LAO PDR AND WTO ACCESSION: IMPLICATIONS 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. ii 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 iii Preface 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. iv Acronyms ACP AFTA AMS APEC ASEAN ATC CAP DSB EU GATT IMF ITC LDCs MFA MFN MTN OECD SME SOE SPS STE TRIMs TRIPs TPRM TRQ UNCTAD UNDP USITC VER WTO Africa, Caribbean and Pacific members of the Lome Convention ASEAN Free Trade Area Aggregate Measure of Support Asia Pacific Economic Cooperation Association of South East Asian Nations Agreement on Textiles and Clothing Common Agricultural Policies Dispute Settlement Body European Union 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 v 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. vi 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: vii • 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 at present); • justifying scientifically the use of quarantine import restrictions, as required under the SPS Agreement; • ensuring that those farm products subject to import licences are administered in the transparent and rules-driven manner stipulated in the WTO’s Agreement on Import Licensing Procedures; and • 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. viii 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; ix • 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. [...]... 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. .. 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... 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... impacts this may have on Laos are discussed in Sections 5 and 6 below 22 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... 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 15 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. .. 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... 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 below) Agricultural policy changes The main areas where Lao agricultural policies... 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) 5 changes... 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... 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