In developing countries in general
and in Vietnam in particular,
capital mobilization plays a decisive role in economic development. Since the
renovation, the Vietnamese government has carried out many favorable policies to
attract foreign investment and has gained some success. However, foreign
investment may be affected by many controllable and uncontrollable factors and
that the mass withdrawal of foreign investment in the region created many
difficulties for the host economies.
In 1995- 2001 period, household
saving in Vietnam accounted
for from 31 to 48 percent of the total domestic saving (Chinh et al,
2002). However, saving rates among households is still very low. Household on
average saves VND 823 thousand a year, which equals to 6 percent of total
household disposable income.
This thesis seeks to contribute to
the existing literature on the empirical study of household saving behavior in
two ways: by focusing on household in Vietnam
and by using econometrical tool to analyse the quantitative impact of the
related variables affecting household saving in Vietnam in a particular period
of 1997-1998.
2. Focus and scope of the thesis
2.1. Focuses
The study focuses on analysing the
impact of determinants of household saving behavior in Vietnam based on data from Vietnam
Living Standard Surveys
2.2 Scope
The thesis focuses on the household
level, rather than aggregate, private saving in a nation wide framework.
3. Research questions
The central research question of the
thesis is “What are the major determinants of household saving in Vietnam?”
4. Research methodology
The thesis makes an extensive use of
econometric methods. Qualitative and descriptive methods will also be used in
the analysis.
5. Data sources and limitation
The primary data were obtained from
the VLSS conducted in 1997-1998. Secondary data: these data were collected from
various sources as VLSS 92-93, official and unofficial reports and documents.
The study would be more interesting
if the data at household level were available
6. Structure of the thesis
Chapter I:
Theoretical frameworks and empirical studies
on household saving behavior
1.1. Concepts and Definitions
This section devoted to
analyse the concept and definition of household and household members
as well as consumption and saving
1.2. Theoretical framework on household saving behavior
1.2.1. Keynesian
view of saving
Keynes
approach started on his introspection and casual observation. His saving
function was constructed based on three conjectures as follow:
·Marginal propensity to
save (MPS) varies from 0 to 1.
·Average Propensity to
Save rises as income rises.
·Income is the primary
determinant of consumption and saving
Keynesian consumption and saving
functions are often written in the form below:
C= C0 + MPC.Y
S= -C0 + MPS.Y
In which
C:
Household’s Consumption
S:
Household’s current Saving
C0:
Autonomous consumption
MPC:
Marginal propensity to consume
(exogenous variable)
MPS:
Marginal propensity to save
(exogenous variable)
1.2.2 Irving Fisher
and the intertemporal choice model
Intertemporal budget
constraint
C1+ C2/(1+r)=
Y1+ Y2/(1+r)
Household’s preferences
A particular utility function denoted
by UL(C1, C2) behaves like any other utility function
familiar from consumer theory.
Household decision-making
Household would like to end up with
the best possible combination of consumption in the two periods i.e. on the
highest possible indifferent curve. However, the budget constraint requires that
the household must also end up on or below the budget line
Irving Fisher’s intertemporal choice
model can be used to explain how a household behaves when there is a change in
one of the exogenous variables such as income, real interest rate.
1.2.3. Franco
Modigliani and the life cycle hypothesis
Based
on Fisher’s model, Modigliani (1966) has developed a model, which emphasizes
that income varies systematically over people’s lives, and that saving allows
consumers to move income from these times in life when income is high to those
when income is low (Mankiw, 1994).
Consider a consumer who expects to
live another T years, has wealth of W, and expects to earn annual income Y until
he retires R year from now.
The saving functions can be found as
S= -(1/T).W+
(1-R/T).Y
(1.15)
1.2.4. Milton
Friedman and the permanent income hypothesis
Milton Friedman’s permanent income
hypothesis used Irving Fisher’s theory to argue that consumption should not
depend on current income alone. The PIH emphasizes that people exerience random
and temporary changes in their incomes from year to year.
The current income Y is the sum of
the two components permanent income (denoted by YP) and transitory
income (denoted by YT)
1.2.5. Conclusion of
the theoretical framework:
1.3. Outstanding Empirical studies on household saving behavior
There have been much empirical
literature on saving behavior base on the aggregate (macro) data and household
(micro) data, however many issues remain unresolved. This section devoted to the
main hypotheses that have guided previous works will be discussed.
1.4. Chapter remarks
Chapter 2:
Overview of Vietnam's economy and household saving
2.1. Overview of
Vietnam's economy
Source: 1986-1999: Economic Study, 1999, No 255, 2000-2002 World Bank
Table 2.3: Saving mobilization through the baking system, 1991-1999
Unit: billion VND
12/92
12/93
12/94
12/95
12/96
12/97
12/98
12/99
Deposit in VND
8,091
10,590
14,376
22,497
28,063
35,023
37,649
42,534
of which
Demand deposit
3,971
4,796
4,903
6,882
9,354
14,273
11,695
12,465
Time/Saving deposit
4,210
5,794
9,473
15,597
18,709
20,750
25,954
30,069
Foreign currency deposit
8,214
7,406
8,193
11,061
12,084
15,456
na
21.536
Total
16,305
17,996
22,569
33,540
40,147
50,479
na
64,070
na: Not Available
Source: OECF Research paper No 9 1992- 1997, Vietnam banking review 1997-2000.
Table 2.5: Cross- country comparison of ICOR
in 1991-1998
1991
1992
1993
1994
1995
1996
1997
1998
Vietnam
2.4
1.8
2.2
2.8
2.7
3.1
3.6
5.3
Hong Kong
5.3
4.3
4.7
5.1
8.2
7.7
6.1
-
Korea
3.5
7.7
6.3
4.1
4.1
5.2
7.0
-
Singapore
5.7
5.5
3.4
3.9
3.7
4.8
4.5
-
Taiwan
3.0
3.4
3.9
3.9
3.9
4.2
3.1
4.6
China
3.6
2.4
2.7
3.4
3.9
4.3
4.6
4.9
Indonesia
3.4
4.7
4.6
3.9
3.8
4.1
6.3
-
Malaysia
3.7
4.9
4.5
4.1
4.3
5.1
5.4
-
Philippine
-
-
9.90
5.4
5.0
3.7
4.4
-
Source: Economic Study, No 255, 1999.
2.2. Trend of household saving in
Vietnam
2.2.1.
Characteristics of households in Vietnam
The proportion of males and females
were 48.78 and 51.22 percent respectively in 1990 and has reduced to 49.16 and
50.84 percent in 2000. In 1998, the urban population accounted for 22.43% and
the rural population accounted for 77.57%. The average household size also
changes from region to region with the greatest household size of 5.2 people in
rural South and the smallest household size of 4.0 people in urban North. The
overall dependency ratio
was 0.79 of which children accounts for 0.61. Male household heads made up 74.44
and most household heads have low level of education (81.02% have not finished
general education of which 7.99% never attending school).
2.2.2. Household
income
Table 2.7: Household income by components in 1998
Unit: thousand VND
Urban
Rural
Farm
Non-farm
Total
Farm
Non-farm
Total
Number of Household
190
1,540
1,730
3,248
1,021
4,269
Total income
15,538
25,246
24,180
11,001
16,480
12,311
By components:
Agricultural
10,586
315
1,442
7,176
2,848
6,141
Wages
1,008
8,258
7,463
1,156
4,585
1,976
Non-farm income
1,473
11,040
9,990
1,074
6,881
2,462
Pension & Scholarship
1,343
876
928
430
306
399
Domestic remittance
246
1,726
1,564
180
417
237
Oversea remittance
364
802
754
255
432
298
Other income
519
2,227
2,039
729
1,012
797
Household size
4.0
4.5
4.5
4.9
4.9
4.9
Per capital income
3,711
5,909
5,667
2,377
3,496
2,645
Per capital consumption
3,232
5,477
5,230
2,212
2,836
2,361
Source: Author’s calculation from Vietnam Living Standard Survey 1997-1998
2.2.3. Household
expenditure
Table 2.9: Household expenditure by components in 1998
Unit: thousand VND
Urban
Rural
Farm
Non-farm
Farm
Non-farm
Total expenditure
12,567
24,578
10,367
13,327
Of which:
Rice expenditure
2,133
1,805
2,486
2,293
Food and foodstuff expenditure
4,394
8,471
3,491
4,709
Non-food and non-foodstuff expenditure
2,018
4,052
1641
2,231
Education expenditure
668
1758
511
770
Health expenditure
705
1033
633
805
Utilization of durables expenditure
1,257
3812
993
1,613
Garbage disposal expenditure
5.1
44
0.19
3
Water expenditure
46
258
5
20
Electricity expenditure
277
822
145
207
Value of house uses expenditure
1,065
2,521
463
674
Per capital consumption
3,403
5852
2,252
2,865
Source: Author’s calculation
from Vietnam Living Standard Survey 1997-1998
2.2.4. Household
saving
Table 2.10:
Household saving by items in 1998
Unit: thousand VND
Form of savings
Mean
Std.Dev
Frequency
Deposit of all kinds
5,759
27,359
961
Stock, bond and informal credit
1,103
7,666
867
Cash including foreign currency
1,399
5,835
5,421
Gold and Gemstone
2,465
5,708
4,883
Stock of agricultural product
206
698
174
Value of house, land
52,714
123
243
Others
8,860
24,086
58
Total
3,130
20,727
12,607
Source: Author’s calculation from Vietnam Living Standard Survey 1997-1998
Chapter 3:
an Econometric analyis on Household
saving behavior in
Vietnam
3.1. Model Specification and data
3.1.1. Model
specification
Saving= f(Permanent income, age of household head, age square of household head,
household size, dependency ratio, education of household head, experience of
household head, head sex, urban, farm, interest, and regions)
The linear functional form is as
follows;
S= b0
+ b1X1
+ b2X2
+…. + bnXn
+ mi
3.1.2. The data
Of the total 5999 observations, 60
observations (1 percent of the sample size) have been dropped from the sample
because they did not represent the income of households in the regions.
The remaining 5939 observations is
used in the econometric analysis.
3.1.3. Explanation
of the variables
Table 3.1:
Variables definitions and summary statistics, 1997-1998
Number of observation 5,939
Variables
Mean
Std. Dev.
Definitions
Saving
823
9,152
Value of yearly saving (in 1000 dong)
Income
14,449
12,821
Value of yearly income (in 1000 dong)
Permanent income
32,155
8,875
Value of yearly permanent income (in 1000 dong)
Sex
0.73
0.44
Dummy variable, =1 if Male household head
Household size
4.8
1.9
Number of member in household
Age
48
14
Age of household head
Year of schooling (head)
7.1
4.4
Number of school year of household head
Year of schooling (spouse)
6.3
4.3
Number of school year of spouse
Dependency ratio
0.43
0.25
Dependency ratio
Young ratio
0.28
0.22
Young ratio
Old age ratio
0.14
0.25
Old age ratio
Urban
0.28
0.45
Dummy variable, =1 if Urban household
Farm
0.575
0.494
Dummy variable, =1 if Farm Household
Interest rate
1.18
0.87
Monthly interest rate (percentage)
North West and North East
0.15
0.35
Dummy variable, =1 if HH resides in region 1
Red River Delta
0.20
0.40
Dummy variable, =1 if HH resides in region 2
North Central Coast
0.12
0.32
Dummy variable, =1 if HH resides in region 3
South Central Coast
0.13
0.33
Dummy variable, =1 if HH resides in region 4
Central Highland
0.06
0.24
Dummy variable, =1 if HH resides in region 5
North East of South
0.17
0.37
Dummy variable, =1 if HH resides in region 6
Mekong River Delta
0.18
0.39
Dummy variable, =1 if HH resides in region 7
Source: Author’s calculation based on data of Vietnam Living Standard Survey
97-98
3.2. Determinants of household saving behavior
Table 3.3:
Determinants household saving in Vietnam, 1997-1998
Number of observations: 5939
Variables
Full model
Reduced model
Coefficients
P |t|
Coefficients
P |t|
Permanent income
0.35
0.00
0.35
0.00
Age of HH head
79
0.02
81
0.02
Age square of HH head
-1.7
0.00
-1.7
0.00
Household size
-591
0.01
-595
0.02
Dependency ratio
-919
0.03
-932
0.03
Year of schooling
-208
0.02
-270
0.02
Experience
-2.13
0.649
Sex
552
0.07
Interest rate
81
0.05
82
0.05
Urban
-4027
0.00
-4327
0.00
Farm
660
0.31
North Mountain and Midland
851
0.02
840
0.02
Red River Delta
-1172
0.00
-1165
0.00
Central Coast of Northland
1835
0.00
1870
0.00
Central Coast of Southland
-969
0.01
-956
0.01
Central Highland
1175
0.06
North East of Southland
-3824
0.00
-3840
0.00
Intercept
-3960
0.02
-3956
0.02
R-squared
0.32
0.32
Root MSE
9,079
9,123
F
F(15,5923)
153
F(13, 5925)
186
Pr>F
0.00
0.00
Note: Dependent variable is current household saving in thousand VND/year
Source: Author’s calculations based on data of Vietnam Living Standard
Survey1997-1998
Ceteris paribus, for each additional
dong of permanent income, a typical household will raise its saving by 0.35
dong.
the relationship between household’s
head age and household saving is in the form of square function. Ceteris
paribus, the relation between head age and household saving is in the form S=
79*(age of household head) - 1.7*(age of household head)(age of household head).
Household size is negatively related
to household saving.
Dependency ratio measures the ratio
of dependents to work- age members in the household is negatively related to
saving.
The evidence on education (measured
by the years of schooling of household head) diverges from the typical finding
of a positive education elasticity of saving for market economy. In the
transitional economy as
Vietnam, household saving declines with education.
There is a
clear distinction between urban and rural saving,
Farm activities is positive related
to saving
Interest
rate is positively related to household saving. As interest rate increase by 1
percent, households tend to save an additional of VND 81 thousand a year. The
empirical results imply that in the case of Vietnam substitute effect is
outweighed income effect (see more in empirical study in chapter 1).
Household saving behavior also varies
from region to region.
3.3. Chapter remarks
Chapter IV:
Conclusion and policy implications
4.1.1. Conclusion
4.1.2. Findings
Theoretical and empirical studies
based on the LCH and PIH on household saving behavior in Vietnam indicated that permanent
income and age of household head were the main determinant of household saving.
The net
effect of interest on household saving is VND 82 thousand which mean that as
interest increase by one percent, ceteris paribus, a typical household save VND
82 thousand a year more.
4.2. Policy implications
To reduce dependency ratio the
government should encourage family planning campaigns to help households fully
aware of the disadvantage of a family with numerous children.
The
government can increase interest rate to encourage households’ saving.
The
government should develop the financial and banking system in Vietnam.
4.3. Further research questions
The model should use of age profile
and education profile of households.
The model
may be better if interest rate data are collected more carefully.
The thesis
should include effectiveness of saving mobilization and the use of these savings