Friday, February 22, 2008

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

Part IV


Going back to opposition leader Sam Rainsy’s negative remarks on the comparison of Cambodia to Thailand and Vietnam, one can see that overall the Cambodian economy has not done too badly, all things considered.

As mentioned before, the underlying conditions in Cambodia before 1993 were vastly different from the ones in Vietnam and Thailand.

Vietnam had won their war of unification in 1975 and received generous help from the Soviet Union and East Germany. Cambodia was plunged into something reminiscent of the Dark Ages with the annihilation of the elite, the destruction of the entire economy, abolishment of money, and a workable administration. During the time of the Vietnamese occupation in the 1980s, efforts at establishing an administration in the country were half-hearted at best and self-serving at worst, as Vietnam had to cope with its own problems caused by the same events in their economy as the Soviet Union. Both were faltering, which led to a gradual introduction of more liberal economic policies in both countries. They had no resources to aid a suffering country like Cambodia, and the aid that was forthcoming was symbolic at best. (See also John Tully, “A Short History of Cambodia”.)

Faltering economies occurred in all former Soviet satellite countries. But both Romania and Bulgaria had a stronger industrial base even in Communist times, so their economic rebirth would not begin at point zero, and, consequently could develop much faster. Additionally, these countries had the vast European market in their front yard. European businesses were eager to utilize the proximity of those production facilities. Average wages in those countries in the early 1990s rivaled those in Vietnam and China in attractiveness.

Thailand had a 30-year head start. Conventional wisdom holds that Cambodia would today be on a par with Thailand had it not undergone those tragic experiences of the Pol Pot terror and the subsequent ruinous Soviet-Vietnamese inspired Communist reign.

The turning point for Cambodia came with the elections in 1993 but no overnight miracles could be expected. This was going to be a long and arduous process, which would have failed without the foreign that started pouring in from mostly Japan, the U. S., France, and others.

The country’s leadership was under-educated with no experience in running a democratic, pluralistic country and a free-market economy. It was no wonder that they were overwhelmed with the task, and seeing those huge amounts of money pouring in, succumbed to the temptation of helping themselves to a good share of it. The base of the government was precarious. Each party focused on strengthening its own power base rather than on the development of the country. This ended abruptly in 1997 with the removal of Ranariddh as first prime minister. Unfortunately, this also led to an erosion of confidence of foreign investors, which was not to be restored until after the 2003 elections. The surge in foreign investment, mostly from China and South Korea, did not come until after 2003. The major growth in the Cambodian economy has occurred since then. So, in effect, the first 10 years of liberty were indeed wasted on internal struggles. But there is not one blameless party in that conflict, any finger pointing is counterproductive. Each party contributed its share to the instability, be it intransigence on positions, or simple hunger for power and personal wealth.

Endemic corruption is blamed for most of the woes of today’s Cambodia. Given that some $320 million a year is lost due to that, and since that has been going on for almost 15 years, this is a sizable amount that could have been invested in the development of the country. It is probably safe to say that approximately 20% of the national budget disappears in a black hole. Remedies or cures for this disease are not easy to find. This problem will remain the greatest obstacle to the further and more rapid development of Cambodia.

Of course, tax revenues must reflect the actual incomes earned. The majority of income earners in Cambodia does not pay any income tax. A rigorous tax reporting and collection system must be implemented.

There remains a wide field for programs to enlarge the base of the economy, and as a result, create the necessary jobs. Incomes need to be spread more evenly among all segments of the population, most significantly in rural areas where about 75% of the population lives.Cambodia needs to create programs for a number of existing industries in order to achieve better growth and stability, like tourism, natural rubber, cement, rice, tropical fruits, spices, as well as attract new industries to create a stronger base, e. g. computer parts, light machinery, automobile parts, tire production, cell phone production.

The wage structure in Cambodia, even if increased to a minimum wage of $150/month for factory workers, is still very competitive with Vietnam and China. All other SE Asian nations have higher averages wages already. By extending incentives to large international companies, e. g. rent-free land for 5 years, long-term leases thereafter at low rent, no taxes for the first 3 years, etc. these industries will certainly be interested in setting up production in Cambodia. These incentives would ideally be on a gliding scale tied to the number of jobs created. What the government would lose in tax revenues initially would be compensated by the creation of jobs.

But for this to happen, all parties must cease to play at politics and begin to formulate and execute policies.

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