Country Brief

LAO

Country Brief

Development Progress

Lao People's Democratic Republic (Lao PDR) is the poorest and least developed country in the East Asia region, with an estimated per capita income of US$310 in 2002. More than three-quarters of the people of Lao live on less than US$2 a day, and the country's social indicators are among the worst in the region.

On a brighter note, Lao's poverty levels have decreased substantially since 1994. Preliminary results from a 2003 survey (The Lao Expenditure and Consumption Survey), indicate that the share of people living in dire poverty fell from 39 percent to 31 percent since the 1997/98 survey.

These levels have dropped in large part due to a decline in poverty rates among the rural poor. In 1997 poverty rates in rural areas were 50 percent higher than in cities. As of 2003, the incidence of rural poverty had dropped to just 30 percent more than in cities.

The drop in rural poverty reflects government shifts in agricultural policy toward greater market orientation. Diversification of production systems, a higher share of livestock production, and continuing regional specialization have spurred agricultural growth since 1997. Agriculture remains the major driver of the economy, contributing 53 percent of GDP and employing over 80 percent of the labor force.

Transforming the Economy

With the introduction of its "New Economic Mechanism" in 1986, Lao PDR has been gradually reforming its economy, transitioning from a centrally planned to a market-oriented system to achieve economic stability and increased growth. The economic plan is also helping to boost levels of foreign direct investment and the flow of trade, particularly with the Association of South East Asian Nations (ASEAN) member countries, China, Japan, the European Union, and the United States. The growth of Lao's GDP averaged 7 percent from 1992 to 1997, and 5.8 percent from 1999 to 2003.

The government has undertaken a broad range of reforms in several areas, including public expenditure management, natural resources management, trade policy, state-owned enterprises, and the banking sector. The World Bank's Lao PDR Economic Monitor provides an in-depth look at the country's economy and examines measures taken by the government to reform key sectors. The following is a brief overview of the reform process:

Public Sector Reform

The Government is taking a series of important steps to improve the collection and management of public revenues and to increase transparency and accountability in the use of public funds. For example, the finance ministry has begun publishing its budget in the Official Gazette. This is a significant step forward in making government functions more transparent. The finance ministry has also established an office to monitor government purchasing and procurement, which is part of a larger project to help improve the public procurement process.

The government also has adopted mandatory accounting regulations which must be established and maintained in each ministry, province, district, and agency. The regulations require the government to provide financial statements which are then submitted to the National Assembly at the end of each fiscal year. These and other measures are being undertaken to enhance financial accountability and transparency by improving controls over revenues, expenditures, assets, and liabilities.

Financial Sector Reforms

Currently, Lao PDR's financial sector creates many obstacles to economic growth and stability. Fundamental changes are needed in several areas, including privatizing state-owned commercial banks; upgrading accounting standards; improving the supervision capacity at the Central Bank; restructuring regulatory policy to level the playing field for private- and public-sector banks; and ending Central Bank interference in the commercial banking sector. State-owned enterprises account for a large share of the non-performing loans granted by state-owned commercial banks and continue to be a drain on the budget.

With the support of the Asian Development Bank, the European Union, the International Monetary Fund, and the World Bank, the Lao government is implementing its banking-sector reform through the Financial Management Adjustment Credit, which aims to improve the operation and management of state-owned banks. Key next steps include creating a medium-term strategy for the financial sector that supports growth in the private sector, reforms in accounting standards and practices to improve access to information, and improvements to the legal framework and judicial capacity to enforce contracts on a fair and timely basis.

Private Sector Development

Lao PDR offers some comparative and competitive advantages in certain private sector development activities due to its relatively low labor and production costs, its natural resource base, and its inexpensive tax structure. Garment manufacturing, for example, is now a major export earner, rivaling timber and wood products. But these key exports face challenges from a 2005 quota reduction and WTO accession.

The potential for the development of the private sector is limited by numerous factors, including a small economy of scale, a nascent domestic market, few domestic suppliers, general difficulties with importing and exporting materials, little tradition of manufacturing, lack of access to credit, and poor infrastructure. The country's institutional and legal framework needs to be strengthened in order to attract levels of foreign direct investment needed for significant growth. The legal environment often lacks transparency and is saddled with informal red tape and practices that allow abuse and increase the cost of doing business.

The government has taken several steps to improve the investment climate and promote investor confidence, including the passage of the Prime Ministerial Decree of April 23, 2003, which provides local governments’ new autonomy over investment and defines the responsibilities of relevant ministries and agencies at central and local levels. The government has amended its constitution to explicitly promote economic development and to confirm the country's intention to guarantee interest in property and lawful capital of all investors.

Finally, the Department of Domestic and Foreign Investment Management of the Committee for Planning and Cooperation (CPC) began publishing a quarterly newsletter in July 2003 to disseminate information on foreign direct investment to investors. The newsletter provides updates on investment regulations (mainly on decentralized management and approval process at the central and provincial levels), tips for applications, investment incentives for various priority sectors and investment zones, and data on the cost of doing business in Lao PDR.

Laos - Department of Domestic and Foreign Investment (DDFI)

State-Owned Enterprises

The government's efforts to reform state-owned enterprises aim to increase efficiency and promote the country's commercial viability. Lao PDR introduced reforms in the 1990s that reduced the large number of state-owned enterprises -- closing them down, easing them out, or privatizing them. Remaining government enterprises play a small role in the economy in terms of GDP and employment. However, the remaining state-owned enterprises contribute a large share of the non-performing loans in the state-owned banking system.

Reform of state-run enterprises is integral to the success of economic reforms, due to their impact on economic stability. The government's reform program aims to improve governance of enterprises in which the state has capital at risk; restructure those enterprises that have caused losses to the state; and rationalize the regulatory and pricing environment for infrastructure SOEs, initially through tariff reform.

Forestry and Natural Resources

Nearly half of Lao PDR is covered with valuable, productive and ecologically unique forests. These play a central role in supporting both rural livelihoods and the national economy. About 85 percent of the people in Lao PDR live in a rural area. These people tend to be highly dependent on forests, especially as sources of food, raw materials, revenue, and traditional medicines. Villagers may obtain half of their income and also half of their dietary protein from forest products. The country's poorest people often depend most heavily on forest resources, especially in times of scarcity. Forests also contribute about 7 to 10 percent of the country's GDP and 15 to 20 percent of all non-agricultural GDP.

The agricultural and forestry ministry recently approved new reforms to promote sustainable management of forests. The new guidelines and legislation provide a sound basis for the establishment and management of production forests with participation of local people. The government has approved a new forestry and rural development project supported by the World Bank and the Government of Finland, which will restructure the state-owned forestry enterprise, BPKP, into a private company.

What Does Lao PDR Export?

Lao exports are highly concentrated in a few product categories. In 2002, garments were 33.6% of the total, electricity 33.3%, wood and wood products 20.6%, and coffee 5.5%. Soon however, gold and copper will become one of the key exports and will drive future export growth.

Where Are Lao PDR's Markets?

Current export markets are limited to Thailand, Vietnam, France, Germany, Italy, and Belgium. China is becoming a potential export market, especially for timber and agricultural products. Exports of mining products to Australia are expected to grow rapidly in the near future.

Trade Liberalization

Trade liberalization is one of the key elements of Lao PDR's economic reform. The country has applied for membership in the World Trade Organization. There has been significant progress in trade sector reforms: basic tariff and non-tariff trade barriers have been removed or minimized; export and import licensing procedures and regulations have been simplified; exchange control and transfers have been liberalized; transport infrastructure and services to facilitate trade and investment in the country and region are being modernized; one-stop services at customs border check-points have been introduced to reduce bureaucratic procedures and provide better export and import services; and price controls have been removed (except those on fuel). The government has made a significant effort to boost local production to help reduce the need for imports and to increase exports in order to reduce the trade imbalance.

The World Bank Group in Lao PDR

The World Bank has supported the Lao PDR's development efforts since 1977 through 34 interest-free loans from the International Development Association. The Bank's commitments to date total US$711.3 million, including about US$31 million in grants. Currently, there are 12 World Bank supported projects underway in various sectors, including agriculture, education, finance, energy, health, and the environment. Twenty-three projects have been completed.

The Bank's assistance strategy for Lao PDR supports the government's broad goals of reducing poverty, stabilizing the economy, reforming the financial sector, developing infrastructure and the rural economy, and building social capital.

The World Bank is currently working with Lao PDR to develop a Country Assistance Strategy. The strategy will focus on capacity-building in all areas and levels of government in order to help Lao PDR overcome the obstacle of weak institutions and weak capacity which has stymied its development efforts in the past. Consultations are currently underway with key stakeholders from the government, civil society, the private sector, as well as with the donor community.

In April 2002, the government finalized its Interim Poverty Reduction Strategy Paper. Using the strategy paper and the five-year National Socio-Economic Development Plan, the government, through a consultative process, prepared its National Poverty Eradication Program. The program articulates Lao's framework for poverty reduction, specifies targets and goals, and listsprograms that will be needed to achieve those goals.

Results: Helping Communities Improve Their Quality of Life

Education: The recently completed Education Sector Development Project helped improve the quality of education in seven provinces by developing a new multi-lingual curriculum and providing new textbooks and teacher guides for primary and secondary schools. Under this project 277 primary schools and 31 secondary schools were built. More than 3 million textbooks 200,000 teacher guides were printed and distributed.

Rural Development: The Agricultural Development Project is helping to reduce rural poverty by involving communities in improving and increasing agricultural production. The project supports the rehabilitation of small-scale irrigation systems and improvement of rural water supply and sanitation. The recently completed District Upland Development and Conservation Project helped improve the livelihoods of communities while protecting biodiversity in a nearby protected area by improving the productivity of agricultural practices by local farmers.

Natural Resources and Environment: The Sustainable Forestry for Rural Development Project is designed to support the government's commitment to bringing the country's priority natural production forests under participatory sustainable forest management. This forest management policy aims to create a partnership between the government and communities to foster stewardship of forests and their valuable resources. The policy gives local communities an equitable share in the revenue earned from the sale of forest products.

The project is designed to involve local communities in identifying forests to be made into "Forest Management Areas." Community participation will help ensure the protection of areas of social and cultural value, including sacred forests and other cultural assets. Community participation in planning land-use and in forest management will also serve to clarify land tenure and resource use rights and promote greater consultation, fairness, and consistency in land allocation and forest regulation.

Infrastructure: The Provincial Infrastructure Project is helping to reduce poverty and improve living standards in Oudomxay and PhongsalyProvinces by rehabilitating and upgrading basic infrastructure -- including roads and water supplies -- for about 52,000 people in 125 villages.

The project is building roads to provide year-round access to a number of isolated rural communities. The project will connect these communities with the rest of the country and increase economic opportunities for the people in these poor communities. Creating access to these communities will also pave the way for future development projects, which have been hampered in the past by poor access. The project is also bringing low-cost water and sanitation services to about 42,000 people in 165 rural communities, many largely populated by ethnic minorities.

Social Protection: The Poverty Reduction Fund is helping local governments and local communities collaborate to determine their most pressing development needs -- whether they be bridges, schools, nurseries, clinics, community halls, communal water supply systems, or irrigation and drainage systems. The project then helps communities plan and manage the public investments that will address those needs. The project is working to empower local communities and strengthen local institutions to support participatory decision making and conflict resolution processes at the village and district levels and ensure the inclusion of women and the poor in the decision-making process.

Financial Sector: The Bank is supporting the government's reform efforts through the Financial Sector Adjustment Credit. The program is reforming the management of public expenditures, state-owned enterprises, and state-owned commercial banks to improve management of public funds and to put the country on a healthier economic footing.

Land Titling: An important element of the government's policy to move toward a market-oriented economy is the development of efficient land markets. The Land Titling Project is working to provide landowners with official titles of ownership to their land. Titles can be used as collateral to get bank loans, which can be used to expand businesses or establish new ones. Titling has also made it easier to obtain longer-term loans from banks, making possible some larger projects investments such as building apartment buildings.

Also noteworthy is the project's involvement of the Lao Women's Union in community outreach to inform women of the benefits and risks of land titling. As a result, the number of titled land parcels registered jointly and in the names of women exceeded the number registered in the name of males, compared to provinces not included in the project.

A second land titling project has just begun, and will provide titles to 200,000 families in urban, peri-urban, and lowland agricultural areas. In urban areas, secure property rights should promote more investment in property development, while in peri-urban areas land titles will provide incentives for rural land holders to invest in agricultural land and adopt more sustainable and environment-friendly agricultural practices.

What is in the Pipeline?

Lao PDR will be receiving a US$13.2 million credit for the Second Education Development Project, which will allow the country to provide universal primary education. This project aims to bring primary education services to the country's 19 poorest districts in the 6 poorest provinces and to improve the abilities of education officials to plan, budget, and manage school services and monitor their results. The project would help improve classrooms, school facilities, curricula, and textbooks, and provide training to improve the skills of teachers. To ensure greater equity in the delivery of education services, children in the poorest provinces would receive grants to attend school.