CHAPTER I: INTRODUCTION

1.1. BACK GROUND

Rice is one of the most important staple foods in the world. More than 50 per cent of the world’s population depends on rice for about 80 per cent of their food requirements (FAO 2000, p.1).

In Vietnam, rice plays a central role in the lives of the people. Rice is the food of the Vietnamese diet, contributing 75 per cent of calorific intake of the average household (Oxfam, 2001, p. 5).

As (real) income increases, people often consume more of most goods and switch to higher quality commodities. There are a many empirical studies on demand for commodities including quality factors, e.g. Deaton (1998), and Elisabeth (1995). Results of these studies show a strong relationship between incomes and quality of commodities chosen by people.

Of all goods, policy makers and researchers are often interested in the change in food consumption pattern when incomes increase. When incomes rise, people tend to change both the quantity and quality of foods consumed. The same tendency is expected to occur in Vietnam because, in the late 1990s, real income per capita of Vietnamese people had doubled in comparison with that in the mid 1980s (VLSS 1997-98, p. 1).

However, about 15% of Vietnamese people live in food poverty in 1998, the change in the rice consumption pattern may not happen in the same tendency for all people. When per capita real income had double in the last decade, we expect that there are some changes in rice consumption pattern, both in quality and quantity, in Vietnam. But these changes may not happen in the same direction for all people.

If we can estimate changes in rice consumption pattern, we can make appropriate policies to alter rice cultivation to meet demand of people. Moreover, it will help to generate and maintain incomes for many farmers because rice is about 90 per cent of total Vietnamese staple food production grown by two thirds of Vietnamese households on more than 60 per cent of total agricultural land (Oxfam, 2001, p. 5).

Because of the importance discussed above, in this thesis, we will focus on analyzing the demand for rice in Vietnam. We will examine changes in both quantity and quality of rice consumed by Vietnamese people. The analysis will be undertaken for the whole country and for different groups of people as well as for different geographic regions.

In this thesis, we use the tradition theory of consumer choice, but we treat households rather than individuals as units to study.

1.2. FOCUSES OF ANALYSES

I hypothesize that when initially low income increases, demand for rice in quantity increase to some certain level, then it matures and declines when income continues to rise. Accompanying to this process, quality of rice consumption increases. Thus, we will try to find out some income ranges in which whether rice is an inferior good.

The main theme of the thesis is to identify some factors that affect changes in rice consumption by Vietnamese households. Of which, changes in incomes have the strongest effect. Some other factors, including demographic and geographic ones, may also affect rice consumption by Vietnamese households although their effects may relatively weaker. And we will investigate the way these factors affect demand for rice in terms of quantity as well as quality.

The main objective of this thesis is to examine the relationship between income and rice consumption, quality and quantity, by Vietnamese people. Other objectives are:

1, Effects of demographic and geographic factors on rice consumption by Vietnamese households.

2, The variation of share of rice expenditure by Vietnamese households.

3, Which policy to recommend after examining rice demand.

1.3. RESEARCH METHODOLOGY AND DATA

In this thesis we will use comparative and qualitative methods. By using the comparative method, we will review some lessons from studies already done in other countries. The qualitative method is used in this thesis to investigate and explain rice consumption in Vietnam and compare the results with studies in other countries if possible.

The structure of the thesis is as follows:

Chapter I, the introduction of this thesis, presents the overview of the thesis. It shows the background, focus, and methodology applied.

Chapter II presents the theoretical framework about consumer choice, household economics, and the choice of food quality.

Chapter III presents some empirical studies about demand for foods in some countries illustrating for chapter II.

Chapter IV presents the main work of the thesis. It shows results of the analysis of per capita demand for rice (jointly consumed by household members) in Vietnam.

Chapter V will summarize main findings, give some recommendations, and present limitations of this thesis, which need some further study.

CHAPTER II: THEORETICAL FRAMEWORK FOR FOOD DEMAND AT THE HOUSEHOLD LEVEL.

2.1.THEORY OF CONSUMER CHOICE

There are many theories about demand for goods. However, the most well-known and easy to understand theory, which we can find in almost microeconomic textbooks, is the Neo-Classical Model based on consumer utility. In this chapter, we will present only some most important points of the Theory of Consumer Choice.

Why do people buy what they buy? The easiest answer is that because commodities provide them utility. Utility is level of satisfaction that a person gets from consuming a good or undertaking an activity (Pindysk, 1992, p. 35). The theory of consumer choice aims to explain choices made by consumers, given the conditions of market environment, typically incomes and prices, they have to face. The theory use individuals as units to study.

In the theory, people are assumed to make the choice in a rational way. People will choose to buy the bundle of goods that maximize the satisfaction (utility) they can achieve, given the limited budget available to them (Pindysk, 1992, p. 36).

In the theory of demand, responsiveness of consumers toward changes in incomes and prices is measured by elasticities.

Because we use households as units to study in this thesis, we need to present the theory of household behaviour used in rice consumption analysis. In the “New Household Economics”, beginning in 1970s, economists have constructed some models to explain how decisions within household are made. In the analysis of household behaviour, the choice of a household model is of crucial importance. It may be unnecessary to present all models. We will introduce only the Unitary Model, which is used in this thesis.

2.2.UNITARY MODEL OF HOUSEHOLD BEHAVIOUR

In economics, “A household is a unit consisting of people with a common budget who organize some aspects of work and consumption together (Himmeiweit, 1998, p.149)”. In this situation, household members not only have to share household income, they also have to make decisions about how to spend their joint income.

The unitary model treats the household as a single decision maker. In the other word, the unitary model treats households as if they were individuals. In this model of household, all members pool their resources. The model assumes that the household’s preferences can be adequately described by a single utility function. This model is sometimes referred as the “common preferences” model, the “altruism” model, or the “benevolent” model. We now investigate each specific type in more details.

2.2.1. The “common preferences” model

This model was presented by Samuelson. In this model, the head of a family, unlike other collectives, can be assumed to have the welfare of all members in mind when making decisions. He treated a household utility function as the result of a consistent “family consensus” that represents a meeting of minds or compromise between them (Himmelweit, 1998, p. 186).

However, some economists, such as Becker, criticized about the assumption that individuals would act according to the common utility function that is different from their own (Himmelweit, 1998, p. 186). He introduced the “altruism” model to get over this problem.

2.2.2. The “altruism” model

In this model, Becker agued that, under certain circumstances, all members’ actions could be determined by the preferences of only one member, namely the household’s head. In this case, the head’s preferences would become the common preferences of the household (Himmelweit, 1998, pp. 186-187). In the “altruism” model, although individual may have different utility functions, the head will takes into account of their differences and reconcile them to make the common utility function for the household as a whole.

Because, in this thesis, we analyze rice demand, which is the main staple food in Vietnam, we should mention some important economic laws related to food consumption.

2.3.ECONOMIC LAWS ABOUT FOOD CONSUMPTION

In food consumption, households’ responsiveness to changes in income and prices follow some economic laws. We consider only two most important laws directly related to food consumption analysis.

2.3.1. Engel’s law

Engel’s law implies that there is a negative relationship between the food share and total expenditure (Deaton, 1998, pp 251-252). As income increases, other thing equal, the share of food expenditure on total outlays will decrease. Furthermore, Engel’s law shows that, for given level of total expenditure, the large family spends a large of its budget on food than the small family does.

The Engel’s often holds true both at the level of household and at the aggregate level. The share of total outlay on food in Developed countries is, in most cases, lower than that in Developing countries.

One thing should be noted about the law is that it is that it is the proportion of income spent on food that declines. Richer people spend more (absolute amount) on food than poorer people, but they spend a smaller percentage of their income (Brassley, 1997 pp. 30-31).

2.3.2. Bennett’s law

When income changes, consumers respond to changes by altering both the quantity and quality of goods. This implies that when income rises, people often spend less on staple food with low quality and switch to consume more on higher-quality foods (Duong, 2000, p. 21).

2.4.UNIT VALUE AND QUALITY OF FOOD CONSUPMTION

Although economists are aware that consumer demand is influenced by product quality as well as by price and income, product quality generally is excluded in most partial equilibrium analysis of consumer behavior. Recently, researchers are more concerned about quality of goods consumed, especially food quality.

The ratio of expenditure and physical quantity is often treated as the prices of goods. However, more accurately, this ratio is a unit value or the average price of composite goods.

Unit values are not the same thing as prices because healthy households often buy high-quality commodities (Deaton 1998, p. 288). In a composite good, wealthy households are likely to buy a higher fraction of more quality brands. So unit values will have a positive relation with income or total expenditure and they partly reflect the quality of goods bought.

As analyzed above, one way to examine the change in quality of rice consumed, or food in general, when incomes and other factors vary is to examine changes in unit values.

There are some methods to examine determinants of the quality of foods consumed by households. Economist often examine the quality and quantity of foods demanded for different brands of foods simultaneously. In this thesis, we will examine the change of rice unit value for different groups of households without using any econometric model. We will use only means of rice unit values.

CHAPTER III: LITERATURE REVIEW OF STUDIES ON DEMAND FOR FOOD

3.1.TRADITONAL DEMAND THEORY AND EMPERICAL RESULTS

Demand for a good is defined as the amount people want to buy at different prices given their incomes and market prices..

Foods, especially main staple foods, are considered as the “first necessity”. However, each country may consume different categories of staple foods with different quantity for each category. First of all, we review the quantity of rice consumed as the main staple food in different countries in Asia.

Table 3.1: Average annual per capita rice consumption in selected Asian countries in 1998

Products	(Own) Price elasticity
Bread	-0.09
Fresh potatoes	-0.21
Processed potatoes and frozen chips	-0.29
Sugar and preserves	-0.24
Liquid milk	-0.29
Carcase meat	-1.37
Broiler chicken	-0.13
Frozen convenience meat and meat products	-0.94
Fresh green vegetables	-0.58
Processed fruit and fruit products	-1.05

Source: Table 3.1 in Brassley P., 1997

From table 3.1, we can see that, although rice is the main staple food in all selected countries, annual per capita quantity of rice consumption varies greatly across different countries. It is highest at 256 in Laos and lowest at 120 in India. This variation in quantity of rice consumption may result from the difference in the age structures and food diet of these countries.

3.1.1. Price changes and demand

3.1.1.1.Changes in own price

Given other things constant, changes in own price of one food induce movements along its demand curve. As rice becomes cheaper, people are likely to buy more rice, but how much more. The responsiveness to own price changes is measured by the own price elasticity of demand. The own price elasticity refers to the percentage change in the quantity demanded of a good when there is a one percentage change in its price.

Two points should be noted from table 3.2 (next page). First, basic food products often have low price elasticities of demand. People have to buy basic foods in order to survive no mater what the price is. Conversely, when they buy enough of basic foods they will not likely to buy more no mater how cheap they are.

Second, the more a food might be classified as a luxury, or the more substitutes it has, the more likely the quantity demanded responds to changes in its own prices. In the table it shows that the price elasticity of Carcase meat or of Processed fruit and fruit products is much greater than that of bread.

Table 3.2: Estimates of (own) price elasticity of demand for various food products in England

Products	(Own) Price elasticity
Corn and cassava	-0.26
Spices	-0.25
Rice	-0.63
Coconut	-0.88
Tea and coffee	-0.90
Vegetables and fruits	-0.97
Prepared food	-1.01
Fish	-1.04
Sugar	-1.15
Drinks	-1.71
Livestock and livestock products	-1.73

Source: Table 2.3 in Duong, 2000

Price elasticities vary not only across commodities but also across income levels. Some goods may be considered as luxuries for the poor, such as meat, but can be necessities for richer people. An example of price elasticities of foods classified by income groups in Cali is presented in table 3.3 below.

It is clear from table 3.3 that peas, eggs, oranges, milk, and pork are luxury goods for the poor but they are necessities for the rich. This is a good illustration for the point that when income increases consumers tend to switch to buy higher quality foods. And the table also verifies the argument that food price elasticities will decrease when people become richer.

Demand for a good depends not only on its price, but also on prices of related goods defined as substitutes and complements. Consumer may change demand for a food when there are changes in prices of other foods. We review results about cross price elasticities of demand for some foods in next section.

Table 3.3: Estimated (own) price elasticity of demand by income groups, Cali, 1969-1970[1]

Products	Low income			High income
	I	II	III	IV	V	Average
Cassava	-0.23	-0.28	-0.25	-0.00	-0.00	-0.19
Potatoes	-0.41	-0.42	-0.31	-0.00	-0.00	-0.26
Rice	-0.43	-0.40	-0.40	-0.26	-0.18	-0.35
Maize	-0.63	-0.55	-0.44	-0.00	-0.00	-0.44
Bread/pastry	-0.65	-0.56	-0.32	-0.24	-0.00	-0.31
Beans	-0.82	-0.78	-0.64	-0.45	-0.25	-0.60
Peas	-1.13	-1.13	-0.76	-0.59	-0.52	-0.70
Eggs	-1.34	-1.23	-1.26	-0.75	-0.35	-0.92
Oranges	-1.39	-0.96	-0.79	-0.64	-0.29	-0.69
Milk	-1.79	-1.62	-1.12	-0.64	-0.20	-0.77
Pork	-1.89	-1.61	-1.12	-0.82	-0.70	-1.01

Source: Table 2.4 in Duong, 2000.

3.1.1.2.Changes in other foods’ prices

Cross price elasticity of demand for a food can be positive or negative depending on the relation in consumption between goods. Unlike changes in the own price that induce movements along the demand schedule, changes in other foods’ prices lead to switch of the demand curve for a food. Table 3.4 below shows that “Mutton and Lamb” and “Pork” are substitutes for “Beef and Veal”.

Table 3.4: Estimates of (own) price elasticity and cross price elasticity of demand in England

Products	Elasticity with respect to the price of beef and veal
Beef and veal	-1.25
Mutton and lamb	0.36
Pork	0.08

Source: Table 3.2 in Brassley 1997

The second factor that is demand for goods is the change in incomes. Like changes in other food prices, Changes in incomes will lead to shift of the demand curve for a food.

3.1.2. Income changes and demand

The amount each person wants to eat is limited. When people have enough to eat, they will spend little or even no more extra income on food, although they may buy more expensive (higher quality) foods. Moreover, people may reduce the quantity of some foods consumed when incomes increase. Engel’s Law states that as people get richer, the proportion of their income spent on food declines.

Table 3.5: Income groups and food expenditure in 1994, England.

Gross weekly income of head of household (£)	Expenditure on food per person per week (v£)	Percentage of food expenditure on total
Over 560	15.68	2.8
290-559	13.37	3.15
140-289	12.58	5.86
Under 140	11.53	8.24

Source: Table 3.3 in Brassley, 1997.

We can see from table 3.5 (previous page) the fact that expenditure on food in absolute term increased from 11.53 to 15.68 but the proportion of expenditure on food declined from 8.24% to 2.8%.

The above argument is also relevant in the national sense. As the national income increases we would expect the percentage of total expenditure on food to reduce (Brassley, 1997, p. 30). Tables 3.6 will illustrates the argument.

Table 3.6: Percentage of total consumers’ expenditure spent on food.

Year	Percentage of household food expenditure on total
1978-80	17.6
1985	14.1
1990	11.9
1992	11.9
1995	11.0

Source: Table 3.4 in Brassley , 1997.

Table 3.6 shows that, from 1978 to 1993, when GDP of UK grew, the share of expenditure on foods in UK fell gradually from 17.6% to 11.0%. It supports the above argument.

Income elasticities of demand vary between commodities, income levels, groups of people within a country, and between countries. Estimated income elasticities of demand for food in some countries to verify this argument are presented in table 3.7.

Table 3.7: Income elasticities of demand for food in some countries.

Country	Income elasticity of demand for food
India	0.78
Hungary	0.61
Israel	0.58
UK	0.48
Germany	0.43
USA	0.37

Source: extracted from Table 2.1 in Kooreman, 1996.

Economists often argue that income elasticities of demand for foods are likely to reduce when people become richer. This argument is true no matter we compare at the individual or nation level. Table 3.7 verifies this argument. Income elasticity of demand for food is highest in India (0.78) and lowest in USA (0.37).

3.2.HOUSEHOLD AND QUALITY OF FOOD DEMANDED

The scope of quality effects can be examined by running regressions of the logarithm of unit value on the logarithm of total expenditure and the usual list of household demographics and other characteristics (Deaton, 1998, p. 288) in such a model described in Appendix I in full version of the thesis. Table 3.8 and 3.9 below will show results from a recent study in Vietnam.

Table 3.8 shows that rice is a staple food with an expenditure elasticity of quantity at about 0.3. Noodles and meats are luxuries. All expenditure-quality elasticities are positive except for noodles. This show the positive relation between expenditure and quality of foods consumed.

Table 3.8: Within-cluster regressions for unit values and quantity of different food in Vietnam in 1998

Food	Expenditure elasticities[2] of		Household size coefficients
	Quantity	Quality	Budget share	Unit value
Rice	0.2972	0.0626	0.1436	-0.0570
Noodles	1.2022	-0.0642	-0.0034	(-0.0226)
Meat	1.2339	0.0240	-0.0333	-0.0238
Fish	0.6747	0.1490	(0.0014)	-0.1475
Vegetables	0.3521	0.1720	0.0037	-0.1628
Fruit	0.9996	0.1773	-0.0066	-0.1061
Oil	0.7607	0.0690	(-0.0004)	-0.0626
Sugar	(0.9325)	0.0557	-0.0019	-0.0574

Note: Coefficients in brackets are not significant. All other coefficients are significant at 1% level.

Source: Table 4 in Youdi, 2002.

The effect of household size on unit values is negative in all foods. The increase in household size tends to reduce unit values.

The effect of household size on the budget share is negative for luxury goods and it is positive for necessities. That can be explained by the fact that, keeping total household expenditure constant, when the number of people in a household increases per capita expenditure level must fall, people must give up luxury foods to maintain the consumption of necessities, such as rice.

In table 3.9 (next page), own-price elasticities, printed in bold, are significant except for oil and sugar. Rice has the lowest own-price elasticity, confirming that it is a necessity as the main staple food in Vietnam.

Some cross-price elasticities are significant, implying that the change in price of one food may affect consumption of other foods. Some foods are substitutes, whereas some other foods are complements. In food demand analysis we should deal with the interaction in consumption between different food categories.