Vietnam Development Report 2004: Poverty

Vietnam’s achievements in terms of poverty reduction are one of the greatest success stories in economic development. A decade ago, 58 percent of the population had an expenditure level that was insufficient to support a healthy life (with the definition of "healthy" based on a minimum caloric intake per day plus a set of basic non-food needs). Five years later, the proportion of the population below this particular poverty line had fallen to 37 percent. And it had further declined to 29 percent by 2002. Thus almost a third of the total population, the equivalent of more than 20 million people, were lifted out of poverty in less than ten years.

Progress has also been substantial when other dimensions of poverty, apart from expenditures, are considered. The broader Vietnam Development Goals (VDGs), which are a localized version of the Millennium Development Goals, show a consistent improvement of social indicators, from education enrollment to infant mortality. While some regions and some population groups gained more than others, Vietnam continues to reduce poverty considerably faster than other countries at a similar development level.

While rapid economic growth accounts for an important part of the reduction in poverty over the last decade, one of the salient characteristics of Vietnam’ growth pattern is its strong pro-poor nature. As the size of the economy roughly doubled between 1993 and 2002, the fraction of the population living in poverty declined by half. In annual terms, a growth rate of output of roughly 7 percent was associated with a reduction in poverty by about 7 percent too, implying an "elasticity" of poverty reduction to economic growth close to one.

Such a high elasticity reflects the commitment of the Government of Vietnam to equality and social inclusion, reiterated throughout its blueprint for development, the Comprehensive Poverty Reduction and Growth Strategy, or CPRGS (Socialist Republic of Vietnam, 2002). The report, and the seven associated RPAs, aim at supporting the implementation of CPRGS at all levels: national, sectoral and provincial.

The story behind the reduction in poverty has somewhat changed over time. Earlier gains had been associated with the distribution of agricultural land to rural households, in a context where economic reform provided the right incentives for increased farm production. But those gains have been mainly reaped by now. In more recent years, the driving forces behind poverty reduction are job creation by the private sector and the increased integration of agriculture in the market economy.

A vast majority of the working-age population of Vietnam actually works, and labor market participation rates are among the highest in the world. What has changed is not activity, but rather the composition of employment. Over the last four years, the proportion of people who mainly work on their own farm dropped from almost two thirds to slightly less than half. Instead, many more are now engaged in wage employment: 30 percent of those at work earned a wage in 2002, compared to 19 percent four years earlier. Thanks to its buoyant expansion, by 2002 the formal private sector already accounted for around 2.5 million jobs, more than the entire public sector. But a much larger number of jobs have been created by the private informal sector.

Increased incomes from farming over the past few years have also been important for rural poverty reduction. Farm households in Vietnam have become much more  oriented towards the market rather than towards home consumption. Currently they are selling 70 percent of their farm output, compared to 48 percent nine years ago. This has not been at the expense of food security or nutritional intake as both of these indicators have also improved over time. Increased diversification has also helped farmers reduce vulnerability to shocks.

Nevertheless, rural households still represent a vast majority of the poor. And poverty will remain mainly rural for many years to come. But it will become increasingly concentrated in remote areas, and very heavily so in ethnic minority areas. While broad-based growth will continue to reduce agricultural poverty, especially in the lowlands, it might be insufficient to tackle the problems of mountainous and remote areas as well as the specific issues faced by minorities. Further reducing poverty in Vietnam may become increasingly difficult, as more marginalized groups of the population will offer tougher pockets of resistance.

Conversely, urban households will represent an increasing share of the poor. Losses associated with distress sales of land, migration to urban and suburban areas without basic services, exposure to crime and environmental degradation in neighborhoods growing out of control...these are some of the emerging challenges for poverty alleviation efforts in Vietnam. 

The pattern of growth might change as well. The economy is likely to expand at a rapid pace, but this expansion may be less pro-poor. A key to fast poverty reduction over the past decade was the redistribution of agricultural land to rural households. Because of its relative scarcity, land is one of the most valuable assets in Vietnam. The allocation of land-use right certificates to rural households in the lowlands amounted to a massive transfer of wealth. And not only was this transfer targeted to a poor segment o f the population: it was also remarkably egalitarian across households in that segment. The development of agricultural production and  exports resulting from the redistribution of land was phenomenal, and it effectively helped millions of households to escape poverty. It also led to a relatively stable level of inequality.

Whereas the development of the market economy raised incomes in urban areas, rural areas were not left behind. Completing the land redistribution process in the uplands could further reduce rural poverty, provided that it does not formalize the currently unequal allocation of perennial and forestry land. But most of the gains from land redistribution might be reaped by now.  The next decade may well be characterized by increasing inequality in Vietnam. Three main forces will be at play:

1. Further integration with the world economy will primarily benefit the economic hubs of the country. At least for some time, the gap in earnings between urban and rural areas will increase. And the earnings gap between skilled and unskilled workers could increase as well. Provinces with more inefficient administrations and less business-friendly procedures will also be left behind, as their private sectors will be less dynamic and create fewer jobs.
2. The trend towards increased decentralization could amplify the disparities between rich and poor areas. As the fraction of public expenditures that is funded out of local revenue grows, richer provinces, communes and districts will be able to spend substantially more on infrastructure and social services than their poorer counterparts.
3. Increased reliance on market forces may raise the out-of-pocket cost of health and education. This trend has already been at work over the last few years and is likely to continue. While it may not have a large impact on access to the most basic social services, it could accentuate inequalities in the use of more advanced services, such as higher education or more sophisticated medical treatments.