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Globalization, poverty and environment in Vietnam A review of empirics, methods and policy issues

Ian Coxhead1 University of Wisconsin-Madison This version: July 2007

1. Motivation

A growing body of research considers the implications of ‘globalization’, or the process of “integration of economic activities, across borders, through markets” (Wolf 2004), for the welfare of resource-abundant developing economies. The aggregate benefits of globalization are widely agreed, but distributional issues, including poverty change, and the environmental consequences of integration with the global economy when some natural resources are subject to open-access have received only limited attention. Poverty and environmental damage are serious issues in a very large group of developing economies and their relationship to globalization is not yet well understood. Following a brief introduction, section 2 of this paper surveys the literature for the case of Vietnam, a prominent resource-abundant developing economy that has undergone significant recent integration with global markets. Section 3 provides a sketch of a formal methodology for modeling these issues, using the Vietnamese economy as a case study and methodological ‘test bench’. Section 4 reviews data, modeling and policy issues. 1.1 Empirical and policy issues “Globalization” in Vietnam dates from 1986, when the Vietnamese government adopted doi moi, its response to liberalizing reforms in both the USSR and China. In just a few years the thrust of economic policy shifted from hermetic self-sufficiency (albeit with substantial Soviet aid) to engagement with the booming Asian and global economies, and from pervasive controls over domestic markets to a more relaxed stance, especially in agriculture. Devaluation and the relaxation of many trade barriers facilitated export growth. From a value less than 50% in 1992, the share of trade in GDP had almost doubled by 2000. Other reforms paved the way for foreign investment and joint ventures as means to attract capital, and foreign-invested firms play an increasingly prominent role in production and job creation.

These policy reversals were accompanied by a tremendous acceleration in growth: throughout the 1990s, the Vietnamese economy grew at an average rate in excess of 6% per year; the headcount measure of poverty declined from 75% in 1988 to 58% in 1993, 37% in 1998, and less than 30% in 2002 (Swinkels and Turk 2004; GSO 2002). These remarkable gains were achieved despite serious deficiencies in infrastructure, human capital, legal institutions and other factors commonly associated with growth “miracles”. In Vietnam, growth has been contemporaneous, and for practical purposes coterminous, with globalization and the liberalization of domestic markets. The country continues to move toward greater international economic integration, through more open trade with China and ASEAN, expanded bilateral links 1 This paper is an adaptation of a research proposal submitted to the Ford Foundation. For details of the project please visit www.aae.wisc.edu/gpe-vn. I thank Nguyen Van Chan and Tom Hertel for helpful comments on earlier drafts and Diep Phan for research assistance.

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with the US, and plans to for WTO accession. These innovations in trade policy are proceeding together with major shifts in domestic development policy, where the formerly dominant state-owned sector is losing market share and government support, and reliance on markets and prices as resource allocation mechanisms is gaining ground.

The poverty decline noted above is a tremendous gain in a poor country, and the effects of sustained economic expansion on human well-being will be profound. However, the gains from growth have so far been quite unevenly distributed, with poverty reduction occurring very rapidly in urban areas and the major river deltas, but much more slowly (and from higher initial rates) in highlands, remote areas and the central coast region (Swinkels and Turk 2004; Minot 2000). Average rural incomes vary across these regions (Figure 1). Broad indicators of inequality in the distribution of income, by region and in other socioeconomic dimensions, have begun to rise.

While considerable scholarly attention has been devoted to measuring and explaining

poverty changes, it is less widely recognized that in Vietnam, growth and globalization also threaten to accelerate environmental damage and natural resource (NR) depletion. In spite of rapid changes in the structure of production and employment, the country remains heavily dependent on income from agriculture, fisheries and other resource-based activities. Closer integration with the global economy is a prime source of additional pressures, since Vietnam has clear comparative advantage in resource-based products. Currently, about three-quarters of export revenues are derived from fisheries, rice, coffee, minerals and other resource-based industries. About one-third of new foreign investment in 1998-2000 was directed at these sectors. Problems of deforestation, flooding and water pollution, and degradation of coastal fishery resources threaten future growth in export sectors, a threat that the Vietnamese government has only belatedly recognized with establishment of a Ministry of Environment and Natural Resources late in 2002.

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The Government of Vietnam’s National Socio-Economic Development Strategy 2001-10 articulates the desired approach to development as promoting “rapid and sustainable development by ensuring economic growth, accompanied by social equality and progress, and environmental protection.” (CPVN 2002) Recent evidence points to considerable—even spectacular—progress on the first two of these goals. The effects of rapid growth on the environment are less clear, however, and there are many signs that the trade-off of resources and environmental quality for growth is a significant one. Can growth, poverty alleviation and environmental protection be simultaneously achieved? What can be learned from Vietnam’s case that is applicable to resource abundant developing economies in general? 1.2 Methodological issues What are the welfare and environmental effects of a trade or trade policy shock on a specific economy? Canonical models in international economics tell us that for a given global market shock, the change in GDP or a similar aggregate welfare proxy will be relatively greater for small economies (since their responses have no impact in world markets) and for economies whose structure differs substantially from that of the world market. In general, global market shocks affecting natural resource prices will have the largest welfare effects on small economies that are highly resource-abundant or resource-scarce relative to the world economy as a whole. Similarly, domestic trade policy innovations are expected to have the largest effects on households that deviate furthest from the average in terms of consumption patterns and sources of income. This is shown by the “magnification effect” of product price changes on factor returns in standard trade models containing sector-specific factors (Jones 1971). Even relatively simple trade models can generate surprisingly robust predictions of changes in factor returns and (given a known pattern of asset ownership) of household incomes for a given world price or trade policy shock. As with effects of trade shocks across countries, the impact of a world price or policy shock on individuals or households within an economy is distributed more (less) equally as the population is less (more) heterogeneous. Moreover, there are multiple channels through which the effects of a shock are transmitted—product markets, factor markets, taxes and transfers, remittances, risk and adjustment, and so on—so the effects of a given shock on a given household are contingent not only on the characteristics of the household, but on economic structure, policy regimes and more (Winters 2002; Zhai and Hertel 2006). These insights are becoming standard in the literature on trade and poverty (Hertel and Reimer 2005). Where natural resource wealth is concerned, there is the additional challenge of augmenting the impacts of changes in flow variables with at least some endogenous changes in stock variables, through the use and subsequent depletion or degradation of assets used in production, such as land and other natural resources. In some cases, moreover, related externality effects (e.g. pollution) may be important.

To be adequate, then, a research methodology must be capable of assimilating both economic and environmental phenomena, including trade and domestic policies, land and other resource use decisions at the household or firm level, and environmental consequences of those decisions. In addition, the analysis should generate decomposable welfare measures as criteria for normative and policy judgments. For this purpose the most appropriate tool is an applied general equilibrium (AGE) model, one that captures in algebraic form the major features of resource endowments, producer and consumer decision-making, trade, price formation and incomes, in an internally consistent general equilibrium framework. Carefully used, such models

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can generate surprisingly useful insights in empirical and policy experiments. Methodologically, however, the devil is in the details of decisions on model structure, parameterization from specific data, and validation through tests of its capacity to replicate economic development experience.

2. Review of literature

Much of the existing research on Vietnam’s economic development focuses either on the analysis of household income and expenditure data to track trends in poverty and income distribution, or on the use of input-output and general equilibrium simulation models to replicate the aggregate economic effects of policy reforms and trade shocks. The literature that integrates these—the so-called “macro-micro” modeling approach (Hertel and Winters 2006; Bourguignon and Pereira 2003)—is relatively new globally, has very few applications at present in Vietnam, and to date has not attempted to capture environmental or natural resource phenomena, despite their clear importance to aggregate and household welfare in most developing countries. 2.1 Analyses of disaggregated household data. The impact of globalization on poverty and income distribution in Vietnam has been the subject of considerable empirical research, especially since the release of the second round (1998) of the Vietnam Living Standards Survey (VLSS), the national household income and expenditure survey. Glewwe et al. (2004) present an important collection of recent studies. The work in this volume, as well as in numerous other recent papers, makes use of two rounds of VLSS data to document and analyze changing household incomes and expenditures, poverty, shifts in economic structure, educational investments and migration, and the impacts of growth on health, nutrition and the distribution of income. Papers in this literature are motivated by a broad conceptual model of the links between trade (or others aspects of globalization) and measures of welfare such as household income, poverty, or income distribution, but typically focus on one or a few individual channels through which such links operate, for example agricultural product markets (Minot and Golletti 2000; Seshan 2004) or labor markets (Gallup 2004; Jenkins 2004).

Other empirical studies characterize impediments to adjustment. The Vietnamese economy is characterized by relatively high barriers to internal movement of goods and factors. Price transmission is impeded by transport costs and other barriers (Le Goulven 2001, Roland-Holst and Tarp, n.d.), and mobility in the labor market is inhibited by informational asymmetries, risk and uncertainty, transport costs and legal restraints (Van de Walle 2004a; Le 2005). These impediments to market clearing are thought to be important determinants of the widening income gap between urban and rural areas, and between households with and without access to incomes derived from the more rapidly growing sectors. As a result, the distribution of income growth and poverty alleviation in Vietnam reveals a heavy bias toward urban and peri-urban areas, with remoter regions and those populated by ethnic minorities showing much slower progress (Swinkels and Turk 2004). Such regional, ethnic and sectoral discrepancies have been addressed in part in the design of poverty alleviation programs. These, however, appear not to have been influential (Van de Walle 2004b); rather, it is remittances from migrant workers that have been important in spreading the benefits of export-led manufacturing growth to rural areas and agricultural households (Cox 2004; Litchfield et al. 2003; Niimi et al. 2003).

This body of empirical work contributes valuable insights into the changing patterns of poverty in Vietnam, but being partial equilibrium, does not provide a complete accounting for the intersectoral effects of policy or market shocks. Moreover—and very surprisingly—no

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published studies in this literature examine the links between growth, poverty and the natural resource base. Environment, deforestation and other natural resource issues are not mentioned, for example, in any of the studies collected in Glewwe et al. (2004). This is a surprising omission in a country where well over half the population (and a far higher fraction of low-income households) derive their income from activities that directly exploit the natural resource base. 2.2 Input-output and general equilibrium analyses of globalization, growth and welfare The second branch of the relevant literature takes a general equilibrium approach (AGE), using simulation models to predict the effects of trade and policy shocks on growth, the structure of production and employment, income distribution and poverty. These are based on various editions of the Vietnam Social Accounting Matrix (SAM). Whereas empirical studies of the kind just discussed take the household as the unit of analysis, virtually all AGE models use a representative household (RH) approach, positing one or a small number of such units, and extrapolate from policy shocks to measures of household welfare that are uniform for all households for which each RH stands. This approach better highlights impacts of trade on the function income distribution, especially those operating through Stolper-Samuelson type changes in relative factor prices. One group of studies makes use of the GTAP (Global Trade Analysis Project) model (Hertel 1997) to examine the effects of global trade shocks and some domestic trade policy reforms on the Vietnamese economy. Fukase and Martin (2000, 2001), for example, examine the effects of the US granting MFN status to Vietnam, and of Vietnam’s accession to the ASEAN Free Trade Area (AFTA), using a 13-sector AGE model. Granting of MFN status was found to increase aggregate income and lead to large increases in exports of labor-intensive manufactures such as apparel, but produced only small predicted changes in agricultural and natural resource outputs.

In one of several country-level AGE studies, Chan et al. (2004) use a 17-sector SAM to examine unilateral trade liberalization. This model is innovative in that it explicitly recognizes impediments to labor mobility in the Vietnamese economy. The authors construct several scenarios, including complete and costless mobility, segmented agricultural and industrial labor markets, intersectoral mobility with transactions costs, and initial unemployment with fixed real wages. Their results show the expected increases in production and exports of labor-intensive manufactures; surprisingly, however, they too do not show any stimulus to resource-based sectors in which Vietnam has comparative advantage. Perhaps because of this, the simulation results with restrictions on labor mobility reveal significantly lower gains to rural poor households by comparison with the full mobility case, in which such households presumably share in the gains from output and job growth in labor-intensive manufactures.

As noted above, there is presently only one “macro-micro” model of trade liberalization and poverty in Vietnam (Fujii and Roland-Holst 2004). This uses a 38-sector SAM linked to a spatial data set of geographical variables and household income and expenditure, from VLSS and the national census, to evaluate the effects of unilateral trade liberalization (UTL) and of global trade liberalization (GTL) on poverty and income distribution. Like others of its type, this model creates a recursive link between “macro” shocks and responses and their “micro” (household) impacts. Trade shocks generate output price changes, and these in turn induce changes at sectoral level in factor value marginal products, which lead to intersectoral movements of labor and other reallocable factors along with factor price changes. The vectors of product and factor

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price changes, together with any endogenous changes in taxes and transfers, then form the basis for calculations of change in household incomes and expenditures. The analytical approach permits a very detailed mapping of macro changes to poverty and incomes at household and commune level. It finds that both UTL and GTL raise aggregate welfare and reduce poverty in spite of generally higher inequality. Structurally, both forms of liberalization produce large predicted increases in the output of apparel and other labor-intensive manufactures, but only the GTL scenario also predicts an unambiguously large increase in agricultural and natural resource output. The model imposes immobility of labor between rural and urban industries, which may help explain the surprisingly small agricultural and natural resource sector response.

All these AGE studies underline two general stories and raise some puzzles. First, trade liberalization—whether unilateral or global—increases aggregate welfare and induces substantial changes in the structure of production and employment. Second, the implied poverty and distributional effects of liberalization are clearly contingent on which industries expand and on the extent to which the model permit labor—the main income source for poor households—to move among sectors. In light of this, it is puzzling that there has not been a more concerted effort to obtain empirical information on the operation of Vietnamese labor markets for the purpose of “parameterizing” such models. Chan et al. (2004) is the only study making a serious effort to capture labor market phenomena. A second puzzle is why trade liberalization does not induce a greater increase in the output of Vietnam’s agricultural and natural resource sectors. Here, the simulation results appear to be at odds with trends in the Vietnamese economy in the two decades since doi moi, over which period the country has become the world’s second largest exporter of both rice and coffee—from a base of net rice imports and near-zero coffee exports—to name just two examples. These anomalies motivate a re-examination of the structural assumptions of current AGE models. In particular, the assumption of a fixed land area in agriculture (or analogous restraints on supply growth in models without land) now comes into sharp focus. A priori, allowing for endogenous growth in the area devoted to farming and fisheries could have two effects relevant to our research concerns: it could better capture likely sectoral responses to stimuli created by trade and trade liberalization, and, by allowing for households to expand their non-labor resource base, could alter the predicted effects of such shocks on household incomes and poverty (Coxhead and Jayasuriya 2004). These effects would be spatially specific, in that the land frontier is not everywhere uniformly open; they would, moreover, have implications for the depletion and degradation of environmental resources. 2.3 Trade and environment in general equilibrium Though the GE theoretical approach to trade-environment questions is well established (Anderson 1992; Fredriksson 1999; Copeland and Taylor 2003), the current literature in this area has limitations where developing economies are concerned. Many analyses are highly aggregative, combining widely different types of environmental damage into a single variable. This approach can help elucidate basic principles, but is less useful as a guide to normative analysis and policy formulation. Other analyses choose to deal only with a single environmental concern, such as SO2 emissions or deforestation. Overall, there is heavy emphasis on industrial emissions; even the otherwise comprehensive work by Copeland and Taylor (2003) omits analysis of natural resource use and depletion. This approach is unsuitable in most of the developing world, where resource depletion and degradation shares top billing or even outranks industrial pollution as a leading environmental problem (Asian Development Bank 1997; Jha and Whalley 1999). Nowhere is this more true than in tropical Asia, where deforestation rates are the

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highest of any world region, and other trade-driven problems such as soil degradation and conversion of coastal ecosystems to fish and shrimp farms are very prominent. A complicating factor in such cases is that property rights over natural resources are often poorly established or enforced, leading to conditions resembling open access.

The open access stylization has been used in a number of theoretical examinations of trade, environment and economic welfare. Deacon (1995) presents an influential formalization of the links between manufacturing tariff reforms and natural resource degradation in a developing country setting. He analyzes the impact of tariff reform on deforestation in a Ricardian model with two traded goods (a protected, import-competing manufactures and exportable agriculture) and one intersectorally mobile factor, labor. Labor is also used to convert open-access forest into agricultural land. Trade liberalization shrinks the manufacturing sector, which releases labor; this in turn reduces the cost of forest conversion for agriculture, thereby increasing deforestation. This result illustrates the proposition that an institutional failure such as open access to a natural resource will worsen socially excessive rates of pollution or resource degradation when trade frictions are reduced, if the country has comparative advantage in the polluting sector (Brander and Taylor 1997). From a policy perspective, however, this result pits environmental concerns against the conventional gains from trade liberalization; if preservation of forest has positive value, then the Deacon result indicates a welfare tradeoff.

This tradeoff, however, is contingent on a model structure that precludes the case in which a developing country also has comparative advantage in labor-intensive manufactures. When this is true, the implication of an unambiguously negative relationship between trade liberalization and environmental quality that emerges from the Deacon and Brander-Taylor models no longer holds (Copeland 1994; Coxhead and Jayasuriya 2005). When labor is intersectorally mobile, a boom in labor-intensive manufactures induces outmigration from resource sectors, driving up labor costs and thus reducing deforestation and labor-intensive agricultural activities. The lesson is that in modeling trade and environment, parsimony in model structure may give misleading results: there is no clear and general prediction on the environmental effects of trade liberalization, even when countries have comparative advantage in resource products or polluting industries. 2.4 AGE analyses of trade and environment in Vietnam There are just two published applications of AGE modeling to natural resources and the environment in Vietnam (El Obeid et al. 2002; Dufournaud et al. 2000). Dufournaud et al. use a highly stylized SAM-based model to examine pressures for deforestation. The paper by El Obeid et al. is part of a large research project (Beghin et al. 2002) using common AGE frameworks to examine trade-environment relationships in several developing countries. The model examines 13 types of pollutants (7 air, 4 water, and 2 land) whose emissions are linked to consumption, both as intermediate goods and in final consumption. The model uses the Vietnam SAM and contains 50 production sectors, one labor category, one representative household, and one capital type.

In simulations, a business-as-usual scenario determines a reference growth and pollution trajectory in the absence of environmental or other tax reforms. Three alternative scenarios are then examined: piecemeal environmental policies, unilateral trade liberalization and a combination of the two. Trade reform on its own is found to promote both growth and pollution, particularly of airborne effluents. The composition effect of trade reform—that is, the shift in the structure of production and consumption that changing relative prices induce (Antweiler et

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al. 2001)—shows that in Vietnam this measure would induce a relative increase in the consumption and production of dirty products. Environmental taxes alone have a variable and sometimes significant negative impact on growth, depending on the effluent targeted. Finally, growth-environment trade-offs are minimized when free trade is combined with emissions taxes; there is a positive impact on growth and trade, and at the same time, the country specializes in cleaner goods for export. There is evidence of a double dividend, that is, that reforms lead both to reduced emissions and a more efficient tax system (Bovenberg and Goulder 1996). Both the structure of this model and its results closely resemble those obtained in other AGE studies on this theme (Lee and Roland Holst 1997, Dessus and Bussolo 1998, Beghin et al. 2002, Beghin et al. 1997). In particular, it is often found that trade liberalization by itself leads to GDP growth but increases pollution, that environmental policies alone have negative growth impacts (although these may be small), and that a combination of reforms tends to produce a win-win outcome, i.e., to be beneficial for both growth and the environment.

The model has some drawbacks. Its parameter values, other than those from the SAM, are not explicitly based on Vietnamese data. It lacks spatial features, in spite of the inherently spatial nature of its subject, and contains no mechanisms for feedback from pollution to economic activity. Like most of the environmental AGE literature, it focuses on industry-based air and water pollution and all but ignores natural resource issues such as deforestation, soil degradation and erosion, and loss of watershed function. On the welfare side, it is an RH model and thus cannot generate income distribution or poverty information. This is important not merely because poverty eradication is itself a major policy target, but also because poverty and the environment are intimately linked, in resource-dependent poor economies, through the production and consumption decisions of poor households. Though these links are as yet poorly understood, there is little debate over their importance.

Finally, policy shocks applied to the model are at best only distantly related to actual policy concerns and options in Vietnam or elsewhere in the developing world. The simulations impose taxes on consumption of polluting goods; these are conventional first-best policies used to correct for environmental damage. They require that there be plausible and effective monitoring and enforcing instruments to implement the taxes. However, it is precisely the lack of these instruments that causes difficulties for policy makers in developing countries. Simulations examining the use of second-best instruments might be more relevant; it would also be appropriate to examine the environmental as well as economic effects of a broader range of current tax policy reforms, not exclusively those directly addressing environmental problems. This would link environmental models of this type to the broader tradition of AGE modeling as a tool of welfare analysis (Chan, et al. 1999; Chan et al. 2004).

3. Theoretical model

3.1 The standard model We begin with the simplest sketch of a model that captures the general equilibrium links between globalization and trade policies, household incomes, poverty and the natural environment. This version serves as a ‘platform’ on which we will build increasingly complex variants.

Consider an economy with one representative producer and one consumer. The economy is endowed with a vector v = (v1, …, vF) of productive resources. These are fully employed in production of a vector y = (y1, …, yn) of industry outputs. The economy is assumed open to trade but small in relation to global markets. A subset m of goods is tradable, while the remainder, m+1, … n, are non-tradable. The vector of base prices of tradable goods pT

* is

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determined exogenously in the world market. International trade in goods is taxed at rates t, giving a domestic tradables price vector pT with elements pi = pi

*+ ti for i = 1, …, m. Together

with nontradables prices pN, these make up the domestic price vector p. Net revenues from trade taxes are returned to the consumer in lump-sum form. Assuming profit maximization, constant returns to scale, complete and competitive markets, and a fixed number of goods, aggregate income is given by a maximum revenue function: g(p,v) = max p y v{ } . (1)

This has the usual properties of linear homogeneity, and is non-decreasing in p and v. By the envelope theorem, the following derivative properties hold:

g(p,v)pi

= yi (p,v) (i = 1,...,n) andg(p,v)vk

= wk (p,v) (k = 1,...,F) , (2)

giving industry supplies and shadow prices of inputs as functions of prices and endowments. The consumer is assumed to derive income equal to the total earnings of factors and to spend this entirely on goods. Her utility maximizing behavior, with indirect utility (p, m) is captured by a minimum expenditure function e(p,u) = min p c u{ } , (3)

where u is the target utility level. Again the envelope theorem gives optimal domestic demands: e(p,u)pi

= ci (p,u) i = 1,…,n. (4)

In this model, net exports are the excess of production over domestic demand for each good. Using subscripts on g and e to denote derivatives, zi = gpi (p,v) epi (p,u) = yi (p,v) ci (p,v) , i = 1,…,n (5)

and zi > 0 (< 0) indicates that the ith good is a net export (import), and zi = 0 for nontradables. Aggregate expenditure is equal to income, so in equilibrium with tariff revenues returned in lump-sum form to the consumer, we have an aggregate budget constraint of the form e(p,u) = g(p,v) + t 'z . (6) The system made up by (2), (4), (5) and (6) defines a standard Walrasian model and its solution yields general equilibrium values of factor prices, industry supplies, consumer demands, international trade quantities, prices of non-traded goods and a measure of aggregate real income, all as functions of an exogenous vector (p*, t, v). There are 3n + F + 1 equations and the same number of endogenous variables. The comparative static properties of this model are well known. A trade shock or policy reform alters relative product prices, and this will in turn change relative factor prices in ways that are broadly if not precisely predictable (Lloyd 2000): factors used intensively in sectors whose output price has risen (fallen) will tend to experience real gains (losses), and so on. While the model is highly non-linear, it can easily be solved as a system of linear equations by conversion to proportional changes of variables, in which form its parameters are shares (e.g. budget shares, cost shares) obtainable from national accounts data, and elasticities about many values of which researchers have fairly strong priors.

This structure provides a basic framework for studies of trade reform, product prices, returns on factors, and aggregate welfare upon which additional features and relationships of particular interest to the Vietnamese case can be built. 3.2 Multiple households

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We first extend the model to consider multiple households h=1, …, H. These are distinguished by household-specific asset endowments, incomes and preferences, and thus have unique expenditure patterns and welfare in the initial equilibrium. When product and factor prices are determined in the “macro” system just sketched, we can examine the effects of exogenous changes in household assets, trade policy or global market shocks, and changes in policies such as taxes and transfers, on the incomes and welfare of households and on aggregate poverty. In general, the real incomes of households are dependent on their factor endowments and the returns to those factors, as well as on preferences and the prices of consumer goods and any applicable taxes or transfers. Define household factor endowments by vector vh and general equilibrium factor returns by w(p); lump-sum taxes or in-kind transfers by Th; the tax rate on

factor incomes by h; and a consumer price index by h (p) = piih

i, where i

h is the share of

good i in total household expenditure. Household real disposable income is then:

rh =w(p) vh

(1+ h )+ T h h (p) (7)

We can now find the effects of a variety of economic shocks on real household incomes. Define the proportional change in each variable by a caret (e.g., rh = drh / rh , and so on). To reduce clutter, assume h = 0. Expanding each price vector, the total change in real income for household h is:

rh =h wi + vi

h( )i

ih + 1 h( )T h p j j

h

j

i = 1, … F; j = 1, …, n (8)

where ih is the contribution of factor i to a household’s total income from factors, and h is the

share of net household income from factor earnings. At constant prices and policies, an increase in the household endowment of factor i raises real income by an amount proportional to the growth of the endowment and its contribution to household income. Holding endowments constant, a trade or trade policy shock alters some element(s) of p, and thus affects the household both directly, and indirectly through general equilibrium changes in w. It may thus raise or lower rh, depending on the magnitudes of the various price changes, the shares of factor in total income, and expenditure shares on goods. Taxes and transfers may also change endogenously due to altered public revenues. 3.3 Poverty changes The real income information can be aggregated over groups of households to construct the proportional change form of a distributionally sensitive poverty measure P (Foster et al. 1984):

P = μh ( , z)rh

z rhh=1

q

rh for h = 1, …, q poor households, (9)

where > 0 is the distributional sensitivity parameter, z is a poverty line, and the weights

μh ( , z) = (z rh ) (z rh ) are -adjusted poverty gaps for household h relative to that for all

poor households (Coxhead and Warr 1995). Substituting for rh from (8), equation (9) provides a prediction of aggregate poverty change due to trade shocks or policy reforms. The subgroup decomposability property of P

means that poverty changes can also be calculated for distinct groups within the poor population.

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These analytical tools support the examination of poverty data during episodes of trade reform. Initial empirical analyses with Vietnamese data indicate the importance of a general equilibrium approach. Minot and Goletti (2000) used subgroup data on rice farming households distinguished by location and income and found differential effects of welfare changes due to rice market liberalization. Litchfield et al. (2003) noted that Vietnam’s trade liberalization was contemporaneous with huge expansion of products intensive in the use of labor and natural resources (coffee, rice, handicrafts, processed foods and light manufactures) and a substantial decline in poverty, which they found econometrically to be most intense among households dependent on farming and unskilled labor incomes. 3.4 Factor markets How price and policy changes affect real income for any given household will depend on its endowments and consumption patterns as shown, but also on just which markets the household is in, since factors and products may be distinguished by quality, distance, and other states of the world, and arbitrage between these may work very imperfectly in a developing country context. Several studies have identified the intersectoral mobility of unskilled labor as a key component of the poverty alleviation effects of Vietnam’s reforms (e.g. Hertel et al. 2003, and for a China study see Zhai et al. 2003), a result that is readily understood in theoretical terms by comparing a short-run Ricardo-Viner specific factors model with the results from a long-run model with all factors mobile. Resource (im)mobility may also have spatial or other dimensions, with migration costs, ethnic or linguistic divisions, or other barriers to economy-wide labor market clearing. As noted above, most current AGE models make quite stark assumptions about the operation of labor markets, and only a few attempt any systematic form of sensitivity analysis with respect to labor market structure. In Vietnam as in many developing countries, household labor allocations are made jointly with other resource use decisions; labor mobility away from agricultural areas, for example is constrained by unwillingness to relinquish control over land, and this limits intersectoral mobility and migration possiblities (Hertel and Zhai 2005). Some groups are denied access to some labor markets for linguistic or cultural reasons. And in Vietnam, a complex and rigid system of residence permits also raises the cost of relocating, in addition to the usual transport and transactions costs (Le 2005).

It reasonable therefore to hypothesize (i) that full labor market integration is impeded by these institutional and policy factors, and (ii) that these impediments affect the distribution of gains and losses from global market shocks and domestic policy reforms. If these hypotheses are supported in empirical work, then it will be necessary to incorporate explicit impediments to intersectoral mobility and migration in the model. It is to be expected that different specifications of labor markets will also lead to different outcomes in terms of the demand for natural resources, poverty changes, and aggregate welfare. 3.5 Spatial resource use decisions The model in Coxhead and Jayasuriya (2005) provides a starting point for the incorporation of environmental phenomena. It captures the desired structural and policy characteristics of a small, open developing economy in stylized form, and separates agriculture into two regions, upland and lowland, each with specific economic and environmental characteristics. Land is specific to regions; in Asia, “lowland” refers to fertile river deltas, which have highly developed infrastructure and produce rice almost as a sole crop. “Upland” refers to sloping and often

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mountainous land, relatively remote, with poor soils and infrastructure and less reliable yields due to dependence on rainfall, typically used to grow a mix of staple foods and plantation crops. While land is specific, however, capital and labor display higher degrees of interregional and intersectoral mobility. To the upland-lowland model we add an aquaculture sector based on coastal lagoons and estuaries and structured as for upland agriculture; in particular, we hypothesize (iii) that that legal limitations on expansion of the total aquaculture area through conversion of other coastal resources do not constrain decisions (Barbier and Cox 2005). Failure to reject this hypothesis will imply another alteration in model structure.

Assume, for this exposition, that aggregate agricultural (or aquacultural) output in each region is produced using region-specific land and labor, and that the urban/industrial region produces a range of goods using capital and labor. Using Kr to denote region-specific capital (in agriculture, land; in aquaculture, impoundments), and assuming that at the upland and aquacultural margins, Kr is produced and maintained using labor according to Kr = Lr/ r, where

r > 0 is the unit labor requirement, we may define maximum revenue functions for each sector or region:

Urban/Industrial (S): S(LS, K, pS) (10)

Lowland/Delta (Q): Q(LQ, KQ, pQ) (11)

Aquaculture (F): F(LF– FKF, KF, pF) (12)

Upland (R): R(LR – RKR, KR, pR), (13)

where pr is the relevant output price vector in each region. Total income in the economy is thus given by the sum S + Q + F + R. Assume that labor is freely mobile among regions and is fixed in total quantity:

L = LS + LQ + LF + LR. (14) This framework is suited to a wide range of analyses of changes associated with globalization. These may be direct, since for tradables a change in producer price stems from changes in global prices and trade policies as shown in section 3.1. They may also be indirect: for example, an increase in investment in labor-intensive manufacturing, or a rise in the relative price of that sector’s output, raises labor’s marginal productivity and causes migration into the sector, both from other manufacturing sectors and from agriculture. In the lowland agricultural region, land area is fixed in the short-medium run, and the ability to release labor is limited by rice production technology. In upland (coastal) regions, by contrast, total land (fishery) area is elastic due to open access, so a change in labor costs can induce a much larger area response. This stylization fits very closely with the realities of tropical Asia. In Thailand, for example, a boom in labor-intensive manufacturing between 1988 and 1997 induced almost 20% of the farm labor force to transfer to industrial jobs and brought agricultural expansion at the land frontier to an abrupt halt (Coxhead and Jiraporn 1999). In the Philippines, rising labor costs due to expansion in labor-intensive exportables sectors have been shown to contribute both to reduced upland land area and also to land use substitutions from labor-intensive seasonal crops toward land-intensive perennials such as orchards and agroforestry (Coxhead and Demeke 2004). From this point, stylized stories of resource depletion and degradation are easy to develop. On-site, land use choices driven by product and factor prices determine the allocation of land or water resources across activities that are more or less environmentally damaging. In

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upland and coastal regions, higher output prices and/or lower labor costs encourage both land area expansion and intensification (that is, higher-frequency cultivation of existing area, for example through a switch from perennial to annual crops, or open-capture fisheries to fish farming). The former implies deforestation (including mangrove forest loss in the coastal area), with associated environmental costs, and the latter, in the absence of offsetting technological or management changes, implies more rapid degradation of existing resources.

In addition, off-site effects may occur when upstream land use decisions result in deposition of eroded soil and agricultural chemicals into streams and rivers. Downstream, these alter the productivity of land or aquaculture resources in ways that Coxhead and Jayasuriya (2003) show are analogous to factor-specific technological regress, that is, they reduce the effective (quality-adjusted) endowment of the resource. In coastal fisheries, for example, water turbidity and chemical pollution caused by agricultural runoff reduces the productivity of the existing resource, and rents fall accordingly; whether labor productivity also changes depends on its capacity to migrate to other regions or sectors. If we index upland by r=3, lowland by r=2, and coastal areas by r=1, then changes in effective resource stocks in downstream sectors due to emissions upstream are measured by

%Kr= Kr D j

j>r

for regions j, r (15)

where Dk is a damage function, determined by total land area and the uses of land by crop, in each region upstream from r.

In general equilibrium, changes in the effective quantities and returns to natural resources then alter household incomes, changing both w and v (equation (8)), and as a result, subgroup measures of poverty are also altered (equation (9)). In sum, optimal private responses to market signals have direct environmental effects under open access; expanded and more intensified use of upland and aquaculture area raises household incomes in the expanding regions, but may also reduce incomes and raise poverty elsewhere if unaccounted externalities reduce productivity downstream. This highly stylized sketch has direct relevance in Vietnam, where in recent years a boom in upland farm area and production—notably, the coffee export boom of the 1990s—has been associated with rapid loss of watershed function, including rapid rises in erosion-related water pollution and increased risk of serious flooding in lowland and coastal regions. The numbers of people involved are not small: for example, Asia’s largest lagoon, on Vietnam’s central coast, is home to more than half a million people whose livelihoods are gained mainly from fisheries. It is fed by several rivers of 100km or less in length, which drain directly from mountain areas that are undergoing massive conversion of forest land to agriculture, both perennial (e.g. coffee) and annual (e.g. maize and vegetables). Of course, dynamics are important to the environmental processes just described. Dynamic optimization models allowing for on-site degradation and investments in resource quality (Clarke 1992; LaFrance 1992) are feasible in partial equilibrium, but are much more difficult to implement in a general equilibrium framework. The model just described provides a vehicle for steady-state comparative statics. Not all information on dynamics is lost by such an approach, however. The solutions to exogenous policy or market shocks will yield, among other things, predictions of changes in rents earned by specific factors such as land and aquaculture area. These predictions convey information about incentives to further deplete the resource base or to invest in maintaining its future productivity, and can be used in the design of compensatory policies.

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3.6 Other amendments to the standard model Lack of space prohibits a full exposition of other amendments that are clearly desirable in an unconstrained world. For convenience, we have here posited only one intersectorally mobile factor and have ignored intermediate goods. In a fully specified model, intermediates play an important role, and there is scope for more mobile factors—some mobile only within regions, others across regions. Finally, it is also important to model public sector finances. The Vietnamese economy is typical in being characterized by many varieties of taxes and transfers,–for example, trade policies, anti-poverty programs, and some environmental taxes. It is important to ensure a realistic representation of the government budget and policy instruments.

4. Empirical strategy

Ideally, research on globalization, poverty and environment in Vietnam should proceed by construction of a regionally differentiated AGE data base and model, estimation of key parameters and testing of hypotheses about the operation of markets known to be important to general equilibrium outcomes, validation of the model performance through historical validation exercises, and to applications to the study of global market shocks and domestic policy reforms. With the existing data and modeling resources it is possible to construct an extended RH model, with households (and their behavior as consumers and producers) differentiated by regions, endowments, and initial wealth and poverty. This approach would integrated methods and data from three existing areas of research on Vietnamese economic development, and also add one new source. Data and analysis from the third VLSS round (2002) can be used to obtain information on household welfare, poverty and distribution; these data can be disaggregated by region as defined earlier, as well as by labor type and other characteristics as described below. Two strands of current AGE work, namely studies of tax and trade policy and economic welfare, and studies of environment and natural resource use and policy, can be integrated. Baseline data from the 2000 Social Accounting Matrix (SAM), can be decomposed to generate specific regional sub-economies. In addition, it is feasible to add new parameter sets based on micro studies of important phenomena such as agricultural land and aquaculture area responses and the economic behavior of specific groups of households by region. These micro studies are ongoing in related research (for details, see www.aae.wisc.edu/gpe-vn). 4.1 Description of the model The basic model structure is that of a standard Walrasian AGE model as sketched above. On production, assume each sector to produce one good except in the agricultural regions, where joint production is possible using a common land resource (Warr and Coxhead 1993). Firms combine intermediates and primary factors to produce output. Each intermediate is a composite of imported and domestically produced goods, with an Armington aggregation function. Composite labor inputs are created by aggregating over labor of different skill types and (subject to data) other relevant characteristics. A composite primary factor input is then created through CES aggregation, and combined (again using CES) with intermediates.

Final demand comes from households, government, investment, inventories and trade. Household demand parameters can be estimated from VLSS data as noted above. Each distinct household group will generate demands for goods from domestic and imported sources (aggregated by the Armington assumption) subject to a household budget constraint. Subject to data, it may be feasible to estimate a demand form such as Stone-Geary to account for non-linear expenditure patterns in which subsistence requirements are satisfied prior to discretionary

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spending on other types of goods. Government and investment will be linked to macroeconomic variables.

In trade, we assume Vietnam to be a small country in export markets, with prices exogenous. Imports, however, are differentiated, allowing for two-way trade and interior solutions to consumers’ choices between domestic and imported goods.

Household incomes come from factor returns, taxes and transfers as shown in equation (7). The model excludes endogenous changes in savings; households are assumed to dedicate all of a given change in disposable income to changes in consumption. However, incomes may change due to endogenous changes in factor assets as the result of resource depletion or the effects of externalities. Hence there is an element of automatic or involuntary saving (or dissaving) by households that control natural resources.

On public finance, the model will replicate the current Vietnamese fiscal system (see Chan et al 1999), which includes taxes on corporate profits, labor incomes, sales (consumption), trade, and other indirect measures. Government expenditures will include those devoted to anti-poverty and environmental programs; the former are well established and can be identified by location, but most of the latter are still the subjects of policy discussion.

Equilibrium in the model is characterized by market clearing with endogenous prices for factors and goods, endogenous trade quantities for tradables, zero profits in production, and binding household budget constraints. The public sector deficit and current account deficit will be either endogenous or exogenous depending on whether we adopt a long-run or short-run closure, with taxes, government expenditures, and other macroeconomic variables also capable of being switched between exogenous and endogenous to satisfy the closure rule.

The poverty calculations in section 3.3 above can be computed for groups in the population from information contained in the rest of the model. Subject to data, we posit a feedback from poverty to resource allocation decisions, consistent with observed behavior of poor rural households (Shively 2001).

Similarly, estimates of resource depletion rates, environmental damages and shadow values associated with these will be derived as ‘satellite’ accounts, except insofar as external and on-site damages reduce effective factor endowments (see Bandara and Coxhead 1999). A model of this type can be solved in linearized “Johansen” form, using the Gempack software suite (Harrison and Pearson, 1996). While single-step solutions to Johansen models are subject to linearization errors, this software suite allows for the use of multiple-step algorithms to minimize such errors. 4.2 Data Data requirements consist of a social accounting matrix (SAM) and a set of technological and behavioral parameters governing the responsiveness of the economy to exogenous changes.

Social accounting matrix The most recent SAM available from the Vietnamese Government Statistical Office (GSO) is for year 2000 and includes up to 112 sectors, 8 labor types by skill, gender and location, and 16 household types by gender, location, sector (farm/non-farm) and labor market participation. The goal of spatial differentiation of production and factor markets requires a decomposition of parts of the SAM, which will be carried out using provincial land use and related data from the GSO. These data will be used to construct weights with which to allocate production and input use in some sectors across ecological zones—in our case, uplands, lowlands, coastal areas and urban areas. This type of spatial decomposition has already been undertaken, albeit for different regional definitions, in previous GSO work.

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Extending the SAM to include environmental data is a more complex task. Some environmental and natural resource phenomena are measured as flows, others as stocks; some can be measured in monetary terms (for example, abatement measures or specific productivity losses) while values for others—particularly stocks, but also any phenomena for which markets do not exist or do not function well—can only be ascertained through valuation methods, a controversial area. The default solution is to reserve all environmental calculations to a set of “satellite accounts”, separate from the SAM. Flow data, however, can be incorporated in an extended SAM in physical (rather than monetary) terms, both for assets such as forests and minerals, and for pollutants such as industrial emissions and soil deposition in rivers, if suitable data can be found (Alarcon et al. 2000). These accounts help quantify the resource or environmental “intensity” of production and consumption activities and thus aid in assessments of the environmental implications of changes such as trade liberalization. The intersection of environmental rows and columns with those for production and consumption can be used to approximate environmental feedbacks.

Elasticity data The complete elasticity data set includes several sets of elasticities of substitution in production, consumption and trade; elasticities of transformation in multiproduct industries; expenditure elasticities of demand; and elasticities of product and factor supply with respect to price. Estimates of the complete parameter set do not exist for any country, let alone for Vietnam. The standard approach in AGE modeling has been to assume values where estimates are unavailable, or in some cases to “borrow” them from estimates obtained in arguably similar economies.

For many components of this data set, data constraints require a similar strategy. In two critical areas, however, it is possible to obtain original econometric estimates. There is an entirely new data set containing a panel of data on land use, aquaculture area, and relevant product prices at commune level. These data will be used to estimate the responsiveness of agricultural land area and allocation to crops, and that of aquaculture area and allocation by species, to product prices. These estimates will supply parameter values for an important part of the environmental model, the responsiveness of resource users to economic signals derived from trade or trade policy. Additional environmental data are beginning to be compiled in the newly-formed Ministry of Environment and Natural Resources.

It will also be possible to obtain estimates of the responsiveness of households to product and factor market shocks from the VLSS data set. This is an essential step in moving beyond the RH model. Information on household behavior from the current VLSS can be derived only from cross-sectional estimates, as the most recently released (2002) survey round does not build on the households sampled in earlier rounds (1993, 1998). However, subsequent VLSS round (2004) re-surveyed some households from the 2002 round, so it is feasible to use panel data estimators to build in more detailed econometric information on household behavior with respect to product markets, factor (especially labor) markets, and allocation of fixed resources such as land. 4.3 Hypothesis testing The discussion in section 3 motivated several hypotheses, tests of will contribute to a better-specified AGE model. These were (i) that there are impediments to intersectoral and interregional labor mobility that are associated with household and institutional characteristics and other economic variables; (ii) that these impediments affect the distribution of gains and losses from trade and policy reform; and (iii) that legal constraints on land and fishery area expansion do not inhibit decisions by producers subject to changes in market incentives (it is

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likely that other hypotheses will present themselves in the course of our investigation of the data). These hypotheses can be tested using the data described in section 4.2. Failure to reject them will provide important clues as to the links between globalization, poverty and the environment in Vietnam and will generate analogous research agendas for other similar developing countries. The results of these hypothesis tests should also provide guidance for innovations in AGE modeling that depart from the standard assumptions on model structure. 4.3 Model validation For the AGE purposes, it is important to test key hypotheses underpinning functioning of factor markets in the model, and also to estimate key elasticities imbedded in the model structure. However, taking these steps still does not ensure that the model as a whole will be valid, i.e. that it will provide useful predictions for the entire economy. To validate the model requires some kind of historical experiment against which we can measure its performance. Kehoe et al. (1995) validate their model of the Spanish economy by comparing predicted with actual changes in the composition of the economy in the wake of tax reform. Liu et al. (2004) validate a global model of international trade by projecting it backwards in time and asking how well it predicts observed changes in trade shares. Valenzuela et al. (2005) compare the responsiveness of predicted historical commodity prices in response to known supply shocks.

It is feasible to validate a model of the type described above by means of “backcasting”. The specific focus of this exercise is motivated by the observation that Vietnam has experienced strong growth of primary production and exports over the past decade. As noted, existing AGE models underpredict this sectoral response to policy reform shocks. This discrepancy could be due to misspecification of behavior or policies, or to external developments not considered in previous studies. Given the importance of agricultural responses for trends in both poverty and environmental quality, validation of model predictive power is particularly important. The purpose of the validation exercise is to see whether the model can accurately capture the resource boom experienced by Vietnam over the decade to 2002. This can be done by collecting data on changes in policies, external trade and world prices, and estimating changes in unobservable total factor productivity growth over the period. By applying these historical changes to the model as exogenous shocks, it is possible to evaluate how well it predicts historical changes in patterns of production, consumption and trade. The combination of data-based econometric estimation and use of derived elasticities to validate and improve model specification is not new as a general technique, but the model described above will be the first to use this method to specifically obtain a better understanding of links between trade, poverty and environment. This research should produce methodological innovations with applicability to many countries in the developing world, where globalization is rapid and threats to natural resources are pervasive. 4.4 Policy experiments In light of the importance of external shocks to the evolution of poverty and environmental quality in open developing economies, it is important to conduct a systematic exploration of their effects using a carefully structured set of experiments. Here, the approach is somewhat different from the historical analysis discussed above. Retrospective experiments simply take observed data on export and import volumes and prices (regardless of source or destination) and shock the model with the relevant changes over a historical period. Of course the historical growth in trade is driven by a host of developments in the global economy, including economic growth as well

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as policy reform. So, while these retrospective experiments are important for decomposing the impact of external developments and internal reforms on poverty and the environment in a country like Vietnam, they are of limited value in understanding the sources of the external changes.

To explore this, two linked sets of experiments can be undertaken. The first is a set of prospective experiments aimed at isolating the differential effects that economic growth in different countries has on poverty and environmental degradation in Vietnam. We hypothesize that continued rapid growth in China will limit Vietnamese exports of labor-intensive manufactures, favoring instead the raw materials sectors, including agriculture and resource extraction, while simultaneously encouraging additional importation of manufactured goods from China ( Coxhead 2007). This is likely to be beneficial for rural poverty, but, in the absence of well-defined property rights, adverse for environmental quality. On the other hand, growth in the OECD economies is likely to favor Vietnamese exports of labor-intensive manufactures, thereby boosting wages and drawing resources out of NR sectors. Of course reality is likely to be much more complex, varying by partner country and Vietnam’s pattern of bilateral trade. Research of the type described in this section should help us to better understand these economic forces and their implications for Vietnam and other developing countries. To conduct the prospective experiments, it may be possible to use a variant of the global GTAP model (Hertel, 1997). The methodology for linking this global model to more detailed national models in order to elicit the national impacts of global policy changes is now fairly standard. Horridge and Zhai (2006) show how the impacts of WTO reforms in the rest of the world can be transmitted to national models by computing commodity-specific export demand shifts and import price changes implied by the global model. These are then implemented as exogenous shocks to the national model, along with national commitments under the WTO scenario. A similar approach can be taken here, only now the shocks will be endowment and productivity growth in Vietnam’s trading partners. The magnitude of these shocks can be based on annual average projected growth rates of these partner economies over the next ten years. These forecasts can in turn be obtained from World Bank forecasts, as reflected in the GTAP baseline. The second set of experiments should address the reform (or expected reform) of policies that limit the openness of the Vietnamese economy to trade. The package of domestic policy reforms required or anticipated to prepare Vietnam for WTO accession is a prime subject for research. If we are concerned about poverty and environmental outcomes, then research should also address specific policies in these areas; however, the main focus should probably remain on the direct and indirect consequences of trade liberalization and other reform measures. Vietnam’s National Assembly (NA), continues to debate specific legislative measures related to trade and WTO accession, poverty alleviation, and environmental protection. Measures adopted by the NA can provide input to policy experiments. Such an approach will have the added advantage of ensuring that policy experiments are relevant to contemporary Vietnamese development debates. This relevance is central to the value of any model for economic and environmental policy analysis.

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