Patterns of household consumption in vietnam

e goods and adjusted to price differences among regions and to inflation. In analysis, household consumption is calculated from VHLSS 2002 data set and grouped in 5 quintiles that represented for 5 groups of household in different economic situation. Household consumption is measured in thousand VND per year. Household consumption by household income As throughout analyzed in theoretical chapter, household consumption always depends on household income. In other words, household consumption is positively related to household income. Once again, it is true when examining household consumption in Vietnam. Statistical results from VHLSS 2002 data set are shown in table 3.1. In the first quintile, household consumption accounted for 4,975 thousand VND per year where as household income was 6,671 thousand VND per year or household consumption took a share of 0.74 of household income. Household consumption increased as household income rise across quintiles. Interestingly, the share of household consumption on household income did not increase as income rise. This share fallen from 0.746 in the first quintile to 0.75 in the forth quintile. It is slightly higher (0.737) in the fifth quintile. This finding is consistent with Keynesian consumption model, which stated that as income rise, household would save a greater and greater fraction of their income, it would, in turn, reduce fraction of their consumption. To examine magnitude of consumption fraction to income in the whole data set, quantitative model in the next chapter will bring a full-sided analysis. Table 3.1: Household consumption and HH income by quintiles (’000 VND/year) Consumption quintile Consumption Income Consumption/ Income 1st quintile 4,975.41 6,671.02 0.746 2nd quintile 8,246.56 11,215.19 0.753 3rd quintile 10,921.68 14,995.82 0.728 4th quintile 14,895.84 20,823.29 0.715 5th quintile 28,558.61 38,742.77 0.737 Source: Author’s calculation from VHLSS 2002 Household consumption by region and quintiles To examine the pattern of household consumption in Vietnam across region, some descriptive analysis was done basing on VHLSS 2002 data set with 22,462 observations. The result shows that consumption level of household living in the South was highest (16,764.90 mill VND per year), that of household living in the North was lowest (11,800.80 mil VND per year) and consumption of household living in the Central was in the middle (11,968.5 mill VND per year). This thesis also applies cluster methodology by using quintile of consumption level for each region. The obtained results partly answer to the question about geographic impact on consumption level. Table 3.2 reveals differences in consumption level across regions, the North, the Central, and the South of Vietnam. The lowest and the highest consumption quintile show clearly this difference. In the first quintile, consumption level of household in the North accounted for about 4,984 thousand VND per year, that of household located in the South reached 5,113 thousand VND per year, whereas consumption level of household in the Central was only 4,878 thousand VND per year. There is a similar picture for consumption level of the highest quintile. Household consumption level in the North, the Central, and the South respectively was 26,965 thousand VND per year, 26,613 thousand VND per year and 30,151 thousand VND per year. Table 3.2: Household consumption by regions and quintiles (’000 VND/year) Consumption quintile North Central South 1st quintile 4,984.385 4,877.992 5,113.045 2nd quintile 8,238.136 8,217.052 8,293.896 3rd quintile 10,893.83 10,914.62 10,963.39 4th quintile 14,832.50 14,832.92 14,995.8 5th quintile 26,964.92 26,613.46 30,151.03 Source: Author’s calculation based on VHLSS 2002 data set In overall, five consumption quintiles display a apparent distance of consumption level of household living in the South with that of household living in two other regions. It can be explained by following reasons: In the North, especially in the Northeast and the Northwest regions, a large number of household is living in poor infrastructure such as having bad accommodation, using unpurified water, lighting by petrol in stead of electricity. Thus consumption level of household in these regions is certainly lower than that of household in region with good infrastructure like in the South where gather large industrial zones and processing zone. Household in the Central also consume less than household in the South because in the Central, household often faces with natural disaster (flood, storm). These events force Central household have to make forward-looking decision. Maintaining a certain saving by consume less in a given budget constrain is the best way. This is accompanied by PIH hypothesis shown in the previous chapter. People in the South have a more generous perception and habit in consumption partly because services sector in this region is more active to satisfy wants and needs of household. Moreover, life in the South is apparently more modern than in other regions resulting from historical inheritance. Thus, it is reasonable to expect that household living in the South has higher level in both autonomous consumption and MPC than household living in the North and in the Central. However, the comparison of consumption level of household in the North and in the Central does not show clear relation. This will be further studied in the next chapter. Household consumption between urban and rural area In many developing countries, income, expenditure and consumption of household located in urban area is often higher than that of household in rural area. Vietnam is not exclusion. According to VHLSS 2002, consumption level of household located in urban area (20,661 thousand VND per year) is nearly double that of rural household (11,348 thousand VND per year). It can be explained by following reasons: in rural area, making businesses and finding jobs is more difficult due to unfavorable location, lower quality of human capital (e.g. knowledge, skills and chance to access to information) As a result, household income could be lower. This is similar to findings of Vu P.H.D. (2000). most of rural household’s income comes from agriculture, aquaculture, and sylviculture which faces with vulnerable conditions and general living standard in rural area is lower than that in urban area. This argument is further supported as shown in table 3.3 where difference in consumption is more substantial across consumption quintiles. Table 3.3: Household consumption by rural/urban and consumption quintiles (’000 VND/year) Consumption quintile Urban Rural Discrepancy 1st quintile 4,988.045 4,974.353 14 2nd quintile 8,305.059 8,239.13 66 3rd quintile 11,058.68 10,893.74 165 4th quintile 15,167.5 14,789.15 378 5th quintile 31,677.41 25,119.95 6558 Source: Author’s calculation from VHLSS 2002 In overall, figures in above table are consistent with the idea of household in urban area consume more than that in rural area. It can be also observed that the discrepancy of household consumption level in each quintile increases gradually. Surprisingly, the difference in the 5th quintile reaches 6,558 thousand VND per year. Base on these stylized facts, it can be expected that household’s consumption level in the urban area is greater than that of household in rural area. Linear model regression is used in testing this hypothesis in chapter 4. Household Consumption by household size and number of children A fact that cannot be denied is increase in household member induces household consumption expansion. Event the member is adult or children the household must use a larger share of income to satisfy, at least, his necessity need. Appendix 4.2 strongly supports to this idea. If a family consisted of only one member, its consumption level was 4,481 thousand VND per year. Household consumption gradually in creased long with household size. It reached a peak of 38,034 thousand VND per year for households of 14 members. Household included 15,17 and 18 persons occurred only one time for each in the data set. Thus theirs consumption level consider to be unidentical result. In brief, higher household consumption level is always associated with larger household size. However, to that extent does the household size affect to consumption level, it need to be further analyzed in the next chapter where quantitative model is used. There is similar picture when examining relationship between number of children and household consumption. The higher number of children, the larger household consumption level. Evidence illustrated in Appendix 4.3 where household consumption in the families without children was about 12,767 thousand VND per year, with one child it accounted for 14,593 thousand VND per year and so on. Especially the household with 9 children, consumption level was 22,829 thousand VND per year. This number was much higher than the previous consumption level of household with 8 children (15,075 thousand VND per year). All above figures resulted from VHLSS 2002 and the term number of children is measured in counting number of children under fifteen year old. Because below 15 year old, children cannot self-rely. At 15, all most children pass secondary school and they can work to feed themselves since then. Household consumption by household head’s education According to many previous studies, education impact not only directly on consumption level but also indirectly through income level. Appendix 3.1 shows relationship between education of household head and household consumption. Once again, result from VHLSS 2002 confirms positive relationship between education and consumption. As higher educated household head, household consumption level will be greater. Here, education is measured in number of schooling year of household head. There are some clear breakdowns of consumption level at number of schooling year of 9, 12, 15, 16, 18, and 21. It’s can be understood that there is a significant change in consumption level if household head educated secondary school, upper secondary school, college, university, master degree, and doctor degree. For those who have never attended school (represented by number of schooling year is 0), his household consumption level was about 9,931 thousand VND per year. The consumption level increased gradually as the household head gets higher education. If the household head passed secondary school, his family consumption level reached nearly 13,000 thousand VND per year. However, there was a remarkable rise in consumption level of household whose head participates in upper secondary school. The rise was approximately 3,000 thousand VND per year. Changes in consumption level also occurred in circumstance of household head getting higher education. If household head has studied college, consumption level was 19,259 thousand VND per year. For graduated university head, his household consumption level accounted for 27,358 thousand VND per year. Especially, consumption level pushed up to 46,607 thousand VND per year, if household head has received master degree and reached a pick of 63,591 thousand VND per year for household which head getting doctor degree. Examining household head’s number of schooling year by consumption quintiles further supports the positive relationship between education and consumption. Table 3.4 reflects high consumption level is always associated with higher education. Table 3.4: Household head’s number of schooling year by consumption quintiles Consumption quintile Number of schooling year 1st quintile 5.15424 2nd quintile 6.493989 3rd quintile 6.827732 4th quintile 7.33363 5th quintile 8.557111 Source: Author’s calculation from VHLSS 2002 Explanation for the positive relationship is that high-educated household head often have good planning for the future and over-handed attitude about consumption. That is direct impact of education on consumption. Moreover, the indirect impact through income is that: income is higher if head better educated, as income rise, want and need further expanded, necessity goods reduced and luxury goods increased in the household consumption bundle of goods of household owned higher income. Household consumption and head’s age and gender. Basing on VHLSS 2002 data set, household consumption was analyzed by using cluster method. Table 3.5 presents average age of household head by consumption quintiles. Table 3.5: Age of household head by consumption quintiles Consumption quintile Age of household head 1st quintile 49.41776 2nd quintile 44.97841 3rd quintile 46.08079 4th quintile 47.61028 5th quintile 49.7328 Source: Author’s calculation from VHLSS 2002 It’s easily to recognize that (i) in all consumption quintiles, household heads were above 40 years old and (ii) there was no clear linear relationship between household consumption and household head’s age. In the lowest and the highest consumption quintiles, age of household head are both more than 49. The age was lower in other consumption quintiles and the lowest age of household head accounted for nearly 45 in the second consumption quintiles. In most studies about relationship between household expenditure, heath care expenditure or household saving and household head’s age, there was a linear correlation between those and household head’s age. However in analyzing household consumption, with above figures, it seems to be irrelevant. This finding further strengthens lifecycle hypothesis of consumption stated in the previous chapter. Therefore, using “square function” of household head’s age proved to be more suitable in investigating impact of household head’s age on household consumption. In general, statistical result from VHLSS 2002 shows that household, which headed by female consumes more than those headed by male. Average consumption level of household headed by female accounted for 13,873 thousand VND per year whereas that of household headed by male was only 13,410 thousand VND per year. However if household consumption level is analyzed in quintiles, the nature with not stay the same. Table 3.6: Household consumption by head’s gender and consumption quintiles (’000 VND/year) Consumption quintile Female head Male head 1st quintile 4,345.217 5,292.823 2nd quintile 8,217.488 8,253.204 3rd quintile 10,902.85 10,926.01 4th quintile 14,930.97 14,887.23 5th quintile 31,221.25 27,599.83 Source: Author’s calculation from VHLSS 2002 The above table reveals that in the three first quintiles, consumption level of household headed by male was slightly higher than that of household headed by female. Nonetheless in the two remained quintiles, surprisingly, household headed by female seemed to consume more than those headed by male. So, there is no apparent relationship between household head’s gender and household consumption level. It’s consistent with many empirical studies in Vietnam especially that of Le (2004) and Vu (1999). Household consumption by occupation of household head Occupation in this thesis is narrowed in state sector (including public sector) and other sector. Reason for this classifying is to examine the difference in household consumption between household with rather stable income and other. Relying on VHLSS 2002 data set, if household head works in state sector, the household consumption level was 20,284 thousand VND per year while consumption level of household which head works in other sector was only 12,836 thousand VND per year. The dissimilar in consumption level can be observed more clearly by analyzing consumption by quintiles as shown in below table. Table 3.7: Household consumption by occupation of household head and consumption quintiles (’000 VND/year) Consumption quintile State sector jobs Others Discrepancy 1st quintile 4,964.565 5,558.647 594 2nd quintile 8,239.183 8,412.598 173 3rd quintile 10,913.27 11,024.57 111 4th quintile 14,864.06 15,125.15 261 5th quintile 27,950.92 31,027.71 3077 Source: Author’s calculation from VHLSS 2002 In table 3.5, household consumption varies across occupation classification discrepancy is quite large, especially in the 5th quintile. This fact raises a question of whether household which head works in state sector always associated with higher household consumption. This question will be answered in the next chapter where quantitative model will be used. This model will examine where occupation variable is significant in determining household consumption CHAPTER REMARKS The descriptive analysis on pattern of household consumption based on VHLSS 2002 shown that household consumption is affected by demographic characteristics (gender, age, household size, number of children), by geographic characteristics, and by other factors such as household income, education, and occupation. However, the relationship between household head’s age and household consumption is not clear. It is also not apparent when examining impact of household head’s gender and household consumption. Some important conclusions in this chapter are found. First, there is a difference in consumption level of household located in the North, the Central and the South of which family living in the South consume more than others. Second, consumption level of household in urban area is nearly double that of household in rural area. Third, higher consumption level is always associated with larger household size and increase in number of children. Forth, the higher educated household head, the greater household consumption level. Fifth, household which head works in state sector is always get along with higher household consumption. These conclusions imply that household consumption depends on a lot of factors. All above conclusions, however, are only based on descriptive analysis. Therefore, in order to confirm these findings and point out what main factors determine household consumption, a quantitative analysis of determinants of household consumption will be carried out in the next chapter. The combination of two methods will provide useful recommendations in the final chapter. CHAPTER 4 MODEL SPECIFICATION AND EMPIRICAL RESULTS So far, we have highlighted the outstanding theoretical and empirical studies on the household consumption. Theoretical frameworks and empirical results introduced in Chapter 1 postulates the hypothesis of intertemporal choice of household, which has been further developed to the PIH and LCH. It is proved a good explanation of how households make their decision theoretically and empirically. Chapter 2 provided an overview of household consumption in Vietnam intuitively. This chapter, the core chapter of the thesis, will concentrate on econometric analyzing patterns of household consumption quantitatively and finding out whether they are consistent with those observed previously in Chapter 2. MODEL SPECIFICATION Econometric formulation Analysis of household consumption in Vietnam in 2002 can be conducted based on the LCH and PIH. By expanding the theoretical model, this paper examines consumption function including present of household characteristics, which hypothesized to be important in making consumption decision. Thus, consumption (C) function is possibly as following: C = f (income, household features, household head’s characteristics, geographic properties) For more detail, the below variables, which are thoroughly discussed in the next section, are brought in the econometric model of consumption. Appendix 4.3 Introduce variable definition in detail where ai are coefficients estimated, and e is stochastic disturbance term, reflecting the possibly that the actual consumption of household might be higher or lower than predicted. The consumption function combines expenditure on non-durable goods with information on household characteristics from the census. The household characteristics are those included in the questionnaire of the survey. These characteristics will be in detail in the next part and they are expected to be significant in estimating above simple OLS estimation of household consumption. Variables This part is devoted to variable justification. It will focus on discussing relevance, measurement, and expected results of the chosen variable in consumption estimation. For short, only chosen variables are justified, the excluded ones are neglected. Appendix 4.3 provides variables description in short. Dependent variable Consumption in the above model is value of total household consumption measured in thousand VND/year and denoted by CON. This paper uses expenditure on non-durable goods as a proxy for consumption. The exclusion of durable expenditure distinguishes the concept of consumption and expenditure. For most non-durable goods, household’s consumption is closely tied to their purchases of these goods while consumption on durable things linked to stocks of them, which differ from expenditure for these goods. Unfortunately, the lifetime of the durable goods is not recorded in the data set. Therefore, the calculation of stocks of durables is unfeasible and it is safe to assume that household consumption is similar to expenditure on non-durable things. The remained expenditure comprises of expense on daily and holiday foods and drinks, housing, electricity, water services, education and health, and other expenses on no-food or non-food stuff. Consumption of self-made product is in estimated value. It is true that estimates of these products are sensitive to which method is used. The common way, which can be bias, is taking market value of similar product sold. Explanatory variables Current income, expressed in INCOME, is also measured real household income in thousand VND per year. This is the most important factor explaining to consumption. If the variable is omitted, model specification error will definitely arises. Hypothetically, income has positive impact on consumption. In the relied data set, income absorbs from a number of sources such as wages, salaries, pension, remittances, scholarship, renting, leasing, agriculture, aquaculture, sylviculture, livestock, and other activities. Household size is the number of people in household. Household size (HHSIZE) certainly affects to its consumption level because it related to the problem of intra-household resource allocation. Keep other things being fixed, an increase in household member induces increases in want and need, which in turn push consumption up. Hence, introducing a variable measuring number of household members is reasonable. It is expected to have a positive relationship with consumption like income. Proportion of children, which is represented by PRO, is considered as another factor affecting to consumption. Since the activities of parents and children are different, the presence of children will change the allocation of the budget over the various consumption categories resulting from their dependence. In a study of Kooreman (1997), he founded that the more children, the higher food budget share, and an increase in the number of children and a decrease in income have similar effect on the budget allocation. Moreover, Browning and Crossley (2001) showed that children with higher age would cause consumption pushing up. For these reasons taking this variable is appropriate. This variable presents percentage of children in a household. To calculate this figure, we divide number of children under fifteen years of age to household size and multiply by 100. This thesis use term proportion (or percentage) of children in a household in order to eliminate correlation between two variables number of children and household size. Because increase in number of children is often go along with increase in household size. Thus, proportion of children is more suitable in examining impact of children on consumption in the same household size. A threshold of fifteen year is selected because at that age, children finish their secondary school. Since then, they can be self-reliant by their earning or doing housework so that their budget burden is less. It is hypothesized that the larger number of children, the higher household consumption level. The following part will demonstrate some characteristics of household head. Person stood in the position of household head in the family-register, or “So Ho Khau” in Vietnamese, is record as head in the data set. The hypothesis that household head’s characteristics are determinants of household consumption is derived from cultural and social context of Vietnam. Head of household plays an important role in a family. Conventionally, household head affects promptly to decision process of resource allocation as well as activities of households.