Five months into the COVID-19 pandemic, East Asian countries like Vietnam, Taiwan and South Korea have garnered widespread praise for their effective handling of the coronavirus. Nearby Laos, with just 22 confirmed cases and no deaths, has gone largely unnoticed. While the World Health Organization has praised Laos’ prevention measures as “exemplary,” the mountainous Southeast Asian nation’s sparse rural population, limited transportation system and dearth of major cities have aided its response.
But while Laos has so far weathered the public health effects of the pandemic, the economic impacts are starting to bite. In May, the World Bank cautioned that Laos was “not immune from the global economic downturn” triggered by COVID-19, predicting its economy could shrink by 1.8 percent in 2020. Tourism and the service sector have been hit the worst, causing unemployment to surge to 25 percent. The outlook is especially concerning for a country that already has a high level of public debt.
Taking a strategic gamble, Laos has doubled down on what has regularly been blamed for its pre-coronavirus financial stresses: large-scale infrastructure projects, funded by China. Despite warnings of a “debt trap” and fears of environmental harm, the government is forging ahead with plans to build huge dams along the Mekong River and its tributaries, while the $6 billion China-Laos railway nears completion. Laotian leaders hope to make their landlocked country “land-linked,” and export electricity to its neighbors.
Yet with this grand vision for Laos’ future comes significant risk. While China hopes its investment will bring “win-win benefits,” COVID-19 is raising the stakes for its financially strapped neighbor.
Laos’ first cases of COVID-19 were recorded on March 24, prompting the government to order a strict lockdown and close border crossings. A task force, established in January after the virus first emerged, oversaw testing and designated the 150-bed Mittaphab hospital in Vientiane, the capital, as a special COVID-19 ward. The measures proved effective; after 19 initial cases, Laos went 102 days without a confirmed new case. The 20th patient, a returning South Korean worker, tested positive in quarantine on July 24. And two more cases, both Laotian nationals who had recently returned from abroad, were confirmed last week.
While the recent cases appear isolated, Prime Minister Thongloun Sisoulith remains wary of a second wave, and has urged the public to stay on high alert. A recent surge of cases in the central Vietnamese city of Da Nang, 100 kilometers from the border with Laos, is a particular cause for concern. Earlier this month, the government tightened border controls, including a requirement that anyone entering from Vietnam show a medical certificate upon entry and stay at a government-run quarantine center for 14 days.
For now, Laos’ domestic economy is open for business. Yet the critical tourism industry—which in 2019 contributed 4.6 percent of Laos’ GDP and employed 54,000 workers—is taking a big hit due to restrictions on incoming travel. The full impact might not be seen until 2021, as Laos’ peak tourism season runs from November-February, when the weather is cooler ahead of searing summer heat and monsoon rains. Even in the first quarter of 2020, before COVID-19 exploded in earnest, tourist arrivals dropped by 17 percent.
The World Bank has warned that Laos’ hospitality sector will experience a sharp drop in profits, while the return of 100,000 Laotian migrant workers will result in $125 million in lost remittances. Laos’ fiscal deficit was 5.1 percent in 2019, and is expected to increase to as much as 8.8 percent this year. External debt could rise to 68 percent of GDP, up from 59 percent in 2019. A shrinking economy means Laos will struggle to service its debts.
Laos has doubled down on what has regularly been blamed for its pre-coronavirus financial stresses: large-scale infrastructure projects, funded by China.
Many of its loans come from overseas, to finance megaprojects that the ruling Lao People’s Revolutionary Party is now banking on to secure a post-coronavirus economic recovery. The government is keen to see work start on a new, 1,460-megawatt dam, 25 kilometers from the northern city of Luang Prabang. It would be only the third on the mainstream of the Mekong River in Laos, after the completion of the 1,285-megawatt Xayaburi Dam and the 260-megawatt Don Sahong Dam last year. Laos has plans for seven dams on the Mekong in total, not including the dozens of dams it has already built on tributaries of the river. Neighboring Cambodia, Thailand and Vietnam have raised concerns about disrupted migratory patterns for fish, as well as droughts and flooding, but do not hold veto power.
The dams are central to the government’s plans to export 20,000 megawatts of electricity to its neighbors by 2030 and become what it calls the “battery of Southeast Asia.” Yet with other renewable energy projects like wind turbines and solar power plants coming online in the region, notably in Vietnam, there is doubt over whether sufficient demand for hydropower will exist in a decade. Energy profits may also be offset by harm caused to fishing and agriculture downstream if more dams are given the go-ahead.
The centerpiece of Laos’ development plans, a Chinese-built high-speed railway, has also moved closer to completion during the pandemic. The first phase is set to run from Kunming, the capital of Yunnan province in southern China, to Vientiane, before eventually connecting to Bangkok and Singapore. In late March, track-laying work began after construction was finished on 150 bridges and 76 tunnels along the meandering, 414-kilometer route. The project is 90 percent complete, and in July, workers broke ground on a new passenger station in Vientiane, the line’s main hub.
Although COVID-19 initially forced a halt to construction, work had resumed at “full capacity” by late April after developers recruited more Laotian workers and turned to local suppliers for crucial supplies like sand, gravel and cement.
The railway will allow Beijing to reach export markets overland, cutting journey times for goods moved by ship from ports on its eastern coast. It remains to be seen how much Laos—a central node in China’s ambitious international infrastructure scheme, the Belt and Road Initiative—will benefit. Although a joint venture, most of the work has been done by Chinese firms, such as the Guangzhou Engineering Group, which recently drilled the 9.2-kilometer Ban Nakok tunnel in northern Oudomxay province. Around 30 percent of the roughly $6 billion price tag will come from loans taken out by the Laotian government. While the exact financing arrangements remain obscure, Laos is reported to have borrowed $465 million, roughly 3 percent of its GDP, from the Export-Import Bank of China, albeit at a low interest rate.
In order to realize its vision of going from landlocked to land-linked, however, Laos must avoid becoming an unwitting transit zone. To benefit from the new international connectivity, it will need to improve its wider domestic transport network, building roads to link up with the new railway stations. Passenger services must also be adeptly marketed to boost tourism and promote business travel once COVID-19 restrictions end. Otherwise, the country risks becoming a vehicle for Beijing to expand its trade links southward.
High levels of debt are a persistent concern, as well. The International Monetary Fund had already upgraded Laos’ risk of debt distress from moderate to high in early 2017, while the World Bank predicts only a gradual economic recovery. If Laos can’t afford to repay, it may feel obliged to make additional political and economic concessions to China, increasing Beijing’s already strong leverage.
In a democracy, such outcomes would be essential to the political fortunes of the party in power. But in Laos’ authoritarian system, where the ruling party does not brook dissent, leaders have no such concerns. The targeted opening date for the railway, Dec. 2, 2021, marks Laos’ National Day and the anniversary of the ruling party taking power in 1975. This highlights the importance attached to the project by Laos’ government. Yet it is still uncertain whether Laos will reap the benefits, or remain a cog in China’s grand regional plan.
Michael Hart is a writer and researcher covering civil conflict and postwar issues in Southeast Asia. He has researched for the International Institute for Strategic Studies (IISS) and Action on Armed Violence (AOAV), and has contributed to World Politics Review, The Diplomat, Asia Sentinel and Geopolitical Monitor.