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
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?
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.
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.
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."
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
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
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
"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.
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.
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.
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.
"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
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
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
- "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"
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
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
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
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.