The views expressed in this paper are the views of the author and do not necessarily reflect the

views or
policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of
Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this
paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily
be consistent with ADB official terms.

Regional Workshop on Eco-Industrial Clusters 2013

Country Paper for
Regional Workshop on Eco-Industrial Clusters
(2-4 December 2013)
Tokyo, Japan
----------------------------Prepared By:
Mr. Souksamone PATHAMMAVONG
Mr. Savath KHOUNDAVONG

(Lao PDR)
I. General Overview.
1. Geography.
Laos is a landlocked country with a total land area of 236.800 square kilometers and shared the
border with five countries (China, Vietnam, Cambodia, Thailand and Myanmar). About two thirds of
the land area is mountainous. The mountains pose difficulties for transportation and communication,
and the development of other infrastructure. Laos is divided into three different development parts
such as the north, central and south.
2. Natural Resources.
Laos has a rich natural resource base and unique biological diversity. Forests cover more than
one third of the country. The potential of the natural-resource-based economy includes agriculture,
forestry, fishing, tourism and eco-tourism, mining, and hydropower. There are twelve branchs of river
in Laos, the abundance of river resources is probably the most important natural resource endowment
of the country, including the 1,898 km stretch of the Mekong River producing a vast potential for the
hub of an economic corridor linking the sub-regional economies. However, deforestation and shifting
cultivation remain major problems.
3. Demography.
Laoss total population is estimated at about 6.5 million (NSC, 2012) with a 2,2% growth rate,
and there 3 major ethnic groups. Women represent about 51% of the overall population. Population
widely disperses over the country with an average density of 28 persons/km2, one of the lowest in
Asia. The population is concentrated in three provinces along the plateau of the Mekong River,
Savannakhet (43 prs/sqkm), Vientiane (203 prs/sqkm), and Champasak (43 prs/sqkm) (NSC, 2012).
80% of the population lives in rural areas.
4. Transportation.
In general, the transport sector remains poor and discourages both domestic and foreign
investments. A well-managed road network is one of the essential prerequisites for economic growth.
Transportation costs are the most expensive in ASEAN nations and/or perhaps in Asia, because Laos
has no access to the sea. The high cost is also due to monopoly and lack of competition; there are a
few freight companies invested to operate in Laos. Located at the strategic center of the Mekong
River, Laos can serve as an export-processing center between South and Southeast Asian nations. In
order to realize such an advantage, infrastructure improvement is a priority issue.
5. Labor Force.
In general, the Lao labor force is young. The young (between 15-45) account for almost 60% of
the total population but the skilled labor force is still low. Over 80% of the labor force is heavily
concentrated in agricultural activities. Labor force is considered as a determinant, which links to the
social infrastructure development directly. Laos is set plan to increase the numbers of skilled labor.
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Moreover, the distribution of the Lao labor force is uneven across the country and mainly concentrated
within urban areas in Vientiane, Savannakhet, Champasak, and Luangprabang. As a result, the labor
force has not been utilized sufficiently and efficiently in all sectors of the economy. The shortage of
skilled human resources distorts the structure of knowledge, as human resources are not wisely
utilized. Limited job availability forces people to accept any jobs. Today, the effective use of
knowledge is becoming the most important factor in improving international competitiveness.
II. Socio-Economic Development in Laos.
Laos is still in the list of the least developed countries in the world, but a country with an
abundance of natural resources, which are potentiality for the socio-economic development. Since
1986, Laos has decided to adopt a package of reform intended to transform the countrys economy to a
market-based system. This new economic management system has been known as the New Economic
Mechanism (NEM). The NEM reform process has fostered the states new role of providing an
appropriate legal and regulatory framework and macroeconomic environment for private sector
production through improved physical and social infrastructure.
The environment and condition of both internal and foreign investment have become better year
by year. The number of factories and household industrial unites has increased steadily. Although they
are increasing, most of them are small scale industries.
In the past 15 years, Laos has experienced a steady economic growth, even in face of the severe
financial crisis that affected the Region and particularly Thailand its main trading partners, and the rise
to 3 digit inflation (19981999), controlled by tight adjustment policy. Inflation control has been
learned by GOL and economic measures are geared towards this objective. In year 2011 progress has
been substantial. Inflation remains at 7,7% and the exchange rate is stable. Progresses in reforms have
stimulated investment and real GDP growth is estimated at 7,9% for 2012, the sectorial share of GDP
here is 26% for agricultures, 31,2% for Industries and 37,1% for services.
In the social area there have been important achievements in health and education. Overall
poverty has been reduced from 33,5% in 2002/2003 to 27,6% in 2007/2008 and estimate remains to
26% in 2009/2010. In spite of these advances, it is also clear that poverty remains as the countrys
biggest challenge and its causes have been clearly recognized: problems in land tenure, low prices of
agricultural products, lack of markets, poor transport infrastructure, lack of irrigation, livestock
diseases, poor health conditions, weak education and technical abilities, difficult access to credit,
environmental degradation, biodiversity losses, lack of environmental awareness, lack of leadership in
villages and weak governance structure.
Continuing responses to these problems are contained in the National Poverty Eradication
Program that should be completed by 2015. The Program responds to the goal of the Laos of exiting
from the status of LDC by the year 2020, by eradicating poverty, ensuring economic growth with
equity and safeguarding the social, cultural, economic and political identity of the country. The
success of the past years permits a realistic view of the medium and long-term development prospects
and plans. Nine National Social-Economic Priority Programs have been adopted to channel the efforts
of GOL towards the above objectives. These have served as landmarks for planning and for defining
investments, they are:
a) Food production (agriculture and forestry).
b) Commodity production (with emphasis on agriculture and forestry).
c) Stabilization of shifting cultivation.
d) Rural development (agriculture and forestry and the creation of centers of learning).
e) Infrastructure development (with emphasis on roads).
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f) Expansion of external economic relations and cooperation.
g) Human resources development (education and health).
h) Services development, primarily the tourism sector.
To achieve its goals, the following basic strategies have been identified:
a) Develop human resources by improving basic and vocational education. This component
should take into account the need for at least 74.300 new teachers and infrastructure for about
2.229.900 new students in 2015.
b) Develop social and economic infrastructures to make the Laos the centre of some services in
the Sub Region.
c) Connect all areas and Regions of the country to the electricity grid.
d) Rationally allocate production capability based on locality specific advantages to establish an
economic structure and emphasize the development of small and medium scale
manufacturing and handicrafts, while protecting the environment.
e) Effectively promote and develop all economic sectors, promote particularly family
businesses, mixed businesses and joint venture businesses (private initiatives) to enable them
to respond to demands from local, domestic and export markets. To this should be added that
some form of import substitution will be needed for products that can be realistically
produced in the country and compete in the internal market.
f) Actively contribute and participate in globalization and regionalization through AFTA, WTO,
ASEAN investment zone and other cooperation projects in the Mekong Region.
g) Appropriately invest in the development of science and technology to proceed to
industrialization and modernization.
III. Industrial Situation in Laos.
The industrial sector in Laos contributes 10,3% (2012) to the GDP and provides employment for
approximately 100.354 workers, around 4% of the total labor force. Since the early 1990s there has
been a consistent and high rate increasing of employment of about 15% per annum. The increasing in
manufacturing value added produced by the private sector, including foreign invested private sector
has reached approximately 4 times of the manufacturing value added produced in state owned
enterprises. About 1/3 of the private manufacturing value added has been created by the Lao national
private sector.
In Industry, the total number of factory are 36.043 firms, here are large size (>200 employees)
454 firms and employing 31.407 people; medium size (51-200 employees) 584 firms, employing
11.723 people and small size (10-50 employees) 7.361 firms, employing 27.235 people; household
size (less than 10 employees) 27.644 firms, employing 29.989 people. Industrial production is highly
concentrated in a few large establishments. SME are emerging as the private sector instrument for
economic growth with equity. This group makes a significant contribution to employment generation,
but it consists of a large number of very small businesses, unable or reluctant to grow.
Industrial Sector Constraints.
There is a large set of common constraints that affect all industrial sectors to a larger or lesser
degree, the main ones being:
a) Information gaps. There is a lack of information systems or references to information
systems. Lao entrepreneurs lack practical access to updated export market information.
b) Lack of interpersonal contacts, especially between local producers and foreign buyers.
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c) High in-land (and out-land) transportation costs. Competing products are cheaper in export
markets. Especially high costs are products competing with those of China.
d) Low skills in labor force.
e) Technical and Vocational schools tend to be of low quality and/or are poorly managed and
with limited infrastructure.
f) Lack of standards and certification of products. Lack of quality control.
g) Inability to produce large volumes.
h) High costs of raw materials and insufficient volume.
i) Lack of design capacities to develop products for the export market.
j) Insufficient knowledge of the conditions of exports markets.
IV. Small and Medium Enterprise in Laos.
1. Situation of SMEs.
According to the law and the Prime Ministers Decree on Promotion of Small and Medium
Enterprises. Small and Medium Enterprises (SMEs) are independent enterprises that are legally
registered and operate according to the prevailing laws of the Laos and are classified into the
following size categories:
Small enterprises - those having an annual average number of employees not exceeding 19
persons or total assets not exceeding two hundred and fifty million kip or an annual turnover
not exceeding four hundred million kip.
Medium enterprises - those having an annual average number of employees not exceeding 99
persons or total assets not exceeding one billion two hundred kip or annual turnover not
exceeding one billion kip.
Based on the Enterprise Law, in 2008-2012 the total number of enterprises about 88.845 units
and the capital investment 242.650,41 billion kips. Most of them (90 percent) are SMEs, SMEs have
played an important role in socio-economic development in Laos. In recognition of this, the
government is developing a policy to promote SMEs and provide intending entrepreneurs access to
finance and other facilities such as:
- Local investment covers 96,8% and the investment capitals about 25,45%.
- Foreign Investment covers 2,3% and the investment capital about 18,25%.
- Both local and foreign investment covers 0,9% with a total investment capital about 56,29%.
Types of investment (ISIC, International Standard for Industrial Classification):
- Industrial processing covers 10% with the investment capitals 46%.
- Trading covers 48%, with the capital investment increase 4%.
- Hotel and Guest House cover 6% with the capital investment increase 3%.
- Transportation and Warehouse cover 17% with the capital investment increase 1%.
- Other businesses cover 4% with the capital investment 1% per unit.
2. The main constrains for SMEs.
+ Limited competitiveness due to:
- low level of technology and small scale of production.
- Lack of qualified technical staff and skills.
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- Inadequate business management skills.
- High transaction costs and risks.
+ Lack of awareness about the importance of technical and management.
+ Lack of know-how and skills.
+ Lack of capital and financial resources.
+ Lack of capacity for business development services.
+ Inadequate knowledge of laws and regulations.
+ Underdeveloped inter-business linkages/value-added chains.
+ Unfavorable administrative and regulatory business environment.
+ Unfavorable attitude and limited capacity of public/civil servants.
3. SME policy.
The aim of the Law on Promotion of Small and Medium Enterprises are created the improving
and expanding SMEs (New business creation and Survival and growth of existing enterprises) and
contains 6 main policies:
1. Creating an enabling regulatory and administrative environment.
2. Enhancing competitiveness of SMEs.
3. Expanding domestic and international markets.
4. Improving access to finance.
5. Encouraging and creating favorable conditions for establishment of business organizations.
6. Enhancing entrepreneurial attitudes and characteristics within the society.
4. Implications for SME development.
Development of social and physical infrastructures is generally unbalanced between different
regions. The geographical characteristics pose constraints on delivering services to remote areas.
Education is very important to the national development. It is, however, not considered as the final
solution to success as long as the social conditions and physical infrastructure communication
networks remain underdeveloped. Poor infrastructure and low skilled labors can exacerbate the
implementation of the governments socio-economic development activities. Building a knowledge
based economy might take more years. A HRD program has to improve both quantitative and
qualitative aspects in order to develop and diversify the social network, to make it more adapted to the
needs of the society.
V. Industrial Cluster.
1. Situation of industrial cluster.
Industrial Cluster in Laos is newly established and people are not interested in this term of
clusters.
- Industrial cluster is very new term for Lao people.
- No industrial cluster in Laos.
- There are only associations such as:
+ textile and garment,
+ construction material,
+ food production,
+ wood processing,
+ handicraft and so on.
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2. Perspective of industrial cluster.
- Legal framework for Industrial Areas is being developed.
- Ministry of Industry and Commerce will study Industrial Cluster in selected sectors or
provinces.
VI. Conclusion.
This country report is to present the general information about the development of clusters in
Laos. Based on the information from SME Support Division in order to enhance the development of
cluster, the government have to concentrate on improving its capability and infrastructure, both public
and private sectors have to collaborate, support, fund, and incentivize both domestic and foreign
investors by increasing its innovative capacity skill labor, human resource development and enhancing
technology infrastructure in its cluster environment going forward.
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