Impacts of afta on goverment revenue external trade and FDI of lao PDR (tt)

I INTRODUCTION Background Regional integration has become the main form of trade liberalization since the early 1990s.Progress of the integration has been very impressive in recent decades for a number of developing countries in Asia and, to a lesser extent, in Latin America These countries have become successful because they chose to participate in regional and global trade, helping them to attract the bulk of foreign direct investment in developing countries (IMF, 2001) There are a number of arguments on free trade It can bring about several advantages and disadvantages The benefits can be indicated in trade creation, increased exports, economies of scale, increased competition, make use of surplus raw materials, increased production, production efficiencies, benefits to consumers, foreign exchange gain, employment opportunities, and economic growth Although free trade has benefits, there are a number of disadvantages such as changes in structural unemployment in the short term, increased domestic economic instability from international trade cycles, as economies become dependent on global markets, developing or new industries may find it difficult to become established in a competitive environment with no shortterm protection policies by governments, free trade can lead to pollution and other environmental problems, free trade may raise government revenue by import taxes, but this will only be a small amount of money In Southeast Asian region, ASEAN Free Trade Area (AFTA) is a significant trade bloc Having established in 1992, it is considered in the second level of economic integration The primary goals of AFTA are to increase ASEAN’s competiveness through eliminating the tariffs and non-tariff barriers within member countries and to attract more foreign direct investment to the region The impacts of free trade in general and AFTA in particular can be reviewed from different countries’ case studies Within ASEAN member, a number of research papers focus on the consequences of AFTA on economy as a whole These can be found in the study case of Vietnam conducted by Fukase and Martin (1999), Loc (2001), Ba (2004), Harris et al (2007), and Thanh (2007) The main findings reveal that there is an increase in welfare and poverty reduction thanks to broader liberalization In addition, many studies on economic impacts, particularly government’s revenue, intra-trade, and FDI flows of the entire and individual member countries have been conducted.Chaiwootet al (2006) analyze the economic impacts of AFTA on Thailand’s economy, whereas Piriya (2010) examines whether the AFTA creates trade for Thailand or actually diverts it away from the country by analyzing various trade indicators and Pupongsak (2009) investigates the impact of trade liberalization on taxation and government revenue of Thailand Fukase and Martin (2001) explore implications for Cambodia of its entry into the AFTA through considering the trade regime, including the reliance on customs duties as a revenue source Hartono et al (2007) investigate the impacts of AFTA on the Indonesian economy, namely economic growth, poverty, and income distribution Participating in AFTA is challenging for newer ASEAN members (Cambodia, Lao PDR, Myanmar, and Vietnam) in terms of social and economic development Therefore, there have been some studies related to the consequences of AFTA commitment execution on CLMV The empirical evidence can be found in the work done by Tongzon, Khan, and Doanh (2004 and 2005) and Araya (2002) which focus on analyzing how CLMV deal with revenue lost and options for revenue management after participating in AFTA tariff reductions, as well as the challenges of economic integration for CLMV Elsie (2005) examines whether the formation of AFTA leads to an increase in ASEAN intra-trade and how it brings trade benefits to economies with different stages of development from 1988 to 2003 Adams and Park (1995) evaluate the impact of AFTA with a link to Computable General Equilibrium (CGE) model to quantify the macroeconomic effects of external shock, domestic policy, and regional-grouping and market-opening efforts through tariff reduction policies among ASEAN nations Hapsari and Mangunsong (2006) analyze the determinants of AFTA members’ trade flows and potential for trade diversion, including the impacts of creation of AFTA on its intra- and extra-regional trade flow by comparing trade patterns of AFTA countries with AFTA members and non-members David Cheong (2008) studies the effects of AFTA, using a gravity model to address changes in trade patterns of ASEAN during 2001-2003 Adams and Horridge (2000) estimate the AFTA trade liberalization on ASEAN member countries, with special reference to Thai economy in long term Ho Sze Yin (2010) investigates the effects of AFTA whether it leads to trade creation or diversion among member countries during 1988-2004 Gumilang (2011) studies the trade agreements with Japan (IJEPA) and AFTA with reference to Indonesia Hector et al (2009) examine the impacts of AFTA on trade flows and external trade barriers during 1992-2007 In case of Lao PDR, one of the most directly related to the consequences of implementing AFTA can be found in the study conducted by Menon (1999), AusAid and UNDP (1996), and Phouphet (2004) In these papers, the main objective is to examine the impacts of AFTA on Lao economy by addressing the trade, government revenue and foreign investment flows The key findings show that (i) trade diversion is likely to be low; (ii) the reduction in government revenue from trade taxes is likely to be low; and (iii) foreign direct investment (FDI) flows are likely to grow sharply in the future However, Phouphet argues that AFTA will lower the general price, causing an increase in real consumption, investment, and macroeconomic variables, and therefore the GDP will also increase Besides, Phongsavanh (2003) studies the Lao PDR’s integration in ASEAN The main objective is to initially assess the potential impacts of joining ASEAN of the Lao PDR By employing descriptive approach, the results reveal that through accessing to ASEAN and following the commitments of AFTA, the trade regime of the Lao PDR is negatively affected However, the risk of trade diversion is considered to be minimal, it may occur in some imported products, namely automobiles Simultaneously, the welfare of people will be improved through AFTA’s scheme as they can buy commodities at lower prices with more choices in a larger ASEAN market From the above-revised researches, the discrepancies between this study and the previous ones, particularly the one conducted by Phouphet (2004), can be distinguished in terms of analytical methodology, independent variables used in the models, and time periods In building Lao macroeconomic model, Phouphet focuses on the effects of AFTA on the whole economy through changing general price He also focuses on demand and supply sides which are adjusted by general price mechanism Since Lao PDR is an agricultural country, he thus divides the supply side (GDP) into agricultural and nonagricultural GDP to analyze the agricultural structure change To analyze the trade structure change, trade with Thailand and trade with non-Thailand are also divided.The model consists of 15 structural equations The main policy variable is government investment, foreign direct investment, money supply, and exchange rate The main target variables are GDP, general price, private consumption, domestic investment, export, and import He uses ordinary least square method to estimate structural equations and Newton method to simulate the model.In the export and import equations, there is no tariff rate Therefore, he assumes that the effects of AFTA by deduced tariff have the same effect by decreasing import price by per cent The data used covers during 1988-2000, which is a short-time period and the data per se is not well organized and less reliable since the economic structure had changed from centrally planned to market-oriented economy in 1986 In this paper, rather than using only the OLS method of econometric approach to estimate the impacts of AFTA on government revenue, external trade, and FDI, but descriptive approach is utilized to analyze the tendency and relationship among the specified variables In the export and import equations, the tariff rate of both ASEAN member countries and Lao PDR are included Concerned with the time period, it covers from 1990 to 2012 which is longer and more accurate Objective The main objectives of this dissertation are twofold as follows:  To review the economic performance of Lao PDR before and after participating AFTA;  To estimate the impacts in implementing the Common Effective Preferential Tariff (CEPT) scheme under AFTA on the Lao PDR’s government revenue, external trade (exports and imports), and Foreign Direct Investment (FDI) flows Expected Outcomes Based on the above-specified objectives, the expected outcomes of this paper are as follows:  Be able to realize the current situation of AFTA’s CEPT scheme of Lao PDR; and  Be able to measure the changes in the magnitude of the Lao government revenue, expansion of external trade to the regional markets, and growth of FDI after joining ASEAN in 1997 Significance of Study The findings of this paper are considered significant for the author since it deepens more understandings on economic development policies, strategies and growth in Lao PDR in the past and shades light on the future development directions Moreover, the results will provide better knowledge on the repercussions of regional economic integration, particularly with ASEAN on the Lao government revenue, external trade directions, influx of FDI, and smuggling activities In addition, this paper will be a useful reference for the scholars, researchers, and general interested groups who desire to analyze the similar issues in the different case studies, approaches, and time periods Scope of Study The scope of this study is to focus on the impacts of regional economic integration, namely AFTA on the Lao government revenue, external trade, and FDI These indicators are selected as dependent variables to indicate the impacts during 1990-2012 These time periods cover several internal, regional, and international economic shocks, namely the implementation of NSEDP, membership of ASEAN and AFTA implementation of Lao PDR, Asian Financial Crisis in 1997, and global economic crisis in 2008 II Methodology In order to carry out the findings in accordance with the set objectives, this paper simply employs descriptive and econometric approaches 2.1 Descriptive Approach The impacts of AFTA on economic performance, government revenue, FDI, and external trade (exports and imports) can be analyzed through the specified indicators of individual variable, which are displayed in Table To clearly present the results or the relationship between the tariff reduction under AFTA’s CEPT scheme, tables and charts will be used Also, to distinguish differences of economic development, changes in government revenue, FDI, and external trade, the duration of time will be divided into a five-year period: 1990-1995, 1996-2000, 2001-2005, and 2006-2012, which are in accordance with the five-year NSEDP of the GOL Table 1: Framework on Analyzing the Impacts of AFTA on Economic Performance, Government Revenue, Trade, FDI Issues Economic Indicators —Economic development measured by GDP growth rate Issues Performance Indicators during 1990-2012; —GDP per capita during 1990-2012; —Structure of Lao Economy; —Economic growth rate by sectors: Agriculture, Industry, and service, covering from the 3rd to the 6th five-year NSEDP —Structure of government’s revenue (tax and non-tax Government revenue); Revenue (Tax — Growth rate and percent share of tax and non-tax revenue to Revenue total revenue and GDP; Reduction) —Relationship between government’s tax revenue and averaged-tax rates —Volume, growth rate, and percent share of exports and imports; —Growth rate and percent share of trade balance to GDP; Trade —Trade directions (main exporting and importing markets); —Compositions of exports and imports; —Percent share of total trade to intra-trade of ASEAN; —Degree of trade openness (terms of trade); —FDI flows from ASEAN members (intra-FDI) and nonASEAN countries (Extra-FDI); FDI —Percent share of total FDI to intra-FDI of ASEAN; —FDI by home/original countries; —FDI by economic sectors 3.2 Econometric Approach To obtain the empirical evidences of the consequences of the AFTA on government revenue, FDI, and external trade (dependent variables), the Ordinary Least Squares (OLS) method is applied The functions of the abovementioned dependent variables can be expressed as follows: Export Function EXP: f1(GDPF, TAXA, INFR, EXR, LIB) ……………………… (1) Import Function IMP: f2(GDP, TAXL, INFR, EXR, LIB) ………………………… (2) Government Revenue Function GOVR: f3(GDP, TAXL, INFR, EXR, IM, LIB) ……… ………… (3) Function of Foreign Direct Investment FDI: f4(GDP, TAXL, INFR, EXR, LIB) (4) Where, fi : Shows functional forms of the model/equation ith; GDPF : National income of ASEAN member countries, proxied by the income of major trading partner, namely Vietnam, Thailand, and China; GDP : National income of Lao PDR; TAXA : Tariff rate of ASEAN member countries; TAXL : Tariff rate of Lao PDR; INFR : Inflation rate; EXR : Exchange rate; LIB : Trade Liberalization by implementing AFTA commitments commencing in 1998; Dummy Variable, LIB = (1990-1998), LIB = (otherwise); IMP : Imports; EXP : Exports; FDI : Foreign direct investment RP : Relative price : Error corrections In export function (EXP), some of the most influential factors are determined as independent variables, peculiarly foreign income (GDPF), tariff rate of ASEAN member countries (TAXA), inflation rate (INFR), and exchange rate (EXR) Also, Liberalization (LIB) is used as a dummy variable GDPF is associated positively with EXP because when global or ASEAN member countries’ economies grow, their demand for imports from Laos will increase Therefore, the expected sign of GDPF is positive (+) Theoretically, tariff rate has an opposite with the export; when tariff rate increase, the export will decline and vice versa So, TAXA has a positive relationship with EXP since continuous tariff reduction of ASEAN member countries will make the Lao exports relatively cheaper in their markets Thus, the expected sign of TAXA is positive (+) Pertaining to INFR, it has a negative association with EXP because when domestic price increase the exports will become more expensive in the world’s market Hence, the expected sign of INFR is negative (-) This is in contrasted with EXR, when it increases or depreciation the exports will be cheaper Consequently, the expected sign of EXR is positive (+) It is also anticipated that AFTA will bolster the Lao exports to ASEAN markets For that reason, the expected sign of LIB is positive (+) In the import function (IMP), GDP is related positively to IMP which implies that when income increases, demand for imports will also rise As a result, the expected sign of GDP is positive (+) With regard to TAXL, the expected sign is positive (+) because decreased tariff rate will also encourage more demand on imports With respect to INF, when domestic price rises the commodities become more expensive It is better to import rather than consume domestically produced goods and services Therefore, the expected sign of INF is positive (+) On contrary, depreciation of exchange rate will lower the imports Thus, the expected sign of EXR is negative (-) It is expected that AFTA bring about better quality commodities and cheaper price to Lao market Consequently, the expected sign of LIB is also positive (+) With regard to the FDI function, it is important to observe that economic growth of host country is one of attracting factors for FDI So, the expected sign of GDP is positive (+) Also, the expected sign of TAXL is positive (+) more invest capital will flow to Lao PDR when the tariff rate is gradually eliminated In respect of the function of government revenue, there is not only tax that affects government revenue, but also other factors, namely macroeconomic stability and external environment (economic growth, price stability, and exchange rate) In the Lao context as an importing country, the tax revenue derived from imports is the major income source of the GOL Therefore, it is determined as an independent variable in the function, which is associated positively with GOVR In this connection, it is expected that GOVR will reduce after joining AFTA (both TAXL and LIB are expected to have negative signs) From functions (1), (2), (3), and (4), the econometric models of imports, exports, government revenue, and FDI in the logarithm forms can be written as follows: …………………… ………… … (5) ……………… .……………………………………………….………… (6) (7) 10 …… .… (8) To obtain the empirical evidences, Equations (5), (6), (7), and (8) will be estimated by applying the OLS method In the computing process, both Lao and weighted-average data (WAD) will be used to find the most appropriate results to better describe the issues in the Lao context.There are two main reasons why the WAD is also used in estimating the equations First, the structure of economy has been changed since the New Economic Mechanism initiated in 1986, causing the data collection has been haphazard until in 2000 onward Second, the WAD is acquired by calculating the weight of a particular item or variable to the total number of major trading partners, namely Vietnam, Thailand, and China These three neighboring countries are the top three export and import markets, as well as the home countries for FDI in Lao DPR Therefore, any internal policy changes or unexpected shocks occurred in these countries will also bring about the impacts on the Lao economy The formula of the WAD can be expressed as follows: Where, : and : 11 are the weighted-average and total foreign income (Vietnam, Thailand, and China); are total income of Vietnam, Thailand, and China, respectively; : is a sum of foreign income (Vietnam, : Thailand, and Vietnam); are the weighted-average and the sum : of imports of foreign countries; Are total imports of Vietnam, Thailand, and China, respectively; are the weighted-average inflation and exchange rates; : , : , are the inflation rate Vietnam, Thailand, respectively; and are the exchange rate Vietnam, Thailand, : of Lao PDR, and China, of Lao PDR, and China, respectively; and Table 3.2: Summary of Expected Signs of Independent Variables Dependent Variables Independent Variables EX IM FDI GOVR Constant + + + - + + + + + - GDP GDPF + TAXL TAXA + INFR - + - - EXR + - + - IM LIB + + + + Sources: Author’s Expectation (2013) 12 - 3.2 Data Collection In analyzing economic development and impacts of AFTA accession on government revenue, external trade, and FDI flows to Lao PDR, the secondary data of time series during 1990-2013 is used Generally, the difficulty in conducting analysis on economic issues in case of Lao PDR is a lack of data Thus, the data were collected and derived from different sources such as Ministry of Finance (2013), Asian Development Bank (ADB), “Key Indicators of Developing Asian and Pacific Countries”, International Monetary Fund (IMF), “World Economic Outlook Database, 2013” III Findings 3.1 Lao Economic Performance During 1990-2012 The significant findings reveal that Lao PDR’s economy has continuously grown with robust growth rates, particularly during the implementation of the 6th five-year NSEDP (2006-2010) In an average, the economic grew at 5.32 per cent during 1996-2000, 6.3 per cent in the period of 2001-2005, and per cent in the course of 2006-2010 The main contributors to the economic growth are seen in hydropower and mining The results also indicates that the GDP per capita of Lao PDR has gradually increased and been classified as a lower middle-income country in 2011 With regard to the output structure of Lao PDR’s economy, during 1996-2000, agricultural sector accounted for 50 per cent of GDP in an average, whereas industry and services covered 20 per cent and 30 per cent of GDP During 2001-2005 and 2006-2010, it is also seen that the general tendency of output structure has changed from agricultural-based economy towards industrialization in line with the GOL’s economic development strategy The percent share of agriculture in GDP has gradually declined, while the industry and services has grown up It is contended that the momentum of this growth is thanks to the regional liberalization and integration, namely AFTA participation 13 The results of examining the impact of AFTA participation on Lao PDR’s government revenue, external trade, and FDI can be summarized as follows: First, the main revenue sources of the GOL are derived mainly from taxes, which account for 65 per cent of the total revenue in an average The excise tax and import duties are major composition of taxed revenue With the commitment to reduce the tariff lines for the influx of imported commodities from ASEAN countries, tax revenue derived from import duties has increased This is because low tariff rates would induce more imports and then more revenue levied The ratios of total revenue and expenditure, taxes, and budget balance to GDP also show a significant direction Though the expenditure is greater than the revenue, the gap is gradually narrow owing to a continuous increase in the revenue from different sources As a consequence, the overall budget deficit is gradually mitigated If it is compared with many ASEAN countries, Lao PDR has lower budget deficit Second, in respect of external trade of Lao PDR, the exports have tended to increase after joining ASEAN The main contribution to a persistent increase in exports stemmed mainly from an increase in electricity sector, garments, coffee, and wood products With regard to the export markets of Lao PDR, it is observed that Thailand, Vietnam, and China are the top of the export markets throughout the time periods Also, it has continued to expand the markets to the larger markets such as USA, the United Kingdom, France, and Germany For the import side, the import markets of Lao PDR, Thailand, Vietnam, and China are also the top import markets that it has relied on Recently, China has become the second largest import market of Lao PDR which has replaced Vietnam since 2003 It can be argued that the external trade deficit of Lao PDR has been mitigated after joining ASEAN since the exports have increased faster than the imports Before joining ASEAN, Lao DPR’s economy was not much opened The degree of trade openness is only 51.65 per cent 14 However, it can be argued that Lao PDR has gradually integrated into regional and international economic integration when comparing with some selected countries in the region and the rest of the world Third, FDI has made a positive contribution to the manufacture of goods, economic growth and the restructuring of the Lao economy It also helped develop the private sector These achievements are attributed to the incentives provided by the Government and other measures, including as the decentralization of foreign investment licensing Major FDI to Lao PDR in recent years comes from the region, mainly, from Thailand, China, Vietnam, andAustralia Many projects were invested in industry and handicraft, followed by services, agriculture, and mining 3.2 Empirical Results By using econometric method with the Lao and WAD data, the results are displayed in Tables and 2, respectively Table 2: Results of Regressions by Using Lao Data Dependent Variables Independent ln(EXP) ln(IMP) Ln(FDI) ln(GOVR) Variables Constant -17.222 -7.246 -27.331 -14.706 (-3.553)*** (-3.048)*** (-2.327)** (-2.032)** ln(GDP) ln(GDPF) 1.540 (5.817)*** 2.682 (2.051)** 2.687 (2.155)** 0.678 (1.825)** 1.043 (0.569) 2.079 (2.033)** 1.772 (5.402)*** ln(TAXL) ln(TAXA) -0.081 (-0.251) ln(INFR) 0.015 -0.003 -0.066 -1.183 (0.347) (-0.076) (-0.342) (-5.343)*** 0.300 (2.187)** 0.141 (1.497) 1.762 (3.796)*** 0.213 (0.877) ln(EXR) ln(IMP) 1.089 15 (2.193)** LIB R-Squared Adjusted-R Squared Durbin-Watson Stat F-Statistic -0.251 (-0.967) -0.615 (-2.618)*** -3.370 (-2.904)*** -0.626 (-1.187) 0.950 0.934 1.574 (61.0689)*** 0.941 0.923 1.611 (51.159)*** 0.817 0.759 1.684 (14.261)*** 0.961 0.946 1.532 (65.620)*** Sources: Author’s Estimation (2013) Note: 1) The figures in the parentheses are t-statistical values; 2) ** and *** denote statistically significant at 5% and 1% of significance level, respectively; 3) D.W: n = 22, K = 5, at 5%, dL = 0.769, dU = 1.940 and at 1%, dL = 0.587, dU = 1.691; and 4) D.W: n = 22, K = 6, at 5%, dL = 0.677, dU = 2.090 and at 1%, dL = 0.510, dU = 1.849.1 Table indicates the regression results of export, import, FDI, and government revenue equations by using the Lao time-series data during 19902012 The estimated findings of individual independent variable can be described as follows: In the export equation (EXP), economic growth of foreign countries (GDPF) and exchange rate (EXR) are associated positively with the export They alsohave the expected signs and are statistically significant at per cent and per cent, respectively.This is implied that an increase in GDPF by per cent, the exports of Lao PDR will rise by 1.772 per cent, given the other factors remain constant Similarly, an increase in or a depreciation of EXR by per cent, the exports will go up by 0.3 per cent, provided that the other factors remain unchanged Nevertheless, the coefficients of the tariff rate of the ASEAN countries (TAXA) and inflation rate (INFR) have the opposite expected signs and are statistically insignificant With respect to the import equation (IMP), the estimated coefficients of The Durbin-Watson statistic ranges in value from to A value near indicates nonautocorrelation; a value toward indicates positive autocorrelation; a value toward indicates negative autocorrelation 16 economic growth (GDP) and tariff rate of Lao PDR (TAXL) have positive signs in line with the expectations and are statistically significant at per cent and per cent, respectively An increase in GDP by per cent, the imports will rise by 1.540 per cent (elasticity of demand for imports is greater than 1), given the other factors are unchanged This is plausible in the Lao context because it could not have domestically produced It has thus relied on the imports to meet the needs of the domestic markets Certainly, a decline in TAXL by per cent, the imports will increase by 0.678 per cent, provided that the other things remain unchanged This can be argued that Lao PDR will import more when tariff rate reduces as a result of CEPT implementation The coefficients of INFR and EXR have the contrary signs and are statistically insignificant Though LIB is significant at per cent, its estimated coefficient is negative which is not in compliance with the assumption FDI is also positively associated with GDP and EXR, which can be obviously observed by the computed parameters with the expected signs and significant levels at per cent and per cent, respectively An increase in GDP by per cent will attract more FDI to invest in Lao PDR by 2.682 per cent A rise in or depreciation of EXR by per cent will also help create a conducive factor to attract FDI by 1.762 per cent Although, TAXL and INFR have positive and negative relationships with the FDI, they are statistically insignificant In the equation of government revenue (GOVR), GDP, IM, INFR have the expected signs and are statistically significant at per cent and per cent, respectively An increase in GDP per cent will stimulate GOVR to be raised by 2.687 per cent Interestingly, a reduction of TAXL will not affect the government revenue This means that tax revenue may reduce due to a reduction in tariff rate, but it will be offset by an increase in Value Added Taxes and profit tax derived mainly from hydropower projects and naturalresourced sector, namely mining The EXP, IMP, FDI, and GOVR equations have high goodness fit as the 17 Adjust R-squared are 0.934, 0.941, 0.817, and 0.961, respectively These suggest that the sample regression lines fit the data very well.Additionally, the Durbin Watson Statistics (D.W) of 1.574, 1.611, 1.684, and 1.532 illustrate non-autocorrelation or inexistence of the serial correlation of the error terms in the EX, IM, FDI, and GOVR equations of using the Lao data Table 2: Results of Regressions by Using the Weighted-Average Data Independent Variables Constant Dependent Variables ln(IMP) Ln(FDI) -7.213 -2.898 (-3.557)*** (-2.945)*** 2.068 2.436 (9.631)*** (23.378)*** ln(GOVR) -20.838 (-5.850)*** 1.928 (2.520)*** 1.147 (3.809)*** 0.213 (1.456) 2.296 (4.415)*** 0.585 (2.819)*** -0.916 (-13.900)*** 0.636 (7.286)*** -0.189 (-2.614)*** -0.167 (-1.622) -0.944 (-26.897)*** 0.217 (4.340)*** 0.548 (3.060)*** 0.995 0.993 1.739 (648.651)*** 0.015 (0.061) 0.963 0.952 1.662 (88.729)*** 0.478 (4.053)*** 0.998 0.997 1.443 (1,628)*** -1.288 (-10.169)*** -0.709 (-2.696)*** 1.910 (3.290)*** -0.328 (-0.756) 0.978 0.970 2.168 (119.519)*** ln(EXP) -11.079 (-4.296)*** ln(GDP) ln(GDPF) 1.400 (8.956)*** ln(TAXL) ln(TAXA) ln(INFR) ln(EXR) ln(IMP) LIB R-Squared Adjusted-R Squared Durbin-Watson Stat F-Statistic Sources: Author’s Estimation (2013), Table reveals the regression result of the estimated equations of the EXP, IMP, FDI, and GOVR by using the Lao data weighted with the data of its main trading partners, particularly China, Thailand, and Vietnam The results show more interesting and significant evidence In the EXP equation, the estimated coefficients of all independent variables 18 GDPF, TAXA, INFR, EXR, and LIB - have the expected signs and are statistically significant at per cent In other words, GDPF, TAXA, EXR, and LIB are associated positively with the export, whereas INFR has negative relationship with the export It is statistically implied that an increase in GDPF by per cent, the exports of Lao PDR will rise by 1.4 per cent, given the other factors remain constant Similarly, an increase in or a depreciation of EXR by per cent, the exports will go up by 0.636 per cent, provided that the other factors remain unchanged A reduction of TAXA by per cent, the exports will rise by 0.585 per cent, and regional economic integration or trade liberalization (LIB) will boost the exports to increase by 0.548 per cent.In contrast, INFR increases by per cent, the exports will go down by 0.916 per cent With respect to the IMP equation, the estimated coefficients of GDP and tax rate of TAXLalso have positive signs in line with the expectations and are statistically significant at per cent An increase in GDP by per cent, the imports will rise by 2.068 per cent, given the other factors are unchanged and a decline in TAXL by per cent, the imports will increase by 1.147 per cent, provided that the other things remain unchanged The coefficient of INFR has a negative sign, which is in contrast with the set assumption Yet, it is statistically significant at per cent, which can be contended that when the INFR increases, it may not only affect the exports, but also the consumers’ consumption delay As a consequence, demand for the imports will decline during the inflationary period In this case, an increase in INFR by per cent, the imports will decline by 0.189 per cent With regard to LIB, though it is insignificant, its estimated coefficient is positive, which gives an intriguing signal on an increase in import demand as a result of regional trade liberalization In respect of the FDI equation, the estimated parameters of GDP, EXR, and LIB are also positive and statistically significant at per cent, which confirm the set hypothesis An increase in GDP by per cent will attract FDI flows to Lao PDR by 2.436 per cent A rise in or depreciation of the EXR by per cent will also help create an incentive for FDI by 0.217 per cent.In addition, 19 regional economic liberalization will absorb more FDI flows to Lao PDR by 0.478 per cent In the GOVR equation, most independent variables, except TAXL, have the expected signs and are statistically significant at per cent An increase in GDP per cent will stimulate GOVR to be raised by 1.928 per cent A reduction of TAXL will not affect the government revenue, but GOVR will increase by 2.296 per cent Both INFR and EXR have negative impacts on the GOVR to be decreased by 1.288 per cent and 0.709 per cent, respectively Analogously, the Adjusted R-squared of EX (0.993), IM (0.952), FDI (0.997), and GOVR (0.970) are considered very high to explain the goodness fit of the models In addition, the D.W statistics of 1.739, 1.662, 1.443, and 2.168 indicate inexistence if the serial correlation of the error terms in the EX, IM, FDI, and GOVR equations of using the WAD In comparison, it is obviously observed that the empirical evidences derived from the WAD are better in terms of describing the expected signs and relationships of the specified variables of the models This is because more estimated coefficients have the expected signs, which support the set hypotheses Also, they are statistically significant Having used the Lao data, only GDPF and EXR have the expected signs and are associated positively with the exports, whereas TAXA, INFR, and LIB have the opposite signs and are statistically insignificant The WAD yields more plausible evidence since the estimated coefficients of all independent variables – GDPF, TAXA, INFR, EXR, and LIB - have the expected signs and are statistically significant at per cent In the IM equation, by using the WAD, the estimated parameter of INFR has become statistically significant at per cent and EXR has a negative sign, which confirm the set assumptions Also, in the FDI equation, INFR and LIB have become statistically significant at per cent With regard to the GORV equation, EXR has also become statistically significant at per cent with a negative sign, which verifies the specified hypothesis Additionally, the 20 D.W statistics of the equations by using both the Lao and WAD indicate nonautocorrelation of the error terms IV Conclusion and Policy Implication 4.1 Conclusion This dissertation has attempted to analyze the progress on the economic development before and after joining ASEAN of Lao PDR from 1990 to 2012; and to investigate the impacts of regional economic integration, namely AFTA on the Lao PDR’s government revenue, external trade, and flows of FDI In order to carry out the findings in accordance with the objectives, this paper simply employs descriptive and econometric approaches The significant findings reveal that Lao PDR’s economy has continuously grown with robust growth rates, particularly during the implementation of the 6th five-year NSEDP (2006-2010) In an average, the economic grew at 5.32 per cent during 1996-2000, 6.3 per cent in the period of 2001-2005, and per cent in the course of 2006-2010 The main contributors to the economic growth are seen in hydropower and mining The results also indicates that the GDP per capita of Lao PDR has gradually increased and been classified as a lower middle-income country in 2011 With regard to the output structure of Lao PDR’s economy, during 1996-2000, agricultural sector accounted for 50 per cent of GDP in an average, whereas industry and services covered 20 per cent and 30 per cent of GDP During 2001-2005 and 2006-2010, it is also seen that the general tendency of output structure has changed from agricultural-based economy towards industrialization in line with the GOL’s economic development strategy The percent share of agriculture in GDP has gradually declined, while the industry and services has grown up It is contended that the momentum of this growth is thanks to the regional liberalization and integration, namely AFTA participation AFTA participation has moderately affected the GOL’s revenue since 21 low tariff rates have induced more demand for the imports, reduced smugglings and promoted legal trade For the external trade of Lao PDR, the exports have tended to increase after joining ASEAN It is seen that the external trade deficit of Lao PDR has been mitigated after joining ASEAN since the exports have increased faster than the imports FDI has made a positive contribution to the manufacture of goods, economic growth and the restructuring of the economy Major FDI to Lao PDR in recent years comes from Thailand, China, Vietnam, and Australia, Many projects were invested in industry and handicraft, followed by services, agriculture, and mining With respect to the regression results, it is obviously observed that the empirical evidences derived from the WAD are better in terms of describing the expected signs and relationships of the specified variables of the models In the EXP equation, the WAD yields more plausible evidence since the estimated coefficients of all independent variables – GDPF, TAXA, INFR, EXR, and LIB - have the expected signs and are statistically significant at per cent In the IMP equation, the estimated parameter of INFR is statistically significant at per cent and EXR has a negative sign, which confirm the set assumptions Also, in the FDI equation, INFR and LIB are statistically significant at per cent With regard to the GORV equation, EXR is statistically significant at per cent with a negative sign, which verifies the specified hypothesis Additionally, the D.W statistics of the equations by using both the Lao and WAD indicate non-autocorrelation of the error terms In short, it is argued that participating in AFTA of Lao PDR can bring about positive benefits rather than the negative impacts This can firstly be evidenced by the faster economic growth rate after joining the trade bloc Secondly, though the export and import duties have tended to decline due to the tariff reduction, they have not affected much the tax revenue thanks to increases in other revenue sources Thirdly, participating AFTA has also attracted more flows of foreign direct investment and it has tended continuously augmented Finally, regional economic integration has improved 22 external balance since the exports have grown faster than the imports 4.2 Recommendation Based on the above-mentioned analytical results of economic growth and the consequences of ASEAN integration on the government revenue, external trade, and FDI of Lao PDR, some recommendations are proposed as policy implications for policy makers as follows: Firstly, with respect to economic growth, though the Lao economy has grown up with robust rates, Lao PDR has been generally considered in the early stage of economic development process Should it desire to move out from this development stages, it is suggested that it would be better for the GOL to continue to increase its expenditure – expansionary fiscal policy – on socio-economic infrastructure in order to clear the ground for the country to step forward to industrialization in the wake of globalization By doing so, there would be possibly numerous domestic enterprises and FDI increase in Laos At this juncture, it is projected that the exports would gradually increase and exceed the imports, which would also bring about the mitigation on trade balance The deficits on the trade balance of Lao PDR would improve and become surplus in the long term On the other hand, though Lao PDR has the fastest GDP growth rates in the region, it is still necessary for the country to work hard on developmental issues to prepare for economic integration in order to meet the goals set by the Asian Economic Community by 2015 Secondly, since the country is increasingly reliant on natural resources, in particular, mining and hydropower, it will be critical for the GOL to manage its natural wealth over time and space well to maximize economic benefits while limiting the potential negative social and environmental footprint It is equally essential to diversify growth sources to the non-resource-more-labor intensive sectors in order for the growth process to remain inclusive of all This is taken significantly into account for Lao PDR to achieve the Millennium Development Goals by 2015 and graduate from the list of the Least Developed Countries by 2020 23 Fourthly, the mining sector is currently contributing about 20 per cent to government revenue in Laos However, it is relatively uncertain as the sustainability of the sector is subject to the global commodity price and the continuity of exploration of activities There is a need to connect mining sector strategy to the national socio-economic development plan as well as to define the policy that optimizes the use of mineral reserve and attracts good quality investment Fifthly, now that the export and import duties have tended as a consequence of CEPT implementation, it is thus significant for the GOL to compensate such revenue loss by executing Value Added Taxes Sixthly, though FDI has gradually accumulated, the GOL should give more emphasis on selecting good quality investment that can effectively and efficiently contribute to socio-economic development of Lao PDR Seventhly, it is significant for the government to help domestic entrepreneurs to improve the quality of their products in order to enhance the export competitiveness with other ASEAN member countries and the rest of the world Eighthly, it is paramount for the GOL to take the import pattern into account As the country is still in the first stage of economic development, it is inevitable to avoid the huge imports, but it is better for Lao PDR to focus on importing the capital goods rather than the consuming commodities This will help Lao PDR to export more and mitigate the trade balance in the foreseeable future Finally, it is indeed important for the GOL to keep macroeconomic environment remained stable, particularly the stabilities of the inflation and exchange rates This is because they can positively and negatively influence the country’s economic growth, government revenue, FDI, and external trade 24 ... determinants of AFTA members’ trade flows and potential for trade diversion, including the impacts of creation of AFTA on its intra- and extra-regional trade flow by comparing trade patterns of AFTA. .. before and after joining ASEAN of Lao PDR from 1990 to 2012; and to investigate the impacts of regional economic integration, namely AFTA on the Lao PDR? ??s government revenue, external trade, and. .. approaches, and time periods Scope of Study The scope of this study is to focus on the impacts of regional economic integration, namely AFTA on the Lao government revenue, external trade, and FDI These