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Laos - The Economy


IN THE EARLY 1990s, the Lao People's Democratic Republic (LPDR, or Laos) was among the ten poorest countries in the world, according to a World Bank ranking, with a per capita gross national product (GNP) in 1991 of just US$200. Its labor force is poorly trained and educated, its infrastructure severely damaged from years of inadequate maintenance, and its ability to feed itself precariously dependent upon the weather. Development expenditure is financed almost entirely by foreign aid, and, by 1991, exports financed only 40 percent of imports. By the beginning of the 1990s, however, Laos, while still an impoverished country highly dependent on foreign aid for its development, had taken some essential steps toward a free-market economy.

Despite the many obstacles to economic development that remained in the early 1990s, however, in little more than a decade, starting in 1979, the government had deliberately shifted the focus of its economic policy away from socialist goals and has made great strides. Many state-owned enterprises, which had been draining the nation's treasury through subsidies, were privatized, and tax collection was boosted tremendously, helping to bring the fiscal deficit under control. Liberal laws on foreign investment and trade were passed, precipitating a surge of investment activity. Prices of many commodities were freed from government controls, domestic transport restrictions were lifted, and the cooperative farming system was ended.

The Seventh Resolution, passed at a plenary session of the Central Committee by the ruling Phak Pasason Pativat Lao (Lao People's Revolutionary Party--LPRP) in late 1979, marked the start of the country's shift toward a market-oriented economy. The resolution affirmed the government's commitment to begin to open to a market economy, as the necessary path to economic development. Since its inception in 1975, the government, in theory, has recognized private property and private enterprise. However, they were not encouraged, and, in fact, the provincial governments of Louangphrabang (Luang Prabang) and Phôngsali abolished private trade and traders through 1987. The objectives of the First FiveYear Plan (1981-85) included self-sufficiency in food production, defined as the equivalent of 350 kilograms of paddy rice and other foodstuffs per capita per year, and the collectivization of agriculture. The plan also focused on developing industrial activity, increasing trade with Thailand, improving the shattered rural infrastructure, and increasing export revenues, all goals that received much greater attention as the tentative steps toward a market-oriented economy continued.

However, growth during the plan period was slower than had been anticipated, and the government decided to take bolder steps toward reform. At the Fourth Party Congress in 1986, the Second Five-Year Plan (1986-90) was endorsed, and new national development strategy was introduced. The New Economic Mechanism, as this program was called, was designed to expose the economy to world market forces gradually, without sacrificing the nation's goal of food selfsufficiency . To implement this plan, many facets of the economy were decentralized. Although the central authorities continued to set policy guidelines, responsibility for administering and financing many programs for economic and social development was delegated to the provinces. About a year after the congress, the new policy was promulgated into regulations, and changes became rapid and extensive.

The second plan also sought to encourage foreign and private investment. Among the reforms called for under the New Economic Mechanism were the lifting of numerous trade regulations and the creation of opportunities for foreign investment. In a major shift from its economic dependency on Vietnam, Laos began to look toward Thailand--and, later, toward other socialist countries--for private investment, technology transfer, and trade. Through the improvement of transportation and communications systems, encouragement of the private sector, and development of the agroforestry industrial processing sector, it was hoped that nonfood imports could be reduced and exports increased, thus improving the balance of payments. Although Laos showed an overall balance of payments surplus in 1985 and 1986, the current account deficit had been increasing, and during those years exports financed less than 30 percent of imports. The government took a new interest in environmental protection and sought to limit the practice of swidden, or slash-and-burn cultivation as a means of protecting its forest resources and encouraging cash cropping. It proved difficult, however, to bring about such a change because of negative effects on upland farmers' livelihoods. Traditional swidden agriculture does not adversely affect forest resources to the same extent that commercial exploitation does.

Many reforms were carried out successfully during the late 1980s, but the Second Five-Year Plan ended with economic performance lagging well behind planned achievements. Not least among the disappointments was the need to import rice during the droughts of 1987 and 1988, underlining the fact that an objective identified over ten years earlier--sustained self-sufficiency in food--had not been met.

Despite economic failures, however, the Fifth Party Congress, held in March 1991, reaffirmed the government's commitment to the development of a market-oriented economy. The Third Five-Year Plan (1991-95) proposes a "strategy" that aims to continue progress made under the previous two plans: improving the country's infrastructure, promoting exports, and encouraging importsubstitution industries. In August 1991, the Supreme People's Assembly (SPA) approved a new constitution--the first since the previous constitution was abolished in 1975. Among its provisions is the affirmation of the right to private ownership; the words "democracy and prosperity" replaced "socialism" in the national motto.




Agriculture in the Economic System

At least 5 million hectares of Laos's total land area of 23,680,000 hectares are suitable for cultivation; however, just 17 percent of the land area (between 850,000 and 900,000 hectares) is, in fact, cultivated, less than 4 percent of the total area. Rice accounted for about 80 percent of cultivated land during the 1989- 90 growing season, including 422,000 hectares of lowland wet rice and 223,000 hectares of upland rice, clearly demonstrating that although there is interplanting of upland crops and fish are found in fields, irrigated rice agriculture remains basically a monoculture system despite government efforts to encourage crop diversification. Cultivated land area had increased by about 6 percent from 1975-77 but in 1987 only provided citizens with less than one-fourth of a hectare each, given a population of approximately 3.72 million in 1986. In addition to land under cultivation, about 800,000 hectares are used for pastureland or contain ponds for raising fish. Pastureland is rotated, and its use is not fixed over a long period of time.

In the early 1990s, agriculture remains the foundation of the economy. Although a slight downward trend in the sector's contribution to gross domestic product (GDP was evident throughout the 1980s and early 1990s--from about 65 percent of GDP in 1980 to about 61 percent in 1989 and further decreasing to between 53 and 57 percent in 1991--a similar decrease in the percentage of the labor force working in that sector was not readily apparent. Some sources identified such a downward trend-- from 79 percent in 1970 to about 71 percent in 1991--but both the LPDR's State Planning Commission and the World Bank reported that 80 percent of the labor force was employed in agriculture in 1986. Available evidence thus suggests that the percentage of the labor force employed in agriculture in fact remained relatively steady at about 80 percent throughout the 1970s and 1980s.

Agricultural production grew at an average annual rate of between 3 and 4 percent between 1980 and 1989, almost double its growth rate in the preceding decade, despite two years of drought-- in 1987 and 1988--when production actually declined. Paddy rice production declined again in 1991 and 1992 also because of drought. By 1990 the World Bank estimated that production was growing at an increasingly faster rate of 6.2 percent. Increased production, long one of the government's goals, is a result in part of greater use of improved agricultural inputs during the 1970s and 1980s. The area of land under irrigation had been expanding at a rate of 12 percent per annum since 1965, so that by the late 1980s, irrigated land constituted between 7 and 13 percent of total agricultural land. Although still a small percentage, any increase helps to facilitate a continued rise in agricultural productivity. Smallscale village irrigation projects rather than large-scale systems predominate. Use of fertilizers increased as well, at an average annual rate of 7.2 percent; given that commercial fertilizer use had been virtually nonexistent in the late 1970s, this, too, is an important, if small, achievement in the government's pursuit of increased productivity. In addition, the number of tractors in use nearly doubled during the decade, from 460 tractors in 1980 to 860 in 1989.

<>Crops Other than Rice
<>Agricultural Policy


Laos - Crops


Most farmers employ one of two cultivation systems: either the wet-field paddy system, practiced primarily in the plains and valleys, or the swidden cultivation system, practiced primarily in the hills. These systems are not mutually exclusive, especially among the Lao Loum or lowland Lao in areas remote from major river valleys. Swidden cultivation was practiced by approximately 1 million farmers in 1990, who grew mostly rice on about 40 percent of the total land area planted to rice.

Swidden agriculture is highly destructive to the forest environment, because it entails shifting from old to new plots of land to allow exhausted soil to rejuvenate, a process that is estimated to require at least four to six years. The extent of destruction, however, depends on the techniques used by the farmers and the overall demographic and environmental circumstances that relate to the length of the fallow period between farming cycles. Further, traditional agricultural practices allowed for forest regeneration and not the stripping of forest cover, which is a current commercial logging practice. Swidden fields are typically cultivated only for a year, and then allowed to lie fallow, although Kammu (alternate spellings include Khamu and Khmu) anthropologist Tayanin Damrong reports that at least through the 1970s some fields were planted two years in a row. An increasing population, encroachment on traditional swidden farming areas by other villages or ethnic groups, and gradual deterioration of the soil as a result of these pressures have led to increasingly frequent shortfalls in the harvests of midland swidden farmers.

The swidden farming process begins with clearing the selected fields in January or February, allowing the cut brush and trees to dry for a month, and then burning them. Rice or other crops are seeded by dibble shortly before the rains begin in June, and the growing crops must be weeded two or three times before the harvest in October. Swidden farming households are seldom able to harvest a rice surplus; in fact, the harvest usually falls one to six months short of families' annual rice requirements.

Erosion from deforestation is a direct and serious result of swidden agriculture. By the 1960s, however, swidden agriculture was not a threat to the forest environment. Moreover, swidden cultivation is less productive than wet-field cultivation because it requires between ten and fifty times as much land per capita--if one includes the fallow fields in the calculation--yet produces just 20 percent of the national rice harvest. Mature fallows or young forests have other benefits such as wild food gathering, animal habitat, and watershed protection. Government policy following the introduction of the New Economic Mechanism discourages the practice of swidden cultivation because it works against the goals of increased agricultural productivity and an improved forest environment. Also, the government wishes to control the population in close clusters. However, farmers have resisted the change, largely because wet-field cultivation often is not feasible in their areas and because no alternative method of subsistence has presented itself, especially given the lack of markets and infrastructure necessary for cash-cropping to be an attractive, or even a possible, venture. Further, government traders' defaults on purchase contracts with farmers in the late 1980s made farmers with better physical access to markets skeptical about cash-crop production. In general, despite government efforts to increase export-oriented agricultural production, the "rice monoculture" persisted in Laos through the early 1990s.


Laos - Rice


Rice is the main crop grown during the rainy season, and under usual conditions, rainfall is adequate for rice production. However, if rain ceases to fall for several weeks to a month at a critical time in the rice growing cycle, yields will be significantly affected. Upland rice varieties, although adapted to a lower moisture requirement, are also affected by intermittent rains because farmers have no means of storing water in their fields.

Rice accounted for over 80 percent of agricultural land and between 73 percent and 84 percent of total agricultural output of major crops throughout the 1980s, except in 1988 and into the early 1990s. Rice paddies also yield fish in irrigation ditches in na (lowland rice fields). Production of rice more than doubled between 1974 and 1986, from fewer than 700,000 tons to 1.4 million tons; however, drought in 1987 and 1988 cut annual yields by nearly one-third, to about 1 million tons, forcing the government to rely on food aid for its domestic requirements. In 1988 and 1989, some 140,000 tons of rice were donated or sold to Laos. With improved weather and the gradual decollectivization of agriculture--an important measure under the New Economic Mechanism--rice production surged by 40 percent in 1989. The increase in production reflected the importance of the agricultural sector to the economy and was largely responsible for the economic recovery following the droughts. In 1990 production continued to increase, although at a much slower rate, and the point of self-sufficiency in rice was reached: a record 1.5 million tons. Sufficiency at a national level, however, masks considerable regional differences. The southern Mekong provinces of Khammouan, Savannakhét, and Champasak regularly produce surpluses, as do Vientiane and Oudômxai provinces, but an inadequate transportation system often makes it easier for provinces with shortages to purchase rice from Thailand or Vietnam than to purchase it from other provinces.

According to some sources, the percentage of the labor force engaged in rice production declined gradually, by over 30 percent between 1986 and 1991, a trend encouraged by the government because it tended to increase export-oriented production. However, some feared this trend would threaten sustained self-sufficiency in food, another key goal of the government. Sustained selfsufficiency however, more likely depends on a continued increase in the use of agricultural inputs such as fertilizers and improved strains of rice, and on the implementation of extension and research services rather than on the actual number of workers involved in planting.

The overall increase in rice production throughout the 1980s was the result of higher productivity per hectare, rather than of an increase in the land area planted in rice; in fact, the area planted in rice decreased during the 1980s, from 732,000 hectares in 1980 to 657,000 hectares in 1990. Because farmers make little use of fertilizers or irrigation, however, most land still yielded only one annual crop in the early 1990s, despite government efforts to foster the use of double-crop rice.


Laos - Crops Other than Rice


Only about 150,000 hectares were planted with major crops other than rice in 1990, an increase from approximately 80,000 hectares in 1980. Principal nonrice crops include cardamom--sometimes considered a forestry product--coffee, corn, cotton, fruit, mung beans, peanuts, soybeans, sugarcane, sweet potatoes, tobacco, and vegetables. The only crop produced for export in substantial quantities is coffee. Although the total area planted to these crops is small relative to the area planted to rice, it increased from 10 percent of total cropped area in 1980 to about 18 percent in 1990. Although the increase in part reflects the drop in rice production during the drought years, it also demonstrates some success in the government's push to diversify crops. Yields for all the major crops except coffee, vegetables, and cardamom--for which some figures are only available from 1986--increased gradually between 1980 and 1990, most notably corn (by 70 percent), fruit (by 65 percent), peanuts (by 28 percent), and mung beans (by 25 percent). Despite increasing agricultural output, however, Laos is still an importer of food, heavily dependent on food aid.

Statistics for agricultural production do not reflect either the nature of the subsistence agricultural economy or the importance of opium to the hill economy. Opium, legal in Laos and once even accepted as a tax payment, is a lucrative cash crop for the Lao Sung--including the Hmong--who have resisted government efforts to replace opium production with the production of other goods, for which the market is much less profitable. Opium production provides the funds necessary to the household when there is a rice deficiency, common among swidden farmers. Crop substitution programs, however, have had some effect, and to some extent tougher laws against drug trafficking and government cooperation on training programs have also contributed to reduced output. In 1994 Laos remained the third largest producer of illicit opium for the world market, according to United States drug enforcement officials. These officials estimate the potential yield of opium declined 47 percent--from 380 tons in 1989 when a memorandum of understanding on narcotics cooperation between the United States and Laos was signed--to an estimated 180 tons in 1993. The 22 percent decline in opium production in 1993 from 1992, however, was largely attributed to adverse weather conditions.


Laos - Livestock


The government encourages animal husbandry through programs for cattle breeding, veterinary services, cultivation of pasture crops, and improvement of fish, poultry, and pig stocks. Between 1976-78 and 1986-88, the stock of all farm animals increased greatly: cattle by 69 percent to 588,000 head; goats by 128 percent to 73,000; pigs by 103 percent to 1.5 million; horses by 59 percent to 42,000; buffaloes by 55 percent to 1 million; and chickens by 101 percent to 8 million. Increases, however, would, have been significantly greater without diseases and a persistent shortage of animal feed. Disease is a serious problem: there is a significant annual mortality of chickens and pigs in most villages, and buffaloes are also frequently subject to epidemics.


Laos - Fishing


For many Laotians, freshwater fish are the principal source of protein; per capita consumption averages 5.1 kilograms annually. Fishpond culture had begun in the mid-1960s, and production--mainly carp raised in small home lots--grew an average 30 percent annually thereafter, the highest rate in Asia between 1975 and 1985. The Mekong districts in the south have especially high potential for greater increases in fish production. In the 1982-84 period, the average annual catch was 20,000 tons, all of which was consumed domestically.


Laos - Forestry


In the 1950s, forests covered 70 percent of the land area; yet, by 1992, according to government estimates, forest coverage had decreased by nearly one-third, to just 47 percent of total land area. Despite the dwindling expanse, timber--including ironwood, mahogany, pine, redwood, and teak--and other forestry products-- benzoin (resin), charcoal, and sticklac--constitute a valuable supply of potential export goods. The forest has also been an important source of wild foods, herbal medicines, and timber for house construction and even into the 1990s continues to be a valued reserve of natural products for noncommercial household consumption. Since the mid-1980s, however, widespread commercial harvesting of timber for the export market has disrupted the traditional gathering of forest products in a number of locations and contributed to extremely rapid deforestation throughout the country.

Deforestation increased steadily throughout the 1980s, at an annual average rate of about 1.2 percent in the first half of the decade according to the United Nations (UN) and other monitoring agencies. This rate represents the destruction of about 150,000 to 160,000 hectares annually, as compared with annual reforestation of about 2,000 hectares. The government, however, reported a deforestation rate double this figure. Deforestation results from clearing forestland for shifting cultivation and removing logs for industrial uses and fuel. The volume of logs (roundwood) removed for industrial purposes increased by about 70 percent between 1975- 77 and 1985-87, to about 330,000 cubic meters; however, this volume was dwarfed by that removed for domestic (fuel) purposes. Between 1980 and 1989, the volume of logs removed for fuel increased by about 25 percent, to about 3.7 million cubic meters; only about 100,000 cubic meters were removed for industrial purposes. By 1991 these figures had increased to approximately 3.9 million cubic meters and 106,000 cubic meters, respectively.

Following the introduction of the New Economic Mechanism, decentralization of forest management to autonomous forest enterprises at the provincial level encouraged increased exploitation of forests. At the central and provincial levels, autonomous forest enterprises are responsible for forest management.

Timber resources have been commercially exploited on a small scale since the colonial period and are an important source of foreign exchange. In 1988 wood products accounted for more than one-half of all export earnings. In 1992 timber and wood products were almost one-third of the total principal exports.

The government needed to reconcile its opposing objectives of decentralized forestry management and environmental protection. In January 1989, the government imposed a ban on logging--initially announced in January 1988 as a ban on the export of unprocessed wood--although exemptions are granted on a case-by-case basis. This measure was followed by the imposition of high export taxes on timber and other wood products, included in the June 1989 tax reforms. Toward the end of 1989, logging was again permitted, but only based on quotas extended to individual forestry enterprises. In response to the restrictions, production of unprocessed logs (roundwood or timber) decreased slightly in 1989, but, according to the Asian Development Bank, production more than recovered the following year. The effect of the restrictions is most clearly shown in the export statistics for 1989--exports of timber and wood products had decreased by 30 percent from the previous year. In 1991 a new decree banned all logging until further notice, in hopes of controlling widespread illegal logging and subsequent environmental destruction. However, there was little practical impact, and illegal logging remains widespread. The smuggling of logs to Thailand also is significant.


Laos - Agricultural Policy


Agriculture, the most important sector of the economy, clearly benefited from the introduction of the New Economic Mechanism. The changes positively affected performance by establishing a consistent policy that induced increased agricultural production over a number of years--before the droughts in 1987 and 1988-- particularly in paddy production.

In June 1988, in line with the policies described by the New Economic Mechanism, the government passed a resolution to reform the agricultural sector. As announced at the Fourth Party Congress in 1986, the principal goal was to reorient the sector toward a market economy. The abolition of the much hated agricultural tax as well as the socialist restrictions on marketing helped to create necessary incentives for farmers.

The major change was in the pricing policy. The practice of setting low producer prices for a wide range of crops was ended, boosting incomes in rural areas. (In 1987 the procurement price of rice was only 30 percent of the market price).

Other changes were implemented. Restrictions on internal trade of agricultural products were removed allowing free markets to operate, at least for important crops such as rice. Laws also were enacted to guarantee farmers' rights to private ownership of land, including the right to use, transfer commercially, and bequeath. Tax exemptions for specified periods also were decreed.

The reforms emphasize the government's belief that further increasing and diversifying agricultural production requires the participation encouragement of the private sector. Food security, as always, remains a key objective, but the focus of the new agricultural policy is on the production of cash crops that can be processed--to increase their value--and then exported. The means for reaching that goal include the popular 1989 measure of abandoning the poorly developed attempts at establishing the socialist infrastructure of agriculture--a cooperative farming system.

The primary objective of the cooperative farming system, based on the Vietnamese model, had been to help the nation achieve selfsufficiency in food. Reflecting the government's pursuit of this goal, the number of government-assisted cooperative farms nearly tripled between 1978, when the drive to reorganize agriculture began, and the introduction of the New Economic Mechanism in 1986. At that time, cooperative farms numbered about 4,000 and employed about 75 percent of the agricultural labor force although most were cooperatives only on paper, and there was no practical cooperative management. By 1988, however, employment in the cooperatives had decreased and included only 53 percent of all rural families and about half of all rice fields.

The distribution and sale of collectively managed land to families began in 1989. Most families in the old settled areas had their original land returned, which they still recognized. By mid1990 most state farms and agricultural cooperatives had been disbanded. This move, in conjunction with the removal of many restrictions on food prices and the distribution of agricultural goods, helped to precipitate a modest growth in agricultural output of about 7 percent in 1990.

At the Fifth Party Congress in March 1991, the government reiterated the basic objective of its agricultural policy: a shift from subsistence production to cash crop production through crop diversification and improved linkages to export markets. Although rural farmers have limited experience in marketing their farm produce and are cautious about participating actively in the market, they are beginning to produce and sell their specialized crops and livestock and buy manufactured goods on a regular basis. At the congress, the government also affirmed its support for the private ownership of land and its intent to protect farmers' rights to long-term use of land, to bequeath land to their children, and to transfer their land rights in exchange for compensation. These assurances, among other improvements in the economic atmosphere, are an attempt to make Laos more attractive to foreign investors.


Laos - Environment


Laos suffers from a number of environmental problems, the most important of which are related to deforestation. Expanding commercial exploitation of the forests, plans for additional hydroelectric facilities, foreign demand for wild animals and nonwood forest products for food and traditional medicines, and a growing population put increasing pressure on the forests. Deforestation not only destroyed at least 150,000 to 160,000 hectares of valuable forest annually in the 1980s, but also caused erosion--leading to siltation of reservoirs, navigation channels, and irrigation systems downstream--and reduced groundwater levels. The practice of swidden cultivation not only contributes greatly to deforestation, but, in 1987, also made Laos one of eleven countries in the world that together were responsible for over 80 percent of net world carbon emissions amounting to a per capita emission of ten tons annually, compared with the world average of 1.17 tons per capita. Further, during the Second Indochina War (1954-75), Laos was heavily bombed and left with tons of unexploded ordnance and bomb craters that ultimately altered the local ecology.

The government's desire to preserve valuable hardwoods for commercial extraction and to protect the forest environment, as well as international concern about environmental degradation and the loss of many wildlife species unique to Laos, have motivated efforts to prohibit swidden cultivation throughout the country. This policy has a significant effect on the livelihoods of upland villagers dependent on swidden cultivation of rice. Traditional patterns of village livelihood relied on forest products as a food reserve during years of poor rice harvest and as a regular source of fruits and vegetables. By the 1990s, however, these gathering systems were breaking down in many areas. The government has restricted the clearing of forestland for swidden cropping since the late 1980s and is attempting to resettle upland swidden farming villages in lowland locations where paddy rice cultivation is possible. However, both the government's inability to ensure compliance with the measures and the attraction of Thai money for forest products inhibits implementation of the restrictions.

Although a lack of environmental planning, surveys, and legislation diminishes the likelihood of substantial improvement of the environment in the near future, a number of decrees were issued to encourage environmental protection. These decrees include general principles for protecting forestland; prohibitions on cutting certain tree species; regulations on hunting, fishing, and the use of fire during the dry season; and regulations on the management and protection of forestland, wildlife, and fish. The use of manure and compost encouraged to help rejuvenate soil. Burning also encourages many forms of forest growth.

The government's commitment to environmental protection is affirmed in the constitution and in its policy of finding new occupations for swidden cultivators. In 1991 the Ministry of Agriculture and Forestry established a land use program under the National Forest Resource Conservation and Development Strategy. The program reserves 17.0 million hectares, including 9.6 million hectares for forest protection, 2.4 million hectares for wildlife reserves and national parks, and 5.0 million hectares for production. However, the commitment is mainly on paper: the highest priority park--Nam Theun--will be flooded by a hydroelectric dam by 2000.




Industrial Output and Employment

Estimates of the industrial sector's contribution (including construction) to GDP vary, but most sources find it to be slowly increasing, from about 10 percent in 1984 to about 17 percent in 1993. The World Bank estimated the sector's contribution at 14 percent in 1989. Most sources also indicated an increase in the percentage of the labor force employed in the sector, from about 5 percent in 1970 to about 7 percent in 1980. However, World Bank figures available in mid-1993 indicated that the sector employed only just over 2 percent of the labor force in 1986. All sources agree that the growth of the industrial sector had increased throughout the 1980s; the World Bank estimated an average annual growth rate of 3.4 percent between 1980 and 1989, despite negative growth in the drought years of 1987 and 1988 during which exports of hydroelectricity were substantially lowered. By 1990 the growth rate had leveled off, from a surge of nearly 32.0 percent in 1989 to about 12.7 percent in 1992. The virtual end of the command economy fueled the 1989 industrial boom and supported steady growth for at least the medium term. Principal activities in the industrial sector include manufacturing, construction, mining, processing agricultural and forestry goods, and producing hydroelectricity.

<>Industrial Policy


Laos - Manufacturing


There is a paucity of any real industry in Laos outside of timber harvesting and electricity generation. Nonetheless, "manufacturing" represents about half of all industrial activity. Other manufacturing activities include the production of agricultural tools, animal feed, bricks, cigarettes, detergents, handicrafts, insecticides, matches, oxygen, plastics, rubber footwear, salt, soft drinks and beer, textiles and clothing, and veterinary products. Manufacturing employed only approximately 2 percent of the labor force in 1991. A few factories in the Vientiane area have been rehabilitated since the mid-1980s. As of 1994, the garment industry was "booming" with investment from China, France, Taiwan, and Thailand; there were more than forty garment factories in the Vientiane area.

The manufacturing subsector was composed of over 600 factories and plants, of which one-third were state-owned in 1991. Most manufacturing is for domestic consumption and is centered in the Vientiane area. As of mid-1994, there was little manufacturing in or near Laotian towns. In 1989 and 1990, there was a rapid increase in cottage industries such as cotton spinning and weaving, traditional village crafts, basket-weaving, and the production of alcoholic beverages. As part of the informal business sector, however, cottage industries are not covered by national statistics.

Between 1980 and 1990, over 80 percent of manufacturing was in the production of clothing, food and beverages, metal products, tobacco products, and wood products. Industrial roundwood production increased 71 percent between 1975- 77 and 1985-87 to an annual average of 330,000 cubic meters and then declined to 309,400 cubic meters in 1990. Sources differ over the growth trend for lumber production; the UN reported a decrease in production of 61 percent between 1980 and 1988, and the Asian Development Bank showed an increase of nearly 400 percent in the same period. Cigarette production rose from 1.10 billion units per year from 1981-84; to 1.12 billion units in 1985 and an estimated 1.20 billion units per year for 1986-90. Statistics over a lengthy period of time for the production of other major goods are not readily available; however, the Asian Development Bank estimated that the value of metal products, food and beverages, and clothing (at 1991 prices) had increased greatly between 1980 and 1990, by 55 percent, 195 percent, and 196 percent, respectively. A general upward trend in the growth of production is borne out by official LPDR statistics from the first half of the decade. The World Bank reported that the manufacturing subsector grew by 35 percent in 1989, slowing to about 4 percent the following year.


Laos - Energy


Mountainous terrain and heavy annual rainfall give Laos considerable hydroelectric potential. The Mekong River and its tributaries in Laos have an estimated hydroelectric potential of between 18,000 and 22,000 megawatts, or roughly half that of the river as a whole. The remaining potential belongs to Cambodia and other riparian countries. Total installed capacity in 1991 was 212 megawatts, the majority of it hydroelectric, or only about 1 percent of the potential.

Production of hydroelectricity, the country's major export until 1987, expanded slowly throughout the 1980s, from 930 thousand megawatt-hours in 1980 to about 1.1 million megawatt-hours in 1989, an increase of about 17 percent. The majority of electricity produced--approximately 75 to 80 percent, as of 1992--is exported to Thailand, which has an agreement to purchase all surplus electricity. The remainder is supplied to power networks for domestic consumption. Through 1986 the sale of electricity to Thailand was the country's most important source of foreign exchange. Despite increased production, in 1987 hydroelectricity yielded its place as the principal export to wood products, because of the drought, which lowered water levels, and a reduction in the unit price of electricity to Thailand. By 1991 a new agreement between Laos and Thailand had raised the unit price of electric power.

The largest hydropower facility in Laos is the Nam Ngum dam, sited on the Nam Ngum River, north of Vientiane. The Nam Ngum plant began operation in 1971 with an installed generating capacity of thirty megawatts; by 1987 additional turbines had increased capacity to 150 megawatts. In the early 1970s, the Nam Ngum facility provided electricity to Vientiane; the supply was gradually extended to surrounding villages on the Vientiane plain. As of the early 1990s, approximately 80 percent of the power produced at Nam Ngum was exported to Thailand; some was diverted to the south for town and village electrification.

A second hydroelectric dam was completed at Xeset near Saravan (Salavan) in southern Laos in 1991. The Xeset plant has an installed capacity of twenty megawatts.

About twenty smaller hydropower facilities and diesel plants supply additional power. Since the mid-1980s, Thakhek and Savannakhét had access to a regular power supply through a repurchase agreement with Thailand whereby a cable under the Mekong diverts power from the Thai electrical grid; villages along Route 9 east of Savannakhét have been receiving electricity since the late 1980s. Louangphrabang has seasonal access to power from a hydroelectric dam supplemented by diesel generators. A power transmission line from Nam Ngum to Louangphrabang is scheduled for completion in the mid-1990s and will bring electrification to many villages near Route 13 that previously relied on kerosene lamps and battery-operated florescent lights.

Hydroelectric capacity will further increase as a result of agreements signed either for construction of new facilities or for conducting feasibility studies for additional sites. Thailand is the primary investor in the hydroelectric sector; Australia, Denmark, Finland, Japan, Norway, and Sweden also have companies with interests in various projects.

As of 1992, other provincial centers relied primarily on diesel generators, which are run for three to four hours nightly and serve only a fraction of the surrounding population. Most district centers do not have electricity other than small private generators that light the houses of a few dozen subscribers for several hours each evening. Automobile batteries and voltages inverters are used as a means of supplementing the limited hours of power. These devices enable Laotians to watch television and listen to stereo cassette players, even in remote locations.

Despite assistance from the International Development Association, the Asian Development Bank, the United Nations Development Programme (UNDP), and other donors to increase rural electrification services, national consumption of electricity increased slowly. The average annual increase between 1970 and 1980 was 14.5 percent--an overall increase of 287 percent- -to 325 million kilowatt-hours. After 1980 the growth of consumption slowed greatly, to an average annual rate of just 1.5 percent, reaching 365 million kilowatt-hours in 1988. Per capita consumption was just 93.6 kilowatt-hours, one of the lowest rates in the region.

According to the World Bank, energy consumption grew at an average annual rate of 4.2 percent between 1965 and 1980, slowing to 1.8 percent in the 1980-90 period. Fuelwood constitutes about 85 percent of total energy consumption. Per capita consumption of fuelwood is between one and three cubic meters annually, accounting for more that ten times the consumption of wood for commercial purposes. Total usage--including fuelwood and charcoal--was 3.9 million cubic meters in the 1985-87 period, a 21 percent increase over the 1975-77 period. In 1985 hydroelectric power accounted for approximately 5 percent of annual energy consumption. Most consumption was in Vientiane; domestic use accounted for about 89 percent in 1983 and industrial use, only about 10 percent. The transportation sector, especially civil aviation, which consumed imported petroleum products, accounted for the remaining 5 percent of energy consumption.

The cost of fuel imports--primarily from the Soviet Union until 1991--has placed a heavy burden on the economy, constituting nearly 19 percent of all imports in 1986. In 1989 approximately 124,000 tons of petroleum fuel were imported, an increase of nearly 40 percent over the preceding year.

In 1987 an oil pipeline of 396 kilometers was laid from Vientiane to the border with Vietnam, close to the port of Vinh, facilitating the import of oil from the Soviet Union. The pipeline's capacity is 300,000 tons annually, considerably in excess of the annual national oil consumption rate of approximately 100,000 tons.


Laos - Mining


Assessments of mineral reserves are imprecise, because by 1991 most of the country had not been geologically surveyed in a detailed manner. According to 1991 estimates, deposits of gemstones, gold, gypsum, iron, lead, potash, silver, tin, and zinc have relatively high commercial development potential, but mining activity is on an extremely small scale. In addition, Laos has small deposits of aluminum, antimony, chromium, coal, and manganese, as well as potential for oil and natural gas. In 1989 exploration agreements for oil and gas were signed with British, French, and United States companies.

Mining operations are carried out by state mining enterprises, and supervised by the Department of Geology and Mines and small- scale miners. Production of tin--the principal mineral export-- decreased 50 percent between 1975 and 1988, to about 240 tons. Gypsum production increased 167 percent between 1980 and 1988, to about 80,000 tons. Salt production increased 233 percent between 1981 and 1988, to eleven tons. Coal production increased more than 600 percent between 1982 and 1988, to about 800 tons. In addition to commercial enterprises, some individual households pan for alluvial gold on the Mekong as well as on small streams during the dry season to supplement household incomes.

Further development of the mineral sector is contingent upon the willingness of private companies to invest. However, the lack of adequate data, a trained labor force, dependable and adequate infrastructure, and legislation (a mining code was being drafted as of 1991) inhibit private companies from major investments, although private investment was growing as of 1993.


Laos - Tourism


In line with the government's desire to increase foreign exchange earnings, Western tourists were first permitted to enter Laos in 1988, although just 600 persons visited, well within the official limit of 1,000. The following year, 2,600 tourists visited, and in 1990, the figure increased by 130 percent, to approximately 6,000 tourists. The Ministry of Trade was assigned responsibility for the development of the tourism industry in 1989. In the following year, the government monopoly on the industry was removed, and nine private tourist agencies were authorized. As of 1992, tourism was somewhat limited to group travel. However, if an individual has a Laotian sponsor who provides individual sponsorship assurances, it is possible to receive a visa without being a member of an organized tour group.


Laos - Industrial Policy


The organization of the industrial sector prior to 1986 was centered on the state. Between 1979 and 1984, most state-owned enterprises incurred huge losses, and industrial sector output decreased by 10 percent. At the same time, gross industrial production began to shift slightly, to the private sector: private industrial output as a percentage of gross industrial output doubled to 8 percent between 1980 and 1983, whereas state output decreased slightly from 93 percent to 89 percent. In the early 1980s, a slow increase in the number of private enterprises began, reflecting both the government's newly relaxed policy on the private sector and the private sector's greater efficiency and profitability compared to that of the state sector.

Following the introduction of the New Economic Mechanism, the private sector's involvement in industry increased even more, as industrial management was decentralized and most prices--except prices of basic utilities, air transport, postal service, and telecommunications--were freed from price controls. In 1988 Decree 19 granted state-owned enterprises expanded financial and managerial responsibilities.

As a result of these changes, some state-owned enterprises were forced to curtail production sharply or close down entirely, precipitating a short-run drop in manufacturing output. It was not until March 1990, however, that the government provided a legal basis for the actual privatization of state-owned enterprises, through the promulgation of Decree 17. Under this decree, most state-owned enterprises were transformed into enterprises under other forms of ownership, through leasing, sale, joint ownership, or contracting with workers' collectives. Exceptions included enterprises deemed necessary to the nation's security or economic and social health, such as utilities and educational facilities. The extension of credit to unprofitable state-owned enterprises was discontinued, and state-owned enterprises were required to set prices and salaries at free market levels. By the end of the year, the private sector's contribution to net material product had increased dramatically, to 65 percent.

The government reported at the Fifth Party Congress in 1991 that its "disengagement" policy was succeeding; two-thirds of the approximately 600 state-owned enterprises have been either partially privatized or leased to domestic or foreign parties. The remaining state-owned enterprises were granted greater autonomy in making investment decisions and setting input and output targets, in hopes of improving their productivity.




The Banking System

In March 1988, Decree 11 on the reform of the banking system was passed, separating commercial bank functions from central bank functions. The Vientiane branch of the old State Bank, the Banque d'État de la République Démocratique Populaire du Laos (RDPL), became the central monetary agency. In June 1990, the Central Banking Law was passed, establishing the Bank of the Lao People's Democratic Republic, or Central Bank, to replace the State Bank. Under this law, the Central Bank assumes responsibility for regulation and supervision of commercial and regional banks; maintenance of foreign exchange reserves; issuance and supervision of money for circulation; licensing, supervision, and regulation of financial services; and management of the monetary and credit system. The Central Bank has about ninety regional branches; as of 1991, the government was considering separating these branches into three regional banks, serving the southern, northern, and central regions.

Other branches of the former State Bank were transformed into autonomous commercial banks to promote private investment. These banks are responsible for accepting savings deposits from enterprises, government departments, and individuals, and for granting credit to state entities, joint ventures, and individuals for capital investment and business start-ups or expansion. Commercial banks are restricted from granting credit to economic units experiencing deficits and losses. These banks do not receive subsidies, although they do render 60 percent of their profits to the government.

By 1991 Laos had seven commercial banks, including the Joint Development Bank--a Lao-Thai joint venture--and six wholly stateowned banks. Government policy encourages privatization of these six banks. However, in part because of the absence of laws governing banking activities and in part because of the relatively small size of the economy, foreign bankers do not express much interest in these ventures.

The Foreign Trade Bank (Banque pour le Commerce Extérieur Lao-- BCEL), a subsidiary of the Central Bank, is the country's foreign exchange and foreign trade bank. By Decree 48 of July 1989, the Central Bank is assigned sole responsibility for setting and managing the exchange rate. BCEL was granted autonomy in November 1989 and was charged with handling foreign exchange transactions relating to trade; as of 1991, BCEL had arrangements with sixtyfour banks internationally. However, a Foreign Exchange Decree was scheduled to go into effect soon after 1991, allowing all commercial banks already authorized to deal in foreign exchange to carry out foreign exchange transactions themselves, thus removing BCEL's monopoly on such activities. Information on the status of this decree was unavailable as of mid-1994.

Responsibility for state-owned enterprise debts was transferred to the commercial banks, giving them enormous liquidity problems. To alleviate the precarious situation, in 1989 the government allowed foreign banks to begin operations in Laos. That October the Joint Development Bank became the first private commercial bank permitted to operate since 1975, followed soon thereafter by the Thai Military Bank. In addition, new reform measures stipulate that enterprises will have to clear all debts owed to the banks before being considered for new loans. In 1990 the Asian Development Bank granted Laos a soft loan of US$25 million to recapitalize the banking system.

Interest rates on commercial bank deposits with the Central Bank are uniform across the country and are generally higher than rates for enterprises depositing at the commercial banks. After August 1989, only minimum interest rates are set by authorities; banks are allowed to set specific rates on their own. Interest rates on deposits vary from bank to bank, depending on the type and currency of deposits. The annual rate on kip deposits at the end of 1991 was between zero and 1.2 percent for most banks; fixed deposits in kip earned between 16 and 24 percent annually, and deposits in United States dollars at some banks, including BCEL, earned 7 percent annually. Rates for loans depend on the term and currency of the loan and on the sector for which the investment is intended. Loans for the agriculture and forestry sectors carry rates ranging from 7 to 12 percent, for example, and loans for the services sector carry rates between 12 and 30 percent.


Laos - Money and Prices


By Decree 14 of March 1988, prices of most goods are no longer set by the government; exceptions include basic utility and mineral prices. Instead, a new system of "unified prices"--free market prices--was instituted. As a result, prices of rationed and subsidized goods such as rice, sugar, cloth, and petroleum increased, and procurement prices were raised by 50 percent to 100 percent.

In addition, in 1988 the wages of state employees, previously paid through coupons redeemable for subsidized goods at state stores, began to be gradually remonetized. Very high inflation rates soon caused a real drop in annual wages, however, and low rates of tax collection gave the government less revenue to spend on wages. As a result, large arrears built up on salaries that are quite small. In 1990 salaries were increased by 83 percent, and arrears began to be paid off, contributing to the increase of 65 percent in government expenditure. Once paid, however, salaries almost immediately go again into arrears. Moreover, the salary increase is not sufficient for state employees to recoup real losses from inflation.


CITATION: Federal Research Division of the Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.

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