Urban‐biased Policies and the Increasing Rural–Urban Expenditure Gap in Vietnam in the 1990s

There was a significant and widening rural–urban gap during the economic boom in Vietnam in the 1990s. Using an econometric decomposition, we find that differences in individual characteristics such as education, ethnicity and age are the primary explanation for this widening gap, whereas differences in the returns to these characteristics are the primary explanation for the increase in the gap at higher percentiles. We then argue that government investment policies and the manipulation of price incentives were important factors behind the gap. In particular, we argue that government policies created some benefit to urban dwellers at the expense of rural areas, lending support to Lipton's urban‐bias hypothesis, which states that government, under strong political pressure from the urban population, directs resources from rural to urban areas without consideration of efficiency or equity.