As Laos chairs the ten-member Association of Southeast Asian Nations (ASEAN), it is time to take a look at the opportunities the landlocked country has to offer and the challenges that lay ahead. Laos´ presidency marks an historic year. It will be the first year following the creation of the ASEAN Economic Community and Lao´s first as a signatory to the WTO Trade Facilitation Agreement. Yet, little is known about one of ASEAN´s smallest member states.
AEC presidency gives Laos unprecedented international attention
Economic reforms in Laos began in the mid-1980s and have made significant progress ever since. A particularly notable milestone was the country´s WTO accession in 2013. Now, both the integration into ASEAN Economic Community (AEC) and the ASEAN presidency offer new opportunities. As the country presiding over a range of ASEAN Summits and regional meetings in 2016, Laos stands to gain unprecedented international attention; a rare treat for the country making up just seven million of the region´s 600 million people. At the September Summit President Barack Obama will be the first ever US president to visit the communist state. For Vientiane, this signifies growing recognition as an on par actor in ASEAN and the chance to promote its case internationally. The chairmanship also allowed Laos to set the agenda for this year’s meetings, enabling it to push topics of national importance such as the narrowing of the development gap in ASEAN and the advancement of the Initiative for ASEAN Integration, aimed at accelerating the economic integration of the less developed ASEAN countries including, besides Laos, Cambodia, Myanmar and Vietnam.
Laos will have to reduce its over-reliance on resource-based exports in order to remain competitive
Indeed, both greater economic integration and development lies at the heart of Laos’ strategic agenda as the country is threatened by increasing competition under AEC and an over reliance on resource exploitation. The Laotian GDP relies mainly on extractive industries and agriculture, two sectors hit hard by slowing international demand, unfavourable weather conditions and dropping raw material prices. The government tries to keep up development investments but the expanding fiscal deficit has become an issue hard to overlook. Only the construction industry continues to grow solidly, benefiting from rising investments in hydropower projects and real estate. Over the last ten years, hydropower and mining accounted for half of the country´s exports and more than a third of output growth. While continued investments in these sectors remain an essential growth driver, allowing the country to maintain its 7.4% GDP growth rate, they also stand for an ever expanding reliance on resource-based production and exports.
The AEC will not only lead to increased competition for Laos small-and-medium-sized businesses but also for its resource-based exports, as other ASEAN nations will be ready to compete. Thus, in order to stimulate the non-resource economy and lay a more competitive and sustainable economic foundation, Laos will have to significantly improve business and infrastructure conditions.
Businesses face significant bureaucratic hurdles
According to recent World Bank estimates, documentary compliance in Laos takes an average of 216 hours per export shipment, significantly above the East Asia and Pacific average of 75 hours. Certainly, administrative efforts are higher due to the reliance on foreign ports, yet, overall bureaucracy in Laos is ranked amongst the worst in the world. For years, exporters have faced confusing export procedures, obsolete customs operations and lacking cooperation between government agencies. The country currently takes place 134 on the Ease of Doing Business Index.
Besides the urgent need to harmonise and simplify trade regulations and limit bureaucratic restraints, infrastructure development is a major priority for the landlocked country. Greater connectivity will play a crucial role in advancing the Laotian economy. The government is striving to underline its commitment to greater multilateral integration, highlighted by the ratification of the WTO Trade Facilitation Agreement in 2015, by transforming Laos in a land-linked country well connected via major transport hubs in neighbouring countries over the coming years. An ASEAN wide railway initiative extending from China to Laos and Singapore is already under construction. The Laotian project component is expected to be completed in 2020.
Compared to the growing presence of countries like Indonesia or Vietnam on the world stage, Laos is one of the more unknown ASEAN countries, having as of now neither a bustling consumer market nor an exhaustive range of export products on offer. Yet, one should not underestimate the country´s quiet potential. As neighbouring countries move further up the value chain, Laos will benefit as cost-sensitive industries look for new destinations. The textile industry, in particular, bears great potential. In order for the country to gain from this development, it will be essential for the government to encourage the formation of an integrated and diversified industrial landscape. For instance, Laos could avoid mistakes made by neighbouring countries like Vietnam. While Vietnam focused on sewing clothes, the country hardly produces any fabrics, making accession to multilateral trade agreements such as TPP difficult due to stringent rules of origin. For a diversified industry, investment in a skilled and technically advanced local workforce will be crucial, enabling the country to absorb higher-end clients from China.
Moreover, ASEAN-wide infrastructure connectivity projects forming the central transportation axis of tomorrow offer investors opportunities. Western machinery and construction tools as well as expertise will be valued by Asian partners. Potential exists also in the green-energy and climate management sectors as Laos is part of the climate sensitive Mekong Delta.
Laos remains a difficult investment terrain but like many ASEAN members, the country has consistently perused greater multilateral integration and trade facilitation. With the Lao PDR Trade Portal an important first step has been made towards the national single window required under AEC and cross-border trade has experienced significant facilitation. The country has furthermore made great progress implementing AEC commitments, notably in complying with tariff cuts and the creation of the ASEAN trade repository. As the country further liberalizes, first mover investors will be advantaged. In particular, European investors should take an open-minded look at what the country has to offer as they will likely face higher competition from American firms, advantaged in TPP-member countries such as Vietnam and Malaysia.