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Laos Economic Information
(kindly provided by the  Embassy of Peoples Democratic Republic of Laos to the United States of America)



ECONOMIC FOUNDATION OF THE LAO PDR

NATURAL RESOURCES

Laos has adopted the concept of its New Economic Mechanism as its policy on economic reform. The policy allows the application of a capitalistic system with the socialistic economy. The reason behind this adoption is the decision for Laos to develop its economy gradually under conditions that maintain decent living standards for its people as well as protect its national identity.

The following is an overview of the country’s natural resources, which are the foundation of economic development.

Agriculture, Forestry and Livestock

Cultivated land covers only 8.000 square kilometers of the 80.000 square kilometers of potentially cultivable land. Rice growing accounts for 85% of the area planted. About 1.65 million tones of rice were produced in 1994 and 40% of the total output came from Savannakhet, Saravane and Champasak. Another portion was produced in the Vientiane Municipality.

Other crops cultivated in Laos are maize, sugarcane, root crops, beans, tobacco, cotton, fruits, tea and coffee. Coffee produced in the south is among the best quality in the world. Coffee cultivation is currently being promoted in Champasack, Saravane and Sekong.

Agriculture is still practiced predominantly by traditional means and simple aimed at subsistence farming. The agricultural methods have been applied and improved for utilization of planted areas. The department in charge of agricultural development has tried to solve these problems by increasingly diversifying the current mono-culture agricultural structure. Intensive farming has been encouraged to replace extensive farming.

Since 1987, forestry has played an important role in the country’s economic system. Forests cover 55% of the nation’s land area and are certainly a crucial resource. Business connected to forestry and forest products, however, has not effectively expanded. This is the result of policies and regulations on timber exports, difficulties of access and lack of transportation, all of which have, however, been improving.

Coupled with government policy to maintain the balance of nature, commercial utilization of this resource has been reduced. Operational conditions are other constraints affecting such utilization.

Laos is economically self-sufficient in animal husbandry, not only breeding livestock as a source of food but also as a commodity and for labor. It is therefor important to the economy.

With 80% of its area being pasture, animal husbandry plays a major part in the country’s economic development and is scattered throughout the north in provinces such as Huaphanh, Luangprabang and Xayabury. In 1994-1995, the Lao Government encouraged cultivation of rice in both large and small paddy fields in every province as part of its economic development plan. First priority was given to the lowlands in Vientiane Province, with emphasis on the expansion of both cereal crops and agro-industrial crops to supply manufacturers and to support the processing of agro-products. Another goal was to provide a better view of the economic structure of the province. The target set for rice production in 1995, 1.7 million tones, was achieved. 18,500 hectares and the irrigated area expanded the rice-cultivated area also increased to 150,000 hectares. 4,000 hectares expanded low-grade rice fields as well.

The manufacture of goods in appropriate areas was promoted, with marketing support provided to manufacturers through the establishment of a project to plant agro-industrial crops to serve factories directly. Output of the project includes tobacco, sugar cane, wheat, cotton, kapok, cashew, pineapple, beans and white mulberry, grown to raise silkworms. The project area covered Vientiane Municipality and provinces nearby. Livestock breeding has been promoted as a viable business and the number of veterinarians in breeding areas increased to serve it. Furthermore, the number of plant seeds and animal species available was also increased and a survey of the area utilized for animal husbandry was conducted.

Laos has planned to end deforestation and slash-and-burn farming to conserve forests and waters resources. To achieve this it seeks to survey and allocate forest resources by clear zoning as well as employing natural reforestation methods. Priority is given to previously damaged areas, in particular upstream watershed areas.

The Lao forestry industry originally aimed to serve the domestic market. Strict control of export of logs by the government has been strictly enforced and tended to reduce the volume of exports gradually. The only forest zones allowed to be exploited were areas to be covered following the construction of hydropower dams irrigated areas and during the construction of roads.

In promoting coffee growing, Lao Trade Ministry announced the establishment of the Lao Coffee Exporters Association in Champasack, Saravane, Sekong and Attapeu. The association has controlled over the distribution and export of coffee. In the south, six companies have already registered as members of the association.

Members of the association must abide by the terms set; for example, a member has to possess a license to trade coffee seeds and offer loans to farmers who grow coffee in Laos.

Minerals

Minerals are important natural resource in the future economic development of Laos. The country still has ample sources of gemstones, coal and iron ore. Plenty of iron ore has been found near Xiengkhuang; anthracite in Vientiane and Savannakhet; tin in Khammuane and gypsum in Savannakhet.

More than 40 types of minerals have been found in Xiengkhuang covering around 150 square kilometres. In addition, several important rivers of the northeast region as well as in the Mekong River are sites for gold prospecting. Surveys to search for oil and natural gas have been conducted in the south.

ELECTRICITY & ENERGY

Laos has more than thirteen tributaries that join the Mekong River, covering a distance of 1,500 kilometers. The rich soil of both mountainous and riverside areas accounts for 80% of the country’s land mass, with rainfall never falling below 2,500 millimeters a year. This provides Laos with electricity generating capacity of not less than 18,000 megawatts.

With such plentiful natural resources, the Government of Laos set up a master plan to develop hydropower. Projects of the tributaries of the Mekong River cover 30 dams around the country that would generate hydroelectricity.

These dams are expected to enhance the country’s hydroelectricity generation capacity to 8,520 megawatts. The current capacity stands at 220 megawatts only, most of which have been produced by the Nam Ngum Dam, located to the north of Vientiane, and the Se Set Dam in Saravane.

In addition, Laos also has thermal-powered electricity generation project in the district of Xieng Hon-Hongsa. The capacity here is 600 megawatts and distribution of electricity under this project is planned to start in 1998.

Energy is regarded by the Lao Government as a major concern and includes hydroelectric development and the strengthening of local capability in the matter with the objective of making Laos the centre for electricity export in Southeast Asia.

TRANSPORTATION

Transportation is a fundamental key to economic development. Lao has immense potential to develop itself as the land transportation hub of the region with careful planning, taking into account its pivotal position as the only Asian country with five borders, surrounded as it is by Thailand, Myanmar, China, Vietnam and Cambodia. As any international land transportation among other nations has to be conducted through Lao territory, and acknowledging the rapid economic growth of these countries, therefore, the future growth of the international transportation industry is assured.

LAND TRANSPORTATION

Laos recognizes that it is necessary to construct roads connecting it with surrounding countries. According to the National Statistical Centre of Laos, there are 22,321 kilometers of roads in the country. These are classified as three types: asphalt (3,502 kilometers), laterite (8,541 kilometers) and earthen (10,278 kilometers). The five major roads in Laos are:

Route 1, which starts from the China-Lao border and passes Luangnamtha, Oudomxay and Luangprabang before connecting with Route 6 in Huaphanh; Route 13 connects the south with the north of the country. It begins at the Cambodian border and passes through Champasack, Saravane, Savannakhet, khammuane, Borikhamxay, Vientiane and Luangprabang before crossing through the middle of the country into Oudomxay. Route 13 is regarded as the "trans-Asia highway" passing through Cambodia to the south of Vietnam as well as the starting point of several routes, for instance routes 7,8 and 9;

Route 7 starts from Route 13, linking Luangprabang and Xiengkhuang to the Lao-Vietnam border before terminating at the seaport of Vinh.

Route 8 begins at Route 13 at Borikhamxay before passing through Khamkeut and entering Vietnam. The route also connects to roads within Vietnam between Vinh and Ha Tinh, both of which are important ports.

Route 9 starts at the Khaengkabao fluvial port in Savannakhet before joining Route 13 to Vietnam at the Danang seaport. This route is regarded as the major highway linking Laos to the sea.

Land Transportation Development

The country’s goal is to develop itself as a centre for road transportation since the country is linked on all borders by progressively developing economies. Transportation between such countries like Thailand, China, Myanmar and Vietnam has to be made via Laos.

Laos consequently gives priority to the development of its main lines of transportation. That is, the renovation of Route 13, which links several important towns throughout the country from the north to the south, over a distance of more than 1,000 kilometers.

Water Transportation

In the mountainous reaches of Laos, land transportation is almost impossible or uneconomic. In such places resorting to the nation’s waterway system has solved the problem. The Mekong River is navigable for much of its 1,800 kilometers length through Laos, linking the north and south of the country. The route can be divided into three parts: Huoixai-Luangprabang, Luangprabang –Vientiane and Vientiane to Savannakhet.

Air Transportation

Laos has more than 8 airports. The only two international airports are in Vientiane and Luangprabang whereas the others are domestic airports in Xiengkhuang, Savannakhet, Champasack, Bokeo, Oudomxay and Huaphanh.

Vientiane is in practice the air travel centre of this country, serving to support most of the nation’s commercial air traffic and the development of the tourist industry. Lao Aviation flies daily from Vientiane to Luangprabang, Savannakhet, Xiengkhuang, Pakse and Oudomxai, and there are several flights a week to Luangnamtha, Xayabury, Huoixai, Xamneua, Saravane, Lakxao, Muangkhong and Attapeu.

TELECOMMUNICATIONS

Since 1990, postal and telecommunications services have been extended both at the local and international levels. For example, there are express mail services to France, Australia, Switzerland, Germany, China, Thailand and Vietnam; an international call service; a cooperation program with foreign countries, and a microwave transmission system.

In 1993, Laos installed an advanced and modern telephone system as part of a project on the development of telecommunications systems operated by the Ministry of Communications, Transport, Posts and Construction. The objective of the project was to maintain compatibility and comparability with other countries in this region.

The telecommunications master plan will update the entire system to provide optimal communications with the outside world. To do this, a microwave transmission centre will be established and the number of satellite channels received by the country increased. The telecommunications mater plan covers the period from 1987 to 2010 and is divided into five phases.

Improvements to the existing system were made during the first phase (1987-1990) using a US $ 4.5 million loan from the World Bank. Aid from Australia totaled 1.8 million and was used for the installation of the VISTA (F3) satellite earth station. The station is capable of receiving signals from INTELSAT with connections to the United States of America, France and Australia.

In the second phase (1991-1993), development focused on the installation of basic equipment. Communications, both locally and internationally, become automated. This phase used a budget of US$ 43.4 million: US$ 24.5 million in the form of a World Bank loan, US$ 13.8 million was Japan’s aid and the remainder generated from foreign aid and local investment.

By the end of the second phase, the number of telephone lines increased from 5,675 to 18,232, all of them digital. Communications in and between Oudomxay, Luangprabang, Vientiane, Pakxanh, Thakhek, Savannakhet and Pakse that originally were accomplished by a high frequency radio system were changed to a microwave system, providing a 24 hour automatic switched telephone service for both local and international calls by way of the international gateway in Vientiane.

Expansion of a modern communication system network throughout the country was the objective during the third phase (1994-1997). A microwave dispatching line system was to be extended from Luangprabang to Pakse, where only 480 channels existed. This expansion plan makes possible communications with other provinces. The microwave system was also extended to cover every province, which also received a telephone public service office, telegraph and on-line information service.

Construction of a new satellite earth station was designed to have at least 120 telephone channels that can be expanded up to 1,920.

The expansion includes international radio and television broadcasting as well as personnel development. Completion of the project resulted in an additional 40,000 lines.

As for the fourth (1998-2000) and the fifth (2001-2010) phases, the plan has been revised to be much more in line with the country’s needs. The number of telephone lines will increase to 340,000 (5 lines per 100 persons).

Economic development in Laos is aimed mainly at the development of its infrastructure. Another focus is on such unique opportunities as being an electricity-exporting centre for neighboring countries, especially Thailand and Vietnam. Thus, technological applications to help in the development of the country current tend to lean towards those areas of knowledge and management rather than more varied and complicated machinery.

INDUSTRY AND HANDICRAFTS

Laos is promoting small and medium industries and handicrafts. These are processing industries, which add value to agricultural, and forestry products, industries producing consumer goods using local natural resources that reduce unnecessary imports. Such goods include traditional foods, clothes, vegetable oil, sugar, household appliances and construction equipment. Other manufacturing industries are geared for exports, especially the textiles industry, for which special import duty privileges have been granted for the import of raw materials and products imported specifically for exports production. Privileges also apply to the construction industry, such as for the construction of dams for electricity generation, the construction of transportation routes, communications and telecommunications-related construction and infrastructure-related industries that play a key role in the economic development of the country.

TRADE, SERVICE, AND TOURISM

Local Trade

Before the adoption of the "New Thinking" economic reform policy, the country’s local trade was centralized. Decisions on manufacturing, wage rates and production structure were made entirely by the government.

Control over production by the agricultural sector has declined since the adoption of the policy. This led to the expansion of production. For example, livestock breeding was promoted as a new type of business.

The economy under the local trading system was encouraged. Improvements were made to the foreign exchange rate to make it more liberals. Government support was provided for certain aspects of production, and people were entitled to possess land.

Today, Laos has a law on the promotion of local investment. This focuses on the promotion of local investment directly. A unit responsible for providing all Laotian investors with legal guidance was established. Soft loans, of which the interest rate is determined by the Bank of the Lao PDR, have also been provided for investment activities. In addition, tax exemption privileges have been granted to local investors for all investments made in underdeveloped areas.

The main objective of this law is to establish stability for local economies. Should transfers of manufacturing bases occur in the future, there will be no effect to the country because of the availability of domestic capital.

International Trade

Due to the present economic expansion of the country, it is necessary to import almost every category of goods, such as consumer goods, fuel, food, vehicles, capital goods, construction equipment and electrical appliances.

Improvements have been made to the country’s commercial fundamentals to enhance the confidence of investors. Since the beginning of the "New Thinking" policy, Laos has opened its doors to other countries, both with the same socialistic system and with the more liberalized one. Privatization has been adopted in the area of international trade. The government now follows an open policy regarding foreign economic and technological assistance and promotes foreign investments focused on export and import substitution.

Tourism

Laos possesses great natural beauty, with tracts of forests and mountain dotted with natural gateways and stunning waterfalls. Together with its historical, cultural and artistic heritage, gracefully embodied by the evocative period when Lao civilization was known as Lan Xang (the Land of Million Elephants), the country has a lot to offer tourists, a fact recognized by the government. Consequently, a state organization was put directly in charge of tourism promotion entitled, "The National Tourism Authority of Lao PDR".

Information on tourism in Laos focuses on four provinces: Vientiane Municipality, Luangprabang, Xiengkhuang and Champasack. Tourist sites include many typical Lao temples, several ancient monuments and buildings and the national museum in Luangprabang. Locations where tourists enjoy a touch of nature include Kuang Si and Khone Phapheng waterfalls. Other fine scenic locations outside Vientiane and Luangprabang are Pakse, Savannakhet, Huoixai, Xiengkhuang, Huaphanh, Oudomxay and Phongsaly.

Moreover, the culture and the way of life are very attractive in that they have remained very simple and close to nature. The Lao people are a kind and gentle race who are ready to befriend every traveling stranger. Their traditions and culture are, to some extent, very impressive. For example, there is the Baci, an ancient, characteristically Lao ceremony performed to ensure the return of a person’s thirty-two souls in preparation for some important occasions, like a wedding. There are also ceremonies celebrating a new home, welcoming State guests, entering the monkhood and traditional festivals like Boun Bang Fai in June, Boun Tha Luang in Vientiane, the New Year Festival and boat racing festival. Traditional fairs impress tourists with beautiful and joyful shows.

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THE ECONOMY AND INVESTMENT OPPORTUNITIES IN LAOS

For more than 10 years after the alteration of both the political system and the title of the country to the Lao People’s Democratic Republic in December 1975, Laos had no constitution. The Supreme People’s Assembly gave approval in that year for the Lao PDR constitution, which was promulgated 15 August 1991.

The Lao constitution possesses three important features. First, the constitution is the result of Laotian unity in fighting for the recovery of independence. A provision stated that members of the People’s Supreme Assembly, acting as the people’s representative council, would automatically be discharged after the promulgation of the constitution.

Thereafter, the constitution stated that the title of the Supreme People’s Assembly be changed to the National Assembly, a member of which represents 50,000 inhabitants.

Consequently, it is the result of collective decision making by the Supreme People’s Assembly. All members are elected and employ collective reasoning and mutual agreement to perform their duty to the people.

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ECONOMIC DEVELOPMENT PLANNING

The country’s trading policy has varied from period to period according to economic policy. During the period 1975-1985, focus was made on centralized planning of economic policy. >From 1985 until 1990, there was a change in economic policy with an emphasis on the role of marketing mechanisms in the country’s economic development. The latest period, 1993-2000, has seen the adoption of the current plan for the long-term economic development of Laos under the policy of complete preparation for the 21st century. The period 1975-1985 was the first time the country stepped into socialism. The leadership of the Lao PDR tried to change society rapidly to be socialist. Meanwhile, the government also tried to strengthen its power to keep the system viable. This was in accordance with the ‘two duties of military strategy’ which are the erection and protection of the country’s security.

In the first phase of this period, a shortage of consumer goods required the country to rely upon imports. Trade policy was thus focused on allowing the private sector the freedom to both import and export goods.

Trade occurred with other socialist countries, that is, Vietnam, Cambodia and the Soviet Union. Public enterprises began to play a role in foreign trade.

During the period 1986-1990, promotion focused on the role of the public enterprises as importers and exporters, coupled with the policy of trading only with other socialist countries, but brought no improvement to the shortages being experienced. Even in major provinces like Luangprabang and Champasack, the period towards the end of 1986 still faced the same old problem. Changes in the policy on economic management, which included foreign trade, came subsequently after the 4th Meeting of the Party Congress.

The new policy was known as the ‘New Thinking’. Under this new policy, both the public and private sectors were given the freedom to make decisions as well as to plan their own future. The private sector also received support. To some extent, privatization was adopted. At the same time, foreign investors were also welcome to run their business in Laos.

Policies adopted during this period were virtually aimed at reducing the country’s trade deficit through increasing its purchasing power. Briefly, the new plan for economic management was to:

As for the current period, 1993-2000, the long-term Economic Development Plan prepared goals and policy guidelines in 1993. In short, they aimed to:


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ECONOMY AND MANAGEMENT SYSTEM

The long-term plan for economic development clearly identifies three regions to focus development: the north, the centre and the south. In the north, Xiengkhuang and Luangprabang are indicated as investment promotion areas for husbandry and tourism. Vientiane in the central region focuses on tourism and industry, whereas Khammuane focuses on electricity and processing industries. Savannakhet and Champasack in the south are areas focused on trading, agriculture and tourism.

Development has also been zoned so that ancient buildings and natural beauty spots receive development as tourist sites. Development of trade and industry will rely upon the promotion of foreign investment in industrial groups using local raw materials, such as mineral resources and electricity. Agricultural development focuses on agro-industrial and cereal crops.

To achieve its objectives in practice, the management system is set up according to a plan for annual economic development. For example, between 1995-1996, the goal for economic expansion was set at 8% above that for agriculture, and 6-7% above that for the forestry sector. Industrial output and handicrafts were set at 10-11% and the service sector 7-8%. Per capita income was set 5%, export growth at 7-8% and the inflation rate at no more than 8-9% with control over the current account deficit so that it would not rise above 10% of GDP.

In this regards, seven major supporting action plans were designed.

Some details of each of these action plans are summarized here for reference: Agriculture

Rice cultivation will be promoted in 6 large plains. Priority will be given, through, to the low plains around Vientiane. Promotion will focus on the expansion of cultivation of both rice and other agricultural products to supply factories, as well as support for livestock breeding.

Forestry

Surveying and zoning of forests would be clearly made. There will be such forest zones as a national park reserved zone, a watershed zone, a commercial forest zone, etc. Commercial wood as raw material for factories will be planted and natural reforestation is to be conducted in previously damaged zones, especially watershed areas. All are included in the plan covering up to 10,000 hectares. The areas the industry is allowed to conduct activities include only those in which irrigation dams and new roads will be constructed.

Industry

Focus will be made on the development of electricity, the surveying of minerals, and the construction of agro-products processing factories.

Transportation, Postal Services and Construction

The plan emphasizes improvement of highways and routes between provinces as well as bridge and road repaired throughout the country. Projects expected to be completed under this plan are Route 13 in the north, Route 20, a bridge crossing the Theun River and 15 small and medium bridges.

Aviation

This plan constitutes the upgrading of the Wattay Airport in Vientiane to reach international standards. Airports in Luangprabang, Savannakhet, Pakse and other specified provinces would also be improved. Meanwhile, cooperation and investment in both local and foreign aviation would be promoted.

Commerce

Manufacturing for export will be promoted as well as production for import substitutes. Commerce is to be extended into remote areas. Exporting and importing are targeted to be increased to 7% and 10% respectively and the trade deficit to remain 9% of GDP.

Tourism

Organizations responsible for tourism activities would be improved and there will be much more promotion of investment in tourism. The number of tourists is expected to go up by 33%.

Finance and Banking

The tax system will be rearranged to be able to tax at 15% or more, the foreign exchange rate and the inflation rate are to be kept stable at the level of no more than 8-9%.

International Economic Relations

Expansion of cooperation with neighboring countries as well as others will be made and regulations, including foreign assistance requests, will be improved. Control over the utilization of loans and aid is to be made more efficient.

Foreign investment is to emphasize the processing industries of agro-and forest-products, industries for exports to employ local raw materials, the industries for import substitutes and the service industry. Organizations related to foreign investment will be restructured in such a way that the division of responsibility between urban and rural areas is clear-cut whereas the strict implementation of investment projects as contracted enforced.

Education

Elementary education is compulsory. The learning system as well as the syllabus will be reformed in such a way to as be in compliance with natural policy. The private sector will be allowed a much larger part in the development of education.

Rural Development

Rural life is to be upgraded, especially for those in the Xaysomboun Special Region, the Vientiane and Champasak plains and the border areas. Issues like deforestation are to be resolved.

Bureaucratic Reform

Provisions for governing civil servants, both in the urban and rural areas, are to be drafted. The structure and description of jobs at every level will be clearly improved. The training of officials is specified to be able to cope with future economic expansion.



SUMMARY OF THE ECONOMY IN 1997 AND FUTURE TRENDS

GROWTH INDICATORS

The Economy’s Expansion Rate

Since 1988, with the advent of the policy of New Thinking, the nation’s economic development has steadily been liberalized and is moving towards a market economy. Due to the natural expansion of the economy, Laos achieved a growth rate of 7.2% in 1997, compared with 6.9%, and 7% in 1995.

INVESTMENT SITUATION

Since 1988, in which Laos opened its doors to foreign investors, total investments from both the local and foreign investors was nearly US$ 7 million for a total of 636 projects. Of this total, US$ 4,614 million belonged to foreign investors. Of these, Thais were ranked first in terms of the amount of money invested, followed by American, South Korean, French, Australian and Taiwanese in that order. The total amount of investment by Lao investors in terms of joining capital in foreign investment projects was US$ 988 million.

The total value of foreign direct investment in Laos from 1988 up to the first half of 1997 is US$ 6,785 million. Promotion was focused on value-added product industries. This was due to the expectation that in the following 4-5 years the volume of foreign investment would have risen and value-added products would then be of much greater contribution to the economic development of the country.

The Lao Government also promoted foreign investment in infrastructure-related development, which received top priority from the government.

Dam construction projects receive much attention from foreign investors due to the major promotion efforts provided by the government. The benefits are rewarding to all sides as dam areas also open up forest tracts for exploitation. For Laos, the principal goal is to become Asia’s major electrical power exporter, earning US$ 2,500 million from its 30 hydroelectricity dams from the years 2000 to 2007. This would raise per capital income from today’s US$ 375 p.a. to US$ 500 p.a .


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For more information on doing business in Laos, the Embassy of Peoples Democratic Republic of Laos to the United States of America has kindly provided extensive information in the following Guide to Doing Business in Laos.  This can be viewed online or printed to assist you in your research and business efforts.

Copyright, 2007 Runckel & Associates
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