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Economics and Business in Laos

According to COUNTRYAAH, Laos is one of the least developed countries in the world and currently has a relatively poorly developed monetary economy. The former centralist planning economy was gradually replaced by a market economy in the 1980s and 1990s. The reforms brought significant economic growth until 1997, when the country was severely hit by the crisis in neighboring Thailand. The country is rich in hydropower, mineral resources and forests. Nevertheless, the development of inadequate infrastructure, a low educational level in the population and a small domestic market with very poor purchasing power are hindered.

Business of Laos

Historical background

The goal of the revolutionary government in 1975 was a socialist society; its main instruments were the collectivization of agriculture and industrialization according to the Eastern European model. The collectivization met resistance and led to a decline in rice production; it was also seen as contributing to the fact that about 300,000 laots fled the country in 1975–1985, about half of which belonged to the hmong people. Gradually, an economic reorientation came with leeway for private business operations. In agriculture, they gradually returned to traditional family farming. By the turn of the millennium, most collectives had been closed down.

Following Vietnam's pattern, the regime has implemented market economy reforms since 1988, but the pace of the Lao reform has been slower. Yet important legal and institutional structures are lacking for an efficient market economy. Nevertheless, the market has responded positively to the changes and growth has been good, albeit from a very low level.

In 1991, Laos got a new constitution without the previous emphasis on socialism, but with the opening of market economy and private property rights. The Constitution confirms the Communist Party's position as the country's leading power body. The one-party state was also confirmed at the party congress in 2006.

Average economic growth in the period 1988–2008 is stated at approximately six per cent annually. The country continues to develop the market economy according to the Vietnamese pattern. Between 1993 and 2003, the proportion of people living in extreme poverty was reduced from 30 to 24 percent of the population, according to government statistics. In 2013, this percentage had dropped to 22 per cent. Poverty is particularly widespread in rural and remote areas.

Laos has long been a major producer of opium and heroin in its part of " The Golden Triangle." Production has gradually decreased. UN drugs agency (United Nations Organization on Drugs and Crime, UNODC) designated in 2008 Laos as "almost opium-free." In 2001, a law was passed that stipulates the death penalty for possession of more than 500 grams of heroin.

The financial situation

The country's gross domestic product (GDP) increased by 6.9 percent in 2017. GDP per capita amounts to USD 7,400. Of the ASEAN countries, only Vietnam, Myanmar and Cambodia have a lower GDP per capita. In 2017, the state budget deficit accounted for 5.5 per cent of the country's GDP and public debt 63.6 per cent of GDP. Registered unemployment is low (0.7 per cent). In 2017, Laos was ranked 139th out of 189 countries on the UN Global Living Index. Of the ASEAN countries, only Myanmar and Cambodia rank lower on this list.

The government's goal is for Laos to grow out of the Least Developed Countries (LDCs) group, but the country is increasingly dependent on foreign aid to achieve this goal.

Agriculture

Agriculture is the main industry. In 2017, agriculture accounted for 20.9 percent of the country's GDP, while 73.1 percent of the working population was employed in this industry. The industry is generally underdeveloped and productivity is low. Only ten percent of the country's land is considered suitable for agriculture. The terrain and poor transport conditions degrade the potential for cost-effective rice production as practiced in neighboring countries.

Agriculture can be divided into two separate economic zones: a richer lowland zone along the Mekong (the "Mekong corridor") and a poor highland zone in the higher-lying areas. In the 1990s, through large investments in technology and farmers' education, the authorities succeeded in significantly increasing productivity in the lowland areas. In the higher-lying areas, the practice of sweating and natural housekeeping is mainly practiced.

Rice is by far the most important product and is grown by 85 percent of farmers. The most important rice areas are in the plains along the Mekong, near the capital Vientiane and the cities of Savannakhet and Champasak in the southwestern part of the country. Laos are usually self-supplied with rice. However, the country is often exposed to droughts or floods, which severely affect rice production and the economy.

In addition to rice, corn, sweet potatoes, tobacco, peanuts, cassava, soybeans, fruits and vegetables are grown in the lowlands, tobacco, tea, coffee and corn in the highlands.

In northern Laos, in the so-called Golden Triangle, various hmong and mien groups grow opium, which is usually their only sales product. In 2001, Laos was considered the world's second largest opium producer after Myanmar, and the population as the world's second most opium-dependent after Iran. The authorities aim to combat opium cultivation with foreign aid. Coffee production is a growth industry on the Boloven Plateau in the south. Animal husbandry is also considered a growth industry, and the stock has increased significantly since 1985.

Forestry

Laos has Asia's largest forest reserves in terms of area content. Forest covers 57.4 per cent of the country's area (2015). Forestry accounts for 3.8 per cent of the country's GDP (2016).

Teak is the most valuable tree species. Uncontrolled harvesting, clearing of forests in connection with sweat farming, as well as widespread destruction during the war have significantly reduced forest reserves. In 1991, the authorities imposed severe logging restrictions, and in 1999 a new landscape protection law was passed. The commercial harvest of economically exploitable tree species, including the illegal ones, is around 425,000 m 3 per year, which is 50 per cent above what is considered sound. In addition, 4–5 million m 3 are collected per year for use for fuel.

Mining

Laos is believed to have rich deposits of gold, iron ore, tin, copper, lead, zinc, silver, gemstones, pot ash and plaster. Copper and gold are mined, for example, at Sepon east of Savannakhet. Otherwise, tin, plaster and some silver and zinc are extracted. Poorly developed transport years and poor legal protection have so far kept foreign mining companies from investing more in the country. Copper, tin and other metals were mined 5,000 years ago. The Ban Chiang culture, believed to be the world's oldest Bronze Age culture, had its center in central Laos and northeast Thailand.

Energy

The upturn in the economy led to strong growth in energy consumption. In 2013, primary energy consumption was 103.4 PJ (petajoule), an increase of 140 percent from 1990. Around 20 percent of consumption is based on non-renewable energy sources such as oil (17 percent) and coal (3 percent). The renewable part of 80 per cent consists essentially of biomass (wood) with 68 per cent and hydropower with 12 per cent.

In 2018, the consumption of electrical energy was 4.2 TWh. After extensive expansion of the country's power grid, 80 per cent of the population in rural areas now have access to electricity. The government's goal is for at least 98 per cent of the population to be connected to the electricity grid by 2030.

A special potential lies in the production and export of hydropower with Thailand as the main customer. The Mekong River flows through the country from north to south, and a large-scale hydropower development is underway on Mekong's numerous tributaries. Hydropower's expanded capacity in 2013 was 2971 MW. About 60 per cent of production is exported to Thailand. Laos has significant hydropower potential, which is estimated at a total of 20,000 MW. Exports of electrical energy are regarded as an important source of income for the future, and several new power plants are under construction or planning with foreign aid. Lack of funding has prevented faster development.

In 2005, the World Bank supported one of Asia's largest and most controversial hydropower projects, Nam Theun 2 (NT2), 25 miles southeast of Vientiane. It had been at the planning stage for 20 years. The estimated cost of approximately NOK 10 billion was this country's largest construction project ever. NT2 had been counteracted by environmental activists since the 1990s. These showed, among other things, the forced relocation of 6200 people and the consequences for an additional 100,000 in areas below the 50 meter high dam. The power plant was opened in 2010 and is today, with an installed capacity of 1075 MW, the largest power plant in the country.

Industry

The industry has traditionally been little developed and limited to wood processing, textile and clothing production, lighter consumer goods and handicraft production. 6.1 per cent of the working population are employed in manufacturing, contributing 33.2 per cent of the country's GDP. Industrial production increased by 8.0 per cent in 2017.

In the 1990s, the authorities carried out the privatization and restructuring of many state-owned enterprises. For a period in the 1990s, the country received several direct foreign investments in industry (most of them Thai). Development is hampered by a small and weak domestic market. However, the government seeks to facilitate increased foreign investment, especially in hydropower development, mining, tourism and clothing production. The majority of industrial companies are located in Vientiane with the production of mineral water, beer, cigarettes, cement and other building products.

Foreign Trade

In 2017, Laos' exports totaled USD 3,654 billion, while imports amounted to USD 4,976 billion. As a result, the country had a deficit in the foreign trade balance of USD 1.322 billion.

The four main export markets are: Thailand (42.6 per cent), China (28.7 per cent), Vietnam (10.4 per cent) and India (4.4 per cent). The main export products are clothing and textiles, pewter, copper, gold, electricity, lumber, plywood, coffee and cassava.

The three main markets for Laos imports are: Thailand (59.1 per cent), China (21.5 per cent) and Vietnam (9.8 per cent). The main import products are vehicles, cement, fuel and consumables.

Liberalization of the economy has opened a lively trade between the related people groups in Laos and Thailand on both sides of the Mekong. A similar border trade has occurred over the Lao-Chinese border in the north, and with Vietnam over Lao Bao in the south.

Transport and Communications

Transport is very poorly developed, which hinders economic development. The country lacks rail, has a poorly developed road system, and has expensive access to ports in neighboring countries. The total road length is 39 586 km, of which 5 415 km has a fixed tire. An improved road network that is crucial for the country's further growth is undergoing significant development with assistance from the Asian Development Bank (ADB), the World Bank, the UN, Sweden and Australia. It is estimated that 1/3 of the villages, with 22 percent of the population, are located in places that can be reached by vehicles.

In 2008, a new highway opened through Laos, mainly funded by China. Previously, it took two days to drive through the country from the Chinese border to the capital Vientiane - on the new highway the trip can be done in about five hours. Road construction has led to strong growth in Laos - China trade. The road through Laos is part of the larger North-South Economic Corridor, a network of roads between the Chinese provincial capital Kunming and Bangkok. With the new road connection, considerable growth is expected in trade with China.

The "Friendship Bridge" over the Mekong, 20 km south of Vientiane, was completed in 1994, as the first bridge connecting Laos with Thailand. During the drought period, the Mekong is navigable only about 550 km between Luang Prabang and the Khong Falls, south of Savannakhet. At higher water levels it is also navigable into China. The country's waterways, which are mainly Mekong and its tributaries, total 4,600 km.

Air transport, operated by Lao Aviation, is small in volume. Still, it is important, since it connects the urban areas with otherwise inaccessible places. In total, there are 41 airports in Laos.

The authorities see it as an important focus area to develop the transport sector so that the country can act as a "service center" for trade between China, Vietnam, Thailand and Cambodia.

Tourism

After years of isolation, since the turn of the millennium, Laos has become a new tourist destination. While there were 735,668 foreign tourists in Laos in 2000, the number had increased to 3,868,038 in 2017. In 2017, 71 percent of tourists came from other ASEAN countries, 22.87 percent from Oceania and other Asian countries than ASEAN countries. and 4.17 percent from Europe.

Aid

Foreign aid is crucial to the country's development. The country receives significant assistance both from multilateral organizations such as various UN organizations, the World Bank and the Asian Development Bank, and bilateral assistance. In the period 2011–2014, Japan, Australia, South Korea and Germany provided the most bilateral assistance. According to the United Nations Development Program (UNDP), total aid represents 18 per cent of GDP and 70 per cent of public investment.

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