Lao People’s Democratic Republic (Lao PDR) has made significant headway on its development path, combining high economic growth with poverty reduction. Sustained economic growth of more than 7% annually between 2000 and 2019 was led by booming commodity exports and substantial inflows of external financing, notably from large investment projects in hydropower, mining and transport. Many Laotians experienced significant improvements in their well-being. Poverty declined as household income increased, and many important development gains in education and health were achieved.
After three successful decades, Lao PDR is now grappling with the shortcomings of its current model of development. While debt-financed investments have supported growth, government revenue has not followed suit, undermining the country’s capacity to cope with a fast-mounting debt service burden and causing debt distress and pressure on the national currency. At the same time, past growth and investment were highly concentrated in a few sectors and dominant state-owned enterprises (SOEs). More than 90% of workers are still employed in sectors dominated by informal employment, with more than 50% working in the agricultural sector, generating limited income, added value and tax revenue. Past development has also come at the expense of natural wealth: Lao PDR has lost nearly 23% of its tree cover since 2000 and is also grappling with high levels of air pollution.
Looking ahead, Laotians are hoping for more broad-based and sustainable development. During foresight exercises undertaken in the context of preparing this report, strong education systems, good governance and the rule of law, a clean environment, and a dynamic economy that offers opportunities for many were all highlighted as the main elements of a desired future for Lao PDR. Laotians hope for middle-class family lives and the opportunity to contribute to society, achieve good health, live in green cities with attractive public spaces, have access to clean water, and experience minimal air pollution and waste.
Focusing on four strategic pillars would help Lao PDR to step up its efforts to deliver on these aspirations. These four strategic pillars are:
1. Prosperity: creating the conditions for opportunities to emerge in all sectors and for all citizens
2. People: making human capital development a priority
3. Planet: preserving Lao PDR’s abundant natural wealth, fighting air pollution and mobilising green finance
4. Financing: building solid management and revenue capacity and focusing on sustainable investment.
In order to establish a foundation for delivering on these four pillars, Lao PDR must tackle two urgent tasks, the first of which is to reduce the debt burden and re-establish macroeconomic stability. Seeking debt relief is a crucial step towards freeing up fiscal space that must be combined with enhancing spending efficiency. Managing fiscal risks related to public-private partnerships and SOEs involves auditing existing entities, enforcing strict criteria for government guarantees and implementing quick-win reforms in those SOEs that present the highest-risk profiles. Public debt management should be centralised, with clear authority and validation processes for all public debt.
The second of Lao PDR’s urgent tasks is to boost revenue generation and taxation capacity. Lao PDR stands out because of its low capacity to raise tax, having the lowest tax-to-gross domestic product ratio among the members of the Association of Southeast Asian Nations. Insufficient revenues are an important element of the country’s current debt crisis, and public funds are currently insufficient to pay for the necessary investments in human capital and sustainable development. Lao PDR must address tangible design and administration flaws across all types of taxes and investment incentives by:
increasing revenues gradually while also transforming the tax system into a positive force that helps address rising inequality, high informality and environmental degradation
reforming those aspects of the tax system that introduce distortions or contribute to low revenues and limited equity of the tax system, and moving from profit-based to expenditure-based investment incentives
building a consistent international taxation framework in order to reduce revenue leakages.
Once this foundation has been established, Lao PDR should focus on fostering a thriving private sector and sustainable investment. Attracting more sustainable investment that contributes to economic diversification and helps achieve environmental and social goals requires improving the overall enabling environment for investment. This includes improving access to land through better co‑ordination in land administration and management structures, as well as establishing an improved legal framework for land titling, better transportation infrastructure, and a more advanced and competitive financial sector.
Lao PDR should also invest in human capital. A shift away from the current trajectory of capital-intensive investments in natural resource extraction and energy generation and towards a wider range of sectors – such as manufacturing, agri-business, tourism and services – will necessitate an increase in the amount of qualified labour available. It is essential to invest in education and skills development, but funding must also be made available for healthcare and a minimum level of social services. However, there is a gap between these development priorities and the total amount of resources currently allocated to them.
Increasing efficiency and predictability for investors requires the adoption of a whole-of-government approach to investment policy. Improved co‑ordination between different government entities and between the public and private sectors can facilitate the development of policies and services for investors that are more closely aligned with their needs. In addition, a predictable regulatory framework for investment and an independent court system can provide a firm basis for reducing opportunities for corruption.
Unlocking Lao PDR’s abundant potential for green and climate finance will necessitate improvements in data availability and increased institutional capacity. Climate finance depends on high-quality, reliable data to measure emissions reduction or removal and allow third-party verification of such measurements. Building these Measurement, Reporting and Verification (MRV) mechanisms requires the availability of accurate, harmonised and regularly updated environment statistics.
Finding ways to overcome fragmentation and a lack of co‑ordination between branches of Lao PDR’s government can have significant benefits for all policy areas. A shared and well co‑ordinated governance of the sustainable development financing agenda with active involvement of development partners is fundamental for achieving long-lasting results. There is also scope for better inter-institutional co‑ordination and alignment of Lao PDR’s strategic objectives and priorities among the different government entities involved in the design and implementation of the country’s tax and investment policies. Better data sharing and harmonisation with regard to methodologies, data collection processes and definitions are also essential for improving access to climate financing.
