Din Merican, an economist with 30 years experience in the banking and private

sectors, explores precedents and pitfalls on the Cambodian road to development.

NATIONAL economic development is a complex and human, hence a long term, process.

The results of that process are not predictable, and the outcomes neither certain,

precise nor as controllable as we would like them to be. As a process of change,

it involves, leaving aside the considerations about efficient use of factors of production

(land, labour, capital, management and entrepreneurship), many actors from national

leaders, local politicians and leaders to administrators and technocrats at various

levels of Government to the private sector to people whose lives are directly affected

by changes induced by development.

Donor countries, multilateral and regional agencies, and NGOs and other "external"

groups can play a decisive support role by providing finance, expertise and experience.

In short, development involves a partnership of all concerned with national leaders

and those at the grassroots level making difficult choices with the consent and on

behalf of people. This is then a democratic process.

UNDP and the Cambodian Adjustment Programme (CAP)

The fact that Cambodia today has a national vision, as embodied in the National

Programme (NPRD) is a major step forward. The greater challenge will be for leaders

of this Second Kingdom to promote this vision to ordinary Cambodians in the outer

reaches of Mondulkiri, Ratanakiri and elsewhere and demonstrate to them in small

and practical ways what that means to their lives and income, for better health,

good roads, irrigation and clean water and education for the children. I am encouraged

to see some progress in these areas during my recent weekend visits to Kompong Cham

and Kandal. The various projects there are making development relevant and meaningful,

and encourage active participation of Cambodians at ground level up.

In a letter to the Editor to the Phnom Penh Post (March 22-April 4, 1996), UNDP Resident

Representative André Klap explained his organisation's approach to development.

Under the label Cambodian Adjustment Programme (CAP), this approach to macroeconomic

policy and management is "to be supportive of achieving the overall goal of

sustainable human development, that is equitable, and sustainable development".

UNDP's cooperative efforts with the Royal Government and other parties is "...

geared towards meeting the real-life needs of people in Cambodia". Their emphasis

is on rural development and poverty alleviation through the development of small

and medium scale enterprises and agriculture.

UNDP is obviously listening and responding to the national priorities of the Kingdom.

Its approach reflects an understanding of development as a complex and human process

of economic change and of the need to operate within a cultural context. This appears

to be a major departure from the IMF/IBRD structural adjustment paradigm. To some

extent, the UNDP position reflects the ongoing debate, including philosophical or

ideological differences, among national governments, international and regional development

institutions.

More importantly, the UNDP position makes the point that while we may all agree on

the importance and benefits of development and the consequences of various economic

growth stategies, we often disagree ideologically and professionally on how to bring

about development (approaches, strategies and tactics).

It is quite risky to be dogmatic and inflexible, or to champion a paticular approach

because it is in vogue, or supports and promotes Anglo-American economic liberalism.

Development is too important a process. Since it affects the lives of people in a

country or a region, it cannot be subject to experimentation and racidal shifts in

economic thinking which often surreptitiously find their way into appoaches of agents

of development. In so far as IMF stabilisation programmes are concerned, Robert Wade

in his book, Governing the Market quoted the conclusion of an IMF study by M. Khan

and M. Knight (1985) which states that "Little empical evidence exists on the

long-run effects of Fund programs, and none at all on the effects of various combinations

of stabilization policies on economic development... Even the informal evidence that

is available is ambivalent on the relationship between financial stability and economic

development".

External Development Dimension

Development is also about formulating strategies in the areas of industrialisation,

trade and investment policy and building national capacities to compete in an open

global trading environment. For Cambodia, which needs to integrate into and also

to benefit from its membership of ASEAN and AFTA (Asean Free Trade Area), these matters

take on an urgency of thier own. There are no sraight forward answers to these matters.

Even explanations of how East Asian economies like Japan, South Korea, Taiwan, Hong

Kong, Singapore, Malaysia, Thailand and Indonesia (HPAEs) have been able to sustain

high rates of eocnomic growth since the mid-1960s are mirred in controversy, and

subject to different interpretations.

In September 1993, the World Bank published The East Asian Miracle: Economic Growth

and Public Policy. In this report, the Bank stated that the High Performing Asian

economies of Japan, South Korea, Taiwan, Hong Kong, and Singapore (the First Tier

NICs) recorded the highest economic growth rates in the world between 1965 and 1990

on account of superior physical (mainly infrastructure) and human capital, the implementation

of similar market friendly economic policies and by getting the basics right (that

is, successful macroeconomic policies a la structural adjustment), especially getting

prices right (that is, no price distortions to impede efficient allocation of scarce

resources in the economy).

The report acknowledges that Japan, South Korea and Taiwan pursued indistrial policy

and other froms of statist intervention, including the promotion of selected strategic

industries and directed credit and long term bank loans on concessional tems. These

countries, according to the Bank, faced special historical, poitical and cultural

factors which permitted competent, meritocratic, powerful and insulated technocrats

working in close collaboration with equally powerful and politically influential

captains of industry to successfully pursue industrial policy.

Their success story is not likely to be repeated by late industrializers like Burma,

Cambodia, or Vietnam because changes in domestic and international conditions make

it difficult for industrial policies to be right. The Bank stated that the economic

successes of Malaysia, Thailand and Indonesia (the second tier NICs) show that rapid

economic growth and industrialisation can be achieved without industrial policy.

These countries have adopted strategies of courting foreign direct investment (FDI)

and creating incentives for exporters without adopting policies of Japanese-style

financial repession and industrial targetting. They have thus shown that by relying

on market forces and minimal statist interventions in trade, finance, technology

and human resources development, rapid economic growth can be achieved. In fact,

industrial policy, according to the Bank, is at best ambiguous.

There is little doubt that the manufacturing sector in Malaysia, Thailand and Indonesia

has expanded rapidly. Much of that growth is resource-based and export-induced, aided

by relatively cheap labour. Furthermore, these countries have benefitted from the

restructuring and transfer of Japanese industries following the oil shocks of 1973

and 1979 and the yen appreciations of the mid-1980s and the 1990s. Increasingly,

Japan has been working with the second tier NICs and others in Southeast Asia to

promote an orderly and sequential transfer of industries with changing comparative

advantages. This means using Japanese factories in Southeast Asia as platforms for

export to Japan and other industrialized countries. There is no doubt that Japanese

FDIs and the Japanese economic model have contributed the rapid economic growth of

the second tier NICs and Southeast Asia in the last 30 years. According to Jomo,

"Both the Japanese Government and the private sector see southeast Asia has

increasingly important ... for Japanese industry... The Government has recently encouraged

others to draw lessons from and emulate its domestic experience with industrial policy."

(Jomo, K.S. et. al, University of Malaya, Kuala Lumpur, 1996).

Industrial Policy

Industrial policy is important and should be an integral part of planning for

national economic development. Creating an environment favorable for exports, providing

financial and support services for small and medium size companies wishing to export,

improving trade related aspects of the civil service (e.g. MATRADE in Malaysia and

Trade Development Board in Singapore), promoting export driven FDI (e.g. MIDA in

Malaysia, EDB in Singapore) and building infrastructure that encourage and facilitate

exports are pre-conditions for the successful export-led growth of the economies

of Singapore and the second tier NIEs in Southeast Asia.

The Singapore experience, in addition, emphasizes the point that strong, future-oriented,

dedicated and honest political leadership combined with a responsive, disciplined

and efficient technocracy has delivered sustained economic growth over three decades.

Quality of governance which is, in part, a consequence backed by competitive reward

systems and uncompromising performance standards is a major factor for economic growth.

Malaysia has also similiar experiences, although the political, social, cultural

and economic circumstances of both countries have deviated from a common history,

and are today different. Both countries have, however, been able to make market economics

serve the national interest. In my view, exclusive total reliance on the prescriptions

of neo-classical economics could not have produced such economic growth on a sustained

basis. Both countries are not resting on their laurels; their search for ways and

means to managing success continues.

In making the above comments, I have not dismissed the importance of the domestic

private sector, trans-national corporations, foreign entrepreneurs and foreign talent

in development. The private sector can be the engine of growth, but this cannot just

be an article of faith. The private sector must be encouraged and sometimes directed

to invest. It would not be that growth engine if Government did not deliver "public

goods and services" (rule of law and security, physical infrastructure conducive

industrial relations climate, etc) or was directionless (with no clearly articulated

and committed national vision).

Private sector companies have a different orientation (profit motivated) and subject

to pressures from sharehlders and other investors and are, therefore, quite incapable

of taking a long term national perspective. For these reasons, it is not prudent

to rely completely on the private sector. In countries like Singapore and Malaysia

commercially managed state owned enterprises (SOEs) have been used to spearhead development

in strategic areas where the private sector on its own is unwilling to invest. In

a number of instances, these SOEs have performed better in terms of return on investment

than multinational companies.

Conclusion

The temptation is to emulate, as the Bank in its study suggests, the second tier

NIC model. The Kingdom should proceed with caution as these countries have had a

head start. By all means, learn from the diversity of the experiences and policies

of these countries.

For sustainable economic growth, a premium should be placed on the rule of law and

good governance. It means strong democratic government, an independent judiciary,

and efficient, accountable and development oriented professional civil service. Some

consideration should be given to the creation of a viable domestic private sector.

Here credit must be given to the Ministry of Commerce for the formation of the Cambodian

Chamber of Commerce. The Chamber working with the Ministry can be an instrument for

future public/private sector consultations on matters of economic and financial policy.

Reform of the financial and banking system, which is being undertaken in collaboration

with the IMF, should be accelerated. It is important that these banks and financial

institutions are real intermediaries between savers and borrowers and also will be

responsive to the development needs of the Kingdom, not just to financing trade,

land speculation, gambling and conspicious consumption.

Political stability is vital. External stability will be provided by the Kingdom's

membership in ASEAN, but internal stability and security will be entirely in the

hands of Cambodian leaders. The time has come for Cambodia to "get organized"

and more focused on development. Cambodians must be ready to seize opportunities

in ASEAN and East Asia which are poised for continued high economic growth. For at

least the first decade of re-newed Cambodian development, active involvement of Government

and SOEs in its market driven economy is unavoidable and even desirable, with apologies

to the proponents of "the private sector as the engine of growth".

Because Cambodia has a nascent domestic private sector and over-reliance on foreign

investors, especially multinational companies is not likely to be a preferred political

option, the role of the Cambodian Government is more than that of a "strategist,

manager and facilitator". It is, therefore, a matter of top priority that existing

reforms of Government machinery and SOEs be vigorously pursued so that institutional

capacity can be created for the Government to play its crucial role in development,

and be a strategic partner with domestic and foreign investors in the industrialisation

of the Second Kingdom.

Finally, in order to sustain economic growth, the maladies of Europe must be prevented

from ever taking root in Cambodia. Senior Minister Lee Kuan Yew of Singapore attributed

the decline of economies of Europe to the "high-spending, low-savings, high-welfare,

low-investments syndrome" .

The writer wishes to acknowledge his intellectual debt of gratitude to Dr.

Jomo K. Sundaram, Dr K. Kannan, Dr Waldon Bello, Dr Kao Kim Hourn, Dr Aun Poen Moniroth,

Dr Pat Darith and Mr. Predeep Kutty. He, however, remains solely responsible for

the views expressed and the position taken in this article.