Laos’ “Different Face” of Poverty

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By Johannes Loh

November 17, 2012

While Laos has been the beneficiary of rapid economic growth, not all are seeing its benefits.

Laos is a country in transition that is enjoying robust economic growth as a result of its exposure to global markets, increased foreign investment in the country’s abundant natural resources, and a blossoming tourism industry. At the same time, more than a third of Laos’s population continues to live below the global poverty line of U.S. $1.25 PPP a day in a society where most of the population remains dependent on subsistence agriculture. Farming still accounts for 67.6% of total employment, compared with 16.9% of the population who is self-employed and only 15.5% who are wage-earners, according to the World Development Report 2013. The UN Food and Agriculture Organization estimatesthat 93% of women who participate in the labor force in Laos are employed in agriculture. Agriculture also still accounts for 29% of Laos’ GDP, compared with 19% for industry and 51% for services.

The official Vientiane Capital Region extends over 3,920 km2of which only 6% are occupied by developed areas while 68% are forest areas and 16% paddy fields. With a total population of just over 800,000 people, many settlements in the capital region are still villages. Even within the city of Vientiane itself, good roads are a privilege and residents often times must use dirt roads to access essential services like schools or hospitals.

As this suggests, booming economic development does not automatically translate into improved access to services for the poor. Without a system of social protection, the poor have to rely on friends and relatives in times of economic hardship. This reflects the fact that unskilled farmers working small plots of land face immense difficulties in trying to find a non-agricultural job to supplement their meager incomes.

In Phonethong Village, located on the outskirts of Vientiane, the capital city, I encountered a woman named Kaum – a mother, farmer, laborer, and factory worker – living at the far end of the village. She and her husband own a small plot of land barely capable of producing a subsidence level output. In order to feed their family, they are forced to spend their nights laboring on other villagers’ farms. In addition, Kaum works a number of shifts at a nearby garment factory, earning U.S. $50 every two weeks, or approximately U.S. $3.57 a day. Despite these extra income sources, Kaum and her husband struggle just to feed their family of four, let alone to put their children through school or make capital investments in their farm to increase output.

“I would like to open a small shop to earn more money” says Kaum, “but nobody wants to give me a loan.” She informs me that her home does not qualify as collateral, which prevents her from securing loans to improve productivity or expand her farm.

Government programs for skills training or small business development do not exist, and the few non-governmental organizations (NGOs) operating in Vientiane only have enough resources to reach a small proportion of the people who would benefit from their work. As Oxfam country director Dominique van der Borght points out, the country’s education system falls well short of delivering the services needed in a country that has a rapidly growing economy. Consequently, foreign firms operating in Laos often bring their own staff and laborers because local workers lack the necessary skills and linguistic training. Only the lowest level jobs are given to local residents.

Micro-entrepreneurs who want to take advantage of new opportunities in the emerging non-agricultural economy face a different kind of obstacle. Up until 2004, Laos had no laws governing microfinance institutions (MFI) and formal financial services were inaccessible to the poor. Eight years later a number of MFIs are offering savings and loan products, but they largely deal exclusively with clients who have collateral. Moreover, their branch network is focused on Vientiane where they a serve small, but established entrepreneurial class in the city.

In a way, the risk-averse business model of any financial organization favors individuals and companies who already have established their business model. For those without collateral, the MFIs are starting to offer group loans, but the reach of these initiatives is still limited. The MFI capacity to provide free business training and actively support aspiring entrepreneurs is even more limited. The MFIs themselves are still struggling to build reliable client bases to secure their long-term survival in an increasingly competitive market.

Founder and executive director of Laos’ first MFI, Ekphattana Microfinance Institution (EMI), Somphone Sisenglath, states that MFIs also try to emphasize to clients the importance of saving part of their incomes. “Savings are part of our mission,” Sisenglath tells me. “Access to credit is one thing, but if there is nothing left [at the end of repayment], they are still poor.” Accordingly, EMI requires that all its clients save 10% of their initial loan in order to instill in them the importance of building wealth.

Access to microloans coupled with educational opportunities to learn about small business management would go a long way towards building an additional stream of income for families like Kaum’s. Unfortunately, as members of the bottom echelon of society, Kaum’s family and countless others like them do not have access to these kinds of services.

Mr. van der Borght describes the situation in Laos as having a “different face of poverty.” He explains that importing solutions from places of scarcity may not work in a country like Laos, which has an abundance of natural resources but suffers from a chronic lack of infrastructure and a grossly underfunded social service system. Expanding access to education and financial services to families like Kaum’s, as well as integrating them more fully into supply chains, are crucial if Laos is to boost household income for the vast majority of its citizens working in agriculture and non-agriculture industries.

Johannes Loh is a research associate at the Asian Trends Monitoring Bulletin at the Lee Kuan Yew School of Public Policy, University of Singapore.

Photo Credit: ATM Photo of Subsistence farmer, Kaum, with her children in Phonethong Village.

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