New roads are nice, but they won’t last without reforms in several key areas, economists say.
Legitimate public administration, better taxation, stronger banks and a closer look at the way financial assistance is allocated are the cornerstones for necessary “urgent reform” suggested by the Cambodian Resource Development Institute.
If reform in those sectors were instituted immediately, Cambodia could “take off” within five or 10 years, said Sok Hach, a macro-economist for the institute. If not, he said, the country will remain poor and “donor dependent.”
While the government is working towards improving tax collection and instilling greater faith in banks, Sok Hach said “the problem of institutional reform” is given less attention.
He said that if institutional reform were given priority, any projects that followed—roads, for example—would be better administered.
That would mean driving out corrupt practices and money leakage that occurs in every ministry—a “drastic proposal [that] is probably not realizable right now,” Sok Hach said.
Cambodia’s development will be boosted once the government begins to collect its potential tax revenues. The government is currently working with the World Bank and the International Monetary Fund on a draft law that would improve tax revenues.
But some of the proposed changes have been a sticking point for the investors who were enticed by Cambodia’s tax benefits, such as reduced tariffs for imports and other tax incentives. Under the World Bank and IMF proposals, those would be lost.
Tax collection is now “20 to 30 percent of what it should be,” Sok Hach said. “So we have a lot of potential.”
The banking sector also faces challenges that prevent Cambodia’s development. Cambodians and foreign investors remain skeptical of the banks here, even after an improved bank law was passed and weaker banks were closed down last year. While the law will eventually strengthen the sector, analysts say it did little to improve confidence in the short term. Some banks that were forced to close were unable to fully reimburse their depositors. But the banking sector also faces another challenge, Sok Hach said.
Bankers are still unwilling to give long-term loans, fearing they will not be repaid. A farmer who wants to increase his land holdings, will likely only be able to get a small loan that must be repaid in one year, Sok Hach said.
“The money could be used for small-scale productions, small trade and small business,” he said. When confidence between the lender and the borrower improves, those enterprises will expand, he said. In the meantime, Sok Hach suggested the government should also review the role of foreign assistance. The government received $615 million in donor aid pledges this year.
But where that money is allocated could make a large difference in Cambodia’s long-term development. According to the CDRI, if more money were devoted to institutional reform, Cambodia would be able to increase its GDP per capita from $270 today to about $1,600 by 2020. (Thailand’s GDP per capita is about $2,000 today). Without reform, CDRI predicts that GDP per capita will remain flat.
Without reform, the unemployment rate will soar as more young people enter the labor force. Sok Hach predicts unemployment could reach as high as 17 percent in 2020, compared to its current rate of 7 percent.