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Logo of Phnom Penh Post newspaper Phnom Penh Post - Blue berets, green backs: What was the impact?

Blue berets, green backs: What was the impact?

"Bon Voyage, Countdown sale," announced a shop sign recently seen on Monivong

boulevard. The United Nations is pulling out, its signature white UN vehicles, once

ubiquitous on the bustling commercial strip are less frequently seen, rapidly being

replaced by privately owned cars. On the political front UNTAC achieved most of what

it set out to do, peace has taken root in much of the country, a legitimate government

has taken power and democracy has been established.

But what about the economic legacy of that part of the $2 billion operation spent

in Cambodia?

Although not widely recognized as such, UNTAC did have a direct economic role in

Cambodia. UNTAC's economic management mandate stemmed from the provisions of the

"Declaration on the Rehabilitation and Reconstruction of Cambodia," one

of three instruments signed at the Paris Peace Conference on October 23, 1991.

UNTAC had three key economic tasks. First, to oversee the co-ordination of international

aid. Second, to ensure, in the reconstruction phase, that aid should reach all levels

of society, especially, the more disadvantaged. Thirdly, that immediate needs were

to be addressed. Thus priority attention was to be given to: food security, health,

housing, training, education, the transport network and the restoration of Cambodia's

existing basic infrastructure and public utilities. Because of the expected heavy

demands to be made on it by the UNTAC operation and the repatriation of refugees,

the latter, together with assisting rural communities was top of the list.

UNTAC was also given one other specific goal with an important bearing on the economic

scene. It was given a precise surveillance mandate with respect to five key ministries

within the existing civil administration. Though not spelt out in detail, this provision

implied institutional capacity building, teaching improved public sector management

and preparing Cambodian counterparts for the exercise of effective administrative

control. From the viewpoint of economic management, the authority it was given to

oversee all financial bodies and agencies, including the State of Cambodia's Ministry

of Finance, plus the right to issue binding directives, was the most important. Altogether,

from the beginning, UNTAC powers of economic tutelage could be likened to that of

a temporary protectorship.

When it arrived in mid-March 1992, the Cambodian economy, despite laboring under

a diplomatic and financial assistance embargo (except for humanitarian aid) for 12

years, had commendably pulled itself up by its boot straps. Nevertheless, it was

an economy, sufficiently poverty-stricken as to be unable even to provide the basic

necessities for the bulk of its population, and whose collapsing infrastructure was

crying out for reconstruction. The economy was also in a rapid and uncoordinated

transition from a centralized command system to a full market economy.

Given the combination of these three factors, the effects were predictable. The courageous

decision to move from "Marx to Market," taken without guidance or models,

had spawned a situation analogous to a "Jungle Economy" in which a cash-strapped

government with a disintegrating civil service presided over runaway inflation. The

scandalous selling off of state property at artificial prices, pointed up an equally

important prerequisite for the proper functioning of a market economy-the necessary

back-stopping legal framework for contractual liability in the transfer of assets

did not exist. This background, together with limited viable options, a worrying,

growing imbalance, between the urban and vast rural subsistence sectors, suggested

that governance was really out of control.

In the circumstances, what was called for was clear immediate assistance to the then

administration to help combat inflation, with its deleterious effect on the poor.

This would have required three things, two of which would have substantially aided

efforts to haul back inflation, the scourge of the poor: immediate financial support

for the unfunded budget deficit complemented by general import financing or commodity

aid. As a supplement, practical fiscal help to assist the authorities to increase

the totally inadequate income from taxes. Practical help meant an immediate concentration

on core infrastructure needs such as road construction and health care as well as

assistance in setting up key legislation to realize the virtues of a market-economy.

Unfortunately for Cambodia and its poor, three factors-donor political considerations,

a lack of UNTAC boldness, and the complexities of UN bureaucratic control-militated

against this happening. Why? First, the brokers of Cambodia's peace process were

antipathetic towards the existing de facto government because of its origins in the

1979 Vietnamese overthrow of the Pol Pot regime. They were thus unprepared to do

anything that might conceivably shore up the Hun Sen administration. The latter was

starved of essential public funding leaving it no choice but to print money to make

up for its revenue short-fall. In addition, donor reluctance to finance basic needs

programs per se and small-scale multi-sectoral projects, plus a marked preference

for projects of a longer term nature and an appallingly slow disbursement rate, meant

that most of the rural areas as well as critical infrastructural needs, remained

untouched throughout the period of the UNTAC operation.

Second in importance was a failure of nerve. Despite having a specific mandate, that

required UNTAC to get cracking with immediate needs and to influence aid flows to

all levels with those on the margin of society having priority, very little was done

in the critical pre-election period. Although Annex 1 of the framework agreements

recognized that the Hun Sen adminstration would have to operate to ensure normal

everyday life in Cambodia, this was not backstopped in practice. Again, one can ask

why? For the most part it was because refuge was taken in the narrowest of interpretations

of the Paris text; assistance should not benefit one party/faction over another.

Realities such as there being only one functioning civil service, that the factions

were not equal in administrative capacity, and that it was in the Khmer Rouge's interest

to assume a blocking role on the Supreme National Council, were tacitly ignored.

Net result, though it was clear that these problems would have to be addressed irrespective

of which party ultimately gained power, what was really required was put on the back-burner.

Cambodia's economy was thus deliberately put on hold for a further 19 months until

the elections provided an "acceptable" government; the poor 90 per cent

of the population thus became the pawns of Big Power politics.

Finally, due to bureaucratic control being held in New York, UNTAC was slow to get

off the ground. This was particularly unfortunate in terms of economic management

where the key Rehabilitation Unit had the misfortune of undergoing three changes

of leadership during the period. Together with the lack of experienced personnel

in the field, it quickly became clear that the UN was not geared to oversee Cambodia's

economy in any meaningful sense. Appropriate mechanisms were not set up, only parallel

institutions that did not include Khmers, and full financial control-a major requirement-only

became a reality, both in Phnom Penh and the provinces, in January/ February 1993.

Against this background, what happened to the economy was extraordinary. Cambodia's

economy picked up and enjoyed startling growth for two years. In 1991, GDP grew by

13.5 per cent and by a further 8 per cent in 1992; income per head moved, on average,

from about U.S. $170 to an estimated U.S. $200 /210. On the surface, all substantial

improvements but, by and large, benefiting only those outside the large subsistence


What were the triggers of this sudden upsurge? Pride of place must go to UNTAC outlays

in the country. According to their figures, US$ 245 million was spent locally in

1992, or 13 per cent of total Gross Domestic Product (GDP). This had two effects,

direct and indirect. Direct wage payments to a growing number of employed Cambodian

personnel substantially boosted pitifully low local purchasing power, which was considerably

added to in the second half of 1992 by expatriate staff expenditures. More importantly,

though indirectly, UNTAC's huge spending muscle brought in a flood of dollars that

added massively to aggregate demand. Other growth accelerating factors were derived

from the disturbingly fast run down of Cambodia's irreplaceable natural resources,

mainly for personal and pre-election party gain; and a speculative economic boomlet

fueled by domestic and overseas expectations of making a fast buck out of UNTAC's

high spending presence.

But the advance had a cost as well. Put bluntly UNTAC, by the very nature of its

speed of irruption on the local scene and relatively enormous spending power, could

not but help swamping the Cambodian economy. The impact of UNTAC's presence becomes

even more startling when comparing UNTAC's injection of cash against actual money

in circulation. Recent statistics up to June 1993 (see tables A&B) when compared

with more meaningful parameters, suggest a different perspective. Given the very

low level of Cambodia's economic structure and the lack of any ability to sterilize

the effect of a sudden sharp influx of foreign monies, UNTAC's actual outlays should

be seen not against estimates of Gross Domestic Product (GDP), which were simply

rough and ready measures of the value of the flow of the goods and services produced

in the country. Though perhaps academically contentious (relating assets to income),

a more insightful ratio would be the actual money in circulation. This for two reasons.

Cambodia, due to its turbulant monetary past, is a highly monetorized or cash country.

Next, although Cambodian statistics need to be taken with a grain of salt, those

on money availability and UNTAC outlays can be considered more accurate than most.

Comparing cash with cash changes the picture. From 13 per cent of GDP (or UNTAC's

original 10 per cent in December 1992), the ratio of UNTAC's local expenditures for

the whole of 1992 moves to 152.6 per cent of total liquidity. It was like sharing

one's bed with an elephant; it cannot but alter one's sleeping patterns. Thus, wherever

UNTAC had a considerable presence, it transformed the local scene; this was nowhere

more apparent than in Phnom Penh.

Again the results were predictable. True, UNTAC bore no direct

responsibility for galloping inflation from a revenue-starved budget deficit administration,

although its, and the donors' hands-off approach in the long months preceding the

election, certainly made inflation management more difficult. Where it can be castigated,

however, was in refusing all suggestions to make certain local payments in riels.

By not transferring a proportion of its substantial local expenditures into the domestic

currency at the official rate, it totally reinforced the dual currency economy and

thus further undermined the riel in Cambodian eyes.

Other foreseeable problems can also be laid at the UNTAC door. Once the aid promised

in Tokyo in June 1992 was not forthcoming, except largely for the repatriation exercise,

once immediate needs were not going to be addressed, it was clear that without forethought,

UNTAC would end up by promoting, willy-nilly, a shallow economy whose sole development

seemed predicated on its success in providing final goods and services for immediate

consumption. An economy, moreover, despite its impressive growth until end 1992,

that was unbalanced, and wholly urban in orientation with the possible exception

of a few provinces in the northwest. An economy, moreover, in which domestic sources

played a minimal part, and whose overhead capital was further stretched to breaking

point by UNTAC's free usage thereof. It is no wonder, at the end of the day, that

experts all agree; the present situation, despite UNTAC's economic mandate and spending

power, is not only unsustainable, but that the newly elected Government will face

practically the same range of problems as confronted the State of Cambodia in 1991,

before UNTAC's arrival!

In addition, through its late start in financial management control, UNTAC's contribution

to all important fiscal management was well below what could have been expected.

The same comment would apply to their capacity-building and Khmer-counterpart training

at the planning level.

But while there were shortcomings it would not be fair to ignore a number of important

gains that can be chalked up to UNTAC's credit. Despite having to operate in a difficult

and complex environment that had its own short-term priorities-essentially of a party

political nature, UNTAC was instrumental in bringing about a number of laws promulgated

by the Supreme National Council (SNC).

•on March 12 1993, the SNC agreed to address the lack of transparency in sales of

State assets by insisting that all such sales should be registered or else declared

invalid. It then adopted a Moratorium, 10 June 1993, halting the previous scandalous

disposal of such public assets;

  • A Moratorium, effective 1 January 1993, on the export of logs together with a

    quota on the export of sawn timber, as of 10 February 1993;

  • A Declaration on the mining and export of minerals and gems, which effectively

    placed a moratorium, effective 28 February 1993, on the commercial extraction of

    mineral resources on land and offshore, and on exports of minerals and gems;

  • Institution of a control system on the import of petroleum products;
  • Introducing, as from 11 January 1993, a new tariff system to bring customs valuation,

    unlike the existing socialist system, more in line with the actual value of imports;

  • Assisting in the introduction of new taxes by the State of Cambodia so as to

    increase the revenue take;

  • An IMF inspired stabilization memorandum (partially adopted by the State of Cambodia)

    but monitored by the IMF and UNTAC, resulted in a strict control of currency issuance

    as from October 1992;

  • In December 1992 came the introduction of positive interest rates for 3-month

    riels deposits as well as the subsequent closing of the gap between the official

    and kerb side exchange rate to 5 per cent;

  • Also, in March, 1993, after unprecedented movements in the exchange rate (a 70

    per cent loss in purchasing power overnight) and in key commodities UNTAC, with the

    support of the Dutch government and the World Food Program, intervened in the market

    to pull down the inflated rice price, the main item of expenditure in the Khmer household

    budget. They also persuaded the Council of Ministers to ban the panic selling of

    rice for export. UNTAC acted in a similar fashion to set the price for imported fertilizer.

  • Finally, in the areas of budgetary reform, public expenditure monitoring and

    control and treasury operations, considerable policy standards and procedural improvements

    were made. On the other hand, full UNTAC financial control for Phnom Penh and the

    provinces only became operative as of 1 January 1993 (in February, for the remaining

    eight provinces).

An impressive list but, like the curate's egg "only good in parts."

Not having any enforcement mechanisms, all the above-mentioned bans on trade were

largely ineffective. Apart from its positive market intervention with respect to

rice and fertilizer, UNTAC's major successes were in strengthening previous weak

fiscal control. But here, unfortunately, their slow start meant that the main gains

only materialized late in the pre-election period; or over nine months after UNTAC's


But what of the state of the economy at the end of UNTAC's mandate?

Briefly, the economy stalled in the first part of 1993 and is in danger of staying

stagnant before its hoped for pick-up in the second quarter of 1994. The severe flattening

out, unexpected after the rosy picture at the end of last year, was a result of several

elements. In combination they have shown just how unsustainable the previous get-rich-quick

expansion really was.

This came about for three reasons which all created what economists call "negative

feedback loops" or spillover. First, the international aid community continued

to drag its feet for political considerations. Their recalcitrance was not helped

by FUNCINPEC blocking, in March at an SNC meeting, a proposed, US $75 million World

Bank/ IDA credit together with an associated IMF package. This attitude was persisted

in despite knowing the economy was between a rock and a hard place, the parlous state

of the country's infrastructure and that, contrary to the Paris Declaration, rehabilitation

activities had been skewed by-passing most of the rural areas.

Private investors also read the signs negatively, noting that despite its recognized

importance, donors had still not provided Cambodia with critically needed program

aid. With business confidence on hold as a result of the electoral campaign , venture

capital became a trickle and the previous motive force of the construction industry

slowed to a walk in the second quarter of 1993. Confidence was not helped by the

extraordinary events of 19 March 1993 when the riel lost 70 per cent of its purchasing

power overnight. Finally, the whole country was gripped by political uncertainties.

Speculating as to possible Khmer Rouge disruption of the elections, the likely results,

and whether they would be peacefully accepted.

Economies do not thrive on widespread uncertainty and Cambodia was no exception.

In the first five months of 1993, the riel's average kerb-side rate depreciated 82

per cent; inflation soared to 330 per cent in March compared to the previous twelve

month period; employment fell as activity slowed, the revenue shortfalls widened

horrendously with the budget deteriorating to an unprecedented extent. The only thing

staving off collapse was increased UNTAC expenditure from January to June 1993, commensurate

with the election build up and unprecedented private borrowing by the administration.

The major beneficiaries, as before, were those lucky enough to be part of the growing

dollar economy. Since then, there has been little real change. The fillip given by

the undoubted success of the UNTAC-sponsored elections-which were also a tribute

to the Cambodian voter's refusal to be intimidated - was short-lived as the country

and outside investors became aware that UNTAC would soon be pulling out and what

that might mean. Prospects for the last 6 months of the year have been sharply downgraded

to show a growth rate of perhaps 3 per cent for the 6 months since June; or only

just above the rate of annual population increase.

What will be the full impact of UNTAC's departure? The answer in the aggregate is

simple. UNTAC's sudden arrival on the Cambodian scene provided the economy with an

enormous kick-start, both practically and expectation-wise. Its withdrawal will have

an opposite deflationary effect as foreign-induced demand and dollar income earning

possibilities are sharply reduced. The situation is somewhat akin to the massive

imposition of an excise tax (like the effect of the massive crude petroleum price

hike in 1973/04 on oil importing countries). But, just as in those days, there is

one big proviso: how quickly can it be compensated for?

The chances of pulling through are inextricably linked to the speed with which donors

make available actual cash disbursements, the amount spent in the country, and the

direction of the investment. The arithmetic is clear. In less than 15 months UNTAC

poured a cumulative total of U.S. $511 million of which at least U.S. $403 million

were spent locally. Money that helped create an unsustainable urban boom. The last

ICORC donor meeting in Paris, a month ago in September, which mainly re-pledged what

had been agreed to last June in Tokyo, promised Cambodia just over U.S. one billion

dollars in aid.

The likely scenario, between now and the second quarter of 1994, is thus further

stagnation. Reinforced by the necessary but severe shake-out from UNTAC induced economic

distortions. The unknown factor remains the private sector and the extent of foreign

investment-still largely in land and services, and mainly Chinese in origin.

The results can already be seen and inferred from the breakdown of UNTAC expenditures

which were largely for rents, local services, especially telecommunications and freight

cartage, as well as the purchase of imported consumption goods. Thus all those sectors

that grew up dependent on UNTAC custom will find the new commercial environment a

tougher place.

For many, overall business has already declined between a quarter and one-third.

Inventory controls have become tighter, salary expectations have had a rude awakening,

the previous free-wheeling attitude: "let's go for all the cash outside",

has given way to a hard look at the long haul ahead. Investment interest remains

but, for the moment it is of a "wait and see" variety, there is little

commitment of funds, except in land. The economy is just ticking over until confidence

is re-inspired. Unfortunately, this all means that the government's revenue expectations-despite

new measures-will become that much harder to realize; compounding the problems that

existed pre-UNTAC.

Ironically, the 90 odd per cent of Khmers who benefited the least from the UNTAC

presence will suffer the least. But, once aid starts to flow, they should be able

to look forward to a development that is better balanced and more directed to the

basic needs that have been neglected for so long. In the meantime, the urban population

will bear the brunt of this re-structuring.

Overall, one can say that without UNTAC Cambodia would be a sorry place. The impulse

they have given to change in the right direction is undeniable.

In the economic sphere they brought in a new sense of public control. They set a

precedent for a need for probity and for checks and balances. They clearly identified

the key economic problems although they were unable to push them through. Finally,

they altered the psychology of expectations. A Khmer proverb says "we are like

a frog in a well; what you see when you look up is the limit of our world".

The Khmer frog now has a wide-screen vision; not a bad legacy!

Judged purely on the economic scene UNTAC found on arrival and the one its leaving

behind; judged according to the material change in the well-being of the vast majority

of Cambodians; judged by their involvement of Cambodians in planning; judged from

their ability to get their analytical insights implemented; judged by their usage,

from the beginning, of NGO local expertise; judged by their success in bringing about

renovating overhead capital, the conclusion to be drawn is largely negative.

UNTAC's economic achievements fell far short of Cambodian expectations and what was

indicated in their widespread mandate. Donor tardiness and their excessive lip service

to political considerations provides a reasonable excuse. As does the complexity

of UN bureaucracy. The latter, from the viewpoint of UNTAC, is perhaps the crux in

any assessment. What the whole Cambodian episode demonstrates is that, as organized

at present, the United Nations system is not really geared to take on the economic

consequences of a peace-keeping operation.

Cambodia was unique in its turn-round possibilities. It could have been a model for

the future. Instead, when the whole Cambodian operation becomes a case study, perhaps

the words Shakespeare gave to Hamlet will provide the most fitting epitaph of UNTAC's

economic mandate:

"More honour'd in the breach than the observance."



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