VI Assessment of the contribution of forestry to poverty alleviation in Lao People’s Democratic Republic Phouthone Sophathilath* Introduction Lao’s People’s Democratic Republic (Lao PDR) is a landlocked country located in central Indochina. The country shares borders with China to the north, Myanmar in the northwest, Thailand to the west, Cambodia to the South, and Viet Nam to the east. Lao PDR has a total land area of 23.7 million ha, 70 percent of which is mountainous. There are three agro-climatic zones in the country: the mountainous north; the hilly to mountainous regions in the central and south; and the alluvial river plains along the Mekong and its tributaries in the central and southern parts of the country. In 2009, the country’s total population was estimated at 6.38 million, with a population growth of approximately 2.3 percent per annum. The Lao population comprises 49 official ethnic groups of some 200 sub-ethnic groups, and around 73 percent of them live in rural areas in which livelihoods rely on forest resources. Forest situation and forest policy Being a landlocked mountainous country, Lao PDR is well-endowed with natural resources that can make a major contribution to the country’s long-term economic development. The most important of these resources are forests, agricultural lands, hydroelectric potential, and minerals. In particular, the Lao forests are rich in species with a high degree of endemism and biological distinction1. In 2010, forest cover was estimated at 40.3 percent of the total land area (approximately 9.5 million ha) (DOF 2010). This is considered to be among the highest forest cover in the Southeast Asian region. However, Lao PDR experienced a notable deforestation rate in the last two decades. Forest area decreased dramatically with an estimated forest loss of about 134,000 ha per annum or about 0.6 percent of the total land area (DOF 2002). Deforestation took place mostly in the north, where arable lands are limited and where most people practice shifting cultivation. If this deforestation rate continues, the Lao forest area will decrease to 7.4 million ha (approximately 31.3 percent of the total land) by 2020.In addition to decrease in area, changes also occurred in stocking density, species composition, forest structure, and decrease in wildlife and plant population. There are external and internal factors causing deforestation in Lao PDR. External factors include increasing market demand for Lao timber and NWFP in the region, partly resulting from logging bans * National Agriculture and Forestry Research Institute (NAFRI), Lao PDR. 1 According to MAF, FS 2020, there are at least 8,100 plant species, 166 reptile and amphibian species, 700 bird species, and 100 mammal species identified in Lao PDR. 175 in neighboring countries that increase pressure on the Lao forests. Internal factors, on the other hand, include shifting cultivation practices, unsustainable logging, land conversion to commercial plantations, hydropower development, and mining. More recently, deforestation in Lao PDR has been intensified by careless land concessions for domestic and foreign direct investments in natural resource-based sectors, particularly commercial plantations, hydropower electricity generation, and mining. In the Lao policy, deforestation has been recognized as a serious threat to the sustainable socio- economic development of the country. The Government of Lao PDR (GoL) has spent a lot of effort in placing Lao forests under sustainable management. This includes the development and testing of various sustainable forest management models and improvement of forest policy and related legal framework. The participation of local people in forest management, protection, and conservation has been strongly promoted. These policy directions have been finally translated into the Forest Strategy toward 2020 (FS 2020) adopted by the GoL in 2005. The strategy consolidates the government’s visions and related policies for the sustainable development in the forestry sector and specifies the important role of forestry development in economic growth, poverty reduction, environmental and biodiversity conservation, and mitigation of global climate change. In FS2020, the GoL envisages to increase forest cover to reach 70 percent of the total land area by 2020, of which the production forest (PDF) accounts for around 13 percent, the conservation forest (NBCA) around 20 percent, and the protection forest (PTF) around 35 percent. In addition, forest plantations are expected to contribute 2 percent or around 500,000 ha. The key strategies set for forest recovery include natural regeneration, sustainable forest management, and the promotion of forest plantations. In June 2011, the GoL adopted the 7th NSEDP (2011-2015) that targets an increase in forest cover to 65 percent by 2015. To date, 51 PDF areas covering a total area of around 3.1 million ha (about 13 percent of total land area) have been demarcated throughout the country. All these PDFs are to be put under the Participatory Sustainable Forest Management System (PSFMS)2 developed and implemented by DoF with support from the Sustainable Forestry for Rural Development (SUFORD) project. The PSFMS has so far been implemented in 16 out of 51 PDFs covering 42 percent of the total demarcated PDF areas (DOF 2010a). Out of these PDFs, six sub-PDFs covering almost 82,000 ha have been certified by Smart Wood using the Forest Stewardship Council (FSC) criteria. Further expansion of certified forest areas is planned in the future (Ibid.). By doing so, GoL expects to maximize the value of Lao timber when trading with international markets. But due to a number of limitations, not much in premium benefits have been obtained from the effort so far. In addition, PTFs covering a total area of around eight million ha are to be established. This forest type is particularly important for the protection of watersheds, especially in the uplands. However, the establishment and management of PTFs in Lao PDR are currently in an initial stage. No specific strategy and plans yet have been prepared for the establishment and management of PTFs. Efforts so far have been concentrated on boundary delineation on maps and preparation of governing regulations. In 2010, 308 protection forest areas covering around six million ha were in the process of boundary demarcation, 180 of which were officially approved by relevant provincial authorities. No groundwork has started yet. Finally, 23 NBCAs have been established with a total area of about 4.4 million ha (approximately 19 percent of total land area) (DoF 2010). These forests are managed under two management systems: the “Participatory Protected Area Management System” and the “Participatory Conservation and Development.”3 In spite of a lot of efforts to develop management models and build associated capacity, the management of NBCAs in Lao PDR is still in an early stage and faces a number of limitations 2 PSFMS is a forest management system developed for the management of PDFs with full participation of respective villagers in planning, operation, and benefit sharing in accordance to prescribed rules and regulations. 3 The two management systems both involve local people in the planning and management of NBCAs, but the difference between them is that in ICAD, rural development activities are integrated in the management system. 176 and obstacles. Some key issues include, for instance, unplanned village settlements, unclear NBCA boundaries, pressure from exploitation, encroachment and large-scale development projects4, inadequate institutional arrangements, lack of knowledge and experience, lack of funds, and other concerns. Economic situation In terms of economy, Lao PDR is currently in the transition period, moving towards a market economy. In general, the economy has performed relatively well in recent years in spite of the global financial crisis. Currently, Lao PDR belongs to the top 10 countries that improved their human development index (HDI) and ranks 122nd out of 169 countries listed (UNDP 2010). The gross domestic product (GDP) shows a steady growth of about 7.9 percent per annum in the last five years and it is projected to continue growing steadily in the future. Within the total growth, the agriculture sector grew on average at 4.1 percent, with a 30.4 percent share in the GDP; the industry sector at 12.5 percent with 26 percent share; and the service sector grew at 8.4 percent with 37.2 percent share. The rest was accounted for by indirect taxes (Report on the High Level Round Table Meeting 2010). The economic growth in Lao PDR has been extensively attributed to external demand and massive inflows of foreign direct investment (FDI) from neighboring countries, particularly China and Viet Nam. During the period from 2000 to 2009, the FDI in Lao PDR accounted for US$12.2 billion, out of which 34 percent went to electricity generation, 26 percent to mining, 12 percent to service, 9 percent to agriculture, 8 percent to industry and handicraft, and 11 percent to the other sectors (PEI 2010). The number of approved and implemented projects gradually rose. In 2009 alone, 208 projects were approved and implemented, valued at approximately US$4.3 billion of FDI. Table VI.1. Poverty and literacy rates of populations affected by hydro & mining investments in Lao PDR Hydro: Within 1 hour’s walk of Mining: Mining: exploration planned (with current/planned exploitation /general survey*** MOU)* hydro** stage Villages 293 255 36 1,225 Population 104,962 112,256 19,082 568,370 PovertyRate 47% 42% 37% 40% Literacy rate 60% 69% 46% 40% * Based on 42/81 hydro projects,“planned” include under construction, planning or feasibility study **Excluding population within the inundated area, based on 42/81 hydro projects ***Rough average of projects in exploration or general survey stage Source: Fenton et al, 2010 in Lao PDR Development Report 2010. Background Paper. Social Impact Mitigation from Hydropower and Mining in Lao PDR: Examining Potential for Benefit-Sharing Approaches. The investments are mostly concentrated on resource sectors such as hydropower electricity generation, mining and agriculture, particularly commercial plantations (Ibid.). The majority of these projects are located in remote rural areas where poverty incidence is high. Table VI.1 above depicts examples of the characteristics of affected populations from hydro and mining investments in Lao PDR. In general, Lao PDR has achieved a rapid economic growth that drives development. However, the GoL has recognized that the growth does not reflect sustainable development because it is mainly derived from the exploitation and export of natural resources (Report of the Lao President to the IX Party Congress 2011). Increasing demand for the country’s abundant natural resources will further accelerate the pace of exploitation of these resources, frequently without adequate measures to prevent or mitigate their adverse impacts. 4 Large-scale development projects that challenge NBCAs include hydro-power development, mining, and industrial agriculture production, and plantations. 177 Poverty situation Despite the significant economic growth, Lao PDR remains a country with much poverty. Poverty in Lao PDR is defined as “the lack of ability to fulfill basic human needs such as not having enough food, lacking adequate clothing, not having permanent housing and lacking access to health, education and transportation services” (NGPES 2004). Poverty in Lao PDR has a strong geographic dimension. Poverty incidence registers higher in the uplands as compared to lowlands. In particular, it appears highest in the southwestern region of the country, particularly along the Vietnamese border. In general, there is a big poverty gap between rural and urban areas, as depicted in Figure VI.1.That the average national poverty line is very close to the average rural poverty line indicates that the highest poverty incidence remains in rural areas. For concentrating poverty eradication schemes, the GoL identifies 72 districts as poor and a core group of the 47 poorest districts has been selected for priority investments. All identified districts are located in remote and mostly forest areas. Figure VI.1. Poverty trend in Lao PDR 60 51 50 42.5 37.6 40 46 31.9 Rural 39.1 30 22.1 33.5 Nation 26.5 27.6 20 Urban 19.7 17.4 10 0 1993 1998 2003 2008 Source: Draft 7th NSEDP of Lao PDR. To tackle the problem, the GoL is strongly committed to achieve the MDGs and targets set in its National Growth and Poverty Eradication Strategy (NGPES)5. The strategy set the targets for stable economic growth at 7.5 percent and the population living under the international poverty line to 24 percent by 2015. The strategy was elaborated and translated into the 6th National Socio-economic Development Plan (NSEDP), which was implemented during the period 2006-2010. The 6th NSEDP considered agriculture and forestry, transport, health, and education as priority sectors for poverty eradication. The implementation of the 6th NSEDP resulted in a rapid economic growth and a satisfactory poverty reduction rate. For instance, in this period GDP per capita increased from US$491 (2005) to US$1,069 (2010) and the poverty headcount ratio was reduced from 33.5 percent to 26 percent in the same period (Report on the High Level Round Table Meeting 2010). The positive trend of poverty reduction in Lao PDR is also shown in Figure VI.1. In spite of the rapid economic growth, there is a big poverty gap between rural and urban areas. In 2010, more than 73 percent of the total population still lived in rural, marginalized areas (Ibid.). These people are heavily dependent on forests for their livelihoods, and the majority of them practice shifting cultivation. According to Lao policy, this practice is one of the main causes of deforestation and must be eradicated. 5 NGPES was developed and adopted by GoL in 2004 to guide poverty eradication in the nation. 178 To continue reducing poverty, the GoL adopted its 7th NSEDP in the 6th National Assembly Meeting held 9 to 24 June 2011. In the 7th NSEDP (2011-2015), GoL targets an increased annual per capita income of US$1,700 by 2015 and a stable annual GDP growth at 8 percent. Out of the total GDP, the agriculture and forestry sectors are expected to contribute 23 percent, the industry sector 39 percent, and the service sector 38 percent. The poverty headcount ratio is targeted to be brought down to 24 percent (Draft 7th NSEDP of Lao PDR 2010). Another forestry-related target in the 7th NSEDP is to increase forest coverage to 65 percent of the country’s total area by 2015. Poverty eradication and forestry in national policy The highest poverty incidence in Lao PDR is found in rural areas, where around 73 percent of the total population reside. These people are dependent on natural resources, especially forest resources for survival. Thus, forests and poverty are interrelated, and sustainable forest management and utilization are essential for poverty alleviation. In the national policy, the GoL recognizes that forest resources are essential for poverty eradication. It is clearly spelt out in one of the NGPES strategic objectives “maintaining a healthy and productive forest cover as an integral part of the rural livelihood system, and generating a sustainable stream of forest products” (NGPES 2004). To materialize the objective, sustainable forest management is one of the four development goals of the Agriculture and Forestry Development Strategy towards 2020 ‘Sustainable forest management for preserving biodiversity, improving national forest cover, providing valuable environmental services and fair benefits’(Draft MAF Agriculture Development Strategy 2020). In addition, forests are recognized as one of the most important environmental resources, which play an important role in the poverty-environment nexus, particularly in the interrelationship between economic growth, poverty eradication, and environmental degradation. It is also noted in the national policy that deforestation will most likely accelerate poverty in rural areas, where most of the poor inhabit, and cause unsustainable economic development in natural resource-based sectors such as mining and hydropower development, and environmental degradation, which in turn affects economic growth and exacerbates the poverty situation. In reaction, the GoL through the Poverty-Environment Initiative (PEI)6 has conducted a number of social and environmental impact studies of the development in key sectors with potential negative impact on the forest and its natural resources, including forest resources. These include, for instance, impacts related to FDI such as land concessions, commercial plantations, mining, hydropower development, bio-energy development, and others. Findings and recommendations for inclusive and sustainable development have been streamlined into the planning process, especially in the preparation of the 7th NSEDP. Contribution of forests to poverty alleviation Forests have an important role to play in the national economy and are central to poverty alleviation, especially for rural people. For poverty alleviation in particular, Oksanen (2003) has grouped contributions from forests into five categories: (i) income generation, (ii) subsistence, (iii) energy, (iv) agriculture and rural development, and (v) governance. In general, it is recognized that forests provide a significant contribution to poverty eradication, but to what extent, especially at the household level, is hard to quantify and is not recorded in national statistics. The following sections describe examples of forest contributions to poverty alleviation. Knowing that it is difficult to quantify indirect contribution of forest to poverty alleviation, discussion hereunder focuses on direct contributions in different aspects. 6 A program that aims to mainstream poverty and environmental issues into national level planning and development processes to ensure that the country’s rapid economic growth generates inclusive and sustainable development, supported by UNDP and UNEP. 179 Subsistence use of forests and allocation of tenure over forest land and resources Almost all the Lao population living in rural areas is heavily dependent on forests for their subsistence, income generation, energy, and agriculture and rural development. Because it is difficult to distinguish whether forest products are collected for food, for income generation, or for other subsistence uses, the following sections will discuss the traditional contributions of forest resources as categorized into two dimensions, namely the contribution of NWFPs as food and income sources, and timber as fuel wood and subsistence materials. Phouthone Sophathilath Wild tea and mushrooms are some of the NWFPs collected and sold in open markets. NWFPs as food and income sources In Lao PDR, NWFPs are diverse and accessible to all Lao citizens, regardless of ethnicity, gender, wealth classes, and living conditions. NWFP collection is a traditional subsidiary livelihood activity for rural forest- dependent people, who mainly practice shifting cultivation. These people collect NWFPs mainly for food and additional income generation. For poverty eradication, NWFPs are recognized as an important natural resource in the policy of the Lao Government, especially in the NGPES. In this context, NWFPs are the main sources of food, income, medicines, and other subsistence items. Living within and closer to forest areas, rural people have greater advantages in being able to benefit from NWFPs as compared with urban people. They are the main collectors, even if they sell these for urban consumption and commercial trading. The true extent of NWFPS contribution is hard to quantify, but roughly estimated, on the average, NWFPs are worth a total of almost US$320 per year for each rural household, contributing to about 44 percent of subsistence value, 55 percent of cash income, or 46 percent of the total household economy.7 As a food source, over 700 NWFP species in the forests (238 plant species and 470 animal species) are 7 Clearing-House Mechanism, http://chm.aseanbiodiversity.org 180 identified as edible (Baird et al. 1999 cited in Foppes and Ketphanh 2000). Wild plant species such as mushrooms, bamboo shoots, wild fruits, vegetables, and honey, for instance, provide a wide range of food products for consumption. According to Emerton, contribution from wild food has been estimated to be 61-79 percent of non-rice food consumption by weight and to provide an average of 4 percent of energy intake, 40 percent of calcium, 25 percent of iron, and 40 percent of vitamins A and C. They are also commonly used as buffers against seasonal and emergency food shortages (Emerton 2005). Besides, NWFPs are also important income sources in rural areas. In many locations, NWFPs are also widely collected for sale in open markets. For cash income, national studies found out that the average sales of NWFPs on the national level are worth 11 percent of poor household cash incomes, but rise as high as 55 percent in forest-rich areas. For example, a survey carried out in Houapanh Province found that NWFPs contributed an average of 38 percent of village cash income, and up to 56 percent for household living within and adjacent to forests.8 The case studies conducted in Khammouane (Foppes and Ketphanh 2000), Sayabouly (Foppes et al. 2001), Luang Phrabang (Yokoyama 2003) and Sekong (Rosales et al. 2003) discovered that NWFPs provide an average annual income in a range of US$69- 127, averaging 45 percent of family cash income. Many studies also revealed that local people use income from NWFPs to pay back debts associated with rice shortage. The case study in Luang Nam Tha, for instance, showed that income from NWFPs contributes an average 61 percent of cash income or around US$60 per family per year that households need in order to pay back debt associated with rice shortages (Kaufmann 1997). In addition, NWFPs serve as materials for household construction and handicraft production including bamboo, rattan, pandanus, broom grass, and paper mulberry. They are also the ingredients of traditional medicines and are also used for livestock fodder and pasture. It is also important to note that NWFPs can be an important incentive for forest conservation, given that the forest is the main source of NWFPs, which are important food and income sources for local people, especially shifting cultivators. However, these resources are rapidly declining in recent years, especially the species found in dense forests. Important factors associated with this negative trend are over-harvesting, shifting cultivation, forest fire, animal damage, lack of management regulation, and damage from infrastructure development. The decline will continue and may lead to complete loss of NWFPs (and extinction of some species) given that NWFP domestication cannot meet the demand and market demand is high (Sophathilath 2006). The continuous decline of NWFPs can increase the challenge for poverty reduction in forest-dependent areas. Many efforts have been made to sustainably and effectively manage natural NWFPs. The case study carried out by this author shows the successful case from the intervention of NWFPs Sustainable Management Project carried jointly by IUCN-NAFRI in Ban Nam Pheng, Oudomxay Province. Fuelwood and other materials for subsistence Another important aspect of forest contribution to poverty alleviation is providing energy sources, especially for fuelwood and charcoal. Fuelwood is an essential energy source for the rural poor where there are no other alternatives. It was estimated that fuelwood accounts for 80 percent of total energy consumption in Lao PDR, and 92 percent of total households in the country use fuelwood for cooking and heating.9 In addition, fuelwood and charcoal are often traded for urban consumption, from which the poor can benefit in terms of additional income and employment. In Lao PDR, fuelwood collection is part of the Lao culture, especially for people living in rural areas. Thus, collecting fuelwood for household consumption, so long as it is not for business purposes, is allowed in all categories of natural forests. Fuelwood collection is allowed by law in village forest areas allocated for communities to manage and utilize. Rural people, who practice swidden cultivation, often 8 Clearing-House Mechanism, http://chm.aseanbiodiversity.org 9 MEM Renewable Energy Strategy. 181 collect fuelwood from their newly-cleared upland rice areas. Many also get their fuelwood from fallow lands. Some also collect from dense forests near their villages. Because there is no national record on fuelwood consumption, the author used the estimates obtained from the website of Clean House Biodiversity to describe the fuelwood situation. According to the source, data on the quantity of fuelwood used in rural areas of Lao PDR show extreme degrees of variation ranging from 0.75-2.92 cu m or 0.58-2.26 tonnes per capita per year. Thus, a conservative average per capita consumption of 1.2 tonnes10 per capita per year was used for further estimation. According to the same source, consumption of fuelwood and charcoal by urban dwellers has been estimated at 42,146 tonnes or 280,973 cu m per year, and firewood demand for fuelwood consuming processing industries at 111,118 tonnes or 143,468 cu m per year. Applying current prices, household and commercial fuelwood consumption has a total annual value of approximately Lao kip (LAK) 45.75 billion, which is equivalent to US$45.7 million for the use of more than 5.6 million tonnes or almost 7.5 million cu m of raw wood a year. Given the figure, it can be said that forests are essential and provide substantial values to rural people whose livelihoods heavily depend on forests. The GoL has promoted and invested in a number of bio- energy schemes such as biogas and rural electricity networks that could be good alternatives to and replacements for fuelwood at certain levels. However, since fuel wood consumption is already rooted in Lao culture and development of other alternatives is at a slow pace, fuelwood will remain an important energy source for the rural poor. Commercial and industrial forestry Commercial forestry is understood as the use of forest products and forest lands for commercial purposes. There are many types of activities that can be put under commercial forestry. As examples, four different types of activities are used by the author to discuss their contributions to poverty alleviation in this section. These include contributions from commercial plantations, contributions from the management of production forests, contributions from wood products and wood processing, and contributions from forest-induced environmental services. Commercial forest plantations Undertaking commercial forest plantations is one of the key strategies for the GoL to meet its targeted forest cover set in its Forest Strategy 2020. In the strategy, the GoL anticipates an increase in the coverage of industrial tree plantations up to 500,000 ha (MAF 2020). To fulfill the objective, the GoL has strongly promoted domestic and foreign investment in forest plantations. As a result of the promotion, the investment in commercial plantations increased sharply during 2004 to 2006, mostly through large-scale FDI in the form of land concessions. In 2007, over 109 foreign Phouthone Sophathilath Monocrop plantations. 10 This is a conservative estimate for rural households in the Lower Mekong Region. 182 The expansion of rubber, eucalyptus and other monocrop plantations in vast land concessions, mostly under large-scale foreign investments, is drawing attention to the social and economic costs for the local communities and harmful environmental impacts. Phouthone Sophathilath companies received business licenses in the plantation sector (MPI 2007) and 123 plantation projects worth almost US$0.7 billion were approved.11 In terms of area, plantations increased from around 5,000 ha in 1990 to 165,800 ha in 2007 (NERI). The most recent national record is unfortunately not accessible. The most favorable tree species for commercial plantations in Lao PDR were rubber, eucalyptus, acacia, teak, agar wood, and jatropha. In recent years there was a rubber boom in Lao PDR. Areas planted with rubber skyrocketed from approximately 27,000 ha in 2007 to 140,550 ha in 2008, and 195,000 ha in 2010, as a result of FDIs from China and Viet Nam. These mostly occurred in the northern and southern parts of the country (NAFRI 2008). MAF projected that rubber areas would increase to 300,000 ha by the year 2020 (MAF 2009). Companies from China have large investments in rubber plantations mostly in the northern region near the Chinese border, while Vietnamese companies are located in the southern region. The Chinese investments are mainly in the form of contract farming; the Vietnamese, on the other hand, mainly have used the concession model. Besides rubber, foreign companies have also invested in eucalyptus plantations. The largest investor is the Japanese pulp and paper giant Oji Paper, which received a land concession of 50,000 ha in the central region and applied for another 30,000 ha in the southern part of the country. Another large- scale investor is Grassim-Birla Group of India. This company also received a 50,000-ha concession in the central region. More recently, the Finnish pulp and paper giant Stora Enso received 35,000 ha concession for planting eucalyptus in the southern region. There has also been a substantial investment in jatropha feedstock cultivation with a total planned investment of approximately US$50 million (Gaillard 2010). In this area, the largest companies, Kolao Farm and Bio-energy Company, have announced an investment of US$30 million for producing 400 million liters of biodiesel for domestic uses. However, the actual scale of the developed plantation and the status of the planted jatropha are still uncertain. By 2020, the land area to be covered by jatropha cultivation is expected to reach 167,000 ha with a total seed production of about 250,000 tonnes per year (Gaillard et al. 2010). In terms of investment models, three main models apply in the plantation sector in Lao PDR, namely the Smallholder Farming Model, Contract Farming Model, and the Concession Model. Besides contributing to the fulfillment of the forest cover target of the FS 2020, the commercial plantation is also perceived to bring about many social and economic benefits in terms of economic growth, increased per capita income, improved standards of living, and poverty reduction. The following 11 These figures do not include plantation projects with investments lower than US$ 3 million approved by provincial and districts authorities and those established by smallholders. 183 discusses whether or not plantations contribute to poverty alleviation. In particular, the discussion will compare benefits and possible negative impacts of the three different investment models. Smallholder farming model This investment model is commonly used for teak, rubber and agarwood. Individual farmers who have sufficient land and capital and can wait for the long-term benefits of this model. These farmers mostly belong to middle-class or wealthy groups. Experiences show that investment in these plantations take a minimum of eight to 15 years to receive returns (eight years for rubber and agar wood and 15 years for teak). For rubber, an eight-year rubber tree produces 1,360 kg of latex per hectare for a profit of around US$880 (NAFRI 2008) with a tapping period until the trees reach 35 years of age. Famers who invest in teak plantations have to wait at least 15 years for financial returns, given that there is no market for small wood from the first and second thinning. Once the teak trees mature (in 15 years) for harvest, teak farmers receive an average of 15 cu m per hectare valued at US$1.5 per hectare in 15 years or about US$100 per hectare per year.12 There have been cases, wherein famers have sold their young plantations to investors at prices ranging from US$700 to US$2,000, depending on the location and the ages of the trees. These farmers, after selling their plantations, often seek lands in other places, often in forests, to cultivate rice. The investment in agar wood plantation, on the other hand, is very costly, compared to the investments in teak and rubber. The total cost is estimated at about US$4,200 per hectare in eight years with an establishment cost of about US$1,950 per hectare (Sengdala 2010). In terms of income generation, about US$17,000 per ha can be made from selling wood (about 58 tonnes per ha) with a net profit of around US$12,800 per ha in eight years or US$1,600 per ha per year. Profits can also be made from extracting oil estimated at US$8,500 per ha (Ibid.). Contract farming model Investors who obtain no large land concessions usually use this model. This model, particularly the ‘2+3 model’ has been strongly promoted by the GoL and widely used in both perennial and short duration crop plantations in different parts of the country, such as rubber plantations in Northern Laos, maize in Louangnamtha, soybean in Oudomxay, sweet corn in Vientiane, horticulture in Bokeo, and tea in Phongsaly (Setboonsarng et al. 2008). This model is considered as the most appropriate in the transition period while moving from a subsistence to a market economy. Under this model, external investors bring with them technology, capital, and market access to rural areas. In exchange, farmers have better access to promising technology, sufficient inputs and credit, and an assured market for their produce that enables them to earn higher profits. This translates into improved incomes and an effective transformation from subsistence to commercial production with no financial burden upon the public sector. This suggests that contract farming can be an effective private-sector-led mechanism to facilitate the transition to commercial agriculture. In addition to bringing FDI into the rural sector, contract farming can be an effective tool to improve the profitability and raise the incomes of small farmers, thereby reducing poverty in rural areas with limited market development. In addition, while involved in the contract, farmers have full rights in land ownership. Thus the model secures land tenure for farmers. The model also introduces a fair benefit-sharing system. Additional benefits that farmers can gain from this model are the ability to intercrop seasonal crops such as rice and corn in perennial plantations such as rubber. This can be done in the first three years before the plantation’s canopy closure. 12 Price at farm gate US$ 100 per cu m cited in Midglay et al. 2006. 184