"Impact of Economic and Trade Liberalization on Cambodia"
 Presented by 

Dr. Pich Rithi, Deputy Director-General and

ASEAN Senior Economic Official, Ministry of Commerce, Cambodia
At the Globalization Conference: Business and Law Perspectives
June 27, 2001
Hotel Cambodiana, Phnom Penh

Excellencies
Ladies and Gentlemen, 

1. First of all, I would like to thank the Conference Organizer (the Ministry of Commerce, the Faculty of Laws, and the Cambodian Legal Resources Development Center) for inviting me to speak at this important Globalization Conference from Business and Law Perspectives. The timing of this Conference is very crucial because Cambodia has been a member of the Association of South East Asian Nations (ASEAN) for about two years, and we are now actively preparing to join the World Trade Organization (WTO).

2. Knowledge about the Impact of Economic and Trade Liberalization on Cambodia is very significant for our daily work/business as well as for the future socio-economic policies of the Royal Government of Cambodia.

I. Introduction 

3. As you already know, in 1979, after defeating the Pol Pot Regime, Cambodia's administration at that time took control of a country in which private property rights had been abolished; property records had been destroyed; former proprietors were decimated or had been displaced; productive assets had largely been devastated; and urban properties had been laid waste. Faced with the challenges of rebuilding the economy, the administration kept real estate, natural resources, and all substantial enterprises under state ownership.

4. In 1985, the administration began to accept a larger role for private initiatives, in particular, by relaxing the collective organization of agriculture and by officially recognizing private enterprises beyond merely household production.

5. In 1989, a decade after assuming control, the authorities launched a broad reform program for the governance of the country's properties. This program gave state enterprises greater autonomy and strict budget constraints; allowed for privatization of state enterprises and other state assets; and encouraged foreign and local private investment.

6. The reform program deepened when the Royal Government of Cambodia was established in 1993 following the General Elections sponsored by the United Nations. The Free Market Economy is scripted in the Cambodian constitution.

II. Core Strategy of Royal Government of Cambodia

7. Since its establishment in 1993, the Royal Government of Cambodia considers the integration of the Cambodian Economy into the Regional and World Economies as one of the core government strategies for socio-economic development and for poverty alleviation in Cambodia.

8. Economic integration will result in close economic relationships among participating members, through the free movement of goods and services, capital and labor, the coordination of economic and financial policies, and information sharing networks. These are factors that stimulate the process of economic liberalization, increase the economies of scale, improve factor mobility and reduce the prices of imported and exported products. Therefore, such integration will increase the attractiveness of Cambodia to investors, promote a higher factor of productivity, and create and develop the comparative advantages of the nation through the participation in international competition and specialization. If economic integration can be properly implemented and handled, it will play a crucial role and have positive direct or indirect impact on economic development and poverty reduction.

9. In this sense, Cambodia applied for ASEAN membership in 1994 and became an ASEAN observer in 1995. Since April 1999, Cambodia has been a full member of ASEAN. As such, Cambodia has participated in many ASEAN economic activities, for example the ASEAN Free Trade Area (AFTA), ASEAN Industrial Co-operation (AICO) Scheme, ASEAN Investment Area (AIA), and ASEAN Framework Agreement on Trade in Services (AFAS).

10. In addition, Cambodia has signed many bilateral trade and investment protection agreements with the countries in the region and in the world. Furthermore, being classified by the United Nations has resulted in Cambodia receiving trade preferences (Generalized System of Preference-GSP and Most-Favor-Nations-MFN) from 28 developed countries. Since receiving these trade preferences, Cambodia has exported mainly garments to the US and EU markets. 

11. Last but not least, Cambodia is also actively preparing for accession into the World Trade Organization (WTO), which now has 140 countries as members. 

III.    Evidence of the Positive Impact of Economic and Trade Liberalization

III. 1. Macroeconomic Development

12. When we look at the past economic development in Cambodia, we can say that the achievement was quite favorable for us even though peace and stability only first fully prevailed in the entire country in late 1998 following the establishment of the second Royal Government of Cambodia. This is evidence that economic and trade liberalization has contributed enormously to that achievement.

13. Between 1993 and 1996, Cambodia managed to maintain high economic growth with an annual average of 6.1 percent. In 1997 and 1998, due to the adverse impact of domestic political developments and regional economic turmoil, economic growth dropped to 3.7% and 1.8% respectively. During the last two years, in 1999 and 2000, real GDP growth rebounded to 5.0% and 4.5% respectively. The GDP per capita has increased from US$ 200 in 1993 to US$ 289 in 2000.

14. The inflation rate fell sharply, down from 41.1 percent in 1993 to 12.6 percent in 1998, and to almost zero percent in 1999 and 2000. Curbing inflation is crucial for an economy because unrestrained inflation, as we all know, afflicts the poor first and foremost as their resources are too inelastic to withstand volatile price movements. The exchange rate was fairly stable since the end of 1998 ranging around KHR 3,800 to KHR 3,900 per US Dollar.

III. 2. Impact on Trade Development

15. The total international trade of Cambodia increased from US$ 754 million in 1993 to US$ 2,192 million in 1999 (see also table 1 below); and the simple annual average of growth for international trade from 1993 and 1999 was 23.2 percent. The strongest growths were recorded with 63.7 percent and 65.4 percent in 1994 and 1995 respectively. These were the years of better peace and stability in Cambodia right after the first general elections sponsored by the United Nations, and after the formation of the first Royal Government of Cambodia.

Table 1: Cambodia's Trade Development from 1993 to 1999 in Million US$

Source: National Bank of Cambodia

16. Cambodia's exports rose from US$ 283 million in 1993 to US$ 980 million in 1999; and the simple annual average of export growth from 1993 and 1999 was 26.1 percent. In 1997, Cambodia's exports went up by 33.9 percent when compared to 1996 because of the MFN trade preference granted by the United States in 1996. But the annual growth rate of exports in 1998 and 1999 were only 4.4 percent and 8.9 percent.

However, in general, Cambodia's exports were strongly supported by the trade preferences "GSP and MFN" granted by the 28 developed countries, especially by the United States and the European Union. The exports under these schemes continuously increased from US$ 102 million in 1996 to US$ 1,012 million in 2000. The simple annual growth rate of exports under these schemes was 84.2 percent (see also table 2 below). The annual growth rates for 1998, 1999, and 2000 were 40.5%, 44.6% and 78.5% respectively.

Table 2: Cambodia's Exports under MFN and GSP Scheme (in million USD)

Source: Ministry of Commerce 

17. Cambodia's imports went up substantially to US$ 744 million in 1994 and US$ 1187 million in 1995 or by 58 percent and 59.5 percent, respectively when compared with imports from the previous years. In 1996, 1997 and 1998, trends of imports were -9.7, +1.9, and -1.7 percent, respectively, because of the financial and economic crises in Asia. However, imports rose by 13 percent in 1999 when compared to 1998, following economic recovery in Cambodia and in Asia. 

18. The trade deficit declined noticeably, mainly reflecting buoyant garment exports and stagnant imports from 1997 to 1998.

III. 3. Impact on Investment

19. As you may already know, foreign and local private investment was first encouraged in 1989. From 1994 to 2000, investment amounts in fixed assets in Cambodia, declared by foreign and local investors in approved projects, was US $ 6,102 million (see also table 3 below). Investments have been made in many sectors of the economy like in manufacturing, construction, tourism, agriculture, and the agro-industry. With the investments, Cambodia has benefited from the generation of new employment opportunities and absorbed new technology, know-how, and experiences associated with FDI and international trade. Cambodia's production and export capacity have been expanded and strengthened.

However, the amount of investment in Cambodia had not increased steadily because of internal and external factors like the political events in Cambodia and the financial crises in 1997, the economic slowdown in the US and Japan, and the high oil prices, etc.

Table 3: Investment Trends in Cambodia 1994-2000

Source: The Cambodian Investment Board (CIB).

Note: "Investment amount" and "number of required jobs" refer to declared magnitudes in the approved investment projects rather than actual out-turns.

IV. Benefits and Challenges of Joining ASEAN

IV. 1. Benefits of Joining ASEAN

20. Let us now look closer at the benefits that Cambodia gained by joining the Association of South East Asian Nations (ASEAN). As a member of ASEAN, Cambodia enjoys the following benefits:

a) Lowest Import Tariffs in ASEAN for Cambodia's Export Products  
Under the Bold Measures announced by the ASEAN Leaders at their Sixth ASEAN Summit in Hanoi in December 1998, the original ASEAN-6 have to achieve a minimum of 90% of their tariff lines in the Inclusion List with tariffs of 0-5% in year 2001 (see also table 4). By 2002, 100% of items in the Inclusion List would have tariffs of 0-5%, with some flexibility. This means that Cambodia's products in the Inclusion List with import tariffs up to 20% can enter ASEAN-6 markets with low import tariffs in the range of 0-5 % beginning in 2002. The average CEPT tariff rate for all ASEAN-10 is 3.54% this year (see also table 5). Cambodia's average CEPT tariff rate is 10.4% in 2001.

In addition, the original ASEAN-6 will eliminate all tariffs by 2010 and for the newer ASEAN-4 by 2015, with some flexibility.

Table 4: CEPT Product List For the Year 2001  

Source:  ASEAN Secretariat. As of 15 September 2000

Table 5: Average CEPT Tariff Rates by Country

n/a: not available

Source: ASEAN Secretariat

Regional CEPT tariff rates are a weighted average with the number of tariff lines in the Inclusion List for 1999 used as the weights

b). Market of 500 Million People
The combined population of the 10 ASEAN member countries is about 500 million people. The grouping, which is also rich in natural resources, raw materials, and land, represents a large market full of economic potential and an attractive destination for investment. The combined GDP of the ASEAN-10 was about US$ 700 billion in 1996. The region experienced high economic growth of 5% to 7% in the 25 years before the financial crises in 1997.

c). Membership in ASEAN allows Cambodia to import fabrics from ASEAN countries to produce garments for the EU market. When Cambodia was not a member of ASEAN, Cambodia had to ask for derogation from the EU every year in order to import fabrics to produce garments for the EU market, and at the same time, to meet the requirements in the Rules of Origin under the European Union GSP Scheme.     

d). Cambodia's Membership in ASEAN Increases Investor Confidence 
The fact that Cambodia was allowed to be an ASEAN member represents a collective vote of confidence on the country's political and economic situation. This is an important and positive sign that greatly influences the attitude of investors.

e). ASEAN is a training ground for Cambodia to prepare itself for participation in the global economic cooperation, i.e. the World Trade Organization (WTO), because ASEAN trades in goods (AFTA) and in services following the same principles as the WTO for the implementation of its own economic cooperation.

f). ASEAN is a catalyst for stimulating Cambodia's domestic economic and institutional reform process.

g). Cambodian consumers will get better goods and services with reasonable prices.

h). ASEAN will help strengthen Cambodia's position in negotiations with big countries or organizations.

IV. 2. Challenges of Joining ASEAN

21. There are five challenges that Cambodia is or will be facing: expected loss of import tax revenues, financial means, legal and institutional reforms, human resources, and international standards.

a). Expected Loss of Import Tax Revenue
Membership in ASEAN requires Cambodia to participate in an ASEAN economic cooperation like AFTA and the ASEAN Industrial Cooperation (AICO) Scheme, and so on. By participating in AFTA, Cambodia will reduce its import taxes for ASEAN exports to Cambodia to 0% to 5% in ten years, beginning January 1, 2000 and ending January 1, 2010. And by 2015, Cambodia will eliminate import duties for all ASEAN products. Therefore, Cambodia will lose an important part of its import tax revenue, on which Cambodia is heavily dependent  (42% of the total current revenue or 65% of the total tax revenue in 1996). Hence, Cambodia needs to reform its tax structure in order to compensate for the expected loss of import duties in the coming 10- 15 years.

b). Financial Means
As a member of ASEAN, Cambodia has to pay contributions to the ASEAN Fund and other ASEAN activities for the operation of the ASEAN Secretariat, for participating in ASEAN meetings and for hosting ASEAN meetings.

c). Legal and Institutional Reform
Cambodia should undertake legal reforms in order to make our current legal system compatible with the legal systems of ASEAN countries to facilitate trade and investment in Cambodia. Laws and regulations to be established are, for example:

Commercial Contract Law, Law on Business Organizations, Commercial Arbitration Law, Trade Marks Law,           Law on the Establishment of a Commercial Tribunal, Law on Insurance, Law on Patents and Industrial Designs, Law on Customs Code, and Copyrights and Related Rights Law.

In addition, Cambodia also has to carry out institutional reforms in order to work effectively with the ASEAN countries. Since its preparation for joining this Association, Cambodia has established ASEAN departments and/or bureaus, and working groups in various ministries for dealing with ASEAN activities. Cambodia has also nominated senior government officials to be responsible for different ASEAN activities.

d). Human Resources
There is a lack of human resources dealing with ASEAN matters, especially officials with good skills/capabilities (in economics, trade and English). Cambodia needs further technical assistance to upgrade its human resources. Moreover, Cambodia does have enough manpower so that more officials could be recruited for dealing with regional and global integration matters, if Cambodia would be able to provide better salaries for them. This issue is very important for future economic development in Cambodia. We need to build an effective and capable administration in dealing with regional and global integration matters.

e). International standards
In order to be able to export Cambodia's products and to compete on the world market, Cambodia needs to produce goods and services that meet international standards. Moreover, we also need to have capable institutions, which are in a position to test and certify that the export product meets international standards.

V. Future Policy Options

Cambodia is a small Least Developed Country with limited natural resources, insufficient skill and technology. Liberalization is thus not a choice, but a necessity for Cambodia if it is not to be marginalized in this increasingly globalized world economy.

The benefits from liberalization, however, will not take place in a vacuum or automatically, but in the context of an integral plan which properly defines priorities and sequences of stimulating policy actions.  

How fast and how much Cambodia can gain from liberalization is up to the government and to our efforts to create an environment conducive to cross-border trade, investment, knowledge and other resource transfers.