LAO PDR AND WTO ACCESSION: IMPLICATIONS ...

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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 [email protected]

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.

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Table of contents Page

1.

Preface Acronyms Summary Introduction ♦ Why focus on WTO accession for Lao PDR at this time? ♦ Why pay special attention to agriculture and rural development? ♦ Outline of the study

iii iv v 1 2 3 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 ♦ A transition economy on the move ♦ Agriculture’s relative decline ♦ Developments within the agricultural sector ♦ Production and trade prospects under current policies

15 15 16 18 19

4.

What policy changes are needed for WTO accession? ♦ Agricultural policy changes ♦ Non-agricultural policy changes that will affect rural development

22 22 25

5.

What new opportunities will open up by joining WTO?

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6.

Effects of policy changes on agriculture and rural development ♦ Economic growth, structural change and trade ♦ Food security and food price instability ♦ Job creation, poverty alleviation and income distribution ♦ Resource depletion and the environment ♦ Government revenue ♦ Are these changes consistent with government policy objectives?

32 32 34 35 36 38 39

7.

Choices confronting the Lao PDR

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Tables and box Appendix 1: Why the WTO exists and what accession involves Appendix 2: Determinants of structural change in a developing market economy Appendix 3: Agriculture in the WTO: the Uruguay Round and next steps References

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55 67 88 113

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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.

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Acronyms ACP

Africa, Caribbean and Pacific members of the Lome Convention

AFTA

ASEAN Free Trade Area

AMS

Aggregate Measure of Support

APEC

Asia Pacific Economic Cooperation

ASEAN

Association of South East Asian Nations

ATC

Agreement on Textiles and Clothing

CAP

Common Agricultural Policies

DSB

Dispute Settlement Body

EU

European Union

GATT

General Agreement on Tariffs and Trade

IMF

International Monetary Fund

ITC

International Trade Centre

LDCs

Least-developed Countries

MFA

Multilateral Fibre Arrangement

MFN

Most Favoured Nation

MTN

Multilateral Trade Negotiations

OECD

Organisation for Economic Cooperation and Development

SME

Small and medium (non-farm) enterprise

SOE

State-owned enterprise

SPS

Sanitary and phytosanitary

STE

State Trading Enterprises

TRIMs

Trade-related Investment Measures

TRIPs

Trade-Related Intellectual Property Agreement

TPRM

Trade Policy Review Mechanism

TRQ

Tariff-rate quotas

UNCTAD

United Nations Conference on Trade and Development

UNDP

United Nations Development Programme

USITC

United State International Trade Commission

VER

‘Voluntary’ export restraint WTO

World Trade Organization

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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.

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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 moreadvanced 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 inwardlooking 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.

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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 leastdeveloped 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).

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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).

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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 moreadvanced 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.

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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.

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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 membership5

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).

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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

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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 nonmembers. 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

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predictably. Typically, WTO members are more demanding in all these respects on acceding countries than on existing members, although perhaps less so for leastdeveloped 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.

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

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

12

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.

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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).

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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.

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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 moreadvanced 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,

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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.

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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.

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During the 1990s Laos has also become increasingly a net exporter of nonfactor 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).

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

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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

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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.

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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.

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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 onesixth 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 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.

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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 leastdeveloped 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

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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 socalled ‘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 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

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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 nonagricultural 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-agricultural policies are more likely to be affected by WTO accession than agricultural ones, since the GATT/WTO rules concerning them are longstanding. 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).

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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 phaseout 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

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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 labourintensive 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.

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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 antidumping 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.

29

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

30

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 outof-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.

31

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.

32

6.

Effects of policy changes on agriculture and rural development

The key economic goal of the Lao Government is to maintain a high real economic growth rate (targeted at an ambitious 8.8 per cent per year) into next century. Its specific objectives for agriculture and rural development, as laid out in the Government’s 1993 Socio-Economic Development Plan to the Year 2000, include ensuring food security and food price stability (including though promoting rice self sufficiency), increasing agricultural exports, stabilizing slash-and-burn agriculture, and improving rural infrastructure including irrigation on the six plains. Other more general policy objectives include job creation, poverty alleviation, reduced income inequality (including as between rural and urban areas), development that is sustainable in terms of resources and the environment, and adequate government revenue, including from trade taxes, to fund such things as public infrastructure investments. The effects of the reform program that Laos will need to introduce to become a WTO member are discussed below with these objectives in mind. They are based on standard economic reasoning and the experiences of similar countries now at more advanced stages of development, as formal modelling work is beyond the scope of the present study.

Economic growth, structural change and trade

Each of the economic reforms required for WTO membership to proceed, including all those outlined in Section 4 above, will boost Lao economic growth. This is no surprise, for WTO rules and obligations are deliberately designed to raise living standards and accelerate national and thereby global economic development in a way that is sustainable. They do so in at least three ways:

33 •

by encouraging the transfer of resources to their most productive use in each economy to maximize the gains from exploiting comparative advantage;



by reducing policy uncertainty and instability through requiring commitments to reform to be legally binding, which increases savings rates and investor confidence and thereby faster rates of capital accumulation (including via direct foreign investment); and



by encouraging, through greater openness to the rest of the world, the inflow of new technologies and new marketing and other business management ideas.

The more Laos removes distortions to producer and consumer incentives and the more it provides a transparent, open and stable macroeconomic and sectoral policy environment – both absolutely and relative to other countries – the faster its economy will grow, other things equal. In particular, the more the economy moves away from assisting importcompeting sectors and discriminating against actual and potential export sectors, the faster will output grow. Trade too will grow faster with such reform, but that should be seen simply as an outcome and not as a policy objective in its own right. The potential for such reform is indicated in part by the extent to which Lao imports are restricted: by 15 per cent from tariffs alone (Table 9), not to mention the large array of non-tariff barriers to both imports and exports. Clearly there is great scope to unleash the productive potential of the Lao people by reducing this bias against the industries in which the country has its strongest comparative advantage. Changing trade policies and hence the domestic price of exportables relative to imported products is a necessary but not sufficient condition to guarantee an output and export boom, however. Equally important in unleashing the potential of the rural sector, as the Government recognises, is the provision of essential infrastructure, to lower the transactions costs of doing business there, plus investment in the people involved. The crucial infrastructure needed to encourage farmers to move beyond subsistence and into production for domestic and export markets includes rural roads, electricity, telecommunications and radio transmission, so that costs of transport, communications and information (about market conditions, new technologies and the like) become affordable. Investments in these items probably will be more expensive per capita than in urban areas, but that needs to be weighed against the net benefits

34

from expanding output faster from rural areas. Irrigation investments also need to be facilitated, even if they are mostly funded at the local level with the help of loans (which require secure property rights over land use so land can be used as collateral with lenders). The crucial investments in people include basic schooling (for girls as much as for boys), basic health services, and agricultural research and extension. All the empirical evidence points to the social rates of return from such public investments as being very high in developing countries.

Food security and food price stability

Since trade policy reforms for Laos will in general expand agricultural output, food security is almost certain to increase. True, some products such as rice may face greater import competition, particularly if the above-mentioned investments in rural infrastructure are not forthcoming. But supplying via imports itself does not necessarily equate with less food security. Indeed by becoming a long-term reliable customer to an export supplier (in the case of rice, Thailand), a country can often gain more security of supply with knowledge of that additional source being available on a regular basis. This is especially true in Laos where the southern part of the country has a rice surplus but the northern part has a deficit: importing by the north is far more efficient than purchasing from the south, given the country’s high internal transport costs. Nor should price instability, which is really just one element of food security, increase when the economy is opened up more. On the contrary, by being more open to international trade, reductions can be expected in both within- and between-season fluctuations in food prices that occur due to agriculture’s necessary dependence on the weather. This reduction is possible simply because in times of shortfalls in domestic supplies, more can be secured through market forces by temporarily exporting less or importing more, and conversely in times of gluts. True, international food prices fluctuate too, but econometric evidence shows overwhelmingly that they tend to fluctuate less than do domestic prices in all but the most rigidly administered national markets.

35

Moreover, one of the important consequences of making commitments to the WTO is that it creates in the acceding country a more stable and transparent policy environment where there is less risk of policy reform reversals and policy fluctuations. With the assurance of less stop-go ad hoc policy responses to each market fluctuation comes less short-term hoarding/dishoarding, especially if the government leaves the bulk of the food storage activities to the private sector. This too enhances food security and reduces food price fluctuations.

Job creation, poverty alleviation and income distribution

As already implied above, 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. This is not to deny the reality of economic and social costs of adjustment to reform. Certainly some urban people who have been employed in the most-protected industrial sectors may lose their jobs as protection barriers are lowered. But there will be fewer such people the earlier the reforms take place and the more they are phased in gradually, according to a clear schedule announced at the outset and implemented on time (as is the case in making commitments under the WTO). A further point is worth making. Many of those displaced by reform programs will have no difficulty getting another job – perhaps even a better-paying one – in one of the expanding industries. This is easier to comprehend when it is recalled that the economy is growing rapidly and will be expanding even faster with reform; hence while output and employment will expand in what will become more-profitable rural areas in absolute terms, the rural share of the total is likely simply to fall less rapidly than it otherwise would. That is, urban employment will still grow, but possibly somewhat slower initially than otherwise because of more job opportunities becoming available in rural areas. One possible new source of job creation is in mining.14 The more the policy environment is encouraging of foreign direct investment, the more mining exploration companies would be enticed to search for profitable sites. Should such sites be found, 14

On the potential of the mining sector, see Jordt and Ma (1994).

36

the investment in mine construction and subsequently mineral exploitation will create jobs both directly and indirectly. In the long run, indirect job creation may be the more important, especially if capital-intensive mining techniques have to be used. As explained in Appendix 2, those indirect jobs come about because national income rises as the mining sector grows, and much of that extra income will be spent, including on goods and services that are non-tradable internationally. Hence output of the non-tradable part of the economy (particularly services) grows in response to this demand expansion. It is no accident that the countries that are most richly endowed with natural resource per capita, and hence have the strongest comparative advantage in primary and processed products, are more urbanized and have a larger share of GDP from the service sector than other economies with the same per capita income. That is, their economies are not simply made up of farms, forests, dams and/or mines. On the contrary, typically the share of production and employment in their primary sectors is little more than for other economies at a similar stage of development, because of the dominance of the service sector that is meeting the needs of producers and consumers regardless of which productive activities they are involved in.

Resource depletion and the environment

The question of whether freer trade is associated with more or less natural resource depletion and environmental degradation is a complex one that cannot be answered unequivocally. There are many reasons to assume reform will lead to an improved outcome though. One is simply that freer trade allows a more efficient allocation of all resources in the economy, including land and other natural resources, so long as property rights over those resources are well defined and enforceable. Another is that we know from standard economics of markets that so long as optimal environmental policies are in place and adjust to changing circumstances, removing trade distortions will necessarily improve welfare. This is so even if there is an increase in environmental damage, since the welfare loss from that damage will be less than the welfare gain from trade reform (Anderson 1992; Corden 1997, Ch.13). But what if resource and environmental policies are not well developed? Then it is an empirical question as to whether the production and consumption changes

37

associated with trade reform raise or lower overall damage to the environment. Very few empirical case studies have been undertaken addressing this question – and case studies are the only option since every country will be different. But one recent study for a setting not dissimilar to that of the Lao PDR is instructive. Strutt and Anderson (1998) asked precisely this question of Indonesia. Not surprisingly, they found that with no accompanying changes in environmental policies, trade reform raised some environmental damage indicators while lowering others. There is no satisfactory way of adding up those changes to get a net effect on the environment, but more indicators showed an improvement than a worsening. Much more telling, though, was the comparison with what would have happened had there not been any trade reform. The study projected the economy to 2020 without and then with the already-announced Uruguay Round and APEC liberalizations. It turns out that even in the cases where environmental indicators suggest some worsening of the environment, the proportional change in that indicator due to trade reform typically added only a fraction of 1 per cent to the damage that would have occurred over those two-plus decades with normal economic growth and structural change but no trade reform. Such a slight increase due to liberalization could very easily be accommodated by a slight tightening in environmental regulations of course, suggesting at least in the Indonesian case that this is a small-order issue. In the case of Laos, two obvious environmental concerns are deforestation and slash-and-burn agriculture. To date the Government has chosen to allow deforestation and the export of timber products to continue, unlike many other countries in Southeast Asia. The rate of deforestation of the country’s natural forest area has been estimated to be between 1 and 2 per cent per year (ADB 1996). Should the Government choose to slow that activity in the future, there are numerous lessons that could be learnt from its neighbours about how best to do that (with trade policy not necessarily being anywhere near the best instrument, despite the superficial appeal of a log export ban).15 It may slow anyway, without further government restrictions,

15 Between 1988 and 1994 the Lao Government imposed a 30 per cent export tax on logs and sawn timber, but since 1994 that and the stumpage fee and resource tax have been absorbed into fixed timber royalties via a system of minimum prices, with control of logging and log trading being taken away from private firms and given to three state-owned enterprises that are allowed to operate as a cartel. Apparently this has not worked well in terms either of revenue raising or resource conservation (World Bank 1997c, Ch. 13).

38

since much of the current deforestation is associated with clearing land for the massive Nam Theun 2 hydroelectricity dam. With respect to slash-and-burn agriculture, the Lao Government has already taken steps to discourage it. The opening up of the economy domestically and internationally would contribute to that process, by making available to farmers more income-earning opportunities. In particular, de-emphasising the need for regions and the whole nation to strive for self sufficiency in rice would reduce the need for as much upland area to be slashed and dedicated to paddy production. Instead rural people could concentrate more on those cash crops and livestock in which they have their strongest comparative advantage.

Government revenue

There is a natural presumption to assume that trade reform must lower government revenue. After all, more than one-quarter of Lao tax collections come from trade taxes (one-sixth of which is from export taxes, the rest from import taxes). However, three considerations are worth noting. First, lowering import and export tariffs expands trade. It is conceivable that the rates of trade taxation are so high that with the larger volume of trade that would result from lowered tax rates, more revenue would be collected despite the lower rate of tax per unit. Second, reducing official trade taxes lowers the incentive for people to use otherwise-more-costly unofficial channels (that is, smuggling). The more goods are thereby redirected through official channels, the greater will be the collection of tax revenue. And thirdly, many restrictions on Lao trade, both exports and imports, are in the form of quantitative non-tariff barriers. Converting those quantitative restrictions to trade taxes necessarily raises rather than lowers government revenue. In short, the tariffication of non-tariff trade barriers and the lowering of high rates may well raise government revenue. Furthermore, a simplifying of the structure of tariffs (in the extreme, having just one import tariff rate and one export tax rate), would reduce administrative costs and corruption at customs posts -- as well as reduce domestic price distortions and thereby increase the efficiency of resource use within the import-competing and export sectors.

39

A variation on the previous point applies when the country is involved in a free trade area, as Laos is with AFTA. In that case the larger the gap between the tariff rates applying to AFTA partners and those applying to third parties, the greater the risk of trade diversion. That is, a Lao firm may buy from an AFTA country because the tariff-inclusive price is lower from there than from the cheapest non-AFTA supplier, despite the fact that the non-AFTA supplier’s pre-tariff landed price is lower. Trade diversion reduces not only national economic welfare generally but also is likely to reduce government tariff revenue. This is because the rate of taxation of imports from AFTA is lower, which may not be compensated for by firms buying a sufficiently larger volume of them relative to what would have been bought from nonmembers. Finally, if and when the massive hydroelectric dam projects currently under construction or consideration come on stream (see, for example, World Bank (1997c, Ch.12) for a summary), the scope for raising government revenue efficiently from that source will be enormous. Thus the need for revenue raising via merchandise trade taxes should diminish as the next century approaches.

Are these changes consistent with government policy objectives?

To conclude, it is clear from the listing of government policy objectives at the beginning of this section that the effects of opening up the Lao economy in line with the spirit as well as the letter of WTO law are quite consistent with the government’s economic and social development plans (with the possible exception of the desire within parts of government to strive for rice self-sufficiency). How much and how fast the government moves down the reform road is going to be determined only to a small extent by WTO members’ demands on Laos during the accession process, however. Largely it will depend on how much the government is prepared to impose in the way of short- to medium-term adjustment costs that inevitably accompany policy reform. The next and final section lays out some of the choices that still confront the Lao PDR.

40

7.

Choices confronting the Lao PDR

The reforms whose effects are discussed in the previous section are not necessarily all essential for WTO accession. The Government of the Lao PDR might therefore be tempted to make just the minimum number of policy changes and market access commitments as is necessary to ensure accession, and no more. Those changes include tariffying and binding all agricultural import restrictions, and offering MFN and national treatment to all WTO members (apart from the preferences given to AFTA members). How much more will be required of Laos by WTO members is still difficult to say. However, the experience of other recent and prospective acceding countries suggests accession might not occur without also committing to not introduce any export subsidies (even though GATT contracting parties only had to commit to reduce theirs), making significant commitments on services market access, removing at least some preferential assistance to STEs, and otherwise abiding by WTO rules including getting intellectual property rights legislation in order, publishing details of all trade and trade-related policies, and notifying the WTO of any changes to those policies. That sounds like – and is – a rather formidable list. So why offer to do more, other than because it will speed the process of accession? The simple answer is: because it is in the direct economic interest of the Lao PDR to do so (as laid out in Section 6 above). This is not to underestimate the political pressures that protected interest groups exert on governments not to reduce trade barriers and increase competition. But against that needs to be weighed the benefits to be derived from going beyond the minimum reforms required for membership – bearing in mind that the accession process offers a unique opportunity to use it for political cover to introduce reforms that otherwise would face formidable obstacles, and to legally bind them so as to prevent backsliding in the future. By way of illustration, consider the following choices the Lao PDR might make.

41

Bind tariffs at well above applied rates? It might be argued that this would provide bargaining chips for future negotiations and leave the government with flexibility to raise protection rates in the future. However, Laos is too small to have any real bargaining power with such ‘chips’; and the downside of retaining some flexibility to raise protection is that it leaves the government vulnerable to protectionist interests seizing that opportunity whether the government likes it or not. Keep MFN tariffs well above the lower preferential ones required to fulfil AFTA commitments? The argument here might be that Laos can compete with limited regional competition within ASEAN but could not compete with the rest of the world. The fallacy in this argument is that every economy has a comparative advantage in some products (and no economy has a comparative advantage in every product), so it is only those currently protected industries in which the country has a strong comparative disadvantage that may find it difficult to compete if AFTA commitments were multilateralized. The downside of retaining lower tariffs on AFTA trade, which could well be legal under GATT Article XXIV, is that it may cause trade diversion and lower overall tariff revenue collection. Infrastructure and human capital investments in rural areas are too expensive per capita to be warranted? This view is based on the obvious fact that there is a greater concentration of people in urban areas. Economies of scale ensure that it is relatively cheap to provide city people with roads, electricity, a phone service, basic education and health services and the like. Greater expense does not always equate with poor value for money though. Myriad studies demonstrate that social rates of return to these investments in rural areas of developing countries are very high. Keep SOEs and STEs in the hands of the State because they are able to generate substantial income for the government? The evidence is more often to the contrary, namely that many of these enterprises lose money and have to be assisted by the Treasury. Even where they are returning a profit, the question arises as to whether they could earn even greater profits in private hands. If the market believes they could, selling them would bring a higher price than the discounted value of future profits under state ownership – and at the same time would raise capital for high-payoff public investments (such as in rural infrastructure?)

42

What types of institutional strengthening are needed to make the most out of becoming a WTO member? Substantial resources are obviously needed to establish a WTO desk capable of responding to enquiries and coordinating all the inputs needed to fulfil notification requirements, not to mention staffing the mission in Geneva and servicing its needs from Vientiane. But how much more than that should be devoted to the task? The answer depends on the seriousness with which the Lao PDR wishes to continue to open up and become an aggressive exporter like several of its neighbours. To some extent the Government can depend on other ASEAN governments defending its interests in Geneva, but inevitably there will be situations where Lao national interests do not coincide with those of its neighbours. What are some of the additional ingredients that might be considered in developing good trade policy practice and effective WTO involvement? Detailed general suggestions can be found in Hoekman (1995), Anderson (1996, Ch. 4) and Michalopoulos (1998a), but they include, among other things, the following: •

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,



taking an active interest in new issues of pertinence to Laos as they emerge on the WTO’s agenda, and



engaging those domestic interest groups (particularly exporters) who stand to gain from Lao involvement in the WTO to help convince skeptics, and those who fear they might lose from more openness, of its virtues. All of this requires an expansion of effort and the expending of more resources

on the part of the Ministry of Commerce and relevant sections of other ministries. While the initiative has to come from the Ministry of Commerce, there is ample technical assistance funding available for the asking to finance that effort. In addition to the multilateral agencies such as WTO, UNCTAD, UNDP and the World Bank, numerous bilateral aid agencies stand ready to receive assistance requests. Project funding might be sought for such things as:

43 •

more in-country seminars and short courses (1-2 weeks) on specific trade policy and WTO topics where information is inadequate either in the Ministry of Commerce or other Ministries or in the wider community,



training trainers for such dissemination activities, as well as building up a more comprehensive stock of knowledge and wisdom within the Ministry of Commerce and closely related ministries, which could involve offering Graduate Certificate (one semester) or Graduate Diploma (two semester) coursework opportunities for the most promising officials with a few years of experience,16 and



developing the WTO desk within the Ministry of Commerce and the necessary contacts with other Ministries, which requires a library of trade policy material from abroad, computers with Internet lines to have continuous access to the WTO’s and related websites, and space and library personnel to catalogue and store reference material, including all the necessary details on Lao policies so as to be able to notify the WTO and respond to other members’ requests for information. Finally, analyses of the effects of prospective and potentially negotiable policy

changes at home and abroad on the Lao economy, particularly in the context of its rapid economic growth and structural changes, are fundamental for improving the Government’s understanding of its trade interests. The descriptive analysis provided in Section 6 above is a poor substitute for formal empirical modelling. Even when interest is focused just on the agricultural sector, economy-wide modelling is desirable because of the many indirect effects that other sector’s activities can have on the farm sector. To make effective use of the results that can be generated by such models, analytical capability needs to be developed within the Ministry of Commerce or an affiliated research centre or unit for trade/economic policy analysis. This is an area where specialized training would definitely be required, in this case in post-graduate research techniques offered in Masters and preferably PhD programs. Again, technical

16 For example, the Chinese Government successfully sought funding from AusAID for a four-year comprehensive program of trade policy training, included in which is a project to provide scholarships from 1996 to 1999 for twelve officials from Beijing per year (a total of 48) to undertake at the University of Adelaide a ten-month Graduate Diploma in International Economics with a specialization in trade policy and WTO matters. The average age of those officials has been 29 years. All have returned to and stayed with their Ministry upon graduation. Details of the course are available at the University’s Centre for International Economic Studies’ website at http://www.adelaide.edu.au/cies

44

assistance in the form of scholarships could be sought for this purpose, taking care to ensure that the trainees return on completion of their studies.

45

Box 1: Text of Article V of the GATT, on freedom of transit 1. Goods (including baggage), and also vessels and other means of transport, shall be deemed to be in transit across the territory of a contracting party when the passage across such territory, with or without transshipment, warehousing, breaking bulk, or change in the mode of transport, is only a portion of a complete journey beginning and terminating beyond the frontier of the contracting party across whose territory the traffic passes. Traffic of this nature is termed in this Article “traffic in transit”. 2. There shall be freedom of transit through the territory of each contracting party, via the routes most convenient for international transit, for traffic in transit to or from the territory of other contracting parties. No distinction shall be made which is based on the flag of vessels, the place of origin, departure, entry, exit or destination, or on any circumstances relating to the ownership of goods, of vessels or of other means of transport. 3. Any contracting party may require that traffic in transit through its territory be entered at the proper custom house, but, except in cases of failure to comply with applicable customs laws and regulations, such traffic coming from or going to the territory of the contacting parties shall not be subject to any unnecessary delays or restrictions and shall be exempt from customs duties and from all transit duties or other charges imposed in respect of transit, except charges for transportation or those commensurate with administrative expenses entailed by transit or with the cost of services rendered. 4. All charges and regulations imposed by contracting parties on traffic in transit to or from the territories of other contracting parties shall be reasonable, having regard to the conditions of the traffic. 5. With respect to all charges, regulations and formalities in connection with transit, each contracting party shall accord to traffic in transit to or from the territory of any other contracting party treatment no less favourable than the treatment accorded to traffic in transit to or from any third country. 6. Each contracting party shall accord to products which have been in transit through the territory of any other contracting party treatment no less favourable than that which would have been accorded to such products had they been transported from their place of origin to their destination without going through the territory of such other contacting party. Any contracting party shall, however, be free to maintain its requirements of direct consignment existing on the date of this Agreement, in respect of any goods in regard to which such direct consignment is a requisite condition of eligibility for entry of the goods at preferential rates of duty or has relation to the contracting party's prescribed method of valuation for duty purposes. 7. The provisions of this Article shall not apply to the operation of aircraft in transit, but shall apply to air transit of goods (including baggage).

Table 1: Growth in value of GDP at constant (1990) prices, by sector, Lao PDR, 1987 to 1996 (per cent per year)

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Agriculture

-1.2

-4.2

10.7

8.7

-1.7

8.3

2.7

8.3

3.1

2.3

Industry

-16.0

-2.4

34.2

16.2

19.9

7.5

10.3

10.7

13.1

17.0

Services

8.0

4.1

11.3

-0.5

6.5

3.9

7.7

5.5

10.2

8.7

TOTAL

-1.1

-1.8

13.5

6.7

4.0

7.0

5.9

8.1

7.0

6.8

na

260

220

200

230

260

280

320

360

380

GDP per capita ($)

Source: Bank of the Lao PDR (1998) and earlier editions.

Table 2: Sectoral composition of GDP at constant (1990) prices and employment, Lao PDR, 1987 to 1996 (per cent) 1987

1990

1992

1995

1996

Agriculture

63

61

59

55

53

Industry

11

14

17

19

21

Services

26

24

24

26

26

TOTAL

100

100

100

100

100

Agriculture

na

89

87

85

na

Industry

na

3

4

8

na

Services

na

8

9

12

na

TOTAL

100

100

100

100

100

GDP:

Employment:

Source: National Statistical Centre (1997) and World Bank (1995).

48

Table 3: Agriculture’s share of exports, ‘revealed’ comparative advantage index, and net export specialization index, Laos and other Asian countries, 1965 to 1995

Agriculture’s share of exports (%) Lao PDR 1965-69 1990-95 Vietnam 1975-79 1980-84 1985-89 1990-95 Nepal 1980-84 1985-89 1990-95 Malaysia 1965-69 1970-74 1975-79 1980-84 1985-89 1990-95 Thailand 1965-69 1970-74 1975-79 1980-84 1985-89 1990-95 China 1970-74 1975-79 1980-84 1985-89 1990-95 Indonesia 1965-69 1970-74 1975-79 1980-84 1985-89 1990-95

14 11

Agricultural ‘revealed’ comparative advantage indexa 0.70 1.25

Agricultural net export specialization indexb -0.36 -0.33c

21 24 30 31

1.60 2.05 2.91 3.30

-0.65 -0.24 0.09 0.49

66 40 16

5.50 5.28 1.66

na na na

46 44 37 28 23 11

2.35 2.76 2.77 2.40 2.23 1.29

0.34 0.41 0.48 0.42 0.44 0.32

80 72 64 55 35 18

3.66 3.98 4.20 4.58 4.62 2.00

0.68 0.72 0.74 0.72 0.68 0.51

35 26 17 18 9

2.24 1.97 1.46 1.78 1.00

0.19 0.01 -0.11 0.28 0.15

53 29 15 9 15 10

2.69 1.82 1.12 0.81 1.51 1.20

0.54 0.24 0.20 0.19 0.41 0.18

a Agriculture's share of the country's exports relative to agriculture's share of global exports, following Balassa (1965). b Agricultural exports minus imports as a ratio of agricultural exports plus imports. C 1995. Source: FAO (1997).

49

Table 4: Changing export composition and value of recorded merchandise exports and imports, Lao PDR, 1991 to 1996 (per cent and current US$) 1991

1992

1993

1994

1995

1996

7 3

8 2

6 2

6 1

12 7

14 8

Forestry & wood products

42

34

30

34

32

41

Electricity

22

13

9

9

8

10

Manufactures of which: clothing

29 16

45 22

55 22

51 21

48 27

35 21

100

100

100

100

100

100

97

126

222

277

286

302

37

60

91

85

97

104

133 28

186 32

313 29

363 24

382 25

406 26

215

266

432

564

589

690

38

38

56

51

69

79

253

304

488

615

658

769

Services, % of total

15

13

11

8

10

10

Balance of trade (US$)

-118

-140

-210

-287

-303

-388

Balance on current account (US$)

-110

-118

-175

-252

-276

-363

Exchange rate (Lao kip per US$) GDP at market prices (US$ million) MNFS exports, % of GDP

717

734

728

726

853

952

1006

1151

1306

1388

1665

1796

13

16

24

26

23

23

MNFS imports, % of GDP 25 Source: Bank of the Lao PDR (1998).

26

37

44

40

43

Merchandise export shares: Agriculture of which: coffee

TOTAL, merchandise Value of merchandise exports (US$m) Value of nf services exports (US$) TOTAL, MNFS exports Services, % of total MNFS Value of merchandise imports (US$m) Value of nf services imports (US$) TOTAL, MNFS imports

50

Table 5: Composition of agricultural GDP at 1990 prices, Lao PDR, 1986 to 1992 (per cent, excluding fish, forestry and own-consumption by rural households)

1986

1989

1992

51

47

41

Other food crops

3

4

3

Cash crops

4

5

7

Fruit

4

4

5

Vegetables

1

2

1

37

38

43

100

100

100

Rice

Livestock products TOTAL

Source: World Bank (1995, Table 2).

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Table 6: Food production growth, arable land, and fertilizer use, Lao PDr and other Asian countries, 1979 to 1996 Food prodn. per capita growth (% pa), 1979-93

Persons per ha of arable land, 1993

Malaysia

4.3

China

Fertilizer consumption (kgs per ha. Of arable land) 1979-81

1994-96

3.9

427

674

3.0

12.2

149

354

Vietnam

2.2

11.1

30

249

India

1.5

5.3

34

83

Nepal

1.2

7.8

10

33

Thailand

0.0

2.5

18

82

Lao PDR

-0.2

2.4

4

5

Myanmar

-1.3

4.4

10

3

Philippines

-1.3

8.1

64

109

Source: World Bank (1997c, Table 3.3; 1998, Table 3.2)

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Table 7: Direction of recorded merchandise trade as reported by partners, Lao PDR, 1995 Intensity indexa

Share (per cent) Exports

Imports

Exports

Imports

Thailand

27

65

19.3

59.2

Singapore

4

8

1.8

3.3

Other ASEAN

0

1

0.0

0.2

China

3

9

1.0

3.0

Taiwan

7

1

3.4

0.5

12

5

1.8

0.6

0

4

0.0

3.5

39

7

1.0

0.2

United States

4

0.3

0.3

0.0

Others

4

1

0.2

0.0

100

100

1.0

1.0

Japan Australia European Union-15

TOTAL

a

The index of intensity of export (import) trade is defined as the Lao PDR’s share of exports to (imports from) a trading partner relative to that trading partner’s share of world imports (exports).

Source: Lao PDR shares from Fukase and Martin (1998), partners’ world trade shares from WTO (1997b).

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Table 8: Distribution of import tariff rates, Lao PDR, 1997 Tariff rate

Number of

Proportion of

(per cent)

tariff line items

tariff line items (per cent)

5

1820

52

10

1151

32

15

7

0

20

246

7

30

201

6

40

123

4

3

0

prohibited

TOTAL

3551

Source: Fukase and Martin (1998, Table 3).

100

Table 9: Weighted average MFN import tariff rates for agricultural and other goods, Lao PDR and other ASEAN countries, circa 1997 (per cent)

HS code

Description

Lao PDR

Indonesia

Malaysia

1-5

Animals and animal products

7.1

10.8

1.7

14.2

34.2

13.7

6-14

Vegetable products

13.0

3.6

3.1

37.6

13.3

11.6

15

Animal and vegetable oils

10.1

3.8

0.7

17.7

16.1

15.2

16-24

Processed foods, beverages and tobacco

30.7

5.6

3.0

21.1

23.5

89.3

ALL GOODS

14.7

7.8

3.6

10.9

13.7

19.4

Source: Fukase and Martin (1998, Table 4).

Philippines Thailand

Vietnam

Appendix 1: Why the WTO exists and what accession involves

Why the WTO exists

The WTO has four key objectives: to set and enforce rules for international trade, to provide a forum to negotiate and monitor trade liberalization, to resolve trade disputes, and to improve policy transparency. These are discussed in turn below. But the WTO is much more comprehensive than the GATT. For example, GATT’s product coverage in practice was confined mainly to manufactures (effectively not including textiles and clothing), whereas the WTO encompasses all goods (including now the sensitive farm sector), services, capital to some extent, and ideas (intellectual property). As well, following the conclusion of the Uruguay Round negotiations, the interim GATT Secretariat was converted to a permanent WTO Secretariat with greatly strengthened trade policy review and dispute settlement mechanisms.

The purposes of WTO rules GATT/WTO rules to govern international trade serve at least three purposes. First, they protect the welfare of small and weak nations against discriminatory trade policy actions of large and powerful nations. GATT Articles I (most-favoured-nation) and III (national treatment) promise that all WTO members will be given the same conditions of access to a particular country’s market as the most favoured member, and all foreign suppliers will be treated the same as domestic suppliers. These fairness rules are fundamental to instilling confidence in the world trading system. In particular, they lower the risk associated with a nation’s producers and consumers becoming more interdependent with foreigners -- a risk that otherwise could be used by a country as an excuse for not fully opening its borders. Second, large economies have the potential to exploit their monopoly power by taxing their trade, but we know from trade theory that the rest of the world and the world as a whole are made worse off by such trade taxes. Thus while each large economy might be tempted to impose trade taxes, the effect of lots of them doing so simultaneously may well be to leave most if not all of them worse off -- not to

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mention the welfare reductions that would result in many smaller countries. Hence the value of agreeing not to raise trade barriers and instead to ‘bind’ them in a tariff schedule at specified ceiling levels. This rule is embodied in GATT Article II, whereby WTO members are expected to limit trade only with tariffs and are obligated to continue to provide market access never less favourable than that agreed to in their tariff schedules. Again, the greater certainty which this tariff-binding rule brings to the international trading system adds to the preparedness of countries to become more interdependent. And the third key reason as to why multilateral rules disciplining trade policy are beneficial is that they can help governments ward off domestic interest groups seeking special favours. This comes about partly via Article II, which outlaws the raising of bound tariffs, as well as via numerous other articles aimed at ensuring that non-tariff measures are not used as substitutes for tariffs. This benefit of the system is sometimes referred to as the ‘Ullyses effect’: it helps prevent governments from being tempted, in this case to favour special interest group at the expense of the rest of their economy. While no-one would argue that the GATT rules have been applied without exception, the fact that they are there ensures the worst excesses are avoided. They therefore bring greater certainty and predictability to international markets, enhancing economic welfare in and reducing political tensions between nations. More than that, by promoting interdependence the GATT/WTO indirectly has raised the price and hence reduced the likelihood of going to war.

Why countries need the WTO to negotiate freer trade One of the clearest lessons from trade theory is that an economy unable to influence its international terms of trade cannot maximize its national income and economic growth without allowing free trade in all goods and services. Consumers lose directly from the higher domestic prices of importables, while exporters lose indirectly because import barriers cause the nation’s currency to appreciate (there is less demand for foreign currency from importers) and raise the price of labour and other mobile resources (Lerner 1936; Clements and Sjaastad 1984). More-open economies also grow faster. Why, then, do countries restrict their trade, and why do

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they need to get together to agree to liberalize those protectionist trade regimes multilaterally, when it is in their interests to do so unilaterally? Numerous reasons have been suggested as to why a country imposes trade barriers in the first place, but almost all of them are found wanting (Corden 1997). The most compelling explanation is a political economy one. It has to do with the national income re-distributive feature of trade policies: the gains are concentrated in the hands of a few who are prepared to support politicians who favour protection, while the losses are sufficiently small per consumer and export firm and are distributed sufficiently widely as to make it not worthwhile for those losers to get together to provide a counter-lobby, particularly given their greater free-rider problem in acting collectively (Hillman 1989, Grossman and Helpman 1994, Anderson 1995a). Thus the observed pattern of protection in a country at a point in time may well be an equilibrium outcome in a national political market for policy intervention. That political equilibrium in two or more countries might, however, be able to be altered for the better through an exchange of economic market access. If country A allows more imports it may well harm its import-competing producers if there are no compensation mechanisms; but if this liberalization is done in return for country A’s trading partners lowering their barriers to A’s exports, the producers of those exports will enjoy this additional benefit. The latter extra benefit may be sufficiently greater than the loss to A’s import-competing producers that A’s liberalizing politicians too become net gainers in terms of electoral support.Likewise, politicians in the countries trading with Amay well be able to gain from this trade in market access, for equal and opposite reasons. That is, a new opportunity for trade negotiations can stimulate trade liberalization by altering the incentives to lobby politicians and thereby the political equilibrium in trading nations (Grossman and Helpman 1995, Hillman and Moser 1995; Hoekman and Kostecki 1995; Anderson 1996, Ch. 1). Such gains from trade negotiations involving exchange of market access will tend to be greater nationally and globally, the larger the number of countries involved and the broader the product and issues coverage of the negotiations. Hence the wisdom in negotiating multilaterally with more than 100 countries over a wide range of sectors and issues, as in the Uruguay Round, despite the process being cumbersome. Now that there is so much more product coverage under the WTO than

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under the GATT, and the number and extent of participation by member countries keeps growing, the scope for exchange of market access has increased dramatically. That is especially true for exchanges between more- and less-developed countries now that agriculture and textiles and clothing are back in the GATT mainstream and services and trade-related intellectual property have been added, making a wider range of intersectoral tradeoffs possible.

The WTO’s role in dispute resolution In the absence of a global government, another key contribution of the GATT has been to provide an avenue for resolving trade disputes. That role has been strengthened substantially under the WTO, whereby members are committed not to take unilateral action against a trading partner but rather to seek recourse through the WTO’s Dispute Settlement Body (DSB) and to abide by its rules and findings. The process and timetable for dispute resolution has been tightened up, made much more automatic, and otherwise greatly streamlined relative to what operated under the GATT before 1995. If both parties agree, the matter can be dealt with via mediation, conciliation or ‘good offices’. Failing that, the complaining country may seek a legal ruling from a panel. The panel submits its draft report privately to the parties involved for comment, and may then revise the report before releasing it to the full WTO membership. Unless one or both of the parties files a notice of appeal, or the WTO membership decides by consensus not to do so, the report is automatically adopted and made legally binding after 60 days. That whole process is to be completed in less than nine months. If an appeal is lodged, the new WTO Appellate Body will hear and rule on any claim of legal error within 60 days, and its ruling is automatically adopted too unless the WTO membership decides by consensus not to do so (Hudec 1995). The experience over the first two years of this new system has been highly successful (see Cameron and Campbell 1997). During that time developed countries have brought 48 matters to the DSB, developing countries have brought 20 cases, and a further four have been brought by both developed and developing country members. About two-thirds of these have been against developed countries, the other one-third against developing countries. This total of 72 in less than two years compares with a mere 300 cases in the total 48-year history of the GATT. Moreover, the DSB’s Panel

59

Reports are causing countries to implement significant policy changes, unlike many of the GATT dispute reports. John Jackson, a prominent international trade law professor, believes the establishment of the DSB in the WTO “is likely to be seen in the future as one of the most important, and perhaps even watershed, developments of international economic relations in the twentieth century” (Jackson 1997, p.176).

The WTO’s role in monitoring trade policies and providing information One of the reasons protectionist trade policies persist is that the losers from those policies (suppliers of imports from abroad as well as domestic consumers and domestic producers of exportables) are poorly informed about the nature and extent of their loss. In so far as they underestimate the loss, so they under-invest in lobbying against such distortionary policies. In these circumstances there is an economic return to society from supplying more information on the effects of interventionist policies. Yet many governments choose to under-supply such information, presumably at the request of those interest groups gaining from incomplete transparency (Rattigan and Carmichael 1996). The shortfall in national transparency agencies can be offset somewhat at least by the WTO Secretariat providing that service. It now does so, in the form both of annual notification requirements and of the Trade Policy Review Mechanism (TPRM). Notices of all changes in trade and trade-related policies also must be published and made accessible to a country’s trading partners, which means that information is also more accessible to groups within the protective country. For countries acceding to the WTO, particularly developing and former centrally planned economies, this requirement of WTO membership is a major step towards more transparent governance. The WTO reviews each country’s policies once every four years (two years in the case of the major traders, six or more years in the case of the smallest and poorest developing countries). After extensive consultations in the national capital, the WTO Secretariat publishes its TPRM review together with a companion review by the government concerned. The process thus monitors the extent to which members are meeting their commitments and obligations, as well as providing information on

60

newly opened market opportunities. It serves too as a firmer basis for subsequent trade negotiations and for resolving trade disputes. These notification and TPRM processes, begun on a trial basis during the Uruguay Round, are now making much more policy information available not just to the international community but also -- and perhaps much more importantly – to consumer and exporter groups in the country concerned. The latter in turn can then assess at lower cost the adverse effects of its government’s protectionist trade policies, and thereby become more effective campaigners for socially beneficial trade reform.

Emerging issues for the WTO A huge amount of digestion is required as the Uruguay Round is implemented and the new WTO processes are explored. Even then there will still be considerable scope for further gains from traditional multilateral trade reform (Francois and McDonald 1996). Nonetheless, new issues are emerging that also will require the attention of member governments, businesses, and the WTO Secretariat. In part that is due to the very success of the GATT/WTO in reducing traditional barriers to trade. The lowering of those barriers, together with falling costs of transport and communication between countries, have raised the relative importance of domestic economic and social policies in determining the international competitiveness of different industries. For that reason, and because the outlawing of trade policies has encouraged groups to seek government assistance by other (domestic policy) means, attention is focusing increasingly on trade-related domestic policy measures. We have already seen the entwining of trade and environment policies, trade and investment policies, and trade and competition policies in the WTO work program (and there is still pressure from some members to address also the issue of trade and labour standards). There will also be more pressure put on WTO members – and particularly those countries seeking WTO accession -- to sign on to the plurilateral Government Procurement Agreement. Meanwhile, countries have and will continue to seek to make faster progress on these issues through existing or new groupings of a subset of WTO members, most notably through regional integration agreements such as the EU, NAFTA, AFTA, and APEC. A challenge for the WTO is to ensure that those regional arrangements supplement and reinforce the rules-based global trading system rather

61

than marginalize or undermine it (WTO 1995b). Likewise, countries seeking to accede to the WTO need to ensure that any regional agreements they may join provide a stepping stone rather than a stumbling block to their WTO accession.

What WTO accession and membership involve

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. While the details of the GATT and now the WTO rules are numerous,17 the three key obligations on members are adhering to the non-discrimination rules mentioned above, limiting the use of non-tariff trade measures, and keeping applied tariff rates no higher than those bound in the country’s tariff schedules (Articles I to III and XI of the GATT). What are one member’s obligations are also other members’ rights, and vice versa. Hence getting the balance right is a challenge, for the single-minded pursuit of a right to the neglect of one’s obligations is likely to lead a member into dispute and litigation. Policy coherence across all sectors of the economy is therefore required of WTO members -- and much more so than was the case for GATT contracting parties prior to 1995 when the focus was confined mostly to just manufactures. That policy coherence and consistency across sectors has to be not only in trade policy but also in trade-related domestic policies. As discussed above, this is because, with the continuing reductions in border protection, domestic regulations are becoming evermore significant as determinants of international competitiveness. In addition to the three key obligations mentioned above, there are numerous other WTO obligations that need to be met, some of which will require institutional 17 The texts of the Uruguay Round agreements comprise more than 500 pages (GATT 1994) and the Analytical Index which records GATT case law and history contains over 1,000 pages of fine print (WTO 1995c). For a succinct summary of the provisions see Hoekman (1995), and for more details see Jackson (1997). An excellent explanation of the political economy underlying the GATT and WTO is provided by Hoekman and Kostecki (1995).

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innovations. Many become clear during the course of accession because the procedure follows a formal pattern, as follows (WTO 1995a; Cai and Hart 1996; UNCTAD 1997).

Letter of application and establishing a Working Party Any non-member country or separate customs territory can apply for WTO membership. All it requires is submitting a letter of application to the DirectorGeneral of the WTO for accession under Article XII of the WTO Agreement. Normally this would follow a period in which the country had been granted Observer status and taken advantage of that opportunity to begin learning from the inside about the workings of the institution. On receipt of the letter of application, the General Council of the WTO decides whether to establish a Working Party to examine the application by that country. The Working Party, usually chaired by the Head of Mission/Ambassador of one of the WTO members, is responsible for organizing the accession negotiations, examining the country’s trade policies and practices, and preparing the Protocol of Accession.

Preparing a Memorandum on its Foreign Trade Regime Once the Working Party is established, the country must prepare a memorandum detailing precisely the country’s trade policies and practices. This exercise can be a major undertaking for a country in which policy transparency is not the norm and where there is only weak institutional capacity. For that and other reasons the WTO Secretariat offers training courses in Geneva and, with other institutions such as UNCTAD, in-country short courses. As well, several individual WTO members offer assistance to applicants through their bilateral technical cooperation programs. The Memorandum must include all the items that appear in the regular reports as part of the WTO’s Trade Policy Review Mechanism and more. Background sections include information on the economy and domestic economic policies, detailed statistics on its foreign trade and investment, an outline of the legislative and bureaucratic frameworks for making and enforcing policies affecting foreign trade,

63

and a copy of all the laws and regulations affecting trade with at least a summary of each in one of the WTO official languages (English, French or Spanish). The more substantive sections cover 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. In addition, the currently applicable tariff schedule in the detailed harmonized system nomenclature must be attached. The more policy transparency that is introduced through this Memorandum, the faster will be the accession process. This is because the Memorandum is circulated to all WTO members, and they are invited to submit in writing any questions of clarification. The Working Party collects and organises the questions and conveys them to the applicant. If the written answers from the applicant are not satisfactory, one or more further rounds of questions follow before the first meeting of the Working Party is called. In the case of China, more than 3000 questions have been raised so far, while for Russia the number already exceeds 2500. It has taken on average ten months for countries to prepare the initial Memorandum and nine months from the time of its circulation until the first questions and answers are distributed (Michalopoulos 1998b, p. 17).

Review sessions of the Working Party Sessions are held to examine the answers to questions and the issues they raise. Usually two to four are held per year, but the frequency depends heavily on the speed and comprehensiveness of the applicant’s responses to questions raised. Delays result because of weak institutional capacity of the applicant to respond and because fact finding about policies tends to merge into the next phase in the process, namely, negotiations about how existing policies need to be changed to ensure conformity with the WTO.

Negotiate policy changes and three schedules of commitments Only when the examination of the country’s foreign trade regime is sufficiently advanced do members initiate negotiations about needed changes in

64

existing policies and 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 can proceed on a multilateral basis through the Working Party. Three draft schedules of commitments have to be prepared. They are negotiated bilaterally and reviewed multilaterally via the Working Party before being finalized for attaching to the draft Protocol of Accession. They relate to: tariffs (to be reduced and bound) 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 also specify phase-in periods and allow temporary maintenance of current practices for a limited period. Even though these commitments are negotiated with one or more of the WTO members who are substantial suppliers, 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), and a few members expect them to be greater than some original WTO members have made (e.g., signing onto the plurilateral Government Procurement Agreement). And note that the applicant cannot seek ‘concessions’ from members: it simply has the guarantee of MFN access to members’ markets (something which it may have been denied previously). There are many places in the WTO agreements where developing countries, and in particular net food importers, economies in transition from central planning and the least-developed countries, can receive special and differential treatment (see UNCTAD (1997, Annex 2) for a comprehensive listing). This treatment is available to the original members of the WTO but is more circumscribed than was the case under the GATT and many ‘concessions’ are only temporary. Furthermore, this is not a right automatically given to acceding countries. Rather, they must negotiate on a case-bycase basis. In practice many developing and transition countries are finding it difficult to secure such special and differential treatment. This has been possible because only the category of ‘least-developed countries’ is clearly identified under the United Nations (although a list of net food importing developing countries is being developed by the WTO Committee on Agriculture). But even those applicants classified as least developed cannot count on receiving all the S&D available to current LDC members.

65

Submit Working Party report to General Council Once the negotiations on the schedules of commitments conclude, the Working Party submits its report together with a draft Decision and Protocol of Accession to the General Council or Ministerial Conference of the WTO. The draft Decision requires a two-thirds majority of WTO members to approve it. It then enters into force thirty days after acceptance by the applicant (which may require parliamentary approval). On average the whole process is taking about six years per applicant, but there is a considerable range: the fastest to accede are those with the greatest willingness to commit to open their economies and with the strongest institutional capacity to develop and implement market-opening and transparent policies (Michalopoulos 1998b).

Enquiry point, periodic notification, and policy review A new member is required not only to have notified the WTO of its policies at the time of accession, but also to establish a single enquiry point in its national capital, inform the Secretariat each year if any significant policy changes occur, provide statistical information annually in a set format, and undertake with the Secretariat periodically (usually every four years) a comprehensive TPRM review of the member’s trade and trade-related policies and practices, again in a set format. The information required for each TPRM review is substantial, ranging from the current tariff schedule that is applied, recent trade flows on a tariff line item basis, procedures for customs valuations and administration, specifications for marks of origin, and a revised description of the country’s trade legislation, policies and implementing institutions. 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

66

any trade-related investment measures and import licencing procedures that are not in conformity with the TRIMs and import licencing agreements, respectively, 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, the enquiry point must be created and maintained such that other WTO members can readily find up-to-date information about all trade and trade related policies including such things as technical regulations and conformity assessment procedures. 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 ‘onestop shop’ (or at most three), applicants have the right to ask for an explanation of non-approval and to appeal the decision, and a great deal of statistical information must be made available.

67

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

One of the most striking features of economic development is the relative decline of the agricultural sector in growing economies. Also typical, particularly of densely populated countries, is a decline in their agricultural comparative advantage as industrialization proceeds. Whether that leads to declines in food self-sufficiency and the value of net imports of agricultural products are moot points: it depends in part on policy trends, which happen often to gradually change from disfavouring to favouring agriculture relative to other tradable sectors over the long term. This Appendix seeks to explain these trends, drawing in part on modern trade and development theory that is shown to be strongly supported by comparative evidence across countries and over time. The text draws on this empirically supported theory to explain developments in Vietnam’s economy in recent years and to examine its prospects for the years ahead under various policy scenarios. Why agriculture declines relatively as an economy grows A primitive economy with few trading opportunities necessarily has to devote most of its resources to the provision of food. Agriculture’s shares of national output and employment therefore start at high levels. As economic development proceeds, however, agriculture’s shares of GDP and employment typically fall. This has commonly been attributed to two phenomena: the slow rise in the demand for food as compared with other goods and services as incomes rise (that is, relatively low price and income elasticities of demand); and the more rapid development of new technologies for agriculture, relative to those for other sectors, which leads to expanding food supplies per hectare and per worker. Some of those new technologies can be imported by a late-developing economy from those more-advanced economies that were similarly endowed in earlier decades with a scarcity (or abundance) of land per worker, and then adapted relatively easily to local conditions. A third but lesscommonly mentioned phenomenon contributing to agriculture's relative decline is the growth in the use of intermediate inputs purchased from other sectors. This has been such that the farmers’ value added share of output falls considerably faster than is the case for non-agricultural sectors. The effects of the first two of these tendencies in a two-sector closed economy can be seen from Figure A.1. In the upper partial-equilibrium diagram, normalized for convenience of exposition, the supply curves for the two sectors (agriculture, A, and

68

all other goods, M) are assumed to coincide and the demand curves are assumed to each cross the supply curves where the price and quantity are both 100. Suppose productivity growth were to occur equally in the two sectors so that the overlapping supply curves shifted out by 100 per cent, from S to S’. The resulting doubling in income would cause both demand curves to shift to the right, but not to the same extent because of the lower elasticities of demand for agricultural goods. In the case illustrated the new quantities are 180 units of farm products and 220 of other products, and the price of farm products falls to 85 while the price for other products rises to 115. The lower part of Figure A.1 shows these changes in general equilibrium, where the equilibrium point shifts from E to E’. Agriculture’s share of national output is clearly lower after than before growth even at pre-growth prices, but more so at postgrowth prices. And -- ironically -- it would be lower still if productivity growth had been faster in agriculture than nonagriculture (thanks to the lower price and income elasticities of demand for food). Figure A.1 could be used to describe the world as a whole, in which case it suggests we should expect a decline in agriculture’s terms of trade in international markets, and more so the stronger is productivity growth in agriculture compared with other sectors.18 In practise that decline is exacerbated by the gradual policy change, from taxing to subsidising agriculture, that so often accompanies the economic development of nations (Anderson 1994, 1995a). The weight of empirical evidence seems consistent with that expectation, in that agricultural prices appear to have declined considerably relative to industrial product prices during the past century, even after adjusting prices of (particularly non-farm) products for changes in quality (Grilli and Yang 1988). But what about in an open agrarian economy that can trade all of its products internationally at those terms of trade? Suppose the domestic terms of trade in this agrarian economy could be represented by the slope of line 1 in Figure A.2 if the economy were closed to foreign trade, but that the international terms of trade are represented by the slope of line 3. Then if the economy opened itself fully to international trade, the production point would shift from E to E0. The importance of agriculture would increase and the country would export E0T units of agricultural produce and with the foreign exchange proceeds would import TC0 units of other products. If productivity growth and/or factor accumulation occurred in this open 18 Farm productivity growth in the agricultural-exporting rich countries has been comparatively very rapid. In the United States, for example, total factor productivity growth since the late 1940s has been nearly four times as fast in farming as in the private non-farm sectors (Jorgenson and Gollop 1992), and similar performances have been found in Australia and Canada. This has been sufficient only to slow the decline in agriculture in these countries, however, not to prevent it or allow its relative importance to rise. See Martin and Mitra (1998) for a survey of these and other country studies.

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economy and the international terms of trade remained unchanged, agriculture’s share of national product would rise or fall depending on whether that growth was biased toward farm or non-farm production. If that growth was sectorally unbiased, agriculture’s share would remain unchanged, as at E’0 in Figure A.2. However, if growth also occurred in the rest of the world in the manner depicted in Figure A.1 so that the international terms of trade deteriorated, then E”0 rather than E’0 would be the new equilibrium. More generally, if economic growth is occurring abroad and so altering relative prices internationally, the agricultural sector of a small open economy would decline unless the economy’s own growth is biased towards agriculture sufficiently for the quantity changes to more than offset the adverse change in the terms of trade that result from global economic growth. This agricultural bias in productivity growth would have to be even stronger in a large open economy because its own contribution to world agricultural exports would depress the terms of trade even further. The above model assumes all products are tradable internationally. In reality, however, a large part of a developing economy involves the production and consumption of nontradable goods and services. These are items for which the costs of overcoming barriers to trading internationally -- especially transport costs -- are prohibitively expensive. The price of nontradables is determined by domestic demand and supply conditions because, unlike tradables, in equilibrium the quantity of nontradables demanded has to equal the quantity supplied domestically. Since the vast majority of nontradables are services,19 and since the income elasticity of demand for services tends to be well above unity,20 the demand for nontradables as a group is likely to be income elastic. To see how taking into account the existence of nontradables alters the above conclusions, think of the two tradable sectors as comprising one super-sector of tradables and the rest of the economy as comprising nontradables whose demand is income elastic (which means the demand for tradables as a group must be income inelastic for their weighted average to sum to unity). Then Figure A.1 can again be used to illustrate the effect of growth on sectoral shares simply by changing the axes from ‘agriculture’ to ‘tradables’ and from ‘all other goods’ to ‘nontradables’. If both sectors enjoyed equally rapid productivity growth, then the demand conditions would ensure that the GDP share of tradables declines with economic growth. And if, for the reasons mentioned above, agriculture’s importance is likely to decline within the

19 Globally, sectoral exports in 1995 accounted for about 48 per cent of the agricultural sector’s value added, about 51 per cent of manufacturing value added, but only about 7 per cent of services value added (World Bank 1997a; WTO 1997b). 20 See Lluch, Powell and Williams (1977), Theil and Clements (1987) and Falvey and Gemmell (1994).

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tradables super-sector, it is even more likely to decline in relative importance in the total economy. Thus even for an open economy with an exceptionally dynamic farm sector, retaining resources in agriculture over the long term is unlikely; in fact, they will tend to be retained only in economies that are accumulating/importing non-farm resources relatively slowly and/or are suffering very slow productivity growth in their non-agricultural sectors, ceteris paribus (Anderson 1987). The above reasoning is sufficient also for explaining the decline in agriculture’s share of employment unless labour productivity is much slower in agriculture than in other sectors. Official data imply that agriculture’s share of employment has not been declining as rapidly as the GDP share in growing economies.21 The latter should not be seen as a sign of relative deterioration in labour productivity in the agricultural sector, however, as more care is needed in measuring farm labour input. Specifically, the proportion of farm household labour time spent in non-farm activities needs to be counted as agricultural only as much as the output is attributed to the agricultural sector. Typically in practice the recording of output is changed faster than the recording of employment and so the decline in agriculture’s share of employment tends to be understated more in national accounts than the decline in the GDP share. This decline in agriculture’s GDP share results partly because post-farm gate activities, such as taking produce to market, get commercialized and taken over by specialists in the service sector. In such cases the farmers receive a lower price, in return for which their households spend less time going to market. Another contributing factor is that previous manual farm jobs such as spreading manure and weeding crops disappear as farm chemicals become more profitable, available and affordable with higher-yielding crop varieties, the seeds for which also have to be purchased in the case of hybrid varieties. As a result, value added by the farm household's own labour, land and capital, as a share of the gross value of agricultural output, falls over time as purchased intermediate inputs become more important. In fact, Anderson (1987, Table 2.1) provides evidence showing that the value-added share typically falls much more for agriculture than for the industrial sector. This increasing use of purchased intermediate inputs and off-farm services by farmers adds to the relative decline of the farm sector per se in overall GDP and employment (Timmer 1988, 1997; Pingali 1997). One might also expect agriculture’s share of exports to decline with economic growth, although with less certainty than for agriculture’s shares of GDP and 21 For low-income countries the share of agriculture in GDP fell from 34 to 25 per cent between 1980 and 1995, while the share of the labour force in agriculture as measured declined only slightly (from 73 to 69 per cent between 1980 and 1990 – World Bank 1997a).

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employment. To see this, consider again an open economy in a world in which the international price of agricultural relative to other goods is declining over time because of economic growth abroad of the type depicted in Figure A.1. If this open economy is growing and if its output growth is insufficiently biased towards the nonfarm sectors to match the non-farm bias in domestic demand growth, agriculture’s share of exports may not decline: excess supply may grow more rapidly for farm than for non-farm products. But if this economy is not growing or its growth is concentrated in non-farm sectors, agriculture’s share of its exports would decline, in part at least because of the decline in the relative price of farm products internationally. Why agricultural self sufficiency may or may not decline with growth What determines whether a country is a net agricultural exporter or importer at a point in time? And how will that position change over time? In other words, in terms of Figure A.2, what determines whether E0 is to the left or right of C0 and hence E, and whether E”0 is to the left or right of C”0? A nation's self sufficiency in farm products depends largely on its relative factor endowments compared with the rest of the world’s (the key determinant of agricultural comparative advantage) as well as on government policies at home and abroad. Leaving the latter aside for the moment, how can we conceptualize the impact of the former on a country’s trade composition? The role of relative factor endowments Perhaps the most appropriate simple model for explaining agricultural comparative advantage in a growth setting is that developed by Krueger (1977) and explored further by Deardorff (1984a). It is a model of two tradable sectors each using intersectorally mobile labour plus one specific factor (land or industrial capital). Assuming labour exhibits diminishing marginal product in each sector (and assuming for the moment that there are no other primary products, no services or nontradables, and no policy distortions), then at a given set of international prices the real wage is determined by the overall per worker endowment of land and industrial capital. The commodity composition of a country's trade -- that is, the extent to which a country is a net exporter of agricultural or industrial products -- is determined by its endowment of land relative to industrial capital compared with that ratio for the rest of the world. Leamer (1987) suggested using a triangle as a way of summarizing the relative resource endowment ratios of different countries. In Figure A.3 the three factors of production are denoted N for arable land, L for labour time and C for produced capital. The national ratios of crop land to aggregate labour are readily available, and

72

the proxy used here to represent produced capital to labour is gross domestic product per worker. (Crude though that proxy is, more sophisticated indexes are not likely to change very much the relative positions of the country groups in Figure A.3.) These ratios are measured in log terms along the LN and LC sides of the triangle, respectively, the mid-point of each being the world average which is taken as the numeraire. Thus point W represents the global average endowment of all three factors in 1995, with countries above the LD line likely to have a comparative cost advantage in farm products, ceteris paribus. On the assumption that the stock of farm land is fixed (or changes at the same rate in all countries), rapid growth by one or more countries relative to others in their availability of produced capital per worker would cause the location of those countries to move towards point C in Figure A.3, strengthening their comparative advantage in non-farm products. The more significant those countries are in the world economy, the more their expanded stock of capital would boost the world average stock and thereby shift the location of slower-expanding economies away from C, that is, towards the LN line. In other words, economies that were expanding their stock of non-farm capital relatively rapidly (slowly) would see their comparative advantage in farm products weaken (strengthen), ceteris paribus. There are several ways to make Figure A.3 more realistic. One is by adding other natural resources (minerals, forests, grassland). That, however, would require adding a third dimension, which would make the diagram more difficult to comprehend. But it follows that the more abundant a country’s per worker endowment of other natural resources compared with arable land and industrial capital, the stronger will be its comparative advantage in primary products other than food crops. That more-realistic model also offers more scope for changes in comparative advantage over time. For example, a minerals or energy raw materials discovery, or an increase in the international price of minerals or energy, would strengthen the country’s comparative advantage in mining and weaken its comparative advantage in farm and other goods, ceteris paribus. Likewise, new FDI in dams to build exportoriented hydro-electric power stations would have a similar de-agriculturalization effect. It would also encourage mobile resources to move into the production of nontradables as their demand strengthened and prices rose, further reducing farm and industrial production.22 On the other hand, net deforestation simultaneously depletes the stock of trees and natural forest land and increases the potential area of land for

22 (Corden 1984). In fact the increased demand for nontradables (and other products) would begin as soon as expectations about future income prospects rose, which could be well before the export boom shows up in the trade statistics in the case where the exports are preceded by FDI inflows for investments with a long lead time (Corden 1982).

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plantation cash crops (assuming all the potentially arable land had already been cleared), thereby eventually strengthening the country’s comparative advantage in agriculture as a whole, ceteris paribus, even though within the sector food crops may lose some of their competitive edge to plantation crops. A further concession to realism is to recognise that domestic or foreign savings can be invested to enhance the stock and/or improve the quality not only of industrial capital but also of labour or natural resources, in addition to providing capital specific to the nontradables sector. Any such increase in the net stock of produced capital per worker will put upward pressure on real wages. That will encourage, in all sectors, the use of more labour-saving techniques and the development and/or importation of new technologies that are less labour intensive. Which type of capital would expand fastest in a free-market setting depends on their expected rates of return. The more densely populated, natural resource-poor a country, the greater the likelihood that the highest payoff would be in expanding its capital stocks for non-primary sectors. At early stages of development of such a country with a relatively small stock of natural resources per worker, wages would be very low and the country would have a comparative cost advantage in unskilled labour-intensive, standard-technology manufactures. Then as the stock of industrial capital grows, there would be a gradual move toward exporting more capital- and skill-intensive manufactures. Natural resource-abundant countries, on the other hand, would enter manufacturing at a later stage of development. Such countries are likely to have remained more than fully self sufficient in agricultural products for longer (although less so the greater their comparative advantage in minerals or other primary products, ceteris paribus), and their first industrial exports would be comparatively capital intensive. 23 What determines the extent to which a country’s agricultural exports will be unprocessed rather than processed products, low quality rather than high quality, and non-perishable rather than perishable? The capital intensity of production of the latter will play some part, but most of the explanation will have to do with the cost/speed of in-country transportation and communications, with packing, grading and storage 23 Notwithstanding its popular media coverage, the theory of ‘competitive’ advantage espowsed by Porter (1990) does not supersede this theory of comparative advantage based on relative factor endowments. Warr (1994) explains why, noting that the confusion arises because while both are concerned with international competitiveness in a global context, the former applies to firms within an industry or sector (which focus on their private costs and benefits alone) whereas the latter is concerned with the competitiveness of industries and sectors from a national viewpoint, taking account of all (including social) costs and benefits. The theory of comparative advantage in its simplest form is based on numerous assumptions which, as critics never tire to point out, are unrealistic. However, the basic thrust of the theory survives when these assumptions are relaxed (Ethier 1984; Ruffin 1984) and the theory is made dynamic (Grossman and Helpman 1991), and strong empirical support from a wide range of countries can be found for the theory (Balassa 1979; Anderson 1983; Deardorff 1984b; Leamer 1984). Its relevance to developing countries is made clear in Krueger (1984).

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facilities, with sea and air port facilities, and with the volume of domestic urban sales of processed, high-quality and perishable products. The latter sales volume is important because it provides the derived demands for processing and distribution services which, when sufficiently large, allow economies of scale to lower the price at which the more sophisticated products can be made available for export). A final small point to keep in mind is that food self sufficiency can be measured in several ways. If policy makers are concerned primarily with food security, they may wish to measure it as domestic production as a percentage of domestic consumption in volume terms (aggregated using constant prices) or, if they are especially conscious of the needs of the poorest people, in calorie terms. Simply focusing on whether the value of net food exports is positive could be misleading because exports may be intensive in the use of imported intermediate inputs (farm chemicals and feedstuffs) and yet contribute very little value added. The role of policies affecting agricultural incentives The above expectations about agricultural self sufficiency drawn from the theory of comparative advantage are based on the assumption of no interference in markets by governments. But in fact most countries intervene in markets and alter incentives facing producers and consumers. From a national viewpoint, four levels of intervention can be distinguished. One is intervention abroad that alters a country’s terms of trade. Another is intervention at the national macro level to encourage savings and investment: the provision of price stability (i.e., low inflation), responsible fiscal policies, the optimal regulation of an open financial market, law and order including for the establishment and protection of property rights, the optimal provision and geographic distribution of public goods such as infrastructure, and the offsetting of externalities (which again could involve sectoral or geographic biases). The third level of intervention has to do with the biasing of prices in favour of non-tradables via an overvalued currency (or, less commonly, in favour of tradables via undervaluing the nation’s currency). And the fourth level of intervention has to do with altering output and input prices within the grouping of tradables sectors so that some tradables sectors enjoy more effective assistance from the government than others.24 The fact that sub-optimal intervention is rampant would make it difficult to qualify the above conclusions from comparative cost theory, were it not for the fact that governments intervene in a fairly consistent fashion. Five empirical features of 24 As Corden (1994, Ch, 15) makes clear, these levels are useful in sorting out the different uses people make of the term “international competitiveness”, which could apply to all sectors, to just the grouping of sectors producing tradables, or to just one or a subset of those tradables sectors.

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intervention are worth mentioning. First, policies in high-income countries tend to overprice farm relative to nonfarm products while policies in lower-income countries tend to underprice them (Johnson 1991; Bautusta and Valdes 1993). Second, the degree of overpricing (underpricing) is highly positively correlated with the degree of agricultural comparative disadvantage (advantage). These features are illustrated in Figure A.4. Third, over time countries tend to gradually change their policy induced distortion pattern away from negatively to positively assisting farmers and from effectively subsidizing to hurting food consumers (Anderson and Hayami 1986). Fourth, much of the disincentive to agriculture in developing countries comes not from direct underpricing but indirectly via manufacturing protection and overvaluation of the nation’s currency (Krueger, Schiff and Valdes 1988). And fifth, most national governments have an urban bias in their provision of public infrastructure (transport, communications, etc.) and human capital (education, health, information production and dissemination, etc.) which decreases but rarely reverses with economic development, especially when the quality of those investments is properly accounted for (Schultz 1980). These transitions tend to occur at a faster rate the faster an economy is growing and, in the case of relative price distortions, to reach the point of intersectoral policy neutrality at an earlier stage of economic development the weaker a country's agricultural comparative advantage (for reasons suggested in Anderson 1995a). According to one recent set of estimates, the net effect on international prices of temperate foods of this relative overpricing in rich countries is almost exactly offset by the underpricing of those products in poorer countries (Tyers and Anderson 1992, Ch. 6). But that is less likely to be the case for edible oils and natural fibres, and it would certainly not be the case for beverages and other tropical products not produced in high-income countries: in both of these latter cases, the underpricing domestically in developing countries dominates, causing international prices for these products to be higher than they would be under global free trade. Three important consequences follow from these facts. One is that countries are trading less in farm products than would be the case without intervention: countries with a comparative advantage in farming tend to be exporting less, and those with a comparative disadvantage in farming tend to be importing less (and may even be depressing international prices further by using export subsidies to dispose of protection-induced surpluses, as in Western Europe). Another is that the relative price of agricultural products in international markets has been under even greater pressure to decline in the course of global economic growth than suggested in the discussion of Figure A.1 above, as more and more upper middle-income developing countries gradually move away from taxing to subsidizing farmers. And the third consequence

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of these facts is that it has left ample scope to reform policies affecting farmer and consumer incentives, the effects of which will depend heavily on the pace and nature of multilateral, regional and unilateral reforms in the various commodity markets. It is conceivable, for example, that an increase in net farm imports by high-income countries following the Uruguay Round could coincide with an increase in net exports of agricultural products from developing countries undertaking unilateral reforms, and have offsetting effects on international farm prices but reinforcing effects on quantities traded as both sets of countries better exploit their respective comparative advantages. And it is expected that the discipline placed by the Uruguay Round on developing and transition economies (including those subsequently acceding to the WTO) not to raise farm producer or export subsidies will, in the long run at least as bound agricultural tariffs are lowered, reduce the likelihood that agricultural disincentives are replaced by protectionist policies in the future. The role of policies affecting light manufactures The trade policy bias in favour of import-substituting industrialization, discussed above, has a similar effect on unskilled labour-intensive manufacturing in a newly industrializing economy as it does on agriculture. Limiting imports through protectionism reduces the demand for foreign currency and thereby causes the real exchange rate to appreciate. That effectively holds back the development of all industries otherwise able to export,25 including those light ones in which a poor country’s manufacturing comparative advantage will first emerge. They are the very industries most likely to benefit from relocating or establishing in rural areas to take advantage of lower wages and other costs of production there. Hence not only agriculture but also rural industrialization is hampered by all-too-common protectionist import-substituting industrial policies. The role of rural infrastructure investments Needless to say, the move from subsistence-only farm production to having a marketable surplus of food, and the emergence of cash cropping, depend on the provision of rural roads, radio, post and telecoms to lower the cost of transport, information and communication. Constructing those infrastructures and maintaining them provide off-farm work for farm households, but more importantly those 25 For more on how protection against imports effectively taxes exports, see Clements and Sjaastad (1984).

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infrastructures spawn additional new service-sector jobs in rural areas and elsewhere for transporting, grading, processing, packing, and distributing the marketed farm products. The opening up or extending of rural roads and communications, and investments in irrigation, also expand the effective demand for purchased farm inputs such as improved seed varieties, chemical ferrtilizers, pesticides, farm machinery, and fuel. Rural

roads,

electricity

and

telecommunications

also

make

rural

industrialization more profitable for unskilled labour-intensive industries not connected to primary sectors. True, those roads also make it easier for rural workers to drift to urban areas, which would close the urban-rural wage gap somewhat. But many workers will stay put because for much of the year they are fully occupied in seasonal farm work. Manufacturing activities that have the flexibility to close temporarily during peak rice transplanting and harvesting periods would be especially likely to be attracted to rural areas. The more that rural industrialization is successful, the more the country’s comparative advantage would move away from the primary sectors. The new jobs created by those off-farm activities have been shown to contribute substantially not only to economic growth but also to reducing absolute poverty and rural-income inequality in many modernising agrarian economies (Findlay, Watson and Wu 1994; Lipton and Ravellion 1995; Mellor 1995). They also slow the growth of urban pollution and congestion. All of this suggests a high social rate of return to investments in rural infrastructure, and more so the less government price and trade policies discriminate between primary and light manufacturing sectors. The returns would be higher the freer the economy is of government interventions in general for two reasons. One is that being located near policy makers so as to lobby for special protectionist favours would then not be an issue. And secondly, in the presence of protection manufacturers sell mainly to domestic consumers and buy inputs from other producers. Those linkages encourage a concentration of manufacturing in the cities. By contrast, in an open economy most sales are exports and many inputs are imported, so together with higher urban property prices, congestion and pollution those factors can eventually encourage rural industrialization (Krugman and Livas 1996; Krugman 1998). This

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new theory of economic geography suggests a government can slow or reverse the growth of large urban cities by freeing trade and boosting rural infrastructure.

Empirical evidence

Both global cross-sectional and Asian (and other) time series evidence provides strong empirical support for the comparative advantage theory outlined above, notwithstanding policy distortions. The negative relationship between agriculture’s shares of gross domestic product (GDP), employment (EMP) and exports (EXP) on the one hand, and income per capita (YPC) on the other, are very significant statistically. These shares are also negatively associated with population density per unit of agricultural land (PDA) although significantly so only for the export share equation. The relationships are summarized in the following OLS equations, from Anderson (1987), which are based on World Bank data for 70 countries with populations in excess of 1 million (t-values in parentheses):

(1)

GDP = 87 - 9.9lnYPC, (6.7)

2 R = 0.80

(2)

EMP = 179 - 18.5lnYPC, (16.6)

R2 = 0.80

(3)

EXP = 152 - 9.5lnYPC - 8.5lnPDA, (5.1) (4.7)

R2 = 0.45

The time series evidence for Northeast Asia is even more striking. As Table A.1 shows, agriculture supplied two thirds of Japan’s jobs and export earnings and one third of GDP in the late nineteenth century, while today those contributions by Japan’s farmers are miniscule. In South Korea and Taiwan, a similar contraction of agriculture has occurred in the second half of this century -- twice as fast as in Japan. And China also has undegone a dramatic decline in the relative importance of its farm sector. For Asia’s less developed economies the changes began later, but the same tendencies are clear from the middle columns of Table A.2. The first four columns of that table summarize the relative resource endowments and economic growth rates of Asia’s economies. Leaving aside the centrally planned economies of Indo-China and

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North Korea, three groups of developing economies are identifiable: the NIEs of South Korea and Taiwan, the large ASEAN economies plus China, and the South Asian economies. The first are extremely densely populated, very rapidly growing and with high incomes; the second are moderately densely populated, rapidly growing (the Philippines only in the 1990s) and with moderate incomes; and the third are very densely populated, slowly growing prior to the 1990s and with low incomes. Theory would lead us to expect the first group to have a weak and rapidly declining comparative advantage in agriculture, the second to have a stronger agricultural comparative advantage at the same per capita income but one that is nonethless declining, and the third to have an in-between and only slowly declining comparative advantage in farm products. The final four columns of Table A.2 support that theory. They show the trends in two indicators of agricultural trade specialization. One is the so-called 'revealed' comparative advantage index, defined as agriculture's share of a country's merchandise exports relative to agriculture's share of global merchandise exports, following Balassa (1965). The other is agricultural exports minus imports as a ratio of agricultural exports plus imports. The latter therefore takes a value between minus and plus one, and is zero when a country is 100 per cent self sufficient in farm products. Notwithstanding massive growth in agricultural protection in the three advanced economies of Northeast Asia (Anderson and Hayami 1986), and major structural adjustments within agriculture away from cereals and towards more valuable vegetables, fruits and livestock products (Table A.3), these economies have become increasingly dependent on imported farm products as their agricultural comparative disadvantage increases. This has happened least so for Taiwan, however, where greater rural industrialization has allowed more efficient utilization of rural labour in both farm and factory work -- although as the final column of Table A.3 reveals, off-farm earnings have become increasingly important for farm households in the other Northeast Asian economies as well. In the lower middle-income, lessdensely populated economies of Southeast Asia and China where policy distortions against farmers have been reduced but still prevail (Anderson 1994), the index of 'revealed' comparative advantage in farm products has been high but has fallen considerably since the latter 1960s. And while the index of net agricultural export surplus is still positive in most cases, it has been falling also. Even China has followed this path, despite huge increases in producer prices (Sicular 1989). While all the revealed comparative advantage indexes are above unity in most of the low-income, slow-growing countries of South Asia, they have been falling; and, apart from India (where agricultural disincentives recently have been reduced considerably), the net

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export surplus in farm products has diminished and gone into deficit for these densely populated countries whose policies continue to discourage agriculture. In short, the above theory is well supported by the experience of Asian and other developing countries.

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Table A.1: Changing importance of agriculture in Northeast Asia, 1880 to 1996 Share of agriculture (%) in: Employment GDP

Exports

Japan 1880

74

38

63

1900

60

29

30

1920

51

22

23

1939

42

15

18

1960

33

13

11

1980 1996

11 5a

4 2

2 1

South Korea 1956 1960 1970 1980 1996

na 66 50 34 15a

46 40 26 15

89 56 17 10

6

3

Taiwan 1953 1960 1970 1980 1996

56 50 37 20 13b

38 33 18 9 3

92 68 21 9 4

China 1952 1965

84 82

51 40

55 35

1972 1978 1987 1996

79 71 60 48

33 28 28 21

37 25 18 10

a

1994. 1993. Source: Updated from Anderson (1990, Table 2.1) using World Bank (1998) and Asian Development Bank (1996). b

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Table A.2: Agriculture's shares of GDP and merchandise exports and trade specialization indexes, various Asian countries, 1965 to 1995 Land & GNP/worker (1995, % of world av.) Arable Total GNP land land 12 750 Japan 12 South Korea 18 10 210 North Korea 32 21