Unfair trade

93 days to open a business and other reasons Laos could be a lousy bet for foreign investors

October 29, 2012
October 29, 2012

In 2001, China joined the World Trade Organization, a membership that helped turn China into the world’s second largest economy after the United States. On Oct. 26, the trade body finally approved the application of Laos, another communist, one-party, East Asian nation in the process of opening its economy. It had been waiting 15 years.

Laos is projected to grow near 8% for the next two years, according to the International Monetary Fund. Rich in mining, agriculture, and hydropower resources, and home to a cheap supply of workers, it has caught the attentions of foreign companies like South Korean SK Engineering and Construction and Western Power who have together just announced a $1 billion contract to build and operate a hydropower plant in Laos. Austrian engineer Andritz just won a tender worth €250-300 million ($324-389 million) to supply electromechanical equipment to Laos.

But unbridled optimism—like saying Laos actually stands for Land of Opportunity and Ample Successes, (pdf) as one analyst has—should be checked. Here’s why:

Investing in Laos is still a risky bet. Laos has made serious reforms like ending subsidies on agricultural exports, slashing import tariffs to an average of less than 19% and, under its WTO agreement, opening 10 sectors to foreign competition. Still, authorities are likely to arbitrarily impose regulation on foreign companies, analysts say.

“Given that any substantial structural reforms remain unlikely, pervasive corruption and bureaucratic inefficiency will continue to pose extreme reputational, legal and operational risks to new market entrants after the WTO accession,” Giulia Zino, senior Asia analyst at Maplecroft, says in a research note on Laos. As an example, Macau-based Sanum Investment is suing the Laos government over taking away its 60% stake in a slot-machine club in Vientiane, the capital of Laos.

Bureaucracy will still be frustratingly slow and at times corrupt. Laos ranked 163rd out of 183 economies for ease of conducting business by the World Bank’s Doing Business 2013 report. It takes an average of 93 days to establish a business, compared to the regional average of 38, Zino notes.

Laos also ranked at the bottom of a list of countries where investors are the most protected, just above Afghanistan, in the World Bank report. The country, which has been under four decades of authoritarian, single-party rule, ranked 154th of 183 countries on Transparency International’s Corruption Perception Index for the past two years.

No new markets for Laos. The country puts great hope on WTO membership to help increase exports to foreign markets. Some argue that the results vary too much by country to conclude whether this happens, but one study finds that sales of long-standing exports to new markets are not helped by WTO accession, only exports to existing foreign markets. For Laos, which already has a trade deficit with its top trading partners Thailand, China, and Vietnam, gaining access to new markets is key. Without that, there is little benefit in joining the WTO, considering other pressures it will bring.

Competition and instability. Laos’ economy is overly reliant on foreign aid and its natural resources, making it more vulnerable to shifts in the global economy and competition. Over 70% of Laos’ small population of 6.5 million people depend on agriculture for their livelihood. Slashing subsidies and opening up to foreign competition will no doubt increase unemployment. That risks social instability for Laos, one of the poorest countries in the world, and the government has done little to educate the public about the short-term costs of WTO membership.

Laos is also competing with its Southeast Asian neighbors and other developing economies, Myanmar, Cambodia, and Vietnam. Some argue that when developing countries sign bilateral investment treaties they compete against each other (pdf) for foreign investment until the “benefit enjoyed by the host from the investment is zero” (p.671). Laos, an “economic minnow” compared to them and the last to the game, will  be at a disadvantage.

But there’s still hope for this relationship. Some say the WTO is on its way out but, if managed well, membership could help Laos’ economy. WTO inclusion means more scrutiny on Laos, which can eventually translate to better governance and transparency.

If risks to foreign businesses are minimized, investment and the transfer of technology and intellectual capital can flow. Competition to traditional sectors should be introduced in a way that won’t displace workers. Both will help Laos as it tries to commercialize its subsistence-focused agricultural sector and take full advantage of its mining and water resources. It’s only after millions of its citizens are lifted from poverty that the country really can become the land of ample opportunity and successes.

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