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Laos - Economy

Laos is a landlocked country with an inadequate infrastructure and underdeveloped human resources. The country's per capita income in 2011 was $1010. Agriculture, mostly subsistence rice farming, dominates the economy, employing an estimated 75% of the population and producing 33% of GDP. Laos to relies heavily on foreign assistance and concessional loans as investment sources for economic development. In 2010, donor-funded programs accounted for approximately 8.5% of GDP and 90% of the governments capital budget. In 2010, the country's foreign debt was estimated at $5.8 billion.

Following its accession to power in 1975, the communist government imposed a harsh, Soviet-style command economy system until 1986, when the government announced its "new economic mechanism" (NEM). Initially small in scale, the NEM was expanded to include a range of reforms designed to create conditions conducive to private sector activity. Prices set by market forces replaced government-determined prices. Farmers were permitted to own land and sell crops on the open market. State firms were granted increased decision-making authority and lost most of their subsidies and pricing advantages. The government set the exchange rate close to real market levels, lifted trade barriers, replaced import barriers with tariffs, and gave private sector firms direct access to imports and credit. These economic reforms led to increased availability of goods and economic growth that has continued to the present day.

The economy of Laos is essentially a free market system with active central planning by the government, similar to the Chinese and Vietnamese models. However, unlike China or Vietnam, Laos has negligible industrial capacity, an undeveloped and underproductive system of agriculture, and increasingly relies on its rich natural resources to earn much needed-foreign reserves. In particular, the hydropower, mining, precious metals, and timber sectors have attracted major investment from Thailand, Vietnam, and in the previous decade, China. Vietnam was the largest source of foreign direct investment (FDI) in Laos.

The government relies heavily on foreign assistance for public investment, and despite escalating revenues from the natural resources sector, shows no signs of significantly reversing this trend. The seventh 5-year plan (2011-15) calls for a budget of U.S. $5 billion for public investment, U.S. $3.8 billion (76%) of which would come from foreign assistance. Tourism remains a bright spot of the Lao economy, offering real future potential, solid growth, and substantial job creation.

International indices rate Laos poorly on transparency and ease of doing business. Endemic corruption and poorly developed commercial law continue to hamper economic development. Laos has begun the World Trade Organization accession process, with the intention of joining that organization as soon as possible.

The Laos economy in the mid-1990s was predominantly rural and agricultural. Market-oriented economic liberalization measures beginning in 1986 did stimulate some economic growth. Policy reforms continued, including decentralizing and expanding private-sector economy; reversing agricultural collectivization policy and ending cooperatives; introducing foreign investment code; and restructuring banking system. Still, as of 1994, agriculture accounted for almost 56 percent gross domestic product (GDP) and approximately 85-90 percent of workforce (1993 estimate). An 1989 estimate said that unemployment in the country was around 21 percent.

Estimates of Laos' GDP varied as of 1994. These included US$989 million, US$295 income per capita (1993 estimate); from $US295 to US$335 per capita (1994 estimate); and a real growth rate from 4.5 percent to 5.9 percent. Composition of GDP had agriculture and forestry making up approximately 56 percent; industry including construction, totaling approximately 17 percent; services, totaling approximately 25 percent; and import duties totaling 2 percent (1993 estimate). GDP growth was targeted at 7 percent for fiscal year 1993-94 (Laos' fiscal year runs from October 1 to September 30). Laos' was said to have US$4.1 billion purchasing power equivalent (1993 estimate).

Laos' had a record trade deficit of estimated US$150 million in 1993. Its foreign debt was US$1.1 billion according to a 1992 estimate. Foreign aid to Laos totaled approximately US$167 million in 1992. The country was almost totally dependent on foreign assistance for development and financing deficit on its existing account balance. Major foreign aid partners included many formerly communist countries, particularly those that were members of the Council for Mutual Economic Assistance (Comecon) members until 1990. After the fall of the Soviet Union, Australia, Japan, the Netherlands, Sweden, and multilateral agencies, primarily the World Bank and Asian Development Bank, had also become major aid providers. As of 1992, the country's curreny, the Kip had an average exchange rate of 705 to 1 US dollar. By June 1994, the estimated average was 721 to 1 US dollar.

As of 1994, Laos had almost no industrial production outside Vientiane area. Its main agricultural crop was rice, with corn, tobacco, coffee also grown. Laos had sources of Tin and gypsum, but exploitation of these minerals was on a small scale. Some electrical energy was provided from hydroelectric power and as of 1994, the country had enough of a surplus to exported electricity to Thailand. As of 1993, the country's total exports had an estimated value of US$133 million, free on board. Laos primarily exported goods to France, Germany, Japan, Russia, Thailand, Vietnam, and United States. Principal exports were timber and wood products, valued at US$42 million; textiles and garments, valued at US$27 million; assembled motorcycles and other items, valued at US$20 million; and electricity, valued at US$16 million. As of 1992, Laos imported an estimated US$266 million in good, cost, insurance, and freight. These items came primarily from China, France, Italy, Japan, Russia, Thailand, and Vietnam. Imports increased by approximately 20.5 percent in 1993, with an estimated value of US$353.2 million total. Principal imports were petroleum, food, vehicles, machinery, consumer goods.

On 5 April 1995, Laos was party to the signing of the Agreement on Cooperation for the Sustainable Development of the Mekong River Basin. The agreement, supported by the United Nations Development Programme, replaced a 1957 pact between Laos, Cambodia, Thailand, and Vietnam, and had taken 2 years to negotiate. The agreement established the Mekong River Commission as an institutional body and legal framework with which to promote basin-wide studies and joint development projects in the lower Mekong River basin. China and Burma (Myanmar) were expected to join the commission at some point. Five areas of cooperation had been delineated at the time of signing: hydropower generation, irrigation, fisheries, navigation, and tourism. Plans for a series of dams on the Mekong, however, were contested by various environmental groups although the agreement purportedly takes environmental protection into account.

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Page last modified: 03-06-2012 18:54:46 ZULU