Via East Asia Forum, a look at Laos’ economic future:

The economic growth trend in Laos started when it first opened to foreign trade and investment in the early 1990s. Three major economic crises have hit Laos since, profoundly affecting the country’s growth strategies.

Laos is a landlocked country whose substantial interaction with the outside world is carried out through Thailand, one of its immediate neighbours. Trading with or through Thailand to the west had long been the most economically efficient route for geographic and historical reasons. Most cities in Laos are also distributed along the western border with Thailand, making trading westward simply more efficient. The formalisation of trade and investment westwards in 1989 was a pragmatic reverse of the stagnant attempts to establish an alternative connectivity eastward via Vietnam since 1975.

Trade westward brought sustained economic growth to Laos until the Asian financial crisis hit the country in 1998. Laos was struck much harder than neighbouring Thailand. The heavy impacts came from the drastic drop in investment from Thailand and high inflation caused by a steeper depreciation of the Lao Kip against the Thai Baht compared to the US dollar, sharply reducing its capacity to import. Laos realised it needed to secure alternative linkages with the world.

Laos quickly wrapped up preferential trade agreements with Vietnam and China in the early 2000s that aggressively slashed tariff and non-tariff barriers. This move paid off, coinciding with the rise of China. Both exports and imports with China increased from less than 1 per cent in 2000 to about 10 per cent in 2008. Investment from China quickly constituted a major portfolio of foreign direct investment (FDI) into Laos. The economy remained almost unaffected by the global financial crisis in 2008. China’s Belt and Road Initiative accelerated the development partnership.

COVID-19 has become the third crisis. Before 2020 foreign tourists and remittances accounted for about US$1 billion in annual foreign exchange revenue. The statistics reveal a mixed reality for cross-border movements of goods. While imports from Thailand between January and November 2020 declined by 13 per cent compared to 2019, exports increased by 6 per cent. Transit goods from Thailand to Vietnam decreased by about 20 per cent but increased by around 13 per cent from Vietnam to Thailand. Transit goods from Thailand to and from China increased by about 8 per cent and 34 per cent, respectively.

Construction rail and motorways continued almost without disruption. A 109-kilometre long dual-carriage highway linking the capital Vientiane and Vang Vieng began in 2019 and was completed under lockdown ahead of schedule. Construction of a further 137 kilometres linking to the former capital of Luang Prabang was approved in December 2020. This construction will boost tourism. The completion of a 200-kilometre highway to Boten, the border with China, will secure another linkage in addition to the current one via Thailand.

The heavy debt surrounding the development partnership with China is still a source of concern. The scale of some projects is so large that parts of them may put unmanageable pressure on Laos’ financial position, especially during economic crises. Laos still decided to take the risk because of its high growth target within a fixed time frame. In its 2030 vision, Laos aims to quadruple per capita GDP between 2016 and 2030. An annual investment of around 30 per cent of GDP is required to achieve this target.

But economically profitable investment opportunities are limited given the size and distribution of the population. Labour-intensive FDI in the garment industry levelled out quickly because of the low population density, scattered over a relatively large and difficult landscape. The relatively high growth since 2000 has been mostly propelled by a rapid expansion of natural resources and hydroelectric power exports, as well as steady increases in foreign tourist arrivals. Attracting FDI into these sectors in Laos was not easy. The impact on the environment and local communities are major concerns accompanying natural resources and hydropower developments, while dependency on foreign tourists and accessibility are the challenges of the tourism industry. China is currently the only country with the capacity and willingness to fill present supply and demand gaps needed for continued rapid growth in Laos.

The annual growth target has been revised down substantially, from around 8 per cent to 4 per cent, in the next five-year plan (2021–2025), according to Prime Minister Thongloun Sisoulith’s speech at the 11th Party Congress on 14 January 2021. The emphasis on ‘sustainable, balanced and quality’ growth reflects widespread concern of excessive emphasis on resource-based economic development. This amounts to another sharp turn in growth strategy if materialised.

Achieving the new growth target will require FDI, while the involvement of international institutions is essential for Laos to achieve its non-economic goals. The importance of FDI in economic growth is true for any developing country and Laos needs to ensure diversity in its economic relationships with immediate neighbours and beyond.