Laos’ Debt Raising Eyebrows

Laos’ reputation as an economic backwater and relic of the Cold War has been well earned. This year, however, the Lao government has sought to break free from the traditional communist stereotypes.  Engaging the private sector and Chinese state-owned enterprises (SOEs), Vientiane sought to emulate a well-established model by focusing on big ticket infrastructure projects.

Applause and concern has followed in equal doses. A railroad to traverse the country is set to begin soon and

Applause and concern has followed in equal doses. A railroad to traverse the country is set to begin soon and cost U.S. $7 billion, which will be funded through loans from China that are rumored to carry a minimum total interest repayment of at least U.S. $3.3 billion.

cost U.S. $7 billion, which will be funded through loans from China that are rumored to carry a minimum total interest repayment of at least U.S. $3.3 billion.

The highly controversial Xayaburi dam — the first to dam the mainstream of the Mekong River — will cost at least U.S. $3.5 billion although early estimates suggest the figure will be much higher. Still, Vientiane plans to build another 10 dams planned as part of its effort to make Laos “the battery of Asia.”

Roads, airports, tunnels, and other railways are among the other big ticket items slated for development. It’s an extraordinary feat when one considers that Laos has a total GDP of just U.S. $8.3 billion, according to the World Bank.

Such vast amounts of foreign money being injected into such a small economy is likely to cause a noticeable increase in inflation, higher interest rates as the central bank tries to control the economy, potentially a lower standard of living for ordinary Lao.

Nevertheless, the Laos government of Prime Minister Thongsing Thammavong insists such projects will benefit all the nation’s citizens and propel Laos into the ranks of the world’s middle class countries.  

Pronouncements like that are at the very least questionable. Indeed, one need only look at the U.S. and Europe where large debts continue to hamper growth.

Cambodia is well ahead of the curve in this regard. Its growth numbers are impressive but it has incurred a substantial debt in the process. For example, according to Prime Minister Hun Sen, Phnom Penh owes China $2 billion in debt while a member of Parliament put the figure at $6 billion (but later retracted his statement). Furthermore, NGO reports have stated that China offers the least favorable concessionary terms on its financing demanding five times more in repayment from Cambodia than other creditors like Japan and South Korea. Meanwhile, last month an opposition parliamentary member said the country’s total public debt stood at U.S. $10 billion.

Yet despite the cash influx the wealth gap between rich and poor has only grown over the last 20 years.

In Laos, not unlike Cambodia, nobody seems too sure about the broader economic plan. The Xayaburi Dam got the go ahead after Vientiane claimed it had resolved issues with downstream countries over anticipated damage to fish stocks –  although it never bothered to say what it had done to achieve this.

Transparency also matters, particularly when such huge sums are involved.

In its recent survey Transparency International ranked Laos at a lowly 160^th spot out of 183 countries on its corruption index for 2012, down from 154^th position a year earlier.

As if to confirm these findings, a local NGO was kicked out of the country as Transparency International was releasing its report. According to Swissinfo.com, Anne-Sophie Gindroz, the country director of the Swiss non-governmental organization Helvetas was expelled from Laos after being accused of criticizing the government in a letter to donors in which she said the one-party state was stifling public debate and making work for aid groups difficult.

The well-heeled political elite and business leaders with the right connections are poised to make a lot of money in Laos. However, given the wealth distribution elsewhere, Lao’s own track record and the nature of the global financial system, the chances of such wealth being shared further down the food chain is unlikely. Instead, the only consolation prize ordinary Lao are likely to get is an enormous pile of debt.