Economy in Laos

ECONOMY

Pre-revolution Economics

Approximately 80% of the Lao population' works in agriculture, fishing and forestry; another 10% is employed in the armed forces or in the civil service while an estimated 10% are unemployed. These figures are virtually the same as before the Revolution. Laos has been dependent on foreign aid since the 1950s, however, and the amounts and sources of aid have varied greatly over the intervening years.

Between 1968 and 1973, when US aid to the RLG was at its peak (about US$74.4 million a year), the Lao received as much aid per capita as almost anyone in the world. This aid was enjoyed by those in the RLG- ,controlled Vientiane/Luang Prabang/Savannakhet zone and not by those in the PL liberated zone' (who got US bombs instead); during this period these II provinces existed on a subsistence economy supplemented by commodity assistance from the USSR, China and North Vietnam

Lao Economic System

Lao's economic system can perhaps best be described as a capitalist reality trimmed with socialist ideology. Jlntanaakpan mai (new thinking), the Lao version of perestroika, is another term for what the Lao ruler ship claims is a loyal rendering of Marxism, in which capitalist practices are a way-station on the road to full socialism. When will full socialism be achieved? 'When world conditions are ripe.' according to government leaders.

Observers who would criticize the leadership for what might appear to be hypocrisy should pause to remember that the Revolution was motivated more by nationalism than communist ideology. Because only Ho Chi Minh and the North Vietnamese supported' their struggle. Lao nationalists walked and talked like their Ideological masters. but in governing their new state followed a pragmatic path. When collectivization didn't work. it was quickly abandoned; when the outright suppression of Buddhist monasticism violated the people's mandate. this policy too was relinquished.

Post-Revolution Reforms

After the termination of US aid in 1975, the Vientiane economy collapsed and the new government found itself struggling to manage a virtually bankrupt state. Until 1979, policies of 'accelerated socialization' (the nationalization of large private sector businesses and the collectivization of all agriculture) only made conditions worse. In July f979, however, the government stopped the creation of new collectives and ordered the consolidation of existing ones.

Under this new policy, a certain amount of free enterprise was allowed at the village level. For example, families were given permission to cultivate individual rice fields, although major farming activities (clearing fields, planting, weeding and harvesting) were to be done cooperatively (as it was traditionally done anyway). Rice harvests arc divided into three portions: one for the state, one for the village rice bank, and one for the. family for sale or consumption.

The LPRP has also made radical changes in monetary policy (allowing a free-floating currency) and commodity pricing (bringing prices closer to free-market rates), with the result that by the end of the 1980s the economy appeared to be relatively stable, Consumer goods and agricultural products an widely available, except in the rural areas of the south, where temporary rice shortages are still common.

In 1987, the government further loosened restrictions on private enterprise, as evidenced in the thriving shop house trade along Thanon Samsenthai, Vientiane's main commercial avenue. Foreign private
investment is welcome in Laos.

Private land ownership is now legal in Laos. Many farmers and householders (but by no means all) whose family lands had been collectivized since 1975 have been able to reclaim their property. Since 1991 even selected pre-1975 aristocrats - at least those who have the wherewithal to provide 'favors' to the political establishment - have been permitted to reclaim their former villas.

Such measures have had a pronounced' effect on the Lao economy after 14 years of stagnation. The gross domestic product (GDP) grew at an average rate of 6.5% from 1989 to 1995, and by 1996 real GDP had tripled.

Current Income, Infrastructure & Inflation

Foreign aid has also greatly increased since 1980, making up as much as 78% of the national budget in some years (16% of GDP in 1997). Asian Development Bank (ADB) loans and other kinds of credit have also increased as the country's credit image has improved. UN agencies like Unesco and the United Nations Development Programmer (UNDP) are pouring funds and personnel into Laos. Several nongovernmental organizations (NGOs), including Save the Children, Mines Advisory Group and World Concern, are also present.

Foreign aid averages over US$150 million per year, around 70% of which comes from multilateral donors such as the ADB, UNDP and Unicef, 25%' from bilateral donors (mainly from Japan, Sweden, Australia, France, Germany, Switzerland and the USA) and 5% from NGOs. The US Congress rescinded a 20-year ban on aid to Laos in 1995. All totaled, foreign aid comprises around 45% of the annual national budget, of which an astounding 40% goes directly to the Lao government payroll.

Yet another reason the economy has developed since 1989 is due to the tolerance of the talaat meut (free, or 'black', market). Markets everywhere in Laos trade freely in untaxed goods from Thailand, China and elsewhere and the changing of international currency (mostly US dollars and Thai baht) is quite open.

A small entrepreneurial class, along with members of the communist establishment who thrive on bribes and kickbacks, is flourishing in the cities; having attained a privileged economic status reminiscent of the French colonials. On an international scale, however, Laos is still one of the 10 poorest countries in the world, keeping company with Bhutan, Bangladesh and Rwanda.

According to the World Bank definitions, an estimated one half of Lao citizens are living below the poverty line. The annual per capita income in 2001 was US$263 (down from US$370 in 1998), which places Laos
ahead of Nepal and Afghanistan, but below both Cambodia and Vietnam. If income is measured using the 'purchasing power parity' method (which takes into account price differences between countries), the Lao average US$I726 per capita annually, about the same as Vietnam.

Gross National Product (GNP) growth in 2001 was estimated to be a moderate 4% per annum. Laos has one of the lowest foreign debts in Asia, mainly because of the heavy international aid. Exports of goods and services grew from 4% of GDP in 1985 to 23% in 1996, followed by an inexplicable decline to single-digit levels in 1997 and 1998 despite the lower price tags (in dollar terms) for export goods.

The economic turmoil that struck the rest of South-East Asia in 1997-98 had a strong impact on the Lac-economy. The Lao .national currency (kip) fell into a deflationary tailspin along with the Thai baht, although it suffered much worse, falling from 1080 to the dollar in early 1997 to .as low as 10,000 to the dollar. Many Thai-financed development projects. - such as the Huay Xai, Luang Nam Tha highway - were postponed or even scrapped. To a large extent, however, the Lao economy was cushioned from the full impact of the crash by its reliance on Western aid; the large proportion of the population living at a subsistence level were less affected as well.

Inflation in Laos declined significantly in the early 1990s, and in 1997 and 1998 the real-dollar inflation rate was flat, even deflationary, as the kip continued to decline due to regional pressures on local currencies and an insatiable demand for dollars. 'The exchange rate for the kip has fluctuated wildly since 1997; the World Bank estimates it had reached 12.8% per annum in mid-200!. Real-dollar inflation in Vientiane is somewhat higher - perhaps 15% per annum - due to the heavy influx of foreign aid specialists on expat salaries.

Economic Regionalisation

About a third of the population live in the Mekong valley, where trade with Thailand' is vital. Another 10% or so live in recently emerging economics in the extreme north (primarily Udomxai, Phongsali and Luang Nam Tha), where trade with China is dominant but where there has been little Lao government economic intervention since 1989. A similar situation exists along the

t, Lao Bao corridor between the hai and Vietnamese borders, where a three-way trade between Laos, Vietnam and Thailand goes on with little Lao government intervention.

A slim but significant 3% of all Lao people participate in the insulated Luang Prabang economy, where production is growing but self-limited because of the area's isolation from exterior markets. Rising incomes in Luang Prabang are heavily infused with foreign-aid money and tourism receipts. Once Rte 13 is extended all the way from Luang Prabang to the Chinese border, the area will become a major trade crossroads.

Between 50% and 60% of the nation's population still live at a subsistence level, largely autonomous from all government involvement, in small villages scattered throughout the country.

Agriculture & Forestry

Only around 7% of the total land area in Laos is considered suitable for agriculture. Cultivation is carried out according to dual patterns. one for the lowlands and one for the highlands'. .

Lowland agriculture involves permanent farming communities which cultivate irrigated fields; in the highlands, farming communities are to some extent emigrational, preferring to use swidden methods in which forest is cut to the ground and burned in preparation for planting (see Ecology & Environment earlier for more on swidden agriculture).

Important crops in the lowlands include rice, corn. wheat, cotton, tobacco. peanuts, soybean, fruits and vegetables. In the mountains, dry rice, tobacco, tea, coffee, maize and opium (by far the country's most lucrative agricultural product) are the major cash crops.

Since about hall' of the country is forested timber and wood products arc also important, comprising up to 39% of Laos's annual export earnings. Teak is the major wood for export earnings, followed by secondary forest products like benzoin, a resin which is used to make perfume, and cardamom. Most of the benzoin trade in Laos is controlled by Hmong insurgents in Xieng Khuang Province. Processed wood. such as sawn timber, plywood, parquet and furniture, is becoming increasingly important as well.

Minerals

Lao's greatest economic potential lies in' its rich mineral resources. which include tin. gypsum, coal. oil. iron ore, copper, gold, tin, phosphorite, zinc and salt. So far only tin and gypsum are extracted in any significant quantity. Significant gemstone deposits include sapphire, amethyst and zircon. Several international oil companies are engaged in gas and petroleum exploration, mostly in Southern Laos.

Hydroelectric Power

Laos has 60,400 cubic metres or renewable water resources per capita, more than any other country in Asia. The Nam Ngum dam, 70km north of Vientiane. generates most or the electricity used in the Vientiane valley. In addition, Thailand buys about 850 million kilowatt-hours per year from Laos. via high power lines that stretch across the Mekong to as far away as Udon Thani. Near Tha Khaek, the Nam Theun-Hin Bun dam project exports all of its 210-megawatt out-put to Thailand. and is connected to Thai- land's main grid via a 95km transmission line. Over a dozen other hydropower plants are in the works (see Ecology & Environment earlier for more details).

Fishing

The rivers in Laos yield a steady supply of fish, an important source of nutrition for the general population. The huge lake (370 sq km) created by the damming of the Nam Ngum is being used for a number of experimental fisheries. As these and other fishery projects expand, Laos will probably begin exporting freshwater fish to Thailand.

Manufacturing

The manufacturing sector continues to expand steadily, with garments and motorcycle assembly maintaining the largest segments of the country's export market. Although most of the consumer goods used in the country are imported from Thailand or elsewhere, factories in Vientiane produce soft drinks, beer, cigarettes, bricks and cement. Foreign investment has begun moving from raw materials to joint manufacturing ventures, though Laos doesn't have as large and skilled a labour force as Vietnam, which currently attracts such ventures.


The government has plans to develop Khammuan Province in Central Laos - an area rich in mineral and forest resources with easy. access to markets in both Thailand and Vietnam - as an industrial centre. The regional economic downturn of 1997 has put the brakes on the expansion of manufacturing exports, however, and so far Khamrnuan has been spared most industry (but logging continues at an alarming rate).

Tourism

Since the Lao government first began keeping tourism records, the number of annual visitors has increased from 14,400 in 1991 to 500,200 in 1998, the latest year for which statistics are available. Well over half of the total comprised regional visitors from Thailand, Vietnam and China. Exclusive o£ regional tourists and visa extensions, the number of international tourists entering Laos in 1998 totaled a mere 120,903. Among these, the USA (20,174), France (17,886) and Japan (12,936) ranked highest.

Tourism is the country's fourth most important source of income, although Laos still lags far behind Thailand

Opium & the Golden Triangle

The opium poppy, Papaver somniferum, has been cultivated and its resins extracted for use as narcotic at least since the time of the early Greek empire. The Chinese were introduced to opium by Arab traders during the Kublal Khan era (1279-94). It was so highly valued for Its medicinal properties that hill-tribe minorities In southern China began cultivating the opium poppy In order to rats money to pay taxes to their Han Chinese rulers. Easy to grow, opium became a way for the nomadic hill tribes to raise cash for transactions with the lowland world. Many of the hill tribes that migrate, to Thailand and Laos In 'the post-WWII era, to avoid persecution in Burma and China, took with them their one cash crop, the poppy. The tall flowering plant Is well suited to hillside cultivation a It flourishes on steep slopes and In nutrient-poor soils.

The opium trade became especially lucrative in South-East Asia during the 1960s and early 1970 when US armed forces were embroiled in Indochina. Alfred McCoy's The Politics of Heroin in South east Asia recounts how contact with the GI market not only expanded the immediate Asian market, but provided outlets to world markets. Before this time the source of most of. the world's heroin was the Middle East. Soon everyone wanted a piece of the profits and various parties alternately quarreled over and cooperated in Illegal opium commerce. Most notable were the Nationalist Chinese Army refugees living in northern Burma and northern Thailand, and Burmese antigovernment rebels, In particular the Burmese Communist Party, the Shan States Army and the Shan United Army The CIA eventually became involved, using profits from opium and heroin runs aboard US aircraft (the Infamous Air America, a CIA front) from Laos to Vietnam and farther a field to finance cover 4lperations throughout Indochina. This led to an increase in the availability of heroin throughout the world. which in turn led to increased production in the remote northern areas of Thailand, Burm and Laos, where there was little government interference. This area came to be known as the 'Golde Triangle' because of fortunes amassed by the 'opium warlords' - mostly Burmese and Chinese military-businessmen who controlled the movement of opium across three international borders. As more opium was available, demand increased along with the profits, and so the cycle expander As a result, opium cultivation became a full-time job for some hill-tribe groups within the Golden Triangle, and opium production became a necessary means of survival for thousands of people.

Opium In Laos

Opium has been cultivated, processed and used in Northern Laos for centuries but Laos didn't become a major producer until the passing of the 1971 Anti-Narcotics law by the Royal Lao Government (at the urging of the US government), a move which helped drive regional prices up steeply This in turn resulted In an increase in criminal activity and in the increased use of heroin among former opium addicts (since heroin could be more easily transported and concealed). licensed opium dens were permitted until the Revolution. In 1975 there were over 60 licensed dens in Vientiane and probably many other unlicensed ones; their current legal status is unclear, although opium smoking dens certainly still exist.

Today opium - until 1991 an official export in spite of objections from the USA and neighboring countries - probably remains Lao's biggest export' earner. Worldwide the country ranks third in production after Myanmar and Afghanistan, with annual crops yielding anywhere from 100 to 200' tonnes of refined opium, surpassing even the figures for colonial Laos under the French. Grown and collected by the Hmong, Akha, Lolo and Mien tribes - experts estimate around 60,000 families in 2200 villages plant poppy - about half the product leaves the country along smuggling routes through Thailand, Cambodia and China, while the other half is consumed in Laos. Some opium is also refined into heroin in clandestine laboratories in the north (and just over the Chinese border in Yunnan), and then smuggled out of the country. ( Poppy is cultivated in 10 provinces, particularly throughout the north, although unlike in Myanmar it's not used to finance insurgent armies nor are there opium warlords per se. Instead it's mostly grown in small to medium-size plots, with planting beginning in October and harvesting taking place in January or February. Prices for processed (boiled) opium in Laos fluctuate from USS30 to US$ 1 20 per kilogram depending on the size of the annual harvest. Due to the country's rugged terrain and lack of roads, large-scale poppy cultivation is much tougher to combat here than in Thailand.

In 1987 the Lao and US governments signed an agreement to allow a Lao-American Counter- Narcotics Cooperation program to be carried out in Northern Laos. The UN Drug Control Programme (UNDCP) also operates in the country. The principal thrust of these programs is to train poppy growers in crop substitution. Experience with similar projects in Thailand indicates that success only occurs in areas where crop substitution is accompanied by a concentrated effort to indoctrinate the minority ethnic groups into the main- stream lowland culture.

For many ethnicities in Laos, opium plays an important role in traditional medicine. The Lao government doesn't discourage the latter use, but instead concentrates on locating and destroying large fields. A recent French study concluded that in villages where opium was produced, only about 11 % smoked it regularly and less than five per 1000 were addicted to the point where they could no longer work. Among many ethnic groups, raw opium sap, pressed oil and/or poppy seeds also feature significantly in daily food intake.

Foreign Investment in Laos

Laos has one of the most liberal foreign investment codes in the world. Unlike in Thailand, where foreign companies are legally limited to a maximum 49% ownership in any enterprise, the Lao government allows
100% foreign ownership in approved projects. Two major conditions apply: investors must operate through a broker to obtain all permits (including business visas) and 100% foreign ownership is limited to 15 years UIT- less an extension is approved.

Standard profit taxes run at 35%, though a lower 20% to 30% rate is available in certain promoted sectors (mostly infrastructure projects). Personal income tax is limited to a low 10%. As of the beginning of 1998, the government had granted foreign investment licenses totaling US$6.8 billion - over a tenfold increase since 1993. Around three- quarters of this investment was in energy, followed by much smaller investments in tourism, mining, garments/textiles, wood products, import/export and agribusiness.

Foreign investment in Laos typically out- distances domestic public investment by a ratio of three to one. Of the more than 30 . countries with companies operating in Laos, the top live foreign investors are
Thailand, the USA, Australia, Malaysia and France.