Is Laos on the brink of a lucrative future on the back of its relationship with China, or is it about to sell its soul?

NANJING – “I work for a Chinese company in Laos. The Chinese are building everywhere, they have the money now. They can invest,” an Australian miner told me during a visit to Burma last month. He claimed that his company was law-abiding – not least because being listed on the stock market meant they had to play by the rules – but he added that villagers were not always happy with foreign workers popping up and “drilling holes”.

The tale offers a glimpse into how Laos has become a frontier for Chinese investments. Land-locked between Vietnam, Cambodia, Thailand and China, Laos is the smallest economy in Southeast Asia and with US $1,130 per capita income, the country is no Eldorado. Its small population and its geography make Laos dependent on regional partners for economic development, and the giant to the north is a good bet as a partner.

Wen Jiabao, Thongsing Thammavong

China's then-Premier Wen Jiabao, center, inspect an honor guard with Laos' Prime Minister Thongsing Thammavong in Vientiane late last year. Pic: AP.

After a period of turbulence during the Cold War, relations between China and Laos were normalized in 1989. Former President Jiang Zemin paid a visit in November 2000, the first by a Chinese head of state. Since then, cooperation has rapidly increased and French newspaper Le Monde reported that in 2011 the Chinese government had already invested US$3.3 billion in the country, making it the third largest foreign investor in Laos after Vietnam and Thailand.

A couple of years ago, while visiting Laos, I caught the positive mood when talking with a local tour guide. As we were sitting in the back of a small van on a potholed road in northern Laos, I asked him what he thought of China. He absent-mindedly answered that he was happy with Chinese people visiting: surely he was not dissatisfied with wealthy tourists eager to spend money.

The growing Chinese presence will soon be on display in the capital itself. Last year, Bloomberg reported that Shanghai Wanfeng Group had invested $1.6 billion to develop 365 hectares around That Luang Lake in Vientiane order to build a tourism and commercial complex.

According to the Asia Economic Institute, other signs of the partnership include “the introduction of economical and fuel-saving cars made in China”, “the growth in membership of the Laos-China Business Association to more than 100 members in April 2008” and “the establishment of a center for cooperation on land and natural resource management.”

Laos Thailand Mekong Dam Battle

In this 2010 photo released from the NGO International Rivers, a fisherman works near the site of the proposed Xayaburi Dam in Paksey, northern Laos. There are serious concerns about the environmental impact of foreign investment in Laos. Pic: AP.

This all pales in significance compared to the new railway that – if approved and eventually built – will link Vientiane with Kunming, in south-western China. The railway will serve as a major highway for trade between the two countries and, according to what Laos’ Energy and Mining Minister Soulivong Dalavong told the Wall Street Journal last October, by 2020 it may supply about 5 million tons a year of mineral resources along with other raw materials to China. Building hundreds of kilometers of railway in mountainous, forest-covered Laos, however, is neither easy nor cheap.

In order to carry on with the project Laos could receive a US$7 billion dollar loan from China Export-Import Bank. To get an idea of what this means, one has just to think that World Bank figures for the Laos GDP in 2011 stood at about U.S. $8.2 billion. The railway, in other words, would amount to slightly less than the combined output of the whole economy in one year.

Critics of the project focus on its environmental impact and the displacement of local communities. After years of discussions, last October the two sides seemed to be close to an agreement. Roughly at the same time, however, Radio Free Asia, quoting an official inside the Lao Ministry of Finance, announced that Vientiane would have to pay a staggering US$3 billion in interest. This would considerably postpone the date on which the project would reach a “break-even point” (the moment in which Laos would actually begin making money out of it).

The railway project highlights the importance of raw materials in forging economic ties between the two states. From this point of view, there is a much common ground between China and Laos: while the former is hungry for Laotian resources, the latter needs technology and money that can be provided by Chinese companies.

In October 2011, for example, China Daily wrote that the China-ASEAN Fund on Investment Cooperation invested U.S. $50 million in the development of a potash mine in Khammouane Province. The mine will boast an annual capacity of 3 million tons and will be Asia’s biggest potash fertilizer producer.

Despite the willingness to cooperate, problems remain. Bad practices by Chinese companies and environmental damage are a primary sources of concern. The International River Network – a US-based NGO – reported that Chinese companies are funding the construction of as many as 29 dams inside the Lao DPR, thus supporting a dam-building binge which activists say threatens the country’s long-term prosperity.

In November 2012, the Environmental Investigation Agency (EIA), another NGO, published an investigation into timber trade, claiming that China is now the world’s biggest importer of illegal timber. On page 26, the report points out that, “Laos exported 80,000 cubic meters of rosewood logs directly to China in 2011 in contravention of log export and rosewood harvesting bans.” And, even though “the bulk of the illegal timber is transported through Vietnam and controlled by Vietnamese traders,” most of it eventually winds up in China.

Finally, there is the thorny issue of political dependence. Being among the biggest investors in the country, Beijing has now a considerable leverage on the government in Vientiane. An analysis by the Jamestown Foundation contends that “within the next decade or so, China seems destined to become the LPDR’s largest trade partner and source of external funding, and hence its new closest friend in Asia.”

Then US Secretary of State Hillary Rodham Clinton, left, and Laotian Prime Minister Thongsing Thammavong in Vientiane, Laos last July. It was the first visit by a US Secretary of State in 57 years. Pic: AP.

In an article published online by the London School of Economics, Southeast Asia politics expert Oliver Hensengerth stressed the importance of water management in cooperation among China, Laos and Cambodia, concluding that “the economic and political closeness coupled with the interest of Vientiane and Phnom Penh to develop the national water resources gives the Chinese government and Chinese companies tremendous influence.”

It remains to be seen how Beijing’s enhanced role in Laos will play out for the larger Southeast Asian block; don’t forget that Laos is a member of the Association Of South East Asian Nations (ASEAN). As the heat stemming from territorial disputes lingers and big power politics – between China and the US, but also India and Japan – make a comeback to the region after the end of the Vietnam war, Vientiane may turn out to be a valuable friend for Beijing. Authorities there – locked away from the sea by mountains and forests – are understandably not too concerned about the South China Sea issue, while China’ market and investments provide their country with an opportunity for development – albeit not an environmentally friendly one.

The most imminent risk is that China’s hold may create another crack in ASEAN, whose internal tensions became manifest in July 2012 when for the first time an ASEAN Summit failed in coming up with a final statement. Members were not able to find an agreement on the Code Of Conduct, a document which was supposed to prevent conflicts among members.

The United States, too, are back in the region. Spearheading America’s “pivot to Asia” in the summer of 2012, Hilary Clinton did not forget to pay her country’s respect to small, land-locked Laos. The visit, aside from the specific issues discussed, was highly symbolic: it was the first time an American Secretary of State had set foot there in 57 years. And certainly its purpose was not admiring Laos’ stunning natural beauty.