Courtesy of STRATFOR (subscription required), an interesting look at Laos and how – in recent years  as China and Vietnam have jockeyed for influence in Indochina and as countries in the region have increased their cooperation – Laos has envisioned itself becoming a “corridor country,” tying into a Chinese high-speed rail network and exporting hydro-powered electricity to the region.  As the article notes:

“…Vietnamese Prime Minister Nguyen Tan Dung, in his first international trip since his re-election, traveled to neighboring Laos Sept. 9-10. During the visit, Dung and his Laotian counterpart pledged to prioritize their countries’ traditional alliance. Meanwhile, Choummaly Sayasone, the Laotian president and the secretary-general of the Lao People’s Revolutionary Party Central Committee, prepared for his first state visit to China Sept. 18-21, which likely will focus on economic relations.

Landlocked Laos, one of the poorest countries in Southeast Asia, has largely been absent from the world stage since the end of the Vietnam War in 1975. Now Vientiane is looking to capitalize on its resources and geographic position in the center of Indochina. Laos envisions itself as a key transportation corridor from southern China to Singapore and as the “battery of Southeast Asia,” exporting electricity to neighbors who sorely need it, such as Vietnam and Thailand.

One problem is that China and Vietnam are historical rivals in Indochina, and as Laos’ regional policy evolves it is becoming a political battleground in this rivalry. Laos and Vietnam share a revolutionary legacy dating back to the Indochinese Communist Party in 1930, but China’s influence in the region is rapidly expanding. As this regional change plays out, a Laotian realignment with China would certainly not be in Vietnam’s strategic interest.

Laos’ Geopolitical Challenges

Laos is locked in the center of Indochina, surrounded by Cambodia, China, Myanmar, Thailand and Vietnam. This position makes Laos the crossroads for trade in the region, but it also dooms the Laotian economy to dependency on a major benefactor and means that Laotian territory is seen by its neighbors mainly as a buffer between one another. In ancient times, this buffer role meant Laos was frequently invaded by its neighbors, but now it means that they compete for influence in the country.

Formerly a Soviet-style command economy, Laos introduced the “new economic mechanism” in 1986 in order to reorient itself toward a market economy and spark economic growth. It slowly began allowing the emergence of private enterprises and foreign participation in its economy, and it gradually integrated with international institutions. Vientiane joined the Greater Mekong Subregion economic area, the Association of Southeast Asian Nations (ASEAN) and the ASEAN Free Trade Area. It applied for membership in the World Trade Organization, signed a number of regional free-trade agreements and opened its stock market in January 2011. Laos remains poor and largely dependent on agriculture and foreign aid, but it has enjoyed an average economic growth rate of about 6 percent between 1988 and 2008, thanks to increasing foreign investment.

Today the countries of Southeast Asia are more interconnected, particularly the countries along the Mekong River. Vientiane hopes to use this opportunity to boost prosperity by transforming itself into a “corridor country,” liberalizing its economy, breaking down investment barriers and campaigning for trans-Asian transportation projects like a $7 billion high-speed rail network intended to link China’s Yunnan province to Vientiane and eventually Thailand, Malaysia and Singapore.

Another aspect of Laos’ policy shift is its efforts to utilize its hydropower capacity to power itself and its neighbors. Laos’ long western boundary is formed by the Mekong River flowing from the north out of Tibet. Vientiane plans to build 20 new hydropower plants over the next decade, in addition to 14 already in operation. The goal is to increase the country’s hydropower capacity from the current 2.54 gigawatts (GW) to 8.04 GW by 2020. Laos is thought to have an exploitable hydropower potential of about 18 GW of electricity, 12.5 GW of which is located in the Mekong Basin.

Competition Between China and Vietnam

After establishing the Lao People’s Democratic Republic in 1975, the Communist Lao People’s Revolutionary Party established a close relationship with newly unified Vietnam that was secured by treaty in 1977. Vietnam provided Laos sea access and trained Laotian government and military leaders. Vietnam gets electricity from Laos, but more important, it needs Laos to provide a strategic buffer on its western flank. Vietnam is some 1,600 kilometers (1,000 miles) long but only about 50 kilometers wide in its center. Fearing that the country could be split, Hanoi seeks to secure buffers to its east and west, which means securing influence in Laos.

Under Hanoi’s pressure, Vientiane distanced itself from Beijing, and bilateral relations between Laos and China were further strained when Laos supported Vietnam’s occupation of Cambodia in 1978, an attempt to end the Khmer Rouge regime that led to a brief border war between Vietnam and China in 1979.

Since the mid-1980s, however, Laos has been trying to reduce its dependence on Vietnam, in part due to the departure of Vietnamese troops and Vietnam’s waning economic influence. Instead, Vientiane has reached out to China, the United States and ASEAN countries such as Thailand. Hanoi retains significant political influence over Vientiane, but alignment with Vietnam does not bring the same economic advantages as alignment with China, particularly as Laos pursues its ambitious infrastructure projects.

Beijing significantly increased its influence over Laos during the 1997 Asian financial crisis, when China poured financial aid and investment into the Laotian economy. The Chinese became Laos’ largest source of foreign investment in 2010, sending more than $344 million to Vientiane. Much of this investment flows into Laotian mining, hydropower and agriculture projects. Additionally, bilateral trade between the two countries rose from about $64 million in 2002 to more than $1 billion in 2010. But the links between Beijing and Vientiane extend beyond economics. Both countries operate under single-party communist rule, and China’s opening up under Deng Xiaoping in 1979 provided a model for Laos’ effort seven years later.

Much of China’s investment in Laos is not profit-driven but aims to secure a foothold in the region. Beijing sees influence in Laos as another phase in expanding Chinese influence in Southeast Asia, particularly in the Mekong region. As a member of ASEAN, Laos also could help China by supporting Beijing’s interests within the bloc. China is also interested in Laos’ minerals and resources, which could help address China’s rapidly growing demand for resources.

For Laos, closer relations with China mean prosperity and diplomatic leverage against Vietnam. China has completed several hydropower projects in the upstream Mekong River and has supported Laos’ dam-building ambitions in the lower Mekong, to the consternation of downstream countries, particularly Vietnam. Chinese banks and contractors lined up to finance, build and operate at least four planned Laotian dams. Laos’ latest move is the continued forging of the Xayaburi hydropower project despite Vietnam’s displeasure over dam construction, as it fears it would set a precedent for other projects that could cause environmental damage and reduce the flow of the Mekong.

But Vientiane is not thrilled about every aspect of relations with Beijing. Chinese investment in infrastructure projects usually comes with Chinese workers. One project in particular, an urban development venture in the heart of Vientiane, has drawn the ire of Laotians who see it as the creation of a “Chinese city” in the Laotian capital. Nevertheless, Laos is on a transitional path and the government has no other option but to accept the influence of a regional power — and today that power is China.

Chinese control of Laos is not ineluctable, however. Vietnam retains more political influence in Vientiane than China does, and Hanoi will continue to use this advantage to counter Beijing and attempt to undermine Laos’ regional ambitions. Laos can be expected to leverage the two powers to its advantage, as it did with the Xayaburi dam. Still, with greater Chinese influence, Vientiane may have to work harder to balance China and Vietnam for its own economic gain.