LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 1 Currency Equivalents Currency unit = Lao Kip US$ 1 = 8,000 Kip Acronyms and Abbreviations ASEAN Association of Southeast Asian Nations DEAC Department of Agricultural Extension and Cooperatives ECD Early Child Development ECE Access to Early Childhood Education EDI Early Development Instrument EGRA Early Grade Reading Assessment ETS Educational Testing Service FAO Food and Agricultural Organization FDI Foreign Direct Investment GDP Gross Domestic Product ILO The International Labour Organisation IMF International Monetary Fund IRRI International Rice Research Institute Lao PDR Lao People’s Democratic Republic LECS Lao Expenditure and Consumption Survey LFS Lao Labor Force and Child Labor Survey LSB Lao Statistics Bureau LSIS Lao Social Indicators Survey MDG Millennium Development Goal MOES Ministry of Education and Sports NSEDP National Socio-Economic Development Plan OECD Organisation for Economic Co-operation and Development PSE Producer Support Estimates STEP Skills Toward Employment and Productivity TFP Total Factor Productivity TVET Technical Vocational Educational and Training UNDP United Nations Development Programme WBG World Bank Group WTO World Trade Organization Regional Vice President : Axel van Trotsenburg Country Director : Ulrich Zachau Senior Practice Director : Arup Banerji Country Manager : Sally Burningham Practice Manager : Jehan Arulpragasam Task Team Leader : Lars M. Sondergaard Acknowledgements This report was prepared by a World Bank team led by Lars Sondergaard (Program Leader) with the much- appreciated contribution of Minna Hahn Tong (Consultant) in drafting and editing. The team comprised (in alphabetical order) Genevieve Boyreau (Senior Economist), Lucilla Maria Bruni (Economist), Ximena del Car- pio (Senior Economist), Paavo Eliste (Lead Rural Development Specialist), Somneuk Davading (Senior Econo- mist), Thomas Flochel (Young Professional), Yuki Ikeda, Dilaka Lathipipat (Human Development Economist), Bob McLaughlin, Konesawang Nghardsaysone (Economist), Keomanivone Phimmahasay (Economist), Richard Record (Senior Economist), Marlon Seror (Consultant), Anita Soukhaseum (Program Assistant), Ami A. Thak- kar, and Sergiy Zorya (Senior Economist). Administrative and report production assistance from Anita Souk- haseum and Toomkham Luanglath (Communications Associate) is gratefully acknowledged. Overall guidance was provided by Jehan Arulpragasam (Practice Manager, Social Protection & Labor), Keiko Miwa (Adviser), and Xiaoqing Yu (Director, Social Protection & Labor). The team is grateful for their ongoing support and guidance provided. Background papers for the report were written by (in alphabetical order) Genevieve Boyreau, Lucilla Maria Bruni, Ximena del Carpio, Yuki Ikeda, Dilaka Lathipipat, Konesawang Nghardsaysone, Richard Record, Marlon Seror and Michele Davide Zini (Social Protection Economist). The team wishes to acknowledge Philip O’Keefe (Lead Economist) for the extensive comments and advice pro- vided at several stages of the preparation. Moreover, numerous discussions with Christian Bodewig (Program Leader) and Reena Badiani-Magnusson (Economist) around their Vietnam Development Report 2014 provided invaluable inspiration for chapter 4. Finally, drafts along the way received comments and useful guidance from numerous people, including Omporn Regel (Senior Operations Officer), Lan Van Nguyen (Senior Operations Officer, IFC), Phongsavanh Phomkong (Head of Office, IFC), Pedro Cerdan-Infantes (Education Economist), Boun Oum Inthaxoum (Operations Officer), Xiaoyan Liang (Senior Education Specialist), and Stephen Rudgard (FAO Representative in Lao PDR). Peer reviewers for the report were: Ekaterina Vostroknutova (Senior Economist; concept and decision stage), Halsey Rogers (Lead Economist; concept stage), Ariel Fiszbein (concept stage), Christian Bodewig (decision stage), Rogier J. E. Van Den Brink (Program Leader; decision stage), and Ana Maria Oviedo (Economist; decision stage). The team also received valuable feedback on preliminary findings and messages through six learning events organized with government counterparts. This report would not have been possible without data from the World Bank’s Skills Toward Employment and Productivity (STEP) skills measurement project which collects information on workforce skills in multiple coun- tries across the world, including in a first round in Lao PDR, Vietnam, Yunnan Province of China, Sri Lanka, and Bolivia in 2011/2012. The Lao PDR surveys were managed by Maria Laura Sanchez Puerta (Senior Economist) and Alexandria Valerio (Senior Economist) from the World Bank’s Human Development Network under the oversight of Ariel Fiszbein. The findings and interpretations expressed here are those of the authors and do not necessarily reflect the views of the World Bank Group, its Executive Directors, or the countries they represent. Table of Contents Executive Summary .............................................................................................................................................................. 10 Chapter 1: Overview .............................................................................................................................................................. 14 I. Introduction .................................................................................................................................................................... 15 II. Overview of Report ...................................................................................................................................................... 20 Chapter 2: Improving Livelihoods Through Higher Agricultural Productivity ............................... 24 I. Context and Challenges ............................................................................................................................................. 25 II. Current Government Approach ............................................................................................................................... 27 III. Recommendations ..................................................................................................................................................... 28 IV. Conclusion ..................................................................................................................................................................... 31 Chapter 3: Expanding Employment Opportunities For Lao PDR’s Growing Workforce ....... 32 I. Context and Challenges ............................................................................................................................................. 34 II. Current Government Approach .............................................................................................................................. 42 III. Recommendations ..................................................................................................................................................... 44 IV. Conclusion ..................................................................................................................................................................... 47 Chapter 4: Building Critical Knowledge And Skills For Productive Employment .......................... 48 I. Context and Challenges ............................................................................................................................................. 49 II. Current Government Approach ............................................................................................................................... 53 III. Recommendations ..................................................................................................................................................... 56 IV. Conclusion ..................................................................................................................................................................... 61 Chapter 5: Conclusion ......................................................................................................................................................... 62 I. Summary of Policy Recommendations ................................................................................................................. 63 II. Areas for Further Work ................................................................................................................................................ 64 Annex 1: Lao Pdr Labor Market Data Issues .......................................................................................................................... 67 Annex 2: Background Papers And Recent World Bank Reports Used For Ldr 2014 ............................................... 71 References ........................................................................................................................................................................................ 73 Boxes Box 1.1: The key policy priorities for “Agrarian Economies” ............................................................................................. 22 Box 2.1: Stimulating economic growth and poverty reduction through rice policies in Cambodia ............... 29 Box 3.1: The Movement of Workers from Low-Productivity to Higher-Productivity Sectors in Vietnam ....... 33 Box 3.2: The bureaucratic barriers to moving internally are high ................................................................................. 35 Box 3.3: Challenging two common misconceptions about the Lao workforce ....................................................... 41 Box 3.4: The Lao PDR Trade Portal: Making trade more transparent .......................................................................... 46 Box 4.1: Assessing School Readiness in Vietnam ................................................................................................................ 57 Figures Figure 1.1: Percentage of firms in Lao PDR, Vietnam, and Yunnan province (China) complaining that there were no or few applicants to a job, by skill level ................................................................................................................. 15 Figure 1.2: Population structure of Lao PDR in 2010 ......................................................................................................... 16 Figure 1.3: Projected population structure of Lao PDR in 2030 ..................................................................................... 16 Figure 1.4: Employment in Lao PDR by sector .................................................................................................................... 17 Figure 1.5: Structure of the farm population in Lao PDR ................................................................................................ 17 Figure 1.6: Sectoral breakdown of output and labor in the overall economy of Lao PDR ................................. 18 Figure 1.7: Early Grade Reading Assessment for Lao PDR .............................................................................................. 19 Figure 2.1: Share of workforce by employment type (circa 2010) ............................................................................... 25 Figure 2.2: Historical and projected rice surplus (tons of raw milled rice) (1990 2015) ....................................... 25 Figure 2.3: Average per capita annual agricultural growth, 2000-2012 .................................................................... 26 Figure 2.4: Glutinous rice prices in Lao PDR and Thailand, 2006-2013 ($/ton) ....................................................... 26 Figure 2.5: Sectoral comparison of average hours worked per week in Lao PDR (2013) .................................... 26 Figure 2.6: Evolution of budget transfers to rice producers (in constant 2011 Kip million) ............................... 30 Figure 3.1: Country comparison of changes in employment by sector .................................................................... 34 Figure 3.2: Number of working months in farming in the last 12 months (manufacturing sector workers) in 2013 ................................................................................................................................................................................................ 34 Figure 3.3: Wage developments in agricultural vs. non-agricultural sector in Lao PDR and Thailand (for workers with a secondary school education) ....................................................................................................................... 36 Figure 3.4: Comparison of non-agricultural wages in Lao PDR with wages in Thailand (2013) ....................... 37 Figure 3.5: Output price index by sector in Lao PDR (GDP deflator) .......................................................................... 38 Figure 3.6: Increases in real wages and real labor productivity in Lao PDR, 2009-2013 ...................................... 38 Figure 3.7: Country comparison of unit cost of labor of manufacturing firms ....................................................... 38 Figure 3.8: Profitability in the manufacturing sector ....................................................................................................... 39 Figure 3.9: Comparison of Lao PDR and comparator economies in ease of doing business ............................. 40 Figure 3.10: Private investment in Lao PDR by sector (share of GDP) ........................................................................ 40 Figure 3.11: Profitability in the services sector ................................................................................................................... 41 Figure 4.1: Percentage of firms identifying each factor as the biggest constraint in Lao PDR in 2012 .......... 49 Figure 4.2: Country comparison of percentage of employers complaining that an inadequately educated workforce is either a major or a severe constraint .............................................................................................................. 50 Figure 4.3: Basic reading skills in grades 2-4 in Lao PDR ................................................................................................. 50 Figure 4.4: International comparison of adult literacy skills .......................................................................................... 51 Figure 4.5: Comparison of adult literacy by education level in Lao PDR and Vietnam ........................................ 51 Figure 4.6: The process of skills formation ........................................................................................................................... 51 Figure 4.7: Share of first graders who attended any form of pre-school in .............................................................. 52 Figure 4.8: Prevalence of stunting among children under age 5 (%) .......................................................................... 52 Figure 4.9: Public spending by level of education (%) ...................................................................................................... 54 Figure 4.10: Public spending on education (as share of GDP) ....................................................................................... 54 Figure 4.11: The three dimensions of skills sought by employers ................................................................................ 55 Figure 4.12: The steps of skills development ....................................................................................................................... 56 Figure 5.1: Summary of recommended actions .................................................................................................................. 64 Tables Table 2.1: Producer support estimates for Lao glutinous rice (Kip billion) ............................................................... 27 Table 3.1: Capital intensity by sector for Lao PDR and Thailand ................................................................................... 37 Table 4.2: Information Collected from Tracer Study of Dutch University Graduates, 2007 ................................ 61 Table 5.1: Country comparison of labor force data collection ...................................................................................... 64 Photo by Bart Verweij / World Bank, 2014 LAO DEVELOPMENT REPORT 2014 10 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Executive Summary KEY MESSAGES • Although recent media reports of a perceived sought by firms. The Government and other partners “skills problem” in Lao PDR have spurred an in- have responded by channeling more resources to tense focus on the role of the education sector in skills development, for example with investments in creating the right skills, this focus on skills over- vocational training facilities to train more workers. looks more fundamental issues that are critical to the future of Lao PDR’s workforce and economy. However, this report argues that the workforce problems which Lao PDR faces do not only stem • In order to achieve broad-based growth and pov- from problems in the education sector. Looking erty reduction, Lao PDR must channel greater re- only to skills development as a solution would not sources toward tackling key workforce and pro- address the fundamental problems constraining eco- ductivity challenges. nomic growth, employment creation, and poverty re- duction. Creating an environment conducive for farm • Given the large majority of the population that and non-farm businesses to make investments and is engaged in agriculture, boosting agricultural grow remains an essential first step for skills devel- productivity is a top priority for improving live- opment. As World Bank (2004) states, “Training does lihoods and reducing poverty. Higher agricul- not create jobs. Skills are a derived demand and that tural productivity will raise farm incomes and demand depends on policies for growth and employ- will eventually free workers to move to higher- ment creation.” productivity, higher-paying sectors. One indication of bigger underlying structural • Diversification will be critical for providing bet- problems is that firms complain that not enough ter employment opportunities for workers who workers are applying for jobs, even the low- are released from agriculture. Because the natu- skilled jobs. Nearly half of firms in Lao PDR indicated ral resources sector generates few jobs, greater that they had no or few applicants to an unskilled job emphasis is needed on creating an environment (Figure 1), a much higher percentage than in neigh- that helps businesses in the employment-gener- boring countries. This phenomenon points to trou- ating manufacturing and services sectors flour- bling workforce issues. Why aren’t people moving to ish. fill vacancies in manufacturing that offer potentially better opportunities? Does Lao PDR lack enough • At the same time, workers must be equipped workers, and/or is it a problem of workers lacking the with the basic skills necessary to take up the right skills? higher-productivity opportunities that are avail- able. Reforms must focus on expanding early Figure 1: Percentage of firms in Lao PDR, Vietnam, childhood education, ensuring literacy, and and Yunnan province (China) complaining that there building job-relevant technical skills. were no or few applicants to a job, by skill level 1. Introduction Recent media reports of a perceived “skills prob- lem” in Lao PDR have spurred an intense focus on skills development initiatives. Alarming media cov- erage of rising wages and complaints among firms of a shortage of skilled workers has raised concerns over Source: World Bank Enterprise Surveys in Lao PDR, Vietnam, and whether Lao workers are equipped with the skills Yunnan province (China) (2012) LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 11 Tackling key workforce and productivity issues is agricultural jobs that keep them on the farm de- particularly pressing given that Lao PDR is under- spite lower living standards. This is particularly going a major demographic transition. The popu- troubling considering that about 1 million chil- lation is projected to increase by 38 percent from 6.4 dren under the age of 10 live on farms and face million in 2010 to 8.8 million in 2030, with approxi- dim prospects for breaking out of poverty. mately 96,000 additional people reaching working age every year in the coming decade compared to • Limited opportunities for higher-paying, higher- 63,000 in the 1990s. Expansion of the labor force and productivity jobs. Countries develop by moving a decrease in the number of dependents present an workers from low-productivity jobs in agricul- opportunity for growth, particularly if Lao PDR can ture to higher-paying, higher-productivity jobs tap the potential of young workers through produc- in manufacturing and services. However, the Lao tive employment opportunities. Without sufficient manufacturing sector appears to struggle to at- prospects for employment for these labor force en- tract workers, and numerous factors discourage trants, poverty reduction and stability could be un- the investment necessary to help boost produc- dermined. tivity (and therefore wages) in the sector. As il- lustrated by Figure 2, the share of the manufac- 2. Key Challenges turing sector in terms of both output and labor in the overall economy has remained very low A number of key workforce-related challenges relative to the natural resources sector and the must be addressed for Lao PDR to manage its construction and services sector in recent years. demographic transition successfully and advance to the next stage of development. These challeng- Figure 2: Sectoral breakdown of output and labor in es include: the overall economy of Lao PDR • Overreliance on the natural resources sector. While Composition of economy by amount of output pro- there has been a heavy reliance on the natural re- duced by each sector (measured as value-added and sources sector as an engine of growth, it does not expressed in % of total value-added) create shared growth and employment. Because the sector has a high ratio of capital to labor, it was able to produce approximately 18 percent of Lao PDR’s GDP in 2013 with only 22,000 people. Furthermore, the boom in the natural resources sector makes it relatively more difficult for the nascent manufacturing sector to grow, includ- ing by putting upward pressure on the exchange rate which makes manufacturing exports less competitive and by fueling a consumption and investment boom which can put upward pres- sure on wages. Such upward pressure on wages is one possible reason why manufacturing work- ers have seen their wages rise by approximately 12 percent per year in the past 5 years, well above labor productivity growth. Source: National Statistical Center of Lao PDR • Low productivity in the agricultural sector. Because most of the labor force is currently engaged in agriculture, improving livelihoods for those in the sector is critical to reducing poverty in Lao PDR. However, an estimated 7 in 10 Lao work- ers are still mainly employed in low-productivity LAO DEVELOPMENT REPORT 2014 12 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Composition of economy by amount of hours Figure 3: Comparison of adult literacy by education worked in each sector (in % of total) level in Lao PDR and Vietnam Lao PDR Source: Authors’ calculations based on LECS III, IV and V Vietnam • Very low levels of literacy. The skills problem in Lao PDR is deeper and more severe than is gener- ally recognized, being a problem not simply of vocational skills but of even basic reading and numeracy skills. An Early Grade Reading Assess- ment showed that over 30 percent of 2nd grad- ers could not read a single word, and among those who could read, 57 percent did not un- derstand what they had just read (Figure 3). In an adult literacy assessment carried out in six countries around the world—including Vietnam, Yunnan Province (China), and Lao PDR—adults in Lao had the poorest literacy skills among the Note: Graphs show scores on basic literacy test (from 0-8 points) for adults with different education levels in Lao PDR (left graph) and adults tested. Post-secondary graduates in Lao Vietnam (right graph). PDR performed almost on par with people with Source: STEP Household survey 2011/2012. Within the survey, only primary schooling in Vietnam (see figure 4). there is a literacy assessment designed by Educational Testing Ser- Given how important reading ability is for learn- vice (ETS). ing more advanced skills, the low level of basic literacy has serious implications for the country’s 3. The Way Forward productivity, growth, and competitiveness. Given that the majority of the country’s workforce is Early Grade Reading Assessment for Lao PDR currently engaged in agriculture, raising agricultural productivity is arguably the top development priority for Lao PDR. In the shorter term, higher agricultural productivity will help generate better livelihoods for the 4.5 million Lao people living on farms. Over the longer term, increased productivity on the farms would eventually lower the need for labor, freeing up agricultural workers to move to more productive jobs in other sectors. In particular, greater attention is needed in two areas: Source: World Bank (2014). “2012 Lao PDR EGRA Survey Report” [draft]. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 13 • Facilitating trade in paddy and rice to encourage Greater priority should be placed on cultivating a private investment in milling, which would help workforce that possesses the basic foundational skills reduce milling costs and give farmers greater in- needed to be productive. Resources need to be fo- centive to increase production for export; cused more effectively on the critical windows of op- • Making better use of public resources supporting portunity when skills are built by: rice farmers, with a more balanced approach in allocating resources for extension activities, • Expanding and strengthening early childhood de- technology development and transfer (including velopment and education to help develop school good seed), and irrigation. readiness skills and basic cognitive and behav- ioral skills, which also includes efforts to reduce As agricultural productivity increases and more work- chronic malnutrition which threatens cognitive ers are able leave farming, the Lao economy will need development; to generate more attractive off-farm jobs to absorb • Ensuring that all children can read by the end of these workers. Contrary to what media reports might grade 2, making reading a national obsession so suggest, Lao PDR is not facing a labor shortage, as it Lao PDR can build a skilled and productive work- has a very large “reservoir” of farm workers that could force; and potentially move to the non-agricultural sectors; rath- • Building job-relevant technical skills, with the Gov- er, Lao PDR has a shortage of attractive job opportu- ernment taking on a more strategic role in voca- nities that make it worthwhile for a farmer to give up tional skills development by developing policies, farming. To help create more attractive off-farm em- setting standards, investing in training materials ployment opportunities, barriers to doing business in and instructors, improving public information Lao PDR must be removed to encourage investment about the training system, and carrying out train- and spur productivity growth in diversified sectors. In ing evaluations. particular, action is needed on three fronts: In the process of planning specific reforms in these • Streamlining and simplifying the business compli- areas, it will be critical for policies to be grounded in ance and transaction costs associated with deal- better information. For example, policies affecting ing with government to create a more business- the workforce should be based on a complete and friendly environment; accurate picture of labor market dynamics—what is • Improving transparency in the provision of public happening, who is affected, what the implications of sector services to business through measures such potential policies might be. However, crucial informa- as publication of all fee schedules, permits, and tion on sectoral employment, migration, and other licensing requirements; and labor market indicators are lacking. Instruments such • Establishing a more predictable playing field for the as a labor force survey could help provide essential private sector, with consistent implementation of information for policymakers to understand the key publicly available legislation, rules, and regula- challenges and design appropriate solutions. Further tion and with reduced bureaucratic discretion. work is also needed to understand the array of factors affecting the workforce-related challenges discussed As greater diversification generates more produc- above, including determining why manufacturing tive employment opportunities, it will be critical to wages have been rising faster than labor productiv- ensure that the Lao workforce is equipped with the ity and identifying other barriers to worker mobility knowledge and skills to be able to take up these jobs. between jobs and sectors. Increase agricultural Create more attractive Ensure basic literacy skills productivity off-farm jobs Streamline and simplify the business Expand and strengthen early Facilitate trade in paddy and rice compliance and transaction costs asso- childhood development and to encourage private investment ciated with dealing with government education in milling Improve transparency in the provision Ensure that all children can read by of public sector services to business the end of grade 2 Make better use of public Establish a more predictable playing Build job-relevant technical skills resources supporting rice farmers field for the private sector Chapter 1: Overview Photo by Bart Verweij / World Bank, 2012 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 15 I. Introduction 1. Recent media reports of a perceived “skills to an unskilled job, a much larger proportion than in problem” in Lao PDR have spurred an intense Yunnan province (China) and Vietnam. This phenom- focus on skills development initiatives. Alarm- enon points to troubling workforce issues. Why aren’t ing media coverage of rising wages and complaints people moving to fill vacancies that offer potentially among firms of a shortage of skilled workers has raised better opportunities? Does Lao PDR lack enough concerns over whether Lao workers are equipped workers, and/or is it a problem of workers lacking the with the skills sought by firms. The Government and right skills? other partners have responded by channeling more resources to skills development, particularly for initia- tives aimed at aligning skills with employers’ needs. Figure 1.1: Percentage of firms in Lao PDR, Vietnam, Such measures have included increased investment and Yunnan province (China) complaining that there in vocational training facilities to train more workers, were no or few applicants to a job, by skill level albeit from very low levels of spending. 2. However, this report argues that Lao PDR’s development challenges stem not only from problems with education and skills but also from the country’s slow structural transformation. The highly publicized “skills problem” may make it tempt- ing to direct resources toward quick fixes for the problem, for example by expanding vocational edu- Source: World Bank Enterprise Surveys in Lao PDR, Vietnam, and cation or expanding on-the-job training. The main Yunnan province (China) (2012) message of this report, however, is that it would be a mistake to look only to the education sector and more training as a solution because doing so does 4. Tackling such workforce issues is particularly not address the fundamental problems constraining pressing given that Lao PDR is undergoing a ma- economic growth, employment creation, and pover- jor demographic transition, which represents ty reduction. Creating an environment conducive for both a challenge and opportunity for growth and farm and non-farm businesses to make investments poverty reduction. The country has a large youth and grow remains an essential first step for skills de- cohort that is entering adulthood and starting to velopment. As World Bank (2004) states, “Training participate in the labor market (Figure 1.2 and Figure does not create jobs. Skills are a derived demand and 1.3). The population is projected to increase by 38 that demand depends on policies for growth and percent from 6.4 million in 2010 to 8.8 million in 2030, employment creation.” Moreover, insofar as improved with approximately 96,000 additional people reach- skills are needed, this report argues that scarce public ing working age every year in the coming decade resources would be better spent addressing serious compared to 63,000 in the 1990s. Expansion of the gaps in basic literacy. labor force and a decrease in the number of depend- ents present an opportunity for growth, particularly if 3. One indication of bigger underlying structural Lao PDR can tap the potential of this cohort of young problems is that firms complain that not enough workers through productive employment opportuni- workers are applying for jobs, even the low-skilled ties. Without sufficient prospects for employment for jobs. As shown in Figure 0.1, nearly half of firms in these labor force entrants, poverty reduction and sta- Lao PDR indicated that they had no or few applicants bility could be undermined. LAO DEVELOPMENT REPORT 2014 16 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Figure 1.2: Population structure of Lao PDR in 2010 Figure 1.3: Projected population structure of Lao PDR in 2030 Source: United Nations (2013) Photo by Bart Verweij / World Bank, 2014 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 17 5. A number of key workforce-related challenges exports less competitive.1 It can also fuel a con- must be addressed for Lao PDR to manage this sumption and investment boom which can put demographic transition successfully and achieve upward pressure on wages in the economy. Such its growth and development aspirations. These upward pressure on wages is likely to be one rea- challenges include: son why manufacturing workers have also seen their wages rise by approximately 40 percent in • Overreliance on the natural resources sector. While the past 5 years, well above labor productivity there has been a heavy reliance on the natural growth.2 resources sector as an engine of growth, Lao PDR cannot rely on its resources sector alone. Because • Low productivity in the agricultural sector. Because the sector has a high ratio of capital to labor, it most of the labor force is currently engaged in is able to produce approximately 18 percent of agriculture, improving livelihoods for those in Lao PDR’s GDP in 2013 with only 22,000 people the sector is critical to reducing poverty in Lao (Figure 1.4). Therefore, the sector does not create PDR. However, agricultural productivity remains shared growth and employment. very low. An estimated 7 in 10 Lao workers are still mainly employed in low-productivity agri- cultural jobs that keep them on the farm despite Figure 1.4: Employment in Lao PDR by sector lower living standards. This is particularly trou- bling considering that about 1 million children under the age of 10 live on farms (Figure 1.5) and face dim prospects for breaking out of poverty. Figure 1.5: Structure of the farm population in Lao PDR Source: Lao Expenditure and Consumption Survey (LECS) IV (2007-2008) and V (2012/13) Not only does the natural resources sector do lit- tle to create jobs, it also makes it relatively more difficult for the nascent manufacturing sector to grow. It does so through a number of chan- nels, including by putting upward pressure on the exchange rate, which makes manufacturing Source: Agricultural Census Office (2012) 1 The export of natural resources brings a large inflow of foreign currency which drives up the value of the country’s own currency. Ap- preciation of the exchange rate makes the country’s other exports (mainly, manufactured goods) more expensive for other countries, thus reducing the competitiveness of the country’s exports and hurting domestic manufacturers. 2 The extent to which the national resource sector has adversely affected other parts of the Lao economy has been studied by a number of different authors, including Mitra (2007) (studying the period 2000-2006), Brahmbhatt and Vostroknutova (2010) (studying the period 2000-2009), and World Bank (2014g). LAO DEVELOPMENT REPORT 2014 18 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH • Limited opportunities for higher-paying, higher- manufacturing sector in terms of both output productivity jobs. Countries develop by moving and labor in the overall economy has remained workers from low-productivity jobs in agricul- very low relative to the natural resources sec- ture to higher-paying, higher-productivity jobs tor and the construction and services sector in in manufacturing and services. However, the recent years. The growth of the services sector Lao manufacturing sector appears to struggle to while manufacturing firms are facing difficulties attract workers, and numerous factors discour- is a worrying indication that the manufacturing age the investment necessary to help boost sector may be suffering from the effects of the productivity (and therefore wages) in the sec- natural resources boom as described above. tor. As illustrated by Figure 0.6, the share of the Figure 1.6: Sectoral breakdown of output and labor in the overall economy of Lao PDR Composition of economy by amount of output pro- Composition of economy by amount of hours duced by each sector (measured as value-added and worked in each sector (in % of total) expressed in % of total value-added) Source: National Statistical Center of Lao PDR Source: Authors’ calculations based on LECS III, IV and V LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 19 • Very low levels of literacy skills. While higher-pay- understand what they had just read (Figure 1.7). ing, higher-productivity employment opportuni- In an adult literacy assessment carried out in six ties may be limited, the workforce also does not countries around the world—including Vietnam, appear to be well-equipped to take advantage Yunnan Province (China), and Lao PDR—adults of the employment opportunities that might be in Lao PDR had the poorest literacy skills among available. The very low levels of literacy skills are the adults tested. Given how important reading particularly problematic. An Early Grade Read- ability is for learning more advanced skills, this ing Assessment showed that over 30 percent of low level of basic literacy has serious implications 2nd graders could not read a single word, and for the country’s productivity, growth, and com- among those who could read, 57 percent did not petitiveness. Figure 1.7: Early Grade Reading Assessment for Lao PDR Source: World Bank (2014e) Photo by Stan Fradelizi / World Bank, 2011 LAO DEVELOPMENT REPORT 2014 20 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH II. Overview of Report 6. This report responds to the growing concerns 8. The report is structured as follows. The remain- over the Lao workforce by using new evidence to der of Chapter 1 provides a brief summary of the delve into the fundamental challenges constrain- main findings that are discussed in greater detail in ing employment and growth in Lao PDR. In doing the subsequent chapters. Chapter 2 describes the so, it aims to help inform two important strategic ini- challenges faced in the agricultural sector and sug- tiatives that are underway: an update of the Human gests some priority areas for improving agricultural Resource Development Strategy and preparation of productivity going forward. Chapter 3 covers off-farm the 8th National Socio-Economic Development Plan. employment opportunities, with a particular empha- Both of these strategic documents are aimed at en- sis on creating the preconditions to make the manu- suring that efforts and resources are targeted effec- facturing sector a potential source of higher-paying, tively at the most critical areas. higher-productivity jobs. Chapter 4 addresses the is- sue of skills, looking across the spectrum of skills and 7. The report draws upon a wide range of sourc- proposing a refocusing of efforts given the particular- es, including new survey data. Preparation of this ly low level of basic skills in Lao PDR. Finally, Chapter report involved a large literature review, analysis of 5 concludes, reviewing the suggested priority areas available large-scale household surveys,3 and com- for reform and proposing some next steps for further missioning of four data collection exercises: a survey work. of 3,000 households which included a skills assess- ment (carried out in parallel with similar assessments 9. The report argues that the number one priority in five other countries around the world); a survey of for Lao PDR is to help improve the livelihoods of 379 private sector firms, with a particular focus on the its large agricultural workforce by increasing pro- skills they seek; a survey of nearly 3,000 recent voca- ductivity in the agricultural sector. With 70 percent tional school graduates; and a survey of 29 educa- of its workforce engaged in agriculture, Lao PDR re- tion institutions. Six “learning events” were organized mains primarily an agrarian economy. As discussed in with government experts to discuss the findings from World Bank (2014d), for economies that are catego- each of these surveys. Several background papers rized as “agrarian,” raising agricultural productivity is providing more detailed analysis were also prepared the key priority to improve well-being from work (Er- and shared with government experts.4 In addition, ror! Reference source not found.). In the shorter term, the report benefited from a new World Bank report higher agricultural productivity will help generate on skills in Lao PDR, recent World Bank studies on better livelihoods for the 4.5 million Lao people living similar issues in nearby countries, and a newly pub- on farms. Over the longer term, increased produc- lished regional report on jobs.5 tivity on the farms would eventually lower the need 3 The labor market analysis for this report relied on the latest three rounds of the Lao Expenditure and Consumption Surveys (LECS3, LECS4, and LECS5) rather than the Lao Labor Force and Child Labor Survey and the Skills Toward Employment and Productivity (STEP) household survey due to shortcomings with those sources, as described in Annex 1. 4 Annex 2 describes each of the background papers in more detail. 5 This report draws upon a 2013 technical assessment of skills in Lao PDR (“Skills for Quality Jobs and Development in Lao PDR”) and a 2014 regional report on skills, “East Asia Pacific at Work: Employment, Enterprise, and Well-Being.” Research for this report was undertaken in parallel with work on similar development reports in Vietnam (“Skilling Up Vietnam: Preparing the workforce for a modern economy,” published in 2013) and the Philippines (“Philippine Development Report: Creating More and Better Jobs,” published in 2013) as well as a skills report on Yunnan, China (“Developing Skills for Economic Transformation and Social Harmony in China: A Study of Yunnan Province,” published in 2014). LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 21 for labor, freeing up agricultural workers to move to as publication of all fee schedules, permits, and more productive jobs in other sectors. Although the licensing requirements; and agricultural reform agenda is wide-ranging, this re- port proposes greater attention to two areas: • Establishing a more predictable playing field for the private sector, with consistent implementation of • Facilitating trade in paddy and rice to encourage publicly available legislation, rules, and regula- private investment in milling, which would help tion and with reduced bureaucratic discretion. reduce milling costs and give farmers greater incentive to increase production for export, and 11. The report also argues that to enable workers to take advantage of these opportunities, priority • Making better use of public resources supporting must be placed on ensuring basic literacy skills. rice farmers, with a more balanced approach Greater priority should be placed on cultivating a in allocating resources for extension activities, workforce that possesses the basic foundational skills technology development and transfer (including needed to be productive. Resources need to be fo- good seed), and irrigation. cused more effectively on the critical windows of op- portunity when skills are built by: 10. At the same time, the creation of attractive off- farm employment opportunities needs to be pro- • Expanding and strengthening early childhood de- moted. Contrary to what media reports might sug- velopment and education to help develop school gest, Lao PDR is not facing a labor shortage, as it has readiness skills and basic cognitive and behav- a very large “reservoir” of farm workers that could po- ioral skills, which also includes efforts to reduce tentially move to the non-agricultural sectors; rather, chronic malnutrition which threatens cognitive Lao PDR has a shortage of attractive job opportuni- development; ties that make it worthwhile for a farmer to give up farming. To help create more attractive off-farm em- • Ensuring that all children can read by the end of ployment opportunities, barriers to doing business in grade 2, making reading a national obsession so Lao PDR must be removed to encourage investment Lao PDR can build a skilled and productive work- and spur productivity growth in diversified sectors. In force; and particular, action is needed on three fronts: • Building job-relevant technical skills, with the Gov- • Streamlining and simplifying the business compli- ernment taking on a more strategic role in voca- ance and transaction costs associated with deal- tional skills development by developing policies, ing with government to create a more business- setting standards, investing in training materials friendly environment; and instructors, improving public information about the training system, and carrying out train- • Improving transparency in the provision of public ing evaluations. sector services to business through measures such LAO DEVELOPMENT REPORT 2014 22 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Box 1.1: The key policy priorities for “Agrarian Economies” Using a typology laid out in the World Bank’s 2013 World Although Lao PDR could be mapped into numerous Development Report, World Bank (2014d) proposes categories under this typology, given the large share of a classification of countries in the East Asia and Pacific the population living in rural areas, it is categorized as region to help identify policy priorities for the different mainly “agrarian.” An “agrarian” economy is one in which types of economies. It uses empirical measures to clas- the majority of the population (60 percent or more) lives sify countries into eight different categories: agrarian, in rural areas, where work consists mainly of subsistence conflict-affected, urbanizing, resource-rich, small islands, and small-scale commercial farming and related indus- high youth unemployment, formalizing, and aging. It tries. As shown in the Figure below, other countries in then identifies and prioritizes the policy challenges in the region that share this classification are Cambodia, improving well-being from work according to this clas- Thailand, Vietnam, Myanmar, Papua New Guinea, and sification. Timor-Leste. Figure: Share of the population living in rural areas, by income level and population size, in East Asia and the Pacific (2010) As described by World Bank (2014d), for agrarian econo- prices, rural infrastructure, and good-quality education mies, the policy priority is to raise agricultural productiv- and health services to build human capital. As work- ity in order to free labor to work in rural off-farm enter- ers seek to move to cities, governments should remove prises and eventually migrate to urban areas. The most policies and programs that restrict working people from powerful instruments for increasing agricultural produc- moving off the farm and into rural non-farm industry tivity and facilitating the structural transition are land and to manufacturing and services in cities. reform, agricultural extension programs, deregulation of Source: World Bank (2014d) LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 23 Photo by Bart Verweij / World Bank, 2013 12. Finally, the report reviews the main findings 13. The report also notes that in the process of and suggests an overall approach to prioritiz- planning specific reforms, it will also be critical ing reform measures. As mentioned above, raising for policies to be grounded in better information. agricultural productivity is the top priority for Addressing major data gaps is an urgent priority, addressing Lao PDR’s workforce challenges and pro- for example by collecting better information on the moting broad-based growth. As agricultural produc- employment situation through annual labor force tivity increases and the cohort of youth entering the surveys. Further analytical work is also needed to labor market grows, Lao PDR will be under greater understand the array of factors affecting the work- pressure to ensure the availability of quality jobs. force-related challenges discussed in this report, At the same time, firms will be seeking more skilled including determining why manufacturing wages workers. However, reforms in these areas take time to have been rising faster than labor productivity and produce results, therefore these reforms must also be identifying other barriers to worker mobility between undertaken relatively quickly. jobs and sectors. LAO DEVELOPMENT REPORT 2014 24 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Chapter 2: Improving Livelihoods through Higher Agricultural Productivity Photo by Bart Verweij / World Bank, 2014 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 25 14. Given that the majority of the country’s work- Figure 2.1: Share of workforce by employment type force is currently engaged in agriculture, boosting (circa 2010) agricultural productivity is critically important to improving livelihoods in Lao PDR. Raising agricul- tural productivity is a key development priority for Lao PDR, not only for improving incomes for the large rural labor force but also for eventually reducing the need for more labor in the agricultural sector. Work- ers could then be released into more productive sec- tors of the economy that offer higher income-earn- ing opportunities and better growth prospects. This chapter provides an overview of the factors that have been constraining agricultural sector development Sources: Data from the World Bank, International Income Distribu- and proposes measures to help increase agricultural tion Database (I2D2); National Bureau of Statistics of China productivity going forward. 16. Thanks to expanding production, Lao PDR has achieved rice self-sufficiency at the national level and is building exportable rice surpluses. Despite some pockets of poor rice availability, Lao PDR has I. Context and Challenges achieved national rice self-sufficiency since the late 1990s (Figure 0.2). Even assuming modest produc- tion growth and conservative demographic changes, 15. The agricultural sector—and the rice sector, the exportable surplus is expected to reach 450,000 in particular—has been critical to the livelihoods to 500,000 tons by 2015. and food security of the Lao population. Lao PDR Figure 2.2: Historical and projected rice surplus (tons has 2.3 million people engaged in agriculture, repre- of raw milled rice) (1990-2015) senting nearly 70 percent of the country’s workforce and making Lao PDR the most agrarian economy in East Asia (Figure 0.1). Rice is the predominant crop, with 71 percent of all households in the country growing rice in 2010/2011. It has been a key element of food security and has also become an important export commodity for Lao PDR’s trade with Vietnam, Thailand, and increasingly China. Source: World Bank, IRRI, and FAO (2012) (based on data from MAF, NBS data) LAO DEVELOPMENT REPORT 2014 26 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 17. Nonetheless, productivity in the agricultural costs and reduces the derived prices to farmers. High sector remains very low, and growth over the past marketing costs also increase the prices of inputs, fur- decade has been the lowest in the region. In 2012, ther reducing profitability. average agricultural value added per worker (ex- pressed in 2005 US$ prices) in Lao PDR was US$476, Figure 2.4: Glutinous rice prices in Lao PDR and lower than in Cambodia (US$524) and Thailand Thailand, 2006-2013 ($/ton) (US$1,136). In the rice sector, the low level of farm productivity is due to factors such as poor availability of high-quality seeds and other inputs, poor quality and limited farm advisory services, limited irrigation and drainage infrastructure, and regional differences in social and climactic characteristics (World Bank, IRRI, and FAO, 2012). Low productivity implies that a very large number of workers are needed in agricul- ture, each producing very little and hence each mak- ing only a meager living. At the same time, growth of the sector has been relatively slow. The average per capita annual agricultural growth rate was only 0.8 Note: Prices for Lao PDR are for second-quality glutinous rice, retail prices. Prices for Thailand are the export prices of glutinous 10% percent from 2000 to 2012, compared to 2.8 percent rice in Bangkok. in Cambodia over the same period (Figure 2.3). Source: FAO (GIEWS) Figure 2.3: Average per capita annual agricultural growth, 2000-2012 19. Notably, evidence indicates a higher degree of underemployment in the agricultural sector com- pared to other sectors. Farm work is seasonal and does not usually provide “full-time” work: only 11 per- cent of farmers report working 9-12 months per year on the family farm, while 45 percent work for only 3-6 months (Agricultural Census). Caring for livestock usually requires less than an hour a day. A sectoral comparison of hours worked per week also shows that agricultural workers spend less time working than their counterparts in non-agricultural sectors Source: Authors’ calculations based on World Bank World Develop- (Figure 2.5). This evidence suggests that a large share ment Indicators of the agricultural workforce could potentially supply more labor and produce more (World Bank, 2013c). 18. Lao rice farmers receive low prices for their produce due to numerous factors—including sec- Figure 2.5: Sectoral comparison of average hours tor policies—which in turn limits profitability. worked per week in Lao PDR (2013) Although most of the country’s rice is glutinous and of higher value than other types of rice, Lao milled rice suffers from low milling quality, making it unat- tractive to consumers in neighboring countries (and its price lower, see Figure 0.4). Provincial trade bans and price ceilings as well as export restrictions also push down farm prices. Another reason for low prices is that the costly infrastructure increases marketing Source: LECS V (2012/13) LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 27 II. Current Government Approach 20. Multiple national development policies and mercial inputs has also contributed to a slight rise strategies have emphasized the importance of ag- in productivity. Around 42 percent of farmers in riculture and rice, in particular, for food security 2010/2011 used improved seeds and chemical and and economic growth. Rice has been a top priority organic fertilizers, compared to 1989/1999 when 30 for the Government since the country’s first National percent of farmers used improved seeds, 29 percent Socio-Economic Development Plan (NSEDP). As de- applied chemical fertilizers, and 34 percent applied scribed in World Bank, IRRI, and FAO (2012), three organic fertilizers (Agricultural Census, 2012). From main policy documents outline the current objec- 1988/1989 to 2010/2011, the proportion of farmers tives and strategic framework for the rice sector in owning two-wheel tractors increased from 7 percent Lao PDR: (i) the Political Report of the 8th Party Cen- to 34 percent, while the proportion using tractors in- tral Committee to the 9th Party Congress in 2011; (ii) creased from 20 percent to 61 percent. the 7th NESDP; and (iii) the Agricultural Development Strategy and the associated Agricultural Master Plan. 22. However, government policies restricting The Political Report to the 9th Party Congress, for ex- trade have constrained development of the ag- ample, recognizes the importance of agriculture and ricultural sector. As described in World Bank, IRRI, forestry as “a fundamental sector of our national eco- and FAO (2012), rice exports are subject to many nomic structure” and calls for a fundamental transfor- restrictions, while the export of paddy is subject to mation of the rice sector to modernize it and make it re-occurring temporary bans. Trade relationships are more productive and market-oriented. unstable because restrictions are applied without ad- vance notice at the central and provincial level. Rice 21. Certain policy measures have helped foster is exported to Vietnam and Thailand on an informal greater farm commercialization and improved basis but in small quantities and at high cost, bring- production to some degree. Such measures have ing little money to Lao farmers. While public expen- included the introduction of the first improved seed ditures in irrigation, roads, agricultural research, ex- varieties in the 1970s and the loosening of price con- tension, and other public goods try to increase farm trols in the early 1980s, which resulted in improved incomes, they bring small gains compared to the incentives for producers. Production has become losses generated by the inward-oriented trade policy, more market-oriented, with 71 percent of house- as shown in Table 0.1. holds selling some produce in 2010/2011 compared to only 35 percent in 1998/1999. Greater use of com- Table 2.1: Producer support estimates for Lao glutinous rice (Kip billion) 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 Price support (+)/taxation (-) -332 -2,373 -840 619 -1,703 -3,141 Agricultural budget transfers 32 45 63 74 70 74 Net Producer Support Estimate -300 -2,328 -777 694 -1,633 -3,067 Note: Price support is the difference between the average domestic farm-gate prices in Lao PDR and reference border prices in Thailand for the comparable paddy quality. Source: World Bank, IRRI, and FAO (2012) LAO DEVELOPMENT REPORT 2014 28 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 23. The large agricultural concessions, which have geting poor farmers rather than crops. It will also be increased in number significantly since the early important to support rural infrastructure improve- 2000s, cannot replace an increase in the agricul- ments from which all crop production would benefit. tural productivity of smallholders. In 2009, about 1.1 million hectares was estimated to be managed Facilitate trade in paddy and rice to encourage private by the economic land concessions, with the num- investment in milling ber of agricultural concessions reaching about 1,700 (Schoenweger et al., 2012). While there are many 26. One key priority is to encourage private complaints that they do little to create jobs, they investment in milling by facilitating trade in pad- also do not seem to encourage farm labor to migrate dy and rice. The vast majority of commercial mills in for non-farm jobs and to produce spillover effects Lao PDR are small and operate with obsolete milling to smallholders, for example through technology equipment. They require investments to reduce mill- transfer. The traditional farm sector remains the larg- ing costs to the levels observed in Thailand and Viet- est employer in Lao PDR, and unless the productivity nam, in order to pay higher prices to farmers for their and profitability of this sector are improved, the labor paddy. The experiences of neighboring emerging rice market will continue to be harmed by the low out- exporters show that an open trade policy provides a flow of farm labor. very strong incentive to invest in the milling industry to benefit from new market opportunities. III. Recommendations 27. The Cambodia experience illustrates how dra- matically rice and paddy exports can increase under a more open trade policy, with tremendous 24. Although the agricultural reform agenda is impacts on growth and poverty. Cambodia’s open wide-ranging, this report identifies two areas trade policy allows farmers to sell both paddy and that are critical for addressing the constraints Lao rice across the border and outside of the region with- farmers face in expanding production. As this re- out any restrictions. In response to these incentives, port is primarily concerned with workforce-related paddy production has increased by 6 percent annu- issues, it focuses on two reform areas that can help ally in the last five years. In 2013, Cambodia exported raise productivity and increase profitability in the rice 1.6 million tons of paddy (in milled equivalent) to sector.6 Such reforms would help improve the liveli- Vietnam and Thailand, compared to only 0.1 million hoods of the large proportion of the population en- tons in 2008 (World Bank, 2014b). This paddy is be- gaged in rice farming as well as free up labor to move ing milled outside of Cambodia due to cost advan- into higher-productivity sectors. tages in Vietnam and Thailand, but at the same time, the country’s open trade policy has also stimulated 25. Although these recommendations focus on private investment in the milling industry. Knowing the rice sector given its current predominance, that rice exports would not be restricted, milling and gradual diversification will be needed to maintain polishing capacity in Cambodia increased seven-fold higher agricultural productivity and profitability between 2009 and 2013. Thanks to these private in- over the longer term. Helping Lao rice farmers slow- vestments in the milling industry, farmers increased ly diversify into high-value rice production or other production of aromatic paddy, and exports of this crops will help ensure their longer-term profitability. high-value rice jumped from 12,600 tons in 2009 to Therefore, public investments in agriculture should 378,800 tons in 2013. Box 2.1 describes the dramatic eventually follow a more comprehensive agricultural impacts of such government policies in stimulating development strategy, moving away from commod- economic growth and poverty reduction in Cambo- ity-specific programs toward public investments tar- dia. 6 A more comprehensive reform agenda for the rice sector is provided in World Bank, IRRI, and FAO (2012). LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 29 28. Because Lao PDR has moved from having a needed across the agricultural sector, the priority at rice deficit to a sizeable rice surplus and since rice Lao PDR’s current stage of development should be shortages as a source of food security are becom- to improve the productivity of rice for a number of ing an increasingly localized phenomenon, the reasons. First, the rice planting areas in wet season Government should stop imposing temporary account for 57 percent of total agricultural area, export restrictions. Glutinous rice is in demand in according to the 2011 Agricultural Census. Rice neighboring countries, and Thai, Vietnamese, and accounts for the large share of farm incomes, with Chinese traders have expressed interest in import- nearly all farms producing paddy. Thus, while all ing Lao glutinous paddy, which could be milled more agricultural sectors should be developed and there cost effectively in their countries and sold on domes- are many market opportunities, without addressing tic or international markets. However, without a con- low rice productivity, it will be difficult to raise aver- sistent export promotion policy, lower milling costs, age agricultural incomes. Second, if rice productivity higher paddy production, and increased agricultural remains low, farmers will continue to use most land productivity are unlikely. for rice which will hamper crop and livestock diversi- fication, particularly in low-land areas. 29. Why focus on improving the productivity of rice production, not agricultural productivity more broadly? Although improved productivity is Box 2.1: Stimulating economic growth and poverty reduction through rice policies in Cambodia Cambodia achieved remarkable growth and pov- Figure: Drivers of Poverty Reduction, Cambodia erty reduction from 2004 to 2011, thanks in large 2004-11 part to rice sector policies. In that seven-year pe- riod, Cambodia’s per capita GDP (in constant 2000 US$) grew 54.5 percent, ranking 15th among 174 countries. Moreover, this growth was pro-poor, with a dramatic drop in the poverty rate from 52.2 per- cent in 2004 to 20.5 percent in 2011. Poverty reduction was concentrated in rural areas (where 90 percent of Cambodia’s poor reside) and was driven by rice farming. From 2004 to 2009, the price of rice (in constant value) increased by 37.1 percent, boosting farm incomes and providing incentives for higher production. As shown in the Source: Based on simulations conducted for World Bank (2013g) Figure below, the substantial increase in rice prices (see details in Annex 3 of that report) and increased rice production were the two most significant drivers of poverty reduction over this pe- The Cambodia experience provides a powerful ex- riod. Better rural wages and improved income from ample of how government policies can enhance non-farm self-employment also contributed to pov- opportunities for households to pull themselves erty reduction. out of poverty. Government policies on rice pro- duction (no price controls and no taxes); basic in- frastructure improvement (roads, communication, rural irrigation); minimum wage in apparel manu- facturing; and overall industrial policy provided the right environment for the poor to take full advan- tage of favorable conditions. Source: World Bank (2013g) LAO DEVELOPMENT REPORT 2014 30 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Make better use of public resources supporting rice ject, which helped farmers raise rice yields by 43 per- farmers cent, provides many lessons on how more and bet- ter advisory services can be delivered.7 In particular, 30. The highest value from agricultural public appropriate research and technology development expenditures is in reducing production costs to are needed for seed production and management help farmers increase their incomes and expand systems and to understand and address factors that production. Investments in irrigation (a focus of the limit rice yields. Extension efforts should also be current agricultural budget) help to do that, but more aimed at farm mechanization and reduction of post- needs to be spent on other public goods (Figure 0.6). production losses. These efforts need to be under- In this respect, a more balanced approach is needed pinned by focused and sustained capability building in allocating scarce public resources among invest- programs. ments in extension activities, technology develop- ment and transfer (including good seed), and irriga- 32. Training the next generation of rice scientists tion. and agricultural extension practitioners should be given high priority. Currently, extension support Figure 2.6: Evolution of budget transfers to rice is limited by the current capacity of the Department producers (in constant 2011 Kip million) of Agricultural Extension and Cooperatives (DEAC) in terms of number of staff, their training, and their incentive structure. DEAC is also under-funded, with little operational funds available to field staff out- side of donor-financed projects. To ensure effective extension support, greater resources should be chan- neled to training future rice scientists and agricul- tural extension practitioners and providing adequate resources for frontline extension staff. Innovative ap- proaches such as the use of non-governmental ser- vice providers should also be considered to scale up extension investments. 33. In addition to functioning extension services and access to fertilizer, a key component of the investment package is availability of good-quality Source: World Bank, IRRI, and FAO (2012). seed. A basic requirement for enhancing and sustain- ing rice production is the development, testing, and adoption of high-yielding and high-quality rice vari- 31. Simulations indicate that although irrigation eties for the major rice ecosystems of Lao PDR. Sys- investments are important, the highest incre- tematic evaluation, testing, and release procedures mental production volumes and returns on pub- must be in place, with the continued production lic spending come from “best practice” extension and wide distribution of new and better rice seeds to packages (World Bank, IRRI, and FAO, 2012). Invest- ensure that they reach the most farmers when need- ments in irrigation should go hand-in-hand with farm ed. Support for public sector seed production should advisory services that transfer technology and mar- be supplemented by strong private sector invest- ket knowledge to farmers for higher and sustained ments. productivity. The Lao Extension of Agriculture Pro- 7 More information about this Swiss-financed project can be found at http://www.laoex.org/LEAP.htm LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 31 IV. Conclusion 34. Undertaking the proposed measures to boost force has been trapped in lower-productivity farm- agricultural sector productivity will help ensure ing jobs, and their movement into more productive a better future for the almost 1 million children non-agricultural jobs is needed to help the country under the age of 10 living on farms. Because ag- advance to the next stage of development. Virtually ricultural products have a high labor content (unlike all economies worldwide started out as mainly ag- minerals or hydropower), raising productivity in the ricultural and became less so over time. Historically, agricultural sector can have a real impact in improv- the share of agriculture in the economy fell as greater ing livelihoods. Higher incomes can help break the wealth, technological innovations, and connections cycle of poverty for the large number of poor house- through trade allowed diversification and structural holds engaged in farming. change. This transition out of agriculture works best when supported from both ends: by rising productiv- 35. Improving the productivity and profitability ity in the agricultural sector which allows the sector in the agricultural sector is also important for Lao to gradually release workers to other sectors and by PDR’s economic transformation. Although media a growing, employment-generating non-farm sector reports may suggest otherwise, Lao PDR’s growth that can attract and absorb additional workers, as dis- is not constrained by a labor shortage. Instead, the cussed in Chapter 3. problem is that a large proportion of the Lao work- Photo by Bart Verweij / World Bank, 2014 LAO DEVELOPMENT REPORT 2014 32 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Chapter 3: Expanding Employment Opportunities for Lao PDR’s Growing Workforce Photo by Stan Fradelizi / World Bank, 2011 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 33 36. While agriculture will continue to be impor- ductivity increases and more workers are able to tant to Lao PDR for some time, expanding the leave farming, the Lao economy will need to gener- manufacturing and services sectors is crucial for ate more productive employment opportunities to offering workers better job opportunities as well absorb these workers. Error! Reference source not as for promoting more broad-based economic found. describes the experience of Vietnam, where growth. As discussed in Chapter 2, the economic the movement of workers from low-productivity to development path usually involves a shift from higher-productivity sectors—supported by both agriculture toward “modern” sectors which offer “push” and “pull” factors—has been a key engine of greater earning opportunities. As agricultural pro- economic development for the past two decades. Box 3.1: The Movement of Workers from Low-Productivity to Higher-Productivity Sectors in Vietnam Vietnam’s rapid economic growth over the past two dec- Doi Moi) which involved sweeping reforms in agricul- ades has been accompanied by a dramatic shift of work- ture, the enterprise sector, and international integra- ers from the low-productivity agricultural sector to the tion. A mix of agricultural reforms (including the lower- higher-productivity services and manufacturing sectors. ing/removal of restrictions on trade in rice) contributed Vietnam started as a highly agrarian economy, with ag- to increased agricultural labor productivity and a dra- riculture accounting for 73 percent of total employment matic expansion in rice production. It appears that Vi- in 1990. By 2008, the employment share of agriculture etnam’s agricultural productivity reached a sufficiently had fallen drastically to 54 percent, while the employ- high level for agriculture to exceed the subsistence level ment share of services grew from 18 percent in 1990 and release labor to more productive sectors. At the to 32 percent in 2008, and the employment share of same time, reforms in the enterprise sector (including manufacturing grew from 8 percent to 14 percent. This the liberalization of FDI and reforms that dramatically movement of workers made a significant contribution improved the business environment) likely contributed to growth over this period: McCaig and Pavcnik (2013) to productivity gains in the non-agricultural sectors estimate that this movement accounted for 38 percent which helped pull agricultural labor to non-agricultural of growth in aggregate labor productivity, which grew activities. by an average of 5.1 percent annually during this period. Source: McCaig and Pavcnik (2013) A number of “push” and “pull” factors supported this movement of labor out of agriculture. In the late 1980s, Vietnam implemented a package of policies (known as LAO DEVELOPMENT REPORT 2014 34 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH I. Context and Challenges 37. However, the current reliance of Lao PDR on 38. The movement of workers out of the agricul- its natural resources sector, which generates few tural sector has been slower in Lao PDR compared jobs, runs the risk of not being able to provide to neighbors at the same level of development. As sufficient employment opportunities. This has discussed earlier, Lao PDR remains the most agrarian implications for the Lao workforce as well as the coun- economy in East Asia so has the largest “reservoir” of try’s longer-term growth prospects. This chapter fo- workers that could be released into the non-agricul- cuses on the need to create a more vibrant economy tural sectors. However, as illustrated by Figure 0.1, the beyond hydropower and mining, in particular by movement of workers from farms into sectors that stimulating growth and investment in broader provide greater earnings potential appears to be rela- areas of manufacturing and services that could offer tively slow. Even when workers do leave agriculture employment to a larger number of people. for manufacturing jobs, only 47 percent of them give up on farming (Error! Reference source not found.).8 Figure 3.1: Country comparison of changes in Figure 3.2: Number of working months in farming in employment by sector the last 12 months (manufacturing sector workers) in 2013 Source: WDI and WDR9 Source: LECS V (2012/13) 8 Interestingly, a much larger proportion of workers who leave agriculture for service sector jobs gives up farming: 71 percent of service sector workers reported doing no farming in the past 12 months. 9 The figure plots the “mix change” by sector of activity (and unemployment) by country, based on shift-share analysis. The “mix change” represents by how much employment in a sector or unemployment would have changed if the total increase in the labor force had been zero. It is expressed here as a percentage of the total change in the labor force for comparability over time and across countries. Countries are compared at the same level of GDP per capita whenever data on employment by sector and unemployment are available. A seven-year interval was chosen so as to maximize the duration of the period for Indonesia, for which the earliest data point is 1990, while avoiding the disruption due to the 1997-1998 East Asian crisis. Thailand was excluded because the earliest available data point is 1990, whereas by 1966, Thailand had reached the same level of GDP per capita as Lao PDR in 2005. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 35 39. Manufacturing and service sector firms often outside of the agricultural sector) earned approxi- complain that there are no applicants even for mately 4,100 kip per hour in agriculture (Figure 0.3). low-skilled jobs, despite the possibility of higher By moving to the non-agricultural sector, the worker earnings from moving out of agriculture. The agri- would almost double his or her salary (earning 7,450 cultural sector provides the poorest earnings possibil- per hour). Similarly, workers with tertiary education ities of all the sectors. In 2013, a secondary-educated earned an average of 6,911 kip per hour in agricul- agricultural worker (whose educational background ture, compared to 7,970 per hour in industry and would conceivably be useful for finding employment 9,574 per hour in services. Box 3.2: The bureaucratic barriers to moving internally are high These articles are from the ministerial decision on mi- fairs of the province of original residence. After gration (dated September 14, 2012). Given how cum- that, an approval must be obtained from the bersome the procedures are, it is easy to imagine that a governor of the original province. Then the ac- farmer interested in moving to the city would either give tual migration can take place. up or decide to move illegally. • The Provincial Department of Home Affairs of the new location must inform the provincial police Article 7: Procedures for migration office within 15 days to change the family book. (Sub-section 7.1 refers to “migration between villages Article 8: Migration Request Documents within the same district,” while Sub-section 7.2 refers to “migration between districts within the same province”) The documents to be obtained from the village of new residence include: Sub-section 7.3: Migration between provinces • Letter of request for migration, • Individuals or families wishing to migrate must • Certificate of residence, submit a letter of request to the village author- • Family registry book and ID card, ity, then the request must be considered by the • Personal biography, District Office of Home Affairs of the new district. • Letter of criminal record, and Then the request must be submitted to the Pro- • Other documents supporting the reason for mi- vincial Department of Home Affairs of the new gration. residential location within 7 official working days (starting from the date of receiving the request). The documents to be obtained from the village of origi- • After receiving a letter from the District Office nal residence include: of Home Affairs, the Provincial Department of • Approval of acceptance from the village chief, Home Affairs of the new province must consider district governor, provincial governor or major of and give an answer on whether to receive or not the new residence; within 15 official working days (starting from the • Approval for migration from village chief, district date of receiving the request). governor, provincial governor or major of the • Upon approval given by the governor of the new original residence; province, migration documents must be ob- • Health check-up certificate; and tained from the village, District Office of Home • 6 photos 3 x 4 cm in size. Affairs and Provincial Department of Home Af- Source: Unofficial translation of Articles 7 and 8 of Ministerial Order No. 633 LAO DEVELOPMENT REPORT 2014 36 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Figure 3.3: Wage developments in agricultural vs. non-agricultural sector in Lao PDR and Thailand (for workers with a secondary school education) Wage developments for Lao PDR’s secondary Wage developments for Thailand’s secondary educated workers in Lao PDR’s educated workers in Thailand’s agricultural vs. non-agricultural sector agricultural vs. non-agricultural sector Source: Authors’ calculations based on LECS III, VI, and V and Thai LFS 40. Lack of data and information makes it difficult offer higher wages, the current “wage premium” for to pinpoint the factors that are preventing rural non-agricultural jobs may not be high enough to pull workers from moving into manufacturing and workers off the farm. In Thailand, for example, during services jobs. A wide range of factors could be af- the big movement of farmers into the manufactur- fecting the desire and ability of workers to move to ing sector that took place during the decade-long other sectors, including poor literacy or language economic boom from 1986 to 1996, a farmer with skills, lack of information about opportunities, and secondary school education could nearly triple his difficulties finding housing in urban areas. Unfortu- or her income by making such a move (Figure 0.2)). nately, the available data does not provide sufficient Thailand remains an attractive destination for many information on what factors are constraining labor Lao workers, as even Thailand’s agricultural wages are movements, although given the low levels of basic more than double those of Lao PDR’s agricultural sec- literacy as discussed in Chapter 4, insufficient literacy tor and are still higher than those of Lao PDR’s non- is likely one important factor. farm sector (Figure 0.3). Although there are no exact figures for the number of Lao workers in Thailand, in 41. A comparison with other countries suggests 2006, UNDP estimated that at least 250,000 Lao work- that lack of sufficient incentives may be one fac- ers worked in Thailand (UNDP, 2006). That number tor preventing workers from moving to non- has likely increased further since 2006. agricultural jobs. Although non-agricultural jobs LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 37 Figure 3.4: Comparison of non-agricultural wages in of Home Affairs describes the hurdles a family must Lao PDR with wages in Thailand (2013) overcome to be allowed to move, each of which is likely to deter families from even trying (see Box 3.2). 43. The lack of labor movement in Lao PDR points to deeper problems in the manufacturing sector, including low productivity growth. Without new machinery and other forms of capital, labor produc- tivity growth will continue to be muted. While labor productivity of the Lao manufacturing sector was three times higher than agricultural labor productiv- ity in 2013, labor productivity of Thailand’s manufac- turing sector in 1986 (when Thailand was at the stage of its development when the largest movement out of agriculture took place) was 15 times higher than the labor productivity of its agricultural sector. Note: Wage rates shown are composition-adjusted, meaning that Similarly, during the rapid movement of Vietnam- the representative worker is secondary school-educated and has 17 years of work experience (i.e. around 34 years old) ese workers from the agricultural to non-agricultural Source: Authors’ calculations based on LECS V and Thailand Labor sectors in the 1990s and 2000s, labor productivity in Force Survey manufacturing was four times higher than that in the agricultural sector in the 1990s and six times higher in 42. In addition to the low wage premium, bureau- the 2000s (McCaig and Pavcnik, 2013). This suggests cratic barriers raise the cost of moving. Although that although Lao manufacturing firms are investing, moving from a village to a city is allowed in Lao PDR, they are not doing so at a high enough rate: as Ta- an individual first needs to obtain permission through ble 0.1 shows, capital intensity (the ratio between the a cumbersome set of bureaucratic procedures. A min- amount of labor and the amount of capital) has fallen isterial decree (633, 14/09/2012) from the Ministry in the Lao manufacturing sector since 2003. Table 3.1: Capital intensity by sector for Lao PDR and Thailand (value of capital stock (in constant 2002 Kip prices) per labor hour) Lao PDR Thailand 2003 2008 2013 1986 1996 2006 2011 Agriculture 7,202 7,619 8,746 2,702 5,243 10,276 11,853 Manufacturing 16,466 12,277 12,619 35,282 67,060 66,791 81,742 Mining, electricity, water & gas 1,028,278 705,030 780,384 326,704 745,772 1,259,037 1,117,369 Construction & services 18,475 15,291 22,472 51,872 81,500 79,390 78,197 Aggregate 13,289 13,746 19,126 18,635 44,742 56,445 59,832 Source: National Statistical Center of Lao PDR and National Statistical Office of Thailand LAO DEVELOPMENT REPORT 2014 38 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 44. At the same time, the Lao manufacturing sec- whereas worker output (per hour) rose by only 8 per- tor has experienced relatively unfavorable price cent.11 When labor costs rise faster than workers’ pro- developments. As shown in Figure 0.4, price de- ductivity, firms’ profitability shrinks, unless firms have velopments in the manufacturing sector have been the possibility of increasing the prices they charge unfavorable compared to those in agriculture and for their products. In the case of Lao PDR’s manufac- mining. The relatively high prices in agriculture make turing sector, the rapidly rising wages implied lower moving to the manufacturing sector less attractive to profits (as shown by Figure 0.6 and Figure 0.7). farmers. Rapid growth in the mining and hydropower sectors has begun to shape the Lao economy in a Figure 3.6: Increases in real wages and real labor number of ways, bringing high rates of foreign direct productivity in Lao PDR, 2009-2013 investment, strong economic growth, and upward pressure on wages and the exchange rate.10 Manu- facturing firms, which are much less able to pass on higher costs in the domestic economy or gain from a weaker exchange rate compared to firms outside manufacturing, have therefore experienced de- pressed pricing power and competitiveness. Figure 3.5: Output price index by sector in Lao PDR (GDP deflator) Source: Authors’ calculations based on LECS IV and LECS V (see Annex Table 1 for more details) Figure 3.7: Country comparison of unit cost of labor of manufacturing firms Source: National Statistical Center of Lao PDR (the graph shows sectoral GDP deflators) 45. Rising labor costs without commensurate productivity gains have lowered profitability for manufacturing firms and limited their growth. As illustrated by Figure 0.5, real wages rose at a faster rate than workers’ productivity. For example, real wages in the manufacturing sector grew by 12 per- cent per year on average between 2009 and 2013, Source: World Bank Enterprise Surveys, 2009 and 2012 10 In their past three annual reviews of the Lao economy, the International Monetary Fund (IMF) noted that the nominal exchange rate seems to be overvalued by as much as 20 percent (IMF 2011, 2012, and 2013). 11 Point estimates of total factor productivity (TFP) in Lao PDR over the last three rounds of the enterprise survey (2006, 2009, and 2012) show only very limited improvements over the period. Moreover, the estimates suggest that TFP has been increasing more slowly than per capita GDP. Based on per capita GDP growth rates compared with other countries, one would expect TFP in Lao PDR to be around 75-85 percent higher than the estimates currently suggest. Estimates for labor productivity show a similar pattern (see World Bank 2014g for a fuller discussion). LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 39 Figure 3.8: Profitability in the manufacturing sector 47. Notwithstanding the limitations of the availa- ble data, manufacturing firms in Lao PDR find them- selves in a difficult situation when it comes to their workforce. With wages rapidly growing across the economy (for reasons which are not entirely clear), to retain and attract workers, manufacturing firms need to offer wages which are growing faster than workers’ productivity. As described above, this implies falling profitability. This falling profitability perpetuates a vicious cycle in which firms struggle to make long- term investments that would improve labor produc- tivity and justify the higher wages. 48. The relatively sluggish growth of the manu- facturing sector raises concerns over whether Lao PDR‘s structural transformation has come to a halt. As discussed above, for nearly all advanced economies, the transition from agriculture to manu- facturing was a key part of the development process. If this structural transformation does not occur, Lao Note: The horizontal axis displays median returns as a percentage of sales (pre-tax, no depreciation) PDR may not reach its full development potential, Source: World Bank Enterprise Surveys and growth may stagnate. The experience of the Phil- ippines provides a cautionary example of what can happen when structural transformation is incom- 46. Due to lack of sufficient information, the plete: as described in World Bank (2013d), the share underlying causes of these rising labor costs of manufacturing to GDP has stagnated at around without commensurate productivity gains are 25 percent since the 1960s, and the share of manu- unknown. Additional data and analysis are needed facturing employment to total employment has to understand why wages are rising so rapidly while hardly risen above 10 percent. This failure to fully productivity growth has been slow. The relative industrialize—in large part a product of policy distor- importance of the recent minimum wage increases, tions such as low public and private investments and increases in public sector wages, demand for labor protectionist policies such as the rice self-sufficiency from the natural resources sector, and other possible policy—has resulted in a relatively weak economic contributing factors needs to be determined.12 As dis- growth record which has not brought significant pov- cussed in Annex 1, in a rapidly changing labor mar- erty reduction or job creation. Unemployment and ket, only having information on labor movements underemployment rates have remained stubbornly and wages every five years is grossly insufficient. high at around 8 percent and 20 percent, respectively. 12 As discussed in World Bank (2014g), the minimum wage applied to the private sector increased by 20 percent in 2009, followed by a fur- ther 80 percent increase that came into force in January 2012. Moreover, the Government has raised civil servant salaries by 35-40 percent annually over two consecutive fiscal years (2013-2014), which has put upward pressure on wages across the economy as more talented individuals are attracted from the private sector into employment in the higher-status and more job-secure public sector. LAO DEVELOPMENT REPORT 2014 40 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 49. A major roadblock to growth of the manufac- capital inflows and growth are coming through con- turing sector is that the poor investment climate cession-based investments. As mentioned above, the makes doing business in Lao PDR less attractive investment and consumption boom associated with compared to other countries with similar labor growth in the natural resources sector has contributed costs. Lao PDR is among the worst performers in the to rising labor costs which, in turn, has hurt manufac- world in terms of business climate indicators. In the turing (not service) firms’ profitability. The booming 2013 Doing Business assessment, which presents resources sector has also contributed to an apprecia- quantitative indicators on business regulations and tion of the Lao Kip against trading partners’ currencies the protection of property rights that can be com- which hurts Lao PDR’s exporting firms, most of which pared across 189 economies, Lao PDR ranked at the are in manufacturing. The natural resources sector bottom compared to other countries in the region in has thus started to reshape the Lao economy, putting ease of doing business (Figure 3.9). It has the highest pressure on labor and trade flows which has repressed average number of visits or required meetings with the manufacturing sector while providing only lim- tax officials in the East Asia and Pacific region (World ited direct employment opportunities, which points Bank, 2014e) and some of the longest time delays to again to the importance of diversification. register a business across the region (92 days in 2012). Such extended periods of time may discourage busi- Figure 3.10: Private investment in Lao PDR by sector ness activity. (share of GDP) Figure 3.9: Comparison of Lao PDR and comparator economies in ease of doing business Note: The Ease of Doing Business index ranks economies from 1 to 189, with first place being the best. A high ranking (meaning a low numerical rank) means that the regulatory environment is condu- Source: National Statistical Center of Lao PDR cive to business operation. Source: World Bank (2013a) 51. Services firms have fared better than manu- facturing enterprises and exporters. Many services 50. In contrast, the natural resources sector sector firms—especially those in construction, retail, is the main recipient of private investment. and tourism—differ from manufacturing firms in a Although foreign and domestic private investment key aspect: the goods they produce are “non-trada- ble” and are not subject to international competition. initially benefited the manufacturing and services These firms therefore have more flexibility to increase sectors, the natural resources sector has become the prices of their goods to reflect high wage costs. the primary recipient (Figure 3.10). Most natural Manufacturing firms do not have the same flexibility, resources investors operate under concession-based as consumers can purchase their goods from a for- legal frameworks, outside of the mainline business eign firm instead. Given this key difference, services environment. This has helped to fast-track large firms have fared much better than manufacturing “mega projects” but can also weaken incentives to enterprises, as shown in Figure 3.11 compared with reform the broader investment climate, if sufficient Figure 3.8 above. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 41 52. In considering how Lao PDR can continue on tic workers. Another myth is that Lao workers lack the the path of structural transformation, two “myths” motivation or work ethic needed for jobs in manufac- related to the Lao labor force should be addressed. turing or services. These misconceptions, discussed Two common myths or misconceptions about the further in Box 3.3, need to be dispelled, as they pro- Lao labor force threaten to derail or negate the vide an inaccurate picture of labor market dynamics need for efforts to expand productive employment and thus fail to recognize the importance of generat- opportunities. One misconception is that Lao PDR ing better employment opportunities for Lao PDR’s has been experiencing a huge influx of foreign work- expanding workforce. ers, presumably to make up for a shortage of domes- Figure 3.11: Profitability in the services sector Note: The horizontal axis displays median returns as a percentage of sales (pre-tax, no depreciation). “Services” refers to all retail, construc- tion and service firms, i.e. with ISIC Rev. 3 groups E through K. Source: World Bank Enterprise Surveys Box 3.3: Challenging two common misconceptions mainly used to fill skills gaps at the high end of the skills about the Lao workforce spectrum (i.e. for managerial and professional jobs). While it may be argued that the available data do not capture Misconception #1: The Lao labor market is being flooded the full extent of influx as some foreign workers may be with foreign workers to make up for a domestic labor short- informally employed and “under the radar,” quantitative age evidence of a huge wave of foreign workers is lacking. A common perception in Lao PDR is that the labor market Furthermore, contrary to popular belief, Lao PDR is not has been experiencing a sudden, massive wave of foreign suffering from a shortage of domestic workers. As dis- workers, mainly from Vietnam and China. This view sug- cussed earlier in this report, Lao PDR has a large reservoir gests that Lao PDR has a shortage of domestic workers, of workers in the agricultural sector who could potential- so labor market demand must be met by foreign workers ly take up jobs in manufacturing and services. instead. Figure: Percentage of foreign workers in Lao PDR and Although the data are scarce, the available survey data Yunnan province (China), by skill level indicate that Lao PDR has relatively few foreign work- ers, particularly in non-managerial and non-professional positions. According to Enterprise Survey results, only 2 percent of unskilled workers in Lao PDR are reported to be foreign, compared to more than 20 percent in Yunnan province (China). The comparison with Yunnan Province also clearly shows that foreign workers in Lao PDR are LAO DEVELOPMENT REPORT 2014 42 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Figure: Composition of domestic and foreign workforce This myth is not unique to Lao PDR. In all countries, there in Lao PDR and Yunnan province (China), by occupational have been myths about how the poor are unmotivated and unsuited for longer working hours. As described in Chang group (2007), early in the development processes of Germany and Japan, dismal predictions were made of the “cultural suitability” of their workforces (characterized as “Thieving Germans” and “Lazy Japanese”) for moving into the modern industrial sector. These assertions of course proved to be ridiculous and have been completely debunked. Examples from around the world have shown that when people are empowered with the appropriate skills and can access better opportunities, they seize the chance Source: Enterprise Surveys (2012) in Lao PDR and Yunnan to improve their livelihoods and escape poverty. This report rec- Province (China) ognizes the barriers and disincentives Lao workers have faced in improving their livelihoods and suggests that the key is to ex- Misconception #2: Lao workers are ill-suited for factory life pand the opportunities available to them. A common myth about Lao workers is that they are not suited to Although the myth about Lao workers should be debunked, work in factories and firms due to cultural and lifestyle reasons. It this is not to say that the influence of social and cultural factors has been suggested that they lack the discipline and work ethic on employment decisions is trivial. To ensure that labor mar- required to commit to working on a specific schedule under a ket interventions target the appropriate incentives for work- long-term contract. Furthermore, even if presented with higher- ers, it will be important to understand all of the factors at play paying opportunities outside agriculture, they might choose to in worker decisions to move (or not) between jobs and sec- remain on the farm because they place higher value on having tors. For example, one potential impediment to mobility might more free time. be the cost and type of accommodations available to rural migrants in urban areas. This is both a lifestyle issue as well as an economic issue that may affect incentives to migrate. II. Current Government For example, legislation may be less effectively and Approach equally applied in sectors such as commercial bank- ing, telecommunications, and insurance. Some for- eign direct investments in Lao PDR and concessions are often approved with non-standardized special 53. Although Lao PDR has started to undergo a conditions and incentives. Rapid expansion of the market transition, the Government continues to legal framework for business during a time when Lao play a dominant role in the post-centrally planned PDR has been attempting to accede to various inter- economy. The state can engage in and influence the national bodies (such as the WTO and ASEAN) has economy through four primary channels: produc- exposed structural weaknesses in the law-making tion of goods and services, transfer payments, taxa- process. Lower-level implementing regulations often tion, and regulation. While the state may be involved conflict directly with higher-level legal frameworks, in more than one of these channels, the concern is creating uncertainty and providing opportunities for whether there is separation of ownership from con- rent-seeking behavior among officials. Such inequal- trol, with independent sector regulation. The govern- ity, inconsistent application of rules, and differential ment continues to exercise significant influence in treatment results in unfair competition, corruption, the Lao economy with substantial ownership in the distortions, and inefficiency in resource allocations. banking, insurance, and telecommunications sectors, among others. There is limited separation between 55. Regulatory inconsistency and the ambiguous ownership and control and generally weak over- role of the state can generate different interpre- sight and regulatory mechanisms, exposing the state tations and misunderstanding at the operational to elevated risks and at times discouraging private level. One good example is the law on tourism, investment due to concerns about the lack of a level approved in 2005 but only partially applied and cur- playing field. rently under revision. The key principle of the law is that private firms can operate in that sector, but many 54. Legislation is often inconsistently designed provisions remain unimplemented. The ambiguous and applied, which contributes to uncertainty in role of the state as regulator and as investor in the the business climate. Inconsistent application of production and supply of services also provides room regulations and lack of transparency and predictabil- for discretionary and inconsistent actions, which ity can generally be seen across all sectors and areas. often exacerbate frustrations. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 43 56. While broader efforts have been made to sim- manage and solve these problems. Delayed deci- plify the process of starting a business, such gains sions cause loss of time and money for businesses, are increasingly being undermined by complex as evidenced in competition disputes in telecommu- secondary licensing and approval requirements nications, insurance, and land use. Furthermore, Lao at the sector level. For example, the tourism sector PDR has almost no effective mechanisms available for remains clogged up by a complex web of licensing the private sector to seek redress in any dispute with regulations, much of which is redundant. New inves- the government (e.g., on taxes, customs, licensing). tors in hotels and restaurants are required to present a business plan to the authorities for scrutiny when 59. These factors contribute to Lao PDR’s poor submitting initial sectoral licensing level applications. ranking on measures of the costs of doing busi- Such business plans are, among many other things, ness. In 2012, firms in Lao PDR reported spending an required to demonstrate profitability and must average of nearly 8 percent of senior management include detailed lists of staff employment expec- time dealing with government regulations. This is tations. It is difficult to see any value-added from substantially higher than in comparable economies imposing such a redundant process on businesses, and represents an increase in the share reported by which is costly and time-consuming and discourages firms in the previous enterprise survey in 2009. Simi- quality investment.13 larly, firms in Lao PDR are visited by officials (tax and otherwise) much more frequently than in comparator 57. At the same time, far too many straightfor- countries. High regulatory compliance costs are one ward and simple business activities aresubject to of the top business environment complaints in Lao government regulation. Such processes (licenses, PDR. For example, businesses are much more likely permits, and permissions) provide little value added to complain about tax administration than tax rates, to the private sector and are associated with both for- suggesting that regulatory compliance costs are a mal and informal payments, making them difficult to significant investment climate constraint.15 reform.14 The net effect is that substantial activities of government departments are focused on day-to-day 60. While efforts have been made to improve the transaction processing and the collection of “technical investment climate, much of the reform agenda revenues.” For example, detailed mapping of the flow has focused on facilitating natural resource sector of documents in processing applications for import investments and “mega projects” rather than on licenses indicates that license applications go through diversified sectors. Furthermore, natural resource eight review steps within just one government investors have been more able to absorb high in- department. Aside from concerns about rent-seeking vestment transaction costs thus far thanks to larger opportunities and compliance costs for the private resource rents and economies of scale. High transac- sector, this results in a significant share of the human tions costs, as a share of business investment costs, resources of government departments simply push- discourage small investors in diversified sectors of ing paper from one desk to another. the economy. Even in areas where Lao PDR has im- plemented investment climate reforms, it still lags be- 58. When problems arise, business operations are hind comparator countries since reforms have been further impeded by the limited experience and implemented elsewhere in the region, thus maintain- competency of public bureaucrats who should ing the gap. 13 See World Bank (2014g) for further discussion. 14 There are obvious negative incentives opposing the abolition of licensing requirements at the individual level when opportunities to earn informal fees are likely to be lost. Similarly, given current fiscal pressures in Lao PDR resulting in budget cuts, lower-level govern- ment units are increasingly reluctant to surrender opportunities to collect “technical revenues” that accrue directly at the agency level. The justification for many such blanket licensing requirements (which for the most part are a legacy of the central planning process) is for the collection of statistics. There are of course much more cost-efficient ways of compiling statistical data that is useful for policymakers. 15 See World Bank (2014g) for further details. LAO DEVELOPMENT REPORT 2014 44 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH III. Recommendations 61. Although the natural resources is an impor- 63. To help maximize growth potential across tant engine of growth for Lao PDR, overreliance the manufacturing and services sectors, improv- on the natural resources sector carries risks and ing the investment climate is an urgent priority. tradeoffs. As discussed above, while the natural Vietnam and China have shown that it is possible to resources sector is an important source of revenue develop a vibrant manufacturing sector despite rela- and growth for Lao PDR, it generates limited jobs and tively poor rankings on the Doing Business indicators. can repress the growth of other sectors, particularly However, both countries offered investors large and sectors such as manufacturing that play an impor- attractive domestic markets and easy access to world tant role in the process of economic modernization. markets with higher-quality and lower-cost logistics Furthermore, increasing dependence on natural services. In contrast, Lao PDR cannot afford to remain resources can leave the economy more exposed to at the bottom of the rankings. As a land-locked coun- the inherent risks of commodity dependency.16 To try with poor connectivity to other countries and a ensure more sustainable, broad-based growth, great- small domestic market, Lao PDR must maximize the er emphasis is needed on developing an economy opportunity to develop more vibrant non-resource that creates a variety of jobs in a wider range of sec- sectors. An improved investment climate will allow tors. In particular, it will be important to facilitate manufacturing and service sector firms to accumu- greater growth in employment-generating manufac- late capital and raise their productivity, which will in turing and services subsectors that are not tied to the turn improve profitability and enable firms to offer natural resources sector. higher wages that can help draw workers into more productive jobs. Recommendations in three key 62. Beyond the natural resources sector, Lao PDR areas are presented below. has a diversity of subsectors-including within manufacturing-that offer promising growth op- 64. Although there are a host of other issues portunities. The manufacturing sector encompasses affecting private sector development in Lao PDR a large group of activities, not only the more “tradi- such as infrastructure constraints, this report tional” foreign direct investments associated with focuses on the critical “soft” issues that are yet catch-up industrial development in low-income to be addressed. Policymakers in Lao PDR are well- economies such as garments, footwear, and light aware of the continued infrastructure constraints to electronics. Given the greater relative abundance further private sector development and have made of natural rather than human resources in Lao PDR, progress in addressing them. A series of investment more promising opportunities may in fact lie in small- climate assessments has shown a progressive shift scale manufacturing that is closely related to the over the past decade in the factors that are identi- agricultural and agribusiness sector, for example in fied as major investment constraints, with a shift from milling, coffee, fruit, and vegetables.17 These opportu- “hard” issues (i.e. power supply, roads, border cross- nities “at the farm gate” offer potential for diversified ings) toward “soft” issues (i.e. labor/skills, regulatory development, but increased activity is constrained compliance). However, policy attention to these “soft” by high-cost supply chains and border costs, weak issues has been limited to date. The recommenda- extension and support services, small volumes, and tions of this report thus focus on these “soft” issues poor conformity with international sanitary and phy- that are now identified by firms as the most serious tosanitary standards. constraints. 16 Such as greater risk of terms-of-trade shocks, the early onset of diminishing marginal returns, and the risks associated with limited export/product diversification. See Brahmbhatt and Vostroknutova (2010) for a fuller exposition. 17 See World Bank (2014f ). LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 45 Streamlining and simplifying the business compliance authorization. This will require sustained political will and transaction costs associated with dealing with gov- for reform, given the strong financial incentives that ernment are currently associated (both formally and informal- ly) with such face-to-face interactions between the 65. The Government must do much more to dem- public and private sectors. onstrate a commitment to creating a more busi- ness-friendly environment, an important part of 67. Transaction costs could also be reduced by which involves lowering the costs of doing busi- deeper investments in infrastructure and services ness. This will require extensive efforts to rethink for competitiveness, but on an affordable basis. the way the state engages and interacts with private For example, at-the-border and behind-the-border enterprise. The public sector should move away from reforms to reduce the transactions costs associated direct regulation of business activity through with international trade—which are felt most keenly licensing, permits, and taxation toward an approach by small traders in the non-natural resources sec- of facilitation, with much greater use of risk-based tors—should be continued. Investments in border approaches creating the necessary conditions to facilities, power, telecommunications, and regulatory attract investors. At the present time, only in cus- infrastructure could all help reduce transaction costs. toms has any attempt been made to introduce risk- based compliance processing in functions where Improving transparency in the provision of public sector the government interacts with businesses.18 There services to business is enormous scope to adopt similar risk-based approaches for other government functions such as 68. Lao PDR needs a public commitment to sub- sectoral licensing and control mechanisms, which stantially greater transparency in all aspects with can be achieved in many areas without any need for which the state engages with the private sector. investment in automated systems. Businesses in Lao PDR suffer from a lack of transpar- ency in what they can expect from government, and 66. One key change would be to substantially in turn what government expects from them. Poor reduce the number of sectors requiring non-au- transparency results in greater uncertainty, higher tomatic licensing and permits for establishment risk, and increased opportunities for rent-seeking and/or operations, both importing and exporting. and in a weaker investment climate. Recommended This would require a large and wholesale process to policy measures include the compulsory publication eliminate unnecessary processes, measures, licenses, of all fee schedules, permits, and licensing require- and government requirements for businesses. Com- ments; tax, excise, customs and duties; and busi- pliance would be assumed in all but a handful of sec- ness processing requirements with which firms are tors. Regulatory control would remain only in limited expected to comply. Electronic publication of laws, areas where there is a strong public goods rationale regulations, and schedules should be granted equal (for example, relating to public health or security) treatment with print publication, with much greater for prior regulation. By freeing up civil servants from public access. This is important both to improve day-to-day transactions processing, much greater private sector understanding of regulatory require- effort could be directed at higher-risk activities that ments and to reduce the scope for discretionary require government regulation.19 Remaining regula- enforcement by the public sector. The Lao Trade Por- tory requirements could be processed through full tal (Box 3.2) is an interesting example in which Lao electronic data interchange systems—for export/ PDR has made important steps in improving regula- import transactions, for example, with a regulatory tory transparency in line with international require- National Single Window that includes full electronic ments on trade.20 18 The introduction of an automated customs processing system that allows for import declarations to be allocated to red, yellow, green, and blue customs processing channels according to risk has helped to cut average clearance times, provides a positive incentive for increased private sector compliance, and allows officials to prioritize attention toward higher-risk traders. 19 See World Bank (2012), Streamlining Non-Tariff Measures - A Toolkit for Policy Makers. 20 See http://www.worldbank.org/en/news/feature/2012/07/09/lao-pdr-new-online-platform-to-boost-trade-transparency for further details on the Lao Trade Portal. A good practice note was developed by the World Bank International Trade Department based on the Lao model—World Bank (2012), Developing a Trade Information Portal, The World Bank, International Trade Department. LAO DEVELOPMENT REPORT 2014 46 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH and between domestic and foreign obligations, and Box 3.4: The Lao PDR Trade Portal: Making trade with unforeseen negative consequences. The overall more transparent effect is reduced confidence among private sector The Lao PDR Trade Portal (www.laotradeportal.gov.la), investors, the persistence of direct conflict between launched by the Ministry of Industry and Commerce on different legal texts, and difficulties in actual imple- June 22, 2012, enables traders to reduce the number mentation. of trips needed to obtain information or the length of time for carrying out transactions when trading across borders. It is also the first step toward the establish- Establishing a more predictable playing field for the pri- ment of a National Single Window that will allow trad- vate sector . ers to discharge all import/export obligations through one channel electronically. 70. The investment climate could also be improved by strengthening the rule of law and The Lao PDR Trade Portal provides traders with access to: ensuring that firms, both domestic and foreign, have access to a level playing field. This would • All trade-related laws, regulations, measures, require fundamental change in the way that pub- restrictions, and licensing requirements as well as lic officials interact with businesses, with primacy tariffs indexed, cross-referenced, and searchable by given to the consistent implementation of pub- commodity code; • Detailed process maps of business procedures for licly available legislation, rules, and regulation and importing and exporting; to a reduction in bureaucratic discretion. The high • Full listings of national standards for products; frequency of “deals” versus “rules,” a process which • Procedures for clearing goods at the border; has been exacerbated by the role that large “mega” • Downloadable forms; and natural resource projects have played in Lao PDR’s • E-alerts which traders can customize to receive information on commodities. recent economic development, runs the risk of ben- efitting insider investors or those with privileged The Lao PDR Trade Portal is also helping Lao PDR com- access, against the interests of the broader private ply with WTO and ASEAN commitments that require sector. member countries to make their trade-related regula- tions available to the public in an easily accessible man- ner. 71. A low-cost, transparent, and independent appeals process for all administrative decisions regarding private enterprise (on tax, customs, 69. Implementation of laws also needs to be and licensing decisions) needs to be established. strengthened. Including on compulsory prior con- Inconsistent and arbitrary application of rules sultation on draft legislation before adoption, prior undermines investor confidence. Businesses should publication of approved legislation before imple- be granted access to fast, low-cost, and independ- mentation, and full transparency of legal instru- ent arbitration mechanisms when disputes occur ments and implementation of “sunset clauses” that with the government. In broader terms, Lao PDR also would automatically revoke redundant legislation.21 needs to move away from a system based on nego- Nontransparent drafting processes that do not in- tiation to one based on the consistent application of clude adequate consultation with the private sec- a clear, transparent, and predictable framework for tor are more likely to result in poorly defined legal taxation, licensing, and general interaction between instruments, with inconsistencies across regulations the state and enterprises. 21 The new 2012 “Law on Making Legislation” establishes a number of key principles in this area and brings much-needed common stand- ards to the legislative process in Lao PDR. However, compliance has been patchy thus far. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 47 72. Key conflicts of interest exist in a number of to keep its growing labor force engaged in productive sectors, particularly in services where the Govern- employment. Thus, the measures proposed above to ment is both regulator and shareholder. This inevi- help promote greater diversification can have longer- tably creates tensions, discourages investment, and term impacts in improving livelihoods, maintaining leads to both real and apparent conflict of interest. stability, and promoting stronger economic growth. Major efforts are needed to establish clear separation between the Government’s two different functions 75. As greater diversification generates more pro- and to put in place much stronger and more inde- ductive employment opportunities, it will be criti- pendent regulatory bodies in key services (including cal to ensure that the Lao workforce is equipped in particular in telecommunications, transport, and with the knowledge and skills to be able to take financial services22). up these jobs. Increasing the number of productive employment opportunities only addresses the labor 73. Similarly, greater efforts are required to market demand side of the equation. On the labor facilitate improved public-private sector dialogue supply side, particularly for the new jobs created in as a means of resolving issues of broad private the“modern” sectors of the economy, it will be im- sector interest in an open and transparent man- portant to have a literate, skilled labor force. Without ner. Previously, the Lao Business Forum acted as a workers who are qualified enough to move into the mechanism for coordinating the analysis of broad jobs that are created, productivity and growth will private sector development issues for presentation stagnate. The following chapter looks at the skills to the Government for resolution. Infrequent meet- situation in Lao PDR and discusses the challenges ings and poor follow-up has resulted in a loss of con- that must be addressed to ensure that the workforce fidence in public-private sector dialogue, which in is well-equipped to take advantage of the productive turn has undermined efforts to address public inter- employment opportunities that are and will become est issues affecting business. The lack of effective and available. open mechanisms for engaging in public-private dia- logue also reinforces “deals” versus “rules”-based ap- 76. Other barriers to worker mobility in Lao PDR proaches to the resolution of public-private disputes. must also be identified and addressed. As dis- cussed earlier, while this discussion has focused mainly on how insufficient wage differentials may be IV. Conclusion disincentivizing workers to move between sectors, other factors may be influencing their decisions. Oth- er reasons for the slow transition out of agriculture 74. Promoting diversification and managing the and rural areas could include lack of Lao language growth of the natural resources sector appropri- skills, lack of information, poor transport infrastruc- ately will improve longer-term prospects for the ture, and lack of safety nets. However, information on workforce and the overall economy. If the natural the extent to which such factors may pose a barrier resources and services sectors continue to grow while to employment transitions in Lao PDR is lacking. As manufacturing firms struggle to raise their labor pro- discussed in Chapter 5, further research is needed to ductivity to a level where they can offer attractive understand these issues to ensure that government wages, Lao PDR will not generate the jobs necessary policies address the barriers effectively. 22 Lao PDR has made a number of commitments in these areas as part of the process of acceding to the World Trade Organization in 2013. LAO DEVELOPMENT REPORT 2014 48 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Chapter 4: Building Critical Knowledge and Skills for Productive Employment Photo by Bart Verweij / World Bank, 2014 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 49 77. Efforts to foster the growth of productive em- 78. Lao PDR’s “skills problem” has become the ployment opportunities must be accompanied by number one concern of firms. As shown in Figure efforts to equip the Lao workforce with the knowl- 4.1, when firms were asked to rank the top three con- edge and skills to take up these opportunities. As straints they face, the largest proportion of firms iden- discussed in Chapter 3, the expansion of employment tified “an inadequately educated workforce” as their opportunities in diversified sectors will require a more biggest constraint in 2012. The problem appears to skilled workforce. However, recent assessments indi- be growing more severe—in 2009, a greater propor- cate that Lao PDR faces a serious gap in skills, even at tion of firms ranked “crime, theft, and disorder” and the level of basic literacy. Skills development efforts “access to finance” as their top constraints. By 2012, must therefore go beyond the current focus on vo- 17 percent of firms said that an “inadequately edu- cational skills to ensure that the workforce possesses cated workforce” was their top constraint, overtaking the basic foundational skills necessary to gain even the other constraints in the ranking.23 more skills and be productive. This chapter looks across all stages of skills development and identifies priority areas for ensuring that the Lao workforce will be able to meet the demands of the labor market. I. Context and Challenges Figure 4.1: Percentage of firms identifying each factor as the biggest constraint in Lao PDR in 2012 Source: World Bank Enterprise Survey 2012 23 The “other elements” category is the sum of the following nine possible constraints (which were also presented to firms): “Business li- censing and permits”; “Corruption”; “Courts”; “Crime, theft and disorder”; “Customs and trade regulations”; “Electricity”; “Labor regulations”; “Political instability”; and “Tax administration.” LAO DEVELOPMENT REPORT 2014 50 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 79. Lao PDR also stands out in Asia as the coun- years of schooling to achieve this basic level of liter- try where worker skills are the most severely criti- acy. Even then, the EGRA found that over 40 percent cized. As shown in Figure 4.2, around 10 percent of of students in grade 4 had not achieved basic reading Vietnamese employers criticized the inadequacy of fluency (World Bank, 2014e). workers’ skills in 2009, compared to 19 percent of their Lao counterparts. Although no Enterprise Sur- Figure 4.3: Basic reading skills in grades 2-4 in Lao veys were carried out in most comparator countries PDR in 2012, the share of Lao firms reporting that low skills was either a major or a severe constraint in 2012 was double that of Vietnam in 2009.24 Figure 4.2: Country comparison of percentage of em- ployers complaining that an inadequately educated workforce is either a major or a severe constraint25 Source: World Bank (2014e) 81. An international comparison underscores the extent of the problem and the implications for Lao PDR’s competitiveness. Results from a recent assess- ment of adult literacy skills (World Bank 2013e) show that Lao PDR’s adults’ literacy skills are significantly poorer than those of comparable countries such as Vietnam, Bolivia, Sri Lanka, and Yunnan province in Source: Authors’ calculations with various World Bank Enterprise Surveys China (Figure 4.4). About 64 percent of the rural pop- ulation and 33 percent of the urban population could not pass the section of the assessment that tested 80. However, the skills problem in Lao PDR is even reading comprehension and ability to decipher text, deeper and more severe than is generally recog- compared to less than 10 percent in Vietnam and nized, being a problem not simply of vocational Yunnan province (World Bank, 2013c). Moreover, the skills but of even basic reading and numeracy skills. assessment found that adults in Lao PDR consistently An Early Grade Reading Assessment (EGRA) conduct- underperform at all educational levels compared to ed in October 2012 found that over one-third of 2nd other countries. As shown in Figure 4.5, only 32 per- graders cannot read a single word correctly (Figure cent of people in Lao PDR with secondary schooling 4.3). The problem is even worse among children who achieved perfect scores, compared to 81 percent in do not speak the Lao language at home. Students Vietnam. Post-secondary graduates in Lao PDR per- begin to achieve fluency in reading—an ability formed almost on par with people with only primary strongly related to reading comprehension—only at schooling in Vietnam (World Bank, 2013e). the end of grade 3, which means it takes three to four 24 As discussed in more detail in World Bank (2014g), the Enterprise Survey uses two complementary ways to identify the biggest con- straints firms are facing: one approach uses one question to asks firms to identify their most binding constraint from a list of possible options (used for creating Figure 4.1); another approach asks the firm to rate each of the possible constraints (used for creating Figure 4.2). 25 The graph was made using Enterprise Surveys from across the world. The survey asks employers to identify if an inadequately educated workforce is one of the following: not an obstacle, a minor obstacle, a moderate obstacle, a major obstacle, or a very severe obstacle. The graph shows the sum of firms answering that an “inadequately educated workforce” is either a “Major” or “Severe” obstacle. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 51 Figure 4.4: International comparison of adult literacy 82. The low level of literacy in Lao PDR is particu- skills26 larly troubling because those skills are the foun- dation upon which other skills are learned and developed. Figure 4.6 illustrates the process of skills formation across different age groups. Children who do not learn to read in the early grades risk falling behind in later grades—perhaps even dropping out of school—and have difficulty attaining more so- phisticated critical thinking and analytical reasoning skills and technical skills, as learning them involves some degree of ability to absorb written information. Failure to master basic foundational skills can thus Source: STEP Household Survey 2011/12 undermine an individual’s future employment pros- pects and productivity. Figure 4.5: Comparison of adult literacy by education level in Lao PDR and Vietnam Figure 4.6: The process of skills formation Lao PDR Primary Secondary Post Life Long 0 to 3 3 to 5 School School Secondary Learning Behavioral Skills Technical Skills Cognitive Skills Vietnam Source: World Bank (2013e). 83. Basic literacy (or lack thereof) has real impli- cations for economic growth. As discussed in Gove and Wetterberg (2011), recent research reveals that it is learning, not years of schooling, that contributes to a country’s economic growth. It has been estimated that a 10 percent increase in the share of students achieving basic literacy translates into an annual growth rate that is 0.3 percentage points higher than it would otherwise be for that country (Hanushek & Woessman, 2009). Note: Graphs show scores on basic literacy test (from 0-8 points) for adults with different education levels in Lao PDR (left graph) and Vietnam (right graph). Source: STEP Household survey 2011/2012. Within the survey, there is a literacy assessment designed by Educational Testing Ser- vice (ETS). 26 The figure shows percentage of participants scoring 0-8 on the literacy assessment, with 8 being the maximum score and 3 represent- ing the passing score. The percentages reported next to country names are the percentage of participants who passed the assessment. LAO DEVELOPMENT REPORT 2014 52 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 84. Access to early childhood education (ECE) is 85. Notably, problems with learning are linked also problematic. Lao PDR lags far behind its neigh- to child health and nutrition, as stunting has bors in providing access to full-day preschool for severe negative effects on cognitive development. children 5 years of age. Furthermore, government Lao PDR has one of the highest rates of stunting in the ECE programs cover mainly 5-year-old children in world, with 44 percent of children below age 5 being the “pre-primary classroom” attached to a primary stunted (Figure 4.8). This stunting is largely a result of school, leaving 3- and 4-year-old children with lim- inadequate feeding practices at an early age, despite ited access. As shown in Figure 4.7, ECE services are improvements in food security in Lao PDR, and poor available mostly for the richest segments of the pop- sanitation. Children who are stunted are more likely ulation and mainly in urban areas. Only 10 percent to have lower cognitive abilities, as documented of the poorest children attend any form of organized extensively in the literature.27 Key parts of the brain ECE before they enter primary school, compared to develop less in children who are severely malnour- 67 percent of the richest children. About half of chil- ished, making it much more likely that these children dren in urban areas attend, compared to 20 percent will never make it to school or will drop out early. in rural areas. Compared with non-stunted children, stunted children: Figure 4.7: Share of first graders who attended any • score 7 percent lower on math tests; form of pre-school in Lao PDR • are 19 percent less likely to be able to read a sim- ple sentence at age 8, and 12 percent less likely to be able to write a simple sentence; and • are 13 percent less likely to be in the appropriate grade for their age at school.28 Figure 4.8: Prevalence of stunting among children un- der age 5 (%)29 Source: Lao Social Indicators Survey (LSIS), 2011-12 Notes: GNI per capita is based on 2011 figures. Stunting rates are latest available data. Source: WDI 27 See Hoddinott, Alderman, Behrman, Haddad, and Horton (2013) for a review of this literature. 28 See Save the Children (2013). These impacts remain after controlling for children’s backgrounds, including where they grew up and went to school. 29 Prevalence of stunting is a measure of severe child malnutrition. It is measured as the percentage of children under age 5 whose height for age is more than two standard deviations below the median for the international reference population ages 0-59 months. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 53 II. Current Government Approach 86. Lao PDR has made considerable progress in which can play an important role in expanding access expanding access to education. A large effort to to ECE in a sustainable manner. build a national school network and staff schools with teachers has contributed to significant achievements 88. However, much remains to be done, as not- in the education sector in recent years. The country ed in the sobering Ministry of Education and is on track to meeting the Millennium Development Sports (MOES) mid-term review of its Educa- Goal (MDG) of a 99 percent net primary enrollment tion Sector Development Plan for 2011-2015. rate by 2015, with a high degree of gender parity. While net primary enrollment rates have increased, grade 1 dropout and repetition rates have not 87. In its Education Sector Development Plan improved over the past six years, meaning that chil- (2010-2015) and National Policy on Holistic Early dren are enrolling but either drop out or repeat their Childhood Development (2010), the Govern- grades. Moreover, the national figures mask large ment has also recognized the critical importance variations across the country, with three provinces of ECE for all children. It has laid out ambitious (Phongsaly, Houaphan, and Savannakhet) lagging targets for access to ECE services for 5 year olds (55 behind (MOES, 2013). percent by 2015) and introduced the expansion of services for 3-4 year olds as a key priority in educa- 89. The recent media spotlight on the “skills prob- tion, with more modest but still relatively ambi- lem” has prompted a greater focus on technical tious targets (17 percent by 2015). Furthermore, the skills by the Government and other partners, National Policy on Holistic ECD sets out policy pri- which runs the risk of failing to address more fun- orities for the 0-2 year age group, including parent- damental issues as discussed above. With larger ing education and health support for pregnant and cohorts of students completing primary education lactating mothers. In addition, the Government has and moving on to higher levels of education and recognized that new low-cost and flexible modalities with firms complaining about skills shortages, it may of service provision may facilitate the expansion of be tempting for policymakers to shift more focus and services in remote areas. The Government is wisely scarce public resources toward vocational education introducing these modalities gradually, testing and and higher education. However, as discussed further evaluating them before considering a significant below, these efforts may have little impact on the expansion. The lessons learned from these pilots will more fundamental skills problems for the Lao work- be crucial for developing community-based pro- force. grams that can be effective in the Lao context and LAO DEVELOPMENT REPORT 2014 54 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 90. Overall spending on education is on the rise, ing more on education is no guarantee for better edu- and the composition of spending (by level of ed- cational outcomes. Indeed, simply increasing teacher ucation) seems sensible. Given the large share of wages (as has been done in recent years) is unlikely population under age 15, its difficult geography, and to improve sector outcomes. The overall composition the education gap with its neighbors, Lao PDR should of spending (by level of education) remains sensible: probably be spending relatively more (as a share of most of public spending supports primary education, GDP) than its neighbors. As such, recent increases a tiny proportion goes to tertiary education, and the (Figure 4.10) are a welcoming sign. However, spend- share spent on pre-primary education is on the rise. Figure 4.9: Public spending by level of education (%) Figure 4.10: Public spending on education (as share of GDP) Source: World Bank Edstat and Lao Education Sector Plan Mid-Term Source: World Bank Edstat and Lao Education Sector Plan Mid-Term Review Review 91. In terms of developing a workforce with the evolving economy undergoing structural change right skills, Lao PDR is using what appears—at (albeit at a slower-than-desired pace), this fore- least to an outsider—to be a centralized plan- casting is likely highly imprecise. These forecasts, ning approach that is likely based on inaccu- which are not done by smaller sub-sector or by rate information and therefore does not pro- occupation, are then compared to a forecast of the vide useful guidance. As part of the five-year plan, supply of workers (generated from demographic data economists forecast sectoral GDP and use these and student enrollment data). Not surprisingly, the forecasts to estimate broad “workforce require- forecasts tend to show that Lao will face a shortage ments” (i.e. how many people are needed in each of workers in the future—a misleading result which sector), using historical relationships between GDP stems from the fact that high future growth rates are growth and employment. In attempting to apply assumed while assuming that yesterday’s poor labor the historical relationship between variables to an productivity will continue. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 55 92. Moreover, it seems that in considering skills and numerical ability and the ability to understand development issues, policymakers tend to revert complex ideas, learn from experience, and analyze to a focus on vocational skills rather than consid- problems using logical processes. Social and behav- ering the full range of skills that are important ioral skills capture personality traits that are linked to for productive employment. A worker’s skill set labor market success: openness to new experiences, comprises different domains of skills: cognitive skills, conscientiousness, extraversion, agreeability, and social and behavioral skills, and technical skills (Fig- emotional stability. Technical skills range from manu- ure 4.11). Cognitive skills include the use of logical, al dexterity for using complex tools and instruments intuitive, and critical thinking as well as problem solv- to occupation-specific knowledge and skills in areas ing using acquired knowledge. They include literacy such as in engineering or medicine. Figure 4.11: The three dimensions of skills sought by employers Cognitive Social and Technical Behavioral Involving the use of logical, Involving manual dexterity and Soft skills, social skills, life-skills, the use of methods, materials, intuitive and creative thinking personality traits tools and instruments Openness to experience, Technical skills developed Raw problem solving ability vs. through vocational schooling or conscientiousness, extraversion, knowledge to solve problems acquired on the job agreeability, emotional stability Verbal ability, numeracy, problem Self-regulation, perseverance, Skills related to a specific solving, memory (working and decision making, interpersonal occupation (e.g. engineer, long-term) and mental speed skills economist, IT specialist, etc) Source: Pierre, Sanchez Puerta, and Valerio (forthcoming), STEP Skills Measurement Surveys. Innovative Tools for Assessing Skills Photo by World Bank, 2008 LAO DEVELOPMENT REPORT 2014 56 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH III. Recommendations STEP 1: Expand and strengthen early childhood devel- opment and education 93. Given how crucial foundational skills are for 95. Investing in early childhood development the future of the Lao workforce, this report recom- and education can have a multiplier effect, and mends staying focused on these basic skills, espe- public money spent on basic skills has a higher cially with respect to public resource allocations. return than money spent for more sophisticated More emphasis (and public resources) to provide skills. As mentioned above, new skills are built upon students with more technical skills training is not the old skills. Helping young children (3-5 years of age) solution. Action on multiple fronts is needed to develop school readiness skills and basic cognitive ensure that the Lao workforce is equipped with basic and behavioral skills is more effective and less costly literacy and other skills which will in turn provide the than trying to rectify problems at a later age. Plus, foundation for developing the cognitive, behavioral, given the higher private returns to completing voca- and technical skills necessary to be more productive. tional and tertiary education, it could be argued that individuals can (and should) be expected to bear a 94. Efforts should focus on the critical junctures bigger proportion of the costs for higher education. and windows of opportunity when skills are built. A useful approach to skills development is to consid- 96. Much more attention is needed on helping par- er which skills need to be mastered at each stage of ents (especially disadvantaged and poor parents) learning. Figure 4.12 illustrates the three steps in skills make more informed choices for their youngest development: (i) promoting school readiness to help children, especially with regard to feeding and children learn in school, (ii) building foundational intellectual stimulation. ECE interventions have skills, and (iii) learning job-relevant skills for employ- been shown to be not only one of the most cost-ef- ability. All three steps are critical to building a skilled fective interventions in education but also one of the workforce, and each step depends on the previous most equitable ones, since the largest impacts of ECE one—behavioral skills feed into and benefit from are on disadvantaged populations. This early stage cognitive skills, and behavioral and cognitive skills of learning is a critical time for closing gaps between can help beget strong technical skills. The recom- children in poorer and better-off households. If this mendations presented below are framed according window of opportunity is missed, children who have to these steps in skills development. not learned the basic skills will continue to fall further and further behind, putting them at a disadvantage Figure 4.12: The steps of skills development for later learning and perpetuating inequalities. Cognitive and Behavioral Foundations Technical and hehavioral deepening Primary Secondary Post Life Long O to 3 3 to 5 School School Secondary Learning Build job-relevant teachnical skills Ensure that all children can read by the end of grade 2 Expand and strengthen early child education and development Source: World Bank (2013f ) LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 57 97. While the government’s plans for ECE are may prove to be a cost-effective alternative in areas commendable, what is needed is: (i) a stronger without enough children to sustain a full kindergar- focus on the first 1,000 days of life, when the root ten. Another alternative, especially in very remote causes of many of Lao PDR’s problems start; and areas, is non-formal models for 3-5 year olds. Evi- (ii) a strategy for mobilizing more public and pri- dence from other developing countries (Indonesia, vate resources to finance the expansion. Cover- Mozambique, Philippines) suggest that non-formal age of ECE services and resources devoted to ECE are ECE can have a similar impact on children’s develop- still insufficient. Despite the significant investments ment for a fraction of the cost. However, the details of made in education, Government expenditure for ECE implementation matter enormously for the success of was only 5.4 percent of the total education budget in these alternative models, so exploring and evaluating 2012/13, a much too small proportion given the mag- what works in the Lao context is crucial for expanding nitude of the problem. Greatermobilization of public access quickly while ensuring quality of services. and private resources is needed to expand coverage. 99. Assessing strategies and interventions for 98. Expanding services to more and younger ECE will require defining what “quality” means children should be a priority, and it will be criti- and measuring whether it is delivered. The qual- cal to determine the most effective strategy for ity criterion is essential for determining what works delivering quality ECE in each context. Any initia- and does not work. To this end, many countries are tives should be based on careful analysis of what is using standardized assessments to measure a child’s needed to deliver quality ECE and what the costs development across some key domains and to moni- will be. As described in MOES (2013), social demand tor which modalities are working and which are not. for ECE is very strong, so a menu of service options These assessments can also be used to track whether should be made available to communities willing services are being provided equitably. As an exam- to expand ECE services. For example, in order to ex- ple, Box 4.1 describes an assessment undertaken in pand access to formal kindergarten and pre-primary Vietnam to take stock of school readiness among chil- classrooms for 5 year olds, some provinces have re- dren in public pre-schools. Although kindergarten quested a “quick” 30-day program for teacher train- teachers in Lao PDR are supposed to track 100 items ing in contrast to the 30-week program that is cur- for each child in their class (e.g., “Can the child hold a rently being offered in Vientiane. A series of short pen?” “Can the child communicate their needs?”), the in-service courses might be a viable alternative to information is collected but not used. Developing a the 30-week course currently offered, which would simpler form (tracking 10-15 items) and aggregating reduce the cost of expansion significantly. Similarly, it up to the school and district level would help pro- multi-age teaching in ECE, in which 3-5 year olds vide a picture of child development gaps. share a classroom with a properly trained teacher, Box 4.1: Assessing School Readiness in Vietnam In 2012, the Ministry of Education and Training in Viet- mains are considered “vulnerable” in terms of school nam assessed school readiness among five-year-old chil- readiness. While the EDI cannot be used to diagnose dren in public pre-schools. The survey adapted the Early whether a particular child is ready for school, it can be Development Instrument (EDI) (Offord Centre for Child used to identify the shares and types of children who are Studies, 2013) to measure the development of children most vulnerable to not being ready. across 5 domains: physical health and well-being; social knowledge and competence; emotional health/matu- The results of the 2012 assessment in Vietnam con- rity; language and cognitive development; and general firmed that much of the inequality in learning outcomes knowledge and communication skills. The scores for observed among children in primary school and beyond each of the five domains indicate the shares of children are established even before formal schooling begins. The who are at various levels of school readiness. Children results are summarized in the following figure. scoring in the lowest decile in one or more of the do- LAO DEVELOPMENT REPORT 2014 58 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Figure: Percentage of Vietnamese children vulnerable in terms of school readiness, by household poverty status and domain Source: World Bank (2013f ). 100. Given the negative impacts of stunting on • early initiation of breastfeeding within one hour cognitive development, chronic malnutrition of birth; must be addressed as an integral part of an ECE • exclusive breastfeeding for the first six months of strategy. Fixing Lao PDR’s literacy problems must life; and begin by tackling the high rates of severe malnutri- • the introduction of nutritionally adequate and tion. Policymakers across ministries must ensure that safe complementary (solid) foods at six months, nutrition is integrated as a key component of early together with continued breastfeeding up to years’ programming, including in ECE. Interventions two years of age or beyond. to stimulate the child’s development (such as play, reading to the child, and listening to music) should STEP 2: Ensure that all children can read also be integrated into early years’ programs in order to mitigate the impacts of malnutrition on cognitive 102. Reading should become a national obsession development.30 for Lao PDR. A strong, focused push is needed to help all young children master the basic skill of being 101. The likely causes of malnutrition arebroad able to read. The objective should be to ensure that and cross-sectoral but mostly preventable. Causes all children learn to read by the end of grade 2, which include: poverty leading to limited dietary diversity, may seem like a daunting task but which is essential poor infant and child feeding practices, poor sanita- for building a skilled and productive workforce. tion indicators and related diarrhea, micronutrient deficiencies, chronic childhood illnesses, and mater- 103. Experiences from other countries point to nal anemia. Malnutrition can be prevented by focus- interventions that can be particularly effective in ing on improving sanitation and reaching pregnant promoting early grade reading. It will be important mothers with nutritional supplements and teaching for Lao PDR to identify the specific interventions that them about the importance of three simple feeding will have the most impact according to its country practices: context and the particular needs of its population, as identified through instruments such as the Early Grade Reading Assessment. However, as described 30 Save the Children (2013). LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 59 in greater detail in Gove and Cvelich (2011), interna- gain early reading skills more quickly, making tional experience suggests some common areas for them more likely to attend school and less likely intervention: to drop out or repeat a grade. It also provides a foundation for learning in a second language. • Training teachers on how to teach reading, as Thoughtful and thorough planning is needed teachers in low-capacity countries oftentimes to ensure that language policies in schools are lack the basic knowledge and support for teach- implemented effectively. ing reading. Interventions could include pre- and in-service programs such as training on specific • Measuring reading skills to help determine pedagogical skills for teaching alphabetics and needs and design effective responses. Read- comprehension, provision of reading lesson ing tests should be targeted at the early grades, plans and teaching aids (if they are instructed on which are critical windows of opportunity for how to use them), and coaching in the classroom learning how to read as discussed above. The to help teachers adopt good practices. Such tests should also be useful for teachers to inform techniques can have swift and dramatic results: their instruction, for supervisors to help monitor in Liberia, South Africa, and Mali, student reading teachers, and for communities and policymak- gains were two to four times higher than those of ers to know whether the objectives are being control groups in only a matter of months. achieved. • Maximizing instructional time in the classroom STEP 3: Building job-relevant technical skills to ensure that reading receives particular atten- tion as a subject, with time that is explicitly for 104. An important part of workforce development reading instruction. Once teachers are equipped is having a well-run vocational school system, but with the proper training, materials, and guid- creating a well-run vocational school system is ance, they should be held accountable through much more difficult than for other forms of educa- curricular standards and supervision for dedicat- tion, particularly for countries with limited govern- ing time to teaching reading. ment capacity. Compared to other types of schools, vocational schools tend to be more expensive to • Putting appropriate books in the hands of chil- build since they require more tools and equipment, dren and mobilizing communities to use them. and they are more expensive to run because they To foster literacy, books are important not only usually need smaller classes, more non-teaching staff, in school but also at home. As described in Gove and more non-salary inputs for instruction. They are and Cvelich (2011), a study in Ethiopia found that also more difficult to staff as they need teachers with having a textbook boosted children’s oral read- relevant and up-to-date professional experience, and ing fluency by 9.6 words per minute, and having these types of people tend to be gainfully employed other books at home boosted their fluency by 8.3 in the private sector. Perhaps most importantly, words per minute (Piper, 2010). Parents should designing appropriate vocational skills programs and encourage reading as a daily activity at home so teaching content is much more difficult because the children can practice on a regular basis. In the skills needed by the private sector keep changing. In case of Lao PDR, additional resources could be addition, management of the TVET sector is more channeled to improving the availability of read- challenging compared to other education sub-sec- ing materials in the Lao language, as lack of Lao tors because it involves a complex set of government language books poses a major barrier to learning agencies, stakeholders, and providers. In short, creat- to read. ing a well-run vocational schools system is very chal- lenging, especially in countries where ministries of • Implementing appropriate language poli- education have limited capacity and resources and cies. As summarized in Gove and Cvelich (2011), are struggling to fix widespread problems in their studies have found that primary education that general education sector. begins in a child’s mother tongue helps students LAO DEVELOPMENT REPORT 2014 60 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 105. Lao PDR’s vocational education system does and instructors, improving public information about not seem to be as responsive as it needs to be and the training system, and carrying out training evalu- suffers from “disconnects” among the schools, em- ations. World Bank (2013e) suggests several channels ployers, and students. As described in World Bank for doing so, including: (2013e), vocational schools have limited and mostly informal interactions with employers and students, • Fostering closer interaction between the pri- and curricula and teaching materials are generally vate sector and vocational schools. For exam- developed without employer or student inputs. No ple, employers could contribute to the design of formal mechanisms are available for firms to provide programs and curricula by providing feedback feedback to schools on their programs or quality of on courses, assisting in decisions on equipment teaching. Moreover, public vocational schools have purchases, lending equipment, and developing no financial incentive to redesign or close down pro- internship programs. The Government could grams with declining student numbers: the Govern- also encourage partnerships between educa- ment pays for their teachers, irrespective of whether tional institutions and firms to design programs a class has 10 or 30 students. These schools therefore or facilitate public-private partnerships between appear to be disconnected from labor markets and large employers and schools. Neighboring coun- student needs and remain largely supply-driven, tries provide examples of how to foster such which increases the potential for skills mismatches. closer networks. For instance, Thailand created a joint committee—comprised of educators 106. One challenge Lao PDR faces in creating a and representatives from the Federation of Thai more demand-driven vocational education system Industries, the Chamber of Commerce, and other is the lack of a dynamic and organized private sec- occupational associations—to enhance collabo- tor. A responsive flexible training system is a result of rative work on a competency-based curriculum. interaction between industry and government and Similarly, China is actively strengthening school- between demand and supply. For the system to industry linkages in a number of communities in become more demand-driven, more of the private provinces such as Guangdong, Liaoning, Shan- sector’s help is needed to define the demand (i.e. dong, and Yunnan. how many workers are needed, where, and with what competencies). Vietnam provides an interest- • Strengthening monitoring and evaluation ing example of how the Ministry of Labor, Invalids capacity. Improved labor market information is and Social Affairs has actively reached out to industry needed to ensure the relevancy of skills devel- experts to help define skills standards (see World opment. Such information could be obtained Bank 2013h). through annual labor force surveys, consulta- tions, and tracer studies to track the employment 107. While this report argues for greater attention outcomes of higher education graduates. on foundational skills, as far as vocational schools are concerned, a more strategic role for the Gov- 108. Furthermore, the government could provide ernment is recommended. Given the scale of the support for private sector involvement in skills problems with foundational skills and the challenges development for specific high-growth manufac- of building a well-functioning vocational school sys- turing or services subsectors. For example, public tem, this report recommends focus more attention subsidies could be warranted for youth apprentice- and public resources on improving foundational ship programs or public-private partnerships among skills. In terms of vocational schools, the recommen- the private sector, colleges, and business. However, dation is for the government to focus less on running to ensure good governance, the benefitting firms the schools (i.e. being a direct provider) and more on should be required to make considerable invest- taking on a stronger strategic role by developing pol- ments in the schemes themselves and agree to trans- icies, setting standards, investing in training materials parent accountability and performance measures. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 61 109. Several OECD countries provide examples of involve unemployment spells?); the type and quality how data on graduation can be collected and dis- of employment, if any (e.g., sector and requirements seminated. Norway has tracked such data since 1972; for education and skills); and students’ satisfaction Italy since 1998; and the Netherlands since 1989. In with the education they have completed (Did it pro- the Netherlands, almost all graduates of higher edu- vide a solid basis for entering the labor market? Did it cation institutions are surveyed 1.5 years after gradu- develop the relevant skills? Did it achieve the right ation. The survey collects comprehensive information mix between practical and theoretical knowledge?). on a range of different topics, including information Table 4.2 shows the types of information collected by on the school-to-work transition (asking such ques- the survey. tions as: How long did it take to find a job? Did it Table 4.2: Information Collected from Tracer Study of Dutch University Graduates, 2007 Duration of Full-time Unlimited Monthly Managerial or High job job search employment term contract gross income professional satisfaction (months) (%) (%) (euros) (% ISCO 1 (%) or 2) Mean Mean Mean Mean Mean Mean Science and math 0.7 88.4 45.6 2499 83.6 77.5 Medicine and health 0.7 79.0 41.0 2904 82.6 81.7 Engineering 1.0 94.4 66.2 2772 87.4 72.8 Economics 1.0 96.1 71.3 2954 70.3 70.1 Law 1.2 92.7 57.5 2864 87.8 70.2 Humanities and arts 1.2 59.1 43.0 2188 66.0 61.3 Social sciences 1.3 60.6 45.4 2317 72.0 65.4 Agriculture 1.5 86.7 45.6 2137 84.2 71.2 Source: Table provided by the Research Centre for Education and the Labour Market (ROA), The Netherlands, 2008 (reproduced from World Bank, 2012) • Using social marketing to facilitate better skills matching. Social marketing could promote pro- IV. Conclusion grams and courses with high social returns, steer- ing students away from lower-return areas such as business administration, accounting, and eco- 110. Given the wide range of challenges in skills nomics to high-need areas such as electronics development, it will be important to adopt a and construction. Marketing techniques could strategic approach to reform and focus on the also be used to increase awareness about TVET most critical gaps. Reflecting the wide range and attract students toward the sector. of challenges in the education sector, the Gov- ernment has a very broad and ambitious sector However, social marketing may not address the review. Given the limited resources available, it root causes of low student enrollment in TVET. will be important to prioritize the reforms and al- Lack of interest may be due to other factors, such locate resources accordingly. Careful sequenc- as the current shortcomings of the TVET system ing will also be important—for example, a greater as described above which make pursuing TVET focus on literacy skills will be a necessary basis for less attractive. Another possibility is that, given other improvements as discussed above. Chapter 5 the relative stagnation of the manufacturing reviews the priority reform areas as laid out in Chap- sector, students may not be interested in a TVET ters 2, 3, and 4 and proposes next steps for moving degree that is aimed at facilitating entry into the forward. manufacturing sector. No amount of social mar- keting will help resolve these issues, which must be addressed through other channels. LAO DEVELOPMENT REPORT 2014 62 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Chapter 5: Conclusion Photo by Bart Verweij / World Bank, 2014 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 63 I. Summary of Policy Recommendations 111. To summarize, in order to achieve broad- 113. While increasing agricultural productivity is based growth and poverty reduction, Lao PDR arguably the most important and urgent priority must channel greater resources toward tackling for Lao PDR’s agrarian economy, reforms in the key workforce and productivity challenges. As other areas will also be needed relatively quickly. discussed in the previous chapters, this develop- As agricultural productivity increases and increas- ment agenda goes much deeper than the vocation- ing numbers of youth enter the labor market, the al skills issues that have drawn so much attention, economy will be under greater pressure to produce although improving vocational skills is part of the better-quality employment opportunities. However, overall agenda. Lao PDR must achieve a more bal- creating a business environment that attracts FDI and anced approach to development, avoiding overreli- encourages firms to invest is not accomplished over- ance on the natural resources sector and creating an night. At the same time, firm demand for more skilled environment that helps farm and non-farm business- workers will increase. Postponing efforts to combat es flourish. Growth of employment-generating sec- malnutrition and promote literacy will be very costly, tors, combined with improvements in basic literacy as today’s illiterate children will not be tomorrow’s and other skills to allow workers to move into more productive workers. Thus, although boosting agri- productive opportunities, will contribute to stronger cultural productivity is a top priority, Lao PDR cannot growth, enhanced competitiveness, and improved afford to wait in fostering a more conducive business livelihoods for the Lao population. environment and addressing the major skills gaps, as the impacts of such reforms take time to materialize. 112. Specifically, a three-pronged approach is needed to (i) increase agricultural productivity, 114. Within each of the three recommended ar- (ii) create more attractive off-farm jobs, and (iii) eas of focus, this report identified a set of key ensure basic literacy skills. These three areas are all actions which will need to be prioritized and critical to addressing Lao PDR’s workforce and pro- sequenced carefully. The priority actions within ductivity challenges, and they are all inter-related. each area are summarized in Figure 5.1. Chapters 2, 3, Higher agricultural productivity is needed to improve and 4 provided ideas and proposals for measures that livelihoods for the majority of the workforce that is could be undertaken for each priority action. Giving currently engaged in agriculture as well as to free equal and immediate attention to all areas is both up labor to move into the more productive “mod- impossible and undesirable, and spreading resources ern” sectors. Employment opportunities in these thinly across a multitude of initiatives will dilute their “modern” sectors will need to be expanded to ac- impact. To maximize impact with the limited resourc- commodate the increased flow of workers out of the es available, reform measures will need to be planned agricultural sector, which means looking beyond the and sequenced carefully according to their relative natural resources sector and fostering the growth of urgency and importance and the feasibility of under- employment-generating manufacturing and services taking them in the short, medium, and long term. subsectors. At the same time, it will be important to ensure that the Lao workforce is equipped with the basic skills to be able to move into the jobs that are created. LAO DEVELOPMENT REPORT 2014 64 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Figure 5.1: Summary of recommended actions Increase agricultural Create more attractive Ensure basic literacy skills productivity off-farm jobs Streamline and simplify the business Expand and strengthen early Facilitate trade in paddy and rice compliance and transaction costs asso- childhood development and to encourage private investment ciated with dealing with government education in milling Improve transparency in the provision Ensure that all children can read by of public sector services to business the end of grade 2 Make better use of public Establish a more predictable playing Build job-relevant technical skills resources supporting rice farmers field for the private sector II. Areas for Further Work 115. In order to ensure that reforms will be rel- 116. However, crucial information on sectoral evant, effective, and targeted appropriately, it employment, migration, and other labor market will be critical to improve the analytical basis for indicators are lacking. As discussed in Annex 1, the reforms. For example, policies affecting the workforce task of analyzing labor market dynamics in Lao PDR is should be based on a complete and accurate picture of challenging given the shortcomings in the available labor market dynamics—what is happening, who is survey data. Lao PDR lags behind comparator coun- affected, what the implications of potential policies tries in collecting such labor force data, as shown in might be. Table 5.1. Table 5.1: Country comparison of labor force data collection Survey name First year the survey Periodicity Sampling frame was conducted updating frequency Thailand Labor Force Survey 1963 Monthly 2 years Indonesia National Labour 1986 Quarterly 10 years Force Survey China Annual Sample 1989? Yearly ? Survey on Labour Force Cambodia Cambodia Socio- 1993-1994 Yearly Continually Economic Survey Vietnam Labor Force Survey 1996 Yearly Not updated with a specific frequency Lao PDR Labor Force Survey 2010 Conducted once 10 years so far Note: Question marks indicate information not available on LABORSTA Internet. Source: International Labor Organization, LABORSTA Internet. Available from http://laborsta.ilo.org/applv8/data/SSM3_NEW/E/SSM3.html [Accessed Aug. 30, 2013]. Presented in World Bank (2013c). 117. Much greater efforts are needed in collect- 8 percent, a labor force expanding by nearly 100,000 ing better data to enable meaningful and accu- every year, and rapid wage growth (which appears rate analysis for policymaking. Most importantly, to outpace labor productivity), policy makers need Lao PDR needs more frequent household (or labor) more frequent data than the current situation of get- surveys that can provide insights on changes in em- ting LECS data every five years. ployment and wages. With an economy growing at LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 65 118. Along with improved data, further analytical Office, 2012). Further research is needed to work is needed in a number of areas to help pri- understand the types of employment in the oritize reforms. These areas, which will likely require rural off-farm sector and the potential for future gathering of more data and information through sur- growth in specific subsectors, segments, and veys and other channels, include: markets (domestic consumption and exports) to determine where efforts should be focused • Identifying other barriers to worker mobility. given the Lao context. While this report focused on the wage incentives for workers to move between sectors, little analy- • Understanding the factors underlying the ris- sis has been conducted to date on other barri- ing wages in the manufacturing sector despite ers that may affect worker mobility. In China, for slow productivity gains. As discussed in Chapter example, numerous policies and institutional 3, rising labor costs have not been matched by barriers have affected the integration of rural productivity gains in the manufacturing sector, migrants into urban areas. Such barriers include which has lowered profitability for firms and lim- the national household registration system, ited their growth. Chapter 3 points to a number which has effectively prevented migrants and of possible factors behind this phenomenon, their families from having access to basic services such as pressure on wages from the natural in the receiving areas, as well as institutional bar- resources sector boom, scarcity of particular riers such as lack of portability in pensions which skills, rising public sector wages, and increases in might discourage workers from moving to a new the minimum wage. However, the relative impor- locality. tance of the various factors is unknown, making it difficult to determine the appropriate policy As discussed in Chapter 3, further analysis is response. Further research is needed to examine needed to determine what factors, if any, beyond wage setting practices and understand the fac- wage incentives influence whether workers in tors at play. Lao PDR move to new jobs and new geographic areas. If there are numerous barriers to mobility, • Identifying specific measures to promote basic reforms that fail to address all the barriers are less literacy. As a follow-up to the early grade read- likely to be successful. Given the basic skills gaps ing baseline assessment in 2012, a more in-depth in Lao PDR, it is possible that information barriers case study analysis was conducted for a subset may affect inter-sectoral mobility. Language bar- of schools in Lao PDR.31 Although replicating the riers as well as poor transport infrastructure may conditions in the high-performing schools will also discourage workers from moving from rural not necessarily yield the same outcomes in low- to urban areas and need to be studied further. performing schools, the study proposed areas for further research that could help identify critical • Exploring additional sectors/subsectors that interventions for the early grade reading effort, can contribute to growth and employment gen- such as: eration in rural areas. As agricultural produc- tivity increases, one area that offers significant o the effect of classroom management tech- potential for growth and employment genera- niques on learning outcomes; tion is the rural off-farm sector. However, little o the effect of classroom activities on learning attention has been given to the potential of this outcomes; sector. The Lao Agricultural Census indicates that o the effect of school amenities such as elec- alternative employment opportunities in rural tricity, clean water, and bathroom facilities on areas are expanding and that many people have learning activities; secondary jobs. The percentage of the farm pop- o how to cater to and incorporate students of ulation aged 15 years and over who did their main ethnic minority into the teaching and learning job work on their own holding as well as other activities of the classroom in an inclusive way; work increased from 24 percent in 1998/1999 to o how language, dialect, and accent are man- 40 percent by 2010/2011. Many worked in other aged, observed, and interact in the classroom family businesses, while 249,000 of them worked and their effects on learning. as non-farm employees (Agricultural Census 31 See Machuca-Sierra (2014) for more details. LAO DEVELOPMENT REPORT 2014 66 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH More generally, deeper analysis of the bottle- 2015, ASEAN will allow for the free movement of necks in the education service delivery system skilled labor, opening up new opportunities for would also help inform efforts to improve basic Lao PDR’s skilled workers to go abroad and for literacy and promote early grade reading. Laotian firms to recruit skilled workers from oth- er ASEAN nations. This may have implications for • Examining the implications of regionalization. Lao PDR if the shift of labor from rural to urban Thanks to regional cooperation initiatives, Lao areas and across sectors continues to be slow. As PDR is becoming more integrated with its neigh- borders become more open, better information bors and other countries in the East Asia region. is needed on how many workers are leaving Lao This regionalization has implications for the Lao PDR, where they go, and what types of employ- economy, both in terms of more open trade (and ment they are engaged in in order to understand the opportunities it presents for development of and anticipate workforce transitions. the manufacturing sector) and employment. In Photo by HUMA / World Bank, 2012 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 67 Annex 1: Lao PDR Labor Market Data Issues Analyzing movements in employment, changes in sation (ILO), and the World Bank’s Skills Toward productivity, and wages is a major challenge in Lao Employment and Productivity (STEP) Household Sur- PDR for two reasons: (i) the data needed for such vey conducted in 2012. However, careful investiga- analysis is only available every five years; and (ii) Lao tion of these datasets reveals some major shortcom- PDR has very few wage earners, making the sam- ings which make some of them ill-suited for analysis ple to be examined very small. This annex discusses of wage movements, in particular. these limitations in more detail. Table 1 depicts the labor force participation and In terms of data, for the decade spanning 2003 to unemployment rates calculated using the three 2013, only one data source is reliable enough to en- rounds of LECS, the LFS, and the STEP survey data. able a meaningful investigation of Lao PDR labor Immediately apparent are the much lower participa- market dynamics across time, and this data source tion rate figure obtained from the LFS and a higher provides only three data points that can be analyzed. one from the STEP than what is observed in the three This reliable data source is the latest three rounds LECS. Given the consistent story across the three of the Lao Expenditure and Consumption Surveys large LECS surveys, the participation rates from (LECS3, LECS4, and LECS5), which were conducted LFS and STEP are likely less reliable. Moreover, the in 2002/03, 2008/09, and 2012/13 by the Lao Sta- unemployment rates calculated using the LFS and tistics Bureau (LSB). Two additional sources of labor the STEP also appear to be much lower. One obvious market data that could potentially have been used in shortcoming of the STEP is the very small sample size this report are the Lao Labor Force and Child Labor which would very likely lead to poor statistical infer- Survey 2010 (LFS 2010), carried out by the LSB with ence in more disaggregated analyses. assistance from the International Labour Organi- Table 1. Labor Force Participation and Unemployment Rates (15-64 years old) LECS III LECS IV LFS STEP LECS V 2003 2008 2010 2012 2013 Labor force participation rate 92% 88% 83% 91% 88% Unemployment rate 1.45% 2.96% 0.69% 0.48% 3.13% Sample Size (15-64 years old) 26,778 27,877 36,021 2,847 26,728 Several inconsistencies inherent in the LFS and STEP 2010 and 2012 are too high, while the shares in man- survey data can also be seen in Table 2, which shows ufacturing and construction and services are too low the deployment of labor hours in different economic compared to the trends estimated using the three activities across time periods. The results show that rounds of the LECS data. the shares of labor hours employed in agriculture in Table 2. Labor Hour Share of Employed Workers by Sector (15-64 years old workers) LECS III LECS IV LFS STEP LECS V 2003 2008 2010 2012 2013 Agriculture 68% 63% 71% 68% 61% Manufacturing 6% 8% 5% 5% 8% Mining, electricity, water & gas 0.26% 0.52% 0.95% 0.04% 0.77% Construction & services 25% 28% 23% 27% 30% LAO DEVELOPMENT REPORT 2014 68 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH A significantly more serious problem occurred in ambiguity of the two questions, it is highly likely that the LFS collection of key wage income variable. The some individuals—for example, in the “Daily wage very first question in Module 3 (Current Activity earners” category—would have reported their wage Status) asked employed workers for their employ- income on a daily basis, while others would have ment status, categorized into five groups as follows: reported it on a monthly basis. The problem from weekly, monthly, daily, or other types of wage earn- an analytical perspective is that there is no way of ers, as well as non-wage earners. The question that ascertaining what, in fact, individuals reported. This immediately followed asked the amount of money is why the amount of 185,867 Kip seems to be much these individuals received from carrying out these too high for an average daily rate, while at the same activities but without specifying whether the amount time it is much too low for a monthly rate. Similar reported was on a weekly, monthly, or daily basis. The inconsistencies can also be seen for other employ- mean earnings reported by these individuals for each ment status categories. employment status is presented in Table 3. Given the Table 3. Mean Earnings by Employment Status (LFS 2010) -15-64 years old (constant 2008 Lao Kip) Status in Employment in Main Work Sample size Mean earnings Weekly wage earners 106 602,283 Monthly wage earners 3,621 987,749 Daily wage earners 540 185,867 Others 201 1,580,395 Non-wage earners 6 3,716,960 The wage income variables from the LECS and the wages (except for the LFS data as discussed above) STEP survey are much more reliable in comparison, across the time periods calculated using the various since the surveys did explicitly ask individual workers surveys are presented in Table 4. for their monthly wage income. The average monthly Table 4. Mean Monthly Wage (Except for LFS 2010) – 15-64 years old (constant 2008 Lao Kip) Year Sample size Mean monthly wage 2003 4,597 990,235 2008 2,851 845,197 LFS 2010 4,474 910,306 STEP 2012 663 1,135,101 2013 4,386 1,199,657 In terms of the number of wage earners, the small Data inconsistencies in other dimensions can also be sample sizes of individuals who reported their wage seen in Tables 5 and 6, which show average weekly income is a concerning issue for all datasets (see working hours and labor force educational attain- Table 4). The problem is most severe for the STEP ment. The LFS and the STEP survey indicate that the household survey with a sample size of 663 in 2012, Lao labor force worked much longer hours than the which is much too small for any meaningful analysis three rounds of LECS would suggest. Using these at more disaggregated levels. labor supply figures would clearly cause labor pro- ductivity figures (output/labor hours) to be thrown off significantly. LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 69 Table 5. Mean Weekly Hours for Employed Workers (15-64 years old) Year Sample size Mean weekly hours 2003 22,815 37.7 2008 23,509 38.7 LFS 2010 29,370 48.3 STEP 2012 2,425 58.5 2013 21,903 37.6 Table 6. Labor Force Educational Attainment (15-64 years old) 2003 2008 LFS 2010 STEP 2012 2013 Some primary or lower 49% 39% 38% 38% 35% Complete primary 18% 21% 22% 27% 22% Lower secondary 18% 19% 20% 16% 21% Upper secondary 9% 12% 10% 14% 12% Tertiary 5% 8% 10% 5% 10% It is due to these reasons that this report has relied much more consistent picture of labor market solely on the three LECS datasets, which provide a patterns across the decade under study. Annex Table 1: Sectoral wages, prices and labor productivity Agriculture Manufacturing Construction & services Economy-wide Labor Productivity or Output per Labor Hour (Kip/Hour) - current prices 2003 2,094 4,923 5,842 3,476 2008 2,447 5,916 6,910 4,431 2013 2,543 8,535 8,349 5,788 Labor Productivity or Output per Labor Hour (Kip)- 2002 prices 2003 2,094 4,923 5,842 3,476 2008 2,447 5,916 6,910 4,431 2013 2,543 8,535 8,349 5,788 Output price index (2002=100) 2003 113 110 123 117 2008 169 143 171 175 2013 214 166 229 214 Relative Output Price (sector output price/agg output price) 2003 0.963 0.940 1.049 1.000 2008 0.968 0.818 0.977 1.000 2013 0.998 0.775 1.068 1.000 Nominal Wages by Sector (Nominal) - Kip/hour (composition-adjusted secondary-educated labor) 2003 2,589 4,831 4,843 3,531 2008 3,034 4,950 5,351 4,539 2013 4,901 10,459 8,903 7,619 Real Wages by Sector (2012 Lao Kip) - Kip/hour (composition-adjusted secondary-educated labor) 2003 3,687 6,879 6,896 5,028 2008 3,034 4,950 5,351 4,539 2013 4,104 8,759 7,456 6,380 Source: Authors’ calculations based on LECS IV and LECS V LAO DEVELOPMENT REPORT 2014 70 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH Photo by Stan Fradelizi / World Bank, 2011 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 71 Annex 2: Background papers and recent World Bank reports used for LDR 2014 This report benefited greatly from numerous back- Other Recent Reports ground papers and recent World Bank reports on Lao PDR. This annex provides a brief overview of some of World Bank, IRRI, and FAO (2012), “Lao PDR Rice the papers that provided an analytical basis for this Policy Study.” This study is a first attempt to ana- lyze the rice sector in Lao PDR to support evidence- report. based policy decisions regarding the rice sector. It combines a review of existing secondary evidence Background Papers with new analysis and technical expertise. It includes, among others: (i) a new analysis of household survey World Bank (2013), “Lao PDR Labor Market data from LECS III and IV to understand per capita rice Dynamics and Structural Transformation” consumption trends; (ii) a comprehensive farm-level [unpublished]. Lao PDR has experienced high and miller profitability analysis; (iii) a policy analysis, GDP growth and rapid changes in the structure of including a calculation of historical rice producer the economy over the last couple of decades. This support estimates (PSEs) as a way to evaluate public background paper looks back at the transformations sector support policies for the rice sector; and (iv) a that took place within the Lao labor market in the scenario analysis for future sector evolution based on past two decades in order to inform future economic various alternative public investment options, which are evaluated in terms of their relative efficiency. policy. It focuses in particular on living standards, fol- lowing four non-exclusive channels for improving liv- World Bank (2013), “Skills for Quality Jobs and ing standards through transformations of the labor Development in Lao PDR: A Technical Assessment market: (1) changing sectors; (2) changing places; (3) of the Current Context.” This report aims to 1) pro- investing in higher productivity; and, (4) investing in vide critical information to the Government about job quality. It analyzes data from numerous sources existing skills gaps in Lao PDR; 2) to provide the including LECS (various years), and the World Devel- Government and steering committee that will revise opment Indicators. the Human Resource Development Strategy 2000- 2020 (and link it to the 8th NSEDP) with evidence of Dilaka Lathapipat (2014), “What Accounts for the the current skills situation in the country, to better Differences between Labor Market Structural inform decisions and human resource planning for the Transformation in Lao PDR and Thailand? This future; and 3) to provide the Government, World Bank, and other development partners a baseline of paper uses household survey and other data from skills indicators against which to measure progress Lao PDR and Thailand to evaluate the dynamics of la- going forward. Primary sources used to inform the bor market structural transformation and their contri- analysis included: the Skills Towards Employment and bution to aggregate labor productivity growth over Productivity (STEP) household survey (which includ- different time periods. The comparison between the ed an assessment created by the Educational Test- two countries is interesting due to the near-identical ing Services (ETS)), the STEP employer survey (which composition of labor hours employed in various eco- included regular Enterprise Survey questions), a nomic sectors in Lao PDR in 2003 and Thailand in survey of 29 educational institutions in Lao (mostly 1986. However, the paper shows that the two econo- TVET), and a Tracer Survey of recent graduates. More- mies were otherwise structurally very different in im- over, secondary sources included the Labor Force portant ways. Survey and LECS III and IV. LAO DEVELOPMENT REPORT 2014 72 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH World Bank (2014), “2012 Lao PDR EGRA Survey World Bank (2014), “Lao PDR Investment Climate Report” [draft]. This report summarizes the results Assessment 2014: Policy uncertainty in the midst of the Lao language Early Grade Reading Assessment of a natural resources boom” [draft manuscript]. carried out in October 2012. The analysis of student This is the third Investment Climate Assessment for data included descriptive statistics (means and stand- Lao PDR and is based on analysis and interpretation ard deviations) to measure average levels in basic of data from an enterprise survey undertaken in late reading skills; logit models were used to determine 2012. The report reviews the current economic con- which student and teacher-specific factors have a text of Lao PDR then analyzes firm-level performance statistically significant relationship with the acquisi- and business environment constraints as identified tion of basic reading skills. The report presents the by firms, looking in particular at the four most sig- most relevant results as well as policy implications for nificant business environment constraints that firms reading instruction and teacher professional devel- face in Lao PDR as shown by the data: skills, access to opment in the country. finance, regulatory compliance, and corruption. Photo by Stan Fradelizi / World Bank, 2011 LAO DEVELOPMENT REPORT 2014 EXPANDING PRODUCTIVE EMPLOYMENT FOR BROAD-BASED GROWTH 73 References Agricultural Census Office (2012). Lao Census of Agriculture 2010/2011 Highlights. Vientiane: Steering Committee for the Agricultural Census, Agricultural Census Office. 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