Laos: Maintaining Economic Reform Focus

2005

Nick Freeman

It is proving to be a relatively busy and fruitful year for the Lao economy. The Oxiana-run gold and copper mine at Sepon appears to go from strength to strength. And as has been widely reported by the media of late, the World Bank has finally given the green light to commence construction of the mighty US$1.2bn Nam Theun II hydropower project. The risk guarantees that the World Bank and ADB will provide will be critical for the project's developers in raising the large amounts of loan financing necessary to fund the project from international markets.

For a country with such a small domestic economy, just a few large projects of this kind can add significantly to Laos macro-economic growth figures. At the very least, they should increase the country's foreign exchange earnings and help mitigate the fairly consistent trade deficit that Laos runs. Indeed, the impact of such major projects as Sepon can be felt right through Lao society, even 600km away in the capital city. Owners of local firms in Vientiane are girding themselves for the inevitable departure of some of their more capable employees to Nam Theun II and other foreign-invested projects, lured by the high salaries and other opportunities that they anticipate will be on offer.

The challenge of retaining capable staff is a perennial problem for local private firms, which find it hard to compete with the privileges and security that come from being employed in the state sector, and the higher salaries on offer from members of the extensive international donor community. But staff retention is certainly not the only problem that local private firms encounter. The World Bank's most recent 'Doing Business' survey placed Laos second from bottom in its rankings for the average time needed to incorporate a new company. Taking up to 198 days to register a firm in Laos, comprising nine different procedures, only Haiti appears to have a longer incorporation process.

However, things may be about to improve for local enterprises. Last year saw the passing of an SME Decree by the government, which sets out a broad agenda for supporting the development of small and medium sized firms. Earlier this year, an SME promotion and development office was formally established, attached to the Ministry of Industry & Handicrafts. And with IFC support, a Lao Business Forum has also recently been unveiled, which should create a formal channel for improved dialogue between businesses and government. Looking ahead, a new Business Law is also expected to be passed by the National Assembly towards the end of the year. This revised law will replace a rather out-of-date 1994 law, and is expected to be much more robust.

All this comes as welcome news. But one temptation that should be resisted is to allow the gains from large scale mining and power projects to distract policy-makers from the business liberalisation measures needed to allow local firms to burgeon (particularly as we move closer towards the next Party Congress, tentatively scheduled for March 2006). This important part of the economic reform agenda definitely remains a work in progress.

WATCHPOINT: Look out for increased foreign investment activity in Laos, as the business environment improves and investor sentiment rises in tandem.

 

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