The Effects of afta on Macroeconomic Variables and Poverty: Evidence of Laos
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- 4.0. TRADE POLICY AND CHARACTERISTICS OF LAO TRADE
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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. 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.
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
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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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