Globalization, Trade Liberalization and Poverty Alleviation in Southeast Asia

40 Pages·2003·0.26 MB·English

Globalization, Trade Liberalization and Poverty Alleviation in
Southeast Asia: the Case of the Livestock Sector in Vietnam

Alejandro Nin

Ma. Lucila Lapar

Simeon Ehui

ILRI

April 30, 2003

Paper to be presented at the 6th Annual Conference on Global Economic Analysis, June 12 - 14,
2003. Scheveningen, The Hague, The Netherlands

The authors acknowledge IFPRI for providing the data from the survey of livestock producers in
Vietnam conducted by the Markets and Structural Studies Division under the leadership of
Francesco Goletti and Mohammad Jabbar as the ILRI counterpart in the project entitled: 'Policy
Options for Using Livestock to Promote Rural Income Diversification and Growth in Vietnam.
Funded by DANIDA and ADB (CASREN project). The authors are grateful to Elias Mulugeta for
assistance with data processing and analysis.
Globalization, Trade Liberalization and Poverty Alleviation in
Southeast Asia: the Case of the Livestock Sector in Vietnam

Alejandro Nin*, Ma. Lucila Lapar, and Simeon Ehui

Abstract

A number of developing countries consider their livestock production sectors to be
particularly vulnerable to global trade liberalization, especially because of the dominance of
smallholder systems. The argument goes that agricultural trade liberalization will give undue
advantage to large-scale commercial livestock systems at the expense of smallholder production
systems, and that this in turn will add to the adjustment pressures on smallholder producers for
whom income from livestock production is vital in helping them avoid poverty. We use a micro-
macro approach that combines the GTAP general equilibrium model with a simple micro model
to measure expected impacts of trade liberalization on a representative sample of Vietnam’s
livestock producers. Our results show that the impact of trade liberalization on Vietnam’s
livestock production tends to be small but in general a more open Vietnamese economy would
result in a deterioration of the trade balance of livestock products. In spite of this, trade
liberalization would benefit poor livestock producers by increasing livestock prices relative to
production costs, in particular feed costs, and by increasing non-agricultural income.

* ILRI, P.O.Box 5689, Addis Ababa, Ethiopia, FAX [phone]. Please direct correspondence to
[email protected]
Globalization, Trade Liberalization and Poverty Alleviation in
Southeast Asia: the Case of the Livestock Sector in Vietnam

Introduction
Over the next 20 years, the livestock production systems in many Asian developing
countries are likely to face significant adjustment pressures from economic growth and
globalization of their economies. The globalization process will bring trade liberalization and
further integration to the world economy, increasingly stringent food safety and quality standards,
and increasing liberalization of capital flows in agri-food industries. Other events that shape the
globalization process like urbanization and rising incomes, rapid strengthening of domestic
demand for livestock products and technological change among others, are also expected to
dramatically affect agriculture production and agri-industries. These events are likely to lead to
profound changes in the structure and performance of livestock industries in these countries,
providing both opportunities and threats.
Trade liberalization is one of the key drivers of the globalization process, affecting supply
and consumer prices and triggering second-round effects through income, investment, factor
prices and employment. A number of developing countries consider their livestock production
sectors to be particularly vulnerable to global trade liberalization, especially because of the
dominance of smallholder systems (Narayanan and Gulati, 2002). Smallholder production is
constrained by poor access to markets, a very low scale of operations, poor access to improved
genetics and to high-quality forage and concentrates, and poor animal husbandry and animal
nutrition. In contrast, commercial livestock production systems are seen as having significant
advantages in all these areas and in access to capital and new technologies. Hence, smallholder
production is considered to be less internationally competitive than large-scale operations. This is
why a widely held view in developing countries contends that agricultural trade liberalization will
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alter the incentives in livestock production systems toward large-scale commercial operations
relative to smallholder systems. The argument goes that agricultural trade liberalization will give
undue advantage to large-scale commercial livestock systems at the expense of smallholder
production systems, and that this in turn will add to the adjustment pressures on smallholder
producers for whom income from livestock production is vital in helping them avoid poverty.
The economic mechanisms that might validate this view of the links between global
agricultural trade liberalization and the performance of smallholder livestock producers are not
well understood. Global trade liberalization can be expected to accelerate global income growth,
implying potentially higher incomes in both industrial and developing countries. This will
translate into higher demand for and consumption of livestock products in developing countries
than in the industrial countries where, due to saturation levels, per capita meat consumption no
longer increases significantly as per capita income grows.
Livestock producers in the world, therefore, are likely to benefit from trade liberalization.
But how the increased production to supply this additional demand will be shared between
commercial and smallholder producers in developing countries and producers in industrial
exporting countries is less clear. The way in which livestock industries are expected to be
affected by trade liberalization is likely to be determined by the interplay of many factors,
including their reliance on feed grains in production, existing barriers to trade, the capacity of
each system to respond to changes in the price-cost situation, the impact of second round effects
through income effects, factor prices, investment and demand linkages and the scope and nature
of the liberalization process.
The goal of this paper is to evaluate the impact of trade liberalization on Vietnam’s
smallholder livestock producers and the potential contribution of the livestock sector to poverty
alleviation in anticipation of Vietnam’s accession to the WTO. It specifically investigates how
effects of trade policy changes trickle down to the livestock sector and what their consequent
effects are on welfare. It also discusses what the opportunities and threats from trade
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liberalization are for smallholder livestock producers, analyzing the effects of pull and push
factors attracting or expelling smallholders away from farming. The results will contribute to the
identification and evaluation of potential policy options that will help mitigate the negative
consequences of various trade policy reforms and lessen the burden on the poor smallholders.
The paper is organized as follows. In the next two sections we consider the patterns of
production, trade and protection of Vietnam’s economy and the main characteristics of its
livestock sector. The subsequent section describes the methodology employed. We then turn to
the results and the analysis of the impact of trade liberalization on Vietnam’s economy, followed
by our estimates of the impact of trade liberalization on smallholder livestock producers and
poverty.

Vietnam and the global economy: patterns of production, trade and protection
In the last decades of the twentieth century, Vietnam progressed from a nation of chronic
food shortages to one of the world’s leading exporters of agricultural products that include rice,
coffee, rubber, and tea. This economic growth, marked by a doubling of gross domestic product
between 1991 and 2000, was largely made possible by the doi moi reforms of the 1980s. Doi moi
consisted of two successive reforms: the allocation of the means of production (especially land) to
individual households, followed by economic liberalization and the opening to external markets
(Castella and Dang 2002).
The remarkable economic growth that resulted from the reforms was based largely on the
rural household, which had become the new unit of agricultural production. The technical,
economic, and social changes that accompanied the transition transformed agricultural
production, resource management, land use, and the institutions that defined resource access and
distribution. However, the impact of the changes varied widely across different regions. In
particular, agricultural growth in the past decade has benefited the delta regions far more than the
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more-remote mountainous areas (Kerkvliet and Porter 1995; Poverty Task Force 1999; Minot and
Baulch 2002). Of interest as well are the differential impacts of these changes across sectors and
within sectors in the economy. For the latter, a comprehensive study was undertaken on the rice
sector that analyzes the policy issues and impacts of the reforms, specifically the liberalization of
the rice markets (Minot and Goletti, 2000). The study indicated that it is fairly clear that market
reforms have had a positive effect on economic growth, agricultural production, and the rice
sector. Furthermore, survey data reveal rural incomes appear to have risen with the reforms.
About 93 to 95 percent of the poor live in rural areas in Vietnam. In spite of these gains, poverty
rates are still high, and the benefits of liberalization have probably not been distributed equally
among regions and between urban and rural areas. These are potential areas for further empirical
investigation. Similar studies focusing on the other sectors, likewise, would be worthwhile
contributions to the existing literature
The analysis of Vietnam’s output structure shows that almost 60 percent of Vietnam’s
total output comes from services (table 1). Manufactures contribute more than 30 percent of
output while agriculture’s contribution is less than 10 percent with livestock representing less
than 2 percent of total output. The most relevant manufacturing sectors are light manufactures,
processed food, electronics and wearing apparel. Within agriculture, rice, other crops (coffee, tea,
rubber) and non-ruminant livestock comprise 80 percent of total agricultural output value.
The disposition of output (table 1) and trade data from figure1 shows the importance of
the manufacture sector in Vietnam’s international trade. More than 40 percent of total output in
manufactures is exported. The share of manufactures in total exports reached 72 percent in 1997.
The sectors that contribute the most to exports are mainly light manufactures (26 percent of total
exports), processed food (16 percent) and wearing apparel (15 percent). The most significant
contribution to exports from the agricultural sector comes from other crops (10 percent of total
exports). Livestock products have historically had a relatively low participation in total exports
with a peak in 1982 (3 percent of total exports) but decreasing ever since (0.6 percent in 1998).
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The domestic market largely absorbs much of livestock production in Vietnam (Vu 2002).
Vietnam imports manufactures, mainly electronics, chemicals, heavy manufactures, and textiles
(figure 1). This group of commodities comprises more than 75 percent of the value of total
imports. Vietnam is self sufficient in agricultural products and processed foods are the most
significant food imports.
Average import tariffs for Vietnam are shown in figure 2, together with tariffs faced by
Vietnam in third markets. Tariffs for manufactured products are high even for export
commodities such as wearing apparel (47 percent) and processed food (39 percent). Transport
equipment and textiles also have tariffs above the 30 percent level. Electronics, chemicals and
heavy manufactures have relatively low tariffs (less than 10 percent). Protection of agriculture is
low compared with tariff levels in manufacture, with low tariffs for livestock and cereals and
higher protection for industrial crops.
Tariffs faced by Vietnam for its most significant exports are between 10 and 20 percent
in most cases, except for processed food for which Vietnam faces tariffs of 30 percent on average.
Tariffs for Vietnam’s non-ruminant meat exports are within the 10-20 percent range and below 5
percent for non-ruminant live animals.
We conclude that despite the recent market reforms and liberalization process, Vietnam’s
economy is still highly protected. With the prospect of future accession to WTO and the
continued reforms toward market liberalization in the years to come, reduction of tariffs and
protection will likely result in significant changes in Vietnam’s patterns of trade and production.

The livestock sector in Vietnam
The work by IFPRI (2001) presents information from an extensive survey of producers in
Vietnam. Based on IFPRI’s report, we describe below some of the characteristics of Vietnam’s
livestock sector relevant for our analysis.
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Livestock production in Vietnam is primarily undertaken on household farms where
crops and other agricultural products are also produced. More than 92 percent of producers utilize
only household labor in livestock (62 percent in general agriculture); they cultivate 0.77 hectares
of land on average. In terms of livestock sales, 60 percent of their sales are pigs, 23 percent are
poultry and only 8 percent are cattle (see table 2). More than 99 percent of producers who kept
pigs or chickens were involved in pigs and chickens sales, while less than 69 percent of producers
with cattle were involved in selling cattle.
Livestock products are predominately sold to assemblers and wholesalers at the farm
gate, or (in the case of pigs) direct to small slaughterhouses. Direct sales of products to consumers
are uncommon due to the relatively remote locations of many livestock firms. A lack of an
organized livestock marketplace infrastructure means that farmers usually deal with buyers on an
individual basis. Only around 2 percent of producers had ever been involved in livestock supply
contracts.
There are differences between producers at different income levels. Table 2 also presents
information for the first four percentiles of the income distribution and a fifth group including
producers in the 5th to 10th percentile. The first two percentiles cluster producers mostly below the
poverty line of 1,789,871 Vietnamese dongs (VND)1 per capita, as defined by the General
Statistics Office of Vietnam using the Vietnam’s living standards survey in 1998 prices (CIE,
2002). Poor producers are more diversified than larger producers and tend to have smaller shares
of pigs and poultry sales and larger shares of cattle sales.
Livestock raising costs are dominated by feed costs, which account for an average of over
75 percent of total costs. Feed costs are still the dominant cost component even when household
labor is valued at full cost. Poor producers use mainly grazing systems while larger households
use more roughage and complete feed systems.

1 Exchange rate is US$1=15,000 VND
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Crossbred pigs are the dominant type of pig, with the proportion of crossbred and exotic
pigs increasing with farm size. Local pigs are predominantly fed using only roughage; crossbred
pigs are mostly fed on roughage and concentrates while for exotic pigs a diet of complete feed is
used. Exotic chickens dominate chicken inventories and are fed on complete feed. For local
chickens grazing and roughage are used. In cattle production, the low level of commercialization
of the industry means that quality feed is rarely fed.
Producers were stratified into 8 regional groups dependent on the location of the farming
operation. The regional groups are consistent with the 8 agro-ecological zones in Vietnam2. The
largest proportion of surveyed households came from the Red River Delta region and the smallest
from the North West region. Pig farming is the dominant farming system in all regions,
accounting for more than 70 percent of surveyed producers. The level of specialization in pig
farming in the North East South and Mekong River Delta regions is the highest, at over 75
percent of farms. Poultry farming is most popular in the Red River Delta and Mekong River Delta
regions. Bovine farms are most common in the Central Highlands region. The highest
concentration of large-scale commercial pig and poultry farms are located in the North East South
region in southern Vietnam where here are a number of large pig farms that have been developed
to serve the Ho Chi Minh city market.
IFPRI (2001) finds diseconomies of scale in livestock production, with profits increasing
at a slower rate as inventories and revenues increase. This implies that the efficiency levels on
smaller farms, based on raising local animals with low cost feedstuffs are higher than those on
larger farms employing intensive high quality feed production techniques.
There are several reasons why Vietnam and the livestock sector presents a good case
study for looking at the impacts of globalization on poverty alleviation. As a country in transition
from central planning to a market-oriented economy, Vietnam has been going through a rapid

2 Central Highlands, Mekong River Delta, North Central Coast, North East, North East South, North West,
Red River Delta and South Central Coast
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process of liberalization. Moreover, it has exhibited a fairly strong growth during the last decade
of reforms, growing at an average annual rate of 4.4 percent per year and accelerating in the
second half of the 1990s. The livestock sector together with aquaculture has increased its
contribution to at least one-third of total increases in agricultural revenues (Vietnam Development
Report 2001). Livestock is an important source of income for the majority of Vietnamese
farmers, particularly those in upland areas where poverty rates are highest, so that its
development carries important implications for poverty reduction and income distribution.
The main explanation behind the rapid growth of the sector has been investment by the
private sector in feed industry, breeding, and slaughtering/processing stimulated by strong
domestic demand (IFPRI 2001). This rapid increase in demand for meat (at about 6 percent per
year) was induced by rising income, particularly in urban areas. There has not been a
comprehensive assessment of the impacts of such expansion on poverty in Vietnam, however.
In a scenario of increasing globalization, the livestock sector is faced with both
opportunities and threats that could have implications on its poverty-reducing capacity. There is
a growing trend toward the development of large commercial livestock production systems for
pigs intended for the export market. This is supported by policies that provide investment
incentives, as well as open importation of breeding animals and veterinary inputs. On the other
hand, it is the case that a large proportion of livestock production still comes from smallholder
production systems. Thus, there is a potentially critical inconsistency of current policies with the
ultimate objective of reducing poverty. This will require empirical investigation in order to
validate these concerns, and also to inform policymaking and development planning.

Methodology
In a survey of recent studies that analyze how trade policies affect the incidence of
poverty in developing countries, Reimer (2002) distinguishes four broad categories of studies.
The first category includes cross-country regression analysis that test for correlations among
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