Resource Boom, Growth and Poverty in Laos: What Can We Learn from Other Countries and Policy Simulation?

1. Resource Boom, Growth and Poverty in Laos: What Can We Learn from Other Countries and Policy Simulation? Phouphet KYOPHILAVONG, National University of Laos 37th AnnualConference of the Federation of ASEAN Economics Association(FAEA) Philippine International Convention Center, Nov 28-29, 2012

2. Outline of presentation • Introduction • Problem statement, objective and scope • Characteristics of CGE model • SAM and coefficients/parameters • Simulation design • Results/discussions • Conclusion/policy recommendation

3. Introduction • Laos is LDC- About 34% of population is under • poverty line (WB and DOS, 2009). • About 30% of GDP is from agriculture, 26% is from industry • and 34% is from services. • Laos is ranked as one of the most resources-rich countries in Asia. • More than 570 mineral deposits have been identified (WB, 2001). • FDI has suddenly increased since 2003. This is mainly • from resource sectors (mining and hydropower).

4. Introduction • The national development goal is to liberate the country from • the group of LDCs by the year 2020 (GoL, 2004). • Enhancing the sustainable economic growth and reduction of • Poverty reduction are top prioritiesof government (GoL, 2004).

5. Introduction FDI Inflows US$ Source:Ministry of Planning and Investment (2011).

6. Introduction FDI Inflows (Resource Sectors) (2005-2010) Source:Ministry of Planning and Investment (2011).

7. Introduction Contribution of Resources Sector Sources: WB(2011) and IMF(2011).

8. Problem statement • Theoretically, abundant natural resources are a “big push” • that could promote growth. • Empirical studies have illustrated that resource-rich • countries grow more slowly compared to resource-poor countries. • Various factors account for low growth in resource-rich • countries: one of the most important factors is referred to as • “Dutch disease” (Gregory, 1976; Cordon, 1982). • Despite the possible positive or negativeimpact of resource boom, • there are few research studies on this issue.

9. Research Question How resource-boom affects Lao economy? • Does resources-boom improve macroeconomic variables? • Does resources-boom have positive impact on other sectors? • What is the policy recommendation to deal with • Adverse impact from booming sector?

10. Literature Reviews • There are few studied of CGE model analysis for the Lao economy. • Fukase and Martin (1999) built a simple CGE model to analyze • the economic effect of joining the AFTA. • Warr (2006) built a two sectors, multi-household CGE model • to analyze the impact of the hydropower dam (NT2). • Warr and Menon (2006) built CGE model to assess • the impact of road improvement on poverty • Lack of CGE model building for analyzing impact of resource • booms on Lao economy.

11. Lao CGE Model • PEP-1-1 model which developed by Decaluwe et al, 2009 • Single-country, static CGE model. • Sectors: Mining, Industry, Agriculture, Private services, • and Government services (will expand more sectors). • Factors: Capital, skilled labor, unskilled labor and land.

12. Lao CGE Model Nested structure of production Output (XSTj) Leontief Value added (VAj) Aggregate intermediate consumption (Cij) Leontief CES Composite labor (LDCj) Composite capital (KDCj) Production 1 (DIi,j) Production 2 (DIi,j) CES CES --- Labor 1 Labor 2 --- Capital 1 Capital 2 Source: Decaluwe et al (2009).

13. Lao CGE Model • Current account balance is fixed. • Current government expenditure is fixed. • Minimum consumption of commodity i by type h household. • Small country assumption. • Numeraire is the nominal exchange rate.

14. we extract Lao SAM from GTAP data base[1] (version 7) following by McDonald and Thierfelder (2004) and PEP(2011). we extract Lao SAM from GTAP data base[1] (version 7) following by McDonald and Thierfelder (2004) and PEP(2011). we extract Lao SAM from GTAP data base[1] (version 7) following by McDonald and Thierfelder (2004) and PEP(2011). Macro-SAM for Laos (2009) • No existingnational Social Account Matrix (SAM), national Input- Output table. • Build the Lao SAM from various data sources. Firstly, extract Lao SAM from GTAP data base (version 7) following by McDonald and Thierfelder (2004) and PEP(2011) Secondly, adjustment of coefficient by consultation economists in NSC, and government agencies. Thirdly, updated Macro-SAM (2004) to 2009 by using various sources of data (NSC, ADB, IMF, and WB).

15. Basic Structure of Lao Economy from SAM Household

16. Basic Structure of Lao Economy from SAM Factor of production

17. Basic Structure of Lao Economy from SAM Consumption and output

18. Parameters • Different parameters lead to different policy results • (Abler et al, 1999). • Some parameters (Elasticity of Substitution (ES) • function and Elasticity of Transformation (ET) function) • come from PEP model follows Warr (2006).

19. Simulation Design • There are various channels of impact of mining sector on Lao economy: Simulation 1: Increase capital stock in mining • We assume that the supply of capital in the mining sector will • increase by about 10%. Simulation 2: Increase productivity • We therefore assume that total factor productivity will • increase by 5%. Simulation 3: Impact of mining • Simulation 3 combines the first two simulations

20. Simulation Design • There are various channels of impact of mining sector on Lao economy: • We focus on:

21. Simulation Results Impact on macroeconomic variables

22. Simulation Results Impact on output

23. Simulation Results Impact on exports

24. Conclusions • Increase capital and productivity of mining sector has positive impact on Lao economy in term of increase real value of GDP, output, export and investment. • But it also decline real output, value added and export of • agriculture sector. • Booming in mining sector might cause the Dutch disease effects in Lao economy.

25. Policy Recommendation • Support linkage between mining sector and the rest of economy, • and diversify economy. • Expenditure of booming sector revenues should focus on promote tradable goods especially on human resource development, infrastructure and health care (Larsen, 2006; Levy, 2007). • Reduce/maintain low level of foreign borrowing is important for Laos during booming sector (Usui, 1996).

26. Policy Recommendation • It is crucial to pay back debt as soon as possible during government has windfall from mining (Usui, 1997). • It is important saving windfall for using when booming sector finishing. Setting up mining fund for saving or investment in emergency time and external shock are crucial • It is important to avoid real exchange rate appreciation thougth • control inflation and depreciate nominal exchange rate.

27. Limitation of this study (Need to Improve) • This model is static CGE model which do not reflectinvestment • flows from mining investment. • Disaggregation of sectors according to data availability. • It is important to capture winner and loser from the impact • of mining by spilt the household to various categories. • Finding appropriate elasticity from other countries which have • similar economic structure like Laos.

28. Limitation of this study • Conduct other simulation scenarios and combine them together to capture impact of mining sector. • Conducting policy implementation to cope with adverse impact on mining sector (fiscal policy and other policy). • It is important to focus on windfall management (transfer) because it is crucial for sustainable economic growth and poverty reduction.

29. Thank You Very Much For Attention