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Households earned income in vietnam evidence from VHLSS 2008

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM

INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

HOUSEHOLDS’ EARNED INCOME IN
VIETNAM: EVIDENCE FROM VHLSS 2008

BY

TRƯƠNG NGỌC QUANG

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, JANUARY 2013



UNIVERSITY OF ECONOMICS
HO CHI MINH CITY

INSTITUTE OF SOCIAL STUDIES
THE HAGUE

VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

HOUSEHOLDS’ EARNED INCOME IN
VIETNAM: EVIDENCE FROM VHLSS 2008

A thesis submitted in partial fulfilment of the requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By
TRƯƠNG NGỌC QUANG

Academic Supervisor
Dr. PHẠM KHÁNH NAM

HO CHI MINH CITY, January 2013


ACKNOWLEDGEMENT
First of all, I would like to thank you to all professors in the teaching board of
MDE program, who have helped me accumulate valuable knowledge to complete
this study. I would like to express my thanks to Mr. Phung Thanh Binh, Mr. Nguyen
Khanh Duy, Mr. Truong Thanh Vu, and all other scholars participated for arranging
and conducting training on the quantitative research with STATA & VHLSS 2008.
Also, I would like to say thank you to Mr. Nguyen Van Phuong for his earlier
comments on my paper.
I would like to express my gratitude to Prof. Dr. Nguyen Trong Hoai, who has
inspired me to greater effort of thesis writing.
I would like to express my sincere appreciation to Dr. Pham Khanh Nam, my
current supervisor, who provides me directive suggestions, helpful advices and
precious supports during my thesis writing.
To all my dear friends of MDE class 16, who give me sincere encouragement


and support, I would like to express my heartfelt thankfulness.
Finally, I would like to express my deeply appreciation to my dear parents, to
my wife - also my best friend, and my family for their spiritual and physical
supports. In particular, I dedicate this thesis to my grand-father, who used to be a
teacher. His noble example is still inspiring me to further learning and going
forward in my life.


ABSTRACT

The most considerable element of households’ income structure on average is
earned income which is one of the main drivers to improve the living standard of
most Vietnamese households in recent years. However, there is an increasing
tendency of income inequality and living standards’ difference between regions,
rural and urban areas as well as between the richest and poorest households. This
paper contributes to the understanding of the effects of Region-level characteristics,
Community-level characteristics and Household and individual characteristics on
household’s earned income. The determinants of earned income are considered at
household, commune and regional levels. While wage employment still constitutes
the backbone of the urban economy, non-farm activities and income diversification
are increasingly significant for rural households. It is recognized that households’
physical capital (housing), human capital (education), and local infrastructure are
significant determinants in increasing their earned income.
Key Words: earned income; household; semi-log model; poverty; inequality,
Vietnam.

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TABLE OF CONTENTS
CHAPTER 1: INTRODUCTION ............................................................................ 7
1.1

Problem statement ..................................................................................... 7

1.2

Research objectives and research questions .............................................. 9

1.3

Scope of study ......................................................................................... 10

CHAPTER 2: LITERATURE REVIEW ............................................................... 11
2.1

Definition and concept review ................................................................ 11

2.2

Review of framework for livelihood and income analysis ..................... 19

2.3

Understanding the determinants of incomeError! Bookmark not defined.4

CHAPTER 3: RESEARCH METHODOLOGY ................................................... 30
3.1

The data ................................................................................................... 30

3.2

Methodology ........................................................................................... 30

3.2

Specification of variables ........................................................................ 32

CHAPTER 4: RESULTS ....................................................................................... 38
4.1

Overview of earned income in Vietnam ................................................. 38

4.2

Regression Results .................................................................................. 48

CHAPTER 5: CONCLUSION, RECOMMENDATION AND LIMITATIONError!
Bookmark not defined.8
5.1

Conclusion and Recommendation .......................................................... 58

5.2

Limitation ................................................................................................ 60

REFERENCES ....................................................................................................... 62

2


APPENDIX
Appendix 1. The Vietnam Development Goals ..................................................... 66
Appendix 2: Map and economic regions of Vietnam ............................................ 69
Appendix 3: Expenditure poverty rate using the World Bank and
GSO poverty line ..................................................................................... 70
Appendix 4: New poverty line of the Government, period 2006-2010 ................. 70
Appendix 5: Poverty rate using the new poverty line of the Government,
period 2006-2010 .................................................................................... 70

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LIST OF TABLES
Table 2.1: Classication of activities: sectorial, functional, spatial activities ......... 18
Table 3.1: Description of the variables .................................................................. 33
Table 4.1: Wilcoxon rank-sum (Mann-Whitney) test for earned income
per capita (without remittance): rural vs. urban ...................................... 42
Table 4.2: Wilcoxon rank-sum (Mann-Whitney) test for earned income
per capita (with remittance): rural vs.urban ............................................ 42
Table 4.3: T-test for equality of means of earned income per capita .................... 45
Table 4.4: Correlation coefficient between log of earned income per capita
and other exploratory variables ............................................................... 47
Table 4.5: Regression result of Logarithm of
Earned Income without remittances ........................................................ 51
Table 4.6: Regression result of Logarithm of
Earned Income with remittances ............................................................. 55

4


LIST OF FIGURES
Figure 1.1: Vietnam poverty headcount ratio at national poverty line ............................ 7
Figure 2.1: The components of potential sources of income ......................................... 15
Figure 2.2: Conceptual framework for livelihoods analysis .......................................... 20
Figure 4.1: Monthly average income per capita, period 2002 – 2008 ........................... 38
Figure 4.2: Monthly earned income per capita by urban and rural sectors,
period 2002 – 2008 ..................................................................................... 39
Figure 4.3: Monthly earned income per capita by region,
period 2002 – 2008 ..................................................................................... 40
Figure 4.4: Monthly income per capita by quintile, period 2002 – 2008 ...................... 41
Figure 4.5: Structure of monthly income per capita by quintile in 2008 ....................... 41
Figure 4.6: Histograms for log of earned income per capita without remittances ......... 43
Figure 4.7: Histograms for log of earned income per capita with remittances .............. 44
Figure 4.8: Histograms for log of earned income per capita: rural vs. urban ................ 44
Figure 4.9: Histograms for log of earned income per capita with remittances:
rural vs. urban ............................................................................................. 45

5


LIST OF ABBREVIATIONS
GDP:

Gross Domestic Product

GSO:

General Statistics Office

HH:

Household

MDG:

Millennium Development Goals

MOET:

Ministry of Education and Training

NA:

Not Applicable

OECD:

Organization for Economic Co-operation and Development

RE:

Random-effects

SIDA:

Swedish International Development Cooperation Agency

SNA:

System of National Accounts

UNDP:

United Nations Development Program

VDG:

Vietnam Development Goals

VHLSS:

Vietnam Household Living Standard Survey

VLSS:

Vietnam Living Standards Survey

VND:

Vietnam Dong

WB:

World Bank

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CHAPTER 1:

INTRODUCTION

Since the economic reforms initiated in 1986, the United Nations and Vietnam’s
other international institutions and partners have been recognizing the significant
results in the execution of the Millennium Development Goals (MDG) and the
poverty reduction program in Vietnam. The goal number 1 on reducing the
percentage of poor and hungry households is the most vital and critical foundation
for the successful implementation of other MDG. For better integration into
Vietnam’s national and provincial socio-economic development strategies and
programs, eight MDGs have been translated into Vietnam Development Goals
(VDG) (see appendix 1) to bring them closer to the country’s situation.
1.1 Problem statement
As one of the poorest countries in the world 25 years ago, Vietnam proudly became
a lower middle income country with per capita income of $1,130 in the end of 2010
and the poverty rate at national poverty line has dropped remarkably from 58.1
percent to 14.5 as figure 1.1 below. Five of MDG targets has already achieved and
most of social welfare indicators have been improved, thus Vietnam is making
progress in attaining two more targets by 2015 (World Bank, 2008).
Figure 1.1: Vietnam poverty headcount ratio at national poverty line

Source: World Bank (2008)

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Nevertheless, policy makers have realized that results of some poverty reduction
programs are not sustainable because the ratio of household falling back under the
poverty line remains high, especially in some rural and remote areas1. Moreover,
there is very high rate of household closely above the poverty line in accordance
with the new poverty criterion. Since early 2008, Vietnam has faced some economic
difficulties due to the global financial crisis, thus many new obstacles rise from the
present poverty reduction programs. Consequently, the government has to consider
how to reach a more balanced achievement in all of VDG, economic regions and
social communities to improve the sustainable development. In another word, rural
poverty reduction must be evaluated as an effectiveness measure and a vital section
of any poverty reduction strategy, as well as rural development policy.
Any policy that focused on subsidy package was already proved as band – aid
solution having less impact on sustainable rural development and its resources
should be diverted to pro-poor policy.

Every government’s pro-poor policy,

directly or indirectly, seeks to create employment opportunities for the poor or
improve productivity and earning capability on a sustainable basis, especially in the
sectors employing most of the poor.2 Both elements raise the incomes of the poor
and hence speed up the pace of poverty reduction.
The strategies which households often use to strengthen income have been a topic
for research in recent times (Ellis, 2000). Studies on rural income growth suggests
that diversification of income sources is a key strategy which individuals and
households use to strengthen their income sources and thus this way reduces
poverty (Minot et al. 2006). Among the sources of households’ income, earned
income (comprising wages or salary and net revenue from both agricultural and
non-agricultural self-employment) is the most important component of sustainable
development and engine to higher living standards. However, there is an increasing
1

Rural area is “a local community with a population density below 150 habitants/ km2 (500 in the case of Japan).
Typology of regions according to the share of rural population: “predominantly rural” = more than 50%; “significantly
rural” = 15-50%; “predominantly urbanized” = below 15%” (OECD, 1994).

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tendency of income inequality and living standards’ difference between regions,
between rural and urban areas and between the rich and poor. Fast urbanization,
industrialization and high unemployment rate in rural areas of Vietnam has led to
increasing internal migration since the last decade of the 20th century. The role of
remittances has become more and more important in improving households’ living
standards because of its immediate impact on households’ well-being (Pfau and
Giang, 2008). GSO of Vietnam estimated that mean domestic remittance is about
38% of households’ wage income in the period of 2002 to 2006. For “economic
motive” (e.g, investment and savings) as well as family support, households’
members send remittances directly to their family for starting self-employment and
enhancing the performance of the existing businesses. Moreover, if domestic
remittances can stimulate the formation of household businesses in rural areas, the
problems of rural unemployment and city’s overcapacity can be gradually reduced;
and nationwide rural-urban migration flow can be mitigated.
1.2 Research objectives and research questions
The general objective of my paper is to investigate the determinants of households’
earned income in the whole of Vietnam. Specifically, my thesis will focus on
investigating the difference between household’s earned income in rural and urban
areas. Moreover, this study will investigate the determinants of earned income with
regard to domestic remittance. My thesis questions are as follows:
 What factors determine Vietnamese household’s earned income nationwide?
 What factors determine household’s earned income in rural areas and urban
areas of Vietnam respectively?
 What are the determinants of earned income with regard to domestic
remittance?

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1.3 Scope of study
My paper draws on data from the Vietnam Household Livings Standards Survey
(VHLSS) conducted in 2008 to examine the determinants of households’ earned
income. The survey was divided into two phrases in 2008 and carried out
nationwide by direct interviews with household heads and key commune officials.
VHLSS 2008 has a sample size of 45,945 households in 3,063 communes or wards,
in which the income survey for 36,756 households and both income and expenditure
surveys for 9,189 households. My focus is on studying determinants of earned
income by linear regression method with the support of Stata software and the
backup of VHLSS 2008 data on income survey. Data will be classified as pooled,
urban, and rural respectively with interest in domestic remittance.
SUMMARY
Vietnam has gained significant results in the execution of the Millennium
Development Goals (MDG) and the poverty reduction program since 1986.
However, there is very high rate of household closely above the poverty line in
accordance with the new poverty criterion, so the results of some poverty reduction
programs are not sustainable because the ratio of household falling back under the
poverty line remains high, especially in some rural and remote areas. Government
policies on creating employment opportunities for the poor or improving
productivity and earning capability on a sustainable basis, especially in the sectors
employing most of the poor will raise their incomes and hence speed up the pace of
poverty reduction. Among the sources of households’ income, earned income
(comprising wages or salary and net revenue from both agricultural and nonagricultural self-employment) is the most important component of sustainable
development and engine to higher living standards. My paper draws on data from
the Vietnam Household Livings Standards Survey (VHLSS) conducted in 2008 to
examine the determinants of households’ earned income on urban, rural, nationwide
scale of Vietnam respectively.

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CHAPTER 2:

LITERATURE REVIEW

This chapter begins at definition overview and conceptual problems that arise when
analyzing income such as household, classification and components of both income
and income generating activities. After that, the relation between income, inequity
and poverty will be noticed. Then it reviews the framework for livelihoods and
income analysis. Finally, my study focuses attention on method of finding the
causes of low income by undertaking regression analysis to identify the effects of
each of “region-level characteristics”, “community-level characteristics”, and
“household and individual characteristics” on earned income per capita.
2.1 Definition and concept review
2.1.1 Household
As the survey’s coverage of the population and the data analysis are governed by
the definition of household, so finding the criteria to identify household are critical
and they must be suitable to the local circumstance. The most commonly used
criteria are members having family ties or emotional connection, living together in
the same house, making contribution in income and resources, and sharing expenses
on living necessities. In my opinion, it is interesting to introduce the first definition
of a household drawn from the System of National Accounts 1993 (UN, 1993), and
as follow:
A household may be defined as a small group of persons who share the same
living accommodation, who pool some, or all, of their income and wealth
and who consume certain types of goods and services collectively, mainly
housing and food.
It is clear view of SNA93 that household is a unit of consumption having income
sources from wages, property earning and transfers. However, this definition
absolutely is not complete because household is also a production unit as the case of
agricultural households. On the other hand, SNA/ESA definition of household
includes also some units which are non-family and do not correspond with the

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notion of the target group for agricultural policy. The irrelevant units are
“communal living units (hostels and monasteries) and other institutions such as
universities”. As the result, the notion of household for developing countries is not
the same with that for OECD countries, thus it is considered as one of the basic
elements of a national statistics system or a useful sample unit in survey task. In
1998, the United Nations developed the definition of a household used for
population censuses as follows:
"The concept of household is based on the arrangements made by persons,
individually or in groups, for providing themselves with food or other
essentials for living. A household may be either (a) a one-person household,
that is to say, a person who makes provision for his or her own food or other
essentials for living without combining with any other person to form part of
a multi-person household, or (b) a multi-person household, that is to say, a
group of two or more persons living together who make common provision
for food or other essentials for living. The persons in the group may pool
their incomes and may, to a greater or lesser extent, have a common budget;
they may be related or unrelated persons or constitute a combination of
persons both related and unrelated” (UN, 1998, paragraph 1.324)
The concept pointed out that there may be more than one household living in a
house, but a household may occupy more than one house. For example, different
families having a common household head live in separate houses, or extended
families living in more than one house having contribution of food together. It is
obvious to understand the concept of a “family” more easily than a “household”, but
two concepts are quite different. The major point is that “a family may include
people living in other households in other places”.
Regarding the concept of household members, definition which is within the
framework of VHLSS, as well as GSO guideline and applied for this paper is as
following:

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Household members were defined generally to include all people who
normally live and eat their meals together in a house and have done so for 6
or more months out of the past year (GSO, 2008) 3.
In summary, it is critical to acknowledge household as a social unit because it is
really immersed in the larger society. It is true that household head’s social status
can partly determine household members’ welfare. In addition, every household
member can decide to choose his job, directly earns his living and selects his
expenditure patterns. A conceptual framework to study household‘s decision on its
resource allocation is needed as we are considered household as a social unit
making decision. There are two key issues in the study of household as a decisionmaking unit. Firstly, household has the role of both production and consumption
unit, while the firm is assumed to be producing unit and household to be consuming
unit in orthodox economic theory. Secondly, decision-making process within
household has been addressed because conflicts of interest between its members are
common. Such household’s decisions can jointly be agreed by all the members, by
dominant group or individually determined by the householder, so a relevant topic
of interest is a “household welfare function”. In many studies, the first assumption
is that household comprises of individuals having the same preferences based on
“identical tastes”, and then household is considered as a single individual who can
make its own decision. Household is assumed as group of people having emotional
ties or the same goals so together set up a family. This pattern is called the “gluedtogether household” (Sen, 1983). In another theoretical point of view, we have
“despotic household” in which the householder is the primary decision maker, thus
the head’s preferences definitely represent the household behaviors. In short, there
3

“There are 7 exceptions regarding household members: (1) A head of household is always considered as household
member even he or she does not live and eat in the household more than 6 months. (2) People who are going to live in the
household for a long time such as daughter-in-law, son-in-law, relatives who come back from military service are
considered as household members even they were staying at the household less than 6 months. (3) Students who are
living outside the household but still being supported by the family are considered as household member. (4) Guests or
relatives who living in the household for more than 6 months and take their meals together are considered as household
member. (5) Hired workers, servants, lodgers or guests if they are members of any households elsewhere are not the
household members. (6) Individuals who passed away in the last 12 months or moved out of the household and do not
intend to come back are not considered as household members. (7) Infant of less than 6 months year old is considered as
household member” (GSO, 2008).

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are two extreme types. All household’s members are assumed to have identical
preferences in the former type, and the householder’s preferences dominantly rule
in the latter.
2.1.2 Income and earned income
2.1.2.1 Components of potential income sources
Household welfare or living standard is typically measured by income aggregate
including many different sources of income such as wage or non-wage, employed or
self-employed, and earned or unearned incomes over a defined period. As
consumption-based measures with money metric are evaluated more precise and
convenient to get in any typical household survey, such an approach is used in
welfare analysis more universally. On the other hand, income-based measures and
their components, particularly if properly measured, will have an important
function, as they allow for the meaningful analysis of every household’s livelihood
strategies and poverty condition.
Income is the critical factor to influence households’ living standard. In principle, a
practical definition of income must embrace a “measure of well-being” within an
accounting period. Almost researches have considered annual income which is
compatible with guidelines for data collection of both household surveys at micro
level and national accounts at macro level. It is very important to comprehend the
potential sources of income and their components. Bright et al (2000) suggest three
potential sources of income, specifically of rural households, as followings:
(1) Farm income
(2) Non-farm income
(3) Unearned income
First, farm income can comprise incomes from agricultural core production and
agricultural employment activities. Second, non-farm or non – agricultural income
can include three components respectively: (i) income from non-agricultural wage;
(ii) non- farm enterprises or self-employment; and (iii) remittances. Third, it is

14


unearned income, such as interest, pensions, and dividends, can be very significant
and has an important impact on personal goal and crucial decisions as retirement
plan or choice of cultivation method although it is generally neglected.
Figure 2.1: The components of potential sources of income

Source: adapted from Davis and Pearce (2000)

Another key household income component is from migratory activity with the
following income raising strategy: (1) Rural-urban migration (private domestic
transfers or “domestic remittances”), and (2) Overseas migration (private transfers
from abroad or “abroad remittances”). Both domestic and abroad remittances are
classified as “migrant remittances” and different from “income transfers”. In the
scope of household’s earned income, remittances generally are earnings from family
members who temporarily and seasonally migrate to work but are still household
members. Otherwise, “transfer income” is receipts transferred by government,
former household members and relatives.

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Core study of the effect of remittance concentrates on describing the typical process
of labor migration and then the delivery of remittance to home. Regarding studies
about remittances in Vietnam, Le and Nguyen (1999) study the data of 1992/93
VLSS to investigate both domestic and international remittance flows and they
conclude that households with female head are more likely to receive remittances.
Friedman et al. (2003) relate gender differences with elderly well-being, and take
into account the support for the old from family members in Vietnam. By
controlling for some determinants such as marital status and age, their findings
show that gender does not matter so much on transfers between generations. Babieri
(2006) uses both the 1999 Census sample and VLSS 1997 – 1998 sample to analyze
‘domestic remittances’ between the elderly and their children by applying a
regression model to verify what factors influence the flow of remittances. The paper
specifically tests whether the increasing trend of migration during the economic
reform is leading to the failure of support between family generations in Vietnam. It
comes to the conclusion that parents continuously have got their children support
and that “geographic distance between adult children and their elderly parents
should not be interpreted as a sign of indifference”. Moreover, the paper points out
that old women aged 60 and older receive more remittances from their children than
men of the same age do.
2.1.2.2 Earned income
National accounting defines earned income is obtained through the individual’s own
efforts, while unearned income requires no physical activity by the recipient and is
usually in the form of a pension, benefit or compensation. For any household
surveys, analysts see earned income as the most familiar and easily measured one
and they usually classify it as follows:
(1) Money wage or salary income: the total earning received for work done
as an employee of another person or firm during a defined period such as a
year, or

16


(2) Net income from non – farm self – employment: the net earnings (gross
receipt minus expenses) gained through self-employment when the
individual gives substantial services in connection with the enterprise: own
business, professional enterprise, or partnership, before tax.
(3) Net income from farm self – employment: the net earnings (gross receipt
minus expenses) from the operation of a farm by a person on their own
account, as an owner, tenant farmer, or sharecropper, before tax.
Regarding the guidelines for VHLSS 2008, actual income can be received from
different sources, including monetary income or income in kind. Based on its
sources, income is classified into four types: (i) income earned from agriculture,
forestry, livestock, and fishery; (ii) income earned from self-employment in nonfarm activities such as industry, transportation, construction, and services, (iii)
income earned from formal or informal wage, including salary, allowance, bonus,
dividend, and other kinds of remuneration, and (iv) other non-productive incomes,
such as pensions, transfers, grants/subsidies, rents, and financial income. (GSO,
2008) As the result, earned income should be productive incomes, which come from
production activities and individual’s effort, and definitely are calculated as the sum
of the first three types of actual income.
2.1.3 Classification of income generating activities
It is important to have a consistent terminology of literature on poverty and
inequality policies because all the terms “off-farm”, “non-farm”, or “nonagricultural”, “earning”, and “income” etc. routinely appear in a confusing way. In
my opinion, this research has to make clear distinctions among activities and
incomes so readers can easily understand the terms in usage. Barrett et al. (2001)
suggest such distinctions have to be performed along both sectorial and spatial
categories. However, sectorial classifications as guidelines of national accounting
standard must be complied with to maintain a conformity with both micro and
macro level.

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Table 2.1: Classification of sectorial, functional, and spatial activities.
Primary Sector

Wage
employment
Selfemployment

Secondary Sector

Tertiary Sector

Agriculture

Mining &

, forestry

other

and

extractive

fisheries

industry

Local

Migratory

Local

Migratory

Local

Migratory

Local

Migratory

Local

Migratory

Local

Migratory

Manufacturing and

Services

construction

Source: adapted from Barrett et al. (2001)

Table 2.1 describes the components of household income by “sector” which
includes farm versus nonfarm, “function” which includes wage versus selfemployment, and “space” which involves local versus migratory. As sectorial
distinctions of national accounting systems, we can classify into primary sector
which embraces agriculture, mining, and other extractive industries), secondary
sector which includes manufacturing, construction, and tertiary sector which is
service – related industries. At this stage, we can know clearly the distinction
between “agricultural” or “farm” income and “nonagricultural” or “nonfarm”
income. So “Farm” incomes are derived from the production or gathering of
unprocessed crops or livestock or forest or fish products from natural resources,
while “nonfarm” incomes are from mining, manufacturing, utilities, construction,
commerce, transport and a full system of financial, personal and government
services. On the other hand, it is necessary to know the term “agro-processing” is
the transformation of raw agricultural products by milling, packaging, bulking or
transporting, which forms a vital part of the rural nonfarm economy.
Consequently, it is only the types of production factors used in process and the
nature of output determine sectorial classification of farm or nonfarm income. Other
elements such as location (for example, at home, on the farm, in a city, or abroad),
scale (for example, activity by a single man or a large factory), technology, and

18


function of participants (for example, managing a private enterprise to earn profit or
working for salary) do not matter at all.
Concerning functional classifications as two separate rows in table 2.1, there are
two polar cases from "clearly wage-employment" which is accompanied by wage or
salary contract to "clearly self-employment" or entrepreneurial activity, but there
should be matching area between wage or self-employment activities. Finally,
regarding spatial classification, there will be two broad categories as follows:
“local” and “migratory” labor forces or activities. Firstly, the “local” activities
include two sub-categories: (a) “at-home” or “on farm”; and (b) “local away-fromhome” which takes place in (1) “countryside or strictly rural”, (2) “nearby rural
town”, and (3) “intermediate city”. Secondly, “migratory” activity can be described
as “distant away-from-home” with three subcategories: (a) “domestic rural” or
migration between rural zone, (b) “domestic urban” e.g, to a distant metropolitan
area, and (c) “foreign” or located outside the home country.
2.2 Review of framework for livelihoods and income analysis
Definition of well-being as the control over resources is one popular approach in
poverty and income analysis, so people have better lives if they have a greater
control power over commodities. According to the WB (2000), “poverty is
pronounced deprivation in well-being”, so the objective of poverty analysis is
answering the question if households or individuals have enough goods to meet
their needs. As the basic point in poverty analysis, poverty typically is considered in
monetary terms and thus is measured by comparing individuals’ income or
consumption with some well-defined threshold or level. Such individuals or
households having income below already mentioned threshold are considered to be
poor.
The concept of livelihoods approach (Ellis 2000) is now used extensively in poverty
and income analysis. According to this concept, livelihood is defined as ways to
earn one’ living or to reach one’s well-being. Along the ways, assets and activities
are supportive tools and using methods to achieve one’s well-being. The

19


intervention of government, economy, society and institutions can induce doubleacting effect which can facilitate or confine individual or family‘s standards of
living. Also, increasing access to social and public services contribute positively to
the well-being of the individual or family.
Figure 2.2: Conceptual framework for livelihoods analysis

Source: Adapted from Ellis (2000)

Firstly, regarding the definition of assets, it is commodities and property owned by
households to be utilized to secure their living. Basically, Ellis emphasizes the
traditional meaning of asset referring to natural, physical and financial capital, but
he extends the concept to take human capital and social capital, such as household
members’ skills, experience and social relations into consideration. In addition,
assets can be classified as productive and non-productive if we see the way from
which income is generated or earned. Productive assets such as live-stocks, human
capital, or equipment which generate “earned” income only indirectly through their
allocation to activities such as farming, employment or production. In the other

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hand, non-productive assets generate “unearned” income directly. For example,
households can deposit their money in some banks and get monthly income from
saving interest. Secondly, activities are defined as methods in which households
allocate their members’ time budget to attain expected livelihoods, thus households
may apply the following methods: employment or private enterprise, farm or nonfarm, production or trade. Households are required to have some level and some
types of asset to choose their activities and such movement possibly increase
household’s asset stock. In reality, households’ assets are not homogeneous, so
naturally diversification of their income generating activities is almost the best
strategy to improve household’s living standard. As the result, almost individuals
have more than one income source (Barrett et al, 2001). In short, engagement in
activities and possession of assets together decide household’s well-being.
The studies of income diversification are the main issue of poverty reduction policy
for rural areas and also one of antipoverty solutions proposed by the UN, while
focus of interest for urban areas are wage income studies. In most studies on rural
household’s income diversification, the increasing importance of non-farm income
which comprises of off-farm wage and earning from non-farm self-employment (or
non-farm enterprise operations) are realized. Bright et al (2000) differentiate
between “enterprise diversification” and “income diversification” in conjunction
with non-farm economy. To protect household against risk, enterprise
diversification is self-insuring strategy including establishment of both on-farm and
off-farm businesses out of major agricultural productions, while income
diversification covers all of enterprise diversification activities and also embraces
any resource allocation relating to non-farm employment.
Factors which foster households and individuals to diversify their income sources
can be classified into two groups: “push factors” and “pull factors”. The first group
of factors concerns household behaviors in a passive way of response to risks,
market constrains, weak or incomplete financial institutions and “diminishing factor
returns” in order to stabilize their income inflows in any given household ‘s

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economic condition. For example, households have to make self-provision of some
goods and services due to high transactions costs on the market. The second group
comprises of active reaction after realization of strategic combinations between
economic activities, and comparative-advantage based specialization originated by
higher technologies or more abundant endowments and resources. At macro-level
point of view, it is important to develop “local engines of growth” such as
agriculture promotion center, complete financial system, and connection to urban
areas. Such engines for rural development will create opportunities for income
diversification by fostering production and service activities (Barrett et al., 2001).
2.2.1 Income diversification
As paper from Bales et al. (2001) concludes that an increase in earnings in all
sectors has caused the poverty reduction of over 90%, but not an increasing
movement into high-wage sectors has done. The remaining 10% largely reflects the
move out of agriculture, which accounted for 66% of principal jobs in 1993 and
62% in 1998. The movement from agricultural to wage employment appears to
occur in stages. There is considerable occupational multiplicity, with fully 37% of
workers holding more than one job. It appears that typically farmers early pick up
some part-time wage work, or move into self-employment. Only once these
subsidiary activities prove profitable results, they eventually break the link with
agriculture.
Van de Walle and Cratty (2004) examined off-farm income diversification in
Vietnam and found a positive association between rural income diversification and
standards of living. They used cross-sectional data to prove that diversification into
wage and self-employment activities can reduce poverty. Rural households having
income from farming activities as the major source are among the poorest, while
others having some types of off-farm activities can get out of the poor.
Minot, Epprecht, Tran and Le (2006) studied income diversification in the Northern
Uplands of Vietnam by calculating the impact of each income source on income
growth. They analyzed income diversification into two processes. The first, income

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