On the cusp of modernity: the Lao private sector at a crossroads

For older generations of Lao citizens, the streets of Vientiane must be nothing short of unrecognizable. Over the past fifteen years, Lao PDR and its capital have enjoyed strong economic growth on the heels of a natural resources boom and closer regional integration. The result has been an undeniable if only gradual trend toward modernity for a country once completely shielded off from the outside world. With some of the world’s fastest growing economies right in its backyard, Lao PDR has benefited significantly from external demand for tradable goods and services and increased foreign direct investment inflows. Cooperation and coordination with development partners has intensified, leading to progressive efforts to reform and increase openness. What’s more, strong growth in real GDP (averaging over 7 percent throughout the two decades to 2014) has been accompanied by a reduction in poverty from 46 percent of the population in the early nineties to 23 percent in 2013.

But while a decade of reforms has brought significant economic gains for the poor, more must be done to ensure that fruits of the country’s economic growth are accessible to all.

The private sector in Lao PDR continues to be beset by a formidable number of challenges, as outlined in the World Bank’s recent Lao PDR World Bank’s 2014 Investment Climate Assessment (ICA). The report presents Lao PDR’s challenges in a sobering light, based on an enterprise survey of nearly 400 manufacturing and services firms of all sizes from across the country. Economic growth, while impressive, has been heavily reliant on a natural resources boom that will neither last forever, nor provide sufficient jobs for the growing workforce in the future. The lack of high-quality private investment in diversified sectors has stifled labor productivity, and the ability to attract new investment has been hindered by a suboptimal business-enabling environment. The level of workforce education and skills has lagged behind that of comparable economies. And, finally, the report found that a gap still remains between written laws and day-to-day business on the ground as a result of inconsistent and unpredictable enforcement practices.

Like so many of its peer countries around the world, the fate of the Lao economy and its private sector hinges largely on one primary factor: jobs. According to the latest Lao Development Report, released concurrently with the ICA, nearly 100,000 young people in Laos will enter the labor market every year for the next decade. Not only that, they will be looking for good jobs. The jobs challenge looms large over the future economic landscape in Laos, no matter how many exports are shipped, how many regulations are reformed, or how many other benchmarks are met.

The Lao economy has been growing swiftly, fueled largely by the rapid development of the hydro and mining sectors. In fact, the country has enjoyed the highest growth rate in all of Southeast Asia over the last 15 years, becoming a middle-income economy in the process, reducing poverty, and delivering improved public services. The development of natural resources has even created spillover effects in the form of an expanding services sector and construction sector. But even still, the impressive growth rate and overreliance on natural resources is not generating a lot of jobs.

Faced with this dilemma, policymakers in Lao PDR face two different pathways, as outlined in the ICA: business as usual, or radical change in the approach to private sector development. The former implies a continued adherence to the natural resource extraction model, with limited growth in diversified sectors and a focus on “mega projects.” While this approach can drive high rates of growth in the short to medium term, it is vulnerable to sector-specific shocks and has no answer for the massive influx of young people entering the job market every year.

A radical reformation of the business-enabling environment would improve transparency and predictability. It could attract higher-quality investors and investments, encourage substantially larger investments in skills upgrading, facilitate productivity growth, and create more and better jobs in diversified sectors. While natural-resource-based development projects would still play a dominant role in the economy, much greater emphasis would be placed on facilitating higher productivity and performance in diversified and higher value manufacturing, agriculture and services.

Both the ICA and the Lao Development Report recommend that stakeholders spurn ‘business as usual’ and take the necessary steps now that will result in the creation of new jobs, as well as better income and productivity in existing jobs. A large majority of the Lao population is engaged in agriculture, so boosting agricultural productivity is a first priority. It will both raise farm incomes and lower the need for agricultural labor, freeing up workers to move to more productive, higher-paying jobs with more growth prospects in the manufacturing and services sectors.

The Lao economy will need to generate more off-farm jobs to absorb workers transitioning from the agricultural sector. More and better jobs can be created in the manufacturing and services via foreign and domestic investments in the private sector, which can be increased by:

• Streamlining and simplifying the business compliance and transaction costs of dealing with government;
• Improving transparency in the provision of public sector services to business (e.g. by publishing all fee schedules, permits, and licensing requirements); and
• Establishing a more predictable playing field for the private sector, with consistent implementation of publicly available legislation, rules, and regulation and with reduced bureaucratic discretion.

Perhaps most importantly, however, is the need to improve the quality of basic education that Lao youth receive before entering the workforce. This year’s ICA singled out inadequate workforce skills as the top constraint to private sector expansion in Lao PDR. Previous ICAs, by contrast, had listed deficiencies in “hard” infrastructure such as transport, energy and telecommunications, as the most significant constraints. In fact, workforce education and skills in Lao PDR compare poorly to similar economies on just about every metric, resulting in a workforce that is ill-equipped to contribute towards a more modern economy.

Lao PDR is poised to successfully manage its transition toward middle-income status, and for its people to reap the benefits of better incomes and economic gains. To do so, the government must seize this opportunity to expand and strengthen the role of the private sector.