2009 Index of Economic Freedom

Quick Facts

Population:

• 5.8 million

GDP (PPP):

• $11.4 billion
• 8.1% growth
• 6.7% 5-year compound annual growth
• $1980 per capita

Unemployment:

• 2.4%

Inflation (CPI):

• 4.5%

FDI Inflow:

• $187.4 million

Laos’s economic freedom score is 50.4, making its economy the 150th freest in the 2009 Index. Its overall score remains almost the same as last year, with a considerable increase in trade freedom offset by a decrease in freedom from corruption. Laos is ranked 35th out of 41 countries in the Asia–Pacific region.

Laos has undertaken reform measures that can help pave the way to economic development. Although progress has been very gradual, reforms in trade and public finance management have been implemented. Laos scores relatively well in government size, and its tariff barriers have been reduced to facilitate trade liberalization. Non-tariff barriers still hurt overall trade freedom.

Despite some progress, many institutional challenges continue to have a negative effect on overall economic freedom and the development of a more vibrant private sector. Financial freedom and property rights stand out as weak areas relative to other countries. The rule of law does not always hold without political influence, and corruption is rampant. Burdensome business regulations hinder entrepreneurship, and regulatory enforcement is in the hands of an opaque bureaucracy.

Background Back to the top

Laos, governed by one of the world's few remaining Communist regimes, is also one of Asia's poorest nations. Upon coming to power in 1975, the Communist government imposed a rigid socialist program that had a devastating impact on the economy. Starting in 1991, the government started to liberalize slowly, but with only limited success. The country remains highly dependent on international aid and suffers from high levels of corruption and weak rule of law. Basic human rights are still heavily restricted. In 1998, Laos began formal negotiations with the World Trade Organization with an eye to joining the WTO by 2010.

Business Freedom 59.5 Back to the top

The overall freedom to start, operate, and close a business is restricted by Laos's regulatory environment. Starting a business takes an average of 103 days, compared to the world average of 38 days. Obtaining a business license requires more than the world average of 18 procedures. Modern bankruptcy proceedings have not been fully developed.

Trade Freedom 66.4 Back to the top

Laos's weighted average tariff rate was 9.3 percent in 2006. There has been some progress in liberalization, but prohibitive tariffs, import bans and restrictions, discriminatory import taxes, restrictions on service market access, preauthorization for imports, corrupt and inefficient customs administration, weak border control, and weak enforcement of intellectual property rights still add to the cost of trade. Fifteen points were deducted from Laos's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 70.6 Back to the top

Laos has high tax rates. The top income tax rate is 40 percent, and the top corporate tax rate is 35 percent. Other taxes include a vehicle tax and a tax on insurance contracts. The government is hoping to implement a value-added tax (VAT) by 2009. In the most recent year, overall tax revenue as a percentage of GDP was 10.8 percent.

Government Size 89.7 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 18.5 percent of GDP. Management of spending continues to improve. There were no significant privatizations in the most recent year.

Monetary Freedom75.4 Back to the top

Inflation is moderately high, averaging 5.3 percent between 2005 and 2007. The government influences many prices through state-owned enterprises and utilities and sets the price of fuel products. Ten points were deducted from Laos's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom30.0 Back to the top

Foreign investors may not engage in business activities that are deemed detrimental to national security, have a negative impact on the environment, or are regarded as harmful to health or national traditions. Foreign investors must submit project proposals for screening and approval by various levels of government. Investors must obtain a number of certificates, secure a license, and pass other bureaucratic hurdles before gaining permission to operate. Weak and inconsistent contract enforcement and non-transparent bureaucracy inhibit investment. Residents and non-residents may hold foreign exchange accounts subject to restrictions and government approval. Some payments and transfers face quantitative restrictions or require indirect government approval. Foreign investors may lease but not own land.

Financial Freedom20.0 Back to the top

The financial system is small and subject to heavy government involvement. High credit costs and scarce access to financing severely impede more dynamic entrepreneurial activity and development of the private sector. Much of the population remains outside the formal banking sector. Supervision and regulation are weak. Three state-owned banks dominate banking, accounting for more than 50 percent of assets, and directed lending and poor credit standards have left them burdened with non-performing loans. Activities of the 10 private and foreign banks are limited. A new banking law was passed in late 2006 to encourage foreign participation by permitting foreign banks to set up branches in all provinces of Laos. The government directs credit allocation, and the central bank is not independent. Capital markets remain underdeveloped. The government plans to open Laos's first stock market in 2010.

Property Rights10.0 Back to the top

The judiciary is not independent, and judges can be bribed. Foreign investors are generally advised to seek arbitration outside of Laos, since the domestic arbitration authority cannot enforce its decisions. Foreign investors may not own land but may lease it with government permission. There is no copyright system. An intellectual property law drafted in 1996 with help from the World Intellectual Property Organization is still pending.

Freedom From Corruption19.0 Back to the top

Corruption is perceived as rampant and worsening. Laos ranks 168th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Low-level officials must be bribed to expedite such documents as business licenses and import permits, and there is growing anecdotal evidence of more pervasive corruption among higher-level officials within the executive and judicial branches.

Labor Freedom63.5 Back to the top

Laos's labor regulations hinder employment opportunities and productivity growth. The non-salary cost of employing a worker is low, but dismissing a redundant employee can be both costly and difficult. Modifying the number of work hours remains difficult.