BANGKOK: Isolated for decades, impoverished and landlocked, Laos is not an obvious choice for investors.
But the Communist country of 6.4 million people hopes to change that with its expected entry into the World Trade Organization (WTO) on Friday, capping years of steady reforms aimed at building a modern economy and tapping a Southeast Asian boom as global manufacturers hunt for lower-cost alternatives to China.
“Laos now seems to be genuinely competitive, unlike before,” said Hal Hill, a professor at Australian National University who specialises in Southeast Asian economies.
After 15 years of talks, the 157-member, Geneva-based world trade body is expected to confirm Laos as a member on Friday.
Laos' parliament expects ratification by 2013, touting the move as crucial for reducing one of Asia's worst poverty rates.
The transition, however, looks difficult. Reducing red tape and enforcing pro-business regulations are proving more formidable for the Lao People's Revolutionary Party (LPRP) than crushing political dissent and chasing anti-communist rebels during nearly four decades of authoritarian, single-party rule.
In one imminent test case, Macau-based casino operator Sanum Investments Ltd has started international arbitration proceedings after the government took away its 60 per cent stake in the Thanaleng Slot Machine Club in the Lao capital, Vientiane.
Sanum President Jody Jordahl says his Lao partners conspired with “extremely well-connected people” to take control of the club when it started to generate good profits. Sanum could also be stripped of its stake in casino Savan Vegas for failing to pay $23 million in taxes that Jordahl said were not part of their agreement. Sanum executives face jail.
“They have regulations but no intention to follow them. If this is how they'll treat foreign investors, then they're not ready to be integrated into the global economy,” Jordahl said.
Officials in Laos did not respond to interview requests.
Thanks to a mining and hydro-power boom, Laos is already one of Asia's fastest growing economies, expanding 7.9 per cent this year with double-digit growth in exports and imports, according to the Asian Development Bank. Japanese cars and sport utility vehicles clog the streets of once-sleepy Vientiane.
According to the WTO, more than 90 laws and regulations have been enacted and amended to meet the requirements of the global trade group in a spasm of reform that has also seen the opening of a stock exchange in 2011 and plans to host an Asia-Europe Meeting summit next month.
Some view Laos' accession to the WTO as mostly symbolic. It agreed to maximum import tariffs on goods averaging 18.8 per cent, limits on agriculture subsidies and market-access pledges in 10 industries. Still, Hill says the WTO entry could help reformers push their agenda.
“Sometimes reformers at home find it easier to get reform through by joining regional or international associations. It puts a bit of check on more protectionist pressures like large state enterprise,” he said.
Laos could also learn from its bigger communist neighbour, Vietnam, whose entry to the WTO in 2007 supercharged exports and accelerated its transformation into one of Asia's fastest-growing economies. Reforms in the country of 89 million people have since stalled as banks contend with crippling bad debts.
Like Vietnam, Laos began opening its socialist economy in 1986.
Laos already enjoys trade privileges from most Western markets, China and the 10-state Association of Southeast Asian Nations, of which Laos is a member and which takes 70 percent of its $2.2 billion annual exports.
“Much of what's exported from Laos is minerals, basic commodities, electricity exports from hydro-electric dams to the region,” said Ken Stevens, managing partner at frontier investors Leopard Capital. “I expect more of the same - a resource-driven economy.”
But manufacturing is on the rise. Since 1990, manufacturing has averaged 12 percent annual growth, ratcheting up its share of gross domestic product to 20 percent, according to a 2010 Australian National University (ANU) paper. Food and beverages account for three-quarters and garments are the single biggest manufactured export.
“For a tiny economy like Laos, garment manufacturing really is quite important,” said Hill, author of the ANU study. “It signifies the country can compete in 'footloose' exports - where they are able to compete on the basis of being genuinely competitive rather than state-supported.”