LV Thạc sỹ_Sectoral compositions of growth and proverty reduction in Vietnam

It is found that anincrease in the proportion of the agricultural sector will lead to higher poverty rateand the overall growth rate has a positive impact on poverty reduction in Vietnam

National Economics University – Institute of Social Studies Vietnam –Netherlands Master Program in Development Economics

SECTORAL COMPOSITIONS OF GROWTH AND POVERTY REDUCTION IN VIETNAM

This thesis examines the impact of sectoral economic growth on povertyreduction in Vietnam during the period from 1998 to 2008 It is found that anincrease in the proportion of the agricultural sector will lead to higher poverty rateand the overall growth rate has a positive impact on poverty reduction in Vietnamduring the review period These results support our hypothesis that the sectoralstructure of economic growth affects poverty independently of the growth of theeconomy Moreover, these results also demonstrate that the process of restructuringthe sectoral economy tending to reduce the proportion of agriculture and increasethe share of industry will have positive impact on poverty reduction in the future

I sincerely thank the instructor for my thesis, Assoc Prof Dr …, for hisenthusiasm, the careful, detailed and helpful instructions as well as encouragementfor me to complete this thesis

I would also like to thank Dr.The and members of the General StatisticsOffice Vietnam for the help of data

Finally, I would like to thank all members and lecturers of Netherlands Center for Development Economics and Public Policy for theirsupports during the study and thesis process

Vietnam-TABLE OF CONTENTS

ABSTRACT 1

CHAPTER 1 7

INTRODUCTION 7

1.1 R ESEARCH BACKGROUND

7 1.2 R ESEARCH OBJECTIVES

8 1.3 T HESIS STRUCTURE

9 CHAPTER 2 10

LITERATURE REVIEW 10

2.1 T HEORETICAL REVIEW

10 2.2 E MPIRICAL REVIEW

12 CHAPTER 3 22

OVERVIEW OF COMPOSITION OF ECONOMIC GROWTH 22

AND POVERTY REDUCTION IN VIETNAM 22

3.1 S ECTORAL COMPOSITIONS OF ECONOMIC GROWTH IN V IETNAM

22 3.2 P OVERTY REDUCTION IN V IETNAM

26 3.3 T HE RELATIONSHIP BETWEEN SECTORAL COMPOSITION OF GROWTH AND POVERTY REDUCTION

34 3.3.1 Agricultural growth and poverty reduction 34

3.3.2 Industrial growth and poverty reduction 36

3.3.3 Service growth and poverty reduction 37

EMPIRICAL ANALYSIS 39

4.1 E MPIRICAL MODEL

39 4.2 E MPIRICAL RESULTS AND DISCUSSIONS

43 4.2.1 The relationship between sectoral compositions of growth and poverty reduction 43

4.2.2 The role of sectoral compositions of growth on poverty reduction in high- proportional industry provinces 51

CHAPTER 5 56

CONCLUSIONS AND POLICY RECOMMENDATIONS 56

5.2 P OLICY RECOMMENDATIONS

58 5.2.1 Improving productivity and efficiency in the agricultural sector 58

5.2.2 Enhancing the economic transition process by increasing the proportion of industrial sector 60

REFERENCES 62

APPENDIX 65

LIST OF FIGURES AND TABLES ABSTRACT 2

ABSTRACT 1 4

CHAPTER 1 7

INTRODUCTION 7

1.1 R ESEARCH BACKGROUND

7 1.2 R ESEARCH OBJECTIVES

8 1.3 T HESIS STRUCTURE

9

CHAPTER 2 10

LITERATURE REVIEW 10

2.1 T HEORETICAL REVIEW

10 2.2 E MPIRICAL REVIEW

12 CHAPTER 3 22

OVERVIEW OF COMPOSITION OF ECONOMIC GROWTH 22

AND POVERTY REDUCTION IN VIETNAM 22

3.1 S ECTORAL COMPOSITIONS OF ECONOMIC GROWTH IN V IETNAM

22 3.2 P OVERTY REDUCTION IN V IETNAM

26 3.3 T HE RELATIONSHIP BETWEEN SECTORAL COMPOSITION OF GROWTH AND POVERTY REDUCTION

34 3.3.1 Agricultural growth and poverty reduction 34

3.3.2 Industrial growth and poverty reduction 36

3.3.3 Service growth and poverty reduction 37

EMPIRICAL ANALYSIS 39

4.1 E MPIRICAL MODEL

39 4.2 E MPIRICAL RESULTS AND DISCUSSIONS

43 4.2.1 The relationship between sectoral compositions of growth and poverty reduction 43

4.2.2 The role of sectoral compositions of growth on poverty reduction in high- proportional industry provinces 51

CHAPTER 5 56

CONCLUSIONS AND POLICY RECOMMENDATIONS 56

5.2 P OLICY RECOMMENDATIONS

58 5.2.1 Improving productivity and efficiency in the agricultural sector 58

5.2.2 Enhancing the economic transition process by increasing the proportion of industrial sector 60

REFERENCES 62

APPENDIX 65

ABSTRACT 2

ABSTRACT 1 4

CHAPTER 1 7

INTRODUCTION 7

1.1 R ESEARCH BACKGROUND

7 1.2 R ESEARCH OBJECTIVES

8 1.3 T HESIS STRUCTURE

9 CHAPTER 2 10

LITERATURE REVIEW 10

2.1 T HEORETICAL REVIEW

10 2.2 E MPIRICAL REVIEW

12 CHAPTER 3 22

OVERVIEW OF COMPOSITION OF ECONOMIC GROWTH 22

AND POVERTY REDUCTION IN VIETNAM 22

3.1 S ECTORAL COMPOSITIONS OF ECONOMIC GROWTH IN V IETNAM

22 3.2 P OVERTY REDUCTION IN V IETNAM

26 3.3 T HE RELATIONSHIP BETWEEN SECTORAL COMPOSITION OF GROWTH AND POVERTY REDUCTION

34 3.3.1 Agricultural growth and poverty reduction 34

3.3.2 Industrial growth and poverty reduction 36

3.3.3 Service growth and poverty reduction 37

EMPIRICAL ANALYSIS 39

4.1 E MPIRICAL MODEL

39 4.2 E MPIRICAL RESULTS AND DISCUSSIONS

43 4.2.1 The relationship between sectoral compositions of growth and poverty reduction 43

4.2.2 The role of sectoral compositions of growth on poverty reduction in high- proportional industry provinces 51

CHAPTER 5 56

CONCLUSIONS AND POLICY RECOMMENDATIONS 56

5.2 P OLICY RECOMMENDATIONS

58 5.2.1 Improving productivity and efficiency in the agricultural sector 58

5.2.2 Enhancing the economic transition process by increasing the proportion of industrial sector 60

REFERENCES 62

APPENDIX 65

CHAPTER 1 INTRODUCTION

1.1 Research background

One of Millennium Development Goals to 2015 proposed by UNDP is thatpoverty reduction has been the most prominent target for all countries over theworld, especially for developing countries It was clearly found that the relationshipbetween poverty reduction and economic growth was virtually admitted since earlyresearches Lewis (1954) and Kuznets (1955) with U-shape curve indicated throughgraphs that with the high growth rate of the economy, increasing inequality must beaccepted In contrast, in recent years, many evidences to the contrary for thisrelationship have been provided Chen, Datt and Ravallion (1993) found that withthe cumulative distribution of consumption changing only negligibly, the numbers

of the poor had been growing as the same rate as the population of the developingworld Lopez revealed through his paper (2004) “It is difficult to argue that povertyreduction can be achieved through income redistribution policies in the absence ofeconomic growth” This exposed a positive relation from economic growth topoverty reduction

However, it is uneasy to give a conclusion that the sectoral composition ofgrowth affects poverty reduction through economic development The answer to thisproblem was found differently from one country to another country Montalvo andRavallion (2009) discovered the fact that China had great success in reducingpoverty through economic growth and the primary sector for poverty reduction wasagriculture rather than manufacturing or service sectors Another study bySuryahadi, Suryadarma and Sumarto (2009) investigating how poverty was reduced

by differentiating growth in Indonesia indicated that the growth of services sectorhad the most powerful effect on the improvement of poverty situation in both ruraland urban areas, followed by growth in rural agriculture Additionally, onenoticeable conclusion was that industrial growth had a relatively small impact onpoverty reduction in Indonesia These outcomes from investigating in Indonesiawere mimic the results inquired from India Meanwhile, doing the research on Taiwan

the largest effect on reducing poverty From different findings discovered in variouscountries, many incomprehensible questions to point out which pattern of the economicgrowth has the biggest impact on poverty reduction, has arisen in developing countries.

Vietnam, one of the developing countries in the world, has experienced ahigh economic growth with a huge reduction in the incidence of extreme povertysince the economic renovation started in the mid1980s Reforms began primarily inthe agriculture sector which accounted for nearly 40% of GDP and 70% of totalemployment Further, the reform included the stabilization of inflation andliberalization of foreign trade and investment As the result of the process, theaverage annual rate of economic growth from 1986 to 2009 was about 7% Thishigh rate of economic growth led to a sharp reduction in poverty The poverty ratehas been decreased from 58.1% in 1993 to 14.5% in 2008 Such a sharp drop inpoverty is one of the greatest success stories in Vietnam’s economic development Itappears that economic growth has been the key determinant of poverty reduction inVietnam This result was proved by the research on the linkages between growth,poverty and inequality in Vietnam from 1996 to 2004 by Hoi Le (2008) The mostrobust result had been found in this research was the negative association betweenpoverty rate and subsequence GDP growth rate Nevertheless, the growth processhas been highly uneven across sectors and regions It is also evident that there is asizeable variance in the impacts of a given rate of growth on poverty It is moreimportant to go beyond cross-country average index to find out what is the robustelement of growth-poverty relationship A question raised is that whether the pattern

of Vietnam’s growth matters to poverty reduction Debate on how Vietnam dealswith this question will affect the willingness of policy makers to pursue more rapideconomic and poverty elimination in the future This thesis attempts to answer thisquestion

1.2 Research objectives

The primary objectives of this thesis are presented as three following points.Firstly, I analyze and identify the situation and drivers of economic growth andpoverty reduction in Vietnam Second, I conduct an empirical study on the impacts

of sectoral composition of growth on poverty reduction in Vietnam These resultswill be very helpful and reliable for us to study deeply the growth structure and its

effects on poverty Third, having relied on empirical outcomes, challenges ofVietnam poverty alleviation will be introduced and policies recommendations will

be raised

My thesis is attempted to find the answer to the central question “Does thesectoral composition of growth affect the poverty reduction independently of theaggregate rate of growth?” The sub-research questions are “Which is the sectorhaving the most impact on poverty reduction?” and “What do other factors affectpoverty reduction?”

According to the questions above, the hypothesis of the research is asfollows: “Sectoral compositions of growth have effects on poverty reductionindependently of the aggregate rate of growth.”

1.3 Thesis structure

The thesis includes four chapters The first chapter provides an introduction

on the importance of studying the impact of the sectoral structure of growth topoverty reduction in Vietnam Chapter 2 focuses on the review of previous researchabout the structure of growth and poverty reduction In this chapter, empiricalstudies on both developed and developing countries will be reviewed to show thatthere are different results between nations This chapter also clarifies the theoreticalrelationship between composition growth and poverty reduction This theoreticalmodel will be severed as the theoretical background for the empirical study inChapter 4 Chapter 3 provides an overview of economic growth in Vietnam in theperiod 1998 to 2008 in three sectors: agriculture, service and industry In addition,this chapter analyzes the specific situation of poverty as well as Vietnam'sachievements in the implementation of poverty reduction policies Chapter 4provides an empirical analysis on the influence of growth structure on povertyreduction in Vietnam Based on data from Vietnam General Statistics Office (GSO)the impact of the share of agriculture, industry and services on poverty reduction inVietnam during the period 1998-2008 will be clarified The last chapter offersgeneral conclusions and provides some policy recommendations to acceleratepoverty reduction in Vietnam in the future

CHAPTER 2 LITERATURE REVIEW

The relationship between economic growth and poverty reduction is virtuallyaccepted, however, whether which composition of economic growth has the closestrelationship to poverty alleviation seems to generate more controversy Ondiscussion of these matters, there were many different points of view and thischapter reviews theoretical and empirical studies to give the answer to this issue

2.1 Theoretical review

The correlation between the distribution of income and economic growthwas early proved by many theoretical studies Lewis (1954) was the first whoproposed dual-sector model based on assumption that developing countries had dualeconomies with traditional agriculture sector and modern industry sector In hismodel, the agricultural sector was labor-intensive and characterized by low wagesand low productivity As the manufacturing sector was determined by higher wagethan the agricultural sector, there is a demand for more workers initially and highermarginal productivity He confirmed that because all the wealthy of the economywere produced by industry sector agriculture should not be invested due to its lowproductivity

Lewis also proved that in the end of this process, the agricultural andmanufacturing wages rates are equals and the agricultural and manufacturingmarginal product of labor are the same Hence, there would be no motivation forenlargement in industry sector when labor had no monetary incentive to turn fromagriculture sector to industry sector This process would remain until there was nolabor with low or zero- marginal product Then the rule was opposite The industrysector must raise wages to absorb agriculture labors, which improve the quality ofthe poor in the society Together with the rising income for the poor, the amount ofbenefit taken by the rich would be reduced relatively in comparison with theprevious period According to Lewis’ theory, the living standard of the poor andwhether the gap between classes in the society would change depended ontransferring labors between two sectors The evident trend was found is that more

investment on manufacturing could help the poor have better lives He not onlygave the conclusion about relationship between income distribution and economicgrowth but also provided theoretical explanations by dual economy model He alsoascertained the important role of modern industry sector in economic growth as well

as increasing incomes for the poor through urban migration from rural areas

The study of Oshima (1993) for Asian developing countries provided anopposite finding to the Lewis’s study Oshima disclaimed the practicability ofLewis’ theory in Asian developing countries because in agriculture sector laborforce did not always have low productivity Urban migration sometimes inhibitedproductive developing period in agriculture which was considered to have therelative advantage in comparison with developed countries He pointed out thatdeveloping countries should have a reasonable model, of which agriculture sectormust be firstly developed Oshima analyzed the relationship of both agriculture andindustry in the structural transition from economies dominated by agriculture to theindustrial economy Oshima's model made the development process based on theagricultural sector will reduce inequality and improve the quality of life for poorpeople, especially workers in rural enterprises According to this theory, growth inthe agricultural sector would narrow the gap in rural and urban development byfocusing on rural land reform policy and the support of the government.Additionally, the process of improving the income gap between large enterprisesand small-scale farms in rural areas would be improved This will enable the poorrural escape poverty and improve the quality of life This view was also firmlyasserted by a study of Mellor in 1976 He argued that since agriculture employs themajority of the population in developing countries, increasing agriculture outputwould boost the economy and hence reduce poverty

Another persuasive advocate of agriculture-first view, Loayza and Raddatz(2006) also explained how the poverty responds to changes in the economicstructure of growth They provided a two sector theoretical model, of which themechanism through the sectoral compositions of growth could affect workers’wages and poverty alleviation Additionally, they defined the economy population

by two groups of individuals: poor and rich The first concern is that the shortage of

effective economic growth is the difficult problem in developing countries to reducepoverty Hence, no lasting poverty alleviation happened in the lack of sustainedproduction growth but growth size seemed not to be a sufficient condition forpoverty reduction They also proved that sectors which had stronger effects onpoverty reduction must have more labor intensive in relation to their size Hence,agriculture was the most important sector to reduce poverty, followed bymanufacturing Services seemed not to help the poor to improve their lives.

In a nutshell, economic theories affirmed the relationship betweeneconomic growth and poverty reduction as well as the different role of each sector

in reducing poverty Two main theories were proposed while investigating the mostimportant sector to reduce poverty: agriculture-first view and non-agriculture view.Together with theories, there are many empirical studies to support and profoundlyprove each theory Hence, in the next section, I will review typical empirical studies

on this issue

2.2 Empirical review

In the 1950s, Kuznets firstly postulated a correlation between the distribution

of income and economic growth Kuznets provided a U-shape curve hypothesis thateconomic equality increases over time while a country was developing, and thenafter a certain average income was reached, inequality would begin to decrease Theempirical works were implemented from 1962 to 1985 in about 70 countries in theworld to test this hypothesis Empirical results show that during the first period ofdevelopment, the more increasing GDP, the bigger gap was between the rich and thepoor But this trend would be converse in the second period only when the economyreached the high level of development Many detractors argued that the empiricaldata which used in his analysis originated mostly from the development processes

of rich nations like the USA, Great Britain and Germany, in the 19th and 20th

centuries, and that it could not be applied to the current developments of poorercountries that have a colonial mortgage and other social as well as economicconditions It means that the U-shape curve’s rule did not come from progression inthe development of individual countries, but rather from historical differencesbetween countries However, promoters said that a wealthy part of the population

gains from economic growth Growing inequality finally in the Kuznets’ hypothesiswas not considered as a negative factor and increasing the wealth of only one part

of the population should promote investment and consumption Kaldor (1970) alsoclaimed that a certain level of inequality was necessary for economic growth

Apart from the researches about connection between economic growth andinequality as the rule of Kuznets’ curve, many researches provided opposite ideas.Results attained from Taiwan by Warr and Wang (1999) proved that growth ofindustry was always strongly associated with poverty reduction despite the fact thatTaiwan was in the first or the second developing period as defined by Kuznets’curve Taiwan had many outward oriented trade policies implemented effectively,therefore, industrialization could induced significant improvement in povertyreduction in both rural and urban areas

Although the dual economic models inspired by Lewis (1954) and Kuznets(1955) typically viewed agriculture as an unproductive subsistence sector, analternative view of agriculture as a leading sector especially during the early stages

of development also emerged with persuasive evidences Much of the earlydevelopment economics literature was thus interpreted to support anindustrialization strategy and find out which labor and resource to be drawn toencourage development of the dynamic productive industrial sector Additionally,due to link between the sectoral composition of growth and poverty reduction, it isvery important to investigate whether this relationship is positive in order to helpthe government give policies to reduce poverty in the society It was found thatthere are some models used to test the relationship between compositions of growthstructure and poverty reduction

The results from research of Warr (1999) on poverty reduction and sectoralgrowth in Southeast Asia provide an opposite case against industry-first view Healso examined relates inequality and the rate of economic growth in the agriculture,industrial and service sectors In his paper, cross sectional data sets were pooled forfour countries of Southeast Asia including Thailand, Indonesia, Malaysia and thePhilippines over the period from the 1990s to 1999, as the difficulties and theunfortunate lacking of time series data He first viewed the relationship between

aggregate, rural and urban poverty incidence and then turned to the manner inwhich of this measures affected by economic growth He decomposed povertyincidence into three parts: (1) the change in rural poverty incidence weighted by therural population share, (2) the change in urban poverty incidence weighted by theurban population share, (3) the movement of populations from rural to urban areasweighted by the different in poverty incidence between these two areas For thesecond step, he used F-test to check if the sectoral compositions of economicgrowth have impacts on poverty reduction The results proved that the reduction inpoverty depended on the rate of aggregate growth and change in the share ofsectors The results also implied that while poverty reduction was highly related togrowth of agriculture and service, there was no significant connection betweenpoverty and industry growth Growth of industry was seen very weakly associated

to increases in poverty Warr pointed out fundamental differences in his study andresearch by Warr and Wang (1999) study of Taiwan Warr and Wang concluded thatfor Taiwan, the industrial sector has the greatest influence on the rate of poverty.The causes of the differences between the two studies were the differences in therole of industrial policies of each country The trade policy toward Taiwan'seconomic openness, especially in the industry led to the process of industrializationrapid and strong in both urban and rural areas This indicates that the growth of theindustry has great influence on both poverty reduction in rural areas and urbanareas

In contrast to South-East Asia, in India the construction of protective barriersfor heavy industry has led to increased capital intensive This has not broughtbenefits to the poorest groups in society Agriculture and services increased demandfor labor in these areas, especially unskilled labor, low-skill workers According to astudy by Warr (1999), structure of economic growth clearly affects povertyreduction However, in addition to structural growth, economic policies, includingtrade policies and industrial policies, also had influence on the sectoral composition

of growth

Montalvo and Ravallion (2009) assessed the contribution to povertyalleviation of the sectoral and geographic areas of China’s growth through the

expansion of Ravallion-Chen analysis to the provincial level He tested if thepattern on growth matters to poverty reduction in the specification for the log of theheadcount index of poverty for provinces with independents variables as the share

of output produced by sectors, GDP per capita and inflation rate This model wasbased on the empirical equation by Ravallion and Datt (2002) for India Theyexamined how China got the impressive results in process against poverty byexplicable achievements in terms of the sectoral compositions of growth They usedstandard classification of sectors: primary (mainly agriculture), secondary(manufacturing and construction) and tertiary (services and trade) Additionally,they suggested that if sector A’s impacts on poverty reducing occurred via sector B’soutput then we would distribute it to sector B Hence, the results found could betermed the proximate impacts In order to implement the model, they got two sub-samples: time series difference and one cross section in order to avoid lackinginformation for all the years surveyed In general, there were not many differencesbetween the model of Warr (1999) and this model In order to make comparisonwith the research results of Datt and Ravallion (2007), he eliminated trends andinflation rate and worked only with growth rates of three sectors It caused fewerobservations because of the gaps between surveys

Warr found weak evidence of significant poverty-reducing effects of primary sector growth These results were quiet similar to results estimated by Dattand Ravallion For the secondary and tertiary sector, he respectively pointed outsignificant negative coefficients in just one and two provinces These resultsrevealed the importance of primary sector growth in China to reduce poverty.However, he could not reject the null hypothesis that the parameters of secondaryand tertiary sectors were equal Additionally, through the success in China, the idea

non-of a trade-non-off between compositions non-of economic growth turns out to be a mootpoint to make policy choices in the reform period Hence, policies focusing onagriculture and the access to agricultural land need to be improved in order to makebetter lives to Chinese people Although methods and models used have much incommon, the conclusions of Ravallion and Montalvo (2009) and Warr (1999) have

a few minor differences as follows While Warr confirmed the importance of both

the industrial sector and service, Ravallion and Montalvo in their study did not seethe role of the industry in poverty reduction in China, only agricultural sector hasthe important role This implies that achievements of the agricultural sector andagricultural policy reform in China will improve the lives of the poor

Christiaensen, Demery and Kuhl (2010) also provide evidence that theparticipation of poor households in agriculture was the most important, followed bythe poverty-reducing effect of non-agriculture Starting at the point of debating therole of agriculture in economic development and poverty reduction, they built anempirical model in which a measure of poverty is a dependent variable Theproportionate change in poverty could be seen to be equal to the GDP elasticity ofpoverty The growth in GDP per capita was considered approximately by the sum ofthe share-weighted growth rate of sectors (agriculture and non-agriculture sectors)

In this study, the author does not divide the economic structure into three specificsectors They divided the economy into two sectors: agriculture and non-agriculture,which was slightly different from previous studies Accelerating agriculture growthwould induce changes in other sector, resulting in higher non-agriculture growth.Therefore, four key elements link poverty to sectoral growth were defined: the directgrowth component from the sector itself, the indirect growth component arising fromspillover effects of growth in one sector on another, the participation component, and therelative size of the sector in the economy

Having tested the direct growth effects, the indirect growth effects and theparticipation effects, they focused on analyzing the role of agriculture in povertyreduction in comparison with another sector They also examined the marginaleffect on total poverty of one percent growth in agricultural GDP per capita and onepercent growth in non-agriculture GDP per capita The data was a series of settingsand for different poverty measures Two components of stimulations were examined

as the direct effect of one percent additional growth in agriculture GDP per capita

on total poverty and the indirect impact on poverty which was raised from its effects

on growth in non-agriculture one period later Some important messages emergedafter estimation Non-agriculture was more powerful in reducing poverty amongbetter-off poor in resource poor countries and slower agriculture growth (the direct

growth component) should not be taken This means that agriculture was lessproductive When it came to one dollar per day headcount poverty, agriculture was3.2 times better at reducing poverty than non-agriculture Across poverty measures,the poverty reduction potential of non-agriculture reduced substantially whenextractive industry sector became sizeable of the economy The empirical evidence inthis paper supported the point that enhancing agriculture productivity could remaineffective poverty reduction strategies to reduce one dollar per day poverty especially inlow-income countries However, when it came to reduce poverty among over two dollarsper day poor, non-agriculture was very important especially in resource poor countrysettings.

Christiaensen, Demery, and Kuhl have made it clear that agriculture hasalways occupied an important role in the process of poverty reduction in terms ofdensity, although the share of the agricultural sector tends to decrease Moreover,the growth rate of the agricultural sector is always smaller than that of industry andservice sectors as the economy grows more This follows the rules of Engel butagriculture is still the most important in the process of raising living standards forpoor countries Developing the agricultural sector will have the greatest benefit forthe poorest groups in society

In the third view of this issue, the research by Suryahadi, Suryadarma andSumarto (2009) estimated the impact of economic growth on poverty in Indonesiawith the change in poverty rate as a dependent variable and the rate of economicgrowth as independent variable In this study, they assumed that there was no effect

of the inter-provincial migration Compositions of economic growth were notconsidered as three sectors as usual, they refined the model by dividing each of thethree economic sectors into their location: urban and rural The classification intosix sectors allowed us to see the linkages between sectors in terms of povertyreduction in both areas Hence, there were six sectoral compositions of economicgrowth used to analyze: urban agriculture, urban industry, urban service, ruralagriculture, rural industry and rural service The research, therefore, would providericher results Additionally, they used longer spanning dataset to have more precise

estimates The estimation method used GLS for panel data where the standard errorswere corrected for heteroskedasticity across provinces

They firstly calculated poverty trends by using region-specific poverty linesdeveloped by Pradhan (2001) to get the comparable results across regions and overtime Then they examined the impact of economic growth on poverty through themodel mentioned above The lack of data and information were circumvented byemploying a panel data with provinces as the unit of observations After estimating,they got some noticeable conclusions The first was that growth in the agricultureand service sectors were the key in poverty alleviation in rural areas Secondly, theyfound that a linkage between urban growth and rural poverty At last, theysuccessfully proved that the industrial sector had a relative minor impact on povertyreduction in rural areas This revelation evoked the idea of making policies while inIndonesia, industry (relative to agriculture and service) had the least contribution tothe rural economy However, some differences were found in urban compared withrural areas While rural agriculture was the key to rural poverty alleviation, it had noimpact on reducing urban poverty A robust growth in urban service sector wasproved to make better lives for the poor in urban areas and the other sectors had alittle influence The results were more essential when examining Indonesian policies

to real life Most industries were located in urban areas and industrial sectorvirtually absorbed highly skilled labors Agricultural areas have little impact onpoverty reduction in urban areas This is explained by the author of two reasons.First, their industrial sector is less labor intensive than most agricultural regions andindustries So the industry will contribute less to reduce poverty in the country Thesecond reason is that most poor people in Indonesia were selected to participate inthe agricultural sector in rural areas or engaged in active service in the citiesbecause they do not have the skills to participate in the industry Hence, the poor inIndonesia mostly contributed in rural agriculture sector or urban service sector.Economic growth based on industrial development might not be the key policy forreducing poverty in Indonesia as results of estimation In comparison among 6sectors, the sector which had the largest effect on poverty alleviation in both rural

and urban areas was urban service The policymakers, therefore, should focus onexpediting growth in this sector

Apart from these above researches about poverty reduction and growth, therehave been many studies on economic growth and poverty reduction in Vietnam.Balisacan, Pernia and Estrada (2003) suggested that the faster the growth rate was,the lesser the role of distributive factors that directly influenced the poor’s well-being They ran OLS regression with mean expenditure of bottom quintile andprovincial mean expenditure, which were expressed in logarithms and found astrong positive relationship between the living standards of the poor and provincialincomes Then they employed panel data estimation techniques to get consistentestimates of growth elasticity of poverty and some parameters Other explanatoryvariables included in the model they used were household demographics,geographic location, schooling, farm characteristics and infrastructure Inconclusion, they affirmed that the growth process occurred in Vietnam had a strongpro-poor bias and economic reforms could reinforce both growth and povertyreduction in the long run

In 2006, Thang Nguyen, Trung Le, Dat Vu and Phuong Nguyen released apaper for the chronic poverty report in 2008-2009 This paper analyzes the impact

of key markets including the labor market, commodities, financial and housing onthe poor, including chronically poor people This study is particularly interested inthe role of agricultural growth to help the poor move out of poverty and prevent thenon-poor from falling into poverty This paper also provides policyrecommendations to reduce poverty Analysis of the authors of the dynamics ofpoverty reduction for the period 2002-2004 is based on panel data sets Due to thesignificant differences in the characteristics of poor households in rural and urban areasand due to incomplete data, only the rural sub-sample of the panel is used for economicanalysis

The study divided households into different groups: group moving out ofpoverty, moving into poverty and being non-poor at both the beginning and end ofthe period in consideration These groups took place the process varies In terms ofother characteristics, chronically poor households tend to increase in number, are

not entitled to good education and most likely most of this poor work in agriculture.Therefore, the change in occupation of the household for these groups reflectchanges in the economy towards less involved in agriculture and many who work innon-agricultural sectors The study concluded that while agricultural growth hasproven to be an important factor in increasing the opportunities of rural householdsand reduce poverty, effective policies to maintain stable growth and relatively highfarm incomes is central to maintaining rapid poverty reduction Thus, in the context ofvolatile international markets especially for agricultural products, equipment insurancefor agricultural production should be enhanced Emphasis on public investment in ruralinfrastructure should be included in the targets in the present and long-term future,although they may have different impacts on different groups of poor people.

Another study of the relates economic growth to poverty elimination, theresearch of Hoi Le (2008) concluded that there was negative association betweenpoverty rate and subsequent GDP growth rate and no empirical results showedevidence of the relation between inequality and the growth rate of GDP.Additionally, he predicted that higher initial poverty level could result to higherinequality in the future In his study, growth was the dependent variable and it wascalculated as the average growth rate of GDP in province over the period Threeindependent variables include initial inequality, the rate of poverty and a vector ofother control variables Unlike most other related researches in the literature, across-section of provinces was analyzed Based on given findings in his study, somepolicy implications were proposed for both Vietnam poverty reduction andpromoting economic growth such as helping the most segments of the society andtrying to lower inequality

Recently, Drewby and Cesvantes-Godoy (2010) also provide research on therole of the agricultural sector to reduce poverty in four poor countries, includingVietnam In their study, the authors pointed out the fundamental reasons thatagriculture is important for the group of poor people in developing countries are asfollows: agriculture is seen as a fundamental factor promote economic development

in width, agriculture makes food prices down, agriculture is also seen as valuableresources to generate income for the poor Studies have also shown that Vietnam's

growth rate of agriculture sector the highest among Asian-Pacific region Theaverage growth rate in the 1981-2005 in Vietnam is about 18%, while average thenational army in Asia-Pacific region is about 7 to 8%, Indonesia even negative 5%.Through statistics and compare changes in the agricultural sector indices and indicators

of poverty, Vietnam is recognized as a country where the growth rate of agriculturesector has contributed greatly to improving the lives of the poorest groups in society Andcompared to Indonesia, the Vietnam quite well the premise of economic growth such asmacroeconomic stability, promote international trade development and growth is themost important agricultural areas quickly All policies of the agricultural sector areclosely related to poverty reduction

In sum, there are several studies on the relationship between economicgrowth and poverty reduction in Vietnam However, there has not been any paper oninvestigating the impact of sectoral compositions of growth on poverty reduction inVietnam As all the conclusions of theory and empirical researches mentionedabove, there will be no common rule for all countries in finding which pattern ofcompositions of growth has the most impact on poverty reduction Persuasiveanswers to the question can be attained for each development period of a countrybased on statistical analysis

CHAPTER 3 OVERVIEW OF COMPOSITION OF ECONOMIC GROWTH

AND POVERTY REDUCTION IN VIETNAM

Economic growth has played as one of the most important roles in Vietnamsociety since economic innovation in 1986 It not only helped Vietnam shorten thebig gap with developed countries but also make the valid foundation for attainingstrides in economic as well as social fields In comparison with previous period andother countries in the world, Vietnam has actually made noticeable progress incompositions of economic growth Together with higher GDP per capita, the trend

of poverty line has tended to decrease In this chapter, I provide an overview of therelationship between composition of economic growth and poverty reduction inVietnam through data from 1998 to 2008

3.1 Sectoral compositions of economic growth in Vietnam

During the period from 1998 to 2008, Vietnam economy had experienced arecovery after economic recession and many policies which aim to renovate theeconomic structure were implemented This led to an increasing trend of growth,from 5.76 percent in 1998 to 6.78 percent in 2010 The average growth rate wasnearly 7.5 percent from 2000 to 2007 However, some signals of global economicdepression that appeared in the end of 2008 were considered as an obstacle to interioreconomy It resulted in decreasing trend of growth rate in 2008 and 2009 (just 6.32% and5.32% respectively) Although the growth rate of 2010 was much lower than in 2007,Vietnam was still one of 12 countries which had high growth rate

Table 3.1: Vietnam economic growth rate from 1998 to 2010 (%)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Growth

rate

5.76 4.77 6.79 6.89 7.08 7.34 7.79 8.43 8.32 8.48 6.32 5.32 6.78

Source: GSO, Vietnam

Throughout the rise and fall of figures, it is said that Vietnam is one of the fastesteconomies in Asia over the last decade This achievement has been contributed by thegrowth of three sectors: agriculture, industry and service

Figure 3.1: Sectoral economic growth from 1998 to 2010:

Source: GSO, Vietnam

First, like many other developing countries, agriculture is still regarded as thesector has comparative advantages of Vietnam and contributed greatly to the fight topoverty Vietnam is known as an agricultural country with 24.7 million ha of totalland area of agriculture, forestry and fisheries, which account for 74.5 percent of thetotal area of natural land In Vietnam, agriculture still remains the largest source ofincome of households in rural areas About 70 percent of Vietnam's population lives

in rural areas of which 68 percent rely heavily on agriculture, forestry and fisheries

After over 20 years of policy reform with the opening-up and operation ofthe economy under the market mechanism, agricultural production has attainedgreat achievements Agricultural production growth has been always at relativelyhigh and stable in the last 10 years (1998-2008) with the average of 5 percent peryear of production value The trend of agricultural growth from 1998 to 2008 can beclearly seen through figure 3.1 From 1998 to 2005, although agriculture was insuch a severe weather conditions because of long drought spell, many hurricanesand extending poultry flu, the gross output of agriculture was on the increase andaccount for over 5.4 percent on the average This amazing figure was higher thanthe target number for agriculture (just about 4.8 percent per year) In the period2006-2010, the trend seemed to be decreased and the lowest growth is in 2009 with

nearly 2.0 percent However, the average number was still as the target in thisperiod

According to VHLSS from 1998 to 2008, an average income of people fromagriculture sectors tends to increase significantly and in 2008 it was 202.3 thousandVND It was higher than the average income in other areas This did not happenonly in 2008 but also during 10 years from 1998 to 2008 Regarding the role ofagriculture in improving the income of the household, there is a big differencebetween rural and urban areas In urban area, income is not largely contributed byagriculture while incomes of rural residents from agriculture are much higher thanincomes from other sectors In 2008, monthly average income of agriculturalhouseholds is about 300 thousand VND while income of households in industry andservices is 40 thousands and 100 thousands respectively Corresponding to this,income from agricultural areas generally accounts for about 24 percent of totalincome and accounts for about 37 percent of total rural income in 2008 It is clearthat agriculture plays an important role in improving incomes and population lives

in rural areas

Second, in the inevitable cause of industrialization and modernization,Vietnam and other developing countries are accelerating the process of sectoralrestructuring by increasing the proportion of the industry sector The continuouslyincreasing trend was also realized in the industry sector from 1998 to 2008 (figure3.1) In 10 years from 1998 to 2008, the industry sector of Vietnam has madesignificant achievements, including a huge role in poverty reduction

In economic development plans, Vietnam aims to basically become anindustrialized country by 2020 In order to accelerate phase of industrialization andmodernization, the industry sector plays an important role In 1998, while thegrowth rate of GDP was 5.76 percent, the industrial sector’s growth rate was over8.0 percent Restructuring of the industry are associated with the development of thesector towards diversification, gradually forming a number of key industries withhigh growth rates, favorable market field and capable of exporting Thisdevelopment has contributed significantly to economic restructuring It can be seenfrom figure 3.2, the proportion of industrial sectors in GDP increased from 23.2

percent in 1996 to 49.0 percent in 2005, 50.0 percent in 2006 and 51.0 percent in

2007 In 2007 the share of agriculture, forestry and fisheries were about 8.0 percentand the share of service sector accounted for 41.0 percent The share of theindustrial sector in GDP increased significantly and the industrial sector becomesthe driving force for national economic development

Gross output of the industry grows at 10 percent per year during the period1998-2008 The industrial production value in 2010 was estimated to be 94.5percent higher than 2005, in which the state sector increased 34.6 percent, non-statesector increased by 137.4 percent and the foreign investment has increased 115.1percent (GSO, 2010) Internal structure of the industry is moving positively towardsincreasing the proportion of processing industry from 82 percent in 2005 to about85.3 percent in 2009 (GSO, 2009) Processing agricultural, forestry and aquaticproducts, especially processed food and beverages contribute significantly to thesector which account for 17 percent in 2005 and about 18.2 percent in 2009 (GSO,2010) Rapid growth was seen in all fields of industry and in some provinces whichhad higher growth rate than the average such as Vinh Phuc, Binh Duong, HaiDuong, Can Tho, Dong Nai, Khanh Hoa, Quang Ninh, Hai Phong, Da Nang

Like other sectors, the service sector has also grown rapidly and had positiveimpact on poverty reduction in Vietnam in last 10 years During the period from

1991 to 1995, the service sector had high growth rate with the average growth of 12percent a year However, this rate dropped to 5 percent a year from 1996 to 2000and had an upward trend since 2001 The value of service output rose 8.85 percent

in 2007, which was estimated at the highest since 1997 (figure 3.1) This is higherthan the overall growth rate of the economy The service sector has created manyjobs during the period from 1998 to 2008 With the pressure of creating about 1.7million jobs per year, while industry and agriculture attracted only a maximum of1.1 million people, services needed to create the 0.9 million people annually Withthe current growth rate, services creates only 0.5 million workers per year (Duc ThanHoang, 2010) The service industry in Vietnam has not really created a goodenvironment for all economic development Currently, the cost of telecommunicationsservices, ports, transportation of Vietnam is higher than the average of countries in the

South East region (30-50 percent higher in telecommunications and more than 40 – 50percent higher in maritime transport)

Figure 3.2 shows the general structure trend in three sectors: agriculture,industry and service in Vietnam from 1998 to 2008 It can be seen that the trendshift of these three sectors is clear The share of the industrial sector tends to risesharply in the period 2000 to 2006, but in 2008 the share leveled off and slightlydecreased The share of the agricultural sector declined substantially especially from

2001 But in the years from 2002 to 2008, the trend is not significantly reduced asthe previous period The share of the service sector has increased slightly over theperiod and there was no sudden increase in the period 1998 to 2008

Figure 3.2: Vietnam sectoral structure of development from 1998 to 2008

Source: GSO, Vietnam

3.2 Poverty reduction in Vietnam

Together with the success in economic growth from 1998 to 2008, Vietnamalso exhibited remarkable achievements in poverty reduction as illustrated byhousehold surveys dataset from 1998 to 2008 Over the past ten years, the UnitedNation and Vietnam’s other partners have acknowledged many impressive successes

in implementing the Millennium Development Goals and poverty alleviation inVietnam With impressive achievements, Vietnam has ability to accomplish theremaining targets of the Millennium Development Goals before 2015 In recentyears, Vietnam has been also considered as one of the world’s fastest declines in

poverty Vietnam’s consumption-based poverty rate which measured as thepercentage of people lived below $1 a day has come down from 37.4 percent in

1998 to only 14.5 percent in 2008, which is a sharp drop of almost 23 percentagepoints over ten years in accordance with international poverty line (figure 3.3) Inthis period, over 34 million people have been out of poverty Steady and rapidgrowth in income at about 7 percent and 8 percent a year (VASS, 2011) has been akey factor in poverty reduction As such achievements, Vietnam has attainedpoverty reduction target in Millennium Development Goals ahead of schedule

Figure 3.3: Vietnam poverty rate from 1998 to 2008

Source: VHLSS 2008

However, it should be acknowledged that numbers of poverty reductionoutcomes are not truly stable According to data published by the World Bank(2008), Vietnam had 73 percent of the population living in rural areas, accounted for93.6 percent of the country’s poor while urban areas accounted for only 6.4 percent

In particular, the population engaged in agriculture accounted for 90.9 percent of thepoor, and non-agriculture population accounted for only 9.1 percent Of the populationengaged in agriculture, the rice-growing population was the poorest and accounted for 78percent and non rice- growing was only 22 percent

It is clear that poverty in Vietnam has still largely concentrated in rural areasand the number is more than worth thinking when the proportion of people living inrural areas is huge In Vietnam, both the rate and the absolute number of people inpoverty is higher in rural than in urban areas In 1998 the urban poverty rate was 9.2percent but rural poverty in that year was at 45.5 percent (figure 3.4) By 2008,poverty in urban areas decreased to 3.9 percent and in rural areas nearly 20 percent

(figure 3.4) The changes in percentage rates masked the great effort of Vietnam inreducing numbers of people in poverty Besides, the declining number of poorpeople nationally was overwhelmingly due to the reduction in rural poverty

Figure 3.4: Vietnam poverty rate in urban and rural areas from 1998 to 2008

Source: VHLSS 2008

The poverty rate was not only higher in rural areas but also in the northern

were still a high number of households under or falling back under the poverty line,which could not be controlled by the government policies Besides, the rate of poorhouseholds in accordance with the new standard also remained so high (290thousands VND for rural areas and 370 thousands VND for urban areas) and

was likely because poor rural regions, especially mountainous ones, tended to bethe most disadvantaged in terms of basic infrastructure They were more remotefrom market center and lacked information sources as well as basic socialservices and suffer from frequent natural disasters such as typhoons, drought,floods and landslides The southern regions tended to have better weatherconditions, better soil quality, more land per capita and more experience incommercial production

Poverty rates also vary quite substantially across regions Viet Nam isdivided into eight economic regions: Red River Delta, North East, North West,North Centre Coast, South Central Coast, Central Highland, South East and

Mekong River Delta It can be seen that there was decreasing trend of povertyrate among areas though North West always has the highest rate and South Easthas the lowest (Table 3.2) Across regions in 2008, the headcount index ofpoverty calculated by income ranged from a high of 45.7 percent in the NorthWest region to a low of 3.5 percent in the South East region The Northern Eastregion was next with 23.1 percent of the total poor Although 50.1 percent of itspopulation was defined as poor, the Central Highland contributed lowerpercentage to the total (24.1 p e r c e n t ) because of its smaller population Thehigh levels of poverty in the North West, the North East and Central Highlandregions reflected constraints that they face in participating in the growth process due

to a difficult physical environment limitation and a restricted access toinfrastructure, markets and social services However, the North West, North Eastand Central Highland have persistently shown higher poverty rate reduction thanthe rest of the country The North region succeeded in reducing its poverty byrelatively modest about 37.7 percentage points over ten years It was much lower inthe Mekong and Red River delta than in other areas, but the decline in poverty hasalso been felt in Central Highlands, where poverty was relatively higher In the RedRiver, poverty rate sharply fell down from 29.3 percent in 1998 to 8.1 percent in

2008, which showed a great improvement in living quality Central Highlandsdecreased nearly a half of poverty rate in 2008 in comparison with 1998 Regionsexhibited the lowest poverty incidence were South East and Mekong River Deltaand Red River Delta, in which the main cities of Ho Chi Minh and Hanoi arelocated respectively

Table 3.2: Poverty rate among regions in Vietnam from 1998 to 2008

so far were literacy, trade and infrastructure Vietnam’s drive towards literacy began

as early as 1945 and picked up through the 1970s and 1980s A final major push foruniversal literacy was made in the 1990s, when provincial and commune-levelliteracy campaigns were launched Vietnam’s adult literacy rate has been well abovethe average of low income countries for both male and females Inequality between

male and female literacy rate has been also relatively low From 1998 to 2008,literacy rate of male has increased from 95 percent to 96 percent and that of femaleincreased from 89 percent to 90 percent (VHLSS, 2008) Today Vietnam hasachieved more than 93% literacy in general compared to about 73% in low-incomecountries and about 89 percent in middle-income countries These figures are evenhigher than China and India And there was just a little gap between rural and urbanareas in literacy (97 percent and 92 percent in urban and rural areas respectively,VHLSS; 2008)

Another indicator to study poverty situation is the poverty gap which defined

as average difference between poor household expenditure and the povertythreshold The gap is considered to be zero for the non-poor (people whoexpenditures are greater than the poverty line) A closely related measure, thepoverty gap index expresses the poverty gap as a percentage of the poverty line Thepoverty gap index decreased from 9.5 percent in 1998 to 3.8 percent in 2006 for the totalpopulation (table 3.3) This suggested an outstanding improvement not only in thereduction of poverty as a whole but also in the depth of poverty in the country The samepattern was observed in rural and urban population through table 3.3 Rural populationhad a high poverty gap index in 1998 and by 2006 the gap is only 4.9 However, forurban population, the poverty gap tended to increase from 1.7 to 3.2 in the same periodwhich suggested that poor people in urban areas were consuming further under the

0.7 in 2004 to 1.7 in 2006 This showed the opposite trend of poverty reduction whichwas clear from 1998 to 2004 The second reason is the flow of migrants from rural tourban areas that made the number of people in the urban areas increase significantly,particularly the poor who did not have stable employment and low income

1 Food poverty line in 2002 and 2004 are 112 thousand dongs and 124 thousand dong per capita per month for the rural area and 146 thousand dong, 163 thousand dong per capita per month for the urban area, respectively The new Government poverty lines for 2006 is

200 thousand dongs per capita per month for the rural area and 260 thousand dongs per capita per month for the urban area These poverty lines are up dated by 2008 prices and have values of 290 thousand dong for rural and 370 thousand dong for urban.

Table 3.3: Poverty gap in Vietnam from 1998 to 2006

Source: VHLSS 2006

Table 3.3 also shows poverty gap by ethnic group There are 54 groups inViet Nam, of which the Kinh (Vietnamese) is dominant, accounted for almost 85percent of the population Poverty was not equally among different ethnic groups

In various ethnic minorities regions, the rate of poor households was highercompared with national average Kinh and Chinese had decreasing poverty gap(from 7.1 in 1998 to 2.0 in 2006) while ethnic and minorities still had high povertygap and slower decreasing trend (24.2 in 1998 to 15.4 in 2006) The ethnic andminority groups had a higher incidence of poverty than the national average,particularly the H’mong (100 p e r c e n t ), Dao (88.5 p e r c e n t ), Khmer (76

p e r c e n t ) and Muong (75 percent) Those groups were mainly inhabited fromthe remote and mountainous areas in the Northern Upland, North Central and theCentral Highland The commercial center of Ho Chi Minh City has the lowestincidence of poverty among the minority groups with only 14 per cent

Interestingly, it can see from the figures of poverty by gender that thepoverty incidence among male-headed households tends to be much higher thanthat of female-headed households from 1998 to 2008 (table 3.4) Female-headedhouseholds reported poverty rates of 10.8 percent in 2008 (down from 28% in 1998)whereas male-headed ones reported poverty rates of 15.5 percent (down from 40%

in 1998) This is unusual for developing countries and further research is required

to understand the reasons behind this difference Poverty reduction policies ofVietnam carried out from 1998 to 2008 were always associated with theimportance of reduced gender inequality Consequently, poor female-headedhouseholds received great supports in the process of poverty reduction especiallywith the help of the local Women's Unions and the Government Moreover, theachievement of poverty reduction for women tended to more sustainable

compared to men However, this finding needs to be interpreted with somecaution Many married female-headed households are recipients of largeremittances from their migrant husbands working elsewhere in the country oroverseas In addition, female headed households tend to have a smaller size,which is an important determinant of poverty levels Though, the research datashows the irreplaceable role of women in the poverty reduction

Table 3.4: Poverty rate by male or female-headed households (%)

in economic growth Although each policy had direct or indirect effects on specificaspects of poverty, the results were remarkable By the end of 2008, the lives of thepoor in the remote areas have been improved markedly

Although the substantial gains achieved earlier the millennium goals set,these results are not sustainable As in 2008, the poverty rate is about 14.5 percentand Vietnam continues to face challenges in reducing poverty The poverty line for2011-2015 is determined as 400 thousand VND per capita per month or less in ruralareas and 500 thousand VND per capita per month in urban areas According to thereport of Ministry of Labor-Invalids and Social Affairs in 2011, approximately 3.3million of poor households (accounting for 15.25 percent) are under the new

poverty line The poor are still largely concentrated in rural areas (90 percent) insome northern mountainous, central highlands, mountainous Central Coast SouthWest is the place of ethnic minorities, the poverty rate remains high (50 percent).These are very difficult areas for poverty reduction It is easy to see that the poorgenerally have limited in access and enjoyment of basic social services According

to UNDP figures about social security, the top 20 percent richest people enjoying 45percent of social medical assistance and 35 percent of education subsidies, while thepoorest 20 percent receive only 7 percent and 15 percent of the benefits listedabove Thus, the poor in Vietnam suffer from poverty in many aspects, not onlythrough the personal income of households per month Hence, although Vietnamhas achieved much success in poverty alleviation it is necessary to carry out otherprograms to further reduce poverty in the future, especially sectoral economicgrowth policies to improve people's lives

3.3 The relationship between sectoral composition of growth and poverty reduction

3.3.1 Agricultural growth and poverty reduction

Most poor people living in rural areas consider agriculture as their mainlivelihood Studies have shown that the persistence of poverty along with inequality

in the region is as a result of neglect of agriculture It can be seen clearly inVietnam, the poverty rate fell by half in the first half of the 1980's when agriculture

is the top priority areas and the downward trend has continued along with the

reduction and agriculture reminds that when agricultural development is still animportant goal of the national development agenda, the rate of poverty may declinerapidly The neglect of agriculture has created enormous pressure on farmers Thecultivated area of narrow, high input prices, low market prices for agriculturalproducts have led to a cycle of low income and stagnation The large decline inpublic services, particularly in irrigation and agricultural extension services, havecontributed worse to this situation Unless the neglect of agriculture is addressed,the situation of poverty and social justice are truly effective

The survey of socio-economic Vietnam in 2008 by GSO showed thatimproved productivity of agricultural labor can have a profound impact on povertyreduction The study also revealed that increasing agricultural productivity wouldsignificantly reduce the decentralization of social inequity There is a notion thatagriculture needs another revolution and increasing agricultural productivity should beconsidered the center of this revolution The key of agricultural productivity is improvinginvestment in research and development, extension services, irrigation and ruralinfrastructure, human education, improving land tenure systems.

Along with the development of the country, the midlands and mountainousnorth have been considered as typical examples in reducing poverty These regionswere based on its advantages to develop agriculture, forestry and fishery There aremany midland and mountainous northern grassland but mainly on the plateau withelevations from 600 to 700 m The pasture is not so great but it can supply enoughfor cattle (for meat and dairy), horses and goats Dairy farming is concentrated inthe Highlands, Moc Chau (Son La) where buffaloes, cattle are raised widely.Therefore, the region's poverty rate has dropped significantly in the period 1998-

2008 from 64.2 percent to about 20 percent (VHLSS 1998, 2008) Model of farmdevelopment priorities has made significant achievements in these provinces.Poverty rate in Thai Nguyen has decreased significantly from 43 percent to 16.5percent, likewise, Ha Giang was 37.6 percent (reduced by half compared to 1998)and Son La decreased from 73 percent to about 36 percent (VHLSS 1998, 2008).This is a new economic model which is established and developed in general and inthe midland and mountainous regions in particular It is rather new but itsimportance for poor household in these regions is huge, especially in the midlandand mountainous north

A more typical result of the intimate relationship between agriculturedevelopment and poverty reduction is Lao Cai province From 1998 to 2008, LaoCai has been actively implementing the national program objective of povertyreduction programs integrated with many resolutions, which contributes to theprovince's economic growth In 2008 Lao Cai has 33.2 percent of poor households

in comparison with 70 percent in 1998 (VHLSS 1998, 2008) According to the

report of Lao Cai Provincial Department of Statistics of 2010, the poverty rate ofLao Cai was still high The main reason is that labor productivity and capitalefficiency in the agricultural sector are low and resources are limited

3.3.2 Industrial growth and poverty reduction

In the period of transition, it can be said that industrial policy has animportant role, especially in terms of growth and economic efficiency As anintegral part of the system of national economic policy, industrial policy became themost important driving force for the economy to maintain high growth in allcircumstances In the process of integration with economic development towardindustrialization and modernization, industry is the object that influences theefficiency of integration and development Industrial policy also plays an importantrole in contributing to poverty reduction and sustainable development

As a province in the Red River Delta, located in the triangle of economicgrowth, Bac Ninh is more conducive to economic-social development, in particular,industry and construction have played the most important role In 2008 theproportion was only 15.8 percent in agriculture while service was 32.8 percent andindustry was up to 51.4 percent (GSO, 2009) With the rapid development ofindustrial sector, the poverty rate in Bac Ninh declined from 38 percent in 1998 to7.5 percent in 2008 (VHLSS 1998, 2008) In particularly, the above results were dueimmediately after the re-establishment (1997), Bac Ninh province had manypolicies which directed to accelerate the industrial development and urban.Recently, the province has been planned and approved by the Prime Minister 15industrial parks, which may create jobs for over 20,000 local laborers whocontributed to the labor structure shifted towards the industrial sector As the report

of Bac Ninh Provincial Department of Statistics of 2010, proportion of workers inindustry increase from 22.3 percent in 2005 to 32 percent in 2009 and trainingactivities increased from 21.6 percent in 2000 to 37 percent in 2008

The second demonstration for the development of the industrial sector whichhad a positive impact for poverty reduction is Hoa Binh province Hoa Binhindustrial development creates conditions for the growth dynamics of production,handling jobs, leverage poverty reduction The value of industry sector in this

province in 2008 increased up to 60.3 percent compared to 7.6 percent in 1998(report of Hoa Binh Provincial Department of Statistics 2010) Industrial production

in Hoa Binh thrived with production value reaching higher The industry has greatpotential to develop such as engineering, food processing, forest productsprocessing, production of construction materials, garments Along with industrialdevelopment, employment generated more help Hoa Binh to reduce povertysignificantly from 49.4 percent in 1998 to 23 percent in 1998 (VHLSS 1998, 2008).Hoa Binh industrial development is determined as basic conditions to createincentives for the development of agriculture and forestry production, buildinginfrastructure and settlement jobs The industry sector created a solid foundation forthe development of Hoa Binh and narrowed the gap with other provinces Thepoor's living standards were improved markedly, in which the socialization of thepoverty reduction is important Additionally, the impact of changing people'sperceptions of self-escape from poverty stabilizes their lives and avoidsdependence

3.3.3 Service growth and poverty reduction

Service sector has also played important role in economic growth andpoverty reduction in Vietnam There is a misconception that only services with higheducated and skilled human resources are important In fact, many areas of theservice sector need work force with simple skills In recent years, Vietnam hasexported a large amount of labor in the service sector overseas In addition, theservice sector of Vietnam, which is essentially for provision of simple services, is asolution to create jobs for poor people Although the productivity of the servicesector in Vietnam is still low, the service sector is playing an increasingly importantrole as a driving force for economic development

It is obviously seen that there is positive relationship between economicgrowth and poverty reduction in Vietnam in all three sectors We can clearly catchthe increasing trend of industry and service sectors in sectoral structure of growthwhile agriculture tended to fall It can be seen that industry, agriculture and servicesectors had been motivation for poverty reduction during the period from 1998 to

2008 However, there was not persuasive evidence to confirm which sector has the

most powerful impact on poverty reduction in Vietnam Hence, after preliminarystudies on economic growth of Vietnam and the achievement of poverty reductionprocess, I will try to give the reasonable answer to this issue in the next chapter byquantitative research

CHAPTER 4 EMPIRICAL ANALYSIS

4.1 Empirical model

In this section we will study empirically the impact of structural growthsector on poverty reduction in Vietnam Inherited from the model in the previousstudy (Montavol and Ravallion, 2009), I use the empirical model as follows:

LnPOVit = a0 +

3 1

of 290 thousands VND and 370 thousands VND for rural and urban areasrespectively

Sijt is calculated by Yijt

j in province i at time t Yit is total output per capita of province i at time t So Yijt

Yit

are the share of agriculture, industry and services in each province when j gets 1, 2

or 3 respectively

GDPpcit is gross domestic product per capita in the province i and time t and

is calculated by real value with constant price of 1994 This indicator is determined

by the ratio of the gross domestic product in each province in 1994 constant prices

to the population of that province X is a vector of control variables Morespecifically, I will discuss extensively about the nature and measurement of all thesevariables

According to research by Dollar and Kraay (2002), growth has a majorimpact on poverty reduction but we need to consider additional explanatoryvariables which may affect poverty reduction Apart from poverty and economicgrowth, inequality is also a big problem in developing countries Bourguignon(2004) showed that in order to achieve the goal of rapidly reducing absolute povertyrequires strong combinations of growth and distribution policies Likewise, muchevidence suggests that a worsening of the distribution tends to increase poverty Infact, many researchers pointed in this direction (Dollar and Kraay, 2000;Bourguignon, 2004; Ferreira and Ravallion, 2008) In addition, research by HoiQuoc Le (2006) showed a close relationship between the process of povertyalleviation and inequality in income distribution in Vietnam The most popularmeasure of inequality is the Gini index which measures the degree of inequality inthe distribution of national income Therefore, in this model, I also add the Ginicoefficient as an explanatory variable

The Gini coefficient is most widely used of the inequality of the wholepopulation in an economy It is based on the Lorenz curve, which describes thecumulative distribution of income (or expenditure) as a function of the cumulativedistribution of households (Cowell, 1995) The Gini coefficient has values from 0 to

1 When the Gini is 0 to show for the social distribution of absolute equality andpeople in society have the same amount of income When the Gini represents asocial distribution of absolute inequality, only one individual in society has a totalincome of society The Gini coefficient is most accurate when the value iscalculated based on data on average income of each citizen However, based on theavailability and convenience of calculation, the actual Gini coefficient is calculated