Reforms Needed to Save Fragile Economy

The World Bank-sponsored conference on the future of Cam­bodia’s economy wrapped up on Friday with an urgent and oft-re­peated message from senior government officials and donors: The country needs to shape up to keep its fragile economy from sinking.

While donor presentations focused on combating graft during the two-day conference, the Com­merce Ministry laid out ambitious multiyear goals to link Cambodia to the economies of Vietnam and Thailand through industrial zones and contract-based agriculture.

At the same time, Commerce Ministry officials confronted strong accusations by union leaders that unions face intimidation and workers are forced to work overtime without proper compensation.

Despite their differing perspectives, all participants emphasized the extreme vulnerability of Cam­bodia’s garment-dependent economy.

“There is no country in the world that is as dependent on a single subsector of its exports as Cam­bodia…. There is clearly a very major degree of vulnerability,” said Homi Kharas, the World Bank’s chief economist for East Asia, noting that garments ac­count for more than 80 percent of the country’s exports.

“A second source of vulnerablility is foreign direct investment, which had been very promising in the late 1990s, has started to tail off,” he said, adding that all countries in the region are racing to at­tract investors by improving business climates.

With some 80 percent of businesses reportedly having to pay bribes in Cambodia, “Corruption is essentially wiping out profits, corruption is the major impediment to new investment and corruption is the main barrier to exports,” Kharas said.

Throughout the conference, participants focused on shoring up Cambodia’s garment industry by selling it as an island of high labor standards, finding new sectors to develop, building infrastructure and reducing corruption—especially when it comes to customs.

Prime Minster Hun Sen drew praise from the World Bank after he promised in a speech to tackle unnecessary and overlapping business fees and customs regulations.

The program he outlined in­cluded a 12-step process, focusing on trade regulations that will be monitored by the World Bank. The program includes goals such as establishing teams that will work to ease trade barriers, introducing corporate governance awards and producing review documents about CamControl procedures.

It also includes introducing flat fees for government services, single-form tax registration and a single window for customs at the Sihanoukville port.

If even four of the points are met after 60 days, the Bank said it will recommend a grant of $10 million to help the other stages reach completion.

Kharas emphasized the need to encourage small enterprise as a means of reducing poverty—though with an average of $1,600 in fees and licensing requirements, it is nearly impossible for the average Cambodian making $300 a month to start up a business. He also emphasized that most investors do not believe Cam­bo­dian courts respect property rights and that court reform was essential to attracting investors.

Gap Vice President Dan Henkle and Sally Paxton of the Inter­national Labor Organization guided several discussions about Cam­bo­dia’s reputation for high labor standards.

Gap, the largest buyer here, largely bases its decisions on good labor conditions, Henkle said.

Both he and Paxton agreed that Cambodia has established a reputation for having better labor standards and fewer labor disputes than all of its neighbors, but eliminating cost, especially unofficial fees, will be necessary.

Since 2001, the ILO has been in­volved in monitoring factory conditions and in setting up an Ar­bitration Council to resolve disputes. Funding, Paxton announ­ced, has now been extended until 2009 for the ILO project.

But the largely rosy picture of improved factory conditions was challenged by Chhorn Sokha, vice president of the Cambodian Apparel Workers Democratic Unions, and by Neal Kearney, general secretary of the Inter­na­tional Textile, Garment and Leather Workers Federation.

“Intimidation of union leaders and the increasing criminalization of strike action indicates that Cambodia does not have a mature system of industrial relations,” Kearney said.

Chhorn Sokha said that in some factories, “there is anti-union discrimination” and “forced overtime is still a problem.”

Commerce Minister Cham Prasidh responded by blasting unions for not offering compensation for damage accrued by strikes. Despite the urgency for reform stressed during the conference, Cambodia, he said, is a young democracy that is maturing and workers must be patient.

World Bank: Debt Relief Not on Table Yet

Cambodia’s estimated $4 billion international debt has not been included in recent discussions on across-the-board debt relief by the Group of Seven developed nations, World Bank President James Wolfensohn said Friday. “I can tell you that Cambodia was not discussed at the G-7 meetings,” he said. Earlier this month, the G-7 agreed to pursue a 100 percent write-off of the $70 billion owed to institutions like the World Bank by 27 of the world’s poorest nations. “I think that Cambodia first is trying to resolve its bilateral debts that are largely owed to Russia and the United States,” Homi Kharas, Bank chief economist for East Asia, said Friday. “Then as a least developed country, Cambodia could certainly expect to qualify for indebtedness relief.” According to a 2002 report by the Far Eastern Economic Review, Cambodia owes Russia about $1 billion and the US $500 million. Kharas said those nations could decide to include the money owed to them into the G-7 program if it goes forward.


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