Lao Economy and Trade StructureSinc

Lao Economy and Trade Structure
Since introducing the New Economic Mechanism (NEM) in 1986,4 Laos has been in transition from a centrally planned economy to a more market-oriented economy. As a result, except during the Asia Financial Crisis of the 1990s, Laos has been achieving high rates of economic growth with low inflation. The average rate of economic growth was about 6.53% during 2001-2010. The average inflation and exchange rate was maintained at one digit during 2001-2010. The engine of growth during this period was the capital inflow of foreign direct investment (FDI) in the mining and hydropower sectors and mining production and exports (Kyophilavong & Toyoda, 2008).
Even though Laos has been maintaining high economic growth with low inflation and a stable exchange rate, it still has serious macroeconomic issues to overcome. Firstly, Laos is basically facing chronic twin deficits in both government spending and international trade. The average ratio of budget deficit to GDP was 4.4% during 2001-2010. The average ratio of current account balance deficit to GDP was 9.24% during the same period (IMF, 2007, 2011). These deficits are mainly financed by official development assistant (ODA), FDI, and remittances. The fiscal issue is particularly serious in Laos. If the budget deficit continues to expand, it might cause an accelerating inflation rate and the devaluation of the kip (Lao currency), and could lead to economic instability like during the period of the Asian Financial Crisis (Okonjo et al., 1999). Secondly, there

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