Lao PDR: Accelerating Structural Transformation for Inclusive Growth

193 Pages·2017·4.72 MB·English

by  Asian Development Bank

LAO PDR
ACCELERATING STRUCTURAL
TRANSFORMATION FOR
INCLUSIVE GROWTH
Country Diagnostic Study
ASIAN DEVELOPMENT BANK

LAO PDR
ACCELERATING STRUCTURAL
TRANSFORMATION FOR
INCLUSIVE GROWTH
Country Diagnostic Study
AsiAn Development BAnk
Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO)
© 2017 Asian Development Bank
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Some rights reserved. Published in 2017.
ISBN 978-92-9257-993-7 (print), 978-92-9257-994-4 (electronic)
Publication Stock No. TCS179052-2
http://dx.doi.org/10.22617/TCS179052-2
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In this publication, “$” refers to US dollars.
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Contents
Figures, Tables, and Boxes iv
Foreword viii
Preface ix
Acknowledgments x
Abbreviations xi
Executive Summary xii
1. Economic Performance and Key Development Challenges 1
1.1 Introduction 1
1.2 Major Economic Developments: 1975–2016 4
1.3 Foreign Direct Investment and Dollarization 9
1.4 External Sector Performance 12
1.5 Dutch Disease and the Lao PDR Economy 13
1.6 Economic Growth and Structural Transformation 16
1.7 Economic Growth and Inclusiveness 18
1.8 Major Challenges to Inclusive Growth 21
1.9 Conclusions 25
2. Structural Transformation and Diversification 27
2.1 Introduction 27
2.2 Structural Transformation and Product Space Analysis 33
2.3 How the Lao PDR Can Diversify and Upgrade Its Exports 38
2.4 Identification of “Frontier Products” for Structural Transformation 40
2.5 Policy Implications for the Lao PDR 47
2.6 Conclusions 48
Appendix 2.1 Technical Notes on Complexity Concepts in Product Space 49
3. Unlocking Agricultural Growth in the Lao People’s Democratic Republic 52
3.1 Introduction 52
3.2 Potential of the Agriculture Sector 55
3.3 Performance of the Agriculture Sector 56
3.4 Evolving Agricultural Policy 69
3.5 Key Constraints to Agricultural Performance 70
3.6 Empirical Analysis of Public Programs 82
3.7 Conclusions 89
4. Leveraging Services for Sustainable Growth and Employment 98
4.1 The Role of the Services Sector in the Economy 98
4.2 Development of Selected Services Subsectors 101
4.3 Developing Cross-Cutting Synergies across Sectors 125
4.4 Conclusions 128
5. Power Sector Development in the Lao People’s Democratic Republic 133
5.1 Introduction 133
5.2 Status and Trends in the Energy Sector 134
5.3 Institutional, Legal, and Policy Framework of the Energy Sector 136
5.4 Status and Trends in the Power Sector 140
5.5 Challenges in the Power Sector 141
5.6 Recommendations 151
References 167
iii
Figures, Tables, and Boxes
Figures
1.1 GDP Growth Rate and per Capita Income, 1970–2016 3
1.2 Share of Resource-Based Industry in Industrial Value Added, 2000–2014 3
1.3 Contribution to GDP Growth, 1986–2016 4
1.4 Sectoral Share in GDP, 1970–2015 4
1.5 Foreign Direct Investment Inflows, 1988–2015 10
1.6 Approved Foreign Direct Investment by Sectors, 2011–2015 10
1.7 Degree of Dollarization in the Lao PDR, 1996–2016 11
1.8 Trends in Exports, 1984–2015 12
1.9 Share of Resource-Based Products in Total Exports, 1992–2015 13
1.10 Changes in Real Effective Exchange Rate, 2000–2015 15
1.11 Tradable and Nontradable Production, 2000–2015 16
1.12 Poverty Incidence and GDP Growth, 1997–2016 18
1.13 Poverty Headcount Rate by Region, 2003, 2008, and 2013 19
1.14 Composition of Exports, 1990 and 2015 22
1.15 Average Labor Productivity 24
2.1 Exports per Capita, 2016 28
2.2 Economic Complexity and GDP per Capita 32
2.3 Economic Complexity Indexes for Selected Countries, 1990–2014 32
2.4 Product Space of the Lao PDR for Selected Years 35
2.5 Number of New Products and Exports per Capita 36
2.6 The Basic Trade-Off between Distance, Product Complexity Index, and Opportunity Gain 38
2.7 Unexploited Export Products of the Lao PDR 39
2.8 Knowledge Frontier Products for the Lao PDR 41
2.9 Classification of Frontier Products 41
B2.1.1 Product Space 34
3.1 Agricultural Share of Employment, GDP, and Public Expenditure in the Lao PDR 53
3.2 Sources of Household Income by Province in the Lao PDR 53
3.3 Share of Food in Total Household Consumption, National Average versus Low Income 54
3.4 Poverty Headcount Rate by Main Employment Status of Household Head, Lao PDR,
2002–2003, 2007–2008, 2012–2013 54
3.5 Available Arable Land per Rural Inhabitant, Selected Asian Countries, 2014 55
3.6 Total Renewable Water Resources per Hectare of Arable Land, Selected Asian Countries, 2014 55
3.7 Rice Production Endowments, Southeast Asia, 2012 56
3.8 Composition of Agricultural Production Value, 2012 56
3.9 Planted Area of Top 10 Crops in the Lao PDR, 2007 and 2012 57
3.10 Growth in Paddy Rice Production and Yield, Lao PDR, 2007–2015 58
3.11 Comparison of Paddy Rice Yields, Selected Asian Countries, 2007 and 2012 60
3.12 Gap between Attainable and Actual Paddy Rice Yields, Selected Asian Countries, 2012 61
3.13 Cropping Intensity in Irrigated Areas, Selected Asian Countries 61
3.14 Balance of Rice Trade, Lao PDR, 2005–2016 61
3.15 Yields of Annual Crops, Lao PDR and Selected Asian Countries, 2012 62
3.16 Average Yield Growth of Annual Crops, Selected Asian Countries, 2007–2012 63
3.17 Total Number of Households with Livestock and Poultry by Region, 2010–2011 64
3.18 Land Use Prior to Issuance of Concession or Lease to Investors, Based on Remote Sensing Analysis 66
iv
Figures, tables, and Boxes
3.19 Balance of Trade in Food Products, Lao PDR, 2010–2016 68
3.20 Agricultural Trade Balance as a Share of Agricultural GDP, Selected Asian Countries, 2016 68
3.21 Trends in Prevalence of Undernourishment, Selected Asian Countries, 2005–2016 68
3.22 Prevalence of Village Reported Constraints to Agricultural Production by Agro-Ecological Zone,
Lao PDR, 2010–2011 70
3.23 Share of Cropped Area Irrigated, Selected Asian Countries 71
3.24 Average Nitrogen Fertilizer Application Rates on Cropped Area, 2014 74
3.25 Agricultural Borrowing Activity by Purpose of Borrowing, 2010–2011 75
3.26 Farm Gate Paddy (Rough Rice) Prices in the Lao PDR, Thailand, and Viet Nam, 2005–2013 77
3.27 Costs of Compliance with Agricultural Export Regulations and Permits, 2016 77
3.28 Rice Supply Chain in the Lao PDR 78
3.29 Livestock Value-Chain Structure in the Lao PDR 79
3.30 Road Length per Land Area, Selected Asian Countries, 2011 80
3.31 Overall Logistics Performance Index, Selected Asian Countries, 2007 and 2016 80
3.32 Agricultural Research Spending as Share of Agricultural GDP, Selected Asian Countries,
2005, 2010, Latest Year 81
3.33 Intensity of Extension Coverage in Developing Asia, 2009 81
3.34 Share of Rice Area Planted to Modern Varieties in Selected Countries of Developing Asia 82
B3.1.1 Average Paddy Yields in Savannakhet Province during 2015 Rainy Reason, According
to Different Sources 59
B3.2.2 Average Climate-Related Crop Damage in the Lao PDR over 2012–2015 72
4.1 Government Employees 103
4.2 International Visitor Arrivals in ASEAN Countries, 2008–2015 105
4.3 Share of Visitors by Province, 2008 and 2015 107
4.4 Tourist Sites in the Lao PDR 107
4.5 English Language Proficiency, 2016 115
4.6 The Global Networked Readiness Index, 2016 119
5.1 Lao PDR’s Total Primary Energy Supply, 1990–2014 134
5.2 Lao PDR’s Total Final Energy Use by Source, 1990–2014 135
5.3 Lao PDR’s Total Final Energy Use by Sector, 1990–2014 135
5.4 Ministry of Energy and Mines Organizational Chart 138
5.5 Electricity Consumption by Sector, 1995–2015 142
5.6 Electricity Intensities, Selected Countries, 2005 and 2014 142
5.7 Growth of Electricity Consumption Versus Income 143
5.8 Electricity Intensity by Sector, 1995–2015 143
5.9 Electricity Use per Capita in Selected ASEAN Countries, Latest Year 144
5.10 Electricity Supply for Domestic Needs, 2005–2015 144
5.11 Progress of Electrification Programs in Selected Countries 146
5.12 Power Export Value, 2005–2020 149
tables
1.1 Macroeconomic Indicators, 1981–2016 8
1.2 Banks in the Lao PDR, 1991–2016 11
1.3 Performance of the External Sector, 1997–2015 13
1.4 Composition of Output and Employment, Selected Countries 17
1.5 Gini Coefficient by Region and Rural–Urban Location, 1992–2013 19
1.6 Governance Indicators for ASEAN Countries, 2015 23
1.7 Ease of Doing Business Ranking for ASEAN Countries, 2016 24
v
Figures, tables, and Boxes
2.1 Share of the Lao PDR’s Top 20 Exports 29
2.2 Number of Products with Revealed Comparative Advantage, 1980–2014 30
2.3 Distribution of Product Complexity and Export Share, 2014 31
2.4 Communities of Products of the Lao PDR, 2014 37
2.5 Frontier Products with Positive Opportunity Gain, 2014 42
2.6 Frontier Products with Negative Opportunity Gain, 2014 43
2.7 Option 1, Nearby Frontier Products, 2014 44
2.8 Option 2, Middle-Distance Products, 2014 45
2.9 Option 3, More Advanced Middle-Distance Products, 2014 46
3.1 Farm Area by Province and Land Type, 2010–2011 57
3.2 Proportion of Households that Sold Rice, Crops, and Livestock, by Region, 2010–2011 58
3.3 Livestock Population in the Lao PDR 63
3.4 Aquatic Production and Growth Rates, Lao PDR, 2003–2013 65
3.5 Agricultural and Plantation Concessions and Long-Term Leases in the Lao PDR as of 2012 65
3.6 Depth of the Food Deficit in Southeast Asian Countries, 2005–2016 69
3.7 Percent of Cropped Area Irrigated by Province and Land Type, 2010–2011 71
3.8 Presence of Input Facilities in the Lao PDR, 2010–2011 73
3.9 Input Market Characteristics in the Lao PDR and Other Mekong Basin Countries
in Dominant Rice-Producing Locations 73
3.10 Presence of Credit Activities in Agricultural Villages in the Lao PDR, 2010–2011 75
3.11 Estimated Effects of Agricultural Interventions in the Lao PDR on Paddy Yields 85
3.12 Estimated Effects of Agricultural Interventions in the Lao PDR on Rice Sales 85
3.13 Estimated Effects of Agricultural Interventions in the Lao PDR on Nonrice Crop Sales 86
3.14 Estimated Effects of Agricultural Interventions in the Lao PDR on Livestock Sales 86
3.15 Estimated Effects of Interventions in the Lao PDR on Land Clearance for Agriculture 86
A3.1 Interventions Evaluated for Impacts in the Lao PDR 92
A3.2 Summary Statistics for Variables Used in the Regression Models 93
4.1 GDP Growth and Sectoral Shares in GDP 98
4.2 Share of Services in GDP and Employment, 2015 99
4.3 Skilled and Unskilled Workers in the Services Sector 100
4.4 Services Exports of the Lao PDR, 2010–2015 100
4.5 Revealed Comparative Advantage of the Lao PDR in Services, 2000–2014 101
4.6 Sectoral Shares in Services Sector, 2000–2014 102
4.7 International Tourist Arrivals, 1995–2015 105
4.8 Percentage Share of Tourist Arrivals, 2009–2015 106
4.9 Tourism Contributions to GDP and Employment in Selected ASEAN Countries, 2015 108
4.10 Logistics Performance Index for ASEAN Countries, 2016 113
4.11 Selected Education Indicators for ASEAN Countries, 2015 114
4.12 Indicators of Universal Access to Primary Education, 2010–2015 115
4.13 Enrollment Rate in Basic Education, 1992–2014 115
4.14 Higher Education and Technical and Vocational Education and Training 116
4.15 Network Readiness Index of the Lao PDR 119
4.16 Selected Information and Communication Technology Development Indicators, 1992–2015 120
5.1 Power System Capacity of the Lao PDR, 2016 140
5.2 Electricity Generation, Consumption, Export and Import, 1991–2015 140
5.3 Transmission and Distribution Lines, 2015 141
5.4 Forecast of Domestic Power Demand, 2016–2030 143
5.5 Distribution Losses, 2005–2015 145
5.6 Electrification Rates by Region, 2015 146
5.7 Generation and Transmission Investment Plan, 2016–2020 147
5.8 Forecast of Domestic Power Demand and Capacity Gap, 2020–2030 147
5.9 Investment Requirement to Meet Domestic Demand 148
5.10 Investment Requirement for 2016–2020 148
vi
Figures, tables, and Boxes
5.11 Government’s Revenue from Power Export, 2010–2020 149
5.12 Government’s Revenue from Power Export from Nam Theun 2 Project, 2010–2018 150
A5.1 Existing Power Plants in the Lao PDR (2015) 154
A5.2 Power Projects in the Pipeline 156
A5.3 Power Generation of Each Power Plant, 2005–2015 158
A5.4 Summary of Planned Transmission Lines 160
Boxes
1.1 Natural Resource Boom and Dutch Disease 14
2.1 Product Space Analysis 34
3.1 Accuracy of Paddy Rice Yield Statistics—Evidence from Savannakhet Province,
Lao PDR 59
3.2 Impacts of Climate Change on Agriculture in the Lao PDR 72
3.3 Methods for Identifying the Effects of the Lao PDR’s Agricultural Programs 83
4.1 Tourism Targets of the Eighth National Socioeconomic Development Plan 110
4.2 Outward and Inward Migration in the Lao PDR 117
4.3 Key Focus Areas of the Lao PDR’s Education Sector Development Plan for 2011–2015 118
4.4 Information and Communication Technology Development in Asia 123
4.5 Smart Cities 125
5.1 Reorganization of the Ministry of Energy and Mines 137
vii
Foreword
The Lao People’s Democratic Republic (Lao PDR) has made substantial progress since its transition from a
centrally-planned to a market-oriented economy in 1986. With the inception of the New Economic Mechanism
(NEM) in 1986, the Government of the Lao PDR came up with various economic and structural reforms that laid
the foundation for transitioning to a market-oriented economy. Since then, the Lao PDR has seen remarkable
progress by consistently building itself into a market-oriented economy and moving forward with broad-based
reforms across many fronts. More importantly, the country has sustained the higher economic growth in the last 2
decades, transforming its economy in many ways and making it more open and integrated into the region and the
world. Gross domestic product (GDP) during 1986–2016 grew at 6.5% per annum resulting in increased per capita
income of $2,352 in 2016 (from $170 in 1986).
However, as the study rightly points out, despite achieving a higher growth trajectory, the pace of structural
transformation from primary to modern sectors of the economy has remained sluggish. We appreciate the findings
of the study, which reveals clearly that future economic growth should be inclusive in nature and supported by
new drivers of growth. The study highlights the importance of relocating resources from low productivity to high
productivity sectors. In this context, the report stresses the improvement of agriculture productivity, which would
eventually release the excess labor that could be absorbed in more productive services and manufacturing sectors.
The study also highlights the importance of “low hanging fruits,” that is, the high value-added products that are
relatively close to the Lao PDR’s productive knowledge. To promote these high-value products, meaningful dialogues
between the public and private sectors are essential to help identify product-specific constraints. By addressing
these constraints, the government can encourage the private sector to venture into investing in nontraditional
products and thus accelerate the speed of structural transformation.
This country diagnostic study complements the strategies of the Lao PDR’s 8th National Social Economic
Development Plan 2016–2020, which articulates the government approach to help achieve sustainable
development. We believe that the findings of the study would facilitate wider dialogue among key development
stakeholders and benefit us in implementing the strategies and policies to achieve sustained and inclusive growth.
We also envision to graduate from the status of a least developed country by 2020. While growth performance in
the last decade indicates that the country can achieve that target by meeting the gross national income threshold,
our performance, in the other two criteria—human assets index and economic vulnerability index—is lagging far
behind. The findings and key recommendations of this country diagnostic study, which emphasizes the need to
diversify the production structure and find new drivers of growth, would help reduce the country’s vulnerability
from economic shocks and achieve our aspirations.
The Government of the Lao PDR welcomes this report and its key findings. We appreciate the analysis and policy
suggestions to help realize our goals of sustained higher growth and better employment outcomes for the prosperity
of Laotian.
mr. souphanh keomixay. ph.D.
Minister of Planning and Investment
viii