Vietnam’s income distribution

Author: An Hodgson

Date published: 29 Jun 2007

Income inequality is rising in Vietnam as the country transforms into a manufacturing and services based economy. New jobs with its entry into the WTO in early 2007 and increased FDI will raise income levels but high inflation rates will remain a cause of concern.

Issue

Vietnam's GDP per capita has increased at an average annual rate of 5.9% during 2001 and 2006 in real terms. But income inequality remained high as its Gini coefficient rose to 0.432 in 2006 from 0.345 in 1990. As a measure of income inequality, the Gini coefficient takes a value of 0 to 1 with values closer to 1 indicating a higher inequality in the distribution of income. The share of the poorest two deciles to total income has fallen while the share of the richest two deciles has risen. Income deciles divide the total income data into 10 equal subsets each accounting for households with the lowest 10% to the highest 10% of total income. Accession to WTO in 2007 and increasing FDI should create jobs, raise income levels and stimulate consumer spending in Vietnam, although high levels of inflation will remain a concern.

Importance

Income inequality is increasing in Vietnam as it transforms into an industrial economy:

Vietnam's GDP per capita has increased at an average annual rate of 5.9% during 2001 and 2006 in real terms. But its Gini coefficient, which was 0.345 in 1990 had risen to 0.432 in 2006;

The gap in income is widening between the richest and poorest deciles of total income in Vietnam. The poorest two deciles of households accounted for 8.0% of total income in 1990. Their share fell to 5.6% in 2006. The richest two deciles accounted for 42.7% of total income in 1990, the share increasing to 49.3% in 2006;

Income variation is also large across regions. Data from national statistics show that between 1999 and 2004 the average monthly income per capita rose by VND 45,500, the least in the Central Highlands while it rose by VND 305,200, the highest in the South East region;

Income gaps are also widening when Vietnam is transiting from being an agricultural economy to a manufacturing and services based one. The contribution to GDP from the agricultural sector had fallen to 20.3% by 2006, from 25.7% in 1997. The share of manufacturing to GDP meanwhile rose to 20.9% from 16.5% during the same period.

Share in total income of richest and poorest deciles: 1999 – 2010

Source: Euromonitor International from national statistics/UN

Note: Figures for 2007 onwards are projections. Income deciles divide the total income data into 10 equal subsets each accounting for households with the lowest 10% to the highest 10% of total income.

Implications

Income inequality will affect the urban-rural divide and government expenditure in Vietnam:

Rising income gaps will shift Vietnam's population from rural to urban areas as new jobs are created in its cities. The average annual growth rate of the urban population during 1997 and 2006 was 3.4% while it was 0.7% for the rural population;

A shifting population with income inequality will also impact the quality of life between urban and rural areas. For example, in 2004 (latest year available), 92% of Vietnam's urban population in comparison to 50% of its rural population had improved access to sanitation facilities;

Widening income gaps will also necessitate the Vietnamese government to spend more on health, education or social security. Government spending on health, education and social security in total government expenditure however has only increased marginally to 27.8% in 2006 from 27.7% in 2001;

Income inequality might peg back overall disposable incomes in Vietnam. In real terms, annual disposable income grew at an annual average rate of 4.4% during 2001 and 2006 slower than a 7.5% growth of ASEAN economies during the same period;

Annual rates of inflation in Vietnam were at 7.5% by 2006 from 3.8% in 2002. High rates of inflation will not only drag down incomes but also widen the gap as the economy continues to grow with rates of real GDP growth in excess of 6.0% annually since 2001.

Real GDP growth rates and inflation in Vietnam: 2001 – 2010

Source: Euromonitor International from national statistics

Note: Figures for 2007 onwards are projections.

Future scenarios

Policies like WTO accession should absorb labour, create jobs and erase income inequality:

The Vietnamese government hopes to tackle income inequality by creating more jobs through accession to the WTO. Its rate of unemployment was 2.7% in 2001 and had fallen to 2.0% in 2006;

Minimum monthly wages for state employees were revised to VND 450,000 from VND 350,000 in October 2006. Foreign firms are following suit in revising their wages as well. This should increase labour absorption in the economy and erase income inequality;

FDI inflows, which were 16.7% of total GDP in 2006 are increasing and are expected to create new jobs spelling good news for household income levels;

Vietnam's transformation into a manufacturing and services based economy should also ameliorate income inequality. An industrial economy with more jobs, rising incomes and higher consumer spending should bridge the urban-rural divide;

Inflation rates in Vietnam are, however, expected to stay over 6.0% between 2007 and 2010 causing a drag on incomes and slowing consumer spending.