Abnormal Pricing in International Commodity Trade: Evidence from Lao P.D.R.

Introduction

In this post, the economics researchers based in Lao P.D.R. present their experiences over the period 2017-20. The blogpost was written by Dr. Vanthana Nolintha, a Senior Researcher and Deputy Permanent Secretary of Lao PDR’s Ministry of Planning and Investment and Mr. Vanxay Sayavong, Researcher and Deputy Chief of Macroeconomic Monitoring and Forecasting Division (MMF) at the Center for Macroeconomic Policy and Economic Restructuring (CMER), National Institute for Economic Research (NIER), Vientiane, Laos. The Lao economic research team has worked closely with the Swiss experts from the Graduate Institute of International and Development Studies, Geneva, Switzerland. Both Lao and Swiss researchers exchange ideas on a regular basis to jointly develop the research methodology and address specific challenges. The post therefore highlights both the achievements and challenges encountered during the three-year period. 

Our Research

Over the past three years, the Lao Economic Research team has initiated extensive research to investigate the pieces of evidence of illicit financial flows (IFFs) and the potential risks of IFFs along the value chains of two prominent commodities – copper and coffee – as case studies for Laos. While IFFs have received much attention internationally, the topic remains relatively unexplored in Lao PDR. The issue of IFFs is very important for Laos since the natural resource sector contributes a significant share of government revenue and Laos, as a low-income country, requires huge resources to finance its socioeconomic development or the implementation of Sustainable Development Goals (SDGs). Therefore, reducing revenue loss by curbing IFFs should be a priority for the Lao government and our research aims to provide novel evidence of existing IFFs in terms of abnormal pricing in international commodity trade by examining the presence of potential trade misinvoicing in copper and coffee exports in Lao PDR. 

We use the price filter analysis methodology which compares transaction-level export prices from the custom data against the free-market benchmark prices. The price filter analysis method used is based on several assumptions informed by significant commodity sector research and expert interviews. We find some evidence of abnormal pricing in Lao’s commodity exports. Firstly, we find a significant undervaluation of green coffee export, which is equivalent to 260 million USD or 77.1% of total coffee export during the study period of 2012-2017. Secondly, we find that the invoice prices of copper concentrate have been fixed at two price levels throughout the study period. Under such fixed price phenomena, we find some evidence of both overvaluation (210 million USD or 11.4% of the total export value) and undervaluation (104 million USD or 5.6% of total invoiced export) in the export of copper concentrate. Thirdly, we find that the invoiced export prices of refined copper cathodes generally lies within the range of free-market prices. 

Challenges encountered

Our research has encountered several challenges. The IFFs topic is very new but sensitive in the Lao context hence the team has to be very clear and careful while communicating the topic to our local stakeholders. Data required for our analysis is very limited both in terms of availability, access and quality. The team has to put a lot of effort into understanding and cleaning the data. Existing research on our studied commodities is also limited, making it difficult to formulate our assumptions to define the arm’s length price range, which is crucial for the price filter analysis. Therefore, the team addresses this by engaging with industry experts. Finally, the research methodology is new for the Lao research team but we are fortunate to receive extensive support from our Swiss colleagues. 

Insights and conclusion

Since the commencement of the R4D project in Lao PDR in late 2017, our project has raised more awareness and understanding of IFFs issue. Our research team engages intensively with relevant stakeholders, such as Custom Department, Tax Department, Mining Department, National Assembly, Ministry of Planning and Investment (MPI), the Bank of Lao PDR, Lao National Chamber of Commerce and Industry (LNCCI), and Lao Coffee Association (LCA). Most of the stakeholders have shown great interest in our research by engaging in several of our research activities such as key informant’s interviews and our local project seminars and consultation workshops.  Some stakeholders express their willingness to use our results to improve some of their works to better govern the natural resource sector. 

The Lao economic research team has worked closely with the Swiss experts from the Graduate Institute of International and Development Studies, Geneva, Switzerland. Both Lao and Swiss researchers exchange ideas on a regular basis to jointly develop the research methodology and address specific challenges. Other collaborations between Lao and Swiss researchers include country study visit, joint-policy dialogue workshops held in Laos and Switzerland. In Laos, for instance, we jointly organized a seminar on “Improving Resource Governance to Finance Development: Curbing Illicit Financial Flows (IFFs)” on 22nd January 2018 in Vientiane, and similarly, Lao research team participated and presented the preliminary results in the plenary workshop for R4D.ch project on “Curbing Illicit Financial Flows from Resource-Rich Developing Countries” at the Graduate Institute of International and Development Studies in Geneva during 14 to 16 February 2019.  

Mehrotra, R., Nolintha, V. & Sayavong, V. (2019). Abnormal Pricing in International Commodity Trade: Evidence from Lao P.D.R.. R4D-IFF Working Paper Series, R4D-IFF-WP02-2019. New version – under peer review.  

Photo by Pascal Müller on Unsplash

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