ECONOMY OF LAOS
Laos is one of Asia's poorest nations and is highly reliant on foreign donors. The GDP per capita around $3000. Laos has been designated a least developed country by the United Nations. Laos suffers from a lack of infrastructure and diversified industry. It relies on hydropower, textile industries and tourism for much of its income. Most people in Laos depend on subsistence farming, Just two companies are listed on its fledgling stock market, which opened in 2011. Chinese economic influence is rising rapidly in Laos, which has traditional political ties, as well as business links, with Vietnam. Corruption is endemic.
Laos is one of the few remaining one-party communist states. Laos' growth exceeded 7 percent per year during 2008-12. Despite this high growth rate, Laos remains a country with an underdeveloped infrastructure, particularly in rural areas. It has a basic, but improving, road system, and limited external and internal land-line telecommunications. Electricity is available 75 percent of the country. Laos' economy is heavily dependent on capital-intensive natural resource exports. The labor force, however, still relies on agriculture, dominated by rice cultivation in lowland areas, which accounts for about 30 percent of GDP and 75 percent of total employment. Economic growth has reduced official poverty rates from 46 percent in 1992 to 26 percent in 2010. [Source: CIA World Factbook ++]
The economy also has benefited from high-profile foreign direct investment in hydropower, copper and gold mining, logging, and construction though some projects in these industries have drawn criticism for their environmental impacts. Laos gained Normal Trade Relations status with the US in 2004. On the fiscal side, Laos initiated a VAT tax system in 2010. Simplified investment procedures and expanded bank credits for small farmers and small entrepreneurs will improve Laos' economic prospects. The government appears committed to raising the country's profile among investors, opening the country's first stock exchange in 2011 and participating in regional economic cooperation initiatives. Laos was admitted to the WTO in 2012. The World Bank has declared that Laos' goal of graduating from the UN Development Program's list of least-developed countries by 2020 is achievable. ++
In the early 1990s, the Lao People's Democratic Republic (LPDR, or Laos) was among the ten poorest countries in the world, according to a World Bank ranking, with a per capita gross national product (GNP) in 1991 of just US$200. Its labor force is poorly trained and educated, its infrastructure severely damaged from years of inadequate maintenance, and its ability to feed itself precariously dependent upon the weather. Development expenditure is financed almost entirely by foreign aid, and, by 1991, exports financed only 40 percent of imports. By the beginning of the 1990s, however, Laos, while still an impoverished country highly dependent on foreign aid for its development, had taken some essential steps toward a free-market economy. *
The economic outlook has been helped by major investment projects in hydropower (the US$1.1 billion Nam Theun II dam, plus several smaller dams) and mining (gold, copper and, in the future, bauxite) that will bring a steady income into government coffers. Light industry, including textiles, may face a more uncertain future as the Asean Free Trade Agreement (AFTA) comes into force and Laos joins the World Trade Organisation (WTO). Forestry is another important resource, but is largely under the control of the military. [Source: Lonely Planet]
Economic Statistics for Laos
GDP (purchasing power parity): $19.16 billion (2012 est.), country comparison to the world: 133; $17.69 billion (2011 est.); $16.37 billion (2010 est.); $1.8 billion (2001). GDP (official exchange rate): $9.269 billion (2012 est.) [Source: CIA World Factbook ++]
GDP - real growth rate: 8.3 percent (2012 est.), country comparison to the world: 13; 8 percent (2011 est.); 8.1 percent (2010 est.). ++
GDP - per capita (PPP): $3,000 (2012 est.), country comparison to the world: 176; $2,800 (2011 est.); $2,600 (2010 est.). ++
GDP - composition by sector: agriculture: 26 percent; industry: 34 percent; services: 40 percent (2012 est.). ++
Unemployment rate: 2.5 percent (2009 est.), country comparison to the world: 18 2.4 percent (2005 est.). ++
Inflation rate (consumer prices): 4.9 percent (2012 est.), country comparison to the world: 136 7.6 percent (2011 est.). ++
Fiscal year: 1 October - 30 September
Money in Laos
The currency of Laos is the Lao kip (LAK). Some sources refer to the unit of Laos money as the "New Kip" because the Lao Kip has been through some changes in recent times. Dollars and Thai baht can be used and in fact are often preferred to the kip. By some counts a third of the money transactions in Laos are done with baht. There are 500, 1,000, 2,000, 5,000, 10,000, 20,000, 50,000 and 100,000 Kip banknotes. No coins are currently in use in Laos.
Exchange rates: kips (LAK) per US dollar -8,017.7 (2012 est.); 8,035.1 (2011 est.); 8,258.8 (2010 est.); 8,516.04 (2009); 8,760.69 (2008).
Brief history of Lao Money: 1) In 1945 the Lao currency was called Free Kip. 2) In 1952 it was called Royal Kip, the kip was also called piastre in French. In that era, there were both coins and banknotes. 3) In 1976 Pathet Lao Kip replaced Royal Kip following the Pathet Lao's takeover of the country. 4) In 1979 Lao PDR Kip or Lao Kip or New Kip replaced Pathet Lao Kip (100 Pathet Lao Kip = 1 Kip (Lao New Kip)). 5) The 1979 Lao Kip, initially came in 1, 5, 10, 20, 50 and 100 Kip denominations. The 500 Kip notes were added in 1988 followed by 1,000 Kip in 1992, 2,000 and 5,000 kip notes in 1997, 10,000 and 20,000 kip notes in 2002 and 50,000 kip notes in 2006. 6) At present no notes under 500 Kip are in circulation. 7) Lao Coins: Coins were removed from circulation many years ago.
Macroeconomics in Laos
Martin Petty of Reuters wrote: “Laos's $7.5 billion economy is dwarfed by its neighbors 790 times smaller than China's, a 14th of the size of Vietnam's, and roughly two percent of Thailand -- but it has more than doubled since 2006, as has GDP per capita, which jumped from $600 to $1,200, according to World Bank data.” [Source: Martin Petty, Reuters, December 18, 2011]
The economic system in Laos has been described as a rudimentary capitalist system that operates within a socialist vocabulary. When the government is accused of hypocrisy some point out that the Pathet Lao was more a nationalist movement than a Communist one.
Most of the wealth is concentrated in the Vientiane area, where only about 10 percent of the population lives. A lack of good transportation links and its distance from sea prevents Laos from exploiting its cheap labor to promote industry as countries like Cambodia, Myanmar and Bangladesh have. Laos is dependent on imports for many of its necessities such as petroleum.
One government official told the Washington Post, “Economic growth is very slow. Revenue is low. But the demand for resources his very high. We don’t have a balance.” In the old days about 80 percent of Laotians were said to operate outside the currency-based economy. One foreign businessman told the BBC, “The further Laos falls behind, the longer they have to go got to catch up.
GDP - composition by sector: agriculture: 26 percent; industry: 34 percent; services: 40 percent (2012 est.) By one estimate around 80 percent the population is engaged in agriculture, fishing or forestry and 10 percent are employed by the civil service or are in armed forced and 10 percent are unemployed. There is little manufacturing.
A) Public debt: 48 percent of GDP (2012 est.), country comparison to the world: 69 49.1 percent of GDP (2011 est.) B) Current account balance: $30.5 million (2012 est.), country comparison to the world: 55; $90.2 million (2011 est.). C) Reserves of foreign exchange and gold: $821.7 million (31 December 2012 est.), country comparison to the world: 142; $773.5 million (31 December 2011 est.). D) Debt - external: $5.599 billion (31 December 2012 est.) country comparison to the world: 108, $5.955 billion (31 December 2011 est.). [Source: CIA World Factbook]
Economic History of Laos
The government of Laos, one of the few remaining one-party communist states, began decentralizing control and encouraging private enterprise in 1986. The results, starting from an extremely low base, were striking - growth averaged 6 percent per year from 1988-2008 except during the short-lived drop caused by the Asian financial crisis that began in 1997. Laos' growth exceeded 7 percent per year during 2008-12.
The traditional independence and relative isolation of lowland villages has been reduced since the late 1980s. Although commerce in forest products—for example, sticklac—dates to colonial times, as roads have improved and marketing networks expanded, the government has encouraged commercial production for trade and export. As long as the open economic policies of the New Economic Mechanism are operating, the process of integrating lowland villages into a national socioeconomic system will likely continue. *
During the Vietnam War era Laos received large amounts of foreign aid from the United States. By some estimates it received more U.S. aid on a per capita basis than any country in the world. When this aid was withdrawn after the war, the Vientiane economy collapsed and has been virtually bankrupt ever since.
Economy of Laos After the Communists Took Power in 1975
Under the Pathet Lao, Laos had a centrally planned, isolationist economy. Shops closed down in 1975, many merchants fled to Thailand.
In the late 1970s and early 1980s the Laotian Communist government largely followed the failed economic path of Vietnam. It first followed the failed Communist policies of the 1970s and early 80s and then opened up somewhat with economic reforms in the late 1980s and the early 1990s.
In some cases reformist moves made by Laos preceded those of Vietnam. Laos adopted chintanakarnmay, the equivalent of perestroika, in the mid 1980s—before Vietnam launched its reforms in 1986—to promote economic development abandoning centralized economic planning. Since then the country has improved but still remains very poor.
Laos was largely untouched by the phenomenal growth take part in Southeast Asia in the 1970s, 1980s and 1990s. The economy stagnated in the 1970s and 1980s as result of Maoist-style agrarian socialism.
Early Reformist Moves in Laos Starting in 1979
Despite the many obstacles to economic development that remained in the early 1990s, however, in little more than a decade, starting in 1979, the government had deliberately shifted the focus of its economic policy away from socialist goals and has made great strides. Many state-owned enterprises, which had been draining the nation's treasury through subsidies, were privatized, and tax collection was boosted tremendously, helping to bring the fiscal deficit under control. Liberal laws on foreign investment and trade were passed, precipitating a surge of investment activity. Prices of many commodities were freed from government controls, domestic transport restrictions were lifted, and the cooperative farming system was ended. [Source: Library of Congress *]
The Seventh Resolution, passed at a plenary session of the Central Committee by the ruling Phak Pasason Pativat Lao (Lao People's Revolutionary Party--LPRP) in late 1979, marked the start of the country's shift toward a market-oriented economy. The resolution affirmed the government's commitment to begin to open to a market economy, as the necessary path to economic development. Since its inception in 1975, the government, in theory, has recognized private property and private enterprise. However, they were not encouraged, and, in fact, the provincial governments of Louangphrabang (Luang Prabang) and Phôngsali abolished private trade and traders through 1987. The objectives of the First FiveYear Plan (1981-85) included self-sufficiency in food production, defined as the equivalent of 350 kilograms of paddy rice and other foodstuffs per capita per year, and the collectivization of agriculture. The plan also focused on developing industrial activity, increasing trade with Thailand, improving the shattered rural infrastructure, and increasing export revenues, all goals that received much greater attention as the tentative steps toward a market-oriented economy continued. However, growth during the plan period was slower than had been anticipated, and the government decided to take bolder steps toward reform.
Bolder Economic Reforms in the 1980s
In 1986, the Laotian government introduced market-economy reforms, called Chintanakhan Mai (“New Thinking,” and translated by some as “New Economic Mechanism") that encouraged private-sector economic activity and reversed its policy on the collectivization of agriculture. The Vietnamese made a similar move around the same time.
The hammer and sickle was removed from the national seal; the banking system was liberalized; farmers were allowed to own land and livestock and sell surplus goods at the local markets. Local markets opened up all over the country and the trade of all kinds of goods was tolerated. Many people got into the act. In the early 1990s, one writer noticed the minister of finance selling quail eggs in Vientiane’s Morning Market each day before he showed up at his government office. The impoverished Russian Embassy sold vodka.
At the Fourth Party Congress in 1986, the Second Five-Year Plan (1986-90) was endorsed, and new national development strategy was introduced. The New Economic Mechanism, as this program was called, was designed to expose the economy to world market forces gradually, without sacrificing the nation's goal of food selfsufficiency . To implement this plan, many facets of the economy were decentralized. Although the central authorities continued to set policy guidelines, responsibility for administering and financing many programs for economic and social development was delegated to the provinces. About a year after the congress, the new policy was promulgated into regulations, and changes became rapid and extensive. [Source: Library of Congress *]
The second plan also sought to encourage foreign and private investment. Among the reforms called for under the New Economic Mechanism were the lifting of numerous trade regulations and the creation of opportunities for foreign investment. In a major shift from its economic dependency on Vietnam, Laos began to look toward Thailand--and, later, toward other socialist countries--for private investment, technology transfer, and trade. Through the improvement of transportation and communications systems, encouragement of the private sector, and development of the agroforestry industrial processing sector, it was hoped that nonfood imports could be reduced and exports increased, thus improving the balance of payments. Although Laos showed an overall balance of payments surplus in 1985 and 1986, the current account deficit had been increasing, and during those years exports financed less than 30 percent of imports. The government took a new interest in environmental protection and sought to limit the practice of swidden, or slash-and-burn cultivation as a means of protecting its forest resources and encouraging cash cropping. It proved difficult, however, to bring about such a change because of negative effects on upland farmers' livelihoods. Traditional swidden agriculture does not adversely affect forest resources to the same extent that commercial exploitation does. *
Laos Economy in the 1980s and 90s
Wayne Arnold wrote in the New York Times, Laos’s “leaders, since taking power in 1975, have not been particularly dogmatic. When collectivization failed a quarter-century ago, the government took a pragmatic approach and in 1986 approved a ''new economic mechanism'' aimed at creating a market-based economy. In 1991, Laos adopted a Constitution enshrining private property and free enterprise. The hammer and sickle disappeared from the flag, and three years later Laos adopted one of Southeast Asia's most permissive foreign investment laws. [Source: Wayne Arnold, New York Times, March 5, 2002 ~~]
“Investors flooded in, but the onset of the Asian financial crisis in mid-1997 put an end to the boom. In 1999, foreign investment in Laos fell to $51.5 million from $379.7 million in 1997. To try to make up for that, the government began an expensive irrigation program, with the central bank alone putting up $24 million . Though it succeeded in making Laos self-sufficient in rice, the program sent the nation's debt spiraling. The inflation rate soared to more than 120 percent, and the Laotian currency, the kip, lost nearly 90 percent of its value.” ~~
Many reforms were carried out successfully during the late 1980s, but the Second Five-Year Plan ended with economic performance lagging well behind planned achievements. Not least among the disappointments was the need to import rice during the droughts of 1987 and 1988, underlining the fact that an objective identified over ten years earlier--sustained self-sufficiency in food--had not been met. [Source: Library of Congress *]
Despite economic failures, however, the Fifth Party Congress, held in March 1991, reaffirmed the government's commitment to the development of a market-oriented economy. The Third Five-Year Plan (1991-95) proposes a "strategy" that aims to continue progress made under the previous two plans: improving the country's infrastructure, promoting exports, and encouraging importsubstitution industries. In August 1991, the Supreme People's Assembly (SPA) approved a new constitution--the first since the previous constitution was abolished in 1975. Among its provisions is the affirmation of the right to private ownership; the words "democracy and prosperity" replaced "socialism" in the national motto. *
After the reforms were initiated foreign aid groups began pouring money into Laos and some foreign investors showed up and began looking for opportunities. GNP grew by 6.9 percent between 1993 and 1997 with tight fiscal polices and foreign investment. A merchant class in Laos developed. Corrupt official enriched themselves with bribes. The lives of non-corrupt civil servants improved somewhat—enough so there was a sense of hope for their children.
Raising Prices and Salaries in Laos in the 1980s and 90s
By Decree 14 of March 1988, prices of most goods are no longer set by the government; exceptions include basic utility and mineral prices. Instead, a new system of "unified prices"--free market prices--was instituted. As a result, prices of rationed and subsidized goods such as rice, sugar, cloth, and petroleum increased, and procurement prices were raised by 50 percent to 100 percent. [Source: Library of Congress *]
In addition, in 1988 the wages of state employees, previously paid through coupons redeemable for subsidized goods at state stores, began to be gradually remonetized. Very high inflation rates soon caused a real drop in annual wages, however, and low rates of tax collection gave the government less revenue to spend on wages. As a result, large arrears built up on salaries that are quite small. In 1990 salaries were increased by 83 percent, and arrears began to be paid off, contributing to the increase of 65 percent in government expenditure. Once paid, however, salaries almost immediately go again into arrears. Moreover, the salary increase is not sufficient for state employees to recoup real losses from inflation. *
Impact of the Asian Financial Crisis on Laos
Laos was hurt less by the Asian financial crisis in 1997-98 than other Asian counties because it was so poor and isolated. The currency fell by more than 50 percent along with the Thai baht and dropped more on its own, but this didn't mean so much since Laos doesn't import much from other countries. The economy in Laos tanked later when the markets and investment from Thailand disappeared. This set in motion a chain of events that devastated the Laotian economy.
Around the time the economies of the other Southeast Asia nations were starting to recover, the economy in Laos crashed. Laos suffered from chronic recession and sky-rocketing inflation in 1999 and 2000. The government responded by implementing price controls and subsidies on things like fuel and staples, which were widely ignored in the markets, and caused the economy to deteriorate further.
In 1999, inflation was 150 percent a year and the value of the kip dropped to a tenth its previous value. The price of rice, meat and gasoline soared. The price of gasoline rose from 600 kip a liter in 1998 to 2,561 in 2000. The value of the kip decreased from 1,000 to the dollar to 10,000 to the dollar. Laos President Khamtay Siphandone said it was time for economic policies to reflect “economic and political realities.”
The crash didn’t hurt the poor so much. They were already very poor to begin with. The crash devastated the middle class. Many civil servants, teachers and nurses saw their pay dwindle to almost nothing and many abandoned their jobs. In the process they began to struggle to get by as the poor did and lost the sense of hope for helping themselves and their children.
Later inflation was reduced to 35 percent, the kip gained back some of its lost value. The government reduced the import of agricultural products from Thailand. China provided interest-free loans.
See Asia factsanddetails.com and Foreign Investment
Laos Economy in the Early 2000s
Growth was 6.4 percent in 2000 and 5.5 percent in 2001. The inflation rate was lower than 10 percent. Laos received about $400 million in aid that year. Growth was 7.2 percent in 2005 and 7.3 percent in 2006. Laos’s ability to grow economically has been hurt China’s ability to attract most of the foreign investment that makes it way to Asia.
Wayne Arnold wrote in the New York Times, Laos’s “Laos has since brought inflation back to single digits, but its banks remain burdened with many bad loans, depriving fledgling private business of cash. To fill that gap, the government is courting foreign investors. The vice chairwoman of the State Planning and Cooperation Committee, Khempeng Pholsena, told an investment seminar in Singapore recently that foreign investors should come to Laos simply because it ''offers very attractive conditions.'' She and other officials declined to be interviewed for this article. [Source: Wayne Arnold, New York Times, March 5, 2002 ~~]
Laos Economy in the Late 2000s
The Laos economy expanded by an average 7.9 percent a year between 2005 and 2011. Foreign direct investment was an important driver as was trade with China, Vietnam and fellow members of the 10-state Association of South East Asian Nations. At the same time Laos was still highly reliant on foreign donors. [Source: Reuters, April 30, 2011]
Martin Petty of Reuters wrote: “Little has changed in Laos' one-party political system and its rulers are trying to emulate the market-based authoritarianism of China and Vietnam with pro-business reforms, with some success. The once fragile economy has grown an average 7.9 percent a year since 2006. Asian Development Bank Country Director Chong Chi Nai said the mountainous, jungle-clad country was becoming an economic success story, but growth should not be its sole focus. "The challenge for Laos is not the amount of funds coming into the country, but whether these funds are invested in a responsible and environmentally sustainable manner," he said. "But there's no doubt Laos is on the right track." [Source: Martin Petty, Reuters, December 18, 2011 <<>>]
Laos’ boom “is fuelled by mining and hydropower, accounting for 80 percent of foreign direct investment (FDI) and half of gross domestic product (GDP) growth. Export revenue from copper and gold from Laos's two big mines was projected to reach $1.3 billion and $240 million respectively this year, double the 2009 figure, according to the International Monetary Fund (IMF). [Source: Martin Petty, Reuters, December 18, 2011 <<>>]
Laos’s leaders have gradually liberalized the economy to encourage development. Ian Timberlake of AFP wrote: “The country's economy has been expanding at an annual average of seven percent in recent years, and the government aims "to lift the country from underdevelopment by 2020." Donors and non-governmental organisations have cautioned the government over its growth strategy, which features large-scale foreign investment in resource sectors that potentially could have negative effects on socio-economic development. Chinese economic influence is fast-rising in Laos, which has traditional political ties, as well as business links, with Vietnam. [Source: Ian Timberlake, AFP, December 24, 2010]
The Voice of America reported: “The economy is growing rapidly, mainly from selling natural mineral and hydropower resources. The influx of cash, and centralized power, has created opportunities for graft. But, ordinary people in Laos are also seeing benefits from increased investment and business, leading few to question the communist party’s legitimacy. Martin Stuart Fox, a professor of history at the University of Queensland, said as long as the economy continues to grow the party will take credit for it. "The problem has been that there has been increasing mal-distribution of wealth. So that most of the wealth that is generated by the improved economy ends up in the Mekong cities and so on. So there is still considerable poverty in the countryside," he says. [Source: Voice of America, April 28, 2011]
Laos Economy in the 2010s
AFP reported: “The government has been aiming for at least eight percent growth, with the aim of escaping from underdevelopment by 2020. Donors and non-governmental organisations have cautioned the government over its growth strategy, which features large-scale foreign investment in resource sectors that potentially could have negative effects on socio-economic development. Chinese economic influence is fast-rising in Laos, which has traditional political ties, as well as business links, with Vietnam. [Source: AFP, February 21, 2011]
Growth was of 7.4 percent for 2010. James Hookway wrote in the Wall Street Journal in 2011, “Rising demand for minerals as the global recovery picks up pace should also help, analysts say, and Rio Tinto Group and Mitsui & Co. . in August 2010 said they were jointly exploring for bauxite, the ore used to produce aluminum. First-move investors in Laos hope that all this foreign interest will bring additional gains in the form of a sharp currency appreciation for the kip, which currently trades at 8,034 per dollar, compared with 8,476 kip a year ago—a gain of 5.2 percent. "In a tiny economy like Laos, it doesn't take much to move the currency—and turning on a big power plant is like creating a trade surplus," says Leopard Capital's Mr. Clayton. "There's much more likely to be a foreign-exchange gain than a loss." [Source: James Hookway, Wall Street Journal, January 11, 2011 <+>]
In January 2011, Laos opened a modest stock market, hoping to attract capital to its largest enterprises and boost its economy. In 2013, Laos became a new member of the World Trade Organization. The economy was forecast by the International Monetary Fund to grow 8.0 percent in 2013.
With numerous rivers flowing through its mountains, Laos wants to become the “battery of Southeast Asia”, selling power to its energy-hungry neighbours. Its jungles are also rich in minerals, attracting miners.
In December 2001, Martin Petty of Reuters wrote: “The Japanese cars and sport utility vehicles that clog the streets of Laos's once sleepy capital are testament to the changes quietly under way in a county once seen as a basket case isolated for decades behind Asia's bamboo curtain. Shopping malls are under construction, mobile phone shops and modern coffee houses with Wi-Fi are popping up in Vientiane, the bicycles that thronged roads lined with golden temples are rarely seen, replaced by imported motorcycles and cars. These are some of the fruits of a quiet economic boom. International financial institutions forecast economic growth of over 8 percent fuelled by hydropower production, copper and gold mining, tourism and domestic consumption. [Source: Martin Petty, Reuters, December 18, 2011]
Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Laos-Guide-999.com, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.
© 2008 Jeffrey Hays
Last updated May 2014