This report presents the vulnerability profile (VP) of the Lao People’s Democratic Republic, as mandated by General Assembly resolution 59/209 of 20 December 2004. It is intended for use as a background document for the Committee for Development Policy (CDP) deliberations* on the preparedness of the Lao People’s Democratic Republic for graduation from the least developed country (LDC) category.

In the 2018 review, the Lao People’s Democratic Republic met two of the three thresholds for graduation from LDC status: the per capita income and human assets criteria, given its score at 162 per cent and 110 per cent, respectively, of the relevant graduation threshold. By 2017, the Lao People’s Democratic Republic was the thirteenth fastest-growing economy in the world, recording improvements in incomes, poverty, access to some basic services and infrastructure. However, the economy remains largely agrarian, with employment concentrated in agriculture and with labour productivity in the sector considerably lower than in other sectors.

The country is a member of the Greater Mekong Subregion (GMS), the Association of Southeast Asian Nations (ASEAN), the World Trade Organization and the recently established Regional Comprehensive Economic Partnership (RCEP). The GMS, ASEAN and RCEP bring together a range of economies at different stages of development and economic dynamism, with attendant opportunities and challenges for the Lao People’s Democratic Republic. However, the country still lags behind ASEAN partners and other LDC members on a range of key indicators concerning competitiveness and productive capacities. The high cost of logistics and trade facilitation, and low quality of human capital, as key components of productive capacities, inhibit the economy’s future development prospects. Of concern, also, are signs that the lower-income economies of ASEAN have reached a point where their labour-intensive, export-led growth model geared mainly towards attracting foreign investment is failing to yield the benefits it once did. This means that policymakers of the Lao People’s Democratic Republic will be faced with decisions about how the country can most effectively adapt to these circumstances. COVID-19 related economic challenges have introduced a further layer of uncertainty and macroeconomic instability due to significant income, jobs and fiscal revenue losses experienced because of the pandemic. Contractionary fiscal policy is expected to have a further negative effect on demand and indicators of social wellbeing. The report notes that the real economic growth of the Lao People’s Democratic Republic is expected to fall from 5.2 per cent in 2019 to 0.2 per cent in 2020. Without COVID-19, the Lao People’s Democratic Republic would have expected to sustain a GDP growth of 6.7 per cent for 2020 (IMF World Economic Outlook database, 2020).

The country has pursued a development strategy centred on the exploitation of natural resources. Exploiting the Mekong river to harness hydropower is an important development pillar. However, the Mekong river system has many stakeholders, and its exploitation carries potential geopolitical and sustainability concerns.

The country also exploits its significant endowment and potential in mineral and land resources to attract FDI, drive commodity exports and foster integration in regional and global value chains. These strategies have been successful at driving the improvement in development indicators that led to pre-qualification of the Lao People’s Democratic Republic for LDC graduation, but they have not been as fruitful in terms of macroeconomic and fiscal stability. Similarly, the current policy approach has not enhanced preparedness and resilience in the face of increasing vulnerability to extreme weather events, nor strengthened linkages between leading sectors and the wider economy, to boost formal entrepreneurship and high-quality jobs growth.

Instead, there has been a general trend of rising inequalities and the appearance of new vulnerabilities, such as trade and investment concentration, and widening labour productivity gaps, with the manufacturing sector characterized by poor economic linkages and limited GVC participation. Manufacturing is mainly concentrated in low-value segments. These development strategies have also contributed to a rapid deterioration in natural capital, although the country still maintains the largest forest cover in the region.

The export product space of the Lao People’s Democratic Republic is suggestive of a narrow range of new and nearby products with economic gain that offer opportunities for the country to exploit strategic areas with future diversification potential. The report also recommends the development of the services sector to support export diversification.