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Credit market depth and income inequality in Vietnam: A panel-data analysis

Credit market depth and income inequality in Vietnam: A panel-data analysis. Financial development could exert various effects on income distribution of a country. By employing Generalized Method of Moment, this paper aims at examining the impacts of credit market depth, one of most used financial development barometers, on income inequality in Vietnam.



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Journal of Economics and Development, Vol.18, No.2, August 2016, pp. 5-18

ISSN 1859 0020

Credit Market Depth and Income Inequality
in Vietnam: A Panel-Data Analysis
Le Quoc Hoi
National Economics University, Vietnam
Email: hoilq@neu.edu.vn
Chu Minh Hoi
Vietnam Academy of Economics, Vietnam
Email: cminhhoi@gmail.com

Abstract
Financial development could exert various effects on income distribution of a country. By
employing Generalized Method of Moment, this paper aims at examining the impacts of credit
market depth, one of most used financial development barometers, on income inequality in
Vietnam. The empirical findings show that expanding credit market in the country could lead to
higher income inequality. We have not found evidence that supports the hypothesis of an inverted
U-shaped relation ever introduced by Greenwood and Jovanovich, although this hypothesis may
still hold in a sense that Vietnam has not reached to the inflection point to generate such a curve
alike.
Keywords: Financial development; inequality; Vietnam.

Journal of Economics and Development

5

Vol. 18, No.2, August 2016

1. Introduction

2014a). Also according to World Bank (2014a),
76% of urban population and 53% of their rural counterpart in Vietnam expressed concerns
the uptrend of inequality. More strikingly, the
expression of adolescent and young population
is more intensified than that of other groups,
which means the perception at least in one next
generation will increase. And inequality is one
of major determinants that influence a developing country like Vietnam to be able to escape
from middle income trap (Ohno, 2010).

Vietnam kicked off its economic reform
since 1986 and has made a number of remarked
achievements until present. Opening and liberalizing domestic markets and gradual integration into the world economy transformed a
poor country with majority of population working in agricultural sector to a lower middle income country in around two decades. In period
1990-2010 particularly, the economy experienced annual economic growth rate of 7.3%
on average, only below that of China globally
(according to database of IMF, 2011). Successively high economic growth rate has resulted
in the poverty rate of the country dropping dramatically to around 13% (percentage of population earning less than 2USD/day) from over
85% during 1993-2013 (World Development
Indicators). At present, poverty rate by national
standard is around 7.2% only.

The positive role of financial market development, especially the banking system, has
been demonstrated some research works, such
as those by Tran (2008), Nguyen and Anwar
(2009), Nguyen (2011). Chu and Le (2013,
2015) try to inspect the effects of financial development on income inequality in Vietnam
and come across some conflicting findings
depending on alternative proxies of financial
development and analysis approaches. Nevertheless, none of the above works has made an
effort to examine the impact of credit market
depth, one of the most used measures of financial development in economics literature. Thus
by analyzing panel provincial level data this
paper targets to fill the existing gap in literature
of finance-inequality nexus prevailing in Vietnam.

In another corner of the economy, one aspect
of social development could be treated as a big
challenge confronting Vietnam in the long-run
that the income gap is widening, manifested in
rising trend of Gini coefficient. This common
measure of overall inequality of the country
was 0.34 in 1993, went up to 0.422 in 2012.
High inequality does harms to economic growth
and sustainable development in the long-term
(Alesina and Perotti, 1994; Alesina and Rodrik,
1994; Persson and Tabellini, 1994). High social disparity would require a huge resource
to take over its repercussions once perception
and awareness of social groups about it move
upward. Social discontent in Egypt in 2011
was justified due to the fact that gap between
the rich and the poor had bulged to a level that
its people could not stand more (World Bank,
Journal of Economics and Development

The rest of the paper is organized as follows:
Section 2 presents a brief literature review;
Section 3 provides some overview of credit
market development and income inequality in
Vietnam; model specification and methodology
are outlined in Section 4; and finally Section
5 displays empirical findings and concluding
remarks.
2. Literature review
6

Vol. 18, No.2, August 2016

Law and Tan (2009) find no evidence to support linear hypothesis in the case of Malaysia.
Also in Malaysia, financial development could
only reduce inequality after institutional quality has reached a certain threshold (Law et
al., 2014). One study in China by Zhang and
Chen (2015) observes financial development
enlarge urban-rural income gap. Cruz and Imperial (2014) even witness a U-shaped relation,
rather than inverted version, in the case of the
Philippine. Dhrifi (2013) concludes that financial development could only reduce inequality
in developed country; the effects are reverse
in less developed ones. Among African countries, it is uncertain that financial development
would promote equality (Fowowe and Abidoye, 2013).

There are two main strands of theory about
financial development-inequality nexus until
today. Out of the two, the one developed by
Greenwood and Jovanovic (1990) states that
financial development leads to higher inequality in early stage of economic development,
only has narrowing effects after it matures, also
known as non-linear or inverted U-shaped hypothesis. The other one proposed by Galor and
Zeira (1993) and Banerjee and Newman (1993)
predicts that higher level of financial development could result in lowering income gap,
known as linear hypothesis. Aghion and Bolton
(1997) provides a trickle-down theory which
implies that when capital accumulation is high
enough, a governmental policy could still make
income distribution more equal if it redistributes more wealth of the richer lenders to poorer
borrowers, which could be done through credit
allocation mechanism.

In Vietnam, Nguyen et al. (2007) find that
access to micro-credit provided by Vietnam
Bank for Social Policies could not only alleviate poverty but reduce slightly income inequality as well. Studying at provincial level over
2002-2008 and using some indicators of financial companies as proxies for financial development, Chu and Le (2013) find that broader
financial access is correlated with lower Gini
coefficient. On the contrary, employing method
of generating proxies for financial development
from data of Vietnam Enterprises Surveys to regress with Gini coefficient, Chu and Le (2015)
show evidence to conclude that financial development would widen income gap. Apart from
these studies, to the best of our knowledge,
there is no other research work implemented
to verify the potential impact of credit market
depth on income inequality in Vietnam. This is
the main motivation for the current paper to be
conducted.

Based on those theoretical frameworks, a
variety of empirical studies have been done in
various scopes of geography. The empirical evidences that support linear hypothesis could be
found in works by Liang (2006a, 2006b), Jalil
and Feridun (2011) for case of China, or Ang
(2010) for India. Falling in this category are
studies by Muhammad et al. (2012), Baligh and
Pirace (2013) in Iran, Shahbaz and Islam (2011)
in Pakistan, or Bittencourt (2010) in Brazil. As
for cross-country studies, research works by
Clarke et al. (2003), Jauch and Watzka (2012),
Batuo et al. (2010), Kai and Hamori (2009), or
Kappel (2010) are typical ones that conclude
financial development could help alleviate income inequality.
However, a number of other works recently
conducted have shown the opposite outcomes.
Journal of Economics and Development

7

Vol. 18, No.2, August 2016

3. Overall credit market development and
income inequality in Vietnam

pansion as driving factor of economic growth,
but a major part of credit in the economy had
not been translated into real productive activities, such as agriculture, manufacturing. Instead, credit had been diverted into speculative
investment like construction, and other business areas of trading and services. For example, at quarter 3 of 2015, data released by State
Bank of Vietnam shows that only less than 10%
and 25% of total credit was poured into agricultural and industrial production respectively,
while the rest was allocated to construction and
other services. Results of Vietnam Household
Living Standard surveys during 2002-2012
also revealed that around 55-59% of communes in the whole country grasp difficulties
in accessing formal credit market. Additionally,
approximately 97% of domestic private enterprises in the country are of small and medium
size but 70% out of these enterprises face challenges or are be able to capture a credit line
from formal financial institutions (according
to an unpublished report of Ministry of Planning and Investment). These facts explain why
GDP growth is not substantially correlated with
credit growth in Vietnam as depicted in Figure
1.

3.1. Credit market development
Financial and banking system of Vietnam
existed since the 1950, but had not been really active until early 1990s when the economy
began to transit from central planned regime to
a more market based one. And although stock
market officially came into operation since
second half of 2000, banks are the main players in Vietnam financial market. At the end of
2011, total assets of Vietnam financial system
is around 198% GDP, and share of banks system accounts for 86% out of this figure (World
Bank, 2014b). The number of banks in the
country had increased dramatically from only 9
banks in 1991 to 56 banks within half a decade.
The number of banks hit a plateau of around 50
for in another half decade with declining trend
in recent years due to government pushing up
re-structuring the system of credit organizations. At the end of 2015, Vietnam has around
30 active commercial banks.
Since 2000 to 2010, credit grew rapidly at
average rate 30% year-on-year, peaking at
nearly 54% in 2007 (Figure 1). Successively
high growth rate of credit contributed in rising financial depth of credit market. According
to ADB (2015), outstanding domestic credit claimed by private sector (as percentage of
GDP) in 1999 was only equivalent to 22%,
rose to 61% in 2005, almost doubled in 2010 at
115%, then dropped to 100% in 2014.

Linking to income distribution issue, the
facts about credit boom in Vietnam mean that
credit market has been mainly serving elite
groups for ages, either business or political-relating groups. Thus this kind of credit market
should hurt marginalized groups rather than
richer groups. Until the end of 2014, almost
46% the country population still live in rural
area and take farming activities as the main
livelihoods (GSO, 2015). Furthermore, because credit growth does not promote material

On reviewing the history of credit market
development in parallel with economic growth,
we have been gleaned one argument that Vietnam for a long period had pursued a model financial market development taking credit exJournal of Economics and Development

8

Vol. 18, No.2, August 2016

Figure 1: Credit growth and GDP growth 2000-2015
60%

20%
18%

50%

16%
14%

40%

12%

30%

10%
8%

20%

6%
4%

10%
0%

2%
2000

2002

2004

2006

2008

Credit growth (left axis)

2010

2012

2014

0%

GDP growth (right axis)

Source: State Bank of Vietnam

credit market where banks will allocate this
money to richer borrowers. The richest households may lend money (redundant money after
investing in a business) due to profit-maximization behavior. Given that banks center mainly in urban area and poor households live in rural area, it implies that credit market is relative
a channel to transfer financial resource of less
well-off population to more well-off population, so it may be intensifying income disparity.
Nevertheless, this argument should be empirically tested.

production sector, it does not exert spill-over
effects on job creation and equal income opportunities for a low-skilled laborers who account for a large proportion of population in the
country. Only a minority of people who have
a certain degree of financial knowledge could
benefit from credit market expansion. For instance, some of those could borrow and invest
in stock market, or those living in urban areas
that could access to financial services much
easier.
Trickle-down theory of Aghion and Bolton
(1997) may fit under circumstances in Vietnam. Accordingly, most of poor or low-income
household does not own wealth and properties
that are worthy enough to encourage themselves to pursue a venture with high return
rates. Instead, they lend money (savings) in
Journal of Economics and Development

3.2. Income inequality in Vietnam
In general, income inequality in Vietnam has
a rising trend with Gini coefficient consecutively increases from 0.34 in 1993 to 0.433 in 2010
(Figure 2), slightly in 2012. But this pattern of
inequality implies a new downtrend afterwards
9

Vol. 18, No.2, August 2016

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