Provincial Income Thresholds and Inequality Dynamics in Vietnam: A Panel Smooth Transition Regression Approach

This study examines threshold effects in the relationship between provincial income levels and income inequality in Vietnam using a Panel Smooth Transition Regression (PSTR) model for 63 provinces during 2006–2023. Inequality volatility is measured by the change in the Population Weighted Coefficient of Variation, while provincial per capita GRDP serves as the transition variable. The results identify a significant income threshold of 36.74 million VND per capita per year. Below this threshold, FDI inflows are associated with a stronger short-run increase in inequality volatility, but this effect weakens substantially as provincial income rises. Government budget expenditure exhibits the opposite pattern. It slightly reduces inequality volatility in low-income provinces but mildly increases it in high-income provinces, suggesting that the redistributive effect of public spending depends on expenditure composition and targeting rather than income level or spending volume alone. GRDP growth reduces inequality volatility across both regimes, although its effect becomes weaker at higher income levels. The COVID-19 period is also found to be significantly associated with changes in provincial inequality dynamics. Overall, the findings caution against viewing FDI attraction as automatically inequality-reducing and highlight the need for sustained, province-specific structural reforms.