Despite Impressive Economic Growth, Investment Climate In Laos Remains Challenging: World Bank

Source: World Bank

DOING BUSINESS IN LAO PDR: CONSTRAINTS TO PRODUCTIVITY

Key Facts

Despite impressive economic growth, the investment climate in Lao PDR remains challenging.

In the 2018 Doing Business report, Lao PDR was ranked 141 out of 190, down from 139 the previous year.

  • In the 2018 Global Competitiveness index, Lao PDR was ranked 98 out of 137.
  • The country faces issues that include weak regulatory effectiveness, control of corruption and rule of law, and a largely “deals-based” approach, which reduces predictability and transparency.\
  • Decelerating GDP growth in recent years is indicative of the limitations of a growth pattern that relies on natural resources and public spending, neither of which is sustainable.
  • An improved business environment could unlock Lao PDR’s potential in many sectors, including agriculture and agro-processing, services and manufacturing.

Recent data indicates that concerns about the business environment have increased in intensity over the past four years. Many of the main constraints have remained consistent during this period.

  • The main constraint identified by 40% of firms is the practices of firms in the informal sector, referring to other companies avoiding rules and regulations. The second issue cited are high tax rates. Other key issues include transportation, electricity, and inadequately educated workers.
  • For exporters, while access to finance was previously a leading problem in previous years, currently their main issue centers on the informal sector. They are also highly concerned about transportation and trade regulations.

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Different types of businesses have varying priorities, and constraints to the business environment may affect them differently.

  • Large firms are more likely to consider workers’ education a problem, while transportation is a bigger issue for medium firms and tax rates for smaller firms.
  • Foreign firms identify tax rates and access to land as of higher concern than domestic firms.
  • Corruption is not cited as a serious problem by most firms, however businesses report a high occurrence of corruption. This could indicate that corruption is viewed as part of the status quo. Nearly half of firms report being asked for gifts or payments for construction permits and 74% for government contracts.
  • Female-owned firms report tax rates as a more serious issue than non-female owned firms, and also have a higher rate of concern about access to land.

Additional research clarifies what companies mean when identifying the informal sector as a challenge.

  • Interviews with business owners and top managers found that there are four main types of problematic informal practices in Lao PDR’s business environment: inadequately registered (large) businesses that “fly under the radar”; tax evasion by all companies, including those that are fully registered; irregular application of complex regulations; and a culture of non-compliance with basic rules and standards.
  • Highly formalized firms incur higher costs and feel unfairly targeted by authorities, while unregistered or rule-flouting competitors escape the same regulatory burden or official scrutiny.
  • Reducing problematic informality in the business environment and supporting formal enterprises will require stronger institutions and continued efforts to stamp out petty corruption.
  • In the near-term, focus should be placed on simplifying the business registration process, strengthening the tax system, and ensuring regulations are clear, simple, and rooted in the public interest.

As a result of the current challenges, labor productivity remains low in Lao PDR

  • The median labor productivity (value added per worker) in Lao PDR is US$4600, which is 10% lower than Cambodia and less than half of Vietnam; there has been no significant variation in productivity between 2009 and 2016.
  •  The highest performing firms in Lao PDR lag far behind the most productive firms elsewhere in the region. The 10% most productive firms in Lao PDR produce around US$20,967 per worker, compared to $61,646 in Vietnam and $93,378 in Cambodia.
  • Over 3/4 of firms in Vietnam are more productive than the median firm in Lao PDR.
  • Wages are low, but relatively high compared to worker production levels, suggesting workers have low human capital, but also use of old technologies, poor management practices, and the weak investment climate
  • Businesses that report being constrained by inadequately educated workers and transportation grew more slowly over the past few years than those who faced other obstacles, indicating these as major issues in the business environment.

This report is based on data from the 2016 Enterprise Survey, conducted by the World Bank Group and partners around the world, covering various firms (small, medium and large) in the non-agricultural, formal, private sector.

  • The survey focuses on aspects of the business environment relevant to determining whether an economy’s private sector will thrive.
  • The survey measures firms’ productivity and asks firms to identify constraints to their productivity.
  • Lao PDR data collection took place in January-June 2016, and previous surveys occurred in 2012 and 2009.