The Japanese cars and sport utility vehicles that clog the streets of Laos’ 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, while 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 that’s steadily transformed a secretive country little known in the West beyond the tales of backpackers and Vietnam War veterans.
Nominally communist since the overthrow of a US-backed government in 1975, the former French colony is courting neighboring China, Vietnam and Thailand to develop resources and infrastructure, and they are piling in, indifferent to the risk aversion that keeps Western firms on the sidelines.
A big Thai-led dam project was suspended this month pending environmental surveys, but other Thai-built hydropower projects are underway across Laos’s network of waterways. Vietnamese agribusinesses are proliferating and Chinese firms are pouring into the mining and transport sectors.
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.”
International financial institutions forecast economic growth of between 8.1 percent and 8.6 percent this year — one of Asia’s highest growth rates — fueled by hydropower production, copper and gold mining, tourism and domestic consumption.
Laos’ US$7.5 billion economy is dwarfed by its neighbors. It is 790 times smaller than China’s, a 14th of the size of Vietnam’s and about 2 percent of Thailand, but it has more than doubled since 2006, as has GDP per capita, which jumped from US$600 to US$1,200, according to World Bank data.
However, it is still off the radar to Western companies concerned about regulation, labor capacity, a lack of transparency and Laos’ very cozy political and business ties to its neighbors.
“Laos is still seen as a frontier market by most foreign investors, but there’s strong potential,” a Western diplomat in Vientiane said. “Trends in the investment environment are generally in the right direction.”
Urban Laos is modernizing fast, with 19 commercial banks and new special economic zones offering tax breaks. The mobile phone sector is thriving, with its five operators boasting a staggering 10 million users among the 6.4 million population, suggesting many customers use several numbers.
A US$7 billion Chinese-led high-speed railway linking China with Thailand is planned and national carrier Lao Airlines last month expanded its fleet of eight propeller planes with the US$91 million purchase of two Airbus A320 airliners.
Perhaps its most significant leap was a stock exchange launched in January, a US$20 million venture with Korea Exchange, Asia’s fourth-largest bourse operator.
Only its top lender, Banque Pour Le Commerce Exterieur Lao, and Electricite du Laos Generation Co have listed on the Lao Securities Exchange (LSX) and trade is too sparse to interest funds, although private equity funds are starting to take notice.
LSX CEO Dethphouvang Moularat said the priority was to educate skeptical firms about regulation to make them more competitive and boost investor confidence.
Internet and cellphone provider Enterprise of Telecommunications Lao and cassava and tapioca firm Lao-Indochina Group are expected to list in early next year.
Lao Airlines, Lao Brewery Co — a 50-50 joint-venture between a state firm and Danish brewery Carlsberg — and diversified Lao World Group are also likely to join.
“These enterprises are becoming aware that the benefits of listing on the LSX are greater than the risk they may take,” Dethphouvang said in an e-mail.
THAIS TAP ENERGY
However, for now, the boom is fueled by mining and hydropower, accounting for 80 percent of foreign direct investment (FDI) and half of GDP growth.
Export revenue from copper and gold from Laos’s two big mines was projected to reach US$1.3 billion and US$240 million respectively this year, double the 2009 figure, according to the IMF.
Thai firms dominate hydropower. With dozens of new dams, Laos aims to become the “Battery of Southeast Asia,” providing 8 percent of its power by 2025, with the potential to generate 28,000 megawatts (MW). Half of that is committed to neighbors by 2015.
Output doubled in March last year with the start of the US$1.45 billion, 1,086MW Nam Theun 2 hydroelectric dam, a joint venture between Electricite de France, Lao Holding State Enterprise and Thailand’s Electricity Generating PCL.
Thai miner Banpu and Ratchaburi Electricity Generating Holding PCL each hold 40 percent stakes in the US$3.7 billion, 1,800MW Hongsa Lignite thermal power plant, set to be Laos’s largest power station when completed in 2015.
However, these plants are prime targets for environmentalists. Laos recently bowed to pressure from Cambodia and Vietnam and shelved the US$3.5 billion, 1,260MW Xayaburi Dam on the Mekong River, in which Thai builder CH Karnchang PCL has a 57 percent share and Thai state-run EGAT has 12.5 percent.
Japanese experts will investigate the potential dangers of Xayaburi, which activists say could impact 60 million people, wipe out fish species and block fertile silt from flowing to Vietnam, the world’s second-biggest rice exporter.
Economists are bullish about Laos’ potential, but say much needs to be done. Corruption, rudimentary regulation and limited skilled labor have put the country second-bottom in East Asia and the Pacific, ahead of East Timor, in the World Bank’s Doing Business survey.
The IMF says Laos had made “impressive progress,” but needed proper data, banking supervision and streamlining of procedures.
Laotian Planning and Investment Vice Minister Bounthavy Sisouphanthong takes issue with the low ranking and says attention should be paid to political and economic stability, reforms initiated and incentives available for investors.
“Growth is here, we’ve increased our FDI, but we’re still ranked low and we need to change that,” Bounthavy said by telephone. “There may be a negative perception, of slow progress and difficulties in investment, but this is changing.”
That perception suits China, Thailand and Vietnam, Laos’ biggest sources of FDI. Official data since 2000 shows Vietnam has invested US$2.77 billion, China US$2.71 billion and Thailand US$2.68 billion, and they have little competition.
Critics say that’s because too many projects are agreed opaquely and informally, through incentives and lobbying of the political elite — arrangements that frustrate Western firms.
“Where does this leave Western companies? Well, at a certain disadvantage, not only from the business cultural angle, but also from the business ethics point of view. This environment may suit regional companies as it scares off competition,” a Western diplomat said.
Vietnam has a foot in the door because of its close political relationship, but China appears to be using its wealth to muscle in on Hanoi’s turf.
China sees Laos as its gateway to Southeast Asia’s 600 million people and US$2 trillion GDP, and bilateral trade with Laos has grown 40 percent to US$1.1 billion annually since 2009. Chinese banks have offered loans to Laos to hire Chinese firms to build infrastructure, including US$3 billion from the China Development Bank alone.
China is bargaining hard, not just for influence, but for long-term land and agricultural concessions in return for help, sometimes causing friction, with land promised in return for a national stadium not forthcoming and the rail plan put on ice over a concession dispute.
China’s growing presence is also contentious, with concern about gang crime linked to -Chinese -casinos and an influx of migrant workers settling after work is finished.
With Western companies sitting out the boom, Laos seems happy to rely on its neighbors and gain from their competition.
“The politics of Laos is the politics of patronage. They like to play China and Vietnam off each other,” said Ian Storey, a Laos expert at Singapore’s Institute of Southeast Asian Studies.
“Vietnam still has the inside track politically. What Laos does is try to balance its relations with Vietnam and China, not favoring one over the other, and get benefits from both,” he said.
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