LAO PDR AND WTO ACCESSION: IMPLICATIONS FOR AGRICULTURE AND RURAL DEVELOPMENT

Effects of policy changes on agriculture and rural development 32 ♦ Economic growth, structural change and trade 32 ♦ Food security and food price instability 34 ♦ Job creation, poverty

FOR AGRICULTURE AND RURAL DEVELOPMENT

Kym Anderson

School of Economics and Centre for International Economic Studies

University of Adelaide Adelaide SA 5005 Australia

Phone (+61 8) 8303 4712 Fax (+61 8) 8223 1460 kanderson@economics.adelaide.edu.au

July 1998

Report prepared for the Lao PDR’s Ministry of Commerce as part of a UNDP-funded UNCTAD project (RAS/92/041) Thanks are due to many people in Vientiane for their invaluable assistance (see Preface), but especially to my national counterpart Mr Xaypladeth Choulamany, for his help in many ways

Table of contents

Page

Preface iii

Acronyms iv

Summary v

1 Introduction 1

♦ Why focus on WTO accession for Lao PDR at this time? 2

♦ Why pay special attention to agriculture and rural development? 3

♦ Outline of the study 4

2 Why join WTO? 6

♦ Benefits and obligations of WTO membership 7

♦ The steps to WTO accession 11

♦ Special and differential treatment for developing and least-developed countries 13

3 Recent and prospective growth and structural changes in Lao PDR 15

♦ A transition economy on the move 15

♦ Agriculture’s relative decline 16

♦ Developments within the agricultural sector 18

♦ Production and trade prospects under current policies 19

4 What policy changes are needed for WTO accession? 22

♦ Agricultural policy changes 22

♦ Non-agricultural policy changes that will affect rural development 25

5 What new opportunities will open up by joining WTO? 28

6 Effects of policy changes on agriculture and rural development 32

♦ Economic growth, structural change and trade 32

♦ Food security and food price instability 34

♦ Job creation, poverty alleviation and income distribution 35

♦ Resource depletion and the environment 36

♦ Government revenue 38

♦ Are these changes consistent with government policy objectives? 39

7 Choices confronting the Lao PDR 40

Tables and box 45

Appendix 1: Why the WTO exists and what accession involves 55

Appendix 2: Determinants of structural change in a developing market economy 67

Appendix 3: Agriculture in the WTO: the Uruguay Round and next steps 88

References 113

This study is part of a series of studies organized by the United Nations Conference on Trade and Development (UNCTAD) and funded by the United Nations Development Programme (UNDP) under Project RAS/92/041 The series aims to provide technical assistance to the governments of Vietnam, Laos, Cambodia and Nepal as they prepare

to negotiate their accession to the World Trade Organization (WTO) The present paper is prepared for the Lao PDR’s Ministry of Commerce, following a field trip to Vientiane in March 1998 The author is extremely grateful to the many people in Vientiane and to Robert Jauncey and Jayant Menon who graciously offered their time, knowledge and wisdom, without which this study would have been impossible to complete in the time available At the risk of offending the many others who helped in

so many ways, I would like to especially thank the following officials and their

organizations Ministry of Commerce: Ms Khemmani Pholsena (Director General) and Ms Banesaty Thephavong; Ministry of Agriculture and Forestry: Mr Inthadom

Akharath, Mr Somphanh Chanpengxay, Mr Xaypladeth Choulamany and Dr Peter

Stevens; and United Nations Development Programme: Mr David Eizenberg

(Assistant Resident Representative) and Ms Virachit Vongsak

General Agreement on Tariffs and Trade International Monetary Fund

International Trade Centre Least-developed Countries Multilateral Fibre Arrangement Most Favoured Nation

Multilateral Trade Negotiations Organisation for Economic Cooperation and Development Small and medium (non-farm) enterprise

State-owned enterprise Sanitary and phytosanitary State Trading Enterprises Trade-related Investment Measures Trade-Related Intellectual Property Agreement Trade Policy Review Mechanism

Tariff-rate quotas United Nations Conference on Trade and Development United Nations Development Programme

United State International Trade Commission

‘Voluntary’ export restraint World Trade Organization

Summary

Why should the Lao PDR join WTO?

To become a WTO member is to join a club Like all clubs, the WTO bestows benefits on members but there are some costs; it offers rights but with them come obligations; it provides new opportunities but also some challenges Evidently the net benefits are overwhelmingly positive, since most countries are or have applied to become members Four specific benefits to a country’s producers and traders are:

• greater and more-secure transit rights protected by an independent WTO dispute settlement body for resolving transit disputes,

• greater, more-secure and less-discriminatory market access abroad for exports,

• availability of a legal mechanism for resolving bilateral trade disputes, and

• greater discipline on the country’s government to practise sound economic policy making and avoid the temptation to respond to interest-group pleading for special protectionist favours

Like all worthy clubs, there are rules to be followed, entry conditions to be met and formal accession procedures to follow Occasionally the rules and obligations

upset political sensitivities because some groups within a country may lose a privilege

(e.g., protection from import competition) But almost invariably those rules boost the overall economy and thereby the vast majority of its people They do so through encouraging:

• better allocation of national resources towards industries with the strongest comparative advantage;

• enhanced learning and newer technologies from interacting more with the rest of the world;

• greater flexibility, via trade, for dealing with shocks such as natural disasters; and

• less wasteful rent-seeking lobbying activities by groups seeking government assistance and protection

Why focus on WTO accession now?

All the empirical evidence suggests that economies grow faster the more open they are to international trade and investment Therefore the sooner Laos commits itself to become more open, as required for WTO accession, the sooner investor confidence and thereby the rate of per capita income growth will rise This is especially so in the current economic climate of uncertainty in East Asia Secondly, the preferential commitments being made currently to the ASEAN Free Trade Area (AFTA) could lead to trade diversion By promptly multilateralizing those commitments as part of WTO accession, the risk of welfare losses from trade diversion can be avoided Thirdly, there is currently much goodwill surrounding WTO membership applications from least-developed countries, which can be capitalized on

in the form of technical assistance in trade policy training and institution building And fourthly, a comprehensive new round of trade negotiations likely to start perhaps

as early as 2000 Thus the sooner Laos joins WTO, the more opportunity it will have

to seek better access for its exports via the bilateral part of those negotiations

Why pay special attention to agriculture and rural development?

The reasons for focusing on the impact of WTO accession on agriculture and rural development are obvios in the case of Laos, because more than 80 per cent of the Lao population live in rural areas and more than 50 per cent of measured GDP is generated by farmers As well, poverty alleviation requires focusing on where the poor are, and they are overwhelmingly in rural areas

What policy changes are needed for WTO accession?

Both agricultural and some non-agricultural policy changes needed before Laos can accede to WTO will have important impacts on rural areas Agricultural policies have to conform with the Uruguay Round’s Agriculture and SPS agreements

as well as those relating to import licensing and state trading That requires:

• tariffying all non-tariff barriers to agricultural imports (possibly including rice), binding those tariffs, and agreeing on a schedule to reduce them over the accession transition period;

• confining domestic support measures to ‘green box’ instruments such as public investment programs in rural health, education, research and extension, and infrastructure;

• possibly ruling out future use of agricultural export subsidies (since none are used

• ensuring that the markets for the many farm products traded via state trading enterprises (STEs) are contestable and/or that discriminatory treatment such as preferential access to scarce credit for those STEs is notified

Non-agricultural policy changes needed for WTO accession could affect rural development in two ways: through using (or releasing) resources otherwise available for (or useable in) farm production, and/or through altering the amount of non-farm activity in rural areas Currently trade taxes cause the price of importables relative to exportables to be greater domestically than at the country’s border, and non-tariff trade restrictions amplify that difference substantially (and would do so even more were it not for smuggling) WTO accession could require Laos to tariffy some of its non-tariff trade barriers, commit to lowering some of those tariffs over time, and reduce preferential treatment of STEs (such as providing interest-subsidized credit)

To the extent that such reforms are implemented in the accession process, it will benefit rural people because more mobile resources will be available for farm production

What new opportunities will open up by joining WTO?

A crucial part of the Lao PDR’s WTO accession negotiations involves losing its current status as a ‘non-market economy’ prior to joining the WTO, and ensuring all major WTO members approve its accession Both are important because otherwise members such as the US or EU could continue to apply selective safeguards and impose punitive anti-dumping duties against imports from Laos, making access to the WTO’s dispute settlement mechanism close to worthless

Assuming success on those fronts, the most obvious scope for trade and inward investment growth is with the United States: currently Laos trades with the US less than one-third as intensely as does the rest of the world (given the US share of world trade), whereas under free trade one might expect it to trade perhaps 1.5 or more times as intensely as others (given the number of business people in the US with former ties with Laos) The intensity of trade with the EU also is still quite low, with much scope for expansion Both partners would be importing much more if they were

to allow Laos to expand its exports of textiles and clothing, items in which the country has a very strong comparative advantage Beyond that, it is not easy to predict what the precise pattern of trade growth will become during the transition period following accession, because it depends so heavily on the degree of freedom negotiated bilaterally between Laos and its various trade partners but especially the US and Thailand

What will be the consequences for agriculture and rural development?

Should the Lao PDR choose to take this opportunity provided by its accession

to WTO to liberalize its markets in the spirit as well as the letter of the WTO law, the following broad-brush effects can be anticipated:

• economic growth would be boosted and sustained at a higher level, particularly if essential public infrastructures were simultaneously improved;

• agriculture would expand, along with associated agribusiness and other service activities, which would boost income-earning opportunities for farm households in rural areas;

• food output and exports and hence food security would be enhanced, even if rice import dependence increases;

• more jobs will be created, more poverty will be alleviated, and a more equitable income distribution will emerge over time with than without a more open policy regime, particularly for rural people; and

• government revenue from trade taxes, contrary to common perceptions, may actually increase rather than decrease, particularly if non-tariff trade barriers are tariffied

What are the policy choices confronting the Lao PDR?

Clearly, the Lao PDR will have to implement numerous reforms before becoming a member of WTO, but in doing so it has numerous choices to make Reasons are given in the final section as to why the government should not necessarily answer the following questions with a ‘yes’:

• should tariffs be bound at well above applied rates?

• should MFN tariffs be kept well above preferential ones required to fulfil AFTA commitments?

• aren’t infrastructure and human capital investments in rural areas too expensive?

• shouldn’t at least the profitable SOEs and STEs be kept in the hands of the State?

Finally, the report lists some additional ingredients for developing good trade policy practice They include:

• adopting an economy-wide, whole-of-government view of trade and trade-related policies, rather than an ad hoc piecemeal or sectoral view of selected issue;

• understanding well the economy’s long-term trading interests and using that knowledge to develop a clear strategy for seeking out the highest-payoff market access opportunities leading up to the next Round of multilateral trade negotiations; and

• engaging those domestic interest groups who stand to gain from Lao involvement

in WTO (particularly exporters) to help convince skeptics, and those who fear they

might lose from more openness, of its virtues

1 Introduction

The Lao People’s Democratic Republic (PDR, or simply Laos in what follows)

is a small developing economy of just under 5 million people that is land-locked between three large and two smaller neighbouring economies: China to the north, Thailand to the west, Vietnam to the east, plus Cambodia and Myanmar It is classified as a ‘least-developed country’ by the United Nations, and as a ‘non-market economy’ still by the United States even though it is in transition from central planning to a market economy

Mountains along the eastern and northern borders and an almost complete absence of major roads through them, and the smallness of the Cambodian economy, mean that Lao international trade is almost exclusively through Thailand, particularly since the construction and opening in the mid-1990s of the bridge over the Mekong River at Vientiane The long and accessible river and land border with Thailand ensures that smuggling is bound to take place whenever prices of tradable products in Laos diverge significantly from those in eastern Thailand This characteristic necessarily constrains the extent to which Lao trade policy can be independent of Thailand’s The economy is thus a natural part of Southeast Asia’s, and so it made sense for Laos to be welcomed into ASEAN in July 1997, and thereby into the ASEAN Free Trade Area (AFTA)

The Lao PDR government adopted its New Economic Mechanism in 1986 and since then has been shifting the economy from a centrally planned system to one that

is more and more market driven Joining AFTA is adding significantly to that reform program But since AFTA is WTO-compatible it makes sense to consider joining WTO also To that end the Lao PDR became an Observer at the WTO in January

1998

The World Trade Organization members are looking forward to welcoming Vietnam as a member of the WTO ‘club’ As with all clubs, though, benefits and rights of membership are not free In the case of the WTO, one member’s rights or trading opportunities are other members’ obligations or challenges

This report is not so much about the rest of the world’s interest in Laos joining the WTO as it is about benefits and costs to Laos itself, its rights and obligations, its opportunities and challenges from becoming a WTO member The study focuses particularly on how those opportunities and challenges relate to the agricultural sector and to rural development in this rapidly emerging economy The rest of this section discusses the reasons for focusing on Lao PDR’s WTO accession at this time and on implications for its rural areas in particular, before outlining what is in the remainder

of the report

Why focus on WTO accession for Lao PDR at this time?

There are several important reasons for examining the implications of Lao accession to WTO now The most obvious is that the sooner Laos joins, the earlier its membership benefits will begin to flow One of those benefits of WTO membership is that it strengthens the government’s hand for ensuring that the economic policy reforms contributing to the transition from plan to market are sound from a national viewpoint rather than just from that of special-interest groups A crucial part of those reforms is the further opening up of the economy to international trade and investment, for it is openness more than perhaps any other feature that distinguishes rapidly growing economies from the rest.1 For late-developing countries openness matters in part because it allows the importation of new technologies from more-advanced economies, thereby inducing faster catch-up WTO membership also requires each government to bind its market-opening commitments When commitments to openness are so bound, investment is greater from both domestic and foreign sources because the risk of the government returning the economy to inward-looking protectionism is lower The greater policy certainty associated with that reduced risk of backsliding on reform in the future encourages more investment and hence even faster economic growth This is especially so in the current economic climate of great uncertainty elsewhere in East Asia

1 For recent evidence on the gains from openness, see OECD (1998), USITC (1997), and Edwards (1993) The latter study examines the linkage between openness and productivity growth for 93 countries over the 1980s and finds that, however trade openness is defined (he uses nine different measures), there is a strong positive linkage

Another benefit is that WTO accession offers Laos the opportunity to promptly multilateralize its preferential trade liberalization program that began to be put in place in January 1998 as part of AFTA Such early multilateralization would reduce the risk of any trade diversion becoming entrenched, thereby ensuring that AFTA membership provides a very useful stepping stone to WTO membership This is less

of an issue for Laos than it is for, say, Vietnam though, because much of Lao trade is with other AFTA member countries anyway Indeed, since Laos will have until 2010

or even 2015 to implement its preferential trade liberalization commitments in AFTA, and since some sectors will be excluded from AFTA reform, WTO commitments to open up may even run ahead of AFTA commitments

A third reason for concentrating attention on WTO accession now is so as to capitalize on the goodwill that currently surrounds WTO applications from least-developed and transition economies Southeast Asian neighbours have expressed their goodwill very clearly by welcoming Laos into ASEAN in mid-1997 Meanwhile, the European Union has signed a bilateral trade agreement with Laos, and potentially the country’s most important trading partner, the United States, is currently negotiating a bilateral agreement for normalizing trade and investment flows between the two countries Furthermore, at the multilateral level, the key international economic institutions are expanding their efforts to support and accelerate the WTO accession of developing countries in general but economies in transition and least-developed economies in particular (Michalopoulos 1998a).2 This is being complemented by bilateral aid programs from numerous advanced economies (OECD 1997)

An additional benefit of being a WTO member is an ability to influence the WTO’s agenda in general and its multilateral trade negotiation (MTN) agenda in particular, and to seek greater market access for one’s exports during those periodic MTNs Since there is the prospect of a new (Millenium?) round of MTNs beginning

as early as the year 2000, it is in Lao interests to accede as early in the next century as possible Given the large number of steps needed to complete that accession process (see Section 2 and Appendix 1 below), and the fact that for the four most recent members it took over 6 years (73 months) from the time the working party was

2 Indeed all but four of the other twenty economies in transition that are not yet WTO members (Bosnia, Turkmenistan, Tajikistan, and what remains of Yugoslavia) have applied to join, and at least five of them are expected to accede in 1998 (Michalopoulos 1998b)

established until the time WTO membership entered into force, a concerted effort is going to be required by Nepal to join soon after 2000

Why pay special attention to agriculture and rural development?

Focusing on the impact of Lao WTO accession on agriculture and rural development hardly needs justifying in a country where four of every five of the 4.9 million people live in rural areas and where more than half of measured GDP (not to mention uncounted subsistence production) is generated by farmers But there are three other important reasons for a rural focus One is that poverty alleviation requires focusing on where the poor are, and they are overwhelmingly in rural areas in Laos Another is that economic growth will be enhanced by reducing distortions to producer incentives, and in Laos – as in many late-developing countries – the economic policy and public investment regimes are biased against the rural sector And a third reason

to focus on rural development is that if it is neglected by not correcting the pro-urban policy bias, the inevitable consequence will be an ever-greater drift of people from the countryside to urban centres.3 The policy reforms that could accompany WTO accession provide an opportune occasion for making that change

Outline of the study

The next section reviews the Lao Government’s stated policy goals for achieving sustainable economic growth and poverty alleviation, and looks at why it is seeking WTO membership (the pros and cons of which are summarized in Appendix 1) The key point is that the government is aware that WTO-compatible policies are sound economic policies, ones that will ensure Laos makes the most of its opportunities to reap dynamic gains from reforming its trade and trade-related policy regime and from securing better market access abroad for Lao exports

Section 3 summarizes recent developments in the Lao economy These include the rapid economic growth of the past decade, the structural changes that have accompanied that growth and especially the relative decline of agriculture and the

3 For more on the need for more policy emphasis on rural development, see the World Bank (1997b)

changes within that sector This review of the recent past, together with what we have learnt from standard open-economy development theory and the experiences of more-advanced economies summarized in Appendix 2, provides a basis for saying something about where the economy is heading over the next decade or so if current policies continue That speculation of the likely path ahead under current policies has two purposes: it helps identify which markets will be important for Laos to concentrate on in its access negotiations; and it allows a comparison with what is likely to eventuate should the government choose or be required to alter its policies in order to accede to WTO

Then Section 4 reviews current policies and considers those policy changes that are likely to be necessary for WTO accession that will affect the agricultural

sector and rural development These include not just agricultural policies per se but

also, and more importantly, a whole range of other policies that would impact on employment and output in rural areas

A major potential benefit to a country from joining the WTO is to obtain better and more secure market access for its exports Section 5 examines what those might

be, particularly as they would affect agriculture and rural development Appendix 3 reviews the Uruguay Round Agreement on Agriculture and the agenda for further market access negotiations from the end of this decade Then Section 6 draws out the possible effects of both policy reform at home and greater market access abroad for the economy as a whole and for rural households in particular The study concludes with a summary of the policy choices confronting Laos as it moves towards negotiating its Protocol of Accession to WTO

2 Why join WTO

Laos has had sustainable economic growth and poverty alleviation as its key goals of economic policy reform since the introduction of its New Economic Mechanism in 1986 Opening up the economy to foreign trade and investment is seen

as having contributed to those goals, along with freeing up domestic markets and allowing farmers use rights over agricultural land Hence it is not surprising that the government has sought to remain open through joining regional and multilateral trade and economic integration agreements In February 1998 Laos was granted Observer status at the WTO Shortly before, in July 1997, it became a member of ASEAN and thereby was also able to join AFTA (the ASEAN Free Trade Area), which it did by beginning to implement AFTA’s Common Effective Preferential Tariff scheme in January 1998

Participation in ASEAN and WTO will constitute the cornerstone for Lao trade policy development in the 21st century.4 In return for the rights and opportunities that membership of these clubs brings to Laos, there are also some obligations and challenges that must be faced The Lao PDR Government is looking to sign on to those obligations presumably because it believes the benefits will outweigh the costs, even though some of the obligations will be politically difficult to meet In particular, the process of negotiating accession to WTO will further consolidate and make it more difficult to reverse the country’s economic reforms, while requiring the reform and/or creation of new organizational structures in the bureaucracy of this rapidly transforming economy This can be seen by summarizing the benefits and obligations

of WTO membership and then noting the steps involved in WTO accession (see

4 In several respects, Laos is similar to Nepal: categorized as least-developed by the UN, land-locked

by much larger countries, dominated in its trade by one of those neighbours, exploiting its mountains to supply that neighbour with hydro-electricity, engaging in a regional free trade agreement with some of its neighbours, and enjoying rapid growth in exports of clothing to quota-restricted OECD markets Hence the WTO issues for Laos have numerous similarities with those of Nepal (discussed in Anderson 1998a), except that Nepal is not categorized as a ‘non-market economy’ by the United States.

Appendix 1 for more details) How well WTO accession will contribute to the government’s objectives such as providing adequate food security, food price stability and government revenue raising is discussed later in Section 4

Benefits and obligations of WTO membership 5

To become a WTO member is to join a club Like all clubs, the WTO bestows benefits on members but there are some costs; it offers rights but with them come obligations; it provides new opportunities but also some challenges Evidently the net benefits are overwhelmingly positive, given that more than 130 countries are members and more than 30 others have applied to join But like all worthy clubs, there are rules

to be followed, entry conditions to be met and formal accession procedures to follow Occasionally the rules and obligations upset political sensitivities because some

groups within a country may lose a privilege (e.g., protection from import

competition), but almost invariably those rules boost the overall economy of each WTO member As summarized by Rodrik (1995), the general benefits that come from the freer trade those rules encourage include the following:

• better allocation of national resources towards industries with the strongest comparative advantage;

• enhanced learning and newer technologies from interacting more with the rest of the world;

• greater flexibility, via trade, for dealing with shock such as natural disasters; and

• less wasteful rent-seeking lobbying activities by groups seeking government assistance and protection

Three specific benefits of WTO membership are greater and more-secure market access abroad for a country’s exports, availability of a dispute resolution mechanism, and greater discipline at home in sound economic policy making

On the first of these, WTO rules, and particularly GATT Articles I and III, ensure that a member’s exporters are entitled to non-discriminatory treatment by other

5 For a fuller description and answers to frequently asked questions about membership by developing countries, see the new joint World Bank/World Trade organization Trade and Development Centre website at http://www.itd.org Details of the accession process itself for developing countries can be found in WTO (1995a) and UNCTAD (1997)

WTO members in terms of access to their markets This involves two aspects One is

‘most-favoured-nation’ (MFN) status, or the same market access as other WTO members, to any particular member’s markets for most goods The key exceptions at present involve farm products and textiles and clothing, which are subject to separate agreements involving some quantitative import restrictions still But even with these goods, it may be possible for better (including faster-expanding) access to be negotiated bilaterally as part of acceding to the WTO In general (again there are exceptions) an import tariff is the only measure that can be used to restrict market access Moreover, that access is guaranteed through upper limits on those tariffs (called ‘bindings’).6 Typically, members have made commitments not just to cap them but also to phase down over time many of those bound tariff rates, so their trading partner members can expect to enjoy an expansion over time in guaranteed access to such markets The other non-discriminatory aspect is ‘national treatment’, which means that a country must treat foreign suppliers no less favourably than domestic suppliers

These non-discrimination rules ensure, for example, that a member does not have to go to the United States government every year to plead for MFN status in US markets Nor can the US unilaterally impose tighter restrictions on access to another WTO member’s exports for, say, its own domestic political reasons: its tariffs must remain at or below the bound rates, and for each tariff item the tariff rate must be the same for all WTO members.7

Secondly, Article V of the GATT provides for freedom of transit for products traded by any WTO member through the territory of any other WTO member “via the

6 For explanations of this and myriad other trade policy terms, see Goode (1998) Tariff bindings do not yet apply to all products in all countries but, following the Uruguay Round, 89 per cent of all developed-country merchandise imports, and 81 per cent of all developing country merchandise imports, have become subject to tariff bindings (Finger, Ingco and Reincke 1996)

7 There is an important proviso to the application of these rules It is that the acceding country has completed bilateral negotiations with each WTO member and that each of those members consents to the accession of the new member Otherwise, according to GATT Article XXXV, a WTO member has the right to deny MFN treatment The US and EU have designated many former centrally planned economies ‘non-market economies’ and used it to apply different, less transparent and potentially discriminatory practices in their determination of anti-dumping and their use of safeguards against imports from those economies The US also has used it to link MFN access to freedom of emigration and other human rights issues under Section 402 of US trade law (the Jackson-Vanik Amendment of the

1974 Trade Act) For acceding countries such as Vietnam and Laos, a crucial step in their WTO accession process involves securing bilateral trade agreements with such members that ensure them at

route most convenient for international transit” (see Box 1 for the full text of GATT Article V) No distinction may be made on the basis of “the flag of vessels, the place

of origin, departure, entry, exit or destination” Nor may the land-locked country’s trade “be subject to any unnecessary delays or restrictions and shall be exempt from customs duties and from any transit duties or other charges” apart from normal costs

of transport or administration For land-locked Laos, this may be of considerable benefit in its dealings with Thailand, who’s alleged oligopoly on transport services has

in the past at least imposed quite a burden on Lao trade (Bourdet 1992, pp 78-79) Also, as and when road upgrading and planned new roads through to Vietnam are completed, transit trade through Vietnamese ports will become more economical If Vietnam is a WTO member by then, GATT Article V will be of use to Laos in that bilateral relationship too

Thirdly, if a member feels another member is not playing by the rules, the WTO has a dispute settlement mechanism for resolving the issue Thanks to the Uruguay Round, that mechanism is now much stronger, faster, impartial, and binding than was the case under the GATT prior to 1995 As a result, members are less inclined to bend or break WTO rules and, if they do, other members have a reasonable chance of bringing them back into line and/or being compensated Again this brings much greater security of access to markets for WTO members as compared with non-members

And fourthly, because WTO rules also apply to one’s own policies, membership brings discipline to economic policymaking at home as well This can be

a major advantage for a government keen to provide sound economic governance but subject to interest-group pleading for special protectionist favours

More specifically, Laos will be required to tariffy its non-tariff import restrictions, bind them, and perhaps even agree to a phasing down in some of those bound rates over time (which reduces the risk of policy reversals); to free up trade in services over time, again with specific commitments recorded in its Schedules; to strengthen and enforce its intellectual property rights legislation; to reduce state support for or direction of other (especially trading) enterprises; to limit any domestic support for agricultural industries; and to enforce WTO rules uniformly and least conditional MFN status The more market oriented such acceding countries become, the higher the

predictably Typically, WTO members are more demanding in all these respects on acceding countries than on existing members, although perhaps less so for least-developed countries such as Laos

All trade and trade-related policy measures must be notified to the WTO Secretariat This adds to domestic policy transparency, making it more difficult for interest groups to be protected without detection Numerous WTO Agreements require Laos to have a single enquiry point where WTO members can seek information on policies covered by those agreements (e.g., TBT, SPS, TRIPs and GATS) Laos is also required to inform the WTO Secretariat each year if any significant policy changes occur, to provide statistical information annually in a set format, and to undertake with the Secretariat, probably every six years, a comprehensive review of the member’s trade and trade-related policies and practices

There are other notification requirements as well For example, all state trading enterprises must be notified to the WTO’s Council on Goods, even those enterprises not engaged in international trade Any trade restrictions imposed or changed for balance-of-payments reasons, or for sanitary or phytosanitary reasons, must be reported to the WTO Technical standards different from accepted international standards, and conformity assessment procedures, also have to be notified So too do any trade-related investment measures and import licensing procedures that are not in conformity with Uruguay Round agreements, as do all subsidy programs and all GATT-inconsistent voluntary export restraints

Clearly these notification and review requirements are non-trivial, and require considerable cooperation and coordination among the relevant agencies of the various levels of government Furthermore, an enquiry point must be created and maintained such that other WTO members can readily find up-to-date information about trade and trade related policies New trade practices and procedures must be codified into laws and regulations and recorded in an official journal to which other WTO members can

have ready access

An example of a problematic area relates to import licencing rules All rules and procedures for obtaining import licences must be published, procedures must be simple and prompt, the licences in principle should be administered through a ‘one- probability that members such as the US will not invoke Article XXXV and will guarantee MFN status

stop shop’ (or at most two), applicants have the right to ask for an explanation of approval and to appeal the decision, and a great deal of statistical information must be made available

non-The steps to WTO accession

As detailed in Appendix 1, there is a series of steps required before a country can accede to the WTO In the course of taking these steps, a country gradually amends its policies and institutions in readiness to abide by WTO rules and accept the obligations of membership

The first step, already taken by Laos (although it is not obligatory), is to request Observer status so that national government officials can begin learning from the inside as to how the WTO institution works When ready, the next step is to submit a letter of application which triggers the establishment of a Working Party to examine the applicant’s trade policies and practices, to organise accession negotiations, and to prepare the Protocol of Accession

The next big step towards WTO accession is to prepare a Memorandum on the country’s foreign trade regime For a country in which policy transparency is not the norm, this is a major undertaking Background information on the economy and domestic economic policies, detailed statistics on the country’s foreign trade and investment, an outline of its legislative and bureaucratic frameworks for making and enforcing policies affecting foreign trade, and a copy of all the laws and regulations are required In addition, the Memorandum must detail every current and agreed future policy measure affecting trade in goods, foreign investment policy and regulations, the trade-related intellectual property regime, the trade-related services regime, and any bilateral or plurilateral trade or economic integration agreements to which the country is a signatory And a comprehensive tariff schedule in the detailed harmonized system nomenclature must be attached

This Memorandum is circulated to all WTO members who are invited to submit in writing any questions of clarification In the case of economies in transition from central planning, many hundreds or even thousands of questions may be submitted (So far, the number of questions submitted to China and Russia exceeds

3000 and 2500, respectively.) It usually reflects two facts: that the country is only part-way along in its transition from plan to market, and that considerably more detail

is required than is in the Memorandum before WTO members feel they will have enough information to enter negotiations Once Laos has compiled its answers to these questions, they are submitted to the Working Party, which triggers a series of review sessions The frequency and length of meetings and the overall time this step takes depend heavily on the speed and comprehensiveness of Lao responses to the initial and follow-up questions: this step in principle could be completed in just a few months, but in practice (as in China’s case) it could take years

Once the examination of the country’s foreign trade regime is sufficiently advanced, members initiate bilateral market access negotiations on goods and services and on the other terms to be agreed Even then, further fact-finding work on the trade regime may continue in parallel with those negotiations Negotiations also proceed on

a multilateral basis through the Working Party, during which three draft schedules of commitments have to be prepared They relate to: tariffs (to be reduced and bound or subjected to ceiling bindings8) and other measures affecting trade in goods; market access, domestic support and export subsidies affecting agricultural trade (which again have to be bound); and services trade commitments They may specify phase-in periods and allow temporary maintenance of current practices for a limited period

In practice these market access commitments are negotiated with one or more

of the WTO members who are principal suppliers, but they are extended on an unconditional MFN basis to all WTO members The commitments may extend beyond the scope of the Uruguay Round agreements (e.g., privatization) In this process Laos cannot seek ‘concessions’ from members, but on accession it will have the guarantee of MFN access to members’ markets (something which it may have been denied previously)

Once the negotiations on the three schedules of commitments are concluded, the Working Party will submit its report together with a draft Decision and Protocol of Accession to the General Council or Ministerial Conference of the WTO Acceptance requires two-thirds of WTO members to approve it In the case of Laos, Thailand

8 A ceiling binding can apply to all or to a subset of tariff items, at a specified level at or above applied tariff rates

would need to be one of the approving members for its membership to be very meaningful in practice

Special and differential treatment for developing and least-developed countries

In addition to receiving the standard WTO membership benefits such as MFN and national treatment, the right to some of the low-tariff rate quota access to others’ agricultural markets, the possibility of accelerated growth in access to US and EU markets for textiles and clothing, and access to the WTO’s Dispute Settlement Body, those WTO members that are developing countries, and in particular least-developed economies including those in transition from central planning, also receive some special (although typically temporary) treatment in the WTO This crops up in many places in the WTO agreements (see UNCTAD (1997, Annex 2) for a comprehensive listing) However, this is not a set of rights automatically given in full to an acceding country On the contrary, each of those items must be negotiated, and in practice many developing and transition countries (most notably China) are finding it difficult to secure much in the way of special and differential treatment even as developing countries let alone as least-developed

As a least-developed country, Laos will find it helpful to be aware of the special treatment such countries may receive This treatment is included in the Uruguay Round’s Agreement on Agriculture, for example (see Appendix 3 below), and also in two Ministerial Decisions9 made at the time of signing the Marrakesh Declaration of 15 April 1994 which concluded the Uruguay Round Since then there have been several initiatives to implement those Decisions For example, the first WTO Ministerial Conference, held in Singapore in December 1996, approved a comprehensive and integrated Plan of Action for the Least-Developed Countries, and

in that same year a Sub-committee on Least-Developed Countries was set up within the WTO Committee on Trade and Development That Sub-committee subsequently played a significant role in organizing a High Level Meeting in Geneva on 27-28

9 On Measures in Favour of Least-Developed Countries (the main concerns being expanded provision

of preferential market access and technical assistance on trade matters), and on Measures Concerning the Possible Negative Effects of the Reform Program on Least-Developed and Net Food-Importing Developing Countries (the main concern being the continued provision of food aid and food export credits) The Decisions are recorded in GATT (1994, pp 440-41 and 448-49)

October 1997, involving the trade ministers of least-developed countries (LDCs) and six intergovernmental agencies (WTO, UNCTAD, ITC, IMF, World Bank and UNDP), which endorsed a trade assistance program designed to help LDCs increase their ability to trade and led to announcements of new and improved preferential access to richer-countries’ markets (WTO 1997c) And the new Trade and Development Center website (http://www.itd.org), created and maintained jointly by the World Bank and WTO, has a strong focus on providing plain-language information (at least in English) concerning the rights and obligations of LDC members of WTO

3 Recent and prospective growth and structural changes in Lao PDR

This Section summarizes recent developments in the Lao economy These include the rapid economic growth of the past decade, the structural changes that have accompanied that growth and especially the relative decline of agriculture and the changes within that sector, and the ever-changing policy setting particularly as it affects rural areas This review of the recent past, together with what we have learnt from standard open-economy development theory and the experiences of more-advanced economies summarized in Appendix 2, provides a basis for saying something about where the economy is heading over the next decade or so if current policies continue That speculation of the likely path ahead under current policies has two purposes: it helps identify which markets will be important for Laos to concentrate on in its access negotiations; and it allows a comparison with what is likely to eventuate should the government choose or be required to alter its policies in order to accede to WTO (as discussed in the following section)

A transition economy on the move

Prior to the introduction of the New Economic Mechanism in 1986, the Lao economy was subject to central decisions by the planning authorities Domestic prices were divorced from those in international markets through a complex system of multiple exchange rates, trade taxes/restrictions/subsidies, and set procurement and selling prices and quantities for many products Exports were discouraged through overvalued exchange rates and low procurement prices, while imports were impeded

by an extensive system of import quotas and licences Formal imports and exports were primarily with other members of the Council for Mutual Economic Assistance (CMEA), more than one-quarter of which involved barter trade Together with the fact that the majority of non-farm products were produced by state-owned enterprises,

these features ensured the economy lacked flexibility and its agents lacked the incentive to be entrepreneurial and innovative Under these conditions, national output was low and growing relatively slowly, exports accounted for a relatively small share

of that output (less than 10 per cent), and imports contributed only modestly to consumption

Given that starting point and the experiences of earlier-developing East Asian economies, it is not surprising that with the opening up of the Lao economy and its move towards greater fiscal discipline and considerable reliance on market forces, production and trade have grown rapidly GDP expanded at 6.7 per cent per year over the six years to 1996 (or more than 4 per cent per capita), compared with just 3.7 per cent in the 1980s (barely 1 per cent per capita) Industrial output growth has been especially strong, from a small base (Table 1) Per capita income has thus risen from less than $200 prior to the late 1980s to about $400 in 1997 in current US dollars Meanwhile, exports and imports of goods and services have been growing at around

10 and 6 per cent p.a., respectively, since the mid-1980s Recorded exports plus imports of goods and non-factor services in 1996 accounted for 65 per cent of GDP

(World Bank 1998)

This impressive performance began with freeing up parts of the agricultural sector from the early 1980s (Bourdet 1995), but later began to include other sectors and also involve the unification of exchange rates in 1988 at close to the rate prevailing in the parallel market Tight fiscal policy has brought inflation down, further improving the macroeconomic environment as needed for rapid growth

Agriculture’s relative decline

Accompanying this rapid growth has been substantial structural transformation

of the economy One of the most striking features of economic development is the relative decline of the agricultural sector in growing economies Also typical is a decline in their agricultural comparative advantage as modernization in other sectors proceeds As detailed in Appendix 2, this can be explained by trade and development theory that is shown to be strongly supported by comparative evidence across countries and over time, particularly for Asia

For Laos that decline had been slow prior to the 1990s Agriculture still employs more that four-fifths of the workforce and accounts for the majority of GDP

As Table 2 shows, however, agriculture’s share of GDP and employment has been falling steadily in the 1990s as Lao industrial and service sector activities have grown rapidly, albeit from a small base Industry now accounts for more than one-fifth of GDP and one-tenth of employment, up from one-seventh and one-thirtieth, respectively, in 1990

Unlike most Asian low-income countries, in the Lao PDR agriculture contributes only a small share of exports (less than 15 per cent) and the country is a net importer of farm products (Table 3) One item, coffee, accounts for more than half

of those agricultural exports The reasons Lao agriculture is not a major supplier of foreign exchange earnings, despite its relatively large endowment of land per capita (see Table A.2), include the lack of investment in modernizing agriculture; high tariffs (including on transport costs) and non-tariff barriers to official exports to Thailand (Fukase and Martin 1998, p 18); and the competitive strength of four other sources of exports: timber, electricity, clothing, and services (Table 4)

Between 30 and 40 per cent of recorded merchandise exports have been forestry and wood products during the 1990s (down from 56 per cent in 1988) Since there is very little processing of that timber, this really represents the selling off of an asset more than a productive activity But, while ever the government allows felling to continue, this could remain a large export item well into next century as Laos has 2.7 hectares of forest per capita (virtually all natural) compared with a global average of less than 0.6 hectares (World Resources Institute 1997)

Electricity is currently supplying about one tenth of export revenue, but in the latter 1980s its share was one-third Several new hydro plants are under construction

or at advanced stages of planning for supplying Thailand as well as local needs Should they come to fruition, electricity could return to being a much bigger export earner than at present

Manufacturing exports were virtually zero prior to 1989 when clothing production for export began Within three year the share of clothing in merchandise exports had risen to more than one-fifth From 1991 other manufactures also have been exported, mainly motor bikes which are simply assembled in Laos

During the 1990s Laos has also become increasingly a net exporter of factor services Those services have accounted for more than one-quarter of all goods and service exports during the 1990s The main service export item is travel which includes of course tourism Because of sizeable services exports, the deficit in the current account balance is somewhat less than the trade balance deficit (Table 4)

non-Developments within the agricultural sector

Within agriculture there have been some changes in the composition of output

in the past decade or so (measured at constant prices) Rice has been declining in relative terms and is no longer contributing half of agricultural GDP, livestock is now

as important as rice, and cash crops have been growing in importance but from a very low base (Table 5)

The slow growth in food crops in Laos is not just a recent phenomenon During the 15 years to 1993, there was virtually no change in per capita food production in Laos during a period when food production was growing much faster in more-densely populated Asian countries One reason for that is revealed in Table 6: Laos uses extremely little chemical fertilizer It also irrigates only a small proportion

of its cropland: 18 per cent in 1994-96, compared with 28 per cent in other income countries (World Bank 1998, Table 3.2) This is due in part to the relatively small proportion of land that is suitable for irrigation, because of the prevalence of mountains The low level of modern inputs and the near absence of high-yielding cereal varieties means Laos is not competitive with Thailand in basic foods, particularly rice Hence imports flow in from the west, pushing down the price of food products relative to non-agricultural products which further dampens farm households’ incentive to produce more foodcrops for the market Instead, farm households raise livestock for arbitraging across the border (often illegally so as to avoid the export tax and quarantine inspection) The restoration of good border relations between Lao PDR and Thailand, following serious border disputes in the late 1980s, is allowing more border trade between the two and hence more specialization

low-in farm production low-in the two countries Lao rice production growth has suffered because of that competition As well, the reforms which have allowed reduced barriers

to inter-regional agricultural trade within Lao PDR means that regions with a comparative disadvantage in rice production no longer are required to strive for regional rice self-sufficiency, but instead can buy in rice with the proceeds of regional exports of those products for which their region is better suited

It is upland regions, that is those without irrigation infrastructure for paddy, which have seen the sharpest fall in rice production over the 1990s That fall has been enough to ensure national rice production per capita has dropped during the past decade This decline should not necessarily be interpreted as a failure of government policy though In fact it is partly due to an explicit decision by the government to discourage slash-and-burn agriculture in upland regions for environmental reasons And rice was the main crop grown by such cultivators, who are now focusing more on higher-value cash crops and livestock raising

Production and trade prospects under current policies

Speculating about the likely path ahead under current policies has two purposes: it helps identify which commodity markets and countries will be important for Laos to concentrate on in its WTO accession negotiations; and it provides a basis for comparing with what is likely to eventuate should the government choose or be required to alter its policies in order to accede to WTO

Lao aggregate output (GDP) can be expected to grow rapidly in the long term

as the government continues to open the economy to market forces The government’s growth target, to raise per capita incomes by 8 per cent per year so that they average

$500 by 2000, now looks rather optimistic in the wake of Asia’s financial crisis, but at least half that growth rate would not be an unreasonable goal An ever-more open economy can also expect to see agriculture’s share of GDP and possibly exports fall further over time This will happen moreso the more the currency is strengthened as electricity and light manufacturing exports continue to expand rapidly, as foreign capital flows in for hydro-electric and other construction projects, and as forest exploitation continues to be allowed The experience of earlier-industrializing Asian economies suggests the number of workers in agriculture will continue to grow for some decades yet, but the shares of employment in and labour income earned from

farming are likely to diminish over time as off-farm employment opportunities expand (see Appendix 2) The latter will be essential if farm household incomes are not to fall further behind those of non-farm households in Laos

Agricultural output could still grow in absolute terms of course, but it is not likely to be as dynamic as the industrial sector nor to boom in the way agriculture has

in Vietnam or the Punjab unless there is much greater investment to modernize the farm sector This is especially so while other export sectors are booming (including the production in the northwest of poppies for opium).10 Modernization would require something like the Agriculture Perspective Plan that is just beginning to be implemented currently in Nepal (JMA and APROSC 1997) The elements in that plan include developing agricultural research to adapt high-yielding crop varieties for local conditions, plus the complementary modern inputs needed to ensure a marketable surplus results: chemical fertilizer and pesticides, low-cost irrigation, rural credit, agricultural roads, and rural electricity Only 8 per cent of rural households in Laos currently have electricity, compared with two-thirds of households in Vientiane

A particular tension in the country currently is to what extent Laos should strive for food (especially rice) self sufficiency compared with allowing producers to respond to market forces and pursue cash crop and livestock opportunities Those with

an open-economy persuasion believe more in the latter while other worry about the growth in rice import dependence The two may not have to be in conflict, however It may be that as public infrastructures such as rural roads and electricity improve, and

as transactions costs in the provision of rural credit fall, the profitability of modernizing rice production will improve Should that allow more hectares to come under irrigation, for example, another rice crop per year may be possible through irrigating during the dry season Diesel pumps being imported in 1998 may be a beginning to that process

The directions of Lao trade are still evolving as the country develops new trading relationships to replace its former ones with the Soviet bloc As of 1995 its most intense trade was with Thailand and other East Asian economies, plus its clothing exports to the European Union, while its least intense trade among the large

10 An estimated 210 tonnes was produced and traded in 1997, up 5 per cent in volume and 12 per cent

in terms of area cultivated compared with 1996, according to the Vientiane Times, 24-26 March 1998,

page 1

traders was with the United States (Table 7) Once the US and Laos finalize and sign their bilateral trade agreement that is currently under negotiation, trade between the two will soar If that agreement includes provision for accelerated growth in Lao access to US clothing markets, that will add to the relative decline of the agricultural sector ASEAN/AFTA membership will cause Lao trade within Southeast Asia to grow too A recent modelling study suggest Lao exports to other ASEAN members would grow considerably at the expense of its trade with the rest of the world following implementation of the AFTA agreement (Fukase and Martin 1998, Table 17) As well, Lao-Vietnam trade but also transit trade through Laos will grow when the Japanese-funded Mekong bridge and road link between Vietnam and Thailand across southern Laos is completed early next century

The Asian financial crisis is of course going to slow growth in trade and foreign investment inflows in the short term Also, the different degrees of currency devaluations in the region will alter the rankings of competitiveness and has put downward pressure on the Kip as Thailand devalued and developed-country investors stayed away from the region Laos’ own policy changes and uncertainties with respect

to foreign direct investment is adding to the tendency for outsiders to be cautious about committing to new investment projects

Finally, since it is current government policy to conclude the bilateral trade agreement with the United States as soon as possible, it is appropriate to mention in this section that the opening up of trade and investment with the US will have a dramatic impact on the Lao PDR economy As Table 7 shows, virtually no Lao imports and only 4 per cent of its exports are with the United States currently Because Laos does not enjoy MFN status in that market Indeed, it faces an average tariff level

of 40 per cent for exports to the US, compared with just 4 per cent once it secures the MFN access that WTO membership can bring The impacts this may have on Laos are discussed in Sections 5 and 6 below

4 What policy changes are needed for WTO accession?

Joining the WTO invariably involves some policy changes to conform with WTO rules, as well as some commitments to provide greater access for WTO members to Lao markets for goods, services and financial capital This is in return for the benefits of WTO membership and the greater access that members may provide for the acceding country’s exporters (if not immediately then in subsequent rounds of negotiations) The greater the preparedness of Laos to open up its markets to imports, the faster will be its accession and the greater its chances of being able to negotiate better access to markets abroad for its exports in the years ahead Consider first agricultural policy changes per se, before turning to other policy changes that will impact indirectly on agriculture To set the scene, note that Lao import tariff rates are relatively high by the standards of other ASEAN members (unweighted average of 9.6 per cent, weighted average of 14.7 per cent), with six tariff bands in place As shown

in Table 8, half the tariff line items are subject to no more than 5 per cent, but sixth of them have tariffs of 20 per cent or more The Lao weighted average of 14.7 per cent compares with 4 per cent for Malaysia, 8 per cent for Indonesia, 11 per cent for the Philippines, 14 per cent for Thailand and 19 per cent for Vietnam in 1997 Lao PDR agricultural products have average tariff rates similar to Lao non-agricultural goods, but higher than agricultural tariffs for other ASEAN countries (see Table 9

one-below)

Agricultural policy changes

The main areas where Lao agricultural policies will need to conform with WTO rules and obligations have to do with the three key items in the Agreement on Agriculture (distortions to imports, to exports and to domestic production), and with respect to import licensing and state trading Each is considered in turn

Distortions to imports

Laos will be required to tariffy all its non-tariff restrictions on agricultural imports and bind them In principle Laos also may be requested to lower some of those bound rates over the transition period following accession (even though least-developed country founding members of WTO are not so required)

As the main food staple, there is the possibility that Laos would not have to tariffy rice GATT contracting parties who were classified as ‘least-developed’ by the United Nations were provided that exemption as part of the Uruguay Round Agreement on Agriculture Whether an acceding least-developed country will be granted that opportunity is something Laos may have to negotiate – as is the case with all such ‘concessions’ provided to current WTO developing and least-developed country members

Little reform to agricultural import barriers is expected as a result of Laos acceding to the ASEAN Free Trade Area (AFTA) This is not only because of the unusually long transition period (to 2010 or 2015) for Laos to bring its barriers into line with the rest of ASEAN (of close to free trade within AFTA and common external tariffs with the rest of the world) It is also because most unprocessed agricultural products are on the so-called ‘sensitive list’ or ‘temporary exclusion list’ The sensitive list includes 96 unprocessed agricultural product lines, of which live animals and rice are on a highly sensitive sub-list; and line items representing about

85 per cent of Lao imports from ASEAN are on the temporary exclusion list (Fukase and Martin 1998, p 32) Moreover, in the many cases where Laos has placed an item

on the Temporary Exclusion list while other ASEAN countries have it on their Inclusion list, Laos will be denied preferential access into that other country’s market for that item, thereby limiting Lao agricultural export opportunities In any case, reductions in import barriers under AFTA are only for products coming from other ASEAN countries To be relevant for other WTO members they would have to be multilateralized upon Lao accession to WTO

There are provisions in GATT Article XX and in the WTO’s Sanitary and Phytosanitary Agreement allowing import restrictions where they are necessary to protect human, animal or plant life or health However, a case would need to be made for each item so claimed Laos is unlikely to be able to police such restrictions on its

long borders with neighbours anyway (witness the unofficial livestock trade), so there may be little point in it imposing strict standards

Distortions to exports

Laos does not subsidize its agricultural exports, so the most that could be demanded by WTO members is that none be introduced in the future

Distortions to domestic production

Many forms of domestic support to agriculture are allowable under the called ‘green box’ of the WTO’s Agreement on Agriculture In Laos’ case these include such public investment programs as agricultural research and extension, rural education and health, rural infrastructure such as roads, electricity, telecommunications, irrigation, mitigation of such natural disasters as flood and typhoon, and the greening of barren land and mountains Domestic support in the form

so-of fertilizer subsidies “which are generally available to low-income and resource-poor producers” may also be exempted

Import licensing and state trading

Those farm products subject to import licences will need to be administered in

a much more transparent and rules-driven manner, as stipulated in the WTO’s Agreement on Import Licensing Procedures

As well, Laos will be under pressure to increase policy transparency generally, including via the reform of state trading enterprises (STEs) WTO rules on state trading have not been well developed yet, but are coming under scrutiny now as numerous transition and developing countries, with their many STEs, seek WTO membership (Cottier and Mavroides 1998) Reform could take the form of privatization (or at least corporatization) and de-monopolization of STEs to make them compete with the private sector, plus the reduction and eventual removal of all forms of discriminatory government assistance to those enterprises, including

preferential access to scarce credit Thus WTO accession offers an opportunity for the Government to reduce the inefficiencies associated with STEs.11

Non-agricultural policy changes that will affect rural development

It is necessary also to examine how WTO accession will alter key agricultural policies, because that can affect the profitability of farming in important ways For example, many resources used in non-farm sectors could alternatively be used in agriculture Also, the well-being of farm households can be affected by where manufacturing activities are located (urban versus rural sites)

non-Non-agricultural policies are more likely to be affected by WTO accession than agricultural ones, since the GATT/WTO rules concerning them are long-standing

It is true that Laos has been steadily reforming and simplifying its import regime for a decade or more Nonetheless, great complexities remain While the average tariff on Lao imports has been estimated to be less than 15 per cent in 1997, a vast array of non-tariff barriers to imports are still in place, along with a wide range of export restrictions, in the form of non-transparent permit and licensing requirements The average import and export barriers together therefore lower the relative price of exportables to importables substantially compared with prices at the country’s border That bias in incentives towards encouraging import substitution and discouraging exports is compounded by the prevalence of SOEs in numerous industries It is true that the Lao PDR has gone further than many other transition economies in divesting its SOEs, with most of the small and medium-sized SOEs and

a sizeable percentage of the larger ones privatized by 1995 (World Bank 1997c, Ch 14) However, those SOEs remaining in the production sphere, together with the dominance of STEs in the provision of many marketing and distribution services

11 For a description of the substantial progress but still considerable distance to go in reforming STEs

in China before it will be ready to join the WTO, see Martin and Bach (1998) The reason WTO members are especially keen to see that STEs are not receiving any forms of assistance from the government is because of the difficulties faced when Hungary, Poland and Romania were admitted to the GATT: their commitments, for example regarding bound tariffs, were found to be meaningless in the context of their trade being conducted mostly via STEs whose pricing arrangements were far from transparent (Michalopoulos 1998b, footnote 4) To that end the membership adopted in March 1998 a new form for notifying STEs to the WTO, one which seeks more comprehensive information on each enterprise’s activities For further discussion, see Jackson (1997, pp 325-27)

affecting tradable products (for example logging – see World Bank (1997c, Ch 13)), add substantially to the average cost, and its uncertainty, of exporting and importing Only some of the anti-trade bias will be reduced as Laos gradually opens its markets to other ASEAN countries over the AFTA phase-in period to 2010 The extent is as yet far from clear, but it will not be major for at least three reasons:

• only about 15 per cent the tariff line items are in Lao PDR’s ‘inclusion list’ (compared with 82 per cent for other AFTA members – see Fukase and Winters

(1998, Table 8));

• a large majority of the items on that inclusion list already have low tariffs;

• there is a five-year grace period for the removal of non-tariff barriers on products

on the inclusion list

This means that even if Laos were to offer to WTO members to multilateralize all its regional commitments to AFTA on accession, a great deal of protectionism in the industrial and service sectors would remain How much further reform to trade policy and to SOE/STE management practices would be demanded by WTO members before granting Laos WTO accession is still uncertain, but it is unlikely to be trivial

In particular, China’s and Vietnam’s experiences in WTO accession negotiations makes clear that it is not enough simply to not enforce legislated trade restrictions That is seen by WTO members as no substitute to repealing such restrictive legislation because it leaves open the possibility of restrictions being tightened again in the future

Of particular importance to agriculture and rural development are the prospective trade arrangements concerning clothing At present Laos is able to export

a selection of those products to the European Union provided it enforces a ‘voluntary’ export quota restraint (VER) Thus technically this represents a barrier to Laos’ industrial exports and so appears in this section, even though it really belongs in the next section as it is dictated by foreigners as a substitute for them imposing a quota or tariff on their imports from Laos A similar VER clause on textiles and clothing might

be included in the US-Laos bilateral agreement currently under negotiation Such VERs among WTO members are scheduled to disappear by 2005 as part of the phase-out of the Multi-Fibre Arrangement (MFA), and will be replaced by bound tariffs in the importing countries The larger the size and promised rate of growth of those

VERs that Laos can negotiate bilaterally during the WTO accession process for the phase-out period to 2005, the faster will be the potential growth in those labour-intensive industries in Laos That in turn will boost farm household incomes, either through repatriated earning from those household members who migrate to urban centres to take up textile or clothing jobs, or through part-time work if some of those new plants establish within commuting distance in rural areas

5 What new opportunities will open up

by joining WTO?

In addition to the prospects for growth in clothing exports to OECD countries mentioned at the end of the previous section, what other improvements in export opportunities might result from acceding to WTO? Perhaps the most important is the greater certainty of market access WTO members that did not previously provide MFN access for Lao exports will do so, and those that have been offering MFN on a grace-and-favour basis will guarantee it permanently and unconditionally provided Laos has successfully completed all bilateral negotiations and each member approves its accession, so that Article XIII of the Agreement Establishing the WTO cannot be invoked by them (see GATT 1994, p 15) Secondly, Laos has, like other economies in transition, suffered by being designated a ‘non-market economy’ by the US and EU for the purposes of applying selective bilateral safeguards and determining anti-dumping actions, which tended to be less transparent and more severe than actions against market economies (Michalopoulos and Winters 1997; UNCTAD 1998, pages

31 and 44) That practice may end with WTO accession Whether and when it will end

depends to a considerable extent on the preparedness of Laos to abide by the spirit in addition to the letter of WTO law, as evidenced by the offers reflected in its Protocol

of Accession And thirdly, being a WTO member also means Laos will have recourse

to the WTO’s dispute settlement mechanism, should there ever be any doubt as to its rights of market access or transit Again, though, that will be more useful as and when Laos loses its ‘non-market economy’ designation by the major traders.12 Clearly, losing that status prior to joining the WTO, and ensuring all WTO members approve its accession, should be very high priorities for Laos

Likewise, the bilateral trade and transit agreement modifications reached with Thailand during Laos’ WTO accession process will have an important bearing on the benefits to Laos from joining WTO

Assuming success on those fronts, the most obvious scope for expanding exports is revealed in Table 7 in terms of countries Table 7 shows that Vietnam’s trade with the United States is miniscule That share can be expected to jump quickly once the US-Laos bilateral agreement is signed Indeed, given the history of relations between the US and Laos, it would not be surprising if Laos developed a quite intense trade and investment relationship if its trade agreement is reasonably liberal

The intensity of Laos’ trade with ASEAN countries other than Thailand and to

a smaller extent Singapore is also very low, especially given their close proximity to Laos (see Table 7) Presumably the gradual reduction of intra-ASEAN trade barriers will cause their trade shares to rise over the next decade as the AFTA agreement is implemented This is especially true for Lao trade with its large neighbours, Thailand and Vietnam, given their relatively high MFN tariff rates as of 1997, especially for food and agricultural items (Table 9) As Fukase and Martin (1998) show in their model simulation results, that intra-ASEAN trade growth will depend very heavily on the speed with which Laos transfers items from the temporary exclusion list to the inclusion list

What about the commodity composition of those export growth prospects? That depends not just on the differences between current restrictions on US and EU imports from Laos and the former countries’ MFN tariffs, but also on what is negotiated bilaterally during and subsequent to the accession process In general there are no reductions made in MFN tariffs by current WTO members to accommodate the wishes of an acceding member at the time of its accession – that typically has to wait until the next Round of multilateral trade negotiations However, in the case of agriculture and textiles and clothing for which import quotas are still being tolerated within the WTO, there is at least the theoretical possibility that an acceding country might be given some share in that preferential trade It is a very slim possibility, and one that probably depends very heavily on what Laos gives in terms of market access for services as well as goods and improved intellectual property protection that is of interest to that trading partner To the author’s knowledge there is no precedent of an acceding country obtaining a significant increase in in-quota market access in this way The reason is that other in-quota suppliers would be aggrieved if Laos were to

12 On the legal difficulties associated with the US changing its view of such countries as Laos, see

add a significant volume to any market in which they compete A consolation is that the agricultural negotiations at least will begin again by the turn of the century (and textiles and clothing in 2005) Hence as soon as Laos has joined WTO it will have opportunities to negotiate both for shares of in-quota sales and for lower tariffs on out-of-quota sales of products of interest to Lao exporters

Even so, there are some general points that can be made about Laos’ prospects for agricultural export expansion following WTO accession For horticultural and floricultural products especially, success will depend on raising the quality and uniformity and timely delivery of the exported product and on meeting myriad technical standards and SPS barriers to imports by overseas countries This is especially true of products that other low-wage countries can export, because many of them, as they open up too,13 are now seeking markets for the same types of products

as Laos might look to export

There is an extra advantage of WTO membership in addition to getting guaranteed MFN access to other members’ markets It is that any technical import restrictions are subject to the WTO’s Technical Barriers to Trade and SPS Agreements signed as part of the Uruguay Round, and thereby are subject also to the WTO’s dispute settlement mechanism Furthermore, developing country members are eligible for expanded technical assistance in these areas, as provided for in Article 11

of the TBT Agreement and Article 9 in the SPS Agreement

To say any more about specific market opportunities for particular commodities at this stage, however, is very difficult The reason is that they depend overwhelmingly on what comes out of the US-Laos trade agreement With the potential for trade and investment flows with the US being many times greater than the current flows, it would be pointless to speculate as to specific effects for individual commodities in that or any other market and certain to be wrong, because the general equilibrium effects of adjusting from such a gross disequilibium will simply overwhelm everything else that might happen in the way of extra access to other markets And because the US-Laos trade agreement is not finalized, it would be pure speculation to predict in detail its effects on agriculture or any other sector The Jackson (1997, pp 328-37)

13 APEC member countries, for example, are committed to move to free trade by 2020 See Yamazawa (1997) for details of their liberalization commitments

best that can be done at this stage is to discuss the likely broad thrust of the effects of

freer trade on rural development, which is the topic of the next section