Laos and the Hydropower Curse

by robert looney
Vilaphon Phommasane Xinhua/e​ye/Redux
 

robert looney teaches economics at the Naval Postgraduate School in California.

Published July 8, 2019

 

Last July, a dam under construction that was part of the Xe Pian Xe Namnoy hydropower project in southern Laos collapsed following heavy rains. The failure triggered a flash flood that destroyed local villages and, by some estimates, left 800 dead. Thousands are sheltering in makeshift camps in an area still not cleared of landmines left over from the Vietnam War.

In authoritarian Laos, the disaster triggered only a cursory investigation into the cause of the failure at the $1.2 billion joint Laotian-South Korean-Thai hydroelectric construction site. Dam building continued apace as the country rushes to establish itself as the “battery of Asia,” while questions about dam-site selection, contracting and safety standards were brushed aside.

Laos’s first hydroelectric dam, built with Japanese assistance, opened for business in 1971. For the next two decades, the single plant not only kept the lights on countrywide but also generated enough power to allow for exports to Thailand. Then in 1993, spurred by Thailand’s swelling demand for electricity, the government opened the hydropower sector to foreign investment and embarked on a largely foreign-financed dam-building spree.

As new projects came online, Laos also began to supply power to Vietnam and Cambodia. As of December 2018, Laos had 46 operational hydroelectric dams, plus another 54 that were under construction and scheduled to come online by 2020. Many others are in the pipeline. And at first glance, hydropower mania appears to have paid off. The country’s average annual growthrate rose from 6.1 percent in 1980-99 to nearly 7.5 percent in 2000-18.

But Take Another Look …

The current account deficit rose from an average of 4.0 percent in the 1990s to 11.5 percent in the 2000s to an eye-watering 22.3 percent in 2010-18. Meanwhile, the government budget deficit increased from 1.5 percent of GDP in 2011 to 4.6 percent in 2018.

Now, on their face, these numbers don’t really tell us much. The capital to build all those dams had to come from someplace — hence the humungous current account deficit. And the sustainability of the budget deficit turns on both the size of the government’s debt and whether government spending is being used to raise productivity through, say, education or transportation.

A deeper dive into the numbers isn’t reassuring, though. For one thing, Laos isn’t getting sufficient bang for a renminbi/riel/bhat of foreign capital. Indeed, it appears to have fallen victim to a variant of the resource curse common to hydropower-producing countries, in which growing debt, corruption, lack of diversification and environmental degradation outweigh the benefits of becoming an electricity giant.

Meanwhile Laos’s chronic budget deficit has increased the government debt from 49 percent of GDP in 2011 to 63 percent last year. And the fruits of its deficit spending don’t seem all that impressive. One infrastructure project alone, construction of a China-Laos railway, has an estimated $6 billion price tag, of which Laos is responsible for $1.8 billion — a hefty burden for a country of seven million whose 2018 GDP was only $18.5 billion.

The Curse That Keeps on Giving

Back to the hydropower push. By no coincidence, the World Bank’s Worldwide Governance Indicators suggest that corruption is a growing problem. Laos’s ranking for Control of Corruption (where 100 is pure as driven snow) dropped from the 28.5 percentile in 1996 to the 15.9 percentile in 2017.

There are wheels here within wheels: corruption is even affecting the sustainability of the country’s forests, which are controlled by the provincial governors. The discovery of a major timber-smuggling operation(in the province where the dam collapsed) has raised suspicions that projects are deliberately being sited on heavily forested land to circumvent a central government ban on logging for export.

 
Laos appears to have fallen victim to a variant of the resource curse common to hydropower-producing countries, in which growing debt, corruption, lack of diversification and environmental degradation outweigh the benefits of becoming an electricity giant.
 

Scarce agricultural land is also being sacrificed to the hydro dams. In mountainous Laos, only about 4 percent of the country’s total acreage is arable, the lowest percentage of any country in Southeast Asia. And ever more of this land is ending up at the bottom of reservoirs.

The dam-building companies are offering resettlement and dry-season irrigation programs to aid displaced farmers, although the quality of these programs varies. But these are short-term fixes. In the longer term, the 97 percent reduction in the amount of sediment flowing downstream of the dams will dramatically lower the fertility of the remaining farmland, heightening food insecurity.

The dams, in fact, seem to create any number of ways to displace Laotians’ livelihoods. They are bad news for the natural fisheries of the Mekong Riverand its tributaries, whose fish stocks are — or were — among the most diverse in the world. The dams not only change the river flows but, in many cases, block fish from migrating to their spawning pools.

While the trapped fish produce a temporary bonanza for fisherman, it is unclear how many species will be able to adapt to the changes in flows. Fish stocks are almost certain to decline sharply, pushing significant numbers into poverty in a country that can ill afford more.

Laos’s neighbors may be enjoying the cheap power, but will also feel the environmental bite. Sedimentation, decreased river flows and declining fish populations downstream from the dams will negatively affect fisheries and farming in Cambodia, Thailand and Vietnam. In the lower Mekong River basin, full-scale dam development would result in hundreds of millions of dollars of losses in the fishing and farming industries. The hydropower projects will also derail Cambodia’s growing ecotourism sector by threatening the biodiversity of Mekong River ecosystems and further endangering rare species like the Irrawaddy dolphin.

The three countries have been working to persuade Laos to take into account the cross-border impacts of dam building, but to little effect. As a result, Thai activists have begun pressuring the government to table an agreement to import additional Laotian hydro-generated electricity. Vietnam and Cambodia seem to be heading in the same direction. This, it should be noted, is a disaster all around. While Laos’s neighbors may not be able to live with Laos’s dam-centric economy, they may not be able to live without the electricity.

The Climate-Change Catch

Then there is the small problem of what happens if Laos builds more dams and the weather doesn’t oblige with rain to fill them. Long-run forecasts suggest that, thanks to climate change, the rainy season will become shorter but more intense — similar to what occurred just before the Xe Pian Xe Namnoy dam collapsed.

A recent study by the multinational Mekong River Commission concluded that full-scale dam development will be a net negative in economic terms in the long run, costing Laos $9 billion in GDP growth — a finding a Laotian government representative, who apparently was more interested in right now, dismissed as “just an estimate.” In any event, it appears the apparatchiks who run Laos are rapidly losing options for diverse development. With agriculture, fishing and the potential for ecotourism in steep decline, there will be little to cushion the blow when the hydropower boom scuds to an end.

main topic: Asia
related topics: Economic Development