Unlocking Landlocked Country

Laos in Greater Mekong Sub-region (GMS) Economic Cooperation

Dimas Fauzi

Mailing address: Jl. Tentara Pelajar 64 RT 01 RW 02 Jatinegara, Sempor, Kebumen. 54471.

Email: di.fauzi@yahoo.com

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Unlocking Landlocked Country:

Laos in Greater Mekong Sub-region (GMS) Economic Cooperation

Abstract

Dimas Fauzi*

*The Department of International Relations, Universitas Gadjah Mada

Landlocked countries have been struggling to escape from their geographical woes which

hamper their development. Some may succeed and some may not. As the only landlocked

country in Southeast Asia, Laos has been given the chance to benefit from the sub-regional

grouping which gathers the riparian states along the Mekong River in a form of sub-regional

cooperation, namely Greater Mekong Sub-region (GMS) Economic Cooperation. This article

argues that GMS Economic Cooperation has “unlocked” Laos from its geographical “gift”, if

not woes, through infrastructure development and capacity building. As in structuralism,

development can be seen from the shift of economic activities from agricultural to a more

diverse and advance economy and society. Therefore, by putting the emphasis on this model,

it is evident that GMS Economic Cooperation has allowed Laos to develop and transform its

economy over the past decades.

Keywords: Laos, Greater Mekong Sub-region cooperation, Mekong River, riparian states,

structural change

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1. Introduction

Lao People’s Democratic Republic (Lao PDR or simply Laos) is the only landlocked

country in Southeast Asia and one of the few remaining communist regimes in the world.

These geographical and political situations in Laos limit the country from interacting with

international economic system. As a result, Laos’ economy is lagging behind as compared to

its “core” Southeast Asian counterparts. In 1992, Greater Mekong Sub-region cooperation

was established among six countries in this sub-region, namely Myanmar, Thailand,

Cambodia, Laos, Vietnam and China. This regional cooperation becomes a great opportunity

for Laos to “unlock” its geographical “gift”. There are a few scholars that have analysed the

impact of this regional cooperation towards Laos’ economy as compared to those analysing

its impact to Vietnam or Thailand economy. Therefore, this essay aims at giving an analysis

of the impact of Greater Mekong Sub-region cooperation towards Laos’ economic

development.

Given these circumstances, some questions appear to be prominent: Does Greater

Mekong Sub-region cooperation contribute to the economic development in Laos? If so, to

what extent does it contribute? Hence, the main argument of this article would be that Greater

Mekong Sub-region cooperation does play big role in Laos’ economic development. The

main reason for this argument is that Greater Mekong Sub-region cooperation gives Laos

more access for mobilization, thus “unlocking” it from relatively insignificant geographical

location. There are five goals to be achieved by this cooperation, namely infrastructure

linkage, cross border trade and investment, engagement of private sector in the development

programs, human resource development and environmental protection. Yet, one cannot

neglect the initial market liberalization policy which has been implemented since the mid-

1980s through New Economic Mechanism (NEM) as being another driving force for Laos’

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economic development. In this sense, NEM and GMS economic cooperation are in holistic

relation, hence furthering Laos’ development.

To address the issue, this article will be organized into some sections. This article will

be started with the explanation about theoretical framework that will be employed to analyse

the issues. Further, the third section will discuss about Mekong River and Laos’ strategic

position as well as the brief explanation about GMS cooperation development. The fourth

section will focus more on the analysis of the impact of GMS cooperation towards Lao’s

economic development as well as some challenges faced by Laotian government in order to

benefit from GMS cooperation as means of achieving sound economic development. Finally,

the last section will conclude the whole idea and analysis regarding GMS cooperation to

readdress the main hypothesis in this article.

2. Structural Change in Economic Development

Economic development is one of the most common terms used to refer to a country’s

well-being. Yet, what accounts for economic development still remains a debate among

scholars. One must understand that economic development is not merely about growth.

Growth is one way to measure economic performance but it cannot explain further why

developing or even least developed countries (LDCs) keep growing even though many of

their people live below poverty line. Daquila (2007) argues that “even if the economy grows

strongly, there is no economic development if people are poor, unemployed, and/or the gap

between the rich and the poor widens” (1). Besides, there are other scholars who propose

similar preposition to define economic development in which most of them would argue that

economic development is a combination between economic growth accompanied by changes

in output distribution and the structure of economy (Nafziger 2012, 14). In the other words,

what is demanded by economic development is the shift from rural, agricultural economy to

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be urban, industrial economy. This notion is applicable to understand how economic

development happens in different countries although the level of development may differ

from one country to another. To explain this, Yah (2009) argues that country specific factors,

such as natural endowment and government policies may lead to a different degree of

development.

In this article, structural change model of economic development will be used as

theoretical framework to assess the impact of GMS cooperation towards Laos’ economic

development. Structural change is a classical model of economic development which

emphasizes on the transformation towards new industries as to replace the traditional

agriculture accompanied by certain degree of changes in economic structure required to

support the transformation itself (Todaro 1997). Chenery (1979) identifies three proccesses of

the transition:

“the increase in productive capacity (accumulation of capital and skills);

transformation of resource use (demand, production, trade, and factor use); and such

socioeconomic processes as urbanization, the distribution of income and the

demographic transition” (7)

All of the above stated processes refer to the transformation from traditional economy

towards modern economy. In addition, structural change model also emphasizes further on

constraints coming from domestic –such as resource endowment, physical and population

size as well as government policies and orientation-; and international –such as access to

international capital, technology and international trade (Todaro 1997, 122). This model,

then, provides such a holistic approach in analysing a country’s economic development in

which GMS cooperation tries to promote.

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3. Mekong River, Laos and Greater Mekong Sub-region (GMS) Cooperation

3.1. Mekong River and Laos’ Strategic Position

Mekong River is the longest river in Southeast Asia which holds prominent position

among its riparian states as the source of livelihood for Laotian people. Since long time ago,

Mekong has been playing important roles for the lives of the people surrounding its river

basin as being the trading routes, cultural and social interaction and the witness of the ups and

downs of the relations among its riparian states (Serena, Diokno and Chinh 2006). Mekong

River flows from the north to the south of this region, passing six countries: China (Yunan

Province), Myanmar, Laos, Thailand, Cambodia and Vietnam. Among these riparian states,

China and Myanmar are considered as the extreme upstream countries while the rests are

downstream. In total, Greater Mekong Sub-region occupies about 2.3 million square km and

around a quarter billion of population (Dosch, Economic and Non-Traditional Security

Cooperation in the Greater Mekong Subregion (GMS): An Introdcution 2005, 1).

Laos is the only landlocked country in Southeast Asia which has abundant natural

resources, yet low development level. Among these six riparian states, Laos shares the largest

amount of water flow (35 percent of the total) and occupies most of Mekong basin area (26

percent) (Goh 2001, 471 as cited in Binh 2006, 70). This relatively strategic position of Laos

within Mekong deltas provides a plenty of opportunities for Laos to benefit from GMS

cooperation. Prior to the commencement of GMS, Laos was a closed, landlocked country

which was –and is- ruled by authoritarian government. Although in the late 1980s Laos has

started opening its economy through “New Economic Mechanism” (NEM), the development

in this country still remained low. Thus, the involvement of Laos in GMS cooperation -and to

some extent in ASEAN- will “unlock” Laos’ geographical location by enabling it to have

access to the sea, financial as well as technical assistance (Binh 2006, 72).

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Despite the possibility of “unlocking” its geographical location, Laos’ heavy reliance on

the river basin which accounts for 97% of its territory makes it even more vulnerable with the

possible intervention that can be done by the upstream country –China (Litta 2012, 151).

Faye, et al. (2004) argues that landlocked countries are dependent on transit countries in order

to perform international trades. Thus, ecnomic performance of a landlocked country will

depend heavily on the stability in its neighbouring transit countries. In the case of Laos,

political stability in the region was absent for decades due to endless wars and conflicts that

happened until late 1980s. The conflicts involved all countries in indochina in which all of

them are now members of GMS cooperation. The conflicts among riparian states which used

to hinder economic welbeing and development have been turned into prospective cooperation

through GMS.

3.2. Greater Mekong Sub-region (GMS) Cooperation

Greater Mekong Sub-region (GMS) cooperation is one of international regimes which

deal with common pool resource issues, particularly in the Mekong River. Prior to the

establishment of GMS cooperation, there were several efforts to initiate this sub-regional

cooperation, such as Mekong Committee in 1957. The initial goal of sub-regional cooperation

in Mekong was political rapprochement via economic cooperation (Dosch and Hensengerth,

Sub-regional Cooperation in Southeast Asia: the Mekong Basin 2005, 265). Since the end of

the World War II, Indochina countries (Cambodia, Laos and Vietnam) –all of them are GMS

members- engaged in long-lasting wars which hindered economic development in this region.

Thus, it is hoped that GMS cooperation will not only promote economic development, but

also political spill over. In addition, Than (2002, 43) identifies two possible factors of GMS

cooperation establishment: push factor (the fall of communism and fear of US embargo) and

pull factor (geographical, socio-economic and cultural proximities).

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Following the end of Indochina Wars and Cold War, GMS cooperation was initiated in

1992 by Asian Development Bank (ADB) and some development partners to achieve

Millennium Development Goals (MDGs) through the so-called “three Cs”, namely

Connectivity, Competitiveness and Community (ADB, Overview: Greater Mekong

Subregion Economic Cooperation Program 2012). Through these principles, the riparian

states envisage to improve connectivity by developing infrastructure such as transportation

and Information and Communication Technology (ICT) to facilitate competitiveness as well

as building the sense of community among them. As of September 2011, GMS cooperation

has implemented 55 investment programs with the total costs of US$ 14 billion covering all

priority sectors.

GMS has nine priority sectors of cooperation (at the initial stage, there were only six

sectors), namely agriculture, energy, environment, human resource development, investment,

telecommunication, tourism, transport infrastructure and transport and trade facilitation

(ADB, Overview: Greater Mekong Subregion Economic Cooperation Program 2012).

Among these nine sectors, GMS members acknowledge that infrastructure improvement is

one of the priorities as to link all riparian states and thereby promote trade, investment and

stimulate economic growth (ADB, The Greater mekong Subregion Economic Cooperation

Program Strategic Framework 2012-22: Background Paper 2010). Currently, there are nine

planned economic corridors within GMS: Northern Corridor, Central Corridor, Eastern

Corridor, Southern Corridor, East-West Corridor, Northeastern Corridor, Western Corridor,

Southern-Central Corridor and North-South Corridor. These economic corridors will open

road access across the sub-region where three of these corridors (North-South, East-West and

Southern Corridors) have already been completed (ADB, Overview: Greater Mekong

Subregion Economic Cooperation Program 2012).

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In general, GMS cooperation has been implementing several programs in sectors other

than transport infrastructure. In terms of trade and trade facilitation (TTF), there is Cross-

Border Transport Agreement (CBTA) among GMS members which aims to facilitate vehicle

crossing borders through exchange of traffic rights and promote minimum inspection time for

goods at borders (Srivastava and Kumar 2012, 4). This mechanism has been implemented in

several borders between Laos, Vietnam, Thailand and China. Besides, another promising

sector which is developed through GMS cooperation, it is power trading among GMS

countries. It is estimated that GMS has about 229 gigawatts (GW) hydropower potential

generated from Mekong River alone which is enough to meet energy demand throughout

GMS (ADB, Greater Mekong Subregion Power Trade and Interconnection: 2 Decades of

Cooperation 2012). Additionally, GMS cooperation also pays attention to the development of

Information and Communication Technology (ICT), agriculture and human resource

development related programs.

In enabling all riparian states to develop those nine sectors, public-private mix is chosen

as the strategy to finance the development projects in this sub-region, including funds from

developmental agencies (ADB, Overview: Greater Mekong Subregion Economic

Cooperation Program 2012). As of 2012, the total of investments in GMS programs accounts

for US$ 15 billion, of which $ 5.13 billion is provided by ADB, $ 5.59 billion by other

development partner and S 4.31 billion by GMS countries (Srivastava and Kumar 2012). The

implementation of all GMS projects is supervised by Vientiane Plan of Action as agreed by

riparian states in 2008 meeting.

4. The Impact of GMS on Lao’s Economic Development

4.1. Laos’ Economic Development Trend

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Since the inception of GMS cooperation in 1992, Laos has been experiencing

improvements in many sectors. Yet, it is also necessary to note that these improvements

cannot be separated from the initial economic liberalization which is promoted through New

Economic Mechanism (NEM) in the mid-1980s. The implementation of NEM by Laotian

government has contributed to relaxing economic constraints through exchange rate reform

and trade facilitation policies (Ishi 2010). Therefore, the initial economic liberalization

through NEM, in fact, opens more opportunity for Laos to benefit from GMS cooperation in

which further economic cooperation and facilitation at the regional level are offered. In

general, the picture of Laos’ economic development can be seen from the GDP composition

over time.

Figure 1 Laos’ GDP Composition Year on Year

Source: Adopted from the World Bank database (2014)

Figure 1 shows that there is a trend of economic development in Laos, particularly after

the commencement of GMS in 1992. The shares of industrial and service sectors experience

incremental (in some periods, drastic) improvements, except during 1999 where Laos had to

face the after-effects of economic crisis. The decreasing number of agricultural share in GDP

implies that Laos’ economy is experiencing diversification, in which the drop of agricultural

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product share started in 1992 after the inception of GMS economic cooperation. Yet, we

cannot simply assume that this figure results merely from GMS cooperation as economic

liberalization which took place in the mid-1980s would be possible to explain this trend.

Instead, GMS cooperation can be seen as the “booster” of Laos’ economic development since

this cooperation provides not only “hardware” (infrastructure) but also “software” (policies

and mechanism) to integrate Laos into regional and global economy.

4.2. The “3Cs”: Connectivity, Competitiveness and Community

In terms of connectivity, GMS cooperation has completed several projects such as

building road infrastructure, which opens up three economic corridors, namely North-South

Economic Corridor (NSEC), East-West Economic Corridor (EWEC) and Southern Economic

Corridor (SEC). Among these three corridors, Laos directly benefits from two corridors:

NSEC and EWEC (see Figure 2). Recently, there are four friendship bridges that have been

built to link Laos with Thailand, connecting Vientiane-Nong Khai, Savannakhet-Mukdahan,

Khammouan-Nakhon Phanom, Huay Xai-Chiang Khong. As mentioned earlier, Laos is the

only landlocked countries among riparian states and even in Southeast Asian region as a

whole. The development of transportation infrastructure in Laos will help “unlock” its

geographical gift and hence facilitate other sectors to perform, such as trade, investment,

agriculture and many others.

Besides, GMS cooperation also promotes other development agendas such as trade

facilitation, improving human resource competencies, promoting tourism and attracting more

investors to come and invest in GMS. In this sense, riparian countries will become more

competitive in regional and even global economy. The simplification of border procedures,

for instance, will boost trading between Laos and its neighbouring countries and even beyond

as trade barriers have been eased through infrastructure and sound trade policies. A study

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about border economy in Lao Bao-Dansavanh border (East-West Economic Corridor) shows

that improvements in road infrastructure generate positive effects, particularly in Laos’ side

(Shiraishi 2013). In terms of trade, there is an increasing trade figure (exports and imports)

from US$ 57 million to US$ 215 million while people movements also experience the similar

increase (Shiraishi 2013, 136).

Figure 2: The Planning of Nine GMS Economic Corridors

Source: (ADB, Overview: Greater Mekong Subregion Economic Cooperation Program

2012)

Figure 3 shows that Laos’ trading volume is increasing, albeit instable, from the late 1980s

until 2012. Yet, the figure also shows that Laos is experiencing trade deficit in which the

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amount of import is larger than export with the average export and import growths of 16.0%

and 17.6% respectively. Laos’ export is driven by resource-based products such as timber and

minerals with limited added value.

Figure 3: Laos’ Trading Figure

Source: Adopted from World Bank database (2014)

In addition, based on the figure 4, Laos’ intra-regional trade in 2000-09, if combined, made

up to more than two thirds of total trade while during the early period of GMS cooperation,

the share was less than 60%. It shows that GMS economic cooperation has promoted intra-

regional trades among riparian states.

Figure 4: Direction of Trade

0.00

10.00

20.00

30.00

40.00

50.00

60.00

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Export

Import

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Source: (Menon and Melendez 2011, 16)

Besides road connectivity, natural endowment of Laos has also attracted investors to

invest in hydropower generator. Given the fact that Laos occupies the longest share of

Mekong River and water flow, hydropower generation becomes a promising program to

develop. Phomsoupha (2009) identifies two national priorities of hydropower development in

Laos: 1) to promote economic and social advancement by providing affordable domesic

power supply and 2) to give Laos foreign exchange from power trading with its neghbouring

countries. Laos becomes the leading producer of this sector in the region which enables Laos

to export electricity to the neighbouring countries such as Thailand, Vietnam and Cambodia.

In total, hydropower generates approximately 30% of Laos’ total export (Phomsoupha 2009).

This figure shows that hydorpower generator in Laos has such significant impact on Laos’

trade, mainly, with other riparian states in the subregion.

4.3. Governance Issues

In measuring Laos’ economic development, it is also important to include governance as

another indicator. Some scholars have also argued that development and democracy –in this

article good governance will be preferred as democracy does not simply mean good

governance- are in the same direction. It means that good governance will promote

development or vice versa as good governance will develop efficiency and transparency. In

GMS cooperation context, good governance, be it democratic or not, will make GMS projects

implementation run well as malign activities during implementation stage can be eradicated

through accountability and transparency. Additionally, Good governance will create a good

image over the country which in the long run, it will be able to attract more investors to come

and domestic industries to blossom.

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By considering this factor, Laos still needs to improve its governance capacity as to

support economic development. This can be seen from several indicators such as high level

of corruption and freedom rights. Based on the recent data from Transparency International

(TI), Laos is ranked 140 out of 177 countries assessed. Meanwhile, in terms of freedom, Laos

is still considered as “not free” country by Freedom House. What does it tell us? International

perception towards a country is important in establishing the “image”. If Laos’ “image” is

worse as compared to other countries, Laos will be seen as incapable to implement the

projects or even unsafe for economic activity to grow.

In fact, some GMS projects have been suspended, if not cancelled, including the rail

project between Chinese province of Kunming and Laos’ capital of Vientiane which was

planned to be financed by Chinese state run EXIM Bank through loan (ABC 2012). The

project was cancelled in 2012 but in 2014 the project was discussed again and it seemed that

the project would be implemented. Yet, solvency still remains an issue in this project as the

project will cost Laos around USD 7 billion which is slightly lower than their USD 8 billion

GDP (RFA 2014).

5. Conclusion

Greater Mekong Sub-region (GMS) economic cooperation which was established in 1992

has gone through several developments to promote economic development among its

members. For Laos, GMS cooperation has helped it to “unlock” its geographical location

through transport infrastructure development. Hence, this cooperation proves to be quite

prominent in furthering Laos’ economic development as seen from projects implementation

and the positive after-effects resulted from the projects. In general, we can see that Laos is

shifting towards more diversified economy which does not only rely on agricultural sector,

but also industry as well as service sectors. Yet, In order to benefit more from this

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cooperation, Laos still needs to improve its governance capacity so it will be able to handle

the proposed projects and to increase investor trust on Laos’ government. In addition, Laos

also needs to deal with social issues such as poverty and other human development-related

issues as a means of structural change.

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