Building boom set to greet world leaders – Nikkei Asian Review

http://asia.nikkei.com/Politics-Economy/Economy/Building-boom-set-to-greet-world-leaders

 

VIENTIANE — The capital of Laos is a low-rise, low-key city, especially when compared with the hulking high-rises and bustling streets of better known Southeast Asian cities such as Bangkok, Kuala Lumpur and Singapore.

But Vientiane is fast shedding its sedate reputation amid a building boom ahead of a series of international summits that will bring U.S. President Barack Obama, China’s President Xi Jinping and a host of other world leaders to the city in 2016.

Construction cranes tower over the city’s two- and three-storey shophouses and hotels — the din of diggers and drills drowning out the once quiet capital’s increasingly dense traffic.

“So many shopping malls now — around 20 going up all around the city,” said Pouthong Sengchanh, standing over a model of the Vientiane New World project — a mix of shops, restaurants and offices newly stretching along the city’s Mekong riverfront. Inevitably, perhaps, Vientiane New World will include a mall of its own — the final stage in the project, scheduled to be completed by 2018.

Sengchanh, a property consultant with Vientiane New World, is not worried about the type of mall overkill that has characterized — or perhaps undermined the character of — other Southeast Asian cities. But Vanthana Nolintha, a researcher at the government-linked National Economic Research Institute, said some of the new malls might not prove viable.

“Many new shopping malls have been opened, the majority of them do not offer high quality product, hence medium to high income locals still prefer to travel across the border for shopping. Therefore, the benefits of allowing many of these new malls are quite questionable,” Vanthana told the Nikkei Asian Review.

The capital’s construction surge comes on the back of a decade of 7%-8% annual economic growth that has seen the Laotian economy double in size since 2006, according to the Asian Development Bank. Laos’ gross domestic product is still less than $12 billion, however, making it the smallest economy in the 10-country Association of Southeast Asian Nations.

Much of the growth is driven by mining and hydropower exports. Laos sees itself as what the government calls the “battery of Southeast Asia” and is allowing foreign companies — Chinese and Thai in particular — to build massive dams along the Mekong River and its tributaries to supply power to China and Thailand.

While the dam building has irked neighbors such as Cambodia and Vietnam, which depend on the 4,300km river for agriculture, fishing, navigation and tourism, Laos is more concerned about generating employment. About 25,000 people have jobs in the booming mining and dam building sectors.

The government wants a further big expansion, but attracting labor-intensive foreign direct investment will not be easy, despite the creation of economic zones offering tax breaks and other incentives to big-name foreign companies such as Japan’s Nikon and Toyota, both of which have factories in Laos.

“To attract more job-intensive FDI, Laos needs to invest more in improving our human capital, including basic and higher education. Especially, we need to encourage more students to join vocational schools to acquire required skills necessary for industrial works,” said Vanthana, adding that labor productivity is low, undermining the cost advantage conferred by low wages.

Around 70-80% of the population depends on agriculture, which also suffers from low productivity, according to a recent World Bank report. The report  warned that “the challenge is the lack of productive, higher-income generating jobs, which result from the high cost to doing business in the country.”

Some of the difficulties of doing business in Laos stem from its lack of access to the sea. Laos is the only land-locked country in Southeast Asia, and the distance to ports in neighboring countries limits trade outside the region. Nearly 80% of exports go to China, Thailand and Vietnam, which also supply nearly 90% of the country’s imports.

But Laos has been trying to turn its location to its advantage, pushing itself as a transit country for land-based trade between its bigger neighbors. For example, trucks carrying goods from Bangkok to Hanoi must cross Laos en route.

Laos’ strategic location — not landlocked but “land-linked,” to use the government’s favored designation — is the key to the government’s ambitions to achieve “middle income” status for the country by 2020.

International spotlight

The latest blueprint for achieving this goal was discussed in the country’s national assembly on Christmas Day by planning minister Somdy Duangdy, who said that 7.5% growth per year will be needed over the next five years — a pace that would require further significant investment in mining and dams.

Laos will be in the international spotlight this year as chair of ASEAN, which includes hosting a series of international summit meetings culminating in the East Asia Summit in late 2016. Heads of government from Australia, China, India, Japan, South Korea, New Zealand, Russia, the U.S. and the nine other ASEAN members will be visiting the country.

However, the ruling Lao People’s Revolutionary Party is unlikely to face much international scrutiny of its growth policies. ASEAN members, in particular, are reluctant to criticize domestic policy making by individual members, despite pledging closer cooperation and recently establishing an economic community that aims to allow freer movement of labor and goods between member states.

Domestically, the communist LPRP is the sole legal party under the country’s constitution, and dominates decision making. Nongovernmental organizations and media outlets, most of which are state run, refused to speak on the record about political rights when contacted by the NAR.

Laotian government officials regularly cite “political stability” as one of the country’s assets when pitching to would-be investors. Laos, proclaims the Ministry of Planning and Investment’s Investment Promotion Department website, is “one of the most Politically Stable Country in the Region.”

China, Thailand and Vietnam, all run by authoritarian governments, make up the bulk of investment in Laos, with mining and hydropower cash flow funding Vientiane’s property boom. Northern Laos has also seen an influx of Chinese businesses and settlers in recent years, dotting the countryside with big farm projects and gaudy casinos.

“In just a decade, Chinese migration and capital have radically transformed the socio-economic landscape of Laos in both urban and rural areas,” wrote Danielle Tan, an assistant professor at Sciences Po Lyon and a research associate at France’s Institute for East Asian Studies, in a 2014 paper on Chinese business in Laos.

Chinese investors are also prominent in the capital. Vientiane New World is being built by China CAMC Engineering, while Chinese and other foreign investors are making their presence felt in Vientiane’s booming real estate market. Prices can range from $2,000 per square meter in the city center to $50 on the outskirts, according to William Hancock of Laos First & Associates, a property consultancy.

“Laos people are only about 40% of my clients,” said Nakadej Invihan of Saiawardz Real Estate. “The rest are foreign, maybe 20% Chinese, 10% Korean, Vietnamese, Westerners,” he said. “Land prices in Vientiane have gone up maybe 30-50% in the last two to three years, and I think it will continue like that.”

Outside Vientiane and Luang Prabang, a popular tourist destination in northern Laos, there is scant sign of a boom, however. In Pakse, one of the main towns in southern Laos, drivers of the ubiquitous three-wheeled tuk-tuk taxis head home at 8 p.m. most evenings, leaving the tranquil streets empty aside from a handful of backpackers.

“People come for a night, then head to the countryside for hiking,” said a travel agent who gave his name only as Tec.

But with property prices low outside Vientiane and the Laos economy set to keep up its strong growth, realtors are starting to look outside the increasingly clogged capital. “Other cities and towns are a lot cheaper, and very interesting to invest in because prices are rising fast,” noted Hancock.

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