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Resource Boom, Growth and Poverty in Laos:
What Can We Learn from Other Countries and
Policy Simulation?
Phouphet KYOPHILAVONG, National University of Laos
37th Annual Conference of the Federation of ASEAN
Economics Association(FAEA)
Philippine International Convention Center, Nov 28-29, 2012
Outline of presentation
• Introduction
• Problem statement, objective and scope
• Characteristics of CGE model
• SAM and coefficients/parameters
• Simulation design
• Results/discussions
• Conclusion/policy recommendation
2
Introduction
• Laos is LDC- About 34% of population is under
poverty line (WB and DOS, 2009).
• About 30% of GDP is from agriculture, 26% is from industry
and 34% is from services.
• Laos is ranked as one of the most resources-rich countries in Asia.
More than 570 mineral deposits have been identified (WB, 2001).
• FDI has suddenly increased since 2003. This is mainly
from resource sectors (mining and hydropower).
3
Introduction
• The national development goal is to liberate the country from
the group of LDCs by the year 2020 (GoL, 2004).
• Enhancing the sustainable economic growth and reduction of
Poverty reduction are top priorities of government (GoL, 2004).
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Introduction
FDI Inflows
US$
5,000,000,000
4,500,000,000
4,000,000,000
3,500,000,000
3,000,000,000
2,500,000,000
2,000,000,000
1,500,000,000
1,000,000,000
500,000,000
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
-
Source: Ministry of Planning and Investment (2011).
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Introduction
FDI Inflows (Resource Sectors) (2005-2010)
No.
Sectors
Projects
Value (Million. US$)
1
Electricity Generation
28
3,442
2
Mining
123
2,885
3
Services
205
1,485
4
Agriculture
170
1,176
5
Manufacturing
196
946
6
Hotel & Restaurant
73
584
7
Construction
31
312
8
Trading
86
166
9
Banking
16
157
10 Telecom
2
116
11 Wood Industry
22
108
12 Consultances
49
21
13 Garment
21
16
1,022
15,845
TOTAL
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Source: Ministry of Planning and Investment (2011).
Introduction
Contribution of Resources Sector
2008
2009
2010
2011
Real GDP growth (%)
Resources sector (% point)
7.5
2
7.5
2.5
8.4
3.9
8.6
3.6
Domestic Revenues (% of GDP)
Minining
Hydropower
13.9
2.4
0.7
13.8
2.2
0.5
13.9
1.6
0.4
15.1
3.5
0.6
Sources: WB(2011) and IMF(2011).
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Problem statement
• Theoretically, abundant natural resources are a “big push”
that could promote growth.
• Empirical studies have illustrated that resource-rich
countries grow more slowly compared to resource-poor countries.
• Various factors account for low growth in resource-rich
countries: one of the most important factors is referred to as
“Dutch disease” (Gregory, 1976; Cordon, 1982).
• Despite the possible positive or negative impact of resource boom,
there are few research studies on this issue.
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Research Question
How resource-boom affects Lao economy?
• Does resources-boom improve macroeconomic variables?
• Does resources-boom have positive impact on other sectors?
• What is the policy recommendation to deal with
Adverse impact from booming sector?
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Literature Reviews
•There are few studied of CGE model analysis for the Lao economy.
• Fukase and Martin (1999) built a simple CGE model to analyze
the economic effect of joining the AFTA.
• Warr (2006) built a two sectors, multi-household CGE model
to analyze the impact of the hydropower dam (NT2).
• Warr and Menon (2006) built CGE model to assess
the impact of road improvement on poverty
• Lack of CGE model building for analyzing impact of resource
booms on Lao economy.
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Lao CGE Model
• PEP-1-1 model which developed by Decaluwe et al, 2009
• Single-country, static CGE model.
• Sectors: Mining, Industry, Agriculture, Private services,
and Government services (will expand more sectors).
• Factors: Capital, skilled labor, unskilled labor and land.
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Lao CGE Model
Nested structure of production
Output (XSTj)
Leontief
Value added
(VAj)
Aggregate intermediate
consumption (Cij)
Leontief
CES
Composite labor
(LDCj)
Composite capital
(KDCj)
CES
Labor 1
Labor 2 ---
Production 1
(DIi,j)
Production 2
(DIi,j)
CES
Capital 1
Source: Decaluwe et al (2009).
Capital 2
---
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Lao CGE Model
• Current account balance is fixed.
• Current government expenditure is fixed.
• Minimum consumption of commodity i by type h household.
• Small country assumption.
• Numeraire is the nominal exchange rate.
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Macro-SAM for Laos (2009)
• No existing national Social Account Matrix (SAM), national
Input- Output table.
• Build the Lao SAM from various data sources.
Firstly, extract Lao SAM from GTAP data base (version 7)
following by McDonald and Thierfelder (2004) and PEP(2011)
Secondly, adjustment of coefficient by consultation economists
in NSC, and government agencies.
Thirdly, updated Macro-SAM (2004) to 2009 by using various
sources of data (NSC, ADB, IMF, and WB).
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Basic Structure of Lao Economy from SAM
Household
Wage income
Capital income
Land rent
Natural resources
Total
Income
38.8
43.9
12.0
5.4
100.0
Direct tax
Consumption
Agriculture
Industry
Private services
Government services
Mining
Saving
Total
Expenditure
4.1
11.8
55.6
24.8
0.7
0.0
3.0
100.0
Sources: authors' computations.
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Basic Structure of Lao Economy from SAM
Factor of production
Wage income
Capital income
Land rent
Natural resources
Wage income
Capital income
Land rent
Natural resources
Total (value added)
Agriculture
Industry
Private
services
Government
services
Mining
Total
20.9
16.3
100.0
7.9
14.6
38.3
54.5
32.5
0.0
0.4
14.5
100.0
100.0
100.0
100.0
0.4
24.9
37.1
5.0
67.6
0.0
7.8
64.1
0.0
60.3
0.0
0.0
100.0
100.0
100.0
100.0
100.0
2.4
26.2
0.0
71.4
100.0
Sources: authors' computations.
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Basic Structure of Lao Economy from SAM
Consumption and output
Comsumption Output
share
share
Agriculture
12.7
17.6
Industry
59.8
20.3
Private services
26.7
43.7
Government services
0.8
8.2
Mining
0.0
10.2
Total
100.0
100.0
Import
Export
31.6
6.3
12.1
0.0
50.0
100.0
4.3
0.9
1.7
0.0
93.1
100.0
Import/ Export/
consumption output
8.6
4.6
1.7
0.9
3.3
1.8
0.0
0.0
13.7
99.6
Sources: authors' computations.
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Parameters
• Different parameters lead to different policy results
(Abler et al, 1999).
• Some parameters (Elasticity of Substitution (ES)
function and Elasticity of Transformation (ET) function)
come from PEP model follows Warr (2006).
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Simulation Design
• There are various channels of impact of mining sector on Lao
economy:
Simulation 1: Increase capital stock in mining
We assume that the supply of capital in the mining sector will
increase by about 10%.
Simulation 2: Increase productivity
We therefore assume that total factor productivity will
increase by 5%.
Simulation 3: Impact of mining
Simulation 3 combines the first two simulations
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Simulation Design
• There are various channels of impact of mining sector on Lao
economy:
• We focus on:
Capital inflow
Simulation 1
increase 10%
Simulation 2
Simulation 3
Source: the authors.
Total factor
productivity
Increase 5%
increase 10%
increase 5%
Simulation Results
Impact on macroeconomic variables
Simulation 1
GDP
1.107
Consumption
-2.818
Investment
3.81
Export
0.05
Import
3.131
Source: Authors' simulation.
Simulation 2
0.633
-1.478
2.082
-0.018
1.691
Simulation 3
1.74
-4.296
5.894
0.041
4.822
Simulation Results
Impact on output
Simulation 1 Simulation 2 Simulation 3
Agriculture
-0.81
-0.4
-1.25
Industry
0.29
0.16
0.45
Private services
1.23
0.67
1.91
Government services
-1.96
-1.06
-3.02
Mining
6.77
3.63
10.4
Source: Authors' simulation.
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Simulation Results
Impact on exports
Simulation 1 Simulation 2 Simulation 3
-0.91
-1.04
-2.95
-1.55
-0.84
-2.40
-1.87
-1.01
-2.89
Agriculture
Industry
Private services
Government services
Mining
6.96
Source: Authors' simulation.
3.73
5.345
Conclusions
• Increase capital and productivity of mining sector has positive
impact on Lao economy in term of increase real value of GDP,
output, export and investment.
• But it also decline real output, value added and export of
agriculture sector.
• Booming in mining sector might cause the Dutch disease effects
in Lao economy.
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Policy Recommendation
• Support linkage between mining sector and the rest of economy,
and diversify economy.
• Expenditure of booming sector revenues should focus on
promote tradable goods especially on human resource
development, infrastructure and health care (Larsen, 2006; Levy,
2007).
• Reduce/maintain low level of foreign borrowing is important
for Laos during booming sector (Usui, 1996).
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Policy Recommendation
• It is crucial to pay back debt as soon as possible during
government has windfall from mining (Usui, 1997).
• It is important saving windfall for using when booming
sector finishing. Setting up mining fund for saving or investment in
emergency time and external shock are crucial
• It is important to avoid real exchange rate appreciation thougth
control inflation and depreciate nominal exchange rate.
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Limitation of this study (Need to Improve)
• This model is static CGE model which do not reflect investment
flows from mining investment.
• Disaggregation of sectors according to data availability.
• It is important to capture winner and loser from the impact
of mining by spilt the household to various categories.
• Finding appropriate elasticity from other countries which have
similar economic structure like Laos.
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Limitation of this study
• Conduct other simulation scenarios and combine them together
to capture impact of mining sector.
• Conducting policy implementation to cope with adverse
impact on mining sector (fiscal policy and other policy).
• It is important to focus on windfall management (transfer)
because it is crucial for sustainable economic growth and
poverty reduction.
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Thank You Very Much For Attention