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SWOT Analysis of the the Cambodian Economy made in 2006 by Asian Development Bank

SWOT Analysis of the the Cambodian Economy made in 2006 by Asian Development Bank

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  • 1. Insights for Action A SWOT Analysis of the Cambodian Economy Discussion Paper No. 1 2006
  • 2. © 2006, UNDP Cambodia A SWOT Analysis of the Cambodian Economy United Nations Development Programme Cambodia DISCLAIMER The responsibility for opinions in this publication rests solely with the authors. Publication does not constitute an endorsement by the United Nations Development Programme or the institutions of the United Nations system.
  • 3. A SWOT Analysis of the Cambodian Economy A UNDP Funded Discussion Paper In Cooperation with The Supreme National Economic Council and Harvard’s John F. Kennedy School of Government
  • 4. FOREWORD Cambodia has come a long way in the past decade. It has achieved domestic peace and has held elections. The economy has grown and certain sectors, such as tourism and textiles, have taken off. Cambodia has joined the World Trade Organization (WTO) resulting in greater access to export markets. There is a growing likelihood that Cambodia will experience significant oil revenues in a few years. Poverty has dropped. Primary enrolments have risen and young children spend more time in school. HIV-AIDS prevalence has dropped and Cambodia is seen as a model of HIV-AIDS prevention from which many other countries can learn. The nation is unified without the separatist movements or groups that trouble many countries. There is an increasingly vibrant civil society making critical contributions to the country’s development. The Cambodian people and government can be proud of these achievements. Still, many challenges lie ahead to achieve shared prosperity and sustain long-term stability. Poverty and near poverty remain high, especially in rural areas where the vast majority of Cambodian people still live and work. Moreover, all available evidence suggests that inequalities continue to rapidly widen. In this context, UNDP’s Insights for Action (IFA) initiative was created to facilitate policy dialogue among the Cambodian Government, Cambodian society, and Cambodia’s development partners. Its goal is to identify innovative ideas, practical policy responses and needed actions to help meet key development challenges. Too often in the development community we become overly focused on delivering financial assistance, when in fact development history shows that it is often ideas that catalyze the changes that improve human well being. This first Insights for Action Discussion Paper A SWOT Analysis of the Cambodian Economy is aimed at providing a clear framework for exploring some of the most important emerging opportunities and challenges facing the Cambodian economy. This framework will in turn provide a guide for more in-depth solution-oriented research in selected areas. This first Insights for Action analytical report also served as a main basis for discussion at the first Cambodia Economic Forum (CEF) successfully launched by H.E. Prime Minister Hun Sen in January 2006. It is our hope that this Discussion Paper, the first in a series to be produced by Insight’s for Action, will help to generate further innovative ideas and actions that can substantially improve the well-being of all Cambodian people. Insights for Action UNDP Cambodia January 2006
  • 5. Table of Contents Executive Summary 1 Introduction 3 The SWOT: An Overview 6 Oil and Cambodian Prospects 8 How Bad Was Nigeria’s Record? 8 Why Should Oil Be a Curse? 9 Future Oil Production and Revenues: Some Details 10 Ensuring Fuel Security 11 Waste and Corruption 12 Opportunities and Threats 13 Interactions and Complications 15 Rural and Land Issues Problems and Possible Solutions 16 Poverty: How Real is the Measured Drop? 16 Land Concentration 17 Reviving the Rural Economy 18 Connecting to Global Markets 20 Credit Costs to Medium and Large Borrowers 22 Summary and Observations 23 Low Government Salaries: The Cost of Corruption? 24 Appendix: Governance Indicators for 1996 and 2004, Selected Nations 27 i
  • 6. Abbreviations and Acronyms ACLEDA Association of Cambodian Local Economic Development Agencies ASEAN Association of Southeast Asian Nations EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product HDI Human Development Index HDR Human Development Report IMF International Monetary Fund INPRES Instructions of the President - Programme providing financing for infrastructure development at the local level in Indonesia MDG Millennium Development Goal MEF Ministry of Economy and Finance MNC Multi-National Corporation ODA Official Development Assistance SARS Severe Acute Respiratory Syndrome SWOT Strengths, Weaknesses, Opportunities and Threats UNDP United Nations Development Programme WEF World Economic Forum WTO World Trade Organization iii
  • 7. A SWOT Analysis of the Cambodian Economy EXECUTIVE SUMMARY Viewed in the context of its tragic recent history, the country’s achievements over the past ten years are notable, but moving forward it is uncertain what direction Cambodia will elect to follow. One could argue that Cambodia is following, albeit hesitantly, the development path blazed by its dynamic neighbors, with export-led growth fueling increases in standards of living and steadily declining poverty. Garment exports and World Trade Organization (WTO) accession are indicative of this trend. Alternatively, a pessimistic observer could posit that Cambodia today in fact has more in common with the laggards of the region. Significant evidence could be marshaled to paint a bleak picture of the future, in which corruption, feuding elites, an uncompetitive economy, and a stagnant countryside deny the vast majority of Cambodians an opportunity to enjoy happier, healthier, more prosperous lives. 1 UNDP Discussion Paper No. 1
  • 8. A SWOT Analysis of the Cambodian Economy This study concludes that Cambodia’s greatest opportunity is the revenue which will be generated by the exploitation of the country’s offshore oil and natural gas deposits. The potential for misuse of this revenue stream is Cambodia’s greatest threat. Most developing countries have failed to take advantage of the revenue generated by oil. Indeed, the correlation between oil and a decline in socio-economic performance is so pronounced it is referred to as “resource curse.” With appropriate policies oil revenue could be used to address the country’s key weaknesses, including rural decline. Without a fundamental shift in the role of the state, however, it is unlikely that Cambodia will realize its potential. 2 UNDP Discussion Paper No. 1
  • 9. A SWOT Analysis of the Cambodian Economy INTRODUCTION1 The leaders of Cambodia feel that they can look back on the past decade with a degree of satisfaction. Political peace has been achieved and elections held, albeit at the cost of the creation of a large and complicated top-level bureaucracy. Economic growth has been brisk, inflation reduced, and poverty brought down, though progress has been slower than expected and the sustainability of the trends is questionable. Moreover, progress in health and education is mixed; agriculture is weak and land concentration increasing. How does one get an overall view of the progress to date and the options for the future? There are many ways to evaluate a country. One popular method is to list the Strengths, Weaknesses, Opportunities, and Threats facing the economy and the society. This “SWOT” analysis, most often applied to the competitive position of a company, can also be used for a nation. In the case of Cambodia, there could be a comparison with its recent past (of 10-15 years ago) in which case the improvements are generally impressive. Alternatively, the comparison could be with Vietnam or India, in which case the comparisons generally show a gap that is not always shrinking. Complicating the analysis are the usual doubts about data. On something as basic as literacy, various reasonable interpretations can be made. There is a considerable difference between reported adult literacy (nearly three-quarters in 2003) and functional literacy2 (well under 50 percent). This is not just a quibble over numbers. If those with only a few years of education fail to gain functional literacy, this means that most of the workforce and current youth will be severely disadvantaged for long into the future. Depending on the errors and biases, one can reach a variety of conclusions. This also applies to choosing a base year for analysis. The earlier the base year, the stronger growth is because of the unusually depressed initial conditions. A more recent base year often shows more modest progress. Yet it is less for the past than the future that one does a SWOT analysis. The point of the exercise is to identify areas that need attention or might become problematic or even dangerous. If there has been success in some areas, does this mean that one should continue to improve or shift gears and put more emphasis on other issues? Getting a sense of priorities, of possibilities, and of dangers is the real purpose of the exercise. In that sense, it is less useful as a written report than as a way for decision-makers to have a serious conversation about their own priorities. It is a way to begin a thoughtful discussion. It does NOT identify a list of future investments or detailed policies. That depends on its use by others. It contributes to a strategy for, not to the tactics of development. 1 This is a report drafted for UNDP-Cambodia in cooperation with the Ministry of Economy and Finance (MEF). The primary drafter is Professor David Dapice, but significant inputs came from Brian Quinn, Nguyen Xuan Thanh, Ben Wilkinson and Thomas Valley. Seilava Ros and Phalla from the MEF and Panhavichetr Pok and Raksa Pen from UNDP were also very helpful, among several others. 2 “Literacy” is often defined as the ability to read or write one’s own name or recognize a very simple word. Functional literacy measures the ability, for example, to read a medicine bottle or pesticide can − using skills in real life. The Cambodian Review (May 2005, p. 22) reports 36 percent illiterate and 27 percent “semi-literate” in 1999. UNDP Discussion Paper No. 1 3
  • 10. United Nations Development Programme (UNDP) has developed a “human development index” which combines gross domestic product (GDP) per capita with health and education achievements in a single index to compare national trends. The “Human Development Index (HDI)” is available from 1995 to 2003 for Cambodia and most other nations. The index closely shadows targets the government itself endorsed in the Millennium Development Goals (MDGs), so there can be no dispute that this is a reasonable basis for reviewing both economic and social progress. The index has the advantage of going beyond the admittedly broad and rough single measure of real GDP per capita growth. It would be reasonable to hypothesize that Cambodia would enjoy especially fast HDI improvements over this period since it followed the establishment of peace and the beginning of fast growth and considerable foreign assistance. It is also true that those starting with a lower HDI tend to move up faster and this also favors rapid progress. Table showing the HDI levels of various nations in 1995 and 2003 follows below: Country 1995 HDI 2003 HDI % Change Absolute Change Cambodia 5.33 57.1 7.1% 3.8 Indonesia 66.3 69.7 5.1% 3.4 Vietnam 66.0 70.4 6.7% 4.4 India 54.6 60.2 10.3% 5.6 Bangladesh 45.2 52.0 15.0% 6.8 China 68.3 75.5 10.5% 7.2 Mozambique 32.8 37.9 15.5% 5.1 Source: 2005 Human Development Report (HDR), Table 2 In the table, only Indonesia clearly ranks lower than Cambodia in absolute progress. Indonesia had a major economic collapse in 1997-98 from which it is only now just recovering. The economic collapse was followed by political upheaval, domestic violence and terrorism. All this depressed domestic and foreign investment levels. It is disappointing that this is the only country in the table which Cambodia decisively surpassed in terms of HDI improvement. It is about equal to Vietnam in percentage terms, but lower in absolute improvement. For all the others – including India, Bangladesh and Mozambique – it is far below both the relative and absolute increases. This is a surprising and disappointing result for a country in a situation where much greater progress could be anticipated. It raises a red flag about being too satisfied with the progress recorded to date. If this is true for the broad and welfare-oriented human development index, it is even more true for the recent rating of Cambodia in the World Economic Forum’s (WEF) competitiveness index. This index, and its companion, the business competitiveness index, use a combination of hard data and surveys to compare how well or poorly a nation is situated relative to others for growth and global competition. The World Economic Forum is a Swiss-based group that brings together world leaders and provides them with an analysis of global conditions. These include the annual attempt to measure the forward-looking conditions for growth and the current business conditions in the two indices. In both of these indices, Cambodia ranks in the bottom tenth of all 117 rated nations. If we compare its ratings to those of other relevant nations, we see the following: 4 UNDP Discussion Paper No. 1
  • 11. A SWOT Analysis of the Cambodian Economy World Economic Forum: 2005 Competitiveness Ranking Country Growth Index / Rank Business Rank Singapore 5.48/6 5 Malaysia 4.90/24 23 Thailand 4.50/36 37 China 4.07/49 57 Indonesia 3.53/74 59 Philippines 3.47/77 69 Vietnam 3.37/81 80 Mozambique 3.19/91 98 Bangladesh 2.89/110 100 Cambodia 2.82/112 109 In the surveys, 80 percent of those interviewed said corruption was the most pressing concern, followed by an inefficient bureaucracy, poor training for workers and inadequate infrastructure. Being rated well below Bangladesh and Mozambique underlines the fact that Cambodia’s standing is well short of what is possible and what might be expected. 5
  • 12. A SWOT Analysis of the Cambodian Economy Something THE SWOT: AN OVERVIEW between a weakness and a However, a policy maker might want to look at the SWOT issues in more detail and from a threat is the strategic perspective, not necessarily only from the perspective of overall progress. What, in apparent general, can be said about Cambodia in terms of its strengths and weaknesses? (These are consolidation of summarized in the table on page 12). In terms of strengths, there is no doubt that Cambodia land holdings, is in a pretty good geographic neighborhood. Many Association of Southeast Asian Nations which do not (ASEAN) members are richer and fairly fast growing. China is nearby and rapidly increasing imports of commodities that Cambodia produces. Cambodia sits on major trade lanes and has appear to access to major ports in Bangkok and Saigon. The high aid levels have already been support mentioned – and are extremely high in relative and even absolute amounts. If aid were used economic well, this should be a source to upgrade both physical and human capital. efficiency or social equity. Official development assistance (ODA) reflects international acceptance of the current government, a point underlined by Cambodia’s WTO membership. The rapid growth and current relative stability of garment exports suggests that this membership will provide meaningful opportunities. The relative stability in prices and exchange rates has also helped to create a fairly good macro-economic environment, leading to strong GDP growth. There has also been growth in the non-governmental organization (NGO) sector, leading to a vibrant (if insecure and largely aid-financed) development in the voice of many elements of society. The peaceful settling of political differences has also greatly contributed to this development. In addition, the existence of Angkor Wat has allowed the development of a major tourist attraction with a total annual influx approaching 1.5 million tourists – a group that might be enticed to buy Cambodian products or spend more time at other places in the country. Angkor also symbolizes a unified Cambodian people, with few separatist tendencies. These are significant strengths. Against this can be set obvious weaknesses. Cambodia is one of the few nations in the world where poverty appears to be falling rather slowly even though economic growth is reasonably rapid. Even after a decade of aid, crop yields and health and education indicators remain low, if improving.3 Infrastructure, while also improving, is still poor, especially in electricity – the per capita use is among the lowest in the world. Costs of transport, power and interest rates are very high. Corruption is certainly also very high, as the score in the 2005 Transparency International table indicates.4 The economic and administrative cost of securing political accommodation has been high, as positions in the bureaucracy multiply. This might help to explain the relatively low level of foregn direct investment (FDI), especially when oil and gas investments are excluded. Something between a weakness and a threat is the apparent consolidation of land holdings, which do not appear to support economic efficiency or social equity. If land is handed over almost for free in large concessions, or bought by urban elites gaining from government spending, the result in both cases is socially destabilizing. Past experience suggests that underemployed urban masses or a rural proletariat are much more volatile than a well-rooted community of independent farmers. 3 Some experts argue that it takes many years to improve yields of rice, for example. Yet, rice yields did rise from 1.77 tons in 1997-98 to 2.1 tons in 2000-01, and have since dropped to 2.0 tons in 2002-04. Moreover, the gap between Cambodia and nearby parts of Vietnam is widening. 4 Cambodia was ranked by Transparency International, a European NGO, in its most recent ranking made available in October 2005. In that table, Cambodia got a 2.3/10, where 10 is least corrupt. This put it at 130/159 or in the bottom fifth of all nations. It was tied with Congo (Zaire) and below Sierra Leone, but was ahead of Indonesia (2.2) and Bangladesh (1.7), but behind Vietnam (2.6), India (2.9) and China (3.2). 6
  • 13. A SWOT Analysis of the Cambodian Economy Looking forward, what advantages or opportunities does Cambodia have? In a sense, many of the weaknesses that can be remedied are opportunities. If crop yields are low, then investments in water control and agricultural systems can raise them. If FDI has fallen, then improvements in governance, education and infrastructure can attract more inflows again. A higher demand for skilled workers would create an incentive for better training, and this could be performed inside Cambodia or, for those with some foreign language, outside at a reasonable cost. (Of course, the quality and coverage of the existing K-12 system should also be improved). Tourism development remains a real possibility, even if unplanned development in Siem Reap could limit upscale and high-spending tourists. (The very rapid growth of tourism in 2004 and 2005 was partly due to the recovery from Severe Acute Respiratory Syndrome (SARS) in 2003 and the tsunami according to the World Tourism Organization, but also due to more hotel capacity). There is a promising emerging private sector. But it is the development of oil and gas production that is perhaps the most important potential opportunity. Production of 200,000 barrels of oil a day could easily provide nearly two billion dollars of net revenue per year – in a $4 billion economy. UNDP Discussion Paper No. 1 7
  • 14. A SWOT Analysis of the Cambodian Economy OIL AND CAMBODIAN PROSPECTS It is explained in more detail in a following section that no definitive estimate of future oil production is as yet possible because the reserves are not yet proven. Having said this, there are oil and gas reserves in appreciable amounts in the Thai and Vietnamese zones bordering the Cambodian blocks. Each of the four exploratory wells in Block A have been shown to be productive and produced oil and gas. Provisional estimates are that just the explored part of Block A has 400-500 million barrels of oil and 3 trillion cubic feet of gas. While conservative estimates are always safer, a more likely estimate is that production revenues will be high enough to be large relative to current foreign aid, and perhaps several times that amount. If that uncertain projection is correct, the revenues would be large relative to GDP. However, there is a phrase in economics called the “oil” or “resource curse” which refers to the fact that oil-rich countries often do poorly in terms of growth and overall development. Nigeria is the poster child for this. [See below]. In spite of decades of large oil and gas exports – up to $3000 per capita in recent years – its GDP has grown less than its population growth since 1980. But it is not just one country’s experience that has created the phrase. In complicated economic models which adjust for many variables (human capital, overall investment levels, per capita income, etc.), the addition of oil reduces the expected growth rate! Why should a resource which adds to government revenue and potential physical and human capital subtract from expected growth? The answer(s) are given in the following Box which discusses the reasons for this “curse.” However, it is important to note that while it is a tendency for oil to interfere with growth, it is not always true. Some nations manage to do well – Norway, Canada, Malaysia and perhaps Indonesia5 from 1970-95 all come to mind. How Bad Was Nigeria’s Record? Nigeria is a major oil producer. Exports, nearly all of which are petroleum, totaled over $380 billion from 1974 to 2004, or an average of over $12 billion per year. Recent oil exports were $29 billion in 2004, before the 2005 jump in oil prices. This averages out to $150 per capita of exports per year over the last thirty years, though GDP per capita is only $300. The World Bank reports real GDP growth from 1980 to 2002 at 2 percent annual growth while population grew at 2.8 percent over the same period. Even allowing for higher recent growth, real output per capita fell over a period of 25 years. Its most recent survey puts over 70 percent of the population living below a $1 a day poverty line. It is ranked 158 out of 177 by its HDI, which has gained little since 1995. Nigeria is known as a severely corrupt nation and attracts little foreign investment except in oil. Disputes over oil revenues have led to separatist movements and violent actions in which entire regions were suppressed and military leaders took over to stop corruption but in turn became corrupt themselves. Oil company employees face kidnappings and oil installations face sabotage. It appears that in spite of huge oil revenues, there has been very little to show in terms of overall economic growth or poverty reduction. This is why it has been used so often to illustrate the meaning of the “oil curse.” 5 From 1970-95, Indonesia reduced its poverty rate by 86 percent (58 percent to 8 percent, using $1 a day) and tripled its per capita income. Health and education also improved markedly. These improvements were largely regained after the Asian Crisis, which combined with a political crisis, hit Indonesia more seriously than other Asian nations. Its economic performance over this quarter-century period is often contrasted with that of Nigeria. 8 UNDP Discussion Paper No. 1
  • 15. A SWOT Analysis of the Cambodian Economy Why Should Oil Be a Curse? There is little doubt that many oil rich countries do not grow very fast. Why should this be true? There are several reasons given by analysts, and they can be grouped into three main types: exchange rate effects, characteristics and responses to the nature of oil production and sales, and political economy explanations. The exchange rate effect is often called the “Dutch Disease” because the problems associated with it were first clearly analyzed in Holland as it increased its natural gas exports. Because of strong gas exports, it was able to hold its exchange rate constant. Yet the revenues from the gas flowed into government revenues and were spent. Extra spending raised domestic prices, wages, and costs. The Dutch inflation (world inflation was very low) put pressure on traditional manufacturing and agriculture, which found it harder to export or even to compete in domestic markets. The Dutch inflation caused the economy to shift to nontradable services, such as construction and trade. However, these tend not to have the same growth potential as manufacturing. If gas revenues are invested in ways that lower costs – education, efficient infrastructure or research and development – then this impact can be controlled. The oil industry often tends to be an enclave industry with limited linkages to the rest of the economy, especially if it is located offshore in a poor country. Expensive and sophisticated drilling rigs float in, produce oil, and the oil is exported. Few local raw materials are purchased. The main benefit is in the revenues paid to the government and/or domestic oil company. Yet these revenues tend to be highly cyclical, reflecting the varying prices of oil and gas. Many governments get used to revenues when prices are high. Some even borrow additional amounts based on the anticipated future stream of oil income. But when oil prices fall, the country not only loses its expected revenues, but also needs to pay debts on its borrowings based on overly optimistic assumptions. This can create severe shortages of resources. Sometimes the nation then resorts to deficit financing, which often results in excessive debt, money creation and inflation, often with foreign exchange shortages. Or it cuts back severely, creating sharp recessions and bankruptcies among private firms. Either way, it is a tough environment for private firms to plan ahead or operate normally. This tends to slow growth. Putting oil resources into a trust fund and only spending the income on the fund is one way to deal with this problem. A third problem is called the“political economy”problem. Basically, a government which relies on oil does not have to make a contract with its people. It is free to act in an autocratic manner, with the main issues ones of distribution within the elite. The skills that are rewarded in such a situation are not ones of efficiency but of political infighting. It is been called the difference between “farmers” and “treasure hunters.” In a normal economy, it is important to invest, improve skills and technology, and create a broad public agreement about policies. This kind of attitude is one that progressive farmers have. In an oil economy, it is important to be good at getting a group together that “finds” government contracts and fights off other groups that want them. An economy that develops “treasure hunting”skills will not grow nearly so well as one with skills more like that of a progressive farmer. That kind of an oil economy is not a stable society. UNDP Discussion Paper No. 1 9
  • 16. A SWOT Analysis of the Cambodian Economy It will take Future Oil Production and Revenues: Some Details several years before Cambodia has had exploratory drilling in part of one of six blocks and has provisionally appreciable estimated 400-500 million barrels of recoverable oil and 2-3 trillion cubic feet of gas. Further drilling within block A and exploration of the other blocks, once contracts have been awarded, amounts of oil will certainly add to this total. It will take several years before appreciable amounts of oil and and gas flow, gas flow, but a very rough estimate would put potential oil production as high as 200 to 250 but a very rough thousand barrels a day at full production. Another way of looking at this is that there may well estimate would be 2 billion barrels of recoverable oil and 10 trillion cubic feet of gas. The oil at $50 a barrel put potential oil would be worth $100 billion and the gas at $5 per thousand cubic feet would be worth $50 production as billion. (The gas price is thermally equivalent to $29 per barrel oil. Gas normally sells for less high as 200 to than a thermally equivalent amount of oil, although the differential has been shrinking). If 250 thousand production were spread out over 20-25 years, the annual sales value of the oil and gas would barrels a day be $6-$7.5 billion. Current GDP is about $4 billion. Thus, over time, the contribution of oil and gas could be quite large. Of course, it is the contribution of oil and gas to national income rather than GDP that is of most relevance to the government and society. How much revenue per barrel of oil or unit of gas could Cambodia expect to gain? Part of the answer depends on the cost of production. One analysis done for this report6 assumed $10 per barrel production costs. This is in line with production costs of $10 to $15 per barrel for offshore oil. That analysis found that even at that assumed production cost, Cambodia would get 53 percent of gross sales revenue if oil prices were $35 a barrel. The share was quite sensitive to the price of oil, with Cambodia’s share rising to 62 percent at $65 a barrel. It is likely that future oil and gas contracts could, if anything, be revised in Cambodia’s favor. The initial contract was negotiated when oil and gas prices were much lower and Cambodia a new and therefore risky prospect. With supplies of oil and gas tight now and with Cambodia proving itself as being in a productive geological region and reliable partner, the risk premium should drop and the contractual terms a rational company would accept should shift in Cambodia’s favor. Of course, the price of oil could fall in the future or the cost of extraction could be higher. However, for purposes of discussion, let us assume that half of all sales revenues of oil are paid to the government in royalties or taxes. A sensitivity analysis can be used to arrive at even higher ratios in a higher price case for oil. The contribution of natural gas to government revenues is much harder to predict. Gas is often used domestically and the gas price may be set at levels that do not necessarily reflect its price on international markets. In general, the ratio of government revenue to sales is lower for gas than for oil. Without more information concerning production costs and domestic pricing, it is not useful to project government revenues from gas at this time. However, there is certainly enough gas to invest in a combined-cycle electrical generating plant that could supply a large portion of Cambodia’s electricity demand. This, plus perhaps some hydroelectricity, would reduce the demand for expensive diesel-generated electricity and allow more of oil production to be exported. Such a development would also reduce the need for a small (and high-cost) domestic refinery aimed at ensuring fuel security. 6 “Review of Development Prospects and Options for the Cambodian Oil and Gas Sector” by Brian Quinn.This is a draft report prepared in 2005 for UNDP and Cambodia National Petroleum Authority. 10 UNDP Discussion Paper No. 1
  • 17. A SWOT Analysis of the Cambodian Economy Ensuring Fuel Security The issue of fuel (oil product) security is an important question, especially since essentially all electricity and transport currently comes from diesel fuel and gasoline, all of which is imported. Any supply disruption can have a severe impact on the Cambodian economy. If a natural gas electricity generator or hydroelectric generator replaced most diesel generated electricity (and they are much cheaper than diesel electricity), then the main concern would be with the security of gasoline and transport diesel supplies. (An alternative would be to greatly increase purchases of electricity from bordering nations under long-term contracts, but some assert this is also risky). One way to ensure adequate fuel supplies is to have one’s own small refinery. Another way is to sign long-term refining contracts with a nation like Singapore, which has a strong legal system and is extremely reliable and efficient with large- scale refineries. A third way is to buy old tankers or build fuel storage on land and store “strategic” (more than normal commercial) fuel reserves in case of an emergency. A fourth is to have a large export-oriented refinery that uses both imported and domestic crude oil and sells into local and world markets. There is currently a desire in some quarters to build a “small, cheap, quick” refinery to process Cambodian oil, when it becomes available, for domestic demand. In order to do this, construction would have to start almost immediately. Small refineries have higher costs than larger refineries, so the construction of such a refinery can only be justified in terms of fuel security or national pride. A refinery of even a small size without extensive cracking facilities would cost $400 to $500 million, half of the total annual national investment of Cambodia. That represents a huge gamble of national resources for security. The fuel produced would cost more than current fuel imports, given a constant price of crude. This would further reduce the competitiveness of Cambodian farming and manufacturing. Alternative approaches to providing fuel security, such as long-term contracts or extra storage would be cheaper and eliminate the need for a fast decision and a construction start-up this year. Cambodian crude oil is light and sweet, meaning it is well suited for many export markets and has a higher value in those markets than in a domestic fuel mix. A large export-oriented refinery built by private companies familiar with foreign marketing of oil products would be one way for Cambodia to refine its oil, provide a source of domestic fuel (albeit from a mix of imported and its own crude oil), and avoid placing a huge bet relative to its economy on the amount of future refining margins. It would have secure access to oil products at prices equivalent (given the cost of crude oil) to current imports. Lower prices for fuel and less financial risk are substantial benefits, and the degree of national security would not be very different than with a small refinery. Since the cost of this sort of large refinery would be equal to several billion dollars, it would be much too large for Cambodia to build on its own and would require majority multi-national corporation (MNC) investment. A rough way to calculate the cost of strategic fuel storage is to consider that an old tanker capable of holding 33,000 tons (270,000 barrels) of refined product was recently sold for $2.1 million. Refined product in September 2005 sold for close to $80 per barrel, so for about $24 million in product and storage costs, Cambodia could store 270,000 barrels of gasoline and diesel fuel. UNDP Discussion Paper No. 1 11
  • 18. A SWOT Analysis of the Cambodian Economy Increasing This is about one month of fuel use, assuming that electricity demand for diesel stays at its amounts of oil current level. If other electricity generating modes are developed, it would last far longer. It is revenue will make not at all clear if this “insurance” is worth the cost, but it is far less than an uneconomic refinery, it possible and and the economic cost of the used oil tanker and products (if they are later sold) is the foregone income that might have been earned if the money used to buy the product and tempting for storage capacity had been used elsewhere, less any value gained from having a more reliable Cambodian fuel supply. leaders to indulge their preferences for prestige or Waste and Corruption showy investments, even A great deal of attention has been placed on corruption in Cambodia. This is entirely when these are appropriate because it is a serious problem. However, much less attention has been placed on not at all a related problem which could become equally serious – the issue of waste. Waste occurs profitable when an unnecessary and inappropriate investment is made. Increasing amounts of oil without subsidies revenue will make it possible and tempting for Cambodian leaders to indulge their preferences for prestige or showy investments, even when these are not at all profitable or protection. without subsidies or protection. (Protection by import taxes or quotas amounts to a subsidy paid by consumers who cannot choose to pay less for an efficiently produced competitive product). The important difference between corruption and waste is that with waste, there may or may not be a transfer of resources to the corrupt person, but there is certainly a loss to everyone! If a high-cost refinery were built for its proper cost, with nothing added in improperly padded costs or commissions, it would still create a loss for the Cambodian economy and people. Higher prices have to be paid to cover the costs of the refinery, or it is shut down. If it is shut down, there is a huge loss. If it operates, the price of fuel would be higher than it need be. Nobody benefits. Often waste and corruption are combined. In that case, those few officials able to profit from a particular bad project derive a benefit, but society still loses. Corruption must be fought, but it exists in almost all societies. Waste is easier to avoid if there is a serious review of public investments and limited protection, subsidies or guarantees to private projects. Because there are large losses from bad project selection, a leader concerned with political stability and economic growth will try to ensure public investments are well chosen. If there must be corruption, it might as well be on needed and appropriate projects rather than “white elephants” that become a costly embarrassment. A competent group that will not be involved directly with a costly project should be required to review its economic feasibility. While this is costly, it is much less costly than the “free” feasibility studies provided by potential contractors or financiers who stand to benefit if the project is built. Such free feasibility studies tend to ask what kind of project should be built, rather than if any project of that type is sensible. They are often a rich source of technical data but a weak guide to the underlying economics of the project. The surest way to avoid waste is to have private groups invest their own money without any special support. While environmental and safety concerns must still be checked, they are unlikely to put their own money into an unprofitable venture. Such constraints are much weaker with government-owned or guaranteed projects. Successful nations manage to insulate investment choices from corruption, in the sense that they manage to build what should be built at about the right cost, rather than what should not be built at a wildly inflated cost. (They also avoid wildly inflated costs even on well-chosen projects). Nigeria, as noted above, is a poster child for a nation that got hundreds of billions in oil revenues, but failed to grow because of both waste and corruption. 12 UNDP Discussion Paper No. 1
  • 19. A SWOT Analysis of the Cambodian Economy OPPORTUNITIES AND THREATS Ironically then, the “opportunity” Ironically then, the “opportunity” of greater oil revenues is also a potential threat. If aid has of greater oil resulted in only slow progress in reducing poverty in recent years, then oil may actually further revenues is also a concentrate and even destabilize the society.7 Serious thought about ways to improve the use potential threat. and broaden the impact of any forthcoming oil revenues are therefore part of any relevant SWOT analysis. This analysis should include not only government spending but also investments by the national oil company. Overall, though, the “threat” of oil is that governance would become worse and spending would further concentrate wealth, fund capital flight, and increase social tensions. It is also possible that aid would be reduced. The end of the international conflict period is now over 15 years ago. The obligations felt by the international community may not hold so strongly after years of poorly used aid and increasing amounts of oil revenues. While a dollar to dollar offset is not likely, the net increase in resources could end up being much less than the net revenues expected from oil. This would make the efficiency of use – and a political strategy for stability and equity as well as growth – of even higher priority than it is now. What of other threats? The loss or reduction in garment exports is one such possibility. While there may be temporary quota put on Chinese garment or textile exports, this is at best only a temporary reprieve. Likewise, when Vietnam joins the WTO, it will be a significant competitor. Building up a real competitive advantage by lowering port and other transport costs, electricity, informal charges and other costs that are now much higher than in neighboring states is the best and only response. The idea of building an integrated supplier network is not a bad one, but is more likely to work if combined with the network already evolving in Binh Duong (a province of Vietnam) bordering Cambodia. As roads improve and red tape is reduced, the garment industry can become a regional one, and reduce costs more effectively together than either nation could alone. The interest in investing in border export processing and industrial zones illustrates this potential. It is very hard to improve education in a country that has had so much of its educated population moved or killed, just as it is hard to provide good health services when qualified care providers are few. Poor health and education, if they persist, are likely to create another threat. Cambodians can see their well-off neighbors, at least in the cities, and know how people in other places live through watching television and DVDs. But with poor education their prospects for earning much above the poverty level are not good. Indeed, many jobs will be insecure as well as low paying. In addition to poor jobs, they have the threat of ruinous health care costs if they become ill or injured. Many who lost land did so because of health costs – another example of poor (health) services increasing insecurity and poverty. The rise of HIV-AIDS, recently slowed, shows that progress is possible. To help the growing number of young workers find decent jobs, to increase competitiveness, and to improve poor health levels, finding a way to improve these critical services of health and education is necessary to avoid a threat of restless workers with little to hope for. Current health and education workers are poorly paid and typically charge users for their services (of uncertain quality) rather than provide them for free. This means lower levels of use by the poor. If better salaries were paid to providers, and combined with better training and supervision, accessibility would improve. A realistic discussion of how to improve these services will also have to be part of a SWOT that responds to popular concerns. 7 Paul Collier, a well known development economist, wrote a paper, “Is Aid Oil? An analysis of whether Africa can absorb more aid ” (June 2005) in which he asked if oil and aid had similar impacts. He found that aid, except debt relief, was better than oil in part because the donors had some influence. [http://users.ox.ac.uk/~econpco/research/aid.htm] UNDP Discussion Paper No. 1 13
  • 20. A SWOT Analysis of the Cambodian Economy Perhaps we can put these various general comments together into a single table. Of course, a table does not show the interactions among and between the various elements. Still, it is a start for visualizing the overall situation. Strengths: Weaknesses: Good geographic location Corruption/poor governance International acceptance Falling foreign direct investment (FDI) WTO membership Low crop yields High aid levels High/slowly falling poverty Political and economic stability Land concentration Emerging democratic society Poor health and education Rapid export, economic growth Low electricity use/high price Angkor Wat attraction High costs (transport/port/finance) Cambodian unity/identity Opportunities: Threats: Oil and gas exports “Oil curse” Higher crop yields Worsening governance FDI potential Loss of aid Tourism development Garment exports competition Better governance Growing unemployment/insecurity Emerging private sector 14 UNDP Discussion Paper No. 1
  • 21. A SWOT Analysis of the Cambodian Economy Cambodia INTERACTIONS AND COMPLICATIONS should seek to learn from It is all very well to list various elements, but like a good recipe, a well-functioning economy Nigeria’s or society needs the proper mixture and sequencing of policies to be just right. Furthermore, mistakes. It is the outcomes (low crop yields, high poverty) are distinct from and rely upon the causes (poor even more health and education, corruption) that contribute to them. Of course, poor health and important corruption might accelerate land concentration, which likely also aggravates poverty. because of its Lower FDI also is partly due to some combination of corruption and poor education and small population health. Getting the causality clear, which can and often does flow in both directions, helps us size, limited understand the importance of combinations of policies. Rather than trying to do everything market, and the equally all at once, it helps to have a sense of priorities. Putting the prioritized elements difficulty of together in a mutually supportive and logical package creates a strategy. The desirable seeking self- outcome of a SWOT for Cambodia, combined with subsequent discussion, is a coherent sufficiency at a strategic plan consistent with the Rectangular Strategy.8 reasonable cost in an economy of However, there is also the question of feasibility and timing. Lowering corruption is an its size. excellent idea, but one that requires a complicated set of policies that take effect only over time. Raising educational quality (as opposed to coverage) requires training and retraining teachers and developing curricula that fit current circumstances. Then salaries, supervision and management need to be improved. This too can take several years. A further element concerns the urgency or pace of change of negative or positive developments. Is land concentration proceeding very rapidly? That would suggest moving aggressively to deal with it. Is the garment industry in need of dramatic cost reductions in transport and port charges? This too could be dealt with quickly, so that more of the existing base could be preserved and later expanded. When discussing the particular elements of a SWOT, the magnitude and velocity of the issue needs to be factored into a final set of actions. All of these complications might seem to make any useful outcome unachievable. However, by identifying key issues and establishing their relation with each other, a degree of clarity is often possible. And being clear about priorities and the time a policy will take is clearly useful in fashioning any plan. The next sections review particular aspects of the various SWOT elements in more detail. After these sections, a synthesis section will lay out major decision items. Cambodia should seek to learn from Nigeria’s mistakes. It is even more important because of its small population size, limited market, and the difficulty of seeking self-sufficiency at a reasonable cost in an economy of its size. If Nigeria seems too remote, the alternatives of Vietnam or Malaysia on the positive side and Myanmar on the negative are perhaps closer to home. One is developing rapidly and with a degree of equity. The other is unstable, stagnant and weak. These two countries are roughly the alternative futures for Cambodia. 8 The Rectangular Strategy, introduced in 2004, has good governance; social and macro stability and integration, including global; development of human and infrastructural capital; and growth in agriculture and the private sector as its main elements. Poverty reduction would follow from these elements. UNDP Discussion Paper No. 1 15
  • 22. A SWOT Analysis of the Cambodian Economy RURAL AND LAND ISSUES – PROBLEMS AND POSSIBLE SOLUTIONS Agricultural output has not risen much in recent years, and rice yields were little higher in 2004 than in 1999 – about 2 tons per hectare compared to 4-6 tons in Vietnam. While most Cambodians live in rural areas, for many their lives have not gotten much better. Water control and fertilizers are still not much used, and fish yields have been declining. Real agricultural output in 2004 was lower in per capita terms than in 2000. This reflects a lack of needed investments and high input costs. For example, diesel fuel is expensive in Cambodia relative to its neighbors. This would be a major input to water pumps, tractors and rice hullers – if it were not so costly. An alternative for pumping would be to make electricity available over central lines, but electricity is also very expensive relative to Thailand or Vietnam, where prices below ten cents per kilowatt-hour are normal. Farmers pay over twenty cents when they can get power at all. Poor roads compound the difficulty of making much profit from even higher value-added products. On the Thai border, a few kilometers of bad roads prevented farmers from selling their crops at a profit. The result is a high level of rural poverty and very slow rural growth. Poverty: How Real Is the Measured Drop? The SWOT team visited many different parts of Cambodia and observed deep and significant deprivation. A serious and highly professional recent household survey estimated poverty in Cambodia in 2004. It found that the overall national poverty rate was 34.7 percent. Comparisons with 1993 are tricky, because the earlier survey covered only 56 percent of Cambodia. If the same area is used as in 1993, the poverty rate fell from 39 percent to 28 percent. As this SWOT points out in its first page, there seems to be uncertainty about effective literacy in Cambodia. Measuring poverty is harder, and there may be problems even with good surveys that only time and additional measurement will reveal and correct. It is plausible that the rapid expansion of employment in garments and tourism have helped lower rural poverty, as some wages are sent back home to rural households. However, there is another rough measure of well-being that is quite independent of these problems: the food balance sheet data collected by the United Nations Food and Agricultural Organization. This data lags somewhat – it is only available now for 2002 – but does report on the amounts of various foods that the nation as a whole appears to be consuming. The reported caloric intake was up 10 percent from 1995-97 to 2000-2002. However it rose to only 2060 calories per capita per day, which falls well short of requirements and was below the levels in Myanmar, Laos and Chad.9 Moreover, there is a universal tendency for fat and oil consumption to rise relative to other foods as real household incomes rise. However, the share of the diet in 1995-97 and 2000-2002 attributed to fats and oils stayed at 13 percent. This suggests that there was not much improvement in real incomes over that time for most people. (Groups in the top fifth or tenth tend to have their food spending patterns less influenced by rising incomes, as their diets are already adequate). These data do not extend to 2003 and 2004, but do suggest that the poverty data needs to be seen in the context of low average levels of rural living that are highly variable. 9 Adult males from 16 to 60 years require about 2900 calories per day and females about 2100. The national requirement, adjusting for children and age and sex structure, is 2200 calories per day. Typically, the average intake is above the median caloric intake, meaning that a majority of people consume less than the already inadequate average amount. 16 UNDP Discussion Paper No. 1
  • 23. A SWOT Analysis of the Cambodian Economy Land Concentration There has apparently also been an alarming increase in the concentration of land holdings in Cambodia in the past four years. Data from recent household surveys showed the top tenth of holdings accounted for about 45 percent of total land held in 1999 and about 65 percent in 2003. The top fifth of landholders held 59 percent in 1999 and 70 percent in 2003.10 While the rural land shows much less of a tendency to concentrate holdings, this is likely to be due to concessions not being included in “rural” as they were not in the household survey. While these and other data issues need checking, there can be no reasonable doubt that there has been a considerable concentration of land holdings due both to concessions granted and land purchases. The table below is perhaps better for indicating the direction of land ownership changes than the actual magnitude of those changes: Land Ownership in Cambodia by Decile Group, 1999 and 2003 Share of Land Owned by Each Group 1999 2003 Bottom 40% 8.4% 5.4% Middle 20% (40-60) 11.0% 8.6% Next 20% (60-80) 21.6% 16.0% Top 20% 59.0% 70.0% Of which: top 10% 44.6% 64.4% Should this matter? After all, many Cambodian farmers are poor and might be reluctant to risk trying better techniques or improved inputs. It could be argued that larger landholders would have the capital to be able to take risks and improve yields. If this were true, then there would be a conflict between the desire for greater output and the cost in terms of reduced equity. Economists sometimes confront challenges of this sort.11 However, in this case, there is very little evidence that land is being bought or acquired most often for use as a productive asset, as opposed to speculation. (If it were otherwise, agricultural output per capita would not be falling!) The large concessions granted have not as yet produced much in the way of major investment or output, with a few notable exceptions. Even the well-known palm oil plantation near Sihanoukville appears to be a mixed success due to the climactic conditions there that do not favor competitive palm oil yields – and that is one of the few recent examples of major concession investment.12 However, recent gains in the price of palm oil may make this particular investment viable. 10 The implied holdings by the 80-90th percentiles are 14.4 percent of land in 1999 and 5.6 percent in 2003. The 2003 figure is very low, not even equal to half of the 60-80th percentile holdings. This is a contradiction that needs to be studied and resolved. 11 It is possible that some small-scale farmers sold out because nonfarm activities promised a better living. This, in fact, has happened in the Mekong Delta region of Vietnam. However, research in Cambodia suggests the landless have never had land or have lost it due to illness or other misfortune. See, “Potential Poverty and Social Impacts of Cambodia’s proposed Social Land Concession Program − Presentation and Discussion of Results and Recommendations from the PSIA exercise”, June 2004. See especially pages 7 and 26. Also, the number working in agriculture grew 700,000 from 1998 to 2002, a 19 percent gain vs. 30 percent overall. 12 Standard advice on planting palm oil is that yields fall off above 10 degrees from the equator, and that a steady rainfall of at least 150 mm a month is ideal. A long dry season decreases yields, even with good care. The area near Sihanoukville is above 10 degrees north. While it is the most humid part of Cambodia, it has a 2-3 month dry season. This tends to depress yield relative to Malaysia and Indonesia, the major producers. However, increasing use of palm oil instead of crude oil, has raised palm oil prices and should help profitability. UNDP Discussion Paper No. 1 17
  • 24. A SWOT Analysis of the Cambodian Economy One woman, In addition to concession land, there are also many reports of land being bought up by with a sick individuals in amounts of a few to dozens of hectares. In most cases, these appear to be husband, was wealthy investors from Phnom Penh who are speculating or perhaps buying land for later use. not using It is hard to measure the extent and cumulative importance of this type of activity. It is important to distinguish between these two types of land acquisition, as they have different fertilizer on her mechanisms and perhaps different required policy responses.13 small plot, even though the If the reported trend in concentration in land holdings is indeed accurate, it would be a major benefit/cost ratio shift towards inequality, and one very seldom observed in peace time anywhere in the world. was ten to one. If the apparent lack of productivity of the new concession accumulations is not simply a short- She was afraid of term transitional issue but (as seems likely) a longer-lasting structural issue, that would borrowing and suggest that both output and equity are suffering. This would be undesirable from all losing her land. perspectives. Two questions arise. First, why is it happening? Second, for the government, what can be done? Reviving the Rural Economy The problems of poor roads, expensive inputs and credit have been mentioned. Yet beyond this, is a lack of ability of farmers or of the society to take advantage of obviously desirable bargains. In Siem Riep province, only 10 km on a good road from the city, we talked to villagers. Many did not have enough food to last the year. Fish catches in Tonle Sap were falling. One woman, with a sick husband, was not using fertilizer on her small plot, even though the benefit/cost ratio was ten to one. She was afraid of borrowing and losing her land. She knew what she was doing, or not doing. Another group of farmers was growing eggplant in the dry season but only for their own consumption. Markets in the city had eggplant from Vietnam. No connection had been made between those poor farmers, who had all of the needed knowledge of growing, and the markets. This lack of social or financial “wiggle room” in using credit for fertilizer, or in social entrepreneurship in connecting farmers and nearby markets suggests a fundamental failure. The farmers seem to resemble people up to their lips in water. A small wave will sink them. That is why so many of them are losing land. What can be done? The simplest step has already been taken. There is a temporary freeze on issuing of new land concessions. This will prevent further transfers of “empty” lands. Often, these “empty” lands are already being cultivated by farmers, so the transfers result in displacement and loss of livelihoods, since the new employment generated (if any) is typically less than the number previously working the land. Such transfers often cause unrest and demonstrations, as farmers resist losing the land they have farmed. Thus, the government was wise in stopping these concessionary transfers. A second step would be to charge a modest annual land tax on holdings above 5 or 10 hectares. The purpose of this would not be to tax small landholders, but to remind large landholders that there is an annual cash cost to holding land. The problem with this suggestion is that if there are farmers renting or sharecropping the land, the landowner might transfer the tax onto them. This would make their lives even harder and cause no change in 13 The increase in total farm area was about 10 percent during the 1991-2001 period, so if the data in the table are correct, then the upper fifth in effect acquired all new lands plus an additional amount nearly as large. 18 UNDP Discussion Paper No. 1
  • 25. A SWOT Analysis of the Cambodian Economy behavior for the landowners. In any case, many of the concessionaires are powerful and are said not to have paid fees or taxes for which they are now legally liable. If this is true, it would underline the difficulty of imposing even a modest annual land tax. A third step, although it is of only long-term benefit, would be to accelerate the formal land titles being issued to small farmers. These are cheap when done in an entire area, but there are relatively few teams now doing the work and it will take about twenty years to finish. Farmers do appreciate having a formal title and seem to feel it provides more security for them than the locally provided land-use right certificate. If a farmer is more secure in his or her land ownership rights, more intensive investment in the land is likely. A fourth step, also likely to pay off in the medium to longer term, would be to further accelerate the extension of better-quality rural roads and to maintain the ones already built. This is likely to be more important than investing in gravity-fed water systems. (The large water systems should be compared to electricity-driven water pumps, which tend to have fewer coordination problems14). If produce cannot be brought cheaply to market, then few improved inputs will be used to grow it. Road construction and upkeep can use local labor, providing jobs during the dry season. A fifth step would be to extend rural electrification much more rapidly than currently planned. The extension of power lines from Thailand and Vietnam, and the eventual construction of a large thermal or hydroelectric power plant, will be most effective if many more villages are connected to the main grid. Water pumping should be cheaper than with diesel pumps and rural industrialization will be more feasible. Given the size of Cambodia and the density of settlements close to major roads, the distribution of electricity to most people should not take decades, as is currently planned. Finally, for the poor, a “starter pack” of rice seeds and fertilizer could be given. This has been tried in Malawi and provides enough inputs for a small plot. Since the poor usually have to buy additional food, they are not able to sell excess rice paddy and pay off a loan. The normal problem with this is getting the distribution right. However, since there is a very high payoff to using fertilizer on rice in most cases (nearly ten to one in terms of revenues to costs if water is available), the social profitability of this is likely to be high. Many of these suggestions are costly. However, donors are likely to respond well to proposals with high economic returns that also promote equity. In the medium term, there is a possibility that oil revenues could fund some of these suggested initiatives. They would provide an attractive set of high-return and pro-poor investments to compete against low- return heavy industry investments. The main problem, as with many other types of government spending, is to plan and to execute the projects so that they minimize waste and corruption and provide the intended benefits. This could be less difficult with projects where progress is clear, such as the provision of electricity or the improvement and upkeep of roads. The costs of these activities are reasonably well understood and local oversight (if allowed) would help keep local authorities honest. There are examples of central grants for local infrastructure projects, such as the successful Instructions of the President (INPRES) programs in Indonesia. This could also support the efforts to upgrade local governments. 14 A common problem with large, centralized irrigation systems is that water fees are not collected and maintenance is neglected. The area effectively irrigated shrinks and the returns to the investment fall. Better outcomes are possible, but only with a high degree of organization and management. 19
  • 26. A SWOT Analysis of the Cambodian Economy One major area CONNECTING TO GLOBAL MARKETS for progress would come from One recurring complaint we heard was that Cambodia was a “high-cost economy.” That is, the using Saigon interest rates on dollar loans for normal businesses (not micro-credit) were often very high, port rather than even for good credit risks. Trucking and shipping costs were high. Electricity and diesel prices Sihanoukville, were higher than in neighboring countries. All of these problems lead to a lower level of investment and less job creation than if costs could be reduced. There is no doubt that especially if investment could be higher, as interest in border export zones attests. customs red tape could be reduced One major area for progress would come from using Saigon port rather than Sihanoukville, at border posts. especially if customs red tape could be reduced at border posts. Saigon port is close to having “mother ships”15 call and load containers directly for delivery to Japan, the US and the European Union (EU). This is much cheaper than delivering a container to Sihanoukville and then shipping it to Singapore for the mother ship. Once the bridge is built connecting Phnom Penh with Saigon, it could be very cheap and easy to deliver a container directly to Saigon. To get some idea of the excess costs, consider the following prices (quoted as of August 2005) for a twenty-foot container: Costs of Shipping a Container from Phnom Penh via Sihanoukville to Singapore Cost to truck one container from PP to Sihanoukville: $150 Cost to ship container from Sihanoukville to Singapore: $325 Total cost to ship to “mother ship” in Singapore: $475 Alternative Cost of Shipping: Phnom Penh via Saigon to Singapore Cost to truck one container from PP to Saigon (with bridge): $95 Cost to ship container from Saigon to Singapore: $185 Total cost to ship to “mother ship” in Singapore: $280 Compare this to the reported appropriate cost of taking a container to Saigon (once a bridge is in place) without excess payments ($95) and the cost of shipping a container from Saigon to Singapore [a longer distance] of only $185 for a total cost of $280. That means, once a bridge is available, it would cost about $200 a container more just to ship out of Phnom Penh through a Cambodian port instead of going directly to Saigon, even with no “mother ships” in Saigon. Once the larger ships do come, it will be even cheaper, since the shipping then will be direct to the rich-country ports without any intermediate maritime connection. When truckers and shippers we interviewed considered the possibility of shipping through Saigon, they were extremely positive. Once the bridge (already planned) is built, the main issue will be getting customs on both sides of the border to waive inspections and allow the containers to go direct to the port for export. This will require some negotiation, but should be in the self- interest of Vietnam since with more container traffic they will attract more mother ships and better rates. This would benefit both Vietnam and Cambodia. One shipper even said that he expected Sihanoukville to become a “suburban port16” in the next several years as container traffic would shift to Saigon, given the distances and costs. 15 A “ mother ship” is a very large container vessel, carrying 5,000 to 10,000 containers. It is not economical for them to call except at very busy ports − even Bangkok only started getting service in the later 1990s. Ships that call on Saigon now and Sihanoukville carry only a few hundred to a few thousand containers and deliver those containers to a major port, such as Hong Kong or Singapore. This adds to costs. 16 A “suburban port” is one that carries relatively light traffic and is supportive and secondary. 20
  • 27. A SWOT Analysis of the Cambodian Economy It is important to focus on the purpose of ports and roads. They exist to minimize transport costs, not to maximize tonnage passing through a particular port. If a garment manufacturer is more competitive with lower transport costs shipping through Saigon, then that “solution” should be supported. There will be more jobs, more output and more exports. Therefore, it should be a priority to negotiate improved customs clearance through Vietnam (or Thailand) for containers bound for export. On the Cambodian side, customs could follow the Vietnamese example of posting factory-paid inspectors at the factory where the containers are packed and sealed. This acts as a guarantee that the container has what is on the manifest and does not require additional inspection. If the cost of unpacking and repacking the container is avoided, along with the pilferage often associated with such activity, then the underlying benefits of better roads and bridges will be fully realized and Cambodia will find it easier to attract investment. A related, though separate, question concerns the planned $80 million upgrade to the port in Sihanoukville. If the completion of a bridge over the Mekong to Saigon and some improved customs procedures do indeed lead to a lower use of Cambodia’s main port, then the upgrade now planned might be unnecessary in the near term. It is true that an industrial park close to the port is planned, but the success of this is uncertain, quite aside from the possibility that it might conflict with tourist development in that area. Perhaps a slight delay in the upgrade should be allowed for while the situation is reassessed. If it turns out that Sihanoukville will not be a “suburban port” but instead grow in importance, then there would still be time to make the upgrade just a few years later. UNDP Discussion Paper No. 1 21
  • 28. A SWOT Analysis of the Cambodian Economy CREDIT COSTS TO MEDIUM AND LARGE BORROWERS We were often told that credit was costly. Visits to an Association of Cambodian Local Economic Development Agencies (ACLEDA) bank branch confirmed this. Their cost of funds was 4-6 percent a year from deposits, while their lending to those with collateral, but under $1500 was 3 percent a month. Those without collateral up to $10,000 also paid 3 percent a month, while those borrowing over $10,000 paid 1.5 percent a month. The branch had no bad loans, so the cost of bad loans was not a significant issue. Interest rates doubled if the payment was more than four days late. They said they could make more loans and had expansion plans. They borrowed money from the Phnom Penh branch due to low deposits. It is one thing to charge 3 percent a month for micro credits of up to a few hundred dollars. But with low inflation and a modest cost of funds, it is much harder to see why the current spreads of close to 2.5 percent a month (30 percent a year) with no bad loans should be justified on larger loan sizes. In Battambang, even quite large and solvent rice millers wanting to borrow hundreds of thousands of dollars faced interest rates of 2 percent a month, compared to 1 percent for Thai rice millers. Given that normal interest spreads are 3-6 percent a year, it is hard to see why the lending rates are so steep. One answer might be that domestic savings, even in dollars, are scarce. (Balance of payments data from the International Monetary Fund (IMF) show a capital outflow of nearly $700 million from 1998 to 2004). If Cambodia had to attract foreign money at 1 percent a month, then interest rates of 1.5 percent a month (but not 2 percent) are understandable. But if it could draw back money earning 4 percent a year in foreign banks and greatly increase loans, that might provide cheaper loanable funds. Bank competition is one issue, but the larger one is getting more domestic savings at reasonable costs. This requires confidence in the future of the country and its policies. One trucker we talked to, obviously well connected, was located in Phnom Penh and he was able to borrow at 8.4 percent a year, or about 3 percent a year over the deposit rate. While trucks are easy to value and resell (and so lower risk), this example illustrates how more reasonable rates are possible to achieve. His rapid expansion and profitability suggested that the impact of reasonable loan rates could be quite important for private sector growth. 22 UNDP Discussion Paper No. 1
  • 29. A SWOT Analysis of the Cambodian Economy SUMMARY AND OBSERVATIONS The cost of political peace Cambodia has managed to grow at a rate of 6-7 percent a year in the past decade, and the has been a kind latest data indicate a decline in poverty. The nation is at peace with its neighbors, who are of paralysis in mostly richer with growing economies, providing a good economic environment. Garment progress on, or exports have held up after the end of quotas and significant oil exports are a real possibility. even Given all of this, a Cambodian leader might feel that he had done well and had the means to backtracking do better in the future. Against this are several cautionary trends. The cost of political peace from, improving has been a kind of paralysis in progress on, or even backtracking from, improving governance and reducing corruption. governance and reducing This has contributed to slow and irregular growth in agriculture; mixed progress in social corruption. indicators; and widening inequalities in income and, even worse, land ownership. Much of the reduction in poverty appears to us to be tenuous. Exports essentially rely on garments and tourism. Costs of fuel and energy are high and use is very restricted. Lofty real interest rates are also a drag on investment,17 which is only a fifth of output. In short, progress, while real, is partial and not clearly sustainable. There have been a number of criticisms of donors spending too much on technical assistance and not enough on construction. Donors have responded that simply budgeting funds, even for simple construction projects, would not necessarily produce the desired results. Even now, there is a real possibility of declining assistance due to a growing chill between some donors and the government. If oil revenues grow to anything near the levels projected in this paper, then the government will have its own, larger, revenues and have to assume responsibility for its own spending decisions. In that likely reality lies the greatest hope and the greatest threat to Cambodia. Given the recent tendency to use new government positions to buy peace, the advent of new revenues from oil, free of any donor pressure, could lead to an explosion of overlapping positions and authorities and wasteful and corrupt spending. If Cambodia were to combine a government of low responsiveness and efficiency with sharply higher public spending, the results would be growing inequality and political tensions. Even if this unrest could be held down, the cost of doing so and the resulting crime and insecurity would make Cambodia an unattractive location for investment or tourism. Only a political understanding of the danger of this, and a strong response to this danger, would help to prevent its likely occurrence. A recent overview of the Cambodian situation by the former Ambassador of Singapore, Mr. Verghese Matthews, was titled,“Cambodia – wasted time and lost opportunities.” It focused on the lost opportunities caused by political bickering. However positive one might be about past growth, it is hard to deny that some opportunities for economic progress have slipped away in the complicated consolidation of political power. If this consolidation is now largely accomplished, then there is an urgent need not to repeat the delays. It would be tragic to waste an even larger opportunity presenting itself with probable growing oil revenues. While no mistake is everlasting, a failure to move aggressively and use oil revenues effectively would 17 Using Asian Development Bank data, Investment/GDP declined from 21.2 percent in 2001 to a projected 18.5 percent in 2005. Meanwhile real GDP growth is estimated at about 6.5 percent a year from 2001-2005. This implies a sluggish rate of growth in real investment of under 4 percent a year. The Asian Development Outlook 2005 Update is used, available online at www.adb.org. It was released in the second half of 2005. UNDP Discussion Paper No. 1 23
  • 30. A SWOT Analysis of the Cambodian Economy set Cambodia back significantly. Donors would be exhausted. Investors would be skeptical. Ordinary Cambodians would be frustrated and angry. Elite Cambodians would choose to invest their savings elsewhere as a hedge against instability and uncertainty.18 It is easy to envision such a future. The rubber and other tree crop areas would be like the Philippines with absentee ownership and agricultural workers. The rice farms would have low productivity with poor farmers in risk of losing their land, much as Myanmar is today. Health and education levels would be low, reflecting the meager incomes of most of the rural people. The elites would contest for the oil rents, as in Nigeria. Such a hypothetical society could not be called successful. It is very far from Vietnam or Malaysia. Fortunately, there are many productive and equality-increasing investments that would create broad benefits, growth and stability. Rural roads including both new roads and maintenance of older ones would accomplish this. So would rapid national electrification, improved health and education, lower fuel and transport charges, and more competitive interest rates, and they would all be possible with well-directed government spending. These improvements would create higher levels of induced investment and output growth, and create jobs for many of those who are already drifting out of agricultural employment. In addition, focused programs for poor farmers could introduce small packages of inputs via grants or help them invest in longer-duration crops such as rubber. Taken together, these initiatives could add legitimacy to the government that implements them with reasonable efficiency and create a more stable and sustainable development path than the current one. If there are government revenues, there will be no lack of suggestions on how to spend the money. The problem will be selecting a sensible mix of policies and getting them implemented with reasonable efficiency. If some program starts to go bad, there needs to be a mechanism to report this and to get it back on track or to terminate it. It is here that the growth of the NGO and journalist communities could become a national asset. Allowing these groups to ferret out poor performance and corruption and to report on it would help ensure that the government’s efficiency does not deteriorate to dangerously low levels. If the government cannot always detect and clean its own house, it would benefit from the information and pressure coming from non-governmental groups, even if they are sometimes wrong. Low Government Salaries: The Cause of Corruption? Government workers in Cambodia are very poorly paid. It is not reasonable to expect officials with subsistence salaries to handle large amounts of government funds without augmenting their own inadequate incomes. Even private sector entrepreneurs said they did not mind paying extra (modest) amounts to government workers, as they thought it a reasonable fee for service. Would higher salaries reduce corruption? Experience in other countries suggests that higher salaries are only one step in a long journey. Rational and meritocratic structures and promotion, oversight and accountability, law enforcement, and public inquiry all help create a low corruption environment. Ignoring low salaries dooms any anti-corruption drive to failure. Ignoring the other variables would make simply raising salaries an expensive, but unproductive gesture. Fighting corruption is a difficult, 18 Official balance of payment data from the IMF shows a cumulative $684 million outflow from Cambodia from 1998 to 2004 in the line “short term outflows and errors and omissions.” Unrecorded outflows often show up as an error or omission and it is common to estimate unrecorded outflows from such data. It should be noted that this $684 million excludes any outflows in 2005 and is a net and not a gross figure. To the extent that there were gross short term capital inflow, the gross outflows would be larger by that amount. 24 UNDP Discussion Paper No. 1
  • 31. A SWOT Analysis of the Cambodian Economy long-term problem. It has to have both carrots and sticks, with consequences for anyone The biggest found involved in criminal activities. Without a high probability of punishment, there is threat to progress impunity. in Cambodia is that large One observer argues that the tendency to use government positions and spending to cement amounts of oil political relations and develop patron-client relationships is deeply embedded in Cambodian money will tend culture and will not easily be dislodged.19 Others challenge this view. At one level, this is a judgment that can only be made in the future, when a history of this period is written. to accentuate However, it is clear that if there is a large amount of oil revenue, there will be the danger of weaknesses and repeating a Nigeria-like experience, and that this can be avoided by moving on from political negative consolidation to more of an emphasis on governance and long-term stability. tendencies that are evident in the For those who believe that it is simply not necessary to improve the level of government current services or to implement policies that further spread the benefits of growth, one need look no environment. further than public health. A major source of revenue in Cambodia is tourism. Is it likely that tourists will flock to a country that finds itself unable to control bird flu, malaria, or other infectious diseases? A concerted effort has already helped to control HIV-AIDS, so we know that such programs can and do work in Cambodia. Beyond tourism, reducing the high levels of mortality and morbidity would improve welfare and productivity, and reduce the pernicious disease-poverty cycle that leads to so much inequality. In general, it is hard to plug into one part of the global economy (tourism) without also bringing other parts of the society up to some acceptable level. And in order to achieve better health and education levels, a better-performing governmental apparatus has to be developed. This is difficult and time consuming, but is certainly possible with money and commitment. This SWOT concludes that the biggest threat to progress in Cambodia is that large amounts of oil money will tend to accentuate weaknesses and negative tendencies that are evident in the current environment. Oil funds, on the other hand, will also provide the means to break out of this current tendency for development to narrowly concentrate benefits, and could provide the leadership with a free hand and funds to spread the benefits of growth more widely and secure a longer-term political and economic stability that has so far proved hard to attain. While donors can play a useful supportive role in helping point out the benefits of aid programs in a path leading to prosperity for all, the real decisions will be made by Cambodians. If these conclusions are accepted, then there should be a chance for the government and the donors to move forward on an agenda that would include improving governance and reducing waste; developing programs to improve the productivity and incomes of those who are currently lagging; and to improve and maintain the infrastructure so that costs are lower and investment is more attractive. Indeed, these are already part of current strategy, though the balance and implementation are still being worked out. In particular, attention to improving the distribution of land, and perhaps reversing to some extent the concentration of land observed in the last several years, would be a priority. This is true because the concentration appears not to be economically or socially productive, at least for the most part. The object is not to reduce the size of holdings if they are well-run and productive, but to discourage speculative holdings of land. Simply giving land to poor people 19 This view, along with the opposite view that foreigners were largely to blame for recent trouble, is covered in a useful survey and analysis in “ Understanding pro-poor political change: the policy process-Cambodia” by Caroline Hughes and Tim Conway. It is a 2004 Overseas Development Institute paper. UNDP Discussion Paper No. 1 25
  • 32. A SWOT Analysis of the Cambodian Economy without also providing access to other inputs is likely to result in small, unproductive holdings that would again be sold. Improving rural electricity, credit, and roads would help avoid that outcome. In summary, Cambodia has had both notable successes and also significant problems. Unless the problems are addressed, the nation could suffer rather than benefit from a potential oil windfall, and fail to capitalize on its potential strengths. It would choose to resemble nations that are not well regarded, even by their own citizens. Avoiding that outcome requires a shift from buying short-term political stability to investing in a more efficient and inclusive kind of economic growth, which should also have benefits for longer-term political stability. Such a shift is not easy, but the benefits of the change would be very high. The question is if it is possible. The reaction of one government official to the poor showing in the World Economic Forum ratings was that to be accurate, the report’s compilers should cooperate with the government. This attitude denies problems and avoids solutions. It is perhaps the real threat. 26 UNDP Discussion Paper No. 1
  • 33. A SWOT Analysis of the Cambodian Economy Appendix: Governance Indicators for 1996 and 2004, Selected Nations The World Bank has collected governance indicators for most nations in the world for years as early as 1996 and as late as 2004. Five items of special interest are accountability, governmental effectiveness, regulatory quality, rule of law, and control of corruption. In this section, the scores of Cambodia are compared with Laos, Vietnam, Indonesia, China and Mozambique. First the ranks for each country are shown for 1996 and 2004. The rank in 1996 of the listed countries is shown first followed by a slash (/) and then the rank for 2004. A “1” means the best ranking and a “6” is the lowest of all in this list. Ranking of Six Nations in Governance Indicators, 1996 & 2004 Cambodia China Indonesia Laos Mozambique Vietnam Accountability 2/3 5/5 4/2 3/6 1/1 6/5 Gov’t. Effectiveness 5/5 1.5/1 1.5/3 3/6 6/4 4/2 Regulatory Quality 3/1 2/4 1/3 6/6 5/2 4/5 Rule of Law 4/5 2/1 1/4 6/6 5/3 3/2 Control Corruption 5/5 1/1 4/4 6/6 2/3 3/2 Average of all 3.8/3.8 2.4/2.4 2.4/3.2 4.8/6 3.8/2.6 4/3.2 In this table, Cambodia starts in 1996 tied for three out of six, but ends up fifth out of six, with only Laos doing worse in 2004. Vietnam and Mozambique do relatively better; Laos and Indonesia do worse, while Cambodia and China keep their average ranking scores. Cambodia does poorly in terms of governmental effectiveness, rule of law, and corruption control but ends up middling in accountability and is number one in regulatory quality. It is difficult to lean too heavily on these types of exercises, but they do seem to indicate a lack of relative improvement. It is not surprising that Indonesia fell, given its political problems since the fall of President Suharto, nor perhaps that Laos is poorly rated. But the lack of relative movement for Cambodia, when competitors are either gaining or ranked much better, does not bode well for its competitive standing or ability. This suggests a fundamental set of problems that time and economic growth are not solving. 27
  • 34. Cambodia United Nations Development Programme No. 53, Street Pasteur, Boeung Keng Kang P.O. Box 877, Phnom Penh, Cambodia Tel: (855) 23 216167 or 214371 Fax: (855) 23 216257 or 721042 E-mail: registry.kh@undp.org http://www.un.org.kh/undp/