ReportNo. 13675-LA LAO PDR Agricultural SectorMemorandum Public Disclosure Authorized An AgriculturalSector Strategy March 23, 1995 Agriculture and EnvironmentOperations Division Country Department I EastAsia and Pacific Region Public Disclosure Authorized Doumn of th Worl Bank' - . Public Disclosure Authorized Documentof the World Bank Public Disclosure Authorized CURRENCY EOUIVALENTS (as of December 1994) US$1 = 720 Kip 1 Kip = US$0.0014 FISCAL YEAR October 1 - September 30 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank APB Agriculture Promotion Bank BOL Central Bank of Lao P.D.R. CEM World Bank's Country Economic Memorandum COMECON Council for Mutual Economic Assistance CPI Consumer Price Index DLVS Department of Livestock and Veterinary Services DSPF Division of Statistics Planning and Finance ESAF Extended Structural Adjustment Facility FIMC Foreign Investment Management Committee FSDU Forage Systems Development Unit FMD Foot and Mouth Disease GDP Gross Domestic Product IDA International Development Association IMF International Monetary Fund HS hemorrhagic septicaemia PAFS provincial agricultural and forestry services MAF Ministry of Agriculture and Forestry MCT Provincial Commercial Service MOF Ministry of Finance NARC National Agriculture Research Center NEM New Economic Mechanism NGO Non-governmental Organizations NICs newly industrialized countries NMP Net Material Product NRRP national rice research program O&M Operations & Maintenance PIP Public Investment Program SB The State Bank of Laos SIRAP Sustainable Irrigated Agriculture Project SIDA Swedish International Development Agency SO Estate-owned enterprises SPF Division of Statistics, Planning and Finance TOT Terms of Trade UNDP United Nations Development Program WID Women in Development LAO PDR AGRICULTURAL SECTOR STRATEGY Table of Contents Page No. EXECUTIVE SUMMARY . i I. A REVIEW OF AGRICULTURAL PERFORMANCE . .1 A. Sector Background .1... .. B. The Role and Objectives of Agricultural Development . 2 Contributions to GDP, Employment, Food, and Trade . 2 Linkages to Development Issues . 3 Expected Role of Agriculture .... 4 C. Policy Environment and Sectoral Performance . 4 Past Development Strategies and Reforms . 4 Agricultural Performance ..... .. .. .. 7 D. Future Growth Opportunities and Challenges . 12 Constraints . 12 Opportunities ........ .. ... ... ... ... 15 An Outline of Key Issues for Growth . 23 II. COMPLETING THE TRANSITION TO A MARKET ECONOMY . 25 A. Abandoning Central Planning and Production Targets . 25 B. Improving Efficiency of Commodity Markets . 27 C. Developing Factor Markets .... 37 D. Improving Agricultural Incentives . 43 E. Promoting Foreign Investment .... 48 F. Improving the Effectiveness of the Privatization Program . 51 III. IMPROVING SUPPORT SERVICES AND THE ALLOCATION OF PUBLIC EXPENDITURE 54 A. Institutional Strategy - Doing Less With Better Results . 54 Institutional Constraints ..... .... .. 54 The Strategic Vision for Institutional Development . 59 An Outline of Strategic Elements . 61 B. Developing Technology and Support Services . 63 Agricultural Research and Extension . 63 Animal Health Services .................. 66 Irrigation Management . 69 Supply of Agricultural Inputs . 73 Food Security ........ .. ... ... ... .. 75 Promoting Women's Participation in Development . 78 C. Improving the Allocation of Public Expenditures . 79 - ii - PaQe No. IV. POLICY AND INVESTMENT PRIORITIES TO THE YEAR 2000 . 84 A. Policy Reforms . 84 Improving Efficiency in Commodity Markets . 84 Developing Factor Markets . 85 Improving Agricultural Incentives . 86 Promoting Foreign Investment .... 86 Improving the Effectiveness of the Privatization Program . .87 B. Institutional Development Priorities . 88 C. Priorities for Technology and Support Services . 88 Technology Development and Dissemination . 88 Animal Health Services . 89 Irrigation Management . ................. 90 Food Security . ..................... 90 D. Public Expenditure Reforms . 91 E. Investment Priorities . .................. 93 F. Reforming the Planning System ... 94 Policy Matrix ..... .. .. ...... .. .. 97 References . 95 Annexes 1. Data Problems and Adjustments . .............. 99 2. Gross Margins, Returns and Import Parity Prices . 106 3. Current and Proposed Donor Aid Projects . 113 4. Agricultural Supply Response Under Lao Conditions . 123 5. Agricultural Terms of Trade Data ... 125 Statistical ADvendix . 128 Map IBRD No. 25510 LAO PDR AGRICULTURAL SECTOR STRATEGY EXECUTIVE SUMMARY Why an Agricultural Sector Review at this Time? 1. This agricultural sector review was initiated due to concern that the World Bank's knowledge of Lao agriculture was becoming outdated; the last review by the World Bank--the Agricultural Sector Memorandum--was done in 1980/81. Equally important has been the concern within the Government of Lao PDR and by donors regarding the poor performance of agricultural projects and lack of a strategic framework to guide public investments and related donor assistance. This report addresses both concerns by providing a sector update and highlighting policy, institutional and investment priorities to the Year 2000. What is the Performance Record of Agriculture? 2. Agricultural performance has been mixed: some sub-sectors have performed very well while others have lagged. Overall sector growth since the mid-eighties has been slow to modest. For the sector as a whole, growth in agricultural value added decelerated from 4.3 percent p.a. in 1980-86 to 3.5 percent p.a. in 1986-92. The forestry and rice sub-sectors in particular have performed poorly since 1986 (under the New Economic Mechanism - NEM), with their value added growing by -9.3 percent and 1.7 percent p.a. in 1986-92 respectively. In contrast, the non-rice crops (particularly maize, legumes, root crops, and vegetables) and livestock have performed strongly under the NEM, with their respective value added growing by 9.7 percent and 5.7 percent p.a. in 1986-92. It seems that the more commercialized part of agriculture has posted higher growth rates as a response to improved producer incentives ushered in by the NEM. 3. While overall agricultural growth has exceeded population growth (at 2.9 percent) since the mid-eighties, such a performance would not meet the Government's future expectations. In its Socio-Economic Development Plan to the Year 2000, the Government has targeted agriculture to grow by 5 percent p.a. and play a key role in reducing poverty, achieving a broad distribution of economic growth and containing rural-urban migration. What Has Gone Wrong With Agriculture? 4. While many factors, including adverse weather conditions, have combined to hamper rapid growth in agriculture, the critical ones relate to the slow transition of the agricultural sector from a centrally planned to market economy. They include the following: sector planning based on production targets; a national rice self-sufficiency policy that has led to over-investment in low return, under-utilized, capital-intensive irrigation schemes; government involvement in inappropriate areas of the economy, for example in direct trading of agricultural inputs; segmented and inefficient commodity markets; underdeveloped and controlled markets for labor, land, and capital; and macro-economic and agricultural policy frameworks that have made the agricultural sector unattractive to investors who prefer the other sectors - ii - that potentially generate greater profits (less than 10 percent of foreign investment has gone into agriculture). 5. There is also an underlying problem of the Government's limited capability to design and implement development policies and programs due to a severe shortage of trained and experienced manpower. Finally, public expenditures in agriculture are inadequate and allocated inefficiently: Lao PDR spends significantly less on agriculture compared to other developing countries, and excessive allocations are directed into construction of high cost, low return irrigation structures while little is directed to high return areas like animal vaccination programs, operation and maintenance, research, extension, and animal health services. What Should Be Done? 6. The main thrust of the report is that agricultural development can best be promoted by accelerating the transition from central planning to an efficient market system and by sharpening the definition of the role of Government to intervene less but more efficiently, focusing on things that nobody else can do in developing an enabling environment for private sector development. Within this context, the role of Government would be to improve the efficiency of markets, create macroeconomic stability, and remove market failures through improvement in farmer support services, rural infrastructure, and environmental conservation. This report has not dealt with macroeconomic stabilization, environmental conservation and rural transport infrastructure because they have been dealt with in other reports. The focus has been on the development and improvement of commodity and factor markets, other issues related to the transition to a market economy, efficient allocation of public expenditures and development and efficient delivery of farmer support services. If these recommendations were implemented, the agricultural sector could grow by 4 percent per annum in 1995-2000. Policy Actions 7. Given the institutional weaknesses, not all the required reforms can be undertaken at the same time. Hence, the policy reforms have been grouped into two categories: