Chapter 2: An Economic Portrait of Rural Households

Characteristics of rural households' demographic structure and income-generating activities are important determinants of financial decisions and needs such as borrowing, saving, lending, and risk management. Therefore, this study of rural and microfinance in the Lao PDR begins by presenting a brief economic portrait of the households surveyed. For the purposes of analysis, each sampled household was assigned to a geographic stratum and a wealth quartile following the methodology described in Chapter 1. ^1-1 Figure 2.1 [ PDF 69.8KB | 1 pages ] presents the distribution of households by wealth quartile in each stratum.

The occurrence of households in the poorest quartile is highest in the Other Rural stratum, where 27.27% of households are in the poorest quartile, and is progressively less frequent in the Rural Mekong, Provincial Capital, and Peri-urban strata, respectively. The occurrence of a household in the richest quartile follows the opposite pattern, being highest in the Peri-urban stratum (where 38.05% of households are in the richest quartile) and progressively less frequent in the Provincial Capital, Rural Mekong, and Other Rural strata, respectively. These results indicate that poverty is more prevalent in more remote rural areas, while the Peri-urban and Provincial Capital strata tend to be wealthier. However, they also indicate that large portions of households in each stratum fall into each wealth quartile.

Households' Income-generating Activities

Figure 2.2 [ PDF 103.6KB | 1 pages ] shows the proportion of rural households that report deriving their primary source of income from selfemployment or their own business (including selfemployment in agriculture, i.e., working their own farm), salaried work, and wage labor. 2 For 90.34% of rural households, the primary source of income is self-employment or ownership of a business. Only 5.38% of rural households have salaried work as the primary source of income, while wage labor provides the primary source of income for only 4.28% of rural households.

Table 2.1 [ PDF 47.5KB | 1 pages ] shows the distribution of sources of households' primary income, broken down by stratum and wealth quartile. The table shows relatively small differences between strata in the percentage of households with primary income from self-employment or private business ownership as the primary income source. However, more households in the wealthiest two quartiles have income from salaried work, while more households in the poorest two quartiles have income from wage labor.

To break this down further, Figure 2.3 [ PDF 47.5KB | 1 pages ]illustrates the frequency that households identified specific economic activities as their primary source of income. Rice production is the most common primary source of income (64.65% of rural households), followed by livestock raising (10.24%), and trade (6.96%). Production of other crops is the primary source of income for only 3.34% of households. The contrast between the poorest quartile–where rice production is the main activity for about 70% of households–and the richest quartile–where it is the main source of income for only 51% of households–suggests that relative poverty is linked with the production of the subsistence crop as the primary household source of income. Households in the wealthiest quartile are also markedly more engaged in wholesale and retail trade as a primary source of income.

Figure 2.4 [ PDF 72.8KB | 1 pages ] and Table 2.2 [ PDF 72.8KB | 1 pages ] present the frequency that households reported engaging in specific income-generating activities (primary or otherwise). These data illustrate that:

• the incidence of rice production as a household activity is greatest in Rural Mekong households (92.79% of households) and least in Peri-urban households (65.93%);
• there is a similar pattern with poultry production;
• the percentage of households reporting other crop production was lowest for Rural Mekong households, consistent with the dominance of rice in the farming systems in the Rural Mekong area, and highest in Other Rural households, consistent with the more diversified farming systems in the Other Rural stratum;
• other crop production was also less frequent in Peri-urban households, reflecting the lower overall dependence of these households on agriculture;
• livestock raising and fishing were consistently lower in Peri-urban households than elsewhere;
• non-timber forest products (NTFP) as a source of income were reported most frequently in Other Rural areas (49.47%), consistent with the farming systems in those areas;
• forestry was most common in Other Rural and Rural Mekong households, again consistent with their farming systems;
• trading was most common in Peri-urban households and least common in Provincial Capital households;
• service, transport, and construction businesses were more frequently reported as a source of income by households in the Peri-urban and Provincial Capital strata than by others, as would be expected given the greater demand for these activities near urban areas; and
• the richest quartile of rural households is less engaged in rice production and other agricultural activities, and more engaged in trading and industry than the other three quartiles.

Figures 2.5 and 2.6 [ PDF 84.1KB | 1 pages ] illustrate the high frequency of multifunctional households in the Lao PDR, i.e., households that report receiving income from more than one source. Some 90% of rural households engage in multiple incomegenerating activities. Even the least multifunctional stratum, Peri-urban households, has an incidence of 81.42%, and all four wealth quartiles fall in the range of 88–92%. The high level of multifunctionality is an important observation with implications for the rural finance system in the Lao PDR. While rural finance policies have traditionally focused on directed lending programs that target agricultural activities, the high frequency of multifunctionality suggests a need for financial services that serve a broad range of economic activities in rural households.

Household Income

The frequency with which households report engaging in particular economic activities is not necessarily a reflection of the importance of those sources in overall income. This section expands further on the previous analysis by examining the amount of income derived from various sources. Figures 2.7 and 2.8 [ PDF 80.2KB | 1 pages ] illustrate the average incomes of households by stratum and wealth quartile.^3-1

Peri-urban households reported an average income in the 12 months preceding the survey of KN29.16 million, some 1.44 times the average of Provincial Capital households, 2.14 times the average of Rural Mekong households, and 1.68 times the average of Other Rural households. The average income of the richest quartile of households at KN39.62 million was 5.08 times that of the average income of the households in the poorest quartile. ^4-1

Figure 2.9 [ PDF 75KB | 1 pages ] provides a more detailed analysis of income sources and illustrates the greater income of Peri-urban and Provincial Capital households, especially from business, in comparison to Rural Mekong and Other Rural households.

It also illustrates the wide variation between the richest and the poorest, stemming again largely from differences in business income. The figure highlights the importance of nonagricultural income in rural Lao PDR. Overall, only 38% of reported income came from agriculture, livestock, or fishing. Over half of reported income came from business activities. Only the Rural Mekong households, who depend primarily on rice production, reported more than half of their income from agriculture, livestock, and fishing. Among wealth quartiles, the poorest derived only 35% of their income from agriculture, livestock, and fishing; the second poorest derived 50% from these sources; and the richest and second richest each derived 37%.

Household Assets

Figure 2.10 [ PDF 83.7KB | 1 pages ] summarizes household fixed asset ownership, while Figures 2.11 and 2.12 summarize household working capital ownership. The figures highlight:

• households in the richest quartile have on average 73.41 times the average fixed assets of households in the poorest quartile, and these differences are pronounced across each type of fixed asset;
• Peri-urban households have fixed assets almost 3 times the average of rural households and almost 5 times the average of Other Rural households, and again these differences are pronounced across each type of fixed asset; and
• Peri-urban households have on average 3.46 times the working capital of the average rural household, and the richest quartile households have on average 10.31 times the working capital of the poorest households.

Characteristics of Household Financial Managers

During the survey, each household was asked to identify the household's main financial manager. The financial manager was defined as the person most responsible for allocating household resources and managing the household's money and financial decisions. As such, this person's characteristics can influence the household's overall economic and financial decisions and activities. Figure 2.13 [ PDF 64.9KB | 1 pages ] and Table 2.3 [ PDF 43.9KB | 1 pages ] present key characteristics of these financial managers, including: 60.5% of households had male financial managers, while 39.5% had female financial managers; the average age of household financial managers is almost uniform across strata; female household financial managers are most prevalent in Peri-urban and Provincial Capital households, and among the richer quartiles; and in general, the education level of the household financial manager is lower in more remote households (Rural Mekong and Other Rural strata) and in poorer quartiles.

Table 2.4 [ PDF 43.9KB | 1 pages ] shows the distribution of the occupations of household financial managers by stratum and wealth quartile. The table illustrates that:

• across strata and quartiles, the vast majority of household financial managers are self-employed; however, household financial managers are most likely to be self-employed in Rural Mekong households and the poorest households;
• the financial managers in Peri-urban households and Provincial Capital households are more likely to own businesses than those in the other two strata, and financial managers in the richest households are more likely to be business owners than those in other quartiles;
• the employment of household financial managers by Government was higher in Other Rural households and in the richest households;
• unemployment among financial managers was most frequent in Peri-urban areas, and least in Other Rural areas; and
• there is a very low incidence of household financial managers being homemakers or retired people, with 98.65% of household financial managers being in the active labor force.

Basic Household Characteristics

Table 2.5 [ PDF 69.3KB | 1 pages ] summarizes some basic characteristics of rural households in the Lao PDR according to the survey results. As already noted, there is noticeable inequality, with households in the richest quartile owning total assets whose value is, on average, 56.5 times that of households in the poorest quartile, 15.8 times that of the next poorest quartile, and 6.4 that of the next richest quartile. Relative poverty tends to be associated with areas that are more remote and more dependent on agriculture. Some 79% of households depend on agriculture, livestock, or fishing as their primary activity but derive, on average, only 38% of their income from these activities; almost 90% are multifunctional, engaging in more than one income-generating activity.

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