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Global Development Institute

WP170/2012

Crop returns, prices, credit and poverty in Lao-PDR

Samuel Annim and Raghav Gaiha

With Lao PDR’s macroeconomic performance currently booming, we investigate the country’s poverty situation by examining the drivers of household poverty.  This paper tests four major hypotheses: (1) Whether higher returns on all crops harvested per capita reduce consumption expenditure, food expenditure and the World Bank’s US$1.25/day (PPP, 2005) poverty cut-offs? (2) Whether higher returns on glutinous rice harvested per capita also reduce poverty? (3) Whether higher crop prices lower poverty? (4) Whether easier access to credit contributes to poverty reduction? Data on 5,031 households from the fourth round of the Laos Expenditure and Consumption Survey (LECS IV) are used to estimate Probit and instrumental variable Probit equations. Potential endogeneity of some of these variables (e.g. returns to crops harvested) is addressed through appropriate instrument variables. Briefly, returns on crops harvested reduce different measures of poverty (e.g. food poverty, dollar poverty), as do higher producer prices and easier access to credit. An important policy conclusion in light of Millennium Development Goal 1 is the imperative of higher returns on rice and glutinous rice, more remunerative prices for farmers and easier access to credit. These areas of policy concern assume greater importance as Laos prepares for its accession to the World Trade Organization (WTO). An accelerated market-orientation of agriculture may induce not just greater efficiency but also more equitable outcomes.