Note: Correction added on 16 May 2013 after first publication online in Asian Economic Policy Review Volume 8, Number 1. The article title has been corrected to read “Comment on ‘The Lao Economy: Capitalizing on Natural Resource Exports’ ”.
ASEAN’s New Frontiers
Comment on “The Lao Economy: Capitalizing on Natural Resource Exports”†
Article first published online: 15 MAY 2013
© 2013 The Author. Asian Economic Policy Review © 2013 Japan Center for Economic Research
Asian Economic Policy Review
Volume 8, Issue 1, pages 90–91, June 2013
How to Cite
Kyophilavong, P. (2013), Comment on “The Lao Economy: Capitalizing on Natural Resource Exports”. Asian Economic Policy Review, 8: 90–91. doi: 10.1111/aepr.12007
- Issue published online: 15 MAY 2013
- Article first published online: 15 MAY 2013
Menon and Warr (2013) have three main objectives. The first is to examine the Dutch disease syndrome. The second is to examine the government expenditure financed by revenue from mining and hydropower that delivers the greatest benefits to the poor; and the third is to suggest policy options and highlight challenges for Laos.
In order to respond to the first objective – the detection of the Dutch disease syndrome – Menon and Warr used a regression analysis to examine the relationship between the real exchange rate and the current account deficit. Their results show that the current account deficit is significant in leading to an appreciation of the real exchange rate, which demonstrates the Dutch disease syndrome in Laos. In order to achieve objective two, an integrated multi-household Computable General Equilibrium (CGE) model was used to examine the effectiveness of government spending on the poor (Warr et al., 2012). The results show that spending produces a Dutch disease effect on the Lao economy and also reduces poverty, based on the characteristics of the spending. The findings also show that if poverty is to be reduced, it is crucial that spending focuses on rural rather than urban areas. Finally, Menon and Warr give three options and challenges for dealing with the Dutch disease: macro policy, expenditure policy, and protection policy.
I found this paper to be rich in information about the Dutch disease and a good analysis of the hypothesis and government spending from windfalls. This study is relevant to policymakers and donors involved in formulating policies and strategies to cope with the Dutch disease or the resource curse in Laos. However, I have three concerns with Menon and Warr's analysis. First, it is questionable whether Laos has been affected by the Dutch disease. Basically, there are four ways of detecting the Dutch disease: (i) an appreciation of the real exchange rate; (ii) declining input factors in the non-booming sectors; (iii) declining exports and output in the non-booming sectors; and (iv) declining real gross domestic product (GDP) (Corden & Neary, 1982). Kyophilavong and Toyoda (2012) also point out that Laos might suffer from the effects of the Dutch disease. However, recently, the appreciation of the real exchange rate may be due to other factors, such as the weakness of the US dollar against Asian currencies, or it might derive from productivity effects. In addition, the recent de-dollarization policy of the central bank seems to be one of the most important factors causing the appreciation of the Lao kip against the US dollar and Thai baht. I think that it is important to use monthly or quarterly data or to use the autoregressive distributed lag (ARDL) bounds test approach to detect Dutch disease syndrome given the small sample of annual data available. Second, the results from the CGE model show that spending is more effective in reducing poverty if the spending focuses on rural rather than urban areas. Even though government revenue has recently increased, Laos still faces a budget deficit. Therefore, it is more interesting to find out what kind of households benefit the most from government spending by looking at household characteristics. As there are no estimates of the free parameters used in the CGE model for Laos, Menon and Warr used parameter estimates from Thailand. I think it is important to estimate and use parameter estimates from Laos in the future studies.
Finally, I am concerned about the policy options. I will break this down into three parts. First, there is evidence that increased expenditure derived from windfalls leads to an acceleration in the appreciation of the real exchange rate. I think it is important to consider the balanced budget principle. As Laos currently needs more investment in vital infrastructure, such as health care and education, it might not be feasible to apply this principle now. But expenditure should be transparent and effective, and it should be focused on promoting trade goods, in particular, as well as human resource development, infrastructure, and health care. Second, it is important to discuss exchange rate policy. The Bank of Lao (BoL) People's Democratic Republic (PDR) has adopted a floating exchange rate regime. The government could intervene to adjust the exchange rate, but the focus for BoL seems to be on de-dollarizing the Lao currency. Third, Menon and Warr do not include a discussion of the current rules and regulations on expenditure. I think it is important to discuss decision-making, rules, and regulations on government spending. In addition, Laos has a high external debt, which accounted for about 60% of GDP in 2010. In order to reduce domestic windfall spending, I think it is important to repay this debt as soon as possible. Borrowing massive amounts of money might accelerate the appreciation of the real exchange rate, therefore during boom times, it is important to avoid massive borrowing and effectively manage expenditure.
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