July 3, 2012
Laos has 6,586,266 people dispersed unevenly across a country that covers 236,800 sq km. The country borders Myanmar and China in the north, Vietnam to the west, Thailand on its eastern border, and Cambodia in the south. Following a period of conflict and civil war, coupled with the fall of Saigon and Phnom Penh to communist forces in 1975, the King relinquished his throne and the communist Lao People’s Democratic Republic (LPDR) party established control. In 1986 the government shifted away from a Soviet-style command economy and began to introduce market reforms that helped cultivate private sector activity. Since economic decentralization, the forces of globalization and regionalization have further driven Laos toward a market-driven economy. The country’s GDP was $1.75 billion in 1984 compared to $7.29 billion in 2010. GDP grew at an average rate of 6.2 percent over the period from 1986 to 2010.
Laos has a one-party political system with active central planning by the government. The only legal political party is the LPRP. In spite of enacting a number of political reforms in recent years, the country is still primarily governed through the issuance of decrees. Many policies are designed to bring Laos into compliance with the World Trade Organization (WTO) requirements, as Laos attempts to become a member in the near future.
The LPRP remains a strong grip on power. In spite of occasional outbursts of low-level violence aimed at the ruling regime since the end of the Indochina Wars, these flashpoints have for the most part subsided in recent years. There were no credible reports of clashes in 2010 or 2011.
The economy of Laos is essentially a free market system with active central planning by the government, similar to the Chinese and Vietnamese models. GDP grew at an average rate of 7.1 percent a year from 2001 to 2010 and is expected to increase at an average rate of 7.6 percent from 2011-2015. Since the 1986 reforms, the country per capita income has grown from $474 to $1176 in 2010. Today the Laotian economy is primarily driven by agriculture and tourism.
Construction is expected to become another major force for economic development in Laos. Hydroelectric dams and road projects are beginning to gain traction, and foreign investment in hydropower and mining has increased. Vientiane has pinned its greatest hopes on the sale of hydropower generated electricity to an increasingly energy hungry region. Laos will also benefit from growing demand for minerals as global commodity prices rebound.
Many factors hinder Lao’s ability to reach its full economic potential. The Laotian labor force lacks many primary skills and there is a dearth of capital in almost all industries. Laos also suffers from inadequate infrastructure; Laos has only a primitive roadway system, limited telecommunications, no railroads and reliable electricity is only available in urban areas.
Future growth prospects
Laos aims to graduate to middle-income country status by 2020. This implies that Loas will remain dependent on aid from the International Monetary Fund (IMF) and other international donors for only a limited time. In the long-term however, Laos has many advantages. It shares borders and common interests with Thailand, Viet Nam, Cambodia and China and will look to piggy-back off of the economic growth of its neighbors while continuing to capitalize on its natural resource base.
The EFB Country Snapshot Series provides macro-level analyses and sector-specific insights into frontier markets. Part 2 of our Laos series will cover the Lao Stock Exchange (LSX)