Determinants of poverty reduction potential of land in rural Vietnam

my special thanks. First of all, I would like to express my special thanks to Assoc. Prof. Dr. Nguyen Quang Dong, for his valuable time reading my drafts and giving me helpful guidance, support and suggestions. I am grateful to Prof. Dr. Sc. Vu Thieu for his lectures on research methodology and econometric. I also would like to thank all the teachers and the staff in the Vietnam – Netherlands Master Project who have given my classmates and me their enthusiasm, kindness and effective help during our course. Finally, I am deeply indebted to my family, MDE classmates for their spiritual encouragement throughout the preparation and development of this thesis. Without their heartfelt love and support, the thesis would have been made impossible. HA CHI HAI November 2007 ABSTRACT This thesis examines the role of land as an instrument of poverty reduction, combine with conditions under which access to land in Vietnam rural. The thesis employs parametric methods and data from Vietnam Living Standard Survey 2002. The results show that marginal welfare value of land is quite high. An increase of 1 hectare will increase annually income by 2,700,000 VND a year, but there is a wide range of difference in return to land among regions. Education is an important factor contributes to household welfare, a marginal increase in the household head’s education level raises welfare by 2,498 thousand VND/year if the head finished primary level and reach up to 14,929 thousands if the heads have education attainment from vocational program, colleague and university or higher. In addition, the marginal welfare value of land depend importantly other conditions under which land is used by households such as household and local characteristics TABLE OF CONTENTS ACKNOWLEDGEMENT i ABSTACT ii LIST OF TABLES iii LIST OF ABBRIVIATIONS v CHAPTER I 1 INTRODUCTION 1 1.1 Research topic 1 1.2 Research objectives, scope and focus of the study 2 1.3 Research questions 2 1.4 Methodology 2 1.5 Data 3 1.6 Structure of the thesis 3 CHAPTER II METHODOLOGICAL FRAMEWORK 4 I. Theoretical framework 4 II. Econometric specification of the welfare equation 6 III. Literature review 7 CHAPTER III OVERVIEW OF LAND ALLOCATION IN VIETNAM’ AGRARIAN TRANSITION AND POVERTY 10 I. OVERVIEW OF LAND ALLOCATION IN VIETNAM’ AGRARIAN TRANSITION 10 1.1  Land reform in Vietnam 10 1.2  The process of land allocation 14 1.3  Land use in Vietnam 15 II. POVERTY IN VIETNAM 17 2.1.  Overall Poverty in Vietnam 17 2.2 Dimensions of poverty in Vietnam 17 2.3 Summary of characteristics of poverty in Vietnam 20 CHAPTER IV ESTIMATION RESULTS OF HOUSEHOLD WELFARE 22 I. DATA 22 II. DESCRIPTION OF VARIABLES 23 1. Dependent variable 23 2. Explanatory variables 23 III.ESTIMATION RESULTS: The household welfare generating potential of land 25 SUMMARY OF FINDINGS 29 CHAPTER V CONCLUSION AND POLICY IMPLICATIONS 30 I. CONCLUSION 30 II. POLICY IMPLICATIONS 30 III. SUGGESTION FOR FURTHER STUDY 31 REFERENCES 32 APPENDICES 35 LIST OF TABLES Table 1 - Major annual crops grown in Vietnam, 1995-2000 16 Table 2: Indicators of poverty in Vietnam 1990-2002 17 Table 3: Spatial dimensions of poverty and inequality in Vietnam 18 Table 4: Ethnic and gender dimensions of poverty in Vietnam 19 Table 5: Socio-characteristics of Vietnam’s poverty profile 20 Table 6: Number of household by region 22 Table 7 - Estimation of the welfare household index 27 LIST OF ABBREVIATIONS CH Central Highland CPI Consumers’ Price Index GSO General Statistics Office of Vietnam MKD Mekong Delta NCC North Central Coast NE North East NW North West OLS Ordinary Least Square RRD Red River Delta SCC South Central Coast SE State-Owned Enterprises VLSS 2002 Vietnam Living Standards Survey in 2002 VND Vietnamese Dong WB World Bank CHAPTER I INTRODUCTION 1.1 Research topic The role of land in economic theory is extensively documented. Originally, land used by agriculture was the main motivation for an economic treatment of land. Prominent effort of classical economist was to established relation between land, labor and capital and its contribution to economic growth. Later, land use did not occupy an important position in neoclassical core economic theory, they considered it as a production factor of relatively little importance. Land as the principal source of wealth in classical economics lost its central role in neoclassical economics (Klaus; Jeroen, 2002). In reality, land in agricultural production still plays a key role both in term of household wealth and mean of poverty reduction. Access to land has for many years advocated as one of the potentially most effective approaches to rural poverty alleviation (Warriner, 1969; Thiesenheusen, 1989; Bingswanger et al., 1995). Therefore land reforms in developing countries aimed to give the poor opportunity to help them go out of poverty status. It was not far away from favoring low income people, pro-poor policy in Vietnam has extensively and dramatically performed land reform over renovation process (Doi Moi) since 1986. Vietnam started to transform its rural sector from collectivized agricultural production to a system based on households’ initiative, a move that culminated in the passage of the 1988 Land Law. A new law was enacted in July 1993 to deal with factors such as threats of administrative reallocation, short duration of use rights, lack of transferability and the inability to use land as collateral. Studies have shown that this led to significant increases in overall rural productivity, although pre-existing differences between North and South were not eliminated (Pingali and Xuan 1992, Tran 1998), other study suggest that land allocation responded positively but slowly to the inefficiencies of the administrative allocation (Ravallion, M; Walle, D.V.D). We see that there is, however, a remarkable absence of solid empirical evidence measuring the potential of land in reducing poverty in Vietnam, particularly carefully taking into account the specific conditions under which land is used by beneficiaries, when we well know that these conditions are key determinants of success or failure. Aim to analyze further these effective factors basically and systemically, the topic “Determinants of poverty reduction potential of land in Vietnam rural” will be employed for my thesis. 1.2 Research objectives, scope and focus of the study This thesis will examine determinants of poverty reduction potential of land in Vietnam rural from Vietnam Living Standards Survey in 2002 (VLSS 2002). In the thesis, I will focus on exploring the relationship between income and agricultural land endowment of household where household mainly generate income from agricultural land and taking into account the specific conditions under which land is used by beneficiaries. The study focuses on four main works. Firstly, it is to introduce a general framework. Secondly, it is to provide a overview of agricultural land and poverty in Vietnam. Thirdly, it is to estimate household welfare equation, which include without and with correcting selectivity bias,. Finally, the study provides policy implications to agricultural land. 1.3 Research questions The thesis is to address main question: Which determinants cause heterogeneity in marginal returns to land for households endowed with agricultural land in Vietnam? Sub-questions include: Does marginal return to land endowed by household increase by area of agricututal land? Are there any differences in welfare of household by regions? Are there any differences in welfare of household by household characteristics, by which ways? Are there any differences in welfare of household by education? 1.4 Methodology The study reviews theoretical frameworks and relevant researches of the research topic. The research questions will be addressed by the quantitative method. Based on theoretical framework, household welfare equation is estimated, including selectivity correction. In addition, statistical and descriptive analyses are used as well. 1.5 Data This study is based on the data from the Vietnam Living Standards Survey 2002 (VLSS 2002) which conducted by World Bank (WB) and the General Statistic Office (GSO) of Vietnam. The survey provides detailed information about employment, income, education, and demographic characteristics of household members. 1.6 Structure of the thesis The thesis is divided into five chapters: Chapter 1: Introduction Chapter 2: Introduces theoretical considerations, methodological framework, and a brief of relevant literatures on returns to agricultural land. Chapter 3: Provides an overview agricultural land and poverty in Vietnam.. Chapter 4: Presents estimation results of household welfare equations. Chapter 5: Summarizes main findings and provides policy implications based on the results CHAPTER II METHODOLOGICAL FRAMEWORK This chapter introduces a economic framework for welfare equation. This chapter has three sections. Section one gives a review of economic theory for welfare equation. Section two introduces welfare equation. Section three is literature review. Theoretical framework: In this section we derive the specification of our income equation from a agrarian household production model. We consider a situation of multiple market imperfections to investigate how these distortions affect the economic return to land. The theoretical framework borrows from the work of Carter and Mesbah (1993) and it assumes three important frictions: 1) Land transactions are ignored and access to land is treated as exogenous, 2) households face the possibility of off-farm unemployment, and 3) access to credit increases with land size. Under these assumptions, consider a household that generates income by cultivating agricultural land, in addition to possibly supplying labor at an exogenously determined market wage, w. The household is endowed with T hectares of land and hours of labor per year that are employed in on-farm agricultural work (Lf) and/or off-farm activities (Ls). The household cultivates a single crop using X units of input purchased at a per unit market price of q. The crop can be sold at an exogenous market price p. Let F(Lf,X,T;z) be the production function, where z represents the set of household and contextual characteristics that affect the return on productive assets. Let Ω(Ls) denotes the number of days employed as a function of labor supplied, Ls, where Ω’>0, Ω”. Let Ґ(T) denotes the amount of working capital available at an interest rate i to a household with land endowment, T. The cost of production, qX, must be financed by the sum of initial wealth K, wage income wΩ(Ls), and available capital Ґ (T). Formally, the household chooses time allocation and purchased inputs to maximize its income: max pF(Lf, X, T;z) – qX + wΩ(Ls) – i(qX - K - wΩ(Ls)) Subject to Lf + Ls qX wΩ(Ls) + Ґ(T) Ls, Lf (1) Assuming an interior solution for the labor allocation, the first-order conditions of this maximization problem can be written: pFL = w(1 + I + λ)Ω’ pFx = q(1 + i + λ) λ(K + w Ω(Ls) + Ґ(T) – qX = 0; λ 0; K + wΩ(Ls) + Ґ(T) – qX 0 (2) So that we have maximum in Y with optimal value of Lf*, Ls*, X* Y = pF(Lf*, X*, T;z) – q(1 + i)X* + w(1 + i)Ω(Ls*) + iK = Λ(p,q,i,w,, K,T,z) (3) The income equation is a function of prices, household’s endowment of productive assets, and any characteristic that affects the return to these assets. We can differentiate Eq. (3) to see how an increase in landholdings affects household income, = pFT + (pFL – w(1 + i) Ω’) + (pFx – q(1 + i)) = pFT + λw Ω’ + λq (4) If capital markets are perfect (λ =0), then the terms in parentheses are identically equal to zero and the marginal value of land is simply the value of its marginal product, i.e., dY/dT = pFT. Moreover, if households face the same opportunity costs of labor and inputs, and we assume constant returns to scale, then the marginal return to land is constant for all land endowments. Conversely, with imperfections in labor and credit markets, the terms in parentheses are positive. An increase in landholding has both a direct and an indirect effect on income. In addition to directly increasing production, more land affects the distortions in the allocation of production inputs. As the land endowment increases, labor allocated to the farm increases, the under-employment rate Ω decreases, and the marginal productivity of labor Ω’ increases. On the other hand, as the land endowment increases, the credit constraint may either tighten or loosen (k can increase or decrease) depending on the relative increase in credit availability Γ(T) and on the demand for inputs. For instance, in poor rural areas characterized by thin labor markets, an increase in household land will increase the marginal product value of household labor and reduce the difference between its shadow wage and the market wage. If, as Eswaran and Kotwal (1986) suggest, larger farms have better access to credit, then an increase in landholding will increase the use of variable inputs and reduce the distortion in the input markets as well. With market distortions, we consequently expect the marginal value of land to vary with the land endowment, and quite possibly in a nonlinear manner. Econometric specification of the welfare equation This section outlines the semi-parametric procedure for estimating the relationship between income and land endowments. Our production model implies that any characteristic that affects the return to the productive assets of the household should influence the household’s income. This list includes household demographics, constraints on factor use, as well as village and regional factors that capture employment opportunities and market integration. Applied in this paper, semiparameter procedure will be mentioned. According to this procedure, it still control for other factors that determine household income one side, in another hand, it allows us relax the functional form on land. Inheriting Thorsnes and McMillen, (1998), we estimate a model of the following form: yi = β’xi + g(zi) + εi (5) where x of dimension n × k is the set of control and z of dimension n × l is the hosehold’s land endowment. The variable y proxies some measure od household welfare. Constant term is denote by α, and β is a k×l vector of parameters of interest. i = 1, . . . , n. The function g(·) is assumed to be smooth and continuous. The error terms, εi, are assumed to be independent, but they may be heteroskedastic and do not have to have zero mean. I use standard parametric approach, where g(zi) is the linear function δ’zi. In a parametric approach, the vector of coefficients, δ, is most easily estimated by regressing y on x and z. Identical estimates are obtained from a three-stage procedure. In the first stage, regress y and each of the K variables in the vector x on z, and form the predicted values y^ and x^k. Next, regress y − y^ on the vector of residuals x*k = xk − x^k to estimate β. In the third step, estimate δ by regressing y − β^’x on z. Intuitively, the first step purges y and x of the effects of z, and the second stage estimates the independent effect of x on y. The third stage estimates the effect of z on the dependent variable after the effects of z have been removed. Literature review In recent years, programs of access to land have returned high on the agenda of poverty reducing strategies pursued by governments, NGOs, and international development agencies (Deininger and Feder, 2002). Measuring the poverty reducing value of land and the conditions F. Finan et al. / Journal of Development Economics 77 (2005) 27–51 28 for successful use of this instrument has thus become all the more urgent. One of influential paper conducted by Frederico Finan, Elisabeth Sadoulet, Alain de Janvry (2002) on measuring poverty reduction potential of land in rural Mexico. Results show that a small amount of land can create large income gains as it permits to mobilize family labor affected by labor market failures. In general, land has a high but decreasing marginal return for endowments of less than 3 ha and a constant return for land sizes larger than 3 ha. Additionally, the marginal welfare value of land depends crucially on both the complementary assets (such as education) and the contextual settings (such as infrastructure) of the poor, prohibiting any absolute statement about the poverty reduction value of land. They also found that ethnicity is an important negative social asset as the marginal value of land for non-indigenous households is on average twice as high as it is for indigenous households. When complementary assets and a favorable context are in place, access to even a small amount of land can help households escape poverty. The paper thus helps establish the complex set of conditions under which land can be a valuable poverty-reducing instrument. Ramo´n Lo´pez and Alberto Valde´s (2002) in the paper of “Fighting Rural Poverty in Latin America: New Evidence of the Effects of Education, Demographics, and Access to Land” in their paper with data collected from 4 countries in Latin American including El Salvador, Paraguay and Honduras have found that marginal productivity of land is higher for small farmers than for large farmers. They found that the hypothesis that farm production elasticities are equal among small and large farmers could not be rejected in any of the countries where this analysis was performed (Paraguay, Honduras, and El Salvador). Combined with the fact that yields are larger for small farmers than for large farmers, and they have conclusion that marginal productivity of land is higher for small farmers than larger farmers. Stefano Paternostro, Jean Razafindravonona, David Stifel, 2001, expressed in the work “Changes in Poverty in Madagascar: 1993-1999” have took advantage of a rich set of three nationally representative household surveys conducted by the Malagasy national statistical office (INSTAT), to examine changes in poverty in Madagascar from 1993 to 1997. The result of estimation of returns to agricultural land holdings (entered as a categorical variable to allow for non-linearities) showed that: first, except for household with extremely small holdings of less than 0.1 hectares per capita, household consumption increases for those who own land. Ceteris paribus, the landless – the left-out group – no longer have consumption levels that are statistically greater than small holders (except for the extremely small holders in 1999). As such, once keep control for other determinants of consumption, the pattern of poverty among land holders observed in which landless have lower rates of poverty than other small-holders, breaks down. Second, returns to landholdings increase with the size of the plots owned, though the positive effects on consumption are only significantly different from zero for those households with 0.2 or more hectares of land per capita (48 percent and 63 percent of all rural households in 1993 and 1999, respectively). Finally, the returns to land holdings decreased from 1993 to 1999 for those households with less than 0.4 hectares per capita, and increase for those with more land. Jean Claude Randrianarisoa (2001) in the paper of “Agricultural Production, Agricultural Land and Rural Poverty in Madagascar” using a production function analysis with flexible marginal returns, how agricultural production activities and returns to agricultural production factors differ by poverty level in the case of Madagascar., with the dataset of the IFPRI/FOFIFA surveying 200 communities in 1997 in the Fianarantsoa, Mahajanga, and the Vakinankaratra Region, Madagascar. The results show that on average, poorer households show low labor productivity while returns to a unit of extra land for them are larger than reacher. Accessing to primary education is relatively more beneficial for poorer agricultural households while additional secondary education has no effect on agricultural productivity. Returns to agricultural inputs are significantly higher for poorer agricultural households. Regarding to Vietnam, land reform has draw much attention from both Vietnamese and Foreign economists, findings pointed out that Vietnam has made considerable progress in agricultural production during time of Doi Moi. In the late 1980s, Vietnam abandoned socialist agriculture. The central government gave local authorities the power to allocate the agricultural land that had been farmed collectively to individual households. De-collectivization was implemented in 1993 by a new land law that introduced official land titles and permitted land transactions for the first time since communist rule began. Land remained the property of the state, but usage rights were extended (typically from 15 to 20 years for annual crop-land) and could (for the first time) be legally transferred and exchanged, mortgaged and inherited (Cuc and Sikor, 1998). Dominique van de Walle and Dileni Gunewardena (2001) in the paper of “Sources of ethnic inequality in Viet Nam” have regressed the log of per capita expenditures for the household in minority or majority group living in communes, against household characteristics and geographic effects We limit our sample to the 2720 rural households sampled in what we loosely call northern Viet Nam, comprising provinces in the Northern Uplands, North Coast, Red River, the Central Coast and the Central Highlands. The last is usually considered part of South Viet Nam but since it is a mountainous, border area with a historically high concentration of minority population we include it in the analysis. Households of Chinese origin tend to be relatively well-off in Viet Nam. In term of returns to land the author find that the marginal returns to aggregate land are higher for the ethnic minority groups, especially controlling for where they live. The author noted that the differences in the gains to levels of consumption will be lower than the plotted proportionate gains since the minority group is poorer. However, the gains in levels are still larger than for the majority group given that the proportionate difference in returns to land with fixed . effects is so much larger than the proportionate difference in consumption. Kazushi TAKAHASHI with the work of “Sources of Regional Income Disparity in Rural Vietnam: Oaxaca-Blinder Decomposition” had used Standards Survey (VLSS) 1993 and 1998, which covered 4800 and 6000 households, respectively and the author found that return to land are positive and significant for all regions in the both periods. Returns to land can be observed in the Northern Upland compared with the Red River Delta. An increase in 1000 m2 annual cropland, for example, increased about 8% average living standards in the Red River Delta, while it raised about 7% in the Northern Upland in 1993. While the magnitude of impacts increased to 10% in the Red River Delta in 1998, but declined to 4% in the Northern Upland. In the paper, the author also compared the estimated coefficients of almost all land categories in the Red River Delta are higher than those of the Mekong Delta. For instance, a 1000 m2 rise in annual cropland in the Mekong Delta leads to 7% and 6% increments to consumption expenditure in 1993 and 1998, respectively. The impacts of the former were close to the Red River Delta, but those of the latter were smaller than the Red River Delta by 4 percentage points. CHAPTER III OVERVIEW OF LAND ALLOCATION IN VIETNAM’ AGRARIAN TRANSITION AND POVERTY OVERVIEW OF LAND ALLOCATION IN VIETNAM’ AGRARIAN TRANSITION Land reform in Vietnam In December 1986 at the Sixth National Congress the government of Vietnam introduced a wide-ranging set of reforms known as “doi moi” (renewal or innovation). Combined with these reforms, the 1993 Land Law (and revisions of 1998), which followed the 1988 “Resolution 10”, formalized the farm household as the main unit of agricultural production and provided for the allocation of land use rights to households. These land use rights give households farm decision-making rights related to the purchase and use of inputs, the sale of outputs, and to some extent the use of land. Under the 1993 Land Law these land use rights can be transferred, exchanged, leased, inherited, and mortgaged. Land reforms that grant land use rights to individual households and encourage the equitable distribution and efficient use of land are considered to be “indispensable for rural development, for the mobilization of human resources, and for increased production for the alleviation of poverty” (FAO, 1979: cited in de Janvry, 1984, p. 263). Vietnam has undergone more than 15 years of reform following the Doi Moi resolutions in 1986. The economy is sustaining strong economic growth and generally speaking the country is considered more ‘open’ and market oriented (East Asia Analytical Unit, 1997; United Nations, 1999). In line with the process of economic development, resources have shifted from agriculture to other sectors. In 1981 about 53 percent of GDP came from agriculture, whereas in 2000 it was around 25 percent. In recent years, however, the rate of economic growth has slackened from rates in the mid-1990s (following the reforms) of around 8 to 9 percent, to real figures in 1998 and 1999 of around 4 to 6 percent (East Asia Analytical Unit, 1997; United Nations, 2000). Real growth in GDP was higher than expected in 2000 at 6.7 percent (UNDP, 2000) and forecasts for 2001 and 2002 are around 4.8 to 5.5 percent (The World Bank, 2001). Although lower than in earlier periods, the forecast growth in GDP is still the second highest behind China among the region’s large economies. Employment share for the agricultural sector remains high. Between 1993 and 1998 it has only fallen from 71 to 66 percent (The World Bank in Vietnam, 2000). Land and other economic reforms were successful in stimulating agricultural production to the extent that Vietnam moved from being a rice importer to the world’s second largest rice exporter. The production of commercial and industrial crops increased significantly and export markets have been developed for coffee, cashew, pepper and aquaculture products. However, significant challenges for agriculture still remain. The combined real growth rate of agriculture, forestry and fisheries declined from 4.4 percent in 1996 to 3.5 percent in 1998, and preliminary figures suggest that growth will be 4.0 percent in 2000. (The World Bank in Vietnam, 2002). The World Bank in Vietnam (2000, p. viii) considers that: “With some of the easy gains from the transition to a market economy now exhausted, Vietnam must focus on improving both the productivity of its existing cropland and providing opportunities for rural workers to diversify into other sectors (such as livestock and non-farm enterprises).” For this increase in productivity and diversification to be possible, there appeared to be consensus in the late 1990s among international donor agencies that reforms needed to be “re-invigorated” (The World Bank in Vietnam, 1998). Although a land use rights market is emerging in Vietnam in response to the reforms that have given a degree of security and tenure to land holdings, it is still constrained for various reasons. Additionally, the flexibility of land use is still constrained, particularly the conversion of paddy areas (that have traditionally grown, and are often still required to grow, rice) to other crops. As Vietnam participates into the world market and reduces trade barriers in line with ASEAN Free Trade Area (AFTA) and WTO requirements, farmers are becoming increasingly vulnerable to falling incomes because of lower prices for their produce on world markets, and a lack of flexibility to change enterprises will condemn many to increased poverty. A brief overview of recent land reforms in Vietnam Kerkvliet (2000, p. 1) writes “it is hard to think of a more politically controversial resource in Vietnam during the 20th century than farm land”. Conflicts over land policy (access to, and the ownership and use of land) have been integral to the period of French colonial rule, the conflict with America and the policies of the Communist Party government after re-unification of Vietnam in 1975. After a period of collectivization of agricultural land lasting from the late 1950s to the late 1970s, there was an official policy shift in 1981 when the party's Central Committee introduced a “product contract” system. This “Contract 100”, as it was known, authorized cooperatives to assign parcels of land to individual households on an annual basis and contract directly with these households to undertake the planting, care and harvesting of rice and other crops. The harvested product, however, still mostly belonged to the cooperative. This “product contract” system was the pre-cursor to future more far reaching reforms that would consolidate the agricultural household as the primary unit of agricultural production by allocating land use rights to households, and lead to a period of sustained agricultural growth. Further pressure for economic reforms in the 1980s resulted in the doi moi resolutions of 1986. Kerkvliet (1995, p.411) writes that the objective was to "radically deal with a number of mistakes in agriculture accumulated over the years," which included the "forced advance to big-scale cooperatives, lack of encouragement to family economy, (and) inadequate attention paid to (the) private economy”. The 1988 “Resolution 10” gave households greater “production rights” (including the right to sell their farm products) and began the process of land allocation on a more permanent basis. The 1993 Land Law granted farmers increased security of tenure over the land ._.