Country Paper - Lao PDR

Transcription

1 Multi-year Expert Meeting on Commodities and Development Palais des Nations, Geneva, March 2010 Country Paper - Lao PDR Prepared by Mr. Sirisamphanh VORACHITH Ministry of Industry and Commerce of the Lao PDR "The views expressed are those of the author and do not necessarily reflect the views of UNCTAD" 1

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3 Multi-year Expert Meeting on Commodities and Development Second Session organized by UNCTAD, in Geneva on the March 2010 Country Paper Prepared by Sirisamphanh VORACHITH, Ministry of Industry and Commerce of the Lao PDR, Laos is a country in the South-East Asian region with an area of 236,800 sq.km and a population of slightly over 6 millions. The annual total trade value exceed US$ 2 billions with main trading partners such as Thailand, China, Vietnam and the European Union. Its main export products are copper, garment, hydropower, wood and wood products and agricultural commodities. Laos is a country dependent on export of commodities. The brief paper for this meeting is structured into 4 parts as follows: 1. Drivers of price trends in recent years in commodity markets, opportunities and challenges faced by commodity-dependent developing countries As a result of increasing oil and commodities price in the world market especially since 2008 to date, the foreign trade of Laos has been affected in such a way that import value of fuel in 2008 reached its peak along with the rising trend of world oil price. In the same period, export of copper and agricultural commodities especially maize was most favorable. Consequently the development in the world commodities market tends to impact and be reflected in the domestic market. Laos is presently a member of the Association of South East Asian Nations (ASEAN) and is in the accession process to the WTO. Its economy is to a certain extent integrated to the regional market. Compared to the 1997 Asian Financial Crisis, Laos has better managed the impact of the most recent financial turmoil and global economic slowdown to its national economy. Though its value of export of copper and maize has dropped drastically especially to Thailand and China. Laos trades extensively with its neighbors by way of border trade mainly agricultural commodities. Market access for these goods needs to be negotiated in the foreseeable future, despite various preferential tariff schemes that have been operational in the trade between countries of the region. To local producers cum exporters these swings in commodities price stems primarily from buyers in the importing markets namely Thailand and China, since they are either bound by farming contract or more than ordinary trading partners. To government circle, due to the level of economic integration of countries, price in the world market tends to be reflected in the domestic price directly or indirectly. In the region, we have witnessed fast development in recent years by countries like China and India. This naturally adds to the world demand for more resources in terms of energy and commodities like steel, copper and primary agricultural commodities. This is to our understanding is the main driver of the price trend of commodities. In 2008, the Chinese preparation for the Olympic Game has drastically boosted the price and volume of export of Lao precious hard wood to China as well. As to Laos, the increasing and decreasing trends of commodities especially copper and maize have been both opportunity and challenge. The rising trend of commodities has stimulated the level of export of gold, copper and maize to an unprecedented level. This has contributed to the stabilization and growth of the national economy for the first half of 2008, but since the last half of 2008 to date, the declining trend of world 3

4 oil price has also driven the falling of prices of commodities of export importance to Laos except gold and coffee, which does not necessarily varies with this trend. The challenge is that the budget revenue from mineral exploitation has decreased considerably. To the local farmers, price of agricultural commodities has dropped unexpectedly to their detriment. Challenge stems from the fact that these commodities have always been subject to price fluctuation. 2. Pros and Cons of alternative approaches to the development of alternative energy sources, including renewable sources in the future energy matrix, likely impact of the development of some of these renewable energies (e.g. bio-fuels) on food and energy security. In the Greater Mekong Sub-region, few countries have opted for change in alternative sources of energy. To mention the case of Laos largest trading partner, Thailand has acted promptly on searching for the substitute for fossil oil and has strived to reduce the consumption of petrol by either diverting to the utilization of natural gas for automobile and has embarked on the production of renewable energy namely bio-fuel. On the contrary, this is not the case for Laos. The import and consumption of fuel did not only decrease immediately, but the research on renewable source of energy has not been very successful. Attempts have been made to import automobile running on battery. Moreover, plantation of jatropha for production of bio-fuel has been experimented only on pilot projects. This requires that the world oil price to reach a certain level to break-even and ensure the feasibility of the undertaking. The pros and cons of alternative approaches to the development of alternative energy sources, including renewable sources in the future energy matrix are as follows: The pros are: - Fossil oil is in the long run an exhaustible source of energy. World consumption thereof tends to rise due to an increasing pressure caused by the development of emerging markets mainly China and India. Once the recovery of the world economy is back on track again, the price of oil will justify an alternative approach to the development of alternative energy sources. In the case of Laos, the country has abundant hydropower potentials. Hydro-electricity is the primary source of energy for the country. Solar energy is presently an alternative source of energy in remote area, where distribution line of electricity is not available. - Overdependence on oil produced by a number of countries in the long term is a burden for the trade balance of the oil importing countries especially Laos, which tends to import more fuel to support its increasing import of automobiles as its economy develops. - The availability of land area for the plantation of potential bio-fuel crops, price stability of agricultural produce and employment benefits all contribute to justify this move. The cons are: - Cereals like maize or crops like cassava and sugar cane, when used to produce gasohol or ethanol, are diverted from their ordinary food use. Hence food price will tend to rise, affecting to fixed income people. - Shift to alternative sources of energy require a huge completely new investment, not suitable for low income countries at least in the short run unless foreign investors are willing to invest. - Initiatives like this need to be supported by international and regional cooperation so that national government policies can be adjusted and be put in place. In addition, production and consumption habits must also be changed. 4

5 3. Measures to enhance competitiveness of low-income countries As a result of commodities price drop, the Lao government has searched for ways to keep the momentum on the production process. This used to happen to our coffee business. The low price of international coffee has forced local entrepreneurs to process their coffee instead of export coffee beans as previously. As for copper, the most likely industry that will need copper as raw material is the electrical wire factory. The copper exporting enterprise will have to weigh their benefits and costs as to what proportion to sell its product to local industries or to export. In the case of maize different approaches have been considered. Part of maize produce has to supply local animal feed mills. Market access of maize to neighboring countries namely Thailand, China and Vietnam remains to be solved, although the demand for maize as raw material in these countries are not sufficient. Other processing of maize is being studied. For the foreseeable future, Laos will have to rely on export of commodities. Hence, for the country to take advantage of opportunities and cope with the challenges it faces in the commodities market, Laos has to enhance its competitiveness, since importing markets of Laos commodities are also strong producers of the same commodities in most of the cases. As for copper, it is exported in the form refined copper and copper alloys, unwrought. The foreign-owned company is applying international standards in terms of management and technology. There no doubt on competitiveness, but options lie ahead for value addition and retention. This undertaking is closely related to the potentials of the country. On the one hand it uses hydro-electricity as its main source of energy and one the other hand, produces essential raw material for cluster industries in power sector especially the transmission line and the like. As for government policies to address the issues, long term interest in the trade of maize for Laos can be secured only within the framework of bilateral, subregional, regional and global trade arrangements. These arrangements can be reached gradually and play a complementary role with each other. Proposed policy changes: Taking into account the market opportunities and especially the supply side constraints, the proposed policy changes required can be summarized as follows: Direct trade measures -Trade facilitation should be further enhanced. Local government should ensure a free flow of goods between production sites and the border checkpoints with minimum transaction costs. -Storage and drying facilities should be established wherever needed coupled with inspection and grading of maize so as to improve maize quality. -Wholesale market is necessary in maize producing provinces. -Contract farming should be introduced to ensure the market outlet and a long term stable export price. -Producers and purchasers groups should be established to improve bargaining power vis-à-vis foreign buyers. -Trade negotiations should focus on reducing tariff and non-tariff barriers in target market namely China. -Marketing Information System should be set up in the Ministry of Industry and Commerce. 5

6 -Marketing services and export promotion activities should be stepped up and entrepreneurial initiatives and the promotion of the participation of SMEs in the maize regional and global value chain be encouraged. Trade-related measures Production(technical and technological inputs), Supply side constraints from technical and technological perspectives are numerous, but attention needs to be focused mostly on seed selection, pest prevention and the use of modern agricultural tools. Credit access, Access to finance for local producers and traders should be made easier and guaranteed. Customs procedures, Negotiation for the establishment of additional border checkpoints should be envisaged with the neighboring countries based on the requirement of the cross-border trade flow. Transport, Road linkage should be established between production sites and the markets. Transport facilitation should also be dealt with. Legal framework, Contract Law enforcement should be strengthened through the commercial branch of the court system. Agricultural support policies, Agricultural support policies in the case of maize in this country can be the strengthening of the research and capacity building of the agricultural extension. FDI, Facilitate and attract investment especially FDI and technical assistance in the maize sub-sector in the forms of various projects. Consistency of proposed policy change with the AoA (Agreement on Agriculture) and current negotiations in agriculture of the WTO. The reform program adopted under the AoA, negotiated in the Uruguay Round, aims at establishing a fair and market-oriented trading system in agriculture. The negotiations undertaken in pursuance of these rules have resulted in some progress in the liberalization of trade in these products. All countries have agreed to replace quantitative restrictions and other non-tariff measures on agricultural products with tariffs. The new tariffied rate as well as other tariffs are being reduced over a six-year period (10 years for developing countries) starting 1995 by a simple average of 36% for developed countries(24% for developing countries). No tariff reduction has to be made by LDCs. In addition all countries have bound all tariffs applicable to agricultural products. In most cases, however, developing countries have given bindings at rates that are higher than their current applied or reduced rates. Member countries using subsidies have agreed to reduce both production and export subsidies considered to be trade distorting by agreed percentage. 6

7 Current negotiations in agriculture of the WTO focus on five main issues: market access, domestic support, export subsidies, special and differential treatment of developing countries and non-trade concerns namely food security and livelihood in the farming sector in developing countries. The proposed policy changes are to my understanding consistent with the AoA and the current negotiations in agriculture of the WTO. As far as domestic support subsidies is concerned, the proposed changes fall under the categories of green and blue box subsidies, export subsidies are not being proposed. However, Laos as an LDC will reserve its right in granting export subsidy subject to resource availability and if the need arises, since the provisions on special and differential treatment permit developing countries to use two out of the six types of export subsidies subject to reduction commitments under the AoA article 10. These are firstly subsidies to reduce the cost of marketing exports of agricultural products, including upgrading and other processing costs, and the cost of international transport and freight and secondly internal transport and freight charges on export shipments on terms more favorable than domestic shipments. Market access strategy - Opportunities for negotiation of improved market access and elimination of trade barriers in the identified target markets. - Negotiation of quota and duty free access with China on bilateral or regional basis. These two options are to be pursued, but not developed here. - Improving market access through WTO LDC rules In general, the improvement in market access particularly in agriculture derived from the result of the current negotiation of the AoA. In addition, under the provisions of special and differential(s & D) treatment, developing countries are given more favorable treatment than developed countries. The GATT s part IV also encourages developing countries to take measures similar to those which developed countries are expected to take and to give priority to the removal of tariffs and other barriers to trade on products of interest to other developing countries. Further, the General Enabling Clause permits developing countries to extend special and more favorable treatment to import from LDCs under the regional or global preferential arrangements adopted by them for the expansion of trade among themselves on a regional and global basis. When Laos accedes to the WTO, it will enjoy this particular treatment from other more developed WTO members. 4. Mechanisms for commodity producers and exporters to enhance access to finance, particularly in times of economic recession. The production and export of maize in Laos through the border trade with neighboring countries were mainly funded by buyers from these countries. Local banks have not adequately provided credit for such business undertaking even in time of commodities boom. This is partly due to other competing business opportunities to be catered for by banking institutions. Local sources of funding if properly mobilized would be more beneficial for producers and exporters not necessarily in terms of cost of finance. 7