Laos' Debt Raising Eyebrows
Image Credit: Wikicommons

Laos' Debt Raising Eyebrows

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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 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 160th spot out of 183 countries on its corruption index for 2012, down from 154th 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.

Comments
7
Free Lao
January 27, 2013 at 14:36

The reality is that China will benefit the most from the project because the project will link China to other ASEAN countries such Thailand, Malaysia and Indonisia. Lao people will benefit the least, but will be responsible for the burden to pay back the loan.

komrad
December 17, 2012 at 19:05

John Chan,

Western countries are providing aid and infrastructure to Laos.  Indeed, that photo in the article is actually a photo of the First Friendship Bridge between Laos and Thailand.  It was funded and built by the Australian Government in the 90s.
Western countries do provide significant aid to Laos for infrastructure, with focussed on both the most poor (eg. rural electrification, rural roads), and also regional connectivity to boost trade links. 
Chinese-built infrastructure has proven to be cheap and nasty – new roads built by Chinese companies with Chinese 'aid' have massive potholes in them after a single year, and the Lao taxpayer has to pick up the bill to have them resurfaced by local contractors.
The $7 billion debt for the railroad is almost 100% of Laos's GDP.  This is way too much for any country to take on for a single infrastructure investment.  There is no publicly available modelling of whether this railroad will pay for itself, either.
Plus you use a poor analogy by choosing retail mortgage interest rates.  It is possible to get financing for projects at near 0% interests rates on the commercial market at present due to the monetary policies of central banks around the world.  The article is right – China is charging the highest interest rates.  Laos would be better off approaching commercial banks.

Greg McCann
December 17, 2012 at 09:35

@John Chan: just say what you mean to say: "Yankee Go Home!" You have nothing else to say, and we all know that. Cut to the chase, be more efficient. Spare us the details and get to your point (which you've said 10,000 times before).
The notion that Laos needs to try and "catch up" to developed countries is ludicrous. Laos should try and find its own path to development the way that Bhutan (another small, landlocked Asian country) is doing. Sell out the country to China. What a disgrace. 
 
 
 
 

John Taylor
December 15, 2012 at 17:26

I been to Laos many times, it’s a very beautiful country and I hope it develops into a modernize country without it being exploited by china.

John Taylor
December 15, 2012 at 17:21

Be careful when you become friends with china. It’s never in china’s interest to help out other country, look at what they’re doing to Tibet, India, Vietnam, Taiwan are just some of the example.

Schminner
December 14, 2012 at 12:18

I agree with this article. Laos will eventually belong to China. Those that are poised to benefit from the Chinese loans are the top political elites, while the ordinary citizens will continue to suffer more and more. Inflation is already on a rapid rise at the moment. The elites that are accepting the loans are parking their new Mercedes and Lexus in their newly built mansions. If any ordinary citizen was to criticize the politicians, it would be suicide. So, it's probably best to just get use the perpetual poverty.

John Chan
December 14, 2012 at 09:53

Nowadays the mortgage rate for a 5 years term in the West is above 5%. To amortize a loan in 30 years at 5% rate, the total interest payment is about the same amount of the loan.
 
China charging 3.3 billion interest on a 7 billion loan that most likely to be amortized in 30 years means China is giving Laos a very favorable rate that no western nations as well as everywhere in the world will offer, not to mention the default risk involves Laos, in fact China virtually gives the loan to Laos nearly free if the CDS premium for the loan is deducted.
 
China as a developing nation is doing its best to help other developing nations to get modernized, but where are the developed nations? Shouldn’t they be in Laos to show others how to help a poor nation as they keep on boasting it is part of western culture superiority? Or is the West all about talk but no show like the 100 billion environmental aid they promised to the Africans?
 
The author should question the West’s inaction in the contribution of Laos’ nation building instead of using the farce of a nosy body NGO to divert attention from the West’s lack of compassion.
 

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