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Reform or stagnate – Achieving sustainable and inclusive development in Laos

Despite achieving tremendous development since the 1980s, economic growth amongst ASEAN nations has been accompanied by persistent, and in some cases rising, income and wealth inequalities. These factors raises questions as to whether growth can be sustained in the longer term. These dynamics are particularly evident in the Lao People’s Democratic Republic (Lao PDR), which has experienced faster average economic growth than ASEAN collectively since 1985. Due to this situation, the Lao PDR economy has also witnessed steep rises in inequality suggesting its development hasn’t been “inclusive” and may not be sustainable in the long term.

Now, what is “inclusive growth” and why is it important in the context of sustainable economic development in Lao PDR and more broadly the ASEAN? While no single definition of “inclusive growth” exists, the Asian Development Bank (ADB) suggests that any period of economic growth that coincides with declines in income and wealth inequality can qualify as “inclusive”.  

Proponents of inclusive growth models argue that economic growth tends to be unstable in the absence of inclusive institutions that reduce inequality. As such, the only sustainable path to long-term prosperity is the establishment of an institutional environment that allows for people to participate in an economy and fulfill their potential and aspirations.

Source: Free to use image by Huỳnh Mai Nguyễn, sourced from Pixabay Caption: Despite decades of rapid economic growth, 80 per cent of Lao PDR’s population still lives on less than $2.50 per day.

For example, it is very unlikely that Australia’s brightest entrepreneurs would have translated their ideas into profitable ventures had they grown up with little to no education or access to basic needs. Sustainable growth is therefore dependent on the establishment of inclusive public institutions that translate human talent into economic activity.

According to the most recent World Economic Forum’s ‘Inclusive Development Index’, inclusivity in the Lao PDR is deteriorating faster than in other featured ASEAN nations, primarily due to rising inequality. Worryingly, there is already evidence that increased inequality has slowed poverty reduction in the country by around 28 per cent per year. This trend is distressing for a nation where almost a quarter of its population lives in absolute poverty and 80 per cent lives with less than US$2.50 a day.

In writing for the ADB, Vinod Thomas identified three crucial requirements for better inclusion in Asia’s economic growth process: entrepreneurship, innovation and governance. Lao PDR performs poorly in all three categories compared to its ASEAN partners.

Lao PDR has a complex and opaque business environment. The latest ‘ease of doing business index’ ranks the country amongst the worst in the world, with a particularly poor environment for starting a business, enforcing contracts, paying taxes and protecting minority investors. A difficult business environment chokes innovation, as potential entrepreneurs struggle to get their ideas off the ground.

Lao PDR’s Government needs to focus on streamlining regulatory procedures currently in place, thereby fostering a more productive business environment and improving citizen access to its formal economy. Starting a business in Lao PDR takes on average 173 days (compared to seven days in Myanmar and six in Thailand) and costs the equivalent of nearly 5 per cent of the nation’s yearly per capita income in fees – this discourages investment and pushes entrepreneurs towards the unproductive informal sector. Paying taxes in the country is also unnecessarily difficult, with 35 taxes levied, which take on average 362 hours to be completed – that’s three times as many taxes and two and a half times more time consuming than the OECD average. Simple potential immediate policy actions include reducing the number of steps needed for establishing a business (i.e. setting up a “one-stop shop” model) and significantly reducing fees. This would encourage new investment and bring businesses into the formal sector, which is likely to raise taxation collections, reduce vulnerable employment and encourage entrepreneurship, making the economy more inclusive and innovative.

Lao PDR also needs to improve governance in order to become a more inclusive economy. The latest Transparency International’s ‘Corruption Perception Index’ ranks the country as the second most corrupt within the ASEAN (tied with Myanmar and behind only Cambodia). To improve Governance and fight corruption, Lao PDR should concentrate on strengthening popular participation in its political process and allowing greater debate around public policy matters. A politically engaged citizenry can go a long way in exposing Government inefficiencies and holding public officials to account.

Over the longer term, Lao PDR will need deep reforms to ensure prosperity and inclusivity, including improving access to education (especially between ethnic minorities), modernising its infrastructure and strengthening its legal sector and rule of the law.

As exemplified by the Latin American experience, inequality tends to slow economic growth, aggravate political tensions and cripple the progress of poverty reduction programmes – the ADB’s managing director Rajat M. Nag noted that “Islands of prosperity (in Asia) will not survive in a sea of poverty”. It is important for Lao PDR, and other developing ASEAN nations, to enact reforms now to ensure inclusive development, guaranteeing sustainable economic growth that will benefit broad sects of the region’s population

Infographic by Thiago Brandao

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