All of the communist countries that have now moved towards open markets have had to experience difficult transitions. Each communist economy has had it’s own unique set of circumstances and Laos is no exception. What makes Laos peculiar is its high dependence on agriculture. As a communist state it is slow to industrialize, so the transition to a market economy is starting with a very low financial baseline. Over 75 percent of the labor force are involved in agriculture and the most prevalent crop is rice. Only a third of the population live in cities.
A Commitment To Economic Growth
The development process is now underway, but starting with so little economic diversity and low savings holds things back. The government began decentralizing economic control and spurring private enterprise in 1986. A single-party communist government at the head of a largely subsistence rice-farming, landlocked country isn’t a formula for high growth and yet they are managing about 8 percent industrial growth per year. Even with this growth, Laos remains one of the poorest countries in Southeast Asia.
As a sector of Gross National Product agriculture generates about 25 percent of the economic wealth, but as I mentioned above, it engages 75 percent of the labor force. Those numbers add up to subsistence farming. So the government is basically attempting to transform subsistence farming into an industrial economy. It takes time. So far hydroelectric power generation has offered a means of growth. Laos now generates excess power and sells the excess to Thailand, China and Vietnam. The problem is that hydro-power generation requires large expensive capital projects before any electricity is produced. And once the power generators are in place they don’t require a big labor force for operation. In essence the country is investing in infrastructure that is the foundation of further economic development. Currently about 75 percent of the population have access to electricity.
Development Along Two Paths
Thus far, the source of capital for these hydroelectric projects has been foreign investment, although in 2011 the government opened the first national stock exchange, so there is the beginning of a local investment market. There are a lot of problems to be addressed, but the first problem is finding ways to develop infrastructure so there is a foundation for economic growth. That infrastructure includes a need for roads, expanding the electrical grid, internet development, and more water and sewage development. The urban base of the country is small at about 34 percent, but the cities are where the economy is developing. The most prominent industries, aside from subsistence rice farming, are: mining of copper, gold and gypsum, timber, electric power generation, agricultural processing, rubber, construction, garments, cement, and tourism.
Another problem is how to transform an agricultural society into a more prosperous society. It may not mean following a traditional industrial development path, instead helping farmers gain access to the financing they need to improve their local economies around agriculture. To accomplish this more simplified investment methods and procedures are needed and expanded banking presence in rural farming areas is required. The government is committed to continuous economic growth and has significantly brought down the level of poverty from above forty percent to about 25 percent. The World Bank has written that Laos’ goal to lift itself out of the United Nations list of least developed countries by 2020 is a reasonable goal.
Growing steadily, but not broadly is a challenge. Thirty percent of the countries GDP goes to the top ten percent of the population. It’s one of the side-effects of economic development; when the country grows those at the center of the growth tend to benefit disproportionately. The most interesting feature of Laos’ economic development is the possibility for rural farmers to improve their lives without having to tie themselves to a process that leads them off of their farms. The financial infrastructure for an urban population is far different than that of rural farmers. The farming life has traditionally passed along a way of living form one generation to the next through families and tribes. The urban life passes along financial instruments like insurance, pensions, education, and health care systems. It could be far less expensive to build on the rural traditional culture in agricultural rather than migrate people into cities and find lifestyles for them. For now it seems Laos is doing a little along both of these development paths.
It’s possible Laos could find a development pattern which keeps rural farmers rural and allows their few cities to grow without overbuilding. By doing this they may be able to construct all the infrastructure needed around the country and allow development to occur in gradual steps. It seems that’s what they are attempting, but in pursuing this approach the downside is that the two paths generate dramatically different financial results. The city and industry path would grow wealthy while the rural farm path would find their way out of poverty and onto a modest growth path. It’s difficult to have a small wealthy part of society and a large low income group. For this to not happen will probably require the communist government to be replaced with a multi-party government system that allows both rural and urban groups to compete for the power to run the government.