Courtesy of STRATFOR (subscription required), a look at Laos’s economic potential in light of the changes happening in the region:

Long one of the poorest countries in Southeast Asia, Laos has moved in recent years to capitalize on the region’s robust economic growth and increased integration by recasting itself as a “corridor country” able to facilitate cross-border trade across its land-locked territory. This plan is highly dependent on the cooperation of and interaction with neighboring countries that have traditionally treated Laos as a strategic buffer or quasi-colony, contributing to its isolation and underdevelopment, and that until recently showed little sign of changing their approach.

However, competition in Southeast Asia among China, the United States, India and Japan has led these countries and others to increase their interest in Laos. Vientiane senses an opportunity to mitigate the country’s primary geographic limitation — its lack of a coastline — by courting outside investment in rail and road infrastructure through regional economic forums. But even if Laos is able to become a transport corridor, its economic future will remain dependent on other countries, which, unlike Laos, will always have other options at their disposal.

Analysis
Confined by mountains and surrounded by more powerful neighbors, including China, Vietnam, Thailand, Cambodia and Myanmar, Laos’ location has limited its economic development. Since Laos was established as an independent entity in the 14th century, it has been subject to incursions from the Vietnamese empire to the east, the kingdom of Myanmar to the north, Siam (modern-day Thailand) to the west and later French colonialism from 1893 to 1953. Traditionally, Laos has had to subordinate itself to one of these major powers for protection, sea access and an economic lifeline or attempt a fitful balance with bordering countries.

From the end of French rule until the late 1980s, Vietnam served as the country’s primary patron, but in recent years Vientiane has tried to diversify its economic reliance away from Hanoi and adopt a more independent foreign policy. A number of factors have accelerated this push. Laos had been the victim of geopolitical competition throughout its history and experienced periodic invasions by its neighbors as a result of its buffer status, but with the end of the Cold War, the shift in focus to economic competition increased interdependence among these countries, thus reducing the threat of direct intrusion.

Meanwhile, increased investment from China after the 1997 Asian financial crisis, renewed U.S. interest in Southeast Asia as the wars in Iraq and Afghanistan wind down, India’s reinvigorated Look East Policy as well as Myanmar’s diplomatic and economic opening means greater interests and competition within the region, therefore making have made Laos more relevant. Regional and outside powers are looking to use the country as a foothold to extend their economic influence in the region.

Laos’ strategy to become a regional transport corridor depends on substantial infrastructure links as well as a careful diplomatic balance with its more powerful neighbors. Though some projects have already been completed, Vientiane still has much work to do in building the infrastructure needed to enable cross-border trade. Because it lacks the financial resources to undertake these projects on its own, Laos has turned to regional integration projects and investment from other powers to finance infrastructure upgrades. However, this also means Vientiane’s corridor strategy will be viable only with outside support, further increasing its dependence on other countries, especially China.

Regional Blocs
Laos is a member of several regional economic blocs, the most important being the Association of Southeast Asian Nations (ASEAN) and the Greater Mekong Subregion (GMS). Membership in regional groups enables Laos to take part in a number of initiatives under way as part of regional economic integration and provides a forum for Laos to negotiate with potential trade partners — both within the group and outside it — from a stronger position than it would have on its own.

Given its location and lack of sea access, trade with neighboring countries has accounted for around 80 percent of Laos’ overall economic activity — mainly exporting electricity and natural resources such as minerals and timber. That may be changing, however. With China aiming to enhance its economic reach and influence in Southeast Asia, an alternative land trade route is a good option.

Beijing does not have to go through Laos to reach sea access in Myanmar or Thailand, but the route does provide easy access to an economically dependent nation and remains an expedient approach to expand its influence in the country as well as in the region. For this purpose, Beijing has increased its investment and assist building connections in Laos under its broader goal of increasing connectivity in the region. While highly dependent on Chinese investment at present, Vientiane’s goal is to draw in more of this type of investment and reinvigorate past programs that would better integrate the country into regional trade routes.

Infrastructure Projects
Two of the major infrastructure plans featuring Laos’ development under ASEAN and the GMS are primarily funded by the Asian Development Bank and Japan — which used to be the primary donor in the region under its Southeast Asia strategy — and span the country’s entire territory (graphic). The East-West Economic Corridor Project under the GMS was a 1,450-kilometer (900-mile) transport corridor completed in 2006 stretching from Savannakhet in western Laos to Dansavanh in eastern Laos, linking the country with Thailand and ports in Vietnam and Myanmar. The North-South Corridor Project, running from China’s Kunming province through Laos to Chiang Rai in Thailand and south to Bangkok, has been under development since 1998 as part of a GMS initiative program.

Laos is dependent on road transport, with road networks accounting for around 80 percent of freight transport. According to Laos’ statistical bureau, the total length of the road increased dramatically from about 18,300 kilometers in 1995 to 39,500 kilometers in 2009, though poor conditions and inadequate capacity continue to hamper Laos’ logistic chain. Its core national highway system is fully surfaced, though major washouts are still common in the wet season. In addition to the North-South and East-West corridor projects, much of the rest of Laos’ road infrastructure is funded by the Asian Development Bank or other financial institutions and through bilateral aid packages.

?At present, Laos has almost no railway infrastructure. A short 3.5-kilometer rail line completed in 2009 over the Mekong River connecting Nong Khai, Thailand, to a highway leading to Vientiane was the first and remains the only rail line in the country. The line was presumably added to be part of the ASEAN Mekong Basin Development Cooperation Initiative’s long-term regional connectivity plan, which will link China’s southwestern Kunming province to Singapore. Additional rail infrastructure could be a massive boon to Laos’ goal of becoming a corridor country. Beijing and Vientiane have signed an agreement to conduct a feasibility study on the high-speed rail link between Boten on Laos’ northwestern border and Vientiane, a distance of about 400 kilometers, and Beijing has committed to pay for 70 percent of the $7 billion project, though no date has been set for construction to begin. A feasibility study on a rail line from Vientiane to Mu Gia on the eastern border with Vietnam is also under way.

Besides roads and rail lines, bridge infrastructure is also important for reducing Laos’ isolation. In addition to the aforementioned Nong Khai rail line across the Mekong River, a second bridge connecting Laos’ southern city of Savannakhet to Thailand’s Mukdahan province as part of the East-West Corridor Project and a third connecting the northeastern Thai province of Nakhon Phanom with Khammuan province in central Laos are under construction. Vientiane also reached an agreement with Myanmar in February to build a bridge between the northwestern Laotian city of Xiengkok in Luang Namtha province and Kainglap in Myanmar.

With many of these projects already under construction or projected to be built in the future, Laos’ position could certainly be improved, but it still needs outside powers to leverage this additional transport infrastructure into domestic economic growth. Concerns remain that development of an economic corridor may benefit only economically large countries, and Laos, without a sufficient industrial base already in place to utilize the goods and investment through the connection, could gain little from the enhanced connection beyond merely being a transit route. To some extent, Laos’ development path will always be determined by factors outside its own control, so it has little choice but to integrate itself as deeply as possible into the regional transport network before circumstances change and other countries lose interest.