Income Diversity and Poverty Transitions: Evidence from Vietnam

Date01 March 2016
Published date01 March 2016
World Food Policy - Volume 2 Issue 2/Volume 3 Issue 1, Fall 2015/Spring 2016
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.
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.

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