Introduction

I.                  Research topic

Recognizing the importance of equality for social stability, economic growth and poverty reduction, in Vietnam economic development with equitable distribution is the basic principle of development strategy, which was already chosen since its early independence in 1945. However, recent economic growth over the past decade has not been equally distributed. Some regions have benefited more than other regions, which is evidenced by the increase of Gini inequality index from 32.2% to 35.8% in the period 1993-1998 (author’s estimates from VLSSs).

The important point to note is that most of the increase in the inequality was explained by the widening gap between rural and urban areas. During the period 1993-98, while rural income increased by 30%, urban income did so twice faster at 61%. This caused the urban-rural per capita expenditure ratio to increase from 1.81 to 2.21 folds (author’s estimates from VLSSs). Therefore, rural-urban gap is the only factor in explaining the inequality increase in Vietnam over the past years.

Although important, there have been very few researches on rural-urban gap in Vietnam. People just want to mention it but do not really focus on explaining it. That is why their explanations are really partial and superficial, not enough to be considered as the underlying causes for the rural-urban gap in Vietnam. Therefore, in the thesis, I will concentrate on pointing out the causes for this gap. By this study, I hope to make some contribution to the current government’s strategy of narrowing down the rural-urban gap and to international organizations in their efforts to alleviate poverty in Vietnam.

II.               Focus and Scope of the thesis

1.      Focus

In the thesis, rural-urban gap mean the difference between rural and urban areas, and this difference is only analyzed in economic terms, particularly in terms of income and expenditure. Some other non-economic differences such as natural condition, cultural and historical heritage, pollution... are omitted from the thesis.

2.      Scope

·        Regional frame

The analysis makes an extensive use of Vietnam Living Standard Survey (VLSS) datasets, which is really nationwide representative.

·        Time frame

Time frame for analysis is from 1993 to 1998. This period is chosen for two reasons. Firstly, two VLSSs were conducted at the beginning and the end of the period that allow a consistent comparison between two periods. Secondly, the reform package, initiated since 1988, was almost finished by 1992, so the period 1993-1998 can truly reflect the impact of reform on rural-urban gap.

III.           Research questions

As I already mentioned, the purpose of the study is to concentrate on explaining the rural-urban gap in Vietnam, so the main research question is:

What are the causes for the rural-urban gap in Vietnam?

The answer of this main research question will require the answers for the following sub-questions:

1.      What is the degree of the rural-urban gap in Vietnam ?

2.      What is the role of various factors in explaining the gap in Vietnam?

3.      What is the impact of government policies on these factors?

IV.            Structure of the thesis

Following the Introduction, Chapter I lays down both theoretical and methodological framework for the analysis of rural-urban gap. Chapter II is devoted to measuring rural-urban gap in Vietnam from 1992-93 to 1997-98 (answering the first sub-question). After understanding the degree of the gap, Chapter III will decompose this gap into various factors (answering the second sub-question). Then, in Chapter IV, the impact of government policies on these factors is thoroughly analyzed (answering the third sub-question). Finally, the Conclusion summarizes the findings in order to target the main research question.

Chapter I.  Theoretical Review and Methodological Framework

Various theories with different approach have quite different explanations for rural-urban gap. So, I will start this chapter by a brief overview of these theories.

I.                  Theoretical Review

A history of ideas on rural-urban gap was closely related with the literature on the agriculture-industry relationship. It began at almost the same time as the birth of economic science in the eighteenth and nineteenth century, when the first economists (Adam Smith, David Ricardo) were so pessimistic about agriculture. They supported movement of resources from rural agriculture to urban industry. In the early twentieth century, the issue of agriculture-industry linkages was confronted in a more elaborate and dramatic manner than ever before, and the Soviet industrialization debate of the 1920s continues to be intellectually important for understanding the agriculture-industry relationship.

Soviet industrialization debate: The issue was how to finance industrialization in the newly born socialist state. The protagonists were Evgeny Preobrazhensky and Nikolai Bukharin. Preobrazhensky argued that the state should turn the terms of trade against agriculture. It should offer the lowest possible prices for farm products and sell the industrial products to the rural areas at the highest possible prices. The surplus thus gained would finance industrialization. In contrast, Bukharin argued in favor of equilibrium prices. Stalin (then the Soviet leader) finally embraced Preobrazhensky’s model for state policy. If the farmers resisted providing food at low price, in Stalin’s reasoning, violence was absolutely necessary. It turned out that Stalin was wrong. So was Preobrazhensky. Food supply dramatically went down causing difficulties to both rural farmers and urban workers.

Lewis’ dualism model: Writing in the middle of the twentieth century, Lewis W. A. (1954) had no doubt that a price-squeeze on stagnant agriculture (Stalin’s way) would only choke off food supplies, thereby hurting industrialization. Lewis found out that labor movement from rural to urban was the best way to achieve income growth in both 2 areas. He postulated that in attracting labor resource from rural to urban areas for industrialization, the wage in the modern industrial sector must equal the “average product of labor” in the traditional rural sector and plus a “gap”. Lewis believed that the “gap” must be reasonable enough to “bring the modern sector as much labor as it wants without at the same time attracting much more than it can handle” and “usually a gap of 30 percent or more between two areas” is suitable (Lewis, 1954:7). In reality, however, the gap between urban and rural sectors is much greater than allowed for in the Lewis’ model. Two views have arisen to deal with this problem: the Neo-classical view and the Institutional view.

Neo-classical View: Neo-classical economists assume perfect labor movement. So under competitive conditions, the same wage must be paid for a given grade of labor no matter where it is (Reder 1971:294). Therefore, rural-urban gap just reflects the difference in individual characteristics between two areas. It means that urban workers have more education, more training than rural farmers and are usually concentrated in high-productivity jobs working under much more pressure than rural farmers.

Institutional view: Institutional economists argue that many barriers, induced by government, have been established, thus severely blockading the labor movement. They are union power, minimum wage, and sticky industrial wages (Tordaro 1971), the public sector (Kwoka 1983), development strategy (Sen 1971), law governing the urban registration (Johnson 1995, Yang 1999). Consequently, labor market is permanently divided into two distinct segments: the rural sector and the urban sector. Each works with its own characteristics and mode of operation. In other word, discrimination exists between the two segments, and urban people are offered a higher income and better working condition than rural people, although both have the same level of characteristics such as education, training, working experiences and so on.

Government influences on rural-urban gap: Lipton with his famous book “Why Poor People Stay Poor” (1977) was perhaps the first prominent economist, who seriously included government’s policies in rural-urban gap analysis. Agreeing with the Institutional economists about the existence of discrimination, Lipton went further by arguing that this discrimination was the consequence of “urban bias” policy, in which the government, under strong political pressure from the urban population, directed resources from rural to urban areas, from agriculture to industry without any consideration of efficiency or equity.

In summary: The brief overview of theories has clearly demonstrated that the rural-urban gap is explained by two leading factors: characteristics gap and discrimination. The former is advocated by the Neoclassical economists, and the latter is advocated by the Institutional economists. Although agreeing with the Institutional economists about the discrimination, Lipton and some other economists go further by arguing that government’s urban-biased policies are the main agent staying behind this discrimination.

II.               Methodological Framework

While Neoclassical economists argued for the characteristics gap, the Institutional economists believed in the discrimination. What needs to be done is to decompose rural-urban gap into the above two factors, so we can understand the role of each factor in explaining the gap in Vietnam.

1.      Econometric decomposition of rural-urban gap

The decomposition starts with standard regression function, which was widely used to analyze determinants of household per capita expenditure (Glewwe 1986, Deaton 1999)

ln Y = a + bX + u                                               (1)

Where: Y is the household per capita expenditure, X is a vector of individual characteristics such as educational attainment, occupation, household demographics.

Because discrimination may exist between the two areas, thus dummy variables are necessary to reflect this discrimination. Equation-1 will be modified as follows:

ln Y = a + a₁U + bX + b₁UX + u                                 (2)

Where: U =1 if urban and U=0 if rural.

A fundamental feature of the least squares estimator is that the fitted regression line will pass through the mean (average) value of both rural and urban areas. This implies that

This Equation states that rural-urban gap ( ) can be decomposed into the three components on the right hand side. The third component is the characteristics gap, which means that urban households have richer characteristics than their counterparts in rural areas such as higher grades of education, working in well-paid jobs, less babies, more adults. The second and first component are the return gap and environment gap, both sum up to discrimination which means the rural-urban gap after controlling for household characteristics.

The great advantage of Equation-4 is that it can be used to reflect both the Institutional and Neoclassical views. The Neoclassical view is reflected by the characteristics gap, and the Institutional view is reflected by discrimination. By computing Equation-4, we can do a test on the accuracy of the two views in explaining rural-urban gap in Vietnam.

Equation (4) can also be used to explain the dynamic change in rural-urban gap over a period of times. For ease of presentation, we replace the gaps with one symbol.

Gap:                              G =                   Environment gap:         E =  a₁

Characteristics gap:        C =                 Return gap:                  R =

Then Equation-4 can be rewritten as follows:

G = E + R + C                                                         (5)

So, dynamic change in the gap from time t to time t+1 is decomposed as follows:

G_t+1 – G_t = ( E_t+1 – E_t ) + ( R_t+1 – R_t ) + ( C_t+1 – C_t )                      (6)

From this decomposition, we can understand the role of each factor in explaining the widening gap in Vietnam over the past years.

2.      Government influences on rural-urban gap

If from econometrics decomposition discrimination exists, then according to Institutional view, government’s policies are the underlying causes for this discrimination. However, if we go further by using the Lipton’s hypothesis we can demonstrate that government’s policies not only widen the gap but also lower the national output (or economic growth).

According to Lipton, to be efficient, government policies must ensure an optimum allocation of resources between two areas. It means that these policies must bring in the maximum output for the whole country (the sum of rural and urban output). If from government intervention, the gain from urban output is less than the loss from rural output, then the total output for the whole country will be reduced. In this case, the total output or economic growth will be lower than what it could be, and the situation of urban bias exists.

Chapter II.  Measuring Rural-Urban Gap in Vietnam

The thesis makes extensive use of the VLSS 1992-93 and 1997-98, the extremely rich datasets for analyzing household economic behaviors and their link to policies.

I.                  General picture of rural-urban gap

Table 1 presents a general picture of rural-urban gap in Vietnam. While the majority of Vietnamese population lived in rural areas (80% in 1992-93 and 76.5% in 1997-98), per capita expenditure in rural areas was much lower than that in urban areas for both 1992-93 and 1997-98. Also, the ratio of expenditure was increasing during that period from 1.81 to 2.21.

Table 1: Average per capita expenditure and income (VND)

Items	1992-93	1997-98
Share of rural population	80%	76.5%
Urban-rural expenditure ratio	1.81	2.21
Per capita expenditure in urban	3,058,229	4,874,854
Per capita expenditure in rural	1,692,291	2,206,269

Source: Author’s estimates from VLSSs

The gap between rural and urban areas is reaffirmed in Figure 1. For each percentage of population in each area, per capita expenditure and per capita income are consistently higher in urban areas than rural areas.

Figure 1: Cumulative distribution functions of per capita expenditure and income:  1997-98

Source: Author’s estimates from VLSSs

However, for formal treatment of rural-urban gap, it is necessary to calculate some inequality indices such as Gini, Theil or Log Variance index.

·        Inequality measurement

In the thesis, I use Theil index because it is decomposable and can provide inequality not only within but also between rural and urban areas.

Table 2: Decomposition of Theil T inequality index

Source: Author’s estimates from VLSSs

For the within-group component, within-rural inequality was lower than within-urban inequality. If combined (both within-rural and within-urban), the within-group component played a big share in total inequality, 88.83% for 1992-93 and 83.18% for 1997-98. However, the within-group component remained rather stable over the period from 1992-93 to 1997-98 (a slight change of 2.31% for within-rural inequality and –0.62% for within-urban inequality). In contrast, comprising a small share in total inequality (11.17% in 1992-93 and 16.82% in 1997-98), the between-group component recorded a dramatic increase of 61.96%. It meant that the dynamic inequality in Vietnam, over the past years, was mainly explained by the between-group component. So, what are the policy implications deriving from state of inequality in Vietnam?

Ø        Firstly, because the within-rural inequality was lower than the within-urban inequality. Therefore, in Vietnam, economic growth targeting rural areas creates more equal distribution (and will thus generate more welfare) than that targeting urban areas.

Ø        Secondly, because the dynamic inequality is mostly explained by the widening gap between rural and urban areas, efforts to prevent inequality from rising must be concentrated on narrowing down rural-urban gap.

·        Poverty measurement

For some economists (Basic Need model, Maoist idea) the state of the poor is the most important indicator for whatever analysis. In their opinions, rural-urban gap is best reflected by comparing the state of the poor within each group.

 

Table 3: Poverty in rural and urban areas

Source: Author’s estimates from VLSSs

Table 3 presents the results of FGT index (see Ravallion 1994 for further information of this index). Thre is a clear conclusion: poverty in Vietnam unambiguously decreased from 1992-93 to 1997-98. However, poverty reduction was not equally distributed. In urban areas, the “incidence of poverty” dramatically fell from 25.1% to 9.2% (a decrease of 63%), while that number in rural areas did not drop as much, just from 66.4% to 45.5% (a decrease of only 31%). The similar situation was observed in “poverty depth” and “poverty severity”.

Beside the FGT index, vulnerability to economic shock is also extensively used in the poverty analysis. Figure 2 shows the vulnerability for both rural and urban areas. In rural areas, a lot of people just pass the poverty line somewhat, a small shock can submerge a large number of rural people into poverty.

1789.71

1789.71

Poverty line

Poverty line

Rural areas

Urban areas

Source: Author’s estimates from VLSSs

Figure 2: The vulnerability of poor people in 1997-98

Ø        From all of these analyses on poverty, we arrive at a clear policy implication: poverty is largely a rural phenomenon, so that any poverty alleviation effort must be concentrated in rural areas.

 

II.               Rural-urban gap in various fields

It becomes clear that there exists a large rural-urban gap in general. In this part, I will try to show that the gap not only exists in general but also in every field in Vietnam.

Table 4: Rural-urban gap in various fields

Urban-Rural ratio