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THE LAO BANKING LAW: Loophole for Corruption
This article was contributed to
(September 2000)

The government always has a special role to play in the economy of the country. Even in a free market society, the government is closely tied to the economic life of the country. Sometimes the government plays the role of the regulators, and at times market arbitrator or participant. We cannot say that the government does not intervene in the market economy. In the United States, Alan Greenspan---Chairman of the Federal Reserve---remains active in lowering and raising interest rate in response to market conditions. The government's role is responsive or reactive. In a socialist economy, however, the government takes a proactive role. It carries out a master plan. The so called 5 year plan in the communist world is a prime example of how the state plays a proactive role in the economy. In hindsight, we can say that a reactive role, such as that played by Alan Greenspan in the US, is more beneficial to the country. The market is allowed to play out its manifold forces. The government closely monitors its movement and intervenes only to prevent or repair economic calamity. This type of intervention limits the role of the government to a bare minimum. The government intervenes to avert self destruction. Hence, the hands of the state is "invisible" during good times and can only be seen when the economy is about to take a free fall. In contrast, the communist government dictates before hand how and in what direction the economy should move. No players are allowed to assert their individuality if their conduct would contravene the master plan; therefore, no competition exists in a socialist economy. Without competition, innovation is difficult to come by and the economy eventually stagnates. It took the Soviet Union 70 years to understand that.
     The role played by the Lao government in the economy is quite interesting. Normally, all economic activities are planed and controlled by the communist party. However, despite monetary fiasco in the late 1970s and early 1980s, Lao did not have a banking law until 1990. The present Banking Law of Lao PDR is not even a legislation. It is an executive decree issued by the Council of Ministers. The law has 25 articles and contains the most convoluted provisions. Despite the rudimentary infrastructure of the financial institution in Lao, the Banking Law of Law divides banks into three types: commercial, development and foreign banks.
     The communists attempted to impress the western world by dividing banks into three types. It gives the world an impression that banking law in Lao is highly structured. However, the true reason cannot be further from the communists' attempt to structure their corruption.
     The first category is the development bank. A development banks acts an intermediary or an implementing institution to receive and disburse money earmarked for developmental projects. Foreign aids, foreign loans, bilateral assistance and the like flow through development bank. Donors have been fooled into believing that the money would really go to targeted projects. However, they have been deceived. Development bank is nothing more than a front; a money laundering machine for the communist government.
The second category of bank is the commercial banks. These are banks engaging in conventional banking business. International trade, loans, time deposit, and small scale lending are funneled through these banks. There is nothing extraordinary about this category of bank.
     The third category of bank is the foreign owned banks. These banks are branch offices of foreign banks. Their operations are conventional. There is nothing abnormal about their activities. Like foreign banks in all other small time totalitarian states throughout the world, the Lao communist leaders use these banks to hold their loot and hiding their assets offshore. There is no law requiring government officials in Lao to declare their assets. Moreover, there is no law subjecting interbank transactions to inspection or audit. Therefore, transactions between the "development" banks and foreign owned banks are virtually untraceable.
Instead of using banking law to lay the foundation for banking infrastructure of the country, the communist leaders succeeded in using the Lao banking law for private gain. When corruption is unchecked, it is nearly impossible for the leaders of the country to truly care about the economic life of the nation. They go to work in luxury cars; sit in an air conditioned offices and return home to a comfortable life. Little do they experience the poverty of the country. To change their corrupt practices would mean to reduce their standard of living. There is more incentive for the communist government to keep Lao poor. Poverty means foreign aids. Foreign aid means more money. As long as Lao's economy stagnates, there will always be some foreign government somewhere willing to lend a helping hand. This is the Lao paradox: the only way to get rich is to be poor. This fact is known by all Lao intellectuals and aspiring politicians inside and outside of Lao.
     Politics in Lao is lucrative. The temptation is too great a lure, especially when abusive conduct is not met with any disapproval----at least not out loud. The depletion of Lao's foreign reserve is a case in point. How many average Lao person in Vientiane or overseas educated "Laotians" know what is a foreign reserve? Not many. A foreign reserve is the amount of money that composes the country core M2. This money is a country's life saving. It is used to defend the value of the Kip when the Kip loses value and to devalue it when it becomes to deflated. It is the country's last line of defense against outside influence on the Kip's value. To regulate the Kip, the government uses its foreign reserve to buy and sell foreign currencies whose fluctuation in the market will effect the Kip. For instance, the Thai Baht, US dollar, Japanese Yen, and French Francs are some of the main currencies that influence the Lao Kip. By buying and selling these foreign currency, the Bank of Lao can control the value of the Kip through market forces. In the mid 1990s, Lao had $95 million in its foreign reserve excluding gold. In the year 2000, the balance of this reserve is less than $20 million. The disappearance of $70 million from the foreign reserve in less than five years was completely unknown to the Lao people---except those who may have moved it and few who know what to look for. In that same period, Lao's M2 increased at an annual rate of 300%. The World Bank, Asian Development Bank, and other financial analysts raised eyebrows. As for the overseas Lao "politicians wannabe," ----well what they don't know, they don't complain. It is not the Vietnamese who is robbing and looting Lao today. It is the Lao communists who are engorging themselves by looting the national treasury. When western governments gave assistance to Lao, the money is deposited in the Bank of Lao's M2 core account. None of that has ever made its way to Hanoi. Despite Vientiane's politial and military dependency on Hanoi, the Lao communists were too greedy to share anything with their ideological master. For the assistance the Vietnamese gave to the Lao PDR, they have unfettered access to Lao's rain forest in return.
     To understand how can the communists in Vientiane looted the country's foreign reserve, we need only to understand the Banking Law of Lao. The law is a Presidential Decree or an Executive Order. Not delving into the legislative process of the Lao PDR, we can safely say that the law was drafted in such a way that the so-called Governor of the Bank of Law is not independent from the President and Prime Minster. Articles 17 and 25 of the Banking Law of Lao provides that the Bank of Law has the power to oversee all banking activity in Lao. The foreign reserve is under direct supervision of the Bank of Lao. The governor of the bank is appointed by the President and his cabinet. Absent any political dissent and auditing body, the movement of money from the foreign reserve is virtually undetected. Since the press serves as a propaganda machine for the state, there was no way for the people to know that the foreign reserve was plundered.
     As the Kip continued to lose its value, instead of looking to its foreign reserve for the answer, the Lao government looked to outside sources for answer. The foreign reserve was almost completed depleted. The government sent its Foreign Minister and Deputy Prime Minister, Gen. Sisavat Lengsavat to Peking to beg for an interest free loan. China obliged the request and the hustler return home with his fill. The money was earmarked for defending the Kip's value. The world must watch closely how that $500 million will be spent. As the year 2000 comes to a close, we could not help but question how much of that money----borrowed in the name of the Lao sovereignty---is still left in the national treasury. Despite the government's report to the World Bank for the fiscal year 1999 that the country's foreign reserve was less than $20 million, the government has not given any indication that it replenished the foreign reserve. Under such circumstances, the Kip will likely continue to fall.
As the Kip falls, the standard of living of the people will suffer. The Lao economy depends heavily on foreign imports. A depressed Kip means that Lao pays more for its imports. This outflow of money depletes the supply of money in the M1 sector. The outflow of the Kip from the country will force the government to dip into its M2 supply. As the economy is replenish with money from M2, the market will reacted with further depreciation of the Kip. The value of the Kip will further fall. As the Kip's value falls, the same imported goods will become even more expensive for the country. As the cycle continues, the Lao economy will suffer.
For the past 25 years, the communists learned that when the economy goes bad or when the Kip becomes less valuable, there will always be more foreign aids. This prediction has worked out like magic. This is the paradox of poverty. As the country becomes poorer and poorer, international aids pour into the country. As aids arrive, those in power become richer and richer by the hour. There is more incentive to create disaster than increasing the standard of living for the people.
     The world is too kind. Perhaps the Lao communists should not be the one to take the credit for poverty in Lao. Western donors, as well as communist block countries contributed plenty to the suffering of the Lao people by propping up the Lao communist regime. This assertion is not an expression of ingratitude. It is a fact that it is too easy for Lao to obtain foreign aids. It is too easy for the world to feel sorry for Lao's poverty. However, as long as foreign aids continue to flow into Lao, the communist leaders would always have an incentive to continue to hold on to power. As long as the country's poverty brings in more dollars into their pockets, they will always believe that the only way to get rich is for the country to remain poor. If the world wants Lao to succeed, it must cease giving free money to Lao unless its leaders change its way of running the country.
     The Lao communists are not ashamed to show off their ill-gotten gains. After successfully sacking the country's foreign reserve, they invited the entire world to come and marvel over their wealth by naming 1999-2000 as the Visit Lao Year. The multimillion dollars houses, expensive cars, night clubs, and even a golf course in the outskirts of Vientiane have been completed. The world may now flock to see how comfortable the communists live in Lao. "Poverty is not that bad after all" seems to be the message they are sending to the world.