Tag: Economics
How a Spike in Trade with the PRC Has Reduced Income Inequality in Viet Nam
Viet Nam is a particularly good case to measure the impact on income inequality of rising trade with the People’s Republic of China.
The sudden rise in trade between the People’s Republic of China (PRC) and the US following the PRC’s 2001 admission to the World Trade Organization and its impact on the US labor market over the next decade has been the subject of numerous empirical studies. Although it has more recently been reversed by the ongoing PRC-US trade tensions, many economies in developing Asia have experienced dramatic upswings in trading volumes from the PRC.
The impact of this on labor markets and other socio-economic outcomes is still largely unknown. We contribute to filling this knowledge gap by studying the case of income inequality in Viet Nam.
We study the impact of higher trade volumes from the PRC on income inequality between 2002 and 2014 using household level data. Applying a quantile regression approach, we uncover that increased trade with the PRC resulted typically in income growth of the lowest income quantiles, whereas the higher income groups saw theirs decline.
Increased trade with the PRC thus led to an alleviation of income inequality in Viet Nam.
Trade opening helps foster economic growth and promote development. International competition leads to an adjustment of factor markets as well as prices, and this affects producers and consumers. But while some groups enjoy net benefits from open trade, others might lose.
Overall, the gains from trade should be sufficient to improve welfare, and thus offer the possibility to compensate those suffering adverse effects. However, the redistribution of benefits might not always happen.
PRC and Viet Nam have become inseparable trade partners
The empirical trade literature shows that trade opening can, therefore, be pro-poor or pro-rich. Similarly, the impact on income inequality can go both ways. In a recent paper, Pinelopi Koujianou Goldberg (the World Bank’s Chief Economist) and Nina Pavcnik argue that in developing countries the shift in demand for skilled workers would lead to a widening wage gap.
In a new ADB Institute working paper, we test how the intensifying trade relations between Viet Nam and the PRC have affected income inequality in Viet Nam. Viet Nam and PRC share a 1,281-kilometer border, and trade relations have been marked by a continuous and rapid growth.
For Viet Nam, the PRC has become by far the largest trading partner in terms of imports. Viet Nam sourced around 13% of its total imports from the PRC in 2000, and the percentage increased to 40% in 2014 (see Figure 1). The dominance is particularly strong for final goods of which over 50% were sourced in the PRC in 2014.
From the perspective of the PRC, Viet Nam has become its biggest trading partner among ASEAN countries. It has been widely argued that the PRC and Viet Nam have become inseparable trade partners.
Our latest research examines the impact of increased imports from the PRC on income inequality in Viet Nam at the provincial level from 2002 to 2014. Import competition from the PRC had the potential to affect the economy of Viet Nam mainly through two channels:
- Product markets. Increased imports from the PRC affected households by offering additional varieties at often lower prices.
- Factors markets. Increased trade with the PRC had an impact on wages and job opportunities. Depending on the sector, the increased imports from the PRC could have created or reduced employment opportunities. Furthermore, it could have resulted in an increase or fall in wages of unskilled or of skilled labor.
In Viet Nam, lower income groups gained most from more PRC trade
Our estimation results show that import competition from the PRC has helped reduce income inequality in Viet Nam. When looking separately at imports of intermediate goods and final goods, we find that both had a positive effect on income inequality.
As an additional step, we apply a quantile regression approach to have a fuller picture on the effects of import competition from the PRC on different household income groups. The results show that at the beginning of our time period, all income quantiles seemed to have suffered from increased imports from the PRC. The negative effect increased with income, suggesting a degressive income effect.
However, during 2006 and 2010 no income group suffered a significant effect, except the highest income groups. The income effect completely changed in the two last periods (2012 and 2014). The two lowest income quantiles enjoyed a positive effect on their income, with the poorest group benefiting the most.
Overall, the results indicate that income inequality decreased in Viet Nam because the lower income groups experienced a relatively lower decline of income at the beginning of our time period and an increase in income at the end. At the same time, trade exposure to the PRC led to a decline or stagnation of income for the two highest income quintiles.
Our latest research thus sheds new light on the question on how increased trade with the PRC has affected household income and inequality in a developing country. The case of Viet Nam provides a particularly good case to measure the impact of rising trade with the PRC. The effect was degressive, with lower income groups benefiting more than higher income groups.
More research is needed to test whether this result also holds in other developing countries. We also need to better understand what drives income inequality in these countries beyond trade. Our study nicely illustrates that in the case of Viet Nam increased trade has not only delivered in terms of stimulating growth, but also in lowering income inequality.
Author
Matthias Helble
Economist, Economic Research and Regional Cooperation Department, ADB
Trang Thu Le
Research Associate, ADB Institute
Trinh Q. Long
Project Consultant, ADB Institute
This blog is reproduced from Asian Development Blog.
Assisting Mongolia on Its Path to Economic Recovery
Watch an interview with Yolanda Fernandez Lommen, Country Director of the ADB Mongolia Resident Mission, talking about the partnership between ADB and Mongolia.
ADB is Mongolia’s largest development partner.
ADB has more than $1.2 billion in new operations in Mongolia, while the ongoing portfolio is $1.3 billion.
ADB’s assistance program to Mongolia is focusing on providing support for economic and social stability, connectivity and economic diversification, and tackling climate change, says Yolanda Fernandez Lommen, Country Director of the ADB Mongolia Resident Mission.
Ulaanbaatar, Mongolia – Following a slump in the price of minerals in the mid-2000s, Mongolia is now recovering from economic stagnation thanks to increasing commodity prices and higher foreign direct investment in mining.
Strengthening social protection and diversifying the economy are key to ensure sustainable and inclusive economic growth.
ADB’s assistance program to Mongolia is focusing on providing support for economic and social stability, connectivity and economic diversification, and tackling climate change, says Yolanda Fernandez Lommen, Country Director of the ADB Mongolia Resident Mission.
What is Mongolia’s current economic outlook?
Mongolia’s economic outlook looks very promising. ADB is forecasting growth of about 6 per cent for next year and this year as well. This is remarkable because Mongolia was a in a deep economic crisis just a couple of years ago.
Thanks to very good macroeconomic policies implemented by the government and supported by the IMF-led program Mongolia has performed a spectacular recovery and the economy is doing very well.
Prospects are very good relying on peak mining developments. Mongolia has fantastic mines that are a source of growth in this country.
How is ADB assisting Mongolia’s development? What are the guiding principles of ADB’s involvement with the country?
ADB a has a very long and standing relationship with the government of Mongolia, as we have been working together for more than 28 years. At present, ADB is the largest development partner of Mongolia.
We have increased our pipeline remarkably in the last 2-3 years. For instance, our current country partnership strategy envisages more than 1.2 billion in new operations, while the ongoing portfolio is 1.3 billion. We are very active: we have many resources and that allows us to be present in almost every sector in the country.
We align our support through three main pillars: the first one is to support economic and social stability in the country; the second one is connectivity and economic diversification; and the third one looks into climate change, which is new area where we are becoming now very active.
Are there cross-cutting themes in ADB’s assistance?
We have two cross-cutting themes that go across the three pillars I just described.
One is gender parity, which has become very prominent now in our country partnership strategy. And the second is public finance reform.
Is ADB supporting Mongolia’s private sector development?
We have also been interacting through the private sector arm. However, compared to sovereign lending, our activity in this area is much smaller. This is a challenge, as this is an area that we want to develop.
Traditionally, we have been active in trade facilitation and some lending to commercial banks to facilitate access to funding for small and medium enterprises.
We are currently looking at identifying new opportunities for ADB to become more present in support of the private sector.
How will ADB assistance to Mongolia evolve in the future?
In general, ADB is very well known for its spectacular client orientation and our work here in Mongolia is no different.
We adjust to the needs of the country. Mongolia is developing very fast, the transformation is quite substantial and so-far we have been flexible and agile adjusting to the new government priorities.
I am happy with some of the new areas that we are exploring now. For instance, gender, climate change impact, and resilience to natural shocks. I feel that, as we continue working together, we will be looking more into these new areas and sectors, and of course innovation is going to be also critical in our future support to the country.
This blog is reproduced from Asian Development Bank.
Sex-Disaggregated Data on Asset Ownership
Sex-disaggregated data highlights the gendered experience of poverty, which is not captured using household-level data. Despite strong evidence linking women’s asset ownership to development goals, sex-disaggregated data—critical for monitoring progress on SDG targets—remains scarce. The Evidence and Data for Gender Equality (EDGE) project is working to address this data gap. ADB supported household surveys measuring assets and entrepreneurship from a gender perspective in Georgia, Mongolia, and the Philippines.
Source: Asian Development Bank.
