Friday, February 22, 2008

Cambodia - Thailand – Vietnam – Romania – Bulgaria -- A Comparison of 5 Economies

Part I - Introduction

Recent interviews by both Hun Sen and Sam Rainsy referred to the economic comparison between Cambodia and its neighbors. While Hun Sen limited himself to pointing out stability as the main incentive for foreign investors, Sam Rainsy in typical fashion lambasted the government for wasting time and comparing the better situation in both Thailand and Vietnam to Cambodia’s deplorable situation, and quite nonsensically and illogically, wanted to compare Cambodia to industrialized nations, indicating how far Cambodia lagged behind.

Here is a real comparison with hard facts using data from the CIA World Factbook. There are other publications available, especially from the World Bank, the IMF, and the ADB. Their research projects gather data from common sources so the compressed form of the CIA data was used.

Two former Communist countries, satellites of the former Soviet Union, were also used in this comparison to see what can be accomplished with the support from nations in an economic union, such as the EU. Both countries were impoverished, and to a certain extent still are, but after shedding their past are solidly on the way to full economic and political stability. Both joined the EU in January 2007.

Let us precede this, however, by a World Bank report on the state of the economy in Cambodia of November 2007.

This can be downloaded at

For the reader’s ease it is quoted here:

Begin quote

CambodiaCambodia’s economic performance continues to be solid. After three years of double-digit growth, the economy is expected to grow 9.5 percent in 2007, underpinned by strong exports, private investment, and consumption. From a sectoral point of view, growth continues to rely on apparel, tourism, agriculture, and construction.

In 2007, garment exports continue to expand (by an expected 17 percent) and tourist arrivals are estimated to grow 25 percent.The outlook for 2008 is positive, with growth projected to ease only slightly to 7.5 percent, and several factors should also help sustain rapid growth over the medium term. These include large foreign direct investment inflows (6 percent of GDP or more over the last 3 years), the possible exploitation of underground resources (oil, gas, and mining), sound macroeconomic management and progress in structural reforms, despite some uncertainty due to the national elections scheduled for July 2008.Cambodia’s narrow export base remains vulnerable to external developments however.

The garment sector faces renewed competition, including when ‘safeguard’ measures on China are lifted by the end of 2008. The exploitation of underground resources also needs to be managed cautiously from a transparency, fiscal, and macroeconomic point of view if Cambodia is to benefit fully from their potential.External developments have supported rapid growth and good macroeconomic performance in 2007.

The nominal exchange rate remained stable, and foreign reserves continue to grow, possibly reaching US$ 1.4 billion by the end of 2007, worth 2.3 months of imports of goods and services. Despite pressure from high world oil prices, the current account deficit (excluding transfers) fell to -7.2 percent in 2006 (from -9.4 percent in 2005) and is expected to stabilize at -7.5 percent in 2007.Broad money increased by 38 percent in 2006 and is projected to grow by 49 percent for 2007, reflecting rapid economic growth and an increasing demand on the financial sector. Inflation has been picking up from a low 2.8 percent in 2006 to a projected 6.0 percent in 2007, even though this has not yet triggered concerns about price instability.

The financial sector is growing: 23 commercial banks are operating with a total lending-to-deposit-ratio of 68 percent (up from 64 percent in 2005), and 17 micro-finance entities providing an estimated US$ 50 million of credits to micro and small businesses.Several important laws were passed in 2007, including laws on anti-money laundering, combating terrorist financing, the issuance and trading of non-government securities and on bankruptcy. Cambodia obtained its first sovereign debt rating from Moody’s and Standard & Poor’s (a B-plus, i.e. two notches lower than Vietnam).

There remain many issues nevertheless. Cambodian entrepreneurs still find it a challenge to access credit - the interest rate for a one-year term loan is above 15 percent. Issues such as concentration of the financial sector and the exposure of the main banks to a single sector (real estate) and, in some cases, a few large customers also require the central bank to step up its efforts to supervise the rapidly-growing banking sector.

The fiscal deficit before grants declined from 3.4 percent of GDP in 2005 to 2.5 percent in 2006, and is projected to further decrease to 1.5 percent in 2007. The joint IMF/WB debt sustainability assessment concluded that Cambodia had only a “moderate” risk of debt distress (against a high risk in the previous assessment). The ratio of total revenue to GDP grew from 10.3 percent in 2005 to 11.5 percent in 2006, with a projected increase to 11.8 percent in 2007 and 12 percent in 2008.

This increase owes mainly to the modernization of collection processes.Spending remains stable, at 13.7 percent of GDP in 2005, 14.0 in 2006, and a projected 13.3 and 14.9 in 2007 and 2008. Public investment remains low, while recurrent expenditures are slowly increasing in an attempt to adjust public wages to more effective level.

Despite good progress, Cambodia is still a highly aid-dependent economy with per capita aid of US$ 33 on average between 1999 and 2005. Foreign financing accounted for 33 percent of total spending in 2006. In June 2007, the first Cambodia Development Cooperation Forum was organized and, in a break from the Consultative Group meetings it replaces, it was chaired and fully prepared by the Government. An aggregate pledge of US$ 700 million was received from donors, targeting activities in line with the National Strategic Development Plan (NSDP) for 2006-2010.In July 2007, the World Bank approved a first Poverty Reduction and Growth Operation, which has been prepared jointly with a group of donors that are expected to co-finance it.

The first area of reform is public financial management, a reform area led by the Ministry of Economy and Finance (MEF) and involving some 13 donors, which has been instrumental in delivering some of the progress on the fiscal side.Budget execution is improving, pilots programs for budgeting have been introduced, procurement is being strengthened, and public financial management increasingly relies on the banking system.

Progress in this area is also underpinned by an innovative Merit-Based Pay Initiative in MEF. Second, in the area of private sector development, some progress is being made toward improving trade facilitation and investment promotion.The customs law and the law on concessions were passed in 2007. Electronic customs declaration through a Single Administration Document (SAD) will be piloted at the end of 2007 and rolled out in 2008. The new ASEAN Harmonized Tariff Nomenclature (AHTN) with 8,314 tariff lines and average un-weighted tariff of 14.3 percent was implemented in July.

There is also progress on land and natural resource management, such as rapid land titling and initial steps toward disclosure of economic land concessions, although substantial challenges remain.Cambodia has also made progress in social sectors in recent years.

The national poverty rate fell from 47 to 35 percent between 1994 and 2004. In education, the gross primary enrollment rate (124 percent) has risen faster than the low-income country average (104 percent) while the gap in adult literacy relative to other East Asian countries has fallen. But completionand literacy rates still remain low.

The infant mortality rate fell from 95 per 1,000 live births in 2000 to 66 in 2005. HIV prevalence also appears to have fallen remarkably. The notable lagging indicator is the maternal mortality ratio, which remains high and unchanged.

End quote

This flies squarely in the face of Sam Rainsy’s public remarks. It appears that if Sam Rainsy continues with his government-slamming and xenophobic rhetoric he will be considered as nothing more than a demagogue who doesn’t have his facts straight.

To make one thing clear, this blog is not anti-SRP or even anti-CPP, for that matter. These are just comments, assessments, sometimes explanations and interpretations – as objectively as possible.

All the information contained in this comparison is in the public domain and is available to anybody with some Internet knowledge. It is truly amazing that the political parties in Cambodia have not been able to formulate an economic program using the most fundamental data. They have access to officials in the World Bank, International Monetary Fund, and the Asian Development Bank. With their help they ought to be able to shape economic policy for the next 5 years.

Hopefully, they don’t think the population is too ignorant and wouldn’t understand anyway. There is a growing number of better-educated young people who would certainly appreciate more transparency in political programs, and who are a decisive factor in the next election. The parties must take the young generation seriously or it might come to haunt them, perhaps not next July but in 5 years time.

Social policies hinge on funding possibilities; these can only materialize with a sound economic policy, its consistent execution, and the resultant development. The tremendous growth rates of the past few years have been very promising signs and should encourage the government to take more drastic steps towards reforms of the social and judicial sector.To be continued.

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