The Impact of Income Inequality on Economic Growth: Empirical Evidence from Vietnam

Abstract

Each country's economic progress creates opportunities for its citizens to raise their income. Meanwhile, the country has secured the people's social security policies, particularly the protection of income equality, to promote harmonious and sustained economic development. Vietnam has been located in a dynamic economic development area in Southeast Asia since the 1986 economic reforms, with an annual growth rate of around 7%. Meanwhile, having achieved a middle-income status of roughly 3500 USD per person per year, Vietnam is attempting to maintain income equality and access to welfare systems for its inhabitants. As a result, the primary goal of this study is to use an autoregressive distributed lagged model to investigate the effects of income inequality and other economic factors such as foreign direct investment and trade openness on Vietnam's economic growth from 1992 to 2019. The research focuses attention on literature on income inequality, economic development indicators, and economic development in unique ways in this study. Income inequality slows the rate of change in economic development in the same year, according to our findings. Finally, the study will make policy suggestions to the Vietnamese government.

1. Introduction

Inequality is a phenomenon and a social process that has existed throughout human history. Equality is a measure of human achievements in the process of social struggle, construction, restoration, and development, and it expresses ambitions and aspirations (Nguyen, 2021; Wang & Choi, 2021). Equality is one of the five pillars of Vietnam’s common objective of “rich people, powerful country, democracy, justice, and civilization.” This is a difficult problem for the development process because, to make that goal a reality, a series of necessary objective and subjective conditions must be met, as well as many diverse and complex relationships in the world in all areas of social life, particularly the often difficult to reconcile the relationship between economic growth and equality, between the law of market competition and its negative consequences and the goal of building infrastructure.

Because the issue of inequality is perceived and implemented differently in different historical periods and under different social regimes, it is difficult to have a unified concept of inequality, especially in the context of today’s diverse and complex world, with many different and even opposing political interests and tendencies. Inequality is not a new issue; it has existed since people first learned how to interact to form a human civilization and continues to this day. This is constantly a hot topic that has to be researched, supplemented, and developed. Currently, humanity’s path is still a voyage of seeking and building equality principles, for a peaceful and successful world, for each individual with important interests deserving of respect and protection, in addition to the objective of economic progress (Nguyen & Pham, 2021).

“Rich people, powerful country, democracy, justice, and civilization” is one of the five parts of the common aim that we strive for in the cause of creating socialism in Vietnam. Managing social development; attaining social progress and fairness, according to the Party’s 12th National Congress (January 2016). The Party’s 13th National Congress (January 1, 2021) reiterated that, in recent years of renovation, along with economic development, the issue of equality has always been raised, solved, and significant achievements have been made, contributing to improving people’s material and spiritual lives while maintaining political and social stability; development opportunities are extended to a large number of people; growth benefits are getting bigger and bigger and distributing the benefits of growth.

However, in the process of market economy development, there are many drawbacks that have serious implications for equality, such as an excessive disparity between rich and poor among population classes and between regions; unemployment, underemployment, inequality in the allocation of means of production, value allocation, injustice in creating learning and employment opportunities for workers, become pressing issues and having negative consequences for equality.

In Vietnam’s current circumstances, implementing equality policies is always a challenging problem for the development process, because there are several objectives and subjective requirements that must be met to make that aim a reality. Many diverse and complex relationships in all aspects of social life must be resolved, particularly the often difficult to reconcile the relationship between economic growth and equality, between the laws of market competition and their negative consequences, and the goal of building a healthy and progressive society.

Profit cycles always cause inequality in the market mechanism, making it difficult to build a complete equality policy. Reality demonstrates that, in many circumstances, we must accept non-socialization to achieve economic concentration, but the form and limits of any inequality is a relatively new topic. Even developed countries, which have gone through a long history of severe social injustices, can only fix the inequality problem to a limited extent and still face numerous obstacles and challenges. Many countries throughout the world have had to reconsider and rethink their development models in recent decades, including some that were once seen as exceptional, such as the Nordic model with a welfare state and the model Europe mainland with the social market. Economic problems are social problems in terms of content, but resolving economic concentration is not always the same as resolving the problem of inequality.

As a result, how to understand equality in Vietnam’s current circumstances; how to ensure the link between economic development and equality at each step and throughout the development process; the role of the state in managing and regulating the market economy to achieve equality; and the leadership role of the Party in implementing equality policies, among other issues, are critical issues that must be recognized and resolved in our country today. We might say that equality is a historical concept that reflects people’s interactions in many aspects of life. Equality is the goal and driving force of social progress since it represents people’s aspirations.

Equality in Vietnam today is equality to a degree, fairness with recognition of injustice within limits; that equality is realized in tandem with economic growth and social progress; that equality is implemented step by step, in each policy and throughout the development process; that equality is realized commensurate with economic growth and social progress; that equality realized commensurate with economic growth and social progress; that equality is the socialist-oriented market economy’s purpose, motive, and standard of measurement. In the current state of affairs in Vietnam, equality has the following basic characteristics: To begin with, the type and scope of equality implementation are tied to the growth of the socialist-oriented market economy.

Second, in each phase and throughout the development process of the socialist-oriented market economy, equality is realized in conjunction with economic growth and social advancement.

Finally, equality is both a driving factor and a metric for assessing the socialist-oriented market economy’s level of progress.

Equality promotes all capacities and creativity of employees by ensuring unity in the relationship of social interests; equality contributes to refining social relations in the direction of progress and humanity. As a result, equality is the most significant condition and measure of the socialist oriented market economy’s development level; on the other hand, each step of the socialist-oriented market economy’s development and perfection also generates an environment and conditions for equality to be achieved.

Equality is closely related to societal variables such as economic (material production, economic interactions, etc.), political (democracy, equality, law, Party leadership, State management, and administration), and cultural (society as a whole) (ethical issues, customs and habits, jobs, education, training, health, life expectancy, etc.), As a result, equality is only truly realized when it encompasses all elements of social life. Each social development strategy must aim to achieve equality; a system of economic and social policies must be implemented simultaneously and in tandem in such a way that each economic policy is linked to social goals, laying the groundwork for the implementation of equality, and each real policy must be based on equality.

Equality must be based on the material premise of economic concentration, and an incentive for the economic concentration must be created. Avoid a situation in which economic development strategies have a negative impact on the resolution of social problems, increasing social inequality, and the execution of social policies that impede the market economy’s progress.

In the current situation in Vietnam, there are several obstacles to achieving equality: The inconsistency between the objective needs of equality implementation and subjective capacity, which includes leadership capacity. The Party’s and the State’s leadership and management continue to be constrained. The inconsistency between rising demands for equality implementation and inadequate capacity to meet them; The contradiction between the demand for consensus in the implementation of equality and the conflict of interests between individual, group, and social interests; the contradiction between the requirement for sustainable equality and the increasing trend of social stratification.

2. Literature Review

Research on the relationship between income inequality and economic growth has been researched in a number of recent studies, typically the study of Mdingi and Ho (2021), Barro (1999), Brueckner and Lederman (2018), Joshi (2017), and Ray and Linden (2018). Overall, these studies all confirm that there is a relationship between income inequality and growth, and the results are different depending on the specific circumstances.

Research by Mdingi and Ho (2021) suggested that there is a relationship between income inequality and economic growth. However, this relationship can be positive, it can also be negative, and in some cases, no relationship exists. This outcome depends on each specific context and each specific country. Similarly, in another study, Barro (1999) argued that high inequality is likely to reduce growth in low-income countries but it is an engine to improve growth in rich countries. Therefore, the author emphasizes the trade-off between equality and growth. In countries with a high degree of equality, the country does not have mechanisms to encourage economic growth, while countries with high levels of inequality can form a wealthy, capable merchant class. Entrepreneurship and job creation and economic growth.

According to Brueckner and Lederman (2018), the relationship between income disparity and growth is dependent on the income starting point in the research country. In low-income countries, this relationship is weakening. Inequality is predicted to rise in low-middle-income and transition nations. In high-income countries, there is a negative relationship between inequality and growth. This demonstrates that some countries, particularly high-middle- income ones, must accept considerable inequality. At the same time, in these countries, all human abilities are fully used, rich people have greater advantages than poor people, and the rich-poor divide is expanding. Joshi (2017), on the other hand, claimed that the relationship between inequality and growth may be explained using the theory established by Simon Kuznets in 1950, which has sparked scholarly discussion. According to author Joshi (2017)’s research in India, there is a positive association between inequality and poverty. Research in India, author Joshi (2017) suggests that there exists a positive relationship between inequality and growth, which is in stark contrast to the theoretical model discussed previously. The author explains that India is inherently a country with high inequality, income disparity in India is widening and that explains one reason for economic growth in this country. That confirms the trade-off between equality and economic growth in India.

According to Hailemariam and Dzhumashev (2020), there is a nonlinear link between income inequality and growth, with a threshold level of inequality influencing growth. This threshold level is frequently greater in developing countries than in developed countries. It demonstrates that there is a positive and negative relationship between income inequality and inequality, with the impact varying depending on the economic growth of each country. Furthermore, Ray and Linden (2018) claim that there is a positive association between income disparity and growth in poor nations and a negative relationship in rich countries for the period 1990– 2014 in 194 countries. However, countries may have to trade equality for growth, particularly in low-income countries where people’s earnings must be raised quickly. Rich countries, on the other hand, have better welfare systems and are able to implement suitable measures to reduce inequality and promote a peaceful society.

Many studies on the relationship between income disparity and growth have been conducted in many groups of nations around the world, but no comprehensive study has been conducted in Vietnam. As a result, the author analyses the relationship between inequality and growth in this study to re-evaluate the relationship. The report also serves as a foundation for re-evaluating Vietnam’s economic development process in terms of maintaining income equality and equal access to social services for all.

3. Data and Methodology

This section presents the data, the equation of the model used to empirically discover the relationship between economic growth and income inequality in Vietnam.

3.1. Data

The study uses data sets of variables selected from some previous studies (Table 1).

This part will implement the ARDL model with yearly data, from 1992 to 2019, to analyze the influence of income inequality, foreign direct investment, and trade openness on economic growth.

Economic Growth

Table 1: Research Variables

One of the best indicators of a country’s economic performance is annual GDP per capita. The GDP per capita in this study is calculated by dividing the midyear population by the gross domestic output. GDP is calculated as the total gross value added by all resident producers in the economy, plus any product taxes, minus any subsidies not included in the product value. It is estimated without taking into account depreciation of manufactured assets or natural resource depletion and degradation. The figures are in current US dollars. The popularity of this measure in the research on income inequality is the justification for choosing it instead of other variables (Barro, 2000). As a result, the dependent variable is chosen to be GDP per capita.

Gini Coefficient

The Gini coefficient, which measures the level of inequality in the distribution of income in each country, is a proxy for income inequality. The Gini index assesses the deviation from a perfectly equal distribution of income (or, in some circumstances, consumption expenditure) across individuals or families within an economy. Starting with the lowest individual or household, a Lorenz curve shows the cumulative percentage of total income received versus the cumulative number of beneficiaries. The Gini index is a percentage of the maximum area under a hypothetical line of absolute equality that assesses the area between the Lorenz curve and a hypothetical line of absolute equality. As a result, a Gini index of 0 denotes perfect equality, whereas a value of 100 denotes perfect inequality. In the literature, the Gini coefficient is frequently employed (Barro, 2000).

Foreign Direct Investment

Direct investment equity flows in the reporting economy are referred to as foreign direct investment (FDI). It is the total of equity capital, earnings reinvestment, and other capital. Direct investment is a type of cross-border investment in which a person from one country has control over or a significant degree of influence over the management of a company in another country. The presence of a direct investment link is determined by the ownership of 10% or more of the ordinary shares of voting stock. Data are in the current U.S. dollar.

Trade Openness

Trade here is the sum of exports and imports of goods and services measured as a share of gross domestic product.

3.2. Research Model

Economic analysis suggests that variables have a long run connection, implying that the means and variances are constant and time-independent. However, many previous studies have shown that maintaining the consistency of the means and variances in time series analysis is problematic. Most cointegration approaches are inappropriate to use in the event of solving this challenge. The Autoregressive Distributed Lag (ARDL) cointegration approach, also known as bound cointegration, is one of these techniques. As a result, the ARDL cointegration technique is superior when dealing with variables that are integrated into distinct orders, I(0), I(1), or a mixture of both, and robust when the underlying variables have a long run nexus. The ARDL model used in this study has the following mathematical form:

\(D(GDP)_t = \alpha_0 + \sum ^m _{i=1} \alpha_i D(GDP)_{t-i} + \sum ^n _{i=1} \beta_i D(GDP)_{t-i} \\ \qquad \qquad + \sum^p_{i=1} \beta_i D(FDI)_{t-i} + \sum^q_{i=1} \beta_i D(TRADE)_{t-i} + u_t,\)

where D is the difference operator; α_i, β_i are the regression coefficients, and u_t is the residual that has a simultaneous correlation but without correlation with its lags and every independent variable. So the right side of the regression equation includes the lags of dependent and independent variables.

4. Results and Discussion

Firstly, we present the data analysis steps, as in Table 2 and Figure 1.

One can also find the dependence structure between income equality and economic growth thanks to the following scatter plot (Figure 2).

The scatter plot indicates that income equality and economic growth have a negative relationship. She stationarity test of the time series using the Augmented Dickey-Fuller test is shown in Table 3 to ensure that the time series is stationary.

Table 2: The Statistical Description of Variables

Figure 1: Graph Depicting Changes Dependence Variable

The results show that, at the 5% level of significance, the initial time series are non-stationary, except for the GINI variable. Table 4 below presents the results of the stationarity test for the difference series.

The results reveal that the difference series are stationary at the 5% level of significance. To fit the ARDL model, difference series will be used. ARDL(1, 1, 1, 0) produces the best model results (Table 5). The authors use Hannan- Quinn criteria to select the optimal model with a maximum lag of 2 for the dependent variable and 1 for the independent variables (Figure 3).

To make the model available in analysis, it is necessary to conduct tests on the model. The first test is the autocorrelation of residuals with the null hypothesis: there does not exist autocorrelation of residuals. The results of testing the autocorrelation phenomenon using the Breusch- Godfrey test are presented in Table 6.

Figure 2: Scatter Plot Expressing the Relation Between Income Equality and Economic Growth

Table 3: Results of Stationarity Test of Original Series

Table 4: The Results of the Stationarity Test of the Difference Series

Table 5: Summary of ARDL Model Estimation Results (1, 1, 1, 0)

Figure 3: Hannan-Quinn Criterion Illustration for the 16 Best Models

Table 6: The Results of the Autocorrelation Test of the ARDL Model

The results in Table 6 show that the ARDL model does not contain autocorrelation defects of the residuals of orders 1 to 5. The following Figure 4 illustrates the cumulative sum of the residuals of the model at the significance level of 5%. In Figure 4, the cumulative sum of the residuals of the ARDL model is within the limit line at the 5% level of significance, demonstrating a stable model.

Figure 4: The Cumulative Sum of the Residuals of the ARDL Model at a 5% Significance Level

5. Conclusion and Policy Implications

Thus, the empirical results can be written as follows:

D(GDP(t)) = 0.634 * D(GDP(t–1)) – 41.438 * D(GINI(t)) + 40.323 * D(GINI(t–1)) + 19.865 * D(FDI(t)) + 8.803 * D(FDI(t–1)) – 8.873 * D(TRADE(t)) + 22.927 + u(t)

It signifies that, in the short term, Vietnam’s economic performance is improving, with last year’s GDP per capita encouraging this year’s GDP per capita. Income inequality in a given year has a negative impact on economic growth in that same year. Foreign direct investment has a positive impact on economic growth both in the short and long term. At the same time, trade openness does not appear to be a driving force behind economic growth. Thus, we can propose some implications thanks to the empirical result of some collected variables, especially income inequality on the economic growth as follows:

Implementing equality is an objective requirement for the development of the socialist-oriented market economy in our country. To turn that objective requirement into reality, the first task is to constantly improve the leadership role of the Party and the effectiveness of the State’s management, that is, promote the power of the subject, create factors and regulate the decisive conditions to ensure the success of the set goals. In the future, it is necessary to do well the following basic solutions:

Firstly, improve the political bravery, qualifications, and leadership capacity of the Party; constantly summarizing practices, developing theories on equality in the context of the socialist-oriented market economy in our country. In Vietnam today, implementing equality in the context of a socialist-oriented market economy is still a new and complicated issue, with opportunities and advantages, but also many difficulties and challenges. Steady and steadfast political bravery will help the Party take advantage of opportunities and advantages, overcome difficulties and challenges, and lead the country steadily forward for the goal of developing a rich and strong country in parallel with the implementation of public policy. Strengthening the Party’s leadership capacity, in addition to maintaining political bravery, the Party must constantly improve its intellectual level to match the requirements of the new task. First and foremost, the Party must improve its capacity to plan scientific and correct policies and guidelines. Such policy and direction must properly reflect the development law of social life, be in line with the legitimate aspirations of the people, and be unanimously supported by the people; associated with the specific historical situation of the country and the objective development trend of the times. Enhancing political bravery and promoting the intellectual capacity of the Party is always associated with the process of learning Marxism - Leninism theory and Ho Chi Minh’s thought; each cadre and member of the Party constantly improve their qualifications in all aspects, actively practice, and stick with the people; selectively absorb the experiences of other countries; constantly expanding democracy in the Party and society.

Second, continue to renew the Party’s leadership method over the State in the implementation of equality. Strengthen the Party’s leadership over the State in formulating and promulgating laws, perfecting the legal system and State’s policies to develop the market economy and realize equality. Strictly implement the Party’s regulations on formulation and decision-making, improve the quality of the Party’s resolutions on socio-economic development related to the implementation of equality, create favorable conditions for the State institutionalizes those resolutions, and at the same time organizes their implementation with high results. Strictly implementing the regulations on the Party’s leadership over the State, the Party does not interfere too deeply in the management and administration of the State, the Party does not replace the work of the State, and the Party leads the State. State to promote the political leadership role of the Party, and at the same time promote the role, initiative, and creativity of the State in the implementation of equality in the conditions of the market economy.

Thirdly, build and perfect the legal basis for the implementation of equality in the context of the socialist oriented market economy. As the most important state management tool, in the context of the market economy, laws, especially economic laws, play the role of creating a legal basis for the State to implement equality. Only by law can the State well implement equality in all aspects, the economic processes operating according to the market mechanism such as equity in ownership of means of production, in management and distribution, in the process of regulating resources for socio-economic development. To step up the implementation of the Party building and rectification work, to improve the leadership capacity and combat strength of Party organizations; consolidating and improving the quality of activities of the Party Personnel Committee, strongly promoting the role of these organizations in directing the leadership of agencies, cadres and civil servants to realize equality.

Fourth, build a clean and strong State apparatus; constantly improve the qualifications, capacity, and moral qualities of the contingent of State officials and civil servants. The State needs to focus on renovating and improving the quality of the contingent of civil servants in both capacity and quality, meeting the requirements of effective public service performance. Strengthen the training and retraining of cadres, strengthen the inspection of public services, prevent and strictly handle negative acts of corruption and bossiness of state officials. The State needs to implement equality right in the cadre work, strengthen the reform of the salary system of civil servants to create conditions for them to feel secure in their work, complete their tasks, and not fall into the above-mentioned extremes and evils, especially corruption, to realize equality.

Fifth, synchronize the implementation of several solutions, particularly inventing and perfecting economic and social policies in the direction of peacefully resolving conflicting interests. Creating and improving economic policies Financial and monetary policy; ownership policy; distribution policy; investment policy Renovating and improving social policies: labor and employment policies; salary and allowance policies; hunger eradication and poverty reduction policies; social security policies; social preferential policies for people who provide meritorious services; health policies; education and training policies.

Promote socialist democracy, improve the effectiveness of the work of preventing and combating corruption, wastefulness, and social evils; Promoting socialist democracy; Improve the effectiveness of the fight against corruption, wastefulness, and social evils; In the coming years, the promotion of the fight against corruption, waste, and social evils must continue to be identified as a strategic task in economic development and implementation of equality in the country. To accomplish this, it is necessary to synchronously deploy the following solutions: strengthen the leadership of the Party in the fight against corruption, wastefulness, and social evils in the new situation; perfect the management and supervision mechanism according to the owner’s instructions, publicity, and transparency; improve moral quality, pure lifestyle for the team of leaders and managers; strengthening law enforcement agencies; promote the active role of the people in the fight against corruption, wastefulness, and social evils.