Does Rural Credit Mediate Vulnerability Under Idiosyncratic and Covariate Shocks? Empirical Evidence from Vietnam Using a Multilevel Model

Abstract

This study explores the relationship between the uptake of credit and household vulnerability in rural Vietnam in terms of two main vulnerability indicators—vulnerability as expected poverty (VEP) and vulnerability to food poverty (VFP)—using data from the 2012 Vietnam Access to Resources Household Survey. VEP and VFP are examined under two decompositions, idiosyncratic vulnerability and covariate vulnerability, by constructing a multilevel structure model. The analysis accounts for two critical problems (selection bias and endogeneity) through an endogenous switching regression model. Generally, the results indicate the positive impacts of credit uptake on poverty alleviation and VEP reduction. Nevertheless, credit uptake increases VFP. Noticeably, compared to other categories of credit, productive credit is found to be more pronounced in reducing either idiosyncratic or covariate vulnerability. There is also suggestive evidence that although credit has positive effects overall, taking on either formal or semiformal credit has negative impacts on both poverty and vulnerability reduction. Hence, towards formal credit, government policies should concentrate more on credit costs and support preferential loan rates for poor rural households for productive purposes.