Cambodia should not expect foreign direct investment (FDI) to stimulate the country's

development, an annual report by a leading economic institute has stated.

But changes in key national policies and focusing on developing rural areas could

bring growth.

In its dissemination of Macroeconomic Performance in 2002, the Cambodia Development

Resource Institute (CDRI) noted last year's growth rate remained slow.

Real GDP growth fell to 4.2 percent, down 2.5 percent from the previous year. Industry-mainly

garment manufacturing-grew by 11 percent, similar to 2001. But the service sector

grew just 7 percent, down from 20 percent. CDRI's Dr Kang Chandararot said that was

mainly due to the tourism slowdown.

Agriculture, which comprises 30 percent of GDP, fell 6 percent, its third consecutive

annual decline. Chandararot blamed that on the loss of paddy rice to floods and drought.

That was bad news for many, as 90 percent of the 10 million-strong rural population

depends on a combination of agriculture, fisheries and forestry resources to sustain

their livelihoods.

The country representative of the International Monetary Fund, Robert Hagemann, agreed

with most of Dr Chandararot's findings at a seminar on the subject. Hagemann warned

that economic growth must reach at least 6 percent over the next few years if the

country is to meet its poverty reduction targets.

"More than higher growth, there will be a need for growth to be less narrowly

based-as it has been mainly based on tourism and garment exports-and to expand and

diversify," Hagemann said. "We'll have to see growth reach ... rural areas.

That's really the challenge for the next few years and it's somewhat urgent."

In recent years, most economists preached that wooing FDI was essential for economic

growth. But Dr Chandararot said it was extremely unlikely the country could lure

FDI, which showed the need to prioritize domestic investment.

FDI has been on a downward slide for the past five years. The Asian Development Bank

pegged it at $60 million in 2002, a significant drop from 1998 when it peaked at

$230 million.

The report noted that the "declining FDI trend reflects the reality" that

it was no longer a guaranteed method of stimulating the economy. To compensate for

the lack of FDI, said Dr Chandararot, the country should focus on domestic investors,

with particular emphasis on rural areas to create shock-resistant, long-term growth.

"If domestic investors grow, they have a better willingness for staying in the

country," he said.

The seminar focused on developing the rural economy, with sessions on fish exports,

forest product trade and cash crops. CDRI program manager Bruce McKenney said most

goods were sold unprocessed, which suggested the potential for adding value in the

future.

However, McKenney said, the rural private sector climate needed improving if development

there was to succeed. Trade-especially among small to medium-sized enterprises-was

stifled by often arbitrary official and unofficial fees.

"Given the current efforts involving the reduction of import tariffs at the

national boundaries under [the ASEAN Free Trade Agreement and the World Trade Organisation],

perhaps similar domestic efforts are needed across provincial boundaries," he

said.

Domestic trade constraints meant rural producers earned less money. CDRI data found

that fees on resin, a key product in many rural areas, amounted to a virtual 40 percent

tax on profits, while those on fish were 70 percent.

"There are a range of inefficiencies caused by this. Many of the traders noted

that they will travel long distances to avoid particularly high fees," McKenney

said. "They'll also ship smaller quantities because they're easier to get past

officials. So you have a lot of goods being transported in small quantities at longer

distances than they should be, and this is not an efficient way to trade."

One positive trend was the emergence of cash crop production. In a preliminary assessment,

CDRI economist Chan Sophal said most small-scale family operations stuck to subsistence

rice-growing for food security. But those who grew maize, cassava, cashews and soybeans

doubled their returns from $100 to $200 per hectare.

John Stellwagen from Danish aid agency DANIDA agreed on the need to grow more cash

crops, but urged an ordered manner in which small to medium-scale farmers obtain

land and advice. He said the country needed to ascertain how much forest to conserve.

CDRI's research director, Dr K A S Murchid, said the underlying theme was a cry for

stronger governance to help the free market: "We want the state to play a much

greater role than before."