Poor prognosis for Cambodia's ailing
economy By Alan Boyd
SYDNEY
- Months of political upheaval have weakened foreign
investor confidence in Cambodia's system of government
so greatly that global development agencies now doubt
its ability to nurse the ailing economy through
deteriorating external conditions.
With a
September deadline looming for ratification of World
Trade Organization (WTO) membership, the new coalition
under Prime Minister Hun Sen faces a credibility crisis
that could nullify any benefits from enhanced access to
global markets.
Hopes that the resumption of
parliamentary sittings after a 12-month impasse might
bring investors back have dissipated in the face of an
aggressive power grab by Hun Sen that has alienated the
main opposition faction, shredded the constitution and
jeopardized the monarchy.
"To my mind there is
no longer a question purely and simply of reforming to
keep the economy afloat. We have moved on to a point
where investors need reassurance that the politicians
are willing to, and indeed capable of meeting their
commitments to their trading partners under the WTO,"
said a trade analyst at a foreign embassy in Phnom Penh.
Hun Sen's Cambodian People's Party (CPP) formed
a coalition last month with the royalist Funcinpec
faction, ending a stalemate that began when the CPP
failed to win an outright victory in the 2003 general
election and refused to accept the outcome.
Funcinpec joined the CPP after being given a
share of cabinet posts, and Hun Sen then moved to quash
the only other tangible threat to his leadership by
accusing the opposition Sam Rainsy Party (SRP) of being
behind an unsubstantiated coup plot aimed at
overthrowing the government.
Shut out of the
National Assembly lawmaking committees, the SRP's
leaders have mostly gone into hiding amid reports of
threats on their lives and a series of physical attacks
on rural legislators.
Disillusioned over the
constant bickering and miffed at not being consulted by
Hun Sen, revered monarch King Norodom Sihanouk flew into
exile in China, though he later reneged on a threat to
abdicate. Sihanouk is expected to return home in late
September and may be the only figure capable of
smoothing the tensions.
The National Assembly
reconvened just in time to approve Cambodia's membership
to the WTO, which had been accepted by the global
trading body at a meeting in Cancun, Mexico, last
September.
Ratification was to have been
completed in March, but the government was unable to act
because of the political paralysis. It was granted a
six-month extension that expires at the end of next
month.
Without ratification, Cambodia will lose
crucial access to international textile and garment
markets once the existing quotas system is phased out
next year, removing its competitive advantage against
producers in China, Sri Lanka, Mexico and India.
Cambodia's 200 garment factories pay their
workers only US$40-$50 a month, well below comparable
rates in Asia and Latin America, but have higher port
handling charges and pay more for raw materials,
transport and electricity. As it is one of the two
remaining least developed countries in the region -
together with Laos - Cambodia already gets special
treatment under the generalized system of preferences
(GSP) and most favored nation (MFN) schemes.
Almost 30 countries offer MFN/GSP privileges;
however, these will not be available indefinitely. Even
WTO membership may not provide the expected buffer
unless there is a deeper political commitment.
In a report released this month, the
International Monetary Fund (IMF) warned that Cambodia's
garment manufacturers would probably continue to lose
business to China, whose clothing is already 20%
cheaper. Hundreds of European and North American firms
are relocating to China to take advantage of the quotas
shakeup, offering even greater efficiency gains and
lower production costs due to bigger economies of scale.
"It will take some time before Cambodia's
exports could recover, even if all identified reforms
are undertaken. Cambodia could earn some time if the US
takes recourse in either the so-called 'product
specific' safeguard against Chinese imports, available
until 2013, or the 'special textiles' safeguard, which
expires in 2008," the IMF report noted. "However, it
would be highly risky for the government to formulate
its economic strategy on the uncertain assumption that
the US will adopt either of these two options."
There are wider economic ramifications, as the
clothing industry last year accounted for more than 90%
of all Cambodia's export earnings, mostly in US and
European markets, while providing a livelihood for a
quarter of a million people.
Shipment value has
soared from $28 million in 1995, when Cambodia was still
struggling to rebuild its ravaged economy after more
than a decade of civil war, to $1.5 billion in 2003. A
key factor was the implementation of a 1996 bilateral
trade agreement with the United States that in effect
reduced the average US tariff rate for Cambodian
garments from 50-70% to 10-20%, boosting US imports from
$1 million in 1996 to $1.1 billion in 2003.
But
Cambodia's overall export performance has been declining
since the United States began offering preferential
access to Latin American nations under trade agreements
and brought other low-cost Asian producers such as
Vietnam into the MFN/GSP schemes.
Agriculture,
which employs 75% of Cambodia's workforce, is operating
well below potential. While industrial employment
averaged growth of more than 43% a year from 1997-2001,
the farming sector managed only 2% because of low
productivity, complex land-ownership laws and inadequate
infrastructure.
International aid, mostly from
Japan, Australia and Western Europe, accounts for 12% of
gross domestic product (GDP), but commitments are waning
as the government fails to heed reform pressures. In any
case, most has been earmarked for technical assistance.
Foreign direct investment has been falling
steadily since 1999, and global development agencies
have forecast that it will not return until the
political and investment environments have been improved
through sweeping bureaucratic and institutional reforms.
The World Bank identified Cambodia as one of the
most corrupt and inefficient countries in Asia in a
study released last week, noting that market impediments
had left labor productivity 62% below industry levels in
China and even 10% below those in Bangladesh.
"To benefit from [WTO membership], the Cambodian
government must implement reforms to decrease
corruption, strengthen the rule of law, and build the
institutions that will attract businesses and allow them
to flourish in the global economy," the report stated.
Corruption in Cambodia is endemic, with
"unofficial payments" there ranking the highest among
countries analyzed by the World Bank. The regulatory
system is laborious and costly; import clearances
require 45 separate documents and can take months.
WTO commitments will require the government to
adopt 46 individual pieces of legislation, ranging from
judicial reform to trade-related property rights. Though
Cambodia appears likely to make the deadline, there is
widespread skepticism that these edicts will be properly
enforced.
The latest reforms package, belatedly
passed by the National Assembly after it reconvened this
month, did not address underlying structural defects and
has probably come too late to avert a drastic economic
slowdown. With Asian growth in general expected to level
off as higher oil prices bite, the IMF forecast growth
of only 1.9% for Cambodia next year, when the garment
quotas are phased out, and said the medium-term outlook
was grim. GDP is expected to expand by 4.3% this year,
compared with 5.2% in 2003.
"Even under the
best-case scenario, growth could reach the annual ...
target of 6-6.5% only by 2009. This achievement presumes
that various challenges, including those noted in this
statement, are properly met," the IMF cautioned.
"Otherwise, a recovery from the negative shock of the
quota elimination may not be possible, and growth could
be limited to 2-4% annually in the medium term."
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