38660 BUILDING EXPORT COMPETITIVENESS IN LAOS Background Report The World Bank East Asia PREM November 2006 CURRENCY EQUIVALENTS (As of end October, 2006) Currency Lao Kip Currency Unit = Kip US$1.00 = 9,888 Kip FISCAL YEAR: October 1 ­ September 30 ABBREVIATIONS AND ACRONYMS ACFTA ASEAN-China Free Trade Agreement DDFI Department for the Promotion and Management of Domestic and Foreign Investment ACV Agreement on Customs Valuation DISM Department of Intellectual Property, Standardization and Metrology AFTA ASEAN Free Trade Area DLF Department of Livestock and Fisheries AGOA African Growth and Opportunity Act DTIS Diagnostic Trade Integration Study AHPADA Asian Handicraft Promotion & EBA Everything But Arms Development Association AHTN ASEAN Harmonized Tariff EC-15 European Economic Community of 15 Nomenclature nations APD Agriculture Promotion Bank EHP Early Harvest Program ERIT Economic Research Institute for Trade ASEAN Association of South East Asia Nations ESEWA Enterprise Support for Empowering Women and Artisans ATC Agreement on Textiles and Clothing FAO Food and Agriculture Organization BAF Bunker Adjustment Factor FCL Full Container Load/ Full Carload BCEL Banque pour le Commerce Exterieur FDA Food and Drug Administration Lao BOL Bank of Laos FDD Food and Drug Department BTA Bilateral Trade Agreement FDI Foreign Direct Investment CAF Currency Adjustment Factor FIAS Foreign Investment Advisory Service CEPT Common Effective Preferential Tariff FMD Food and Mouth Disease CGE Computable General Equilibrium FOB Free on Board CPI Committee for Planning and FTD Foreign Trade Department Investment C&F Cost and Freight FTO Fair Trade Organization Acting Vice President: Jeffrey Gutman, EAPVP Country Director: Ian Porter, EACTF Chief Economist/Sector Director: Homi Kharas, EASPR Task Team Leader: Mona Haddad, EASPR GATS General Agreement on Trade in Services MOF Ministry of Finance GATT General Arrangement on Tariff and Trade MIH Ministry of Industry and Handicraft GBO Grassroots Business Organizations MFA Multi-Fiber Arrangement GEL General Exception List MFN Most Favored Nation GDP Gross Domestic Product MOH Ministry of Health GNI Gross National Income MPDF Mekong Private Sector Development Facility GOL Government of Laos NAB National Accreditation Body GPA Government Procurement Agreement NAHC National Animal Health Center GSP Generalized System of Preferences NEM New Economic Mechanism GTAP Global Trade Analysis Project NGPES National Growth and Poverty Eradication Strategy GTZ German Agency for Technical NPD National Phytosanitary Database Cooperation HACCP Hazard Analysis and Critical Control NPPO National Plant Protection Organization Point HS Harmonized System NSC National Statistic Center ICT Information and Communication NSEDP National Socio-Economic Development Plan Technology IDA International Development Association NTA Lao National Tourism Authority IF Integrated Framework NTB Non-tariff Barrier IFAT International Federation for Alternative NTM Non-tariff Measure Trade IFC International Finance Cooperation NTR Normal Trade Relations IMF International Monetary Fund NWFP Non-wood Forest Products IPPC International Plant Protection Convention NZAID New Zealand Agency for International Development ISO International Standards Organization PMO Prime Minister Office ISPM International Standards for Phyto-sanitary PRA Pest Risk Analysis Measure ITA Information Technology Agreement PRSP Poverty Reduction Strategy Paper ITC International Trade Center SAARC South Asian Association for Regional Cooperation JICA Japan International Cooperation Agency SEZ Special Economic Zone LCD Lao Customs Department SIDA Swedish International Development Cooperation Agency LCL Less than/loose Container Load SME Small and Medium Enterprise LDC Least Developed Country SMTQ Standardization, Metrology, Testing and Quality LECS Lao Expenditure and Consumption SPS Sanitary and Phyto-sanitary Agreement Survey LHG Lao Handicraft Group SRT State Railway of Thailand LIFFA Lao International Freight Forwarders STEA Science, Technology, and Environment Agency Association LNCCI Lao National Chamber of Commerce and TBT Technical Barriers to Trade Industry MAF Ministry of Agriculture and Forestry TIFFA Thai International Freight Forwarders Association MCTPC Ministry of Communication, TRIMS Trade-Related Investment Measures Transportation, Post and Construction MFTR Memorandum on Foreign Trade Regime TRIPS Trade-related aspects of Intellectual Property Rights MOC Ministry of Commerce UAP Unprocessed Agricultural Products UNDP United Nations Development Program USDA United States Department of Agriculture FAS Foreign Agriculture Services ACKNOWLEDGEMENTS This report was prepared by a team consisting of Mona Haddad (Task Team Leader); George Fane (Australian National University) and Khamlusa Nuansavanh (National University of Laos): trade policy and trade and poverty; Paul Brenton: market access; Philip Schuler, Maika Oshikawa (WTO), and Phouvieng Phongsa (WTO and Ministry of Commerce, Laos): WTO; John Arnold (consultant): trade facilitation; Michel Zarnowieki and William Ledrew (consultant): customs; Kees van Der Meer (standards); J. E. Austin (consultants): export competitiveness; IMF: macro assessment; Amanda Carlier: business environment. Background papers were also provided by the Economic Research Institute for Trade (Ministry of Commerce, Laos): regional agreements and import export regime; Ruth Banomyong (Thammasat University, Thailand): Thailand-Laos border crossing; Dang The Truyen (consultant): Vietnam- Laos border crossing; Santisouk Phounesavath (Ministry of Commerce, Laos): Laos-US bilateral trade agreement; Paul Fekete (consultant) and Andrew Mayock (Booz Allen and Hamilton): IF simulation workshop report. The report benefited from several discussions and brainstorming sessions with government officials from the IF Steering Committee, representatives of IF agencies in Vientiane, AusAid (the IF donor facilitator for Laos), and donor representatives in Vientiane. Peer reviewers are: Sandy Cuthbertson (Centre for International Economics, Australia), Philip English, Jean-Francois Arvis. Extensive comments were provided by Mme Khemmani Pholsena, Mme Banesaty Thephavong, Sirisamphanh Vorachith, Phouvieng Phongsa, Buavanh Vilavong and Latthana Douangboupha (Ministry of Commerce) as well as by Khan-Ngeune Savengsuksa (PMO), Nhun Sisavath (STEA), Phoukhong Bannavong (CPI), and Xaypladeth Chounlamany (MAF). Sjamsu Rahardja provided excellent research assistance and Somneuk Davading provided outstanding support. Bob Warner (Centre for International Economics, Australia) prepared the summary report. Silja Baller, Walter Meza-Cuadra, and Lynn Yeargin assisted in the production of the report. Leendert Solleveld provided guidance regarding the Integrated Framework. The report was prepared under the guidance of Kazi Matin (Lead Economist for Laos) and under the leadership of Mme Khemmani Pholsena (IF focal point, Ministry of Commerce, Laos). A NOTE ON PROCESS Following the preliminary DTIS mission, the government requested the Bank to follow a practical approach with a focus on export competitiveness. To that end, the DTIS included a series of workshops with private sector and government stakeholders. During March 2005 (main mission) and July 2005, eight workshops on cluster export competitiveness were organized with a strong participatory and consultative approach (six in Vientiane on agriculture, light manufacturing and tourism; one in Savannakhet; and one in Luang Prabang on tourism). The workshops aimed at (i) providing an opportunity for the private sector and the government to discuss together the constraints they face in exporting; (ii) learning from best practice around the developing world on how clusters managed to improve their export competitiveness; (iii) allowing local stakeholders to come up with a SWAT analysis and an action plan on what needs to be done in Laos. The DTIS benefited greatly from the work done for the National Export Strategy (NES) that was being undertaken by the government with the assistance of ITC. Recommendations from the DTIS work and the NES were merged in the export competitiveness component of the draft Action Matrix. Discussions with the government and IF agencies took place on how to incorporate the DTIS findings into the five-year plan of the government. In March 2006, a workshop to discuss the draft Action Matrix was organized in Vientiane (modeled after the IF Simulation Workshop in Addis Ababa in September 2005, but discussing a real Action Matrix with real stakeholders). The workshop brought together representatives from the government, private sector, and donor community. It aimed at debating and agreeing on priorities of the Action Matrix within each group and across the three groups. In addition, two awareness raising workshops were organized in March 2006 in Luang Prabang and Pakse and included representatives from various provinces. The workshops aimed to share the main results of the DTIS and the draft Action Matrix, and seek feedback from the provinces. The workshops were supported by the World Bank and led by Mme Khemmani Pholsena (IF focal point in Laos). TABLE OF CONTENTS Chapter 1: Macroeconomic Setting, Opportunities, and Challenges Ahead .............. 1 ap 1: ac oe onom g, or an al ge ad The macroeconomic setting........................................................................................... .1 he oe onom ng Economic outlook and challenges .................................................................................. 2 onom ut ook nd ha ng Chapter 2: Trade Policy................................................................................................... 7 ap 2: ad ol Import duties and effective protection............................................................................ 7 por dut nd ve prot ............................................................................ Trade reform under AFTA.............................................................................................. 9 de or unde .............................................................................................. Non-tariff barriers to imports........................................................................................ 12 on- ba por 12 Current import procedures............................................................................................ 15 ur nt or proc dur 15 The incentive regime for exporters.............................................................................. 16 he nc nt ve gi xpor 16 Current export procedures............................................................................................. 18 ur nt xpor proc dur 18 Conclusion .................................................................................................................... 19 onc us on 19 Chapter 3: Regional and Global Market Access Issues for Laos............................... 21 ap 3: gional an obal ar aos The structure of trade.................................................................................................... 21 Market access conditions in the EU.............................................................................. 23 Access to the US........................................................................................................... 27 Access to the Japanese market...................................................................................... 28 Access to East Asian markets and ASEAN.................................................................. 29 Conclusions................................................................................................................... 30 Chapter 4: Leveraging Lao WTO Accession for Growth and Development ............ 32 True benefits for Lao WTO membership...................................................................... 32 Status of negotiations.................................................................................................... 35 Negotiations issues........................................................................................................ 36 WTO accession: what's in it for Laos........................................................................... 44 Immediate technical assistance priorities...................................................................... 48 Chapter 5: Tailoring the Logistics Sector to the Export Potential............................. 51 1. Where does the logistics sector stand? ..................................................................... 51 Logistics, trade, and exports ........................................................................................ 51 Land transport............................................................................................................... 53 Inbound and outbound supply chains via Bangkok...................................................... 55 Trucking services and tariffs......................................................................................... 58 Transit time................................................................................................................... 60 Ocean shipping cost and time ....................................................................................... 61 2. What can be done? ................................................................................................... 62 Developing logistic services tailored to small-scale shipments.................................... 62 Reducing regulation...................................................................................................... 64 Implementing the transit agreement with Thailand ...................................................... 65 Improving customs procedures for transit .................................................................... 66 Improving supply chain performance........................................................................... 67 Developing LCL logistics............................................................................................. 70 Inland container depot/dry port..................................................................................... 72 Proposed short-term initiatives to improve logistics in Laos........................................ 73 Chapter 6: Customs update ........................................................................................... 77 Lengthy, costly, and unpredictable procedures............................................................. 77 Major customs issues.................................................................................................... 79 Progress in reform and performance............................................................................. 81 Remaining constraints................................................................................................... 82 Strategy for the way forward ........................................................................................ 83 Donor coordination....................................................................................................... 84 Chapter 7: Addressing Sanitary and Phytosanitary Issues to Raise Competitiveness ........................................................................................................................................... 86 Agriculture and food trade............................................................................................ 86 Private sector involvement............................................................................................ 88 SPS issues constraining market access ......................................................................... 89 Institutional and legal framework for SPS.................................................................... 90 Monitoring and enforcement......................................................................................... 92 Potential areas for growth............................................................................................. 94 What needs to be done? ............................................................................................... 95 Priority actions.............................................................................................................. 96 Chapter 8: Business Environment and Institutional Framework for Trade and Investment ....................................................................................................................... 99 Where is the private sector? ......................................................................................... 99 1. Constraints to PSD: Policy and Legal Framework for Business ............................ 100 Policy uncertainty ....................................................................................................... 100 Legal framework for Business.................................................................................... 101 Regulations and Procedures to Start a Business ......................................................... 105 Trade and Tax Regulations and Procedures to Operate a Business ........................... 110 Capacity and Institutional Constraints........................................................................ 114 2. Constraints to PSD: Costs of Doing Business ........................................................ 116 Infrastructure for Business.......................................................................................... 116 3. Constraints to PSD: Access and Cost of Key Inputs for Business. ...................... 117 Access and Cost of Financing..................................................................................... 117 Labor Issues: Skill and Regulations. .......................................................................... 117 Land ............................................................................................................................ 119 4. Recommendations to Facilitate PSD in Lao PDR .................................................. 119 Chapter 9: Raising Export Competitiveness: A Vision from Within....................... 121 Defining competitiveness............................................................................................ 121 Why is competitiveness important for Lao PDR and its key sectors? ....................... 123 Methodology and approach to this analysis: a vision from within............................. 125 1. Competitiveness Assessment of Tourism............................................................... 126 Profile and importance of tourism ............................................................................. 126 International and regional market trends .................................................................... 128 Competitive position of tourism ................................................................................. 128 Tourism cluster and value chain analysis ................................................................... 130 Business environment constraints............................................................................... 133 Strategy for repositioning the Lao tourism industry................................................... 134 2. Light Manufacturing............................................................................................... 138 Profile and importance of light manufacturing in the economy ................................. 138 Textiles and garments ................................................................................................. 139 Wood and wood products ........................................................................................... 142 Other light manufacturing........................................................................................... 145 Competitive position of light manufacturing industries ............................................. 147 Business environment constraints............................................................................... 149 3. Agriculture.............................................................................................................. 151 Profile and importance of agriculture ........................................................................ 151 International and regional market trends .................................................................... 152 The case of coffee ...................................................................................................... 153 Competitive position of Lao agriculture..................................................................... 155 Business environment constraints............................................................................... 156 Strategic opportunities ................................................................................................ 157 4. Conclusion and cross-cutting recommendations .................................................... 159 Chapter 10: What's In It For The Poor? ................................................................... 161 1. Impact of Trade Measures on the Poor.................................................................. 161 Profile and trends of poverty....................................................................................... 161 Government strategy................................................................................................... 163 Impact of AFTA and EHP .......................................................................................... 164 Impact of road improvement on poverty .................................................................... 164 The role of remittances ............................................................................................... 166 2. Competitive Strategies for Grassroots Handicraft Export Development................ 168 Constraints in the handicraft sector ........................................................................... 170 Competitive strategies in the handicraft sector........................................................... 171 Recommendations ...................................................................................................... 178 Chapter 11: A Practical and Collaborative Approach: The Process of Undertaking the DTIS in Laos? ........................................................................................................ 181 1. Description and assessment of the industry cluster workshop............................... 181 Methodology and activities......................................................................................... 181 2. Action matrix and awareness raising workshops ................................................... 184 The action matrix workshop ..................................................................................... 184 The provincial workshops: Luang Prabang and Pakse .............................................. 186 Appendix .................................................................................................................... 187 Chapter 1: Macroeconomic Setting, Opportunities, and Challenges Ahead Recent macroeconomic performance in Laos were insolvent, weighed down by high levels has been encouraging, with the economy now of non-performing loans, which accounted for enjoying stable macroeconomic conditions almost 90 percent of the state banks' loans. and relatively robust economic growth. The broader structural reform agenda also Significant challenges remain, however, needed to be revived to place the economy on notably in fiscal management and financial the path of sustained growth and poverty sector reform. They need to be overcome for reduction. Laos to sustain macroeconomic stability and achieve its long-run development potential. Figure 1. Inflation and exchange rate Strengthening the economy's external under control since 2001 competitiveness, through trade reforms and 200 0 measures to improve the business Inflation and Exchange Rate environment, will also be critical to attract the 180 January 1997- August 2005 private investment that is needed to widen the 2,000 160 resource base and diversify exports. 140 4,000 The macroeconomic setting 120 Inflation (12 month percent change; LHS) Laos began the transition from a centrally 100 6,000 Exchange Rate planned to a market economy in 1986, when (Kip/US$; RHS) 80 the government introduced the "New 8,000 Economic Mechanism". Over the next 60 decade, steady progress was made in 40 transforming the economy: price controls were 10,000 removed, the exchange rate system was 20 unified, tariffs were rationalized, a two-tier 0 12,000 banking system was introduced, the 1997 1998 1999 2000 2001 2002 2003 2004 2005 government's monopoly on trade was Source: IMF removed, the number of state-owned enterprises was sharply reduced and private The fifth National Socio-economic enterprises were allowed to operate. Reforms Development Plan (NSEDP) (2001­2005), stalled in the second half of the 1990s, as Laos which was supported by an IMF PRGF struggled with a major economic crisis, arrangement and programs by the World Bank stemming from a breakdown in and ADB, sought to address these challenges. macroeconomic management in the wake of One of the primary objectives was to sustain the Asian crisis. the stabilization effort, through strengthening public finances. Raising budget revenues and The government launched a successful strengthening expenditure management were stabilization program in late 1999, and by the main priority, complemented by reform of early 2001 the Kip had stabilized and inflation the state banks and state-owned enterprises to had been reduced to single digits (Figure 1). strengthen the broader fiscal position. The However, the economic situation remained development plan also sought to accelerate fragile. The fiscal position was weak, as structural reforms to develop the private sector budget revenues remained very low, and the and facilitate greater regional integration state commercial banks, which account for through trade reforms associated with Laos' over half of the assets of the banking system obligations under the ASEAN Free Trade Area (AFTA) and preparations for accession 1 to the WTO. The government has prioritized developed.3 Lastly, while some progress has investment in infrastructure and social services been made in trade and other private sector under the National Growth and Poverty reforms,4 the country's economic base is Eradication Strategy. Development of the fragile and over-dependent on a narrow range country's natural resources were also accorded of commodities. high priority. Economic outlook and challenges Macroeconomic performance under the fifth NSEDP has been relatively encouraging. The economic outlook for Laos is favorable, Apart from a brief interruption in 2002­2003, provided that progress is made in structural Laos has enjoyed stable macroeconomic reform. Economic growth should remain conditions. In the last few years, the Kip has strong during the next few years--in the range traded within a relatively narrow band, of 7­7½ percent--with the stimulus from the inflation has remained in single digits, and Nam Theun 2 (NT2) hydroelectric project and external reserves have remained comfortable a number of large mining projects more than at around three months of imports. The offsetting a weakening of garment exports economy has also enjoyed buoyant growth following the expiry of the Multifiber since 2003, driven largely by a surge in Arrangement (MFA) quota system. Further mining activity. Much credit for this integration of the economy into the region will favorable performance is due to a commitment likely provide additional stimulus particularly to disciplined monetary and fiscal policies, in the agriculture and tourism sectors. The and in particular a firm adherence to avoiding external outlook is also expected to remain monetary financing of the budget deficit. reasonably buoyant. While the external current account deficit is projected to increase The pace of structural reform has been slower in the next few years, due to a surge in capital than envisaged, however, leaving many imports associated with the NT2 and mining underlying weaknesses unaddressed. In projects, this is expected to be financed by particular, progress in strengthening fiscal increased capital inflows--mainly foreign management has been slow and uneven, due to direct investment--and external reserves are capacity constraints and a difficulty in expected to remain at relatively comfortable advancing reforms in a decentralized levels. environment.1 Budget revenues have fallen significantly since the start of the plan,2 Significant challenges will need to be putting excessive pressures on expenditure overcome for Laos to sustain its recent compression, and raising concerns about fiscal macroeconomic performance, and achieve its sustainability. Expenditure management also longer-term goal of graduating from the group remains weak, undermining progress in reducing domestic arrears and improving public services, most critically in education and health. The state banks remain in a 3 The degree of monetization--M2 is under precarious financial position, and the banking 20 percent of GDP--and credit extension (10 system as a whole is still severely under- percent of GDP) are both very low relative to other low-income countries. Banking services are also very limited (for example there are currently only 1 In 2000, the government took steps to 11 ATMs throughout the entire country). decentralize fiscal management, which resulted in a 4Key reforms include further trade liberalization weakening of central control over revenue under AFTA, the ratification of AFTA's Early administration and treasury operations. Harvest Program with China, the establishment of 2 The revenue-to-GDP ratio is estimated at normal trade relations (NTR) with the United 11 percent in 2004/05, two percentage points States, and the initiation of steps towards WTO below its 1999/00 level. membership. 2 of least developed countries by 2020.5 In policy change in the medium term,6 the particular, the fiscal position is fragile, with immediate priority is to strengthen tax and weak revenue collections and rising spending customs administration. pressures putting strains on the budget. The impact of the tariff reduction resulting from The main challenge on this front has been to implementation of the AFTA obligations is centralize control over the tax and customs likely to be mitigated by increased imports and operations in the provinces. In the customs reduced revenue leakages after customs area, some steps have been taken to improve administration reforms (Box 1). Public debt is central oversight over provincial customs high at about 80 percent, and the budget will posts, although this remains a challenge. have to absorb significant liabilities when the Progress has been slower on the tax side. The state banks are fully recapitalized. More authorities have been encouraged, as a first generally, the financial sector needs to be step, to integrate the administration of large strengthened to provide a well functioning tax payers into a single unit under central payment system and efficient financial government control, but there is little intermediation, and private sector investment consensus on how to proceed on this front. is needed to widen the resource base and Strengthening the technical capacity in both diversify exports. The latter is particularly the customs and tax administrations also important, as the large projects that will drive remains a priority. growth in the next few years have few linkages with the rest of the economy and will On the expenditure side, the priority is to not by themselves provide much growth in strengthen the planning and execution of the employment opportunities. government budget, as weaknesses in the public expenditure management system are The government's National Growth and widespread. As on the revenue side, a lack of Poverty Eradication Strategy (NGPES) has central treasury control over provinces has highlighted many of the key reforms that are aggravated underling capacity constraints, needed to overcome these challenges. While resulting in weak control over expenditures there is a broad consensus on the main and poor fiscal reporting. The Government direction of reform, the details of the policy has launched a Public Expenditure priorities still need to be fleshed out in a Management Strengthening Program, with the number of areas. This paper focuses on three support of the World Bank. The main key priority areas: priorities in the short run will be to: (i) strengthen control over provincial Strengthening fiscal management is a first treasuries, notably with regard to priority area. There is a broad consensus that transmission of national revenues revenue mobilization continues to be the main to the center; fiscal priority. This is critical given Laos' (ii) improve budget planning and high public debt and its substantial execution, by updating the development needs. The need for accelerated budget's nomenclature and progress is heightened by the impending loss developing supporting accounting of customs revenue associated with the tariff systems; and reductions under AFTA (Box 1). While the (iii) develop a central government cash introduction of a VAT remains the main tax management system. 6The introduction of the VAT is likely to be 5 This would require sustained growth of 6­7 delayed until 2008, to provide adequate preparatory percent over an extended period. time. 3 Progress in strengthening fiscal management capacity, the scope of bank supervision needs is likely to require reforms to the broader to be broadened beyond the state banks, to framework of center-province fiscal relations. assess the soundness of the private banks. The Provinces are unlikely to cede control over first step in this regard would be to develop revenue and treasury operations until such a standard financial soundness indicators for the framework is in place. A review is needed of banking system to identify potential areas of the regulatory framework for fiscal relations vulnerability. between the central government and the provinces, to clarify the assignment of revenue Improving competitiveness is a third priority and expenditure responsibilities and develop a area. Conventional macroeconomic robust mechanism for inter-governmental assessments of competitiveness using real transfers. effective exchange rates do not suggest any major competitiveness concerns. Indeed, Establishing a functioning banking system is Laos' real exchange rate is broadly unchanged a second priority area. Laos needs an from its pre-crisis levels in the mid-1990s efficient banking system to achieve the (Figure 2). However, other approaches, government's development goals and meet the involving a more detailed assessment of the competitive challenges of regional integration. various elements that make up the investment The main emphasis continues to be on the climate, suggest that competitiveness is a reform of the state banks, as they dominate the major impediment to attracting investment to banking system.7 As noted above, progress in Laos. restructuring the state banks has been slow, and they remain deeply insolvent. Given the Figure 2. The real effective exchange rate is not a difficulties in restructuring the state banks, source of concern for competitiveness greater priority needs to be given to finding Real and Nominal Effective Exchange Rates strategic partners for the banks to strengthen January 1995 - December 2004, January 1995=100 their technical expertise and provide them 120 REER with the autonomy needed to run a successful 100 NEER banking operation. In the interim, the focus is on improving the governance frameworks of 80 the state banks, in order to streamline the 60 bank's management structures, strengthen their performance indicators, and ensure a 40 sound lending framework. 20 Steps also need to be taken to strengthen the 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 general banking environment. One priority Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan has been to facilitate the entrance of strong strategic investors into the banking system. Source: IMF The key next step in this process is to secure passage of amendments to the banking law to Poor infrastructure is one key impediment. allow foreign banks to operate on a nationwide The state of Laos's infrastructure lags far basis on equal terms with domestic banks. behind other countries in the region. There is Prudential oversight of the banking system no railway system and the road network has a also needs to be strengthened. In addition to very low density--less than a hundred meters improving the regulatory framework and of road per square kilometer--and less than building up the Bank of Laos's supervisory half the roads are paved. A quarter of the district centers lack year-round access and the situation is even worse at the village level. 7 The three main state banks--BCEL, LDB, and The lack of infrastructure is a major obstacle APB--account for over two thirds of total deposits. to the development of an integrated domestic 4 market. Access to export markets is also difficult. In addition to the difficulty of getting goods to the border, cumbersome customs procedures and governance problems at the border raise transport costs and increase delivery times for key exports (e.g., garments and agricultural products). As a landlocked country, Laos' trade is sensitive to the transit procedures in neighboring countries, which can add to the costs of shipping goods. The business environment is also very difficult. While Laos has cheaper labor than other countries in the region, productivity is also lower, and it has higher than average electricity, telecommunications and rental costs. Laos ranks 144th out of 145 countries in terms of the length of time that it takes to start a business and 150th out of 161 in a recent Heritage Foundation study on the cost of doing business. Limited foreign investment and low numbers of domestic private firms are an indication of how difficult the investment environment is in Laos. In a country of 5.5 million people, there are only a few hundred manufacturing firms with more than 10 employees. The basic framework for the reform agenda has already been established in the NGPES, which appropriately stresses the need to: (i) improve the business climate by creating a predictable and transparent policy environment; (ii) streamline administrative procedures and regulations that are an obstacle to domestic and foreign private investment; and (iii) strengthen market institutions, including most notably those related to dispute resolution and contract enforcement. The remaining chapters of this study will address the main elements of the reform agenda to strengthen Laos' competitiveness, placing special emphasis on trade facilitation and reforms to the business environment. 5 Box 1. Impact of AFTA and ACFTA on tariff revenue The impact on revenue of tariff reductions resulting from implementation of AFTA and the ASEAN China Free Trade Agreement (ACFTA) will be mitigated by the increase in the value of trade and, potentially, by the reduction in revenue leakage following customs administrative reforms. Two projections are undertaken, using different datasets. The baseline projection uses Lao customs data and assumes that the revenue leakage continues. It projects a rapid increase in imports driven by economic growth and reductions in tariffs. The US$ value of imports from AFTA and non-AFTA countries is projected to increase by over 50 and 45 percent respectively over the period 2006-08. Under this scenario, full implementation of AFTA and ACFTA is expected to cause a gradual and moderate decline in tariff revenue--from 1.8 percent of GDP in 2004 to 1.4 percent in 2008. (As a point of reference, if the free trade agreements were not implemented and all imports were subject to MFN tariff rates, revenues would be expected to be around 2.1 percent of GDP in 2008.) An alternative projection uses trade statistics from partner countries and shows potential revenue gains from fully taxing all trade flows (rather than just those that are captured by Lao customs). Tariff revenue would then be significantly higher than current collections. Projected revenues would have been 2.3 percent of GDP in 2004, and would fall to 1.5 percent of GDP in 2008 under full implementation of AFTA and ACFTA. This suggests that customs reform could help claw back some of the revenue loss from implementation of the agreements. Projection using customs data Projection using partner countries data $million AFTAimports percent $million estimatedtariff revenue/GDP percent AFTAimports 600 estimatedtariff revenue/GDP 2 1000 (RHS) 2.5 (RHS) 1.8 900 500 1.6 800 2 Non-AFTAimports Non-AFTAimports 1.4 700 400 1.2 600 1.5 300 1 500 0.8 400 1 200 0.6 300 0.4 200 0.5 100 0.2 100 0 0 0 0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Note: Both projections assume: (i) full transmission of tariff changes to domestic prices of imported goods; (ii) own- price elasticity of import demand based on the WITS estimates for HS chapters; (iii) zero cross-price elasticity of import; (iv) income elasticity of unity is assumed for the relationship between import and GDP growths in US dollar terms; and (v) international unit price for each item remains constant through out the forecast period. Gross domestic production growth projections include the impact of tariff reduction on economic activity through better access to external markets and increased competition at home. Projections are constructed at the HS 6-digit level using import items that matched with tariff lines from the AFTA and ACFTA agreements. Both projections take into account exempted goods, which include capital goods, non-passenger transport equipment, and industrial machinery. The Lao customs data used are inconsistent with those provided by trade partners. In 2004, Lao imports reported by customs were only half the figure based on partner countries data (from COMTRADE). The difference is likely to be attributable to smuggling, misreporting, and the granting of ad hoc tariff exemptions by provinces. Under-reporting is significant in relatively highly-taxed items such as beverages and tobacco, and machinery and transport goods. Source: World Bank 6 Chapter 2: Trade Policy Trade in Laos has been liberalized Import duties and effective protection substantially in recent years under the direction of the New Economic Mechanism A major turning point in tariff policy (NEM) which in the 1980s launched the started in 1993. As part of the NEM, the country's transition from a centrally planned Lao government gave firms autonomy to to a market economy. Trade liberalization engage in international trade and in 1993 it has also been driven by regional agreements, began to reduce the taxes on trade. Even especially AFTA. Tariffs are now low on after the 1993 reforms there were 12 average, and still coming down as different tariff bands, with rates that ranged implementation of AFTA commitments from 5 percent to 100 percent. A major proceeds. Import licenses have also been reform in 1995 was to reduce tariffs to streamlined, but more can be done to make moderate levels. The top rate was lowered them more transparent, and ultimately they to 40 percent and the number of bands need to be removed or replaced by more reduced to six: 5 percent, 10 percent, 15 appropriate regulation. percent, 20 percent, 30 percent, and 40 percent. In addition to these reductions in To a large extent, trade policy is now shaped tariffs, export taxes have now been by the regional and bilateral agreements that abolished. Laos has engaged in. These include AFTA, the Early Harvest Program (EHP) of the MFN tariffs are low, and so is dispersion. ASEAN China Free Trade Agreement The average MFN unweighted tariff is 10 (ACFTA), and the bilateral trade agreement percent, and the weighted average is 13 with the United States (BTA).1 There is a percent. Tariff dispersion, measured by the risk that implementation of these agreements standard deviation, is also quite low (Table could lead to some fragmentation of tariff 1). Tariffs are also low relative to countries policy and additional administrative burdens in the region and countries with similar for government and traders. In the longer income level--IDA countries--(Figure 1). term, Laos may be expected to commit to reduce its Most Favored Nation (MFN) Table 1. Profile of MFN tariff structure in tariffs as a condition of joining the WTO. Laos This would reduce some of the risks of trade Unweighted Weighted diversion that are inherent in the current tariff (%) tariff (%) differentiation of tariffs according to the Average 10.3 13.2 Median 5.0 country of origin of imports. In the Standard deviation (8.6) (11.9) meantime, it would make sense for the Maximum 40.0 Ministry of Commerce to factor in the risks Minimum 5.0 of trade diversion in its consideration of Source: MOC future tariff reform. Some sectors still enjoy higher protection. The average weighted tariff in manufacturing sector (13 percent) is higher 1 than in agricultural sector (7 percent). Laos is also a signatory to the Bangkok Within agricultural sector, by far the most agreement, whose membership includes Bangladesh, India, Republic of Korea, Sri Lanka highly protected sub-sector is fruits and and China. Laos has not, however, extended any vegetables, with an average duty rate of 25 tariff concessions under the agreement, so it as percent (Figure 2). Within the yet has little impact on trade policy. 7 manufacturing sector, the highest tariffs are that firms in the modern manufacturing on food processing, wood products, sector that have obtained investment furniture, and motor vehicles. licenses from the Committee for Planning and Investment (CPI) under the Foreign or Figure 1. Overall tariffs in Laos are low Domestic Investment Laws, receive substantial effective protection. This is IDA average because, for imports of raw materials and semi finished goods that are part of their Thailand approved business plans, they need only pay Papua New import duty rates at a special concessionary Guinea duty rate of 1 percent, and approved imports Vietnam of capital equipment can be imported duty Mongolia free. Cambodia Among sectors in which domestic Lao, PDR production is substantial, those with the highest effective rates are probably those 0 5 10 15 20 average tariff (%) producing processed foods and beverages. Source: IMF Trade Restrictiveness Index, 2004 The average MFN tariff for manufacturing sectors producing processed meat and fish is Figure 2. Some sectors are more protected 29.8 percent and that for prepared vegetables is 30.0 percent (Table 2). The Commodities nes. corresponding rate for processed cereals is Miscellaneous 18.6 percent and other food, beverages and Machinery & transport tobacco the average tariff rate is 17.8 weighted MFN Manufactured goods percent. Other sectors producing for the unweighted MFN Chemicals domestic market that receive substantial effective protection are chemicals (including Animal/vegetable oil/fat Mineral fuel/lubricants cement and soaps and detergents) with an Crude materials average tariff rate of 13.9 percent; rubber Beverage & tobacco and plastic products, with an average tariff Food & live animals rate of 12.0 percent; and footwear with an 0 10 20 30 40 average tariff rate of 11.2 percent. average tariff in percent Note: SITC classification The effective rate of protection for the Source: MOC garment sector is probably close to zero, since raw materials and capital enter duty Effective protection is probably highest for free and most of the output is exported. production of processed food and Similarly, although there are high average beverages, and lowest for the major export tariff rates on wood products (29.8 percent) products such as garments and furniture. and furniture (17.9 percent), these sectors It is difficult to calculate effective rates of probably also receive little effective protection for Lao industries because there is protection. Since furniture and wood no input-output table for Laos and because products are important exports for Laos, the no price comparisons are available for the high tariffs on them are probably largely many goods that are not directly tradable-- some because of licensing, but most because of high transport costs2. However, it is clear controls over imports to protect local producers could mean that levels of protection are much 2Further, the willingness of central and higher than calculations at a single point in time provincial authorities to use discretionary would suggest. 8 redundant. If there is competition between make use of tariffs to keep domestic prices domestic producers, it will of course drive above those that they receive for their down the domestic price to the price exports, but this is unlikely to be the case in received by exporters. If domestic markets furniture and wood products since there are are monopolized, or operated by many firms in these sectors. oligopolistic cartels, domestic producers can Table 2. Tariffs are still high for manufacturing sectors with large domestic production % Share % Share MFN AFTA AFTA 2001/02 2003/04 2005 2005 2009 Meat and fish 0.0 0.0 29.8 13.1 0.7 Sugar and cocoa 1.2 1.2 10.3 9.4 4.1 Cereals, processed 0.5 0.2 18.6 12.6 1.8 Vegetables, prepared 0.0 0.0 30.0 20.2 3.0 Other food, beverages & tobacco 7.6 4.0 17.8 13.7 2.4 Chemicals, organic & inorganic 1.1 0.6 5.0 4.0 0.0 Pharmaceuticals 0.4 0.7 9.8 7.8 4.9 Fertilizers 0.4 1.2 5.0 4.1 0.0 Other chemicals 2.8 1.2 13.9 10.5 2.4 Plastic & rubber products 3.2 2.4 12.0 9.7 1.7 Hides, leather 0.1 0.1 10.7 10.4 1.9 Wood products 0.2 0.1 29.8 18.7 2.6 Paper & printing 1.1 1.2 6.9 6.9 1.4 Textiles 1.3 0.9 8.4 5.7 0.0 Apparel 1.8 0.9 9.9 5.8 1.2 Footwear etc. 0.4 0.3 11.2 8.4 0.4 Cement, stone, glass 2.5 2.5 5.1 4.7 0.3 Iron & steel 6.0 5.9 5.0 5.0 0.1 Other metals 1.1 1.3 8.6 7.7 3.3 Machinery 17.6 25.7 8.5 8.4 0.5 Motor vehicles 14.7 14.4 24.7 22.0 11.7 Other vehicles 2.4 0.3 10.0 9.7 9.3 Precision machinery 1.1 1.5 5.6 5.3 0.0 Furniture 0.7 0.1 17.9 12.9 2.5 Other manufactures 0.2 0.2 13.8 12.2 2.2 Imports, not elsewhere classified 0.8 0.6 0.0 0.0 0.0 Manufacturing 67.4 69.2 13.1 11.4 3.7 Whole economy 100.0 100.0 11.3 10.1 3.9 Note: The import shares are the shares of dutiable imports in the sector as a percentage of dutiable imports. Source: MOC. Trade reform under AFTA Tariffs are even lower for imports from rates to between zero and 5 percent and ASEAN countries, which are the major made these rates applicable to all imports trading partners for Laos. Laos joined the except for `sensitive' Unprocessed AFTA in July 1997. Under this agreement, Agricultural Products (UAP) and a relatively each member announced a schedule of small number of items that are permanently Common Effective Preferential Tariff excluded on the grounds of religion, moral, (CEPT) rates that are available to other health or public safety. To implement the members. The availability of the AFTA agreement, all imports, classified by preferential CEPT rates has to be phased in Harmonized System (HS) code, must be gradually. The six `original' ASEAN placed on one of the following four lists: members have already reduced their CEPT 9 · The Inclusion List (IL) of items for announced a schedule according to which which importers pay only the CEPT rate of items would be moved from the TEL to the the importing country, rather than the MFN IL in tranches. All items originally on the tariff, provided that: (i) the item is on the IL TEL were to be moved to the IL by January of exporting country; (ii) 40 percent of the 1st, 2005. The tranches were roughly equal sale price of the item comprises value added in terms of the number of items transferred in ASEAN countries; (iii) if the items listed each year, but the first items to be in the IL have a CEPT rate at 20 percent or transferred were the least `sensitive' ones. less in the exporting country the same item Obviously the least sensitive items were should also have the CEPT rate at 20 percent those that were not imported at all; after or less in the importing country. these items had been transferred to the IL, · The Temporary Exclusion List the next to be selected were those that were (TEL) of items that must be gradually imported only in small quantities and those moved onto the IL in accordance with a that did not compete with domestic specified schedule. production and for which duty rates were · The Sensitive List (SL) of usually relatively low. As consequence of Unprocessed Agricultural Products (UAPs) items being selected in this way the value of that will be liberalized by 2015. For Laos, trade per item was relatively low for the this list includes products such as rice, in items that were moved to the IL in the initial various stages of processing, and pork tranches and the bulk of items by value were carcasses. to be transferred to the IL in the last two · The General Exception List (GEL) tranches (Table 3 summarizes the schedule). of items for which there are no commitments to reduce tariffs. Some of About half of the 855 items that remained on these items are those covered by Article XX the TEL after January 1st, 2003 were of GATT, such as those that could threaten scheduled to be moved to the IL on January national security, public morals, health, 1st, 2004 and the remainder on January 1st, religion or the preservation of the national 2005.4 In accordance with this schedule, the heritage. Trade in these items is banned TEL has indeed been abolished, but the with all countries, whether or not they are legislative enactments needed to give effect members of ASEAN. In addition, there are to the new CEPT rates have not yet been 71 non-prohibited GEL items that can be passed. As a result, the rates that are imported into Laos, but with respect to currently being applied to the items which it has made no AFTA commitments. transferred to the IL on January 1st, 2004 Examples include weapons, sporting guns and 2005 are no lower than the MFN rates. and alcoholic beverages. In the case of beer, This means that the abolition of the TEL has which is produced locally and subject to a not yet had any real effect. The necessary 40 percent import duty, it appears that the enactments are currently at the National restrictive trade arrangements are imposed Assembly and were expected to be passed to protect the local producer.3 before the end of 2005. In the meantime, the applied CEPT rates are unchanged from Initially, Laos placed almost all items on the January 1st, 2003. TEL or on one of the other still more restrictive lists. However, Laos has 3 In 2004, Laos adopted the ASEAN 4 In Table 3, these 855 items are represented by Harmonized Tariff Nomenclature (AHTN) the difference between the 3,389 items scheduled which is based on the HS 2002. This resulted in for inclusion in the IL on January 1st, 2005 and an expansion of the number of tariff lines to the 2,534 items already on the IL at January 1st, 10,690 items from 3,551 in the HS 1996. 2003. 10 Table 3. Coverage of the AFTA lists Figure 3. MFN and AFTA tariffs No. of % of % of % of items all dutiable all 14 (HS code) items imports imports IL 2001 1,673 47.1 16.4 19.6 12 Agriculture IL 2002 2,098 59.1 19.3 24.2 Mining 10 IL 2003 2,534 71.4 44.7 44.9 Manufacturing IL 2004 2,961 83.4 65.6 67.0 Overall 8 IL 2005 3,389 95.4 95.9 93.9 SL 88 2.5 0.6 0.6 6 GEL 74 2.1 3.5 3.5 Total 3551 100.0 100.0 100.0 4 Note: "Dutiable imports" include imports to be used 2 by approved investment projects, even though the duty on such imports is only 1 percent. "All imports" 0 means "dutiable imports" plus "exempt imports", MFN 2005 CEPT 2005 CEPT 2006 CEPT 2009 where the latter are imports by government ministries, diplomatic imports and imports by projects funded by Source: World Bank estimates from data supplied by foreign bilateral donors. Department of Customs. Averages are imported Source: Department of Customs, Ministry of Finance. weighted averages using dutiable imports only. The AFTA preference is still low--at only By the time AFTA is fully implemented, one percentage point below the MFN rate. most products will face a zero tariff, and The duty rates on imports from ASEAN the vast majority will face a tariff of under members under CEPT scheme have been 5 percent. Currently, over 80 percent of reduced. However, as of 2005, the average tariff lines are subject to tariffs which are AFTA preference is only 1.2 percentage less than 5 percent (Figure 4). With AFTA points: the average import-weighted CEPT implementation, the share of tariff lines rate is 10.1 percent, while the average MFN subject to tariffs above 5 percent will be tariff is 11.3 percent. Part of the reason for negligible, and will encompass the most the small size of the AFTA preferences is sensitive products. that Laos lagged behind the agreed CEPT schedule in 2004 and 2005. Further, and Figure 4. Most products face low tariffs much larger, reductions in the CEPT rates % share of tariff lines subject to MFN or AFTA tariff are scheduled for the period 2005­2009; if 70 they occur, the average CEPT tariff will be 60 only 3.9 percent by 2009 (Figure 3).5 >= 40% 50 30% <=t< 40% 20% <= t < 29% 40 15% <= t< 19% 10% <= t< 15% 30 5% <= t< 10% 20 1% <= t< 4% 5 t= 0% Note: The CEPT rates shown for 2005 include 10 only the reductions in CEPT that have actually been implemented (reductions originally 0 MFN 2004 2005 2008 scheduled for 2004 and 2005 have not yet been implemented; therefore the CEPT rates shown Source: MOC here for 2005 are essentially unchanged from those originally scheduled for 2003). The CEPT rates shown for 2006 and 2009 are those that are Tariffs on agricultural trade with China have scheduled for these years. For these rates to be been slightly reduced as a result of the Early achieved it will be necessary for Laos to get back Harvest Program (EHP). Much more on schedule by implementing the CEPT substantial reductions have been scheduled reductions originally scheduled for 2004 and under this program for the period 2006-2009 2005 and then also implementing the reductions (Table 4). scheduled for years that are still in the future. 11 Table 4. Impact of Early Harvest Program on tariffs in 2009 % Share 2009 AFTA 2009 AFTA Reduction due 2003/04 No EHP + EHP to EHP Livestock 0.2 6.6 3.2 3.4 Fishing 0.1 0.2 0.2 0.0 Dairy 1.1 4.5 0.2 4.3 Other animals 0.0 0.0 0.0 0.0 Fruit, vegetables etc. 0.2 4.1 3.3 0.8 Cereals, excluding rice 1.1 0.0 0.0 0.0 Rice 1.3 5.0 5.0 0.0 Milled agricultural products 0.5 0.0 0.0 0.0 Edible oils and fats 0.1 0.1 0.1 0.0 Animal fats 0.2 0.1 0.1 0.0 Agriculture, total 4.4 3.1 1.9 1.2 Whole economy 100.0 4.0 3.9 0.1 Source: MOC Non-tariff barriers to imports Figure 5. Comparing Lao trade restrictiveness While overall tariffs are low and streamlined with other countries to a large extent, the situation of non-tariff barriers remains opaque. The IMF trade IDA average restrictiveness index for 2004 shows that Thailand Overall Rating while Lao tariffs rate well, its non-tariff Tariff Rating barriers do not (Figure 5). Papua New Guinea NTB Rating Vietnam Non-tariff barriers have been eased in Mongolia theory but in practice remain a source of friction. Significant administrative and non- Cambodia tariff barriers to trade remain, but are now Laos much lower than they used to be. The 0 2 4 6 8 10 process of relaxing non-tariff barriers has rating been a gradual one that began with the Note: overall rating: 1 (most open) to 10 (most introduction of the New Economic restrictive); tariff rating: 1 (average tariff less than Mechanism in 1986 and that is still 10%) to 5 (average tariff over 25%); NTB rating: 1 continuing. By 2005, exchange rate controls (less than 1% of production covered by NTBs) to 3 were no longer a significant barrier to trade, (more than 25% of production covered by NTBs); overall TRI: 1 (less restrictive) to 10 (more customs clearance and other administrative restrictive). procedures for importing and exporting had Source: IMF Trade Restrictiveness Index been simplified, and import licensing requirements had been reduced to those Thailand and other Asian countries. A much aimed at monitoring and registration more important factor was that greatly (although these still cause unwarranted increased government spending, particularly delays). on irrigation projects, was not matched by increased revenues and the deficit was Foreign exchange controls. The rationing financed by borrowing from the Bank of of foreign exchange at the official rate was a Laos (BOL). The reluctance of the BOL major problem in the period 1997­99. It and the government to allow the official arose in part because the Asian crisis exchange rate to depreciate in line with the reduced the demand for Lao exports in rapid domestic inflation led to a wide 12 divergence between the price of foreign since 2000 have combined to eliminate exchange in the official and parallel excess demand for foreign exchange at the markets. The largest divergence occurred in official rate and import licenses that were March 1999, when the parallel market rate once tightly restricted are now freely was 51 percent above the official rate. available. As recently as 2002, foreign exchange Figure 6. No more gap between official and controls were operated in conjunction with parallel exchange rates restrictive import licensing under a system kipper dollar that was a survival from the period of central 11100 11000 planning and direct government control over 10900 parallelmarket the enterprise sector. Under this system, the 10800 10700 government drew up an annual `import- 10600 export balance plan'. Projections were made 10500 by the central bank, the BOL, of the likely 10400 officialmarket 10300 sources and uses of foreign exchange. As 10200 part of this process, firms were required to 10100 10000 submit estimates of their expected annual foreign exchange earnings. They also had to submit requests for allocations of foreign exchange to pay for their projected import Source: BOL requirements. Once each firm's plan, or amended plan, had been approved it formed The controls and decrees have been retained the basis of that firm's access to the foreign partly as a registration measure and partly as exchange needed to pay for imports. As an a safety measure in case of the recurrence of incentive to export, firms with export a foreign exchange crisis. While it is no earnings were given ready access to their longer a problem to get approval for the own foreign exchange earnings if they import-export plan, in practice the process is wished to use them to pay for their own not always transparent and often a hassle to imports, whereas firms without foreign firms. If a company changes its export- exchange earnings were unlikely to obtain as import plan during the year, it has to have it much foreign exchange as they wished. re-approved. Some firms have indicated that they have to pay an informal "fee" to By 2002, the BOL had largely eliminated get their plans approved. Others have the gap between the price of foreign complained about delays in obtaining the exchange in the official and parallel approval (Chapter 8 cites an example of a markets--since January 2004, the average factory for whom the approval process takes divergence has been only 0.6 percent around two months, and requires gaining (Figure 6). Following the resolution of the approvals from three different ministries, foreign exchange crisis, import licensing has and Chapter 5 indicates that it can take up to been relaxed and access to foreign exchange two weeks to get approvals for individual has been eased. Although foreign exchange shipments under these plans). While few controls and import licensing have been firms complain about not receiving the greatly liberalized in practice since 1999, the foreign exchange they need, maintaining import licensing decrees have not been such a system is no longer necessary. rescinded and the list of products subject to import licensing is largely unchanged. What Import licenses. Import licensing is has happened is rather that the increased regulated by Decree No. 205 of the Prime availability of foreign exchange, the Minister's Office, issued on 11 October devaluation of the kip at the official rate and 2001, and by Notices No. 284 and 285 of 17 the BOL's relatively tight monetary policy March 2004 of the MOC. These two 13 notices, which are updated annually, set out both government officials and private sector the lists of goods to which the particular firms reported that the restrictive nature of provisions in Decree 205 apply. import licensing is now much less than it was even five years ago. As recently as Notice 284 defines the lists of prohibited 2002, there was a general provision that imports. These include many products that allowed MOC or line ministries to impose appear uncontroversial because they are licensing requirements on any imports of related to public safety and morals and not any product they might choose. This to protection of domestic producers. provision has now gone, although the Examples include explosives, weapons, corresponding provision for exports is still drugs, pornography, dangerous chemicals in place. In the case of exports, the and industrial wastes and wild animals. provision has been maintained so that the Besides these uncontroversial bans, there are authorities can try to hold down the also bans on importing sawn timber, wood domestic prices of sensitive items. Price products and forestry products. monitoring is applied in the case of 30 products.6 The authorities do not have the Notice 285 deals with licenses for imports resources to subsidize these products, nor to that are not banned. It specifies that import enforce rigid price controls, but they can in licenses are needed to import a range of some cases put downward pressure on products. These include: domestic prices by restricting exports, in particular rice and live animals. In practice, 1.Petrol and gas. 14.Human medicines. it appears to be the case that export licensing 2.Vehicles and parts 15.Animal medicines. is now seldom, if ever, used restrictively. for assembling 16.Animals and animals vehicles of any type for breeding. The two products for which import licensing other than bicycles 17.All raw and semi- is most restrictive are cement and steel rods and plowing manufactured products for construction. In both cases, import machinery. used in manufacturing. 3.Diamonds. 18.Fertilizers and licensing is used to protect domestic 4.Cement. pesticides. producers--as is the case in many developed 5.Steel. 19.Video cassettes, CDs, and developing countries. The licensing of 6.Fresh or frozen movies etc. imports of motor vehicles is now used as a meat, fish. 20.Computer games. registration device and importers have 7.Canned fruit. 21.Sculptures and mostly been allowed to import as many 8.Milk products. paintings. vehicles as they want. 9.Prepared food, 22.Sporting guns. including canned 23.Chemicals. foods. 24.Gold and silver 10. Coloring and ingots. preserving products 25.Telephone, fax, and for foods. telecommunications 6 They include: 1. Fuel and gas, 2. All kinds of 11. Sugar substitutes. equipment. steel for construction, 3. Cement, 4. Roof floor 12. Beverages. and wall tiles, 5. Zinc, 6. Sawn wood, 7. All 13. Food seasoning kinds of paint for houses, 8. PVC pipes, 9. products, including Tractors, 10. Water pumps, 11. Thrashing soy sauce. machines, 12. Fertilizer, 13. Animal feed, 14. Milling machines, 15. Rice mills, 16. Bicycles, 17. Motorcycles, 18. Student uniform, 19. Most of these licensing requirements are Writing equipment, 20. Raw materials for merely `technical measures' that are used for factories, 21. Medicines, 22. Rice, 23. Sugar, 24. quality control, safety, animal quarantine or Soy sauce, 25. Fish sauce, 26. Monosodium SPS. While such technical measures can glutamate, 27. Vegetable oil, 28. Flour, 29. Meat (cattle swine and poultry), and 30. Sea fish and potentially be used for protective purposes, fresh water fish. 14 Removing import licensing restrictions at an importer submits an import plan for the provincial level has been slow. In approval from provincial trade offices in the addition to the licensing requirements provinces, Vientiane capital or special applied by the central government, there are governing zone. The import plan specifies at least 214 non-tariff measures (NTMs) on total value of goods to be imported within imports at the provincial government level the semi-annual or annual period. The (see www.aseansecretariat.org). Of these importer forwards the import plan to the 214 provincial NTMs, 15 percent apply to trade authority at border checkpoints for agricultural products, 1 percent apply to monitoring actual importation. Second, the fuels, 23 percent apply to other minerals, 43 importer proceeds with the trade and percent apply to chemicals (including customs clearance at the single window fertilizers), 14 percent apply to iron and steel service at border checkpoints. Thereafter, and 4 percent apply to other manufactures. goods can be taken out of the warehouse All the NTMs listed are administered by (Figure 7). provincial trade offices. Some provincial governments have been slow to implement The import procedure has been simplified directives from the central government. As with the introduction of the import a result, directives from the central (indicative) plan. It replaces the import- government to relax import licensing export equilibration plan which in the past restrictions have not necessarily been required the balancing of imports with implemented by the customs posts in the exports. The Ministry of Commerce plans provinces. for the total amount of imports at the national level in a given year and then Current import procedures allocates to each province. The provincial trade authorities then divide the allocated Obtaining a license to import is still not amount to traders in their jurisdiction. Items straightforward despite the authorities' and amount of goods to be imported each efforts to simplify the process. Goods to be time are deducted against the overall imported into Laos can be categorized into 3 indicative plan. There is no penalty for non main groups: 1) general goods, 2) goods utilization of the approved amount. The subject to approval by relevant authorities, business can request an additional amount 3) prohibited goods. General goods are when the import plan has been depleted. those that neither fall under the list of controlled nor prohibited goods. The list of Import procedures for goods under control controlled goods is provided in the MOC's of relevant authorities. Notification no. Notification no. 285/MOC.FTD of 17 March 285/MOC.FTD contains a detailed list of 2004 while prohibited goods are stipulated goods to be imported subject to technical in the Notification no. 284/MOC.FTD of 17 regulations of relevant authorities. Imports March 2004. The procedure for importation subject to control cover a wide range of of goods has recently been simplified as products. The Ministry of Agriculture and detailed in the Prime Minister's Notification Forestry administers controls over goods No. 1691/PMO dated 7 October 2004. falling under 1,325 tariff lines (out of the total 10,690 lines under the 2005 AHTN). Import procedures for general goods. Goods falling under 1,028 tariff lines are Goods which are not subject to import controlled by the Ministry of Health, while prohibition and government controls can be imported by a simplified procedure7. First, rubber, consumer goods, etc. Specifically, the goods fall under HS headings from chapter 26 to 97 (except chapter 30, 31, 49, 77, 88, and 93). 7 These goods are mainly non-agricultural As of 2005, general goods accounted for around products such as textiles and footwear, plastics, 65.5 percent of total tariff lines. 15 the Ministry of Communication, Transport, be imported subject to approval from the Post and Construction controls goods under Prime Minister's Office (PMO) as stipulated 1,026 lines, and MOC controls goods under in Article 8 of the Prime Minister's Decree 952 lines. It is worth noting that the goods on Export and Import Administration No. under control measures administered by 205/PMO of 11 October 2001 and Ministry these four ministries also face higher tariffs of Commerce's Regulation on Procedures (around 18-24% as compared to an average for import and export of controlled goods of 10% for all goods). from trade authorities No. 106/MOC.FTD of 25 January 2002. The MOC is responsible for monitoring the importation of vehicles and parts as well as Import procedures for investors with fuel and gas. To import these items, traders concessional tariff rates. The Lao need first to submit a request to the Foreign government promotes domestic and foreign Trade Department of the Ministry of investment in most economic sectors. Commerce. Once approved, the importer Investors can import raw materials and can go to a single window service and clear vehicles for production and pay customs goods from the Customs warehouse. duties at only 1 percent. In this case, prior to importation, the importer needs to obtain For other controlled goods, the importer approval from the Committee for Planning needs to submit a request to relevant and Investment. In interviews with traders, authorities then take the relevant documents many complained that this process is quite to the single window service before clearing lengthy--it takes approximately 2-3 weeks goods out of the warehouse. Relevant to obtain a certificate for tariff concessions. authorities include: Science Technology and After that the normal import procedures Environment Agency, Ministry of Health, apply. Ministry of Agriculture and Forestry, Ministry of Industry and Handicraft, The incentive regime for exporters Ministry of Information and Culture, Ministry of Communication, Transport, Post Export taxes and licenses. Export licensing and Construction, and Bank of Laos. is regulated by the same decrees and notices that are used to regulate import licensing-- Import procedures for prohibited goods. namely, Decree No.205 of the PMO, issued The Ministry of Commerce (Foreign Trade on 11 October 2001, and by Notices No. 284 Department) issues an updated list of goods and 285 of 17 March 2004 of the MOC. for which importation is prohibited. The Prohibited exports are explosives, weapons, current list is provided in Notification of the drugs, antiques, wild animals, logs and sawn Ministry of Commerce No. 284/MOC.FTD. timber, pornography and currency printing The notification identifies 131 tariff lines equipment. The most important of these applying to goods subject to import bans is that on exports of logs and sawn prohibition.8 The goods prohibited for timber. This is imposed partly for import are those which pose a serious threat environmental reasons, partly to prevent the to the national economy, society, public illegal logging of national forests, and also morals, national culture and traditions, to promote value addition. health and safety, and the environment. In exceptional cases, some prohibited items can Notice 285 deals with licenses for exports that are not banned. The goods that require export licenses are the following: 8 The majority of goods covered in the 1. Diamonds. notification have not been assigned an HS code. 2. Minerals. These include narcotics, materials affecting national culture and customs, industrial waste, right-handed steering wheel vehicles, etc. 16 Figure 7. Import procedures in Laos for different categories of goods Import procedures for general goods A B C Provincial trade Single window service: Warehouse offices Trade and Customs and relevant authorities Documents required 1. Import plan; 2. Business registration; 3. Tax registration; 4. Customs Declaration Form. 5. Invoice; and 6. Packing list. (Note items 2 and 3 to be presented annually, not for each transaction.) Import procedures for controlled goods under the Ministry of Commerce A B C Foreign Trade Single window service: Warehouse Department Trade, Customs, Technical regulations authorities Documents required 1. Import plan; 2. Business registration; 3. Tax registration; 4. Customs Declaration Form; 5. Invoice; 6. Packing list; and 7. Summary of goods previously imported. (Note items 2 and 3 to be presented annually, not for each transaction.) Import procedures for controlled goods under relevant authorities A B C Relevant authorities Single window service: Warehouse Trade, Customs, Technical regulations authorities Documents required 1. Approval by relevant authorities; 2. Business registration; 3. Tax registration; 4. Customs Declaration Form; 5. Invoice; and 6. Packing list. (Note items 2 and 3 to be presented annually, not for each transaction.) 3. Seeds (both of plants and fish and Some of these restrictions are used to animal reproductive materials in any prevent illegal exploitation of natural form). resources. Most of the others are of minor 4. Breeding animals and products importance although item 7 obviously gives derived from animals. the government the power to immediately 5. Wooden products. impose whatever export licenses it may wish 6. Forestry products. to impose without the need to issue a new 7. Other products, as notified from decree or notice. At present, no additional time to time by line ministries. licensing is in force. 17 Duty exemptions for exporters. Some anti- domestic customs controls do apply to trade bias is an inevitable consequence of trade between each zone and the rest of restricting imports in order to protect the domestic economy. domestic industries. Import restrictions not only reduce imports but also exports by Laos allows duty exemptions on raw raising domestic prices and wages. In materials for exporters and is in the early addition, tariffs on capital goods and stage of setting up special economic zones. imported inputs directly raise exporters' There appears to be a need to introduce a costs and therefore reduce their duty drawback scheme to provide competitiveness. This latter problem can be exemptions for imported inputs used by reduced by schemes that allow exporting indirect exporters. Most exporters use firms to have duty-free access to imported packaging and labeling inputs that are inputs. While usually better than nothing, supplied by firms that specialize in these such schemes are a poor substitute for free services. Garment exporters often use local trade since they do not provide exporting firms to perform specialist functions, such as firms with access to domestic factors of embroidery. There are undoubtedly many production at the prices that would obtain more examples and the importance of under free trade. Besides providing only indirect exporters will increase as the partial relief from the anti-trade bias of manufacturing sector grows. In Laos, it import taxes, schemes to provide exporters appears that indirect exporters generally pay with duty-free access to imported inputs duty on their inputs. The reason is that since have often been plagued by administrative they sell some of their output domestically, problems, including not only inevitable as well as selling some to final exporters, it monitoring costs and delays, but also fraud. is seldom practical for them to use the bonded warehouse operations that are There are three main kinds of schemes to typically used by specialist exporters as part provide exporters with access to imported of a duty exemption system. Without a duty inputs at free trade prices: drawback scheme, the cost of the services · Duty drawbacks: import duties are paid supplied by indirect exporters is raised by when the imported inputs enter the tariffs on their inputs and this disadvantages country, but are refunded by the customs the final exporters. Now that Laos has department when the finished products developed a substantial manufactured export into which they have been incorporated sector, there is probably a need for a duty are exported. drawback scheme and there is a case for · Duty exemptions, or `temporary technical assistance to investigate this importation': imports of inputs into possible need. products that are to be exported are exempted from duty, but the importer Current export procedures has to provide some guarantee that the product will indeed eventually be Similarly to imports, export goods can also exported. Usually, the products that be classified into three groups: 1) general have avoided duty must be stored in goods, 2) controlled goods, and 3) bonded warehouses, which the customs prohibited goods. Detailed export department has the right to enter in order procedures are stipulated in the Prime to check that the exempt items have not Minister Notification No. 1691/PMO dated been sold to domestic buyers. 7 October 2004. · Free Trade Zones, or Special Economic Zones: there are no domestic Export procedures for general goods. customs controls on trade between Goods which are not subject to government foreign countries and all the factories control and prohibition, can be exported and warehouses in the zones; however, without any license. (Goods classified to 18 around 83 percent of all HS commodity to submit the export request to relevant codes fall into this category.) Exporters need authorities. Then approval from the PMO only to prepare necessary documentation must be obtained. Once approved, the such as business and tax registration, exporter can present the approvals and invoice, packing list and in some supporting documentation to the single circumstances certificate of origin for window service and clear goods. preferential treatment purpose to present to the single window service at the border Conclusion checkpoints. The goods can be inspected and released for shipping in a relatively Laos has an open trade regime. On average, simple manner (Figure 8). tariffs are reasonably low, and the degree of dispersion is quite moderate. The average Export procedures for controlled goods. tariff applicable to most imports will decline Goods subject to approval from relevant further as Laos implements the AFTA and authorities prior to export are provided in other bilateral and regional agreements. the Notification no. 285/MOC.FTD of 17 While this reduction in the average tariff on March 2004. The Foreign Trade Department imports should reduce costs of importation of the MOC oversees the exportation of --and in turn the costs of exporting--the diamond (rough and unwrought) and proliferation of different rates applicable to minerals. All other types of goods are identical goods does have some downsides. subject to approval by relevant authorities. Administration and compliance are made Goods classified to around 16 percent of all more complex, and the scope for duty HS commodity codes are subject to evasion is increased. There are also risks of government control. The majority of such trade diversion: goods are imported from goods are under the control of the Ministry less competitive sources because traders of Agriculture and Forestry and Ministry of face lower tariffs. The government should Health. To export these products, the bear these costs in mind as the scope arises exporters first submit a request to the in the future to rationalize the tariff regime relevant authority. Once this has been (for example in the context of accession to approved, they can go to the single window the WTO). service and clear goods. On the non-tariff side, while de facto non- Export procedures for prohibited goods. tariff barriers are not constraining trade, the The export of goods which pose a serious fact that they still exist, and are implemented threat to the national economy, society, often in a non-transparent way that leaves public morale, national culture and room for bribes and controls, reduces the traditions, health and safety, and the effect of the positive steps that Laos has environment is prohibited. The current list been undertaking to liberalize its trade of prohibited goods is provided in regime. The licensing system is more Notification of the MOC No. complicated than it needs to be, and can be 284/MOC.FTD dated 17 March 2004. As dismantled without much impact. Doing so with the prohibited import list, the will send a positive message to the business notification identifies 131 tariff lines that community. As discussed in other chapters, cover goods subject to export prohibition.9 the way in which the trade system is The procedure is that the exporter first needs administered does add to the costs and uncertainty of trade, which in turn impacts on the efficiency of exports and the 9 attractiveness of the country as a destination The majority of goods covered in the for export oriented investment. notification have not been assigned an HS code. These include narcotics, Buddha images, wild life, etc. 19 Figure 8. Export procedures for different categories of products Export procedures for general goods A B Single window service: Trade and Customs, Technical Warehouse regulations authorities Documents required 1. Business registration; 2. Tax registration; 3. Customs Declaration Form; 4. Invoice; and 5. Packing list. Export procedures for controlled goods A B C Single window service: Trade or relevant Trade, Customs, Technical Warehouse authorities regulations authorities Documents required 1. Approval by trade or relevant authorities; 2. Business registration; 3. Tax registration; 4. Customs Declaration Form; 5. Invoice; and 6. Packing list. Export procedures for prohibited goods A B C Relevant authorities Prime Minister's Ministry of Office Commerce Single window service: Warehouse Trade, Customs, Technical regulations authorities Documents required 1. Approval by relevant authorities; 2. Business registration; 3. Tax registration; 4. Customs Declaration Form; 5. Invoice; 6. Packing list; 7. Approval by PMO; and 8. Approval by MOC. 20 Chapter 3: Regional and Global Market Access Issues for Laos Laos is making significant progress in countries, Thailand is losing in relative reducing the anti-export bias of past trade importance--41 percent of Lao exports went policies and in pursuing a growth strategy into Thailand in the early 1990s, but only 27 that recognizes the key role that openness to percent after 2000. The share of exports trade must play. But if the country faces going to Southeast Asia remained roughly major barriers in overseas markets, it will constant, but Vietnam is gaining in not be able to reap the full potential of the importance and now receives 24 percent of comparative advantages it possesses. With Lao exports as compared to 12 percent one the wide range of preferences given to Laos, decade ago. Within high-income countries, especially given its least developed country 84 percent of exports went to the EC-15 in status, market access should not be an issue. 2000-03, compared with 67 percent in 1990- But it turns out that Laos is not making full 93. The relative importance of high-income use of the preferences available to it--while North America and Asia as export market part of the problem is certainly due to supply has declined. constraints in the country and lack of competitiveness in certain sectors, the other Table 1. Geographical structure of Lao exports part of the problem is due to complex rules Share of exports in percent of origin and difficulty in managing them. 1990-1993 2000-2003 Unless rules of origin are simplified, it HIGH INCOME 38.04 43.34 would be difficult for Laos to take EC-15 25.33 36.60 advantage of them. This chapter discusses Europe 0.65 1.63 the geographic and commodity structure of North America 5.01 2.41 Lao exports and imports, then reviews the Oceania 0.03 0.19 main factors affecting access to overseas Asia 7.02 2.51 markets for Lao exporters. Middle East 0.00 0.00 Caribbean 0.00 0.00 The structure of trade1 LOW INCOME 61.96 56.66 South Asia 0.83 0.09 Europe has become the largest export Southeast Asia 57.68 54.76 market for Laos in recent years, although China (mainland) (3.36) (2.55) adjacent countries are still important Thailand (41.47) (27.48) trading partners. High-income countries Vietnam (12.04) (23.94) and the EC-15 in particular, have strongly Oceania 0.00 0.01 gained in importance for Laos in their North Africa 0.01 0.08 function as export markets between 1990-93 Latin America 0.13 0.07 and 2000-03 (Table 1).2 Among low-income Sub-Saharan Africa 0.50 0.11 Middle East 0.01 0.09 1 WORLD ($000s) 471.59 1317.84 For caveats on discrepancies in the trade data reported by Laos, see Box 1. Source: IMF Direction of Trade Statistics 2Mirror data from COMTRADE for the sectoral analysis of exports and imports. The data does The structure of exports is changing. A not perfectly match data from the IMF Direction decade ago, the Lao export structure was of Trade Statistics, which is only available for total imports and exports. However, there are a number of problems in using the COMTRADE aggregation of sectoral data for imports and data. In particular, data for Thailand is not exports from COMTRADE is substantially lower available in COMTRADE for 2002 (IMF data than the IMF data. Better data recording systems show a total of $94m of exports to and $404m of will have to be put in place in order to allow for imports from Thailand for that year) and the a more detailed analysis. 21 dominated by wood products that were Table 2. Geographical structure of Lao imports mainly shipped to Thailand (Figure 1). Share of imports in percent While the share of wood product exports has 1990-1993 2000-2003 more than halved, the share of clothes in HIGH INCOME 23.44 10.04 exports has more than doubled (and EC-15 6.43 5.52 increased more than sevenfold in value Europe 0.16 0.21 terms) and now represents more than 50 North America 0.91 0.63 percent of exports. Wood product exports Oceania 3.18 1.23 have increased by some 40 percent between Asia 12.76 2.44 the early 1990s and the early 2000s and Middle East 0.00 0.00 continue to go primarily to Thailand. Most Caribbean 0.00 0.00 of the textile exports go the EC-15 countries. LOW INCOME 76.56 89.96 Metals have become nearly irrelevant as an South Asia 0.30 0.70 export good whereas coffee has gained Southeast Asia 73.71 88.50 somewhat in importance. China (mainland) (10.90) (9.09) Thailand (52.73) (62.21) Figure 1. Composition of Lao exports Vietnam (6.01) (10.61) Oceania 0.00 0.00 70.00% North Africa 0.00 0.00 60.00% Latin America 0.09 0.02 1990-1993 2000-2003 50.00% Sub-Saharan Africa 0.01 0.10 stropxefo 40.00% Middle East 0.06 0.00 erah Eastern Europe and 30.00% S Central Asia 2.39 0.64 20.00% WORLD ($000s) 831.47 2654.03 10.00% 0.00% Source: IMF Direction of Trade Statistics agriculture plastics leather clothing ents chemicalsand minerals and products skin wood andpaperand in textiles(precious)stonmetals, machineryandengineerin es,pearlstalproductsg strumother me Imports are concentrated in fuels and machinery. Imports of alcoholic beverages (mainly from Singapore) and bottled water Source: World Bank (from Thailand) have increased strongly over the past decade. The data suggest that Most imports originate from Thailand, fuels come mainly from Thailand.3 The followed by Vietnam and China, and their largest share of imports in machinery is share has grown over the past decade. from Thailand, followed by China and Imports from high-income countries Japan. These three trading partners increased by less than 40 percent, while represent nearly 90 percent of all imports in imports from low-income countries have chapters 84, 86, and 87 of the Harmonized nearly quadrupled and now represent 90 System. Generally, imports are strongly percent of all imports (Table 2). Thailand, concentrated, with four chapters (HS27­ China, and Vietnam alone account for 82 mineral fuels, HS84­nuclear reactors, percent of total Lao imports. The most broilers etc., HS85­electrical machinery, significant change over the past decade is and HS87­vehicles and parts) representing the decline in the share of imports from more than half of all Lao imports. Nearly all high-income Asia (which includes Japan, imports in the textiles category are fabrics or Korea, and Singapore), and the increase in the share of imports from Thailand. 3COMTRADE data suggests that a quarter of Lao imports of fuel in the decade came from Algeria, but the IMF direction of trade data do not confirm this trade flow. 22 cotton, mainly originating in Thailand and indirect, in the form of the constraints (Figure 2). on other competitor countries under the Agreement on Textiles and Clothing (ATC). Figure 2. Import structure If these preferences have been driving export growth then Laos may be vulnerable 50.00% to their erosion, immediately in the form of the end of the ATC and over time if the 45.00% 1990-1993 2000-2003 40.00% Doha Round of WTO negotiations are 35.00% strop successful and MFN tariff rates decline in 30.00% mifo 25.00% the EU. era Sh20.00% 15.00% Figure 3. EU 15 imports from Laos 10.00% 5.00% 80000 0.00% agriculture minerals plastics leather clothing ,pearls roducts and and andpaperand s instrumentserproducts 70000 chemicals skin wood textiles ious)stoneetals, (prec machineryandenginee metalp ring oth m 60000 50000 Source: World Bank 40000 Box 1. Discrepancies in Trade Data 30000 There are large discrepancies among the estimates of im- and exports provided by different agencies 20000 in Laos (see analysis by Brenning et al. 2002). They are the result of discrepancies in coverage 10000 and errors of measurement. Possible sources of measurement error include the failure of customs 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 officials at border check points to record trade flows correctly, the failure of MOC officials to Knitted Clothing Non-Knitted Clothing Other Products record licensing data correctly, the non-use of Source: World Bank import licenses and computational errors in processing raw data. Differences in coverage include differences in treatment of re-exports, transit trade, informal border trade estimates, and Laos is eligible to export all products to the EU duty free and quota free under EBA preferences. The introduction of the EBA Market access conditions in the EU has not obviously changed the pace of growth of clothing exports to the EU. This The EU is currently the largest single market reflects that prior to the EBA all of Lao for Lao exports. Exports of Laos to the EU exports to the EU were already allowed to have grown strongly over the past 15 years, enter duty free under provisions in the GSP driven by exports of clothing products-- for LDCs and were also free of quotas their share in total exports to the EU has throughout the 1990s.4 However, clothing been steadily rising and now accounts for exports were excluded from GSP around 90 percent of Lao exports to the EU preferences in 1995 until 1997 due to an EU (Figure 3). ruling that Laos was systematically violating the GSP rules of origin. It appears that Is export of clothing to the EU driven by exports from Laos contained imported trade preferences? An important issue is content in violation of the rule of origin yet the extent to which this growth in clothing exports to the EU has been driven by trade preferences, both direct, in the form of the 4Laos is not exporting the agricultural products GSP and now Everything But Arms (EBA), that were previously subject to duties under the GSP that have been removed under the EBA. 23 were being certified as originating in Laos. Table 3. Exports of Laos to the EU and the utilization Preferences were reestablished in 1997 of available preferences (2001) Total Agricul- Manufac- following the EU acceptance of a derogation ture turing from the rule of origin allowing for the use Total exports 143716 8436 135280 of ASEAN and then SAARC raw materials (Euro 000) to count as originating content in the Exports eligible for 133872 617 133256 clothing exports of Laos, subject to specific preferences Preferences 78878 504 78374 tariff quotas. As the graph above suggests requested this issue with the rules of origin appears to Ratio of exports 93.2 7.3 98.5 have affected exports of knitted clothing eligible for (which dropped during 1995-97) rather than preferences to total non-knitted clothing. exports (%) Rate of utilization of 58.9 81.8 58.8 preferences GSP preferences are important in (preferences stimulating exports of clothing to the EU. requested/eligible Table 3 shows the value and utilization of for preferences) (%) EU preferences in 2001. Unfortunately, Value of preferences 6.6 1.0 7.0 as a share of total more recent data have not been made exports to the EU available to us by the EU Commission, but (%) the picture revealed by these data is unlikely Source: Eurostat to have changed. The table shows that a high proportion of exports to the EU are eligible Why are these preferences not being fully for preferences and that most of these utilized?6 The main reason why financial preferences relate to exports of manufactures, reflecting the importance of clothing exports. Almost 60 percent of the exports that were eligible for preferences conformity with those rules raises costs which actually requested preferences in 2001 under reduces the extent to which the preferences raise actual returns. the EBA. This is the fourth highest rate of 6It is important to recognize that the utilization utilization among the 49 EBA beneficiary rates we present do not capture situations where countries. Actual preferences used in the EU the rules of origin are prohibitive, in that they market were equivalent to 6.6 percent of the prevent any preferential exports and there are no value of total exports in 2001 (more than 9 exports at the full duty. In other words, they may million Euros). If, however, preferences had be cases where the beneficiaries can only export been fully utilized the transfer would have with preferences but the rules of origin constrain amounted to more than 11 percent of exports any take up of those preferences. In this sense (or more than 16 million Euros).5 the utilization rates understate the constraining impact of the rules of origin. It is also important to note that the under-utilization of preferences 5 The extent to which the available rents are that we observe, the fact that some exports do actually obtained by suppliers in Laos will not request and therefore are not granted the depend upon a number of factors including the preferential access to which they are in principle nature of competition in the industry and the eligible, cannot reflect the inability of the rules and regulations governing the granting of recipients to meet other requirements to access preferential access. If there is little effective the relevant market, such as health and safety or competition among buyers/importers of the sanitary requirements or deficiencies in their product then the suppliers/exporters may be infrastructure, as is sometimes suggested. Lack unable to acquire much of the price premium. of infrastructure might explain why there is a Ozden and Olareaga (2003) find evidence that very muted response from trade to preferences only one third of the available rents for African but cannot explain why at the border some exports of clothing to the US under AGOA products that are eligible for preferences do not actually accrue to the exporters. Satisfying the request those preferences. Differences across rules governing preferences and proving exporters in their understanding of how to utilize 24 incentives such as trade preferences are not The EU is currently reviewing its rules of fully exploited, that is why traders forego a origin under the GSP further, and this will transfer of money that is available to them, also apply to exports under the EBA. The is that there must be some accompanying review has been initiated by the recognition costs that outweigh the benefits. The main that the impact of the GSP on trade and cost factor relating to trade preferences are development has been constrained by the the rules of origin. For processed rules of origin. manufactured products the rules of origin stipulate the amount of processing or the Box 2.Economic impact of restrictive nature of the domestic processing that must rules of origin schemes take place to ensure a substantial Restrictive rules of origin are often supported by transformation has taken place and to confer the argument that they are necessary to encourage origin. substantial value-added activities in developing countries and as a mechanism for encouraging the development of integrated production structures EU rules of origin for clothing require within individual developing countries, or within double transformation, i.e. production from regional groups of countries through cumulation yarn; in the case of Laos this requirement mechanisms, to maximize the impact on is, however, partly offset by regional and employment and to ensure that it is not just low value-added activities that are undertaken in the bilateral cumulation allowances as well as developing countries. However, there are a special derogation from double important problems with this view. First, such transformation for a certain number of rules discriminate against small countries where categories of textiles. EU rules of origin the possibilities for local sourcing are limited or require a double transformation to take place non-existent. Since most developing countries are small countries they are particularly in the beneficiary with the yarn being woven disadvantaged by restrictive rules of origin into fabric and then the fabric cut and made- relative to larger countries. Second, there is no up into clothing. Countries cannot import evidence that strict rules of origin over the past 30 fabrics and make them up into clothing and years have done anything to stimulate the receive preferential access, which constrains development of integrated production structures in developing countries. In fact such arguments the value of the scheme for countries which have become redundant in light of technological do not have an efficient textile industry. changes and global trade liberalization that have led to the fragmentation of production processes However, in the case of Laos, this and the development of global networks of sourcing. Strict rules of origin act to constrain the restrictiveness is eased under the Derogation ability of firms to integrate into these global and to the EC Preferential Rules of Origin which regional production networks and, as has was granted to Laos garment manufacturers materialized in practice to dampen the location of in 1997 as well as under ASEAN Regional any new value-added activities in the clothing Cumulation since 1996 and Bilateral sector. Finally, it should not be forgotten that these strict rules of origin are the result of a Cumulation with the EC since 1997. In process involving import competing firms in the particular, under the Derogation, Lao preference granting country. Strict rules of origin manufacturers do not have to follow the act to protect clothing firms from competition double transformation process for a certain from preferences receiving countries. Source: Paul Brenton, World Bank number of textile categories and certain quantitative limits, allowing them to import fabric from ASEAN, SAARC or ACP The impact of the ATC phase out on Lao countries. However, they still have to meet exports to the EU has been mixed so far. certain less restrictive transformation With regard to the ATC, Lao exports to the criteria. In addition, Laos benefits from EU remained quota free throughout the regional (diagonal) and bilateral cumulation. 1990s and 2000s, although there was a period when they were subject to preferences may explain some of the observed surveillance. In contrast, EU imports from under-utilization. 25 other Asian suppliers, and in particular than 115 per cent and exports of men's shirts China and India, were subject to quantitative rose by 95 percent. limits. These quotas were removed at the It is clearly too early to make firm end of 2004 which, in principle, ushered in a conclusions about the impact of the end of new era of competition in global clothing textile and clothing quotas on Lao exports to markets. Information for the first 5 months the EU, even more so now that the EU has of 2005 shows that the value of Lao exports introduced safeguard measures to limit the to the EU declined by about 11 percent expansion of Chinese exports. Of relevance compared to the first 5 months of 2004 to Laos are limits on T-shirts and trousers. (Table 4). This initial information on the Nevertheless, it would appear that although impact of quota removal in the EU also pressure from Chinese competitors in the shows diverse performance across EU market has been increasing, it is still product/quota categories. Eurostat data show possible for Lao exporters to maintain and that Lao exports of men's shirts and other even increase exports to the EU. garments to the EU fell by 30 percent or more. However, the value of exports of Lao exports of textiles and clothing in the trousers (the main export category) fell by EU market are more similar to those of only 8 percent, while exports to the EU of T- Bangladesh than China. To what extent shirts actually increased. may Lao exports of clothing as a group be affected by competition from China, India Table 4. Value of EU imports of textiles and other suppliers in the EU market? Table and clothing from Laos (million Euro) 5 presents a measure of the similarity of Lao Jan- Jan- exports of clothing to the EU to that of other May May Change suppliers. The higher the value of the 2004 2005 (%) similarity index, the more the export Total 47 42 -11 structures of each pair of countries match or Total of products overlap and the greater the potential liberalized at end competitive pressure. This measure 2004 43 39 -9 suggests that the degree of similarity between exports from Laos and those of Key categories China is not high relative to the similarity to T-shirts 9 10 3 the exports of other countries. The degree Pullovers 4 4 -16 of overlap of export structures is highest Trousers (not with Bangladesh, which, being an LDC, has knitted) 13 12 -8 exactly the same market access conditions as Men's Shirts 6 4 -30 Laos. Trousers (knitted) 2 2 -17 Other garments To conclude, competitive conditions in the (not knitted) 2 1 -35 EU textiles and clothing market have Sum of key intensified following the removal of quotas, categories 36 32 -11 but the impact on Laos may be limited by Source: Eurostat the fact that China and India seem to be exporting different products than Laos. In This difference in performance across addition, export prospects would be categories does not appear to reflect the increased by measures that simplify the rules strength of competition from China in the of origin for the EBA and allow Lao EU market. To compare, the value of exporters to make more effective use of the Chinese exports increased most strongly for available tariff preferences. Nevertheless, in trousers (400%), while exports of T-shirts to the medium term the government should be the EU over this period increased by more looking to support an industry that can be sustained without trade preferences. 26 Table 5. Similarity of clothing (HS 61 and 62) exports to the EU in 2003 Laos Bangladesh Cambodia China India Thailand Vietnam Laos Bangladesh 61.7 Cambodia 52.8 55.7 China 26.7 21.4 19.5 India 41.2 45.4 28.5 38 Thailand 55.2 57 57.1 42.7 43.3 Vietnam 39.8 33.9 24.7 54.8 33.6 39 Calculated at the 8-digit level of the HS using data from the COMEXT database of the EU. The value of the similarity index lies between 0 and 100, higher values indicating greater similarity. increased exports in the clothing sector. Access to the US This large fall in applied tariffs could provide a substantial stimulus to exports to In 2005 Laos has been granted normal trade the US, if there is the capacity to increase relations by the US. Normal trade relation supply in Laos. A simple partial equilibrium status ensures that exports from Laos to the simulation of the direct impact of lower US will now be subject to the standard, most tariffs on Lao exports suggests that the value favored nation (MFN) tariffs. Prior to this, of trade would increase by more than 50 exports from Laos were subject to the percent from $3.2 million to over $5 million. autonomous duties in the US tariff schedule, However, this is likely to vastly understate which exceed the MFN rates often by a large the potential for increased exports from Laos margin (Table 6). The average applied duty to the US. The use of trade-weighted in 2004 was around 35 percent, whilst when averages hides the fact that there may be MFN rates are applied to this bundle of certain products where Laos has a capacity exports the average tariff falls to just over 11 to export but where tariffs were prohibitive percent. The difference between before normal trade relations were granted. autonomous and MFN duties is particularly Figure 4 shows that exports from Cambodia pronounced for clothing (HS 61 and 62), to the US were virtually zero prior to the products that currently account for around granting of normal trade relations in 1996. two-thirds of Lao exports to the US. The In the subsequent 9 years exports to the US average tariff on these products will fall have increased dramatically to reach around from over 50 percent to less than 20 percent. $1.5 billion in 2004. In contrast, Lao On the other hand, tariffs on certain key exports to the US are currently less than $5 exports to the US, such as coffee, tea and million. In part, this reflects the spices (HS 09) and wood products (HS 44), opportunities that existed for Cambodia to will change little since the autonomous rate increase exports of clothing whilst quotas is very low or zero. Hence, at least initially, under the Agreement of Textiles and the move to normal trade relations appears Clothing were still in place to limit exports to offer the greatest opportunities for from China and other large Asian suppliers. Table 6. Tariffs and Lao exports to the US in 2004 Weighted Duty-Free Weighted Ave. Export ($) Ave. Tariffs Share (%) Entry ($) Tariffs (Non-NTR) (NTR) Total 3,214,160 335,856 35.1 11.4 100.0 Agriculture 391,320 302,430 6.2 0.2 12.2 Manufacture 2,822,840 33,426 39.1 13.0 87.8 HS 09 302,430 302,430 0.0 0.0 9.4 HS 44 642,276 0 1.5 0.1 20.0 HS 61 1,862,471 0 51.0 17.1 57.9 HS 62 239,810 0 50.1 19.1 7.5 27 Source: US ITC database As these quotas were removed at the end of under this subchapter if any of the following 2004, clothing exporters in Laos will have to applies: face a more competitive environment as they Such country is a Communist seek to increase their presence in the US country, unless-- market. Nevertheless, the liberalization of (i) the products of such country US tariffs offers substantial opportunities for receive nondiscriminatory the expansion of Laos' exports. The treatment, challenge is to ensure that there is a local (ii) such country is a WTO Member business climate and trade facilitating (as such term is defined in section infrastructure that allows Laos exporters to 3501(10) of this title) and a member exploit these opportunities. of the International Monetary Fund, and Figure 4. Cambodia's exports to the US (iii) such country is not dominated before and after normal trade relations or controlled by international communism." 1800 1600 Laos passed the first hurdle when the BTA entered into force. Laos is already a 1400 NormalTrade Relations implemented member of the IMF. Clause (iii) is rather 1200 1000 vague. So, WTO membership would appear 800 to be the final hurdle that Laos must pass to 600 be considered for GSP treatment in the US. Nevertheless, the impact of the GSP on Laos 400 is likely to be limited due to the exclusion of 200 clothing and a range of agricultural 0 products. Source: World Bank Access to the Japanese market Laos could obtain GSP from the US Compared to exports to the EU, Laos following its accession to the WTO. The currently exports little to the Japanese US offers trade preferences to developing market despite its relative proximity. The countries under its GSP scheme. This value of exports has actually fallen from scheme reduces tariffs to beneficiary $107 million to $65 million from the early countries on a range of products (subject to a 1990s to the beginning of this century. In 35% value-added rule of origin). However, 2003 exports to the EU were nearly 20 times many agricultural products and textiles and greater than those to Japan. Laos is eligible clothing are excluded from preferences. for preferences under the Japanese GSP. Laos is not currently eligible for GSP Table 6 summarizes the structure of exports preferences in the US due to the following to Japan and preferences in 2002. Most of conditions which govern access to the the value of preferences accrues to wood scheme: products, but the tariff and the margin of preference of these products is relatively "The President shall not designate any low. country a beneficiary developing country 28 Table 7. Lao Exports to Japan and Utilization of Preferences (2002) Export Value of Eligible for Preferences Value of Value Preferences as % Preferences Requested Preferences (yen) of Total Export TOTAL 837,091 385,928 287,409 34,733 4.1 Agriculture 2,705 0 0 0 0.0 Manufacture 834,386 385,928 287,409 34,733 4.2 44 Woods articles 650,810 213,187 212,899 10,219 1.6 61 Clothing, knitted 82,293 82,293 6,732 779 0.9 62 Clothing not knitted 54,701 54,701 45,707 4,084 7.5 Source: Japan Ministry of Trade Laos has benefited from preferences in ASEAN members, and especially Thailand, non-knitted clothing exports to Japan, have grown strongly during the 1990s and partly because of easier rules of origin. early 2000s (see Figure 5), although as The margins of preferences are larger for shown earlier the share of these countries in clothing products. There is, however, an total exports has declined. interesting difference between knitted and non-knitted clothing products. The rate of Figure 5. ASEAN (6) imports from Laos utilization of preferences for non-knitted products was 84 percent and considerably 120000 higher than the rate of utilization of 100000 preferences for knitted products, 8.2 percent. 80000 Here again the rules of origin are likely to be 000 60000 $ important since the rules for knitted products are more restrictive than those for non- 40000 knitted products. The rule for most knitted 20000 products requires manufacture from fibers, so that imported yarn cannot be used. The 0 01/01/1900 1992 01/02/1900 1997 01/03/1900 2003 rule for many, but not all, non-knitted products allows for manufacture from Source: World Bank imported textile fabrics. A liberalization of these rules on knitted products could Thailand is the key market, accounting for stimulate greater exports to Japan and at the over 96 per cent of Lao exports to the least allow for greater utilization of original ASEAN member countries. Exports preferences on existing amounts of exports. to Thailand, in turn, are dominated by wood products, which account for around 80 per Access to East Asian markets and cent of the total. In addition to the ASEAN ASEAN agreement, Laos has also signed a bilateral agreement with Thailand, which offers Laos is a member of ASEAN and the preferences for 26 products comprising ASEAN Free Trade Area (AFTA), but there edible oil seeds, hides and skins and certain has been little preferential access for Lao wood products. MFN tariffs in Thailand on exporters. Because Laos has been slow to hides and skins and wood products are implement its commitments under AFTA's rather low. The key product exported to Common Effective Preferential Tariff Thailand is sawn wood, the average MFN agreement, given the symmetrical nature of tariff for which is less than 4 percent. preference eligibility, Lao exporters have had limited eligibility for preferences in So, exports to ASEAN countries are highly other member country markets. concentrated by country (Thailand) and by Nevertheless, exports to the original 6 29 product (sawn wood). There is substantial is important that Laos has the institutional scope for export diversification and indeed a capacity to effectively exploit the need for this to reduce vulnerability to opportunities for export facilitation that are country and product specific shocks. Whilst offered by the ASEAN program on the ASEAN members markets offer standards and conformity assessment. important opportunities for trade expansion it is most unlikely that export growth will be Conclusions driven by tariff preferences, given the low MFN tariffs applied to most products in Market access conditions are important these countries. Export diversification and determinants of export opportunities. The growth will have to be driven by strong coming years will see important changes in capacity to compete, underpinned by market access to key markets. In Europe, effective export promotion activities and which has been the main market for export cheap and accessible trade-supporting growth over the past decade, competition in infrastructure services. clothing products has intensified following the removal of quotas on countries such as One area where ASEAN membership can be India and China. Nevertheless, Lao leveraged to support export diversification exporters remain eligible for tariff and growth in Laos is standards and preferences under the EC GSP/EBA. standards supporting infrastructure, Measures should be taken such that metrology, testing certification and utilization of these preferences can be accreditation. For an initial 20 key product increased further. In the longer term, groups, mainly electric and electronic however, it will be important for the products, members have adopted as national clothing sector to adjust to a situation where regulations the agreed international norms. it can compete across the board without Members that do not adopt any of the tariff preferences. identified international standards as their national standards still need to accept In the US, new opportunities for exports are products from partners which comply with arising as Laos is granted normal trade these international standards unless they can relation status and some very high tariffs are demonstrate an inability to accept the reduced to the levels faced by other international standard due to "climatic countries in the region such Cambodia. In conditions or infrastructural reasons". In ASEAN, a wider set of preferences should addition, a further 71 standards relating to be available in partner countries as Laos has safety for electrical products and allowed for a broad range of products to be electromagnetic compatibility were due to moved to its inclusion list under the CEPT. be adopted by July 2004. However, the size of the preference margin for many products will remain relatively In addition to this process of harmonization small. around international standards, ASEAN members have been implementing a sectoral The ability to exploit the opportunities that strategy of mutual recognition of conformity are available to exporters in Laos will assessment results. Under these agreements depend on underlying competitiveness and members accept test reports and certificates the trade supporting framework that from approved bodies in another member provides information on export markets and state so that exported products need not be opportunities, that provides suitable and low re-tested or certified in the destination cost infrastructure services (such as financial markets. Both harmonization and mutual services, telecommunications, energy, recognition of testing procedures are transportation) and appropriate and efficient important initiatives to reduce technical trade facilitation services, including those barriers to trade and therefore trade costs. It relating to standards and conformity 30 assessment, customs and ports. Domestic that Laos needs to address in developing its trade policy is also important in the extent trade strategy is the lack of product that it allows exporters access to the diversification in key export markets. intermediate inputs they require at world Exports to the EU are concentrated in prices. An effective trade strategy is one clothing; exports to ASEAN are dominated which brings these factors together under a by wood products. Identifying and vision of export led growth, which identifies alleviating the main factors that constrain the main barriers to exports and leads a diversification will be crucial to allow for a concerted effort to prioritize and combat the more broad-based expansion of exports in main constraints to trade. A key element the short and medium terms. 31 Chapter 4: Leveraging Lao WTOAccession for Growth and Development Joining the World Trade Organization in itself.1 WTO accession presents Laos provides an important avenue for greater with opportunities to improve its trade integration of Laos into the global economy. policy and the country's economic Membership adds certainty and transparency competitiveness. It also presents challenges to the policies faced by Lao exporters as in terms of institutional reforms that tax the well as foreign companies wanting to do capacity of the government and private business in Laos. Membership gives the sector. Donors and international agencies country access to an impartial, rules-based can provide assistance to help Laos realize dispute settlement process. As a member, these opportunities and overcome the Laos will have a seat at the table as world challenges. The vision must come from the trade rules are negotiated. The process of country itself. accession itself can reinforce the country's economic policy reforms, which have been True benefits for Lao WTO membership underway since the mid-1980s and were strengthened when joining the ASEAN in Market access is not an important benefit 1997. It is these benefits--and not so much from WTO accession. Market access usually greater market access--that would accrue to dominates attention given to WTO Laos from WTO accession. accession. But Lao exporters already receive MFN treatment or better in the But the road to accession is not going to be markets of their major buyers. Other an easy one. Acceding countries face a ASEAN members grant preferential access long, complex and often difficult process for on a reciprocal basis, and most OECD achieving WTO membership. Accession countries unilaterally offer low or zero duty especially challenges least developed treatment on imports from Laos through countries, which frequently lack the capacity programs such as the Generalized System of to understand and negotiate highly technical Preferences (GSP) or, in the case of the EU, matters--often in a foreign language--as through the Everything But Arms initiative. well as financial means and institutional Lao membership in the WTO gives its setup to support negotiations. In addition, exporters the assurance that at the minimum many economic benefits of WTO their goods will continue to receive MFN membership associated with increased treatment.2 Furthermore, developed country market access opportunities do not accrue automatically to developing countries. 1 Governments must work with private-sector These conferences were held in November stakeholders to build the capacity to exploit 2004 and January 2005, and are summarized in GTZ, Accession to the WTO: Country opportunities of WTO membership. Experiences and Technical Assistance, forthcoming 2005. Participants included At two recent conferences on WTO government officials from acceding countries, accession, participants concluded that academic researchers, and representatives from countries which have benefited from WTO international agencies and bilateral donors. accession are those that enter negotiations 2 The only possible market access gain that with a clear vision of how they want to use might accrue from WTO membership is GSP WTO membership as a tool to advance their treatment from the US. US laws prohibit economic development agendas--WTO extending GSP treatment to communist membership is a means to an end, not an end countries, unless they (i) already receive MFN treatment; (ii) are members of the WTO and 32 members have committed to providing duty- importers, exporters, and investors. In free and quota free market access to at least addition to strengthening the foundations of 97% of products originating from all LDC a market economy, joining the WTO can WTO members by 2008, following a reinforce reforms of domestic economic decision at its Ministerial Conference in policies. Nowhere is this more evident than Hong Kong in December 2005.3 in East Asia. China, Cambodia, and Vietnam are three examples of countries that WTO accession can be an anchor for treat WTO membership as an integral tool to Laos's own reforms. In general, the reinforce their economic reform programs. economic benefits of WTO membership are determined by the nature of a country's own WTO members provide duty-free transit to policies, not tariff reductions received in any landlocked member countries. Transit particular foreign market. Membership in through neighboring member countries is of the WTO raises the costs of reneging on past particular importance to a landlocked trade policy commitments. This helps country.4 Article 5 of the GATT requires policymakers resist protectionist pressures WTO members to commit to providing from special interests groups, thereby duty-free transit via most convenient route helping them implement policies that benefit to other members' shipments: the economy as a whole. Many developing There shall be freedom of transit through countries therefore look to WTO the territory of each contracting party, via membership to provide an external anchor the routes most convenient for international for changes they have made to their own transit, for traffic in transit to or from the trade policies. territory of other contracting parties. No distinction shall be made which is based on The use of WTO membership as a lever for the flag of vessels, the place of origin, reforms is especially important for Laos and departure, entry, exit or destination, or on other countries making the transition from any circumstances relating to the central planning to a market economy. The ownership of goods, of vessels or of other process of negotiating membership and means of transport. complying with WTO rules requires countries in transition to create the basic WTO membership provides a legal laws, policies, and institutions that support a benchmark for establishing transit market economy, including, for example, arrangements with neighboring countries. basing the trade regime on the rule of law The WTO's dispute settlement procedures and publishing all trade-related regulations. could be used if neighboring country These measures in turn help create an governments impose restrictions that investment climate that is more predictable discriminate against Lao goods in transit in and that reduces transaction costs for favor of other products from other countries or in favor of their own nationals. IMF; and (iii) "are not dominated or controlled by international communism." (Title 19, the Membership in the WTO will give Laos a U.S. Code, Section 2462). In addition, the seat at the table when countries negotiate legislation that would extend the preferential the rules governing international trade. treatment that African LDCs receive to Asian Among the issues being discussed in the LDCs, if passed by the Congress, will not benefit current round of negotiations (known as the Laos unless it is a WTO member since AGOA is treated in the law as an enhancement of GSP. (Tariff Relief Assistance for Developing Economies Act of 2005). 4 Nepal's 1989 application to join the GATT, 3This is subject to the conclusion of the current made in the wake of Indian restrictions on Doha Development negotiations, as part of the transit, was motivated almost entirely by GATT single undertaking. Article 5. 33 Doha Development Agenda: DDA), those imports to ensure access to patented that are important for Lao trade include: medicines. WTO members decided in · Agriculture: Laos would benefit from late 2005 to extend the transition negotiations to achieve substantial period for LDCs in fully improvements in market access, implementing the TRIPS Agreement reduction in all forms of export from 2006 to 1 July 2013. They also subsidies as well as in trade-distorting agreed to make amendments to patents domestic support. and public health permanent. Laos · Non-agricultural market access: The needs to ensure that over the course of DDA mandates for reduction and its accession, it does not accept terms elimination of tariff peaks, high that could limit its ability to utilize tariffs, and tariff escalation, as well as this flexibility.5 non-tariff barriers, in particular on products of export interest to The WTO dispute resolution mechanism developing and least developed puts a small and poor country like Laos on country members. equal footing with other members. Dispute · Services: Laos is expected to gain resolution is another reason why most from the services negotiations, countries seek to join the WTO. Access to including through the plurilateral the WTO's dispute settlement procedures is request-offer process in sectors of a fundamental benefit of membership, exporting interest to LDCs and giving a member legal recourse to contest movements of workers (mode 4). protectionist trade policies. As the dispute · Trade facilitation: Laos would benefit settlement is based on rules and an impartial from stronger disciplines on transit examination of countries' policies, it treats rights and increased transparency of all WTO members equally. This allows customs procedures, as well as small and poor countries to compensate for technical assistance and capacity their lack of political power in trade disputes building. with larger and richer partners. While most · Developing country's increased cases involve disputes between participation in world trading system: industrialized countries, since they export The country would benefit from the and import the most, the WTO's dispute negotiations to address settlement process has enabled small implementation issues and concerns, countries to challenge larger ones. For special and differential treatment, and example, soon after Ecuador joined the technical assistance to strengthen WTO, it quickly used the process to negotiating and exporting capacities challenge the EU's banana import policies. of developing and least developed country members. But developing countries face financial · Disciplines on anti-dumping: As a constraints in bringing disputes to Geneva.6 country in transition from central 5 planning, Laos could become WTO document: WT/L/641. 6 vulnerable to anti-dumping actions by Shaffer (2003) cites estimates of approximately other countries. Stronger disciplines $200,000 in legal fees just to bring a small case on anti-dumping could force WTO to the panel stage; lawyers for Fuji and Kodak billed their clients $10 million in the U.S. case members to use less discriminatory against Japan on photographic film. The and more transparent policies. governments invested additional resources in the · Access to patented drugs: Laos would case. Gregory Shaffer, "How to Make the WTO benefit from greater flexibility under Dispute Settlement System Work for Developing the TRIPS Agreement to use Countries: Some Proactive Developing Country compulsory licensing and parallel Strategies," ICTSD Resource Paper No. 5, (Geneva: ICTSD; March 2003). 34 The more significant constraint for many Regime in 2001. The working party held countries is that trade negotiators in Geneva the first meeting in October 2004. The next are not engaged with the business working party meeting has not yet been community at home. The trade ministry scheduled, although it is expected that it will must first create institutions to work with be held by the last quarter of 2006. In exporters to identify foreign trade barriers, advance of that meeting, working party develop the capacity to evaluate which members expect the government to submit a barriers are actionable under different trade number of documents describing aspects of agreements, and finally identify the most the country's trade regime in more detail. appropriate forum for pursuing the dispute. These include standard questionnaires on agriculture, standards and technical regulations, services, and intellectual Status of negotiations property rights.7 The government has received additional questions about specific The WTO accession process involves four issues presented in its MFTR (such written stages: questions are circulated for each meeting). 1. The candidate formally submits an The government must submit an initial application. Once this is accepted by legislative action plan listing laws that need WTO members, a working party is to be passed or amended to comply with established to examine the applicant's WTO rules. In addition to these documents, trade regime and to discuss the terms WTO members may expect candidate of accession. countries to circulate any new trade-related 2. The fact-finding stage starts with the laws to the working party on an ongoing submission by the applicant basis, since WTO transparency provisions government of the Memorandum on require members and acceding countries to the Foreign Trade Regime (MFTR), notify and publish trade-related legislation the document detailing its trade once it has been enacted. regime, and is followed by exchanges of questions and replies between Although market access negotiations members and the applicant. capture most of the attention in public 3. The candidate and negotiating party debates, WTO accession documents filed in then negotiate terms of accession, in other countries' accession negotiations other words, the concessions that the suggest that compliance with WTO rules applicant is willing to make for WTO occupies more of the working party's membership in terms of market access attention. After WTO members feel they and rules. These are summarized in sufficiently understand the current state of the Report of the Working Party and the Lao trade regime, the accession process the schedules of concessions. will begin to focus more on negotiation of 4. WTO members adopt the Protocol of market access commitments (on both goods Accession, which sets out the terms and services), possible caps or cuts in that the applicant has negotiated for its agricultural subsidies, and reforms needed to membership. Membership will be bring the trade regime into compliance with effective 30 days after the candidate WTO rules. Laos will negotiate market country informs members of its access commitments bilaterally with ratification of the Accession Protocol. interested members of the working party, Laos is currently in the fact-finding phase 7 of accession negotiations. A working party These are also known by the document code numbers assigned by the WTO Secretariat: to consider the Lao application to join the ACC/4 (agriculture), ACC/5 (services), ACC/8 WTO was formed in 1998. Laos submitted (standards), and ACC/9 (intellectual property its Memorandum of the Foreign Trade rights). 35 although all bilateral commitments are Large countries, such as China and Russia, consolidated into a single offer that is spend well over a decade in negotiations extended on an MFN basis. Plurilateral because of their size and their importance to negotiations will take place to discuss the world trading system. Smaller countries agricultural subsidies--both their current generally face less scrutiny, and the pace of level, as reported in ACC/4, and any their negotiations is set primarily by their reductions. At the same time, Laos will willingness and capacity to negotiate. continue to meet with all members of the Cambodia, Kyrgyzstan, Mongolia and working party to discuss the status of legal Nepal--countries at roughly the same level and institutional reforms, particularly of development as Laos--spent between 2.5 whether or not new laws ensure compliance and 12 years negotiating their membership with WTO rules. in the WTO (Table 1). To date, Laos has been advancing through the process at a Although no prize is awarded for the relatively deliberate pace compared to its quickest accession, Laos could be better off counterparts in the region. If Laos joining before the Doha Round is accelerates its negotiations, it could concluded to avoid having to adhere to new potentially complete the process before the disciplines that WTO members adopt. The conclusion of the Doha Development amount of time spent between the first Agenda. working party meeting and the adoption of the working party report varies substantially. Table 1. Milestones in Selected Asian WTO Accession Negotiations Memorandum of Report of the Working party the Foreign Trade First working working party formed Regime circulated party meeting held adopted Nepal 1989 1990 2000 2003 Mongolia 1991 1992 1993 1996 Cambodia 1994 1999 2001 2003 Vietnam 1995 1996 1998 Kyrgyz Republic (Apr) 1996 (Aug) 1996 1997 1998 Laos 1998 2001 2004 Bhutan 1999 2003 2004 Tajikistan 2001 2003 2004 Source: WTO accession reports Negotiation issues criteria such as maximum tariff levels or minimum reductions in tariff rates or amounts of WTO rules say little about the requirements of domestic support to agriculture. Each new membership and the accession process. Article member's protocol of accession is different. 12 of the Agreement Establishing the World Trade Organization states that any country may Membership requirements are becoming more accede to the WTO "on terms agreed between it demanding. There is a visible escalation in the and the WTO." The salient feature is that new demands that existing WTO members place on members negotiate the conditions of their candidate countries. Some complain that new membership.8 There are no WTO rules members must commit to greater liberalization specifying universal, objective membership and internal reforms than existing members agreed to undertake in past negotiating rounds. For example, most candidate countries are asked 8 Moreover, only the candidate country makes to join the Government Procurement Agreement concessions during accession negotiations. 36 (GPA) and the Information Technology The rest of this section discusses negotiations Agreement (ITA), two codes that are optional over market access and agricultural subsidies, for current members. where Laos has flexibility in choosing how much to liberalize. It then summarizes WTO members have agreed to moderate their negotiations over Lao compliance with WTO demands with respect to LDC candidates. In rules, where Laos retains some flexibility in 2002 the WTO General Council adopted a new choosing when to reform, but very little room to policy on LDC accessions.9 These guidelines choose which policies to adopt. call for substantial facilitation of the accession process by exercising restraint on WTO Tariff bindings. Like all WTO members, Laos members in seeking concessions and will need to commit to keeping customs duties commitments on trade in goods and services on all products below ceiling levels.14 These from acceding LDCs. In particular, they stress levels are negotiated and are known as tariff that LDCs are under no obligation to join bindings. All new members to the WTO have plurilateral agreements, including the GPA, ITA bound all tariff lines. For some products, and sectoral initiatives. They also allow LDCs countries negotiate bindings that are well above to benefit from the special and differential currently applied rates, meaning that tariffs are treatment provisions under WTO agreements. not reduced as a condition of membership. For The emerging convention is that members ask others, existing members insist on ceilings lower LDCs to provide an action plan for than currently applied rates. The trend is implementing agreements when requesting increasingly for acceding countries to bind their transitional periods. They also call for targeted tariffs close to their currently applied MFN and coordinated technical assistance and levels for most products. As LDCs, Nepal and capacity building such as in the context of the Cambodia received more leeway to negotiate IF. These provisions provide greater flexibility tariff bindings above their applied rates. The to Lao negotiators, and they should also maximum bound rate on manufactured products facilitate the implementation process. in Nepal's offer is 60 percent and the average bound rate is 24 percent, while the average Applicant countries at more advanced levels of applied rate (in 2002) is 14 percent. Laos can development may face higher demands over the expect similar flexibility. course of their accession negotiations; however, the special circumstances of LDCs, including WTO members will likely ask Laos to join the Laos, have been recognized through the Information Technology Agreement (ITA), an adoption of the 2002 General Council Decision optional WTO agreement under which countries on accession of LDCs.10 This is to facilitate and eliminate all duties on information technology accelerate negotiations with acceding LDCs in on an MFN basis, as well as what are known as accordance with paragraph 42 of the Doha sectoral agreements. The latter are informal Ministerial Declaration11 and the mandate in agreements to eliminate duties on certain sets of paragraph 18(iii) of the WTO Work Program on products.15 To date no LDC has joined the ITA. LDCs.12 The accession in a more simplified manner by both Cambodia and Nepal reflects WTO conformity. WTO document: this spirit.13 WT/ACC/10/Rev.3. 14During the Uruguay Round, GATT signatories agreed to bind 100 percent of agricultural tariff lines and substantially increased the share of non- 9WT/L/508 agricultural products subject to tariff bindings. 10WT/L/508 Members acceding since the Uruguay Round have 11WTO document: WT/MIN(01)/DEC/1 bound 100 percent of non-agricultural as well as 12WTO document: WT/COMTD/LDC/11 agricultural tariff lines tariff lines. 13 Transition periods have been extended more 15Sectoral agreements cover such disparate products readily to LDC applicants, allowing them greater as chemicals, dairy products, and medical equipment. flexibility for bringing their foreign trade regime into These emerged as a negotiating modality during the 37 Neither Cambodia nor Nepal signed any of the countries that have completed the accession informal sectoral agreements when they joined process since the Uruguay Round, including the the WTO. two LDC members, did not provide subsidies exceeding their de minimis level, and therefore The Lao government can expect requests from did not need to make any cuts from existing some WTO members to "multilateralize" its past levels. Given that the government currently preferential liberalization. Laos has negotiated provides few, if any, subsidies that affect preferential agreements, either regionally or international trade flows, it seems unlikely that bilaterally. Given that a core principle of the Laos will be asked to reduce existing subsidies. GATT is non-discrimination, other WTO members could ask that these preferences be Instead, negotiations will likely revolve around extended to them as well. This has been the whether Laos will bind export subsidies at zero experience faced by some acceding countries. and commit to keeping trade-distorting domestic GATT Article XXIV and GATS Article V allow support that the government might introduce in any members to conclude free trade agreements the future below a certain threshold. During the without the necessity to extend those terms on Uruguay Round, existing LDC members were an MFN basis. The 1979 Enabling Clause also also exempted from the requirement to reduce, provides more flexibility for developing and ultimately eliminate, export subsidies on countries and least developed countries to agricultural products. Laos has room to engage in these preferential arrangements. negotiate whether it will forego export subsidies. Cambodia chose to bind export subsidies at zero Agricultural subsidies. During the Uruguay upon accession. Nepal did not. A request to Round, GATT members negotiated reserve the right to provide export subsidies will commitments on agricultural subsidies, agreeing be stronger if it demonstrates how export to reduce trade-distorting domestic support that subsidies help agricultural markets work better.17 was being provided above a de minimis level.16 This threshold is 10 percent of the total level of The choice of the base years used to compute production for developing countries and 5 existing support levels has been contentious in percent for others. These levels have been used some accession negotiations, especially in those in accession negotiations, although subject to that have lasted for a decade or more.18 some variation (Table 2). Many low-income Services commitments. While acceding Uruguay Round and are still treated as such by some countries must set ceilings on all products, the WTO members. They are not recognized as WTO scope as well as depth of services sector agreements, unlike the Information Technology commitments is negotiated, and these vary from Agreement. country to country.19 The GATS provides 16Subsidies that governments make conditional upon a particular level of production or export are 17Practical cases where export subsidies can be considered to be trade-distorting. Where markets defended on economic welfare grounds are rare. In function well, the introduction of such subsidies most cases they simply transfer income from the reduces overall economic welfare. In general, society as a whole to politically favored special government support known as 'green box' for interest groups. research and development, pest and disease control, 18 services provided to the rural community as a whole, Laos may be asked to reproduce the ACC/4 extension services, marketing services, etc. are not worksheet in the future, or to update, if its considered to be trade-distorting under the negotiations are not concluded within a few years. 19 Agreement on Agriculture. Under the Agreement on Generally, acceding countries are required to Agriculture, existing developing country members submit checklist on measures affecting trade in were allowed to exclude from their calculations services (WT/ACC/5). In practice, some members certain types of support that was considered trade- understand difficulties faced in compiling those distorting when provided by developed country measures, notably by Cambodia, and are willing to governments, such as investment support and input open negotiations on specific commitments rather subsidies ('development box'). than expect a full response to the services checklist. 38 flexibility for developing and least developed The economic implications of services countries in services negotiations, notably in the liberalization are not measured simply by the GATS Preamble as well as Articles IV and XIX. number of sectors a country includes in, or Specifically, GATS Art XIX:2 provides that: excludes from, its services offer. Sectors differ ''The process of liberalization shall take place in the need for regulation and in their role as with due respect for national policy objectives inputs into the production of exports. But and the level of development....''. This article opening services sectors too fast, or without the also states that ''There shall be appropriate proper regulatory framework in place, is not a flexibility for individual developing country viable option. It would be important for Laos to Members for opening fewer sectors, liberalizing revisit the terms of preferential trading fewer types of transactions, progressively agreements with some countries in the extending market access in line with their negotiations of the next one to allow a more development situation and, when making access feasible program that would end in a win-win to their markets available to foreign service situation for all. The agreements themselves are suppliers, attaching to such access conditions meant to align Laos' trade regime, including aimed at achieving the objectives referred to in rule-making and market access liberalization Article IV.'' In addition, guidelines on services with international practices. It would be scheduling20 and negotiating21 as well as the advisable to abandon those WTO-incompatible General Council's Decision on LDC accession22 agreements once Laos accedes to the WTO and recognize the special needs of LDCs and call for let the multilateral trade rules prevail. additional flexibilities so as to facilitate their involvement in trade in services negotiations and Customs valuation. WTO rules require all liberalization. members to use the transaction value principle when assessing ad valorem customs duties; the All countries that have joined the WTO since its use of reference prices or minimum values is inception have undertaken at least some form of prohibited.23 Unless the overall customs commitments in business services (notably administration is improved, employing GATT professional services such as accounting, legal, valuation rules creates an incentive for importers and architecture), construction, and financial to falsify their invoices to evade customs services. Most new members have made duties.24 The Customs Department currently commitments in some subsectors in distribution, applies the transaction value principle to a environment, tourism, and education services. A limited degree. The National Assembly has somewhat smaller share of members also made recently approved the revised Customs Law commitments in certain sub-sectors within designed to implement the transaction value communications--mostly telecom and courier principle, as well as facilitate customs services but fewer in postal and audiovisual modernization more generally. Several agencies services. The social services, health, and have provided technical assistance in recent recreational services sectors have experienced years, including the IMF, UNDP, and France. relatively fewer commitments. Developing More will be needed in the future. countries have phased in certain commitments over time. Nepal and Cambodia made commitments in fewer sectors than did most other new WTO members thanks to the 2002 General Council Decision facilitating LDC 23 accession. Under this principle, the customs inspectors use the price paid or payable in the market when determining the amount of customs duties owed. The ASEAN Customs Code of Conduct of 1995 commits ASEAN members to implementing GATT valuation rules. 20WTO document: S/L/92 24For more information, see Luc De Wulf and José 21WTO document: S/L/93 Sokol, eds., Customs Modernization Handbook, 22WTO document: WT/L/508 Washington: The World Bank, 2005. 39 Table 2. Agricultural support commitments of new WTO members Base support Accession de minimis exceeds Reduction Member Year Base Years level de minimis? commitment Cambodia 2003a 1998­2000 10% no Nepal 2003a 1996­1998 10% no Macedonia 2003 1998­2000 5% yes 0% Armenia 2003 1995­1997 10%/5%b no Chinese Taipei 2002 1990­1992 5% yes 20% China 2001 1996­1998 8.50% no Moldova 2001 1995­1997 5% yes 20% Lithuania 2001 1995­1997 5% yes 20% Croatia 2000 1996­1998 5% yes 20% Oman 2000 1994­1996 10% no Albania 2000 1996­1998 5% no Georgia 2000 1996­1998 5% no Jordan 2000 1994­1996 10% yes 13% Estonia 1999 1995­1997 5% no Latvia 1999 1994­1996 8%/5%b no Kyrgyzstan 1998 1994­1996 5% no Panama 1997 1991­1993 10% no Mongolia 1997 n.a. 10% no Bulgaria 1996 1986­1988 5% yes 79% Ecuador 1996 n.a. 10% no a Cambodia and Nepal completed negotiations in 2003; ratification came later. bArmenia and Latvia negotiated transitional periods where they agreed to keep trade-distorting support below a higher de minimis initially but eventually reduce support below a lower de minimis level. Sources: WTO accession protocols for Nepal and Cambodia. For other countries, data are taken from Lars Brink, "New Members of the WTO: Their Commitments in Agriculture and Provisions Proposed in the Doha Negotiations," paper presented at the International Conference on Agricultural Policy Reform and the WTO, Capri, June 23­26, 2003. The decentralization of Lao customs Standards. The TBT and SPS agreements administration is likely to attract attention in recognize the right of countries to restrict WTO accession negotiations. WTO imports when necessary to protect human, members will seek assurances that customs animal or plant life or health. But these procedures are applied identically across agreements limit exercise of that right to provinces. This is not the case at present. measures that do not discriminate between countries with the same conditions and that Securing a transition period for are not disguised restrictions on trade. implementing the customs valuation Members must notify others of all new draft agreement should be an important priority standards and technical regulations, for Lao negotiators. Both Cambodia and allowing others time to comment. The Nepal negotiated transition periods (five and agreement further obligates members to three years, respectively).25 The first step is impose such restrictions only to the extent to prepare an action plan for customs reform necessary to protect life and health, and on (see Chapter 6). the basis of scientific principles. The TBT agreement extends the basic principles of transparency, non-discrimination, and trade 25All other 18 acceding members committed to facilitation to the processes of developing apply the customs valuation agreement by the standards and conducting conformity date of accession. 40 assessment. Members are encouraged to Both the SPS and TBT agreements require recognize unilaterally other WTO members' Laos to designate organizations responsible regulations when they are equivalent to for notifying other WTO members of any domestic regulations, and do not require new standards or technical regulations and additional testing or certification. The for responding to enquiries from other ultimate objective of these agreements is to members about any new or existing screen out only harmful products while measures.27 In other accession negotiations, facilitating trade in safe products. WTO members have expressed a preference for a single enquiry point rather than Laos currently maintains very few multiple enquiry points, each addressing standards.26 Indeed the entire standards requests about different issues covered by regime--including all institutions involved the SPS agreement. Some recently acceding in setting standards, conducting conformity countries operate a single enquiry point assessment, and enforcing regulations--is covering both TBT and SPS agreements. still in its infancy and lags behind that of The government could consider appointing other countries in the region. The country STEA as the single enquiry point for these has been working to develop its standards agreements. regime in recent years. A food safety law was passed in 2004, and the government is Developing a standards regime takes time considering draft veterinary and and costs money, so Lao trade negotiators phytosanitary laws. Both UNIDO and the should treat securing a reasonable transition EC have been working with the Science, period to implement the TBT and SPS Technology and Environment Agency agreements as a high priority. Nepal (STEA) to develop a program to build negotiated a three-year period for both capacity in metrology, standardization, and agreements; Cambodia negotiated a three- procedures for testing industrial products. year period for the TBT agreement and four Despite these steps, much more work years for the SPS agreement.28 Submitting remains to be done. All standards-related an action plan is a necessary precondition to laws will need to include language reflecting receiving a transition period (as well as to obligations required by WTO rules (e.g., coordinating technical assistance). As notification requirements, non- several donors and agencies are already discrimination, use of international working with the government on standards standards, etc.) and other international issues, negotiators should approach these agreements. Many steps are needed to build organizations in drafting the action plan and an effective standards regime. This section technical assistance required. focuses solely on the enquiry point mechanism, which is unique to WTO rules, Customs duties and import licensing. One and the issue of negotiating a transition of the fundamental principles of the GATT period to implement WTO rules. is that countries use only ordinary customs 27Enquiry points must provide information on measures taken by local governments and non- governmental organizations, not just those 26 As discussed below, some of the existing introduced by the central government. The TBT import licensing requirements have objectives agreement also requires standardization bodies to similar to standards and technical regulations. publish their work programs every six months. The Regulation on Import and Export Licensing (The TBT Committee encourages WTO also lists technical certification as a requirement members to do so via the internet.) for obtaining an import license (Article 5), 28Except for Ecuador, no other new WTO although MOC officials suggested to the DTIS member has received a transitional period; all team that this requirement is not always enforced have pledged to fully implement both the TBT in practice. and SPS agreements upon accession. 41 duties as trade policy instruments. This straightforward: publish widely all licensing means eliminating quantitative restrictions rules and ensure that only these rules are and trade taxes other than ordinary customs applied in practice. Addressing the scope of duties, as well as ensuring that internal licensing is less straightforward. In some taxation, licensing requirements, subsidies, cases the economic justification for standards, foreign exchange controls, etc. licensing may be weak. In others the are not used in a protectionist manner. Very objectives are sound but the country could few import bans, licensing requirements, achieve those objectives more cost- and ad valorem administrative fees remain. effectively using other methods. The government will need to replace any For example, the Ministry of Commerce administrative fees based on the value of a officials use licensing to gather trade data on product or investment with fees based on the trade flows. But gathering data directly government's administrative costs, which from customs declarations could yield more involves relatively simple calculations. In complete and accurate statistics. Other the case of import prohibitions, negotiators examples show that many import licenses will need to present economic justifications requirements act as proxies for technical for maintaining these bans. regulations or health and safety standards (e.g., beverages and food products) in that There is currently some ambiguity about they purportedly screen out unsafe products. Lao import licensing requirements. WTO A well-functioning standards regime would agreements require import licensing to be screen out unsafe products while imposing transparent and as simple as possible, and fewer transaction costs on the economy. governments should use automatic licensing procedures whenever feasible. Members In both of these examples, the government must notify other countries when proposing will need to expand capacity in other areas to introduce new licensing requirements. to achieve its objectives in the absence of These agreements do not specify when licensing. What does this mean for WTO licensing is permitted or prohibited, accession negotiations? Lao negotiators although they imply that countries should should plan to develop action plans showing use them sparingly and for purposes other how and when these institutional than to discourage international trade. improvements will be made.29 The Agreement on Import Licensing granted In Laos, the MFTR states that all goods original developing member countries a require licenses--this kind of licensing was two-year grace period to implement put in place during the East Asian financial automatic licensing procedures in line with crisis for foreign exchange control (see the agreement (Article 2). Thus far all Chapter 2 on Trade Policy). In subsequent acceding countries, including the two LDCs filings with the WTO, the government (Nepal and Cambodia), have committed to reported that the licensing requirements had apply the agreement by the date of been reduced in scope. Furthermore, it accession. reported that the licensing program was temporary and applied on a case by case Import licenses are reportedly required for basis--these licenses aim at quantitative or agricultural and food products, raw materials other restrictions to imports. Although in and semi-manufactured inputs used in practice most licensing requirements have manufacturing and some non-agriculture been phased out, Laos can expect WTO goods, including cement and steel rods. It members to request that it clarifies current requirements and shortens the list of 29 The specific requirements of customs products that require licenses. Achieving modernization and SPS reforms are discussed in greater transparency and predictability is other Chapters of the DTIS. 42 will be difficult for Lao negotiators to of state management of foreign trade under defend these requirements, as they appear to central planning. Most are asked to be nothing more than policies to protect explicitly commit that they will comply with domestic producers from import GATT rules by the date of accession.31 competition. A fundamental pillar of the GATT is that ordinary customs duties are to TRIMS and export processing zones. Laos be the only tool available for that purpose. conditions certain investment incentives on The use of import licensing as a trade policy trade performance. The foreign investment tool in place of a tariff is difficult to defend law provides for reduced rates of customs on economic grounds since licensing costs duty on imported inputs used to achieve money while tariffs raise revenue. import substitution targets, and the domestic investment law also reportedly contains WTO members will want to see legislation measures proscribed by the Agreement on that explicitly limits the government's Trade-Related Investment Measures authority to require import and export (TRIMS). licenses to only those situations permitted under Articles XX and XXI of the GATT. Developing countries that have acceded to Under these articles import and export the WTO received a transition period to restrictions can be maintained only on the implement the TRIMS agreement. But all grounds of public morals, national security, new members, including Cambodia and environmental protection or health and Nepal, agreed to eliminate by the date of safety. Such laws should also incorporate accession any measures inconsistent with the Agreement on Import Licensing the TRIMS agreement. All new members Procedures' requirement to notify other have agreed to apply all WTO rules to free WTO members of changes in licensing zones or special economic areas (such as requirements. export processing zones). National treatment. WTO agreements The export processing zone that is about to require members to provide national be established in Savannakhet is providing treatment in internal taxation and other incentives for investors. Some of these charges, etc. "National treatment" means incentives may not be WTO-compatible and that policies treat foreign products no less will have to be revised as a requirement for favorably than domestic goods. VAT and accession. excise tax rates must be applied in the same way to imports as locally supplied articles. Intellectual property rights. The TRIPS Most acceding countries, including the two agreement requires WTO members to LDCs Nepal and Cambodia, agreed to provide minimum levels of protection for eliminate violations of national treatment in the full range of intellectual property rights: internal taxation by the date of accession.30 patents, trademarks, copyrights and related Foreign-owned firms must enjoy the same rights, geographical indications, industrial right to export or import as locally-owned design, lay-out design of integrated circuits, firms (whether private or public). Countries and trade secrets. The agreement essentially in the transition from socialism have incorporates into WTO rules the standards received the most scrutiny on national treatment in trading rights, due to the legacy 31Cambodia received a transition period to bring the right to trade pharmaceuticals in line with the 30Ecuador received a one-year transition period, GATT. China stated that it would apply the same Bulgaria and Lithuania received transition limitations of trading rights to domestic firms periods for certain tobacco products and that it applied to foreign firms, and at the same alcoholic beverages, and Armenia applied VAT time progressively liberalize trading rights for all to agriculture gradually. firms. 43 of intellectual property rights protection that to bring the current regime into compliance prevail in most industrial countries and in a with WTO rules. As they prepare this action number of international treaties. plan, negotiators should bear in mind that strengthening intellectual property rights The Lao intellectual property rights regime protection transfers money from consumers is at an early stage of development. The to property rights holders. In the long run, government has provided trademark stronger protection should also create protection for the past decade under a prime incentives for increased investment in new minister's decree. STEA began accepting technologies and creative endeavors, though patent applications in 2004 under a similar this depends on the existence of institutions decree, although no patents have yet been that connect investors with inventors and granted.32 The National Assembly is creators (e.g., venture capital markets). It considering a draft intellectual property law. also depends on the establishment of legal This would provide the legal framework for methods, and sometimes new organizations new regulations on each form of intellectual (e.g., copyright collection organizations), to property rights protection. Other countries channel payments from rights users to rights acceding to the WTO have found it owners. These institutions do not appear necessary to amend a number of other laws, overnight, and they depend critically on the such as commercial, civil, and customs rule of law and well-functioning capital codes, to comply with the TRIPS agreement. markets. Once new rights are established in law, the government will need to create the In the 2001 Doha Declaration on TRIPS and institutional infrastructure to administer, Public Health, WTO members agreed that enforce and adjudicate these rights. As part LDCs may delay extending patent protection of these reforms, administration of to pharmaceuticals until 2016 as one means intellectual property rights could at some of ensuring the supply of essential drugs at time be transferred to line ministries, such as low costs.34 The WHO and others have the Ministry of Information and Culture and advocated that the government incorporate the Ministry of Commerce, so that STEA this provision into the draft intellectual can focus instead on policy development and property law. coordination. The scope for doing this will be determined by the levels of expertise WTO accession: what's in it for Laos available in the line ministries, and the overall institutional development agenda Laos can use the WTO accession process to will challenge the government's resources. its best advantage. First, recognizing that Some donors have been providing accession negotiations challenge the assistance, and more will be needed. government's capacity to make and implement trade policy, the country can use Lao negotiators have requested a transition the opportunity to strengthen and improve period to implement the TRIPS agreement.33 trade policy institutions. Second, Laos can As in other areas, the government will need use the obligation to comply with WTO to submit an action plan that identifies the rules on customs, standards, and intellectual steps it will take during the transition period property to make the economy more competitive. Finally, Lao negotiators can use the market access negotiations to 32 STEA officials estimated that each patent improve exporters' access to critical services application will take around four years to process inputs and to comprehensively identify 33Nepal and Cambodia each negotiated three- defensive interests. year transition periods. Except for Ecuador, which received a one-year transition, all other new WTO members pledged to implement the 34WTO document WT/MIN(01)/DEC/2 of 21 TRIPS agreement upon accession. November 2001. 44 Greater transparency to attract more Improved trade policy process and investment. Perhaps the principal benefits institutions. Experience from other to transition countries of WTO membership accessions demonstrates that the structure of and the accession process come from the a country's trade policy making institutions WTO's transparency and rule of law shapes policy outcomes. Laos will benefit requirements. Potential foreign investors from WTO membership if it constructs a and traders currently lack access to policy process that focuses on trade as a information about the Lao trade regime. In means of achieving economic policy addition, there is a perception among objectives. This will require improving businesspeople that laws and regulations as inter-ministerial coordination, reorienting written do not correspond to how they are units of the Foreign Trade Department along applied in practice. In some cases, actual functional lines, and strengthening procedures are more liberal than the written institutions for public engagement. rules. Many trade restrictions that are on the books, e.g., foreign exchange limitations and Inter-ministerial coordination is the sine qua licensing requirements, are not implemented non of an effective trade policy process. in practice. Even in these cases, the lack of Trade agreements and the policies that can transparency and predictability introduces influence a country's competitiveness transaction costs that can deter needed exceed the ambit of any single ministry. investment. Although the government has already put in place an inter-ministerial Steering If the country is going to benefit from WTO Committee for WTO accession, there is membership, the government must take the room for improving inter-ministerial transparency requirements to heart. GATT coordination to speed up progress in Art X on transparency in trade in goods completing the fact-finding stage of WTO states that ''Laws, regulations, judicial negotiations. For example, certain check- decisions and administrative rulings of list documents had not been completed general application...shall be published because different ministries were unclear promptly in such a manner as to enable about who was responsible for them, though governments and traders to become by now most of them have been completed. acquainted with them.''35 GATS Article III Staff working in the secretariat responsible mirrors this text on trade in services. When for supporting WTO negotiations noted that trade rules become final, they should be staff in line ministries have not always been disseminated widely and distributed in empowered to cooperate with the secretariat. brochure form to traders and other Similar problems affect trade policy making stakeholders. Trade-related laws and in most countries. To overcome them, a regulations should be amended to reflect country must strengthen coordinating notification requirements of WTO and other mechanisms at two levels. At the top, a international agreements, in addition to subset of the cabinet of ministers, chaired at introducing a standard provision that the the deputy prime minister level, must government must solicit comments from oversee trade negotiations. As Laos moves stakeholders on new regulations. into the bargaining phase of WTO negotiations, direct involvement from the top levels of political leadership will be 35 GATT Article X also provides that ''The needed to broker compromises across provisions of this paragraph shall not require any ministries. At the operational level, the contracting party to disclose confidential inter-ministerial task force working on information which would impede law accession may need to be expanded and its enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises, public or private.'' 45 members may need to be given the authority Agreements to introduce a market-oriented and budget to support trade negotiations.36 national standards regime. This will enhance the ability of Lao exporters to There is also fragmentation within the group exploit foreign markets for high-value of officials responsible for trade products. A country's standards regime negotiations, which results from dividing represents an important element of the negotiators into units according to the business climate. When the standards negotiating forum. For example, until regime introduces new transaction costs-- recently, officials working on AFTA through lack of transparency and negotiations worked out of the Ministry of harmonization, for example--it reduces the Foreign Affairs rather than the Foreign economy's competitiveness and discourages Trade Department of the Ministry of new investment. Constructing a new Commerce. Even within the Foreign Trade standards regime will take many years, and Department, bilateral, regional and the government should focus on multilateral negotiations are managed by implementing first those obligations of different units. Since most trade agreements WTO rules that bring the most immediate address many of the same issues (e.g. payoff--mainly the enquiry point services, market access, standards, trade mechanism and the aspects of the SPS facilitation, etc.), it may be more efficient to Agreement that facilitate exports of high- organize trade experts along functional lines value agriculture products (see Chapter 7 on rather than by trade agreement. SPS issues). Customs modernization to improve trade The notification and enquiry points can play facilitation. Without improved trade an important role in both commercial facilitation the Lao economy will not benefit diplomacy and export promotion. They can from improved market access that comes disseminate information about standards from WTO membership. Laos can use the (both foreign and domestic) to the business requirement to comply with the WTO community, help them to incorporate customs valuation agreement and other international standards into their production international conventions to advance the processes, and use feedback from exporters pace of customs modernization. It can also to identify foreign standards that are merely tap into specialized technical assistance to protectionist tools in disguise. Lao benefit from the trade facilitation program businesses will benefit from the under discussion at the WTO (See Chapter 6 establishment of an enquiry point as an on Customs). export promotion tool as soon as it is established--there is no reason to postpone Increased standards and quality implementation of this part of the WTO management to benefit high-value agreements. Once Laos joins the WTO, the agriculture exports. As with customs enquiry point can then be used to challenge modernization, the Lao economy can benefit other countries' standards and technical from WTO membership if the government regulations. Doing so will require that the uses the requirements of the TBT and SPS government develop a mechanism to first distribute other countries' WTO notifications to the Lao business community 36Cambodia eventually created a task force of and then channel exporters' comments on 100 senior officials to assist the inter-ministerial them back to trade negotiators in Geneva. coordinating committee in accession negotiations. For details see Sok Siphana, As noted earlier, the government faces the "Preparing for a WTO Accession Negotiation: challenge of choosing an institutional Cambodia Country Case Study," presented at the location or locations for the WTO enquiry conference "Preparing for and Evaluating WTO Accessions," Geneva, January 27, 2005. points. The trend is for countries to 46 designate one enquiry point for each WTO membership, the trade department agreement, and sometimes even to operate a also needs the capacity to identify its single enquiry point that handles offensive interests in tariff negotiations, i.e., notifications and enquiries for both market access barriers to either current agreements. Consolidating the planned two exports or products the country expects to SPS enquiry points would economize on export in the future. administrative resources. These should remain in the Ministry of Agriculture and Services sector liberalization to support Forestry if the government chooses to efficient production and exports. Lao operate separate SPS and TBT enquiry negotiators will soon need to submit an points. If the enquiry points are to be used initial offer of services sector commitments for export promotion and commercial to the WTO working party. Laos is also diplomacy, the Ministry of Commerce negotiating services liberalization at the would be a more appropriate location than regional level as a member of ASEAN. STEA for the TBT enquiry point, given its Services are becoming increasingly greater administrative capacity, its closer important in bilateral trade agreements as relationship with the business community, well. Developing a consistent strategy for and its leadership role in trade negotiations. services liberalization and a sound This does not mean that STEA should be regulatory framework will help the Lao entirely isolated from the enquiry point economy benefit from WTO membership as mechanism. But given STEA's location in well as regional and bilateral agreements. the Prime Minister's Office, its role is more appropriately science and technology policy Different services sectors present different development, and in the longer run it would challenges and opportunities for make sense to release it from the burden of liberalization. At one extreme are sectors maintaining the enquiry point function. where Laos has a comparative advantage as an exporter of services. The chief example Tariff bindings negotiations to consolidate is tourism. GATS commitments can trade agreements. While setting ceilings on complement a broader program to develop tariff rates benefits the economy in a general high-value tourism (e.g., eco-tourism, way, perhaps the most important heritage-tourism, cultural-tourism, contribution of WTO accession and adventure-tourism). membership is to rationalize the process of negotiating tariff reductions across trade The Lao economy can also benefit from agreements. To bargain effectively with the commitments in sectors where imported WTO working party, the Foreign Trade services are used as inputs in the production Department will need to consolidate all of exportables. Foreign providers of negotiations over tariffs rates, reviewing all business services (e.g., market research and bilateral and regional agreements for any consulting), technical services, and preferential rates, and analyzing effects of accounting services can help Lao exporters any tariff liberalization or binding. take advantage of foreign market access Negotiators will need to use this analysis to opportunities and identify new markets. back up arguments to maintain any large gaps between applied rates and proposed ceiling bindings.37 To fully benefit from argue that the difference between applied and bound rates could serve as a `policy space' for developing countries. Under the WTO 37 Research conducted in other countries framework, tariffs are the only legitimate tool for suggests that an economy is generally better protecting domestic industries in light of LDCs' served by binding relatively close to the applied limited capacity to deploy other complicated rates rather than maintaining high binding measures such as antidumping, countervailing overhang. Other studies, notably by UNCTAD, duties or other safeguards. 47 Regulations that raise the cost of importing will then need to work with the Ministry of such services create an anti-export bias, Justice, the National Assembly, and other which undermines the export promotion government agencies to identify regulations, strategy. laws, practices that affect trade in each service. In some sectors--notably professional services, health, and education--the Using trademarks and copyrights as existence of professional standards or commercial tools. As a WTO member, credentials gives consumers greater Laos will need to enforce the full range of assurance about the technical competence of intellectual property rights. Compliance service providers. Developing new with some parts of the TRIPS agreement credentialing procedures or harmonizing may impose net costs on the economy and existing standards with those prevailing in require institutional strengthening over the the exporting country can help Lao short and medium terms, and should be consumers benefit from liberalization in phased in gradually. However, compliance these sectors.38 in other areas can bring immediate benefits. Research elsewhere suggests large Workshops on export promotion held by the macroeconomic gains to liberalization of ITC and by the DTIS team pointed out the backbone services, such as transportation, commercial benefits of using trademarks telecommunications, and finance. Since all and copyrights to distinguish Lao products sectors of the economy use these services, in the global marketplace. Lao businesses reducing costs through greater competition can use these instruments to prevent others increases productivity of the economy as a from imitating the unique designs and whole. Yet many of these sectors are also packaging of their products. subject to well-known market failures (most notably banking). In those cases, external The government is already working on liberalization must be sequenced with writing legislation to introduce or expand regulatory reforms (such as establishing legal rights. The next steps are to educate independent regulators, developing businesspeople about the benefits of using prudential regulations, and ensuring intellectual property rights, improve universal service), privatization, and de- administrative systems for registration, and monopolization. Technical assistance will train the judiciary to handle intellectual be needed to support the necessary property cases. regulatory reforms. Trade negotiators will need to work through Immediate technical assistance priorities the list of service sectors and, in each sector, meet with enterprises that use the imported Negotiating WTO accession is a long services and other stakeholders to identify process, which taxes the capacity of costs and benefits of liberalization. They developing countries such as Laos. Technical assistance from donors and 38In the quest to balance consumer and business international agencies can help Laos build concerns, one should not introduce unnecessarily the capacity necessary to complete this restrictive sector-specific regulations when a process and to implement WTO more generic consumer-protection framework commitments in a way that fits its will achieve the same goal. General consumer development objectives. The immediate protection laws, NGOs (e.g., better business priorities facing Lao negotiators are to bureau), and investigative journalism can protect complete and update the checklist the public from unscrupulous computer documents and legislative action plan, programmers, for example, more effectively than conduct economic analysis to support by trying to establish a professional licensing system for programmers. 48 market access negotiations, and overcome society to establish independent think-tanks fragmentation in trade policy making. to evaluate policy, the economic and social impact of WTO accession measures, and Complete the checklist documents and legislation. Currently, the MOC has its legislative action plan. The government is Economic Research Institute for Trade required to complete the legislative action (ERIT) but assistance is needed to plan and checklist documents on services, strengthen its capacity for research and intellectual property rights, standards, and analysis. Other educational and research agricultural support to maintain the institutes in the country include the National momentum of the negotiations. As of July Economic Research Institute (NERI), 2005, the government received assistance to National Organization for the Study of prepare the following checklist documents: Public Administration (NOSPA), and the · ACC/4 (agricultural subsidies): Faculty of Economics and Business technical assistance from Canada Administration. The EC have supported the · ACC/8 (illustrative TBT/SPS measures): creation of policy and legal advice centers to technical assistance from the EC conduct such research in a number of · ACC/9 (TRIPS implementation): Eastern European countries, which might technical assistance from the EC serve as models for Laos.39 These are purely descriptive and technical Conduct economic analysis to support documents, and have been discussed in market access negotiations. Trade general terms in workshops and seminars negotiations to date have not been supported conducted over the past several years. For by economic analysis of either the benefits example, the EC sent several missions in or the costs of trade agreements. This late 2004 and early 2005 to help with observation is not new; it has been raised by preparation of the standards checklist, and others, both in the government and in the UNCTAD has conducted a number of donor community. The need for in-house seminars reviewing WTO reporting analytical capacity as well as independent requirements. research capacity will become critical in the coming years as Laos pursues more bilateral Based on discussions at the Ministry of and regional negotiations, in addition to Commerce and Ministry of Justice during making commitments to WTO members. the DTIS technical mission, it would seem reasonable for the Foreign Trade UNDP's forthcoming Laos National Human Department to take the lead and to manage Development Report, which focuses on revisions to the action plan on an ongoing trade, is a first step. The next is to drill basis, since the document will provide a down to the product and sector level to snapshot of progress the government is evaluate the effects of trade barriers and making in legal reforms, and the Foreign trade liberalization in greater detail. Trade Department is the focal point for work Analysts can use partial equilibrium models on WTO accession negotiations. Preparing with relatively little technical background and maintaining revisions to the document and data. Donors can support training of will require close cooperation between the government officials and independent Ministry of Commerce, Ministry of Justice, researchers in using this methodology. Prime Minister's Office, and the National Many researchers find that computable Assembly. Donors can provide advice on general equilibrium (CGE) models are the format of this document, but they cannot force cooperation between these ministries. 39Examples are the Ukrainian-European Policy and Legal Advice Centre (www.ueplac.kiev.ua) In the medium term, the government should and the Georgian-European Legal Advice Centre consider working with donors and civil (www.geplac.org). 49 indispensable for evaluating the effects of Consolidate the trade policy establishment. trade agreements. No CGE model of the Fragmentation within the Foreign Trade Lao economy yet exists. The most cost- Department also constrains effective trade effective way to build one is to commission negotiations. Staff are organized by the development of a social accounting negotiating forum: the Multilateral Trade matrix for submission to the Global Trade Division handles multilateral negotiations; Analysis Project (GTAP), so that the Lao the Bilateral Division oversees bilateral economy can be broken out of the `Rest of trade agreements; and work on ASEAN has Southeast Asia' aggregate in the GTAP recently been strengthened by moving in database and made available as a separate teams from the Ministry of Foreign Affairs. module in the GTAP model of the global Trade agreements in all fora address many economy. of the same issues, however, so this division of labor can prevent staff from developing In the medium term, donors should work to the necessary experience on specific issue build the capacity to conduct international areas and ensuring that different trade economic policy analysis in the government agreements reflect the government's (e.g., ERIT and the National Economic economic priorities. Organizing the Foreign Research Institute), in the Faculty of Trade Department along functional lines Economics and Business Administration at (e.g., services liberalization, tariffs, etc.) the National University of Laos, and in would facilitate evaluation of challenges and independent think-tanks. Through the opportunities Laos faces in its commercial International Development Research Centre, diplomacy. It will also ensure greater Canada supports networks of research consistency across trade agreements. organizations in Africa and Latin America. These networks have enhanced the quality Any structural reorganization of the Foreign of trade policy analysis available to trade Trade Department is a medium term negotiators in those regions. priority--ad hoc measures to improve coordination across divisions can work in Only this depth of analysis would equip the short term, given the small size of the Laos to fully exploit benefits from WTO department. Donor assistance could be membership and address the potential useful in funding a functional review of the challenges. department and provide support for retraining after reorganization. 50 Chapter 5: Tailoring the Logistics Sector to the Export Potential Much has been made of the fact that Laos is countries in select export markets, smaller a landlocked country, but this condition has companies do not have this access and must three dimensions--physical isolation from operate at a competitive disadvantage--at foreign markets, efficiency of logistic least a week is required to move goods from services, and availability of infrastructure a Lao factory to the point of loading on a and border crossings. Physical isolation is mainline vessel. not a significant problem since the distance between Lao cities and gateway ports in Laos increasingly benefits from unfettered Thailand and Vietnam is less than 700 km, a access to the Thai transport and logistic day's travel by truck. system which offers a large number of competing providers and a better quality of Efficiency of logistic services depends on service than could be sustained by Lao the quality, variety, and cost of logistic service providers given the relatively small services. These are being enhanced through volumes shipped to and from Laos. This is improved access to logistic services in less true, however, in the case of Vietnam neighboring countries, especially Thailand. where the border crossings are located far The Transit Agreement with Thailand, from urban areas and the roads are not as proposed in 1999 and ratified in 2004, will well developed. expand competition and should provide a significant reduction in logistics costs. The basic strategy for improving supply Remaining difficulties associated with cost chains is to reduce intermediaries, minimize and availability are a result of the small cargo handlings, and strengthen domestic traffic volumes rather than the fact that the logistics service providers while improving country is landlocked. access to foreign service providers. This would entail reducing and simplifying Availability of infrastructure and border procedures throughout the supply chain; crossings (which include the capacity and developing a consolidation service for small productivity of the land borders, the freight shipments; establishing an inland international ports and airports) is limited by container depot/dry port near the border; and the number of official international provide technical assistance to the Customs crossings and the cumbersome procedures at Department and the logistics industry to both crossings and gateway ports add time develop their capabilities. and cost and reduce reliability of delivery. Efforts to improve the efficiency of Laos- 1. Where does the logistics sector stand? Thailand border crossings and the Thai ports have been successful but lack consistency Logistics, trade, and exports and sustainability. As a result, examples of world-class facilitation exist alongside The logistics sector should be evaluated in restrictive practices and rent-seeking relation to the trade and production profile activities. in Laos. The formal private sector in Laos is small both in terms of number and size of The development of the logistics sector has firms. There are less than 1,000 registered to be tailored to the export possibilities of private firms with assets greater than Laos. Most Lao firms and exporters are $100,000. Less than 100 of these firms have small. While larger Lao companies have more than 100 employees. Of the 560 firms access to efficient supply chains and can with 10 or more employees, about half are compete with companies in neighboring located in either Vientiane (capital and 51 province) or Savannakhet. The largest firms in the small order market. However this are the garment factories, which employ on advantage is also disappearing as average about 400 workers. Other medium- automation allows even larger Chinese firms sized industries are involved in wood to produce orders of less than 10 thousand processing and products, construction, pieces. tourism, and commercial agriculture and forestry. Figure 1. Lao transit cargo imports exports Laos' principal trading partners are Thailand 100% 90% other and Vietnam. Most of the imports arrive other 80% through the capital, Vientiane and used car 70% spare parts Savannakhet province, while the majority of 60% garments exports are shipped through the South, 50% especially Pakse of Champasack province, 40% 30% where the main producing areas for export textiles and accessories 20% commodities (wood, coffee) are located. 10% The volume of trade at different crossing 0% points is underestimated because of the large scale smuggling of consumer goods into and Source: estimated by Nongkhai customs out of Laos along its porous borders (Table 1). In the wood processing industry, most legal exports of logs or simple sawn timber are Table 1. Thai-Lao transit trade sent to Thailand and Vietnam for further (million US$) processing. A relatively small proportion To Laos From Laos (less than 10 percent) is finished products, Border 2004 2003 2004 2003 e.g. furniture and parquet flooring. The Post major constraint in the past was the Nongkhai 155.36 135.17 145.76 143.66 Mukdahan 6.35 7.20 108.15 33.41 cumbersome logistics associated with Piboon 18.68 16.83 6.22 6.36 procuring natural wood. This has largely Nakorn 1.07 0.47 7.18 5.79 been eliminated with the establishment of Phanom teak and eucalyptus plantations, which Other 1.16 1.59 4.20 6.19 provide an increasing supply of the TOTAL 182.62 161.26 271.51 195.41 necessary inputs for production of wood Source: Adapted from Royal Thai Customs (2005) products. The major constraint now is the quality and scale of production. As Lao exports develop, they would need to Manufacturers are unable to meet the larger move to larger orders and tighter order orders and tighter order cycles of the major cycles--which require more sophisticated and efficient logistics. The major export retailers and must aim for smaller retailers, industries--garments, wood products, and either within the region or in countries food products--transit through Thailand where they have established a special (Figure 1). In the garment industry, nearly relationship with individual buyers. all inputs are imported. At present, lengthy input supply chains prevent Lao In agriculture, the low density of manufacturers from competing in markets production, difficult terrain, and limited road with shorter order cycle times, e.g. three infrastructure result in relatively high months or less. Growth and competitiveness transportation costs and reduced are therefore limited by inbound logistics. competitiveness compared to Laos' Moreover, Lao garment manufacturers do neighbors. The production of the major not enjoy economies of scale; they gain agricultural export--coffee--is concentrated some advantage for their size by competing in the Southern highlands on the Bolovens Plateau, which despite its elevation has good 52 access to the Thai border. Lao producers than 1/6 are paved (Table 2). Because of have also been increasing the volume of relatively low road density, a large portion fresh vegetables shipped from this area by of the population is more than 5 km from an road to the markets in Bangkok and from all-weather road and a significant portion of Northern Laos to Japan using air-freight. the villages are not accessible during the There are also small shipments of glutinous rainy season. rice to niche markets. None of these involve processing other than sorting and packing Table 2. Lao road network (and roasting in the case of coffee) due to Paved Gravel Earth the lack of scale and limited infrastructure in National 3,830 2,118 1,212 the rural areas. The only processed food Provincial 337 3,947 4,666 exported in significant volume is Lao beer, North 1,420 2,180 1,952 but even this trade is constrained by Central 1,587 2,149 1,968 marketing channels and logistics. Like South 1,161 1,734 1,957 many other developing countries, Laos has Source: MCTPC 2002 very limited opportunities to expand its food industry because of fundamental changes in Recent investments in road infrastructure international markets. The growing role of have focused on restoring the arterial road large-scale retailers and their demand for network--especially NR13 which runs large volumes of relatively uniform quality down the center of the country--as well as goods supplied throughout the year has some links connecting Laos to Vietnam and precluded small producers from China. For the latter, the major undertakings participating. The traditional markets in were the rehabilitation of the East-West Europe are becoming increasingly connection between Savannakhet and Lao challenging because of the need to deliver Bao and the construction of the Northern quickly, at low cost, and with consistent economic corridor connecting Thailand and quality. There are also increasingly China. The National Growth and Poverty stringent phytosanitary standards and Eradication Strategy prioritizes transport requirements for traceability that necessitate infrastructure (along with health, education not only better post-harvest technologies but and infrastructure), and around one-third of also secure supply chains from farm to the government budget is allocated to the market. The more attractive outlets for Lao Ministry of Communication Transport Post producers are specialty stores, especially and Construction, most of which is for road ethnic grocery stores, and auctions. They construction and maintenance. require smaller shipments and less uniformity of product. However, the Traffic on the national roads remains logistics of supplying these markets can be relatively light with volumes of 250-1,000 challenging and entail greater commercial vehicles or less per day. Most of the risk, especially for goods sold on maintenance of the road network is financed consignment. through a fuel levy, heavy vehicle surcharge, international transit fees and road user Land transport charges collected as part of the Road Maintenance Fund. Road is the primary mode of transport carrying about two thirds of freight traffic While the domestic network is limited, and its share is growing. The waterways much of the country has access to the carry most of the remainder in the form of extensive road network in Thailand through bulk commodities moving along the major crossings at Nongkhai/Thanaleng, Mekong (see map in Appendix 1). The road Mukdahan/Savannakhet, and Chong network includes some 32,600 km of which Mek/Pakse. These three main transit about one quarter are national roads and less 53 corridors connect Bangkok with the North, expressway just south of Kunming, which Center, and South of the country. Nongkhai is now the main route from Kunming to is 620 kilometers by road from Bangkok Yuanjiang; (ii) a 216-km expressway from along a four-lane highway that is also used Yuanjiang to Mohei; and (iii) an existing by trucks carrying cargo to and from highway from Mohei to the China-Laos Northern Thailand. Savannakhet is 663 border. The upgrading of the last two is kilometers from Bangkok on Provincial expected to be completed in 2006. The Lao Road 212 through Mukdahan to Ubon section of the corridor--NR 3, connecting Ratchathani and then via Thai National Boten on the border with China with Highway 23. There are plans to widen this Houayxay on the border with Thailand--is route to four lanes between Laem Chabang also in the process of being upgraded. and Ubon Ratchathani, which should reduce Given the good road connections between transit times. From Pakse, the distance to Bangkok and Singapore and from Kunming Bangkok is 747 kilometers. The connection to Beijing, the North-South Economic is via Lao NR 16 to the border and then via Corridor could eventually extend from the Provincial Road 217 to Ubon Ratchathani. Chinese capital to the tip of the Malay There are bridges at the crossings at Peninsula. Vientiane and Pakse and one is under construction at Savannakhet. Table 3. Distance to International Ports (km) Bang- Cua Vung Danang Vinh kok Lo Ang The connections to Vietnam are not as well Luang 1,032 787 developed. Under the Agreement on Road Prabang Transport signed in 1996 between Laos and Vientiane 642 397 666 961 Vietnam, eight checkpoints were designated. Paksane 257 580 The major crossing is in the center of the Savannakhet 663 429 508 Pakse 747 597 553 country at Lao Bao, at the eastern end of the Source: World Bank East-West Corridor. The distance from Lao Bao to Da Nang port is 260 kilometers. There are several border checkpoints with Access to Hanoi/Haiphong port is through China, but the most promising corridor is Tay Trang (650 kilometers). the North-South extending from Beijing to Singapore. Under the Agreement on These corridors have much less transit International Road Transport between China traffic than the Thai routes. While they and Laos (December 3, 1993), three border provide shorter access to the sea (Table 3), checkpoints between the two countries were the roads are narrower, slower, and more selected (Table 4). A fourth checkpoint is difficult to traverse. They cannot support not yet accepted by Laos. significant container traffic without improvement. Furthermore, the Vietnamese Table 4. Border crossings into China ports do not offer the same level of service Laos National China as the Thai ports. Most of the Lao imports Route and exports transiting Vietnam use the port Boten (Luang Namtha) NR13 Bohane of Danang. Three other ports--Cua Lo, Lanthuy (Phongsaly ) NR1 Paksa Xuan Hai, and Quy Nhon--are occasionally Paka (Phongsaly ) NR19 Ban Chom Source: World Bank used. The port Vung Ang, constructed specifically for Lao cargo by the The most extensively used corridor is the government of Vietnam, does not currently one connecting Bangkok to Vientiane. The present an attractive option. volume of transit traffic on the other corridors has remained relatively small The principal corridor is from Kunming despite the improvement in the roads. through Boten to Houayxay to Thailand. This includes (i) a 198-km, four-lane 54 Inbound and outbound supply chains via this agreement can be combined with a Bangkok reorganization of consolidation activities cost for the movement of goods between and Prior to the revision of the Lao-Thai Transit revision of customs procedures, there would Agreement in 2004 (Box 1), the structure of be significant reductions in time and their the basic supply chains for imports and origin/destination in Laos and the exports had not changed substantially for transshipment terminal in Singapore. some time. If the changes allowed under Outbound transport movement. The typical Box 1. Lao-Thai Transit Agreement supply chains for exports are shown in Table The agreement grants the right to both Thai 5. and Lao trucking companies, private and public, to carry goods between the two Option X1: The basic movement involves a countries or in transit to a third country by six- or eight-wheel Lao truck transporting road or international port. It requires that the exports from the point of production across trucking companies be licensed to provide the border to Nongkhai. From there, the international transport services. This cargo is transferred in a back-to-back licensing can come from either country or a operation to an eight- or ten-wheel Thai third country that has bilateral agreements truck and transported to the Bangkok ports with the two. It also requires that the transporters comply with national laws and where it is stuffed into a container and regulations while transiting that country. At loaded onto a vessel for transport to the same time, it prohibits carriage of Singapore. If the consignment is large domestic cargo by trucks registered in the enough, then the cargo is shipped as an FCL other country and transshipment of the goods container; if not, the cargo is consolidated to other than domestic operators, while with other cargoes having the same moving in transit through the other country. destination and shipped as an LCL The agreement calls for facilitation of the container. While domestic Lao containers cross-border movement and avoidance of are now allowed for the movement between unnecessary customs inspection subject to Nongkhai and Bangkok, mostly Thai provision of proper transport document. For containers are used--typically coming overseas shipments, the agreement specifies empty from Bangkok. direct movement between the Laos and either the warehouse for transit goods in Bangkok In recent years, shipping lines worldwide or directly to/from the ship. Also under this have introduced en route reconsolidation, agreement and complementary procedures introduced by Laos Customs, full containers allowing LCL cargo to be consolidated not can be moved directly from the factory to the for their final destination but for their next port. point of transshipment. This process reduces the time required to consolidate Parallel with this transit agreement, the Thai cargo since the container is loaded with government relaxed the limitation on transit clearance agents and trucking companies that cargo moving to the next transshipment port. could be used for goods in transit to and from This is already done in Thailand as some of Bangkok. Originally, only five the cargo shipped out of Bangkok is forwarders/transport companies were reconsolidated in Singapore or Tanjung authorized to perform this activity. This was Pelepas, but it is not known how widespread later increased to 13 but now the restriction this practice has become. on the transport companies has been eliminated. Under this agreement, these Option X2: A significant savings in time and companies can arrange the complete factory- cost can be achieved by consolidating the to-port and port-to-warehouse movements cargo into a container at Nongkhai, thus but must be bonded. This has led to a dramatic drop in the inclusive freight rates eliminating a more expensive consolidation for transport of goods to Bangkok. 55 Table 5. Transport chain between export factory and Singapore X1 LCL/FCL LCL/FCL X2 LCL/FCL X3 FCL X4 Origin Thanaleng Nongkhai Bangkok Singapore in Bangkok. This has not been done because receipt of the LCL cargo and arrange for of Thai Customs restrictions as well as consolidation up to Singapore where the limitations by the shipping lines on the cargo would be reconsolidated. movement of marine containers outside of the ports. Inbound transport movement. The situation for imports is similar as shown in Option X3: Since the new transit agreement Table 6. allows for direct movement of containers from Laos to the port of Bangkok, it will be Option M1: For the traditional procedure, possible to consolidate cargoes into containers arriving at Bangkok are unloaded containers at the customs facility at and the cargo reloaded into eight- or ten- Thanaleng and transport them direct to the wheel Thai trucks for transport to Nongkhai port. This is already being done. where the cargo is transferred to a Lao truck in a back-to-back operation. This cargo is Option X4: In some cases the cargo is delivered to the customs facility at loaded at the producers' factories with Thanaleng where it is unloaded and stored. customs permission and oversight; these Subsequently, the consignee arranges for containers are then sealed and moved inspection and clearance of the cargo after directly to the port after a brief inspection of which it is loaded onto another truck and the cargo documents at Nongkhai customs. sent for final delivery. Although this arrangement offers substantial savings for FCL cargo, it is not widely Option M2: There are circumstances in practiced. Customs have limited its use which an FCL shipment remains in the claiming a lack of manpower to provide container and is delivered to Nongkhai proper supervision. A different arrangement where the container is unloaded. However, would be required for LCL cargo to be this requires customs approval and was consolidated within Laos. Lao Customs relatively infrequent until the recent Lao- would have to authorize forwarders to Thai agreement was signed. provide consolidation services at bonded facilities under their supervision. As there Option M3: Under the new agreement, it is are limited volumes of cargo for individual possible for these FCL containers to be ports, the time for consolidation of a transported directly to the customs facility at container would make the service Thanaleng. There the container is unloaded uncompetitive unless the forwarders could and stored until the consignee arranges for arrange for reconsolidation en route. If a clearance and delivery of the cargo. dry port were established near Vientiane Capital, then the shipping lines could take 56 Option M6: A more efficient arrangement container depot or dry port be established at would be for direct delivery to the one of these locations. Then the forwarder consignee's warehouse or a designated or the shipping line would arrange for the bonded warehouse, but Lao Customs has container to be moved inland where the been unwilling to permit this except for container would be unloaded and the cargo certain re-exports delivered to bonded stored until the individual consignees clear factories. their cargo and transport it to the final destination. Obviously, a dry port in Options M4 and M5: The options available Thanaleng would be the preferable for transporting LCL cargo are more limited. alternative as it would involve fewer There is no provision for LCL containers to movements and avoid Thai customs. be transported from Bangkok to Nongkhai (M4) or Thanaleng (M5) even under the new arrangement. This requires that an inland Table 6. Transport chains for imports from Singapore to destination M1 LCL M2 FCL M3 FCL M4 LCL M5 LCL M6 FCL Singapore Bangkok Nongkhai Thanaleng Destination While direct movements between factory special features). If there is no suitable and port would reduce the time and cost of cargo available, the shipping line will move transport, they do not solve the problem of the empty container to the nearest container empty backhauls. Efforts to simplify the storage depot. Since there is no such depot transport chain typically focus on the cargo in Laos or near the border, the containers handling activities in order to reduce the return to Bangkok. The situation is more time and cost of transport. While the difficult from an export perspective because introduction of direct movements (options the shipping line must deliver an empty box X4 and M6) will reduce the costs for to the loading point at the agreed time. If handling, it will not necessarily reduce the there is no container storage depot nearby, total cost of transport because of the then it must be sent from the nearest depot, backhaul issue. In order to transport a in this case Bangkok. For this reason, the loaded container in both directions, it is transport of a container either inbound or necessary to have cargo available to load outbound usually involves an empty move into the container within a few days of when and the container thus incurs the cost for a it has been unloaded. This must be cargo round trip. that will be carried on the shipping line that owns or controls the container and that Empty backhauls are less of a problem for requires the same type of box (20', 40' or loose cargo as there are more opportunities 45', standard or high cube, with or without for finding cargo for the other leg of the 57 journey. For one thing, there is no is inbound. Lao trucks have trouble requirement to return to a depot and no need competing for this traffic because they to match the cargo to a specific shipping cannot carry domestic Thai cargo on the line. More important, Thai trucks delivering outbound leg. For trade with third countries loose cargo to Nongkhai or Thanaleng can (international cargo through Thailand), the carry domestic cargo on the return trip to primary flow is outbound but Lao trucking Bangkok. Similarly, Thai trucks delivering companies do not have an effective domestic goods to the Northeast can pick up mechanism for booking import cargoes on Lao export cargo at Thanaleng or Nongkhai. the return journey. Since Thai trucks are It is more difficult for Lao trucks to do the able to carry cargo in both directions, they same since they cannot carry Thai domestic can quote lower rates. For international cargo and it is difficult to coordinate trade through Vietnam's ports, the Lao truck movements of Lao cargo to and from operators have resolved the backhaul Bangkok. problem by transporting exports up to the port and allowing the driver to wait on the Trucking services and tariffs border during the return trip to pick up shipments from Vietnamese truckers who The Lao trucking industry is highly are unwilling to enter Laos. fragmented and largely informal. There are relatively few articulated trucks and Transit rates through Thailand have almost no container chasses. The majority dropped as a result of the new transit of trucks are either very old Russian or used agreement. The trucks used to transport Korean and Japanese trucks. Most trucking Lao imports and exports are either 18-wheel is provided by independent operators, with articulated trucks carrying containers or 10- one or two 6- or 10-wheel, rigid body trucks. wheel rigid body trucks carrying loose Even formal (registered) trucking companies cargo. The 10-wheel trucks can carry the have relatively small fleets and rely on equivalent of a TEU (up to 25 m³), but independent operators for peak capacity. charge significantly less per trip. Lao 10- The characteristics of the four largest fleets wheelers carry cargo from Vientiane to are shown in Table 7. Nongkhai where there is a back-to-back transfer to Thai 10-wheelers for the Lao trucks have difficulty operating in movement under bond from Nongkhai to Thailand and are therefore at a cost Bangkok. Under the new transit agreement, disadvantage. Lao trucks are used for long the 10-wheel trucks are able to avoid domestic movements (up to 800 km) and for transshipment at Nongkhai but the cargo carrying cargo to Vietnamese ports. They must still move under customs bond. do not operate in Thailand because of certification requirements, alternate side of The freight rate for a 10-wheel truck moving the road operations and, most important, between Vientiane and the Thai ports with lack of backhaul cargo. For trade with transshipment at Nongkhai is about Baht 10 Thailand, the predominant direction of cargo thousand, about $250 at the current Table 7. Large Lao trucking fleets Company Vehicle Type Vehicle Fleet Purchased Financing Market Boulin Used Japanese 24 articulated 1997 Self-finance Lao Beer No. 1 Old Russian 18 10-wheel - Government WFP, Vietnam SMT Used Korean 4 10-wheel, 7 6-wheel, 1998 Bank 4 articulated Vientiane- Lao Freight Used Japanese 5 10-wheel, - - Nongkhai 2 articulated Source: World Bank 58 exchange rate (Table 8). In contrast, the be marginal as transit rates are rapidly freight rate for an articulated truck with 20- approaching parity with domestic or 40-foot container has until recently been movements for comparable distances. between Baht 27-31 thousand, i.e. $700 and $800.1 There was a Baht 8-10 thousand Further reductions in the door-to-port ($200-$250) drop in container haulage rates charges for movements of Lao exports and as a response to the revised new transit imports will derive from fewer cargo agreement. Most of rate drop was due to the handlings and lower agent charges. Agent increase in the number of Thai trucking charges currently amount to about $300- companies allowed to compete for the $350 for a 40-foot container. This charge haulage of cargo under customs bond rather includes a fee for clearance of the container than an opening of the market to Lao at Bangkok Port, Nongkhai or Thanaleng of truckers. More than 164 Thai trucking about Baht 2.5-3 thousand, exclusive of companies have received a permit to duties. In addition, there is an unloading fee transport international transit traffic, at either Bangkok or Thanaleng of Baht 1-2 although so far only 20-30 have deposited thousand and a slightly higher fee for the required one million Baht bond with the transshipment at Nongkhai.3 There is also a Customs Department.2 None of the Lao refundable security deposit, which can trucking companies have received a permit, amount of $2,500 per container, that is paid although some are forming joint ventures to the shipping line for containers leaving with Thai companies that have this permit. the port as well as demurrage charges for any delays. With the simplification of Table 8. Typical freight rates movements allowing containers and, `000 US$ Notes eventually loose cargo, to bypass Nongkhai, Baht there should be a drop in handling charges 10 wheel truck - one way of about Baht 2 thousand per Nongkhai-Bangkok 9.5 245-275 Vientiane-Nongkhai 2.5 60-80 container/truck. Increased competition Vientiane-Bangkok 15.6 400 among clearance agents should yield an Articulated truck additional savings of 1-1.5 thousand Baht. (loaded 40' container on trailer with empty return) Thanaleng-Bangkok Of the various logistics problems facing Before 27-31.2 700-800 freight only Lao foreign trade, the one that has the 39-47 1000-1200 all in greatest impact on competitiveness for the Now 19.5- 500-550 freight SMEs is the cost for moving LTL/LCL 21.5 only cargo. The transport of loose cargo is 33.2 850 all in charged based on volume (Figure 2), unless 36.0 925 40' the shipper pays for the entire truck. "All in" includes clearance charges and handling Assuming a capacity of 25 m3 for a 10- Freight rates now appear competitive wheel truck, then the charge for a load of assuming a load factor of 85 percent for a mixed consignments would range from 19.5- 10-wheel vehicle and 65 percent for an 18- 21 thousand Baht for two consignments to wheel truck. While there may be some 30-35 thousand Baht for five consignments. further reduction in rates if competition Since this is significantly more than the increases and load factors improve, this will truck rate, shippers ship their goods on partially loaded trucks. It should be possible to eliminate this problem through efforts by 1Because of similar transport distances, the rates consolidators in Vientiane or Nongkhai. charged for the movements between Bangkok Port and either Pakse or Savannakhet are similar to those for Vientiane. 2 The rest limit their activities to direct trade 3The usage fee levied at Thanaleng by the Lao between Thailand and Laos. Authorities is around $90 per truck 59 Figure 2. Freight rates for LTL movements Tanjung Pelepas, or Hong Kong, where it is Nongkhai-Bangkok transshipped to the mainline vessel. rate (000 Bhat) 14 Table 9. Generic order cycle 12 Actor Activity Time Mode 10 Buyer Order Product 2-60 Phone, 8 Fax, email 6 Buyer Open Letter 1-2 4 of Credit 2 0 Buyer, Order Input 1 Phone, 1-7 7-13 13-18 Up to 25 Producer Materials Fax, Email volume (cbm) Supplier Production of 7-14 TEC quoted rates Inputs Supplier Ship Supplies 1-2 Air Producer's to Bangkok 7-14 Water Transit time Forwarder Clear Cargo 2-4 Transport 1 Road One of the major concerns of Lao exporters Supplies to Transport is to improve transit time--inbound carrying Thanaleng inputs for production and outbound Clearance Clear Cargo ½ delivering products to the market. In order Agent Producer's Deliver ½-2 Road to understand where the bottlenecks occur, it Forwarder Supplies to Transport is necessary to consider the total order cycle Factory (Table 9). Lao producers of high value Producer Production 14-42 goods can meet order times of 1-2 months Producer's Ship Product 1 Road when using airfreight or shipping to regional Forwarder to Bangkok Transport Clear Cargo ½ markets. Otherwise, the typical order time Forwarder Load Ship 1-2 is around 3-4 months. Shipping Shipping Line 1-3 Air Line/Airline to Destination 14-28 Water In order to identify the appropriate Port/Airport initiatives to reduce the order time, it is Buyer's Ship Product 1-4 Water of Forwarder to Final Air necessary to distinguish between the Destination Transport domestic/transit component of the supply Producer Receive 1 Electronic chain and the international component. The Payment Transfer domestic/transit component includes the Total 33-60 Airfreight movement between the Lao (excluding 53- Sea Freight Order Time) 120 origin/destination and the port at which the Source: World Bank cargo is loaded to/unloaded from the mainline vessel. For this component, time Table 10. Outbound transit times and reliability of these movements are less Time Distance of a problem because the supply chains are Travel times relatively simple and the distances relatively Vientiane-Nongkhai 1 hour 24 km short. Nongkhai-Bangkok 1-1 ½ days 640 km Port 7-11 hours* The time for the outbound movement from Sailing times Bangkok Port­ 2 days 831 n.m Vientiane to Bangkok is short and Singapore predictable. The time from Vientiane to the Danang­Singapore 2¼ days 940 n.m Bangkok port has been about 1½ days and Bangkok Port­Hong 3 ½ days 1490 n.m. the time in port prior to loading has been 1-3 Kong days (Table 10). The time is shorter for Danang­Hong Kong 1¼ days 520 n.m FCL containers. The cargo then moves on Source: World Bank daily scheduled feeder services to Singapore or on less frequent services to Port Kelang, 60 Because the feeder vessels operate on day- Thai and Lao customs, their performance of-the-week schedules out of Bangkok ports, remains unpredictable and their procedures exporters can schedule their shipments from lack transparency. If the revised transit the factory to the transshipment port with agreement were fully implemented and Lao relatively little slack time. From Bangkok, Customs re-established its procedures for there is a two-day sailing time to Singapore clearing cargo at the warehouses of the where the shipment is loaded on the larger traders/manufacturers, then it should mainline vessel nominated by the buyer.4 be possible to reduce the time from The slack time in Singapore to catch the unloading at Bangkok port to when the mainline vessel can be as little as one day or container is delivered to the consignee to 4-5 as much as five days. The average is about days for most shipments. two days implying that within 6-8 days from leaving the factory, the cargo can be Ocean shipping cost and time onboard a mainline vessel headed for its major destination. The recent revisions in The impact of the improvement in logistics the transit agreement should simplify the on exporters depends largely on the size of movement from factory to port allowing a the exporters and the value of their exports. reduction in transit time of ½ day. The freight rates and sailing times for the transshipment ports with destinations to The movement from Vientiane to Bangkok Europe and the US West Coast are shown in can incur unexpected delays due to Thai Table 11 along with the frequency of customs procedures but this rarely exceeds service. 1½ days. The reliability is relatively high for movements from Bangkok outward Table 11. Shipping rates from Thai ports via because these are all scheduled services and Singapore are generally chosen by the buyer to meet a Destination USD Transit Frequency 20'/40' Time fixed delivery date. The time in port has Singapore 420/830 2 Daily become shorter and more predictable so that Port the exporter can schedule the entire Port of 420/830 2-3 2-3 times a movement from the factory with a high Tanjung week degree of reliability. Pelepas Port Klang 550/900 3 Weekly Rotterdam 1400/2800 18-22 Weekly The inbound movements are similar in Port timing except for the customs clearance Los Angeles 2000/2600 16-20 Weekly times, which are longer and less Port predictable at both the Thai ports and Notes: FAK Rates to Singapore & Port Klang Thanaleng. The typical time in Bangkok is inclusive of bunker adjustment factor (BAF); Rotterdam's rate inclusive of BAF but subject to 2-4 days. In Thanaleng it is 1-2 days currency adjustment factor (CAF) assuming there is no problem with Source: Compiled from industry documentation. Although there have been significant attempts at reforming both the Logistics costs from the factory to the destination port are 15-20 percent of the C&F value to Europe and North America for 4 An analysis of the supply-chain for garments low value shipments such as knock-down moving from Vientiane to Rotterdam furniture, but as little as 4-6 percent for high considering alternative routes indicated that the value shipments such as specialty garments. route through Danang cost nearly $1,000 more This means that a further reduction in the for a TEU than through the Thai ports. The route cost of inland movement of $200 for high- through Port Kelang, although a longer distance value products would represent a reduction by land, offered some advantages because it has in C&F costs of only about 1 percent. direct calls. 61 The movement from the factory to Bangkok resources, especially managerial skills. port amounts to only about 1/10 of the total Access is determined not only by location trip time from factory to destination port in relative to the principal markets and major Europe or North America but about 1/3 and transport routes but also by the agreements 1/5 of the cost for the movement, governing bilateral and multilateral trade respectively. This proportion is larger for and cross-border movements of goods. smaller containers since the land transport costs are not significantly different between Figure 3. Scale and market access a 20' and 40' box, whereas the ocean freight Natural Human Location Bilateral for a 20' box is lower by almost 50 percent. Resources Resource Agreement s s The proportion is even higher for LCL shipments, since the land transport costs are Scale of Activity Market Access much greater but ocean freight rates are the same. Domestic FDI Processes Logistics Platform Since most of the competition faced by Lao exporters is from within the Asian region, Source: World Bank the relevant cost comparator is C&F Singapore. Although the inland movement accounts for about 80 percent of the logistics Since Lao production activities are limited cost up to Singapore, it accounts for only in scale, they require a logistics platform about 6 percent of the C&F value for low capable of handling smaller shipments value goods and 1½ percent for high value efficiently. Because market access is goods. limited by lack of a major gateway, minimum ICT infrastructure, and Improvements in logistics will therefore cumbersome shipping processes, it is have relatively little impact on the necessary that this logistics platform has competitive position of the larger exporters simplified supply chains and efficient producing medium to high value goods for communications among the participants in export to Europe and North America. In the supply chains. It is also necessary that contrast, the benefits will be significant for the logistics platform has low transactions exporters of low value goods and also those costs and high reliability in meeting delivery exporting within the region. The greatest schedules while supporting a variety of benefits will be for the smaller exporters cargo forms and shipment routes. who use a significant amount of imported inputs and whose shipments are primarily Much of the polemics associated with the LCL cargoes in 20-foot containers. high cost of transport for landlocked and other isolated countries, ignore the fact that 2. What can be done? small cargo volumes are more costly to transport.5 Since Lao companies are small- Developing logistic services tailored to to-medium scale, they are at a competitive small-scale shipments disadvantage in terms not only of cost of production but also marketing and logistics. An effective logistics platform is needed to For marketing, larger transactions produce create competitive advantage for exports and lower unit costs as well as a larger revenue establish an efficient distribution system for base to support better quality marketing imports. Two factors can improve competitive position--scale and market 5For example, it is much less costly to ship access (Figure 3). Scale is constrained by goods to Europe from China rather than from the availability of resources--not only Bangkok and to Manila from Bangkok rather capital and materials but also human than from Mindanao. 62 efforts. For logistics, the unit costs of that all be able to receive and ship containers transport and documentation decline with at their factory. Initially this would require the size of consignments. In addition, larger reliance on Thai logistics providers to volumes attract greater competition among arrange the shipments from/to Bangkok, but providers and more frequent service. eventually Lao forwarders would participate. Lao exporters have sought to overcome the disadvantages of size by focusing on market At the same time, it is necessary to develop niches that are less interesting to larger larger transport companies in order to producers. This implies contract improve fleet management. To improve the manufacturing for smaller retailers who quality of road transport, it is necessary to require more personalized service and develop larger transport companies with smaller orders. These markets require improved fleet management. Not only does greater agility to respond to changing this allow these companies to handle larger demand and more frequent design changes. orders but also to improve their efficiency Buyers assume responsibility for design, by automating cargo booking and fleet quality control and marketing and provide management. While it would be difficult to most of the inputs and logistics. increase the size of these firms through capital investment given current market For smaller exporters, improvements in conditions, they can be expanded through logistics require strategies to consolidate mergers and contracting arrangements. cargo in order to achieve economies of Mergers among Lao companies involved in scale. Most inputs are procured C&F international road transport would not affect Bangkok while products are sold FOB competition since there is increasing number Bangkok. Since the suppliers and buyers of Thai companies entering the transit nominate the port and shipping line, Lao market as a result of the new transit exporters' control over the supply chain is agreement. They would have little impact limited to domestic movements. They use on competition in the domestic market given Lao forwarders for exports and Thai the highly fragmented structure of the forwarders for imports. A significant portion trucking industry. Alternatively, larger of exports are transported as loose cargo firms can expand through subcontracting of from Laos then consolidated by Thai independent truckers as well as joint forwarders in either Nongkhai or Bangkok. ventures with larger Thai logistics providers. The reverse process applies for inputs. In Both are already occurring. order for smaller exporters to improve their logistics, they need better opportunities for The need for increased shipment size and consolidating cargo in order to take improved fleet utilization suggests that advantage of economies of scale in certain proposals for improving transport are transport. To achieve this it is necessary to unlikely to succeed. For example, the strengthen the abilities of freight forwarders utilization of the Vietnamese port to handle these shipments both individually specifically constructed for Lao cargo is and with their international partners. unlikely to be attractive because there is insufficient cargo to attract larger, more Only as their business grows can producers efficient vessels. The frequency and range expand their role in terms of value added of services offered are not comparable to and thereby strengthen competitive position. those available in Bangkok or Danang. For supply chains, this implies the Similarly, the proposed extension of the development of efficient logistics for Thai rail system to Thanaleng is unlikely to increasing shipment sizes. At present, only offer a competitive service. While it would a few large exporters are able to ship permit an increase in the size of shipments, containers from their factory, it is necessary and lower cost transport for fully loaded 40' 63 containers and empty containers, there is knowledge of their qualifications. Efforts to insufficient traffic to justify an acceptable increase market share of Lao providers must frequency of unit train operations.6 Without be done through joint ventures with Thai a daily service from Nongkhai, road and other foreign companies. Indeed, both transport would continue to be dominant and SMT and Lao freight have already rail would only carry the less time-sensitive developed such relationships but their empty containers. participation is generally limited to the movement up to Nongkhai. Access to the transit market is still limited. For logistics service providers, access to the Reducing regulation market for transporting transit cargo is limited. While the new transit agreement The current emphasis in the global market is nominally provides open access for Lao to reduce order times. This places additional transporters, the procedures for licensing pressure on exporters to reduce their Lao trucks and drivers to operate in delivery times for inputs and lead times for Thailand is less clear. Furthermore, in order export. Bureaucratic procedures that delay to compete, Lao trucking companies will these transactions create a competitive need to invest in new trucks that can operate disadvantage. They also discourage efficiently in Thailand and to improve potential foreign investors interested in management capacity and skills in order to establishing trade-oriented businesses. compete with the relatively well-organized Since these investors have multi-country Thai logistics industry. Lao forwarding operations, they cannot jeopardize their companies do not have brokerage services to reputation with customers by establishing arrange backhaul shipments from Thai and production activities that cannot meet agreed Vietnamese ports. The limited information delivery schedules or adjust production to regarding availability of loads, especially for changes in demand. backhaul moves, increases the cost of transport. While efforts to reduce regulatory delays usually focus on improvements in the Efforts to increase market share of Lao customs procedures, more significant providers can be done through joint delays and impediments result from ventures with Thai and other foreign government controls over import and companies. Most of the major integrated export. Laos' procedures are among the international logistics service providers, most restrictive in the region (see Chapters 2 4PLs, have regional offices in Bangkok and and 6). These require not only registration provide a full range of services. In Laos, of companies that engage in trade, but also there are limited business opportunities so annual trading licenses specifying the they provide transport services primarily for volume that will be traded, and project cargo, personal effects, and donor authorizations for each shipment that must supplied imports. Foreign sellers and buyers be checked against the annual allocation. have difficulty nominating Lao logistics The time required to obtain these service providers because they lack authorizations is said to average about two weeks because of the need to process the 6 The only existing unit train operation in documents through different agencies, each Thailand is between the port and rail ICD at Lad in a different location. For importers and Krabang. In order for the State Railway of exporters located outside of Vientiane Thailand (SRT) to consider offering daily rail Capital, there is the additional delay of freight service in Nongkhai to and from Thai processing the documents through the ports, there should be freight traffic of at least 40 provincial offices. These procedures to 50 TEUs both ways. The SRT maximum combined with the requirement to prepare a wagonload is 36 tons on an 8 wheel- bogey and 15 tons and a 4-wheel bogey. plan of annual imports requirements may be 64 appropriate for a closed economy but are Another area in which government inappropriate for an open economy actively regulation could enhance trade is product involved in trade. Relatively few exporters certification. The government should take an have annual orders from their buyers. active role in enforcing standards applied by Instead they must be able to respond quickly trade partners, e.g. quality of material used, to new orders. These orders have at most a country of origin, and chemical content. six-month lead-time and during that period, This does not imply that government labs it is likely that there will be adjustments in should do the testing, as these are usually the amount ordered. Even for manufacturers inefficient and often ineffective, but rather with long-term orders, these represent only a that the government should oversee private portion of their total output. testing facilities and reporting procedures (see Chapter 7 on SPS). In contrast to this heavy-handed regulation of trade transactions, Laos has minimal Implementing the transit agreement with regulation of logistics services. This is Thailand advantageous as logistics is a dynamic area. Significant changes are continuing to occur Many of the features of an effective transit in supply chain management and the corridor through Thailand have been configuration of 4th party logistics. implemented on a piecemeal basis. The Attempts to regulate this industry would 2004 agreement between Laos and Thailand limit its ability to change and discourage for movement of goods in transit is an participation by foreign service providers. attempt to introduce a more comprehensive arrangement. Market forces should be sufficient to regulate performance especially where there While this agreement has provided is competition from international providers. significant liberalization in the movement of However, a proactive approach will be goods between Laos and Thailand, full required by the industry to upgrade the implementation will require further quality of its services. While there have clarification concerning the following: been some efforts by LIFFA to provide o Requirements that Lao trucks must meet training, more needs to be done to improve in order to operate on Thai roads. standards and make both the providers and While the transit agreement allows for users aware of these standards. Formal Lao truck operators to haul transit cargo regulation can contribute to this effort by to/from Bangkok, there is the usual improving the allocation of liability for provision requiring that these trucks cargo losses and for providing cargo conform to local regulations. These insurance for logistics companies at regulations should not be a serious reasonable prices. It can also be used to impediment, but without a clear facilitate customs clearance by licensing statement of what regulations apply, it is customs clearance agents. Currently there is likely that the initial efforts of Lao no such requirement and consignees clear truckers to operate in Thailand will fail. about 80 percent of the goods delivered to o Procedures for sealing cargo in transit. Thanaleng. This not only increases delays Thai customs continue to remove the and malfeasance but also discourages the seals from import containers destined introduction of modern procedures and for Laos and affix their own seals. They technology. Furthermore, without a also continue to replace Lao seals with professional clearance agent organization, their own on export containers at the Lao customs has no channel through which time they enter Thailand. There is no to communicate changes in procedures. reason to replace these seals or to inspect the contents of the containers, 65 except in exceptional situations and then and informal, without providing significant only in the presence of Laotian customs. advantages. An example is the decision to o Procedure for bonded movements. require all imported fabrics and other inputs Within Thailand, TIFFA provides Thai for garment manufacturing to be cleared at trucking companies with guarantees for Thanaleng rather than at the factory. payment of duties for goods moving in transit should they fail to exit Thailand. Without discounting past efforts to improve The trucking companies must also be procedures, Lao Customs has not adopted a bonded for carriage of goods in transit. policy of facilitating trade. It continues to Comparable arrangements need to be introduce new regulations without established for Lao truckers and consulting stakeholders or considering the forwarders possibly through a joint impact on trade facilitation. A recent arrangement with TIFFA. example is the decision in 2004 to stop o Service charges for transit movements. clearing any imports at the warehouses of The agreement leaves these extraneous larger importers and to require they be charges to subsequent discussions, but cleared through Thanaleng. This not only indicates that they should not exceed the increased the handling costs but also the rates for comparable domestic services. damage to cargo as a result of third parties It is important not only to agree on these involvement in the handling of cargo.7 rates but also to make them known and to provide better enforcement in order to The practice of changing customs reduce informal charges procedures without sufficient advance notice is particularly troublesome for Improving customs procedures for transit small-scale importers and exporters. Large firms have frequent interaction with customs Despite recent improvements, the Lao officials and stay informed of changes in customs procedures for clearing imports procedures. They can adjust more easily and exports and the Thai customs even when this involves additional costs, procedures for clearing transit cargo do both formal and informal, and delays. not yet meet international standards. The Smaller industries interact less frequently process for clearing import and export cargo with customs and have difficulties has been greatly simplified in recent years. responding to changes they see as arbitrary The commodity classification has been and unpredictable. As a result, they are converted to the Harmonized System (HS). more likely to experience significant delays A single administrative document similar and losses each time a change is introduced. but not identical to the UN Layout Key format was introduced in 2000. This A similar form of discrimination against document is used for imports, exports, and smaller traders occurs as a result of variation transit goods, and replaced 16 documents. in customs procedures at different border Direct clearance of goods at the factory is crossings. Both appointments of customs permitted in certain situations. The average officials and control of their activity are a time to clear cargo has been substantially provincial rather than national reduced both in Laos and at the transit responsibility. Since customs lacks a facilities in Klong Toey. Despite these unified management, there is considerable improvements, the Lao customs procedures variation in performance and in the level of for clearing imports and exports and the informal payments. As a result, cargoes are Thai customs procedures for clearing transit cargo remain unnecessarily cumbersome. 7It also reduces accountability as claims for Furthermore, some of the gains achieved damage could not be processed without delaying through past reforms have been offset by the delivery of cargo and increases levels of new procedures that add costs, both formal informal payments 66 often rerouted several hundred kilometers computerize the procedures and documents (from Vientiane to Savannakhet) to obtain used by these other departments. more favorable treatment. Larger traders are able to reroute cargo to exploit these Improvements in Thai customs procedures differences but small and medium size are necessary. The new transit agreement enterprises do not have similar opportunities with Thailand, if fully implemented, due to the small size of their shipments. promises to greatly simplify the movement of goods. As part of the implementation, Although Lao Customs procedures are Thai customs procedures regarding transit intended to reduce the level of illegal trade, cargoes need to be brought in line with most illegal trade occurs not at the border international practices. This extends beyond crossings but along the long stretches of the problems of lack of transparency and Laos' porous border. Illegal imports have informal payments. Although Thai customs the benefit of avoiding not only duties and have established a procedure for a time- taxes but also informal costs and delays bound movement of transit goods under involved in complying with customs bond, they continue to inspect cargoes, procedures. As a result, many of the including containerized cargo, at the point of procedures introduced by customs have been entry, and to replace the seal placed on the counterproductive. container by the customs authority at the point of shipment. This practice appears to For Lao Customs, the most important reform have arisen because of an ambiguity in the goals to speed up transit goods include: (i) Customs Law regarding handling of transit an institutional commitment to trade cargoes. If this is the case, then an facilitation in accordance with the goals for amendment to the Law should be the Kyoto Convention; (ii) immediate introduced. attention to clearance of goods under temporary admission and associated exports; Vietnam has more restrictive procedures (iii) establishment of bonded facilities at than Thailand. As a result, Lao importers exporters' factories allowing containerized and exporters rarely use these routes. This goods, both inbound and outbound to be is unlikely to change significantly despite cleared at the factory. The changes in with the current MOU for developing a procedures needed to address problems of common border crossing facility. Even with transparency and corruption are: significant simplification in procedures, there would still be major disincentives due · reduction in the number of signatures to the longer travel times, poorer road required, networks and fewer sailings from the · computerization of customs documents, Vietnamese ports. Danang currently handles · introduction of direct trader input and only about 35 thousand TEU versus over 3 channeling. million TEU for the ports in Bangkok. As is common for most countries, there are Improving supply chain performance also a number of complementary certification procedures associated with The options for improving supply chain obtaining health, safety, and environment. performance can be understood by These occur in parallel with customs considering the typical supply chain for procedures but are not as closely monitored. garments shown in Figure 4, which includes Although they only affect certain cargoes, both the inbound chain for inputs and the they can be significant sources of delay. outbound chain for products. The times for Parallel efforts are needed to simplify and the various logistics activities are estimates based on current performance. The transport costs are for loaded 40' containers. 67 Figure 4. Supply chain for garment production (Cost per FEU/16-20 tons) Design Legend Process 2 weeks-2 months Import Approval Process Production of Inputs 1-2 weeks Transport Thai or Foreign Supplier Regulatory Procedures Ocean 7-12 days Transport Storage $800-$1200 1-2 days from Region Air $20,000 Transport to Factory 1-2 days Decision Road $100-$200 Check Seals in Transport Bangkok 1-2 days from Thailand Clearance at 1 day Airport Road time Transport to Road cost 8-12 hours Thanaleng Transport to $850 Factory 8-12 hours $850 Road Customs Transport to 1-2 days Clearance Factory 2-4 days $50-$75 Clearance at Transport to Factory Factory and 1-3 hours 1 day Unload $50-$100 Export Approval Manufacture 2-6 weeks Load and Transport to 1-3 hours $50-$100 Thanaleng 1-3 hours Clearance at Factory Customs Clearance 4-6 hours Load and Load and 1-3 hours Transport to Transport to $50-$75 Bangkok Airport 1-3 hours $850 Transport to 8-12 hours Bangkok $850 Load Aircaft Clearance at 4-6 hours Bangkok 2-3 days Air $40,000- Transport $60,000 via Hub Load 1-2 days onto $150 Vessel Ocean 18-26 days Transport Via $2500-$3000 Singapore 68 The costs for cargo clearance have not been possible for repeat orders and presents a included but, exclusive of duties, these significant commercial risk unless there is a would be relatively small. Various modal firm order. options are included. The imports are trucked from suppliers in Thailand or Significant savings in the costs for logistics shipped by water or air from suppliers will be more difficult to realize. Additional elsewhere in East Asia. The exports are reductions in the cost for door-to-port and shipped by sea or air to destinations in port-to-door transport could provide a Europe and North America. savings over about $400 or 8-10 percent. Simplification and automation of customs The different modal combinations produce procedures would reduce the informal costs different ranges of order cycle times. Most for clearing cargo and allow manufacturers of the variation in time for each combination to take advantage of the temporary is explained by the time for manufacturing, admission status for inputs. These informal which can range from 2 weeks for smaller costs have not been determined but the orders to 6 weeks for very large orders savings would likely be in excess of $500 (exclusive of the time for the design phase). for an FEU shipment of inputs (imports) Because of cost, most shipments use either a plus a similar shipment of products road-ocean or ocean-ocean combinations. (exports). Assuming that the transactions associated with procurement, order processing, If the growth path for Lao exports is to focus licensing for import and export shipments, on niche markets, then it is necessary to look other government approvals and financing at the flexibility of the complete supply add another two weeks, the cycle time chain. This includes not only logistics but would be 2-3 months. If this is an initial also the facilitation of other non-production order for a specific product, then there is activities. Supply chain management also the time for design which can be as involves not only efficient movement and little as two weeks but is more likely to be at storage of goods but also rapid information least a month. The result is an order cycle flows, low cost financial transactions and of 3-5 months (this can be reduced by about tight control on product quality throughout ½ month using airfreight for the outbound the supply chain. This has not been a movement, but the increase in cost is problem because of the simple structure of prohibitive except for high value cargo). the supply chains and because the exporters' control over the chain is limited. The These order cycles have improved in recent practice of purchasing inputs on a C&F years as transit times to/from Bangkok have Bangkok basis and selling them on an FOB decreased, the frequency of feeder services Bangkok basis has limited the role of Lao at Thai ports have increased and the times and Thai forwarders to control of the port- for port and customs clearance has been factory-port movement while international reduced. Additional reductions will be more forwarders manage the foreign portion of the difficult to achieve. The restoration of the movement. However, if Laos is to expand practice of clearing both inputs and products its trade and compete effectively with its at the point of manufacture could reduce the neighbors, it will have to further shorten order cycle by an estimated of 2-4 ½ days. order cycles while guaranteeing the same Simplification of the procedures for moving order fulfillment rates offered by containers inland could provide an competitors in the surrounding countries. additional savings of about 2 days for This will require tighter integration of imported inputs but at most a day for movements and further reduction of products being exported. Maintaining an procedural delays at the borders and inventory of inputs could reduce the order gateways. This will also require greater use cycle by 1-4 weeks. However, this is only of ITC systems to speed the transmission 69 and processing of information and to make destination.8 This process reduces the procedures more transparency. delays for each consolidation. It also increases the portion of the trip from origin Assuming that growth in Lao trade derives to final destination that is containerized. from an increase in the number of small- This strategy is information-intensive but scale producers rather than the introduction not necessarily capital intensive and can be of large-scale factories, similar to those in replicated for relatively small traffic Vietnam and China, then the supply chains volumes. will have to handle larger numbers of smaller shipments. They must also provide Each consolidation is for cargo that is routed greater flexibility and variety. Airfreight through the next major transshipment hub. shipments are expected to increase as This expands the range of eligible cargo that exports of perishables and high value goods can be loaded in a container, thus reducing increase. Door-to-door movements are the time to fill that container. With the expected to increase as buyers order for decrease in the cost of deconsolidating a delivery to specific retail outlets or inland container and cross-loading its contents into distribution centers. Most important LCL other containers, the trade-off between time movements are expected to increase. and cost favors more frequent consolidations. Shippers of individual Developing LCL logistics consignments benefit from the savings associated with a door-to-door container The development of an efficient supply movement. Such a system would chain for small shipments, specifically LTL significantly improve the competitive or LCL consignments has been slow to position of the smaller Lao exporters, which evolve. Consolidation was traditionally export primarily LCL shipments. performed at the port of export. This procedure allows shipment of full container The challenge is to replicate this system with mixed consignments so as to minimize despite the small volume of traffic. There the logistics cost, including those for have been efforts in this direction already, as handling of and damage to cargo. However, cargo is being consolidated into domestic it also increases transit time by as much as containers for shipment to Bangkok. But so one week while waiting to acquire sufficient far this has not been cost competitive as the cargo for onward shipment to the destination cargo typically moves in an open truck. In port. Furthermore, it was only applicable order to be competitive, movements in for the shipments going to the major domestic and maritime containers must be destinations. tightly integrated. This requires improved cross docking in Bangkok and better Over the last decade, forwarders and shipping companies have combined 8As a hypothetical example, for a shipment from improvements in consolidation strategies Vientiane to Brussels, the cargo would initially developed by global manufacturers and be consolidated in Vientiane in a domestic larger retail chains with advances in container with other goods destined for electronic interchange of cargo data to Bangkok. It would then be reconsolidated in introduce a new strategy involving multiple Bangkok in a marine container with other consolidations in a door-to-door movement. shipments for Singapore. At Singapore, the The initial consolidation occurs close to the cargo would be reconsolidated in a marine source of production while the final container with other shipments for Rotterdam. deconsolidation occurs close to the At Rotterdam the cargo would be reconsolidated in a van with other cargo destined for Brussels. A shipping company or international forwarder would arrange this entire movement. 70 integration between domestic and would ensure the safety of the cargo while international freight forwarders and allowing for proper sealing of the cargo. transport companies. The seals would be modern electronic seals possibly with RFID to provide additional At present, most of the consolidation into comfort to the Thai customs. This transport maritime containers takes place at the transit services would be contracted from Lao land warehouse located in the port. There is Thai trucking companies operating under the some consolidation of both maritime and recently signed transit agreement, which domestic containers as part of the back-to- allows for consolidated loads to move back transshipment operation on the Thai directly from the factory or bonded side of the Friendship Bridge. This activity consolidation warehouse to the port. could be shifted to the exporter's factory if there is sufficient volume or otherwise be An information system is required to performed at a bonded container freight coordinate and track the handling and station equipped for cross-docking transport of individual consignments. This operations. The service should be provided system should also have the capability to by the private sector on a competitive basis. prepare plans for the deconsolidation/ Because of the need to coordinate the reconsolidation activity and report on the deconsolidation/ reconsolidation activities, it contents of the domestic containers to may be necessary for the same party to customs and the logistic services providers. provide the service in both Vientiane and Eventually it should provide information on Bangkok. the location of individual consignments in a domestic container or marine container in The system could also be used for order to speed the cross-docking operation consolidated shipments of imports. If a and coordinate the movement of the container has multiple consignments, it reconsolidated shipments to the seaport or should be possible to move the container airport from which the goods will be directly to Laos for deconsolidation.9 exported. However, if the container has a mix of consignments with some for Thailand, it The information system should also be would be necessary to deconsolidate in the integrated with the information required by port. The Lao cargo could then be Lao customs, initially as hardcopy and reconsolidated into a domestic container and subsequently as part of the DTI system, to moved under bond to the deconsolidation expedite the processing of customs warehouse in Laos. documents. The system should also provide internet-accessible information to the A system for efficient movement LCL exporters. The international transport shipments between Laos and the Thai ports companies and logistics service providers would require not only consolidation/ already have these systems, as do the Thai deconsolidation services at each end but also ports and customs. However the Lao secure transport and the supporting logistics industry and customs services lack information systems. An efficient land this capability. transport service for consolidated shipments would make use of enclosed vans, domestic In order to implement this system for small- containers or maritime containers depending scale industries, it is necessary to have the on timing and cargo availability. These following items: 1. Study of commercial viability including: forecasts of the volume of consolidated 9 The current requirement of Thai customs that cargo exported over the next five years the cargoes be deconsolidated in Bangkok does by major destinations, the savings from not appear to be consistent with the transit agreement or with international practice. the introduction of an efficient 71 consolidation/deconsolidation operation Inland container depot/dry port in Vientiane and Bangkok and the revenues that would be generated by The most dramatic developments in the such an operation; configuration of supply chains in the 1980s 2. Agreement between Thai and Lao focused on large volume, especially FCL, Customs for facilitated movement of shipments. This included relocation of consolidated shipments under bond warehousing from the retail outlets to between bonded warehouses in Laos and distribution centers located near the major Bangkok; import ports, e.g. Rotterdam's Distripark. 3. Bonded warehouse for consolidation of This was followed in the 1990s by the cargo with a competitively bid movement of these distribution centers up concession for operating the warehouse; the supply chain to the transshipment hubs, 4. Expedited procedure for processing of e.g. Singapore Distripark, and from there to consolidated shipments in Bangkok; the ports in the countries of production, e.g. 5. Competition in the provision of Saigon. This last phase allowed for deconsolidation/reconsolidation services consolidation of products from multiple in Bangkok; contract manufacturers into full container 6. Information system to supply the loads for individual urban markets or retail information required by customs, outlets. In parallel, the storage function of international transporters and forwarders the distribution centers located near the to plan and coordinate the movement of import ports was replaced with a cross- consolidated shipments. docking function that minimized the delivery time for cargoes. The timeframe for putting the system in place includes three phases. It is expected Establishing an inland container depot can that the initial traffic study and financial reduce transport cost of containerized feasibility could be completed within a few cargo. The implementation of the transit months. Time to complete the new agreement with Thailand and increase in arrangements with the Thai and Lao customs competition among trucking companies and is indeterminate, although with goodwill it clearance agents has produced a substantial should be possible within four to six months. reduction in the rates for transport of While the systems analysis and design for containerized cargo. However, these rates the information system would require four to are still high relative to those for movement six months, the implementation would likely of loose cargo because of higher truck stretch over a year or more depending on the operating costs and, more importantly, the ability to interface with the customs. need to reposition empty containers from the unloading point for imports to Bangkok and Relatively little capital investment would be from Bangkok to the point of loading for required. The information system would exports. In order to reduce this problem, it utilize existing EDI protocol and a simple is proposed to establish an ICD that would data structure. It could be expanded later to operate as a dry port. include information on the size and physical position of individual consignments. While foreign shippers can currently Facilities are available for consolidation/ designate Vientiane as their port of reconsolidation activities but these may not destination, this is rarely done since it is be appropriate for efficient cross docking expensive to have shipping lines arrange the and cargo inspection, in which case they inbound transport. As a result, most import should be replaced. However, the cost of containers are designated for delivery to such warehouse/cross-dock facilities is Bangkok and the consignees or their relatively modest. representative arrange for onward movement. If the shipment is in a container, 72 then the consignee incurs the additional While this project has attractive features, it costs for transport in bond and for payment might be difficult to realize because the of detention and demurrage changes for the small volume of traffic. The opportunities container (after a specified free period).10 If for unloading the import containers and the cargo is deconsolidated and moved reloading them with export cargo may be inland as loose cargo, then the transport is limited by the shipping line that owns the less because the empty backhaul is avoided containers. Imports come primarily from along with other charges. With an ICD/dry East Asia and are carried on regional port, the inland transport for import carriers, whereas most exports are shipped containers having Vientiane as their port of to Europe or the US on large international destination can be arranged jointly for all carriers. Before proceeding with this shipping lines through one or more trucking project, it will be necessary to prepare a companies.11 This arrangement would forecast of container traffic by reduce the overheads associated with this origin/destination. From this, it can be movement. It would also eliminate the need determined if there will be sufficient for a bank guarantee or the detention bidirectional container movements to justify charges during this move. For exports, the participation by the shipping lines and if shipping lines could issue a bill of lading there will be sufficient revenues to make the with Vientiane as the origin port and then ICD commercially viable. assume responsibility for transportation to the ports in Bangkok and beyond. A proposal has already been prepared by a private operator for establishing an ICD at a The ICD/dry port can also be used to store new location near Thanaleng. The final empty containers after their import cargo has choice of location should be part of a been unloaded. These boxes can be broader strategy for improving supply chain subsequently loaded with Lao export cargo performance. A marketing study is needed or repositioned for loading of Thai export to identify the performance characteristics cargo. This arrangement would not only needed to make the ICD successful, reduce the time required for delivering an including the level of coordination with empty container to the factory but also customs and transport services. It is increase the percentage of loaded backhauls expected that in the first stage, the ICD and therefore reduce trucking costs. If would require only a few hectare with successful, this could increase the load ground slots for up to 200 TEU and one or factor for articulated trucks by as much as two top loaders or reachstackers. Loaded 10-20 percent, thereby potentially reducing boxes would be stacked three high and freight rates by 8-16 percent. At the same empties up to four high. The operator time, it would largely eliminate the should be a third party selected through detention charges paid by the importers and competitive bidding.12 exporters. Proposed short-term initiatives to improve logistics in Laos 10 Demurrage is calculated from date of discharge of full container up until the date the There are a number of initiatives that Laos full container is cleared out of port. Detention can undertake to improve the performance period is calculated from the date the full of the supply chains for goods traded with container is cleared out of port up until the date neighboring and foreign countries, and the container is returned empty by the consignee thereby increase the competitiveness of to the carriers stack in port. 11 As an example, the operators of the ICD in Sialkot, Pakistan also provide a trucking service 12Given the diversity of shipping lines, it is between the ICD and Karachi which is one of the unlikely that a consortium of shipping lines best organized trucking operations in Pakistan. could be formed to operate the ICD. 73 exports and reduce the cost of imports. 2. Develop a consolidation service for small Most include changes in procedures that freight shipments on the Vientiane- require relatively little investment. These Bangkok corridor. The current practice of would build on existing practices and either consolidating loads at Nongkhai would be simplify them or remove key constraints. replaced by a similar activity at a container freight station in Vientiane. Export cargo 1. Simplify procedures for factory-to-port would be loaded into either marine or container movements along the Vientiane- domestic containers equipped with modern Bangkok corridor. This could begin as a electronic seals and moved in transit to the pilot project to introduced changes that will ports. The cargo in the domestic containers facilitate major trades, specifically imports would be reconsolidated into marine for and exports from the garments and wood containers. In the reverse direction, LCL products industries. These changes would cargo imports would move directly to the include: freight station or, if the consignments were · Checking of containerized cargo on for multiple destinations, would be the Thai side would be limited to consolidated into domestic containers at the inspection of seals. Physical Bangkok transit warehouse and moved inspections would not be conducted under seal to the Vientiane CFS. This except based on specific intelligence facility would be accessible not only to regarding the contents. domestic forwarders but also to Thai and · Transit permits for exports would be foreign companies that have a presence in issued at the Friendship Bridge and the Vientiane market. The operation of the imports documents would be CFS and the consolidation/deconsolidation checked there. Information facility in Bangkok would be contracted out regarding imports including the on a competitive basis. This initiative would approvals would be transmitted require an agreement from Thai customs to electronically between the transit treat these movements in the same way as warehouse at Bangkok and the FCL shipments. customs office in Vientiane. · Containerized goods would be 3. Establish an Inland Container transported direct from the port to Depot/Dry Port near the border where the the importer's warehouse and from shipping lines could deliver loaded the exporter's factory to the port. containers and receive cargo for loading Clearance of inbound and outbound into empty containers. The ICD would also full container loads would take provide a focal point for transactions with place at the warehouses. both the shipping lines and the trucking companies. It would allow importers to The program would begin with the return empty containers to the ICD rather larger exporters then expand within a than to Bangkok. Similarly, it would act as short time to the major importers, e.g. a dispatch point for empty containers to be WFP, Unilever, Trio, and finally to the loaded with exports thus reducing the smaller traders. It would begin with the transport of empty containers to Bangkok. corridor between Vientiane and This facility would also allow repositioning Bangkok and later be expanded to other empties to shippers within Thailand as well corridors. Since this project would as to container yards around Bangkok using require an increase in the workload of a single trailer or rail wagon for two 20' customs and other border officials, containers.13 procedures would have to be developed to increase staff and improve scheduling 13Thai customs has identified as area for of their activities. constructing an ICD in Nongkhai. This should be considered in the marketing study which 74 4. Reduce the number of signatures border activities, but also the impact of required to clear cargo. Once accepted this various initiatives on improving these could be combined with a procedure for activities. There are a number of standard electronic submission of these documents indicators. Some measure the effectiveness and for expedited approvals in order to of trade facilitation, e.g. times for individual reduce the incidence of informal payments. processes and total in-out time, while others There are a number of systems available for measure the efficiency of the resources used, this purpose of which ASYCUDA is the e.g. number of clearances per customs agent most widely used, but not necessarily the or signatures required. best for small-scale applications. The system would be developed in phases None of these initiatives involve significant beginning with Direct Trader Input built capital investment with the exceptions of the around the SAD and incorporating valuation financing of trucks and the establishment of and accounting modules. Subsequent phases the ICD. Even then the amounts would be would address inspection, selectivity and less than $5 million. The consolidation risk management. service would be developed by the private sector but would require relatively little 5. Reduce the regulation of imports and investment assuming that existing exports. This would include elimination of warehousing space is available. The annual projections and approvals for development of a Direct Trader Input system individual shipments. with supporting modules and equipment for installation in Vientiane should cost less that 6. License customs clearance agents. This $1 million although a rollout of the system would include certification of technical for the entire country and the expansion of knowledge combined with a commitment to modules could cost about twice as much. remain current on customs procedures. It The other initiatives might require some would also include a requirement for technical assistance, but these are relatively bonding individual customs agents. common reforms for which there is considerable experience 7. Provide assistance to the logistics industry to develop their capability. For the It is difficult to quantify the benefits without trucking companies this would involve developing a more detailed project scope financing for equipment suitable for hauling and a more careful analysis of trade patterns. containers on the roads in Thailand. The However, it is possible to indicate the financing would be in the form of lending impact in terms of effect on supply chain directly to the trucking companies or to performance (Table 12). companies that lease trucks. For the forwarding companies, this would involve training in modern logistics based on programs available directly through TIFFA or from UNCTAD or the Bank's Distance Learning Program as well as establishment of a program for self certification. 8. Monitor clearance times and productivity at the border crossings. The data collected would be used to evaluate not only the effectiveness of the customs and related would be prepared leading up to the establishment of a Lao ICD. 75 Table 12. The expected benefits from the proposed initiatives Initiative Competition Time Cost Reliability Losses Informal Payments Pilot to Simplify Transit ++ + ++ + ++ Process Establish Bonded CFS ++ + Establish Dry/Port ICD + ++ + Process Simplification and + + + ++ Direct Trader Input Simplify Export Approvals ++ + + License Clearance Agents + ++ + Assistance for Logistics ++ + + ++ + Industry Monitor Performance ++ + + + + Map of Laos Source: CIA factbook 76 Chapter 6: Customs Update Despite major progress and reform effort, of shipping one container from Marseilles to customs remain a stumbling block to Bangkok is between $600 and $700, and imports and exports. Importers complain $1,200 from Bangkok to Vientiane. about lengthy, costly, and unpredictable Although this is not entirely due to the LCD procedures. The capacity of the Customs (permits have to be obtained from the Department is still weak, the authority over Ministry of commerce, the Ministry of Customs clearance is spread across health carries out sanitary and phyto- ministries and regions, and informal sanitary inspections, shipments may take up payments are still widespread. Much to three weeks from Bangkok to the Lao remains to be done to make the Customs border), Customs are still considered the Department a modern one, including in the major impediment: areas of legislation, organization structure, human resources, computerization, clearing · Practically every shipment is procedures, and enforcement. Donor physically inspected, and often assistance in this area would also need to be sampled ­ this is partly necessitated well coordinated. by the fact that no risk management system is in place; customs officers Lengthy, costly, and unpredictable sometimes have limited professional procedures skills and their performance further suffers due to understaffing and lack The Lao Customs Department (LCD), of equipment; clearance rules--and supported by extensive technical assistance, sometimes tariffs--vary from one has undergone for several years a reform clearance station to another; and and modernization process, but continues to updated documentation is usually suffer from a lack of institutional capacity unavailable; and weak performance.1 Progress has been · Levels of duty can be very high, inhibited by weak capacity within the thus encouraging systematic under- Department, characterized by insufficient valuation;2 numbers of qualified staff at the · Smuggling (estimated by Customs Departmental headquarters and unqualified at over one billion Kips per year in and poorly trained field staff. The Customs lost revenue) and fraud are Department does not exercise full control widespread,3 with significant under- over the operation of provincial offices and reporting of goods at approved border checkpoints as provincial authorities points of entry, thus making it have been delegated responsibility for their management and operation including the recruitment, transfer and promotion of staff, and collection of duty. (In some cases, 2Altogether, tariff on excise goods represents 90 different provincial clearance locations even percent of the value, to which unofficial offered "discounted" duty rates.) payments must be added. 3Although Lao Customs procedures are intended Importers face difficulties in clearing to reduce the level of illegal trade, most illegal goods. According to one importer, the cost trade occurs along the long stretches of the country's porous border rather than at the crossings. Illegal imports have the benefit of 1 A reformed action plan including the avoiding not only duties and taxes, but also establishment of a national customs informal costs and delays involved in complying administration with a vertical management with customs procedures. As a result, many of structure has been proposed to the government, it the procedures introduced by customs to reduce has, however, not been approved until now. illegal trade have been counterproductive. 77 uncompetitive for importers to work Customs house, is based on the following honestly; steps: · Inward processing procedures are · Entering trucks5 are weighed, complicated (until recently, licenses submit the Thai carrier report, and required 18 different steps and 14 are logged into a manual register; signatures ­ 3 from customs and the · A few Thai trucks are allowed to others from other relevant agencies proceed to Vientiane (essentially oil ­ with a delay of 10 to 15 days to tankers and perishables), but need to obtain an authorization for an take on board a Lao police officer, operation), suffer from lack of for road safety reasons; all other codification, and imports under the trucks are transferred to Thanaleng Code des Investissements (subject to Customs house under a rudimentary, only a one percent payment on raw and potentially insecure, transit material) are often abused; control scheme; · Corruption is a major problem, with · Trucks arriving at Thanaleng are payments requested at every step, again weighed, the transit procedure including for the provision of is cleared, and the trucks are overtime or on the premise unloaded under Customs control clearance4, but can result, when into a warehouse (on average, routine payments are made, in Customs detect between 30 and 40 predictable service, and keeps cases of under-reporting of cargo clearance delays within 24 hours; per month), and the carrier report information is captured both in a The organization of the LCD is weak. The manual register and into a absence of a national Customs standalone Excel worksheet, for administration with a vertical management subsequent inventory control; structure has resulted in inconsistent · Within 10 days, importers are application of the law and regulations, weak required to lodge a declaration for revenue performance, inappropriate decision clearance which is submitted to making respecting tariff, valuation and Customs, entered into a manual penalty matters, and uncoordinated human register, then keyed into the resource management. Provincial Customs computer system by authorities reportedly overstep their Customs officials; authorities and have been granting · Importers must also produce a MOC exemptions, varying tariff rates and customs permit, which is issued locally, at a value, and settling seizure cases. In addition, charge.6 other government departments, most · Duty is paid locally at a Treasury noticeably the Ministry of Commerce are window, by cash or certified check; involved in functions that are within the · Every consignment is inspected; purview of the customs administration, · If the inspection is satisfactory, the resulting in duplication of efforts and related goods are released. delays in border clearances. At field level, officials have limited documentation, which is often not updated. 5The bridge is open from 6 am to 10 pm while Procedures are control oriented, yet the Customs house operates from 8 am. to 4 pm, with the possibility of clearing goods outside ineffective. Clearance of goods, as observed working hours, subject to a pre-notification. at Friendship Bridge and Thanaleng There are between 10 and 100 trucks per day. 6This permit is also required from travelers 4 A figure of $10 paid directly to the Customs importing goods in excess of the duty free officer was mentioned by importers. allowance (imports in excess of 250,000 Kips). 78 Valuation of goods. Customs applies the practiced at many Customs houses where transaction value principle to a limited officers complete declarations on behalf of degree, and extensive use is made of price importers/exporters. This procedure is not lists issued by Customs (and by the MOC). in line with modern Customs principles and The LCD has difficulty maintaining up to practices or with international standards. It date lists and often the reference values are makes it extremely difficult for Customs to not representative of actual prices. In order impose any sanctions in cases of fraudulent to ensure reasonable revenue collection on declarations as the declaration is sensitive products such as liquor and wine, questionably not that of the importer.7 tobacco and mobile phones, the LCD has introduced a system under which specific (or Uncoordinated processing by several forfait) duty rates are established through a government inspection and control form of contract with individual importers. agencies. At some border locations up to 10 This practice avoids difficulties in separate government inspection and establishing actual values for these high regulatory agencies intervene in the revenue risk goods and assessing ad valorem clearance of goods, vehicles and people. rates of duty and tax. Practically all imported goods are thus inspected several times. Involvement of Major customs issues many of these agencies in routine processing and inspection operations at the border is not Customs clearance. Although in the past necessary, and their functions could be few years the LCD has (a) introduced the delegated to primary agencies (such as AHTN tariff classification based on the Customs or immigration) with no loss of International Harmonized System (HS) regulatory control or revenue. The border nomenclature, (b) introduced a modern clearance process is characterized by declaration form, and (c) carried out some different documents often containing the streamlining of procedures, clearance still same information, and permit/license includes redundant steps, risk management requirements that cause excessive delays. techniques are not employed, and virtually The Ministry of Commerce's involvement in all goods are inspected. These inspections the import and export process functions produce very few results and appear to have duplicates Customs procedures; prohibited become a mechanical procedure carried out goods and goods subject to technical as a matter of simple routine. In Thanaleng, regulations face the extra hurdle of issuance importers are allowed inside the of "import licenses". (MOC staff at Customs administrative area of the declaration houses also verify and authorize the declared lodging position, creating unwanted private value of the shipments through this permit); contacts between importers and officials, MOC authorities indicate that they require and defeating the purpose of the tentative this permit in order to collect essential trade single window approach. The use of manual data that is not provided by Customs on a registers is not clear, except it provides some timely, accurate basis, but it would be more level of control over keying-in of data by effective if the MOC and Customs would Customs officials. The existing computer jointly explore ways to improve the system is not used effectively (for example, provision of such data. it does not assign a declaration number), and suffers from unreliable and untimely data Control over cargo and transit is weak. caused by poor quality Customs declarations The MOC is involved in the control of by traders, excessive input errors and the goods in international transit through Laos. failure of many Customs houses to transmit An MOC official acknowledges transit data or send in declarations in a timely manner. The fundamental Customs 7These penalties, when they exist, are in any principle of self assessment is not being case very low and have limited deterrent effect. 79 goods by signing the document submitted by does not have control over the recruitment, the freight forwarder and records it for training, deployment and discipline of their statistics. The customs official will then staff. Thus standards of recruitment and issue a permit accompanying the respective promotion are not consistently applied, and goods to the bonded warehouse. The permit trained staff are often rotated or transferred is subsequently cancelled when the goods out of the department to be replaced by are re-exported. untrained officers. Levels of staff The Customs transit control procedures, competence and specialized Customs while manual, are compatible with the knowledge are therefore weakened. requirements of the WCO Convention on the Although the recently-introduced Harmonization and Simplification of monitoring and control program has helped Customs Procedures (Kyoto Convention). strengthen the role of the Department in the Similarly, the procedures are in accordance management and supervision of field with the provisions of Article V and VIII of operations, the absence of a national the GATT. However, Customs assesses Customs administration with a vertical duty at a reduced rate for transit goods, a management structure impedes the provision practice that is incompatible with Article of consistent Customs services and policy VIII. Control over vehicles entering at application throughout the country. Friendship Bridge and destined to Thanaleng is only based on a token system, Valuation procedures are not in and while there are currently few reported accordance with the WTO's Agreement on irregularities (only one case per month on Customs Valuation (ACV)8. Although the average), should traffic increase use of minimum price lists is sensible significantly, risks of fraud would also considering the low capacity of the Customs increase considerably. At Thanaleng, field offices and the need to protect revenue Customs do not match their computer collections, the LCD will need to undertake registry of arriving cargo against the a comprehensive program to develop the warehouse operator's computerized management systems, organization, inventory control system. infrastructure, and staff capacity to implement the transaction value under the The Customs Department does not exercise ACV. Customs should develop a valuation full managerial control over field reference database. Full implementation of operations and lacks the human resource transaction value is a long term undertaking capacity to carry out its headquarters and a clear strategy and transition plan will responsibilities. Responsibility for be required. The forfait system used for administration of the Customs houses and high duty imports results in lower effective checkpoints in the 18 provinces, including rates, and does not address revenue evasion human resource management and budget through under-declaration of quantities. allocation including payment of staff While arguably a transparent approach, it is salaries, has been largely delegated to the a practice that is of questionable value and Provincial Governments by the Government one that should be phased out. The LCD of Laos. While improvements have been should consider special measures to ensure noted recently, the assessment, collection proper reporting and valuation of these and remittance of Customs revenue to the goods such as centralized clearance National Treasury have been problematic procedures, close monitoring by the Post with revenue being retained by the clearance Division of all transactions, provincial treasury authorities. Instances have been reported of provincial officials exceeding their authority by granting duty 8However, the revised Customs Law which exemptions and concessionary rates of duty came into effect in early 2006 contains and settling enforcement cases. The LCD provisions on GATT valuation. 80 maintaining up-to-date price lists based on c. Establishment of a post clearance audit information from the country of supply. function. The post clearance unit was established two years ago with IMF Progress in reform and performance technical assistance. Its staff of 13 is responsible for (i) the review of In spite of these limitations, the LCD has declarations, re-assessment of duty, and made real efforts to improve its capacity collection, and (ii) the preparation of a and performance and to establish a reference price system. Although all national Customs administration: declarations are, in principle, subject to post release review, in practice the unit only a. Implementation of the revised Customs checks specific sectors, such as automobiles, Law, which will provide a sound basis for construction material, and electrical modernization. The previous Customs Law equipment.9 7745 reviews took place in did not provide a sound legal basis for the 2003/2004, and 46 cases were detected. modernization of the Customs administration and did not comply with d. Implementation of international WTO requirements. Major deficiencies agreements. Customs has implemented the included limited powers of Customs ASEAN Harmonized Tariff Nomenclature officers, unclear rights and obligations of (AHTN), and is a signatory to the ASEAN traders, inadequate Customs valuation, Free Trade Agreement (AFTA) including origin, and appeal provisions, and limited implementation of the tariff reductions flexibility to adapt to new procedures under the Common Effective Preferential including automation. With technical Tariff (CEPT) scheme. Further, there are assistance from the IMF, the LCD has plans to implement ASEAN rules such as drafted a new customs law, which entered the Cargo Processing Model and the into force in early 2006. It establishes a ASEAN Single Window. modern flexible legislative base for the Under the provisions of the GMS department and will fully meet WTO Agreement on the Cross Border Transport of requirements and international standards People and Goods, the Government of Laos such as the WCO Kyoto Convention. has committed to streamlining border clearance procedures and to removing non- b. Implementation of an automated physical barriers to trade. A key initiative Customs database system (C-2000). The under the Agreement is the establishment of current system (C-2000) was developed mutual carrier rights that will enable locally with technical assistance under transport vehicles from GMS countries to UNDP project 96/005; it provides a basic operate throughout the Sub-Region. level of Customs transaction data capture, Currently, commercial vehicles arriving storage and reporting at some 21 sites. The from Thailand (and departing Laos) are not system's operational functionality is limited allowed as a general rule to proceed inland to declaration processing, daily revenue and all cargo must be transferred to reporting and statistical and management domestic vehicles. This transshipment reporting. Automated sites submit data to results in delays, loss of goods through the central server either by dial up modem, breakage and pilferage, and in additional or on floppy discs. Declaration data from costs to traders. The Transport Agreement non-automated sites is input to the system at provides for improved clearance processes headquarters. With assistance from the through such initiatives as Single Stop UNDP, some improvements to the system Inspection, Single Window Processing and are underway, including preparation of a improved cooperation and exchange of user manual, provision of staff training and stabilization of the system. 9Declarations can be reviewed for a period of three years after the initial import. 81 information between member make use of the system and continue to administrations. These initiatives are being maintain parallel manual records and pursued with the support and assistance of registers, reflecting a lack of understanding the Asian Development Bank. of, and confidence in, the system. The declaration form is not entirely aligned to e. Anti-corruption approach. Traders feel the UN Layout Key Single Administrative they have no choice but to pay in order to Document, making further development, have their documents processed and including the exchange of data with other shipments cleared, and avoid future countries, difficult. The LCD does not have retaliation. There are numerous allegations an ICT strategic plan, and therefore has no of inappropriate conduct on the part of staff clear sense of direction and priorities for in the checkpoints and provincial automation. Enhancements to the C-2000 government officials in terms of accepting system appear to be based more on under-declared and under-valued goods and expanding the technical capacities of the facilitating smuggling, aggravated by the system and on pursuing specific initiatives lack of headquarters management control without a well thought out strategy and plan, and the involvement of provincial and there is little ownership over the system, authorities in Customs operations. apart from a small dedicated technical team However, senior Customs managers admit that appears isolated from the rest of very frankly that Customs officers and Customs operations. The LCD is officers of other inspection agencies assess considering implementing direct trader input informal facilitation fees for normal procedures using a web-based system. clearance procedures, and try to build into While this may well be an appropriate each development activity an anti-corruption direction, before proceeding the Department approach. should first establish its ICT vision and strategy based on a careful analysis of its f. Institutional strengthening. The LCD requirements (both functional and has prepared an organizational strategy to technical), capacities, and clearly articulated introduce a national administration. The priorities. first stage is the strengthening of the Department's monitoring and control of The post audit function is insufficiently Customs offices through a program of field credible. At the present, the unit has monitoring visits by teams led by senior difficulties in obtaining declarations from departmental managers. Teams have the the provincial offices, and only two percent authority to provide direction to local staff of all declarations are selected for a post on proper procedures and to ensure release review, and half of these reviews end corrective action is taken. The teams are up in the detection of an irregularity, which required to provide a written report of their is very low. When an irregularity is visits to the Director General. The second suspected, Customs have further difficulty in stage entails implementation of a new obtaining additional information from the departmental organization structure in order importers, who often simply ignore such to increase the capacity of the Department to requests. The unit has no power to issue re- exercise direct managerial control of field assessment notices ­ which are the operations and to carry out essential prerogative of provincial directors ­ and the headquarters policy and program only result of a re-assessment is the management functions. collection of unpaid duty, thus further eroding the credibility of the unit. Remaining constraints The LCD does not have a comprehensive computer system. Customs houses do not 82 Strategy for the way forward organization is in place and staffed, implementation of the national organization The LCD needs to continue to strengthen its should occur, resulting in a unified national efforts to modernize and reform if it is to be administration providing consistent service in a position to meet WTO obligations and to facilitate trade and to ensure compliance. requirements. Even if WTO accession is not in the near future, the Department still needs c. Strengthening human resource: Limited to pursue an aggressive and comprehensive attention has been paid to date to the reform agenda to ensure the proper development of the Department's human collection of government revenue, to resources capacity and professionalism of facilitate trade and regional integration and staff in order to implement modern Customs to afford legitimate businesses protection practices consistently throughout the from unfair competition from smuggled or country. In order to implement successfully fraudulently entered goods. Recognizing the national customs administration and to that considerable progress has been made to meet the demands to be placed on the date in reform and modernization, and that department by WTO membership and donors have been and continue to actively regional commitments under the GMS and support and assist the Customs in their ASEAN, much greater priority will need to reform efforts, the Department should focus be given to developing the capacity of on the following priority objectives: departmental human resources. A comprehensive human resource plan is a. Legislation: The Government should required. The LCD needs to develop its give a very high priority to the internal training capacity including trainers implementation of the new Customs Law and a training centre (both of which are and supporting regulations. As the new Law being developed with the assistance of the entails a major departure from existing Government of France). The centre should policies and practices, including meeting deliver technical and management training WTO requirements, a comprehensive policy courses, as well as English language training and procedures manual will need to be (English being the official language of developed for use by Customs staff and the ASEAN). Competency based recruitment public. Extensive work will be required to and promotion policies and clear and develop the new regulations, including a transparent policies for delegation of detailed assessment of existing regulations, authority and accountability are required. writing of new or revised regulations, and in An integrity program needs to be developed implementation activities such as training for the new national Customs and public information. administration, including elements such as internal audit, a code of conduct (discipline b. Organization: The Government needs to code), internal "checks and balances", and continue to develop a national Customs reasonable compensation policies for administration. Initial efforts to improve the customs officials (salaries and bonuses) to control of field operations through the discourage inappropriate behavior, and to Monitoring and Control program and attract and retain higher qualified staff. restructuring and strengthening the Customs Department headquarters organization d. ICT: Significant improvements in trade should continue. A comprehensive human facilitation, revenue collection and internal resource development plan is needed to controls in the Customs Department can ensure the new organization has sufficient only be achieved with the implementation of numbers of qualified staff to direct the field an automated and comprehensive Customs operations and to carry out essential processing system. The C-2000 system headquarters policy planning and monitoring currently in use in the Department needs to functions. Once the headquarters be stabilized and strengthened as a matter of 83 priority to improve the quality and processes: Building on the work carried out timeliness of trade data, management reports under the GMS Cross Border Transport and support to operations before any Agreement, and past initiatives of the expansion takes place, as long as there is a Department to streamline procedures sufficient capacity within the Department, supported by technical assistance from the both in terms of IT personnel and full-time UNDP, IMF, Government of France and customs staff assigned to the project, which others, a major review of existing border is not the case at the moment. The clearance procedures should be undertaken Department therefore needs to develop a covering all government agencies. This comprehensive ICT strategy, based on a initiative should aim to eliminate redundant careful analysis of its requirements and and unnecessary procedures, integrate and capacities. Decisions on the best way streamline documentary requirements, and forward can then be made, to use the seek to make maximum use of ICT. considerable work that has been put into C- 2000 and turn it into a fully integrated g. Strengthening enforcement capacity in operating system. Another, cheaper, option, order to reduce smuggling and other illegal should there not be sufficient resources to activities. While no studies have been further develop C-2000, would be to carried out to assess the revenue loss integrate the existing computerized through smuggling and other Customs fraud, processes into an "off the shelf" system. all indications are that it is extensive. The Department needs to strengthen its anti- e. Preparation of a transition strategy for smuggling operations throughout the implementation of the WTO Valuation country, building on the successes of the Agreement: While Annex III, Paragraph 2 inspection division's anti-smuggling task to the Valuation Agreement provides a force approach in the major provinces.10 The transition period for developing countries, intelligence unit needs to be expanded and the use of minimum values will have to be provided with the training and tools needed phased out and replaced with the transaction and finally, a Customs fraud investigations value provisions of the ACV. The function needs to be established. Government of Laos should develop a proposal for a transitional period for Donor coordination application of the valuation provisions in order to protect the revenue, given the low Following is a brief summary of the donor rate of voluntary compliance by importers, activities and technical assistance being their lack of sound accounting systems and provided to or planned for the LCD: record keeping, and the limited capacity of the Department to administer transaction UNDP. Continued provision of a resident valuation provisions. This transition plan advisor for approximately four months should provide for the gradual introduction beginning in March 2005. Areas of of the provisions of the agreement, based on assistance include: preparation of a new a careful assessment of revenue risks, the reform project document; strengthening the levels of capacity within the customs C-2000 system and preparation of an ICT Department and the capacity of the trade to strategic plan; strengthening post clearance comply. Extensive technical assistance will be required in the planning for and implementation of the Valuation Agreement. 10Results of the anti-smuggling unit have reduced by 30 percent in 2004 (196 cases) f. Improved trade facilitation through compared to the previous year, largely, streamlining clearance procedures and according to Departmental sources, because rationalizing the involvement of other Customs were no longer able to hire and pay government agencies in the clearance informants. 84 audit; and implementation of the LCD reorganization. JICA. A JICA project formulation mission visited Laos in February-March 2005. While their proposals for TA are not final, the mission was advised it is considering assistance in the following areas: management of assembly factories (motorcycles); Customs transit procedures; compliance management of Duty Free Zones; and compliance management of garment factories (investment firms). Vietnamese Customs. There is no formal program establishing the extent and timing of assistance but the Customs Department advised that Vietnamese Customs have offered to assist in the following areas: (i) review of the Customs Law; and (ii) reorganization (a short mission in 2005 focusing on the VN experiences with the provincial authorities). France. The resident advisor responsible for both Customs and the Treasury (accounting) matters, with a major emphasis on the provision of training will be extended for another two year term in mid 2005. Areas of assistance include: (i) management courses in planning and decision making; (ii) automation training and familiarization (study tours); (iii) creation of a training center and a training program including Training of Trainers; (iv) assistance in developing an automation strategy; and (v) general policy advice. The extent of this technical assistance also illustrates the need for a closely concerted approach to modernization strategy and issues, if only to avoid overlaps, or even conflicting advice and developments. 85 Chapter 7: Addressing Sanitary and Phytosanitary Issues to Raise Competitiveness Laos has a high agricultural growth phytosanitary controls would do more bad potential. In its vicinity, there are 200 than good, especially in areas of low SPS million people in China, Vietnam and risks. SPS capacities (facilities and staff) for Thailand with rapidly growing incomes and managing food safety, animal health, and demand for products which Laos can plant health in cross border trade are weak produce. The main priorities are in the field making it more difficult to control and of potential and emerging formal exports of manage ongoing animal diseases--Foot and fruits and vegetables, coffee, perhaps some Mouth Disease and Avian Flu. With other fresh products, and possibly high increasing intra-regional trade and quality beef. The abundance of good soils agricultural diversification, new plant health and favorable climatic conditions in the hazards may be brought into the country. highlands offer unique comparative The lack of capacities for phytosanitary advantage for producing temperate and off- management adds to uncertainties and risks season fruits and vegetables which are in for private investors. high demand. Demand for high quality beef in neighboring countries is rapidly Like other developing countries, Laos does increasing. However, the present capacities not have the financial means, technical skills for animal disease surveillance and and infrastructure needed to comply with quarantine of bovine animals are quality and safety requirements of overseas insufficient. markets. In many cases, the adoption of food safety procedures and practices entail The growing concern for food safety and huge up-front costs that cancel out the agricultural health has given rise to the competitive edge that developing countries prevalence of safety standards that has would otherwise have from low labor costs, markedly affected agricultural trade. seasonality, and niche product capabilities. Outbreaks of food-borne diseases and food The inability to meet SPS requirements scandals have added pressure for the stricter restricts access to markets opened up by enforcement of these sanitary and trade liberalization. If Laos is to maintain phytosanitary (SPS) requirements. In competitiveness and benefit from new general, the capacities for managing SPS by export opportunities, it will need to build up the government and the private sector fall the framework and/or infrastructure short of what is prudently needed for an necessary for adopting and enforcing safety agricultural sector which is diversifying and and quality regulations. Given the focusing on opening for international government's constrained budget and competition. Shortages are not merely lack limited human resources, expanding SPS of budget, skilled staff and laboratory capacities can only be achieved gradually equipment; they include legislation, and will require selectivity, and shared regulation, databases, monitoring, funding and shared implementation by the evaluation, negotiating skills, public private sector. awareness of law enforcement and, last but not least, private sector capacities. SPS Agriculture and food trade issues are further complicated by border problems. For several products, governance Agriculture contributes about 50 percent to problems in border procedures contribute to GDP and employs 80 percent of the people. the high formal and informal transaction The sector grew by 2.2 percent in 2003, costs that erode competitiveness. There is a lower than the previous year's 4 percent, yet risk that expanding sanitary and growth picked up again in 2004 with 3.5%. 86 It is largely subsistence farming--primarily and seed."3 The crops are transported to the rice and livestock. In 2000, 54 percent of urban centers to be sold in the marketplace. the sectoral GDP was from crops, 36 percent Limited quantities of tomatoes and other from livestock and fisheries, and 10 percent vegetables are exported to Thailand for from forestry.1 processing. Lao farmers have the competitive advantage of supplying fresh At present, only 6 percent of total land area vegetables to Thailand during Thailand's is used for agriculture and pasture: 3 percent off-season. The Thai merchants supply of land is cropped and another 3 percent is seed, fertilizers and chemicals. grassland or permanent pasture. Rice is Development of this sector requires greater grown on over 80 percent of the cultivated effort with regard to phytosanitary land. The other agricultural products procedures, pesticide management, include vegetables and fruits (pineapple, agricultural inputs and distribution bananas, orange), sweet potato, tobacco, infrastructure. coffee, cassava, maize, soybean, mungbean and groundnut. Livestock and poultry. Laos has 1.2 million heads of cattle and 1.1 million heads of The contribution of the agricultural sector buffalo. The pig population is about 1.65 to international trade is relatively small-- million heads (FAOSTAT 2004). Livestock accounting for 5 percent of exports and 17 is important in the smallholder farming percent of imports in 2002.2 The main systems of the country. Cattle and buffaloes agricultural exports include wood and wood provide assistance in rice production products, forest products, coffee, and tea; through the ploughing of fields, transport of the main imports include beverages and rice and organic fertilizer. Pigs, poultry and tobacco. Agricultural products with an goats generate household cash income. export potential include vegetables, Livestock production caters mainly to livestock and poultry, coffee, and wood domestic consumption. About 95 percent of products as well as non-timber forest the country's livestock are owned by products. smallholders. Demanding sanitary checks encourage informal border trade. Vegetables. Vegetables are widely grown in all provinces. Main crops are cucumbers, Coffee. About 20,000 tons of primary cabbage, cauliflower, eggplant, yardlong processed coffee is exported each year bean, tomato, Chinese cabbage and mustard. (UNIDO 2003). Europe is the main market The Boloven plateau produces vegetables for coffee. Export sales are monitored by and has fertile soil and good weather that the Lao Coffee Exporters Association. The allow for year-round production with following documents are required for relatively few inputs. Production, however, export: a Certificate of Quality with is still not sufficient for domestic demand. humidity content from the Ministry of Production problems range across "poor Industry and Handicraft (MIH), a seed quality, limited pest management, Phytosanitary Certificate from the Ministry inadequate water resources, high local labor of Agriculture and Forestry (MAF), and a costs, the low technical skills of farmers, Certificate of Origin from the Ministry of and the high costs of fertilizer, pesticides, Commerce. Due to a lack of qualified technical staff, however, these documents are often inaccurate, especially the Certificate of Quality. 1Lao Consulting Group. Laos SME Agribusiness Study for the Vientiane Plain. Mekong Private Sector Development Facility. August 2004 2 FAO Food and Agricultural Indicators, July 2004 3USDA FAS Grain Report LA4001 87 Wood products. Laos is estimated to have A common problem of the agro-processing the highest ratio of forest to total area in business is the reliability of supply of raw Asia. Wood products, including lumber, are material. Most Lao farmers are not used to one of the main export earners. In 2001, the commercial farming; they have difficulty reported GDP contribution of the forestry supplying the agreed quantity and quality of sector was about 3.2 percent. The harvest due to inadequate inputs and farming sustainability of the sector, however, is practices or lack of organization. At other endangered by current logging practices, the times, however, farmers take advantage of cutting of fuel wood and the practice of price differentials and sell to another buyer. shifting cultivation. Legislation has been The Lao Agro-Processing Association enacted in recent years to control the sector. attributed the failure of contract farming to the `below market' prices offered by buyers. Private sector involvement In other cases, the buyers fail to honor contracts leaving the farmers with unsold The formal private sector is small and at produce. early stages of development--most But there have been successful stories. The agribusiness companies are small-scale, Lao Agro Industry Factory is a joint venture employing 3-5 people.4 There is little between Thai and Lao investors. The production of manufactured food--less than company exports canned fruits and 0.1 percent of fruit and vegetable production vegetables (bamboo shoot, sugar palm nut, is processed. Processed food is mostly mango, garlic, baby corn and Chinese imported from Thailand since farm produce cabbage) to EU countries (United Kingdom, is either sold unprocessed in the domestic Belgium, Germany, Poland), Russia, and market or sold to Thailand, Vietnam, or Vietnam. Initially, they had problems with China where value is added (processed raw material supplies. Learning from their goods are then sold at much higher prices).5 experience they adopted a more proactive approach to management--they became The increasing demand from large foreign more involved in the production (supplying markets has provided an impetus to seeds, providing technology and quality agricultural diversification. A number of control), set minimum productivity levels entrepreneurs are taking advantage of this (e.g. yield/unit of land area) and pay farmers market potential. They implement HACCP higher prices. Farmers who cannot produce and traceability systems in their operations, the minimum yield were removed as and hire technical consultants to train and suppliers and replaced by more productive supervise farmers. One example is the farmers.7 export of potatoes off-season from Laos for processing in Thailand. Some companies Another example is the Lao Farmer invite foreign buyers to look at farm sites, Products. The company produces jam, fruit observe operations and check out products juice, candies, banana, processed bamboo, or they send sample products to potential rice, wine, liquor and beer (made of liquid buyers. In certain cases where there is trust, from sugar palm) with organic products buyers find products acceptable even bought from individual farmers. The raw without formal certifications.6 materials are semi-processed in the areas of origin then transported to the factory in Vientiane. Since the company is small-scale 4Lao Consulting Group 5USDA FAS Gain Report 2004. 6From interview with Dr. Sisaliao Svengsuksa, President Director General, Fonds Coopératif. He noted that organic certification is too expensive, yet buyers accept claim of organic 7Company has a registered capital of production. US$300,000 and employs 350 people. 88 and produces according to orders, it has no region. There is much uncontrolled and problem with the supply of raw materials.8 unregistered border trade so that pests and diseases in animals and agricultural SPS issues constraining market access products, unsafe food, harmful pesticides can very easily get into Laos. Neighboring Given the profile of its current agriculture countries along the border are exposed to the exports as well as new diseases that have same risks from the products transited emerged worldwide, Laos faces, or could be through Laos. Additionally, traditional facing, several SPS requirements from entry/exit points also often neglect countries to which it exports. quarantine requirements for animal quarantine. Phytosanitary certificate for coffee. In Laos, the issuance of phytosanitary International Standards for Phytosanitary certificates to export coffee is done upon Measures (ISPM) 15 for wood packaging. request of the exporter (or foreign importer). ISPM 15 presents the guidelines regulating The reported requirement for a wood packaging material primarily to phytosanitary certificate for the export of control the spread of timber pests through coffee requires some clarification. There the movement of timber packing and may be a phytosanitary concern for coffee dunnage in international trade. Many beans imported for sowing; fresh coffee countries have implemented procedures to beans have a risk of having fruit flies and accept ISPM compliant imports. The coffee rust disease, as well as coffee berry National Plant Protection Organization borer (Hypothenemus hampei); but there is (NPPO) of the exporting country is no such concern for dried, but unroasted responsible for ensuring systems are in place coffee beans for consumption. In the US, to meet the requirements of ISPM 15. The for example, dried, unroasted coffee beans currently approved measures for the are considered as sufficiently processed and, treatment of wood packaging materials are as such, are not likely to harbor injurious heat treatment and methyl bromide pests. fumigation. In Laos, no assessment of risks and implementation of measures have been Exporting countries issue certificates as a made yet. service to exporters to meet the requirements of the importing country. However, if the Avian influenza. On January 2004, avian exporting country charges a fee for each flu was confirmed in Laos. The control certificate issued, it may consider it a source measures used included stamping out, of income and issue certificates even when quarantine, movement control, active they are not required by the importing surveillance, a culling program9 and regional country. Also, some importers require a coordination through the FAO. Accurate certificate as a basis for extending a letter of surveillance and diagnosis are not readily credit. These are not legitimate reasons for available in many Asian countries. the issuance of phytosanitary certificates. Diagnosis is made more difficult by the similarity of the clinical symptoms to fowl Sanitary and phytosanitary risks from cholera and acute Newcastle disease informal border trade. Besides the local (diseases affecting poultry). Laos, trade between villages on both sides (Laos and any of the neighboring countries), there 9 is smuggling of goods from and to Laos government pledged K550 million destinations beyond the Southeast Asia (US$50,700) to acquire chickens for the state farms affected by the outbreak. The Ministry of Finance suggested that farmers be compensated 8 Both examples are from a study by Lao for 20% of poultry deaths and 30% of birds Consulting Group. culled (EIU Country Report 2004). 89 Cambodia, and Indonesia do not have in- Institutional and legal framework for SPS country capacity for confirmation of diagnosis of avian influenza (H5N1).10 The Food and Drug Administration (FDA) Commission was established in 1991.14 It is Foot and Mouth Disease (FMD). Laos is chaired by the Minister of Public Health and one of seven Southeast Asian countries includes member representatives from 7 where foot and mouth disease (FMD) is ministries. The Commission is responsible endemic.11 The occurrence of the disease for the management and control of both could be attributed to Laos being a major imported and domestically-produced food transit corridor of livestock trade from and drugs. The Food and Drug Department Vietnam to Thailand, from Cambodia to (FDD), under the Ministry of Public Health, Thailand (through the south of Laos), and carries out all activities of the Commission. from China to Thailand (through northwest Laos).12 Certain trading practices were also Responsibility for food safety along the considered to be a factor in the spread of supply chain is shared by different FMD--traders buying infected animals for Ministries.15 The Ministry of Agriculture lower prices and selling these in other areas and Forestry (MAF) is responsible for the for slaughter. The ideal solution of removing production activities--farm and post-harvest (or reducing) the threat at the source is often practices. The Ministry of Public Health, not feasible. Quarantine measures at the the Ministry of Industry and Handicraft and borders are deemed impractical in the region the Ministry of Commerce are the agencies given the scarce human and capital that oversee the processing, importation and resources to run the facilities.13 Moreover, exportation of agriculture and food products. the increased cost would push the traders A food safety program has been developed towards another route. Also, widespread with the support of all these ministries to vaccination will not only deplete the meager address food safety along food chain. resources of the smallholder farms but also may well be ineffective if authorities cannot The National Codex Committee16 members control the movement of livestock. are from the following ministries: Science, Technology and Environment Agency (STEA), Ministry of Commerce, Ministry of Agriculture and Forestry (MAF), Ministry of Industry and Handicraft, Ministry of Public Health (Food and Drug Department, Food 10ACIAR website. 11The other countries are Cambodia, Malaysia, Myanmar, the Philippines, Thailand and 14 The information on legislations and Vietnam. FMD is also endemic in China, another institutions was mainly obtained from a Laos border country. report "Country Overview on Food Safety" from 12Gleeson, L.J. 2002. "A Review of the Status of the FAO/WHO Regional Conference on Food Foot and Mouth Disease in South-East Asia and Safety for Asia and the Pacific, held in Approaches to Control and Eradication" OIE's Seremban, Malaysia, 24-27 May 2004. Scientific and Technical Review, Vol 21(3), pp. 15The division of responsibilities may not be 455-475. clear. With regard to the private sector, the Laos 13 According to information from ACIAR's Food Safety report specified the role of the website ­ Laos' Department of Livestock and private sector to be "following the regulations, Fisheries (DLF) had set up a four-tiered network rules and codes or practice related to food of veterinary workers ­ at village, district, safety." province and national levels ­ but the network is 16Laos has been a member of the Codex under-resourced, lacking skills and equipment. Alimentarius Commission since 1995 and the Thus, there is no detailed information available Codex contact person is the Director General of about the frequent outbreaks of diseases in the Food and Drug Department (FDD) of the buffalo, cattle, poultry and pigs. Ministry of Health (MOH). 90 and Drug Quality Control Center, and coordinate the line agencies including the Hygiene and Prevention Department). The private sector. committee is responsible for the various food safety standards17 and food safety SPS Enquiry Point. A major requirement to control issues. comply with the WTO's transparency provisions is the establishment of the Specific offices under the Ministry of enquiry point. The enquiry point is the Agriculture and Forestry have their single contact point to which enquiries respective responsibilities: regarding SPS and related issues can be · Plant Health. The Department of addressed. It is responsible for obtaining the Agriculture is the National Plant pertinent information from the relevant Protection Organization (NPPO)18 national bodies or agencies and relaying that for Laos. MAF has designated the information to the party making the inquiry. Plant Protection Center under the Laos has no SPS enquiry point yet, though it Department of Agriculture as the has been suggested to set one up within agency responsible for plant DISM. protection activity and for the collection and dissemination of In terms of legislation, information on plant protection and · The National Assembly enacted a related border controls. National Food Law in May 2004. · Animal Health. The National · The Ministry of Public Health, the Animal Health Centre under the Ministry of Industry and Handicraft Department of Livestock and and the Ministry of Commerce have Fisheries (MAF) is the office regulations on the importation and responsible for animal health exportation of food, safe processing activities in the country and related of food, bottled drinking water, food border controls. additives, inspection, and hygiene.20 · A draft of the veterinary law has Standardization, Metrology, Testing and been approved by the government Quality (SMTQ). The Department of and has subsequently been Intellectual Property, Standardization and submitted to the national assembly Metrology (DISM), under the STEA, is the for approval. government agency responsible for the · The Ministry of Agriculture and formulation of national standards and Forestry (MAF) has regulations on maintenance of national metrology livestock and pesticide management. standards.19 It acts as focal point to Under the regulation on management and usage of pesticide (issued in 1992, amended in 1998 17For food products for which no standards have and 2000), the import, sale and been set, the Codex standards are applied. transport and storage of pesticides 18Contracting parties to the International Plant are controlled through a registration Protection Convention (IPPC) designate an scheme. There are 46 active office to be the contact point regarding ingredients with 33 trade names that phytosanitary regulations and requirements. 19The Decree on the Management of Standards and Quality of Products (No. 85/PM) named the Science, Technology and Environment Agency (STEA) the central agency responsible for standardization activities. Based on interview 20The Laos Food Safety report, however, noted with Director Nheune Sisavad, Department of that most of these regulations require a review Intellectual Property, Standardization and and a revision. Moreover, more regulations on Metrology. other issues have to be drafted. 91 are permitted within Laos and 26 Plant health. In the negotiations for market active ingredients that are banned.21 access for agricultural commodities, Laos · The Department of Agriculture (in may have to undertake a pest risk analysis the MAF) is pushing for an existing (PRA)--a scientific analysis of the risk of regulation on plant quarantine to be moving pests with traded commodities. made into a national law. PRA requires information and knowledge of pests endemic to the country, a detailed Monitoring and enforcement record of the occurrence, distribution and prevalence of plant pests within the country. Animal health. Effective management of A major output of a recently completed animal health requires knowledge of the project of the New Zealand Agency for epidemiology of the diseases and movement International Development (NZAID) was of animals, which requires resources and the installation of a National Phytosanitary organization. Database (NPD) system, a management · A reporting system for disease information system that facilitates information was established from computerization of pest records and can be grassroots to central level. For the used to issue phytosanitary certificates. 10,044 villages in the country, there Plant health authorities can utilize the are 8,220 village veterinary workers system and initiate the creation of pest that can gather information.22 records. There are six plant quarantine · There are 10 international animal border posts, though these are lacking in check posts and 6 operational equipment and personnel. animal disease diagnostic laboratories that can perform simple Food safety. The capacity, both in human parasitological tests. Further, the resources and technical capacity, of the food National Animal Health Center safety agency determines the strength of the (NAHC) can perform food safety control system. microbiological diagnosis and · Food quality inspection is carried testing, except toxicological testing. out at the point of entry. The · In the Avian Flu outbreak, there was importer must declare and provide little facility to gather disease samples which may be analyzed in information. Also, the samples the laboratory. If quality does not were submitted to Vietnam and comply with the attached certificate, Thailand for analysis. Funding from entry is not allowed. FAO has helped to establish an · The Hygiene and Disease Avian Influenza diagnostic lab for Prevention Department of the disease surveillance and monitoring. Ministry of Health monitors and · A livestock project involving the maintains data on certain food-borne tagging of cattle, vaccination and diseases. issuance of certification was · The staff of the Food and Drug initiated. Out of an estimated 1.2 Department (FDD) is insufficient million heads of cattle, for the inspection and enforcement approximately 35% had been of food regulations. Moreover, the vaccinated and 10% tagged with a educational background of most of cost of 6000 Kip per head. the staff is on pharmacy. In the However, the project seems to be capacity plan of FDD for 2004- too costly and not effective. 2005, out of 135 personnel, 90 have an advanced degree in Pharmacy; 21 Lao Report in the Plant Protection Commission 2003. 22Laos Food and Feed Report 2004. 92 only 40 percent of the staff received usually obtained certification from Thai specific training on food.23 certifying bodies.25 · Due to their tight budget constraint, the FDD has analyzed less than 400 Laboratory capacity. food samples in 2000. · The Ministry of Health assumes · Food safety courses for producers responsibility for the control of are organized only once a year. processed food and water, including hygiene in food and bottled water Issuance of certificates. The issuance of processing plants and restaurants. certificates of quality for domestic food The two departments involved in products is the responsibility of the pertinent food safety are the Food and Drug departments--Department of Industry, Department and the Department of Department of Agriculture, Department of Hygiene and Disease Prevention. Livestock and Fishery. For imported foods, The Food and Drug Department, most sanitary and phytosanitary certificates together with its laboratory, the from exporter countries are accepted Food and Drug Quality Control (special attention is paid to insect pests and Centre, is responsible for analysis of diseases that could be a risk to crops in the domestic food and quality assurance country and in order to ensure national food of imported foods. The Food and security). Due to the country's limited Drug Quality Control Centre capacity to analyze food, the manufacturer's performs tests on food samples analysis is often accepted. For food submitted by food establishments exportation, the issuance of certificates of for the issuance of certification. The food analysis and quality assurance is the Department of Hygiene and Disease responsibility of the Food and Drug Prevention is responsible for safe Department and Food and Drug Quality food practices (in particular, Control Center of the Ministry of Health markets and street vendors) and the (MOH). The issuance of sanitary and monitoring of 18 diseases. The phytosanitary certificates24 for agricultural National Center for Laboratory and and animal products is the responsibility of Epidemiology provides laboratory the Department of Agriculture and the services and coordinates the disease Department of Livestock and Fisheries, both surveillance. of the Ministry of Agriculture. The quality · The laboratory of the Department of of food and agricultural products to be Livestock and Fishery does analyses exported has to comply with the of animal parasites and diseases and requirements of the importing countries. issues certificates on the sanitary With regard to organic production, the condition of meat products. Fish government still has no system for disease diagnosis on the other hand certification. Laos does not yet have a is being done by Namxuang certification body for quality assurance Aquaculture Development Center systems (ISO 9000, HACCP). Companies and Living Aquatic Resource Research Center. · The Agriculture Inputs Testing 23Since 1999, food safety curriculum has been laboratory of the Plant Protection added to medical science university and college Centre in Vientiane tests fertilizer of health and technology. and agricultural produce for heavy 24In an interview with a private company, it was metals, pesticide residues and mentioned that the phytosanitary certificate microbiology.26 These tests are for needed for the export of potatoes has to be requested 10-15 days before the export date, even though it is not based on any substantial 25UNIDO report 2004. data, tests or inspection. 26UNIDO report 2004. 93 the issuance of phytosanitary Laos can produce. The abundance of good certificates for exports (mainly rice, soils and favorable climatic conditions in the coffee and potatoes) at six border highlands offer unique comparative crossings to Vietnam, Thailand and advantage for producing temperate and off- China. season fruits and vegetables which are in · The Animal Feed laboratory (under high demand. Several of these production the MAF) collects and analyzes areas have already fairly good transport samples from the feed mills.27 links with main logistic centers in However, the quality assurance neighboring countries. There is also system is still hampered with the growing interest from foreign buyers to limited staff, inadequate equipment outsource agricultural produce from Laos and methods of analysis, and the for supplying food processing plants in oftentimes unavailable chemicals Thailand, Vietnam, and China. The potential and reagents. market for fruits and vegetables is not · The laboratories in Laos are not limited to processing plants; there is a internationally accredited. growing demand from fresh markets and Accreditation can be done by a third supermarkets for fresh product as well. country party. The option of creating a National Accreditation Adding value. A good business strategy is Body (NAB) in Laos may not be to increase value-added to agricultural appropriate or efficient given the products in Laos. Technology and market few laboratories, the absence of access can be provided by investors from certification bodies, and the neighboring countries who are already unavailability of highly skilled active in these fields. Some of these technical staff required.28 companies even have well-established supply chains to the top-end of the market in Potential areas for growth Europe and Japan. Growing market. Laos has a high Traditional crops. Expansion of cultivated agricultural growth potential. In its vicinity areas in the lowlands allows farmers to earn there are 200 million people in China, more income by expanding cultivation of Vietnam, and Thailand with rapidly growing traditional crops such as rice and maize. incomes and demand for products which These products have low requirements for SPS services. 27Control for the quality of animal feed is based High quality beef. Demand for high quality on the animal feed standard and formulation of beef in neighboring countries is rapidly the US National Research Council. Information increasing. Availability of large areas of from "Country Report on Food and Feed grassland in parts of Laos offers Production in Laos" from the FAO/OIE Regional opportunities for production of high quality Food and Feed Safety Workshop, 19-22 July 2004, Bangkok, Thailand. beef. With the use of improved breed, cold 28 Decree of the Prime Minister No. 85 on storage and meat processing facilities, Laos Management of Products and Goods allows the has good potential. The government and set-up of Certification Bodies within STEA as private sources interviewed in the USDA well as the set-up of a National Accreditation FAS Gain report are recommending the Body, however, due to the limited resources of livestock sector for possible investments DISM in particular the lack of testing facilities stressing the suitability of the terrain for this and skilled technical staff, Lao is currently production and the opportunities for both unable to do so. However DISM now assists backward (e.g. forage, animal and some factories to prepare for third party certified supplementary feed processing ISO 9000. technologies) and forward (e.g. slaughter 94 house, meat processing) integration and the neighboring countries and risk of illegal resulting multiplier effects on local import, control capacities in this area economies. However, the present capacities deserve assessment. Regulation, monitoring, for animal disease surveillance and promoting good agricultural practice and quarantine of bovine animals are enforcement of regulations will become insufficient, though better in urban than in important elements in promoting food safety rural areas. Easy and reliable market access and human health at home and in preventing would probably also require extensive restrictions of exports in foreign markets. negotiations with neighboring countries on disease surveillance, quarantine, and border Laos' capacities for managing food safety, procedures. The cost of necessary veterinary animal health and plant health in cross controls and investments for developing border trade are weak. Testing facilities and high quality beef exports are high. A trained staff are very limited. Certificates feasibility study is needed covering costs are issued without adequate databases, and benefits of public and private surveillance, testing and inspection and, to investments. some extent, perhaps without a necessity (not a buyer requirement). As for other Organic farming. The use of chemicals in trade regulatory services, there are agriculture is not very common in Laos. All governance problems in carrying out SPS pesticides are imported and not easily border controls. This weakness in border accessible or affordable for most farmers. control makes it more difficult to control This would make organic farming a possible and manage ongoing animal diseases--Foot niche market for Laos. However, because and Mouth Disease and Avian Flu. most farms are dispersed and remote, it is difficult to have an organic-certified To date, there are no urgent plant or pest production. The farmers cannot benefit hazards that require immediate attention. from the premium price for organic However, with increasing intra-regional products. trade and agricultural diversification, new plant health hazards may be brought into the What needs to be done? country from Thailand, Vietnam, and China, and trading partners may require new In general, the capacities for managing SPS control measures. The lack of capacities for by the government and the private sector fall phytosanitary management in Laos adds to short of what is prudently needed for uncertainties and risks for private investors. realizing the growth potential in agriculture through diversification and further opening The capacity for inspection and laboratory for international competition. Shortages are testing is lacking in human resources, not merely lack of budget, skilled staff and equipment and facilities. Laboratories are in laboratory equipment; they include better need of upgrade of equipment and supply of governance, legislation, regulation, chemicals and reagents to perform basic databases, monitoring, evaluation, methods of analysis and, more importantly, negotiating skills, and, last but not least, to satisfy accreditation requirements. private sector capacities. Appropriate scientific training of personnel is necessary to be able to perform tests and The needs for monitoring and control of analyses. A plan with priorities is needed. markets of agrochemicals deserve further assessment. To date, the use of Laos still has significant governance agrochemicals in Laos is limited. However, problems in border procedures. For several with further diversification of agriculture, products, reported formal and informal use of pesticides will increase. Given the transaction costs contribute a high share of widespread use of illegal pesticides in total cost in the supply chain and erode 95 competitiveness. Sanitary and phytosanitary Action Plan for SPS management. There is controls contribute to this. Therefore, there concern in government agencies about SPS is a risk that expanding sanitary and standards and a feeling that something phytosanitary controls will do more bad than should be done. In particular, the WTO good, especially in areas of low SPS risks accession process adds to the sense of and in situations where governance is poor. urgency. However, there is also some degree of apprehension based on a perceived The government of Laos is budget lack of direction on how to accomplish the constrained and has limited human WTO and SPS requirements. A number of resources. Expanding SPS capacities can officials have expressed the need for a only be achieved gradually and will require comprehensive discussion of SPS selectivity and shared funding as well as management that will: shared implementation by the private sector. · define basic capacities required to Selectivity has to be guided by assessments effectively manage food safety and of risks, costs, and benefits. In many cases, agricultural health in the context of part of the implementation and cost can be the Laos economy left to the private sector, while the · discuss factors that determine government can concentrate on core public priority--i.e. potential in the export roles and oversight of self-control measures market, infrastructure obstacles etc. by the private sector. Strengthening · discuss possible gaps, overlaps and industry associations, such as for coffee and duplication in functions and wood products, will be an important element activities that are not based on in promoting self-control by the private international good practice. sector. Moreover, there is clearly a need for a more Priority actions detailed assessment of the present SPS capacities to better identify needs and Given the economic context and priorities in capacity building. For this circumstances of Laos, the following areas purpose, the preparation of an action plan is may be considered as priorities: recommended. Such preparation will · Drafting of pertinent legislations and require information gathering and rationalization of existing regulations assessment on the following issues: · Creation of databases (e.g. collection of pest data for plant health) and Institutional responsibilities and improvement and update/maintenance of coordination. The division of areas of existing databases responsibilities among the various ministries · Setting up of an emergency response may require some further clarification. With system (FAO is supporting this process) regard to the issue concerning post-harvest · Human resource training and technical activities29 of agricultural products, the capacity (equipment and facilities) National Food Law defines food inspection required for the control of animal as "the examination of food, raw materials, diseases production, processing, packaging, service, · Creating public awareness on SPS storage, distribution, importation, requirements, safe food production and exportation and donation of food, including agricultural health the testing of the food productivity and food · Setting up an institutional coordination products commencing from the primary and collaboration mechanism to serve SPS requirements 29 Post-harvest activities in the fruit and vegetable sector can be broadly defined to include cleaning, sorting, grading, packing, transport and storage. 96 production to the processed products..." region. The sufficiency of available The food management and inspection databases and sustainability of their authorities are then defined to be the district, maintenance is still to be assessed. provincial and central levels of the Ministry of Public Health. The Ministry of Capacities to perform risk assessments on Agriculture and Forestry and its area of food safety, animal and plant health. Import jurisdiction are not mentioned. On another regulations and priorities for public issue, the Agriculture Inputs Testing spending need to be based on some form of laboratory of the Ministry of Agriculture and risk assessment. For exports of fruits, Forestry performs pesticide residue testing, vegetables and livestock products, approvals although this belongs more appropriately are usually necessary from the importing under food safety control which is the country. These are based on negotiations responsibility of the Ministry of Public with and risk assessments by the importing Health. One important issue for WTO country. For negotiation, risk assessment accession is policy coordination and capability can be an important attribute. establishing the Office of the SPS Enquiry Point. Capacities to do cost benefit analysis on options for public intervention on food Adequacy of the legal and regulatory safety, animal and plant health and to set framework. One of the primary requirements priorities. Considering the scarce resources to set up the SPS framework concerns the and the numerous capacities necessary to drafting of legislations and regulations. manage SPS requirements, it behooves the Priority areas include: government to do cost-benefit analysis in · Delineation of functions and considering the various options available in responsibilities among the various implementing SPS activities, whether it be Ministries controlling diseases, issuing certifications, · Import restrictions to protect against setting-up surveillance and monitoring human health hazards, pests and systems. In the area of animal health, the diseases MAF undertook an animal tagging project-- · Regulations to monitor and enforce cattle were vaccinated and tagged. Out of the import, production, sale and use about 1.2 million heads of cattle, the officers of pesticides and veterinary drugs. were able to tag only 10% at a cost of 6000 Kip per animal. Apparently, there is no Databases on food-borne diseases and pest clear benefit. More resources in general and disease databases on agricultural inspection, testing, quarantine and health issues. Databases are fundamental in certification should be prioritized for areas the management of food safety, animal and with international requirements and areas plant health. Pest Risk Analysis (PRA) that with high risk. Also, there are certain is usually a requirement for market access activities, specifically, the control of animal for fruits and vegetables makes use of data diseases, that are most efficiently carried out on pest incidence. Proper implementation of in cooperation with other countries in a disease control strategies such as zoning regional approach. requires adequate understanding of the sources of infection and disease pathways Capacities for managing health hazards, into the relevant area. Records of incidence animal diseases and plant pests, including of food borne diseases contribute to the rapid alert systems. A communication implementation of government health network is essential for the necessary early policies. The importance of databases is response to disease outbreaks. The recognized in the number of donor projects capacities of Lao PDR for managing health providing assistance in the establishment of hazards, animal diseases and plant pests, databases for Laos and other countries in the 97 including rapid alert systems, the Divisions of Standards and Quality communication networks, and emergency under DISM, STEA to provide certification plans are very limited. services for the quality assurance systems. A number of export markets extend their Technical and human resource capacities to requirements beyond HACCP to include the prepare policies, to monitor food safety and traceability of inputs. agricultural health, to perform tests for inspection, and to issue of certificates. The technical capacity for equipment and facilities (for inspection and laboratory analysis, and database maintenance) usually entails a substantial capital expense that is not readily present in developing countries. The numerous SPS activities require skills that are, in certain cases, not available in Laos, such as chemical and microbiology analysis and food technology. Awareness of food safety among stakeholders. Producers and processors do not understand the need for good practices in the production and processing of food. Also, there is no participation of the private sector in discussions on standard setting. Work programs carried out by the various services. The team has not been able to collect and assess actual work plans in the light of priorities and capacities. Some activities carried out may not be priorities. Private sector capacities. At least 15 exporting companies have to be visited with the aim to assess their SPS capacities and more general constraints to the private sector. Certain SPS activities can be facilitated with the help of industry associations. Farmers' cooperatives can facilitate dealings with either the government or with the investors- processors. Capacities for tracking and tracing and quality assurance. An increasingly important requirement for certain export markets is the implementation of quality assurance systems (such as ISO 9000 and HACCP) in the processing plants. This presents a huge difficulty for small-scale processors. Part of the UNIDO project is concerned with initiating activities to enable 98 Chapter 8: Business Environment and Institutional Framework for Trade and Investment Promoting the business or enterprise sector, environment in Laos. But significant and particularly private enterprise, is a pre improvements in each of these areas will requisite for Laos to be able to take require long term efforts--and considerably advantage of trade opportunities. But doing more financial resources--than those business in Laos is still difficult and costly, required to streamline the regulatory placing domestic producers at a processes. disadvantage--both in terms of competing with imports as well as being competitive to Where is the private sector? export. It is almost 20 years since Laos started its The problem of high cost of critical services, transition to a market oriented economy. In such as transport or telecommunications, is this time, however, there has been limited exacerbated by a cumbersome regulatory entrepreneurial response to the greater environment, at the national level as well as market freedoms. This "lack of supply at the provincial level. Adding to the response" is most noticeable in sectors magnitude of the challenge is a relatively requiring long term investments such as low level of entrepreneurial experience and manufacturing. In the entire country with a know how in Laos, which is an emerging population of 5.6 million, there are only a market economy trying to compete few hundred manufacturing businesses with regionally with its more developed and more than 10 employees (Table 1). The experienced neighbors. manufacturing sector continues to be overwhelmingly dominated by small or This chapter analyzes the business micro scaled enterprises. The relatively environment in Laos, with an emphasis on small number of medium sized enterprises the legal and regulatory environment for suggests that there are substantial constraints doing business in the country. The chapter to firm sized growth from small scale to details the business regulations and medium scale. Only 30 40 percent of total procedures that private entrepreneurs need manufacturing output and value added are to go through in order to do business, accounted for by medium and large sized including detailed information on the enterprises (with more than 10 employees) existing business start up, registration and with the balance being made up by micro licensing requirements, investment, and and small sized production units and the taxation. The focus on the legal and informal non monetized economy.1 regulatory environment is not because it is the only element of the business 1 environment that needs to be improved, but A GTZ study (1996) of small and medium enterprises, found that the average number of because amending the business regulations workers per firm was 1.9 (including the owner) (especially sub laws and/or legal documents among a population of 2,799 businesses visited. such as decrees and decisions) is arguably The domination of the micro sized firms was the "quickest" and "least cost" way to confirmed by the 1999 UNIDO survey of small achieve a large improvement in the business manufacturing establishments, which recorded a environment. Building institutional total of about 21,800 small manufacturing capacity, strengthening entrepreneurial skills establishments (less than 10 workers), with an and improving the physical infrastructure, average size of about 2 persons. Three quarters are equally important pieces of the jigsaw of these were micro grain mills. The output of puzzle to significantly improve the business the `other' approximately 5,450 micro sized manufacturing establishments was 2.5 times 99 Manufacturing activities are also narrowly 1. Constraints to PSD: Policy and Legal focused in four key sub sectors--food Framework for Business processing, wood and wood processing, textiles and garments, and construction Policy uncertainty materials--making the economy particularly vulnerable to a shock in one of these sub Lack of a clear and well communicated sectors. government policy towards the business sector creates an unpredictable operating Table 1. By far most firms are small scale environment, undermines business 2000 2001 confidence, and discourages investment. Large enterprises (more 95 116 Entrepreneurs cannot be expected to invest than 99 employees) in an environment where the "business Medium sized enterprise 512 542 (10 99) ground rules" may change without warning Small scale 20,962 23,651 or recourse, and in doing so, jeopardize the establishment (less than commercial viability and rationale of the 10 employees) original commercial decision to make the Source: CPI ­ National Statistical Center, Statistical investment. In unpredictable/risky Yearbook 2001. environments business activities are biased towards short term activities like trade, The limited level of foreign investment and against longer term productive investments. low numbers of domestic private firms are This is largely the case in Laos. signs of a difficult business environment (Figure 1). The question is why the business In Laos, there have been statements made in environment in Laos is so difficult, and what some broad scope documents (such as the specific high leverage actions are needed to NGPES) confirming government's support stimulate entrepreneurial activity and private for business development. However, such investment. statements are very general and not well communicated to the business sector. Policy Figure 1. FDI approval and implementation commitments towards promoting private FDI (mio $) sector development remain vague and are 600 typically not reflected in actions. Public approved 500 private dialogue, although improving, is 400 very limited. At the simplest level it is 300 difficult to get copies of business related laws, in part because the authorities have yet 200 implemente to compile a list of all related laws and d 100 regulations. Until very recently there was 0 almost no consultation with the private 2000-2001 2001-2002 2002-2003 2003- sector in the development of legislation or Source: Government Presentation at Business Forum administrative procedures affecting them, August 2004 and effectively no transparency in the decision making processes of the government, though the situation is improving. higher than the grain mills and employed an The combined impact of poor public private average of 2.8 persons. This survey also showed dialogue, unclear and poorly communicated that almost all of the establishments were operated as individual proprietorships, with only government policies, and a lack of a small fraction run either under cooperative or transparency in decision making processes, partnership basis, and none reported on share creates a business environment with a high capital basis. 100 Box 1. What are private investors saying? degree of policy uncertainty. Inconsistent and opaque government policies and Comments from local investors bureaucratic procedures continue to hamper the growth of business activity and promote On Government: (i) More transparency in the vested interests. Further compounding the Government's procedures is required to problem is the poor coordination of policies operate in an appropriate way. (ii) Better between the central and provincial trained Government officials to deal with authorities, with the effect that the practices private sector issues. (iii) Domestic market is at the provincial levels may differ from the too small to attract investments. GoL's central government explicit policy. policies should concentrate in promoting export oriented industries (iv) Long periods to set up a business (or to complete any kind On the positive side, the government has of transaction with the Government) (v) Lack taken some steps in recent years to move of coordination among different agencies. towards a more open and consultative policy approach with respect to the private sector. On the Financial System (i) Banks are not Two events in particular deserve to be lending following commercial criteria highlighted. The first is the recent decision (suggestions that loans are given on political to host regular and structured Private Sector grounds) hence the number of non Fora, to facilitate the exchange of views and performing loans in the system. (ii) Very concerns between the policy makers and expensive rates. business community. The first regular On the legal system (i) Laws are not being Forum was scheduled for February 2006.2 enforced consistently. Enforcement of The second event is the one day forum that existing laws, rather than creation of new was held in mid 2005 to consult with the ones, is the priority. (ii) Labour regulation private sector on the outline of the sixth 5 too strict, difficult to dismiss staff. (iii) year National Socio economic Development Corruption of officials in charge of law Plan (2006 10) currently under preparation. enforcement. This event represents a tremendous leap forward in the government's efforts to Comments from Foreign Investors dialogue with the private sector. Remarks (i) Lao accounting system not standardized: from local investors during this consultation two sets of books have to be kept for foreign are summarized in Box 1. companies. (ii) Fulfilling a company's tax duties takes up to 6 months per year. Highly Legal framework for Business incompetent GoL officials. Corruption on tax collection. (iii) Many potential foreign Much of the legislation governing business investors discouraged by the experience of activities was enacted in the early mid 1990s current investors. (iv) Most of the companies soon after the start of Laos' transition to a are still paying 35% profit tax (while the GoL market oriented economy, when the concept announced long time ago a reduction in this %) (v) Lack of training, low qualification of the Lao people is below the average worker 2 MPDF is acting as the Secretariat for the Fora in China or Vietnam. Vocational schools and has already started setting working groups have to be created: some factories are and gathering initial list of issues from undertaking this task privately for their own businesses in Vientiane Capital and the first employees. (vi) Financial system: most of working group meetings are expected to take the components of the banking sector are place from mid July, an Inter ministerial Team is unable to provide the private sector with being set up by the Government. In terms of lending on a commercial basis. (vii). geographical coverage, this year the focus will Garment industry is being neglected by the be on Vientiane Capital with 1 2 meetings of GoL even though 26% of the export revenues tourism working group in Luang Prabang. GTZ come from this sector. is planning to support some dialogue at provincial level 101 of a market economy was still not well effect of these outdated and relatively poorly understood by policy makers or legal crafted laws, the extensive regulatory drafters. Since then, capacity constraints in requirements, and limited capacity of the central government and the slow, top agencies, is a huge bureaucratic burden on heavy law making process in Laos, have firms in business which stifles business meant that only a few of these key laws have activity. It is therefore unsurprising, that in been updated to meet the needs of a modern the global context, Laos is consistently in market economy. the lowest decile across all of the World Bank's 2005 Doing Business Indicators. The laws are strongly "control oriented", i.e., designed to "control" business The key laws relevant for business activities activities, rather than to facilitate them. in Laos (in addition to the laws on taxation There are inconsistencies and overlaps and international trade) are: among the laws. The wording of laws is often vague, leaving too much room for The Business Law, 1994. The 1994 interpretation and uncertainty. For example, Business Law is a basic company act that the 1994 Business Law, instead of clearly covers the establishment and operation of stipulating which Ministries an entrepreneur firms of all ownership types. It covers four needs to obtain authorization from, and the types of enterprises: private, state owned, application procedures involved in setting collective, and joint venture. The Business up a business, it vaguely states that: (Article Law further defines two legal forms of 12): enterprises: sole trader enterprise and companies. In general the law is fairly "Persons having the intention to create board brush with vague provisions, although an enterprise shall present an application in some aspects it is very specific and thus for the creation and registration of such rigid (e.g. specifying the amount minimum enterprise to the commercial sector. paid in capital requirement). A new Application procedures for the creation "Enterprise Law", that was recently passed and registration of enterprise will be by the National Assembly (9 November separately determined by the relevant 2005) will replace the 1994 Business Law. sectors." The new law has been crafted with the input of international and regional experts and is This vagueness gives officials considerable expected to be a substantial improvement discretionary authority, and creates over the current Business Law. It has also opportunity for corruption. It also places the been prepared through a relatively entrepreneur in a vulnerable position of consultative approach including consultation having to "do the rounds" of several with the business sector. ministries and agencies to obtain approvals and being in the "ask grant" position. In The Industrial Processes Law (Factories many areas each Ministry/agency inserts its Law), 1999. According to the assessment of own clearance/authorization steps into the an ADB financed commercial lawyer regulatory processes the entrepreneurs have working for the government of Laos on the to satisfy, which adds both to the time revision of laws, the Industrial Processes delays and documentary requirements Law is a particularly archaic and entrepreneurs need to meet3. The combined problematic law for businesses. The 3 Take the case of an importer in Laos. As an documents for presentation to customs. The list importer of goods the entrepreneur is responsible of documents required include: (i) customs for the self assessment of the duty and tax declaration (ii) a cargo control or transport liabilities on all goods imported, her/his document (iii) a carrier advice note (iv) invoice authorized agent must prepare all necessary and (v) relevant permits. 102 Industrial Processes Law requires this "new" law is not up to the same manufacturing businesses to get standard as the Investment Law now in force approval/permission for all minor operating in Cambodia and (soon to be passed) in changes in their manufacturing production. Vietnam, let alone international best It is also unclear how the Industrial practices. FIAS notes, that while there has Processes Law should be implemented been some progress in the most recent because the implementing guidelines to legislation over previous versions4, the new support this law, which is already several Law still falls short in fundamental areas years old, have yet to be issued. including: Labor Law, 1999. This law provides (i) Investment Licenses: A less than protection of worker rights: for example, it transparent licensing approach based on clearly sets out the responsibilities of the loosely defined criteria which are to be employer and processes to be followed in spelt out in more detail in sub laws and dismissing a worker. decrees. Significantly, this licensing rather than registration approach leaves The Land Law, 2003. The amended Land far too much discretion with the Law of 2003 has expanded the nature and Government officials with not enough lease term of land use rights for individuals certainty for the investors. Investors can and firms, which has effectively made land often deal with risk but hate uncertainty; lease rights a fairly close proxy to private (ii) Investment Sectors: A reliance on a freehold ownership, within prescribed poorly defined "positive list" rather than parameters. For example, the Land Law adopting a "negative list" approach (2003) allows the lessee to transfer the land use right, to give the right to another person 4 or to dispose of the right to by sale, offer or Examples of where there has been some progress in the most recent legislation over exchange (article 57). But the Law also sets previous versions include: (i) Land Rights and limits on the nature of this right, depending Uses: the new Foreign Investment Law version on the party involved. Foreign invested is clearer and explicit (Article 12.4) on land firms can lease land for up to 50 years for an rights and uses than the previous Implementing agreed purpose. But if the firms' plans Decree (Article 23.2 and Article 25) (ii) change (or their business involves sub Intellectual Property Rights: a clearer and more leasing) the term for which they in turn can explicit (Article 12.7) recognition of protection lease out their land is determined on the in the new Law; (iii) Length of Investment Term basis of the feature, size and conditions of for Foreign Investment: extended to a maximum the activities, but in any case can not exceed of 50 years (Article 11) in new Law from 15 three years. From a business perspective, years (Article 17.1) in the old Implementing especially for foreign invested firms, the Decree; and (iv) More timely screening: within land market still imposes many the limitations of the screening approach for authorization/ approval steps, and leads to foreign investment applications, the new law significant discretionary power of officials. (Article 20) requires a more rapid (Article 26 of For example, these firms need to first get old Law) response in terms of the number of State approval before they can use their days to respond to applications. fixed assets on its land as collateral (article On the question of the Decentralization of 66) with local banks. Approvals, both the old Law (Article 28) and Article 4.1(a) of the 27 Feb, 2003 "Decision" do provide for the possibility of a role for the Law on the Promotion of Foreign provincial authorities in approving promoted Investment, 2004. The current Foreign investment activities; this option is decided on a Investment Law was recently passed in case by case basis by the Committee for October 2004 and replaced its predecessor Investment Management, Foreign Cooperation that dated 1994. In the assessment of FIAS, and Domestic Investment (CIC). 103 which would provide a more logical environment, etc. The challenge will be to structure for defining the activities in actually make this Decree operational and which various categories of investors especially to finance the host of activities it can invest; and proposes. The sources of funds for the SME (iii)Dispute Resolution: procedures are too Promotion and Development Fund are the general -- however, the implementing national budget, international grants or decree does provide for recourse to loans, donations and service fees. This fund international arbitration. can be used to cover administrative and staff costs (including bonuses and training) of the The (revised) Law on the Promotion of Fund, financial support for SMEs and Domestic Investment, 2004. In contrast to promotional activities. the international trend of having a single piece of investment legislation for both Decree No. 15 on Trade Competition domestic and foreign firms, thereby placing (February 2004, effective in August 2004). them on a level legal footing, Laos has Prime Minister Decree No. 15 on trade maintained two separate regimes. The competition provides key principles to (revised) Law on the Promotion of Domestic regulate anti competitive practices and to Investment was passed in October 2004, at promote fair competition. The business the same time as the foreign investment law, environment in Laos is open to entry and and replaces the previous domestic competition by all entities. While there are investment law of 1994. Many of FIAS' about 150 state owned enterprises, including criticisms of the foreign investment law also some large joint ventures, they operate in apply to the domestic investment law, such competitive sectors, with the exception of as the less than transparent licensing some of the utilities. In general, SOEs do approach based on loosely defined criteria. not have preferential access to resources (This said, the Implementing Decree No. (such as commercial credit). Therefore, 300/PM which was approved by the Prime crowding out results more from the small Minister's Office in October 2005 does size of the market and competitive pressures provide some more details.) rather than from regulatory favoritism. Public sector entities are not required to SME Decree, 2004. The Decree on the purchase goods only from state firms. Promotion and Development of Small and Medium Sized Enterprises5 was passed in The Enterprise Law, 2005. This new law April, 2004. This Decree, sponsored by the which will eventually replace the 1994 Ministry of Industry and Handicraft (MIH), Business Law was crafted with the input of defines directions and policies and international and regional experts and establishes an SME Promotion and prepared through a relatively consultative Development Fund. The Decree, albeit approach including consultation with the brief, is very comprehensive in the scope of business sector. Like the old Business Law, activities to promote SMEs, covering access it covers the establishment and operation of to finance, training of entrepreneurs, setting firms of all ownership types. It stipulates up new regulatory and administration and defines four types of enterprises: private; state owned; joint venture (between 5 Small enterprise is defined as those having an government and domestic or foreign average number of employees not exceeding 19 investors), and partnership. Moreover, it also persons or total assets not exceeding 250 million defines three legal forms of enterprise: sole kip, or an annual turnover not exceeding 400 proprietorship, partnership, and companies. million kip. Medium sized enterprises are those Once implemented, the new law will be an having an average number of employees not improvement over the Business Law as it exceeding 99 persons or total assets not reduces ambiguities of procedures and exceeding 1,200 million kip, or an annual turnover not exceeding 1,000 million kip. shortens the timeframe of business 104 registration approval. This is achieved by Table 2. Doing Business indicators reducing the amount of documentation Indicator Laos Regional OECD required and doing away with stringent Average Average conditions such as minimum capital Number of 9 8 6 requirements. procedures Time (days) 198 51 25 Cost (% of 18.5 48.3 8.0 income per Regulations and Procedures to Start a capita) Business Min. capital (% 28.5 100.5 44.1 of income per It takes longer in Laos than any where else capita) in the world, except Haiti, to start up a Note: In Laos, there are 9 key administrative business (WB Doing Business Report). In procedures to complete starting with obtaining order to formally establish a business in application forms ­ followed by applying for a Laos entrepreneurs are required to go business license, investment license, enterprise registration certificate, tax licenses, asset through a multiplicity of regulatory registration, depositing capital registration processes; obtain several licenses/ money into a bank account and making a certificates and meet heavy documentary business sign, obtaining a company seal, and requirements. This is a long, time registering workers. consuming, and in parts highly opaque Source: Doing Business, 2004 process (the Law on Business is particularly vague on the sector/business license Contrary to current international practices, requirements). It provides room for Laos continues to require the submission of extensive official discretion and encourages a feasibility study/business plan for all firms to remain informal. The process businesses. In the Lao context, given the places extra costs on business set up in low capacity of the bureaucracy, it makes Laos, especially in terms of the time of even less sense for bureaucrats to assess managers and government officials. The business plans. The heavy regulatory challenges of launching a business in Laos burden encourages enterprise "informality', are shown below through four measures: rather than growth. Many businesses do not procedures required to establish a business, bother to apply for enterprise registration the associated time and costs, and the because it is such a long process. Instead minimum capital requirement. they pay a monthly fee to the district Entrepreneurs can expect to go through 9 authorities, and a monthly lump sum amount steps to launch a business, take over 198 to the tax collectors as "profit tax". Such days on average, at a cost equal to 18.5 businesses do not have a Tax License percent of gross national income (GNI) per because they do not have the business capita. (Note that there may have been registration, a necessary prerequisite. Thus some reductions in the time to work through in the cases of some types of businesses at all of these processes since the government least, such as small restaurants, there is little has set time limits for approval of incentive to formally register, and no investment projects.) Entrepreneurs must penalty for not being registered. deposit at least 28.5 percent of GNI per capita in a bank to obtain a business The start up procedures cover the period registration number, compared with the from when the entrepreneur decides to start regional average of 100.5 percent of GNI a business to the stage where (s)he has and OECD average of 44.1 percent of GNI fulfilled the necessary requirements to (Table 2). legally open for business. A firm in Laos requires at least four separate licenses/certificates before it can start operations: 105 agency, depending on the sector of activities Entrepreneur prepares a wide range of and/or the ownership of the proposed firm. documentation that will be required to obtain the necessary licenses and certificates, Domestic businesses under the 1994 including a business plan (or feasibility Business Law (No. 03/NA) are required to study). apply directly to the relevant sector agency/other concerned ministries to obtain Sectoral (Business) Approval a "business" license.7 The documentary Investment License requirements vary according to the specific regulations of the sector concerned, but at Certificate of Business Registration minimum include the (i) business plan (feasibility study), and (ii) professional Tax Registration Certificate certificates of owner and future staff of the business. According to the Law on Others: e.g., Company Seal, Company Business, the "relevant" sector agencies and Sign concerned government bodies have 60 days Company can start business (assuming no in order to review the business application need to acquire land/ build or import ­ all of and provide their comments to the Ministry which involve many more procedures) of Commerce.8 Once the new Enterprise Law is fully Sectoral or (business) approval. A implemented, sectoral or business sectoral or business approval or license is approvals/licenses will be required only for required by Article 16 of 1994 Business businesses to be set up in sectors that are Law. This provision is currently still a contained in a controlled list, where a concern as the new Enterprise Law has not "controlled" sector is defined as one that is yet been fully implemented. highly sensitive with respect to national The approval specifies exactly what type of security, social order, culture and tradition business the applicant can carry out. In an and environment. The exact content of the effort to facilitate new firm entry, most controlled list is yet to be specified. The transition economies have moved from a approval specifies exactly what type of licensing regime to a system based on a business the applicant can carry out. Under simple registration process, where all the new Enterprise Law, it will be possible business activities are allowed unless explicitly prohibited. In contrast, Laos is still effectively operating a licensing regime, 7The wording in the Business Law is very vague even though all firms must also receive a as to which agencies need to be involved. certificate of registration. Obtaining a Article 16 states "persons having the intention to "license" to operate is the first key step in create an enterprise shall present an application legally setting up a business, and a necessary for the creation and registration of such prerequisite for obtaining a business enterprise to the commercial sector. Application registration. Under a licensing regime the procedures for the creation and registration of would be entrepreneur prepares a business enterprise will be separately determined by the plan or feasibility study6 (together with relevant sectors". 8Article 16 of the Business Law specifies that all several other documentary requirements), relevant sectors and agencies review a business which is then reviewed by officials either in application for the establishment of a business the relevant sector or line and provide their comments to the Ministry of ministry/department or the investment Commerce within 60 days. The Ministry of Commerce has tried to shorten this period with the issuance of MoC instruction No. 750 August 6, 1996, which states that response, should be 6This requirement is in the yearly plan. provided in 30 days. 106 to register businesses directly at the relevant conditions are met will be granted the trade authority (ministerial, provincial or investment license, business registration, district authority depending on the size of and tax registration altogether by the DDFI. the planned business). Trade officials will For local investors who submit the respond within 10 business days if the sector application to the Internal Trade Department is not contained in the controlled list. If, on and comply with all conditions business the other hand, a business is listed in the registration and tax registration will be controlled list, the relevant sectors/agencies' granted by the Trade Department. While an approval is needed. The latter are required to implementing decree for a one stop shop has respond back to the trade authority within 10 been drafted, it has not been agreed to by business days, except where special government or passed by the National assessment is needed, e.g. in cases where Assembly. there are environmental concerns. In case an application is rejected, the agency Foreign investors apply for foreign should give reasons in writing. However, the investment licenses through the DDFI, thus documentary requirements may vary removing the need for foreigners to apply according to the specific regulations of the directly to the various sectoral ministries. sector concerned. Foreigners submit an application to investment authorities at the central or Investment License. The recently amended provincial level with copies of passport and Law on the Promotion of Domestic resume of the foreign investor; feasibility Investment, October 2004 (Article 12) study or business plan; background requires persons or juristic persons who information on the investor, or JV want to invest in any economic/social sector agreement (if applicable). DDFI then that relates to procurement's rights and coordinates with all relevant agencies and activities in investment sectors as stated in responds in writing to the foreigner investor Article 9 shall duly fill an application form within 15 45 working days, depending on made by the Committee for Planning and area of activities and whether a concession Investment (CPI) together with preparing a is requested. Foreign investors who qualify copy of the family register book, resume, will obtain a foreign investment license from feasibility study or business plan, and JV the DDFI. Within 90 days of receiving this agreement (in the case of a joint venture). investment license the business must operate After that, these documents have to be in accordance with the feasibility study or submitted to the Department for the business plan, if not the investment license Promotion and Management of Domestic may be revoked.9 and Foreign Investment (DDFI) under the CPI for its consideration. Apart from the Under the recently amended Foreign aforementioned sectors, the application Investment Law the DDFI can also organize should be submitted to the Internal Trade and provide the foreign investor with (i) an Department or Provincial Trade Offices Investment License (ii) a Business under the Ministry of Commerce. After Registration Certificate and (iii) a Tax receiving the required documents, DDFI will Registration Certificate at the same time, in respond to a subscriber within 30 working a one stop shop approach. days for activities related to procurement's rights. For other activities, the feedback shall not be given later than 20 working days. For activities relating to trading sectors, the Internal Trade Department or 9 A 90 day period is extremely short by Provincial Trade Offices will respond within international practices. Indeed most consider 12 20 working days. Local investors that months too inflexible, especially where submit the application to DDFI if all construction or land acquisition is involved. 107 Business Registration Certificate.10 Once passport sized; (v) Regulation confirmed by entrepreneurs have obtained their sectoral commerce authority, and (vi) Business and investment license, they apply for a feasibility study. If all documents are Business Registration Certificate to the complete as required, the registration Internal Trade Department, Ministry of process should be completed in 24 hours.12 Commerce (whether this is submitted to the However, once the new Enterprise Law will central, provincial level or district level have been fully implemented, less depends on the nature and scale of documentation will be required. business11). To be registered, domestic investors and enterprises in commerce, for Tax registration. After entrepreneurs have example, need to submit the following obtained their business registration, the documentation to either central or provincial "registration of revenues shall be made with level authorities as appropriate: (i) the [Tax] Department" (Article 18 of the Application form from the Ministry of Law of Business) and the firm will be issued Commerce, (ii) Curriculum Vitae, (iii) Asset a tax registration certificate. Foreign statement, (iv) Criminal record clearance investment companies must obtain this No. 3, copy of an ID card, 3 photos of registration within 90 days of receipt of the Foreign Investment License13. 10 Notification on Procedure for Business Other Licenses and Permits. In addition to Registration in Laos. Announcements No.0530/MOC, dated 10 May 2002 & the four above mentioned licenses/ No.0538/MOC, dated 13 May 2002. Ministry of certificates, firms are required to obtain Commerce, Domestic Trade Department some additional permits or fulfill other (Business Registration Division) hereby notifies certain regulatory processes. The number of the procedures for Business Registration and these "additional" permits required depends documents required for Enterprises. to some extent on the nature and size of the 11 The Ministry of Commerce (Internal Trade proposed business. The following list is by Department) handles the registration of (i) no means exhaustive. investment whose registered capital is more than or equal to $200.000. (ii) Enterprises engaged in import of vehicles, gas and export of wood 12 To be registered: Domestic investors products. (iii) State owned enterprises and state and enterprises in sectors other than commerce owned joint venture enterprises. The Trade need to submit the following documentation to Offices in the Provincial, Capital and special either central or provincial level authorities as zone level handle the registration of (i) investors appropriate (i) License from the concerned sector whose registered capital is less than $200,000. (ii) Registration form (iii) Curriculum Vitae (ii) Enterprises regulated by or that have dealings (CV) (iv) Asset statement (v) Criminal record with other main sectors such as: agriculture, clearance No 3, copy of ID card, 3 photos. industry and services. (iii) Commercial Whereas Foreign Investors must submit the enterprises engaged in export import outside the following documentation to either central or administration of the Ministry of Commerce. At provincial level authorities (i) Investment the district level small business enterprises License from the CPI (formerly FIMC) (ii) which operate outside the Ministry and Registration forms (iii) Copy of passport. (iv) 3 Provincial jurisdiction should register with the photos (v) Letter of authority from the manager district offices; these are: (i) Branches (ii) Small of company. (Note: Foreign investor can now shops. (iii) Others. Source: Notification on get this registration as part of the package when Procedure for Business Registration in Laos. applying for their Investment license). See Announcements No.0530/MOC, dated 10 May Minister of Finance's additional announcement 2002 & No.0538/MOC, dated 13 May 2002. No. 0341/MF, dated 21/02/2002 for fees Ministry of Commerce, Internal Trade involved. Department (Business Registration Division) 13Under the Foreign Investment Law October hereby notifies the procedures for Business 2004, the DPDF will obtain this tax registration Registration and documents required for as part of the overall licensing package service Enterprises. they provide. 108 · Company seal ­ all firms need to file an sealed by the related tax officials before application with the Ministry of Public its utilization. (Article 62 of the Tax Security ­ Police Department for a Law). company seal. · Asset registration. A newly registered · Company sign (required by Articles 19 of business is required to declare and the Law on Business). register its physical assets with officials · Registration of workers. (Social Security of the Department of Housing and Lands Decrees 207, Dec.1999, Article 48 Labor and the Ministry of Finance. The Law 1999)14. declaration of assets is minutely detailed, · Document registration. FDI companies including both movable and non must also register its legal documents movable assets of a business. MOF and pay document registration fees. appraises the value of the assets based on · Additional sector specific licenses: for the predetermined standardized values, example, garment exporters claim they and a fee of 0.01 percent of the total need six licenses and permits before they value is assessed on the business. can start operations. According to the MOF, the time to · Registration of accounting books complete the procedure ranges from 2 "Before utilization the accounting books days to 7 days, depending on the shall be registered with numbering, availability of government personnel to sealed and signed by the competent tax appraise the value of the assets and authority. (Article 61 of Tax Law) assess the fee to the complexity of some of the more tangible assets owned by the · Certification of the "The bills of payment receipt"15 (effectively a firm's invoice businesses. book) needs to be checked, certified and In addition to these above mentioned processes, entrepreneurs who want to set up 14Art. 48 of the Labor Law 1999 states that each manufacturing factories, involving the labor unit in the socio economic sectors should acquisition of land, construction of a factory, establish a social security fund... and workers and employer shall contribute to the social and the importation of capital goods security fund in accordance with regulations (equipment), will need to go through adopted by the Government. Employee considerably more procedures, which can be registration is covered in Social Security Decree expected to add at least 6 12 months to the 207, December 1999. processing time. 15Article 62 of the Tax Law requires those who deal in such business as production, trade and Construction Permit & Utilities: services, or have an independent job occupation and pay the profit tax on the system of · A permit is required for all new accounting holding as stated in Article 41 of the construction. The approval process present law as well as providing the sales of is time consuming, and requires goods and services, shall issue the bills of either a large MCTPC or an inter payment receipt to the buyers or clients served. departmental committee to consider The bill of payment receipt shall consist of the and approve the construction plans. following contents: i) Name and location of the Utilities are inadequate, especially shop selling goods, commodities or providing in the areas designated as Special services; ii) Name and address of the buyer/of Economic Zones (SEZs). The clients receiving goods or services; List of items process for seeking approval and sold or services provided; Price of goods without connection of utilities is costly and turnover tax or services charges divided on each separate rate; iii) Amount of the calculated time consuming, taking, for turnover tax divided on each separate rate; Total example, up to 10 12 months in price of goods or services including the turnover Savannakhet's two SEZs. tax. 109 Factory License: government consultation on the 5 Year · Entrepreneurs must submit an Socio Economic Development Plan; in application for approval to the particular they noted: Ministry of Industry and Handicraft · Fulfilling a company's tax duties (central, provincial or district level) takes up to 6 months per year: along with details of the factory · Government officials are highly layouts, master list of equipment, incompetent and tax collectors are electricity plan, and drainage and particularly corrupt waste water systems. The more · Most of the companies are still complex the manufacturing process, paying 35 percent profit tax, despite the longer it will take to obtain a the fact that the government Factory License. The approval announced a reduction in this rate a speed varies between provinces. long time ago. Trade and Tax Regulations and The tax system of Laos consists of direct tax Procedures to Operate a Business (profit tax, minimum profit tax, income tax, fees etc) and indirect tax (turnover tax and The regulatory burden does not just go away excise tax)17. Most businesses pay a monthly when a firm finally satisfies all the lump sum for taxes, as well as the annual necessary requirements to start up a tax in quarterly installments (Article 48 of business. Indeed meeting bureaucratic the Tax Law "those who pay the profit tax requirements is a part of firm's daily life in Laos. There are many repetitive regulatory 17Indirect taxes: (i) Turnover tax is collected requirements a "standard" firm must meet from imports, sales of goods and general doing the course of a year. Some of these services. (ii) Excise tax is imposed on some are quarterly, semi annual, or annual products imported or manufactured by domestic requirements. If a firm is dynamic, that is, it producers for sale inside the country, considered luxury consumer goods such as cosmetics, grows, expands its scope of activities or alcohol, soft drinks, etc. Direct taxes: (i) Profit product range, opens new branches, tax includes business profit tax and profit tax increases its capital or asset stock, or incurs from self employed activities. It is paid annually any other "changes", this firm would be based on the total profit or income obtained required to meet several additional within the year (ii) Income tax includes salary, regulatory requirements16. wages, interest from loans, rental incomes, income on dividends, royalties, income from Tax requirements. Feedback from movable and immovable property, (iii) entrepreneurs suggests that their interaction Minimum profit tax is a "minimum duty" of with the tax officials is the most problematic anyone who operates a business in Laos (domestic and foreign) whose income falls below of all bureaucratic process. Tax related the threshold for payment of normal income tax., issues were among the main concerns raised Fees/charges are those collected from the by entrepreneurs during the recent issuance of the tax registration license, road tax, river transport fees, border entry and exit fees, 16 For example, to expand existing business etc. Source: Presentation by Mr. Daovala activities (e.g. additional factories, production Phommala, Assistant to Director General, lines, or branch offices), the entrepreneur must Ministry of Finance Laos in Tokyo, October, submit a new business plan and financial forecast 2004. The Tax Department in Laos consists of a to the MOC and MOF for approval and pay the Head Quarters, 18 Provincial Tax Offices and a additional license fees to the concerned number of District Tax Units in each province departments. From the interviews with the and at the village level a grass roots tax entrepreneurs, it is unclear how long the process collection administration. The Province Tax takes, but estimates range from 2 weeks in offices administer the large and medium sized Savannakhet to several months in Vientiane taxpayers and the district offices administer the Capital and Udomxay. small tax payers, and villagers ­ the very small. 110 according to the extended or ordinary Firms complain that the approach used to accounting system shall pay, the annual impose taxes is arbitrary and that unfair profit tax (each phase shall include three practices are used to determine the amount months) based on the profit of the previous of the different taxes. The tax amount paid year or the estimated profit of the fiscal is reportedly more of a result of the accounting year). On an annual basis, firms negotiation between the firm and the tax need to (i) submit a financial report to the officials. Firms also report that as a relevant authorities, to be audited by the standard practice, tax officials do not accept State Audit Authority or an independent the profit figures in the business's accounts audit company established in Laos18; (ii) pay and negotiations take place to determine the Minimum Tax, annually based on the annual final payments. In these negotiations the business income or the total annual income entrepreneur is in a vulnerable position of the preceding year (at the rate stated in because if he does not accept the "negotiated Article No. 55 of the Tax Law); and (iii) amount" he risks non renewal of his license. facilitate an audit by tax department.19 Domestic businesses complain about the penalties regularly imposed at the end of the The tax system involves a relatively year by tax authorities, claiming that either complicated web of advance payments and no concrete reasons are given or they are refunds, which seems to be more designed groundless. Again, negotiations will take towards generating over payments than place and the firm finally has to pay a fee, making it easy for firms to meet their tax officially or unofficially. obligations. For example, importers, or producers who operate sales or services Further complicating the businessman's inside the country and have paid the initial frustration with the tax system is the fact tax (at customs checkpoints) shall have the that apparently the Lao Accounting System right to get the deduction of initially paid is not compatible with the Lao Tax System. turnover tax from a monthly tax amount due Both systems produce different profit to payment. If the amount of the initial tax figures, because deductions that are allowed paid exceeds the monthly tax volume, the under the accounting systems are not difference shall be transferred to the next accepted in the tax systems.20 Foreign firms month deduction until its completion. Those in particular complain that because the Lao who are able to obtain the initial tax accounting system not standardized they deduction, shall have the tax registration have to keep two sets of books. with the tax authority and hold a legal accounting system as well as providing a Firms also report that in addition to the full set of tax payment certificates, such as national taxes, other taxes and duties are import documents on tax declaration (D10), being imposed by the village, district and tax payment receipts and invoices stating a provincial levels. For example, the village certain turnover tax amount. If firms do not reportedly has a production tax. The legal perfectly meet all the complex documentary bases of these additional taxes are unclear. requirements they will not be able to obtain the refund for the excess tax paid. Trade procedures. Firms that trade internationally need to submit an indicative 18Article 7.2 Law on Domestic Investment 2004. plan of imports and export volumes to trade 19The audit shall be made at least once a year, authorities (provincial trade offices) on an but if it is considered as necessary, the audit can annual basis. For example, at the beginning be made earlier. Article 75 of the Tax Law of each year garment exporters have to requires the tax agency to give 10 days warning, in writing, of a tax inspection "to let them prepare all necessary accounting documents and 20For example, interest paid for loans from select an accounting consultant to assist in the shareholders is a deductible cost in the explanations during the audit." Accounting system but not in the Tax system. 111 estimate the volume and the kinds of fabrics notice. Assuming that they are not, they intended to import and the volume of next the exporter needs to: garments for exports. If they later exceed · Obtain Export Permission. The this volume because of more orders than exporter needs export permission for expected, it reportedly takes at least 14 days every export transaction he makes to get the required approval for an increase from the provincial trade offices. On in quota. the application form the exporter must include exporters name, the port of Beyond these specific requirements, the lading, settlement method, and period Business Law provides opportunity for of validity, as well as specifications of considerable government intervention, the export items. especially with respect to businesses · Export Inspection of designated wishing to operate in the following sectors: export items prior to shipment. "food, medicines, petroleum, water supply, Export inspection is not required for telecommunications, wood and wood all commodities but pertains only to products, mining and minerals, chemical those items designated by the substances, alcohol and cigarettes, which are government, e.g. textiles and subject to "close control by the State" garments. (Article 13 of the Business Law and Prime · Customs Clearance. The exporter Minister Decree on Export Import must deposit the export commodities Management, no 205/PM, dated 11 October in a bonded area before submitting 2001). documents to the head of the customs house for clearance. The customs The export of goods from Laos requires a clearance house inspects export series of relatively time-consuming commodities against invoices and procedures. The process includes steps export permits. If all is found to be in such as the conclusion of an export contract, order, the customs house issues an the securing of export permission, customs export declaration for customs clearance and shipment, and the collection clearance (Box 2 gives the example of of payments. The following provides an garments). outline of the export procedures, using a Letter of Credit (probably the most typical The importation of goods is also a time- case). consuming process.22 The procedures range across the conclusion of import contracts23, Key procedures for exports using the L/C the securing of import permissions, customs method to export garments and textiles21. 22Source: Website of the Export Promotion · Official confirmation that items are Division of the Lao National Chamber of not on the restricted export list. Commerce and Industry. Firstly, entrepreneurs need a http://www.lncci.laotel.com "recommendation from an authority 23An import contract is included when an offer assigned" to determine whether the based on a written agreement or a contract export items (listed on the L/C of the between a Lao trading agent and a foreign importer) are included on the list of supplier is received, or an offer issued overseas products restricted from export under from a foreign exporter is accepted, administered according to the Foreign Exchange Regulations, the government's export import the Custom Law and with special reference to the Export & Import Regulations issued by the Ministry of Commerce. All items can be freely 21 Source: Website of the Export Promotion imported unless they are specifically controlled Division of the Lao National Chamber of or prohibited goods. Commerce and Industry. 112 clearance and payments for imports. bonded area. After doing so, the Imported goods legally enter into Laos when import procedures are complete. shipments have arrived at the port of entry, estimated duties have been paid, and Box 2. Exporting Garments from Vientiane. delivery of the goods has been approved by Garment exporters from Vientiane Capital the customs house concerned. The key complain that the numerous rules and regulations regulatory steps are as follows: associated with the export of garments from Laos · Obtain an import license from the hinder their efficient business operations. There provincial trade offices where the are currently 59 garment exporters in the capital. These exporters are particularly critical of the importer is situated. (The Ministry of export inspections and clearance progress. Commerce delegates its authority to According to garment exporters, the practice is issue license to the provincial trade that representatives from the Department of offices). An import license remains Customs and a representative of Economic valid for, in principle, three months. Police need to be presented to inspect, monitor Payment for imports, as well as and count the loading of a truck with cartons for customs clearance of imported goods, export. Only 15 policemen are available in should be completed within the term Vientiane Capital for this process and difficulties of the import permission. (See arise because of the lack of officials available. Chapter 2 on Trade Policy). Moreover, as the police are not motorized, the exporter needs to "pick up" the official. When · Establish the Letter of Credit (L/C) the checking/loading process is complete the exactly in accordance with the truck is sealed by the Economic Police and importing permit. The party transported to the border. At the border ­ 20 km receiving import permission must away, the seal is reopened and the shipment is establish an L/C through a foreign re checked by the customs and sealed again. exchange bank within the effective Then the shipment crosses the border. At the period. When arranging the L/C, the other side the seal is broken again and checked same information as noted on the by the Thai customs officials. So over a distance import authorization form must be of about 20 kilometers an export shipment has used. The amount of the L/C should been checked and sealed three times by different officials. not exceed the authorized amount, and it must be expressed in the same currency specified in the import In practice the complexity and time that authorization form. firms need to spend to satisfy the import · Customs Clearance. The importer procedures depends, to some extent, on the unloads the imported freight and products being imported. For example a places it in a bonded area house. The domestic factory owner located in the customs clearance report can only be Vientiane Capital requiring one shipment of prepared by a consignee (importer). imported chemicals each month for the Upon receipt of the import, the manufacturing of his finished goods for customs house inspector will verify exports: At the beginning of each year he that the contents of the imported provides an estimate of the amount of merchandise correspond with that import volume to the Ministry of described in the import authorization Commerce. The procedure for the approval form and confirm that the of monthly imports then takes him two documentation is in order. The tariff months to obtain, and requires him to apply on the merchandise is then calculated for approval at three ministries (i) Ministry and levied, and an import approval is of Defense (ii) Ministry of Heath and (iii) presented to the person reporting the Ministry of Communication Transport Post import. This person may remove the and Construction (MCTPC). imported merchandise from the 113 Capacity and Institutional Constraints each of the six provinces reviewed24 a separate Business License application is Capacity constraints are numerous, required by each ministerial department, especially at the provincial level. The which involves a very time consuming practical experience of firms does not process for the entrepreneur (to obtain the always align with the specifications and applications, complete and file each time lines set out in the legislation. How application at the different departments). long it takes to complete the regulatory But the application submission requirement processes required to set up a firm will varies from submitting an individual depend greatly on the implementation effort application at the concerned provincial by the provincial authorities. offices in Champassak, Khammouane, Luang Prabang, Udomxay and Vientiane Laos is a highly decentralized country. This capital, to submitting all applications is particularly true for all authorizations and together at any one department in official interactions involving the private Savannakhet province, where the sector. Provincial governments, rather than department will in turn distribute the the central authorities, are responsible for applications and coordinate the approval processing/authorizing firm registrations and process. Champassak, Luang Prabang, and investment licenses; for firm level Savannakhet do not impose any extra inspections; for allocating land use rights administrative processes before approving and a private firm's access to other the licenses. But in Udomxay an inspection resources. Except for some very large or of the business site is required. Vientiane politically sensitive business ventures, the capital requires in person interviews with various authorizations an entrepreneur needs several departments, often over many rounds to do business are provided at the provincial before the licenses are approved. In level or below. Khammouane an inspection of existing land (if a new business already owns the land The capacity, attitude, and workload of the rights) for agricultural activities is required. officials concerned varies by agency and Overall, the procedure was found to be the provincial location and significantly most streamlined and efficient in influences the time and "hassle factor" Savannakhet, followed by Champassak and involved for entrepreneurs going through Luang Prabang. While in Khammouane, these processes. The provinces located on Udomxay, and Vientiane capital, the key trade routes tend to be more "business procedure seemed lengthy and time savvy" and supportive. The officials in the consuming with many redundant parts less well connected provinces often lack a (Table 3). clear understanding of private sector activities and often, despite good intentions, Provincial capacity and attitude is the key tend to be obstructionist rather than factor determining the length of time and supportive to entrepreneurs. But the ease of dealing with this procedure. In a regulatory procedures in the country's pro business province, the government capital, Vientiane, were found to be the most combines the irrelevant or small processes to burdensome and time consuming, due to a expedite the completion of a procedure. rigid and hierarchical approach taken by Whereas in other provinces, the procedure capital city bureaucrats. took much longer than the requirements stipulated in the legislation, either (i) Provincial differences can be illustrated because extra administrative processes are through the example of obtaining a added to a procedure for "control" or "rent Business/Sector license (one of the many steps required to step up a business). In 24Champassak, Khammouane, Luang Prabang, Udomxay, Savannakhet, and Vientiane capital. 114 seeking" purposes, making it more considerable time to build this institutional cumbersome and time consuming, or (ii) capacity, as it involves the training of there is a lack of understanding of the need commercial lawyers, etc. Nevertheless, Laos to expedite the business start up and has made this process much more operational procedures in order to facilitate complicated than need to be, and certainly the growth of businesses and the private far too complicated given the capacity sector. constraints in the country, by inserting numerous procedures. Table 3. Reports of exporting firms highlighting provincial differences in the The 2004 Doing Business study assessed the handling of exporting procedures ease or difficulty of enforcing a simple Province Exporters' experience in contract, counting the number of procedures seeking approval for exports from the moment the plaintiff files a lawsuit Champassak · Export of coffee is handled with much less administrative procedures, no until actual payment. It found that in Laos, quantity check, a Certificate of Origin this involved 53 procedures and took 443 can be issued in Pakse, and only 13 days compared to the regional average of 27 approval stamps are needed. · Export of wood products are procedures and 316 days (which is still high inspected twice, in Pakse and then again by international standards). And the cost of at the border. In all 24 approval stamps enforcing the contract, (court and attorney are needed. Khammouane · A wood furniture exporter has to fees) is equivalent to 30 percent of the value obtain 19 stamps before a shipment can of the debt (Figure 2). cross the Mekong River to Thailand. Udomxay · An exporter of agricultural products (maize, job's tears) recalled each Figure 2. Enforcing contracts--where does shipment being inspected in Udomxay Laos stand regionally and globally and again at the border, and had to obtain at least 19 approval stamps 500 before the shipment leaves Laos. Lao PDR 450 Vientiane · An exporter of parquet floor and Regional Average 400 capital wood furniture had to obtain 27 OECD Average approval stamps from the various 350 departments before a shipment can 300 cross the Friendship Bridge to Thailand. 250 Savannakhet · As far as can be determined, all 200 exporters are subjected to only one 150 Inspection in the city (a distance of 2 100 km from the Provincial Administration 50 to the ferries), and 8 stamps are needed. 0 Source: interviews with entrepreneurs Number of procedures Time (days) Cost (% of debt) Institutional Constraints. As is normal for Source: Doing Business 2004 an economy in transition from a centrally Similarly, the process of registering property planned system to a market oriented is more complicated and time consuming economy, many of the institutions needed to than in most other countries (Table 4). The underpin a market economy have not yet Doing Business Report looked at the ease been established or are very new and require with which businesses can secure rights to strengthening. For example, Laos now has a property, by comparing the number of reasonably comprehensive set of business procedures necessary to transfer a property laws, albeit of mixed quality, but it lacks the title from the seller to the buyer. In the case institutional capacity to effectively enforce of Laos, this process was found to involve 9 these laws. procedures and take 135 days, compared to 4 procedures and 51 days average for the There is little effective recourse to the Court East Asia region. Again Laos is making system in Laos, or other formal alternatives itself relatively less competitive by inserting to resolve disputes between businesses, or to additional procedures, which in a country of enforce contracts. It will necessarily take 115 low capacity significantly add to the time it the bridges in the country can take the takes to meet these requirements and to the weight of a truck carrying 20ft containers frustration of businesses. (Table 5). Indicative information collected from freight forwarding companies shows Table 4. Registering property that Laos is effectively more expensive to Indicator Laos Regional OECD transport from than the comparative average average countries, although the costs for Laos have Number of 9 4 4 been brought down following the recent procedures transit agreement between Thailand and Time (days) 135 51 34 Laos (see Chapter 5). Cost (% of 1.1 4.3 4.9 property value) Table 5. Comparative transportation costs for Source: Doing Business 2004 a 20ft container, door to door, for general commercial cargo In several other areas important to business In US$ Bangkok Manila, Hambur Osaka L.A development and product diversification, the Thailand Philipp. g Japan USA Germany required institutions are not yet in existence From: in Laos. For example, the institutions Vientiane 935 1635 2625 1635 4135 necessary to ensure and certify that Laos necessary quality and standards are met both Beijing, 666 746 1737 506 2241 for domestic consumption but especially for China Hai Phong, 350 450 1550 700 2,900 exporting purposes are lacking in several Vietnam 450 2000 product areas where Laos could potentially 4,000 be highly competitive, such as the export of Source: These estimated costs are based on quotations from freight forwarding companies at the site of fresh meat products and traditional plant origin, in late May/early June 2003. medicines. Laos could have a comparative advantage in exporting meat products to its While it may not be surprising that rapidly growing markets, especially from the transportation costs from Laos are not southern, cattle raising regions of Laos. But competitive given its rugged terrain, at present its meat exports are only accepted landlocked status, and dependence on in a couple of limited markets, as they lack shipping through ports in third countries, the required quality and hygiene one would expect Laos to be more certification. competitive with respect to other costs of doing business. Based on a limited 2. Constraints to PSD: Costs of Doing comparison of labor, electricity, telephone Business and office rental costs in several East Asian countries, Laos does appear to have a slight Infrastructure for Business cost advantage in these areas. In general it has cheaper labor costs, and about average The principal constraints on production for for electricity and telecommunication costs exports are transportation costs and lack of (Table 6). However, these costs advantages information on export markets and prices. do not seem sufficient to outweigh the other Infrastructure, especially the road and bridge disadvantages, especially the regulatory transport links to the markets are burden and difficulty of dealing with underdeveloped. And transporting goods to government agencies and processes. markets is relatively expensive. Because of the high cost and unsuitable roads most goods shipped out of Laos are shipped unbundled in trucks (not containers) and are loaded into containers, usually in Thailand (see Chapter 5 on Logistics). Only a few of 116 Table 6. Comparative cost of Doing Business in Laos, 2002 Operating Costs Vientiane Hanoi HCMC Jakarta Bangkok Beijing Manila KL Singapore Laos Vietnam Vietnam Indonesia Thailand China Philippines Malaysia Monthly salary for 200 300 264.5 241.4 205 296 206 237 710 1282 engineers Monthly wages 50 70 (a) 97.5 117.5 108 163 120.5 150 208 462 for workers Monthly salary for 200 528.5 592.5 540 671 386.5 506 1518 2339 middle managers Office rent 15 20 21 21 17 10.13 37 7.49 16.29 45.77 (USD/m2/ month) Telephone cost 5.40 5.61 5.61 3.76 2.07 2.9 1.2 1.42 1 (3 minute call to Japan in $) Electricity cost 4 6 6 4 4 4 3.5 5 7 (Cent/Kwh) Source. Lao estimates ­ World Bank Office Vientiane. Other countries ­ JETRO compiled from information gathered from Japanese Chamber of Commerce, Local Governments 3. Constraints to PSD: Access and Cost and credit reporting systems, are highly of Key Inputs for Business. underdeveloped, and transactions remain heavily cash based. A very small proportion Access and Cost of Financing of the population has access to formal financial services, and SMEs have limited Business access to formal debt and capital access to finance. The legal and regulatory financing and financial services is very framework is improving but is not yet limited in Laos as a result of a highly conducive to the provision of adequate underdeveloped financial services sector, financial services. Microfinance is still in its including a weak banking system25, and infancy. absence of an equity/capital market. At present the financial sector in Laos To assess the private sector's access to comprises a few commercial banks (state financial services, the Doing Business owned banks, private domestic banks, joint Report looks at a number of indicators, from venture banks, and foreign bank's branches), the sharing of credit information made one agricultural promotion bank, micro available by public and/or private credit finance institutions, and one joint venture registries and the legal protection of creditor insurance company. Non bank financial rights. It is more expensive to create institutions, such as leasing companies, do collateral in Laos (Table 7); the collateral not exist. The size and reach of financial and bankruptcy laws are much less likely to markets is very limited and there are no facilitate lending, with the combined effect capital markets other than a primary market of making access to financial services in for treasury and central bank paper. Laos comparatively more difficult. Interest rate spreads are very high and Labor Issues: Skill and Regulation private sector credit (as a ratio to GDP) is very low, because the level of monetization The combined effect of a relatively less of the economy is low and the legal educated labor force (not much more than framework for secured lending remains 1/3 of the adult population are literate), a weak. The payment and clearance system, limited tradition of entrepreneurship and the prolonged war years, when Laos was 25 The credit provided to the economy is less effectively isolated, have taken its toll on the than 15% of GDP compared with an average for labor skills and productivity in Laos. the ASEAN countries that exceeds 100 percent. Eighty percent of the SMEs do not take out loans. 117 Table 7. Access to financial services--Laos compared to its neighbors East Asia & Pacific regional Cambodia Thailand Vietnam Laos average Cost to create collateral 2 0 1.1 2 3.8 (% of income per capita) Legal Rights Index[1] 5 4 5 4 2 Credit Inform. Index[2] 1 0 5 3 0 Public Credit Registry coverage (borrowers per 33 0 0 8 .. 1,000 adults) Private Bureau coverage 67 0 150 0 0 (borrowers per 1,000 adults) 1. Legal Rights Index measures the degree to which collateral and bankruptcy laws facilitate lending. 2. Credit Information Index measures rules affecting the scope, access, and quality of credit information. Source: Doing Business 2004 Increases in labor productivity will be Box 3. Hiring and Firing Workers important in raising the competitiveness of the Lao manufacturing sector. Similarly, The difficulties that employers in Laos face in concerted efforts to "train" and "expose" hiring and firing workers are shown below. Laos would be entrepreneurs to business Three indices measure how difficult it is to hire a new worker, how rigid the regulations are on practices and markets in other countries will working hours, and how difficult it is to dismiss be important in stimulating Laos' a redundant worker. Conditions covered by the entrepreneurial capacity. indices include: availability of part time and fixed term contracts, working time requirements, From a labor regulations perspective, the minimum wage laws, and minimum conditions labor market is relatively un restricted in of employment. Each index assigns values Laos albeit with some rigidity (see Box 3 between 0 and 100, with higher values and Figure 3). The state does not allocate representing more rigid regulations. The overall individuals to jobs. Salaries diverge across Rigidity of Employment Index is an average of the private and public sectors. The Labor the three indices. For Laos, the overall index is 50, compared with the regional average of 24.4 Law (1999) provides reasonable protection and OECD average of 34.4. Firing costs are for employees, but less flexibility for the calculated on the basis of the number of weeks employer, and thus creates some rigidity in worth of salary in severance, notification and the labor market. Article 25, for example, penalties that must be paid to dismiss a worker. stipulates that a worker may work a maximum of eight hours per day, and 48 hours per week. The Law also builds in Figure 3. Hiring and firing indicators additional state approval steps in many procedures rather than allowing these to be Firingcosts governed by the employment contracts. For (weeksof wages) example, if an employer wishes to terminate Rigidityof Employment Index OECDAverage the contract of a worker for misconduct after repeated warnings, the employer must first Dif f icultyof RegionalAverage FiringIndex notify the labor administration in the LaoPDR Rigidityof Hours respective jurisdiction at least five days in Index advance, and then wait a further 15 days for Dif f icultyof HiringIndex their response, before the contract can be terminated. 0 50 100 150 200 Source: Doing Business, 2004 118 Land For example, the Land Law (2003) gives the lessee the right to transfer the land use Land in Laos is under the ownership of the right/to give the right to use and dispose of national community as prescribed in Article the land/ to another person by sale, offer, or 17 of the Constitution of 1992 (amended in exchange (article 57). But the Law also sets 2003). The State is charged with the limits on the nature of this right, depending management of land in a central and on the party involved. uniform manner throughout the country, and with the allocation of land to individuals, Under the 2003 Law, foreign invested firms families and economic organizations for use, can lease land for up to 50 years for an lease or concession. The provincial agreed purpose. But if the firms' plans governments exercise these rights on behalf change (or their business involves sub of the state. They grant land rights for a pre leasing) the term for which they in turn can determined purpose in exchange for lease out their land is determined on the payment of an annual tax, and allow the basis of the feature, size and conditions of purchase and transfer of rights between the activities, but in any case can not exceed individuals for both personal and business three years. From a business perspective, reasons. especially for foreign invested firms, engaging with the land market still involves In practice across provinces, allocation of many authorization/approval steps, and land rights and tax rates are discretionary on leads to significant discretionary power of the part of the authorities. Although the officials. For example, an FDI firm needs to revised Land Law allows for longer periods, first get State approval before it can use its in practice, the range of land rights and fixed assets on its land as collateral (article payment method vary from as little as 5 66) with local banks. years in Vientiane Capital to perpetuity in Udomxay, while the other provinces grant 4. Recommendations to Facilitate PSD in 50 years, and in all provinces advance Laos payment of tax is required. For some businesses, the short term land rights create Businesses trying to become established or business uncertainty, potential risk, and are to operate in Laos are being smothered by a not attractive to larger businesses. huge regulatory burden. The laws pertaining to ongoing business activity in The advance payment of annual land tax is Laos involve relatively long winded an impediment to a start up business with procedures; various ministries and limited capital and cash flow. The time to provincial governments typically have complete the land registration also varies additional procedures through sub law legal between provinces, ranging from over a year documents (Decrees, Circulars, etc). The for acquiring new land rights from the combined effect is an enormous regulatory authorities of Vientiane Capital to 2 days for and documentary burden for firms to face, transferring land rights between two that absorbs much management time, and individuals in Savannakhet; it takes longer if reduces competitiveness. These regulatory more than one person holds the rights to a requirements also create room for particular land. substantial official discretion--giving too much arbitrary power to the civil servants-- The amended Land Law of 2003, has and thus create excessive scope for expanded the nature and lease term of the corruption. land use rights for individuals and firms, which has effectively made land lease rights The regulatory requirements placed on a fairly close proxy to private freehold businesses in Laos are simply too high. ownership, within prescribed parameters. They are too high compared to those faced 119 by firms in Vietnam, Thailand, and other almost all sectors). The current regional neighbors with whom Lao amendment of the Business Law enterprises are trying to compete. They are provides the perfect opportunity for this too high compared to the technical capacity (in the drafting of the new Enterprise of the civil servants in Laos, especially at Law). At minimum remove the review the provincial level, who lack the capability of business plan requirement for most to serve the private sector--for example to sectors. critically review business plans. They are b. In the few sectors where licensing is still too high for the capacity of the local absolutely necessary, implement without entrepreneur, who already faces competitive further delay the provision of the new handicaps in terms of poor infrastructure and Investment Laws that provide for a one less entrepreneurial experience. And finally stop shop service to obtain the necessary they are way too high for a country whose licenses, and especially limit the time main potential source of growth out of lesser allowed within this for the sectoral developed economy status is through ministry to review a business plan. facilitating rapid private sector development. c. Either remove the need for firms to obtain a company seal or allow private The recommendations of this paper focus on suppliers to make seals. This would the legal and regulatory environment not remove the monopoly of the Ministry of because they are the only element of the Public Security and the extensive delays business environment that needs to be that are incurred as a result. improved, but because amending the 2. Repeal the Industrial Processes Law, or at business regulations, especially sub law minimum review the implementing decree. legal documents such as decrees and 3. Revamp the tax system and decisions, is arguably the "quickest" and administration, minimizing the opportunity "least cost" way to achieve a large for negotiation between firms and tax improvement in the business environment. officials and simplifying the reporting Building institutional capacity, requirements for entrepreneurs to meet their strengthening entrepreneurial skills and tax obligations, and effectively implement improving the physical infrastructure, are the "promised" tax rates. equally important pieces of the jigsaw puzzle to significantly improve the business A joint ADB/WB Investment Climate environment in Laos. But significant Assessment is currently being undertaken improvements in each of these areas will for Laos which will yield further insights. require long term efforts, and considerably more financial resources, than those required to streamline the regulatory processes. Key regulatory reforms that should be instituted as a priority include: 1. Substantially simplify the business start up process: a. Move away from a business licensing to a "proper26" registration system (for 26By "proper" we mean an approach where a registration system replaces a business licensing system ­ as is the trend globally, for all but very sensitive sectors. However, in the Lao case, while they have adopted ­ or rather added "business registration" to the process, they have not removed the "licensing requirements", thus registration system to facilitate firms' entry in all undermining the whole purpose of moving to a but a few specified restricted sectors. 120 Chapter 9: Raising Export Competitiveness: A Vision from Within The government of Laos is seeking to boost verifying and further detailing the exports, increase foreign exchange earnings, opportunities and recommended generate sustainable employment actions to raise the export opportunities and improve standards of competitiveness of key sectors. living. The government, in partnership with 2. Design action matrices for 3 key international donors, has undertaken a export sectors (tourism, light number of measures to gain market access manufacturing, and agriculture). and to increase its competitiveness in the The action matrices outline the global market economy. The goal is for practical initiatives that public exports to grow quickly and significantly in sector, commercial leaders, and the coming years. international donors can undertake to boost exports in each industry The effort to help boost exports comes at a 3. Test the feasibility and willingness time of rapid change in the global economy. of the government and the The apparel sector will undergo radical commercial sector leaders to change as the former MFA quota regime implement practical strategies for ended in January 2005 as part of integration raising the competitiveness of Laos. into WTO trade agreements. China's continued growth is altering trade patterns In doing this, the initiative complemented globally with major implications and work being done under the International opportunities for South East Asia. Trade Centre's National Export Strategy Neighboring countries, such as Thailand and Design project with the Ministry of Vietnam, have been highly successful in a Commerce. number of export industries and tourism. Laos may be able to exploit opportunities Defining competitiveness offered by these neighboring countries to take advantage of their existing trade Competitiveness is not to be confused with networks, infrastructure and experience. natural resource abundance, cheap labor or continued devaluation of the currency. Across the key industry clusters in Laos, Competitiveness based on cheap labor is not there is keen interest on the part of local a formula for boosting prosperity in the entrepreneurs and exporters in learning long-run, especially when relative about international markets, taking productivity is taken into account versus advantage of new trading opportunities and neighboring countries, some of which also cooperating with the government to help have relatively cheap labor on a build exports. There is also great potential productivity-adjusted basis. for narrowing the gap in export growth rates with China, Vietnam, and Thailand in Nor should competitiveness be confused coming years. In an effort to support the with export growth rates or foreign government and key industry clusters in the exchange generation based on mineral commercial sector to raise the wealth or hydroelectric power. While these competitiveness of exports, this initiative will be important generators of government sought to: revenues, they will not create large numbers 1. Focus and align public sector and of investment and innovation driven jobs. commercial leaders around the most Unless the revenues generated from these important strategic initiatives by activities are invested in human capacity and 121 in facilitating (but not subsidizing) the The model illustrates how a country's emergence of competitive industry clusters, potential for competitiveness, and long-run the benefits may not reach the average economic growth is created by a sound person. macroeconomic, political, legal and social context, and a continuous drive to improve Competitiveness can be defined as the microeconomic environment, foster the sustainable increases in productivity sophistication of local companies, and resulting in improved incomes for the increase local competition. average citizen. Competitiveness can also be defined as the ability of Lao products and The model also illustrates how Laos' future services to meet the test of the market place economic growth track will be determined without protection or subsidies in ways that by its ability to support: boost the average income of people in Laos. 1. Sector-specific growth, driven by local companies that are successful The government has articulated a goal of 7 in raising the sophistication of their percent growth with equity in GDP/capital operations and strategies and per annum on a sustainable basis. The key increasing their competitiveness question underlying this goal is how this 2. Improvements in the business growth will be achieved and what should be environment and release of cross- the priority strategies and actions for public cutting, binding constraints to and commercial sector leaders in Laos in growth. achieving this goal? This study focuses specifically on industry The competitiveness framework used in this cluster-specific growth and the underlying study for analyzing Laos' growth prospects microeconomic determinants of is Michael Porter's determinants of competitiveness for each sector. To competitiveness and the Competitiveness understand the current state of Laos' Diamond. His model provides a useful competitiveness in agriculture, light framework for organizing the many manufacturing and tourism, this study uses determinants of a country's competitiveness the Competitiveness Diamond, often and economic growth potential (Figure 1). referred to as the Porter Diamond (Figure 2). Figure 1. What is behind competitiveness? Determinants of Competitiveness Macroeconomic, Political, Legal, and Social Macroeconomic, Political, Legal, and Social Context for Competitiveness Context for Competitiveness Microeconomic Foundations of Competitiveness Microeconomic Foundations of Competitiveness The Sophistication The Sophistication The Quality of the The Quality of the of Company of Company Microeconomic Microeconomic Operations and Operations and Business Business Strategy Strategy Environment Environment · Nations or regions compete in offering the most productive environment for business · The public and private sectors play different but interrelated roles in creating a productive economy · A sound macroeconomic, political, legal, and social context creates the potential for competitiveness, but is not sufficient Source: Michael Porter 122 The economic theory of the Competitiveness industries and work with the government to Diamond has been validated by numerous improve its business environment. analytical and case studies and is now used by industries and governments worldwide to Why is competitiveness important for assess industry cluster competitiveness and Laos and its key sectors? to develop strategies for improving competitiveness. It is structured around four Raising competitiveness is one of the most pillars: critical challenges and one of the most 1. Factor (input) conditions: skilled labor, important goals facing Laos today. There infrastructure, etc. are several reasons for this. First, Laos still 2. Demand conditions: size and type of falls behind other neighboring countries in accessible demand terms of export performance (Figure 3) and 3. Related / supporting industries: presence would need to catch up. Second, the signing of supplier and supporting industries of trade agreements with ASEAN and the 4. Context for firm strategy and rivalry: US and the eventual accession to the WTO conditions for conducting business. will result in the lowering of tariff barriers and the need to improve productivity. At Within each sector and across the economy, the same time, these agreements have these four pillars interact to form a created new opportunities for market access foundation for building a competitive that are still relatively untapped. These, in economy. For developing economies like turn, create potential investment Laos, building a competitive industry cluster opportunities. starts with understanding the demand for products and services in key markets and Third, the 80 percent of the people who still then organizing and investing in the factor depend on farming, and especially those inputs (supply) to best meet the needs of the who rely on subsistence farming, have market. Only by accessing and begun to migrate to other activities and the understanding the specific needs of the government will need to ensure that there is market can the commercial sector in Laos adequate employment to avoid social utilize its resources in the most efficient way problems. Fourth, the goal of reducing that create the most value for the producer poverty requires achieving high rates of and the customer. As a more in-depth growth, especially in export-driven understanding of the market is developed industries. and the supply is upgraded accordingly, the industry cluster must then concentrate on Finally, the rapid pace of globalization and upgrading its suppliers and supporting technological change threatens to bypass Figure 2. Porter competitiveness diamond Context for Firm Strategy and Rivalry Factor Inputs Demand Conditions Related and Supporting Industries 123 Laos and relegate its producers to relatively temporary opportunities, but in the long-run low rungs on the value chain unless actions this will not be a sustainable source of can be taken to adapt to change an adopt competitive advantage. emerging technologies of which e- commerce transactions is but one visible The presence of subsoil assets for mining example. and hydroelectric power will also generate economic activity and government revenues. Figure 3. Lao export performance has been All of these factors are "inherited" or relatively poor compared to neighboring "received" factors. Many resource- countries dependent countries have not achieved high MerchandiseTradeas %of GDP, 2003 levels of prosperity and have experienced the "natural resource curse". The Lao PDR government of Laos will be receiving Indonesia China increased revenues and rents from Korea, Myanmar hydroelectric power and mining Cambodia concessions. Unless these are invested well, Mongolia Philippine they could end up not having as broad an Vietnam Taiwan, impact on poverty alleviation as they might Thailand otherwise have. Brunei Malaysia Hong Singapore The future sustainable competitiveness of 0 50 100 150 200 Laos will come first from improving the productivity of its people through Source: World Bank education, training, and capacity building. There is an urgent need to invest in more The base for current competitiveness is language training, computer training and unsustainable. The current competitiveness basic business skills. Apart from this, it will of Lao exports has been based on natural be necessary to invest in more specific areas resource abundance and cheap labor. such as marketing training, design and However, this is not a source of sustainable industry specific schools such as tourism competitive advantage. Price pressure on and hospitality. (Note that Seco/ITC is raw agriculture and other raw material expecting to have a strong capacity building products will continue to exert itself. component in the next phase of its ongoing Although the world economy has been export development project. Training would experiencing an upward trend in commodity be divided into sector-specific training for prices, over the last 30 years the real prices businesses that are already exporting and of most commodities have gone down. general export oriented training for potential Competing on the basis of cheap labor may exporters) allow Laos to enter certain areas of light manufacturing but will not be a long-run ...and from creating a business formula for building prosperity, especially environment that facilitates the emergence when labor costs are adjusted for relative of entrepreneurs and competitive clusters. productivity and compared with Indonesia, Competitiveness will require building the China, Cambodia and eventually Myanmar. capacity to understand international consumer and market trends and then to To some extent, competitiveness has been translate this knowledge and insight into based on trade preferences in apparel in the higher value products and services. EU market, and this is also not a sustainable Competitiveness will come from well- strategy. Formal apparel quotas ended in considered investments in infrastructure that January 2005. Continued restrictions on generate industry dynamism. certain countries like China may offer 124 Productivity can be strategic in nature. study indicated that there are still major Competitiveness is determined by the impediments in the business environment. productivity (value per unit of input) with Releasing these constraints is critical to the which an economy uses its human, capital, competitiveness of Lao entrepreneurs in and natural resources. Productivity depends regional and international markets. on the value, uniqueness, and quality of a product in addition to the efficiency with Although good strategic decisions enhance which it is produced. Productivity can be competitiveness, competitiveness is not strategic as well as operational in nature. about picking winners and losers. It is about For example, by choosing to grow and improving the business environment that export high value agarwood instead of allows many entrepreneurs and many exporting raw logs of other varieties, Laos companies to make good strategic decisions can greatly increase its export values1. By and implement them efficiently in a variety choosing to focus on high income tourists of industries. It is not so much about where already living in the region, the tourism firms compete but how they compete in industry could increase its off-season those industries. business and thereby amortize its investment more effectively while creating more stable The productivity of local industries is year-round jobs. By choosing the critical to competitiveness even if attracting appropriate commercial development model key foreign investors can contribute to for an export-oriented industrial park, the export competitiveness. This requires country could accelerate its entry into light building the capacity to learn about manufacturing industries by attracting a customers, understand markets, innovate, critical mass of investors to set up satellite improve quality, invest in human resources, plants. cooperating with the supply chain and working constructively with private sector Productivity is also operational in nature. leadership and government to solve By investing in infrastructure and abundant problems and address constraints in the energy resources, Laos can improve the business environment. economic feasibility of many industries which can now import inputs, manufacture Methodology and approach to this outputs and export the results. However, analysis: a vision from within much remains to be done. Perhaps the most important priority for improving operational The quantitative information available on productivity is to invest in human resources Laos is still relatively scarce. As such, the beyond literacy and numeracy to include information included in this study was not basic business skills such as English and simply based on desktop research and other foreign languages, computer skills, interviews, but also interactive workshops accounting and entrepreneurship. After with entrepreneurs and public sector leaders human resources, a focus on improving from each sector. The team worked directly access to finance and the building of a with business leaders, industry associations competitive financial sector could do much and government officials to understand the to improve productivity by mobilizing and competitiveness of agriculture, light allocating resources efficiently. Creating manufacturing and tourism and design abundant access to bandwidth at lower cost strategic action matrices for each. The can also help improve the business action matrices outline the practical environment (see Chapter 8). The large initiatives that private sector and public majority of businesses interviewed for this sector leaders can take to boost exports in each industry. The focus of this effort was 1 on implementation. The key to successful This example is outlined further in the agriculture section of this study implementation of the initiatives outlined 125 below will be to engage the local and 12 percent in the coming years. In addition, regional industry and governmental capital investment in tourism projects is leadership in constructive ways that can projected to double over the next ten years. have a tangible impact in the short to medium term while improving the business However, tourism in Laos is still largely environment for achieving these results. concentrated in a few locations in the There are a number of implementation country, namely Luang Prabang, Vientiane, constraints that were apparent in this study and, to a lesser extent, Champasak. Among and must be considered when undertaking the international tourists, these "point" future initiatives to support the commercial locations are not considered to be sector in Laos: destinations in themselves, but side trips as a 1. The commercial sector is small and part of a regional tour. As a result time-constrained, making convening key international tourists spend less than 3 days commercial leaders and facilitating a in Laos--the lowest in the Mekong Region constructive public-private dialogue (Figure 4). In addition, Laos is attracting a very difficult. very different mix of tourists compared to its 2. Understanding of the international neighbors. In 2003 Thailand attracted 1.3 markets and competition is very low million Europeans while Laos attracted among the public and commercial under 100.000 (Figure 5). Over 65 percent sector. of arrivals are from the Mekong region and 3. Channels for information dissemination, can be attributed to regional cross-border both formal and informal, are either day trippers. Reflecting the regional mix of non-existent or very weak. tourist arrivals, tourists that come to Laos 4. There is a mindset that financial spend on average less than any other country resources must precede actions. in the region except Myanmar; they also spend less per day and stay less than in other 1. Competitiveness Assessment of countries of the region (Figures 6-8). Tourism Knowledge of Laos as a country is limited; this is both an advantage and disadvantage Profile and importance of tourism for the tourism sector. Laos is still "undiscovered" and still carries a premium Tourism is a significant and growing of mystique, but lack of awareness in the industry worldwide and has been a key market is constraining growth. At a recent lever for local and regional economic tour operator conference in Malaysia, a development. Globally, the tourism industry Malaysian tour operator asked if Vientiane is estimated to represent $4.4 trillion, or 10 was in Myanmar. percent of the world's GDP. The industry supplies over 230 million jobs and over The tourism industry has the potential to $800 billion in tax revenues internationally. grow from $120 million to $500 million per Tourism is a major generator of foreign year in the coming 5-7 years, but care must exchange revenues and facilitates regional be taken for it to be socially and and international trade and investment environmentally sustainable. Industry linkages. experts in Laos had estimated that current foreign exchange revenue is $120 million For Laos, tourism is a critical industry for and that 100,000 international tourists will driving economic development. Tourism arrive in 2005--already, in the first four currently generates over $120 million in months of 2005 over 380,000 tourists have revenues. The industry employs 3.4 percent come to Laos. The country is increasingly of total employment, represents over 4 on the map for international tourists and percent of total GDP, 23 percent of export becoming known as one of the last revenue and is projected to grow by nearly untouched places in Asia. 126 Figure 4. Tourist arrivals in ASEAN countries Figure 7. ...spend less per stay in thousand total spent per tourist stay 800 ($) 60,000 Vietnam 700 50,000 Thailand Singapore 600 40,000 The Philippines 500 Myanmar 400 30,000 Malaysia 300 20,000 Lao PDR 200 Indonesia 10,000 Cambodia 100 Brunei Darussalam 0 0 1998 1999 2000 2001 2002 2003 2004 Thailand Vietnam Cambodia Myanmar Yunan LaoPDR Source: ASEAN Statistical Yearbook, 2005 Source: Asian Development Bank, 2004 Figure 5. Mekong tourists by nationality Figure 8. and less per day tourist arrivals(inthousand) totalspent per day ($) 12000 120 100 10000 Other Mekong 80 8000 Asiaex Mekong USA 60 6000 Europe 40 4000 20 2000 0 Yunan Thailand Vietnam Cambodia LaoPDR Myanmar 0 Thailand Vietnam Cambodia Yunan LaoPDR Myanmar Source: Asian Development Bank, 2004 Source: ASEAN Statistical Yearbook, 2003, and World Travel and Tourism Council, 2004. Tourism is important to the government's regional economic development objectives. Figure 6. Tourists don't stay long in Laos... In some regions tourism production is the major driver of economic activity. averagedaysin 9 Therefore, the tourism industry has a major 8 role to play in improving rural incomes and 7 in poverty alleviation in rural areas. This is especially true in Luang Prabang which used 6 to be a relatively poor province but which 5 has become more prosperous in the last 15 4 years. Tourism also has the potential to play 3 a key role in increasing economic 2 opportunities for the southern provinces of 1 Attapeu and Sekong. To this end the 0 MOC/ITC Tourism Sectoral Strategy is Thailand Myanmar Vietnam Cambodia LaoPDR Yunan explicitly focusing on building backward linkages from the tourism industry to the Source: Asian Development Bank, 2004 rural areas. An action plan will be proposed in this regard. 127 With special emphasis on community and customize high-value experiences to the eco-tourism from tour operators and exact motivations of the segments. international donors, the industry is becoming an increasingly important source Innovations in communications technology of rural income and poverty alleviation. The are allowing tourists to conduct primary potential doubling of the industry revenues research on a destination prior to arranging would have a tremendous impact on people and arriving. The increased availability of in this sector. Even a modest impact on the information on destinations on the internet is productivity and incomes of the people who changing the standard and manner for rely on this industry would be quite attracting international tourists. In addition significant. to using international tour operators, tourists are increasingly planning their own visits. Tourism also has important spillover International tour operators cannot be relied effects in terms of creating a Lao national on to be the primary gateway for "brand" in global markets and developing a international tourists. Clear, concise favorable international image for the information portals and ecommerce country. It also has spillover effects in capabilities are now a necessity for promoting rural tourism and handicrafts, attracting international tourists. The last encouraging so-called "exports on the spot". tourist feedback report conducted by the National Tourism Authority (NTA) International and regional market trends highlighted the high cost of traveling to Laos and the difficultly in finding The tourism industry, defined broadly to information about Laos prior to arriving. include all travel, lodging, restaurants and supporting services, already represents 10 Within the Mekong, nearly all international percent of GDP. While there are many tourists coming to Laos are part of a regional significant trends taking place tour that takes them to surrounding simultaneously, the following are a few of destinations as well. Growth in the medium the "mega-trends" that will affect Laos to high-income brackets of Asian economies tourism. is fueling growth in travel and tourism within Asia. Huge growth in Chinese The first is the aging of the population in tourists is expected, but it is unclear whether wealthy countries which means an these tourists will bring value to Laos. In increasing supply of tourists who have more fact among many tour operators, there is time, disposable income but evolving needs concern that the Chinese market may be including concerns for safety, comfort, high volume, but with limited value. beauty and cultural stimulation (over the rigorous water sports and beaches that Competitive position of tourism represented the goals of more youthful tourists). The team applied a number of diagnostic tools. Most of these tools were applied in Another trend is the movement away from workshops with tourism representatives. mass tourism to many "micro-segments" Some 50 representatives came to the that are appealed to increasingly through workshop in Luang Prabang and about 25 very specific and targeted means of representatives were present at the workshop communication. These niche segments in Vientiane. The team applied a series of catering to affinity groups such as soft diagnostic tools including SWOT Analysis, adventure tourism, cultural tourism, GAP Analysis, Value Chain Analysis, ecotourism or health tourism are allowing Market Trend Analysis and Diamond destinations and tourism companies to Analysis. Below are the results obtained from the workshops with the contribution of 128 the private sector and government officials destinations. The growing prosperity of the present. ASEAN countries and India and China Overall, the Lao tourism industry is provide additional target markets that are not currently positioned as a relatively low-cost put off by the heat or occasional rain of the "add-on" destination where tourists come "low season." Thai Airways has offered to mainly during a relatively short high season, provide its international offices as spend little and stay only 2-3 days. There is distribution channels for NTA promotional great potential to triple or quadruple tourism literature and to help convene the relevant industry revenues without having to triple or target groups (whom they know quite well) quadruple the volume of tourists arriving in to meet with promoters of Lao tourism Laos by four principal strategies to be during their visits to places like Japan, China described below. The industry has or Australia. Since Laos is relatively traditionally lacked good information on unknown abroad, there is the opportunity to markets and effective market development shape and manage the image of the country skills. As a result it does not control its own as a tourist destination. The relatively low destiny and is dependent on others. volumes of tourists during the off-season is Government policy has rightly stressed itself an opportunity to market the conservation and preservation, even routing destination during those months which also a major highway around the historical town correspond to summer vacations in northern of Luang Prabang but the industry now countries. needs to focus on improving its strategic position. However, threats to the industry include downward impacts on tourist volumes that SWOT analysis: have happened in the past and could happen again related to terrorism, SARS or other Tourism industry strengths include great global problems. If tourism growth is not natural beauty, world heritage sites, managed, it could have adverse beautiful architecture, a navigable river for environmental and social impacts and this in boat tourism, relatively low costs, unique turn can negatively affect the perception of ethnic cultures which have maintained Lao tourism abroad. Already there are signs traditional dress and customs and traditional that increased tourism to Luang Prabang is music and dancing. The country is also well having a negative impact on the local known in France. The natural hospitality of citizens. As one established tour operator the people is an asset. mentioned, "our people are losing their hospitality and are now focused simply on Industry weaknesses include the lack of how to earn more money." bilingual and multilingual staff with training in the service industry, a short "high GAP analysis: season," an unfavorable image for the "low season" as being hot and rainy, relative At the national level, Lao tourism leaders isolation, limited air transport, low capacity identified Vietnam, Cambodia and Thailand to market internationally, lack of access to as relatively successful countries in the finance for small businesses, very short region. They also identified a number of stays by tourists as an "add-on" and things it takes to be successful in tourism relatively low expenditure per day by including knowledge of market, good tourists. strategic focus, human capacity, access to finance, transportation ease of access and There are major opportunities that could quality of government policy (Figure 9). propel the growth of this sector in the future. The Luang Prabang leadership identified Global tourism is growing quickly and tour comparative destinations Siem Reap, Chiang operators and tourists are looking for "new" Mai, Bali, Ha Long Bay, and southern 129 China. The recent emphasis placed on Tourism cluster and value chain analysis: preservation of architecture and culture in Luang Prabang was reflected in the key The tourism industry value chain analysis success factors that the participants revealed a surprisingly large number of highlighted, specifically architectural industry participants who form the tourism preservation and cultural performances. cluster. The tourism cluster includes: air transportation, immigration and customs The industry representatives identified department, hotels, guest houses, home-stay significant gaps between the Lao industry hosts, restaurants, boat operators, taxis, and counterparts in these other countries. "tuk-tuk" drivers, motorcycle rentals, The participants in Vientiane ranked Laos bicycle rental shops, museums, temples, relatively low versus other countries in national parks, artisans, retail shops, food knowledge of market, human capacity, suppliers, communications providers access to finance, transport accessibility and including Internet cafes and mobile phone quality of government policy. The Luang providers, education and training providers Prabang leadership perceived the gap (secondary schools and universities), foreign between Luang Prabang and comparative investors, infrastructure and conservation destinations to be much smaller, but still donors, travel agents, tour operators, tour highlighted a gap in marketing and ability to guides, translators, the local and deliver high quality services. international media (including producers of documentaries), artisan villages, the Figure 9. Gap analysis for the tourism sector National Tourism Authority, provincial and in Vientiane and Luang Prabang local governments, the Ministry of Culture Vient iane Clust er Group and other government departments and ministries (Figure 10). Coordinationof Stakeholders LaoPDR CompetitiveEnvironment Vietnam Accessibility Cambodia In both Vientiane and Luang Prabang, there Thailand was strong consensus that the tourism Diversityof Product Off ering industry cluster must be better coordinated HumanResources and must cooperate to develop the industry Marketing further. In Luang Prabang, leadership representatives ranked the cooperation of the Government Policies Overall cluster at about average, clearly highlighting a need for better communication and 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 ranking(1is best;5isworst) cooperation among key stakeholders across Luang Prabang Clust er Group the industry cluster. Cuisine Communication and coordination across LuangPrabang the cluster is deficient. The most Architectural SouthernChina Preservation HaLongBay formalized channels of communication and ChiangMai coordination are between the tour operators, SiemReap Peace/ Security the hotels, and the national and regional Bali tourism administration. Aside from the Services National Tourism Administration and the newly formed Tourism Marketing Board, Marketing there are no mechanisms or organizations that facilitate cross-cluster coordination and planning. Among the National and Regional 0 ranking(1isbest; 5isworst) 1 2 3 4 Source: Workshops held in Vientiane (March 2005 Tourism Administrations, increased and Luang Prabang (July 2005) 130 Figure 10. Luang Prabang tourism cluster map Tour Operators Local Healthcare Tour Guides / Luang Prabang Interpreters Vientiane Lao Traditional Massage Local retail, Abroad Media / Information Spa Services health care, and Public Relations & Travel Press Hospitals other services Television, Radio Market Research Internet Services Local Transportation Taxies / Tuk-tuks Local buses Local Wats Charter Services Transportation Specialty Museums River Boats Food Food Restaurants Caves Suppliers Suppliers Waterfall Activities Shopping Retail Stores Night markets Souvenirs, Tourists Communications Handicraft Shops Duty Free Providers Property Duty Free Internet Services Hotels Airlines Airlines, Phone Guest Houses Hotels Airport Domestic Financial Services Homestays Buses Banks, Banks Villages River Cruises Foreign Exchange Foreign ATMs Infrastructure Exchange Maintenance Maintenance Services Utilities Government agencies International Agencies NTA Education Industry Groups Asian Development Bank Industry Groups Tourism Police National University (Vientn) LATA SNV Lng Prbg Tourism School e.g. Universities, Hotel and Restaurant Assoc e.g. Tourism Local Tourism Office UNESCO Immigration Services Heritage Committee World Bank Customs Source: Workshops in Vientiane and Luang Prabang, March and July 2005 planning and coordination is essential. Despite the focus on regulation and There is a significant amount of interest licensing among the government tourism among donors to assist tourism at the bodies, there are no certifications and national and regional level, but to date there standards for hotels or restaurants. There is limited coordination among the is a perceived need among the cluster government interfaces. This has become stakeholders, and some discussion on setting apparent in recent tourism trainings and up a system through the newly formed workshops when the trainings are designed LATA, but still no central body that for a high level audience, but because regulates the key service providers in the managers are so busy with managing their industry. Given the fact that Laos is still business in addition to the various developing its reputation among initiatives, they do not attend, or simply international tourists, setting up self- send junior staff. Regional tourism offices regulating systems for the industry cluster, within the government are still mainly by the industry cluster, is critical for focused on regulation and licensing of the establishing Laos as a high-value, unique tourism businesses; more emphasis needs to destination in Asia. be placed on supporting the businesses with information dissemination and coordination. 131 The value chain for tourists visiting Laos future, especially considering that current can be further developed as a cluster of best estimates place the daily international additional products and services emerge to tourist expenditure at only $60/day. meet the needs of various segments of the However, to date most of the tourism market. Already there is a sophisticated industry is still dependent on international network of camera and digital photography tour operators and other marketing shops that has emerged to serve the needs of information providers to communicate with tourists. In addition, cooperation among the international tourists. Even the most tour operators and rural villages are leading successful tour operators struggle with to product development in homestays and connecting to international tourists. One agricultural tourism. As new segments of major operator noted the continued travel the market are attracted to Laos, new warnings from embassies as a big issue that sources of revenue and new products and is still affecting demand. The isolated services can be offered. Given the incidents that occurred in 2003 have not increasing interdependence of the been repeated, yet the embassies are not destinations in the Mekong region, fostering cooperating in removing travel warnings regional partnerships will be critical for maintaining the perception that Laos is a attracting tourists to Laos. The opening of dangerous place to travel. Luang Prabang airport to international airlines is already starting to yield benefits The tourists who come to Laos can provide a with Thai Air offering to promote Laos for rich source of feedback on how to upgrade free on international flights and at facilities and services. To date there is very international offices, and Bangkok Air little evidence that tourism companies are partnering with a number of tour operators proactively seeking feedback from tourists and offering special packages. and changing the way they provide services. The new tourism marketing and promotion Strategies for tourism industry firms are board includes 6 representatives from the relatively unsophisticated. As a result many private sector and 5 from the government-- tour operators compete mainly on price with it may be well positioned to play a similar tourism packages for their coordinating role in the larger cluster. competitors. Tour operators also compete on their ability to get and maintain strategic Porter Diamond: alliances with tour operators abroad who send them clients. While there is now a Diamond analysis has revealed very weak program to assist hotels and others to create current competitiveness for the Lao websites, there is no ability to book directly tourism industry. Few Lao tourism firms from abroad with hotels via the Internet. As are linked directly to sophisticated and a result, the tourism industry is still reliant demanding consumers and only a handful of on tour operators to facilitate international very sophisticated hotel firms are located in tourists. Yet similar technology weaknesses the country. The Pansea Group, now are evident in the marketing of the tour affiliated with Orient Express, has set up a operators. Of the 60 tour operators in Laos, high end hotel in Luang Prabang (Mick only 20 have brochures for tour operating Jagger was one of the more famous partners and customers and less than 10 customers), following on the success of a have operating websites. Given the wide World Bank/IFC resort on the outskirts of variety of tourism segments, there could be town. Another even more exclusive firm much greater sophistication and associated with $1,000/night fees is said to diversification for tourism companies. be interested in locating a hotel in the area. Similarly, most retail shops offer a similar This emerging discrimination in targeting variety of tourist goods. high income consumers bodes well for the 132 The tourism cluster has emerged but is still architecture, proximity to high-volume relatively weak. While there are many tourist destinations in neighboring countries groups of stakeholders, these have not yet and a relatively good climate. Warm come together effectively to forge a hospitality and authentic, welcoming culture common vision, agree upon a joint strategy are characteristics that tourists cite as a and implement strategic initiatives to distinguishing factor between Laos and its enhance the competitiveness of the industry. competitors. Local labor is cheap but not For example, there is no coordinated well trained in languages or service. The strategy to bring tourists to the country in availability, skills, knowledge, and service the off-season. Yet this would be one of the delivery of tour guides is still very weak. surest ways to enhance growth, improve Transport logistics are poor but improving profitability and provide for more constant with the safety and capacity of the national and sustainable employment without airline being a weakness. There is no good overcrowding natural or cultural sites. The tourism or hospitality training institute, financial sector is a very weak participant in although the Department of Tourism and the cluster as most family and small Hotel Management (under the Social businesses have very limited access to Sciences Faculty) at the university in finance to add capacity. Vientiane is starting a program on this. There is a small institute in Luang Prabang, The pro-tourism perspective from the but both graduating students and local government has been successful at businesses agree that it is currently not supporting the growth of the industry, but providing the skills needed by the industry. many constraints still remain including: The University of Souphanouyong is · Visa requirements are a significant considering introducing an international barrier to attracting tourists, visa on management program which will include arrival is a good step and the visa tourism and hospitality management. exemption for ASEAN countries will be Capable higher level management is very important to attracting more visitors, but scarce, and typically imported. The more can be done to make it easier on National University of Laos as well as three tourists coming to Laos other private colleges offer a Bachelor's · Documentation for organizing a degree in management and marketing. There conference or meeting in Laos is still are, however, no masters programs in significant. For instance, letters of tourism in Laos, for higher level training invitation are required for attendants most Lao students go to Thailand, Vietnam, from different departments in the China, Japan, Australia and sometimes government. This imposes a significant Europe if they can afford it. Top hotels cost to the organizers and deters must send their employees to affiliated organizations from conducting hotels in the region for training. conferences in Laos · Lao Airlines only has 4 planes, all are Business environment constraints very old, 2 of which are ATRs seating 70 people and two others only seat 17. Numerous issues in the business This limited and outdated fleet heavily environment are holding back the constrains scheduling issues. development of the tourism industry. While Breakdown of one aircraft can alter the the tourism industry has still registered schedule for multiple days. Charters do strong growth under the currently exist, but there are not many options. constrained environment, there are a number of issues that need urgent resolution in order Basic factor conditions for tourism are for the industry to continue to grow in the good but advanced factors are weak. Laos right ways: has excellent natural beauty, wonderful 133 · Implementation of the Law on Foreign · Facilitation of money transfer: Money Investment (the law was passed in Oct. transfer through local banks is costly 2004 and one year later in Oct. 2005 and can take a significant amount of the Law on Tourism followed): time. o Foreign partners are critical to upgrading service infrastructure, Strategy for repositioning the Lao expanding capacity, and raising the tourism industry2 level of service delivery o According to one tour operator, Significant investment is occurring in numerous foreign investors are building the supply of the Lao tourism waiting in the wings for this decree to industry; however, the industry is not clear be signed. One high-end hotel group on what types of tourists it wants to attract is planning the construction of a hotel and how to effectively promote to those in Luang Prabang with projected audiences. Limited information is available pricing at $500 - $1000 per room per in Laos on tourist needs and preferences by night motive of travel. This information is critical · Adoption of open skies policy for for guiding the industry in setting a targeted international airlines: Restriction on strategy. International expertise could be open skies is a significant barrier to useful in helping the industry segment the expansion of the tourism industry to global tourism markets by motive of travel, other regions and income levels. Lao identify the most attractive niche markets Airlines has a fleet of 4 planes, of which appropriate to Lao offerings, prepare only two can seat 70 people (ATR 72) appropriate marketing efforts and thereby and the other 2 are much smaller. The increase the number of tourists arriving, the entire fleet is old, and when one plane average spending per day and the length of breaks down, the national flight stay. Other important steps to attracting the scheduling must be altered right tourists include: improving the ability spontaneously. The result is that tour of Lao tour operators to proactively target operators and international tourists attractive clients, improving the language, cannot rely on intra-country bookings communication skills and professionalism of with Lao Airlines in advance. Tourists tour guides and other service providers and arriving from outside the region are not providing upgraded certification. willing to take the risk of altering travel plans. With the opening of Luang The strategy workshop moderated with the Prabang to international flights, more industry cluster resulted in the validation of tourists may choose just to fly directly in the current vision statement, the and out of Luang Prabang without identification of key strategies, the visiting the rest of the country. elaboration of strategic action initiatives and · Easing of border crossing time and the fleshing out of initial targets. procedures at Vietnamese border: It can take 2-3 hours to cross the border The strategy needs to fit to government's into Vietnam for a tour group. The vision of social harmony and constraint is on the Vietnam side, not environmental preservation. The values the Laos side. Nearly all tour operators that motivate the government are preserving mentioned the ease and friendliness with social harmony, conserving the environment which the Laos officials dealt with and developing tourism in such a way as to tourists. Facilitating a reciprocal have a maximum impact on poverty response from Vietnam would assist the Laos tour operators engage in regional 2In this context, the Cabinet Meeting adopted tours the National Strategy for Tourism Development in December 2005. 134 alleviation and broad distribution of income Box 1. Ways to extend the tourist season including to rural areas and ethnic minorities. Extending the tourist season beyond the high season can improve year-round employment prospects, increase foreign exchange, improve The strategy for Laos should be to tap into capacity utilization for hotels and restaurants and the high-value, longer-stay, seasonally increase tax revenues without having an balanced tourism, while still promoting overcrowding effect during the high season. As a low-cost tourism that has a positive result, this is one key strategy recommended by spillover on the poor. This would require the team. Below are specific ways to do this: working with the international press, 1. Promote annual traditional song/dance festivals improving the local offerings, learning about at the end of the school year (June) market niches abroad and improving and 2. Market boat racing festival to international diversifying local package offerings. tourists (September) 3. Promote caravan tourism to World Heritage Laos could achieve a tripling or Triangle sites quadrupling of revenues without adverse 4. Attract tourists to annual bamboo rocket social and environmental impacts simply by festival getting people who do come to Laos to 5. Develop a package geared to "summer vacation" tourists in the EU, USA, and Japan spend more, stay longer, and visit the 6. Develop annual food festival, chef competition country on the off-season. Laos should and cooking classes avoid the expansion of large volume during 7. Improve trip planning services, maps and guide the high season as this will decrease the services for backpackers attractiveness of the experience for the 8. Hold annual handicraft competition among tourist (with adverse consequences for provinces word-of-mouth promotion) while having 9. Market Laos as honeymoon destination after adverse social and environmental weddings (June) consequences. 10. Develop agro-tourism with visits to rice farms, fishing communities, etc 11. Develop golf tourism and golf tournaments Key strategies to do this were identified and 12. Work with publishers of tour guide books to discussed in detail among industry change off-season image participants. These strategies include 13. Promote boating and rafting trips branding Lao tourism, increasing off-season 14. Revive the festivals on the monthly calendar arrivals, targeting higher income tourists 15. Target high-income regional tourists from with unique offerings, and promoting Laos Singapore, Thailand, Malaysia, etc. who are not as a destination in its own right. Other at all put off by the heat and occasional rain of the strategies to support this include facilitating low season access to finance, engaging in private-public 16. Target expatriate communities in regional dialogue and improving human resources capitals in neighboring countries for weekend get-aways capacity. 17. Use the low volume of the off-season as an attractive feature to market to high-income Increasing off-season tourism: Some tourists who value privacy, solitude and natural 20 specific strategic initiatives were beauty identified that can improve counter- 19. Market Laos as an offering to cruise tourists seasonal tourism (Box 1). Laos has a docking in Asia unique heritage in music and dance. An 20. Offer personal development thematic annual music and dance festival packages: Buddhist philosophy, architecture coinciding with the graduation period of lessons, massage classes, silk weaving, cooking the music and dance schools in June classes 21. Identify and attract micro-segments such as could be marketed abroad. Honeymoon bird watchers tourism could be marketed in June when some countries traditionally have 135 marriage ceremonies. A summer Once the tourism cluster agrees on the vacation package could be marketed to appropriate brand image (possibly with Lao people who have moved to other some advice from international branding countries. The boat racing festival in experts), a low-cost and high-impact September could also be promoted. The publicity campaign can be mounted that most promising strategic initiative is to involves engagement with tour book market Lao tourist destinations to writers, contacts with leading affluent consumers in the ASEAN documentary film makers, promotional region who are not at all put off by the literature and dissemination of the heat or occasional rain because they message throughout the cluster. An already live with these conditions. For international public relations and example, Luang Prabang is cooler than publicity expert can help to create, Singapore in the off-season. The advise and manage such a campaign. beneficial impacts of counter-seasonal Numerous tour operators expressed a tourism are: increased incomes, more willingness to share the cost of a stable incomes, more stable marketing and public relations expert to employment, the ability to amortize orchestrate a cohesive and convincing investment more rapidly (and thus marketing and public relations attract more investment in the first campaign. place), increased tax revenues and decreased dependency on external Developing tourism destinations factors affecting high season tourist outside of Luang Prabang, Vientiane, volumes. and Champassak: Both the southern and northern provinces have tourism Creating a national brand image for potential in adventure tourism, eco- Lao tourism: Branding Lao tourism tourism, and agro-tourism. These areas involves both the development of a are currently underdeveloped, so country brand and company brands and attracting tourists could have a will further involve choices regarding significant impact on rural populations. specific packages marketed to specific In the south specifically, there is high segments. It is beyond the scope of this potential for safari tourism. Abundant effort to create such a national brand wildlife and untouched natural beauty, if image but, the current theme, "Jewel of organized carefully, could attract high the Mekong" may have the desired income tourists. There is little impact. Other themes could include: knowledge of building and managing "Destination Lao" safari tourism in Laos, so an initial step "Peaceful Lao" is to sponsor a number of study tours to "Laos: Nature Conserved, Culture centers of excellence in safari tourism Preserved" and bring an international expert to assess the potential and create a plan of It should be noted, however, that action for development of safari tourism considerable promotion costs will be in Laos. associated with such a strategy (cf. Malaysia's "Truly Asia" campaign) and Assisting with marketing skills, it needs to be ensured that once the targeting of market segments and attention of the potential visitor has been developing diversified offerings: caught, the tourism industry has Creating company brands will require sufficient financing and know-how to informed choices regarding target maintain this interest. markets, positioning, packaging and distribution channels. This can be facilitated by participation in 136 international trade fairs and through office management, guest house using international consultants management, catering, etc. In addition, knowledgeable on branding. Firm-level there is a need to assist the new tourism assistance is needed to help companies faculty at the National University to improve their marketing skills, target develop an appropriate curriculum for attractive niches and develop trip training future managers in the tourism itineraries and packages appropriate to industry the micro-needs of each target segment. If done appropriately, this will increase Improving and facilitating access to the daily tourism spending while finance: Small and family businesses do diversifying the tourism base for the not have access to finance to improve country. and expand their facilities. The tourism industry can collectively approach the Enhancing the general market banking industry to design new financial knowledge on Laos tourism will be products appropriate to industry needs essential in supporting tourism and to identify ways to encourage credit marketing. The annual statistical report to the sector. currently underway at the NTA is a good start, and can be further developed Attracting appropriate foreign to include detailed information about investment: There is also potential co- specific customer segments (by both investment from joint venture interest motivation of travel and origin country) with foreign partners who could also attracted to Laos, in partnership with provide technology, market access and WTTC and WTO. A survey of other key inputs. The government international travel agents on the current should take as a point of departure this image of Laos would be useful in tourism strategy outline in its efforts to assessing the current international promote that kind of investment which perception of Laos. The end result is to results in the targeting of high-income identify attractive segments and develop segments, the diversification of appropriate itinerary and package tours offerings, the expansion of business in targeted to those segments. the off-season and the improvement in human capacity through internal Improving quality by building human employee training programs. capacity: A national training institute for hospitality and tourism should be Establishing a public-private created with international guidance with dialogue: Public-private dialogue can a national center in Vientiane and an bring to government attention obstacles ongoing training program in Luang to implementing this strategy and will Prabang (the Swiss who are among the help mobilize private sector and best in the industry3, are reported to be entrepreneurial energies and investment discussing support in this area). Key to implement the Laos strategy and skills needed in the industry include: achieve government growth targets. hospitality management, tourism The IFC, through the MPDF is marketing, customer service, tour guide supporting a tourism business forum as training, language training, reception, part of the larger Lao Business Forum initiative. This has the potential to facilitate a constructive public-private 3Top international hospitality schools include: dialogue. It is very new, so care will Les Roches (Switzerland), IHTTI (Switzerland), need to be taken to ensure buy-in from Le Bouveret (Switzerland), Brig (Switzerland), key tourism representatives and early Cornel University (USA), Boston University (USA), Cesar Ritz (USA). successes to prove effectiveness in 137 resolving key business environment $500 million per year. To achieve this, it issues and building credibility. would be helpful if the donor community could provide the requisite expertise in the Strengthening associations within the various areas mentioned above by fielding a tourism cluster: There is very little tourism industry expert, providing technical coordination and joint planning and assistance and funding for a tourism and investment from the various hospitality training institute, providing short stakeholders in the tourism cluster, both term technical assistance in marketing and at the provincial and national levels. by helping to convene, guide and enable the The Association of Travel Agents, the tourism cluster to implement the above Hotel, and Restaurant Association and a strategies. A center for design, such as that potential tour guide association are being developed under the National Export critical players in coordinating the Strategy project, could also help to develop cluster and implementing joint new and unique handicrafts, silk products, initiatives such as establishing wood products and cotton products for sale certification committees for hotels, to tourists and these designs could benefit restaurants, and guest houses aligned artisan villages that would help them with ASEAN standards. supplement their existing traditional products with other high-value products. Improving regional coordination of tourism bodies at the provincial and Implementing mechanisms: The strategy national level is critical to Laos tourism. can be implemented in an uncoordinated Currently there is no joint planning fashion by the existing tourism associations across regional offices and limited or in a coordinated fashion. In a coordinated sharing of information of tourist way, this could be implemented by information centers. The Lao Tourism assembling representatives of the tourism Marketing and Promotion Board has the industry that include the various existing potential to play the necessary associations and government agencies. This coordinating role, but care will need to should be done under the overall umbrella of be taken to make sure the Board has a the Lao National Tourism Authority (NTA) broad representation of the various with a strong supporting role of the Lao provincial and functional stakeholders Association of Travel Agents and hoteliers of the cluster as illustrated in the cluster association. The industry is cooperating map. already under the Lao Tourism Marketing and Promotion Board and the Ecotourism Establishing Luang Prabang tourism Working Group. cluster working group: As evidence by the tourism cluster map above, Luang Prabang tourism has advanced enough to need a coordinating body that 2. Light Manufacturing facilitates joint planning across the various members of the cluster. A Profile and importance of light cluster working group will assist the manufacturing in the economy Luang Prabang tourism industry in developing strategies specific to the The manufacturing sector in Laos achieved region. strong growth over the past ten years, registering over 9 percent growth from 1998 Quantifiable targets: The implementation to 2002. In 1998 industry represented under of this strategy can result in a four-fold 22 percent of the national GDP, but now increase in tourism value added over the represents nearly 25 percent. Within the next 5-7 years from $120 million per year to industrial sector light manufacturing, 138 including garments, wood products, and Figure 11. Sectors with high export potential assembly of electronic and mechanical parts are the main export segments, with textiles Animal and Animal Pr oducts Chemicals and Allied Industr ies Laos and wood products dominating, representing Foodstuf f s World 85 percent of total tracked goods exports. Tr anspor tation Raw Hides, Skins, Leather , Fur s Stone / Glass There are a number of high growth Plastics and Rubber segments in light manufacturing that are Metals Machiner y / Electr ical starting to establish themselves with a Miner al Pr oducts significant presence. The high growth, high Footwear / Headgear potential export segments include rubber, Vegetable Pr oducts Wood and Wood Pr oducts which grew at over 200 percent annually Textiles over the past 5 years, machinery and -50 0 50 100 150 200 250 electrical parts (71 percent), and production 5-year averagegrowthrate(1999-2003) of footwear and headgear (54 percent)-- Source: UNCOMTRADE Figures 11-12. Individually, all three segments still do not make up more than 2 Figure 12. Rubber exports are growing and go percent of Lao exports, but the significant 5- mainly to China year growth trajectory indicates that they Destinationof Lao rubber exports (1999 - 2003) $thousand have a strong future. In the rubber industry, 3,500 there is much foreign interest in addition to 3,000 Guyana domestic investment. Thai Rubber Latex United Kingdom 2,500 SouthAfrica Corp (TRLC) is investing $490,000 in Germany 2,000 Thailand developing rubber plantations in Vientiane Denmark 1,500 Honduras and Borikhamxay province, with the China 1,000 intention to export rubber for processing in 500 Thailand. Significant interest in rubber - 1999 2000 2001 2002 2003 plantations has also surfaced from Vietnam and China. Rubber is exported mainly to Source: UNCOMTRADE China (Figure 12). Textiles and garments World markets for Laos's key exports are generally growing fast. World markets in At its peak, the garment industry employed textiles and wood products grew an estimated 30,000 people. Current consistently from 1999 to 2003. Total world estimates are between 22,000 and 25,000 exports in textiles were over $400 billion in employed. As of the end of 2004, there 2003 and grew 7.2 percent annually since were a total of 57 firms, of which an 1999. World export markets in wood estimated 70 percent have foreign processing lagged in both size ($243 billion ownership. Lao investors in garment in 2003) and growth (4.8 percent since companies are mostly subcontractors that 1999). One group of promising light take on spillover contracts with very tight manufacturing activities for Laos appears to margins. There are a few Asian investors be machinery and electrical equipment, from Singapore, Taiwan and Malaysia who representing over $2 trillion in world trade have recently invested in the garments and growing at over 7 percent annually; sector, but these investors still appear to be rubber, a $70 billion world market using the Lao location for access to EU registering 7.4 percent growth; and preferences, of which Laos companies are foodstuffs, a $212 billion market growing at still only filling $60 million of the $150 6.7 percent. million equivalent quota cap. These foreign investors already bring a pool of customers, 139 the technology, skilled labor and sources of Laos at this point. World markets are still raw materials. adjusting to the expiration of the MFA. While it is too soon to assess the impact of Laos's comparative advantage in garments the MFA phase-out, initial data from varies by category (Figure 13). The imports into the EU market show that Revealed Comparative Advantage (RCA) overall Laos has been able to maintain a index shows that between 1999 and 2003 positive growth in exports (Figure 14). But Laos has gained competitiveness in products apparel manufacturers in Savannakhet noted such as men's shirts, synthetic and cotton that two of the five producers in their area undergarments, trousers, jerseys, and silk had closed down. Apparel manufacturers in products. Vientiane reported continued severe price pressure from buyers. As China is again Figure 13. Revealed Comparative Advantage subject to quotas for certain apparel in textiles and clothing categories products--both in the US and the EU, this may offer Laos an immediate opportunity to RCA:Textiles,GarmentsandFootwear fill excess demand and raise orders through 2008. However, a constraining business Shirts,men's,of textilefabrics Under garmentsof synthetic environment makes it difficult for fab entrepreneurs to take advantage of short- Trousers,breeches,of textile fab Jerseys,pull- 2003 term opportunities. The garment sector in overs,twinsets,cardigan Under garments,knittedof 1995 cotton Laos still faces many constraints compared to other neighboring countries, as evidenced Other outer garments Corsets,brassieres,suspendres by the gap analysis (Table 1). The largest Fur clothing,articlesmadeof constraints are availability of management fursk Silk yarn&yarnspunfromnoil Other outer garmentsof staff; education level and skill of workers; textilefab Other outer garments& productivity; and access to raw materials. clothing Skirtsof textilefabrics Coatsandjacketsof textile Figure 14. Initial response to the MFA phase fabric Men'sovercoatsandother out in the EU market coats Dresses,skirts,suits,knitted Pr opor ti onate Change i n EU T exti le and Clothi ng I mpor ts by Women'sdresses Suppl i er (Fi r st hal f 2005/ Fi r st hal f 2004) Footwear China Jackets,blazersof textile India Sri Lanka fabrics Turkey Malaysia Egypt Clothingaccessories Cambodia SouthAf rica Bulgaria Blousesof textilefabrics Bangladesh Israel Lao Romania 0 5 10 15 20 25 30 35 40 FYROM Thailand Madagascar RCA Vietnam Morocco Moldova Mauritius Albania Note: RCA index greater than one indicates that the country Pakistan Bosnia-Herz. has a comparative advantage in the product--the greater the Tunisia Ukraine Serbia,Montenegro RCA the greater the comparative advantage. Indonesia Taiwan Br azil Source: UNCOMTRADE Croatia Belarus SouthKorea Iran Philippines U.A.Emirates Uzbekistan Syria The textiles and garments sector seems to Russia Myanmar HongKong be experiencing pressure from the Macao -60.0 -40.0 -20.0 0.0 20.0 40.0 60.0 80.0 expiration of the MFA. Textiles and garments are the most uncertain markets for Source: Paul Brenton 140 Table 1. Gap analysis for the garment industry Laos Cambodia Bangladesh China Vietnam Labor and Management Availability of production workers 1 1 1 1 1 Availability of management staff 5 4 3-4 3 4 Recruitment of expatriate management staff 1 1 1 NA 3 Education level 5 4-5 5 4 NA Skills 5 4-5 4-5 3 3 Training facilities in house 4 2-5 5 3 NA Vocational training schools 4 4 5 3 NA Productivity 4-5 4-5 4-5 2 NA Absenteeism 4-5 2-3 3 2 NA Work ethic 3-4 2 3 2 NA Diligence / dexterity 2 2 3 2 3 Overtime pay (% of regular pay) 200% 150% 200% 150% NA National holidays pay (% of regular pay) 200% 200% 200% 200% NA Access to Raw Materials Access to fibers Cotton 5 5 5 1 2 Wool 5 5 5 3 4 Silk 5 5 5 1 4 Polyester staple 5 5 4-5 1 5 Polyester filament 5 5 5 1 5 Polyester micro 5 5 5 1 5 Acrylic 5 5 5 1 5 Nylon/polyamide 5 5 5 3-4 5 Bast 5 5 1 5 5 Local yarn suppliers 5 5 4 1 5 Local fabric suppliers 5 4-5 3-4 1 4-5 Cut panel printing 5 4-5 3 1 4 Embroidery 5 4-5 3 1 4 Garment wet processing 5 4-5 3 1 3-4 Threads, interlining, buttons, zippers 5 5 3 1 4 Performance Productivity 5 4-5 4-5 2 3 Quality 3-4 2 3-4 2-3 NA Prodution flexibility 4 4 2-4 2-4 NA Small Runs 3 4-5 3-5 2-4 3-4 Technology (CAD CAM) 4 3 3 2-3 NA Computerized planning and control 4 3 3-4 3 NA Code of conduct compliance 4 2 2-3 3 4 Lead-times: placement to delivery Woven garments 90 90 - 120 90 - 120 40 - 60 60 - 90 Cut & sew knit garments 90 90 - 120 60 - 80 50 - 60 60 - 120 Source: "Cambodia's Garment Industry: Meeting the Challenges of the Post-Quota Environment, September 2004, Asian Development Bank; Compiled for Laos by: "Lao's Textile and Clothing Analysis," March 2005, ITC Based on Formal and Informal surveys and interviews with members of the industry across the region Scale: 1 = Excellent, 2 = Good, 3 = Average, 4 = less than average, 5 = Weak or Poor 141 Wood and wood products related exports are one of the major export items--it employs an estimated 22,000 The wood and wood products sector is a people and accounts for over a third of the major contributor to exports and income country's exports. Nevertheless, the sector and holds significant potential. The is still underdeveloped. The bulk of exports majority of wood exports are still direct are basic sawn and planked wood, without from sawmills with very little value added much value addition going into products activity occurring in Laos (Figure 15). such as furniture. The share of furniture in There are a few furniture producers that are wood exports has generally been less than 3 exporting to international buyers, and wood percent, while that of sawn wood is about 75 flooring is seen by producers as a segment percent. with high potential. Implementing strategies for stimulating downstream production will Figure 16 below illustrates the value chain transition Laos' activity into high growth of a java chair, typically used as garden and higher value segments (see below a furniture, made from teak wood, purchased value chain assessment for furniture). as ungraded or mixed class of wood. The World markets are triggering high growth producer is situated in the province of rates in processed wood products such as Khammuane. The integrated value chain paper and paperboard (16 percent), toilet analysis shows that the end-price of the and facial tissue paper (15 percent), chair, FOB Bangkok, is $9.46, with the three fiberboard (29 percent), and paper highest value-added components being the trays/dishes (11 percent). These products raw material, at 51 percent, followed by are largely driven by growth in urban overhead, at 29 percent, and charges for populations. With significant growth export administration, at 6 percent. expected to continue in China and India, Discussions with various processors of the Laos could be well-placed to enter into the value chain highlight problems that are Asian paper market. constraining the road to high value added export-driven furniture processing. Figure 15. Lao wood exports have low value added and face low world market growth Uncertain raw material supply. One of the most often mentioned issues that the Growth in Lao Exports (% 19992003) ­ secondary processors raise is the difficult 60 access to raw material supply, which 40 Wood sawn/ chopped lengthwise Wood introduces uncertainties in the production 20 continuously shaped along process, most notably the inability to plan 0 edges customer orders over long periods of time. -20 The primary cause of this difficult access is -40 the distribution of wood by the government, Articles of wood Wood in the rough -60 who owns forest resources and logging Builders' joinery and -80 Woodmarquetry carpentry operations through outsourced suppliers. -100 Introduced over the last year, the -6 -4 -2 0 2 4 6 8 10 distribution of logs takes place through a World Market Growth (% 1999­ 2003) ­ mixed system of allocation of a portion of Source: UNCOMTRADE wood quota directly to wood processing companies, and auctioning another portion The case of the furniture value chain of wood quota through a `sealed bid' bidding process, both under the authority With a forest cover of 47 percent of total and discretion of provincial forestry land, Laos is highly endowed with timber authorities. resources. Wood processing and wood- 142 Figure 16. Furniture Value Chain, Java Chair, Laos A newly introduced log auctioning system is pricing out small and medium size processors in favor of financially powerful larger firms, mainly sawmills, which effectively buy the bulk of available logs and thus deprive smaller players of predictable and steady supply of logs. Collection of 25 signatures or stamps over an average period of 12 days is needed to Log payments upfront strain the cash flow of small and clear the goods for export. medium size enterprises. Rent seeking behavior of government No transparency as to the allocation of logs on the part of officials is rampant, as reflected in the share government, which makes it impossible to plan over the of unofficial charges exceeding the official longer term and keep steady pricing policies with charges for administering exports. customers Royalty Logging& Transport Documents Tax Sawmilling Fee Transport 53.3% 17.8% 83.0% 17.0% 16.5% 12.4% Raw Drying Framing/ Finish/Pack Export/ OH Material Assembly Loading Admin 51.2% 4.3% 5.7% 3.9% 6.0% 28.9% Rent & Labor Depreciation Financing Profits Other Utilities Charges 6.6% 16.7% 1.3% 13.7% 57.9% 3.8% Maintaining expatriate staff is indispensable for Margins over and above cost of proper operations due to the lack of skilled and goods sold cannot be more than trained local labor. 15 - 20% in order to stay competitive in international markets; margins (and cash flows) are squeezed by upfront financing of timber purchases. Source: Global Development Solutions, LLCTM 143 While the strategic orientation of the High overheads reduce profit margins. authorities to allocating timber resources Another issue identified by the value chain according to market-based principles is analysis is high overheads, generally driven correct, the current system does not support by the high cost of finance. The current the higher-value added furniture producers, payment mechanism for timber is such that especially given the nascent stage of the all payment must made within a week of furniture industry. The small and medium acquiring the timber. For a furniture size high-value added producers are company that needs 2,500 m3 of timber per disadvantaged in comparison with year, in the unlikely event that it has been financially powerful lower-value added allocated a direct quota, and depending on producers like sawmills or outright timber the type and grade of timber needed, the traders. Interviews in the field suggest that company would need to pay between purchasing wood from sawmills or trading $250,000-$1,000,000. In the event the companies is next to impossible, since they company chooses to compete in the bidding have secure international markets for their process, this price range will most probably produce where they can achieve a much be higher. One way to address this higher price than in the local markets. constraint is to split the auctioning quantities Direct quota allocation is also proving into smaller volumes, to have multiple difficult for furniture makers--in the auctions, and to allow phased payment. allocations in the Khammuane province, only 14 percent of quota had been allocated In addition to the financing charges, to furniture makers as of May 2005 (Fig 17). expatriate labor costs dominate overhead costs (at 35 percent of pre-profit cost) Importantly, a realignment of the current associated with operating a furniture quota allocation can help. First, as far as the company in Laos. However, at present it is non-competitive direct allocation is very difficult to find a local Lao company concerned, furniture makers could be given that exports high-value added furniture a larger share of timber. Second, a better without relying on the expertise and design balance needs to be achieved as to the skills of international experts. It is therefore quantities sold in a competitive process of utmost importance that training and skills versus direct allocation at preset log develop, as well as transfer of know-how be prices--allocating a larger share of stable, facilitated to help accelerate the directly-allocated timber at prices that have indigenization of the sector. At the same historical precedence from previous years' time, local capacity needs to be built in the quota prices would go a long way toward form of educational institutions that would decreasing the uncertainty of timber supplies support the private sector through the and thus enable furniture makers to produce provision of a trained labor force (Note, more efficiently. these considerations are acknowledged in the NES and will be included in the Wood Figure 17. Most of the quota goes to sawmills Strategy Action Plan). Currently, in the case shar e of total quota of Khammuane and Champasak provinces 100% Outsideprovince for example, there exist only two classes 90% 80% Chipboard with 20 students each within vocational 70% training colleges that provide training for Plywood 60% wood processing. The placement of these 50% Furniture 40% students could not be traced directly with the 30% Sawmilling schools, but judging from the interviews in 20% the field, it appears that more graduates from 10% 0% these schools work within government total quota allocated=8,500m3 departments than they do in the private Source: Interviews GDS, LLCtm sector. 144 Expensive and time-consuming export Table 2. Sample running cost for export clearing process. Export administration is administration/documentation of wood the third highest value (cost) adding products component (6 percent). There are two key Expense Kip Share (000) in features of the export administration total process. First, unofficial payments exceed 1. Customs Department Form 30 payments for official charges. Every step 2. Commerce Department Form 40 of the export clearance process requires 3. Industry Department Form 30 unofficial handouts to be issued to 4. Agriculture Department Form 50 government officials. On average, a 5. Advance Profit Tax 171 6. Property Tax 155 company pays $100-150 per export 7. Agriculture & Forestry Tax 22 shipment (Table 2). For a small to medium 8. Mekong Ferry Fee 234 size company that ships between 30 9. Overtime Fee 1 Border 156 containers of end product per year, this Section amounts to approximately $3,000-4,500 per Total Official Payments 888, 45.5% year. Unofficial Payments: a) 4 Government Departments 200 b)Paper work/export clearance 20 Second, it takes approximately 12 days to handouts: 40 complete all the paper work necessary to (each amount represents a 10 export. This entails significant resources on different transaction in which 25 the part of the exporting companies who a bribe was required to 50 facilitate that one transaction). 84 must allocate staff for export clearance 30 procedures. Usually this process requires 60 involvement of a number of people, 20 including significant management 20 involvement to oversee the documentation 88 40 process. Going through the entire export 26 clearing procedures for wood processing 200 companies takes an average of 12 days to 150 complete and 25 stamps and signatures are Total Unofficial Payments 1,063 54.5% required to clear a shipment through the Lao Total Running Cost of Export 1,951 Clearance ($195) border (Table 3). By any standard, this is a Source: Interviews, Global Development Solutions, major distortion that hinders the LLC competitiveness of the sector. Not unlike most globally traded goods, the furniture Other light manufacturing market is extremely customer driven, and time to delivery is just as important as price There is an emerging mechanical and competitiveness for attracting and retaining electrical equipment and parts industry in customers. In contrast, it takes only 30 to 31 Laos. According to the Ministry of days to clear, ship, and deliver the same Commerce, there are over 20 motorcycle goods from Bangkok to Rotterdam. Thus assembly factories currently operating in almost 30 percent of time-to-delivery to end Laos. Hyundai assembles and exports customer is lost to in-country export motorcycles to Niger and Uganda. The parts administration. If Laos is going to have any are imported, but the frame is from Laos. meaningful exports of wooden value-added The mechanical parts are assembled in Laos products, this export procedure red-tape and then shipped to Thailand, Vietnam, or must be greatly reduced. China (Figure 18). This is a short-run, high growth segment since it takes advantage of low labor costs and very little investment is needed. It also shows that Laos is starting to take advantage of the production sharing 145 Table 3. Export clearing procedures for wood products Day 1 *Collect and fill forms (6 sets) from each department: o Ministry of Finance, Customs and Tax Department; o Ministry of Commerce, Commerce Department; o Ministry of Industry, Industry Department o Ministry of Agriculture, Agriculture Department Day 2 *Apply at each office for inspectors to be sent to inspect goods prior to shipment: o MOF, Customs and Tax Department Inspector; o MOC, Commerce Department Inspector; o MOI, Industry Department Inspector; o MOAF, Forestry and Agriculture Department Inspector *Inspectors assigned within 1-2 days at best *Goods inspected and signed by the 4 officers Day 3 *Stamp the MOI Inspector's signed form with Chief of Industry Department *Go to the bank to confirm that payment for exports has been received, as a measure to "protect" exporters *Stamp the MOC Inspector's signed form with Chief of Commerce Department *Reconcile Log List and Stamp the MOAF Inspector's signed form with Chief of Department Day 5 *Confirm the goods are Industrial Goods (with MOI officer) *Apply for Export Permit with Chief of Forestry Section, MOAF (3-5 days) Day 9 *With the Export Permit, go to MOF and Customs: o Tax Section, MOF: pay for advance income tax, cash or check o Property Section, MOF: reconcile log list with data of property section o Customs Section, MOF: obtain Customs Declaration o Border Checkpoint, Export Section of MOAF: sign Export Permit (5-50 km from exporter's facilities, depending on location) o Ministry of Communication and Transportation: obtain permit for truck to leave country o Customs Section, MOF: ask for officer to be assigned to seal truck Day 11 *Border checkpoint, Immigration Section: Invite officially assigned officer to seal truck *Officially assigned officer seals truck at exporter's facilities *Truck heads to export point. *Obtain 4 signatures from each representative at export point (MOI, MOC, MOF, MOAF, and head of customs on duty at export point *Obtain Certificate of Origin from MOC, signed and stamped, including with MOAF Day 12 *Goods ready for loading at Thai border Source: Interviews, Global Development Solutions, LLC Figure 18. Destination and size of Lao Figure 19. New light manufacturing sectors electrical equipment and parts exports are emerging as competitive $000s RCA index Partsof rotating 12 4,500 electric plant Other 4,000 Norway 10 Other tyres,tyre 3,500 United Kingdom cases,inner tubes 8 3,000 Hong Kong, China Public-service 2,500 Belgium 6 typepassenger 2,000 Honduras motor 4 1,500 Thailand Propellent powdersandother 1,000 2 prepar 500 0 - 1995 2003 1999 2000 2001 2002 2003 Source: UNCOMTRADE Source: UNCOMTRADE 146 networks of the Asia region. These have been starting to align themselves to Laos's raw growing in importance in recent years as a materials supply such as rubber and metal. source of export. Industry leaders that participated in the DTIS workshops perceive the current government World export markets for electronic parts and support and subsidies as a significant strength, equipment are consistently growing at above 7 signaling a misinformed and short-sighted view percent annually. While overall growth is solid, on the underlying determinants of the but not exceptional, there are a number of competitiveness of their businesses. product segments that are registering above 10 percent growth. High growth segments include: Weaknesses in light manufacturing include lack integrated circuits (averaging 15 percent growth of market and trade information, shortages in over the past five years), electronic micro- labor supply (especially skilled labor), lack of assembly (21 percent), transmission apparatus raw materials for garments and furniture, poor (18 percent), headphones and earphones (11 infrastructure and high transport costs, percent), and color video monitors (39 percent). restrictive labor laws, lack of technical and Some of these segments require highly skilled design skills, weak knowledge and skills in labor and advanced technology and so may marketing, high communication costs and poor require significant investment in Laos, but infrastructure, and ability to manage peaks and segments such as integrated circuits and valleys in demand and meet increasingly tight transmission apparatus may provide short-term deadlines (Table 4) opportunities for growth. Opportunities for development of the sector are Competitive position of light manufacturing viewed to be the new trade agreements (AFTA, industries NTR, EU), rising income in neighboring countries and the emergence of a consumption SWOT analysis: driven upper and middle class, improved infrastructure, and capitalizing on Laos's strengths in light manufacturing include communication technology innovations to low labor costs, disciplined labor, good labor- connect Laos to key markets. Reinstatement of management relations, low electricity costs, and quotas on China to the US for a few garments bilateral preferential trade agreements. In may present a short-term opportunity to attract addition, segments in light manufacturing are investment and create jobs. Table 4. Infrastructure and Market Access Laos Cambodia Bangladesh China Pakistan Sri Lanka Roads 5 5 5 3 1-4 2-4 Rail NA 5 4 3 4 Airports 5 4-5 3-4 2-3 2-4 1-3 Shipping ports NA 5 5 2-3 3 2 Container terminals 5 4 4 2 4 2-3 Customs systems 5 4-5 5 3 4 3 Power shortage 3 5 5 3 3-4 3 Power supply breakdown 3 5 5 4 4 2 Cost of electricity 2-3 4 3 3 3-4 3 0.047 - Grid ($US/kwhr) 0.07 0.15 0.065 0.08 0.065 - 0.075 Internet 4 2-5 3-4 1-3 3-4 3 Telecommunications 4 2-4 3-4 1-3 2-3 2-3 Source: ITC, 2005, Lao Textiles and Clothing Sector Analysis 147 Threats to the sector are numerous. Laos is that Vietnam, Cambodia, and the Philippines all already behind in international standards, and have industry-wide garment training centers. the latter keep increasing. Elimination of the MFA agreement is underscored with the larger In scale-driven industries, especially in threat of China, and soon Vietnam, as an garments, there are significant capacity efficient, low cost manufacturing powerhouse. constraints to growth and attracting major foreign investors. In the past six months a Porter Competitiveness Diamond: number of major US retailers including Walmart and Sears have visited Laos, but decided that it Exporters need to understand the demand did not have the needed capacity to justify conditions in their export markets. With such significant investment. Laos imports nearly 100 small local market, it is essential for light percent of raw materials for the garments sector. manufacturing companies to be well connected In addition, there is currently only one factory in to buyers and end consumers in regional and Laos that is able to comply with US garment international markets. As the majority of standards and certifications, and it is a companies are sourcing downstream companies Taiwanese firm. in the region or covering overflow production, there is minimal interaction with key markets. For wood processing, the majority of raw Understanding of the current needs and trends in material is still sourced from natural forests, not key markets is very weak. China, Vietnam, and from sustainable plantations. The natural forest Thailand all represent large, growing markets. resources are quickly depleting, but plantations In addition, normalized trade relations with the are growing. For now, there appears to be US offer the opportunity for proactive Lao enough raw material and production capacity to entrepreneurs to profitably penetrate the US keep up with demand; however, the availability market. To date there are very few of skilled labor and craftsmen is extremely low. entrepreneurs with even a plan of how to enter There are training centers, but according to the US market due to lack of information, but wood processing managers, the curriculum is not those that have been successful have used the aligned with needs of the industry. diaspora to make initial contacts and gather information. Even for smaller scale silk weavers, human resource is a key constraint. With basic Factor inputs need to increase in quality-- education so low, there is a need to invest a lot cheap is not enough. Low cost labor is available, of resources in quality control; in addition, many but getting scarce in some industries due to high of the weaving companies have set up in-house competition for cheap labor. Skilled labor is training programs. There is also a significant very limited and higher level supervision / need for marketing and business management management is typically imported. Garments skills in silk and handicraft industry. and wood products both require unique skill sets in order to participate in high-value segments of The local context for competitiveness and the market. There are no training centers for rivalry needs to leave enough flexibility to employees of larger industrial firms in both producers and be more market based. Laos once garments and wood products and only 5­6 enjoyed a 10-12 percent margin advantage in smaller training centers for training small scale garments over other countries in the region, but family producers. To date all training has been recent passage and enforcement of labor laws conducted by international donors course by has reduced this to just a 5 percent advantage, as course, but this is not sufficient to train a the minimum wage rose and the enforcement of substantial labor pool. It should be emphasized company contributions to social welfare became more stringent. This, compounded with an 148 increase in the electricity cost by 10-15 percent, to conduct in-house training. Transportation and resulted in an overall upward pressure on distribution services are significantly lacking. operating costs. Coupled with a significant The cost of owning and maintaining trucking downward pressure on prices in most segments, fleets is prohibitively high for most companies, margins of many Lao companies are being and leasing is not available. severely squeezed. Business environment constraints Given the many business environment constraints in Laos, success in light The business environment is a significant manufacturing is still largely determined by constraint to growth and investment in light networking and a company's ability to navigate manufacturing. Similar to tourism, business the various delays to doing business. The leaders in light manufacturing are eagerly textiles and garments industry cluster is well- awaiting the passage of the foreign investment organized under an industry organization that decree. Channels for market and regulatory effectively advocates with the government on information collection and dissemination are key issues. Other industry clusters such as wood nearly non-existent. Rigid labor laws were cited processing and mechanical parts assembly have by the Garment Exporters Association as a no such dialogue mechanism or are just starting competitive risk for manufacturers in Laos. the process. In most cases, advantages for Lao Under the law there is a limit to 1 hour of companies are still based on protection from overtime per day, competing countries average international competition or government 2-4 hours per day. In addition, producers cannot subsidies, neither of which can be relied upon in employ workers after 10 pm, which means that the medium and long term. Sustained manufacturers are not able to run 2 full shifts. innovation across light manufacturing is Currently the laws are not enforced, but if they significantly lacking. Companies are relying on are, they will significantly impact the cheap factor costs and established marketing competitiveness of manufacturing companies channels, or are simply importing highly mobile operating in Laos. technology and skills that can quickly be removed as protections and subsidies disappear. Significant progress has been made on improving customs and the various processes for A more extensive network of related and importing and exporting commercial goods. The supporting industries needs to be put in place. time for clearing customs is estimated to be just All light manufacturing activities in Laos have 1 day for textile and wood products. Yet much very shallow industry cluster structures. Apart remains to be done in synchronizing and from wood processing, nearly all raw materials harmonizing customs with other regulations. are imported at a high cost and questionable There is a contradiction between customs laws quality. Support services for producers and and the recent SME promotion decree. Under assemblers are weak. Exporters struggle to find the customs law, all imported materials must be appropriate financial services that meet the monitored and tracked by customs while in needs of their business such as lines of credit country and then at point of export, but this and long-term loans, business services are makes it very difficult and costly for larger Laos almost non-existent, and business associations, companies to transfer materials to SMEs for with the exception of textile exporters, are subcontracting, as is promoted in the recent uncoordinated or non-existent. There is no SME promotion decree. Also, the government- institutionalized training for skilled labor-- operated warehouses at customs have caused cluster-wide training sessions are short-term and some concern among industry leaders in their sporadic, mostly based on donor timelines, so efficiency and cost. companies are forced to expend significant cost 149 Strategic opportunities The planned Special Economic Zone (SEZ) offers good prospects for attracting Strengthening marketing linkages will be light manufacturing, but this needs to be critical to light manufacturing businesses confirmed with surveys. Given the continuing to adapt to the changing market construction of the new bridge at dynamics. Currently there are five full-time Savannakhet and the focus on the East-West commercial attachés working under the Corridor connecting Myanmar-Thailand- Ministry of Foreign Affairs in Vietnam, Laos-Vietnam, the SEZ has good potential Thailand, China, France and Russia. There for success according to the JICA study is limited communication and coordination completed in 2001. It is important to between the Lao National Chamber of confirm the demand assumptions of the SEZ Commerce and Industry (LNCCI) and these by conducting more in-depth surveys of foreign representatives, even though these manufacturers in Thailand, Vietnam, and representatives could be a source of market others to confirm the "demand side" linkages for Lao exporters. The industry feasibility and the conditions under which cluster should make full use of these firms would transfer operations or add attachés in providing on-the-ground links to capacity in Laos. After confirming this, it is potential clients and for feeding back market necessary to expedite progress on the SEZ information. In 2003 Russia only accounted using international best practice and for 0.1 percent of total registered exports strategic partners who can provide from Laos, so there may be an opportunity financing, engineering, management to re-evaluate the key export markets where expertise and--most importantly--the the LNCCI and the government are best ability to attract a critical mass of tenants. If positioned to assist industry growth. these steps are taken, the SEZ might generate 20,000 jobs in its first five years of Realigning Lao garments industry operations. However, workforce around its expertise as well as cheap labor development and training are constraints to will require a more focused effective implementation. understanding of market and customer needs. Currently, the market economics are Commissioning a comprehensive survey of on a downward trend and profitability will Thai industries to identify companies willing continue to deteriorate. There is already to create satellite plants for light evidence of business closures and manufacturing in Laos, and the conditions entrepreneurs transitioning into other required for them to do so, would be an industries. Investment should be cautious important first step in investigating this and focused on: opportunity. Unlike the JICA study, this · Improved technology use in garments survey should include site visits to sector in anticipation that wages will companies in Thailand.4 begin to increase · Target niche opportunities to raise export values to the US and grow exports in Europe · Position Laos as the most efficient 4The JICA study used faxed surveys to companies in destination for spillover business from Thailand and Vietnam. The response rate was Thailand and Vietnam relatively low. Only a handful of companies indicated existing plans to establish operations in Laos although many others indicated interest in the SEZ. 150 Improving customer knowledge and connections could accelerate the option of market contacts as well as design this model across the silk industry and in capabilities are two urgent priorities for other similar handicraft and agro-industries boosting wood product and handicraft (medicinal plants and herbs, coffee). A exports. Much can be done to assist current certification process and labels for high- and potential producers and exporters. It is value Lao Silk is much needed and already important to build market research capacity, planned by Japanese donors. A JICA participate in international trade shows initiative building the Chao Lao brand for (conditional upon companies actually being the Japanese market has already been ready to participate in such an event, successful in increasing the value of Lao silk practically as well as in terms of company abroad. strategy), develop e-commerce capability and link up with importers in foreign 3. Agriculture markets who are willing to pay attractive prices.5 Design capabilities in Laos are still Profile and importance of agriculture very weak. Design skill will raise the value of exports. Master craftsmen and women Agriculture remains the main source of income earn up to three times as much as normal and livelihood for the people of Laos. The craftspeople. Creating a Lao center of sector accounts for 50 percent of GDP, down design and innovation would build human from 52 percent in 1998, with rice representing resource capacity and continue to spur 75 percent of all agricultural production. Other product innovation. Value-added main crops include maize, coffee, sugarcane, manufacturing in wood exports is clearly an tobacco, and peanuts. Laos is transitioning from important opportunity to fully capture the an agricultural based economy much slower than value of unique wood in Laos. It may be its neighbors (Figure 20). Of the total unrealistic to expect sawmills themselves to population in Laos, 76 percent still dwell in the forward integrate into furniture production rural areas and an estimated 80 percent of the but there are a number of entrepreneurs labor force are farmers. already interested. One Swedish entrepreneur with expertise in furniture had Figure 20. How fast is Laos moving out of at one point made export agreements with agriculture? the Swedish firm IKEA. percent changeof agriculturetonon-agricultureactivities,1980-2010 16 14 Promotion and certification of Lao silk 12 products can increase value. For the silk 10 industry, a few of the successful silk 8 6 weavers have developed a successful cottage 4 industry model of bringing income 2 generating activities to the rural areas. One 0 silk business based in Vientiane works with Laos Cambodia Vietnam Thailand village cooperatives covering over 300 Source: FAO estimates families. Promotion of urban-rural industry Coffee is currently the main agriculture export commodity. Despite its importance in the 5For example, the non-profit group "Ten Thousand domestic economy, agriculture only represented Villages" is an importer of handicrafts that passes on 6.1 percent of total Laos exports in 2003, of "fair prices" directly to artisans in developing countries much as "fair trade certified" coffee passes which coffee dominates (Figure 21). Coffee on higher prices to coffee farmers. alone accounted for nearly 80 percent of 151 agricultural exports, $12.5 million, with cereals Figure 22. Agriculture exports falling back and the next highest value at $1.4 million and hides, gaining ground skins and leather totaling $1.4 million as well. Fish, crustaceans &aquatic invertebrates There are some smaller segments that are Ediblefruit &nuts; citrus fruit or melonpeel achieving high growth rates in agricultural Falling back Leather articles exports including: edible vegetables/roots/tubers Live animals (226 percent average growth since 1999), cereals Coffee, tea, mate &spices (106 percent), and vegetables/fruits/nuts (91 Meat andediblemeat offal percent)--Figure 22. Illustrating the volatility Rawhides/skins/leather of commodity markets and the uncertainty of Veg plaiting mats &other veg products crop yield, coffee exports declined 15 percent Oil seeds; indust/medplants; straw/fodder Gaining ground over the five-year period. Since 2003 Lao Beverages, spirits and vinegar coffee has made a rebound, but future exports Preps of veg, fruit, nuts or other plant parts Cereals are still subject to external shocks that Lao Edible vegetables &certainroots & Tubers farmers and the agricultural industry overall are -100 -50 0 50 100 150 200 250 5-year average export growth rate(1999-2003) not yet able to successfully mitigate. Source: UNCOMTRADE Laos has gained comparative advantage in several agriculture products, including castor oil, Figure 23. Agriculture sectors with comparative advantage jute fibers, coffee, wheat, and seeds used in perfumes (Figure 23). A successful example is Castor oil seeds Jute&other textilebast fibres,ne agar wood (Box 2). Coffee,whether or not roastedor fr Buckwheat,millet,canary seed,grain Plants,seeds,fruit usedinperfumer Vegetableproducts,roots&tubers,f There is a significant amount of informal trade Veget.mater.of akindusedprimar.f Sesame(sesamum)seeds in agriculture across the Mekong region. This is Animalsof thebovinespecies,incl. Essential oils,concretes&absolute Woodof coniferousspecies,sawn,pla especially the case for livestock, which can and Groundnuts(peanuts),green,whether 2003 Calf skins,raw(fresh,salted,dried, do leave by mass on foot into Thailand. In Potatoes,freshor chilled,excl.swee 1995 Fuel wood(excludingwoodwaste) an addition non-wood forest products (NWFP)-- Other materialsof vegetableorigin Flours,meals&flakesof potatoes.f including medicinal herbs, fiber products, resin Cotton,cardedor combed Bovine&equinehides(other thanc and edible products--are harvested in the forests Rawsilk (not thrown) Spices(except pepper andpimento) and then traded into southern China and sold at Leather of other bovinecattleand 0 10 20 30 40 50 60 local markets. No definite number is known for RCA index the value of NWFP exported from Laos, but Source: UNCOMTRADE estimates are up to 2.5 percent of exports, of which the majority are medicinal plants headed International and regional market trends for China. Reflecting the low value-added and their largely Figure 21. Laos' key agriculture exports domestic nature, agricultural export markets are $00 Animal and Animal Products relatively small in comparison to light 30,000 Foodstuffs manufacturing and tourism trade. World fruit 25,000 Raw Hides, Skins, Leather, Furs and vegetable exports in 2003 totaled $190 20,000 VegetableProducts billion and registered 5.8 percent growth during 15,000 1999-2003. High growth vegetable products from 1998 to 2003 included: green tea (23 10,000 5,000 percent) tropical fruits (pineapple, mangosteen, - guavas, papayas ranging from 13-20 percent 1999 2000 2001 2002 2003 growth), fruit juices, coconut oil (25 percent), Source: UNCOMTRADE and soya bean (20 percent). 152 Box 2. High-value cultivation: Eagle wood Animal and animal exports followed closely behind fruits and vegetables at $139 billion and One example of the ability of Laos to reposition itself in the global economy is the example of Eagle Wood, also 5.7 percent annual growth. High growth known as "Agar Wood" or by its scientific name segments included: swine meat (17 percent), "ecoleria". salmon (18 percent), and natural honey (20 The team visited a plantation of agar wood and also percent). interviewed the Managing Director of Lao Agar International Development Company, Ltd., who was based for many years in Saudi Arabia and knows the Agriculture exports to Thailand have grown, market there quite well. The end-product is used for but those to China remain low. Rising incomes burning as incense in Asia but especially prized in Saudi and urban migration in Southeast Asia are both Arabia and the Arab world. As an essential oil, it is also positive market trends for Lao agriculture. used as perfume or cologne with a woody scent. The oil Vegetable and foodstuff exports from Laos to and the wood are given as gifts in the Middle East. One 11.62 gram bottle can be sold for $100. Treated wood Thailand grew notably; from 1999 to 2003, appropriate for the market goes for between $200 and foodstuffs registered 628 percent annual growth $2000 per kilogram and can easily average $800 per and vegetable products grew 69 percent year on kilogram. In both oil and treated wood, this is a very high year. Surprisingly there was very little growth value product. in exports to China. With recent partnerships The tree itself only produces the desired black resin if it is between Laos and China, Laos agricultural damaged by natural disasters or insects, but the response exports destined for China should grow can be induced by drilling holes in the tree and injecting a substance that causes this response. This is often done significantly--while other ASEAN countries after five years of growth, after the tree has reached a also have preferential access to the Chinese certain size and maturity. Thereafter, it takes only a few agriculture market as part of the Early Harvest months to produce the resin that can be used in essential Agreement of the ASEAN-China free trade area, oil. Alternatively, the tree can be aged for many more Laos can export niche products to China (e.g., years (10-15 years) to produce the wood that is highly prized for its incense smell when burned. The tree is medicinal herbs and products) and can target the felled and the valuable dark part of the wood is separated Southern part of China. from the white part of the wood which is not usable. One hectare can yield 800 trees, of which 700 can Notable market trends in agriculture include a normally be used when treated appropriately by injection. growing demand for organic products in Minimum prices for trees are $150 (although others allege international markets, rising standards for that the price should more properly be estimated at $500). agriculture produce and livestock, rising Even at the lower price, each hectare would produce over $100,000 when brought to harvest in 5-6 years. After efficiency of international distribution networks, processing, this value goes up and each tree is said to be and rising levels of income in Asia that is likely able to produce between $200 and $1,000 worth of final to shift the consumption needs of a large portion product. When wrapped as a gift in an attractive bottle of the market. and wood box, the final product can be sold for over $2,000. The case of coffee Supply is said to be diminishing in Cambodia, Thailand and Vietnam but is still quite good in Laos and Myanmar. The team found evidence of new planting of eagle wood Coffee is a growing export product for Laos. at more than one site. Agarwood also provides an While there is some coffee grown in the alternative crop to highland people who have in the past Northern Provinces, nearly all of the primary grown opium. coffee production takes place in the southern The plantation of 3,200 hectares, the entrepreneur was region, particularly Champassak where over 80 investing in eagle wood expansion while also growing percent of the coffee is produced. Total coffee under the tree canopies, harvesting eucalyptus, production in 2004 is estimated at about 35,000 processing eucalyptus charcoal for export, raising cattle which grazes on the grass among the trees, developing hectares and 23,000 tons--of which 70 percent fish ponds and investing in rural tourism. is Robusta, 20 percent is Arabica, and the remaining 10 percent is Catimor. Production is 153 gradually shifting towards Arabica and Catimor where coffee is grown, infrastructure and access which command a much higher market price. to transportation is poor. For poor rural farmers whose primary source of income and livelihood is not coffee, Robusta Table 5. Greater Mekong coffee comparison continues to offer a viable choice. The market Laos Thailand Vietnam Myanmar structure for coffee is an inverted pyramid with a Production 37576 66400 500000 5000 large number of smallholding farmers, very few area medium size farmers (<10 hectares), and a Yield (kg/ha) 681 1193 2500 458 single large coffee plantation (210 hectares). There is a budding cooperative movement which Production 23000 86400 700000 1830 began in 2004 with 500 smallholding farmers. volume (tons) Source: Compiled by Global Development Solutions, LLC. Exports of coffee amount to $153 million (2003), or 7 percent of agriculture commodities From the perspective of Lao coffee farmers' exports. Over 80 percent of coffee exports go to competitiveness, the inability to use Europe, and the rest to Asia. Vietnam is an agrochemicals by small farmers undermines important destination of Robusta exports, mainly yield rates but creates the possibility to exploit because of close ties between Lao coffee the organic niche market. With the market for companies and Vietnamese traders (Figure 24). coffee increasingly more competitive and consumers more quality conscious, premium Figure 24. Main destinations for Lao coffee prices are being paid for organic coffee. exports, 2004 Although most Lao coffee farmers produce organic coffee, they have not been able to take Vietnam Poland Arabica advantage of it because of several constraints: Spain · Weak extension services. Farmers have Germany poor on-farm technical skills and poor Belgium post-harvesting handling, all Switzerland Robusta Vietnam contributing to low yield, poor quality Poland control, poor product quality, and 0 10 20 30 40 50 limited volume of marketable product-- shareinpercent further efficiency gains in on-farm and Source: Coffee Exporters' Association of Laos post harvest handling techniques can go Lao coffee faces key competitors within the a long way towards improving the income generating potential of rural Mekong Region. Vietnam is the largest producer--accounting for 45 percent of all coffee farmers; coffee production in Asia and over 10 percent of · Lack of marketing infrastructure. world production. In this context, Laos is a Currently there is little marketing, from small player and its production represents less both within the country to improve that half a percent of world coffee. The yield awareness among the farming per hectare in Laos is lower than most of its community and to develop a "coffee neighboring countries but is adequate enough to culture" within Laos, as well as outside attract farmers into this sector (Table 5). the country to draw the attention of key buyers in the international coffee market A unique feature of Lao coffee farming is the on the potential of Lao organic coffee; fact most smallholding farmers practice organic · No "country branding" associated with farming--not necessarily by choice but because Lao coffee; they cannot afford fertilizers. In many areas 154 · Weak capacity of the Coffee Growers' Threats continue to be posed by external shocks, Association. This would allow the ability to mitigate the risk of natural disasters Association to promote organic coffee, inclement weather, and rising agricultural both within the country and to foreign productivity in neighboring countries. consumers. · Absence of quality and grading Porter competitiveness diamond: standards. Laos lacks certified liquoring specialists to help categorize Demand conditions. Laos farmers are coffee and respond to demands from extremely isolated, both physically and international buyers seeking distinct and informationally, from end markets. As a result, complex flavors, aroma, acidity, and there is limited understanding of markets outside character. Standards and certification of Laos and this is reflected in basic pricing and will greatly improve value. the quality of processing, packaging and distribution of current agricultural goods. Competitive position of Lao agriculture According to the Ministry of Agriculture, which is currently engaged in a project to raise the SWOT analysis: awareness of the value of organic products, many farmers simply do not see the market for Agricultural strengths in Laos include abundant these goods yet, so they are not willing to make and fertile land, preserved, naturally organic the investment to go organic. farms, cheap electricity and good access to irrigation in many areas, wide access to cheap Factor conditions. Abundant land with access labor, and limited, but well-trained government to irrigation and an appropriate climate makes staff. Laos a natural candidate for high-value agricultural exports. However, knowledge and Weaknesses in industry clusters in the skills in modern farming techniques are severely agriculture sector are high cost of production lacking. Physical infrastructure is weak: many and distribution, weak extension services, poor roads are either unpaved or worse, unpassable, availability and dissemination of market and irrigation systems need expansion and information, lack of technical know-how, lack of upgrading. Processing techniques are very institutional support and research on modern rough and current handling, processing and processing and packaging techniques, limited packaging occur at warehouses many kilometers supply of skilled labor, poor warehousing and away from the point of harvest. As a result, Lao distribution infrastructure, lack of cold chain farmers and exporters typically get a very low infrastructure, no regulation or certification for value for their products and further processing export products, lack of export financing, no and packaging is needed in the country of breeding of seedlings by segment, capacity of destination. production, limited use of organic fertilizers, landlocked country with limited and expensive Access to appropriate financing is a major issue air-freight. for many exporters. Interest rates for agricultural loans range from 22-28 percent and Opportunities include the lowering of trade require a faster payback period than is possible barriers in ASEAN, large populations with rising with most commercial agriculture investments. incomes in neighboring countries, increasing For commercial entrepreneurs that are seeking to infrastructure connecting Laos with its building businesses in new areas of agricultural neighbors, the rising awareness and concern for exports, these high rates are not aligned with the organic produce, and the still unknown brand of risk profiles and return timelines that they are Laos for export commodities such as coffee. facing in new investments. 155 Context for strategy and rivalry. Given that Figure 25. Coffee organizational division much of Lao agriculture is still informal and largely domestic, the sector is fragmented and unorganized. Ability to compete in this sector is driven by access to physical and financial resources and market linkages to regional and international markets. Given the limited formal commercial sector participation outside coffee, it is unclear whether the regulatory environment is significantly constraining to competition. Related and supporting industries. The supporting knowledge institutions and services that are essential for sustained agricultural Business environment constraints competitiveness over time are virtually non- existent in Laos. There is no cold chain As highlighted above in the Diamond Analysis, distribution and warehousing services, even in there are a number of key issues in the business the major urban areas. There is no official environment that need resolution for supporting count, but estimates total less than 5 cold trucks further growth in agricultural exports. available for use in the country. Warehousing Regulations and standards are cited by both and packaging facilities are equally lacking. public and commercial sector representatives as NAFRI is the main agricultural research a critical issue. Regulations and standards on institution, but its mandate is broad and farming of organic products are already drafted according to local experts it does not have the and in the process of being reviewed and passed; capacity to effectively deliver desperately however, there is very little awareness of this needed knowledge and technology to key among the agricultural sector. Exporters of agricultural segments. Insect and pest coffee are individually seeking out compliance management is a big problem, but there is very to international standards, but there are no little knowledge of the organic and chemical services available in Laos for this. It should be solutions. noted that the issue of standardization is of critical importance also for other sectors, so The coffee industry is the only segment that has awareness raising and action in this respect an organizational structure for coordinating should become a priority. industry-wide decisions and activities (Figure 25). Yet even with the coffee cluster, Distribution and warehousing infrastructure, communication, flow of information and especially cold chain services are another urgent activities are not occurring efficiently between priority. High-value agricultural products the farming community, directly supported by require modern packing and transportation that the Ministry of Agriculture, and the exporters preserves the freshness of the product. association, directly supported by the Ministry Currently these services are not available in of Commerce. Numerous leading coffee Laos. exporters stressed the urgency of better coordination between the two groups in In a country as fertile as Laos, surrounded by developing and implementing standards, growing markets, it is surprising that there is not educating the industry on best practice in a higher level commercial investment occurring farming and processing, and coordinating the than currently. Farmers appear to be facing supply-chain to better handle large orders. more than just supply-side and infrastructure constraints in expanding their farming activities. 156 This indicates that there may be regulatory technology regulatory bodies and constraints in private property or farm regulating agricultural standards. management that are hindering commercial scale-up of the sector. Review agriculture incentive structure for commercial farming. As mentioned Strategic opportunities above, there is a need to assess the current state of farm growth and the constraints on Examples already exist of Lao entrepreneurs farmers to growth into larger scale marketing high-value agricultural exports to commercial farming. Once the constraints international markets in coffee and organic rice. are clear, the government, with assistance There have also been recent small-scale from international experts, should design a successes in expanding pork production for the strategy for facilitating transition of domestic market, exporting selected horticulture subsistence farming to commercial products, selling non-wood forest products (e.g., farming. herbal medicine) and establishing rubber plantations for export. The investments being Provincial production zones and made in road infrastructure will create not just distribution centers. Establishing transport corridors but economic development production zones for cultivation and corridors as well. Agriculture is still the major processing in each province that have provider of livelihoods in Laos and agro-exports incentives and infrastructure for can help reduce poverty. To do this, it will be commercial agriculture that meets necessary to improve village-market linkages, international standards would allow ensure fair price discovery, develop agricultural regional farmers to share the costs of key credit, implement export standards and grades infrastructure needs. This alone would not and encourage value-added processing of natural solve the infrastructure constraints, but resources. may be one part of a near-term solution, which would also have to include Specific strategies that can be developed or improvements in the legal framework initiatives implemented include: supporting contracting. Upgrade agricultural practices and Market access to regional and develop standards for agricultural international markets. Laos farmers and exports. Initiatives here could be exporters need assistance in market patterned on recent initiatives identification and market linkages to help implemented in Thailand with the them make better decisions and increase eventual goal of adopting HAACP and exports. Setting up provincial market ISO standards. Also essential is the information centers would improve market establishment of an organic certification and pricing information. These centers body. could also play a role in developing farmer-to-market strategies. This could be Upgrade capabilities and capacity of closely tied to the design of regional STEA. STEA plays a critical role in both production zones. informing, facilitating and monitoring agricultural standardization and Farmer processing training. Increased modernization. It is currently not able to access to information and markets will not support the industry to the extent needed be enough. Local farmers and first stage in linking with international science and processors need training in: 157 - Complying with international export - Insurance services for external shocks standards and natural disasters - Quality control and order size - Orders used as collateral management - Village funds and microfinance - Managing buyer relationships - Warehousing, storage, packaging, and Annual sector publication to increase distribution the availability of information for - Training of trainers in specific crop investors. Publish investor oriented segments agriculture information to inform potential investors and producers (e.g., what This training could be facilitated through products are being produced, where, how one of the above centers mentioned. much, at what price?) Alternatively, an overall provincial agricultural extension services center Support the formalization and growth could be an efficient way of delivering all of the coffee sector. of the above services to the provinces. o Boost Arabica production with financial assistance, technical Investment in road and irrigation expertise, and raising awareness of the infrastructure. Invest in rural road benefits. Currently there is very little infrastructure from high potential production and limited knowledge of agricultural regions is essential in ensuring how to cultivate and process so that farmers can get their produce to volumes are limited. market in a timely fashion. Irrigation, o Institutionalize standards certification while adequate in regions, can be for coffee exports. The quality expanded according to commercial and delivered to international coffee public sector leaders. buyers is currently sporadic and needs to be carefully managed as a few bad Seedling investment. Technical shipments could tarnish the country's assistance is needed in breeding seedlings image. optimal for cultivation in Laos and then o Establish a coffee marketing media supplying seedlings to rural farmers along and information channel, broadcasting with training on modern farming price discovery and information techniques dissemination via radio and other means to assist the farmers in Appropriate technology identification capturing full value for their product. and investment. Facilitate the transfer, o Deliver coffee training and extension investment, and adoption of appropriate services to support farmers in technologies to increase the productivity capturing additional value through for rural farmers. Set up a long-term initial coffee processing at the farm agriculture investment fund designed for level. investment projects with long return o Establish Coffee Cluster Working period or start-up funds. Group that bridges the divide between the exporters/Ministry of Commerce Agriculture financial services and the coffee farmers/Ministry of Assess the availability and appropriateness Agriculture. of current financial services available to industry clusters in the agriculture sector such as 158 4. Conclusion and cross-cutting building in marketing and management recommendations is an urgent priority. 6. To date there has been much focus on The analysis in this chapter--especially the the "supply side" of tourism identification of constraints, opportunities, and development and industry development; challenges to the main export sectors--is however understanding the "demand derived from feedback from cluster leaders side" is an urgent priority as this can during the extensive workshops undertaken for help guide investment priorities at both this DTIS. In this respect, the chapter reflects business and government levels. the vision from within the Lao private sector 7. It would be helpful to form industry itself. The ITC has recently developed a cluster working groups that can better National Export Strategy for Laos--which understand their current positioning in provides comprehensive and in-depth world markets, develop a clear vision recommendations to boost exports in Laos. This and design and implement strategic chapter seeks to complement the ITC study by initiatives. focusing on practical issues raised within the 8. Implementation of concrete initiatives context of the DTIS workshop. can boost export competitiveness; examples include improving market linkages, e-commerce, product Key overall messages include: innovation, branding, workforce development, supply chain management 1. Laos has the potential to meet or exceed and others. the growth rates of neighboring 9. The Special Economic Zone (SEZ) countries Vietnam and Thailand over the planned for Savannakhet promises next ten years. particularly to create jobs in 2. However, large scale increases in Laos' manufacturing; progress should be exports will not be immediate or accelerated with strategic partners who automatic from signing trade can provide financing, management and agreements or entering the WTO; ability to attract tenants. proactive efforts must be undertaken to 10. Workshop participants revealed a high achieve this export potential. level of receptivity to further active 3. There is potentially high interest in participation in understanding their international markets for a number of current position and working together to Lao export products and tourism implement strategic change. offerings--modest examples of export competitiveness are already emerging in On the basis of intensive work in these industry coffee, silk, wood and cultural and eco- clusters, there are several general tourism. recommendations that would apply across the 4. Laos is relatively unknown abroad and board. this provides an opportunity for building a "Laos" national brand for specific Industry cluster strategies. Many commercial high-value industries. industries in Laos are still in the early stages of 5. While some Lao export champions development in positioning themselves to already exist, very little in the past has compete in international markets. The Laos prepared the average Lao entrepreneur industries need to develop a vision, goals and to understand the needs of international strategy for building export competitiveness. markets and respond with world-class Working together in close communication and offerings; therefore human capacity cooperation, these leaders can then implement 159 strategies that focus on quick wins as well as Industry-government coordination. All four building long-term competitiveness. workshops expressed a desire from both industry and government representatives for increased Market research and understanding of coordination between businesses and the international markets. Understanding government in achieving increased export international markets is critical for building competitiveness. It is understood that neither export competitiveness. International marketing group alone will be able to implement the capacity in Laos is currently very low across all necessary steps to raising exports--it will take a industries. The industries individually as well as joint effort with both sectors working towards the government overall, with donor support, the same vision. The government should should invest in building capacity among young support the formation of "industry working professionals in Laos in market research. groups" that would be charged with improving Sending at least 30 Lao professionals abroad for the measurable performance of export training in market analysis and international competitiveness in their industries. marketing would create a critical mass of talent for understanding and taking advantage of Improving financial services. Lao business global market opportunities. At the industry participants were nearly universal in their level, supporting the dissemination of industry agreement that they do not have access to information can help strengthen the ability of finance, that finance is too costly and that this industry associations to provide useful represents a major barrier to expansion. For information and services to their members. most business people, this was the most serious constraint in the business environment. Branding of Laos and its high-value products and services. High quality products from Laos are currently undervalued on the international market due to limited recognition of the origin and uniqueness of the products. Building brand value in these high-value areas is critical for positioning Laos to compete in international markets. Overall, the Lao "brand" could be built around themes such as "peaceful people, creative culture". Within specific industries, branding opportunities are apparent in Tourism, Silk, Coffee, Wood Products, and organic foods. This would include the development of a "Laos" brand, mark of origin, and assistance to firms on trademarking.6 6 It should be kept in mind, however, that a brand should only be introduced once consistent quality and availability of the product can be assured; funds should primarily be allocated to strengthening the capacity of a sector and only later towards marketing. The tourism and silk industries are probably the ones that are most prepared for the launch of a marketing strategy. 160 Chapter 10: What's in it For the Poor? There are 1.8 million poor in Laos; most live Table 1. Poverty and inequality in rural areas spread all over the country. Headcount Poverty Poverty Gini They wonder how economic reforms and poverty gap % severity coeffi- rate % % cient trade openness is going to reach them. % What's in it for them? If the past is any Laos: indication, the reforms of the New 1992/93 46.0 11.2 3.9 30.5 Economic Mechanism have been 1997/98 39.1 10.3 3.9 34.9 2002/03 33.5 8.0 2.8 32.6 remarkably successful: GDP grew rapidly, Rural: poverty incidence fell by about a quarter in a 1992/93 51.8 12.9 4.6 29.0 decade, and inequality increased only 1997/98 42.5 11.4 4.4 32.1 slightly and is still lower than in most 2002/03 37.6 9.2 3.2 30.3 countries. The government is now Urban: 1992/93 26.5 5.5 1.6 30.9 embarking on a new reform agenda, 1997/98 22.1 4.9 1.7 39.7 including implementation of regional 2002/03 19.7 4.1 1.3 34.8 agreements that would lower tariffs and Source: Richter et al., World Bank, 2005. accession to the WTO. It is also promoting an export-led growth strategy. This is not The growth resulting from the only a challenging task in and of itself, but government's reform program has led to a the link to the poor is neither direct nor reduction in poverty, and only a slight obvious. What can the poor sell or export? increase in inequality. In order to promote How can they reach foreign markets? This development and reduce poverty, the paper (i) assesses the impact of trade government adopted in the mid 1980s the measures on the poor and (ii) provides some New Economic Mechanism (NEM), a practical experience from other countries on program for the transition from a centrally making the poor reach out to export planned economy to a market economy. opportunities. GDP growth during the reform period has been rapid. It averaged 7 percent per year 1. Impact of Trade Measures on the Poor between 1992 and 1997, slowed to 4.5 percent between 1996/97 and 1997/98 Profile and trends of poverty because of the financial crisis in Thailand-- the most important single market for Lao About a third of the Lao population is poor, exports--and then recovered to just under although inequality is low (Table 1). Laos the 7 percent rate that had been achieved in contains many ethnic groups that are located the early 2000s. in remote rural regions and are cut off from economic opportunities in the towns both by The rapid growth of the 1990s substantially language and cultural barriers and by poor benefited most poor people. Inequality transport and communications. The remote increased between 1992/93 and 1997/98 but northern part of the country, in which the was partially reversed in the next five years proportion of the population in rural areas is (see Table 1 above). The headcount ratio highest, is much poorer than the relatively fell from about 46 percent in 1992/93 to more urbanized central provinces (Table 2). about 33 percent in 2002/03. Over the same Although poverty incidence is generally period, the poverty gap fell from 11 percent higher in rural areas than in urban areas, it is to 8 percent and the severity of poverty fell higher in the urban areas in the north than in rural areas in general. Vientiane capital has the lowest poverty incidence. 161 Table 2. Poverty incidence by region Province LECSI LECS2 LECS3 Change Change 1992/93 1997/98 2002/03 92/93 to 97/98 to 97/98 02/03 Northern Region 58.4 52.5 37.3 -5.9 -15.2 Oudomxay 51.1 73.2 44.9 22.1 -28.4 Luangnamtha 60.3 57.5 23.0 -2.8 -34.6 Huaphanh 78.4 74.6 50.9 -3.8 -23.7 Phongsaly 68.7 64.2 50.8 -4.5 -13.4 Luangprabang 62.7 49.4 38.6 -13.3 -10.8 Xayabury 30.1 21.2 24.7 -8.9 3.5 Bokeo 63.5 37.4 20.9 -26.1 -16.5 Central Region 39.5 34.9 34.8 -4.6 -0.1 Bolikhamxay 10.6 25.8 32.9 15.2 7.1 Khammuane 43.7 41.6 33.7 -2.1 -7.9 Vientiane Province 28.1 24.3 18.4 -3.8 -5.9 Savannakhet 45.7 37.1 41.7 -8.6 4.6 Xiengkhuang 57.3 34.9 41.8 -22.4 6.9 Xaysomboun SR 55.0 - 29.7 - - Southern Region 45.9 38.4 32.4 -7.5 -6.0 Salavane 36.7 39.6 54.2 2.9 14.6 Champassak 43.6 35.6 17.5 -8.0 -18.1 Sekong 65.9 45.7 41.6 -20.2 -4.1 Attapeu 72.2 45.3 43.6 26.9 -1.7 Vientiane Capital 24.4 12.2 16.4 -12.2 4.2 Laos 45.0 38.6 32.9 -6.4 -5.7 Source: World Bank estimates based on LECS data. from 4 percent to 3 percent.1 Poverty fell However, communicable diseases such as most rapidly in Vientiane capital. malaria, dysentery, cholera, dengue fever, intestinal parasites, tuberculosis, acute Social indicators have improved across the respiratory infections and measles are still board during the reform period. Between common. The proportion of the population 1995 and 2000, life expectancy at birth with access to safe drinking water increased increased from 51 years to 59 years, the from 15 percent in 1995 to 50 percent in mortality rate for children under 5 years fell 2000 (I-PRSP). In October 2000, Laos was from 170 to 107 per 1,000 live births. The declared to be free of polio and 95 percent maternal mortality rate per 100,000 live of villages were covered by basic births fell from 560 in 1995 to 530 in 2000. vaccinations under the government immunization program. Education attainment is low but improving. Less than 30 percent of all adults went 1 The headcount ratio is the proportion of the beyond primary school, and one quarter population below the poverty line. The poverty never attended school in 2002/03. School gap is the product of the `expenditure gap' and attendance is highest in urban areas-- the headcount ratio, where the expenditure gap is Vientiane capital, along the Thai border, in the average, for all poor people, of the lowlands, and in non-priority districts--and proportionate shortfall of their expenditures below the poverty line. The severity of poverty is very low along the Chinese-Myanmar the headcount ratio multiplied by the mean, for border where just two in five adults ever all poor people, of the squared proportionate attended school compared to 19 in 20 adults shortfall of their expenditures below the poverty in the capital. School attendance of adults line. 162 has improved over the second half of the NGPES and the National Socio-Economic past decade--it increased from 49 percent in Development Plan (NSEDP). The last 1997/98 to 59 percent in 2002/03 in priority NSEDP finished at the end of 2005 and the districts. This is a remarkable progress as it CPI is preparing the sixth plan for the period reflects exclusively improvement in school 2006­10, which is currently being reviewed attendance among young cohorts joining the by the National Assembly. The NGPES adult population. refers to trade policy and lists the tariff reductions scheduled under AFTA as part of There are large differences among the government's package of policies for provinces in social indicators. For eradicating mass poverty. At present, example, in Vientiane capital about 90 however, the most important components of percent of both girls and boys between ages the NGPES are those that provide for 6 and 14 are enrolled in primary schools, increased spending on health, education, and whereas in the northern region the infrastructure, on policies aimed at directly corresponding enrolment rate for boys is helping the poor and at reducing the barriers between 45 and 50 percent, while that for that separate the most isolated provinces girls is below 40 percent (2002/03). Life from the rest of the country. expectancy at birth ranges from 57 years in the northern region to 63 years in Vientiane To target increased spending at the poorest capital and the prevalence of malaria varies groups, the NGPES used data from the from 7 cases per thousand people in household expenditure surveys to identify Vientiane capital to 82 per thousand in the 47 very poor districts that will receive top southern provinces. priority in the allocation of public investment. The next poorest districts have Government strategy been assigned to a 2nd priority group and the remainder are classified as `non-priority'. The government's reforms aim at further integration into the regional and global The government recognizes the importance economy. The government has shown its of agricultural development to poverty intention to consolidate the process of reduction: poverty incidence is higher in opening the economy to international trade rural areas than in urban areas and most and investment by applying to join the rural households are involved in agriculture. World Trade Organization (WTO) in 1997. The main ways of promoting agricultural Besides the liberalization of merchandise development proposed in the NGPES are trade and investment, this will involve the public spending on extension services, opening up of service sectors to international improved road and river transport, rural competition and the introduction of laws to electrification and irrigation. protect intellectual property rights, to modernize the customs service and to make Reducing the physical barriers separating the treatment of import and export standards people in remote areas from the urban and quarantine procedures compatible with centers in which growth is likely to be WTO norms. concentrated will make an important contribution to poverty alleviation. In Laos, To try to ensure that the benefits of these residential districts are categorized into three and other planned reforms flow through to groups--1st priority, 2nd priority and non- the poorest groups, the government has set priority--according to their general levels of out a National Growth and Poverty living standards and need for development. Eradication Strategy (NGPES). The The government is keen on improving road Committee for Planning and Investment access in the first and second priority (CPI) is responsible for coordinating the districts. preparation and implementation of both the 163 Impact of AFTA and EHP Table 3. Estimated changes in poverty and inequality due to AFTA and EHP implementation (reducing average tariffs from 11.3 percent to 3.9 Trade policy reform can affect welfare in percent over 4 years) two ways: `dynamic effects' through GDP Neutral Bias growth--these effects operate through + price + price changed incentives to accumulate physical Neutral changes Bias changes and human capital and changes in the rate of (% points) (1) (2) (3) (4) Headcount ­0.9 ­1.5 ­0.8 ­1.4 growth of total factor productivity--and Income gap ­0.3 ­0.6 ­0.3 ­0.6 `static effects' due to changes in relative Poverty gap ­0.3 ­0.5 ­0.3 ­0.5 prices, with aggregate real income Poverty severity ­0.1 ­0.2 ­0.1 ­0.2 unchanged. Gini 0.0 ­0.3 0.0 ­0.3 Note: Columns 1 and 3 are obtained by ignoring the relative price changes. Columns 2 and 4 take also Implementing all AFTA and EHP relative price changes into consideration. In all cases, concessions by 2009 can lift an additional it is assumed that aggregate real spending rises by 1.2 80,000 people out of poverty. Table 3 percent, based on Weerasinghe's estimate of the effect shows the simulation results of the impact of on GDP growth of trade liberalization. The this trade liberalization on poverty.2 If the differences among the three simulations arise from the ways in which this total increase is shared among benefits of trade liberalization are allocated individuals--equi-proportional increases for all in neutrally (column 1), poverty would decline cases 1 and 2, and increases that are biased towards by 0.9 percentage points, from 32.7 percent the rich in cases 3 and 4. in the base case to 31.8 percent. When the Source: World Bank calculations based on LECS III data. benefits are biased towards the rich, the result is almost the same, meaning that the purchase goods at the lowest price possible, bias is negligible. When account is taken nor would they be able to sell their products, both of the growth effects and of the relative let alone export. The potential benefits of prices effects of trade and associated trade liberalization and access to reforms (columns 2 and 4), the reduction in international markets will pass them by. the headcount rate ranges from 0.9 percentage points to 1.5 percentage points. In Laos, poverty and lack of road access are However the effects on the poverty gap, the strongly correlated. There are 2,262 income gap and the severity of poverty are households living in the first priority smaller. districts, of which 962 rural households are poor (Figure 1). About 43 percent of rural Impact of road improvement on poverty poor people have no access to road in either dry or rainy season, and 17 percent of them Access to roads, and hence to markets, is have access to roads only in the dry season key for poverty reduction. If the poor do not (Figure 2). have road access, they will not be able to Progress in road development has been 2 It is important to emphasize that the results of remarkable during the last five years. In the these estimations do not take account of ongoing case of national roads, the total length of the growth between 2005 and 2009 and are therefore network has only been increased by 3 not estimates of the changes in poverty between percent, but great progress has been made in 2005 and 2009. Rather, they are estimates of upgrading these roads from gravel and earth how the simulated trade reform, by itself and in to paved roads (Figure 3). In the case of the absence of any other source of growth, would reduce poverty. Even in the absence of further other roads (provincial, municipality, trade reform, annual growth is likely to continue district, rural, village and special roads), at the rates of between 5 percent and 7 percent there have been large increases in the total that have occurred in the recent past. The AFTA length of the network for all surface types. and EHP tariff reductions are assumed to be Remote villages have been connected to the provided on an MFN basis. 164 main network by building new earth and Figure 1. Household distribution in priority gravel roads and existing roads have been districts upgraded from earth to gravel and from number of households gravel roads to paved roads. 4500 4000 3500 Improved road access is also apparent from Poor 3000 Non-poor the LECS data. These surveys imply that in 2500 1997/98, 59 percent of rural households 2000 lived in villages with no road access in the 1500 1000 wet season, but that this proportion had 500 fallen to 48 percent by 2002/03. This 0 improvement was entirely due to the Rural Urban Rural Urban Rural Urban Rural Urban provision of wet season road access to First priority Secondpriority Non-priority Alldistricts districts districts districts villages that already had dry season access; the proportion of rural households in Source: LECS III villages with no access in either season was roughly unchanged at 31 percent. Figure 2. Many rural households do not have access to roads If all-weather road access is provided to all, ruralhouseholds as many as 182,000 people will be lifted out 4000 of poverty--that is nearly 5 percent of the 3500 poor. Simulation results show that the 3000 2500 impact of road building on national poverty 2000 depends on whether the roads are built in 1st 1500 Poor priority, 2nd priority or non-priority districts 1000 Non-poor (Table 4). Among the three categories of 500 0 priority districts, providing roads in first noaccess dryseason bothseasons priority districts has the largest and also the best targeted impact on poverty and Source: LECS III inequality reduction. If first priority districts were given full access to all-weather roads, Figure 3. Progress in road improvement 3.3 percent of the population would escape kms poverty. Providing all-weather road access 30000 in all rural districts that lack such access 25000 would raise total expenditure by 6.3 percent Earth 20000 Gravel and reduce the national headcount ratio by 15000 Paved 6.4 percentage points. 10000 5000 0 nationalroads nationalroads other roads other roads 1998 2003 1998 2003 Source: LECS III 165 Table 4. Simulation results for impact of roads accessibility on poverty. 1st and 2nd priority districts Location included in simulation: 1st priority 2nd priority Non-priority Rural Urban All (1) (2) (3) (4) (5) (6) Increase in expenditure (%) 9.3 10.0 4.7 8.4 0.4 6.4 Fall in headcount (% points) 11.4 6.8 4.0 7.9 0.5 6.5 Fall in poverty gap (% points) 3.6 2.8 1.1 2.5 0.1 2.1 Fall in severity of poverty (% points) 1.5 1.2 0.4 1.0 0.0 0.8 Fall in Gini (% points) 1.0 0.4 0.5 0.6 0.1 0.9 Increase in total expenditure (%) 2.2 1.1 3.1 6.3 0.1 6.4 Fall in national headcount (% points) 3.3 0.8 2.1 6.4 0.1 6.5 Note: Simulations of the impact of road improvement on the poor are done by first calculating the changes in real expenditure per capita for each person due to providing all-weather roads in particular areas (urban/rural) and regions with choice of districts--based on Warr's results (regressing per capita spending on household and village characteristics). We ignore relative price changes and assume that expenditure is unchanged in regions in which road access is not improved. Using the resulting estimates of how changes in road access affect expenditure of each household, we then estimate the changes in the various poverty measures and the Gini coefficient. We run simulations that differ according to the priority of the districts in which road access is provided: 1. All people in first priority districts who do not already have all-weather road access are provided with it. 2. All people in second priority districts who do not already have all-weather road access are provided with it. 3. All people in non-priority districts who do not already have all-weather road access are provided with it. 4. All people in rural areas who do not already have all-weather road access are provided with it. 5. All people in urban areas who do not already have all-weather road access are provided with it. 6. All people in Laos who do not already have all-weather road access are provided with it. Source: LECS III. The role of remittances illegal for Lao people to migrate to Thailand. Lao people face strict regulations Migration--or temporary movement of on migration to other countries. Moreover, people--is a key trade area that can play an most Lao workers in Thailand are breaking important role in reducing poverty in Thai laws that require migrants from Laos developing countries. Remittances to and other foreign countries to pay developing countries have grown steadily registration fees and obtain work permits. over the past 30 years, and currently amount Removing Lao prohibitions on migration to about $100 billion a year. For many and trying to persuade the Thai government developing economies, remittances to ease the cost to migration appears to be constitute the single largest source of foreign one of the cheapest ways of raising the exchange, exceeding export revenues, standard of living of the poor and the middle foreign direct investment, and other private class given slow growth in the domestic capital inflows. Remittances have proven labor market. Around 80 percent of the remarkably resilient in the face of economic people who still depend on farming, and downturns. They can help improve a especially those who rely on subsistence country's development prospects, maintain farming, have begun to migrate to other macroeconomic stability, mitigate the activities and the government will need to impact of adverse shocks, and reduce ensure that the private sector can grow poverty. Remittances allow families to quickly enough to generate adequate maintain or increase expenditure on basic employment to avoid social problems. consumption, housing, education, and small- business formation. Data on Lao migrant workers in Thailand is available from the Thai authorities as a The most important destination for result of the registration of migrant workers. international migration from Laos is Between September 2002 and February Thailand. Until very recently, it has been 2003, 59,358 Lao migrant workers in 166 Thailand registered for 6-month permits in countries, even if they are not breaking the Thailand. Of the total, 43 percent were laws of the host countries.3 males and 57 were females. More recent Thai data for July 2004 show that there are Most internal and international migrants 181,614 registered Lao migrants in are in the middle socio-economic group. Thailand, of which 45 percent are male and Migrants account for 6.5 percent of the total 55 percent are female. population--international migrants make up 5.2 percent of the population and internal In 2002-03, the fee charged by the Thai migrants make up 1.2 percent. The authorities for registration for a migrant proportion of migrants in each socio- worker for one year was Baht 4,450, or economic group rises with income (Figure about $100. There was therefore a 4,5).4 This pattern is found for both internal considerable incentive for migrants not to and international migrants. This is because register. The Thai Ministry of Labor migration is an investment that cannot be estimates that there may be an additional undertaken without the initial outlay of 80,000 unregistered Lao workers in resources. In addition, many host countries Thailand. UNDP estimates suggest that the are less reluctant to accept skilled workers true figure may be even higher and that than unskilled ones. remittances from Thailand alone amount to at least $100 million per year. Remittances are important for the middle income group and should not be ignored. Strict Lao laws regarding migration are Facilitating migration is an important way of increasing the number of illegal migrants. reducing poverty, but families above the Many of the migrants who are legally poverty line may nevertheless gain more registered in the host country (and all those from remittances than those below the who are not) are in breach of Lao laws, poverty line. Existing restrictions on which require a Lao citizen working in a international migration should be replaced foreign country to satisfy all the following by policies to regularize the status of criteria: international migrants and minimize the · Hold a valid Lao passport. potential dangers of international migration, · Have an exit visa to leave Laos. such as migrant abuse (Figure 6). · Have a visa and work permit from the host country. · Not take a job in any of the occupations specified in the Decree of the Prime Minister (Group 2, section 2, 2002). The banned occupations cover all of those in which employment would be most readily 3 Recently, MOF has allowed Lao workers in available for Lao migrants (and particularly Thailand to have an exit visa for 1 year; female migrants) from poor families, moreover, the Lao embassy is now allowed to including house maid, maid in hotel, renew visas for Lao workers. 4 cleaner, restaurant service worker, Data on internal and international migration are supermarket worker, parking lot attendant, also available from the National Migration Survey (NSC, 2003). This survey is not road sweeper, other unskilled worker. The representative of the whole country, since it effect of these regulations is to make it covered only three provinces--Savannakhet, illegal, from the perspective of Lao law, for Khammuane and Champassak. Since these are most poor people to migrate to other the three provinces that send the most migrants to Thailand, the survey presumably overstates the propensity for Lao people to migrate. 167 Figure 4. Distribution of migrants and non- 2. Competitive Strategies for Grassroots migrants by socio-economic status Handicraft Export Development percent share Non-migrants 50 Internal A frequent question about an export- 45 migrants oriented growth strategy is how does it 40 External migrants benefit the poor, especially those living in 35 AllMigrants rural or remote areas with little education 30 and access to transport or markets. The Totalpopulation 25 development of the handicraft industry 20 presents an option--though still a partial 15 one--to link people at the grassroots level 10 and with traditional knowledge with international markets. There are several 5 examples of countries that have succeeded 0 1 2 3 4 5 in raising the incomes of these people by incomequintile promoting the ethnic products they can Source: Labor Migration Survey, National Statistical produce. Handicraft production is one way Center, Vientiane. The sample covered all people, 0 to diversify and increase income in rural years and up. areas, especially for disadvantaged people Figure 5. Distribution of socio-economic such as women and ethnic minority groups. groups by migration status The government of Laos is aware of the percent share 10 importance of creating an environment that 9 external is suitable for village craft micro-enterprises, 8 migrants 7 such as hand-woven textiles, wooden crafts, 6 internal basket weaving, paper mills, organic foods, 5 migrants 4 jewelry, etc. In order to ensure sustainable 3 development in poor and remote areas, with 2 1 ethnic minorities, the National Growth and 0 Poverty Eradication Strategy suggests that 1 2 3 4 5 incomequintile the government should implement policies Source: Labor Migration Survey, National Statistical that encourage natural resource preservation, Center, Vientiane. The sample covered all people, 0 keep traditional techniques, use domestic years and up. materials, and promote trade and industrialization. Figure 6. Non-poor are the main recipients of remittances The handicraft industry is mainly informal, householdsreceivingremittances 350 so there is no accurate data on employment 300 or income. A 2003 UNIDO study estimates 250 Poor the equivalent of 30-40,000 full time 200 Non-poor workers employed in this sector, of which 150 15-20,000 people work full time, while 100 100,000 work part time or as a 50 complementary activity. The number of 0 Rural Urban enterprises in the handicraft sector was estimated at 21,558 in 2000 growing from Note: Includes internal and external remittances. 10,826 in 1995. Out of the estimated output Source: LECS III value of $30-40 million, half was hand- woven textiles. 168 Most of the potential to develop traditional and have the potential to become a high- handicrafts would come through exports, as volume export commodity. Clothing made domestic demand for the domestic market is from traditional Lao textiles can target very limited. But the handicraft industry various ranges of consumers regardless of cannot as yet meet the demands of the gender, age, and nationality. world's commercial buyers in terms of both quality and quantity. Laos must find its own Lao woodcraft products are not yet products which no other country can recognized in international markets. The produce or replicate, and suitable markets wood processing industry accounts for about which appreciate the uniqueness of these 30 percent of total manufacturing output, products. It is possible to foster a handicraft and employs about 22,000 people (UNIDO industry from the grassroots level to meet 2003). Compared to the hand-woven textile the needs of the world market trends if the sector, the woodcraft sector does not have an government encourages micro and small established image as a Lao craft in the enterprises to take initiatives. This section international market and thus, the sector looks at two handicraft sectors--hand- needs to establish a strong identity. In woven textiles and woodcraft products--and addition, while the hand-woven textile provides recommendations on what can be sector has many skilled artisans in villages, done to increase the quality, visibility, and the woodcraft sector lacks the necessary exports of these products. This section was amount of skilled artisans who can produce prepared by a former buyer to a Japanese- sellable woodcraft in the international equivalent of Walmart. It therefore offers market in terms of quality and design. practical suggestions. Although there are many institutions Traditional Lao textiles have significant supporting the handicraft sector market potential. Hand-woven textiles in development, they need to coordinate and Laos not only reflect the strong tradition of work through an integrated framework to weaving, but are also unique among the increase effectiveness and maximize the world's textiles. Women have practiced capacities of existing programs. There are weaving since ancient times across the several institutions dedicated to support the country by using naturally dyed cotton and handicraft sector. These include: silk yarns. Hand-woven textiles include silk (1) The Ministry of Industry and and cotton and are used for various purposes Handicraft (MIH). The MIH initiated the such as clothes, home use, and souvenirs. National Five Year Plan (2001-2005) for the Patterns in Lao textiles have cultural and handicraft sector to support artisans, religious significance. Traditional methods villagers and private sector investment. The such as "Chok" and "Mat Mi" have been MIH considers hand-woven textiles and passed on from generation to generation. woodcrafts to be priority. Although Lao women have traditionally (2) The Lao Trade Promotion Center. This worn woven silk skirts, this custom has been center is under the Ministry of Commerce fading (it remains the case that women are and promotes export activities including obliged to wear traditional costumes in maintaining a web site for Lao companies formal working places, however.) Lao producing handicrafts, wood products, and textiles, silk and cotton, are very popular as well as providing technical assistances to among tourists. The market could be artisans that are participating in international expanded if they are able to improve product trade fairs. marketing. Expensive silk clothes are (3) The Lao Handicraft Group (LHG). The appropriate for high-end niche markets, but LHG was established in 1998 by the not for ordinary consumers. Small National Chamber of Commerce and accessories such as bags and scarves, as well Industry to promote Lao handicrafts as an as decorative textiles have a broader appeal, association for various kinds of handicraft 169 artisans. It had 106 member companies as of companies in the export market. The 2005 and collaborates with the Lao Trade amount of exports remains limited and an Promotion Center and the Department of appropriate policy is needed to increase the Handicraft, Ministry of Industry and total amount of exports (Table 5). Handicraft. (4) The Lao Women's Union. The Union Table 5. Existing Handicraft Exporters was founded in 1955 to increase women's Company Number Exports (2002) political awareness and in 1992 initiated the Name of Products Amount Workers (US$) Women's Development Program to Textiles sector empower women in villages. It assists the Thida 15 Silk fabrics 4,000 traditional Lao textiles sector and provides Handicraft and scarves technical assistance to artisans in the sector Nikone 47 Silk 64,925 and has been supported by many Handcraft scarves, cushion international organizations such as UNICEF, covers UNIFEM, SIDA and JVC.5 The Union Phaeng Mai 35 Silk fabrics 50,000 managed the Lao Cotton Company, has Gallery and scarves created a museum and has a retail store in Lao Cotton Co. 85 Scarves and 5,000 Vientiane capital. shirts Thonglahasinh 200 Cotton 72,882 fabrics Multilateral donors such as UNESCAP and Cama crafts 75 Scarves 37,989 UNIDO provide technical assistances to Lao Textiles 55 Silk fabrics 9,298 develop export markets for small and (Carol Cassidy) medium sized enterprises (SMEs) in the Ethnic 42 Silk fabrics 36,000 Handicrafts handicraft sector. Bilateral donors such as Sub Total 280,094 GTZ and JICA have programs to support Woodcraft sector capacity development for handicraft SMP 50 Wood 20,000 enterprises. NGOs are also actively accessories engaging in the handicraft sector and Phai Exclusive 25 Bamboo 9,288 carrying out development activities. products Sub Total 29,288 Total 309,382 The government should provide clear Source: The Lao Handicraft Group, 2003, "Report on strategies and guidelines for the future the Lao Handicraft Industry" prospects of the handicraft industry, and ensure a well coordinated effort among the Constraints in the Handicraft Sector various institutions supporting the handicraft sector. Limited interest of international buyers in Lao handicrafts. Despite government and Exports of handicrafts are limited and supporting agencies' efforts to help artisans dominated by a few companies. The Lao to export handicrafts, foreign demand for Handicraft Group (LHG) identified existing Lao handicrafts remains low. Foreign handicraft exporters and the amount of buyers do not have sufficient information exports as of 2002. Although many new about Lao handicrafts. Moreover, since they exporters have been established since 2002, are able to purchase handicrafts made in primary exporters such as Phaeng Mai neighboring countries such as Vietnam and Gallery and Thonglahasinh are still leading Thailand, they are not interested in buying handicrafts from Laos. They are also constrained by limited capacity of Laos to 5 UNICEF (United Nations Children's Fund). produce in large quantities. UNIFEM (United Nations Development Fund for Women). SIDA (Swedish International Lack of information and marketing skills. Development Agency. JVC (Japan International Volunteer Centre). Artisans lack of information about foreign 170 markets. As a result, the handicraft products competitive in the international market. they produce do not meet consumer needs There are synergies among these strategies, and market trends. Direct business contact suggesting a multi-tiered approach to the with foreign buyers is extremely limited. problem is necessary. Handicrafts made by village artisans usually go through a conventional supply chain that Building business linkages with Fair includes middlemen; artisans rarely have Trade Organizations: direct links with foreign buyers, who may be A strong linkage with the fair trade able to give artisans feedback over their organizations provides artisans various products. There is also a lack of designers embedded services including product design and craft persons who are aware of the development and market feedback (Box 1). handicraft's competitive market. The level of the capacity of artisans in Laos, Information on consumers' preferences is however, is still far too low to be able to also not available in Lao villages. deal with commercial buyers whose goal is to maximize their profits. As a first step, a Lack of skills and entrepreneurship among business linkage with fair trade artisans. The shortage of skilled labor to organizations whose mission is to help produce quality handicrafts for the export artisans and promote fair trade is strongly market is a critical disadvantage in the recommended. handicraft sector. The lack of business skills, such as management skills, also hinders Box 1. Fair Trade Organizations competitiveness. Due to the lack of More than 270 organizations in 60 countries are information and direct contact with foreign members of the International Federation for buyers, artisans are not aware of the Alternative Trade (IFAT), a global network of Fair Trade Organizations (FTOs), established in 1989. importance of entrepreneurship. They lack IFAT defines fair trade as "a global network of the necessary incentives to improve product producers, traders, marketers, advocates and design and quality. Further, a shortage of consumers focused on building equitable trading successful examples in the domestic market relationships between consumers and the world's most economically disadvantaged artisans and has failed to inspire competition among Lao farmers." Members include producer associations, artisans. marketing organizations (import and export), retailers, and national and regional fair trade High transportation costs and insufficient networks dedicated to the fair trade movement. volume of raw material. Since Laos is a About 65 percent of members are located in the South, meaning Asia excluding Japan, the Middle landlocked country, transportation costs are East, Africa and South America while the considerably high, which hinders price reminder is located in North America, the Pacific competitiveness among other countries. Rim (Australia, New Zealand and Japan) and Moreover, the insufficient infrastructure in Europe. Fair trade organizations assist producers by providing guidance such as pricing, marketing, rural areas increases cost of transportation quality control, and exporting. and raw materials. For the hand-woven textile sector, the domestic production of Source: www.ifat.org both silk yarn and cotton yarn is not sufficient, and therefore, artisans have to The fair trade movement is growing in the import them mainly from Thailand. This world. According to the 2003 Report on does not only increases costs but also hurts Fair Trade Trends, total sales in the US, the image of Lao textiles. Canada, and the Pacific Rim reached $250 million in 2002 (IFAT, 2003). The total Competitive strategies in handicrafts sales for the fair trade industry in North America and the Pacific Rim jumped 44 There are numerous practical strategies to percent and 23 percent, respectively, during expand handicraft exports, overcome 2002 compared to the previous year (Table inherent constraints, and make it more 171 6). Certified fair trade coffee accounted for School in Nepal. Products purchased the highest proportion of sales and registered through IFAT members are subject to the highest growth rate among other fair compliance with IFAT's fair trade criteria trade products, increasing from 6.8 million and are subject to quality control. The Fair lbs. in 2001 to 10.6 million lbs. in 2002. Trade Company imports products from 250 Following certified fair trade coffee, other partner producers in twenty counties. handicrafts accounted for 24.5 percent or $13.8 million while jewelry accounted for Sales have increased since 1995 and reached 11.5 percent or $6.5 million. about $6 million in 2003, an increase of 10 percent from 2002. Their sales channels Table 6. Total Sales of Fair Trade Industry: include catalogues (29 percent), a directly North America and Pacific Rim in 2001 and owned store in Tokyo (9.3 percent) and 2002 wholesale (37 percent).6 Clothing accounted 2001 ($ 2002 ($ % for the highest share of sales at 38 percent million) million) change followed by handicrafts. Among the 20 North America FTF & IFAT 48.2 56.2 16.6 producing countries, 38 percent of products members are from India followed by Bangladesh (22 TransFair 85.6 131 53 percent) while 73 percent of all products are USA from Asia. The Fair Trade Company has TransFair 5.4 9.1 68.5 not yet entered into contracts with Laos, but Canada has shown interest in buying Lao Total 139.2 196.3 41 handicrafts. Less FTF 14 16.3 member coffee sales Joining the IFAT provides opportunities to (29%) utilize a wide range of networks including Total 125.2 180 43.8 finding new buyers that are able to not only (excludes purchase handicrafts but also give technical double counting) assistance such as product design and Pacific Rim marketing skill development. Also, strong IFAT 9.9 11.3 13.9 business linkages with fair trade members organizations leads to cultural preservation TransFair 47.8 59.6 24.7 and environmental protection while at the Japan Total 57.1 70.1 22 same time providing artisans opportunities Less 0.23 0.28 to achieve higher income. Laos has only Japanese one organization, Phontong/ Camacrafts IFAT Handicrafts Cooperatives, which registered member for IFAT while Bangladesh has 14 coffee sales (5.25%) organizations. In the past, Aid to Artisans Total 57.5 70.6 22.9 US, an IFAT members funded by the Grand Total 182.7 250.6 37.2 Rockefeller Foundation, provided technical Source: IFAT (2003). "Report on Fair Trade Trends in assistance to Laos. They conducted a 10- US, Canada & the Pacific Rim." day workshop on natural dyes in 2002 and a 15-day workshop on product development in "The Fair Trade Company" in Japan is the United States in 2003 for 20 handicraft another such organization. Established in micro-enterprises. 1995, it is a leading fair trade organization in Japan buying many of its handicrafts from organizations registered in IFAT, such as Thanapara Sallows Development Society in Bangladesh, Ockeden International in 6 Pakistan, and Kumbeshwar Technical The Fair Trade Company (2005). www.peopletree.co.jp 172 Engaging in e-commerce: marketing. ESEWA helps market its The internet is one of the best ways to partners' handicraft products through connect grassroots artisans with the outside initiating web catalogues and listing world. Artisans can periodically update their products on eBay, a top e-commerce site in products on the internet while they are in the United States. ESEWA lists products their countries. Buyers can search for which are in Nepal while customers in the products that they want through the internet United States bid through eBay. Sales and contact the artisans directly through e- reached over $6,000 through eBay. A mail. Artisans are able to reduce spillover effect of this way of selling transportation costs because they do not handicraft is increased awareness of buyers have to send samples each time they about Lao products. approach a new buyer. Also, they can introduce new products in a timely manner E-commerce saves time and cost because it as soon as they create new samples by is accessible worldwide and does not need to updating their web catalogues. For this to consider inventory risks. Handicraft work, apart from English language, artisans producers that have a partnership with need to get trained in computer skills (or ESEWA are responsible for making sure organize themselves to hire computer how much inventory they have, and services). ESEWA collects the products as soon as they receive notice that the products were CatGen and online shopping. CatGen, an sold through eBay. ESEWA then bundles e-commerce NGO in the United States, is commodities together to minimize shipping helping artisans in developing countries by costs. providing software that enables artisans to create and maintain their own websites. One of the most popular items that ESEWA CatGen occasionally provides technical sold through eBay was the art of Thanka training for artisans in order to familiarize paintings representing Buddhist Gods, a them with computers. The software to very traditional art in Nepal. Artists usually create web catalogues is user-friendly and spend months and sometimes years to create manageable for beginners. Artisans are able a Thanka painting. Collectors in the United to create their own web catalogues after States are not parsimonious in order to get receiving only a few hours of training. After those rare items. The average price of creating a web catalogue, artisans are even Thanka is about $150 and it is more than the able to sell their products online. In this amount that an artisan earns in a month. way, they save costs and maintain direct contacts to buyers all over the world. While selling handicrafts online is very Examples can be seen at convenient and creates an environment www.modishandicrafts.com and also where it is easy to find buyers in the www.nayocrafts.com. international market, there are some requirements to engage in e-commerce, such Selling products through eBay. CatGen as establishing a payment system, inventory assisted in establishing the Enterprise control, and shipping methods. One concern Support for Empowering Women and in using eBay is the nature of the bidding Artisans (ESEWA) in Nepal in 2002 system over a certain period of time. The (http://www.esewanepal.com) aiming at system appeals to collectors and bargain capacity building for small and micro level seekers. producers through technology. ESEWA helps provide handicraft producers access to Empowering existing Lao-owned global markets by using the internet as well domestic stores: as by conducting training related to e- There are some privately owned companies commerce, product development, and that engage in the handicraft retail business. 173 The Mekong Private Sector Development appreciate the artisans' works is one of the Facility (MPDF) conducted a comparative best ways to promote Lao handicrafts. study to determine which Grassroots Making business linkages with a Business Organizations (GBOs) trigger commercially oriented niche market such as potential private sector development in the ABC Market is more demanding and Laos, Cambodia, and Vietnam.7 hard to establish considering the current level of capacity in the Lao handicraft Although the study shows that Laos did not sector. Therefore, establishing a business have a conducive environment for GBOs, linkage with a socially oriented niche market the MPDF identified some GBOs in the is suggested as a first step towards handicraft sector in Laos, such as Phaeng increasing international linkages. Mai Gallery and Taideng Lao (Tables 7 and 8). These organizations are privately funded Box 2. Aarong in Bangladesh and owned by Lao citizens. It is very Bangladesh serves as a successful example that important to empower existing domestic has attracted domestic consumers and raised stores and nurture them as "the best awareness of the importance in preserving the practices" in the handicraft sector in Laos. handicraft culture. Aarong, established in 1978, Artisans in Laos need to have role models in is a marketing department of Bangladesh's order to learn and become competitive in the largest domestic NGO, BRAC (Bangladesh market. Rural Advancement Committee), and deals with more than 30,000 artisans, of which 85 percent were women in 2002.1 They sell Boosting domestic demand: various kinds of Bangladeshi handicrafts Though domestic demand is limited, including silk and cotton textiles/clothing, establishing a "flagship store" in Vientiane leather items, clay and brass products, straw, as Capital will stimulate the domestic market well as jute and bamboo products. not only for tourists but also fashion- They have eight domestic stores, five of which conscious Laotians. Currently, those are located in Dhaka. The stores attract not fashion-conscious Laos prefer buying Thai only tourists but also middle-class Bangladeshi. products to Lao products. Creating a As of 2002, the most popular items for fashionable trend within Laos is necessary. Bangladeshi were Panjabi and Salowakamis Existing domestic stores including Phaeng (traditional costumes) with hand-made Mai Gallery and Taideng Laos mainly target embroideries. Panjabi from Aarong is well- on tourists. The new "flagship store" should known by other Bangladeshi and wearing the target on the Lao middleclasses. Aarong's Panjabi gives Bangladeshi a sense of Bangladesh provides a good example of a special self-esteem and pride. Fashion-sensitive young people save money in purchasing country that succeeded in boosting domestic Panjabi and Salowakamis in Aarong. demand for handicraft (Box 2). Establishing a firm status as a trend shop in Targeting niche markets: Dhaka, Aarong successfully engaged in Targeting niche markets where customers do exporting handicrafts to international markets, including the US, Europe and Japan. The brand not mind paying higher prices and name recognized by Bangladeshi people became a guarantee for international buyers. As of 2002, Aarong was exporting Nokshi Kantha, 7 Grassroots Business Organizations (GBOs) are a traditional quilted embroidery in Bangladesh, "Organizations or programs (whether which was revived by BRAC, to many independent or part of a larger organization and international buyers including Takashimaya, regardless of structure or legal status, though one of the largest department stores in Japan. always formal) that seek to provide employment The department store, targeting a niche market, opportunities, training and income generation sold Nokshi Kantha at a price that was about activities to underprivileged segments of society ten times the domestic price. Targeting through the sale of products or services." MPDF domestic consumers as well as foreign tourists (2004). and residences is necessary in order to establish the domestic demand. This model can serve as an example for ways in which a domestic retail 174 sector in Lao can aid in overseas expansion. Table 7. Phaeng Mai Gallery Industry Handicrafts Organizational Type Private Sector Company Social Objectives Provide employees with dignity and job opportunities through employment and training. Business Operations Phaeng Mai Gallery has a strong retail outlet in Vientiane and also sells to export markets in Japan and the U.S. The business sources its silk fibers from independent Lao farmers, has one factory and a training center that trained approximately 36 weavers last year. Size Employs 125 staff of which 105 are weavers. Management Team Strong family-run business with significant management experience. The same management team has been operating the company since its inception in the early 1990s. Financial Status Profitable. Rationale The company is looking to expand its operations and penetrate more export markets. To do this, they require additional capital, expansion advice and greater design capacity. Already sustainable and with large number of beneficiaries, Phaeng Mai has the potential to achieve good development impact, providing jobs and training for weavers and a market for silk producers. Phaeng Mai sees its biggest challenges as capital availability, the small local market (hence the need to be good at exporting) and price/competitiveness. Phaeng Mai has had exposure to business consultants previously, taking marketing and management advice as well as training. It is positive about receiving additional business services. Part of an initial hub-wide focus on handicrafts to gain sectoral analysis and product standardization capabilities early in SGBI life. Potential Intervention Provide export promotion assistance and operation expansion advice through consulting services. Also, potentially, investment capital to support growth. Source: MPDF (2004). "Strengthening Grassroots Business Initiative: East Asia Hub Review." Table 8. Taideng Lao Industry Handicraft Organizational Type Private Sector Firm Social Objectives Employs a significant number of beneficiaries in production of silk goods Business Operations Production and sale of silk accessories and scarves. Also specific training in natural dye and silk protection. Exports to Thailand and Japan. Size 100 employees Management Team Well established, opened in 1994/95, has a strong management team. Financial Status Unclear. Survey report suggests revenues consistently around $96 thousand revenues over past several years, with small $2 thousand profit. Status as a private sector firm may be open to question, since it explains the consistency of revenues as arising from use of a revolving fund. Rationale Taideng Lao employs a significant number of 100 staff and is mature. The organization is looking to improve the quality of its products and its production capacity, and to grow its markets. Potential Intervention Technical Assistance with production Management consulting growth strategy Export marketing Cost reduction Source: MPDF (2004). "Strengthening Grassroots Business Initiative: East Asia Hub Review." 175 Novica. Established in 1999 in association baskets, shawls, scarves, and jewelry. The with National Geographic, Novica sells average spending per customer is $39 to 50 handicrafts from more than 1,700 artisans all per transaction. Average annual sales are over the world though the internet. Novica about $300,000 with about 30,000 visitors. sells more than 8,500 products online and The shop manager started to buy Lao sends the products to customers all over the handicrafts in 1992 through personal world. Aiming at promoting the handicraft connections with one of the curators in the products of talented artisans, Novica has museum. The store is quite small, but gives successfully increased revenues. Novica has grassroots organizations opportunities to 11 local offices in El Salvador, Brazil, start selling their handicrafts to a new Ghana, India, Indonesia, Mexico, Morocco, market. The store manager says that Lao Peru, Thailand, Venezuela and Zimbabwe. textiles are special and have competitive Artisans all over the world are interviewed advantages in terms of their quality and by Novica's local staff, and photos of their design among other textiles. Lao hand work are placed on the Novica website. woven silk textiles with natural dyes have When customers purchase handicrafts the potential to attract consumers in the through the Novica's online shopping site, international market. The manager buys the local staff collects those handicrafts and products depending on customers' demand delivers them directly to the customers. by looking at upcoming exhibitions. Having a direct linkage between artisans and Through her personal connections, she picks customers, Novica can eliminate inventory and buys products for exhibitions. She is risks as well as cut costs. Novica attracts interested in expanding purchases of Lao customers because it sells products which textiles. customers cannot find anywhere else. Although they are not selling any products Participating in international from Laos, having a business linkage with competitions: these companies targeting niche markets Participating in international competitions would greatly contribute to the development increases the identity and image of Lao of the Lao handicraft industry. traditional handicrafts in the international market. It also stimulates artisans' Textile Museum in Washington, D.C.8: incentives. Selling products through a museum could work as a means of establishing an Each year, Asian Handicraft Promotion & international reputation. The Textile Development Association (AHPADA) in Museum in Washington, DC is hosting a cooperation with UNESCO awards the "Seal series of exhibitions featuring textiles from of Excellence" for handicrafts which all over the world, and they have a store demonstrate excellent quality on highly inside of the museum. Currently they sell selective standards in the ASEAN region. products from about 100 different countries Since 2002, six handicrafts from Laos including products from Laos. Their received awards, including clothes from customers, typically aged between the mid- Thonglahashinh (2002), 100 percent silk 30s to seniors, pay special attention to the hand-woven wall-hanging from Lao contexts behind products such as how and Textiles, paper weaving products from by whom those products are made. The Vangvieng Posa Handicraft (2002), hand- most popular products are books about woven cushion cover from Paula Jones at textiles of the world, and sales of these Mulberries (2003), and scarves and shawls books amount to 50 percent of total sales. from Phaeng Mai Gallery (2004). Popular products include items like woven Receiving awards contributes to raising the 8 brand image of handicrafts and guarantees Based on interviews with the Textile Museum (2005). the quality of the products. It also increases 176 interest among consumers in domestic stores must not compromise the quality of and international markets. The handicraft handicrafts. They have to pursue the best sector can appeal the cultural heritage in possible quality in order to compete with Laos. Lao handicrafts are unique and not mass-produced products and attract comparable with mass-produced products. customers. Customers do not accept Increasing awareness of the cultural richness handicrafts that have lower quality simply and uniqueness of Lao handicrafts will add because they are made by poor villagers in more value. developing countries. A high level of quality is necessary in order to enter the Understanding buyers' needs: international market. Most importantly, artisans have to understand what buyers are looking for. While it is important to attract buyers by They should not produce handicrafts providing handicrafts of high quality, it is because of artisans' preferences but instead also critical to offer competitive prices. must look for buyers' needs and tastes. Buyers make the final decision by looking at Sales do not grow without making an effort the balance between the quality and price of to grasp consumers' needs. If buyers cannot the handicraft. Cheap price and low quality sell products to consumers, their inventories does not satisfy customers. Products should remain in stores, which makes it difficult for come with high quality and appropriate buyers to purchase new stocks. On the other pricing. hand, if buyers can increase sales and can have a higher rate of inventory turnover, Introducing items in a "coordinated" orders to artisans grow. Artisans should manner. The method of presenting product create a dialogue with consumers in order to lines is also very important. In order to receive feedback over their products. This attract customers' attention, introducing will lead to a long-term relationship which items in coordinated sets is desirable. For mutually benefits both buyers and artisans. example, instead of introducing a single color for an item, introducing multiple color The importance of new products. In a models of same item, or suggesting a set of retailing business, new products sell the accessories such as a bag, scarf, pendant, most. In an accessory department in Ito- and earrings in the same product line catches Yokado, the largest super-store chain in customers' attentions and is essential to Japan, new products which arrive in a store remain competitive. In purchasing a new in the previous week account for less than item, customers tend to think whether the 20 percent of total stock, but account for new item is a suitable match to their own about 80 percent of total sales. Newly possessions, depending on an item. They arrived products attract customers' attention, may not buy all items in the coordinated set; especially if the customers frequently visit however, suggesting items in a coordinated the store. Timely introduction of new way enables each product to look better and products is critical for a retailing business. to attract more attention. Because handicraft products are not essential commodities such as food or However, this does not mean that producing clothes, customers buy handicraft products if as many varieties as possible is a good they find "something new" compared to method to increase sales. The number of those things they already possess. items that buyers can display in their retailing stores is limited. Buyers always Quality and pricing. In order to become consider how they are going to create a competitive in the international market, display to appeal to customers because artisans should acknowledge the importance appropriate spacing for displayed products is of quality. Customers are finicky and pay very important due to limited space. attention to the details of products. Artisans Therefore, suggesting coordinated items is 177 essential to appeal to customers in the the Lao handicraft industry indicates its international market, but needs to be done ability to gain access to world markets while thoughtfully. at the same time increasing living standards among the nation's impoverished regions The best way to meet buyers is at trade through increased production and exports. shows. Buyers are always looking for In order to create an economic environment producers who can produce unique, creative, that is conducive to growth, the Lao and new handicrafts which they are not able government must initiate policies that target to find anywhere else. The best way to meet both the domestic and international sectors them is still through trade shows although in order to ensure growth in the handicraft communication methods have changed sector. through the expansion of the internet. Buyers go to trade shows to discover new Promote artisans' initiatives. Most products as well as to gain ideas over market importantly, the government should provide trend. While the internet allows buyers to a framework which inspires artisans to take find new producers through websites, most initiatives towards the export market. The buyers still want to meet producers or bottom line is that the successful suppliers and see the products in person to development of the handicraft sector does ensure a successful deal. Getting to know not happen without stimulating the business buyers' needs and obtaining buyers' contact interests of the artisans. information are one of the most important tasks for producers. Provide a constructive environment for grassroots business organizations in the Be aggressive in order to learn buyers' handicraft sector. The study by MPDF needs. In order to increase sales, artisans showed that the environment of Laos' GBOs should be aggressive in learning buyers' suffered from a lack of infrastructure and needs and the current trend in the supporting institutions and a limited international market. Although there are domestic market compared to Cambodia and many explanations for the lack of Vietnam, countries which went through the information or lack of direct contact to same screening process (Table 9). buyers, artisans should actively pursue market trends such as learning from such A constructive environment requires the secondary sources as tourists. Artisans can establishment of proper regulations and also get information about customers' needs frameworks. The SME sector in Laos lacks and market trends from simple means such appropriate regulations, and the legal as fashion magazines. The internet makes framework is underdeveloped. Although the research for market trends a lot easier. government drafted a New Prime Ministerial Through the internet, artisans can see what Decree on SME Development Support in competitors are selling and what kind of 2004, the government has not yet enacted products are popular in the international appropriate laws to promote SMEs. A lack market. of supporting infrastructure and the low capacity of supporting institutions are also Recommendations problems and need to be addressed. The handicraft sector shows considerable Supply chain management. Analyzing potential exports that would benefit the poor value and supply chain structures will lead and minorities in Laos. Until now, the Lao to more cost-effective and efficient handicraft industry has existed in isolation production of handicrafts. In order to make from world markets, and has fallen behind Lao handicrafts attractive, Laos should the handicraft industries of neighboring provide buyers attractive products and countries. However, the unique character of prices. Understanding the supply chain 178 helps to eliminate middlemen or distributors For all these steps, the use of the internet is that benefit from inefficient chains. The an essential tool. Effective use of the ideal way for artisans to sell handicrafts is a internet will put producers in contact with direct linkage with buyers by skipping some their target market, allow producers to learn links in the supply chain. This is also a the specific wants and desires of consumers, global trend in the manufacturing sector. and obtain information on market trends easily. Identify handicraft clusters in villages and promote handicraft development in the Policies to penetrate international market. context of rural development. Although the The government can facilitate several Central Government allocates financial channels through which artisans can export support for provincial governments such as their products. Vientiane capital, Bolikhamxay, o actively pursue the assistance of Fair Khammuane, and Savannakhet provinces to Trade Organizations in order to provide promote the handicraft sector, the programs the domestic handicraft industry with lack strategic policies. Identifying international exposure. This will allow handicraft clusters in villages should be previously inaccessible customers done in order to maximize artisans' capacity exposure to Lao goods. Because of the and promote the sector in the international respectability of such organizations, this market. will assist Lao handicrafts in establishing an international reputation Using a social marketing message that for quality and unique goods. signifies the development of the handicraft o promote e-commerce programs to raise sector as a means of cultural preservation is the profile of Lao goods and allow a good advantage in competing with other producers to reach international sectors. Also, the social mission of consumers. Utilization of the internet economic growth will be achieved under the would also reduce costs by cutting implementation of a decentralization policy middlemen out of the supply chain, and that increases local ownership and these profits would be absorbed by the involvement in projects. rural micro-enterprise workers. o actively target global niche markets. Necessary domestic policies. Stimulating Because Lao products are unique, the the domestic market is essential to ensure Lao government has an opportunity to the vitality of the handicraft industry. A use its image to create demand for a collapse of this industry would not only be a product that only it can supply. Further, blow to the Lao economy, but a blow to the developing a strong niche market would rich cultural tradition of Lao handicrafts. also help the government preserve its Domestically, the Lao government must take rich heritage of handicrafts through sales steps to: to wealthy international buyers. o establish the infrastructure necessary for o encourage participation in international producers to gain information on world competitions to raise international market trends awareness about Lao products. The Lao o establish direct linkages between government should use this venue as a producers and buyers in order to means of establishing and raising the communicate on their needs profile of domestic handicrafts. o empower domestic stores to become Participation in these competitions more responsive to market indicators, would also ring the producers closer to such as demand and supply buyers and consumers, allowing them to o increase domestic demand by making have greater access to vital information products competitive with regional over market trends. This would not only competitors. establish the Lao handicraft industry, 179 but also ensure its prestige among the great textile cultures of the world. Table 9. Summary for the comparison of GBOs market in Laos, Cambodia and Vietnam. Cambodia Laos Vietnam Relative Size of Large Small Medium (large with inclusion of Market Cooperatives) Industry Segments All Agriculture Agriculture Handicraft Handicraft Services (Disabled) Organizational All Legal Structures Private Sector Cooperatives Type Association Social Mission NGOs NGO Environment Large, relatively free to Small, restricted Medium, unable to pursue business pursue business activities, require local activities with scale activities partner Legal Environment Relatively open and Restrictive, unclear and Improving with respect to supportive of GBO undeveloped with respect formalization of laws governing development to business activities business development Still restrictive with respect to NGO income generating activities Government Minimal Active, restrictive Active provincial governments Oversight overseeing most activities Other Structure Limited formal Strong Mass Complex interaction between the structures involved in Organizations involved government, the Communist Party, grassroots business in most grassroots Mass Organizations and Business development development Activities which are all involved at some level in most grassroots business activities SGBI Opportunity* High across most Low with some Medium across Handicraft, sectors opportunities to support Agriculture and Services in the private sector handicraft Handicapped population. High with organizations and GBO respect to cooperative development. start-up *"Strengthening Grassroots Business Initiative (SGBI): An international IFC initiative to provide business/technical advice and "patient" investment to Grassroots Business Organizations globally." MPDF (2004). Source: MPDF (2004). "Strengthening Grassroots Business Initiative: East Asia Hub Review. 180 Chapter 11: A Practical and Collaborative Approach: The Process for Undertaking the Laos IF When the Laos DTIS started with the 1. Description and Assessment of the preliminary mission, government officials Industry Cluster Workshops from the Ministry of Commerce provided the World Bank with clear feedback that this Three industry competitiveness experts was not the approach they were seeking for worked with the Government of Laos, the IF. They wanted a practical approach commercial sector leaders and the World (given that they already have many reports Bank over a six month period to assess the on trade and industrial performance) and a competitiveness of key export industry focus on export competitiveness. As a clusters and develop practical result, the task manager and the whole recommendations for boosting export approach were changed accordingly. The performance. The team moderated eight DTIS put much emphasis on participatory half-day workshops in Vientiane, workshops: 8 workshops on export Savannakhet, and Luang Prabang on competitiveness were organized--in competitiveness in agriculture, light Vientiane, Savannakhet, and Luang manufacturing and tourism. The experts Prabang. The approach and results of these also met individually with approximately 75 workshops are summarized below. entrepreneurs, exporters and government officials to discuss current constraints for The draft DTIS report was shared at every export and potential strategies for growth. step with donors and government, and a complete draft was distributed to all Methodology and Activities stakeholders in October 2005. Their comments are already incorporated in this This effort worked directly with business version. But more importantly, it became leaders, industry associations and clear that for the IF to succeed, the emphasis government officials to assist them in should be on the Action Matrix--not only understanding the competitiveness of their on building a coherent and actionable industry clusters and designing strategic matrix, but also on ensuring government action plans for agriculture, light ownership and donors buying in early on, manufacturing, and tourism in Laos1. The and on thinking through the implementation strategic action plans outline the practical hurdles that needed to be overcome to make steps that private sector and public sector the action matrix happen. leaders can take to boost exports in each industry. The focus of this effort was on As a result, an Action Matrix workshop was developing tangible recommendations for organized in February 2006, with all action at the sector level. stakeholders--government officials, private sector, and donors--attending and attempting at reaching consensus on what they would like to see in the matrix. In addition, awareness raising workshops were undertaken in several provinces to engage 1Within the agriculture and light manufacturing them in this process. The preparation and sectors, specific industry clusters included: results of the workshops are summarized coffee, horticulture, rice farming, livestock, below. wood and forestry products, agarwood, food processing and distribution, textiles and apparel, silk products, handicrafts, and automotive parts assembly 181 Stage 1: Benchmarking Competitiveness example, the presentation to the tourism of Laos and Export Sectors cluster not only benchmarked the current Prior to visiting Laos, the international performance of the industry (using dollars experts assembled information and analysis per day per tourist and Laos market share of relevant to the country and specific sectors global and regional tourism) but provided including studies conducted previously by many examples of how tourism revenues the World Bank, UN Agencies, the Asian have been increased in countries where the Development Bank, ASEAN and bilateral team has worked such as Thailand, donor agencies. The team also reviewed Mongolia, Sri Lanka and the Caribbean. global and regional industry trends relevant Specific strategies were presented as to Laotian exports. examples along with diagnostic tools focused the industry leadership on Stage 2: Competitiveness Assessment increasing value for their businesses and for Workshops with Commercial and Public the country. Similarly, presentations to Sector Leaders industry leaders in wood products included Two highly qualified experts with examples from countries where the team has experience in export competitiveness worked on increasing value-added wood relevant to Laos then traveled to the country exports such as Croatia. Presentations to to make a series of intensive presentations government leaders included examples of on export competitiveness and discuss key public policy initiatives that have improved constraints to and opportunities for growth. the national platform for competitiveness in other countries. In preparation for the competitiveness assessment workshops, the Government of The objective of the initial competitiveness Laos, with the guidance of the team, presentation is to make an impact on the assembled commercial sector leadership mindsets of those present by providing maps and convened the key actors and compelling examples of practical ways to decision-makers in each of the sectors boost export revenues that are based on the including: real experiences of industry clusters in other A. Industry leaders in 3 sectors countries. The outline for the presentation representing multiple industry was as follows: clusters B. Regional economic leadership in the 1. Economic and Social Goals of the capital and two secondary cities Government of Laos C. Government of Laos leaders 2. Definition of Export Competitiveness D. Academic economic leadership 3. How Export Competitiveness Is Built a. Macro Economic Platform On the basis of the national and industry b. Micro Economic Platform and cluster benchmarking, the international Business Environment experts developed compelling presentations c. Quality of Business Strategy and on the current competitiveness of Laos that Operations (with examples) indicated current export competitiveness, i. Improving Understanding of highlighted opportunities currently available International Markets to boost such exports, provided relevant ii. Innovation in Products and examples on boosting competitiveness from Services (Mongolian Tourism) other countries in industries relevant to Laos iii. Design (Croatian Wood and provided some initial indications of Products) ways to boost exports. iv. Supply Chain Management (Sri Lankan Ceramics) Each presentation was tailored to the v. Workforce Development different industry groups and audiences. For (Tourism Schools) 182 vi. Policy Initiatives (Thai "Good promote foreign investment and improve Agriculture Practices") workforce skills and productivity. vii. Branding (Ceylon Sapphires, Vietnamese Ceramics) Stage 3: Design of Industry Cluster 4. Examples from Other Countries Export Strategies and Action Plans a. Wood Products: Boosting Value- On the basis of the initial benchmarking, and Added the first interactive workshops in Laos and i. Case of Croatia: Furniture meeting with regional industry experts, the b. Coffee: High value added sector team proceeded to map out a practical i. Mistakes: Vietnam; strategy for "jump-starting" exports for the Colombian Coffee three sectors. Federation ii. Successes: "BanCafe" The team then returned to Laos to present c. Tourism the findings to the Laotian government i. How to Attract High Income leaders, industry cluster leaders, and the Tourist Segments World Bank and other donors in an effort to d. Horticulture encourage rapid implementation of the i. Improving Value Added in Cut strategies developed. Flower Exports (Colombia) e. Other Attendance was requested from all i. Apparel and Light Industry participants during the first set of workshops ii. Information Technology as well as any additional leaders of the key iii. Financial Sector companies in each industry, industry 5. Discussing Relevance of These associations, relevant university Approaches to Laos departments, and the Chamber of Commerce 6. Develop Initial Industry Cluster and Government of Laos. Strategies and Prioritize Key Actions for achieving Export Goals In preparation for the second set of workshops, a consultant was mobilized prior The team used a highly interactive and to the mission to gather information needed participative methodology for engaging in the second set of workshops and begin to leadership groups so that the concepts discuss the key strategic opportunities for presented and strategies identified are both each industry cluster. The consultant held understood and supported by local leaders approximately 20 meetings with industry (see Appendix for methodologies used). and government leaders to verify the initial The workshops engaged the leaders in a findings and begin to discuss potential highly interactive and participative manner industry cluster strategies. working with and through native Lao- speaking professionals who are fluent in Review and develop specific strategic English and who have been exposed opportunities at the industry cluster level. previously in their education to economic, These strategies will build directly off the public policy and business and industry assessments and opportunities developed in strategy concepts. the first mission. For example, the initial strategic opportunities for the tourism While in Laos, the team also met with cluster that were further developed in the government officials to review plans for second mission included: boosting exports, existing strategies and a. Enhance Market Knowledge in Laos budget priorities designed to remove Tourism Industry impediments to exports, to boost trade b. Invest in Human Resource Development facilitation (infrastructure and customs), c. Improve Quality of Lao Tourism Experience 183 d. Strengthen associations within the Some examples of actual cluster strategic tourism cluster, including the initiatives facilitated by the consultant in Association of Travel Agents, the Hotel previous projects include: and Restaurant Association and a Improvement in travel logistics for potential tour guide association tourists (air travel, taxis, visas, signage, e. Improve regional coordination of etc.) tourism bodies at the provincial level. Development of E-commerce This would include regional tourist capability by hoteliers and tour information centers and guidebooks and operators annual meetings of provincial tourism Investment in first eco-tourism lodge officials Market survey and client satisfaction f. Establish Luang Prabang tourism cluster initiatives for Mongolian tourism working group to coordinate and Branding "Ceylon Sapphires" develop strategy specific to the region Investing in laboratory testing equipment to certify sapphires In the second set of workshops, the Negotiation of 10% energy price consultants presented practical examples of discount through joint procurement how other industry clusters have pursued Improvement in materials and kiln similar opportunities. The consultants then technology to save on ceramics input worked with the leaders to design specific costs action plans for the most important Certifying product characteristics and opportunities. standards for Sri Lankan latex rubber Innovating in gourmet coffee A typical strategic agenda for a cluster production and exports prioritizes the high value opportunities and Adding product and service features to constraints for the cluster. Depending on the ornamental flower exports market economics, competitive position, and Foreign investment attraction efforts business environment for a given cluster, to "fill out" the apparel cluster in key these strategies can represent different related and supporting industries broader drivers of profitability and Fostering greater responsiveness and competitiveness: customize curriculum in technical training schools and management · Production processes and institutes productivity · Supply-chain structure and 2. Action Matrix and Awareness Raising management Workshops · Development of key related and supporting industries The Action Matrix Workshop · Access to profitable markets and Route-to-market strategies The Action Matrix workshop held in · Administrative barriers to operation Vientiane was modeled on the IF Simulation and growth held in Addis Ababa in September 2005. Unlike the simulation in Ethiopia, rather · Infrastructure than creating an artificial environment with · Human resources (technical and a "generic" draft Action Matrix, the management) workshop in Vientiane was based on the · Access to financing actual Lao draft DTIS report, and asked · Marketing and demand-side participants not to role play, but to assume strategies their real responsibilities and consider the actual issues facing Laos in its drive toward an improved trade performance. As a 184 consequence, the workshop in Vientiane was · Which three actions will Lao take less a simulation, but more accurately, a first first and why? step in working toward a national consensus At the end of the first move, each group was of Lao IF priorities and the creation of an asked to present their priorities in plenary "implementable" Action Matrix. session to all workshop participants. Team 1 The objectives for the workshop to be held Government in Vientiane were to encourage government, private sector and development partners to work to reach the full potential of IF implementation, including: Team 2 Team 3 · Further developing the Action Private Sector Donors Matrix phase by better utilizing the resources, knowledge, and experiences of other IF countries and the Lao DTIS · Helping IF stakeholders explore and During the second move, the composition of understand implementation the three teams was altered so that private expectations and realities sector and government representatives · Fostering commitment of formed Lao public/private partnerships. government, private sector and IF These combined Public/Private teams were donor organizations and agencies to instructed to work to reach a consensus on implementation planning Action Matrix priorities and to move to · Building a core team in Laos for IF develop project implementation plans. implementation During this move, donors worked to refine The concept for the Vientiane workshop was their priorities for Laos, but were also asked to have a simulation exercise that would to visit with each of the other two teams in encourage participants to consider the order to comment on identified priorities and various issues identified in the Lao DTIS implementation plans. Results of the move report and seek to prioritize them. During were subsequently reported out in plenary the workshop, three moves or action phases session. required participants to identify priorities for Team 1 Laos and address a variety of Public-Private Sector implementation challenges and opportunities. In the first move, stakeholders were divided Team 2 Team 3 into three teams, consisting of government, Public-Private Sector Donors private sector, and donor representatives. These teams, representing the three major Lao stakeholder groups were asked to separately identify three major priorities from the draft Action Matrix for Laos. During this move, participants were asked to Move three, which took place on the second respond to relevant questions including: day of the workshop, was similar to the · What are high-priority, feasible Lao second move, except for the fact that each trade development concerns? team was asked to develop more detailed · What actions best address these implementation plans for a specific priority priorities? that had been identified the previous day. In order to focus on two priorities that had been 185 identified earlier, one team was asked to the more limited exposure of participants to focus on trade facilitation issues and the the IF process, one of the primary objectives other, to focus on the development of of these two workshops was to increase implementation plans related to the tourism awareness of the IF process. Thus, the sector. Teams were asked to provide details opening presentation focused on an on: overview of the IF and the various phases · Project objective and technical that constitute the entire process. However, description as in the capital, the findings of the DTIS · The specific roles or actions of the were also presented. The third presentation stakeholders, was a more detailed discussion of the draft · The identity of (a) champion(s) and Acton Matrix, along with a summary of the the primary implementing entity prioritization that had been carried out by · Estimated cost, duration, and the Vientiane workshop. possible funding options (use of Window II funding) With the main emphasis for the regional · The keys to implementation success workshops being placed on awareness and how to overcome identified raising, they were designed as introductory barriers sessions to the IF. During the first part of the As in the second move, donors visited with workshop, DTIS results were presented, the the teams and offered their comments on the draft action matrix was discussed and the implementation plans that had been prioritization as proposed by the Vientiane developed. The results of the final move workshop was summarized. were also reported in plenary session, after which the workshop facilitators offered their It became clear during the course of the commentary on the outcome of the workshop that priorities identified by proceedings. representatives of the regions are not entirely different from those identified in the Workshop Results. The process of capital, though prioritization of sectors prioritizing the draft Action Matrix was reflects more the economic structures of the difficult and time consuming. Despite the regions. Discussion focused on the need to fact that the draft had been prepared to guide support those sectors that had already been discussions and to focus deliberations along identified as promising, in particular tourism five thematic lines, the observations by and agriculture. The impression emerged participants were wide ranging. Ultimately, that the private sector is very much relying a general consensus emerged to identify the on government to make those three top priorities as follows: improvements, being hardly prepared to take initiatives themselves. Another issue that 1. The need to promote and develop was raised by participants throughout was the lack of working capital and non- small and medium enterprises. existence of micro-finance schemes raised. 2. Trade facilitation. 3. Capacity building for Ministries dealing with policy support, particularly MOC. The Provincial Workshops: Luang Prabang and Pakse The workshops held in the provinces of Luang Prabang and Champassak provinces were designed somewhat differently. Given 186 Appendix Participatory Industry Diagnostic Tools/Exercises Diagnostic Tool/Exercise Description Facilitation Approach Porter Assesses industry cluster competitiveness Participants posed probing questions Competitiveness along four components: factor inputs, about their industry specific to each Diamond demand conditions, context for strategy component to test the competitiveness of and rivalry, and related and supporting the industry and business environment industries GAP Analysis Compares industry with key competitors Participants first choose 3-4 direct along industry specific factors of success. competitor industries / countries and then Reveals strengths and weaknesses, choose 8-10 factors that determine focuses industry on critical success success and rank their performance versus factors, forces leaders to think about what their competitors on each factor competitors are doing better than they are. Note: answers are based on perception by industry leaders and should be verified with international expertise SWOT Analysis Highlights industry cluster strengths, Participants collectively discuss the four weaknesses, opportunities for growth and categories and characterize the current near-term and long-term threats to state of the industry profitability and performance Market Trend Highlights current trends in demand for Participants outline key market trends that Analysis domestic, regional and international they have observed in their industry and markets. Tests trends from international brainstorm how these trends will affect industry experts with local demand their business conditions Cluster Analysis Assesses the robustness of the cluster by Participants asked to list the players in highlighting gaps in core products and their industry and then probed to think of services and weaknesses in linkages to supporting industries, academic and related and supporting institutions and governance institutions. Finally asked to industries. Also shows the participants assess the linkages and effectiveness of the many different players critical to the communication among players success of the industry outside of just producers, processors, and exporters Study Questions in Preparation for Laos simulation Questions to be addressed throughout the IF process · How can the government of Laos build and maintain sufficient commitment to the IF process within government? How can it improve the inter-ministerial process which is crucial for the success of the IF? Are there ways to improve ownership of the IF process among Lao stakeholders? How can senior government officials be encouraged to become champions for the IF? · How can the role of the IF focal point be strengthened? How can the IF focal point be empowered to carry out its role of overseeing the IF process among disparate stakeholders both inside and outside of government? · How can the Lao government institute regular, consistent, and meaningful consultations with its private sector? 187 · How can the Lao government reach out to the international private sector to further its trade-related objectives? How can the Lao government respond to issues that are critical to the concerns of traders and investors? · How can the government of Laos work to develop priorities that are consistent with the expectations of bilateral donors and donor agencies operating in Laos? · How can the Lao government encourage integration of the IF process into the ongoing national development strategy envisioned in the PRSP process? Questions to be addressed during the development of the Action Matrix. · Among the constraints identified in the DTIS, what are Laos' most pressing needs? Given that there is a limited amount of resources available from the donor community, how will the money be most effectively spent? · The DTIS addresses a number of broad issues relevant to Laos's greater participation in the international trading system. How should these interventions be sequenced among these competing interests? Which interventions can be accomplished in the short, medium, and long-term? Can interventions be characterized as having greater or lesser impact? · Are the identified constraints issues which can be addressed through regulatory or legislative changes by the Lao government or through collaboration with other Lao stakeholders--primarily the private sector? · Are the identified priorities matters that require technical or other assistance from the donor community? If yes, what type of assistance (and over what period) would be most effective in resolving these constraints? · Are there interventions that have cross-cutting benefits and therefore constitute more efficient methods of addressing Laos' trade performance? Questions to be addressed related to implementing the IF · What can the Lao government do to encourage a collaborative relationship with the donor community and to ensure that all parts of government are engaged with donors in discussions about IF implementation? · How can Action Matrix recommendations be made more specific and targeted to allow for more efficient translation into project designs? · How can IF findings and Action Matrix priorities be integrated rapidly into Laos' PRSP in order to mainstream trade into national development strategies and improve broad donor support? · How can the Lao government ensure that national priorities are better aligned with the implementation activities of bilateral donors and agencies? · How can the process of project development be accelerated? What resources are available to assist with project design, which includes development of technical descriptions, estimated costs, project timelines, and possible funding options? · How can IF Window II funding lead to more rapid implementation of specific priorities and lessen competition among stakeholders for limited resources · How might an empowered Lao IF focal point assist more actively with implementation initiatives? Can it assist donors by providing templates and sample project Terms of Reference to advance the process of implementation? · How can government work cooperatively with its private sector to build capacity related to trade policy formulation and implementation of trade-related initiatives? · How can the international business community be encouraged to participate in the implementation of IF recommendations? Can the international business community be called upon to contribute its views and other resources to Laos' development priorities? 188 Related questions to be addressed by the donor community · How can donors work most effectively with Lao stakeholders to advance the IF process · What can donors in Laos do to improve donor coordination? · How can donors encourage a collaborative inter-ministerial process within the Lao government? Similarly, how can donors assure that other Lao stakeholders are engaged in IF-related discussions? · How can the donor community identify a donor champion who will serve to animate the IF process in Laos? · How can the donor community catalyze the appropriate and effective us of Window II funding be advance Laos's IF implementation activities? · What activities are donors willing to undertake? 189