Laos Economic Situation

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Steve Dowall

7:47pm Monday 21 May

Laos Economic Situation

Laos is among the least developed group of countries (LDC) and relies heavily on donor assistance. Social indicators are among the poorest in the region and 34% of the population are living below the poverty line. Estimated average life expectancy in 2008 is 63.2 years. A large proportion (around 80%) of the population relies on subsistence agriculture (largely peasant farming) and agricultural development is constrained by a lack of modern skills, inadequate infrastructure and capital. Laos has no railways, a basic roading system, limited telecommunications and electricity is only available in urban and some rural areas. The government is sponsoring major improvements in the road system with support from Japan and China.

In 1986 the government of Laos began decentralising control and encouraging private enterprise. The New Economic Mechanism, aimed to expose the economy to market forces, opening trade and foreign investment opportunities, strengthening the role of the private sector and improving macro-economic management. The results, starting from an extremely low base, were striking- growth averaged 6% per year in 1988-2007, except by the short-lived drop caused by the Asian financial crisis beginning in 1997.

Remittances from migrant workers in Thailand are an important source of revenue, particularly in southern Laos where thousands cross the Mekong annually to find work. Construction will be another strong economic driver, especially as hydroelectric dam and road projects gain steam, as will foreign investment in hydropower and mining.

Several policy changes since 2004 may help spur growth. In late 2004, Laos gained Normal Trade Relations status with the US, allowing Laos based producers to face lower taxes on exports. Laos is seeking to join the World Trade Organisation in the next few years; the resulting trade policy reforms will improve the business environment. On the fiscal side, a budget law passed in February 2007 was designed to centralise and rationalise taxation. A value-added tax regime should help streamline the government's inefficient tax system. Public debt has fallen steadily from 89% of GDP in 2003 to a projected 49.3% in 2008.

Laos is increasingly open to international trade, and is prepared to begin reducing tariffs. However, the regime lacks transparency, and in practice trade and investment are more heavily regulated- including through import and export licensing.

The Government's objective of removing Laos from the list of LDC by 2020 implies that the country will remain dependent on aid from the International Monetary Fund (IMF) and other international donors for some time. In the long term however, Laos has many advantages. It shares border and common interests with Thailand, Viet Nam, Cambodia and China and is starting to exploit its natural resources base; including energy production and mining.