Crowding-out effect of tobacco expenditure in Vietnam

This study aims at analysing the causal crowding-out effect of tobacco spending on intrahousehold budget share in Vietnam. Besides, we also examine the differences in expenditure patterns between tobacco spending households and non-spending households in Vietnam as well as determine the reason behind these differences.

We estimated a system of quadratic conditional Engel curve to determine intrahousehold resource allocation using the latest Vietnam Household Living Standard Survey data in 2016. In order to estimate the causal crowding-out effect of tobacco spending, GMM 3SLS method is used to simultaneously deal with heteroscedasticity and endogeneity problems.

Although the Wald test results propose the difference in preferences between tobacco spending and non-spending households in Vietnam, once controlling for household characteristics, the results from GMM 3SLS method show that the differences are insignificant. Generally, the crowding-out effect of tobacco spending in Vietnamese households is modest because of the small share of tobacco in the total household expenditure. An increase in tobacco expenditure only leads to a fall in the budget shares of education. The crowding-out effect, however, mainly appears in the case of low-income households.

The reduction in education caused by tobacco consumption, particularly in low-income households, may extend inequality and thus prevent the socioeconomic development in Vietnam in the long term. Additionally, the tiny share of tobacco in household expenditure reveals that the price of tobacco products in Vietnam is extremely low, leading to high proportion of tobacco smokers. Government, therefore, should continuously increase the tobacco tax so that it could restrict the tobacco affordability.