UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF INCOME DIVERSIFICATION AND ITS EFFECTS ON HOUSEHOLD INCOME IN RURAL VIETNAM BY HO THI NGOC DIEP MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, JANUARY 2013 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF INCOME DIVERSIFICATION AND ITS EFFECTS ON 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 HO THI NGOC DIEP Academic Supervisor: Dr. HA THUC VIEN HO CHI MINH CITY, JANUARY 2013 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENTS With these words, I would like to express my sincere thank to all who have supported me during my journey to complete the Master program in general and this thesis in particular. First of all, I would like to thank the Board of Faculties of the University of Economics of Ho Chi Minh City and International Institute of Social Studies (ISS) for providing me with all fruitful and precious academic knowledge during the master program. The Thesis could not have been designed and completed without the support from my Professors in the University of Economics and ISS.
I would like to show my deepest gratitude to Dr. Ha Thuc Vien and Dr. Tran Tien Khai for all their invaluable comments and fruitful guidance from the very beginning of the formatting of the topic. My special thanks go to Dr.
Ha Thuc Vien for his academic supervision, inspiration through the progress of my thesis writing. In addition, I would like to express my sincere thank to Dr. Pham Khanh Nam, Mr Nguyen Van Dung for their guidance on technical issues used for the analysis of the thesis. Last but not least, I am deeply indebted to my family members: my parents, my parents – in law, my sisters for all their understanding and supports during my study.
I would like to express my special thanks to my mother and my mother- in-law, who have helped me to take care of my little baby so that I can concentrate on my thesis. Finally, I would like to thank my husband who is always besides me, encouraging and helping me with daily life, so that I can spend most of my time on completing the thesis. 2 TIEU LUAN MOI download : skknchat@gmail.com TABLES OF CONTENTS Acknowledgements List of tables, figures Abstracts CHAPTER 1 INTRODUCTION 1.1 Concepts and measures of income diversification .3 Determinants of income diversification .4 Previous studies on income diversification in Vietnam. 10 CHAPTER 3 DATA AND RESEARCH METHODOLOGY .1 Classification and calculation of income sources .2 Indicators of income diversity .3 The method of analysis.
16 CHAPTER 4 FINDINGS AND DISCUSSION .1 Patterns and trends in income diversification.1 Diversity of income sources .2 Diversification as a shift to non-farm activities .3 Diversification as commercialization production .2 Econometric results and discussion .1 Expected sign of determinants of income diversification .2 Determinants of income diversification (number of income sources) .3 Determinants of income diversification (Simpson index of diversity). 35 3 TIEU LUAN MOI download : skknchat@gmail.4 Determinants of income diversification (share of non-farm income in total income) .5 Impact of income diversification on total income of household. 45 CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS. 46 4 TIEU LUAN MOI download : skknchat@gmail.com LISTS OF TABLES AND FIGURES TABLES Table 4.
1 Measures of diversity in income sources and Simpson index of diversity in rural areas by regions across years. 2 Measures of diversity in number of income sources and Simpson index of diversity in rural areas by income quintile across years. 3 Share of non-farm income in total income by income quintile across years. 4 Measure of commercialization by regions and year.
5 Measure of commercialization by income quintile and year. 6 Descriptive statistics for the dependent and independent variables .7 Hypotheses regarding impact of independent variables on measures of income diversification. 8 Determinants of income diversification (NIS). 9 Determinants of income diversification (SID) and (NFS).
10 Summary of results on determinants of income diversification. 11 Impacts of income diversification on total income of household .2 The Sustainable Livelihood Framework………………………………. 1 Trends in income composition of rural households……………………22 4. 2 Share of nonfarm income in total income of rural households……… 23 4.
3 Share of output sold or bartered by region and year………………… 25 5 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT Income diversification has been a special attention of researchers, especially in developing countries. It is a means to increase household’s income and reduce risks of income volatility of each income source. However, the patterns and trends of income diversification vary from country to country and from region to region. This research aims at examining the determinants of income diversification among rural households in Vietnam and the impact of diversification on household’s total income in order to decide appropriate policy responses.
Based on Vietnam Household Living standard surveys in 2002, 2004, 2006, 2008 and 2010, the descriptive analysis on a variety of concepts of diversification shows that the diversification in rural areas is very common and tends to increase over time. For instance, a number of income sources among rural households goes up to from 4. The analysis also indicates the growing importance of non-farm activities. Nevertheless, the extent of diversification is not the same between the rich and the poor.
The poorer tend to have more income sources than the richer while the richer is much more diversified in terms of share of income from non-farm activities than the poorer. The econometric analysis uses methods of Poisson regression in the model of number of income sources and Tobit regression in the model of SID and NFS. The regression results show that socio-economic status and access to formal financial market both have positive impact on the number of income sources pursued by households and the Simpson index of diversification. Interestingly, it is found that the access to financial markets has negative effect on the share of non-farm income.
The accessibility of infrastructure is also an important determinant of income diversification. The evaluation of reverse impact of diversification on household’s total income confirms that all of the three indicators of income diversification: a number of income source, share of non-farm income and Simpson index of diversity have positive impact on household’s total income. It implies that households try to 6 TIEU LUAN MOI download : skknchat@gmail.com increase their income by pursuing multiple income strategy, expanding their income generating out of agricultural activities and maintaining the balance among different income activities. 7 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1 INTRODUCTION 1.1 Problem Statement Income diversification among rural household in developing countries has called for substantial attention of scholars in development economics.
It is referred to the allocation of resources among different income generating activities, both on-farm and off-farm, according to Abdulai and Crolerees (2001). There are several motives for households to diversify their income sources. Households tend to carry out the income diversification because of the need to manage risks, to secure a smooth flow of income, to allocate the surplus labor or to respond to different kinds of market failures such as insurance and credit market imperfection (Ellis, 1998). Given the potential role of income diversification in stabilizing income and alleviating rural poverty, governments in several developing countries are increasingly interested in promoting diversification.
And Vietnam with more than 70% of the population lives in rural areas is not an exception. Since 1986, the Government has implemented various policies with an aim to developing multi-sector economy, renovating the economic structure and stabilizing the social economic environment including improving people’s living standards and opening the country’s economy to the rest of the world. For rural development, some specific objectives raised are to create more jobs, to raise agricultural and rural industry-related income, and to develop services and off- farm activities. In other words, these policies are designed to directly or indirectly stimulate the process of income diversification in Vietnam in general and in rural areas in particular.
With the nation-wide renovation, Vietnam has gained some remarkable achievements in economic development and poverty reduction, with the annual economic growth rate of 6-8 percent since the early 1990 and the poverty rate falling from 58% in 1993, 29% in 2002, 15.5% in 1 TIEU LUAN MOI download : skknchat@gmail. Part of income growth and poverty reduction is undoubtedly due to diversification among households both into higher value crops and into non-crop activities such as livestock raising, and non-farm activities. Though income diversification plays such an important role in the early stage of rural transformation, the patterns of rural income diversification may vary across countries and regions (Ellis, 1998). Hence, it is necessary to identify the determinants of income diversification of specific countries and regions as it helps government have appropriate policy response to support the rural areas.
While there are very few empirical studies about the income diversification issue in Vietnam, the research on the impact of diversification on household income is even rarer. Based on the empirical studies and data from Vietnam Household Living Standards Survey 2008 (VHLSS 2008), this paper is aimed at determining the factors that affect the ability to carry out income diversification among households in rural Vietnam and to measure the impacts of diversification on household incomes.2 Research objectives The paper is to investigate determinants of income diversification among households in rural areas of Vietnam, and measure the difference in the level of impact of these factors among economic and geographical regions. This paper also aims at examining the reverse effects of income diversification on the household income.3 Research questions Specifically, the paper tries to address the following questions: - What are the determinants of income diversification in rural Vietnam at household level? - How does the level of income diversification differ among rural regions within Vietnam? 2 TIEU LUAN MOI download : skknchat@gmail.com - What are the impacts of diversification on household income? The thesis is organized into 5 chapters. After the introductory Chapter, Chapter 2 is literature review, including the review of theoretical framework and the previous studies of income diversification in developing countries.
Chapter 3 describes the data source and methodologies used to analyze the data. Determinants and impacts of income diversification are analyzed economically in Chapter 4. Chapter 5 summarizes the results found, draws some conclusion related and discusses some policy recommendations. 3 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 2 LITERATURE REVIEW 2.1 Concepts and measures of income diversification Income diversification has been employed by households as one of the strategies to minimize the income variability and ensure a minimum level of income.
Empirical studies commonly based on five different indicators of income diversification for their analysis, each of which is discussed in details as bellows: The first definition is possibly the simplest one that diversification is referred to the increase in the number of income sources of households (Minot et al. Accordingly, households with more income sources are considered to be more diversified and the more number of sources a household has over time, the greater the increase in diversification that household pursue over that time period. This indicator is simple to measure and understand. However, it only focuses on the number of sources with equal treatment among every income source but not taking into the consideration its importance to the total income of household.
The second approach is introduced to overcome the weakness of the previous measure. This indicator takes into account not only the number of income sources but also the contribution of each source to total household income.