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Professor Martin Stuart-Fox
Of all the countries affected by the Asian economic crisis, Laos has been hardest hit. In a country that has always suffered a severe balance of payments deficit, inflation now seriously threatens to erode hard-won urban living standards. Over less than two years the value of the kip has declined from 1000 to US$1 to the current market rate of 8000. This has reduced salaries of the average civil servant to about US$5 per month. Ministers make US$12.
It was impossible before the crisis for any government or party official to live on his salary. Now it is even more essential to have an alternative source of income, and a working spouse. Corruption was always a problem: now it is endemic, as officials scrounge whatever means they can to survive.
The general state of the economy is not encouraging. Despite potentially rich natural resources, Laos depends largely on two export products: timber and electricity. Timber is a monopoly of the military, the proceeds of which go to pay the salaries of soldiers and to maintain officers in the lifestyle to which they have become accustomed. Present rates of exploitation cannot be much increased without threatening both the long-term viability of the industry and environmental degradation.
Hydro-electricity provides the best prospect both for growth and government revenue. The vast Nam Theun II dam in central Laos has cleared all the financial, technical and environmental impact hurdles, but will still only go ahead if purchase of power is assured. And that depends on the Thais. Thailand now wants to renegotiate contracts to lower prices and delay purchase until its economy improves.
Other sectors offer slight hope for economic recovery. Several textile factories have closed and the country's tiny light industrial sector is in the doldrums. Commercial agriculture is undeveloped, but for coffee. Exploration for minerals continues, especially gold, but world market prices will have to improve before major mining ventures become viable.
Faced with these problems, the Lao political leadership of ageing generals seems bereft of ideas, plans or policies - except to wait and hope that the eventual economic recovery of powerful neighbours - Thailand and Vietnam - will drag the Lao economy in their wake. Popular criticism is not a problem in a tightly controlled communist state, especially since the self-subsistent seventy percent of the population that are peasant farmers remain largely unaffected. So Laos will muddle through, even if it takes the best part of a decade to recover, dependent as ever on foreign aid and a friendly smile.
WATCHPOINT: Lao economic prospects will be heavily dependent on recovery in Thailand and Vietnam.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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