Ambition, concern drive Lao-China high-speed rail project



Ambition, concern drive Lao-China high-speed rail project

December marks one year since Vientiane’s bet on China’s Belt and Road

A high-speed train pulls into Boten Station in Laos. The Lao–China Railway marked the first anniversary of its opening on Dec. 3, 2022. (Photo by Ken Kobayashi) TORU TAKAHASHI, Nikkei senior staff writerJanuary 14, 2023 17:00 JST

TOKYO — On the first anniversary of the opening of the Lao-China Railway on Dec. 3, China’s state-run Xinhua News Agency touted the project as a big success for the Belt and Road Initiative (BRI), Beijing’s continent-spanning infrastructure drive and the centerpiece of President Xi Jinping’s foreign policy.

The 1,035-kilometer line, which links Kunming, in China’s Yunnan province, and the Laotian capital of Vientiane, has transported “8.5 million passengers and 11.2 million tons of freight” in its first year, Xinhua said in an English-language article on the project.

The railway “has not only benefited the people of both countries, but also become a popular international public [good] and a platform for international cooperation,” the news agency reported, praising its role in facilitating cross-border transactions.

But that characterization may be misleading. Because China kept its borders closed all last year under its draconian zero-COVID policy, there was little international passenger traffic. Most people included in Xinhua’s report likely traveled only on the Chinese section, which accounts for 60% of the line. It is also unclear how much of the cargo figure represents cross-border traffic.

With an adequate quarantine system finally in place on the Chinese side, however, it is no longer necessary to transfer cargoes to trucks at the border for customs clearance, enabling the railway to carry agricultural and other products nonstop. The economic benefits of the railway will ultimately depend on how much Beijing’s decision to ease its COVID restrictions increases cross-border traffic.

The costly project was paid for almost entirely by China. Beijing covered 70% of the construction cost of some $6 billion, with Laos taking out loans for most of the rest. China also provided technology and equipment, including train cars and signaling systems, along with operational expertise.

The 422-km section in Laos, between the northern Laotian town of Boten on the border with China and Vientiane, has 23 cargo stations and 10 for passenger service. The rail line shortens travel time to four hours, versus the one day previously required for land transport. The passenger service is so popular that it is difficult to buy a ticket.

But the country’s first long-distance railway is still viewed with skepticism by some. Laos must come up with $1.8 billion for the project, an amount equal to 10% of its gross domestic product for 2021. Its foreign debt, which totaled $14.5 billion at the end of 2021, likely exceeded its GDP by the end of last year, due to the weakening the Laotian currency, the kip, according to the World Bank.

Keola Souknilanh of the Japan External Trade Organization’s Institute of Developing Economies has estimated the project’s economic benefits by estimating how much it will boost the country’s GDP in 2030.

If both passenger and cargo trains make six round trips per day, the railway will boost the country’s GDP by $81.63 million, according to the estimate. If redevelopment of areas around train stations raises the productivity of the service sector by 5%, the economy will expand by $616.88 million. Simply put, it will take Laos 22 years to recoup the investment in the former case and less than three years under the latter scenario.

While there are many views on the project’s cost-effectiveness, nearly all analysts express concern about Laos’ growing dependence on China, given the heightened confrontation between Washington and Beijing, among various geopolitical factors.

Laos’ debts to China, including such off-balance sheet items as borrowings by state-owned enterprises, amount to 65% of GDP, the highest in the world, according to U.S. research institute AidData. This raises concerns about a “debt trap” that would leave Laos saddled with loans it cannot repay.

While Laos does not have to pay back the $4.2 billion Beijing has provided for the project, the scale of China’s investment is bound to increase its influence in tangible and intangible ways.Vientiane Station in the Laotian capital displays its name in both Lao and Chinese. The railway linking the two countries was largely paid for with Chinese money. (Photo by Ken Kobayashi)

Led by an autocratic communist party, Laos has long been close to China but is not oblivious to the risk of relying too much on Beijing. Still, it decided to build the railway as “Laos has quite a strong policy of changing its limitation from a landlocked country to land-linked, to see the possibility of value adding economy,” said Suriyan Vichitlekarn, executive director of the Mekong Institute, an intergovernmental research institute based in Thailand.

The biggest obstacle to the country’s growth is its geography. Laos is the only landlocked country in Southeast Asia; 70% of its landmass is mountainous. Plains are largely limited to the area along the Mekong River, which constitutes much of the border with Thailand. Maintaining a good relationship with its western neighbor has been vital to Laos’ economy as it offers a relatively low-cost trade link to the outside world.

In the past, the political situation in Laos — which abolished the monarchy in 1975 after a lengthy civil war brought the communists to power — prevented it from forging close ties with monarchist, anti-communist Thailand.

Things began to change in 1986 when Laos embarked on a market-oriented reform, called “Chintanakhan Mai,” modeled after China’s economic liberalization. In response, Thailand began to expand ties with its communist neighbor under the slogan, “Turning Indochina from a battlefield into a marketplace.” These moves paved the way for the development of infrastructure connecting the two nations. In 1994, the first Thai-Lao Friendship Bridge opened, linking Vientiane with Thailand’s Nong Khai province.

The modern bridge opened a new commercial era between the two countries by making it possible to cross the Mekong without ferries. Thai consumer goods and investment, mainly in the textile industry, started pouring into Laos, which in return began to export hydropower to its neighbor. By 1996, Thailand became Laos’ largest trading partner, accounting for 40% of the total.

But this period of rapid growth in cross-border activity came to an end in the wake of the 1997 Asian currency crisis, which hit the Thai economy hard. Thailand’s GDP shrank 2.8% in 1997 and 7.6% in 1998, slowing growth in the Laotian economy from 6.9% in 1997 to 4.3% in 1998 and to 4% in 1999. The collapse of the Thai baht helped trigger a doubling of prices in Laos, where the Thai currency was in wide use.

Alarmed by the risk of excessive dependence on a single country, Laos began to look for ways to diversify its trade. It soon found a partner in China, which had begun to use its growing economic clout to gain influence in Southeast Asia and elsewhere.

But the two countries are separated by steep mountains, which made it difficult and costly to transport goods between them. To overcome this obstacle, Laos came up with the idea of a cross-border railway and proposed it to Beijing. The two began negotiations in 2001 and struck a deal in 2010.

Initially, Laos planned to borrow most of the funds for the project from China. But Beijing balked, citing concerns about Laos’ ability to repay. The project gained momentum only after Beijing launched the Belt and Road Initiative in 2013.

Beijing was eager to secure a land route that could serve as an alternative to shipping lanes in the event that ocean transport in the South China Sea or the Strait of Malacca was disrupted. Dropping its previous reservations, Beijing agreed to invest heavily in the Laotian section of the railway, regarding it as the starting point of a planned international rail route through Indochina.

As Laos’ desire to diversity its trade dovetailed with China’s regional ambitions, the two agreed to a new financial arrangement in 2015. Construction of the railway, mostly financed by Beijing, began the following year.

“That really was the last chance to start construction,” said JETRO’s Keola, a native of Laos. “At that time, China still could afford such large financial aid. A delay of several years could have sunk the project,” Keola added, saying, “Laos needed something to break through the status quo and bet big on the railway.”A crowd gathers on the second Thai-Lao Friendship Bridge over the Mekong River after an opening ceremony in December 2006.   © Reuters

The Lao-China Railway shows that China does not always force infrastructure projects on reluctant nations, a point often ignored by pundits who criticize the initiative as part of China’s debt-trap strategy.

“China’s own economic success was powered by infrastructure built with borrowed money,” said Naohiro Kitano, a professor at Waseda University in Tokyo and an expert in development aid. “Beijing learned that debt can be repaid if projects help generate growth, adding, “Beijing was first taught this approach by Japan through its yen loans, and it has been trying to teach the lesson to less developed nations through the BRI.”

Yet it is also true that the infrastructure drive has caused some serious problems in emerging countries, including debt overhangs and corruption. China’s hegemonic ambitions have also raised concerns among many nations.

But despite those problems, the benefits of Chinese investment cannot be denied, as they have helped their recipients build infrastructure they had long desired. What is important to Laos is whether the original assumption of what the railway will bring [in terms of] direct benefits to Laos [is] forthcoming as expected. It is too early to assess, nor see clear direction,” said Suriyan of the Mekong Institute.

Emerging countries should spend the next 10 years working to take advantage of what has been built to achieve their long-term goals, while cleaning up the debt left behind from the BRI’s first decade.



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