Luận án tác động của AFTA đối với nguồn thu ngân sách chính phủ, thương mại quốc tế và đầu tư trực tiếp nước ngoài của CHDCND lào (e)

MINISTRY OF EDUCATION AND TRANING

MINISTRY OF EDUCATION AND SPORT

NATIONAL ECONOMICS UNIVERSITY
VIETNAM

NATIONAL UNIVERSITY OF LAOS
LAOS

ATHSAPHANGTHONG SIPHANDONE

IMPACTS OF AFTA ON GOVERNMENT REVENUE,
EXTERNAL TRADE, AND FDI OF LAO PDR

A dissertation Submitted to the National Economics University, Vietnam and
National University of Laos in fulfillment of requirements for the degree of
Doctor of Philosophy in Economics

Supervisor: Prof. Dr. TRAN THO DAT

VIENTIANE – 2014

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


ii

ACKNOWLEDGEMENT

My sincere appreciation and heartfelt thanks are expressed to my supervisor,
Professor Tran ThoDat, for his regular provision of invaluable pieces of advice,
guidance, correction, and encouragement to me throughout this research. This
dissertation could not have been successfully accomplished without his
contributions and supports.
Also, I would like to dedicate this success to my beloved parents and
especially to my everlasting dearest wife, my lovely children, who all the time stay
beside me with their love and caring. I would not be able to achieve this success
without their continuous supports and great deal of encouragements.

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


iii

TABLE OF CONTENTS
ACKNOWLEDGEMENT ....................................................................................... ii
TABLE OF CONTENTS ........................................................................................ iii
LIST OF TABLES ....................................................................................................v
LIST OF FIGURES ................................................................................................ vi
ABBREVIATIONS AND ACRONYMS ............................................................... vi
CHAPTER 1: INTRODUCTION ............................................................................1
1.1

Background ....................................................................................................1

1.2

Problem Statement ........................................................................................6

1.3

Objective.........................................................................................................8

1.4

Expected Outcomes .......................................................................................8

1.5

Significance of Study .....................................................................................8

1.6

Scope of Study................................................................................................9

1.7

Organization of the Dissertation ..................................................................9

CHAPTER 2: LITERATURE REVIEW ..............................................................11
2.1

Theoretical Literature Review ...................................................................11

2.1.1 Definition and Levels of Economic Integration ............................................11
2.1.2 Advantages and Disadvantages of Regional Economic Integration .............13
2.1.3 ASEAN and AFTA .......................................................................................17
2.1.4 Challenges and Opportunity for Lao PDR after Joining ASEAN ................28
2.2

Empirical Literature Review......................................................................30

CHAPTER 3: ANALYTICAL METHODOLOGY AND DATA
COLLECTION ............................................................................................43
3.1

Analytical Methodology ..............................................................................43

3.1.1 Descriptive Approach ....................................................................................43

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


iv

3.1.2 Econometric Approach ..................................................................................44
3.2

Data Collection ............................................................................................51

CHAPTER 4: IMPACTS OF AFTA ON ECONOMIC PERFORMANCE,
GOVERNMENT REVENUE, EXTERNAL TRADE AND FDI ........................53
4.1

Lao PDR Economic Performance During 1990-2012 ..............................53

4.1.1 Growth Rate ..................................................................................................53
4.1.2 Output Structure ............................................................................................58
4.1.3 GDP per Capita .............................................................................................61
4.2

Impacts on Government Revenue ..............................................................63

4.2.1. Total Revenue ...............................................................................................63
4.2.2. Tax and Non-Tax Revenue ...........................................................................66
4.3

Impacts on External Trade.........................................................................71

4.3.1. Exports, Imports and Trade Balance, 1990-2012..........................................71
4.3.2. Direction of Exports and Imports ..................................................................77
4.3.3. Degree of Trade Openness ............................................................................80
4.4

Impacts on Foreign Direct Investment ......................................................85

4.5

Empirical Evidence of Impacts of AFTA on Government Revenue,
External Trade, and Foreign Direct Investment ......................................91

CHAPTER 5: CONCLUSION AND RECOMMENDATION .........................103
5.1

Conclusion ..................................................................................................103

5.2

Recommendation .......................................................................................106

REFERENCES ......................................................................................................108
APPENDIX ...........................................................................................................115

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


v

LIST OF TABLES
Table 2.1:

Schedule for Tariff Reduction under CEPT Agreements .......................... 21

Table 2.2:

Timetable for Accelerating AFTA for the Regional Six ASEAN
Countries. ............................................................................................26

Table 3.1:

Framework on Analyzing the Impacts of AFTA on Economic
Performance, Government Revenue, Trade, FDI. ..............................43

Table 3.2:

Summary of Expected Signs of Independent Variables .....................50

Table 3.3:

Data Sources Used in Analysis ...........................................................51

Table 4.1:

Directions of Exports, 1900-2012 ......................................................77

Table 4.2:

Merchandise Exports of Lao PDR (% of Total Merchandise
Exports) ...............................................................................................78

Table 4.3:

Directions of Imports, 1990-2012 ......................................................79

Table 4.4:

Merchandise Imports ..........................................................................80

Table 4.5:

The World‘s most Opened and most Closed Economies in 1996 ......82

Table 4.6:

Degree of Openness of ASEAN Member Countries, 1995-2012 .......83

Table 4.7:

Intra-ASEAN Trade 2009 & 2010 ......................................................85

Table 4.8:

FDI Net Flows to ASEAN ..................................................................87

Table 4.9:

Percent Share of FDI in ASEAN ........................................................87

Table 4.10: FDI as Percent of GDP........................................................................88
Table 4.11: FDI by Countries, 2001-2010 .............................................................89
Table 4.12: Results of Regressions by Using Lao Data .........................................91
Table 4.13: Results of Regressions by Using the Weighted-Average Data
(WAD) .................................................................................................95
Table 4.14: Comparing the regression results by using the Lao data and WAD ...99

Table 4.15: Regression Results by Excluding INFR in the EXP, IMP, and FDI
Equations and EXR in the GOVR Equation. ....................................101
Table 4.16: Regression Results by Excluding INF and EXR in All Equations. ..101

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


vi

LIST OF FIGURES
Fig. 2.1:
Fig. 2.2:

Levels of Economic Integration ......................................................... 12
Tendency of ASEAN Members‘ Tariff Rates, 1993-2009 ................ 27

Fig. 2.3:
Fig. 4.1:
Fig. 4.2:

Tariff Rates of ASEAN-6 and ASEAN-4, 1993-2009 ....................... 28
Economic Performance of Lao PDR, 1990-2012. .............................. 55
Resource Sector Contribution to GDP Growth, 2004-2012 .............. 57

Fig. 4.3:
Fig. 4.4:

Structure of Output as Percent of GDP, 1990-2012. .......................... 59
Growth Rates of Economic Sectors, 1990-2012. ............................... 60

Fig. 4.5:
Fig. 4.6:

GDP per Capita of Lao PDR, 1990-2012 ......................................... 61
GDP per Capita of ASEAN Members In 2012 .................................. 62

Fig. 4.7:
Fig. 4.8:
Fig. 4.9:
Fig. 4.10:

Total Revenue of GOL, 1990-2012 ................................................... 63
Annual Percent Change of Total Revenue and Grant, 1990-2012 ..... 65
Tax and Non-Tax Revenue, 1990-2012. ............................................ 66
Tax and Non-Tax Revenue and Grants as Percent Share of Total

Fig. 4.14:
Fig. 4.15:

Revenue, 1996-2010. .......................................................................... 67
Components of Tax Revenue, 1995/60-2009/10 ................................ 68
Growth Rate of Import and Export Duties, 1996/97-2009/10. .......... 69
Total Revenue, Tax Revenue, Total Expenditure, and Budget
Balance as Percent of GDP, 1990-2012 ............................................. 70
Tax Revenue and Tariff Rate, 1998-2012. ......................................... 71
Exports, Imports, and Trade Balance, 1990-2012 ............................ 73

Fig. 4.16:
Fig. 4.17:
Fig. 4.18:
Fig. 4.19:
Fig. 4.20:
Fig. 4.21:
Fig. 4.22:
Fig. 4.23:

Annual Change of Exports, Imports, and Trade Balance, 1990-2012 .... 74
Exports and Imports as Percent Of GDP, 1990-2012. ....................... 75
Lao Exports and ASEAN Averaged-Tariff rate, 1996-2013 .............. 76
Lao Imports and Averaged-Tariff rate, 1998-2013 ............................ 76
Exports Shared by Countries, 1990-2012........................................... 78
Imports Shared by Counties, 1990-2012 ............................................ 80
Degree of Trade Openness, 1990-2011 .............................................. 81
Trends of Openness Degree of ASEAN Members, 1995-2012 ........ 84

Fig. 4.11:
Fig. 4.12:
Fig. 4.13:

Fig. 4.24: Foreign Direct Investment in Lao PDR, 1990-2012 ........................ 86
Fig. 4.25: FDI Project Numbers by Sectors, 2002-2010 .................................... 90
Fig. 4.26: Values of FDI by Sectors, 2002-2010 ............................................... 90

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


vii

ABBREVIATIONS AND ACRONYMS
ADB

Asian Development Bank

AEC

ASEAN Economic Community

AFC

Asian Financial Crisis

AFTA

ASEAN Free Trade Area

ASEAN

Association of Southeast Asian Nations

ASEAN-4

Cambodia, Lao PDR, Myanmar, and Vietnam

ASEAN-6

Brunei, Indonesia, Malaysia, Philippines, Thailand,

BOL

and Singapore

CEPT

Bank of Lao PDR

EXP

Common Effective Preferential Tariff

EXR

Exports

FDI

Exchange Rate

FTA

Foreign Direct Investment

FY

Free Trade Agreement

GDP

Fiscal Year

GDPF

Gross Domestic Product

GOL

Foreign Income

GOVR

Government of Lao PDR

GSP

Government Revenue

IMF

Generalized Systems of Preferential

IMP

International Monetary Fund

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


viii

INFR

Imports

Lao PDR

Inflation Rate

LIB

Lao People‘s Democratic Republic

MPI

Liberalization

NSEDP

Ministry of Planning and Investment

NTRs

National Socio-Economic Development Plan

ODA

Normal Trade Relations

RTAs

Official Development Assistance

TAXA

Regional Trade Agreements

TAXL

Tariff Rate of ASEAN Member Countries

VAT

Value Added Taxes

WAD

Tariff Rate of Lao PDR

WB

Weighted-Averaged Data
World Bank

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


1

CHAPTER 1
INTRODUCTION
1.1 Background
Regional integration has become the main form of trade liberalization since
the early 1990s. After the conclusion of the Uruguay Round in 1994, no
significant progress has been made at multilateral liberalization. By contrast, a
new regional trade agreement (RTAs) is announced almost every month.
According to the World Trade Organization, more than 300 regional trade
agreements (RTAs) are currently in force and all but one (Mongolia) of its 153
members participate in at least one of those arrangements. Given the rising
prominence of bilateral and regional trade liberalization, it is important to
understand the implications for world trade.
This is even more important because, unlike multilateral liberalization, which
most economists believe to be largely beneficial for both liberalizing countries and
by standers, preferential liberalization is controversial. The reason comes from its
inherent discriminatory nature: when forming an RTA, members agree to lower
trade barriers to each other but their tariffs on imports from outsiders remain
unconstrained. This can induce members to substitute inefficiently produced

imports from bloc members for imports previously sourced efficiently from
nonmember countries. Such trade diversion harms the nonmembers through lost
markets, as well as the members through reduced tariff revenue. However, like
broader trade liberalization, the RTA is also likely to enhance trade of the goods
that are efficiently sourced within the bloc. This trade creation will enhance welfare.
These two forces suggest that preferential liberalization can in principle be either
welfare-enhancing or welfare-reducing. Ultimately, the result must be empirical,
and may be different for different trading blocs. Trade creation forces may prevail
over trade diverting ones in some cases, but the reverse could be true in other cases.

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


2

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. This is true of China and India since they
embraced trade liberalization and other market-oriented reforms, and also of higherincome countries in Asia—like Korea and Singapore—that were themselves poor
up to the 1970s (IMF, 2001).
It has been realized since Viner (1950) that the formation of a free trade
agreement (FTA) can lead to trade creation and/or trade diversion. The former
arises when the FTA promotes trade among the members without disrupting trade
with nonmembers, and tends to be efficiency-enhancing. By contrast, trade

diversion arises when the FTA promotes trade among members at the expense of
trade with bloc outsiders, and tends to be efficiency-reducing.
There have been attempts to pin down theoretically the characteristics that
make FTAs more trade creating or more trade diverting. Frankel (1997) develops
the ―natural trading partners‖ hypothesis, which states broadly that agreements
between countries that already trade significantly (in particular geographically close
countries and those that share cultural characteristics that reduce transaction costs,
such as language) are the ones most likely to be trade creating. Although
theoretically this does not need to always hold, as Bhagwati and Panagariya (1999)
point out, Frankel (1997) finds evidence consistent with the natural trade partners
hypothesis in a number of regression analyses based on the gravity equation with
country-level trade flows.
Lee and Shin (2006) extend the approach of Frankel (1997) and estimate a
gravity model with year dummies and with both random and fixed effects to assess
trade creation and trade diversion in 175 countries using data from 1948 to 1999.
The key trade creation variable is a dummy that is one if both countries are

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


3

members of a common RTA; the key trade diversion variable is a dummy that is
one if one country belongs to an RTA and the other does not belong to that RTA.
Lee and Shin interact these variables with geographical and common language
variables to identify whether trade creation and trade diversion are different for

―natural‖ trade patterns.
In most specifications, Lee and Shin (2006) confirm that RTAs increase
bilateral trade between members. The magnitudes are around 50 percent, but if the
countries share a common border this effect increases to up to 200 percent.
Similarly, the closer the countries are from each other, the larger is trade creation.
On the other hand, RTAs are never found to reduce trade between members and
nonmembers significantly. In fact, in most specifications RTAs are estimated to
increase trade between members and nonmembers, from 6 to 15 percent. Trade
with nonmembers grows more for RTAs with a smaller average distance between
their members and when more members of the RTA have common borders or
share a common language. Having the trade creation and trade diversion estimates
in hand, Lee and Shin then predict the average trade impact of several proposed
RTAs in Asia. They find in particular that the trade effects of AFTA are
significantly positive.
There is a sizeable theoretical literature that explores the optimal external
tariff response of countries following the formation of FTAs. In a standard model,
with a welfare-maximizing government, optimal external tariffs are likely to fall in
a free trade area precisely to limit the welfare costs of trade diversion [Bagwell and
Staiger (1999), Freund (2000), Bond et al. (2004)]. The intuition is that the welfare
cost of trade diversion induces governments to lower external tariffs to recapture
tariff revenue and improve economic efficiency.
When political-economy motives are incorporated, the results are
ambiguous. For example, Richardson (1993) and Ornelas (2005) find that, upon the
formation of a free trade area, lobbying will decline and external tariffs fall, as the

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399

4

import-competing sector contracts and becomes weaker politically. This force will
be more important, the greater the share imports stemming from the bloc partners.
However, in a different model, Panagariya and Findlay (1996) find that countries in
a free trade area will raise protection against outsiders because lobbying in favor of
tariffs against the partner will be diverted to lobbying for a greater external tariff.
Furthermore, it is not just existing trade blocs that matter. As Bagwell and Staiger
(2004) show, the mere potential for a future trade agreement may affect the extent
of current tariff reduction that can be negotiated multilaterally. The threat of
―bilateral opportunism‖ reduces the extent of multilateral tariff reduction because
current global trade agreements can be later diluted by bilateral preferences.
By contrast, the empirical literature on the effect of RTA formation on
external tariffs is still in its infancy. Bohara, Gawande and Sanguinetti (2004)
examine tariff adjustments in Argentina following the formation of Mercosur,
finding some support for the hypothesis that the decline of industries driven by the
formation of a trading bloc leads to lower external tariffs. Similarly, Estevadeordal
et al. (2008) examine the direct impact of changes in preferential tariffs on changes
in MFN tariffs in ten Latin American countries and one hundred industries over 12
years. Using a number of empirical techniques to extract causality, they find that
preferences in free trade areas lead to a decline in external tariffs, whereas the
effects are negligible in customs unions. In contrast, Limão (2006) finds that the
United States was more reluctant to lower tariffs in the Uruguay Round for products
where preferences were granted. His results imply that trade preferences lead to less
multilateral tariff reduction. Limão and Karacaovali (2008) find similar results for
the European Union.
Recently, Lendle (2007) has developed the first analysis of the trade policy
reactions to regionalism in Asia. Specifically, Lendle evaluates whether products

receiving preferential treatment in Indonesia, Malaysia, Philippines and Thailand
under the ASEAN Free Trade Agreement underwent greater reduction in MFN
tariffs during the late 1990s and early 2000s than goods that did not receive

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


5

preferential treatment. The approach resembles that of Limão (2006), in that he
estimates the change in the MFN tariff from the mid-1990s to the early 2000s (the
precise years vary with the country in analysis due to data availability) on a dummy
that represents whether the country offered preferential treatment under AFTA.
Lendle finds evidence of tariff complementarity for Indonesia, the Philippines and
Thailand, where the MFN tariffs of preferential products were reduced by more
(between one and five percentage points) than for non-preferential products. In
contrast, the results for Malaysia, which has the lowest average MFN among the
four countries studied, are somewhat mixed, varying according to the specification.
While Lendle‘s study is very instructive about the developments in internal and
external liberalization in ASEAN, it does not take into account the variations in the
extent and the speed of intra-bloc liberalization, which are significant.
The impacts of free trade can be reviewed from different countries‘ case
studies. One of the most directly related to the consequences of implementing
ASEAN free trade area can be found in the study conducted by Menon (1999). In
this paper, it examined the impact that membership of AFTA is likely to have on
Lao's trade, government revenue and foreign investment flows. The findings show

that (i) trade diversion is likely to be low, and that AFTA will provide the vehicle to
negotiate market access issues with Thailand; (ii) the reduction in government
revenue from trade taxes is likely to be low, particularly in light of the high share of
informal trade and only low levels of trade diversion; and (iii) foreign direct
investment (FDI) flows are likely to grow sharply in the future, as the legal,
administrative and institutional framework in Lao develops to meet the ASEAN
standard. Araya (2002) also analyzed the ways how new ASEAN member countries
(CLMV) cope with revenue loss due to AFTA tariff reduction.
Another recent studies of the impact of trade blocs have found that trade
diversion has been less apparent than was previously assumed to be the case. A
1995 study by the OECD concluded that there was no evidence that these
agreements had created trade diversion. While conceding that it was in some cases

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


6

difficult to assess diversion, the anecdotal evidence suggested that these agreements
had probably served to stimulate trade liberalisation elsewhere, including through
multilateral liberalisation.
A study by the Department of Foreign Affairs and Trade of the impact of
NAFTA concluded that there was no evidence that the trade agreement has had
diversionary effects. According to Krueger (1999), the NAFTA experience lends
weight to the conclusion that Free Trade Agreements between countries with low
trade barriers.

There are also 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.

1.2 Problem Statement
The Lao People‘s Democratic Republic (Lao PDR) - a landlocked country
with a population of 6.7 million (MPI, 2012) - is classified to be one of the Least
Developed Countries (LDCs) by the United Nations (UN) in the region with an
estimated GDP per capita at current price of US$ 1,067 in 2011 (IMF, 2011). Lao
PDR has, similarly to other LDCs, confronted with many chaotic circumstances in

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


7

developing

its

national

development

programs

aimed

at

maintaining

macroeconomic stabilities, achieving Millennium Development Goals in 2015 and
graduating from LDC status by 2020 (MPI, 2010).
The socio-economic impediments of Laos can be illustrated in two main
factors. One of the most difficult constraints is geographic conditions of landlocked
country with mountains covered two-thirds of total land areas which restrict both
the quantity and quality of agricultural land and pose difficulty to the trade
development, social infrastructure, and transportation and communication links.
Second, though GDP per capita is low, consumption level is very high in both
public and private sectors. The national saving rate is thus low, which is insufficient
for infrastructure investment. This is also considered to be a severe limitation in the
Lao socio-economic development process. Apart from this, the general present
characteristics of Laos can be categorized by Human Development Index: low
literacy rate of both adult and children enrollments – only 76 per cent of population

age 15+ in 2010, low life expectancy, high fertility, crude birth and death rates –
due to a lack of contraception and health care accession, and massive poverty.
To solve the above-specified development difficulties and attain the longterm development goals, a sound national socio-economic development plan
(NSEDP) needs to be identified and implemented. The government of Lao PDR has
continued to set a five-year NSEDP in response to the development process
requirement. During implementing the 6th NSEDP (2006-2010), the average annual
GDP growth was 7.9 per cent, budget deficit accounted for 4.7 per cent of GDP,
FDI accumulation amounted to US$ 8 billion, exports accounted for 20.72 per cent,
imports covered 26.1 per cent and trade deficit represented 5.3 per cent of GDP,
respectively.
With respect to the economic integration with the regional and international
counterparts, after having become a member of Association of Southeast Asian
Nations (ASEAN) in 1997, Lao PDR has attempted through the implementation of a

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


8

policy of open foreign economic cooperation, on the basis of independence and
mutual benefit. As a result, there has been expansion in cooperation in the fields of
economy and commerce. International trade negotiations at the bilateral, regional,
sub-regional and global levels have increased and strengthened. International
integration includes multi-party trade cooperation, ASEAN and Regional Economic
Cooperation, Trade Negotiation within ASEAN and related countries, and AsiaPacific Trade Agreement (MPI, 2011).

1.3 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
Tariff (CEPT) scheme under AFTA on the Lao PDR‘s government revenue,
external trade (exports and imports), and Foreign Direct Investment (FDI)
flows.

1.4 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.

1.5 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

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


9

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.

1.6 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.

1.7 Organization of the Dissertation
For a scientific approach and systemic and chronological flows, this thesis is
divided into five chapters, which will be further subdivided into sections, and they
are organized in the following manner.
The introductory part briefly presented problem statement, objective,
anticipated outcome and significance, scope of study, and thesis organization,
respectively as shown in Chapter 1.
Chapter 2 will review both theoretical and empirical literature on regional
economic integration. In the theoretical section, it firstly defines the levels of
economic integration, followed by the pros and cons of such integration. Next, it
will briefly review the background and objective of establishing ASEAN and

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


10

AFTA. After that, it will also describe the implementation of CEPT, especially the
CEPT production list and products covered under the CEPT agreement. Finally, it
will discuss the positive and negative impacts of AFTA that ASEAN member
countries have experienced. In the empirical section, some of the previous
researches on AFTA impacts in different countries‘ case studies will be
summarized. Additionally, it will discuss the differences between the previous and
this study in terms of the analytical methodology, models, and scope of study.
Chapter 3 is concerned with the analytical methodology and data sources. In
the section of analytical methodology, it will describe the method and model
specifications used in analyzing the AFTA impact on Lao PDR‘s government
revenue, external trade, and FDI. In the section of data sources, it will describe how
data were collected from different sources and data modification in terms of
weighted-average data.
Chapter 4 will present the analytical results of AFTA impacts on the issues.
It will firstly present the overall economic performance, followed by analytical
results of AFTA impacts on government revenue, external trade, and FDI by using
descriptive approach. Secondly, the results derived from utilizing econometric
technique will be revealed.
Chapter 5 will come up with the main conclusion of analyses and policy
implications.

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


11

CHAPTER 2
LITERATURE REVIEW
2.1 Theoretical Literature Review
2.1.1 Definition and Levels of Economic Integration
Economic integration is a process whereby countries cooperate with one another
to reduce or eliminate barriers to the international flow of products, people or capital.
The aim of economic integration is to reduce costs for both consumers and producers,
as well as to increase trade between the countries taking part in the agreement. The
more integrated the economies become, the fewer trade barriers exist and the more
economic and political coordination there is between the member countries.
There are six additive levels of economic integration: preferential trade
agreement, free trade area, custom union, common market, economic union, and
political union.


Preferential Trade Agreement (PTA) is the simplest form of economic
integration which offers member countries tariff reductions in certain product
categories. Discrimination or preferential treatment for some countries is not
allowed as it is against the principle of Most Favored Nation (MFN) under
the World Trade Organization (WTO).



Free Trade Area (FTA) is the second level of economic integration which
tariffs (a tax imposed on imported goods) between member countries are
abolished or significantly reduced. Each member country keeps its own tariffs in
regard to the third countries. The general goal is to develop economies of scale
and comparative advantages, which promotes economic efficiency.



Custom Union (CU) sets common external tariffs among member countries,
implying that the same tariffs are applied to third countries. Custom unions
are particularly useful to level the competitiveness playing field and address
the problem of re-exports (using preferential tariffs in one country to enter
another country).

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


12



Common Market (CM) is an advanced level of economic integration that
factors of production, such a labor and capital, are free to move within

member countries, expanding economies of scale and comparative
advantages. Thus, a worker in a member country is able to move and work in
another member country.



Economic Union (EC). In this level, monetary and fiscal policies between
member countries are harmonized, which implies a level of political
integration. A further step concerns a monetary union where a common
currency is used, such as with the European Union (Euro).



Political Union (PU) represents the potentially most advanced form of
integration with a common government and were the sovereignty of member
country is significantly reduced. Only found within nation states, such as
federations where there is a central government and regions having a level of
autonomy.

Fig. 2.1: Levels of Economic Integration

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


13

2.1.2 Advantages and Disadvantages of Regional Economic Integration
1. Advantages of free trade
Free trade occurs when there are no artificial barriers put in place by
governments to restrict the flow of goods and services between trading nations.
When trade barriers, such as tariffs and subsidies are put in place, they
protect domestic producers from international competition and redirect, rather than
create trade flows.
 Increased production
Free trade enables countries to specialize in the production of those
commodities in which they have a comparative advantage.
With specialization countries are able to take advantage of efficiencies
generated from economies of scale and increased output.
International trade increases the size of a firm‘s market, resulting in lower
average costs and increased productivity, ultimately leading to increased
production.
 Production efficiencies
Free trade improves the efficiency of resource allocation. The more efficient
use of resources leads to higher productivity and increasing total domestic output of
goods and services.
Increased competition promotes innovative production methods, the use of
new technology, marketing and distribution methods.
 Benefits to consumers
Consumers benefit in the domestic economy as they can now obtain a greater
variety of goods and services.
The increased competitions ensure goods and services, as well as inputs, are
supplied at the lowest prices. For example in Australia imported motor vehicles

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


14

would cost 35 per cent more if the 1998 tariff levels still applied. Clothing and
footwear would also cost around 24 per cent more.
 Foreign exchange gains
When Australia sells exports overseas it receives hard currency from the
countries that buy the goods. This money is then used to pay for imports such as
electrical equipment and cars that are produced more cheaply overseas.
 Employment
Trade liberalization creates losers and winners as resources move to more
productive areas of the economy. Employment will increase in exporting industries
and workers will be displaced as import competing industries fold (close down) in
the competitive environment. With free trade many jobs have been created in
Australia, especially in manufacturing and service industries, which can absorb the
unemployment created through restructuring as firms close down or downsize their
workforce. When tariffs were increased substantially in the period 1974–1984 for
textiles and footwear - employment in the sector actually fell by 50 000, adding to
overall unemployment.
 Economic growth
The countries involved in free trade experience rising living standards,
increased real incomes and higher rates of economic growth. This is created by more
competitive industries, increased productivity, efficiency and production levels.
2. Disadvantages of free trade
Although free trade has benefits, there are a number of arguments put
forward by lobby groups and protestors who oppose free trade and trade
liberalization. These include:

 With the removal of trade barriers, structural unemployment may occur in
the short term. This can impact upon large numbers of workers, their
families and local economies. Often it can be difficult for these workers to

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


15

find employment in growth industries and government assistance is
necessary.
 Increased domestic economic instability from international trade cycles, as
economies become dependent on global markets. This means that
businesses, employees and consumers are more vulnerable to downturns in
the economies of our trading partners, e.g. Recession in the USA leads to
decreased demand for Australian exports, leading to falling export incomes,
lower GDP, lower incomes, lower domestic demand and rising
unemployment.
 International markets are not a level playing field as countries with surplus
products may dump them on world markets at below cost. Some efficient
industries may find it difficult to compete for long periods under such
conditions. Further, countries whose economies are largely agricultural face
unfavorable terms of trade (ratio of export prices to import prices) whereby
their export income is much smaller than the import payments they make for
high value added imports, leading to large current account deficits and
subsequently large foreign debt levels.

 Developing or new industries may find it difficult to become established in a
competitive environment with no short-term protection policies by
governments, according to the infant industries argument. It is difficult to
develop economies of scale in the face of competition from large foreign
Transitional Corporations. This can be applied to infant industries or infant
economies (developing economies).
 Free trade can lead to pollution and other environmental problems as
companies fail to include these costs in the price of goods in trying to
compete with companies operating under weaker environmental legislation
in some countries.

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


16

 Pressure to increase protection during the GFC. During the global financial
crisis and recession of 2008-2009, the impact of falling employment meant
that protection pressures started to rise in many countries. In New South
Wales, for example, the state government was criticised for purchasing
imported uniforms for police and firefighters at cheaper prices rather than
purchasing Australian made uniforms from Australian companies. Similar
pressures were faced by governments in the United States, Britain and other
European countries.
For the advantages of ASEAN Free Trade Area can be summarized as
follows:

 Rural Development and Poverty Eradication
Certain ASEAN member states, such as Laos, Cambodia and Myanmar are
defined by the United Nations as "least developed nations," while others, such as
Singapore and Brunei, are considered fully developed by international standards.
One of the stated goals of the ASEAN Free Trade Agreement is to reduce poverty
while bringing member states into a state of full development. For example,
ASEAN encourages the proliferation of information and Communication
Technology (ICT) in rural, underdeveloped communities.
 Preserving Peace and Stability
An annual forum consisting of all the ASEAN members, plus other observers
from Asia and the Pacific region, aims for "promoting peace and security through
dialogue and cooperation". Intended to provide a venue for multilateral and bilateral
discussion, this forum works to reduce tension amongst member states while
preserving the Free Trade Agreement.
 Protecting the Mekong
ASEAN formed the Mekong Basin Development Cooperation as a
cooperative effort to sustainably develop the Mekong Basin. The Mekong River,

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399


17

which flows through five of the 10 ASEAN member states, is a fragile ecosystem
that could be easily damaged by the actions of a single member state (runoff from
pesticides in Thailand, for instance, can have ramifications for Cambodia's fish

stocks). By developing the Mekong Basin Development Cooperation, ASEAN aims
to reconcile conservation efforts with economic development while living up to the
promises of the Free Trade Agreement.
 Women's Rights
Originally established in 1976 and re-established in 2002, the ASEAN
Committee on Women focuses on incorporating the roles of women into free tradeoriented social and economic development. ASEAN's work on women's rights is
guided by two main documents: The Work Plan for Women's Advancement and
Gender Equality (2005-2010) and The Work Plan to Operationalise the Declaration
on the Elimination of Violence against Women (2006-2010).

2.1.3 ASEAN and AFTA
1. Establishment and Objective
ASEAN was established on 8 August 1967 in Bangkok, Thailand, with the
signing of the ASEAN Declaration (Bangkok Declaration) by the Founding Fathers
of ASEAN, namely Indonesia, Malaysia, Philippines, Singapore and Thailand.
Brunei Darussalam then joined on 7 January 1984, Viet Nam on 28 July
1995, Lao PDR and Myanmar on 23 July 1997, and Cambodia on 30 April 1999,
making up what is today the ten Member States of ASEAN.
As set out in the ASEAN Declaration, the aims and purposes of ASEAN are:
1. To accelerate the economic growth, social progress and cultural development
in the region through joint endeavours in the spirit of equality and
partnership in order to strengthen the foundation for a prosperous and
peaceful community of Southeast Asian Nations;

Viết thuê luận văn thạc sĩ, luận án tiến sĩ
Mail:

Luận Văn A-Z
0972.162.399