Development Strategies and Policies:
Economic and Political Impact of Foreign Aid in the Lao People’s Democratic
Republic
March 26, 2005
Waterfront Activity Center
University of Washington, Seattle, Washington
OF ECONOMIC DEVLEOPMENT IN LAOS
By
Sin Vilay, PhD
Abstract
• Laos remains today one of the least developed countries in the world. While the level of poverty has
been reduced over the last decade, three quarters of the people still subsist on less than US$2 and the gap
between rich and poor has widened both between the urban and rural sectors as well as within each. And
it all came about despite hundreds of millions of dollars in foreign grants, soft loans and private
investments over the last three decades.
• Economic priorities are not necessarily of paramount importance to the political leadership, at least
not in the shorter run. Political and social stability is held to be the absolute precondition for steady
economic development. Coerciveness is therefore used to ensure stability at all costs.
• Political stability helped bring in substantial flows of multilateral and bilateral assistance and
foreign direct investments, which produced GDP growth rates 8 or 9 percent until the Asian Financial Crisis
in the late 1990’s. But foreign aid has proved to be only a stop-gap fix that has not led to a fundamental
change to promote domestic savings and investment. Rather than promoting self-help towards self-
sufficiency, it has created a sort of international welfare syndrome, taxing foreigners to grow the Lao
economy.
• The total external debt now stands close to US$3 billion and substantial loans are still being actively
sought and gotten by the government to finance the chronic deficits in the public and trade sectors. The
debt burden will get heavier with mounting servicing costs. Because of continued controls and the lack of
the rule of law, donor fatigue has set in and foreign direct investment has dwindled. With 20 percent of the
government’s budget and 80 percent of its capital expenditure being financed by foreign money, self-
sufficiency slips farther away as aid-dependency deepens. There is an urgent need for both the
government and the donor community to rethink the overall political economy of the LaoPDR.
• According to the UNDP, “Sustained poverty reduction requires equitable growth - but it also requires
that poor people have political power…by building strong and deep forms of democratic governance at all
levels of society.” Economic growth by itself will not effectively reduce poverty. Social policies are also
needed to address the income disparities between the urban and rural sectors, between the genders,
among the ethnic, occupational and other societal strata.
• Lao populace still fatalistically accept poverty as their lot. They see the potential benefits of
development but they do not fully comprehend or necessarily care to be part of the development process.
They simply take orders from the authorities and the town or village heads and mechanically carry them out .
• The people need to be transformed into active agents of economic change rather than passive
recipients of occasional welfare. They need to be provided with systematic participatory opportunities and
avenues where their thoughts and ideas can be heard. Incentives such as legal and secure
landownership will make them feel they have a stake in the development process and will facilitate their
willingness to undertake socially risky change. As stakeholders they will use their own resources, inputs
and initiatives for productivity.
• The environment with its fragile ecological system is the most intractable constraint to sustainable
development. The abundant natural resource base offers the one economic comparative advantage that
landlocked Laos has. It is the greatest source of food, medical and industrial raw materials, energy,
tourism revenues and, of course, quality of life. Properly harnessed and managed, it will be the lynchpin of
steady long-term development. Neglected and mishandled, it will render ineffectual the other factors of
production including capital and labor.
• One misstep at the outset can take centuries to remedy the damage and restore the capacity, and
reverse the socio-economic consequences. Almost three-quarters of the country had been covered by
forest; now more than 40 percent of it is gone. Economic and commercial exploitation must be preplanned
and rationally managed as part and parcel of the development process.
• The ecological implications of the mega hydroelectric project, Nam Theun 2, are disturbing based
on the studies by NGO’s and others concerned yet do not seem to be taken seriously by the protagonists of
the project. Whatever the true facts are, given the current limited ecological knowledge it would seem
advisable to err on the side of caution in view of the monumental risks involved. Doubts have been raised
also concerning the estimated return on the project. There are better development options to redress
poverty than throwing big money at it.
• The relative ineffectiveness of foreign aid reflects weaknesses in the following key areas which are
by no means an exhaustive list:
-Misconception of the role of aid
-Inattention to the special conditions of Laos and its long-term needs for structural change in the economy
and the socio-political framework
-Bureaucratic inertia of aid agencies
-Inadequate coordination within the aid community
-Lack of emphasis by aid agencies on the role of private direct investment
-Low absorption capacity and mismanagement
The fact that these problems and issues relating to foreign aid are not unique to the LaoPDR should not
mean that the status quo is to be accepted.
All views and opinions expressed herein reflect those of the author alone and do not by any means
represent those of nor endorsed by the symposium's organizing committee and its sponsors.
