Lao PDR: Social Development Assessment and Strategy

Poverty Profile

Lao PDR is distinctive in several ways: it is land-locked; it has a small population of approximately 4.5 million people relative to its land area; and it is poor by Asian standards with GNP per capita estimated at $280.

A recent World Bank study on social development in Lao PDR analyzed the first national survey of consumption and social indicators to establish a baseline profile of the poor. The incidence of poverty in Lao PDR is 46 percent with a large urban-rural differential of 53 percent of rural individuals and 24 percent in urban areas. The South emerges with the highest regional incidence of poverty (59 percent) and severity of poverty, coincident with unfavorable nutrition and health indicators. High average incomes and modernized farming in the South points to sharp disparities between the poor there and the better off. Nationally, farmers are the poorest occupational group, followed by private and public sector employees. Families of self employed people show the lowest poverty, consistent with the opportunities newly open to entrepreneurs in a transition economy. Income distribution is comparatively equal (.32 Gini coefficient) as would be expected in a low income, agricultural economy.

Incentive and Regulatory Framework

As Lao PDR continues to register high rates of GDP growth, the distribution of the benefits of growth, as of 1992-93, appeared to strongly favor urban areas, thus raising the prospect of unbalanced, less equitable development in a region of the world widely known for its rapid and equitable growth patterns. This emerging challenge to the goal of "social development" in Lao PDR does not appear to have strong macroeconomic causes. Macroeconomic stability has been sustained, with clear benefits to growth and incomes. Recent reforms of taxation have removed potentially heavy burdens on the poor (repeal of land tax, for example); exchange rate management has been prudent overall, avoiding strong real appreciation of the kip (which would benefit better off consumers of imports). Some deterioration in the internal terms of trade may have affected farmer incomes, but only the better off selling their production. Subsistence agriculture is dominant in 50 percent of Lao rural villages. The fiscal incidence of public expenditure by province is progressive, that is low income provinces are receiving a higher net flow of public resources on a per capita basis then higher income provinces.

Public Expenditure

Public programs designed to reach rural households were analyzed for their poverty targeting using the household and village surveys, as well as an incidence analysis of public expenditure on education. The agriculture sector can be characterized as an extensive but low productivity quintile (20 percent) of income distribution owning 1.29 hectares on average and the richest quintile only 1.72 hectares. Irrigation is rare, double cropping equally scarce, and land quality overall is highly variable. The well known low productivity of Lao agriculture is well displayed by the absence of any clear relationship between land type (irrigated, dry land, both) and household income. Only land size shows such a relationship, indicating that with more land, a typical Lao family will be better off.

The reasons for low productivity are, on the supply side, that extension services are widely available, but of low quality, given that most such visits are to monitor production targets. Most Lao farmers do not use modern inputs (only 13 percent use fertilizer and 6 percent use pesticides). On the demand side, the accessibility to rural roads is poor, with half of Lao villages inaccessible by truck during the rainy season. The poorer households tend to live in villages that are never accessible by truck. Market access is also quite limited with over half of Lao villages more than 10 km from the nearest market. The low-input, low output character of Lao agriculture places a major obstacle in the way of balanced growth in urban and rural areas.

In both education and health there is abundant evidence from the surveys that primary schools are widely available, that children are enrolled, and that private medical practitioners are present in most villages. But the quality of such education and medical services is low and the productivity of those services, as seen in literacy rates, immunization coverage, infant mortality rates, is also low. For example, primary schools are present in over 90 percent of the survey villages. However, on the quality side, only 62 percent of rural schools have textbooks, and just 55 percent offer the complete 5 year primary school curriculum. On the efficiency side, enrollments drop off drastically from the primary to secondary level, and age grade matching shows that many students are late entrants or repeaters. Thus, it is not surprising that 36 percent of the population is illiterate.

The poor show markedly lower participation in education than the better off. At the levels of secondary and higher education, the poor are very lightly represented and the heavy government subsidies for secondary and higher education flow almost exclusively to the better off, non-poor Lao population.

Access to modern health care and facilities is far more constrained than primary education. Urban residents enjoy nearly 100 percent access to nearby hospitals and medical practitioners. In rural areas, about 70 percent of rural families are more than 3 km from the nearest hospital, dispensary or pharmacy. The poor are particularly disadvantaged in terms of health access. In terms of access to medical services in urban areas, measures of proximity for the poorest 20 percent and the richest 20 percent are equally high. But in rural areas, disparities are sharp by quintile, with the top 20 percent enjoying high levels of nearby access to medical practitioners, hospitals, dispensaries and pharmacies, while the lowest 20 percent of the population shows very low levels of nearby access. The poor show a pattern of utilization favoring the low cost, non-modern rural services such as "traditional" and "no care". Not surprisingly, the services favoring the better-off are hospital visits and pharmacies, which show much stronger usage by the better off than the poor. Low access is matched with high rates of infant mortality (142/1000 lives births) and maternal mortality (660/100,000 live births). Fertility in Lao PDR is very high at 6.9 in rural areas and 6.7 overall. For health reasons alone, Lao PDR will need to address birth spacing as an urgent priority.

The government provided Safety Net is limited to social security for government employees and some social welfare expenditure on natural disaster relief. In a country as poor as Lao PDR, development of a true safety net for the poor has not moved past basic health and education services, both of which involve out of pocket expenditure by the poor.

Poverty Strategy

As Lao PDR enters a period of more robust growth, fueled by the urban/industrial sector, what are the prospects for social development? Rapid growth will reduce poverty quickly; if per capita GDP grows at an annual average of 3.5 percent, poverty will decline from 46 percent today to 22 percent by the year 2000, assuming no deterioration in the distribution of income. The Government of Lao PDR faces conditions that, in many ways, prevailed in some of its high-performing East Asian neighbors 30 years ago. Poverty incidence is high and per capita income low in an agricultural, rural economy. The Government of Lao PDR has demonstrated its commitment to economic growth as the surest guarantor of increasing welfare for all through the adoption of a sound macro policy framework. But are these building blocks of growth sufficient to ensure a social development outcome of broadly shared, balanced growth?

The findings of the assessment report present a mixed picture of strengths and vulnerabilities in meeting the challenge of social development, that is rapid growth with no decline in income equality. What can the Government of Lao PDR do in the near term to shift the balance of growth benefits in the favor of the rural poor?

The assessment report recommends interventions to address the relatively unfavorable position of the rural poor in regard to publicly financed programs. Educational quality improvements are vital, and a fee structure to help finance the expansion of post secondary and higher education would also help reduce the current education subsidies for better off families. The health system needs to expand and improve public services in disease control and primary care for mothers and children, including the urgent need to reduce fertility rates. In the transport and agricultural sectors investments in rural roads (or their improved maintenance) and support for rural market development should be coupled with improved extension services for rural farmers to help farmers break the low input-low output cycle of Lao agriculture. More fundamentally, the assessment concludes that new financing mechanisms for rural development may hold the key to the empowerment of communities and their increased participation in choosing and managing small scale rural investments. A shift toward decentralization of investment decision making has generated strong responses in other countries facing the same dilemma of rural stagnation in productivity growth.

Statistical System

To support such a poverty strategy, continued production of household and village data from the Statistical System is essential. The next consumption survey will need to be expanded to include modules to gather data on priority sectoral issues, rather than conducting such sectoral modules separately and later in time, as was the case with these first ever national surveys used for this assessment report.