Author: Sandra Seno-Alday, University of Sydney
Laos is one of the fastest growing economies in Southeast Asia. From 2010 to 2018, it realised the second highest compound annual growth rate (CAGR) in exports in the region, next only to Vietnam. The country’s rapid growth in exports is more remarkable considering it is the only landlocked country in Southeast Asia.
Landlocked countries have no direct access to the sea. Exports and imports, therefore, must transit through neighbouring countries to get to-and-from seaports. Given around 80 per cent of world trade is done by sea, landlocked countries’ trade is significantly slower (between 9 and 130 per cent) and more costly (between 8 and 250 per cent).
Laos has proactively established trade and economic networks by participating in regional integration agreements and free trade agreements. Doing so has sent a strong signal to the regional and international community that the country is economically and politically open and committed to domestic reform. In 1991, it signed the Laos–Thailand regional trade agreement (RTA) and upon its 1997 accession to ASEAN it became part of the ASEAN Free Trade Area (AFTA).
As a member of ASEAN, Laos is party to a range of RTAs involving China (2007), Japan (2008), South Korea (2008), Australia and New Zealand (2011), and India (2011). The country also independently participated in the Asia Pacific Trade Agreement (APTA) with Bangladesh, China, India, South Korea and Sri Lanka in 1975.
Laos has successfully harnessed the trading potential of these agreements. In 2018, its five largest export partners were Thailand, China, Vietnam, Japan and India. Its exports to Thailand grew at an 8-year CAGR of 13 per cent, China at 27 per cent and Vietnam at 28 per cent. These countries are its largest transit neighbours. Export growth in these large, geographically-close markets covered by regional integration or free trade agreements is certainly notable but unsurprising.
But export growth in more geographically distant markets also deserves highlighting. Exports to Japan grew at a CAGR of 16 per cent and India at 156 per cent. While these countries accounted for less than five per cent of Lao exports in 2018, success at growing exports beyond immediate neighbours in the face of its landlockedness is exceptional.
Laos is poised to take advantage of further opportunities for trade growth and trade diversification in an increasingly efficient trading environment. Five of its eight trade agreements cover trade in both goods and services. And it is also in the process of implementing the World Trade Organization’s (WTO) Trade Facilitation Agreement.
Laos has embraced technology in trade facilitation. To increase customs efficiency, Laos has established the Automated System for Customs Data (ASYCUDA) at 24 of its border posts. This is a critical time and cost saving mechanism for the cross-border movement of products in general, but this is particularly key in light of the importance of the agricultural sector in the country’s international trade.
The country has channelled investments into upgrading infrastructure and improving manufacturing capability. Its manufacturing sector has grown at an 8-year CAGR of 7 per cent, while its services sectors have grown at a CAGR of 12 per cent from 2010 to 2018. It is participating in China’s Belt and Road Initiative through the Laos–China Railway project, which will help strengthen the strong export-import cluster it has developed with its largest and most important trading partners: Thailand, China and Vietnam.
Other major infrastructure initiatives include the Vientiane–Vangvieng stretch of the China–Laos highway and the Boten–Vientiane high speed rail that will make the historic Luang Prabang site in central Laos more accessible to regional tourists. These upgrades to physical infrastructure links together with increased manufacturing capability place Laos in a strong position to further increase its economic engagement with the broader region.
Laos has been successful at diversifying its resource-based economy over time. Its Competitive Industrial Performance (CIP) Index score increased at a CAGR of 4 per cent over eight years. Developed by the United Nations Industrial Development Organization (UNIDO), the CIP Index captures a country’s capability to competitively manufacture and export products.
The country’s performance thus shows indications of disproving the so-called ‘resource curse’: when a country’s dependence on resource exports results in slower growth and the inability to expand its value-added economic sectors.
Of course, opportunities for further growth remain, including increasing the country’s attractiveness to foreign direct investment (FDI). Putting in place measures to protect investor rights and intellectual property will be critical to attracting FDI and decreasing the country’s dependence on debt. Further, there is an important role for policies to support entrepreneurial initiatives to establish digital enterprises. This will require the appropriate regulatory and physical infrastructure to increase the internet and mobile phone penetration rate in the country. There also remains significant scope to diversify its trading partner base and to continue along the trajectory of economic diversification.
These opportunities need to be viewed in light of Laos’ strong track record. Despite the liabilities of landlockedness, it has grown its exports at an 8-year CAGR of 15 per cent, its GDP at 12 per cent and its GNI per capita at 10 per cent. Given the economic foundation and infrastructure it has laid, Laos can certainly be expected to rise to the challenges of future growth. It is a prime example of ‘the little engine that could’.
Sandra Seno-Alday is a Lecturer in International Business at the University of Sydney Business School.