Lao People's Democratic Republic - Economic development

The National Plan and Foreign Aid Council was established in June 1956 to prepare a general plan for the development of Laos and to set up a series of five-year plans. In view of its limited capital resources, the government sought increased private foreign investment, continued US governmental economic assistance, and help from international monetary bodies and the Colombo Plan organization. An economic plan drafted by the Laotian government in 1962 was never fully implemented, however, owing to internal instability. Little of the infrastructure for public works, industry, and mining that was abandoned in 1961 has been resumed. Although a major goal of the 1969–74 economic and social development plan, completion of the Nam Ngum Dam, was fulfilled, a host of other targets had to be abandoned because of disruption stemming from the war. US aid to Laos began in 1955 and continued until the US pullout in 1975. During this period, the Laotian economy became almost totally dependent on US aid, which amounted to over $900 million in nonmilitary loans and grants and $1.6 billion in military assistance.

Following the Pathet Lao takeover in 1975, efforts were made to restructure the Laotian economy along socialist lines. The source of most foreign assistance shifted to China between 1975 and 1979. By 1979, however, with the economy reduced to a virtual standstill because of poor harvests, rapid inflation, and the absence of private incentives, the government abandoned central planning for a mixed model of a centrally coordinated amalgam of state-run enterprises, cooperatives, and private ventures.

Laos's first five-year plan (1981–85) after the removal of the Pathet Lao government envisioned increases of 65–68% in the gross social product, 23–24% in agricultural production, and 100–120% in industrial production, as well as completion of repairs on major highways and waterways. During this period the source of aid again shifted, this time to the USSR, Vietnam, and their allies. Aid from Council for Mutual Economic Assistance (CMEA) countries totaled $90 million in 1985. Among non-Communist nations, Japan, Australia, Sweden, and the Netherlands have also furnished assistance. In 1985, the US ban on aid was lifted, largely because of Laotian cooperation in accounting for US military personnel missing in action in Laos during the Vietnam war. Aid from international agencies totaled $183.1 million between 1946 and 1986.

The targets of for the first five-year plan were largely not met as per capita income fell to $100 and inflation rose to 30% in 1985. Failure was ascribed to an overly rigid central planning approach and in August 1986, as a major part of the second five-year plan (1986–90), the New Economic Mechanism (NEM) was introduced. The New Economic Mechanism (NEM) approved in 1986 (based on chin tanakan may , "new thinking,") introduced free enterprise initiatives including decentralized decision making, deregulation of pricing and financial systems, and promotion of domestic and international trade and foreign investment. Reforms have been introduced in phases. In 1988 land use reforms and market determined prices were introduced. In 1989 the tax system was modified, the Foreign Investment Code and Decree was implemented, the banking system was restructured, and the privatization of state economic enterprises commenced. Creation of a national taxation system and a customs administration are aimed at increasing government revenue. The Ministry of Industry and Primary Resources, the Economic Planning Unit, which monitors existing and new businesses, and the Economic Development Board (EDB), which assists in the establishment of new industries, facilitate foreign investment in most sectors of the economy. Incentives offered to encourage the development of industrial and commercial enterprises include allowing 100% foreign ownership, emphasized exportation of food products, strengthening of economic management, rehabilitation of routes to seaports and rural feeder roads, reform of general education and training, and development of small- and medium-scale projects.

The third five-year plan (1991–95) continued previous policies of infrastructure improvement, export growth, and import substitution. Four sectors were considered priority areas for future income for Laos: mining and energy; agriculture and forestry; tourism; and service, as a way-station and service center between China, Vietnam, and Cambodia. Laos has untapped mineral resources and proven reserves of gold, gemstones and iron ore. Pulp and paper tree plantations would be substituted for the export of timber and agricultural products to serve the Thai market. Based on Thailand's experience, the government recognizes that mass tourism involves environmental degradation, yet the opening of the Mittaphap (Friendship) Bridge over the Mekong between Laos and Thailand (1994) seemed to open an opportunity for both trade and tourism. A second bridge was approved in 1996 but the Japanese company holding the concession backed out in 1998. In 2002 the second bridge project was revived with an agreement with a Thai company. In 1993 three western oil companies, Enterprise Oil and Monument Oil, both from the UK, and Hunt Oil of Dallas, engaged in exploration for oil and gas in Laos. These projects, handicapped by inadequate geological maps, unexploded ordnance, tough terrain, encounters with the remnants of the anticommunist insurgency movement, tropical and dietary illness, and the potential expense of drilling and pipeline construction for transport to the Vietnamese coast, have not produced any substantial discoveries. However, two major hydroelectric projects, the Nam Thuen Dam on a tributary of the Mekong in Khammouan province, and the Xeset dam in southern Laos were completed, and produce electricity sold to Thailand.

At the sixth party congress, held in March 1996, Laotian officials debated the country's slow pace of opening up to the international investment community. By that year, the country had allowed more than 500 foreign investors, in a variety of sectors, to either establish or buy (in whole or in part) Laotian businesses. The majority of $5 billion (75%) was invested in hydroelectric power. In February 1997, Laos joined ASEAN, though some raised questions about its ability to afford even to attend all the organization's 200 or so annual meetings. Balance of payments problems had emerged almost as soon as the economy opened up to foreign trade and investments, with imports regularly running about 40% above exports. By 1997, Laos had entered into two stand-by arrangements with the IMF, a one year arrangement under the Structural Adjustment Facility (SAF), and a three year arrangement under the Extended Structural Adjustment Facility (ESAP). The credit line for the ESAP arrangement amounted to about $49 million and ran until 7 May 1997. The next month Hong Kong returned to Chinese rule precipitating the Asian financial crisis that was to have devastating effects of Laos's economic development ambitions. From June 1997 to June 2002 the kip depreciated from 1,171 to more than 10,000 to one US dollar. Direct foreign investment (DFI) dropped from $179 million in 1997 to $23.9 million in 2001. In the first six months of 2002, investment flows from ASEAN countries, formally the source of the nearly 60% of FDI, fell to zero. A possibility of some relief from the downward spiral of inflation and dwindling investment lies in the likelihood that Laos will be voted normal trade relations (NTR) status in 2003 by the US Congress in line with legislation submitted by the Bush administration in 2003. NTR would reduce US tariffs on Laotian imports from an average of over 40% to about 3%, and allow for the implementation of bilateral trade and investment agreement with the US. In turn, this would open the way for the World Bank to issue guarantees for foreign investment projects in Laos.

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