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OPINION March 27, 2019

Unlocking Opportunities with Human Capital

Poverty in Lao PDR has been declining, as the country has enjoyed sustained economic growth averaging a remarkable 7.8 percent annually over the past 10 years. Despite impressive achievements, not all Lao people are fully reaping the benefits of their country’s development. And their ability to do so may well depend on their chances to increase the one capital asset they possess: their human capital.

Up until now, growth has been largely dependent on natural resources, resulting in high rates of resource depletion, and low-quality job creation. Rising levels of inequality, reflected by the country’s GINI index, suggest that growth so far is not as inclusive as it could have been.

In coming years, and as the country becomes more connected to the regional economy, Lao PDR will need to look to new drivers of growth, such as services, and high skill sectors. Investments in human capital -- the knowledge, skills, and health that people accumulate over their lives -- will be more important than ever.

Last October, the World Bank launched the Human Capital Index (HCI), which seeks to measure how much countries can gain in economic productivity by investing in their people. The Index measures the amount of human capital a child born today can expect to attain by age 18, given the country’s status of health and education. One of the aims of the HCI is to provide countries with a tool they can use to set goals and measure progress going forward. The HCI reflects the productivity as a future worker of a child born today, compared with what it could be if he or she had full health and complete, high-quality education, on a scale from zero to one, with 1 as the best possible score.

So how does Lao PDR fare in the HCI? The results reveal both good news and room for improvement. Lao PDR has made progress on all HCI indicators. Between 2012 and 2017, the Lao PDR HCI showed overall improvement, from 0.41 to 0.45. While this is a positive step, the HCI is lower than the average in the region and lower than the score of countries with a similar income level.

The results show that the country has work to do to further develop the skills of its people. As things stand, a child born in Lao PDR today is less than half as productive as she could be if she enjoyed full health and complete education. Substantial gains can be made then if the country invests on the right kind of programs.

Regarding health, stunting remains the most stubborn issue, affecting 33 percent of children, a significantly higher proportion when compared with other countries in the region. There is also a large variation across geographic regions of the country and across different socioeconomic groups. In Phongsaly province, for instance, 54 percent of children are stunted, compared with 13.6 percent in Vientiane Capital. And stunting rates among Hmong-Mien children are 50 percent compared with 23 percent among Lao-Tai children. The impacts of stunting affect the ability to succeed later in life, perpetuating a cycle of poverty.

In education, children in Lao PDR can expect to complete 10.8 years of school by age 18. However, when adjusted for quality of learning, years of schooling is estimated at only 6.4, suggesting that quality of education needs to be improved to match the gains that have been achieved in expanding access. Literacy and dropout rates remain high.

The country is already making some essential investments. Together with the World Bank, the government is applying international lessons from countries that have successfully reduced malnutrition. Lao PDR is piloting a new approach in provinces with the highest rates of stunting. This approach targets the same families and districts to simultaneously address demand and supply factors that contribute to malnutrition.  

Such new approaches and continuing to borrow lessons from successes across the world will be key to Lao PDR’s human capital transformation. It will take time for results to materialize – there is no quick fix. Indeed, there is no time to lose. If governments at central and local levels accelerate action now, communities can become healthier and better educated, they can benefit more from the process of growth, improve their livelihoods and become more productive.

In recent decades, natural resources have driven strong economic growth in Lao PDR. To sustain robust growth in the long-term and make it more inclusive, the country must now look to its human resources and diversify the economy. A healthy, skilled, population can enable Lao PDR to tap into the many opportunities that exist in this dynamic region, and to successfully compete in the economy of the future.

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