender of household head, land size, the proportion of dependents and household composition Age of the household head are counted in years In quantitative analysis, only persons whose aged 16 and over are used in the analysis According to previous studies, the age of the household head affect to non-farm income of households but the effect will change with age According to data

analysis in Chapter 3, at the class of age 16 - 45, ifthe age increases, the labor will tend to join in non-farm activities Because the elements of experience in working and health of labors shall be promoted However, the participation begins to fall after age 55 In other words, the relationship between age and income of farm households may be a quadratic relationship So, when we estimate, the age variable was divided into two variables: Agehead and Agehead 2

Years schooling variable is calculated by years of schooling of the household head This variable represents the educational level of the head of household According to several studies and in practice, education of the head of household usually is highly crucial in the production and operation activities of the family In the case, if the household head had intermediate, college, university, masters or PhD degree, years of schooling would be calculated the total number of school years + total time over higher education Thus, the school year data ranged from 0 (illiterate) to 21 According to data for analysis, data are limited in rural areas so that the school year ranged from 0 to 16 years

Genderhead is a dummy variable received variable value of 1 if the household head is male and 0 if the household head is female Gender is taken into the equation to determine that there is gender difference in creating non-farm income or not Data analysis in Chapter 3 showed that there are not different in gender of household head for the participation in non-farm activities of households

Hhsize variable is the total number of household members, coupled with

Dependency ratio variable - total number of household members divided by the total number of members who are working of household Two variables are included to consider the demographic characteristics of households that impact the non-farm income of the household As in the theoretical analysis, demographic characteristics of households play an important role in the decision to participate in non-farm activities First, with large household size, the ability to specialize each

Similarly, the high dependents rate will create pressure on incomes, and would make the labors to seek employment in non-farm activities And these households are more likely to engage in non-farm activities than other households (may be due

to agricultural work can be used the labor with outside working age)

Household composition represents the proportion of household members in different age groups: 16-25, 26-35, 36-45, 46-55, 56-65 and over 65 as well as the proportion of numbers of women in households aged 16 and over These variables are included to consider in more detail about household characteristics It

is possible that non-farm income of household affected by the age of members in the household rather than the age of household head

Landsize is the scale of agricultural land of household The hypothesis will

be tested: the wider the extent of land use by household, the higher the non-farm household income There are two possibilities can occur: first, with large scale land households are more likely to make large capital for non-farm activities through accumulation from agricultural production or credit relationship with banks and therefore a positive impact to non-agricultural income Second, with large-scale agriculture land, households prefer to focus on agricultural production due to the economic benefits of scale in agricultural production can make agricultural production more profitable or more easy restructuring plants That means the landsize variable can have positive or negative sign

Traditional handicraft village (Ti) variable ts dummy variable This variable shows that there is the presence of traditional handicraft village in the commune or not There are many analysis appreciated the role of the handicraft village in helping families to restructure labor but also many ideas did not appreciate the role of the handicraft village Because of the characteristics of trade secrets, market, ect, the scalability of handicraft villages is limited Therefore the promotion of labor participation of non-farm activities should be based heavily on

Migration (Mi) variable represents migration status of relatives of the household These members are doing away from home will be considered The inclusion of this variable into the model to examine the impact of migration in rural areas to non-farm income of the household There is the assumption that households having members who work far from home will reduce the non-farm income of households due to loss of labor However, the people working away from home can send money that they earned to their household And their household can accumulate for participation, maintain and develop non-farm self employment activities of household This variable is a dummy variable, receiving a value of 1 if household received remittances of the members working away from home, whereas the value is 0

Electricity, Road index1 Factory (Ii) present the condition of infrastructure

in rural areas The inclusion of these variables into the model to assess the impact of improved rural infrastructure to non-farm income of the household Electricity variable is dummy variable has the value is 1 if the commune with electricity and the value is 0 otherwise The road index is calculated by the information on the survey of commune Factory variable is a variable showing the presence of factory

in the commune This variable receives the value of 1 if the commune has a factory and 0 otherwise The appearance of the factory may have two effect: increasing the number of wage labor and increasing numbers of non-farm self employment labor (through the provision of services for these factories)

1

According to the methodology developed by Vijverberg and Houghton (2002), a rural infrastructure road index as follows:

indict-t Km to nearest road]~ Months with impassable roaj

This measures the availability of a viable road system Distances greater than 10 are truncated at 10 The

Household income is also affected by local economic environment The economic environment is the totality of economic factors (such as employment, income, inflation, interest rates, productivity ) that influence the buying behavior

of consumers and institutions So, Market lndex 2 (Ei) represents the economic environment of the local This variable is calculated from the information relating to the daily market and period market in the commune The high index shows the local market will have more favorable conditions in the exchange, trading goods and services, creating more employment opportunities for local labors This will stimulate the activities of non-farm production to meet demand for goods and services The production of non-farm activities will have more advantages when households want to sell their products

In summary, Market Index has a positive impact to non-farm income of the

household

The Occupation of household bead (Oi) is considered in model The

variables receive the value 1 if the household has a occupation and 0 otherwise There are 10 occupations in the VHLSS 2008 The inclusion of these variables into the model to consider occupation of the headed household that how to affect the non-farm income of the household There is the assumption that occupations of household head have an important influence to the decision to participate in non-farm households

t Distance to nearest daily markej

Daily Market Index=

-72

t Distance to nearest period markej

50

Factor Ri includes the variables represent the different regions There are

seven variables present for seven regions to control geographic factor affecting farm income of the household in rural And they are dummy variables

non-3.3 Data collection

This thesis uses the data from Vietnam Household Living Standard Survey

2008 The survey is completed by the General Statistical Office ofVietnam with the assistance of the UNDP and World Bank The survey was conducted nation-wide and included a sample scale of 45,945 households in 3,063 communes, 8 regions, urban and rural area and provinces In that, there are 36,756 households for income survey, 9,189 households for income and consumption survey Survey was implemented with 9,189 households in 64 provinces (6,837 household living in rural and 2352 urban households) The survey for commune included 2219 communes

This study focus on the households who have positive non-farm employment income in rural area Then, the volume of rural households which have self-employment income is collected Moreover, this thesis considers the impact of infrastructure on non-farm household income So, 2219 communes will be used Combine the volume of communes survey and the rural households which have self-employment income, we have 2117 households without missing value and negative income The self-employment income is transform into logarithmic form in order to remove possible volatility

self-3.4 Data Analysis

The independent variables without perfectly multicollinear is an important assumption for the multiple regression model If the multicollinearity occurs, standard errors may be inflated Stata will drop one of the variables to avoid a division by zero Inflation factor method (VIF) is used to test the multicollinear

phenomenon If mean VIF is greater than 10 or 1MF < 0.1, it will indicate trouble This phenomenon will be checked by Stata command "vif'

If the vanance of the error terms differ across observations, heteroskedasticity will occurs Heteroskedasticity arises often with cross-section data If the standard errors of the estimates are biased, we cannot use the usual t statistics or F statistics or LM statistics for drawing inferences The command

"hettest" is used to check the heteroskedasticity If heteroskedasticity occurs, the robust option to remove heteroskedasticity In order to proposed the most suitable model for the analysis, five models will be run to compare And the final model will

be chosen by the Adjusted R2•

3.5 Chapter remark

The empirical model about the determinants of rural non-farm household income is presented in this chapter Vietnam Household Living Standard Survey 2006-2008 is the data base for estimation From the survey, 2,012 observations (households with positive non-farm income in rural) is suitable for model With the cross-section data, the integrated model is very week in capturing the effect of variables on non-farm household income in rural

The meanings of all variables are specified The variable log(non-farm income) is created to make residual also look like normal distribution The Adjust

R2 will be used to choose the suitable model for determinants of non-farm household income in rural Vietnam Phenomenon of multicollinear and heteroskedasticity will be checked and removed by the technique of Stata software The results of determinants of non-farm household income in descriptive and in regression model will be discussed in next chapter