Laos has a good chance of climbing out of Least Developed Country status after the United Nations reviews its social and economic progress next year but may yet be held back by the coronavirus pandemic and ballooning debt to China, economists and analysts say.
The tiny communist country of 7.2 million people on China's southern border is one of 47 nations that still bear the U.N.'s LDC label, which comes with international aid and free-trade privileges. In February a special U.N. committee that vets the countries' progress every three years may decide that Laos is ready to graduate, sapping the aid and trade benefits provided to LDC nations but boosting its odds of attracting more foreign investment and versatile low-interest loans that would sustain economic growth and viability.
Laos has made graduating a key policy goal for years. It passed its first of two requisite consecutive reviews in 2018 by meeting two of the three criteria the committee gauges progress by — gross national income per capita, which was then set at exceeding $1,242, and human assets, a measure of the increase in health, education and literacy of the population. It failed to meet the third, economic vulnerability, a measure of how susceptible a country is to economic and environmental shocks that could affect sustained economic growth.
The X factors
An analyst and two economists who watch Laos closely told VOA recently the country was very likely to meet the same two criteria it met in 2018 at its second review in February. If it does, Laos could officially shed its LDC status by 2024, after the standard three years to prepare.
It helps that the data the committee will be using in February for the three core criteria only go up to 2019, before the COVID-19 pandemic. However, the committee will also be drawing on a flexible set of "supplemental graduation indicators and country-specific analysis" that will show the pandemic's social and economic toll on Laos.
"Based purely on those three criteria I'd say it's very likely that Laos will be above the line on at least two if not all three of the criteria. But then of course there's all of the other things that would need to be taken into account, so I wouldn't want to prejudge the outcome of the review yet," said Matthew Johnson-Idan, senior economist for the U.N. resident coordinator's office in Laos.
He said the supplemental indicators the committee looks at vary from country to country but tend toward those that help it decide whether the progress a country has made in meeting the three core criteria is sustainable. The more sustainable a country's progress looks, the better.
Johnson-Idan expects the pandemic to factor heavily into what those additional indicators will be.
Though COVID-19 has officially infected only 24 people in Laos and killed none, lockdowns at home and abroad have hit the economy hard. The World Bank forecasts Laos' gross domestic product growth rate to plummet from an average of about 7% over the past decade to 1% or less in 2020.
Fiscal fundamentals
Johnson-Idan said that will make it tougher for Laos to service a mounting debt burden and keep up the social services spending propelling the health and education gains that have brought the country to the brink of graduating from LDC status.
He said the government is making plans to improve its fiscal standing.
"It's certainly something, though, I would expect the [committee] to be looking at very closely when it comes to the review, and that will be one of the core factors that will determine whether or not they think this progress is sustainable post-graduation," he added.
The World Bank estimates that Laos' debt could climb to 68% of its gross domestic product this year, most of it owed to China for several massive infrastructure projects. In August the U.S. ratings agency Moody's warned of a credible risk that Laos could default on its debts "in the near term."
Imogen Page-Jarrett, Laos analyst for the Economist Intelligence Unit, a global research firm, said the country remains dangerously reliant on just a few industries, namely hydropower and mining, and a narrow range of exports, including garments and minerals. She said the government has also made little progress building up a mostly low-skilled workforce.
"There hasn't really been much progress in that respect over the last two years, so I would say the vulnerabilities in its economic structure are still high. And if we add to that the rising levels of debt, and especially the rising proportion of debt owed to China, I think that adds to the vulnerability of the economy," Page-Jarrett said.
"If they're using just the traditional three criteria then Laos would pass the review. But there is a risk that it would not now because they're using this additional criteria," she added.
In the neighborhood
On the whole, though, Page-Jarrett and Johnson-Idan reckon that Laos' growing economic ties to its giant neighbor have thus far done more to help than hinder its odds of graduating from LDC status. They say Chinese investment and trade have done much to expand the economy and raise the country's per capita gross national income past the new $1,222 threshold set by the U.N. for its 2021 review.
Mana Southichack, an economist and head of Lao Intergro, a local research firm, agreed. He said China was one of Laos' top three trading partners, along with fellow neighbors Thailand and Vietnam, and recently overtook Thailand as its largest investor.
A flood of cheap Chinese goods, from farm tools to motorbikes, has also helped boost living standards by saving locals money and making small businesses more productive, said Mana.
"These are the things many people don't look at, and they are important," he said.
Mana said the U.N. was more likely than not to approve Laos' graduation bid in February. He worries that the economic impact of the pandemic could drag the country back into LDC status after it graduates but believes it would pull through so long as China, Thailand and Vietnam recover from their own downturns in the next few years.
Of the five countries that have graduated to date, none has slipped back, and all have continued to grow, said Johnson-Idan.
The U.N. also has a few options besides simply passing or flunking Laos. If the country does once again meet two of the three core criteria in February but fails to impress on the additional indicators, the committee could recommend postponing a decision until 2024 or approving graduation and extending the transition period beyond the standard three years. Johnson-Idan said it has done both before.
On Thursday Laos' state-run Vientiane Times reported that the pandemic could delay the country's graduation but did not mention any changes to the government's plans. Planning and Investment Minister Sonexay Siphandone told the paper the government was still assessing the outbreak's impacts.
