Introduction of the New Economic Mechanism in 1986 and the adoption of the first Constitution of the Lao PDR in 1991 reflected the reform of Laos's political and economic system. The Constitution represented an important watershed in the country's economic and political life. In the economic realm, it legally recognized the shift from a planned to a market economy with significant liberalization. The Constitution vows "to protect private property of national and international capitalists." The implementation of a clear legal framework was seen as essential to attract critically needed international investment. The new Constitution and subsequent laws led to a dramatic increase in foreign investment in the 1990s. Party leadership has frequently pulled back from completely endorsing economic reform. The 1999 sacking of high-level finance officials associated with a free market appeared to indicate confusion within the government about which economic course to pursue.
On the political front, the Constitution confirmed the absolute power of the LPRP. The LPRP is normally referred to simply as "the party." With the promulgation of the 1991 Constitution, the hammer and sickle were removed from the Lao national symbol and replaced by the famous That Luang Buddhist temple, now the symbol of the nation.
The party determines fundamental policy in Laos, and the National Assembly debates laws to implement party policies. The Constitution designates the country as a "people's democratic republic." Its democratic dimension is not in the area of Western style political liberty and pluralism but in an emphasis on equality and political mobility. Members of ethnic minorities serve in the Politburo. Under the new system, the appointed Supreme People's Assembly was replaced by an elected National Assembly.
Eligible voters are those 18 years and older. Party membership is not required to compete for seats, though most candidates and those elected are, in fact, party members. Each member of the National Assembly serves for five years.
The liberalization of the economy brought new problems related to influence peddling and growing corruption. Forest depletion has resulted from increased logging, legal and illegal, for exports to Thailand and other parts of Asia. An August 1991 decree attempted to address this problem by banning many types of logging activity, and efforts have been made to restrict timber exports. To deal with the problem of corruption, an Anti-Corruption Commission was established in 1993, reporting directly to the prime minister. It recovered a significant amount of money earned illegally and had the authority to remove and punish corrupt officials. However, crime, smuggling, and corruption have continued to be on the rise into 2003.
Khamtay remains a secretive, authoritarian leader, operating within a political system that lacks transparency and accountability. In October 1999, a few academics staged a prodemocracy protest in Vientiane, followed the next year with a demonstration on their behalf in the same city by European human rights activists. These small stirrings were the first known civil challenge to one-party rule in Laos. Amnesty International released a report in July 2002 which was highly critical of the Laotian justice system, calling it without "transparency, clarity or reason," and condemning the widespread use of torture by the police forces. A series of unexplained bomb explosions in and around Vientiane in 2000 and 2001 was a further indication of urban instability, and guerrilla violence continued to flare in the mountains from time to time. A February 2003 attack on a bus, in which Swiss, Chinese and local civilians were killed, was blamed on bandits rather than terrorists.
Khamtay was elected for his third term as president at the seventh Party Congress in March 2001 and is expected to be in office until 2003. He pledged that the LPRP would focus on modernization and would triple economic growth by 2020. At the seventh Party Congress, Sisavath Keobounphanh was replaced as prime minister by Bounyang Vorachit, a younger Politburo member who had been the Finance Minister. In February 2002, parliamentary elections were held, in which 165 candidates were from the LPRP and only one was not. Khamtay commented on the election process: "In the party apparatus there won't be any change."