06/06/2024 – Having achieved remarkable economic and social progress, Lao People’s Democratic Republic (Lao PDR) faces the challenge of shifting away from commodity-driven growth to a more inclusive prosperity model emphasising human capital development and green sustainability, says a new OECD Development Centre report.

According to the Multi-dimensional Country Review (MDCR) of Lao PDR launched today in Vientiane, the country has made significant progress in terms of development. Sustained economic growth of over 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. The country experienced an impressive increase in FDI inflows between 2006 and 2017, from USD 187.4 million to USD 1.69 billion.  Extreme poverty fell from 25% to 7%, 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 development model, recently exacerbated by COVID 19 pushing up food and energy prices.While debt-financed investments –including public-private partnerships (PPPs)– have supported growth, government revenue has progressed more slowly, hindering the country’s capacity to meet a growing debt service burden and limiting its ability to invest in human capital. 

Growth and investment have been concentrated in a few sectors and dominant state-owned enterprises (SOEs), 90% of workers are still employed in primarily informal sectors, and past development has dented natural wealth: Lao PDR has lost nearly 23% of its tree cover since 2000 and grapples with high levels of air pollution.

Focusing on human capital and green sustainability, and reforming public finance and taxation can help Lao PDR overcome these challenges. To this end the MDCR of Lao PDR formulates these recommendations:

• Reduce the debt-burden to free up fiscal space, while improving spending efficiency. Managing fiscal risks related to PPPs and SOEs involves auditing existing entities, enforcing strict criteria for government guarantees, and implementing quick-win reforms in the SOEs with the highest risk profiles.
• Reform the tax system to boost revenue and taxation capacity, including by removing distortions and shifting from profit-based to expenditure-based investment incentives. Build a consistent international taxation framework to reduce revenue leakages.
• Improve access to land, transport infrastructure and the competitiveness of the financial sector to attract more sustainable investment.
• Increase investment in education, skills, health care and social services.
• Improve data collection and institutional capacity for green and climate finance, where Lao PDR has untapped potential.
• To strengthen implementation capacity, overcome fragmentation and improve co-ordination with  clear roles and responsibilities being defined across government and other development stakeholders.

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