Cambodia in the Spotlight
|Aug 8, 2007|
Beleaguered by endemic corruption and victimized by one of the most brutal genocides in modern history, long-impoverished Cambodia has begun to come around, and a host of international institutions are paying close attention.
The country was in the spotlight last week when World Bank President Robert Zoellick showed up for a visit, in the wake of a separate appearance by International Monetary Fund Managing Director Rodrigo de Rato.
In a press conference Sunday, Zoellick called on the country to transform itself into a transparent, clean, and socially responsible place to do business, which could give it a fighting chance to compete in the regional and international economy.
“Cambodia is a small country. It needs to be distinctive to get on the map,” Zoellick said at the end of his two-day visit to the country. “It can be distinctive by emphasizing its heritage, better labor practices, better transparency, fighting corruption, which is important if Cambodia is going to draw the foreign investment and create jobs.”
Both the World Bank and IMF, along with the United Nations, have lavished special attention on the country since the early 1990s. The Bank, for its part, has funneled its aid through its Country Assistance Strategy in education, environment, health and other programs, as well as loans through the International Finance Corporation. Under the authority of the UN Resident Coordinator, some 23 agencies, funds and programs have worked to support the reconstruction of the tiny nation, which has a current population of only 14.2 million. Aid of various kinds totals US $690 million this year alone.
Certainly, the country’s economic profile has changed drastically since the UN-led occupation began in 1992. Decades after civil war decimated its population and infrastructure, Cambodia’s newfound stability has opened the country to a flood of capital and financial sector reforms—though corruption remains a nagging problem.
Driven by its garment and tourism industries, Cambodia has posted double-digit gross domestic product growth for the past three years, with GDP growth expected to cool slightly to 9.1 percent in 2007, according to the IMF. Other signs of change are steadily accruing. Foreign direct investment, while still anemic, rose from US $121 million in 2004 to US $475 million in 2006, according to IMF figures. The banking sector is also expanding rapidly, and the country received its first credit ratings from Standard and Poor’s and Moody’s last spring.
The country’s remarkable turnaround has caught the attention of development leaders and investors alike. Zoellick’s own visit to Cambodia was his first to a developing country since he replaced Paul Wolfowitz last month. De Rato arrived to Phnom Penh only days earlier. And business delegations from more cautious, deep-pocketed investors—Japan, France, and the US—have toured Cambodia in recent months, with US giant General Electric setting up its first country office in July.
While upbeat in their assessment of the country’s prospects, both Zoellick and de Rato underscored Cambodia’s need to broaden its revenue base and expand its economic profile, which remains largely limited to garments, tourism, and agriculture. Garments alone make up 80 percent of the country’s exports. Though Cambodia’s industry has carved out a niche by marketing its pro-worker stance to Western companies, notoriously fickle garment manufacturers can and do flee countries in days if they turn up better tax or investment deals or lower wages elsewhere.
De Rato also urged Cambodian officials to negotiate for debt forgiveness with Russia and the US to liberate further government revenue. But Zoellick went beyond the usual fiscal prescriptions in suggesting that Cambodia recast its global image to make the most of its economic ascent.
“Cambodia has a particular opportunity and need to develop a global brand—the need to build on this as a country with distinctive standards,” Zoellick said, singling out the garment industry’s success in capitalizing on its International Labor Organization standards for workers. “This is not just a question of pleasing the external world. It’s a question of being fair to the Cambodia people…making sure that whether it be foreign aid or government revenue, that it’s spent appropriately.”
Cambodia’s reputation for corruption, poor governance, and weak judiciary has doubtlessly continued to affect its international profile. Last year, the country was ranked 151st of 163 countries in Transparency International’s corruption perceptions index. The World Bank itself suspended funds from three projects in Cambodia last year after discovering that millions of dollars had been siphoned by officials.
“The leverage of the donor community is decreasing—the government is much happier with money from China, which comes without the same conditions,” said Sam Rainsy, leader of Cambodia’s opposition Sam Rainsy Party. China has become Cambodia’s second-largest donor country and foreign investor, pledging US $91 million in aid this year, mostly in soft loans, and investing US $1.58 billion between 1994 and 2006, according to the Council for the Development of Cambodia.
Zoellick’s remarks seem to suggest an alternate strategy of persuasion. By linking reforms with private sector gains, groups like the World Bank may be able to convince more Cambodian officials to bend an ear, said Tim Smyth, managing director of Indochina Research in Phnom Penh.
Cambodia’s inconsistent judiciary and inadequate legal framework have made it difficult to enforce contract law, for example, Smyth said. “The end result is that people are making it up as they go along, and in business, a waste of time is a waste of money.”
Ultimately, the business incentives for fighting corruption and improving governance could help tip the balance toward change, Smyth said. But first, he added, groups like the World Bank need to provide clear evidence that anti-corruption, governance, and labor reforms would be economically beneficial, beyond the specialized Western market for ILO-standard textiles.
Hang Chuon Naron, secretary-general for Cambodia’s Ministry of Finance, acknowledged that better legal mechanisms and infrastructure could help improve Cambodia’s investment climate.
“It’s not just anti-corruption, but service delivery…having transparent and efficient management [to] streamline procedures,” Hang said. He added, however, that implementing any broad-based changes would necessarily be a gradual process.
Whatever the current impetus for reform, Cambodian officials will soon be put to the test with the arrival of oil revenues, which are expected to generate over US $500 million a year for the government by 2009.
Whether or not Cambodia falls victim to the “oil curse”—squandering its income through corruption and mismanagement—will speak volumes to the world about the country’s maturity and investment climate, Zoellick noted.
“It’s part of the challenge for the brand of Cambodia,” Zoellick said. “Rather than see it as a concern, I see it as an opportunity where people can look at Cambodia as a model for development.”