Opportunities and Challenges of Lao PDR’s Integration into ASEAN Economic Community (AEC) by and after 2015
Dr. Leeber Leebouapao Director General National Economic Research Institute (NERI) Lao PDR
July 2014
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Table of Contents 1.Background .......................................................................................................................................... 3 2.The Current Status of Lao PDR in ASEAN ........................................................................................ 3 2.1 Foreign Trade ................................................................................................................................ 3 2.2 Investment .................................................................................................................................... 4 2.3 Labour Migration .......................................................................................................................... 5 2.4 Tourism ......................................................................................................................................... 5 3. Possible Impacts of AEC after 2015 .................................................................................................. 5 3.1 Opportunities................................................................................................................................. 5 3.2 Challenges .................................................................................................................................... 7 4. Policy Recommendations.................................................................................................................... 8 Statistic Tables ........................................................................................................................................ 9
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1.Background In 2003, ASEAN leaders decided to establish the ASEAN Economic Community (AEC) by 2020 (Bali Declaration II). In 2007, the leaders affirmed their strong commitment to accelerate the establishment of AEC to 2015 (Cebu Declaration on the Acceleration of the Establishment of ASEAN Community by 2015). According to the AEC blueprint, the establishment of AEC1 aims to achieve: 1) 2) 3) 4)
A Single Market and Production Base A Highly Competitive Economic Region A Region of Equitable Economic Development A Region Fully Integrated into the Global Economy
An ASEAN single market and production base shall comprise five core elements: 1) 2) 3) 4) 5)
Free flow of goods Free flow of services Free flow of investment Free flow of capital Free flow of skilled labour
2.The Current Status of Lao PDR in ASEAN 2.1 Foreign Trade2
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Foreign Trade Volume Over the past 7 years (2006-2012), the volume of foreign trade between Laos and ASEAN has increased from US$ 1.301,6 million in 2006, accounting for 83.8% of the total volume of foreign trade, to US$2,484 million in 2012, about 51.8% of the total foreign trade.This represented an increase of 90.8% in foreign trade during that time. + The Lao export to ASEAN increased from US$ 590 million in 2006, accounting for 95% of total exports, to US$ 1.292,4 million in 2012, about 59% of total exports, an increase of 119.3% over the period, of which exports to Thailand and Vietnam increased 85.2% and 14%, respectively. + The Lao imports of goods from ASEAN increased from US$ 711.6 million in 2006, representing 76.4% of total imports, to US$ 1.191,6 million in 2012, equivalent to 45.8% of total imports, an increase of 67.46% over the period: of which the import from Thailand and Vietnam accounted for 84.5% and 14% respectively.
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Main export goods to ASEAN in 2012: + Electricity export value to ASEAN totaled US$ 210.5 million, accounting for about 16.9% of total exports to ASEAN; the biggest share of the total electricity export.
ASEAN Economic Community Blueprint, ASEAN Secretariat, 2008 Ministry of Industry and Commerce, Trade Statistics, Lao PDR, 2006-2012
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Mineral export value totaled US$ 779.8 Million, accounting for about 60.34% of total exports to ASEAN. Manufactured and handicraft products export value totaled US$ 143.46 million, accounting for about 11.1% of total exports to ASEAN. Agricultural products and livestock export value totaled US$ 82,1 million, accounting for about 6.35% of total exports to ASEAN. Wood and wood products export value totaled US$71.7, accounting for about 5.55% of total exports to ASEAN. Forest products export value totaled US$2.7million, accounting for about 0.21% of total exports to ASEAN. Metals export value totaled US$2.1 million, accounting for about 0.16 % of total exports to ASEAN.
Main import goods from ASEAN to Lao PDR in 2012: + Vehicles and vehicle spare parts import totaled US $278.8 million, accounting for about 23.4% of total imports from ASEAN + Fuel and gas import totaled US$162.1 million, accounting for about 13.6% of total imports from ASEAN + Import of construction equipments totaled US$199 million, accounting for about 16.7% of total imports from ASEAN + Import of electrical equipment totaled US$160.9 million, accounting for 13.5% of total imports from ASEAN + Food supply import totaled US$112 million, accounting for 9.4% of total imports from ASEAN + Agricultural equipment import totaled US$63.2 million, accounting for 5.3% of total imports from ASEAN + Industrial supplies import totaled US$ 51.2 million, accounting for 4.3% of total imports from ASEAN + Electricity import totaled US$ 42.9 million, accounting for 3.6% of total imports from ASEAN + Luxury goods import totaled US$ 42.9 million, accounting for 3.6% of total imports from ASEAN + Daily consumption goods import totaled US$33.4 million, accounting for 2.8% of total imports from ASEAN + Medicine and medical equipment import totaled US$ 25 million, accounting for 2.1% of total imports from ASEAN + Other import totaled US$ 20.3 million, accounting for 1.7% of total imports from ASEAN .
2.2 Investment3 -
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The total investment capital from ASEAN during 2006-2012 amounted about US$ 6,254 million, which represented 44.1% of total foreign investment. Investment from Thailand amounted to US$ 5,065.2 Million, accounting for 80.1% of total investment
Ministry of Planning and Investment, FDI Statistics, 2006-2012
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from ASEAN and 35.7% of total foreign investment, followed by investment from Vietnam about US$ 916.9 Million, representing 14.7% of total investment from ASEAN and 6.5% of total foreign investment; Investment from other ASEAN member countries amounted to US$ 272 Million, representing 4.35% of total investment from ASEAN and 1.9% of total foreign investment. -
Investments from ASEAN countries 2006-2012, by sector: + Agriculture, 7.37% + Industry and handicrafts, 5.81% + Mining, 3.04% + Electricity, 61.86% + Other services, 21.92%
2.3 Labour Migration4 -
In 2012, approximately 200,000 Lao workers migrated to ASEAN countries; of which 190,000 went to Thailand , equivalent to 95% of Lao workers in ASEAN and 94% of total Lao workers working in foreign countries. In the same year, 110,000 workers from ASEAN countries migrated to Laos; 100,000 people were from Vietnam, 5,000 people were from Thailand, and around 5,000 people were from other ASEAN countries. Estimated remittance was about US$50 million. Most of the workers were employed in construction, industry, agriculture, trade and wholesale-retail sectors.
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During the period 2006-2012, the number of tourists from ASEAN countries visiting Laos was approximately 9.2 million, of which Thailand accounted for 7.85 million, Vietnam 1.12 million, and other ASEAN countries 0.2 million. Tourists from ASEAN generated revenue of about US$ 1,306 million.
3. Possible Impacts of AEC after 2015 3.1 Opportunities Establishing AEC by 2015 as a single market and production base, Lao PDR will become part of the ASEAN market, which will enable the country to share in market and production networks among the ASEAN country members through the free flow of goods, capital and skilled labour. Opportunities for each sector will be: A. Trade: Lao Exports to ASEAN: a. Opportunities Under the Free Flow of Trade framework, Laos will benefit from a reduction of tariff and non-tariff restrictions in other ASEAN member countries. The trade facilitation
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NERI Study, 2013 Lao National Tourism Authority, 2013
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will present the Lao PDR with opportunities to expand production and increase exports to the ASEAN market. b. Competitive products and possibilities for increasing exports to ASEAN market - Products currently exported to ASEAN market: Lao PDR can now penetrate the ASEAN market in particular the products already exported from Laos as described earlier, which would be competitive in ASEAN market. Lao PDR will be able to expand the production and increase the export of these product by increasing productivity and quality especially goods that are highly demanded in ASEAN markets such as electricity, wood products, rubber, job’s tears, mulberry, bananas, corn, organic products, minerals, and others. - Niche market in ASEAN for Lao export: In addition to the products that are already exported to ASEAN market, silk, handicraft baskets, and traditional medicine are the emerging products with high potential to enter the ASEAN market. - Products for competition There is high possibility to increase export to ASEAN market in particular those goods that already exported to ASEAN market or other goods produced in other ASEAN market. However, the production of such goods for exports should be highly competitive. Therefore, improving quality and lowering costs by using modern methods, techniques and technologies is key for the country’s AEC intergration. Those products include manufactured products such as Nikon cameras ( now in the process of production), food supplies (rice, meat, vegetables, fruits), medicine, machineries produced by foreign firms, such as Hyundai (in production), and Toyota auto spare parts (in production), etc. - Goods and services with immediate potential for AEC integration: Immediate potential goods and services for AEC integration are those that currently serve the increasing tourism industry, in particular restaurants, souvenirs, hotels, guesthouses, transportation, communications, banking services, tourist destinations, tour guide, others. Lao Imports from ASEAN: a. Opportunities: Under the Free Flow of Goods and Services framework, tariff reductions, non-tariff measures, and trade facilitation of imports will lower the price of imported goods, diversify imported products, lower import costs, and diversify local consumer options. These are crucial factors affecting national economic growth. b. Types of goods and services that need to be imported Goods to be imported are those that cannot be produced within the country or can be produced but with different type and quality, complementary goods and substitute goods such as vehicles, machinery, fuel, technological goods, consumer goods, and others meeting the demands in the domestic market, including air transportation services, technical services, and others. The goal of such import is to meet the diversified and high quality demands of the domestic market. 6
The number of ASEAN tourists visiting to Laos is expected to increase because of implementation of the tourism complex plan of the Greater Mekong Sub-region (GMS) and other ASEAN tourist facilitation policies and measures (e.g. free visa for ASEAN people ). B. Investment Opportunities: Under the Free Flow of Investment framework, more investors from ASEAN and non-ASEAN countries are expected to increase their investment, especially in priority sectors determined by the Lao government; the investment will be an important capital source for socio-economic development of the country. C. Capital Movements Opportunities: Under the Free Flow of Capital framework, the Lao PDR will be able to integrate its financial market into those of other ASEAN countries. The financial market integration will facilitate access to capital for socio-economic development of the country. D. Labour Migration Opportunities: Under the Free Flow of Skilled Labour framework, the country will have better opportunities to import skilled labour and technicians for domestic demand of labor market in different areas/sectors in the country. The import of skilled labour and technicians will contribute to economic growth because Lao PDR still lacks skilled labour in both quantity and quality. 3.2 Challenges
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a) Exports: Challenges and recommendations for exports to ASEAN market: - A single market in AECwill be a highly competitive market. Therefore, in order to benefit from opportunities associated with AEC integration, including the reduction of tariffs and no-tariff bariers as well as other trade facilitation provided by other ASEAN member countries, it will be necessary to enhance completitiveness by improving quality of products and by seeking niche markets. With the exception of electricity and minerals, the major export products are exported to ASEAN market only by small sized enterprises exporting mainly agricultural products. Most of these small enterprises are still lacking capacity to increase their production and to enhance quality of their products for export. Increasing productivity and upgrading quality of export products it is the key factor to enhance competitiveness in joining AEC. b) Imports: Challenges and recommendations for imports from ASEAN countries: After 2015, the country will lower tariffs for all goods to 0% and eliminate all nontariff barriers for import from ASEAN member countries. This will lower the price of imported goods which may lead to extreme competition with domestic producers. For 7
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those domestic producers, who cannot compete, their businesses will be less profitable, encounter losses and even leading finally to bankruptcy. More opening and increasing imports from ASEAN member countries may create social and environment impact for the country in particular crime, cultural impact, , environmental issues, others. c) Labour Migration Challenges and recommendations for labour migration : Domestic workers might migrate to other ASEAN countries where higher wages are provided. Consequently, this could lead to a shortage of domestic workers, and to family problems and social problems. Labour migrants from ASEAN member countries are likely to increase to Lao PDR because Lao PDR has relatively small population compared with other ASEAN member countries and is in shortage of labor forces in particular skilled labor. This will increase competition for job opportunities in the country and create labor migrant management challenges. So, Lao PDR needs to enhance coping measures for labor migrant management.
4. Policy Recommendations In order to cope with Lao PDR’s integration to AEC, in particular to maximize the benefits and to minimize the negative impacts, the author recommends the following measures: 1) To organise more workshops to dissiminate information on the AEC blueprint to all stake holders including colleges and universities, business sectors, and all citizens in order to raise their awarness and to well prepare for the AEC integration. 2) All stakeholders need to review the progress in the implementation of their commitments for the AEC, by focusing on the legal and institutional framework requirements and other measures needed for AEC integration, and by seeking solutions where progress has been lagging. 3) All stakeholders should try to make use of what opportunities of AEC integration by and after 2015 they have and to maximize the benefits from these opportunities, particularly in trade, services, investment, labour migration. At the same time, each sector is required to develop their own long-term strategy and work plans in order to anticipate and to cope with potential challenges and negative impacts. 4) There is a need to strengthen the human resource development of Lao PDR , particularly to improve the quality of education to catch up with other member countries so that the Lao labour can be recognized by other ASEAN members within the framework of Free Flow of Skilled Labor. 5) All economic sectors, particularly the business sector, should focus on enhancing competitiveness in order to be able to expand their export to the AEC. Enterprises that produce goods and services to meet the domestic market also need to improve the quality of 8
goods and services to compete with goods imported from ASEAN countries that are highly competitive (better quality and lower price).
Statistic Tables
Table 1: Main Export Markets of Lao PDR Country FY 1999-2004 FY 2004-2009 1 Thailand 46% 38% 2 Australia 6% 10% 3 Vietnam 7% 12% 4 China 3% 5% 5 United Kingdom 1% 7% 6 Japan 1% 1% 7 Germany 3% 4% 8 Switzerland 3% 5% 9 Netherlands 1% 1% 10 Italy 2% 1% Source: Ministry of Industry and Comerce, Lao PDR, 1999-2012
FY 2009-2012 56% 18% 8% 4% 1% 2% 2% 2% 1% 1%
Table 2: Main Export Items from Lao PDR No. Items FY 1999-2004 FY 2004-2009 1 Minerals 61.77 (16%) 495.57 (50%) 2 Electricity 94.93 (25%) 127.93 (13%) 3 Garment 96.14 (26%) 152.53 (16%) 4 Agriculture and live animals 82.49 (22%) 88.51 (9%) 5 Other industrial goods 10.77 (3%) 69.57 (7%) 6 Wood & wood products 73.13 (19%) 69.32 (7%) 7 Diamond 0 18.83 (2%) 8 Forestry products 8.67 (2%) 5.09 (1%) 9 Handicraft 5.23 (1%) 1.03 (0%) Unit: million USD (share to total) Source: Ministry of Industry and Comerce, Lao PDR, 1999-2012
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FY 2009-2012 1,048.52 (59%) 289.00 (16%) 167.30 (9%) 119.24 (7%) 113.62 (6%) 37.11 (2%) 12.74 (1%) 1.01 (0%) 0.40 (0%)
Table 3: Main Import Markets Country FY 1999-2004 FY 2004-2009 1 Thailand 26% 64% 2 China 5% 9% 3 Vietnam 4% 12% 4 France 0% 0% 5 Japan 0% 2% 6 South Korea 0% 0% 7 Belgium 0% 2% 8 Germany 1% 0% 9 Denmark 0% 1% 10 Taiwan 0% 1% Source: Ministry of Industry and Comerce, Lao PDR1999-2012
FY 2009-2012 52% 12% 8% 4% 3% 1% 2% 0% 0% 0%
Table : Main Import Items to Lao PDR No. Items FY 1999-2004 FY 2004-2009 1 Capital goods (ODA, Loan 179 (33%) 319 (32%) projects and FDI) 2 Fuel and gas 93 (17%) 206 (21%) 3 Vehicles and spare parts 25 (5%) 75 (8%) 4 Food stuffs 19 (3%) 24 (2%) 5 Luxury goods 3 (1%) 9 (1%) 6 Clothing and daily use 14 (3%) 22 (2%) commodities 7 Agriculture inputs 16 (3%) 17 (2%) 8 Electricity 7 (1%) 21 (2%) 9 Electric appliances 4 (1%) 10 (1%) 10 Construction materials 27 (5%) 27 (3%) Unit: million USD (share to total) Source: Ministry of Industry and Commerce, Lao PDR, 1999-2012
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FY 2009-2012 700 (42%) 333 (20%) 107 (6%) 92 (5%) 71 (4%) 54 (3%) 48 (3%) 47 (3%) 38 (2%) 32 (2%)