Lao People's Democratic Republic - Economy



One of the world's poorest and least-developed nations, Laos is overwhelmingly agricultural, with 85% of the population still engaged in subsistence farming. Because industrialization is minimal, Laos imports nearly all the manufactured products it requires. Distribution of imports is limited almost entirely to Vientiane and a few other towns, and even there consumption is low. The hostilities of the 1960s and 1970s badly disrupted the economy, forcing the country to depend on imports from Thailand to supplement its daily rice requirements.

With the curtailment of hostilities in 1975, the development of a unified political structure offered an immediate advantage. The government began in late 1975 to pursue in earnest a variety of projects to repair and improve the infrastructure and make use of the country's ample mineral, lumber, and hydroelectric resources. During 1978–80, the government gave priority to postwar reconstruction, collectivization of agriculture, and improvements in rice production. In 1994 a liberalized Foreign Investment Law was promulgated as the government sought greater economic integration regionally and internationally.

By 1997, Laos had made modest improvements. In international investment, it had opened up its economy considerably. In April 1997, the government signed a trade and cooperation agreement with the EC. In July 1997, Laos became a full member of ASEAN and AFTA. In 1998 the government applied for membership in the WTO. More than $5 billion in foreign investment had been made by more than 500 investors, mainly from other ASEAN countries. The government had also made considerable progress in the construction of a modern road network linking Laos to China and Vietnam. The country also announced plans for a second bridge into Thailand and the construction of its first railroad, linking Vientiane with Nong Khai in Thailand.

However, the Asian financial crisis dealt the economy a series of blows from which it has not yet recovered. Laos's economy was particularly dependent on Thailand, source of 42% of its foreign investment as well as 45% of imports and 37% of export purchases, which was severely affected by the financial crisis. From June 1997 to June 1999, the Laotian currency, the kip, lost 87% of its value. Growth, which averaged 7% for the six years 1992 to 1997, dropped to 4.8% in 1998, the lowest since 1991. Foreign investment dropped from $179 million in 1996 to $45.3 million in 1998. Growth increased in 1999, to 7.3%, propelled by growth of over 8% in both industry and agriculture, and continued at moderated rates of 5.7% and 6.4% in 2000 and 2001. However, high inflation rates and low declining foreign investments have persisted. Inflation in 2000 was 25% and though it eased to 10% with lower growth in 2001, it was back to double digits, 12% in 2002 and a projected 15% in 2003. Foreign direct investment dropped to $23.9 million in 2001. By late 2002, the kip had fallen to more than 10,000 to 1 US dollar from its level of 1,171 to 1 US dollar in June 1997. In February 2003, the Bush administration submitted legislation supporting the granting of normal trade relations (NTR) to Laos.

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