38660 v2 BUILDING EXPORT COMPETITIVENESS IN LAOS Summary Report The World Bank East Asia PREM November 2006 CURRENCY EQUIVALENTS (As of end October, 2006) Currency Lao Kip Currency Unit Kip US$l.OO 9,888 Kip FISCAL YEAR: October I September 30 ABBREVIA TIONS AND ACRONYMS ACFTA ASEAN-China Free Trade DDH Department for the Promotion and Agreement Management of Domestic and Foreign Investment ACV Agreement on Customs Valuation DISM Department of Intellectual Property, Standardization and Metrology AFTA ASEAN Free Trade Area DLF Department of Livestock and Fisheries AGOA African Growth and Opportunity Act DTIS Diagnostic Trade Integration Study AHPADA Asian Handicraft Promotion & EBA Everything But Anns Development Association AHTN ASEAN Hannonized Tariff EC-J5 European Economic Community of 15 Nomenclature nations APD Agriculture Promotion Bank ElIP Early Harvest Program ASEAN Association of South East Asia ESEWA Enterprise Support for Empowering Women Nations and Artisans ATC Agreement on Textiles and Clothing FAO Food and Agriculture Organization BAF Bunker Adjustment Factor FCL Full Container Load! Full Carload BCEL Banque pour Ie Commerce Exterieur FDA Food and Drug Administration Lao BOL Bank of Laos FDD Food and Drug Department BTA Bilateral Trade Agreement FDI Foreign Direct Investment CAF Currency Adjustment Factor FIAS Foreign Investment Advisory Service CEPT Common Effective Preferential FMD Food and Mouth Disease Tariff CPI Committee for Planning and FOB Free on Board Investment C&F Cost and Freight FTD Foreign Trade Department FTO Fair Trade Organization Jeffrey Gutman, EAPVP Ian Porter, EACTF Director: Homi Kharas, EASPR GATS General Agreement on Trade in MOC Ministry of Commerce Services GATT General Arrangement on Tariff and MOF Ministry of Finance Trade GBO Grassroots Business Organizations MOH Ministry of Health GEL General Exception List MPDF Mekong Private Sector Development Facility GDP Gross Domestic Product NAB National Accreditation Body GNI Gross National Income NAHC National Animal Health Center GOL Government of Laos NEM New Economic Mechanism GSP Generalized System of Preferences NGPES National Growth and Poverty Eradication Strategy GTZ German Agency for Technical :\JPD National Phytosanitary Database Cooperation HACCP Hazard Analysis and Critical Control NPPO National Plant Protection Organization Point HS Harmonized System NSC National Statistic Center ICT Information and Communication NSEDP National Socio-Economie Development Plan Technology IDA International Development Association NTA Lao National Tourism Authority IF Integrated Framework NTB Non-tariff Barrier IFAT International Federation for Alternative NTM Non-tariff Measure Trade IFC International Finanee Cooperation NTR Normal Trade Relations IMF International Monetary Fund NWFP Non-wood Forest Products IPPC International Plant Protection NZAID New Zealand Agency for International Convention Development ISO International Standards Organization PMO Prime Minister Office ISPM International Standards for Phyto PRA Pest Risk Analysis sanitary Measure ITC International Trade Center PRSP Poverty Reduction Strategy Paper JICA Japan International Cooperation SAARC South Asian Association for Regional Agency Cooperation LCD Lao Customs Department SEZ Special Economic Zone LCL Less than/loose Container Load SIDA Swedish International Development Cooperation Agency LDC Least Developed Country SME Small and Medium Enterprise LECS Lao Expenditure and Consumption SMTQ Standardization, Metrology, Testing and Survey Quality LHG Lao Handicraft Group SPS Sanitary and Phyto-sanitary Agreement LIFFA Lao International Freight Forwarders SRT State Railway of Thailand Association TIFF A Thai International Freight Forwarders STEA Science, Technology, and Environment Association Agency LNCCI Lao National Chamber of Commerce UAP Unprocessed Agricultural Products and Industry MAF Ministry of Agriculture and Forestry UNDP United Nations Dcvelopment Program MCTPC Ministry of Communication, USDA United States Department of Agriculture Transportation, Post and Construction FAS Foreign Agriculture Services MIH Ministry ofIndustry and Handicraft VAT Value Added Tax MFA Multi-Fiber Arrangement WTO World Trade Organization MFN Most Favored Nation WTTC World Travel and Tourism Council ACKNOWLEDGEMENTS This report was prepared by a team consisting of Mona Haddad (Task Team Leader); George Fane (Australian National University) and Khamlusa Nuansavanh (National University of Laos): trade policy and trade and poverty; Paul Brenton: market access; Philip Schuler, Maika Oshikawa (WTO), and Phouvieng Phongsa (WTO and Ministry of Commerce, Laos): WTO; John Arnold (consultant): trade facilitation; Michel Zarnowieki and William Ledrew (consultant): customs; Kees van Der Meer (standards); J. E. Austin (consultants): export competitiveness; IMF: macro assessment; Amanda Carlier: business environment. Background papers were also provided by the Economic Research Institute for Trade (Ministry of Commerce, Laos): regional agreements and import export regime; Ruth Banomyong (Thammasat University, Thailand): Thailand-Laos border crossing; Dang The Truyen (consultant): Vietnam-Laos border crossing; Santisouk Phounesavath (Ministry of Commerce, Laos): Laos-US bilateral trade agreement; Paul Fekete (consultant) and Andrew Mayock (Booz Allen and Hamilton): IF simulation workshop report. The report benefited from several discussions and brainstorming sessions with government officials from the IF Steering Committee, representatives of IF agencies in Vientiane, AusAid (the IF donor facilitator for Laos), and donor representatives in Vientiane. Peer reviewers are: Sandy Cuthbertson (Centre for International Economics, Australia), Philip English, Jean Francois Arvis. Extensive comments were provided by Mme Khemmani Pholsena, Mme Banesaty Thephavong, Sirisamphanh Vorachith, Phouvieng Phongsa, Buavanh Vilavong and Latthana Douangboupha (Ministry of Commerce) as well as by Khan-Ngeune Savengsuksa (PMO), Nhun Sisavath (STEA), Phoukhong Bannavong (CPI), and Xaypladeth Chounlamany (MAF). Sjamsu Rahardja provided excellent research assistance and Somneuk Davading provided outstanding support. Bob Warner (Centre for International Economics, Australia) prepared the summary report. Silja Baller, Walter Meza-Cuadra, and Lynn Yeargin assisted in the production of the report. Leendert Solleveld provided guidance regarding the Integrated Framework. The report was prepared under the guidance of Kazi Matin (Lead Economist for Laos) and under the leadership of Mme Khemmani Pholsena (IF focal point, Ministry of Commerce, Laos). A NOTE ON PROCESS Following the preliminary DTIS mISSIOn, the government requested the Bank to follow a practical approach with a focus on export competitiveness. To that end, the DTIS included a series of workshops with private sector and government stakeholders. During March 2005 (main mission) and July 2005, eight workshops on cluster export competitiveness were organized with a strong participatory and consultative approach (six in Vientiane on agriculture, light manufacturing and tourism; one in Savannakhet; and one in Luang Prabang on tourism). The workshops aimed at (i) providing an opportunity for the private sector and the government to discuss together the constraints they face in exporting; (ii) learning from best practice around the developing world on how clusters managed to improve their export competitiveness; (iii) allowing local stakeholders to come up with a SWAT analysis and an action plan on what needs to be done in Laos. The DTIS benefited greatly from the work done for the National Export Strategy (NES) that was being undertaken by the government with the assistance of ITe. Recommendations from the DTIS work and the NES were merged in the export competitiveness component of the draft Action Matrix. Discussions with the government and IF agencies took place on how to incorporate the DTIS findings into the five-year plan of the government. In March 2006, a workshop to discuss the draft Action Matrix was organized in Vientiane (modeled after the IF Simulation Workshop in Addis Ababa in September 2005, but discussing a real Action Matrix with real stakeholders). The workshop brought together representatives from the government, private sector, and donor community. It aimed at debating and agreeing on priorities of the Action Matrix within each group and across the three groups. In addition, two awareness raising workshops were organized in March 2006 in Luang Prabang and Pakse and included representatives from various provinces. The workshops aimed to share the main results of the DTIS and the draft Action Matrix, and seek feedback from the provinces. The workshops were supported by the World Bank and led by Mme Khemmani Pholsena (IF focal point in Laos). T ABLE OF CONTENTS Laos Today and the Potential of Tomorrow............................................................. 1 Trade, Growth and Poverty Reduction ........................................................................... 1 Future Sources of Export Growth and Foreign Exchange Earnings ............................... 2 Tourism ................................................................................................................... 2 Opportunities and constraints ............................................................................ 4 Light manufacturing ................................................................................................ 4 Opportunities and constraints ............................................................................ 6 Agricultural products .............................................................................................. 7 Initiatives for agriculture ................................................................................... 7 Export Competitiveness: Looking ahead ....................................................................... 8 What the government can do ............................................................................. 9 Exports of labor............................................................................................................... 9 Making Trade Easier ................................................................................................... 10 Negotiating Market Access ........................................................................................... 10 Market access conditions in the EU ................................................................ 10 Access to the US market ................................................................................. 11 Access to the Japanese market ........................................................................ 11 Access to East Asian markets and ASEAN .................................................... 12 Reducing and Rationalizing Trade Regulation ............................................................. 12 Import duties and their effective protection ......................................................... 12 Non-Tariff barriers to imports ............................................................................... 13 Foreign exchange management and import planning ..................................... 13 Import licenses for general goods ................................................................... 14 The incentive regime for exporters ....................................................................... 14 Import and export procedures ............................................................................... 15 Streamlining Customs ................................................................................................... 15 Improving Trade Logistics ............................................................................................ 16 Where does the logistics sector stand in relation to other sectors? ................. 16 Land transport ........................................................................................ 17 Inbound and outbound supply chains via Bangkok ............................... 17 Trucking services and tariffs .................................................................. 18 What can be done? .......................................................................................... 18 Developing logistics services ................................................................. 18 Reducing regulation ............................................................................... 19 Implementing the Transit Agreement with Thailand ............................. 19 Developing LCL logistics ...................................................................... 20 Inland container depot/dry port .............................................................. 21 Addressing SPS Needs .................................................................................................. 21 Priority issues .................................................................................................. 21 Potential areas for growth ............................................................................... 22 What needs to be done? .................................................................................. 22 Leveraging WTO Accession ......................................................................................... 23 Potential benefits for Laos from WTO membership ....................................... 23 Making Investment and Doing Business Easier .................................................... 24 Macroeconomic Management ....................................................................................... 24 Welcoming Private Investment and Business ............................................................... 25 Where is the business or enterprise sector? ..................................................... 26 Policy uncertainty ............................................................................................ 26 Legal framework for business ......................................................................... 27 Regulatins and procedures to start a business ................................................. 28 Capacity and institutional constraints ............................................................. 28 Key steps to facilitate business or enterprise sector development .................. 28 Conclusion and Key Messages Looking Ahead .... ................................................. 30 Summary of recommendations .................................................................... 32 An Action Matrix of Projects and Technical Assistance to Promote Export Competitivess in Laos ........................................................................................... 34 EXECUTIVE SUMMARY Integration with the regional economy and important elements of the agenda to openness to international trade and achieve these goals. investment have been key elements of the development strategy in Laos since the Lao exports of major commodities 2003 introduction of the New Economic 2004 Mechanism in the mid 1980s. Foreign I!! Electricity CJ Gold o Garrrents 0 Wood & Wood Products trade and investment have underpinned · OJHee · Manufactures (exct. garrrents) II Crops & forest products much of the expansion of economic activity and poverty reduction that has occurred over the last two decades. The reforms introduced involved changes in the prevailing thinking about the role of the state in the economy, and facilitated the parallel expansions of trade, investment, production and employment. The economy, which had stagnated under the post-war attempts at state control, The next steps that Laos needs to make to responded strongly when the reforms harvest further benefits from integration began to take effect. GDP has grown at 6 are more challenging, since they will percent a year since 1990, driven by strong require significant efforts to build the growth in agriculture and manufacturing. institutional underpinning of a market Investment grew from 13 percent of GDP economy. They will also involve making in )990 to 22 percent of GDP in 2004, as some strategic decisions about the best both foreign and domestic investors took way for Laos to deepen its integration into advantage of the opportunities to supply the world economy. foreign markets with electricity, garments, wood products, coffee, vegetables and Challenges and opportunities other cash crops and, more recently, gold and copper. Expanding exports played a The challenge for Laos is complicated by major role in Laos' growth, growing at 11 the legacy of the past. The country has percent per year to account for 24 percent poor infrastructure, underdeveloped of GDP in 200S-up from 9 percent in market institutions, an embryonic private 1990. sector and a public sector with little experience of managing a modernizing Much of the early expansion in exports market economy. has been in activities that directly exploit the country's natural resource endowment This translates into a series of constraints - hydro-electricity and mining. Since the on export diversification and growth that 1990s, exports became more diversified include: and embodied more value added-mainly · lack of awareness of modern, in wood products, garments, and coffee. transparent, market-based ways of doing business; In its National Growth and Poverty · insecure property rights and an Eradication Strategy, the Government ties inefficient financial system, which its ambitious poverty reduction goals inhibits the accumulation and use of eradicating mass poverty by 2010, capital; eliminating all poverty and tripling per · a regulatory system built on control capita income by 2020 to an equally and rent extractions rather than ambitious target of 7 percent sustained facilitation; growth over the medium and long term. · restnctIOns on trade through The Strategy identifies regional integration burdensome licensing regulations; and export growth and diversification as · weak institutional and fiscal management capacity; and · decentralized authority for trade, with and infrastructural ingredients of an confusing and overlapping attractive environment for investment. responsibilities of the central and provincial governments, which makes Heavy regulatory burden affects exporters it considerably more complex for both more donors and firms to do business in Laos. Time spent with regulators Laos' natural resource endowment will continue to provide opportunities for Customs expansion of mineral and hydro-electricity Inspections exports; but there is also considerable potential to expand exports of tourism Total services, light manufacturing and Inspections 29.1 agriculture. Realising this potential will require entrepreneurial skill, ability to o 5 10 15 20 25 30 identify and respond to the requirements Number of inspectionsf'4 of time with regulators of international markets, improving the skill base used by these industries, and, in some cases, collaborative efforts to market what Laos has to offer to the world. Making trade easier with higJ:tj!xport potential Given its status as an LDC, Laos generally has quite easy access into world markets. TrarlSpOf!"'!,OP Machln",,~-I Eleclrlc" f,.. jI Complex rules of origin often constrain making full use of the preferences available to Lao exports, however, and delays in implementing commitments under the agreements underpinning the ASEAN Free Trade Area have limited FOOlwear t Heady",ar Vegelable Produ~(" access to potential tariff preferences in that market. But, generally speaking, the 50 100 200 policies of other countries do not subject ~yoar averagegr cl\l'l.hr dte(19'J9-2003) Lao exports to harder access than exports from other sources. The issue is more about Laos being able to take advantage of But the critical issue is that all of the the preferences offered by increasing its strategies to expand exports depend on competitiveness. investment of one kind or another. They also depend on Lao businesses deepening Laos has made significant progress in commercial and contractual relationships reducing the costs of engaging in with each other and foreign partners. One international trade. Its MFN import duties priority for government is to reduce are low (in 2003, the unweighted average regulatory burdens and make it easier to tariff was at 9.5 percent) and not highly engage in international trade, bearing in dispersed. Despite recent liberalization and mind that exporters cannot pass excess simplification, the management of trade is costs of regulation on to their customers still restrictive, with burdensome, (and also recognizing that the purpose of nontransparent, and inconsistent rules exports is to exchange for imports: if acting to increase costs and reduce importing is difficult or costly, the competItIOn from new entrants. For incentives to export are reduced). An example, exporting wood products may equally important priority is for the require over 10 signatures from various government to reduce policy and ministries and agencies. Further, administratively induced uncertainty that procedures for import licenses are, even can deter investment, and to foster the after some streamlining, still unnecessarily development of the critical institutional complicated, and leave room for unofficial 11 controls. Reform in these areas has been accession to the WTO. These agreements constrained by the fragmentation of the provide opportunities to improve trade trade policy and administration policy and economic competitiveness, but architecture. These add to frictions caused they can seriously tax the institutional by the underdevelopment of transport capacity of government and business infrastructure and logistic services. sectors and sometimes prioritize legislative and institutional developments Importers complain about lengthy, costly, that will only generate benefits for LDCs and unpredictable procedures. The in the longer term. Laos needs to develop a capacity of the Customs Department is clear vision of how it wants to use these still weak, the authority over Customs agreements to further its own trade and clearance is spread across ministries and reform agenda. regions, and informal payments are still widespread. Despite some reform effort, Making investment and doing business much remains to be done to make the easier Customs Department a modem one, including in the areas of legislation, Investment in one fonn or another is a organizational structure, human resources, crucial ingredient for export growth: computerization, clearing procedures, and households and enterprises foregoing enforcement. current consumption, directly or indirectly, to invest in human or physical capital, Laos' status as a landlocked country gathering information, adopting new entails three dimensions. The first technology or new ways of doing physical isolation from markets·-is not business. They do so in expectation of really a problem, given its proximity (700 future returns. If returns are low or km) to ports in Thailand and Vietnam. The uneertain, and risk taking is discouraged, second-inefficiency of logistics investment will be low, and so will growth services-is being resolved as the 2004 of exports. Transit Agreement with Thailand will Laos is not an easy place to do business, expand competition and should provide a and many institutional and policy features significant reduction in logistics costs. The of the business environment add to third-lack of infrastructure and capacity uncertainty, increase costs and reduce how at border crossings-is a serious barrier to much of the returns from investment the trade. There is much to be gained from investor can appropriate. Among the rationalizing the regulation of imports and factors causing these problems are exports, and simplifying procedures for perceived risks of macroeconomic movement of goods into and out of the instability: the government's fiscal country-in particular establishing an pOSItIOn remains fragile, threatened by inland container depot near the border poor revenue mobilization, limited control with Thailand. over provincial spending, and weak budget planning and execution. The poor state of Laos will also have to put considerable the state banks lies at the centre of the effort into improving the country's limited ability of the finaneial system to capacity to meet international Sanitary and intermediate efficiently between savers Phytosanitary requirements on food safety and investors. Also important are factors and animal and plant health if it is to such as: ensure market access for agricultural and · unclear and poorly communicated forestry produets, as well as to protect its government policy toward the business own industries from damaging incursions or enterprise sector and lack of of pest and diseases. eoordination among line ministries in the policy making process; The initial efforts that Laos made to · the high cost of power, transport, liberalize trade were largely unilateral. . telecommunications, and other critical Now the country's trade and integration services; strategy focuses much more on the pursuit · exeessive and unnecessary regulation and implementation of bilateral, regional of ongoing business operations; and multilateral agreements, including 111 · orientation toward control rather than identifies a set of priority projects that facilitation by the tax and trade donors can support. These include the administration systems; following. · lack of access to land and its limited · A collection of projects aimed at use as collateral for debt; improving competitiveness in tourism, · lack of a sufficiently functional legal light manufacturing and agriculture, system to support investment, supporting micro, small and medium enterprise establishment, contract sized enterprises to develop capacities enforcement, and commercial needed to engage in export oriented transactions; production, improving infrastructure · insufficient intellectual property rights and capabilities at the regional level, protection for both domestic and and deVeloping an export processing foreign investors; and zone in Savannakhet; · rigid labor regulation. · A set of projects targeting trade facilitation through modernization of Remedying these problems will require customs, improving trade logistics and both immediate- and longer-term actions. strengthening SPS capabilities; The first priority is to improve the legal · Projects providing support for and regulatory environment, in order to development of appropriate industry facilitate economic activity and meet the policy and for investment promotion, conditions of international agreements. as well as establishing a unit to Key short-term actions include: manage implementation of the IF and · simplifying the business start-up its activities; process, and moving from a licensing · Capacity building for trade toward a registration system; negotiations and developing · introducing a one-stop investment coordinated trade negotiation service where licensing remains; strategies; and · repealing the Industrial Processes Act, · Projects concerned with promoting which regulates production processes; trade opportunities for the poor, with · updating labor laws to align with support for development of the regional standards; and handicraft sector and for construction · revamping the tax system and its of rural roads. administration. The diagnostic work carried out for this In the longer term, sustained efforts and report is part of a continuing effort to considerable financial resources will be identify key constraints to required to build institutional capacity, competitiveness-by the government strengthen entrepreneurial skills, and (such as the Export Competitiveness improve physical infrastructure. Strategy 2006-2008 supported by ITC) as well as bilateral donors and international A way forward agencies (including the upcoming Investment Climate Assessment by the The challenges facing Laos as it charts the World Bank and ADB, and the "Lao PDR next stages in its pursuit of integration and National Human Development Report: export development are daunting: but they Trade and Human Development" of need to be seen in the light of the UNDP). But more importantly than these challenges that Laos has already dealt with strategies and reports, a key element of an (and the returns that the country and its integration strategy for Laos should be to people have reaped from confronting develop internal capacity to analyze trade them). and investment and related policies and to identify complementary actions needed to There is also the prospect - which the IF secure the benefits and to facilitate the is designed to help with - of support adjustments that integration and growth from development partners in addressing will bring in their train. some of the capacity and institutional development issues that lie ahead. An action matrix has been developed which IV LAOS TODAY AND THE POTENTIAL OF TOMORROW TRADE, GROWTH AND POVERTY Figure 2. Composition of exports, 1990-2005 - Wood products~mm%., Coffee Garments - - . Etectricity Minerats REDUCTION US$ (million) 200------------------~· Laos took a decisive tum towards market 150------------------~ oriented policies in 1986 when the government adopted the New Economic Mechanism (NEM). The NEM embodied a transition away from the system of state control over production and trade and policies of provincial self-sufficiency, at the same time as it recognized private ownership and property 19901991 199219931994199519961997199819992000200120022003 2004 2005 rights. Source: World Bank, IMF, CIE The economy, which had stagnated under the post-war attempts at state control, responded Fi ure 3. Increasin 0 enness, 1990-2005 US$m strongly when the reforms began to take _ Exports _ tmports _ Openness Indicator 1200 80.0% effect. GDP has grown at a trend rate of 6.3 70.0% percent a year since 1990, driven by strong 1000 ~~ ,/ growth in agriculture (4.7 percent) and /'0-. / 60.0% 800 manufacturing (1l.1 percent). Growth dipped in 1998 as a result of the effects of the regional 600 / -- ~ 50.0% 40.0% financial crisis, but the economy has recovered since then. (Figure 1) 400 '-.. / 30.0% 200% 200 · I I I ~.111 II I 10.0% Figure 1. GDP growth in Laos 0.0% percent 30 19901991199219931994 19951996199719981999200020012002200320042005 25 -+--GDP Note: the openness indicator is export+import/GDP Agriculture Source: UNIDO, IMF, and World Bank 20 tv1anufacturing 15 ~Other Laos's strong growth has translated into a 10 significant reduction in poverty: the number 5 of people living below the national poverty 1990 A: 1992 1994 1996 1998 2000 2002 line fell from 46.0 percent in 1992-93 to 33.5 -5 percent in 2002-03 (Table 1). While inequality Source: ADB has grown, changes in income distribution have not been as pronounced as in other Investment has grown from 13.5 to 21. 8 countries, as strong agricultural growth has percent of GDP, as both foreign and domestic ensured that the rural population has benefited investors have taken advantage of the from the reforms. opportunities to supply foreign markets with electricity, garments, wood products, coffee, Table 1. Changes in poverty and inequality vegetables and other cash crops and, more 1992-93 1997-98 2002-03 recently, gold and copper (Figure 2). Exports Poverty incidence have grown at a trend rate of 10.8 percent per (headcount) % Urban 26.5 22.1 19.7 annum to account for 24 percent of GDP in Rural 51.8 42.5 37.6 2005 (up from 9.1 percent in 1990 - Figure National 46.0 39.1 33.5 3). International trade now plays a very Inequality significant role in the economy. (Gini coefficient) National 0.31 0.35 0.33 Source: Richter et al 2005, World Bank This positive performance reflects a number The government's development strategies of elements of the reform program, and the rightly focus on export diversification. The country's natural endowment. question is what must be done to achieve this · Early and convincing recognition of the goal? To help explore this issue, the DTIS has role of the private sector stimulated a examined the potential to increase the value of strong response from investors interested exports and foreign exchange earnings outside in meeting market opportunities. The state of the electricity and minerals sectors. This rapidly abandoned its involvement in involved a series of consultative workshops industry, with the share of state enterprises with industry representatives involved in in manufacturing output falling from export activities in the tourism, light around 100 percent in 1990 to 10 percent manufacturing (including handicrafts) and at the end of the decade, and the private agriculture sectors. I It also involved looking at sector began to take the lion share of the potential to generate income from export domestic credit (87.0 percent in 2000, up of labor services. The findings are very much from 19.0 percent in 1990). in line with the National Export Strategy 2006 · Agriculture responded positively to the 2008 being developed by the government and rationalization of incentives created by the supported by ITC. termination of price, marketing and input supply controls. Rice yields grew in the Tourism lowlands and the upland switched to more appropriate cash crops. Tourism is a critical industry for driving · Foreign direct investment has been economic development in Laos. The industry growing: hydro-electricity production was currently generates more then $120 million in the largest recipient (although one mining revenues, accounting for 3.4 percent of total project has now become the largest employment, 23 percent of export revenue, operational foreign investment project.) and more than 4 percent of total GDP. · The government has been reasonably Tourism is growing in the region, and there is successful in fiscal and monetary a natural niche for Laos: the sector is projected stabilization. Changes in exchange rate to grow by nearly 12 percent in the coming management have ensured that the official years. In addition, capital investment in rate has depreciated to offset domestic tourism projects is expected to double over the inflation, and to keep pace with next ten years. movements in the parallel market. Taxation has replaced transfers from SOEs To achieve its growth potential, the tourism as the core source of government finance, industry needs improved marketing skills, and the government has been able to better targeting of market segments, and increase its spending on public health and development of diversified offerings. This is education, with some commensurate going to involve building human capacity, improvements in sector performance attracting appropriate foreign investment, (albeit from a very low base). building better frameworks for dialogue with government, and strengthening associations within the tourism cluster. FUTURE SOURCES OF EXPORT GROWTH AND FOREIGN EXCHANGE Tourism is still largely concentrated in a few locations in the country, namely Luang EARl~INGS Prabang, Vientiane, and, to a lesser extent, Champasak. Among international tourists, Expanding exports have played a major role in these "point" locations are not considered to Laos' growth over the past two decades. But be destinations in themselves, but side trips as much of this expansion has been in activities a part of a regional tour. As a result, they that directly exploit the country's natural spend fewer than 3 days in Laos - the lowest resource endowment - hydro-electricity and in the Mekong Region (Figure 4). More than mining. While these exports are and will 65 percent of arrivals are from the Mekong continue to be - an important source of government revenue, they have limited linkages with the rest of the economy, and I Eight export competitiveness workshops were organized during the DTIS missions: in Vientiane, Luang tend to have very localized impacts. Prabang, and Savannakhet. 2 region and can be attributed to regional cross be relatively poor but has bccomc more border day trippers (Figure 5). Reflecting the prosperous in the last 15 years. Tourism also regional mix of tourist arrivals, tourists that has the potential to play a key role in come to Laos spend, on average, less per stay increasing economic opportunities for the than in any other country of the region (Figure southern provinces of Attapeu and Sekong as 6). Knowledge of Laos as a country is limited; well as for SMEs. this is both an advantage and disadvantage for the tourism sector. Laos is still undiscovered With special emphasis on community and eco and still carries a premium of mystique, but tourism from tour operators and international lack of awareness in the market is constraining donors, the industry is becoming an growth. increasingly important source of rural income and poverty alleviation. The potential doubling Fi ure 4. Tourists don't sta of the industry revenues would have a averagedays!n tremendous impact on people in this sector. Even a modest impact on the productivity and incomes of the people who rely on this industry would be quite significant. Tourism also has important spillover effects in terms of creating a Lao national "brand" in global markets and developing a favorable Thailand international image for the country. It also has spillover effect in promoting rural tourism and Source: Asian Develo men! Bank, 2004. handicrafts. Fi ure 5. Mekon tourists bv nationalit Significant investment is occurring in the tourist alrivals.(inlhousaod) 12000 tourism industry; but a critical issue for 10000 investors is to identif.v what types of tourists they want to attract and how to effectively reach those audiences. This requires developing an understanding of tourist needs 40QO and preferences, identifying the most attractive 2000 niche markets appropriate to Lao offerings, and preparing appropriate marketing efforts to nHliland VI',, problem of competing for investment with s:::~:::r,:::o:':,:::".=·.= e= .2003 locations in Thailand that may provide a more LI ~995 favorable overall environment. Agricultural products Agriculture remains the main source of 40 50 60 income and livelihood for the people of Laos. Note: A revealed comparative advantage (RCA) The sector accounts for 48 percent of GDP, index > I means the product has comparative down from 52 percent in 1998, with rice advantage. representing 75 percent of all agricultural Source: UNCOMTRADE, production. Other main crops include maize, coffee, sugarcane, tobacco, and peanuts. growth in recorded exports to China. However, with the Early Harvest Program of Coffee is the largest agricultural export the ASEAN-China Free Trade Agreement, the commodity, but other products are showing transport and trade facilitation programs of the promises. Despite its importance in the Greater Mekong Subregion program of domestic economy, agriculture only economic cooperation, and growing represented 6.1 percent of total Lao exports in commercial linkages between Laos and China, 2003. Coffee is the largest export commodity, Lao agricultural exports destined for China, accounting for nearly 80 percent of especially Southern China, should grow agricultural exports in 2003 ($12.5 million). significantly. Cereals and hides skins and leather are the next largest exports. Trade statistics reveal Notable market trends in agriCUlture include a that Laos has gained comparative advantage in growing demand for organic products in several agriculture products, including castor international markets, rising standards for oil, jute fiber, coffee, wheat, plants, and seeds agriculture produce and livestock, increasing and fruits used in perfumes, including the efficiency of international distribution successful cultivation of agar wood (Figure networks, and rising levels of income in Asia, 11 ). which is likely to shift the consumption hahits of a large portion of the market. There is also a significant amount of informal trade in agriculture across the Mekong region, Examples already exist of Lao entrepreneurs particularly in livestock and non-wood forest marketing high-value coffee and organic rice products harvested in the forests and then to international markets. There have also been traded into southern China and sold at local recent small-scale successes in expanding pork markets. These products include medicinal production for the domestic market, exporting herbs, fibers, resin, and edible forest foods. selected horticulture products, selling non wood forest products (e,g., herbal medicine), Agriculture exports to Thailand have grown, and establishing rubber plantations to meet but exports to China remain low. Rising export demand. Further, the investments incomes and urban migration in Southeast being made in road infrastructure will create Asia are both positive market trends for Lao not just transport corridors but economic agriculture. Vegetable and foodstuff exports development corridors as well. from Laos to Thailand grew notably from 1999 to 2003, though there was very little Initiatives for agriculture Specific strategies and initiatives for the agriculture sector include: 7 · upgrading agricultural practices and financing and management expertise needed to developing standards for exports; attract tenants. · upgrading the capabilities and capacity of the Science Technology and Environment Cross-cutting recommendations that would Agency (STEA); apply to tourism, light manufacturing, and · reviewing the incentive structure for agriculture are summarized below: commercial farming; · establishing provincial production zones Industry cluster strategies. Working together and distribution centers; in close communication and cooperation, · expanding access to regional and industry leaders can develop and implement international markets; strategies that focus on quick wins as well as · training farmers m value-added building long-term competitiveness. processmg; · investing in road and irrigation Market research and understanding of infrastructure; international markets. Industries and · investing in seedlings; government should both invest in building · identifying appropriate technologies and capacity among young professionals for investments. market research, including sending a critical · developing financial services for the mass of young professionals abroad for sector; training. In addition, supporting the · publishing annual sector reports aimed at dissemination of industry information can help potential investors; and strengthen the ability of industry associations · supporting the formalization and growth of to provide useful information and services to the coffee sector. their members. Export Competitiveness: Looking Branding ofLaos and its high-value products and services. Building brands in high-value ahead areas is critical for positioning Laos to compete in international markets. Branding Laos has the potential to meet or exceed the opportunities are apparent in tourism, silk, growth rates of neighboring countries Vietnam coffee, wood products, and organic foods. and Thailand over the next ten years. However, proactive efforts must be undertaken Sustainable competitiveness and growth to achieve this export potential. There is depends on improving productivity through potentially high interest in international education, training, and capacity building... markets for a number of Lao export products There is an urgent need to invest in more and tourism offerings, but very little in the past language training, computer training, and basic has prepared the average Lao entrepreneur to business skills; as well as in marketing understand the needs of international markets training, design, and industry-specific schools and respond with world-class offerings; such as tourism and hospitality. therefore human capacity building in marketing and management is an urgent ... and on facilitating the emergence of priority. entrepreneurs and competitive clusters. Competitiveness will require an understanding The formation of industry cluster working of international consumer and market trends, groups and the implementation of concrete and translating this knowledge into higher initiatives, such as improving market linkages, value products and services. It will also e-commerce, product innovation, branding, reqUIre well-considered investments in workforce development, and supply chain infrastructure that generate industry management, can help to develop this dynamism. capacity. Further, the Special Economic Zone (SEZ) planned for Savannakhet might offer a Productivity can be strategic as well as partial and localized way of addressing some operational in nature. For example, by of the constraints to domestic and foreign choosing to grow and export high-value agar investment in manufacturing if strategic wood instead of exporting raw logs of other partners are brought in to provide the varieties, Laos can greatly increase its export values. By focusing on high-income tourists 8 already living in the region, the tourism originally may have been poor (Figures 12 industry could increase its off-season business 13). and thereby amortize its investment more effectively, while creating more stable year Figure 12. Distribution of migrants and non round jobs. By choosing the appropriate mi rants b socio-economic status commercial development model for an export percent share --Non-m!graf'ts 50 oriented industrial park, the country could Interna! accelerate its entry into light manufacturing 45 migrants industries by attracting a critical mass of External investors to set up satellite plants. What the government can do Expanding exports in these sectors will require concerted efforts by the business sector. The govemment can choose to support some of the collective initiatives where the private sector may have insufficient incentive to undertake activities which generate significant benefits to the community. But the eritieal issue is that aU of the strategies to expand exports require investment of one kind or another, and Lao businesses deepening commercial and contractual relationships with each other and I Figure 13. Non-poor are the main recipients foreign partners. This suggests that the priority . of remittances for government is to focus on reducing ~ouS!hOidsreceiving remi t t ancs regulatory burdens (bearing in mind that 350 exporters cannot pass excess costs of 300 250 regulation on to their customers), reducing 200 poliey and administratively induced 150 uncertainty, and fostering the development of 100 the critical institutional and infrastructural 50 ingredients of an attractive environment for investment. 2 Rural Urban Note: Includes internal and external remittances. Exports of labor Source: LECS III. Laos can generate external incomes from its The most importallt destillatioll for labor endowment by exporting products made international migration from Laos is within the country, or by receiving remittances Thailalld. Lao people face strict regulations from people who migrate to undertake work in on migration to other countries, and until very other countries. The temporary movement of recently it has been illegal for Lao people to people for purposes of work is a key trade area migrate to Thailand. Because of their infonnal that can play an important role in reducing status, most Lao workers in Thailand are poverty. For many developing economies, breaking Thai laws that require migrants from remittances constitute the single largest source Laos and other foreign countries to pay of foreign exchange, exceeding export registration fees and obtain work pennits. revenues, foreign direct investment, and other Many of the migrants who are legally private capital inflows. In Laos, remittances registered in the host country (and all those are important not only for the poor, but also who are not) are in breach of Lao laws, which for the middle Illcome grou~which require a Lao citizen working in a foreign country to satisfy a set of criteria which include not taking a job in nearly all of the occupations in which employment would be 2 The World Bank and ADB are currently preparing an most readily available for Lao migrants (and Investment Climate Assessment for Laos that analyzes in particularly female migrants) from poor more depth business environment constraints. 9 families. (These include house maid, maid in Making it easier for Lao people to migrate to hotel, cleaner, restaurant service worker, Thailand, and trying to persuade the Thai supermarket worker, parking lot attendant, government to ease the cost to migration could road sweeper, and other unskilled workers). be a cheap way of raising the standard of living of the poor and the middle class if the Around 80 percent of the people who still domestic demand for labor does not grow depend on farming, and especially those who quickly enough to absorb all of the people rely on subsistence farming, have begun to seeking employment. It would also assist migrate to other activities and the government efforts to minimize potential dangers such as will need to ensure that there is adequate migrant abuse. employment to avoid social problems. MAKING TRADE EASIER The ability of Lao exporters to exploit the The wide range of preferences available to opportunities available to them will depend on Laos, especially given its least developed underlying competitiveness and a supporting country status, suggests that market access framework that provides information on export should not be an issue. But it turns out that markets and opportunities, along with suitable Laos is not making full use of the preferences and low-cost infrastructure services (financial, available to it. One reason is supply telecommunications, energy, transportation) constraints in the country and lack of and appropriate and efficient trade facilitation competitiveness in certain sectors. Another services. It will also depend on what the reason is complex rules of origin associated government can practically do to reduce with preferences and the difficulty that transaction costs - the costs of arranging, exporters encounter in managing them. This monitoring and fulfilling contracts since has long been a characteristic of preferential contracting lies at the business heart of market access arrangements, and the international trade. Phasing out policies that government will need to take full account of increase the costs of importing or provide this issue as it decides how much effort it protection to import substituting activities is should devote to securing preferential access. crucial, since these policies increase exporters' Equally importantly, some of the areas of costs and reduce their ability to compete for preferential access that Laos has been using in domestic resources and factors of production. the past are being phased out: this is Identifying and alleviating the main factors particularly the case for exports of garments. that constrain diversification will be crucial to allow for a more broad-based expansion of Market access conditions in the EU exports in the short and medium term. The EU is the largest single market for Lao This part of the report considers what actions exports. The strong growth in this market has the government can take to reduce the costs been driven by clothing products, which now and uncertainties that are specific to account for 90 percent of Lao exports to the international trade; the next part considers EU. what can be done to do the same for investment and business development. "No preferences, 110 textile in Laos". That is the view of the Lao Association of Textiles and Garments. An important issue for Laos is the extent to which the growth in clothing NEGOTIATING MARKET ACCESS exports has been driven by trade preferences, both direct, in the form of the EU's General One avenue to reduce uncertainty and increase System of Preferences (GSP) for developing returns for Lao exporters has been to seek countries, and now Everything But Anns preferential-and in the case of the United (EBA); and indirect, in the fonn of constraints States, Most Favored Nation (MFN) access on other competitor countries under the to export markets. Agreement on Textiles and Clothing (ATC). 10 If these preferences have been driving export This is the fourth highest rate of utilization growth, then Laos may be vulnerable to their among the 49 EBA benefIciary countries. erosion-immediately, with the end of the Actual preferences used in the EU market ATC; and over time if WTO negotiations are were equivalent to 6.6 percent of the value of successful and MFN tariff rates decline in the total exports in 2001 (more than 9 million EU. There are two forces in play: the Euros). If, however, preferences had been fully reduction in overall barriers to imports into utilized the transfer would have amounted to developed countries will increase demand for more than I 1 percent of exports (or more than textiles and clothing, but Laos may lose 16 million Euros). market share to more competitive producers. One reason for the remaining under-utilization Table 2 shows the value and utilization of EU is that the fInancial benefIts of the preferences preferences in 2001 (the most recent data are outweighed by costs relating to the rules of available). A high proportion of Lao exports origin. Complying with the rules typically to the EU are eligible for preferences, most of require producers to adopt less than optimal which relate to exports of manufactures (Le., input sourcing patterns and to incur costs in clothing). Almost 60 percent of the exports meeting certifIcation requirements. These that were eligible for preferences actually costs often exceed the gain from the margin of requested preferences in 2001 under the EBA. preference. Table 2.·iV."H·"~ of Laos to the EU and the utilization of available nr.,t·".""n ... "" Total Agriculture Manufacturing Total exports (Euro 000) 143716 8436 135280 Exports eligible for preferences (Euro 000) 133872 617 133256 Preferences requested (Euro 0(0) 78878 504 78374 Ratio of exports eligible for preferences to total exports (%,) 93.2 7.3 98.5 Rate of utilization of preferences (preferences 58.9 81.8 58,8 requested/eligible for preferences) (%) Value of preferences as a share of total exports to the EU (%) 6.6 1.0 7,0 Access to the US market Laos will also become eligible for GSP . preferences in the US when it completes Normal trade relations with the US, agreed in negotiations for WTO membership. 2005, offer great opportunities for increased exports in the clothing sector. The large fall in F.igUre 14. cam.b.o.dia takin. g advantage of applied tariffs with Most Favored Nation Normal Trade Relations in the US (MFN) status - from more than 50 percent to r us Import$fror'J1 Cambodia US$r-mlllo" less than 20 percent - could provide a 1800 N1Rlmpiemenled substantial stimulus to exports to the US. 1600 1400 Figure 14 shows that exports from Cambodia 1200 to the US were virtually zero prior to the granting of normal trade relations in 1996. In the subsequent 9 years, these exports increased dramatically, reaching around $1.5 billion in 2004. While exporters in Laos will have to face a more competitive environment than did Cambodian exporters, the liberalization of US tariffs still offers substantial opportunities for expansion. Again, the challenge is to ensure Access to the Japanese market that the local business climate and trade facilitating infrastructure allow Lao exporters Despite its relative proximity, Laos exports to respond to these opportunities. little to the Japanese market. In 2003, exports to the Eli were nearly 20 times greater than those to Japan. Laos is eligible for preferences II under the Japanese GSP. Most of the value of REDUCING AND RATIONALIZING preferences accrues to wood products, but the TRADE REGULATION tariff and the margin of preference of these products is relatively low. Laos has already made significant progress in reducing the costs of engaging in international The margins of preferences are larger for trade. Controls have been relaxed and direct clothing products. But here, again, the rules of taxation of imports and exports has been origin are an issue, since the rules for knitted reduced. products are more restrictive than those for non-knitted products. Liberalization of the These steps to liberalize international trade rules on knitted products could stimulate were taken unilaterally. Now, however, the greater exports to Japan and allow for greater main effort on trade policy is focused on utilization of preferences. regional and bilateral agreements the ASEAN Free Trade Area, the Early Harvest Access to East Asian markets and ASEAN Program (EHP) of the agreement between ASEAN and China, and the Bilateral Trade Lao exports to ASEAN members have grown Agreement with the United States (BT A) strongly during the 1990s and early 2000s. and on WTO negotiations. Tariff policy is Because Laos has a longer implementation also in line with liberalization, although there schedule (as a less developed ASEAN are cases of high tariffs on production inputs member) and has been slow in implementing which disadvantage industries that use these the ASEAN Free Trade Area (AFT A) inputs, especially where tariffs on competing Common Effective Preferential Tariff imports are low or where smuggling prevails. agreement (CEPT), it has not received the full Despite the liberalization that took place, the range of preferences available from other management of trade is still restrictive, with ASEAN members (as these are given on a burdensome, nontransparent, and inconsistent reciprocal basis). It has, however, been rules acting to increase costs and reduce. granted preferences for some products under a competition from new entrants. Further, bilateral agreement with Thailand. procedures for import licenses are, after some streamlining, still unnecessarily complicated, Lao exports to ASEAN are highly and leave room for bribes and unofficial concentrated by country (Thailand accounts controls. Reform in these areas has been for more than 96 percent of Lao exports to the constrained by the fragmentation and weak original 6 ASEAN member countries) and by capacity of the trade administration. product (wood products account for around 80 percent of total exports to ASEAN). Given the low MFN tariffs applied to most products in Import duties and their effective ASEAN countries, diversification of this protection export base will have to be driven by strong capacity to compete, underpinned by effective MFN import duties in Laos are low and not export promotion activities and cheap and highly dispersed (Figure 15). The highest accessible trade-supporting infrastructure current import tariff rate is 40 percent serVIces. (compared with about 150 percent in 1995) and for most products the tariff rate is below Laos could leverage ASEAN membership to 15 percent. The tariff schedule has six rates: support export diversification and growth by 5, 10, 15, 20, 30, and 40 percent, with an joining the other ASEAN countries in unweighted average of 9.5 percent in 2003 hannonizing around international standards, lower than many neighboring countries and implementing a strategy of mutual (Figure 16). The import-weighted average recognition of testing assessments, in order to MFN duty rate on imports is lower and the reduce technical barriers to trade and therefore standard deviation of these rates is fairly trade costs. small. There is some tariff escalation in the tariff schedule, and thus effective rates of protection are likely slightly higher especially in processed food and beverages (Figure 17). 12 Figure 15. AFTA implementation increases under AFT A's Common Effective Preferential trade 0 enness Tariff Agreement, imports from ASEAN °/d5ra-eof taiff lire;silljECl to MFNor AFTA ta"iff countries of most products will face a zero m,~~-~-~···--····~·-~~··~·~·~ tariff, and nearly all will face a tariff of less than five percent. There is scope to further rationalize tariffs by reducing the number of tariff bands and further reducing the maximum tariff. However, the biggest impediments to trade~both imports and exports-are non-tariff barriers. Non-tariff barriers to imports Foreign exchange management and import planning As recently as 2002, foreign exchange controls were operated in conjunction with restrictive import licensing under a system that was a carry-over from the period of central planning and direct government control over the enterprise sector. Under this system, the government drew up an annual import-export balance plan. Projections were made by the central bank of the likely sources and uses of foreign exchange. As part of this process, firms were required to submit estimates of their expected annual foreign exchange earnings. They also had to submit requests for allocations of foreign exchange to pay for their projected import requirements. Once each firm's plan, or amended plan, had been approved it fonned the basis of that firm's access to the foreign exchange need cd to pay for imports. As an incentive to export, finns with export earnings were given ready access C.ommOdlties.oes. Vllscelianeous ~"".' "~' ..'.... ' " to their own foreign exchange earnings if they wished to use them to pay for their own MachInery & transport 0 Manufac!uredgoods "b, '" , · weighted MFN imports, whereas firms without foreign Cherrleals 'Y ED urwveigh!ed MFN exchange earnings were unlikely to obtain as Animal/vegetaoleoillfsl ) #'".)cj!!'''".~1 much foreign exchange as they wished. r Mine alfuelliubrica:1ts " ' Crude~aterials ~ Although foreign exchange controls and import licensing have been greatly liberalized, B::::~~:el::i::I: ,.@:!I.;II:::II::.:.:~.;.I!I:;g.:.~ ..... the process is hard to document because the 5 10 15 20 25 30 35 40 import licensing decrees have not been average tariff:'1 ;Jercent rescinded and the list of products subject to import licensing is largely unchanged. What Note: SITC classification has happened is rather that the increased Source: MOC availability of foreign exchange, the devaluation of the kip at the official rate and Implementation of Laos' obligations as a the central bank's relatively tight monetary member of AFT A is also reducing the average policy since 2000 have combined to eliminate duty levied on many imports. By the time that excess demand for foreign exchange at the Laos has fully implemented its obligations official rate and import licenses that were once tightly restricted are now freely available. 13 least 214 non-tariff measures on imports at the The controls and decrees have been retained provincial government leveL Some provincial partly as a registration measure and partly in governments have been slow to implement case of the recurrence of a foreign exchange directives from the central government. As a crisis. While it is no longer a problem to get result, directives from the central government approval for the import-export plan, in practice to relax import licensing restrictions were not the process is not always transparent and often necessarily implemented by the customs posts a hassle to firms. If a company changes its in the provinces. export-import plan during the year, it has to have it re-approved. While few firms The incentive regime for exporters complain about not receiving the foreign exchange they need, maintaining such a Export taxes and licenses. Export licensing is system is no longer necessary. regulated by the same decrees and notices that regulate import licensing. Even exporting Import licenses for general goods general goods requires several signatures and documentation. Prohibited exports are Import licensing is regulated by a decree explosives, weapons, drugs, antiques, wild issued by the Prime Minister's Office, and animals, logs and sawn timber, pornography, annual notices that set out the lists of goods to and currency printing equipment. The most which the particular provisions in the decree important of these bans is on exports of logs apply. One notice deals with prohibited and sawn timber, which is imposed partly for imports, and the other identifies products for environmental reasons and partly to prevent which import licenses are needed. the illegal logging of national forests. Some goods are not banned from export but require Most of these licensing requirements are export licenses-these include diamonds, merely 'technical measures' that are used for minerals, wood and forestry products. quality control, safety, animal quarantine or SPS which are implemented through single Introducing a duty drawback scheme may be window services at the border checkpoints. needed to provide exemptions for imported While such technical measures can potentially inputs used by indirect exporters. Laos be used for protective purposes, both allows duty exemptions on raw materials for government officials and private sector firms exporters and is in the early stage of setting up reported that the restrictive nature of import special economic zones. It further adopted two licensing is now much less than it was even PM's decrees in 2002 to create border trade five years ago. As recently as 2002, there was zones, one with Vietnam (Dan savanh-Lao a blanket provision for imposing import Bao) and one with China (Boten-Bohan). Most licensing requirements on any product that the exporters use packaging and labeling inputs MOC or line ministries migbt wisb to license. that are supplied by firms that specialize in Tbis condition has now gone, although the these services. Garment exporters often use corresponding condition for exports is still in local firms to perform specialist functions, place. In the case of exports, it is maintained such as embroidery. There are undoubtedly so that the authorities can try to hold down the many more examples and the importance of domestic prices of sensitive items. indirect exporters will increase as the manufacturing sector grows. In Laos, indirect The two products for which import licensing is exporters generally pay duty on their inputs. most important and most restrictive are cement The reason is that since they sell some of their and steel rods for construction. In both cases, output domestically, as well as selling some to import licensing is used to protect domestic final exporters, it is seldom practical for them producers-as is the case in many developed to use the bonded warehouse operations that and developing countries. The licensing of are typically used by specialist exporters as imports of vehicles is now used as a part of a duty exemption system. Without a registration device and importers have mostly duty drawback scheme, the cost of the services been allowed to import as many vehicles as supplied by indirect exporters is raised by they want. tariffs on their inputs and this disadvantages the final exporters. In addition to the licensing requirements applied by the central government, there are at 14 Now that Laos has developed a substantial Box 1. Current import and export procedures manufacturing export sector, a duty drawback scheme could help boost exports. However, it Import procedures for general goods. For goods not subject to import prohibition and government would not directly address the impact of non controls, an importer submits an import indicative tariff barriers on the costs of importing plan to a provincial trade office, or to MOC in the production inputs, and would need to be capital. After approval, the importer forwards the assessed in light of the ability of Customs plan to the trade authority at border checkpoints authorities to take on additional administrative for monitoring actual importation. and regulatory challenges. Import procedures for controlled goods. MOC is responsible for monitoring the importation of Import and export procedures vehicles and parts as well as fuel and gas. For other controlled goods, the importer needs to submit a request to relevant authorities before Because of the continued extent of trade clearing goods out ofthe warehouse. licensing, import and export procedures Import procedures for investors with remain cumbersome. While these instruments concessional tariff rates. The government may not be aimed at restricting trade, they promotes domestic and foreign investment in create opportunities and incentives to increase most economic sectors. Investors can import raw the costs of trade. Imports under some 40 materials and vehicles for production and pay percent of the ten thousand odd tariff lines in customs duties at only I percent, with prior the tariff schedule, and exports under around approval from the Committee for Planning and Investment. This process can take two to three 16 percent of these tariff lines are under the weeks. control of government agencies. This can lead Export procedures for general goods. Goods to some friction in the procedures summarized which are not subject to government control and in Box I. prohibition can be exported without any license. But the exporter needs to prepare necessary STREAMLINING CUSTOMS documentation such as business and tax registration, invoice, packing list and in some circumstances certificate of origin for preferential Despite major progress and reform effort, treatment purpose to present to the single window customs remain a stumbling block to imports service at the border checkpoints. and exports. Importers complain about Export procedures for controlled goods. Goods lengthy, costly, and unpredictable procedures. subject to approval from relevant authorities prior The capacity of the Customs Department is to export are provided in the ~otification no. still weak, the authority over Customs 285/MOC.FTD of 17 March 2004. The Import clearance is spread across ministries and Export Department of MOC oversees the regions, and informal payments are still exportation of rough and unwrought diamond as widespread. Much remains to be done to welI as mining. AlI other types of goods are make the Customs Department a modern one, subject to approval by relevant authorities. To including in the areas of legislation, export these products, the exporters first submit a request to trade or relevant authorities. Once organizational structure, human resources, approved, they can go to the single window computerization, clearing procedures, and service and clear goods. enforcement. · Direct clearance of goods at the factory is The process for clearing import and export permitted in certain situations. cargo has been greatly simplified in recent years, resulting in substantially reduced Despite these improvements, customs clearance times both in Laos and at the transit procedures for clearing imports and exports facilities in Klong Toey. For example: remain unnecessarily cumbersome, and the · The ASEAN Harmonized Tariff customs system as a whole remains weak and Nomenclature has been implemented. fragmented. Clearance still includes redundant · A single administrative document similar steps, risk management techniques are not to (but not entirely aligned with) the UN employed, and virtually all goods are Layout Key format was introduced in inspected. Valuation procedures are currently 2000. This document is used for imports, not in accordance with the WTO's Agreement exports, and transit goods, and replaces 16 on Customs Valuation (ACV), though the separate doeuments. revised Customs Law approved by the NA in May 2005 contains provisions on GATT 15 valuation. The Department does not exercise structure, clearance procedures, and full managerial control over field staff, enforcement. Donor coordination in these because of the delegation of trade areas is crucial. administration (and often policy) to provinces; procedures are oriented toward control rather To address these issues Customs has proposed than facilitation; smuggling and corruption are a revised action plan that includes the still problems; and the newly established post establishment of a national customs audit function is not very credible. administration with a vertical management structure. This plan is awaiting government Further, some of the gains achieved through approval. The Government should also give a past reforms have been offset by new very high priority to the implementation of the procedures that add costs, both formal and revised Customs Law and supporting informal, without providing significant regulations. As the new Law entails a major advantages. New regulations have also been departure from existing polieies and practices, introduced without consulting stakeholders or including meeting WTO requirements, a considering the impact on trade. A recent comprehensive policy and procedures manual example is the decision in 2004 to stop will need to be developed for use by Customs clearing imports at the warehouses of larger staff and the public. Extensive work will be importers, and requiring that they be cleared required to develop the new regulations, instead through Thanaleng. This decision including a detailed assessment of existing increased handling costs and damage to cargo regulations, writing of new or revised as a result of third party handling. regulations, and in implementation activities such as training and public information. The most important customs reforms needed to speed up the transit of goods include: (i) an IMPROVING TRADE LOGISTICS institutional commitment to trade facilitation, in accordance with the goals of the Kyoto Of the three dimensions of Laos' status as a Convention; (ii) immediate attention to landlocked country, one physical isolation clearance of goods under temporary from markets - is not really a problem, given admission, and associated exports; (iii) its proximity (700 km) to ports in Thailand establishment of bonded facilities at exporters' and Vietnam. The second dimension, factories, to allow containerized goods, both inefficiency of logistics services, is being inbound and outbound, to be cleared at the resolved; the Transit Agreement with factory. Changes in procedures are also needed Thailand, ratified in 2004, will expand to address problems of transparency and eompetition and should provide a significant corruption, such as a reduction in the number reduction in logistics costs. The third aspect, of signatures (from Customs and other however - the lack of infrastructure and the agencies) required for clearance; lack of capacity at border crossings (land computerization of customs documents; borders, international ports, and airports) - is a implementation of valuation procedures serious barrier to trade. The limited number of consistent with the ACV; and introduction of official international crossings and the direct trader input and channeling (some of the cumbersome procedures at both crossings and problems that traders encounter when clearing gateway ports add time and cost and reduce goods result from uncoordinated processing by the reliability of delivery. Efforts to improve several government inspection and control the efficiency of Laos-Thailand border agencies.) The government needs to rationalize crossings and the Thai ports have been the involvement of other government agencies somewhat successfuL However, the customs in the clearance process. and trade management systems remain weak The capacity of the Customs Department also and fragmented: as a result, examples of needs to be upgraded, since the lack of (i) world-class facilitation exist alongside modem equipment, (ii) a risk management restrictive practices and rent-seeking activities. system (which would eliminate the need to inspect every shipment), and (iii) sufficient Where does the logistics sector stand in numbers of trained personnel all seriously relation to other sectors? undermine its ability to function effectively. Reforms and improvements are also needed in The logistics sector should be evaluated in the areas of legislation, organizational relation to the trade and production profile in 16 Laos. The formal business or enterprise sector eventually extend from the Chinese capital to in Laos consists of a limited number of small the tip of the Malay Peninsula. firms. As exports develop, these firms will need to move to larger orders and tighter order Inbound and outbound supply chains via cycles, which will require more sophisticated Bangkok and efficient logistics. Prior to the revision of the Lao-Thai Transit Land transport Agreement in 2004, the structure of the basic supply chains for imports and exports had not Roads carry about two-thirds of freight changed substantially for some time. Most traffic, and this share is growing. Recent goods shipped out of Laos were shipped investments in road infrastructure have unbundled in trucks (not containers) and focused on restoring the arterial road network, loaded into Thai containers, as Lao trucks especially National Route 13, which runs from were not allowed into Thailand. If the changes the North to the South of the country; as well allowed under the Agreement were combined as some links connecting Laos to Vietnam and with a reorganization of consolidation China. For the latter, the major undertakings activities and a reVlSlon of customs include rehabilitation of the east-west procedures, there would be significant connection between Savannakhet and Lao reductions in time and cost for the movement Bao; the construction of the Northern of goods between their origin or destination in Economic Corridor connecting Thailand and Laos and the transshipment terminal in China; and the Greater Mekong Subregion Singapore. initiatives on Lao-China trade. The basic movement of goods involves a six While the domestic network is limited, much or eight- wheel Lao truck transporting exports of the country has access to the extensive from the point of production across the border road network in Thailand through major to Nongkhai. From there, the cargo is crossings at Nongkhai/Thanaleng, Mukdahanl transferred in a back-to-back operation to an Savannakhet, and Chong MekiPakse. These eight- or ten-wheel Thai truck and transported three main transit corridors connect Bangkok to the Bangkok port, where it is put into a with the north, center, and south of the container and loaded onto a vessel for country. The most extensively used corridor is transport to Singapore. If the consignment is the one connecting Bangkok to Vientiane. large enough, the cargo is shipped as a full container load (FCL) container; if not, the The connections to Vietnam are not as well cargo is consolidated with other cargoes developed. The Agreement on Road Transport having the same destination and shipped as a signed between Laos and Vietnam in 1996 less than container load (LCL) container. designated eight checkpoints. The main While domestic Lao containers are now corridors have much less transit traffic than the allowed to move between Nongkhai and Thai routes. While they provide shorter access Bangkok, mostly Thai containers are used, to the sea, the roads are narrower, slower, and typically coming empty from Bangkok. more difficult to traverse. They cannot support significant container traffic without The lack of a container storage depot in Laos improvement. Furthermore, the Vietnamese or near the border means that the transport of a ports do not offer the same level of service as container either inbound or outbound usually the Thai ports. involves an empty move, and the exporter thus incurs the cost of a round trip. Empty There are several border checkpoints with backhauls are less of a problem for loose China, but the most promising corridor is the cargo, as there are more opportunities to find North-South extending from Beijing to cargo for the other leg of the journey. Thai Singapore. The principal corridor is from trucks delivering loose cargo to Nongkhai or Kunming through Boten to Houayxay to Thanaleng can carry domestic cargo on the Thailand. Upgrading of this corridor on both return trip to Bangkok. Similarly, Thai trucks the Chinese and Lao sides is underway. Given delivering domestic goods to the Northeast can the good road connections between Bangkok pick up Lao export cargo at Thanaleng or and Singapore and from Kunming to Beijing, Nongkhai. It is more difficult for Lao trucks the North-South Economic Corridor could to do the same, since they cannot carry Thai 17 domestic cargo and it is difficult to coordinate impact on the competitiveness for the SMEs is movements of Lao cargo to and from the cost for moving LCL cargo. The transport Bangkok. of loose cargo is charged based on volume, unless the shipper pays for the entire truck. Trucking services and tariffs The charge for a load of mixed consignments is significantly more than the truck rate, so The Lao trucking industry is highly shippers ship their goods on partially loaded fragmented and largely informal. There are trucks. It should be possible to eliminate this relatively few articulated trucks and almost no problem through the efforts of consolidators in container chassis. The majority of trucks are Vientiane or Nongkhai. either very old Russian or used Korean and Japanese trucks. Most trucking is provided by What can be done? independent operators with one or two 6- or 10-wheel, rigid body trucks. Even formal Developing logistics services (registered) trucking companies have relatively small fleets and rely on independent operators For smaller exporters, improvements in for peak capacity. logistics require strategies to consolidate cargo in order to achieve economies of scale. In Lao trucks have difficulty operating in order for smaller exporters to improve their Thailand and are therefore at a cost logistics and take advantage of economies of disadvantage. Lao trucks are used for long scale in transport, they need better domestic movements (up to 800 km) and for opportunities for consolidating cargo. To carrying cargo to Vietnamese ports. They do achieve this, it is necessary to strengthen the not operate in Thailand because of certification capacity of freight forwarders to handle these requirements, alternate side of the road shipments, both individually and with their operations and, most important, lack of international partners. Typically, Lao backhaul cargo. Since Thai trucks are able to forwarders are used for exports and Thai carry cargo in both directions, they can quote forwarders for imports. lower rates. For international trade through Vietnam's ports, the Lao truck operators have At the same time, it is necessary to develop resolved the backhaul problem by transporting larger transport companies in order to exports up to the port and allowing the driver improve fleet management. Larger companies to wait at the border to pick up shipments for are better able to handle larger orders and the return trip from Vietnamese truckers who improve their efficiency by automating cargo are unwilling to enter Laos. booking and fleet management. While it would be difficult to increase the size of these firms Transit rates through Thailand have dropped through capital investment, given current as a result of the new Transit Agreement. market conditions, they can be expanded Rates have declined by around 30 percent: but through mergers and contracting most of this fall was due to the increase in the arrangements. Mergers among Lao companies number of Thai trucking companies allowed to involved in international road transport would compete for the haulage of cargo under not affect competition, since an increasing customs bond, rather than to an opening of the number of Thai companies are entering the market to Lao truckers. More than 164 Thai transit market as a result of the new Transit trucking companies have received a permit to Agreement. Nor would such mergers have transport international transit traffic, although much impact on competition in the domestic so far only 20-30 have deposited the required market, given the highly fragmented structure one million baht bond with the Customs of the trucking industry. Alternatively, larger Department (the rest limit their activities to firms can expand through subcontracting of direct trade between Laos and Thailand). independent truckers and through joint None of the Lao trucking companies have ventures with larger Thai logistics providers. received a permit, although some are forming Both are already occurring. joint ventures with Thai companies that have this permit. Increased access to the transit market can be achieved through joint ventures. While the Of the various logistics problems facing Laos new Transit Agreement nominally provides in foreign trade, the one with the greatest open access for Lao transporters, the 18 procedures for licensing Lao trucks and In contrast to the burdensome regulations for drivers to operate in Thailand is less clear. trade, Laos only minimally regulates logistics Furthermore, in order to compete with the services. This is advantageous, as attempts to relatively well-organized Thai logistics regulate this dynamic industry would limit its industry, Lao trucking companies will need to ability to change in response to competition improve their management capacity and skills, from foreign service providers. However, a and invest in new trucks that can operate proactive approach will be required by the efficiently in Thailand. industry to upgrade the quality of its services. While there have been some efforts to provide Joint ventures are also needed to overcome the training. more needs to be done to improve limited information available to Lao standards and make both the providers and forwarding companies about the availability of users aware of these standards. Government loads, especially for backhaul moves. Indeed, regulation can contribute to this effort by: two Lao companies have already developed · improving the allocation of liability for such relationships. cargo losses, and for providing cargo insurance for logistics compames at Reducing regulation reasonable prices; · facilitating customs clearance by licensing The current emphasis in the global market is customs clearance agents. Currently there on reducing the time it takes to fill orders. This is no such requirement, and consignees places additional pressure on exporters to clear about 80 percent of the goods reduce their delivery times for inputs and lead delivered to Thanaleng. This not only times for export. Bureaucratic procedures that increases delays and malfeasance, but also delay these transactions create a competitive discourages the introduction of modem disadvantage for Lao companies. procedures and technology. Furthermore, without a professional clearance agent While efforts to reduce regulatory delays organization, Lao customs has no channel usually focus on improving customs through which to communicate changes in procedures, more significant delays and procedures. impediments result from government controls · certifying products and enforcing over imports and exports. The import and standards applied by trade partners; e.g., export procedures in Laos are among the most quality of material used, country of origin, restrictive in the region, requiring not only the and chemical content. This does not imply registration of companies that engage in trade, that government laboratories should do the but also annual trading licenses specifying the testing, as these labs are usually inefficient volume that will be traded, and authorizations and often ineffective. Rather, the for each shipment that must be checked government should oversee private testing against the annual allocation. The time facilities and reporting procedures. required to obtain these authorizations is said to average about two weeks because of the Implementing the Transit Agreement with need to process the documents through Thailand different agencies, each in a different location. For importers and exporters located outside of Many of the features of an effective transit Vientiane capital, there is the additional delay corridor through Thailand have been of processmg the documents through implemented on a piecemeal basis. The provincial offices. These procedures, Transit Agreement for movement of goods in combined with the requirement to prepare a transit is an attempt to introduce a more plan of annual imports, all act to inhibit trade. comprehensive arrangement between Laos and Further, relatively few exporters have annual Thailand. While this agreement has already orders from their buyers. Rather, the exporters significantly liberalized the movement of must be able to respond quickly to new orders, goods between the two countries, full which have, at most, a six-month lead time. implementation will require further Even for manufacturers with long-term orders, clarification concerning: these represent only a portion of their total · Requirements that Lao trucks must meet in output. order to operate on Thai roads. Without a clear statement of what regulations apply 19 to Lao truckers, it is likely that their initial destination. This process reduces the delays efforts to operate in Thailand will fail. for each consolidation, and increases the · Procedures for sealing cargo in transit. portion of the trip from origin to final Thai customs continue to remove the seals destination that is containerized. This strategy from import containers destined for Laos is information intensive but not necessarily and affix their own seals. They also capital intensive, and can be replicated for continue to replace Lao seals with their relatively small traffic volumes. Such a system own on export containers at the time they would significantly improve the competitive enter Thailand. There is no reason to position of the smaller Lao exporters, which replace these seals or to inspect the export primarily LCL shipments. contents of the containers, except in exceptional situations and then only in the The challenge for Laos is to replicate this presence of Lao customs. system despite the small volume of traffic. · Procedure for bonded movements. Within There have been efforts in this direction, with Thailand, the Thai international Freight cargo consolidated into domestic containers Forwarders' Association (TIFF A) provides and carried by truck to Bangkok. But so far Thai trucking companies with guarantees this has not been cost competitive. To be for payment of duties should the goods competitive, movements in domestic and they are moving fail to exit Thailand. The maritime containers must be tightly integrated. trucking companies must also be bonded This requires improved cross-docking in for carriage of goods in transit. Bangkok, and better integration between Comparable arrangements need to be domestic and international freight forwarders established for Lao truckers and and transport companies. The service should forwarders, possibly through a joint be provided by the business or enterprise arrangement with TIFF A. sector on a competitive basis. Because of the · Service charges for transit movements. need to coordinate the deconsolidationl The Transit Agreement leaves these reconsolidation activities, it may be necessary extraneous charges to subsequent for the same party to provide the service in discussions, but indicates that they should both Vientiane and Bangkok. not exceed the rates for comparable domestic services. It is important to agree In order to implement this system for small on these rates and make them known, and scale industries, the following actions and to provide better enforcement in order to conditions are necessary: reduce informal charges. · A study of commercial viability, including forecasts of (i) the volume of consolidated Developing LCL logistics cargo exported over the next five years by major destination; (ii) savings from the The development of an efficient supply chain introduction of an efficient consolidation/ for small shipments, specifically loose truck deconsolidation operation in Vientiane and load or LCL consignments, has been slow to Bangkok; and (iii) the revenues generated evolve. Consolidation has traditionally by such an operation; occurred at the port of export. This procedure · Agreement between Thai and Lao allows shipment of a full container with mixed Customs for facilitated movement of consignments in order to minimize costs, consolidated shipments under bond including those for handling of and damage to between bonded warehouses in Laos and cargo. However, consolidation also increases Bangkok; transit time, since it may take up to a week to · A bonded warehouse for consolidation of acquire sufficient cargo for onward shipment cargo, with a competitively bid concession to the destination port. Further, consolidation for operating the warehouse; is only done for shipments going to major · Expedited procedures for processing destinations. consolidated shipments in Bangkok; · Competition in the provlSlon of A new strategy that could be useful to Laos deconsolidation/reconsolidation services in involves mUltiple consolidations in a door-to Bangkok; door movement. The initial consolidation · A system to supply the information occurs close to the source of production, while required by customs, international the final deconsolidation occurs close to the transporters, and forwarders to plan and 20 coordinate the movement of consolidated ADDRESSING SPS NEEDS shipments. Laos has high agricultural growth potential, Inland container depot/dry port and demand from neighboring countries for Lao fruits and vegetables, coffee, and possibly Establishing an inland container depot can high-quality beef is increasing at a rapid pace. reduce the transport costs of containerized However, the growth in agricultural trade is cargo. Implementation of the Transit constrained by the lack of capacity, in both the Agreement with Thailand and increased public and business or enterprise sectors, to competition among trucking companies and meet international sanitary and phytosanitary clearance agents has caused the rates for (SPS) requirements on food safety and animal transport of containerized cargo to fall and plant health. Meeting these standards will substantially. However, these rates are still require more skilled staff and better laboratory relatively high, because of higher truck equipment; the creation of databases on operating costs and, more importantly, the diseases and pests; and the capacity to monitor need to reposition empty containers from the avian flu, foot and mouth disease, and unloading point for imports to Bangkok and agrochemical use; and to carry out risk from Bangkok to the point of loading for assessments and cost-benefit analyses. The exports. lack of capacity in these areas is already affecting market access for coffee and wood To address this problem, Laos could establish products, and is adding to cost and risks for an inland container depot (lCD) that would other products that have been drawn to Laos operate as a dry port. Currently, most import by trade liberalization. containers are designated for delivery to Bangkok and the consignees or their Developing these capacities will involve large representative arrange for onward movement. upfront costs. Therefore, an action plan is With an lCD/dry port, the inland transport for needed to (j) carry out a comprehensive import containers having Vientiane as their assessment of current capabilities; and then (ii) port of destination can be arranged jointly for outline a gradual approaeh to SPS all shipping lines through one or more trucking management and capacity building. Other companies. 3 This arrangement would reduce priority actions include: costs associated with this movement, and · drafting of pertinent legislation, eliminate the need for a bank guarantee or and rationalization of existing regulations; detention charges. For exports, the shipping · creation and maintenance of databases; lines could issue a bill of lading with · setting up an emergency response system; Vientiane as the origin port and then assume · human resource training and technical responsibility for transportation to Bangkok capacity (equipment and facilities) for the and beyond. The lCD/dry port could also be control of animal diseases. used to store empty containers until they are reloaded, thus increasing the percentage of Priority issues loaded backhauls and reducing trucking costs. SPS concerns are focused on several mam A proposal has already been prepared by a areas: private operator to establish an ICD at a new location near Thanaleng. The final choice of Phytosanitary certificate for coffee. location should be part of a broader strategy Phytosanitary certificates to export coffee are for improving supply chain performance. A issued upon the request of the exporter (or marketing study is needed to identify the foreign importer). The phytosanitary concern performance characteristics needed to make is that fresh coffee beans have a risk of the ICD successful, including the level of carrying fruit flies and coffee rust disease. coordination needed between with customs However, there is usually no such concern for and transport services. dried, unroasted coffee beans for consumption. Risks from informal border trade. Pests and 3 As an example, the operators of the lCD in Sialkot, Pakistan also provide a trucking service between the ICD diseases in animals and agricultural products, and Karachi which is one of the best trucking unsafe food, and harmful pesticides can easily operations in Pakistan. 2l get into Laos through uncontrolled and However, most fanns are too dispersed and unregistered border trade. Neighboring remote to easily get organic certification. countries are exposed to the same risks from the products transited through Laos. What needs to be done? International Standards for Phytosanitary The WTO accession process adds to the sense ,~Ieasures (ISPM) 15 for wood packaging. of urgency about meeting SPS requirements, ISPM 15 presents the guidelines regulating and a number of Lao officials have expressed wood packaging material, primarily to control the need for a comprehensive discussion of the spread of timber pests through the SPS management that will: movement of timber packing and dunnage in · define the basic capacities needed to international trade. Many countries have effectively manage food safety and implemented procedures to accept ISPM agricultural health in the context of the compliant imports. Laos has not yet country's economy; implemented the ISMP measures; nor has it · identify factors that detennine priority conducted risk assessments to detennine the actions; e.g., a product's potential for the possible presence of wood pests. export market; · consider possible gaps and overlaps in Avian influenza. Avian flu was con finned in functions and responsibilities. Laos in January 2004. Accurate surveillance and diagnosis are not readily available in many There is also clearly a need for a more detailed Asian countries, including Laos. assessment of present SPS capacities, in order to better identify needs and priorities in Foot and mouth disease. Laos is one of capacity building. Preparation of an action several Southeast Asian countries where foot plan would serve this purpose, since it would and mouth disease (FMO) is endemic. The require infonnation gathering and assessment occurrence of the disease could be attributed to of the following issues: Laos being a major transit corridor for · institutional responsibilities and livestock trade from Vietnam to Thailand, coordination; from Cambodia to Thailand (through the south · adequacy of the legal and regulatory of Laos), and from China to Thailand (through framework; northwest Laos). Certain trading practices are · databases on food-borne diseases, and pest also considered a factor in the spread of the and disease databases on agricultural disease - traders buying infected animals for health issues; lower prices and selling them in other areas for · capacity to perfonn risk assessments on slaughter. Praetieal and feasible solutions are food safety and animal and plant health; needed to control the movement of livestoek. · capacity to do cost benefit analysis on options for public intervention on food Potential areas for growth safety and animal/plant health issues; · capacity for managing health hazards, Traditional crops. Traditional crops such as animal diseases, and plant pests, including rice and maize have low requirements for SPS a rapid alert system; services, and their cultivation can easily be · technical and human resource capacities to expanded. prepare policies, monitor food safety and agricultural health, perfonn tests for High-quality beef The country's large inspection, and issuance of certificates; grassland areas offer opportunities for the · awareness of food safety among production of high-quality beef. However, the stakeholders; costs of necessary veterinary controls and · work programs carried out by the various investments for developing high-quality beef serVices; exports are high. A feasibility study is needed · business or enterprise sector capacities; to assess the costs and benefits of public and · capacities for tracking and tracing and private investments in this sector. quality assurance. Organic farming. Since the use of chemicals in agriculture is not common in Laos, organic fanning could be a possible niche market. 22 LEVERAGING WTO ACCESSIOl\" Everything But Arms initiative. Laos' membership in the WTO will give its Laos has started the process of joining the exporters the assurance that their goods will WTO. Along with implementation of the continue to receive MFN treatment. The only country's commitments to AFTA, and the market access gain that might accrue is GSP bilateral trade agreement with the United access to the US market, since US laws States (which calls for some actions that Laos prohibit extending GSP treatment to will have to take as a member of the WTO), communist countries unless they are WTO the accession process could playa key role in members. shaping the country's approach to integration in the coming years. How can Laos best utilise WTO accession can be an anchor for Laos' accession and membership in the pursuit of its own reforms. The process of negotiating integration strategy? membership and complying with WTO rules requires countries in transition to create the WTO accession presents Laos with basic laws, policies, and institutions that opportunities to improve its trade policy and support a market economy; to create a trade economic competitiveness as well as regime based on the rule of law; and to publish supporting its domestic reform agenda. all trade-related regulations. These measures However, it also taxes the institutional help create an investment climate that is more capacity of the government and the business or predictable, thus reducing transaction costs for enterprise sector. Donors and international importers, exporters, and investors. In addition agencies can help to build this capacity, but to strengthening the foundations of a market the benefits of membership will depend on economy, joining the WTO can reinforce Laos having a clear vision of how it wants to domestic economic policy reforms. Nowhere use WTO membership to further its trade and is this more evident than in East Asia, where reform agenda. China, Cambodia, and Vietnam all treat WTO membership as an integral tool to reinforce The road to WTO accession is not easy for their economic refonn programs. developing countries, and particularly those transitioning from a centrally planned to a Membership in the WTO will give Laos a seat market economy. WTO membership requires at the table when countries negotiate the significant legal, administrative, and rules governing international trade. Among regulatory reforms, which are difficult to the issues being discussed in the current round implement in low-capacity environments. In of negotiations (known as the Doha neighboring Vietnam, accession talks have Development Agenda), those that are focused on passage of new domestic important for Lao trade include: legislation compatible with WTO · Trade facilitation. Laos would benefit commitments, and on a demonstration of from stronger disciplines on transit rights Vietnam's capacity to enforce these laws and increased transparency of customs effectively. Laos faces similar issues, and is procedures. attempting to resolve them and gain entry · Full developing country participation in before the Doha Round, after which entry tariff liberalization. While enjoying requirements may get even tougher. preferential access to markets in the region and in developed countries, Lao exporters Potential benefits for Laos from WTO face high MFN tariffs in many developing membership country markets, including fast-growing economies that are potential markets for Market access usually dominates attention Lao exports (e.g., India). given to WTO accession. But Lao exporters · Disciplines on anti-dumping. As a already receive MFN treatment or better in the country in tranSItIon from central markets of their major buyers. Other ASEAN planning, Laos may not obtain market members grant preferential access on a economy status and could become reciprocal basis, and most OECD countries vulnerable to anti-dumping actions by unilaterally offer low or zero duty treatment on other countries. Stronger disciplines on imports from Laos through programs such as anti-dumping could force WTO members the Generalized System of Preferences (GSP) or, in the case of the EU, through the 23 to use less discriminatory and more recourse to contest protectionist trade policies. transparent policies. This allows small and poor countries to · Access to patented drugs: Laos would compensate for their lack of political power in benefit from greater flexibility under the trade disputes with larger and richer partners. TRIPS agreement to use compulsory For example, soon after Ecuador joined the licensing and parallel imports to ensure WTO, it quickly used the process to challenge access to patented medicines. the EU's banana import policies. However the costs involved in the dispute settlement The WTO dispute resolution mechanism will process could still be a constraint for many put Laos on equal footing with larger, richer developing countries. members. Access to the WTO' s dispute settlement procedures is a fundamental benefit of membership, giving a member legal MAKING INVESTMENT AND DOING BUSINESS EASIER Export diversification and growth will not · maintain macroeconomic stability through occur without investment, and a central prudent monetary, fiscal, exchange rate element of an integration and export and interest rate policies; diversification strategy for Laos is to improve · improve the financial sector; the climate for investment and carrying out · improve the business climate by creating a business. predictable and transparent po licy environment; Detailed assessments of the various elements · streamline administrative procedures and that make up the investment climate suggest regulations that are an obstacle to domestic that the lack of competitiveness is a major and foreign private investment; and impediment to attracting investment to Laos. · strengthen market institutions, including Barriers to competitiveness include: most notably those related to dispute · poor infrastructure absence of a railway resolution and contract enforcement. system, a low-density road system (less than 100m per km2), lack of year-round These are difficult challenges to address, but access to many district centers - which is a they lie at the heart of an effective trade major obstacle to the development of an strategy for Laos. integrated domestic market; · a difficult business environment - while MACROECONOMIC MANAGEMENT Laos has cheaper labor than other countries in the region, productivity is also While the economy has recently shown lower, and it ranks 144th out of 145 relatively robust growth, driven largely by a countries in terms of the length of time that surge in mining activity, the pace of structural it takes to start a business, and 150th out of reform has been slower than envisaged, 161 on the cost of doing business. Limited leaving underlying weaknesses. The fiscal foreign investment and low numbers of position is fragile, with high public debt (75 domestic private firms are an indication of percent of GDP); weak revenue collection; how difficult the investment environment major liabilities in the state bank system is in Laos. In a country of 5.5 million (which the budget will have to absorb when people, there are only a few hundred the banks are fully recapitalized); and manufacturing firms with more than 10 structural problems in the tax and customs employees. systems, including lack of central controL Further, the financial sector lacks the well To address these challenges, the NGPES has functioning payment system and efficient laid out the basic framework for the reform financial intermediation needed to support agenda. It stresses the need to: business or enterprise sector investment and the diversification of exports which is 24 important because the large power and mining transmission of national revenues to the projects that are expected drive growth in the center; next few years will not contribute much to · improve budget planning and execution, employment. by updating the budget's nomenclature and developing supporting accounting systems; The National Growth and Poverty Eradication and Strategy highlights several key reforms in the · develop a central government cash area of macroeconomic management that are management system. needed to overcome these challenges. There is also a need to review the regulatory The first priority is to strengthen fiscal framework for fiscal relations between the management, particularly in the areas of: central government and the provinces, to · revenue mobilization, to offset tariff clarify the assignment of revenue and revenue declines resulting from AFT A expenditure responsibilities, and develop a commitments. Priority measures include robust mechanism for inter-governmental strengthening the tax and customs systems transfers. in the short run, and introducing a V AT in the medium term; and With regard to the banking system, which · public expenditure management, to must be able to support the Government's address lack of control over provincial development goals and meet the competitive spending, and improve budget planning challenges of regional integration, the main and execution. emphasis continues to be on the reform of state banks, as they dominate the banking Another key priority is to establish a system. 4 However, progress in restructuring functioning banking system, in order to these banks has been slow, and they remain achieve the Government's development goals deeply insolvent. Strategic partners (i.e., and meet the competitive challenges of foreign banks) need to be brought in to regional integration. Specific priority measures strengthen the technical expertise of the banks; include: and a new Banking Law needs to provide them · improved governance of state banks, with the autonomy needed to run a successful pending the entry of strategic partners; banking operation. In the interim, the focus is · amendment of the Banking Law; on improving and streamlining the banks' · strengthening of prudential oversight; and management structures, strengthen their · building the capacity of the central bank. performance indicators, and ensure a sound lending framework. On the revenue side, some steps have been taken to improve central oversight over Prudential oversight of the banking system provincial customs posts, although this also needs to be strengthened, for both state remains a challenge. Progress has been slower and private banks; oversight could include on taxes. A first step could be to integrate the establishing standard financial soundness administration of large taxpayers into a single indicators and identifYing potential areas of unit under central government control. vulnerability. Strengthening the technical capacity in both the customs and tax administrations is also WELCOMING PRIVATE INVESTMENT crucially important. AND BUSINESS On the expenditure side, weaknesses in the The business or enterprise sector in Laos is public expenditure management system underdeveloped and dominated by very small, including capacity constraints, weak control informal enterprises. Addressing their over expenditures, and poor fiscal reporting problems through reform of the business are widespread. To address these challenges, environment is at the heart of what the the Government has launched a Public Government needs to do to achieve a sustained Expenditure Management Strengthening increase in exports. Program, with the support of the World Bank. The main priorities of this program are to: · strengthen control over provincial 4 The three main state banks~BCEL, LDB, and APB~ treasuries, notably with regard to account for more than two-thirds of total deposits. 25 Development of the sector is constrained by a Where is the business or enterprise sector? number of factors within the ambit of state action, all of which relate to the conditions and More than a deeade after Laos started its institutions needed to underpin a market transition to a market economy, there has been economy. These factors include: limited entrepreneurial response to the greater · unclear and poorly communicated market freedoms. This lack of supply response government policy toward the business or IS most noticeable in seetors sueh as enterprise sector and lack of inter manufacturing that require long-term ministerial coordination and consultation investments. The slow inerease in the level of with stakeholders m the policy making foreign investment, and the low level of process; implemented investments compared to · the high cost of power, transport, approvals, are evidence of the difficult telecommunications, and other critical business environment (Figure 18). services; · excessive and unnecessary regulation of Fi ure 18. FDI a roval and im lementation ongoing business operations; FDI($) 600 · orientation toward control rather than approved facilitation by the tax and trade 500 administration systems; 400 · failings of the financial system, including 300 the high cost of finance and of the 200 collateralization of land; · lack of access to land; 100 · lack of a sufficiently functional legal 2000-2001 2001-2002 2002-2003 2003 system to support investment, enterprise establishment, contract enforcement, and Source: Government presentation at Business Forum commercial transactions; August 2004 · insufficient intellectual property rights protection for both domestic and foreign Policy uncertainty investors; and · the rigid regulation of labor. The combined impact of poor public-private dialogue, unclear government policies, and Remedying these problems will require both lack of transparency in decision-making immediate and longer-term actions. The first creates a bu&iness environment with a high priority is to improve the legal and regulatory degree of policy uncertainty. While there have environment, in order to facilitate economic been statements made in NGPES and other activity and meet the conditions of broad-scope documents confirming the international agreements. Key short-term Governmcnt's support for business actions include: development, policy commitments remain · Simplifying the business start-up process, vague and are typically not reflected in and moving from a licensing toward a actions. Further, public-private dialogue is registration system; extremely limited. Until recent months, before · Introducing a one-stop investment service the Government began taking steps toward a whcre licensing remains; more open and consultative policy approach, · Repealing the Industrial Processes Act, there was almost no consultation with the which regulates production processes; and sector m the development of relevant · Revamping the tax system and its legislation or administrative procedures. administration. Despite increasingly open decision-making processes with regard to specific investments, In the longer term, sustained efforts and the lack of clarity policymaking is still a considerable financial resources will be barrier to investment. Box 2 summarizes required to build institutional capacity, remarks made by local and foreign investors strengthen entrepreneurial skills, and improve during this consultation. physical infrastructure. 26 Box 2. What are private investors saying? several years after its passage, the implementing guidelines have yet to be Comments from local ltlVestors issued. On Government: (i) More transparency in the · The Land Law. 2003. This Law gives Government's procedures is required to operate in landowners the right to lease, dispose of, an appropriate way. (ii) Better-trained Government sell, or exchange land, but it also sets officials are needed to deal with business or burdensome and sometimes arbitrary limits enterprise sector issues. (iii) The domestic market is too small to attract investments. (iv) It takes a on use. For example. FDI finns can lease long time to set up a business or to complete any land for up to 50 years for an agreed-upon kind of transaction with the Government. (v) There purpose, but if plans change, the lease is is a lack of coordination among different agencies. then limited to three years. Further, the On the financial system: (i) Banks are not lending many authorization and approval steps based on commercial criteria [i.e., loans are given required give officials significant for political reasons]. (ii) Rates are very high. discretionary power and create On the legal .system: (i) Laws are not being opportunities for corruption. enforced consistently. Enforcement of existing · The Law on Promotion of Foreign laws. rather than creation of new ones, is the priority. (ii) Labor regulation is too strict, difficult 1nvestment, 2004. This Law replaces the to dismiss staff. (iii) Corruption of officials in Foreign Investment Law of 1994, but is charge of law enforcement. still not up to international or regional standards. It falls short in two fundamental Comments (rom toreign investors areas: (i) lack of transparency in (i) The accounting system is not standardized; investment licensing; and (ii) a poorly foreign companies have to keep two sets of books. defined "positive list" rather than a (ii) Fulfilling a company's tax duties takes up to 6 "negative list" in the investment sectors. months per year; tax officials are corrupt. (iii) The Law does provide for international Many potential foreign investors are discouraged arbitration in the case of disputes. by the experience of current investors. (Iv) Most companies still pay a 35 percent profit tax. (v) · The Law on the Promotion of Domestic Workers are less skilled than those in China and 1nvestment, 2004. This replaces the 1994 Vietnam; some factories are undertaking their own Law, and has the same shortcomings as the training. (vi) The banking sector is unable to Foreign Investment Law. The existence of provide commercial lending. (vii) The garment two separate regimes for foreign and industry is being neglected by the Government, domestic investment creates additional even though 26 percent of export revenues come burdens for investors. · Decree on the Promotion and Development of Small and Medium Sized I,ega) framework for business Enterprises, 2004. This decree supports a broad range of activities to promote SMEs, The legal framework for the business and including access to finance, training of enterprise sector is gradually being adapted to entrepreneurs, setting up a supportive the needs of a modem market economy. Steps regulatory and administrative environment, in the right direction include the new etc. It also establishes a Fund with investment laws, the decrees on small and resources to cover administrative and staff medium sized enterprises as well as the costs (including bonuses and training), recently approved Enterprise Law. financial support for SMEs and promotional activities. The key laws comprising the framework for · Decree No. 15 on Trade Competition. the business or enterprise sector are: 2004. This decree lays out key principles · The Labor Lmv, 1999. This Law clearly for regulating anti-competitive practices sets out the responsibilities of employers, and promoting fair competition. It does not and processes to be followed in dismissing give state-owned enterprises preferential a worker. access to resources, including commercial · The Industrial Processes Law (Factories credit, and SOEs are not required to La,v), 1999. This Law is particularly purchase goods only from state finns. archaic and problematic for businesses, as · Enterprise Law, 2006. This law will it requires manufacturing businesses to get replace the 1994 Business Law which approval for all minor operating changes in governed the establishment of businesses. their manufacturing production. Further, The Business Law contained some vague 27 provisions but was rigid in other aspects highly decentralized country, and provincial (e.g., specifying a minimum paid-in capital governments, rather than central authorities, requirement). The new law has been are responsible for: (i) processing/authorizing designed in consultation with the business firm registrations and investment licenses; (ii) sector. It has been approved by the firm-level inspections; and (iii) allocating National Assembly and the related land-use rights and a private firm's access to implementing decree is under preparation. other resources. The only exceptions are some very large or politically sensitive business Regulations and procedures to start a ventures, which may need authorizations at the business national level. It takes longer in Laos than anywhere else in The capacity, attitude, and workload of the the world, except in Haiti, to start a business. officials concerned varies by agency and To formaJly establish a business in Laos, provincial location, and significantly entrepreneurs are required to go through a influences the time it takes for entrepreneurs to multiplicity of regulatory processes, obtain go through these processes. The provinces several licenses/certificates, and meet huge located on key trade routes tend to be more documentary requirements (Table 3). Further, business savvy and supportive, while officials contrary to current international practice, Laos in the less well-connected provinces often lack continues to require the submission of a a clear understanding of business or enterprise feasibility study/business plan for all sector activities and, despite good intentions, businesses. This long, time-consuming, and in may tend to be obstructionist rather than parts a highly opaque process provides room supportive to entrepreneurs. But the regulatory for extensive official discretion and procedures in the country's capital, Vientiane, encourages firms to remain informal rather were found to be the most burdensome and than focus on growth. Unregistered businesses time consuming, due to the rigid and pay a monthly fee to the district authorities, hierarchical approach taken by capital city and a monthly lump-sum amount to the tax bureaucrats. collectors as "profit tax." Institutional constraints. As is normal for an Table 3. Requirements to open a business economy in transition, many of the institutions Laos Regional OECD needed to underpin a market economy have not yet been established or are very new and require strengthening. For example, Laos now Cost (% of income per has a reasonably comprehensive set of capita) business laws, albeit of mixed quality, but Minimum capital (% 28.5 100.5 44.1 lacks the institutional eapacity to effectively of income per capita) enforce them. There is also little effective Source: Doing Business, 2004. recourse to the court system or other formal means to resolve disputes or enforce contracts, Establishing a one-stop shop is a good start, and building this capacity will take but implementation is slow. The recently considerable time, as it involves the training of amended Law on the Promotion of Domestic judges and eommerciallawyers. Investment allows for the possibility of a one stop shop approach for domestic finns. Key steps to facilitate business or enterprise However, the Government has yet to sector development implement this approach in practice. The recently amended Foreign Investment Law The regulatory requirements placed on also provides foreign investors access to a one businesses in Laos are too high compared to stop service. Implementing decrees for both those placed on competitors operating in domestic and foreign investment laws were Vietnam, Thailand, and other regional released in October 2005. neighbors. They are also too high compared to the technical capacity of the civil servants in Capacity and institutional constraints Laos, who lack the capability to serve the business or enterprise sector by, for example, Capacity constraints are numerous, critically reviewing business plans. They are especially at the provincial level. Laos is a too high for the capacity of the local 28 entrepreneur, who already faces competitive the new Enterprise Law provides the handicaps in terms of poor infrastructure and perfect opportunity to introduce these less entrepreneurial experience. They are felt reforms; more by exporters (Figure 19). And finally, in sectors where licensing is still they are much too high for a country whose necessary, immediately implement main potential source of growth is through one-stop-shop services, and limit the facilitating rapid business sector development. time allowed for the sector ministry to review business plans; and To address these problems, the reform agenda either remove the need for firms to established in the NGPES stresses the need to: obtain a company seal, or eliminate the · improve the business climate by creating a Ministry of Security's monopoly on predictable and transparent policy issuing seals, which adds an average of environment; 45 days to the process of setting up a · streamline administrative procedures and business; regulations that constrain domestic and · repealing the Industrial Processes act, or at foreign private investment; and minimum reviewing the implementing · strengthen market institutions, including, decree; and most notably, those related to dispute · revamping the tax system and resolution and contract enforcement. administration to minimize the opportunity for negotiation between firms and tax Priority regulatory reforms include: officials, and simplifying the reporting · substantially simplifying the business start requirements for entrepreneurs to meet up process by: their tax obligations. moving from a business licensing to a registration system, and removing the requirement for review of business plans for most sectors. The drafting of ~_ _ Figure 19: Heavier and less predictable regulatory burden felt bv ex orters Time spent with Local regulators Reguators Customs Inspections National Total 13.0 Regulators Inspections o 10 20 30 0% 25% 50% 75% Number of inspectionsJ% of time with regulators % of firms saying regulations predictable IIII Exporter · Non-exporter I I_ Exporter · Non-exporter I Source: Investment Climate Survey, World Bank and ADB 29 CONCLUSION AND KEY MESSAGES LOOKING AHEAD Laos is committed to further integration with rely on good connections with the government the rest of the world, and this is central to the to resolve commercial problems. country's future development. This will require building on past actions and moving What then can the government do to facilitate export growth, and what are desirable forward in a way which captures the benefits elements of an export diversification strategy to be had from integration while limiting risks for Laos? Much of this is about what the and possible disruption. public sector can do to foster the development There is considerable potential for Laos to of institutions that facilitate private investment expand and diversify its exports; but some and the commercial contracting that underpins essential messages need to be reinforced: it. It is also about what the Government can · It is the private sector, not the public sensibly do to reduce transaction costs the sector, that will carry the main burden in costs of arranging, monitoring and fulfilling generating export growth. And it is risk contracts. This includcs the issue of what taking to earn profits and incomes that kinds of investment the public sector itself motivates the private sector whether should be undertaking, and it also concerns individuals, households or businesses to ensuring that public sector activity and be the engine of export diversification and policies do not depress or distort the pattern of growth. returns to investment. · Investment in one form or another is a crucial ingredient for export growth: The challenge for Laos is complicated by the people foregoing current consumption, legacy of the past. Long years of war and past directly or indirectly to invest in human efforts at central planning have left the country capital, physical capital, new technology, with poor infrastructure, constraints on use of or new ways of doing business. This is significant parts of the country's land because done in the expectation of a future return: of unexploded ordinance, underdeveloped if returns are low or uncertain and risk market institutions, an embryonic private taking is discouraged, investment will be sector and a public sector with little experience low, and so will growth of exports. of how to manage a modernizing market · Exports will not grow without open economy. policies towards investment and imports. This translates into a series of constraints on The development of the private sector in Laos export diversification and growth that include: appears to be well supported in terms of · lack of awareness of modern, transparent, pricing policy, exchange and interest rate market-based ways of doing business; elements of macro-monetary policy, wage · restrictions on personal movement, both determination, and the development of a body within and across borders; of legislation directly bearing on business. · rudimentary infrastructure; However, poor micro-fiscal instruments, · insecure property rights and an inefficient elements of trade policy, long lags in financial system, which inhibits the developing regulations to implement accumulation and use of capital; legislation, discretionary interventions in the · a regulatory system built on control and use of policy instruments and their rent extractions rather than facilitation; administration, information bottlenecks, · restrictions on trade through burdensome business registration and licensing red tape, all licensing regulations; militate against the efficient development of · weak regulatory arrangements for the sector. managing public goods such as electricity and water, both domestically and More importantly, the legal and judicial potentially across borders; underpinnings of a market economy are still in · weak institutional and fiscal management embryonic form. This impedes contracting capacity to equitably handle the potentially and transactions between unrelated parties. large income stream from hydropower and The absence of effective mechanisms to mining; and enforce security of loans and resolve disputes, · decentralized authority for trade, with and the lack of an effective bankruptcy system, confusing and overlapping responsibilities stand in the way of the development of larger of the central and provincial governments, private firms. As a consequence, firms have to 30 which makes it considerably more are good for Laos, and should be complex for both donors and firms to do implemented as widely as possible, business in Laos. bilateral, regional and multilateral agreements are a means to an end, not The countlY's development objectives are an end in the themselves; more likely to be met if integration is pursued · actions to shield local production from as one part of the broader transition process international competition impose costs on and is accompanied by actions aimed at: the community, and shift the burden of · implementing prudent fiscal and monetary adjustment elsewhere in the economy (and policies; not onto the rest of the world); · fostering enterprise development and · because taxes and restrictions on imports domestic competition; reduce the volume of trade they are also, in · orienting trade and tax policies towards the effect, taxes and restrictions on exports; incentives they create for decision making; · maxlmlzmg the benefits of foreign · reducing the costs of carrying out investment depends on subjecting foreign transactions within Laos and with the rest invested fimls to strong external and of the world; domestic competition; · facilitating development of efficient · investors both foreign and domestic markets for land labor and capital; and are influenced as much by their · creating a legal and judicial framework expectations of future policy as by current that fosters and reduces costs of business policies. Thus, credibility, consistency, transactions. transparency and coherence of policy are required to ensure a rapid response to The Government faces complex technical and integration efforts. It is desirable to rely as political challenges in carrying these actions much as possible on clearly established, forward, since they will require working on: generally applicable rules and timetables · the sequencing of further trade and for reform; and investment reforms; · the benefits of integration arise from · adoption of complementalY policies to having resources - capital, land and secure the benefits particularly for the labour respond to the incentives created poor and facilitate the structural by exposure to international prices and adjustments that integration and growth market opportunities. So flexibility and will bring in their train; responsiveness of factor markets is · institutional changes needed to manage necessary to get the best from integration. economic policies and support business And the evidence is that private enterprises development as integration proceeds; and are the most flexible vehicle for organising · ensuring public awareness of, and support investment and production responses. for, the changes involved with integration. Priorities for the Integrated Framework. The Complex as these issues are for Laos, there are above messages and recommendations some lessons that can be drawn from the (summarized in the Table below) set the stage experience of other countries that have been for export competitiveness and business confronting the same challenges. This development in Laos. Within this framework, experience identifies some of the key key practical priorities for trade-related principles that should guide development and projects· and technical assistance have been implementation of an integration strategy. identified based on the DTIS analysis. These They include: are summarized in the Action Matrix below. · imports are the end purpose of trade, so The Action Matrix was discussed with integration is about accessing the world's government and private sector stakeholders, as best sources of goods, services and well as with donors. The three priorities technology. This implies, among other identified for urgent action are: (i) the need to things, that: promote small and medium enterprises; (ii) the best approach to trade and trade facilitation; (iii) capacity building for investment liberalization is to mmlstries dealing with policy support, implement it on a non-preferential particularly the MOC (this should include basis MFN and national treatment setting up an IF implementation unit). 31 Summary of recommendations Recommendation and taxation Tariffs and taxes on trade Reduce the number of tariff lines that are subject to the top MFN tariff rate of 40% and reduce number of tariff bands Introduce duty drawback scheme for indirect exporters Trade licensing system Dismantle redundant licensing requirements, including annual import/export plans, replace necessary technical regulation with arrangements that do not discriminate between local products and imports Organic certification Review options for establishing organic certification body to certify and monitor compliance with international organic standards Standards Adopt and implement regional standards for key export crops (coffee, horti culture) Air transport Resolve issues concerning Lao Airlines structure and capacity, evaluate the possibility of adoption of open skies policy to enable private an international airlines to service more locations Laos WTO accession Economic analysis Develop capacity to undertake ex ante evaluations of the implications of implementing WTO agreements. Trade policy establishment Consolidate trade policy establishment to improve economy-wide perspective, coordination in Trade Container and freight movements Simplify procedures for factory-to-port container movements along Vientiane Bangkok corridor. Develop consolidation service for small freight shipments Negotiate necessary changes in Thai customs and border management arrangements Monitor clearance times and productivity at border crossings Inland container depot Establish inland container depot near Lao-Thai border in order to consolidate small customs Legislation Implement new Customs Law, develop policy and procedures manual Organization Continue efforts to build a unified national Customs administration, and build on efforts to improve control of field operations through the Monitoring and Control Program Human resources Develop a comprehensive human resource development plan, adopt competency based recruitment and promotion policies, implement clear and transparent policies for delegation of authority and accountability Information and communications Develop comprehensive ICT strategy technology Customs valuation Prepare a transition strategy for adoption of the WTO Agreement on Customs Valuation Trade facilitation Streamline clearance procedures and rationalize involvement of other government agencies in clearance processes Build on work under GMS Cross Border Transit Agreement to undertake a review of clearance procedures covering all government agencies Strengthen enforcement capacity Strengthen anti-smuggling operations, expand intelligence unit and establish a Customs fraud investigations function, address constraints on post-audit function - - - - ......--~ ---~ Sanitary and Phytosanitary Procedures 32 Market opportunities and trade Examine potential SPS requirements in markets for potential/emerging non requirements traditional agricultural exports, review SPS requirements of trading partners and transit countries to identify WTO inconsistent measures to bring to WTO negotiating table, and review SPS requirements of Laos in light of WTO and AFT A principles Institutional and legislative Establish joint Enquiry/Notification point at Ministry of Commerce, review framework existing legal framework and amend to capture SPS roles and responsibilities and coordination mechanisms. Surveillance Amend legal framework to incorporate stronger monitoring and control of markets for agrochemicals, initiate data gathering and data base creation on health hazards, plant and animal diseases Diagnostic capacity Expand laboratory capacity and relevant capabilities Emergency response Amend laws, prepare guidelines and procedures Risk assessment Establish core group of risk assessors Inspection and certification Identify unnecessary requirements for export and import, simplify and strengthen governance of SPS border procedures Making investment and doing business easier Macroeconomic management Fiscal management Strengthen tax and customs administration and introduce VAT, to offset revenue loss from implementation of AFT A CEPT commitments. Further centralize control over tax and customs operations in the provinces Strengthen control over provincial treasuries, improve budget planning and execution, and develop a central government cash management system Conduct review of intergovernmental fiscal relations Banking system development Improve governance of state banks and find strategic partners for them. Secure passage of amendments to banking law to allow entry of foreign banks on equal footing with domestic banks in the medium to long term. Strengthen prudential oversight of banking system Conduct review of export financing services, and work with financial sector to develop relevant products Facilitate development of financial services for tourists - such as A TMs and credit card facilities Business environment Simplify business start-up process Move away from licensing to a registration system Implement without delay provisions in new investment laws that provide for a one-stop service Simplify requirements surrounding acquisition of company seals Industrial Processes Law Repeal the law, or at a minimum review the implementing decree Labor Law Review and update labor laws to align with regional standards SMELaw Review alignment of SME Law and customs regulations Taxation Revamp tax policy and administration to reduce scope for tax negotiations and make it easier for firms to meet tax obligations 33 An Action Matrix of Projects and Technical Assistance to Promote Export Competitiveness in Laos Objectives Government Costing Related Trade Assistance Type of ------------------- ResJ:)~Il~ibi!i! Pro rams Intervention Putting in Place the IF im lementation and Monitorin Rationalize IF supervisory priority MOICIlF Medium Estimated IF Trust Fund Governance NA committees, establish a National IF with actions Steering cost 0 f establishing and Management Unit already having Committee training a IF begun and will Implementation Unit is be ongoing US$1.5 million over 5 ears Encourage the production of High priority MAF, LNCCI, High - in particular France's Coffee Value Chain Technical Large organic agricultural products for with action to NUOL, MOIC significant investment Development (2005-0S, export; improve quality standards be undertaken is required to improve US$2Am) & Cash Crop regulatory; of traditional agricultural from the first productivity and Production Project (2006-0S, human resource nrnrhll'tivihr of traditional year EC's Asia Invest chain Agribusiness Training in the investment agriculture techniques for farmers; agriculture are US$1. 7 Mekong Region (completed encourage the production of 2 million over 3 years. 2006, US$OA shared with 5 medicinal plants and spices for Estimated costs for countries); ADB's Marketing export. project to build-up the Support for the Organic Produce medicinal plants and of Ethnic Minorities (2004-07, spices sector are US$O.6m); Switzerland's US$1.5-l.75 million Promotion of Organic Farming over 3 years. and Marketing (completed 2006, US$O.3m); FAO's Improvement of Coffee Industry Project L _ _ _ _ _ _ _ _ _ _ _ _ ~ ________________ ~I (completed 2005, US$0.35) __ Projects 1,2 and 3 under Component I are in line with the National ExpOIi Strategy of 2006-2008 where more details can be found. 34 Project 2: Support Garment sector: Encourage local priority LNCCI, ALGI, Medium - Estimated General Export Competitiveness Technical I Medium light manufacturing producers to gradually shift from with MOIC costs for a project to Support: Switzerland/lTC's assistance; competitiveness working on CMT to FOB basis; preferably for strengthen the export Support to Trade Promotion and human and tivity of garment sector; promote Lao garment action to begin from the first I competitiveness of the "pocity,nd Development (2004-07, infrastructure of Lao year garment sector are US$1.5-1.7 million. I Production (2004-08, I international trade and information distribution O.09m) Silk products: Improve domestic Medium MAF, LNCCI, Medium - Estimated US's Economic Acceleration Technical Medium supply capacity in Lao native silk; priority with MOlC costs for a project to Program for the Silk Sector assistance; improve Lao silk product designs; action to be improve capacity of (completed 2006, US$0.5m) human resource develop new silk products; develop undertaken as producers and exporters capacity building standard for Lao silk handicraft; soon as of silk products are and improved training for silk possible US$1.6-1.85 million infrastructure produetion techniques; develop development; tradc information on silk sector. and information distribution ------------------ Other handicraft nrc\(h"'t~· Improve Relatively low MOrC, LNCCI Small financial outlay Technical I Small design capabilities; study and prioritv assistance improve distribution trade information and with Medium MAl"', MOIC, I Medium-High- I EC's Asia Invest Fund I Technical I Medium with LNCCI - action to be undertaken in of the wood sector; ensure the medium sustainability of wood Marketing System sustainability of raw materials to term products sector would for Non-Wood Forest Products support the industry. be around US$2 million (completed 2006, US$O.37m) over 3 years 35 Project 3: Support I Develop craft villagcs such as local I High priority I LNTA, I Medium- Estimated I ADB's Mekong Tourism I Human resource I Medium tourism artisans and craftsman (textiles, reQuiring LNCCL costs of a tourism centre with support I involv~ment of th( sector of US$I m for a period of Tourism in Laos (2006-09, I in vestment encourage tourism 4 years; estimated costs O.3m); New Zealand's Nam Ha to other sectors of the for model craft villages Ecotourism Project (2004-07, economy; diversiry services in 10 major tourism US$0.34m); German Human capacity within the tourism sector; destinations ofU$lm Resource Development for promote Lao tourism to make it for a period of 4 years Market Economy Programme internationally recognized. (2004-07 US$S.S m; Planned: Japan's Tourism Development in Develop local agriculture and High priority LNTA, Medium high the East-West Corridor (2007 healthy food products (vegetable, required on- LNCCI estimated cost for 10, US$2m); planned: German meat, local food cottage, etc) in going support LHRA-LHA, establishment ofmodcl Vocational Education tourism destinations through MAF,LTPC village cottage food Programme (2007-10 5 m) developing the capacity and industry, animal farms, competency of small and medium modem slaughter house sized farming and agro-processing in 10 major tourism enterprises. destination ofUS$2m for a period of 4 years ---------------------- Project 4: Micro, Build an integrated market access High priority MOIC,BOL, Medium - Estimated UNINDO & India's South-South Human resource I Medium small and medium and trade facilitation infrastructure; with projects LNCCI costs of a trade Response to Poverty (completed capacity building - High enterprise project support entrepreneurship to begin from information and export 2006, US$O.lSm shared with 5 & infrastructure for export development; develop and the first year training program for the countries); UNESCAP & Japan's development; development strengthen the of local business sector would Capacity Development of SMEs information intermediaries to deliver financial be US$0.8-0.9Sm over (completed 2006, USO.59m); dissemination; and non-financial services to two years. ADB's Small and Medium encouraging investment increased investment. 36 Project 5: Regional Construct and rehabilitate critical Medium I Provincial level of Regulatory Medium development of infrastructure essential for sustained with a authorities assistance; -Large export potential economic in the technical tourism, manufacturing, agribusiness I focus infrastructure issues assistance; human and mining sectors; which would not to be resource capacity Put in place appropriate incentive funded directly through building; measures at the regional level to IF. Other funding achieve rapid growth; sources required, possibly including Aid Develop the instruments to ensure for Trade. IF process equitable, sustainable growth. can assist in policy development and C>U"'l1~tllC:l1 the capacity of local capacity building (cost authorities to formulate, would be low to Component 2: Trade Facilitation --------------- Project 1: Customs Develop regulations to implement the High priority MOF and Medium-High - Funds IMF's Technical Assistance on Legislative/ Medium modernization new Customs law with actions to MOlC needed tor a broad Customs Operations (2004-07, regulatory reform; Refom1 the national customs begin as soon range of activities US$0.5m); Japanese Customs human capacity administration as possible mainly based on Technical Cooperation building and ------- ----- Strengthen capacity building to training but also Program (completed 2005, infrastructure ",."",,,1,, administer the customs including investments US$().17m); development; ovisions of the law in improved customs ADB's technical assistance customs hI/modernize border clearance systems. (2006-2008) to support trade infrastructure (including expert advice facilitation and capacity development to prepare long term customs in the Greater modernization project) Automation and data processing Assistance on implementin systems (e.g. automated customs the Cross Border Transport clearance svstem) Agreement in GMS (2006 Strengthen and expand the anti 20()7, US$().86m). smuggling program ---------------- Licensing of customs brokers Develop a customs training program, e.g. seminar/workshoD as well as medium and 37 Project 2: Trade Pilot Gold Card Program (to expedite High MOF, MOIC, Medium-High - Funds ADB's Trade Facilitation in Infrastructure Medium facilitation clearance procedures for approved priority/2nd MTCPC, needed for investments Greater Mekong (2006-08, development -High traders) year Border in improved technology US$I.49m shared regionally); Increasing capacity building for agencies, and processes. Also, UNESCAPlNetherlands' officials dealing with Import-Export National potentially high capital Institutional Capacity Building Issues quarantine and investment needed to for Landlocked Countries International container logistics standards build a container (completed 2006, US$O.4m); center in Vientiane agencies, logistics centre ADB's regional technical National assistance (2006-2008) to Licensing of related government Transport support trade facilitation and agents Facilitation capacity building; ADB's Improve the single window Committee regional technical assistance operations in various provinces (2006-2007) on implementing Increase transparency the Cross Border Transport Agreement. Institutional strengthening of trade facilitation focal point, to coordinate trade facilitation activities Needs and gap assessment on customs procedures (as in Project I); trade logistics development (including trade logistics center and service sectors development, etc.); standards/technical regulations development; and improved business mobility). Facilitate cross border movements of goods, people, and vehicles (single window, single stop inspection at GMS selected land border crossings, involving Lao PDR, GMS transit traffic regime, vehicle standards, exchange of traffic rights, etc.) Simplify or eliminate the export- import licensing and indicative plan. 38 Project 3: Sanitary Institutional and legislative High - Estimated e01tsNorway,S Market and Phyto-Sanitary framework (high priority) with projects of an export quality Trade Facilitation (SPS) and Technical .--.--- . . .. for long-term management project 09, US$1.7m Barriers to Trade DiagnostIc capacIty (hIgh PrIOrIty) improvement would be US$1.4-1.6 i Australia's SPS Capacity (TBT) Issues 2 of capacity to million, but investments Project (ongoing, Market opportunities and trade begin as soon in SPS-related US$4m shared between 8 as possible laboratory equipment countries) & ASEAN Surveillance could increase this Development Cooperation amount significantly (2002-08, A$4Sm); EC's Asia Emergency response Invest Capacity Building of Geographical Indication (2006 economic 09, £'0.3m shared with China and Cambodia), & Ee's Project on Quality & Conformity (ongoing, O.Sm) & Building human skills Intellectual Property Rights Cooperation (completed 2006, Information and education O.Sm); France's Geographiv Indications Elaboration Private sector development (2006-08, US$Um); FAO's Improving Food Safety Management (200S-08, Technical Barriers to Trade (TBT) US$O.8Sm shared); ADB's Integrating the Poor Regional cooperation Standard Setting 200S, US$O.7m) 2 More detaiJ can be found in the Action Plan for Sanitary and Phytosanitary Management Report for Lao PDR, World Bank, May 2006, prepared in conjunction with the IF. 39 Component 3: Business Environment Project I: Develop an industrial strategy that: Medium MOIC Small-medium General Business Environment I Regulatory and I Medium Development of sets a broad framework for priority with Support: IFC's Mekong Project industrial strategy promoting and developing Laos' actions to take Facility (2003-07, US$2.8Sm); I legislative to facilitate business industrial base; identities priority place in the ADB's Private Sector operations areas; and ensures a consistent and medium term Development Program (200S-10, stable policy environment US$0.7m plus US$lOm loan); UNIDO's Integrated Programme (2004-08, US$6.3m); France's Business Management Training US$3.8m); Human Resource Development for Market Economy Program (2004-07, US$S.Sm) Project 2: Investment Review and simplify business regulations, e.g. foreign investment High priority with actions CPI Small-medium Japan's Expert on Promotion of Investment for Lao Government I Regulatory I Medium assistance and promotion start-up and registration procedure already (2007-09, US$0.3m); US's South reform; create investment guidelines underway East Asia Commercial Law I legislative (sector by sector); set up a public- (200S-07, US$0.24m shared private stakeholder platform to regionally) & Competition Law