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Lao PDR: Government Reforms Spur Growth, Reduce Poverty

Last Updated: July 2009
Lao PDR: Government Reforms Spur Growth and reduce Poverty

Challenge

By the mid-2000s, Lao PDR was enjoying a sustained period of strong growth. But poverty persisted, especially in remote upland areas. The country was characterized by predominantly agrarian subsistence economies with unsophisticated industries, significant barriers to export, a weak investment climate and a fledgling private sector. At the same time, the government’s mixed record of reform through the 1990s left many donors wary of engagement.

Approach

In 2005, the Bank initiated a series of three Poverty Reduction Support Operations (PRSO 1–3), which by 2008 had provided around US$28 million to help the government undertake a comprehensive program to reform public financial management, improve the investment climate and reduce national poverty.

Lao PDR would be the first Low-Income Country under Stress to initiate a PRSO series. This required the government to meet high standards for implementation of key public policy reforms. In designing the PRSO series, IDA drew on the shortcomings of earlier budget support operations in Lao PDR by fostering national ownership of reform programs and tackling weaknesses in the public sector head-on. Thus the PRSO 1–3 was based on the government’s National Growth and Poverty Eradication Strategy (2004) and National Social Economic Development Plan (2006–10), and designed to programmatically link the management of reform to a series of incremental steps that could be monitored to produce impacts over time.

Results

Lao PDR has demonstrated that PRSO programmatic budget support, coupled with a strong technical assistance program, can have a significant positive impact on the economic performance of a Low-Income Country under Stress and bring about stable progress on policy reform.

Highlights:
By the end of the PRSO1-3 series in 2008, results had been achieved in multiple areas—

An improving investment climate:
- An environment more hospitable to business and greater regional and global trade integration now exist. Lao PDR is moving toward accession to the World Trade Organization and is introducing a single entry point with the Association of Southeast Asian Nations (ASEAN) to regularize decision making for customs information and clearance.
- New enterprise and customs laws based on international best practice in business regulation are being implemented.
- Comprehensive government strategies are improving the climate for private sector development and trade by local firms and foreign direct investment, while the focus on supporting small- and medium-size enterprises and legal reforms is leveling the playing field between small and large businesses and those that are domestic and foreign-owned.
- According to the Bank’s 2008 Doing Business Report, the time required to start a business in Lao PDR has been nearly slashed in half—from 198 days in 2004 to 103 days in 2007—and is expected to fall further as the next PRSO series is implemented.

A better and more transparent management of public resources:
- Systems for good public finance management and sound economic governance are now in place, and better natural resource management is boosting public revenues.
- Total revenues were up from 11 percent of GDP in 2003/2004 to 12.1 percent in 2005/2006 and 13.2 percent in 2006/2007, with GDP growing more than 7 percent yearly.
- Budget papers are being prepared in a more timely and transparent way; there is a modernized chart of accounts and a more centralized Treasury; and public procurement systems have improved.
- A new Tax Law and Value-Added Tax Law will help the government move toward centralized revenue collection and broaden the tax base.
- Public electricity and water utilities are gradually becoming financially self-sufficient, and the performance of state-owned enterprises has improved. Reform and restructuring of these firms is yielding higher revenues and decreased losses.
- Through the introduction of utility price tariff adjustments, the proportion of water utilities operating at full cost recovery rose from 11 percent in 2004 to 35 percent in 2005.

Better basic service delivery to the entire population:
- The government’s Power Sector Action Plan is helping the electricity company Electricité du Laos to become financially viable even as it delivers more power to the poor. The percentage of the rural population with access to electricity rose by 50 percent between 2003 and 2008, while cost recovery levels increased from 83 percent in 2003 to nearly full recovery in 2007.
- Health workers and teachers are receiving their salaries on time, and new school grant programs and hospital equity funds were piloted in some of the poorest districts.
- A fuel levy increase is funding road upgrades and maintenance, resulting in a 4 percent increase in useable paved roads throughout the country.
- However it is still a major concern that funding for basic education and health as a percentage of public spending remains among the lowest in the world and is heavily reliant on external financing.

Contribution

IDA provided grants of US$10 million to PRSC 1, US$8 million to PRSO 2 and US$10 million to PRSO 3. In May 2008 IDA approved financing of around US$10 million annually for a follow-on series of operations (PRSO 4, PRSO 5, PRSO 6, and PRSO 7) to run between fiscal years 2007/2008 and 2010/2011.

Partners

As confidence grew in the government’s performance throughout the series of Poverty Reduction Support Operations, donor involvement intensified. In February 2007, after the government had completed the first operation, the Japan Bank for International Cooperation signed an agreement for a concessional loan of ¥500 million (around US$4.2 million) for PRSO 2. The European Commission committed €3 million in grant support for PRSO3 implementation. During PRSO 2 and 3, several more donors, including the Government of Sweden and the Asian Development Bank, provided coordinated funding for specialized technical assistance to public finance management reforms.

Development partner programmatic support for the next poverty reduction series has also been forthcoming. The European Commission is supplying a grant of €3 million yearly and Australia is supplying a grant of $A 2.5 million yearly upon successful implementation. Japan is also considering support.

Next Steps

Donor engagement in the next generation of Poverty Reduction Support Operations is strong, and several are participating in multidonor trust funds to provide technical assistance for public expenditure management and trade-related reforms. PRSO 4–7 builds on the achievements of the previous series, deepening structural reforms on public financial management, and expanding efforts to improve the investment climate for business start-ups and operations, as well as beginning the process of strengthening basic public service delivery.


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