Laos: Economy

Laos is a poor, landlocked country with an inadequate infrastructure and a largely unskilled work force. The country's per capita income in 2010 was $986 (est.). Agriculture, mostly subsistence rice farming, dominates the economy, employing an estimated 75% of the population and producing 29% of GDP. Domestic savings are low, forcing Laos to rely heavily on foreign assistance and concessional loans as investment sources for economic development. In 2010, donor-funded programs accounted for approximately 8.5% of GDP and 90% of the government’s capital budget. In 2010, the country's foreign debt was estimated at $5.8 billion.

Following its accession to power in 1975, the communist government imposed a harsh, Soviet-style command economy system until 1986, when the government announced its "new economic mechanism" (NEM). Initially small in scale, the NEM was expanded to include a range of reforms designed to create conditions conducive to private sector activity. Prices set by market forces replaced government-determined prices. Farmers were permitted to own land and sell crops on the open market. State firms were granted increased decision-making authority and lost most of their subsidies and pricing advantages. The government set the exchange rate close to real market levels, lifted trade barriers, replaced import barriers with tariffs, and gave private sector firms direct access to imports and credit. These economic reforms led to increased availability of goods and economic growth that has continued to the present day.

The economy of Laos is essentially a free market system with active central planning by the government, similar to the Chinese and Vietnamese models. However, unlike China or Vietnam, Laos has negligible industrial capacity, a primitive and underproductive system of agriculture, and increasingly relies on its rich natural resources to earn much needed-foreign reserves. In particular, the hydropower, mining, precious metals, and timber sectors have attracted major investment from Thailand, Vietnam, and in the last decade, China. China is now the largest source of foreign direct investment (FDI) in Laos.

The government relies heavily on foreign assistance for public investment, and despite escalating revenues from the natural resources sector, shows no signs of significantly reversing this trend. The seventh 5-year plan (2011-15) calls for a budget of U.S. $5 billion for public investment, U.S. $3.8 billion (76%) of which would come from foreign assistance. Tourism remains a bright spot of the Lao economy, offering real future potential, solid growth, and substantial job creation.

International indices rate Laos poorly on transparency and ease of doing business. Endemic corruption and poorly developed commercial law continue to hamper economic development. Laos has begun the World Trade Organization accession process, with the intention of joining that organization as soon as possible.

Sources:
CIA World Factbook (September 2009)
U.S. Dept. of State Country Background Notes (June 2011)