Reports
International Seminar "Challenges and Opportunities for Lao PDR's LDC Graduation."
1. Introduction
On 31 July 2024, the Institute of Developing Economies, Japan External Trade Organization (IDE-JETRO), Lao Academy of Social and Economic Sciences (LASES), and Economic Research Institute for ASEAN and East Asia (ERIA) co-hosted a seminar titled "Challenges and Opportunities for Lao PDR's LDC Graduation." Three researchers from LASES, the Lao PDR's National Assembly, and IDE-JETRO presented their studies. This seminar report summarizes the findings from these studies and opinions from various discussants during the panel discussion session after the presentations.
2. Thematic Areas of the Lao PDR's Smooth Transition Strategies
Ms. Ladavanh Songvilay, the Director General of the Macroeconomic Research Institute, presented her study focusing on the progress, challenges, potential impacts, smooth transition strategy, and ways forward for LDC graduation in Lao PDR.
The author showed that Lao PDR joined the list of LDCs in 1971. In 2000, The Lao People's Revolution Party adopted Vision 2020, which stated the intention to graduate from LDC status. Lao PDR met the criteria to grade for the first time by clearing two out of three criteria in 2018. Lao PDR met all three criteria for the second time in 2021, but UNCDP recommended a five-year preparatory period due to various challenges, including COVID-19. The Lao PDR is currently expected to graduate from LDC status in 2026.
The author cited various studies (Razzaque and Mohammad, 2022; UNDP, 2020) to state that only around 10% of Lao PDR's exports depended on LDC status. Thus, the majority of exports will not be affected by the graduation. In addition, most ODA is received from the members of OECD-DAC or through South-South cooperation. The impacts are likely limited to loss of access to the funds related to the LDC scheme, less favorable terms on concessional loans from Japan and the Republic of Korea, decreasing grants from Germany, the reduction of external resources for country-specific activities, and the requirement for higher cost-sharing. On the contrary, opportunities include possible shifts from grants to soft and loans, the expansion of commercial loans, favorable credit terms for development finances through debt.
The author called for a Smooth Transition Strategy (STS) that secures continuity in development, optimizes support measures, and ensures implementation of strategic measures. Such STS consists of policy actions for macroeconomic stability and financial sustainability, promotion of trade and investment, human capital development and structural transformation, and climate change and disaster management. The author emphasized the need to cope with high inflation, rapid local currency depreciation, and high debt burden. Limitations of state budgets, financial resources, human resources, and expertise are the major challenges for STS. In addition, conflicting priorities, weak coordination among sectors, and the lack of public awareness are making implementing STS difficult.
The author called for establishing a strong inter-ministerial coordination mechanism to align sectoral priorities, utilizing international supports, especially for capacity building, informing and engaging the local public, and implementing robust monitoring and evaluation systems to assess the outcomes.
3. The Contribution of the National Assembly on LDC Graduation and Ways Forward
Dr. Saithong Phommavong, the Director General of the Department of Planning and Investment, Planning, Finance and Audit Committee at the National Assembly of Lao PDR (NA), discussed the role of NA in the LDC graduation process.
In the context of LDC graduation, NA oversees the National Social Economic Development Plan (NSEDP), which governs economic policies in Lao PDR. Therefore, NA is responsible for passing the legal frameworks necessary for graduation, adopting NSEDP and its goals and targets, approving budget implementation, and monitoring progress.
So far, NA approved NSEDP to build the economic foundation to graduate from LDC in 2025 and achieve high-middle-income country status by 2030. NA had approved PIP and other financial resources to implement consecutive NSEDPs. NA oversees the progress at ministerial and provincial levels twice yearly, scrutinizing the government's reports at the plenary session and visiting various socio-economic development projects.
The author pointed out the slow-down growth rate, the declining value of local currency, the decreasing state revenues, and other financial resources as challenges to LDC graduation. The predominance of border trade in international trade and the declining secondary school enrollment rate are also sources of concern. The author called for laws and regulations explicitly aimed at LDC graduation, adopting ex-post LDC graduation plans, targets, and measurements, e.g., GDP, Human Asset Index, and Economic Vulnerability Index.
The author stressed the importance of increasing education and health care budgets, prioritizing five areas in the National Agenda, i.e., promoting local products and exports, strengthening revenue collection capacity, raising public expenditure efficiency, stabilizing the financial sector, and strengthening the rule of law.
4. Economic Impacts of LDC Graduation in Lao PDR
Kazunobu Hayakawa, a senior research fellow from IDE-JETRO, presented the impacts of LDC graduation focusing on international trade. The author started by showing that except for the United States and Hong Kong, Lao products' top five export destinations were countries providing GSP to Lao PDR or ASEAN countries for all 19 industries, from live animals and vegetable products to precision machinery and miscellaneous in 2022. GSP utilization ratios are high for EU (95%), United Kingdom (70%), Japan(69%) and Canada (68%) but generally lower (35% and below) for China, Republic of Korea (29%), Switzerland (10%), India and Australia (0% each). Focusing on the EU, Japan, and the Republic of Korea, the author looked further for utilization rates by industries High GSP utilization rates are found in plastic and rubber products (97%), chemical products (94%), wood products (94%), textile products (94%), footwear (94%) towards EU. For Japan, high GSP utilization rates are found in leather products (100%), prepared foods and drinks (98%), wood products (78%), and textile products (85%). For the Republic of Korea, the AKFTA is often used (65% on average), whereas the highest GSP utilization rate in wood products is just 34%.
GSP towards LDC will disappear after graduation, but GSP towards developing countries remains. The author found no tariff rates hike after graduation for export to Australia. Exports to China will increase from 3.6% (paper and pulp products), 2.1% (wood products), and around 1% for animal or plant oils, vehicles, prepared foods and drinks, wood products, and plant products. For exports to Japan, the most significant increase will be in prepared food and beverages (5.7%), followed by animal products (3.8%), footwear (3%), and around 1% for plant products, animal or plant oils, and leather products. The increases are significant for exports to the EU, from prepared food and drink (8.5%), textile (6.3%), animal products (4.8%), footwear (3.8%), plant products (2.9%), animal and plant oils (2.3%), and various others at around 1%.The increase in exports to the United Kingdom is similar to the EU, although the increase for plastic and rubber products will be 3.7%, significantly higher than 0.8% to the EU. Exports to Canada will face the most significant increase in animal products (13.3%), around 6% for both textiles and footwear. The highest hike of tariff rates for Lao products among selected countries is for those exported to India. The tariff rate will increase by 16% for animal and plant oils, 12.8% for plant products, 11.5% for vehicles, 8% for prepared foods, 3.3% for textiles, and 2.3% for footwear.
The author concluded that Lao PDR's export structure is not currently leaning towards GSP for LDC. Therefore, the impact of LDC graduation is likely to be limited in several industries towards the EU.
5. Panel Discussion
Fukunari Kimura, President of IDE-JETRO moderate the panel discussion session with three panelists, Dr. Kikeo Chanthabuly, Vice President of LASES, Dr. Leeber Leeboaupao, Chairman of the National Assembly's Planning, Finance and Auditing Committee, Mr. Souknilanh Keola, Senior Economist, Economic Research Institute for ASEAN and East Asia (ERIA). Panelists have different views on the readiness of LDC graduation in 2026, from optimistic to cautious and critical. The optimistic view emphasizes the relatively high economic growth to date, while the cautious view stresses the need for better preparation. The critical view centered on the timing of graduation, arguing that a longer grace period is necessary given the relatively weak industrial base compared to neighboring countries even with GSP of LDC status.