Development Assistance for the Trade Sector in the Lao PDR: Evaluations and Future Directions for Korea's Aid for Trade

Yoocheul Song, In Soo Kang, and Hosaeng Rhee

The total size of Aid for Trade (AfT) and the share of AfT in ODA have increased substantially during the past decade. Likewise, Korea now gives greater priority to Aid for Trade in its development assistance program. Currently categorized as one of the Least Developed Countries, Lao PDR is seeking to graduate from LDC status by 2020. In its 7th National Socio-Economic Development Plan, it is outlined that trade has a critical role in developing the country’s economy. Therefore, international organizations and donor countries are making efforts to strengthen trade in Laos through the implementation of AfT programs.

After carefully observing the current domestic situation in Laos as well as aid activities by other donor countries, we have selected the garment industry, trade finance and export promotion services as potential areas of cooperation between Korea and Laos. Korea possesses abundant experience in the above-mentioned areas since it utilized them to encourage trade activities during its development stage during the 1970’s and the ’80s. By reflecting on Korea’s own development experience, the paper aims to provide an analysis of the challenges Laos is currently facing, and seeks to map out plans for future program to promote trade in Laos.

The garment industry is one of the most important exporting industries in Laos. However, its productivity is lower compared to competing countries. Therefore, we chose technical/vocational education and training (TVET) in the garment industry as one of the fields for Korean AfT. The problems regarding TVET in Laos are as follows: difference between demand of the industry amd supply from the TVET institutions, lack of effective participation of the industry and its constituent enterprises, and difficulty in accessibility. Therefore, we recommend development of a systematic support plan for TVET in the Laotian garment industry.

The high interest rates, small amount of loans and vulnerability of the private banking system are reasons why we also selected trade finance and export credit as one of the fields to be improved by Korean AfT. In particular, the efficiency of private banks in Laos is very low and the net interest margin appears very significant. Therefore, utilization of state owned commercial banks in trade financing to lower interest rates should be introduced at the first stage. Because the scale of trade financing is not sufficient to cover all sectors, a specific sector should be chosen to bring about sufficient results. However, Laos should follow the Agreement on Subsidies and Countervailing Measures of the WTO, as it is a member of the WTO.

During the development period, trade promotion service in Korea played a critical role in increasing the amount of exports and diversifying export destinations. Because the private sector in Laos is not big enough to have a specialized ‘section’ for exports, a government-supported trade promotion service can bring new opportunities to the Lao private sector, and especially for small and medium size enterprises. At the first stage, the individual service based on a Trade Portal can be introduced; followed by the establishment of a government-affiliated trade promotion agency, which should be considered the next stage.

The Aid for Trade by the Korean government for improvement of competitiveness of the garment industry, and on trade finance/export credit and export promotion services can help economic development of Laos by increasing trade. Korea has much experience on its implementation from its own development process and Korea also has more than adequate experience in the aforementioned fields, in terms of ODA to help other countries. Therefore, AfT in these three fields can lead to greater effectiveness and efficiency. These fields are also relevant for Laos as the Lao government placed much emphasis on them. If the work programs in this study are created and implemented, it would greatly facilitate and promote trade in Laos.