Asia Times: Laos takes long and winding market road


	November 28, 2000	atimes.com

Special Reports

Laos takes long and winding market road
By Fred Thurlow

Summary
The leaders of Laos have assured international donors - on whom the communist country relies heavily for aid and grants - that they will push on with market-opening reforms.

These include increased transparency, improved budgetary procedures and administrative reforms in a drive to decentralize decision-making and improve the efficiency with which foreign investment is approved and foreign aid disbursed.

Impoverished and landlocked Laos received an estimated US$345 million in 1999 from international organizations and through bilateral arrangements with individual countries, accounting for 20 percent of gross domestic product (GDP) and 75 percent of public investment.

Following the economic crisis that devastated the region the government has slowed the pace of market reform, much to the concern of donors and investors. They say Laos is moving backwards towards old-style controls and economic repression, forcing donors to re-evaluate - and in some cases cut back on - aid to the country.

Donors say authorities must quickly launch strong stabilization measures to curb inflation, steady the kip currency and restore a growing loss of local and foreign confidence.

In 1975 the communist Pathet Lao took control of the government, ending a centuries-old monarchy. The government imposed a harsh, Soviet-style command economy. However, although it became clear these economic policies were preventing growth, no substantive reform was introduced until 1986. The government then announced its "new economic mechanism" (NEM). Initially narrow in its scope, the NEM was expanded to include a range of reforms designed to create conditions conducive to private sector activity.

The collapse of the former Soviet Union and its allied communist regimes in Eastern Europe, with which Vientiane had enjoyed close relations and economic assistance, forced Laos to develop cooperative relations with a broader range of countries, irrespective of their political, social or economic systems. This culminated in Laos being admitted to the Association of Southeast Asian Nations (Asean) in 1997. It still maintains a strong relationship with China.

Laos has a limited infrastructure, no railroads, a poor road system and limited telecommunications. Electricity is available in only a few urban areas. Key areas that require attention include recapitalization and reform of the highly indebted financial sector; reform of state-owned enterprises and better management of foreign exchange transactions. Laos also suffers from a severe shortage of tertiary-trained personnel and lacks sufficient officials with English language skills to interact effectively with donors and investors and undertake its Asean commitments.

On the plus side, Laos shares borders and many common interests with Thailand, Vietnam, Cambodia and China, forming a natural economic growth area. While the small size of the domestic market limits opportunities for trade with Laos, the more than 100 million people who live within 100 kilometers of its borders can generate market opportunities. Laos also has the potential to become an important overland transit point for trade in the Mekong region.

Pledge on reform
The communist leaders of Laos, where foreign grants and loans account for 20 percent of gross domestic product, have assured international donors that they will push ahead with new measures to promote the private sector and curb red tape and corruption.

Speaking at a recent gathering of donors in the capital Vientiane, Finance Minister Bounhang Vorachit, who is a member of the all-powerful politburo that effectively rules the country, said the government needed to do more to stabilize the national currency, bring inflation under control and balance the budget. He stressed the government was also committed to "increased transparency, improved budgetary procedures [and] administrative reforms" and was determined to decentralize decision-making to improve the efficiency with which foreign investment is approved and foreign aid disbursed.

Laos has over the years relied heavily on foreign aid, receiving an estimated $345 million in 1999 from international organizations and through bilateral arrangements with individual countries. Laos has attracted $7 billion in foreign investment since December 1988, with more than half of this in the power sector. The next most important sector is hotels and tourism, which has drawn $600 million. Tourism was the country's biggest foreign exchange earner in 1999, earning it $97.2 million, a 21.6 percent increase on 1998.

A wide-ranging privatization program was undertaken in 1989 with the aim of improving economic efficiency and freeing state coffers from the drain of propping up inefficient state enterprises. This process has slowed in recent years, however, and about 30 enterprises remain in government hands.

The People's Democratic Republic of Laos, although an Asean member, is one of the region's poorest countries and is classified as a "Least Developed Country". Per capita income is below $300, down from $400 in 1997. Japan, Germany, Australia, the European Union, the World Bank and the International Monetary Fund (IMF) have been traditional donors since the former USSR and Eastern Europe bloc stopped assistance. They have helped fund programs in areas of rural development, health, the natural and urban environments, demining and poverty reduction, among others.

However, following the economic crisis that devastated the region, in particular Thailand, which is landlocked Laos' leading trading partner and investor, the government has slowed the pace of market reform, to the widespread concern of donors and investors. They say Laos consequently has been moving backwards towards old-style controls and economic repression, forcing donors to re-evaluate - and in some cases cut back on - aid.

The IMF has not returned to the country over differences with Vientiane on economic policy, while the United States House of Representatives has passed a resolution condemning the human rights record of Laos, even hinting at possible sanctions. Germany also scrapped a $3.1 million aid project.

In 1999 the World Bank halved its aid to $25 million, although officially the bank said this was because of budgetary restraints rather than punishment. However, officials of the bank have said that development assistance and aid increases will in future be tied to decisive action on the part of the government. The bank has extended over $576 million in development credits to Laos since 1977.

"We are not ganging up against them and we are not pulling out of Laos. What we are trying to do is to get some reaction," a World Bank official in Laos has been quoted as saying.

With the financial sector in a precarious state and half the population of 5 million living below the poverty line, donors say authorities must quickly launch strong stabilization measures to curb inflation, stabilize the kip currency over the long term and restore a growing loss of local and foreign confidence.

Lao officials admit they expect inflation to rise again after averaging 140 percent in 1999 before a support package from neighbor China helped slow a headlong collapse of the kip. From June 1997 to June 1999 the kip lost 87 percent of its value and reached a crisis point in September 1999 when it fluctuated wildly, falling from 3,500 kip to the dollar to 9,000. It is currently around the 7,500 level.

Part of the reason for the lack of urgency on the part of the government in tackling inflation is that it has had less impact in rural areas because agriculture ensures basic food security for villagers. Agriculture accounts for more than 50 percent of the country's GDP and the sector employs about 86 percent of the labor force. The authorities admit they have yet to gain a grip on imports, which were 8.6 percent over projection for 1999-2000 and up 7.7 percent year-on-year. Only an unexpected 19.2 percent boost in exports enabled Laos to keep its trade deficit at $217 million, or about 12 percent of GDP.

Compounding Laos' problems has been a bombing campaign in the capital which has resulted in at least one fatality.

Path to reform
In 1975, the communist Pathet Lao took control of the government, ending a centuries-old monarchy. The government imposed a harsh, Soviet-style command economy, replacing the private sector with state enterprises and cooperatives; centralizing investment, production, trade and pricing; and creating barriers to internal and foreign trade.

Although it became clear in a matter of years that these policies were preventing rather than stimulating growth and development, no substantive reform was introduced until 1986. In this year the government announced its NEM. Initially narrow in its scope, it was expanded to include a range of reforms designed to create conditions conducive to private sector activity.

Prices set by market forces replaced government-determined prices. Farmers were permitted to own land and sell crops on the open market. State firms were granted increased decision-making authority and lost most of their subsidies and pricing advantages. The government set the exchange rate close to real market levels, lifted trade barriers, replaced import barriers with tariffs and gave private sector firms direct access to imports and credit.

In August 1991, the Supreme People's Assembly adopted a new constitution which formalized the establishment of a market-oriented economy, guaranteed the right of every Lao citizen to own private property and provided protection for foreign and domestic investment.

In common with its larger socialist neighbors, such as China and Vietnam, the Lao leadership has tried to encourage economic openness while preserving one-party rule and political stability is still considered of primary importance. This has proved a difficult tightrope to walk, especially as the rulers include several hardliners hankering for a return to a more controlled economy. The Asian regional crisis provided them with an excuse to slow down reform.

Although a legislative body meets twice a year and its committees have begun to scrutinize more closely the details of proposed legislation, real power resides in the Lao People's Revolutionary Party (LPRP), and the Central Committee of the party (nine-member politburo) is effectively the key decision-making forum. The LPRP will hold its Seventh Party Congress in 2001.

Foreign policy
The collapse of the former Soviet Union and its allied communist regimes in Eastern Europe greatly affected the Lao leadership, which had enjoyed close relations with and economic assistance from these states since the establishment of a one-party state in Laos in 1975.

Consequently, in the early 1990s, Lao foreign policy was aimed at developing cooperative relations with a broader range of countries, irrespective of their political, social or economic systems. Intensive diplomatic efforts were made to expand relations, particularly trade and investment relations, with all of Laos's neighbors as well as other countries in the region and the West. Vietnam and China, nevertheless, remain its closest allies.

Laos (together with Myanmar) was admitted to Asean in July 1997, an important step in consolidating economic reform and the political integration of the Southeast Asian region. Laos is also a member of the Asean Regional Forum, the Mekong River Commission and the Greater Mekong Subregion. Laos also applied in 1998 to join the World Trade Organization, where it currently has observer status.

Laos's relations with Thailand have historically featured territorial conquests in both directions, and as recently as the mid-1980s there were fierce and bloody border clashes. This has led to a lingering mistrust between the two nations and Laos actively works to reduce dependence on its larger neighbor, which often, somewhat derogatorily, refers to it as "little brother".

Nevertheless, Thailand remains one of Laos's most important bilateral partners for reasons of history, proximity and cultural affinity as well as strong trade and investment links. The opening of the Australian-funded Mekong River "Friendship" bridge between Laos and Thailand in 1994 represented a step forward in the relationship. The visit of Thai Prime Minister Chuan Leekpai in May 2000, the first visit by a Thai PM in three years, served as an important occasion in further cementing ties.

The relationship between Laos and Vietnam, enshrined in the 1977 Treaty of Friendship and Cooperation (which covers defense arrangements, delineation of the border between Laos and Vietnam, and Vietnamese economic assistance to Laos), continues to be the most politically important of Laos's bilateral relationships. High-level bilateral exchanges between the two neighbors occur on an on-going basis, and the two countries lose few opportunities to reiterate the special "solidarity of their relationship".

Areas of concern and drawbacks
Landlocked Laos has a limited infrastructure, no railroads, a poor road system and limited telecommunications. Electricity is available in only a few urban areas.

Key areas requiring attention include:
* Recapitalization and reform of the highly indebted financial sector;
* Reform of state-owned enterprises; * Better management of foreign exchange transactions;
* Greater capacity for increased revenue collection;
* Further liberalization of the foreign trade regime and greater collection and publication of economic data;
* Further progress in promoting private sector activity;
* Increasing domestic savings and improving the efficiency of resource allocation, and;
* Greater commitment to reliance on market mechanisms and to effective management in the resource-based industries. Laos hopes to graduate from Least Developed Country status by 2020.

Education: Laos suffers from a severe shortage of tertiary-trained personnel and lacks sufficient officials with English language skills to interact effectively with donors and investors and undertake its Asean commitments.

Health and social development: The health status of the Lao people is poorer than elsewhere in the region and government expenditure on health is among the lowest in the world.

Public Infrastructure: After years of war and isolation, replacement and upgrading of destroyed and obsolete public infrastructure is a high priority.

Humanitarian: Clearance of millions of unexploded bombs, the legacy of the 1960s and 1970s regional conflicts.

Advantages
Laos shares borders and many common interests with Thailand, Vietnam, Cambodia and China, forming a natural economic growth area.

Subregional economic interaction has, until recently, been obstructed by political and ideological divisions and hostilities, but these divisions have reduced considerably in recent years, especially with Laos joining Asean in 1997.

Laos's extensive and largely untapped natural resource base (notably hydroelectric power) and its geographic location places it in a position to benefit from a return to regional prosperity. While the small size of the domestic market limits opportunities for trade with Laos, the more than 100 million people who live within 100 kilometers of its borders can generate market opportunities.

Laos has the potential to become an important overland transit point for trade in the Mekong region and between Southeast Asia and the Chinese and East Asian economies. This will be especially so once the proposed East-West highway from Danang in Vietnam across Laos and Thailand to Myanmar is completed in the next few years.

Laos could also become a supplier of commodities to fuel economic development in its neighbors, particularly in the fields of energy production and mining. Other countries in the region, notably Thailand, Taiwan, Malaysia and South Korea, have been expanding their commercial links with Laos in recognition of these opportunities.

(Special to Asia Times Online)

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