Under the Radar: Laos’ new PM pushes for regional integration

Under the Radar: Laos’ new PM pushes for regional integration
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Laos’ new leader Thangloun Sisoulith is banking on regional integration and economic diversification, as Laos chairs ASEAN in 2016.

Having assumed office in April, and as Laos chairs ASEAN for 2016, the country’s new Prime Minister, Thangloun Sisoulith (left) has indicated his willingness to refresh relations with Laos’ neighbours. His predecessor, Thongsing Thammavong’s rule was marked by corruption, human rights abuses, and ill-advised efforts to borrow billions for massive infrastructure projects. Such projects often conflicted with the interests of fellow ASEAN members, notably Cambodia, with icy relations ensuing due to disputes over dam construction.

While corruption and human rights concerns remain, Thangloun has sought to moderate his approach with regards to economic development, with a greater emphasis on social and environmental concerns. For instance, Thangloun recently ordered a halt to new mining concessions in the heavily polluted Attapeu province, as well as a crackdown on illegal mining and the corrupt timber quota system which only exacerbates the problem. Furthermore, Thangloun has announced that Laos will implement the UN’s education goals.

Hopes and hiccups for regional integration and development

Laos is one of the fastest growing nations in Southeast Asia and the Pacific region, with its GDP increasing 12 times over since 2000, reaching $12.3 billion in 2015. The country’s rapid growth has until now over-emphasized mining and hydroelectric projects, both spurred by Chinese investment. The slowdown in China has already impacted bilateral trade which fell from $3.6 billion in 2014 to $2.78 billion in 2015.

Alongside increased economic ties with China, ongoing integration and trade among ASEAN member states which stood at $2 trillion in 2015, has benefitted Laos. As part of the ASEAN Economic Community launched last year, Laos is reducing regional barriers and tariffs, with the aim to help create a single market and production base for the $2 trillion, 622 million people zone. To this end Laos has already established more than ten special economic zones, employing 11,000 workers.

With the end of the commodity super-cycle, as well as slowing Chinese growth, Laos must continue to diversify its economy, and strengthen ties with ASEAN to balance reliance on China. To this end Laos has recently signed trade agreements with Thailand and Cambodia, and is working on border infrastructure projects with Myanmar, China, and Thailand. The fact that Thangloun is pro-Vietnamese also aids ASEAN cooperation, although this stance could draw the ire of Beijing, as Chinese-Vietnamese relations suffer from territorial disputes in the South China Sea.

Laos will need to carefully balance its loyalties, because despite new ASEAN deals, China remains by far the largest investor in Laos, with $6.7 billion spread over 760 projects: China also constitutes 40% of Laos external public debt. That being said, Laos stands to benefit from Chinese and ASEAN efforts to develop the Mekong River Economic Zone. Indeed, in December 2015, China and Laos began a $6 billion, 427 kilometer high speed rail project connecting the Lao capital Vientiane to the Chinese border.

It is to be noted that while this mega-project has gone ahead, some uncertainty has emerged since its inception concerning Chinese investment trends and slowing growth. This project also highlighted a weakness for Laos, namely its lack of skilled labour, as China has had to send 100,000 workers to man the project. Similarly, 60% of the workers in Laos’ aforementioned special economic zones are foreigners, putting economic growth at the risk of labour migration, and freedom of movement agreements.

Moreover, Laos’ construction industry is rife with corruption, a blemish which even Thangloun cannot avoid.

Of note is the recent news that a subsidiary of Lao-Chinese owned Lao World Engineering and Construction has withdrawn its bid to upgrade a road between Lao National University and Vientiane. While the project was commissioned under the previous government for $54 million, the Thangloun administration cut the price to $45 million, allocating the remainder to immediate rainy-season related repairs. The deal broke down as the company held out for $49 million, with the government refusing to budge.

An added element to this debacle is the fact that critics have noted that the price of the project is double what it ought to be, and have complained about a lack of transparency in the bidding process.

Furthermore, another hurdle for regional integration can be found on the Lao-Burmese border, as the Myanmar-Lao Friendship Bridge has remained closed since its completion due to a border dispute. The bridge had been built in 2015 to facilitate cross-border commerce, as well as connect Myanmar’s Kyaukphyu deep sea port and special economic zone to the Haiphong seaport in Vietnam.

This route was scheduled to be developed by a consortium of Chinese companies, yet progress has been slow, and with the bridge closed, Myanmar must continue to receive Chinese imports via the lawless Mong La border point. Said region is controlled by the United Wa State army, a faction at war with Myanmar’s central government, and one that imposes a tax on goods travelling through the area, one that Burmese exporters refuse to pay. This in turn forces Burmese exports on a roundabout trip via Thailand.

Tourism a bright spot for Laos

In recent years, Laos has made a concerted effort to boost tourism, and a new cross-border agreement with Thailand is designed to boost regional hospitality links and eco-tourism. Tourism accounts for 15% of Lao GDP and 13% of national employment, with 4.6 million tourists visiting the country in 2015. Laos is seeking to further increase these numbers with the $61 million expansion of Wattay international airport in Vientiane, scheduled for completion in 2018. New travel agreements with regional carriers in 2016 have already reaped benefits, with Thai Air Asia setting up daily flights from Bangkok in March. The airline is currently acquiring permission to add a second daily flight.

Much of Laos’ tourism push has benefitted local communities with tourism minister Bosengkham Vongdara explaining that “Laos has placed greater emphasis on eco-tourism since 2009. As a result […] villages earn more income directly from tourists by selling food and homemade products as well as providing tourism related services.” To aid the sector, PM Thangloun has ordered a crackdown on unlicensed operators, as said shady operations led to the deaths of over a dozen tourists in 2011.

Laos stands to benefit greatly from greater regional integration, but only if it can ensure cordial relations with its neighbours, and succeed in diversifying its economy and trade partners.

Under the Radar uncovers political risk events around the world overlooked by mainstream media. By detecting hidden risks, we keep you ahead of the pack and ready for new opportunities.

Under the Radar is written by GRI analyst Jeremy Luedi.

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