Laos in the ASEAN free trade area: trade, revenue and investment implications

Abstract

The Lao People’s Democratic Republic (PDR) is a transitional economy, and one of the few least developed economies in the Southeast Asian region. Laos became a member of ASEAN in July 1997, and will participate in the ASEAN Free Trade Area (AFTA) from 1 January 1998. This paper examines the likely impact of AFTA membership on Laos’s trade, government revenue and foreign investment flows. It is found that: (i) trade diversion is likely to be low, and that AFTA will provide the vehicle to negotiate market access issues with Thailand; (ii) the reduction in government revenue from trade taxes is likely to be low, particularly in the light of the high share of informal trade and low levels of trade diversion; and (iii) foreign direct investment (FDI) flows are likely to grow sharply, as the legal, administrative and institutional framework in Laos develops to meet the ASEAN standard.