Is Laos a rich or Poor country?

March 7, 2024

Is Laos a rich or Poor country?

Rather ironically, the term ‘developing’ country refers to countries with impoverished, moreover, often stagnant economies.

Being a developing country, Lao PDR is categorized as one of the world’s least prosperous economies.

Consisting of a complex and multifaceted history of economic progress, Lao PDR provides an interesting insight into the macroeconomic characteristics of a potentially prosperous country in the 21st century. With a population largely existing in and around the poverty line, the description of a hardly prosperous economy does indeed seem very fitting.

However, based on recent years, it would be inaccurate to refer to Lao PDR’s economy as impoverished. As per the World Bank, “Lao PDR has made good development progress over the past 20 years” ¹, rendering the recent economic activity of the country to be somewhat prosperous. Nonetheless, there is still a sizable distance for Lao PDR to develop.

Even though poverty has halved over the past two decades, in 2018, 18.3% of the population still found themselves beneath the poverty line ². With this ‘good development progress’ yet a still underwhelming macroeconomy, it is evident that there are underlying issues that act as barriers to the economic development of Lao PDR.

The role of geography is a significant factor in determining the past and ever-changing economic potential of Lao PDR. Geography’s multifaceted nature within Lao PDR can be viewed via the country’s topography, location, and natural resources. Including a vastly mountainous/rugged terrain in tandem with thickly forested regions and the unfortunate characteristic of being landlocked, the role of geography acts as a harsh drag on economic development.

As a result of the rugged terrain, the land becomes difficult to rule politically, and to trade between regions.

In addition, exacerbating the negative effects on trade is the fact Lao PDR is landlocked and thus has no access to sea ports, mainly halting development in the past.

Furthermore, a historical perspective (the role of history) sheds light on the context of Lao PDR’s development. Lao PDR remained under French colonial rule until 1953, a period when France exerted control over several South-East Asian nations, including Vietnam and Thailand. Lao PDR, due to its relatively small population and its landlocked geography, experienced a decline in French interest. As a result, it did not receive the same level of investment as other French colonies in the region. Moreover, during this colonial period, there were economic leakages as government positions were often occupied by Vietnamese individuals instead of Laotians, leading to monetary extraction from the local population and negatively impacting the economy.

Additionally, French rulers neglected commercial activity, leaving it primarily in the hands of the local population. As a result of leakages and a lack of investment, capital accumulation in Lao PDR would have been incredibly low. As GDP per capita (Income) is directly proportional to capital per worker (y directly proportional to k), the lack of investment due to French colonial rule can be accredited to the low income that Lao PDR faced and still faces.

Via French colonial rule, many scholars mentioned government positions often became given to Vietnamese individuals.

However, on a wider scale, Lao PDR became a place with a variety of different ethnic groups with it being the most ethnically diverse nation in South-East Asia today.

Lao people comprise four main ethno-linguistic families: Lao-Tai (62.4 percent), Mon-Khmer (23.7 percent), Hmong-Iu Mien (9.7 percent), and Chine-Tibetan (2.9 percent), which are officially divided into 50 ethnic groups The 50 ethnic groups in the country can be further broken down into more than 200 ethnic subgroups ³.

Thus, there is a high degree of ethnic fractionalization, which has strong correlations to low economic development. The reason for this is that increased division leads to political instability. As a result, this reduced the consensus for public goods, which are vital for the issue of capital accumulation in Lao PDR, due to further problems of poor capital stock, development is hampered in the long-run.

A greeting ceremony of Laotian, Ban Thasala, muang Khamkeuth, Borikhamxay province

These various issues stemming from France’s colonial rule highlight the significant role that history played in hindering Lao PDR’s economic development due to the idea of path dependency – past conditions of an economy strongly determine the future conditions.

Despite the harsh barriers to Lao PDR’s development, there are still signs that previous economic performance isn’t set to continue. Exploring the different macroeconomic trends of development, it is clear that there is potential for the Laotian economy. Whether through income, poverty, or inequality, the general trend is that Lao PDR is in fact developing.

Income and Growth

Figure 1

Figure 2

Frequently, economic growth serves as a dependable gauge of economic development. We can deduce from Figure 1 that, between 1985 and the early 2000s, Lao PDR experienced a period of relatively stagnant growth. As previously mentioned, the nation grappled with inadequate capital accumulation during this time, which can elucidate the lackluster growth. Nonetheless, a notable transformation occurred from the mid-2000s onward, as reflected in the steep upward trajectory of economic growth. This surge in growth can be attributed to substantial investments in infrastructure development ⁴. Through state intervention, Lao PDR bolstered its capital stock, which, in turn, facilitated rising income levels and, consequently, robust economic growth.

Furthermore, this state intervention exemplifies the concept of a “big push” policy, wherein government-led initiatives enable a country to amass sufficient capital to break free from the poverty trap and achieve substantial growth. Evidently, this policy proved successful, given the rapid income increases witnessed in the economy until 2017.

Additionally, the proportion of Lao PDR’s population residing in urban areas surged from 15.4% in 1990 to 37.6% in 2014 ⁵.

This significant urban population growth closely correlates with the upswing in GDP per capita. Consequently, it can become inferred that the shift of the rural population to urban centers plays a pivotal role in income growth. This structural economic shift aligns with the principles of the Lewis two-sector model, where surplus labor from rural regions of Lao PDR relocates to urban areas, fostering industrialization and economic expansion. Figure 2 illustrates a substantial increase in the urban population between 1995 and 2005. This population shift largely explains the period when income experienced rapid growth.

However, it becomes apparent that the pace of labor movement from rural to urban areas decelerated after the 2000s.

Thus, coinciding with a notable reduction in the growth of the urban population. Consequently, the country’s income stagnated. This underscores the critical importance of industrial sector growth, which relies on expanding infrastructure and increased investment, in driving economic growth in Lao PDR.

Figure 1 highlights a significant departure from the trend of high growth observed until 2017, with negative growth between 2020 and 2022. This abrupt change appears erratic in comparison to the preceding 15 years of robust growth. The devaluation of the Laotian currency, the kip, by half against the US dollar triggered fuel shortages and restricted access to foreign exchange ⁶. Consequently, the nation grappled with severe macroeconomic instability, leading to economic contraction. This underscores the fragility of Lao PDR’s economy, which proved susceptible to macroeconomic shocks.

In sum, an analysis of the patterns in Lao PDR’s GDP per capita and urban population growth indicates a general trend of substantial development progress. However, there are still signs of economic vulnerability. For instance, the economy’s vulnerability to fluctuations in the kip’s value, resulting in significant economic upheaval, thus, underscores that Lao PDR has a considerable journey ahead. Before achieving a level of development considered satisfactory.

Poverty

Figure 3

As previously mentioned and as apparent in Figure 3, the poverty rate in Lao PDR has witnessed a decline over the past few decades. On the surface, this reduction in poverty rates signifies an improvement in economic development, much like the growth in income. However, when we examine the issue more closely, it becomes evident that a substantial portion of the population still falls below the poverty line. The progress in reducing poverty rates is closely intertwined with the concurrent increases in income, and this relationship is strongly influenced by the trends of urbanization and industrialization. It is worth noting that, according to the OHCHR, “The poverty rate in rural areas is four times higher than in urban areas.”

Moreover, this observation highlights that while efforts have been made to stimulate capital accumulation and create demand for labor in urban sectors, those residing in rural areas have not received the same level of attention. This discrepancy is further underscored by the fact that, in 2022, 10% of the employed population remained below the poverty line ⁷. In line with the principles of the Lewis two-sector model, labor typically transitions from the agricultural (rural) sector to the industrial (urban) sector at a rate determined by new investments in industrialization. The Lewis turning point reached when surplus labor in the agricultural sector becomes scarce. Leading to increased food prices and a subsequent decrease in the availability of labor for the urban sector.

Lao PDR has yet to reach this turning point, as surplus agricultural labor remains available.

This implies that over time, a significant portion of the rural population living in poverty should see improvements in their living conditions. Furthermore, in the long run, as surplus labor becomes scarce (reaching the Lewis turning point), agricultural labor will receive wages based on their marginal productivity, as their work becomes commercialized. As agricultural wages start to rise, all else being equal, the economy advances to a new stage of development, where the Solow growth model comes into play. Hence, there is reason for optimism regarding the future prospects of poverty alleviation in the context of development. However, it is important to recognize that the current issue of poverty still poses significant challenges to the overall macroeconomy.

Inequality

Figure 4

Figure 5

While at first glance, the above Lorenz curves may appear quite similar, a closer examination reveals that income inequality was, in fact, more pronounced in 2018 compared to 1985. In contrast to statistics related to poverty and overall income, the quantitative data on income inequality reflects a negative trend in development. This phenomenon closely tied to the dynamics of rural-urban migration. Which plays a pivotal role in shaping income growth and poverty reduction. Notably, urban areas exhibit the highest levels of income inequality, primarily because recent migrants tend to earn significantly lower wages than their long-established counterparts. Conversely, income inequality is at its lowest in the south and central highlands, which are predominantly rural regions.

This pattern aligns with the principles of the Lewis two-sector model, where real wages in the agricultural sector are determined by the average product, resulting in uniform wages for all.

However, due to the relatively low wage levels, a trade-off between poverty and inequality becomes apparent. This raises the question of whether developing countries can realistically achieve all their development objectives simultaneously.

Moreover, Lao PDR faces a multitude of social inequality issues that act as barriers to economic development. Gender inequality becomes particularly pronounced! With the country ranking 110 out of 162 on a gender inequality index in 2018 ⁸. This inequality is evident in the fact that women have nearly equal labor force participation compared to men but earn, on average, only 77% of what their male counterparts do ⁹.

The prevalence of women in low-skill occupations, stemming from issues like illiteracy and a lack of formal education, significantly contributes to this disparity.

Furthermore, the nation’s inadequate access to healthcare disproportionately affects women, especially in terms of reproductive health. Although substantial efforts have become made to reduce mortality rates. Which decreased by 78.2% over the past 25 years. However, the rate of 197 deaths per 100,000 births still exceeds the regional average of 110 ¹⁰.

Additionally, these challenges highlight the multifaceted nature of development in Lao PDR. Where addressing income inequality and social disparities remains a complex and interconnected endeavor.

Conclusion ?

Lao PDR’s progress in development over the past few decades is evident, with a clear increase in income, a reduction in poverty rates. And notable efforts to mitigate gender inequality. Overcoming various barriers to development, including geographical and historical challenges, has posed macroeconomic difficulties for Lao PDR. However, the implementation of deliberate government initiatives, such as big-push policies, and the application of the Lewis two-sector growth model have facilitated capital accumulation and subsequently led to income growth.

Furthermore, assistance from the United States has played a crucial role in improving healthcare, particularly through initiatives like vaccinations to combat significant diseases like malaria.

Additionally, UXO (unexploded ordnance) clearance programs have contributed to a reduction in casualties, further promoting economic stability. These measures are the primary drivers behind Lao PDR’s recent economic development and offer a promising outlook for its future as a genuinely ‘developing’ economy.