Trade and trade policy of land-locked countries

1. Trade and trade policy ofland-locked countries Kym Anderson World Bank, Washington DC and University of Adelaide, Australia Vientiane, Lao PDR, 15-17 June 2005

2. Land-lockedness is not uncommon • … at least since the breakup of the Soviet Union, which boosted the global number of LLCs from 26 to 40 • Asia – 5 • Africa – 14 • South America – 2 • Former Soviet Union -- 14 • Europe -- 5

3. LLCs are typically small and poor • The exceptions being small but rich ones in W. Europe (Andorra, Liechtenstein, Luxembourg, Switzerland) • which suggests smallness alone is not enough reason for a LLC to be/remain poor • As is also true of small island economies (the key non-poor exceptions being small but rich Hong Kong and Singapore, but also Cyprus, Malta, Tahiti and Hawaii)

4. What distinguishes small and poor LLCs is their economic remoteness • ‘Economic’ in the sense of facing above-average costs of trading internationally • Because of the need to transit through neighbouring countries • Bearing in mind that over 90% of the volume of global international trade is by sea rather than air, road or river • This means the fob-cif gap is larger for poor and remote LLCs, so they tend to trade less than other LDCs (recall A. Venables’ Figure 1)

5. LLCs’ transport costs are non-trivial • Especially if the LLC effectively has only one transit country (as with Lao and Nepal) • and if that transit country allows monopoly pricing on land transport, or insists on duplicate customs inspection • Even so, Lao’s average transit cost and time are no more than Nepal’s, and only: • two-third’s that of Kazakstan’s through Russia • < half that of Mongolia’s through China (see UN ESCAP’s 2003 study)

6. LLCs have less scope for an independent trade policy • e.g. Nepal, Lao, where lower import tariffs in the LLC than the transit country simply invites smuggling • Since the LLC typically is the much smaller economy, its trade policy is the one that has to accommodate to the transit country’s (even though that may be inconsistent with the LLC’s objectives)

7. How can an LLC’s economic remoteness be reduced? • Being less trade-focused is NOT the answer • On the contrary, it makes sense to adopt LOWER governmental trade taxes/bans/NTBs/trade administrative procedures • bearing in mind the natural protection those high transport costs provide

8. How can Lao’s economic remoteness be reduced? (continued) 1. Joining WTO and committing to those lower trade barriers reduces the prospect of policy reversals, provides rules of transit, and adds credibility to any scheduled further trade reform, thereby boosting investor confidence 2. Bilateral (esp. with Thailand) and ASEAN regional cooperation can help too

9. How can Lao’s economic remoteness be reduced? (continued) 3. But there is much that can be done unilaterally by Lao, including as part of its DTIS (Diagnostics Trade Integration Study) process • Bearing in mind the on-going forces of globalization (which in essence involve a lowering of the transactions costs of doing business across space and national borders, and in some situations the ‘death of distance’)

10. How can Lao’s economic remoteness be reduced? (continued) • Lao’s DTIS process will examine: • Opportunities/prospects for pro-growth, pro-poor trade expansion • External constraints to such trade expansion • Domestic constraints to trade expansion • Ways to effectively and efficiently facilitate poverty-reducing trade expansion

11. How can Lao’s economic remoteness be reduced? (continued) • Traditionally, LLCs have focused on: • goods with a high value relative to volume/weight (e.g. Swiss watches; air-freighted fruit & vegetables) • services, such as: • Swiss banking and insurance • Caribbean call centres • transit services where the LLC is between two major traders • But Lao’s resource endowments and location need to be borne in mind • e.g. its small distance between Ch or Vn and Thailand, but might privately funded toll highways contribute?

12. Lao’s export prospects • Lao is relatively well endowed, per worker, with: • forests • minerals • hydro-electricity sites, and • potential pasture and tropical tree-crop land • How might a mining boom, or the Nam Theun 2 hydro project, alter the Lao economy? • See Appendix 2 in: Anderson, K., Lao Economic Reform and WTO Accession: Implications for Agriculture and Rural Development, (translated into Lao by Ministry of Commerce), and also use Figure 1 in A. Venables, “Small, Remote and Poor”, World Trade Review 3(3): 453-45, Nov. 2004

13. Lao’s domestic constraints to pro-poor trade expansion • Institutional/bureaucratic constraints • Export-import Equilibrium Plan? • Free market forces are the most efficient way to ensure equilibrium (again see Venables’ Figure 1) • Hassles to start a business • Takes nearly 200 days, compared with an average of about 50 days in other ASEAN countries • Other export and import taxes/bans and licensing requirements

14. Lao’s external constraints to pro-poor trade expansion • e.g. Thailand’s cumbersome/costly transit procedures (which contribute >20% of the total transit cost incl. land transport) • see next presentation by Ruth Banomyong