The Environmental Consequences of FDI Inflows, a Fruitless Sacrifice Towards Economic Growth? The Case of Lao P.D.R.

This op-ed is part of AASYP’s Digital Dialogues 2022, which is a programme that aims to provide a platform and forum for future leaders from across the region to contribute to the policymaking and diplomacy sphere by engaging in issues relating to innovation and investment, digital economy, and regional mobility.

Foreign direct investment or FDI has always been one of the business activities that indicate the trade openness of a country, which has also been a determining factor of significant growth for a country’s economy. But what if the growth opportunity comes with an exchange of environmental degradation and climate change for the worse, would it be really a fair trade? Are there any sustainable solutions that would help tackle the ongoing matter?

Taking a look at the situation of Lao PDR, complying with the standard of economic competitiveness of ASEAN to achieve complete integration has always been a major challenge. The driving factor of Lao’s economic growth has always been involved in the utilisation of natural resources, which has been depicted in the prominence of FDI projects such as the hydropower and mining industry along with other raw materials which accounted for the country’s majority of export activities. Additionally,  the majority of the population residing in the rural areas have also solely depended on the utilisation of natural resources to sustain their livings, maximising the surrounding forests, which offer invaluable non-timber forest products (NTFPs) and are able to generate and sustain food, medicine and income for subsistence in rural areas. 

According to Open Development Laos, forestry has always been one of the crucial industries that contribute to economic development and livelihoods in Laos. In 2016, forest and timber production accounted for a total of 3.8% of the country’s GDP. The mining and quarrying industry plays a big role in providing necessary resources as well as generating revenues from investments, contributing roughly 10,500 billion kips (around 60-70 million US dollars) to the total GDP in 2017. The growth of investments is equivalent to the development of infrastructure, which is considered a crucial factor that drives economic growth to catch up with ASEAN’s standards.

However, despite the utilisation of natural resources being a contributing factor to driving economic performance, it is without a doubt that the subject of sustainability remains a major question towards climate change and ecological degradation. For instance,  excessive deforestation has been included as one of the consequences resulting from the increasing demand for cultivation. Such factors have contributed to environmental deterioration, which leads to an enormous rate of carbon dioxide (CO2) emissions. Indeed, 69% of tree cover loss occurred in areas where the dominant drivers of loss resulted in deforestation in the past 20 years. To aggravate the current position, Lao P.D.R. is currently encountering an economic recession due to insufficient Foreign Exchange Reserves funds, which the inflation rate has seen to surge to an all-time high in 2022, meaning an increasing demand for further production involving natural resources. Therefore, there are need for immediate action to tackle current challenges.

To initiate a solution, according to World Bank, the ongoing debt levels and increased fiscal space were identified as top priorities under the pathway, in which quick actions are needed in order to escape a recession. Moreover, a dynamic corporate/private sector along with enhanced learning outcomes was also identified as top priority in order to enhance job growth in both white- and blue-collar sectors. Management of natural resources and enhanced agricultural productivity are in demand for further improvement. 

In order to apply all the concepts mentioned to be able to produce tangible results, my suggestion would begin with limiting the extraction of natural resources, by shifting our focus to promote the operation of Micro, Small- and Medium Sized Enterprise (MSMEs) along with local businesses by establishing structural support to protect those businesses, to comply with the principles of transition opportunities for sustainable, inclusive growth, including where MSMEs are in local economies and the necessities required for transition. According to the Asian Development Bank, this may include the focus on providing personalised business assistance to MSMEs operators to maximise efficiency; providing adaptation strategies for coping with changing climate and environmental conditions to avoid further environmental degradation, and lastly, developing mitigation approaches for managing personal and commercial risk utilising data-driven analysis approach to comply with ASEAN’s standards to the route of complete economic integration and enhancing Laos’ competitiveness. As ASEAN citizens, may this be one of the first small steps for ASEAN to transition towards a dynamic, sustainable and prosperous community.

This article was written by Panitha Vongsaly edited by the Diplomacy Team, and reviewed by the AASYP Publications Team.

Note: The views and opinions expressed in this op-ed are solely those of the writer and in no way represent nor reflect the position of AASYP and members of the AASYP Publications Team. The AASYP Horizons Blog provides a platform for the free expression of opinions and intellectual discourse.

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