LAO PDR AND WTO ACCESSION: IMPLICATIONS FOR AGRICULTURE AND RURAL DEVELOPMENT

LAO PDR AND WTO ACCESSION: IMPLICATIONS
FOR AGRICULTURE AND RURAL DEVELOPMENT






Kym Anderson






School of Economics and
Centre for International Economic Studies
University of Adelaide
Adelaide SA 5005
Australia


Phone (+61 8) 8303 4712
Fax (+61 8) 8223 1460

July 1998








Report prepared for the Lao PDR’s Ministry of Commerce as part of a UNDP-funded
UNCTAD project (RAS/92/041). Thanks are due to many people in Vientiane for their
invaluable assistance (see Preface), but especially to my national counterpart Mr Xaypladeth
Choulamany, for his help in many ways.

ii

Table of contents
Page
Preface iii
Acronyms iv
Summary v
1. Introduction 1
♦ Why focus on WTO accession for Lao PDR at this time? 2
♦ Why pay special attention to agriculture and rural development? 3
♦ Outline of the study 4

2. Why join WTO? 6
♦ Benefits and obligations of WTO membership 7
♦ The steps to WTO accession 11
♦ Special and differential treatment for developing and least-developed
countries 13

3. Recent and prospective growth and structural changes in Lao PDR 15
♦ A transition economy on the move 15
♦ Agriculture’s relative decline 16
♦ Developments within the agricultural sector 18
♦ Production and trade prospects under current policies 19

4. What policy changes are needed for WTO accession? 22
♦ Agricultural policy changes 22
♦ Non-agricultural policy changes that will affect rural development 25

5. What new opportunities will open up by joining WTO? 28

6. Effects of policy changes on agriculture and rural development 32
♦ Economic growth, structural change and trade 32
♦ Food security and food price instability 34
♦ Job creation, poverty alleviation and income distribution 35
♦ Resource depletion and the environment 36
♦ Government revenue 38
♦ Are these changes consistent with government policy objectives? 39

7. Choices confronting the Lao PDR 40


Tables and box 45

Appendix 1: Why the WTO exists and what accession
involves 55
Appendix 2: Determinants of structural change in a developing
market economy 67
Appendix 3: Agriculture in the WTO: the Uruguay Round
and next steps 88


References 113

iii

Preface


This study is part of a series of studies organized by the United Nations Conference on
Trade and Development (UNCTAD) and funded by the United Nations Development
Programme (UNDP) under Project RAS/92/041. The series aims to provide technical
assistance to the governments of Vietnam, Laos, Cambodia and Nepal as they prepare
to negotiate their accession to the World Trade Organization (WTO). The present
paper is prepared for the Lao PDR’s Ministry of Commerce, following a field trip to
Vientiane in March 1998. The author is extremely grateful to the many people in
Vientiane and to Robert Jauncey and Jayant Menon who graciously offered their time,
knowledge and wisdom, without which this study would have been impossible to
complete in the time available. At the risk of offending the many others who helped in
so many ways, I would like to especially thank the following officials and their
organizations. Ministry of Commerce: Ms Khemmani Pholsena (Director General)
and Ms Banesaty Thephavong; Ministry of Agriculture and Forestry: Mr Inthadom
Akharath, Mr Somphanh Chanpengxay, Mr Xaypladeth Choulamany and Dr Peter

Stevens; and United Nations Development Programme: Mr David Eizenberg
(Assistant Resident Representative) and Ms Virachit Vongsak.

iv

Acronyms
ACP
AFTA
AMS
APEC
ASEAN
ATC
CAP
DSB
EU
GATT
IMF
ITC
LDCs
MFA
MFN
MTN
OECD
SME
SOE
SPS
STE
TRIMs
TRIPs
TPRM

TRQ
UNCTAD
UNDP
USITC
VER
WTO

Africa, Caribbean and Pacific members of the Lome Convention
ASEAN Free Trade Area
Aggregate Measure of Support
Asia Pacific Economic Cooperation
Association of South East Asian Nations
Agreement on Textiles and Clothing
Common Agricultural Policies
Dispute Settlement Body
European Union
General Agreement on Tariffs and Trade
International Monetary Fund
International Trade Centre
Least-developed Countries
Multilateral Fibre Arrangement
Most Favoured Nation
Multilateral Trade Negotiations
Organisation for Economic Cooperation and Development
Small and medium (non-farm) enterprise
State-owned enterprise
Sanitary and phytosanitary
State Trading Enterprises
Trade-related Investment Measures
Trade-Related Intellectual Property Agreement

Trade Policy Review Mechanism
Tariff-rate quotas
United Nations Conference on Trade and Development
United Nations Development Programme
United State International Trade Commission
‘Voluntary’ export restraint
World Trade Organization


v

Summary



Why should the Lao PDR join WTO?

To become a WTO member is to join a club. Like all clubs, the WTO bestows
benefits on members but there are some costs; it offers rights but with them come
obligations; it provides new opportunities but also some challenges. Evidently the net
benefits are overwhelmingly positive, since most countries are or have applied to
become members. Four specific benefits to a country’s producers and traders are:
• greater and more-secure transit rights protected by an independent WTO dispute
settlement body for resolving transit disputes,
• greater, more-secure and less-discriminatory market access abroad for exports,
• availability of a legal mechanism for resolving bilateral trade disputes, and
• greater discipline on the country’s government to practise sound economic policy
making and avoid the temptation to respond to interest-group pleading for special
protectionist favours.
Like all worthy clubs, there are rules to be followed, entry conditions to be met

and formal accession procedures to follow. Occasionally the rules and obligations
upset political sensitivities because some groups within a country may lose a privilege
(e.g., protection from import competition). But almost invariably those rules boost the
overall economy and thereby the vast majority of its people. They do so through
encouraging:
• better allocation of national resources towards industries with the strongest
comparative advantage;
• enhanced learning and newer technologies from interacting more with the rest of
the world;
• greater flexibility, via trade, for dealing with shocks such as natural disasters; and
• less wasteful rent-seeking lobbying activities by groups seeking government
assistance and protection.



vi

Why focus on WTO accession now?

All the empirical evidence suggests that economies grow faster the more open
they are to international trade and investment. Therefore the sooner Laos commits
itself to become more open, as required for WTO accession, the sooner investor
confidence and thereby the rate of per capita income growth will rise. This is
especially so in the current economic climate of uncertainty in East Asia. Secondly,
the preferential commitments being made currently to the ASEAN Free Trade Area
(AFTA) could lead to trade diversion. By promptly multilateralizing those
commitments as part of WTO accession, the risk of welfare losses from trade
diversion can be avoided. Thirdly, there is currently much goodwill surrounding WTO
membership applications from least-developed countries, which can be capitalized on
in the form of technical assistance in trade policy training and institution building.

And fourthly, a comprehensive new round of trade negotiations likely to start perhaps
as early as 2000. Thus the sooner Laos joins WTO, the more opportunity it will have
to seek better access for its exports via the bilateral part of those negotiations.

Why pay special attention to agriculture and rural development?

The reasons for focusing on the impact of WTO accession on agriculture and
rural development are obvios in the case of Laos, because more than 80 per cent of the
Lao population live in rural areas and more than 50 per cent of measured GDP is
generated by farmers. As well, poverty alleviation requires focusing on where the poor
are, and they are overwhelmingly in rural areas.

What policy changes are needed for WTO accession?

Both agricultural and some non-agricultural policy changes needed before
Laos can accede to WTO will have important impacts on rural areas. Agricultural
policies have to conform with the Uruguay Round’s Agriculture and SPS agreements
as well as those relating to import licensing and state trading. That requires:

vii

• tariffying all non-tariff barriers to agricultural imports (possibly including rice),
binding those tariffs, and agreeing on a schedule to reduce them over the accession
transition period;
• confining domestic support measures to ‘green box’ instruments such as public
investment programs in rural health, education, research and extension, and
infrastructure;
• possibly ruling out future use of agricultural export subsidies (since none are used
at present);
• justifying scientifically the use of quarantine import restrictions, as required under

the SPS Agreement;
• ensuring that those farm products subject to import licences are administered in the
transparent and rules-driven manner stipulated in the WTO’s Agreement on Import
Licensing Procedures; and
• ensuring that the markets for the many farm products traded via state trading
enterprises (STEs) are contestable and/or that discriminatory treatment such as
preferential access to scarce credit for those STEs is notified.
Non-agricultural policy changes needed for WTO accession could affect rural
development in two ways: through using (or releasing) resources otherwise available
for (or useable in) farm production, and/or through altering the amount of non-farm
activity in rural areas. Currently trade taxes cause the price of importables relative to
exportables to be greater domestically than at the country’s border, and non-tariff
trade restrictions amplify that difference substantially (and would do so even more
were it not for smuggling). WTO accession could require Laos to tariffy some of its
non-tariff trade barriers, commit to lowering some of those tariffs over time, and
reduce preferential treatment of STEs (such as providing interest-subsidized credit).
To the extent that such reforms are implemented in the accession process, it will
benefit rural people because more mobile resources will be available for farm
production.





viii

What new opportunities will open up by joining WTO?

A crucial part of the Lao PDR’s WTO accession negotiations involves losing
its current status as a ‘non-market economy’ prior to joining the WTO, and ensuring

all major WTO members approve its accession. Both are important because otherwise
members such as the US or EU could continue to apply selective safeguards and
impose punitive anti-dumping duties against imports from Laos, making access to the
WTO’s dispute settlement mechanism close to worthless.
Assuming success on those fronts, the most obvious scope for trade and
inward investment growth is with the United States: currently Laos trades with the US
less than one-third as intensely as does the rest of the world (given the US share of
world trade), whereas under free trade one might expect it to trade perhaps 1.5 or
more times as intensely as others (given the number of business people in the US with
former ties with Laos). The intensity of trade with the EU also is still quite low, with
much scope for expansion. Both partners would be importing much more if they were
to allow Laos to expand its exports of textiles and clothing, items in which the country
has a very strong comparative advantage. Beyond that, it is not easy to predict what
the precise pattern of trade growth will become during the transition period following
accession, because it depends so heavily on the degree of freedom negotiated
bilaterally between Laos and its various trade partners but especially the US and
Thailand.

What will be the consequences for agriculture and rural development?

Should the Lao PDR choose to take this opportunity provided by its accession
to WTO to liberalize its markets in the spirit as well as the letter of the WTO law, the
following broad-brush effects can be anticipated:
• economic growth would be boosted and sustained at a higher level, particularly if
essential public infrastructures were simultaneously improved;
• agriculture would expand, along with associated agribusiness and other service
activities, which would boost income-earning opportunities for farm households in
rural areas;

ix

• food output and exports and hence food security would be enhanced, even if rice
import dependence increases;
• more jobs will be created, more poverty will be alleviated, and a more equitable
income distribution will emerge over time with than without a more open policy
regime, particularly for rural people; and
• government revenue from trade taxes, contrary to common perceptions, may
actually increase rather than decrease, particularly if non-tariff trade barriers are
tariffied.

What are the policy choices confronting the Lao PDR?

Clearly, the Lao PDR will have to implement numerous reforms before
becoming a member of WTO, but in doing so it has numerous choices to make.
Reasons are given in the final section as to why the government should not necessarily
answer the following questions with a ‘yes’:
• should tariffs be bound at well above applied rates?
• should MFN tariffs be kept well above preferential ones required to fulfil AFTA
commitments?
• aren’t infrastructure and human capital investments in rural areas too expensive?
• shouldn’t at least the profitable SOEs and STEs be kept in the hands of the State?

Finally, the report lists some additional ingredients for developing good trade
policy practice. They include:
• adopting an economy-wide, whole-of-government view of trade and trade-related
policies, rather than an ad hoc piecemeal or sectoral view of selected issue;
• understanding well the economy’s long-term trading interests and using that
knowledge to develop a clear strategy for seeking out the highest-payoff market
access opportunities leading up to the next Round of multilateral trade
negotiations; and

• engaging those domestic interest groups who stand to gain from Lao involvement
in WTO (particularly exporters) to help convince skeptics, and those who fear they
might lose from more openness, of its virtues.

1. Introduction



The Lao People’s Democratic Republic (PDR, or simply Laos in what follows)
is a small developing economy of just under 5 million people that is land-locked
between three large and two smaller neighbouring economies: China to the north,
Thailand to the west, Vietnam to the east, plus Cambodia and Myanmar. It is
classified as a ‘least-developed country’ by the United Nations, and as a ‘non-market
economy’ still by the United States even though it is in transition from central
planning to a market economy.
Mountains along the eastern and northern borders and an almost complete
absence of major roads through them, and the smallness of the Cambodian economy,
mean that Lao international trade is almost exclusively through Thailand, particularly
since the construction and opening in the mid-1990s of the bridge over the Mekong
River at Vientiane. The long and accessible river and land border with Thailand
ensures that smuggling is bound to take place whenever prices of tradable products in
Laos diverge significantly from those in eastern Thailand. This characteristic
necessarily constrains the extent to which Lao trade policy can be independent of
Thailand’s. The economy is thus a natural part of Southeast Asia’s, and so it made
sense for Laos to be welcomed into ASEAN in July 1997, and thereby into the
ASEAN Free Trade Area (AFTA).
The Lao PDR government adopted its New Economic Mechanism in 1986 and
since then has been shifting the economy from a centrally planned system to one that
is more and more market driven. Joining AFTA is adding significantly to that reform
program. But since AFTA is WTO-compatible it makes sense to consider joining

WTO also. To that end the Lao PDR became an Observer at the WTO in January
1998.
The World Trade Organization members are looking forward to welcoming
Vietnam as a member of the WTO ‘club’. As with all clubs, though, benefits and
rights of membership are not free. In the case of the WTO, one member’s rights or
trading opportunities are other members’ obligations or challenges.


2


This report is not so much about the rest of the world’s interest in Laos joining
the WTO as it is about benefits and costs to Laos itself, its rights and obligations, its
opportunities and challenges from becoming a WTO member. The study focuses
particularly on how those opportunities and challenges relate to the agricultural sector
and to rural development in this rapidly emerging economy. The rest of this section
discusses the reasons for focusing on Lao PDR’s WTO accession at this time and on
implications for its rural areas in particular, before outlining what is in the remainder
of the report.

Why focus on WTO accession for Lao PDR at this time?

There are several important reasons for examining the implications of Lao
accession to WTO now. The most obvious is that the sooner Laos joins, the earlier its
membership benefits will begin to flow. One of those benefits of WTO membership is
that it strengthens the government’s hand for ensuring that the economic policy
reforms contributing to the transition from plan to market are sound from a national
viewpoint rather than just from that of special-interest groups. A crucial part of those
reforms is the further opening up of the economy to international trade and
investment, for it is openness more than perhaps any other feature that distinguishes

rapidly growing economies from the rest.
1
For late-developing countries openness
matters in part because it allows the importation of new technologies from more-
advanced economies, thereby inducing faster catch-up. WTO membership also
requires each government to bind its market-opening commitments. When
commitments to openness are so bound, investment is greater from both domestic and
foreign sources because the risk of the government returning the economy to inward-
looking protectionism is lower. The greater policy certainty associated with that
reduced risk of backsliding on reform in the future encourages more investment and
hence even faster economic growth. This is especially so in the current economic
climate of great uncertainty elsewhere in East Asia.


1
For recent evidence on the gains from openness, see OECD (1998), USITC (1997), and Edwards
(1993). The latter study examines the linkage between openness and productivity growth for 93
countries over the 1980s and finds that, however trade openness is defined (he uses nine different
measures), there is a strong positive linkage.


3


Another benefit is that WTO accession offers Laos the opportunity to promptly
multilateralize its preferential trade liberalization program that began to be put in
place in January 1998 as part of AFTA. Such early multilateralization would reduce
the risk of any trade diversion becoming entrenched, thereby ensuring that AFTA
membership provides a very useful stepping stone to WTO membership. This is less
of an issue for Laos than it is for, say, Vietnam though, because much of Lao trade is

with other AFTA member countries anyway. Indeed, since Laos will have until 2010
or even 2015 to implement its preferential trade liberalization commitments in AFTA,
and since some sectors will be excluded from AFTA reform, WTO commitments to
open up may even run ahead of AFTA commitments.
A third reason for concentrating attention on WTO accession now is so as to
capitalize on the goodwill that currently surrounds WTO applications from least-
developed and transition economies. Southeast Asian neighbours have expressed their
goodwill very clearly by welcoming Laos into ASEAN in mid-1997. Meanwhile, the
European Union has signed a bilateral trade agreement with Laos, and potentially the
country’s most important trading partner, the United States, is currently negotiating a
bilateral agreement for normalizing trade and investment flows between the two
countries. Furthermore, at the multilateral level, the key international economic
institutions are expanding their efforts to support and accelerate the WTO accession of
developing countries in general but economies in transition and least-developed
economies in particular (Michalopoulos 1998a).
2
This is being complemented by
bilateral aid programs from numerous advanced economies (OECD 1997).
An additional benefit of being a WTO member is an ability to influence the
WTO’s agenda in general and its multilateral trade negotiation (MTN) agenda in
particular, and to seek greater market access for one’s exports during those periodic
MTNs. Since there is the prospect of a new (Millenium?) round of MTNs beginning
as early as the year 2000, it is in Lao interests to accede as early in the next century as
possible. Given the large number of steps needed to complete that accession process
(see Section 2 and Appendix 1 below), and the fact that for the four most recent
members it took over 6 years (73 months) from the time the working party was


2
Indeed all but four of the other twenty economies in transition that are not yet WTO members

(Bosnia, Turkmenistan, Tajikistan, and what remains of Yugoslavia) have applied to join, and at least
five of them are expected to accede in 1998 (Michalopoulos 1998b).


4


established until the time WTO membership entered into force, a concerted effort is
going to be required by Nepal to join soon after 2000.

Why pay special attention to agriculture and rural development?

Focusing on the impact of Lao WTO accession on agriculture and rural
development hardly needs justifying in a country where four of every five of the 4.9
million people live in rural areas and where more than half of measured GDP (not to
mention uncounted subsistence production) is generated by farmers. But there are
three other important reasons for a rural focus. One is that poverty alleviation requires
focusing on where the poor are, and they are overwhelmingly in rural areas in Laos.
Another is that economic growth will be enhanced by reducing distortions to producer
incentives, and in Laos – as in many late-developing countries – the economic policy
and public investment regimes are biased against the rural sector. And a third reason
to focus on rural development is that if it is neglected by not correcting the pro-urban
policy bias, the inevitable consequence will be an ever-greater drift of people from the
countryside to urban centres.
3
The policy reforms that could accompany WTO
accession provide an opportune occasion for making that change.

Outline of the study

The next section reviews the Lao Government’s stated policy goals for
achieving sustainable economic growth and poverty alleviation, and looks at why it is
seeking WTO membership (the pros and cons of which are summarized in Appendix
1). The key point is that the government is aware that WTO-compatible policies are
sound economic policies, ones that will ensure Laos makes the most of its
opportunities to reap dynamic gains from reforming its trade and trade-related policy
regime and from securing better market access abroad for Lao exports.
Section 3 summarizes recent developments in the Lao economy. These include
the rapid economic growth of the past decade, the structural changes that have
accompanied that growth and especially the relative decline of agriculture and the


3
For more on the need for more policy emphasis on rural development, see the World Bank (1997b).


5


changes within that sector. This review of the recent past, together with what we have
learnt from standard open-economy development theory and the experiences of more-
advanced economies summarized in Appendix 2, provides a basis for saying
something about where the economy is heading over the next decade or so if current
policies continue. That speculation of the likely path ahead under current policies has
two purposes: it helps identify which markets will be important for Laos to
concentrate on in its access negotiations; and it allows a comparison with what is
likely to eventuate should the government choose or be required to alter its policies in
order to accede to WTO.
Then Section 4 reviews current policies and considers those policy changes
that are likely to be necessary for WTO accession that will affect the agricultural

sector and rural development. These include not just agricultural policies per se but
also, and more importantly, a whole range of other policies that would impact on
employment and output in rural areas.
A major potential benefit to a country from joining the WTO is to obtain better
and more secure market access for its exports. Section 5 examines what those might
be, particularly as they would affect agriculture and rural development. Appendix 3
reviews the Uruguay Round Agreement on Agriculture and the agenda for further
market access negotiations from the end of this decade. Then Section 6 draws out the
possible effects of both policy reform at home and greater market access abroad for
the economy as a whole and for rural households in particular. The study concludes
with a summary of the policy choices confronting Laos as it moves towards
negotiating its Protocol of Accession to WTO.



6



2. Why join WTO


Laos has had sustainable economic growth and poverty alleviation as its key
goals of economic policy reform since the introduction of its New Economic
Mechanism in 1986. Opening up the economy to foreign trade and investment is seen
as having contributed to those goals, along with freeing up domestic markets and
allowing farmers use rights over agricultural land. Hence it is not surprising that the
government has sought to remain open through joining regional and multilateral trade
and economic integration agreements. In February 1998 Laos was granted Observer
status at the WTO. Shortly before, in July 1997, it became a member of ASEAN and

thereby was also able to join AFTA (the ASEAN Free Trade Area), which it did by
beginning to implement AFTA’s Common Effective Preferential Tariff scheme in
January 1998.
Participation in ASEAN and WTO will constitute the cornerstone for Lao
trade policy development in the 21
st
century.
4
In return for the rights and opportunities
that membership of these clubs brings to Laos, there are also some obligations and
challenges that must be faced. The Lao PDR Government is looking to sign on to
those obligations presumably because it believes the benefits will outweigh the costs,
even though some of the obligations will be politically difficult to meet. In particular,
the process of negotiating accession to WTO will further consolidate and make it
more difficult to reverse the country’s economic reforms, while requiring the reform
and/or creation of new organizational structures in the bureaucracy of this rapidly
transforming economy. This can be seen by summarizing the benefits and obligations
of WTO membership and then noting the steps involved in WTO accession (see


4
In several respects, Laos is similar to Nepal: categorized as least-developed by the UN, land-locked
by much larger countries, dominated in its trade by one of those neighbours, exploiting its mountains to
supply that neighbour with hydro-electricity, engaging in a regional free trade agreement with some of
its neighbours, and enjoying rapid growth in exports of clothing to quota-restricted OECD markets.
Hence the WTO issues for Laos have numerous similarities with those of Nepal (discussed in Anderson
1998a), except that Nepal is not categorized as a ‘non-market economy’ by the United States.

7


Appendix 1 for more details). How well WTO accession will contribute to the
government’s objectives such as providing adequate food security, food price stability
and government revenue raising is discussed later in Section 4.

Benefits and obligations of WTO membership
5


To become a WTO member is to join a club. Like all clubs, the WTO bestows
benefits on members but there are some costs; it offers rights but with them come
obligations; it provides new opportunities but also some challenges. Evidently the net
benefits are overwhelmingly positive, given that more than 130 countries are members
and more than 30 others have applied to join. But like all worthy clubs, there are rules
to be followed, entry conditions to be met and formal accession procedures to follow.
Occasionally the rules and obligations upset political sensitivities because some
groups within a country may lose a privilege (e.g., protection from import
competition), but almost invariably those rules boost the overall economy of each
WTO member. As summarized by Rodrik (1995), the general benefits that come from
the freer trade those rules encourage include the following:
• better allocation of national resources towards industries with the strongest
comparative advantage;
• enhanced learning and newer technologies from interacting more with the rest of
the world;
• greater flexibility, via trade, for dealing with shock such as natural disasters; and
• less wasteful rent-seeking lobbying activities by groups seeking government
assistance and protection.

Three specific benefits of WTO membership are greater and more-secure
market access abroad for a country’s exports, availability of a dispute resolution
mechanism, and greater discipline at home in sound economic policy making.
On the first of these, WTO rules, and particularly GATT Articles I and III,
ensure that a member’s exporters are entitled to non-discriminatory treatment by other


5
For a fuller description and answers to frequently asked questions about membership by developing
countries, see the new joint World Bank/World Trade organization Trade and Development Centre
website at . Details of the accession process itself for developing countries can be
found in WTO (1995a) and UNCTAD (1997).


8


WTO members in terms of access to their markets. This involves two aspects. One is
‘most-favoured-nation’ (MFN) status, or the same market access as other WTO
members, to any particular member’s markets for most goods. The key exceptions at
present involve farm products and textiles and clothing, which are subject to separate
agreements involving some quantitative import restrictions still. But even with these
goods, it may be possible for better (including faster-expanding) access to be
negotiated bilaterally as part of acceding to the WTO. In general (again there are
exceptions) an import tariff is the only measure that can be used to restrict market
access. Moreover, that access is guaranteed through upper limits on those tariffs
(called ‘bindings’).
6
Typically, members have made commitments not just to cap them
but also to phase down over time many of those bound tariff rates, so their trading

partner members can expect to enjoy an expansion over time in guaranteed access to
such markets. The other non-discriminatory aspect is ‘national treatment’, which
means that a country must treat foreign suppliers no less favourably than domestic
suppliers.
These non-discrimination rules ensure, for example, that a member does not
have to go to the United States government every year to plead for MFN status in US
markets. Nor can the US unilaterally impose tighter restrictions on access to another
WTO member’s exports for, say, its own domestic political reasons: its tariffs must
remain at or below the bound rates, and for each tariff item the tariff rate must be the
same for all WTO members.
7

Secondly, Article V of the GATT provides for freedom of transit for products
traded by any WTO member through the territory of any other WTO member “via the


6
For explanations of this and myriad other trade policy terms, see Goode (1998). Tariff bindings do not
yet apply to all products in all countries but, following the Uruguay Round, 89 per cent of all
developed-country merchandise imports, and 81 per cent of all developing country merchandise
imports, have become subject to tariff bindings (Finger, Ingco and Reincke 1996).
7
There is an important proviso to the application of these rules. It is that the acceding country has
completed bilateral negotiations with each WTO member and that each of those members consents to
the accession of the new member. Otherwise, according to GATT Article XXXV, a WTO member has
the right to deny MFN treatment. The US and EU have designated many former centrally planned
economies ‘non-market economies’ and used it to apply different, less transparent and potentially
discriminatory practices in their determination of anti-dumping and their use of safeguards against
imports from those economies. The US also has used it to link MFN access to freedom of emigration
and other human rights issues under Section 402 of US trade law (the Jackson-Vanik Amendment of the

1974 Trade Act). For acceding countries such as Vietnam and Laos, a crucial step in their WTO
accession process involves securing bilateral trade agreements with such members that ensure them at


9


route most convenient for international transit” (see Box 1 for the full text of GATT
Article V). No distinction may be made on the basis of “the flag of vessels, the place
of origin, departure, entry, exit or destination”. Nor may the land-locked country’s
trade “be subject to any unnecessary delays or restrictions and shall be exempt from
customs duties and from any transit duties or other charges” apart from normal costs
of transport or administration. For land-locked Laos, this may be of considerable
benefit in its dealings with Thailand, who’s alleged oligopoly on transport services has
in the past at least imposed quite a burden on Lao trade (Bourdet 1992, pp. 78-79).
Also, as and when road upgrading and planned new roads through to Vietnam are
completed, transit trade through Vietnamese ports will become more economical. If
Vietnam is a WTO member by then, GATT Article V will be of use to Laos in that
bilateral relationship too.
Thirdly, if a member feels another member is not playing by the rules, the
WTO has a dispute settlement mechanism for resolving the issue. Thanks to the
Uruguay Round, that mechanism is now much stronger, faster, impartial, and binding
than was the case under the GATT prior to 1995. As a result, members are less
inclined to bend or break WTO rules and, if they do, other members have a reasonable
chance of bringing them back into line and/or being compensated. Again this brings
much greater security of access to markets for WTO members as compared with non-
members.
And fourthly, because WTO rules also apply to one’s own policies,
membership brings discipline to economic policymaking at home as well. This can be
a major advantage for a government keen to provide sound economic governance but

subject to interest-group pleading for special protectionist favours.
More specifically, Laos will be required to tariffy its non-tariff import
restrictions, bind them, and perhaps even agree to a phasing down in some of those
bound rates over time (which reduces the risk of policy reversals); to free up trade in
services over time, again with specific commitments recorded in its Schedules; to
strengthen and enforce its intellectual property rights legislation; to reduce state
support for or direction of other (especially trading) enterprises; to limit any domestic
support for agricultural industries; and to enforce WTO rules uniformly and


least conditional MFN status. The more market oriented such acceding countries become, the higher the


10


predictably. Typically, WTO members are more demanding in all these respects on
acceding countries than on existing members, although perhaps less so for least-
developed countries such as Laos.
All trade and trade-related policy measures must be notified to the WTO
Secretariat. This adds to domestic policy transparency, making it more difficult for
interest groups to be protected without detection. Numerous WTO Agreements require
Laos to have a single enquiry point where WTO members can seek information on
policies covered by those agreements (e.g., TBT, SPS, TRIPs and GATS). Laos is also
required to inform the WTO Secretariat each year if any significant policy changes
occur, to provide statistical information annually in a set format, and to undertake with
the Secretariat, probably every six years, a comprehensive review of the member’s
trade and trade-related policies and practices.
There are other notification requirements as well. For example, all state trading
enterprises must be notified to the WTO’s Council on Goods, even those enterprises

not engaged in international trade. Any trade restrictions imposed or changed for
balance-of-payments reasons, or for sanitary or phytosanitary reasons, must be
reported to the WTO. Technical standards different from accepted international
standards, and conformity assessment procedures, also have to be notified. So too do
any trade-related investment measures and import licensing procedures that are not in
conformity with Uruguay Round agreements, as do all subsidy programs and all
GATT-inconsistent voluntary export restraints.
Clearly these notification and review requirements are non-trivial, and require
considerable cooperation and coordination among the relevant agencies of the various
levels of government. Furthermore, an enquiry point must be created and maintained
such that other WTO members can readily find up-to-date information about trade and
trade related policies. New trade practices and procedures must be codified into laws
and regulations and recorded in an official journal to which other WTO members can
have ready access.
An example of a problematic area relates to import licencing rules. All rules
and procedures for obtaining import licences must be published, procedures must be
simple and prompt, the licences in principle should be administered through a ‘one-


probability that members such as the US will not invoke Article XXXV and will guarantee MFN status.


11


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

The steps to WTO accession

As detailed in Appendix 1, there is a series of steps required before a country
can accede to the WTO. In the course of taking these steps, a country gradually
amends its policies and institutions in readiness to abide by WTO rules and accept the
obligations of membership.
The first step, already taken by Laos (although it is not obligatory), is to
request Observer status so that national government officials can begin learning from
the inside as to how the WTO institution works. When ready, the next step is to
submit a letter of application which triggers the establishment of a Working Party to
examine the applicant’s trade policies and practices, to organise accession
negotiations, and to prepare the Protocol of Accession.
The next big step towards WTO accession is to prepare a Memorandum on the
country’s foreign trade regime. For a country in which policy transparency is not the
norm, this is a major undertaking. Background information on the economy and
domestic economic policies, detailed statistics on the country’s foreign trade and
investment, an outline of its legislative and bureaucratic frameworks for making and
enforcing policies affecting foreign trade, and a copy of all the laws and regulations
are required. In addition, the Memorandum must detail every current and agreed
future policy measure affecting trade in goods, foreign investment policy and
regulations, the trade-related intellectual property regime, the trade-related services
regime, and any bilateral or plurilateral trade or economic integration agreements to
which the country is a signatory. And a comprehensive tariff schedule in the detailed
harmonized system nomenclature must be attached.
This Memorandum is circulated to all WTO members who are invited to
submit in writing any questions of clarification. In the case of economies in transition
from central planning, many hundreds or even thousands of questions may be
submitted. (So far, the number of questions submitted to China and Russia exceeds


12

3000 and 2500, respectively.) It usually reflects two facts: that the country is only
part-way along in its transition from plan to market, and that considerably more detail
is required than is in the Memorandum before WTO members feel they will have
enough information to enter negotiations. Once Laos has compiled its answers to these
questions, they are submitted to the Working Party, which triggers a series of review
sessions. The frequency and length of meetings and the overall time this step takes
depend heavily on the speed and comprehensiveness of Lao responses to the initial
and follow-up questions: this step in principle could be completed in just a few
months, but in practice (as in China’s case) it could take years.
Once the examination of the country’s foreign trade regime is sufficiently
advanced, members initiate bilateral market access negotiations on goods and services
and on the other terms to be agreed. Even then, further fact-finding work on the trade
regime may continue in parallel with those negotiations. Negotiations also proceed on
a multilateral basis through the Working Party, during which three draft schedules of
commitments have to be prepared. They relate to: tariffs (to be reduced and bound or
subjected to ceiling bindings
8
) and other measures affecting trade in goods; market
access, domestic support and export subsidies affecting agricultural trade (which again
have to be bound); and services trade commitments. They may specify phase-in
periods and allow temporary maintenance of current practices for a limited period.
In practice these market access commitments are negotiated with one or more
of the WTO members who are principal suppliers, but they are extended on an
unconditional MFN basis to all WTO members. The commitments may extend
beyond the scope of the Uruguay Round agreements (e.g., privatization). In this
process Laos cannot seek ‘concessions’ from members, but on accession it will have
the guarantee of MFN access to members’ markets (something which it may have
been denied previously).

Once the negotiations on the three schedules of commitments are concluded,
the Working Party will submit its report together with a draft Decision and Protocol of
Accession to the General Council or Ministerial Conference of the WTO. Acceptance
requires two-thirds of WTO members to approve it. In the case of Laos, Thailand


8
A ceiling binding can apply to all or to a subset of tariff items, at a specified level at or above applied
tariff rates.


13


would need to be one of the approving members for its membership to be very
meaningful in practice.

Special and differential treatment for developing and least-developed countries

In addition to receiving the standard WTO membership benefits such as MFN
and national treatment, the right to some of the low-tariff rate quota access to others’
agricultural markets, the possibility of accelerated growth in access to US and EU
markets for textiles and clothing, and access to the WTO’s Dispute Settlement Body,
those WTO members that are developing countries, and in particular least-developed
economies including those in transition from central planning, also receive some
special (although typically temporary) treatment in the WTO. This crops up in many
places in the WTO agreements (see UNCTAD (1997, Annex 2) for a comprehensive
listing). However, this is not a set of rights automatically given in full to an acceding
country. On the contrary, each of those items must be negotiated, and in practice many
developing and transition countries (most notably China) are finding it difficult to

secure much in the way of special and differential treatment even as developing
countries let alone as least-developed
As a least-developed country, Laos will find it helpful to be aware of the
special treatment such countries may receive. This treatment is included in the
Uruguay Round’s Agreement on Agriculture, for example (see Appendix 3 below),
and also in two Ministerial Decisions
9
made at the time of signing the Marrakesh
Declaration of 15 April 1994 which concluded the Uruguay Round. Since then there
have been several initiatives to implement those Decisions. For example, the first
WTO Ministerial Conference, held in Singapore in December 1996, approved a
comprehensive and integrated Plan of Action for the Least-Developed Countries, and
in that same year a Sub-committee on Least-Developed Countries was set up within
the WTO Committee on Trade and Development. That Sub-committee subsequently
played a significant role in organizing a High Level Meeting in Geneva on 27-28


9
On Measures in Favour of Least-Developed Countries (the main concerns being expanded provision
of preferential market access and technical assistance on trade matters), and on Measures Concerning
the Possible Negative Effects of the Reform Program on Least-Developed and Net Food-Importing
Developing Countries (the main concern being the continued provision of food aid and food export
credits). The Decisions are recorded in GATT (1994, pp. 440-41 and 448-49).


14


October 1997, involving the trade ministers of least-developed countries (LDCs) and
six intergovernmental agencies (WTO, UNCTAD, ITC, IMF, World Bank and

UNDP), which endorsed a trade assistance program designed to help LDCs increase
their ability to trade and led to announcements of new and improved preferential
access to richer-countries’ markets (WTO 1997c). And the new Trade and
Development Center website (), created and maintained jointly by
the World Bank and WTO, has a strong focus on providing plain-language
information (at least in English) concerning the rights and obligations of LDC
members of WTO.



15



3. Recent and prospective growth
and structural changes in Lao PDR


This Section summarizes recent developments in the Lao economy. These
include the rapid economic growth of the past decade, the structural changes that have
accompanied that growth and especially the relative decline of agriculture and the
changes within that sector, and the ever-changing policy setting particularly as it
affects rural areas. This review of the recent past, together with what we have learnt
from standard open-economy development theory and the experiences of more-
advanced economies summarized in Appendix 2, provides a basis for saying
something about where the economy is heading over the next decade or so if current
policies continue. That speculation of the likely path ahead under current policies has
two purposes: it helps identify which markets will be important for Laos to
concentrate on in its access negotiations; and it allows a comparison with what is
likely to eventuate should the government choose or be required to alter its policies in

order to accede to WTO (as discussed in the following section).

A transition economy on the move

Prior to the introduction of the New Economic Mechanism in 1986, the Lao
economy was subject to central decisions by the planning authorities. Domestic prices
were divorced from those in international markets through a complex system of
multiple exchange rates, trade taxes/restrictions/subsidies, and set procurement and
selling prices and quantities for many products. Exports were discouraged through
overvalued exchange rates and low procurement prices, while imports were impeded
by an extensive system of import quotas and licences. Formal imports and exports
were primarily with other members of the Council for Mutual Economic Assistance
(CMEA), more than one-quarter of which involved barter trade. Together with the fact
that the majority of non-farm products were produced by state-owned enterprises,


16


these features ensured the economy lacked flexibility and its agents lacked the
incentive to be entrepreneurial and innovative. Under these conditions, national output
was low and growing relatively slowly, exports accounted for a relatively small share
of that output (less than 10 per cent), and imports contributed only modestly to
consumption.
Given that starting point and the experiences of earlier-developing East Asian
economies, it is not surprising that with the opening up of the Lao economy and its
move towards greater fiscal discipline and considerable reliance on market forces,
production and trade have grown rapidly. GDP expanded at 6.7 per cent per year over
the six years to 1996 (or more than 4 per cent per capita), compared with just 3.7 per
cent in the 1980s (barely 1 per cent per capita). Industrial output growth has been

especially strong, from a small base (Table 1). Per capita income has thus risen from
less than $200 prior to the late 1980s to about $400 in 1997 in current US dollars.
Meanwhile, exports and imports of goods and services have been growing at around
10 and 6 per cent p.a., respectively, since the mid-1980s. Recorded exports plus
imports of goods and non-factor services in 1996 accounted for 65 per cent of GDP
(World Bank 1998).
This impressive performance began with freeing up parts of the agricultural
sector from the early 1980s (Bourdet 1995), but later began to include other sectors
and also involve the unification of exchange rates in 1988 at close to the rate
prevailing in the parallel market. Tight fiscal policy has brought inflation down,
further improving the macroeconomic environment as needed for rapid growth.

Agriculture’s relative decline

Accompanying this rapid growth has been substantial structural transformation
of the economy. One of the most striking features of economic development is the
relative decline of the agricultural sector in growing economies. Also typical is a
decline in their agricultural comparative advantage as modernization in other sectors
proceeds. As detailed in Appendix 2, this can be explained by trade and development
theory that is shown to be strongly supported by comparative evidence across
countries and over time, particularly for Asia.