The Lao economy has performed well compared to those of its neighbours in the face of the global financial crisis, according to analysis from the World Bank.

The bank released its Lao PDR Economic Monitor 2009 last week, showing that the real GDP growth of Laos reached 6.4 percent in 2009, the second highest in the East Asia Region after China, despite the landlocked nation facing the negative impacts of world economic recession.

The Asian Development Bank (ADB) estimated the nation's economic growth at 6.5 percent for 2009, while the government figures reflected growth of 7.6 percent in the past fiscal year.

According to the World Bank, a main cause of this impressive growth is that the Lao economy is relatively insulated from the global financial system and its exposure to global trade is still limited, thereby mitigating the direct impact of external shocks.

A sustained demand for Lao exports, including copper and gold bought by China, garment products by Europe and electricity by Thailand, combined with the strong tourism industry has also helped cushion the Lao economy compared to other nations.

Another reason behind robust economic growth in Laos is the increase of expenditure on the construction of infrastructure to facilitate the 25th Sea Games in Vientiane in December. The move injected substantial funds to stimulate economic growth during a time of falling inflow of foreign direct investment.

Contributions to GDP growth have shown a noticeable shift toward the resource sectors. The mining sector alone, in particular copper and gold, contributed about 2.5 percentage points to growth in 2009, while manufacturing, construction and agriculture sectors each contributed 1 point to the growth. Services accounted for the remainder, the bank reported.

Economists said that although Lao economic growth remained strong in the recession there are a number of challenges the Lao government has to overcome to ensure this growth is sustainable.

The impressive growth of the Lao economy was primarily driven by metals processing industries and hydropower plants, which are not sustainable in the long-term due to the unavoidable depletion of natural resources.

They urged the government to attend to shifting the base of economic growth toward agricultural processing industries and services including tourism to ensure that Lao economic growth remains stable over the next generation.

Development of human resources and improvements to the investment mechanism to facilitate business operations are key challenges the Lao government has to overcome, economists said.

The government has also increased efforts to create a better climate to encourage private investment, creating jobs and income for Lao people, and amended investment promotion laws, offering investors a number of incentives including tax reductions and residential land use rights.