Lao PDR Economic Development And Its Integration With ASEAN

Since becoming a full member of the Association of Southeast Asian Nations (ASEAN) in1997, the focus of Lao PDR policy makers shifted towards full integration into the organization through active participation in economic, political-security, and socio-cultural affairs. In particular, participation to the ASEAN Free Trade Area (AFTA), which had been established in1992, is considered of importance for the country’s economic development.Being the only landlocked country in Southeast Asia, Laos’economic development and security is tightly connected with that of its neighbors, among which China, Thailand and Vietnam, are of particular importance. Under the influence of the example of neighboring Thailand, Vietnam, and even Myanmar, which joined ASEAN the same year as Laos, and Cambodia, which intended to apply for ASEAN membership, it has no any surprise that Laos’policy makers recognized the benefits an ASEAN membership would bring to the country, both in economy and in security. Moreover, the structure of ASEAN, based on principles of non-intervention and increasing economic ties, appeared as attractive and in the eyes of Laos’leaders. In order to pave the way towards integration into the fast developing region, in1986, following the example of other East Asian countries, Laos launched a program of reforms, the New Economic Mechanism (NEM) that led to market economy and open-door policies in the1990s, when Laos applied for ASEAN full membership together with Vietnam. The results of these reforms helped the integration of Laos into ASEAN’s in general, and the AFTA in particular, which took place in1997and1998respectively.On the one hand, the benefits from joining ASEAN and AFTA for Laos became from the first years of her membership:between2000and2006GDP growth rose to6.4%and climbed to an average of7.9%in the next five years. Total exports more than doubled in between1996and2006, whereas FDI from Vietnam, Thailand and China showed a significant increase in the same period. Moreover, Lao’s human capital benefited a lot from contact with more developed ASEAN economies. The gains in the economic sector soon translated into improvements in living standards. In general, ASEAN offered the right institutional environment for the development of a weak and small economy into one witnessing high growth rates and good prospects. On the other hand, the backwardness and the geographical challenges that Lao economy faces have been the main difficulty in country’s efforts for achieving economic integration as they place the country’s economy at a disadvantage in comparison to its ASEAN trading partners. Weak infrastructure and lack of highly-skilled labor present more difficulties for the competitiveness of Lao economy in ASEAN and AFTA. Rising levels of investment from ASEAN countries, China and western countries have increased the demand of skilled labor which could not be met by Laos’labor market, so the import of foreign workers has been inevitable. Moreover, this mismatch between demand and supply of labor has led to rising levels of income inequality, as the benefits from the opening of Lao economy have not reached large parts of the population. On the contrary, the rising of prices caused by the flow of foreign capital has caused resentment among low income Laotians. In addition to that, ASEAN membership brought to Laos the obligation to implement a large number of regulations and laws some of which contradicted with aspects of the country’s political system and local interests. Finally, increased interdependence with other ASEAN countries raised the degree of exposure of Lao economy to crises affecting the region, as the effects of the1997Asian Crisis on Laos.The purpose of this research aims to examine the progress on Lao economic development before and after joining ASEAN; the mechanism and policies by which Laos employed for economic development and integrate into ASEAN; and to examine the benefits and difficulties of Laos after joining ASEAN.