tóm tắt tác động của afta trên doanh thu của chính phủ, ngoại thương, và fdi của lào

MINISTRY OF EDUCATION AND TRAINING VIET NAM
NATIONAL ECONOMICS UNIVERSITY


ATHSAPHANGTHONG SIPHANDONE



IMPACTS OF AFTA ON GOVERNMENT REVENUE,
EXTERNAL TRADE AND FDI OF LAO PDR
(Economics)
Code : 62.34.03.01



A dissertation submitted to the National Economics University in fulfillment of
requirements for the degree of Doctor of Philosophy in Economics



Hanoi, March 2014

Summary

This dissertation has been fulfilled at the
National Economics University, Hanoi, Vietnam


Supervisor: Prof. Dr. Tran Tho Dat

First Commentator: Assoc.Prof.Dr Dao Van Hung

Second Commentator: Assoc.Prof.Dr Phosy Chanhming

Third Commentator: Assoc.Prof.Dr Nguyen Dinh Tho


The oral defense will be undertaken at the National Economics University,
Hanoi, Vietnam at date of …., 2014




The dissertation can be found at:
- The National Library of Vietnam
- The Library of National Economics University, Hanoi, Vietnam
- The Library of National University of Laos, Vientiane, Lao PDR

PUBLICATIONS

1. Athsaphangthong Siphandone (2011), “Vận dụng một số kinh nghiệm
về thu hút đầu tư trực tiếp nước ngoài (FDI) của một số nước vào nước
CHDCND Lào”, kỷ yếu hội thảo khoa học Quốc tế:, “Phát triển kinh tế xã
hội Việt Nam và Lào giai đoạn 2011-20120”, Tập II, 7/VIÊNG CHĂN.
2. Athsaphangthong Siphandone (2014), “Impacts of AFTA on Lao
External Trade”, in “Creating new growth momentum: strengthening FDI
– local enterprises linkages” International Conference in Hanoi, 2014.

1

I. INTRODUCTION

1. Background
Regional integration has become the main form of trade liberalization since
the early 1990s.Progress of the integration has been very impressive in recent
decades for a number of developing countries in Asia and, to a lesser extent, in Latin
America. These countries have become successful because they chose to participate
in regional and global trade, helping them to attract the bulk of foreign direct
investment in developing countries (IMF, 2001).
There are a number of arguments on free trade. It can bring about several
advantages and disadvantages. The benefits can be indicated in trade creation,
increased exports, economies of scale, increased competition, make use of surplus
raw materials, increased production, production efficiencies, benefits to consumers,
foreign exchange gain, employment opportunities, and economic growth.
Although free trade has benefits, there are a number of disadvantages such as
changes in structural unemployment in the short term, increased domestic economic
instability from international trade cycles, as economies become dependent on global
markets, developing or new industries may find it difficult to become established in a
competitive environment with no short-term protection policies by governments, free
trade can lead to pollution and other environmental problems, free trade may raise
government revenue by import taxes, but this will only be a small amount of money.
In Southeast Asian region, ASEAN Free Trade Area (AFTA) is a significant
trade bloc. Having established in 1992, it is considered in the second level of
economic integration. The primary goals of AFTA are to increase ASEAN’s
competiveness through eliminating the tariffs and non-tariff barriers within member
countries and to attract more foreign direct investment to the region.
The impacts of free trade in general and AFTA in particular can be reviewed
from different countries’ case studies. Within ASEAN member, a number of research
papers focus on the consequences of AFTA on economy as a whole. These can be

2
found in the study case of Vietnam conducted by Fukase and Martin (1999), Loc
(2001), Ba (2004), Harris et al (2007), and Thanh (2007). The main findings reveal
that there is an increase in welfare and poverty reduction thanks to broader
liberalization.
In addition, many studies on economic impacts, particularly government’s
revenue, intra-trade, and FDI flows of the entire and individual member countries
have been conducted.Chaiwootet al (2006) analyze the economic impacts of AFTA
on Thailand’s economy, whereas Piriya (2010) examines whether the AFTA creates
trade for Thailand or actually diverts it away from the country by analyzing various
trade indicators and Pupongsak (2009) investigates the impact of trade liberalization
on taxation and government revenue of Thailand. Fukase and Martin (2001) explore
implications for Cambodia of its entry into the AFTA through considering the trade
regime, including the reliance on customs duties as a revenue source. Hartono et al
(2007) investigate the impacts of AFTA on the Indonesian economy, namely
economic growth, poverty, and income distribution.
Participating in AFTA is challenging for newer ASEAN members (Cambodia,
Lao PDR, Myanmar, and Vietnam) in terms of social and economic development.
Therefore, there have been some studies related to the consequences of AFTA
commitment execution on CLMV. The empirical evidence can be found in the work
done by Tongzon, Khan, and Doanh (2004 and 2005) and Araya (2002) which focus
on analyzing how CLMV deal with revenue lost and options for revenue management
after participating in AFTA tariff reductions, as well as the challenges of economic
integration for CLMV.
Elsie (2005) examines whether the formation of AFTA leads to an increase in
ASEAN intra-trade and how it brings trade benefits to economies with different
stages of development from 1988 to 2003. Adams and Park (1995) evaluate the
impact of AFTA with a link to Computable General Equilibrium (CGE) model to
quantify the macroeconomic effects of external shock, domestic policy, and regional-
grouping and market-opening efforts through tariff reduction policies among ASEAN

3
nations. Hapsari and Mangunsong (2006) analyze the determinants of AFTA
members’ trade flows and potential for trade diversion, including the impacts of
creation of AFTA on its intra- and extra-regional trade flow by comparing trade
patterns of AFTA countries with AFTA members and non-members. David Cheong
(2008) studies the effects of AFTA, using a gravity model to address changes in trade
patterns of ASEAN during 2001-2003. Adams and Horridge (2000) estimate the
AFTA trade liberalization on ASEAN member countries, with special reference to
Thai economy in long term. Ho Sze Yin (2010) investigates the effects of AFTA
whether it leads to trade creation or diversion among member countries during 1988-
2004. Gumilang (2011) studies the trade agreements with Japan (IJEPA) and AFTA
with reference to Indonesia. Hector et al (2009) examine the impacts of AFTA on
trade flows and external trade barriers during 1992-2007.
In case of Lao PDR, one of the most directly related to the consequences of
implementing AFTA can be found in the study conducted by Menon (1999), AusAid
and UNDP (1996), and Phouphet (2004). In these papers, the main objective is to
examine the impacts of AFTA on Lao economy by addressing the trade, government
revenue and foreign investment flows. The key findings show that (i) trade diversion
is likely to be low; (ii) the reduction in government revenue from trade taxes is likely
to be low; and (iii) foreign direct investment (FDI) flows are likely to grow sharply in
the future. However, Phouphet argues that AFTA will lower the general price,
causing an increase in real consumption, investment, and macroeconomic variables,
and therefore the GDP will also increase. Besides, Phongsavanh (2003) studies the
Lao PDR’s integration in ASEAN. The main objective is to initially assess the
potential impacts of joining ASEAN of the Lao PDR. By employing descriptive
approach, the results reveal that through accessing to ASEAN and following the
commitments of AFTA, the trade regime of the Lao PDR is negatively affected.
However, the risk of trade diversion is considered to be minimal, it may occur in
some imported products, namely automobiles. Simultaneously, the welfare of people

will be improved through AFTA’s scheme as they can buy commodities at lower
prices with more choices in a larger ASEAN market.

4
From the above-revised researches, the discrepancies between this study and
the previous ones, particularly the one conducted by Phouphet (2004), can be
distinguished in terms of analytical methodology, independent variables used in the
models, and time periods. In building Lao macroeconomic model, Phouphet focuses
on the effects of AFTA on the whole economy through changing general price. He
also focuses on demand and supply sides which are adjusted by general price
mechanism. Since Lao PDR is an agricultural country, he thus divides the supply side
(GDP) into agricultural and non-agricultural GDP to analyze the agricultural structure
change. To analyze the trade structure change, trade with Thailand and trade with
non-Thailand are also divided.The model consists of 15 structural equations. The
main policy variable is government investment, foreign direct investment, money
supply, and exchange rate. The main target variables are GDP, general price, private
consumption, domestic investment, export, and import. He uses ordinary least square
method to estimate structural equations and Newton method to simulate the model.In
the export and import equations, there is no tariff rate. Therefore, he assumes that the
effects of AFTA by deduced tariff have the same effect by decreasing import price by
5 per cent. The data used covers during 1988-2000, which is a short-time period and
the data per se is not well organized and less reliable since the economic structure
had changed from centrally planned to market-oriented economy in 1986.
In this paper, rather than using only the OLS method of econometric approach
to estimate the impacts of AFTA on government revenue, external trade, and FDI, but
descriptive approach is utilized to analyze the tendency and relationship among the
specified variables. In the export and import equations, the tariff rate of both ASEAN
member countries and Lao PDR are included. Concerned with the time period, it
covers from 1990 to 2012 which is longer and more accurate.
2. Objective

The main objectives of this dissertation are twofold as follows:
 To review the economic performance of Lao PDR before and after
participating AFTA;
 To estimate the impacts in implementing the Common Effective Preferential

5
Tariff (CEPT) scheme under AFTA on the Lao PDR’s government revenue,
external trade (exports and imports), and Foreign Direct Investment (FDI)
flows.
3. Expected Outcomes
Based on the above-specified objectives, the expected outcomes of this paper
are as follows:
 Be able to realize the current situation of AFTA’s CEPT scheme of Lao PDR;
and
 Be able to measure the changes in the magnitude of the Lao government
revenue, expansion of external trade to the regional markets, and growth of
FDI after joining ASEAN in 1997.
4. Significance of Study
The findings of this paper are considered significant for the author since it
deepens more understandings on economic development policies, strategies and
growth in Lao PDR in the past and shades light on the future development directions.
Moreover, the results will provide better knowledge on the repercussions of
regional economic integration, particularly with ASEAN on the Lao government
revenue, external trade directions, influx of FDI, and smuggling activities.
In addition, this paper will be a useful reference for the scholars, researchers,
and general interested groups who desire to analyze the similar issues in the different
case studies, approaches, and time periods.
5. Scope of Study
The scope of this study is to focus on the impacts of regional economic
integration, namely AFTA on the Lao government revenue, external trade, and FDI.

These indicators are selected as dependent variables to indicate the impacts during
1990-2012. These time periods cover several internal, regional, and international
economic shocks, namely the implementation of NSEDP, membership of ASEAN
and AFTA implementation of Lao PDR, Asian Financial Crisis in 1997, and global
economic crisis in 2008.


6
II. METHODOLOGY
In order to carry out the findings in accordance with the set objectives, this
paper simply employs descriptive and econometric approaches.
2.1 Descriptive Approach
The impacts of AFTA on economic performance, government revenue, FDI,
and external trade (exports and imports) can be analyzed through the specified
indicators of individual variable, which are displayed in Table 1.
To clearly present the results or the relationship between the tariff reduction
under AFTA’s CEPT scheme, tables and charts will be used. Also, to distinguish
differences of economic development, changes in government revenue, FDI, and
external trade, the duration of time will be divided into a five-year period: 1990-
1995, 1996-2000, 2001-2005, and 2006-2012, which are in accordance with the five-
year NSEDP of the GOL.
Table 1: Framework on Analyzing the Impacts of AFTA on Economic
Performance, Government Revenue, Trade, FDI.
Issues
Indicators
Economic
Performance
— Economic development measured by GDP growth rate
during 1990-2012;
— GDP per capita during 1990-2012;

— Structure of Lao Economy;
— Economic growth rate by sectors: Agriculture, Industry,
and service, covering from the 3
rd
to the 6
th
five-year NSEDP.
Government
Revenue (Tax
Revenue
Reduction)
— Structure of government’s revenue (tax and non-tax
revenue);
— Growth rate and percent share of tax and non-tax revenue
to total revenue and GDP;

7
Issues
Indicators
— Relationship between government’s tax revenue and
averaged-tax rates
Trade
— Volume, growth rate, and percent share of exports and
imports;
— Growth rate and percent share of trade balance to GDP;
— Trade directions (main exporting and importing markets);
— Compositions of exports and imports;
— Percent share of total trade to intra-trade of ASEAN;
— Degree of trade openness (terms of trade);
FDI

— FDI flows from ASEAN members (intra-FDI) and non-
ASEAN countries (Extra-FDI);
— Percent share of total FDI to intra-FDI of ASEAN;
— FDI by home/original countries;
— FDI by economic sectors.
2.2 Econometric Approach
To obtain the empirical evidences of the consequences of the AFTA on
government revenue, FDI, and external trade (dependent variables), the Ordinary
Least Squares (OLS) method is applied. The functions of the above-mentioned
dependent variables can be expressed as follows:






8
1. Export Function
EXP: f
1
(GDPF, TAXA, INFR, EXR, LIB) ………………………. (1)
2. Import Function
IMP: f
2
(GDP, TAXL, INFR, EXR, LIB) …………………………. (2)
3. Government Revenue Function
GOVR: f
3
(GDP, TAXL, INFR, EXR, IM, LIB) ……… ………… (3)
4. Function of Foreign Direct Investment

FDI: f
4
(GDP, TAXL, INFR, EXR, LIB) (4)
Where,
f
i

:
Shows functional forms of the model/equation i
th
;
GDPF
:
National income of ASEAN member countries, proxied by the
income of major trading partner, namely Vietnam, Thailand,
and China;
GDP
:
National income of Lao PDR;
TAXA
:
Tariff rate of ASEAN member countries;
TAXL
:
Tariff rate of Lao PDR;
INFR
:
Inflation rate;
EXR
:

Exchange rate;
LIB
:
Trade Liberalization by implementing AFTA commitments
commencing in 1998; Dummy Variable, LIB = 0 (1990-1998),
LIB = 1 (otherwise);
IMP
:
Imports;
EXP
:
Exports;
FDI
:
Foreign direct investment.
RP
:
Relative price

:
Error corrections.

9
In export function (EXP), some of the most influential factors are determined
as independent variables, peculiarly foreign income (GDPF), tariff rate of ASEAN
member countries (TAXA), inflation rate (INFR), and exchange rate (EXR). Also,
Liberalization (LIB) is used as a dummy variable. GDPF is associated positively with
EXP because when global or ASEAN member countries’ economies grow, their
demand for imports from Laos will increase. Therefore, the expected sign of GDPF is
positive (+). Theoretically, tariff rate has an opposite with the export; when tariff rate

increase, the export will decline and vice versa. So, TAXA has a positive
relationship with EXP since continuous tariff reduction of ASEAN member countries
will make the Lao exports relatively cheaper in their markets. Thus, the expected sign
of TAXA is positive (+). Pertaining to INFR, it has a negative association with EXP
because when domestic price increase the exports will become more expensive in the
world’s market. Hence, the expected sign of INFR is negative (-). This is in
contrasted with EXR, when it increases or depreciation the exports will be cheaper.
Consequently, the expected sign of EXR is positive (+). It is also anticipated that
AFTA will bolster the Lao exports to ASEAN markets. For that reason, the expected
sign of LIB is positive (+).
In the import function (IMP), GDP is related positively to IMP which implies
that when income increases, demand for imports will also rise. As a result, the
expected sign of GDP is positive (+). With regard to TAXL, the expected sign is
positive (+) because decreased tariff rate will also encourage more demand on
imports. With respect to INF, when domestic price rises the commodities become
more expensive. It is better to import rather than consume domestically produced
goods and services. Therefore, the expected sign of INF is positive (+). On
contrary, depreciation of exchange rate will lower the imports. Thus, the expected
sign of EXR is negative (-). It is expected that AFTA bring about better quality
commodities and cheaper price to Lao market. Consequently, the expected sign of
LIB is also positive (+).
With regard to the FDI function, it is important to observe that economic
growth of host country is one of attracting factors for FDI. So, the expected sign of

10
GDP is positive (+). Also, the expected sign of TAXL is positive (+) more invest
capital will flow to Lao PDR when the tariff rate is gradually eliminated.
In respect of the function of government revenue, there is not only tax that
affects government revenue, but also other factors, namely macroeconomic stability
and external environment (economic growth, price stability, and exchange rate). In

the Lao context as an importing country, the tax revenue derived from imports is the
major income source of the GOL. Therefore, it is determined as an independent
variable in the function, which is associated positively with GOVR. In this
connection, it is expected that GOVR will reduce after joining AFTA (both TAXL
and LIB are expected to have negative signs).
From functions (1), (2), (3), and (4), the econometric models of imports,
exports, government revenue, and FDI in the logarithm forms can be written as
follows:

…………………… ………… … (5)

………
……… ……………………………………………….………… (6)


(7)

…… … (8)

To obtain the empirical evidences, Equations (5), (6), (7), and (8) will be
estimated by applying the OLS method. In the computing process, both Lao and
weighted-average data (WAD) will be used to find the most appropriate results to
better describe the issues in the Lao context.There are two main reasons why the

11
WAD is also used in estimating the equations. First, the structure of economy has
been changed since the New Economic Mechanism initiated in 1986, causing the data
collection has been haphazard until in 2000 onward. Second, the WAD is acquired by
calculating the weight of a particular item or variable to the total number of major
trading partners, namely Vietnam, Thailand, and China. These three neighboring

countries are the top three export and import markets, as well as the home countries
for FDI in Lao DPR. Therefore, any internal policy changes or unexpected shocks
occurred in these countries will also bring about the impacts on the Lao economy.
The formula of the WAD can be expressed as follows:




Where,

:
are the weighted-average and total
foreign income (Vietnam, Thailand,
and China);
and
:
are total income of Vietnam,
Thailand, and China, respectively;

:
is a sum of foreign income
(Vietnam, Thailand, and Vietnam);

:
are the weighted-average and the
sum of imports of foreign countries;

:
Are total imports of Vietnam,
Thailand, and China, respectively;

:
are the weighted-average inflation
and exchange rates;
, ,
:
are the inflation rate of Lao PDR,
Vietnam, Thailand, and China,
respectively; and

:
are the exchange rate of Lao PDR,
Vietnam, Thailand, and China,
respectively; and

12
Table 3.2: Summary of Expected Signs of Independent Variables
Independent
Variables
Dependent Variables
EX
IM
FDI
GOVR
Constant
+
+
+
-
GDP

+
+
+
GDPF
+



TAXL

+
+
-
TAXA
+



INFR
-
+
-
-
EXR
+
-
+
-
IM

+
LIB
+
+
+
-
Sources: Author’s Expectation (2013).
2.3. Data Collection
In analyzing economic development and impacts of AFTA accession on
government revenue, external trade, and FDI flows to Lao PDR, the secondary data
of time series during 1990-2013 is used. Generally, the difficulty in conducting
analysis on economic issues in case of Lao PDR is a lack of data.
Thus, the data were collected and derived from different sources such as
Ministry of Finance (2013), Asian Development Bank (ADB), “Key Indicators of
Developing Asian and Pacific Countries”, International Monetary Fund (IMF),
“World Economic Outlook Database, 2013”.



13
III. FINDINGS
3.1 Lao Economic Performance During 1990-2012
The significant findings reveal that Lao PDR’s economy has continuously
grown with robust growth rates, particularly during the implementation of the 6
th

five-year NSEDP (2006-2010). In an average, the economic grew at 5.32 per cent

during 1996-2000, 6.3 per cent in the period of 2001-2005, and 8 per cent in the
course of 2006-2010. The main contributors to the economic growth are seen in
hydropower and mining. The results also indicates that the GDP per capita of Lao
PDR has gradually increased and been classified as a lower middle-income country
in 2011.
With regard to the output structure of Lao PDR’s economy, during 1996-2000,
agricultural sector accounted for 50 per cent of GDP in an average, whereas industry
and services covered 20 per cent and 30 per cent of GDP. During 2001-2005 and
2006-2010, it is also seen that the general tendency of output structure has changed
from agricultural-based economy towards industrialization in line with the GOL’s
economic development strategy. The percent share of agriculture in GDP has
gradually declined, while the industry and services has grown up. It is contended that
the momentum of this growth is thanks to the regional liberalization and integration,
namely AFTA participation.
The results of examining the impact of AFTA participation on Lao PDR’s
government revenue, external trade, and FDI can be summarized as follows:
First, the main revenue sources of the GOL are derived mainly from taxes,
which account for 65 per cent of the total revenue in an average. The excise tax and
import duties are major composition of taxed revenue. With the commitment to
reduce the tariff lines for the influx of imported commodities from ASEAN countries,
tax revenue derived from import duties has increased. This is because low tariff rates
would induce more imports and then more revenue levied. The ratios of total revenue
and expenditure, taxes, and budget balance to GDP also show a significant direction.
Though the expenditure is greater than the revenue, the gap is gradually narrow

14
owing to a continuous increase in the revenue from different sources. As a
consequence, the overall budget deficit is gradually mitigated. If it is compared with
many ASEAN countries, Lao PDR has lower budget deficit.
Second, in respect of external trade of Lao PDR, the exports have tended to

increase after joining ASEAN. The main contribution to a persistent increase in
exports stemmed mainly from an increase in electricity sector, garments, coffee, and
wood products. With regard to the export markets of Lao PDR, it is observed that
Thailand, Vietnam, and China are the top 3 of the export markets throughout the time
periods. Also, it has continued to expand the markets to the larger markets such as
USA, the United Kingdom, France, and Germany.
For the import side, the import markets of Lao PDR, Thailand, Vietnam, and
China are also the top 3 import markets that it has relied on. Recently, China has
become the second largest import market of Lao PDR which has replaced Vietnam
since 2003. It can be argued that the external trade deficit of Lao PDR has been
mitigated after joining ASEAN since the exports have increased faster than the
imports. Before joining ASEAN, Lao DPR’s economy was not much opened. The
degree of trade openness is only 51.65 per cent. However, it can be argued that Lao
PDR has gradually integrated into regional and international economic integration
when comparing with some selected countries in the region and the rest of the world.
Third, FDI has made a positive contribution to the manufacture of goods,
economic growth and the restructuring of the Lao economy. It also helped develop
the private sector. These achievements are attributed to the incentives provided by the
Government and other measures, including as the decentralization of foreign
investment licensing. Major FDI to Lao PDR in recent years comes from the region,
mainly, from Thailand, China, Vietnam, andAustralia. Many projects were invested
in industry and handicraft, followed by services, agriculture, and mining.
3.2 Empirical Results
By using econometric method with the Lao and WAD data, the results are
displayed in Tables 1 and 2, respectively.

15
Table 2: Results of Regressions by Using Lao Data
Independent
Variables

Dependent Variables
ln(EXP)
ln(IMP)
Ln(FDI)
ln(GOVR)
Constant
-17.222
(-3.553)***
-7.246
(-3.048)***
-27.331
(-2.327)**
-14.706
(-2.032)**
ln(GDP)

1.540
(5.817)***
2.682
(2.051)**
2.687
(2.155)**
ln(GDPF)
1.772
(5.402)***



ln(TAXL)

0.678
(1.825)**
1.043
(0.569)
2.079
(2.033)**
ln(TAXA)
-0.081
(-0.251)



ln(INFR)
0.015
(0.347)
-0.003
(-0.076)
-0.066
(-0.342)
-1.183
(-5.343)***
ln(EXR)
0.300
(2.187)**
0.141
(1.497)
1.762
(3.796)***
0.213
(0.877)

ln(IMP)



1.089
(2.193)**
LIB
-0.251
(-0.967)
-0.615
(-2.618)***
-3.370
(-2.904)***
-0.626
(-1.187)
R-Squared
Adjusted-R
Squared
Durbin-Watson
Stat.
F-Statistic
0.950
0.934
1.574
(61.0689)***
0.941
0.923
1.611
(51.159)***
0.817

0.759
1.684
(14.261)***
0.961
0.946
1.532
(65.620)***
Sources: Author’s Estimation (2013).
Note: 1). The figures in the parentheses are t-statistical values; 2). ** and *** denote
statistically significant at 5% and 1% of significance level, respectively; 3). D.W: n = 22, K
= 5, at 5%, d
L
= 0.769, d
U
= 1.940 and at 1%, d
L
= 0.587, d
U
= 1.691; and 4). D.W: n = 22,
K = 6, at 5%, d
L
= 0.677, d
U
= 2.090 and at 1%, d
L
= 0.510, d
U
= 1.849.
1

1
The Durbin-Watson statistic ranges in value from 0 to 4. A value near 2 indicates non-autocorrelation; a value toward
0 indicates positive autocorrelation; a value toward 4 indicates negative autocorrelation.

16
Table 2 indicates the regression results of export, import, FDI, and government
revenue equations by using the Lao time-series data during 1990-2012. The estimated
findings of individual independent variable can be described as follows:
In the export equation (EXP), economic growth of foreign countries (GDPF)
and exchange rate (EXR) are associated positively with the export. They alsohave the
expected signs and are statistically significant at 1 per cent and 5 per cent,
respectively.This is implied that an increase in GDPF by 1 per cent, the exports of
Lao PDR will rise by 1.772 per cent, given the other factors remain constant.
Similarly, an increase in or a depreciation of EXR by 1 per cent, the exports will go
up by 0.3 per cent, provided that the other factors remain unchanged. Nevertheless,
the coefficients of the tariff rate of the ASEAN countries (TAXA) and inflation rate
(INFR) have the opposite expected signs and are statistically insignificant.
With respect to the import equation (IMP), the estimated coefficients of
economic growth (GDP) and tariff rate of Lao PDR (TAXL) have positive signs in
line with the expectations and are statistically significant at 1 per cent and 5 per cent,
respectively. An increase in GDP by 1 per cent, the imports will rise by 1.540 per
cent (elasticity of demand for imports is greater than 1), given the other factors are
unchanged. This is plausible in the Lao context because it could not have
domestically produced. It has thus relied on the imports to meet the needs of the
domestic markets. Certainly, a decline in TAXL by 1 per cent, the imports will
increase by 0.678 per cent, provided that the other things remain unchanged. This can
be argued that Lao PDR will import more when tariff rate reduces as a result of
CEPT implementation. The coefficients of INFR and EXR have the contrary signs

and are statistically insignificant. Though LIB is significant at 1 per cent, its
estimated coefficient is negative which is not in compliance with the assumption.
FDI is also positively associated with GDP and EXR, which can be obviously
observed by the computed parameters with the expected signs and significant levels
at 5 per cent and 1 per cent, respectively. An increase in GDP by 1 per cent will
attract more FDI to invest in Lao PDR by 2.682 per cent. A rise in or depreciation of

17
EXR by 1 per cent will also help create a conducive factor to attract FDI by 1.762 per
cent. Although, TAXL and INFR have positive and negative relationships with the
FDI, they are statistically insignificant.
In the equation of government revenue (GOVR), GDP, IM, INFR have the
expected signs and are statistically significant at 5 per cent and 1 per cent,
respectively. An increase in GDP 1 per cent will stimulate GOVR to be raised by
2.687 per cent. Interestingly, a reduction of TAXL will not affect the government
revenue. This means that tax revenue may reduce due to a reduction in tariff rate, but
it will be offset by an increase in Value Added Taxes and profit tax derived mainly
from hydropower projects and natural-resourced sector, namely mining.
The EXP, IMP, FDI, and GOVR equations have high goodness fit as the
Adjust R-squared are 0.934, 0.941, 0.817, and 0.961, respectively. These suggest that
the sample regression lines fit the data very well.Additionally, the Durbin Watson
Statistics (D.W) of 1.574, 1.611, 1.684, and 1.532 illustrate non-autocorrelation or
inexistence of the serial correlation of the error terms in the EX, IM, FDI, and GOVR
equations of using the Lao data.
Table 2: Results of Regressions by Using the Weighted-Average Data
Independent
Variables
Dependent Variables
ln(EXP)
ln(IMP)

Ln(FDI)
ln(GOVR)
Constant
-11.079
(-4.296)***
-7.213
(-3.557)***
-2.898
(-2.945)***
-20.838
(-5.850)***
ln(GDP)

2.068
(9.631)***
2.436
(23.378)***
1.928
(2.520)***
ln(GDPF)
1.400
(8.956)***



ln(TAXL)

1.147
(3.809)***
0.213

(1.456)
2.296
(4.415)***
ln(TAXA)
0.585
(2.819)***




18
Independent
Variables
Dependent Variables
ln(EXP)
ln(IMP)
Ln(FDI)
ln(GOVR)
ln(INFR)
-0.916
(-13.900)***
-0.189
(-2.614)***
-0.944
(-26.897)***
-1.288
(-10.169)***
ln(EXR)
0.636
(7.286)***

-0.167
(-1.622)
0.217
(4.340)***
-0.709
(-2.696)***
ln(IMP)



1.910
(3.290)***
LIB
0.548
(3.060)***
0.015
(0.061)
0.478
(4.053)***
-0.328
(-0.756)
R-Squared
Adjusted-R
Squared
Durbin-Watson
Stat.
F-Statistic
0.995
0.993
1.739

(648.651)***
0.963
0.952
1.662
(88.729)***
0.998
0.997
1.443
(1,628)***
0.978
0.970
2.168
(119.519)***
Sources: Author’s Estimation (2013),
Table 2 reveals the regression result of the estimated equations of the EXP,
IMP, FDI, and GOVR by using the Lao data weighted with the data of its main
trading partners, particularly China, Thailand, and Vietnam. The results show more
interesting and significant evidence.
In the EXP equation, the estimated coefficients of all independent variables - GDPF,
TAXA, INFR, EXR, and LIB - have the expected signs and are statistically
significant at 1 per cent. In other words, GDPF, TAXA, EXR, and LIB are associated
positively with the export, whereas INFR has negative relationship with the export. It
is statistically implied that an increase in GDPF by 1 per cent, the exports of Lao
PDR will rise by 1.4 per cent, given the other factors remain constant. Similarly, an
increase in or a depreciation of EXR by 1 per cent, the exports will go up by 0.636
per cent, provided that the other factors remain unchanged. A reduction of TAXA by

19
1 per cent, the exports will rise by 0.585 per cent, and regional economic integration
or trade liberalization (LIB) will boost the exports to increase by 0.548 per cent.In

contrast, INFR increases by 1 per cent, the exports will go down by 0.916 per cent.
With respect to the IMP equation, the estimated coefficients of GDP and tax
rate of TAXLalso have positive signs in line with the expectations and are
statistically significant at 1 per cent. An increase in GDP by 1 per cent, the imports
will rise by 2.068 per cent, given the other factors are unchanged and a decline in
TAXL by 1 per cent, the imports will increase by 1.147 per cent, provided that the
other things remain unchanged. The coefficient of INFR has a negative sign, which is
in contrast with the set assumption. Yet, it is statistically significant at 1 per cent,
which can be contended that when the INFR increases, it may not only affect the
exports, but also the consumers’ consumption delay. As a consequence, demand for
the imports will decline during the inflationary period. In this case, an increase in
INFR by 1 per cent, the imports will decline by 0.189 per cent. With regard to LIB,
though it is insignificant, its estimated coefficient is positive, which gives an
intriguing signal on an increase in import demand as a result of regional trade
liberalization.
In respect of the FDI equation, the estimated parameters of GDP, EXR, and
LIB are also positive and statistically significant at 1 per cent, which confirm the set
hypothesis. An increase in GDP by 1 per cent will attract FDI flows to Lao PDR by
2.436 per cent. A rise in or depreciation of the EXR by 1 per cent will also help
create an incentive for FDI by 0.217 per cent.In addition, regional economic
liberalization will absorb more FDI flows to Lao PDR by 0.478 per cent.
In the GOVR equation, most independent variables, except TAXL, have the
expected signs and are statistically significant at 1 per cent. An increase in GDP 1 per
cent will stimulate GOVR to be raised by 1.928 per cent. A reduction of TAXL will
not affect the government revenue, but GOVR will increase by 2.296 per cent. Both
INFR and EXR have negative impacts on the GOVR to be decreased by 1.288 per
cent and 0.709 per cent, respectively.

20
Analogously, the Adjusted R-squared of EX (0.993), IM (0.952), FDI (0.997),

and GOVR (0.970) are considered very high to explain the goodness fit of the
models. In addition, the D.W statistics of 1.739, 1.662, 1.443, and 2.168 indicate
inexistence if the serial correlation of the error terms in the EX, IM, FDI, and GOVR
equations of using the WAD.
In comparison, it is obviously observed that the empirical evidences derived
from the WAD are better in terms of describing the expected signs and relationships
of the specified variables of the models. This is because more estimated coefficients
have the expected signs, which support the set hypotheses. Also, they are statistically
significant.
Having used the Lao data, only GDPF and EXR have the expected signs and
are associated positively with the exports, whereas TAXA, INFR, and LIB have the
opposite signs and are statistically insignificant. The WAD yields more plausible
evidence since the estimated coefficients of all independent variables – GDPF,
TAXA, INFR, EXR, and LIB - have the expected signs and are statistically
significant at 1 per cent.
In the IM equation, by using the WAD, the estimated parameter of INFR has
become statistically significant at 1 per cent and EXR has a negative sign, which
confirm the set assumptions. Also, in the FDI equation, INFR and LIB have become
statistically significant at 1 per cent. With regard to the GORV equation, EXR has
also become statistically significant at 1 per cent with a negative sign, which verifies
the specified hypothesis. Additionally, the D.W statistics of the equations by using
both the Lao and WAD indicate non-autocorrelation of the error terms.






21
IV. CONCLUSION AND POLICY IMPLICATION

4.1 Conclusion
This dissertation has attempted to analyze the progress on the economic
development before and after joining ASEAN of Lao PDR from 1990 to 2012; and to
investigate the impacts of regional economic integration, namely AFTA on the Lao
PDR’s government revenue, external trade, and flows of FDI. In order to carry out
the findings in accordance with the objectives, this paper simply employs descriptive
and econometric approaches.
The significant findings reveal that Lao PDR’s economy has continuously grown
with robust growth rates, particularly during the implementation of the 6
th
five-year
NSEDP (2006-2010). In an average, the economic grew at 5.32 per cent during 1996-
2000, 6.3 per cent in the period of 2001-2005, and 8 per cent in the course of 2006-2010.
The main contributors to the economic growth are seen in hydropower and mining.
The results also indicates that the GDP per capita of Lao PDR has gradually
increased and been classified as a lower middle-income country in 2011.
With regard to the output structure of Lao PDR’s economy, during 1996-2000,
agricultural sector accounted for 50 per cent of GDP in an average, whereas industry
and services covered 20 per cent and 30 per cent of GDP. During 2001-2005 and
2006-2010, it is also seen that the general tendency of output structure has changed
from agricultural-based economy towards industrialization in line with the GOL’s
economic development strategy. The percent share of agriculture in GDP has
gradually declined, while the industry and services has grown up. It is contended that
the momentum of this growth is thanks to the regional liberalization and integration,
namely AFTA participation.
AFTA participation has moderately affected the GOL’s revenue since low
tariff rates have induced more demand for the imports, reduced smugglings and
promoted legal trade. For the external trade of Lao PDR, the exports have tended to
increase after joining ASEAN. It is seen that the external trade deficit of Lao PDR

22
has been mitigated after joining ASEAN since the exports have increased faster than
the imports. FDI has made a positive contribution to the manufacture of goods,
economic growth and the restructuring of the economy. Major FDI to Lao PDR in
recent years comes from Thailand, China, Vietnam, and Australia, Many projects
were invested in industry and handicraft, followed by services, agriculture, and
mining.
With respect to the regression results, it is obviously observed that the
empirical evidences derived from the WAD are better in terms of describing the
expected signs and relationships of the specified variables of the models. In the EXP
equation, the WAD yields more plausible evidence since the estimated coefficients of
all independent variables – GDPF, TAXA, INFR, EXR, and LIB - have the expected
signs and are statistically significant at 1 per cent. In the IMP equation, the estimated
parameter of INFR is statistically significant at 1 per cent and EXR has a negative
sign, which confirm the set assumptions. Also, in the FDI equation, INFR and LIB
are statistically significant at 1 per cent. With regard to the GORV equation, EXR is
statistically significant at 1 per cent with a negative sign, which verifies the specified
hypothesis. Additionally, the D.W statistics of the equations by using both the Lao
and WAD indicate non-autocorrelation of the error terms.
In short, it is argued that participating in AFTA of Lao PDR can bring about
positive benefits rather than the negative impacts. This can firstly be evidenced by the
faster economic growth rate after joining the trade bloc. Secondly, though the export
and import duties have tended to decline due to the tariff reduction, they have not
affected much the tax revenue thanks to increases in other revenue sources. Thirdly,
participating AFTA has also attracted more flows of foreign direct investment and it
has tended continuously augmented. Finally, regional economic integration has
improved external balance since the exports have grown faster than the imports.
4.2 Recommendation
Based on the above-mentioned analytical results of economic growth and the
consequences of ASEAN integration on the government revenue, external trade, and