NEW PLAN TO INCREASE POVERTY IN LAO
by Alex, LaosFreedom Staff Writer
At the closing ceremony of the three day symposium on finances (10-13-00), Bounyang Vorachit, Deputy Prime Minster and Minister of Finance, told all sectors in the Lao economy to strictly adhere to thriftiness. This announcement also came at the closing of the government's meeting chaired by Prime Minister Sisavath Keobounphanh. That meeting reiterated a national budget for fiscal 2000-2001. The original national budget was adopted by the ordinary session of the Fourth Congress of the National Assembly earlier this month. Both Sisovath Keobounphanh and Bounyang Vorachit called for central planning. Under this new policy, the provincial officials are given authorities to lay out economic plans for the provinces, and the village officials are charged with the duty to implement these plans. This new development calls into question two points: (i) the policy of thriftiness, and (ii) the delegation of economic planning from the central government to the provincial level.
The call by the Lao government for the people to exercise thriftiness has been on the book since 1975. This type of policy contributed to the further economic sluggishness of the country than solving the pressing needs of the country to move forward. It calls for the change in consumers behavior without changing the basic economic condition under which that consumption pattern exists. Clearly, such a policy places the government at the helm and dictates consumption pattern in the country. This type of policy approach is striking different from macroeconomic policy in market economies. Governments in market economies influences consumption pattern in the economy through policy tools by indirectly changing conditions affecting productive forces in the economy. The use of interest rate is one most powerful policy tool for that purpose. However, Lao has never effectively exploit this type of policy tool in responding to its economic changes.
The policy of thriftiness is not unique to the Lao government. After the free fall of the Baht in the summer of 1997, the Thai government also implored its people to exercise thriftiness. By doing so, the policy makers contended, the economy will somehow slow down its downward spiral trend and stabilize the country's dwindling currency devaluation. For a country with sufficient economic safety net, such as strong financial, banking and manufacture bases, such a policy may be advisable. Even a country such as Thailand, whose economic structure boasts a strong manufacture infrastructure, the policy of thriftiness failed. Had Thailand followed that path to non-consumption, it would had been in worse situation than what it finds itself in today with the intervention of the IMF----who garnered different policy than issuing empty commands of consumption reduction or thriftiness.
Return now to the policy of Thriftiness called for by the Lao government. The Lao economy is not a consumer based market. The country has very limited financial and manufacture infrastructure. The Lao economy can best be characterized as a subsistence economy. The economic structure of Lao is predominantly agricultural. Whatever limited number of manufacturing industry that Lao possess is mainly labor intensive and oriented towards export processing rather than domestic consumption. This proposition is substantiated by the fact that most of the manufacturing facilities in Lao are owned and run by foreign investors. Having been established by direct foreign investment, these manufacturing facilities produced almost exclusively for export purposes. Having outside market as their focal point, the Lao economy derives income from them in a form of either income taxation or licensing fees. As for the people who derived income from these facilities as workers or employees, little is spent in the Lao economy. Therefore, the call for thriftiness is meaningless. It is nothing more than an admission by the government that it has failed in its economic leadership. It failed to help the economy go forward and shed away its downward trend of its currency and stagnated development. It failed in formulating and implementing effective monetary and fiscal policies to shore up the value of the Kip in light of the dwindling trend of the kip's shadow, i.e., the Baht.
How should we interpret the meaning and effect of the policy of thriftiness? A closer examination of this policy tells us a remarkable story about the state of the economy in Lao. It is a well established fact that Lao is a poor country. However, having seen the government telling the people to change their consumption behavior by consuming less then what little consumption they now have, we are confident in concluding that the economic situation in Lao today is much worse than what it was a year ago. By telling a poor man to consume less than what he is already being deprived from consuming the most necessity in life is the same as telling a starving person to eat less for his own good. Spending, not thriftiness, stimulates the economy. Spending by companies stimulates the economy by increasing consumption power of the people through the disbursement of wages. Spending by the consumers stimulates the economy by exchanging goods and services thereby spreading the wealth in the country.
Surely there is a time when thriftiness is a good policy. Such a time is one when the economy is overheated or there has been a prolong period of growth. As the result of sustained growth, inflation sets in. As inflation creeps in, the economy becomes overheated. Overheating under such circumstances comes from unusual accumulation of wealth by consumers. The policy of thriftiness, then, aims at curtailing uncontrollable growth and consumption in the economy. The aim of such a policy is to stem the tide of inflation. The key instrument of thriftiness under such a situation is to increase interest rate of the central bank. The higher interest rate will attract money from the economy into the central bank. As the result, people has lesser money to spend. Companies are not likely to expand operations or build more factories because higher interest rate means higher cost of capital. This is known constrictive monetary policy.
Once again turn now to the economy of Lao. We see that inflation in Lao does not come from an overheated economy. Lao does not enjoy high percentage of economic growth to the extent that the country experiences a runaway inflation. Inflation in Lao, however, resulted from economic stagnation. The government has never formulated or implemented any type of effective monetary policy. According to the Fourth Congress in late September and ended early October of this month, the government adopted a fiscal budget for the nation. That budget goes to fiscal policy of the government. It says nothing about the government's monetary policy. So far, the government has never actively participated in the market by manipulating its interest rate through the Bank of Lao. The value of the Kip spirals downward consistently, yet the government remained complacent towards its interest rate. A shrew policy maker would decisively intervene the devaluation of the Kip by hiking interest rate through the Bank of Lao.
Increasing interest rate will attract foreign deposits into the Bank of Lao or more currency traders will likely dump the Baht, Riem, and Dong and buy the Kip. By increasing the interest rate in Vientiane, the regional market will respond by shifting its demand in favor of the Kip. This higher demand for the Kip comes from the implicit promise by the Bank of Lao that time deposit accounts will be paid with higher interest or returns than the neighboring depositories in Cambodia, Thailand or Vietnam. This type of policy also calls for economic independence by Lao. For instance, if Vientiane unilaterally increases its interest rate, Hanoi will feel a pinged at its financial market because the demand for the Dong will decrease. Similarly, the Thai Baht and the Kmer Riem will also be artificially devalued by Vientiane's higher interest rate. The over all effect will be the increase of the Kip's value resulting in tightening domestic consumption. This is called "thriftiness."
However, thriftiness, as described above, truly differs from the policy of thriftiness advocated by the Minister of Finance, Bounyang Vorachit. Mr. Bounyang's thriftiness is nothing more than telling the people not to spend money. He does not touch interest rate in the Bank of Lao. That is not a policy because it lacks policy tool and has no policy objective.
Recognizing that Lao is poor, the Lao government recently announced in its Fourth Congress that it will give provincial authorities to plan the economy for each provinces. The districts in each province will be responsible for implementing such policies. The delegation of power by the central authority to the provincial and district levels are known as devolution. This now policy approach different that past policy because the central government, i.e., the Central Committee, plays no role in planning for the economy. Instead of having a centrally planned economy, Lao will now have localized markets planned by the provincial authorities. This is a new experiment that will lead to a disaster. If the Lao economy is lack luster now, wait for another year or so when this new policy is put into practice, Lao will set a new record in implementing economic disaster.
When economy authorities are diffused into many hands among provincial authorities, corruption is inevitable. Each provincial governor will become prey to profiteers and opportunists who will hijack whatever little economic development each province possess. This type of devolution weakens the national authority. The country's economic direction will become unclear and power is diffused. The lack of clarity in economic policy comes from the fact that each province has been empower to synthesize its own economic policy and development. That fact that not all provincial governors are trained in economic policy development will further contribute to the stagnation of growth and development in the country. As power is diffused among provincial level, economic development in Lao will become uneven. Social unrest will set in as the result of uneven distribution of wealth. If this speculation becomes a reality, the communist leadership will most likely respond by tightening its grip by reassuming power over economy matter. Central planning might return again. However, if the unrest is widespread in a pace faster than the government's response, communism might ultimately fall as the result of nation wide uprising.
The future of Lao depends not so much on politics or ideology, but the intertwining role of politics and economics. Until Lao is governed by a leadership that is well versed in both politics and economics, the fate of Lao will remain uncertain. For 25 years, Lao experimented with planned economy, it proved unsuccessful. By shifting the planning authority from the central government to the provincial will not change the result. The market, even in poor Lao, is too strong and too wild to be tamed by any political ideology.