The Economy

The Economy

IN THE EARLY 1990s, the Lao People's Democratic Republic (LPDR, or Laos) was among the ten poorest countries in the world, according to a World Bank ranking, with a per capita gross national product (GNP) in 1991 of just US$200. Its labor force is poorly trained and educated, its infrastructure severely damaged from years of inadequate maintenance, and its ability to feed itself precariously dependent upon the weather. Development expenditure is financed almost entirely by foreign aid, and, by 1991, exports financed only 40 percent of imports. By the beginning of the 1990s, however, Laos, while still an impoverished country highly dependent on foreign aid for its development, had taken some essential steps toward a free-market economy.

Despite the many obstacles to economic development that remained in the early 1990s, however, in little more than a decade, starting in 1979, the government had deliberately shifted the focus of its economic policy away from socialist goals and has made great strides. Many state-owned enterprises, which had been draining the nation's treasury through subsidies, were privatized, and tax collection was boosted tremendously, helping to bring the fiscal deficit under control. Liberal laws on foreign investment and trade were passed, precipitating a surge of investment activity. Prices of many commodities were freed from government controls, domestic transport restrictions were lifted, and the cooperative farming system was ended.

The Seventh Resolution, passed at a plenary session of the Central Committee by the ruling Phak Pasason Pativat Lao (Lao People's Revolutionary Party--LPRP) in late 1979, marked the start of the country's shift toward a market-oriented economy. The resolution affirmed the government's commitment to begin to open to a market economy, as the necessary path to economic development. Since its inception in 1975, the government, in theory, has recognized private property and private enterprise. However, they were not encouraged, and, in fact, the provincial governments of Louangphrabang (Luang Prabang) and Phôngsali abolished private trade and traders through 1987. The objectives of the First FiveYear Plan (1981-85) included self-sufficiency in food production, defined as the equivalent of 350 kilograms of paddy rice and other foodstuffs per capita per year, and the collectivization of agriculture. The plan also focused on developing industrial activity, increasing trade with Thailand, improving the shattered rural infrastructure, and increasing export revenues, all goals that received much greater attention as the tentative steps toward a market-oriented economy continued.

However, growth during the plan period was slower than had been anticipated, and the government decided to take bolder steps toward reform. At the Fourth Party Congress in 1986, the Second Five-Year Plan (1986-90) was endorsed, and new national development strategy was introduced. The New Economic Mechanism, as this program was called, was designed to expose the economy to world market forces gradually, without sacrificing the nation's goal of food selfsufficiency . To implement this plan, many facets of the economy were decentralized. Although the central authorities continued to set policy guidelines, responsibility for administering and financing many programs for economic and social development was delegated to the provinces. About a year after the congress, the new policy was promulgated into regulations, and changes became rapid and extensive.

The second plan also sought to encourage foreign and private investment. Among the reforms called for under the New Economic Mechanism were the lifting of numerous trade regulations and the creation of opportunities for foreign investment. In a major shift from its economic dependency on Vietnam, Laos began to look toward Thailand--and, later, toward other socialist countries--for private investment, technology transfer, and trade. Through the improvement of transportation and communications systems, encouragement of the private sector, and development of the agroforestry industrial processing sector, it was hoped that nonfood imports could be reduced and exports increased, thus improving the balance of payments. Although Laos showed an overall balance of payments surplus in 1985 and 1986, the current account deficit had been increasing, and during those years exports financed less than 30 percent of imports. The government took a new interest in environmental protection and sought to limit the practice of swidden, or slash-and-burn cultivation as a means of protecting its forest resources and encouraging cash cropping. It proved difficult, however, to bring about such a change because of negative effects on upland farmers' livelihoods. Traditional swidden agriculture does not adversely affect forest resources to the same extent that commercial exploitation does.

Many reforms were carried out successfully during the late 1980s, but the Second Five-Year Plan ended with economic performance lagging well behind planned achievements. Not least among the disappointments was the need to import rice during the droughts of 1987 and 1988, underlining the fact that an objective identified over ten years earlier--sustained self-sufficiency in food--had not been met.

Despite economic failures, however, the Fifth Party Congress, held in March 1991, reaffirmed the government's commitment to the development of a market-oriented economy. The Third Five-Year Plan (1991-95) proposes a "strategy" that aims to continue progress made under the previous two plans: improving the country's infrastructure, promoting exports, and encouraging importsubstitution industries. In August 1991, the Supreme People's Assembly (SPA) approved a new constitution--the first since the previous constitution was abolished in 1975. Among its provisions is the affirmation of the right to private ownership; the words "democracy and prosperity" replaced "socialism" in the national motto.

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