The
Challenge of Sustainable Economic Growth
and Development in Cambodia
Naranhkiri
Tith
Introduction
Since 1970 Cambodia has been through major changes in its
economic, political, and social systems. From 1970 to 1991,
the Cambodian people suffered a great deal as a result of
civil strife, foreign occupation, and massive man-made errors
in economic and social management. The country lost an estimated
two million people or 25 percent of its population as a result
of the genocidal policy of the Khmer Rouge and foreign invasion.
Most of its infrastructure was destroyed, and its small endowment
of human capital was decimated or forced to flee the country.
The standard of living of the average Cambodian as measured
by per capita GDP was $260 in 1995, and the nation was ranked
by the World Bank as among the 20 poorest in the world. Cambodian
per capita income in 1995 represented only two thirds of the
1969 level.
From 1975 until 1991, the Cambodian economy operated under
a centrally planned system. Cambodia was integrated into the
economic and trading system of the Eastern bloc or the Council
for Mutual Economic Assistance (CMEA). For this reason Cambodia
was practically cut off from the world's market economies.
Some modest systemic reform was introduced by the People's
Republic government in 1985 and accelerated in 1989, reflecting
changes in the communist system in Europe. However, only with
the arrival of the UNTAC in 1992 was Cambodia able to fully
reconnect with the world economy. This led to relatively large
inflows of private and official financial and technical resources.
This relatively large influx of resources allowed the Cambodian
economy to record relatively high growth rates combined with
low inflation. However, this phenomenon also caused Cambodia
to become highly dependent on foreign humanitarian, technical,
and financial assistance for its survival.
Thus today Cambodia must not only make the transition from
a centrally planned economic system to a market-oriented one,
it must also make the transition from a war economy to a peace
economy, and from a poor and underdeveloped economy to a more
prosperous and developed one. It is indeed a formidable task
for Cambodia's leaders and its people, as well as for the
international community involved in helping the country to
rebuild its shattered society and economy.
This chapter describes the economic challenges facing Cambodia
and assesses the effectiveness of the policies adopted to
reform the economy and promote economic growth. In the case
of Cambodia, where the structure and level of population,
income, and production are not well balanced, macroeconomic
variables such as GDP growth rates and inflation rates alone
may not be appropriate or sufficient for measuring the success
or failure of economic management and performance in the long
run. Other factors, such as structural change, income distribution,
poverty levels, education and health services, environmental
issues, unemployment, and underemployment, are also crucial
to the evaluation of the impact of the reform program on Cambodian
society. The true measure of success in transition for Cambodia,
as professor James Riedel has suggested, is whether the combination
of high rates of growth and low inflation is sustained over
a period of two to four decades. Only then can Cambodia escape
the cycle of poverty and political and social instability.
Key Developmental Constraints and Challenges
This section provides a brief survey of Cambodia's key developmental
constraints and challenges, namely its resource endowment
and the legacy of the centrally planned economic system.1
Human Resource Development
Cambodia has a population of about 10.2 million (1995), growing
at an estimated rate of 2.5 to 2.8 percent per year.2
About 85 percent of the population lives in rural areas and
depends on farming as well as nonfarming income for its living.
Regionally the population is largely concentrated (60 percent)
in six provinces located in the central plains and around
the capital, Phnom Penh. The average population density of
around 50 persons per square kilometer is relatively low compared
to neighboring countries, such as Thailand (108) and Vietnam
(195). However, it varies widely among provinces ranging from
4 in the northeastern provinces to 160 in the central provinces
around Phnom Penh.
As a result of the war the Cambodian population is young (at
least half are under 18 years), and, women constitute the
majority (52.6 percent) of adults. Life expectancy is around
52 years, an improvement from the low of around 40 years during
the Khmer Rouge period. Estimates of literacy vary widely
from a recent figure of 85 percent provided by the government
to only 65 percent according to the World Bank. There are
signs that the majority of the population is physically weakened
by malnutrition and traumatized by prolonged mental and physical
hardship resulting from years of warfare and civil strife.
Malnutrition was estimated at around 10 percent (1992) in
Phnom Penh and 20 percent in the provinces.
One of the most tragic consequences of nearly two decades
of social and economic dislocation and destruction is the
emergence of extremely "vulnerable" groups within
the Cambodian population. Prominent among these groups are
female heads of households, refugees returning from the Thai
border camps, and internally displaced persons. Finally there
are about 350,000 handicapped. This number continues to climb
as there are still about nine million unexploded land mines
buried throughout the country. Cambodia has the distinction
of having the highest number of amputees per capita in the
world. The vulnerable groups are among the poorest in Cambodia
and require special attention from the government and NGOs.
In addition there is a pervasive health problem in the country,
especially in rural areas where access to health care services,
safe water, and adequate sanitation is still very limited.
After four years of Khmer Rouge rule (1975-79), Cambodia's
education system was totally destroyed. During this period
a large number of the country's estimated 20,000 teachers,
other educational personnel, and technicians and professionals
either died or left the country. Many schools and books as
well as other educational equipment were destroyed. It is
estimated that one in four of the adult population was illiterate
at the end of 1979. During the 1980s the education system
recovered substantially, but its quality remains poor, especially
in the vocational, technical, and scientific fields. Poor
education and other constraints in human resources will have
a detrimental impact on labor productivity and weaken Cambodia's
ability to adopt a strategy of export-led industrialization
based on skilled and semiskilled labor.
Sustainable Natural Resource Use
Cambodia is relatively well endowed with natural resources,
including minerals as well as timber, inland and coastal fisheries,
and various agro-ecological conditions suited to a wide range
of crops and livestock. The country is also well served by
one of the most important rivers in Asia, the Mekong, with
great potential for irrigation and generation of hydroelectricity.
Agriculture. Agriculture, animal husbandry, fishing, and forestry
contribute almost 45 percent to GDP. Thirty percent of GDP
originates from the rice and rubber sectors alone. Rice is
by far the most important crop in Cambodia. Because of low
soil fertility and the limited use of fertilizer, rice yields
in Cambodia are the lowest in Asia, averaging 1.3 tons/ha,
compared to 2.2 tons/ha, 3.5 tons/ha, and 4.3 tons/ha for
Thailand, Vietnam, and Indonesia, respectively. This leaves
room for higher yields through the use of multiple cropping,
mechanization, and fertilizer. Rubber used to be the second
most important foreign exchange earner for the country. Now,
most rubber trees are old and need replanting to increase
productivity. The potential for rubber production remains
good for Cambodia, especially in production by small plantation
holders.
Forestry. In the early 1970s Cambodia had a large forested
area by Asian standards, with nearly 70 percent of its land
area still under forest cover. However, Cambodia's forest
area has been reduced to a mere 35 percent as a result of
rapacious and uncontrolled logging. Global Witness, a British
environmental NGO, has warned that:
mismanagement and corruption within the RGC is now responsible
for the destruction of Cambodia's forests on a scale that
dwarfs all activity in the years prior to 1995. Environment
degradation caused by the destruction of Cambodia's forest
has a direct and adverse effect on almost every aspect of
human activity in Cambodia.3
Fisheries. Because of unique ecological conditions, mainly
the annual flooding of the Great Lake (Tonle Sap), freshwater
fish are abundant. Offshore areas also have abundant fish.
As one of the most valuable resources of Cambodia, the Tonle
Sap ecology must be carefully protected. However, this valuable
natural asset has been deteriorating since the 1950s, and
decline has accelerated since 1975. The main causes appear
to be closely linked to environmental deterioration, including
increased siltation and destruction of substantial portions
of flooded forest resulting in the reduction of fish nursery
and feeding areas. Overfishing and illegal fishing may also
be significant causes of the decline in fish yield.4
Traditionally Cambodians have not engaged in fishing activities,
and commercial fishing is not yet well developed owing to
a lack of skill and capital. However, the potential benefit
from marine fishing, shrimp farming, and aquaculture is as
good as in neighboring countries and could be a good source
of extra income for farmers, provided that environmental safeguards
to farmers are strictly enforced.
Minerals. There is little mineral resource exploitation in
Cambodia. Besides gems and phosphate, which are now being
mined, there are indications that some deposits of bauxite,
gold, phosphate, and limestone warrant further exploration.
Other potential mineral deposits that may be commercially
promising include iron ore, manganese, tin, copper, lead,
zinc, and cilia. After a break of 20 years, the government
reopened offshore oil and gas exploration in 1991, and bids
were called in early 1992 for onshore exploration. Territorial
disputes between Thailand and Vietnam prevented explorations
for oil and gas from expanding further.
Only with a thorough geological mapping can the commercial
viability of these mineral resources be known with a sufficient
degree of certainty. For the moment such mapping is taking
place only in the gas and oil subsector where some serious
exploration activities are being undertaken. Even in this
field only limited exploration is being done onshore. Almost
all explorations are being carried out offshore.
Industry and Tourism
Accounting for about 20 percent of GDP, Cambodia's industrial
sector is small but relatively diversified. It includes mining,
manufacturing, construction, and public utilities. In the
long run the manufacturing sector is the most important source
for generating employment and income as well as foreign exchange
earnings. To enhance the manufacturing sector, the government
must design and executed a comprehensive plan for the industrialization
of Cambodia. This plan must be export-oriented and executed
primarily by the private sector with the government playing
a supporting role. It also must be labor-intensive at first
and become skill- or technology-intensive at a later stage.
For this to happen, the government will need to reform and
upgrade the education system. Infrastructure must be upgraded
and updated, and trade and payments systems must be open.
The potential for a responsible tourism industry is very promising
and could attract important foreign investment as well as
create a great number of jobs for low-and semiskilled Cambodian
workers. Cambodia's cultural and artistic heritage is rich
and diversified, as can be seen in the Angkor Wat complex
and the variety of folklore. Cambodia's pristine beaches and
crystal-clear water along the Gulf of Thailand are still unspoiled
by mass tourism. These relatively untouched cultural and natural
sites can be responsibly transformed into a major source of
foreign exchange earnings.
The Past as Prologue: The Legacy of Communism
A better understanding of recent economic and political developments
in Cambodia requires a brief survey of the major events of
the past two decades.
Democratic Kampuchea Period: Social Engineering Madness
Immediately after Phnom Penh fell to the Khmer Rouge in 1975,
the government of Democratic Kampuchea (DK) was established
with Pol Pot, the victorious guerrilla leader, as prime minister.
The DK government launched a radical social engineering experiment
in communal and social organization. Proclaiming its intention
of totally breaking with the past and ready to use any means
necessary, including mass killing to ensure the success of
its policies, DK leadership set out to transform Cambodian
society and economy into an agrarian "utopia."
The Khmer Rouge government started this drastic social and
economic transformation by abolishing and outlawing all private
property. Deliberately, most industrial enterprises and infrastructure
were neglected, money was banned, and foreign contacts, including
trade, were forbidden. Inhabitants were evicted from the cities
and were forced to work under inhuman conditions in gigantic
rural irrigation projects later known as "Pol Pot's canals."
Workers were paid in food rations and required to surrender
all production to central control. Anyone showing signs of
resistance or doubt was swiftly and severely punished, including
by death.
The Khmer Rouge system was based on the collectivization of
the agricultural sector. Planning to turn Cambodia into a
vast rice field, the Khmer Rouge were obsessed with the idea
of making Cambodia agriculturally self-sufficient and convinced
that the solution resided in building a vast network of irrigation
canals similar to the one that existed in the Angkor period.
Village cooperatives were established as the basic blocks
of the system. In turn these cooperatives were consolidated
into large communes.
The devastating economic effects of this radical and inhuman
regime were to change Cambodian society beyond recognition.
As Milton Osborne, an Australian historian soberly observed:
Phnom
Penh was forcibly evacuated; existing patterns of Cambodian
society with roots stretching back more than a thousand
years were ended at one stroke; the Buddhist church ceased
to exist; money as a means of exchange was eliminated; and
we know that the population labored long hours in the fields
working toward agricultural self-sufficiency and a new program
of irrigation. But we will never know just how many Cambodians
were killed.5
The human and economic costs were monumental. Children were
separated from their parents. Malnutrition, disease, and summary
executions were widespread. An estimated two million people--25
percent of the population--died or were killed. The extent
of the damage to the Cambodian economy in just four years
of under the Khmer Rouge regime was captured by the IMF:
When
the People's Republic of Kampuchea was established in January
1979, there was no private property, and property claims
that existed before 1975 had been dispersed or destroyed.
The virtual disappearance of the educated elite meant that
administrators had to be selected from people with little
prior experience. Industry and agriculture had been devastated.
There were no functioning schools or medical facilities
and virtually no medical supplies.6
Khmer People's Republic Period: Beginning of Rehabilitation
The Vietnamese invasion of Cambodia in December 1978 dealt
a mortal blow to the DK regime. In 1979 the country was renamed
the People's Republic of Kampuchea (PRK) and more orthodox
centrally planned economic system was introduced by the Vietnamese-installed
government of Pen Sovann and Heng Samrin. From 1980, the focus
was on rehabilitating and reconstructing the economy and society,
including the drafting of a new criminal law and civil code,
the repair and building of infrastructure, the stimulation
of agricultural and industrial production, and, later, the
encouragement of the private sector. The people were allowed
to return to their original communities, including the cities.
However, many rural residents chose not to stay in rural areas.
Instead they moved into the cities and occupied property that
had been abandoned. Among the most important economic decisions
of the new regime were the reactivation of the Central Bank
and the introduction of a new currency, the riel, in March
1980. The main foreign economic and financial assistance came
from the former CMEA bloc.
Despite these changes, the new government's emphasis remained
on reorganizing Cambodia into a classic command economy. The
PRK first attempted to implement a modified form of collectivized
agriculture, based on administrative and political units of
people's revolutionary committees known as Krom Samaki. These
committees were set up at all administrative levels, starting
from the district level to the provincial level, as well as
among professional groups, such as trade unions or women's
associations.
The PRK government was not able to implement the collectivization
of the economy as envisaged, partly because of the major changes
that occurred in the socialist countries in Europe and Vietnam
in the mid-1980s, as well as from the lack of administrative
capability. This failure was recognized by the PRK's leadership
at the Fifth Party Congress in 1986. There the private sector
was formally recognized as one of the five official sectors
in the economy; the others included the state, the collective,
the joint venture, and the family sectors. The economy was
opened up to foreign direct investment through joint ventures.
During 1986-88 additional reform measures were introduced.
These included the restoration of private use (but not ownership)
of land to boost agricultural production; the granting of
greater autonomy to provincial authorities and managers of
state enterprises; the delayed introduction of a tax system;
and the freedom for family, private, and joint ventures to
function alongside the state and collective economies. With
these reforms in place, the Cambodian economy was gradually
recovering in all sectors, albeit rising from a very low base.
With the return of farmers to their original communities,
crop production, especially rice production, started to increase
modestly. Similarly, as the cities started to be populated
again, industrial production resumed with imported inputs
and machinery financed with credit from the Eastern Bloc countries.
In return exported agricultural products were used to pay
for part of those imports from the CMEA countries. At the
same time border trade with neighboring countries, especially
Thailand and Vietnam, began to flourish.
Beginning in 1989 the pace of reform accelerated and the scope
expanded. A number of important new laws were approved by
the legislative body. They included the lifting of price controls
with the exception of some key commodities, such as petroleum,
electricity, cement, iron, and fertilizer; the restoration
of private ownership, including the right to inherit property
and build on private land; a decree on foreign investment
designed to encourage joint venture state-owned enterprises
(SOEs); the privatization of SOEs through leasing or outright
sale; and autonomy to most SOEs.
It appeared that policy reforms were starting to have considerable
impact on the economy, especially in Phnom Penh where a modern
hotel, the Cambodiana, was completed and a number of banks
were opened. More than 12,000 private establishments, including
more than 1,500 medium-sized units were reported to be operating
in the capital city. In addition the supply of consumer durables
as well as that of luxury consumer goods increased. These
goods came mostly through border trade.
The Paris Agreements and the UNTAC Interregnum
The Declaration on the Rehabilitation and Reconstruction of
Cambodia of the 1991 Paris Peace Accords provided a new framework
for the reconstruction of Cambodia. It also made it possible
for the Cambodian government to appeal to official donors,
international and regional financial organizations, the UN,
and NGOs for contributions. The declaration called for an
initial and immediate focus on the provision of food, security,
health care, housing, education and training, and transportation
as well as the restoration of Cambodia's existing infrastructure
and public utilities. The implementation of a long-term plan
for Cambodia's reconstruction and development would await
the formation of a government following the elections and
the determination and adoption of its policies. However, the
declaration stipulated that the reconstruction phase should
promote Cambodian entrepreneurship and make use of the private
sector, among others, to help advance sustainable growth.
It also stipulated that following the formation of a new government,
Cambodia's international donors would create a consultative
group, the International Committee on the Reconstruction of
Cambodia (ICORC), in order to "harmonize and monitor
the contribution that will be made by the international community
to the reconstruction of Cambodia."7
Within this framework the first ministerial meeting on the
rehabilitation and reconstruction of Cambodia that took place
in Tokyo in June 1992 pledged $880 million for the rehabilitation
and reconstruction of Cambodia. At the Tokyo meeting the ICORC
was formally established. Chaired by Japan, the ICORC convenes
annually, with the venue normally alternating between Paris
and Tokyo.
Thus the Paris Peace Accords not only provided a chance for
Cambodia to regain its sovereignty, they also provided a framework
and a commitment from the international community to provide
long-term financial and technical assistance to help Cambodia
rehabilitate and reconstruct its shattered economy and society.
After 1991 the Cambodian economy was further enhanced by the
increase in the demand for goods and services from some 20,000
UNTAC personnel involved in maintaining the peace and administering
elections.
Unfortunately UNTAC's massive presence in Cambodia also had
its bad side. According to William Shawcross:
the
continuing arrival of UNTAC troops and civil administrators
had an enormous impact on Cambodia's economy, especially
Phnom Penh. UNTAC's international officials were paid a
per diem of $145, while the average annual income in Cambodia
was approximately $160. Land value, rents, and the prices
of services and utilities soared, with no commensurate increase
in government wages. As a result a double economy quickly
developed and a large proportion of civil servants left
their desks in order to profit from the private sector boom.
In Phnom Penh inflation, corruption, and nepotism became
ever more pervasive. New brothels were established and AIDS
began to spread.8
There were also other major social and economic problems generated
by the transition from a centrally planned system to a market-oriented
one. These problems included the acceleration of inflation,
the worsening of income distribution, the lack of linkages
between development in the cities and the rural areas, and
the increase in unemployment, insecurity, lawlessness, and
corruption. In addition the balance of payments and debt problems
also worsened.
An Assessment of Recent Economic Performance (1993-96)
With the newly elected government installed, a program for
reconstruction and sustainable growth was introduced at the
end of 1993. The main macroeconomic objectives of the 1994-96
structural adjustment and stabilization program were maintaining
real growth of 7 to 8 percent per year; reducing the inflation
rate to a rate comparable with partner countries or 5 percent
by 1995; strengthening worldwide position by reducing the
current account deficit to 9 percent of GDP by 1996, and raising
international reserves.
Accomplishments
By any standard one cannot help but be impressed by the recent
economic performance of Cambodia. From Table 1, we can observe
that during the 1991-96 period real GDP grew at an average
of 6.1 percent per year, albeit from a very low base. The
exchange rate has remained fairly stable despite the shaky
and precarious situation in the fiscal and monetary sectors.
Thanks to the United States granting Most Favored Nation Status
to Cambodia and the Generalized System of Preferences granted
by some European countries, export growth has accelerated,
especially in the recently established textile industry. Prior
to mid-1997 there was a boom in construction and tourism--two
labor intensive sectors--and are important sources of employment
in a country where unemployment and underemployment are still
extremely high and widespread.
The service sector has been the most dynamic and is geared
toward the trade, hotel, and catering services. The service
sector has been buoyed mainly by the impressive increase in
the number of tourists visiting Cambodia, which increased
from 5,000 a month in 1991 to about 15,000 in 1996. Responding
to the surge in tourism, a number of well-known international
luxury hotel chains, such as the Japanese Intercontinental
group, the Singaporean Raffles group, and the French Sofitel
group, have rushed to build large complexes in Phnom Penh
and Siem Reap, a city near the famous ruins of Angkor.
Cambodia also has been successful in fighting inflation. That
it was able to lower its inflation rate from triple to single
digits in a short period, despite the presence of major financial
and fiscal difficulties and major institutional weaknesses
is indeed impressive. This success was based on two important
factors: the availability of foreign assistance, such as budget
support, and the ability of major international financial
institutions such as the IMF and the World Bank, to design
reform measures and monitor very closely their implementation.
Cambodia's recent macroeconomic performance looks even more
impressive when compared with other former centrally planned
economies in transition in Europe. Practically all former
socialist countries, especially those in Eastern Europe and
the former Soviet Union, experienced sharp and protracted
output and trade collapse combined with hyperinflation during
the early period of systemic reform. Cambodia along with other
Asian economies in transition, such as China, Laos, and Vietnam,
have recorded high and positive real growth rates. The balance
of payment and budget deficits became more manageable thanks
to external financial inflows. (See Table 1.)
- The
IMF has identified a number of exogenous and structural
factors that allowed the three Asian countries in transition
to avoid output collapse and hyperinflation. The most important
are:
- In
contrast to countries in transition in Eastern Europe and
the Former Soviet Union, the three Southeast Asian countries
had larger and more family-based agriculture with a labor
surplus. Except for China, they also had relatively small
state-owned industrial sectors. For instance Cambodia had
less than 200 state enterprises, and Vietnam had about 12,000
compared with hundreds of thousands in such countries as
Russia and Poland.
- The
Asian countries in transition were less integrated with
the CMEA bloc in terms of production, trade, and aid. Therefore,
the impact of the CMEA collapse in 1991 was not as harmful
as in the European countries in transition.
- The
proximity of the Asian countries in transition to other
Asian economic powerhouses creates a dynamic network of
trade and investment among these countries, which, in turn,
is conducive to high growth. For instance the major share
of foreign direct investment in the Asian countries in transition
originated from ASEAN, Korea, and Taiwan.
- Owing
to the relatively short period of central economic planning
in these Asian countries, the market legacy remained sufficiently
strong to allow quick and positive responses to the reform
process, once the state's constraints were removed.
A closer look at the recent economic performance of Cambodia,
however, reveals a number of important weaknesses. When the
rate of real growth is adjusted for the rate of population
growth, which was about 2.8 percent, the growth of per capita
income was only about 3 percent for the period. The low rate
of inflation masks a number of major problems in the macroeconomic
field. The extremely high dependence of the Cambodian economy
on foreign economic and financial assistance is not sustainable.
Sectoral Weaknesses
Sectoral analysis also indicates that the growth performance
in Cambodia during this period was not broadly based and was
in fact precarious. For example the Cambodian economy is overwhelmingly
dominated by agriculture. This sector represented on average
about 45 percent of total value added during the 1991-95 period,
but recently it has been gradually declining (see Table 2).
During 1993-94, due to bad weather conditions rice and other
crops recorded a decline and no growth. This, in turn, impacted
negatively on the growth rates of real GDP during the same
period. (See Figure 1.)
The service sector is the second-largest, responsible for
about 35 percent of GDP. The construction and service sectors
alone were responsible for about three fourths of GDP growth
during 1991-95. The expansion in these sectors has been fueled
by growing foreign investment and increasing numbers of visitors
from Cambodia's more affluent Asian neighbors. However, the
construction sector is highly dependent upon foreign investment
and tourism--especially in a country with Cambodia's history--
which is very sensitive to political conditions. Two events
in July 1997--the currency crisis in Southeast Asia and the
coup in Cambodia--are likely to have serious negative consequences
for these two sectors, at least in the short to medium term.
The size of the industrial sector increased from 15.1 percent
of GDP in 1991 to 18.7 in 1995, but the manufacturing subsector
remained unchanged at about 7 percent throughout this period,
and the construction sector's share represented about half
of the total share of the industrial sector.
Mobilizing Resources
The government's large budget and balance of payment deficits
have been extremely vulnerable because they have been financed
almost entirely by foreign savings. On the revenue side of
the budget, import duties represent an overwhelmingly large
share of total revenue. On the expenditure side, military
expenditures and government employees' salaries represent
a very large share of the total, leaving very little for much-needed
health, education, and other social expenditures. (See Tables
3 and 4.)
In a country like Cambodia, where there is a large surplus
of labor, it is the availability of savings as a source of
financing investment which determines the rate of output growth
and productivity. The level of total investment as a percentage
of GDP increased dramatically from 9.4 percent in 1991 to
21 percent in 1995. Both government and private investments
recorded strong increases during this period. However, these
investments were financed mostly by foreign savings, which
increased almost tenfold, from a mere 1.5 percent of GDP in
1991 to 13.5 percent in 1995, rather than by domestic savings,
which remained low, at an average of approximately 7.6 percent
of GDP during this period. (See Table 5.) It is clear that
without the large inflows of foreign savings, mostly in the
form of multilateral and bilateral grants and concessional
loans along with an increasing share of foreign direct investment,
the economy of Cambodia could not have grown at the pace it
did. (See Table 6.)
In 1996 the World Bank stated that for Cambodia to maintain
an average rate of real growth of 7 percent per year for the
next five years, a yearly average amount of $500 million in
foreign financial resources would be needed to fund the balance
of payments and budget deficits, service external debt, and
allow for the accumulation of a critical minimum level of
international reserves. These calculations were based on the
fact that during the 1993-96 period, Cambodia had already
received an estimated $2 billion in total economic and financial
assistance from the international community.9
The extremely heavy dependence of the Cambodian economy on
foreign economic and financial assistance is not sustainable.
Therefore, the foreign savings must be replaced as soon as
possible by domestic savings, as these sources of foreign
financing will end sooner rather than later. The probability
of success in mobilizing domestic resources will depend on
reform policy measures that lead to the early establishment
of, among other things, an efficient banking system, an open
trading system, an efficient and transparent government, an
efficient and transparent judicial and legal system, and a
vibrant private sector.
The Quality and Sustainability of Economic Growth
The improvements in Cambodia's economy are a relatively recent
development. For confidence in Cambodia's economy to be on
more solid ground, one also needs to see whether the impact
of this achievement is sufficiently broad-based and if the
recent high rates of growth and price stability can be sustained
over a long period of time.
In a country like Cambodia where the majority of the population
still lives in rural areas and poverty and unemployment are
high and pervasive, it is important to look also at the quality
of growth that fosters human development, promotes equity,
safeguards the environment, and allows an enhancement of the
cultural values of the country. The quality of Cambodian performance
is not satisfactory because the impact of the growth process
is not broad-based. Economic benefits have been highly concentrated
in the urban centers, especially Phnom Penh. At the policy
level the containment of inflation has been achieved mostly
through cuts in budget expenditures. Unfortunately these cuts
have fallen mainly in the fields of educational, social, and
health services, and they hurt those who need most--the poorest.
At the same time military expenditures have increased, and
the political will needed to reduce the bloated civilian and
military bureaucracy has been absent.10
Institutional Foundations
The sustainability of Cambodia's economic recovery is threatened
by severe shortcomings in the government's institutions. There
is little political accountability in present-day Cambodia.
The National Assembly exists largely to rubber-stamp policies
rather than provide checks and balances. The bureaucracy,
judicial system, and military, police, and security forces
are highly politicized. Corruption is pervasive, demoralizing,
and detrimental to good governance. There is not yet any fair
and competent judicial system to decide disputes between locals
and foreigners or the government and private parties.
Sustained economic growth requires that Cambodia's system
of governance be made more transparent and efficient in delivering
its services.11 This requires an improvement
in the legal and judicial system, civil and military administration,
education system, monetary and fiscal system, accounting system,
land titles recording system, private property system, labor
organization, and foreign investment code. A host of legislation
and other reform measures have been introduced. But one should
remember that laws are only a framework to which people or
institutions can refer in case of dispute or misunderstanding.
The problems in Cambodia lie in the implementation.
Administrative reform is one key to Cambodia's becoming less
dependent on foreign assistance and enhancing productivity.
Civil, security, and military personnel represent about 4.5
percent of the total population of Cambodia, a very large
proportion compared to other countries. They are also very
poorly paid. The average monthly wage amounts to $25-$30,
well below the subsistence level. Most civil and military
personnel have a second job in order to survive. Therefore,
Cambodia's productivity is very low.
This situation could lead to the loss of competitiveness in
the export sector and an increase in corruption, which was
already pervasive in Cambodia. Corruption can harm Cambodia's
efforts to become economically prosperous and independent,
as it diverts much-needed resources to support the rebuilding
and rehabilitation of the economy. Moreover, it has a pernicious
effect on society.12
The Cambodian government has had plans to gradually downsize
its civil and military personnel with the help of external
financing. However, there have been numerous problems in this
endeavor. They are mostly political in nature, as both civilian
and military personnel are highly politicized. Unless there
is a strong political will, this problem will not be adequately
addressed.
Another area of great concern to both Cambodians and the international
community is the problem of resources management, forest management
in particular. The opaque and unconstitutional method by which
forest concessions have been granted to a number of foreign
firms and the lack of control of illegal logging do not bode
well for Cambodia. The rate at which the nation's forest reserves
have been depleting is alarming. If this is not corrected
soon, Cambodia's development prospects will be seriously jeopardized.
The Cambodian government plans to be more forceful in its
environmental policy. During 1994 the government formulated
a National Environment Action Plan in consultation with the
World Bank and other donors. Again, this problem is not amenable
to any quick solution as it is directly related to rent-seeking
activities at the highest level of the Cambodian government.
Only with monitoring and conditionalities from international
financial institutions and major donors can this problem be
contained if not resolved.
The elections scheduled for 1998 are a cause both for alarm
and hope for many, Cambodians and foreigners alike. These
elections will determine in which direction Cambodian society
will move. If generally fair and free elections can take place,
and if the outcome is accepted, then a new era of real hope
and peace for the Cambodian people can begin. If not, there
will be a period of great uncertainty, with possible social
and political unrest, the consequences of which are difficult
to predict.
Role of the International Community
The only meaningful oversight of the Cambodian government's
management of the economy has come not from within Cambodia
but from the international community. About 40 percent of
the Cambodian government's budget expenditures are financed
by IMF and World Bank programs as well as bilateral foreign
assistance. The conditions attached to IMF and World Bank
financial support enable these international financial institutions
to monitor government actions that affect Cambodia's economy
and to apply pressure when the government does not comply.
Major bilateral donors increasingly have used international
forums, such as the ICORC meetings to make the government
more accountable vis-à-vis the international community
and the Cambodian people. International NGOs also have been
playing more major roles as monitors of the government's performance.
The coordination of official economic assistance to Cambodia
and the monitoring of the economic reform program rests with
ICORC. ICORC meetings are an important venue for the exchange
of views among donors, the review of progress made, the raising
of additional funds for the program, and the monitoring of
the implementation of the program. These meetings also can
provide major donors an opportunity to scrutinize and ask
for changes or improvements in the program. Although implementation
remains essentially the responsibility of the Cambodian government,
monitoring is the responsibility of the donors and international
financial institutions through contingencies and the phasing
of financing.
Quantitative economic performance targets as well as a deadline
for the introduction of institutional structural reforms were
formally set and agreed upon between the Cambodian government
and the international financial institutions in a letter of
intent and a policy framework paper. It is within this framework,
which is a kind of collateral, that the monitoring of the
progress in the reform process takes place. Failure to meet
the criteria of performance may lead to either a delay or
a cancellation of the disbursement of funds. This framework
provides a relatively good way to make the Cambodian government
accountable for its actions and management and use of external
resources.
Beginning in 1996, this monitoring process was used more forcefully.
The turning point in this regard was the 1996 annual meeting
of the IMF and the World Bank. During this meeting the two
organizations for the first time officially and publicly warned
their member countries that corrupt practices would no longer
be tolerated. The granting of resources depends a great deal
on whether or not these resources are used efficiently. Therefore,
member countries cannot expect financial assistance if corruption
is not checked or eliminated.
This new approach was quickly applied to Cambodia. At the
Summer 1996 ICORC meeting in Tokyo, major donors insisted
for the first time that the Cambodian government implement
a more transparent forestry policy. This problem was so serious
that the Socit General de Surveillance (SGS), a Swiss company
chosen by the IMF to monitor logging activities in Cambodia,
decided not to accept the job for fear of being involved in
the dangerous game of party politics in Cambodia. In this
context the IMF took the unusual measure of suspending further
financial assistance to Cambodia until the forestry policy
was clarified. And in September 1997, citing the government's
inability to meet its economic conditions, the IMF announced
that it had suspended its $120 million financial support program
(of which $60 million had not been disbursed). To emphasize
the seriousness of the situation, the IMF also decided to
withdraw its resident representative in Cambodia. Following
the IMF decision, the World Bank decided not to renew an $85
million budgetary support program until the IMF resumes its
program.
The impact of the suspension of these programs goes well beyond
their actual dollar amounts. The presence of the IMF in a
country like Cambodia and the Cambodian government's willingness
and ability to comply with the terms of its agreement with
the IMF are important influences on the confidence level of
foreign investors. The suspension of these programs will dampen
the enthusiasm of all but the most adventurous investors.
There is a serious absence of institutions and groups inside
Cambodia that possess both the vision and the authority to
ensure that the government pursues economic policies that
will result in broad-based, sustainable, and environmentally
sound economic growth. Absent this, the international community,
and particularly major bilateral donors, such as Japan, must
continue to play a major role in encouraging the government
to adopt the right policies and ensuring that they are implemented.
This can best be accomplished through a nuanced use of carrots
and sticks. But this approach must be coordinated carefully
among donors, and underpinning any tactical compromises must
be a firm commitment on the part of all donors to reject corruption,
partisanship, and the further plundering of Cambodia's environment.
Only if official donors and international NGOs adhere to this
approach can there be any real hope for Cambodia to achieve
sustainable economic growth and broad-based development.
Conclusion
It is generally recognized that during the Khmer Rouge's insane
and brutal regime the Cambodian people lived through one of
the most tragic and horrible experiences in recent history..
Perhaps this has had paradoxically beneficial and detrimental
effects on the Cambodian people and their society.
On the beneficial side this tragedy has generated enormous
and genuine sympathy and support from all levels of the international
community. This has resulted in Cambodia receiving large amounts
of economic, financial, and technical assistance since the
1991 Paris Peace Accords. It also caused the Cambodian people
to become more aware of the world at large and to benefit
from a cross-fertilization of ideas and ways of life. This
has happened either through increased Cambodian contacts with
foreigners in the country or through the exodus of Cambodians
to countries and societies with new and different ideas and
notions of entrepreneurship largely absent in Cambodia. There
is little doubt that Cambodia benefited a great deal from
those Cambodian expatriates who chose to return home to either
to take advantage of new business opportunities, or to simply
to try to help rebuild their shattered homeland.
On the negative side the plight of the Cambodian people could
be a hindrance to quick recovery, self-respect, and self-reliance.
Often, because of this unique and tragic history the international
community has tended to be lenient regarding the standards
used by the international community to assess the behavior
and the performance of Cambodia's leaders. An example of this
faulty reasoning is the frequency with which the Khmer Rouge
regime is used as a benchmark to judge the success or failure
of any economic, social, or political programs or the behavior
of those in power. This amounts to the assumption that "anything
is better." Thus the abuses of the basic rights of the
Cambodian people by their leaders, which under normal circumstances
would not be tolerated, are accepted.
On balance Cambodia's resource potential both in human and
nonhuman terms is relatively good. For instance Cambodia does
not yet have population pressure on land. Cambodia could have
a food surplus with only slight improvements in the use of
water and inputs such as fertilizers or mechanization supported
by a good rural infrastructure and financing system. There
are sufficient mineral deposits, including oil and gas, that
can be commercially produced with the help, for instance,
of foreign investment through the production-sharing contract
system, as in Indonesia's case. With reform in the education
system, Cambodia can eventually follow the example of other
Asian countries that produce and export labor-intensive manufactured
goods. Cambodia may soon join ASEAN and benefit not only economically
but also in terms of political stability.
There is no doubt that since 1993 Cambodia has succeeded in
laying a foundation for future economic growth. It has been
transformed into a better place for at least some Cambodians
but not for the majority. The Cambodian people are starting
to emerge from a long, dark night. They urgently need warmth
and light in their tragic and precarious lives.
Notes
1. This portion of the paper draws heavily
on the following sources: World Bank, Cambodia: Agenda for
Rehabilitation and Reconstruction (Washington, DC: World Bank,
East Asia and Pacific Region Department, 1992); Food and Agriculture
Organization (FAO), Cambodia Agricultural Development Options
Review (Rome: FAO Center for Investment, 1994); and Asian
Development Bank (ADB), Cambodia: An Economic Report (Manila:
ADB, 1991).
2. Statistical data on Cambodia are unreliable
and therefore should be considered carefully. As of early1998,the
most current economic statistics available were for1996.
3. Global Witness, Corruption, War, and Forest
Policy--The Unsustainable Exploitation of Cambodia's Forests
(London: Global Witness LTD., 1996).
4. UNDP, Report of the Kampuchea Needs Assessment
Study (New York: UNDP, 1989).
5. Milton Osborne, Before Kampuchea: Prelude
to Tragedy (Boston: George Allen & Unwin, 1984), p. 192.
6. IMF, Cambodia (Washington, DC: IMF Economic
Review, 1994), p. 10. For a biased and sympathetic view of
the Khmer Rouge regime, see George Hilderbrand and Gareth
Porter, Cambodia: Starvation and Revolution (New York: Monthly
Review Press, 1976).
7. United Nations, The United Nations and
Cambodia, 1991-1995 (New York: United Nations, 1995), p.148.
8. William Shawcross, Cambodia's New Deal:
A Report (Washington, DC: Carnegie Endowment for International
Peace, 1994), p. 15.
9. World Bank, Cambodia: From Recovery to
Sustained Development (Washington, DC: World Bank, 1996).
10. For a good analysis of the impact of
adjustment policy on income distribution and other social
effects, see Lionel Demery et al., Understanding the Social
Effects of Policy Reform (Washington, DC: World Bank, 1993).
11. On the role of the government in industrial
policy, see Joseph Stiglitz, "Some Lessons from the East
Asian Miracle," The World Bank Research Observer, August
2, 1996.
12. For a good understanding of the impact
of corruption on the economy, see Poalo Mauro, "Why Worry
About Corruption?" IMF Economic Issues, no. 6, 1997.
Back to top | Contents
|
