Following economic liberalisation reforms in the 1980s, the Laos economy has experienced tremendous economic growth. Referred by the World Bank as one of the fastest growing economies in Asia, it has recorded an impressive 8% GDP growth annually over the past decade.
A landlocked nation, Laos is blessed with an abundance of natural resources. Its ambitious strategies for economic development hinge on exporting natural resources like rice varieties, metals and electricity generated from its rivers to its neighbours: China, Vietnam, Thailand, Cambodia. However, many challenges continue to lie ahead for the nation’s economy.
The objective of this article is to address the obstacles Laos will face as the nation strives to further enhance its economy, and assess the effectiveness of corresponding government policies being put forth to navigate these roadblocks.
While economic progress has been made, Laos remains as one of the poorest countries in the world. Laos currently ranks 141st on the Human Development Index, indicating a low life expectancy, GDP per capita, and education level in the nation. Poor enforcement of law and regulation has deterred foreign direct investment. Ranked at 139th out of 175 countries by Transparency International in 2015 for clear dealings in the public sector, the primary forms of corruption reported in Laos include delays in approving documents, bribery, forgery of papers and the unauthorised modification of technical standards. Dr. Bounthong Chitmany, head of the Government Inspection Authority, believes that the country has lost US $149.40 million because of these corrupt practices between 2012 and 2014.
In addition, Laos’ economy may be overly-reliant on the export of its natural resources, potentially falling victim to the natural resource curse. Subsistence agriculture produces 51% of the nation’s GDP and 85% of those exports go to its neighbouring states Vietnam, China and Thailand. Furthermore, its service, IT and manufacturing sectors lag greatly behind because of its underdeveloped human capital.
As of 2017, only 79.9% of the nation’s population is literate. Higher education is only available at a number of universities in the country, and the wealthy Laotians who seek further education overseas tend to remain there after they have finished their degrees, rather than returning home. As a result, Laos suffers from severe brain drain.
Fortunately, there has been some work in progress. Well underway are several development plans and projects that aim to tackle the very issues facing the economy. On 12 December 2016, Microsoft announced its partnership with the government to deliver Youthworks programmes that aim to promote digital literacy in Laos. In alignment with Microsoft’s National Empowerment Plan, the purpose of this initiative is to enable Laos leverage technology to boost the employability of young people and the development of the nation’s service sector.
The programmes will offer 2500 online courses, including in ICT, entrepreneurship, vocational and skills, and as well as guidance, mentorship and job placements. Already operated in 18 other emerging countries, the programmes had achieved remarkable success in promoting youth employment in Africa and the Middle East. As 58% of Laotian population is under the age of 24, this makes youth employment an unequivocally key focus for the government.
This measure is such a crucial investment in the nation’s human capital that, soon after the announcement was made, former US president Barack Obama when referring to the subject, commented that young people in Laos should not have to relocate in order to prosper as they should be able to work and build a better life in their home country.
In addition, the establishment of the ASEAN Economic Community (AEC) in 2015 aims to create a common and single market to facilitate the free flow of capital, skilled labour, investments, goods and services between all ASEAN nations. Integration with other ASEAN economies will unlock new opportunities for Laos, which was previously limited by a small domestic market.
As a matter of fact, the Laotian economy has started to reap the benefits of increased integration within the region. Singapore had shown an inclination to relocate its businesses to developing regions like Laos, as Singaporean President Tony Tan Keng Yam urged Singaporean firms to “move quickly and seize first-mover advantage in developing markets like Cambodia and Laos”. Singapore has also recently signed pro-business policies like the Avoidance of Double Taxation Agreement with Laos, which aims to boost Singaporean investors’ confidence in Laos’ economy by eliminating the double taxation relating to the cross-border transaction between the two countries.
Measures are also put forth to sustain and further enhance the performance of the Laotian export sector. To further increase electricity supplies, the Laos government plans to install 54 more electricity transmission lines and build another 16 substations by 2020.
To increase intra-regional trade among Laos, China and other countries of Southeast Asia, a railway connecting Laos with China is under construction. The project started in 2015 and is due for completion in 2020. The 414 km railway line runs south from the China-Laos border at Boten to Lauang Prabang, Vang Vieng and the Laotian capital Vientiane, and aims to deepen the cooperation between the two countries in tourism, trade and investment.
The Laos people have high hopes that the project will bring tremendous benefits to the economy, as Mr Bouchanh Sinthavong, the Lao minister of transport optimistically stated, “the railway will benefit Lao people of all ethnic groups, facilitate and reduce costs of transportation, stimulate the development of agricultural and industrial sectors, tourism, investment and trade, as well as generate income for Lao people and the country”. The completion of the train would make it significantly more convenient and less costly to transport Laotian products, precious energy sources and agricultural products, to China and its neighbouring ASEAN countries.
As the Chinese economy is undergoing a shift from manufacturing to services, the Laos manufacturing and export-oriented businesses are expected to benefit hugely from this measure. Reduced transportation costs will also lead more frequent travel to Laos, thus boosting the tourism sector.
Nonetheless, there are some looming grand challenges and concerns with the implementation of these policies.
Firstly, ASEAN nations will inevitably find it difficult to conduct business with Laos due to its poor business environment. Laos currently ranks 134th on the World Bank’s ease of doing business index, mainly due to its toilsome corporate regulations. The World Bank estimates that exporters in Laos spend an average of 216 hours per shipment on documentary compliance, significantly above the average of 75 hours for East Asia and the Pacific. The unnecessary trade barriers are likely to dampen business confidence.
Secondly, the proposed hydropower development plan will lead to the widening of an already outsize fiscal deficit. To date, the Laos government has run fiscal deficits for years. Fiscal deficits have widened to 6% in the fiscal year 2016 due to weak tax revenue growth and rising spending. Without fiscal consolidation, public debt could rise to 70% of the GDP, potentially resulting in adverse effects on the economy such as high inflation, which could undermine business confidence.
We should also examine the effectiveness of some of the proposed measures. The railway linking Laos and China will undoubtedly create new opportunities for Laos, but taking into account of the recent economic slowdown in China, the measure may not be the elixir to Lao’s underdevelopment.
In response to the challenges Laos faces, the Lao government has implemented necessary regulatory and procedural changes. Commissioned by the German Federal Ministry for Economic Cooperation and Development and led by the Lao government, the Regional Economic Integration of Laos into ASEAN (RELATED) project aims to assist the Laos business community, Small and Medium Enterprises, to better prepare for the opportunities and challenges of economic integration with ASEAN.
Started since 2013, the project has helped to foster communication between the public and private sectors on how to ease the registration process, and facilitate trade-related investments in special economic zones by donating to Trade Development Facility II, a multi-donor trust fund that provides financial support to prioritised trade-related activities. It has also enabled Laos private sector stakeholders to participate in business-to-business events in other ASEAN states, in order to improve their access to those markets and advertise Laos as an investment destination in ASEAN.
Increased market exposure and promotion had resulted in some remarkable success, such as an initial export of 2 metric tonnes of Laotian tea to Germany’s biggest tea trader in 2013. Lastly, it has provided training for quality management in tourism and other service sectors. Skills training had contributed to a 13% increase in arrivals, a 16% in revenue and a 17% in length of stay (8.4 days) in 2013 compared to 2012. Since the Laotian service industry accounts for 44.2% of the country’s GDP, improvement in this sector is crucial to Lao’s economic growth.
Laos is likely to experience unforeseen difficulties and setbacks as it strives to diversify its economy and establish more intimate commercial links with other ASEAN states. However, with the Lao government’s implementation of necessary regulatory changes and the establishment of the ASEAN Economic Community and the RELATED project, we are hopeful that Laos will experience further and sustainable economic growth. A vibrant Laos economy is an outcome that not only Laos, but all ASEAN states should collectively strive for, since an economically thriving Laos will not only reduce the development gap within ASEAN, but will also lead to higher volumes of intra-regional trade and investment, benefiting ASEAN as a whole.
David is currently studying Philosophy, Politics and Economics at the University of Warwick. He has been part of the organising committee of the Warwick ASEAN Conference 2017. His interests include political economy, management consulting and entrepreneurship. He can be reached at email@example.com. This article was also published on Warwick ASEAN Conference.
Disclaimer: All opinions expressed in this article are the author’s own and do not necessarily reflect the views of the ASEAN Economic Forum.