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Determinants of income distribution inequality in Vietnam Essay Sample

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Determinants of income distribution inequality in Vietnam Essay Sample

Usually, during the long way to become developed countries, developing and emerging nations have been trading off many things, industry expansion versus environment purity, international integration versus cultural maintenance and improvement, etc. Among them, there always exists a problem that all developing countries like Vietnam are facing with, income distribution inequality. Vietnam has seen a continuous growth in recent years and moved from low income class to lower middle income country. That is a huge effort of Vietnamese economy and policy makers. However, we are coping with disparity in income distribution and this problem tends to non-stop exacerbate over time. We are wondering the causes lying behind income inequality in Vietnam and what determine its changes. By that way, we would like to do this small research on such issue, figuring out its trend, causes and effects, giving comments on Vietnamese Government policies and suggesting something new from the experience of foreign countries if possible.

Our report is composed of 4 parts, Literature review, Income distribution inequality in Vietnam, Regression models and Government policies respectively. In part one, we take you around the typical research papers with popular determinants of income inequality. Then part 2 shows you the current situation of income disparity in Vietnam, its causes and impacts. To support our research, we use econometrics model testing its determinants and proving hypothesis in part 3. The final one, part 4, just illustrates some policies or programs of our Government in tackling such situation in our point of view. 1. Literature review of determinants of Income Inequality

Income distribution inequality, or income inequality in short, is the situation of unequal distribution of household or individual income across the various participants in an economy, which is usually illustrated by Gini index. A number of empirical studies have attempted to explain income distribution from various standpoints by examining a broad range of factors on income inequality as discussed subsequently. Here are some determinants that have been regularly associated with income inequality: economic growth, globalization, population growth, urbanization, government expenditure, education inequality, inflation and democracy. The association between economic growth and income inequality was first analyzed by Kuznets (1955) who found an inverted U-shaped curve. That is, increased economic development is associated with increased inequality at lower levels of growth, but then shifts at some point beyond which increased development leads to decreasing inequality. Zlatko Nikoloski (1987) pointed out that measures of economic growth which would spur growth of the GDP per capita are associated with lower levels of inequality in the long run. Matthew O. Odedokun (WIDER) and Jeffery I. Round (2001), after running the regression of the Quasi-panel data for 35 African countries over different periods during 1960s to 1990s, proved that per capita income exerted unequal effect. More specifically, the phase of economic cycle was believed to have exerted a reckonable effect, with the rising phase of the cycle having equalizing effect and declining phase (i.e., during an economic slump), unequal effect. Growth of output (GDP) was found to reduce inequality in the long run. In the short run, there may be disequilibrium.

When output grows, income increases, and wealth is created in the hands of producers which in turn improves the distribution of income. Openness of both capital and trade flows have been examined in the empirical literature for their effects on income inequality but with inconclusive results. The standard trade theory suggests that the effect of opening up an economy to international trade on the income distribution depends on the factor endowments. For countries that are highly endowed in human and physical capital, trade expansion would tend to lower the relative wages of unskilled labor and thereby increase inequality. This would involve an increase in imports of products intensive in unskilled labor and increase in exports of products intensive in human and physical capital. Evans and Timberlake (1980) stated that: dependence on foreign capital exacerbates income inequality by “distorting the occupational structure of developing economies, bloating the tertiary sector and producing highly paid elite and large groups of marginalized workers”. Alderson and Neilsen (1999), considering the role of foreign investment in income inequality using an unbalanced cross-national data set for 1967 through 1994, concluded that the relationship between income inequality and investment dependence should be revised in light of an investment-development path relating the inflow and outflow of foreign capital to economic development.

Barro (2000) showed that openness had a statistically significant and positive relationship with income inequality, and that the openness would increase the inequality in poor countries. In contrast, Dollar and Kraay (2002) found evidence that free trade and open economic policies lead to increased equality in a sample of eighty countries that covers over 40 decades. Milanovic (2002) realized a more complex relationship whereby openness in low-income countries tended to benefit only the rich, but openness in higher-income countries largely benefited the poor and middle class. Rudra (2004) also investigated the relationship between openness and income distribution using a panel data set for 35 least developed countries from 1972-1996. She found that openness had a much more severe impact on inequality in developing nations and that income distribution tended to be much more sensitive to trade flows in developing countries than in more industrialized nations. Population growth and population under 15 years of age are generally expected to push up the level of inequality. The oversupply of unskilled young workers depresses lower incomes and increase wage differentials (Alderson and Nielsen, 1999). Aged population is also expected to have a positive impact on inequality.

The argument is that higher elderly population suggests lower productivity, lower savings rates, and smaller intergenerational transfer of income (Deaton and Paxson, 1997). Jose and Teilings (2002), with the regression model being estimated using 24 transitional countries and findings from the regression result, showed that the share of population aged 60 and above has a strong adverse effect on income inequality. Urbanization can also affect income distribution. Growth of the urban population contributes to a higher middle class, and more employment (Boschi, 1987). Similarly, the larger the proportion of the labor forces in agriculture, the higher the degree of inequality. As the movement of the labor force shifts from agriculture to the urban sector, low-paid rural jobs become less important and inequality is expected to decrease. Deininger and Squire (1996) showed that inequality in the rural samples in Latin America is generally higher. Morley (2001) showed that rural-urban migration in the twentieth century reduced the pressure in the countryside, but at the cost of transferring inequality and low wages for the unskilled to the urban sector. Meenal Javed and Yasir Khan used the data in the period 1981-2005 in 25 provinces of China showing that urban-rural income gap and percentage of urban population are significant determinants of inequality and they all affect it positively. Monica Ospina, in the study of 19 Latin American and Caribbean countries from 1980-2000 presents that urbanization has a positive and significant effect on income inequality. This effect goes against the hypothesis that growth of the urban population contributes to a higher middle class, more employment, and less inequality.

It might be that the process of urbanization on most Latin American countries could be a consequence of total absence of government, bad economic conditions and violence in rural areas, rather than a consequence of better economic opportunities of large countries. That is, forced displacement from rural to urban areas could generate higher levels of inequality in urban areas. The nexus between income inequality and various measures of education is examined herewith. The direct relationship between educational inequality (unequal distribution of human capital) and income inequality yields mixed results. Most studies find a negative relationship between income inequality and a country’s average or median educational attainment. Aboyade (1978) analyzing the disparities in the current salary structure according to educational levels, it should be noted that, the lowest paid workers in the public service are expected to have a minimum qualification of complete primary school education. The income distribution among employees in relation to their education background was summarized in their findings which indicated that the salary of a secondary school graduate was 65% higher than that of the primary school while that of university graduate or post secondary school graduate was between 115% – 170% higher than that of secondary school’s graduate.

Friedman of the WIDER concluded that, the returns to higher education had been rising all over the world, especially since the early 1990s when there was a rapid increase in the salary premium enjoined by university graduates. Therefore, education plays important role in determining rate of employment and pattern of income
distribution in an economy. Barro (2000) also found a negative relationship between primary and secondary school enrollments and income inequality but a positive relationship between higher education enrollments and income inequality. Morley (2001) found that in Latin America the spread of education over 30 years coincided with a trend towards increasing income inequality. In contrast, Shanahan (1994) could not find any relationship between an expanded educational system and a country’s degree of income inequality. De Gregorio and Lee (2002) proved a positive relationship between the two. Rudra (2004) also expressed that only education spending helps mitigate the adverse effect of openness on income inequality in poorer countries, while spending on healthcare, social security and welfare do not. Huber et al (2005) examined the 18 Latin American and Caribbean countries and found that health and education spending have a negative impact on inequality, meaning that such spending reduces income inequality, while social security and welfare spending (transfers, primarily pensions) has a strong positive impact on inequality.

This is because education helps increase the stock of human capital within middle- and low- income groups and improves their chances of gaining employment (Xiaolu, 2009). The relationship between inequality and overall government spending as well as government spending for particular services have been studied but the results are not consistent across these various studies. Sylwester (2002) considered how education expenditures were associated with subsequent changes in income inequality within a cross-section of countries. After dividing the sample into OECD and less-developed-country subsamples, he found that education expenditures were more strongly associated with falling income inequality in the former group. Rudra (2004) realized that while all categories of social spending helped reduce income inequality in richer countries, the effects of social spending were much less favorable in LDCs. In LDCs, only spending on education reduced income inequality in the face of globalization. Rudra contended that education spending mitigates the adverse effects on openness in inequality. Ferrati et al. (2004) indicated that education spending is progressive, health spending is slightly progressive or neutral, and that social security spending tends to be regressive.

Matthew O. Odedokun (WIDER) and Jeffery I. Round, when observing the overall size of the government budget in relation to GDP, thought that it had inequal effect while the reverse was the case with the size of government subsidies and transfers (in relation to both the overall budget and the GDP). Besides, no remarkable effect of inflation rate and anti-corruption measures on income distribution was recorded except that the latter appeared to have reduced the income share of the ‘middle class’, possibly because this was the class profiting mostly from the type of corruption being checked. About the influence of inflation, Bulir (1998) stated that impact of price stability on income distribution is nonlinear. He concluded the reduction in inflation from hyperinflationary levels significantly lowered income inequality while further reduction toward a very low level of inflation seems to bring about negligible additional gains in the Gini coefficient of income distribution. Nevertheless, Matthew O. Odedokun (WIDER) and Jeffery I. Round found that a unit increase in inflation rate widens the inequality gap by about 0.33 percent. This is because inflation rate reduces the purchasing power of income, and this mostly affects the low-income earners.

It is expected that democratic nations will exhibit a more favorable distribution of income. Some studies contend that more authoritarian regimes cause income distribution to be skewed because income will be concentrated in the hands of a few elites who hold political power (Muller, 1988; Burkhart, 1997; and Huber et al., 2005). Instead, Huber et al. measured the strength of the democratic tradition and found a positive correlation with income inequality, meaning that the stronger the democratic tradition of country the more unequal the distribution of income. Plumper and Martin (2003) found a U-shaped relationship between political participation and government spending on economic performance in more democratic countries. By the same token, Fidrumc (2001) used OLS in order to address the impact of democratization on the level of economic growth in the countries of Central and Eastern Europe and the former Soviet Union, concluding that democratization in the initial years decreased the level of growth, while in the long run it promoted economic liberalization, which in turn encouraged economic development, however, increased human capital accumulation and decreased physical investment rates. Henderson’s third hypothesis related to the relationship between inequality and repression. He argued that the more unequal the society was, the more likely the government would use repression. 2. Income distribution inequality in Vietnam

2.1 Situation
In this section we document the changes in indicators of income inequality over the period from 1993 to 2010, which gives us an in-depth understanding of the current situation. These include the Gini coefficient, comparison between top and bottom quintiles and different regions (urban/rural). As we look from various angles and on different scales, it is easier for us to identify contributing factors of income inequality. Gini Coefficient

Gini Coefficient is derived from Lorenz curve graphing the correspondence between population groups and their respective share of income. It equals to the area bounded by the Lorenz curve and the absolute equality curve divided by the area below the absolute equality curve. Thus, it holds value from 0 to 1 meaning no inequality and absolute inequality respectively. The higher Gini index implies higher level of income inequality.

Source: General Statistics Office.
As illustrated by the bar chart, the dominant trend of Gini Coefficient of Vietnam is upward, which suggests deterioration in the income inequality. In specific, it has increased in 16 consecutive years from 0.347 to 0.434. In spite of a negligible decline in 2010 (0.343), it is not sufficient to project a decreasing tendency in the future. In fact, according to international standard, efficient inequality ranges from 0.3 to 0.45; then we are at an ideal level of income inequality and there would be no concern in short run. However, it should be noted that Gini based solely net income can not reflect the real asset owned by population groups. Particularly in Vietnam, the redistribution of real estate has proliferated lately. Income by quintile

Source: Compilation of data from General Statistic Office over the years. The absolute value of the monthly income per capita increases at all income level, which is attributable to the massive economic development over the past 2 decades as well as the devaluation of Vietnamese currency. Having said that, the relative income of bottom 20% has nosedived. The gap between the richest household quintile and the poorest one in 2010 was 9.2 times, increasing in comparison to the gap of previous years. Besides, it is noticeable that the income of the top quintile grew faster than that of the bottom, 17.78% per year and 15.90% per year in 2010 respectively despite an extreme slowdown this year. A similar indicators of inequality proposed by World Bank is the “40%” standard, defined by the proportion of income held by 40% poorest people. If a share of less than 12% means high income inequality, from 12 to 17% is medium and greater than 17% can be considered as relative equality. In Vietnam, this figure in terms of share of households was 17.98% in 2002, 17.4% in 2004, 17.4% in 2006, 16.4% in 2008, and 15% in 2010. According to this, Vietnam’s income distribution is medium but there is an accelerating trend in the disparity between rich and poor in Vietnam. Income by regions

Source: General Statistic Office.
It can be seen that the disparity in income distribution in urban areas was greater as demonstrated by higher Gini Coefficients. What is more, inequality in rural areas has deteriorated as Gini increased gradually from 0.36 in 2002 to 0.395 in 2010, slightly lower than urban ones. Likewise, the rich-poor gap in rural regions has widened as in 2010 the richest 20% earned 7.5 times as much as the poorest 20%, compared to 6.0 times 8 years earlier. Although we can observe a tendency in which the urban-rural gap is narrowing, the income inequality in general is still an alarming concern. 2.2. Causes of income inequality in Vietnam

This section contains a discussion of the major causes of broadening income rift in Vietnam, which, for sure, have been partly shaped by economic development and globalization. However, there should be other forces that expedite the gap deeper and faster than elsewhere. Since Gini coefficient itself cannot uncover the derivation of disparity, only by identifying these forces, we can put forward viable solutions. 2.2.1. Economic restructuring and globalization

Following the globally dominant trend, Vietnamese economy is switching from an agriculture-based economy to a knowledge-based economy. Favors and priorities have been given to high-tech, R&D-intensive industries. Employers are now seeking or even competing for skilled labors, enabling this labor segment to exploit careers and business opportunities and consequently plummeting the relative income of unskilled/semi-skilled ones. The survey of General Statistic Office in 2010 showed that the dependency ratio of households whose heads never finish grade 1 or never go to school was 0.82, significantly greater than that of households headed by university graduates
or postgraduates (0.55 and 0.60 in that order).

The labor structure of various industries can also explain this differential. In 2010, the vast majority (78.2%) of uneducated people worked in agriculture, forestry and fishery. On the contrary, the proportions of graduates or higher in this field were negligible (3.0 and 0.6) as they are mainly employed in administration, education, health, culture and sports, which are normally better paid. The current restructuring policy also gives liberty to the development of economic sectors, especially FDI enterprises, leading to different income levels of employees even when working in the same industry. Employment created by FDI has improved substantially from 0.6% in 2000 to 4% in 2012. Compared to that of private and FDI enterprises, the recruitment, layoffs and salary of employees in state-owned enterprises are bounded by a great deal of regulations and often disadvantageous when attracting high-quality labors. Thus, the massive growth rate of non-government enterprises may possibly drive the state ones out; in turn raise unemployment and inequality in urban areas. Net value added per 1 employee 2008.

Source: Enterprises in Vietnam during the first 9 years of the 21 century.
It is comprehensible that workers in FDI Enterprises enjoy higher payment than other sectors, particularly at high level of management. In 2005, the average monthly salary of manager in FDI Enterprises was 12 million VND, much greater than their counterparts in SOE (4.3 million VND) and private enterprises (3 million VND). Another dimension of the effect of FDI on income inequality is that it implementation mainly focused on the potential and productive industries and regions has worsened the urban-rural gap and the gap between industries. 50% of FDI invested in real estate in 2008 also added to the asset inequality, which will be discussed later. 2.2.2. Inequality of services access

Income inequality and inequality of services access are interconnected. In the same way as the cycle of poverty, one is the cause and also the result of the other. In specific, children born in poor families are very unlikely to have equal opportunities to rich ones to receive education of good-quality. Likewise, due to budget constraints, they have fewer chances to approach the social welfare system such as medical services and entertainment. In such an environment, it is unlikely to build an exploitable network. As a result, similar to the previous generation, both their income and social position are lower compared to rich counterparts. And again they are trapped in the cycle. According to a recent survey by UNDP, the top quintile in Vietnam received 40% benefit from social welfare, whereas the poorest received less than 7%. Until 2010, about 98% of the 20% lowest income just finished upper secondary school. 15.5% of this group was uneducated, while this rate of the highest one was 1.4% and nearly 16% of them went to college or university. 2.2.3. Asset inequality

Although asset inequality is not reckoned in Gini coefficient, it explains why inequality has improved in spite of government’s attempts. In fact, the unequal redistribution of asses is occurring at a faster pace than income, due to unreasonable allocation of resources leading a few a people to hold the majority of productive resources namely real estate, capital, legal right to exploit natural resources, monopoly in profitable business. Corruption also lubricates asset inequality. Meanwhile, there are some who lose their capital. For example, the farming land has increasingly been confiscated and used for construction project, leaving the farmers unemployed. Every year, the construction of industrial, urbanized zones and infrastructure consumes 200 thousand ha converted agricultural land and takes away the jobs of 1.5 individuals per household on average. As the percentage of wage in income in Vietnam is relatively low, 44.9% in 2010, the majority (55.1%) should be derived from assets. Hence, gain in asset can substantially increase a person’s income. Conversely, losing asset can eliminate the livelihood of long-term source of income, not only of one family but also several generations. 2.3. Impact

In this section, we will review some economic, social and political factors that could be influenced by the income inequality in Vietnam. 2.3.1. Economic impact.
In this part, we will examine the Kunzites and Lewis that inequality is necessary for growth and it is an enviable consequence of growth in Vietnam. The linkage between growth and income inequality is still debated in many different papers. We now focus on two contradictory schools of thought. One stated that inequality is one cause of growth while the other supposes that inequality discourages economic growth. Each has several mechanisms by which income distribution impacts growth. We hereafter briefly summarize some main reasons, mechanism and idea of each. First, about the former one, there is a quite popular explanation which considers saving and capital accumulation as the drive force of growing. The inequality could be seen as an incentive to earn more and when the rich get richer, in Luigi Pasinetti (1962), they will increase the savings and investment more rapidly than the poor because of the lower marginal consumption propensity. Therefore, the growth is boosted. On the other hand, the other school said that the inequality will reduce the productivity of the worker due to the uneasy thought of unfairness. In Galor and Moav, it shows that the human capital is more important at the latter stage of development. Therefore, the inequality may have adverse impacts.

Figure 1: Trend in GDP growth and Gini coefficient for Vietnam 1993-2010. Source: GSO, WB and others
In Deeininger and Squire (1996) and many others looked over the relationship between inequality and growth, they found no relationship. Similarly, as can be seen in the graph, for Vietnam, it was similarly inconclusive. They appeared to share no common trend in the period; when GDP growth fluctuated cyclically, Gini coefficient gradually increase overtime. Therefore, we can draw the similar conclusion in Jason Furman and Joseph E. Stiglitz that “there is little evidence for Lewis and Kuznet’s hypothesis, inequality is neither necessary for growth nor is it an enviable consequence of growth”. 2.3.2. Health and social problem

In this section, we will mention a book named The Sprit Level: “Why more equal societies almost always do better” by R. Wilkinson and K. Pickett (2009) which point out a linkage between inequality and different health and social problems: mental and physical health, obesity, education performance, teenage birth, violence, imprisonment, social mobility in rich countries. Despite the controversial opinion on this book, there are many supporting explanations and research for this relationship. Steven Pressman identified a psychological effect that may arise when it comes to fairness and affects the productivity and efficiency. Similarly, inequality may lead to social problem when people feels that everything has set up and feel insecure. Moreover, if corruption involves as a result from inequality (which is discussed latter); then the redistribution will become less and the welfare of the society (healthcare, security) is affected. However, the actual cause-effect relationship between equality and those issues is still in question. The collected information shows that although the crime rate was low, the teenage birth of Vietnam was high, the obesity rate was increasing. Due to the lack of statistic and persuasive casual link between the health and social problems, we only conclude that inequality is a potential risk for Vietnamese society. 2.3.3. Political problem

In this part, we will examine some political issues arising from income inequality. Firstly, we take a glance at corruption level in Vietnam as illustrated as follows:

Figure 2: Inequality and corruption in Vietnam 1997-2010
Source: Transparency International and GSO
We can see that the corruption problem in Vietnam has been slightly improved
in 2010 compared to 1997. However, the pace was slow and since 2004, Vietnamese corruption level has continuously increased along with the rise in Gini index. We do not jump to conclusion of income inequality’s impacts on corruption but predicting that they may correlate to each other. A study of 129 countries by Jong-sung You and Sanjeev Khagram proved that income inequality could breed corruption. The rich become richer by acquiring greater political power and support policies for their interest groups. Corruption also influences growth by reducing efficient allocation, distorting investment and create asset price bubbles. There are a lot of examples for those in Vietnam: PMU118 and Vinalines were typical examples for corruption and inefficient allocation; in addition, several policies in Vietnam were influenced by interest groups.

Nevertheless, the more important thing we would like to mention here is the potential risk caused by high income disparity on Vietnamese politics. It is clear that we are a socialist country following social equality beside economic growth. The problem is that there are very few countries of socialism in the world and most of the rest are capitalism ones, which means an inherent and implicit conflict between these two political poles. Whenever Government dissatisfies the people or neglect citizen’s rights, international press and media will be ready to badly comment and some “dark powers” even take advantage of contradiction among Vietnamese people to spark a civil war. Therefore, if Government fails to ensure the living standard for the poor, it would be a danger of losing people’s faith and loyalty. 2.3.4. Comments

As discussed, inequality could be considered as a cause of corruption and potential risk of health and social problems in Vietnam. More importantly, inequality was not the cause for economic growth which is the main reason for accepting inequality. Additionally, our socialist essence presented by many document in our communist party congress always support the policy balancing economic growth and social equality. Hence, we can say that economic growth associating with social equality is still the right development path for Vietnam. 3. Regression model

3.1. Model specification
Expected signs
Data sources
GNI per capita
Government expenditure, or Government spending score

– GSO, or
– Heritage Foundation
Unemployment rate
Industry added value

Corruption index
Heritage Foundation
GNI per capita is among the most common factors in research papers on income distribution inequality. Obviously, it is the typical index of average people’s wealthiness, reflecting the amount of money that each person on average have in hands. We chose GNI instead of GDP because of its coverage of all capital transfers into and out from one country. However, the sign of this variable is uncertain, either positive or negative. It is clear that developing or emerging countries usually face the problem of increasing income inequality despite their rising GNI per capita. The reason for this fact lies in their unequal development policy that benefits most the rich but worsens the poor. Nevertheless, if a country emphasizes the social equality, then its Gini index decreases once GNI per capita rises. Additionally, in many developed countries, the higher GNI per capita is, the lower Gini index tends to be.

Government spending is used here to proxy the income redistribution. We assume that once government spends money, it somehow transfers incomes to workers at state-own enterprises, subsidies to the farmers and the poor,
etc, which contributes to the income redistribution. The expected sign of this variable is minus, indicating that if government spends more, Gini index tends to reduce.

Unemployment measured in percentage is expected to influence the Gini coefficient because high unemployment rate results in little income for families. With no income, people can not meet their daily needs such as dwelling, clothes, nutrition, education, medical care, etc. Vicious circle says this low income will finally end at unemployment. By adding this variable into the model, we forecast that it usually worsens Vietnamese income equality.

Industry added value is computed as the percentage over GDP. This variable can represent the industrialization in Vietnam and we expect that it would have a negative relationship with Gini index. Industrialization makes a great difference on people’s lives due to much more jobs, and thus income it could brings out.

Corruption index which is taken from Heritage Foundation ranges from 0 to 100 in that the higher the index, the more corrupt the government. The reason to include corruption is that it supports the rich only and creates unfairness in income distribution. Imagine that our government provides subsidies to or raise a collective fund for the poor but before such money reaches the poor’s hands, it has been gradually extracted by many officials. Corruption slows down the income redistribution process and can not be ignorable in such a country like Vietnam. 3.2. Econometric models

In Vietnam, since 2000, Gini index has been calculated every 2 years. Before 2000, there were some other figures but not continuous. Among two kinds of Gini index (one based on income and one based on consumption), we choose the former which is computed on the basis of income earned. Firstly, we run the model with all 5 variables above using the government spending data from GSO, hereinafter called government expenditure, annually measured in thousand dong and here is the result: Model 1:

However, the result was not as good as expected with low statistical significance and an extremely high collinearity. Then, we switch to Heritage Foundation’s data for government spending which is measured as the level of government expenditures as a percentage of GDP by the equation GEi = 100 – α (Expendituresi)2, where GEi represents the government expenditure score in country i; Expendituresi represent the total amount of government spending at all levels as a portion of GDP (between 0 and 100); and α is a coefficient to control for variation among scores (set at 0.03). The minimum score is zero and the higher the Expenditures are, the lower the GE is. Model 2:

We drop the variable Corruption out of the model due to its relatively low significance and then arrive at another model which looks better. Model 3:

As can be seen, all of incorporated variables are highly significant and the task here is to check whether our model meets any problem. a) Heteroskedasticity does not need checking.
c) Test for normality of residual with the null hypothesis: error is normally distributed Test statistic: Chi-square(2) = 0.296882 with p-value = 0.862051 indicate a model of normally distributed residual. d) Test for serial correlation

Using Breusch-Godfrey test, we have the below result :

With Chi2 of 4.264, at 1% level of significance, our model does not have a serial correlation problem. e) Test for Multicollinearity: Variance Inflation Factors.
Values > 10.0 may indicate a collinearity problem
Minimum possible value = 1.0

It is obvious that most of VIFs are lower than 10 and only ln(GINI per capita) has VIF slightly higher than 10. We could proceed to run a supplement model on ln(GNI per capita) against the others for a closer look: Model 4

This model also implies a moderately high correlation between GNI per capita and the others but still acceptable. Moreover, multicollinearity here stems from the nature of the variables and is the least serious error. Therefore, we could accept Model 3 as the final one. 3.3. Interpretation

GNI per capita: If the GNI per capita increases by 1%, centeris paribus, then Gini index on average will increase by 0.0003. Government spending: If the government spending score rises by 1%, centeris paribus, Gini index on average will rise by 0.0007. Put it another way, when the government spends more, the income inequality tends to be narrowed. Industry added value (%): 1% increase in the percentage of industry value added, centeris paribus, leads to 0. 001 increase in Gini coefficient on average. Unemployment: For each 1% rise in unemployment rate, centeris paribus, the Gini coefficient will rise by 0.0065 on average. 4. Government policies

It is standard acknowledgement that the urban and rural sectors have different characteristics in terms of income levels and distribution, and bridging the gap between the two sectors has become a challenge for Vietnamese Government for years. The government has approved many polices toward the two sectors to gradually solve the problems for each and strengthen the power of the whole economy. In this section, we discuss key policies in designing Vietnam’s Socio-economic Development Strategy that are directly related to the income distribution inequality, and we furthermore provide some recommendations to improve the quality of those policies. Vietnam has gone through different periods of economic development, during which time there were a number of five-year Socio-Economic Development Plans (SEDP) and two Socio-Economic Development Strategies designed for the 1991-2000 and 2001-2010 periods. After nearly two decades, since the end of 2000s, Vietnamese government has started to create a new strategic plan for the next 10-year period. The SEDP for the period 2010-2020 was approved in the Party meeting in January 2011.

The SEDP anticipates Vietnam’s transition to being a basically-industrialized country by the year 2020, with a knowledge-based economy and stable and secure livelihoods for all sections of society. The priorities and development principles set out in the SEDP provide a context within which sectoral and provincial level plans should be established. For the first period of this SEDP, Vietnamese Government published the Socio-economic Development Plan for the period 2011-2015. The 5-year plan focused on 5 goals, including a big concern with the inequality between urban and rural sectors. Similarly to the previous strategy, the government wants to both equalize the economy and continuously reach the big goal. This means that the country has to deal with many unsolved internal problems while it’s facing many external problems. From our point of view, these strategies as well as the orientation of the government partly met the basic needs of the country in the short-term, but they should be amended and modified in each specific short period to help the government achieve the goal of sustainable development.


Tax relief for low-income earners is one of the main policies to help individuals and organisations overcome difficulties due to economic slowdown. The Finance Ministry’s General Taxation Administration has issued instructions in Official Letter 187. According to the Letter, the income tax payable in 2012 is the multiplication of average monthly taxable income, tax rate and 12 (months). The tax exemption for eligible people would be half the income tax payable calculated thus. Tax deduction for dependents is calculated from the month tax payers assume responsibility for their dependents. This adjustment shows the big effort of the government to overcome the situation of the whole economy. Under the current Law on Personal Income Tax, the threshold is VND 4 million ($192) per month and deduction for each dependant is VND 1.6 million ($77) per month. However, last November, the National Assembly approved amendments to the law by which the threshold will be increased to VND 9 million ($430) per month and the deduction rate for family will be VND3.6 million ($180) per dependent per month. When this amendment takes effect in early 2013, it can help the lower income groups reduce the tax burdens. Wages Policies

The Vietnamese Government has relied on minimum wage policy, in addition to being a key instrument for reducing working poverty and providing social protection for vulnerable employees, as a leading mechanism for wage development in general. In September 2012, the government proposed increasing the monthly minimum wage from its current range of $67-$96 per month to approximately $89 – $125 per month in 2013. The minimum wage increase proposal comes in light of the Vietnamese government calculations that current minimum wages only cover approximately 60% of employees’ costs of living. Despite the extra financial burden of increasing the minimum wage, local companies have mostly supported the proposal. This minimum wage increase proposal comes despite Vietnam’s current economic difficulties. As of August 2012, over 30,000 companies in Vietnam have declared bankruptcy this year. As a result, the minimum wage increase will be postponed from its originally planned date of January 2013 to March 2013 to ease the burden on local businesses.

However, the growth of wages and the increasing complexity of the economy mean that the minimum wage is no longer that effective in setting the wage trends in the formal sector for paid employees. It’s important to have more effective wage setting mechanisms accounting for the development in the labor market and ensuring that wage growth is in line with labor productivity growth. Policy efforts should focus on the nearly 60 percent of the labor force that remain in the informal economy with low productivity, little protection and low income. Social Security and Welfare Policies

Ethnic minorities continue to be “left behind” and are not experiencing increased food expenditure, household income, or asset holdings. This is the obvious fact in many regions from the North to the South. Despite high economic growth, the effect of household welfare has not been shared equally across provinces or across households in rural areas. Low income earners, migrant workers and the elderly are also among those prone to be affected by difficult economic conditions. The long-term social welfare strategy will protect these people from falling to the ‘bottom’ when they are forced to deal with shocks caused by the negative impacts of economic development. The strategy should focus on the social insurance policy, especially retirement insurance and health insurance. In the next 10 years, the average income per capita is expected to rise to US$3,200. Without a stable and strong social welfare network, low income families will continue to live without enough money for healthcare, children’s education or a decent living if they were to lose their jobs or retire.

Therefore, it is essential to continue to research and adjust social insurance policies, including social insurance, in order to provide a safety net not only for vulnerable people but for society as a whole. In the future, we should gradually raise insurance fees and provide a number of options to meet the needs of people from different walks of life. a. Program 135 (P135) was established in 1998 to implement government policies targeting the most vulnerable communes, promoting production and access to basic infrastructure, improving education, training local officials and raising people’s awareness for better living standards and quality of life. As a major national program linked to the national Socio-Economic Development Plan, P135 has created very little additional administrative burden, as it relies on existing GOVN systems for management and implementation, including financial management and monitoring. This arrangement also helps avoid the creation of extra mechanisms to implement and manage P135 and provide better opportunities to coordinate P135 activities with mainstream socio-economic development plans.

However, Communication under Program 135 could not attract extensive and positive participation of local people. The planning, establishment of models and organizing information dissemination still followed top-down approach. Disseminating information on regulatory procedures using administrative channels as well as Information programs conducted to village level was poorly implemented failing to promote participation of people in implementing and monitoring projects. Activities of the Program and projects could not frequently and positively link to and coordinate with mass communication channels both at central and local levels. Information on policy and results of project implementation was basically disseminated by communication agencies (newspaper, TV, radio) and local authorities. The communication agencies used their own budgets to disseminate information or sent their staff to collect information. b. Financial support for the poor

The Vietnam Bank for the Poor (VBP). The VBP established by a decree in August 1995 became the fifth state-owned bank. VBP intends to alleviate poverty through the provision of credit to those who do not qualify for individual loans because of limited ownership of potential collateral.

Private Banks in Rural Areas was the second long-term project in rural areas. Banking has been one of the first areas of the economy which had been deregulated and was opened to the private sector. Soon the number of joint-stock banks increased rapidly. The focus of lending by rural joint-stock banks is on farm households and traders in their service area. Loans are generally small, ranging from 1 to 3 million VND, and for short-term purposes, only, i.e. for purchasing seeds, fertilizers and insecticides. Lending through joint liability groups has cut down their transaction costs, and so has the simplification of their loan procedures. However, it became evident that rural joint-stock banks did not play any significant role as financial intermediaries. Their market share was marginal and seemed to decline over time. .

To sum up, all included variables in the econometric model are found to have a positive relationship with Gini index. They are GNI per capita, Government spending score, Industry value added and Unemployment. When income per capita or added value in industry or unemployment rate increases, income distribution tends to be more unequal across households. Meanwhile, government expenditure as a percentage of GDP is believed to reduce income disparity in Vietnam, which means our public spending is relatively efficient in terms of supporting social equality. Now, Vietnam is following the model of simultaneous economic growth and income equality. Though we are trying to push the economy further, social equality is still among priorities. Government and policy makers should have effective ways to develop our economy but still controlling Gini index below a certain threshold. If we could not fulfill such tasks, political risks may arise because of losing citizens’ faith and trust, losing their support and power to foreign countries that target to erode Vietnamese Government power of management. Income inequality is not a simple problem to solve because we are a small socialist country. Vietnam policies should harmonise different objectives in order to grow and develop sustainably.

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