In partial fulfillment of the requirements for obtaining the degree of master of arts in economics of development

NATIONAL ECONOMICS UNIVERSITY  INSTITUTE OF SOCIAL STUDIES   HA NOI  THE HAGUE   DETERMINANTS OF POVERTY REDUCTION POTENTIAL OF LAND IN RURAL VIETNAM A THESIS PRESENTED BY HA CHI HAI In Partial Fulfillment of the Requirements for Obtaining the Degree of MASTER OF ARTS IN ECONOMICS OF DEVELOPMENT SUPERVISOR Assoc.Prof. Dr. NGUYEN QUANG DONG HANOI - 2007 ACKNOWLEDGEMENT In completing my thesis, I have been received considerable and kind support from many people, to whom I would like to give 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