Trade Liberalization, Pollution and Poverty: Evidence from Lao PDR

Various empirical studies have confirmed that trade liberalization stimulates economic growth. In order to strengthen economic development and emerge from Least Developed Country (LDC) status by the year 2020, the Government of Lao (GoL) PDR is eager to capitalize on trade liberalization agreements such as the ASEAN Free Trade Area (AFTA) and future membership of trade organizations such as the World Trade Organization (WTO). However, the exact impact of trade liberalization is debatable, especially in LDCs such as Lao PDR, which face various economic and social constraints. Due to a lack of research on this issue, the impact of trade liberalization on pollution and poverty is unclear from a quantitative perspective. The main objective of this study is to use a Computable General Equilibrium (CGE) model to analyze the impact of trade liberalization on pollution and poverty. In particular, this study uses two approaches: a Global CGE model – GTAP model – to assess the impact of trade liberalization on CO2 emissions, and a micro-simulation to assess the impact of trade liberalization on poverty. The results from the GTAP model show that trade liberalization has a positive effect on growth, but this effect is relatively small. Surprisingly, trade liberalization decreases CO2 emissions but the change is small due mainly to declining output in some sectors as a result of trade liberalization. However, trade liberalization increases the rate of resource depletion in some sectors because the demand for products increases. The micro-simulation using a household survey indicates that the change in household welfare due to tariff reduction is heterogeneous. The winners from the tariff cut are urban households, households in Vientiane, the capital of Lao PDR, and non-poor households in urban areas. The losers from this policy change are households that do not belong to the above categories; these households suffer a drop in income and their poverty rate increases.