metadata: authors: 0: author: Cuong, Nguyen Viet
1: author: Truong, Tran Ngoc
2: author: van der Weide, Roy
count: Vietnam
docna: 0: docna: Poverty and inequality maps for rural
            Vietnam: an application of small area estimation
docty: Policy Research Working Paper
subtopic: Vocational & Technical Education,Vocational Education & Technical Training,Hydrology,Inequality,Armed Conflict
teratopic: Macroeconomics and Economic Growth,Poverty Reduction
abstracts: cdata!: The objective of the paper is to update
            the small area estimates of poverty and inequality for rural
            Vietnam. The new estimates of province and district level
            poverty for the year 2006, when combined with estimates
            available for 1999, allow for examination of how poverty has
            changed in rural Vietnam over the past seven years. The
            analysis finds that all provinces across the country
            experienced a noticeable reduction in rural poverty during
            the period 1999-2006. Some of the largest reductions in
            poverty are observed for provinces with poverty rates close
            to the national average. The poorest provinces have also
            experienced reductions in poverty, albeit at a more modest
            pace. Provinces and districts with lower levels of
            inequality in 2006 have seen above average poverty
            reductions. The authors consider both expenditure and income
            based measures of poverty and inequality, and find the
            results to be very similar.
geo_reg_key: 80475,80451,80471
repnme: repnme: Poverty and inequality maps for rural
            Vietnam: an application of small area estimation
display_title: Poverty and inequality maps for
            rural Vietnam: an application of small area estimation
listing_relative_url: /research/2010/10/13148967/poverty-inequality-maps-rural-vietnam-application-small-area-estimation
topicv3: Water m1326522 137,Vocational Education and Technical
            Training m1326570 1573,Poverty m1326687 695,Vocational Education and Training m1326810 483,Political Violence and War m1327310 2462
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,Poverty Reduction
no_of_pages: 38
model_extractions: WPS5443 Policy Research Working Paper 5443 Poverty and Inequality Maps for Rural Vietnam An Application of Small Area Estimation _Nguyen Viet Cuong Tran Ngoc Truong Roy van der Weide_ The World Bank Development Research Group Poverty and Inequality Team October 2010
Policy Research Working Paper 5443

# **Abstract**

The objective of the paper is to update the small area estimates of poverty and inequality for rural Vietnam. The new estimates of province and district level poverty for the year 2006, when combined with estimates available for 1999, allow for examination of how poverty has changed in rural Vietnam over the past seven years. The analysis finds that all provinces across the country experienced a noticeable reduction in rural poverty during the period 1999–2006. Some of the largest reductions in poverty are observed for provinces with poverty rates close to the national average. The poorest provinces have also experienced reductions in poverty, albeit at a more modest pace. Provinces and districts with lower levels of inequality in 2006 have seen above average poverty reductions. The authors consider both expenditure and income based measures of poverty and inequality, and find the results to be very similar.

This paper—a product of the Poverty and Inequality Team, Development Research Group—is part of a larger effort in the department to derive and disseminate disaggregated estimates of poverty and inequality. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The author may be contacted at rvanderweide@worldbank.org.

_The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# **Poverty and Inequality Maps for Rural Vietnam: An Application of Small Area Estimation**

Nguyen Viet Cuong Tran Ngoc Truong Roy van der Weide<sup>_1_</sup> JEL classification: I31, I32, O15 Keywords: Poverty measurement, poverty mapping, agricultural census, household survey, Vietnam.

> 1 Nguyen Viet Cuong is a lecturer at the National Economic University; Tran Ngoc Truong is a researcher at the Institute of Labor Science and Social Affairs (ILSSA), Roy van der Weide is affiliated with the Poverty and Inequality Research group at the World Bank. This report documents the main findings of the poverty mapping project initiated by Dr. Nguyen Thi Lan Huong from ILSSA, MOLISA and funded by the World Bank in Vietnam. We would like to thank Gian Thanh Cong from ILSSA, Le Trung Hieu and Lo Thi Duc from GSO for their help and comments. The logistic and financial supports have been provided by the World Bank in Vietnam and the Institute of Labor Science and Social Affairs, Ministry of Labors, Invalid and Social Affairs.
# **I. Introduction**

Vietnam has set up poverty reduction as a major development policy. To achieve this goal, Vietnam has maintained an extensive public safety net and launched a large number of poverty reduction programs. These programs generally benefit from having precise information on where the poor are located, and on how poor they are, see e.g. Bigman and Fofack (2000) and Elbers _et al._ (2007).

The objective of this study is to estimate poverty and inequality for rural Vietnam at different levels of aggregation by combining the Vietnam Household Living Standard Survey (VHLSS) from 2006 and the Rural Agriculture and Fishery Census from the same year. We will produce estimates at the regional, provincial and district level, and will consider both expenditure and income based measures. The estimates are obtained by adopting the small area estimation method put forward by Elbers _et al._ (2003) (henceforward ELL), which has since been used to put poverty on the map in over 40 countries worldwide.

The information on all households provided by the census combined with the detailed information on selected households from the survey makes it possible to estimate poverty at levels of aggregation the survey alone does not allow for. The standard errors of our province level estimates are comparable to the standard errors of the region level estimates based on survey data only. The standard errors of our district level estimates are obviously larger, but still acceptable.

The use of the agricultural census denotes a modest variation on the approach of ELL, which conventionally uses a population census instead. The motivation for appealing to the agricultural census is that the population census is only available once every ten years. In Vietnam, the agricultural census is conducted every five years. This means that by alternating the population census with the agricultural census we are able to triple the frequency of poverty and inequality estimates at the small area level. The latter is important as it makes the small area estimation exercise a more suitable tool to monitor poverty and inequality over time, channel resources when and where they are most needed, and to evaluate poverty reduction initiatives across the different areas in Vietnam.

While replacing the population census with the agricultural census does not require any methodological changes, there are some differences worth noting. Most importantly, the agricultural census only allows us to provide estimates for rural Vietnam, where the population census covers both rural and urban areas. Also, the two different census data sets each have their own specific variables, in addition to a standard set of 2
variables that they have in common. Plausibly, the agricultural census is in comparison more informative of rural livelihoods.

Other poverty maps of Vietnam that have been constructed in the recent past include: Minot (2000) who combined the Vietnam Living Standard Survey (VLSS) from 1993 and the Agricultural Census from 1994 to estimate rural poverty at the province and district level; Minot _et al._ (2002) and Gian and van der Weide (2007) combined the 1998 VLSS and a 33 percent sample of the population census from 1999. Fujii and RolandHolst (2008) study the effects of Vietnam’s access to WTO on poverty. They too combine the 1998 VLSS and a 33 percent sample of the 1999 population census to estimate provincial poverty rates. Nguyen et al. (2007) attempt to bridge the three-year gap between the Vietnam Household Living Standard Survey (VHLSS) from 2002 and the 1999 population census to estimate poverty levels for 2002. Nguyen et al. (2005) and Nguyen et al. (2007) produce a district map of poverty and inequality of Ho Chi Minh City for the year 2004. Recently, most of these poverty maps, however, are out-of-date.

The paper is structured into seven sections. The second section describes data sources. The third section presents the method of small area estimation of Elbers _et al._ (2003). The poverty and inequality estimates and the models used for respectively the expenditure and income based measures are reported in sections four and five. Section six compares the estimates of expenditure based poverty to those based on income, and the poverty rate reported by the Ministry of Labour, War Invalids and Social Affairs. Finally, concluding remarks are presented in section seven.

# **II. Data**

# _II.1 Household survey and agricultural census_

The two data sources used are: The Vietnam Household Living Standard Survey (VHLSS) for 2006 and the 50 percent sample of the Rural Agriculture and Fishery Census (ARFC) for 2006. Both data sets have been collected by the General Statistic Office of Vietnam (GSO).

The VHLSS 2006 includes 9189 households (with 39071 individuals), of which 2250 are urban and 6939 rural households. The collected information on household characteristics includes: income, expenditure, employment status, education level, housing condition, fixed assets owned by household. The survey is designed to be representative at the regional level. This means that the survey is not able to guarantee consistent poverty estimates at lower levels of aggregation (such as at the province level).

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The Rural Agriculture and Fishery Census (RAFC) includes all households in rural areas, and is conducted every five years. While the agricultural census and the population census have a range of variables in common (demographics, education, dwelling unit characteristics and asset ownership), there are also some important differences.

Firstly, the agricultural census only covers rural households such that the small area poverty and inequality estimates represent the rural population of Vietnam. Estimates based on the population census represent the entire population.

Secondly, the agricultural census includes a selection of specific variables that are particularly informative of rural livelihoods and which are not available in the population census. These include variables on rice cultivation, aquatic cultivation, household ownership of farming tools and machinery. These variables are important correlates of the household’s agricultural activities that will directly affect the household’s income.

Data on individual household members, however, is only collected for members aged 15 or older (the population census covers all household members). To ensure consistency between the variables from the census and the survey, household members aged 14 or younger were dropped from the latter. Also, the head of household is not identified in the agricultural census.

Finally, the codes that identify communes, districts and provinces did not provide a perfect match between the census and the survey. We managed to resolve this problem by using the names of both the provinces and districts to merge data from different sources.

# _II.2 Poverty line_

In the report we use two poverty lines: one for expenditure and one for income. Household members are classified as poor if their per capita expenditure (income) is below the expenditure (income) poverty line.

GSO calculated the expenditure poverty line with technical support from the World Bank in Vietnam. The expenditure poverty line is designed to measure the price of a consumption basket that meets pre-specified nutritional needs and essential non-food expenditures that include clothing and housing. For 2006, the expenditure poverty line was equal to 2,560,000 VND/person/year (in national real terms).

The income poverty line is set by MOLISA. It equals 2,400,000 VND/person/year (200,000 VND per month) for the year 2006 (in national real terms). When this poverty line is applied to household income data from the 2006 VHLSS, however, we obtain a 4
poverty estimate for rural Vietnam of around 7.5 percent. This is considerably lower than the MOLISA rural poverty rate of 19 percent for that same year.

Although, MOLISA sets up an income poverty line to identify poor households, this poverty line is not applied since collection of income for the whole population is very costly, and almost impossible. In reality, the poverty classification procedure is rather complicated. Basically, a village committee prepares a list of the poor based on their own criteria, which may, for example, include asset levels, food security, type of housing, and school-going of children. The number and nature of the criteria differ widely between villages. The preliminary list is submitted to a commune-level committee of Hunger Eradication and Poverty Reduction (HEPR), which might conduct a very simple income survey for some households on the list. These surveyed households are expected to have income around the poverty line, thus their income data should be collected for crosscheck. The resulting incomes are compared to the income poverty line of the Ministry of Labour, War Invalids and Social Affairs (MOLISA). Those households with higher per capita income than this poverty line are excluded from the list. Finally, the refined list is updated by the village committee and the People’s Committee and People’s Council in an iterative procedure (MOLISA, 2003). Thus there is a large difference between the poverty estimates based on the VHLSS and the poverty incidence reported by MOLISA.

To facilitate comparisons between our income poverty estimates and the incomebased poverty rates from MOLISA, we adjust the income poverty line such that income poverty estimated using the 2006 VHLLS coincides with the MOLISA poverty rate (at around 18.5 percent for rural areas in 2006). The income poverty is set at 3,288,000 VND/person/year (in national real terms).

# **III. Methodology**

The small area estimation method developed by Elbers, Lanjouw and Lanjouw (2002, 2003) is arguably most popular in the context of poverty analysis. In ELL two data sets, a socio-economic survey and a census are combined through an income or expenditure model. This combination allows us to obtain small area estimates (SAE) of income or expenditure based poverty and inequality. By using the survey alone, we would only be able to disaggregate at the region level.

Typical indicators considered are average expenditure/income, percentage of poor (with expenditure/income below poverty line), poverty density (number of poor per area) and the Gini coefficient. We will determine both the point estimates and the standard errors associated with them. The standard errors are important because they make explicit 5
the trade-off between the statistical precision of the poverty and inequality estimates and the level of disaggregation.

The census is assumed to enjoy complete coverage (of all rural households), such that sampling error may safely be ignored. The basic idea behind the small area estimation method is to replace a small number of exact observations of expenditure/income (using households from the survey) with a large number of estimates of expenditure/income (using households from the census) to obtain accurate estimates of aggregate poverty and inequality. This means that we will be replacing sampling error with approximation error. As approximation errors cancel out on average, the errors induced by approximation tend to be small when the number of households is large.

# _III.1 The ELL framework_

Let us provide a brief review of the ELL methodology. In the standard setup, we consider the following model: Where ln( _ych_ ) denotes the dependent variable (think of logarithmic per capita expenditure), _xch_ the vector of explanatory variables,  the vector of regression coefficients,  _c_ the cluster-specific random effect and  _ch_ the household-specific random effect. The subscript _ch_ refers to household _h_ living in cluster _c_ . The explanatory variables _xch_ must be available in both census and survey. The household specific errors are assumed to be independent from each other, and independent from the cluster error.

Once all the parameters of interest have been identified, the dependent variable is imputed into the census: where <sup>ˆ</sup> ,  ˆ and _c_  ˆ denote the estimates for _ch_  ,  _c_ and  _ch_ . Now suppose that we want to estimate poverty for a given district. As an illustrative example, let us consider the head-count index, which measures the percentage of poor households in the district: where<sup>1</sup> ( _ych_  _z_ )<sup>denotes the indicator function that equals 1 if</sup><sup>_y < z_and 0 otherwise, and</sup> where _n_ denotes the number of households living in the district. An estimate of W can be obtained by replacing _ych_ with _y_ ˆ _ch_ for all households _ch_ .

6
For accurate estimation of the standard error of W, ELL advocate repeated MonteCarlo simulations. In each round, a simulated regression coefficient  ~( _r_ ) is drawn (from its estimated distribution), where r denotes the _r-th_ round of simulation. Further,  ~ _c_ ( _r_ ) and ~ ( _r_ )  _ch_ are drawn from their estimated distributions, which means we will have a simulated cluster error for each cluster and a simulated household error for each household in the census. The imputed dependent variable for household h in cluster c, in the r-th round, is therefore given by: Each round of simulation yields a new estimate _W_ ~ ( _r_ ) . By taking the average and standard ~ ( _r_ ) deviation over the _r_ different simulated values of _W_ , we obtain both the point estimate and the corresponding standard error.

In this paper, we use measure poverty using three Foster-Greer-Thorbecke (FGT) poverty indexes including the poverty headcount index, poverty gap index and poverty severity index (see Foster et al, 1984). Inequality is measured by the Gini coefficient. The FGT indexes and Gini index are the most popular measures of poverty and inequality, especially for developing countries. They are often reported in poverty assessment studies in Vietnam such as Vietnam Development Reports (see World Bank, 2003; World Bank, 2007).

# _III.2 Two key assumptions_

The ELL method is based on two key assumptions: _The model is accurate at each level it is applied_ : Tarozzi and Deaton (2007) refer to this as the `area homogeneity’ assumption. While the model is typically estimated at the regional level, predicted expenditures are aggregated over much smaller areas (think of provinces and districts). Consistency therefore requires that any omitted variables, which end up in the error term, have zero expectation at any level of aggregation.

_Spatial correlation is accurately accounted for_ : The errors for different households are likely to exhibit a level of correlation, in particular when the households live close to each other such that they are subject to similar (unobserved) geographical effects. An accurate account of this spatial correlation is important for the precision of the standard errors of the SAEs.

ELL accommodate spatial correlation by assuming that the error can be decomposed into a cluster error (an error that is shared by all households living in the 7
same cluster) and a household specific error. The common error is referred to as location error. The household specific error will also be referred to as an idiosyncratic error. Empirical results from a wide range of countries indicate that spatial correlation is indeed significant, and that the approach put forward by ELL works quite well.

A violation of either of the two key assumptions will affect the precision of the SAEs. Therefore, each time the method is used, it is important that the user tests the validity of these assumptions, as this may vary from country to country. Specifically, if one decides to ignore spatial correlation, while it is in fact present, one runs the risk of significantly underestimating the standard errors, and hence overestimating precision.

# **IV. Estimates of Expenditure Poverty and Inequality**

# _IV.1 Selection of explanatory variables_

The first step in the poverty mapping exercise is to select the explanatory variables in the regression model with either expenditure or income as the dependent variable. These variables should meet the following criteria:

- Available in both the household survey and the census.

- Household survey and census are comparable (both questionnaires accommodate the same variable definition, and both data sets show similar summary statistics).

- Sufficiently correlated with household expenditure or income.

After carefully screening the questionnaires and examining the data (comparing summary statistics) of candidate common variables from the 2006 VHLSS and the 2006 RAFC, we selected 27 household variables which will be used as the explanatory variables in the models for expenditure and income.

We also constructed commune level data that was merged with the household level data. For selected household level variables from the 2006 ARFC we derived commune mean values, which were merged with the VHLSS at the commune level. For example, we construct the percentage of ethnic minorities of communes, the average household size of communes, etc. Note that these variables are comparable by construction. They are referred to as the `mean variables of communes’.

The commune (and district level) variables were complemented with GIS variables from third data sources. The list of all the explanatory variables is presented in Table A.1 in the Appendix.

8
# _IV.2 Expenditure models_

This section will present the regression models used for (log) expenditure. There are eight geographical regions in Vietnam. To allow for geographical heterogeneity, we estimate a separate expenditure model for each region.

Our strategy of model selection is forward stepwise regressions. We start with a model including only one explanatory variable but providing the best fit. Then other variables are added one by one to the model to increase the goodness of fit. Thus different regions have different expenditure models. Overall, to avoid over-fitting, we tend to use models that are both relatively small and robust. To examine the sensitivity of the poverty estimates to model specifications, for each region, we compare two different models, which vary mostly in the number of explanatory variables they include. The poverty and inequality estimates from large and small models are found to be very similar. Interestingly, also when we compare standard errors, the differences are rather small. The poverty estimates obtained with the large model tend to come with relatively smaller standard errors. We are inclined to label the estimates from the larger model as more precise. In this paper, we will present the estimation results from the large models.

It should be noted that several explanatory variables such as assets, education, and employment can be endogenous in expenditure and income equations. Ideally, all explanatory variables should be exogenous. However, if we use only exogenous variables such as demography and GIS variables, the prediction power will be small. Thus, we have to use all available household variables. It is expected that the endogeneity of several variables is not a serious problem in the poverty map exercises, since our objective is to predict expenditure (or income) rather than to estimate the causal effect of explanatory variables on expenditure (or income).<sup>2</sup> Tables A.2 to A.9 in the Appendix present the GLS regressions of the logarithm of per capita expenditure (the large models). The results were obtained using the latest version of the PovMap program (updated in March 2009).<sup>3</sup> The location effect was modeled at the district level. (The latter affects the estimates of the variance-covariance matrix and hence the GLS estimates of the model parameters.)

> 2 Another issue is multicollinearity between explanatory variables. We calculated the variance inflation factor (VIF) for multicollinearity after regressions, and all most the estimates of VIF are below 5. It implies that the multicollinearity is not serious. In addition, we also report the correlation matrix of household explanatory variables in Table A.11 in Appendix.

> 3 The program is developed by researchers of the World Bank. <u>http://iresearch.worldbank.org/PovMap/PovMap2/PovMap2Main.asp</u>

9
It is found that all estimates of the model parameters make economic sense (have expected signs). Given the controlled variables, ethnic minorities still have lower per capita expenditure than Kinh and Hoa people. Households of large size are more likely to have lower per capita expenditure than households of small size. As expected, assets are positively correlated with per capita expenditure. Households who have more working members or members with vocational training tend to have higher expenditure. Finally, the R-squared values are quite encouraging with the range from 0.43 to 0.7.

# _IV.3 Poverty estimates_

# _Regional estimates_

Table 1 presents the estimates of the poverty incidence of the eight rural regions. It shows that the estimates from the small area estimation exercise are very close to the estimates based on the 2006 VHLSS (both for the large and small models). While we observe a noticeable difference for the Central Highlands, the difference is not statistically significant. The standard errors for the Central Highlands estimates based on the 2006 VHLSS are rather large due to the small number of observations.

The poorest region is the North West with a poverty rate of above 50 percent. In regions with low levels of poverty, about 10 percent of the rural population lives below the poverty line.

**Table 1 The poverty incidence estimates of regions**

|Region<br>VHLSS 2006|Small area estimation|
|---|---|
|Red River Delta<br>11.0|11.3|
|[1.1]|[0.9]|
|North East<br>29.9|31.6|
|[1.8]|[1.6]|
|North West<br>56.4|57.3|
|[3.7]|[2.6]|
|North Central Coast<br>33.1|32.9|
|[2.4]|[1.7]|
|South Central Coast<br>17.1|17.8|
|[2.1]|[1.2]|
|Central Highlands<br>34.4|39.9|
|[3.7]|[2.0]|
|North East South<br>9.9|10.1|
|[1.5]|[0.9]|
|Mekong River Delta<br>11.8|12.6|
|[1.0]|[1.3]|
|_Standard error in the brackets_||

_Source: Authors’ estimation from VHLSS 2006 and ARFC 2006_ 10
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# _IV.4 Inequality and poverty_

We also examine the spatial pattern of expenditure inequality (the Gini coefficient) in Vietnam. The provincial estimates of the Gini coefficients can be found in Table A.10 in the Appendix. Inequality varies across provinces and districts albeit with small differences. Average inequality (based on expenditure) is rather low at 0.27 for provinces and 0.25 for districts. The province with the lowest Gini (0.23) is Thai Binh, while the province with the highest Gini (0.35) is Lam Dong. At the district level, the Gini coefficient varies from 0.17 to 0.47. Meo Vac disitrict of Ha Giang province has the lowest Gini (0.17), while Da Lat city of Lam Dong province has the highest Gini (0.47).

Interestingly, low levels of inequality are found in both the poorest provinces and the richest provinces. Figure 3 plots the relationship between poverty and inequality. The quadratic relationship is highly significant both at the province and district level. Inequality tends to be lower in areas with relative low poverty and areas with relatively high poverty rates, although the differences are not enormous. This finding is consistent with the Kuznets hypothesis that inequality first increases as the economy develops, and then decreases once a high level of economic development is reached.

**Figure 3 Inequality (Gini index) and poverty (P0)**

<!-- Start of picture text --> 0 20 40 60 80 0 20 40 60 80 100<br>The poverty incidence in 2006 The poverty incidence in 2006<br>Source: Authors’ estimation from VHLSS 2006 and ARFC 2006<br>.35 .5<br>.4<br>.3<br>.3<br>Gini coefficient Gini coefficient<br>.25<br>.2<br>.2 .1<br><!-- End of picture text -->

# _IV.5 Poverty change during the period 1999-2006_

Figure 4 compares the poverty maps for the years 1999 and 2006. This shows how poverty has been reduced across the country during 1999-2006. Virtually all provinces experienced a reduction in the poverty rate. The areas where progress has been slow are the poorest areas of the country (the North West of Northern and the North West of Southern Vietnam).

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**Figure 7 The district poverty incidence in 1999 and 2006**

<!-- Start of picture text --> 0 200 400 600<br>Districts<br>0 20 40 60 80 100<br>1999 2006 The poverty incidence in 1999<br>Source: Authors’ estimation from VHLSS 2006 and ARFC 2006<br>Figure 8 presents the relation between poverty reduction in the period 1999-2006<br>and the inequality level in 2006. It shows that provinces and districts with a larger<br>poverty reduction in the period 1999-2006 tend to have a lower level of inequality in<br>2006. It means that poverty reduction can be associated with inequality reduction.<br>Figure 8 Poverty reduction and inequality during 1999-2006<br>0 10 20 30 40 -20 0 20 40<br>Poverty reduction during 1999-2006 Poverty reduction during 1999-2006<br>Source: Authors’ estimation from VHLSS 2006 and ARFC 2006<br>100<br>40<br>80<br>60 20<br>40<br>The poverty incidence 20 0<br>Poverty reduction during 1999-2006<br>0<br>-20<br>.35 .5<br>.4<br>.3<br>.3<br>Gini coefficient Gini coefficient<br>.25<br>.2<br>.2 .1<br><!-- End of picture text --> Figure 8 presents the relation between poverty reduction in the period 1999-2006 and the inequality level in 2006. It shows that provinces and districts with a larger poverty reduction in the period 1999-2006 tend to have a lower level of inequality in 2006. It means that poverty reduction can be associated with inequality reduction.

# **V. Estimates of Income Poverty and Inequality**

Since the government of Vietnam is using the income poverty line, we also estimate income poverty and inequality measures for provinces and districts.

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# _V.1 Income models_

We begin with constructing regression models for (log) income. Also here, we estimate two models for each of the eight regions, a large and a small model specification. The results from the large and small models are very similar. However, the large models produce lower standard errors of estimates. Thus, in this paper we present the estimation results from the large models.

Tables A.2 to A.9 in the Appendix present the GLS estimates for the large models. It shows that all model coefficients make economic sense (have expected signs).

# _V.2 Poverty and inequality estimates_

# _Poverty estimates_

Table 2 reports the estimates of the rural poverty incidence for all eight regions. The estimates are all very close to the estimates based on the 2006 VHLSS. The poorest region is North West with a poverty rate of just below 50 percent. With a poverty rate of around 8 percent, North East South is among the least poor regions.

**Table 2 The income poverty incidences of regions**

|Region|VHLSS 2006<br>Sm|all area estimation|
|---|---|---|
|Red River Delta|15.5|15.3|
||[1.1]|[0.7]|
|North East|22.0|24.4|
||[1.6]|[1.4]|
|North West|48.8|49.2|
||[3.6]|[2.5]|
|North Central Coast|28.2|26.7|
||[1.9]|[1.1]|
|South Central Coast|20.3|18.7|
||[1.9]|[1.4]|
|Central Highlands|24.4|25.4|
||[3.0]|[1.2]|
|North East South|7.7|8.6|
||[1.2]|[1.2]|
|Mekong River Delta|11.5|11.0|
||[0.9]|[1.0]|
||_Standard error in the brackets_||

_Source: Authors’ estimation from VHLSS 2006 and ARFC 2006_ 17
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average Gini for provinces and districts is 0.32 and 0.30, respectively. Income inequality estimates are lowest in the Binh Dinh province (0.28), and highest in Son La (0.57). The income inequality estimates for districts range from 0.19 (Nam Giang district, Quang Nam province) to 0.79 (Son La town of Son La province). Note that these results should be interpreted with care, as standard errors need to be taken into account.

# **VI. Comparison of Alternative Poverty Indicators**

This section compares different indicators of poverty, which include expenditure poverty, income poverty and MOLISA poverty rates.

# _VI.1 Income poverty and MOLISA_

Figure 10 compares the MOLISA poverty rates with the income poverty estimates at the province level. All estimates refer to the year 2006. The left panel provides a simple scatter plot. If the two poverty indicators are comparable, the points will be close to the diagonal line. The two different indicators are clearly related. Judging whether the observed differences are significant is not straightforward. Firstly, we do not have the MOLISA poverty rates for rural areas: the MOLISA poverty rate represents the entire population in a given province (both urban and rural). In contrast, we are estimating rural poverty (as the census only covers rural Vietnam). Secondly, each estimate comes with standard errors. (We do not have the standard errors for the MOLISA poverty rates.) The right panel of Figure 10 plots the 95% confidence interval of our income poverty estimates together with the MOLISA point estimates. We find that for 32 out of 64 provinces the MOLISA poverty rate is contained in the 95% confidence interval of our income poverty estimates.

The spatial pattern of poverty at the province level shows little differences when we compare the MOLISA poverty rates with our income poverty estimates (see Figure 11).

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Figure 13 shows that the geographic pattern of the MOLISA poverty rate and our income poverty estimates are rather similar, which indicates that the difference in rankings is not very large.

# _VI.2 Expenditure and income based poverty_

Figure 14 shows that the two different poverty indicators yield similar poverty estimates and a similar ranking at the province level. Differences can be observed for areas with higher levels of poverty, in which case expenditure poverty is found to be higher.

**Figure 14 The expenditure poverty incidence and the income poverty incidence of provinces**

|0<br>20<br>40<br>60<br>80<br>100<br>The expenditure poverty incidence<br>0<br>20<br>40<br>60<br>80<br>100<br>The expenditure poverty incidence||
|---|---|
|0<br>20<br>40<br>60<br>80<br>100<br>The income poverty incidence|0<br>20<br>40<br>60<br>80<br>100<br>The income poverty incidence|
|_Source: Authors’ estimation from VHLS_<br>Table 3 reports the correlation coefficients<br>indicators. It shows that they are strongly correlated.<br>poverty rates are rather high. Interestingly, expen<br>exhibit a stronger relation with the MOLISA pov<br>estimates.<br>**Table 3 Correlation between p**|_S 2006 and ARFC 2006_<br>between the two different poverty<br>Also correlations with the MOLISA<br>diture poverty estimates appear to<br>erty rates than our income poverty<br>**overty estimates**|
|Correlation between the provincial<br>poverty|Correlation between the district poverty<br>(Districts with the percentage of rural<br>population higherthan95%)|
|Expenditure<br>Income<br>MOLISA|Expenditure<br>Income<br>MOLISA|
|povertyrate<br>povertyrate<br>povertyrate|povertyrate<br>povertyrate<br>povertyrate|
|Expenditure<br>poverty rate<br>1|1|
|Income poverty<br>rate<br>0.9575<br>1|0.9615<br>1|
|MOLISA poverty<br>rate<br>0.8693<br>0.8046<br>1|0.8503<br>0.831<br>1|

_Source: Authors’ estimation from VHLSS 2006 and ARFC 2006_ 22
# **VII. Conclusions**

We have updated the small area estimates of poverty and inequality for rural Vietnam, where existing poverty maps were outdated. These new estimates of province and district level poverty for the year 2006 allow us to examine how poverty has changed in Vietnam over the last seven years.

Vietnam has seen a remarkable reduction in (rural) poverty during the period 1999-2006. Poverty has been declining in virtually all provinces across the country. The largest improvements are observed for provinces with poverty rates close to the national average. It is found, however, that the poorest provinces have shown the lowest rates of improvements, i.e. were least successful in reducing poverty. The areas with some of the highest poverty rates are also more likely to be the areas with higher shares of ethnic minorities, which as a group are seeing below average reductions in poverty. There is found to be a noticeable gap in household endowments as well as returns to these endowments between ethnic minorities and the Kinh/Chinese people in Vietnam (see Baulch et al., 2008).

While national inequality seems to be increasing, our estimates of rural inequality within provinces and districts are relatively low. This seems to indicate that inequality is largely driven by inequality between local areas rather than within local areas. As expected, income inequality is higher than expenditure inequality. Interestingly, inequality tends to be higher in areas with relatively low poverty areas as well as in areas with relatively high poverty rates. Also, we find that provinces and districts which experienced a larger poverty reduction during the period 1999-2006 are more likely to have a lower level of inequality in 2006.

Policies that may benefit from having small area estimates of poverty and inequality include: (a) cash transfers and income support programs; (b) local government support and community development programs investing in e.g. health care, infrastructure, education, labor markets, agricultural productivity and micro finance; (c) food-and-cash for work programs; (d) fund raising and donor coordination; and (e) evaluation of country strategies, and the monitoring of progress towards millennium development goals (MDGs).

To take full advantage of the poverty maps, in particular of their policy relevance, it is key that they are accessible to a wide range of policy makers that include local entities as well as high level officials. It is not uncommon that public institutions, many of which may be potential users, are left largely unaware of the results from the poverty mapping exercise and their potential applications. Also important is that outdated estimates are replaced with up-to-date estimates of poverty and inequality.

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