The small nation may have won its battle for ascension to the World Trade Organisation, but the financial war is far from over
By Erika Mudie
A current international arbitration case is tempering optimism over Laos finally joining the World Trade Organisation (WTO) and could hint at the country’s ability – or lack thereof – to be a productive member of the Asean Economic Community (AEC) when it is implemented in 2015.
February saw the ratification of Laos’ 15-year campaign for ascension to the WTO, making it the final Asean state to become a full member of the global trade body and lending it a ‘stamp of legitimacy’ for attracting foreign investors, experts say.
However, the country’s current involvement in an international arbitration case undermines the one-and-a-half decades of legal and procedural reforms undertaken to reach this goal.
Gretchen Kunze, country representative in Laos for the Asia Foundation, said via email that Laos’ ascension to the WTO “[is] certainly symbolic, in that it further indicates Laos’ integration into the global economy. It [the WTO membership] has also been a huge impetus for Laos to reform – and in many cases, write for the first time – a whole array of laws and regulations”.
The lustre of Laos following this achievement is dulled by the reality of its challenges. According to Kunze, the country has a small and relatively poor population, meaning there is no significant domestic market. The country is also landlocked and yet to develop strong transportation infrastructure.
Then there is the upheaval faced by foreign investors already present in Laos. One notable example is Sanum Investment, a Macau-based property investment company, which is currently involved in an arbitration case with the Lao government at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID).
The case brought against Laos at the ICSID is a $500m lawsuit over what Sanum claims are illegal seizures of its assets, the most prominent of which include a slot machine club in Vientiane, a hotel and entertainment complex in Savvanahket and land for a similar project in Paksong.
Jody Jordhal, president of Sanum, said the company signed a master agreement with its Lao partner, ST Group, in 2007, in which it acquired 60% of ST Group’s current and future gaming projects. The agreement also stated that Sanum would take over management of Vientiane’s Thanaleng Slot Machine Club in October 2011, according to Jordhal.
Sanum made what Jordhal described as “significant investments” in the country’s gaming industry and as the deadline approached, Jordhal noticed conflicts with the ST Group emerging.
“Quite frankly, I think they saw how much it was making and they didn’t want to abide by the terms of our agreement,” he said, adding that the turnover date was amended to April 2012.
When that date arrived, the ST Group sent a letter saying it would unilaterally cancel all agreements with Sanum and locked it out of the Thanaleng Slot Machine Club, according to Jordhal.
From there, the Lao government placed control of the property in the hands of the ST Group, imposing a $5m fine and conducting illegal audits on Sanum, resulting in a retroactive $23m tax bill. Sanum alleges these actions to be misconduct by the government.
Attempts to contact the ST Group and the Lao Ministry of Foreign Affairs, which is representing the Lao government in the ICSID case, have been unsuccessful.
The case may provide a lens through which to view Laos’ next major economic milestone: its participation as a member of the AEC.
Giovanni Capannelli, special advisor to the dean at the Asian Development Bank Institute, does not mention credibility as one of Laos’ challenges, noting that with WTO membership in hand, outside perceptions of the country’s economic climate are expected to greatly improve. Instead, he believes its labour force may be a hindrance in gaining interest from foreign investors.
“The availability of skilled labour and relative inexperience of local workers to adjust to the requirements of foreign companies’ production systems may create an impediment to FDI inflow,” he said.
However, Capannelli notes that Laos – alongside Cambodia, Myanmar and Vietnam – is “expected to make considerable progress in developing their domestic financial sectors to fulfil AEC commitments and to receive a substantial share of total infrastructure projects needed to realise the AEC”.
In essence, Laos stands to gain increased market access through liberalisation and improved infrastructure and “an opportunity to specialise its production structure in agriculture and some manufacturing goods to expand its importance in niche markets, such as high-end organic products where return on investment tend[s] to be particularly high”, Capannelli added.
The AEC scorecard, which was designed by the Asean Secretariat to track the progress made toward meeting the AEC blueprint’s deliverables, says that between 2008 and 2011, 67.5% of the measures were met throughout Asean as a whole. Although no finite figures were given for individual countries, a table in the document illustrating country progress gives the impression that Laos is on par with the rest of the region.
Although initially appearing impressive, Capannelli said the measures that needed to be implemented in the first years of the AEC blueprint were “relatively simple and non-controversial ones”, adding that “…as we get close to December 2015, initiatives become more ambitious and difficult to introduce”.
For Laos progress toward the AEC, in Capannelli’s view, has been stunted. “My impression is that countries like Laos have been going slow,” he said. “[With] Laos, I see a less corporate approach to fulfilling the AEC commitments, and so it may be more subject to different ministries and public agencies, more than a country overall approach to fulfilling commitments.”