Post-war history shows no poor country moving to the development "take-off"
stage on aid alone. This, together with the trend line that shows there will not
be much official development aid money around in the next decade puts a premium on
attracting capital. As prospects for public sector borrowing overseas are equally
dim-due to doubts about debt servicing capabilities-private foreign direct investment
(FDI) has become not only a sine qua non for all of the least developed countries
but its continuance has come to be taken as barometer of any government's track record.
As expected, competition for a slice of the world's stock of FDI has intensified.
Capital scarcity is driving more and more countries to draw up policies conducive
to winning the approval of the international investing community. While no one questions
the benefits, both direct and indirect of FDI, there is often too little thought
as to the implicit trade-off between the interests of government and FDI requirements.
At the moment Cambodia has an interim coalition government charged with defending
the interests of the state, pending the passage of a new constitution and the formation
of a government. As an aid to policy formation, this article will consider the key
questions of the implicit trade-off between the interests of government and the FDI
community. Where the country's long term good can be said to lie. It will also consider
Cambodia's investment sex appeal.
One assumption will underlie these observations. That the essential precondition
for attracting FDI-economic stability-will be realized. In other words, that appropriate
policy measures will be enacted through the IMF/World Bank Stabilization Program,
that appropriate policy measures will be enacted to correct Cambodia's severe macro-economic
imbalance. An imbalance made visible like the tip of an iceberg by three-digit inflation
and its source, the wide unfounded budget deficit.
Here, one obvious comment-the twin prongs, monetary and fiscal policy-of which the
latter is by far the key-cannot be expected to deliver the goods if external assistance
is just confined to urgent infrastructure rehabilitation. Quick-flowing budgetary
and balance of payments lifelines is the support most needed if unfavorable foreign
investor perceptions regarding the country's "terminal ward" category are
to be removed.
One last proviso-none of the major parties in the election formulated a clear economic
program-except for paying lip service to the continuance of a liberal market economy
and the need to improve public revenue. This calls for some crystal ball gazing.
Three things make this difficult. There has been practically no long-term FDI in
the country since pre-1970, nor attempts to find out and match what neighboring countries
similarly placed are doing. Finally, with Cambodia still in a statistical Stone Age,
much essential data is simply unavailable.
Nevertheless, enough is known to sketch the shape of the environment the two sides-Government
and FDI-will have to cohabit and the trouble spots to be avoided.
To be realistic, such a sketch must start by enumerating hard truths that determine
the Cambodian situation and investment climate irrespective of the achievement of
fiscal balance, or government in power. The logic of these parameters will then be
explored to see where they lead in terms of policy issues. This analysis should hopefully
shed light on policy objectives that will receive a "thumbs up" and those
a "thumbs down" from foreign direct investors.
To move to substance, there are three predominant hard facts determine any future
- First, the population constraint: any government wishing to retain power and
avoid social unrest must ensure the economy grows at least as fast as population
(on present trends, this means the economy must double in size within just 22 to
- Next, the size constraint: due to its small market size, low effective demand,
poor natural resource-based potential (with the exception of natural gas), and limited
surplus capital, Cambodia does not have the option of going it alone;
- Finally, its absorptive capacity constraint, an unavoidable factor for a decade
at least: this catch-all phrase includes a series of critical features stemming from
history-like a potentially explosive huge rural/urban imbalance, a near defunct infrastructure,
chronic human skill-capital shortage, cultural preference (like the Greeks) for trading
activities rather than building and working in factories, an understandable predilection
for the immediate over the long term, and a dependency syndrome broken only once
since colonial times.
Cumulatively, these features suggest vulnerability to exploitation, quick-fix
policies, plus a related need to hold outside world interests that will no longer
be guilt-driven by their neglect of the Pol Pot era.
Let me insert a sketch of the two main role players: government and foreign investors.
The difference in optic between government and FDI, though obvious, bears repeating.
The economic rationale for governance, both in terms of political and technical management,
stops at the macro-level. In Cambodia's case this means managing the successful completion
of the transition to a market economy with its essential back-stops: physical infrastructure
plus the stability that underpins a healthy private sector.
Regulatory aspects concern control of the money supply, a manipulative fiscal policy,
overseeing a supportive legal framework that business can rely on and, genuine protection
of the environment.
The micro-level, unless there is a clear case for official intervention to redress
failure or inefficiency, should be left to the markets' players. The great development
policy lesson of the 1970s and 1980s, that competitive markets determine production
and allocation of goods and services, not governments, is a lesson that Cambodia
can ill-afford to ignore.
The foreign direct investor (FDI), on the other hand, is in the business of "risk-based
capital management." Three types of risk can be distinguished: the choice of
market to be invested in (potential selling range, communications possibilities and
product quality); the ambient business environment (government stability, "red
tape", corruption and danger of nationalization); and financial risks (exposure
to interest rate changes, currency exchange prices and ease of profit/capital remittances).
Only when the "guesstimates" seem reasonable, profit-wise, will the FDI
bandwagon start to roll towards a particular location.
Although the difference between government and FDI is essentially between a "pro-active"
and a "re-active" agent, meeting the exigencies of the latter cannot be
The essential point, though, is how far should this go? Having broadly demarcated
the roles of the main protagonists, one can now extend the implications for policy
of the three afore-mentioned inescapable parameters.
- 1) Population growth was the first. Its iron logic for government policy
is contained in a simple equation: HW = R (r1 + r2) / p where HW = Human welfare,
however defined; R = resources of which r1 = domestic and r2 = foreign; while P =
In Cambodia, the only element in the equation we are relatively sure of is that population
growth is between 2.8 and 3.2 percent per anum. Hence the inescapable doubling time
of 22 to 25 years. If "R", in whatever combination of "r1" and
"r2", does not increase at least twice as fast, then social welfare (HW)-the
raison d'etre for development-will have to be revised downward for up to 18 million
Doing so will inevitably widen existing inequality because, whenever the majority
derive their livelihood from land, high population growth is more deleterious in
its effects than when land use has declined as a major factor of production.
Three principal policy conclusions emerge. The need for nation-wide family planning
with the main emphasis-despite a cultural prejudice-in raising the average age that
Khmer females give birth one of the quickest ways of beginning the vital slowdown
process. Secondly, as human capital is the only asset of the poor, raising its productivity
must have top priority. This is not a soft humanitarian option. All recent studies
on the lessons of the last two decades show that improving education and health is
the key to economic performance.
2) Economic size, the second major policy constraint, is equally compelling.
Although geographically located in the fastest growing area of the world, Cambodia
is a featherweight in economic terms. This suggests not only a real risk of unequal
trade relationships with little in the way of credible defense but an equally low
profile in the cut throat race to attract FDI.
Again, a policy solution suggests itself. The only way for Cambodia to enhance
its investment-location attractiveness is by becoming part of a regional free trade
area. Given its weaknesses and inability reap the benefits of economies of scale,
its ability to survive as a small viable country will be dependent on being part
of a larger economic hub, albeit with appropriate safeguards.
As previously argued (Phnom Penh Post, After the Polls, Quo Vadis Cambodia",
April 23-May 6), Cambodia, through a unique set of circumstances, can easily join
the GATT. The one and only international trade organization whose contractual basis
provides built-in devices for safeguarding the interests of the weak against the
strong. That apart, there are two other important considerations:
For a country with Cambodia's background, GATT membership, together with the surveillance
functions of its Secretariat, is like receiving a seal of approval. A type of guarantee
that there will be no backsliding with respect to market-oriented policies. In investment
terms it is akin to being given a recognized credit rating. Joining GATT can also
be seen as a soft, safe, start-off for Cambodia's re-integration in the world economy.
Also important, if Cambodia's need to become part of a larger economic grouping is
accepted, are GATT provisions relating to free trade areas and custom unions. Given
that all the principal countries of the region are parties to GATT, Cambodia would
not only enjoy a degree of "protection" but have access to multilateral
dispute settlement procedures when its national trade interest was in jeopardy; something
it would not have were it to stand alone.
Membership of ASEAN is a related issue. Currently, a study is underway to examine
the procedures for the formal entry into ASEAN of Cambodia, Laos and Vietnam, the
latter having already been granted "Observer"status. With ASEAN finally
deciding to move, within 15 years from 1993, to a full free trade area including
harmonized FDI incentives, Cambodia cannot afford to remain outside. As a principal
entry criteria is manifest commitment to market values, Cambodia's negotiating position
for acceptance would be more credible if it also had the force of GATT membership
3/ Absorptive capacity was the final constraint mentioned. Here, only three items
will be touched on-rural/urban imbalance; infrastructures; and human skill shortage.
The other points flagged were cultural, more susceptible-if at all-to the "invisible"
rather than the "helping hand."
The rural/urban imbalance cannot be ignored. Urban riches and foreign domination
therein have long been a source of political tension is Cambodia's history. A feature
successfully exploited but with disastrous results by the Khmer Rouge.
Here, the central objective must be two-fold: first, cushion the poor (mainly women)
from the hardships that go with the initial adjustment; second, ensure that the predominantly
rural population share, as much as possible, in the fruits of growth.
Infrastructure, currently the major headache, needs to proceed on the basis of a
mix of FDI priorities which generate maximum social spin-off. Targets which will
provide high returns are thus power supply, road networks and irrigation (including
the outlet of the Tonle Sap lake), together with urban utilities and communications.
At the same time, to avoid worsening the imbalance, simple investments in drinking
water, feeder-roads and electricity are proven ways of improving the productively
of the rural poor. A forceful credit policy, both to farmers and to women capable
of creating cottage industries, would probably create an income generating dynamic
far outweighing the initial capital outlay.
A monumental constraint if Cambodia is to manage its own destiny is the lack of human
skills. With today's small elite and training's built-in time lag, two expedients
need to be considered. Strongly encourage the most productive members of Cambodia's
large emigre population to return. Make it attractive to overseas Khmers to invest
back home; for example, expatriate Vietnamese investors have recently been allowed
to pay 20 percent less tax than other investors while retaining the same privileges
granted to FDI. Finally if a predominantly young population is to believe in the
sacrifices necessitated by the shift to a full market economy, then the government
must insist that promotion will be based on merit and honesty.
Potential FDI investment sectors are different. There are basically four. Agriculture
(essentially rubber, marine fisheries and, possibly, palm oil; Petroleum (most probably
natural gas); Manufacturing and Tourism.
Only three (fisheries, natural gas and tourism), have both long term foreign exchange
earning potential, and the possibility of showing cash returns in the short run.
Manufacturing, from the view point of FDI, even if rehabilitated, is limited.
Cambodia has never managed to build up much of an industry base. The existing sector
is small, lopsided, with a few large state-owned enterprises awaiting privatization
and multiple micro industries of the cottage type; it is also badly neglected. Development,
if it is to take place, would better concentrate on exploiting those areas where
Cambodians have both skills and access to materials viz handicrafts, food processing,
livestock, aqua culture and, of course, trading.
Again there is an FDI contrast. Today's Asian "tigers", the principal investors
in the region have become highly cost conscious. Labor shortages, exchange rate movements
making exports less competitive, and a reduction in trade preferences, are responsible.
Their choice is stark: move up market or shift to another low cost location. In the
case of Cambodia, FDI interests are likely to focus on the short-term exploitation
of natural resources and, should Cambodia become part of a regional trade zone, may
consider the country as a low cost assembly center.
The latter observation contains the nub of government's difference from FDI. The
government's optic is long term; unless persuaded to the contrary, FDI perspective
is invariably short term. Due largely to the fact that, to balance the downside they
faced in the past, investors in developing countries now look for a large potential
upside in their investments.
Unless Cambodia becomes part of a recognized trading association and FDI investors
view it as a jumping off point for further penetration of the regional market, it
would be unrealistic to see a change either in short term investment attitudes or
in the country's current lack of "attraction".
Apart from thinking through the implications of this challenge, there are two areas
for the government to establish in the interim. On the mundane level, government
must ensure that today's low wage advantage is not off-set by factors contributing
to low productivity.
This means paying attention to: ease of getting supplies through customs; cutting
bureaucratic "red tape" in acquiring business contracts; a legal system
that investors can rely on; copyright protection, land ownership and acquisition,
a speedy arbitration panel and adequate legal representation; provisions for export
processing; clear cut definitions of differences between joint ventures, 100 per
cent foreign owned businesses, contractual business operations; and Build-Operate-and-Transfer
Such considerations are essential if investors are to be really persuaded that, in
the "Cambodia after UNTAC," their potential returns will exceed their cost-risk
relative to other potential locations.
But wooing investors also needs to be contained within a policy frame safeguarding
Cambodia's national interest. Basically, these can be boiled down to two yardsticks.
Sustained development and protection of the environment.
The former is short hand for saying social and economic change and must not take
place at the expense of future generations. To put this into practice, the national
government needs a simple rule of thumb: no economic activities-whether local or
foreign inspired-should be allowed that do not pass the criteria of sustainability.
The last parameter should be the environment. A buzzword the world over and of considerable
importance to Cambodia. It not only implies preserving the best physical attributes
that still make up the country today, but preserving the particular cultural identity
of the Khmers.
In practice, Cambodia's most viable options appear to embrace three possibilities:
- Joining a regional trade association on the condition of vetting all activities
from the view-point of sustainability. The latter is essential, ending up as the
region's sweatshop is not in the country's interest;
- Vigorously promoting "eco-tourism," the one and only activity with
the triple advantage of enabling the country to earn immediate foreign exchange,
place a "green" value to its environment and provide rural Khmers with
the wherewithal to continue to preserve a way of life that they apparently wish to
- Finally, place maximum emphasis on developing Sihanoukville as an entrepot port
to serve the Vietnamese hinterland and Laos which, if current explorations (copper,
gold, oil) bear fruit, may resemble another Brunei with the same import demands.
Of all the major policy issues drawn from this unromantic analysis, there is little
any hard nosed FDI would disagree with. The only lack of "complement-arity"
is likely to come from really requiring FDI to respect "sustainability"
and the "environment." In the business world it is easy to pay lip service
to these concepts, it is another matter when FDI finds it has to respect fish harvest
quotas, engage in reforestation, pay clean-up costs, or post "environment bonds"
to ensure good ecological behavior.
The coming period will prove a test of Khmer character and decisiveness, of what
they want their country to be and look like for their children's children.
It will also be a test of management: how to balance the population-propelled need
for growth with the preservation of a strong national identity and way of life relatively
resistant to change.
The need to stimulate a healthy investment climate for FDI is unquestionable. What
should be questioned is its form. Cambodia's development must be based on well-implemented
strategies not simply on the transfer of its resources abroad.