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6.8
Effects of minimum wages on employment: evidence from other
developing economies There are two clear and divergent views on the impact of minimum wages on labor markets in developing economies. One view is that minimum wages redistributes resources in a welfare enhancing way, and as such have the potential to reduce poverty, enhance productivity and foster growth. The other view is that minimum wage intervention leads to depressed wages where most of the poor are found - in the informal urban sector and in the rural sector. If these are the divergent views, what is the evidence? A number of developing countries have applied minimum wage legislation. These ‘experiments’ provide a growing body of evidence that setting minimum wages close to or above the market-clearing wage does have an adverse effect on employment growth in the modern sector and can undermine efforts to reduce poverty in the long term. Recent research in Latin America, for example, shows that setting relatively high minimum wages has created a protected high paying formal sector characterized by relatively slow employment growth and increasing concentration of workers in the lower paying informal sector. Relatively high minimum wages increase the cost of structure of the labor intensive industrial sector thereby making it internationally uncompetitive and, thus, reducing long term economic growth. In contrast to the Latin American experience, many Asian labor markets are relatively flexible - particularly with respect to wages. Malaysia and Singapore do not have minimum wage legislation. Korea has a minimum wage rate for workers as a social safety net policy, but this is set well below market wages. Consequently, there are relatively small differentials in wages, labor costs and productivity between modern and quasi-traditional sectors. Much of the modern sector is internationally competitive because they use the country's most abundant resource, labor, more intensively. Relative to per capita income, a high share of labor is involved in the modern sector compared to many Latin American countries. Mexico and Columbia are two countries that have contrasting wage policies. Columbia implements a high minimum wage policy whereby minimum wages are around 50 per cent of unskilled workers' market wages. Mexico has adopted a more flexible approach, whereby minimum wages are set well below prevailing market wages (about 30 per cent of average wages of blue collar workers). A recent study found substantial unemployment effects of minimum wages in Columbia, where the impact is greatest on low skilled employment. A 10 per cent increase in minimum wages reduces employment by 3 per cent for unskilled workers and 2 per cent for skilled workers. In contrast minimum wages had no impact on employment in Mexico because minimum wages there are too low to have any effect. Recent evidence for Indonesia suggests that minimum wages are beginning to adversely effect employment. Indonesia has had a minimum wage policy since the early 1980s, however, it was not until the early 1990s that the government began to vigorously implement the wage policy. A recent study estimated the effect of rapid increases in minimum wages on different types of workers and found substantial unemployment effects for women, young people, and unskilled workers. A 10 per cent increase in the minimum wage reduced employment of women and young workers by 3 per cent, unskilled workers by 2 per cent and factory workers fell by 1.4 per cent. These findings have important implications for poverty reduction strategies. While in the short term, increases in minimum wages benefit those workers who have jobs, in the long term, high minimum wages reduce employment opportunities in the modern sector, crowding workers in low productive, low paying jobs in the urban informal sector and the rural sector. The workers most affected by high minimum wages are those that are most vulnerable to poverty such as women, especially single women heads of households and young women, and unskilled workers. experience of several Latin American countries demonstrates that setting minimum wages above market clearing wages leads to greater segmentation of the labor market into a protected high paying formal sector characterized by relatively slow employment growth and increasing concentration of workers in the low productive and paying informal sector (see box 6.8). Positioning for unrestricted market access The barriers to imports of garments and textiles that confront all countries wishing to export to the US and the EU are scheduled for dismantling by 2005. One of the adjustment problems looming as that happens will be the need for firms that have depended on those barriers to adjust. This obviously includes domestic firms attempting to operate labour intensive activities in wealthy high wage countries. Paradoxically adjustment might also be a problem for exporting countries which have had cost blow outs as a result of the way preferential access has been allocated. Cambodia faces a choice at this early stage of its economic development: should it go the East Asian or Latin American route in terms of the structure of output, employment, wages and income. International experience suggests that it can take decades to reverse the political processes that lead to the creation of a small, elite and protected work force which inhibits modern sector job expansion. To some extent, Cambodia’s approach to labor policy is constrained by its exchange rate system. Cambodia is a highly dollarized economy and is likely to remain so for some time yet. With a dollarized economy Cambodia does not have the option to devalue its currency whenever there is an external shock to the economy. Adjustment in the economy will need to come through prices including wages. This is what happens in Hong Kong. A vigorous implementation of minimum wages would slow wage and price adjustment and as a consequence unemployment persist. While the government is concerned about providing basic protection of workers, raising wages independently of output and productivity is not a proven recipe for investment and growth. The interests of all those workers outside the modern sector is threatened by attempting to push increases in wages more quickly than productivity increases in the modern sector especially given competition in highly competitive export markets. The greatest improvement in the incomes and welfare of workers will come through providing them with more productive jobs through the growth in both modern and informal sectors. Raising productivity in agriculture is important for employment and wage improvements. But it is the transfer of workers out of these sectors into more productive activities, many of which are associated with modern sector growth, which offers the prospect of greatest improvements in incomes and poverty decline. It is important to have policies for supporting a growing and internationally competitive modern sector in an employment friendly development strategy. Both domestic and FDI are important in this context. 7 Tourism Cambodia is one of only four LDCs in the World with tourism income exceeding US$100 million per year. Located in the center of the fastest growing tourism region in the world, Cambodia is positioned to gain from tourism through:
Tourism is a re-emerging industry rather than a new one for Cambodia. During the 1950s and 1960s, along the southern shorelines near Kompong Som and Kompot, Cambodia was a popular year round tourist destination. Thirty years of civil war destroyed most of the infrastructure connecting tourist destinations and all but eliminated the social capital and hospitality skills required by a fast growing tourism industry. On a more positive note, the closed borders resulted in the preservation of much of Cambodia’s natural beauty. Dozens of Khmer temples remain hidden in the jungles, untouched for centuries, and Cambodia’s vast forests are considered the best in Southeast Asia. More recently, Cambodia has experienced tourist growth rates averaging nearly 30 per cent for each of the past two years. While most of this sudden growth can be attributed to the release of pent up tourism demand. Cambodia’s innovative private-public sector partnerships have facilitated an effective supply response. Recent decisions by the government, with the support of airlines and tourism related businesses, have created economic incentives for local and foreign investors to build hotels, establish tour and travel agencies, open a variety of restaurants, and bring modern transportation to Cambodia. The open skies policy encouraged regional airlines to fly directly to Siem Reap and allowed the magnificent temples of Angkor Wat to become available to a much broader set of tourists. The tourism business in Asia, especially the Greater Mekong Subregion (GMS) is highly competitive, and Cambodia is surrounded by strong and capable competitors. For example, in 2001 Cambodia expects about 500 000 tourists (MOT 2001). Thailand, with 50 years of tourism experience, a skilled work force, world famous beaches and entertainment, and internationally recognized tourism promotions, is expecting more than 5 million tourists and continued 10 to 15 per cent annual growth rates. Extent of economic leakage Economic leakage is high in Cambodia, as it is in other LDCs that lack an industrial and agricultural supply industry. It is estimated that up to 75 cents of each tourist dollar is returned to Thailand or Vietnam to import fresh vegetables, fruits, flowers, handicrafts, paper products, and furniture (Jameison W. 2001). National and local initiatives aimed at improving the production of high quality agricultural and handicraft supplies would help retain the economic value of tourism. The development of a smallholder agricultural industry to produce high quality vegetables, fruits, and flowers supplied to hotels and restaurants, and the development of a high quality handicrafts industry are two fundamental industries that would help retain and spread the economic benefits of tourism to a much broader constituency, provide cash incomes, long term rural based employment, and ensure that the maximum portion of each tourist dollar remains in Cambodia, thus increasing the in country multiplier effect and benefit to the economy. Already Cambodian entrepreneurs are exploring ways of better marketing handicrafts involving such things as packaging handicrafts to a consistent standard and establishing of handicraft villages. There is concern among tourism commentators that Cambodia’s growth rates are not sustainable and may begin to stabilize or decline soon. They say that Cambodia is one of the most expensive package tour destinations in Asia and the price to service quality value is low relative to other GMS countries. Some observers are concerned about having 570 000 tourists arrive in 2001 without promotion or coordinated efforts by the MOT and private sector firms. The fear is that the industry will become complacent and fail to improve service quality or expand destination choices. Complacency could result in the loss of focus necessary to continuously encourage private sector investment, build long term social capacity and service skills, improve service quality, and promote tourism with a passion. How appropriate such concerns are only time will tell. Until now there has been a remarkably effective supply response facilitated by good airport infrastructure, an open skies aviation policy and apparently few barriers to entry for tourism support services such as buses, hotels, restaurant and internet services. Focus of this report The research for this report included a lengthy literature review and interviews with MOT officials, private sector businesses, and tourism industry experts. Volumes of preparatory analysis and planning materials have been produced for Cambodia’s tourism sector as a result of UNDP technical assistance in 1996 and more recently, the Asian Development Bank’s (ADB) TA 3454 Tourism Project focused on building institutional planning capacity at the Ministry of Tourism. ADB’s current project is broad in scope. Some of the key components of its approach are:
The ADB project identifies critical links in the tourism value chain, along with the institutional needs of the MOT, and defines the need for private-public and stakeholder partnerships. The objective of this report is to identify how international trade linkages and private sector participation can enhance tourism development, enhance the economic benefits, and assist development agencies, the Cambodian government, and private sector firms to promote pro-poor trade policies and development practices. The report presents sector specific initiatives to further develop business linkages, build social capacity, and promote competition and cooperation. Industry snapshot Table 7.1 provides a snapshot of the value Cambodia receives from tourism. If current growth trends continue, the tourism sector, which is supported by many service industries, could become Cambodia’s leading contributor to GDP growth. 7.1 Selected tourism statistics
Source: MOT 2001. The tourism products currently offered in Cambodia are:
Products which are proposed to be developed include:
Past, current, and projected rates of growth Cambodia’s tourism industry experienced a relatively high average annual growth of 10 to 15 per cent from 1995 to 1999. For 2000 and 2001, tourist arrivals have grown by 30 per cent each year. MOT officials project tourist arrivals will continue to grow at a 30 per cent annual rate, resulting in 1.2 million tourist arrivals by year 2005. The ADB consultants interviewed for this report estimate tourism growth of 8 to 15 per cent per year for each of the next five years, resulting in 745 000 tourist arrivals by 2005. To provide relevance, an eight per cent growth rate is about twice the average tourism growth rate of Asia and about four times the average worldwide tourism growth rate. Can growth at these rates continue? The two fairly well developed tourist destinations in Cambodia are the capital of Phnom Penh and the temples of Angkor Wat located in Siem Reap. Phnom Penh is currently under utilized as a tourist destination and already possesses the hotel, restaurant, and travel agency capacity to host about one million visitors per year. Service quality is low and continuous investments are required to develop human resource capacity and tourism infrastructure; improving service standards will take considerably more concerted efforts. Hotel operators in Phnom Penh report that occupancy rates are lower now than they were prior to the events of July 1997. As a result, several medium quality hotels recently closed. Restaurants in Phnom Penh complain of only moderate profitability, but tour and travel agencies report a profitable and lucrative tourist business. Tourism commentators believe continued 15 to 30 per cent growth rates will soon begin to stress the service capacity of the hospitality industry in Siem Reap, and the road and other infrastructure capacity of Angkor Wat. As of 2001, Siem Reap has or is currently completing 7 200 hotel or guestrooms, and will require only about 500 more rooms before 2005 to meet a 30 per cent growth rate. Occupancy rates at most hotels and guesthouses were reportedly 30 per cent or lower, except during the four high season months from January to April. The number of international and domestic flights arriving in Siem Reap is already capable of supporting about one million tourists While it may be structurally feasible (that is, hotel rooms and airline seats) for Cambodia to support tourism growth of 30 per cent, a few industry commentators feel that institutional service quality levels may already be beginning to deteriorate. This is a primary concern because once tourists begin to experience low service quality while paying premium prices they will not return and will tell others not to visit. Recent data, obtained from discussions with hotel operators and members of the private-public sector working group, suggest that the average lengths of stay and expenditures per day have already begun to decline in Siem Reap and that many tourists are choosing to skip Phnom Penh entirely. Therefore, while the numbers of tourists are increasing at double digit rates, the time and money each tourist is spending in Cambodia appear to be decreasing. If Cambodian tourism firms and supportive government agencies collaborate to address service quality issues promptly, begin to build a tourism supply chain that incorporates supplies from local cost efficient producers, and diversify and promote tourist destinations to such categories as eco village, and adventure tourism, then perhaps accelerated rates of growth may be manageable and attainable. Priority issues for tourism trade development The following list of priority issues was identified in literature searches, through interviews with tourism commentators, and in papers prepared by the Private-Public Sector Tourism Working Group.
Developing institutional and social capacity to promote tourism In reviewing the volumes of development plans, interviewing tourism specialists, and discussing issues with tourism related firms, it appears obvious that there is a severe shortage of institutional capacity and social capital from which to manage current levels of tourism, much less a base from which to quickly expand. Improved international and regional trade and resulting economic benefit depend on well developed business and social linkages. Most of these linkages are created through the efforts of private sector organizations, such as working groups and sector specific trade and business associations. The government’s role is to facilitate and support the development of these organizations, promote international and regional trade relationships, and promote national interests. Development agencies, the government, and private sector firms can assist by facilitating the development of these institutions. Rather than analyze and present specific capacity shortfalls of which there are many, it is more helpful to first define the roles performed by participants in robust tourism industries of other countries. From that basis, one can identify initiatives to encourage tourism sector participants in Cambodia develop the necessary institutional and social capacities from which a robust tourism industry can emerge. Although there is no one best method for developing tourism, experience has shown that a few fundamental institutions and social structures are required before an economic activity, such as tourism, can become sustainable. Development agencies should consider if the initiatives they fund are complementing these roles of inhibiting their development Public Sector Roles. Tourism related government institutions usually serve as facilitators, coordinators, stimulators, catalysts, and supporters of the tourism and hospitality industry. These institutions create incentives for tourists to come to a destination and for private sector participants to invest in businesses and products that satisfy customer demand. Among the functions of the public sector are:
In Cambodia, the MOT is the government institution most responsible for guiding developing, and managing development of the tourism sector. The MOT employs about 900 persons, of whom 300 are full time staff, and has offices in all 23 provinces. Private sector roles The role of tourism related private sector businesses, sector specific working groups, and private business associations is to develop structures to self regulate the industry through codes of conduct, quality standards, and grading systems. The functions of private sector firms includes:
At least three sector specific private business associations have been formed in Cambodia. The Tour Guide Association located in Siem Reap and the Hotel Owners Association and Cambodian Association of Travel Agents located in Phnom Penh. Associations offer a mechanism for representing tourism related interests and concerns with local and national government agencies. With proper facilitation and encouragement, private business associations have the capability to establish quality standards and classification systems, as well as self regulating the industry, enforcing codes of conduct, promoting training, coordinating services, and improving marketing and information exchange. These associations should be strengthened to achieve these objectives. Private-public sector partnerships Institutionalizing systematic consultations between private and public sector institutions can have positive, long term effects. In addition to promoting a self regulated private sector, these partnerships can assist government institutions, which in Cambodia generally lack experience in competitive markets, to understand the interconnections between good governance and economic growth. These partnerships assist in developing industry standards with the customer perspective and long term customer satisfaction in mind, while relieving the government of the burden of enforcement. For example, by jointly developing with private associations a professional code of business ethics and conduct, a template for fair trade practices, and quality standards, government institutions, such as the MOT can focus on more important promotion and linkage activities. They can be confident that the tourism sector will develop efficiently and without the constant need for oversight by government institutions. Among the essential functions of the private-public sector partnerships are:
The tourism related private sector businesses in Cambodia have taken on an increased presence through the formation of the Tourism Working Group. This is a private-public sector partnership that meets monthly and is chaired by the MOT. Participants of the partnership who were interviewed for this report felt that the partnership has been very successful at identifying and solving tourism related problems. Sector specific initiatives to enhance tourism trade Tourism in Cambodia has experienced phenomenal growth in that past decade. The rates have exceeded all expectations and are several times the average annual growth for any Asian competitor. While there is a limit to how long double digit growth can continue without running up against human resource, infrastructure, environment or institutional barriers, that is no reason to stop promoting the wonders of Cambodia to an even broader international audience. Tourism growth has risen so fast for so long that neither the government nor the private sector have been able to build the required capacity to sustain the growth and keep quality high. Rather than identify the shortfalls that have resulted, this report has presented a template from which participants and the development community can contribute to the industry. The roles of the private and public sectors are mutually exclusive in many components and interdependent in others. The ability of the participants to develop the proper mix of interests, create partnerships that are properly focused, and continually develop new products and services will be the determining factor in how Cambodia’s tourism trade benefits the country and helps to alleviate poverty. The government should strive to become a facilitating, coordinating, dynamic agent for change that promotes partnerships, understandings, and self governance through a set of standards developed by private sector firms with support of public sector institutions. These skills will require a change in mindset and actions, but will set in motion the confidence building necessary to encourage continued tourism sector investments by the private sector in physical as well as human resources. The development community’s role is also essential. The manner in which the community invests scarce financial and technical resources will have a determining effect on how well all participants can fulfill their roles. Initiatives to enhance tourism trade The following sector specific initiatives are recommendations that require further analysis and discussion with tourism sector working groups, ADB tourism advisers, development agencies, and the government.
The export of labor has been an important option for reducing poverty and improving household livelihoods in many Asian economies, including the Philippines, Sri Lanka, Thailand and Vietnam. Remittances from export workers are an important source of foreign exchange earnings for these countries. While these remittances have come at some considerable cost in terms of family disruption, there have been long term benefits in the form of developing skills, contacts, business networks, and linkages to markets and information. Cambodian government policy is to encourage increased official labor exports to (i) improve the living conditions of the people; (ii) enhance professional skills; (iii) absorb unemployed and underemployed labor, and; (iv) raise State revenues (Article 1 of the Anukret on the Export of Khmer Labor to Work Overseas, N. 57 29 July 1995). Official labor exports from Cambodia have been limited to less than 1000 people to work in manufacturing industry and plantations, and as maids, in Malaysia. Another contract was recently signed to supply about 1200 construction workers to Greece. There is also considerable unofficial migration of workers, mostly to Thailand, but also to Malaysia. Estimates of unofficial migration to Thailand range from 50 000 to 100 000 workers. Unofficial labor exports are the only option for some poor rural communities to earn income during period of economic hardship. On the other hand, the unofficial nature of these exports leave workers vulnerable, and they frequently have to pay a large portion of their wages to facilitate access to such work. There are also unofficial imports of Vietnamese into Cambodia who work in trading activities, fishing, wood processing, machinery, construction, and the entertainment and commercial sex industries. A variation on labor export is for foreign based businesses to outsource the production of goods and services by Cambodian workers. Many garment manufacturers effectively involve the export of Cambodian labor, with most other inputs being provided, and the final product sold, by foreign interests. With new information technology, there are also emerging opportunities for labor services such as data processing, technical support services, and computer animation and programming to be subcontracted to workers in foreign countries. This is an emerging source of employment growth in countries such as India, the Philippines, and Vietnam. Such employment in Cambodia has been limited to minor cases of data entry, but with supportive training and information technology policies, such employment could increase in the longer term. Opportunities and labor supply issues The ratio of active workforce per/hectare of cultivatable land is relatively low in Cambodia compared with other regional economies. Population pressures are much greater in countries such as the Philippines and Vietnam which are major exporters of labor as shown in table 8.1. This suggests that the pressure for exporting labor in Cambodia might be less than elsewhere in the region, or at least, a greater potential to develop alternatives options. However, with 36 per cent of the population living in poverty, the reality is that higher wage rates in neighboring countries provide strong incentives and potential economic benefits to look for employment outside of Cambodia. A recent DAN survey identified major differences in casual daily rates for unskilled labor on the Thai side of the Cambodian border as shown in table 8.2. 8.1 Population Densities in Southeast Asia
Source: DAN 2001. A major constraint to labor exports is high illiteracy rates, poor education levels, and health indicators which rank amongst the lowest in the region. Many of the skills demanded by labor importing countries (for example construction, maid, tourism services) are in short supply in Cambodia. Indeed, workers are frequently imported from Vietnam and elsewhere to make up for skills shortages in Cambodia. 8.2 Wage comparisons, Cambodia and Thailand
Source: DAN 2001. Institutional and regulatory issues in labor exports Official exports The Ministry of Social Welfare, Labor and Veteran Affairs (MSWLVA) is responsible for the regulation of labor exports, and cooperates with the Ministry of Interior with regard to issuing passports for export workers, and with the Ministry of Foreign Affairs an International Cooperation for the management. A company wishing to export labor must apply to MSWLVA for permission, and MSWLVA is required to respond within 45 days (Article 2 of the Anukret on the Export of Khmer Labor to Work Overseas, no. 57, 29 July 1995). The regulations appear to be directed at labor broking companies who enter contracts directly with workers on behalf of the enterprises that require export labor. The regulations specify that labor conditions for export workers are specified in contracts agreed between workers and the exporting company (that is, the exporting company employees the workers) in line with government regulations (but contracts must be approved by the MSWLVA). Each laborer is required to provide copies of a security clearance, medical certificates, qualifications (if any), passport, and labor license. Export workers are subject to Cambodian tax laws. Labor exporters are required to deposit with MSWLVA a surety fund of US$100 000 within 7 days of official authorization to export labor. This surety may be reduced when an employer directly hire workers to work rather than through an agent. The surety is set aside to be used to compensate workers in the event the exporting company fails to implement any provisions of the work contract. Unused funds are returned to the labor export company at the expiry of the contract and the return of the workers. The labor exporter is required to cover MSWLVA expenses on official duty to inspect the working conditions and the living accommodations of the workers, and to provide unspecified remuneration and service fees to MSWLVA for document preparation. This later condition could substantially increase labor export costs and if regularly enforced would act as a major disincentive to the export of small groups of workers. Only two companies have so far been licensed to export labor. Both companies are licensed to export maids to Malaysia. One company, Human Resource Development, has also been licensed to export plantation and industry workers to Malaysia. Less than 1 000 workers have been exported at this stage, well below initial expectations. The other local company, Cambodian Consulting Associates, has signed a contract with a foreign company to supply about 1 200 workers to assist in construction associated with the 2004 Olympic Games in Greece with salaries ranging from $400 per month for construction workers to $1 800 per month for an engineer. Some reasons given as constraints to increased exports of workers include:
Assessment of the relative impacts of these constraints warrants further analysis. There is a prima facie case for good regulations to protect workers rights and maximize long term benefits, and an important role for government support in negotiating bilateral agreements to open up new opportunities. There is considerable regional experience in developing labor markets that should be tapped in formulating government policy and regulations to develop Cambodian labor exports, and protect the interests of workers and labor exporting agents. Unofficial labor exports Despite the risks and fees, working in Thailand without proper documentation remains the most attractive economic option for many of the poorest Cambodians. In some cases labor brokers/guides travel to Cambodia looking for workers for factories, plantations, fishing boats, and construction companies. In addition many Cambodians regularly travel to Thailand to engage in border trade, and some of these people end up finding employment in Thailand. Cambodians account for a large proportion of sellers in many Thai border markets. Most such workers young (17–35 years) and are typically employed in plantations, factories, farms, households, and in the commercial sex industry. Females are most likely to immigrate temporarily for seasonal work. Males are more likely to take longer term work. Day passes can be obtained at the Thai border without a passport for at a cost of 10 Baht (about $0.23), but additional informal facilitation charges are also often reported. Higher wages can be obtained in Bangkok and other cities, but workers report paying brokers/guides up to 3 000 Baht for such employment. Wages and opportunities for Cambodians to work are reported to have declined markedly since the Asian financial crisis. There are reports that some Thai factories have withheld part of total wages owed to Cambodian workers, threatening to report workers that complained to the authorities. The incidence of such actions is reported to have increased since the onset of the Asian financial crisis. However, many illegal immigrants are still willing to accept such risks, because of the limited alternatives in Cambodia. A recent DAN study found that most long term migrants reported long term positive outcomes from their experience, including being able to meet short term food requirements, buy land, open a small business, renovate housing, and purchase motor bikes (DAN 2001). Migration was also seen as positive in developing construction, tailoring and other skills. While their illegal status leave such immigrants vulnerable to exploitation, attempts to control such migration would greatly reduce the options available to the poorest segments of society and increase their vulnerability to poorly paid immigration officials. An alternative option would be to encourage increased information flows, and to provide mechanisms for illegal workers to raise concerns (for example. including through the press and NGOs) and to disseminate information on risks and safeguards to potential illegal workers in Cambodia. In the longer run, the government might facilitate Thai and other investors to relocate labor intensive businesses to the Cambodian side of the border to take account of lower labor costs. An improved regulatory framework for business, reductions in ‘red tape’, improved infrastructure (possibly concentrated in industrial zones), and improved health and education indicators are needed to attract such investors. Improving options for labor export Further recovery from the regional economic demand could result in a recovery in demand for unskilled and semi skilled export workers. Areas for further action to increase national gains from labour exports include the following.
9
Land, markets, property rights and regulatory processes THE DEVELOPMENT OF AN EFFECTIVE SYSTEM of property rights and contract enforcement is crucial to the development of a competitive market economy. Clarity and certainty about the enforceability of property rights facilitates the use of land as collateral for investments in land and land related businesses, and can facilitate financial sector development. With land use rights being the major asset for most domestic private investors, streamlining of administrative arrangements for protecting and transferring land use rights should be a high priority area for reform. There is also need to address the broader issue of contract enforcement, and the constraints to the development of efficient factor markets for capital and labor. The development of efficient land markets has been constrained by the slow pace of land titling, and increasing land disputes as land prices increase and community and State land are appropriated for private purposes. Official transfers of private land use rights are constrained by cumbersome and time consuming administrative arrangements. The large number of disputes, and the long time taken for courts to resolve disputes raise concerns about land tenure security. There are also concerns about the lack of transparency in awarding large areas of forest and other agricultural land for commercial use, that were previously used by poor communities for subsistence foraging activities. The administrative allocation of land administrative, rather than market based, can have negative consequences for resource use efficiency and equity. Full ownership rights to land are limited to a small proportion of residential land. Recent developments in land use policies The government reintroduced private property rights in 1989, and instructed that land rights established prior to 1979, that all land belonged to the State, and any prior rights to land use were no longer valid. Private entities were able to use and sell the land provided by the State for residential and productive purposes. Residential and productive land was redistributed to people. Other land was retained by the State. The 1992 Land Law created ownership rights for residential properties, and recognized State public land and State private land. State private land could be released as concessions. The 1993 Constitution recognized land ownership rights in a broader sense. A recent national Land Policy Workshop (17–18 July 2000) identified some key regulatory and administrative problems arising from existing arrangements, including:
Many people do not obtain land titles in order to avoid land transfer taxes. The government issued a land policy statement in April 2001. Stated policy objectives of land policy are to i) strengthen land tenure security and land markets, and prevent or resolve land disputes; ii) manage land and natural resources in an equitable, sustainable and efficient manner, and; iii) promote land distribution with equity. These policy objectives are to be achieved by focusing on improvements to land administration; land management, and; land distribution. The main proposed initiatives in each of these areas is given below:
Land issues are an important focus of the government’s reform program. The Interim Poverty Reduction Strategy states that land policy reform is one of the six key areas for promoting opportunities in order to reduce poverty (RGC 2000a). The SEDP II recognizes that land reform is a crucial determinant of the prospects for economic growth and poverty reduction (RGC 2001). The draft 2001 Land Law extends private ownership rights to non urban land, delegates land administration from the central to provincial/ municipal level, provides for official certification of land ownership, creates a single land registry authority, removes the need for administrative approval of land transactions, requires all land transactions to be registered, protects private rights to transfer, prohibits foreign ownership, recognizes communal management rights of indigenous and ethnic communities, includes provisions for use of land as security, dispute resolution mechanisms, and provides remedies for violations of the law. This provides a basis for substantive improvements in land use efficiency. Resulting improvements in land administration could also facilitate property based taxation to finance local public services and infrastructure. However, much remains to be done in terms of issuing implementing regulation, and in developing institutional capacity, in order to generate tangible benefits. Effective implementation of the Land Law also requires new, or revised, legislation on forestry, water resources, and fisheries. Drafts of these laws have been prepared and are being further developed in consultation with civil society. The Land Policy Council, established in December 2000, is responsible for providing guidance to ensure consistency in legal concepts, administrative arrangements and enforcement mechanisms among these laws and other related legislation. Implementing regulations will need to address a broad range of issues, including land title registration agency; land registration procedures; mortgages and procedures for foreclosure; the transfer of State property; expropriation; leasing; resolution of disputed land claims; land transfer taxes; survey and mapping standards and professional conduct; recognition of indigenous communities as legal entities, and; guidelines related to land concessions. Support is being provided by a number of donors to facilitate Land Law implementation. ADB is providing technical assistance in support of drafting implementing regulations dealing with the issuance of concessions. The governments of Finland and Germany are proving institutional support to assist reforming land registration, including land surveying, mapping and planning. The World Bank is working with the government to formulate a Land Administration Project with components for i) land policy development; ii) legislative framework and policy dissemination; iii) institutional development, capacity building, and training; iv) implementation of accelerated land titling; v) development of land registration system, and; vi) strengthening land dispute settlement mechanisms. While informal enforcement arrangements, including reputations and sanctions, are important at all stages of development, investors require more formal contracting institutions as economies develop and the scale of business activity increases and contracting becomes more complex. Such arrangements are important in i) encouraging longer term investments; ii) facilitating entry of new participants; iii) providing access to formal financial institutions; and iv) providing timely information on failures. The need to develop more formal mechanisms is particularly important for Cambodia because the protracted period of violence and the relatively recent collapse of most major institutions means that ‘business networks’ and the informal ‘rules of the game’ that facilitate informal contracting are relatively less developed. On the other hand, the scope to utilize the judicial system is also constrained by institutional weaknesses. This reinforces the need for regulatory simplicity. Given weaknesses in public institutions opportunities for using non judicial arbitration arrangements could be explored. Regulatory environment for business Need for improved regulation Investors note that frequent institutional and regulatory changes leave businesses vulnerable to ad hoc interpretation of the changing (and sometimes inconsistent) legal and regulatory framework by bureaucrats in administrative agencies. Such difficulties are compounded by ambiguities in the roles, responsibilities and accountability of government agencies. In some sectors, attempts to regulate in excessive detail result in unnecessary transaction costs, reduce competition, and increase opportunities and incentives for corruption. Moreover, ambiguous and inconsistent regulations often result in outcomes counter to stated policy objectives. Specific examples are discussed in the sector studies. Improvements in the regulatory framework could help promote increased investment and trade, and thus increase employment. Efforts to develop a regulatory environment conducive to business development are constrained by i) limited institutional capacity and/or commitment to analyze and promote regulatory reform; ii) the influence of vested interests; and iii) inadequate involvement of those most affected by regulatory reform. Inadequate stakeholder consultation also means that the public support needed for efficient enforcement of laws has not adequately developed. The net result is a regulatory framework for business that:
An improved regulatory environment will only generate benefits if it is enforceable, and will only be enforceable if there is strong stakeholder support for regulations. A key step to improving the regulatory framework is to improve regulatory process to improve stakeholder participation, to reduce the costs of compliance, and to facilitate enforcement. Improved regulatory processes Finding the appropriate balance between the risk of not regulating, and excessive regulatory costs, is a critical challenge for policy makers. Good regulations should:
A trend in developed countries is to require regulatory impact assessments. Australia requires regulation impact statements for ‘All reviews of existing regulations, proposed new or amending regulation or proposed treaties which will directly or indirectly affect business, or restrict competition.’ (Productivity Commission 1998-99). Some transition economies (for example. Hungary) and some Asian economies (for example South Korea) include regulatory impact assessments as elements of their reforms process (for example, see OECD reports on regulatory reform in Hungary and Korea). Some key principles for improving regulatory processes are described in the following box. Provision of public services and infrastructure National and regional linkages While more than 50 per cent of total public investment during the period 1996–2000 was directed to improving transport and communications infrastructure, poor transport infrastructure remains a major constraints to trade development. Flooding caused major damage to infrastructure during 2000, and maintenance of all roads is constrained by lack of operations and maintenance resources. Poor enforcement of axle load limits and other regulations add to these problems. Further improvements in infrastructure, through public and private investment, plus institutional strengthening to improve sector regulation and planning remain important priorities if the benefits from increased trade are to reach most rural populations. The focus of past efforts has been on rehabilitation of damaged infrastructure. The government is now aiming to develop a longer term strategic approach to sector development and is receiving support from ADB to formulate a transport development strategy to identify options to accelerate transport development, and to promote private sector participation and competition in providing transport infrastructure and services. Pro-poor trade development requires that rural producers be integrated with urban markets, urban producers need to be able to trade with rural areas, and rural and urban populations need to access international markets. This requires investments in infrastructure in urban centers and rural towns, and in transport linking rural towns to domestic and international markets. Rural electrification and water supply improvements can facilitate commercial development via impacts on new commercial opportunities, greater productivity |