PATTERNS OF HOUSEHOLD CONSUMPTION IN VIETNAM

4.3 Estimation results 39
4.4 Chapter remarks 44
CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 45
5.1 Conclusions 45
5.2 Recommendations 46
5.3 Limitations and suggestion for further studies 47
Bibliography 48
Appendix 51
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LIST OF TABLES
Table 3.1: Household consumption and HH income by quintiles (’000 VND/year) 22
Table 3.2: Household consumption by regions and quintiles (’000 VND/year) 23
Table 3.3: Household consumption by rural/urban and consumption quintiles (’000 VND/year) 24
Table 3.4: Household head’s number of schooling year by consumption quintiles 27
Table 3.5: Age of household head by consumption quintiles 27
Table 3.6: Household consumption by head’s gender and consumption quintiles
(’000 VND/year) 28
Table 3.7: Household consumption by occupation of household head and consumption quintiles (’000
VND/year) 29
Table 4.1: Variables description 38
Table 4.2: Estimation of household consumption in Vietnam in 2002 40
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LIST OF FIGURES
Figure 1.1: Keynes’ consumption function 7
Figure 1.2: The consumer’s budget constraint 10
Figure 1.3: The life-cycle hypothesis of consumption 11
Figure 1.4: The Life-cycle consumption functions 12
Figure 1.5: Household consumption and permanent income 15
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LIST OF APPENDIXES
Appendix 3.1: Household consumption by number of schooling year 51
Appendix 3.2: Household consumption by household size 52
Appendix 3.3: Household consumption by number of children 53
Appendix 4.1: Regions classification in the data set 54
Appendix 4.2: Urban and rural classification 55
Appendix 4.3: Variable definition 56
Appendix 4.4: Estimation of full model 57
Appendix 4.5: Estimation of reduced model 58
Appendix 4.6: Analysis of correlation among variable 59
Appendix 4.7: Test normality of residual 60
Appendix 4.8: Other usual tests 61
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ABBREVIATIONS
ADB Asian Development Bank
APC Average propensity to consume
CPI Consumer Price Index
GDP Gross Domestic Product
GNP Gross National Product
GSO General Statistic Office
LCH Life-cycle hypothesis
MPC Marginal propensity to consume
MSE Residual Mean Square
OLS Ordinary Least Square
PIH Permanent income hypothesis
P-|t| Associated p-value
SOE State-owned enterprise
Std.Dev. Standard Deviation
UNDP United Nations Development Program
VHLSS Vietnam Household Living Standard Survey
VLSS Vietnam Living Standard Survey
VND Vietnamese Dong
WB World Bank
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CHAPTER 1
INTRODUCTION
“Consumption is the sole end and purpose of all production”
- Adam Smith -
1.1 THE RELEVANCE OF THE THESIS
In any society, one of the ultimate objectives of the economic system is to deliver goods and services to
its members. The success of an economy can be measured by its ability to provide for its people, to feed
them, to clothe and shelter them, and to offer them access to good health, to education and to a wide
range of consumer goods (Deaton and Case, 1987). Based on such things, to evaluate the prosperity and
social welfare of an economy, consumption is the most appropriate measurement.
At macro level, consumption, or more precisely aggregate consumption, is a major component of
aggregate demand or so-called gross national product (GNP). It runs about 65 percent of GNP in the
United States (Branson, 1989) and even higher in many developing counties, accounted for about three
fourth of annual GNP (Deaton, 1997). Because of its significance, consumption becomes direct or
indirect target of many economic polices such as demand stimulating policy, other fiscal policies and
national programs.
With respect to consumer behavior at micro level, household consumption is also of interest. Patterns of
consumption within the budget constrain are important in examining the structure of household activity,
while the amounts consumed of various goods, particularly foodstuffs, are usually used in determining
nutritional status, health and life-expectancy, which in turn results in the quality and quantity of human
resource in the economy.
Considered to be one of the most successful economies in transition, Vietnam has experienced high
growth rate of about 8 percent annually (GSO, 1998). Consequently, a large number of poor household
have been escaped from poverty and living standard has much improved. A decade ago, 58 percent of
the population had an expenditure level that was insufficient to support a healthy life but this figure had
fallen to 29 percent by 2002 (Rama, 2004).
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To measure of these changes in Vietnamese living standards, consumption is used extensively and
taken an important component of human welfare. In much of the World Bank’s operational work as
well as in applied research, consumption constructed from survey data have been used to measure
poverty, to analyze changes in living standards over time, and to assess the distributional impacts of
various programs and policies in Vietnam.
Although there were a great number of researches attempting to analyze and evaluate different aspects
of poverty in Vietnam by using VLSS 1992 and VLSS 1998 data sets, less work has been done on
household consumption. Moreover, the limited accuracy of data on consumption from VLSS 1992 and
VLSS 1998 has hindered researchers’ endeavors in studying on household consumption composition, as
well as its determinants.
For those reasons, basing on an accurate data set, VHLSS 2002, to find out determinants of household
consumption is worth of researching. Beyond the analysis of household consumption, a foundation for
proposing policies on consumption stimulation established. It is particularly relevant to developing
countries like Vietnam of which consumption occupies a large share of aggregate demand.
1.2 FOCUS AND SCOPE OF THE THESIS
This thesis focuses on the demand side of the household consumption, of which household expenditure
is an official proxy. Main purpose of this paper is investigating determinants of household consumption.
Other factors in supply side including price, inflation, and supply quantity will be neglected.
The thesis also tries to examine fixed effects of household characteristics on consumption level rather
than random effects. Applied model is an expansion of fundamental macroeconomic consumption
model introduced by Keynes.
Major objective of the thesis is finding out the answer to the central question: “What are determinants
of household consumption in Vietnam?”
Sub questions:
• To what extent and in what dimension does the household characteristics affect to
consumption?
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• Is there any geographic effect on patterns of household consumption?
• What are implications for consumption stimulating and development policy?
1.3 METHODOLOGY
The study is developed in analytical framework from demand side of consumption. This thesis will
firstly review fundamental theoretical issues relating to household consumption. Then, it will
concentrate on descriptive analysis of household consumption relying on data from VHLSS 2002. A
quantitative analysis using linear econometric model will be applied to demonstrate main characteristics
of household affecting to the household consumption level. Finally, it will show key findings and
suggest some policy implications for enhancing household consumption in Vietnam.
1.4 DATA SOURCES
For primary analysis, relying data is Vietnam Household Living Standard Survey (VHLSS) carried out
by the General Statistic Office (GSO) in 2002. The nation-wide household survey was part of the
Living Standards Measurement Study (LSMS) household surveys with technical assistance from the
World Bank. It is cross sectional in design and administered at the individual level with nearly 140,000
observations. However, the number of observation at household level is only nearly 30,000.
The VHLSS 2002 used questionnaires contained 9 sections each of which covered a separate aspect of
household activities. Those are: (i) Household member; (ii) Education; (iii) Employment; (iv) Health;
(v) Income and Source of income; (vi) Expenditure; (vii) Fixed assets and durable things; (viii)
Housing; (iv) Participant in poverty alleviation program. The whole data set is recorded in STATA data
files. Those files include data about household size, age, sex, education, occupation, expenditure,
income, and other household compositions and geographic features that are available for studying.
1.5 STRUCTURE OF THE THESIS
The thesis includes five chapters. After the introduction, chapter 2 provides key concepts, and general
theoretical framework on household consumption. This chapter firstly reviews fundamental
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consumption theories, which show numerous approaches explaining consumption behavior of
household. Then, it goes over key findings of some relevant empirical studies on the aspect.
An overview of household consumption in Vietnam relying on data set VHLSS 2002 is presented in
chapter 3. This chapter points out intuitive patterns of household consumption in Vietnam with
descriptive tendency and expectations before coming to quantitative analysis.
The core part of the thesis is chapter 4, which focus on quantitative analysis of household consumption
including highlighting major features of household consumption, rationing and formulating
econometric model, describing data, presenting and interpreting empirical results.
Based on chapter 3 and chapter 4, Chapter 5 is dedicated to key findings and proposing some policy
implications.
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CHAPTER 2
THEORETICAL FRAMEWORK
This chapter is dedicated to discussing theoretical framework and empirical studies on household
consumption. Some basic concepts and definitions will be presented in the first section of this chapter.
The second section will concentrate on the evolution of theories on consumption. The third section is
devoted to reviewing some outstanding empirical studies on household consumption.
2.1 CONCEPTS AND DEFINITIONS
2.1.1 Household
The concept of household is defined and discussed by economists, feminists, and anthropologists. Chen
and Dunn (1996) defined household as a domestic residential group whose members live together in
intimate contact, rear children, share the proceeds of labor and other resources held in common, and in
general cooperate on a day-to-day basis. However, there is much controversy on the definition.
Generally, economists consider household as an essential unit of analysis and developing theories based
on modeling household behavior. Chayanov model is the earliest one that integrates production and
consumption activities in analyzing the peasant households. By combining utility maximization from
consumption theory with the production from production theory, Chayanov model provides a
foundation for integrated model of household behavior (Nguyen, 2003).
As a conceptual concept, household is reckoned as a portfolio of economic resources, economic
activities, and flows between them (Tran, 2000). Household resources are set of human, physical, and
financial resources available for use by household in a given period. Household activities include
consumption, production and investment activities that household member undertake in a given period.
Household flows are sets of inputs and expenditures coming from household resources to support
household activities.
Besides, there are some definitions relating to the household. First, the household characteristics are
defined as things like household composition or household typical features such as number of adults,
children, occupation, age, and marital status. Second, household endowments are circumscribed as
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