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Economic growth and living standards of Vietnamese population
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The relationship between economic growth and social development in Vietnam is under recent attention. The concerns of this paper are about the characteristics of the economic growth in Vietnam, the differentiation in living standards and some consequences of the economic growth and market mechanism that contribute to this differentiation.

1. The Economic Growth


The Vietnamese economy achieved a relatively high growth in comparison with other countries in the region and in the world. It is also a “vulnerable” economy in this changing world. Not being a “direct victim” of the Asian financial crisis in 1997, but Vietnamese economy also suffered from its negative effects. As the crisis occurred, the speed of Vietnamese economic growth decreased sharply from 9.34% in 1996 and 8.15% in 1997 to 5.76% in 1998 and 4.77% in 1999. After that, along with the restoration of other affected economies, the economic growth rate of the country witnessed an increase, especially in the period of 2005 – 2007, by over 8% annually. However, the recent world’s recession did not exclude Vietnam from its effects since its first year 2008.
 
With the annual growth rate of 7.48% in the period of 1995 – 2008, Vietnam was one of the economies that reached the highest growth rate in the world. However, it had to pay a price for it. The “Tightening the belt” policy to reduce spending and promote investing was under implementation. Saving rate per GDP of Vietnam was pretty high in comparison with that of some Eastern Asian countries in this period of the high economic growth. Take South Korea and Taiwan in this period of 1981 – 1990 for example. Annually, they saved 29.6% and 21.9% of their GDP for investment and gained a 9.5% and 8% growth rate on average, respectively.

Encouraging savings for investment purposes was very important to the process of economic industrialization. However, levels of appropriateness and efficiency of investment in countries was not the same. A comparison of ICOR between Vietnam and other Eastern Asian economies will show a big difference.

As seen in Table 1, to create 1 dollar of GDP, while Taiwan spent 2.7 dollars of invested capital, Japan and South Korea 3.2 dollars, China 4.1 dollars, Vietnam should spend 5 dollars. This reflects a low level of efficiency in Vietnam’s economy.

Table 1: Rate of development investment of Vietnam and other countries in the high growth period

The high growth period

Investment/GDP (%)

GDP growth rate (%)

ICOR

Vietnam

2001-2005

37.7

7.5

5.0

2006

40.0

8.17

5.0

China

1991-2003

39.1

9.5

4.1

Japan

1961-1970

32.6

10.2

3.2

South Korea

1981-1990

29.6

9.2

3.2

Taiwan

1981-1990

21.9

8.0

2.7

Source: Chi Hung Kwan, Why China’s Investment Efficiency is Low, China in Transition, June 18, 2004.

2. DISPARITY OF Living Standards

Achievement in the economic growth over a long period of time significantly supported the work of poverty reduction. However, the economic growth was one of the causes of increases in inequality between regions, areas, as well as between groups of rich and poor people.

During the period 1993 – 2006, inequality has widden in Vietnam. How the inequality revealed depends on the criteria that were used in calculating GINI.

GINI that was based on consumption expenditure grew from 0.34 in 1993 to 0.37 in 2004 and went down to 0.36 in 2006. This level of inequality was reasonable in the context of a high economic growth in the country. It was noted that, however, in the survey, many rich people did not account for their consumption; that led to an inaccurate GINI calculation. For this reason, the World Bank indicated in its Development Report (2008) that Vietnam should develop a more accurate GINI co-efficient.

On the contrary, GINI that based its calculation on income increased fast, from 0.35 in 1993 to 0.43 in 2006, which was much higher than the one that was calculated from the consumption expenditure. In particular, this calculation found a bigger gap between incomes of the richest and the poorest groups. Up until 2006, the average income of the richest quintile was 8.4 times higher than that of the poorest quintile.

Table 2: GINI co-efficient based on consumption expenditure and income in Vietnam

1993

1998

2002

2004

2006

GINI based on consumption expenditures

0.34

0.35

0.37

0.37

0.36

GINI based on income

0.35

0.39

0.42

0.41

0.43

Income gap between the richest and the poorest quintiles (times)

6.2

7.6

8.1

8.3

8.4

Source: Data of Vietnam Living Standards Surveys 1993, 1998, 2002, 2004 and 2006, quoted from Tran Hai Hac, 2008.

2.1. Regional disparity of poverty rates

The poverty rate in Vietnam decreased rapidly in the last two decades, with a lower decrease in some recent years. It was 37.4% in 1998 and 16% in 2006: an altogether decrease of 21.4% over 8 years. In more detail, the poverty rate went down sharply in 2003 and 2004 by 9.4%, but was slower going down in 2005 and 2006 with a 3.5% decrease. That was quite an impressive achievement when the poverty rate of Vietnam was reduced by half in just 8 years (1998 – 2006).

Table 3: Poverty rate, 1998 – 2006 (%)

Region

1998

2002

2004

2006

Red River Delta

29.3

22.4

12.1

8.8

North East

62.0

38.4

29.4

25.0

North West

73.4

68.0

58.6

49.0

North Central Coast

48.1

43.9

31.9

29.1

South Central Coast

34.5

25.2

19.0

12.6

Central Highlands

52.4

51.8

33.1

28.6

South East

12.2

10.6

5.4

5.8

Mekong River Delta

36.9

23.4

19.5

10.3

Vietnam

37.4

28.9

19.5

16.0

Source: General Statistical Office, Data of Vietnam Living Standards Surveys 1998, 2002, 2004 and 2006.

However, the achievements were different from region to region. The poverty rate of the North West was still the highest in the country, followed by the North Central Coast and the Central Highlands: 49% and 30%, respectively. These regions owned a much lower decreasing speed in comparison with other regions (See Table 3).

2.2. Regional gaps in income and consumption

Average income levels of the population in the North West and the North Central Coast were the lowest ones in the whole country. However, these observed an impressive improvement: the average income level of the North West’s population increased by 35% from 2002 to 2004 and by 40% from 2004 to 2006. From 1998 to 2006, it rose by 77.38%. In the same period of time, the rates of increase in income of the North Central Coast's population were 34.71%, 31.91% and 96.94%, respectively.

However, in comparison with other regions, especially the fastest developing region South East, the income level of the North West was 2.86 times lower and this of the North Central Coast was 2.55 times lower. These differences represented quite a large gap of development between population in different regions in the country. It is obvious that geographical disadvantages and limited access to the market were the real obstacles to income improvement in these regions. In general, inhabitants in the North West region, the Central Highlands and the North Central Coast earned a much lower income compared to the national average level. The gap between the richest and the poorest regions widened, from 2.5 times in 1998 to 2.86 times in 2006 and 3.1 times in the period of 2002 – 2004. It shows the fact that despite the overall improvement, income levels in the poorest regions were falling behind, and even further and further behind other regions in the country.

Table 4: Average monthly per capita income (at real price, 1000 VND)

Region

1998

2002

2004

2006

Red River Delta

280.3

353.1

488.2

653.3

North East

210.0

210.0

268.8

379.9

511.2

North West

197.0

265.7

372.5

North Central Coast

212.4

235.4

317.1

418.3

South Central Coast

252.8

305.8

414.9

550.7

Central Highlands

344.7

244

390.0

522.4

South East

527.8

619.7

833.0

1064.7

Mekong River Delta

342.1

371.3

471.1

627.6

Vietnam

295.0

356.1

484.4

636.5

Source: General Statistical Office, Data of Vietnam Living Standards Surveys 1998, 2002, 2004 and 2006.

The average income level of populations in the North West region, the Central Highlands and the North Central Coast were slightly above the new national poverty level which was established by the Ministry of Labor, Invalid and Social Affairs. Since a large portion of their income came from agriculture and husbandry, just a small “shock” could push them back to poverty. According to the results of the Survey on Basic Socio-economic Situations of Vietnamese Rural Households in 2005, conducted by the Vietnamese Academy of Social Sciences, on average, 39% of household incomes in the North West region came from agriculture, 26.5% from husbandry, 5.5% from forestry, 3.6% from aquaculture, 4.7% from trading, 1.9% from non-agricultural activities, 14.7% from wages (including salary, subsidy and allowance, etc), and 4.1% from other sources. Income from agriculture and husbandry was unstable because these economic activities being so risky (heavily affected by weather, plagues and prices of inputs and outputs, etc.)

Regarding average per capita expenditure for consumption, in 1998 a person in the North Central Coast, the North West region and the South Central Coast spent 200,000 VND monthly – the lowest level in the country. In 2006, expenditure of people in the North West was still at the lowest level – 300,000 VND monthly (Table 5).

Table 5: Average spending per capita monthly (at real price, 1000 VND)

Region

1998

2002

2004

2006

Red River Delta

227.0

271.2

273.5

475.0

North East

175.8

175.8

220.2

293.8

372.8

North West

179.0

233.2

296.3

North Central Coast

162.3

192.8

252.7

314.1

South Central Coast

197.5

247.6

330.8

414.7

Central Highlands

251.1

201.8

295.3

391.1

South East

385.1

447.6

577.0

740.5

Mekong River Delta

245.8

258.4

335.1

434.5

Vietnam

221.1

269.1

359.7

406.4

Source: General Statistical Office, Data of Vietnam Living Standards Surveys 1998, 2002, 2004 and 2006.

2.3. Income gap between urban and rural areas

Average income of people in the urban areas was always higher than that of the rural areas. In Vietnam, this gap became even greater, increasing from 1.43 times in 1998 to 1.85 times in 2004 and 1.72 times in 2006.

This gap was different between regions. Except three regions where the income gap between urban and rural areas became smaller (the Central Highlands from 1.8 times to 1.31 times in 2002 – 2006; the South East: from 1.74 times to 1.45 times in 1998 – 2006; and the Mekong River Delta: from 1.49 times to 1.27 times in 1998 – 2006), this gap widened in all other regions in Vietnam. It was noted that all the later regions had a relatively higher density of population. Among them, the North West Region suffered the largest gap (about 3 times), followed by the North East Region (1.96 times), the Red River Delta (1.93 times) and the North Central Coast (1.83 times) (see Table 6).

Table 6: Income gap between population in urban and rural areas, by region (1000 VND)

Region

1998

2002

2004

2006

Rural

Urban

Rural

Urban

Rural

Urban

Rural

Urban

Red River Delta

3363

5961

4862

10234

5899

11365

6615

12746

North East

2990

4833

3958

8206

5129

9298

6125

11992

North West

3084

4794

2486

6943

3091

7862

4103

12018

North Central Coast

3123

5180

3495

6523

4241

7470

5638

10333

South Central Coast

3077

4977

4308

7448

4842

9394

5789

9987

Central Highlands

3638

-

3311

5945

4915

7792

6821

8936

South East

4684

8148

6337

1294

7118

13899

8948

12983

Mekong River Delta

3911

5834

5502

8324

6103

9591

7589

9662

Vietnam

3484

4966

4282

6865

5167

9584

6454

11082

Source: General Statistical Office, Data of Vietnam Living Standards Surveys 1998, 2002, 2004 and 2006.

2.4. Income gap between household groups

GINI co-efficient in Vietnam was not too high when assessing the differentiation of the rich and the poor; and it did not show a serious inequality in this country. However, if the population was divided into 5 income groups, this would be a different picture. The income gap between the richest and the poorest quintiles in Vietnam was 8.1 times in 2002, 8.3 times in 2004 and 8.4 times in 2006. It was noted that the most developed region in Vietnam (the South East region) owned the biggest gap of 8.8 times. This was a real problem in the process of economic growth, as well as in ensuring a sustainable development and equality in the country. (Table 7)

Table 7: Per capita monthly income gap between the richest and the poorest quintiles

Year

The poorest quintile

(1000 VND)

The richest quintile

(1000 VND)

Gap between the poorest and the richest quintiles (time)

Vietnam

2002

108

873

8.1

2004

142

1182

8.3

2006

184

1542

8.4

Red River Delta

2002

121

828

6.9

2004

164

1140

7.0

2006

215

1518

7.1

North East

2002

95

588

6.2

2004

124

872

7.0

2006

169

1205

7.1

North West

2002

75

447

6.0

2004

95

612

6.4

2006

134

880

6.6

North Central Coat

2002

89

519

5.8

2004

114

684

6.0

2006

148

934

6.3

South Central Coast

2002

113

657

5.8

2004

141

918

6.5

2006

188

1235

6.6

Central Highlands

2002

86

547

6.4

2004

119

904

7.6

2006

157

1229

7.9

South East

2002

165

1493

9.0

2004

233

2033

8.7

2006

299

2626

8.8

Mekong River Delta

2002

126

860

6.8

2004

159

1071

6.7

2006

210

1427

6.8

Source: General Statistical Office, Data of Vietnam Living Standards Surveys 1998, 2002, 2004 and 2006.

3. Impacts of Economic Growth To Living Standards

3.1. High growth goal and its impact to the poor

The high economic growth in the last decades contributed to poverty alleviation, reduced the number of poor households and improving living standards of the Vietnamese population by increasing the average income per head year by year. However, a high economic growth created a number of burdens in the macro-scope of the economy, including inflation. In exchange for high economic growth rates, Vietnam had to encourage spending on investments, implement a “loose” monetary policy and try to attract FDI. All these led to an “extreme hot” credit growth (54.6% in 2007 for example) and money supply in the period 2002 – 2007 (29% annually on average, especially by 45% in 2007) (data of Bao Viet Security Joint-Stock Company, 2008).

In Vietnam, the poor and peasants were heavily affected by inflation. Some opinions expressed that inflation would bring benefits to these groups whose income mostly came from agriculture. It may be true provided that: (1) Prices of agricultural products became higher while input’ costs stayed unchanged; (2) Peasants received all value of sold products in the market; and (3) Good conditions for agricultural production that led to good harvests. Unluckily, these factors occurred in quite different ways and created difficulties for Vietnamese peasants, especially in situations of a high inflation rate since 2007. Prices of agricultural products decreased leading to the fact that in many cases, input expenditures were greater than the profits made. This was partly caused by the poverty of the peasants. Due to a lack of capital, poor peasants had to purchase inputs (fertilizers, insecticides and other inputs) on credit at higher prices. Also, they had to sell the outputs right after the harvest at any price (usually lower than the market price) to settle their debts in time.

In addition, even good crops could not help poor peasants to be any better-off because of a poor development in agricultural product processing and preservation. Raw products were sold at low prices.

Besides, natural disasters, plagues and unusual weather conditions created disadvantages to poor peasants and pushed them back into poverty.

The poor spent a much larger part of their income on food in comparison to the rich. Their savings were mostly in cash. While rich people would keep their savings in form of other assets (such as real estate, gold and foreign currencies), in the case of high inflation, the poor had to spend almost all their savings on necessities (food and things, clothes, etc.) at higher prices. Moreover, because these amounts of money were limited, it was not enough to transform into other more beneficial kinds of investments, the poor usually became vulnerable to price skating. Therefore, high inflation affected the poor the worst. This was a consequence of the inequality caused by the negative chain of growth – inflation – income – expenditure.

3.2. Imperfect market and inequality

In the beginning of the economic reform, there was equality in all aspects in Vietnam relatively. Market mechanism encouraged economic growth, brought greater benefits and more opportunities to population. It also extended the gap between the rich and the poor. That is a normal road of development in a perfect market. However, it is odd in an imperfect market economy where there was a lack of reasonable mechanisms, policies and market elements like Vietnam. The rich became much richer thanks not to legal and truthful activities, but to stealthy power relations, illegal and unequal economic activities. Land speculation also distorted the market where unclear or inner information was prevalent and was used to make huge benefits to the rich who had advantages in capital and pragmatic relations. All this widened the gap between the rich and the poor.

4. CONCLUSION

1. As usual, regions in difficult natural conditions always possess a poor infrastructure system, had less opportunity to gain access to economic development resources. As a result, their economic structures were not in a favorable process with the bias of agriculture. In this context, peasants and the poor were the most “vulnerable” ones.

2. Economic growth is only qualified in the case that the circle (natural condition – opportunity to gain access to resources – economic growth – inflation – market – power – rich and poor gap) is operated in equality. The equality can also solve the problems of unequal natural conditions.

REFERENCE

· Dao Ngoc Lam (2008), Inflation and Peasants, Thanh Nien Online, Saturday, 19 March 2008.

· General Statistical Office, Vietnam Statistics Yeabooks.

· General Statistical Office, Vietnam Living Standards Surveys 1993, 1998, 2002, 2004 and 2006.

· Nguyen Ngoc Son (2008), Signals of instability from “holes” of Vietnam’s Economy. The gate way to WTO and Market Accessing of the Ministry of Commerce.

· Pincus J. (2006), Globalization, Poverty and Inequality, UNDP Vietnam.

· Vietnam Investment Review 2008, Inflation and Living Standard, number 72, 16 June 2008.

· World Bank (2007), Vietnam Development Report 2007: Aiming High.

· World Bank (2008), Vietnam Development Report 2008: Social Protection.
 
 
Source: The Vietnam’s Socio-Economic Development Review - No.61, March 2010


Nguyen Trong Xuan