Impact of trade liberalization policies in rural Vietnam
This analysis shows that trade liberalization policies lead to significant nonfarm-farm and urban-rural labor migration in Vietnam. As Vietnam enters the Trans-Pacific Partnership (TPP) free trade agreement, the country's rural population is likely to feel the effects of trade liberalization the most keenly.
Context, issues and objectives
The Vietnamese agricultural sector is braced for change as the country enters into the Trans-Pacific Partnership (TPP) free trade agreement. With more than 70% of the population living in rural areas and depending on agriculture for their livelihoods, the impact of a free trade agreement will certainly be felt across country.
The TPP is the next step in Vietnam’s economic reforms, which began with the Doi Moi in the late 1980s, and moved the country from a planned economy to a “socialist-oriented market economy”.
Trade liberalization policies, particularly those that reduce tariff and non-tariff barriers, produce a significant increase in the trade of intermediate goods. This is especially true for developing countries that depend on foreign technology to be able to expand production and reduce costs.
Studies show that importing intermediate goods, such as agricultural fertilizer, is beneficial to a country’s economy. In the case of Vietnam, the 23% drop in fertilizer prices and the 27% increase in the volume of chemical fertilizer imported to Vietnam between 1993 and 1998 are attributed to the trade liberalization policies in place during this period.
However, little is known about what impact trade liberalization policies have on rural households in terms of employment and productivity. A team of local PEP researchers therefore chose to examine the transformations in the agricultural sector to assess whether these changes help or hinder development in both the agricultural and nonfarm sectors of rural Vietnam, as well as how labor is divided between the two sectors.
Research questions, method, and key findings
As fertilizer represents the largest component of farm input expenses, affecting both agricultural production and household welfare, the research team chose this variable to study the effect of imported intermediate goods on the agricultural sector in rural Vietnam. The team analyzed panel data from the 1993 and 1998 Vietnam Living Standards Surveys for 3,258 rural households looking particularly at the price of chemical fertilizer and the land allocation to individual households. The researchers used a regressional model to estimate the impact of the trade liberalization of chemical fertilizers on nonfarm and farm participation, the relationship between the volume of chemical fertilizer and other agricultural performances, and the effect of the volume of chemical fertilizers by initial (1993) status and land size.
The team’s findings indicate that trade liberalization policies have significant labor reallocation effects in rural Vietnam:
- An increase in the volume of chemical fertilizers leads to increased involvement of rural households in agriculture while nonfarm participation significantly decreases.
- This is attributed to the increased demand for chemical fertilizers (due to the drop in price) creating new incentives for rural households to move into the agricultural sector, to stay in the sector, or to increase their engagement.
- The liberalization of chemical fertilizers also provides more on-farm labor opportunities for smallholders than it does for owners of larger farms,
- Smallholders tend to have a surplus of on-farm family labor, as such, the increased volume of chemical fertilizers has a greater impact on farm participation for households with small landholdings than it does for those with large landholdings.
Joining the Trans-Pacific Strategic Economic Partnership Agreement (TPP) means that Vietnam will have to reduce tariffs on imports with some of these changes expected to significantly affect the rural sector. The team’s analysis, focusing on a specific “price policy” option (i.e. trade liberalization of chemical fertilizers between 1993 and 1998), can therefore provide useful evidence to inform and assist in current trade policy decisions.
Find out more about the research methods and findings, as well as subsequent policy implications, through the PEP publications posted below - in particular, the Working Paper 2016-11 and Policy Brief 133.
Project links and documents
|Find out more about this project - its analytical approach and outcomes - through the following links/documents:|
|PEP Project PMMA-12673||Working paper 2016-11 (PDF)|
|Project proposal (PDF)||Policy brief 133 (PDF)|
|Final report (PDF)||Impact brief (PDF)|
Policy engagement, consultation, and dissemination
From the outset, and before the project was selected for PAGE funding, the research team recognized the importance of engaging with stakeholders and policy actors, in particular representatives of political offices and government ministries and institutions, in order to ensure the relevance of and interest in their research.
The team consulted with representatives of the Central Economic Committee and the Ministry of Agricultural and Rural Development who expressed their interest in policy analysis relating to rural-urban migration and rural living standards respectively. The comments received during the planning stages of the study allowed the team to improve their proposal by including further analysis on the relationship between farm and nonfarm labor in rural areas and thus better addressing the knowledge gaps perceived by the policy actors and research users.
Once preliminary findings had been established, the team presented their analysis to various stakeholders including the Vietnam Institute of Economics, the Centre for Analysis and Forecasting, the Ministry of Labor, War Invalids and Social Affairs, and the Institute of Regional Sustainable Development. The team also presented their preliminary findings at several events including a policy advisory seminar organized by the Vietnam Centre of Economic and Policy Research. During this stage, the representative for the Ministry of Agricultural and Rural Development, Ms. Le Thi Thu Trang, said: "the team’s findings linking the farm and nonfarm sectors are particularly relevant and will allow me to present strong empirical evidence during policy development". Similarly, Ms. Le Thi Huong of the Central Economic Committee stated that the team’s findings would contribute towards a policy draft to be submitted to the government. A few months later, the Government issued the Circular 81/2016/TT-BTC, supporting farmers in development of agricultural production in Vietnam.
The research team has presented their findings at a number of conferences, both in Vietnam and abroad, notably the Eighth Vietnam Economists Annual Meeting (2015) in Thai Nguyen, Vietnam, and the Third China Meeting of the Econometric Society (2016) in Chengdu, China. These conferences provided the opportunity for the team to discuss their findings with academics and policymakers as well as to be featured in media reports.
Finally, in June 2016, the research team organized a PEP-funded policy conference in Hanoi, Vietnam, in collaboration with the Vietnam Institute for European Studies, specifically to share and discuss their findings with both the stakeholders and policy actors who had previously consulted on the project as well as those who had not, such as the representative for the Vietnam Chamber of Commerce and Industry. The policy conference also benefitted from substantial media coverage from two television channels and three national newspapers. Find out more in the PEP impact brief.
Soon after, the Government issued the
The project described above is one of the several projects selected for support under the PEP research and capacity building initiative for Policy Analysis on Growth and Employment (PAGE) in developing countries. The PAGE program is co-funded by UK's Department for International Development (DFID) and Canada's International Development Research Center (IDRC).
This particular project was selected in May 2014, following the first of three competitive calls for proposals of the PAGE initiative. A total of 65 projects have been selected for support under the three PAGE funding rounds. Find out more