Income Diversity and Poverty Transitions: Evidence from Vietnam

• DOI: http://doi.org/10.18278/wfp.2.2.3.1.7
• Date: 01 March 2016
• Published date: 01 March 2016
• Author: Van Q. Tran

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World Food Policy - Volume 2 Issue 2/Volume 3 Issue 1, Fall 2015/Spring 2016

Introduction

The dynamics of poverty have

been one of the central issues in

development economics. ere

has been a great deal of theoretical studies

(Cappellari and Jenkins 2004; Carter

and Barret 2006) and empirical studies

(McCulloch and Baulch 1999; Glewwe,

Gragnolati, and Zaman 2000; Woolard

and Klasen 2005; Justino, Litcheld, and

Pham 2008) that discuss the transitions

into and out of poverty using dierent

approaches and country cases. ey

have identied the characteristics of a

household, the private and public assets

a household possesses, the changes in

macroeconomic condition such as trade

reform, ination, and economic crisis on

the dynamics of poverty.

In fact, the majority of the

poor lives in rural areas and engages

in agricultural activities. Also, the

large share of the rural population is

diversifying their income sources to

nonagricultural activities that are usually

Van Q. TranA

Income Diversity and Poverty Transitions: Evidence

from Vietnam

A University of Economics and Law, Vietnam National University

e large share of the population in rural areas of the developing world has

been diversifying their livelihood to nonagricultural activities. However, the

amount of the literature that discusses the possible eects of the diversity on

a household’s well-being is still limited. is study contributes to this strand

of the literature by investigating the eects of income diversity on poverty

transitions. e analysis is based on household panel data collected in the

2000s from Vietnam and applied to a multinomial logit model. e results

show that households with better access to markets are more able to diversify

their income sources to nonagricultural activities and the diversity is helpful for

a household to escape poverty or to avoid falling into poverty.

Keywords: income diversity, poverty transitions, nonagricultural income

sources, Vietnam

JEL classication: I32, O13, P36, R11

doi: 10.18278/wfp.2.2.3.1.7

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World Food Policy

of higher returns and consequently

making them better o. Studies by De

Janvry, Fafchamps, and Sadoulet (1991)

and Kinsey, Burger, and Gunning (1998)

indicate that income diversication

is not only positively correlated with

wealth but also with an increased ability

to cope with shocks. Diversication is

a way through which rural households

insure themselves against the occurrence

of such shocks, or, in other words,

diversication reduces livelihood

vulnerability. is self-insurance can

also be seen as a negative function of the

availability of social insurance, provided,

for example, by the community or family.

e better access to social networks and

institutions, the less likely a household

needs to apply self-insurance systems as

the diversication of income portfolios.

In contrast, social capital can also foster

the ability to participate in many dierent

income activities.

is study aims to contribute to

the literature of vulnerability to poverty

by examining the relationship between a

household’s diversity of income sources

to nonagricultural activities and its

transitions into and out of poverty. e

main goal is to identify which households

are more able to diversify income sources

and if such income diversity makes the

household better o or prevents it from

falling into poverty.

is study examines these research

questions in the context of Vietnam,

although the approach can be applied

to other developing countries. Vietnam

has been one of the most successful

countries in the developing world in

terms of economic growth and poverty

reduction. e rapid economic growth,

together with market liberalization and

trade openness that took place during

the last two decades, has lied a large

share of the population out of poverty

(see Tran, Alkire, and Klasen 2015).

Nonetheless, poverty is still a central

issue in the country as nearly 43 percent

of the population still lives on less than

$2 a day (World Bank 2013), and many

people earn their living by engaging in

agricultural activities. Various population

subgroups have beneted less from such

development; households in rural areas

have made slower progress than those in

urban areas (see GSO 2011).

is study uses three waves of

a panel surveys from 2007, 2008, and

2010 of more than 2000 rural and peri-

urban households from three provinces

in Vietnam. e drivers of poverty

transitions are investigated via descriptive

statistics and empirical results from

multinomial logit (MNL) models. e

analyses are based on the hypothesis that

a household that diversies its income

sources to nonagricultural activities

nds it easier to escape poverty than a

household that relies its income only

on agricultural activities. e ndings

conrm that an increase in the share

of nonagricultural income to total

household income is correlated with the

advancement of a household’s well being.

is study is organized as follows.

Section 2 describes the household

panel data used in the analysis and

presents the estimation strategy. Section

3 discusses the results of the MNL

models that highlight the relationship

between income diversication and

household well-being. It also discusses

the robustness of the estimation results.

Finally, Section 4 concludes with the key

messages of this paper.