Written by Brian McCaig, Dwayne Benjamin and Loren Brandt

Many initially poor countries have grown quickly, frequently accompanied by rising inequality, over the past 30-40 years; China is perhaps the best-known example of rapid growth combined with increased inequality. Countries may often be willing to accept higher inequality in exchange for overall improvements in living standards and reductions in poverty. However, long-term increases in inequality might ultimately erode popular support for further economic reforms and have other adverse consequences. Thus, it is important to understand the key factors that link economic growth and changes in inequality.

Although overall inequality has not increased, ethnic minority households are falling further behind the majority ethnic Kinh households

Vietnam is frequently held up as a notable exception to the general trend in developing countries – that rising inequality is accompanied with rapid economic growth. It is well into its third decade of economic reforms, including significant injections of liberalisation through major policy initiatives (e.g. the new Enterprise Law in 2000, the US-Vietnam Bilateral Trade Agreement in 2001, and accession to the WTO in 2007). These policies, and the associated inflow of foreign direct investment and economic restructuring, have helped contribute to sustained annual growth rates in excess of 5 percent.

From the outset of the reforms, the government of Vietnam monitored the distributional consequences of economic development using biennial household surveys to track changes in poverty and inequality. These data show unambiguous and steep declines in absolute poverty, accompanied by stable and relatively low levels of inequality. Less well understood is how this happened in terms of the various activities households participate in. We explore this question using the household surveys from 2002 through 2014.

Overall inequality was relatively unchanged due to fast income growth throughout the income distribution. Median household income per capita grew at an annualised rate of 7.7%. Incomes for households slightly richer (at the 75^th percentile) grew at 7.4% per year, while incomes for those slightly poorer (at the 25^th percentile) grew at 7.1%. Thus, the middle 50% of households experienced gains of over 7% per year. The richest households (at the 90^th percentile) had slightly slower income growth (6.7%), while those at the bottom of the distribution (the 10^th percentile) saw growth of 5.8%. The rich neither pulled away from the rest of the pack, but nor did the poor fall much further behind. The most commonly used measure of inequality, the Gini coefficient, which typically ranges between 0.30 and 0.55 in developing countries with higher numbers representing greater inequality, declined slightly from 0.375 in 2002 to 0.360 in 2014.

Robust growth in agriculture and increased wage employment helped to keep inequality from increasing. Farm income is disproportionately earned by households in the bottom half of the income distribution and is relatively equally distributed. These households benefited from a strong agricultural sector, including significant increases in perennials and other cash crops. More important has been the role of the labour market and access to non-farm employment. In both urban and rural Vietnam, wage earnings and access to employment opportunities are relatively evenly spread across the income distribution, facilitated by declining differences in educational attainment between groups. Looking forward, a steady increase in an educated labour force will be critical to maintaining economic growth, and avoiding sharp increases in the return to education that often drive higher income inequality.

Although overall inequality has not increased, ethnic minority households are falling further behind the majority ethnic Kinh households. Despite rising incomes for ethnic minority households, average income for ethnic minority households had fallen to only half of the Kinh majority by 2014 from two-thirds in 2002. This problem is growing in economic and political significance as the ethnic minority share of the population is rising. In separate research, we show that addressing this will be difficult, especially given the lower educational attainment of ethnic minorities and the importance of education and human capital to participation in the economy.

Vietnam’s experience has similarities with China’s more open and rapidly growing coastal provinces, especially in the behaviour of rural incomes and the gap in urban-rural incomes. Outside China’s coastal provinces, wage inequality has risen sharply, contributing significantly to overall inequality. This contrasts with the relative equality of labour income in Vietnam, and its equalising role.

The experience of Vietnam shows that the fruits of rapid liberalisation and integration with the global economy can be widely shared, and that growth with equity can be achieved. The research challenge is to go beyond the correlations we identify, and determine which policies or combination of policies can support this going forward, in Vietnam or elsewhere.

Dwayne Benjamin is Professor of Economics at the University of Toronto; Loren Brandt is Professor of Economics and the Noranda Chair in Economics and International Trade at the University of Toronto; and Brian McCaig is Associate Professor of Economics, Wilfrid Laurier University. Image Credit: CC by USAID Biodiversity & Forestry/Flickr