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Acceleration to accession: Should Cambodia join the WTO?

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Cambodia will head to its third round of negotiations on accession to the World

Trade Organization in mid-October, but while the government is upbeat about the reasons

for joining, other observers are questioning whether the country is going too fast,

too soon.

Sok Siphana, secretary of state at the Ministry of Commerce, says: "If successful,

we will be well on our way to entry by the end of 2003."

Will joining the WTO help Cambodia's poor?

That timeframe, well ahead of the government's 2005 target, would likely make Cambodia

the first 'Least Developed Country' (LDC) to join the WTO, the body that sets the

rules for world trade.

But it worries others who are urging the government to delay accession to the organization.

"What's the hurry?" asked Oxfam-GB's Mike Bird at a recent workshop on

the government's poverty reduction strategy paper (PRSP). "Oxfam's position

is that trade can be used as a motor to drive poverty reduction [but] what would

be lost by waiting until the strategies [to develop poverty reducing industries]

have been given time to work?"

The short answer is garments, said Siphana. Garment exports were worth $1.1 billion

in 2000; the industry employs close to 200,000 workers. However 60 percent of garment

exports fall under the US quota, which ends in 28 months.

"Without entry we would suffer a major blow in 2005 [when export quotas to the

US end]," he said. "If there is one reason to enter it is at least to preserve

the level playing field in our number one export industry."

Siphana is one of a cadre of technocrats at the Ministry of Commerce (MoC) and the

Ministry of Economy and Finance (MEF) who have been pushing since 1999 for Cambodia

to enter the WTO. Their enthusiasm is driven partly by faith in the free market and

partly by fear of exclusion from the world's trading system.

"The biggest risk ... does not come from the potential losses that globalization

may pose, but from the exclusion from the opportunity for growth," said Sous

Someth, Cambodia's permanent representative to the WTO at a recent seminar at the

Cambodian Institute for Cooperation and Peace (CICP).

Cambodian officials have also invested much faith in the ability of the free market

to deliver prosperity. The ongoing debate, said Dr Hang Choun Naron, the deputy-secretary

at the MEF, is merely slowing the inevitable.

"Countries resisting [liberalization, deregulation and privatization] are falling

behind," he told the seminar. "Those who are still debating the issues,

or are paralyzed in bewilderment are of no use to their businesses and economies."

However critics of the WTO charge that developing countries lose a significant amount

of sovereignty once they sign up to the organization. Charles Santiago, an international

trade consultant based in Malaysia, told the CICP seminar that the WTO was "on

a collision course with the interests of developing countries".

Santiago said backroom negotiations usually favored the most powerful members.

"In theory the WTO is a democratic institution where one country has one vote,

[but] in reality the WTO is less democratic," he said.

Santiago added that it was not just governments in the developed world that had enormous

leverage, but also large companies from those countries.

"A critical protagonist of the new trade investment and business environment

is the multinational corporation," he said. "The fear among governments

of the developing world is that big business will not only by-pass national controls

but also wipe out domestic businesses."

Under the proposed WTO investment agreement, for instance, the rules for foreign

and local investment would be identical, exposing Cambodian firms to their highly

skilled and experienced international competitors. Government controls on the transfer

of profits overseas or reviews on foreign investment would be disallowed.

That might work against plans announced in May 2002 by Prime Minister Hun Sen to

diversify the Cambodian economy with seven 'priority sectors', including manufacturing,

electronics and agri-business.

Such fledgling industries already suffer from handicaps specific to Cambodia. Speaking

at the CICP conference, Mario Fischel of the Mekong Project Development Facility

(MPDF) identified a range of "systematic constraints" that affect the development

of a complex, export-led economy.

"Poor infrastructure, governance issues, especially informal taxes and transaction

costs, access to information and access to capital...Only some of these issues will

be solved with accession to the WTO," he said.

Siphana agreed that major change would need to take place if Cambodia was to have

any chance to compete, but argued accession would act as a driving force to reform

both the public and private sectors.

"If you stay out of the WTO then there's no pressure to reform and no pressure

to produce," he said.

Others worry that the looming crisis in the garment industry is driving the accession

push at the expense of the Kingdom's other industries.

"The main problem is that we are not well prepared," said Dr Yang Saing

Koma, executive director of CEDAC, an agricultural development NGO. "For agriculture

I don't think it will be good at all. Now people produce mainly for themselves, but

after WTO it will take a long time before farmers can produce enough and become organized

enough to enter the market."

That sentiment was echoed by Oxfam's Mike Bird at the PRSP workshop.

"We're heading for a food shortage, partly because too much rice has been exported

this year," Bird said. "It's exported because profits are higher when dealers

sell abroad, but food security is a crucial issue for the poor, and guaranteeing

food security implies retaining some state control."

Dr Yang believes that export oriented agriculture will favor large agribusiness interests

rather that the majority of Cambodia's poor.

"More than eight million people depend on agriculture and over the next ten

to 15 years that number will grow, but any extra land concessions may be given to

big business," he warned, estimating that new land concessions could support

a population of up to 20 million small farmers.

Other critics doubt that market access and exports will simply flow once Cambodia

joins the WTO.

"Oxfam's position is that we support a democratic and fair rules-based system

of trade negotiations, but not the current regime where the double standards and

hypocrisy of the developed nations completely flout WTO principles," said Mia

Hyun, senior program officer with Oxfam America.

With developed countries spending $1 billion a day on agricultural subsidies alone,

critics argue that the playing field of world trade is anything but level.

Siphana acknowledged subsidies were an issue, but argued that being inside the WTO

was the only way the country could make its voice heard.

"Agriculture is the killer because of the subsidies but, particularly if you're

outside the circle, you don't matter. If you're in, then at least you can do something,"

he said.

"That's the advantage of moving from negotiations based on diplomacy to rules-based

negotiations. It doesn't matter if you are big or small you have to follow the same

rules in the WTO.

"We may not get perfect market access but market access is there. It's only

a dream to believe that the EU and the US will simply eradicate their subsidies but,

even if they break 20 out of every 100 rules, then we've still got the other 80,"

said Siphana.

Cambodia's enthusiasm contrasts with other poor countries which have pushed for greater

fairness in the WTO. With its plans for speedy entry Cambodia could weaken its ability

to wring concessions out of other WTO members, said some observers.

"Cambodia is going up against some incredibly powerful vested interests; countries

and companies that are not remotely concerned with poverty reduction in Cambodia,"

said Oxfam's Mike Bird. "The government will weaken its bargaining position

by going too fast, and if we lose our ability to control the trade regime it will

be very difficult to win it back."

Not surprisingly Siphana rejects that, pointing out that as an LDC Cambodia is eligible

for a variety of concessions in its liberalization timetable. The "special and

differential" treatment allows the use of import quotas and other barriers to

allow the affected economic sector time to adjust.

 

Critics have argued that those concessions are mostly to do with the amount of

time LDCs have to implement their liberalization policies rather than allowing exemptions

from global competition. But Siphana is adamant that developing global competitiveness

and becoming a trading nation are vital to reducing poverty.

"If we want the fruits of globalization then ultimately we need the benefits

of investment and trade. If we create the right environment then hopefully the wealth

will filter down to the poor," he said.

Cambodia's accession bid is being conducted in parallel with the implementation of

the 'Integrated Framework' (IF), a technical assistance project of six agencies including

the WTO, World Bank and UNDP. The IF is an attempt to reduce poverty by increasing

trade in the context of liberalization.

The World Bank's Development, Trade and the WTO Handbook suggests that building industries

behind tariff walls, as happened in Taiwan, South Korea and other 'Asian Tiger' economies,

is an outdated strategy. It says open trade regimes create more growth.

That is a controversial view.

"Many rapid liberalizers have a weak record on both economic growth and poverty

reduction, such as Peru and Haiti where poverty increased following liberalization,"

according to Oxfam International's Make Trade Fair Report.

According to Hyun much depends on the way Government prepares the domestic economy

to engage with the global economy.

"In the absence of equitable distributive policies, the benefits of trade will

continue to flow to those who already have access to productive resources and market

opportunities, and not to those who are economically margin-alised," she said.

Gradual liberalization in Vietnam benefited many small-scale farmers because of distributive

land policies. Without a strong regulatory environment, according to Hyun, there

is a risk that agri-business will lead to mono-cropping and the amalgamation of large

land holdings, resulting in unsustainable agricultural practices, landlessness and

food insecurity.

However Cambodia is already well on the way to more open trade through a low tariff

regime. In May 2001 Cambodia substantially restructured its tariff regime for imports,

cutting the number of tariff bands from 12 to four, and the maximum tariff from 120

percent to 35 percent. The aim is for an average tariff of 15 percent by the end

of this year.

And although Cambodia currently generates more than 75 percent of its tax revenue

from taxes on imports, the Integrated Framework suggested an even lower uniform tariff

rate. According to the study a rate of 5 percent could produce the same revenue as

the current system with fewer "bureaucratic costs" and a substantial decrease

in smuggling.

Even more dramatic cuts are required under the ASEAN Free Trade Agreement (AFTA).

Cambodia must eliminate all tariffs to other Asean nations by 2017. Even proponents

acknowledge that accession and rapid tariff reductions are likely to lead to pain

for the economy.

Dr Hang predicts that WTO membership will affect every sector of the Cambodian economy.

"Domestic markets will increasingly be threatened because of lowering tariffs

leading to freer entry of foreign goods," he told the CICP seminar. "Export

markets will become tougher because of competition among developing countries."

While the garment industry has become the country's largest employer, the vast majority

of firms in Cambodia are micro-enterprises with ten or fewer employees. Directors

of these small to medium-sized businesses are already reporting "severe competition"

as their major concern.

And it is the poor in rural areas that could suffer most. The MPDF's Fischel warned

that, "what may be good for urban consumers [in terms of cheaper goods] may

be bad for small scale rural producers in particular ... It is almost certain that

some businesses will close and many workers will lose their jobs."

Proponents of Cambodia's WTO entry expect this to be a short term cost on the way

to long term prosperity but the question of what to do with those who lose their

jobs in the interim remains open.

"We still feel that a poverty impact assessment of trade liberalization is essential,"

said Mia Hyun. "We'd like to see a comprehensive single analysis done with all

stakeholders and a single process which is inclusive and therefore has a chance to

reach a consensus."

CEDAC's Dr Yang warned of potentially higher costs for farmers.

"We need localization to go in parallel with globalization. Since the opening

of the market in the early 1990s the flow of inputs like agro-chemicals has become

easier. People become addicted. They increase their production but also the cost

of their inputs," he said.

CEDAC has taken a local-level approach over the past three years to around ten villages

in Prey Veng and Kandal. The NGO first calculated the yearly expenditures of the

village on imported inputs, then convinced locals to forgo pesticides and try to

replace other imported products.

Dr Yang said some villages were spending up to $10,000 a year in pesticides. By reducing

that cost, they had transformed their local economies.

"Now gradually the money circulates within the community and over time the impact

can be seen in the street. Where there was one shop now there are many," he

said.

 

Who benefits from EPZs?

 

Cambodia has already started moves to establish up to four Export Processing Zones

(EPZ), which will operate as specialist development parks for foreign investors.

Located in areas close to the Thai border they are designed to attract manufacturers

wishing to take advantage of preferential tariff treatment given to Cambodia under

the Generalized System of Preferences (GSP).

Thailand, which recently lost its GSP status, will jointly operate the co-production

areas. According to Integrated Framework documents the zones are eventually expected

to attract investment of $320 million, provide 84,000 jobs in 420 factories, and

generate $50 million in wages annually.

While the EPZs could prove a boon for foreign investors, an NGO statement to the

June donors meeting said that unless there were "backward linkages" - such

as Cambodian raw materials being used in the factories - the gains to the economy

might be minimal.

Other critics have noted that workers in the factories themselves might not benefit

much.

"EPZs are proposed for remote areas and imply relocating large numbers of poor,

poorly-educated, young women to work in factories producing for export," said

Oxfam's Mike Bird at a recent PRSP workshop.

"I have a strong concern that these women will be put in an extremely vulnerable

position with doubtful economic benefits. It is foreign retailers who will reap the

profits, not the government of Cambodia and not the women who work in the factories,"

he added.

The question of how much Cambodia's poorest and most vulnerable will benefit from

developing the manufacturing sector and free trade zones is rarely raised in discussions

on increasing economic growth.

Oxfam Hong Kong/Womyn's Agenda for Change has tried to assess how working in the

garment sector affects young female employees. One in five women between the ages

of 18-25 work in Cambodia's clothing industry, collectively earning around $12 million

every month.

The agency conducted in-depth interviews with more than 100 garment factory workers

to assess what impact factory work had on women's lives and whether such work empowered

the employees.

The answer was "unfortunately not so much," said Margaritta Maffii.

"Garment workers are very, very desperate and very angry, their self-empowerment

is destroyed," she said. Garment workers suffer social stigma, isolation and

have trouble finding marriage partners.

The interviews showed the young women felt compelled to send money back to their

families.

"Most income of the garment workers goes to support the failing agricultural

system. Garment wages are a subsidy to buy food, pay interest on debts, pay school

and health costs and so on," said Maffii.

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