Laos: Struggling to Keep Up

Construction of the Xayaburi dam on the Mekong Photo: Biosphotos, Jean-Franáois Mutzig

Construction of the Xayaburi dam on the Mekong
Photo: Biosphotos, Jean-Franáois Mutzig

Authorities in Laos hope to lift their tiny country out of poverty with an ambitious spending plan, but their many critics argue the economic prescription might be wrong. By Luke Hunt

In the economic development stakes, Laos has lagged much of the region for decades. Its communist centrally planned economy, run by a government reticent to engage the outside world, had ensured the landlocked country remained a backward Cold War relic.

That started to change as the ASEAN Economic Community (AEC) moved from the drawing boards and towards reality. In Vientiane, that momentum picked-up after Thongsing Thammavong was named prime minister more than five years ago.

Ambitious plans to link Thailand, Cambodia and Vietnam with China by rail through Laos were drawn up alongside designs for more than 10 hydro-power dams on the Mekong River and its tributaries, which would be used to produce and export electricity on a grand industrial scale.

Highways, bridges and airports have been added to the mix for an extraordinary bill worth more than two-and-a-half times the country’s entire GDP of almost $12 billion.

“ The amount is pretty steep,” says Martin Stuart-Fox, a Laos specialist and Emeritus Professor at The University of Queensland. “ The Lao economy is expanding at around eight percent per annum, but the country’s ability to repay such a loan is undercut by corruption at the highest levels.”

One 420 km railway, designed to traverse the north-south of the country, is expected to cost $7.2 billion. A $5 billion dollar loan for construction of a 220 km rail link across the southern Laos pan-handle linking Thailand and Vietnam has apparently been approved by ongsing’s notoriously secretive government.

“Another question is whether it will be a pro table investment,” Stuart-Fox says. “It will take a while for freight charges to reach that sum.”

Further, the Xayaburi Dam across the main- stream of the Mekong River has outraged scientists, environmentalists and downstream countries – where 60 million people depend on the river for their livelihoods – in equal doses. It is expected this will cost about $3.8 billion alone.

As a result, the Vientiane-based Mekong River Commission (MRC) is under heavy pressure from its members, foreign donors and importantly from locally based Lao bureaucrats charged by the central government to ensure its infrastructure agenda proceeds unimpeded.

As one of the few genuine international institutions to find a home in Laos, the MRC is also facing its own financial issues with this year’s currency collapse among major donors from Europe, Japan and Australia punishing its budget amid a spate of senior resignations.

This has added a sense of urgency to construction and the politics surrounding Thongsing’s cash-strapped administration, already under fire from human rights groups, particularly in regards to the disappearance of the prominent agriculturalist Sombath Somphone who was last seen being bundled into a police car almost three years ago.

Groups like Amnesty International, Human Rights Watch and the Singaporean government representing his wife have tried but failed to obtain any information regarding his whereabouts, and donors are being asked by them to consider his plight when reassessing their aid commitments.

In June the US State Department on Human Rights Practices noted “the most significant human rights problems continued to be that the government denied citizens the ability to change their government, conditions in some prisons were harsh, and corruption in the police and judiciary led to a lack of due process and arbitrary arrest and detention.”

The report also said Thongsing’s government had failed to prosecute officials who committed abuses while police and the security forces acted with impunity.

“However, this case and the country’s generally poor human rights record, has had a minimal impact on most donors readiness to continue providing funds to the country, or among foreign investors willingness to seek opportunities in Laos,” Gavin Greenwood, a security analyst with Hong Kong-based Allan & Associates, says.

“Given the country’s strategic position, the high levels of poverty and provision of low cost labour, human considerations are unlikely to have a serious impact on future aid disbursement or overseas investment.”

Still any contributions from donors will fall a country mile short of what’s needed if Thongsing’s grand designs to criss-cross the country with rail lines goes ahead.

The government has claimed that an obscure New Zealand financial institution it named as Rich Banco Bhd would contribute to the financing of the east-west line while Chinese banks will fund the north-south line.

Chinese interests are all about alternative trade routes and its ‘string of pearls strategy’ – the forward deployment of trading posts and military bases around the world to ensure its trading interests are protected. The enmity between Hanoi and Beijing can not be understated, and relations have been sorely tested by Chinese maritime claims in the South China Seas.

The north-south line will open up an alternative route to Vietnam – across Laos to Bangkok and southeast to Cambodia and the port of Sihanoukville, where the Chinese have built-up substantial interests over the last 15 years.

“Political and strategic considerations override normal economic calculations in Beijing’s push to build a rail network that binds much of continental Southeast Asia to China,” Greenwood says.

“Cost, as in many of China’s massive domestic infrastructure projects, is measured against metrics other than profit – or even gain in a material sense,” he says. “Laos’ location as a wedge separating Indochina from Thailand while connected to China has ensured the country remains a prize for whichever of its neighbours dominates it.”

His sentiments were echoed by Stuart-Fox who said future success would depend on the rate of growth in China-Thailand trade and whether it would be cheaper to export from Yunnan through Bangkok rather than Hong Kong, and whether China obtains an outlet though Myanmar.

Analysts, however, said this would be hurt by the massive tumble in the Chinese markets, and the slowing of its economy would take an unwanted economic toll on its neighbours.

Even before the Chinese economy showed signs of sputtering, precipitating The Great Fall of China, the IMF was adopting a cautious approach to Laos by lowering its medium-term growth forecasts to 7.5 percent from 8.0 percent.

It says a further cooling down in economic activity was expected, and the external position will remain fragile, adding, “Fiscal expansion, a sharp regional growth slow-down and deteriorating terms of-trade and capital in ows are the key risks”.

Laos’ prescription for modernising its troubled country is fraught with economic challenges which, assuming it proceeds, will enrich a few ensconced within the decision making process.

But who eventually foots the bill in a highly impoverished, least-developed nation remains unclear, and expectations Vientiane can borrow twice its GDP in order to spend its way into the industrialised ranks of the world’s economies still makes little fiscal sense.


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