Can Laos’ Communist Party Recover From the Current Economic Crisis?

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ASEAN Beat | Economy | Southeast Asia

Can Laos’ Communist Party Recover From the Current Economic Crisis?

The ruling Lao People’s Revolutionary Party has grossly mishandled the economy, but there is no political alternative – at least for now.

Can Laos’ Communist Party Recover From the Current Economic Crisis?
Credit: Depositphotos

For the past three decades, the Lao People’s Revolutionary Party (LPRP) government appeared to prove the claim that Asia’s communist parties survive – and can even thrive – through “economic legitimacy.” In 1989, as the Cold War came to a shuddering end and hermetic Laos found itself forced to engage with the rest of the world, the country’s GDP stood at $714 million, with GDP per capita of just $170. Fast forward to 2019, and after almost a decade of above 7 percent annual growth rates, its GDP was nearly $9 billion and per capita GDP sat at almost $2,500.

As such, the average Laotian was almost four times richer in 2019 than he would have been in 1989. The average Laotian could also expect to live 15 years longer than in the early 1990s. Most households had electricity by 2019. Healthcare was rudimentary and, at times, costly,  but it was available. Things weren’t fantastic but, at least, they were improving, and the LPRP appeared a competent, though oppressive and corrupt, custodian.

According to the story told by the LPRP, all this was scuppered by the COVID-19 pandemic. Economic growth slowed to 0.5 percent in 2020 and 2.5 percent in 2021. Things got worse in 2022 as inflation started to skyrocket. It peaked at 41.3 percent in February of this year and is still hovering at around 25 percent, jacking up the cost of everyday goods and forcing many people back down toward the poverty line. The national currency, the kip, hit an all-time low in mid-September when it traded commercial banks at 20,000 to the U.S. dollar, compared to around 8,000 in 2019. The young are now speaking with their feet. My guess, based on data from the first half of this year published by the International Labor Organization, is that as many as 90,000 Laotians will have emigrated for work by the end of 2023, added to the 53,000 who officially left last year. Include unofficial migration and the true number will be far higher.

Talk to most Laotians and there’s not just a sense of hopelessness, especially for the prospects of the young, but also a feeling of decay. The BBC recently quoted one young person: “Every person in this generation doesn’t believe in the government. They want to leave Laos, they don’t believe anything the government says.” The same piece noted that 38.7 percent of 18-to-24-year olds are not in education, employment or training, the highest rate in Southeast Asia.

According to a correspondent of mine in Vientiane, people are still split on what exactly went wrong. Some people, I was told, thought the good times of the 2010s would never end: that the economy would continue to surge by around 7 percent annually, that there would be no downside of taking on debts to pay for Chinese investment, and that Laos wouldn’t need to go through tough times in order to remodel its economy away from mining, plantations, and hydropower generation. Indeed, there was a sense that, as the communist bosses hoped, Laos could simply copy the Chinese model of debt-driven, infrastructure-led development, and the loans would be repaid after Laos grew rich. According to these people, the LPRP is correct in placing all of the blame on the COVID-19 pandemic, which, of course, wasn’t the party’s fault.

As my correspondent suggested, however, there is also a perception that the economic and societal progress of the 2010s wasn’t sustainable. For sure, the communists in Vientiane weren’t to blame for the U.S. Federal Reserve raising interest rates, which jacked up the value of the U.S. dollar, nor for the economic downturn in China. But there is much they were responsible for. Despite years of growth, they were lazy in restructuring the economy. In 2018, mining still accounted for about a third of exports, for instance, while the government made little effort to create a low-cost, low-skilled manufacturing sector, the “Asian tiger” method of development used by most of Laos’ Southeast Asian peers. Laos has barely any trade with the West; the U.S. accounts for a little over 4 percent of Laos’ exports.

At the same time, it gave little thought to domestic producers. Scant investment went into the agricultural sector, which laid fallow for years. That forced Laos to rely on imports, making it particularly vulnerable to inflation and currency depreciation, as has happened. Corruption has gone mostly unchecked, as has the black market, which has made it tricky to crack down on illegal currency converters, further pushing up the inflation rate. Moreover, social problems were brewing. For instance, combined public spending on education and health declined from 4.2 to 2.6 percent of GDP between 2017 and 2022, according to the World Bank.

Most of these problems result from Laos’ chronic national debt, which is probably around 120 percent of GDP when you include all unofficial liabilities. Every quarter appears to bring queries about whether it will be the moment Vientiane finally defaults. It has so far managed not to, but chiefly by cutting spending, hiking taxation, and handing over state assets to its creditors (read: China). Ignore all the talk of Chinese “debt traps,” though. As I’ve argued on numerous occasions, that narrative denies the LPRP any agency, and it overlooks the fact that the communist party willingly bought into the tale that it could simply copy-and-paste China’s debt-laden, infrastructure-led model of economic growth.

And why not? Who else was going to lend Laos so much money so quickly? Should Laos have denied the sort of Chinese investment and loans hundreds of other countries have accepted? Would the one-party regime have commanded enough public trust if it had to explain why it turned down so quick wealth creation? More to the point, why not focus on big-ticket, impressive megaprojects – which allow communist officials to cut the ribbons in front of cameras and get to go on luxurious junkets to Beijing – when building profitable, sustainable agricultural and manufacturing sectors takes so much time and effort?

The gamble was too alluring for the LPRP to reject, even if it meant that, if the wager backfired, the younger generation would have to bear the brunt of their elders’ mistakes. Indeed, a national debt is simply a tax on the young and unborn, so small wonder that adolescents and those in their twenties perceive the system to be rotten; they’ll be paying back this debt through increased taxation and decreased state investment when the current crop of communist bosses – most in their sixties and seventies – has long passed. There’s a notion that authoritarian regimes have an advantage over democracies because they get to engage in longer-term planning. But this overlooks the short-term risk-taking of officials not held to account by the public and the pressure on them from within their own party to deliver quick results.

The economy may soon pick up. This week, the International Monetary Fund has forecast 4 percent growth for the economy next year. But few experts expect a major decline in the inflation rate or for the kip to rally, while the national debt will remain a problem for years. Politically,  the communist government now appears penetrable. Its reputation as a steady pair of hands over the economy, making the average Laotian a little less poor each year, has been tarnished. Perhaps its image will never recover. The party has attempted cosmetic changes. For instance, Phankham Viphavanh resigned as prime minister in December 2022 after less than two years in the job, making him the shortest-serving premier in recent history. His replacement, Sonexay Siphandone, a scion of one of the party’s most powerful families, hasn’t done too much better.

That leaves two facets of legitimacy. One is repression, a natural go-to for this oppressive regime. In May, Anousa Luangsuphom, a political blogger, survived an attempted assassination in Vientiane. Bounsuan Kitiyano, an activist, was murdered in Thailand weeks later. But the LRPR can count itself fortunate that no meaningful Laotian diaspora pro-democracy movement exists. It’s also lucky that so many of its unemployed or underpaid and disaffected youths can migrate to Thailand or South Korea, emptying the country of potential troublemakers.

It helps, too, that the Thai government has been more than happy to deport Laotian activists back home. Jobs in other countries, such as South Korea and Japan, are so comparatively well-paid that no one wants to lose them by becoming politically active.

The other facet is the status quo, the people’s desire for a quiet life. Although the LPRP is massively underperforming and has jeopardized the future of the young and yet-to-be-born, it is a party that the masses know. Who else is there? Currently, there are no alternatives. The situation in Laos is far different from Vietnam, where activists have created meaningful pro-democracy alliances (the Brotherhood for Democracy, for instance), where one could imagine civil society groups and disaffected, politically active individuals forming some new entity that could take a stab at running the government.

It will be interesting to watch will the LPRP approaches its next party Congress, set for early 2026. It’s now the halfway mark between the quinquennial congresses, which is usually the time when party grandees start to hammer out compromises and squabble over which of their loyalists will get the top job. Unless Prime Minister Sonexay can turn around the economy (a mammoth task!) it’s difficult to imagine him getting another term.

More importantly, has the party learned anything from the mess it has allowed the country to become? Some National Assembly delegates are demanding more socialism. Indeed, in October, the government increased the minimum wage for a third time in just over a year, from $66 to $88 per month, but one struggles to imagine where the government will find the cash to pay for another increase. The socialists within the party are likely to be on the losing end. The future of Laos is greater repression, increased taxation on the common person, and ever more desperate bids for foreign investment, all of which will further inflame public anger over dwindling incomes, government corruption, and the belief that their country is slowly but surely being sold off to the highest Chinese or Thai bidder.

Moreover, there doesn’t appear to be a figure within the LPRP like Nguyen Phu Trong, the general secretary of the Communist Party of Vietnam (CPV), who since 2016 has orchestrated a considerable anti-corruption drive and a morality drive, attempting to reconstruct some ethical trust in the party amongst the public. It’s not an exaggeration to say that Trong has probably saved the CPV from its worst excesses and restored a degree of public faith. In Laos, Thongloun Sisoulith, now state president, tried something similar as prime minister between 2016 and 2021. Yet, his anti-corruption campaign never got beyond stopping some provincial governors from wasting money on cars and reshuffling a few tainted officials, most of whom – such as Khampheng Saysompheng, the prime minister’s brother-in-law – are now back in the party’s good books.

Laos is at a rupture point. In the past, the communist party might not have been popular or respected, but the people accepted its rule because of its economic achievements. Now, it’s a negligent institution, squatting toad-like over a decaying system, and it may never recover its self-professed mantle as the custodian of economic growth. Perhaps its saving grace is that there is no political alternative, at least for now.