Rubber investments and market linkages in Lao PDR: Approaches for sustainability

Lao PDR is currently experiencing a sudden, rapid and largely uncontrolled expansion of rubber cultivation. It is clear that growth in China’s demand for rubber is influencing the Chinese investment in rubber planting in northern Lao PDR and is very likely influencing the Vietnamese proposals for rubber plantation expansion in southern Lao. Some industry experts predict that the estimated 28,000 hectares of rubber plantations in Lao at present will grow to some 300,000 hectares by 2020.

This study is the result of collaborative research undertaken by the International Union for Conservation of Nature (IUCN) Lao PDR Office with partners in Lao PDR, China and Vietnam, with support from the Sustainable Mekong Research Network (SUMERNET). The overall goal of SUMERNET is to enhance the governance of natural resources and to catalyze the transition to sustainability in the Mekong region. In 2008, SUMERNET supported a series of interlinked research projects, including this study into rubber development in the Greater Mekong Sub-region (GMS) with a focus on the recent, rapid increase in rubber cultivation in Lao PDR. This study aims to enhance the current understanding of the scale, scope and linkages of investments in rubber in Lao PDR, as well as to explore approaches that could potentially inform the more sustainable development of rubber.

Utilizing a combination of desk-based research and field work carried out in northern and southern Lao PDR, China and Vietnam, this study examines the
investment trends, market linkages and business models that are driving the development of rubber in Lao PDR, focusing on the ties between the Lao rubber sector and those of its neighbours. This study also explores the understanding and practice of corporate social and environmental responsibility in the lower Mekong
region, particularly in Lao PDR, and discusses approaches to enhance the sustainability and poverty reduction potential of rubber cultivation.

This study shows that the Lao rubber sector is intricately linked to the rubber sectors of China and Vietnam, with financing, technology and marketing, as well as
demand for the final product, being supplied by these countries. This gives Chinese and Vietnamese investors important influence over the trajectory of rubber development in Lao PDR. The study also finds that the investment and business models utilized in the Lao rubber sector, although differing in their emphasis on concessions versus contract farming in the north and south of the country respectively, face a number of similar challenges in ensuring that rubber development leads to positive and sustainable outcomes for the people of Lao PDR. Unless challenges related to ensuring adequate benefit-sharing, labour supply, food security and environmental protection are addressed, the benefits of rubber cultivation in Lao PDR may not outweigh the negative impacts.

There are a number of approaches being applied in countries around the Asia-Pacific region and the world that attempt to maximize the positive outcomes of
rubber production. These include market-based and private sector approaches, such as CSR activities in the rubber industry and forest certification, as well as
government and civil society-led initiatives to guide and support rubber development.

Examination of the available literature, as well as discussions with a range of stakeholders involved in rubber cultivation and production in Lao PDR, China and
Vietnam, shows that there are options open to government, companies and farmers in Lao PDR to help ensure a more sustainable development of the country’s rubber sector. This study supports recent moves in Lao PDR to suspend further rubber development until key questions about its economic, social and environmental impacts can be answered:

  • How much rubber does Lao PDR want, where is suitable to grow it, and how will the country provide the labour to manage and harvest it? Equally important, what policy process is needed to determine scale and location of plantations in a sustainable and equitable fashion?
  • What models or approaches for rubber cultivation and production would support the country’s sustainable development goals? As well as understanding the trade-off between rubber plantations and other crops or land-uses, there are important trade-offs to consider in the levels of profitability, risk and environmental protection offered by different rubber cultivation methods.
  • How can rubber investments be effectively regulated and monitored in a transnational context to ensure that sustainable development goals are being met?

Our recommendations to the Lao authorities, investors, farmers and researchers also include:

  • Address gaps in the policy and regulatory framework: A number of steps can be taken to improve the policy and regulatory framework governing the development of rubber and other cash crops in Lao PDR. These include undertaking land-use planning at the national, provincial and local levels, as well as finalizing the land allocation process. Existing laws and regulations need to be fully implemented and to be effectively communicated to investors and developers, particularly those associated with environmental protection. The capacity of WREA needs to be strengthened in this regard, and EIA requirements must be enforced. In addition, the GoL and/or provincial governments should consider the formulation of additional laws or regulations to ensure that the development of processing facilities for rubber meets adequate standards.
  • Protect control over land resources and access to benefits: The concession model favored for plantation development in southern Lao PDR should be reconsidered. As well as promoting non-environmentally friendly logging practices and monoculture plantations, villagers lose ownership and access to agricultural and forest land resources. The contract farming models as practiced in Lao PDR should also be improved to ensure a more equal sharing of risks and benefits between farmers and companies. Another option is introducing a land taxation system, where land tax per hectare increases with increasing land ownership. Very large parcels of land would therefore attract more tax, providing an incentive to promote smallholder farming over large concessions.
  • Enhance transnational ties and information-sharing: Linkages between the relevant government agencies, as well as trade, industry and farming associations, of Lao PDR and China, and Lao PDR and Vietnam, should be encouraged. There is a need for improved exchanges in order to betterunderstand the scope of linkages between the countries’ respective rubber sectors, and to help to manage inconsistencies in the implementation of laws, regulations and guidelines. Cooperation with other rubber producing countries may also help to address issues that threaten the stability of the rubber market and process, such as the level of supply.
  • Improve support for rubber smallholders: Compared to other rubberproducing countries, Lao PDR lacks institutions to support the sustainable development of rubber, such as rubber growers’ associations or rubber institutes. Given the still relatively small scale of the Lao rubber sector, this study does not propose that resource-intensive support mechanisms or institutions be established. However, an inter-agency body could be considered to develop strategies and plans for the sector and to help provide the information and guidance needed for effective smallholder rubber cultivation. It is in the interest of the Lao authorities to build on the first steps taken by NAFES and NAFRI to provide smallholders with technical, market and practical information about rubber and other livelihood options. The formation of farmers’ associations at the local level should also be encouraged.
  • Consider agroforestry options: More detailed analysis of alternative models of rubber cultivation and approaches to encourage sustainability should be carried out. This study reviews several options, such as rubber agroforestry, but further study of their applicability in Lao PDR is required. We recommend further testing of intercropping of agricultural and tree crops with rubber specifically. It is also important to study of the environmental, socioeconomic, marketing and institutional factors relevant to utilizing such a model in Lao PDR.
  • Establish investor protection and improve investment climate: A precarious investment climate contributes to unsustainable practices. When investors are unsure about the long-term security of their projects, their priorities are to make quick gains and they are less motivated to invest in the sustainable development of rubber.
  • Encourage CSR among local and foreign investors: CSR is an important complement to government and civil society efforts to promote sustainable development. In order to facilitate the spread of effective CSR in Lao PDR, this study recommends that relevant government, company and civil society actors should encourage a multi-stakeholder approach towards CSR promotion and implementation. Greater stakeholder participation can help to make social and environmental needs and issues more accessible to the private sector. Companies also benefit because communities which are given a voice in the decision-making process feel that they have a larger stake in the well-being of that company’s activities. There is also a need for active capacity building and networking amongst CSR actors and stakeholders, including among the regulatory institutions that monitor trade, investment and corporate behavior in Lao PDR. Learning exchanges between Lao PDR and its neighbors could play a key role in building awareness of the role of and the regulatory capacity for CSR.
  • Encourage competition and peer and public monitoring: The Lao authorities may opt to encourage competition among investors based on their adherence to sustainable practices. Businesses that perform poorly will be penalized, with the penalty channeled to rewarding those that do well. The presence of peer and public monitoring in addition to governmental oversight is necessary to safeguard against the possibility of corruption and cronyism and also supplement the inadequate monitoring capacity currently available to the Lao authorities.
  • Link PRSF subsidies to investors’ environmental performance: The existing mechanisms for monitoring Chinese companies receiving subsidies through the Poppy Replacement Special Fund may be expanded to also include sustainable practices as a criterion. From an economic perspective, profitmaximizing enterprises will not rationally adopt sustainable practices at increased cost to the business. While one-time subsidies are often used to lower risks for investors, permanent subsidies may be necessary to motivate businesses to account for environmental impacts.