Laos - The Economy

Laos - The Economy

Laos IN THE EARLY 1990s, the Lao People's Democratic Republic (LPDR, or Laos) was among the ten poorest countries in the world, according to a World Bank ranking, with a per capita gross national product (GNP) in 1991 of just US$200. Its labor force is poorly trained and educated, its infrastructure severely damaged from years of inadequate maintenance, and its ability to feed itself precariously dependent upon the weather. Development expenditure is financed almost entirely by foreign aid, and, by 1991, exports financed only 40 percent of imports. By the beginning of the 1990s, however, Laos, while still an impoverished country highly dependent on foreign aid for its development, had taken some essential steps toward a free-market economy.

Despite the many obstacles to economic development that remained in the early 1990s, however, in little more than a decade, starting in 1979, the government had deliberately shifted the focus of its economic policy away from socialist goals and has made great strides. Many state-owned enterprises, which had been draining the nation's treasury through subsidies, were privatized, and tax collection was boosted tremendously, helping to bring the fiscal deficit under control. Liberal laws on foreign investment and trade were passed, precipitating a surge of investment activity. Prices of many commodities were freed from government controls, domestic transport restrictions were lifted, and the cooperative farming system was ended.
The Seventh Resolution, passed at a plenary session of the Central Committee by the ruling Phak Pasason Pativat Lao (Lao People's Revolutionary Party--LPRP) in late 1979, marked the start of the country's shift toward a market-oriented economy. The resolution affirmed the government's commitment to begin to open to a market economy, as the necessary path to economic development. Since its inception in 1975, the government, in theory, has recognized private property and private enterprise. However, they were not encouraged, and, in fact, the provincial governments of Louangphrabang (Luang Prabang) and Phôngsali abolished private trade and traders through 1987. The objectives of the First FiveYear Plan (1981-85) included self-sufficiency in food production, defined as the equivalent of 350 kilograms of paddy rice and other foodstuffs per capita per year, and the collectivization of agriculture. The plan also focused on developing industrial activity, increasing trade with Thailand, improving the shattered rural infrastructure, and increasing export revenues, all goals that received much greater attention as the tentative steps toward a market-oriented economy continued.
However, growth during the plan period was slower than had been anticipated, and the government decided to take bolder steps toward reform. At the Fourth Party Congress in 1986, the Second Five-Year Plan (1986-90) was endorsed, and new national development strategy was introduced. The New Economic Mechanism, as this program was called, was designed to expose the economy to world market forces gradually, without sacrificing the nation's goal of food selfsufficiency . To implement this plan, many facets of the economy were decentralized. Although the central authorities continued to set policy guidelines, responsibility for administering and financing many programs for economic and social development was delegated to the provinces. About a year after the congress, the new policy was promulgated into regulations, and changes became rapid and extensive.
The second plan also sought to encourage foreign and private investment. Among the reforms called for under the New Economic Mechanism were the lifting of numerous trade regulations and the creation of opportunities for foreign investment. In a major shift from its economic dependency on Vietnam, Laos began to look toward Thailand--and, later, toward other socialist countries--for private investment, technology transfer, and trade. Through the improvement of transportation and communications systems, encouragement of the private sector, and development of the agroforestry industrial processing sector, it was hoped that nonfood imports could be reduced and exports increased, thus improving the balance of payments. Although Laos showed an overall balance of payments surplus in 1985 and 1986, the current account deficit had been increasing, and during those years exports financed less than 30 percent of imports. The government took a new interest in environmental protection and sought to limit the practice of swidden, or slash-and-burn cultivation as a means of protecting its forest resources and encouraging cash cropping. It proved difficult, however, to bring about such a change because of negative effects on upland farmers' livelihoods. Traditional swidden agriculture does not adversely affect forest resources to the same extent that commercial exploitation does.
Many reforms were carried out successfully during the late 1980s, but the Second Five-Year Plan ended with economic performance lagging well behind planned achievements. Not least among the disappointments was the need to import rice during the droughts of 1987 and 1988, underlining the fact that an objective identified over ten years earlier--sustained self-sufficiency in food--had not been met.
Despite economic failures, however, the Fifth Party Congress, held in March 1991, reaffirmed the government's commitment to the development of a market-oriented economy. The Third Five-Year Plan (1991-95) proposes a "strategy" that aims to continue progress made under the previous two plans: improving the country's infrastructure, promoting exports, and encouraging importsubstitution industries. In August 1991, the Supreme People's Assembly (SPA) approved a new constitution--the first since the previous constitution was abolished in 1975. Among its provisions is the affirmation of the right to private ownership; the words "democracy and prosperity" replaced "socialism" in the national motto.

Laos - AGRICULTURE

Laos

Agriculture in the Economic System

At least 5 million hectares of Laos's total land area of 23,680,000 hectares are suitable for cultivation; however, just 17 percent of the land area (between 850,000 and 900,000 hectares) is, in fact, cultivated, less than 4 percent of the total area. Rice accounted for about 80 percent of cultivated land during the 1989- 90 growing season, including 422,000 hectares of lowland wet rice and 223,000 hectares of upland rice, clearly demonstrating that although there is interplanting of upland crops and fish are found in fields, irrigated rice agriculture remains basically a monoculture system despite government efforts to encourage crop diversification. Cultivated land area had increased by about 6 percent from 1975-77 but in 1987 only provided citizens with less than one-fourth of a hectare each, given a population of approximately 3.72 million in 1986. In addition to land under cultivation, about 800,000 hectares are used for pastureland or contain ponds for raising fish. Pastureland is rotated, and its use is not fixed over a long period of time.
In the early 1990s, agriculture remains the foundation of the economy. Although a slight downward trend in the sector's contribution to gross domestic product (GDP was evident throughout the 1980s and early 1990s--from about 65 percent of GDP in 1980 to about 61 percent in 1989 and further decreasing to between 53 and 57 percent in 1991--a similar decrease in the percentage of the labor force working in that sector was not readily apparent. Some sources identified such a downward trend-- from 79 percent in 1970 to about 71 percent in 1991--but both the LPDR's State Planning Commission and the World Bank reported that 80 percent of the labor force was employed in agriculture in 1986. Available evidence thus suggests that the percentage of the labor force employed in agriculture in fact remained relatively steady at about 80 percent throughout the 1970s and 1980s.
Agricultural production grew at an average annual rate of between 3 and 4 percent between 1980 and 1989, almost double its growth rate in the preceding decade, despite two years of drought-- in 1987 and 1988--when production actually declined. Paddy rice production declined again in 1991 and 1992 also because of drought. By 1990 the World Bank estimated that production was growing at an increasingly faster rate of 6.2 percent. Increased production, long one of the government's goals, is a result in part of greater use of improved agricultural inputs during the 1970s and 1980s. The area of land under irrigation had been expanding at a rate of 12 percent per annum since 1965, so that by the late 1980s, irrigated land constituted between 7 and 13 percent of total agricultural land. Although still a small percentage, any increase helps to facilitate a continued rise in agricultural productivity. Smallscale village irrigation projects rather than large-scale systems predominate. Use of fertilizers increased as well, at an average annual rate of 7.2 percent; given that commercial fertilizer use had been virtually nonexistent in the late 1970s, this, too, is an important, if small, achievement in the government's pursuit of increased productivity. In addition, the number of tractors in use nearly doubled during the decade, from 460 tractors in 1980 to 860 in 1989.
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Laos

Laos - Crops

Laos Most farmers employ one of two cultivation systems: either the wet-field paddy system, practiced primarily in the plains and valleys, or the swidden cultivation system, practiced primarily in the hills. These systems are not mutually exclusive, especially among the Lao Loum or lowland Lao in areas remote from major river valleys. Swidden cultivation was practiced by approximately 1 million farmers in 1990, who grew mostly rice on about 40 percent of the total land area planted to rice.
Swidden agriculture is highly destructive to the forest environment, because it entails shifting from old to new plots of land to allow exhausted soil to rejuvenate, a process that is estimated to require at least four to six years. The extent of destruction, however, depends on the techniques used by the farmers and the overall demographic and environmental circumstances that relate to the length of the fallow period between farming cycles. Further, traditional agricultural practices allowed for forest regeneration and not the stripping of forest cover, which is a current commercial logging practice. Swidden fields are typically cultivated only for a year, and then allowed to lie fallow, although Kammu (alternate spellings include Khamu and Khmu) anthropologist Tayanin Damrong reports that at least through the 1970s some fields were planted two years in a row. An increasing population, encroachment on traditional swidden farming areas by other villages or ethnic groups, and gradual deterioration of the soil as a result of these pressures have led to increasingly frequent shortfalls in the harvests of midland swidden farmers.
The swidden farming process begins with clearing the selected fields in January or February, allowing the cut brush and trees to dry for a month, and then burning them. Rice or other crops are seeded by dibble shortly before the rains begin in June, and the growing crops must be weeded two or three times before the harvest in October. Swidden farming households are seldom able to harvest a rice surplus; in fact, the harvest usually falls one to six months short of families' annual rice requirements.
Erosion from deforestation is a direct and serious result of swidden agriculture. By the 1960s, however, swidden agriculture was not a threat to the forest environment. Moreover, swidden cultivation is less productive than wet-field cultivation because it requires between ten and fifty times as much land per capita--if one includes the fallow fields in the calculation--yet produces just 20 percent of the national rice harvest. Mature fallows or young forests have other benefits such as wild food gathering, animal habitat, and watershed protection. Government policy following the introduction of the New Economic Mechanism discourages the practice of swidden cultivation because it works against the goals of increased agricultural productivity and an improved forest environment. Also, the government wishes to control the population in close clusters. However, farmers have resisted the change, largely because wet-field cultivation often is not feasible in their areas and because no alternative method of subsistence has presented itself, especially given the lack of markets and infrastructure necessary for cash-cropping to be an attractive, or even a possible, venture. Further, government traders' defaults on purchase contracts with farmers in the late 1980s made farmers with better physical access to markets skeptical about cash-crop production. In general, despite government efforts to increase export-oriented agricultural production, the "rice monoculture" persisted in Laos through the early 1990s.
Laos

Laos - Rice

Laos Rice is the main crop grown during the rainy season, and under usual conditions, rainfall is adequate for rice production. However, if rain ceases to fall for several weeks to a month at a critical time in the rice growing cycle, yields will be significantly affected. Upland rice varieties, although adapted to a lower moisture requirement, are also affected by intermittent rains because farmers have no means of storing water in their fields.
Rice accounted for over 80 percent of agricultural land and between 73 percent and 84 percent of total agricultural output of major crops throughout the 1980s, except in 1988 and into the early 1990s. Rice paddies also yield fish in irrigation ditches in na (lowland rice fields). Production of rice more than doubled between 1974 and 1986, from fewer than 700,000 tons to 1.4 million tons; however, drought in 1987 and 1988 cut annual yields by nearly one-third, to about 1 million tons, forcing the government to rely on food aid for its domestic requirements. In 1988 and 1989, some 140,000 tons of rice were donated or sold to Laos. With improved weather and the gradual decollectivization of agriculture--an important measure under the New Economic Mechanism--rice production surged by 40 percent in 1989. The increase in production reflected the importance of the agricultural sector to the economy and was largely responsible for the economic recovery following the droughts. In 1990 production continued to increase, although at a much slower rate, and the point of self-sufficiency in rice was reached: a record 1.5 million tons. Sufficiency at a national level, however, masks considerable regional differences. The southern Mekong provinces of Khammouan, Savannakhét, and Champasak regularly produce surpluses, as do Vientiane and Oudômxai provinces, but an inadequate transportation system often makes it easier for provinces with shortages to purchase rice from Thailand or Vietnam than to purchase it from other provinces.
According to some sources, the percentage of the labor force engaged in rice production declined gradually, by over 30 percent between 1986 and 1991, a trend encouraged by the government because it tended to increase export-oriented production. However, some feared this trend would threaten sustained self-sufficiency in food, another key goal of the government. Sustained selfsufficiency however, more likely depends on a continued increase in the use of agricultural inputs such as fertilizers and improved strains of rice, and on the implementation of extension and research services rather than on the actual number of workers involved in planting.
The overall increase in rice production throughout the 1980s was the result of higher productivity per hectare, rather than of an increase in the land area planted in rice; in fact, the area planted in rice decreased during the 1980s, from 732,000 hectares in 1980 to 657,000 hectares in 1990. Because farmers make little use of fertilizers or irrigation, however, most land still yielded only one annual crop in the early 1990s, despite government efforts to foster the use of double-crop rice.
Laos

Laos - Crops Other than Rice

Laos Only about 150,000 hectares were planted with major crops other than rice in 1990, an increase from approximately 80,000 hectares in 1980. Principal nonrice crops include cardamom--sometimes considered a forestry product--coffee, corn, cotton, fruit, mung beans, peanuts, soybeans, sugarcane, sweet potatoes, tobacco, and vegetables. The only crop produced for export in substantial quantities is coffee. Although the total area planted to these crops is small relative to the area planted to rice, it increased from 10 percent of total cropped area in 1980 to about 18 percent in 1990. Although the increase in part reflects the drop in rice production during the drought years, it also demonstrates some success in the government's push to diversify crops. Yields for all the major crops except coffee, vegetables, and cardamom--for which some figures are only available from 1986--increased gradually between 1980 and 1990, most notably corn (by 70 percent), fruit (by 65 percent), peanuts (by 28 percent), and mung beans (by 25 percent). Despite increasing agricultural output, however, Laos is still an importer of food, heavily dependent on food aid.
Statistics for agricultural production do not reflect either the nature of the subsistence agricultural economy or the importance of opium to the hill economy. Opium, legal in Laos and once even accepted as a tax payment, is a lucrative cash crop for the Lao Sung--including the Hmong--who have resisted government efforts to replace opium production with the production of other goods, for which the market is much less profitable. Opium production provides the funds necessary to the household when there is a rice deficiency, common among swidden farmers. Crop substitution programs, however, have had some effect, and to some extent tougher laws against drug trafficking and government cooperation on training programs have also contributed to reduced output. In 1994 Laos remained the third largest producer of illicit opium for the world market, according to United States drug enforcement officials. These officials estimate the potential yield of opium declined 47 percent--from 380 tons in 1989 when a memorandum of understanding on narcotics cooperation between the United States and Laos was signed--to an estimated 180 tons in 1993. The 22 percent decline in opium production in 1993 from 1992, however, was largely attributed to adverse weather conditions.
Laos

Laos - Livestock

Laos The government encourages animal husbandry through programs for cattle breeding, veterinary services, cultivation of pasture crops, and improvement of fish, poultry, and pig stocks. Between 1976-78 and 1986-88, the stock of all farm animals increased greatly: cattle by 69 percent to 588,000 head; goats by 128 percent to 73,000; pigs by 103 percent to 1.5 million; horses by 59 percent to 42,000; buffaloes by 55 percent to 1 million; and chickens by 101 percent to 8 million. Increases, however, would, have been significantly greater without diseases and a persistent shortage of animal feed. Disease is a serious problem: there is a significant annual mortality of chickens and pigs in most villages, and buffaloes are also frequently subject to epidemics.
Laos

Laos - Fishing

Laos For many Laotians, freshwater fish are the principal source of protein; per capita consumption averages 5.1 kilograms annually. Fishpond culture had begun in the mid-1960s, and production--mainly carp raised in small home lots--grew an average 30 percent annually thereafter, the highest rate in Asia between 1975 and 1985. The Mekong districts in the south have especially high potential for greater increases in fish production. In the 1982-84 period, the average annual catch was 20,000 tons, all of which was consumed domestically.
Laos

Laos - Forestry

Laos In the 1950s, forests covered 70 percent of the land area; yet, by 1992, according to government estimates, forest coverage had decreased by nearly one-third, to just 47 percent of total land area. Despite the dwindling expanse, timber--including ironwood, mahogany, pine, redwood, and teak--and other forestry products-- benzoin (resin), charcoal, and sticklac--constitute a valuable supply of potential export goods. The forest has also been an important source of wild foods, herbal medicines, and timber for house construction and even into the 1990s continues to be a valued reserve of natural products for noncommercial household consumption. Since the mid-1980s, however, widespread commercial harvesting of timber for the export market has disrupted the traditional gathering of forest products in a number of locations and contributed to extremely rapid deforestation throughout the country.
Deforestation increased steadily throughout the 1980s, at an annual average rate of about 1.2 percent in the first half of the decade according to the United Nations (UN) and other monitoring agencies. This rate represents the destruction of about 150,000 to 160,000 hectares annually, as compared with annual reforestation of about 2,000 hectares. The government, however, reported a deforestation rate double this figure. Deforestation results from clearing forestland for shifting cultivation and removing logs for industrial uses and fuel. The volume of logs (roundwood) removed for industrial purposes increased by about 70 percent between 1975- 77 and 1985-87, to about 330,000 cubic meters; however, this volume was dwarfed by that removed for domestic (fuel) purposes. Between 1980 and 1989, the volume of logs removed for fuel increased by about 25 percent, to about 3.7 million cubic meters; only about 100,000 cubic meters were removed for industrial purposes. By 1991 these figures had increased to appr