RESPONSES TO POVERTY AND RISKS IN VIETNAM: HOW EFFECTIVELY CAN THE CURRENT PUBLIC SAFETY NET TARGET? Nguyen Ngoc Quynh Major in International Political

RESPONSES TO POVERTY AND RISKS IN VIETNAM:

HOW EFFECTIVELY CAN THE CURRENT

PUBLIC SAFETY NET TARGET?

Nguyen Ngoc QuynhMajor in International Political Economy

Graduate School of Humanities and Social SciencesUniversity of Tsukuba

Prepared for the JJ/WBGSP Asian Regional Conference, May 25th, 2006

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Vietnam Fact

Economic growth: 7.5% average in 1995-1999 7.2% average in 2000-2004

Poverty (% of population below national poverty line) and inequality: Poverty rate in 1993, 1998 and 2002:

1993: 58.1%; 1998: 37.4%; 2002: 28.9% for urban areas: 25.1; 9.2 and 6.6; for rural areas: 66.4; 45.5; 35.6; for ethnic minorities: 86.4; 75.2; 69.3

Stable gradually increasing disparity from 1992 to 2003 between urban and rural areas, and among the latter, a worrying situation regarding ethnic minorities.

Will rapid economic growth be enough to eradicate poverty within the next few years?

Source: World Development Indicator 2006; Vietnam Development Report 2003

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Vietnam Fact (cont.)

Where are the poor? Most ethnic minorities live in the poor mountainous and highland

areas.

The areas with higher poverty rate and higher inequality indicators are those normally have to face with adverse shocks such as natural disasters, disease and other kind of concentrated shocks specific to geographical location.

People face with shocks on day-to-day basis, and the poor tends to have fewer reserves as well as less access to consumption-smoothing devices.

The necessary of national risk pooling mechanisms and policies to mitigate the adverse impacts of shocks, which in principle, can be potentially played by safety net programs.

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Why this study?

The desirability of safety net policies clearly depends on how well pre-existing risk-sharing arrangement work. However, little is known about: If risks are shared? Who are more vulnerable in facing with risks? Which types of coping mechanisms used? How much safety net program contributes to insuring the poor?

What does this study do? Examines the level of risk sharing among households in Vietnam Identifies vulnerable groups Identifies coping mechanisms adopted by households to investigate how

well existing social welfare programs can target and insure poor people from shocks in Vietnam

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Previous Studies on Risks and Public Safety Net in Vietnam

Jennie Litvack (1999): Redistribution of resources across communes in Vietnam

Dominique van de Wall (2001): Effect of poverty on public transfer

Donald Cox (2002): private transfer rise upon retirement, widowhood and typhoon

Nguyen (2003): 5-10% of the population of Vietnam is still vulnerable to fall into poverty

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Theoretical Background

Definitions:

Risk management strategy: actions that are intended to smooth income in the face of risks and uncertainties (Morduch, 1994)

Risk sharing: sharing of uncertainties about future income with borrowing and lending based on intertemporal consumption smoothing

Vulnerability: limited accessibility to risk management strategies

Risk-coping strategies: (i) consumption reallocation, (ii) credit, (iii) precautionary savings, (iv) returns to human capital, (v) informal private transfer, (vi) direct public transfer and social welfare programs

The model:

Theoretical Model: full insurance model (Townsend 1994, Udry 1994, Jalan and Ravallion 1999)

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Theoretical Model

Perfect risk sharing model: Townsend (1994), Jalan & Ravallion (1999), Hess & Shin (2000)

Shocks

IncomeFluctuations

IncomeFluctuations

Risk pooling

mechanisms

Consumptionchange

Consumptionsmooth

Aggregate/common shocks

Idiosyncratic/specific shocks

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Data and Variables Data source: Household level panel data from the Vietnam Living

Standard Survey (VLSS) 1993, 1998, General Statistical Office of Vietnam

Sample size: 4300 households/150 communes/8 regions 3396 households in rural areas; 904 households in urban areas

Main variables: changes in household consumption and income per capita

Shocks: HH member became unemployed between the two surveys (dummy) Number of days HH member was in sickness HH faced with natural disaster (dummy)

Coping mechanisms: Net debt Net private transfer HH sold asset or dissaving over last 12 months (dummy) HH member got 2nd wage earning job (dummy) HH received support from safety net programs (dummy)

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Results

Risk sharing among households: There is strong evidence that risk sharing takes place

within very small community (i.e. communes), but it explains the performance of self-insurance mechanism only.

No risk-sharing at regionally or nationally, justifying a shortage of effective national risk pooling mechanisms. No risk-sharing across regions.

Despite the good results of risk sharing at commune level, Vietnamese households are not insured against specific community risks.

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Five findings on the identification of vulnerable households: female headed households are more vulnerable than

male headed households; ethnic minority households are more vulnerable; households who have use-right of agriculture land are

less vulnerable than households who do not; poorest decile households are most vulnerable; households reside in Red River Delta regions are

most vulnerable.

Results (cont.)

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Main coping devices: Self insurance strategies (selling asset, dissavings, private transfers),

which may make household are less vulnerable to risk at the moment, but in fact, become more vulnerable in the future.

Credit. But still, poor households have less accessibility to credit due to collateral issue.

People who become unemployed depends only on self insurance mechanisms to insure their risk.

Results (cont.)

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Targeting of social safety net programs: In most of the cases, households get support from safety net

programs only when they face with natural disasters, which are common shocks within region. Recall that there is no evidence of cross-region risk-sharing mechanisms, this result suggests a poor effectiveness of safety net programs.

While 67% of households face with natural calamities, only 3% of them received supports from safety net system.

Households belongs to most vulnerable groups are less likely to get support from safety net program in comparison with other households

Results (cont.)

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Conclusions

The current system suffers from the lack of national norms for identifying the poor consistently across regions

The system seems to short of financial resources to cover for risks. Poor targeting is a fundamental problem of the current system. In

practice, the current safety net programs failed to target the most vulnerable households.

Needs for: Consistent mechanisms to identify beneficiaries More compensatory mechanisms from the center, which could take the

form of more money, better incentives for fiscal redistribution at the local level;

More monitoring of central norms or administrative constraints on local discretion in the implementation of centrally mandated social welfare programs.

Establishment of an unemployment insurance system

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Risk-sharing Estimation Results (1)

Variables OLS estimates IV estimates

With region dummies

With commune dummies

With region dummies

With commune dummies

∆(income per capita) 0.2**

(0.02)0.15**

(0.02)1.09**

(0.16)0.08

(0.22)

AGE 10.55(11.05)

-3.85(10.19)

-65.29**

(23.72)0.19

(15.79)

AGE2 -0.1(0.11)

0.01(0.1)

0.71**

(0.24)-0.03

(0.17)

Sex -192.6**

(67.76)-75.19

(59.88)-451.65**

(121.88)-49.25

(104.72)

∆household_size -208.29**

(20.65)-174.94**

(18.2)-10.5

(48.72)-187.72**

(48.13)

∆hour_work 0.04**

(0.008)0.002

(0.008)-0.11**

(0.03)0.01

(0.02)

No. of observations 4300 4300 4300 4300

R2 0.2253 0.3697 - 0.3579

Note: 1. Change in per capita income is treated as endogenous instrumented out using a dummies variable indicating if household’s member is unemployed between the two surveys, number of days household’s member cannot carry out usual activities due to illness or injuries, and a dummy variable indicating if there is natural disaster causing more than 10% of crop lost.

2. ** estimates are significant at 1%; * estimates are significant at 5%; + estimates are significant at 10%. 3. Figures in parentheses are robust standard errors.

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Risk-sharing Estimation Results (2)




Within region Within commune Within region Within commune

∆(income per capita) 0.19**

(0.02)0.15**

(0.02)1.17**

(0.19)-0.07

(0.27)

∆(average income per capita)

0.36**

(0.06)0.37**

(0.037)2.22

(1.51)1.22**

(0.24)

AGE 12.43(11.01)

4.24(10.64)

-108.88**

(34.23)-17.82

(19.83)

AGE2 -0.12(0.11)

-0.057(0.11)

1.07**

(0.32)0.1

(0.21)

Sex -196.356**

(64.95)-152.05(63.79)

-421.55**

(140.79)-7.99

(120.95)

∆household_size -213**

(20.46)-202.25**

(19.5)57.9

(61.85)-181.56**

(52.19)

∆hour_work 0.04**

(0.007)0.03**

(0.007)-0.18**

(0.04)-0.008(0.03)

No. of observations 4300 4300 4300 4300

R2 0.2058 0.2535 - -

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Coeff. Robust Std. Err.

Coeff. Robust Std. Err.

Wealth groups

Poorest decile (ref. group) 0.28** 0.06 0.5 0.3

Poor middle 10%-60% -0.15+ 0.09 0.37 0.6

Rich 60% up -0.29** 0.05 -0.38 0.34

HH in urban area 0.05 0.04 0.4 0.26

Farm HH -0.06* 0.03 -0.23 0.25

HH with children less than 6 years old 0.03 0.04 -0.03 0.2

HH head is male -0.05 0.04 -0.34* 0.17

HH belongs to majority ethnic groups -0.049+ 0.029 -0.22 0.14

HH that owns agriculture land -0.02 0.03 0.26 0.43

No. of observations 4300 4300

R2 0.3263 0.1119

Identification of Vulnerable Groups

Effect of income shocks on consumption by all characteristics of households:



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Choice of Coping Strategies

Have support from safety net programs

Have positive net debt

Have positive net private transfer

Sold assets or dissaving over last 12 months

HH members get 2nd job

Coeff. Std. Err. Coeff. Std. Err. Coeff. Std. Err.

Coeff. Std. Err. Coeff. Std. Err.

HH member was unemployed

0.033(0.0009)

0.12 0.054(0.026)

0.064 0.25**

(0.06)0.06 0.12+

(0.027)0.069 -0.005

(-0.001)0.07

HH member in was sickness

0.00004(0.0000011

)

0.004 0.011**

(0.005)0.002 0.0088**

(0.0022)0.002 -0.005*

(-0.001)0.002 0.002

(0.0004)

0.002

HH faced natural disaster

0.49**

(0.0134)0.11 0.19**

(0.091)0.04 -0.25**

(-0.063)0.046 -0.079+

(-0.017)0.046 0.24**

(0.049)0.04

Log likelihood

-10013.346

No. of obs. 4300


2. ** estimates are significant at 1%; * estimates are significant at 5%; + estimates are significant at 10%. 3. Figures in parentheses are marginal effects 4. The multi-choices model is estimated by multivariate probit

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Accessibility of most vulnerable households to safety net programs

Variables Interaction between household has support from public safety and household characteristic

Coeff. Std. Err. Marginal Effect

HH head is female

HH member was unemployed -0.14 0.23 -0.07

HH member in was sickness 0.0017 0.008 0.0001

HH faced natural disaster 0.4* 0.17 0.022

HH belongs to ethnic minority groups

HH member was unemployed -0.16 0.23 -0.0028

HH member in was sickness -0.015+ 0.008 -0.0003+

HH faced natural disaster - - -

HH do not have the use-right of land

HH member was unemployed 0.11 0.2 0.0016

HH member in was sickness -0.002 0.008 -0.000029

HH faced natural disaster -0.099 0.15 -0.0013

HH belongs to poorest wealth groups

HH member was unemployed 0.036 0.12 0.0019

HH member in was sickness 0.00013 0.004 6.90e-06

HH faced natural disaster 0.49** 0.11 0.022*

HH resides in Red River Delta area

HH member was unemployed - - -

HH member in was sickness 0.006 0.014 3.14e-06

HH faced natural disaster -0.269 0.31 -0.00017

Documents

RESPONSES TO POVERTY AND RISKS IN VIETNAM: HOW EFFECTIVELY CAN THE CURRENT PUBLIC SAFETY NET TARGET? Nguyen Ngoc Quynh Major in International Political