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A Debt too far? Laos' incorporation into China's Belt and Road Initiative

Updated: Nov 28, 2023

By Wolff Weisbach

International Affairs Analyst

Thongloun Sisoulith, Prime Minister of Laos - Credit: Wikimedia Commons

Nestled in the core of Southeast Asia, Laos remains shrouded in obscurity compared with its more prominent neighbours, including China, Vietnam, Cambodia, Thailand and Myanmar. Despite this, Laos' significance on the geopolitical chessboard should not be overlooked - China agrees.

As far as countries with unfortunate histories go, Laos is near the top of the list. French colonial rule and subjugation profoundly impacted Laos' culture, society and economy during the late 19th and early 20th centuries. Then, Laos' occupation by Japanese forces during World War II spelt further economic disruption and resource exploitation as Japan sought to bolster its war effort. As if this was not enough, Laos also became embroiled in the Vietnam War despite not actively participating in the conflict. This involvement was, in part, due to the Ho Chi Minh Trail, an intricate network of routes the North Vietnamese Army and Viet Cong used to transport troops, supplies and equipment during the war. With Laos sharing a border with Vietnam and significant segments of the trail passing through Laos, the United States conducted secret mass bombing campaigns across the border, which resulted in extensive civilian casualties. More bombs were dropped on Laos per capita than any other country in history; the unexploded ordinance remains an issue even today.

With shared geography, the Ho Chi Minh Trail, and Cold War proxy war dynamics, the Laotian Civil War waged from 1959 to 1975 was intricately linked to the Vietnam War. Both conflicts were part of a broader struggle for regional influence in Southeast Asia. According to The Economist, the Laotian Civil War resulted in the deaths of one-tenth of the country's population. In addition to the loss of life, the war severely damaged the Laotian economy, and a refugee crisis ensued. The conclusion of the conflict saw the accession to power of the Lao People's Front (formerly known as Pathet Laos), a communist group characterised by its use of repression, restricted freedoms and censorship. The group remains in power today and continues to implement such control methods. A knock-on effect of Communist rule in Laos has been the persecution of the Hmong ethnic group, which sided with the United States in the Vietnam War. To eliminate anti-Communist sentiment, Hmong individuals were sent to brutal "re-education camps" and subjected to forced labour working on collective farms. Many Hmong people were forced to flee Laos and seek refuge in neighbouring countries and the United States. The lasting impacts of this litany of historical events have resulted in Laos still lagging in economic development and income levels, while also increasing Laos' vulnerability to external influences.

As China's regional influence expands, it should be no surprise that Beijing's interest in Laos has grown. As an economically less-developed yet resource-rich fellow communist state, Laos represents an appealing opportunity for China to extend its sphere of influence. As with many others, China included Laos in its Belt and Road Initiative (BRI) by financing several extravagant infrastructural projects. One of the most prominent BRI projects in Laos is the high-speed railway connecting Laos' capital, Vientiane, with the border town of Boten and then on to China's Yunnan province. Proponents of the plans claim they will develop Laos from being "landlocked to land-linked". Indeed, the impacts of the BRI on Laos have been manifold.

Three Chinese state-owned companies hold a 70% stake in the joint venture to construct the railway. Since its launch in December 2021, state-run media in China and Laos have praised the project's impacts on exports and tourism. However, the benefits of this project are skewed in favour of China rather than Laos. For instance, many Laotian companies are not in a position to take advantage of the new railway as they are not equipped to ship their products by train, which requires larger quantities. Paperwork and import tariffs at the Chinese border have also proven challenging. The result of these barriers is that the vast majority of trade travelling on the railway consists of Chinese goods imported into Laos.

In addition to the new railway, Laos has collaborated with China on several hydropower megaprojects, particularly in the Mekong River Basin. Laos harbours a desire to boost its economic development by becoming the battery of Southeast Asia and exporting hydropower energy to its neighbours. Once again, evidence suggests China's actions are self-serving rather than altruistic. China's vulnerability concerning electricity supply was recently illustrated by power shortages affecting the Yangtze River basin following heatwaves and drought. China has identified Laos as a potential solution to this problem, leading to the construction of several Chinese-funded hydropower plants. Sceptics have pointed out that a disconnect exists between the Laotian government's objectives through hydropower BRI projects and the broader needs of the people.

The use of dams poses significant risks to the many Southeast Asian residents who depend on the Mekong River for their livelihoods through fishing and agriculture. This is because altering the river flow can affect fish migration patterns and sediment deposition. Additional environmental impacts include habitat destruction and water quality degradation, which are likely to reduce fish populations.

The most concerning aspect of Laos' involvement in various BRI projects concerns their economic viability. According to AidData's executive director, Brad Parks, there is "no country in the world with a higher amount of debt exposure to China than Laos". At US $6 billion, the total cost of the new railway is equivalent to nearly one-third of Laos' GDP, leading economist Jayant Menon to assert that the project cannot be "justified at the cost it was agreed to". Laos' hydropower projects have also proven less economically efficient than hoped due to inconsistent water supply and a lack of real demand from potential customers. This is unacceptable when you consider the additional debt Laos has incurred as a result.

For instance, the total cost of the Nam Ou River hydropower plant alone came to US $2.73 billion. Government borrowing has plunged Laos further into debt and contributed to a severe economic downturn. Record inflation and currency depreciation significantly impact the population, calling into question the extent to which these projects meet Laos' needs. This perspective contradicts China's proclamations of "win-win" engagement for them and the countries participating in the BRI. It is essential to acknowledge that things can change and that the full impact of this project on Laos will be revealed in time. Notwithstanding this, participating in the BRI is a substantial risk for a country in Laos' position.

It is a worthwhile endeavour to understand the logic that encouraged Laos to participate in these projects. The BRI is undoubtedly helping Laos to realise its vision of modernisation. Nishizawa Toshiro, former advisor to the government of Laos, has cited Laos' status as a communist country to support his argument that China will not allow Laos to go into default over its external debt obligations. Whether his prediction will hold remains to be seen. Interestingly, the fact that China's BRI has come under increased international scrutiny could benefit Laos. Several countries participating in the BRI have been forced to make unfavourable concessions to China following its failure to repay loans.

A notable example was when Sri Lanka was forced to lease the strategically advantageous Hambantota Port to a Chinese state-owned company for 99 years. Could China take a softer approach with Laos to avoid deterring other countries from becoming involved in the BRI going forward? Similarities between Sri Lanka's and Laos' BRI experiences suggest otherwise. For instance, the Nam Ou hydropower plant's opening involved a concessional agreement allowing China to operate the dams for the first 29 years.

Even if Laos wanted to, its position relative to China makes it difficult to resist China's influence. As Laos becomes even more entrenched in the BRI, growing debt combined with China's control over critical infrastructure will further compromise Laos' negotiating position. If France were operating in Laos as China is currently, accusations of neocolonialism would follow. Participating in the BRI could be the tipping point that takes Laos from a country vulnerable to outside interference to one whose destiny is controlled by an external actor. Should Laos be rendered subservient to the will of Beijing, the country's status as a puppet state will be confirmed. The pervasive difficulties the Laotian population suffers daily combined with these concerns provide significant cause for concern. With uncertain times ahead, Laos cannot afford to become another case study of a country failed by the BRI.


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