Determinants of Economic Growth in Laos

Abstract

This paper identifies the key determinants of economic growth in Laos, using annual time-series data from 1980 to 2010. To avoid the problems of non-stationary associated with time series analysis, the Dickey-Fuller unit roots statistic is checked in order to ascertain whether the variables are stationary. This prevents problems of spurious results in the regressions by transforming the dependent and independent variables in the first different operator form. This paper contributes on the on-going research issue whether foreign aid and trade liberalization help developing countries to foster their growth. The findings show that trade openness and foreign aid contribute to economic growth in Laos. Furthermore, foreign direct investment, domestic investment, government expenditure, labour force and being a member of ASEAN also found to have positive effects on the performance of the economy, whereas the population growth has a negative impact. This is in line with the argument that a large population is related to the capacity of government expenditure to provide the people with social services efficiently, thereby negatively impact development. To sustain a high rate of growth, this paper suggests improving the trade policy orientation, based on value-added products for exporting, together with investment policy adoption and tourism promotion based on the potential resources of the country. The foreign aid allocation should be focused on specific areas, such as (1) promoting economic growth and (2) direct intervention for the poor, and ensured the positive effectiveness with accountability and transparency methods for aid allocation.