Academic journal article Journal of Southeast Asian Economies

Petroleum Prices and Poverty in Laos

Academic journal article Journal of Southeast Asian Economies

Petroleum Prices and Poverty in Laos

Article excerpt

I. Introduction

Lao PDR (subsequently Laos, for brevity) imports virtually all of the petroleum products it uses. It is obvious that if the international prices of these imports rise, there will be negative economic consequences within Laos. Declines in these same prices will do the reverse. But how large will these effects be and how will different groups of people within Laos be affected? And how will changes in petroleum prices affect the achievement of the Millennium Development Goals (MDGs)? All petroleum importing countries were negatively affected by recent increases in petroleum prices, but Laos has some particular features which make these issues especially important and which complicate the analysis. First, it is a poor and mountainous country with a high rate of poverty incidence, especially in rural areas. (1) Second, roads in many rural areas remain badly maintained or even non-existent. The implication is that transport costs within Laos are unusually high. Moreover, because the poorest people often reside far from urban centres, these people are the most disadvantaged by the high transport costs resulting from inadequate roads. Increases in petroleum prices imply increases in transport costs.

Over the past two decades Laos has made considerable progress in reforming legal and administrative obstacles to market-based development. But for people facing very high transport costs arising from bad roads, these reforms may be of limited value. For them, markets cannot be accessed except at high cost. Considerable effort is being invested in the improvement of rural roads in Laos. The expected benefits include reductions in the incidence of poverty within rural areas. Petroleum price increases are therefore a matter of concern because they threaten to undermine the contribution that improved roads can make to the achievement of sustained reductions in poverty incidence, along with other MDGs, to which both Laos and the international community are committed.

The quantitative relationships between petroleum prices, transport and other costs, and poverty reduction are not well understood. The present study focuses on these relationships. The analysis uses a general equilibrium modelling approach in which the relationship between transport costs and poverty incidence is a central focus. Section II describes the information available on the relationship between road improvement and transport cost. We then use this information to analyse the effects of petroleum price changes using a multi-sector and multi-household general equilibrium model of the Lao economy which accommodates the importance of the road quality--transport cost linkage. This model is described in section III. Three features are especially important. First, it distinguishes four categories of households, one urban and three rural categories, the latter three differentiated by the quality of roads which service the villages in which these rural households are located. Second, each of these four categories of households contains 100 household sub-categories, arranged by real expenditures per household member. Third, the three rural household categories differ according to the transport costs that they face, commensurate with the quality of roads servicing them. The results of the analysis are presented in section IV. Finally, section V draws out the major conclusions that follow from the results.

II. Road Access, Transport Costs and Poverty Incidence

Petroleum prices affect the poor via their effects on transport costs. An analysis of the way petroleum prices affect poverty in Laos should take account of the wide differences in transport costs faced by different categories of households within that country. Motorized vehicles are the dominant mode of transport in Laos, carrying 91 per cent of total freight ton-kilometres and 95 per cent of total passenger-kilometres. The Lao road system, which totals just above 31,000 kilometres, is mostly in poor condition. …

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