VIENTIANE: Past policies that have enabled Laos to meet the United Nation’s least developed country (LDC) graduation thresholds are no longer adequate to ensure sustainable development.
The focus of future policies should be on fostering greater productive capacity, increased economic diversification and enabling a stronger business environment.
The UN’s 2018 triennial review of Laos’ LDC status found the country eligible for graduation for the first time, having passed thresholds for two of the three graduation criteria: Gross national income per capita and the human assets index.
While not yet meeting the threshold for economic vulnerability index, the remaining criterion, Laos has managed to reduce this index to a level close to the required threshold.
If the current level of progress is maintained, Laos is set to graduate from LDC status three years after its next 2021 triennial review in 2024.
LAOS’ ECONOMIC DIVERSIFICATION
Laos’ rapid economic growth has changed its economic structure.
The agricultural sector’s share of gross domestic product (GDP) has declined while that of the services and industry sectors has increased.
Manufacturing, which traditionally concentrated on the production of garments, has grown and diversified to parts and components as well as machinery and transport equipment.
Manufacturing’s share of merchandise exports increased from 12.9 per cent in 2013 to 22.3 per cent in 2017.
Attracted by low labour costs and market access to developed countries, foreign direct investment (FDI) into the garments sector has led to an export-oriented manufacturing surge.
This sector had been a major source of foreign exchange earnings and represented more than 40 per cent of total merchandise exports between 2001 and 2004. But its importance has since subsided to only 5.6 per cent of total merchandise exports in 2017.
Laos’ exports took off after 2005 due to FDI in two large mining projects. Log and wood product exports also increased and was mainly driven by neighbouring countries’ increasing demand.
The average annual growth rate of exports surged from 2.4 per cent between 1996 and 2004 to 17.6 per cent between 2005 and 2017.
The services sector — tourism, banking, transport and distribution — also expanded thanks to further economic liberalisation and spillovers from natural resource development.
But despite the growth, higher value-added services account for a small part of the sector. The Lao Statistics Bureau revealed that logistics, financial and information and communications technology services together represented roughly 6 per cent of GDP and 3.7 per cent of employment in 2017.
Meanwhile, in agriculture, diversification has taken the form of a transition away from subsistence production, mainly rice, towards cash crops such as coffee, tea, bananas, rubber and beans.
WHAT RESILIENT GROWTH NEEDS
These transformations have had little impact on the composition of employment. Employment remains highly concentrated in the low productivity agriculture sector and there is little movement from low-productivity to higher-productivity production — explaining the limited impacts of strong growth on poverty reduction.
Diversifying the economy and exports towards more labour-intensive and higher value-added activities is necessary for sustained and inclusive long-term growth.
The reason why Laos’ strong growth has not had a desirable impact on either reducing poverty or creating decent employment is that it has not been accompanied by the development of productive capacities in a wider range of activities — a necessary condition to make economic growth inclusive and its proceeds broadly shared.
The emergence of capital-intensive natural resources activities — the country’s path to LDC graduation — has reduced Laos’ economic vulnerability index. It has reduced export concentration, export instability and the share of agriculture in GDP.
But it also brings new risks. The country’s growth and socioeconomic progress are now highly dependent upon mining, electricity prices and weather conditions.
The resources sector’s low capacity to create employment and high potential to generate negative environmental impacts and economic vulnerabilities will need to be mitigated.
This puts at risk the country’s LDC graduation in 2024 and highlights the importance of building economic resilience for sustainable development.
Building resilience requires sound development strategies to advance productive capacities, increase competition, diversify the national economy, create an enabling environment for investment and strengthen national capacities to mitigate environmental shocks.
Particular attention ought to be placed on institutions, human capital and information and communications technology.
Dr Buavanh Vilavong is Director General of the Department of Industry and Handicraft under the Ministry of Industry and Commerce in Laos.
Dr Sitthiroth Rasaphone is Acting Director General of the Center for Development Policy Research under the Ministry of Planning and Investment in Laos. This commentary first appeared in East Asian Forum.