Laos’s economy: growing fast, unequally

The trade diagnostic study which I led in Laos has just been published. Laos, normally seen as a chilled-out Communist backwater, has one of fastest-growing economies in East Asia. The country will probably leap into middle-income status within the decade. But inequality is rising and poverty remains stubbornly entrenched.

Mining and electric power accounted for just over half of total exports in 2008 but the proportion is expected to reach three-quarters in 2020 as huge new dams and mines continue to crank up output. Half of exports, largely electricity, go to Thailand, which is also the source of three-quarters of imports. The economy risks becoming over-dependent on its neighbour.

Although big social gains have been made, many people haven’t benefited from the resource boom. Natural resource development has in some instances actively worsened poverty through resettlement and reduced food security. Including downstream communities, up to half a million people (in a population of 6 million) may have been displaced or affected as the dams change the flow of the river and the quality of water, damaging fisheries, paddies and vegetable gardens.

A quarter of people live below the poverty line. Nutrition remains a significant problem, with around two in five children underweight and a similar proportion stunted. Since the start of the economy boom in around 2002 inequality has risen to levels almost as bad as those seen in Vietnam and Indonesia. Lao PDR fares badly on the UN Human Development Index, at 138th of the 187 countries on the latest Index.

Given the impact of resource-led development on the natural environment and the concentration of economic activity and exports, the report recommends moving away from gross domestic product, which doesn’t account for equity or the environment, towards an alternative measure of development such as China’s GDP quality index; Gross National Happiness or the UN Human Development approach. Among the main tasks facing policymakers in the years ahead are the redistribution of earnings from natural resource projects; the diversification of economic activity into new areas in addition to hydropower and mining; and the establishment of appropriate human development policies — particularly education and health — as the foundations of long-term economic success.

Government officials were surprisingly receptive to the idea of moving beyond GDP. The breakneck speed of economic expansion and its associated inequality indeed suggest that a new approach needs to be adopted if Laos isn’t to become another example of growth without development.

The report is here.