Trade Development Briefing Note Issue 5, July 2011 68929 Do exporters still face a heavier regulatory burden than non-exporters? Evidence from the new enterprise survey for Lao PDR Key messages ers as 20.3 percent of exporting firm management see this issue as a Previous surveys of enterprises in Laos have suggested that exporters serious problem, compared to 18.0 percent of management in non ex- face a heavier regulatory burden than non-exporters. The government porters. has embarked on a major program of reforms to customs and trade facilitation procedures, but this work is still in the early stages. A new Exporters spend much more time dealing with regulatory proce- enterprise survey allows us to revisit this issue and check progress. dures, compared to non-exporters. The average exporting firm re- Overall the evidence suggests that while things have improved, there is ports spending 5.6 percent of senior management time to navigate regu- still a disparity between the amount of time exporters and non-exporters lation, more than the amount of time spent by management in non ex- spend dealing with regulatory requirements. When background charac- porting firms (1.8 percent) (Figure 1). In the previous round of the survey teristics (sector, location, size, ownership) are controlled for, a propor- in 2005, it was found that the time spent with regulators was an average tion (but not all) of these differences disappear. Similarly in most coun- of 4.9 percent of senior management time for exporters and 3.6 percent tries it is generally quicker to export goods than to import, but the re- for non-exporters. This implies that things have got much better for non- verse is true in Laos. Overall the results suggest that good progress has exporters, but a little worse for exporters. been made, but more still needs to be done to ensure that the business enabling environment in Laos is made as “export friendly� as possible. Exporters receive fewer visits by tax officials, but more visits by other (non tax) officials, compared to non exporting firms. The The first Lao Investment Climate Assessment, which drew upon an average number of inspections by tax officials per year appears to be enterprise survey conducted in 2005, found evidence that export- fairly equal between exporters and non-exporters, with non-exporters ers face a heavier regulatory burden than non-exporters. The study receiving slightly more inspections by officials every year (3.4 and 3.2 indicated that senior management of exporters spend more time dealing respectively) (Figure 2). With regard to inspections by other officials, with government regulation that non-exporters (4.9 percent and 3.6 exporters are visited a little more often than non-exporters (3.1 and 2.3 percent of exporter and non-exporter management time respectively), times per year on average). Comparing the data with that of 2005, the and that exporters also reported a higher number of inspections (29.1 number of inspections appears to have been substantially reduced, with per year for exporters compared to 13.0 percent for non-exporters). The exporters in 2005 seeing a yearly average total of 29.1 inspections and study also found that while exporters reported more customs inspec- non-exporters being visited by officials 13.0 times altogether per year. tions that non-exporters (an average of 5.6 percent per year compared to 3.8 per year for non-exporters), this difference was not sufficient to Figure 1: Exporters are more likely to describe key regulatory environment con- account for the full difference in number of total inspections. The overall straints as “major� or “very severe� conclusion was that a greater regulatory burden was being imposed on exporters1. This interpretation formed the underlying basis for a series of pol- icy recommendations and investments. The government has since been progressively reforming trade facilitation and customs procedures with a view towards streamlining and simplifying the environment in which exporters operate. Similarly a number of investments by the World Bank and other donors in areas such as customs modernization and trade facilitation are helping to finance the government’s program. A new enterprise survey presents an opportunity to revisit this issue and answer the question: do exporters still face a heavier regulatory burden than non-exporters? Data from the new Lao enter- prise survey provides detailed productivity and performance information, as well as information on firm perceptions of business environment con- Figure 2: Exporters spend much more time dealing with regulatory procedures, straints for 360 enterprises (including 147 manufacturers) collected by although the number of inspections is similar to non-exporters the World Bank across four urban centers in late 2009. Only formal firms with five or more employees are included in the survey. The sample was selected using stratified random sampling. This means that the data can be considered to provide unbiased estimates of the national population of enterprises and is therefore the only statistically representative survey of businesses operating in the Lao PDR. Full analysis of the enterprise survey data is presented in the Second Lao Investment Climate Assess- ment2. The new data suggests than exporters are more likely to report key regulatory environment constraints as being a problem compared to non-exporters. The largest difference is in business licensing and permits, where management in exporting firms are almost three times as likely to describe this issue as being a “major� or “very severe� con- straint to their business, compared to non exporting firms (Figure 1). Exporters are also twice as likely as non exporters to describe customs Source: World Bank Enterprise Survey for Laos 2009 and trade regulations as being a constraint. The differences are less acute in labor regulations or tax administration, although in both cases 1 World Bank and ADB (2007) Lao PDR Private Sector and Investment Climate Assessment: exporters are still more likely to describe regulations as being a prob- Reducing Investment Climate Constraints to Higher Growth, Manila: Asian Development Bank, lem. Tax administration stands out as the regulatory issue of most con- and Washington, DC: The World Bank. 2 World Bank (2011) Lao PDR Second Investment Climate Assessment: cern, although it appears to be not much more of a problem for export- Growth in the Non-Resource Sectors, Washington, DC: The World Bank. Policies to Promote Regression analysis confirms that exporters continue to face a The average time taken to import goods in Lao PDR is comparable heavier regulatory burden in terms of actual time spent dealing with with neighboring Thailand and Vietnam, but the time to export regulation and the number of inspections, even after controlling for goods is higher. Firms report a mean aggregate import time of 5.6 days firm characteristics such as size, ownership and sector. Exporters in for all border related procedures, however the variance is high implying the Lao PDR tend to be disproportionately found in the garments and significant inconsistency in clearance times (Figure 3). Strangely, given wood products sectors, large in terms of number of workers, and are that border authorities generally exercise greater control over imports more likely to be foreign owned. Regression analysis on the amount of rather than exports, the mean aggregate export time reported by firms, at management time spent dealing with regulation confirms that exporters 7.3 days, is higher than the import time (Figure 4). Although the maxi- face a heavier burden than non exporters, although sector specific effects mum time reported to export is lower than that to import, the variance is are strong (Table 1). Interestingly, the coefficients for the garments and higher. This again implies significant inconsistency (and therefore uncer- wood sectors are negative and significant, implying that the burden is tainty) on clearance times. less demanding in these two sectors. However the net effect for exporters in these two sectors is still greater than zero as the size of the positive Figure 3: On average, firms report that it takes 5.6 days to import goods into coefficient for exporters is larger than the negative garments and wood Laos ... coefficients. The coefficient for the agro-industry sector is positive and significant, implying a greater burden in this sector as one would expect given the challenges of meeting sanitary and phytosanitary requirements. The regression on the number of tax inspections per year does not return a significant result for exporting firms, similarly confirming the result in Figure 2 that exporters face no different treatment to non-exporting firms. The coefficient for firm size is significant and negative (implying that lar- ger firms receive fewer tax inspections), while the garments, wood and agro-industry sectors all have positive and significant coefficients. Firms in construction (the base category in the regression) receive fewer tax inspections. Finally, the regression on the number of other (non-tax) in- spections per year returns a positive and significant coefficient for export- ers, and negative and significant coefficients for the garments and agro- industry sectors. Firms where the state has an ownership stake report a positive and significant coefficient for the number of both tax and non-tax inspections. Table 1: Regression analysis confirms the extent of the regulatory burden imposed on exporters Figure 4: ...and in contrast to neighboring countries, it takes longer to export goods with an average of 7.3 days OLS Poisson Poisson % of time Number of tax Number of dealing with inspections/ other inspec- regulation year tions/year Observations 145 128 107 Firm characteristics Number of workers 0.583 -0.249*** -0.045 (natural log) (0.902) (0.042) (0.052) Exporter 10.545*** 0.005 0.744*** (dummy) (2.823) (0.123) (0.154) Ownership State-owned 0.264 1.854*** 1.736*** (dummy) (13.538) (0.322) (0.328) Foreign-owned -2.967 -0.158 -0.162 (dummy) (2.772) (0.137) (0.146) Sector (construction is omitted) Source: World Bank Enterprise Survey for Laos 2009 Garments -7.568** 0.763*** -0.661*** Note that the box represents the 25th and 75th percentile of the distribution, the (dummy) (3.391) (0.157) (0.189) middle line the median, and the bold line the mean. The extreme bars represent the Wood and furniture -5.901* 0.751*** -0.059 minimum and maximum of the distribution. In both charts the mean is larger than (dummy) (3.344) (0.142) (0.169) the median due to the number of large positive values on the right hand side (on the left hand side low values cannot be any less than zero). Figures displayed for Thai- Agro-industry 9.153** 0.466*** -0.625** land and Vietnam are mean times. (dummy) (3.954) (0.174) (0.260) R2 / Pseudo R2 0.143 0.105 0.116 Overall, it appears to be the case that while things have improved, exporters continue to suffer from a heavy regulatory burden which Source: Author’s calculations based upon data from the World Bank enterprise is not yet as “export friendly� as it could be. Comparing the data from survey for Laos 2009 2009 with 2005 is not straightforward, and results needs to be interpreted ***, **, * Statistically significant at 1%, 5% and 10% significance Levels with care given different samples and sampling methodologies employed in the two surveys. However, while it appears that the overall number of Perceptions data suggests that exporters do not see regulation as inspections and visits by officials to firms (both tax and non-tax) appears the most important constraint, perhaps implying that exporters ac- to have declined, exporters still spend much more time than non- cept a need for regulatory interaction given the legitimate role of the exporting firms navigating regulations. Different export manufacturing government in managing borders. Exporters might, therefore, be re- sectors also seem to suffer from very different levels of regulation, per- signed to the fact that a heavier regulatory burden is a function of their haps depending on the different levels of organization and risks in the business. Given the clear evidence that exporters do continue to face a sector. Paradoxically it takes longer to export than to import, and in both heavier regulatory burden than non-exporters, it is perplexing that export- cases the variance with very high. The introduction of modern risk man- ers do not (where other characteristics are controlled for) describe the agement tools and systems into Lao customs and border management key regulatory issues as being a constraint. This might be because it is agencies should help in all of these areas. In summary, improvements other characteristics that drive these issues (i.e specific sector issues), are clearly being made but much more still needs to be done. that things are generally getting better so firms feel less need to com- plain, or more generally that exporters simply accept the fact that export- ing requires dealing with a large amount of officialdom. For further information, please contact: World Bank Office, Vientiane Produced with resources from the Trade Development Facility Poverty Reduction and Economic Management Multi Donor Trust Fund, financed by the Government of Aus- Patou Xay, Nehru Road tralia, the European Union and the German International Coop- Information contained in this briefing note reflects the Vientiane, Lao PDR eration Agency, and administered by the World Bank. views of the authors, and not necessarily those of the t: +856 21 414209 World Bank Group or the donors to the Trade Devel- f: +856 21 414210 Visit us at http://www.worldbank.org/lao/trade opment Facility Multi Donor Trust Fund. e: laoinfo@worldbank.org