Lao PDR is a resource-rich, developing country in Southeast Asia with a population of 7.2 million. Economic growth averaged more than 7% per year for most of the last decade, among the fastest in Asia. The Lao economy is heavily dependent on capital-intensive natural resource sector exports, which include hydroelectricity, mineral and agricultural commodities (copper, gold, coffee, wood products and cassava). This sector plays a major role in driving domestic economic growth through export earnings and attracting foreign direct investment (FDI), but overall domestic revenue mobilization remains low in Laos.
Recent research has shown that revenue contributions from the natural resource sector can be affected by practices contributing to illicit financial flows (IFFs). IFFs in the form of trade mispricing and abusive transfer pricing have been identified as particularly significant risks for tax base erosion in this sector. While IFFs have received much attention internationally, the topic remains relatively unexplored in Lao PDR. However, this is potentially a very urgent economic risk for Laos since the natural resource sector contributes a significant share of government revenue. Since the commencement of the R4D.ch project, our first priority was to therefore present the latest research on IFFs to policy makers and high-ranking officials.
Over the past one and half years of participation in the R4D.ch project, the Lao research team led by Dr. Sthabandith Insisienmay, has initiated extensive research investigating the evidence of IFFs, regulatory loopholes and the potential risks of IFFs along the value chains of two prominent commodities – copper and coffee. The preliminary results were presented in the plenary workshop for R4D.ch project on “Curbing Illicit Financial Flows from Resource-Rich Developing Countries” held at the Graduate Institute of International and Development Studies in Geneva on 14 – 16 February 2019. The results suggest that there are potential risks of IFFs along the value chains of both copper and coffee, and the preliminary estimates also indicate significant tax revenue losses due to IFFs.
The plenary workshop of the project allowed the Lao team to receive useful comments and recommendations from the members of our project’s advisory board (including Dr. Leeber Leebouapao, Vice President of National Institute for Economic Research, NIER) as well as academics and senior experts from various international organizations. The team received a significant amount of valuable feedback from the advisory committee, including: (i) identification of specific contributions to academic literature and empirical methodology; (ii) areas for further research on trade between unrelated and related parties, and (iii) simplifying the terminology of illicit vs. illegal for building more precise understanding with policymakers.
In addition to the workshop, Lao research team also had great opportunity to join the rich discussion at the public event on Taxation and Development: Addressing IFFs in Commodity Trade organized by the Graduate Institute.