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Non-farm diversification and household vulnerability

(LLCT) - Non-farm diversification has been found to be welfare enhancing for Vietnamese rural households. This paper highlights the nexus between such trend and household vulnerability to poverty in rural Vietnam. Pertinent policy recommendations are discussed, taking into account the heterogeneity of the relationship.

Non-farm diversification has the potential to reduce household vulnerability - Source: hanoimoi.com.vn

1. Structural transformation of economic activities in Vietnam

Vietnam is an agricultural country. When fundamental reforms were executed in the late 1980s, about 80% of the population lived in the coutryside; over 70% of the labour force worked in the agriculture sector.

Numerous households in rural Vietnam rely on farm activities as their major source of income, which is prone to significant variation due to environmental shocks and potential economic risks associated with Vietnam’s increasing trade openness. Natural disasters, aggravated by the climate change, have been on the rise in Vietnam. Households across different regions are exposed to a wide variety of natural shocks such as drought, floods, typhoons, storms or saline water intrusion. Diseases such as foot-and-mouth disease or avian flu also pose a direct threat to the livelihoods of rural households. As a consequence of global warming, 7 per cent of agricultural land in Vietnam could potentially be adversely affected by a one-metre rise in sea levels (Dasgupta et al., 2009). It is poor households in rural areas who are likely to be most afflicted by these disasters. Agricultural households are also exposed to economic risks resulting from the rapid process of trade liberalisation in Vietnam. As trade protection and subsidies are reduced, the domestic economy is more vulnerable to the world market’s fluctuations. For instance, farm households in the Central Highlands of Vietnam were pushed into non-farm activities due to a collapse in coffee prices in 2001 (Duc et al., 2009). Therefore, not only can non-farm diversification be a process of shifting to higher-return activities but it also serves as a risk-coping strategy for farm households.

Non-farm diversification has always topped the national agenda in Vietnam and there have been many programmes promoting the trend in the Socio-Economic Development Plan since the 6th National Assembly in 1986. The government aimed to “...create new jobs so as to transit labour away from agriculture to non-agriculture, enhancing rural households’ welfare”(1) and “promote the structural change in rural areas in the direction of rapidly reducing the proportion of the labor force in agriculture, increasing the proportion of workers in industry and services”(2). Despite ongoing urbanalisation in Vietnam, rural areas, which still accounted for two-thirds of the total population in 2017(3), have been at the centre of the national development strategy.

Although many papers have found non-farm diversification to be welfare-increasing and have poverty-reducing impacts on households, it is increasingly recognised that addressing the observed poverty level alone might not be an appropriate goal of development policies. In recent years, the development literature has focused on vulnerability as a new approach to anti-poverty analysis in developing countries. A forward-looking development policy should aim to both eliminate current poverty and preclude future poverty. A currently non-poor household prone to adverse shocks might fall into poverty in the future. Similarly, the likelihood of getting out of poverty differs between chronically and transiently poor households. This is not reflected in the traditional ex post poverty measure, namely the observed poverty level. Meanwhile, vulnerability is considered as an ex ante proxy for household deprivation that is based on not only household welfare measures - namely income or consumption - but also potential covariate and idiosyncratic shocks such as health issues, asset loss, economic crisis or natural disasters. It offers a reflection of dynamic poverty, which provides policy makers with a more comprehensive picture. The vulnerability as expected poverty (VEP) method proposed by Chaudhuri et al. (2002) and Chaudhuri (2003) has been used widely in the economic literature.

This paper focuses on two factors: (a) household diversification away from specialised agriculture into non-farm activities including waged employment and household enterprises (b) household vulnerability to poverty. The main objective is to examine the pattern of income diversification and its relationship with household vulnerability.

2. Household economic activities in rural Vietnam

This paper uses the data from Vietnam Access to Resources Household Survey (VARHS) in 2008, 2010, 2012 and 2014. The survey covers a total of about 2,600 rural households in 12 provinces across five regions of Vietnam, encompassing household consumption, income, assets and access to resources. This paper focuses on a balanced dataset of 1,713 households. In this section, this paper highlights the context of household economic activities in rural Vietnam. It is crucial that the definition of each economic activity be clearly defined. There are a total of 7 categories of interest comprising three main activities namely agriculture (Ag), waged employment (Wage) and enterprise activities (Ent), which, in the context of VARHS, are defined as follows:

Agriculture (Ag): Participating in household production related to agriculture, forestry and aquaculture;

Waged employment (Wage): Working for a wage/salary outside the household;

Enterprise activities (Ent): Pursueing any non-farm, non-wage, non-forestry, non-aquaculture businesses. This can involve trading, providing services, transportation, or other business (self-employed) for the household.

The seven categories are presented in Table 1. The focus of this paper is rural household diversification away from specialised agriculture. Therefore, households that are only engaged in agriculture are considered non-diversified while households involved in at least one non-agricultural economic activity such as waged employment and/or household enterprises are regarded as diversified households.

General information on various economics activities that the sample households participated in between 2008 and 2014 is demonstrated in Table 2 and Table 3.

As reported in Table 2, the sample period witnessed a consistent decline in the percentage of households specialising in agriculture, reflecting structural change in rural Vietnam at the micro level. In line with Beck’s (2017) commune level analysis which also used VARHS, the most popular form of diversification was to expand the portfolio of production activities by adding waged employment and/or enterprise activities (Ag & Wage, Ag & Ent and Ag, Wage & Ent) rather than moving completely out of agriculture. The category accounting for the largest share of households throughout the period was the combination of agriculture and waged employment, which rose from 40 per cent in 2008 to nearly 50 per cent in 2014. On average, over 10 per cent of households diversified by supplementing farm work with enterprise activities while approximately 11 per cent were fully diversified, being involved in all three types of activities. Despite constituting only a small share of households (2-4 per cent), the proportion of households engaged in paid employment only and/or enterprise activities only (Wage only, Ent only and Wage & Ent) displayed a slightly rising trend over the period.

Table 3 demonstrates the share of income generated from four various sources namely agriculture, paid employment, household enterprise and others such as transfers, rent, common property resources and sales of assets. There is a contrasting trend between agriculture and waged employment as the proportion of income earned from the former decreased significantly from 36.93 per cent in 2008 to 22.27 per cent in 2014 while the income share households generated from the latter experienced a marked increase from 28.34 per cent to 47.59 per cent over the same period. This highlights the rising significance of waged employment for household welfare. Meanwhile, the proportion of income earned from household enterprise activities hovered at around 13 per cent.

3. Results and discussion

In general, diversification has the potential to reduce household vulnerability, albeit only slightly. Among diversified households, those who supplement agriculture with additional activity appear to perform better than the other categories and the best performance is apparent for fully diversified households who participate in all three economic activities with their vulnerability being nearly 2 per cent lower than that of agriculture-specialised households, ceteris paribus, followed by households combining agriculture with waged employment and enterprise whose vulnerability rate is about 1.3 and 1.5 per cent lower, respectively.

Meanwhile, although the other diversified households who are engaged in waged employment and/or enterprise activities are also better off in terms of vulnerability to poverty than households where agriculture is the sole production activity, the difference is minimal. The probability of being poor over the next year for households who concentrate only on enterprise activities and for those who combine waged employment and enterprise activities is less than that of agriculture-specialised households. However, the coefficients are not statistically significant when the fixed effects are in place. Households that are specialised in waged employment are less vulnerable than those in the base category and the estimate is only statistically significant when the fixed effects are included.

Some notable results will now be discussed. Firstly, non-farm diversification is associated with vulnerability alleviation.

Secondly, non-farm diversification of Vietnamese rural households was led by push rather than pull determinants(4). It is possible that a large share of agriculture-specialised households were pushed by adverse factors such as natural disasters to diversify into low-return activities to stabilise income flows. While diversification as a result of pull factors is associated with higher welfare, the correlation between push-led diversification and household welfare is rather unclear.

Thirdly, the results reveal that among various categories of diversification, supplementing agriculture with additional non-farm activity appears to be a promising strategy. The best performance was witnessed in fully diversified households. This might imply that despite the discernable development of non-farm activities, agriculture remains a key production activity in rural Vietnam and that there are advantages of combining it with non-farm work. This is possible when the surplus of agricultural labour is absorbed by the rapid expansion of non-farm work. At the micro level, rural households allocate any labour surplus in farm work that is redundant to non-farm activities. The study of Hoang et al. (2014) supports this assumption. They also provide evidence that additional participation in non-farm work by Vietnamese rural households reduces time spent on the farm but does not reduce income generated from agriculture. As a result, additional earnings from non-farm work could be conducive to higher household welfare and a lower probability of falling into poverty. This is also the case in China where the rising availability of non-agricultural work facilitates a more efficient reallocation of rural labour as shown by De Brauw et al. (2002).

Fourthly, in comparison with Kinghan and Newman (2017) who use a similar model to examine the relationship between non-farm diversification and household consumption levels, fully diversified households also perform best, followed by those with an enterprise. They found that these two groups enjoy consumption levels that are 22 per cent and 20 per cent higher than agriculture-specialised households respectively. However, in this paper, households that are engaged only in enterprise activities are not conclusively found to fare better in terms of vulnerability than households specialising in agriculture as the coefficient is not statistically significant at conventional levels. Presumably this is due to the uncertainty and risks of running a household enterprise in rural Vietnam that may result in income fluctuation. Although Vietnam now has a more business-friendly environment, there is no policy that explicitly facilitates the development of household non-farm business acitivities (Economica Vietnam, 2013). There is also evidence of household enterprises in Vietnam suffering from discernable fluctuations in establishment and closure as well as a low survival rate (Benedikter et al., 2013; Vijverberg and Haughton, 2004).

Regarding the sample household enterprises, statistics reveal that most of them appear to operate on a small scale as more than 95 per cent of the enterprises do not employ any paid workers(5). These findings might indicate the vulnerability of sample household enterprises given the assumption provided by Benedikter et al. (2013) as well as Vijverberg and Haughton (2004) that large enterprises are more likely to be sustainable and survive. In addition, virtually 80 per cent of the enterprises belong to the informal sector and the process of formalisation was barely discernable during the survey period(6). Pasquier-Doumer et al. (2017) has pointed out a marked performance gap between formal and informal household businesses in Vietnam, with the former doing better with regard to value added generated, the size of capital and investment.

 Fifthly, there are other key factors such as ethnicity and education that are significantly associated with household vulnerability. Therefore, non-farm diversification should further be examined in an incorporated approach in future research.

4. Conclusion and policy implications

Econometric results in this paper corroborate the assumption that non-farm diversification has the potential to reduce household vulnerability, albeit only slightly. Several key points in order to put forward policy implications as well as recommendations for future research are as follows:

Firstly, different categories of non-farm diversification are found to be unequally correlated with lower vulnerability. The potential vulnerability-reducing effect seems to be larger and more robust for households supplementing agriculture with non-farm activities compared to those who are only engaged in non-farm work. Despite the benefits that non-farm employment may offer, agriculture still plays an indispensable role in rural livelihoods. As a result, development policies should focus on both facilitating rural households’ access to non-farm work and improving agricultural production such as by providing farm households with the opportunities to modernise and commercialise their agriculture or to switch from subsistence agriculture to higher-value farm production. The main target group should be households specialising in subsistence agriculture as well as those who are highly exposed to adverse natural shocks as they tend to benefit more from non-farm diversification.

This is in line with Prime Minister Nguyen Xuan Phuc’s summary of the 10-year National Target Programme on New Rural Development (NTP - NRD): “It is necessary to consider agriculture, farmers and rural areas to be strengths because there are still many areas for development, and to be an advantage in the development and integration process ”. Sustainable rural growth needs to focus on developing agriculture along with industry and services. Thus, not only can rural households utilise their competitive advantage of agricultural products but they also have the opportunity to improve their livelihoods by participating in non-farm activities.

Secondly, although diversifying into enterprise activities only was found to significantly increase household consumption by Kinghan and Newman (2017), it does not seem to play a role in reducing household vulnerability (unless it is complemented by farm work) possibly due to the uncertainty associated with doing business in rural settings. The majority of households involved in enterprise activities still rely on agriculture to generate parts of their income instead of specialising in doing business solitarily. Since there has been no policy that explicitly facilitates the development of household non-farm business activities in Vietnam (Economica Vietnam, 2013), it is high time the government filled this gap given the potential welfare-increasing effects of enterprise activities for rural households. In addition, household business formalisation should also be further encouraged.  

Although the findings should be interpreted as partial correlation rather than causality due to potential endogeneity, they could serve as evidence that non-farm diversification has the potential to reduce rural household vulnerability. In terms of political theory, this evidence reinforces the importance of the economic structural transformation objective set out in the National Target Programme on New Rural Development 2010-2020 (NTP - NRD) in particular and in the five-year Socio-Economic Development Plan in general with a view to enhancing sustainable livelihoods for rural households. As for economic theory, not only does this paper extend the findings of Kinghan and Newman (2017) but it also provides new evidence on the nexus between non-farm diversification and household vulnerability.

This paper could potentially be extended by future studies that investigate the determinants of non-farm diversification and disaggregate non-farm work into low-end and high-end activities.

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Endnotes:

(1) Beck, U., 2017. Local Transformation: A Commune-Level Analysis. In F. Tarp ed. Growth, Structural Transformation, and Rural Change in Vietnam. Helsinki: Oxford University Press, pp.51-67.

(2) Chaudhuri, S., 2003. Assessing Vulnerability to Poverty: Concepts, Empirical Methods and Illustrative Examples, mimeo. New York: Columbia University. [Online]. Available at: https://pdfs.semanticscholar.org/4461/840126dab19ab38692628d35de9516e6dcc0.pdf [Accessed on 8 May 2020].

(3) Dasgupta, S., Laplante, B., Meisner, C., Wheeler, D. and Yan, Y., 2009. The impact of sea level rise on developing countries: a comparative analysis. Climatic Change, 93, pp.279-388.

(4) De Brauw, A., Huang, J., Rozelle, S., Zhang, L. and Zhang, Y., 2002. The Evolution of China’s Rural Labor Markets During the Reforms. Journal of Comparative Economics, 30(2), pp.329-353.

(5) Duc, T. P. and Waibel, H., 2009. Diversification, risk management and risk coping strategies: Evidence from rural households in three provinces in Vietnam. In Research Committee Development Economics, German Development Economics Conference. Frankfurt, 2009.

(6) Hoang, T. X., Pham, C. S. and Ulubasoglu, M. A., 2014. Non-Farm Activity, Household Expenditure, and Poverty Reduction in Rural Vietnam: 2002–2008. World Development, 64, pp.554-568.

(7) Kinghan, C. and Newman, C., 2017. The Rural Non-farm Economy. In F. Tarp ed. Growth, Structural Transformation, and Rural Change in Vietnam. Helsinki: Oxford University Press, pp.91-113.

(8) CPV: 9th Congress Resolution, National Political Publishing House, Hanoi, p.276

(9) CPV: 10th Congress Resolution, National Political Publishing House, Hanoi, p.195.

NGUYEN VIET DUNG, MSc

Institute of Economics - Ho Chi Minh National Academy of Politics

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