by
Mr Nguyen Manh Toan
(PhD Candidate, Department of Economic Development and Policies,
Graduate School of International Cooperation Studies, Kobe University)

  "The Effect of Trade Liberalization on Income Distribution in Vietnam: Dynamic Computable General Equilibrium Approach"   

Summary

The first workshop of VDF Tokyo in GRIPS’s new campus featured Mr. Nguyen Manh Toan from Kobe University who presented his analysis on the income-distribution effects of Vietnam’s trade liberalization using a dynamic computable general equilibrium (DCEG) model. This paper was to be one chapter in his dissertation.

The author started by introducing the general problem of income distribution and welfare in Vietnam under trade liberalization. The general equilibrium approach was proposed as a method to analyze such broad effects. The author had compiled a new version of Social Accounting Matrix (SAM) based on the latest 2000 Input-Output Table at producer prices. The structure of the new SAM was explained in details.

In his DCGE model, forward-looking economic agents optimized their consumption and investment behaviors over a long time span. The model comprised of twenty-six sectors, eight household groups and thirteen factors of production. These classifications allowed the author to track welfare changes among different groups.

The simulation was based on a scenario that all import tariff be reduced to 5% or less. In addition, the lost tariff revenue was assumed to be offset by a uniform increment in indirect taxes on all sectors to maintain the government revenue unchanged. As a result, there would be a reallocation of resources and shifts in production and consumption patterns, which would affect real income distributed among the eight categories of households. The change in total welfare was evaluated by using Hicksian equivalent variations (EV). In this model, the transitional period was assumed to be 35 years. GAMS software was used to solve the model.

The simulation results showed that national welfare was reduced slightly, by 1% of GDP. Urban employed households were shown to gain highest benefit from trade liberalization, while rural-unemployed and farming households, which accounted for more than 70% of the population, incurred a loss. In other words, the income gaps between urban and rural as well as rich and poor would become wider.

In the discussion session, the inherent characteristics of the CGE model were discussed. What was measured by this model was the pure relative-price effect. If the dynamic growth and competitiveness effects as well as internal labor mobility and policy responses were also incorprated, we could no longer say that free trade was likely to worsen the income gap.

Abstract (PDF17KB) 

  (by Nguyen Duc Thanh)