Does the private sector increase inequality? Evidence from a transitional country

Abstract

This study examines the relationship between private sector development (PSD) and inequality in Vietnam's 63 provinces over the 2010-2020 period. PSD is measured by the ratio of (i) domestic private enterprises (DPE) and multinational enterprises (MNE) to the labor force (π), (ii) private sector employees/enterprises per 100 inhabitants, and (iii) private sector employees per one billion VND in private investment. We apply a two-step general method of moment (GMM) estimator to account for unobservable factors, heterogeneity, simultaneity, and potential dynamic endogeneity. We find that a 1% increase in π contributes to a 0.263% reduction in income inequality (i.e., the Gini coefficient and Theil T index). In particular, the mechanism is partly explained by reduced poverty and higher income resulting from the expansion of the economic “pie,” such as an increase in employment, especially for unskilled and skilled manual female workers, and the improvement of public services and essential goods. However, PSD in Vietnam entails unevenly distributed economic opportunity in the mountainous areas, which may exacerbate inequality, and is seen in a lack of commitment to female workers. Therefore, welfare and social programs for the vulnerable still need to be improved in the years ahead.