Laos, officially the Lao People’s Democratic Republic (Lao PDR), is a rapidly growing developing economy at the heart of Southeast Asia, bordered by Burma, Cambodia, China, Thailand, and Vietnam. Laos’ economic growth over the last decade, prior to the COVID-19 pandemic, averaged just below eight percent, placing Laos amongst the fastest growing economies in the world. Over the last 30 years, Laos has made slow but steady progress in implementing reforms and building the institutions necessary for a market economy, culminating in accession to the World Trade Organization (WTO) in February 2013. The Lao government’s commitment to WTO accession and the creation of the ASEAN Economic Community (AEC) in 2015 led to major reforms of economic policies and regulations with the aim to improve Laos’ business and investment environment. Nonetheless, within ASEAN, Laos ranks only ahead of Burma in the World Bank’s “Ease of Doing Business’ rankings. The Lao government is increasingly tying its economic fortunes to the economic integration of ASEAN and export-led development and is prioritizing the digital economy, logistics, green growth, and more sustainable development.
Prior to Laos’ second COVID lockdown in September 2021, the World Bank predicted that Laos’ economic growth rate would increase from 0.5 percent in 2020 to 3.6 percent in 2021 on the prediction that Laos would soon open its borders. However, limited fiscal and foreign currency buffers have posed a challenge to the government’s ability to mitigate the economic impacts of COVID-19. Overall, the pandemic has resulted in an intensification of the country’s macroeconomic vulnerabilities. When compared to other countries in the region, foreign direct investment (FDI) inflows to Laos have been relatively stable and driven by the construction of infrastructure and power projects. In 2022, if the pandemic is brought under control and the government effectively implements fiscal support measures, international and Lao economists project GDP growth will reach four percent.
The exploitation of natural resources and the development of hydropower has driven rapid economic growth over the last decade, with both sectors largely led by foreign investors. However, because growth opportunities in these industries are finite and employ few people, the Lao government has recently begun prioritizing and expanding the development of high-value agriculture, light manufacturing, and tourism, while continuing to develop energy resources and related electrical transmission capacity for export to neighboring countries.
The Lao government hopes to leverage its lengthy land borders with Burma, China, Thailand, and Vietnam to transform Laos from “land-locked” to “land-linked,” thereby further integrating the Lao economy with the larger economies of its neighbors. The government hopes to increase exports of agriculture, manufactured goods, and electricity to its more industrialized neighbors, and sees significant growth opportunities resulting from the Laos-China Railway, which connects Kunming in Yunnan Province, China with Laos’ capital city Vientiane. Some businesses and international investors are beginning to use Laos as a low-cost export base to sell goods within the region and to the United States and Europe. The emergence of light manufacturing has begun to help Laos integrate into regional supply chains, and improving infrastructure should facilitate this process, making Laos a legitimate locale for regional manufacturers seeking to diversify from existing production bases in Thailand, Vietnam, and China. New Special Economic Zones (SEZs) in Vientiane and Savannakhet have attracted major manufacturers from Europe, North America, and Japan. Chinese and Thai interests also have plans for new SEZ projects.
Economic progress and trade expansion in Laos remain hampered by a shortage of workers with technical skills, weak education and health care systems, and poor—although improving—transportation infrastructure. Institutions, especially in the justice sector, remain highly underdeveloped and regulatory capacity is low. Despite recent efforts and some improvements, corruption is rampant and is a major obstacle for foreign investors.
Corruption, policy and regulatory ambiguity, and the uneven application of laws remain disincentives to further foreign investment in the country. The Lao government is making efforts to improve the business environment. Its 8thfive-year National Socio-Economic Development Plan (NSEDP) (2016-2020) directed the government to formulate “policies that would attract investments” and to “begin to implement public investment and investment promotion laws.” The former prime minister, now president, has stated his goal was to see Laos improve its World Bank Ease of Doing Business ranking (Laos is currently ranked #154). In February 2018 and January 2020, the Office of the Prime Minister issued orders laying out specific steps ministries were to take to improve the business environment. These efforts made an impact. For example, due to streamlining of application processes, it now takes to less than 17 days to obtain a business license, compared to 174 days a few years ago.
In 2021, the former prime minister assumed the presidency of a new administration with a stated focus on economic issues. This continuity provides a foundation to build on Laos’ previous National Socio-Economic Development Plan. Laos’ new development plan, the 9th NSEDP (2021-2025), will be published later this year with a focus on graduating Laos from Least Developed Country (LDC) status in 2026 and become an upper-middle income country. One of the government’s priorities is to diversify the economy and improve the investment climate encouraging both domestic and foreign investment to accelerate economic growth. The government is focused on a post-COVID economic recovery through policies to achieve macro-economic stability, connectivity through improved infrastructure, and green, sustainable growth initiatives. Sectors such as agriculture, natural resource development, and tourism are emphasized in the draft 9th NSEDP plan. Further development of investment-related policies and other regulations can be expected from the new government.
The current administration remains active in firing or disciplining corrupt officials, with the government and National Assembly in 2019 disciplining hundreds of officials for corruption-related offenses. Despite these efforts, Laos’ Ease of Doing Business ranking fell from 139 in 2016 to154 in 2020. The multiple ministries, laws, and regulations affecting foreign investment in Laos creates confusion, and requires potential investors to engage either local partners or law firms to navigate a confusing and cumbersome bureaucracy.
|TI Corruption Perception Index||2021||128 of 180||http://www.transparency.org/research/cpi/overview|
|Global Innovation Index||2020||117 of 132||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2021||N/A||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2020||$ 2,520||https://data.worldbank.org/indicator/NY.GNP.PCAP.CD|