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Belt and Road Initiative in Laos: A Success Story?

What is happening?

This year marks the decennial of the Belt and Road Initiative (一帶一路 Yidai Yilu, BRI), and this week, the third Belt and Road forum will take place in Beijing. Lets look at one of the most significant infrastructure projects to remember the decade we have lived with the BRI. 

It has been almost two years since the China-backed high-speed railway launched its operations in Laos. As the first real railway in Laos (before the construction began, Laos had had only four kilometers of railways) and one of the biggest and costliest infrastructure projects in Laos, which is among the world’s poorest countries, it was subject to huge expectations from the Lao government. Vientiane, Laos capital, hoped that the “Iron River” — a Lao monicker for the railroad — would transform the country from “landlocked” to “land-linked,” attracting foreign investment and enhancing tourism, logistics, and people-to-people exchanges. For Laos, the railway is undoubtedly an essential step towards its people’s economic development and welfare. But at what cost? 

 

What is the broader picture?

Laos had engaged with Chinese infrastructure projects long before the BRI. Since the early 2000s, China has bolstered its economic presence in Laos, increasing its demand for the country’s natural resources and agricultural products. Through its state-owned enterprises and large private companies, Beijing invested in the construction of roads, dams, telecommunication networks, development of mining, agriculture, etc. 

The new railway cuts through 417 kilometers of rugged terrain between the Lao capital of Vientiane and Boten, the country’s main border town with China. Having been known for gambling, prostitution, and crime, Boten became one of the special economic zones. The road travel time between the two cities is 15 hours, but the high-speed train cuts to just four hours. On the other hand, the price tag of US$5.9 billion makes it the costliest and most controversial infrastructure project in Laos

Despite propaganda efforts showing only the project’s benefits, in reality, the construction of the railway abounded with serious controversy. China received criticism for its unfair compensation to the resettled Lao people, damage to water and irrigation systems, employing mainly Chinese workers and companies, and several cases of labor exploitation. After the railways launched its operation, controversy continued: there were strict goods controls on the Chinese borders, and Chinese companies began to dominate the tourism sector in Laos. Currently, the “Iron River” flows only one way—it facilitates the export of Chinese goods to Laos, while Lao exports to China remain minuscule. Further, there are serious concerns related to using underground mineral resources as loan guarantees, which allows China to extract natural resources if the revenues are too low. The MoU signed between the two countries in 2010 “guaranteed repayment of China’s loan with the income and assets of the railway and two unspecified mining areas.” 

 

Why it matters?

As in other BRI projects, the Boten–Vientiane railway is an example of asymmetrical power relations between China and its partners. Laos and China established the Laos–China Railway Joined Venture Company to carry out the project. Chinese state-owned enterprises own 70 percent, and only 30 percent belong to the Lao State Railway. The joint venture contributed 40 percent of the total project cost, and the remaining 60 percent ($3.54 billion) came from a loan from the Chinese Exim Bank. According to AidData, the Lao government has been trapped in a “hidden debt” as the project is “too big to fail.” As a result, the “Laotian government’s true level of contingent liability due to lending from China may be as high as 35 percent of GDP.” 

Currently, Laos faces enormous public debt, which contributes to “economic instability and undermines development prospects.” International credit agencies decreased Laos’ credit rating. Similarly to other BRI projects, it is questionable who is the real beneficiary. Foreign investment is essential, especially for developing countries. In the last decade, China has been a generous loan provider. However, through the construction of the Vientiane–Boten railway, China sought to extend its sphere of influence beyond its borders. It is vital that recipients of China-backed infrastructural projects carefully distinguish between corrosive and constructive capital and do not engage in business that can destabilize or threaten their national security and sovereignty.