Poverty reduction strategies On CAFTA, Lao PDR I. Background

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1 Poverty reduction strategies On CAFTA, Lao PDR I. Background Lao PDR is a small country, situated in the South-East Asia, sharing the border with relatively dynamic countries in the world and region such as China, Vietnam, Thailand, with its population of around 6 million, abundant cheap labor, the country is also rich in natural resources: mining ores, water resources and forests, and its geographic location which could be transformed land-locked into land-linked. Apart from that, the country also enjoins political stability. Therefore, from the above mentioned potentials many would think that the country is ideal for development and already developed by many aspects. Over 80% of the population engaged in agriculture, working on just 5% of the country s land that is suitable for farming. Lacking access to credit or economies of scale, many households survive predominantly by subsistence. The introduction of modern cultivation systems remains slow. The most important problems to agriculture development are; weak market institutions; formal and informal barriers to national and regional trade; high transport costs; and lack of supporting urban infrastructure and service. Difficulties are especially acute for ethnic minorities in the northern uplands, over 20% of the population cut off geographically and by language from other parts or groups as 80% of the country areas is mountainous. Apart from that, the geographic (spatial) structure of the economy shows considerable disparity, with large variations in the growth rates, with a relatively low level of development in many Northern and Southern Provinces. The economies in many areas remain unbalanced and the territorial potentials have yet to be strengthened. At the same time, the economic transition still remains slow. The development gaps between urban and suburban, provinces/territories, economic sectors, and the ethnic groups are large. The skill level of the labor force is developing slowly compared to the improvements in the economic components in each sector and area. The unskilled labor maybe cheap and abundant but the low productivity and discipline is the main concern. At the same time, the health and education sector do not fully meet the requirements of the population, either in quantitative or qualitative terms. They do not reach all isolated and remote areas, particularly poor areas with difficult access. The figure from government s own evaluation of a national poverty line showed that, out of 142 districts of country wide, 72 districts are considered as poor of which 47 are the poorest (NGPES, 2004; Statistic Center, MPI LECS II). 1

2 Other problems like insufficient infrastructure, facilities, undeveloped commercial production, market network and low competitiveness of domestic producers, combined with the governance issue and law enforcement in many respects, would make development and sustainable development event more difficult to achieve. From the above mentioned facts and situation, it is clear that the perception on the sustainable development term for Lao PDR is rather complex and it should be understood in the broad context and dimensions. In short, the sustainable development in the Lao context would mean the development that at least would cover economic, social and environmental aspects. II. Characteristics of Trade in Lao PDR 1. Trade overview From mid-1997 to the end of 1999, the economy of the Lao PDR faced arduous difficulties, especially the significant negative impacts of the Asian Economic Crisis and recurring severe natural disasters. However, the Fifth National Socio Economic Development Plan (NSEDP) spanning the five-year period was developed under more favourable conditions. The economy has begun to resume expansion and build up the potential for growing at a faster pace in the following years. Production forces and socio-economic elements have built the necessary initial base for future growth. The legal frameworks were gradually adjusted and their positive impacts on socio-economic development have been increased. The market-oriented economy emerged further and operated in a more efficient manner. Political and social stability were enhanced. Relations with countries in the region and outside on economic and other fronts were expanded, with significant strengthening of the capacity and standing of the Lao PDR in the region and the global community. The developments outside the country also provided significantly favourable conditions. Stability and economic recovery in the Asian region and at the global level, scientific and technological innovations and globalization brought about many opportunities to overcome the difficulties and obstacles. GDP growth: In the Lao PDR is less affected by the global financial crisis than many of its neighbours. Real GDP growth for FY 2008/09 will expand at 7.5% (Target 8%). - Major Lao export destinations include ASEAN countries, China, Australia and EU - less affected region; - Key Lao export products: mining (copper & gold), wood products, garments, electricity and agriculture (coffee, rice, maize and other crops). 2

3 Trade Flows (US$ millions) Exports 1,145 1,170 1,320 1,040 1,200 Imports 1,450 1,760 2,100 1,820 2,000 Source: MOIC of Lao PDR. 2. In rural area Rural area people mains job are livestock feeding, cultivation, handicraft mostly; for the goods that they can produce are small scale that sales in their communities. Farm household owns land about 1~2 ha, Lowland rain-fed paddy cultivation ~ 70%, dry-season irrigated paddy cultivation~4%, upland paddy cultivation ~ 25%. For the villages that have available condition they are producing for export to the boring nation market (especially the northern part of Laos export to China and Vietnam) and domestic market by themselves. The government of Lao has emphasis to support some infrastructure; however they are still not enough. III. Strength rural area to trade In the poverty eradication front, one of the proudest achievements of the country is the eradication of opium growing in the country which announced in 2006 and the significant reduction of shifting cultivation areas. Completed drafting poverty development plan in 51 Khumban of 46 poor districts with 606 projects. The government has provided credits amounted US$ 4,5 million through Village Development Funds, Nayobya Banks has also provided credits to 20,487 households of its member in 17 provinces. A part from this, Poverty Reduction Funds also spent on building infrastructure, and running poverty reduction activities in several provinces worth of 168 billion kip (US$ 20 million) and another (US$ 20 million) is being used to extend its activities. As a result of the efforts, poor households were reduced from 28,7% in 2005 to 22,3% in 2007 (MPI report, July 2008; the Notice from the Committee on Rural Development and Poverty Reduction, Sep.2008 ). It is being a good condition for poor people in rural remote area access to the fund and produce to consume and sale some for income generation by based on the ancient skill, real situation of local and experience; for example rural villagers in Luangnamtha they are able to produce rice, rubber, maize/corn, sugar cane, water melon, banana, onion, NTFP etc for consume and export. It also has rich natural resource and forest; however most of them export to China as a raw material and cheap price. People in some area are able to produce hand made goods such as silk and cotton produce, rattan and bamboo produce they sale in local market 3

4 IV. Poverty-focused Trade Development Trade is an essential, all-encompassing factor for the expansion and development of key sectors as well as for other supporting sectors. Trade is a powerful stimulus for economic growth. As trading activities increase, they create immense opportunities for supply side responses in all sectors of the economy. Resulting new investment opportunities lead to increases in output, particularly in agriculture and industry, giving rise to the growth of various service industries such as transport, banking, insurance, communication and tourism. Employment opportunities increase and incomes grow, giving rise to increased demand-side responses. This process gathers momentum, fuelled by trade and commerce. The Government recognises that trade is important to the country s poverty reduction efforts. As such, it places great emphasis on trade and most sectors have incorporated a trade and commerce element into their poverty eradication strategies. Integrated Framework The Integrated Framework (IF) is an initiative of the WTO and other core multilateral agencies to provide technical assistance with a view to improving the trade-related capacity of LDCs and to integrate them more effectively into the world economy. This is expected to promote trade and development and thus lead to poverty eradication. The IF encourages mainstreaming trade into overall national development plans and poverty eradication strategies. The Government is fully committed to take full advantage of this integrated framework to enhance trade facilitation and market linkages within and outside the country. To this end, a strategic approach is being prepared. Pro-poor Trade Development Strategy To enhance the trade sector s role as a dynamic force in promoting development and poverty eradication, and especially to encourage poor people to engage in trade activities, the Government s pro-poor trade strategy banks on the following key elements: Continuing sustainable trade policy reforms. Mainstreaming trade into national growth and poverty reduction strategies. Rationalising and streamlining trade administration procedures. Upgrading the capacity of service delivery system in the trade sector. Improving trade facilitation. 4

5 The main function of the Government s trade policy is to provide a healthy policy environment for the development of trade and commerce, with particular regard to reducing obstacles and hindrances. With such a trade policy, the productive sectors will be encouraged to invest, produce and market their products in a free market environment. The Government will act to rationalise the trade policy administration procedures, both in foreign and domestic trade, with a view to reducing time and transactions costs. This reflects the Ministry of Commerce s (MOC) strengthened position in matters of trade policy administration. In this context, import administration (rather than import controls ) and price surveillance (rather than price controls ) better reflect the MOC strategic approach to trade facilitation and administration. Trade policy in general, and the import licensing system in particular, will give due attention to current account balance and balance of payments through policy developments consistent with competitive market system principles. Policy Improvements Rationalising Policy on Protection There is a need to protect and promote new domestic industries, however, at some stage producers need to reach the levels of efficiency and quality of those of overseas markets. This is necessary for both efficient import substitution and export orientation of domestic production. For this to happen, domestic producers need to be exposed to foreign competition, but in a sustainable manner. On this basis, the Government aims to phase out industry protection beyond the infancy period. Consideration will be given to the possibility of replacing protective quantitative restrictions with tariffs, wherever possible, as they are a better and more efficient means of protection because they work through the market system. More vulnerable traditional economic activities, particularly in agriculture, may need a longer period of protection for adjustment to the emerging competitive market environment. Foreign Trade The expansion of foreign trade will be achieved through the establishment of more bilateral trade relations and regional and international integration. In addition, border trade with neighbouring countries will be enhanced under the new land-linked programme, together with the development of border trade zones and special economic zones. North-South and East-West corridors will be developed with improved national road and checkpoint networks. 5

6 The Government will implement the CEPT under AFTA by reducing tariffs on a range of products to 0-5 per cent by This will almost eliminate remaining trade barriers between the Lao PDR and its ASEAN counterparts and thus increasing trade. These tariff reductions, as well as the harmonisation of standards and rules, will mean that the ASEAN market will be a favourable environment to attract foreign investment, particularly with regard to export orientated investment. The Government has finalised arrangements to sign a bilateral trade agreement with the USA. The signing of this agreement is expected to establish normal trade relations with the USA and help attract more foreign investment. Import Administration It is important for sustainable development that the Lao PDR lives within its means. This means that the country s expenditure on imports should approximate its total income from exports of goods and services, foreign aid receipts and net inflows of capital. Containing imports is mainly a function of macroeconomic management. As such, the Government will provide a sound import administration system. This system will be consistent with a liberal and free market trade regime and in accordance with the country s obligations under AFTA and other international requirements. The application of quantitative and other restrictions on imports will be minimal and only to the extent required for social security and infant industry protection. Export Development The Lao PDR has been GSP status from 35 countries, China being the latest country to have This status is a significant opportunity to expand given the Lao PDR this preferential status exports. ( Recently, New Zealand, Canada and Australia have also granted Lao exports duty free entry) The promotion of export development and production activities will be achieved through: Rationalising of export administration procedures reduce time taken for processing license applications, etc. Researching on products in which Laos would have a comparative advantage Disseminating market intelligence on overseas market opportunities, procedures, GSP and other tariff concessions etc to prospective exporters. Providing information on investment opportunities and facilities to domestic and foreign investors using a variety of mass media as well as ICT networking. 6

7 This will mainly be done by the information service of the Lao Trade Promotion Centre. Improving trade facilitation. Domestic Trade The development of domestic trade is vital for the overall development of the economy. The private sector will be encouraged and supported by the Government to engage in trading activities that will facilitate the unrestricted distribution of goods and services throughout the country. Such trade-oriented distribution is essential to prevent shortages of consumer and investment goods, as well as unnecessary increases in their prices. The production and marketing of domestic goods both locally and overseas will be encouraged through the following measures: Creating market opportunities for domestic products by regularly organising exhibitions and trade fairs within and outside the country. Publishing of information on the availability of domestic products and the prevailing prices, as well as other basic information needed by traders and consumers. Providing producers and traders with information on the use and availab ility of Generalised System of Preferences (GSP) available to the Lao PDR from several developed countries. Promoting the development of trade and commerce related infrastructure, such as rural marketplaces, transport and communication. Promoting the availability of banking, finance and credit facilities, particularly for medium and small-scale enterprises. New Initiatives The Government is taking a number of new initiatives in order to improve the policy environment in the trade sector. Fair Trading Commission Anti Monopoly and Competition: In order for the country and its people to fully benefit from trade and business development, the Government will promote competition and fair-trading practices in the business sector. Restrictive business practices by dominant firms such as transnational corporations can impede the realisation of the benefits of trade liberalisation. To prevent such practices and other 7

8 monopoly elements emerging in the economy, the Government will take steps to promote more competition. Competition will ensure greater efficiency in production, export development and trading activities. Action is being taken to introduce an anti-monopoly and competition law. Consumer Protection: It is essential, particularly for a newly emerging market economy, to have measures to protect the consumer from hazardous products and unethical trade practices. To this end, the Government is taking steps to introduce consumer protection legislation. In order to implement the policies and legislation on competition and consumer protection, a Fair Trading Commission will be established under the Ministry of Commerce (MOC). A Fair Trading Unit will be set up within MOC to provide administrative support to the Commission. Assistance is being obtained from UNCTAD and other aid agencies for the preparation of necessary legislation, for training of staff and for raising community awareness and understanding of competition and consumer protection. Community awareness will be raised through seminars, workshops and public awareness programs. Commercial Law Reforms The liberalised trade and commercial regime that is emerging in the Lao PDR through the new market mechanism requires an appropriate legal framework to ensure its smooth functioning. To this end, the Government has taken steps to review and revise the existing laws relating to trade and commerce, particularly the Business Law of Train-For-Trade Programme Train-For-Trade is an UNCTAD sponsored technical assistance project for the Lao PDR and Cambodia which is aimed at trade related capacity building in the two countries. This four-year project is scheduled to start in September During this period, UNCTAD will conduct training and other technical assistance activities in the Lao PDR with a view to improving the skills of Lao officials and other staff engaged in trade related activities. Trade Training Centre The Trade Ministry s TTC is designed to provide short-term courses for the staff of the MOC, along with other relevant ministries and provincial governments, to 8

9 upgrade their trade-related skills. The TTC facility will be utilised both by the IF Initiative and the Train-For-Trade Programme for conducting skills training activities. UNCTAD is in the process of arranging for supply of computers, audio-visual and other equipment needed to make the TTC fully operational. Lao Chamber of Commerce The Chamber of Commerce has an important role to play in promoting trade and business development. To make this role more effective, the Government has taken steps to make the Chamber of Commerce independent. In conjunction with the Lao Chamber of Commerce, the Government intends to make full use of the Greater Mekong System (GMS) Business Forum in Vientiane in order to promote trade and business relations with other countries in the region. V. Conclusion Now Lao Government has a clear policy on promotion goods produce and rural areas have the potential ability for agriculture produce, handicraft and natural resource; in addition Lao Government has new concept to promote free tax for investor who invest in the poor cluster villages (Kumban) and the China-ASEAN free trade area for sale goods; however we are still lacking of fund and technique of agriculture production and industry/factory to transform the raw material to increase the value of goods before export, no have traders to buy goods from rural villages directly to export and investors to invest in poor Kumban to promote income generation for the poor in rural area. 9