Fifteen years after Laos first sought membership in the World Trade
Organization (WTO), the small landlocked Southeast Asian state finally became
the global trade body’s 158th member on February 2, 2013. While many have
touted the benefits of WTO membership for Laos, Vientiane must grapple with
several formidable challenges to realize these benefits in the coming years.
WTO membership is the latest in a
series of steps Laos has taken to increase its global profile. Other
initiatives included establishing a stock market in 2011 and hosting the
Asia-Europe Meeting (ASEM) in 2012.
Building on these previous
efforts, by joining the WTO Vientiane is binding itself to a political
framework designed to help countries realize gains from trade. In exchange for
lowering barriers and enacting other market reforms, it has been assured of
favorable trade terms and increased market access for its goods. Ideally, these
changes will help boost its U.S. $8 billion dollar economy, which has grown by
more than 7 percent annually over the past decade. Laos will also be able to
diversify its list of trading partners, which is now dominated by Thailand,
China and Vietnam.
Membership could also enhance
Vientiane’s geopolitical clout. As part of the WTO, tiny Laos, with a
population of just over 6 million, can improve its bargaining position with
larger counterparts by forming alliances within the grouping and using the
body’s dispute resolution mechanism to prevent discrimination it would
otherwise be powerless to stop.
Laos’ commitment to abide by the
WTO’s market access rules also increases its level of predictability in the
eyes of corporations assessing the risks of investing in frontier markets. In
fact, Vientiane hopes to attract U.S. $8 billion in investment between 2011 and
2015 in a bid to graduate from the UN’s list of Least Developed Countries
(LDCs), where it has remained since 1971, by 2020. Roughly a quarter of Laos’
population still lives below the poverty line, and the country ranks a dismal
138th out of 187 countries in the UN Human Development Index.
More broadly, WTO membership for
Laos will arguably benefit all ASEAN member countries. With Vientiane’s entry,
every ASEAN member country is now part of the global trading body. Brighter
economic prospects for Laos, combined with Myanmar’s recent opening, adds
momentum to the grouping’s goal of forming an ASEAN Economic Community by 2015,
which would bring 600 million people, or around one-tenth of humanity, into a
shared economy with an estimated worth of more than U.S. $2 trillion.
But if Laos wishes to realize the
full potential gains of WTO admission, it must overcome several major
obstacles. First of all, it must diversify its economy by shaking off its
overwhelming dependence on China, Thailand and Vietnam. This is easier said
than done. The three countries alone accounted for nearly 80% of Laos’ imports
and 70% of its exports in 2011, and about 60% of all foreign direct investment
in the country in 2010.
Laotians are especially concerned
about China’s growing footprint in the country. Beijing has led a string of
large-scale infrastructure projects, sparking labor, land, environmental and
macroeconomic concerns. A planned U.S. $7 billion, 260-mile Chinese railroad,
for instance, which would be the largest infrastructure project ever in Laos,
has come under scrutiny by experts who warn that the financing terms offered by
China’s Export-Import Bank to Laos were so onerous they put its “macroeconomic
stability in danger”.
Laos also needs to avert the
so-called resource curse. More than half of Vientiane’s total wealth comprises
natural resources, a dependency that may foster impressive short-term economic
growth but could also compound governance problems and exacerbate already high
levels of poverty and inequality. A recent study found that natural resource
development not only led to widespread resettlement and worsening food
security, but prevented Laos from improving on several key human development
indicators such as education and health.
Several other sectors of the
economy also need development. Although rice farming is the single most
important economic activity in Laos, accounting for about 40 percent of its
agricultural GDP, the government announced last month that rice production had
fallen short of targets for the second consecutive year, undermining its goal
of becoming a rice exporter by 2015.
Textiles are the biggest export
in the Laos’ growing manufacturing sector, but chronic labor shortages may
prevent the country from meeting its target of tripling clothing exports over
the next three years.
Indeed, Laos has a long way to go
towards cultivating a business-friendly environment. The country is notorious
for its underdeveloped infrastructure and rampant corruption. Weak rule of law
and frequent government intervention expose foreign businesses to high
political risk.
In one high-profile case,
Macau-based Sanum Investments sued the Lao government last year over U.S. $23
million in taxes and penalties levied at it. The firm alleged that judicial and
tax authorities were colluding with well-connected Lao families and companies
to expropriate its businesses.
The country’s image has continued
to take a beating in recent months, despite government efforts. In December,
Sombath Somphone, Laos’ most prominent activist, disappeared, prompting the UN
to express concern and activists to pressure ASEAN to speak out against
government repression in Laos.
Such repression persists in Laos
against religious groups, farmers who lodge land-grabbing complaints, and
political opponents. Just last month, international donors issued a
sharply-worded statement to Vientiane for its plan to proceed with the massive
Xayaburi Dam project along the Mekong River. According to the statement, the
Lao government has not adequately consulted its neighbors or fully considered
the potential risks and adverse impacts of the dam.
To be sure, these challenges do
not diminish the positive impact that will come from Laos’ entry into the WTO,
which is itself a tremendous achievement for a rapidly growing economy. What
the issues do indicate is that translating the potential benefits of WTO
membership into actual gains will not be an easy task for the government over
the next few years.
Prashanth Parameswaran
Business & Investment Opportunities
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