1. L’Economie du Cambodge
Depuis le début des années 90, le Cambodge a réalisé de gros progrès, mais l’effort de réforme doit être soutenu et renforcé dans les domaines essentiels pour promouvoir la croissance soutenue et le développement durable. Apr1es plus de trois décennies de guerres, la paix est retrouvée et renforcée. La confiance s’est accrue, et les résultats économiques se sont améliorés durant les dix dernières années, avec une croissance annuelle de 6,5% en moyenne, grâce à une politique budgétaire prudente, une gestion monétaire saine et des réformes structurelles appropriées.
Cependant, le Cambodge, avec le PIB par habitant de 300 dollars, demeure un des pays les moins avancés. Il reste beaucoup à faire pour assurer une croissance économique forte et durable, durant les années à venir, dans un climat mondial et régional de plus en plus difficile. Les succès des dernières années n’ont pas suffit à masquer les déséquilibres foudroyants qui les ont accompagnés : la stagnation du secteur agricole, l’inégalité croissante entre les zones urbaines et les zones rurales, les problèmes sociaux liés aux paysans sans terres et la jeune population en quête du travail.
Il est donc essentiel que toutes les parties prenantes du Cambodge poursuivent leur effort de réforme dans les volets structurels essentiels pour répondre aux besoins de développement:
D’abord, la stabilité politique, le respect de l’ordre public et les garanties d’application des lois, et d’administration doivent être renforcés. Dans le domaine de la démocratie et de la promotion des droits humains, le Cambodge a renforcé son propre système de valeurs politiques. Les différentes élections sont régulièrement organisées dans la transparence et l’équité. Les libertés individuelles et collectives sont garanties. Les partis politiques, les syndicats ainsi que la presse fonctionnent librement dans la jeune démocratie. En outre, le Cambodge a marqué son adhésion au dispositif de protection internationale des droits de l’homme, en signant et ratifiant la plupart des accords en la matière. L’éducation aux droits et devoirs du citoyen constitue un volet important de l’action gouvernementale. Cependant, les risques de dérapage dans le maintien de l’ordre politique et social subsisteront dans les années à venir, en raison de la fragilité du tissu politique, social et éthique du Cambodge, due au fait que la culture de coopération et de l’entente politique sont encore naissantes, et par suite des déficiences de la capacité institutionnelles. La société cambodgienne est cassée en deux: les riches et les pauvres. Le Cambodge doit maintenir la stabilité macroéconomique et la croissance économique pour faire reculer sensiblement et durablement la pauvreté et les fruits du développement doivent être partagés d’une manière équitable.
En deuxième lieu, de grands progrès ont été enregistrés ces dernières années et sont à porter incontestablement au crédit du gouvernement : la grande liberté dont jouit la presse, fut-elle étrangère, la liberté totale des cultes, la latitude a bien des égards exceptionnelle laissée aux très nombreuses organisations non gouvernementales, nationales ou étrangères, intervenant dans les domaines les plus variés. Beaucoup reste cependant à faire en matière de lutte contre les trafics d’êtres humains, notamment des femmes et des enfants. De même, il convient de mentionner le problème des paysans sans terre.
En troisième lieu, la période 1993-2003 a vu la consolidation des institutions et l’amélioration des politiques économiques et financières. Néanmoins, beaucoup plus d’efforts doivent être déployés pour que les institutions mises en place fonctionnent régulièrement et que les actions concrètes suivent les stratégies et les politiques engagées. Les réformes menées ces dernières années et à poursuivre durant les années à venir doivent renforcer l’efficacité des institutions politiques et économiques de l’État. Face à une compétition virulente dans la région, il est également nécessaire de promouvoir l’éducation et la formation technique et professionnelle, améliorer l’accès aux soins de santé de qualité, former une main d’œuvre qualifiée, veiller à vulgariser les nouvelles technologies de l’information et de la communication pour en faire des outils au service du progrès. Le Gouvernement royal s’attachera à mettre en œuvre les stratégies et les programmes dans ces domaines.
En quatrième lieu, qu’il s’agisse de la protection et de la mise en valeur des ressources naturelles qui doivent apporter une contribution au développement du pays. L’accès équitable aux ressources doit être assuré pour garantir la cohésion sociale et la prospérité partagée. En fait, il est nécessaire de prendre des actions qui concrétisent la volonté de construire un développement durable à travers la protection de l’environnement et les champs de la coopération technique et financière, culturelle et universitaire, politique et institutionnelle, technologique. Un mécanisme transparent doit être mis en place pour mettre en œuvre un sous décret sur la concession sociale pour renverser la tendance des paysans sans terre.
En cinquième lieu, également de caractère d’accumulation du capital, c’est l’accent qu’on met sur l’épargne intérieure et ressources financières intérieures comme instrument indispensable pour promouvoir l’investissement bien orienté et productif. En même temps, parmi les facteurs immédiats du développement économique, l’offre d’entrepreneurs, d’administrateurs capables et des connaissances techniques occupe une place de premier rang, au moins égale à celle du capital. On a souligné l’importance du capital humain et des investissements consacrés aux hommes en tant qu’agents productifs et l’introduction de techniques perfectionnées. Le Cambodge a vu émergé une classe moyenne soucieuse de renforcer sa capacité de relever le défi du développement. Néanmoins, la classe capitaliste du Cambodge doit rattraper celle de la région en ce qui concerne la capacité institutionnelle et technique.
En sixième lieu, la mondialisation et les relations économiques extérieures doivent soutenir le développement par le biais de: (i) l’aide publique au développement; (ii) investissement étranger direct; et (iii) commerce extérieur. Faudrait-il rappeler, de surcroît, les activités et les résultats des réunions du Groupe Consultatif pour le Cambodge, ou des Missions du FMI, de la Banque mondiale, de la Banque asiatique de développement, des autres bailleurs de fonds bilatéraux ou de l’intégration en sein de l’ASEAN, de l’ASEAN plus trois et l’adhésion à l’Organisation mondiale du commerce (OMC). Ce sont autant de mécanismes où le Cambodge prépare les travaux, conduit les débats ou les négociations et conclut les accords pour promouvoir le décollage économique.
Enfin, tous ces rapports et ces analyses, l’infrastructure économique et sociale comme les services publics qui englobent l’enseignement, la santé, les transports, les communications, l’adduction d’eau et d’énergie, les systèmes d’irrigation et de drainage, la qualité des institutions et la bonne gouvernance jouent un rôle prépondérant pour attirer les investissements privés en vue d’assurer le développement durable.
Le présent ouvrage essaye de faire la synthèse de la lutte menée par le Cambodge pour promouvoir le développement durable et la prospérité équitablement partagée, ainsi que des stratégies et politiques de réformes dans les secteurs essentiels qui les ont sous-tendus, et des résultats qui en ont découlé. Il met naturellement l’accent sur les réalisations du Cambodge ces 10 dernières années et aussi sur les problèmes à résoudre dans les années à venir.
L’ouvrage a été construit sur les axes majeurs du développement : (i) l’aperçu général sur les conditions géographiques et climatiques du Cambodge ; (ii) la population du Cambodge ; (iii) le cadre macroéconomique ; (iv) l’agriculture et le développement rural ; (v) l’industrie et le développement du secteur privé; (vi) les services ; (vii) l’infrastructure et (viii) la valorisation des ressources humaines.
En définitive, au delà de la satisfaction personnelle d’avoir engagé dans le processus de développement, je reste convaincu que c’est les cambodgiens qui doivent être le moteur de l’action sur le terrain pour promouvoir le développement au Cambodge. Donc il faut tout faire pour renforcer la capacité des cambodgiennes et cambodgiens à mieux faire face aux défis du développement.
HANG CHUON NARON
Phnom Penh, janvier 2005
2. Essais économiques
Les essais économiques du Dr. Hang Chuon Naron vont beaucoup plus loin que leur appellation ne le laisse suppose. En dépit de la naturelle modestie de leur auteur, il s’agit de travaux solides qui constituent une référence incontournable pour tous ceux qui veulent mesurer et comprendre la surprenante performance économique du Cambodge, apprécier son degré de durabilité et dresser un tableau raisonné des risques et opportunités qui vont déterminer l’avenir du pays.
Economiste qu’une longue pratique des chiffres dans un paysage statistique encore perfectible a rendu prudent, le Dr Naron brasse avec dextérité toutes les données disponibles pour donner de son pays, qui n’est simple qu’en apparence, une image aussi fidèle que possible. Soucieux de pédagogie et de formation, dans un pays où l’activité économique tend depuis quelques années à croître plus vite que les capacités institutionnelles et humaines susceptibles d’en maîtriser et orienter le cours, le Dr. Naron présente ses analyses avec précision et clarté selon des schémas logiques qui empruntent aux meilleures écoles de culture anglo-saxonne et française. Il nous fait d’ailleurs l’honneur de publier ce recueil en français, témoignant ainsi de son propre attachement mais aussi de celui du Gouvernement Royal du Cambodge en général et du Ministre d’Etat chargé de l’Economie et des Finances en particulier à cette langue.
Attaché au concret, désireux de ne pas déconnecter la macro de la micro économie, en dépit de ses hautes et larges responsabilités au MEF et au SNEC, le Dr. Naron ne cesse de rester ancré dans l’économie réelle et de montrer à ses lecteurs que la croissance résulte d’une alchimie réussie entre réglage monétaire, discipline budgétaire et fiscale et durabilité des dynamiques sectorielles. Sous cet angle, il n’hésite jamais à se plonger dans le détail des forces et faiblesses des principaux moteurs de l’économie cambodgienne : tourisme, confection, construction. Il restitue aussi à l’agriculture – qui représente avec presque 1/3 du PIB et plus des 2/3 de la population active un enjeu économique majeur et un défi social crucial – l’importance qui est la sienne mais qu’occulte parfois la fascination, par ailleurs assez légitime, qu’exercent sur nombre d’observateurs les politiques néolibérales d’ouverture radicale aux échanges et leur impact sur les autres piliers de la croissance.
Enfin et peut-être surtout, l’analyste engagé qu’est le Dr. Naron n’oublie pas les responsabilités dont il est porteur : ses observations s’inscrivent dans le monde réel ; et ses préconisations appartiennent au monde du possible. Il sait qu’il convient, dans ce pays en transition économique récemment rendu à la paix civile, où les effets de plusieurs décennies de déchirement et les stigmates de la pauvreté extrême qui prévalait il y a une douzaine d’années n’ont pas été tous résorbés, d’agir avec modération, pas à pas mais globalement, à tous les niveaux possibles.
Le lecteur trouvera donc dans ces essais ample matière à réflexion sur les facteurs matériels et institutionnels essentiels de compétitivité qui détermineront la poursuite de la croissance ainsi que sur le juste chemin dont l’économie et la société cambodgienne ont besoin.
Conseiller Economique et Financier
Chef des missions économiques françaises au Cambodge et au Laos
3. Macroeconomic Developments in Cambodia in 2007
This paper outlines the major aspects of Cambodia’s recent macroeconomic performance, particularly the developments in 2007. It also reviews the policy developments and reform initiatives being undertaken in the financial sector and in public finance, particularly public financial management. The success in implementing financial sector reform will be crucial for integrating Cambodia’s rapidly modernizing economy with the rest of the world. Effectiveness and efficiency in resource mobilization and public service delivery lie at the heart of the reform of public finance. The progress in achieving the MDGs and strengthening infrastructure can be sustained only if public finance reform proceeds as planned. Hence the prospects of sustaining Cambodia’s economic growth are closely tied to the successful implementation of reforms in these two areas.
2. An Overview of Recent Macroeconomic Developments
After climbing to an all time record of 13.4 per cent in 2005, growth of real GDP slowed to 10.4 per cent in 2006 and was estimated at 9.6 per cent in 2007. Mainly due to the sustained high growth poverty incidence dropped from 35% in 2004 to an estimated 31% in 2007. During the decade ending 2007, Cambodia doubled the per capita GDP to US$589. Nevertheless, the size of Cambodia’s Gross Domestic Product is still relatively modest at US$8.4 billion. Cambodia’s per capita GDP is expected to reach the US$1,000 by 2015, possibly even earlier when oil and gas production comes on stream. With continued real GDP growth of 10 per cent, Cambodia’s per capita GDP is expected to reach US$1,000 by 2014, US$2,000 by 2023 and US$3,000 by 2028. However, with real GDP growth of 7 per cent, Cambodia’s per capita GDP is expected to reach US$1,000 only by 2018 and US$1,500 by 2025.
Economic performance in 2007 though somewhat diminished compared with 2005-2006 was still impressive. This underscored the increasing resiliency of the economy and showed that the performance during 2005-2007 was not fortuitous but reflected the underlying strength of the country’s economic fundamentals. Important contributions for the strong economic performance in 2007 came from steady growth in agriculture (4.0 per cent), sustained growth of tourism receipts (10.2 per cent), the continued growth in garment exports (10 per cent) and the continued expansion of financial services (22.2 per cent) and construction activities (4.3 per cent).
Fiscal policy continued to be prudent in 2007. While the current budget surplus increased from 1.7 per cent in 2006 to 2.3 per cent in 2007, the overall budget deficit declined to 1.5 per cent reflecting ongoing budget consolidation. As the result of the steadfast implementation of the Public Financial Management Reform Program, domestic revenue increased by 1.5 per cent of GDP during 2006-2007 to reach 11.3 percent of GDP in 2007, while expenditure was maintained at a low level. Tax revenue increased by 36%. Cash in the government coffers has increased by 200 times in early 2008, compared to 2003.
Monetary developments in 2007 reflected the continued improvement in external position. Credit to the private sector rose by 71 per cent while M2 increased by 63 per cent. The key objectives of monetary policy were maintaining price stability and bolstering international reserves. These were substantially achieved, as Cambodia’s international reserves increased by US$600 million in 2007 to US$1.7 billion. Inflation was contained to an estimated 5.9 per cent, despite high oil prices.
The deficit in the current account of the balance of payments declined from 7.2 per cent of GDP in 2006 to 6.7 per cent in 2007. However, the surplus in the overall balance of payments continued to increase and amounted to US$290 million or 3.4 per cent of GDP, mainly due to the strong inflow of capital receipts.
2.1 Real Sector Performance in 2007
Two key features of economic performance in recent years are the increasing diversity of the sectors contributing to economic growth and the robust contribution of the agriculture sector to economic growth.
Real GDP growth averaged 11 per cent during 2004-2007. This performance is underpinned by the strong support extended to agriculture and the garment sector by the Royal Government of Cambodia. However growth has not been centered only on these two sectors. Tourism and construction are also emerging as important growth centers in the economy. Overall recent economic performance has been characterized by balanced contributions from agriculture, manufacturing, construction and services. This was clearly evident in 2007.
Overall, economic growth over the last decade has raised living standards and reduced poverty headcounts. When comparing living standards within the same geographical frame in 2004 and 1993/4, average per capita household consumption is found to have risen 32% in real terms (to 2,932 riels per day in 2004). In Phnom Penh and other urban centers the rise has been considerably more dramatic.
Thus, the decline in poverty has been significant and widespread. As average per capita consumption has risen, many more households now have per capita consumption values above the poverty line, resulting in falling poverty headcounts.
Within the geographical sampling frame of the first survey, the headcount fell from 39 to 28 percent. Backward projection on the basis of this observed trend suggests that the national poverty rate fell by 10-15 percentage points over the last decade (from a projected 45-50 percent in 1993/4 to a measured 35 percent in 2004). Moreover, poverty is very likely to have fallen further in 2005 and 2006 due to the exceptionally high growth rates of those years, especially in agriculture. Projections put the poverty rate at about 32.5 percent in 2006 and 31 percent in 2007.
At the same time, inequality in Cambodia has increased over the last decade. The Gini coefficient for per capita household consumption rose from 0.35 to 0.40. Inequality has been increasing during the years in several dimensions – between rich and poor; different regions; and urban and rural areas and also within the rural areas.
The average living standard of the richest fifth of Cambodians in 2004 was 45% higher than it was a decade ago; but living standards for the poorest fifth had gone up by only 8%. In addition, Cambodia has experienced regional differences in poverty reduction and urban-rural gap wideness. Poverty has fallen at much faster rate in urban areas such as Phnom Penh and costal provinces than in other regions of Cambodia. In some remote and mountainous areas poverty incidence has even increased.
After strong growth in 2005 (15.7%) and 2006 (5.5%) agriculture grew by 4.0 per cent in 2007. Rice production increased by 4.9%, mainly due to favorable weather conditions and measures taken by the RGC to build irrigation facilities and pumping stations for increasing the area under irrigation. Cambodia produced 6 million tons of rice, of which a rice surplus of 2 million tons in 2007 was exported.
Livestock grew by 6.7 per cent in 2006 and Fisheries by 0.8 per cent. The relatively low performance of fisheries is disappointing since the government has put considerable emphasis on the revival of this key sub sector which provides livelihoods for the poor and marginal sections of society.
Industry’s growth continued to be strong at 7.5 per cent. The key contribution came from construction and mining activities, as well as the exports of textiles and garments. The textile and garment sub sector, which accounts for nearly half of the value added of the industrial sector grew at a slower pace.
In order to reduce the costs of doing business, the RGC has exempted the garment industry from the corporate tax. The tax foregone amounts to US$100 million per annum.
The mining sub sector grew by 5.5 per cent. The major activities contributing to this growth were the exploration of oil and gas in the Gulf of Thailand, the exploration of bauxite and gold in the Northeast, and the establishment of an iron ore extracting company in Preah Vihear Province, in the northeastern part of Cambodia.
Construction activities showed signs of slowing down. Construction grew by only 4.3 per cent in 20071. In particular, construction activities in Phnom Penh and Siem Reap continued to expand, albeit at a slower pace. New township projects and the planned construction of two bridges across the Tonle Sap River in Phnom Penh, as well as the establishment of Special Economic Zones would give a strong boost to construction in the medium term. The new township projects include the Koh Puos Development Project, the Camco City Project, the Boeung Snor Development Project, the Sunway City Project, the Boeung Kak Development Project and the Special Economic Zone developed by the Attwood Group.
2.4. The Services Sector
Services grew by 10.0 per cent in 2007, the same rate as in 2006. All the sub sectors of services have shown robust growth. The expansion of the tourism and hotel industry continued, with a growth rate of 10.2 per cent. In 2007, a total of 2 million tourists visited Cambodia.
The RGC has put emphasis on strengthening the linkages between tourism and rural development so that the poor could benefit from the expansion of tourism. The RGC intends to transform the entire Siem Reap region into a green belt so that strong backward linkages of tourism with agriculture could be established.
The transport and communication sub sector grew moderately by 6.6 per cent. After completing the rehabilitation and reconstruction of the national road network, the RGC has turned its attention to the rebuilding of provincial and rural road infrastructure for bringing the rural areas of Cambodia into the mainstream of the economy.
The telecommunications sub sector showed a robust growth, especially the market of mobile phone services. However, the telephone tariffs in Cambodia are high and discourage the rapid growth of telecommunications.
Financial services grew by 22.2 per cent. The main contributor was the rapid growth of commercial banking services. Real estate services increased by 10.7 per cent reflecting the surge in private sector construction. Trade services grew moderately by 9.4 per cent.
2.5. External Sector Performance
The main developments in the external sector in 2007 were the continued shrinking of the current account deficit as a proportion of GDP, a sharp increase in service receipts and foreign direct investments (FDI), and a substantial increase in foreign currency deposits held by commercial banks with the National Bank of Cambodia. Official transfers decreased slightly. As a result of these favorable external sector developments the overall balance of payments and the gross international reserves continued to improve in 2007.
2.5.1. Exports and Imports
Exports increased by only 3 per cent from US$3.7 billion in 2006 to US$3.8 billion in 2007. Garment exports experienced a slowdown in the fourth quarter of 2007. Even though garments exports continued to increase in 2007, the pace of growth has leveled out. Garment exports account for nearly 70 per cent of Cambodia’s total exports. Innovative measures should be implemented in order to maintain the growth of garment exports.
The US remained the top export market, accounting for 70 per cent of Cambodia’s total exports, followed by the European Union – 21 per cent and Canada – 4 per cent. Re-exports were estimated at US$184 million. Vietnam has become a strong competitor for Cambodian garment exports to the US. Garment exports from Vietnam to the US have increased rapidly at the expense of China, which has started to rely increasingly on domestic markets for economic growth.
Total imports increased by 12 per cent from US$4.7 billion in 2006 to US$5.3 billion in 2007, mainly due to the growth in the imports of petroleum products and intermediate products for the production of garments.
2.5.2. Trade Balance
Cambodia’s trade deficit in 2007 increased by 20 per cent to US$1.5 billion, mainly due to the increase in the value of petroleum imports.
2.5.3. Services and Transfers
Services account increased by 27 per cent. Net services were estimated at US$644 million in 2007, compared with US$506 million in 2006. This increase was mainly due to the growth in tourism receipts (US$1.1 billion).
Private transfers increased by 5 per cent from US$315 million in 2006 to US$332 million in 2007, while the official transfers in the form of grants, food aid and project aid declined by 7 per cent from US$449 million in 2006 to US$416 million in 2007.
2.5.4. Current Account
The current account deficit increased from 1 per cent of GDP in 2006 to 1.8 per cent in 2007. Excluding official transfers, the current account deficit decreased from 7.2 per cent of GDP in 2006 to 6.7 per cent in 2007.
2.5.5. Capital Account
The financial account increased by 39 per cent from US$324 million in 2006 to US$451 million in 2007. The capital transfers in the form of medium and long term loans increased by 41 percent from US$123 million in 2006 to US$173 million in 2007.
The influx of private capital in the form of FDI increased by 50 percent, from US$475 million in 2006 to US$711 million in 2007. The increase in investments reflects the confidence of investors in the political and macroeconomic stability of the country.
2.5.6. Overall Balance
In 2007 the overall the balance of payments was in surplus by US$290 million (3.4 per cent of GDP in 2007 compared with 2.8 per cent in 2006). This outcome was underpinned by the increase in tourism receipts (US$1.1 billion), the surplus of both private and official transfers (US$748 million), the increase in concessional loans, and the increase in foreign direct investment (US$711 million).
4. Introduction into Insurance
Cambodia has made tremendous efforts to develop its financial sector, especially the insurance sector. Although the first insurance company was established here in 1993, real development of the insurance industry in Cambodia started only in 2000, when the Law on Insurance was enacted. In 2001, the Royal Government of Cambodia, with the technical assistance of the Asian Development Bank, prepared and adopted the Financial Sector Blueprint for 2001-2010, which provided a roadmap for the development of the insurance sector in Cambodia. In 2003 the government issued license insurance companies.
I have ventured into this previously unknown to me specialized area of finance, when I was assigned by the management of the Ministry of Economy and Finance to establish and operationalize the national reinsurance company, Cambodia Re. I felt that insurance was too technical and without good knowledge about insurance, it would be hard to manage Cambodia Re. I therefore decided to explore the techniques of insurance.
The paper contains seven sets of technical notes covering fundamental areas of insurance. These notes were taken during my preparation for eight insurance examinations for the Advanced Diploma on Insurance, leading to the Associate of the Malaysian Insurance Institute and eventually the Chartered Insurance Institute in the United Kingdom.
It was felt that these notes could be useful to those who wants to gain insight into insurance or who also wants to take examination on insurance. I therefore decided to publish these notes in the form of a manual entitled “An Introduction into Insurance”. I would like to express my profound gratitude to my family for their understanding and to all my friends for their support during the last two years, 2006-2007, when I prepared for the insurance examinations. I wish all those who want to sit for insurance exams a great success.
Hang Chuon Naron, Ph.D., ACII, AMII
Risk and Insurance
1. The Nature of Risk
Risk is different from chance. Risk implies some form of uncertainty about an outcome, which is not favorable; risk implies both doubt about the future and the outcome leaves us in a worse position. Chance also implies some doubt about the outcome, which is favorable: chance of passing an examination.
Risk implies some form of uncertainty about an unfavorable outcome or the future, which could leave us in a worse position than at the moment. For example, the risk of being in an accident or the risk of a fire. Risk consists of three components:
- Firstly, there is the idea of uncertainty, which is at the core of the concept of risk. It implies that there is some doubt as to whether the event will occur or not, as a result of imperfect information about the future, leading to doubt, hence uncertainty about the future;
- Secondly, there is the implication that there are differing degrees of risk. Thus, risk is a combination of the likelihood of an event and the severity of the damage caused should the event occur, such as the frequency of damage by flooding and the severity of damage.
- Thirdly, there is the idea of a result having been brought about by a cause or causes.
Chance also implies some doubt about the outcome, which is favorable: the chance of winning a bet or the chance of passing an examination.
1.1. The Meaning of Risk
Risk implies some form of uncertainty about an unfavorable outcome or the future, which could leave us in a worse position than at the moment, such as the risk of being in an accident or the risk of a fire. Risk consists of the following components:
Uncertainty: there is the idea of uncertainty, which is at the core of the concept of risk. It implies that there is some doubt as to whether the event will occur or not, as a result of imperfect information about the future, leading to doubt, hence uncertainty about the future;
Level of risk: there is the implication that there are differing degrees of risk. Thus, risk is a combination of the likelihood of an event and the severity of the damage caused should the event occur, such as the frequency of damage by flooding and the severity of damage. One way to look upon the actual level of risk is to compare perception against the known or real risk. But there is a tendency to overestimate low frequency events and to underestimate high frequency events; and
Peril and hazard: The peril is the prime cause. It is what will give rise to the loss. For example, flood is the peril and the proximity of the house to the river is the hazard. Storm, fire, theft, motor accident and explosion are perils. Hazards are factors that may influence the outcome. Theses hazards are not themselves the cause of the loss, but they can increase or decrease the effect should the peril operate. The underwriter has the task of assessing the hazards.
Hazards can be physical or moral:
- Physical hazard relates to the physical characteristics of the risk, such as the nature of the construction of a building, i.e. wooden house, security protection of a shop or factory, or the proximity to a river bank.
- Moral hazard concerns the human aspects, which may influence the outcome. This refers to the attitude of the insured person: (i) lack of care on the part of the insured; (ii) regular claimant or people who look at insurance as investment; and (iii) dishonest insured, dishonest claimant.
The Heinrich Triangle shows that for every one major injury at work, there are thirty minor injuries and three hundred non-injury accidents. The triangle was the result of looking at several thousand incidents at work. The construction industry has a very narrow Heinrich Triangle – This means that in the construction industry, accidents in general cause minor and major injuries and there are less non-injury accidents than in other industries.
1.2. Classification of Risks
Risk can be classified as follows:
- Financial and non-financial risks—This approach relates to the outcome rather than the nature of risk itself. Financial risk is the risk with the outcome can be measured in monetary terms and where it is possible to place some value on the outcome. For example, it is possible to measure in financial terms the loss related to the damage to property, theft of property or lost business profit following a fire. Non-financial risk is the risk where the outcome cannot be measured in financial terms. For example, the selection of a career, the choice of marriage partner or having children can be classified as non-financial risks, as the outcome is not measurable financially.
- Pure and speculative risks—The second approach to risk classification also concerns the outcome, but where there is only the possibility of loss and gain. Pure risks involve a loss or, at best, a break-even situation. The outcome can only be unfavorable or leave us in the same position. The risks of a motor accident, fire, theft or injury, storm, explosion, malicious damage, liability, machinery breakdown are pure risks with no element of gain. Speculative risk involves a situation where there is the chance of gain. Investing money in shares, pricing the products, making marketing decisions and providing credit to customers can be classified as speculative risks. These actions may result in a loss or a break even situation or a prospect of a gain. Speculative risk involves a situation where there is the chance of gain. Investing money in shares can be classified as speculative risks. These actions may result in a loss or a break even situation or a prospect of a gain. Speculative risks are usually uninsurable. Insurance is not normally available for those risks where the outcome can be a gain. Speculative risks are entered into in the hope that there will be gain. There would be little incentive to work towards achieving this gain if it was known that an insurance company would pay up, regardless of the effort of the individual and there is very high risk or moral hazard. However, the pure division between pure and speculative risks has also evolved. For example, there is insurance for a credit risk, which is classified as a speculative risk, to meet some of the consequences of a default debtor.
- Examples of speculative risks: (i) Investing money in shares – this kind of investment can result in a gain when the share prices go up or in a break-even situation when the share price remains the same or in a big loss during the stock market crash; (ii) Pricing of products – a wrong price may either make the products uncompetitive or not yield a sufficient high return to the company; (iii) Marketing decisions – incorrect interpretation of market needs may cause a loss, but a correct decision could be very profitable; (iv) Providing credit to customers can be a risky business. If the customers are not in the position to pay back the loan, there will be a loss.
Fundamental and particular risks—The third classification relates to both the cause and effect of risk. Fundamental risks are those which arise from causes outside the control of any individual or group of individuals. Their effects are felt by many people: earthquakes, floods, famine, volcanoes and other natural disasters. Social change, political intervention and war are capable of being interpreted as fundamental risks. Particular risks are much more personal both in causes and effects: fire, theft, work injury and motor accident. All these risks arise from individual causes and affect individuals in their consequences. Fundamental risks, such as earthquakes, floods, famine, volcanoes and other natural disasters, arise from causes outside the control of any individual or group of individuals, with their effects being felt by many people. This is contrasted with the particular risks, which are much more personal both in causes and effects and arise from individual causes and affect individuals in their consequences.
Because of that different nature of risks, particular risks, such as fire, theft, work injury and motor accident are insurable, as these risks arise from individual causes and affect individuals in their consequences. At the same time, fundamental risks, such as earthquakes, floods, famine, volcanoes or social changes and political intervention, which will affect many people, are not insurable.
However, it is difficult to generalize this statement, as the insurance market place has changed from time to time. For example, earthquakes and floods, which are regarded as fundamental and not insurable in many parts of the world, are insurable in the United Kingdom. The ADB and the World Bank provide political risk insurance for projects in developing countries.
The three main elements of risk management are as follows:
- Risk identification ;
- Risk analysis: measure the potential impact of risk on organization; gathering information; analysis of past experience; frequency and severity of risk to the organization; and
- Risk control – physical risk control: pre-loss risk reduction – advice on safety and recommendations to industry; Post-loss risk control: use of automatic fire sprinkler system; and financial risk control: risk retention – risk transfer, ie. insurance.
There are positive aspects of risk, within the business environment: (i) Risk creates hope for profit. Entrepreneurs are encouraged to take risks in the hope that reward will be higher; (ii) Risk is a bar to entry into the market place for ventures which are unsound or short-lived. When the cost of risk is viewed as too high potential players will look elsewhere; and (iii) Risk encourages a safety culture, which includes employees, consumers, the public and the environment.
2. The Function of Insurance
Insurance fulfill the following functions:
- Risk transfer: the primary function of insurance is to act as a risk transfer mechanism. A Telecommunication company can transfer the financial consequences of the risks, such as fire, lightning, loss of profit following fire, theft and other perils to an insurance company in return for paying a premium. In so doing, the company can exchange the uncertainty for a loss for certainty. This risk transfer mechanism allows the Chief Executive Officer of the company to concentrate on developing and expanding the business in order to increase the company’s profit.
- Creation of the common pool: By accepting premiums from a large number of the insureds, the insurance company creates a pool to provide insurance protection. The losses of the few insured are met by the contribution in the form of premiums of the many. The pool will operate only when there will be only a few losses in any one year and the premiums of the insured will be sufficient to pay any claim and cover the cost of operating the pool and the profit of the insurer; and
- Equitable premiums: the insurer has to ensure that a fair premium is charged which reflects the degree of risks, i.e. the hazard and the value which people bring to the pool. Thus, the risks of similar type that are brought together in a common pool do not all represent the same degree of risk to the pool itself. However, the premium must also be competitive. Charging too much the insurer will loose the business to the competitors, but charging too little the insurer will not be able to get sufficient funds to pay claims.
From the above definition, it is clear that insurance would not be an effective risk transfer mechanism without the common pool and equitable premium principles. However, in real life, this principle may not be working perfectly. Indeed, a common pool of each class of business and the critical mass of the insured is critical for the law of large numbers to operate. For that reason, at a global level, international insurance and reinsurance companies are striving to get global business by taking about 5% of the business from each country in order to limit their exposure as part of risk management. However, at the national level, especially at the business line level, in a small country where insurance market is still underdeveloped, the pool concept may not be working well. For that reason, sometimes profit from one class of business will be used to pay the loss from the others.
As to the equitable premium principle, this may not be possible at all time. Competition and fluctuations of the insurance markets make it difficult to charge equitable premiums. The insurance market has gone through ups and downs. In a good year, premiums go up and in the bad year premiums drop as a result of increase in competition. Moreover, insurance company is divided into two sections: insurance and fund investment. Revenue generated from fund investment can be used to compensate for losses in the insurance business.
2. The Benefits of Insurance
Insurance can bring benefits to both individuals and the economy of a country. Following are the benefits that insurance can bring to people, businesses and the country:
- Peace of mind: insurance exists to meet the financial consequences of certain risks. Buying insurance allows entrepreneur to transfer some risks to an insurer. Insurance also acts as a stimulus to the activity of businesses which are already in existence through the release of funds for investment in productive side of the business. Because of the common pool, the business is able to purchase insurance at a premium which is less than the fund that the company itself would have to retain.
- Loss control: insurers do have an interest in reducing the frequency and severity of losses, not only to enhance their own profitability but also to contribute to a general reduction in economic waste in the country as a whole. Surveyor provides recommendations on loss prevention and safety (sprinklers and how to store stocks). Loss adjusters reduce after-fire losses.
- Social benefit: when the owner of business has fund to recover from a loss people will keep their job and continue to contribute to the national economy.
- Investment of funds: time gap between receipt of premiums and payment of claims allows for investment of funds. Life insurance creates possibility for development of government bonds. Thus, insurance contributes to the promotion of economic activities and the development of the capital markets.
- Invisible earnings: insurance transactions across borders bring large volume of premium inflows, which are classified as invisible earnings or service transfer for the balance of payments.
3. Nature of Insurable Risks
The insurable risks have the following nature:
- Fortuitous: happening of event must be entirely fortuitous. It is not possible to insure against an event which will definitely occur;
- Financial value: insurance does not remove the risk, but endeavor to provide financial protection against the consequences. The risk to be insured must result in a loss which is capable of being measured in financial terms;
- Insurable interest: relationship between the insured and the financial loss;
- Homogeneous exposures: insurer looks for homogeneous exposures in order to enjoy the benefits from the law of large numbers. In the absence of large number of homogeneous exposures, the benefits of the law of large numbers disappear and the calculation of required premiums becomes more of a guesstimate;
- Particular risks are much more personal both in causes and effects, such as fire, theft, work injury and motor accident;
- Pure risks, which involve a loss or, at best, a break-even situation. The outcome can only be unfavorable or leave us in the same position. The risks of a motor accident, fire, theft or injury, storm, explosion, malicious damage, liability, machinery breakdown are pure risks with no element of gain.
- Public policy: it is common principle in the law that contracts must not be contrary to what society would consider to be the right and moral thing to do.
5. Three Essays on Macroeconomic Management of Cambodia
Cambodia’s recent macroeconomic performance in terms of low inflation, high fiscal discipline and maintenance of a stable exchange rate has sparked the interest of researchers and policy analysts who are curious to know more about the techniques of macroeconomic management of Cambodia. It was felt that the time was appropriate that an insider should present an overview of the methods and techniques of macroeconomic management in Cambodia. This paper attempts such an overview.
The paper contains a set of three essays covering areas which are central to Cambodia’s macroeconomic management. The first essay is a discussion of Cambodia’s dollarization, its implications for monetary and fiscal policies. The second deals with monetary management which is primarily the function of the central bank, the National Bank of Cambodia (NBC). The third deals with budget and fiscal management, which is primarily the function of the Ministry of Economy and Finance (MEF). All the essays are closely linked. Dollarization of the economy has severely constrained the use of monetary policy in Cambodia. As a consequence fiscal policy is the only potent macroeconomic policy lever available to the government to influence economic outcomes in the country. It is hoped that the paper will provide useful information to the researchers and public at large on the systems of macroeconomic management in Cambodia and spark constructive debates on how to improve it.
Hang Chuon Naron
6. Les finances publiques du Cambodge
Le sous-titre de l’ouvrage qui est entre vos mains – les défis de la réforme – rappelle quel lourd défi ont accepté ses auteurs en entreprenant une telle somme sur les finances publiques du Cambodge.
Le résultat est d’abord à apprécier à l’aune de cette ambition et des difficultés extrêmes de la tâche.
De leur cadre de référence doctrinal à leurs outils et modes opératoires, les finances publiques du Cambodge sont encore en devenir. L’ensemble déjà considérable et multiforme des textes organiques et législatifs en vigueur n’est pas facile à rendre avec clarté et cohérence. Nombre de dispositions et de pratiques obsolètes restent en vigueur. Des principes de gestion, retracés dans cet ouvrage, sont encore à mettre en œuvre de façon effective et générale. Des dispositions récentes, faute d’appropriation suffisante, restent en partie inappliquées. Des expériences pilote, en matière par exemple de programmes prioritaires et de suppléments salariaux, coexistent avec des procédures et pratiques qui en limitent le plein effet.
Au fil des années et des influences diverses dont elles ont été l’objet, des efforts intenses de modernisation qu’elles traversent et des pratiques nouvelles qu’elles intègrent constamment, les finances publiques du Cambodge sont devenues un ensemble difficile à saisir et donc à présenter de façon totalement structurée et cohérente.
Guidés par le souci pédagogique qui est au cœur de leur démarche, les auteurs ont d’abord tenu à replacer les finances publiques dans le cadre juridique et organisationnel de l’Etat, des comparaisons internationales fournissant un début de mise en perspective. Ils ont aussi voulu couvrir le champ le plus large, du budget et de ses composantes aux marchés publics, de la fiscalité aux questions de décentralisation, privatisation et informatisation, des problèmes de paiements extérieurs et de dette aux règles de comptabilité publique. La référence constante aux textes et leur abondante citation directe, même lorsque quelques incertitudes subsistent quant à leur interprétation, met enfin l’accent sur le concret, permet un travail d’approfondissement personnel et invite au perfectionnement de l’ouvrage au fur et à mesure des modifications et des évolutions. La démarche visant à fournir aux étudiants et aux futurs cadres du pays un ouvrage d’initiation aux missions économiques régaliennes et au fonctionnement financier de l’Etat dispose désormais d’une base jusqu’alors introuvable.
Il fallait donc se lancer dans l’exercice, aussi ardu soit-il. Il fallait, malgré des embûches de toutes sortes, tenter de fournir un document synthétique – fut-il à compléter et préciser. Il fallait enfin s’efforcer de saisir dans toute son ampleur le chantier des finances publiques cambodgiennes, à la recherche de plus d’efficacité et de transparence, et ce faisant démontrer son importance cruciale dans l’émergence d’un Etat souverain moderne.
Un livre sur les finances publiques pourrait susciter deux réactions. Soit considérer que ce sujet devrait être laissé aux experts, comptables et économistes, qui s’intéressent aux chiffres et aux finances. Soit ignorer ce livre par frustration vis-à-vis des performances des finances publiques sur la vie quotidienne (trop de corruption, pas assez de résultats pour les citoyens).
L’excellent ouvrage de Hang Chuon Naron et Patrick Gilbert-Desvallons nous rappelle au contraire l’importance critique d’un système de finances publiques efficace et transparent. La capacité de l’Etat cambodgien à collecter ses revenus et financer les services publics et les investissements publics – des taches critiques pour la stabilité et la croissance du pays, ainsi que pour le bien-être de ses citoyens – dépendent en grande part de la qualité du système de finances publiques. La capacité des dirigeants cambodgiens à prendre de bonnes décisions de politique économique et à les mettre en œuvre dépend aussi largement des systèmes d’informations financières et de l’efficacité de la gestion des finances publiques. Enfin, la bonne information des citoyens et électeurs cambodgiens dépend en grande partie de la qualité des données financières et la transparence à leur égard.
Comme le décrit cet ouvrage, le système de finances publiques du Cambodge est tout à la fois une bonne base de départ et une longue liste de reformes nécessaires. Le système de base est rationnel et approprié pour une bonne gestion. Mais la mise en œuvre des textes est inégale et le système est exposé à de nombreuses difficultés. Tout d’abord, la capacité de la fonction publique, érodée par des années de conflit, est limitée et le Gouvernement a peine à attirer des employés qualifiés, en particulier du fait de salaires très faibles. Le grand nombre de bailleurs de fonds ajoute à la complexité car beaucoup d’entres eux ont des procédures particulières (en conséquence, au lieu de devoir être expert d’un système – le leur –, les fonctionnaires cambodgiens doivent connaître un grand nombre de systèmes !). Cette fragmentation des ressources nuit également à la lisibilité des comptes publics et à la capacité du gouvernement à les gérer efficacement. La liste des difficultés et enjeux est longue.
Dans ce livre, Hang Chuon Naron et Patrick Gilbert-Desvallons mettent en valeur non seulement le système tel qu’il fonctionne aujourd’hui, mais également le programme de reforme que le gouvernement a conçu et initié en 2004. Ce programme, supporté et financé par un consortium de plus d’une douzaine de bailleurs de fonds – dont la Banque Mondiale –, présente l’intérêt de confronter toutes les failles du système, tout en adoptant une approche pragmatique par « plateforme » : cette approche reconnaît que tout ne peut pas être changé immédiatement, mais que toutes les reformes doivent être coordonnées pour conduire à un véritable changement (à quoi bon avoir un bon budget si on ne peut le dépenser comme prévu ?).
Cet excellent ouvrage sera un livre de référence pour tous ceux qui veulent comprendre comment fonctionnent les finances publiques au Cambodge, quels en sont les points forts et faibles, quelles sont les complexités, les reformes en cours. Il servira en particulier à tous ceux – dans le gouvernement et à l’extérieur – qui s’intéresse ou participe au processus de reforme et contribuera à donner à chacun un cadre de référence commun. Il servira aussi à un public plus large intéressé, mais peut-être freiné par la complexité de ce domaine. Je ne peux que souhaiter que cet ouvrage soit régulièrement mis à jour pour qu’il conserve sa pertinence au cours des années à venir.
Enfin, je tiens à saluer le rôle de Hang Chuon Naron dans ce projet de réforme des finances publiques. En tant que Secrétaire Général du Ministère de l’Economie et des Finances, il joue un rôle à la fois de concepteur et de mise en œuvre et un grand nombre des reformes décrites dans cet ouvrage lui doivent beaucoup. Les finances publiques du Cambodge lui seront à présent également redevables d’un remarquable ouvrage de référence sur la question.
Économiste à la Banque Mondiale
7. Public Finance in Cambodia (English)
The epithet to the title of the book you are holding in your hands—“Challenge of the reform”—says something about the daunting challenge that its authors agreed to take on with the subject of public finance in Cambodia, a vast one indeed.
The outcome is to be measured by the yardstick of this ambition and the extreme difficulties inherent in the task.
From its doctrinal reference framework to its tools and procedures, public finance in Cambodia is still in the making. The number of organic laws and pieces of legislation in force in their many and sundry forms is truly substantial, however, and not easy to render with clarity and coherence. Many obsolete provisions and practices remain in effect. Management principles discussed in this book still need to be effectively and holistically implemented. For lack of sufficient ownership, recent provisions have not yet been fully enforced. Pilot schemes in such areas as priority programs and wage supplements coexist with procedures and practices which narrow down their full force and effect.
Over the years and due to the various influences to which it was subject, the intense modernization efforts that it is going through and new practices that it is constantly integrating, public finance in Cambodia has become overall difficult to understand and thereby to present in an absolutely structured and coherent manner.
Inspired by a pedagogical concern which lies at the heart of their approach, the authors were committed first to address public finance within the legal and organizational framework of the State and in the light of international comparisons, thus making a start at putting public finance in perspective. They also wanted to cover the broadest field, from the budget and its components to public procurement, from taxation to decentralization, privatization and computerization, from external payment and debt issues to public accounting regulations. Legislation is constantly referred to and quoted directly in profusion—even when some uncertainties prevail regarding its interpretation—which highlights the concrete, enabling the individual to go deeper and inviting improvement of the work as amendments and new situations take place. The approach to provide students and future senior managers of the country with a book introducing the sovereign economic missions and financial operations of the State now has a baseline that previously could not be found.
There was no choice but to venture into this exercise, as arduous as it was. Despite pitfalls of all kinds, an attempt had to be made to provide a summary document, albeit one that needs to be rounded out and clarified. It was undeniably a struggle to grasp the full scope of the workings of public finance in Cambodia, to search for more efficiency and transparency and thereby demonstrate its crucial importance as the country emerges as a modern sovereign State.
A book about public finance may generate two reactions. People may either deem that subject matter like this should be left to the experts, accountants and economists, who fancy figures and funding, or disregard the book out of frustration towards public finance performance in daily life—too much corruption, too little in the way of positive outcomes for citizens.
On the contrary, the excellent book written by Hang Chuon Naron and Patrick Gilbert-Desvallons highlights the vital importance of an efficient and transparent public finance system. The capacity of the government of Cambodia to collect its revenues and finance government services and investments—critical tasks for the stability and growth of the country, and the welfare of its citizens—depends to a great extent on the quality of the public finance system. The capacity of Cambodia’s leaders to make right economic policy decisions and implement them also depends to a great extent on financial information systems and the efficiency of public finance management. And providing relevant information to Cambodia’s citizens and electorate depends largely on the quality of financial data and the transparency pertaining thereto.
As presented in this book, Cambodia’s public finance system is on a sound platform but with a long list of necessary reforms. The basic system is rational and appropriate for sound management. However, implementation of legislation is inconsistent and the system faces many difficulties. First of all, the capacity of the civil service, eroded by years of conflict, is limited and the government is struggling to attract skilled employees, something particularly challenging because of very low wages. The large number of donors adds to the complexity since many of them follow specific procedures (consequently, instead of having to be experts of one system—their own—civil servants in Cambodia have to be familiar with a great many systems!). This resource fragmentation also harms the readability of public accounts and the government’s capacity to manage them efficiently. The list of difficulties and challenges is a long one.
In this book, Hang Chuon Naron and Patrick Gilbert-Desvallons not only develop the system as it operates today, but also the reform program conceived and initiated by the government in 2004. Supported and funded by a consortium of over a dozen donors, including the World Bank, this program’s value is that it presents the overall deficiencies of the system while adopting a pragmatic “platform” approach: this approach acknowledges that not everything can be changed immediately, but that all reforms must be coordinated to lead to genuine change (what is the point of having a good budget if it cannot be spent as planned?).
This excellent book will be regarded as a benchmark for anyone who wants to understand how public finance operates in Cambodia—its strengths and weaknesses, its complexities, the reforms now underway. It will be particularly useful to people both within and outside the government who take an interest in or are contributing to the reform process, and will provide a common reference framework for all. It will also be of assistance to a broader concerned public who may possibly be held back by the complexity of this field. I can only hope that this book will be regularly updated in order to keep its relevance over the years to come.
Finally, I would like to pay tribute to the role of Hang Chuon Naron in this public finance reform project. As Secretary General of the Ministry of Economy and Finance, he is playing both the role of an idea man and implementer, and a large number of reforms described in this book are beholden to him. From now on, public finance in Cambodia will also be indebted to him for this remarkable reference work on the issue.
Economist at the World Bank
8. Public Finance (Khmer)
9. Macroeconomics (Khmer)
10. The Cambodian Economy: Frontiers of Socio-Economic Development
1. Economic Growth during 1989-2008
Since 1989 Cambodia has embarked on a series of reforms to replace central planning with rudiments of a market economy. These include the introduction of private ownership of property, rapid price and trade liberalization, current account convertibility, the opening of domestic markets to entry by private businesses, privatization of state-owned companies, demonopolization of industries and services, and the reform of accounting standards, the tax system, the legal system and the financial sector.
Economic development in Cambodia can be divided into three distinct phases:
- The rehabilitation phase, 1989-1998;
- The reconstruction phase, 1999-2003;
- The economic take-off phase, 2004-2008;
The rehabilitation phase, 1989-1998: The rudiments of a market economy have been established, with the introduction of private property, privatization of state-owned companies and decollectivization of agriculture, thus paving the way for national reconciliation and the general elections in 1993. However, efforts to implement market reforms were undermined by macroeconomic imbalances, caused by the following factors (World Bank (1992) p. iii):
- Economic liberalization starting in 1989 acted to hinder revenue mobilization. Privatization of State-Owned Enterprises (SOEs) and enterprise reform combined with price and trade liberalization slashed economic rents formerly captured by the public sector enterprises. This loss of revenue was not made up by revenues from the emerging private sector. The contribution made by public enterprises to budget revenues fell from 36% of total expenditure in 1989 to 22% in 1991. The introduction of new taxes made only a small contribution to the budget. Non-tax revenue declined from 5.5% of budget expenditure in 1989 to less than 1% in 1991. However, elimination of customs duties exemptions increased customs revenues from 8.5% of expenditures in 1989 to 37% in 1991;
- On the expenditure side, removal of price control has considerably increased the unit cost fo the goods and services procured for operations and investments. The government’s policy to protect wages and defense expenditures crowded out public investment and operations and maintenance. Their share in the budget reduced from 41% in 1989 to 16% in 1991;
- The elimination of Cambodia’s credit facility under the 1986-1990 trade and payments agreement with the Soviet Union. Commodity aid received under this agreement financed 15% of budgetary expenditures in 1989. Humanitarian assistance amounted to only US$20-30 million a year in 1991-92.
- Under such circumstances, the government resorted to monetary financing of the budget deficit. Monetary financing covered more than half of the budgetary gap in 1991 and the budget went in arrears for the remaining 20% of expenditures. Wage payments have become sporadic. Monetary financing resulted in high inflation, running at average rates of 70% in 1989, 157% in 1990 and 121% in 1991. This, in turn, contributed to the lack of public confidence in national currency and high dollarization.
The formation of the Royal Government of Cambodia (RGC) led to the end of the economic embargo imposed on Cambodia since 1979 and resulted in the inflows of Foreign Direct Investment (FDI) and Official Development Assistance (ODA) for economic rehabilitation. During 1993-1998, Cambodia was both at peace and at war. The RGC of the first legislature could not give full priority to economic development and poverty reduction, as it was required to combat the Khmer Rouge forces scattered across the country. Defense and security spending amounted to 6.3% of GDP in 1994, while social spending represented only 2.1% of GDP. However, attention was also given to implementing the first generation of reforms. Inflation was reigned in from 121% in 1991 to -0.7% in 1993. A new French-based budget system was introduced and a legal framework has been established for public enterprises. With the implementation of a “win-win” policy, the military and political organization of the Khmer Rouge was dismantled in 1998. The RGC of the first legislature laid out the foundation for peace, security and economic growth in Cambodia. Despite many setbacks, economic growth during 1993-1997 averaged 6.6%. Growth during this period was financed mainly by the overuse of natural resources, Official Development Assistance (ODA) and the FDI inflows into the financial sector. The high performing sectors were forest, rubber, utilities, public administration and banking. Forest value added grew at an annual average rate of 17.2% and wood, paper and publishing increased by 22.9% a year. Rubber manufacturing grew by 21.9%. Over 1994-1998, much of the ODA was used to rehabilitate power generation capacity and water supply. Electricity, gas and water, the subsector of manufacturing, grew at an annual average rate of 14.9%. Public administration grew at the rate of 20.8%. Finance increased at an average annual rate of 38.5%.
The reconstruction phase, 1999-2003: The RGC of the second legislature was established with the following mandate under the Triangular Strategy: (i) restoration of peace and security; (ii) integration of Cambodia into the region and the world; and (iii) promotion of socio-economic development. Cambodia has been at peace only since 1999. Political stability has been restored and democratic institutions have been rebuilt. This period created unprecedented opportunity for economic reform and social progress. Cambodia has regained international recognition, after the factional fighting in July 1997, having been given a seat at the UN in December 1998 and having been formally admitted to ASEAN in April 1999. Cambodia has embarked on a wide-ranging reforms, by focusing on
|Box 2.1. The “Washington Consensus”The term “Washington consensus” consists of 10 principles governing the conduct of macroeconomic policy:
Source: Williamson, J. (2000) “What Should the Bank Think About the Washington Consensus?” World Bank Research Observer, Vol. 15, No. 2, August, p. 251-264.
macroeconomic management, public financial management and financial sector reforms, and rehabilitation and reconstruction of physical infrastructures, especially national road network.
The economic reform undertaken by the RGC during 1989-2003, especially the consolidation of market reforms during 1999-2003, reflected the economic orthodoxy of the “Washington Consensus,” the prevailing ideology for ensuring sustainable development. This way of thinking reflects macroeconomic reforms and a growth strategy based on exports and on the quality of institutions seen in certain countries of East Asia, especially the imperative of rigorous budgetary discipline, proper functioning of the judicial system, quality of labor, development of infrastructure, maintenance of a competitive rate of exchange, attractiveness for foreign investors, promotional strategy for exports, and integration into the regional and global economy.
Economic growth during 1999-2003 averaged 8.8%. Although ODA continue to finance growth, FDI especially investments in garment and tourism, was key to promoting growth. The high performing sectors were rice and cash crop production, utilities, construction, tourism, telecom and transportation and real estate. The decline in forest value added was offset by improving the production of rice and other cash crops, at an annual average rate of 6.4%. Textile was growing by 35.1% a year. Continued rehabilitation of the power and water sector resulted in the electricity, gas and water subsector growing at an annual average rate of 10.2%. Construction has become a pillar of growth, increasing at an average annual rate of 20.1%. Recently restored peace contributed to rapid development of tourism, the sector increased at the average rate of 13.6% a year. It coincided with the mobile phone revolution and the transport and telecommunication subsector grew at an average annual rate of 12.1%. Real estate was also increasing fast at the rate of 12.1%, the beginning of the real estate boom.
The economic take-off phase, 2004-2008: Considerable efforts have been made by the RGC to implement the second generation reforms as specified in the Rectangular Strategy, in particular the implementation of the first phase of the Public Financial Management (PFM) reform program and continued investment in provincial and rural roads. Economic growth during 2004-2007 averaged 11.1%. For the first time Cambodia achieved a double-digit growth, financed chiefly by the rapidly growing banking sector and FDI inflows. The high performing sectors were rice and cash crop (9.7%), mining (18.2%), textile (16.1%), utilities (16.7%), construction (15.5%), tourism (17.4%), telecom and transportation (8.3%), finance (21.6%) and real estate (12.4%).
1.2. The Real Sector
Cambodia has made considerable progress in macroeconomic management, with economic growth averaging at 9.4 percent during the last decade, 10.6% during the last five years, from 2003 to 2007, with a record high of 13.3 percent in 2005, 10.8 percent in 2006 and 10.2 percent in 2007.
According to a study by the World Bank, Cambodia was among the 15 fastest growing economies in the world during 1998-2007, positioning slightly ahead of China and exceeding the Asia-Pacific average of 8.4%.
Two key features of economic performance in recent years are the increasing diversity of the sectors contributing to economic growth and the robust contribution of the agriculture sector to economic growth. This performance is underpinned by the strong support extended to agriculture and the garment sector by the Royal Government of Cambodia.
However growth has not been centered only on these two sectors. Tourism and construction are also emerging as important growth centers in the economy. Overall recent economic performance has been characterized by balanced contributions from agriculture, manufacturing, construction and services. This was clearly evident in 2007.
During the five years of the government’s second mandate, Cambodia succeeded in reaching its fixed objectives in terms of economic growth, with an average GDP of 6.9% from 1999 to 2003, and this in spite of natural disasters such as repeated floods and drought. The general objective is to maintain a growth rate between 6% and 7%.
Overall, economic growth over the last decade has raised living standards and reduced poverty headcounts. When comparing living standards within the same geographical frame in 2004 and 1993/4, average per capita household consumption is found to have risen 32% in real terms (to 2,932 riels per day in 2004). In Phnom Penh and other urban centers the rise has been considerably more dramatic. However, poverty reduction is not keeping pace with growth, a sign that Cambodia is increasingly less egalitarian.
During the last 20 years, since the implementation of market reforms in 1989, Cambodia’s Gross Domestic Product (GDP) increased fivefold from US$1.27 billion in 1989 to US$8.7 billion in 2007. During this period per capital income also grew fourfold from US$152 to US$594.
Cambodia’s per capita GDP is expected to reach the US$1,000 by 2015, possibly even earlier when oil and gas production comes on stream. Mainly due to the sustained high growth poverty incidence dropped from 35% in 2004 to an estimated 30% in 2007.
Growth is projected to be lower at 6.8% in 2008 and 1.5% in 2009, reflecting the global economic slowdown. This underscored the increasing resiliency of the economy. Important contributions for the strong economic performance in 2008 came from steady growth in agriculture (4.0 per cent), sustained growth of tourism receipts (10.2 per cent), the continued growth in garment exports (10 per cent) and the continued expansion of financial services (22.2 per cent) and construction activities (4.3 per cent).
The agriculture sector is characterized by the coexistence of traditional agriculture, non-mechanized peasant farming, strongly dependent on climate conditions, carried out on small plots of land, with farming methods designed to produce export products. The RGC’s agricultural policy has as its goal to stimulate agricultural productivity and increase income in the farming sector.
The share of agriculture in GDP declined drastically from 45.8% in 1989 to 29.7% in 2007, while the labor force employed in the agricultural sector dropped from 80% to 60% during this period. Despite such drastic decline in its share in GDP, agriculture continues to dominate the economy. Agriculture is the key to sustainable growth in Cambodia. The sector grew on average by 4.5% per annum during 1993-2007. After strong growth in 2005 (15.7%) and 2006 (5.5%) agriculture grew by 4.0 per cent in 2007. Thus, during the last 20 years, the share of agriculture in GDP contracted by 16.1%. This decline was attributable to the drop in the share of rice production and fisheries in the agricultural value-added.
Rice cultivation remains a determining factor in the growth of agricultural sector. Rice is a staple food of the Cambodian people and supplies about 75% of the calories consumed; the rest come from fish, maize, rootcrops (cassava and sweet potato), fruits, and vegetable. Rubber has become one of the booming sectors of the rural economy, especially during the economic boom. Rubber production averaged 50,000 tons a year. Other industrial or cash crops include maize, soybean, mungbean, groundnut, sesame, sugar cane, tobacco and black pepper. However, the share of rice and other crops in agricultural production declined from 28.9% of GDP in 1989 to 15.5% in 2007. Rice production is sensitive to weather conditions. Rice and crop production increased on average by 6.7% a year. Rice production was badly affected by flood and drought in 2000 and 2002. To improve Cambodia’s status as a rice exporting country, the RGC has taken serious strides to invest in irrigation facilities and pumping stations in order to expand the coverage of irrigated areas and to ensure water supply during the sensitive period of the year. As a result, Cambodia produced 6 million tons of rice, of which a rice surplus of 2 million tons in 2007 was exported.
Fisheries production increased at an average rate of 3.2% a year. Its share in GDP dropped from 28.9% in 1989 to 15.5% in 2007. Fish production averaged 365,000 tons for inland capture fisheries; 66,000 tons for marine fisheries; and 40,000 tons from freshwater aquaculture. Moreover, it is estimated that more than 70% of the 365,000 tons of freshwater production are undertaken on a family basis as a food supplement. Fish are caught in rice fields or trapped or netted in ponds, floodwaters, streams, and rivers. Subsistence fishing increases during the dry season. Since 2002, half of the commercial fishing lots were dissolved and transferred to fisher communities for management. The RGC has put considerable emphasis on the revival of this key sub sector which provides livelihoods for the poor and marginal sections of society.
Livestock grew at an average rate of 2.7 per cent per annum. Its share declined from 7.3% of GDP in 1993 to 4.4% in 2007. Livestock remains important for subsistence farmers, who rely heavily on cows, buffalo, pigs, and poultry grazing on the farm plots for meat and for their cash income. The use of cows and buffalo for draught reduced in importance, as Cambodian farmers have more and more resorted to tractors and mechanized agricultural equipment for farming.
Commercial logging accelerated during 1994-1998 at an average rate of 17.2% a year. Unsettled internal atmosphere and continuing sporadic internal conflict led to illegal logging of forest resources on a large scale during these years. Sawmilling was the only processing of wood undertaken at that time and were mostly designed for export. However, since 1999, the RGC introduced logging ban and cancelled 12 concessions of 9 companies covering more than 2 million hectares of forest. Logging royalty was also raised from a $14 per cubic meter to $54 per cm. As a result, the share of logging reduced from 5.8% of GDP during 1993-1998 to 3.3% during 1999-2007. During 1994-2007, forest exploitation grew at an average rate of 4.7% per annum.
Cambodia’s industrialization followed the patterns of many developing countries, with the development of light industry, such as textile and garment, as well as the processing of agricultural products, such as rice milling, food processing, and gradually moving to mining, oil and gas exploration and production and construction. A number of companies have established assembly factories for motorcycles in the country. As per capital income rises, physical infrastructures improve and the quality of work force, Cambodia is like to diversify its industry to IT, assembly, and the production of electric and electronic equipment.
The industrial sector displays a remarkable dynamism, which illustrates the country’s openness, pro-business government and liberal economic policies. Sustained and stable growth in the industrial sector has been attributable to the development of garment exports, informal sector enterprises, as well as small and medium enterprises serving an expanding domestic market for basic consumer goods. The average growth rate was 15% during the last 14 years; which can be broken down as follows: 12.1% in 1994-1998; 18.5% in 1999-2003; and 14% in 2994-2007. Its share of GDP declined from 16.7% in 1989 to 12.6% in 1993, as a result of privatization of State-Owned Enterprises; but increased from 12.6% in 1993 to 25% of GDP in 2007, driven by the development of textile and garment and the expansion of construction activities, which have become the pillars of economic growth in Cambodia.
Textile and garment, which accounts for nearly half the industrial sector, was the main contributor to industrial growth. The development of textile and garment industry is closely linked to the Most Favored National (MFN) and the Generalized System of Preferences (GSP) status granted to Cambodia by the United States in 1996 and 1997 respectively. During 1996-1998 garment exports increased at a rate ranging from 70% to 190% annually. This growth slowed down after the United States imposed quotas on 12 Cambodian garment products. Nevertheless, textile and garment were the fastest growing sector in Cambodia, increasing at an average rate of 37% during 1993-2007 and its share of GDP grew from 1% of GDP in 1993 to 12% in 2007. Garment exports multiplied by 107 times from US$26.7 million in 1995 to US$2.8 billion in 2007. The number of garment factories increased from 53 to 398, and the number of salaried workers totaled 350,000 people at its peak in 2005. To help garment industry weather the Global Financial Crisis (GFC) the government provides exemptions to textile companies from the profit tax. This exemption amounts to US$100 million per year. In addition, the government decided to reduce export charges by 15% in 2007.
The mining industry grew by almost 15% a year, due to oil exploration in the Gulf of Thailand and mineral exploration in some provinces of Cambodia. This includes iron ore exploration in Preah Vihear, and bauxite, copper and gold in the Northeast. International mining firms see Cambodia as a new frontier that has yet to be explored. During the last decade, mining accounts for 0.2-0.4% of GDP. This share is expected to increase as more and more companies move from exploration to development and production of oil and gas and minerals.
Construction activities have been one of the pillars of economic growth. The emphasis made by the RGC to the rehabilitation and reconstruction of physical infrastructures during the last 15 years contributed to expansion of construction activities. The annual growth rate of construction averaged 13 per cent over 1994-2007. Construction boom took place between 2002 and 2006, with an annual growth rate of almost 20%. The boom was driven by construction of many infrastructure projects, but also by residential construction in Phnom Penh and Siem Reap. New township projects and the construction of bridges across the Tonle Sap River in Phnom Penh, as well as the establishment of Special Economic Zones would give a strong boost to construction in the medium term. The new township projects include the Koh Puos Development Project, the Camco City Project, the Boeung Snor Development Project, the Sunway City Project, the Boeung Kak Development Project and the Special Economic Zone developed by the Attwood Group. This growth slowed down to 6.7% in 2007 and was brought to a standstill in the second half of 2008.
1.2.3. Services sector
The service sector grew at an average rate of 8.6% over 1994-2007. This high economic growth rate was attributable to the expansion of the tourism, transport and communications, banking and real estate. The share of the services sector slightly declined over the last 14 years, from 39.4% in 1994 to 38.5% of GDP over 1994-2008.
The expansion of tourism and hotel industry continues, with a growth rate of 14.3%. In 2007, a total of 2 million tourists visited Cambodia. The Royal Government is emphasizing stronger links between tourism and development of the rural economy, in order to enable the poor to benefit from the economic growth. To this end, the government intends to transform the Siem Reap region into a green belt for agricultural production so that strong backward linkages of tourism with agriculture could be established.
Transportation and communication grew at the average annual rate of 8.5%. During the last 15 years, the RGC completed the reconstruction and rehabilitation of the national highway network and embarked on the improvement in provincial and rural infrastructures in order to connect the rural communities of Cambodia and bring the rural areas of Cambodia into the mainstream of the economy. The telecommunications subsector showed a robust growth of some 50% a year, especially for the mobile phone services.
The financial sector expanded at the average annual rate of 24.7%, reflecting the rapid financial deepening and the increase in financial intermediation.
The added value of real estate (leasing and real estate services) grew at an annual rate of 8.3%, reflecting the surge in foreign direct investment and residential construction.
11. Sustaining Rapid Growth in a Challenging Environment
- The analysis of Cambodia’s sources of growth that led to this report was initiated in February 2008, under the guidance of His Excellency Hang Chuon Naron (Permanent Vice-Chairman of the Supreme National Economic Council, SNEC). The concept note and the final draft were reviewed with the Supreme National Economic Council.
- The World Bank team was led by Stéphane Guimbert. The team was composed of: Craig Andrews, Caridad Araujo, Natasha Beschorner, Milan Brahmbhatt, Veasna Bun, Mudita Chamroeun, Vandana Chandra, Huot Chea, Tim Conway, Sophal Ear, Tom Easterling, Verena Fritz, Frederico Gil Sander, Mohinder Gulati, Naomi Halewood, James Hanson, Peter Jipp, Kai Kaiser, Sophorn Kith, Masami Kojima, Ashish Lall, Zhi Liu, Samsen Neak, Israel Osorio-Rodarte, Sanjoy Rajan, Ratha Sann, Steven Schonberger, Jamie Seward, Robert Taliercio, Peng Seng Tan. Sophorn Kith ensured the production of the report and Kathryn Bice edited it. Additional background papers were prepared by the Economic Institute of Cambodia (EIC), the International Food Policy Research Institute (IFPRI, with Bingxin Yu, Shenggen Fan, Anuja Saurkar, and Racha Ramadan), and Mitsui Mineral Development Engineering Co., Ltd. Eric Sidgwick (ADB), Wisal Hin and Thierry Noyelle (UNDP), Frederic Mauret and Gilles Vernet (Municipalite de Paris and French Embassy), and Richard Erlebach (DFID) participated in the preparation of the report. The team worked under the guidance of Ian Porter and Annette Dixon (Country Director), Qimiao Fan (Country Manager), and Mathew Verghis (Lead Economist). Peer reviewers – Shadid Yusuf (World Bank) and Sandeep Mahajan (World Bank) – provided extremely valuable comments and feedback. DFID, UNDP, and the World Bank provided financial resources to prepare this analysis.
- Important insights were provided upstream through an external panel organized by Susanna Lundstrom, in February 2008, and composed of Louise Cord, Sophal Ear, Francisco Ferreira, Ricardo Hausmann, Kai Kaiser, Roy Katayama, Kenneth Simler, Chan Sophal, Alfie Ulloa, Rodrigo Wagner, and Andres Zahler. Very fruitful discussions were held with the Overseas Development Institute (ODI) during the preparation of their report on competitiveness for SNEC (financed by the UNDP).
- Consultations were held on the concept paper with Government, civil society, and development partners. Consultations on discussion draft.
- The concept note for the work program was reviewed in February 2008. This report was reviewed in December 2008 within the World Bank Group. The executive summary was released at the Second Cambodia Development Cooperation Forum, in December 2008, and the final report will be presented at the February 2009 Cambodia Economic Forum organized by the SNEC.
- Many countries succeed in generating high economic growth at some point in their history. but only a very few manage to sustain rapid growth for an extended period. Only such a prolonged period of rapid growth can have a significant impact on income per capita, and such an impact often brings with it many other important changes to people’s lives..
- Cambodia has been one of the countries in this select group. It has more than doubled its income per capita over the past decade, from US$285 in 1997 to US$593 in 2007. This doubling has been accompanied by the trappings of a profound structural transformation: integration into the global economy; a shift of jobs from agriculture to manufacturing; a demographic transition; and migration from rural to urban areas. Translating into jobs and better services, these outcomes have led to a significant reduction in poverty, as well as improvements in health and education.
- Even so, the next episode in this story is very uncertain. The achievements of the past decade are very fragile and leave many Cambodians poor and with few assets. The base for this economic growth appears narrow. And the winds that once served Cambodia well – global trade and investment flows – have lost their strength, at least temporarily.
- What will it take for Cambodia to continue on this trajectory, to become a middle income country in a decade or so, and lift more of its people out of poverty? This report aims to contribute to policymakers’ and citizens’ thinking about growth in Cambodia in three ways: (i) it reviews the experience of the past decade and draws the Cambodia-specific lessons of this period; (ii) it sketches the major potential sources of growth with the aim of assessing the barriers to growth; and (iii) it outlines policy options for addressing these barriers.
- The analysis has three main messages. First, the economic growth of the past decade is a remarkable achievement, but it is unlikely to be sustainable in its current form. That said, the experience has established that growth in some sectors can be stimulated by good policies and governance arrangements. Second, Cambodia has a potential to sustain growth if it increases competitiveness and diversifies. This requires a focused growth strategy. Finally, Cambodia has three important opportunities: harnessing regional integration; managing natural resources in a sustainable way; and investing in its future (through agriculture, infrastructure, education, and higher savings).
- This analysis builds on recent developments in thinking about growth, in particular the 2008 Report of the Growth Commission. The approach used here is to undertake some detective work on what works and does not work in the Cambodian context, to propose a diagnostic on the key constraints on growth, and to pinpoint the actions that hold most promise for sustaining growth. It readily acknowledges that much remains unknown about the process of growth and development; and thus takes the view that experimentation, monitoring, and evaluation will be key components of a successful strategy.
- Four features of the rapid growth of this past decade are of particular significance (Chapter 1). First, over 1997-2007, growth has been driven by an open economy and a stable macroeconomic environment. These macroeconomic features are visible in the rapid increases in exports and Foreign Direct Investment (FDI) and the relative stability of inflation (at 4.7 percent on average over the past decade) and the exchange rate. Second, stable macroeconomic management has been achieved with very few policy instruments. Indeed, the economy is largely dollarized, leaving fiscal policy as the main instrument in the policy mix. Third, growth has been narrowly based. The four leading sectors have been garments, tourism, construction, and agriculture. Very little diversification has occurred beyond them: garment products account for 88 percent of all exports. Fourth, the levels of domestic savings and investment are low (13 and 21 percent of GDP respectively), though increasing. While this was to be expected given the initial conditions of Cambodia in the 1990s, it differs from other experiences of rapid growth, in particular in East Asia. Related to this is the recent and very rapid development of the financial sector, from a very low base, mobilizing well-needed financing but also creating significant risks.
- How did this happen? The dynamic behind this rapid progress can be understood along three dimensions. (Chapter 2). They are not mutually exclusive and each provides useful insights for the future (Table 1):
Understanding a Decade of Rapid Growth
Cambodia has benefited from its recent history and its favorable geography. The past decade has seen the end of the multi-decade conflict and the establishment of political stability, the rapid growth of global trade, and a demographic transition. Geographically, it is a coastal country in dynamic South East Asia. In this “history and geography” view, the achievements that underlie Cambodia’s sustained growth are its political and macroeconomic stability, and the policies that have allowed it to become integrated within the region. These factors have enabled it to establish a track record of change, including its accession to the World Trade Organization and the approval of a number of significant economic laws. On the other hand, this dimension of the story highlights how vulnerable Cambodia is to the recent global economic turmoil.
Cambodia has helped to fuel growth by drawing on some of its assets (forests, fisheries, land, Angkor Wat site), but at the cost of a reduction in the level or quality of these assets. A related issue is the low – albeit increasing – level of savings and some misallocation of savings. Evidence for this view can be found in environmental concerns (e.g. on the Angkor Wat site), the disproportionately high returns on some classes of assets (e.g. real estate and land), the increase in inequality, and the short horizon of many investments. This dimension suggests a style of growth that is unsustainable and highlights the importance of sustainable management of assets.
Cambodia has achieved rapid growth in an environment of poor governance through sector-specific or product-specific arrangements. These are best illustrated by the garments sector. The U.S.-Cambodia Trade Agreement negotiated in 1999 linked progressive increases in quotas to improvements in labor standards, monitored by a “third party” (the International Labour Organization program known as Better Factories Cambodia, or BFC). This has given Cambodia’s overall industry an international reputation for being able to meet these standards. The Garment Manufacturers Association of Cambodia (GMAC) has liaised closely with government counterparts, particularly in the Ministry of Commerce (MOC), to continually address constraints on sustained growth in the sector (this happened partly because GMAC chaired one of the working groups of the Government-Private Sector Forum (G-PSF). The BFC arrangements and sectoral collective action and dialogue were crucial in sustaining growth even after the original quota scheme was phased out. Indeed, the absence of development in many other sectors can be explained by the absence of such arrangements. A major question for Cambodia is therefore how to replicate similar arrangements in other sectors.
This period of rapid growth profoundly transformed the economy (Chapter 3). Poverty incidence was reduced from an estimated 45-50 percent in 1993-94 to 30 percent in 2007. Many other social indicators confirm the improvements in the welfare of the Cambodian people. Key drivers of these achievements were the labor market changes and the demographic transition. In the labor market, a major development was the creation of jobs outside of agriculture, in industry and services: as these sectors have higher labor productivity than agriculture, this reallocation of labor had a significant impact on growth. Demographic trends reveal two baby booms, in the early 1980s and 1990s, followed by a demographic transition in the late 1990s: the reduction of the dependency ratio over the past decade (fewer non-working age Cambodians for each working-age Cambodian) contributed 1 to 2 percentage points of per capita growth per annum.
- Three conclusions emerge from this review. First, the current growth dynamic is unlikely to be self-sustaining, because (i) the economic base is relatively narrow and diversification has made no progress; (ii) a significant proportion of past growth was driven by events, such as the demographic transition and the establishment of political stability, which were either one-offs or in which the major gains have already been made; (iii) some natural assets, such as forest resources, have been used in an unsustainable way; (iv) governance arrangements are sector-based; and (v) inequalities have increased sharply in recent years. The global financial turmoil of late 2008, to which Cambodia is not directly exposed given its weak financial sector, will significantly weaken the existing drivers of growth. Second, some important conditions for a fresh wind have been established: the importance of macroeconomic stability has been institutionalized; the garment sector has demonstrated that adequate governance arrangements (and an adequate investment climate) can deliver growth; the usefulness of an independent third-party monitor (BFC/ILO) has been proven; the efficiency of partnerships between public and private sector (the G-SPF) has been tested; and the role (and limits) of industrial policy have also been proven. Third, Cambodia’s demographics played a major role in its sustained growth; but a sustained flow of new jobs is required to absorb the 250,000 or so young Cambodians entering the labor market each year, many with high expectations prompted by the recent growth.
- In this context of highly commendable but fragile achievements, and sharp global slowdown, from which quarters will Cambodia’s new wind blow? Reviewing Cambodia’s growth potential and options for diversification, the analysis highlights four potential sources of growth (Chapter 4 and 5).
- First, Cambodia should make the most of its relatively abundant land, natural assets, and inexpensive labor. A growth strategy should be built on, rather than run counter to, these comparative advantages. Unfortunately, at the moment, distortions are pushing up the price of land, and lack of planning for areas away from major population centers reduces these areas’ potential as a source of growth. The recent sharp appreciation of the Cambodian riel (due to inflation in a context of a stable Cambodian riel against the US dollar) has also increased the cost of labor (a problem compounded by poor industrial relations, leading to a high incidence of strikes). It is important to correct these distortions to enable Cambodia to make the most of its comparative advantages. If this can be achieved, it should continue to perform well in agriculture, tourism, and light manufacturing. Cambodia should in parallel upgrade its endowment – in particular through education, health, and infrastructure – to make possible a transition to a new set of comparative advantages in the medium term.
- Agriculture will continue to be important, but needs to be complemented by development in other sectors. Experience in Cambodia and other countries have shown the central role of agriculture-led growth, in particular in reducing poverty (since more than 9 out of 10 of the poor live in rural areas). Cambodia has the potential to significantly increase yields in rice production and consolidate food security, and this could provide a sizeable growth dividend in the short term. But experience has also shown that agriculture is unlikely to grow beyond 5 percent or so per annum, hence contributing less than 2 percentage points of growth per annum. Manufacturing will remain very important in absorbing new workers. The fact that urbanization has proceeded slowly, while value-added per worker in agriculture is similar to other countries at the same level of development, suggests that Cambodia is not taking full advantage of the agglomeration effects around urban centers. These should not be ignored, as they will contribute greatly to growth.
- Second, Cambodia needs to build on its existing capabilities and develop new ones as a step towards diversifying its economy. Recent cross-country research has shown that countries that export product A tend to then move to export product B, indicating that the capability to export product A are related to the capability to export product B. It is not surprise, given the absence of diversification over the past decade, that there are very few products “similar in capabilities” to those that Cambodia now exports. This leaves Cambodia with few options for diversification. One obvious option would be to develop new products in the garment sector, but other products that Cambodia is already – although marginally – exporting (such as fish and wood products) could also be given priority.
- Third, diversification should also be a matter of new markets, not only new products. From that point of view, Cambodia has underperformed in relation to its regional market (only 13 percent of its trade is intra-regional, against an average of 49 percent). Much more could be done to integrate further into the East Asia region.
- Fourth, sustainable management of natural resources, particularly minerals and energy, represents another growth opportunity. Although the extent of its reserves remains unclear, Cambodia could develop a significant extractive industry in oil, gas, and mining over the next decade. To ensure Cambodia reaps the growth dividends of this sector, there needs to be a significant upgrade of the sector’s management which, at the moment, is ineffective and opaque. The three priorities in this area are (i) to clarify the legislative, regulatory, and institutional framework to increase accountability; (ii) to build the staffing to implement the framework, recognizing that the capacity required develops in tandem with the sector itself over time; and (iii) to manage expectations in relation to subsidies of petroleum and mining products or downstream industries.
- If these changes are achieved, these opportunities should help Cambodia to sustain growth of around 6 or 7 percent per annum in the medium term, although the short-term outlook is less encouraging given the global environment. It is not possible – and unlikely to be desirable – to pinpoint through such analytical work which product or which market will emerge: a fresh wind may come, but policymakers and entrepreneurs will have to “feel it”. A sustained growth rate of 6 to 7 percent per annum would be consistent with: (i) international experience based on the quality of some drivers of growth (such as education and financial sector development); and (ii) continued investments in human and physical capital.
- To realize this potential, it is important to clarify the constraints on growth (Chapter 6). In a low-income, low-governance country such as Cambodia, it would be easy to make a case that everything is a constraint. However, not only would this be at odds with the experience of rapid growth over the past decade, it would also contribute little to a growth strategy. The methodology for identifying and prioritizing constraints consists of enquiring into why entrepreneurs do not invest more for new capacity or new products, or to improve productivity. The answer could be either that the returns of the potential investments are too low or that the cost of financing them is too high.
- Until recently, there was little evidence of finance being a constraint at the aggregate level. Overall, the financial sector was very liquid (e.g. the loans-to-deposits ratio is 64 percent), it had developed rapidly in response to the increasing demand of the past few years, and real interest rates had recently become negative. Real interest rates and the rate of investment in durable equipment had been moving in parallel, suggesting that investment is constrained by demand rather than supply. Two exceptions still stand out. First, large investments have been difficult to undertake: only a link with a foreign investor makes them possible. Second, access to finance in agriculture remains insufficient and a constraint on farmers’ ability to improve productivity. Beyond these two exceptions, there is evidence that a large part of the available financing comes from foreign savings (cf. for example the fact that growth and the current account have parallel trends), highlighting the adverse impact that tighter conditions in international financial markets will have on growth in Cambodia.
- Hence the question is why entrepreneurs cannot identify projects with higher returns. Two hypotheses are possible: either there are simply too few of these high-return projects (because of excessive costs of inputs or coordination issues), or entrepreneurs doubt that they can capture sufficient returns themselves (because of the risks in the environment or because of official or unofficial taxation). It is likely that the issue is not primarily the cost of inputs, but one of coordination and appropriation of returns. Indeed, a striking feature of the Cambodian economy is the productivity of the top performers (in a few cases on par with more advanced countries), with a wide dispersion of performance across firms – in most sectors, firms on average work at 60 percent or less of the productivity of the top performer.
- Coordination is a major issue. Production, especially of new products, requires the coordination of a large number of actors along the value chain and the establishment of a large number of rules or regulations for various transactions. This is in particular important for “self-discovery”, i.e. finding out what “Cambodia is good at”. Evidence of the difficulties in achieving this coordination includes: (i) the lack of diversification into new products over the past decade; (ii) the simplicity of the value chains of most products made in Cambodia (for instance, the vast majority of garment firms are “Cut-Make-Trim” (CMT), the simplest part of the value chain), and (iii) the fact that most agricultural products are exported as raw commodities (e.g. paddy rice, unshelled cashew nuts, unprocessed rubber). This highlights deep issues in coordinating more complex value chains. In the past, this has happened in Cambodia mainly through dedicated governance mechanisms (e.g. in garments).
- Appropriation issues are pervasive, at the macro and micro levels. Macroeconomic uncertainty is only a recent concern and should be promptly addressed (other types of instability costs, such as crime or security, are now much less of a concern than they were 10 years ago). Entrepreneurs are unable to appropriate the returns of their investments due to two types of microeconomic issues: (i) disputes (both commercial and labor) have become a major concern given the lack of an effective court system; and (ii) corruption remains widespread, in its many forms. The level of tax itself – as opposed to its administration – is not viewed as a major constraint. It should be noted that, in relation to both issues, many firms have found mitigating strategies (such as pre-paying sales to avoid any dispute; moving toward collective bargaining agreement to reduce the incidence of labor disputes; keeping businesses informal; etc.), but many other firms simply have not been set up because of these appropriation issues, partly explaining the lack of diversification over the past decade.
- In relation to input costs, the high costs of electricity and logistics appear to be major constraints. Their importance is evident in (i) the willingness of firms to produce 36 percent of their electricity from expensive generators; (ii) the lack of investment in electricity-intensive sectors (the garment industry is rather light in that regard); (iii) the efforts by garment firms to reduce the costs of transport and customs (over the past four years, the costs of shipping goods through customs went down for garment firms, but up for rice producers); and (iv) the high inventories that firms maintain (41 days on the main input, against less than 30 in most countries). Logistics services are constrained by poor trade facilitation and complex cross-border processes. Limited rural road coverage constrains Cambodia’s agriculture potential in particular. The cost of labor remains low, but, as noted above, the recent sharp appreciation of the Cambodian riel in real terms is weakening this comparative advantage: unaddressed, it will weaken the performance of the garment sector and prevent further diversification.
- The Royal Government of Cambodia has a development strategy, the National Strategic Development Plan (NSDP), which elaborates on the goals and policy priorities laid out in its political platform (the Rectangular Strategy, the second phase of which was presented by the newly re-elected Government in September 2008). These strategy documents focus on the key elements of a growth strategy. The foregoing analysis contributes to further understanding the drivers of growth in Cambodia, past and future, with a view to fine-tuning or prioritizing actions to sustain rapid growth and to adjust the strategy to the recent global economic developments.
- With this background, what actions in today’s context could feasibly help to extend the recent period of rapid growth? This report focuses on three instruments: macroeconomic policy and financial sector development; fiscal policy; and regulatory, trade, and industrial policy (see Table 2). To get a fresh wind, three key tactics could be prioritized (Chapter 7-9).
- The first priority is to deepen Cambodia’s integration, in particular in the East Asia region. The slowdown of global trade gives this objective an added sense of urgency. Obviously, progress in trade facilitation (at the border and behind the border) is important. There are opportunities to make trade within the Greater Mekong Sub region (GMS) much easier, making Cambodia the bridge between Ho Chi Minh and Bangkok, two of the largest cities in South East Asia. But this first priority should focus more deeply on inserting Cambodia’s firms into global supply chains: Thai, Chinese, and possibly Vietnamese firms should increasingly be looking at Cambodia as a place to locate their factories. Cambodia could use Association of South-East Asia Nations (ASEAN) as a vehicle for new initiatives in this area. Three types of action could be considered:
Scoping Cambodia’s Growth Potential
Identifying the Constraints
A New Wind? The most pressing priorities is for Cambodia to address financial sector risks (e.g. by tightening bank entry criteria and by renewing efforts to monitor non-performing loans) and to manage the policy mix (by containing inflationary pressures while supporting growth). At the same time, it is important to manage the exchange rate more actively as Cambodia, being essentially dollarized, is quickly losing its comparative advantage of low costs due to inflation and the appreciation of the dollar. It is important to address this soon, as large revenues from extractive industries would exacerbate the problem in the future.
In addition, Cambodia should position itself to take advantage of opportunities once trade and investment flows start to rebound. Trade and investment can be further facilitated, most likely with a focus on agri-business. This could be accomplished by creating a dedicated unit to service agri-business investors and by creating an independent monitor of Sanitary and Phyto-Sanitary standards (on the model of BFC for labor standards). Doubling rice yields requires a coordinated approach in order to create the knowledge and incentives for farmers to apply the appropriate combination of seeds and fertilizers. Making the existing tax incentives more active could also generate a significant return.
Finally, the diagnostic of constraints on growth stresses the importance of coordination issues, especially the need to integrate Cambodia into more complex value chains. As well as the investor servicing unit and the standards monitor (previous point), consideration could be given to support for business associations, more proactive management of Special Economic Zones, and increased access to financial products (including through a well-functioning credit bureau). An important platform for identifying and addressing issues of common concern is the G-PSF (this would require the Forum to prepare more research and analysis). In addition, a number of business associations – such as associations for the hotel and garment industries – could be supported in identifying common issues hurting productivity and in proposing options for diversifying within the sectors (in particular, they would have a role in addressing vocational training issues). Indeed, the government and the private sector need to work hand in hand to prioritize key constraints and opportunities. The role of such coordination in agriculture is particularly important and can take the form of contract farming, farmers’ associations or cooperatives, and self-help groups. Such creative solutions to providing public goods will be a critical factor for Cambodia’s success in sustaining growth.
Second, management of natural resources must be sustainable. Cambodia can build upon both good experience (e.g. development of community forests and fisheries) and bad experience (e.g. illegal logging). The possible development of extractive industries provides both an opportunity and a series of major challenges. Priorities in this area include the following:
A more decisive effort to manage existing resources should be initiated, including the demarcation of forests, community forests and fisheries, and management of state land. Coordination should also be improved in tourism.
The area of extractive industries is critical as it sets the tone for the overall climate for investors in Cambodia. The legal and fiscal regime for both petroleum and mining should be clarified urgently. The RGC should build its capacity to manage the sector, including through training, computerization, and development of a good cadastre, etc. If and when the revenue base turns out to be large, external monitoring mechanisms comparable to BFC would be useful in reinforcing accountability in the sector (in particular, for revenue collection, the Extractive Industry Transparency Initiative (EITI) provides a process and label to strengthen accountability and to signal Cambodia’s commitment to transparency).
More broadly, further experimentation with external mechanisms addressing governance constraints in a sector-specific way should be encouraged.
Third, in the medium term, Cambodia should upgrade its endowment to move to the next stages of development. While it is not desirable to overlook its current comparative advantages, Cambodia should continue to develop its infrastructure and human capacity, and mobilize more savings to prepare for future episodes of growth:
Priorities are the upgrading of rural roads, agriculture public goods (research and extension), and human capital (continuing to stress primary education to expand the base). In all cases, however, higher spending will not be sufficient: the quality of spending (including addressing institutional issues and electricity pricing, the maintenance of roads, and the quality of teaching) will matter more than the level of expenditures. The limited fiscal space also calls for a strong effort at prioritizing expenditures based on good cost-benefit analyses (e.g. there is evidence that the returns on improvements in rural infrastructure in terms of rice yields vary greatly across regions).
Mobilizing domestic savings is likely to become increasingly important, including to finance infrastructure and education. Expanding the fiscal space, especially through developing the revenue base, will be important in this regard.
To manage this medium-term agenda, a number of public sector reforms will take on an increasing importance.
Finally, the report identifies three challenging areas for further analysis (Chapter 10). Although these areas would not generate an immediate growth dividend, they deserve closer analysis so that they can be fully integrated into the growth strategy. Urban development needs to be better managed given the growth potential of cities and the risk of mismanagement (such as congestion, poor services, etc, which would reduce incentives to invest and increase costs for existing firms). Depending on its nature, rapid growth could fuel inequality. Various indicators show that inequality has indeed increased significantly over the past four years: such rapid increase in inequality is not only politically and socially undesirable, it also tends to be inimical to sustained rapid growth. As highlighted by the recent spike in food prices and the impact of the global financial turmoil, well managed, well targeted social safety nets will be an important instrument to mitigate the impact of economic shocks on the most vulnerable. Finally, the environment is an asset for Cambodia, but rapid growth and global developments such as climate change are putting it under stress.
Cambodia has made strong progress with a long episode of rapid growth. The conditions for a new episode of growth, however, remain highly uncertain – because of the nature of past growth and the depressed external environment. The country has the potential for further growth and the foregoing analysis has sketched what this potential could look like. The ongoing financial crisis should also be seen as an opportunity. But it will take resolute actions to achieve this potential. What needs to be done cannot be fully known in advance and the diagnostic of constraints on growth should be an ongoing process of testing new policies, scaling up the successful ones, and learning from failures. This process will require committed leadership and focused attention on growth constraints and opportunities. If such a process is achieved, it is indeed possible for Cambodia to push its development toward new levels, contributing to a number of important welfare and social outcomes.