This article was originally published on The Diplomat
Recent years have witnessed much concern about the expanding scale of China’s influence within Laos. Almost half of Laos’ total public debt is now held by China. The Chinese state-owned company China Southern Power Grid now holds a controlling stake in Laos’ national power grid, and in December this year, the highly contentious Lao-China high-speed railway is scheduled to begin operating.
This year also marks the 60th anniversary of diplomatic relations between China and Laos and, with the recent appointment of Khemmani Pholsena to Minister of the Presidential Office, the anniversary year will also likely see a further strengthening of political ties between the two countries.
According to a 2017 media release from China’s Ministry of Foreign Affairs, “the Pholsena family is China’s good friend and old friend,” and several family members attended the same school – the Beijing Bayi School – as President Xi Jinping.
Laos’ party system is interwoven with powerful elite familiesthat jostle to shape political and economic policy, and when Xi Jinping traveled to Vientiane in 2017 he spent time with Khemmani and her family.
While it seems that concerns regarding China’s influence in Laos are well-founded, it also bears emphasizing that Laos has an impressive track-record when it comes to balancing the interests of competing diplomatic partners.
China is a critically important partner for Laos, but it is by no means its only partner. Political, economic and cultural ties to a number of other countries continue to shape Laos’ international affairs.
Beginning with bilateral aid funding, Japan has long been Laos’ largest bilateral aid donor. Japan is a well-respected donor that has delivered projects of a high standard across multiple sectors.
Laos’ second largest bilateral aid donor is South Korea, with South Korean aid increasing significantly over the past decade. As a member of the OECD Development Assistance Committee (DAC), Seoul adheres to the same lending standards as other OECD donors regarding, for example, funding transparency, avoidance of tied aid, and the separation of Official Development Assistance (ODA) from Foreign Direct Investment (FDI) and Other Official Flows (OOFs). One point of distinction between South Korean aid and that of many other OECD donors has been financial support for urban development initiatives such as the beautification of Vientiane’s Mekong riverside Chao Anouvong Park.
It is difficult to provide precise comparisons of Chinese development financing to OECD donors because China doesn’t adhere to the same lending or reporting systems, and doesn’t adopt the same distinctions between ODA, FDI, and OOFs. That said, the broad consensus is that China has now matched or exceeded Japan in terms of its development financing.
China does not yet, however, have the same credibility as Japan in terms of the quality of its aid financing projects. Indeed, much Chinese aid funding has supported controversial projects, such as hydropower dams, which have significant negative social and environmental effects.
Exceeding both Chinese and Japanese development financing to Laos is aid from the Asian Development Bank (ADB). The Bank is Laos’ largest aid donor, and it is significant that Japan is its largest investor and shareholder. Chief ADB positions are always held by former Japanese finance ministers, and ADB programming tends to align with Japan’s international interests. By contrast, the Chinese-led Asian Infrastructure Investment Bank only approved its first project in Laos in 2019.
Development financing is one of the tools that countries use to advance their geopolitical interests, and competition between Japan and China has been evident regarding aid funding. In Vientiane, for example, the upgrading and expansion of Wattay International Airport was undertaken with both, Chinese and Japanese financing.
Over the past year, geopolitical rivalries have also played out via COVID-19 assistance with China, Vietnam, Thailand, Japan, and Korea all providing Laos pandemic-related assistance.
Foreign Direct Investment
Over the same 20-year period, Laos’ second and third largest FDI providers, Thailand and Vietnam invested $4.7 and $3.9 billion, respectively, while Korea and Japan provided just $751 million and $180 million, respectively.
Notably, Japan’s FDI to Laos is not of the same scale or significance as its aid financing, although in 2019 it totaled $22 million, making it Laos’ fifth-largest investor. For the same year, Chinese FDI totaled around $1 billion.
Laos’ top three trade partners, in order, are Thailand, China, and Vietnam. Korea and Japan also remain important partners, but are some way behind the previous three, all of which border Laos.
Laos’ trade relationships with all of its major partners are dominated by the export of natural resources (including copper, gold, rubber, and timber) and the import of manufactured goods (such as telephones, vehicles, motors, and steel products). Laos has eight trade agreements in force, and more than 90 percent of its imports and exports flow to/from trade agreement partners.
As expected, there is alignment between the trade patterns of leading partners and their FDI flows, as well as geographical correlations regarding where trade and investment is targeted.
While much of Chinese investment is clustered in the north of Laos, much of Vietnamese investment is concentrated in the south. Thai investment is dispersed, but is prominent along the shared border between the two countries.
Tourism is an important economic sector for Laos. It sees a wider distribution of investment and a more dispersed livelihood contribution than large-scale infrastructure or mining projects.
Thailand is – by more than a million arrivals in 2019 – the largest source country to Laos for tourism, followed by China, Vietnam, Korea, and Japan.
Korean tourism arrivals now substantially outnumber Japanese arrivals, and are also growing more quickly. In the town of Vang Vieng, for example, streets and restaurants that were once filled with inebriated Western backpackers now have a large Korean presence.
Tourists from different countries are looking for different experiences, have different spending patterns, visit different sites and places, and have differential impacts in the places they visit. Accordingly, arrival numbers provide an incomplete picture of tourism’s impacts. What they do reveal, however, is that Laos’ major trade, aid, and investment partners, are also its major tourism partners.
In the realms of geopolitics, money matters. Yet Laos’ international affairs are also shaped by complex forces beyond economic flows.
For example, Thailand has a complicated – close yet oftentimes tense – history with Laos that shapes contemporary diplomatic relations. Thai and Lao kingdoms fought a number of historic wars that are still very much a part of contemporary nationalism, though these lingering tensions sit alongside intimate familial and business ties, close cultural and linguistic commonalities, and other bonds across national borders. People-to-people ties are rich and diverse.
Vietnam’s relationship with Laos is shaped by entwined revolutionary histories, and the ongoing political training of Laos’ party cadres in Hanoi. As with Thailand, transborder familial and business ties also weave the two countries together, as does a common history of French colonialism.
One important difference between Laos’ relationship with China and Cambodia-China relations, for example, is that the latter does not share the same political closeness with Vietnam – and hence does not seek the same middle-ground on sensitive regional disputes such as those regarding the South China Sea. Where Vietnam has historically invaded China, and where China, Thailand, and Japan have all historically invaded Laos, Laos and Vietnam’s war history is predominantly one of allyship against foreign forces.
As detailed above, China is Laos’s largest provider of FDI and development financing, its second-largest trade partner, and its second-largest source of tourism arrivals. China is also the most important financer and builder of large-scale infrastructures in Laos, and this makes it a critical partner for achieving Laos’ two national development priorities: moving from landlocked to “land-linked,” and becoming (via hydropower exports) the “battery of Southeast Asia.” Finally – and while this is difficult to get accurate numbers on – Chinese immigration to Laos is also growing.
All of this makes China a critically important player in Laos that is present in complex ways, which extend beyond official aid and investment figures. But China is by no means Laos’ only significant diplomatic or economic partner.
As a small, landlocked, heavily-indebted lower-middle income country, Laos needs as many friendly diplomatic partners as it can get – and its ability to maintain a balancing act between China and other partners remains a critical future challenge for its political leadership.