Laos, officially the Lao People’s Democratic Republic (Lao PDR), is a 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 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. However, international companies continue to report significant hurdles navigating Laos’ business environment. The Lao government is increasingly tying its economic fortunes to the economic integration of ASEAN and export-led development and has prioritized the digital economy, logistics, green growth, and more sustainable development, in addition to continuing to develop the agricultural and resource extraction.
Although Laos reopened borders in 2022, the World Bank lowered Laos’ 2022 economic growth rate to 2.5 percent from its initial prediction of 3.6 percent. Limited fiscal and foreign currency buffers have posed a challenge to the government’s ability to mitigate the economic impacts of COVID-19 and by global economic disruptions, including Russia’s war in Ukraine. The Lao currency, the kip, depreciated more than 45 percent against the U.S. dollar at one point during 2022, according to the Economist Intelligence Unit, and year-on-year inflation exceeded 40 percent in December 2022. These factors have exacerbated the country’s macroeconomic vulnerabilities. Compared to other countries in the region, foreign direct investment (FDI) inflows to Laos have been relatively stable, driven primarily by infrastructure construction and power projects. In 2023, international and Lao economists project GDP growth will reach almost four percent, primarily due to the resumption of tourism and the reopening of China.
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 higher-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, Cambodia, 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 neighbors, and sees significant growth opportunities resulting from the Laos-China Railway, which opened in December 2021 and connects Kunming in Yunnan Province, China with Laos’ capital city, Vientiane. A small number of 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 manufacturers from Europe, North America, and Japan, and Chinese and Thai interests also have plans for additional SEZ projects. Investors should be aware, however, that some SEZs in Laos are associated with transnational organized crime and one, the Golden Triangle SEZ, is affiliated with entities subject to U.S. Treasury sanctions.
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, lack independence, often operate without transparency, remain highly underdeveloped and have low regulatory capacity. Despite recent efforts and some improvements, corruption is rampant and is a major obstacle for foreign investors.
Corruption, policy and regulatory ambiguity, and uneven application of laws are disincentives to further foreign investment. 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 an opaque and cumbersome bureaucracy.
The government is making efforts to improve the business environment. In 2021, the former prime minister assumed leadership of a new administration with a stated focus on economic issues. Laos’ current development plan, the 9th NSEDP (2021-2025) focuses on graduating Laos from Least Developed Country (LDC) status by 2026. To achieve this goal, the government continues to prioritize diversifying the economy and improving the investment climate to encourage domestic and foreign investment to boost growth. Starting with the 8th five-year National Socio-Economic Development Plan (NSEDP) (2016-2020), the government has sought to formulate “policies that would attract investments” and to “begin to implement public investment and investment promotion laws.” In February 2018, and again in 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 have borne fruit; 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 on average a few years ago.
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. The draft 9th NSEDP plan prioritizes sectors such as agriculture, natural resource development, and tourism.
|TI Corruption Perceptions Index||2022||126 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2020||154 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2022||112 of 132||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2022||N/A||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2021||USD 2,500||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|