I t' UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FORMA IN DEVELOPMENT ECONOMICS INCOME DIVERSIFICATION AND THE ROLE OF NON-FARM ACTIVITIES: A CASE OF RURAL VIETNAM By LEVINHHOA MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, MAY 2011 TIEU LUAN MOI download : skknchat@gmail.com ~·--r--------------------------------------------------~ UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FORMA. IN DEVELOPMENT ECONOMICS INCOME DIVERSIFICATION AND THE ROLE OF NON-FARM ACTIVITIES: A CASE OF RURAL VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS Academic Supervisor: Dr. HA THUC VIEN HO CHI MINH CITY, MAY 2011 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENTS First of all, I appreciate and sincere gratitude to the Vietnam Netherlands Program for • granting me an academic course to pursue the Master of Art in Development Economic. I would like to give my sincere thank to my supervisor professor Dr.
Ha Thuc Vien, who has straight accepted to guide me in this thesis. He supervised me with enthusiasm, efficiency and pragmatism, and always provided me with ideas and guidance. During my thesis, I have benefited from the assistance of Mr. Nguyen Trung Hieu, Mrs.
Nguyen Thi Kim Cue (Vietnam- Netherlands Programme for M. in Development Economics). I want to thank Mrs. Nguyen Thi Kim Cue for her very pertinent comments and frankness.
I've really appreciated Mr. Nguyen Trung Hieu availability for technical help as well as for guiding me towards a higher level in econometrics. Professor Peter Calkins has also commented on an earlier version of this thesis. I would also like to express my sincere thanks to all of you.
HCMC, Summer 2011 LE VINHHOA TIEU LUAN MOI download : skknchat@gmail.com ECLARATION declare that "INCOME DIVERSIFICATION AND THE ROLE OF NON- ARM ACTIVITIES: CASE OF VIETNAM" is my own work, that it has not been ubmitted to any degree or examination at any other universities, and that all the ources used or quoted are indicated and acknowledged by complete references. HCMC, April 2011 LE VINHHOA 11 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT his thesis examines how diversification level of household income in Vietnam. The suits show a trend in increasing number of income resources. The fact that one third f the households in the studied have not engaged yet in any form of economic iversification (if exclude money transfer), both wage and non-farm activities ontribute to an increased average total household income.
Increasing rural income trongly relies upon the development of non-farm activities, including the evelopment of a local rural industry, tourism as well as migration. Non-farm ctivities are a part of rural economy in Vietnam today and it is a significant income ontributor for many rural households. Non-farm income has good impacts on ousehold income and agricultural sector is not the leading employment sector. 111 TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CKN 0 WLEDG EMENTS.
iii ABLE OF CONTENTS. iv 1ST OF TABLE. vi 1ST OF FIGURES. vii HAPTER 1: INTRODUCTION.
The objectives of study. Structure of thesis. 3 HAPTER II: LITERATURE REVIEW. Factors effect to income diversification.
Household non-farm activities. Declining a share of agriculture in GDP and labor. Increasing role of non-farm activities in household economy. 11 CHAPTER III: RESEARCH METHODOLOGY.
Model specification-dependent variable. Model specification-independent variables. 22 CHAPTER IV: DATA ANALYSIS AND DISCUSSIONS. 26 IV TIEU LUAN MOI download : skknchat@gmail.
Household's income diversification. Income diversification by the number of income sources. Measurement of income share diversity. Roles of non-farm activities in Vietnam's rural household economy.
40 HAPTER V: CONCLUSIONS AND RECOMMENDATIONS. Conclusions and recommendations. v TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLE Table 4.1: Structure of family income in the 2008 survey .3: Structure of employed population by kind of economic activity .4 Trends in income diversification, by the number of income sources .5: Trends of income diversification, by income shares .6: Income of household with and without non-farm income .7: Detailed non-farm activities of household .8: Status of Training and Education of household .1: Regression results of diversification index .2: Regression result ofhousehold income .40 VI TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 2.1: Share of labor and GDP in agriculture .1: Distribution of the Shannon equitability index .1: Family income and the number of family income sources .2: Number ofhouseholds and number of income sources. 31 vii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER I: INTRODUCTION 1.
Problem statement A renovation process of Vietnam, commonly known as "Doi Moi", was officially launched in 1986 and has spent about two and haft decades. The country has transformed from an economy centrally planned economy to a dynamic market. One of the fundamental reforms was the legalization of most forms of private economic activities (including households and businesses), and the removal of price controls on almost all products and services. Most of the reforms affected the rural sector, where farmers were given a greater freedom in the choice of their production, and price distortions were slowly diminished.
Agriculture directly benefit to the majority of Vietnam's population whose livelihoods are closely dependent on small-scale agricultural self-sufficiency in rural areas (Benjamin and Brandt, 2004). Higher yields of rice and other crops after have allowed Vietnam to become the second largest rice exporter without expansion in rice area and reduction in domestic consumption while it had been a rice importer in the mid-eighties (Minot and Goletti, 2000). As farmers were given the choice of their agricultural production with new exporting possibilities, other kind of crops started to be grown, such as pepper or rubber. Vietnam has become the second largest coffee producer in the world, and production and export of fruits and vegetables have risen dramatically over this period.
And part of the income growth is undoubtedly due to diversification into other -= activities such as aquaculture, livestock, and non-farm activities with substantial tructural changes towards more industry and services. 1 TIEU LUAN MOI download : skknchat@gmail.com The importance of each of income resources in rural income growth has implications for policy and public investment. If most rural income growth comes from technological change which increases yields, then investments in agricultural research and extension deserve priority. If income growth derives largely from crop diversification, then attention needs to be focused on agricultural credit, transportation, and market information to facilitate this process.
And if income growth or poverty rises mostly due to diversification into non- farm activities, then perhaps the focus should be on training, electrification, and commercial credit to stimulate non- farm employment growth. In comparison with agricultural activities non-farm activities can create more jobs and generate higher incomes for the rural population. Non-farm incomes also may create positive spillover effects on agricultural activities as they help defeat market failures in agriculture, particularly for credit and insurance. But, the growth and importance of non-farm income in rural area should not isolated from agriculture activities because both sectors are linked through investment, production, human resources and consumption decisions throughout the rural economy, and both sectors are part of complex livelihood strategies followed by rural households.
If non-farm employment is to increase household income, it is important that such constraints are overcome. The massive shift toward non-farm incomes implied an extensive sorting out of rural households between those who stayed as pure farmers and those who embraced mixed agriculture-non-farm activities. This raises the interesting question as to whether market signals, however incomplete they may be in a transition economy, maintained in agriculture those with intrinsic characteristics that make them be better farmers ompared to those who diversified out of agriculture. 2 TIEU LUAN MOI download : skknchat@gmail.
The objectives of study This thesis aimed at investigating the role of rural non-farm activities on household income by analyzing the result of a Vietnam household living standard survey in 2008. More specifically, the objectives of the study are: ( 1) First, reviewing current status of diversification level of household income. (2) The second objective is to examine the role of non-farm income in increasing household income and how to increase non-farm income for household in Vietnam. Research question In order to research the importance of income diversification and the role of non-farm income in total income of household during 2002 - 2008, the following research questions are raised: What is current status of household's income diversification? Does income diversification affect household's income? What factors do affect household income diversification? 4.
Structure of thesis The thesis will begin with Chapter 1, the introduction will present. In the next, a review of existing empirical research related to diversification and non-farm economy. In chapter 3, a method will follow. In chapter 4 and 5, the data will be presented and the statically results explained.
Finally, the thesis will be concluding by a presentation of the results obtained and by some final remark. 3 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER II: LITERATURE REVIEW 1. Definitions: Income diversification refers to several distinct concepts; the patterns of diversification vary depending on the definition used. Here, the thesis briefly describes some of review studies on income diversification.
To understand the economic rationale for an individual household to have multiple income generating activities, there is the need to look at household level factors. One definition of income diversification, perhaps closest to the original meaning of the word, refers to an increase in the number of sources of income or the balance among the different sources. Thus, a household with two sources of income would be more diversified than a household with just one source, and a household with two income sources, each contributing half of the total, would be more diversified than a household with two sources, one that accounts for 90 percent of the total (Joshi et al. 'Non-farm' refers to those activities that are not primary agriculture or forestry or fisheries.
However, non-farm does include trade or processing of agricultural products (even if, in the case of micro-processing activities, they take place on the farm). Non- farm work can divide into wage work (including agricultural) and all self-employment that is not self-employment in agriculture. The rural non-farm sector usually includes manufacturing, trade, construction, transportation, communications, and services. Barrett and Reardon (200 1) stress that this definition is sectored, i.
it follows the convention used in national accounting systems where a distinction is made between primary production, secondary (manufacturing) activities, and tertiary (service) activities). It does not matter where the activity takes place, at what scale, or with 4 TIEU LUAN MOI download : skknchat@gmail.com what technology. The term 'non-farm' should not be confused with 'off-farm'. The latter generally refers to activities undertaken away from the household's own farm, and some authors (e.
Ellis, 1998) use it to refer exclusively to agricultural laboring on someone else's land, so 'off-farm' used in this sense would not fall within the normal definition of 'non-farm'. Factors effect to income diversification Income diversification is not synonymous with livelihood diversification. The latter is a process by which households construct a diverse portfolio of activities and social support capabilities in order to improve their living standards and manage risk. Income generation is one of the components of livelihood strategies (Ellis 1998).
Livelihood diversification also encompasses the social institutions, gender relations, property rights, and other non-income support systems that sustain a living. Household motives for diversification, as well as the opportunities available to them, differ significantly across settings and income groups, suggesting an important distinction between: ( 1) diversification undertaken for accumulation objectives, driven mainly by "pull factors"; and (2) diversification undertaken to manage risk, cope with shock, or escape from agriculture in stagnation or in secular decline, hence driven by "push factors".