GMS Phnom Penh Plan for Development Management

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Will Laos
Laos’ World Trade Organization (WTO)
Accession Reduce Poverty?

Phouphet Kyophilavong
Shinya Takamatsu
Jong-Hwan Ko

ADB LRM, Vientiane, Laos

September 11, 2010

Outline of Presentation

• Problems & objectives

• Framework of methodology

• Simulation scenario design & results

• Conclusion & limitations

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 Problem Statement

• Trade liberalization is the key to promoting growth

and reducing poverty (GoL,2004).

• The effect of trade liberalization on poverty and

income distribution is still being debated.

• Laos will join WTO in a few more years.

WTO accession has cost and benefits.

• Due to limited research on these issues, the impact

of Laos’ WTO accession is still not clear.

Literature Review

There are few studies using CGE model analysis for the
Lao economy.
• Fukase
F k and
dMMartin
ti (1999) b built
ilt a simple
i l CGE model
d l tto analyze
l
the economic effect of joining AFTA.

• Warr (2006) built a two sector, multi-household CGE model

to analyze the impact of a hydropower dam (NT2).

• Warr and Menon (2006) built a CGE model to assess the

impact of road improvement on poverty
poverty.

Lack of studies on the impact of WTO accession

using CGE model.

2
 Research Questions

• How does Laos’ WTO accession affect the

economy
y?

• Does WTO accession improve welfare?

Framework of Methodology

Household Survey GTAP Database
(LECS 3) (Version 7)

Reconciliation

WTO 
Reconciled household survey Reconciled GTAP data
accession
simulation

Micro model GTAP Model

Price and factor price changes

Poverty change Source: authors adopted from Ivanic (2006)

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 GTAP Model
• Comparative static: not dynamic, no endogenous
capital accumulation.
• Bilateral trade specified via
ia Armington ass
assumption.
mption
• Regional household collects all income and allocates
across private consumption, government and savings.
• Explicit treatment of transportation costs in
international trade via global transport sector.
• Global investments linked to global savings via
a global bank.
• Standard closure: Neoclassical closure.
• Welfare decomposition.

Production structure (GTAP model)

Level 1
Output

Leontief

Value‐Added Intermediates Level 2

CES
σVA σD
Armington
Structure
Labor Land Capital Domestic Foreign Level 3

CES σM

Export Import Level 4

Source: Hertel (1997)

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Household welfare change due to policy change
• The monetary value of the change in utility for household i
• Chen & Ravallion, 2004; Ravallion & Lokshin, 2008
• Household welfare is changed
g byy four factors in income
• The four factors are changed by the change in consumer (p^d)
and producer (p^s) prices and wage (w) by the GTAP model
• The shares of each income source are obtained from LECS 3
household survey.

Research Scope

• WTO accession: in terms of tariff cut

• Regions in model: 10

• Sectors in model: 57

• Focus on Laos

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 Simulation Design

• WTO accession has various benefits and costs.

• However, we focus on reduced tariff rates from WTO

accession.

• We assume that tariff rates fall to 2.5%.

Simulation Results

Impact on macroeconomic variables

Macroeconomic variables Impact of WTO accession

Real GDP (%) 0.53

Export volumes (%) 0.93
Import volumes (%) 5.65
Trade balance (US$ million) -42.70

Sources: authors’ simulation from GTAP model.

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 Simulation Results
Impact on output
Sector Impact on industry output (%)
Grains and cropsp -0.41
Livestock and meat products -0.07
Mining and extraction -0.31
Processed food -4.74
Textiles and clothing 5.63
Light manufacturing -1.81
Heavy manufacturing -3.27
Utilities and construction 4 85
4.85
Transportation and communicatio 0.52
Other services 1.01
Source: Authors' simulation from GTAP model.

Simulation Results

Impact on trade balance

Impact on trade balance
Sector
(US$ million)
Grains and crops -5.13
Livestock and meat products -0.65
Mining and extraction 3.14
Processed food -30.87
Textiles and clothing 5.66
Light manufacturing -6.75
Heavy manufacturing -14.18
Utilities and construction 0.78
Transportation and communication 0.48
Other services 4.85
Source: Authors' simulation from GTAP model.

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Welfare Impact of WTO Accession (1)
1. Median welfare change
Per capita (kip) Percentage in income
National -1019.4 -1.1
Rural -1138.1 -1.4
Urban 2388.3 0.9
Region
Vientiane Capital 4044.2 1.1
North -1177.5 -1.4
Central -978.8 -1.0
South -1087.3 -1.2
Expenditure poverty in Base
Non-poor -1034.5 -0.7
Poor -1018.6 -1.6
rural non-poor -1357.2 -1.0
rural poor -1045.4 -1.7
urban non-poor 3279.0 1.0
urban poor -70.4 0.0
Sources: Authors' computations based on the GTAP model and LECS 3.

Welfare Impact of the WTO Accession (2)

2. Gini index as percentage
Baseline Simulated Change
Total 0.488 0.496 0.0076
rural 0.436 0.444 0.0079
urban 0.414 0.420 0.0059
Region:
Vientiane Capital 0.387 0.393 0.0056
North 0.458 0.466 0.0084
Central 0.466 0.474 0.0076
South 0.458 0.465 0.0072

Sources: Authors' computations based on the GTAP model and LECS 3.

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Welfare Impact of the WTO Accession (3)

3. Poverty impacts (headcount index, percentage)

Baseline Simulated Change
National: 30.7 31.2 0.48
rural 28.9 29.6 0.78
urban 37.0 36.4 -0.53
Region:
Vientiane Capital 37.2 36.8 -0.39
North 30.6 31.4 0.81
Central 30.7 31.1 0.40
South 27.2 27.7 0.58
Sources: Authors' computations based on the GTAP model and LECS 3.

Conclusion

• WTO accession has positive impact on real GDP but

this impact is relatively small.

• Output of most Lao products will fall and most

sectors will experience trade deficits.

• The change in household welfare due to the tariff

reduction is not homogenous but heterogeneous.

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 Conclusion

• The winners from the tariff cut are households which live
in the urban areas, Vientiane capital and are the non-poor
in the urban area
area.

•The magnitudes of the changes are not so large with this

simulation, but if more drastic liberalization policies are
implemented, the magnitude of the changes could be
much larger.

Limitations of this study

• Static CGE model. This paper does not consider other

benefits
be e sa and
d cos
costsso
of WTO
O ((this
s sstudy
udy focuses
ocuses o
only
yoon
reducing tariff rates).

• No behavior response linking macro and micro

accounting model.

• Does not capture dynamic effect from trade policy

changes though labor market adjustment
and technical innovation.

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 Limitations of this study

• Does not capture feedback of externalities from

trade policy change on productivity and utility
utility.

• Assumes that price and wage changes from trade

policy are the same in both rural and urban areas.

• Data limitation ((underestimated agricultural

g income data
in household survey).

Thank You Very Much for Your Attention!

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