Globalization in Vietnam

7/29/2019 Globalization in Vietnam

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

Ian Coxhead1

University of Wisconsin-MadisonThis version: July 2007

1. Motivation

A growing body of research considers the implications of globalization, or the process ofintegration 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 toopen-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 notyet 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 undergonesignificant 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 overdomestic 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 beencontemporaneous, 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 TomHertel 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 gainsfrom 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 ofexport 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 VietnamsNational Socio-Economic Development Strategy 2001-10

articulates the desired approach to development as promoting rapid and sustainabledevelopment by ensuring economic growth, accompanied by social equality and progress, and

environmental protection. (CPVN 2002) Recent evidence points to considerableeven

spectacularprogress 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 andenvironmental quality for growth is a significant one. Can growth, poverty alleviation and

environmental protection be simultaneously achieved? What can be learned from Vietnams

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 forsmall 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 economiesthat 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 relativelysimple 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 whichthe effects of a shock are transmittedproduct markets, factor markets, taxes and transfers,remittances, risk and adjustment, and so onso 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). Wherenatural 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) maybe important.

To be adequate, then, a research methodology must be capable of assimilating botheconomic and environmental phenomena, including trade and domestic policies, land and other

resource use decisions at the household or firm level, and environmental consequences of thosedecisions. 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 andincomes, 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 fromspecific data, and validation through tests of its capacity to replicate economic development

experience.

2. Review of literature

Much of the existing research on Vietnams economic development focuses either on theanalysis 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

thesethe so-called macro-micro modeling approach (Hertel and Winters 2006; Bourguignonand 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 subjectof considerable empirical research, especially since the release of the second round (1998) of theVietnam 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 ineconomic 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 ora 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). Theseimpediments 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, withremoter regions and those populated by ethnic minorities showing much slower progress

(Swinkels and Turk 2004). Such regional, ethnic and sectoral discrepancies have been addressedin 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 beenimportant 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 forthe intersectoral effects of policy or market shocks. Moreoverand very surprisinglyno


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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), usingsimulation 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 arepresentative 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 changesin 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, examinethe effects of the US granting MFN status to Vietnam, and of Vietnams 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 andnatural 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 recognizesimpediments 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-intensivemanufactures; 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 presumablyshare 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 andthe 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 atsectoral 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 theGTL 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

liberalizationwhether unilateral or globalincreases 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 laborthe main income source for poor householdsto

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 seriouseffort to capture labor market phenomena. A second puzzle is why trade liberalization does not

induce a greater increase in the output of Vietnams 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 worlds second largest

exporter of both rice and coffeefrom 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 forhouseholds 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 normativeanalysis 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 complicatingfactor 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 formalizationof 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 convertopen-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 resourcedegradation 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 preservationof 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-Taylormodels 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-intensiveagricultural 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 inresource 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 ahighly 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 capitaltype.

In simulations, a business-as-usual scenario determines a reference growth and pollutiontrajectory 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 reformthat is, the shift inthe 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 bothto 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-basedair 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 effectivemonitoring 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 betweenglobalization 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 tradetaxes 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) and

g(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= g

pi(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), andzi = 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 changerelative 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 parametersare 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 ofparticular 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 uniqueexpenditure 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. Ingeneral, 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) = pi

ih

i , where ih 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 reduceclutter, assume h = 0. Expanding each price vector, the total change in real income for

household h is:rh =

hwi + vi

h( )i

ih + 1h( )Th pjjhj

i = 1, F; j = 1, , n (8)

where i

h is the contribution of factor i to a households 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) ofp, and thus affects the household

both directly, and indirectly through general equilibrium changes in w. It may thus raise orlower 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 endogenouslydue to altered public revenues.

3.3 Poverty changesThe 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= h (,z)

rh

z rh

h=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

h(,z) = (z r

h)

(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 ofP 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 generalequilibrium 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 Vietnams trade liberalization was

contemporaneous with huge expansion of products intensive in the use of labor and naturalresources (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 theworld, 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 Vietnams reforms (e.g. Hertelet al.

2003, and for a Chinastudy see Zhai et al. 2003), a result that is readily understood in theoretical terms by comparing ashort-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, householdlabor 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). Somegroups are denied access to some labor markets for linguistic or cultural reasons. And inVietnam, 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 ofgains 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 fornatural 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 ofenvironmental 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 developedinfrastructure 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 throughconversion 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 regionproduces 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(L

S

, K, p

S

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

Aquaculture (F): F(LFFKF, KF, pF) (12)

Upland (R): R(LR RKR, KR, pR), (13)

wherepr 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, anincrease in investment in labor-intensive manufacturing, or a rise in the relative price of that

sectors output, raises labors 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 productiontechnology. 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 andalso 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 allocationof 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, forexample 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 theeffective (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

%K

r

= Kr

Dj

j>r for regionsj, r (15)whereDk is a damage function, determined by total land area and the uses of land by crop, ineach 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 marketsignals 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 productionnotably, the coffee export boom of the 1990shasbeen 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, Asias largest lagoon, on Vietnamscentral 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, bothperennial (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 avehicle 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 aquaculturearea. 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 factorssome mobile only within regions,

others across regions. Finally, it is also important to model public sector finances. TheVietnamese 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 st rategy

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 theeconomic 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 throughCES 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 (ordissaving) 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 forfactors and goods, endogenous trade quantities for tradables, zero profits in production, andbinding 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 ofpoor 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 andon-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 labortypes 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 productionand 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 zonesin our

case, uplands, lowlands, coastal areas and urban areas. This type of spatial decomposition hasalready 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 othersparticularly stocks, but also any phenomena for which markets

do not exist or do not function wellcan only be ascertained through valuation methods, a

controversial area. The default solution is to reserve all environmental calculations to a set ofsatellite 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 withrespect 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 fromtrade 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 rejectthem 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 thecomposition 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. Valenzuelaet al

. (2005) compare the responsiveness of predictedhistorical 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 bedue 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. Thepurpose 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 totalfactor productivity growth over the period. By applying these historical changes to the model asexogenous 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 modeldescribed 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 experimentsIn 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 theireffects 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 tradeis 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 indifferent 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 Vietnams 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 Vietnams 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 GTAPbaseline.

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.

Vietnams 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 Vietnamesedevelopment debates. This relevance is central to the value of any model for economic and

environmental policy analysis.


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Globalization in Vietnam

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