Laos’ Connectivity Drive Paves the Way for ASEAN’s Integration

When Laos took over the ASEAN Chairmanship from Indonesia in 2023, sceptics questioned its capacity to tackle strategic or thorny issues like the South China Sea Code of Conduct, the Myanmar conflict, and mainstreaming the ASEAN Outlook on the Indo-Pacific (AOIP). Laos has surprised critics by making connectivity the cornerstone of its leadership, prioritising both physical and digital linkages to foster a more integrated and resilient ASEAN capable of withstanding external economic and geopolitical pressures.

Physical infrastructural improvement, particularly for regional transportation and logistics networks, is central to Laos’ approach. Landlocked Laos faces significant hurdles in trade and economic development due to its lack of direct access to the sea. By advancing regional infrastructure projects, Laos would be able to gain better access to regional and global markets, thereby diversifying its economy and enhancing its strategic position within ASEAN.

One of the most prominent initiatives is the Laos-China Railway, which is poised to transform Laos from an unfavourable land-locked to a land-linked status, boosting the country’s gross domestic product (GDP) and increasing tourism from China. Beyond immediate benefits to Laos, the railway could serve as the backbone of a larger ASEAN rail network connecting the region with China, ASEAN’s biggest trading partner.

Further developments include the new cross-border passenger service between Thailand and Laos, which began in August 2024, connecting Bangkok with Vientiane daily via the Krung Thep Aphiwat-Vientiane (Khamsavath) route. Moreover, renewed discussion around the Bangkok-Nong Khai High-Speed Train project, which aims to connect Bangkok to Kunming via the existing Boten-Vientiane railway by 2028, further positions Laos as a potential key player in regional transportation connectivity.

Figure 1. Graphic on Thailand-China high-speed rail link-up, aimed to connect Bangkok to Kunming in China via Laos by 2028

Malaysia has also joined these efforts with the launch of the “ASEAN Express”, a cargo rail service connecting Malaysia, Thailand, Laos and China. This initiative aims to open new markets within the region and reduce cargo transportation costs. By prioritising these infrastructure projects, Laos is facilitating smoother trade and mobility within Southeast Asia and China, further integrating itself into the regional economy. Collectively, these initiatives are set to complete the key transport corridors that link the Greater Mekong Subregion (GMS) with the rest of ASEAN.

Beyond physical connectivity, Laos is strategically leveraging the region’s growing digital adoption to advance digital communication and technology integration across ASEAN. These efforts are pivotal in positioning ASEAN as a leading digital economy, fostering deeper intra-regional and global connections through unified trade tools and standards. Since 2022, ASEAN countries including Singapore, Indonesia, Thailand, Malaysia, and the Philippines have successfully operationalised and integrated QR payment systems, setting the stage for a more connected digital financial landscape.

Recent launches of Cambodia-Laos, Cambodia-Vietnam, and Laos-Thailand QR payment systems place ASEAN at the forefront of global QR payment services integration. While this integration will progress at differing speeds depending on member states’ financial systems, these initiatives are essential for keeping ASEAN competitive in a rapidly evolving global economy. Once fully integrated, these systems are expected to provide seamless financial services, benefitting labour mobility and tourism.

In addition, ASEAN is focused on creating a robust digital trade ecosystem through developing a roadmap on digital trade standards and implementing regionally comparable and recognised unique business identification numbers. These initiatives aim to enhance cross-border trade, create a secure and seamless digital trade environment, and ensure that ASEAN remains at the forefront of global technological advancements.

Laos has also positioned itself as a leader in connectivity through its significant role in renewable energy. Known as the “Battery of Southeast Asia”, Laos exports approximately 80 per cent of its annual energy production to neighbouring countries such as Thailand and Vietnam. Hydropower-generated electricity exports to Singapore began in 2022, and transmission lines to Cambodia were initiated in 2023. These developments have revitalised ASEAN’s ambition to realise the ASEAN Power Grid (APG), a project aimed at ensuring regional energy security by integrating power infrastructure across member countries, facilitating cross-border electricity trade, and sharing excess capacity. This initiative is crucial for meeting rising electricity demand, improving access to energy services, and promoting renewable energy use. Implementation will proceed in stages, beginning with bilateral agreements and gradually expanding to a fully integrated regional power grid system. However, the project has faced scepticism for being overly ambitious since its introduction in the 1990s. For instance, securing agreements with Thailand and Malaysia to wheel renewable energy from Laos to Singapore has proved to be challenging. Competition for renewable energy even among neighbours could potentially stall the initiative.

Achieving deeper connectivity in ASEAN is not without its challenges. A significant obstacle is the lack of capital, as well as the complexity of investment structures and impact measurement due diligence for large-scale infrastructure projects. Geopolitical issues, such as Laos’ dependency on China for investment and technology, also pose strategic risks and influence regional dynamics. This is evident in Laos’ experience with the Boten-Vientiane railway. The project, which cost US$5.9 billion, is financed 60 per cent through debt from the Export-Import Bank of China (US$3.6 billion) and 40 per cent through a joint venture between the two countries, with China holding a 70 per cent stake. This has placed Laos’ debt at critical levels. In 2022, the World Bank estimated Laos’ public debt at 110 per cent of its GDP, with about half of its external debt owed to China, while some experts suggested even higher figures. According to a World Bank study, the success of the railway corridor will depend on its ability to increase trade flows between Laos and China, estimated to increase from 1.2 million tonnes in 2016 to 3.7 million tonnes by 2030, of which 2 million tonnes would shift from maritime transport to the railway. The railway has carried over 30 million passengers since its opening in December 2021 but the sustainability of large-scale infrastructure projects like it will depend on Laotian policymakers reforming the business and trade environment and facilitating well-targeted and complementary infrastructural investments, including logistics services.

The lengthy and complex negotiations involved in bilateral and multilateral agreements on infrastructure projects, particularly when deliberating costs and returns on investment, can be challenging. For example, despite their deep integration in labour mobility and connectivity, even Singapore and Malaysia had engaged in long negotiations for the US$17 billion Singapore-Kuala Lumpur High-Speed Rail project due to cost concerns, differing views on return on investment, and multiple parties’ legal considerations.

Similarly, in the digital connectivity realm, the ASEAN Digital Economy Framework Agreement, anticipated to be the world’s first regional digital economy agreement, will set to be finalised only by 2025, with its operationalisation needing even more time.

Despite these challenges, Laos is set to lead ASEAN in adopting a declaration on enhancing supply chain connectivity at the 44th and 45th ASEAN Summits in October 2024. Midway through its chairmanship, Laos has shown strong commitment to regional connectivity, including by convening the 15th ASEAN Connectivity Symposium on 23 August 2024 in Luang Prabang, which gathered experts to discuss innovative solutions for more inclusive and sustainable connectivity.

Through its efforts to improve physical and digital infrastructure and strengthen regional cooperation, Laos is advancing not only its own development but also the broader goal of a more interconnected and resilient ASEAN. While challenges remain, the progress made under Laos’ leadership will lay a solid foundation for future regional integration.

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Editor’s Note:
ASEANFocus+ articles are timely critical insight pieces published by the ASEAN Studies Centre.