Countries and Regions

	Table of Contents
p. 4 of 7 BACK | NEXT Executive Summary I. Development Agenda II. ADB's Development Experience III. ADB's Strategy IV. Operational Approach V. Three-Year Assistance Program VI. Performance Monitoring and Evaluation

Country Strategy and Program 2002-2004: Lao People’s Democratic Republic

---

III. ADB's Strategy

A. Poverty Reduction

51. In line with Government priorities and ADB’s long-term strategic framework,12 poverty reduction by broadening community participation and opportunities will be the unifying principle of ADB’s interventions in the Lao PDR over the next five years. The CSP will help the Government substantially reduce poverty. This primary goal is supported by three pillars:

1. Sustainable economic growth. Sustainable, strong economic growth is essential for poverty reduction, as is targeting development assistance to address the main sources of and constraints to broad-based growth as well as the main roots of poverty.
2. Inclusive social development. Poverty and equity goals require that no group is excluded from active participation in development, including in ADB-financed projects. Remote ethnic minorities need to be empowered in the development process in line with ADB’s policy on indigenous peoples. Gender and development should be emphasized as appropriate in all interventions.
3. Good governance through policy and institutional development. The Government and ADB must be more accountable for their investments, with more transparency and stakeholder involvement at all stages of planning and implementation. Institutional capacity of the Government and local agencies and efficient delivery of public services must be addressed as an integral part of all ADB operations.

B. Thematic Priorities

52. The four thematic priorities to realize the strategic goal of poverty reduction are (i) rural development and market linkages, (ii) human resource development, (iii) sustainable environmental management, and (iv) private sector development and regional integration.

53. Given the limited resources, ADB will adopt a two-track approach to supporting development. One track aims for national institutional strengthening and policy reforms, including in the public sector, financial sector, private sector development and regional integration, and environmental management. The other track aims to develop targeted geographic areas. A major share of project lending will be primarily focused on the northern region provinces (including Xaisomboun, and Xieng Khouang), which have the highest incidence of poverty, and on Savannakhet Province, where the ongoing GMS: East-West Corridor Project connecting Lao PDR with Thailand and Viet Nam will provide low-cost access to larger markets. Community-based rural development projects will be implemented in a few provinces with possible assistance from civil-society and mass organizations. The strategy envisages comprehensive regional development strategies and local institutional strengthening to ensure relevant, geographically focused development.

1. Rural Development and Market Linkages

54. Given that the poor are concentrated in rural areas and that most people depend on agriculture for their likelihood, rural development is critical to achieving sustainable economic growth and reducing poverty. Rural poverty is perpetuated by inadequate basic education and health services, poor access to markets, weak infrastructure, and low productivity. Relief from rural poverty and food insecurity will especially benefit women, who are mainly engaged in low-productivity agriculture activities, and ethnic minorities.

a. Urban-Rural Linkages

55. Nonagriculture output in a developing economy will increase faster than agriculture output. Thus, growth in nonfarm employment must exceed labor force growth to reduce income inequality. Rural producers and consumers and urban markets must be integrated. Local markets, in turn, must be better integrated with international markets. The country’s major markets have been developed through past interventions in urban development, and future efforts will emphasize small towns. Workforce skills must match market demand, including standard quality requirements. Infrastructure must be carefully planned to avoid socioeconomic and environmental costs. Concerted and sustained efforts are needed to lower policy and institutional barriers to integration of small-town economies with higher-income domestic and international markets.

b. Rural Infrastructure Development.

56. Recent experience has shown the importance of market access in promoting rural employment, and the need to develop transport and information links with small towns, urban areas, and larger markets. Better rural electrification and water supply will facilitate commercial development by improving human development, productivity, consumer demand, and economic opportunities. Community contributions to rural development will help ensure ownership and maintenance of facilities, and also help reduce Government fiscal expenditure. Community-managed rural development can be introduced as a viable option: communities decide priorities and improve rural infrastructure by contributing their labor and in-kind resources, while the Government provides materials and appropriate technical guidance (Box 3). With community participation, ADB will support the development of transport (especially rural access roads), electricity and water supply, and other rural physical infrastructure to encourage investment in agriculture and other rural businesses. These investments must be complemented by improved basic education, basic skills, and health standards. ADB will take a long-term approach to rural development that recognizes the interrelated impacts of social, infrastructure, institutional, and policy development.

c. Agriculture Productivity

57. The Government’s Vision for Agriculture and Forestry Development to the Year 2020 aims to increase productivity by strengthening research and extension, developing human resources, liberalizing trade, reducing shifting cultivation, and enhancing irrigation management. ADB will focus on institutional development and policy reform; crop diversification, including livestock and commercialization; reduction of shifting and poppy cultivation; and rural finance development. Land tenure security issues will be addressed, if appropriate. Measures to improve rural education and human capital formation are essential to increase agricultural labor productivity. ADB will strengthen its efforts to address specific needs and participation of women and ethnic minorities in the sector by (i) supporting the rural population, especially ethnic minorities, during the transition period from shifting cultivation to culturally acceptable alternative livelihood schemes; (ii) providing resources, services, and capacity building; and (iii) highlighting gender and development in agriculture and rural development.

2. Human Resource Development

58. Coverage, quality, and relevance of social services need improving. With community participation, ADB will continue to widen the coverage of high-quality services in basic education, primary health care, and water supply. Support will include funds targeted at women and ethnic minorities to redress inequities. ADB will require the Government to redress the imbalance between current and capital expenditure, which results in inefficiencies, as a condition for continuing support to the social sectors. Achieving inclusive social development requires specific targeting of the most disadvantaged groups, the rural poor, ethnic minorities, and women. Equitable land-titling arrangements¹³, equal access to social services, more public finance for maternal and child health care, economic empowerment through improved access to opportunities, and inclusive stakeholder consultations are also important. The provision of social services must be made relevant to community needs, which requires improved consultative processes, including adequate representation of ethnic groups and women. ADB staff will also closely consult with other aid agencies to mobilize grant cofinancing or parallel financing as an essential element of ADB support to social sector activities.

a. Education

59. ADB support will focus on improving the quality and coverage of basic education, including targeted support to the poorest areas, ethnic minorities, and girls. Teacher training needs to be improved and to focus on the needs of ethnic minorities. Curriculums must address community needs and include training in agriculture and other income-generating skills; nutrition, public health, environmental, and market economy issues; and other community issues. School hours and holidays should be flexible to accommodate agriculture cycles and periods of peak labor demand. ADB will encourage the Government to fully reflect community needs and situations in education planning and implementation. Local institutional development is critical to effectively implement the decentralization policy in the education sector.

b. Health Care

60. ADB will focus on primary health care, including reproductive health and birth spacing, and health sector efficiency, and will include targeted support to isolated areas and ethnic minorities. Greater community participation through training of village leaders will broaden the coverage of primary health care and makes it more efficient.

c. Water Supply and Sanitation and Urban Utilities

61. ADB support will focus on rural water supply and small-town development with close involvement of communities in project design, implementation, and monitoring, and will give more attention to systems’ cost efficiency and financial sustainability. Community and/or private sector participation in systems development and operation will be actively pursued.

3. Sustainable Environmental Management

62. Living standards are directly linked to how well the country’s natural resources are managed, protected, and developed. Sustainable natural resource-based development can help reduce poverty, and poverty reduction can reduce pressures contributing to environmental degradation. As the economy is dominated by resource-based economic activity, all ADB interventions must address environmental issues, from education to infrastructure and private sector development, rather than treat environmental protection as a stand-alone issue. ADB will closely work with other development partners, community groups, and civil society to improve the institutional, policy, and regulatory framework for environmental management.

a. Social and Environment Management

63. In a natural resource-based society, all public investments have potentially important environmental implications. Thus, efforts and measures to improve environmental management need to be incorporated into visions for sector development agreed upon between the Government and ADB. Social and environmental considerations must be increasingly integrated into earlier stages of economic planning and infrastructure development. ADB will consider the environmental implications of all its recommendations relating to public policies, investment strategies, and institutional reforms. Potential areas for support include the following:

1. strengthening institutional capacity to analyze environmental issues and policy and regulatory enforcement, including social and environmental impact assessments, and ensuring that safeguards are built into all ADB-financed projects;
2. holding systematic consultations with all stakeholders on social and environment issues, and increasing capacity and transparency in environmental assessment and monitoring;
3. improving monitoring of land registration to ensure that women’s traditional property rights and ethnic minorities’ traditional rights are protected;
4. investing in river basin development, and stabilizing shifting cultivation and stopping poppy cultivation by offering alternative livelihood schemes such as industrial tree plantations and crop diversification;
5. Investing in water supply and sanitation and urban infrastructure and services; and
6. encouraging involvement in regional environmental initiatives.

b. Community-Based Initiatives

64. Most enforcement measures are ineffective without strong community support and participation. Community consultations and involvement will be encouraged, as will be raising public awareness of key issues. Communities will be directly involved in the monitoring of social and environmental impacts of all ADB-financed infrastructure projects. Given that most of the poor rely on natural resources to live, incentives (including ownership arrangements) will be improved to enhance community protection of natural resources. Systematic inclusion of environmental awareness in education and training material will be encouraged.

C. Private Sector Development

65. The private sector will contribute to the country’s economic development through employment creation, foreign exchange earnings, and tax revenues to fund social development programs. Sustainable economic growth and poverty reduction will require private sector investment and reforms to improve agriculture productivity; create rural off-farm employment through the development of SMEs in agriculture and forestry-based industries, handicrafts, light manufacturing, tourism, and other service enterprises; and develop mineral and hydro resources in an environmentally friendly manner. Given the small, fragmented domestic market, internal and subregional economic integration will be essential in accelerating and diversifying growth in economic output and employment. ADB will use subregional cooperation arrangements to increase trade and investment, and seek subregional private investment potential.

a. Infrastructure

66. Improved infrastructure is essential to attract private investment. Infrastructure projects will be designed to develop potential markets, tourism, and enterprises. ADB will be involved in transport (especially subregional linkage, and development of rural access roads and small airports); small-town infrastructure and services; and energy (power generation, transmission and distribution, and rural electrification). ADB will also emphasize efficient O&M of infrastructure projects as well as measures to mitigate potentially negative social and environmental impacts.

b. Business Environment

67. Expected areas of intervention include (i) developing the market institutions needed to reduce transaction costs and risks associated with commercial investments, including credible systems for enforcing contracts and property rights, and transparent and credible accounting and financial reporting systems; (ii) restructuring state-owned commercial banks (SOCBs) with improved corporate governance; (iii) providing a level playing field for SOEs and the private sector, particularly by removing administrative barriers to domestic and foreign investment in micro, small, and medium businesses; (iv) removing nonphysical trade barriers to the movement of goods and people; (v) improving financial service delivery, particularly in rural areas; (vi) improving regulatory systems to encourage commercial investment in infrastructure projects; and (vii) increasing transparency in public tendering. ADB will support Government efforts to regularly consult businesses to identify and address remaining structural weaknesses, including cumbersome bureaucratic requirements and procedures, hampering private sector investment in areas of potential comparative advantage.

c. Catalytic Investment

68. Opportunities for an increased private sector role need to be assessed in planing all ADB support to the Lao PDR. This task will include assessing opportunities for private sector involvement in the development, implementation, and operation of projects, and as commercial and/or contracted suppliers of public services, including health, education, water supply, and sanitation in urban areas. ADB private sector operation modalities will be used to encourage private sector investment in hydropower and SME development through possible participation in the Mekong Enterprise Fund and Mekong Project Development Facility (para. 76).

D. Regional Cooperation

69. The Government’s commitment to regional integration “because we are land linked to our neighbors”14 is consistent with ADB’s long-term strategy of supporting regional cooperation and integration for development, to provide wider development options, address shared problems, and pool information.15 The strategy aims to link the country program and GMS initiatives, which is particularly important as most transport networks connect the Lao PDR with its neighbors. The GMS program aims to extend infrastructure development to rural areas and cross-border areas. The country program and/or GMS activities will complement the GMS East-West Transport Corridor project, experiences from which will feed into planned support for subregional transport development connecting Thailand and the People’s Republic of China through northern Lao PDR provinces. The Telecommunication Backbone Project and the Mekong River Tourism Infrastructure Project are planned to be processed during the program period (para. 19).

E. Risks

70. The Government’s targets of poverty reduction are ambitious relative to what has been achieved. Government’s ambitions are achievable only if the appropriate policy and institutional reforms are effectively implemented in a timely manner. The Government strategy highlights major reform areas that need to be continuously monitored and discussed during CSP implementation. Economic stability and growth, fiscal discipline, improved resource mobilization and external debt management, and increased public expenditure efficiency, including provision of a counterpart fund, must be sustained. ADB will closely coordinate with the World Bank and IMF to improve fiscal performance and public expenditure management. Some other specific risks include the following:

1. Substantially reduced economic growth or instability in neighbouring countries will limit the impact of domestic development efforts.
2. Too rapid a build-up in the resources channeled through local institutions will increase risks of project failure and misuse of resources. Careful analysis and strengthening of local institutional capacity will be needed.
3. A lack of continuity and insufficiency of ADB and counterpart staff will hinder the CSP. The LRM can help provide continuity, but not fully effectively without continuous high-level ADB staff inputs.
4. ADB support will be dissipated if the Government does not improve governance and accountability. CSP measures address this risk.
5. Failure to address geographic, ethnic, and gender inequities in income and social indicators, as well as unsustainable environmental management, will limit the CSP’s impact.

71. To mitigate potential risks, ADB will primarily focus on sectors (or subsectors) and approaches where most of the following criteria are met.

1. Support will contribute to reducing poverty and increasing regional, ethnic, and gender equity.
2. ADB, the Government, and other aid agencies agree on medium-term sector development and a road map to achieve the vision. ADB will have a sustained medium-term role in realizing that vision.
3. Support will not crowd out private and/or grant assistance, and preferably will play a catalytic role in mobilizing additional resources.
4. Detailed institutional and capacity analysis verifying public support and Government commitment and capacity to implement policy and institutional reforms and capacity-building programs must exist.
5. Adequate measures are in place, and capacity exists to address and mitigate potential adverse social and environmental impacts.
6. The interventions will support increased private investment and the development of a competitive market economy.
7. The Government has successfully implemented ADB projects in the past, complied with loan covenants and conditions, and provided sufficient counterpart funds and appropriate O&M expenditures.

Back II. ADB's Development Experience	Next IV. Operational Approach