Po licy Brie f rePort no. 62276-la Lao People’s Democratic Republic Responding to Rice Price Inflation Report No. 62276-LA Lao People’s Democratic Republic Responding to Rice Price Inflation Policy Brief August 15, 2011 Social, Environmental, and Rural Sustainable Development Unit Sustainable Development Department East Asia and Pacific Region _____________________________________________________ This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Cover pictures courtesy of The World Bank. -i- CURRENCY EQUIVALENTS (Exchange rate effective June 13, 2011) Currency Unit = Lao Kip (LAK) US$ 1.00 = LAK 8,029 GOVERNMENT FISCAL YEAR October 1 – September 30 WEIGHTS AND MEASURES Metric System Vice President: James W. Adams Country Director: Annette Dixon Sector Manager: Jeeva Perumalpillai-Essex Task Team Leader: Josef L. Loening -ii- Contents Tables, figures, maps and boxes ............................................................................................ iv Acknowledgements ................................................................................................................ v ບົດສັງລວມ...........................................................................................................................vi Executive summary .............................................................................................................. xii 1. Background and objective .................................................................................................. 1 2. The rice sectors in Laos ...................................................................................................... 1 3. Recent food and rice price trends ....................................................................................... 5 4. Traditional supply and demand factors as minor cause of rice inflation .......................... 16 5. Rice trade and policy as major cause of inflation ............................................................. 20 6. Conclusions and recommendations .................................................................................. 29 Technical annex .................................................................................................................... 33 Data sources ..................................................................................................................... 33 Overview of rice sector studies ........................................................................................ 33 Welfare impacts of rice inflation ..................................................................................... 34 Spatial patterns of rice inflation ....................................................................................... 35 Asymmetric rice price transmission between Laos and Thailand .................................... 36 Volatility analysis between Lao and Thai rice prices ...................................................... 37 References ............................................................................................................................ 41 -iii- S, Tables Table 1: Approximate welfare impacts suggest negative effects of rice price increases in the Northern region and for urban population ................................ 15 Table 2: First-order household welfare impacts of rice inflation ..................................... 34 Table 3: Transmission of glutinous rice prices between Laos and Thailand .................... 35 Figures Figure 1: Rice production increased and is dominated by lowland rain-fed paddy ............. 2 Figure 2: World food prices are high but rice did not increase as much as in 2008 ............ 6 Figure 3: World food prices slowly transmit into Lao food prices ...................................... 8 Figure 4: Glutinous rice prices drive food prices and overall inflation ............................... 9 Figure 5: Thai export prices differ for glutinous and ordinary rice ................................... 10 Figure 6: Lao glutinous rice inflation in real terms reaches............................................... 11 Figure 7: Lao and Thai ordinary rice prices only increased moderately............................ 12 Figure 8: Swings in glutinous rice prices in real terms last for years and are not seasonal ............................................................................................ 13 Figure 9: Regional paddy price trends follow each other .................................................. 14 Figure 10: Glutinous rice trade to Vietnam is associated with price jumps......................... 20 Figure 11: Proximity to Thai border results in higher paddy price inflation ....................... 22 Figure 12: Lao glutinous paddy is competitive .................................................................... 24 Figure 13: Lao and Thai glutinous rice prices share the same long-run trend ..................... 26 Figure 14: Short-run correlation between Thai and Lao glutinous rice prices varies over time and reached a historical peak in 2006-2008............................. 27 Figure 15: Monthly time variation in conditional correlation and volatility between Lao and Thai glutinous rice prices ....................................................... 37 Maps Map 1: Income from rice production is concentrated in the Central and Southern regions ................................................................................................... 3 Map 2: Rice price inflation is highest in producing areas that also trade with Vietnam and Thailand ........................................................................................ 21 Map 3: Paddy price inflation is highest in areas that trade with Thailand ...................... 25 Boxes Box 1: Rice and trade in the 2006-2008 and current food crisis ...................................... 7 -iv- ACKNOWLEDGEMENTS We are grateful for the excellent support This document was prepared by a from Lao government authorities at all team comprising Josef Loening levels. Senior staff from the Ministries of (AFTAR), Paavo Eliste (EASTS), Finance, Industry and Commerce, Chanhsom Manythong (EASTS), Dick Agriculture and Forestry, Planning and Durevall (University of Gothenburg) and Investment, as well as from the National Roy van der Weide (DECRG) with Bank of Laos, National Statistical Bureau, additional support from Brain National Economic Research Institute, Blankespoor (DECRG), Nakul Kumar and National Agriculture and Forestry (George Mason University), Racquel Research Institute greatly supported the Claveria (Columbia University) and analysis by sharing information and Thalavanh Vongsonephet (EACLF). participating in discussions. The report was peer-reviewed by We would like to express our special Richard Record (EASPR), William thanks to Dr. Phouang Parisak Sutton (MNSAR) and Nick Minot Pravongviengkham (Director General, (IFPRI), with additional comments Department of Planning, Ministry of received from Andrew Wilson (Helvetas), Agriculture and Forestry) for organizing Tony Zola (consultant), Shinya and chairing an inter-governmental Takamatsu (University of Minnesota). meeting in March 2011, during which We also received support from Genevieve initial findings were discussed. Boyreau (EASPR), Luc Christiaensen We would also like to thank Michael (EASTR), William Rex (EASTS), and Epprecht (University of Berne) and Bob Magnus Lindelow (EASPR). Baulch (Prosperity Initiative) for The policy brief was prepared under providing mapping data and estimates the overall management guidance of from household surveys, as well as Novah Jeeva Perumalpillai-Essex (Sustainable Deleon (FAO) and Eri Kudo (WFP) for Development Leader, EASTS), Keiko sharing historical rice price data Miwa (Country Manager, EACLF) and complementing information obtained Annette Dixon (Country Director, from the government. Andrew Wilson EACTF). (Helvetas) and his staff greatly facilitated field visits. We are finally grateful to many traders, millers and rice farmers for their time and willingness to share relevant market information. -v- � ຺ຈ຦ ັຄ຤ລມ �າຌ�ະ຤ິຈຽຂ຺ໄາຢູໃເຌ຤າລຽຎັຌ຾��ຑ ໄ ຅ຸຈຎະ຦຺ຄຂຨຄຽຨ�ະ຦າຌວງຂຨຄຌະ �ຸມ�ິຌ. ມຑຼຄຎະມາຌ 10% ຂຨຄ�າຌ ໄ ໄ ໃ ຿ງ�າງຌ຾ມຌຽຑໃ ຨຨ�າຌ ຺ຈວາ�ັຌຈາຎັຈເ຅ ັໄ �ະ຤ິຈຽຂ຺ໄາຽ຋຺ໃ າຌຌ຋ໃ �ຈຽຨ຺ າ�ຎຂາງເຌ ໄ ຋ໃ ຽຎັຌ�ຈ຋ໃ ຽຎັຌ຦າຽວຈ຋ໃ ຑາເວໄ຤າ຃າຽຂ຺ໄາເຌ ໄ ຉະວົ າຈ. �າຌຎູ�ຽຂ຺ໄາ�ລມຽຨ຺ າວົ າງ�ລາ ໃ ໄ �ໃ ຈ ຺ຌ�ໃາຌມາ຦ູຄຂຌ ຾຤ະ ຦ະຽໜ຋າຄຽ຤ຨ� ໄ 80% ຂຨຄຽຌຨ຋ໃ ຎູ��ັຄ຋ັຄ�ຈ. ຺ ເຌຈາຌ ໄ ຉາຄໂ ຽຑໃ ຨ຃ຸມ຃ຨຄ຤າ຃າຽຂ຺ໄາ�ໃ ເວໄຎໃຼຌ຾ຎຄ ໃ ໄ ຑູມ຦າຈຽວັ ຌລາຽຂ຺ໄາຎູ��ຈຢ຋�ຑາ�ຑໄຌຂຨຄ ໃ ໄ ໃູ ຸ ຢໃາຄ�ລລາເຌຨະຌາ຃຺ຈ. ເຌ�຤ງະ�າຄຎ ຎະຽ຋ຈ ຾ຉລາ຦ລຌວົ າງ຅ະຢູເຌຽຂຈ຋຺ໃ ຄຌາ ໃ ໃ ໃ ໃ ໄ 2010 ຤າ຃າຽຂ຺ໄາໜຼລ ຢູ຤າລ�ຈຽຑໃ ມຂຌ ໃ ໄ ຉາມ຋຺ໃ ຄຑຼຄຆໃ ຄຽຎັຌຽຂຈ຋ໃ ຢູເ�ຆາງ຾ຈຌຉິຈ ໃ ໄ ຽ�ຌ�ລາ 50%. ເຌ຃ລາມຽຎັຌ຅ິຄ, ຤າ຃າ ໃ � ັ�ຎະຽ຋ຈ�຋. �າຌຎູ�ຽຂ຺ໄາ຦ລຌວົ າງ຅ະ ໃ ໄ ັໄ ຽຂ຺ໄາເຌຎ 2010 ຋ໃ ຦ູຄຂຌຌຌ຾ມຌຽ�ຌ�ລາ ໃ ໃ ຾ມຌຽຂ຺ໄາໜຼລຢູເຌ 3 ຽຂຈວ຤ ັ�ຂຨຄ຤ະ� ຺� ໃ ໃ �຤ງະຎ 2006 ວາ 2008 ຆໃ ຄ຾ມຌ�຤ງະ຋ໃ ໃ ໄ ຌິຽລຈ: ຽຂຈ຋຺ໃ ຄຑຼຄ຋ໃ ຽຩັຈຌາຈລງຌາ�຺ຌ, ໄ ຽ�ຈລິ�ຈ�າຌຨາວາຌເຌ຿຤�. ຽຊິຄ຾ມຌລາ ິ ໃ ໃ ໄ ຽຂຈຎູ�ຽຂ຺ໄາ�ຩ, ຾຤ະ ຽຂຈຌາຈລງຌາ ໃ ໄ ຤າ຃າຽຂ຺ໄາເຌຢູເຌ຦ະຑາ�຦ະວຄ ຺�ເຌ�຤ງະ ໃ ຆ ຺ຌ຤ະຎະ຋າຌ. ຽ຃ຄຎ຋າຨຈຂຨຄຎ 2011 �ໃ ຉາມ຾ຉລາ�ໃ ິໃ ໃ ໃ �າຌ�ັຌ຤ຸ�າຌ�ະ຤ິຈຽຂ຺ໄາເວໄ�ມ�ິຌ ໃຸ ງ ັຄຽຎັຌ຤າ຃າ຋ໃ ຦ູຄຢູຽມໃ ຨ຋ຼ�ເ຦ ໃ ຎະວລ ັຈ ໃ ເຌ຤ະຈ ັ�຋຺ໃລຎະຽ຋ຈ�ຈ�າງຽຎັຌ�ຸ຤ິມະ຦ິຈ ໄ ຦າຈ຋ໃ �າຌມາ. ໃ ຽຨ�ະ຦າຌຌະ຿ງ�າງ ຋ໃ ຦າ຃ັຌຨັຌໜໃ ຄ຦າ຤ັ�຤ັຈຊະ�າຌ. ຽຊິຄ ໄ ຦ະ� ັ�ຌມ຅ຸຈຎະ຦ ຺ຄຆຨ�ວາ� ັຌຈາຎັຈເ຅຋ໃ ຾ມຌລາ�ຈມ�າຌຎັ�ຎຸຄເຌ�າຌ�ະ຤ິຈ ຾຤ະ ໃ ໃ ໄ ໄ ຑາເວ຤າ຃າຽຂ຺ໄາ຦ູຄຂຌ ຾຤ະ ເວ຃າ຦ະຽໜ ໄ ໄ �າຌຽ�ັ��ຼລ�຺ຌ຤ະຎູ�ຽຂ຺ໄາ �ໃ �ໃ �ຈ�າງ ໃ ໄ ໄ ໄ ໄ຺ ຾ຌະ຋າຄຈາຌຌະ຿ງ�າງເຌຽ�ຨຄຉຌ. ຽຊິຄລາ຋ຸ�຃ຨ�຃ ຺ລຢູເຌຆ ຺ຌຌະ� ຺ຈ຅ະມຽຂ຺ໄາ ໃ ໃ ຽຂ຺ໄາມ຃ລາມ຦າ຃ັຌວົ າງ຋ໃ ຦ຸຈ ຦າ຤ັ� �ຸມ�ິຌຉາມ຃ລາມຉຨຄ�າຌຑ຤ິ຿ຑ�ຂຨຄຉ ຺ຌ. ໄ ໄ ຦ຎຎ ຤າລ. ເຌຊາຌະ຋ໃ ຽຎັຌຨາວາຌວົ �, ັ ຽຌໃ ຨຄ຅າ�ລາຽຂ຺ໄາ຋ໃ ຽຨ຺ າ�ຎຂາງເຌຉະວົ າຈມ ໃ ຽຂ຺ໄາໜຼລງັຄມ຃ລາມ຦າ຃ັຌ຋າຄຈາຌ ໄ ຅າຌລຌໜຨງ ຦ຎຎ ຤າລ ຅ິໃ ຄມ຃ລາມຨຨຌ ໄ ໃ ລ ັຈ຋ະຌາ຋າ ຾຤ະ �າຌຽມຨຄຨ�ຈລງ. ໄ �ວລຉໃ �າຌຽໜັ ຄຉິຄຂຨຄ຤າ຃າຽຂ຺ໄາ຋ໃ ຽ�ຈມາ ຽຎັຌ຋ໃ ຃າຈ຃ະຽຌລາ຃຺ຌ຤າລ�ູໄໜໃ ຄ�຤ິ຿ຑ� ໃ ຅າ��າຌຂາຈ຾຃ຌ�າຌ຦ະໜຨຄຽຂ຺ໄາຢູຑາງ ໃ ຽຂ຺ໄາ຦າຌ 200 �ິ຿຤�ຣາມຉໃ ຃຺ຌ ເຌ຾ຉ຤ະຎ ໃ ເຌຎະຽ຋ຈ ຾຤ະ �າຌຑັຈ຋ະຌາ�າຌ຃າເຌ ໄ ຆໃ ຄ�ລມຽຨ຺ າ 70% ຂຨຄຨາວາຌ຋ໃ ຽຎັຌ຋າຈ ຑາ�ຑໄຌ. �າ຤ຣ ຾຤ະ ຿ຎຣຉຌ1. �າຌ຦ະໜຨຄຽຂ຺ໄາຢູໃຑາງເຌຎະຽ຋ຈ ຾຤ະ �ັຌຈາຎັຈເ຅຃ລາມຉໄຨຄ�າຌ຦າມາຈ ັໄ ຨະ຋ິ �າງ�ຈຑຼຄ຾ຉ຦ລຌໜໄຨງໜໃ ຄຽ຋຺ໃ າຌຌ ໄ ໃ ໃ 1 ຽຂ຺າໜຼລງ ັຄຊ�ເຆຽຩັຈຽຎັຌຽ຦ັ ໄຌຽ� ຾຤ະ ຨາວາຌ ໄ ໄ ໄ ຂຨຄ�າຌຽຑໃ ມຂຌຂຨຄ຤າ຃າຽຂ຺ໄາໜຼລເຌຎ ຎະຽຑຈຂຨຄວລາຌຢາຄວ຤ລຄວ຤າງຨ�ຈລງ. ໃ ໄ -vi- 2010. ຑລ�ຽຩ຺າ�ຈຑ ຺�ຽວັ ຌລາ�າຌ ໄ ໃ ຾ມຌ຦ູຄ຋ໃ ຦ຸຈຢູເຌຽຂຈ຋ໃ ມ�າຌ຃າຽຂ຺ໄາ� ັ� ໃ ໃ ໄ ຦ະໜຨຄຽຂ຺ໄາ຋ໃ �ໃ ຑຼຄຑຢູຑາງເຌຎະຽ຋ຈຨາຈ ໃ ວລຼຈຌາມ ຾຤ະ �຋. ຢາຄເຈ�ໃ ຉາມ ໃ ັໄ ຨະ຋ິ�າງ�ຈ຦ລຌໜຨງໜໃ ຄຽ຋຺ໃ າຌຌຂຨຄ�າຌ ໄ ໃ ໄ �າຌ຃ິຈ�຤຦ ຺ມ຋ຼມເ຦຤າ຃າຽຂ຺ໄາໜຼລເຌ ໃ ໃ ໄ ຽຑໃ ມຂຌຂຨຄ຤າ຃າຽຂ຺ໄາຆໃ ຄງ ັຄ�ໃ ຋ັຌມ຃ລາມ ຉະວົ າຈຑາງເຌຎະຽ຋ຈ຾ມຌ�ໃ ຃� ັຌຽຌໃ ຨຄ ໃ ໃ ໄ ໃ ໄ ູ ຾ຌຌຨຌ�າຄຈາຌ�ຼລ� ັ�ຂມຌ຋າຄຈາຌ�຤ິ ໄ ຅າ�ລາ຤າ຃າຽຂ຺ໄາ�ຈຽຑໃ ມຂຌ຅າ�� ັຌຈາຎະ ໃ ໄ ໄ ມາຈ�າຌ�ະ຤ິຈຽຂ຺ໄາ ຾຤ະ ຽຂຈ�ະ຤ິຈຽຂ຺ໄາ ຽ຋ຈຽຑໃ ຨຌ�າຌ�ຈມ�຺ຌ�ະ຋຺�ຢາຄ�ລລາ ໄ ໄ ໃ ຑລ�ຽຩ຺າເຌຑ຺�ຽວັ ຌລາ຋າຨຼຄຂຨຄ຤ະຈູ�າຌ ໃ ໃ ໃ ວົ າງ�ລາ�າຌວ຤ຸຈ຤ ຺ຄຂຨຄ຤າ຃າຽຂ຺ໄາ. ໃ ຂໄ ຾຤ະ �າຌວ຤ຸຈ຤ ຺ຄຂຨຄຽຂ຺ໄາ຋ໃ ຽຨ຺ າ�ຎຂາງເຌ ມູຌ຋ໃ ຑ຺�ຽວັ ຌ຦ະຽຑາະ຅າ��າຌ຃ ຺ຌ຃ລາຌະ ໄ ຉະວົ າຈເຌຎ 2010 ຂຨຄຽຂ຺ໄາຌາຎ຋ໃ ວ຤ຸຈ ໄ ຿ງ�າງຌຎະ�ຨ�ມ: ໄ ັໄ ຤ ຺ຄງຨຌ຦ະຑາ��ຑ຾ວຄ຾຤ຄຌຌ�ໃ ງ ັຄ�ໃ ໄ ໄ ຦າມາຈເວຽວຈ�຺ຌຢາຄຑຼຄຑຉໃ �າຌຽຑໃ ມຂຌ ໄ ໃ ໄ  ຽຂ຺ໄາ຤າລຽຎັຌ຋ໃ ຉຨຄ�າຌຢູໃຎະຽ຋ຈ ໄ ຂຨຄ຤າ຃າຽຂ຺ໄາ. ໄ ໄ �າຌລິຽ຃າະງ ັຄຆເວຽວັ ຌ ວລຼຈຌາມ: ຋ັຄຌ�ໃ ຽຑາະລາຑໄຌ຋ໃ �າຌ ໄ ໃ ລາມ�າຌ຦ະໜຨຄຽຂ຺ໄາ຾��ເວ຦ຌຽຆໃ ຨ ຾຤ະ ໃ ໄ ິ �ະ຤ິຈ຋ໃ ຨາຌລງຉໃ �າຌຽ�ັ��ຼລ, ຾຤ະ ໃ ມ�າຌ�ະຉຸຌຽຂ຺ໄາຂຨຄ� ັຌຈາ຿ຩຄ຦. ໄ ມ຃ລາມຉຨຄ�າຌຽຂ຺ໄາໜຼລຢາຄວົລຄວົ າງ ໄ ໃ �າຌ຃າຽຂ຺ໄາເຌຑາ�ຑໄຌຨາຈຽຎັຌ຦າ ໄ ຦າ຤�຿ຨ�າຈຑິຽ຦ຈ຦າ຃ ັຌຉາຄ ໂ. ັ ໃ ໄ ໄ ຽວຈຉ຺ຌຉຂຨຄ�າຌຽຑໃ ມຂຌຂຨຄ຤າ຃າ ຽຂ຺ໄາໜຼລ. �າຌລິຽ຃າະ�ຈຆເວຽວັ ຌລາ�າຌ ເຌ຃ລາມຽຎັຌ຅ິໃ ຄ຋ໃ ລາ�຤ງະ຋ໃ ຤າ຃າຽຂ຺ໄາ ໃ ໄ ໄ ໄ ໃ ຃າເຌຑາ�ຑໄຌຑາເວ຤າ຃າຽຂ຺ໄາຽຑໃ ມຂຌຆໃ ຄ ໄ ໄ ໄ ໄ ຦ູຄຂຌ຾ມຌ� ຺ຄ� ັ��຤ງະ຋ໃ ມ�າຌ຦ໃ ຄຽຂ຺ໄາ ໃ ຺ ຑາເວ຤າ຃າຽຂ຺ໄາຢູຑາງເຌຎະຽ຋ຈມ�າຌຎັໃ ຌ ໄ ໃ ຨຨ�ຢາຄວົ ລຄວົ າງ�ຎວລຼຈຌາມ຋ໃ ໃ ຎລຌ ຾຤ະ �າຌຉຨ�຿ຉ຋າຄຈາຌຌະ ໃ ໄ ໄ ຊ�ຉຨຄຽຎັຌ຋າຄ�າຌຽຆິໃ ຄມ ັຌຑ຺ລຑັຌ� ັ� ໄ ຿ງ�າງ຋າຄ�າຌ຃າ຋ໃ �ໃ ຋ັຌ� ັ�຦ະຑາ��າຌ. ໄ �າຌຉ ັຈ຦ິຌ� ັຌວາ຋າຄຈາຌຌະ຿ງ�າງ ໄ �າຌ຃າຽຂ຺ໄາ� ັ�ຎະຽ຋ຈວລຼຈຌາມຨາຈ຾ມຌ ໄ ໃ �າງ຃າເຌ຤ະຈ ັ�ຎະຽ຋ຈ ຾຤ະ ຤ະຈ ັ� ໄ ໄ ໄ ຽວຈ�຺ຌຉ຺ຌຉ຦າ຤ັ��າຌຽຑໃ ມ຦ູຄຂຌຂຨຄ ຾ຂລຄຆໃ ຄມ�຺ຌຉໃ �າຌຎະຉິ� ັຈ຤າ຃າຽຂ຺ໄາ ໄ ຤າ຃າຽຂ຺ໄາເຌ�຤ງະ຦ັຌ ເຌ຃ະຌະ຋ໃ �າຌ຃າ ໄ ຽຂ຺ໄາ� ັ�ຎະຽ຋ຈ�຋�ຈມ�຺ຌ�ະ຋຺�ເຌ�຤ງະ ໄ ຋ໃ ມ�າຌຎໃຼຌ຾ຎຄຢູຽ຤ໄຨງ ໂ ໃ �າຄ ຾຤ະ �຤ງະງາລ. � ັຌຈາ�ູ຦ໃຄຨຨ� ໄ ຺  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຤າ຃າຽຂ຺ໄາ. 2 �າຌ຃າຈ຃ະຽຌຂຨຄ຤ ັຈຊະ�າຌ຾ມຌຽຩັຈເວ�າຌ ໃ ໄ �ະ຤ິຈຽຂ຺າ຃ລຌຽຑໃ ມຂຌ຅າ� 3 ຤າຌ຿ຉຌເຌຎະ຅ຸ� ັຌ ໄ ໄ ໄ ໄ ໃ ັໄ ງິໃ ຄ�ຎ�ລາຌຌ�າຌຉ ັຈ຦ິຌຌະ຿ງ�າງ ຽຎັຌ 4,2 ຤າຌ຿ຉຌຑາງເຌຎ 2015. ໄ ໄ �າລ� ັ�຤າ຃າຽຂ຺ໄາເຌ຤ະຈ ັ�ຎະຽ຋ຈ຾ມຌ ໃ ໃ -ix- ໄ ຂຌ� ັ�຦ະຑາ� ຾຤ະ �າຌຽໜັ ຄຉິຄຂຨຄ ງ ັຄມ຃ລາມ຅າຽຎັຌ຋ໃ ຅ະຉຨຄຽຑໃ ມ຃ລາມ ໄ ຉະວົ າຈ຤າ຃າຽຂ຺ໄາໜຼລເຌ຤ະຈ ັ�ຑາ� ຽຂ຺ໄາເ຅�ຼລ� ັ�ລາ຤າ຃າຂຨຄຨາວາຌ ໃ ໃ ຑໄຌ. ໃ ັ ັໄ ໄ ູ ໃ ຈຄຌຌຂມຌ�ຼລ� ັ��າຌ຃າຂາງ ໄ ຾຤ະ ຑະ຤ ັຄຄາຌເຌ຿຤�ມ�຺ຌ�ະ຋຺�ຉໃ ຽຂ຺ໄາຂາມຆາງ຾ຈຌ຤ະວລາຄ� ັຌຈາຎະ ໄ ໃ ຤າ຃າ຦ິຌ຃າຢູເຌ຤າລ ຾຤ະ ຢູເຌຑາ� ໄ ໃ ໃ ຽ຋ຈເຌຑາ�ຑໄຌ ຾຤ະ ຃ຸຌ຤ ັ�຦ະຌະ ຑໄຌ຃຾ຌລເຈ. ຤າ຃າ຦ິຌ຃າ�຤ິ຿ຑ�຋ໃ ຂຨຄ຤າ຃າຽຂ຺ໄາໜຼລເຌຉະວົາຈ຅ິໃ ຄຽຎັຌ ມ�າຌຎຼຌ຾ຎຄເຌຎະຽ຋ຈ�຋ ຾຤ະ ໃ �າຈ�າລ຋າຨິຈ຋ໃ ສຳຄັນໃນນະໂ�ບຳ� ໄ ວລຼຈຌາມຨາຈ຦ໃ ຄ�຺ຌ�ະ຋຺�຋ໃ ຦າ຃ ັຌຉໃ ຺ ຳລັ ພຳ�ໃນປະເທດ �ລະ ສຳ ບ�ຳນວຳງ ຤າ຃າ຦ິຌ຃າຢູເຌ຤າລ. ໃ � ັຌຈາ �ຜນ�ຳນລົງທຶນ. ມາຈຉະ�າຌ຋າຄຈາຌຌະ຿ງ�າງ຃ລຌ ໄ  �ໃ ເຆມາຈຉະ�າຌ�຤ງະ຦ັຌຽຂ຺າເຌ�າຌ ໄ ໄ ຃າຌຄລາ�າຌຽຑໃ ມຂຌຂຨຄ຤າ຃າຨາວາຌ ໃ ຽຂ຺ໄາ຾ຆ�຾ຆຄ຾��ຂ�ັຌວາ຤າຽຂ຺ໄາເຌ ໄ ຾຤ະ ຽຂ຺ໄາມ�຺ຌ�ະ຋຺�ຉໃ ຽຌໃ ຨຄ຿ຈງ� ຺ຄເ຦ ໃ ຉະວົ າຈ. ຽວຈ�຺ຌຉຌຉໃ �ໃ ຃ລາ� ັຌຈາ຃ ຺ລ ຺ໄ ໃ ຃າ຾ຩຄຄາຌຢູຑາງເຌຎະຽ຋ຈ. ໃ ໃ �າຌ ຽຩຨຌຉາຄໂ ຢູເຌ຤າລ�ຈຩ ັ��຺ຌຎະ ໃ ໃ ໄ ຃າຈ຃ະຽຌຉາຄໂ ຤ລຄໜາ�ໃ ຨາຈຽ�ຈ ໃ ໃ ໄ ຿ວງຈ຾��຦ະຽ຤ງ� ັຌ�ຎ຅າ�຤າ຃າຽຂ຺າ ໃ ໄ ຃ລາມ� ຺ຈຈ ັຌເວ຤າ຃າຽຑໃ ມຂຌ�ຎຉາມ ໄ ໄ ຋ໃ ຦ູຄຂຌ ຽຊິຄ຾ມຌລາມ�າຄ�ຸມ ໃ ໃ ໃ �າຌຽລ຤າເຌຨະຌາ຃ ຺ຈຽຆັໃ ຌ� ັຌ. ງິໃ ຄ�ຎ ຎະຆາ�ຨຌ຅າຌລຌໜໃ ຄເຌຽຂຈຉ ຺ລຽມຨຄ ໃ ັໄ �ລາຌຌ຤າ຃າຽຂ຺ໄາ຋ໃ ຦ູຄເຌຎະ຅ຸ� ັຌ�ຈ ໄ ຾຤ະ ຽຂຈຂາຈ຾຃ຌຽຂ຺ໄາ຅ະ�ໃ �ຈຩ ັ��຺ຌ ໄ ໄ ໄ ໄ ຽ�ຈຂຌງຨຌ�າຌຽຑໃ ມຂຌຂຨຄ�າຌຎໃຨງ ຎະ຿ວງຈ�ໃ ຉາມ. ຦າ຤ ັ�ຎະຆາຆ ຺ຌ�ູ຋ໃ ໄ ໄ ຦ິຌຽຆຨຂຨຄຑາ�຦ລຌຽຨ�ະຆ ຺ຌຆໃ ຄຢູເຌ ໃ ໃ �ຈຩ ັ��຺ຌ�ະ຋຺�ເຌ຋າຄ�ໃ ຈ຋ໃ ຽ�ຈມາ ໄ ຉ ຺ລຂຨຄມ ັຌ�ໃ ຑາເວມ຃ລາມ� ຺ຈຈ ັຌ຋ໃ ຅ະ ໄ ໄ ຅າ�຤າ຃າຽຂ຺ໄາ຋ໃ ຦ູຄຂຌ຤ ັຈຊະ�າຌຨາຈ ໄ ໄ ຑາເວ຤າ຃າ຦ູຄຂຌ. ຦ິໃ ຄ຋ັຄ�ຈຽວ຤຺ໃ າຌ ໄ ຺ ຑິ຅າ຤ະຌາຂະວງາງ຾�ຌຄາຌ ຦ະ຾ຈຄເວຽວັ ຌລາມ຃ລາມ຅າຽຎັຌ຋ໃ ຅ະ ໄ ໃ ຉາໜາຄ຃ລາມຎຨຈ�ຑ຋າຄ຦ ັຄ຃ ຺ມ, ຽຎັຌ ໃ ຉຨຄມ�າຌຉິຈຉາມຢາຄ຃ ຺�ຊລຌ�ຼລ� ັ� ໄ ໃ ໄ ໃ ຺ໄ ຉຌ຾ມຌ຾�ຌຄາຌຨາວາຌຽຑໃ ຨຄາຌ, ຆໃ ຄ ໃ ຋າຨຼຄຂຨຄ຤າ຃າຽຂ຺ໄາຢູເຌ຤າລ. ໃ ໃ ຽຎັຌ�າຌຽຂ຺ໄາ຾ຆ�຾ຆຄ຾��ຂ� ັຌວາ຋ໃ ມ ໄ ຎະ຦ິຈ຋ິ �ຌຨ ັຌໜໃ ຄ. ຺  ຎຸ�຅ິຈ຦າຌ�ເວໄຩ�ຌຽຌໃ ຨຄຉໃ ຤ະ�຺� ໄູ ຺ ຽ຦ຈຊະ�ິຈມະວາຑາ�ເຌ�ງງະງາລ. -x- EXECUTIVE SUMMARY yields, not all rural households are able to fully meet their rice consumption The objective of this policy brief is to requirements. Because of its small market identify likely factors driving the recent surpluses, Laos is vulnerable to price rice price hike and suggest options to fluctuations stemming from domestic manage rice price volatility in the future. supply shocks and regional trade In mid-2010, glutinous rice prices in Laos developments. increased by more than 50 percent. In Traditional supply and demand fact, the 2010 price hike was faster than factors explain only a small part of the during the 2006 to 2008 global food 2010 glutinous rice price inflation. We crisis. Although rice prices have subdued find that domestic rice supply shortfalls in first half of 2011, they remain might explain only a small part of recent historically high. This policy note aims to rice price inflation, albeit there is some identify factors behind the recent rice uncertainty about the information about price hikes and make initial policy aggregate production volumes and its recommendations. location. We show that both seasonality Rice is of utmost importance for Laos. trends and decline in marketable As the main staple food, glutinous rice surpluses in 2010 wet season due to dry has also major cultural and political spell do not explain sufficiently well the significance. It is estimated that people in rice price inflation. The analysis also Laos consume up to 200 kilograms per rules out increased credit supply and capita of milled rice per annum, hoarding by millers. constituting some 70 percent of their Regional trade is likely the main calorie and protein intake.3 proximate cause for high glutinous rice Rice production in Laos is subsistence prices. The analysis shows that regional oriented. Only some 10 percent of trade triggers price increases, which in production capacity is actually marketed. turn may have been exaggerated by Cultivation covers more than 80 percent domestic price and trade policy of the total cropped area. Geographically, responses. rice is grown in all regions of the country, Trade with Viet Nam was likely the but the overwhelming part of rice main reason for short term price production is from lowland fields, which fluctuations, while trade with Thailand are in close proximity to the Thai border. affects medium and long term price Most production is glutinous rice, trends. Large official rice exports to distributed along three main ecosystems: Vietnam preceded the price jumps both in low-land rain-fed rice, upland rice, and 2006 and 2010. The analysis shows that irrigated dry season rice. rice inflation has been highest in areas Achieving self-sufficiency in rice at that trade with Vietnam and Thailand. the national level has been a top priority However, price transmission into the Lao for the Government. In spite of the glutinous rice market has been improvements in rice production and asymmetric, as rice price increases from neighboring countries are transmitted more rapidly than price decreases. 3 In addition, the use of glutinous rice for Specific findings of this policy brief various rice-flour noodles and sweets is include: extensive. -xi-  There is a natural demand for Lao temporary price controls. However, the rice in Vietnam. This is because of effectiveness of these policy measures has favorable geography, harvest patterns, been mixed. First, Laos‘ rice exports are and a large demand for glutinous rice typically restricted by the use of export for special occasions. The fact that quotas and taxes. There may be a conflict periods of large rice price hikes between national trade policy and the coincide with large official exports to rights of provinces to issue export quotas. Viet Nam is also attributed to national Second, government intervention to and provincial trade policy decisions, stabilize rice prices in the form of which appear to reinforce price stockpiling is partly unpopular, owing to volatility. likely limited benefits for millers. Third, price controls can induce negative  Trade with Thailand is important due consequences for long-run rice sector to similar dietary preferences for development. International experience glutinous rice as main staple food, suggests that such interventions often fail although information about actual to their stated goals. In fact, there is a risk trade flows is unreliable. Lao paddy is that they may cause more uncertainty for typically cheaper than Thai paddy at producers and processors which could farm gate level, while the Lao milled limit investments, production and trade glutinous rice is more expensive than incentives. the Thai equivalent due to high There is a need to closely coordinate milling costs. Thus, there is thus a rice production and trade policies—at the strong incentive to export paddy. national and provincial levels—in order to effectively manage price volatility. This A detailed analysis of the effect of would require good knowledge and trade on rice prices in Laos, however, is information systems, which in turn would limited by the paucity of information of provide basis for evidence-based policy regional supply dynamics. There is a decisions. The proposed actions could possibility that major supply shocks may include: be regional, which could affect Laos, Thailand, and Vietnam simultaneously.  Develop a rice sector strategy and Hence, future analysis should thus look at policy framework. This would provide regional glutinous rice production trends the basis for coordination and and related trade flows, to estimate the planning of public and private extent they effectively can explain Lao investments for enhanced rice price volatility. This is because trade may production. Increasing production and be the likely proximate cause of Lao price marketable surplus is necessary spikes, as indicated by the findings of this condition for future price stability.4 document, but volatility in Thai and With the Lao population growing at Vietnamese production—and other factors 2.2 percent per year, the demand for explaining prices in neighboring rice is expected to grow substantially countries—may be the original cause. The current Government policy responses to high rice prices have 4 Government estimates suggest that rice included (i) export restrictions, (ii) production should increase from currently 3 stockpiling, and (iii) plans to implement million tons to 4.2 million tons by 2015. -xii- over time, requiring continued yield  Be aware of long-run macroeconomic and production increases. Current implications. There is a need to better high rice price levels, which are understand how world food and expected to stay, are an opportunity energy prices affect price trends in for rice sector development in Laos. Laos and in the region. Consumer The development of a comprehensive price developments in Thailand and strategy and policy framework will Vietnam can have significant impact help to coordinate production, on prices in Laos through price milling, and trade policy decisions. It transmission. Policy measures also will be also important to coordinate need to consider that rice and food policy decisions at the national, price increases eventually feed into provincial and district levels, and domestic wages. And expectations address knowledge gaps. can create inflationary pressures over time. Moreover, current price  Establish an effective rice price inflation is taking place in the context monitoring system. This should track of already high private credit growth, simultaneously domestic and regional which itself can contribute to price, production and trade trends. inflationary pressures. All this There is paucity of information about justifies comprehensive monitoring of the domestic production volumes, food price trends in Laos. stocks in storage, formal and informal trade, and prices. Furthermore, effective national rice policy decisions in Laos depend also on dynamics and behavior of regional glutinous rice markets. Estimates of actual cross-border trade flows between countries and characteristics of the regional glutinous rice markets would be thus a useful first step in domestic policy and investment planning processes.  Restrain from intervening into rice markets through short-term measures. The main reason for this is that households in Laos gain on average from higher rice prices, albeit, some of the population in urban and food deficit areas will lose. For those, who will be negatively affected by high rice prices, the Government may want to consider expanding social safety nets programs in Laos, such as food for work programs, as an effective intervention. -xiii- 1. BACKGROUND AND OBJECTIVE despite the fact that high prices coincide with currently high world food prices, it Rice is of special political and economic is sometimes believed that international importance for Laos. It is the main staple food price transmission only play a crop and among the most important limited role.5 factors determining the welfare status of The objective of this policy note is to approximately 6.4 million people in Laos. identify likely factors driving rice prices Rice cultivation covers more than 80 and suggest options to manage rice price percent of the total cropped area and it is volatility in the future. It also provides a grown in all regions of the country. The snapshot of recent developments in the Central and Southern regions, in rice sector, and describes rice and food proximity to the Thai border, account for price trends and their implications. Based some 90 percent of the total rice on these findings, the note discusses production. During the last decade, Laos policy options. The policy brief has six has experienced a steady increase in GDP chapters, including this introduction. and several improvements in the general Chapter 2 provides a brief outline of the standard of living. These achievements rice sector. Chapter 3 describes recent are attributed to multiple factors, trends in world and Lao food prices. It including improved policies, which have also provides insights into likely resulted in high growth in services, macroeconomic and household welfare hydro-energy, and mining, but in impacts of rice price inflation. Chapter 4 particular to agriculture and rice discusses the potential causes of rice price production. inflation, as suggested by other reports During 2010, glutinous (sticky) rice and people interviewed. Chapter 5 prices increased by more than 50 percent. analyzes the role of the regional rice Glutinous price inflation, measured market in determining prices, which this throughout this report as year-to-year policy brief identifies as the primary growth rates, was in fact higher in 2010 cause of the glutinous rice price hike. than during the peak of the global food Chapter 6 concludes by presenting crisis in 2008. And even if prices have recommendations. declined recently, glutinous rice inflation was still over 30 percent in February. Yet, despite its great importance, and concerns 2. THE RICE SECTOR IN LAOS regarding price stability and social welfare impacts, there is little This chapter provides an overview of the understanding of what drives the current Lao rice sector. The sector has grown price inflation. Anecdotal evidence significantly over the past decade. Most suggests that it is not just a change in likely this was due to the successful seasonality, and because of its magnitude, introduction and adoption of improved inflation cannot be explained entirely by seed varieties. Glutinous rice is the traditional domestic supply and demand dominant variety of rice, accounting for factors. The rice-price puzzle is made about 85 percent of total rice output. more complex by the fact that Laos produces mainly glutinous rice, largely 5 This policy brief, using rice price data for domestic consumption. Some over the past decade, will shed light on observers believe that only a small international market exists for it. Hence, these assumptions. -1- Figure 1: Rice production increased and is dominated by lowland rain-fed paddy Paddy production in millions tons, 2000-2010 Composition of paddy production by ecosystem in million tons, 2009 Source: Lao Ministry of Agriculture and Forestry; and staff compilations. These graphs show paddy production from 2000-2010 as well as the composition of production in 2009. Paddy production in 2010 is an estimate and shows a discrepancy between government forecasts and FAO/WFP field assessments, indicated in the stacked zone. Production is mainly rain-fed and As the main staple food, rice has a major concentrated in the Central and Southern cultural and political significance. Access regions, mostly in proximity to the Thai to rice is the single most important factor border. However, measuring production determining the welfare status in rural remains a challenge and much of the data and semi-urban areas. People in Laos now on rice production is uncertain.6 consume up to 200 kilograms per capita of milled rice per annum, which constitutes almost 70 percent of their Rice production increased calorie and protein intake (EMC, 2011; FAO/MAF, 2009; ADB, 2006). Per capita rice consumption is thought to be among the highest in the world. Rice production, 6 As discussed in Chapter 4, the in levels, continued to rise. In particular, measurement issues make an assessment rain-fed rice production increased by 6 percent to 2.5 million tons in 2009 of supply factors driving rice glutinous relative to the previous year. Meanwhile, inflation challenging. irrigated rice yield rose by around 2 -2- Map 1: Income from rice production is concentrated in the Central and Southern regions Source: LECS4 and staff estimates. The map shows rice cultivation as the main source of village income in 2008. Dark areas indicate relative concentration of rice income. Visible from the map is that rice cultivation is in relative proximity to the Thai border. percent to about half a million tons. past decade. As shown in Figure 1, total However, rice productivity, as measured paddy rice production has grown from by total rice area, remained almost some 2 million tons in 2000 to more than constant. Total rain-fed rice area 3 million tons in 2010. During this period increased marginally to 3.8 tons per rice productivity increased from about 3 hectare in 2009 from 3.7 tons per hectare to 3.5 tons per hectare. Altogether, the in 2008 while total irrigated rice area was production trends clearly suggest unchanged at 4.7 tons per hectare. significant improvements in rice Achieving self-sufficiency in rice at the production and productivity over the past national level has been a top priority. It decade. At the same time, official data are was achieved in 1999/2000. Over the past reported to suffer from shortcomings. For decade, growth in the rice sector has example, separate statistics for glutinous allowed farmers to increasingly switch and non-glutinous paddy rice production from buffaloes to mono-axle tractors for are not collected (Schiller and others, land preparation. Today, about 70 percent 2006), and expert estimates report lower of glutinous rice seeds come from the average yields than the official ones improved varieties compared to just 5 (EMC, 2011). Moreover, paddy percent in the 1990s. As Lao farmers do production data are generated by first not use much fertilizer or pesticides estimating planted areas in the districts, (FAO/MAF, 2009) this shift is thought to then using approximate district rice yields have played a significant role in to derive district production. Production productivity improvements (EMC, 2011). statistics at the provincial level are then Official data report steady calculated by the Ministry of Agriculture production, and yield increases over the and Forestry. Each stage can be subject to -3- shortcomings and political bias (Bourdet, concentrated in the Central and Southern 2000). Finally, there are discrepancies provinces. Map 1 shows spatial patterns between official paddy production and the of rice production in 2008. The Central actual rice consumption patterns observed region accounts for more than half of the from household surveys (FAO/MAF, total rice area and production output. 2009). Savannakhet province has the largest rice Consequently, there is uncertainty area of all provinces. It accounts for over regarding current levels of national and 20 percent of national production. provincial rice production. For example, Vientiane and Khammuane also have field assessments indicate that aggregate large rice areas in the region. The rice production in 2010 may have remaining rice area is located in the decreased by 6 percent compared to 2009. Northern and Southern regions, which Both paddy area and yields are estimated account for less than half of total to be lower (FAO/WFP, 2011). These production. Champasack and Saravane numbers differ substantially from are the two major rice-producing government forecasts, though final data provinces in the south. The north is are yet to be released. However, to characterized by mountainous terrain and anticipate some of the discussion in the contributes to some 20 percent of total following chapters, it is unreasonable to paddy production. Of the three regions, associate the possible decline in the Northern region has the lowest yields. production with the observed 50 percent Rice production here is often based on peak in glutinous rice price inflation in slash-and-burn cultivation, despite mid-2010. This is because of the government efforts to reduce this practice agricultural production cycle. Rain-fed (ADB, 2006). lowland paddy is typically planted from Production is distributed along three May to June, with the start of the rainy main ecosystems: lowland rain-fed rice, season, transplanted in July, and upland rice, and irrigated dry season harvested from October to November rice. It is often claimed that 90 percent of (Schiller and others, 2006). And rain-fed the rice area is rain-fed, with the lowland paddy production represents 80 remaining being irrigated (EMC, 2011). percent of annual output. The relevant But other estimates suggest that irrigation rice supply indicator for the 2010 rice may in fact be more significant, reaching price hikes is thus the 2009 crop season. up to 25 percent of the total paddy area Expectations about the 2010 crop might (FAO/MAF, 2009). Particularly in the have contributed to inflation, but this lowlands, rain-fed rice dominates. Most seems unlikely, as discussed in Chapter 4. of the rice production is subsistence- oriented; smallholders have an average farm size of less than 2 hectares. Production is rain-fed, concentrated in Although rice production is the single the Central and Southern regions, and most important economic activity, in proximity to Thai border accounting for about one third of the agricultural GDP, little rice is marketed. Rice cultivation covers more than 80 Estimates suggest that roughly 10 percent percent of the total cropped area, but is of the more than 3 million ton production unevenly distributed over provinces. It is capacity is actually marketed (Bourdet, estimated that some 90 percent of total 2000; ETC, 2011; Hill and Christiaensen, rice production is in the lowland fields, 2006). Other data suggests that the share -4- of marketed production is higher, and (Bourdet, 2000; van der Weide, 2006), may reach about a third for non-glutinous even though market integration in general paddy and 14 percent for glutinous paddy may have improved over time, possibly (FAO/MAF, 2009). due to investments in transport Although Laos claims to be self- infrastructure and market institutions sufficient in rice production, food security (Andersson and others, 2007; Takamatsu, is still a challenge. Population growth is 2002). But the importance of rice trade one of the main determinants of rice within Laos and to neighboring countries consumption over time (Bourdet, 2000). is sparsely documented and hence With the population growing at 2.2 constitutes a knowledge gap. It is also percent per year, the demand for rice is possible that market integration may have expected to grow substantially, requiring improved over time due to infrastructure yield increases. Moreover, despite the investments. In fact, some studies observe overall good performance of the rice temporary rice trade flows to Vietnam, sector, not all households are able to Thailand, and possibly China (Segue and permanently meet their rice consumption others, 2009; GSD, 2005). Paddy trade is requirements. About one third of the also encouraged by the underdeveloped population has food deficits for several milling sector. Most of the rice mills are months. And half of the children in rural small family-run operations often areas are reported to suffer from chronic delivering a poor-quality product. It is not malnutrition. Laos‘ economic growth unusual therefore for farmers and experienced over the past decade thus merchants to take paddy across the Thai may not have been inclusive enough to border to more efficient mills that are result in an improved nutritional status of capable of turning out a high-quality the rural population (WFP, 2007).7 product, which then is eventually imported back to Laos. In addition, milling around the Mekong River in Laos Mixed evidence on market integration is done by a relatively large number of commercial mills. Rice traders often own Because of its small market size, these private mills. Altogether, there are temporary trade restrictions, and shallow conflicting findings regarding the actual annual surpluses, Laos is exposed to size of cross-border trade. The evidence large price fluctuations. This can stem on national and regional market from domestic supply shocks and regional integration is inconclusive. developments. The total size of the Lao rice market is less than 10 percent of the market size of Thailand. Some observers 3. RECENT FOOD AND RICE argue that due to subsistence production PRICE TRENDS and regional price disparities, overall market integration maybe limited This chapter looks at trends in world and Lao prices and its implications. It describes the evolution of world and Lao 7 Another interpretation is that this may be food and rice prices. The focus is on an indication of glutinous rice trade, as glutinous and non-glutinous rice. The chapter shows that there has been a small main production areas are located across impact of world food prices in Laos. The the Thai border. behavior of glutinous and non-glutinous -5- Figure 2: World food prices are high but rice did not increase as much as in 2008 Source: World Bank DECPG. The graph shows the evolution of world food prices (left) and Thai rice price (right) from January 2000 to March 2011. Visible are the world food price peaks in 2008 and 2011. Thai rice prices increased enormously in 2008, but since then appear more stable. rice is substantially different. Glutinous 2011.8 The index increased by over 30 rice dominates food price inflation and in percent from January 2010 to March the medium run may contribute to trigger 2011, now being close to its peak in June overall price inflation. While the 2008. The index is constructed from macroeconomic impact has been small, several components, and all major ones price developments need close have risen sharply, but among individual monitoring. Analysis undertaken for this commodities, sugar, edible oil prices and policy brief suggests that the majority of staple crops have risen most rapidly. the farmers have marginally benefitted Importantly, rice prices have been rather from glutinous rice price increases. But stable, which is a key difference from the high prices have had adverse effects on 2006-2008 food crisis. Some observers the welfare of urban and food-deficient argue that rice price increases in 2006- population groups. 2008 were triggered by export bans in major Asian rice producing countries. As described in Box 1, these harmful policy World food price changes are less responses have not occurred during the pronounced for rice than other food items 8 The World Bank’s food index comprises Rapidly rising world food prices coincide major agricultural commodities with large with rice inflation in Laos. It is hence shares in international trade, and those important to understand recent trends. shares determine the weight of each Figure 2 shows the World Bank‘s food price index for January 2000 to March commodity in the index. Food items generally have an international reference price. Trends are very similar with the food price indices from FAO or the IMF. -6- Box 1: Rice and trade in the 2006-2008 and current food crisis Despite some parallels, the current food price rise differs in important ways from the 2006 to 2008 crisis. The rise has been led by sugar, cooking oils, and a few staple crops such as wheat. A crucial difference is that good harvests have kept the international price of rice relatively stable. Moreover, the domestic prices of staple foods in many developing economies have fallen, in contrast to the increases seen in 2006 to 2008. Robust rice harvests in Asia and strong harvests in Africa thus account for much of the more limited international rise and lower domestic prices (Shimelse and Eidelman, 2011). The 2010-2011 food crisis also offers an important trade policy lessons. Major rice producing countries did not issue export bans. These may have accounted for some 45 percent of the rice price increases in 2008 (Martin and Anderson, 2011). Measures to secure access to domestic food Supplies had a snowball effect, as other governments also took preemptive measures, contributing to a further surge in world rice prices that no government would have wished for (Brahmbhatt and Christiaensen, 2008). While more than 20 countries imposed export restrictions in 2008, only a few did in 2010. 2010-2011 food crisis, which partly helps United States have also experienced in explaining stable international rice disappointing yields. These factors, have prices. outweighed favorable production Importantly, rice prices in Vietnam outcomes in Argentina and Australia, and and Thailand, Laos’ giant rice producing induced large draw-downs in food stocks, neighbors, are stable. Global rice prices thereby tightening global supply. Another in March 2011 were unchanged relative leading factor has been the weakening of to a year earlier, and on the whole, the the US dollar since mid-September, benchmark price is roughly 32 percent which continues to sustain the prices of below the peak attained during the 2008 nearly all agricultural and non- crisis. Good harvests in the key exporting agricultural commodities. On the demand countries Thailand and Vietnam, and side, strong economic growth in emerging global stocks at the highest level since economies during 2010 has also 2002 have generally put to rest anxieties contributed to the rise in commodity food about upward pressures on the export prices. price of rice. Production uncertainties had Food price increases are also linked initially contributed to an 18 percent price to energy price increases. Crude oil increase between June and December prices surged by 10.3 percent in March 2010 and led to large imports to 2011, and were 36 percent higher than a complement domestic stocks. As a result, year earlier. These oil price increases domestic rice prices have moderated impact on food prices. Estimates suggest recently (World Bank, 2011). that a 10 percent increase in crude oil The single most important factor prices may be associated with a 2.7 underpinning world food price surges percent increase in the World Bank food are weather-related supply shocks. price index (Baffes, 2011). Multiple Production shortfalls in wheat, barley and transmission channels are at play. First, other grains have occurred notably in higher crude oil prices encourage greater Russia and the Ukraine since June 2010. use of food products such as corn, Additionally, Russia and the Ukraine vegetable oil, and sugar in the production imposed a wheat export ban in August. of biofuels in developed and emerging The European Union, Canada and the economies. Second, higher energy prices -7- Figure 3: World food prices slowly transmit into Lao food prices Source: Lao National Statistical Bureau. The graph shows the evolution of the Lao consumer and food price indices from January 2000 to December 2010. The base of the index is December 2005. Visible is that in 2006 both indices start to drift apart. feed into the cost of food production while inflation of food consumer prices through higher fertilizer prices, the cost of peaked at 14 percent in August 2008, irrigation, and other farm inputs. The much lower than in many other extent of energy price impact varies developing countries. significantly depending on the type of Over the medium run, world food crop and level of mechanization. A third price changes are transmitted slowly to channel of energy price impact is through domestic prices. In Laos, food prices have the increases in the costs of crop risen faster than non-food prices since transportation to destination markets, 2006. Thus, in spite of the small impact leading to larger price variations of the world food crisis there is a domestically and higher costs for relationship with the evolution of importing countries (World Bank, 2011). domestic prices. Figure 3 shows the consumer price indexes and food prices from January 2000 to December 2010. Small impact of international food The food share in the consumer price crises on Lao prices index is 40.9 percent. The two series start to deviate in 2006, when food prices rise The 2006-2008 global food crisis had a quickly, reaching a peak in mid-2008. small short-run impact. One view is that Both series decline in late 2008, and then Laos by and large escaped the global food start to rise slowly. In mid-2010, food crisis in 2006-2008 because of its limited prices begin rising, while non-food prices exposure to international trade in food remain stable. As a result, between and national self-sufficiency in rice January 2006 and December 2010, food (World Bank, 2009). A vast majority of prices rose by 42.6 percent while non- the poor live in rural areas and produce food prices rose by only 13.4 percent. enough rice for own consumption. The This is a difference of close to 30 macroeconomic impact was also small. percentage points. Hence, there is a Annual consumer price inflation rate structural change in the relationship increased to only 10 percent in mid-2008, -8- Figure 4: Glutinous rice prices drive food prices and overall inflation Decomposition of consumer price inflation Decomposition of food price inflation Source: Lao National Statistical Bureau and staff calculations. The graphs show a decomposition of the monthly food and consumer price indices from January 2005 to December 2010 using CPI weights and individual growth rates. Visible is that overall inflation is below 10 percent and almost entirely driven by food prices. Food price inflation itself is determined in 2006-2007 and 2010 by glutinous rice inflation. Ordinary rice has a barely visible impact in 2008 and 2009. between food and non-food prices around rice prices. Rice is the main stable crop 2006, and it seems to be related to world and consequently an important food item market prices, which also started to in the consumer price index, with a increase in 2006. At the same time, the weight of 7.3 percent in the basket. One link between the world food price index way of highlighting the importance of and Lao food price index is sluggish and food and rice prices is to decompose not very tight. annual changes in the overall consumer Changes in Lao food prices are and food price indices. Figure 4 shows almost entirely dominated by glutinous that inflation in 2010, and in the previous years, is mainly the result of food price -9- Figure 5: Thai export prices differ for glutinous and ordinary rice Source: Thai Rice Exporters Association. The graph shows the evolution of the Thai glutinous and ordinary rice from January 2000 to February 2011 measured in US$ per ton. Visible is the spread of both series in particular in 2006 and 2009. increases, which explain some 70 percent Glutinous rice changes differs of overall inflation. Food prices, in turn, substantially from ordinary rice are influenced by glutinous rice price increases, in particular during 2006 to The evolution of world market prices for 2007 and in 2010. The contribution of glutinous and non-glutinous rice differs rice price inflation is much larger than its substantially. This difference probably weight because of the enormous glutinous explains the weak short-run relationship rice price increases. Ordinary (non- between world and Lao food inflation. glutinous) rice prices play almost no role Glutinous rice trade has a small share in in explaining overall food inflation. Not the world market. It is estimated at less visible in the graphs are other, indirect than 10 percent, and thus not well- effects. For example, it is likely that the covered by the world food index. But for jump in rice prices also has a strong effect consumption and inflation in Laos it on other food and non-food prices, partly matters more than non-glutinous rice. because rice is an input in the production About 85 percent of the rice produced is of many other goods, such as beer and glutinous, and its weight in the consumer restaurant meals, and partly because price index is 6.2 percent compared to 1.1 higher rice prices create a demand for percent for non-glutinous rice.9 The price higher wages. In fact, the Lao Federation of glutinous rice is thus a key factor for of Trade Unions, the Ministry of Labor food inflation in Laos. Figure 5 depicts and Social Welfare and National US$ prices of Thai exports of glutinous Chamber of Commerce and Industry agreed in principle to increase the minimum wage because of high food 9 The National Statistical Bureau is in the prices (Lao Voices, January 18, 2011). process of revising the weighting scheme based on LECS4. The food and rice shares will likely be slightly larger. -10- (10 percent broken) and non-glutinous (5 Glutinous and non-glutinous rice are not percent broken) from January 2000 to close substitutes. In the two countries February 2011. The prices represent the where glutinous rice is consumed as a world market price of rice, since Thailand major staple food, Laos and Thailand, is the largest rice exporter in the world. demand is probably highly price inelastic The prices have evolved very differently, since non-glutinous rice is generally not Figure 6: Lao glutinous rice inflation in real terms reaches a decade-high in mid-2010 45 30 15 0 -15 -30 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Lao National Statistical Bureau. The graph shows real annualized monthly glutinous rice inflation from January 2001 to December 2010. The rice prices are based on real consumer price index data (January 2010=100). The overall high volatility and the peaks during the 2006-2008 food crisis and recently, in 2010, are evident in the graph. particularly after 2005. Glutinous rice viewed as a substitute by most people. In prices increase sharply during 2006, other Asian countries, such as for presumably in line with other world example Vietnam, where typically minor market food prices, while non-glutinous quantities are consumed, glutinous rice is rice prices are stable until early 2008, used for preparing breakfast meals and when they shoot up. Both prices start sweet dishes for special occasions, declining after May 2008, but while the making substitution impossible. Hence, non-glutinous rice price drops from US$ demand for glutinous rice does not 907 in May 2008 to US$ 529 in February respond much to rice price differences. 2011, the glutinous rice price starts rising The two types of rice are nevertheless in 2009, and thus increases from US$ 783 substitutes in production, as farmers can to US$ 983 over the same period.10 switch between them. However, this mechanism does not seem to have had an impact on prices during recent years. Lao glutinous rice prices are volatile. 10 Price series in this report are mostly Figure 6 shows annual percentage presented in nominal terms for changes in prices of glutinous rice for transparency. Deflating the series (for 2000 to 2010. Prices rose by over 50 example by consumer prices) shows the percent between late 2009 and late 2010, same visual impressions for rice price overall inflation in Thailand and Laos has trends in real and nominal terms. The been low. reason is that, over the past few years, -11- Figure 7: Lao and Thai ordinary rice prices only increased moderately Source: Lao National Statistical Bureau. The graph shows annual (year-to-year) growth rates of monthly ordinary rice inflation. The rice prices based on consumer price index data. Visible is overall high volatility peaking in 2006 and particularly in 2010. and even though they started to decline are close substitutes, their prices move due to supply increases in the (main) together quite closely. Third, the rice- harvest period (October-November), price shock in 2008 was to some extent annual inflation was over 40 percent in transmitted to Laos, as non-glutinous rice December 2010. It is noteworthy that inflation increased to over 40 percent. glutinous rice inflation was never over 30 However, world market prices rose by percent during the 2006-2008-food crisis. over 60 percent, but then declined Overall, glutinous rice prices must be rapidly. In Laos both the increase and the considered highly volatile, since over the decrease were clearly smaller. As a result, past decade annual inflation rates varied from January 2008 to January 2010 prices between minus 15 and up to 50 percent.11 increased by 46 percent in Laos, while the Non-glutinous rice prices only world market price (Thai export price) increased moderately during 2010. decreased by 9 percent. Annual inflation rates for Lao and The swings in annual inflation rates imported Thai non-glutinous rice, sold in last for several years. This suggests that Laos, are depicted by Figure 7. The figure the volatility is not due to seasonal highlights three interesting facts. First, factors. Figure 8 shows monthly inflation non-glutinous rice inflation rates barely rates from January 2000 to December exceeded 10 percent during 2010. 2010. The volatility observed in the Second, Lao and Thai non-glutinous rice annual inflation rates is due to a few prices shocks: there were large price increases in 2003, 2006 and 2010, which 11 Moreover, extending the series back (so far) have not been followed by large includes short episodes with rice inflation price decreases. Figure 8 also shows rates of over 100 percent in 1998. This is several periods with a strong seasonal pattern, but price changes are small, at associated with the 1997 Asian financial least in relative terms, and only last for a crisis and subsequent macroeconomic couple of months. The role of price turmoil in Laos. shocks is highlighted by depicting prices -12- Figure 8: Swings in glutinous rice prices in real terms last for years and are not seasonal Monthly real glutinous rice inflation Actual and peak real prices of glutinous rice 30 8000 20 7000 10 6000 0 5000 -10 4000 -20 3000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Glutinous price Peak value Source: Lao National Statistical Bureau and staff estimates. The left graph show the month-on-month real glutinous rice inflation from January 2000 to December 2010 based on consumer price index data (January 2010=100). Visible are seasonal factors in the ± 10 percent range. Prices typically peak in August and, with the beginning of the harvest period, decline in November. There are extreme monthly jumps in 2006 and in 2010. The right graph shows that after any given price shock prices, measured in Kip per kg, stay high. and price peaks (see Figure 8). Since for most of the population. Disaggregated there is overall inflation, one should and regional data are typically not shared. expect an upward drift in price levels. There is a lack of good regional price Nevertheless, the price shocks are data, but the available price series show undoubtedly the main drivers of the similar patterns. The Ministry of Industry upward movements in prices; after a price and Commerce also collects price shock they always stay at a higher level. information for five province capitals on The increase in rice prices has various types of rice. This information is affected large parts of the country. The sometimes available at disaggregated reported Lao rice prices are used when levels, which allows comparing the calculating the consumer price index. evolution of regional price trends. Figure These are collected in large markets of 9 shows average prices for glutinous provincial capitals and not in rural areas paddy over January 2006 to February or small towns. Since the rice market in 2011. Even though price levels vary Laos is perceived to be highly segmented, across the country, as documented by van and rice prices in remote rural areas differ der Weide (2006), the price series follow due to transport costs, there is uncertainty each other closely in major cities. regarding measurement of the impacts of Moreover, all prices rose sharply in 2010, rice inflation. According to the Lao though somewhat less in Louang National Statistics Bureau, however, rice Prabang, a city in the Northern region. prices should be broadly representative Another striking feature of Figure 9 is the for major rice-growing areas and hence long periods with stable prices. Even though this to some extent is an artifact of -13- Figure 9: Regional paddy price trends follow each other Source: Lao Ministry of Industry and Commerce. The graph shows regional paddy prices from January 2006 to February 2011 measured in Kip per kg. The figure shows that regional price trends move in par. Also visible are data gaps and constant prices over prolonged time periods, suggesting data quality issues. rounding to the nearest 1,000 Kip, the price inflation stood at 6.0 percent in quality of the data is questionable. During 2010. However, the large rice-price some periods the series do not show any increases during 2010 created uncertainty movements, which is unlikely for prices among government and market actors, in a market economy. The gaps also exist and had welfare and distributional effects. because it is challenging for the It is thus vital to understand why these authorities to compile the information for prices rose so sharply. all regions. Overall, for the last five years, the evolution of glutinous and non-glutinous Macroeconomic impacts of rice rice prices differs substantially. It is inflation are small but need monitoring essential to distinguish between non- glutinous rice, which is consumed in World food inflation does not constitute a relatively small quantities, and glutinous major challenge for macroeconomic rice, the staple food. Glutinous rice prices stability in the short-run. Overall inflation rose sharply during 2010 and are still rates are moderate but rising (recorded at high, even though they have declined 9.2 percent in April 2011). In several recently, while non-glutinous rice prices developing countries, the food price crisis have been modest. Moreover, in Laos the in 2006-2008, in combination with high volatility of glutinous rice prices is a oil prices, created macroeconomic major determinant of food price inflation. instability in the form of high inflation, At the same time, recent food and rice exchange rate instability and current price increases do not constitute a major account deficits. But the impact on Laos threat to overall price stability. Consumer was limited. So far current world food -14- Table 1: Approximate welfare impacts suggest negative effects of rice price increases in the Northern region and for urban population Estimated short-run household welfare impact from December 2009 to December 2010 (in percent of initial household income) Region Urban Rural (with road) Rural (remote) VIENTIANE -1.4 9.2 NA NORTH -0.6 0.7 -3.2 Phongsaly -1.0 -2.8 -3.6 Luangnamtha -1.3 3.4 -6.5 Oudomxay -2.9 -2.2 -3.1 Bokeo -0.0 11.4 9.2 Luangprabang -2.4 -0.8 -3.1 Huaphanh -2.6 0.0 -1.4 Xayabury 3.0 1.4 -6.7 CENTRAL 2.4 3.6 -3.3 Xiengkhuang 2.3 4.0 -5.1 Borikhamxy -2.4 2.7 -2.0 Khammuane -2.2 -0.5 0.6 Svannakhet 3.7 4.8 -3.9 SOUTH -1.3 -0.3 4.2 Saravane -2.3 -0.0 -2.8 Sekong -4.3 -5.8 10.5 Champsak -0.9 0.0 3.9 Attapeu -1.2 -0.0 1.1 Source: LECS4 data based on Davis and Baulch (2011) and staff calculations. inflation does not seem to have affected price transmission is already evident Laos much either, even though through the observed rise in relative food international trade has increased and the prices observed in Figure 2.12 Glutinous country gradually becomes more rice price changes have a strong impact integrated with the world economy. Price on domestic inflation, particularly food transmission is slow because it goes from inflation. In fact, glutinous rice is the food the international to the regional market, item that has the strongest impact on and then from the regional market, to the domestic consumer prices, both directly domestic market. In the medium run, world food prices 12 See also Chapter 5 for a more detailed may well transmit into the domestic market. Some degree of regional food analysis. -15- due to its weight and indirectly due to its by 3.3 percent.13 Households thus on an role as staple food. Since the evolution of average gain from high rice prices. glutinous rice prices is determined in the But urban and some food deficit areas region, at least over periods of a couple of are hurt. Higher prices benefit the years, the 2010 inflation spurt is probably average rural household at the expense of a regional phenomenon. Non-glutinous urban and food-deficit households. rice prices also impact consumer prices, Looking beyond national averages, as but more modestly. documented in Table 1, suggests that Price stability depends critically on actual welfare effects vary by remoteness glutinous rice prices. Both domestic and province (though the results for some glutinous and non-glutinous rice prices areas seem implausible and could be an are currently stable. But international indication of data quality issues). Areas food prices are highly volatile and have where households produce rice surpluses, reached all-time highs. Oil prices are well generally gain from price increase, urban over US$100 and might continue to households suffer slightly, while remote increase. Moreover, the development of rural households, mostly in the food- the regional glutinous rice markets deficient Northern provinces, no doubt remains unclear. Hence, there is great are negatively affected. These findings uncertainty about how food and fuel are consistent with analysis on rice prices will impact the macro-economy inflation undertaken for neighboring over the next couple of years. countries and previous work for Laos Macroeconomic policy measures also (World Bank, 2009).14 need to be based on the extent that commodity price increases feed into wages, and can create inflationary 4. TRADTIONAL SUPPLY AND expectations, which are often viewed as DEMAND FACTORS ARE MINOR one of the most important contributors to CAUSES OF RICE INFLATION inflation. Current rice price inflation in Laos is also taking place in the context of This chapter discusses potential already high private credit growth, which determinants of rice price inflation. itself contributes to overall inflationary Several potential explanations have been pressures of consumer prices. All this suggested for the 2010 price hike. They suggests a need for close monitoring. 13 The methodology of the welfare Marginally positive overall welfare approximations is documented in the impacts of rice price increases, but annex. urban and food-deficient areas lose 14 On the distributional patterns of Rice inflation has marginally positive glutinous rice inflation, Takamatsu (2011) overall welfare impacts. Household survey data suggest that the overall net finds that the negative welfare changes for welfare impacts of rice price increases urban households do not vary much by from 2009-2010 are marginally positive. expenditure quintiles. But the size of the A uniform 10 percent increase in rice prices raises ‗average‘ household welfare positive welfare increases in rural areas is higher for the more wealthy households. -16- range from purely seasonal factors, large rice prices are considered a problem, they supply shocks, increases in aggregate fulfill the role of adjusting production to demand, expansionary monetary policy, changes in demand and supply. Hence, increases in input prices, hoarding by even in well-functioning markets for government institutions, and speculations staple foods, prices vary over the season. by millers and traders. One cannot rule out some contribution of domestic rice supply shocks in the light of data Past supply shocks do not show strong uncertainty. But the main finding is that correlation with rice prices none of these are plausible enough to explain major price peaks of 50 percent There is little correlation between inflation. changes in rice supply and prices. Bad harvests increase prices while good harvests reduce prices. But as Figure 1 in Seasonality effects are existent but of chapter 2 shows, according to official small magnitude estimates the harvest has increased every year since 2000, except in 2003 when it Seasonal differences between rice prices declined by 1.7 percent. As described in Laos are relatively modest. Among the above, there was a significant price most straightforward explanations for increase in 2003, indicating a supply staple food price fluctuations are seasonal shock, but the price increases in 2006 and changes in domestic supply. In Laos, 2010 do not coincide with declines in however, their magnitude is only of harvests in 2005 and 2009. intermediate importance. For instance, None of the data seem to contain intra-seasonal differences between supply shocks that are large enough to be maximum and minimum prices of maize the main cause of the huge price in Southern Africa are usually between 25 fluctuations. However, since the official and 100 percent (Chapota and Jayne, estimates of harvests are known to be 2009). Differences between maximum uncertain and likely to have substantial and minimum glutinous rice prices in margins of errors, it is hard to assess the Laos are much smaller, around 10 percent true role of supply shocks. An indication according to average wholesale prices.15 of uncertainty is that estimates from the On the other hand, over the past decade, Food and Agricultural Organization inter-seasonal fluctuations, well above 10 (FAO) and the World Food Program percent (same month across years) have (WFP) suggest that the harvest in 2010 been common. will be 6 percent lower than in 2009 Seasonal rice price fluctuations exist (FAO/WFP, 2011), differing substantially even in well-functioning markets. It is from government forecasts. Nonetheless, worthy to note that while fluctuations in taken at face value, none of the data seem to contain any supply shocks that are large enough to cause glutinous prices to 15 This estimate is probably at the lower increase by 50 percent annually. end as it is based on aggregated prices. It also seems unlikely that jumps in Yet, individual market prices, collected by the marketed share generated the observed inflation dynamics. Changes in Ministry of Industry and Commerce, move marketed shares of the harvest can be a even less. cause of price fluctuations, but it is -17- challenging to empirically evaluate their increases household income and thus importance. A more subtle argument in aggregate demand. Laos has had growth favor of supply shocks is based on the rates in the 7-8 percent range since 2004. fact that farmers use most glutinous rice One argument why higher income might for self-consumption, and that small generate more demand for glutinous rice changes in harvests, or expectations of rather than other goods is that about one future harvests, can potentially produce third of the population is thought to be large changes in both supply and demand temporarily food-insecure. It cannot for rice. The reason is that farmers retain satisfy their demand for rice during parts a larger share of their produce when of the year (WFP, 2007; FAO/WFP, harvests are small, reducing supply, and a 2011). But there are two countervailing larger number of households fail to arguments. First, average yearly GDP produce a sufficient amount of rice, thus growth has been high for ten years, and increasing the demand for rice (Bourdet, there are no obvious demand shocks that 2000). Yet, it is not at all certain that the can explain sudden price hikes, such as dynamics described are correct. Although the one in 2010. Second, demand for glutinous rice is the staple food, it is glutinous rice, as staple food in general, is possible that high market prices induce relatively income inelastic, as it does not farmers to sell more rice, replacing it in grow in line with income (Bourdet, their diet with other types of food. Since 2000). the amount of rice retained for own Also the role of beer production and consumption is so much larger than the high-potential growth sectors for rice marketed rice, small changes in diets demand is small. Other potential sources might stabilize supply, and subsequently of demand are Beer Lao, that uses rice to prices.16 Moreover, the demand effect brew beer, and mining companies that might be small because farmers who lack buy rice for their employees, but they are rice also lack buying power. Since there of minor importance. Beer Lao is a big is a paucity of information on marketed buyer of rice, close to 10,000 tons in rice and the structure of the rice market, 2010, but it mainly buys non-glutinous the relevance of these two hypotheses is rice, and thus has little impact on hard to evaluate, though currently no glutinous rice prices. Moreover, a credible market information supports the substantial part is imported from claim that high retention caused the 2010 Thailand, where milled non-glutinous rice price inflation. tends to be cheaper (EMC, 2011). Mining is capital intensive and only 0.6 percent of Lao households were involved in the Increased demand over the past decade mining and hydropower sectors in 2007 does not explain fluctuations to 2008 (Fenton and Lindlow, 2010). Hence, the number of employees in Changes in aggregate demand do not mining is not large enough to have a explain the fluctuations either. There are nation-wide impact on rice prices. several reasons why demand for rice Increasing input prices do not explain could have increased. Economic growth rice price increases either. The costs of fertilizer have risen significantly, as oil 16 Around 88 percent is retained according prices have surged. However, fertilizers and pesticides are not widely used by Lao to Hill and Christiaensen (2006). farmers (FAO/MAF, 2009). Another -18- input is seeds, but optimally farmers be hoarding by government institutions. should change them every four years, and For example, the State Food Enterprise in practice do it less often. Moreover, buys rice for government staff during government institutions dominate the harvests and sells stocks during shortages seed market, and there is no information (World Bank, 2009). However, it appears about recent large price increases. to have not been very active in storing large quantities of rice recently. Government agencies, such as the army Monetary policy does not explain and police, also buy rice from millers sudden price jumps using quotas, which are allocated to millers at a price fixed early in the season. There is an overall lack of correlation While the size of the quota market is not between aggregate credit supply and rice insignificant,17 field evidence in the main prices. Expansionary monetary policy is rice-producing provinces does not sometimes believed to cause food price indicate a significant jump in the quota increases. The mechanism goes through market share. reduced interest rates and improved Speculation among farmers, millers access to credit, which reduces the cost of and traders had a limited or no effect on storage for market actors, such as millers non-gluttonous rice. Although and traders. As a result, storage increases, speculation due to the availability of supply drops, and prices may increase or cheap credit seems unlikely, expectations even over-shoot. This hypothesis has about future harvests might matter. In been put forward by Frankel (2006) to 2010, glutinous rice prices started to explain changes in world commodity increase between May and June, and this prices. But the pattern of credit growth is coincided with the beginning of the main not consistent with price changes. Private wet season, complemented by localized sector credit has grown rapidly during droughts and flooding towards the end of recent years (an increase of about 80 it. For some observers this may have led percent yearly between 2008 and 2010 to hoarding of rice, and is a major reason according to the IMF, 2011). It thus could for price increases according to be a potential cause of price increases FAO/WFP (2011). Yet, speculation (also impacting on the price of land). Yet, should also have affected non-glutinous there is no reason why several years of rice prices. But they only rose by 10 easy credit should generate the observed percent. It is of course possible that non- sudden price shock in 2010. Thus, the gluttonous rice prices are determined by overall lack of correlation between credit world market prices, while glutinous supply and prices rules out expansionary prices are determined by demand and monetary policy as a major driver of rice supply in the local market, but there is no price inflation. obvious reason as to why this should be the case. Finally, one cannot rule out Hoarding and speculation are unlikely that millers and traders stored large amounts of paddy while prices were There is no evidence suggesting major rising, but then prices should have increases in government purchases caused the price increase. Another 17 Some observers estimate the quota potential cause for price increases could market share between 10 to 25 percent. -19- Figure 10: Glutinous rice trade to Vietnam is associated with price jumps Source: Lao Ministry of Industry and Commerce and National Statistical Bureau. The graph shows percentage increases of month-to-month glutinous rice inflation and official glutinous rice exports to Vietnam from October 2005 to December 2010. In the graph exports have been lagged by 6 months to highlight the relationship. Visible is that the rice inflation peaks in 2006 and 2010 are closely associated with large exports to Vietnam. Trade data for Thailand shows similar patterns but the magnitude of officially registered exports is very small when compared to Vietnam. declined before the harvest, as there is no reinforced by ad hoc trade policy point in holding on to stocks when prices decisions. By contrast, it is challenging to are expected to fall. Prices started to obtain credible and consistent support for decline slowly in October, as expected, other hypotheses outlined in the previous and were well above previous year‘s section. This of course does not imply values in late February, so large stocks do that supply shocks and speculation, are not seem to have been released. entirely unimportant. In principle it is possible that major supply shocks are regional. They could affect Laos, 5. RICE TRADE AND POLICY AS Thailand and Vietnam simultaneously.18 MAJOR CAUSE OF RICE INFLATION The most likely cause behind the mid- 18 This could have been the case in 2010 2010 price increase is significant exports when floods, which may have caused crop of milled glutinous rice to Vietnam and damages for glutinous rice, hit paddy to Thailand. This chapter argues that regional trade, and domestic trade Northeastern Thailand. Thus, future policy, plays a crucial role in the analysis should look at Thai glutinous rice determination of both glutinous and non- production trends and see to what extent glutinous rice prices. Several pieces of empirical evidence suggest that trade they explain price volatility. This is triggers price increases, which are likely because trade may be the proximate -20- Map 2: Rice price inflation is highest in producing areas that also trade with Vietnam and Thailand Source: Staff estimates based on LECS3 and LECS4. The map shows average annual glutinous rice inflation over 2003 to 2008. The parts of Laos that are believed to be most active in producing and exporting glutinous rice to Vietnam and Thailand are located in the Central and Southern part of the country. In particular, areas where the highest levels of inflation are observed are rice producing areas and areas located at important border crossings. Speculation could thus play some role as Market information suggests large it would then be as a response to commercial exports to Vietnam anticipated regional supply shocks. Further study is needed to disentangle One striking piece of evidence comes their importance. from market information directly obtained from traders. Millers and retailers were interviewed in three major rice-producing provinces, Champasak, Savannakhet and Khammuane. They all exported large quantities of rice to cause of Lao price spikes, but volatility in Vietnam after the 2009 October- Thai production may be the original cause. November harvest. Millers also exported -21- Figure 11: Proximity to Thai border results in higher paddy price inflation Source: Staff estimates based on LECS3 and LECS4. The graphs show average annual glutinous paddy inflation from 2003-2008 plotted against distance measured in hours of travel time to nearest border crossing to Thailand (left) and Vietnam (right). The graphs show that moving away from the Thai border results in almost a 2 percent drop in paddy inflation. The results are significant because it can be shown moving away from provincial capitals would result in less than 1 percent inflation. By contrast inflation peaks at about 4 hours travel distance to Vietnam because glutinous rice is imported from production zones in this distance. rice to Vietnam during the previous was also reported in newspapers seasons, mostly selling directly to (Vientiane Times, June 2010). It also was Vietnamese traders. These amounts were mentioned that the government was substantial; on average about one to three storing rice to ensure it could meet its thirds of total milling output. Some export targets. It further stated that retailers had also sold rice to Vietnamese according to the Ministry of Agriculture, traders, but mostly in small amounts. there is a great deal of informal exports Government export restrictions imposed (actual size is unknown), which causes in mid-2010 reduced formal exports problems for the Ministry of Industry and substantially. Commerce in its attempts to manage Government actively encouraged exports prices in the domestic market through Vietnam during 2009 to early 2010. export regulation. Vietnamese traders have been active in The strongest evidence for the Laos for a long time, and the links to importance of exports to Vietnam comes Vietnam are strong, both politically and from official government trade data. Even because some households are of though data on official exports of rice to Vietnamese origin. To export rice, traders Vietnam may severely underestimate the need to obtain an export quota, which is size of exports, the pattern is striking. issued by provincial governments. The Figure 10 shows monthly glutinous rice- practice varies across provinces, partly price inflation and monthly exports to due to local rice surpluses. During the Vietnam for October 2005 to December 2009 season it was in general easy to 2010, the period for which data are obtain large export quotas, possibly available. Exports have been lagged by because the harvest was considered large enough to cover domestic needs. The intention of boosting exports to Vietnam -22- six months to highlight the relationship.19 Why glutinous rice from Laos is of Large exports preceded the price interest to Vietnam increases both in 2006 and in 2010. The time period between exports and price There is widespread skepticism about the rises are due to the seasonal pattern. After competiveness of Laos in the the main harvest in October and international rice market. Demand for November, there is rice available in the glutinous rice is at best limited to the market, supported by the much smaller region, where Thailand and Vietnam, the harvest of irrigated rice in April and May, world‘s two largest rice exporters are but then prices start to rise in July. located. In addition, there are claims that Vietnamese demand coincides with poor marketing infrastructure severely celebration of New Year in January or limits Laos‘ overall export competiveness February. It could also be due to the (see for example ADB, 2006). At the availability of rice after the wet harvest at same time, some observers note that there the end of the year. is limited information about the regional Survey data also confirms the glutinous rice market to evaluate this importance of trade in price transmission. claim. Map 2 and Figure 11 show the spatial The rice exported to Vietnam comes patterns of average annual glutinous rice from the main rice-growing provinces, inflation between 2003 and 2008. Rice Field evidence, as well as spatial survey inflation has been highest in rice data documented in Map 2, suggests that producing areas that reportedly trade with Vietnamese traders source their rice from Vietnam and Thailand (Sengua and large millers in the main rice-growing others, 2009). This coincides with provinces. This is also consistent with the relatively high glutinous rice price findings of Hill and Christiansen (2006) increases in both countries during this showing that farmers located in districts period. By contrast, average annual near the Vietnamese border are less inflation is much lower in the Northern engaged in crop sales than others. part of the country and around Vientiane, Yet, there is a natural demand for Lao the capital of Laos.20 rice in Vietnam for various reasons. One reason why Vietnam imports rice is that 19 The six-month lag can be explained by Laos is closer to the North of Vietnam than the large rice-producing area, the the fact that prices rise when there are Mekong delta in the South. As a result of shortages, not when the rice is sold. While its elongated shape, and the long distance the magnitude of the recorded trade is between the North and the South of small, it must be remembered that traded Vietnam, the Vietnamese rice market is highly segmented (Baulch and others, market volumes are small and there is 2008). The main rise-producing areas in large unrecorded trade. Central and Southern Laos are close and connected with relatively good roads, 20 Nevertheless it should be noted that although the border between Laos and trade is not the only factor explaining this Vietnam is in a mountainous area.21 For patterns. Further study is needed to distinguish other effects; such for example 21 To this should be added that road improved infrastructure investments. infrastructure has improved in recent -23- Figure 12: Lao glutinous paddy is competitive Lao glutinous paddy prices are more competitive than Thai …but Lao milled glutinous rice prices are more paddy… expensive than in Thailand Source: Lao Ministry of Industry and Commerce and Thai Source: Lao Ministry of Industry and Commerce and ministry of Agriculture and Cooperatives. Thai ministry of Agriculture and Cooperatives. The graph shows ‘farm gate’ paddy prices from January The graph shows retail (Laos first grade) and 2006 to February 2011 measured in Kip per kg. The Thai wholesale (Thailand 10% broken) milled rice prices prices are converted into Kip using the nominal effective from January 2006 to December 2010 measured in exchange rate. Kip per kg. The Thai prices are converted into Kip using the nominal effective exchange rate. instance, it takes only a couple of hours to Substantial amounts of glutinous rice drive from Thakek, the capital of the are consumed in Vietnam. It is a common province with the largest rice surpluses, view that only people in Laos and the Khammuane, to the border town Mu Gip. northeast of Thailand consume glutinous Moreover, because of close cultural ties rice, and that the market outside this area and an estimated large number of ethnic is almost negligible (Bourdet, 2000). Vietnamese or Lao with Vietnamese However, although glutinous rice is not ancestry, trucks from Vietnam regularly the staple food in other East and South deliver goods to cities in Laos, and back- East Asian countries, it is consumed on loading with rice can improve profits special occasions. In Vietnam, for compared to returning empty, even when example, it is used to prepare breakfast price differences are small. meals and sweets, as well as for production of cookies and other products. Demand is particularly high during the years, thus facilitating trade flows. In the Lunar New Year (Tet Nguyen Dan), which always falls in January or 2009 crop seasons there was also a February. According to the Vietnamese damage of the Vietnamese harvest living standard surveys annual because of a tropical cyclone. consumption is over five kg per person. -24- Map 3: Paddy price inflation is highest in areas that trade with Thailand Source: Staff estimates based on LECS3 and LECS4. The map shows average annual glutinous paddy inflation over 2003 to 2008. The parts of Laos that are believed to be most active in producing and exporting glutinous rice abroad are located in the Central and Southern part of the country along the border of Thailand. In particular, areas where the highest levels of inflation are observed are the rice producing areas located at important border crossings. Since there are 86 million Vietnamese, actual magnitude is unknown. Borders are total demand for glutinous rice might porous and export restrictions affect have been at some 430,000 tons in 2009. traders. As rice exports drove up prices This amount is so large that shortfalls in during 2010, the government tightened up production, or price differential, should the restrictions on exports. Though some spill over to the Lao market. One must millers have export quotas to Vietnam, also account for the fact that glutinous and other countries, and there are illegal rice production reportedly has decreased exports, national export ‗bans‘ clearly in Vietnam, as farmers switch to ordinary affect millers. This was observed during rice for the export market. Some Lao the field trip. Several millers had large glutinous rice may also be exported from stocks of rice specifically for the export Vietnam to China, where demand for market. The consequences of the export glutinous rice also exists. restrictions have also been reported in the Actual exports to Vietnam are much media (Vientiane Times, March 2011): larger than official exports, though the millers‘ inability to export leads to losses -25- Figure 13: Lao and Thai glutinous rice prices share the same long-run trend Source: Lao National Statistical Bureau and Thai Ministry of Agriculture and Cooperatives. The graph shows the natural logarithm of retail (Lao first grade) and wholesale (Thai 10% broken) milled rice prices from January 1990 to December 2010 measured in Kip per kg. as domestic prices are low relative to what they paid for the paddy. The reason for large sudden exports Paddy trade with Thailand is mostly to Vietnam is the availability of export undocumented quotas. They typically reflect good harvests in Laos. The two periods with A large part of the trade with Thailand large price increases coincide with large consists of informal cross-border exports official exports to Vietnam. The of paddy, and reported re-imports of procedure of distributing export quotas to milled high-quality rice. A long stretch of millers and traders is not transparent. the border between Laos and Thailand is Both the central government and made up of the Mekong River, and paddy provincial governments are involved. rice can easily and informally be However, official data on harvests for transported to Thailand. There are several 2005 and 2009 indicate that they were reasons why it might be profitable to larger than previous years. Hence, it is export paddy to Thailand. First, Thailand likely that part of the surges in exports to has minimum prices, which often are Vietnam can be attributed to Lao trade higher than Lao prices. Second, milling is policy implemented at the national and more efficient and recovery rates are provincial level. higher. It is estimated that well over 60 percent of the paddy is recovered in Thailand while many mills in Laos recover close to 50 percent. Third, Thailand has excess capacity in the milling sector (Bangkok Post, November -26- Figure 14: Short-run correlation between Thai and Lao glutinous rice prices varies over time and reached a historical peak in 2006-2008 Source: Staff estimates based on Lao National Statistical Bureau and Thai Ministry of Agriculture and Cooperatives. The graph shows time-varying correlation between the volatility of Thai and Lao first grade glutinous rice prices from March 1990 to December 2010. The ‘rolling estimates’ are based on an autoregressive econometric model documented in the annex. The short-run correlation explains on average about 20 percent of price transmission. During 2008-2010 market linkages have intensified as short-run correlation explains more than 40 percent of price transmission. 2010). Fourth, Lao rice can be re- contrast, Lao milled glutinous rice is exported back to Laos as Thai rice, and significantly more expensive than Thai fetch a higher price than Lao rice. milled glutinous rice, Consequently, there There is no reliable information about is a strong incentive to export paddy to the size of exports to Thailand. But in Thailand as documented in Map 3. It also 2010 prices rose in both Laos and shows that average annual inflation from Thailand. Figure 12 shows that Thai and 2003 to 2008 has been highest in paddy Lao prices of glutinous paddy, measured producing areas that trade with Thailand. in Kip per kg, followed each other fairly Inflation has been particularly high well from January 2006 to February 2011. around major border crossings. In particular, the 2010 price hike and In the long run, Lao and Thai decline first occurred in Thailand. Prices glutinous rice prices have the same trend. started to rise somewhat earlier there and This is best illustrated by graphing the rose to a higher level. Figure 12 also glutinous rice price series in logarithmic compares Lao retail prices of glutinous scale.22 Figure 13 illustrates that the Lao rice (grade 1) with Thai long grain (10 and Thai glutinous rice prices share the percent broken) glutinous rice wholesale same long-run trend. A formal test indeed prices, also measured in Kip per kg. The indicates that both price series are co- decline in Thai prices in 2007 and 2008 did not transmit to Laos. Although the prices reported might not be for exactly the same type of good, a striking feature 22 Using logs highlights the long-run is that Lao paddy prices are typically relationship, as constant growth rates are cheaper than Thai paddy prices. By turned into linear growth rates. -27- integrated.23 In the long run about 90 shows that there are several shifts from percent of the price changes in Thailand plus 0.4 to almost zero. The period 2008 are transmitted to Laos (see also Annex). to 2010 was particularly volatile; These findings are robust in the sense that probably because of the aftermath of the using different price series does not affect first global food crisis, several the results. These findings can also be government interventions in rice markets, confirmed with glutinous paddy prices. and the following financial crisis. In Thai glutinous rice prices determine particular, Thai government guaranteed Lao prices in the long run. Thai prices, high minimum prices for paddy in 2008 which should reflect regional market even though food prices were already prices, determine Lao prices in the long high.24 run. In 2009, Thailand produced an To conclude, the available empirical estimated 6 million ton of glutinous rice evidence points to international trade as and exported about 450,000 tons. Laos‘ the main proximate cause for high total rice harvest (including non-glutinous glutinous rice price inflation. But due to rice) is slightly over 3 million ton, out of knowledge gaps about the functioning of which most was for self-consumption. It the rice market, many the details about is thus reasonable to believe that Thai the price transmission mechanisms are prices influence Lao prices, and not vice largely unexplored. Lao glutinous rice versa. In fact, formal statistical analysis prices are determined by regional supply confirms these findings. In a statistical and demand, at least when viewed over sense Thai prices indeed cause Lao prices the period 1990 to 2010. Higher glutinous (see Annex). Moreover, price rice prices in Vietnam most likely lead transmission is found to be asymmetric. large exports,25 and there is a strong link Glutinous rice price increases are between Lao and Thai prices through transmitted much more rapidly than price paddy exports, and re-imports of milled decreases (Figure 7). It is also reasonable glutinous rice, though price changes are to believe that Thai prices reflect regional often volatile and at times transmitted (East Asian) prices of glutinous rice, but slowly. Nonetheless, the knowledge of further study of regional rice markets is how the regional market for glutinous rice warranted. The link with Thai prices thus works is sketchy. From a policy severely limits the Lao government‘s perspective there is a need to analyze ability to manage prices over periods of a regional price transmission mechanisms couple of years. In the short-run, the percentage difference between Lao and Thai 24 An attempt was made to prevent paddy glutinous rice prices varies a great deal. from entering into Thailand from Laos. The short-run correlation in price Thailand itself did not impose trade volatility is on average 0.2. But Figure 14 restrictions. 23 The Engle-Granger co-integration test statistic 25 Information about glutinous rice prices is -3.9 and close to be significant at the one for Northern Vietnam markets is available, percent level. The long-run relationship between the log of Lao and Thai prices is and market information and some price lnPLao  1.27  0.91 lnP , R 2  0.98 data for 2009 to 2010 confirm these Thai . findings. -28- further, particularly since Laos plans to The main findings can be summarized as trade rice freely in 2015 within the follows: Association of Southeast Asian Nations (ASEAN) free trade area.26 Under these  Traditional supply and demand factors arrangements Laos is in principle obliged can explain only a small part of the to drop its current import tariff on rice 2010 glutinous rice price inflation. from other ASEAN countries from 5 Domestic rice supply shocks might percent to zero in 2015. The applied rate only to a limited extent have is the same for both paddy and milled contributed to sudden rice inflation. rice. Vietnam will do the same; Thailand Nevertheless, there is some uncertainty already reduced the tariff on rice to zero about aggregate production data. One in 2010. Formal cross-border rice trade can effectively discount a large role of may thus increase over time. seasonality effects, decreases in marketed shares of the harvest, and increases in aggregate demand in explaining rice inflation. Increased 6. CONCLUSIONS AND credit supply and hoarding can also be RECOMMENDATIONS ruled out as major drivers of rice price inflation. The objective of this note was to identify lessons for policy from the recent  Regional trade appears as the main glutinous rice price hike. Price proximate cause for high glutinous fluctuations are a normal attribute and rice prices. Large official rice exports necessary requisite for a competitive to Vietnam preceded the price jumps market. When a commodity becomes both in 2006 and 2010. Rice inflation scarce its price rises, which induces a fall has been highest in areas that trade in consumption, and eventually more with Vietnam and Thailand. Vietnam investment in production. But the trade seems to drive short-run price efficiency of the price system can break fluctuations in particular whereas trade down when price movements are subject to Thailand drives medium to long-run to extreme swings. Understandably, the rice inflation. There appears to be a main rationale for policy intervention is strong incentive to export milled rice often market failure and addressing to Vietnam and paddy to Thailand. potentially negative welfare implications.  Future analysis should look closer at the role of regional supply shocks for the determination of glutinous rice 26 One possibility is that trade to Vietnam prices. In principle, it is possible that may drive short-term Lao rice price major supply shocks are regional. inflation, whereas Thai trade drives They could thus affect Laos, Thailand medium to long-run developments. This and Vietnam simultaneously. Speculation could play a role, as it suggests that the government does not could be as a response to anticipated have much control over domestic market regional supply shocks. Trade could be prices. Price interventions will thus not be thus a likely proximate cause of Lao an effective policy instrument. price spikes, but volatility in Thai and -29- Vietnamese production—and other factors explaining prices in Against this background, it appears that neighboring countries—may be the current price interventions may not be original cause. Future analysis should effective. At best, the overall impact and look at Thai and Vietnamese glutinous efficiency of current policy responses are rice production trends and analyze to uncertain. Apart from an ongoing general what extent they can explain Lao price policy of increasing domestic rice volatility. production, the government response to the glutinous price hike has three  Glutinous rice price increases may components: (i) export restrictions, (ii) have been reinforced by ad hoc trade interventions to increase rice stocks and policy decisions. The fact that periods maintain strategic reserves, and (iii) plans of large rice price hikes coincide with to eventually implement price controls large official exports to Vietnam is (Lao PDR, 2010). These measures are also attributed to ad hoc national and likely to have an uncertain impact on the provincial trade policy decisions, rice market, largely because of lack of which are temporarily favoring accurate information on production exports, but then reverse and restrict volumes, stocks, trade flows etc. exports. International experience indicates that trade restrictions, government  In Laos, high rice prices tend to have storage and price controls might have marginally overall positive welfare inadvertently exasperated price impacts. In particular, rural rice volatilities, rather than limit it. Evidence farmers in major rice producing from Sub-Saharan Africa shows that regions gain from rice increases. High countries with relatively open and prices also present an opportunity to transparent trade and marketing policies, stimulate production and enhance the such as Mozambique and Uganda, had the role of rice for economic growth and lowest price variability. But countries that rural poverty reduction. Higher rice intervened regularly in a discretionary prices can also help induce private manner, such as Malawi and Zambia, had sector and donor investment in the the highest price volatility. The use of Laotian rice sector, especially in the discretionary policy, which is inherently milling sector which is rather outdated. unpredictable, actively discourages production and trade. Moreover, in  There is an important regional niche countries with few ad hoc interventions, market for Lao glutinous rice. such as Uganda, maize production grew Consequently there is substantial trade rapidly, while it grew slowly in Malawi to neighboring countries. Glutinous and Zambia (Chapoto and Jayne, 2010; rice production in Laos appears to be Jayne and others, 2010). For Laos, marginally competitive at the regional market-friendly forward-looking actions level, possibly due to specific market to manage price risks could include: characteristics. Regional glutinous rice trade flows with the two major rice  Develop and implement a rice sector producing giants Vietnam and policy framework. The current high Thailand are not a threat, but should be rice prices levels are an opportunity interpreted as a major opportunity. for rice sector development. Laos is a small economy and strengthening the -30- rice sector is crucial. But Laos measures may be warranted to address appears as one of the few countries in adverse distributional impacts of rice the region that does not have an price inflation, targeted at poor operational rice sector strategy to households living in urban and food- fully develop its potential. The deficit areas. An important option development of a policy framework would be to consider expanding social could help to establish principles for safety nets programs in Laos, such as production, commercialization, and food for work programs (World Bank, trade policy decisions, and better 2009). Safety net programs would coordinate Government and donor also help address the risks stemming funding for the sector. An important from supply shocks and in the long element would be to better coordinate run deal with climate change issues. policy decisions at the national, provincial and district levels, and  Continue to enhance national rice address knowledge gaps. The strategy production in the long-run through should also be coordinated with public and private investments in the national agricultural growth and sector. Achieving higher production regional trade liberalization targets and marketable surplus is in objectives. particular important in the light of high population growth, which is the  Better understand the regional market main long-run determinant of rice of glutinous rice in order to enhance consumption. With the Lao implementation effectiveness of population growing at 2.2 percent per domestic policy measures. Estimates year, the demand for rice is expected of actual cross-border trade flows to grow substantially over time, between countries and characteristics requiring substantial yield and of the regional glutinous rice market, production increases. Moreover, still including primary data collection on not all households are able to prices and trade flows, would be a permanently meet their rice useful first step. Relaxation of consumption requirements. Enhancing controls and provision of market national production requires access to farming communities could systematically identifying and make Laos a net exporter of rice over addressing bottlenecks for rice sector and above just having a small development. It also requires carefully incremental niche-market. Altogether, prioritizing development needs and prudent trade and stock policies in enabling donor coordination. The Laos are hard to formulate and proposed rice sector policy implement without such are regional framework would be a useful first market analysis. Currently none of step to initiate a comprehensive rice such knowledge is available. development program in Laos.  Restrain from intervening into the  Establish an effective rice price market mechanisms in the short-run. monitoring system, which tracks both This is because households appear to domestic and regional price, gain on average from higher rice production and trade trends. Better prices. However, some short-run information is necessary because -31- there is little information to guide the policy makers on carrying out evidence-based market interventions in Laos. There is paucity of information about the production volumes, stocks in storage, formal and informal trade, and prices. All these information shortages hamper evidence-based policy interventions.  Be aware of long-run macroeconomic implications. There is a need to better understand how world food and energy prices affect price trends in Laos and in the region. Consumer price developments in Thailand and Vietnam can have significant impact on prices in Laos through price transmission. Rice and food price increases can eventually feed into domestic wages. And expectations can create inflationary pressures over time. Moreover, current price inflation is taking place in the context of already high private credit growth, which itself can contribute to inflationary pressures. All this justifies comprehensive monitoring of food price trends in Laos. -32- TECHNICAL ANNEX Overview of rice sector studies Detailed studies on the Lao rice sector are Data sources scarce. This leads to a notion of a lack of reliable evidence of the functioning of the Lao rice price data were obtained from rice market. The few available reports, government agencies, complemented and sometimes presentations, are often verified with historical price data outdated or show conflicting findings. collected by the World Bank Lao country One of the most comprehensive office, FAO and WFP staff, as well as pieces is from Schiller and others (2006). information gathered by several The book mainly discusses agro- researchers over time. The National economic, social and anthropological Statistical Bureau and the Ministry of issues of the rice sector. Industry and Commerce both collect price Moreover, quantitative evidence and data. Data from the National Statistical technical analysis especially on the Bureau is deemed more reliable, because functioning of the rice market are of the Bureau‘s more rigorous approach likewise sparse. Majority of statistical and in generating the data. Meanwhile, data empirical evidence are obtained from from the Ministry of Industry and unpublished reports. The key source of Commerce are mainly collected for policy data is a rapid assessment survey from monitoring purposes and publicly 2008 technically and financially released, unlike the price data sourced supported by the Food and Agricultural from the National Statistical Bureau. Organization of the United Nations Price information shows quality shifts (FAO/MAF, 2009). It presents rice sector at times and there are different time-series statistics in the form presentational slides. with slight revisions and outliers. Overall Sengua et al (2009) employ such data data management quality is poor. Despite along with other market information to these differences, prices seem to provide a snapshot of the rice market. reasonably reflect market conditions. Another comprehensive analysis using Household data are from the 2003 LECS3 actual rice price and production data is and 2008 LECS4 (Lao Expenditure and Bourdet (2000). Consumption Surveys). The spatial data The question of market integration are from the Swiss-funded DECIDE has received some attention from several project and mainly based on the 2005 papers (van der Weide, 2006; Andersson Population and Household Census.27 et al, 2007; Takamatsu, 2002). Formal trade flows are from the Ministry Nonetheless, the findings of these studies of Industry and Commerce. Data was are generally inconclusive and rarely crosschecked with qualitative evidence address regional trade with neighboring from field visits, several reports, countries. Market commercialization discussions with government officials and related to poverty and welfare is analyzed the donor community. by Hill and Christiaensen (2006). Several studies tackle broader institutional and policy questions. These include an evaluation synthesis by the ADB (2006) and two consultant reports commissioned by the World Bank (EMC, 2011 and 27 See http://www.decide.la for details. GSD, 2005). -33- Table 2: First-order household welfare impacts of rice inflation Household production and consumption Estimated welfare impact (in percent) (Dec 2009 to Dec 2010) Production Consumption Net sales of First-order household ratio ratio rice welfare impact Region (PR) (CR) (NBR) (in percent of initial household income) Vientiane 22.5 16.3 6.2 2.5 North 31.8 32.2 -0.4 -0.1 Central 39.0 31.6 7.3 3.0 South 32.7 32.2 0.6 0.2 Total 33.6 30.3 3.3 1.4 Source: LECS4 data based on Davis and Baulch (2011) and staff calculations. Welfare impacts of rice inflation percent. The findings are summarized in Tables 2 and 1 (main text): The seminal work of Deaton (1997) (1) The overall average net welfare provides the methodological framework impacts of the increase in rice prices is to estimate the short-run welfare impact marginally positive. The exception is the of price changes. Rice price changes are Northern region where, on average, proportional to the net benefit ratio increases in rice prices lead to a slight (NBR). The net benefit ratio can be decline in household welfare. interpreted as the elasticity of real income (2) Looking beyond averages, welfare with respect to price change. This ratio is effects seem to vary significantly by the difference between the household region and proximity to rice-producing production and consumption ratio: areas in the Central and Southern provinces. The adverse impact of rice �wi  �pPRi  CRi  price hikes is moderate in urban households but is significant in remote where Δw is the welfare effect expressed rural households in the food-deficient as percentage of original incomes of the Northern provinces are significantly household i, Δp is the percentage change negatively affected by a rice price of rice prices; PR is the rice production increase. Areas where households ratio; and CR is the rice expenditure ratio. produce rice surpluses generally gain Production and consumption data are from price increases. from LECS4, using shares calculated by These calculations only approximate Davis and Baulch (2011). The total short-run welfare impacts, as the analysis change of in relative rice prices from does not capture second-order effects December 2009 to December 2010 is 40.6 stemming from induced wage response. -34- Table 3: Transmission of glutinous rice prices between Laos and Thailand symmetric asymmetric symmetric asymmetric -0.113*** 0.053** (0.027) (0.026) -0.067 0.055 (0.042) (0.041) -0.188*** 0.048 (0.059) (0.057) 0.205*** 0.211*** 0.020 0.020 (0.061) (0.061) (0.059) (0.059) 0.129* 0.122* 0.401*** 0.0401*** (0.066) (0.066) (0.063) (0.064) Constant 0.009** 0.002 0.008** 0.008 (0.004) (0.007) (0.004) (0.007) Co-integrating (1, -0.912) (1,-0.912) vector *, **, *** denotes significance at 10, 5, 1 percent level. Due to data unavailability, these estimates for a selected number of villages and do not account for the possibility of towns, the maps are generated through inflation differentials between rural and spatial smoothing. The data y is on n urban locations, or inflation differentials different locations, which allows between household income groups. estimating y for each of the 10,035 Despite these shortcomings, the overall villages and towns by a spatially findings are consistent with rice inflation weighted average over the n locations. analysis undertaken for Vietnam (Minot The greatest weight is given to and Goletti, 2000; Glewe and Vu, 2009) observations closest to the village for and analysis for Laos during the global which the missing data are imputed with food crisis in 2006 to 2008 (World Bank, the following formula: 2009; Takamatsu, 2011). Spatial patterns of rice inflation All maps presented in this report display a The weights sum up to 1, and decline continuous variation across space. The as the travel time between i and j spatial price data are created from the increases. There are no observations of 2003 LECS3 and 2008 LECS4 household the routes most popularly travelled surveys. As there are only observations between locations. Therefore routes are -35- estimated by minimizing the travel time For the asymmetric model the over all possible routes. After some threshold value is set at zero. Price data experimentation, the final weights in the are too limited to estimate a three-regime spatial smoothing regression equals the model, which would have allowed the inverse of the travel time to the power 1.5 identification of a transaction cost effect, which balances the trade-off between in addition to the standard asymmetric averaging sampling errors across n adjustment effect. Table 3 presents the observations, and maintaining as much of results, suggesting the following: the spatial variation in the underlying (1) Thai glutinous rice prices variable as possible. Granger-cause Lao rice prices, suggesting that Thailand is the regional price setter. Also a separate Granger causality test Asymmetric rice price transmission assuming two lags confirms this finding between Laos and Thailand (p < 0.001). (2) The Lao and Thai glutinous rice The regression is done with glutinous rice markets are co-integrated close to the prices from January 1990 to December one-percent level. In the long run there is 2010 using data from the Lao and Thai almost perfect price transmission. A one national statistical offices. Thai prices are percent increase of Thai prices increase converted to Kip using the nominal Lao prices by 0.91 percent. effective exchange rate. An Augmented (3) Glutinous rice price transmission Dickey-Fuller (ADF) unit root test from Thailand to Laos is asymmetric. confirms that the price series in both the Adjustments following negative price Lao and the Thai market are integrated of deviations from the long-run equilibrium order one, I(1). The estimated baseline (high Thai prices) are faster than error correction model with symmetric adjustments following positive price adjustments to equilibrium has the deviations (low Thai prices). The sign of following form: the error-correction terms (ECT) have the expected opposite signs. They are negative for the Lao model, and positive for the Thai model. This is because when Lao prices experience a negative deviation from equilibrium, Thai prices experience a positive deviation from equilibrium, and vice versa. Following Enders and Siklos (2001), Overall, the results for Lao are incorporating asymmetric threshold consistent with findings on food adjustments to equilibrium, the error- commodity price transmissions in correction model becomes: developing countries. Examples are rice price transmission between Nepal and India (Sanago and Amadou, 2010) and spatial price transmission in the Ghanaian maize market (Abdulai, 2000). -36- Figure 15: Monthly time variation in conditional correlation and volatility between Lao and Thai glutinous rice prices forward by van der Weide (2002) and Boswijk and van der Weide (2011), the Volatility analysis between Lao and multivariate model has the following Thai rice prices form: Short-run price dynamics are analyzed by the means of generalized orthogonal where Z denotes a non-singular matrix generalized autoregressive conditional that links the observed data x (which is heteroskedasticity (GO-GARCH) model. the bivariate time series cleaned from first The regression is done with glutinous rice order auto-correlation) and the latent prices from January 1990 to February bivariate process u that consists of two 2011 using data from the Lao and Thai uncorrelated factors, each with Statistical Offices to estimate the model expectation zero and conditional variance parameters (by means of maximum following a GARCH (1,1) dynamics: likelihood). The model is particularly suited to provide a volatility measure that can be used to understand the time- varying linkage between price changes in the two markets, and the transmission of volatility from one market to the other. The GARCH (1,1) approach is often The data used for the estimation was considered as the simplest and most first cleaned for first order auto- robust of the family of volatility models. correlation. Following the approach put The main results of the analysis are -37- plotted in Figure 15. The following price data suggests that correlations have observations emerge: intensified since 2007. (1) The volatilities of Lao and Thai (3) A possible explanation why rice prices move in tandem in normal correlation rises in 2007, while volatility times, but not in abnormal times. Shocks is not transmitted, could be market that lead to spikes in volatility do not interventions implemented by the spread across the two markets. An government. In particular, after pressure example is the recent surge in Thai rice from farmers, Thailand started setting price volatility in 2010, while Lao high minimum paddy prices in the middle volatility is low. The exact opposite of 2008 and simultaneously prevented occurred two years earlier in 2007. rice imports from neighboring countries, (2) Using conditional correlation as a including from Laos. proxy, one can see that the linkages between Lao and Thai rice markets have intensified significantly. In particular, the -38- REFERENCES Abdulai, A. 2000. ―Spatial Price Transmission and Asymmetry in the Ghanaian Maize Market.‖ Journal of Development Economics 63: 327-349. ADB. 2006. Lao PDR: An Evaluation Synthesis on Rice. Operations Evaluation Department. Manila: Asian Development Bank. Alvesson, H., N. Kiso and J. Rigolini. 2008. Implications of Higher International Food Prices in Lao PDR. Washington DC: World Bank. Processed draft. Andersson, M. A. 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Poverty Reduction and Economic Management Network. Washington DC: World Bank. -41- Lao People’s Democratic Republic r e s P o n d i n g to r i c e P r i c e i n f l at i o n 1818 H Street, NW Washington, DC 20433, USA http://www.worldbank.org