Economic modelling and fish consumption

Dr Audun Lem
Fishery Industry Officer
FAO, Rome
with assistance from
Nghia Nhan
Consultant

1. PRESENT SITUATION

1.1 Studies

A number of assessments of the present levels of fish supply and consumption in Viet Nam already exist. For example, the Food Balance Sheets^[4] produced by FAO show total fish production increased from 939 000 in 1990 to 1 952 000 tonnes in 2000 and exports rose from 5 000 tonnes to 368 000 tonnes in the same period. In this decade, the population rose from 66.1 million to 78.1 million, and total fish food supply increased from 874 000 to 1 464 000 tonnes. As a result, average per caput consumption in Viet Nam increased from 13.2 kg in 1990 to 18.7 kg in 2000.

In another recent report^[5], published in August 2002 by the Vietnamese Department of Planning and Projection with technical assistance from FAO, food balance sheets are presented for Viet Nam for the period 1997-2001. In this publication, average per caput consumption had increased from 15.2 kg in 1997 to 19.4 kg in 2001; total fish supply increased from 1 133 000 to 1 526 000 tonnes, and the population expanded from 74.3 million in 1997 to 78.7 million in 2001.

These reports show that although the periods covered and the absolute numbers may differ somewhat, the trend is similar; confirming a growing total fish supply, an expanding population, but a higher average fish supply per capita despite the increases in population and exports.

1.2 Food supply versus food consumption

It is important to distinguish between how food supply and food consumption figures are derived. Food balance sheets measure the supply of food available for human consumption, reflecting the gross quantities of food reaching the consumer, whereas food consumption surveys measure the amount of food actually consumed by the consumer. The amount of food consumed is lower than the supply of food because of losses such as those occurring in distribution and transportation, in households, in storage, food preparation and cooking, and through the feeding of domestic animals.

In addition, food supplies in balance sheets also include quantities consumed by foreign nationals residing temporarily in the country. Data weaknesses in production and international trade statistics and inconsistencies in reporting may jeopardize the overall reliability of the food supply figures presented. In particular, in many countries food production figures may be underestimated by governmental sources. This is especially the case where the informal sector is significant or where production for domestic use is widespread. On the other hand, in other countries, regional officers may have incentives to over-report production figures, especially when these are measured against national production targets and coupled to the economic remuneration of the same officials.

It is also important to bear in mind that in general, national food balance sheets are aggregate figures and give no indication of regional, demographic or socio-economic differences in availability or consumption. In most countries, at least in the case of fish products, regional variations in supply and consumption may be significant, and regional breakdowns are necessary in order to capture the essence of trends. Such information, although not published by FAO, is normally available from national authorities.

An example of a recent regional fish marketing study and consumption survey in Viet Nam is the Fish Marketing Study in Tien Giang province, carried out in 1999 and part of the project “Rural Extension for Aquaculture Development of Mekong Delta^[6]”. Although this study aimed particularly at forecasting demand for freshwater species, it also surveyed consumption of all fish products. Average fish consumption per caput for the province was estimated at 38.5 kg/year). The price elasticity for fish was estimated at -0.466 and income elasticity at 0.112.

1.3 Modelling, forecasts, and elasticities

In the economic literature a well-defined theoretical framework exists for the analysis of consumer demand for goods and services, including foodstuffs in general and fish products in particular. Over time, a number of different models have been developed for the estimation of future consumption and these have also found their application in many of the world’s markets for fish and fishery products. One of the most common models used is the Cobb-Douglas function where future demand is a function of price and income, calculated by using estimated price and income elasticities. To arrive at aggregate future estimates, alternative scenarios for different population and economic growth rates are used.

Of increasing popularity is also the ‘Almost Ideal Demand System model’, introduced in 1980 by Deaton and Muellbauer^[7], and applied, for example, quite recently by WorldFish in its demand analysis for fish in Bangladesh^[8].

Elasticities play a fundamental role in forecasting future demand. Elasticities are measurements that economists use to analyse the sensitivity of demand and supply, usually to changes in prices or income. In particular, price elasticity reflects the responsiveness of consumers (or suppliers) to changes in product prices or services consumed, whereas cross-elasticities measure the change in demand (or supply) for one product after the price change of a different product.

Demand for any given goods is influenced not only by its price or its substitutes but also by the buyer’s income. Therefore, income elasticities are calculated to measure the responsiveness of the quantity of the goods demanded to changes in the buyer’s income.

When elasticities are estimated, they represent the situation at a certain moment or period for which data have been collected. Over time, as consumers or suppliers have the possibility to adapt to changes in the market, to new products and prices, tastes and trends, the elasticities will reflect the changed behaviour. For example, many products that are considered high-value or luxury products with high elasticities in an initial phase of availability may over time become relatively low-value commodities with low elasticities later. We have many examples of this development in aquaculture, for example for species such as salmon and more recently by seabass and seabream in the European market.

After calculating elasticities, consumers are confronted with what we expected them to show. That is why we suggest that the elasticities resulting from our calculations have the “correct” sign or “incorrect” sign. This just means that we expect income elasticities to be positive; more income leads to higher demand, and price elasticities to be negative; higher prices leads to less demand. In cases where elasticities have the “incorrect sign” these are often caused by deficiencies in the background data, for example a very limited number of observations.

For a recent bibliography of demand elasticities for fish and fishery products, see Demand elasticities for fish: a review, by Frank Asche and Trond Bjørndal^[9].

1.4 Fish consumption and effect of rising incomes

In the previous paragraphs, we discussed briefly the concept of income elasticities; essentially that rising incomes will lead to higher purchases of a given merchandise. In general for all products and services, this holds true; the consumer will consume more if his income rises. However, for individual goods, the picture may be different as the consumer may prefer some goods to other goods, and with rising income he may choose to buy more of the preferred good and less of others. For example, when we talk about fish and fishery products, rising incomes generally lead to higher demand for the more expensive categories of products such as shrimp. At the same time, the consumer may choose to buy less of the more common, less expensive species, for example carp in Asia or small pelagic species in other regions such as mackerel or sardines. The consumer’s change in demand of different species or products resulting from an increase in disposable income can be estimated by calculating separate elasticities for the various products.

Generally, the rise in overall demand for fish and fishery products is caused by two main factors, population growth and income growth. In Viet Nam, population growth has been quite strong in recent decades, but the growth rate is now falling sharply, from almost 2 percent per year in the early 1990s to the present 1.3 percent but it could well be approaching 1 percent per year in the future.

Income growth, as measured by growth in GNP, was high throughout the 90s with annual growth levels between 5 and 9 percent. Income growth is expected to remain quite strong for the medium term but depends upon the health of the overall economy, which in Viet Nam as in most other economies, is heavily influenced by the demand for exported goods to the world market. However, in both the short and the long term, a strong and sustained demand for fish and fishery products can be expected from the Vietnamese population.

2. DESCRIPTION OF SURVEY AND SURVEY RESULTS

2.1 Household consumer surveys

In the present project, family household consumer surveys were carried out in various regions of Viet Nam; in the north, central and south; and in urban, suburban and rural areas within these regions. The findings in the 656 questionnaires returned from households formed the basis for the analysis of the current situation and for the calculation of elasticity estimates used for forecasting future fish consumption in this report.

The data collected through these respondents in various regions in Viet Nam include information on fish, chicken, pork and beef consumption, on family size, on household income and expenditures, product prices, family size, meals composition and on meals consumed away from home. The data permitted calculations of estimates for price and income elasticities in Viet Nam for the different fish species and categories and for different types of households.

Based on the data collected, average consumption per person of fish and fishery products in Viet Nam appears to be quite high, around 35.6 kg for fish alone, and substantially higher than those found in official statistics. These finding supports results from other surveys carried out in Viet Nam and may also explain the anomalies in the report on Viet Nam Food Balance Sheets 1997-2001^[10], in which fish consumption surveys show higher numbers than total supply figures.

The tables below show some of the survey data that describe the current situation in Vietnamese households and which form the basis for estimating the projection for future demands. Among the most important data are quantities of fish consumed, expenditures and household income. Likewise, data are given for consumption away from home.

Segregating the data into regional and residential categories, reveal some differences in consumption patterns. Most markedly, consumption of fish (we exclude here crab, shrimp and squid) is lower in the northern provinces when compared with central and southern provinces. At the same time, consumption in the cities appear lower than in both suburban and rural areas, a result which is common throughout the country and which may be an indication of inadequate distribution channels in urban areas or problems in logistics and marketing. However, given the large production of fish that takes place in the rural and suburban areas in Viet Nam, including the coastal provinces, it is not surprising that ready availability and access of fish results in a higher consumption of fish in these areas.

Household consumption figures are usually reported in product weight, which for comparative purposes must be converted into live weight when comparing with total supply figures. In the case of Viet Nam, due to the preference for live or round fresh fish when making purchases, and in consumption, we may assume that food losses in conversion are limited and that food consumption figures as reported in the household surveys approach live weight.

TABLE 1
Household consumption (kg/yr) of animal proteins consumption

* Includes marine fish and freshwater species plus other fish species particularly mentioned in the survey.

TABLE 2
Average monthly per capita fish consumption (kg) by region and residence

Tables 4 and 5 report the different price levels resulting from the surveys. Regional differences are for the most part small. Beef is the most expensive food, in most cases more expensive even than shrimp. Pork is priced in the same range as chicken, but chicken consumption is still very low in Viet Nam, at only a fraction of pork and fish consumption levels.

TABLE 3
Monthly household consumption of species (kg) by region (unweighted average by households responding only)

TABLE 4
Average food prices per kg as reported by households

* Fish basket is a weighted average of the fish species consumed, excluding shrimp, squid and crab.

TABLE 5
Fish basket price by residence

* Fish basket is a weighted average of the fish species consumed, excluding shrimp, squid and crab.

Household income differs significantly when split into geographic areas and type of residency (Table 6). In all regions, the lowest average household incomes are found in rural areas, whereas the difference in income between urban and suburban areas is not very large. In fact, in the central region, the highest incomes are found in the suburban areas and not in the cities.

TABLE 6
Average income per household and per capita income (VND x 1 000/yr)

Between geographical regions, highest incomes per household and per capita are reported in the south, whereas central and southern regions are fairly similar.

Meals eaten outside the household

To estimate fish consumption away from home, and thereby total consumption, the survey included ques-tions on meals eaten away form home. The responses provided data on both frequency and expenditure of such meals (Table 7). Using the different cost of meals at different times during the day as proxy for weight, we were able to estimate quantities consumed away from home. This resulted in an upward adjustment of total fish consumption by 8.4 percent (an additional 0.25 kg per month or 2.99 kg per year).

TABLE 7
Outdoor meals, expenditure and consumption of fish

2.2 The fish basket

When discussing overall fish consumption we felt it would be helpful to use a metaphor for overall fish demand instead of having to discuss demand species by species. In order to do this, we constructed a simple ‘Fish Basket as a proxy. The fish basket was calculated by determining the price for each species as observed in the surveys and corrected by the quantities consumed as reported by the households. The result is a weighted average of the fish species consumed. The Fish Basket excludes shrimp, squid and crab since these were already singled out with separate identities in the survey.

The Fish Basket therefore allows us to discuss demand of fish species in a general way, without having to go into detail regarding the single species. As the Fish Basket reflects a weighted average it is only valid in the short term as both prices of the species and the quantities consumed will change over time. Ideally, one could even argue for the calculation of regional fish baskets, but given the added complexities this would entail, we decided to let one national Fish Basket suffice in this exercise.

2.3 Regressions

In order to calculate the elasticities needed for the projections of future demand, regressions were carried out on the survey data. The estimated elasticties are given in Table 8.

TABLE 8
Elasticities by income group on per capita consumption

For crab, shrimp and squid separate elasticities were estimated, all showing low values. Except for the price elasticity of shrimp, the elasticities are of the correct sign. However, because of very low adjusted Root squared and high standard errors of estimate, the explanatory validity of the estimates is low, probably caused by the limited number of observations in each income group and for each species^[11]. In the cases where the elasticity is not of the correct sign, it is at least close to zero.

In order to estimate the elasticity for fish consumption in general, we constructed a fish basket with weighted quantities of the various species consumed as reported in the survey. The results are shown in Table 9.

TABLE 9
Elasticities of fish basket (per capita total fish consumed, only fish)

A comment on the validity of the estimated elasticities of the fish basket: The Square Root for all these are in the 0.7-0.8 range with standard error of the estimate at around 0.35. The sign of the income elasticity is as expected; higher income would lead to higher demand. In all three-residency categories, the income elasticity in the range of 0.8-0.9 denotes a high propensity and preference to consume fish products in Viet Nam with rising incomes.

The sign of the price elasticity is as expected only for the suburban and rural population; higher prices lead to reduced purchases. For the city population, the price elasticity is positive, albeit low. In any case, even for the non-urban population, we see that demand is quite inelastic; price increases have little effect on immediate consumption of fish products. Regarding the validity of the calculations of elasticities for the fish basket over all three types of residence, the R square is 0.720 and the standard error of estimate 0.3408, indicating a high validity.

Of course, long-term elasticities may be quite different as consumers over time have the possibility of channeling their purchases and consumption elsewhere.

Cross-elasticities: In the household consumption surveys, consumers reported major consumption of two categories of animal protein; fish products and pork. We therefore tried to estimate cross-elasticities on pork and fish consumption to investigate any correlation or substitution between the two categories. The dependent variable in the calculations was total fish consumption per capita and the variables were pork price, per capita income and fish price. The results show virtually no correlation between fish and pork consumption.

When studying the cross-elasticities over different income groups, the results do not change much (Tables 10 and 11).

TABLE 10
Cross-elasticities: fish and pork

TABLE 11
Cross-elasticities: fish and pork over different income groups

2.4 A few words of caution

The quality of analysis depends on the quality of the data collected through the surveys, on the survey design, on the sample population and on the interpretation of the results. In this study one can not categorically exclude that the survey data collected and analysed here contain certain demographic, geographic, seasonal or social biases in the sample population that influence the reported results and findings. However, even in cases where this could be the case, the model permits the user to modify the dependent variables and run projections using variables with which he feels comfortable. The running of the model should therefore enable the user to improve his understanding of current consumption patterns and of the variables that determine future demand and consumption.

The consumption levels observed in the household surveys are much higher than the results in most other surveys undertaken in Viet Nam. Of course, we do not claim that our results are correct and that the others are incorrect and we cannot categorically exclude that our survey results include inherent biases that overestimate consumption when transcribed to the national level. However, the objective of our study goes beyond the estimation of the level of current consumption. We are equally interested in future demand and how changes in demand have implications for official policy for the fisheries sector. The model we suggest permit the user to input his own estimates for current consumption as well as the major factors that determine future growth; population and income growth rates. Therefore by employing his own set of variables the user may use the model as a tool to form his own view on future demand, and whatever the absolute level of present consumption hopefully arrive at a better understanding of the factors that determine consumer demand in the future.

3. THE MODEL

Given the practical nature of the project, it was decided to use a simple Cobb-Douglas function to make future projections on fish consumption in Viet Nam. The model can be operated in Microsoft Excel and the users may make their own assumptions on income growth, population growth or elasticities, if so desired. Likewise, the users can modify the underlying assumptions regarding current fish consumption in the country in line with their own considerations.

We start from a Cobb-Douglas function in a special form:

Q = K × P^ep × I^ei

and in its linear logarithmic form:

ln Q = ln K + ep x ln P + ei x ln I

where:

Q represents demand quantity
P is price, and I is income
ep is price elasticity coefficient
ei is income elasticity coefficient
K is a constan.

Taking Q and I to represent individual demand and income then:

Q = Total Quantity Demand/Population
I = Total Household Income/Population

Using this model, we can further examine the relations between demand (quantity), price, economic growth and population growth.

We used available national data for economic growth as a proxy for future income development and population statistics as a proxy for future population changes (Table 12). In the calculations we use the elasticities already estimated in the regressions for future consumption. In this respect we underline the significance of the high-income elasticities calculated; with a growing income, the average consumer will increase his demand for seafood significantly. The very low price elasticity indicates high preferences for fish and indicates that consumers will continue to demand fish, despite price increases.

TABLE 12
Basic macro data

In order to simplify the model, we did not include imports and exports. Historically in Viet Nam, trade in fish and fishery products has also been very limited. For example, national statistics show no imports at all in the period 1976-1994 and current imports, although on the increase are still exceedingly small at about 5-6 000 tonnes per year. For exports, however, the situation is quite different. In the 1990s, exports have grown rapidly from less than 100 000 tonnes to the current 370 000 tonnes. The driving force, of course, behind this explosion in exports, is the rapidly rising production in Viet Nam of fish and fishery products, including commercial export-oriented aquaculture.

In the projections, we chose two time horizons; projected demand in 2005 and 2010. Since we did not include foreign trade in the forecasts, any difference between domestic demand and domestic production may be assumed to be cleared though imports and exports, combined with domestic price changes in order to clear the market.

4. PROJECTIONS

Based on different scenarios for population and economic growth, we made several projections for future population and income. As we have shown already, these in turn large determine future fish demand in Viet Nam.

Projection 1. Population and GDP growth index under different economic growth scenarios

Projection 2. Average fish per capita consumption under different economic growth scenarios

* Total fish consumed per month per person at home = 2.97 kg/per month (1 + 0.0849) x (growth index (2001 GDP = 100) - 100)/100);

** Adjustment ratio = 1.0838;

*** Consumed per month per person at home.

Projection 3. Total quantity fish eaten at home under varying economic and growth population predictions

Projection 4. Total fish consumed (million tonnes) by country including outside meals under varying economic and growth population predictions

Projection 5. Total shrimp, squid, crab consumed by country under varying economic and growth population predictions

Projection 6. Total fish consumed, including outside meals, and including shrimp, squid and crab under varying economic and growth population predictions

The projections suggest that the results are highly influenced by economic growth, in fact far more than by population growth. This is in fact predicted by the very highincome elasticity for fish demand that we calculated earlier in the report; with strong economic growth and higher disposable income, consumers will demand more fish. At the same time, the low price elasticities we estimated should support higher demand even if strong growth should cause higher prices on fish and fishery products.

In the regression analysis of this study, we have chosen to use a very simple forecasting model. Of course, this also has its drawbacks. Maybe the most important weakness is the static nature of the model and the assumption that prices do not change, despite a very strong growth in projected demand. More realistically, such a large growth in demand will lead prices to increase and set a limit to future fish demand. At the same time, when seen over a period of several years, consumers’ preference for fish (the income elasticity of fish demand) may change to the benefit of other food products such as poultry for example.

5. CONCLUSIONS AND RECOMMENDATIONS

5.1 Conclusions

This module on Economic Modeling and Fish Consumption is an integral part of the Project on FishMarketing and Credit in Viet Nam (MTF/VIE/025/MSC) and attempts to construct a simple model for use in forecasting future fish demand in Viet Nam. Based on data collected in household consumption surveys in urban, sub-urban and rural areas in Northern, Central and Southern Viet Nam, we have analyzed the current situation, estimated elasticities and made projections for future consumption and demand.

The most important findings are:

• Based on the household consumption surveys carried out in the project, current household consumption per capita of fish and fishery products in Viet Nam could be substantially higher than reported in official sources.

• Household demand and consumption of fish and fishery products in Viet Nam is growing.

• The major factor behind the growth in projected demand is high consumer preference for fish and rising living standards due to strong economic growth.

5.2 Recommendations

The results in this module indicate a significantly higher domestic consumption of fish and fishery products in Viet Nam than those reported in official sources. To some extent, these findings are supported by similar findings in regional surveys referred to in the text and also implied by certain anomalies in official food supply and consumption figures.

The main recommendation is therefore to improve official data collection and compilation of statistics, both at production, distribution and consumption level.

Any analysis based on collected sample data depends upon the accuracy and degree of representation of the sample data. We do therefore recommend that the work on household consumption and projected demand be continued, and on a larger and more representative scale.

Whether this work is to be carried out by the Government, universities or other official bodies is not the major point. What is important is that further research should be carried out in order to improve the knowledge base from which the Vietnamese Government can make well-informed decisions about future policy on fishery sector developments. If such further research incorporate the use of more advanced models than the very simple one used in this report, for example the Almost Ideal Demand System and with a much expanded survey sample, so much the better.

5.3 Policy implications

The Vietnamese population has a strong preference for fish and fishery products. Given the projected economic growth over the next years, we expect consumer demand to continue to grow. At the same time, Viet Nam’s processing and export industries have a substantial need for raw material for their activities. In summary, the growth in demand for fish in the future will be substantial.

With both domestic consumption and the needs of the export industry increasing, the question becomes: Where is the additional supply going to come from?

Increased imports is one possibility, but given the fact that one of the reasons for export promotion is to earn foreign currency, increased imports would conflict with this policy. The only other viable option becomes increased domestic supplies, if domestic prices are not to increase substantially. With marine fisheries unlikely to provide any substantial additional quantities, the only large potential supplier becomes the domestic aquaculture sector with possibly some additional quantities coming from inland fisheries. Further strengthening of the aquaculture sector and promotion of sustainable production practices in aquaculture should therefore be a key priority area for the Vietnamese government.

When aiming to increased output from the aquaculture sector, one must bear in mind that the species produced must find a market. It is not enough to go for a quantitive growth alone as the growth in production must be closely linked to the species demanded by consumers. When discussing export markets, this link is rather obvious and clearly understood by most of the stakeholders involved, but when considering domestic policy, the role and needs of domestic consumers are frequently overlooked. In the Vietnamese situation, with a sustained growth in domestic demand fuelled by strong economic growth, it is important to underline that the species preferred by consumers will probably also change with rising incomes.

Off-shore and deep sea fisheries in Viet Nam could probably also contribute to increased fish supplies for domestic consumption through adoption of more selective fishing methods and targeting of species for which there is local demand, improved onboard and on-shore handling and processing and improved marketing arrangements for catches by off-shore and deep-sea vessels.

Richer, better-informed and more sophisticated consumers will also place more emphasis on food safety. This will increase the role of government in food inspection in general, both on the production level and throughout the supply chain including the wholesale and retail market levels. An increased demand to food safety involves the official inspection of services as well as the producer and processor. Capacity building on food safety issues should therefore be given increased priority by the Government.

This report is meant to address current and future demand in general terms, and it is not our intention to provide specific advice on which species to produce and in what quantities. To embark on such a task, one would require much more detailed information on both current consumption in Viet Nam as well as on consumer preferences. Doing so would have signaled a misguided attempt to prescribe detail decisions that better can and should be left to the operators in the sector, of course within the framework of the Government’s overall sectoral policy. What is important for us to underline, is that the concept of marketing and the changing needs of the consumer should play an important role in the Government’s policy and implementation work in the aquaculture sector, and that the Government should give the aquaculture sector a very high priority, including a strong emphasis on research and training.