"The Effect of Trade Liberalization on Income Distribution in Vietnam:
Dynamic Computable General Equilibrium Approach"
Mr Nguyen Manh
(PhD Candidate, Department of Economic Development and Policies,
School of International Cooperation Studies, Kobe University)
"The Effect of Trade Liberalization on Income Distribution
in Vietnam: Dynamic Computable General Equilibrium Approach"
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
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
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.
(by Nguyen Duc