Small and medium-sized enterprises (SMEs) are critical for the growth and development of the Lao People’s Democratic Republic (Lao PDR). They account for 99% of all businesses in the country and generate most private sector jobs. With COVID-19 affecting households and businesses across the country, and the government struggling with slower growth and debt, the SME sector has a crucial role to play in supporting the Lao PDR’s economic recovery.
Yet, despite their immense importance in boosting national productivity and creating jobs, SMEs continue to face barriers in doing business. One persistent impediment is the cumbersome and complex government regulatory environment. Those businesses with the fortitude to acquire the licenses and permits necessary to operate also face informal charges levied at the local level.
The result is that many SMEs simply try to operate under the radar. According to Lao PDR economic census data in 2020, a staggering 70% of firms in the country operate informally, 78% lack a business license, and 87% do not have a tax identification number. Women-led enterprises, which make up 56% of all SMEs, have an even lower level of compliance, with female entrepreneurs reporting that their business registration takes longer and costs more.
The response of SMEs to the Lao PDR’s regulatory environment contributes to the government missing out on considerable tax revenue – funds that are desperately needed for critical spending on public health and education. Recognizing this funding gap, the government underscored the importance of making tax payments easier in its Ninth National Socio-Economic Development Plan, 2021–2025.
The national government has been taking steps since 2018 to improve the regulatory environment for SMEs. With a focus on simplifying procedures to obtain business registration certificates and tax identification numbers at the same time, the government has succeeded in reducing the cost and processing time of business registration by one-third.
However, further reforms are needed to spur entrepreneurs to take advantage of new business opportunities and create more jobs. A study by the Asian Development Bank (ADB) and the Lao National Chamber of Commerce and Industry (LNCCI) found that greater transparency in the regulatory environment is needed to reduce information asymmetries that distort markets and to build trust in government systems.
Building transparency need not be difficult. To start with, the government can take simple steps like creating websites where SMEs can obtain information on economic planning, regulations, and procurement opportunities, or introducing one-stop portals for enterprises to apply for registration, licenses, and permits. These measures can eliminate significant transaction costs in starting a business.
In addition, the adoption of risk-based licenses can enhance transparency. Under this scheme, businesses are issued licenses according to the potential risk their activities may pose to the health and safety of people and communities. This is a simpler and more efficient system than issuing business licenses based on each business activity. It also means that enterprises operating in sectors with low risks will not be required to obtain operating licenses.
Transparency can be expanded through regular dialogue between all levels of government and the private sector. Such collaboration, often held as public forums, helps to identify barriers that businesses face in regional and global markets and leads to appropriate solutions. The recently concluded National Dialogue on Improving the Business Environment and the Annual Lao Business Forum are excellent examples of dialogue that can be replicated at sector and subnational levels.
Businesses thrive in transparent markets, with access to information critical to the success of all enterprises. According to ADB–LNCCI research, around two-thirds of businesses said they do not have access to necessary procedures and forms for coordination with the government or access to information on public procurement opportunities. In addition, taking into account data suggesting that startups founded by women are more successful at generating revenue, it is critically important that staff at all levels of government are trained to overcome hidden gender biases and make it easier for women to create and run businesses.
Good progress has been made by the national government in reducing some of the regulatory hurdles to business development – steps that have quickened the time for SMEs to obtain business registration. Yet, there is substantial room for improvement. COVID-19 has had devastating human, social, and economic costs across the Lao PDR. Broader measures by the government to address SME concerns on transparency in the regulatory landscape will be an important step in revitalizing the investment climate and helping to restore economic growth.