Vientiane, Lao PDR, November 14, 2011 – Over the past decade, Lao PDR has experienced a boom in economic growth. Per capita incomes have more than doubled since 1990, raising the country from a low-income to a lower-middle-income economy in 2011. Following the introduction of the New Economic Mechanism and the implementation of reforms since 1986, the economy has expanded on average by 6.5 percent per year between 1990 and 2009. By 2010, per capita income reached US$1,010 while the country’s poverty headcount was significantly reduced from 46 percent of the population in 1992-1993 to 28 percent in 2007-2008.
“Recent economic development is commonly linked to the natural resource sector, as Lao PDR is richly endowed with minerals, water resources for hydropower development, and forestry products. However, for the country to sustain its growth, it is important to strike a balance between the resource and non-resource sectors”, says Genevieve Boyreau, the World Bank’s Senior Country Economist for Lao PDR. “The newly released Second Investment Climate Assessment shows how the current investment climate could improve in order to enable an inclusive and sustainable economic growth path,” she added.
The Second Investment Climate Assessment (ICA) for Lao PDR was carried out by the World Bank working closely with government agencies and development partners. The report summarizes the results of a national survey and draws on extensive interviews with policymakers and practitioners. The report presents suggestions on how to address fundamental challenges impeding sustainable business growth and provides constructive recommendations on how to improve the investment climate in Lao PDR.
The ICA report states that the non-resource sector provides more inclusive growth options than the resource sector, such as longer-term employment opportunities. If managed well, the non-resource sector is expected to contribute more than half of Lao PDR’s real GDP growth and 75 percent of the GDP in the medium-term. To achieve these results, policies in Lao PDR should focus on creating an enabling business environment that supports the development of the non-resource sector.
The ICA also provides international case studies which can serve as examples and models for Lao PDR’s future direction in improving its investment climate. By comparing Lao PDR with the countries in the Region and globally, the reader is provided with a framework to better understand the challenges and progress the country is currently experiencing. These comparisons highlight that while labor is relatively cheaper in Lao PDR than in other neighboring or comparator countries, labor productivity is relatively low, leading to competitiveness challenges.
The report also demonstrates primary constraints in the non-resource sector as identified by business holders, focusing on inadequate skills in the workforce and limited access to finance and taxation regimes. As the ICA explains, constraints in the business environment are experienced differently for small, medium or large enterprises and vary according to province and region.
While significant improvements have taken place over the past 5 years in areas such as access to electricity and infrastructure development which supported economic progress, challenges to the business environment still remain. As Lao PDR’s economy continues to transform, the next challenge is to address more complex constraints related to skills, access to finance, and the implementation of a growth-friendly tax regime, specifically for small and medium enterprises. The survey’s results and extensive interviews confirmed that a greater focus on effective implementation of recently passed reforms is crucial to improve the competitiveness of Lao PDR’s economy. The Assessment concludes with recommendations on how to address investment constraints, including improving taxation systems, developing skills within the workforce, and providing increased access to financial tools to better support the needs of small and medium firms.