Nguyen Ngoc Quynh Major in International Political Economy

1. RESPONSES TO POVERTY AND RISKS IN VIETNAM:HOW EFFECTIVELY CAN THE CURRENT PUBLIC SAFETY NET TARGET? Nguyen Ngoc Quynh Major in International Political Economy Graduate School of Humanities and Social Sciences University of Tsukuba Prepared for the JJ/WBGSP Asian Regional Conference, May 25th, 2006

2. Vietnam Fact • Economic growth: • 7.5% average in 1995-1999 • 7.2% average in 2000-2004 • Poverty (% of population below national poverty line) and inequality: Poverty rate in 1993, 1998 and 2002: • 1993: 58.1%; 1998: 37.4%; 2002: 28.9% • for urban areas: 25.1; 9.2 and 6.6; • for rural areas: 66.4; 45.5; 35.6; • for ethnic minorities: 86.4; 75.2; 69.3 • Stable gradually increasing disparity from 1992 to 2003 between urban and rural areas, and among the latter, a worrying situation regarding ethnic minorities. • Will rapid economic growth be enough to eradicate poverty within the next few years? • Source: World Development Indicator 2006; Vietnam Development Report 2003

3. Vietnam Fact (cont.) • Where are the poor? • Most ethnic minorities live in the poor mountainous and highland areas. • The areas with higher poverty rate and higher inequality indicators are those normally have to face with adverse shocks such as natural disasters, disease and other kind of concentrated shocks specific to geographical location. • People face with shocks on day-to-day basis, and the poor tends to have fewer reserves as well as less access to consumption-smoothing devices. • The necessary of national risk pooling mechanisms and policies to mitigate the adverse impacts of shocks, which in principle, can be potentially played by safety net programs.

4. Why this study? • The desirability of safety net policies clearly depends on how well pre-existing risk-sharing arrangement work. However, little is known about: • If risks are shared? • Who are more vulnerable in facing with risks? • Which types of coping mechanisms used? • How much safety net program contributes to insuring the poor? • What does this study do? • Examines the level of risk sharing among households in Vietnam • Identifies vulnerable groups • Identifies coping mechanisms adopted by households to investigate how well existing social welfare programs can target and insure poor people from shocks in Vietnam

5. Previous Studies on Risks and Public Safety Net in Vietnam • Jennie Litvack (1999): Redistribution of resources across communes in Vietnam • Dominique van de Wall (2001): Effect of poverty on public transfer • Donald Cox (2002): private transfer rise upon retirement, widowhood and typhoon • Nguyen (2003): 5-10% of the population of Vietnam is still vulnerable to fall into poverty

6. Theoretical Background • Definitions: • Risk management strategy: actions that are intended to smooth income in the face of risks and uncertainties (Morduch, 1994) • Risk sharing: sharing of uncertainties about future income with borrowing and lending based on intertemporal consumption smoothing • Vulnerability: limited accessibility to risk management strategies • Risk-coping strategies: (i) consumption reallocation, (ii) credit, (iii) precautionary savings, (iv) returns to human capital, (v) informal private transfer, (vi) direct public transfer and social welfare programs • The model: • Theoretical Model: full insurance model (Townsend 1994, Udry 1994, Jalan and Ravallion 1999)

7. Perfect risk sharing model: Townsend (1994), Jalan & Ravallion (1999), Hess & Shin (2000) Idiosyncratic/specific shocks Income Fluctuations Consumption smooth Shocks Risk pooling mechanisms Consumption change Income Fluctuations Aggregate/common shocks Theoretical Model

8. Data and Variables • Data source: Household level panel data from the Vietnam Living Standard Survey (VLSS) 1993, 1998, General Statistical Office of Vietnam • Sample size: • 4300 households/150 communes/8 regions • 3396 households in rural areas; 904 households in urban areas • Main variables: changes in household consumption and income per capita • Shocks: • HH member became unemployed between the two surveys (dummy) • Number of days HH member was in sickness • HH faced with natural disaster (dummy) • Coping mechanisms: • Net debt • Net private transfer • HH sold asset or dissaving over last 12 months (dummy) • HH member got 2nd wage earning job (dummy) • HH received support from safety net programs (dummy)

9. Results • Risk sharing among households: • There is strong evidence that risk sharing takes place within very small community (i.e. communes), but it explains the performance of self-insurance mechanism only. • No risk-sharing at regionally or nationally, justifying a shortage of effective national risk pooling mechanisms. No risk-sharing across regions. • Despite the good results of risk sharing at commune level, Vietnamese households are not insured against specific community risks.

10. Results (cont.) • Five findings on the identification of vulnerable households: • female headed households are more vulnerable than male headed households; • ethnic minority households are more vulnerable; • households who have use-right of agriculture land are less vulnerable than households who do not; • poorest decile households are most vulnerable; • households reside in Red River Delta regions are most vulnerable.

11. Results (cont.) • Main coping devices: • Self insurance strategies (selling asset, dissavings, private transfers), which may make household are less vulnerable to risk at the moment, but in fact, become more vulnerable in the future. • Credit. But still, poor households have less accessibility to credit due to collateral issue. • People who become unemployed depends only on self insurance mechanisms to insure their risk.

12. Results (cont.) • Targeting of social safety net programs: • In most of the cases, households get support from safety net programs only when they face with natural disasters, which are common shocks within region. Recall that there is no evidence of cross-region risk-sharing mechanisms, this result suggests a poor effectiveness of safety net programs. • While 67% of households face with natural calamities, only 3% of them received supports from safety net system. • Households belongs to most vulnerable groups are less likely to get support from safety net program in comparison with other households

13. Conclusions • The current system suffers from the lack of national norms for identifying the poor consistently across regions • The system seems to short of financial resources to cover for risks. • Poor targeting is a fundamental problem of the current system. In practice, the current safety net programs failed to target the most vulnerable households. • Needs for: • Consistent mechanisms to identify beneficiaries • More compensatory mechanisms from the center, which could take the form of more money, better incentives for fiscal redistribution at the local level; • More monitoring of central norms or administrative constraints on local discretion in the implementation of centrally mandated social welfare programs. • Establishment of an unemployment insurance system

14. Risk-sharing Estimation Results (1) Note: 1. Change in per capita income is treated as endogenous instrumented out using a dummies variable indicating if household’s member is unemployed between the two surveys, number of days household’s member cannot carry out usual activities due to illness or injuries, and a dummy variable indicating if there is natural disaster causing more than 10% of crop lost. • 2. ** estimates are significant at 1%; * estimates are significant at 5%; + estimates are significant at 10%. • 3. Figures in parentheses are robust standard errors.

15. Risk-sharing Estimation Results (2) Note: 1. Change in per capita income is treated as endogenous instrumented out using a dummies variable indicating if household’s member is unemployed between the two surveys, number of days household’s member cannot carry out usual activities due to illness or injuries, and a dummy variable indicating if there is natural disaster causing more than 10% of crop lost. • 2. ** estimates are significant at 1%; * estimates are significant at 5%; + estimates are significant at 10%. • 3. Figures in parentheses are robust standard errors.

16. Identification of Vulnerable Groups Effect of income shocks on consumption by all characteristics of households: Note: 1. Change in per capita income is treated as endogenous instrumented out using a dummies variable indicating if household’s member is unemployed between the two surveys, number of days household’s member cannot carry out usual activities due to illness or injuries, and a dummy variable indicating if there is natural disaster causing more than 10% of crop lost. • 2. ** estimates are significant at 1%; * estimates are significant at 5%; + estimates are significant at 10%. • 3. Figures in parentheses are robust standard errors.

17. Choice of Coping Strategies Note: 1. Change in per capita income is treated as endogenous instrumented out using a dummies variable indicating if household’s member is unemployed between the two surveys, number of days household’s member cannot carry out usual activities due to illness or injuries, and a dummy variable indicating if there is natural disaster causing more than 10% of crop lost. • 2. ** estimates are significant at 1%; * estimates are significant at 5%; + estimates are significant at 10%. • 3. Figures in parentheses are marginal effects • 4. The multi-choices model is estimated by multivariate probit

18. Accessibility of most vulnerable households to safety net programs