Study on Generating Employment through Micro and Small Enterprise and Cooperative Development in Lao PDR
2.2 General Characteristics

2.2 General Characteristics

2.2.1 Size and Composition of Micro/Small Enterprise Sectors

The 1996 MIH-GTZ survey conducted under the SEDP project (SEDP - The Lao-German Small Enterprise Development Project is a collaborative effort-between the German Agency for Technical Cooperation (GTZ), and the Ministry of Industry and Handicrafts of the Lao People's Democratic Republic.) records 146,000 micro/small enterprises in Laos, the vast majority of which are very small. Nearly 50 per cent consist of just one person, the owner, and 95 per cent have fewer than five workers. Small-sized enterprises, those with 10 to 29 workers, account for less than 1 per cent of the total.

Figure 1. Percentage of micro/small enterprises with different numbers of workers

(Source: The results of a National Survey, SMEs in Lao PDR, MIH-GTZ, 1996)

The survey classifies micro/small enterprises, according to the International Industrial Standard Classification (ISIC), into six main sectors: Commerce, Manufacturing, Services, which includes Repairs, Transport, Construction, and Rental space.

The commerce sector is the largest, accounting for 54 per cent of all micro/small enterprises and generating 52 per cent of micro/small enterprise-based employment. The biggest proportion of this sector and indeed of all micro/small enterprises, 49.2 per cent of the total, is retailing.

The most typical retail businesses are general trading, food retailing, and hardware sales. This sub-sector has been the largest since the introduction of market liberalization. Previously to that, durable goods for household consumption and raw material inputs were mainly imported.

By contrast, the hotel and restaurant sub-sector accounts for a relatively small percentage, 0.9 per cent, of micro/small enterprises. In more recent years, the hotel and restaurant sub-sectors have increased in number along with the growing tourist industry, particularly in the country's major towns.

The manufacturing sector employs 35 per cent of the total number of workers. It is dominated, with 15.5 per cent of the total by the textile sub-sector, comprising weaving and spinning-related products, and 12 per cent by the food processing sub-sector, largely rice milling. Furniture making and metal working are also important activities.

Micro/small enterprises in manufacturing tend to utilize local resources, employ traditional skills such as weaving and furniture making, and appear to respond to the basic needs of society such as with milling rice.

The service sector which includes repairs, transport, rental space, and construction, comprises 7.6 per cent of micro/small enterprises and 6.3 per cent of micro/small enterprise-based employment. This translates to 11,000 micro/small service enterprises employing 16,000 workers. Repairing bicycles is the largest single kind of business in this sector, representing 1.8 per cent of all micro/small enterprises.

Transport represents only 4 per cent of micro/small enterprises and 3.8 per cent of micro/small enterprise-based employment. This includes owners of taxis, buses and tuk-tuks.

For other sub-sectors, such as construction and rentals, the number of enterprises was very small in 1996. However, it is thought that these categories have increased significantly as the number of expatriates and town development activities in urban areas have grown.

Figure 2: Distribution of enterprises and employment by sub-sector

(Source: The results of a National Survey, SMEs in Lao PDR, MIH-GTZ, 1996)

2.2.2 Contribution to Employment Creation

Micro/small enterprises have played a very important role in providing employment opportunities during the process of economic transition. A total of 146,000 micro/small enterprises identified in the 1996 MIH-GTZ survey, employ the equivalent of 259,000 full-time workers. This contribution is ten times greater than that of large enterprises, which employ 22,000 people. It is estimated that micro/small enterprises account for 43 per cent of the active non-agricultural labour force.

The average number of workers, including the owners of the enterprises, is only 1.9, although this varies across regions. The workforce in this sector is mainly enterprise owners and unpaid family members: 53.8 per cent are the owners themselves, 36.5 per cent are unpaid family members and 8.9 per cent are paid employees. Characteristically in Laos most micro/small enterprises, about 90 per cent, are some type of family business (refer section 2.6.1). Part-time workers are less common in Lao micro/small enterprises. Only 24 per cent of enterprises employ part-time workers, which represents 18 per cent of the total workforce.

2.2.3 Contribution to Household Income

The 1996 MIH-GTZ survey indicated that income per worker is 324,000 Kip per year, which is higher than the minimum wage for unskilled labour, 260,000 Kip per year. However, more than 50 per cent of micro/small enterprises generated earnings per worker that are less than the minimum wage, though about 15 per cent of micro/small enterprise workers in the country earn more than twice the minimum wage. The highest earnings per worker are found in the transport sector while the lowest are in manufacturing. This tends to contradict the assumption that manufacturing is the most productive and remunerative sector. Of the sub-sectors, the wholesale sub-sector generates the highest earnings, followed by the hotel/restaurant sub-sector.

As to earnings per household, 19 per cent of micro/small enterprises contribute the entire family income, 25 per cent contribute more than half, and 25 per cent about half. (The income generated by the owner to household: calculated by multiplying the wage per worker by the number of owners and unpaid family workers in the enterprise.) About one third of the enterprises surveyed contribute less than half of overall household earnings.

The contribution of enterprises to household income varies significantly with the size of the enterprise, the larger ones generally contributing more. The average micro/small enterprise is actually below the average income line. Among households with micro/small enterprises, the average income is about 980,000 Kip per year or approximately 75 per cent of the average income for all Lao households, 1,300,000 Kip per year. (It is based on the 1992-93 Expenditure and Consumption Survey (ECS) combined with the change in the consumer index in 1995 prior to the SEDP-SME survey.) Among the poorest third of households operating micro/small enterprises -- those with incomes of less than 520,000 Kip per year -- two thirds are in retail, vending, or textiles and 54 per cent are one-person firms.

If such patterns of income earning among micro/small enterprises have been maintained since 1996, one could assume that they are still only a supplementary source and not yet a secure main source of income particularly for the smallest enterprises.

2.2.4 Contribution to the National Economy

The micro/small enterprise sector provides goods, services and jobs. At the national level it has sales of 386 billion Kip per year (US$406 million). (The exchange rate at the time of the survey was 950 Kip per US Dollar.) The sector contributes between 74 and 116 billion Kip (US$78 and $US122 million) per year to Gross Domestic Product. This is probably between 6 per cent and 9 per cent of GDP. More than 50 per cent of all micro/small enterprises fall within the range of 100,000 to 500,000 Kip (US$105 to US$525) per year in value added. Only 19 per cent have a value addition of more than one million Kip (US$1050) which represents two thirds of total value added by micro/small enterprises.

The results of the 1996 national survey also show that close to half of all micro/small enterprises have annual sales between 1 and 5 million Kip (US$1050 and US$5250). Over 90 per cent of these enterprises have annual sales of less than 5 million Kip. However sales do not necessarily indicate the 'size' of an enterprise, as traders may have high revenues but low margins.

In terms of the value of fixed assets, the average among micro/small enterprises is relatively high, 2.6 million Kip (US$2,735). However, 60 per cent of micro/small enterprises have assets worth less than one million Kip (US$1050). Probably a small number of quite large enterprises pull the average upward and therefore this figure is not likely to represent a typical enterprise.

2.2.5 Growth Prospects of Micro/Small Enterprises

The largest number of micro/small enterprise owners, 39 per cent, started their working lives as farmers: 30 per cent had been government employees and only 14 per cent were already in family businesses. This indicates the extent of career changes forced as a result of the recent economic restructuring in Laos that has produced a large number of first generation entrepreneurs.

The 1996 MIH-GTZ survey found that between 1994 and 1995 the annual "birth rate" of micro/small enterprises was 29 per cent. In the period 1991 to 1995 it was 25 per cent while the "death rate" was 15 per cent, resulting in a 10 per cent average annual growth rate. Assuming this pattern has remained constant, the total number of small enterprises would have increased from 146,000 in 1996 to approximately 235,000 in early 2002. However there are always risks in starting small enterprises and almost 25 per cent of all new micro/small enterprises close within two years, while about 55 per cent close within four years.

The growth rate estimated by the 1996 MIH-GTZ survey was more positive than that estimated by the National Statistical Centre (NSC). In 1996, the NSC recorded an average growth rate for small industries comprising 1 to 9 workers of 11 per cent, and for medium industries comprising 10 to 99 workers, of 6 per cent.

The average growth rate across all small and medium enterprises is 8.5 per cent. This is slightly lower than the rate in the 1996 MIH-GTZ survey and is not applied in estimating the total number of micro/small enterprises for the current year. However the NSC rate was derived from statistics drawn only from manufacturing producers within the industrial sector, and only from manufacturing enterprises registered with the Ministry of Industry and Handicraft -- with which most micro/small enterprises are not registered at all.

On the positive side, a growing number of micro/small enterprises are expanding. In the 1996 MIH-GTZ survey 37 per cent of micro/small enterprises had increased in size over their lifetime. This corresponded to a 5 per cent annual growth and generated 13,000 jobs per year.

Overall, the micro/small enterprise sector may have been creating jobs at a rate of about 39,000 per year, two thirds coming from growth in the total number of enterprises and one-third from the expansion of existing enterprises.

Making the -- not fully justified -- assumption that these growth rates have been consistent over time, the current number of employees in the sector could be in the region of 454,000.

2.2 General Characteristics
Study on Generating Employment through Micro and Small Enterprise and Cooperative Development in Lao PDR

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