|
|
|
|
Cambodia and the International Community: The Quest for Peace, Development, and Democracy
Frederick Z. Brown and David G. Timberman (eds.)
Asia Society
1998
The Challenge of Sustainable Economic Growth and Development in Cambodia
by 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.)
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.
Endnotes
Note 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). Back.
Note 2: Statistical data on Cambodia are unreliable and therefore should be considered carefully. As of early1998,the most current economic statistics available were for1996. Back.
Note 3: Global Witness, Corruption, War, and Forest Policy--The Unsustainable Exploitation of Cambodia's Forests (London: Global Witness LTD., 1996). Back.
Note 4: UNDP, Report of the Kampuchea Needs Assessment Study (New York: UNDP, 1989). Back.
Note 5: Milton Osborne, Before Kampuchea: Prelude to Tragedy (Boston: George Allen & Unwin, 1984), p. 192. Back.
Note 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). Back.
Note 7: United Nations, The United Nations and Cambodia, 1991-1995 (New York: United Nations, 1995), p.148. Back.
Note 8: William Shawcross, Cambodia's New Deal: A Report (Washington, DC: Carnegie Endowment for International Peace, 1994), p. 15. Back.
Note 9: World Bank, Cambodia: From Recovery to Sustained Development (Washington, DC: World Bank, 1996). Back.
Note 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). Back.
Note 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. Back.
Note 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.
Email this citation