Trade Liberalization and Comparative Advantage ...

Lao Trade Research Digest Vol II, June 2011

Trade Liberalization and Comparative Advantage Dynamics in Lao PDR Souksavanh Vixathep*

Abstract This paper studies the structure of external trade of Laos, a transition economy in Southeast Asia. By analyzing the revealed comparative advantage for 1985-2005, we find that: (i) exports concentrated in some agricultural products and crude natural resources; (ii) the structure of exports did not change significantly; (iii) trade diversification was low; (iv) the labor-intensive garment industry has steadily gained competitiveness; (v) within an industry specialization tended to occur in the simple product lines; and (vi) mining industry (copper) showed a positive trend in competitiveness. These findings imply that Laos largely follows the neoclassical path of industrialization, and appropriate industrial and trade policies are essential for diversifying exports and developing higher value-added commodities.

1.

Introduction Studies on comparative advantage have occupied a large segment of international

trade literature as it has been studied extensively, particularly for developed economies. Even today this issue is still often discussed in trade negotiations among nations. It is a complex concept that encompasses several interrelated aspects of an economy. Balassa (1965, p. 116) contended: “Comparative advantages appear to be the outcome of a number of factors, some measurable, others not, some easily pinned down, others less so.” Among different approaches to comparative advantage, Hirsch (1974) offered an interesting approach to consider a country‟s comparative advantages as the outcome of the interaction between factor endowment (country characteristic) and factor intensity (industry/product characteristics). In an increasingly globalized world of trade, small countries in terms of resource endowment and capital accumulation appear, at the first glance, to have little chance to compete with much larger and stronger competitors. However, in such a huge world of production there should be certain commodities, in which these small economies would have comparative advantages. Vollrath (1991) stated: “It is not unusual for a country to have a *

Assistant Professor, Graduate School of International Cooperation Studies, Kobe University. The author is grateful to the comments on an earlier draft offered by the participants at the 6th International Conference of the Japan Economic Policy Association, Tokyo, 2007. Constructive and insightful comments by an anonymous referee are gratefully acknowledged. Contact: [email protected]

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comparative disadvantage for a composite commodity and yet have a comparative advantage for a particular niche within this composite.” Opening up the economy and liberalizing its trade, a country‟s comparative advantage is said to be affected at different levels, since domestic producers are exposed to more direct competition with foreign competitors when protection has been reduced. Turning to Lao PDR1, in 1986 the country initiated a transition process to move from a centrally planned to a market-oriented economy (often known as the New Economic Mechanism-Chintanakan Mai). The transition includes, among other things, trade liberalization. Trade development and liberalization has marked a new era, when Laos joined ASEAN in 1997, and has since participated in the ASEAN Free Trade Area (AFTA). Under AFTA tariffs and non-tariff barriers are to be gradually reduced and abolished, and a level playing field should be assured for all producers, investors and entrepreneurs. Economic reforms, particularly trade liberalization, would exert significant impacts on the country‟s comparative advantage and competitiveness. The changes in the comparative advantage would, in turn, affect sectoral/industrial development and economic development as a whole. The economic transition in Laos presents an interesting situation to analyze the evolution of a country‟s comparative advantage which has partly resulted from trade liberalization. Such a comprehensive study has proved rare for developing economies, not to mention least developed country like Laos. Using comprehensive trade data from United Nations Comtrade, this paper examines the changes of the country‟s comparative advantages over an extended period. The main objectives are to examine the patterns of external trade and the evolution of revealed comparative advantages in Laos from 1985 to 2005, and to discuss some relationship between trade and investment policies and the country‟s comparative advantages. The hypothesis of the analysis is that despite trade liberalization and integration, the structure of external trade and the revealed comparative advantages of Laos have not changed significantly over this period. The paper is laid out as follows: Section 2 reviews the issues of measuring comparative advantages. Section 3 presents some concepts and indices of revealed comparative advantage, and describes the data used in the empirical analysis. Section 4 introduces some aspects of the economic reforms in Laos with a focus on trade development.

1

The official name of Laos is the Lao People‟s Democratic Republic. In this paper the two terms (Laos and Lao PDR) are used interchangeably to denote the country.

2


The empirical analysis and the results are discussed in Section 5. The last section presents some conclusions. 2.

Measuring Comparative Advantage The measurement of comparative advantage practically started when Balassa (1965),

in an attempt to study the long term effects of trade liberalization, formally introduced the concept of a “revealed” comparative advantage (RCA). He discussed various theoretical explanations of international trade and approaches to measuring RCA, factors influencing the patterns of comparative advantages, and proposed the so-called “export performance index” (Balssa‟s index or RCA index). He argued that a country‟s trade performance can reveal the comparative advantages because it reflects relative costs as well as differences in non-price factors. Since the 1970s empirical studies on international trade have focused on measuring the nations‟ comparative advantage and their positions in such a continuing scale of comparative advantage. Attempts have been made to quantify the RCA at different levels – enterprise, sectoral (industry) and national levels – by applying various approaches, such as cost; supply-demand (production-consumption); and trade (export-import) approaches (Donges and Riedel, 1977; Balassa, 1979; UNIDO, 1982; Marchese and De Simone, 1989). For example, Donges and Riedel (1977) constructed an index of RCA to analyze the impacts of trade policy on export diversification of 15 LDCs, and found that semi-industrial developing countries exhibited RCA in labor-intensive, raw material-intensive and light manufacturing industries. In a study on the patterns of comparative advantage in the world‟s trade of manufactures, UNIDO (1982) discussed various factors influencing a country‟s comparative advantages. They regarded comparative advantage as a “constant changing (dynamic) concept” and employed three measures of RCA for comparisons: a country‟s share in total exports of manufactures, the net export index (NE index), and export-performance ratio. On the other hand, a section of international trade literature has emphasized on evaluation and testing of indices of RCA in various aspects (Yeats, 1985; Ballance, Forstner and Murray, 1987; Vollrath, 1991). Hillman (1980), for instance, used Balassa‟s index to analyze the relationship between RCA and comparative advantages indicated by autarkic prices, established theoretical discussions for cross-commodity and cross-country comparison, and developed the so-called Hillman condition for cross-country comparison. For small countries with (sufficient) export diversification the Hillman condition is generally satisfied and RCA is consistent with the comparative advantage indicated by pre-trade prices. In a 3


theoretical survey, Vollrath (1991) discussed and compared the theoretical foundations of alternative indices of RCA. The survey examined ten indices including export performance indices (Balassa-type index), net export index (UNIDO-type index), and Vollrath‟s indices. He concluded that the most satisfying measures are Balassa‟s index and the relative export advantage measure (one Vollrath‟s index), with the difference between them being negligible for low levels of commodity aggregation and/or for small countries in terms of share in world‟s commodity. The application of the net export index as a measure of comparative advantage is occasionally criticized, because imports are significantly influenced by the system of protection used in a country (Balassa, 1979; Vollrath, 1991). Nevertheless, this index has often been used in combination with other indices of RCA, as it can cast some light on a country‟s trade performance, inter- and intra-industry trade (UNIDO, 1982). Based on such positive aspects, many studies have applied export performance index and/or net export ratio in analyzing a country‟s comparative advantages and comparing RCA across countries and commodities (see Petri (1988) and Lee (1995) for South Korea; Lim (1997) for North Korea; Bojnec (2001) for regional trade of agricultural products for Europe, Oceania, Asia, Africa; and Hara and Shuto (2005) for Laos). Empirical evidence for Laos is rare and limited in scope. A noticeable publication was the work of Hara and Shuto (2005). They employed Balassa‟s index and NE index to evaluate Laos‟ competitiveness structure and the changes of trade structure through experiences of some selected East Asian economies, and found that (1) Laos has competitiveness in agricultural products, organic and handicraft products, and natural “Thamasat” products, such as coffee, wood and wood products, apparel, and live animals; and (2) the commodity competitive structure of Laos is similar to that of Thailand. In their analysis, however, the RCA and NE indices for Laos were calculated as the average of 1999-2001 and 2003, and thereby ignoring the time trend. Also, conclusions on long term comparative advantage of Laos were drawn indirectly from the changing patterns in RCA of certain economies in the region. In an attempt to widen the research scope on Laos, the paper includes all economic sectors in analyzing the RCA trends. This study distinguishes itself from previous studies in some aspects that it includes an economy-wide analysis of the patterns of external trade and revealed comparative advantages at the three-digit level of the Standard International Trade Classification (SITC) for 20 years. Previous studies on Laos‟ RCA covered a much shorter period or employed only the two-digit SITC category for the empirical analysis. With our 4


database, which surmounts most of the problems related to the reliability of data from domestic sources, this kind of study has become possible for the first time at this comprehension level for such an extended period.

3.

Methodology and Data

3.1

Concept of revealed comparative advantage Following Balassa (1965) the concept of revealed comparative advantage refers to the

relative export performance of a country in a particular commodity trade. Under the assumption that the trade pattern reflects relative costs and differences in non-price factors (differences in quality, goodwill and services etc.), the notation “revealed” is derived from the concept that the commodity pattern of trade would “reveal” the comparative advantage of trading countries. Another alternative way to measure RCA is to consider revealed comparative advantage as an outcome of the interaction between an industry‟s exports and imports of the corresponding commodity group (UNIDO, 1982). The study pursues these two alternative concepts and uses Balassa‟s export performance index and the net export index to examine the patterns of external trade and the dynamics of the Laos‟ RCA for the period 1985-2005. Also, doing so would enable us to compare the behavior of the two indices and to assure the reliability of the results.

a. Revealed comparative advantage index/Export performance index (RCA index) The revealed comparative advantage index is defined as the ratio between (a) the share of a country‟s commodity exports in the commodity exports of the world, and (b) the share of the country‟s total exports in the total exports of the world:

RCAi , j 

X i , j / X w, j X i ,tot / X w,tot



X i , j / X i ,tot

(1)

X w, j / X w,tot

where RCAi,j is the revealed comparative advantage index of country i in commodity group j, Xi,j denotes country i‟s exports of commodity group j, Xw,j represents the world‟s exports of commodity group j, Xi,tot stands for country i‟s total exports, and Xw,tot denotes total exports of the world. In this raw form, the RCA index takes a non-negative value. An RCA index above/below unity indicates the country‟s comparative advantage/disadvantage in the corresponding commodity group. For ease of interpretation the paper reports the RCA index in common logarithm (logarithm base 10) (Petri, 1988; Lee, 1995). In the logarithmic scale the index can take a negative or positive value, or zero. For example, an RCA index of zero 5


means that Laos‟ export position in a given commodity is as large as its share in total exports, and a value of -1.0 means that it is 1/10th as large. Therefore, an index of greater/less than zero is regarded as “high RCA”/“low RCA.” b. Net export index (NE index) The net export index is defined as the ratio of a country‟s net exports (exports minus imports) to the country‟s total trade (exports plus imports):

NEI i , j 

X X

i, j i, j

 M i, j 

 M i, j 

(2)

where NEIi,j is the net export index of country i in commodity group j, Xi,j denotes country i‟s exports of commodity group j, and Mi,j represents country i‟s imports of commodity group j. This measure expresses the net exports of a country relative to its total trade and varies between -1 and +1. The former corresponds to no exports of country i in commodity group j and the latter means that country i does not import any goods of commodity group j. Although the interpretation of this measure is subject to criticism due to the pronounced impacts of the protection structure on the levels of imports, this index contains important information about the trade performance of a country. Its absolute value |NEIi,j| represents the portion of interindustry trade relative to the total trade of any commodity group, and (1-|NEIi,j|) consequently corresponds to the portion of intra-industry trade. Thus the measure illustrates the significance of the net exports/net flows in a commodity group. c. Ranking of RCA index and additional indicators The assessment of the RCA index in absolute terms illustrates the degree of a country‟s comparative advantage. Thus, one can classify industries or commodity groups into high RCA or low RCA category. However, solely relying upon the absolute terms could lead to a misinterpretation of comparative advantage, because a certain commodity group could hardly increase its export share if it has already occupied large portion of the nation‟s exports. Moreover, as the range of the export commodities of a country becomes more diversified, it is more difficult for any commodity group to increase its share in this market (Lee, 1995). Therefore, in our analysis we will consider both the value and the ranking of the indices of RCA because they show the trends and the changes of RCA, and thereby illustrate the dynamic aspects of comparative advantages. Moreover, in order to examine other characteristics of trade patterns, such as the diversification and the similarity of export commodities, the share of high RCA cases in total ranked products, the standard deviation and the Spearman rank correlation coefficient will be considered.

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3.2

Data Like many cases of LDCs, empirical studies on Laos often face the problem of

availability and reliability of statistical information. To surmount these difficulties, we use the commodity trade data available in the Comtrade database of the United Nations. Even in such a comprehensive database for commodity trade there are no trade data reported by Laos. Hence, a good option is to use the data reported by Laos‟ trading partners. The selection oftrading partners is based on the importance of such economies in the country‟s export markets as reflected in their share in the country‟s total exports. Using the aggregate trade data and the list of trade partners provided by the Ministry of Industry and Commerce, we have included 38 countries/economies2 in the analysis. In this respect, Laos‟ exports are represented by bilateral cif-import data and Laos‟ imports by bilateral fob-export data of these economies. Therefore, import and export values applied in this study would differ somewhat from the actual values, had domestic trade data been available. However, compared to the value of goods, the cost of insurance and freight is usually small and would not alter the trends of the indices of RCA. According to our calculation, capturing trade with these economies would cover more than 95% of the country‟s exports and imports, and any inferences from these data would be considered “acceptable” (Table A1). However, it is worth noting that the number of countries, which reported trade data with Laos in Comtrade, differed from year to year. Also, for the sub-period 1985-1990 the following former Eastern European countries were included: Czechoslovakia; East Germany; West Germany; and the Soviet Union. To some extent, this helps capture trade with the COMECON3 member countries which were probably the main partners of Laos during that period.

For the calculation of RCA index, data of world commodity exports have been collected from the United Nations International Trade Statistics Yearbook (various issues) for all available commodities at the three-digit level of SITC. The trade data were collected for 20 years (1985-2005) at the five-year interval. The choice of the study period has some merit in that it covers an era with some important economic events: the adoption of an open-door 2

Australia; Austria; Belgium; Bulgaria; Cambodia; Canada; China; Czech Republic; Denmark; Finland; France; Germany; Hong Kong; Hungary; India; Indonesia; Ireland; Italy; Japan; Luxembourg; Malaysia; Netherlands; New Zealand; Norway; Philippines; Poland; Portugal; Romania; Russian Federation; Singapore; South Korea; Spain; Sweden; Switzerland; Thailand; United Kingdom; United States; and Vietnam. 3 COMECON is the abbreviation of “the Council for Mutual Economic Assistance”, which was established in January 1949 by representatives of six former socialist countries: Bulgaria, Czechoslovakia, Hungary, Poland, Romania and the former Soviet Union.

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policy in the late 1980s, the accession to ASEAN and AFTA in the second half of the 1990s, and the implementation of AFTA regulations since 1998. With regard to commodity classification, the three-digit SITC categories are used. This has some advantage, because the three-digit level is considered to represent industries (UNIDO, 1982). Also, these commodity groups/items have higher substitution elasticity, and tests on indices of RCA are widely conducted at this level. Owing to the constraint in the world commodity export data, SITC Revision 2 is applied for 1985, 1990 and 1995; and Revision 3 is used for 2000 and 2005. Data obtained from international sources often show higher accuracy and reliability. However, the following limitations should be borne in mind when interpreting the results. First, although our sample contains all significant trade partners including former COMECON member countries, the data of Vietnam – one of Laos‟ main trade partners – are available only for the year 2000 and 2005. The absence of Vietnam‟s data for 1985-1995 might have some effect on the country-composition of Lao exports and imports (see Table 4 and Table 6). Second, given the long border with her neighboring countries, informal trade with these countries would represent an important part of Laos‟ external trade4. However, given its nature neither Laos nor her partners could record this type of trade data. In addition, informal trade – in many cases also illegal – might contain a large portion of the country‟s international trade, particularly informal or border-trade in agricultural products along the long borders with neighboring Vietnam, Thailand and China. Yet, such data have not been made available (or not recorded) in national and international sources, and cannot be quantitatively addressed in this study. Third, electricity was not included in Comtrade until Revision 3 of the SITC. In our dataset the data for electric current (SITC 351) are excluded from the RCA and NEI analysis, because only trade data of 2005 reported by Thailand include electricity. Fourth, due to the lack of data at the 3-digit level, many commodities are missing in the result list and RCA and NE indices could show a difference in some cases. Finally, the aggregation of national data might have some impacts on the indices of RCA. Individual countries included here may have different rules and definitions in data collection and processing, which might lead to a significant difference from the „unobserved‟ real values in the value of imports and exports of Laos.

4

Fukase and Martin (1999) estimated informal trade between Laos and her neighbors to be between 25-30 percent of total trade.

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In the current circumstances that detailed Lao trade data have not been made available in domestic or international sources, the use of partner countries‟ data available in Comtrade appears to be a good option to conduct a nation-wide trade analysis on Laos for an extensive time span. It is undeniable that ambiguity might be embedded this data compilation, but the benefits tend to outweigh the disadvantages, as it enables such a comprehensive trade study on Lao economy. However, the results should be interpreted with caution.

4.

The Lao Economy: Trade Development

4.1

Overview of economy Lao PDR, with a population of 5.6 million in 2005, is traditionally an agriculture-

based economy. In 2005 the agricultural sector accounted for 46% of the gross domestic product (GDP), while the industry and service sector contributed 28% and 26%, respectively (WDI, 2007). With regard to employment, of roughly 2.7 million people in the labor force in 2003, almost 80% were engaged in agriculture, 9% in industry and 8% in services (Key Indicators, 2006). Table 1: Selected macro-indicators Description 1985 1990 1995 2000 2005 GDP (U$ million, 2000 prices) 765 943 1,290 1,740 2,350 Per capita GDP (U$, 2000 prices) 211.4 228.2 274.6 328.7 396.2 GDP annual growth rate (%) 5.05 4.43a 6.42 b 6.17 c 6.23 d Trade/GDP (%) 8.25 36.53 60.55 64.57 58.93 Exports/GDP (%) 4.04 11.33 23.22 30.12 27.14 Imports/GDP (%) 9.77 24.52 37.33 34.44 30.89 Exports (U$ million, 2000 prices) 584 412 435 523 468 Imports (U$ million, 2000 prices) 641 614 599 598 541 Export growth rate (%) 22.72 7.99 a 33.65 b 1.70 c 12.58 d Import growth rate (%) 19.14 1.41 a 29.56 b -1.36 c 12.84 d e Gross saving/GDP (%) 1.31 -3.65 15.18 20.09 1.50 Gross investment/GDP (%) 7.04 13.50 e n.a. 21.80 f 16.70 External debt/GDP (%) 26.12 204.39 122.73 143.68 82.73 g Total population 5.622 million (as of 1 July 2005) Source: Author compiled; data are from Key Indicators (various issues), Asian Development Bank; World Development Indicators (various issues), World Bank. Notes: 1) “n.a.” means the data were not available. 2) The superscript denotes: a) average of 1986-1990; b) average of 1991-1995; c) average of 1996-2000; d) average of 2001-2005; e) value of 1988; f) value of 2001; and g) value of 2004.

Since the late 1980s, the Lao economy has been growing steadily. Table 1 summarizes some economic indicators for the period of 1985-2005. On average, GDP has grown at an annual rate of over 6 percent over the last 15 years as compared to 4.43% in the second half of the 1980s. Over the same time span, GDP tripled and reached U$2.4 billion in 2005. Per capita GDP increased from U$211 in 1985 to U$396 in 2005. In terms of sectoral contribution, 9


for example in 2005, the GDP growth rate of 6.97 percent was the result of growth of 2.6% in the agricultural, 16% in the industry and 5.6% in the service sector (WDI, 2007).

4.2

Trade development

a. Trade liberalization The economic transition introduced in the late 1980s embraces a wide range of reforms in many areas, including SOEs, price controls, domestic and foreign investment, legal and regulatory framework, international trade, etc. Economic and trade reforms in Laos can be classified into three periods: closed economy with central control (1975-1985); transition to market-oriented economy (1986-2000); and open economy with current policies (2000 onward) (Douangboupha, 2010). In this classification, the analysis of RCA in this paper covers the end of the first period till the beginning of the third period with a focus on the second period. With respect to trade liberalization, starting in the second half of the 1980s the government has gradually removed price controls in retail trade and agricultural procurement, and gave more autonomy to state-owned-enterprises (SOEs) in making business decisions. In the early stage of the reforms, administrative controls were more significant than tariffs. For example, the tax and trade administration system was more oriented toward control than facilitation (World Bank, 2006). Also, inter-provincial trade of certain agricultural goods was restricted or sometimes forbidden. Other key elements of trade reform included price liberalization, introduction of market-oriented trading systems, and an appropriate legal framework for a market economy. Despite being dispersed, the rates of import duties are relatively low for a developing country. The country‟s level of protection is deemed relatively low with tariff rates having a simple average of 9.6 percent and weighted average of 14.7 percent (Otani and Pham, 1996; Fukase and Martin, 1999; Douangboupha, 2010). The country underwent several reforms in the years that followed, and by 1995 the maximum rate of import duty was reduced from 100 to 40 percent and the number of duty bands were reduced to just six: 5%; 10%; 15%; 20%; 30%; and 40% (Otani and Pham, 1996; Fane, 2006). Table 2 summarizes import duties of some agricultural and manufacturing products, which reflect the outcome of the trade reforms the country has undergone. Tariffs have been greatly reduced for agricultural seeds, machinery and equipment and the so-called luxury goods. A major step in trade liberalization process was the accession to ASEAN in July 1997 and the participation in AFTA in January 1998. Under AFTA, Laos was to complete the 10


Common Effective Preferential Tariff (CEPT) scheme, which was designed to drive down tariffs on manufactured and processed agricultural products to 0-5%, by 2008. Therefore, tariffs on various imported products were gradually reduced; the system of export licensing simplified; and export licensing to protect domestic producers abolished. Also under CEPT, quantitative restrictions on products and non-tariff barriers are to be eliminated. Tariffs are now low and not dispersed (Fukase and Martin, 1999). A chronological summary of trade and investment reforms is presented in Table A2 in the Appendix. Comprehensive documentation of reforms in Lao PDR for the period until mid-1990s is presented in Otani and Pham (1996). For more recent reforms and trade liberalization, readers can refer to Sivalingam (2005), Fane (2006) and Douangboupha (2010). Table 2: Import duties of Laos Post-1993 reforms (%) Agriculture Seeds 20 Fertilizer 5 Other 5 Fisheries 5-10 Stock farming Feed 5 Other 5-30 Manufacturing Raw materials 5-10 Packaging 10-20 Energy 5-15 Machinery and equipment 5-20 Trucks, tractors 5-30 Protected local manufactures 30-80 Luxury consumer goods Food 20-80 Non-food 10-100 Source: Fane (2006), IMF (2005, 2008). Notes: 1) The rates of 2005 persist until 2008.

End 2000 (%)

End 2005 (%)

5 5 5-40 n.a.

n.a. 5 5-40 n.a.

5 5-30

5 5-30

5-10 10-20 5-20 5-20 5-30 30-40

5 5 5-20 5-10 5-30 n.a.

10-30 10-40

10-30 10-40

Although it is still early for a conclusion, the liberalization has brought about some positive development on trade. External trade, as a share of GDP, has increased from about 8% in 1985 to almost 60% in 2005. Exports and imports of goods and services have grown well at an average rate of 13% for the last five years, and recorded a value of U$564 million and U$741 million in 2004, respectively (Table 1). Evidence could also be found in our

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investigation that the number of export product groups5 increased from 39 in 1985 to 178 in 2005. The analysis in the next chapter intends to evaluate the evolutions of RCA and to relate such trends to any trade policies in the corresponding periods.

b. Structure of international trade Commodity and country composition of exports Exports of Laos grew steadily over the study period, from U$21 million in 1985 to U$583 million in 2005. Table 3 presents the shares of export commodity groups at the onedigit SITC. It is clear that over the last 20 years Laos‟ exports have concentrated in some sectors and the structure has changed little. In 1985, „food and live animals‟ (SITC 0) and „crude materials without fuels‟ (SITC 2) dominated the exports, as they made up nearly 93% of the country‟s exports. In 2005 these two groups still accounted for more than one third with the share of SITC 0 decreasing a great deal. The representative of „food and live animals‟ is coffee (SITC 071), and that of „crude materials‟ includes wood and wood products (SITC 247; 248). Table 3: Commodity composition of exports (% share of total) Description

SITC 1985 1990 1995 2000 2005 54.82 4.31 10.14 7.33 5.92 0 Food and live animals 1 0.41 0.06 0.21 Beverages and tobacco 2 37.93 77.04 40.49 33.94 29.69 Crude materials, inedible, except fuels 3 0.05 0.25 0.40 11.25 Mineral fuels, lubricants 4 0.00 0.00 0.00 Animal and vegetable oils and fats 5 0.10 0.08 1.74 0.04 0.28 Chemicals and related products, n.e.s. 6 4.01 7.43 8.68 1.21 16.05 Manufactured goods (class. by material) 7 0.91 0.98 0.26 18.16 1.43 Machinery and transport equipment 8 1.13 10.11 37.45 36.81 31.40 Miscellaneous manufactured articles 9 1.11 1.43 0.30 2.01 3.14 Other commodities and transactions 0-9 21.0 63.4 201.5 349.1 582.7 Total commodity exports (U$ million) Source: Author compiled (data are from UN Comtrade online database). Notes: 1) Due to lack of the unit value index of exports, the index of developing Asian economies was used (base year=2000). 2) For 1985, some partners reported only the total value of bilateral trade with Laos. Hence, the value of total exports used for calculating the shares was lower than those reported here. However, the composition was assumed to persist.

It can also be observed that in the mid-1990s exports of miscellaneous manufactured goods (SITC 8) increased remarkably and since then have made up a large portion of exports. The main products of this category are apparel and clothing (SITC 84) with a share increasing from less than one percent in 1985 to 29% in 2005. The table also reveals another interesting issue namely a sharp increase in mineral fuels category (SITC 3) and basic manufactured goods (SITC 6). 5

In this paper, products or product groups are understood as 3-digit SITC categories.

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The increase in the former is attributable to the inclusion of electricity exports (SITC 351), while the rise in the latter is due to export of copper (SITC 682) in recent years. Laos has long been exporting electricity to Thailand, but the world data for this item has first been reported in SITC Revision 3. The RCA and NE indices could be calculated for 2005 only and would suppress the RCA trends of other commodities. Therefore, electricity was excluded from the RCA analysis. Table 4: Country composition of exports (% share) Trade partners 1985 1990 1995 2000 2005 Thailand 6.50 68.55 29.34 21.43 38.16 Viet Nam n.a. n.a. n.a. 30.29 16.41 France 0.46 4.17 12.45 10.20 8.75 United Kingdom 0.04 0.15 9.29 4.61 7.26 Germany 4.04 2.95 7.89 6.56 5.86 China 49.93 9.61 2.71 1.84 4.30 Belgium 4.31 2.93 Netherlands 0.04 0.38 6.88 3.34 2.40 Malaysia 0.03 0.23 0.00 0.01 2.17 Italy 0.13 0.54 1.54 2.83 1.63 Poland 2.26 0.12 0.29 0.02 1.36 Japan 7.40 7.22 12.45 3.43 1.35 Australia 5.28 0.06 0.05 0.15 1.14 Subtotal 1-13 76.10 93.98 82.88 89.02 93.73 Other partners 23.90 6.02 17.12 10.98 6.27 Source: Author compiled. Notes: 1) “n.a.” indicates that the data were not available. 2) “-” means that the data was not reported by the respective trade partner, and hence, it is assumed that Laos did not export to such countries. 3) For 1985-1995, Germany included former East Germany and West Germany. 1 2 3 4 5 6 7 8 9 10 11 12 13

In regard to export destinations, Laos‟ leading export markets are Thailand and Vietnam, which comprised about 38% and 16% of the country‟s exports in 2005, respectively (Table 4). Other major partners are some EU member countries, China, Malaysia, Japan and Australia. Since trade data for Vietnam are available only for 2000 and 2005, the country composition of exports of these years differs significantly from earlier years covered here. It is also interesting to note that the increase in exports to EU countries is due to a significant increase in garment exports. Thus, it can be expected that the country composition of Laos‟ exports for recent years would be similar to that of 2000 and 2005 6 , but the commodity composition would not differ from the pattern presented in Table 3. 6

Owing to availability of Vietnam‟s trade data in the Comtrade database, we have calculated the country composition of Laos‟ exports for 1997-2005. It revealed that Vietnam‟s share in exports of Laos increased from 18% (Thailand=19%) in 1997 and surpassed that of Thailand, and peaked at 47% in 1999. Since then, however, it has decreased and leveled at about 17%. The share of exports to Thailand, on the other hand, first decreased in the years following the financial crisis, but started to rise in 2000 and surpassed the share of Vietnam in 2001. The average share of Thailand and Vietnam over the period is 24% and 23%, respectively. Hence, our aforesaid argument on country composition of exports of year 2000 and 2005 being representative can be justified.

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Table 5: Commodity composition of imports (% share of total) Description Food and live animals Beverages and tobacco Crude materials, inedible, except fuels Mineral fuels, lubricants Animal and vegetable oils and fats Chemicals and related products, n.e.s. Manufactured goods (class. by material) Machinery and transport equipment Miscellaneous manufactured articles Other commodities and transactions Total commodity imports (U$ million)

SITC 0 1 2 3 4 5 6 7 8 9 0-9

1985 6.56 0.74 0.14 19.55 0.06 10.06 22.55 28.80 8.26 3.28 60.7

1990 10.08 0.83 0.25 5.57 0.23 8.76 18.79 46.86 6.79 1.88 120.2

1995 8.68 8.88 0.25 7.83 0.26 6.53 21.62 35.27 6.11 4.62 533.6

2000 6.89 6.86 2.38 11.70 0.28 6.39 22.94 35.82 4.92 1.67 601.9

2005 8.67 5.27 0.83 18.35 0.30 7.60 20.98 29.93 5.20 2.75 1,019.7

Source: Author compiled. Note: Due to lack of the unit value index of imports, the index of developing Asian economies was used (base year=2000).

Commodity and country composition of imports Table 5 presents the commodity composition of imports. We can observe that most of Laos‟ imports are material inputs and equipment, and fuels for production. The country‟s imports mainly consist of petroleum oils; textile yarn and fabrics; non-metallic minerals; iron and steel; machinery and industrial machines; electrical machines; and road vehicles. Among consumer goods, beverages show a higher share. Unlike exports where high shares can be found at the three-digit level, imports of Laos are much more widespread except for petroleum oils with a share of 17% in 2005. With respect to suppliers, the country composition is relatively similar to that of exports. Thailand, China and Vietnam have been the main suppliers for Laos 7, followed by partner countries in East Asia, Australia and the EU (Table 6). Particularly, Thailand has maintained a share of more than 60% over the last decade. It is worth noting that the share of Japan and Singapore, which together was about 44% in 1985, decreased to less than 6% in 2005. The share of China has been fluctuating, increasing from 7% in 1990 to a peak at 14% in 2003 and falling to 9% in 2005. Like the case of exports, the import structure of 2000 and 2005 is quite different from the other years covered here owing to the availability of Vietnam‟s trade data.

7

Similar to the case of exports, the composition of Laos‟ imports for 1997-2005 also revealed that Thailand was the main supplier, followed by Vietnam and China. On average, Thailand supplied 63%, Vietnam 13% and China 7% in Laos‟ import markets. Hence, the composition of year 2000 and 2005 could be regarded as representative.

14


Table 6: Country composition of imports (% share) Trade partners 1985 1990 Thailand 39.35 56.94 China n.a. 6.90 Viet Nam n.a. n.a. Singapore 20.01 Japan 23.51 16.76 Australia 0.09 1.11 Korea Belgium France 2.84 2.50 Germany 3.42 1.06 Subtotal 1-10 89.22 85.26 Other partners 10.78 14.74 Source: Author compiled. Note: See notes in Table 4 for explanations. 1 2 3 4 5 6 7 8 9 10

1995 63.25 8.52 n.a. 7.27 5.01 3.63 4.31 0.85 92.84 7.16

2000 63.26 5.69 11.42 4.94 3.53 0.65 0.74 0.22 2.76 0.54 93.76 6.24

2005 68.87 9.26 6.20 3.58 1.75 1.62 1.25 1.01 0.96 0.92 95.41 4.59

It is worth noting here that to some extent the structure of Laos‟ trade of the 1980s – the commodity and country composition of exports and imports – might be affected by (i) the absence of data on trade with Vietnam and COMECON member countries and (ii) by the absence of information on border trade with Thailand, Vietnam and China.

5

Empirical Analysis Using equation (1) and (2) we calculated the export performance index and net export

index for 1985, 1990, 1995, 2000, and 2005. The RCA and NE indices calculated at the threedigit level of the SITC are presented in Table A3 in the Appendix. It should also be noted that the product items at the four-digit or higher levels included in the three-digit level might differ from one another in some cases owing to the changes in the revisions of the SITC applied in the study. With respect to performance, the two indices show similar behavior in identifying products with RCA as indicated by relatively high values of Spearman rank correlation coefficients (Table 7). Table 7: Correlation between RCA and NE indices RCAxNEI 1985 1990 1995 2000 2005 SRC Coefficient 0.754 0.840 0.874 0.799 0.824 Sample size 30 77 91 111 175 Source: Author‟s calculations. Notes: 1) SRC=Spearman rank correlation coefficients are applied. 2) All coefficients are statistically significant at the 1% level.

5.1

Trends of revealed comparative advantages It is apparent that for the early years of the study period the two indices were missing

for many products (see Table A3). This could be explained by the fact that Laos‟ export commodities were actually very limited to some agricultural products; wood and wood 15


products; and clothing, because prior to the transition initiative trade in Laos was less liberalized and the export sector was much smaller (see also Table 1). Similar to the case of trade shares, some further plausible reasons for large changes in the indices of RCA between 1985 and 1990 include (i) the lack of data for Vietnam and for some COMECON member countries during this period and (ii) the lack of information on information on border trade with Thailand, Vietnam and China. Overall, the RCA index and NE index revealed very similar products with comparative advantage. Some products like live animals (SITC 001); coffee (SITC 071); wood and simple wood products (SITC 245-248); crude vegetable materials (SITC 292); industrial wood products (SITC 634, 635); and apparel and clothing (SITC 841-846) have maintained high RCA, thereby reflecting the concentration areas or product groups of Lao exports (see also Table 3). In addition, we can observe that the following products have gained comparative advantages over the years: maize and cereal (SITC 044; 045); vegetables (SITC 054); preserved fruits (SITC 058); copper (SITC 682); furniture (SITC 821); footwear (SITC 851); and office stationery supplies (SITC 895). These product groups have shown an increasing trend in RCA. Some of them have moved to a positive index, while others are still carrying a negative one, but they could be regarded as products with potential for export. Apart from those mentioned above, the country does not appear to have comparative advantages in product items of beverages and tobacco (SITC 1), chemical products (SITC 5), and vehicle and transport equipment (SITC 7). It is observed that while having gained comparative advantage in apparel and clothing, Laos seems to lose comparative advantage in travel goods and hand bags (SITC 831), and non-textile clothing and headgear products (SITC 848) (see Section 5.3. for more explanation). With regard to export items, the 2000-list is also somewhat unusual, since „motor cycles‟ (STIC 785) with an unusually large share of 18% ranked second, but quickly disappeared in the following year. This short-lived change in RCA trends was caused by a temporarily large export to Vietnam. In addition, between 2000 and 2005 there were some new comers in the high RCA-product list, namely „jute and textile baste fibres‟; „stone, sand and gravel‟; and „copper‟, which noticeably gained competitiveness. This trend would reflect the outcome of government policy on investment promotion and improvement of investment climate. For example, data on FDI for the period 2000-2008 show that in terms of investment value the mining sector is second only to hydropower, while agriculture and industry rank fifth and sixth, respectively (Onphanhdala and Suruga, 2010, Figure 3). With regard to the legal framework, the law on FDI was first promulgated in 1988, subsequently revised in the 16


1990s and 2000s, and recently unified with the law on domestic investment (for more detail see Onphanhdala and Suruga, 2010). Furthermore, a boom in the resource sector could have contributed to a rise in indices of RCA in the 2000s. The drastic development and expansion in this sector would be more clearly captured in the latter half of the first decade of 2000s.

5.2

Diversification of exports In this section three indicators are applied to investigate the export patterns and the

similarities/differences of the export composition throughout the years. Table 8 shows some characteristics of high RCA and high NEI products for 1985-2005. First, it is apparent that, by any measures, the number of products with comparative advantage and total ranked products increased remarkably. However, for the RCA index the ratio between them remained roughly unchanged at an average of 0.21, suggesting that the number of export items and those gaining RCA increase at a similar pace (comparable percentage increase in both categories). On the other hand, the NE measure decreased steadily from 0.37 to 0.19, implying that intraindustry imports tend to expand faster than intra-industry exports in individual product groups. The concentration of the exports is also revealed in this table. Except for 1985 with data being more problematic than later years, a rather small number of products with comparative advantage comprise 78% to 96% of the country‟s exports. Table 8: Products with high RCA and NE indices and standard deviation RCA Index High RCA products (A) Total ranked products (B) Ratio of high RCA products to total (A)/(B) Total share of high RCA products (% share)

Standard deviation Sample size NE Index High NEI products (A) Total ranked products (B) Ratio of high NEI products to total (A)/(B) Total share of high NEI products (% share)

Standard deviation Sample size Source: Author‟s calculations.

1985 8 39 0.21 42.20 0.947 39 1985 11 30 0.37 42.16 0.847 30

1990 20 86 0.23 96.20 1.072 86 1990 24 78 0.31 94.67 0.779 78

1995 23 98 0.23 96.03 1.300 98 1995 26 92 0.28 95.20 0.794 92

2000 22 116 0.19 96.50 1.390 116 2000 25 111 0.23 77.82 0.724 111

2005 33 178 0.19 93.12 1.366 178 2005 34 175 0.19 89.24 0.669 175

At the one-digit level, the increase in the number of products with high RCA mainly occurred in the category of food and live animals (SITC 0); inedible crude materials without fuels (SITC 2); and manufactured goods (SITC 6 and 8). In other categories, there were products with RCA index and/or NE index above zero, and this is often a special case. For

17


example, in „mineral fuels-lubricants‟ category (SITC 3) there was only one high RCA product in 2005, i.e. coal (SITC 321), which has been extracted for exporting and supplying a thermal power plant in Thailand. Hence, one can observe that in spite of an increasing trend in export commodities, Laos‟ exports were still concentrated in those sectors/industries illustrated above. The second indicator in the table was the standard deviation of the RCA and NE indexes. If the range of a country‟s export commodities becomes more diversified, the standard deviation of the indices of revealed comparative advantage is expected to decline. However, in this case the standard deviation of the NE index remained largely unchanged at 0.7, while that of the Balassa‟s index increased from 0.95 to 1.4 over the period under study. This would also imply that the exports of Laos have not diversified in the last two decades. Finally, to measure the similarities/differences in the export composition between two periods we calculated the Spearman rank correlation coefficients for 1985-2005 (Table 9). If the export diversification occurred over time, the correlation coefficients would become smaller, the longer the time lags. In the case of Balassa‟s index, the correlation coefficient showed a decreasing trend from 0.7 for shorter time lags (5-10 years) to 0.5 for longer time lags (15 years or longer). For the net export measure, a similar trend could be observed with a somewhat higher range of the correlation coefficient (0.8-0.6). Overall, this result indicated that despite showing a diversification trend the export patterns between two periods (five-year interval) were still highly correlated and quite similar to each other, in some cases even for a longer time lag. All the three indicators lend support to our argument that the export patterns of Laos have been largely unchanged and diversification was not significant during the study period. Table 9: Spearman rank correlation coefficients RCAxRCA 1985 1990 1995 2000 1985 1.000 0.615 0.710 0.408 1990 1.000 0.669 0.665 1995 1.000 0.750 2000 1.000 2005 NEIxNEI 1985 1990 1995 2000 1985 1.000 0.718 0.643 0.600 1990 1.000 0.681 0.726 1995 1.000 0.736 2000 1.000 2005 Source: Author‟s calculations. Note: All coefficients are statistically significant at the 1% (exception: RCA index of 2000 is significant at the 5% level).

18

2005 0.478 0.490 0.654 0.755 1.000 2005 0.666 0.622 0.729 0.789 1.000 level


5.3

Rankings and trends in RCA of major sectors and industries This section looks into the trade liberalization in more detail and examines the trends

in comparative advantages of major sectors and industries. Table A3 provides detailed information on indices of revealed comparative advantage and the percentage share of major export products. At the level of sector 8 or industry, agriculture and wood processing maintained high ranks for the whole study period, while crude material exports dominated the list until early 1990s. These are some of traditional export products of Laos. On the other hand, apparel and clothing industry entered the top-ten list in early 1990s and since then has dominated the rankings, reflecting the start and development of the industry (Vixathep, 2011). In recent years the mining industry has occupied a significant share in exports and has been among the top-ten products in terms of revealed comparative advantage. This is most likely attributed to the government policy promoting investment and development in the mining sector (see also Section 5.1). Table 10: Export ratio of major sectors (in percentage) Sector Cereals and cereal preparations Vegetables and fruit Coffee, tea, cocoa, spices A. Subtotal of ‘food and live animals’ (SITC 0) Cork and wood Metalliferous ores and metal scrap Crude animal and vegetable materials, n.e.s. B. Subtotal of ‘crude materials’ (SITC 2) Cork and wood manufactures (excl. furniture) Iron and steel Copper C. Subtotal of ‘manufactured goods’ (SITC6) Articles of apparel and clothing accessories Footwear D. Subtotal of misc. manuf. articles (SITC 8) Subtotal (A+B+C+D)

SITC 04 05 07 0 24 28 29 2 63 67 682 6 84 851 8

1985 0.06 25.43 25.50 15.00 0.26 1.69 16.96 0.44 0.44 0.36 0.36 43.25

1990 0.01 0.08 4.01 4.09 58.34 14.13 2.88 75.35 2.32 4.39 0.00 6.72 9.39 0.03 9.42 95.58

1995 0.06 1.23 8.80 10.09 37.86 1.13 0.99 39.98 3.69 0.06 4.20 7.94 36.36 0.23 36.59 94.61

2000 0.04 0.57 5.12 5.73 31.64 0.75 0.69 33.08 0.95 0.01 n.a. 0.95 35.70 0.99 36.69 76.46

2005 1.85 1.20 2.82 5.87 29.62 0.61 0.76 30.99 1.84 0.01 14.55 16.39 32.92 1.28 34.20 87.45

Source: Author‟s calculations. Note: 1) The share of the one-digit level (SITC section) is the sum of the share of the two- and three-digit items presented here. 2) The unusually low share of 2000 is due to the fact that „motor cycles‟ (SITC 785) with 18% share is not included here.

In addition to the RCA rankings, the determination of major sectors/industries is based on the significance of such sectors/industries in terms of export share. Table 10 summarizes the percentage share of the major export commodities. These are „coffee, tea, spices‟; „wood, metalliferous ores, crude materials‟; „wood manufactures, iron and steel, copper‟; and

8

In this analysis, the notion „sector‟ is used to distinguish the agricultural product groups, such as coffee and spices, from those of mining and manufacturing industries such as copper, apparel articles, and the like.

19


„garment and footwear industry‟. Between 1990 and 2005 these sectors and industries together comprised about 76% to 96% of the country‟s exports and constituted the main commodities of Lao exports. Table 11 presents the RCA and NE indices and the rankings of these sectors and industries in detail. Also, for the purpose of comparison among sub-periods, the ranks of the indices were adjusted, i.e. these would be the ranks when the total number of ranked items was assumed to be 178 for RCA index and 175 for NE index. The following analysis is mainly based on Table 11, Table 12 and Table A3.

a. Agricultural sector (coffee) Representing the agricultural sector, coffee and live animals were among the high RCA/NEI products. Coffee (SITC 071) is a traditional export item, which has been exported to many countries, including ASEAN members, Japan, USA, Eastern Europe, and the EU members. In 2005, out of 38 countries in the sample 17 imported coffee from Laos. The export value increased steadily from U$5.1 million in 1985 to U$14.4 million in 2005. As Laos‟ exports expanded significantly during this period, its share declined from 24% to just 3%.. Table 11: RCA and NEI ranking trends of selected commodities SITC

1985

1990

RCA

Raw rank

Adj. rank

071 682

1.51

3/39

14/178

1.20

-

-

-

-2.21

24

1.31

245

-

RCA

Raw rank

1995 Adj. rank

RCA

5/86

10/178

1.43

83/86

172/178

0.76

1.80 -

Raw rank

2000

2005

Adj. rank

RCA

Raw rank

Adj. rank

RCA

Raw rank

Adj. rank

3/98

5/178

1.44

5/116

8/178

1.26

9/178

9/178

11/98

20/178

-

-

-

1.38

7/178

7/178

1.68

1.75

1.79

-

1.19

6/86

12/178

0.95

9/98

16/178

1.51

3/116

5/178

1.00

12/178

12/178

246

-

-

-

0.23

16/86

33/178

-0.30

26/98

47/178

-0.90

39/116

60/178

-0.54

49/178

49/178

247

1.64

2/39

9/178

1.73

3/86

6/178

1.74

1/98

2/178

2.19

1/116

2/178

1.79

4/178

4/178

248

0.88

4/39

19/178

1.87

1/86

2/178

1.68

2/98

4/178

1.50

4/116

6/178

1.83

3/178

3/178

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

071 682

0.99

4/30

23/175

0.99

7/78

16/175

0.99

7/92

13/175

0.88

11/111

17/175

0.51

25/175

25/175

-

-

-

-0.93

53/78

119/175

0.90

15/92

29/175

-

-

-

0.99

5/175

5/175

24

0.99

245

-

0.99 -

-

0.96

1.00 5/68

0.99

13/174

0.97

8/92

15/175

-

1.00 -

-

0.99

5/175

5/175

246

-

-

-

-

-

-

0.93

12/92

23/175

-

-

-

0.94

10/175

10/175

247

1.00

1/30

6/175

1.00

1/78

2/175

1.00

1/92

2/175

1.00

1/111

2/175

1.00

1/175

1/175

248

0.99

5/30

29/175

0.99

6/78

13/175

1.00

1/92

2/175

0.99

6/111

9/175

1.00

1/175

1/175

Source: Author‟s calculations. Note: The adjusted rankings (adj. rank) are the rankings that would prevail when the total number of ranked items was assumed to be 178 for RCA index and 175 for NE index.

However, coffee is the only agricultural product which has retained high comparative advantage and was among the top-ten products for the whole study period (Table A3). Its RCA ranking varied between 3rd in 39 and 9th in 178 products (4/30 and 25/175 for NE 20


index). If the rankings were adjusted to 178, its RCA ranking actually increased from 14th to 9th (Table 11). On the other hand, despite a positive RCA index, „live animals‟ did not occupy a significant portion of exports until 2000. Export of live animals lost their comparative advantage in the 1990s, but could regain some competitiveness in the following years (Table A3). The improvement of the comparative advantage in recent years is attributable to an increase in demand for meat in the neighboring countries - Thailand and Vietnam. It should be borne in mind that the analysis of international trade in this paper is based on recorded or formal trade data. For some of agricultural products, for examples, cattle, buffaloes, and other live animals, informal trade with neighboring countries is said to have gone unrecorded for some time. Also, informal trade with China includes some non-timber forest products, such as medical herbs, fibers, resin, forest foods, etc. (World Bank, 2006). This portion of trade might exert some impacts on the structure of Laos‟ international trade and comparative advantages. However, since it is not captured and/or recorded in the database, a quantitative analysis of such informal/border trade is beyond the scope of this analysis.

b. Mining industry (copper) The representative for the mining industry and the resource sector is copper (SITC 682). Copper, with an RCA index of -2.21 and an insignificant share, was among the lowest RCA products in 1990. However, it has steadily gained competitiveness, with its RCA and NE indices eventually turning positive in 1995. In 2005, with an export value of U$75.8 million, copper amounted to about 15% the country‟s total exports and was exported to China, Japan, Malaysia, Poland, Singapore, Thailand and Vietnam. Its ranks improved from 83/86 (53/78 for NE) in 1990 to 7/178 (5/175 for NE) in 2005 (Table 11). The recent sharp increase in copper exports is an outcome of a large FDI mining project in Savannakhet Province reflecting some of the success of the government in promoting FDI. Apart from copper, Laos has exported gold for sometime, particularly in the early phase of the copper-gold mine in Savannakhet Province, which would reflect the starting point of the boom in the resource sector more clearly. However, the data of gold exports is not available in the Comtrade. Thus, its comparative advantage cannot be addressed quantitatively in this analysis. Currently, the Lao resource sector is experiencing a boom with large FDI inflows, particularly investment from Chinese and Vietnamese investors. Given the investment promotion by the government and the recent boom in this sector, it is expected to be further developed with increasing share in the Lao economy in near future. Coupled with increased 21


FDI and large ODA inflows, this expansion would undoubtedly have some effect on the development of other sectors/industries. It might draw labor and financial resources from other sectors and/or drive up the Kip value and suppress the competitiveness of other manufacturing industries and trade activities. However, such impacts and trends would show up in more recent years (beyond 2005), which are not covered in this RCA analysis.

c. Wood processing industry The wood industry was among the leading exporting commodities for the whole period in terms of competitiveness and export share (Table A3). The industry mainly consists of fuel wood and wood charcoal (SITC 245), wood in chips or particles (SITC 246), wood in rough or squared (SITC 247) and simply worked wood (SITC 248). The export markets for these products are largely Asian economies (China, Japan, Korea, Thailand, Vietnam), and some European countries like Austria, Belgium, Bulgaria, France, Ireland, Italy and the UK. The value of exports steadily increased from U$3.2 million in 1985 to U$154 million in 2005. This industry has maintained high competitiveness with its RCA index varying between 1.31 and 1.80 (NE index was almost 1.00). Two representatives, „simply worked wood‟ and „wood in rough or squared‟, were among the top-five high RCA products with significant share in exports for the whole period under study. In 1990 these two commodities made up nearly 60% of the country‟s exports, and between 1995 and 2005 they accounted for 30%-38% (Table A3). Another product – fuel wood and wood charcoal – was also among the first ten high RCA products for much of the period, although their absolute RCA index decreased and its adjusted rank varied between 5/178 and 16/178. On the other hand, „wood in chips or particles‟ (SITC 246) has lost its competitiveness. Its RCA index decreased from 0.23 in 1990 to -0.54 in 2005 and its adjusted RCA rank dropped from 33/178 to 49/178 (Table 11). Although exportation of logs and unprocessed wood has been limited and reduced, Laos would still continue to export wood and wood products in the future with an emphasis on wood products and furniture. However, as in the case of garment exports, the country tends to have more RCA in product items with lower value added, and lower requirements in skills and knowledge. d. Garment and footwear industry Products of the apparel and clothing industry include: not-knitted men‟s and women‟s cloth (SITC 841, 842); knitted men‟s and women‟s cloth (SITC 843, 844); articles of textile apparel (SITC 845); textile clothing accessories (SITC 846); and non-textile clothing and

22


headgear (SITC 848)9. In 1985 there was only not-knitted women‟s outwear (SITC 843) in the rankings with an RCA index of -0.88 and a rank of 23/39. However, this industry started to gain competitiveness in 1990 with one product among the top-ten commodities. In the following years this industry has dominated the exports of Laos with three to five garment products ranking among the first ten high RCA items (Table A3). Together with footwear products (SITC 851), their export value increased by more than 2000-fold from about U$75,000 in 1985 to U$178 million in 2005, and comprised more than 34 percent of the country‟s total export earnings (31% if electricity is taken into account). This trend reflects a production shift in the global garment industry from newly industrialized economies to developing countries in Asia. Laos can also enjoy some comparative advantage in laborintensive industries owing to its low labor costs. The garment industry is one of the most dynamic industries in the last two decades. Particularly, the 1995 marked a peak year for this industry with five products: men‟s and women‟s outwear, not-knitted (SITC 842, 843); undergarment, knitted and not--knitted (SITC 846, 844); and non-elastic outwear, knitted (SITC 845); ranking between 4th and 10th among 98 products (between 7th and 18th in adjusted scale). In the following years, however, this industry has lost some competitiveness. In 2000 and 2005, only three garment products: knitted men‟s and boys‟ cloth (SITC 841), not-knitted men‟s and boys‟ cloth (SITC 843), and articles of apparel (SITC 845) were among the top-10 items (Table 12). Causes for such trends are complex and may include the phase-out of the MFA, increased competition at the global garment market, recent booms in other sectors (power and resource sectors) which draw both financial (FDI) and labor resources from the garment industry, etc. In addition, the Lao garment industry heavily relies on MFA, but the complicated rules of origin often constrain the full exploitation of Laos‟ quota offered by the EU under the GSP scheme (Vixathep, 2011). At the three-digit level, one can observe different trends in comparative advantage of garment products during the study period. Specifically, in lieu of some fluctuations, notknitted and knitted women‟s and men‟s clothing (SITC 841-844), and articles of apparel (SITC 845) are shown to gain competitiveness steadily. Their comparative advantage (in absolute terms, raw rankings and adjusted rankings) has improved during this period. In contrast, the textile clothing accessories (SITC 846) and non-textile clothing and headgear

9

SITC Revision 2 description includes: men‟s outwear, not-knitted (SITC 842); women‟s outwear, not-knitted (SITC 843); undergarment, not-knitted (SITC 844), non-elastic outwear, knitted (SITC 845); undergarment, knitted (SITC 846); textile clothing accessories (SITC 847); and non-textile clothing and headgear (SITC 848).

23


(SITC 848) have lost their competitiveness with RCA index in absolute terms and RCA rankings decreasing over the period (Table 12). These products belong to the higher-end groups of the respective industries, which usually require more capital, labor skills, and knowledge (design). This implies that Laos tends to specialize in some less sophisticated products with lower degrees of requirement in capital, labor skill and know-how. Table 12: RCA and NEI ranking trends of garment products SITC

1985 RCA

1990

Raw rank

Adj. rank

RCA

1995

Raw rank

Adj. rank

Adj. rank

Adj. rank

Raw rank

Adj. rank

841

-

-

-

-

-

-

-

-

-

1.30

6/116

9/178

1.32

8/178

8/178

842

-

-

-

0.80

9/86

19/178

1.30

4/98

7/178

0.68

13/116

20/178

0.83

14/178

14/178

843

-0.88

23/39

105/178

0.43

14/86

29/178

0.85

10/98

18/178

1.28

7/116

11/178

1.38

6/178

6/178

844

-

-

-

0.21

17/86

35/178

1.26

5/98

9/178

0.47

14/116

21/178

0.77

16/178

16/178

845

-

-

-

0.44

13/86

27/178

1.06

7/98

13/178

1.18

8/116

12/178

1.19

10/178

10/178

846

-

-

-

0.48

12/86

25/178

1.12

6/98

11/178

-0.24

27/116

41/178

-0.23

42/178

42/178

848

-

-

-

-0.84

39/86

81/178

-1.39

56/98

102/178

-0.51

30/116

46/178

-1.31

76/178

76/178

851

-

-

-

-1.46

59/86

122/178

-0.55

28/98

51/178

0.13

20/116

31/178

0.31

24/178

24/178

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

NEI

Raw rank

Adj. rank

-

-

-

-

-

-

-

-

0.99

7/111

11/175

0.98

7/175

7/175 12/175

841

-

0.41

1.05

RCA

-0.77

-0.93

1.06

RCA

2005

Raw rank

84

84

0.46

RCA

2000

Raw rank

0.91

1.08

0.92

0.88

842

-

-

-

0.72

17/78

38/175

0.96

9/92

17/175

0.91

10/111

16/175

0.93

12/175

843

-0.98

27/30

158/175

0.73

16/78

36/175

0.88

16/92

30/175

0.81

14/111

22/175

0.96

8/175

8/175

844

-

-

-

1.00

1/78

2/175

1.00

1/92

2/175

0.88

12/111

19/175

0.70

20/175

20/175

845

-

-

-

0.38

21/78

47/175

0.95

11/92

21/175

0.95

8/111

13/175

0.88

14/175

14/175

846

-

-

-

0.43

20/78

45/175

0.99

6/92

11/175

-0.60

40/111

63/175

-0.66

56/175

56/175

848

-

-

-

-0.83

40/78

90/175

-0.92

48/92

91/175

0.16

25/111

39/175

-0.86

67/175

67/175

851

-

-

-

-0.98

63/78

141/175

-0.76

37/92

70/175

0.20

22/111

35/175

0.15

32/175

32/175

Source: Author‟s calculations. Note: The adjusted rankings (adj. rank) are the rankings that would prevail when the total number of ranked items was assumed to be 178 for RCA index and 175 for NE index.

The footwear industry has also proved a dynamic industry with high potential for development and export. In 1990, footwear products recorded a RCA index of -1.46 and a rank of 59/86 (122/178). However, during the period of study this industry achieved an upward trend in comparative advantage and reached a positive RCA index in 2000, and by 2005 it ranked 24th among 178 products (Table 12). To realize the export potential the country would need to invest more on labor skills development, attract more capital and more advanced technologies, and promote more sophisticated designs, etc.

6

Conclusion In view of testing the hypothesis whether the structure of external trade and the

revealed comparative advantages of Laos have changed over the last two decades as a result 24


of trade liberalization, this paper examined the patterns of international trade for the period 1985-2005. In order to infer the country‟s comparative advantages, the empirical analysis applied the export performance index and the net export index to measure the revealed comparative advantage. Using trade data reported by 38 trade partners, the two indices of RCA were calculated for all available commodities in Comtrade at the three-digit level of the SITC. The use of partners‟ trade data from international sources has some merits that the data have been streamlined to international recording system (SITC of the United Nations). Hence, this analysis captures only formal trade between Laos and her partners. However, the import and export values applied in this study would differ somewhat from the actual values (particularly for the early stage of the reforms), had domestic trade data been available or informal/border trade been captured. Yet, the analysis in this paper mainly focuses on trends of RCA and hence would not be affected much by the use of partner countries‟ data in Comtrade. Especially, the discrepancy would be much smaller for recent years, as the number of reporting countries has been increased and the quality of data improved. With respect to export commodities, our results lend support to the findings of Hara and Shuto (2005) that the exports of Laos comprise largely of some cash crops and unprocessed agricultural products (e.g. raw hides and skins, coffee, spices); resource-based commodities (e.g. wood and wood products, copper); and products of labor-intensive industries (e.g. apparel and clothing industry). At the product-level, coffee, wood and wood products are the leading export commodities, both in terms of value and competitiveness. During this period, Laos‟ revealed comparative advantages have moved from agricultural commodities to light and labor-intensive industries reflecting some outcome of the outwardlooking and FDI promoting policies of the government at the current stage of the industrialization process. Among the industries gaining comparative advantages, the clothing industry has proved to be one of the most dynamic industries. In terms of diversification, by all measures, the structure of Laos‟ exports has been rather rigid and little diversification occurred during the study period. These findings would imply that the accession to ASEAN and joining AFTA have so far not brought the expected positive effects to the country‟s competitiveness. On the other hand, intra-industry diversification has been found to occur in the wood processing and garment industry. In other words, specialization tends to occur in the simple product lines (e.g. simply worked wood; wood in rough or squared; men‟s and women‟s cloth), while the more sophisticated commodities like wood manufactures and non-textile clothing have not gained competitiveness. These findings would partly point to the fact that the skill levels of Lao labor 25


force are not yet sufficient to meet investors‟ requirements for more sophisticated products with higher value added. Based on the above findings, it can be concluded that Laos has largely been following the neoclassical path of comparative advantages. The industrialization in Laos, as indicated by her revealed comparative advantages, is still in the early stage with a dominance of some resource-based and labor-intensive industries. The country could, however, use these industries as a base for her industrialization process. Laos is in need of better infrastructure – both physical and institutional, adequate human resources and the like, to be able to develop such industries and sectors which have the potential for export (e.g. footwear, more sophisticated garment products, and processed mining products). Also, appropriate and sound trade and industrial policies should be put in place to realize the potential of such industries, and thereby diversifying the country‟s exports and moving to higher value-added products. It has been expected that trade liberalization would bring about improvement in the country‟s comparative advantages and export diversification, yet the empirical evidence has lent support only in limited cases. However, it should be borne in mind that Laos‟ international trade is also affected by many other factors, both internal elements (trade policies, reform agenda, institutions of a market economy, DFI policies, integration, geographical location, etc.) and external elements (trade policies and trade procedures of neighboring and other partner countries, etc.) Such factors have not been quantitatively addressed in this study and could be an area for further analysis on trade, particularly in a relation with FDI and resource sectors.

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_________________________________. (1987), “Consistency tests of alternative measures of comparative advantage”, Review of Economics and Statistics, 69, pp. 157-61. Bojnec, S. (2001), “Trade and revealed comparative advantage measures”, Eastern European Economics, 39, pp. 72-98. Bowen, H. P. (1983), “On the theoretical interpretation of indices of trade intensity and revealed comparative advantage”, Weltwirtschaftliches Archiv, 119, pp. 464-72. __________. (1985), “On measuring comparative advantage: A reply and extension”, Weltwirtschaftliches Archiv, 121, pp. 351-54. __________. (1986), “On measuring comparative advantage: Further comments”, Weltwirtschaftliches Archiv, 122, pp. 379-381. Deardorff, A. V. (1980), “The general validity of the law of comparative advantage”, Journal of Political Economy, 88, pp. 941-57. Donges, J. B. and Riedel, J. (1977), “The expansion of manufactured exports in developing countries: An empirical assessment of supply and demand issues”, Weltwirtschaftliches Archiv, 113, pp. 58-87. Douangboupha, L. (2010), “Effects of trade policy reforms on economic growth: The case of Lao P.D.R.”, Lao Trade Research Digest, 1, pp. 59-96. Fane, G. (2006), “Trade liberalization and poverty reduction in Lao PDR”, Journal of the Asia Pacific Economy, 11, pp. 213-226. Fukase, E. and Martin, W. (1999), Economic effects of joining the ASEAN Free Trade Area (AFTA): The case of the Lao People’s Democratic Republic. World Bank: Washington, DC. Hara, Y. and Shuto, H. (2005), Trade structures and export competitiveness in Lao PDR and the East Asian countries. In Main Report on Macroeconomic Policy Support for Socio-economic Development in Lao PDR (Phase II) of Committee for Planning and Investment and Japan International Cooperation Agency, pp. 7-24. Hillman, A. L. (1980), “Observations on the relation between „revealed comparative advantage‟ and comparative advantage as indicated by pre-trade relative prices”, Weltwirtschaftliches Archiv, 116, pp. 315-21. Hirsch, S. (1974), “Capital or technology? Confronting the neo-factor proportions and neotechnology accounts of international trade”, Weltwirtschaftliches Archiv, 110, pp. 535565. IMF. (2000), Lao People’s Democratic Republic: Recent economic developments. IMF Staff Country Report No.03. International Monetary Fund: Washington, DC. IMF. (2005), Lao People’s Democratic Republic: Selected issues and statistical appendix. IMF Country Report No. 05/9. International Monetary Fund: Washington, DC. IMF. (2008), Lao People’s Democratic Republic: Statistical appendix. IMF Country Report No. 08/340. International Monetary Fund: Washington, DC. Lao PDR. (2005), National growth and poverty eradication strategy. Lao People‟s Democratic Republic: Vientiane. Lee, J. (1995), “Comparative advantage in manufacturing as a determinant of industrialization: The case of Korea”, World Development, 23, pp. 1195-214. Lim, K-T. (1997), “Analysis of North Korea‟s trade by revealed comparative advantages”, Journal of Economic Development, 22, pp. 97-117. Marchese, S. and De Simone, F. N. (1989), “Monotonicity of indices of „revealed‟ comparative advantage: Empirical evidence on Hillman‟s condition”, Weltwirtschaftliches Archiv, 125, pp. 158-67. Menon, J. (1999), “Lao PDR in the ASEAN free trade area”, Journal of the Asia Pacific Economy, 4, pp. 340-64.

27


Ministry of Industry and Handicraft. (2005), Report on the implementation of the fifth fiveyear industrial and handicraft development plan (2001-2005), and the sixth five-year plan (2006-2010)[Lao language]. Ministry of Industry and Handicraft: Vientiane. Onphanhdala, P. and Suruga, T. (2010), “FDI and investment climate in Lao P.D.R.”, Lao Trade Research Digest, 1, pp. 31-58. Otani, I. and Pham, C. D. (1996), The Lao PDR: Systemic transformation and adjustment, IMF Occasional Paper No. 137. International Monetary Fund: Washington, DC. Petri, P. A. (1988), “Korea‟s export niche: Origins and prospects”, World Development, 16, pp. 47-64. Sivalingam, G. (2005), Competition policy in the ASEAN countries. Thomson Learning: Singapore. Uchida, Y. and Cook, P. (2005), “The effects of competition on technological and trade competitiveness”, Quarterly Review of Economics and Finance , 45, pp. 258-83. ___________________. (2005), “The transformation of competitive advantage in East Asia: An analysis of technological and trade specialization”, World Development, 33, pp. 701-28. UNIDO. (1982), Changing patterns of trade in world industry: An empirical study on revealed comparative advantage. United Nations Industrial Development Organization: Vienna. _______. (1986), International Comparative Advantage in Manufacturing: Changing profiles of resources and trade. United Nations Industrial Development Organization: Vienna. United Nations Statistics Division. (2007), UN Comtrade Database. Available from URL: http://comtrade.un.org/ [Accessed 30 June 2007]. Vixathep, S. (2011). “Efficiency and productivity change in Lao garment industry: A nonparametric approach”. Journal of International Cooperation Studies, 19, (forthcoming). Vollrath, T. L. (1991), “A theoretical evaluation of alternative trade intensity measures of revealed comparative advantage”, Weltwirtschaftliches Archiv, 127, pp. 265-80. World Bank. (2007), World Development Indicators. World Bank: Washington, DC. Yeats, A. J. (1990), What do alternative measures of comparative advantage reveal about the composition of developing countries’ exports? Working Paper WPS470, World Bank: Washington, DC.

28


Appendix Table A1: Lao exports and imports (as % share of total), FY2002-2006 No 1

2

3

Regions/Partners ASIA China Hong Kong Japan South Korea Total ASEAN Total Asia EUROPE France Germany Netherlands Italy Spain Sweden United Kingdom Poland Total EU Total Europe AMERICA Canada USA

02-03

Exports 03-04 04-05

05-06

02-03

Imports 03-04 04-05

05-06

3.09 0.08 1.10 0.03 52.05 56.87

1.42 0.24 0.56 0.04 46.91 49.58

2.03 0.04 0.70 0.05 50.52 54.08

4.63 0.78 0.32 67.20 74.43

16.24 0.01 1.96 1.11 69.25 88.75

14.61 0.05 1.23 1.47 63.87 81.27

11.65 0.18 0.57 0.96 78.68 93.96

9.13 0.75 4.17 0.73 79.27 95.01

8.51 3.59 0.54 1.99 0.16 0.75 4.76 1.15 24.78 26.58

8.20 4.81 1.68 1.61 0.67 0.58 5.57 1.42 27.06 32.54

7.27 4.61 2.02 1.23 0.26 0.72 6.19 0.92 24.88 26.30

1.63 2.82 1.79 0.23 0.23 0.14 5.76 0.98 14.14 14.20

1.66 0.88 0.11 0.12 0.07 1.06 0.01 4.25 4.96

5.57 3.11 0.02 0.79 0.15 3.92 0.15 14.57 16.88

0.19 3.75 0.01 0.04 0.05 0.03 0.23 0.30 4.90 5.17

0.96 2.10 0.00 0.42 0.00 0.05 0.12 0.08 3.85 4.19

0.84 0.90

0.87 0.64

1.15 0.18

0.41 0.37

0.03 0.11

0.48 0.91

0.00 0.06

0.01 0.55

Total America 1.78 1.51 1.37 0.79 0.14 1.40 0.07 0.56 OCEANIA Australia 11.61 16.36 18.24 10.55 0.45 0.80 0.23 Total Oceania 11.62 16.37 18.25 10.56 0.00 0.45 0.81 0.23 5 38 Selected economies 95.36 95.22 98.79 98.42 93.77 98.03 98.17 99.19 Total (%) 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Author‟s calculations (data obtained from the Ministry of Industry and Commerce, Lao PDR). Notes: 1) Fiscal year (FY): 1 October – 30 September. 2) The 38 selected economies are: Cambodia; China; Hong Kong; India; Indonesia; Japan; South Korea; Malaysia; Philippines; Singapore; Thailand; Vietnam; Austria; Belgium; Bulgaria; Czech Republic; Denmark; Finland; France; Germany; Hungary; Ireland; Italy; Luxembourg; Netherlands; Norway; Poland; Portugal; Romania; Russian Federation; Spain; Sweden; Switzerland; United Kingdom; United States; Canada; Australia and New Zealand. 4

29


Table A2: Brief summary of trade and investment reforms in Lao PDR Time 1975 1978

Reforms/Policies Gained independence and end of colonial era (1) Removal of some restrictions on private sector activity but international trade still under state control 1981-1985 Experiments in decentralizing selected SOEs; allowing small private trading; further reforms in prices, wages and salaries 1986 Introduction of the New Economic Mechanism (Chintanakan Mai) 1986-1987 Low-degree liberalization of internal trade; less intervention of administrative units in small trading companies; elimination of restrictions on provincial trade and rice movement; broadening of economic relations with foreign countries; trade in convertible currencies expanded 1988 Rationalization of tariff structure; reduction in import tariff rates 1986-1989 Relaxation of most controls on retail prices and agricultural procurement prices, giving autonomy to SOEs in decision making on business; private sectors allowed to trade in all commodities (except strategic goods); submission requirement of trade plans to the State Committee for Foreign Economic Relations 1988 Abolishment of the multiple and fixed exchange rate system; introduction to a single rate system (closer to the parallel market); promulgation of law on foreign investment 1989 Introduction of export quota on high-quality logs 1990 Reduction of list of strategic goods exportable only by state companies 1991 Partial liberalization of international trade (elimination of quantitative restrictions and specific licensing requirements for most goods) Mid-1990s Dominance of non-tariff barriers (quotas), but tariff structure partly simplified (12 tariff rates); revision of law on FDI (simplification of profit tax) 1995 Maximum rates down from 100% to 40% and six bands (5%, 10%, 15%, 20%, 30%, 40%); abolishment of restrictive export licensing for domestic user protection; simplification of import licensing system 1997 Joining ASEAN and committed to full implementation of the ASEAN Economic Community Blueprint by 2015; application for access to WTO 2004 Revision of law on FDI (extension of investment term for foreign investors to 50 years and 75 years under special circumstances) 2010 Current trade policy in NSEDP7: Promotion of domestic production of goods with potential for exports; enhancement of economic and trade integration; process to approve unification of foreign investment law and domestic investment law into one Source: Author compiled from various sources (Otani and Pham, 1996; Martin, 2001; Fane, 2006; Douangboupha, 2010; Onphanhdala and Suruga, 2010).

30


Table A3: RCA index and net export index for selected products (1985-2005) RCA NEI Share 1985 Exports High RCA 1.688 0.33 1.644 1.000 10.97 1.514 0.998 24.14 0.882 0.998 4.03 0.797 0.946 0.40 0.730 0.789 1.64 0.219 0.956 0.41 0.114 1.000 0.26 Sum 42.20 Low RCA -0.030 1.000 0.19 -0.057 0.06 -0.137 0.05 -0.161 0.02 -0.330 -0.449 0.04 Total ranked products: 1990 Exports High RCA 1.866 0.997 1.797 1.000 1.726 1.000 1.258 1.000 1.199 0.997 1.193 0.961 0.913 0.922 0.819 1.000 0.798 0.719 0.797 0.970 0.489 0.321

43.65 10.43 14.53 3.54 4.00 0.09 2.77 1.16 3.42 1.80 1.60

SITC

941 247 071 248 075 292 001 288

Product

Zoo animals, pets, etc. Wood in rough or squared Coffee and coffee substitutes Simply worked wood Spices Crude vegetable materials Live animals (other than division 03) Non-ferrous metal waste

(1%Share= U$0.21 million) Raw hides and skins (excl. furskins) 211 Manufactures of leather or composition 612 Crude animal materials 291 Oil-seeds and oleaginous fruits 223 Railway track construction materials 677 RCA=39; NEI=30

248 282 247 288 071 245 292 211 842 634 673

Simply worked wood Ferrous waste and scrap Wood in rough or squared Non-ferrous metal waste Coffee and coffee substitutes Fuel wood and wood charcoal Crude vegetable materials Raw hides and skins (excl. furskins) Men's outwear, not knitted Veneers, plywood, n.e.s., etc. Flat-rolled prod. of iron/steel, not clad

RCA NEI Share 0.482 0.434 1.17 0.444 0.383 2.17 0.427 0.733 2.21 0.368 -0.313 2.59 0.232 0.08 0.213 1.000 0.37 0.204 0.446 0.20 0.076 0.10 0.051 0.949 0.32 Sum 96.20 Low RCA -0.020 -0.827 0.21 -0.023 -0.044 0.22 -0.027 0.738 0.27 -0.053 0.01 -0.098 -0.426 0.16 Total ranked products: 1995 Exports High RCA 1.744 1.000 1.684 1.000 1.432 0.985 1.295 0.962 1.258 1.000 1.118 0.987 1.056 0.947 0.993 0.948 0.946 0.968 0.850 0.881 0.762 0.901 0.592 0.686

11.51 26.29 8.73 11.38 4.82 6.52 7.78 2.68 0.05 5.85 4.20 0.41

SITC 846 845 843 674 246 844 232 291 611

Product Undergarment, knitted Outwear, knitted, nonelastic Women's outwear, not knitted Flat-rolled products of iron/steel, clad Wood in chips or particles Undergarment, not knitted Synthetic and reclaimed rubber Crude animal materials Leather

(1%Share= U$0.63 million) Tractors 722 Wood manufactures, n.e.s. 635 Oil-seeds and oleaginous fruits extract. 222 Oil-seeds and oleaginous fruits 223 Trailers and semi-trailers, etc. 786 RCA=86; NEI=78

247 248 071 842 844 846 845 635 245 843 682 121

Wood in rough or squared Simply worked wood Coffee and coffee substitutes Men's outwear, not knitted Undergarment, not knitted Undergarment, knitted Outwear, knitted, nonelastic Wood manufactures, n.e.s. Fuel wood and wood charcoal Women's outwear, not knitted Copper Tobacco (unmanufactured or refuse)

Continued on next page

31


Table A3: RCA index and net export index for selected products (continued) RCA 0.522 0.511 0.493 0.367 0.347 0.229 0.179 0.178 0.118 0.104 0.008 Sum

NEI 0.804 0.901 -0.149 1.000 0.204 1.000 0.902

Share 1.00 0.97 1.68 0.31 1.22 0.00 0.25 0.02 0.00 0.06 0.31 96.03

Low RCA -0.079 -0.666 0.22 -0.080 0.285 0.66 -0.297 0.926 0.02 -0.345 -0.418 0.02 -0.550 -0.756 0.23 Total ranked products: 2000 Exports High RCA 2.186 1.000 1.721 -0.038 1.506 1.504 0.993 1.445 0.883 1.295 0.992 1.283 0.808 1.176 0.949 1.173 0.994 1.044 0.586

18.80 17.85 0.16 12.68 5.08 13.08 3.27 14.90 0.02 1.59

SITC 634 292 514 211 057 961 282 223 264 074 611

Product Veneers, plywood, n.e.s., etc. Crude vegetable materials Nitrogen-function compounds Raw hides and skins (excl. furskins) Fresh or dried fruit and nuts Coin (excl. legal tender and gold coin) Ferrous waste and scrap Oil-seeds and oleaginous fruits Jute and other textile bast fibres Tea and maté Leather

(1%Share= U$2.01 million) Made-up articles of textiles, n.e.s. 658 Baby carriages, toys, games, etc. 894 Wood in chips or particles 246 Spices 075 Footwear 851 RCA=98; NEI=92

247 785 245 248 071 841 843 845 264 001

Wood in rough or squared Motor cycles, motorized and not Fuel wood and wood charcoal Simply worked wood Coffee and coffee substitutes Men's, boys' clothing, not knitted Men's, boys' clothing, knitted Articles of textile apparel, n.e.s. Jute and other textile bast fibres Live animals (other than division 03)

RCA 1.017 0.940 0.682 0.474 0.474 0.324 0.233 0.190 0.173 0.126 0.081 0.010 Sum

NEI 0.849 1.000 0.908 0.876 0.638 0.784 0.759 -0.003 0.198 1.000 -0.273

Share 0.62 0.73 3.29 0.84 0.69 0.48 0.47 0.03 0.40 0.99 0.10 0.44 96.50

Low RCA -0.014 -0.515 0.04 -0.076 -0.986 0.01 -0.149 -0.076 2.01 -0.194 0.174 0.06 -0.241 -0.604 0.12 Total ranked products: 2005 Exports High RCA 1.856 1.831 -0.032 1.830 1.000 1.794 1.000 1.611 0.949 1.380 0.956 1.377 0.992 1.315 0.977 1.258 0.508

0.07 0.23 22.97 6.58 0.63 3.38 14.55 10.23 2.76

SITC 273 287 842 844 292 635 634 593 321 851 211 057

Product Stone, sand and gravel Ores and concentrates of base metals Women's, girls' clothing, not knitted Women's, girls' clothing, knitted Crude vegetable materials Wood manufactures, n.e.s. Veneers, plywood, n.e.s., etc. Explosives and pyrotechnic products Coal, not agglomerated Footwear Raw hides and skins (excl. furskins) Fresh or dried fruit and nuts

(1%Share= U$3.49 million) Spices 075 Silk 261 Special transactions and commodities 931 Preserved fruits (excl. juices) 058 Clothing accessories, of textile fabrics 846 RCA=116; NEI=111

264 261 248 247 045 843 682 841 071

Jute and other textile bast fibres Silk Simply worked wood Wood in rough or squared Unmilled cereals Men's, boys' clothing, knitted Copper Men's, boys' clothing, not knitted Coffee and coffee substitutes

Continued on next page

32


Table A3: RCA index and net export index for selected products (continued) RCA NEI Share SITC Product RCA NEI Share SITC Product Articles of textile apparel, n.e.s. Oil-seeds and oleaginous fruits extract. 1.191 0.883 13.58 845 0.203 0.651 0.33 222 Stone, sand and gravel Explosives and pyrotechnic products 1.021 0.223 0.60 273 0.203 -0.654 0.03 593 Fuel wood and wood charcoal Wood manufactures, n.e.s. 1.000 0.992 0.05 245 0.186 0.639 0.31 635 Natural rubber and gums (unprocessed) Preserved fruits (excl. juices) 0.942 0.028 0.79 231 0.171 0.356 0.14 058 Women's, girls' clothing, not knitted Pearls and precious stones 0.829 0.933 4.18 842 0.156 -0.055 1.26 667 Rice Spices 0.813 -0.083 0.57 042 0.121 0.890 0.04 075 Women's, girls' clothing, knitted Raw hides and skins (excl. furskins) 0.769 0.702 1.45 844 0.042 1.000 0.06 211 Live animals (other than division 03) Office and stationery supplies 0.759 0.580 0.73 001 0.002 -0.089 0.10 895 Unmilled maize (excl. sweet corn) 0.746 0.933 0.61 044 Sum 93.12 (1%Share= U$5.83 million) Veneers, plywood, n.e.s., etc. 0.726 0.853 1.53 634 Low RCA Crude vegetable materials Vegetables, roots and tubers 0.540 0.763 0.76 292 -0.009 -0.191 0.15 056 Gold, non-monetary (excl. gold ores) Miscellaneous manufactured articles 0.524 -0.271 1.20 971 -0.036 -0.457 0.40 899 Ores and concentrates of base metals Oil-seeds and oleaginous fruits 0.521 1.000 0.57 287 -0.045 0.486 0.01 223 Fresh, chilled, or frozen vegetable Crude fertilizers (excl. division 56) 0.401 0.881 0.79 054 -0.106 -0.153 0.01 272 Footwear Tobacco (unmanufactured or refuse) 0.310 0.151 1.28 851 -0.131 -0.561 0.05 121 Coal, not agglomerated 0.231 0.75 321 Total ranked products: RCA=178; NEI=175 Source: Author‟s calculations (data from UN Comtrade online database). Note: 1) SITC Revision 2 is used for 1985, 1990, and 1995; and SITC Revision 3 for 2000 and 2005. 2) Due to space limitation only products with high RCA (RCA index>0) and the first five products with low RCA (RCA index