On February 2, 2013, the Lao People’s Democratic Republic, to give the country its full name, formally became the newest member of the World Trade Organisation (WTO). This event followed 15 years of negotiations between Vientiane and Geneva, and more than 90 necessary amendments to Laos’s regulatory regime for business.

A landlocked country of just 6.5 million people, governed by one of the world’s few remaining ruling communist parties, Laos has generally tended not to garner much international attention. Even a shadowy civil war from 1953 to 1975 between Lao royalists (with covert support from the US) and the communist Pathet Lao – as an annex to a higher profile conflict being waged in neighbouring Vietnam – is commonly referred to as the ‘secret war’. And with large parts of the Ho Chi Minh Trail – the north-south supply route used by Hanoi’s forces to penetrate southern Vietnam – winding through the country’s jungles, Laos at one point had the dubious distinction of being the most heavily bombed country in the world. The legacy of this bombing remains to this day, despite ongoing efforts to clear the land of unexploded devices, rendering substantial areas of the country extremely dangerous for local inhabitants.

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Good neighbours

More recently, Laos has made tentative strides towards economic reform and business liberalisation, broadly along the same lines as ideological mentors China and Vietnam. Prior to the Asian Crisis of 1997-98, Thailand was the dominant foreign investor in Laos, but the past decade or so has seen fraternal neighbours China and Vietnam duking it out to become the dominant player in the country. Investments made by companies from the two countries have ranged from cement plants to rubber plantations. Many of these investments have been made by Chinese and Vietnamese state-owned enterprises, leaving some analysts to question whether the projects are based entirely on commercial grounds.

But away from such politics, there has already been some significant foreign investment in Laos, most notably in mining and energy generation, and to a lesser extent in garments. Such ‘big ticket’ FDI projects have helped drive the country’s GDP growth rate to be higher than that of Vietnam, and have had an even more potent effect on the country’s aggregate export earnings. 

One of the standout FDI projects has been the large Sepon gold doré and copper cathode mine in Savannakhet province, in the country’s southern ‘panhandle’. Majority owned by MMG (a subsidiary of China Minmetals), the Sepon open-pit mine was the first large private sector mine of its kind in the Laos, and provides work for about 4000 local people. This mine, along with the Nam Theun 2 hydropower project, has significantly bolstered Laos’s aggregate balance of payments. Little wonder, then, that many observers regard Laos as essentially being a ‘resources play’.

Developing goal

The mining and energy sectors will probably continue to present the greatest potential for future inflows of foreign investment for Laos, with some new opportunities emerging in various services – such as hospitality, travel and tourism, banking and finance – that were previously fully or partially closed to overseas capital, but will be liberalised under the conditions of WTO accession. Laos aspires to graduate from less developed country status to developing country status by 2015, and FDI inflows have an important part to play – along with international donor community support, in pursuit of Laos’s millennium development goals – if that target is to be reached.

This is not to suggest, however, that things will be plain sailing from here. It should be borne in mind that Laos has a small domestic economy, and so the main sectors of interest to foreign investors will largely be export-oriented, or at least foreign exchange-oriented. But here too there are difficulties. As a landlocked country, any export items must be trans-shipped through ports in Thailand or Vietnam, although advances have recently been made through the building of additional bridges across the Mekong to Thailand, the opening of a rail link that connects Laos to the Thai rail network for the very first time, and the development of an east-west ‘economic corridor’ between southern Laos and the bustling port city of Danang in central Vietnam. There is also talk of a railway line to China being constructed.

The water way

In energy, Laos aspires to become the ‘battery’ of south-east Asia, with considerable – and largely untapped – hydropower potential. A number of large hydropower plants have already been erected along various Mekong river tributaries, largely using foreign capital and expertise, with the electricity generated being almost entirely exported to Thailand. 

But downstream neighbours Cambodia and Vietnam have become increasingly vocal in their concern about the environmental impact of so many dams, particularly with regard to the long-term health of the Mekong river. This concern tipped over into outright alarm in early 2013 when it became apparent that Laos – in conjunction with Thai investors – was to go ahead with the controversial $3.5bn Xayaburi dam project, in apparent contravention of a treaty it had signed to consult with other Mekong basin countries over such developments. Hanoi and Phnom Penh’s shared view is that upstream damming of the Mekong, by both China and Laos, is having a marked and unwelcome impact on the highly seasonal flow of the river, which is essential for the basic food security and the incomes of many household farmers in the two countries.

Should this state of affairs continue, then it could become much more difficult for the Lao government to embark on subsequent large hydropower projects.

Reform agenda

As has happened in other transitional economies where the pace and extent of economic reform has been incremental, there have been tensions between those groups that benefit from the status quo and those seeking greater liberalisation. In that context, the pursuit of WTO accession has served as a useful vehicle for the pro-reform lobby to help push the economic reform agenda forward.  

But while the regulatory regime for business in Laos has undoubtedly improved over the past decade, the actual implementation and equitable enforcement of laws remains patchy, due to issues of weak institutional capacity across virtually all government agencies, as well as the related issues of opaque laws, excessive red tape and corruption. 

One test case is likely to be that of a lucrative hotel and casino, located close to the Friendship Bridge that links Vientiane with the city of Nong Khai in Thailand. The $400m project is 60% owned by a Macao-based investor that has asked the World Bank’s International Arbitration Forum to intervene and rule on the case. The company alleges that individuals connected to the Lao government have sought to seize the project, which employs 2000 people, in contravention of national law and various agreements made. There have also been allegations that illegitimate tax demands have been made on the project as part of a campaign to ‘muscle out’ the foreign investor. If the World Bank rules in the investor's favour, it could damage Laos's reputation as an investment location.

Negative headlines

There are also political risks associated with investing in a country that has a mixed track record when it comes to protecting civil liberties and human and religious rights. The sudden disappearance of civil society activist Sombath Somphone, in mid-December 2012, has brought calls from the Association of South-east Asian Nations secretariat and the US secretary of state, among others, for the Lao government to investigate the case. This came shortly after the country head of a Dutch development non-governmental organisation in the country was suddenly expelled from Laos after making critical remarks about the government in a letter. Such actions stand in stark contrast to the political reforms being embraced in neighbouring Myanmar.

While WTO accession will certainly be a welcome fillip for FDI activity in Laos, and the country's economy as a whole, it is unlikely that this move will suddenly trigger a large wave of FDI. It will, however, serve as a bulwark in the country’s gradual transition towards a more liberal and dynamic business environment, and therefore should be a positive development for both domestic and foreign investors alike, as well as Lao consumers. However, given that old hands sometimes joke that the initials ‘PDR’ in the country title stand for ‘please don’t rush’, the benefits of this move may be some time coming.