President Barack Obama’s arrival in Laos for the Asean leaders’ summit this week coincides with a struggle by Laos’ communist party leadership to emerge from the shadow of China’s influence.
China plays a key role in Laos’ economic transformation, with current investments in 760 projects worth US$6.7 billion. Laos’ annual growth rate has soared to 7.8 per cent, lifting per capita income to US$1,730 last year, helped in large part by Chinese investment.
“Laos is really a client economy if you will,” said Thitinan Pongsudhirak, a political scientist at Chulalongkorn University in Thailand. “It has ties to Vietnam, to Cambodia, and broader Asean but China is really the main partner-patron.”
And that is a label Laos is trying to tear off as it seeks a balance in its foreign policy. It helps that the United States is reaching out as well, as part of its ‘pivot to Asia’ policy. Obama will be the first US president to visit Laos, his historic trip highlighting how the US and China are jockeying for influence in Southeast Asia.
“Landlocked Laos is in a most challenged position. It has larger neighbours all around it and it is too small a place to have any critical mass. It is susceptible to neighbourhood influence and interference,” said Thitinan. “But it is hedging. It is fully in China’s orbit but is showing some leveraging by cosying up a little bit to the Americans and also the Vietnamese.”
Given China’s sway on the economy, any veering away from its sphere of influence is bound to be a tightrope walk for Laos. From Vientiane’s buzzing construction sites to the northern border provinces of Luang Prabang, Oudomxay, and Bokeo, China’s place in Laos’ economy is omnipresent, most notably in the form of signs in Chinese characters. In the border regions’ special economic zones, Chinese is the main language.
The Asian Development Bank’s Vientiane-based economist Shunsuke Bando said that while Thailand and Vietnam were still key investors, “the investment [landscape] is totally dominated by China”.
In May, the World Bank noted China was seen as “having an increasing influence on the external balance and the overall economy”.
Moves are afoot towards the construction of the 427km, US$6.04 billion rail line linking Vientiane to the Chinese border that analysts say leaves Laos with a hefty financial burden in loans from China.
Last year, China accounted for over 40 per cent of Laos’ public external debt, up from 35 per cent in 2012, pushed up by funding on infrastructure and power projects. Of Laos’ nine hydroelectric dams planned in the Laotian Mekong, Chinese developers and investors are involved in at least four.
The rising debt burden, as well as the risk of overdependence on a slowing economy, is forcing Laos’ Prime Minister Thongloun Sisoulith to boost business ties with neighbours Cambodia and Thailand to diversify trade.
Two-way trade between Laos and China had jumped from US$1.3 billion in 2011 to US$3.6 billion by 2014, but slowed to US$2.78 billion in 2015, in part due to the slower global economy and tighter restrictions on timber exports from Laos.
For the Laos leadership, especially those including the prime minister who came to power earlier this year, it is economically imperative to rebalance regional ties. But Laos, which chairs Asean, finds itself in a particularly precarious position as China is trying to influence Asean to support its position on the South China Sea. Beijing has rejected the Permanent Court of Arbitration’s ruling that denied China’s claims over the region.
Carl Thayer, a defence analyst at the University of New South Wales in Australia, said the Laos foreign policy strategy was to maintain a degree of diplomatic independence. “As much as you can find a Chinese influence, you get a counter-reaction because of the heavy-handedness of the Chinese on the ground,” Thayer said. “I don’t think China can force Laos to do anything Laos doesn’t want to do as Asean chair,” he said.
Resetting ties with the US is hence a priority for diplomatic and economic counterbalance. But in contrast to China’s overwhelming economic and business presence, trade with the US amounts to just US$70 million.
In February, the US and Laos signed a trade and investment framework agreement, establishing a forum to discuss trade and investment issues. Some 58 per cent of US companies with ties to Laos hope to expand their workforce in Laos, says the American Chamber of Commerce’s 2017 Asean business outlook survey. This year the survey found 17 per cent of companies were planning to diversify “some investments or businesses over the next two years from China into Laos”.
Michael Fuchs, a senior fellow at the Centre for American Progress, writing in the New Republic, said while Laos remained “deeply sceptical of the United States, it is willing to have warmer ties with Washington”. Fuchs said the attraction to the US was deeper than a hedge against China. The US had many areas attractive to “countries like Laos” such as business investment, US education and as a “model for human rights and democracy”.
Obama will be the first ever US president to visit Laos - decades after America bombed it with more than 2 million tons of ordnance
But Martin Stuart-Fox, Emeritus Professor of History at the University of Queensland, said Laos’ concerns lay in balancing relations between China and Vietnam rather than with the US. “Laos has always tried to keep a bit of a balance between Vietnam and China,” he said, “and I think the Americans would come in only because the Vietnamese seem to be in their dispute with the Chinese over the South China Sea.”
Chulalongkorn’s Thitinan, however, said Laos’ key long-term relationship in countering China’s influence was Japan, which was already a major financier in regional development and carried “a lot of weight in the region”.
“The US is going to make a lot of waves as Obama comes in – a large show – before his term expires,” he said. “But in the longer term, it’s really the Japan-China relationship [that’s important]. If Laos wants leverage then the country they want to lean more on would be Japan.”
Ron Corben is an Australian journalist who has been based in Thailand since 1989