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Economic and Political Review of Selected Asian Countries

Vietnam Cambodia Japan
Bangladesh Thailand Indonesia
Gold - was lenin right? PhilippinesSingapore
Inside Asia ReportChina - US Relations Enter A New EraAsian Growth Prospects

Prepared for Asia and Pacific Review 2001

Political developments
Cambodia's turbulent past needs no recalling. It had the hardest transition from colonialism as a result of its unwilling involvement in the Vietnam War and then as a pawn in the Vietnam-China power struggle after the fall of the Lon Nol regime in 1975.

The UN-led transition to democracy after 1993 equally did not proceed peacefully at first. However, since 1998 political stability has increased as the Hun Sen-led Cambodian Peoples Party has consolidated its power and the Royalist FUNCINPEC has acquiesced in a junior position in an unlikely coalition. A third party led by a corruption fighter, former Finance Minister Sam Rainsy, also has delegates in the Parliament and acts as an activist ginger group.

The economy has benefited from this era of stability and the international donor community has responded with generous quantums of assistance to spur development, maintain peace and assure that the development is politically - i.e., democracy is maintained even enhanced and governance improved - and environmentally sustainable.

There is a growing determination to make sure the horrors of the past remain in the past and to enjoy the new, limited prosperity. With respect to the past, there is some conflict between the Cambodian authorities and the international community. Given the fact that many of today's leaders, in both main parties, have chequered pasts and some degree of collaboration with the Khmer Rouge, their desire to focus on the future is understandable. Overly aggressive Western demands could possibly upset today's uneasy balance.

The United Nations and Cambodian authorities have agreed, in principle, that a tribunal to try war crimes will be established. There would be two prosecutors: one Cambodian and one foreign. Originally, the UN was insisting on just one prosecutor, a foreigner that was an obviously unacceptable slight on the country's sovereignty. In the event of disputes a panel of judges with a Cambodian majority would adjudicate.

There is still no agreement on who might be tried. A particular source of friction is over Ieng Sary, the former number three in the Khmer Rouge and the most senior official still alive. Hun Sen wishes to protect him, given his help to the regime after leaving the Khmer Rouge.

The local, or commune, elections are supposed to be held in 2001 after multiple delays. They could be temporarily disruptive since violence always seems to accompany Cambodian elections. The small opposition Sam Rainsy Party is likely to be a focus of dissent and government inspired violence during any election campaign.

International relations
Cambodia has been a member of ASEAN since 1998. Tariff barriers with other members are supposed to be reduced by 2008. Along with Vietnam, the country is now also showing interest in joining the World Trade Organisation.

Economic developments
The economy, until the most severe flooding in 70 years knocked it off course in October 2000, was well on the way to growth in excess of the 5 percent achieved in 1999. In the end, the weather meant the final figure was around 4.5 percent.

Export growth grew at a powerful 28 percent rate in 2000. Textiles and garments were the primary drivers with apparel receiving a 5 percent quota increase to the United States and unlimited access to the EU until 2002. In addition, the country's traditional commodity exports, including rubber, palm oil and timber benefited from firmer prices.

Tourism arrivals were also on a strong growth path growing by 42 percent in the first half of the year and almost certainly setting new records for the full year. The improved political stability and the recovery in the regional economies were important in the improved tourist figures. However, the conversion of the Siem Riep airport to an international arrival port was also very important. Siem Riep is close to the outstanding attraction of Angkor Wat. Considerable growth remains for this item since several other foreign airlines are believed to be interested in flying into Siem Riep in the near future. This is a particularly attractive locale for Japanese tourists.

The contribution of foreign assistance to the small Cambodian economy should not be underestimated either. In May 2000, the Consultative Group of bilateral and multilateral donors pledged a further USD 542 million in assistance. In percentage terms, this is probably the highest in Asia. This overseas largesse reflect the international community's increased level of comfort with the Hun Sen led Government. When the original "coup" was effected in 1997 relegating Prince Ranariddh's FUNCINPEC to s secondary role in the Government, the international community had reduced its lines of assistance.

As in much of the region since the Asian crisis, private investment has been disappointing in general. Investment overall was about 15 percent GDP in 2000. Nevertheless, there are signs of a pick up in selected areas such as hotels, power and garments. Selected companies from a variety of regional countries are making targeted investments but there is no boom. But a further sign of the increasing normality is that some large multinationals, such as Shell Oil, are actively and investigating the country's potential. Foreign direct investment is estimated around 4 percent GDP.

The Government deficit, before aid, expanded to 6.9 percent up from 4.1 percent with expenditures reaching 18.7 percent GDP. However, foreign assistance more than covered this deficit so that domestic Government debt fell and foreign exchange reserves rose to about USD 500 million. This relatively comfortable state was helped by strong harvests and, as a result, the inflation rate was negligible in 2000 and an improvement on the previous year's 4 percent. The local currency that a few years ago was suffering from hyperinflation remained stable against the US dollar.

The outlook for 2001 and beyond
The political problems of the past thirty years have meant that economic development has regressed until very recently. Even in the period since 1993 growth in per capita incomes has been of the order of 1.4 percent per annum, a fairly indifferent achievement. That, however, could be changing and growth in the range of 5.0-6.0 percent in 2001-2002 is achievable, implying per capita income growth of a much more respectable rate over 3 percent.

The garment sector is in a favourable position for the next few years, even if there is some slowdown in consumption in the rich countries. Tourism, likewise, is set to expand assuming the regulatory climate remains favourable with the ageing populations in the developed economies will provide a ready market. And agriculture has room to expand further as increased investment is made in rural infrastructure.

The country has an understandable reliance on large-scale foreign assistance at present. That, of course, can be a dangerous situation because fads and chosen countries do change over time. It is vital that the country use the funds productively when they are available. Cambodia's needs are enormous. They encompass the hard infrastructure sides of power, telecommunications and roads as well as the softer human development of health and education as well as areas such as efficiency and effectiveness of the public sector and properly implementing the rule of law.

Cambodia is fast rebuilding its population and has fully recovered the 3 million it lost to the genocide of the Khmer Rouge. But the result of this young population following the devastation of the Khmer Rouge years is that the country's human indicators on health, (HIV/AIDS, life expectancy), education etc. are far below its ASEAN compatriots. Continued development requires an aggressive attack on these issues.

The Government is reasonably devoid of ideology and hence more flexible to the cause of reform than some of its Communist neighbours. Starting from a revenue base of about 6 percent of GDP in 1993 the Government has increased this to over 11 percent whilst expenditures have already increased to 18 percent GDP, which is already in line with its ASEAN neighbours. To finance its development without the same reliance on foreign assistance long term it will be necessary to improve the revenue/expenditure balance.

The demobilisation program can make a valuable contribution in this regard. Defence expenditures have been reduced from 4.3 to 3.6 percent of GDP from 1998 to 2000. This is in line with IMF conditions. There is still room for further potential savings in this item of 2 to 2.5 percent GDP.

Corruption and Good Governance
Cambodia with its casinos and a King whose first love was producing movies, enjoyed a reputation as the Wild East in the 1955-70 period. Since regaining its autonomy in 1993 much of that reputation for anything-goes has been restored, even enhanced, as other centres that enjoyed more normal development in the interim have moved up the development ladder. Alongside a healthy respect for the free market and the vitality that engenders has been a growth in the underside of capitalism manifesting itself in areas such as drug trafficking, money laundering, the sex trade etc. In these days of the global economy, such issues easily become foci of attention from the international community in general and NGOs in particular.

Progress in these areas can only be slow despite the best wishes of the donor community. The bureaucracy is ill trained and badly paid and corruption is endemic amongst them. In these circumstances, in common with much of developing Asia, simple concepts such as conflicts of interest between official duties and private interests do not figure in the consciousness of officials. Regrettably, there is anecdotal evidence that such problems have been increasing in Cambodia eroding its cost advantages from an easier regulatory climate with a heavier informal fee structure.

The legacy of the Khmer Rouge remains in the lack of a qualified administrative cadre. Streamlining the bureaucracy is difficult because of political considerations and the adverse social impact of large-scale redundancies.

The demands of the donor community for improved governance are persistent but lack real teeth. Indeed, they are probably quite realistic in this regard. However, the demands of foreign NGOs and domestic critics such as the Sam Rainsy Party are likely to be louder and more persistent.

Country risk
Political:Fair (and improving)
Regional:Fair (for Indochina subregion)
Stock Market:N/A

After three decades of turbulence, Cambodia is settling into a much quieter period. The growing dominance of the CPP with the monarchist FUNCINPEC increasingly resigned to a position as a junior partner is assisting this process. New national elections are not scheduled until 2003 although communal elections are expected in 2001.

If political stability can be maintained then Cambodia can make further progress by economically leveraging off its tourist and other assets as a part of the greater Indochina experience. The country must develop a strategy to wean itself gradually from its present heavy dependence on large-scale foreign assistance flows. Strategically, Cambodia is at the crossroads of Indochina, a position that has historically made it vulnerable to the desires of others. As a member of ASEAN it has to balance its interests between its ASEAN neighbours Thailand and Vietnam, and to the regional giant China.

William R. Thomson                               13 March 2001
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