Overview - Part A
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Overview - Part A |
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Preface
Appendix A
Boxes, charts and tables 1 Technical assistance matrix xvi
2.1 Macroeconomic developments: TA activities and needs 10 3.1 Trade policy: technical assistance needs and activities 19 4.1 Trade facilitation: technical assistance needs and activities 28
A.1 Day 1, 19 November 2001 57 A.2 Day 2, 20 November 2001 58 IN AUGUST 2001, a team of consultants worked with Ministry of Commerce (MOC) officials in Cambodia to conduct a diagnostic study of Cambodia’s trade policy issues and technical assistance needs. The terms of reference for this study were designed to support the Royal Government of Cambodia (RGC) in developing its Pro-Poor Trade Policy Strategy. Ministry of Commerce officials involved were H.E. Sok Siphana, Secretary of State; In Vothana, Bureau Chief; Ung Sovithiea, Deputy Bureau Chief; Keomuny Kong, Deputy Bureau Chief; Sophann Tauch, Director; and Oeur Samrith, Assistant Director. The team members were Kelly Bird, Consultant — Trade Policy; Sandy Cuthbertson, Consultant, Centre for International Economics (CIE) —Team leader; Martin Desautels, Consultant, Gide Loyrette Noel (GLN) — WTO Accession; Curtis Hundley, Consultant — sector studies on tourism and fisheries; Hiau Looi Kee, World Bank — market access survey and analysis; Ray Mallon, Consultant — sector studies on rice and labour services; Philippe Marciniak, IMF — macroeconomic assessment; Andrew McNaughton, Consultant — sector studies on diversified agriculture and handicrafts; Maika Oshikawa, WTO — trade policy, Sopanha SA, IMF — macroeconomic assessment; Isidro Soloaga, Consultant — poverty assessment; Ieng Sovanarra, Consultant — sector study on garments; and Geoff Wright, Consultant — trade facilitation. The review of investment regulation was carried out by Ross Chapman and Lee Davis of the CIE as a parallel study working directly to the Government. The World Bank Task Manager was Ataman Aksoy. Following this fieldwork, team members prepared drafts of the following reports.
These drafts were discussed at a workshop held in Cambodia on 19 and 20 November 2001. Following that workshop, draft reports were finalized particularly taking into account participants’ suggestions for technical assistance.
Following presentation of its Pro-poor Trade Strategy at the July 2001 donor meeting in Tokyo, the Royal Government of Cambodia (RGC) and donors agreed to conduct a Diagnostic Study of Cambodia’s integration into the international trading system. With support from the Integrated Framework for Trade-Related Technical Assistance, and based on terms of reference developed under the guidance of the RGC, international and local consultants worked with Ministry of Commerce officials during August 2001 to prepare draft reports addressing the terms of reference. These draft reports were discussed at a two day workshop in Phnom Penh on 19 and 20 November 2001 and were revised on the basis of feedback from the workshop. This overview and accompanying reports identify obstacles and institutional development needs to address the demands of increased engagement in the international economy facing Cambodian households and firms. A program of technical assistance to address identified constraints and strengthen the capacity of government agencies and private sector support mechanisms was proposed at the workshop and revised thereafter. Over the last several years the RGC has embarked on a comprehensive program of economic and trade policy reforms. Key areas include fiscal reform, banking sector restructuring, civil service reform and improved governance. Much has been accomplished but much more remains to be done. On the trade side, all quantitative restrictions on trade were eliminated in 1994. More recently, the tariff regime has been significantly simplified with the number of rates falling from 12 to 4 in April 2001 and the top rate reduced to 35 per cent. The currency is convertible with dollarization pervasive. Thus in many respects the trade regime is relatively open. The economy has responded well to this opening of trade. Growth rates of 5 per cent are good compared with those achieved in Cambodia’s recent past. However they fall short of the performance achieved by neighboring countries. Vietnam for example has grown by 8-9 per cent per annum over the past ten years. Moreover, these growth rates are insufficient to make a dent in the incidence of poverty, estimates of which range between 36 to 61 per cent using the headcount approach. In setting out to build a Pro-poor Trade Strategy knowledge of the nature and incidence of poverty is essential. The following characteristics of the poor are consistent across Cambodian poverty surveys:
Notwithstanding the opening of trade many significant barriers remain, as identified in case studies of key sectors. The dispersion of tariff rates (standard deviation of 11.9 per cent) against a top rate of 35 per cent has the potential to create pockets of high protection. The tariff is a tax on consumption and analysis of moving to a uniform 7 per cent duty implies an improvement of 4 percentage points in average household purchasing power from reduced food and clothing prices. Incomes of people in lower deciles improve by between 3.2 and 3.9 percentage points. Income effects would depend on industry structure — for example the income effects of tariff reductions for capital intensive industries would be different from the effects for labor intensive industries. Other non tariff barriers to trade involve various bureaucratic costs (often unofficial) and the need to comply with international labor standards as a condition of international market access. Accession to the WTO is well advanced. But complying with WTO requirements is very demanding for a small developing country and technical assistance will be useful in several areas (legislative framework, valuation procedures, trade policy evaluation and reporting, assessing the impact of trade protection). As part of the Diagnostic Study, a legal expert from the team worked directly with Ministry of Commerce officials to develop a WTO-consistent legislation program. Support for WTO accession or associated institutional capacity building is desirable but the fact that a policy meets WTO requirements does not necessarily mean it is the highest priority for Cambodia. Assistance on WTO accession needs to be complemented with technical assistance that builds domestic capacity to assess and develop policy on its merits. Customs administration has significantly improved in recent years but establishing a low cost formal trade facilitation system faces many difficulties. To begin with, the administrative task is onerous given the porous borders with three neighbours and a long coastline with many rivers and bays. Second, various trade arrangements (rules of origin requirements, preferential trading arrangements in ASEAN) complicate this task. Third, the institutional framework for border control is opaque, with unclear mandates among different agencies. Fourth, limited resources constrain the capacity of the customs department to carry out its functions. Civil service salaries are low, physical support facilities are inadequate, and management information systems are poor. These difficulties are reflected in high unofficial payments, widespread smuggling, unreliable clearance and processing times, and tariff collection that is significantly lower than is implied by the official tariff. Apart from the difficulties associated with ‘external’ trade facilitation, ‘behind the border’ constraints (for example, transport, market intelligence) are also significant deterrents to exporting. Shipping charges in Cambodia are the highest in the region and four times the cost for shipments of comparable size in Thailand. Survey respondents overwhelmingly rated transport costs as a significant barrier to trade – a reflection of the unofficial charges and the poor quality of many roads. Carefully monitored user charges or toll operations to fund road maintenance and construction would be ways of addressing this problem. So would fuel taxes. TA is needed to examine the implications of such options for fund raising and road fund sharing at local levels. Rice is an important source of food for most rural households. An evolution is occurring from rice as a source of food security to rice as a source of trade and income. Rice trade both within the country and across the border is currently constrained by poor transport infrastructure — reflecting in part road funding policy, checkpoint charges and inadequate access to funds for road building and repair. In addition, export procedures pose a significant tax on rice exports. ‘Facilitation fees’ are required to obtain export licenses and are about $14/ton. According to some estimates, unofficial costs are nearly double the official costs. Simulation of impacts on poverty indicate that improving two major elements in rice production technology (paddy to rice yield and post harvest losses) would reduce transaction costs and improve the livelihood of poor Cambodians. A detailed exposure of these unofficial charges is needed to reduce constraints on current and potential exporters of rice. Diversification of agriculture away from rice is increasingly common. The key obstacles to developing non-rice agriculture are similar to those for rice. They include poor transport infrastructure, high energy costs, weak information systems, inherited distrust among buyers and sellers, inadequate access to credit and limited business development skills. Cambodia could potentially benefit from the increasing demand for niche agricultural products, such as spices, herbs, specialty tropical fruits, sesame seeds and essential oils. To do so, action is needed on several fronts. First, the institutional capacity of the Ministry of Commerce needs to be strengthened. Second, technical assistance is needed to help small farmers with their informational needs. This could include the facilitation of establishing associations interested in marketing, technology and purchasing inputs. The authorities could build on the extensive ITC sector analytical studies in this respect. Handicraft production has been hampered by years of civil strife and war which broke the chain of traditional transfer of skill and design. Craftspeople lack critical information on market demand, quality standards and trends. As with diversified agriculture, technical assistance is needed to identify barriers to and sources of market information and to support building associations of people with similar interests in marketing, technology and the sourcing of inputs. Fisheries sector development is hindered by intervention of government agencies in almost every aspect of market transactions. Fisheries marketing is dominated by the Kampuchea Fish Import and Export Company (KAMFIMEX), a state-owned enterprise which has the sole authority to control fish exports. According to the law, all fish destined for export should be sold through this agency, which in turn licenses five export traders to take physical delivery of the fish and transport them across the Thai border to the Arranyaphatet fish market. Building a competitive and market responsive fisheries sector will require a change in the corporate culture in the sector to nurture market-based transactions. Regulation of management regimes to control overfishing is required. Technical assistance is needed in two main areas: fisheries marketing and distribution and fisheries management. In the former, the impact of the export tax and existing restrictions on who can export fish identified in the study merit detailed investigation. In management, TA is needed to examine the incentives for short-term exploitation, unregulated common property fisheries and establishing transparency in the allocation of fisheries access. In addition, TA can help with developing a regulatory system for exports to the US and the EU and enabling the private and public sectors to collectively develop a long-term strategic vision for the fisheries sector. Garment sector export growth has been spectacular over the past several years. Some 160 000 people are reported to work in the sector. This growth reflects a combination of limited access to the currently highly restricted US and EU markets (set to expire in 2005), a hospitable policy environment and competitive production costs. In the case of the US, preferential access means that Cambodia has some access to a tightly restricted market. While Cambodia has US market access for a large number of duty items and quota under GSP, for the items it does export-garments, MFN rates apply and for those garments where Cambodia has shown itself to be especially competitive quotas now apply. For the EU, preferential arrangements are such that Cambodia can export without duty and quantitative limits so long as rules of origin requirements are met. These requirements are in most cases not met given the limited development of Cambodia’s textile sector. However substantial production from Cambodia is sufficiently competitive to be able to sell on the UK market without the concession. Because the US and EU markets are protected by tariff and quotas, prices on these markets are high and those sales that can be made through access arrangements are typically very profitable. But this access to these restricted markets comes at a cost. Satisfying rules of origin, requirements, including the bureaucratic machinery to enforce them, is one such cost. For investors another cost is the need to purchase quota and about 10 per cent of quota is sold by auction. But at least this cost has a positive side in that revenue goes to the government. Other quota is allocated on a historical performance basis. This too has a cost if it means that manufacturers engage in activities in order to secure quota rather than to make profits. Above market wages bought about by the need to comply with labor standards in order to secure quota is also a cost. While employed labor benefits from the higher wage, people who would be prepared to work for lower wages lose out. Restrictions on double shift benefit hardly anybody. In the medium to long-term, reduction of trade barriers by the major developed countries is more important than this limited access, which messes up cost structures. Key areas for technical assistance revolve around the following set of issues: the capacity of Cambodian producers to compete after 2005 when preferential access expires, the impact of existing preferential arrangements on Cambodia’s cost structure and how to achieve a more efficient and equitable distribution of quota rents. Tourism is growing at over 30 per cent annually. The challenge for this industry is to find the appropriate roles and tasks for government industry, private operators with respect to such things as industry statistics, promotion, training, certification and charging for ‘unique’ attractions such as the temples of Angkor Wat. Core technical assistance needs are: TA to collect tourism related data and to analyze it; a careful evaluation of the net benefits of tourism to Cambodia and its long-term potential; developing a tourism development strategy, involving all major stakeholders, building on successful private-public partnerships such as the Tourism Working Group; in conjunction with the tourism development strategy, identifying those investments necessary to encourage greater regional and domestic tourism as well as eco-tourism – all of which would help the poor; and establishing the appropriate role of the government in regulating, ‘charge’-setting, setting standards and collecting industry statistics. Labor export has been an important option for reducing poverty in several of Cambodia’s Asian neighbours, such as the Philippines, Sri Lanka, Thailand and Vietnam. RGC policy is to encourage official labour exports to increase welfare, enhance skills, reduce unemployment and increase state revenues. Constraints to increased exports of workers include, low education and limited foreign language skills, an increasingly competitive market for export labour, complex regulatory and administrative requirements, and training and of initial groups of Cambodian workers. Developing appropriate government policies and regulations and bilateral arrangements, which do not prohibitively raise costs yet adequately protects the interests of export workers poses a challenge. Technical assistance is needed in these areas and should draw on the considerable regional experience in developing labour markets and regulations. Information Technology has much to offer in enabling all these sectors to move to more productive systems. Already some of Cambodia’s many young people are embracing IT based activities. In some cases IT systems are being used to convey market information and expedite transactions of handicrafts produced in villages far from urban centres. In other cases Cambodians are processing data from other countries and thereby effectively exporting data processing services. Technical assistance implied by these findings is foreshadowed in the following table. This table is a living document. A preliminary version was discussed at the workshop in Phnom Penh on 19 and 20 November 2001. The following revised version reflects contributions from breakout group discussions at that workshop. Technical assistance matrix from overview 1 Technical assistance matrix
1.Building a pro-poor trade sector strategy THIS DIAGNOSTIC STUDY of Cambodia’s trade policy priorities and implied technical assistance needs draws on analysis and surveys covering macroeconomic circumstances, trade policy, trade facilitation and poverty impacts. Seven sector case studies provide practical grounding, for ideas and actions. The sector studies confirm that considerable international and domestic trade now occurs in Cambodia. The burgeoning trade in garment and tourism exports and the import of modern inputs to support these activities are contemporary examples. But there is also considerable and long standing trade across borders in traditional products — fish is one example, labour is another. Transaction costs are high..... ....but growth is occurring All this trade happens at various levels of complexity. In some cases, it is small scale and based on barter. Other trade is formal and passes through official channels, typically with the need to pay official taxes and duties. Various unofficial fees and charges are also levied on goods as they move through the country and across borders. Compared with circumstances where there was barely any trade, most people are better off and the Royal Government of Cambodia (RGC) has proposed a pro-poor trade strategy to make opportunities to trade accessible to all citizens. The evidence from experiences of other countries is that trade delivers growth and growth delivers poverty reduction (Dollar and Kray 2000). Institutional arrangements to reduce costs of trade transaction so people at all income levels can join in The RGC has taken the view that trade policy reform — including the building of institutions to support open trade, which enables all Cambodians — urban and rural, poor and not so poor — to enter into domestic and international trade with transaction costs that are not forbidding is an essential ingredient of improved economic performance and poverty reduction. In July 2001, the RGC presented its Pro-poor Trade Sector Strategy at Cambodia’s Third Consultative Group meeting in Tokyo (The Tokyo Road Map). This strategy set out a plan for identifying and overcoming the obstacles and costs facing Cambodians as they engage in trade, whether that trade be simple local transactions or sophisticated international trade. Draw on expertise of other countries through technical assistance An important feature of this strategy involves drawing on the technical support provided by the Integrated Framework (IF) Program for assisting least developed countries to integrate into the global trading system (see box 1.1 for a description of the Integrated Framework Program and events leading up to the design, initiation and conduct of this Diagnostic Study). Following the July 2001 Tokyo meeting, the Ministry of Commerce (MOC), which was assigned responsibility for the IF, worked with the World Bank (WB) as IF task manager to put together a team and terms of reference to conduct the Diagnostic Study. Take other policies being used to tackle poverty The approach taken is set out in chart 1.3. It begins with Cambodia’s past economic and export performance and its macroeconomic policies. It recognizes that a pro-poor trade policy must also consider other measures being used to tackle poverty. These include direct activities targeting health and education and policies developed under the Interim Poverty Reduction Strategy (IPRS), the Socioeconomic Development Plan (SEDPII) and the emerging Poverty Reduction Strategy Paper (PRSP). Add Cambodia’s own trade policies and other countries The next point involves analysis of Cambodia’s current trade and investment policies — including institutional arrangements for developing and administering these policies and trade facilitation procedures. Moreover, while the policies of other countries, particularly with respect to market access are not under control of Cambodia, they do matter. Seven sector case studies were conducted. Based on this material the study draws implications for trade policy and supportive technical assistance. The study reports on tests of the impacts of relevant recommended policies on poor people. Box 1.2 canvasses follow up TA work foreshadowed in the Pro-Poor Trade Sector Strategy and started in the Diagnostic Study.
1.1 Events leading up to this Cambodian Trade Policy Diagnostic Study
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completed IPRS
1.2
Building a Pro-Poor Trade Sector Strategy: technical assistance
activities and needs The Government’s Pro-poor Trade Strategy as spelled out in the Tokyo Road Map envisages detailed fact finding at the firm and household level. This diagnostic study has done some detailed fieldwork with interviews of garment workers, farmer associations, rice cooperatives and a survey of the obstacles confronting 100 exporting firms. Time and resource precluded participatory trade policy assessment directly involving poor communities. The activities that were conducted have yielded valuable insights into the obstacles confronting households and firms as they produce and trade. Further technical assistance is needed to support the design and conduct of fieldwork aimed at identifying and measuring other unnecessary restrictions on trading activities as they exist in various regions across the country. These investigations should focus on particular activities in regions and track the trading chain from producer to consumer in a ‘gate to plate’ manner. They should also involve participatory pro-poor trade policy assessment working directly with poor communities. Such work was foreshadowed in the Tokyo Road Map. Donors such as DFID, JICA, ADB and UNDP are already engaged in household level studies. The survey and measurement should also test restrictions on entry to economic activity and security of ownership and exchange of goods
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