Cambodia: Sustaining high economic growth

January 1, 2017

Cambodia: Sustaining  high economic growth 

by  Heng Pheakdey, Enrich Institute

Here Comes Cambodia: Asia’s New Tiger Economy

After decades of conflict and poverty that captured the world’s attention, Cambodia has enjoyed five years of high economic growth that is moving it toward becoming one of the new tiger economies of Asia, according to forecasts in the Asian Development Bank’s Asian Development Outlook 2016.

For the last two decades Cambodia has been one of the fastest growing countries in Asia with an average annual GDP growth rate of 8.1 per cent.

Image result for tourism in cambodia 2016

Cambodia has been highly successful in embracing the ‘factory Asia’ model of growth, supplying its low-cost labour to export-oriented industries. Economic progress in recent years has allowed Cambodia to invest in physical and social infrastructure, attract foreign direct investment, create jobs and lift millions of its people out of poverty. The Asian Development Bank called Cambodia Asia’s new ‘tiger economy’.

Cambodia’s economic performance in 2016 remained robust, with growth continuing at 7 per cent. Strong garment sector exports and foreign investment in construction drove this economic performance. Exports in the garment and footwear industries rose by 9.4 per cent in the first half of the year, almost double the pace in the same period of 2015 thanks to improved production processes and high demand from the European market. As of September 2016, the value of approved commercial projects in the construction sector more than doubled to US$7.2 billion. Imports of construction equipment and materials also increased to support the construction boom.

But solid growth in the industrial sector has been offset by a slowdown in agriculture and tourism. Unfavourable weather conditions and falling commodity prices have resulted in agriculture’s sluggish performance, which grew at a rate of only 0.2 per cent in 2014–2016. Tourism also underperformed in early 2016 due to a decline in tourist arrivals from Vietnam, Laos and South Korea. 1.3 million tourists visited Cambodia in the first quarter of the year, a mere 2.6 per cent increase compared to the same period in 2015.

Image result for Cambodia Today

The World Bank reclassified Cambodia in July 2016 as a lower middle-income country after its gross national income per capita reached US$1070 in 2015, surpassing the minimum threshold of a lower middle-income nation of US$1026. While this sign of progress should be welcomed, it comes with its own set of challenges. Analysts fear that this new classification will reduce Cambodia’s benefits from international foreign aid and preferential trade agreements that the country enjoyed while still a ‘least developed country’.

To prepare for the anticipated reduction in international assistance and trade privileges, Cambodia needs to strengthen its competitiveness, diversify its economy and upgrade its industries.

Image result for garment industry in cambodia

Although garment exports have held up well so far, the sector remains narrowly based and concentrated on a few markets, making it vulnerable to external shocks. To preserve Cambodia’s attractiveness relative to its regional competitors such as Vietnam and Bangladesh, it must diversify into higher value products and services and strengthen labour productivity to reflect the rise of the minimum wage.

The modernisation of agriculture would also help to sustain productivity in the long run. Employing more than half of Cambodia’s labour force, agriculture has contributed significantly to poverty reduction. But high reliance on rain-dependent rice production, slow adoption of quality seeds and inadequate agricultural extension services and irrigation facilities remain key constraints in the sector. Diversifying to less water intensive crops, developing the agribusiness and agro-processing industry, promoting a modernised value chain and cost effective logistics are crucial to put agriculture back on a higher growth path.

Image result for agriculture in cambodia

Efforts have been made so far to support economic diversification. The Cambodia Industrial Development Policy was launched in March 2015 to transform and modernise Cambodia’s industrial structure from a labour-intensive industry to a skill-driven industry by 2025. This implies increasing the GDP share of the industrial sector, diversifying goods exports including non-textiles and processed agricultural products and modernising the registration of enterprises. The policy also supports stronger regulations and enforcement and helps create a more favourable business environment.

Domestic investors also have an important role to play in the diversification process. Experts believe that the success of Cambodia’s economy will be driven by local entrepreneurs and the private sector, not by international donor assistance. Providing support to domestic investors in trade facilitation, logistics, infrastructure and human capital is just as important.

Cambodia faces many challenges to stay competitive. To realise its vision of becoming an upper middle-income country by 2030 requires strong commitments to address infrastructure bottlenecks, build a high-quality human capital base, strengthen natural resource management, enhance governance and improve financial services and the business environment.

Heng Pheakdey is the founder and chairman of Enrich Institute.


Free market alternatives

November 27, 2016

Here is something I wrote in The Phnom Penh Post in 1996, which may still be of interest. Of course, Cambodia has come a long way, having achieved average GDP of over 7 per cent p.a. over the last 20 years. It is enjoying peace and security, thanks to the strong leadership of Prime Minister Samdech Techo Hun Sen.–Din Merican

Logo of Phnom Penh Post newspaper

Free market alternatives

The Editor,

I read Mr Matthew Grainger’s balanced and interesting report on the recent CDRI International Roundtable on Structural Adjustment Programme in Cambodia (January 26, 1996). I also read Dr Walden Bello’s paper titled “Economic Liberalization in Southeast Asia: Lessons for Cambodia”, and Dr K.P. Kannan’s paper, “Economic Reform, Structural Adjustment and Development: Issues and Implications”.

Dr Bello of Chulalongkorn University’s Social Research Institute in Thailand and Dr Kannan, CDRIs research director, are reminding policy makers in Cambodia that there is an alternative paradigm for Cambodian economic development to the standard IMF/IBRD prescription of market economics.

Image result for cambodia kingdom of wonder

The trickle-down theory is attractive in concept, but it has limited relevance in the real world due to market imperfections. Government intervention, as a result, is necessary to ensure equity and development without degradation of the environment.

Growth and equity are two sides of the same coin. For that reason, real GDP growth, in my view, is alone not a good indicator, if we ignore the distributional or equity and environmental aspects of development. One has to look at Thailand and Malaysia to realize that this obsession with GDP growth rates among policy makers results in serious socio-economic imbalances with long-term political consequences.

Malaysia’s realization of this problem is now incorporated in its Second Outline Perspective Plan 1991-2000. Even as of yesterday (Feb 13), Malaysia’s Deputy Prime Minister Dato Seri Anwar Ibrahim was reported to have said that in the next Malaysia Plan, our seventh, the social and related aspects of development will receive greater attention. After nearly 40 years of economic management, Malaysia’s decision to evaluate its strategies and adopt new approaches to achieve more balanced development supports Dr. Bello’s call “to articulate an alternative future” and “to ponder carefully the consequences of fast track capitalism…”

We must remind ourselves what development is all about. Here I would quote Dr Kannan:

“In terms of development, the ultimate objective is that of human development and reducing inequities as between people and regions.”

I am, of course, reminded of great development economists of the sixties like Sir Arthur Lewis, Gunnar Myrdal, Jan Tinbergen and Ragnar Nurkse and my mentors in economics, Clifton Wharton Jr., and Ungku Abdul Aziz (Malaysia), who studied the processes of development and underdevelopment with a socio-cultural perspective.

Development is about bringing about systematic change, and providing meaning to the lives of people so that they have opportunities to progress as far as their abilities can take them. It is about ensuring that scarce resources are used responsibly so that succeeding generations can build on the efforts and achievements of their forebears.

It is about institutions, culture and people. It does not exist in a vacuum, certainly not in econometric models, computer simulations, scenario planning systems or in the air-conditioned offices of the World Bank, IMF and the ADB. Most of all, development is about responsibility and accountability for all stakeholders, not a power game.

Image result for cambodia kingdom of wonder

Because it is a grassroots process and culture bound, development must be driven by nationals, in the case of Cambodia by Cambodians, with a shared vision, not by experts who have no stake and who do not have to live with the consequences of their prescriptions. This is not to discount the contributions made by the international community, donor countries and multilateral agencies. But it does emphasize that the granting of technical and financial assistance does not confer on the provider the right to impose their own values, preferences and way of life, or to dictate what is best for the beneficiary.

Cambodian leaders know what they want for their country. They have a clear vision of their country’s future as reflected in their National Programme (NPRD) and this is more than what can be said about some countries in the Third World. They have a strategic purpose which is to create a fair, just and peaceful society and, through strong sustainable economic growth, to raise the living standards for all Cambodians.

Cambodia is committed to a democratic system of government with a Constitutional Monarchy, and free market economic system with the private sector as the engine of growth and government in the role of strategist and manager-mentor.

Cambodia is adopting a state-directed economic growth strategy. This approach accepts the price mechanism, and the market in general, as an efficient allocator of resources. It also taps the dynamism of the private sector, but recognizes that government activism is essential in the area of national strategy in a competitive and interdependent world and to tame the excesses of the profit motive and ensure that economic growth is sustainable, balanced and equitable in the long term.

Image result for cambodia kingdom of wonder

Their development will be on the back of agriculture which is today the step child of most economies in East Asia. It may not be the “sexy thing” to do, but Cambodia is making its first wise move. Modern agriculture backed by advances in bio-technology, efficient water resource management systems, and strong marketing and distribution networks is a profitable undertaking.

Since the private sector is going to be given a prominent role in the development of the Kingdom, the World Bank and other multilateral agencies should finance a master plan study on small and medium scale industries and businesses and recommend policies and strategies for developing this sector. In many countries in East Asia, this sector is the driver of economic activity with the greatest potential for growth.

It is more refreshing to talk about development than other issues, usually negative ones, about Cambodia. The country has done well since the formation of the Royal Government. The tasks and challenges ahead are daunting. Cambodia needs the understanding and the patient support and cooperation of friends. Credit when it is due should be given. Criticisms, on the other hand, should be constructive.

For democracy to survive in Cambodia, economic development is essential. I have not known of any situation in the world where democracy exists side by side with abject poverty, unemployment, illiteracy and social inequities.

I stand, therefore, to be educated by anyone who has had the privilege of seeing democracy in a symbiotic relationship with the aforementioned phenomena.

I hope your readers – especially those in the IMF, World Bank, ADB and UNDP here in Phnom Penh – will respond with their comments on my letter. If that happens, my purpose in writing this letter as a sort of rejoinder to the Cambodian development debate is well served.

Image result for Din Merican

Din Merican 2016

– Din Merican, Phnom Penh. (Din Merican is an economist with an MBA degree from the United States, who worked for more than 30 years in the Central Bank in Malaysia and in the private banking industry. This letter represents his personal views.)

Grain Prices: Four hundred years of free fall

September 8, 2016

Grain Prices: Four hundred years of free fall

by Jim Plamondon

Image result for Rice Fields of Cambodia

Image result for Rice Fields of Cambodia

A four centuries long downward trend means grain prices aren’t set to soar any time soon, writes Jim Plamondon.

A decade ago, when grain prices spiked sharply upwards, many were convinced that rising grain prices were the ‘new normal.’ Influenced by new factors such as the economic emergence of China, global climate change, population growth, water shortages, and more, surely the price of grain (and especially rice) would continue to rise… right? Wrong.

Grain prices have been on a downward trend for over four-hundred years. Recent research suggests that this centuries-long downward trend is likely to continue until at least 2050.

Let’s start by skimming four-hundred years of history in just a few charts.

Figure 1 below (from Hearfield 2009) shows the cost of a loaf of bread (and hence of grain) in Britain from 1575 to 1825 (250 years). It shows the cost decreasing in “real” terms (as a percentage of wages, on the left-hand scale) by approximately 75% (from 27% to 7%). The red arrow (added by me, in this and all subsequent figures) emphasises this downward trend.

Figure 1: The cost of a loaf of bread in Britain, 1575-1825.

Figure 1: The cost of a loaf of bread in Britain, 1575-1825.

In 1575, Britain was an entirely agrarian island nation of approximately four million people. But by 1825, it was the industrial leader of a global empire, with approximately 10 million in the same area. In between, the Little Ice Age froze the Thames solid at its peak in the 1600s, followed by global warming (relatively speaking) in Figure 1’s latter centuries.

In short, this centuries-long period included social, economic, and climatic changes that are similar to those that today’s world faces in the next few decades. Despite these dramatic changes, the wage-adjusted cost of a loaf of bread – and hence, the price of grain – fell by approximately 75%.

The downward trend in grain prices accelerated in the 20th century, as seen in Figure 2 below (USDA), falling by approximately 75% in a single century. Inflation-adjusted prices peaked upwards briefly during world wars and, more recently, following spikes in the price of oil, including the 1970s OPEC embargo and the 2007-8 oil price shock. Each grain price spike was followed by a downward over-correction that was deeper than the long-term trend.

Figure 2: The price of grain in the USA, 1912-2014.

Figure 2: The price of grain in the USA, 1912-2014.

The data from the USDA chart ends in 2014. What has happened since then? Figure 3 below (Bloomberg) shows a reversion to the centuries-long downward trend.

Figure 3: The price of commodity rough rice globally, 2014-Present.

Figure 3: The price of commodity rough rice globally, 2014-Present.

Clearly, the historical trend has been downward for more than 400 years. One might agree that this was true, and yet argue that “this time it’s different,” perhaps due to global climate change, population increases, changing dietary habits, the end of the Green Revolution’s productivity gains, water shortages, and the economic rise of rice-loving Asians, among many factors.

Baldos et. al. studied that question in detail, publishing a working paper in 2014 and a follow-up in 2016, provocatively titledDebunking the ‘new normal’: Why world food prices are expected to resume their long run downward trend.

They built a historically-predictive model of grain price influences, and then added to it all of the potential new influences that might make it “different this time.” Then, they ran the model repeatedly, varying the inputs. The results were clear (see Figure 4 below).

Figure 4: Global commodity grain prices projected through 2050. The trend is more than twice as likely to be down than flat or up.

Figure 4: Global commodity grain prices projected through 2050. The trend is more than twice as likely to be down than flat or up.

According to their research, grain prices have a 72% chance of returning to their historically-downward trend, and only a 28% chance of rising or remaining flat, between now and 2050. That is, between 2015 and 2050, the price trend is more than twice as likely to be down than flat or up.

The OECD and FAO recently concurred. Their July 2016 publication, the OECD-FAO Agricultural Outlook 2016-2025, states that grain prices are likely to fall, and includes Figure 5 below (for rice, see the right-most chart in Figure 5). Notice that the real (that is, inflation-adjusted) price of rice is expected to fall more steeply than the other grains.

Figure 5: OECD-FAO projects falling grain prices, 2016-2025.

Figure 5: OECD-FAO projects falling grain prices, 2016-2025.

With all that in mind, what’s a decision-maker to do? There’s a financial rule called the Kelly Criterion which states that, all else being equal, you should divide your investments according to the likelihood that they will pay off.

Knowing this (and all else being equal), the wise investor – including aid agencies, development organisations, government ministries – would invest 72% of their available funds into proposals that would prosper despite commodity rice prices declines, while putting only 28% into proposals that would prosper only if commodity rice prices were flat or rising.

Taking the profitability of the different investments into account might skew the investments even further towards investments that would prosper when commodity grain prices fell.

Image result for Harvesting in Cambodia

Harvesting in Cambodia–The Best Time of the Year

The bottom line — hedge your bets. The “safe” path of simply increasing the production of commodity rice isn’t safe anymore… because after 400 years, prices are still trending down.

Formerly a high-tech marketer with Microsoft and Rackspace, Jim Plamondon now lives in a rural Cambodian village. There, he’s exploring ways to help Cambodia profit from its rice industry, of which his company, AwardBest, is a very small part.

Malaysia: The Deplorable State of the Agricultural Sector

October 11, 2015

The Deplorable State of Malaysian Agriculture

by Murray Hunter

The agricultural sector is crippled by mismanagement, lack of planning, featherbedding, says Murray Hunter

Murray Hunter2Over the past 30 years, Malaysia has grown into a middle income country, transforming itself from a primary producer of minerals and commodities, to a multi-sector economy. However, the country’s agriculture sector is characterized by missteps that have cost lost opportunity in better food security, rural, community and regional development, development, employment and poverty alleviation, and missed some of the great agro-based sunrise industry opportunities of this millennium.

Political considerations have dominated investment and research, with government-linked companies receiving lavish funding in areas that often made no sense and which have resulted in the waste of hundreds of millions of US dollars and left a range of defunct programs scattered across the landscape. Politicians and staff have flown around the world on lavish “research” jaunts that appeared more an opportunity for government-paid holidays than attempts to seek proficiency.

According to statistics cited in various Malaysian Plans, agriculture in 1970 represented 28.8 percent of national GDP against only 9.33 percent in 2013. However in some states like Perlis, Kelantan, and Sabah, agriculture still makes up 20-30 percent of the economy.

50 years of Malaysian AgricultureEmployment in the sector has fallen from 13 percent of the workforce in 2007 to only 9.3 percent in 2014. However 66 percent of the people involved in working within the agriculture sector are over 50 years old. The plantation sector is primarily staffed with foreign laborers, bringing little income benefits to local communities.

The push to industrial crops in the 1960s, although rapidly developing the agricultural sector, decreased diversity. Even settlement schemes like the Federal Land Development Authority (FELDA) and the Federal Land Consolidation Authority (FELCRA) shied away from food and cash crops towards the palm oil and rubber because of the relatively large returns available with little need to market and sell their crops.

If drawbacks are factored in such as poor basic infrastructure, inadequate access to irrigation and roads, the poor level of education of most smallholders, conmen taking advantage and promising big returns to smallholders if they buy seeds from them, and the condescending attitude many government bureaucrats have towards small holders, it’s not hard to understand why this sector is so much in decay.

There is little evidence that local communities have benefited from the presence of GLCs, yet state governments have been eager to transfer state land to them for development with virtually no transparency. Virgin forest is still being ripped up to make way for new palm plantations to replace those developed into housing and industrial estates, where the GLCs are making mega-profits. 

Agricultural direction was planned through a series of 5-year plans. The political and bureaucratic elite have always presented rosy forecasts and gained publicity through staging MOU ceremonies to announce projects which never happen, or fail through mismanagement.

Part of the problem is that the politicians and bureaucrats have been thinking big at the cost of thinking small. For example, the Ministry of Agriculture has developed a list of agro-based industries that should be national priorities. The Malaysian Agricultural Research and Development Institute (MARDI) and the Forest Research Institute of Malaysia (FRIM) restrict their research to these national priorities, while leaving a void in research on crops needed to spur on the growth and development of small local communities.

Consequently, research efforts have benefitted few communities, which still remain in relative poverty today, particularly in agriculture-dominant states like Perlis, Kelantan, Sabah, and Sarawak.  Institutions like MARDI and FRIM have become showpieces to please the politicians.

Further, the bureaucrats involved in implementation have appeared to lack the zeal and commitment to see plans progress into reality. Managers on the ground have focused on building hard infrastructure where favored contractors can be employed, rather than ploughing resources and money into education and extension. The result has been a number of white elephants that litter the country. Corruption via land grants, misallocation of funds and building irrelevant facilities is a major issue hampering effective rural development in Malaysia today.

Malaysian CowsAs an economy skewed towards state planning and intervention, Malaysia has attempted to pick winners and develop them through the state apparatus. In the case of herbs and biotechnology, massive funds were allocated in the pursuit of achieving success in these “sunrise” industries, where the funds were predominantly channeled into developing ineffective and costly bureaucracy.

The Malaysian Herbal Corporation was formed in 2001 with much fanfare, considered within the bureaucracy to be the driver and “flag bearer” for the industry. The corporation undertook many initiatives, with the staff travelling widely and luxuriously around the world. Today, the Malaysian Herbal Corporation is defunct.

With former Malaysian Prime Minister Abdullah Ahmad Badawi’s focus on biotechnology as a “sunrise industry” midway through the last decade, the Malaysian Biotechnology Corporation (MBC), along with various state funded biotechnology companies such as Melaka Biotech, J-Biotech in Johor, K-Biocorp in Kedah, and Kelantan Biotech, were all well-funded with hundreds of millions of ringgit in grants, but have little, if anything to show for it. 

Most of, if not all of the grants given out by MBC to commercial companies failed to produce any commercialized intellectual property, as did university research. 

NFC ScandalThe Forgotten RM250 million NFC Debacle is small potato compared to RM42 billion 1MDB Scandal

Technology Park Malaysia (TPM) built biotech labs around the country in places like Perlis, which are mostly empty. The East Coast Economic Regional Development Council set up herbal parks in Pahang and Terengganu which are basically inactive in regards to their original purpose.

FELDA opened up the FELDA Herbal Corporation, which now has been replaced with another attempt at developing biotechnology through Felda Wellness. Biotropics was set up by Khazanah Corporation and is basically only producing some cosmetic and herbal products. The Ministry of Health set up NINE BIO to produce Halal vaccines and herbal products.

The arrangement between Malaysian University of Science and Technology and Massachusetts Institute of Technology partnership hailed as an example of a smart partnership, came unstuck after five years in 2011 and cost the Malaysian taxpayer US$20 million with absolutely nothing to show. The government, rather than being a driver of the industry, became a participant with disastrous results.

What is tragic is that there has been no transparency in the way the government handed over responsibility to personnel within these GLCS with no accountability.

Top-down planning with no consultation with local industry, communities and scientists has led to the sector falling well behind its neighbors within the Asian region. Top-down planning has allowed bureaucracy to overrun market considerations in Malaysia’s agricultural and agro-based industry development.

Development programs like the agropolitan schemes in Sabah are conceptualized and developed within the bureaucrats’ paradigms. GLCs are asked to take up large swaths of land, plant palm oil and develop small corridors for local villagers. They have been of large benefit for these GLCs, but local villagers have been shortchanged as the GLCs fail to live up to their responsibilities.

Likewise, other bureaucrat concepts such as combining fragmented land holdings into paddy estates run by anchor GLC companies as promoted by the Performance Management Delivery Unit (PEMANDU) within the Prime Minister’s Department disempower local land owners who are expected to work as laborers on their own land. These types of projects have failed in their conceptualization, let alone during implementation.  As a consequence, opportunities to alleviate poverty in rural communities have been missed, and opportunities to develop new crops, and create new industries have been ignored.

Many successful programs like entrepreneurship mentorship schemes run at Agricultural Institutes around the country are starved of funds because of the preference for the bureaucratic white elephants that benefit policy implementers financially.

The country imports up to 60 percent of its current food needs including rice, milk, beef and mutton, flour and fruits.  With the level of national debt, falling foreign reserves due to a declining ringgit and a potential slowdown in exports due to a sluggish international economy, food security appears likely to become more important than ever.

Malaysian agriculture needs new farming practices, business models, and reinvented supply/value chains. The decline of the value of the ringgit will help Malaysian farmers find a new era of competitiveness that the sector has never had.

Murray Hunter is an Australian academic and development specialist living in Thailand.