Land Area: 236,800 km²

Population (Projection for 1993): 4,474,000 persons

LAND USE: Cultivated area 649,310 hectares

(Of which rice) 538,690 hectares

VITAL STATISTICS Population density 19.0 persons/km²

Population density in Vientiane Municipality 125.0 persons/km²

Population growth rate 2.6 %/annum

Rural population (share to total) 85.0%

HEALTH Life expectancy at birth 50.9 years

Infant mortality rate 117/1,000 live births

Access to safe drinking water (1989) 29%

Population per physician 1,510 persons

Population per hospital bed 633 persons

Daily calories supply as % of requirement 111%

EDUCATION Net school enrollment per age group (1992-1993)

Primary schools 69%

Secondary schools 26%

Tertiary schools 1%

Adult literacy rate (1992)

Female 35%

Male 65%

Total 50%

EMPLOYMENT Labour force participation rate 71%

(IN URBAN AREA) Women in labour force 45%

Percent of labour force in agriculture 42%

HUMAN DEVELOPMENT INDEX (1994) 0.246

(Data for 1993 unless otherwise stated)

Monetary unit Kip

Market exchange rate (Buying per US Dollar) (August 1994) 720.0 kip

Gross Domestic Product (GDP) at 1990 Constant Prices 721.8 billion kip

Nominal GDP per capita 290.0 US $

Real growth of GDP 6-7%

Inflation rate per annum 6.3%

Official External Debt (end-year) 1,202.1 US $ million

Debt Service Payments (DSP) 3.4 US $ million

Debt Service Ratio (DSP/Exports of goods/non-factor services) 4.6%

Exports 209.40 US $ million

Imports 375.40 US $ million

Services and Transfers (Net) 152.90 US $ million

Ratio of imports to exports 1.8:1

Trade deficit 166.09 US $ million

BOP Current Account Deficit 26.30 US $ million

* Source: Lao PDR authorities.

1. SETTING

1. Physical Features and Natural Resources

The Lao People's Democratic Republic (Lao PDR) has a land area of 236,800 square kilometers, stretching more than 1,700 km from the north to south and between 100 km and 400 km from the east to west. The Lao PDR has an eastern border of 1,957 km with the Socialist Republic of Vietnam, a western border of 1,730 km with the Kingdom of Thailand, a southern border of 492 km with the Kingdom of Cambodia, and northern borders of 416 km with the People's Republic of China and 230 km with the Union of Myanmar.

Although the Lao PDR has no direct access to the sea, it has an abundance of rivers, including a 1,865 km stretch of the Mekong (Nam Kong), defining its border with Myanmar and a major part of the border with Thailand. Major stretches of the Mekong and its tributaries are navigable and provide alluvial deposits for some, of the fertile plains. About two thirds of the country is mountainous, with ranges from 200 to the 2,820 meters high. The mountains pose difficulties for transportation and communication and complicate development, but together with the rivers they produce vast potential for hydropower.

The Lao PDR is a tropical country, whose climate is affected by monsoon rains from May to September. In Vientiane, the average temperatures range from a minimum of 16.4°C in January to a maximum of 13°C in April.

Its abundant water resources are probably the most important natural resource endowment of the country. There are only three hydroe1ectric plants in operation so far, of which Nam Ngum 1 is the biggest. These three plants with a combined capacity of 200 MW, reportedly realizes only less than five percent of the country's hydroe1ectric potential. About 90% of hydroelectric power production are exported to Thailand, constituting one of the leading exports of the Lao PDR. Plans are underway to construct a number of new hydroelectric power facilities, which are described in greater detail in Section B.

Forests cover about 47% of the country, comprising a wide variety of commercial tree species suitable for production of saw timber, plywood, parquet, furniture, etc. The most important high value species are hardwoods belonging to the Diterocarpaceae fami1y and rosewoods belonging to the Genera Pterocarpus, Dalbergia and Afzelia. Pines and other coniferous species are also available but in comparatively small quantities. Eighty percent of domestic energy consumption is based on fuel wood, and an estimated 300,000 hectares of forest are lost annua1ly largely due to shifting cultivation and logging activities. In the effort to protect forest resources from unsustainable felling of trees, the total annual allowable cut (AC) has been set by the Tropical Forest Action Plan (1991) to 280,000 cubic meters per annum, exportation of logs was temporarily restricted to restructure forest management, and protective measures have been implemented to prevent depletion of forests due to shifting farming practices.

Sizeable deposits of gemstones such as sapphire, zircon, amethyst, gold, iron are and tin are know to exist in the country. Gemstones, gold, coal and tin are estimated to have a high economic value. More geologic surveys are needed to identify location of mineral deposits that would allow their exploitation in commercial quantities. Meanwhile, exploration of potential petroleum deposits is underway. Economic exploitation of mineral resources will depend on development of the required physical infrastructures.

2. Socio-economic Characteristics

The 1993 population of the Lao PDR is estimated at 4.5 million, and is projected to grow at 2.6 % per year. Population density remains one of the lowest in the region, at 19 persons per square kilometer.

Vientiane municipality has a population of about 503,000 and a modest population density of 128 per square kilometer. The provinces with the biggest number of inhabitants are Savannakhet (692,000) and Champasack (490,000) in the south and Luang Prabang (365,000) in the north. Apart from Vientiane, the major urban centers are the cities of Savannakhet and Pakse in the south with populations of 109,000 and 55,000, respectively and Luang Prabang in the north with 69,000 inhabitants.

Two thirds of the population live in rural areas of the 17 provinces, including Vientiane Municipality, and one special region comprising the Lao PDR. The population lives in 685,230 households with an average size of 6.7 members in 11,935 small villages (pan) located in 129 districts (muong). The population of Oudomsay province decreased substantially in 1992 as four of its districts were administratively detached: two were attached to the province of Bokeo, whose population increased, and two were reorganized into a Special Region comprising a small population of 74,000 people.

The population of the Lao PDR is ethnically diverse. Up to 68 ethnic groups have been identified inhabiting the country, which can be roughly categorized into: 1) the Lao Loum who occupy the lowland plains and the Mekong river valley, and constitute some two third of the total population, 2) the Lao Theung, who occupy the mountain slopes comprising about 22 % of the population, and who are thought to have be n the first inhabitants of Laos in the pre-historic era, and 3) the Lao Soung, who occupy the high mountain tops over 1,000 meters constituting about 10 % of the total population, and who carry indigenous linguistic traditions in the remote and highly mobile settlements. Particular emphasis is being placed on finding ways to more fully integrate the ethnic groups into the economic and social life of the country.

The are great regional disparities in access to education. An estimate for adult literacy is 50 % for all adults, 65 % for men, and 35 % for women. Significant efforts were made to build up primary education after 1975, but although the ratio of schools to students increased markedly, particularly at the primary school level, the quality of education did not keep pace with the expansion of the system. This is reflected in high drop out rates of over 60 % from primary education, in which 880% of the children enroll. It is recognized that more public resources must be devoted to teachers' training, their salaries, and teaching materials.

Improvements in health and sanitation, with emphasis on the we11-being of mothers and children are vitally needed. The crude birth rate is 45 per 1000, infant mortality rates range from an estimated 104 to 135 per 1000 live birth depending on the region, and the under - five mortality rate is 156 per 1000 live births, life expectancy is estimated at only 551 years. Half of the children under 5 years old are affected by malnutrition and most of the population lack access to basic health and sanitation, birth spacing, and nutritional services. Diarrhoeal, respiratory, and intestinal diseases are widespread, and particularly virulent strains of malaria are prevalent in some areas.

The annual per capita income, estimated to be about US$290 in 1993, understates living standards in the Lao PDR because of the non-monetized segment of the economic is not represented in the income data. This applies particularly to the agricultural sector, where subsistence farming is the main occupation, and rice is the staple food crop.

Agriculture is the principal economic sector in the Lao PDR, accounting for 56% of total value added in 1993 and covering a wide range of activities from subsistence production to agriculture related industries. About 80% of the population are engaged in agriculture, broadly defined to include livestock, fisheries and forestry.

It is estimated that approximately 649,000 hectares of land are under cultivation, of which 539,000 hectares or 83% are devoted to rice cultivation. Sixty five percent of the country's rice is grow is in the lowlands, of which only 3.7% are irrigated. The remaining thirty five percent of rice production is in the uplands, where 60% of the population do not produce enough to cover their own needs and lack rice for about 3 months per year, during which time they eat maize, cassava, taro, and other rice substitutes. Families dependent on upland rice production, as well as in the lowest terraces, are particularly vulnerable to the vagaries of the weather.

Other crops, including coffee, maize, starchy roots, soybeans, mungbeans, peanuts, tobacco, cotton, sugar cane, tea, and a variety of others are planted to the remaining 17 % of cultivated land area.

Sizeable livestock holdings include buffalo and cattle, as well as pigs, sheep, goats, poultry, and other animals.

The industrial and service sectors of the economy currently account for about 17 and 24%, respective1y, of Gross Domestic Product. Under the New Economic Mechanism, adopted in 1986, there has been a rapid expansion in the output of the industrial sector, particularly manufacturing. Consequently, the share of agriculture to GDP declined somewhat from 59% in 1992 to 56% in 1993. Nonethe1ess, the economy remains predominantly agricultural in nature.

Figure 1.1: GPD Composition by Sector, 1993 (In percent)

The physical and socio-economic characteristics of the Lao PDR set out in the previous paragraphs have given rise to the following development potentials and constraints:

• abundance of water resource giving vast scope for the deve1opment of hydro-electric power facilities.
• large irrigation potential which, once developed, could increase food production capacity and allow for further crop diversification.
• potential for sustained development of high-value timber, provided forest resource management and reforestation programs are improved.
• significant export potential for non-wood forest products (such as cardamom, benzoin, stick1ac and other resins).
• considerable scope for increasing the quantity of minerals already being exported, and for both mining and exporting minerals which are only now being identified
• proximity to large external markets which implies a potentially strategic position for entrepôt trade, although until now most economic activity tends to be concentrated along the Mekong River and the border with Thailand.
• economic and social fragmentation since many parts of the country are physically isolated and since the population consists of a wide variety of ethnic groups.
• prevalence of subsistence farming and barter exchange among the vast majority of the population.
• insufficient physical infrastructure (such as transportation networks and communications systems).
• insufficient information on the country's key physical social, economic and climatic variables, and inadequate access to information on markets, technologies and investment opportunities available abroad.
• limited domestic financial resources, necessitating dependence on external assistance to finance a large part of the Government's investment program and the balance of payment deficit.
• lack of skilled manpower and insufficient institutional capacities required to support a flexible, growing economy.
• high transportation costs, particularly for import-exports.

3. Political and Administrative Organization

The Constitution of the Lao PDR was adopted in August 1991. It provides for separation of legislative, executive and judicial powers. The people, with whom the political power ultimately resides according to the Constitution, exercise such power through an elected National Assembly. The members were direct1y elected by the people in December 1992, whose five-year term commenced in January 1993. Among the key functions of the National Assembly is the approval of annual state budget and plan. It recently passed four important legislations which are vital to the country's transition into a market economy: revised foreign investment law, budget organic law, taxation law, and the law on business operations.

The Constitution further defines the authorities and structure of the state and the fundamental rights of the citizens. It also provides a legal frame for a market-based economic system.

The President is the Head of State, and the main organ of the government is the Prime Minister's Office headed by the Prime Minister. The Government is composed of eighteen members including heads of the ministries, the State. Bank of Lao, and the Committee for planning and Cooperation (CPC). The President of CPC is concurrently the Deputy Prime Minister.

The local government structure extends from provincial leve1s through district levels to village levels. The province is administered by a governor. Divisions of responsibilities within the provincial and district administrations are similar to those at the central leve1, covering the same fields as the central ministries except in the areas of national defense, foreign affairs and police. Decree 68 providing for the Fundamental Centralization of State Finance, Budget and Treasury, promulgated in August 1991, has reformed the administration from horizontal to vertical management, placing fiscal collection and budgetary allocation under the ministerial purview.

The Lao People's Revolutionary Party (LPRP) is the only political party. Its leading role in the political system is explicitly recognized in the Constitution. It is governed by a Central Committee and headed by an executive committee. The Party organization extends downward to the district and village levels, in parallel with the government structure. In line with the NEM reform program, the administrative reform including further delineation of the responsibilities of the Party from those of the State and restructuring of the Party from those of the State and restructuring of the civil service to correspond with the implementation requirements of the NEM reforms.

4. Economic and Development Management System

In 1986, the Fourth Party Congress adopted a package of reforms intended to transform its economic management from a central command system to one which is market-bases and characterized by decentralized economic decision making, with the private sector playing an active role. The new economic management system emerging from the implementation of the economic reform package is referred to as the New Economic Mechanism (NEM) in the Lao PDR. Adoption of the NEM was subsequently confirmed by the Fifth Party Congress in 1991. An economic management system anchored on market principles is now enshrined in the Lao PDR Constitution.

The recent restructuring of the government machinery significantly affected the administrative arrangements for economic, financial and deve1opment management. In early 1993, the Ministry of Economy, Planning and Finance was split into two. The new Ministry of Finance assumed responsibility for fiscal management, inc1uding collection and custody of tax revenues receipt and custody of non-tax revenues, e.g. proceeds from privatization and from external grants and loans, annul budgeting of revenues and expenditures, accounting, reporting and control of public expenditures, and cash and debt management. The new Committee for Planning and Cooperation (CPC) took responsibility for indicative macroeconomics and development planning, policy coordination, statistical coordination, external assistance coordination, public investment programming, foreign investment promotion, and implementation of the privatization program.

The Prime Minister issued Decree No. 132 On 30 August 1993 defining the organization of CPC. Based on unofficial Eng1ish translation "is a high leve1 Central Supervisory Council; of Government mechanism; and also chief of staff for Central Committee and the Government for the coordination, research, implementation and work's supervision on: socio-economic development, international cooperation, and foreign investment."

A system of indicative macroeconomics planning, medium-term public investment programming, and annual budgeting has been adopted as an instrument for development management. At the first session of the National Assembly in February 1993, the Deputy Prime Minister a concurrently President of CPC presented the country's development planning framework up to the year 2000, particularly the problems and constraints confronting the country, the principal goals and objectives, and the tasks ahead.

Within this planning framework, CPC, in cooperation with the spectral ministries and local government units, would prepare the country's development plan up to the year 2000, and the accompanying medium-term public investment program. The annual state budget and plan is formulated and presented to the National Assembly for approval in accordance with the planning/policy framework and public investment program.

The medium-term indicative plan, together with the public investment program (PIP) up to the year 2000 are expected to be completed by the end of 1994. Meanwhile, an outline PIP for 1994-2000 has been approved by the Government and presented at the Fifth Round Table Meeting (RTM) in Geneva on 21 June 1994.

2. ECONOMIC PERFORMANCE

1. Overall Macroeconomics Performance

Respectable economic growth along with relative stability of domestic prices and currency achieved since 1990 was sustained in 1993 under the NEM.

The average annual growth of Gross Domestic Product at constant 1990 prices since 1990 was computed at 6-7%, which is quite respectable even when compared to the economic growth performance of other countries in the Southeast Asian sub-region. This growth was achieved as inflation was gradual1y brought down form a record high of 75.9% in 1989 to 6.3%. The single digit inflation rate was in line with target that it should not be higher than that prevailing in the country's major trading partners. At the same time, the domestic currency remained stable since October 1989 within the range of kip 700 to kip 720 (parallel market buying rate) to the US dollar. Prudent fiscal and monetary policies together with sustained external assistance inflow contributed to the stability of the exchange rate and domestic prices.

With reference to fiscal policy, government budget deficit as a proportion of GDP was significantly reduced from more than 10% in 1992 to 6.1% in 1993 through intensification of efforts in tax revenue collection and tighter control on government spending. This enabled the government, for the first time in so many years, to achieve a modest surplus in the budget's current account.

Sustained inflow of external assistance also minimized recourse to currency and credit creation to finance the overall budget deficit. As show in detail in Part Three - Data on External Assistance, total inflow of external assistance in 1993 was recorded at $227.6 million, compared to an average of around $170 million for the past three years.

Liquidity (broad money supply) increased substantially in 1993 by 65% largely due to expansion of local and foreign currency savings and fixed time deposits. This may be an indication that the policy of positive real interest rate has be a effective in promoting higher level of domestic savings.

The Balance of Payments current account deficit (excluding official grants) remained high as a proportion of GDP at 8.4% in 1993. However, an overall BOP surplus continued to be realized largely due to sustained inflow of external assistance, thereby allowing further strengthening of the international reserve position. As of the end of 1993, gross international reserves stood at $151.0 million (as against $81.2 million a year ago), which is equivalent to 4.8 months of imports. This level of international reserves is certain1y comfortable by any international standard.

The external debt service burden of the country has remained manageable at around 5% of exports despite an increase in the debt stock due to its highly confessional term. All of the disbursed and outstanding debts of the Lao PDR were acquired so far from official bilateral and multilateral sources.

Despite its respectable growth performance since the adoption of the NEM, the Lao PDR remains one of the least deve1oped countries. Its per capita income estimated at $290 in 1993 is still one of the lowest in the world. However, it excludes subsistence activities of a considerable proportion of the population that live in isolated villages, where non-monetized economic transactions are still prevalent.

The Lao PDR has a Human Deve1opment Index of 0.385, with a rank of 133 among 173 countries.

2. Economic Growth and Sectoral Performance

Real Gross Domestic Product (GDP at constant 1990 prices) grew by 5.9% in 1993. Real GDP growth was higher in 1992 at 7.0% but lower in 1991 at 4.0%.

Industry and services carried the economy forward in 1993, as their value added grew by 10.3% and 7.7%, respectively. Because of bad weather conditions, agriculture, which was the main source of growth in 1992, registered a bare1y positive growth performance in 1993 at 2.7%.

Figure 1.2: Growth of Real GDP, 1986-1993 (In percent)

Figure 1.3: GDP at constant 1990 prices (in billion kip)

Crops production continued to account for around one half (48.4%) of total agriculture value added in 1993. Livestock and fisheries also represented a significant proportion (40.7%) of agriculture value added. The remainder of 10.9% is accounted for by forestry.

The sluggish growth of the agriculture sector was due main1y to unfavorable weather conditions in 1993. While drought was reportedly experienced in some provinces, flooding was reported in others. Consequently, value added by crop production declined by 11.0%. Livestock and fisheries posted a growth of 4.2%. This, together with an extraordinary growth of 183.7% of forestry, made possible a positive growth in agriculture value added.

It will be recalled that the country suffered from the same unfavorable weather conditions in 1991. As a result, agriculture value added actua11y declined, thereby reducing GDP growth to only 4% that year.

Figure 1.4: Agriculture Value Added Composition, 1993 (in percent)

Food Corps

Based on GDP estimates of the National Statistics Center, paddy production value added in 1993 represented about 65% of total crop production.

Data from the Ministry of Agriculture and Forestry shows that a total are of 649,310 hectares was under cultivation in 1993. The total area cultivated for rice production is estimated at 538,690 hectares, representing 83% of the total. The remainder was devoted to maize, starchy roots, vegetables and industrial crops, particular1y coffee, tea, mungbeans, soybeans, peanuts, tobacco, cotton, and sugar cane.

The total area cultivated for rice production declined by almost 10% from 592,550 hectares recorded in 1992 to 538,690 hectares in 1993. Lowland rice (350,407 hectares) accounts for 65% of total cultivated area, of which only 3.7 (13,020 hectares) benefit from irrigation. The remaining 35% are accounted for by upland rice cultivation.

Total rice production is estimated at 1.25 million tons in 1993, 20% less than 1.5 million tons in the previous year as a result of adverse weather conditions. Except for vegetables and coffee, all other crops registered a decline in production from 1992 to 1993.

In 1985, total rice production was estimated already at 1.4 million metric tons. Since then, annual rice production in the Lao PDR has exhibited an erratic trend within the range of between 1.2 to 1.5 million metric tons. It is estimated that to achieve national self- sufficiency in food, the country's rice production level must increase to 1.6 million tons. Even at this national production level, traditional rice deficit provinces may still experience acute shortage under unfavorable weather conditions due to poor infrastructure for moving rice stocks from surplus to deficit areas within the country.

A number of irrigation project continue to be implemented in order to promote lowland cultivation of rice towards achieving food se1f-sufficiency and to discourage upland shifting cultivation. Extension services are also being provided to encourage more permanent rice cultivation methods and crop diversification, and to assist farmers in accessing available farm credits. Rural infrastructures, including farm to market roads for a number of pilot upland communities, are also being improved/contracted to encourage family-owned farms to produce at levels beyond subsistence in a market economy.

Value added from livestock and fisheries was recorded at kip 165,478 million in 1993, 4.2% more than the previous year.

It is estimated that there were around one million heads each of water buffaloes and cattle in the country. Most of them are raised in the provinces of Savannakhet, Champasack, and Vientiane. Pig raising is also an important component of the livestock sub-sector with an estimated 1.6 million heads and so is poultry with 10 million.

Government policy aims to increase livestock production and fishpond cultivation as an alternative to subsistence and shifting farming practices. Investments and exports in the sector are being encouraged through reductions in export quotas and taxes. Although cattle beef export has penetrated the Thai market, Lao export of animal products still has to gain access to other markets in neighboring countries. The small domestic market and limited access to the international market pose as a constraint to the expansion of livestock production.

Animal health programs continue to be implemented by the Government to reduce morbidity from various animal diseases, including foot and mouth disease, rinderpest, and intestinal parasites.

The Nong Teng Vaccine Center in Vientiane province produces vaccines for the country's animal health program. However, further training and provision of financing mechanisms are still necessary to enable farmers to benefit fully from the program.

The Lao PDR forests are endowed with valuable hardwood, which continue to be an important source of foreign exchange earnings. In 1993, exports of wood products including lumber amounted to $38.2 million. In addition, exports of raw logs generated $8.5 million. Together, they accounted for more than one fifth (22%) of total export earnings.

The orientation of government policy is shifting towards the promotion of wood processing from exports of raw logs and lumber. However, full implementation of this policy is hindered by shortage of capital and technical skills within the country.

Over the last three years, the Government has also been implementing a policy of striking a balance between exploitation and conservation of the country's valuable forestry resources. A temporary logging ban was imposed in 1991 pending determination of a sustainable system for the logging industry. It would now appear that logging is no longer banned but mere1y regulated in view of the intensification of activities in the forestry sector, including exports of forest products. As noted in a previous section, forestry va1ue added reportedly increased by a1most 200% 1n 1993 after suffering a contraction the year before.

Manufacturing, which accounts for almost three fourths (73.7%) of industrial value added, grew by 7.7% in 1992. Construction, whose share is also significant at 17.7% posted a higher growth of 16.1%. While the share of mining to industrial value added was minimal at 1%, it registered the biggest growth at 36.5%.

Electricity, gas and water, comprising 7.6% of industrial value added also moved ahead with a growth of 21% after suffering contractions during the previous two years. After declining from 828 million kWh in 1991 to 753 million kWh in 1992 due to unusually low water level of the Nam Ngum reservoir, electric power production expanded by 22% in 1993 reaching a level of 919 million kWh. Since 1985 when electric power generation was similarly recorded at 919 million kWh, there has been an erratic trend in the production of electric power depending mainly on the water leve1 of the reservoir.

So far, there are only three hydroelectric power generating plants in the country with a combined capacity of 200 MW: (1) Nam Ngum 1 with an installed capacity of 150 MW; (2) Xeset with 45 MW; and (3) Selabam with 5MW. In view of abundant water resources suitable for hydropower generation, the Government attaches high priority to hydropower its development plan up to 2000 and beyond. An additional 5000 MW generating capacity is envisioned to be put in place within the next fifteen years. Within the next five year, biggest plant envisioned to be completed is Nam Theun 2 with a generating capacity of 600 MW and Theun-Hinboun with 210MW, Houi Ho with 150MW, etc.

Within the manufacturing sector, production of garments has been most promising in terms of growth production, which is mostly exported, increased by 150% from 3.75 million pieces of clothing in 1992 to 9.37 million in 1993. Exports of garments were recorded at $37.0 million in 1993, up by 37% from $27.3 million in 1992, thereby making it the second biggest source of foreign exchange earnings.

The sustained growth of the industrial sector since 1990 has been indicative of its positive response to the reforms under the NEM, which are intended to enable and encourage the private sector to participate in directly productive economic activities.

The legal framework for private sector participation in economic/financial/commercial transactions in Laos has been evolving for the past several years. The enterprise and land decrees which define the basic legal parameters for doing business and for using land, resyective1y, were finally issued in early 1993. A revised Foreign Investment Law to further improve the environment for foreign investment in the Lao PDR was passed in early 1994 by the National Assembly. Subsequently, a law ca business operation and on taxation were also passed by the National Assembly in August 1994. A draft arbitration decree has been pending consideration by the Government.

Privatization of state-owned enterprises (SOES) continued in 1993. Almost half of the 550 SOES have been privatized or in the process of being privatized. Except for SOES in "strategic" areas, the policy is to privatize all of them.

Figure 1.5: Industry Value Added Composition, 1993 (In percent)

The services sector accounts for almost one-fourth (24.3%) of the country's GDP. The three most important sub-sectors in terms of their share to total sector value added are retail and wholesale trade (33%), transport and communication services (20.2%); and government services (17.6%).

Most of the growth of the sector in 1993 came from wholesale and retail trade at 18.5% and hotels and restaurant services at 14.8%. The fast growth of these sub-sectors is reflective of the open door policy of the Government. The other sub-sectors which contributed substantially to the growth. They posted a real growth of 13.2 and 8.0%, respectively, in 1993. It is worthy to note that value added from government services has been dec1ining since 1990 in line with the NEM, which calls for disengagement of government from directly productive activities. As a result, the share of government to the total service sector has also been dec1ining since then.

The Government has been implementing a financial sector reform program with external assistance. In line with the NEM, the central and commercial banking functions of the State Bank were separated. The branches of the State Bank now operate purely as commercial banks. In addition to the state-owned commercial banks, five new commercial banks were licensed to operate in 1992-1993. Consequently, the share of the sub-sector to the sector value added, which more then doubled from 2.0% in 1991 to 4.2% in 1992, further increased to 4.5% in 1993.

The outline public investment program (PIP) for 1994-2000 indicates that transport and communication sector will continue to receive substantial allocation of public 6mds to support and encourage the private sector to participate in economic activities in the Lao PDR The telecommunication development program calls for expansion of the telephone network within the next several years from the current 8,800 lines (of which 70% are in the capital) to 17,550 lines in various parts of the country. A number of projects were underway to improve the transport network preparation of a civil aviation master plan was completed in 1992 with UNDP technica1 assistance. Its implementation commenced in 1993 with financial assistance from the Asian Development Bank and from a number of bilateral sources.

Figure 1.6: Services Value Added Composition, 1993 (In percent)

3. Prices, money and credit

The Consumer Price Index (CPI) series in the Lao PDR is computed only for the prefecture of Vientiane. There are plans, however, to increase the coverage of the series for the entire country. Year-on-year inflation rate was computed at 9.0% in December 1993, somewhat higher than the rate of 6.0% registered the year before, the higher rate of inflation of 1993 was due mainly to services which registered an increase of 34.1% in December 1993 compared to the same month of the preceding year. The price of food, which accounts for around 62.1% of total consumption (based on the recently conc1uded Lao Expenditure and Consumption Survey), was relatively stable, increasing by only 0.2% in December 1993.

The average increase for 1993 was 6.3%, thereby maintaining a single digit inflation rate for the second consecutive year. Pre1iminary estimates for the first half of 1994 indicate that inflation will continue to be constrained at a sing1e digit level. Year-on-year rate was computed at 9.4% in March and 7.0% in June 1994.

As of December 1993, liquidity (broad money supply) was reported by the Bank of the Lao PDR at Kip 125,848 million, representing a hefty increase of 64.6% from Kip 76,463 million as of and of 1992. Narrow money (currency in circulation plus demand despotism) was at the leve1 of Kip 52,239 million, representing an increase of 48.6% while quasi money (time and savings deposits, including foreign currency deposits) was at Kip 73,609, representing an increase of 78.2%.

Notwithstanding this expansion of liquidity, the inflation rate was contained at single-digit level; possibly reflecting continued magnetization of economic transactions in the country.

Figure 1.7: Money Supply Growth and Inflation, 1988-1993 (In percent)

The marked for financial inter mediation continued to improve in 1993 with the opening of branches in Laos of two other foreign commercial banks. Meanwhile, technica1 assistance to the bank of the Lao PDR (central bank) continued to strengthen its capacity for bank supervision.

Real interest rates for deposits in the Lao PDR continued to be positive in 1993. The positive interest rate regime should encourage generation add mobilization of domestic savings to counterpart increasing inflow of foreign savings for private and pub1ic investments.

The minimum savings deposit rate of interest prescribed by the Bank of the Lao PDR for 1993 was 12%, several percentage points higher than the average inflation rate for the year. The maximum lending rate, on the other band, was pegged at 24 %, regardless of the nature of economic activities to be financed by the loan. (In 1992, there were different maximum lending rates ranging from 14 to 26% depending on the purpose and duration of lending).

Commercial banks can set their own interest structure and margin provided they meet the minimum deposit and maximum lending rate prescribed by the central bank. They normally adopt a 5% margin in their lending policy. Subsidized credit from the state-owned Agriculture Development Bank was available at subsidized interest of 7% to 10%.

Actual lending rates for the corresponding period ranged from 14 to 28%, depending on duration and purpose of lending Short-term lending for trade, transportation and services had the highest interest rates. For agriculture and forestry, lending at subsidized interest rates ranging from 7 to l4% was provided by the Agriculture Development Bank.

4. Public Finance

The summary tables of the budget for fiscal year 1993 (October 1992-September 1993) and 1994 were officially made available to the UNDP Country Office upon requests (budget information was not officially available prior to 1993). They included actual revenues/expenditures for preceding fiscal years and budgeted revenues/expenditures for the current fiscal year. Although the budged document does not present details of expenditures for each ministry, it provides a comprehensive picture of the sources and uses of government tax and non-tax revenues, including grants, and the sources of financing of the budged deficit. However, publication of the full budget document, which was again raised and strongly suggested by the donor community at the fifth Round Table Meeting in Geneva, is still awaited.

Formu1ation of the annual budget is undertaken in conjunction with the preparation of plan of action. The budget prepared by the Ministry of Finance and plan of action prepared by the Committee for Planning and Cooperation for Fiscal Year 1994-1995 to be approved by the National Assembly at its session beginning 26 September 1994.

A technical cooperation program between the Government and UNDP, ADB and IMF is current1y on-going, seeking to establish closer linkages among medium term indicative planning, public investment programming, annual budgeting, and public expenditure accounting, monitoring and control. Through this program, as outline public investment program (PIP) for 1994-2000 has been formu1ated and approved by government for presentation at the recently concluded fifth RTM, the outline PIP calls for $146.7 million investment in FY 1994-1995 rising to $291.3 million in FY 1999-2000, the total 6-year PIP to $1,339.8 million. Formulation of a full PIP in the context of a medium-term indicative plan up to 2000 is expected to completed by the end of 1994.

Total revenue collected and grants received by the Lao PDR Government in 1993 amounted to Kip 144.526 million. On the other hand, total expenditure incurred amounted to Kip 170.514, yie1ding and overall budget deficit (commitment basis) of Kip 25,989 million. This deficit represents 2.8% of nominal GDP i.e. measured at current prices. When grants are excluded from revenue, however, the deficit was computed at 6.1% of nominal GDP. This ratio represents a substantial reduction from the previous ratios of over 10% registered in the past.

After adjusting for net arrears, the overall deficit (cash basis) was computed at Kip 39.0 billion. This was financed mainly by net capital inflow amounting to Kip 25.5 billion, representing 65% of total deficit. The remainder of 35% was covered by domestic financing, generated mainly through sale of assets of SOEs in the amount of Kip 14.6 billion.

For FY 1994, a bigger cash deficit of Kip 72.6 billion is envisaged in the budget, representing 10.3% of nominal GDP, thereby bringing the budget deficit/GDP ratio back to the two-digit level registered two years ago.

Until FY 1992, the amount of tax and non-tax revenues (excluding grants) collected by the Government had been inadequate to cover even current expenditures. There was therefore a deficit in the budget's current account of between $10 to $12 million from 1990 to 1992. For the first time since then, a modest current account surplus (excluding grants) of Kip 8.3 billion ($11.6 million) was registered in FY 1993.

For FY 1994, a bigger current account surplus of Kip 12.9 billion is envisaged in the budget account surplus my be attributed to increased revenue collection made possible by improvements in the country's tax and customs administration. The draft tax and customs code formulated under a technical cooperation program of UNDP and IMF was enacted into law in August 1994. Further technical cooperation is envisaged for training tax and customs personnel in the implementation of the new law and in disseminating the same to the general public to facilitate compliance.

Tax revenues collected in FY 1993 amounted to Kip 85,928 million, 41% higher than the amount collected the year before. In addition, Kip 27,328 million in non-tax revenues was collected, and Kip 32,270 in grants was received by the state.

The biggest sources of tax revenues in 1993 were import and export duties (29.2%), timber royalties (27.4%), and turn-over taxes (16.6), accounting for a combined share of almost there fourths of the total. The remainder came from profits, income, agriculture, land and natural resources taxes, and from business license and registration fees.

The tax effort (tax revenue as a proportion of nominal GDP) of the Lao PDR for 1993 was computed at 9.1%. For 1994, the tax effort is targeted to increase to 10.4%. While this tax effort instills low compared to those of other countries in the region, it already represents a big improvement over the tax effort of 7.4% registered in 1992 and 6.1% in 1990.

It is worthy to note that prior to 1990, the bulk of government revenues were derived from mandatory transfers from state-owned enterprises. In 1990, the share of tax revenues total revenues was around 60%. It has increased further to 76% in 1993.

With respect to non-tax revenues, the biggest source was over flight payment by international airlines for use of Lao air space, representing 30.6% of the total. Other major sources were: interest and amortization receipts (25.6%), income from leasing of assets of state-owned enterprises (17.9%), and depreciation payment from state-owned enterprises (17.2%).

For FY 1994 total revenue collection is budgeted at Kip 136.50 billion, representing an increase of 20% from actual revenues collected a years earlier. Tax revenue collection is targeted at Kip 110.23 billion, representing an increase of 28% over the amount of taxes actually collected the year before administrative rules and regulations for tax and tariff collection was enacted by the national Assembly in August 1994. Preparations are underway for training of personnel who would be responsible for implementation of the new law. Considerable training of tax administration personnel in the central and provincial governments would be regard to fully implement the new tax and customs policies and procedures embodied in the new law.

Actual expenditure for FY 1993 was recorded at Kip 170.514 billion, of which g was current and the remainder of 38.5% was capital expenditure, the share of current expenditure total continued its upward trend in FY 1993 from 57.1% to 54.2% in 1991 and 48.7% in 1990.

Conversely, the share of capital expenditures to total has been declining from 51.3% in 1990 to only 38.5% in 1993. This implies that the growth in capital spending has been outpaced by increases in recurring expenditure in the form of wages and sa1aries, materials and supplies. Pensions and severance payments, and interest payments. This trend in public spending needs to be arrested, if not reversed, in the immediate future, if the huge investment outlays targeted in the outline Public Investment Program for 1994-2000 are to be attained.

For FY 1994, a total expenditure of Kip 245,550 was budgeted representing an increase of 44/5 over actual expenditure in the previous fiscal Year. It is worthwhile to note that for fiscal year 1994, almost one ha1f (49.7%) of total expenditure is budgeted for capital spending, recovering and approximating the share registered in 1990.

The bulk of capital spending in 1993 was for transportation and communication, accounting for more than a half (54.7%) of the total Agriculture and forestry sector and industry/mining/energy group had a share of approximately 12% each. The share of the social sectors of education and health were the lowest at 9.5% and 1.3% respectively. With reference to the latter two sectors, the outline PIP is targeting that its combined share to total will increase to 18.3% approximating the 20% share advocated by UNDP in.

Based on the budget tables made available by the Government, more than two thirds (67.6%) of capital spending in FY 1993 was funded from external sources. In absolute amount, it is equivalent to $61.6 million. It shou1d be noted that this amount is confined to expenditure on physical capital and may include investments in human capital. For FY 1994, the amount to capital expenditure budgeted for foreign financing is l25million. In the outline PIP this amount is targeted to increase to almost $300 million by the year 2000.

Figure 1.8: Government Capital Expenditure by Sector, 1993

5. External Sector Ba1ance of Payment and International Reserves

The growth of merchandise exports continued to outpace the growth of merchandise imports in 1993. Exports increase by a hefty 57.9% from $132.6 million in 1992 to $209.4 million in 1993. Imports grew by 48.4% from $253.0 to $375.4 for the same period. However, because exports have been growing from a much lower base, the trade deficit still expanded from %210.4 million in 1992 to $166.0 million in 1993, representing an increase of 37.9%. In terms of proportion, exports continues to be just over one half (56%) imports.

Figure 1.9: Foreign Trade, 1988-1993 (In percent GDP)

Wood products continued to be the top export of the Lao PDR in 1993, earning $38.2 million for the country. Together with log exports of $8.5 million, they represent 46.7% of total merchandise export earning. The other major exports were garments textiles 37.0 million, motorbike assembly $22.0 million and electricity $19.6 million. It will be recalled that in 1990 electricity was the top export earner.

Figure 1.10: Composition of Export, 1990-1993 (In percent)

Figure 1.10.A: 1990

Figure 1.10.B: 1991

Figure 1.10.C: 1992

Machinery and raw materials remained as the top import item requiring foreign exchange outlay of $191.2 million, representing more than one half (50.9%) of the total. It should be noted however, that a major portion of this import item amounting to $97.0 million was for re-export. Other major import items were rice and other food products $31.4 million; imports arising from tied aid $76.9 million; and petroleum $19.7 million.

Figure 1.11: Composition of Imports, 1990-1993 (In percent)

As in the previous year, a positive net export of services amounting to $39.9 mi11ion was recorded in the Balance of Payments. Total receipt from export of services was estimated at $86.1million. This is comprised mainly of services rendered to foreigners in the country, notably the staff of embassies and international organizations and tourists, valued at $67.6 million. Receipt from overflight of international carriers was also considerable at $11.3 million.

Total payment for import of services was computed at $46.2 million, most of which were for payment for international travel ($17.0 million); interest payments ($4.1 million); and expenses of Lao diplomatic missions abroad ($3.0 million).

Transfer receipts were recorded at $113.0 million, of which $103.5 million or 91.6% came from official sources (official grants). The remainder was received from private siroccos.

The affected merchandise trade deficit of $166.0 million, net export of services of $39.9 million, and transfer receipts of $133.3 million yield a current account deficit of only $13.1 million in 1993. However, when receipts from official grants are excluded the deficit would be larger at $116.6 million, equivalent to 8.4% of GDP.

The capital account continued to register a supplies of $63.1 million in 1993 mainly due to net resource inflows from multilateral financing institutions proceeds from committed long-term loans were recorded at $57.8 million: however, there was an outflow of $9.3 million for amortization of maturing principal, thereby yielding a-net inflow of $48.5 million.

Direct foreign investment was registered at $48. Million in the BOP. After adjusting for errors and omissions accounted mainly by unrecorded imports, an overall BOP surplus of $50.0 million was realized in 1993, implying further build-up in the level of international; reserves.

As of end of December 1993, the Bank of the Lao PDR and the commercial banks had gross reserves of $63.2 million and $87.9 million, respectively or a total of $151.1 million equivalent to 5.1 months of imports.

Based on BOP statistics, total official deve1opment assistance (ODA) inflow disbursement in 1993 is estimated at $161.3 million, composed of $57.8 million in confessional loans an $103.5 million in official grants. This amount is considerably lower than the comparable statistic of $220.5 million computed based on information obtained directly from (ODA) sources, implying that many (ODA) inflows, particularly those provided in-kind, are not necessarily captured in the Balance of Payments.

Total external debt disbursed and outstanding as of end of 1993 was $1.202 billion 4.7% higher than a year ago of this amount, $447.4 million or over one third (37.2) was provided by multilateral financing institution. Debts from bilateral creditors from Eastern Europe and the former Soviet Union in the amount of $731.1 million (60.8%) were reportedly outstanding as well .The small remainder of 23.6 million was owed from Japan, Franc: and China.

The debt servicing burden of this debt stock was rather light because of the concessionality of the terms and conditions of lending. In 1993, debt service was calculated at $13.4 million, of which $9.3 million represents principal and $4.1 million interest - payments. The ratio of debt service payments to total exports of goods and non-factor services in 1993 was computed at 4.5%, which may be considered low and manageable.

Notwithstanding the light debt servicing burden at this time the Government has been cautious in mobilizing external resources for public investment and technical assistance, giving top priority to grants and then to official loans pith highly confessional terms.

For the last four years, the exchange rate both in the official and parallel markets have been relative1y stable, which is reflective of the prudent fiscal and monetary policies pursued by the Lao PDR Government. Since January 1990 and until December 1993, the average monthly buying rate in the parallel market has been confined within the range of Kip 714 to Kip 730 per US dol1ar. The comparable rates in the official market were Kip 703 and Kip 716. As of August 1994, the buying rates in the two markets were Kip 720 Kip 716 respective1y.

Foreign investment is allowed, encouraged, and actively promoted in the Lao PDR as an important e1ement of the New Economic Mechanism. A revised foreign investment law was enacted in February 1994 by the National Assembly. Together with the 1aw on business operation and n taxation subsequently enacted in August 1994, they now provide the legal framework for participation of the private sector both local and foreign, in business and other economic activities in the Lao PDR.

The Government established a Foreign Investment Management Committee (FIMC) to coordinate efforts at foreign investment promotion, negotiation and regulation. It has a permanent secretariat headed by a Director, functioning as one of the departments of the Committee for Planning and Cooperation.

A total of 156 investment proposals valued at $751.5 million were approved and licensed in 1993 of which valued at $725.5 million was to be invested by enterprises fully owned by foreigners and from joint ventures between Lao nationa1s and foreigners valued at 25.8 million were approved and licensed.

For the year of 1994, an additional 135 proposa1s were received and licensed with an aggregate value of $3,002 million. Since September 1988 when the foreign investment promotion program was initiated unti1 end 1994, a total of 550 proposals were licensed with an aggregate value of $5,627.9 million.

Million USD

Grand Total: 5,575.00

Foreign share: 4,596.00

Lao share: 979.00

* A number of 630 project is an overlapping figure because of one project may involve several countries in the same time (real figure is 587)

** Norway = Norway + Nordic Group

Vientiane, 17 July 1995.

In most countries, transportation infrastructures are inadequate and are considered as a major impediment to trade, cooperation and the exploitation of rich mineral resources; particularly those located in the hinterlands.

Further major commitments are required before minimum standards can be satisfies and most of the shortcomings could only be addressed by cooperation efforts.

Through several meeting and consultations, the six countries have agrees that:

1. Priority should be on to the improvement and rehabilitation of existing facilities and subregional projects on which there is already agreement among the countries direct1y concerned;
2. The formulation of projects should consider trade generation impacts, especial1y considering the economic transformation taking place in the Subregion;
3. Transport projects should be implemente4 in sections or stretches in order to facilitate project(s) implementation and provide immediate benefits;
4. Given financial constraints, criteria for project(s) se1ection will need to be established, including consideration of the subregional versus national character of the project and financial resources available.

The Second and Third conferences in Subregion Economic Cooperation have identified the following priority projects in the road subsector:

1. Upgrading of the Ho Chi Minh City- Phnom Penh- Bangkok road connection, including possible extension to Vung Tau in Vietnam;
2. Construction of a Thai- Lao PDR- Vietnam east-west Corridor;
3. Development of a good quality road linking Chiang Rai-Kunming via Myanmar;
4. Development of a good quality road linking Chiang Rai-Kunming via Lao PDR; and
5. Upgrading Kunming -Laoshio road system.

The Subregion Transport Sector Study by ADB considers 3 projects in rai1way subsector, 2 in the water transport subsector and 2 in the air transport subsector, which are directly, concerned Lao PDR.

1. Projects in railway subsector:

• Yunnan Province- Thailand Railway Project with two out of three optimal via Lao PDR.
• Extension Thailand Railway to Lao PDR (150 km) through international Mekong bridge.
• Construction of new railway line from Lao PDR's Xiengkhouang Province to a Cualo port in Vietnam mainly for export of iron ore.

2. Water Transport Subsector:

• Upper Mekong River Navigation Improvement Project.
• Southern Lao PDR- Cambodia River Navigation Improvement Project

3. Air Transport Subsector:

• Project to upgrade the airport in Lao PDR
• Project to Establish New Subregional Air Routes involving Luang Prabang.

Electricity requirements in the region are increasing rapidly it has been predicted that 23,958 MW of new generation will be needed between now and year 2000. Lao PDR is rich in energy resources: Hydropower, coal, oil and gas. The uneven distribution of the energy resources among the countries, particularly the hydropower resources: Countries with higher power demand have limited resources while those with limited requirements are well endowed with the hydropower resources.

Lao PDR has a hydropower potential of about 15,000 MW within its territory. Up to now, slightly over 1% of the total potential has been developed with 70 to 75% of the production exported to Thailand.

With the huge resources located close to the biggest power demand country in the subregion (Thailand) and the low domestic demand, the hydropower sector will continue to be one of the main foreign exchange earning of Lao PDR.

Without other financial sources than the public investment funds and the external soft loan the hydropower development would provably continue with the similar slow rate as experienced in the eighties. This would lead to a loss of opportunity for foreign exchange earning of Lao PDR.

On the basis of the above and in line with the new economic policy, the Government has begun, since the beginning of the nineties, to seek participation of foreign investors for projects beyond the financial capacity of the public and soft loan investment.

Within the short time frame, experiences have proven that such policy is correct and several projects with the aggregate generation capacity about 10 times higher than the existing capacity are being implemented in 1994 and expected to be completed by the 2000 as shown in the attached figure.

The funds for these projects are from both the private sector (BOT schemes) for large schemes and soft loan for small/medium schemes. Agreements between the government and the developers have been signed for most of the BOT schemes of the 1994-2000 period.

All the a above-mentioned BOT schemes have a provision for equity sharing by the government ranging from 25% to 60%.

Information given in following tables and figures are aimed to show the potential and the relative advantages of the hydropower resources in Lao PDR. It also indicates the long-term forecast of power and electric energy demands of the countries in the Greater Mekong Subregion.

Foreign investment is particularly sought in the Mining Sector because of its capital-intensive investment combined with scarce domestic financia1 resources and its high potential for export.

In 1991, the foreign investment in this sector was ranked second in terms of aggregate value (about 25% of the total).

Fiscal regulations such royalty rate, income taxes and incentives in the Mining Sector are widely recognized as competitive by international standard. This indicates the firm commitment and strong support of the Government to pave the way for foreign investment in the sector.

The following location maps of various minerals and fossil fuels such as coal, lignite, oil and natural gas show that the country possess huge mineral resources.

Market for fossil fuel in Thailand is tremendous as the country has to import about 60% of its requirements. This would be an area of high prospects for foreign investors. Recently, an agreement was signed with private investors to implement a lignite power plant project in Hongsa (Northwest of Lao PDR) for exporting the electricity to Thailand.

In the short-term, other minerals having high prospects for export would be gemstones which require simple extraction equipment and could be easily transported.

Some medium-and long-term investment opportunities offered by the Ming Sector would be:

1. The potash production in the Vientiane province, the largest knovm deposits in the subregion with the estimated reserves exceeding by far those in Thailand;
2. The significant iron ore deposits in the province of Xiengkhouang, the occurrences of base metals (components needed for steel) and the planned hydropower development on the Nam Ngum river, both in the northeast of Vientiane and in Xiengkhouang Province, suggest the region could provide opportunities for both iron ore and steel export;
3. The Boloven basaltic plateau in the southern Laos well endowed with both the competitive hydropower potential and bauxite might also offer opportunities for aluminum melting plants.

Having been fully aware that the absence of railways and inadequacy of the road network are the major constraints for the development of the Mining Sector, the Government is now seeking all financial means to develop the transport sector including the concession arrangement with private investors Mining and transport development could be tied together in a Single package for concession arrangement.

The economic growth depends to a large extend, upon the performance of the Agricultural sector which contributed in 1993 for 56% of the GDP and employed about 0% of the labor force.

Coffee is by far the most promising product for export. In 1992, export of coffee accounted for around 80% of the export value in the agricultural sector and contributed for 7.4% of the total export value of the country. Export also includes several annual and perennial corps of limited quantities.

The Lao PDR has the highest potential land/person in the Greater Mekong Subregion large and unexp1oited fertile land and favorable climatic conditions, particularly in the Boloven basaltic plateau. This could offer promising opportunities for low-intensive investment in the agro-processing industry for export based on annua1 and perennial crops.

The on-going improvement of main National Roads linking major provinces, together with the high rate of urbanization have created favorable conditions for investment in the import-substitution agro-processing industries.

It has been estimated that the Lao PDR has the highest ratio of forest to total area in ASL4. Wood products including lumber are one of the main export earning of Lao PDR. In 1993, it accounted for 22% of the total export value.

In view of the long-term sustainable development and the preservation of the environment, the Government has been implementing the policy of striking a balance between exploitation and conservation and shifting from exports of logs and lumbers towards the promotion of wood processing.

Due to shortage of capital and the technical know-how in the country, the deve1opment of wood processing subsector also needs the investment and the introduction of new technology of the foreign investor.

Within the Subregion, links and networks in the tourism sector already exist: Government-to-government.

The common interest among all six countries is to promote nature and culture types of tourism. The major problem is the gaps in most countries in the basic infrastructure and support services necessary for maximizing tourism potential.

The subregional cooperation will primarily focus on:

Most of the countries trade more often with countries outside the subregion than within.

However, trade and investment within the subregion are being development steadily owing to the growing openness and revitalization of the economies, and the favorable legal and regulatory framework for local and foreign investors.

The countries in the subregion have many common problems (such as severe infrastructure shortage) and also common goals (such as outward-oriented economy and promotion of the participation of private sector). All countries recognize that the attraction of foreign investor depend to a great extend on the trade and investment environment.

The cooperation aiming at improving the Trade and Investment Climate in the Subregon would enable investors to consider their own strategies in the subregional context which is more attractive than the national context.

Projects and initiatives emerged from the Third Conference on the Economic Cooperation in the Greater Mekong subregion includes:

• Two Projects aiming at Facilitating and Enhancing Trade Flows
• Three Projects aiming at Improving Investment Climates
• Two Projects on Building a Strong Science and Technology Base
• One Project aiming at Increasing the Role of Private Sector

River Basin