by Piyaporn Hawiset
17 March 2003
Laos, South-East Asia's most secretive economy, started to suffer slowing economic growth thanks to the Sars virus and sharply rising inflation. In a rare and detailed report on Laos, the World Bank said the Laotian economy was likely to expand 5.5% in 2003 and 6% in 2004, slower than it had originally expected. At the same time, a surge in government borrowing, a sliding exchange rate and higher food prices following severe flooding had seen annual inflation rise to 18% in March 2003 from 7% a year earlier. Meanwhile, potentially productive forests covered only 40% of the country's 23 million hectare land area--way below the government's target of 70% cover by 2020 and down from 70% in the late 1940s.
Although the World Bank report did not directly mention it, investigators into the massive logging operations across Southeast Asia said there was strong evidence that logging was damaging Laotian forests just as badly as it was in Cambodia and other neighbouring countries.
Heading for market
But the news was by no means all bad. The World Bank said the government's effort to introduce market mechanisms to its formerly command economy was beginning to bring down poverty rates, and the mining industry, it believed, was flourishing. Companies prospecting for gold in Laos included Australia's Oxiana Resources, which raised an extra US$39 million from its shareholders on May 14 to fund further exploration.
And the US government was considering normalising trade with the country, close on three decades after the Pathet Lao government took power following the chaos engendered across the region by the fighting in Vietnam caused by the interference by the United States into the peoples' self-determination.
Change
Despite its secretive nature, Laos derives a sizable proportion of its foreign exchange earnings from tourism. That, the World Bank said, was one reason for the growth shortfall in 2003.
On other fronts, though, things were looking more healthy, as agriculture recovered from a production nosedive in 2001 and the service sector--aside from tourism-linked activities--was growing at more than 7% a year. Tax revenues, better systems for lending money and other reforms meant "the overall economic outlook for Lao PDR [People's Democratic Republic] was improving," the Bank said.
And the "New Economic Mechanism", as the market-directed policy switch was called, combined with poverty-reduction strategies agreed with the Bank, meant that in the five years to 2002 the number of people living on less than US$2 a day declined from 82% to 77%.
Slow to change
But these limited successes may still be challenged, the World Bank warned. Large loans in foreign currency had been awarded by state-owned banks to clients without proper security, it said. This clients are in fact members of the country' economic and political elite, meaning much of this money would eventually be stolen and left to the ordinary taxpayers to repay to the lenders. The poor might be marginally better off, but the richer end of Laotian society had profited much more, widening inequality.
And although the country was getting better at collecting its taxes, it still lagged most of its regional peers, while spending just as much.