Are Returns to Investment Lower for the Poor? Human and Physical Capital Interactions in Rural Vietnam

A revised version is forthcoming in Review of Development Economics. Unless disparities in education are addressed, market-oriented reforms will generate inequitable agricultural growth in Vietnam. If the marginal gains from investment in physical capital depend positively on knowledge, but a household cannot hire skilled labor to compensate for low skills, then even if it has access to credit the household will achieve lower returns than an educated household. If, as is common, the income-poor are less educated because of failures in the credit market and because they live in areas where there is less access to schooling, then the poor will also have lower returns on investments. Van de Walle tests this argument for the case of irrigation infrastructure in Vietnam. She asks how a household's education level and demographic characteristics influence the gains to household income from irrigating previously unirrigated land. The net marginal benefit of irrigation increases strongly with the education of a household. The results suggest that unless disparities in education are addressed, market-oriented reforms will generate inequitable agricultural growth in Vietnam. This paper - a product of Public Economics, Development Research Group - is part of a larger effort in the group to understand the determinants of poverty and the policy implications