Agriculture, the most important sector of the economy, clearly benefited from the introduction of the New Economic Mechanism. The changes positively affected performance by establishing a consistent policy that induced increased agricultural production over a number of years--before the droughts in 1987 and 1988-- particularly in paddy production.

In June 1988, in line with the policies described by the New Economic Mechanism, the government passed a resolution to reform the agricultural sector. As announced at the Fourth Party Congress in 1986, the principal goal was to reorient the sector toward a market economy. The abolition of the much hated agricultural tax as well as the socialist restrictions on marketing helped to create necessary incentives for farmers.

The major change was in the pricing policy. The practice of setting low producer prices for a wide range of crops was ended, boosting incomes in rural areas. (In 1987 the procurement price of rice was only 30 percent of the market price).

Other changes were implemented. Restrictions on internal trade of agricultural products were removed allowing free markets to operate, at least for important crops such as rice. Laws also were enacted to guarantee farmers' rights to private ownership of land, including the right to use, transfer commercially, and bequeath. Tax exemptions for specified periods also were decreed.

The reforms emphasize the government's belief that further increasing and diversifying agricultural production requires the participation encouragement of the private sector. Food security, as always, remains a key objective, but the focus of the new agricultural policy is on the production of cash crops that can be processed--to increase their value--and then exported. The means for reaching that goal include the popular 1989 measure of abandoning the poorly developed attempts at establishing the socialist infrastructure of agriculture--a cooperative farming system.

The primary objective of the cooperative farming system, based on the Vietnamese model, had been to help the nation achieve selfsufficiency in food. Reflecting the government's pursuit of this goal, the number of government-assisted cooperative farms nearly tripled between 1978, when the drive to reorganize agriculture began, and the introduction of the New Economic Mechanism in 1986. At that time, cooperative farms numbered about 4,000 and employed about 75 percent of the agricultural labor force although most were cooperatives only on paper, and there was no practical cooperative management. By 1988, however, employment in the cooperatives had decreased and included only 53 percent of all rural families and about half of all rice fields.

The distribution and sale of collectively managed land to families began in 1989. Most families in the old settled areas had their original land returned, which they still recognized. By mid1990 most state farms and agricultural cooperatives had been disbanded. This move, in conjunction with the removal of many restrictions on food prices and the distribution of agricultural goods, helped to pre75b recipitate a modest growth in agricultural output of about 7 percent in 1990.

At the Fifth Party Congress in March 1991, the government reiterated the basic objective of its agricultural policy: a shift from subsistence production to cash crop production through crop diversification and improved linkages to export markets. Although rural farmers have limited experience in marketing their farm produce and are cautious about participating actively in the market, they are beginning to produce and sell their specialized crops and livestock and buy manufactured goods on a regular basis. At the congress, the government also affirmed its support for the private ownership of land and its intent to protect farmers' rights to long-term use of land, to bequeath land to their children, and to transfer their land rights in exchange for compensation. These assurances, among other improvements in the economic atmosphere, are an attempt to make Laos more attractive to foreign investors.

Data as of July 1994