1
The Effects of AFTA on Macroeconomic Variables and Poverty:
Evidence of Laos
Phouphet Kyophilavong
1
; Richard Record
2
; Shinya Takamatsu
2
;
Konesawang Nghardsaysone
2
; Inpaeng Sayvaya
3
Abstract
The ASEAN Free Trade Agreement (AFTA) plays an important role in regional economic
development. However, whether AFTA contributes to issues of poverty is still not clear.
Therefore, the main objective of this study is to assess the impact of AFTA on poverty using
Laos as a case study. We applied a CGE model and micro-simulation for this study. The
simulation from the CGE model shows that overall, Laos will gain from AFTA through
increasing GDP and welfare gains, and improvements in terms of trade, but will also
experience an increase in trade deficits. The gains from AFTA will mainly come from the
improvement of trade facilitation and significant increase in FDI. The results of the micro-
simulation confirm that Laos will increase in general measures of welfare from AFTA,
especially among rural households. In addition, AFTA might also reduce income inequality at
the national level. It indicates that AFTA will bring positive impacts to the Lao economy,
poverty and income distribution.
Keywords: ASEAN; Laos; CGE model; Micro simulation
JEL Classification: F15; F17
1
Faculty of Economics and Business Management, National University of Laos,
Phouphetkyophilavong@gmail.com
2
The World Bank.
3
Faculty of Economics and Management Champassak University, Laos.
2
1.0. INTRODUCTION
The impact of trade liberalization on growth and poverty is of major interest to academics
and policy makers. Empirical studies show that trade is important to stimulating economic
growth and structural change, which can lead to higher incomes and the reallocation of
production and consumption (Winter, 2004; Dollar, 1992; Frankel and Rose, 1999).
However, there are still some questions as to whether or not trade liberalization is good for
poor households.
The Lao People’s Democratic Republic (hereafter Laos) is a Least Developed Country (LDC)
in economic transition and there is a large development gap between Laos and other
countries. The Government of Laos’ (GoL) national development goal is to graduate from
LDC status by the year 2020, while balancing economic, social and environmental issues
(GoL, 2004; 2006). The GoL is liberalizing trade in order to increase economic growth and
reduce poverty. One of the most significant steps towards trade liberalization, Laos joined the
ASEAN Free Trade Area (AFTA) in 1998.
Laos has achieved economic growth in the past decade along with remarkable poverty
reduction. However, Laos still faces various economic problems. First, Laos is facing budget
and trade deficits. Second, despite reducing poverty gradually, poverty is still high, especially
in rural areas, and inequality has increased.
Therefore, there are some questions concerning whether trade liberalization such as AFTA
will raise or alleviate poverty in Laos. The AFTA could have positive and negative impacts
on poverty depending on changes in household income, factor markets, household and
commodity markets. However, there are very few studies focused on the impact of AFTA on
poverty in Laos. Most studies are descriptive analyses which do not use comprehensive
economic models.
Given the fact that research on these issues is so limited, the impact of AFTA on
macroeconomic variables and poverty is still not clear. Therefore, we used the CGE model
and micro-simulation to analyze the impact of AFTA on macroeconomic variables and
poverty in Laos. This results of this study are vital to formulating appropriate policies for
gaining the maximum benefits from AFTA.
This study has three main contributions to the literature. Firstly, it is a pioneer study in
linking the CGE model and micro-simulation to analyze the impacts of AFTA on poverty in
Laos. Secondly, in order to capture dynamic trade liberalization impacts, we consider the FDI
impact and trade facilitation improvement from AFTA. Third, in order to investigate in more
detail the impacts of AFTA on poverty, the logit model is used to analyze the factors
influencing the gainer and loser from AFTA.
This paper is organized as follows. Section 2 overviews the current economic integration in
Southeast Asia and opportunities and challenges of ASEAN. Section 3 overviews the current
situation and issues of the Lao economy, poverty and characteristics of trade. Section 4
reviews key literature related to the subject of trade liberalization under ASEAN and poverty
impacts. Section 5 describes the research methodology used in this study. Section 6 presents
the results of study and discusses their interpretation and application in national and regional
contexts. Section 7 provides conclusions and policy recommendations.