Laos: Power Trumps Reform
Ronald Bruce St John | December 28, 2006
There is broad agreement today that a market economy works well
within a Western democratic system, but there is much less consensus
over whether it can function effectively in an authoritarian state.
The contemporary political economy of the Lao People's Democratic
Republic (Lao PDR) provides an excellent case in point. The Lao
experience since the Communist takeover in 1975 suggests real limits
to a development model that combines single party rule with market
Checkered Economic Reforms
At the end of the Vietnam War, the Communist leadership of the
newly formed Lao PDR inherited a bankrupt state. The new regime
naturally viewed the suppression of the laissez-faire economy in
the former Royal Lao Government zone as a critical step in consolidating
its socialist revolution. But the ruling Lao People's Revolutionary
Party (LPRP) wisely delayed radical socioeconomic transformation,
pursuing gradual change. Economic reforms in the first years of
the revolution focused on marketing and distribution, property rights,
and agricultural taxation. The Lao PDR had little option but to
introduce taxation to replace the subsidies provided earlier by
the United States. Nevertheless, the levy of agricultural taxes,
without a determined effort to explain their necessity, soured relations
with the very peasantry the government claimed to represent.
After three years in power, the Lao government in 1978 suddenly
announced an ambitious program of agricultural collectivization,
a move precipitated by a decision in Hanoi to accelerate the pace
of Vietnamese collectivization. There was some limited rationale
for such a policy in southern Vietnam. However, there was no possible
justification for its introduction in Laos beyond the ideological
conviction of the Communist leadership in the superiority of the
socialist mode of production. Opposition to collectivization was
widespread, and within slightly more than a year, both Soviet and
Vietnamese officials were advising a rethink. In response, the Lao
government abruptly suspended the forced creation of agricultural
cooperatives in 1979. By 1980, as few as 65 of some 2,800 cooperatives
organized after 1978 retained any organizational basis.
When minor reforms introduced after 1980 were ineffective, the
LPRP leadership in 1986 launched a new round of economic reforms.
The New Economic Mechanism (NEM) called for the decentralization
of administrative controls on pricing, production targets, and wages.
The one market-one price principle, which abolished virtually all
administered prices as well as the multi-tiered exchange rate, was
the most far-reaching policy adopted under the rubric of the New
The Lao PDR continued to encourage private holdings in agriculture
after 1986. Consequently, private ownership by the early 1990s had
become the dominant form of property rights in the agricultural
sector. The situation in the industrial sector was somewhat different,
but private activities here also expanded with the privatization
of state enterprises and the emergence of new private firms. Unfortunately,
the laws and regulations necessary to support market institutions
and private property rights trailed the implementation of market-oriented
reforms. The government didn't pass contract, inheritance, and property
laws until mid-1990, and laws covering the settlement of commercial
disputes, bankruptcy, and liquidations passed only in 1991.
The financial crisis that hit Thailand in mid-1997 had a serious
ripple effect in Laos in 1997-98. Thailand was the principal trading
partner and major source of investment in Laos, and the macroeconomic
instability the former experienced triggered a sharp depreciation
in the Lao kipand a general loss of confidence in the Lao economy.
Lax macroeconomic management and weakening domestic reform in Laos
aggravated the situation. The Asian financial crisis also exposed
a major weakness in the Lao political system. Where the political
stability inherent in a one-party state facilitated reform policy
in the initial stages of the transition process, it became a hindrance
later when more balanced economic development was required.
Macroeconomic conditions improved at the beginning of the current
decade, and the Lao economy began a slow recovery in progress today.
Even as it regained some control over fiscal policy and followed
a tighter monetary policy, however, the Lao PDR remained reluctant
to implement needed structural reforms in areas like the state banking
system. Instead, interventionist policies continued to prevent free
market forces from reaching their full potential, and government
policies too often proved counterproductive.
Laos has enjoyed a long history of aid dependency since it achieved
independence in 1953. From 1968 to 1973, the Royal Lao Government
received over $74 million in aid annually, making Lao nationals
in the Vientiane-controlled zone among the highest per capita aid
recipients in the world. In the same period, guerrilla leaders in
the Pathet Lao-controlled zone presided over a primitive economy
that received large quantities of commodity assistance from China,
the Soviet Union, and North Vietnam. Aid dependency continued unabated
after the fighting stopped. The total value of commodity aid received
by Laos in 1975-78 was estimated at more than $100 million, with
project aid and technical assistance worth an additional $126.5
Ironically, the sources of revenue for the Lao PDR, as early as
1977, mirrored those of previous regimes in that foreign aid accounted
for 81% of the total. Some 60% of multilateral aid came from the
United Nations with the remaining 40% sourced largely from OPEC
financial agencies. The socialist states after 1975 were the primary
sources of bilateral aid, with the Soviet Union and its East Bloc
allies the dominant contributors. Sweden was the most prominent
Western donor with Australia, France, Japan, the Netherlands, and
the United Kingdom also contributing aid in the early years of the
revolution. The United States donated modest amounts of food aid
to Laos in 1977-79, despite the government's socialist orientation.
The Lao PDR remained heavily dependent on foreign aid throughout
the early 1980s with external assistance in 1982 estimated to be
some 80% of annual revenue. In the first half of the 1980s, the
International Monetary Fund (IMF) became the most important multilateral
donor, providing both technical and financial assistance. With U.S.
law prohibiting all but humanitarian aid, the United States dispatched
occasional shipments of food and medicine to Laos, often in support
of efforts to recover the remains of U.S. servicemen. Vientiane
was thus successful in replacing Washington with Moscow and its
socialist allies as primary donors. Nevertheless, it continued to
experience difficulty in absorbing aid and achieving the self-generating
growth envisioned in successive five-year plans.
Largely due to external events, the Lao aid picture changed dramatically
in the second half of the 1980s. The withdrawal of Vietnamese troops
from Laos in 1987 gave the Lao PDR greater latitude to develop closer
ties with neighboring states, especially China and Thailand. Laos
also continued its close relationship with the Soviet Union, the
source of approximately half the economic assistance it received
in 1988. In turn, Moscow continued to criticize Vientiane for its
inefficient use of Soviet assistance. The Soviet Union later welcomed
increasing Western influence in Laos at the end of the decade because
it offered a means to reduce Soviet investment at minimal political
With the subsequent collapse of the Soviet Union in the early 1990s,
Japan assumed the position of principal bilateral donor to Laos,
extending annual economic assistance approximating $50 million.
And Australia, France, Germany, and Sweden remained significant
Western donors. With the death in November 1992 of President and
LPRP Chairman Kaysone Phomvihane, a long-time Vietnamese ally, the
Lao PDR expanded commercial and diplomatic ties with China. While
Beijing provided aid, arms, and trade to Vientiane, its most important
role was to validate the path of the LPRP. If China could succeed
in pursuing market reforms and private ownership while preserving
one-party rule, why couldn't the Lao PDR do the same?
In the wake of the Asian financial crisis, Vientiane pursued closer
relations with neighboring authoritarian regimes, expanding its
ties with China as the latter moved to increase its influence in
Southeast Asia. The Lao PDR also turned to Vietnam, its traditional
patron, for guidance and aid. The most disappointing result of government
economic policy in the aftermath of the Asian financial crisis was
its continuing dependence on foreign aid. In June 2003, Russia agreed
to write off 70% of the loans outstanding from the Soviet era; nevertheless,
the Lao external debt remained at nearly $2 billion in 2004. Moreover,
a significant shift in the composition of aid to Laos occurred with
grants accounting for a smaller share and loans a larger one, threatening
the creation of yet another debt-strapped Third World state.
At the multilateral level, the IMF and the Asian Development Bank
(ADB) continued to provide economic assistance. And the World Bank,
in conjunction with the ADB, eventually approved the highly controversial
Nam Theun 2 hydroelectric project. Scheduled for completion in 2010,
the project will feed electricity to energy-hungry Thailand and
become a source of cash for the Lao PDR. Over the course of the
first 25 years of operation, Nam Theun 2 will earn an estimated
$2 billion. The extent to which the Lao government will use this
windfall for promised social and economic development remains to
Cosmetic Political Reforms
Since 1975, the Lao approach to reform can be described as perestroika
without glasnost, or economic change without political reform. As
the LPRP cast off Stalinist economic doctrines and took tentative
steps toward market reforms, it refused to share political power.
Its approach here again mirrored that of its mentor, the Communist
Party of Vietnam, in that it offered the Lao people increased economic
openness and prosperity in return for continued Communist control
of the political system.
At the Sixth Party Congress, held in March 1996, LPRP members advocating
a slower reform path with greater control over the effects of reform
policy succeeded in reinforcing their position in the Party. According
to one observer, it was a victory of “reformers by necessity”
over “reformers by conviction.” The Sixth Party Congress
also reaffirmed the authority of the LPRP as Party leaders successfully
argued that departure from one-party rule could lead to the political
instability often associated with countries in transition.
At the Seventh Party Congress, which opened in March 2001, the
LPRP adopted vague statements in support of market-friendly reforms
and improved governance to placate the international donors financing
some 80% of development expenditures. The Old Guard, however, retained
its firm grip on political power. In the National Assembly elections
held in April 2006, LPRP members won 114 out of 115 parliamentary
seats. At the same time, democracy and human rights groups in the
West, like Amnesty International, Freedom House, the Heritage Foundation,
and Human Rights Watch, regularly condemned the absence of basic
freedoms in the Lao PDR.
Revolution, 30 Years On
Thirty years after the Lao People's Revolutionary Party seized
power, the Lao People's Democratic Republic remains a Lesser Developed
Country (LDC). According to the World Bank, Laos is the poorest
and least developed country in East Asia with more than three-quarters
of its population living on less than $2 a day and about four-fifths
of the people engaged in subsistence agriculture. In this milieu,
economic and social inequalities are enormous and getting worse.
The poorest 10% of the population receives less than 4% of national
income while the richest 10% takes over 30%. With around 80% of
the people working the land, the economic fruits of the limited
reforms to date are concentrated in urban areas because urban Lao
are best positioned to take advantage of new economic opportunities.
Poverty alleviation has long dominated international discourse on
Laos and probably made the Nam Theun 2 project inevitable, but which
elements of the population stand to gain from hydroelectric revenues
remains a subject of debate. In a word, Laos is poor, and the bulk
of the population looks set to remain that way. The Lao government
boasts of plans to escape LDC status by 2020; however, its performance
over the last two decades suggests this goal is unrealistic.
In most countries, economics and politics are intrinsically related
dimensions of a single social reality, and the Lao PDR is no exception.
The economic crisis in Laos today is largely about how the country
is governed. Although the Communist Party has used economic performance
to retain governing legitimacy for over three decades, this development
model has real limits, as the experience in Vietnam and elsewhere
suggests. At some point, increased respect for human rights and
religious freedoms, in conjunction with real democratic reforms,
are certain to become a precondition for Party survival. Until that
time, foreign aid dependency, and the corrupt and wasteful use of
the aid extended, appear to have become permanent features of the
Lao political economy.
Ronald Bruce St John, an analyst for Foreign Policy in Focus (www.fpif.org),
has published extensively on Southeast Asian issues for almost three
decades. He is the author of Revolution, Reform and Regionalism
in Southeast Asia: Cambodia, Laos and Vietnam (Routledge, 2006).