Thursday, March 26, 2009

Can Cambodia Do Anything to Dampen the Effects of the Economic Crisis?

First, we need to ask whether Cambodia is suffering from the same effects as other nations and whether the same sort of aid and support can be brought to bear in this country. Second, we also need to look at the current regional geo-political situation in face of repeated incursions by Thai troops into Cambodian territory. Some constraints might hamper the government’s ability to act decisively in either sector.

The media come out almost every day with another dire look at the Cambodian economy. If they are to be believed the country faces almost immediate collapse, or so one might assume. But is it really so bad, or can we discount some of the representations think tanks and many other institutions publish? What we do know, though, is that more often than not all predictions are more like reading tealeaves than anything else. Of course, they use certain parameters, but the values of those parameters are hypothetical, and as such rather subjective. Remember, some analysts saw oil prices at $200 at the end of 2008. The U. S. performed better in the 1st quarter of 2009 than analysts expected. So can we disregard them altogether? Certainly not, but rather than seeing them as absolute we should all take them with a little grain of salt.

The Prime Minister was originally very sanguine in his outlook and stated that the crisis will more or less bypass Cambodia, as it does not have an economic structure similar to other countries. He is right about the second part. Of course, he is a politician and they usually paint a better picture if they are in power or a bleaker one if they are the opposition. The same holds true in Cambodia. Naturally, he is now reviled for this remark from many quarters.

Of course, what he failed to see was that Cambodia with its narrow economic base and dependence on foreign economies, whether as the destination for exports or origin of tourists will eventually be affected one way or another. The current downturn in all major sectors proves the point.

On the other hand, we should also remember that leading politicians in the countries most affected did not see this crisis until it had already happened. It looks as though virtually everybody was literally caught with their pants down. I, for one, still remember the statements by the previous American presidential candidate John McCain that ‘the fundamentals of the American economy are strong’ right up to the minute big banks started to falter. The previous president didn’t have a clue whatsoever anyway. And the leaders in Europe weren’t faring much better either.

President Obama hastily cobbled together a stimulus package and a trillion-dollar deficit budget to put an end to the current downturn and to lead the American economy out of this recession.

Europe is still wavering and squabbling among themselves while the rest of the world is standing by, waiting for signals from the industrialized world to have its repercussions everywhere.

Now what about tiny Cambodia? Can Cambodia do the same? We know that the main sectors are the garment manufacturing industry, construction and real estate, tourism, and agriculture – mainly rubber, rice, and cassava (tapioca), and some palm oil. There is a fish industry, but it is mainly for domestic consumption, there was a somewhat sizable cashew nut production but many a cashew farmer converted to cassava or rubber.

Reportedly, the Cambodian national budget calls for $1.88 billion for 2009. $223 million or 11.9% is allocated for national defense and security. Unfortunately, the government has not made available the budget to the public or even the media. We do not know the allocations by sector. But we do know that the defense and security budget includes all expenditures for the military, the national police, the border police, etc. Therefore, this item looks less generous than at first glance. One also needs to remember the brief flare-up at the Thai border in 2008. It makes sense that the government wants to bolster its military power vis-à-vis Thailand. $399 million or 21.2% are set aside for health and education, which is less than most developed nations spend but still considered within an accepted range.

Budgets are passed and once people have money that is given to them, they tend to spend it. However, if there is a shortfall they won’t be able to. As the economy slows down and collection of taxes don’t meet projections all that allocated money may not be available to spend, so certain items, e. g. construction of new military barracks might be postponed, or some new schools might not be built. The major increases are to go into pay-raises for the military, teachers, and civil servants. They all say it is still not enough, and they are right. We should also remember that more than half of the budget is financed by foreign aid, namely a cool $1.0 billion.

Son Chhay, apparently the economic spokesperson for the opposition – not as one might assume Sam Rainsy, a financial expert - requested that the government impose tariffs in order to prevent cheaper imports from impacting the Cambodian marketplace. Previously he had also called for subsidies to farmers to strengthen their position.

Finance Minister Keath Chhon recently wrote that the government subsidized electricity with $300 million in 2008, and $450 million went to the fiber industry. But that was all in 2008. He said further that government intervention, say subsidies, accounted for about $500 million of Cambodia’s GDP, an estimated $10.3 billion at the official exchange rate or $29.24 billion by purchasing power parity. In other words, subsidies account for 4.9 % of the GDP. This is rather substantial. It would be interesting to know the public sector’s contribution to the GDP in order to really gauge the government’s efforts for the economy. I couldn’t find a source on that figure. Any emails to the finance ministry remain unanswered.

Now should the government support the private sector in a way similar to what the U. S. government is doing or would this be somewhat counterproductive as financial resources allocated for certain purposes, e.g. public works, would not be available there? In other words, funds to boost the garment industry would not be available for, say, building roads, which after all provide jobs in the construction industry. Consequently, you save jobs in one industry but lose jobs in another. I don’t think that makes a lot of sense. And remember, private businesses are for profit and business owners might not use public funds to bolster their overall business and save jobs but to guarantee their bottom line. We see market forces at work in the garment industry - nothing more, nothing less. It is not the government’s role to interfere in faltering businesses. These are not businesses too big to fail.

How would you support the tourism industry? You can’t just go out to foreign countries and corral tourists to be sent to Cambodia. Cambodia is attractive enough as a destination for individual tourists from Europe and the U. S. and package tourists from other Asian countries. If foreign economies tank, you can spend all the money you want in advertising but you may only say a very small increase, if that, in arrivals. What has been missed in the past can’t be caught up with over the short term – namely, a more diverse tourism infrastructure, mainly along the coast. Cambodia must appeal to package tourists from Europe and the U. S. The benefit lies in larger numbers. But the country just does not have an adequate infrastructure to accommodate those. Last year we saw an increase of just 5% as opposed to a predicted 25%. Well, the 25% were put out at the beginning of 2008 when the financial crisis hadn’t hit full force yet. All things considered, the 5% is still an impressive number. In the first 2 months of 2009, there were 2% fewer arrivals than in the same period last year. People in the tourism industry know this is nothing, certainly no cause for alarm. In spite of this being the high season, this is not a discouraging number, quite the opposite and the year is not over yet. This is not to say that the Ministry for Tourism shouldn’t make any efforts to lure more tourists into the country. But to spend extra money? I wouldn’t do that. Additionally, any dollar spent now will be just like of puff of wind and mostly ineffective, as it will show results, if at all, in July or August, traditionally low season in Cambodia with fewer arrivals to begin with.

Agriculture has been hit hard with a 40% drop in prices for cassava (tapioca) and a 15% drop in rubber exports in 2008 and the plummeting of prices by 50%. There is a rice surplus available for export, but it just so happens that other countries are saddled with the same problems. No amount of subsidy will alleviate this. After all, this is not a regional problem, this is a global crisis – one thing the opposition seemingly forgets when calling for protectionist measures.

The problems in agriculture are mostly homemade and structural. 90% of the entire annual rubber production is sold to Vietnam, which just rebrands it as Vietnamese and sells it on the world market. In times of slowing demand, Vietnam naturally stops buying Cambodian rubber and sells its own first. The marketing of the surplus in rice is hampered by the same problem. Recently, I was offered 200,000 mt to sell internationally. The agent for the seller couldn’t give me the international rice classification but gave me the Khmer names only. Nobody in Africa knows anything about Khmer rice, as good as it may be. Then they wanted a 15% down payment. This is unheard of in international trade, unless it’s a government. What I mean to say is that there is an insufficient knowledge base in the country, especially in agriculture, to market their products internationally.

Then there is this strange effect, I don’t know whether it’s a typical Cambodian feature. But once they see somebody is successful with one product they all scramble to trade or plant the same product. There were rising prices for cassava in 2007 and 2008 so many changed from cashew nuts to cassava. Now that cassava is afflicted by slackening demand, they don’t know what to do. Should the government simply buy up all the production that can’t be sold? I don’t think so.

The same applies to the rubber industry, which I happen to know intimately. The government actively encouraged the cultivation of new rubber plantations, and many followed that advice. Now world demand has dropped dramatically, and prices fell just as dramatically. Despite the drop, however, the industry will survive. They just face a lean year or two. Again, no subsidy would ameliorate this. We just need to wait for demand to pick up; and this will happen once the auto industry has retooled to better, more-fuel efficient, or alternative energy-driven cars. Tires will be needed for a long time to come, not to mention other huge industries that use rubber in their products, e.g. the health industry.

And now to the construction and real estate industry, which was fueled by mostly Korean investments and developers and Cambodian entrepreneurs who wanted to imitate them. For a while it all worked out well. I won’t repeat here what I wrote about extensively in other posts. Can the government do anything for this sector at all? The short answer is a simple no. The land law on the books, if enforced, is sufficient to protect landowners and prospective buyers. There is a need to regulate the industry, though. Developers’ escrow accounts serve to protect homebuyers and investors and should not be waived. Licensing of developers is another must. As I said recently, the speculators were dealing among themselves a lot of time. There were building and speculating for phantom buyers. They simply don’t exist in that large a number. Again, how can the government help? Aside from ensuring that shady developers don’t disappear overnight, it can’t.

The cause of Cambodia’s economic problems can be found overseas on the one hand and are structural on the other. For both there is no immediate remedy. Funds are scarce and limited and since this is a dollar-based economy, no amount of printing new riels would help, other than blowing inflation out of proportion. In the U. S. and other affected countries, it was and is mainly a financial crisis with repercussions across the entire economy. What Cambodia goes through is what can be called a tertiary effect – financial crisis abroad, recession abroad, dwindling consumption abroad, consequently dampening the Cambodian economy. Again, no amount of stimulus money can ward this off. Domestic consumption cannot be spurred artificially with the majority of people living hand to mouth.

I believe the only way to live through this is to sit tight and wait for the U. S., European, Korean, and other tiger countries’ economies, in short Cambodian trading partners, to pull out of the recession. The government needs to implement a better tax collection system, ensuring that state revenue is close to what is projected in the budget, stick to its programs, and spend the money where it is supposed to go.

The perpetual question of corruption comes into play at this point as well, and we are not talking about petty corruption of the policeman who collects $3 for a wrong turn and pockets it. We are talking about the corruption at the higher and highest levels. The government must make sure that all the money received as foreign aid, or earned as royalties for land or mineral concessions, or from leases of whatever kind, doesn’t end up in party coffers or in private bank accounts but in the national treasury. If that were accomplished Cambodia would have done a great deal to help itself and will live through this slow-down relatively unscathed and be ready for the upswing in 2010, which will hopefully be the year this nightmare ends.

Let’s not forget Cambodia simply does not have the structure and the size, let alone the resources, to implement policies a lá Obama. So far, comparatively it has not been battered as severely as the U. S. or Europe. That may be a poor consolation for the people who just lost their jobs. But it by and large is still a fact.

P. S. I worked 20 years in the tourism industry, and have 20-year experience in international trade (a few years overlapping), and am now engaged in the agricultural sector in Cambodia.


khmerization said...

It's a very balanced article. I just posted it at Ki-Media at:

Anonymous said...

interesting article. I would love to follow you on twitter.