Does Microcredit Improve Rural Households’ Social Network? Evidence from Vietnam

Abstract

Although microcredit targets both financial and, more importantly, social returns, it is unclear in existing literature that whether participating in microcredit programs fosters social network. Filling this gap, this study aims to quantitatively test whether microcredit improves the social network of rural households in Vietnam. Specifically, with microcredit borrowing to fund its family business, a representative household is engaged in a two-stage decision problem, namely to first choose a social network and then consumption to maximise its lifetime utility. Utility maximisation yields an optimal social network as a function of microcredit borrowing, which is estimated using the VARHS dataset from 2008 to 2016 in Vietnam. We find that microcredit improves both rural household’s social network quality and size.

Acknowledgements

We are grateful to the Vietnamese Institute of Labour Science and Social Affairs (ILSSA), the Vietnamese Central Institute for Economic Management (CIEM), and the University of Copenhagen, Denmark for the works on collecting the rich information panel dataset, VARHS. We appreciate comments from anonymous referees which helped improve the paper. The data and code of analysis can be made available to bona fide researchers on request.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The poverty rate declined from 60 per cent in the early 1990s to 20.7 per cent in 2010, then 13.5 per cent in 2014 (World Bank Data, 2016).

2. The set of household characteristics that affect the likelihood of achieving success includes the age of household’s head (AgeH), education of household’s head (EduH), household size (HSize), total land that a household owns (Plot), number of dependent members (Dep), whether a household involvement in non-farming business activities (Nfarming), whether a household experiences any income shock (Shock), whether a household is classified as being poor (Poor), whether a household is local or not (Local), and household income from sources other than the family business (Y).

3. Other household’s characteristics that impact the observed component ($\stackrel{⌣}{z}$) are discussed in Phan et al. (2019).

4. At the steady state, $C_t=C_{t-1}=C,E_t=E_{t-1}=E,S_t=S_{t-1}=S,H_t=H_{t-1}=H,K_t=K_{t-1}=K=\sigma M$.

5. Based on the information of main use of loan reported in the surveys, we excluded all households who borrowed for consumption purpose. For example, there are 14 main use of loan from the survey: (1) for rice production; (2) for other crop production; (3) for animal husbandry; (4) for forestry; (5) for fishery; (6) for non-farm activity; (7) build/buy house; (8) buy land; (9) buy another asset; (10) pay for wedding/funeral; (11) for education expenses; (12) for health expenses; (13) for general consumption; (14) for other consumption. We excluded all households who borrowed for wedding/funeral; education expenses; health expenses; general consumption; and other consumption.

6. This is calculated by summing up the number of years that the household is a member of the associations.

7. In the survey, households were asked two questions for each participated social group: (1) Are members of this group mostly of the same extended family/family network/blood? and (2) Do members of this group mostly have the same occupation? The answers are coded as 2 if it is yes, 1 otherwise. Then, the household social network diversity score is measured by summing up the score from two questions for all social groups to which the households are members.

8. The score of how often the household participates in meetings is coded as 1 for rarely/never; 2 for sometimes; 3 for almost always. This component is obtained by summing up the score from each social group that the household is a member.

9. For each participated social group, a household was asked: How does this group usually make decisions? the answers are coded as 1 for leader decides and informs the other group members; 2 for leader asks the group members what they think and then decides; 3 for all group members discuss and decide together. This component is obtained by summing up the scores related to all the social associations of the household.

10. Measured by summing up the total value spent on New Year’s Eve, social events, and gifts.

11. This variable might also be considered as a component of the social network size. Arguably, a household could spend more on social activities, if it has a broader social network. However, the household appears to be more concerned with the effectiveness of its spending on those activities, as an investment for future return. Hence, we only include this dimension in constructing the quality index.