Review/Econ. Monitor Laos: Government Reform Efforts Hurt Markets By Bertil Lintner VIENTIANE, Laos (Dow Jones)--Socialism in its orthodox form may be dead in Laos, but Lenin's old saying, 'One step forward, two steps back,' still rings true. A declining currency, galloping inflation and a flight of foreign capital have followed in the wake of the government's efforts to insulate Laos from the financial turmoil in the rest of Southeast Asia. In fact, Laos has reached a point where old party hardliners have begun to question the benefits of free- market reforms, the Far Eastern Economic Review reports in its Economic Monitor column in its edition published Thursday. The first warning signals came almost a year ago when the Lao currency, the kip, began to slide. Lack of competitiveness for Lao exports and declining productivity at home were major reasons for the initial crisis. But the real problems began when the Thai baht, to which the kip is effectively linked, started losing value against the U.S. dollar in early July. The International Monetary Fund advised the government not to use foreign-exchange reserves to prop up the currency. As a result, the kip plummeted: It now costs 1,780 kip to buy one U.S. dollar compared with 978 kip in December 1996. By not intervening, Laos did at least maintain its meagre foreign-exchange reserves, which in July amounted to just $154 million. However, the currency issue became more controversial in July, when the Lao authorities tried to control the declining exchange rate by decree. At the same time, many businessmen were told by local banks that their foreign-exchange savings could be withdrawn only in local currency. Concerned at losing more money as the kip fell, many withdrew their savings, changed them back into dollars on the blackmarket and spirited them across to Thailand. Old Style Socialism Ruled Out By Oct. 25, when the governor of the central bank issued a statement explaining that foreign currency could be withdrawn, a sum estimated at up to $40 million had left the country. Foreign investors are also uneasy at the government refusal to overturn a mining law enacted in April that separated contracts for exploration from those for extraction. In effect, foreign companies that had spent millions on exploration stand to lose the right to exploit their finds. Even so, it's not all gloom and doom in Laos. GDP was 1.7 trillion kip in 1996 and has shown steady growth of around 6% over the last five years. And in early November, U.S. Deputy Secretary of State Strobe Talbott visited Vientiane and supported the country's application for most-favoured-nation trade status with the U.S. The application is expected to be passed by Congress early next year. MFN could help rescue Laos's troubled textile industry by reducing duties in its biggest market. Textiles and garments are Laos's second-largest export category after wood products. Overseas sales in the sector amounted to $64.1 million last year, down 16.4% from 1995. Electricity, another major Lao export, was given a boost on Nov. 12, when Jean-Michel Severino, the World Bank's vice-president for East Asia, said he was optimistic loan guarantees would be granted for Laos's biggest ever hydroelectric power project, Nam Theun-2. The $1.4 billion project is expected to bring in $176 million annually from sales to Thailand. In general, however, Laos has few options in tackling major problems like rampant inflation, which has made even food very expensive. A return to old-style socialism seems out of the question but recent government attempts to assert control are chilling reminders of a past most businessmen thought was gone for good. ASEAN-wide military links to offset China - expert By Rene Pastor SINGAPORE, Nov 20 (Reuters) - ASEAN countries should set up formal links between their armed forces so ASEAN can serve as an effective counterweight to China, an Indonesian security expert said on Thursday. Dewi Fortuna Anwar, of the Centre for Political and Regional Studies, said in a paper at a roundtable on the expansion of ASEAN it was time to consider a region-wide security forum where all nine members of the group can take part in joint military exercises. Anwar, who is head of regional and international affairs at the centre, told reporters formal ties linking the military establishments of all ASEAN countries "will go a long way to reducing existing divisions" among members. Asked if this would be seen as an attempt by ASEAN to develop an effective counterweight to China, she said: "Why not? We want to counterbalance the influence of China." Establishment of an ASEAN-wide security structure will improve the ability of military forces in the region to work together as a collective unit even though the region is still not "able to stand up to China," she said. "But at least it could make it harder for China or Japan or the United States to divide and rule ASEAN and to push it around," Anwar added. Members of ASEAN have outstanding territorial disputes with China over ownership of the Spratly islands, which security experts have said could become one of the flashpoints for conflict in the region. The potentially oil-rich cluster of islands and coral reefs in the South China sea are claimed in whole or in part by ASEAN members Brunei, Malaysia, the Philippines and Vietnam. Under current arrangements, there is no ASEAN-wide security arrangement. Most countries conduct bilateral or trilateral military exercises with one another. At the moment, military officers only attend the ASEAN Regional Forum (ARF) but do not take part in other activities of the group. "Why don't we also bring military people into our ASEAN discussions?" she said. "Close cooperation among military personnel is the most effective way to remove mutual suspicions and promote transparency," the expert added in her paper. Anwar said it would take much time and resources to create security arrangements to cover all nine members of the Association of South East Asian Nations (ASEAN). ASEAN links Brunei, Burma, Indonesia, Malaysia, Laos, the Philippines, Singapore, Thailand and Vietnam.