11
2009.
9
Labor productivity in Laos was stagnant between 2005 and 2006 relative to other
countries in the same income group (World Bank, 2010). Manufacturing exporters are less
profitable than non-exports because exporters face elastic world demand and have more
difficulty adjusting to higher labor and trade costs. Real wages have been growing in both the
private and public sectors in recent years. In this sense, the natural resources boom can be
said to have negatively impacted labor productivity, especially among manufacturing
exporters. The symptoms of Dutch disease will become much more prominent as revenues
from the resource sector increase over the medium run.
Given the potential setback of resource-based growth strategy in Laos, policies to enhance
international trade and promote FDI inflows seem a clear means to boost the domestic
production and integrate the country into the regional and global economy, and thereby
remove Laos from of the list of less developed country. It is not enough that Laos opens its
markets for foreign investors. What is more critical is to keep them in the country particularly
if the intention is to attract export oriented foreign investment. Building the necessary
infrastructure support for investment is still crucial. This involves credible efforts to provide
an operating environment conducive for transnational operations and reduce high transaction
costs associated with inefficiencies in infrastructure. In this regard, launching initiatives on
public-private partnerships for infrastructure in Laos is encouraging. That is, the
collaboration between public and private sectors with clear agreement on shared objectives
for delivery of public infrastructure can serve as the key engine of facilitating trade and
investment. By doing so, Laos will be able to enhance not only the competitiveness of
domestic firms, but also to attract FDI seeking for the production base. As trade costs become
lower, the small country size is no longer the FDI constraint because affiliate production by
multinationals could be exported to foreign countries, especially ASEAN countries.
Finally, it is widely recognized that the multinationals are physical capital and skilled labour
intensive. This suggests that Laos needs to pursue the reform on legal environment relating to
FDI and to invest more on human resource development. Further improvements in the legal
environment can potentially make Laos a more attractive foreign investment destination. In
particular, the Lao government should provide a long-term and consistent policy environment
for foreign investors. That is, the favourable environment must be absolutely free from
frequent changes. Formulating a single legal framework for regulating all forms of
investments and removing discriminatory treatment could provide favourable business
climate to prospective investors. Regarding the human capital development, training and re-
training of the labour force should continue to be high on the agenda. A number of skilled
workers must be trained with well qualified instructors coupled with modern training
facilities, which might be done through the co-operation with domestic and foreign expertise.
Therefore, improving legal environment and developing human resources are extremely
important to reap the full benefits from inward FDI and pave the way for future
industrialization of the country.
9
It is important to note that the recent exchange rate appreciation may have arisen from other factors such as a
weak US dollar, a government policy of de-dollarization, increased growth and improved term of trade.
12
3.2. Poverty
Poverty is one of the most important issues for Laos. In order to eradicate poverty by 2020,
the government has implemented the National Growth and Poverty Eradication Strategy
(NGPES), an overall development and poverty alleviation framework (GoL 2004). Analysis
of four Lao Expenditure and Consumption Surveys (LECS) from WB and DOS (2009)
showed that the incidence of poverty has fallen since LECS 1, though it fell slowly from
1997-98. The incidence of poverty fell from 46% in LECS 1 to 39% in LECS 2, and from
33.5% in LECS 3 to 28% in LECS 4. However, inequality has increased, especially in
Vientiane and other urban areas. The Gini coefficient increased from 30.5 in LECS1
(1992/93) to 35.4 in LECS 4 (2007/08). In Vientiane, the Gini coefficient increased from 29.7
in LECS1 (1992/93) to 38.00 in LECS 4 (2007/08).
From these figures, it is clear that despite reducing poverty in recent years, Laos still faces
high poverty and inequality. The inequality (Gini coefficient) increased from 30.5 in 1992/93
to 35.6 in 2007/08 (table 3-2). Vientiane and northern Laos have experienced greater
increases in inequality as compared with with other regions of the country. In Vientiane, the
Gini coefficient increased from 29.7 in 1992/93 to 38.0 in 2007/8 which increased about 28
percent points, and in northern Laos the Gini coefficient increased from 26.9 in 1992/93 to
35.2 in 2007/08 (table 3-3).
Although the national rate of poverty has decreased, malnutrition and education remain
serious problems in Laos. Cases of underweight and stunted children under the age of 5
reached 37% and 40% respectively in 2006 (DOS et al, 2008). Underweight and stunting
declined by only 15-17% from 1993 to 2006 (table 3-4). This shows that malnutrition is one
of the most serious obstacles to development in Laos. Supporting the poor in order to
improve nutrition for children is therefore one of the most critical tasks facing the country
(Kyophilavong, 2010). In addition, poverty and childhood education are highly correlated and
currently, children in rural areas travel 8 km on average to the nearest secondary school,
whereas this journey in urban areas averages 3 km. Improvements in education are apparent,
for example 81% of 6-10 year olds were enrolled in school in 2007/08 compared with 72% in
2002/3. However, only 78% of rural children were enrolled, as compared with 94% of urban
children. The main reasons for low enrollment in rural areas were: school fees, other
expenses, and the need for their labor in agriculture (WB and DoS, 2009).
Reducing poverty in Laos has been discussed by a number of scholars. According recent
studies using the LECS 4 by Kyphilavong and Yearsourher (2013), an
empirical analysis
showed that livestock, education, and access to electricity are the most crucial factors at the
household level to reducing poverty in Laos. Warr (2008; 2010) showed that access to roads
in both dry and rainy season plays a crucial role in reducing poverty in Laos. Kyophilavong
(2010) highlighted the importance of conditional crash transfer for th poor as another crucial
factor to reducing poverty in Laos. Finally, the impacts of agriculture productivity and price
changes related to climate change on poverty and income distribution were discussed by
Kyophilavong and Takamatsu (2011).