The Effects of afta on Macroeconomic Variables and Poverty: Evidence of Laos



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LECS 1


LECS 2

LECS 3


LECS 4

1992/93


1997/98

2002/03


2007/8

Laos


46

39.1


33.5

28

Urban



27

22

20



17

Rural 


  with road

43

32



31

30

  without road



61

51

46



43

Lowland


28

20.5


Midland

36.5


29

Upland


34

33

Source: World Bank and DOS (2009).



Note: LECS (Lao Expenditure and Consumption Census).

LECS 1


LECS 2

LECS 3


LECS 4

1992/93


1997/98

2002/03


2007/08

Laos


30.5

34.9


32.6

35.4


 Urban

30.9


39.7

34.8


36.3

 Rural


     with road

29.3


32.1

30.3


33.2

     with road

27.5

30.9


29.4

33.3


Region

  Vientiane

29.7

36.9


36

38

  North



26.9

34.5


30.7

35.2


  Central

31.5


32.5

31

34



  South

32.3


32.4

31.4


32.2

Source: World Bank and DOS (2009).

Note: LECS (Lao Expenditure and Consumption Census).

Stunting


Underweight

Richest


17.5

19.3


Rich

32

33



Middle

38

41



Poor

38

43



Poorest

43

54




14 

 

4.0. TRADE POLICY AND CHARACTERISTICS OF LAO TRADE 



4. 1. Trade Policy in Laos 

Since trade policies are the core of the overall development strategy, their formulation and 

implementation generally synchronize with the stages of economic development in Laos. 

Evolution of the Lao economy and trade can roughly be divided into two phases: centrally-

planned economy and trade control (1975–1985); and market-oriented economy and export 

promotion (1986–present) (Suvannaphakdy, 2013). 

 

Prior to 1986, the Lao government had controlled over foreign trade (Otani and Pham, 1996, 



p. 11). A battery of interventions, including foreign exchange controls, protective tariffs, and 

import restrictions, were employed to save foreign exchange. Both exports and imports were 

monopolized by the state, except trade made by joint public and private companies or a few 

state enterprises. Along with measures like deficit financing and selective credit allocation

these policies had significant impacts on Laos’ early economic development. However, as is 

usually the case, the state control of foreign trade had become increasingly complex and 

inefficient as the allocation of foreign exchange had to comply with the provisions of various 

bilateral trade and foreign assistance arrangements, leaving little room for flexibility.  

 

However, the external trade system was liberalized in 1987 following the major economic 



reform in 1986, resulting in the elimination of most of these restrictions on trade in 1988. To 

promote exports, two types of export promotion policies were implemented. The first type 

aimed at removing or neutralizing distortions resulting from protectionist policies enacted 

during the centrally-planned economic system. It included, inter alia, liberalization of the 

foreign exchange allocation system, substitution of tariff for nontariff protection, and rebates 

of import duties. The other type involved the provision of new incentives for exports, to 

which the establishment of export processing zones and tax incentives for exports belong.   

 

Together with the continued domestic liberalization, Laos has been integrating into the 



regional and global economy. Laos joined ASEAN in 1997 for geopolitical and economic 

development reasons and has gradually integrated into ASEAN over time. The agreement on 

the Common Effective Preferential Tariff (CEPT) scheme for ASEAN Free Trade Area 

(AFTA) required Laos to eliminate all of its import duties by 2015. By implementing the 

CEPT scheme for AFTA, ASEAN members have made significant progress in lowering 

intra-regional tariffs. However, the actual utilization by traders of AFTA preferential tariff 

rates is still limited as it accounts for only 5% of total trade (Manchin and Pelkmans-

Balaoing, 2007, p.13). Nonetheless, participating in AFTA has significant impact on Laos’ 

trading patterns and trading volume (NSC and UNDP, 2006, p. 21).  In addition, Laos plans 

to join the World Trade Organization in 2013 which can provide larger export market for 

Laos. 

 

The potential trade-increasing effects of allowing international trade expansion in Laos will 



provide a number of new opportunities and challenges. The opportunities include the access 

of a larger variety of intermediate products and capital equipment by many rural people, 

which enhances the productivity of their own resources; and the stimulation of cross-border 

learning of production methods, product design, organization methods, and market 

conditions. Unfortunately, not all of the effects of increases in trade would necessarily be 

positive. At present, Laos could gain limited benefit from AFTA as the country is 

characterized by small and medium size enterprises (SMEs) producing low value-added 

products. Therefore, integrating Laos’ SMEs into the regional production network is 

becoming a major challenge for reaping the full benefit from AFTA. Furthermore, since 



15 

 

Laos’ key export products have concentrated on the mining and hydropower (MOIC, 2011), 



policies aimed at increasing exports of these products can lead to the scarcity of water 

resources for rural people through increased use for mining activities and hydropower 

development. Finally, removing all tariff barriers can lead to more severe trade deficit which 

could result in a depletion of international monetary reserves, currency instability, and a 

slowdown of economic growth. The expansion of Laos’ foreign trade has the potential to 

raise domestic production, but also the potential to cause some forms of macroeconomic 

instability and environmental deterioration if more prudent macroeconomic policies are not 

designed and standards of governance are not raised simultaneously. 

 

 


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