the political economy of laos: poor state or poor policy?

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THE POLITICAL ECONOMY OF LAOS: POORSTATE OR POOR POLICY?

RONALD BRUCE ST JOHN

Ronald Bruce St John is an independent scholar, specialising in the politicaleconomy of developing states. He has worked in and written about SoutheastAsia since the early 1970s, focusing on Cambodia, Laos, and Vietnam. Hislatest book is Revolution, Reform and Regionalism in Southeast Asia:Cambodia, Laos and Vietnam (Routledge, 2006).

Introduction

Since the Communist takeover in 1975, the government of the Lao People’sDemocratic Republic (Lao PDR) has experimented with a variety of approachesto economic reform. The failure of early attempts to introduce an ideologically-based command economy, including collectivization, later led to limitedmarket-based reforms. These initially generated cautious optimism. For atime, the government appeared to make progress in moving away from thedependence on external aid that has plagued successive Lao regimes since inde-pendence. But the momentum of market-based reforms faltered after the deathin 1992 of their main proponent, Prime Minister Kaysone Phomvihane, and inthe wake of the Asian financial crisis (1997–1998), international confidence inthe Lao economy evaporated. Most foreign investors pulled out of Laos withforeign investment approvals plummeting from a peak of $2.6 billion in 1995to $20 million in 2000. In turn, the value of the kip dropped from 935 to theUS dollar in 1996 to near 10,000 to the US dollar in 2001. With the countryonce again heavily dependent on outside aid and remittances, the question iswhether the Lao PDR is simply another poor state doomed to a bleak economicfuture or is its current economic condition largely the product of poor policy? Aclosely related issue is the extent to which one party structure in Laos is themain obstacle to a successful transition to a market economy.

Aid dependent Laos

The government and people of Laos have enjoyed a long, involved history offoreign aid dependence. In the artificial situation created by the Vietnam war,Lao living in the zone around Vientiane controlled by the Royal LaoGovernment (RLG) were among the highest per capita aid recipients in theworld. Between 1968 and 1973, for example, over $74 million in foreign aid

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Asian Affairs, vol. XXXVII, no. II, July 2006

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annually was received by the RLG. Unfortunately, most of this money wasspent not in developing the economy, but in feeding refugees, supporting thecurrency, paying civil service salaries, and meeting the costs of basic adminis-tration. In this period, bilateral and multilateral aid collectively covered some80 percent of the Vientiane government’s expenditures. Two decades of civilwar and foreign intervention, combined with the economic distortion broughtabout by massive doses of foreign aid, turned a once self-sufficient economyinto a net food importer. The abrupt termination of American aid in 1975, com-bined with an end to multilateral budgetary support for the kip under theForeign Exchange Operations Fund in 1976, resulted in the virtual collapseof the economy in what had once been the Vientiane-controlled zone.1

So when the war ended, the Communist leadership of the newly-formed LaoPDR found itself in control of a bankrupt state. For in the Pathet Lao-controlledzone, prolonged American bombing had destroyed once prosperous villages andreduced peasants to subsistence living, mitigated only by large amounts of com-modity assistance from China, the Soviet Union, and North Vietnam. Ideologi-cally, the new regime viewed the eventual suppression of the laissez-faireeconomy as an essential element in consolidating its socialist revolution. Never-theless, the Lao People’s Revolutionary Party (LPRP) wisely eschewed the pathof radical socioeconomic transformation, instead promising gradual change.2

Following the Communist takeover, it took time for the flow of non-militaryaid to Laos to regain momentum. That said, T. M. Burley has estimated the totalvalue of commodity aid received by Laos in 1975–1978 was slightly over $100million, with project aid and technical assistance worth an additional $126.5million. As early as 1977, according to Grant Evans, sources of revenue forthe new government mirrored those of the previous regime in that foreign aidaccounted for 81 percent of the total budget. Approximately 60 percent of mul-tilateral aid came from the United Nations with the remaining 40 percentsourced from OPEC financial agencies. Multilateral aid rose significantly in1978, reflecting in large part increased lending by the Asian DevelopmentBank and the World Bank through the International Development Association.3

Bilateral assistance from the so-called socialist states was also an importantsource of aid for Laos after the new government took power in December 1975.The Soviet Union was the dominant player in this regard, most especially after1978, when Lao support for Vietnam in the latter’s dispute with China led bothChina and North Korea to suspend bilateral aid. Following a Council for MutualEconomic Assistance (CMEA) visit to Laos in January 1978, fresh agreementson economic and technical assistance were concluded, not just with the USSR,but also with Czechoslovakia, Bulgaria, Hungary, and later Poland. In terms ofbilateral aid from nonaligned states, Sweden was the most prominent donor, aswell as the first to make a significant contribution after independence. Australia,France, Japan, the Netherlands, and the United Kingdom also contributed aid inthe early years of the revolution. The United States government, despite thesocialist orientation of the Lao PDR, extended modest amounts of food aidannually in 1977–1979.4

176 THE POLITICAL ECONOMY OF LAOS

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Early economic reforms

Economic reforms introduced in the Lao PDR in the second half of the 1970sfocused on marketing and distribution systems, property rights, and agriculturaltaxation. Not all reforms were implemented at the same time, with changes inthe marketing system and in taxation policies preceding reform of the property-rights system. In 1976, the government established a public trading network andmade inter-provincial trade a state monopoly. As a result, two price systemsemerged, with an administrative system, consisting of prices fixed by thegovernment in the public distribution network, paralleling a free marketsystem determined by supply and demand.

Significant changes in agricultural taxation, intended to generate revenuesand to supply the state distribution network with basic foodstuffs, accompaniedreforms made to the marketing system. In October 1976, the government intro-duced an agricultural tax of between eight and 30 percent, depending on familyrice production and seed required for the next season’s crop. Non-rice crops,when they provided the principal source of income, were taxed at a flat rate ofeight percent. But the previous regime had not collected rice taxes; and withlandlordism not a serious problem in Laos, few farmers had ever paid rents inkind. So while the Lao PDR had little option but to turn to taxation to replacethe subsidies provided by the United States before 1975, the levy of new agricul-tural taxes, without a concerted effort to explain their need, soured relations withthe very Lao peasantry the government claimed to represent.5

In March 1978, the Lao government launched an interim three-year devel-opment plan to run until the end of 1980. The intent was to bring state planningin line with the five-year planning cycle of neighbouring Vietnam and theCMEA member states. Shortly thereafter, the Political Bureau of the LPRPannounced a policy of agricultural collectivization based on the creation ofvillage-based cooperatives. Although the government had made no mentionof cooperatives when it came to power in late 1975, an increasing use in1977 of both mutual aid groups and solidarity teams prepared the way for thedecision in May 1978 to launch a major cooperativization programme.

The government cited traditional methods of mutual assistance at the villagelevel as the principal rationale for the creation of cooperative organizations inthe countryside. In addition, officials argued collectivized agriculture wouldboost production both by increasing the amount of land under cultivation andfacilitating the use of irrigation and technology. Ideologically, the decisionwas rooted in a concept, borrowed from the Vietnamese, of the threerevolutions – the revolution in production relations, the scientific-technicalrevolution, and the ideological and cultural revolution.6 Finally, the governmentsaw collectivization as a means to increase control over the rural populationthrough cooperative management committees.

The decision by the Lao government to embark on what was an ambitiousprogramme of accelerated agricultural collectivization followed in the wakeof a Vietnamese decision to force the pace of collectivization. While there

THE POLITICAL ECONOMY OF LAOS 177

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might have been an economic rationale for such a policy in southernVietnam, there was no possible justification for its introduction in Laosexcept ideological conviction in the superiority of the socialist mode of pro-duction. Given the extent of small-scale, individual landholdings in Laos, anywidespread move towards cooperativization clearly necessitated careful prep-aration and introduction if it was to have any chance of success, and this wasnot done. So broad peasant opposition to collectivization, especially when itfollowed the unpopular changes to rice taxation and purchase policies, wasnot surprising.7

The socialist transformation of agriculture focused on the creation ofvillage-based cooperatives. By the middle of 1979, the government claimed2,800 cooperatives existed, incorporating some 25 percent of peasant families.The programme also involved the creation of a few state farms; however, theemphasis of the cooperative movement was on rice production, which occupiedaround 85 percent of tillable land. The rapid growth of village-based coopera-tives resulted in declining agricultural outputs and increasing peasant resist-ance. Opposition to the policy took a variety of forms, including smugglingto Thailand, destruction of agricultural output, emigration, and cultivation inremote areas where administrative control was lacking.

As a result, in mid-July 1979, just over a year after the inception of theprogramme, with both the Soviets and the Vietnamese advising a policyrethink, the Lao government abruptly suspended the forced creation of agricul-tural cooperatives and called for the consolidation of existing ones. At the sametime, it made provision for peasants forcibly organized into cooperatives whowished to withdraw. As historian Martin Stuart-Fox has suggested, thereasons for the failure of the cooperativization programme were manifold butcan be grouped under a few central headings.

These include peasant attachment to traditional lifestyles, lack ofunderstanding of the value of cooperatives, fear of effects of joining,the shortage of trained cadres, their failure to understand and implementthe Central Committee directive and their use of coercion, failure of thegovernment to provide material support, and the effectiveness of anti-government propaganda in exploiting peasant distrust of governmentmotives.8

The decision to suspend the creation of agricultural cooperatives, whencoupled with reforms in the agricultural taxation system, signalled a majorshift in government policy. The basic mistake, as Kaysone Phomvihane,Prime Minister and Secretary General of the LPRP, admitted in late 1979,was that the government had adopted an over-centralized model of socialismin which the state sector was unable to fulfil its prescribed role. Socialismremained the ultimate regime goal; but in the interest of political stability,both increased production and an improved standard of living were recognizedas more immediate needs.9 Of some 2,800 cooperatives organized after 1978, asfew as 65 retained any organizational basis by 1980.


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More reform, same dependence

In a speech to the Supreme People’s Assembly on 6 January 1981, PrimeMinister Kaysone outlined the first Lao Five-Year Plan, establishing twofundamental objectives for the planning period. First, the government hopedto “normalize the material and cultural life of the people of all nationalities.”Second, it planned to “concentrate on building those enterprises which are stra-tegically important to the [Lao] economy and national defence, with the aim ofgradually and firmly building material and technical bases for the nationaleconomy.”10 He also highlighted seven priorities necessary to achieve thesetwo objectives: promote agricultural production, build strategically importantenterprises, consolidate the economic bases of state enterprises, train economicmanagers and technicians, complete the literacy campaign, consolidate andrestructure the organizations managing the economy and state, and acquireand efficiently utilize foreign economic assistance. Thereafter, a governmentslogan repeated ad nauseam called on the Lao people to “fulfil the twoobjectives and seven priorities.”11

Kaysone also stressed the need for national unity, a reflection of ongoingefforts by the Chinese and by Lao exiles to exploit ethnic differences to under-mine the government. A further theme was the need for increased cooperationboth among the states of Indochina and with the Soviet Union. Emphasizing thatthe success of the First Five-Year Plan was dependent on Laos continuing toreceive foreign aid and investment, he described cooperation with fraternalcountries as strategically important because it would provide the capital necess-ary to build the technical and material foundations of socialism. At the sametime, he cautioned that Laos could not expect unlimited amounts of foreignaid. Diplomatic work would be required to obtain contributions from sourcesoutside the socialist bloc.12

The rural reforms introduced after 1980 had only a limited impact onagricultural performance. The agricultural sector remained an extensive, lowproductivity system characterized by low input and low output. While externalfactors outside the control of government, such as droughts and floods, had anegative impact on the performance of the agricultural sector, they were a sec-ondary and temporary cause. Government policies, in areas like pricing,market development, and resource allocation, were the principal causes oflow growth. The resulting poor performance was then compounded by theinadequate coordination and sequencing of reforms within the agriculturalsector as well as between rural reforms and those implemented in macroeco-nomic and other areas. To reach targeted growth rates in agriculture andrelated sectors, the Lao PDR needed to expand legal system reform, rationalizetax administration, and improve the supervision of banks, investmentcontracts, and trade activities.13 The close association of the LPRP withCambodia, Vietnam, and the Soviet Union heightened the Lao PDR’s isolationfrom the non-socialist world; but, as Stuart-Fox emphasized, it did not reduceits dependence.


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The problem of dependency is one which Laos has always faced, and thetransference of that dependence from Western capitalism (particularly theUnited States and Thailand) to Soviet socialism (particularly the SovietUnion and Vietnam) has done little to reduce it. The geopolitical realityis simply that Laos is underpopulated, militarily and economicallyweak, yet strategically vital to the interests of its neighbours. Conse-quently, it is so vulnerable to outside pressures that the only realisticchoice open to its leaders is which patron they prefer. But this is achoice which depends internally not on economic, but on political andideological considerations, and externally on global and regional powerbalances. Laos is now locked into both the Vietnamese-dominated Indo-china solidarity bloc (consisting of Vietnam, Kampuchea, and Laos), andthe Soviet camp, with all this entails for Lao relations with China and theWest, both of which have provided considerable assistance for the Laofive-year plan.14

The Lao PDR remained heavily dependent on external assistance through-out the early 1980s with foreign aid in 1982 estimated to be some 80 percent ofannual revenue. The Soviet Union remained the principal benefactor. AnAugust 1981 report indicated that Moscow intended to build some 54 economicprojects in Laos in the 1981–1985 period. In contrast, the Vietnamese economywas in such dire straits that Hanoi provided little if any economic assistance. Onthe other hand, the 6,000 Vietnamese civilian advisers and up to 50,000Vietnamese troops stationed in Laos in 1984 made a strong political imprinton the economic policies of the country. Sweden remained the most generousWestern donor, with other states, including Australia, Japan, and France, alsooffering assistance. The International Monetary Fund was Laos’ most importantmultilateral donor in the first half of the 1980s, providing direct support as wellas guidance. US law prohibited all but humanitarian aid to Laos; however, somefood donations and medicines were sent in years of hardship and in support ofefforts to recover the remains of US servicemen.15

Even as the Lao PDR enjoyed some success in replacing Washington withMoscow and its socialist allies as primary donors, its limited ability to absorbaid and achieve the self-generating growth envisioned in the Five-Year Planremained a serious problem. The paucity of skilled administrative, managerial,and technical manpower was an obstacle which the government was unable toovercome. This was largely a self-inflicted wound as policy choices in the earlydays of the regime drove away numerous well-trained Royal Lao Governmentprofessionals and administrators. Moreover, the Lao PDR often made very pooruse of the few experienced managers who did remain.

New Economic Mechanism

In conjunction with the announcement of the Second Five-Year Plan(1986–1990), the LPRP leadership openly acknowledged its poor performance


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and launched a new round of economic reforms. Decrying an excess of centra-lization in a thinly populated country with virtually no infrastructure, LPRP offi-cials admitted there was little scope for building socialism in a subsistenceeconomy. The Party concluded administration must be decentralized, witheconomic management developed from the grass-roots up, as the economyfirst underwent a capitalist phase. According to General Secretary Kaysone,the new system, entitled the New Economic Management Mechanism orsimply the New Economic Mechanism (NEM), was designed to correct theshortcomings of the old approach.

At present, our mechanism of economic management is fraught withbureaucratic centralism and based on state subsidies. The essence ofthis mechanism is that the State must provide the capital, equipmentand all materials needed for running business and the enterprise musthand in its products to the State. The enterprise’s economic accountingis merely perfunctory, as a result the enterprise’s profit is inaccuratelydetermined.16

In an attempt to end “economic operations which are based on wishfulthinking and administrative orders from top levels”, the LPRP replaced theformer management system with what Kaysone termed “socialist economicaccounting.” Under the new system, state enterprises would be responsiblefor their operations based on factors such as capital availability, productioncapacity, labour productivity, and profitability.17

The New Economic Mechanism called for decentralization of administra-tive controls on pricing, production targets, and wages. Under the newsystem, policy decisions in these areas would be delegated either to local econ-omic units or state enterprise management. The approach appeared to be a bolddeparture from past practice; but in reality, it was a classic example of Lao prag-matism. Elements of the system had been quietly implemented by larger stateenterprises on a trial basis after 1983. When positive results were achieved,the Party elected in 1986 to extend the system to all enterprises and to grantadditional autonomy. Support for the approach came from a wide variety ofsources, including Hanoi and Moscow, which were also experimenting withnew systems. Western aid donors, like the World Bank and the InternationalMonetary Fund, also welcomed the change.

The one market, one price principle was the most far-reaching policychange adopted under the rubric of the New Economic Mechanism. The newsystem abolished virtually all administered prices as well as the multi-tieredforeign exchange rate, lifted barriers to internal trade, and granted stateenterprises direct access to international markets. Parallel moves to stimulatedomestic and foreign competition through private sector promotion andimport substitution complemented price and exchange liberalizationmeasures.18

As it implemented the reforms initiated in 1986, the Lao PDR continued toencourage private holdings in agriculture with a mid-1988 announcement that


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no preferential treatment, credit, or subsidies would be provided to coopera-tives. In lieu of moving directly from subsistence to collective farming, the gov-ernment encouraged peasants to enter the small goods economy by tradingsurplus production for commodities. Resolutions adopted in June 1988 gavefarmers long-term tenure rights and allowed them to pass land to their childrenor to sell it, charging for improvements made. These changes followed otherreforms in late 1987, including the removal of restrictions on the internaltrade of agricultural products. The state also stopped setting low producerprocurement prices for a wide range of crops.19

As a result, by the early 1990s, private ownership had become the dominantform of property rights in agriculture as well as in the rapidly expanding servicesector. The situation in the industrial sector was rather different, though thescope of private activities in the industrial sector expanded throughout thesecond half of the 1980s as the result of the privatization of state enterprisesand the emergence of new private firms, especially in construction. Thusoverall private property rights, although occasionally defined imperfectly,could be said to predominate in Laos.20

Unfortunately, the rules and regulations necessary to support marketinstitutions and private property rights trailed the implementation of market-oriented reforms. Contract, inheritance, and property laws, for example, werenot passed until mid-1990. On the other hand, the 1991 constitution did guaran-tee the security of private property and foreign investment. And new insuranceand accounting systems, adopted in 1990, were followed in 1991 by laws cover-ing the settlement of commercial disputes, bankruptcy, and liquidation. Thegovernment also expanded banking reforms initiated in early 1988, announcingplans to privatize state-owned commercial banks.

The international context

From 1975 onwards, Vietnam had an enormous influence on Laos, both directlyand by example. All meaningful reforms in Laos occurred after similar reformshad been introduced in Vietnam. That said, the withdrawal of Vietnamesetroops from Laos in 1987, after being stationed there for almost a decade,gave the Lao PDR new latitude to develop both commercial and diplomaticties with its neighbours, especially the People’s Republic of China. Therewas also a surge in Thai trade with and investment in Laos, with Thai banksopening branches in Vientiane. Nevertheless, this welcome improvement inLao–Thai economic relations did not presage a shift in the essentially political“special relationship” between Laos and Vietnam, which extended from politi-cal work at the party, administrative, and military levels to the twinning of pro-vinces, districts, and communes. Laos also maintained a close relationship withthe Soviet Union, which accounted for approximately half the total economicassistance received by Laos in 1988, even though Moscow continued to criticizethe Lao PDR for inefficient and wasteful use of its assistance. Moscow’s attitudereflected in part its position as the dominant donor to a country with severe


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constraints on its ability to absorb aid. For this reason, the Soviet Union wel-comed the increase in Western influence in Laos at the end of the 1980s as ameans to reduce Soviet financial investment at minimal political cost.

In March 1988, Foreign Minister Phoune Sipaseuth made the first officialvisit to Japan by a Lao foreign minister since the founding of the Lao PDR.The visit highlighted Vientiane’s interest in obtaining development assistancefrom Japan as well as Tokyo’s reluctance to increase the level of its aidbefore a Cambodian settlement was reached.21 Eighteen months later,Kaysone himself visited Japan as well as France, his first visits to countriesoutside the socialist bloc. These excursions to the West were meant to signalto the capitalist world that Laos was committed to strengthening its economicand political ties with the nonsocialist world, over and above its existingclose ties with Australia and Sweden, countries that had long provided generousamounts of aid.

With the collapse of the Soviet Union in the early 1990s, the position ofprincipal bilateral donor passed to Japan, whose presence in Laos, thoughlow-key, was universally recognized to be influential. Its annual economicassistance approximated $50 million, followed by the European states(principally France, Germany and Sweden) and Australia. The key event inthis period, and the most difficult to evaluate, was the death of Prime MinisterKaysone, the leading advocate of market-based reforms and a long-termVietnamese ally. Following his death, the Lao PDR expanded its commercialand diplomatic ties with China. Beijing provided aid, arms, and trade;however, its most important role was to validate the path followed by theLPRP. If the Chinese Communist Party could adopt market reforms andprivate ownership while preserving one-party rule, why could its Lao comradesnot do the same? For China, Laos was attractive both for its natural resources,rich hardwood forests and mineral deposits, and for its strategic location as aland bridge and gateway to Southeast Asia.

Impact of Asian financial crisis

The financial crisis that hit Thailand in mid-1997 triggered a related economiccrisis in Laos in 1997–1998. At the time, Thailand was the main trading partnerand principal source of investment in Laos, and the macroeconomic instability itexperienced triggered a sharp depreciation of the Lao kip, together with a wide-spread loss of confidence in the Lao economy. A weakening domestic reformeffort and lax macroeconomic management compounded the impact of thefinancial crisis. Foreign investment and some key exports, both tied to thetroubled Thai economy, took a severe hit. In addition, the Asian financialcrisis exposed a major weakness of the Lao political system. The politicalstability inherent in a one-party state facilitated reform policy at the beginningof the transition process; however, as economist Yves Bourdet astutelyobserved, it became a hindrance when more balanced economic developmentwas required.


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One main lesson from transition in Laos is thus that the existence of theone-party state has facilitated the formulation, adoption and implemen-tation of a comprehensive and relatively rapid transition programme.This has resulted in significantly improved macroeconomic performancein the short and medium-term. But the absence of democracy andtransparency in interaction with the specific economic and historicalconditions of Laos has contributed to the emergence of a bargainingeconomy in Laos with a stop-and-go macroeconomic stance andlong-term macroeconomic instability.22

A related point was made in January 2002 by Focus on the Global South, aBangkok-based policy research group. Their report highlighted the negativeaspects of centralized decision making.

The current political culture in the Lao PDR is not conducive to formalpublic debate about macro level policies. Members of the generalpublic and even government officials at mid and lower levels are oftenunfamiliar with macro development concepts and therefore unconfidentin their abilities to engage meaningfully in national planning processes.When policies are put in the public realm, there is little space fordissent, and even fewer channels by which the views and concerns oflocal civil society can be fed back into the policy development process.So much for World Bank speak about the poor becoming “activeparticipants.”23

Macroeconomic conditions improved after 2000, when Laos regained somecontrol over fiscal policy and instituted a tighter monetary policy; and the Laoeconomy continued its slow recovery in 2001–2004. Revenue mobilizationremained a major problem, but expenditure control improved. While theinflation rate was one of the highest in the region, the merchandise tradedeficit narrowed, continuing a trend evident for several years. The level offoreign direct investment increased only slightly; however, approvals increasedat a faster pace, causing some to hope that FDI might return to the higher levelsseen before the Asian financial crisis.

But the Lao PDR still held back from comprehensive structural reforms.The state banking system clearly required additional reforms to put it on a com-mercially sound basis. And the government continued to subsidize state enter-prises when they needed to be restructured to reduce nonperforming loans, amove which would complement banking reforms. Interventionist policies pre-vented free market forces from reaching their full potential, and governmentpolicies were often counterproductive. When international lending agenciesencouraged Laos to increase revenue collection, for example, it raised tariffson imported goods which contributed to inflationary pressures and increasedsmuggling.

Thus the Asian financial crisis did not lead to a radical change in economicpolicy. Nor did it lead to major political liberalization. On the contrary,


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Vientiane pursued closer relations with other authoritarian regimes, expandingits growing ties with Beijing as China moved to increase its influence in South-east Asia. Chinese President Jiang Zemin paid the first ever visit of a Chinesehead of state to Laos in mid-November 2000, reaching agreement on closereconomic and technical cooperation as well as more Chinese aid for Laos.With Chinese aid focused on infrastructure projects, Laos announced in May2002 the official opening of three new roads, linking Vientiane with cities inChina’s Yunnan province. More recently, as bilateral trade and investmentexpanded, Chinese Vice Premier Wu Yi visited Vientiane in March 2004,concluding 11 separate agreements in agriculture, chemical production, andhydropower exploration.

Laos also turned to Vietnam, its traditional patron, for guidance and aid,reinvigorating political ties and expanding commercial relations. At therequest of the Lao government, Vietnamese troops intervened in XiangKhouang province in mid-2000 when the Hmong rebellion escalated and Laoarmy casualties mounted. The Ho Chi Minh National Politics Institute inHanoi also offered a series of “refresher” courses for Lao officials. Evidenceof expanded economic ties could be seen in deeper cooperation betweenborder provinces as well as stepped up cross-border and barter trade.Vietnamese investment increased in strategic sectors of the Lao economy,like agro-processing, construction, forestry, and transportation; and Hanoiprovided financial and auditing assistance to Vientiane.

Full circle

The most disappointing economic result of government policy in the wake ofthe Asian financial crisis was that the Lao PDR continued to be heavily depen-dent on foreign aid. Japan remained the principal bilateral donor to Laos,extending a substantial debt relief package in September 2000. In December2001, Tokyo approved loans totalling $62 million to fund a second Mekongbridge, and it later wrote off debts owed by Laos for construction of the NamNgum Dam. In December 2003, Laos welcomed a Japanese commitment of$1.5 billion in aid for Mekong River regional development. Russia agreed inJune 2003 to write off 70 percent of loans outstanding from the Soviet eraand to service the remainder over 33 years; however, the level of externaldebt still remained at nearly $2 billion in 2004. On the multilateral level, theIMF approved in principle a three-year, $40 million loan in April 2001 althoughrenewed policy concerns later delayed distribution of the second tranche of theloan. The Asian Development Bank (ADB) also continued its financialassistance, launching an ambitious poverty alleviation programme, and laterapproving in June 2004 a $17.7 million loan to improve rural roads.24

Over the decade of the 1990s, official development assistance increased tothe point that it represented some 20 percent of GDP. At the same time, thecomposition of international aid shifted, with grants accounting for an increas-ingly smaller share and loans a larger one.25 Among other things, this change in


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aid composition had important ramifications for the future growth of externaldebt, threatening the creation of yet another debt-strapped Third World state.The concentration of aid dependency in a few sectors, like communications,public health, transportation, and social welfare, also had important, albeitunclear, implications.

Professor Hans Luther, an adviser to the Lao government for many years,emphasized the downside of foreign aid dependence in a June 2003 interview.

Foreign aid is like a drug. You want more and more of it because it makesdevelopment much easier for you. Instead of putting up your own moneyfor building roads and repairing them, you get rich foreigners to do it foryou. There are also kickbacks and all kinds of benefits. It is the easy wayout in economic development. Now what should a poor country like Laosdo? They should be modest and have some clear priorities. But most optfor foreign aid as it seems to promise everything at the same time.

But people forget that with foreign aid, one does not necessarily haveownership. There are grants but also loans which have to be paid back.During the time I have been here the amount of foreign aid contributedto the national budget has doubled. Therefore, it can in fact be shownthat this country is increasing its dependence on foreign aid. Aid is notcreating sustainable economic growth, only aid-induced growth.26

Limited political reform

From the outset, the Lao approach to reform could best be characterized asperestroika without glasnost, or economic change without political reform.Even as the LPRP cast off Stalinist economic doctrines and ventured downthe road of market reform, it refused to share political power.27 Much likethe Communist Party of Vietnam, the LPRP offered the Lao people increasedeconomic openness and prosperity in exchange for continued Communistcontrol of the political system. As Bourdet noted:

There is a clear dichotomy in Laos between the comprehensiveness of theeconomic reforms and the inertia of the political system. The New Econ-omic Mechanism has not been accompanied by political reforms, and theregime perpetuates itself despite the demise of most of the foundingmembers of the Lao People’s Revolutionary Party (LPRP), the PathetLao.28

The Sixth Party Congress, held in Vientiane on 18–20 March 1996, washighly significant in that it reinforced the power of Party members advocatinga slower reform path with more control over the various effects of reformpolicy. In effect, it was a victory of “reformers by necessity” over “reformersby conviction.” The Sixth Party Congress also reaffirmed the leading role ofthe LPRP. Party leaders argued economic reform should not be accompanied


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by political liberalization because a departure from one-party rule could lead tothe political instability often found in countries in transition. But although thechanges in the balance of power at the Sixth Party Congress clearly favouredadvocates of slower economic change, at least the Party did reaffirm its commit-ment to reform policy.29

After months of careful preparation, the Seventh Party Congress opened inVientiane in March 2001. Veteran Lao watcher Bourdet captured the spirit ofthe congress when he styled it “confessions without concessions.” To conciliatethe younger generation, the congress ratified cosmetic changes to the compo-sition of the Politburo and Central Committee. To placate an internationaldonor community now financing some 80 percent of Lao development expen-ditures, it also adopted vague statements promising market-friendly economicreforms and improved governance. Nonetheless, the Old Guard retained itsgrip on power. Two seats were added to the Politburo, bringing the total to11, but this change reflected a desire to give the top leadership a youngerlook as opposed to signalling ideological renewal. Central Committee member-ship expanded from 49 to 53 seats to add younger Party cadres, but its averageage remained relatively high at 56 years.30

In the National Assembly elections held in February 2002, nearly a yearearlier than expected, the Party consolidated its hold on power. The pollswere pulled forward to bring them in line with the Five-Year Plan and theEighth Party Congress in 2006 as well as to accommodate reforms promisedto donor countries. All but one of the 166 candidates approved by the Partyto contest 109 available seats were Party members, with 53 high-rankingParty incumbents, mostly members of the Politburo and Central Committee,running for reelection. No foreign poll observers were allowed, and theforeign media was restricted to monitoring no more than the campaign in Vien-tiane. As a result, official election results, indicating 99.23 percent of the 2.5million eligible voters went to the polls, were impossible to verify but highlyquestionable in a country where voters in remote areas might have to walktwo days to reach a polling station.

But as the Communist regime moved to buttress its legitimacy, sporadicambushes, bombings, and dissident acts combined to create an atmosphereof some insecurity. Between 2000 and 2003 there were seven bombexplosions, mostly in Vientiane. Casualties were light, but in mid-2003,nearly 40 people were killed and over 100 injured in a series of violentattacks on buses. Route 13 between Vientiane and Luang Prabang was a par-ticular target. Significantly, in mid-2002, the Lao Citizens Movement forDemocracy (LCMD), a coalition group allegedly representing 20 oppositionmovements, announced plans to overthrow the government, claiming tohave begun military operations in 11 provinces. The actual perpetrators ofthe various attacks remained unclear, with the government attributing themto bandits while foreign diplomats ascribed them to a mixture of ethnic min-ority rebels, anti-Communist exiles, and disaffected members of the Laoarmed forces.31


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While these recent events appear to represent the most serious challenge toParty rule since 1975, there is little to suggest the attacks, raids, and bombingsconstituted a real threat to the regime. The LPRP responded promptly andaggressively with a familiar mix of repressive measures, symbolic gestures,and cosmetic reforms. Despite the claims of groups like the Lao Citizens Move-ment for Democracy or the US-based Fact Finding Committee, which consistsof anti-Communist Lao exiles and their American supporters, there is noevidence of a sustained, credible threat to the regime.

Conclusions

After three decades of LPRP rule, the Lao PDR remains a Lesser DevelopedCountry (LDC) with upwards of 40 percent of its people living below thepoverty line. Average per capita income approximates only $330, and morethan 75 percent of the population lives on less than $2 a day. Life expectancyat birth is low at only 55 years; and the infant mortality rate, anothercommon denominator of social advance, is high at 82 per 1,000 live births.The real growth rate (GDP) has averaged around six percent in recent yearsbut started from an extremely low base. In short, Laos is poor. The governmentboasts a plan to escape LDC status by the year 2020, but past performancesuggests this objective, while admirable, is totally unrealistic.

As is often the case with poor countries, economic and social inequalities inLaos are enormous – and growing. The poorest 10 percent of the populationreceives less than four percent of national income while the richest 10percent absorbs over 30 percent. The fruits of economic reform tend to be con-centrated in urban areas along the east bank of the Mekong River because urbanLao are best positioned to take advantage of new economic opportunities. Onthe other hand, as much as 80 percent of the population still works the land,living in the countryside where poverty is widespread. Rural areas have bene-fited little from macroeconomic reform; and in many cases their lot hasworsened. And the widening economic divide among geographic areas isbroadly congruent with ethnic differences, intensifying the social impact ofdevelopment inequality in Laos.

Poverty and how to overcome it has long dominated the political agenda inLaos, with the preferred solution in some circles being the construction of damsto generate electricity for sale in Thailand. Poverty alleviation arguments, longused by multilateral donors like the Asian Development Bank and the WorldBank to justify external aid, made the recently approved Nam Theun 2project almost inevitable. Yet, embedded within the poverty discourse arehighly important but seldom addressed issues of political economy, beginningwith the question of who stands to win and lose when it comes to generating anddistributing revenue from hydroelectric power. Lao peasants stand to lose theirhomes, forests, and rivers, together with their culture and livelihood. They maygain a replacement hut, water pump, or temporary construction job, but pastexperience suggests urban Lao will remain the primary beneficiaries of


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development funds. The revenues generated from projects like Nam Theun 2will likely also reinforce the LPRP’s grip on power. Whether or not they willreduce the government’s mounting external debt or its dependence on externalaid is another question.

In recent years, the international donor community has expressed growingfrustration with the slow pace of economic reform in Laos but has continuedto fund economic development largely as before. Donor practices, like heavyspending on overpriced technical consultants, excessive administrative costs,and aid tied to purchases from donor countries, have recently been criticizedas self-destructive by Action Aid International.32 To reduce Lao dependencyon external aid, a new approach is required, involving policy clarification bydonor countries as to the criteria for accepting aid, mutual agreement and com-mitment on aid utilization (as opposed to one-sided conditionality), and greatertransparency at the project level.

That said, the ongoing economic crisis in Laos is largely about how Laos isgoverned. It is no use pointing vaguely to outside forces, from floods to SARS toHIV/AIDS, to explain why the country is failing to achieve its economicpotential. The central problem is a rigid, elitist political system which hasmade poor economic decisions over the last three decades out of ignoranceand a desire to retain political power. After 1975, rice purchase and taxationpolicies, combined with the launch of agricultural cooperatives, reduced agri-cultural productivity and alienated much of the population. Subsequent policiesin areas like pricing, market development, and resource management, togetherwith the inadequate coordination of reforms within and between economicsectors, also impacted negatively on performance. Later attempts at reform,delayed and diluted by Party concerns over unwanted socioeconomic conse-quences as well as resistance from various stakeholders threatened by reform,displayed the ambivalence evident in earlier, failed efforts to promote social-ism. Although the New Economic Mechanism tentatively addressed some ofthese shortcomings, the negative impact of the ensuing Asian financial crisiswas compounded by a weakening domestic reform effort and lax macroeco-nomic management. The inertia of the Lao political system, hamstrung by asclerotic political elite, centralized decision making, and corruption, makes acontinuing dependency on foreign aid, together with ongoing inefficiency inthe use of that aid, the most likely future for the Lao PDR.

NOTES

1. Grant Evans, “Planning Problems in Peripheral Socialism: The Case of Laos,” in JosephJ. Zasloff and Leonard Unger (eds), Laos: Beyond the Revolution. New York: St. Martin’sPress, 1991, p. 90.

2. Nayan Chanda, “Economic Changes in Laos, 1975–1980,” in Martin Stuart-Fox (ed.), Con-temporary Laos: Studies in the Politics and Society of the Lao People’s Democratic Republic.New York: St. Martin’s Press, 1982, pp. 116–117.

3. T. M. Burley, “Foreign Aid to the Lao People’s Democratic Republic,” in Martin Stuart-Fox(ed.), Contemporary Laos: Studies in the Politics and Society of the Lao People’s DemocraticRepublic. New York: St. Martin’s Press, 1982, pp. 129–36; Evans, “Planning Problems”, p. 91.


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4. Burley, “Foreign Aid”, pp. 136–145.5. Martin Stuart-Fox, Buddhist Kingdom, Marxist State: The Making of Modern Laos. Bangkok:

White Lotus, 1996, p. 111.6. Kaysone Phomvihane, Revolution in Laos: Practice and Prospects. Moscow: Progress

Publishers, 1981, pp. 181–182.7. Ronald Bruce St John, Revolution, Reform and Regionalism in Southeast Asia: Cambodia,

Laos and Vietnam. London: Routledge, 2006, pp. 36–37; Stuart-Fox, Buddhist Kingdom-Marxist State, pp. 135–136.

8. Martin Stuart-Fox, “The Initial Failure of Agricultural Cooperativization in Laos.”AsiaQuarterly4 (1980): 285.

9. Evans, “Planning Problems”, pp. 96–99.10. “Part II of Kaysone Speech at SPC Plenary Session.” Vientiane Domestic Service, 17 January

1981, in Foreign Broadcast Information Service (FBIS), Daily Report Asia and Pacific (APA),FBIS-APA-81-021, 2 February 1981, pp. I8–I19, quotes pp. I10–I11.

11. Ibid., pp. I11–I12.12. “Last Instalment of Kaysone’s SPC Speech.” Vientiane Domestic Service, 17 January 1981,

FBIS-APA-81-030, 13 February 1981, pp. I6–I22.13. Ronald Bruce St John, “End of the Beginning: Economic Reform in Cambodia, Laos and

Vietnam.” Contemporary Southeast Asia 19, 2 (September 1997): 175–176.14. Martin Stuart-Fox, “Laos in 1981: Economic Prospects and Problems.” Southeast Asian

Affairs 1982. Singapore: Institute of Southeast Asian Studies, 1982, p. 240.15. MacAlister Brown and Joseph J. Zasloff, Apprentice Revolutionaries: The Communist Move-

ment in Laos, 1930–1985. Stanford, CA: Hoover Institution Press, 1986, pp. 202–203, 208–212; Burley, “Foreign Aid”, pp. 140–141.

16. “Political Report of the Central Committee by the Lao People’s Revolutionary Party Presentedat Its Fourth Party Congress by Comrade Kaysone Phomvihane, General Secretary.” FourthParty Congress, Vientiane, 1986, mimeograph, p. 68, as quoted in Ng Shui Meng, “Laos in1986: Into the Second Decade of National Reconstruction.” Southeast Asian Affairs 1987.Singapore: Institute of Southeast Asian Studies, 1987, p. 185.

17. Ibid.18. Private Interview, Liang Insisiengmay, Director, Tax Department, Lao People’s Democratic

Republic, Vientiane, 11 December 1990; Bernard Funck, “Laos: Decentralization and Econ-omic Control.” In Borge Ljunggren (ed.), The Challenge of Reform in Indochina. Cambridge,MA: Harvard University Press, 1993, pp. 129–132.

19. Private Interview, Sitaheng Rasphone, Vice Minister, Ministry of Agriculture and Forestry,Lao People’s Democratic Republic, Vientiane, 3 March 1992; William Worner, “EconomicReform and Structural Change in Laos.” Southeast Asian Affairs 1989. Singapore: Instituteof Southeast Asian Studies, 1989, pp. 198–199.

20. Yves Bourdet, “Reforming Laos’ Economic System.” Economic Systems 16, 1 (April 1992):70.

21. Ronald Bruce St John, “Japan’s Moment in Indochina: Washington Initiative . . . TokyoSuccess.” Asian Survey 35, 7 (July 1995): 674–675.

22. Yves Bourdet, The Economics of Transition in Laos: From Socialism to ASEAN Integration.Cheltenham, UK: Edward Elgar, 2000, pp. 80-81, quote p. 80.

23. Jenina Joy Chavez Malaluan and Shalmali Guttal, “Structural Adjustment in the Name of thePoor: The PRSP Experience in the Lao PDR, Cambodia and Vietnam.” Focus on the GlobalSouth (January 2002): 4–7, quote 6, see Focus on the Global South web site http://www.fo-cusweb.org, accessed on 7 June 2005.

24. Asian Development Bank, Lao People’s Democratic Republic: Country Strategy and ProgramUpdate (2004–2006), July 2003, see ADB web site http://www.adb.org, accessed 7 June2005.

25. Bertil Lintner, “Aid-Dependent.” Far Eastern Economic Review, 3 July 2003: 49; St John,Revolution, Reform and Regionalism, pp. 158–159.

26. Quoted in Grant Evans, “Laos moving along at snail’s pace.” Bangkok Post, 21 June 2003.27. Martin Stuart-Fox, “Laos at the Crossroads.” Indochina Issues 92 (March 1991): 5; Stan

Sesser, “Forgotten Country.” The New Yorker, 20 August 1990: 48.


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28. Yves Bourdet, “Laos in 1995: Reform Policy, Out of Breath?” Asian Survey 36, 1 (January1996): 89–92, quote 92.

29. Bourdet, Economics, 2–3, quote 3; “Change of Face: Reform gets an authoritarian overlay.”Far Eastern Economic Review, 18 April 1996: 22.

30. Yves Bourdet, “Laos in 2001: Political Introversion and Economic Respite.” Asian Survey 42,1 (January/February 2002): 108–109, quote 108; Don Pathan, “Change in Laos glacial, butold guard stays put.” Nation, 17 March 2001. For a discussion of the challenges involved inimplanting Western democracy in a state with little or no democratic tradition, see RonaldBruce St John, “Democracy in Cambodia: One Decade, US$5 Billion Later: What WentWrong?” Contemporary Southeast Asia 27, 3 (December 2005): 404–426.

31. Thierry Falise, “Rare Glimpses of Forgotten Rebels.” New York Times, 14 September 2003;Grant Evans, “Laos is getting a bad rap from the world’s media.” Bangkok Post, 8 July2003; St John, Revolution, Reform and Regionalism, 159–161.

32. Action Aid International, “Real Aid Report.” May 2005, see Action Aid web site http://www.actionaid.org, accessed 12 June 2005. For an insider view of aid distortion in Laos,see Brett Dakin, Another Quiet American: Stories of Life in Laos. Bangkok: Asia Books,2003, pp. 187–195.


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the political economy of laos: poor state or poor policy?

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