consultation: country partnership framework

Consultation: Country Partnership Framework

Consultations on SCD and CEM held September 22-24, 2021

LAO PDR COUNTRY ECONOMIC MEMORANDUM

Leveraging Strategic Location and Natural Wealth for Inclusive and Sustained Growth

THE LIMITS OF LAO PDR’S

GROWTH MODEL HAVE BECOME

APPARENT

Resource-driven growth has created few jobs, while leading

to significant environmental and macroeconomic pressures

Natural resources a key driver of fast growth over the past two decades

Growth not been sufficiently inclusive, no high job-creation

(a) Total employment growth, value added per worker

and share of employment by sector, 2012-18

(b)Wage and non-wage employment by sector: 2012-18

The growth model resulted in severe environmental pressures

Without leading to significant increase in public revenues

While fiscal and external vulnerabilities increased

LAO PDR IS NOT THE USUAL

LANDLOCKED COUNTRY

It has the advantages of natural wealth, young population

and geographic location

Geography is more an asset than a constraint

(a) World view (b) Asia and Pacific view

Source: The world Bank and United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) database

2015-2018 averages. Note: The figure maps the bilateral trade costs between any two countries using WB-UNESCAP trade cost

data. The thicker the border, the larger the wedge between producer prices in the exporting country and consumer prices in the

importing country. The estimated trade costs capture all factors from trade policy measures (tariffs and NTMs) to behind-the-

border measures such as the quality of trade facilitation services or inland transport costs, impossible to quantify on a large-scale.

Laos links to commodity GVCs but has recently diversified

Export-oriented manufacturing FDI linked to local economic development

Agri-food exports have potential to grow both regionally and overseas

Can contribute to poverty reduction, especially given resilience to COVID-19 shock

Scope to improve manufacturing competitiveness

Global value chains thrive on predictable business environment

A sound vision, but deeper policy changes needed to realize potential

Kunming (CN)

Vientiane (LA)

Lao-China

Railway

Thai-Sino RailwayCompletion: End of

2025Bangkok (TH)

▪ Expected completion 2021

▪ 414-kilometer railway (10 stations) from Vientiane Capital to Kunming, China

▪ Connect to Thai-Sino Railway Vientiane to Bangkok by 2025

• < 4 hours from Vientiane to China compared to 15h drive• 30-40 percent reduction in transport costs for transit cargo • Up to 1.5 million tons of trade between China and ASEAN and

2.0 million tons of trade between China and Lao PDR could be shifted from maritime routes to the railway

• Opportunities for further tourism development

Source: World Bank 2020. From Landlocked to land-linked.

THE WAY FORWARD:

PRIORITY AND IMPLEMENTATION

Policy leads for more inclusive and sustainable growth

1. Engineering a return to macro-fiscal stability=> Negotiate credible and transparent debt restructuring with large creditors to reduce the debt

service burden over the medium term.

2. Leveraging on Natural Capital while ensuring Social and Environmental Sustainability=> Renegotiate Power Purchase Agreements to reduce tariffs paid to IPPs and recalibrate take-or-pay

clauses, and adjust domestic electricity tariffs to reflect costs

3. Making Domestic Markets Work for Job Creation=> Implement one-stop business registration service to cut burdensome process and encourage

formalization

4. Leveraging Strategic Location to Diversify into Export-Oriented Manufacturing,Agri-Food and Services=> Advance trade policy reforms, with a focus on NTMs to support quality upgrades in business

5. Building Skills and Capacity for Effective reforms=> Improve data and knowledge to support effective policy making

Changing Faces and Geography of Poverty

Poverty reduction continues but inequality is rising

46.0%

39.0%

33.5%

27.6%23.2%

18.6%

24.6%

18.3%

0

200

400

600

800

1000

1200

1400

1600

1800

20001

992

/93

19

97/9

8

20

02/0

3

20

07/0

8

20

12/1

3

20

18/1

9

GDP per capita (constant 2010 US$)

Povety headcount (1997/98 poverty methodology)

Povety headcount (2018/19 poverty methodology)

30.5

34.8

32.6

3536.2

36

38.8

19

92/9

3

19

97/9

8

20

02/0

3

20

07/0

8

20

12/1

3

20

18/1

9

Gini index (1997/98 poverty methodology)

Gini index (2018/19 poverty methodology)

Rapid GDP growth has not translated into an equally high rate of poverty reduction

*Poverty rates are based on USD3.2 a day in 2011 PPP.

If the impact of economic growth on poverty reduction had been like that in Indonesia,

Lao PDR would have almost eliminated extreme poverty

($1.9 per day in 2011 PPP terms)Lao PDR

(2012-18)

Indonesia (2012-18)

Philippines (2012-15)

Thailand (2014-18)

Vietnam (2012-18)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

Gro

wth

ela

stic

ity

of

po

vert

y

Annualized per capita GDP growth

Effect of economic growth on poverty

Due to two reasons:

1. Large gap between GDP growth and household consumption growth

2. Consumption growth was not pro-poor

-10.00%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Per capita GDP – consumption gap (Circa 2010- 2017)

Lao PDR

3.28%

0

1

2

3

4

5

6

0 10 20 30 40 50 60 70 80 90 100

AN

NU

AL

GR

OW

TH R

ATE

CONSUMPTION DECILE

Growth incidence curve, 2012 – 2018

Consumption growth Mean consumption growth

Geography of poverty is changing, shifting from north to central

7.9%

31.4%

2.5%

31.0%

23.5%

29.9%

7.0%

23.8%

5.0%

20.7% 21.5%17.7%

Urban Rural VientianeCapital

North Central South

Poverty rate

2012/13 2018/19

Changes in poverty rate (2012 – 2018)

Poverty remains higher among non Lao-Tai ethno-linguistic groups, but Chinese-Tibetan groups are catching up. Hmong-Mien groups, however, are lagging

0 10 20 30 40 50 60

Paid worker

Self-employed, non-farm

Self-employed, agriculture

No formal education

Some primary

Completed primary

Completed lower secondary

Completed upper secondary

Completed vocational training

University degree

Lao-Tai

Mon-Khmer

Chinese-Tibetan

Hmong-Mien

Pri

mar

yem

plo

ymen

tH

igh

est

com

plt

ed e

du

cati

on

leve

lB

road

eth

no

-lin

guis

tic

gro

up

Poverty headcount rate (%)

2012/13 2018/19

The poor in Laos can be classified into three groups

14%

45%

41%

Non-farm based livelihoods, low education

Agricultural households, low education, non-remote

Agricultural, low education, remote

COVID-19 is expected to increase the share of this group

Systematic Country Diagnostic

What is a Systematic Country Diagnostic (SCD)?

• Country Economic Memorandum

• Poverty Assessment

• Other thematic reports

Analytical work

• Identifies priorities to achieve the poverty reduction and shared prosperity goals

Systematic Country Diagnostic • Integrated and

selective framework for the WBG’s partnership with the country

Country Partnership Framework

Key risks identified in the 2017 SCD have materialized:

• Increasing macroeconomic instability, aggravated by pandemic.

• Jobless growth with rising inequality.

• Vulnerability to climate change, environmental degradation,

and shocks (e.g. health-related).

Recommendations:

• Stabilize the economy (macro-financial risks).

• Share growth benefits equitably (through better jobs).

• Sustain progress by protecting environment and mitigating shocks.

Stabilize

Share

Sustain

SCD Findings

Stabilize

Securing macroeconomic stability will require measures to tackle rising public debt,eroding fiscal space, declining reserve buffers, and growing financial sector risks.

Public debt service and foreign reserves (USD million) Exchange rate (kip/USD)

8,000

8,500

9,000

9,500

10,000

10,500

11,000

11,500

12,000

7-Ja

n-2

0

6-F

eb-2

0

7-M

ar-2

0

6-A

pr-

20

6-M

ay-2

0

5-Ju

n-2

0

5-Ju

l-20

4-A

ug-

20

3-S

ep-2

0

3-O

ct-2

0

2-N

ov-

20

2-D

ec-2

0

1-Ja

n-2

1

31-J

an-2

1

2-M

ar-2

1

1-A

pr-

21

1-M

ay-2

1

31-M

ay-2

1

30-J

un

-21

Parallel market rate Commercial banks rate

0

200

400

600

800

1000

1200

1400

2016 2017 2018 2019 2020 2021P

Public debt services Reserves (million USD)

Fostering inclusive growth will require a stronger effort to improve the business climate,develop connective infrastructure, and enhance human capital (education and health).

0

5

10

15

20

25

2007 2012 2018 2020(est)

Unemployment

Non-seasonal unemployment

Non-seasonal youth unemployment

25

27

29

31

33

35

37

39

41

0

5

10

15

20

25

30

35

40

2002 2007 2012 2018

National poverty rate (LHS) Gini index (RHS)

Unemployment (%) Poverty and inequality (%)

Share

Resource depletion, climate change, and vulnerability to shocks requires an improvedmanagement of natural resources, climate action, and measures to safeguard livelihoods.

20.4

7.1

11.7

19.2

20.6

69.9

5.5

Job loss

Non-farm business closure

Disruption in agricultural activities

Increased prices of inputs

Decreased prices of outputs

Increased prices of most consumergoods

Sickness

Households experiencing shocks (%, Mar-Jul 2020)

Sustain

SCD Framework

Reemerged macroeconomic

instability

Jobless growth with rising inequality

Vulnerability to climate change, environmental

degradation and shocks

Stabilize Share Sustain

Strengthened governance and institutions

Inclusive, resilient, and sustained growth for reducing poverty and promoting shared prosperity

Weak governance and institutions

PATHWAYS

CHALLENGES

High-Level Outcomes and Development Objectives

Ending Extreme

Poverty and Boosting Shared

Prosperity

Greater Macroeconomic Stability

Sustainable Debt Levels

Increased Fiscal Space

Stable Financial Sector

Broad-Based Human Productivity Improvements

Dynamic Private Sector

Improved Connective Infrastructure

Well-functioning labor market

Reduced Stunting

Enhanced Learning Outcomes

Equitable Access to Quality Health Services

Improved Resilience to Shocks

Improved Management of Natural Resources

Action on Disaster Risk and Climate Change

Well-Managed Urbanization

Comprehensive Social Protection

Improved Financial Inclusion

Improved Agricultural Productivity

Cro

ss-cuttin

g: Strength

ened

Go

vernan

ce & In

stitutio

ns

High-Level Outcomes (HLOs) Development Objectives (DOs)Twin goalsStab

ilizeSh

areSu

stainPathways

Prioritization of Development Objectives

Top High Medium

Sustainable debt levels Stable financial sector Well-functioning labor market

Increased fiscal space Improved connective infrastructure Well-managed urbanization

Dynamic private sector Reduced stunting Improved financial inclusion

Enhanced learning outcomes Equitable access to quality health services

Improved management of natural resources Action on disaster risk and climate change

Increased agricultural productivity Comprehensive social protection

Strengthened governance and institutions

Top priorities High priorities Medium priorities

Re-prioritization

SCD Update SCD 2017 Change

Sustainable debt levels Putting public debt on a sustainable path and strengthening financial sector stability -

Stable financial sector Revised down

Increased fiscal space New

Dynamic private sector Making it easier to do business and create good jobs Revised up

Improved connective infrastructure Investing in infrastructure for growth and inclusion -

Well-functioning labor market New

Reduced stunting Investing in improving nutrition to achieve children’s full potential Revised down

Enhanced learning outcomes Improving quality of education and keeping girls in school -

Equitable access to quality health services Improving access to and quality of health services for more productive people -

Improved management of natural resources Promoting strategic use of natural resources and responsible management of the environment -

Action on disaster risk and climate change Putting in place a strengthened DRM Expanded

Well-managed urbanization New

Comprehensive social protection Introducing a basic social protection system to lower vulnerability Revised up

Improved financial inclusion Improving inclusiveness of the financial sector to improve access to credit and lower risks -

Increased agricultural productivity Increasing agricultural productivity to support incomes -

Strengthened governance and institutions Enhancing governance and creating a rules-based environment Cross-cutting