IN THE SHADOW OF CHINA: TRADE AND GROWTH IN LAO PDR

The rapid integration of China into the global economy has profoundly altered external economic conditions for its neighbors and the wider developing world. This study explores the effects on Laos, a small developing country on the fringe of the Chinese market. The Lao case captures both global effects transmitted across the world market and a regional impact that may be limited to countries located close to China. Based on unique trade and household data-sets, the study identifies three main effects of China’s growth on the Lao economy: (i) an increased demand for exports of primary commodities to the Chinese market; (ii) increased inflows of Chinese manufactured goods competing with domestic Lao production; and (iii) border effects in northern Laos where low transaction costs have allowed even the poorest households to participate in exports to China. The first and second of these effects are expected to apply to most developing countries, whereas the third is unique to developing countries located close to the Chinese market. In the long run, it is possible that increasing wages and a gradual reduction of the Chinese surplus of unskilled labor will create new opportunities for labor intensive industry in other developing countries, but the short run strategies of many countries should probably focus on gradual upgrading of resource based industries.