Laos is one of the world's poorest countries, and thus its primary policy goal is to strengthen its economy and develop its own means to earn foreign exchange. Much of its population is involved in a subsistence economy, in which families produce by themselves what is needed for daily basic living. Laos' major economic disadvantage has been that it is a landlocked nation with weak infrastructure . Nearly 80 percent of the country is mountainous and/or forested with only 21 percent of the land cultivable and less than 4 percent actually cultivated. Laos perhaps has the highest ratio of forest cover to land area in all of Asia: 47 percent of the country is forested.
Laos' long history dates back to the founding of its first kingdom in 1353. It was then known as Lan Xang (the land of a million elephants). It reached its period of greatest glory and influence during the years 1633-90. Later succession struggles led Lan Xang to break into 3 smaller kingdoms. These weakened kingdoms then came initially under the Siamese orbit and later French colonialism. Under French colonialism, Laos suffered neglect.
After achieving complete independence from the French in 1953, the royalist Lao regime was gradually drawn into the vortex of the U.S. war in Vietnam. The economy became war-torn, suffering from extreme dependence on foreign aid. Extensive U.S. bombing of northern, northeastern, and eastern Laos from 1965 to 1973 seriously disrupted the rural economy. The U.S. dropped 33 percent more bombs on Laos than on Nazi Germany.
On 2 December 1975, the Lao People's Democratic Republic was established, representing the culmination of a long extended revolutionary war. This event brought peace and independence to the country. The economy was transformed into a Soviet-style state planned economy and received economic and technical assistance from other communist nations. The attempt to collectivize agriculture was rather quickly abandoned, however. In 1986, a new policy termed the New Economic Mechanism (NEM) was introduced to transform the economic system from a state-planned one to that of free market forces and prices. The major goal of this reform was to provide greater incentives to increase economic performance and productivity. With the collapse of the USSR in 1991, the Lao PDR opened its doors to active economic involvement with the West, both in terms of international aid and investment. The Lao PDR became a favorite of diverse donors, and foreign aid currently represents some 20 percent of the GDP. From 1991 to 1997, the Lao PDR enjoyed considerable macroeconomic success under the NEM system, with annual economic growth averaging 6.5 percent
During the 1990s, the Lao economy became increasingly interconnected with the Thai economy. Laos imports many basic modern consumer products from Thailand. On weekends, it is common to find many Lao families from Vientiane visiting Thailand via the Friendship Bridge, shopping for basic household items such as various packaged foods.
Initially, it appeared that the Lao economy (with no stock market and a currency not traded internationally) would be immune to the Asian economic crisis of 1997 which shook so many Asian economies. In a somewhat delayed effect, the Lao currency went into a free fall far greater than that of any other Asian country. Given Lao's dependence on imports, this had a serious, adverse effect on nearly all Lao, except a small number of elite individuals connected to the dollarized economy. The Asian economic crisis also adversely affected the Lao economy by reducing foreign direct investment from other Asian countries and reducing the demand for Lao electricity exports, a major source of foreign exchange.
Since it received foreign aid earlier from the Eastern block countries and in the past decade from multilateral agencies (primarily the World Bank and Asian Development Bank) and other countries, the country does have a debt burden. Total external debt in 1997 was estimated to be US$2.32 billion, and debt payments represented 4 percent of government expenditures in 1995-98. Many Lao loans are granted at highly concessional terms, meaning that the interest rates are quite low over a long payment period and thus are almost like grants.
The major challenge facing the Lao PDR currently is to restore the sound macroeconomic performance of the early and mid-1990s and develop its own sources of foreign exchange earnings. Hydroelectric power development on the tributaries of the Mekong, the development of light industries such as garments and textiles, marketing of natural resources such as gypsum, tin, and wood products, and tourism development are the primary economic sectors being promoted.