DOI MOI AND INEQUALITY MECHANISM IN RURAL VIETNAM

(EVIDENCE FROM 2002 VIETNAM HOUSEHOLD LIVING STANDARD SURVEY)

By: Giang Hoang Nguyen Department of Sociology Vietnam National University, Hanoi
This paper applies Market Transition Theory (Nee, 1989) and Andrew Walders distinction between marketization and economic expansion (Walder, 2002) to examine the impact of Doi moi on inequality mechanism in rural Vietnam. Data from a nationally representative survey, 2002 Vietnam Household Living Standard Survey, shows that the mechanism of income inequality has been changed significantly due to Doi moi. Doi moi has increased the return of human capital but not necessarily favored entrepreneurs to rural cadres as predicted by Market Transition Theory. Rural cadres have lost their income advantage relatively to entrepreneurs when Doi moi resulting in the expansion of agricultural and entrepreneurial economy. However, it is not the case in the wage economy in which the cadres relative advantage has been over the entrepreneurs one. Contrary to arguments emphasizing the local reactions to reform (Sikor, 2001) and differences between Vietnam and China (Luong, 1998), these findings suggest that inequality mechanism in both countries has been varied in a similar pattern under the impact of economic reform. Introduction Started in the late 1980s, Doi Moi (Renovation) has deeply transformed Vietnams society. Before Doi Moi, Vietnam was a rice importer and one of the poorest countries in the world with the GDP per capital in 1985 is US$ 130 per year. Renovation, firstly started in agricultural sector in 1988, have helped Vietnam to become the worlds third largest rice exporter by 1992 and one of the fastest growing economies in the world for about two decades with an average annual rate of real economic growth of 6-8 percent which only lowers than China. Given the collapse of former socialist block, the Vietnam main economic benefactor in the 1980s, and the East Asian financial crisis in 1997 and 1998, this economic achievement is all the more amazing. This rapid economic growth has been accompanied by significantly changes in social aspects. The poverty rate declined from 75 percent of population in 1984 to 37 percent in 1998, an achievement rarely seen in developing countries. This rate has continued to decline into 21st century. As to education, the gross primary school enrollment rate increased from 40 percent in the mid-1980s to 67 percent in 2000. The incidence of child malnutrition also declined dramatically, from 50 percent in 1993 to 35 percent in 1998 and life expectancy continued its steadily rise to the rates usually since only in high-income countries. While these changes have been widely mentioned in studies of Vietnam, there is a considerable unknown about social inequality especially on the change in inequality mechanism. Most studies on this topic focus on investigating whether the rapid economic development that followed the adoption of Doi Moi led to an increase in inequality based on Gini coefficient and Theils entropy measure which reported a modest increase in inequality. Given the interest of these studies, they do not deal with changes of inequality mechanism during Doi Moi. Luong and Unger (1989), Sikor (2001), and Tran (2004) are first scholars interested in the process of socioeconomic differentiation. In his paper, Luong and Unger argued that given the lack of rural public industry in Vietnam, the effects of intuitional changes on inequality mechanism in Vietnam should be different from China. However, his interest did not allow him to give us more detail about this difference. Based on data from his field work at three upland villages in North-Western Vietnam, Sikor did not find any change in the process of differentiation. Rural people may be rich and poor for the same reasons as under collective agriculture. In contract, Trans study in a Muong ethnic Community

revealed a remarkable change in this process. Given the nature of Sikors and Trans data, their conclusions can not be applied for whole country. As a result, the picture of the winner and losers during Doi Moi is very sketchy in available documents. Using a well known national survey, 2002 Vietnam Household Living Standard Survey, this paper will examine impact of Renovation on mechanism of income inequality in rural Vietnam. Institutional Context in Rural Vietnam Before the Geneva Accord of 1954, Vietnam was under French control. During the colonial period, most farmland in Vietnam was owned either by French plantation owners or by large Vietnamese landlords: 52 percent of the land was owned by only 3 percent of the indigenous population and more than 60 percent of farmers across the country were landless in the mid1940s. After independence in the North, a major land reform was carried out. As a reward for their war efforts, land and ownership rights were distributed to farmers and a rapid increase in agricultural output and productivity followed. However, the policy was reversed and land began to be collectivized in the late 1950s, as Communist ideology gained strength. As a result, 86 percent of all peasant households and 68 percent of total farmland were brought into cooperatives by 1960. Despite significant declines in output, the collectivization process continued so that 90 percent of all peasant households in the North were working in cooperatives by the mid-1960s. An illuminating stylized fact illustrates the impact of such an incentive system: while individual rural households were privately allocated 5 percent of farmland, they derived 60 to 70 percent of their earnings from this small plot. Land institutions in the South during that same period were driven by political conflicts. At times where the government sought support from the local elites, pro-landowner policies were adopted. When the war against North Vietnam began, the government tried to gain popular support by adopting the Land-to-the-Tiller law in 1970. Tillers of the soil were to enjoy all the benefits of their work, and this would be accomplished by providing ownership rights to cultivator land putting a retention limit on landlords as low as 20 hectares. However, the law found opposition from landlords and the lack of independence of the bureaucracy made enforcement uneven throughout South Vietnam. In 1975, when the war ended and the country was reunified, land collectivization started in the South but was implemented with little success: as late as 1986, only 5.9 percent of farmers in the Mekong Delta and 20 percent in the Southeastern region were part of cooperatives, while this figure amounted to 85 percent in the Central Lowlands region (Pingali and Vo-Tong, 1992). Under the collective system, all households were paid a share of output according to their recorded labor hours on the communal land. In 1981, the first changes were made to these arrangements: workers were now allowed to keep the entire surplus they produced over a contracted output. However, this policy was later modified and quotas were constantly renegotiated, resulting in a decline of public confidence. Agricultural yields were extremely low in this period and even as late as 1985; Vietnam was a net importer of rice. Faced with a worsening economic crisis, the government announced the program of Doi Moi. Officially, the Doi Moi was started in 1996 by VI Party Congress but to many Vietnamese, Resolution 10 in 1988 was the first policy change launch by Doi Moi program. The reform consisted of transferring control and cash-flow rights from the cooperative to the individual household. Land was allocated to households with a fifteen-year security of tenure, output markets were privatized and investment decisions were decentralized and left to households. Private property was virtually instituted. However, as land-use rights were given to families without the possibility to trade such rights, a proper land market did not develop despite some informal transactions. Land allocation to individual households was conducted by the commune authorities, and encountered some difficulties across the country. In the North and in some regions of the South, land was distributed on a fairness basis, taking into account soil and sociodemographic characteristics of the region.

Mechanism of change in income inequality The topic of inequality in post socialist societies has been the subject of much empirical research since Nee (1989) proposed the Market transition theory. According to Nee, state socialist economy is distinguished by the state control power over economic resources and transactions. In such kind of society, individuals economic attainment completely depends on their access and relation to state power. In Vietnam during the collective period, the income difference within the village depended on the number of laborers in the household (Luong and Unger, 1998) and political capital (Vu, 2005, Tran, 2004) At the other end of market transition is a market economy in which economic resources and transactions are ideally no longer controlled by state but completely by market. Given the domination of market power, the individuals attainment is the function of their economic, human, social, cultural capital. As a result, Market transition theory argues that the transition from redistributive to market coordination shifts sources of power and privilege to favor direct producers (i.e., entrepreneurs) relative to redistributors (i.e., cadres) (Nee, 1989). From this general thesis, Nee went on two most widely tested hypotheses (1) higher returns to human capital than under a centrally planed economy and (2) a decline of the advantage of re-distributive power and other forms of political capital related to non-state economic actors who possess market power (Yang and Nee, 2000, p. 1175). Since then, Nee thesis has been the most hotly contested theory in the field of sociological research in transforming socialist economies (Szelenyi, 1988; Nee, 1989; Nee, 1991; Peng, 1992; Rona-Tas, 1994; Domanski and Heyns, 1995; Parish, Zhe and Li, 1995; Nee, 1996; Parish and Michelson, 1996; Xiw and Hannum, 1996; Bian and Logan, 1996; Gerber and Hout, 1998; Brainerd, 1998; Szelenyi, 1998; Nee and Cao, 2000; Zhou, 2000; and Walder, 2002). As to the human capital hypothesis, most empirical research reports confirmatory evidence in rural context. However, results from urban study of Xie and Hannum (1996) and Gerber and Hout (1998) do not support for Nees argument. The only possible explanation for this inconsistency is the complexity of transformation in urban over rural. The reason, we suspect, is that agricultural decollectivization combined with private entrepreneurship presents a relatively simple form of rural mercerization, whereas urban transitions are characterized by much greater path dependence due to both policy reasons and the structural complexity of preexisting urban society. Even the theory of declining return (Walder, 2002) gives another account for change in return of human capital in China; it also has the same prediction as market transition theory. In sum, all studies and theories in transition economies claim an increased returns human capital especially in the rural. Nevertheless, market transition theorys prediction on the decline in economic advantage of cadre does not enjoy an coherent status as the human capital prediction and becomes the most debated issue in literature. Many studies have found the persistence of cadres economic advantage (Rona-Tas, 1994; Parish, Zhe, and Li, 1995; Parish ad Michelson, 1996; Xie and Hannum, 1996; Bian and Logan, 1996; and Walder, 2002). This has raised other alternative theories to explain for inequality mechanism in market transition economies. The most direct opponent of market transition theory is argument emphasizing on cadre power persistence. This claims that market transition may not necessarily bring about the relative decline of cadre economic advantage because of the technocratic continuity and power conversion (Bian and Logan, 1996; Rona-Tas, 1994; and Staniszkis, 1991). Even Nee (1991, 1996) also found a mixed result for cadre advantage. Nee addressed this divergence of the theory and the empirical findings with the partial reform thesis: officialsretain their power and privileges under partial reform to the extent that markets remain bounded by redistributive hierarchies (Nee 1991). Unfortunately, this new theoretical argument does not allow us to test it empirically. The unfortunate implications of this new position for the testing of market transition theory (is that) the theory now has no empirical implication until an undefined point in the transition. If the advantages of cadres or former cadres are declining, this supports the theory; if they do not, this simply means that redistributive power has not yet disappeared (Walder, 1996, p. 1067; see also Zhou, 2000). It

seems to be that all latter theoretical proposals have their own disadvantages. While power conversion argument can not cover Nees finding in 1989, partial reform thesis lack of empirical implication. Walder (2002) argued that the conflict findings regarding to cadres economic advance in China should be the result of not only marketitization but also economic expansion. According to Walder, cadres may suffer a loss in income advantage at the beginning of agricultural reform because they no longer had redistributive power. However, when the economy became more complicated they would get more power so that their earnings increased. This is especially true when the rural economy moved to the market labor economy. In this case, cadre power would help their family members to have better wage jobs. This is the reason why Nee found no net effect of cadre position on household income in 1985 but a larger net impact in his latter surveys. Research hypotheses and analysis models From above theoretical arguments we develop following hypotheses: The reform has increased economic return of human capital The decline in returns to rural cadres just happens when the reform resulted only in the expansion of agricultural and entrepreneurial economy In the other form of economic expansion, the wage economy, cadres do not necessary loses their advantages. To test above hypotheses, following analysis models are applied Model A: Log (households income)=F(human capital, number of laborers, entrepreneur, cadre, marketization) Model B: Log (households income)=F(human capital, number of laborers, entrepreneur, cadre, types of economic expansion) The Model A is used for the first hypothesis and the model B is for the last two hypotheses. In these models, human capital variable are measured by education and age. Economic development is proxy of marketization variable as in Nees studies. Types of economic development includes agricultural, entrepreneurial, and wage economies as in Walders study. More detail about the measurement of variables is presented in next section. Given the fact that the above two models contain two levels of variables, household and commune level, a two level logistic regression is used for both models. Economic development and type of economic expansion variables are commune level ones, the rest are household level variables. Statistics presented in this paper are not direct result of the logistic regression model but transformed into percentage from the logistic regression model by the formula [100*(exp(b)1)] to present the percent change in the dependent variable resulting from one unit change in the independent variable. Data and Variables 2002 VIETNAM HOUSEHOLD LIVING STANDARD SURVEY The data used in this paper comes from a nationally representative survey, 2002 Vietnam Household Living Standard Survey (2002 VHLSS). This survey was conducted by Vietnam General Office of Statistics with the technical and financial support from World Bank. The survey contains 30,000 households all provinces in Vietnam. However, we only did analysis on rural sample of 61 provinces, 550 communes, and 13,700 households. Within each province the number of communes was determined by the self-weight sampling. Within each commune, households were selected randomly based on the commune household registers. HOUSEHOLD LEVEL MEASURES Household income: Household income from various sources was estimated through a series of items. Respondents were asked a series of question about household economic activities and the income derived from them such as wage, agricultural, non agricultural activities, and other income in the prior 12 months. The natural log of the estimate for total household income is the dependent variable in the analysis model presented above.

Labor force: Number of laborers in household who are older than 15 years old and answered yes to the question have you worked in past 12 months (unit: person) Education: Average of age of people in household who answered yes to the question have you worked in past 12 months (unit: year) Age: Average of age of people in household who answered yes to the question have you worked in past 12 months (unit: year) Cadre household: households in which have at least one cadre living in. This variable came from the surveys occupational index of each member in household in which value cadre is leader of (1) communist party offices in all level, (2) National Assembly and Presidents Office, (3) Central Government, (4) Peoples court and Peoples control institute, (5) Peoples council and People committees at local level. Entrepreneur household: There is no question for household business in 2002 VHLSS. Given the Vietnamese regulation, families which have to pay tax for their nonagricultural activity should be considered as entrepreneurial households. This indicator is used to identify entrepreneurial households in this study. I divided data into two parts which are most developed commune (third quintile) and least developed commune (first quintile). The purpose of this technique is only to avoid using statistics methods that may not familiar to some people. COMMUNE LEVEL MEASURES Economic development: Economic development is a proxy of marketization level and it is the mean annual household income of the commune (in Vietnamese thousand dongs) computed from 25 household in each commune. In this paper I present only statistics from most developed communes (higher than third quintile) and least developed communes (lower than first quintile). The reason for doing this is to make statistics understandable to those who are not familiar with statistics. Agricultural economy: It is defined as the proportion of total commune income that derived from agricultural sources. Private entrepreneur economy: It is defined as the proportion n of nonagricultural commune income derived from private household production Wage-labor economy: It is defined as the proportion of nonagricultural commune income derived from salaries For the reason similar with that in economic development variable, I present only result in most agricultural, entrepreneurial, and waged economy (95%). More detailed about methods to compute these statistics, please see my and Walders upcoming article in American Sociological Review titled Market and Inequality in Rural Vietnam and China. Research Results Model 1 in the Table 1 report estimated net contribution of household characteristics for a baseline model that includes all households in the sample. There are large net returns to measures of human capital. Each additional year of average household education adds 6.5 percent to total household income. This number is somewhat higher than number in 1988 VHLSS and in China in 1996. However, compared to developed countries where return to each year of education is 1520%, return to education in Vietnam is significantly low. Each additional year of average age of working household member (proxy for working experience) adds 1% to household income, and the quadratic term, age squared, is negative, indicating that this effect shrinks with age. Each additional member of the household who works adds a substantial 15.41 household income. This large estimate may support for Sikor's argument about the important impact of family circle on household income, but the low return to age is kind of conflicting with it. It seems to be that the effect of family cycle is the result of laborers rather than itself. Sikor's argument would be more suitable in case of China because the return to age in rural China is 9%. The net advantage of having a cadre in the household is 23.82 percent; that of operating a family business is 55.88% percent. These are equal to 4 years and 9 years of education or 1.6 and 3.6 additional working household member, respectively. Comparable estimates for China in 1996 are

40.6 percent for cadre and 52.5 percent for entrepreneur. The advantages of entrepreneur in China and Vietnam are similar. However, having a cadre in the household in China is much more beneficial than in Vietnam. This difference may be a result of lacking of rural public enterprise in Vietnam and support for Luong and Unger's assertion about the difference between Vietnam and China. The estimated coefficient for cadre entrepreneurs is not statistical significant so we report it as zero. This does not mean that the income of cadre entrepreneur households is equal to that of common households but it is the total effect of both cadre and entrepreneur, namely 79.7%. Table 1: Estimated Net Contribution of Household Characteristics to Total Household Income Household Characteristics Education Age Age Squared Laborer Cadre Household Entrepreneur Household Cadre Entrepreneur Household Commune Income Model 1 6.50% 1.00% -0.03% 15.41% 23.82% 55.88% 0% 0.15% Model 2 5.26% 0.81% -0.03% 14.93% 30.05 41.96% 0% 0.63% Model 3 6.82% 1.76% -0.04% 15.73% 21.50% 72.52% 0% 0.06% Percentage Change 29.66 117.28 NA 5.36 -28.45 72.83 0 -90.48

The paper's primary interest is whether Doi Moi has increased return to human capital and entrepreneurs and decreased the economic advantage of cadres. Model 2, 3 in Table 1 report estimates of net contribution of household characteristics to total household income in least developed communes (proxy of the collective period) and most developed communes (proxy of the de-collective period), respectively. The column "percentage change" reports changes for each variable from model 2 to model 3. Contribution to household income of education, experience, labor force, cadre, entrepreneurs in Mode 2 re 5.25%, 0.81%, 14.93%, 30.05%, and 41.96%, respectively. These numbers in Model 3 are 6.82%, 1.76% 15.73%, 21.50%, and 72.52%. The return to education in Model 3 is 29.66 % higher than that in Model 2. Returns to experience and labor force are increased 117.28% and 5.36% respectively. These evidences strongly support for Market Transition Theory's argument about the favor of Doi Moi to human capital. As to cadre and entrepreneur, differences between Model 3 and Model 3 are consistent to Market Transition Theory. Cadres in most developed communes earn 28.45% lower than their counterparts in the least developed one while entrepreneurs earn 72.83% higher. These mean that Doi Moi has decreased the cadre's economic advantage but increase the entrepreneur's one. Do these evidences mean that the higher the level of marketization in Vietnam's future is, the higher the returns to human capital and entrepreneur are, and the lower the cadre's economic advantage is? So far, there has no theoretical debate and conflict evidences regarding human capital so one could confident to say so about human capital. However, it is not the case for cadre and entrepreneurs. Walder (2002) argued that the fates of these groups were determined by not only the level of marketization but also economic structure. Table 2 reports estimates for income return for cadre household and entrepreneur household in three difference types of economy. Table 3: Estimated Net return to Cadre Position and Entrepreneurship,

By Structure of Village Economy Types of Households Cadre household Entrepreneur household Ratio entrepreneur/cadre Agricultural Economy 23.8 86.0 3.61 Entrepreneurial Economy 23.8 122.2 5.14 Wage Economy 23.8 20.4 0.86

The estimated net advantage to cadre household does not vary by the extent to which a commune depends on agricultural economy, an entrepreneurial economy, or a wage economy. However, the net returns to entrepreneurship are sensitive to local economic structure. They are 86% in agricultural communes, 122.2% in entrepreneurial ones, and 20.4% in wage communes. Where the commune economy relies heavily in on private entrepreneurship, relative return to entrepreneurs is highest, 5.15 times of cadre's return. This advantage declines to 3.61 times in communes depend on agricultural economy and to 0.86 times in wage economy. The most important finding here is the lower return of entrepreneur than that of cadre in wage economy. This implies that Doi Moi has not necessarily eroded cadre's economic advantage. These findings are similar to estimates based on Walder's survey in China in 1996. The overall consistence in the Table 1 to Market Transition Theory is only the result of the less developed wage economy in Vietnam compared to China. These evidences mean that Market Transition Theory holds true only when Doi Moi result in the expansion of agricultural and entrepreneurial economies but not in the expansion of wage economy or labor market economy. Conclusion Doi moi has increased the return of human capital but not necessarily favored entrepreneurs to rural cadres as predicted by Market Transition Theory. Rural cadres have lost their income advantage relatively to entrepreneurs when Doi moi resulting in the expansion of agricultural and entrepreneurial economy. However, it is not the case in the wage economy in which the cadres relative advantage has been over the entrepreneurs one. Contrary to arguments emphasizing the local reactions to reform (Sikor, 2001) and differences between Vietnam and China (Luong and Unger, 1998), these findings somewhat support Tran's argument (2004) and suggest that inequality mechanism in both countries has been varied in a similar pattern under the impact of economic reform. The difference between two countries in term of cadre's economic advantage is the result of economic structure's difference. REFERENCE Bian, Yanjie, and John Logan. 1996. Market Transition and the Persistence of Power: The Changing Stratification System in Urban China. American Sociological Review 61: 739-58 Brainerd, Elizabeth. 1998. Winners and Losers in Russias Economic Transition. American Sociological Review 88: 1094-116 Gerber, Theodore, and Micheal Hout. 998. More Shock than Therapy: Market Transition, Employment, and Income in Russia, 1991-1995. The American Journal of Sociology 104: 1-50. Luong, Van Hy and Jonathan Unger. 1998. Wealth, Power, and Poverty in the Transition to Market Economies: The Process of Socio-Economic Differentiation in Rural China and Northern Vietnam. China Journal, No. 40, Special Issue: Transforming Asian Socialism. China and Vietnam Compared (Jul., 1998) , pp. 61-93 Nee, Victor and Rebecca Matthews. 1996. Market Transition and Societal Transformation in Reforming State Socialism. Annual Review of Sociology 22: 41-35. Nee, Victor, and Yang Cao. 1999. Path Dependence Societal Transformation: Stratification in Hybrid Mixed Economy. Theory and Society 28: 799-834

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