Introduction
The Association of Southeast Asian Nations (ASEAN) was China’s largest trading partner from 2004 to 2024. In 2023, trade with ASEAN accounted for 15.9% of China’s total trade, totaling $468.8 billion, a 10.5% rise from the previous year. Of the $468.8 billion, $223.2 billion was with Vietnam alone. This makes Vietnam China’s largest trading partner within the regional bloc. In 2023, Vietnam imported $135.1 billion in Chinese exports, and China brought in $89.5 billion in imports from Vietnam. This was made possible by the establishing of the Doi Moi laws in 1986. These laws created a legal framework to manage and allow state-owned enterprises (SOE) to generate profit and, most importantly, private industries in the country. This is despite Vietnam’s initial Marxist-Leninist central-planning economic model. Vietnam has seen an enormous increase in financial strength since 1986, with its Purchasing Power Parity (PPP) rising from $953 in 1985 to a predicted $16,190 in 2025–a nearly 1600% increase.
A similar economic trajectory followed for Laos after the establishment of its 1986 New Economic Mechanism (NEM). Like the Doi Moi, the NEM’s purpose was to liberalize Laos’ economy and create legal frameworks for Laotian SOEs and foreign industries to generate profit. However, it has seen a significant lag in economic progress. From 1985 to 2025, Laos experienced an 838% growth in PPP, from $967.29 to $9,073, but this is only a little over half of Vietnam’s growth. Though Laos and Vietnam both implemented market-based economies, why has Laos experienced lagging growth and fewer investments from overseas capital?
Laos built up weaker, corruption-filled economic institutions, as well as a limited international system of alliances. Vietnam, as an early ally of the USSR and simultaneous economic partner to China (PRC) and the United States, was presented with better opportunities to industrialize, which were harder to achieve in the Lao PDR. The Lao PDR, as an ally of only the PRC, was not able to receive as much aid due to the PRC’s weaker economy. Furthermore, Laos’ mountainous, heavily forested, and landlocked territory made it complicated to capitalize off the land and efficiently industrialize.
The Reform Years: Creation of Market-Based Legal Frameworks
When the Communist Party of Vietnam (CPV) became the ruling party in 1954, Ho Chi Minh followed in Vladimir Lenin’s footsteps and established a centrally planned economy. The Vietnamese model was more restrictive of private industry than its Laotian counterpart. In 1979, the Central Committee of the Lao PDR passed the Seventh Resolution, which allowed for private property and profit-making activities under limited circumstances and subject to local jurisdiction. In Vietnam however, before the 1986 Doi Moi laws, resource allocation was near-universally controlled by the Ministry of Finance, the Supreme People’s Court, and the Ministry of Foreign Affairs.
As a result, Vietnamese state-owned enterprises had no control over their outputs, while prices were controlled to manage the flow of resources and ensure the highest state revenues. However, this meant that the relationship between the value of goods and their resource cost was murky. With SOEs working through the government, it often meant there was a heavy politicization of resource allocation and less focus on the economic impact. As of 1972, the Ministry of Engineering and Metallurgy only handled 14% of engineering factories, and the Ministry of Construction only handled 60% of construction projects. The rest were run through Vietnamese SOEs, which could be run by different levels of the government, from city industry offices to provincial level governance.
In Laos, centrally-planned economic regulations also faced setbacks. Laos established its first Five Year Plan (FYP) in 1981, which mainly focused on food self-sufficiency. The government targeted the production of 350 kg of rice paddies per capita per year, as well as the collectivization of agriculture. They planned to industrialize and open trade with its neighbors, especially Thailand, in order to increase export revenues. However, the FYP showed slower results than expected. From 1985 to 1986, exports financed fewer than 30% of imports and deficits continuously increased. Despite the issues within the centrally planned economy, private enterprise was still banned in the provincial governments of Luang Prabang and Phôngsali until 1987.
Internally, the recentness of the revolution was a problem. Many soldier heroes of the revolution believed they should play a part in the administrative state, without having the technical knowledge to do so. In addition, American sanctions had a strong impact on an already weak economy. Food production also showed a dangerous path. Whereas in 1985, pre-Doi Moi, 18.2 million tons of food had been produced, by 1987, this decreased to 17.5 million tons. By 1988, 9.3 million Vietnamese were underfed.
This was also true in Laos. During its 2nd FYP, it had yet to achieve food self-sufficiency and was still importing rice between 1987 and 1988. However, there were signs of growth. From 1980 to 1989, the agricultural sector, which employed about 80% of the population, doubled its annual production rate to 4%, even with droughts from 1987 to 1988. In fact, before these droughts, rice production had grown drastically, from 700,000 tons in 1974 to 1.4 million tons in 1986. But with the droughts, production was cut back to 1 million tons, forcing Laos to enact food imports. Following the implementation of the NEM, rice production surged 40% by 1989. This proved that, even with environmental setbacks, agricultural institutions could recover. Had droughts not occurred, Laos would have succeeded in its self-sufficiency, showing early promising signs for market reforms.
In fact, as the 1980s were closing, the situation for both countries started improving. In Vietnam inflation, at 14.2% per month in 1988, shrank to 2.8% per month by 1989. In large part, this was because they stopped subsidizing SOEs, which ran at a loss. This forced Vietnamese SOEs to focus more on the economics of their operations.. They were given the liberty to set not just their own prices but to make decisions on which goods to sell and the quantity of these goods.
Laos undertook the same SOE reforms, and by 1988, Laotian SOEs were all operating independently, with some limitations for price-setting agricultural goods. In that same year, Laos instituted profit and turnover taxes, which became a larger and more stable replacement for the revenue previously gained from SOEs. In 1989, the Lao PDR established a two-tier banking system, without the commercial and central functions performed by the State Bank of Vietnam.
To address shortcomings in food production, Vietnam passed its Resolution No. 10 in April 1988, which allowed for private households to lease cooperative paddy fields for up to 15 years. By December 1989, 98% of farm cooperatives in central and Northern Vietnam had leased land to private households and 21.4 million tons of rice were produced. This not only established self-sufficiency, but made Vietnam the 3rd largest global exporter of rice, with 1.4 million tons. In 1988, they also passed the Foreign Investment Law, allowing Foreign Direct Investment (FDI). By November, $832 million had been invested into various projects, mainly from South Korea, Western Europe, Singapore, and Thailand. This shows that given sufficiently strong institutions and proper reforms, the Vietnamese economy was able to surpass its own expectations, even in the face of droughts only a year before.
Although both economies grew through the 1990s, their larger entanglement in the world economy would show signs of difficulty. As a part of the Golden Triangle, Laos was the 3rd largest global exporter of illicit drugs in 1994, even with a 47% decline of drug exports from 1989 to 1993. 22% of that 47% decline was in 1993 and mainly attributed to poor weather that prevented opium growth. Positively, Laos’ industrial development was succeeding. By 1993, 17% of the population was working in the industrial sector, up from 10% in 1984. The service industry, which composed 15% of the GDP in 1982, had grown to 25% in 1991. By all accounts, the process of decentralization and implementation of a market-based economy were forming a more robust economy.
However, the 1997 Asian Financial Crisis would complicate this growth. Vietnam faced three main problems: the investment gap, the deficit to GDP ratio, and the inflation rate. Thankfully, Vietnam enjoyed high levels of FDI as part of its capital inflows. From 2007 to 2009, this was as high as 61%. This improved the stability of Vietnam’s economy and allowed it to navigate through the crisis. Vietnam also became a larger member of the international community, joining ASEAN in 1995 and the World Trade Organization (WTO) on January 11th, 2007.
In Laos, new domestic and international financial measures were put in place to respond to the crisis. In 1999, the central bank limited financial growth to fight inflation. Inflation had been at 128% in 1999 but sank to 7.8% by 2001, and the strong depreciation of the Laotian Kip was also stopped. Laos opened its trade and joined the Association of Southeast Asian Nations (ASEAN) and the ASEAN Free Trade Area in 2007.
Beyond the Law: The Marketization of Politics
Both countries would appear to face similar circumstances and make similar decisions, but, the practical reality differed from what was openly discussed in the plenary meetings. As of 2023, Vietnam ranked 83rd of 183 nations on the Corruption Perceptions Index, while Laos was at 136. A decade earlier, Vietnam had been at 119, while Laos was at 145. While Vietnam was showing slow but meaningful improvements, Laos had stagnated. Corruption in Laos took two common forms: extortion, where governmental authority figures took small sums of money from civilians after accusing them of breaking a law, and bribery, where citizens paid government employees for services rendered in hopes of receiving government employment themselves.
In Laos, governmental and bureaucratic positions are rarely advertised, but rather processed through a system of economic nepotism. Wealthier, property-owning Laotians have rent revenue taxed at 30%, but there is widespread tax evasion and misreporting of revenue. Vietnam’s corruption was highest, with 34.6% of companies bribing the government to receive contracts before 2001. However, after joining the WTO and signing the US Bilateral Trade Agreement (US-BTA) in 2001, this corruption started to wane. Domestic companies experienced a 9% reduction in bribes, while Foreign Invested Enterprises saw a 38% reduction. Vietnam’s willingness and ability to integrate itself into international institutions had a direct and positive effect on the firms and on corruption reduction. Even though the US-BTA was not a result of domestically produced legislation, Vietnam’s government followed through with enforcing its measures. The US-BTA also reduced tariffs from 40% to 3%. This showed a shift in Vietnam’s economic diplomacy, where only four years prior, the US had refused Vietnam’s entry into the WTO.
The Lao PDR joined the WTO later, in February 2013. Laos’ problem of corruption was also an issue of tradition, dating to pre-colonial political systems. In pre-colonial times, Laos’ land was divided and ruled by the Chao Meuang, or the land-owning nobles, who each ruled over their own land. The Chao Meuang themselves were subservient to the King, and each Chao Meuang had their own people whom they could tax, recruit to the army, and were responsible for governing. These institutions were maintained during the French colonization of Laos but they lost relevance during the pre-NEM Communist rule, when all sectors of the political economy were controlled by the government in the capital, Vientiane. However, following the establishment of a market-based economy, aristocratic families who had historically been Chao Meuang were able to capitalize off of the new measures to regain influence with their own wealth.
This displays a fundamental issue within the Lao political system. Despite reforms, it is impossible to wipe away a country’s traditional and political history. Many of the descendants of aristocratic families are members of the government, which hampers fighting corruption in private and public sectors. Instead, the Party has focused on meeting economic goals, reaching between 5% and 6% growth yearly, to avoid pressure to democratize.
Vietnam did not have the same feudalist traditions. Most villages during the pre-colonial times practiced much stronger self-sufficiency. The system of Hoi Dong Sac Muc, or “The Council of Village Dignitaries,” ruled as a system of bureaucrats and was the primary system of governance across much of Vietnam, much closer to the everyday working people. This limited the power and influence of regional autocrats, allowed for a high degree of self-governance, and lessened the corruption ingrained into the Vietnamese political system. Because of this, corruption was scattered, rather than a uniform, nation-wide problem. Corruption remains concentrated in economically important areas like Hanoi or the Red River Delta.
In 2015, the Vietnamese government changed its course by passing the Law on People’s Court. It divided the court structure into four levels, the highest being the Supreme People’s Court, followed by the Superior People’s Court, the Courts of Provinces and Centrally Run Cities, and lastly the Courts of Rural Districts, Urban districts, Cities, and Towns. This also granted the court systems larger budgets. The 2011 judicial budget of $93 million was increased to $142.5 million by 2014. Additionally, cases against wealthy Vietnamese were also heard, often reaching harsh sentences. In 2014, the former chair of Vietnam National Shipping Lines, a national SOE, and a former high-ranking official of the Vietnam Development Bank were both sentenced to death for corruption. Although directly attached to the CPV, the judicial branch has been increasingly efficient in dealing with corruption, unlike in Laos, where the problem is more a feature than a problem of governance.
The Developmental Effect of Chinese Relations
The Chinese economy has been a fundamental source of Vietnamese and Laotian development, both for its problems and benefits. In 2021, China bought 80% of Laotian agricultural exports, and in 2023, China was the largest financier of Laotian infrastructure projects worth $12.2 billion. In August 2013, at the request of the Lao PDR, the Chinese Communist Party (CCP) sent $61 million to build new government buildings. Furthermore, in 2015, Vientiane was directly linked to the Chinese city of Kunming through a Chinese-financed railway and highway costing $6 billion. These projects, both literally and figuratively, directly connected the CCP to the Laotian government.
The CCP’s SOEs, their main arm in foreign investments, often seek out resource-rich countries with weak institutions. This gives the foreign SOEs greater potential to extract more resources quickly and cheaply. Especially from the perspective of Chinese SOEs and Public Owned Enterprises (POEs), prime nations for developmental aid lack domestic infrastructure and build it only to connect themselves back to China. Illustratively, in 2017, Vietnam’s share of FDI from China was only 6%, as opposed to 77.5% for Laos.
Laos’ high debts to China put it at a serious risk of losing autonomy. The Lao PDR is well aware of this issue. In fact, the Lao People’s Revolutionary Party uses the Chinese fund to evade Western pressures to democratize. Although Laos is not in an economically favorable geographical situation, it is in a valuable strategic position. The Greater Mekong Subregion Economic Program was founded in 1992 among the six member states bordering the Mekong River, and Laos is the only country that borders all five other countries. In addition, Laos is the headquarters of the Mekong River Commission (MRC), a legal body formed to regulate the treatment and usage of the Mekong River.
However, MRC regulations did not favor China, so it instead formed the Lancang-Mekong Cooperation Mechanism (LMCM), with Laos, Cambodia, and Thailand as partners. China subsequently built dams in Laos under the provisions of the LMCM. However, these projects, like the Don Sahong and Xayaburi dams, were unpopular with the rest of the GMS Economic Program and ASEAN, as they diverted the path of the Mekong in violation of the regulations of the MRC. Further, while dam projects helped build Laos’ power surplus during the rainy season, China did not develop any infrastructure for power reserves, causing power outages during the dry season. In turn, this caused a constant reliance on Chinese SOEs like the Sinohydro Corporation.
Overall, Laos and China’s relationship has been characterized by dependence and one-sidedness. In 2011, Laos received $280 million in direct investments from China, but this dropped to $90 million by 2015. This exemplifies China’s perception of Laos. Despite its strategic value, its lack of strong international alliances allows the CCP to take Laos’ loyalty for granted. Laos’ lack of economic strength is also intentionally orchestrated by domestic Laotian politicians, who view it as a preferable alternative to the potential for Western reforms. Although Chinese investments have brought measurable growth to Laos, this growth has been reined back by willingly-weakened institutions.
On the other hand, Vietnam’s industrialization and growing economy have seen a much more diverse path. They have grown beyond agricultural goods into more technical exports. In 2000, only 8.8% of Vietnamese exports were machinery, but in 2010, this grew to 16.4%. Meanwhile, agricultural products reduced from 27.5% to 23.2%. A part of that growth in machinery also consists of Japanese firms relocating their industry into Vietnam. Still, China has been a large factor in Vietnam’s trade deficit. China was 60% of Vietnam’s trade deficit in 2008, and in 2010 imports from China alone amounted to more than 100% of Vietnam’s entire export volume.
There is an unarguable economic partnership between the two countries. This was emphasized during Xi Jinping’s visit in 2017, his first visit to a foreign country following his reelection. However, Vietnam maintains a strong sense of sovereignty. For instance, against the wishes of China, Vietnam invited Exxonmobil with a $10 billion deal to extract gas in Vietnam’s Eastern Sea in 2023. Furthermore, even as Xi visited Vietnam in 2017, Prime Minister Nguyen Xuan Phuc was the first Southeast Asian head of state to visit the United States that year. Additionally, whereas China is Laos’ primary source of FDI, it ranks 7th for Vietnam. The country has kept a safe distance from China’s Belt and Road Initiative (BRI), refusing to accept any projects funded through it. Rather, Vietnam used the Asian Infrastructure Investment Bank (AIIB) to receive a $100 million loan to the Vietnam Prosperity Joint Stock Commercial Bank, preferring its transparency. As explained by General Nguyen Chi Vinh, “no one and no other country can force Vietnam to choose sides.”
Additionally, Vietnam showed strong opposition to the building of the Xayaburi Dam.
The Vietnamese People’s Aid Coordinating Committee (PACC) demanded that Laos suspend construction and that Thailand reconsider its funding. Furthermore, Vietnam sought to diversify its SOEs to limit Chinese influence. To do so they sold shares owned by the government to international partners. From 1992 to 2015, the Vietnamese government sold some, or all, of its shares in 4,484 SOEs. Whereas there had been 12,000 SOEs completely owned by the government, only 652 remained by 2015. Revenue from the sold shares totalled $3.35 billion.
Vietnam has strategically accepted China as an economic partner but remained wary of debt traps. The Vietnamese government has promoted its institutions, even when that meant lessening government control, to prevent control from China. They have dealt with trade as a non-zero-sum affair to ensure the best possible deal on all sides.
Vietnam and China have also worked together to gather natural resources. Vietnam’s VINACOMIN and China’s Aluminum Corporation of China Limited (CHALCO), are two state enterprises which have worked together. The mining of bauxite has been an important part of collaboration. This displays a two-sided relationship.
The Laotian mining sector has also been an area of high importance in working with China. In 2023, mining accounted for 23% of FDI. Although mining products originally formed 0% of Laos’ exports, that number quickly grew to 39.16% in 2005, then 59.94% in 2007. However, by 2018, it had fallen to 28.83%. Nonetheless, revenue being generated by the mining industry was still increasing. From 2007 to 2018, mining export revenues increased from $922.69 million to $5,407.81 million. Of the 111 mining projects that were in progress in 2010, only 46 were wholly owned by Laos. The largest project builder aside from the Laotian government was China, with 34 projects. Their projects occupied 37% of the mining land area. Comparatively, Australian projects occupied 32% of this land with only three projects. This displays that China focused on small-scale projects rather than large developments. As of 2017, per the Ministry of Finance, the main resource being sought was coal, with 28% of projects focused on it, and second was gold, with 26% of projects. China’s main resource of interest was copper, with 31% of projects focused on it.
The Laotian labor force is faced with an inadequate education system, with 72% of Laotians not having finished their 3rd year of high school. This has limited employment access in more technical fields. While there are improvements to the labor force, such as th e22% increase in the minimum monthly wage to $130 in 2018, it still stands well below its ASEAN neighbors, like Thailand at $240 or Vietnam at $173. This shows that Laos has used its natural resources as a substitute for strong institutions. Whereas Vietnam has attracted more international and diversified capital by becoming an integral partner regionally and globally, Laos has narrowed its scope as a minor low-income country. Laos remains heavily dependent on the extraction of its resources, through both mining as well as agricultural goods, and in doing so stays reliant on foreign, mainly Chinese, companies. On the other hand, Vietnam’s export of machinery has increased as its manufacturing force modernizes. This allows Vietnam to not be solely dependent on imports for its technology. Diversification has been an essential tool of Vietnamese success.
Conclusion
While Vietnam’s position as a coastal country on the South China Sea does give it an inherent advantage, nothing is certain. Laos has seen increasing returns for its own natural resources, in the form of mines and hydroelectric dams. The difference between the countries is one of politics and institutions. Laos and Vietnam’s market reforms were key to their growth, and their absence would have led to aggravating poverty. However, in Laos, while at first the government owned the capital, today the capital owns the government. Laotian industries have increasingly lost leverage to their Chinese counterparts, in large part with the consent of the government. The industry owners of Laos, many descendants of the Chao Meuang, hold the country hostage economically. While Chinese FDI has benefitted the government, its capacity to negotiate has dwindled, isolating Laos from international interest while Vietnam has benefitted from trade with China and the United States.
As of 2022, Vietnam was the United States’ largest ASEAN trading partner, with $142.1 billion in goods and services exchanged. Laos has not followed Vietnamese policies like selling its share of SOEs to ensure a more internationalist approach to its economy. This has slowed growth and limited its reach in overseas capital. Their growth, more so than Vietnam’s, has also been directly glued to Chinese growth. Stagnation in the Chinese economy will be and has been reflected in the Laotian economy. This destabilizes Laos’ own government and economy, making overseas investment a higher risk. Laos has proven far more interested in the personal financial growth of government officials and wealthy Laotians than the general development of the country.
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