(Regardless if what's correct, my
aesthetic impression is that the first display, without m17n and libotf,
looks better;
I believe you are correct. I don't know Lao, but knowing Hindi and Gujarati, those Lao characters seem similar to the vowel overlays used in Hindi, Gujarati and other Indic languages.
Example: ક + ં should be rendered combined as કં, ક + ી = કી, and so on.