Information about Asia and the Pacific Asia y el Pacífico
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Appendix V The Lao Government's Policy Agenda, 1994/95–1999/2000

Author(s):
Ichiro Otani, and Chi Pham
Published Date:
May 1996
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As described in the Committee for Planning and Cooperation's Medium-Term Policy Framework and Public Investment Program, the Lao Government's ambitious policy agenda for 1994/95–1999/200056 states the macroeconomic and sectoral objectives of the country as follows: (i) consolidate the macroeconomic reforms to ensure a smooth transition to a market-oriented economy; (ii) improve the efficiency and performance of the public sector: (iii) accelerate socioeconomic development and the improvement of living standards; and (iv) halt the degradation of the natural resource base. The policy framework's specific targets for the period are

  • an 8 percent annual increase in economic growth;
  • an inflation rate not exceeding 10 percent per year; and
  • an increase in the ratio of public investment to GDP from 11 percent in 1993/94 to about 15 percent in 1999/2000.

The major challenges facing the Lao P.D.R. are in four key areas. First, macroeconomic stability needs to be restored and maintained by pursuing sound financial policies so as to increase both public and private savings. Second, structural and institutional reforms must be sustained, although the remaining reforms in this area will be more complex and more difficult in implementation than before. Third, given the strategic location of the Lao P.D.R. in Indochina, it is crucial for the Government to formulate its regional development strategy in order to benefit from the opening up of neighboring economies. Finally, a regional development program should be implemented in conjunction with social policies to improve living standards beyond the urban centers.

Macroeconomic Policies

Macroeconomic policies to be pursued in the coming years aim at increasing both public and private savings. To increase public saving, fiscal policy is targeting a continued increase in the budget current account surplus through enhanced revenue mobilization and control of nonessential current expenditures. Furthermore, to avoid recourse to bank financing, overall budget deficits are being financed by available concessional external assistance and moderate amounts of government securities sold to the public. To this end, fiscal management is also being improved along the lines of past reforms (see Section VI).

Additional revenue mobilization efforts focus on strengthening lax administration, mainly by completing the centralization of revenue collection procedures and improving the tax system. In particular, the Government is implementing (i) a comprehensive review of the tax system and measures to strengthen tax administration: (ii) an overhaul of the present system of royalties on the use of natural resources, including timber and precious and other metals; and (iii) appropriate remuneration of the Government's financial assets, including interest payments on its bank deposits and dividend payments by slate enterprises on its equity holdings.

While containing current expenditure, the Government is pursuing a reorientation of expenditure priorities. To reduce the burden of worker compensation on the budget, further retrenchment of the nonmilitary civil service is being undertaken in the 1995–97 period in the context of a comprehensive administrative reform. A similar downsizing is planned for defense personnel and related expenditure. Meanwhile, an increasing share of current spending is devoted to operations and maintenance and social services, including health and education. The Government is also promoting a more efficient use of public resources by developing effective cost-recovery mechanisms for key public utilities.

To promote private savings, monetary policy continues to target positive real interest rates. An immediate goal of the Government is to liberalize interest rates completely, so that commercial banks can freely determine their own deposit and lending rates. While pursuing a tight credit policy, the central bank is continuing to enhance existing indirect monetary instruments, such as reserve requirements, the discount window, and treasury and central bank securities, to pave the way for the commencement of open market operations. Such a policy would contribute to enhancing financial intermediation.57

These financial policies should help mobilize the domestic resources needed to support increased investment and achieve a better macroeconomic balance. These resources, in turn, should help contain the inflation rate in single digits.

Structural and Institutional Reforms

The emphasis of structural reforms under the policy framework is on the effective implementation of the civil service reform, state enterprise privatization, further trade and financial liberalization, the strengthening of the legal and regulatory framework, and land reform.

Civil Service Reform

The main objective of the Government's civil service reform program remains to streamline the civil service while ensuring that compensation and incentives for the more qualified workers are competitive with the private sector. In order to implement the civil service reform effectively, the Government intends to develop a database and technical instruments to monitor the progress and costs of the retrenchment program and the wage bill. After establishing a computerized monitoring system, the Government will develop a long-term strategy for personnel retrenchment and relocation. In particular, areas of redundancy will be clearly identified, and a program to target reductions and retrain redundant staff and unqualified personnel will be articulated.

Privatization

Privatization will continue to be an important component of the reform strategy for state enterprises. Having identified several “strategic” enterprises to be kept under public control, the Government plans to accelerate the privatization process. During 1995–96, privatization strategy has shifted from leasing to the sale of company shares. At the same time, earlier leasing contracts are still being enforced, and parallel efforts are being made to reprivatize such enterprises—through outright sales or joint ventures—on the termination of contracts.

Trade Reform and Export Promotion

In the period ahead, the Government will largely complete the process of liberalizing the external sector. Actions will include the removal of the few remaining quantitative restrictions; the full implementation of the tariff reform adopted in early 1995, including improved customs valuation based on the World Trade Organization's methodology; and further rationalization of the tariff structure, with a view to lowering the rale of protection and stimulating export activities.

The medium-term strategy to promote nontraditional exports will involve the agro-industrial and livestock sectors and light manufacturing, especially the textile and garment industries. To this end, professional training centers will be established to help develop small and medium-sized enterprises.

Legal and Regulatory Framework

The priorities for the legal reform agenda will be to adopt decrees on procurement, negotiable instruments (bills of exchange and promissory notes), banking supervision, and other aspects of financial activity; accelerate the implementation of recently adopted decrees and laws, such as the business law, customs law, State Budget Law, bankruptcy law, and law on guarantees; and issue implementing regulations for several of the previously passed laws and decrees (such as the Foreign Investment Law and the decrees on land use and forestry).

Land Reform

The Government's recent initiatives to strengthen use rights on all types of land are expected to facilitate private sector activity. In particular, the decrees on land reform and use of forestry resources confer on all citizens the right to secure land use rights, while providing safeguards for the sustainable utilization of the country's land and forest resources. The Government is turning its attention to the effective implementation of the land decrees, and it has established several high-level working groups to address different aspects of the implementation process. Furthermore, a pilot project was initiated in mid-1994 to review property and title claims in eight villages in the Vientiane municipality. Drawing on the experience of the pilot project—which suggests, among other lessons, that the process could be somewhat more complicated and contentious in urban areas—the Government intends to extend implementation to all of Vientiane and subsequently to other regions of the country through cadastral surveying and mapping, as well as through the issuance of land use documents.

Institutional Strengthening

To deal effectively with the absorptive capacity problems that have hampered the mobilization and utilization of external aid, the Government is seeking to strengthen macroeconomic institutions and the database. To this end, as soon as the first phase of the United Nations Development Program project on expenditure management is completed, the Government will continue to strengthen the operations and training of staff in the government agencies dealing with economic and financial matters. In particular, it will ensure that budget and treasury operations are appropriately coordinated. Moreover, it will reinforce project monitoring and investment planning, with a view to maximizing the development impact of foreign aid. Finally, the Government will make strenuous efforts to improve the timeliness and accuracy of economic statistics to permit effective analysis of economic developments and to strengthen policy formulation.

Regional Development

The Government is seeking financial assistance from multilateral and bilateral donors for a number of important regional projects, such as road construction to encourage intraregional and interregional trade, an improved water supply for Vientiane and the provinces, and hydropower and forestry projects. The Government is undertaking a number of major projects in education, health, and environmental control in the provinces (see below). In this connection, the Government is also undertaking feasibility studies for projects to promote investment and trade links with neighboring countries, under a sub-regional development project initiated by the Asian Development Bank and covering Cambodia, China, the Lao P.D.R., Myanmar, Thailand, and Vietnam.

Social, Environmental, and Development Objectives

The Government believes that the key to improving the living standards of the poor is to provide additional income-earning opportunities and greater availability of goods and services through economic growth and increased production. In particular, the Government is stressing the provision of effective access to social services—particularly education, health care, and sanitation—which will allow the poor to participate in development. In the education sector, with the help of donors, the Government aims to improve primary and secondary education by improving teachers' salaries and student-teacher ratios, developing suitable curricula and textbooks, and improving the school network. In the health sector, proposed efforts include measures to expand basic health services, control the incidence of malaria, and provide essential drugs. The Government is increasing budgetary allocations for both social services and physical infrastructure in the public investment program. In addition, the household living standards survey, completed in 1994, and the forthcoming social indicators survey will be used to improve program targeting to reduce poverty and identify priority social programs for investment.

The Government's environmental policy focuses on zoning land and forest use to facilitate resource conservation; changing the incentive structure to favor resource conservation rather than short-term exploitation; introducing biodiversity preservation measures to promote production while conserving forest resources; and reducing slash-and-burn agriculture. With World Bank assistance, the Government has finalized its Environmental Action Plan, which will be the basis for attracting support from bilateral donors in this area.

The structural adjustment program (supported by the World Bank and the IMF) is likely to have a beneficial impact on the poor by facilitating broad-based economic development. It will be particularly important to integrate the half of the population engaged in subsistence agriculture into the market economy, so that these citizens, too, may reap the benefits of economic development. To this end, public spending on rural infrastructure will be increased, and access to, and targeting of, social services improved.

The Government also aims to minimize any short-term adverse effects resulting from the adjustment program. Thus, severance payments will help mitigate the decline in living standards from job losses related to the civil service retrenchment or the privatization exercise. However, as many civil servants are already augmenting their income through additional economic activities, the authorities do not anticipate a significant increase in open unemployment. While these factors may reduce the need for an extensive social safety net, the Government is actively assessing the need and scope for such a system.

56On an October-September fiscal year basis.
57An important step to enhance financial intermediation is to restructure the state-owned commercial banks after their recent recapitalization. The improvement of their management, as well as the revision of their accounting system, is a prerequisite for the development of an effective commercial banking network.

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