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posted on 02 March 2016

Cambodia's Sweet-and-Sour Development

by John West, Asian Century Institute

Appeared originally at Asian Century Institute 22 February 2016

Cambodia has been called an "Olympian of Growth" by the World Bank. But there are deep problems in the Cambodian model of development, writes John West.

Cambodia, the "Growth Olympian"

Cambodia has been one of the "Olympians of Growth", according to the World Bank. Its economy has grown at a yearly rate of 7.7% over the past two decades, making it the world's sixth fastest growing economy (the eight "Olympians" include three other Asian countries, namely China, Laos and Vietnam).

Openness to trade and foreign investment has been a key driver of Cambodia's economic growth, especially in the garment, tourism, construction, and agriculture sectors. The stock of inward FDI in Cambodia rose from $125 million in 1993 to $9.4 billion in 2013, an increase from 5% to 57% of GDP. And FDI has been the key driver of Cambodia's exports.

Exports have contributed more than 50% to Cambodia's over the past decade, with the US and Europe being the major export destinations. The garment sector, which accounts for three-quarters of merchandise exports, has benefited from preferential access to US and EU markets, and relocation of production from China as the latter's wage costs have risen.

When a country is at the rock-bottom of the global development ladder, as Cambodia was, getting just a few things right (like its liberal trade and investment regime) can stimulate rapid growth. This is nevertheless an astonishing achievement for a country that was torn apart by a horrifically genocidal war just a few decades ago that killed one-quarter of its population.

Thanks to the strong economy, the share of Cambodia's population living in extreme poverty has fallen sharply, from 53% in 2004 to 18% in 2012. Cambodia's women, who account for 85% of the 600,000 employees in the garment sector, have benefited from the sector's relatively higher wages.

Cambodia's development challenges

Despite its "Olympian growth rates", Cambodia remains a poor country reflecting the immense damage of the Khmer Rouge period. Its GDP per capita was a mere $1006 in 2013 (around $3000 in purchasing power parity terms), well below its neighbors of Laos and Vietnam, and the lowest in Southeast Asia. Cambodia still relies heavily on foreign assistance -- 30-40% of the national government's budget depends on donor aid.

Close to half the population still lives in "near poverty", meaning that they are at great risk of falling back into poverty in the event of a natural calamity or economic shock. Malnutrition and stunting are prevalent. According to a measure of "multidimensional poverty", which takes into account deprivations in addition to low income, Cambodia's rate of poverty would have only fallen from 59% in 2005 to 46% in 2010, due to poor access to basic services like drinking water, sanitation, electricity and cooking fuel. Although the country is slowly urbanizing, close to 80% of the population still lives in rural areas.

Very poor governance is holding back the country from realizing its great potential, with Cambodia having some of the world's very worst scores on international league tables. It ranks 156th out of 175 in Transparency International's Corruption Perceptions Index, 99th out of 102 in the World Justice Project's Rule of Law Index, and 135th out of 189 in the World Bank's Doing Business survey.

Cambodia faces other great challenges in continuing its climb up the development ladder. The country is still suffering from the decimation of its educated elite, and the severe disruption to its education system during the 1975-79 Khmer Rouge period. The average educational attainment of the labour force is currently at primary education level or even lower.

Massive improvements in human capital, especially technical and vocational training, will be necessary to graduate to higher value-added activities, to diversify its export base, and to take advantage of the ASEAN Economic Community (established from 2015). It will also be necessary to take advantage of a potential demographic dividend, as 300,000 youth enter the workforce each year.

At this stage, Cambodia is merely a low-cost producer. The garment sector is basically an enclave, with few linkages to the rest of the economy. Domestic value added in the garment sector is low, with local workers undertaking merely "cut, sew and trim" functions. Indeed, without strong efforts to develop human capital and improve governance, Cambodia will like be caught in a 'low-skill, low-wage' trap.

Cambodia's governance deficit

But Cambodia's challenges run deeper. While most citizens now have a few more dollars in their pockets than before, they still suffer in very many ways. It is important not to be overly seduced by the "Olympians of Growth" chanting of the World Bank.

For example, Cambodia's garment workers suffer from widespread labor rights abuses like forced overtime, pregnancy discrimination, child labor, and anti-union practices, as NGO Human Rights Watch has reported. The Cambodian government makes little effort to enforce labor laws, while big Western apparel brands, whose garments are produced in Cambodia, turn a blind eye.

Cambodia is also a hotspot for human trafficking, being a source, transit, and destination country for men, women, and children subjected to forced labor and sex trafficking. In particular, according to the US State Department, many Cambodian adults and children who migrate to other countries for work are subjected to sex trafficking or forced labor on fishing vessels, in agriculture, construction, factories, or domestic servitude. And children from impoverished families are highly vulnerable to forced labor, often with the complicity of their families, including domestic servitude and forced begging in Thailand and Vietnam.

Cambodia's elite also has a long history of ravaging the country's natural resources like forests, oil and gas, mineral reserves, and agricultural land, to shore up their own positions of power, as Global Witness, an NGO, has well documented. Way back in the mid-1990s, the Khmer Rouge and Phnom Penh government were gutting the country's forests to fund their military campaigns.

More recently, one of Cambodia's most prominent tycoons has been at the helm of a multi-million dollar timber smuggling operation that is stripping Cambodia's forests of precious wood and shipping it to Hong Kong. The Chinese craze for antique-style furniture is driving Cambodia's rare trees to extinction.

A wave of state sponsored land-grabbing has reportedly forced 700,000 people off their land without consultation or compensation. Repression and violence against those who speak out against land grabs is increasingly severe, as shown by the murder of environmental activist Chut Wutty in April 2012.

In short, Cambodia's natural resources are a curse, rather than a blessing, to the nation's citizens.

Cambodia's troubled politics

Cambodia is a phoney democracy where citizens' rights to freedoms of expression, association and assembly are greatly compromised. Human rights defenders and political activists face threats, harassment, prosecution and sometimes violence. Perpetrators of human rights abuses enjoy impunity, with no thorough, impartial and independent investigations into killings and beatings. The judiciary is marred by inefficiency, corruption and lack of independence. The press may be quite free, especially for English-language media, but very low levels of literacy inhibit access to information.

As usual, the most recent elections, in 2013, were deeply-flawed, thereby ensuring the re-election of Prime Minister Hun Sen and Cambodian People's Party. By some accounts the opposition, the Cambodia National Rescue Party, won a majority of the vote, with only electoral fraud facilitating the re-election of Hun Sen. Peaceful protests against election fraud were met with violent repression, while opposition members face official harassment, threats or legal suits. The opposition leader Sam Rainey is in exile once again to escape arrest warrants.

Hun Sen, Cambodia's strongman who has been in power for some 30 years, is himself a very shady figure, and was once a member of Pol Pot's Khmer Rouge. He siphons off massive amounts of the foreign aid for his family and cronies.

Hun Sen can't understand why his ungrateful citizens would vote against him, in light of Cambodia's strong economic performance and relative stability. But Cambodia's youth population (65% are under the age of 30) are greatly discontented with the deep corruption and other widespread abuses of Hun Sen's regime.

In contrast to their parents who value stability, Cambodia's youth are more likely to compare their country's situation with the rest of the world than with its tragic genocidal past. Despite the nation's poverty, everyone has a smart phone and is globally connected. The government has been in power for too long, and it's time for change. But Hun Sen just keeps holding on, using old-fashioned repression tactics.

The China relationship

Another reason for discontent is the Cambodian government's cosy relationship with China. While the US dollar is the currency of choice for all transactions in Cambodia, the country has developed into an economic dependency, and political puppet of the Chinese juggernaut, as China seeks to expand its influence in Southeast Asia.

China is Cambodia's biggest source of investment, foreign aid, and a major source of tourists. The close relations between China and Cambodia have been a key driver of Cambodia's development. In 2010, the two countries upgraded their relations to a "Comprehensive Partnership for Cooperation".

But Chinese garment factories are allegedly among the worst offenders when it comes to labor rights abuses. China has also invested greatly in Cambodia's infrastructure, most notably for hydroelectricity. But these projects have often been associated with forced displacement of peoples, land grabs and widespread damage to livelihoods and the environment. And China's financial assistance, including to Cambodia's military, provides important support to the deeply corrupt regime.

Cambodia appreciates the "no strings attached" nature of China's assistance, compared with the good governance conditionality of Western aid, especially for human rights (much Western aid is channeled through NGOs). But there is no such thing as a free lunch. Indeed, China just has different strings attached, which are turning Cambodia into a lap dog of China.

In 2009, Cambodia returned 20 Uigher asylum seekers to China. And in 2012, when Cambodia was chair of ASEAN, it supported China regarding its territorial disputes in the South China Sea with Malaysia, the Philippines, and Vietnam. China is thus using Cambodia to drive a wedge into this grouping of ten Southeast Asian countries.

Cambodia also occupies a unique strategic location as China develops its "One Belt, One Road" initiative. China is thus investing strongly in the Cambodian port city of Sihanoukville which is a key part of its "Maritime Silk Road". It is an excellent base for projecting Chinese power into the Gulf of Thailand and the Straits of Malacca.

Cambodia is thus caught in the midst of the struggle for influence between the US and China. But crafty old Hun Sen is also able to play off these great powers against each other. The US is obliged to maintain aid to Cambodia and often soft-peddles its human rights so as to not totally lose Cambodia to China.

The observations of Australian business lawyer, Geoff Sutherland, sum up best the plight of the Cambodian people, who are eternally smiling and friendly ...

"It seems to me that their virtue of passiveness is also their weakness. They have not been prepared to face up to those who have run the country since 1975."

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