Left behind for years by the tiger economies of its neighbors, Cambodia’s underdeveloped economic framework has largely protected it from the ravages of the Asian financial crisis, and may offer a blank page on which to inscribe a winning formula for the future, according to a report released Monday.
The report, “Learning from the Asian Economic Crisis,” published in the June edition of the Cambodia Development Review, focuses on the contribution of foreign capital movements to the crisis that swept East Asian nations last year.
Foreign capital which flooded into other Asian countries in the form of stocks, bonds and other portfolio investments over the late 1980s and ’90s quickly flowed out again when the slump took hold, the report’s author, Toshiyasu Kato, explains.
Because of its underdeveloped financial sector, however, most foreign money sunk into Cambodia was invested in the form of more concrete assets such as factories and agricultural projects and could not be so easily withdrawn.
“Given the composition of private capital inflows in Cambodia, a massive outflow of foreign capital is unlikely to happen in such a short period of time as the case in the crisis countries,” the report reads. “This is one of the reasons that Cambodia has not been immediately affected by the crisis.”
While Cambodia’s economic progress has in some ways been hindered in the past by the relative underdevelopment of its financial systems, it now stands in a position to learn from its neighbors’ mistakes and develop along lines that avoid the same pitfalls, Kato explains.
“Cambodia can learn from the success and failure of the crisis countries to establish a robust financial system,” he writes.
“By doing so, it could achieve the same measure of success as its neighbors while minimizing the vulnerability of the economy to large capital outflows.”
The report lays out three principle recommendations for Cambodia, gleaned from the regional experience.
First, Kato suggests, a sound legal framework must be established for the regulation of financial institutions. Crucial for this recommendation is the passing of key legislation governing banks and other financial institutions in Cambodia, including the delayed Law on Financial Institutions.
Second, he writes, it is imperative to invest in the development of human resources both in the government and in private financial institutions if personnel are to have the expertise to manage the necessary reforms.
Third, Cambodia must attempt to address the economy’s heavy reliance on the dollar and pave the way for the eventual and complete “de-dollarization” of the economy.
Kato also noted the success of Cambodia’s nascent democracy may be a key factor in ensuring its economic development. Elected governments such as those in Thailand and South Korea have had more success in implementing economic reform than autocratic regimes like that of Indonesia.
The success of reforms are largely dependent on the cooperation of an electorate to whom the government feels accountable, the report said, making a democratic transition to a new administration after the elections a “critical test” for Cambodia.
