Cambodia Stability
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Quote: Stability Comes to the Killing Fields

Cambodia, wracked first by a terrible reign of terror and then by corruption, is starting to look alive

Asia Sentinel 21 August 2006

By David Fullbrook

For one of the world's poorest countries, Cambodia certainly seems to have a lot of Lexus SUVs these days. Bicycles, once rare, are becoming common, a sign that even the poorest are scraping together a few riel. Rickshaws, which less than a decade ago were as thick as flies around Phnom Penh's markets, are all but gone. Construction is booming, with houses, apartments and small office buildings taking shape across Phnom Penh and provincial towns.

Sales of beer, especially premium labels, are rising.

There is more at work here than foreign aid dollars, on which Cambodia remains dependent. Last year Cambodia turned out to be Asia's star performer, its economy growing 13 percent, outpacing even China. That figure came to light after the International Monetary Fund (IMF) revised its original estimate of 4 percent. Growth from 1999 averaged 7 percent annually, with inflation picking during 2004 and reaching 6.7 percent in 2005 thanks to rising oil prices. This year the Fund expects the economy to grow 6 percent.

Measuring such needy and stricken economies like Cambodia's is not easy. Destitute governments with badly educated officials rarely produce reams of reliable statistics. Even some rich governments with scholarly officials, like Japan's, struggle with their data.

Trying to gauge what is going on in Cambodia by the usual yardsticks is particularly difficult because for a significant sum of investment and day-to-day business it is more beneficial to avoid officials and business registers. Undervaluing investments, often with the palms-up cooperation of poorly paid officials, is common, many believe, because it reduces tax bills, bureaucratic wrangling and rent seeking. Provincial governors, for example, can approve investment worth on paper less than US$2 million without reference to Phnom Penh.

Lots of these bite-sized investments add up to a real difference in Cambodia's small economy. For example, in Rovieng, a small town in Preah Vihear Province, the two-man branch of Acleda Bank, a microfinance specialist which is the only Cambodian bank with an international credit rating courtesy of Moody's Investor Services, received a call to start handling the payroll for 600 workers in a new iron ore mine. Acleda's countrywide online branch network gives insight into what is happening in the real economy that exists beyond the reach of statisticians' rough models and patchy data.

"We estimated at the middle of last year that growth was around 10-12 percent. The IMF tend to rely on the macro, centralized statistics, they are not picking up the micro that we are more tuned in with because of our network. I do believe that the emergence of a grass-roots economy has a much greater impact than a few large investments," says John Brinsden, who joined Acleda as vice chairman after three decades helping Standard Chartered Bank develop in Taiwan and Vietnam.

That investment is picking up suggests confidence is rising and optimism growing. "The way I saw it was two years ago people started spending on long-term goods and investment, spending on cars, houses, and so on. People have a much broader horizon because of political stability. It is also one of the reasons why prices in land and houses have gone up quite dramatically," says Peter Kooi, a respected microfinance expert and director of Acleda.

Curiously, official numbers report there is less cash and savings in the hands of Cambodians as a fraction of the economy's size than for Laotians, whose country is considered even poorer and less developed than Cambodia, due to war, communist economics, and no access to sea routes. Clearly the statistics are missing an awful lot.

"Acleda has 150 offices. We started in-country remittances six years ago, now that will be about $300 million [annually]. Take Steung Treng [province]. We opened there, within a few months we were doing a million dollars of small remittances [a month]. People prefer it to other informal, slower methods. It shows confidence not only in the bank but also in the country," says Kooi.

Confidence and optimism can be infectious. Cambodia's diaspora, long a source of pocket money for relatives in Cambodia, is increasingly sending money to invest, and even returning themselves to enter business in everything from dealing in heavyweight Hummer SUVs to doughnuts, willing to risk a little money to see what business works and what doesn’t.

Wealthy people in Cambodia are also bringing money home that was stashed safely in vaults overseas, especially Singapore. Not only are they more confident, but they are thought to fear the consequences of tighter financial controls aimed at terrorism and crime, and also the fading power of the dollar.

Foreign interest is growing, investment is rising, mostly Chinese, Hong Kongers, Malaysians and Singaporeans, setting up small factories, hotels and trading firms. But bigger investments are being planned. China's Huawei Technologies is building Cambodia's first CDMA mobile phone network. Thai liquor tycoon Charoen Sirivadhanabhakdi's TCC Group signed up for a 49 percent stake in a $50 million sugar mill with Mong Reththy, a Cambodian businessman close to strong man Prime Minister Hun Sen.

Sirivadhanabhakdi's move is the strongest signal yet that Thais are regaining confidence after many fled in 2003 as mobs attacked their businesses supposedly because a Thai actress reportedly claimed Angkor Wat belonged to Thailand. Last year few Thais dropped into their embassy in Phnom Penh to chew over investment opportunities with diplomats. This year the embassy reports at least one enquiry every other day.

Moves into energy and agriculture suggest Cambodia's economy is broadening, perhaps promising a stronger, more diverse, more efficient future. "Agriculture's long-term growth should be about 5 percent because of the land availability and productivity improvements due to better technology. For tourism as long as we develop our road infrastructure I think it will continue to grow. As for garments, I think it is hard to say in the next five years, maybe there will be 1 or 2 percent growth," says Sok Hach, research director of the Economic Institute of Cambodia.

Rubber, palm oil and paper pulp plantations are being planted. Sugar cane fields are spreading, such as Mr Reththy's 100,000 hectare sugar cane concession, which should slash sugar imports from Thailand, currently 250,000 tonnes annually.

"For farmers in China they could be very jealous, there are not a lot of natural disasters here. Theconditions for agriculture here are very good," says Jimmy Gao, president of the Chinese Chamber of Commerce.

Energy is starting to draw large sums, though not without controversy. Chinese firm Sino-Hydropower is proceeding with a $280 million hydro-electric project after the National Assembly, controlled by Hun Sen's Cambodian People's Party, approved a guarantee in July that ensures the firm will receive its profits come what may.

Less controversially US major Chevron is exploring Cambodia's promising undersea oil and gas fields. France's Total is also thought to be interested. Chinese major CNOOC is widely tipped to pick up one of the five offshore blocks soon. Geologists also think their may be oil and gas beneath the Tonle Sap, a shallow inland sea upon which millions rely for fish and irrigation water. Meanwhile 777 Oil Refinery, from Xinjiang in China's far west, received approval in February 2005 for a $200 million oil refinery, Cambodia's first, at Sihanoukville, Cambodia's largest port.

Helping translate rising confidence into cash on the ground is the relative openness of Cambodia's economy, especially compared to competitors in the neighborhood. "Cambodia more easily accepts foreign investment and businessmen than say Vietnam," Gao says.

"Here, compared to China, one very obvious difference is the foreign currency control. In Cambodia there is not this kind of control, whatever money you make you can send out to another country. Most industries are open to investors, you can do as you want. It can be a very easy place to start."

However openness, confidence and optimism are not going to turn Cambodia into a serious competitor to Thailand or Vietnam just yet. It remains a fourth-world country which offers plenty for those loving challenges and headaches.

"I think infrastructure is one of the constraints, but not the main one. Soft infrastructure issues like bureaucracy and so forth are the bigger issues, which could help to improve our competitiveness. Transport is not the biggest issue or cost. Corruption and utilities are the higher costs," says Hach, the economist.

To compensate Cambodia has to exploit sympathy for its plight and tout its growing capacity in some industries, such as garment factories with good work practices. "If compared to ten years ago and now, Cambodia has a big pool of trained labour. Most of the unions have a good reputation with the buyers, which gives more opportunity for Cambodia. Lets say in the next few years, whatever the situation in China or Vietnam, Cambodia will not be affected adversely," says Gao, the Chinese Chamber of Commerce president.

Special economic zones have appeared along the borders with Thailand and Vietnam because power is cheaper and efficient ports closer. However, some question whether the special economic zones policy makes much sense in a small country with relatively low rates of tax. Still, tenants are starting to move in. There is a feeling that garment factories, especially those owned by entrepreneurs from China, will move into Cambodian special economic zones from Vietnam, because its investment policies are being tuned to lure heavy industry, high technology and services.

If Vietnam's policies are a success, it could become an important market for Cambodian garments. Despite Vietnam's reputation, some Vietnamese it seems are already wearing made-in-Cambodia. "I have heard Vietnamese are buying Cambodian garments now because the quality is better," Hach says.

But there is a long way to go before this cub becomes a tiger. Corruption is the biggest bugbear, "One of the risk factors that does concern us is the high levels of corruption," says Brinsden, the banker. Transparency International, a corruption watchdog, rates Cambodia 130th in its global index, a position shared by the likes of Republic of Congo, Georgia and Venezuela.

Bribes cost companies $330 million a year, calculate economists at the Economic Institute of Cambodia. It is a major factor in the government's failure to collect three out of every four tax dollars due -- still an improvement on a few years ago. That costs the treasury about $400 million, which would easily cover salary increases bureaucrats say they need to avoid seeking tea money, not to mention leaving significant sums for education and healthcare, reckons the Economic Institute.

Corruption, especially that driven by greed, rather than need, found at the top of government, has let loggers cut valuable hardwood trees recklessly and pay a fraction of fees due the treasury. Moreover corruption lets many logging firms leave fields of red stumps, shirking tree planting obligations that might create something approaching a sustainable timber industry.

Environmentalists think the forests could disappear some time during the next decade, leading to drought, ruined farms and greater migration to Phnom Penh's burgeoning slums. But even there life is uncertain. Corruption and failures to enforce laws and rights are behind an accelerating land grab by those with the right connections and money.

Not surprisingly politics has little do with grand ideas and coherent policy and everything to do with who gets what when the bribes are doled out. Cambodian politics today echoes South Korea, Taiwan and Thailand in the 1960s. Democracy is strong on form, light on substance. Society is dominated by pyramids of patronage, influence and power. Votes are a commodity. Many people are too busy trying to feed their children and pay school fees long enough for them to read and write to stand up to the okhna, or lord.

Intimidation, beatings, jailings and occasional murders are standard political tools. Last year was one of the worst for human rights since 1991, according to Human Rights Watch. Global Witness, a British organization investigating conflicts fuelled by trade in commodities, whose reports have often irritated Hun Sen, claims threats against Cambodian staff left the organization no choice but to close its Phnom Penh office in 2005.

Nevertheless Sam Rainsy, who leads a few brave souls, continues bravely speaking out. Hach, the economist, enjoys lashings of vitriol for revealing uncomfortable truths about Cambodia's economy but so far no sprays of bullets.

Hun Sen has consolidated power since kicking out co-prime minister and Funcinpec leader Ranariddh Sihanouk in a deadly coup nine years ago. Hun Sen's Cambodian People's Party fills most seats in the National Assembly. Distasteful this may be, however, his increasing power has brought a degree of relative stability and been accompanied by improved security in Phnom Penh. Hence people are buying Lexus SUVs, opening factories, shops and restaurants, and pondering office towers.

Whether investment continues or even accelerates is up to Hun Sen, it is clearly his kingdom. With the world economy strong, demand for exports solid, there is no better time to act. Squeezing corruption and collecting, but not raising, taxes to properly pay civil servants and educate workers' would give investors more cheer.

It might even see Cambodians making fewer comparisons with Saddam Hussein.

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