The Role of the Services Sector in the Lao PDR's Economy

The Role of the Services Sector in the Lao PDR's Economy

Image Attribute: Pha That Luang, Vientiane, Lao P.D.R / Source: Wikimedia Commons

Image Attribute: Pha That Luang, Vientiane, Lao P.D.R / Source: Wikimedia Commons

The services sector is vital to the Lao PDR’s economic transformation. The services sector grew by an average of 8.8% from 2010–2011 to 2014–2015 and its share of GDP rose from 45.2% in 2010–2011 to an estimated 47.2% in 2014–2015 (Table 1). Services have overtaken industry and agriculture in contribution to national output. In the period covered by the seventh five-year plan, industry targets for GDP growth were achieved, while services grew faster than targeted.

Table 1: GDP Growth and Sectoral Shares in GDP
Table 1: GDP Growth and Sectoral Shares in GDP


The services sector in the Lao PDR, however, is still in its early stage of development. Traditionally, the country has been a rural and agrarian economy and only recently has it ventured into developing manufacturing, tourism, international commerce, and modern services such as finance and information and communication technology (ICT). Also, the country has only started to develop cities, which typically plays a leading role in fostering the development of manufacturing, industry, modern services, higher education, technology, and international finance and trade. The Vientiane Prefecture, which is inhabited by more than 800,000 people as of 2016, is the only major center for modern and other services. Vientiane offers a wide range of job opportunities in government, education, healthcare, banking, and other services. It has the comparative advantage of being the country’s capital for government and business services as well as a major hub for transport and logistics. Vientiane leads major cities in tourism, followed by Luang Prabang.

The services sector is expected to expand further as it progresses in improving ease of doing business in the Lao PDR—such as developing infrastructure services, improving the education and training system, and developing tourism. Its growth in output and employment has resulted in leading other sectors in share of GDP and employment growth. Between 1986 and 2015 during its transition from a centrally planned to a market-oriented economy, the services sector has made significant progress and it is now the major contributor to economic growth. The contribution in generating new jobs, however, has not matched with the increasing share in GDP. While increasing from about 10% in 1990 to 20% in 2010 and to 23% in 2015 its share of total employment is still low compared with most economies with a similar stage of development (Table 2).

Table 2: Share of Services in GDP and Employment, 2015
Table 2: Share of Services in GDP and Employment, 2015

The Lao PDR government survey data show that skills levels typically are comparatively high in services such as public administration, education, and in social work activities, while the majority of the unskilled workers are typically found in wholesale and retail, and accommodation and food services. The predominance of farming and services jobs—both mainly low productivity jobs—suggests that a significant share of employment is informal[1] (Table 4.3).

Table 3: Skilled and Unskilled Workers in the Services Sector (in percentage of service employment)
Table 3: Skilled and Unskilled Workers in the Services Sector (in percentage of service employment)

Services have unique characteristics that greatly affect their tradability, including intangibility and non-storability, but they also typically require differentiation and joint production. To capture these aspects, the World Trade Organization defines trade in services to span four modes of supply:

(i) Mode 1, or cross-border trade, are services supplied from the territory of one country to the territory of another (for example, consultancies, market research, graphic design services); 

(ii) Mode 2, or consumption abroad, are services supplied in the territory of a nation to the consumers of another (for example, tourism, education, health services); 

(iii) Mode 3, or commercial presence, are services supplied through any type of business or professional establishment of one country in the territory of another, for example, foreign direct investment; 

(iv) Mode 4, or presence of natural persons, are services supplied by nationals of a country in the territory of another (for example, a consultant or a health worker supplying their services in the importing country). 

All of these modes are significant to the Lao PDR but weakness in data makes it difficult to assess them. The available data indicate that overall progress in the development of trade services has been limited, with the volume of trade services remaining relatively low. Export of services, however, has grown significantly not only in cross-border trade but also in consumption abroad and as a result of Laotians working in other countries. Export of services continues to be dominated by travel followed by transport and ICT (Table 4).

Table 4: Services Exports of the Lao PDR, 2010–2015 ($ million)

World Bank (2016b) reveals that despite the increase in the Lao PDR’s services exports, the country remains well below its potential. The services export share of GDP during 2015 has been estimated to be around 6.5% with growth concentrated in traditional services such as transport and travel. The services share of the Lao PDR’s total exports was 18.3% in 2015, which is lower than 23.3% in 2010. Travel and transport combined accounted for 85.6% of services exports in 2010, which has increased further to 93.4% by 2015. A further disaggregation reveals that while the share of travel increased from 74.7% in 2010 to 85.0% in 2015, the share of transport declined from 10.9% in 2010 to 8.4% in 2015. 

Low use combined with an inadequate supply of modern services, such as in business, financial, insurance, and ICT (as well as weaknesses in traditional services), have significantly impeded growth in exports and reduced indirect contribution to growth by embedding services in manufacturing exports.[2] The study highlights the weaknesses in developing forward and backward linkages between the manufacturing and services sectors.[3] The study also deduces that the Lao PDR’s growth record in services exports points to comparative advantage in travel and ICT relative to other countries in the world. Exports of travel services led by travel sector growth have increased by an average of 13.1% in 2005 and 2014 (World Bank 2016a) (Table 5).

Table 5: Revealed Comparative Advantage of the Lao PDR in Services, 2000–2014
Table 5: Revealed Comparative Advantage of the Lao PDR in Services, 2000–2014


Furthermore, the Lao PDR experience indicates that production of goods that use services is negatively affected by the unavailability of a wider range of services as well as by the low quality of available services such as in transport, electricity, and in financial services. Thus, these issues need to be addressed by increasing competition in the services sector, reducing distortive and ineffective regulations, opening sectors to foreign participants, and building skills and investment in hard and soft infrastructure (World Bank 2016b).

Publication Detail:

This article is an excerpt, taken from Chapter 4:  Leveraging Services for Sustainable Growth and Employment from the report titled -"LAO PDR ACCELERATING STRUCTURAL TRANSFORMATION FOR INCLUSIVE GROWTH" - written by Edimon Ginting, Kaukab Naqvi, and Raja Mitra for Asian Development Bank Publication as a part of "Country Diagnostic Study".

Copyright Details:

This excerpt is published at IndraStra Global under Creative Commons Attribution Non-commercial No-Derivatives 3.0 IGO License, provided by the original publisher.

Endnotes:

[1] Lao Statistics Bureau (LSB) survey data do not allow us to measure the extent of informal sector employment, i.e., employees with access to social security or employers or own account workers in a registered business (LSB 2010, 2013, and 2015). Nevertheless, the predominance of farming and services jobs—both are characterized by low productivity—suggests that a significant portion of employment is in the informal sector. Disaggregating by employment status, over 40% of employed workers are in unpaid family work, and another 40% are own-account workers. About 9% of the labor force are private wage employees (which could be formal employment in registered firms or informal wage work), and 8% are employed by the public sector (1% in state-owned enterprises and 7% as civil servants (World Bank 2016c).

[2] A recent World Bank report on the Lao PDR states, “almost 90 percent of services inputs used by manufacturers come from distribution and transport, while modern services, such as business, financial, insurance, and ICT services, contribute very little to manufacturing value added. Normally, services sector firms are important suppliers of intermediate inputs to other sectors, especially manufacturing firms. When taking these forward linkages into account, the total contribution of services stands at 21 percent of total exports in Lao PDR. Nonetheless, the contribution of modern services in value-added exports remains very small. Inadequate supply of financial and telecommunication services—representing only 3 percent of total services inputs to manufacturing—may also be a constraint on the diversification and upgrading of manufacturing firms, preventing them from moving up the value chain” (World Bank 2016b).

[3] Forward linkages defined as the value added of a sector that is exported indirectly through exports of other sectors that contain inputs from the sector. Backward linkages defined as the value added from other sectors that are embodied in the value of exports of a particular sector (World Bank 2016b).