Economic transformation and criticality:

The country was isolated both politically and economically until the second half of the 1990s, in 1997 to be precise, when it joined ASEAN (the Association of Southeast Asian Nations) after Soviet support failed.

Thanks to ASEAN, the country began its integration not only regionally but also internationally, especially with Thailand, Vietnam and China. Moreover, since June 2010, Laos has also consolidated its relations with the United States, when a Laotian delegation made an official visit to Washington for the first time since 1975. Also noteworthy is the relationship with Singapore with which the Lao National Chamber of Commerce and Industry with Chinese Chamber of Commerce and Industry of Singapore (SCCCI) signed a memorandum of understanding (MOU) on 1 May 2017 to provide businessmen with a greater understanding of investment opportunities in Laos.

China and Vietnam are the Republic’s two main partners and help the country with economic and military aid in exchange for access to its natural resources. Thanks to this aid, investment flows to the country are gradually increasing, through state-owned companies specializing in the energy, mining and infrastructure sectors.

Another very important partner of Laos remains Thailand, with which relations have improved markedly since the mid-1990s.

Over the decades, the two countries have signed a number of agreements on the management of various issues they have in common.

In fact, Laos and Thailand coordinate on border control, plan shared building plans and try to solve the issue of ethnic Hmong refugees.

Despite economic reforms, the country remains poor and heavily dependent on foreign aid.

Since the 1980s, Laos has made considerable progress towards a shift from a command economy to a mixed economy with market characteristics. Prices are set by the market, the Laotian kip is convertible and profits from foreign investments can be transferred abroad. However, competition operates within a weak institutional and regulatory framework. This encourages a ‘business-based’ corporate culture, reducing predictability and transparency. When disputes arise, the legal system is not able to provide companies with protection against those who have powerful political connections. Similarly, although efforts have been made to provide certainty to foreign companies, these remain vulnerable to arbitrary decision-making and collusion between local businesses and political interests. The government also retains ownership of what it considers strategic state-owned enterprises, which are focused in the transport, telecommunications, electricity, insurance and banking sectors. Laos is an active player in the large and growing hydropower industry. In fact, considering the morphology of the territory, as well as the great availability of waterways, the hydropower sector represents a great potential for the country, which, in fact, aims to drastically increase its production in the coming years. Laos is also rich in mineral deposits consisting mainly of gold, tin, copper, limestone and gypsum. The sector accounts for much of the foreign direct investment in Laos, mainly from China and Australia, as well as about half of the exports. Mining and hydropower have thus played a primary role in economic development and the achievement of the Millennium Development Goals, as well as in Laos’s imminent emergence from the LDC category. The Republic has made no secret of its desire to become the ‘battery’ of South-East Asia.

A major problem for the economy of the Republic also is the issue of competition, which is why the government has introduced legislative measures to improve competition and protect consumers, but implementation continues to present challenges.

The Business Competition Act of 2014 significantly expanded the regulatory framework created by the rudimentary Business Competition Decree (2004). In addition to being a requirement of the ASEAN Economic Community Project, the new law can be seen as a component of the government’s ongoing effort to establish Laos as a ‘rule of law’ state. The competition law addresses four substantive areas:

• non-competitive business practices;
• anti-competitive agreements;
• abuse of market power and monopolisation;
• anti-competitive mergers.

In 2018, according to the new law, the government created the Lao Competition Commission and Secretariat to investigate and enforce competition violations.

Although most state-owned enterprises (SOEs) have been sold or privatized, the government retains control of 160-200 SOEs that it considers strategic or essential for national development. These tend to be monopolistic, although this is changing in some sectors, including telecommunications and aviation. Competition law takes a broad approach to the type of entity covered, potentially including SOEs, but also tries to protect the rights and interests of the state (along with businesses and consumers).

As mentioned above, Laos has largely integrated into regional and global markets, mainly due to its membership in ASEAN. To do this, it had to reduce tariffs to join the ASEAN Free Trade Area (AFTA). Laos then joined the ASEAN Goods Trade Agreement in 2010 and the ASEAN Economic Community in 2015. After a lengthy application process, Laos also joined the World Trade Organisation (WTO) in 2013 and became an inaugural member of the Regional Comprehensive Economic Partnership (RCEP) in 2020. Joining these frameworks required deep and ongoing reforms in a wide range of areas such as tariffs, non-tariff measures, customs reforms, trade facilitation, taxation, foreign exchange, investment, and import and export procedures. The average MFN tariff rate applied by Laos was 8.6% in 2019, down from 10.7% in 2014.

While trying to control national development, the Laotian government maintains a high degree of formal and informal influence over large and medium-sized enterprises, which decreases trade competition. Laos, however, has adhered to a rationalization of non-tariff barriers in line with its ASEAN commitments. In 2019, for example, the National Assembly passed the Anti-Dumping and Countervailing Measures Law.

Despite all these economic reforms and membership of international organisations, although its size as a proportion of GDP is uncertain, up to 80% of the non-agricultural labour force works in the vast informal sector of the economy. Moreover, most Laotians live in rural areas, with around 80% working in agriculture, mainly growing rice.

The economic situation:

The macroeconomic situation in Laos has become difficult over the past three years due to the COVID-19 pandemic and the country’s structural vulnerabilities due to soaring public debt and difficult global macroeconomic conditions.

Investments in capital-intensive sectors such as mining and hydropower that had propelled the economy failed to sustain job creation and some resulted in significant environmental costs. Moreover, public investments in the energy sector were mostly financed by foreign debt, often on commercial terms, gradually undermining macroeconomic stability.

The government moved decisively to contain the virus, but the protracted blockades resulted in job and livelihood losses and reduced foreign exchange earnings. Economic activity virtually stagnated in 2020, with GDP growing by only 0.5%. The second wave of the pandemic in 2021 has undermined hopes of a strong recovery, with a growth rate of only 2.5% for 2022, far from the rates of previous years. The effects of these setbacks are meaning macroeconomic instability for the country, increased financial risks and negative trends in government spending, i.e. growth in public debt, declining revenue and therefore less spending on crucial social services such as education, healthcare and social protection.

Fortunately, in recent years, Laos has received help from a range of partners to contrast the pandemic and manage the country’s economic situation, not only from its historical allies, China and Vietnam, but also from the United States, the European Union, the World Bank, the Asian Development Bank (ADB) and UNICEF.

In the last 12 months to September 2022, the national currency, the kip, has fallen 62% against the US dollar, while inflation has reached 30% year-on-year, as reported by the World Bank report of September 2022. The Laotian government is trying to adapt to the changing economic situation, but has limited fiscal room for maneuver. In 2021, a new prime minister and several new ministers were appointed and seven priorities were announced, promising to tackle public debt and revenue losses, increase exports, fight corruption and create more job opportunities. The government also pledged to promote quality growth and reduce dependence on the natural resource sector, increase access to basic public services, in particular health and education, and put more emphasis on human resource development. Structural reforms are therefore needed to stabilize the economic situation and support a more inclusive growth model.

By Michelle Brunori