With the general election now out of the way, donors are hopeful the next five years
will see the government focused on reform and economic growth. That is just what
a Cambodian People's Party (CPP) poll victory would guarantee, Minister of Commerce
Cham Prasidh told the Post as he queued to vote in Siem Reap.
Some 4.1 million tons of rice paddy is produced each year, but milling capacity is only 1.3 million tons, a deficit of 2.8 million tons - and a potential loss of $731 million in export revenue each year.
Prasidh has led the charge on the country's entry to the World Trade Organization
(WTO), which is expected to become official on September 11. But joining the trade
body brings a variety of risks, not least because little has happened in the way
of concrete reform of the economy, and foreign investors are staying away from the
Kingdom in droves.
At the moment Cambodia relies on just a few industries that are barely competitive
in the world of unprotected trade that WTO will usher in. A new study from the World
Bank, Toward a Private Sector Led Growth Strategy for Cambodia, gives one indication
of just how far the economy is lagging because of the high official cost of doing
business, the lack of an integrated 'supply chain' in most sectors, and what the
report euphemistically calls 'unofficial costs'.
The study of just six sectors of the Cambodian economy found potential losses of
almost a quarter of a billion dollars to Gross Domestic Product (GDP) every year
due to "market and administrative distortions".
Given that GDP is only $3.5 billion, that $226 million represents a huge lost opportunity
and also represents forgone activity that would generate around $28 million annually
in government revenue.
Those distortions include huge military-run smuggling schemes, a myriad of officials
who use their government positions to line their pockets, and labyrinthine customs
and port charges.
For instance, the report documents more than $2,300 in 'unofficial costs', charged
by everyone from the Ministry of Labor to the police, to ship a single 40-foot container
from a garment factory in Phnom Penh via the port at Sihanoukville. Those fees add
around 35 percent to the cost of each container.
Opportunities are also lost because, for most industries, only one or two stages
of production occur locally. While the garment industry creates a huge demand for
cotton and fabric, that demand is almost always filled by imports. The report notes
that imported raw materials account for nearly 63 percent of the cost of garment
That is despite the fact that local cotton is actually slightly cheaper than imported
cotton. The problem is that there is not enough cotton of sufficient quality produced
here to satisfy the garment industry. An integrated supply chain would make the garment
industry more competitive and provide employment for local farmers and processors.
Cotton and textiles was one of a selection of six products and commodities the study
examined. The others were rice, garments, motorcycles, tobacco and canned milk.
In rice production alone, some 4.1 million tons of rice paddy is produced each year,
but the country's milling capacity is only 1.3 million tons, creating a deficit of
2.8 million tons. Theoretically, the study states, the lack of investment in commercial
standard milling capacity contributes to a potential loss of $731 million in export
revenue each year.
The lack of milling capacity also provides a strong incentive to export unprocessed
rice illegally. Officially the country exports 60,000 tons of milled rice, but illegal
exports of unmilled rice are as high as 450,000 tons.
The study identifies various barriers to economic growth and concludes that unpredictable
conditions force enterprises to take a short-term view, and deter foreign and domestic
That is a worrying sign for the poor. The International Monetary Fund's resident
representative, Robert Hagemann, recently contended that the economy needs to grow
at more than 6 percent a year to make any inroads on poverty alleviation.
That is not yet happening. CDRI, a local research body, reported that real GDP growth
was just 4.2 percent last year. The World Bank report notes that the workforce is
growing at an annual rate of 3.2 percent, some 228,000 people. To provide work for
all, the country will need to add the equivalent of a new garment industry to the
economy each year.
The study states that the government is aware that "opportunities afforded by
the WTO will not result in the growth of productive employment unless business environment
constraints are removed and market-supporting institutions built".
Sok Siphana, secretary of state at the Ministry of Commerce (MoC), told a gathering
of journalists at the World Bank on August 7 that the ministry would turn its attention
to the report as a matter of priority.
"Once the new government is in place, addressing the supply chain issues is
probably at the top of the agenda," Siphana said.
But that will be a tall order given the vested interests in even Siphana's own ministry.
The report calculated that MoC charges make up 13 percent of the 'undocumented administrative
charges' associated with the production of garments. The Ministry of Transport and
the Ministry of Finance take even larger chunks, with the former accounting for 44
percent of the charges and the latter swallowing 30 percent.
The economy currently relies on a few sectors. The garment industry accounts for
12.4 percent of GDP and employs 220,000 workers. Ninety percent of cultivated land
is used for rice, and 80 percent of people are employed in agriculture. The report
notes that success will require a shift away from such a narrow economic base.
"Diversifying into alternative economic activities will be crucial in Cambodia's
post WTO world," the report said.
It adds that there are good reasons for investors to avoid coming here, with the
"high opportunity cost of an opaque system of governance on short and long term
capital flow to both the public and private sector".
If diversification is one problem, another is illustrated by the motorcycle assembly
industry, which shows the difficulties of competing in the current opaque environment.
Although it is cheaper to assemble motorbikes here than in neighboring Vietnam, only
two manufacturers-Honda and Suzuki-actually do so.
The reason is simple: a 100cc motorbike sold legally in Phnom Penh should cost $900,
with sales tax and import duties included. The problem is that a smuggled one costs
only $600. Little wonder, the author notes, that smuggled second-hand bikes outsell
new legal ones by a factor of five to one.
Dodgy deals and graft mean that legal importers are also squeezed. After paying both
official fees and bribes to government officials, the Bank estimates that motorbike
dealerships are left with a profit margin of less than 1 percent. Meanwhile systemic
motorcycle smuggling flourishes on the Thai and Vietnamese borders.
From the Thai side, a driver will bring a motorbike across the border to a waiting
truck. He is paid $30, returns to Thailand and makes the trip again, sometimes up
to five times a night. One manufacturer interviewed by the report's author witnessed
nearly 200 motorcycles crossing the Thai border this way in a single night.
The difficulties involved in stamping out practices that crush local industry are
apparent in the study of the canned milk market. In an operation run by the Cambodian
military, between five and eight truckloads of canned milk made in Thailand, the
Philippines and Malaysia enter the country each day. As a consequence, a company
like Nestlé ends up competing against its own products. And no sooner is a
system developed to stamp out the contraband trade, than a new way of getting around
it is developed.
The report notes that two official customs stamps are now required for each case
of canned milk, but finds that "such stamps are readily available for purchase
by local distributors". The surprisingly large loss to the economy brings a
relatively modest gain to the smugglers.
"Some insiders suggest that the military is making a mere $7,000 a month on
contraband milk, while companies like Nestlé forego as much as $500,000 a
month in sales thanks to the sales of contraband products," it states.
The bright spot: Tobacco
Much vilified internationally, tobacco is the sole bright spot-a shining example
of the country's first 'fully integrated supply chain'. The country has more than
20,000 hectares under tobacco, and although production is small by global standards,
it is still a $50 million business here. The industry employs over 50,000 people,
accounts for 2 percent of GDP and nearly 30 percent of government revenue.
The ten tobacco companies that operate locally distribute high quality seeds to farmers
and advise them on how to grow the leaf. That includes controversial advice on the
use of dangerous pesticides.
But according to the report, a three hectare tobacco farm can earn between $3,227
and $5,377 per season, well above what a typical rice farmer would bring in. And
while the cigarette filters and casings must still be imported, manufacturing is
"There is ample capacity for cigarettes to become a major export commodity for
Cambodia," the report states.
For the MoC's Siphana, entry into the WTO will help to eradicate those practices
that currently make Cambodia such an unattractive place to do business. Noting that
"trade is a means to generate growth and employment", Siphana says the
government is now eyeing up the potential in exporting goods to such giants as China
Those export markets may well develop, but to have an impact on poverty, the supply
chain will need to link to growers and producers in rural areas where the vast majority
of people live.