# **1. Introduction**

Since 1986, Vietnam performed one of the most successful transitions from a low- to a middle-income economy across the globe, fueled by steep economic growth and a number of subsequent reforms that changed the business and social environments in almost all parts of the country. Almost all the economic indicators improved, with significant increase in employment, productivity, and domestic and foreign investements. These have been closely followed by imrpovements in demographic and social indicators, with growing rates of access to education and health care, and improvements in terms of sanitary and health conditions and food and nutrition security. Today, the large majority of Vietnamese households, both in rural and urban settings, have access to basic services such as electricity and telephone lines, while higher quality mobile and internet services are expanding their outreach.

Despite this story of success, in order to further improve and to achieve the same economic and social security levels as high-income countries, Vietnam still needs to address some key contemporary challenges. A recent report from the World Bank (2020) identifies the issues constraining Vietnam’s second transition towards an advanced economy: “ _Fertility rates drop and the population ages. Automation and other technologies can reduce those jobs on which a large share of Vietnam’s labor force currently depends. And the combination of rising pollution and climate change is affecting health, quality of life and, increasingly, output from both the rural and urban sectors. Global trade has been declining over the last ten years and the COVID-19 pandemic is an accelerator of several megatrends such as disruption of global supply chains, digitalization._ ” (World Bank, 2020, pp. 14) Demand analysis is necessary in order to indentify consumption patterns driving economic evolution. Knowing the income elasticity of demand for a variety of goods and services can support business decisions and economic policy planning. Similarly, own- and cross-price elasticities help identifying households’ preferences and vulnerabilities, highlighting market signals and opportunities, and where there is a need for governmnet intervention. For example, the income elasticity of demand for supermarket products can reveal consumer preferences and, therefore, support supply chain actors to adjust to changing preferences and regulators to define quality and safety standards (Mergenthaler et al., 2009).

In the literature, there is a relative abundance of demand analyses for Vietnam, dating back from the Đổi Mới reforms in 1986. However, this literature has almost exclusively focused on food demand analysis (e.g. Niimi, 2005; Gibson and Kim, 2013a; Bairagi et al., 2020; Vu, 2020), with a few exceptions looking at electricity (Meyerhoefer et al., 2007) and health care services (Phu, 2020). A more detailed analysis looking at the main economic sectors that can contribute to further the economic development of Vietnam is therefore lacking and this paper aims to fill this gap. More specifically, in this paper we use micro-level household consumption data to estimate a Quadratic Almost Ideal Demand System (QUAIDS), obtaining income, own- and cross-price elasticities. We focus on 10 goods and services, namely food, foodstuffs, beverages and tobacco, household equipment, clothing and accessories, transport, telecommunication, education, medical and health, and electricity. These groups are broad aggregates, therefore the degree of unobserved quality substitution can be potentially high, generating overestimated demand elasticities. In order to control for this potential bias, and to reduce the bias potentially generated by using endgogenous unit values as proxies of market prices, we adopt an instrumental variable (IV) approach to the QUAIDS.

Our results show that all the goods and services considered are normal. However, household equipment, post and communication, clothing and accessories, transport, and medical and health services are much more responsive to income changes than food, foodstuffs, beverages and tobacco, education and electricity, which are income inelastic. These tendencies are confirmed also by the estimated own-price elasticities. Moreover, cross-price elasticities reveal a pivotal role of education and health services in driving household consumption, with a complementary relationship between education and the rest of the goods and services, and with medical and health care being substitutes for household equipment, clothing and telecommunication services.

The remainder of the paper is organized as follows. The next session provides a background of the economic growth, social transformation and reforms that have occurred in Vietnam since the Đổi Mới 2