Open Economy Needs New Strategy for Regional Integration

Cambodia must do more than open its borders for trade and investment if it hopes to benefit from regional economic integration and reduce the glaring economic inequality wrought by entrenched patronage networks and corrupt institutions, according to a new report by the Asian Development Bank (ADB).

Since the 1993 U.N.-organized elections that followed years of conflict and isolation, Cambodia’s open trade and investment policies have allowed its economy to become one of the fastest growing in the world, driven largely by the garment, construction and tourism sectors.

However, with an economy failing to diversify beyond those core industries, the report—Trade Policy Challenges in a Small, Open, Fragile, Postconflict Economy: Cambodia—says a strategy of economic openness is “a necessary but not sufficient prerequisite for rapid, broad-based, sustainable and inclusive development.”

The major problems facing Cambodia when the region forms the Asean Economic Community in late 2015 are “behind the border,” according to the report, written by Hal Hill, professor of Southeast Asian economies at Australia National University, and Jayant Menon, lead economist at the ADB’s regional integration office.

“The major barriers to economic integration are now principally behind the border, including high logistics and infrastructure costs, opaque regulations, a weak legal system and high levels of corruption,” it says.

The report says the inflow of foreign capital is being absorbed mostly by the elite, creating an expanding gap between the rich and poor.

“The glaring inequalities associated with the inflows of foreign capital and skills, and the concentrated domestic political patronage networks that benefit from these inflows, threaten to undermine social cohesion and may provoke a nationalist backlash,” the report says.

The report comes as the Commerce Ministry has announced a series of initiatives this year to root out corruption by conducting more transactions between businesses and the government electronically, measures that it says will be implemented through an e-commerce law to be submitted to the National Assembly by the end of the year.

Mr. Menon, co-author of the report, said the impact of the e-commerce law would depend entirely on the way it is implemented.

“I remain optimistic that the e-commerce law will be passed but whether it makes a significant difference in curbing corruption depends on how it is implemented,” he said via email earlier this month.

Mr. Menon said that similar promises about easing business in special economic zones proved to change little in how commerce is conducted.

“The experience with the one-stop service provided in Special Economic Zones, for instance, is that while it simplifies processing, it is neither one-stop nor an effective mechanism in removing opportunities for seeking out informal payments.”

Mao Thora, a secretary of state at the Commerce Ministry, denied that the government’s current economic policies were driving inequality, arguing that foreign investment benefits everyone.

“Foreign investments provide benefits to all Cambodian people. For example, foreigners come to open restaurants and hotels in Cambodia, so they create jobs for our people and foreigners themselves,” he said.

Mr. Thora said the report unfairly focused on the negative aspects of investment in the economy, which he said might cause the government to take a more closed approach to its handling of the economy.

“It’s not necessary for foreign capital to be allowed to flow into Cambodia, so we could just close the door,” he said.

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