Staff writer

Japan will formally agree with Laos next week to launch a comprehensive policy assistance program to help the communist-ruled Southeast Asian country accelerate free-market reforms and put itself on a sound development track, government sources said Monday.

The formal agreement will be made Monday at a meeting in Tokyo between the foreign ministers of the two countries, the sources said. Laotian Foreign Minister Somsavat Lengsavad is to begin a weeklong visit to Japan Sunday on his return home from New York, where he attended the U.N. General Assembly session.

It is uncertain who will represent Japan in the Monday meeting, because Prime Minister Keizo Obuchi, who was re-elected as president of the ruling Liberal Democratic Party last week, is expected to reshuffle his Cabinet as early as Friday.

The government dispatched Motoyoshi Suzuki, a professor at Mie University and an expert on the Laotian economy, to Vientiane last month as part of efforts to prepare for the assistance program.

Following signing of the formal agreement, the government will send a mission of the Japan International Cooperation Agency, a government-affiliated aid organ, to Vientiane to work out details of the program, the sources said.

A joint team of about 20 Japanese and Laotian experts will probably be set up by next spring to conduct a study on Laotian economic problems, they said. The joint team is likely to compile a report containing policy recommendations during fiscal 2000, which ends in March 2001.

Laos is expected to establish a high-level government committee to oversee the joint study and have the joint team's policy recommendations reflected fully in future government policies, the sources said.

Laos will be the second developing country to receive such intellectual assistance from Japan. A similar program -- albeit larger in scale -- has been in place in Vietnam since 1995 as a form of technical cooperation.

Technical cooperation is one of three types of Japanese bilateral official development assistance for developing countries. The two other types of Japanese ODA are yen loans and grants-in-aid. Japan has been the largest single aid donor to Laos since 1991.

The sources said the joint team of experts will focus their study on two pressing economic challenges Laos faces: overcoming an acute revenue shortage and fostering promising industries that are capable of earning foreign currencies.

Laos, an impoverished country of about 4.7 million people, has pushed ahead with efforts to switch to a free-market economy from a communist-style centrally planned system under the "New Economic Mechanism" reform policy introduced in 1986.

But the Laotian macroeconomy is in critical condition, due largely to fallout from the recent Asian economic crisis, the sources said.

The country's gross domestic product for 1997 -- the latest year for which figures are available -- stood at $959 million, almost half the level of 1996. As a result, per capita GDP shrank sharply to $200 in 1997 from $374 in 1996.

Government revenue is estimated to have declined to a level equivalent to only 10 percent of the GDP, while the country's currency has depreciated sharply against the dollar since the eruption of the Asian currency and financial crisis in summer 1997. Inflation is hovering at a triple-digit annual pace.

Last year, Laos posted a deficit of $211 million in external trade and saw its foreign debt rise sharply to nearly $1.1 billion. The country's foreign-currency reserves also dropped significantly, from $155 million as of June 1997 to $11 million as of May, an amount equivalent to only two months of imports.

Foreign investment in Laos was only $45 million in 1998, compared with $128 million in 1996.