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p. 3 of 12 BACK | NEXT Executive Summary I. Recent Economic Developments A. Growth, Employment, Saving, and Investment B. Fiscal Developments C. Monetary Development and Prices D. External Trade and Balance of Payments II. Short-and Medium-Term Economic Prospects and Policy Issues III. Poverty Reduction

Country Economic Review: Lao People’s Democratic Republic : I. Recent Economic Developments

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A. Growth, Employment, Saving, and Investment

1. Aggregate Growth

1. From 1992 until 1997, the gross domestic product (GDP) of the Lao People’s Democratic Republic (Lao PDR) grew at an average rate of 7.0 percent. In 1998, GDP growth slowed to 4.0 percent only to increase to 7.3 percent in 1999 and 5.9 percent in 2000 (Table 1). The slowdown in economic growth was less dramatic than in many other Association of Southeast Asian Nations (ASEAN) countries and was largely caused by a reduction in foreign investment and construction spending. Agriculture led the recovery in 1999, although manufacturing and electricity production were also major catalysts for recovery in 1999 and 2000 (Figure 1). The country is growing from a low economic base. Population growth at around 2 percent per annum reduces the beneficial effect of economic growth on per capita income growth. The Lao Expenditure and Consumption Surveys (LECS) data show that between 1992/93 and 1997/98, per capita consumption grew at an annualized rate of 5.8 percent (Table 2).

2. The regional financial crisis affected the country negatively, reducing GDP growth, Government revenues, and officially measured imports and exports. It contributed to the sharp increase in inflation as the Thai baht lost value (the Thai baht is a major component of the Lao money supply), and the Government monetarized debt in an attempt to maintain investment spending with reduced revenues. The ability of lowland farmers to export to Thailand and the relative isolation of the poor population limited the effects of crisis on the welfare of the poor.

3. In 2000, GDP per capita was estimated to be $330, making the Lao PDR one of the poorest countries in the Asia and Pacific Region. The United Nations Development Programme’s human development index tells a similar story: In 2000, the Lao PDR was ranked 140 out of 174 and, in human development terms, is the poorest country in ASEAN.

4. National account statistics do not measure economic growth by province or region although the LECS consumption data does provide some insight into regional growth rates (Table 2). Between 1992/93 and 1997/98, consumption growth increased the fastest in Vientiane municipality at 10.8 percent. In other regions of the country, the growth rate was slower, between 4.4 and 4.9 percent.

5. Consumption growth was generally higher in urban areas than in rural areas, with the exception of Vientiane municipality. In all regions outside of Vientiane, the gap between urban and rural consumption increased, contributing to the overall increase in inequality.

2. Sectoral Growth

6. The economy of the Lao PDR is largely resource based and depends heavily on a sustainable environment to generate future growth. Agriculture is the largest sector, accounting for 52 percent of GDP (Appendix, Table A2). This proportion was stable from 1996 to 2000 (Table 3). About 85 percent of the employed population works in agriculture.¹ This situation is common in low-income countries: 15 percent of the workforce produces about 50 percent of GDP. In part this reflects the fact that a large part of the rural economy is not monetarized and not properly counted in the national accounts. However, it is also indicates an imbalance in labor productivity. Future economic growth will have to build on improving productivity in the agriculture sector, and the migration of the labor force to more productive subsectors of the economy.

7. Crops have been a leading contributor to economic growth in the past four years. From 1997 to 2000, the crops subsector (which accounted for 27 to 29 percent of GDP) has grown faster than the aggregate economy. Rice yields have increased steadily from 2.6 tons/hectare (ha) in 1996 to an estimated 3.2 tons/ha in 2000 (Table 4). While the yield of all three categories of rice has increased, most of the increase in rice yield is due to a large increase in area under irrigation, from 18,000 ha in 1996 to 110,000 ha in 2000 (Appendix, tables A3.1 and A3.2). A decomposition of rice production shows that around 45 percent of the increase in rice production is due to an increase in land under irrigation. Evidence from qualitative surveys suggest that informal exports increased substantially as Lao farmers increasingly took advantage of the higher relative prices for rice in Thailand.²

8. Agricultural Diversification. Based on evidence of land planted to different crops, the relative share of different categories of crops seems to have remained stable.³ The share of land allocated to rice and other cereals has dropped slightly, while the area of land dedicated to vegetable, beans, and cash crops has increased slightly. Of particular interest is coffee, whose production increased from 10,000 tons to 17,500 tons, with the area under cultivation approximately doubling in five years.

9. After a period of rapid growth in the late 1980s and the first half of the 1990s, livestock production generally declined after 1996. The number of pigs dropped from 1,772,000 to 1,101,000 from 1996 to 2000, with similar, albeit smaller, declines in the number of buffalo and cattle.

10. The Industry Sector. In recent years, manufacturing has played an increasingly important role in the economy, growing from 15.4 percent of GDP in 1996 to 16.8 percent in 2000. Although specific data on the contribution of textiles in this subsector is not available, textiles are considered to be one of the driving forces. Textile exports grew from $64 million in 1996 to $77 million in 2000; presumably local consumers bought more domestically produced textiles as their income increased.

11. The Energy Sector. The energy sector, particularly the generation of electricity from the country’s hydro resources is playing an increasingly important role in the economy. Investment in the hydroelectric sector has been a major source of investment in the economy and the export of energy has been one of the country’s major exports in recent years (Table 5).

12. Traditionally, the Lao PDR has exported the bulk of the energy generated. Even in 1976, the first year with statistics, the country exported about 75 percent of the electricity generated. This ratio has been more or less steady over the past 25 years. Since the introduction of the New Economic Mechanism in 1986, domestic energy consumption has increased more than fourfold due to growing demand for electricity by households and industry.

13. The Service Sector. The output of the service sector has also increased. Tourism has expanded from 1.7 percent of the economy in 1996 to 2.4 percent in 2000. Tourism is also an important source of foreign exchange and with proper investment in the future, it will continue to be an important source of economic growth, employment, and foreign exchange. The biggest subsector in the service sector continues to be wholesale and retail trade, which continued to grow from 1996 to 2000. In 2000, commercial trade accounted for 9.6 percent of GDP. Little specific data is available on this subsector, but it appears to be mostly dominated by informal trade.

3. Employment and Wages

14. Little data is available on the composition of the country’s labor force. To date, no large-scale labor force survey or household living standards surveys have been undertaken. The 1995 census showed that approximately 85 percent of the employed population work in the agriculture sector (Table 6); the 1997/98 LECS shows that 84 percent of households are farm households; 97 percent of farm households own the land that they cultivate and 5 percent also farm rented land.

15. Little quantitative data is currently available on wages and salaries. Government salaries appear to be well below the market level and salary increases are largely given as administrative rewards rather than as adjustments to market conditions. During the most recent bout of high inflation (1998 to 1999), public salaries were only adjusted once and in real terms fell dramatically. Evidence from qualitative surveys during this period show that salaries in state-owned enterprises (SOEs) and the private sector are substantially above those in the Government, and that these salaries increased substantially faster than those in the public sector. The salary scale in the Government is quite flat, with the salary of top officials about twice that of the low paid individuals. A top government official might earn only one tenth of the salary paid for a similar position in a private enterprise (footnote 2).

4. Savings and Investment

16. To maintain a high growth rate, the Lao PDR must have adequate levels of savings and investment. Although foreign savings, in the form of concessionary lending and foreign direct investment (FDI) currently provide a large share of investment, future growth will increasingly need to rely on domestic sources of savings.

17. National accounts do not provide estimates of the savings and investment rates, but the International Monetary Fund (IMF) has estimates that are consistent with growth (presented in Appendix, Table A1). Estimates of the savings rates from 1993 to 1998 are around 13 percent annually.⁴ The share of Government savings increased sharply in 1999 as the Government took steps to restrain spending after the 1998 increase in inflation.

18. Investment has been significantly greater than domestic savings, with a savings-investment gap estimated to be around 10 percent of GDP in 1998, and dropping to around 6 percent in 2000. This was caused by a reduction in foreign investment in the hydropower subsector. Government investment also decreased mildly as a percent of GDP.

19. Due to the high levels of inflation and the administratively set interest rates in banks, households and businesses probably avoid the formal financial system whenever possible. These estimates are only likely to capture part of private savings. Households in the Lao PDR often use physical assets as investments, such as gold, jewelry, livestock, and rice. Harnessing some of these savings will help to ensure that the country is able to meet its growth targets.

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