Wednesday, November 14, 2012

Landlocked Laos's Big Plans

Can one of the world's poorest nations join Burma on the march to development?
lthough Laos is soon to join the World Trade Organization, it remains very much Southeast Asia's forgotten country, a landlocked backpacker magnet of unexploded ordnance and bad, winding roads nicely topped off by stunning jungle, river and mountain vistas.

Lying between China, Vietnam, Cambodia, Burma and Thailand, Communist-ruled Laos has moved off what economists like to call “a low base,” with the country's economy averaging 7-8 percent gross domestic product growth, built on hydropower development – which has raised the hackles of international environmentalists – and a mining boom.

The ruling Lao People's Revolutionary Party (LPRP) started opening slowly in the late 1980s, around the same time as neighboring Vietnam's doi moi or renovation reforms got under way, in which a similar one-party Communist regime slowly liberalized parts of its economy. But despite the parallel paths, Vietnam's much bigger economy – though recently struggling with slowing growth, graft scandals and inflation – is much more diversified than Laos’s, which remains one of the world’s poorest countries, with annual per capita gross domestic product by purchasing power parity of just US$2,700 per year, ranking it 177th in the world against Vietnam’s US$3,400.

In turn, Laos is trying to build a more sophisticated economy on the way to rising to lower middle income status and providing jobs outside of agriculture, which currently accounts for 75 percent of employment. Hydropower electricity sold to neighboring Thailand plays a major role in those plans.

However, three downstream governments – Vietnam, Cambodia and seven Thai provincial governments have in particular objected to the construction of the Xayaburi Dam, deep inside the mountains of northern Laos on the lower Mekong River. Their concerns are that the Mekong, which supports the largest freshwater fishery in the world, is being increasingly imperiled not just by the Xayaburi but 10 other structures planned for the Mekong, which originates in China and flows through Burma, Laos, Thailand, Cambodia, and Vietnam.

The opponents fear that the dams will wreck the fishery and imperil the lives of those who live below it. The river’s silt deposits provide rich soil nutrients for rice and other crops. It feeds a river basin populated by 60 million people. Environmentalists say anywhere between 23 and 100 fish species could be adversely affected.

Nonetheless, Ch. Karnchang, the Thai energy company that is contracting to build the Xayaburi Dam, appears to be moving ahead despite the opposition.

Laos, however, feels it needs the revenues from electricity sales to develop infrastructure and an educated work force get past the light-on-labor, resource-extraction model in order to pull in investment in areas not tied to natural resources. It currently exports most of the power to Thailand that it produces from the Saravan, Bolikhamxay and Attapeu dams.

First up are likely to be labor-intensive sectors such as garment making – although this will put Laos in competition with Burma's newly-opening economy and lower cost labor market. The one-party government is laying some groundwork at least, and the World Bank says that Laos has introduced many laws that are relevant to investors in line with international standards.

Richard Record, trade specialist at the World Bank's Laos office, says that agriculture is another part of the Laotian economy with plenty of potential.

"There is significant potential for Laos to integrate more closely into regional production networks in agribusiness with strong growth being seen in value addition across agro products such as coffee, fresh and processed fruit and vegetables, sugar, rice and spices," he says. Coffee is the country's fifth biggest export and its arabica is highly-regarded by gourmands, an important attribute in a competitive global coffee market.

The Irish consultancy PM Group developed a new online “Laos Trade Portal,” in partnership with the World Bank and Laotian government.

“It's just a start, but every single regulation is on one website, a one-stop shop for people looking to do business here,” says Trevor O'Regan, the company's international business development manager.

Membership in the WTO was approved just before the country hosted a summit of Asian and European leaders on Nov. 5-6, though it is perhaps too soon to say whether this will see investors set up shop in the country in significant numbers.

According to the United Nations Conference on Trade and Development (UNCTAD), last year Laos attracted US$450 million in foreign direct investment, half the amount that went to Cambodia and a fraction of the US$7.4 billion into Vietnam.

Nonetheless WTO membership could help blow away some brain-fog from the minds of companies looking at doing business in the country.

Anthony Nelson of the US-ASEAN Business Council, a trade promotion organization which recently brought a delegation featuring Coca-Cola, Chevron, ExxonMobil, GE and Johnson & Johnson to Laos, suggests that “WTO membership is an important step in Laos's efforts to become a more investment friendly country. Investors need a sense of predictability, trade guidelines, and a dispute mechanism, all of which are supported by WTO membership.”

Tourism is another potential growth area, and perhaps a more obvious one. With spectacular temples, hiking, mountains, jungle and the Mekong River, Laos can offer itself as a lower-cost alternative to Thailand, Vietnam and even Burma, where five decades of military rule have left the country ill-equipped to deal with large tourist numbers amid a shortage of hotel rooms and rip-off prices.

Laos pulled in just over 1.6 million tourists in 2010, according to the World Tourism Organization, and for small businesses in sectors such as furniture and road repair, tourism remains a key source of business.

Standing in his hardware store outside Luang Prabang, the old Lao capital and main tourist draw, Bounlat Latdavanh says that at least half of his commerce is a spin-off from tourism in some way.

“If I fix a road, it is because the government wants to improve access to a site for tourists, if I get work on furniture, it is often because hotels need it,” he says.

Getting around the country is difficult, however, given the poor state of most roads, leaving travelers an unappetizing choice between slow but scenic bus trips through mountains, or overpriced domestic flights. Bounlat, a member of the Young Entrepreneurs Association of Laos, says, therefore, that the most important issue facing Laos in the short-term is infrastructure.

“For sure we need to develop transport, roads – it is very important for people like me who want to grow business,” he said.

On that, perhaps local business and those looking at Laos from outside are in agreement. For investors looking at ways to make money in Laos, work on infrastructure could be one of the first main ways for non-resource based investment to filter into the country.

Says Anthony Nelson, “a lot of U.S. companies are looking at infrastructure projects throughout ASEAN, and Laos is a prime target for that kind of work.” Asia Sentinel

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