The Lao PDR has been a one-party,socialist state since the overthrow of the monarchy by thecommunist Pathet Lao in 1975, which was preceded by a longperiod of civil and regional strife. After a decade ofrelative isolation and close military cooperation withVietnam, the new economic mechanism, introduced in 1986,ushered in an era of market-based reforms, which hascontinued to the present day. Lao PDR is one of the poorestcountries in East Asia, with a 2006 per capita income of US$500. In 2004, 71 percent of its population of 5.7 millionlived on less than US$ 2/day and 23 percent on less than US$1/day. However Lao PDR has grown rapidly since theinauguration of reforms two decades ago. During the 1990sgrowth averaged 6 percent per annum despite severeimbalances during the Asian crisis. Following successfulstabilization, growth continued to average close to 6percent during 2001-2004, accelerating in 2005-2007 to over7 percent. Inflation remained well below 10 percent since2005. Although Lao PDR qualifies for the Heavily IndebtedPoor Countries (HIPC) initiative, the Government has chosento maintain normal creditor relations. The latest debtsustainability analysis confirms that, while risk of debtdistress is high, medium term debt service is manageable,contingent on continued reform and prudent fiscalmanagement. Foreign direct investment has almost quadrupledbetween 2004 and 2007, and exceeds US$ 800 million annually,mostly in hydropower and mining. Growth in Lao PDR has beenpro-poor. Based on the national poverty line, the povertyheadcount has fallen from almost half to one-third of thepopulation during the decade ending in 2002-2003. Thecountry's performance on other elements of povertyreduction as summarized in the millennium development goalsis mixed.
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