Laos’ Austerity Fantasies Reveal the Communist Party’s Weaknesses

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Laos’ Austerity Fantasies Reveal the Communist Party’s Weaknesses

Ballooning external debt and growing fiscal deficits augur political storm clouds for the ruling LPRP.

Laos’ Austerity Fantasies Reveal the Communist Party’s Weaknesses
Credit: Flickr/Jim Fruchterman

“If the facts change,” John Maynard Keynes, the famed economist, is supposed to have said, “I change my opinion.” But what happens when opinions change, with no effect on the facts?

“Austerity” is now the word that will define the next five years in Laos, the country’s ruling communist party has vowed, even though austerity was also supposed to define the last five years and has been on the tongues of communists since the turn of the century. State expenditure will be cut, the country’s new leaders, elected between January and this month, have said, while revenue will be boosted. Prepare for lean times, in other words.

The fiscal deficit climbed to 4.3 percent in 2019 and the Economist Intelligence Unit forecasts it to rise to 6.5 percent in 2021. But the communist government wants to reduce it to 2 percent by 2025, a figure that hasn’t been seen for some time. Promises have been made to cut state official salaries from 52 percent to 40 percent of overall spending by 2025, and to raise revenue collection up to 16 percent of GDP by then, Minister of Finance Bounchom Ubonpaseuth said this week, according to Vientiane Times.

The new prime minister, Phankham Viphavanh, elected by the National Assembly this week, read out a seven-point list of how his government will impose austerity measures. The list repeated almost verbatim the list that his predecessor Thongloun Sisoulith read from when he became prime minister in 2016. Thongloun even admitted this in January. “Our financial management has failed,” he said at the ruling Lao People’s Revolutionary Party (LPRP)’s quinquennial congress, which named him the new party chief. He added that “during the last five years, debt has not been successfully tackled.”

Indeed, but it was Thongloun’s own government that didn’t successfully tackle it (or couldn’t). And why should there be any more confidence now? Thongloun, the most respected technocrat of the era, has moved up to become party chief and Phankham, the new head of government, has very little experience in administration, serving only briefly as a minister of education.

And, it should be noted, austerity measures have failed over the past five or six years when economic growth was high, around 7 percent annually before tanking in 2018 and 2019. Now, it wants to go further with austerity when even the communist party forecasts annual economic growth will be around 4 percent from now until 2025. COVID-19 cannot be entirely blamed. Even though the economy likely contracted by around 0.6 percent last year, it only grew by 5.5 percent in 2019, much lower than previous years’ average.

Whichever way you want to see it, cutting spending will also cut income growth, especially if increased revenue collection takes the form of higher taxation. By the communist party’s own forecasts, per capita income will rise to just $2,887 by 2025, up from $2,534 just before the pandemic started. Even if that’s an obtainable goal, it means incomes will rise by just 13 percent by 2025. By comparison, incomes rose by 18.7 percent between 2015 and 2019. Put differently, ordinary Laotians can expect slower rise in their standards of living. How the communist party deals with this, when its main social contract is that people accept authoritarianism in exchange for the promise of continual, rapid growth in living standards, remains to be seen.

The entire idea of austerity is a deceptively simple one, and politicians around the world have sought to conjure up the most populist of metaphors. Running government finances is the same as running household finances, they say: If you’re spending more than you’re earning, there’s a problem. But this analogy assumes that the entire household isn’t bound together solely by spending above their means.

As a one-party, communist-run state, digging into the pockets of ordinary people might engender the public to begin questioning what their hard-earned money is actually being spent on – or, rather, why corrupt officials are pilfering the funds. Popping the bubble of an inflated state sector, necessary if the LPRP wants to maintain the loyalty of the educated middle-classes who swell the bureaucracy, also comes with huge risks.

Continuing with the household analogy, Laos looked over the fence and simply tried to replicate its more successful northern neighbor. But it has replicated China’s economic policies of the 2000s – of debt-driven infrastructure development – without basing this on China’s economy policy of the 1970s and 1980s, the development of low-cost exports to the West. Laos is the only developing ASEAN state that overlooked low-cost manufacturing exports to the U.S. and Europe, the failsafe way of bringing in much-needed foreign currency reserves. In 2019, trade with the U.S. and the European Union was worth just $165 million and $450 million, respectively, according to official data. Its trade with China was worth $3.5 billion that year.

And its imitation of Beijing’s infrastructure-led Keynesianism overlooked another major difference: China achieved its economic miracle chiefly on domestic credit, boosting its financial sector in the process. Laos is dependent on foreign credit, mainly from China. That significantly changes the game.

Driving the need for austerity is the country’s debt crisis, and growing sums required just to service Laos’s external debt. Conservative estimates say that $1.1 billion will need to be found annually for debt repayments until 2024, although a significant part of that is just interest servicing and some estimates say the total annual debt repayments will climb much higher. Given that the best case scenario is a fiscal deficit of 2 percent by 2025, one assumes that more debt will need to be taken on.

I have never believed in the whole theory that China was seeking to ensnare Laos in a “debt trap,” although supporters of this theory are having a field day after Thongloun recently stated the government will move from credit to equity for Chinese investment, in essence giving Chinese firms shares in state entities in lieu of repayment on loans. Their case in point came in September when China’s state-run China Southern Power Grid secured a majority stake in Laos’ state-owned utility Electricite du Laos, effectively giving China control of Laos’ national power grid.

However, the “debt trap” theory assumes that Beijing was planning this all along, which gives far too much credit to the Chinese communists for their long-term thinking, something that they appear to lack of in almost all other areas of foreign affairs. It also assumes that China will inherently benefit from this situation, whereas in most cases Chinese firms are taking on the headache of managing Laos’s unmanageable public services.

Equally important, Electricite du Laos (as well as other state-run utilities) wasn’t run in the public’s interest when it was owned by the LPRP (“party-owned” is a better description than “state-owned”), and it won’t be run in the public’s interest now it is essentially operated by a state-run Chinese firm. One could argue that utilities run by the Laos’s communist party would be more “accountable” to the public than if they were run by Chinese interests, but it’s a cigarette paper-thin difference.

A recent headline said it all: “Laos set its own debt trap.” And there is a good chance that, come 2026, when the communist party gathers for its next congress and a new leadership team is selected, we’ll be having the exact same debates and listening to the same austerity promises. By then, however, the problem will be much worse and the communist party will be in a more precarious situation politically. Households accustomed to spending beyond their means are rarely harmonious when the money dries up.