ECONOMIC MONITOR: LAOS

Stalled Reforms

By Bertil Lintner

"The trend is disturbing," states an internal memo dated October 10 from a Western embassy in Laos's capital, Vientiane. Most other foreign diplomats and economists tend to agree. The currency, the kip, is sliding, inflation is rising, foreign investment is down, not enough revenue is being collected and the government does not even have enough money to pay state employees such as teachers. But it is a general trend, not a road to complete disaster. In fact, the International Monetary Fund even said in a report dated July 29 that Laos's "economic performance has improved considerably since 1999." But that was in comparison with the disastrous years immediately after the 1997 Asian Crisis, when many economies in East Asia--including Laos's--hit rock bottom.

Laos was actually one of the first communist countries to decentralize control and encourage private enterprise. The first free-market reforms were implemented in 1986. Initial results were striking. Laos--one of the world's poorest countries, where subsistence agriculture accounts for half of GDP and provides a livelihood for 80% of the population--may have started from an extremely low base, but even so,growth averaged 7% in 1988-1997. There was substantial foreign investment in mining, food processing and the textile industry. A major problem was its heavy dependence on Thailand. Thai goods accounted for an estimated 45% of the country's total imports, 37% of total exports and 42% of the $5.7 billion in total committed foreign investment in 1988-97.

Thai businessmen, who were hard-hit by the 1997 crisis, have since then pulled out most of their investment, while Thailand remains a major trade partner. This has led to a heavy dependence on foreign aid and loans. Total external public debt accountedor 69% of the $1.6 billion GDP in 2001 and, domestically, the IMF has pointed out that credit by state-owned banks has increased sharply in recent months despite new credit controls "possibly due to irregular lending."

According to other economists, this carefully worded statement points the finger at Laos's main problem: Despite liberalization in some areas, no structural changes have taken place. The government is still subsidizing state commercial enterprises, which are losing money. The country's economy remains ruled by diktat and has not become determined by free-market forces. Some government efforts to stabilize the economy have also been counterproductive. When earlier this year it came under pressure from the IMF and bilateral donors to increase revenuecollection, the remedy was to levy more tariffs on goods coming in from Thailand. This stimulated smuggling and stoked inflation as foreign goods became more expensive.

In April-May, inflation stood at 7% and in September, it had risen to a two-digit figure--15%-16%--for the first time in years. But revenue increased only marginally, resulting in budget shortages, which, in the case of Laos, means that teachers and other civil servants have to go without pay. The kip has also begun to slip, falling below 10,000 to the dollar, while GDP growth has recovered somewhat since the late 1990s. This is mainly due to a number of infrastructure projects, not because of increased agricultural or industrial output. Prospects are not good even for Laos's main export: electricity to Thailand. This October, Laos decided to go ahead with a controversial hydroelectric power project called Nam Theun-II, at a cost of $1.1 billion and due to be completed by 2008. The problem is that Thailand has not yet agreed to buy the electricity.

This article first appeared in the Far Eastern Economic Review, November 07, 2002

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