Agricultural Change and Development Policy in Laos

By: William Worner
University of Western Sydney

This paper considers the structure of the agricultural sector and its performance within the context of the national policies and policy changes that have been implemented since 1975. Emphasis is given to policy and development strategy, although where possible the economic effects of these policies are considered. The political unification of the country in 1975 after a long protracted civil war allowed a national perspective in economic policy formulation for the first time. The other fundamental change was in the direction of those policies: as a socialist state Laos adopted Soviet styled centralised planning techniques and policies. However, in a pattern now familiar to many socialist states, Laos since 1986 has been making the transition towards a market economy. This policy 'dynamic' is of interest not only because of the magnitude of the changes involved, but also because of the change in development strategy that these policy changes entailed. A phase of highly interventionist government policy, with the emphasis on the socialist transformation of the economy and a centralised management structure to effect these changes within a succession of national plans, has given way to a set of policies which puts Laos in the category of a 'transition economy', concerned with effecting a shift to a market economy.

Summary and Conclusion

In the period after 1975, the parlous state of the Lao economy following decades of war in Indo-China and foreign intervention, meant that the tasks of economic policy were pressing and direct. National planning crystallised the response to these problems in the goal of agricultural self-sufficiency. This objective has been largely achieved although a fragile balance between supply and demand persists. What policy has failed to achieve is a transformation of the agricultural sector. It is now an accepted tenet of government policy that centralised planning is a barrier to the more complex tasks of agricultural diversification, agri-industrial development and export led growth. The acceptance of the role of the private sector in this process has as its counterpart the switch to indicative planning. The fragmentary evidence presented suggests that the old command economy had strong disincentive effects on agricultural production and farm income, as the state pricing system and exchange rate policy interacted with inflation to reduce the relative prices of traded and other agricultural goods. Current policy has reversed this ordering: agricultural prices have been set free to reflect market forces resulting in a rise in agricultural prices, while the acceptance of a market determined exchange rate has led to a real exchange rate depreciation. The evidence at hand suggests that the transition to a market economy has been accompanied, so far, by a shift in the incentive structure towards the farmer, with a resulting boost to farms incomes.

Agriculture continues to occupy a central role in development strategy although government intervention is largely restricted to measures that promote the development of the private sector. The strategy of encouraging a diversified agriculture has as its complement a major allocation of the public investment programme towards infrastructure investments. The policy contained in the third plan on regional economic disparities, and the relationship this has to economic growth, stands in sharp contrast with past practices where a second best approach, given the infrastructure constraint, saw the acceptance of lower growth and a less diversified agriculture as the price of reduced regional food deficits. The implied social welfare function of planners in the past put more emphasis on reducing regional disparities. The current plan anticipates higher than average economic growth in regions with relatively low per capita incomes through an extension of the market system. Economic growth is to be accompanied, in this scenario, by a reduction in regional disparities. Whether and how infrastructure investments, which in turn are so central to the development of markets, have these effects is not demonstrated. The third plan largely ignores the issue of the relationship between growth and income distribution, and the way institutions are to be created that allows both objectives to be achieved.

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