Vietnamese Are Richer Than You Think

If you have been to Vietnam, you’d most likely see a large disparity in income among the Vietnamese population. It is a common complain that “the rich are too rich, and the poor are too poor”. In my latest chat with a recent Vietnamese immigrant, this person confirmed the complain with her own experience and further added that equality is getting worse by the year. That complain, however, is actually heard in the majority of the world, not just Vietnam – even right in the richest country in the world, the United States of America. Nevertheless, I suspect that many people view the world through their own experiences, therefore, their personal testimonies, though valuable, are not necessary a correct representation of reality – as Sherlock Holmes said in The Sign of Four: “Individuals vary, but percentages remain constant.”

Now, I do not mean to say that everyone’s experience is not real, but let us take a step back to analyze the situation a bit before we form further prejudices. After all, to form prejudices is easy, but to overcome them is quite challenging.

Let us look at the situation of Quynh, a shoe-shining boy in Vietnam (testimony on UN web). The last time I met a shoe-shining boy in Vietnam in 2008, he charged 10,000VND for a 30-min service. With the current exchange rate as of 9/11/2010, the boy’s wage for that 30 min work is $0.50. If the boy has more than 4 customers per day, he earns at least $2 a day. Consider his cost of the shoe-shining cream per day, the boy’s daily net income must be $1.50 or more.

Since World Bank’s definition of extreme poverty is an income of less than $1.25 per day (measured in Power Purchasing Parity index, see below for explanation), our shoe-shining boy should not be considered to be living under extreme poverty. However, I have moderate confidence in saying that our boy is probably included in the 21% of the Vietnamese population that live under extreme poverty.

(source: GapMinder)

How did World Bank know that 21% of the Vietnamese population are under extreme poverty?

Unfortunately, World Bank’s explanation page is broken, even though the data for extreme poverty head count for all countries is available here.

My hunch is that World Bank relies much on the official statistics collected by government agencies (income tax, etc.). Although we know this is the best estimate that anyone can have, we also know that there are huge technical problems with aggregate data like this one. What I mean is this:

1. Official accounting does not include the underground economy: our shoe-shining boy, though earns $1.50+ everyday, will most likely not report his income and pay tax on it. As my previous article stated, the necessary legal processes in Vietnam are too costly in terms of time and money, many of the poorer folks prefer to conduct business extralegally. If Italy, a developed nation, has almost half of its production and trading underground (i.e. mafia), I would suspect a very large part of Vietnam’s economy is still under-cover.  This means that the average Vietnamese citizen could be earning much more than the current GDP per capita of $1,051 USD.

2.  The ambiguity of PPP (Purchasing Power Parity): In measuring how much a person can purchase, the exchange rate can be tricky. A dollar cannot purchase a hair cut in the US, but can get me a decent hair cut in Vietnam (as of 2008). PPP tries to overcome this problem by adjusting for the price of a common good. “An example of one measure of PPP is the Big Mac Index popularized by The Economist, which looks at the prices of a Big Mac burger in McDonald’s restaurants in different countries. If a Big Mac costs US$4 in the United States and GBP£3 in the United Kingdom, the PPP exchange rate would be £3 for $4…. However, in some emerging economies, western fast food represents an expensive niche product price well above the price of traditional staples—i.e. the Big Mac is not a mainstream ‘cheap’ meal as it is in the west but a luxury import for the middle classes and foreigners.” (source)

According to the PPP method, in 2010, Vietnamese are estimated to be earning $3,104 – a very large jump from the 2008 official GDP per capita of $1,051. This level also surpass Vietnam’s goal of $2,100 per citizen by 2015.

My point is: I am not trying to disregard people’s personal experience and official statistics. I just want to point you to the ambiguity of the problem so that you can have a better imagination of the reality. And the reality is that Vietnamese are richer than you think.

Let’s think twice about what does the number means, but nonetheless, let us work hard for a better Vietnam, a better world : )

(source)