National Human Development Report INTERNATIONAL TRADE AND HUMAN DEVELOPMENT LAO PDR 2006 INTERNATIONAL TRADE AND HUMAN DEVELOPMENT LAO PDR 2006 The Third Lao PDR National Human Development Report Committee for Planning and Investment National Statistics Centre United Nations Development Programme Copyright © 2006 by: Committee for Planning and Investment National Statistics Centre (NSC) Luang Prabang Road, Vientiane Capital, Lao PDR United Nations Development Programme (UNDP) Kaysone Phomvihane Avenue, Vientiane Capital, Lao PDR All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission. Cover: Upper pictures by NSC - Lao PDR / UNDP / Fradelizi Lower picture by UNICEF Lao PDR / Holmes Registration: No. 008/Nov.30102006 Printed by: BlueGrass Design Co. Ltd. / SongPol Press Ltd. Amount: 500 Team for the Preparation of the Third National Human Development Report - Lao PDR 2006 COAUTHORS PRINCIPAL CONSULTANTS Bhounthavy Sisouphanthong National Economic Research Institute (NERI) Charles N. Myers Gender Resource Information and Development (GRID) Lao National Tourism Administration (LNTA) PROJECT LEADERSHIP AND MANAGEMENT SKDC Co. Ltd. Samaychanh Boupha, National Project Director Phonesaly Souksavath, Deputy National Project Director STATISTICAL ADVISER Phetsamone Sone, Project Manager Dirk U. Hahn Salika Chanthalavong PROJECT ADMINISTRATION AND COORDINATION Davone Bounpheng, Project Coordinator UNDP Patthana Vongkhamsao, Project Accountant Finn Reske-Nielsen, Resident Representative Somsavanh Sivilay, Logistics Setsuko Yamazaki, Deputy Resident Representative Rie Debabrata, Assistant Resident Representative CONTRIBUTING AUTHORS AND RESEARCHERS Ana Gaby Guerrero, Program Analyst Thuy Ha Bui Phantouleth Louangraj, Program Analyst Khamsavath Chanthavysouk Rol Reiland, Program Analyst Ana Gaby Guerrero Pafoualee Leechuefoung MAIN EDITOR Vena Ngonvorarath Maureen Brown Soudalayphone Paseuth Keomanivone Phimmahasay DESIGN, LAYOUT AND PRINTING Oliver Schönweger Patrice Myotte-Duquet, BlueGrass Design PHOTO Stanislas Fradelizi NATIONAL HUMAN DEVELOPMENT REPORT LAO PDR 2006 V Foreword The Lao People’s Democratic Republic (PDR) is preparing to become an active partici- pant in regional integration and globalization. Since it joined the Association of South- east Asian Nations (ASEAN) in 1997, its pace of involvement in regional activities has steadily accelerated. In the past few years, we have seen its growing roles in ASEAN affairs, hosting various conferences including the 10th ASEAN Summit in 2004, and the ASEAN Ministerial Meeting, ASEAN Regional Forum (ARF) and the ASEAN In- ter-Parliamentary Organization (AIPO) General Assembly in 2005. Trade agreements with various partners and Normal Trade Relations (NTR) with the United States of America (USA) have expanded Lao products’ horizons for increased exports. The mining sector has already experienced spectacular growth of export earnings in 2005. By 2009, hydroelectricity generated from the Nam Theun 2 dam will be ex- ported to Thailand, at the same time new hydroelectric dams are under construction or planned. The East-West and North-South corridors will transform the Lao PDR from a ‘land-locked’ country to a ‘land-linked’ country. The Government is now gearing up for its accession to the World Trade Organization (WTO) and has recently validated a Diagnostic Trade and Integration Study (DTIS) under the Integrated Framework (IF) process. In many ways, the Lao PDR is standing at a fork in its development path; it is time to consider which is the best path to take for sustainable growth, poverty reduc- tion and human development. In this context, I am most pleased to present to you the third National Human Devel- opment Report (NHDR) for the Lao PDR, which examines the relationship between human development and international trade. Since the first global Human Develop- ment Report (HDR) was launched in 1990, these flagship reports of UNDP continue to widen the intellectual frontiers of human development from both global and local perspectives. TheHDRs share the single goal of putting people back at the center of the development process in terms of economic debate, policy and advocacy and help to shape a clearer path towards the achievement of the Millennium Development Goals (MDGs). The Report shows that under the right conditions, increasing international integration and trade in the Lao PDR could play a vital role in the realization of the MDGs and in the country’s graduation out of Least Developed Country status by 2020. However, as the report also elucidates, ensuring that trade leads to meaningful and sustainable improvements in people’s lives is neither automatic nor guaranteed. Greater openness to trade offers significant opportunities for human development. However, it also has the potential to widen existing inequalities between urban and rural areas; between border and non-border districts; between villages with access to transport infrastructure and those without; between the rich and the poor and between men and women. We need to be mindful that as we embrace trade, trade will not embrace everyone equally, unless there is a concerted and strategic effort led by the Government and non-govern- ment institutions. In short, we cannot leave it solely to the market to ensure that the VI NATIONAL HUMAN DEVELOPMENT REPORT LAO PDR 2006 Foreword benefits from international trade accrue to all and are equitably distributed. At the global level, the challenge also remains to build a trading regime that is not just more balanced and equitable but one that also actively combats poverty and promotes hu- man development. The Report also points out the lessons to be learned from the resource-based develop- ment path that other countries have taken. The share of mining and energy exports has risen from one-third of total exports in the early 2000s to one-half in 2005. This pro- portion is expected to rise in the years to come. Currently, the Lao PDR relies heavily on natural resource-based revenues. The export earnings from mining and hydroelec- tricity will raise national income and fiscal revenues, allowing the country to increase investment in education and health. However, excessive reliance on natural resources could confront the country with substantial risks and challenges, including adverse consequences for economic growth, employment generation, and environmental pres- ervation. These challenges must be tackled before the so-called ‘Dutch disease’ effects set in, eroding the competitiveness of the Lao economy. It is necessary for the Lao PDR to persevere with initiating and implementing the stra- tegic measures and changes that will promote economic diversification in sectors, such as agriculture, manufacturing, tourism and garments. In this respect, the Report under- scores the necessity of, amongst other things, increasing investments in education and vocational training institutions, strengthening the sectors that will generate employment opportunities for the rural poor, women, and young people, and development of ef- ficient and transparent mechanisms to manage export revenues and public expenditure. Indeed, much progress is being made in laying the foundations for the Lao PDR to take full advantage of the new regional and global trade arrangements that it is entering into. However, still more needs to be done to ensure that development occurs equitably. Finally, allow me to congratulate the project team at the National Statistics Centre (NSC) and the Committee for Planning and Investment (CPI) for taking the lead in preparing this NHDR and also for their commitment and expertise. My colleagues at United Nations Development Programme (UNDP) also deserve special thanks for their concerted efforts in working closely with the project team on all aspects of the NHDR project. The outcome, as you will see, is a very comprehensive account of how international trade currently affects the Lao people, how this may change in the future, and what the country needs to consider in order to ensure that trade benefits the poor, respects cultural diversity and enhances sustainable development. Setsuko Yamazaki, UNDP Resident Representative a.i. NATIONAL HUMAN DEVELOPMENT REPORT LAO PDR 2006 VII Preface In recent years, the Lao PDR has been gradually opening itself up to the outside world both economically - with increased foreign investment and private sector development - and socially. The flow of new investment, new technology and new ideas, has become an important engine of growth and social change. Standards of living have risen. There have been increases in life expectancy, decreases in maternal and infant mortality, and other improvements in the lives of ordinary Lao people. This Report on the impacts of international trade comes at an important time for the country and the region. The country will soon complete most of the tariff reductions required by its member- ship in the ASEAN Free Trade Area (AFTA). Tariff on agricultural products are being reduced under the ASEAN-China Free Trade Agreement. Negotiations for member- ship in the WTO are underway. Lao exports are now increasing faster than imports. There may soon be a balance for the first time between imports and exports. The com- position of Lao exports is also beginning to change. A much larger share of exports in the future will consist of minerals and electricity. All of these changes are affecting