## Structural Reforms to Lift Growth: Lao People's Democratic Republic (Section 1)

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### Executive summary and context
- Goal: achieve upper-middle-income (UMI) status by 2035; requires growth of at least 5 percent annually after pandemic and external shocks.
- Draft 10th NSEDP target: 6 percent annually for 2026–30.
- Baseline forecast (unchanged policy): growth moderates to some 3 percent over the medium term.
- Conclusion: ambitious structural reforms—to strengthen governance, improve the business environment, and promote human development—are essential to lift potential growth sustainably and help achieve the UMI goal.

### Measurement and current structural gaps
- Composite structural indicators: simple averages of components from the Worldwide Governance Indicator Database, the Fraser Institute Economic Freedom Database, and UNDP; all indices scaled from 0 to 1 (higher = stronger).
- Indices and components:
  - Governance: simple average of (1) control of corruption; (2) government effectiveness; (3) regulatory quality; (4) rule of law.
  - External sector: simple average of four Fraser components—(1) tariffs; (2) nontariff trade barriers; (3) parallel market exchange rate; (4) control of movement of capital and people.
  - Business regulation: simple average of three Fraser components—(1) bureaucracy costs; (2) administrative requirements; (3) impartial public administration.
  - Labor market: simple average of two Fraser components—(1) hiring and firing regulation; (2) centralized collective bargaining.
  - Human development: simple average of three UNDP components—(1) life expectancy at birth; (2) average years of schooling for adults 25+ and expected years of schooling for children of school entering age; (3) gross national income per capita.
- Key observed gaps (relative to UMIC median in 2021):
  - Significant gaps in governance, business regulation, labor market regulation, and human development.
  - Governance improved during the 2000s but broadly flat since mid-2010s; scores below LMIC and UMIC averages.
  - Business regulation improved since mid-2010s but remains below the LMIC average.
  - Labor market gap is large—Lao PDR substantially below LMIC peers.
  - Human development broadly in line with LMIC peers but well below UMICs.
  - External sector outcomes are relatively favorable—close to the UMIC average and above the LMIC average, though softened recently.

### Empirical approach and sample
- Methodology: local projection method (Jordà, 2005) following Budina et al. (2023); regressions of future output changes on structural indicator changes, controlling for lagged output growth, country and time fixed effects.
- Major reform episode defined as: the relevant structural indicator improves by two standard deviations of the distribution.
- Sample: middle-income (upper- and lower-middle income) and low-income countries; period 1996 to 2022.

### Key empirical findings on output impacts
- General: in the full sample, reforms in governance, external sector, business regulation, and human development all boost real output; labor market impacts are positive but mixed and less robust.
- Governance reforms:
  - Immediate impact: about 1.5 percent boost in the year of reform.
  - Cumulative impact: about 2 percent after six years.
  - Granular: improving regulatory quality can boost output by as much as 2 percent after one year; government effectiveness and rule of law yield about 1.5 percent after one year; controlling corruption effects grow over time.
- Human development reforms:
  - Immediate impact: about 5 percent boost in the year of reform.
  - Cumulative impact: about 6 percent after six years.
  - Granular: improvements in health accumulate over time; better education outcomes deliver growth dividends over time; impacts are particularly large in LMICs.
- External sector reforms:
  - Immediate impact observed, with effects gradually attenuating over the medium term.
  - Granular: reducing non-tariff barriers has immediate impact; reducing tariffs tends to accumulate over time; liberalizing movement of capital and people particularly beneficial for LMICs over the medium term.
- Business regulation reforms:
  - More gradual impact over years in the whole sample.
  - For LMICs, impacts are larger—boosting output by as much as 2 percent over the medium term.
  - Granular: reducing bureaucracy and improving impartial public administration have immediate positive impacts; reducing regulatory burden boosts output over the medium term; reducing bureaucracy particularly beneficial for LMICs.
- Labor market reforms:
  - Impacts on employment are positive but somewhat mixed and often statistically insignificant, possibly due to measurement issues and high informality.
- Conditional differences for lower-middle income countries:
  - Governance and human development reforms yield positive effects but somewhat smaller than full sample; medium-term impacts remain substantial—for governance ~1.5 percent and for human development ~4.5 percent over the medium term.
- Timing note: t = 0 denotes the year of reform; impacts generally accumulate over multiple years.

### Priority reform areas implied by the evidence
- Governance: prioritize improvements in regulatory quality, government effectiveness, rule of law, and control of corruption for immediate and accumulating output gains.
- Human development: prioritize health and education improvements to secure large, sustained growth dividends—especially effective for LMICs.
- Business environment: reduce bureaucracy, administrative burdens, and improve impartial public administration to raise output over short and medium terms.
- External sector: reduce non-tariff barriers and tariffs and liberalize movement of capital and people to achieve immediate and medium-term gains; liberalization of movement of capital and people especially beneficial for LMICs.
- Labor market: address measurement and informality issues; reforms may produce positive effects on employment but estimated impacts are less robust.

### Growth dividends scenario for Lao PDR (Section 2)
- Scenario parameters:
  - Close 10 percent of structural gaps relative to the UMIC average for governance, external sector, and business regulation.
  - Close 5 percent of the structural gap on human development.
- Estimated output effects:
  - Output could be boosted by more than 3 percent in the year of reforms (assuming all reforms are implemented together).
  - Output could be boosted by more than 4 percent over the medium term.
- Distribution of gains:
  - Output gains primarily come from improvements in human development, followed by governance.
- Feasibility:
  - The proposed pace of structural improvements is below the 80th percentile of the historical distribution of annual improvements in structural reform indicators amongst LMICs and is therefore feasible in Lao PDR.
- Additional benefits:
  - Strengthening governance would bolster productivity and growth and lay the foundation for sustained improvements in policy management, critical for ensuring macroeconomic stability over the long-term.

### Evidence and methodology notes (figure annotations)
- Major economic reform: an annual improvement in the relevant structural indicator of at least two standard deviations of the distribution.
- t = 0 is the year of the reforms.
- Figure interpretation:
  - Blue lines show the effect on real output (or employment in the case of labor market reforms) of a major economic reform in the years after the reform, with dotted lines showing 90 percent confidence intervals.
  - Red lines show effects of reforms for a lower-middle income country, with dashed components of the red lines indicating lack of statistical significance (at the 90 percent level).
- Sources for estimates: IMF staff estimates.

### Conclusions and policy recommendations
- Ambitious structural reforms—especially in human development, governance, and the business environment—are essential for Lao PDR to lift medium-term growth and sustainably move toward UMI status by 2035.
- Prioritization guidance:
  - Prioritize reforms that raise education and health outcomes.
  - Strengthen public-sector effectiveness and regulatory quality.
  - Control corruption.
  - Reduce bureaucratic and regulatory burdens.
  - Safeguard openness.
- Expected policy outcomes:
  - Ambitious but feasible reforms that gradually narrow structural gaps could lift output by more than 3 percent in the year of implementation and over 4 percent in the medium term.
  - These reforms would support the authorities’ development goals while ensuring macroeconomic and financial stability given limited policy space.
  - Reforms would underpin more effective policy management and a more resilient and sustainable trajectory of development.

*Source: International Monetary Fund. Paper completed on January 27, 2026.*

### Section 1

### Structural Reforms to Lift Growth: Lao People's Democratic Republic (Section 1)

### Executive summary and context
- Lao PDR’s overarching goal is to achieve upper-middle-income (UMI) status by 2035; after pandemic and external shocks, achieving this goal requires growth of at least 5 percent annually.
- The draft 10th National Socio-Economic Development Plan (NSEDP) sets a growth target of 6 percent annually for 2026–30.
- Under baseline forecasts assuming unchanged policy, growth is expected to moderate to some 3 percent over the medium term.
- Conclusion: Ambitious structural reforms—to strengthen governance, improve the business environment, and promote human development—are essential to lift potential growth sustainably and help achieve the UMI goal.

*Source: International Monetary Fund. Paper completed on January 27, 2026.*

### A. Measurement and current structural gaps
- Composite structural indicators constructed as simple averages of components from the Worldwide Governance Indicator Database, the Fraser Institute Economic Freedom Database, and UNDP; all indices scaled from 0 to 1 (higher = stronger).
- Indices and components:
  - Governance: simple average of (1) control of corruption; (2) government effectiveness; (3) regulatory quality; (4) rule of law.
  - External sector: simple average of four Fraser components—(1) tariffs; (2) nontariff trade barriers; (3) parallel market exchange rate; (4) control of movement of capital and people.
  - Business regulation: simple average of three Fraser components—(1) bureaucracy costs; (2) administrative requirements; (3) impartial public administration.
  - Labor market: simple average of two Fraser components—(1) hiring and firing regulation; (2) centralized collective bargaining.
  - Human development: simple average of three UNDP components—(1) life expectancy at birth; (2) average years of schooling for adults 25+ and expected years of schooling for children of school entering age; (3) gross national income per capita.
- Key observed gaps (relative to UMIC median in 2021):
  - Significant gaps in governance, business regulation, labor market regulation, and human development.
  - Governance improved during the 2000s but broadly flat since mid-2010s; scores below LMIC and UMIC averages.
  - Business regulation improved since mid-2010s but remains below the LMIC average.
  - Labor market gap is large—Lao PDR substantially below LMIC peers.
  - Human development broadly in line with LMIC peers but well below UMICs.
  - External sector outcomes are relatively favorable—close to the UMIC average and above the LMIC average, though softened recently.

### B. Cross-country empirical approach
- Methodology: local projection method (Jordà, 2005) following Budina et al. (2023); estimates regression of future output changes on structural indicator changes, controlling for lagged output growth, country and time fixed effects.
- Definition of major reform episode: the relevant structural indicator improves by two standard deviations of the distribution.
- Sample: middle-income (upper- and lower-middle income) and low-income countries; period 1996 to 2022 (data availability).

### B. Key empirical findings on output impacts
- For the full sample of middle- and low-income countries, reforms in governance, external sector, business regulation, and human development all boost real output; labor market impacts are positive but mixed and less robust.
- Magnitudes and timing (full-sample estimates unless noted):
  - Governance reforms:
    - Immediate impact: about 1.5 percent boost in the year of reform.
    - Cumulative impact: about 2 percent after six years.
    - Granular: improving regulatory quality can boost output by as much as 2 percent after one year; government effectiveness and rule of law yield about 1.5 percent after one year; controlling corruption effects grow over time.
  - Human development reforms:
    - Immediate impact: about 5 percent boost in the year of reform.
    - Cumulative impact: about 6 percent after six years.
    - Granular: improvements in health accumulate over time; better education outcomes deliver growth dividends over time; impacts are particularly large in LMICs.
  - External sector reforms:
    - Immediate impact observed, with effects gradually attenuating over the medium term.
    - Granular: reducing non-tariff barriers has immediate impact; reducing tariffs tends to accumulate over time; liberalizing movement of capital and people particularly beneficial for LMICs over the medium term.
  - Business regulation reforms:
    - More gradual impact over years in the whole sample.
    - For LMICs, impacts are larger—boosting output by as much as 2 percent over the medium term.
    - Granular: reducing bureaucracy and improving impartial public administration have immediate positive impacts; reducing regulatory burden boosts output over the medium term; reducing bureaucracy particularly beneficial for LMICs.
  - Labor market reforms:
    - Impacts on employment are positive but somewhat mixed and often statistically insignificant, possibly due to measurement issues and high informality.
- Conditional differences for lower-middle income countries (Lao PDR’s current group):
  - Governance and human development reforms yield positive effects but somewhat smaller than full sample; medium-term impacts remain substantial—for governance ~1.5 percent and for human development ~4.5 percent over the medium term.
- Timing: t = 0 denotes the year of reform; impacts generally accumulate over multiple years, with some reforms showing immediate sizable effects (governance, human development) and others building gradually (business regulation, some external-sector measures).

### C. Priority reform areas implied by the evidence
- Governance: prioritize improvements in regulatory quality, government effectiveness, rule of law, and control of corruption to obtain immediate and accumulating output gains.
- Human development: prioritize health and education improvements to secure large, sustained growth dividends—especially effective for LMICs.
- Business environment: reduce bureaucracy, administrative burdens, and improve impartial public administration to raise output over short and medium terms.
- External sector: reduce non-tariff barriers and tariffs and liberalize movement of capital and people to achieve immediate and medium-term gains; liberalization of movement of capital and people especially beneficial for LMICs.
- Labor market: address measurement and informality issues; reforms may produce positive effects on employment but estimated impacts are less robust.

*Prepared by Weining Xin and Liangliang Zhu. IMF Selected Issues Paper (SIP/2026/023). Based on information available at the time it was completed on January 27, 2026.*

### Section 2

### sipea2026023 - Section 2

### Growth Dividends for Lao PDR from Ambitious Structural Reforms
- Scenario parameters:
  - Close 10 percent of structural gaps relative to the UMIC average for governance, external sector, and business regulation.
  - Close 5 percent of the structural gap on human development.
- Estimated output effects:
  - Output could be boosted by more than 3 percent in the year of reforms (assuming all reforms are implemented together).
  - Output could be boosted by more than 4 percent over the medium term.
- Distribution of gains:
  - Output gains primarily come from improvements in human development, followed by governance.
- Feasibility:
  - The proposed pace of structural improvements is below the 80th percentile of the historical distribution of annual improvements in structural reform indicators amongst LMICs and is therefore feasible in Lao PDR.
- Additional benefits:
  - Strengthening governance would bolster productivity and growth and lay the foundation for sustained improvements in policy management, critical for ensuring macroeconomic stability over the long-term.

### Evidence and Methodology Notes (figure annotations)
- Definition of a major economic reform: an annual improvement in the relevant structural indicator of at least two standard deviations of the distribution.
- t = 0 is the year of the reforms.
- Figure interpretation:
  - Blue lines show the effect on real output (or employment in the case of labor market reforms) of a major economic reform in the years after the reform, with dotted lines showing 90 percent confidence intervals.
  - Red lines show effects of reforms for a lower-middle income country, with dashed components of the red lines indicating lack of statistical significance (at the 90 percent level).
- Sources for estimates: IMF staff estimates.

### Conclusions and Policy Recommendations
- Ambitious structural reforms—especially in human development, governance, and the business environment—are essential for Lao PDR to lift medium-term growth and sustainably move toward UMI status by 2035.
- Prioritization guidance:
  - Prioritize reforms that raise education and health outcomes.
  - Strengthen public-sector effectiveness and regulatory quality.
  - Control corruption.
  - Reduce bureaucratic and regulatory burdens.
  - Safeguard openness.
- Expected policy outcomes:
  - Ambitious but feasible reforms that gradually narrow structural gaps could lift output by more than 3 percent in the year of implementation and over 4 percent in the medium term.
  - These reforms would support the authorities’ development goals while ensuring macroeconomic and financial stability given limited policy space.
  - Reforms would underpin more effective policy management and a more resilient and sustainable trajectory of development.

*Sources: IMF staff estimates.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2026/english/sipea2026023.pdf_