The ‘Know Your Region’ series is designed to support unit and individual professional military education on the South East Asian region. It’s important for all serving members of our military to have a foundational knowledge of the countries and issues in the Indo-Pacific.

LAOS – ECONOMY

On this page:

  • Overview
  • Economy and GDP
  • Trade and Foreign Aid

 

Overview

The Lao People’s Democratic Republic (LPDR) is categorised as a less developed country with a centrally planned economy. Yet Laos has recently emerged as one of the world's fastest growing economies, with gross domestic product (GDP) growth averaging 7 to 8% over the past decade. The Laotian Government had an ambitious agenda for the country to graduate from the list of Least Developed Countries by 2020. However, it is now scheduled to graduate in 2026, see the United Nations Economic Analysis for more detail. The key factor holding the country back is the economic and environmental vulnerability index.

While Lao PDR made good development progress over the past twenty years – halving poverty, reducing malnutrition and improving education and health outcomes – economic growth has now slowed and there is a danger that some of the gains previously made could be reversed. Especially with the added pressures of the COVID-19 pandemic. The official currency is the kip (LAK) and is closely linked to the Thai baht. Bargaining is expected in most commercial transactions, although Laos people are generally gentle hagglers.

From land-locked to land-linked is a common catchphrase when discussing the Laotian economy. It refers to widespread efforts to improve transport connections across the country, both domestically and with key neighbours. The Ministry of Industry and Commerce and the Ministry of Planning and Investment are in charge of the country's economic strategy, while the Lao PDR Trade Portal provides information about Laos' foreign investment avenues. In the next video, The World Bank provides an overview of Laotian development.

The Laotian economy experienced a relatively brief period of collectivisation (1975-1985). The Government of Laos, one of the few remaining one-party Communist states, began decentralising control and encouraging private enterprise in 1986. Initially the scope of the New Economic Mechanism was limited, but the Government expanded it upon realising that is was stimulating economic growth. Disbanding collective farms, legalising private ownership of land, allowing market forces to determine prices, and encouraging private enterprise in all but some key industries and sectors.

The results – starting from an extremely low base – were striking; growth averaged 6% per year in 1988-2007, except during the short-lived drop caused by the Asian Financial Crisis beginning in 1997. Despite this high growth rate Laos remains a country with an underdeveloped infrastructure, particularly in rural areas. It has no railroads, a rudimentary road system, and limited external and internal telecommunications, though the government is sponsoring major improvements in the road system with support from Japan and China. Electricity is available in urban areas and in most rural districts. Subsistence agriculture – dominated by rice – accounts for about 40% of GDP and provides 80% of total employment. The economy will continue to benefit from aid from international donors and from foreign investment in hydropower and mining. Construction will be another strong economic driver, especially as hydroelectric dam and road projects gain steam. Several policy changes since 2004 may help spur growth. In late 2004, Laos gained Normal Trade Relations status with the U.S., allowing Laos-based producers to benefit from lower tariffs on exports. Laos is taking steps to join the World Trade Organisation (WTO) in the next few years, with the resulting trade policy reforms set to improve the business environment. On the fiscal side, a value-added tax (VAT) regime began in 2008 and helped streamline the tax system. Taxes in Laos are among the lowest in the region with a low corporate income tax and low progressive income tax.

Hydroelectric power and textiles account for over two-thirds of country’s exports. Coffee is also a major export item. Tourism has become the country’s single biggest earner of foreign exchange. To learn more about the growing tourism trail in Laos (before the COVID-19 pandemic interrupted global travel) check out the following video.

While Lao PDR made good development progress over the past twenty years – halving poverty, reducing malnutrition and improving education and health outcomes – economic growth has now slowed and there is a danger that some of the gains previously made could be reversed.

The Laotian Government moved quickly to avert the most pressing dangers of COVID-19 when it appeared and have also adapted to the changing economic situation. In 2021 the new prime minister announced seven priorities, vowing to tackle public debt and revenue leakages, boost exports, counter corruption, and create more job opportunities. The Government has also pledged to foster quality growth and reduce reliance on the natural resource sector, to increase access to basic public services – especially health and education – and to place more emphasis on human resource development. Yet, the Lao PDR remains one of the fastest-growing economies in the region and expects strong recovery from the COVID-19 pandemic.

The top-down approach to economic growth and poverty alleviation is often counterproductive. Structural reforms are needed to support a more inclusive growth pattern. The Laotian population is young, with more than half under 25 years of age and 70% under 35. In 2018, the country ranked 139th on the Human Development Index (HDI), indicating medium development.

A child born in Laos today will only be half as productive as they could be if they enjoyed full health and education. Malnutrition continues to be a critical issue, with stunting (impaired growth and development from poor nutrition) affecting over 30% of children under five. The maternal mortality rate is also high, at 185 per 100,000 births in 2017. While a Lao child goes to school for 10.8 years on average, they only receive the equivalent of 6.4 years of learning. Moreover, the effects of COVID-19 threaten to make the situation worse.

The Lao PDR’s 9th Five-Year National Socio-Economic Development Plan lays the foundation for building a stronger economy beyond COVID-19, with focus on addressing challenges stemming from the pandemic, climate change, trade wars, and heightened global uncertainty. The plan strives to see Laos graduate from least-developed country status in 2024 and supports strong progress towards achievement of the Sustainable Development Goals by 2030, including the transition to a low-carbon economy. Watch the following videos to learn more about two projects run by the Asian Development Bank to boost economic activity in Laos.

Explore the following resources for more information on the country’s economic development and future strategy.

 

Economy and GDP

The Lao People’s Democratic Republic has enjoyed robust economic growth over two decades, but the economy has been slowing since 2015. While the country has avoided a large outbreak of COVID-19, restrictions associated with the pandemic have restrained economic expansion and accentuated the country’s development challenges.

The past ten years has seen Laos average 7.4% annual real economic growth in local currency terms. In 2019, the economy expanded by 6.3%, with infrastructure developments and tourism underpinning strong domestic growth. Laos needs to achieve faster structural transformation and export diversification for higher and more inclusive growth. Challenges in building institutional capacity and maintaining macroeconomic stability hinder advances in competitiveness, while investments in infrastructure and skills are needed to increase productivity.

Despite the government’s vigorous efforts to strengthen public finance management and improve the business environment, the COVID-19 pandemic has jeopardised economic well-being, with international trading conditions deteriorating, domestic demand weakening, and the public debt burden posing a high risk to macroeconomic stability. Policies to support suppression of COVID-19 have also entailed temporary suspension of selected project operations.

The growth of the past two decades was predominantly driven by large-scale investments in capital intensive sectors, particularly in mining and hydropower. For instance, generating electricity from rivers and selling the power to its neighbours, namely Thailand, China, and Vietnam. The country is aiming to become the battery of Southeast Asia. Alongside initiatives to become a ‘land-linked’ nation, as demonstrated by the construction of four new railways connecting Laos and its neighbours.

The country's plentiful water resources and mountainous terrain enable it to produce and export large quantities of hydroelectric energy. Of the potential capacity of approximately 18,000 megawatts, around 8,000 megawatts have been committed for export to Thailand and Vietnam. As of 2021, despite cheap hydropower available in the country, Laos continues to also rely on fossil fuels – coal in particular – in the domestic electricity production. Electricity is available to 95% of the population. Under an agreement signed in March 2021, the national power distribution grid and export system will be run by a joint venture between the Laos utility and state-owned China Southern Power Grid Ltd.

Much of Laos lacks adequate infrastructure. The major roads connecting the major urban centres, in particular Route 13, have been significantly upgraded in recent years, but villages far from major roads can be reached only through unpaved roads that may not be accessible year-round. Laos' railways include a short link to connect Vientiane with Thailand over the Thai-Lao Friendship Bridge, and a short portage railway – the Don Det–Don Khon narrow-gauge railway built by the French in Don Det and Don Khon in Champasak Province. It has been closed since the 1940s. In the late 1920s, work began on the Thakhek-Tan Ap railway that would have run between Thakhek, Khammouane Province and Tân Ấp station in Vietnam through the Mụ Giạ Pass. The scheme was canned in the 1930s.

In 2015, a 414-kilometre high-speed rail line linking Kunming in the southern Chinese province of Yunnan through tropical mountains to the Laotian capital of Vientiane was announced. It is the biggest infrastructure project in Laotian history, and a massive upgrade from only the few kilometres of rail line that existed beforehand. It will be operated by the Laos-China Railway Co., a joint venture between China Railway group and two other Chinese government-owned companies with a 70% stake and a Laotian state company with 30%. The line opened in early December 2021 but was restricted to cargo due to COVID-19 travel restrictions.

The Laotian segment alone is worth US$5.9 billion and increases Laotian debt to China. The total length of the line is 1,035 kilometres and plans go beyond this number. The Kunming-Vientiane railway is a link in a possible future network to connect China with Thailand, Vietnam, Myanmar, Malaysia, and Singapore. That would give southern China more access to ports and export markets.

Laotian leaders hope the railway will energise their isolated economy by linking it to China and markets as far away as Europe. Vice President of the Lao National Chamber of Commerce and Industry, Valy Vetsaphong, said the railway “will convert Laos from being geographically disadvantaged, by taking advantage of its location, to a regional land-linked hub”. However, there is concern the potential benefits of the Kunming-Vientiane line to the Laotian economy are overstated. Beyond serving as a channel for Chinese trade, the cost is high – borrowed money makes up 60% of the railway's investment – for only 21 stations in the country that fail to connect rural Laotian farmers to markets. The total debt is the equivalent of nearly a fifth of Laos’ economic output in 2020. The country’s outstanding debt, much of it owed to Beijing, is equal to two-thirds of annual economic output. Laos ranks among poor countries deemed to be at ‘high debt risk’. Watch the following report by DW News for more information on the massive infrastructure project.

These investments have failed to support job creation, and some have entailed considerable environmental costs. Moreover, public investment in the power sector has been mostly financed by external debt – often on commercial terms – gradually jeopardising macroeconomic stability. The economic slowdown has been greatly exacerbated by the effects of the COVID-19 pandemic, which has highlighted how vulnerable Laos is to external shocks. Measures to contain the virus have resulted in job and livelihood losses and led to a further reduction in the government’s ability to collect revenue. Economic growth declined to an estimated 0.4% in 2020, the lowest level in three decades, and a second wave of the pandemic in 2021 has dented hopes of a rebound, with a growth rate of just 2.2% forecast for 2021. The country faces macroeconomic instability, with growing debt-service obligations, heightened financial risks, and insufficient foreign exchange earnings.

Expanding commercial exploitation of forests, plans for additional hydroelectric facilities, foreign demands for wild animals and non-wood forest products for food and traditional medicines, and a growing population have brought new and increasing attention to the forests. Traditionally, forests have been important sources of wild foods, herbal medicines, and timber for house construction. Even into the 1990s, the Laotian Government viewed the forest as a valued reserve of natural products for non-commercial household consumption. Government efforts to preserve valuable hardwoods for commercial extraction have led to measures to prohibit swidden cultivation throughout the country. Further, government restrictions on clearing forestland for swidden cropping in the late 1980s, along with attempts to gradually resettle upland swidden farming villages to lowland locations suitable for paddy rice cultivation, had significant effects on upland villages. Traditionally, villages rely on forest products as a food reserve during years of poor rice harvest and as a regular source of fruits and vegetables. By the new millennium, however, these gathering systems were breaking down in many areas. At the same time, international concern about environmental degradation and the loss of many wildlife species unique to Laos has also prompted the government to consider the implications of these developments.

Nevertheless, Laos remains a country with underdeveloped infrastructure, particularly in rural areas. The Laotian economy faces several challenges such as the movement of skilled workers to other nations in search of better opportunities and the country's high rate of corruption. The Government of Laos has invited foreign corporations to invest in various sectors of the country's economy and create employment for the Laotian people. The Laotian Government has also taken action to reduce the levels of corruption in the country. To learn more about the risks following development, watch the in-depth BBC News report on a dam collapse in south-east Laos in 2018.

Explore the following resources to learn more about Laos’ economy and GDP.

 

Trade and Foreign Aid

Laos became independent in 1953, but only adopted market reforms in the late 1980s. In spite of the Revolutionary Party's rhetoric about self-reliance on the march to socialism, Western aid was simply replaced over the 1970s and 1980s by aid from ‘fraternal countries’ of the Soviet bloc. Living standards declined further. Non-government organisations, including some from the United States, in cooperation with local officials, established a few small-scale aid projects that reached out to meet real needs in the areas of health, education, and economic development. The World Bank has an ongoing portfolio of 25 projects in Laos, with a funding value of US$764 million. These include 22 projects financed by the International Development Association – the World Bank’s fund for the most in-need countries. The largest sectors by total financing are natural resources and the blue economy (19%), health, nutrition, and population (almost 15%), environment, and transport (nearly 12%). While talks are underway for the next Country Partnership Framework (CPF) between the World Bank Group and the Lao People's Democratic Republic, the previous effort ran from 2017 to 2021. The Poverty Reduction Fund (PRF) is a large multi-sector local development project which the World Bank has supported through three phases of IDA financing worth over $123 million. The PRF has improved access to basic services for 1.2 million rural people through more than 5,000 community infrastructure projects in the poorest districts of the country. In target villages, access to an improved water source increased by nearly 60%, and travel time to the nearest village was reduced an average of 114 minutes in the dry season and by about 70 minutes in the wet season.

Over the last thirty years, Laos has made slow but steady progress in implementing reforms and building the institutions necessary for a market economy. Yet, Transparency International considers Laos to be one of the most corrupt nations globally – with a score of 29 out of 100, placing the landlocked country below the global average of 43 – which has deterred other nations from investing in the country.

The Lao PDR acceded to the WTO in 2013 and is part of the ASEAN Economic Community (AEC). Both of these organisations have required – and will continue to spur – trade and regulatory reforms, which should make the investment climate more attractive to foreign companies. WTO and AEC requirements also reinforce fuller implementation of the conditions of the 2005 U.S.-Laos bilateral trade agreement. The two countries also signed a Trade and Investment Framework Agreement in February 2016. Other Free Trade Agreements have taken place with China, Vietnam, Thailand, India, and Japan. Additionally, the Laotian Government has attempted to promote trade within the Greater Mekong Sub-region and to attract FDI to support infrastructure development, especially hydropower projects.

The Laotian economy depends on investment and trade with its neighbours, Thailand, Vietnam, and – especially in the north – China. Main exports are timber, mining commodities, and hydroelectricity. Major imports include machinery, equipment and motor vehicles. Recently, the Laotian Government's other communist neighbour is vying for influence in Laos, providing loans, aid, and infrastructure investment. In 2016, China was the biggest foreign investor in Laos's economy, having invested in US$5.395 billion since 1989, according to Laos Ministry of Planning and Investment's 1989–2014 report. China sees Laos as an important route to Southeast Asian ports for landlocked parts of south western China such as Yunnan province; celebrating the recent opening of the Kunming-Vientiane Railway and already looking to expand the line through Thailand and even down to Singapore. Thailand (invested US$4.489 billion) and Vietnam (invested US$3.108 billion) are the second and third largest investors respectively. The economy also receives development aid from the International Monetary Fund, Asian Development Bank, and other international sources, and foreign direct investment (FDI) for development of the society, industry, hydropower and mining (most notably of copper and gold).

The government appears committed to raising the country's profile among foreign investors and has developed special economic zones replete with generous tax incentives, but a limited labour pool, a small domestic market and corruption remain impediments to investment. Laos also has ongoing problems with the business environment, including onerous registration requirements, a gap between legislation and implementation, and unclear or conflicting regulations. There are two types of economic zones in Laos: Special Economic Zones and Specific Economic Zones (collectively, SEZs).

The government of Lao PDR has allocated significant resources in the development of SEZs and in attracting foreign investment in Lao PDR. In 2018 there were 12 SEZs in Lao PDR with approximately 388 companies from Laos and overseas with a registered capital of US$8 billion, covering an area of 12,437 hectares. SEZs in Lao PDR have become increasingly attractive to foreign investors due to tax incentives and infrastructure improvements. Desired industries in the SEZs range from electronics industries to tourism infrastructure and manufacturing. With the growing interest of investors in Laos, the government plans to develop and expand SEZs, with developments to infrastructure and facilities to accommodate investors and generate jobs for local people. To hear from local Laotians about how the investments are impacting their lives, watch the following report by Radio Free Asia.

Vientiane’s relationship with Canberra is the country’s longest unbroken diplomatic relationship at the Ambassador level, with the 70-year anniversary to be celebrated in 2022. Australia remains one of the Lao PDR’s main development partners, with programs focusing on education and human resource development, trade and business reform, rural development and agriculture, and natural resource management.

Australia's total merchandise trade with Laos stood at $35 million in 2014 to 2015, with Australian goods exported to Laos valued at $31 million. Major Australian exports include pumps for liquids and pump parts, taps, valves, civil engineering equipment and parts. During 2014 to 2015, merchandise imports from Laos was dominated by clothing and jewellery, totalling $4 million. With total two-way trade reaching $93 million in 2016.

The dynamo in the economic relationship has been investment in mining. Australian-owned and managed mining companies have a strong record in Laos. They contribute to government revenue, environmental management, workplace health and safety, community development work, and skills training for their predominantly local Lao workers and managers. Australian businesses also have a presence in banking, tourism, and legal services. An agreement on the promotion and protection of investment between Australia and Laos has been in place since 1995.

Laos remains challenging for Australian businesses due to a less conducive regulatory environment. Australia has a modest trade and investment relationship with Laos, although Australian businesses operate in mining, plantation forestry, banking, tourism, and legal services. The Laotian Government is committed to improving the business environment and elevating its trade relationship with Australia.

The first major connection across the lower Mekong was the Thai-Laos Friendship Bridge which links the town of Nong Khai in Thailand with Lao PDR's capital Vientiane. Australia, through the Australian Agency for International Development (AusAID), provided $42 million Australian dollars for the feasibility studies, design, and construction of the bridge between 1991 and 1994. With a length of 1170 metres, the bridge has two 3.5-metre-wide road lanes, two 1.5-metre-wide footpaths and a single metre gauge railway line running down the centre. The bridge is supported by six foundations in the riverbed, each 105 metres apart. Two additional foundations support the bridge at either end. Fifteen columns provide support along the edge of both sides of the bridge, eight on the Thai side and seven on the Lao side. Traffic on the bridge drives on the left, as in Thailand, while traffic in Laos drives on the right. The changeover at the Lao end, just before the border post, is controlled by traffic lights. There is also a shuttle bus service which operates across the bridge, between the Lao and Thai border posts.

Before the opening of the bridge, total value of imports and exports (fiscal year 1993) through Nong Khai Customs House, was 3.6 billion baht. A year later, the value had increased by 34 per cent to 4.8 billion baht and to 5.3 billion baht in the following year. The latest statistics for fiscal year 2011 show the value of the imports and exports at 43 billion baht. In relation to people, in the fiscal year 1994, there were 55,085 people crossing the border through Nong Khai Boundary Post into Thailand and 50,100 crossing out. In 1995, the number rose to 293,126 arrivals and 292,462 departures. In 2011, there were 2,713,495 arrivals and 2,657,100 departures.

Since its opening, the Friendship Bridge has brought about benefits to the two neighbouring countries in terms of their economies, trade, tourism, investment, cultural exchanges, transportation and logistics. The bridge not only connects the two nations physically; it also brings together the Thai and Lao people, enhancing people-to-people links. The bridge remains a focal point for trade and a symbol of Australian commitment to the development in the region. The first Friendship Bridge therefore has become an enduring symbol of friendship and cooperation between Australia, Thailand, and Laos.

 

Discussion Questions:

  1. Laos has and continues to look to harness its riverine system to generate exportable hydro-electric power to its neighbours. Is there scope for Australian engineering to assist the Laotian government in further refining this capability? How would this work?
  2. China is seeking to further engage Laos in order to utilise Laotian ports as a means of exporting the goods produced in its landlocked south western provinces. How else is China looking to economically engage with Laos? What does this mean to the Region and Australian interests in the region? Is this economic competition good for Laos?
  3. The Australian Agency for International Development (AusAID), provided $42 million Australian dollars for the feasibility studies, design and construction of the Friendship Bridge between 1991 and 1994. This has allowed for positive economic benefits between Thailand and Laos. What other ventures could Australia undertake to support Laotian and economic development that would create a regional stabilising effect?