Reuters
November 1, 1999

VIENTIANE, Nov 1 (Reuters) – Laos, one of Asia’s poorest nations, is sliding deeper into a socio-economic mess that can only worsen unless urgent government action is taken to stem the tide, international donors and diplomats say.  The gloomy outlook in turn means Laos, despite an abundance of cheap labour, will likely find it harder than ever to attract foreign companies seeking reasonably stable places to build new manufacturing plants, or to bring in investment to develop its potential as a tourist destination.

In Laos hyperinflation and a violently fluctuating currency have combined with some of the worst social indicators in the East Asian region — close to those of least-developed African countries, according to the World Bank.

In September, the beleagured kip currency swung between 5,300 and 9,000 to the U.S. dollar in a matter of weeks.

Bank Lao PDR officials said the currency stabilised around the 7,000-8,000 range after the central bank hiked interest rates on three-month certificates of deposit in late October to a hefty 60 percent per annum to pull in cash. But donors fear that is not a long-term solution to the problem.

And hyperinflation is still galloping on at nearly 150 percent a year, although its effects are felt more in the capital Vientiane and other urban areas than in the countryside, according to a senior central bank official.

Donor agency officials and diplomats in Vientiane said Laos fell into a slide after being buffeted by the Asian financial crisis, which rocked its top trading partner and neighbour Thailand.

WEAK MACROECONOMIC MANAGEMENT

The situation subsequently worsened because of weak macroeconomic management and a lack of decisive, speedy decision-making on the part of the nominally communist government led by President Khamtay Siphandone and his politburo, they said.

Per capita income in Laos, which has a population of around five million, is about $300 now, down from $400 in 1997, according to government and donor sources.

Infant mortality at 101 per 1,000 live births in Laos is much worse than the average 39 in the East Asia and Pacific region and slightly above the average 53 in Sub-Saharan Africa. Life expectancy is 53 years in Laos versus 69 in the region and 52 years in Africa.

Agriculture accounts for over 50 percent of the country’s gross domestic product and the sector employs around 86 percent of the labour force.

To try to jerk the government awake to the dire socio- economic plight, some donors like the World Bank have cut development assistance and tied aid increases to decisive action.

“We are not ganging up against them and we are not pulling out of Laos. What we are trying to do is to get some reaction,” said Linda Schneider, the World Bank’s local representative.

The World Bank has extended over $576 million in development credits to Laos since 1977. But the Bank this year cut aid to $25 million annually from around $50 million in 1998.

The authorities have been been gradually introducing reforms after deciding in 1986 to move from a centrally planned economic system to a market-oriented one, but progress has been slow.

“There is a lack of decisive leadership here. Laos is not as open as it seems. A couple of years ago we were positive (about economic change), but now we are discouraged,” said a Western diplomat who declined to be identified.

“Change must come from within the leadership, but that does not seem to be a high priority for them,” the diplomat said.

DONORS SEEK SPEEDY GOVERNMENT REFORM

With the financial sector in a precarious state and half the population living below the poverty line, donors say authorities must quickly launch strong stabilisation measures to curb inflation, stabilise the kip over the long term and restore a growing loss of local and foreign confidence in the economy and currency.

A government source told Reuters the slowness of the authorities to take decisive measures was due to the constraints of collective leadership and slow acceptance of free market philosophy by some in the ageing communist military leadership.

“International donors must try to understand. For the government to embark on radical change is not easy because ours is a country just coming out of central planning,” he said.

“The bulk of the leadership is not market-economy trained. They cannot switch that easily. You need more time,” he added.

Part of the reason for the lack of urgency is that inflation has had less impact in rural areas because agriculture ensures basic food security for villagers, donors and officials said. Also, Laos is lucky in that it has little foreign debt, they said without giving details.

Imported products are scarce in Vientiane and expensive. But oddly, the French food and wine business thrives, supported by an affluent clientele of expatriate staff of international agencies.

The U.S. dollar is the preferred currency in the handful of local luxury hotels. A few new off-road vehicles and Japanese saloons ply the capital’s dusty streets, but otherwise most vehicles are aged and kept running by ingenious mechanics.

Producing virtually none of its own manufactured products, Laos continues to live in the orbit and shadow of Thailand, the far larger and more powerful economy across the Mekong River. Thai border traders supply most of the capital’s essentials but at the borders with Vietnam and China there is also bustling trade.