The sustainable independence of Laos

Drought and debt force the country of the 'Million Elephants' to rethink its development strategy

The Lao People's Democratic Republic (PDR) is the only ASEAN member state that does not have a direct outlet to the sea: in fact, the small mountainous country borders with China and Myanmar to the north, Vietnam to the east, Cambodia to the South and with Thailand to the West. While landlocked Laos grapples with limited access to the main maritime trade routes and little attractiveness for foreign investors, its strategic position draws the attention of great powers. Indeed, the PDR, the heir to the ancient Kingdom of Lan Xang, the 'Million Elephants', is increasingly crucial in the "battle for hearts and minds in Southeast Asia”.

These lofty statements reflect fairly well the situation of Laos throughout the past three centuries. Following the dissolution of the Great Kingdom into smaller vassal states of Burma (Myanmar) and Siam (Thailand), Laos was reunified only at the end of the 19th century, when it became a French Protectorate. When the country finally got rid of its colonial masters, the outbreak of the Vietnam War wretchedly compromised the country’s hardly-won independence. During the period 1959-1975, the Kingdom of Laos was the scene of a bloody proxy war between the United States and North Vietnam, which led, eventually, to the victory of the Laotian Communists and the creation of the People's Republic.

The first twenty years of independent Laos were strongly marked by the 'special relationship' between Laos and Vietnam celebrated and sanctioned in the Treaty of Friendship and Cooperation of 1977. Only the end of the Cold War and the dissolution of the Soviet Union allowed Laos to break its economic and diplomatic isolation and to restore ties with its other neighboring countries. The first Thai-Lao Friendship Bridge, inaugurated in 1994 thanks to Australian funding, well represents the change. 

The Mekong River, the most famous 'Mother of Waters' in Southeast Asia, played a crucial role in reviving the Laotian economy and re-connect it with the ASEAN, which Laos joined in 1997. Between 1994 and 2019, the country's GDP grew by an average of 7% per year, thanks to a gradual opening to foreign trade and the exploitation of its rich mineral resources. Most notably, the Laotian government invested heavily in the hydroelectric sector, building dozens of dams along the Mekong and its tributaries with the aim to become the new “Battery of Asia”.

While downstream states initially opposed the project, especially wary of Chinese involvement in the project and potential impact on their economy, their individual interests eventually prevailed. Thailand, for instance, is the main destination of the 6457 MW of energy produced in Laotian hydroelectric power plants and intended for export. 63 plants are already operational, whereas 37 more will be added in the foreseeable future. Ironically, while Vietnam is traditionally the staunchest opponent of the dams, construction also involves prominent Vietnamese companies (Vietnam itself would be the second recipient of Laotian exports!). While environmental NGOs and local committees have always spoken out against the project, more recently, several international organizations have highlighted the limits of a growth model based on the indiscriminate exploitation of natural resources.

The Asian Development Bank, for example, placed emphasis on the structural weaknesses of the energy sector, which offers a very limited number of jobs and lacks connections with the rest of the economy. In fact, about 75% of the Laotian workforce is employed in agriculture, heavily affected by the record drought which last spring brought the economies of the lower Mekong to their knees, due to the compounded effect of climate change and Laotian and Chinese dams. The global crisis of Covid-19, which wiped out the earnings of the tourism industry and significantly reduced the amount of foreign remittances, contributed to a sharp fall in tax revenues and foreign currency reserves. The choice of Fitch Ratings to further downgrade the Laotian economy, from B- to CCC, demonstrates the concern of international creditors about the country's ability to repay its debts (without falling into the ‘debt trap’) .

Within the 8th National Socio-Economic Development Plan 2016-2020, the Laotian government acknowledged the need to create a 'green' agenda that guarantees sustainable and inclusive development for the country. Political will alone, however, is not enough for reforms to succeed: there must also be effective institutions, modern infrastructures and, of course, appropriate investments. The next five-year plan 2021-2025 will hopefully fill the gap. According to a first draft circulated by the Ministry of Planning and Investments, the 9th plan set one new goal: strengthening international cooperation. For once, the government seems to agree with Kishore Mahbubani: "the wisest thing Laos can do to protect its independence (...) is to become one of the ASEAN champions".

By Francesco Brusaporco

The new China-Laos railway

The new infrastructure will be completed by the end of 2021, and it will bring substantial changes to trade in South-East Asia.

The project accords perfectly to the Laotian Government’s strategy to turn Laos from a landlocked country into a land-linked hub. The rail is the longest one outside China in Asia, linking China to Thailand through Laos: a 414-km railway, that will run from Boten (border gate between northern Laos and the Chinese province of Yunnan), to Vientiane (Laos’ capital, at the border with Thailand). Works began at the end of 2016, but unavoidable delays occurred due to the Covid-19 emergency. Despite this, operations re-started after only 23 days, allowing the project to stay on track as initially scheduled.

Economic and geopolitical advantages of the new railway will be remarkable for both China and South-East Asia. For the first time ever Yunnan, already a crucial region for connecting China and ASEAN, will be linked directly to Thailand by land. The railway will allow Chinese products to reach not only Laos and Thailand’s markets, but also those of Malaysia and Singapore. This will be possible without relying on costly air or naval transport anymore. A logistic operation that has no precedents for China, and that will allow the country to expand more than ever in the region. The project is part of the China’s Belt and Road Initiative, but it will not be devoted only to the exchange of goods and people. On the contrary, it will also be an important health support for developing countries. More cooperation in the health sector, possible thanks to the China’s Health and Silk Road project, will be offered through substantial aid to those ASEAN countries more hit by the pandemic and by the lack of adequate healthcare facilities.

According to the World Bank, the new railway could dramatically contribute to the development of the Laos economy, if followed by meaningful reforms. The elections of new leaders and of a new politburo, scheduled for early next year at the Party National Congress of the ruling Lao People’s Revolutionary Party, are likely to bring the right momentum to introduce those reforms.

From new infrastructures comes a new kind of traffic, not only in goods and people but also for mere transit. Laos industries should not waste this moment: if they will be able to seize it, they will create a new economic corridor under a high-quality logistic planning. In fact, another report from the World Bank assigns Laos a good score in the section “Ease of trade across borders”. With the right strategic approach by public and private sector, several experts believe that the new railway will represent an important incentive to diversify Laos economy, still dependent from a limited number of commercial sectors.



Article edited by Valentina Beomonte Zobel.