INTRODUCTION

: Laos or Lao-PDR (People Democratic Republic) is located in South-Eastern Asia. It was a monarchy state till 1975 but in December, 1975 it turned into a communist state and is still a communist one state party which started to be ruled by People’s Republic Party.

There have been a lot of reforms in the field of economy but the political situation in the domestic level has been almost same. One of the most important developments has been in the reduction in the poverty which was 46% in the year but reduced to 26% in the year 2009. FDIs have been increasing since the economic freeform and liberalisation which started in the year 1990.

In the 1980s the government tightened its policies and nationalised almost all the resources leaving the private sector handicapped. There was very less of foreign investment during this period and hence the country fallen down into the deficits.

This was the time when Laos’s government thought for the reforms in the economic policies and came up with liberalisation and inviting private sector investment. Due to these reforms the country could maintain high GDP growth from 2000 onwards of around 7%.

But it was hit by two major setbacks-one being the dissolution of USSR which was major aid providing union as well as trade partner. There it recognised the importance of the regional co-operation and joined ASEAN in 1997 and also signed agreement with Vietnam.

The other setback was the economic downturn in Asia in 1997.

Reforms in the political setup of the country have been very slow and almost steady. Latest election that took place in the region was in 2006 when PRP won 113 seats out of 115.The left independent parties in this region are considered to be the enemy of the state. The next election are to be held in 2011.Althogh this cannot be called as political stability as it is a communist state but this has brought economical stability in Laos. However, there has been some of the improvement in the foreign policies .The major advancement was the improvement of foreign policies with US and EU.

The major problems with Laos are the trade deficit which can be due to the reason that it is still not a member of WTO but recent progress has almost made it go through the door of WTO. It applied for the membership in the year 1997 and is very close to get the membership 13 years from then.

COUNTRY OVERVIEW:

HISTORY:

Lao-PDR also known to be “Indochina”, is one of the few countries which where it has been a one communist party ruling for a long time.After securing independence from France in 1954 as a constitutional monarchy it suffered an outbreak of communist rebellion that bundled it in the US bombing raids against eastern neighbor Vietnam during the 1960s. The communists declared a ceasefire in 1973 but overthrew the monarchy in 1975 with help of North Vietnamese, declaring a one-party state under the People's Revolutionary party (PRP).

During the late 1970s, the Communists moved to consolidate their control and socialize the economy. Private trade was banned, factories were nationalized, and forcible collectivization of agriculture was initiated. But as the economy in 1979 was near collapse because of severe drought in 1977 and flooding in 1978, the Laotian government slowed the process of socialization and liberalization started there in the year 1979.This change in the trade policies was prompted by reforms in today’s Asia economic power China which borders Laos in the north. A 25-year friendship treaty with Vietnam, signed in July 1977, led to closer trade relations with that country.

However this liberalization started cautiously and in the mid 1980s there were limited PPP (private public partnership) in agriculture and other sectors it also showed readiness to accept aid from the non-Communist world. But this growth got hampered by collapse of USSR i.e. Soviet Union in 1991 as it used to get traditional aid and technical assistance from USSR. This made Laos to rethink on its foreign and regional trade policies. Hence, it came forward to strengthen the commercial ties with the neighboring countries and further signed security pact with Thailand in the year1991. This pact holds an agreement to maintain peace, stability and security between Thailand's Amnajcharoen province. They understood that no trade can go well if the trading nations are not in peace. Laos considering importance of regional importance joined the Association of South-East Asian Nations (ASEAN) in 1997. Growth picked up in the mid-1990s, but severe recession occurred after the Asian crisis of 1997-98, mainly due to close investment and trade dependence on Thailand where the regional downturn began.

In 1988 the Lao national legislature, the Supreme People's Assembly (SPA), adopted new election laws and the first elections since the formation of the Lao-PDR in 1975 were held. Local and provincial elections were held in 1988, and on 27 March 1989 national elections took place for an enlarged Supreme People's Assembly. In March 1991 the Fifth Party Congress of the PRP changed Kaysone Phomvihan's title from prime minister to president, elected a new 11-member politburo, pledged to continue economic reforms in line with free-market principles but at the same time remained rigid with “one state party” concept. The newly elected SPA drafted a constitution adopted on 14 August 1991. The constitution provided for a national assembly functioning on principles of "democratic centralism”.

On 24 February 2002, parliamentary elections were held, but all but one of the 166 candidates were from the People's Revolutionary Party (PRP) and PRP won 108 of 109 seats in the National Assembly.

The PRP remained in total political control, winning 113 of the 115 parliamentary seats at elections in April 2006, with independents claiming the other two. Young Bouasone Bouphavanh as prime minister and Choummaly Sayasone as president pointed out more technological advancement .

They also seemed cautious on public communication and consultation also acknowledged public dissatisfaction with high corruption levels, slow growth, inequality and the quality of public health and education services. However, as the PRP shows no inclination to relax its grip on power, public discontent has resulted in periodic disturbances, and there are reports of a Citizens' Movement for Democracy becoming more organised and active in several regions. There has also been low-level but long-running resistance to communist rule by the Hmong ethnic minority, whose leaders allege discrimination and human rights abuse.

POLITICAL SYSTEM

: Laos is one of the last communist countries in the World. Till 1975 Laos was a conservative monarchy, dominated by a small number of powerful families. In December 1975, with the declaration of the Lao People's Democratic Republic (LPDR, or Laos) the king was abdicated. Although Laos was reorganized as a communist "people's democracy," important vestiges of traditional political and social behaviour remained same. Once being the colony of France, it does follow the French rules and norms. The political system of Lao People Democratic Republic is not based on the ICJ(International Court of justice) i.e. it does not follow the norms of world court. Laos is led by an authoritarian, centralized and secretive regime.The Lao PDR is divided into 16 provinces: Attapu, Bokeo, Borikhamxay (Bolikhamxay), Champassack, Houaphan (Houa Phan), Khammouane, Louangmamtha (Luang Nam Tha), Louangprabang (Luang Phabang), Oudomxay, Phongsaly, Saravane (Salavane), Savannakhet, Vientiane (Viang Chan), Sayaboury (Xaignabouli), Xekong (Sekong) and Xieng Khouang. It also has a special zone, Saysomboun (Xaysomboun), and a municipality around the capital city of Vientiane (Viang Chan).

EXECUTIVE BRANCH : President Lt. Gen. Choummaly Sayasone (since June 2006) is the Head of State and shares the executive with Prime Minister Bouasone Bouphavanh (since June 2006) in a somewhat semi-presidential model. The President and Vice-president are elected by the National Assembly for a five-year term, while the Prime Minister and Council of Ministers are selected by the President and elected by the National Assembly. Next elections are to be held in the next year i.e.2011.

LEGISLATIVE BRANCH:

: The Lao People's Democratic Republic adopted a new constitution in August 1991, establishing a unicameral National Assembly and was amended in 2003. The National Assembly makes decisions on fundamental issues and oversees administrative and judicial organs. It’s most significant powers include electing and removing the president of state, the president of the Supreme People's Court, and the prosecutor general, "on the recommendation of the National Assembly Standing Committee." Its prestige has been further enhanced by the constitutional mandate to "make decisions on the fundamental issues of the country" and to "elect or remove the President of state and the Vice President of state", by a two-thirds vote, and to approve the removal of members of the government on the recommendation of the president of state. Its powers encompass amending the constitution, determining taxes, approving the state budget, endorsing or abrogating laws, and electing or removing the two top judicial figures in the system. Members of the National Assembly have the "right to interpellate the members of the government." The National Assembly also ratifies treaties and decides questions of war and peace. These powers may prove to be limited, however, by a provision in the constitution that the National Assembly will generally meet in ordinary session only twice a year. The Standing Committee meeting in the interim may convene an extraordinary session if it deems necessary The 115 members are elected for a five-year term by universal suffrage at 18 years of age from a list of candidates selected by the Lao People's Revolutionary Party, the one legal political party in the country.

In 2002, parliamentary elections were held and PRP won 108 of 109 seats in the National Assembly.

In 2006 elections were held and out of 115 seats PRP won 113 seats,only 2 approved independents were elected in 2006. . Next elections to be held in the next year i.e.2011.

JUDICIAL BRANCH:

The People's Supreme Court is elected by the National Assembly and the legal system is based on traditional customs, French civil law and socialist practices. Laos has not accepted compulsory International Criminal Court jurisdiction.

In the year 1990 the judicial branch was upgraded after 15 years. New legislation provided a draft of a criminal code, established procedures for criminal cases, set up a court system, and established a law school. Also in 1990, the functions of the Supreme People's Court were separated from those of the office of the public prosecutor general. Until then, the minister of justice served as both president of the court and director of public prosecutions. Theoretically, the government provides legal counsel to the accused, although in practice persons accused of crimes must defend themselves, without outside legal counsel. Although the implementation of judicial reforms proceeded slowly and had not significantly improved the administration of justice by mid-1994, the new legal framework offers the possibility of moving away from the arbitrary use of power toward the rule of law.

The constitution empowers the National Assembly to elect or remove the president of the Supreme People's Court and the public prosecutor general on the recommendation of its Standing Committee. The Standing Committee of the National Assembly appoints or removes judges (previously elected) of the provincial, municipal, and district levels.

POLITICAL ENVIRONMENT

: Before 1975 there existed monarchy in Laos but in December 1975 the trend changed and it was declared a communist state and since then it has been a communist state and is the last communist country of the world. On 2 December 1975, the Lao People's Democratic Republic (LPDR) was established, with Prince Souphanouvong as president and Kaysone Phomvihan as prime minister

People’s Republic Party is the ruling party since 1975.There was some amendments made in the constitution in the year 1990 but it always followed one state party . In March 1991 the Fifth Party Congress of the LPRP changed Kaysone Phomvihan's title from prime minister to president. . Laos has enacted a number of new laws in recent years, but the country is still governed largely through the issuance of decrees. Whereas almost all the communist parties in the former Soviet Union and Eastern Europe have crumbled, in Laos, (Lao People's Revolutionary Party-- LPRP has retained undiluted political control.

Some small scale insurgencies were prevailing in Laos .There were reports of clashes in 2005 and 2007. In late 2006 and 2007, more than one thousand former fighters and family members were estimated to have surrendered to Lao authorities. These insurgents (Hmongs ) once raged secret war against communism in the favour of US. These Hmong rebels were hired by US during Vietnam War.

The advancement in the political situation has been very slow and almost steady. The political parties have been suppressed and are considered to be enemies of the state. The PRP has been so strong in its structure and administration that it could gain 113 seats out of 115 seats in the 2006 elections. The other independent parties could gain just 2 seats .If we take this to be mere data it reveals nothing but when we go deeper it does reveal that deep roots the party has in the country which is good as well as bad. Good because the development works are streamlined without any interruption which is created if a different party come into power as it reduced its poverty from 46% in 1992 to 26% in 2009 and is also growing at a constant GDP rate of 7.5% but at the same time it leads to authoritarian conduct which is never a healthy sign

In 2010, the political situation is not much changed the ruling person has changed but not the party or the way of conduct .

POLITICAL OUTLOOK IN 2010

: Globalisation and liberalisation has been the trend since 1990.The countries are more concentrated in their economic development and growth. Wherein most of the communist political parties in the world got dissolved, Lao-PDR has been a communist state since 1975. Laos has actively improved its already "special relations" with Vietnam and Cambodia, while always seeking to improve relations with Thailand, the People's Republic of China (PRC), and the United States.

Although local non-governmental organisations are still not permitted, there is an increasing number of trade and professional organisations, who are now allowed to register. The number of community service groups has grown and the mass organisations of the Party such as the Lao Women’s Union have also started to play a more proactive role. International NGOs have been present in Lao PDR for many years, and many of these work with local community-based organisations. The National Assembly plays a more active oversight role, and corruption cases have decreased.

Ethnic minorities inhabit the more remote areas of the country and as a result of thisisolation tend to be excluded from political power. At the same time, government strategiesdesigned to eliminate slash-and-burn agriculture and opium poppy cultivation and to bringremote communities closer to government services have had a disproportionately negativeimpact on ethnic minorities. The Government faces a real dilemma here, as leaving peoplein remote areas where they may have greater access to land and natural resources oftenleaves them isolated from services, markets and politics.

Foreign policies have been on the better side. Laos and Russia had diplomatic relationship since 1960 and on 28th July 2010 on the eve of 50th anniversary of this relationship Deputy Prime Minister and Minister of Foreign Affairs of Laos , Dr Thongloun Sisoulith, met with his visiting Russian counterpart Sergey Lavrov at the Ministry of Foreign Affairs. The two ministers discussed future cooperation and affirmed their intentions to broaden and deepen their traditional and historical union. In this regard, both sides reached a consensus regarding the exploration of untapped resources linked to education, economics, trade and investment, and the mining and hydropower sectors in Laos.

Russian association has been always beneficial for Laos . President of Laos also complimented Russia.

“......During our most difficult times, Russia has provided assistance to us,” President Choummaly said

The government or PRP has become liberal and is more serious on the country development as it has also agreed to waive visa fees for Lao expatriates who plan to visit their motherland during celebrations to mark the 450th anniversary of Vientiane as the nation's capital. The visa fee waiver will attract the expatriates to come to Laos and is a they may look forward to bring in their ideas and contribute for the development .This is really an appreciable step .

The GDP growth of Laos has been forecasted to be 7.8% in the year 2010.This surge in the GDP is due to the change in the trade and foreign policies. Laos has been making steady progress in its talks on joining the WTO, including reaching agreement with the EU on opening its market to goods. The accession of Laos to become member of WTO has been supported by EU as well.

The National Growth and Poverty Eradication Strategy (NGPES) is the comprehensivestrategic framework under which Lao PDR’s growth and poverty eradication programmeswill be developed and implemented. The NGPES is the result of an extensive processinvolving development partners and national stakeholders that started in 1996 when the6th Party Congress defined the long-term development objective as freeing the countryfrom the status of least-developed country by 2020.

By the end of 2010 the country will have a comprehensive legal system; and the legal procedures will be rationalised and improved with declaration, enforcement and dissemination. This will provide a more stable environment for small and medium enterprises (SME) as suggested by their sixth five year plan.

ECONOMIC ENVIRONMENT

: Economic stature of any geographic region is mainly determined on the estimation of respective GDP growth and prosperity in the region.

Before 1989 the Laos government nationalised most of the sectors an all the private trades were abolished but it resulted into deficits and from 1990 onwards it worked on liberalisation with small base . Laos and the People's Republic of China restored full diplomatic relations in 1989 and became full-fledged trading partners since then.The results, starting from an extremely low base, were striking - growth averaged 6% per year from 1988-2008.

However there had been downturn in the GDP caused by the Asian financial crisis that began in 1997.

Despite this high growth rate, Laos remains a country with an underdeveloped infrastructure, particularly in rural areas. Agriculture, dominated by rice cultivation in lowland areas, accounts for about 40% of GDP and provides more than 70% of total employment.

External stimulus also helped it improve its economic condition. The government in FY08/09 received $560 million from international donors. Economic growth has reduced poverty rates from 46% in 1992 to 26% in 2009. The economy has until recently benefited from high foreign investment in hydropower, mining, and construction.

Laos gained Normal Trade Relations status with the US in 2004, and is taking steps required to join the World Trade Organization, such as reforming import licensing. It has got supports from EU in becoming the member of WTO. The government appears committed in raising the country's profile among investors. The World Bank has declared that Laos's goal of graduating from the UN Development Program's list of least-developed countries by 2020 is achievable. According Laotian officials, the 7th Socio-Economic Development Plan for

2011-2015 will outline efforts to achieve Millennium Development Goals of eradicating poverty and ensuring Prosperity.

The GDP growth has been substantial at 7.5% every year while It is estimated to be 7.8% in 2010-11

Poverty however has declined to 24% in 2009 but still 24% is quite high. There ah been measures taken to reduce poverty such as NGPES (National Growth and poverty eradication strategy). There has been moderate increase in industrialisation.

In the five years (2001-2006), the industrial sector implemented several significantactivities, such as the exploitation of gold and copper at Sepon; zinc in Vientiane Province;construction of a cement plant in Vangvieng and a steel factory in Vientiane; the setting up of anumber of motorcycle assembly plants; the completion of the Nam Mang III Hydropower plant and a number of other hydropower projects; the completion of a number of high tensiontransmission lines; and installation of pilot solar energy production systems. A number ofindustrial zones have been established in such places as Vientiane and Savannakhet. Exports of electricity to Thailand will emerge as a major source of revenue in the next year or so as new hydropower projects come on stream, while tourism revenue will also increase as the country attracts greater numbers of foreign visitors.

By 1996, the country had allowed more than 500 foreign investors, in a variety of sectors The majority of $5 billion (75%) was invested in hydroelectric power. In the sixth five year plan the shares of industry and construction and services sectors in GDP have increased. The potentials of the private sector were strengthened in each of the economic sectors, increasing the shares of the domestic private sector and FDI in the economy

The infrastructure development is continued today also, to maintain, improve and develop thesocio-economic infrastructure with focus on such areas as inland, international, river and airtransport; telecommunications; schools; and health centres to create favourable conditions fordevelopment. It will provide the necessary infrastructure to sustain a modern nation State, where people in all parts of the country could easily communicate and participate in development activities in the country and interact with businesses and markets outside the country. Integrated inland infrastructure will be further developed, with particular emphasis on major roads, roads connecting economic centres, including those being developed in remote areas, and roads for national defence and security. New airports will be built and the current ones upgraded. A number of river routes and main river port systems will be improved and constructed. The construction of a railway system will commence.The distribution of sanitised water to the population and irrigation systems will beincreased, and fundamental infrastructure will be developed to support the development of the post and telecommunications sectors.

The strong growth experienced by the tourism sector in recent years (2003) was supported by the Government’s increasingly open tourism policy. Due to these advancements there has been appreciation of LAK(Laos’ currency) over years.

During the five-year period 2001-2005, the Lao economy has maintained rapid and sustainable growth. On average, the GDP grew at about 6.3 percent per annum, which isabout 0.4 percentage point higher than the average growth rate in the previous five-year period (1996-2000), but about 0.7 percentage point lower than the Fifth Plan target.

Overall inflation has been declining dramatically since mid-2008 (from10.3 percent in May 2008 to -1.6 percent in May 2009) following a drop in globaloil and other commodity prices.

ECONOMIC REFORMS:

A series of economic reform have taken place since 1981, especiallyregarding the restructuring of State Owned Enterprises(SOEs). Other comprehensive measures have been implemented since 1986 like encompassing the removals of price controls, trade liberalization, new tax policy and the creation of a two-tier banking system.

In mid-1988, a law on foreign investment was adopted and promulgated, together with decrees on interest rate policy, credit and exchange rate policies. . In 1989 the tax system was modified, the Foreign Investment Code and Decree was implemented, the banking system was restructured, and the privatization of state economic enterprises commenced.

Due to privatization of SOEs, 570 out of 680 SOEs have already been privatized throughvarious means including joint-venture arrangements and outright sale. Some of themhave also been liquidated. The privatization process is still going on with an emphasison outright sales rather than leasing.

A policy framework to support private sector development was created during the period 1990-1995. Some 35 laws were enacted, including the first Constitution of the Lao People’s Democratic Republic in August 1991 which recognized the activities and rights of the private sector, the Property Law which protects private ownership, and the Business Law, Bankruptcy Law and Surety Law which promote private business transactions.

Amendments were made to the Foreign Investment Law in March 1994 and to the Law on the Creation of the Bank in October 1995. An arbitration system was set up for the first time in April 1995, supported by a decree on arbitration and mediation, thus providing an opportunity for businessmen to settle contractual disputes.

FISCAL POLICIES

: Lao is one of those countries which has embarked on the road to the free market economy

open to international trade. This transformation has been since 1990.All these changes have

altered the relationship market and state’s fiscal policies.

Revenue collection grew and budget deficit declined as the governmentprogressed on the path of consolidation. The total fiscal revenues in 2009 has beenexecuted to 6,439 billion of Kip(Laos’s currency) equal to 14.9 percent of GDP and increased by 1.0% compared to 13.9 percent in FY2006/07 driven by increases in

both resource and non-resource revenue. Resource revenue increased significantly from 1.6 percent of GDP in FY2005/06 to 3.2 percent of GDP in FY2007/08.

Mining revenues are decreased in 2009 due to the fall of the copper price Reduction in mining revenues would put pressure on the fiscal policy, and potentially on social sector spending. Oil price decline , while beneficial for the economy as a whole, had a negative fiscal impact through reduction in revenues.

Domestic expenditures slightly exceeded the target at about 20.9 percentof GDP in FY2007/08 compared to 19.9 percent in FY2006/07 due tocontingency spending on the recent flood and food and oil prices mitigationmeasures. As a result, the overall budget deficit reached to 3.2 percent of GDPin FY2007/08, slightly higher compared to 3.1 percent in FY2006/07.

Looking ahead, the revenue stream is expected to decline due to reduced commodity prices and exports.

Revenue policy and administration reforms have resulted in strong revenue performance.For the third year in a row, revenue collection has met the budgeted revenue collection targets. Revenue collection excluding grants as a share of GDP has risen from 12.9 percent of GDP in FY2005/06 and13.9 percent of GDP in FY2006/07, and has increased to 14.9 percent of GDP in FY2007/08. Revenue increases have helped reduce the fiscal deficit from 3.8 percent of GDP in 2005/06 and to 3.1 percent of GDP in FY2006/07 and slightly increased to 3.2 percent of GDP in FY2007/08. Resource revenues are making a growing contribution to GDP, having increased from 1.6 percent of GDP in FY2005/06 to 2.6 percent in FY2006/07, and has increased to 3.2 percent of GDP in FY2007/08, notwithstanding the declining prices.

Even though expenditures were inline with annual budget estimates, external financing and grants as percentage of GDP has been declining over the past four years. Nominal recurrent expenditures, including wages and salaries have been rising as a reflection of the increase in the salary multiplier from 1800 in FY2005/06, to 2000 in FY2006/07, and to 2500 for FY2007/08. The salary multiplier has increased to 3000 for FY2008/09. Recent fiscal performance demonstrates the GoL’s commitment to fiscal sustainability. The government successfully resisted pressures to expand expenditures in response to strong revenue collection, thereby demonstrating its commitment to macro-fiscal stability. The deficit, including grants, declined in the last three years as revenues have performed above estimates andexpenditures have been contained at budgeted levels.

The GoL’s continued effort at reducing leakages, has improved tax revenue collection. Traders have been required to disclose the identities of purchasers and an electronic tax return submission system has been introduced for large tax payers. These measures have increased the transparency of the tax system and helped to raise tax revenue, which exceeded the target by about 23 percent in FY2007/08.

The 2008 debt sustainability analysis (DSA) shows that Lao PDR remainsat high risk of debt distress, even though debt service indicators are below theindicative thresholds for low income countries (LICs). In the past few years, as aresult of strong economic growth, appreciation of the Kip, and favourable

external conditions contributed to a decline in the debt . The stockof external public and publicly guaranteed (PPG) debt in nominal term wasUS$2.9 billion at end of 2008, or 53 percent of GDP, decreased from 81 percentat end of 2005. Nominal debt stock also declined as share of export of goodsand services, from an estimated at end of 2005 to around 143 percent currently.The net present value of PPG debt as percentage of GDP remains high buton a declining trend: it decreased to 46 percent of GDP in 2007 and decreasedto 35 percent by end-2008. Debt service ratios are below the indicativethresholds, reflecting the high decree of concessional of existing debt.The PPG debt in Lao PDR around 69 percent is held by multilateralcreditors , mainly the Asian Development bank (39 percent) and InternationalDevelopment Association (IDA - 23 percent). About 29 percent is held bybilateral creditors, mainly Russia, China, Thailand, and Japan. The remaining 2percent of PPG external debt comprises external debt incurred by public entitieson non concessional terms and guaranteed by the government, mainly forhydropower development and electricity generation, including to finance equitystakes.The debt ratio to GDP has improved in the past few years and debt status is in manageable and sustainable level and has no impact to the macroeconomic stability.

TRADE

: Major trading partner for Laos before the collapse of USSR but USSR’s collapse hampered

the growth of Laos. In the 1970s it used to trade with its bordering countries like China

Thailand, and Vietnam .Laos was once heavily dependent on Vietnam and USSR but later

recognized the importance of regional cooperation and thus became member of ASEAN in

1997.

Although Lao PDR is not currently a WTO member, it is seeking to become one, and

lodged an application for WTO membership in 1997.By this , Laos will be able to generate

more revenues through trade.

Lao exports are expected to surge to about $1.9 billion in 2010 from nearly $1.5 billion in 2009 due to recent recovery of regional and global demand and commodity prices. The commercial operation of hydropower projects is expected to generate a significant increase in export earnings for Lao PDR. Garments, wood products, minerals, timber and electricity are major export products, accounting for some 71% of total exports in 2009. The country’s terms of trade are therefore vulnerable to fluctuations in world commodity prices. The main export destinations of Lao PDR are the EU, Thailand and Vietnam, which together absorb some 64% of Lao exports (with 28.3% for the EU alone). Bilateral trade flows with the US are expected to grow following the normalisation of trade relations withthe US in 2004. This will allow import duties on Lao products to the US to be reduced from 40-90% to 5-20% in 2006.

The EU is the second trading partner of Lao PDR, but its first export destination. Lao PDR has enjoyed trade surpluses with the EU in recent years. Garmentsaccount for some 86% of exports to the EU. From EU, Lao PDR enjoys duty-free and quota-free access to the EU market except for arms and ammunition,

Laos trade with China has been growing as it was US $ 100 million to US $350 million in 2008.Lao PDR has engaged in regional and bilateral arrangements that are expected to assist its integration into regional and international markets.

Major imports are machinery and equipment, vehicles, fuel, consumer goods and the major importing nations were Thailand 66.2%, China 11.45%, Vietnam 5.3% in 2009.There has been trade deficit since a long time and in 2009 it was found to be US $800 million.

FOREIGN INVESTMENT: FDIs in Laos came from its neighbouring countries.In 2001: Thailand FDIs were US $ 3,291,000 : China FDIs were US $ 13,405,000

: Vietnam FDIs were US $ 3,412,570

In 2007: Thailand FDIs raised to US $ 85,291,000 : China FDIs raised to US $ 492,405,000

: Vietnam FDIs raised to US $ 155,713,820

FDIs has rapidly increased since 2004 mainly because foreign mining companies began to increase production in the mining sector and the price of minerals increased during the period .in 2007 ,the actual FDI inflows were estimated at about US $950 million ,which showed to increase by 60% from 2006.About 90% of FDI value is related to the resource industry of which hydropower sector has got highest share of 54.4%(1989-2008).FDI in the resource sector ,which include mining and hydropower ,contributed 2.5% of the economic growth rate.FDI in the mining sector also contributes to increased exports.FDI in mining sector also contribute towards narrowing budget deficit.Japan is also interested in the agricultural and mining sector and has 50 projects worth 28.9 million US $ and ranks 6th. .Japanese have invested the most in agriculture . Thailand has the largest share in FDI that accounts for 26.5%, France comes second in terms of FDI investment followed by Vietnam.

BANKING

: In March 1988 commercial bank functions were separated from central bank functions. The Vientiane branch of the old State Bank, the Banque d'État de la République Démocratique Populaire du Laos (RDPL), became the central monetary agency. In June 1990, the Central Banking Law was passed, establishing the Bank of the Lao People's Democratic Republic, or Central Bank, to replace the State Bank. The Central Bank has about ninety regional branches Other branches of the former State Bank were transformed into autonomous commercial banks to promote private investment. These banks are responsible for accepting savings deposits from enterprises, government departments, and individuals, and for granting credit to state entities, joint ventures, and individuals for capital investment and business start-ups or expansion. Commercial banks are restricted from granting credit to economic units

experiencing deficits and losses. These banks do not receive subsidies, although they do render 60 percent of their profits to the government.

By 1991 Laos had seven commercial banks, including the Joint Development Bank--a Lao-Thai joint venture--and six wholly state owned banks. Government policy encourages privatization of these six banks. However, in part because of the absence of laws governing banking activities and in part because of the relatively small size of the economy, foreign bankers do not express much interest in these ventures.

The Foreign Trade Bank (Banque pour le Commerce Extérieur Lao-- BCEL), a subsidiary of the Central Bank, is the country's foreign exchange and foreign trade bankResponsibility for state-owned enterprise debts was transferred to the commercial banks, giving them enormous liquidity problems.

In 1989 the government allowed foreign banks to begin operations in Laos.The Joint Development Bank became the first private commercial bank permitted to operate since 1975, followed soon thereafter by the Thai Military Bank

In 1990 the Asian Development Bank granted Laos a soft loan of US$25 million to recapitalize the banking system.

In Laos number of commercial banks in 2009 are 20 while it was 11 in the year 2004.if we see the total no of branches of all the banks it is 72 out of which 69 is in the urban area.One of the major commercial bank in Laos is ACLEDA Bank Lao Ltd. (ABL) which was established in Vientiane, July 08, 2008. It is the largest Cambodian bank .the main sources of capital for this bank is the shareholder’s and savings Thus rural areas does not gain much from the banking system of country. The loan provided in 2009 by these banks in the year 2009 is 18552570.00 millions of national currency. In 2009 commercial bank prime lending rate is 11% which was 24% in 2008

TAXATION:

: In August 1990, the government established two separate departments, theTax Department and the Customs Department, from the former Department on Taxand Customs. Their roles and functions have been more clearly defined in order tostrengthen the tax collecting organizations. In August 1991, the governmentadopted the Centralization of Tax Collection and the fiscal yearwas changed from covering a calendar year to run from October to September.Since 1993, 11 departments have been created within the Ministry of Finance toimplement fiscal policy and management. Four of them are responsibility ofrevenue collection: the Customs Department, the Tax Department, the State PropertyManagement Department and the Land and Housing Management Department.However, ample constraints to tax collection still exist. The serious ones include alack of qualified staff and modern office equipment for monitoring and checkingtraders, and a lack of warehouses in which to store smuggled goods that areconfiscated by Customs Officers. The problem is exacerbated by a lack of awarenessand willingness of the people to pay taxes as well as a weak enforcement regime.

The current system of taxation in Laos remains one of the more liberal systems in the Asia-Pacific region. However, it is still being developed and is highly vulnerable. The Lao PDR taxes all Lao PDR resident individuals and companies on their worldwide income. However, Companies or branches established under the Foreign Investment Law, are only taxed in The Lao PDR on income earned in The Lao PDR. The Government imposes taxes on all persons or legal entities consuming goods or services, conducting business, performing independent professions and generating income in The Lao PDR.

There are 8 broad categories of tax outlined in the Tax Law, as follows:

● VAT: From January 1, 2009 The Lao PDR introduced VAT. The rate of VAT is 10%. Initially, the VAT is to apply to a limited range of locally produced and imported products including: Electricity, water, fuel and all imported products unless they receive an exemption from the Lao government.

● Turnover Tax: Turnover tax is a form of goods and services tax. It is collected on imports and the sale of imported and locally produced goods. In addition, general services, constituting the supply of labour to others in return for a service fee, are also subject to turnover tax. The current applicable rates of turnover tax are five percent and ten percent. Payment of turnover tax is made to the tax authorities on a monthly basis, on or before the 15th day of the following month

● Excise Tax: Excise tax is collected on certain types of goods, including fuel (five to 25 percent), alcohol (50 to 70 percent), carbonated drinks and invigorating drinks (10 to 30 percent), tobacco products (55 percent) and cosmetics (30 percent). Imports of equipment, means of production, spare parts and other materials used in the operation of foreign investors' projects or in their productive enterprises are taxed at a uniform flat rate of one percent of the imported value.

Raw materials and intermediate components, imported for the purpose of processing and then exported, are exempt from such import duties.

For imported goods, excise tax is payable at the time of import; taxes must be remitted in full before goods leave the customs post. For domestic production, producers must produce a monthly excise tax return every month before the 15th day of the following month.

● Charges and Service Fees

: Under the Tax law, Government can collect fees for the issuance of enterprise registration licenses, tax registration licenses, business licenses, permits, certificates or other official documents, the use of roads, the entry into and exit from the country, the issuance of visas to enter and exit the country, residency in Laos, the use of radio and television satellite receivers, the affixing of advertising signs, shop signs, and other services in The Lao PDR.

The charges and service fee rates are set periodically by Presidential Decree in order to meet the actual socio-economic conditions from time to time.

● Personal Income Tax (PIT)

: Personal Income Tax in Laos is levied on every individual, resident or non-resident, who derives assessable income from employment or business in Laos, or has assets located in Laos, whether such income is paid in or outside of Laos.Five percent to be paid by the employer while four and a half percent to be paid by the employee.

● Profit Tax

: Profit tax is calculated on the difference between the total income and total deductible expenses for the accounting year.For businesses operated by Lao nationals, the profits tax rate is 35 percent. However, this rate falls to 20 percent where the entity is licensed under the FIL.

● Social Security

: The Social Security Decree came into force in June 2001 and is being introduced gradually. It applies to employees of state-owned enterprises, private enterprises and joint enterprises ,enterprises that employ 10 or more employees and enterprise that has less than 10 employees, but is a branch of a larger enterprise.

● Minimum Tax

: The minimum tax (MT) is an extra tax some people have to pay on top of the regular income tax. The original idea behind this tax was to prevent people with very high incomes from using special tax benefits to pay little or no tax

TARRIF AND NON TARRIF BARRIER

: Tariff barriers- Despite the attempts to ease market access for developing countries important exports are often sensitive products to their major trading partners. Therefore, importing countries have typically imposed high tariffs on these products. Moreover, these products are often excluded from or have limited GSP benefits. Laos trading partners namely the U.S., EU, Japan, China and Thailand whom they export goods such as animal products; fruit and vegetables; fish and fish products; textiles; clothing; and leather and footwear. Among manufacturing products, clothing is very sensitive for all five countries. Tariffs imposed range from 9.2% for Japan to 24.5% for Thailand. Leather and footwear are highly protected in Japan, China and Thailand. Tariff rate levied are 15%, 13% and 12.7%, respectively. Interestingly, tariff escalation2 is found in textiles and clothing products.

For example, in the U.S., tariff rate on textiles is 7.9%, but tariff rate on clothing is higher at 11.5%. Similarly, tariff rates on textiles and clothing in EU are 6.6% and 11.5%, respectively.

Non tariff barrier

: Besides tariff barriers that prevents Laos from reaping the full benefits from trade openness, it also has to confront difficulties with non-tariff barriers, which could reduce the competitiveness of their exports in the global market. Based upon the analysis regarding export structure, the non-tariff barriers that are of particular concern to Laos include Agreement on textiles and clothing; Rules of origin; Technical Barriers to Trade (TBT); and Sanitary and Phytosanitary (SPS) measures. Some of the non tariff trade barriers are import prohibitions ,import licensing ,customs and taxes.

CURRENCY/ MONETARY POLICIES

: Kip and LAK is the currency of Laos. The central bank of Laos is given the responsibilities to for currency operations related to loans and financing, transactions with securities and banking operations. US dollars and Thai Baht are widely accepted in Laos. In up-market restaurants and hotels, bills are often presented in three choices of currencies (Lao Kip, Thai Baht and US dollars) for your convenience, however, it's almost always better to use Laos currency instead of US dollars or Thai Baht because the exchange rates in such places are usually in their favours.

1 Lao Kip = 0.003822 Thai Baht

1 THB = 261.64 LAK

1 USD=8220 LAK

WTO ACCESSION

: Laos is not yet the member of WTO. Laos applied for the membership of WTO on 16 July 1997 and formed a working party towards to work on the same on 19 February 1998.This party is currently headed by Mr. Zhang Xiangchen (China) Since May,2009. There has been several meeting of this working party and the first meeting was held on 24 October 2004 followed by four others on 30 November 2006,15 November 2007 ,4 July 2008 and 14 July 2009.Lao PDR has applied to join the World Trade Organization so it can fully integrate into the global trading system. The Government of the Lao PDR regards membership of the WTO as a necessary step in the process of modernizing its economy. The strategy of the Government is to build growth and prosperity with a market-based economic system. The aim of the Lao PDR is to complete accession in time to participate in the latter phase of the multilateral round of trade.

As summarized by Rodrik (1995), the general benefits that come fromthe free trade those rules encourage include the following:

• better allocation of national resources towards industries with the strongest comparative advantage;• enhanced learning and newer technologies from interacting more with the rest of the world;• greater flexibility, via trade, for dealing with shock such as natural disasters; and• less wasteful rent-seeking lobbying activities by groups seeking government assistance and protection.

Thus by joining WTO Lao PDR expects to secure economic benefit from accession to the WTO. Lao PDR expectsthat adoption of WTO rules and obligations will lead to a more productive private sector, higher levels of foreign investment and a better functioning market mechanism.Lao PDR also expects tangible trade benefits from membership. Lao PDR values the right tonon- discrimination which membership of the WTO provides. Because the Lao PDR is not a member of the WTO it is not entitled to non-discriminatory treatment of its exports by other countries.Lao PDR has export interests where membership of the WTO can deliver better opportunitiesin foreign markets. Garments are an important export from the Lao PDR. The capacity of ourgarment manufacturers to export is restricted by trade barriers in major import markets. Lao PDR is aware that long term liberalization of world garment markets through the WTO will create better export opportunities.Agriculture is also an important export sector for Lao PDR. Many barriers exist to exports ofagriculture. Like in garments, Lao PDR is aware that liberalization through the WTO will create better export opportunities.The Lao PDR is also a landlocked country. Freedom of transit through third countries is vitalfor Lao PDR trade. The right of freedom of transit which is provided by WTO rules will be very important to the Lao PDR.Accession to the WTO will challenge the capacity of a Lao PDR institutions and capabilities. The Lao PDR has received support from a number of countries and organizations for preparation for accession. There has been lots of advancements since 1997. Laos has entered the final round of negotiations to enter the World Trade Organization (WTO). The process, which has been ongoing for 13 years, was set to accelerate in the coming year

"...........Laos is in the final round of negotiations for WTO accession," Lao Minister of Industry and Commerce Nam Vinhaket told a conference on the WTO held in Vientiane this week.

It took China 15 years before gaining WTO membership in 2001, while after 13 years of talks Laos is already not far from its goal so it’s really a great achievement for Laos.

BUSINESS ENVIRONMENT

: Laos has been ranked 89 in 2010. As many as 7 procedures has to be carried in to establish a firm and do a business and it takes around 100 days to start a business from the commencement of the procedures. In today’s era Laos is one of the liberal market to start a business in Asia Pacific regionThe private firms are encouraged and as it is almost its way to get the membership of WTO thus trade has also been liberalised.Laos is also rich in mineral resources and it encourages mining .There has been investment in this sector by countries such as Thailand , France, China ,Japan Vietnam. and Japan has also invested in the agricultural sector of Laos.Hydropower is one another of the most attracting investment.the above mentioned regions are also investing in this sector.Telecommunication has not developed in Laos and hence there is great opportunity for the private international players of telecommunication to put their feet in Laos.

LABOUR FORCE:

: The labour force participation rate measures the proportion of the working age population that is employed, or unemployed but seeking work. Working age people who are not part of the labour force include students, unpaid household workers, the elderly and the infirm. The labour force present in Laos is around 2,100,000 and 80% of those are engaged in the agricultural sectorLabour force participation rates are high across Laos mainly LMB (Lower Mekong Basin). There is a strong economic need for everyone to work. The highest participation rates occur in the the upland areas of northern and southern Lao PDR .In Laos the main occupation is agriculture and that too rice cultivation and is found that men and women work together to cultivate rice. Women also grow vegetables and raise small livestock, process fish and other agricultural products and sell surpluses at markets. Their handicrafts are a major source of household income. The shares of women working in agriculture generally exceed the shares of men by 5 to 30 percentage points.The major problem with the labour force in Laos is that the most of the labour force are not skilled to be in the industrial sector. Overall unemployment in Laos is around 2.5% but it is much lower in the rural area as compared to urban areas. The capital city of Laos has unemployment 2-3 times more than the rural areas

CORRUPTION

: The Lao Peoples Democratic Republic (LPDR) has scored almost at the bottom of countries globally as a result of high-levels of corruption, and is listed as among the globe’s most corrupt nations, this makes investment in Laos a major risk to investors, businesses and tourists and is one of the most corrupt nations in the world today, according to study by a leading non-governmental organization. Widespread bribery and extortion are common within the Lao government and public sector. Laos scores 2.0 in the corruptions perception index and ranks 158 which show that the extent to which corruption is prevailing. Police kept to maintain law and order can be seen taking few currency notes to let a criminal go by.

There are penalties for corruption but they are not effectively enforced. Government agenciesresponsible for enforcing laws against corruption generally lack sufficient powers and funding to carry out their mandates. The PRP uses its control over the government and media to block the prosecution of corrupt party officials. The government generally deals with corrupt officials by forcing them to resign, retire or transfer to a new position rather than bring charges against them.

Obstacles to foreign investment

: One of the major obstacles towards the foreign investment is the corruption. Corruption in the state causes vulnerable situation for the foreign investors.There is no one step service for the investors but a segregated approval procedure i.e. 7 procedures had to be followed.

Except for the energy sector, the line department have no model contacts for investment.As well the length of time needed for the investment approval depends less on the type of investment but more on its size. Thus small and middle sized enterprises might need 3-4 years to get their activities approved. One of the other problems in FDI is the lack of clarity in the tax law which is a subject to complain for the foreign investors. The financial institution and the bank in Laos provide limited services and thus the foreign investors have to go for international banks to get loan.

CONCLUSION

: There has been growth in the various sectors of the country and there are various sectors Which needs serious concern for the development of the country . The political scene as such is not going to change as the PRP is aggressively dominating However if any significant change has to take place that is only possible through the reforms through which Laos is going on. Country’s foreign policies are highly appreciable as it has increased FDIs in the area. The region has got lots of potential to develop as a hub for electricity generation for its hydro-energy sector and the mining sector. Agriculture can be a competitive advantage as well and this will be well visible when it becomes the member of WTO. It is also a few steps behind to get the membership of WTO which will enhance its exports in agricultural products. Although there has been some obstacles to FDIs but due to its competitive advantage in the field of mining, hydroelectric projects and agriculture FDIs are increasing . It also faces high export duties from major trading countries like Thailand, China. The progress made in the reduction of poverty has been very appreciative as it has been decreased to 24% from 46% almost 20 years back .There has been plans such as NGPES to eradicate poverty as well there are policies for the improvement of economy of the country. There have been two sectors which are not looked upon much by the government and these are telecommunication and internet. The telecommunication in the region is not that developed and can be a target area to put on investment and same is the case with providing internet services provided the Laos’s government is interested in that.

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Country profile

Geography: Location: Southeastern Asia, northeast of Thailand, west of Vietnam

Area : total: 236,800 sq km

Border countries: Burma 235 km, Cambodia 541 km, China 423 km, Thailand 1,754 km, Vietnam 2,130 km

Climate : tropical monsoon; rainy season (May to November); dry season (December to April)

Terrain : mostly rugged mountains; some plains and plateaus

PEOPLE

Nationality: Lao(s) or Laotian(s)

Population: 6,834,345 (July 2010 est.)

Annual population growth rate: 2.32% (2010 est.)

Ethnic groups:

Religions:

Languages: Lao (official), French, English, and various ethnic languages

Literacy : total population: 68.7%

male: 77%

female: 60.9% (2001 est.)

GOVERNMENT:

Government type: communist state

Independence : 19 July 1949 (from France)

Constituion : promulgated 14 August 1991; amended in 2003

Branches :1.Executive 2.Judicial 3.Legislation

Administrative divisions: 16 provinces

Suffrage: 18 years of age; universal

ECONOMY

GDP: $14.22 billion (2009 est.,ppp)

6.5% (2009 est.,real growth)

Currency: Kip

Unemployment: 2.5% (2009 est.)

Trade:

Export: $1.104 billion (2009 est.)

Lao 55%, Khmou 11%, Hmong 8%, other (over 100 minor ethnic groups) 26% (2005 census)

Buddhist 67%, Christian 1.5%, other and unspecified 31.5% (2005 census)

Import: $2.034 billion (2009 est.)

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