Two Decades of Declining Poverty but Rising Inequality in Laos

• DOI: http://doi.org/10.1111/asej.12147
• Published date: 01 June 2018
• Date: 01 June 2018

Two Decades of Declining Poverty but Rising

Inequality in Laos*

Peter Warr, Sitthiroth Rasphone and Jayant Menon

Received 28 July 2016; Accepted 9 March 2017

Over the past two decades consumption inequality has risen within Laos, while

absolute poverty incidence has halved. The estimated Gini coefficient of private

household expenditures per person rose from 0.311 to 0.364. This increase in the

sample-based estimate of inequality was statistically significant and occurred in

all regions, in both rural and urban areas and among all major ethnic, educational

and sectoral employment categories. Within-group increases in inequality domi-

nated between-group changes. Official policy largely overlooks this point, focus-

ing on reducing inequality between rather than within major groups. Economic

inequality seems certain to become a more pressing policy concern.

Keywords: expenditure inequality, Gini coefficient, Laos, poverty reduction.

JEL classification codes: D31, D39, I39.

doi: 10.1111/asej.12147

I. Introduction

This paper describes changes in inequality over the past two decades in the Lao

People’s Democratic Republic (Lao PDR, subsequently Laos, for brevity) and

relates them to the poverty reduction that occurred simultaneously. Since the

early 1990s, five rounds of the official Lao Expenditure and Consumption

Surveys (LECS) have been conducted and these data are the principal informa-

tion source used in this paper.

1

The data measure consumption expenditures, but

*Warr (corresponding author): Australian National University. Arndt-Corden Department of Eco-

nomics, Coombs Building (09), Australian National University, Canberra, ACT 2600, Australia.

Email: Peter.Warr@anu.edu.au. Rasphone: National Economic Research Institute, Vientiane, Lao

PDR. 5th Floor, MPI, Souphanpuvong Ave, Sikottabong, Vientiane, 01001, Lao PDR. Email:

sitthiroth.rasphone@gmail.com. Menon: Economic Research and Regional Cooperation Department,

Asian Development Bank. 6 ADB Avenue, Mandaluyong, Metro Manila, The Philippines. Email:

jmenon@adb.org.

1 The survey has been conducted, analyzed and reported upon at 5-yearly intervals from

1992–1993 to 2012–2013. The survey is conducted by the government’s Lao Statistics Bureau,

Ministry of Planning and Investment, with the technical assistance of Statistics Sweden and the

World Bank.

© 2018 East Asian Economic Association and John Wiley & Sons Australia, Ltd

Asian Economic Journal 2018, Vol.32 No. 2, 165–185 165

not incomes, at the household level.

2

Over the two decades covered by the sur-

vey data, measured inequality increased at the national level, within both rural

and urban areas, within all provinces, within each of the four major ethnic

groups and within all major educational attainment and employment categories.

Over the two decades 1992–1993 to 2012–2013 the estimated Gini coefficient

of expenditure inequality rose from 0.311 to 0.364 at the national level and the

increase in this sample-based estimate of population-wide inequality was statisti-

cally significant. At the same time, the estimated incidence of absolute poverty

halved, from 46 percent of the population to 23 percent. Put together, these data

mean that the poor of Laos became better off in real terms but that the rich

gained more, in both absolute and proportional terms.

Throughout the 1970s and early 1980s, Laos remained extremely poor and

isolated: the outcome of decades of conflict and inward-looking policies derived

from the central planning policy framework in place since the communist take-

over of 1975. In 1986 the government began decentralizing control and intro-

ducing market-oriented reforms under a revised economic strategy called the

New Economic Mechanism (NEM). Early reforms under the NEM removed

price controls, unified exchange rates, expanded foreign and inter-provincial

trade, and encouraged private enterprise in agriculture and manufacturing.

Structural reforms continued in the 1990s through a legislative program provid-

ing the foundation for market-based rules and private sector development.

These early reforms produced impressive results. Between 1990 and 1997,

just prior to the Asian financial crisis (AFC), real GDP growth averaged 6.4 per-

cent a year. Growth contracted in 1998, following the AFC. Expanded public

infrastructure expenditures financed by monetary expansion produced a hyperin-

flation in 1997 and 1988, but the increased aggregate demand fortuitously

enabled the worst effects of the AFC (as experienced in neighboring Thailand,

for example) to be avoided. By 1999 real economic growth had recovered and

continued reforms have since facilitated growth at an average of 7 percent a

year, despite the global financial crisis of 2008. Real per capita income more

than tripled, from $262 in 1990 to $887 in 2016, in constant 2005 dollar terms.

3

Until recently,official planning documents of the Lao Government made no explicit

reference to economic inequality,or even to the government’sown official data relating

to it, focusing instead on economic growth and poverty reduction, both of which have

been impressive. A shift in focus has seemingly begun, with the publication of the 8th

Five-Year Socio-Economic Development Plan (Ministry of Planning and Investment,

2 A preliminary working paper version of the present paper (Warr et al. 2015), available online,

provides a detailed discussion of the LECS expenditure data, describing the included and excluded

items, outlining the implications for the study of poverty and inequality, and comparing the Lao data

with each of the other developing countries of ASEAN. It is argued there that the construction of the

Lao data inadvertently understates both the level and the increase in inequality over time, relative to

other ASEAN countries.

3 A fuller summary of economic change in Laos is provided in Menon and Warr (2013) and in

Warr et al. (2015).

ASIAN ECONOMIC JOURNAL 166