Laos, a landlocked nation in Southeast Asia, is celebrating the completion of the Laos-China Railway (LCR). This monumental initiative, with a budget of $5.5bn, has already had a positive impact on the economy bring more trade and tourists and making the small country a transport node in the region. It is also a testament to China's expanding influence in the region through its Belt and Road Initiative and Laos’ growing dependence on Chinese investment.

The LCR, stretching over 1,000 kilometres from Vientiane, Laos's capital, to Kunming in southwestern China, promises to revolutionize regional transportation. It will enable the swift movement of goods and passengers between the two countries, fostering trade, tourism, and foreign investment. Additionally, ambitious plans to extend the railway south to Bangkok and possibly even to Singapore and east to the Vietnamese coast should place Laos at the crossroads of a pan-Asian trade and transport network.

The Laos-China rail line will be joined by a second Laos-Vietnam rail line that is expected to go into operation in 2008. A cooperation agreement on the project was signed in Vientiane last week by President of Petroleum Trading Lao Public (PTL) Company Chanthone Sitthixay, President of Yooshin Engineering Corporation Chon Kyung-soon, and Executive Director of Korea National Railway Park Jin-Hyun.

The project is expected to continue to strengthen Laos’ role as a transport and trade hub within ASEAN and beyond. The Laos-Vietnam Railway is a part of the Laos Logistics Link Project, which includes a number of sub-projects such as the Thanaleng Dry Port and Vientiane Logistics Park, the Laos-Vietnam Railway, Vung Ang Seaport, and the Boualapha Coal Fired Power Plant.

The high-speed electrified railway project will be built over a distance of some 500 kilometres, including some 312 kilometres linking Vientiane and Khammouane province’s Thakhek district, and a 139-kilometre route connecting Thakhek district with the Laos- Vietnam border. The total investment for the project is estimated at $5.5bn.

Chinese investment

Despite the tremendous potential, Laos faced significant financial risks in funding the LCR. China contributed around 70% of the project's funding, leaving Laos with an investment of approximately $1.5bn—a substantial sum for a nation with a gross national product of just $15.7bn.

Foreign direct investment into Laos has skyrocketed from $27.7mn in 2005, to over $1bn in 2021, with Chinese investment becoming increasingly dominant. In 2018, China alone accounted for nearly 80% of total FDI.

According to a 2019 report, the biggest jump in Chinese investment came between 2014, and 2016, with a huge number of small- and medium-sized Chinese companies from sectors including energy, real estate, tourism, agriculture, and engineering piling into the market.

The COVID-19 pandemic further complicated matters. Laos, heavily reliant on international tourism, suffered severe economic setbacks, resulting in high inflation and slow economic growth. Although borders have reopened, economic problems persist.

However, the LCR has already spurred a wave of Chinese investment transforming the capital Vientiane. New infrastructure, high-rise buildings, and commercial developments have appeared where there were none before, creating jobs and driving economic growth. But in a testimony to the limits of the transformation the new luxury residential complexes going up in the capital are largely bought by foreigners – mostly Koreans and Chinese. Few locals can afford the upmarket apartments.

Chinese companies operating in Laos have become a magnet for young Laotians seeking better-paying employment opportunities. A surge in students learning Chinese underscores the demand for these roles, as working for Chinese firms typically offers better pay and a refuge from the economic problems hitting the economy.

Economy under pressure

Before the pandemic, Laos boasted a robust economy with consistent GDP growth above 5%, visibly improving living standards. However, the tourism ban in 2021 resulted in significant job losses which leapt 20% and an inflation rate exceeding 40%, impacting real incomes. While employment rates have rebounded, the local economy remains subdued.

Laos is at a crossroads, balancing the promise of the LCR and increased Chinese investment against economic headwinds and potential challenges. The railway project is seen as the key to unlocking Laos's economic potential, connecting it to regional trade networks and supporting its aspirations for prosperity in the 21st century.

Some question if Laos can afford the grandiose infrastructure projects as the issue of a “Chinese debt trap” have become increasingly prominent amongst the participants in China’s Belt and Road Initiative (BRI). However, Laotian government officials say they have no choice, thanks to the countries landlocked position and point to Singapore that flourished by creating an international infrastructure that made it a hub for trade in the region.