An economic evaluation of the Lao transition mix

Abstract

Since the middle of the 1980s, Laos has been engaged in an ambitious progranmae of economic reforms, the New Economic Mechanism. The main objectives of this programme are to dismantle elements of the command economy inherited from the first decade of communist rule, and to develop an integrated market economy. Reform began on a limited scale in the agricultural sector in the early 1980s, reaching other sectors of the Lao economy by the second half of the 1980s. During the latter period and the early 1990s, reform efforts were concentrated on the core of the command economy system, namely the administrative allocation of production resources in the public sector and the imbrication of the financial sphere and state-owned enterprises. Because monetary stability is a prerequisite for the sustainability of reform in economies in transition, reform of a more systemic character has been accompanied by a non-accommodating stabilisation policy, similar to that advocated by the IMF and the World Bank in their structural adjustment programmes. The comprehensive and irreversible nature of the reform programme measures introduced in 1986, indicated that the ultimate objective was to be an integrated and monetised market economy. The eight years that have since passed permit a more definitive assessment of the overall transition progranune in Laos to be made. The main purpose of this paper will be to evaluate the design and macroeconomic impact of this reform programme. Lao reform policy faces certain domestic constraints, many of an institutional and political nature, which limit the reformability of the economy. A second purpose of this paper will be to highlight these constraints and to show how they contribute to limiting the development potential of the country. The paper is structured in the following way. Section 2 briefly surveys the Lao transition programme (scope, timing and sequencing) and its economic and political logic. Section 3 provides a macroeconomic assessment of the Lao reform programme. Particular emphasis is placed on the effects on economic growth (overall and by sector), and internal and external balances. Section 4 highlights the bottlenecks, mostly of an institutional and political character, that prevent the Lao economy from embarking on a more ambitious and harmonious path of development, and draws some policy conclusions.