Reevaluating the Economic Benefits of the Lao People’s Democratic Republic (Lao PDR)–People’s Republic of China High-Speed Rail and Its Implications for Fiscal Stability of the Lao PDR
Emerging economies are taking on extremely large amounts of dollar-denominated debt as part of the "Belt and Road Initiative."
We explore the challenges created by debt and fiscal stability in countries where major infrastructure investment is proposed. We specifically focus on the Lao People's Democratic Republic (Lao PDR) and the $6 billion Lao PDR–People's Republic of China (PRC) high-speed railway (HSR) that is currently under construction, which will be compared to a similar investment program in Mongolia. We use two different modeling approaches, a comparison with a similar investment program in a different country and with different assumptions. Our conclusions point to the Lao PDR–PRC HSR being unlikely to bring major economic benefits and having the potential to present a very large contingent liability for the Lao PDR. One of the modeling approaches derived from the recent literature supports the network analysis approach to identify the least cost path and it attempts to identify the increase in land value, which is the immobile factor of production due to the increased market access provided by new infrastructure. This has then been compared with a more traditional net present value approach, which should be equal but in practice has not been the case. Far from negating either modeling approach, these discrepancies have provided more actionable insights for policy makers.
WORKING PAPER NO: 1181