Laos is a landlocked country with an inadequate infrastructure and a largely unskilled work force. The country's per capita income in 2004 was estimated to be $1,900 on a purchasing power parity-basis.
Agriculture, mostly subsistence rice farming, dominates the economy, employing an estimated 85% of the population and producing 51% of GDP. Domestic savings are low, forcing Laos to rely heavily on foreign assistance and concessional loans as investment sources for economic development. In FY 1999, for example, foreign grants and loans accounted for more than 20% of GDP and more than 75% of public investment. In 1998, the country's foreign debt was estimated at $1.9 billion.
Following its accession to power in 1975, the communist government imposed a Soviet-style command economy system, replacing the private sector with state enterprises and cooperatives; centralizing investment, production, trade, and pricing; and creating barriers to internal and foreign trade.
Within a few years, the Lao government realized these types of economic policies were preventing, rather than stimulating, growth and development. No substantive reform was introduced, however, until 1986 when the government announced its "new economic mechanism" (NEM). Initially timid, the NEM was expanded to include a range of reforms designed to create conditions conducive to private sector activity. Prices set by market forces replaced government-determined prices. Farmers were permitted to own land and sell crops on the open market. State firms were granted increased decisionmaking authority and lost most of their subsidies and pricing advantages. The government set the exchange rate close to real market levels, lifted trade barriers, replaced import barriers with tariffs, and gave private sector firms direct access to imports and credit.
In 1989, the Lao government reached agreement with the World Bank and the International Monetary Fund on additional reforms. The government agreed to expand fiscal and monetary reform, promote private enterprise and foreign investment, privatize or close state firms, and strengthen banking. In addition, it also agreed to maintain a market exchange rate, reduce tariffs, and eliminate unneeded trade regulations. A liberal foreign investment code was enacted and appears to be slowly making a positive impact in the market. Enforcement of intellectual property rights is governed by two Prime Minister's Decrees dating from 1995 and 2002 .
In an attempt to stimulate further international commerce, the Lao government accepted Australian aid to build a bridge across the Mekong River to Thailand. The "Thai-Lao Friendship Bridge", between Vientiane Prefecture and Nong Khai Province, Thailand, was inaugurated in April 1994. Although the bridge has created additional commerce, the Lao government does not yet permit a completely free flow of traffic across the span.
These reforms led to economic growth and an increased availability of goods. However, the 1997 Asian Financial Crisis, coupled with the Lao government's own mismanagement of the economy, resulted in spiraling inflation and a steep depreciation of the kip, which lost 87% of its value from June 1997 to June 1999. Tighter monetary policies brought about greater macroeconomic stability in FY 2000, and monthly inflation, which had averaged about 10% during the first half of FY 1999, dropped to an average 1% over the same period in FY 2000.
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