For a lesson in how not to conduct agro-industry, you need only travel as far

as Tumring commune in Kampong Thom province.

Cambodian rice is one area slated for agro-industry development.

After the government granted 1,200 hectares of land to the Chup Rubber Plantation

Company in 2001, the company hired the adjacent forest concessionaires to log local

villagers' resin trees.

Despite a specific promise by Prime Minister Hun Sen last year to the villagers that

no resin trees would be lost, hundreds were cut. When the trees went, so did any

chance of the 1,600 villagers making a living.

The World Food Programme has been asked to investigate their needs. All the agency

will say is that "a course of action is being taken". However, observers

say that there is now little chance that the people of Tumring can survive with what

they have left.

That is clearly not how agro-industry is meant to work. Nor is it how the government

and donors see achieving what has become the country's most pressing issue: reducing

poverty.

The government's Interim Poverty Reduction Strategy states as its goal the need to

diversify the economy and increase exports. That, the logic goes, will achieve the

government's economic aims, and on the way, reduce poverty.

"Our future depends on our ability to diversify our export base and our production

base," says Sok Siphana, secretary of state at the Ministry of Commerce. "So

far we've been very lucky that we have market access to the US for textiles. That's

a breathing space, which keeps our people employed and keeps building the industrial

base."

But that reprieve will not last much longer. The garment industry, whose 200,000

employees make it Cambodia's largest manufacturing sector employer, will likely scale

back in size after the country loses the preferential trade privileges with the US

by 2005.

Despite the decrease in jobs, the government hopes to reduce poverty from 36 percent

of the population to 31 percent by 2005. That will require raising the incomes of

tens of thousands of the poor above their current level of under 50 cents a day.

To do so, it will need to create more jobs than will be lost in the garment sector.

That is where agro-industry - the growing of crops and adding value to them for extra

profit - comes in. Consultants to the Ministry of Commerce studied the country's

trade policy and technical assistance needs last August, and identified seven 'priority

sectors'. Three involved agro-industry: rice, diversified agriculture, and fisheries.

Most of the Kingdom's rural economy currently consists of subsistence rice farms

and small household enterprises. Around four out of five Cambodians engage in some

form of subsistence agriculture. 'Kitchen gardens', which are essential to food security

in rural households, are quite diverse, the government says. In addition to a great

variety of vegetables, they grow products such as aromatic herbs and spices, as well

as traditional medicinal plants.

The government believes there are many opportunities to build on this base for more

profit in international and domestic markets without the need for completely new

approaches or technologies.

Since around 1.2 million hectares of land are currently unused, it says, there is

ample room to meet private sector demands for agro-industry. It hopes to encourage

development by promoting more diversity and expansion in agricultural production,

as well as promoting value-added processing.

Prime Minister Hun Sen told an investment conference May 15 that Cambodia has plenty

of fertile land, cheap labor and natural resources suitable for agro-industry. Its

potential, he said, is simply awaiting investment.

Becoming an international player will be a challenge. The Organization for Economic

Cooperation and Development calculates that the $350 billion rich countries pay in

annual subsidies to their own agriculture industries is enough to fly their 41 million

dairy cows first class around the world one and a half times. And that was before

the US government in May authorized a $180 billion, ten year package of agriculture

subsidies for its farmers.

Oxfam and the government have begun a dialog on the implications of entering the

WTO. Oxfam's report, Rigged Rules and Double Standards, states that "rich countries,

despite the free-market rhetoric of their governments, have remained fiercely protectionist

in their approach to developing-country exports".

Siphana is aware of the imbalance created by subsidies. He says rich countries further

skewer competition by placing stringent health requirements on agricultural products

which are virtually unachievable for developing nations. The issue of unbalanced

international trade was raised at a June 11 UN food security summit in Rome. Some

Asian countries urged world leaders to reconsider their policies, but nothing actually

changed.

"If we are running a diversification strategy based on exports, we have to consider

the policies of foreign countries," says Siphana. "And in the case of Cambodia,

where we are depending on agriculture, one cannot hope to export agricultural products

to developed countries, that's for sure."

Instead, the country hopes to engage in "south-south cooperation", swapping

traditional commodities with other developing nations such as China and India, as

well as those in Africa and the Pacific. Only niche products - specialized organic

commodities with less competition such as essential oils and certain spices - would

be exported to Western markets.

Siphana believes Cambodia "should embrace, full force, globalization".

Now that the government has identified markets, it wants to mobilize the country's

workforce. A detailed analysis of which agricultural products to produce and which

agro-industry markets to compete in is now being conducted. One observer said small-scale

agricultural development would easily add 10,000 jobs over the next two years.

Adding value to products, such as turning fruit into juice, is thought to be key

to sustainable development. The five-year Technical Assistance on Agricultural Sector

Development Program, funded by the Asian Development Bank, aims to steer farmers

away from rice by promoting development of value-added and processing activities.

"We need to decide what to do now," says Francesco Goletti, consultant

to the agriculture sector. "If this program is a success over the next five

years, the conditions will bring in foreign direct investment."

Much agro-industry currently consists of cash crops on plantations. The government

envisages more plantations producing palm oil, cassava, coconuts, coffee, sugar cane,

and horticultural crops.

Mong Reth-thy is the director of the private sector working group on agriculture.

Its 20 members cultivate rice, beans, cashew nuts, cassava, palm oil and rubber.

His company, Mong Reththy Group - which is no stranger to agro-industry and related

criticism - has spent $13 million on palm oil and cassava plantations. Cassava is

ground into seasoning powder for export.

"I encourage people to plant more cassava because the supply for my factory

is not enough," he says, adding that palm oil is another likely growth area.

"So far, palm fruit is produced a lot but it's cut and thrown away because there

are no factories here."

On June 5 he opened a factory for extracting raw oil to be sent abroad for refining

into cooking oil. His company runs a 3,800 hectare palm oil plantation along Route

4 between Phnom Penh and Sihanoukville, but he wants to increase that to 30,000 hectares

to supply local needs.

It all sounds good, but problems experienced in other parts of the world raise the

possibility agro-industry will trample on the rights and livelihoods of the poor.

In a country with few job opportunities, the poor need land to survive, as the villagers

in Tumring know to their cost.

There is agreement even within government that granting large land concessions is

often not 'pro-poor'. Prime Minister Hun Sen, for example, recently ordered a limit

of 10,000 hectares on agricultural land concessions.

Then there are issues such as labor rights, ranging from fair pay to health care

to education for the children of laborers. Observers are not convinced the country's

agro-barons are socially minded.

"Many large-scale agricultural concessions continue to be granted in Cambodia,

for a variety of schemes ... often to well-connected individuals or firms and without

environmental impact assessment, public participation or open bidding," says

the Ministry of Commerce sector report on diversified agriculture and agro-processing.

Daniel Mitchell is president and CEO of SRP International, which invests in "distressed

and under-performing markets". SRP runs a $750,000 teak nursery and plantation

in Kampong Cham that employees 13 full-time and 100-175 day workers. It recently

ran into conflict over its 1,850 hectares of land.

"Until there is a rule of law with regard to land titles and ownership, the

agro-business sector will not achieve its full potential," Mitchell says.

Poor farmers getting squeezed by plantation owners is a concern for Dr Yang Saing

Koma from the Centre d'Étude et de Dével-oppement Agricole Cambodgien

(CEDAC). "Poverty reduction means you should provide land to small farmers,"

says Dr Koma, who believes the rapid expansion of plantations could result in poor

labor conditions for workers.

Another risk concerns environ-mental effects. Dr Koma says there should be a balance

between conservation and concessions because soil erosion, fertilizers, and pesticides

resulting from plantations may be harmful.

"Land concessions are mainly upland," he says. "Since [Cambodia's

topography] is like a big bowl, that could create some problems."

His solution: avoid agro-ind-ustry for the foreseeable future.

"For the next five or ten years we should focus on family agriculture, not agro-industry,"

he says. "Cambodia needs to prepare itself before it goes to a higher level

of development."

As the government encourages agro-business, many say it must also improve the Kingdom's

food security by expanding the production of rice and other food crops. Although

there is a national surplus of rice, more families are unable to grow enough for

themselves, particularly in the areas most affected by the 2000 and 2001 floods.

Rice production is a complex problem, since as much as 70 percent of the paddy is

already exported without duty to Thailand and Vietnam for processing, says an advisor

to the Ministry of Commerce. Milled rice, often of poor quality, is then sold back

to Cambodia.

The Agriculture Quality Improvement Project (AQIP) hopes to change that. AQIP is

setting up four private sector seed companies in Prey Veng, Svay Rieng, Kandal and

Takeo.

The five-year program trains millers in post-harvest activities and business, and

is also trying to improve the quality of rice through contracts with proven farmers

to grow high grade seeds. Now it is developing a policy to help fruit and vegetable

farmers in marketing.

Peter Wood, who runs the project, says it is "all very much in the stage of

development" but aims to "increase agriculture output and value-added products

on a sustainable and cost effective basis".

A five-year project sponsored by both Japan and the World Food Programme and which

started in January pays rice to 350,000 farmers to maintain irrigation waterways

used in agricultural cultivation. As little as 10 percent of the country's farmland

is irrigated, the Ministry of Commerce has calculated.

The government also hopes to market Cambodian products to its own residents, so that

local businesses are not disadvantaged by future liberalized trade. Packaged Thai

noodles, for example, are quite popular despite the fact that noodles are easily

and cheaply made by micro enterprises in nearly every Cambodian town.

However, Boua Chanthou of the Partnership for Development in Kampuchea (PADEK) doubts

agro-industry will help the poor.

"Agro-business will not help the poorest of the poor of Cambodia," she

says. "It is more likely to help middle or large investors."

In the end, she says, agro-industry doesn't serve food security at home. She cites

the Philippines and Latin America as examples where huge plantations for export have

neglected local needs.

"The Philippines is growing sugar cane, but there is not enough rice for food

security," she says. The same will happen here, she continues, where "proponents

for agro-business usually argue that farmers will have a job on the plantation, but

in the end many farmers won't have jobs or land".

Chanthou says the government should go slowly to provide farmers with time to adjust

and to give the country the opportunity to see if it likes the methods of agro-industry.

Above all, she says, the government should pay more attention to small farmers and

provide technology that gives families food security and protects the environment.

For its part the government as-serts its 'pro poor' policy recognizes the need to

increase income opportunities for the country's poor, most of whom live in rural

areas. One strategy to improve their livelihoods is growing crops to order, known

as contract farming.

"Contract farming is a viable option we feel is very successful," says

the ministry's Siphana. "The nature of contract farming is that a company which

has a market, [and which] has a need to buy some commodities, will actually engage

some households to plant according to their specifications. In return it provides

technical assistance, seeds, techniques and standard setting."

Contract farming, which is used here mainly by British American Tobacco (BAT), is

suited to companies reluctant to risk investment in plantations.

"They don't have to worry about the land, which all belongs to the households.

They invest only in seeds and techniques," says Siphana. "It gives them

time over three or five years to know whether they can secure a reliable stream of

output. Then it would justify them putting in a big processing cannery or factory."

Nevertheless, PADEK's Chan-thou has her doubts that contract farming is pro-poor.

She says that "only big farmers will benefit. Poor farmers will not, and they

form the majority."

To increase production, farmers often believe that fertilizers and pesticides, which

are usually imported, are necessary.

BAT admitted earlier this year to the Post that its training for contract farmers

on handling pesticides was inadequate. It also confirmed that farmers who did not

use the pesticides would be unable to sell their crop to the tobacco giant.

For the farmers involved, buying such products reduces profits, which when they are

imported also harms the country's economy. CEDAC estimates Cambodia spent around

$50 million on fertilizers in each of the past two years.

CEDAC's Dr Koma says that since contract farming is new to Cambodia, the method needs

more examination. He is concerned by the Post's recent revelation that BAT recommended

using the harsh pesticide Endosulfin to Cambodian farmers but did not instruct them

how to use it. He also says some farmers in Thailand and the Philippines have abandoned

their land after they found that growing sugarcane and cassava depleted their soil.

"Because everyone wants to get profit, I'm not sure the farmers are strong enough

to fight [these] companies," says Dr Koma. "If the government goes ahead

with agro-industry, there should be certain support for contract farmers so they

can negotiate with business people."

The Ministry of Commerce is trying to help form farmers' associations, which will

help farmers deal with market demands and get assistance.

But not everyone is convinced that strategy will work. Tony Knowles of Enterprise

Development Cambodia (EDC), one of the only NGOs focusing on private sector development,

says the chances of that succeeding with the government's involve-ment are limited.

Knowles helped organize eight provincial rice millers' associations, which are now

marketing themselves and are setting up their own credit unions.

"There are low levels of trust for the government," says Knowles. "We

need to find a way of setting up associations, but not through the government."

So far, the government has had difficulty getting farmers to commit to associations.

But Minister of Commerce Cham Prasidh speculates it is because poor farmers think

they will cost money and do not see the long-term benefits.

The ministry's Siphana says China and some US companies are interested in starting

value-added plantations that will invest in management and production techniques

in hopes of securing a market.

The government also hopes to help Cambodian juice and fruit get packaged in Thailand,

where clients and infrastructure are already in place. Thailand, which is no longer

classified as an underdeveloped country, graduated from the Generalized System of

Preferences scheme which allows certain products to be exempted from duties. However,

goods that originate in Cambodia still get trade benefits. To that end land has been

cleared in Koh Kong, an 'export processing zone', to grow fruit that will be canned

across the border.

Siphana hopes the govern-ment's moves will eventually entice Thai factories into

Cambodia, saving them money and providing jobs.

"A company cannot justify investing in a new factory. However if we can go for

the additional lifespan of a factory for relocation, I think it's cheaper for the

investors," says Siphana. "It's an extension of the value of their machinery

and for us it's a win-win situation."

Siphana adds that private investment is more successful than public because "the

beauty of being private sector driven is they decide where it's feasible".

Knowles agrees. However, he says feasibility is the reason it will be some time before

foreign investment increases and agro-business becomes competitive. He says there

are too many hidden costs in red tape and corruption to doing business in Cambodia,

and "if someone ambushes your profit, there's little interest in improving".

SRP International's Mitchell, whose company runs the teak plantation, says the lack

of an efficient and fair judicial system is the largest problem facing any business

in Cambodia.

"The system reeks of corruption from the very top to the judges in the courts,"

he says.

Knowles adds that there is a basic misunderstanding of the free market, and says

"the government needs to be a facilitator instead of a controller and regulator".

"Almost zero has been invested in private sector development," he says.

"We have to start to build an economy."

Siphana is keen to start an "Incubator Project" which would explore constraints

and show what can be done in small, private sector production, processing and marketing

enterprises. The project would provide a model on how to diversify Cambodian agriculture

and develop its agro-processing industry.

"I think we can re-position ourselves as the granary of Southeast Asia,"

Siphana says. "That's the vision. In the sixties we were the granary of Asia."