Visiting Professor Institute of Economics Criticisms of the United Nations Transitional

Authority for Cambodia (UNTAC) have come to the fore from all major home-grown players

involved in Cambodia's saga. Apart from growing concern over its handling of the

peace process timetable, UNTAC is widely considered-both at the street level and

among educated Cambodians in Phnom Penh-to be at the root of the country's move into

3-digit inflation with all its attendant de-stabilizing consequences. With the organization

understandably on the defensive, it is not surprising that a study has recently been

released to set the record straight.

Although the report, entitled "Impact of UNTAC on Cambo-dia's Economy"-dated

Dec. 21, 1992 and prepared by the Economic Advisor's Office-purports to present an

overall view of the economic consequences of UNTAC's mandate, it is clear that it

is the inflationary judgement that is the main target.

Whatever the purpose, the report is welcome particularly as so little has been written

on the recent economic situation in Cambodia. It also makes interesting reading.

Not only does it do a public service in making available important statistics hitherto

available to only a few, but it presents a valid argument that both stimulates and

provokes discussion.

As an exercise in persuasion it is impressive, but it also leaves lingering doubts.

Many parts of it recall St. Paul's comment "the intelligence of the intelligent

I will frustrate" (1 Corinthians ch 1 v.19).

Before considering its attempted exoneration against the central critique, it is

worth noting the other main points that are stressed.

On the positive side, and the report is full of positive statements, the main emphasis

is on the advantages that Cambodia has, and will derive from UNTAC's presence. These

benefits are seen to range from the stimulus it has given to socio-economic change

through income-generating employment and local capacity building to its primary role

in the revival of international confidence in Cambodia and its concomitant, initiating

the externally financed reconstruction efforts so critical to the country's future.

While the authors admit that not everything in the garden is rosy, what is striking

is the way that all the negative consequences are either attenuated ("a large

and sudden influx of foreigners with ... higher incomes was bound to create some

problems and pressures") or seen to be fairly minimal ("spending patterns

of UNTAC staff are considerably different from the local Cambodian community, the

prices of whose normal purchases are little affected by UNTAC outlays").

The final assessment, having apparently considered all the pluses and minuses, is

not surprisingly upbeat: "Overall, there appears to have been little change

in the balance between the total supply and demand of goods and services as a result

of UNTAC expenditure..."

How plausible is this summary?

The rest of this article attempts, using the same data, to see if there is a different

more nuanced conclusion. Two reasonable criteria will be applied: does the inflationary

argument hold water; secondly, given that the implementation of the Paris Peace Accords

lays stress on the "Rehabilitation" (i.e. pre-election) phase, during which

UNTAC's authority is paramount, how does their performance match their mandate. In

other words, what have they really done on the economic front to lay the ground plan

for the next government?

Inflationary Argument

A few simple theoretical digressions are called for to develop the first point. This

is necessary first, because it is an economic study using economic concepts; secondly,

theory, which needs to be constrained by what we know about the world we are attempting

to understand, should tell us what we can say and what we can not say with certainty.

Although economists lack a rigid causal theory to explain inflation, they have elaborated

a set of reasonable propositions that any sensible person can accept. Moreover, as

the terms used are sufficiently graphic to need little further justification, they

can easily be used as pegs for developing an analytical framework.

The three best known explanations for modes of transmitting inflation are called

"Cost Push," "Demand Pull" and "Monetar-ism." Although

sustained increases in price levels can rarely be isolated in their causes-as they

are invariably due to a combination of factors-for simplicity's sake they will be

treated separately in this article.

"Cost Push"

A simplified version of the "Cost Push" explanation says that market

prices are presumed to be determined by the costs of their inputs. For it to be an

independent cause of inflation, cost inflation must arise on its own and not be a

mere sequel of previous demand inflation. Inflation in this sense can thus be caused

by a round of increases in the pushing element, i.e. the costs of inputs.

"Demand Pull"

Unlike the former, which clearly dispenses with demand pressures as a cause, "Demand

Pull" is clearly about inflation due to people and/or the governing authorities

wanting and having the money to buy more things than can be made available at a given

time. In such a case, inflation derives from the market's attempts to ration out

- through the price mechanism - the limited supply of what is wanted by economy-wide

excess demand, a situation often referred to as "over-heating."

"Monetarism"

The last reason for inflation is called "Monetarism." This approach which

has enjoyed considerable popularity puts the emphasis squarely on the creation of

money. Crudely put, Monetarists hold that increases in the money supply, provided

that the rate that money turns over is fairly stable, cause increases in prices after

a time-lag. For them, inflation is a purely mechanistic monetary phenomenon which

arises in any economy whenever the government/central bank allows the money supply

to grow faster than the growth in productive capacity and the so-called "natural"

rate of unemployment.

They maintain that this happens whenever a government goes on a borrowing binge for

whatever reason to cover the difference between its public spending and what it is

getting in the way of revenue (taxation, etc.). Too much money chasing too few goods

can also arise from monetary transactions with the private sector and from a country's

external sector. Whatever the cause, Monetarists maintain easy money always means

higher inflation!

In developing countries as poor as Cambodia, conventional wisdom holds that inflation

is imbedded in weaknesses of the economic structure and in the start-up of the development

process itself. With few exceptions, inflation is seen, whatever triggered it off,

to be entirely due to money creation in order to finance the government's budget

deficit. This is often seen as axiomatic, however undesirable when taken to extremes

because the alternative to a non-accommodating monetary policy would inevitably reduce

real levels of economic activity more than the rise in price levels.

In many underdeveloped countries it can be argued that once there is a high rate

of inflation, it will become self-generating unless steps are taken to reduce it

which can only go hand in hand with short-term outside financial assistance to support

a stabilization policy. In Cambodia it is more than likely that the budget deficit

has now become a function of the rate of inflation. This is because public expenditures

have risen with inflation, while revenues, for whatever reason, have tended to lag

behind. This situation may well continue unless arrested with outside help.

Thus countries within the group of the least developed, where there is little immediate

flexibility in the fiscal system, especially in the short-run, and where the domestic

capital market is totally inadequate, find themselves willy-nilly in the position

of Hobson's choice. Without a "Stabilization Program" coupled with external

credit lines to fund essential spending increases, they either have to adopt measures

likely to push inflation forward, or cut back the budget, in real terms, thereby

risking severe damage to an already weak economic base.

One further point compounds awkward policy options, countries in such a position

are particularly susceptible to the impact of imported inflation or to a sudden externally

induced pressure. The reason why they get hurt is obvious. Given their limited capacity

for adjustment, reacting to such pressures becomes that much more difficult.

With these points in mind one can examine the contentions of the UNTAC report from

a somewhat different perspective.

But first, one last factual digression without which comment on the UNTAC report

is specious. And this concerns the situation of Cambodia when UNTAC arrived. Briefly

put, because it is well-known, the country was one of the poorest in the world with

an appalling set of socio-economic indicators. Study after study attested to the

near collapse of a whole range of essential services. A direct result of the ravages

of war, poverty, and deprivation due to the prolonged international boycott.

As if this was not enough, the country was in the midst of a bold, if ill-thought-out

jump from Communism to full-blooded Capitalism. A welcome step rendered unexpectedly

more difficult by the sudden cessation of the Communist Bloc's credit life-line and

Soviet hand-outs in 1991; the need for a sudden hike in defense expenditures consequent

on the withdrawal of the Vietnamese army in September 1989; and rapid privatization

which, in the absence of compensatory financial/tax disciplines, led to a sharp decline

in fiscal revenues. Caught between a rock and a hard place and denied the stabilization

programs which were being cobbled together for countries making the same long sought

after shift in Eastern Europe and the Soviet Union, the Phnom Penh administration

simply turned on the money tap. Inflation, as a result, took off and started feeding

on itself.

Against such a backdrop it would have been impossible for UNTAC not to have had an

effect, one way or another. However, the impression given by an overall reading of

the report is that, contrary to what most people would think, this effect has been

relatively minimal, i.e. less disruptive than one might have imagined.

While the study notes that UNTAC'S total budget largely exceeds Cambodia's estimated

GDP (nearly a colossal U.S. $3 billion compared to U.S. $2 billion), it demonstrates

that only a small portion has and will actually be spent within the country. However,

while true, the amounts, in the context of Cambodia's extreme poverty (annual per

capita income between U.S. $150/190; UNTAC monthly subsistence allowance based on

per diem U.S. $145) are not insignificant. Moreover, and more importantly, the time

scale for these disbursements was not only very short, considering the limited absorptive

capacity of the country, but have increased astronomically between the two six-month

periods of 1992.

The report's figures show this clearly. From Nov. - Jun. 1992, total UNTAC staff-related

outlays were estimated at a maximum of U.S. $11 million (of which U.S. $0.2 million

went to locally recruited staff). In the latter half of 1992, these figures had jumped

to U.S. $41.2 and U.S. $1.2 million, respectively. Note that all these statistics

exclude payments for military rations (U.S. $3.7m and U.S. $49.8m, respectively),

as most of it is supposed to be imported. All told, UNTAC estimates suggest that

total staff-related outlays moved nine-fold from U.S. $11 million (Riels 10.45 billion)

to U.S. $95/100 million (Riels 215/225 billion) between the two periods.

To give an order of magnitude, the total for the whole of 1992, including their riel

equivalents of the dollar, can be compared with figures maintained by the Cambodian

National Bank (see chart).

In US dollar terms UNTAC staff outlays in the country were three times the value

of Cambodia's estimated foreign assets, 20 percent greater than planned budget expenditures,

three times the revenues hoped for the SOC's coffers, over double the total money

supply and 11 percent of total GDP. Comparing the figures like this not only gives

an idea of UNTAC's commitment to Cambodia in money terms, but also makes difficult

acceptance of the report's conclusion: "Overall, there appears to have been

little change in the balance betwen the total supply and demand of goods and services

as a result of UNTAC expenditure and UNTAC'S impact on the economy would not constitute,

therefore, a major source of inflationary pressure."

Performance vs. Mandate

Let us now examine it from the three inflation transmission yardsticks to see whether

they throw any light on the latter contention bearing in mind that there was an already

existing price conflagration brought on by SOC authorities themselves. Here what

is important is the extent, if any, of UNTAC'S contribution both to the galloping

inflation already in existence - like throwing petrol onto a fire - and the extent

that they either helped/hindered SOC authority's efforts to bring the situation under

control.

"Cost Push" impulses in Cambodia can be seen in several instances which

can be tied to UNTAC's period of activity. In the aggregate it is unlikely that they

have helped. For example, increased overload on all public sector utilities by UNTAC-occupied

premises (urban water; sewage; solid waste disposal; roads in the city; etc.), at

a time when their delivery costs were rising in any case, at least at the same rate

as the price level overall, added to the cost of their provision. By not paying an

adequate user charge, UNTAC has not helped their already severe operational strains

at a time when public investment is and was virtually at a standstill.

Wages

On the side of wages, the impact is both direct and indirect. UNTAC has established

a minimum monthly wage scale for its local employees which is more than double prevailing

wages. This has inevitably set standards which any employer wishing to retain good

staff is obliged to take into account irrespective of whether their operation justifies

it or not. It has also had unavoidable tension-creating effects on other Cambodians

doing similar work in the local economy. The bidding up of salaries has also drawn

off able people from other essential activities as they understandably go job-hopping

in search of quick riches. The "wage effect" will be compounded when UNTAC

recruits another 50,000 locals ( against a SOC civil service total of 36,000 ) to

assist in the elections.

Rents

Equally pernicious from the angle of "cost push"were the rents that UNTAC

were prepared to pay instead of liasing with the experienced NGO community already

operating in Phnom Penh a system of quasi-rent control. Massively reinforcing existing

inequalities in income distribution, kicking-off an enormous speculative land boom,

while providing the few with an exaggerated standard of living that can not continue

after UNTAC departs, suggests that even without hindsight such a policy was questionable

and hardly justified by the subsequent benefits alleged in the UNTAC study.

Riel Depreciation

Finally, the continuous depreciation in the riel since December 1991, which no sensible

person can say has had absolutely nothing to do with the market's knowledge of the

masses of US dollars floating around, drove up the local price of all imports (especially

fuel, fertilizers; medicines) paid for in foreign currency. This has proved to be

an added burden for all those with insufficient dollars to make direct payments in

dollars. Whether by adding to production costs across all those sectors dependent

on energy or imported inputs (cement; glass; iron and steel; construction materials;

etc.), to the unfortunates expected to pay for medicines/treatment in Phnom Penh's

"free" hospitals. Such factors may have been behind the Asian Development

Bank's recommendation that foreign exchange should be provided to buy fuel, fertilizers,

and other agricultural inputs, etc. ("Economic Report on Cambodia", Dec.

1991).

"Demand pull" is the next transmission mode. The relatively high comparative

level of UNTAC disbursements shown by the figures mentioned previously, has vastly

increased local purchasing power. The amount of conspicuous consumption to be seen

in the main streets of Phnom Penh is ample proof of this. But suddenly having much

more money to spend always adds to inflationary pressures when existing supply can

not quickly expand to meet the rise in effective demand. Until more becomes available

the increased spending can only be absorbed by an increase in prices. For those unable

to share fully in the bonanza, like most of the urban poor, life becomes harder whenever

they have to pay more. Take for example, UNTAC's admitted purchases of local foodstuffs

(fresh meat, fish, rice, fruit and vegetables), which naturally compete with purchases

by Cambodians. As their supply elasticities (i.e. responsiveness to price increases)

is low, sudden jumps in purchasing power inevitably lead to bottlenecks and hence

to price inflation as any expat's cook can attest over the last 6 months.

The report's view: "However, it is clear from the very rapid expansion in a

wide range of informal, and mostly house hold-based, activities serving the lower-income

sections of the community, that such distortions have not contributed to any serious

misallocation of resources," needs an added factor to be set alongside it. The

economic truism that all those whose incomes do not rise in step with changes in

the price level suffer real losses. Unfortunately, such examples are always to be

found among the socially weaker groups of the population....they can be seen daily

in the street life off the main boulevards of the city.

The last vehicle for transmitting inflation is the prime "Monetarist" view

that there is a direct co-relation between the quantity of money and level of prices.

In this connection, the UNTAC report makes two points: one valid, the other open

to debate. The first is that "inflation in Cambodia is mainly the outcome of

the Administration's need to resort to the printing press to pay for an ever increasing

budget deficit." This is undeniable, even though it begs the question as to

what was the nature of the demand that had to be validated by printing more money.

A related question concerns UNTAC's conclusion: "prices will continue to increase

in Cambodia unless policies to raise revenue by increasing taxes are implemented

to help correct the budgetary imbalance. Only then can the rate of price increases

be brought down to a more 'normal' level." A view that seemingly discounts what

was said previously about the built-in inflationary pressures in developing countries,

and the fact that the UN Secretary-General's Consolidated Appeal deliberately included

a significant component of budgetary support for the beleaguered SOC administration.

More pertinently, in the light of the above quote, do the authors of the UNTAC report

seriously believe that SOC can devise/implement a tax system to bring in adequate

revenue before elections are held?

The second major argument is that, as UNTAC expenditures are in dollars which circulate

freely in Cambodia and are a desired medium of exchange, "there is no equivalent

creation of local money." Moreover, these dollars are "similar to foreign

revenues and parallels an export of goods and services and it thus provides automatic

financing for imports." This provokes an interesting after-thought. If, as the

study suggests, these dollars are akin to an export of goods and services, then UNTAC

could be seen as analogous to a country to which Cambodia exports. In which case

one is entitled to ask: "what is being exchanged and at what price in order

to earn such foreign exchange revenue?"

The report goes on to argue that a significant portion of the dollars made available

are either deposited in dollar accounts, sent abroad (not evident from the state

of Cambodia bank balances), or turned into gold (by and large Cambodians switch surplus

riels, not dollars, into gold. It then maintains that these "leakages from the

expenditure stream limit the rise in aggregate demand, while the influx of imports

increases aggregate supply thereby providing an important safety valve (SIC) for

potential inflationary and pressures".

For the above three contentions to be true, several conditions would have to be met.

Obviously, there is no equivalent matching of riels for every UNTAC dollar brought

in and spent in the country. What matters, however, is that everyone receiving U.S.

dollars changes some proportion into the local currency and that proportion is important

in the domestic context where U.S. dollars hithertofore have been sparse. Dollar

earnings, however earned, are regularly changed into riels. This is partly because

Cambodians know well that there are lots of items (foodstuffs in the market; entertainment

outlets; transport; petrol; license fees; school costs; etc.) where payments are

made almost entirely in Riels. They also know that not only are there articles in

their daily budget where amounts less than one dollar are required but that prices,

perhaps through the lack of perfect market information for a range of goods/services,

still cost less than their daily U.S. dollar equivalent.

Cambodians largely use the "Greenback" when paying big amounts or purchasing

imported goods; but how regularly do they do this? Likewise, all expats regularly

buy riels from money changers in the market; few foreigners use US $ exclusively

during their Cambodian stay. What counts, even though the amounts may be considered

small when compared with the gross aggregate figures shown in the previous table,

is their size relative to local purchasing power, and this can be considerable. One

does not need a large stone to provoke a ripple in a little pool.

Arguing that the US $ inflow is similar to foreign revenues has a point, but poor

developing countries are more likely to treat such an unearned windfall as reserves,

forcing the private sector to buy the extra dollars they need on the domestic foreign

exchange market even if this leads to further currency depreciation.

Again, it is academic to postulate a direct, automatic in/out equilibrating flow

of dollars for dollar-priced imports. For one thing there are always leads and lags

between receipts and payments and, unless totally sterilized, because all economies

are porous to a degree, the knowledge of a regular dollar inflow ("similar to

foreign revenues") may well encourage an increase in the domestic monetary base

or a relaxation of policies previously constrained by the lack of necessary hard

currency.

Finally, the existence of large amounts of uncontrolled US $ washing around in the

country can not but add to the authorities' task in managing the economy. Problems

of transparency are multiplied, unregulated dollar cash transactions compound tax

assessment and collection difficulties and often mean that the administration is

severely hindered in attempting to get its fair share of the use made of public services

paid for in dollars. It also compounds problems in restoring credibility in the domestic

currency. In short, the existence of huge uncontrolled US $ liquidity has created

a shadow economy largely to the benefit of UNTAC and those Cambodians and their partners

able to profit from the spoils of peace.

To revert to the report's title, "Impact of UNTAC on Cambodia's Economy";

it suggests that an overall assessment will be put forward. This aspect is perhaps

the weakest treated, despite the-possibly unconscious-use of the noun "impact"

(dictionary definition: collision; profound effect; press).

Among the Agreements on a "Comprehensive Political Settlement of the Cambodian

Conflict," one finds a "Declaration on the Rehabilitation and Reconstruction

of Cambodia." The Declaration gives UNTAC prime authority during the "Rehabilitation"

phase which precedes the "Reconstruction" period (an unrealistic politically

inspired distinction). It also makes clear that the successful implementation of

the Paris Peace Accords on the economic front will require particular attention -

before the formation of an elected government - being given to "food security,

health, housing, training, education, transport network" as well as the "restoration

of Cambodia's existing basic infrastructure and public utilities." Focussing

on these elements can only have been for one reason: creating or enhancing pre-election

stability.

In this context, the report outlines a welcome number of positive features:

• "Without the endorsement of UNTAC, it is doubtful whether Cambodia could

  have gained access to critical international resources." Here, it would have

  been useful to know what has actually been disbursed especially as most people believe-despite

  the U.S. $880 million pledged in Tokyo- that it has been very little so far;

• "Significantly, there has been little or no inflation in U.S. Dollar terms...other

  than in "non-tradeable hotel charges and rental costs." Again, it would

  have been helpful to have had the data in the statistical annex, particularly as

  recent market evidence points to a different conclusion for a number of U.S. Dollar

  priced goods;

• "Construction and renovation activities have expanded dramatically, financed

  directly by the higher rentals paid by UNTAC." Inarguable. The real question,

  though, concerns the aftermath when, after UNTAC goes, market rationalization lowers

  rental and sales prices causing serious problems for many developers;

• "UNTAC's purchasing power has had considerable direct and indirect employment

  generating effects" (mainly in construction and service-related industries,

  spilling over into transportation, restaurants, etc.). The above comment regarding

  the degree of sustainability once UNTAC pulls out is equally relevant;

• "Development over the longer term will also stand to gain from UNTAC's activities

  to open up new tracts of arable land, from its important de-mining operations, from

  its actions to repair and restore the infrastructure, and its efforts to maintain

  basic health, sanitation and education services."

The last observation is the most important as it points to the future. It implied

that UNTAC has used its authority under the "Reconstruction" phase to pave

the way. It provokes a measure of disagreement. The reality is far different even

with only 4 months left before elections and the presumed move into the second "Reconstruction"

phase.

On UNTAC's own admission, relatively few resources could be directed to sustaining

social services and meeting other development needs. A principal reason was apparently

the need "to keep aid flows neutral." Despite its mandate to give particular

attention to the existing basic infrastructure and public utilities for the reasons

already noted and its monitoring and surveillance powers to ensure strict neutrality

when working through the present Phnom Penh administration, this deadly concept of

virtue has been maintained despite all evidence of its illogicality in the Cambodian

context. If it was not economically logical, in the pre-election environment, the

provision of essential external budgetary support would never have been included

in the UN Secretary-General's plea to member States.

The UNTAC Economic Advisor's Office well knows , at the macro-level, that the central

problem from which so many difficulties flows is the growing unfunded budget deficit.

Not only does its continuance feed the destabilizing elements associated with hyper-inflation

("destroy the currency and you destroy society"; Karl Marx), but the strain

thereof tends to sharply reduce investment in necessary infrastructure. Since the

arrival of UNTAC there has been no assistance whatsoever to help bridge the fiscal

gap, not even for essential expenditures. Irrespective of the disadvantages-and it

is not the well-off who suffer in such cases-everything has been put on ice until

a government of international acceptability is elected.

Despite recognition of this financing need by the Secretary General of the U.N. in

his Consolidated Appeal, Cambodia's largely impoverished people will have to still

stay on hold. Simply because no one could, or would, devise a way of providing the

bare financial wherewithal even under the strictest of monitoring tutelage. The poorest

part of the population has once again had to bear the brunt of the sacrifice...to

placate the Khmer Rouge's demand for even-handed treatment?

The latter is more than just a tired old debating point. Cambodia's principal problem

at the micro-level is the pressing need for village development. The economic boomlet

that UNTAC takes credit for is city-based. Outside of Phnom Penh, where the vast

majority of the people live, the critical need for village community development

is forgotten in a report that unwittingly lauds the pumping in of largely urban consumption

expenditures.

To conclude. Yes! UNTAC has had an IMPACT on the Cambodian economy. Without UNTAC

Cambodia would be a sorry place. The impulse they have given towards change in the

right direction is undeniable. What is questionable, however, is where the line should

be drawn when one only looks at their current economic impact, as does the report

under discussion.

The two most important economic problems, the growing unfunded budget deficit at

the macro-level, and the critical need for income-generating village development

at the micro-level have hardly been touched, if at all, by UNTAC's presence. These

problems, with all their attendant dangers of perpetuating the country's two separate

economies and dangerous rural/urban imbalance receivescant treatment in a report

that is supposed to treat UNTAC's overall economic impact, so far, on the country

as a whole.

Their exclusion does not mean that they will disappear. On the contrary, they will

remain, put on the back-burner because of the alleged taint of the current administration,

until an "acceptable" government comes on the scene. And then, hopefully,

they will be tackled nearly two years at the very least after the key problems were

first identified.

What a legacy to hand over.

Time is short for UNTAC to improve on its existing economic "impact." It

needs to exercise more fully and persuasively the obvious authority that was given

to it. It needs to make member States in the outside world more aware of the current

economic situation and, especially, its implications for establishing a supportive

environment for the holding of "free and fair" elections.

If nothing is done about what needs to be done, then there is a real risk that the

so-called "Rehabilitation" phase will go down in the history books as one

which saw the creation of a colonial-style society and a dual shadow economy. For

those who know their Cambodian history, it is almost as if the gods wanted a replay

of the country's ersatz capitalistic experience in the 1960s and early 1970s.