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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program 2004-2006: Lao People’s Democratic Republic
II. Implementation of the Country Strategy and ProgramA. Progress under the Poverty Partnership Agreement12. The Government prepared the interim poverty reduction strategy paper and a draft National Poverty Eradication Programme (NPEP), which will also serve as the full poverty reduction strategy paper (PRSP). The NPEP is consistent with the principle of the poverty reduction partnership agreement signed between ADB and the Government in September 2001. ADB has played an active role in supporting the preparation of the NPEP. The NPEP, which will be presented at the Donor Roundtable Meeting scheduled for September 2003, proposes agriculture, education, health, and transport as priority sectors for poverty reduction. Based on the official poverty definition, the Government has identified 72 poor districts (including the 47 poorest) out of 142, and the NPEP will give special emphasis on poverty elimination to the 47 poorest districts by 2005. ADB’s lending and nonlending activities are oriented to help implement the NPEP, including formulation of the northern region strategic action plan to address poverty concentration in the north of the country. 13. The Government’s preliminary estimates indicate that poverty incidence has fallen from 38.6% in 1997/98 to about 30% in 2002/03. If this momentum is maintained, the poverty reduction target (25% or less by 2005/6) in the poverty reduction partnership agreement may be achieved with sustained effort. ADB has supported the Government’s efforts to set up a poverty monitoring system, and to strengthen the institutional capacity of the National Statistics Center and local authorities. A Poverty Reduction Fund has been established with assistance of the World Bank. While sound progress is being made on poverty reduction, major challenges remain. In particular, the Government’s ambitious goal of graduating from least-developed country status by 2020 requires average annual economic growth of more than 7%, and an investment level of about 30% of GDP. In order to achieve these targets, the Government will continue to strengthen efforts to attract FDI projects (including NT2), enhance domestic private sector investment, and improve fiscal revenue and expenditure management. In the meantime, continued high levels of official development assistance (ODA) will be required in the medium term to bridge the expected resource gap. B. Progress in the Country Strategy and Program Focus Areas14. Rural Development and Market Linkages. Since the country’s recent achievement of rice self-sufficiency and the expansion of the monetized economy, the agriculture sector has moved more strongly from subsistence to commercial agriculture. Rice purchase from the market has become the most important food source in periods when rice produced by the family is not sufficient. Food security in remote and mountainous areas, where farmers have traditionally faced rice shortages, can be achieved by enhancing income-earning activities, including promoting cash crops and livestock production. Various attempts aimed at establishing sustainable farming practices, including small-scale contract farming with traders from neighboring countries, have been introduced. In order to facilitate these and other market-oriented developments, a more supportive enabling environment will be required to encourage private investment in commercial agriculture. Improvements are required in rural finance, basic rural infrastructure, research and extension services, urban-rural market linkages, and effective mechanisms linking investors to farmers. ADB approved the Smallholder Development Project in 2002, supporting the Government’s efforts to enhance commercial agriculture activities. The Small Towns Development Sector Project approved in January 2003 will also contribute to enhancing urban-rural market linkages and connecting the rural Lao PDR to subregional and international markets. 15. Human Resources Development. The 2002 Human Development Report of the United Nations Development Programme (UNDP) put the human development ranking of the Lao PDR at 143rd among 173 countries. However, recent surveys and government reports indicate that some progress has been achieved in the area of social development. The adult literacy rate increased from 60.2% to 75% in 2001, infant mortality declined from 110 per 1,000 live births in 1990 to 82 in 2000, and life expectancy increased from 50 years in 1995 to 59 years in 2000. The Government’s strategy is to achieve universal primary education by 2015 and primary health care for all by 2020, in line with the MDGs. To achieve these targets, capital and recurrent expenditures must be appropriately balanced, and gender and regional development disparities need to be addressed. The Government has increased education expenditure from 9% of total expenditure in 2001 to about 12% in 2002. While the Government plans to increase it further, this may be a quite challenging task considering recent fiscal performance. 16. Sustainable Environmental Management. The ADB-financed Environment and Social Program Loan has provided the umbrella framework for important advances in environmental and social management. There has been progress in establishing regulatory frameworks for environment and social management, including the issuance of the Prime Minister’s Decree on Environmental Impact Assessment, and preparation of draft guidelines on public involvement, involuntary resettlement, and compensation. In addition, the Government is well advanced in the consideration and setup of an environment fund. However, there is a need to improve implementation and application of the policy reforms, and to build capacity of concerned staff. The Government is working with development partners in the areas of protection and conservation of the environment: the World Bank on sustainable forest and rural development, UNDP and International Union for Conservation of Nature and Natural Resources on multilateral environment agreements, Japan International Cooperation Agency on forest conservation and reforestation, and Swedish International Development Cooperation Agency and Agence Française de Développement (AFD) on capacity building in the Science Technology and Environment Agency. ADB approved the Nam Ngum River Basin Development project in 2002 to support the Government’s efforts to introduce a holistic river basin development and integrated water resources management approach. Rich natural and sociocultural resources provide the Lao PDR with the opportunity to develop the ecotourism sector. ADB’s GMS: Mekong Tourism Infrastructure Development Project, approved in 2002, will facilitate the development of the ecotourism sector. The Small Towns Development Sector Project, approved in early 2003, will contribute to sustainable environmental management in urban and peri-urban areas of the Lao PDR. The Government and ADB are exploring how the carbon credit arrangements under the Kyoto Protocol could be developed as an important instrument for forestry protection and management and its associated positive economic and social spin-offs for the country. 17. Private Sector Development. The private sector is an increasingly important source of economic activity. However, most private enterprises are small and have little effect on employment outside of the family. About 75% of SMEs are located in rural areas, in the form of rice milling, textile weaving, and small retail stores. Only few SMEs have access to credit facilities with commercial banks. The Government renewed its commitment to the private sector at the National Assembly in September 2001, and has since held high-level dialogue with the private sector. Investment approval authority has been simplified. Decrees on an incentive package for private sector development, antimonopoly, and SME development have been drafted. The Government is currently registering 200,000 land titles in major urban and peri-urban areas in nine provinces to clarify land user rights. ADB approved the Banking Sector Reform Program Loan in 2002 to support the Government’s efforts to foster efficient financial intermediation and help ensure a sound banking system. ADB is working closely with the Government to develop a pro-business environment by streamlining licensing and registration procedures, improving consistency in the implementation of laws and regulations, enhancing access to finance, introducing quality standard setting, providing a level playing field for enterprises, and strengthening policy dialogue between the Government and private sector representatives. 18. Governance and Capacity Building. Progress has been made in public administration through increasing civil servants’ salaries (by 20% in 2002), and strengthening civil service management including introduction of performance evaluation, and implementation of the Decree on Anticorruption. The Government plans to reduce the number of civil servants by 5% during the period 2001–2005, but this should be implemented with the necessary institutional rearrangements so that the priority areas for development are not understaffed. A strengthening of the legal framework is also in process: amendments to the Constitution, a Law on Local Administration, a Law on the National Assembly, and a Law on Anticorruption (upgraded from decree) have been submitted to the National Assembly. Regulatory frameworks for public finance were introduced with the assistance of ADB: decrees on PIP and ODA management, and the new government accounting regulations and procedures. Notwithstanding recent improvements, weak governance and capacity, particularly at the local level, are still a serious constraint to the country’s development and poverty reduction efforts. The Government drafted a policy paper on governance issues for the first time and discussed it at a governance roundtable meeting in April 2003. This was an important step toward governance reform through public service improvement, people’s participation, the rule of law, and sound financial management. To ensure effective implementation, the reform activities will need to be prioritized and sequenced with emphasis on critical issues, such as implementation of the personnel management system based on professionalism, clarification of the institutional arrangements and pace of the decentralization policy, strengthening the revenue collection mechanism, and upgrading human resources. 19. Geographical Focus. To enhance the development impact of projects and ensure their close monitoring and complementarity, ADB’s interventions will focus primarily on the poor northern provinces and the GMS East-West Corridor in Savannakhet Province, in coordination with other development partners. ADB is currently assisting the Government in preparing a northern region strategic action plan, which will focus on the development constraints and opportunities in the poor northern region and assist in identifying priority investments (both public and private). A gender assessment is being carried out as part of the plan and its recommendations will include how to promote women’s participation in the development process. 20. Subregional Cooperation. The GMS program is a key part of the country’s efforts to be “landlinked” rather than “landlocked”. An intergovernment agreement on power transmission was signed among all GMS countries during the first GMS summit in 2002. This will facilitate electricity exports from the Lao PDR to neighboring countries. Arrangements are also being made to improve the efficiency of the cross-border movement of goods and people. The international border crossing points in Sayabury and Khammouane provinces (with Thailand) and Xieng Khouang province (with Viet Nam) have been upgraded or are newly opened. Prime Ministerial decrees on the Border Trade Area in Boten (Louang Namtha Province) and on the Special Economic Zone in Savannakhet Province were approved in 2002. ADB approved two important GMS projects in 2002, namely, the GMS: Northern Economic Corridor Project, in cooperation with the governments of Thailand and the People’s Republic of China (PRC), and the GMS: Mekong River Tourism Infrastructure Development Project. ADB, in coordination with the governments of the GMS region and stakeholders, is formulating a regional economic cooperation strategy and program (RCSP), with emphasis on sustainable economic growth, human development, promoting the role of the private sector, and addressing environmental and social concerns. C. Highlights in Coordination of External Funding and Partnership Arrangements21. ADB has continued to maintain close cooperation and collaboration on policy and operational matters with other major bilateral and multilateral development partners, particularly the World Bank and IMF. Ongoing and planned joint work between ADB, World Bank, and IMF includes a financial sector reform policy framework, private sector development, and debt sustainability analysis. ADB has closely worked with the World Bank in the NPEP process through providing inputs relevant to both macroeconomic and microeconomic aspects of the country’s development. Lao Resident Mission (LRM) participates in the monthly United Nations country team meetings, quarterly local agency coordination, and various sector coordination meetings. Often these meetings are held in LRM and chaired by ADB. In 2002, ADB mobilized cofinancing for the Nam Ngum River Basin Development Project ($4.5 million equivalent from AFD), and GMS: Northern Economic Corridor Project ($30 million equivalent each from the PRC and Thailand). A number of potential cofinanciers have been identified and approached for future collaboration: AFD (water supply and urban development); EU (livestock, and microfinance); Food and Agriculture Organization of the United Nations (livestock); Organization of Petroleum Exporting Countries Fund (rural access roads and small airports); Nordic Development Fund (rural electrification and urban development); and United Nations Office on Drugs and Crime (rural access roads and rural development). Several projects funded from the Japan Fund for Poverty Reduction, Governance Cooperation Fund, and Poverty Reduction Fund are currently being implemented in the areas of agriculture, environment, and finance in the Lao PDR. The development coordination matrix is in Table A1.5.
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