Laos: a small country with big FDI ambitions

South-east Asia’s only landlocked country, Laos, has consistently struggled to attract foreign investment. The sparsely populated country with fewer than 7 million inhabitants and a GDP of just $17bn is ruled by an avowedly communist government that has jealously guarded its monopoly on power since 1975 while enacting economic reforms since the late 1980s. 

Laos’s policymakers have largely pursued a reform agenda in order to keep the international donor community engaged. Not only does the donor community help underwrite the considerable infrastructure, health, education and other spending needs of the country, but it also serves to lessen the competing hegemonic influences that both China and Vietnam seek to maintain over Laos.

As a consequence, some of the largest foreign investment projects in Laos have been enacted as ‘soft power’ projections, intended to establish an economic foothold in the country. China’s Belt and Road Initiative is a good example. The largest and most controversial FDI project in Laos is a $6.7bn north-south railway line that China is constructing, intended to create a direct route between China and the peninsula of south-east Asia. By connecting with the Thai railway system, it will technically be possible for trains from Europe to run as far as Singapore for the first time, via Russia, China, Thailand and Malaysia.

Strategic importance

Having started in 2016 and due for completion in late 2021, the 410-kilometre railway line will require 75 tunnels (constituting 47% of the entire line) and more than 160 bridges to be built in Laos. In order to fund its 30% equity stake in the joint venture project, the Lao government has reportedly committed itself to borrowing about $500m from China’s Export-Import Bank. Although the financing terms of the project have not been made public, the local government does not seem to fear a debt trap in the making, similar to that of Hambantota port in Sri Lanka. 

In August 2018, Myanmar announced that it would scale back the size of a similar joint venture port project with China at Kyauk Pyu in Rakhine state, on the Bay of Bengal. Originally budgeted at $7.3bn, the deep-water port will now have a budget of less than $1.5bn, principally in order to lessen the financial risk for Myanmar’s government. If both the Lao railway and Myanmar port are completed, and a south-west spur on the former is built to link with the latter, China will have a trade route that reduces its dependence on the Straits of Malacca, and give its westernmost provinces access to the Indian Ocean for the first time. 

Water works 

But not all FDI in Laos has a geopolitical agenda. The government has sought to harness the power of the Mekong river and its tributaries in a bid to make the country the ‘battery of south-east Asia’. Other than mining, exporting electricity is Laos’s main source of foreign earnings. Its largest hydropower project thus far is the $1.3bn Nam Theun 2 hydropower project, completed in 2010, with a capacity of 1075-megawatt, the vast majority of which is sold to Thailand.

Not all of Laos’s hydropower projects have gone smoothly, however. In July 2018, a dam being built by a South Korean-Thai consortium, as part of a $1.2bn, 410-megawatt hydropower project in the southern panhandle of Laos, collapsed suddenly, resulting in extensive flash flooding, an unknown number of deaths and the displacement of tens of thousands of people.

Despite this setback, the Lao government recently announced that it expects domestic and foreign investment to rise in 2019 to more than $2.7bn, equivalent to 14% of GDP.