China is top foreign investor behind Laos’ fast growth
Laos’ emergence on the regional and international stage has seen it formulate the ambitious goal of shedding its least developed country status in four years. How has this transformation come so quick? It hasn’t. Laos is reaping the benefits of economic reforms that began in the 1988.
Foreign investment has been a major driver, with China the biggest contributor – having poured in US$5.395 billion since 1989, according to a Laos Ministry of Planning and Investment report. The 1989-2014 report shows Thailand in second (it poured in US$4.489 billion) and Vietnam (US$3.108 billion).
According to ZICOlaw, a firm in the capital Vientiane, the Lao People’s Democratic Republic today counts among the world’s fastest-growing economies.
“For the past two decades, the Lao PDR’s gross domestic product has grown at an average annual rate of 7%, with increasing exploitation of the country’s natural resources, mostly water, minerals and forests,” says ZICOlaw Managing Partner Aristotle David, who has over 16 years’ experience as an international lawyer, including more than 11 years in the Lao PDR.
“This has transformed the country from low-income economy to lower-middle income economy [by] 2011, and the Lao PDR expects to be an upper-middle income country by 2030.”
The firm, which has a presence in 15 cities across eight of the 10 Association of Southeast Asian Nations (ASEAN) countries, and which moved into Laos with the acquisition of Vientiane Law Co Ltd in 2012, is well-placed to have witnessed the recent changes in the nominally Marxist state.
ZICOlaw’s David says the reasons for its expansion into Laos are that “foreign interest in the Lao PDR continues to grow and we are looking to aggressively expand to further enhance ZICOlaw’s capabilities to our clients in [country].”
Laos is among 43 nations classed in the UN’s basket of “least developed”, or poorest, countries. Of those, 34 have joined the World Trade Organization and Laos became a member on February 2, 2013. Laos also ratified – on September 25, 2015 – a trade facilitation agreement to speed up the movement, release and clearance of goods.
Aside from these bodies, Laos has been a member of ASEAN since 1997 and has held the chair twice, in 2004 and 2016.
The fast pace of development has been spurred by the Lao government’s willingness to welcome foreign investors, especially since it shares its border with five nations – Myanmar and China to the north, Thailand to the west, Vietnam to the east and Cambodia to the south.
The largest and most high-profile infrastructure project involving Chinese companies is the US$6 billion, 427km Kunming to Vientiane rail link – the flagship project of the ASEAN Mekong Basin Development Cooperation, according to a UNESCAP document.
It is also one of the important projects under a masterplan for connectivity in the ASEAN region. The project proposes connecting the capital cities of Cambodia, Laos, Myanmar, Thailand and Vietnam and is part of the Trans-Asia Railway, which is expected to connect Europe to Asia.
Some 28 nations have now signed an intergovernmental agreement under UNESCAP for the construction of this network. The agreement was enacted in 2009, with 18 governments, include Laos, initially signing it in 2006.
Rail construction was expected to start in December but as recently as September only one company had signed an agreement, The Laotian Times reported. Five more agreements were expected to be sealed soon and there was no mention of when work would start.
“The achievements over the past 40 years represent a leap in progress for the Lao people,” Prime Minister Thonglun Sisoulith was quoted as saying in the November-December edition of Foreign Affairs magazine.
The economy is growing fast, largely based on exploitation of natural resources: agricultural and forestry products, minerals (gold, copper, zinc, lead) and hydropower. Mining and electric power exports account for two-thirds of all exports.
However, a shortage of workers with technical skill and weak education has been a serious hindrance to Laos’ development efforts, and … its regulatory capacity is low
“We adopted a development strategy to promote diversification that is built on three pillars: enhancing enterprise competitiveness, creating a business friendly environment and deepening economic integration,” Minister of Industry and Commerce Khemmani Pholsena said in the magazine.
David added that since ZICOlaw firm’s expansion in Vientiane, the rapid economic growth of the country was still being driven by exploitation of natural resources, mainly led by foreign investors.
In light of this, the Lao government “recognized that growth opportunities in this industry were limited and it has prioritized the development of high-value agriculture, light manufacturing and tourism,” David said.
“Unlike in the past, as a member of ASEAN the Lao PDR is increasing its integration into the regional and global economy. The Lao government expects to increase exports in agriculture, manufactured products and electricity to its more industrialized neighboring countries.
“However, a shortage of workers with technical skill and weak education has been a serious hindrance to Laos’ development efforts, and … its regulatory capacity is low.”
Where is the money going?
Statistics from the Ministry of Planning and Investment show that most foreign investors in the Lao PDR are from Asia. In 2015, the top three foreign countries investing were Vietnam, Malaysia and China, in the sectors of electricity generation, agriculture and mining.
Electricity generation is the biggest drawcard, having attracted US$567.76 million worth of investment, mostly in hydropower, representing 44.8% of the US$1.26 billion total in 2015.
Agriculture is ranked second, with US$4.66 million, followed by US$183.72 million in mining. The smallest amounts have been in the garment industry (US$1.44 million), services (US$11.59 million), and hotels and restaurants (US$550,000).
The landlocked nation also hopes to increase the share of GDP from industry to 32% and services to 41% and reduce that of
agriculture and forestry to 19%, it said in its 8th National Socio-Economic Development Plan (2016-2020).
Apart from the economic positives, there are still downsides. For example, according to a Laos official, only 2% of the population in the Lao PDR run businesses.
To boost the country’s economic and social development, the country needs more new start-ups or entrepreneurs, especially foreigners, says David of ZICOlaw. “However, it is found that foreign entrepreneurs have still faced difficulties in doing business in the Lao PDR.”
In the World Bank’s Doing Business 2016 report, Laos is now ranked 139th, down from 136th in 2015, of 189 countries, in terms of ease of doing business.
“Where such difficulties of doing business are solved, it will cause an increase in the number of SMEs operated by foreign firms and then create positive impacts on the national economic system,” David says.