A PRO-POOR TRADE SECTOR STRATEGY FOR CAMBODIA  

 Phnom Penh, January 29, 2000

Royal Government of Cambodia

Ministry of Commerce

A PRO-POOR TRADE SECTOR STRATEGY FOR CAMBODIA

1.  Introduction

As noted in the Royal Government of Cambodia’s April 2000 communication to its development partners, “the country has entered the new millenium having turned a dark page of its history. Whereas chaos, violence, and conflict once prevailed, Cambodia, today, is at peace with itself and is one integrated territory without separatist rebels, turmoil or internal strife for the first time in several decades. As a result, Cambodia can now devote its full energy to the challenges of economic reconstruction and development.” 

The most pressing challenge for Cambodia at the onset of the new millenium is poverty-reduction and eradication.  In 1997, Cambodia ranked 136th (out of 174 countries) on the UNDP’s Human Development Index.  Measured in US dollars, annual GDP per capita at current price has barely changed since the mid-1990s – from approximately $284 in 1995 to $266 in 2000.  This reflects slow growth during the years 1996 and 1997 in particular as well as rapid population growth throughout the 1990s.

Cambodia’s birth rate is high – 4.1 percent in 1998.  Life expectancy at birth is rising – from 46 years old in 1985 to 54 years old in 1997.  And, population growth is rapid as a result – 2.5 percent annual in 1998.  It will take stronger and more sustained economic growth over the new decade for Cambodia to pull itself out of the vicious circle of rapid population growth and unrelenting poverty.

Since the mid-1990s, Cambodia has been witness to a rapid renaissance of its trade sector.  Preliminary evidence examined in this short paper strongly suggests that trade is making a significant positive contribution to economic growth and poverty reduction and that such contribution can be further enhanced provided Cambodia becomes proactive in promoting trade for poverty reduction.

The present paper proposes three key concepts to serve as foundation for the formulation of a full-fledged “Pro-Poor Trade Sector Strategy for Cambodia.”  The concepts are: (1) shifting the balance of policy emphasis from issues of market access and macro-reforms for trade to micro- and meso-level issues of supply capacity; (2) focusing strongly on the delivery of capacity-building support at the export-enterprise and export sector levels; and, (3) stressing the regionalization and geographical decentralization of export business within Cambodia.  

Designing and implementing a full-fledged trade sector strategy for Cambodia will require meeting two conditions at the very minimum:

·        Develop a new partnership framework among government, business, civil society and development to drive the formulation and implementation of the strategy;

·        Ensure that the strategy is deliberately supportive of Cambodia’s national strategy for poverty reduction, including making sure that the trade strategy promotes most particularly developments that have an immediate and deep positive impact on poverty reduction.

Cambodia’s pro-poor trade sector strategy will become one of the building blocks of Cambodia’s national poverty reduction strategy for the next five years and will be reflected fully the forthcoming SEDP-II and full-PRSP docuements.

The objective of the present paper is three-fold:

1.      Outline the three concepts to serve as foundation for a pro-poor trade sector strategy and present some of their underlying rationale;

2.      Propose a partnership strategy to formulate a full-fledged country-owned strategy and plan of action to be presented at the June 2001 Tokyo Consultative Group Meeting; and,

3.      Sensitize development partners to the need for a new partnership framework for Trade and Development in Cambodia in the context of the January 29 pre-CG meeting.

This paper is organized into five chapters following this introduction.  The next chapter (chapter 2) makes reference to the Integrated Framework that is serving as the current mechanism for partnership between the Royal Government of Cambodia and several of its development partners to launch the formulation of a Pro-Poor Trade Sector Strategy in Cambodia.  Chapter 3 discusses some initial evidence of the current and potential contribution of the trade sector to poverty reduction in Cambodia.  Chapter 4 examines current bottlenecks and limitations to the more rapid and effective development of a pro-poor trade sector strategy.  Chapter 5 proposes three concepts to structure a pro-poor trade sector strategy for Cambodia.  Chapter 6 concludes with a proposal for a capacity-development strategy to be implemented over the next few months to formulate a full-fledge pro-poor trade-sector strategy.

2.      The “Integrated Framework” for Trade in Cambodia

Work carried out thus far by the RGC on the ideas proposed in this paper has been conducted as part of the implementation of the Integrated Framework in Cambodia.

The Integrated Framework (or IF) is the outcome of a commitment made by six multilateral Agencies (IMF, ITC, UNCTAD, UNDP, World Bank, and WTO) to coordinate their assistance in the area of trade and investment integration into the global economy among themselves and with other multilateral and bilateral donors.  IF came about as a result of the High Level Meeting (HLM) for LDCs organized by the WTO in October 1997 in Geneva.  In turn, the HLM sought to fulfill a commitment made earlier by the developed countries to deploy special efforts and help LDCs make better use of the opportunities for devleopment opened up by globalization.

The Integrated Framework experienced some early, growing pains but, following a review in the Spring of 2000, there emerged a renewed commitment by both LDCs and the six Agencies to ensure that the initiative be successfully implemented.  To ensure success, a new understanding also has emerged: whatever trade sector strategy is being formulated and implemented in each LDC under the Integrated Framework, that strategy must be fully “mainstreamed” in the country’s national strategy for poverty reduction.  In other words, the country’s trade sector strategy must be fully supportive of and coherent with national objectives of poverty reduction.

Cambodia has elements of a trade sector strategy but lacks a full-fledged strategy that is mainstreamed in its national poverty reduction strategy.  Accordingly, an initial goal of IF in Cambodia is to work with Cambodian stakeholders and develop such a Pro-Poor Trade Sector Strategy.

In the donor community based in Cambodia, UNDP has taken the lead to ensure effective implementation of IF and coordination among local donors.  UNDP-Phnom Penh and the International Trade Center (Geneva) are cooperating and working directly with RGC and others to backstop work in this area.

3.  The Contribution of Trade to Poverty Reduction in Cambodia

The importance of trade in Cambodia’s economy

Rapid population and labor force growth, insufficient employment creation, low per-capita income level, as well as low growth in per-capita income level are surely part of the poverty equation in Cambodia.  Initial evidence suggests that trade can play a significant role in helping break through this vicious circle.

As noted in the introduction to this paper, GDP per capita (in constant dollars) has changed little over the second half of the 1990s.  Part of the root-cause of this problem can be found in the current structure of Cambodia’s economy.  As suggested in Table 1, annual growth of GDP (in constant prices) in the agricultural sector was a low 2.75 percent during the second half of the 1990s (1994-1998.)  In contrast, GDP in the manufacturing sector during the same period grew at an annual rate of 9.50 percent and, in the service sector, at an annual rate of 4.5 percent.  Most striking was growth in the export sector (goods and services) with an annual rate possibly as high as 20-25 percent (in constant prices.)  As a result, during the same 1994-1998 period, all exports (goods and services) grew from approximately 15 percent to nearly 30 percent of GDP (Table 2.)  In sum, in output terms, the agricultural sector relative contribution to the economy is steadily declining while those of services, manufacturing, and, even more importantly, exports are steadily growing.

However, agriculture still represents 43 percent of GDP and, more importantly, still employs over three–fourth of the labor force (77.5 percent.) And, of course, agriculture is an overwhelmingly rural sector.  In contrast, manufacturing and services contribute 57 percent of GDP, while employing only 22.5 percent of the labor force.  Finally, the export sector, which may now contribute close to 25percent of GNP, perhaps employs no more than 6 to 7 percent of the labor force.  Manufacturing, services, and exports as discussed below are overwhelmingly urban sectors.  Put in other words, an overwhelming share of Cambodia’s labor force remains concentrated in the slowest growing sector of the economy and that sector is primarily the rural, agricultural sector.

The slow 2.75 percent growth of GDP in the agricultural sector must be compared to the nearly 3 percent annual rate of growth of the labor force – an overwhelmingly rural phenomenon.  SEDP-II (in the final drafting stage at the time of this writing) estimates that Cambodia will need to create 150,000 or more new jobs each year over the next five years in order to absorb young people entering the labor market and redeploy demobilized soldiers.  The economy, in recent years, has not been able to produce jobs at such a high rate and the results have been a tripling of official unemployment rates (1.9 percent in 1994 to 7.1,percent in 2000) and, more significantly, a considerable increase in rural underemployment.[5]  Simply put, more and more rural workers are working to produce an almost unchanged agricultural output.  The overall result has been the stagnation in total output per capita indicated at the start of this paper.

Part of a solution to this problem clearly lies in a combination of two developments: first, more rapid growth in agricultural output through increases in productivity and the development of new markets; and, second, more rapid employment growth in the manufacturing, service, and export sectors – provided output continue to grow fast and productivity increases are sustained in those sectors.

Clearly, the export sector has a major role to play to break through the vicious circle of rapid population growth, growing underemployment, stagnating income, and poverty.

The contribution of exports to poverty-reduction in Cambodia

Cambodia’s current export base remains extremely narrow (Table 3.)  Export of garments dominate the sector (nearly $600 million in 1999) followed by three products – logs and sawn timber, tourism, and remittances of expatriate Cambodian workers – with annual exports ranging between $100 and $200 million each.[6]  Other exports are small though a few are showing promises.  Destination markets of current exports are also very limited. 

There is nothing unusual in any of those findings.  They reflect the newness of the export base Cambodia has successfully rebuilt over the past five years or so.  Of course, to the extent that a narrow specialization (by product and by destination) entails higher risks, this points to some of the challenges ahead: developing new export sectors and developing new destinations, while solidifying the current base.

Findings presented in Table 4 perhaps are the most revealing.  The table compares estimates of value added created by workers in the garment sector, the tourism sector, and expatriate Cambodian workers with an estimate of value added created by all Cambodian workers for all sectors combined.  The results are striking: workers employed in the export sector create between 70 percent and 250 percent more value-added per worker for the Cambodian economy than does the average worker. Clearly in national income terms alone, exports make a major, positive contribution to the economy.

That being said, a closer look at some characteristics of current exports suggests there is plenty of room for improvement.  In term of the multiplier effect of exports on the economy, their current contribution remains low.[7]  Most of the garment sector operates on a CMT basis.[8]  Fabric and accessories (e.g. zippers, buttons, thread) are imported and financed overseas and the purchase of local inputs is limited to transportation and freight clearing services, utility-type services to run factories, and construction to build factories.  There is very little processing of exported wood or rubber.  Expatriate workers have no direct impact on other production sectors of the Cambodian economy, save perhaps some banking services to transfer back remittances.  Of all current export, tourism is likely to be the one with the greatest multiplier impact. Typically, hotels and restaurants must purchase local food, sundries, and other inputs including electricity and telecommunication.  In addition, tourism generates demand for construction services.  The educated guess here is that demand for domestic goods and services by the tourism sector in Cambodia today remains on the low-end of the scale.  Nevertheless this is common to an emerging tourism sector and the experience of other countries shows that, overtime, the multiplier effect increases as domestic suppliers emerge to meet the demand from the sector.  The lesson here is that Cambodia, in the years ahead, needs to focus on how to increase the domestic multiplier effect of existing export sectors and/or develop new export sectors with higher value-added content created by Cambodian workers and greater potentials for domestic mulitplier effect.

In term of the geographical impact of exports on Cambodia’s economy, the sector is overwhelmingly located in Phnom Penh, Siem Reap, and Sihanoukville for the moment.   The lesson, here, is that notwithstanding its positive contribution to national income, the export sector, at present, is also aggravating the wealth gap between the three areas and the rest of the country.  The need for regionalizing and decentralizing Cambodia’s export production base within the country is clearly a major issue to prevent the build-up of a major wealth gap.

Initial evidence from the 1998 Census of Population suggests that the export sector is a large employer of women.[9]  But initial evidence also strongly suggest that some exports can have a rather harmful impact on the environement unless concerns for environmental sustainability are built into the way in which those sectors are developed (e.g. logging, fish farming.)

In sum, these and other dimensions of impact need to be reviewed in greater depth if Cambodia is to chart a course for trade sector development that is based on a solid understanding of the potential positive impact of exports on poverty reduction and sustainable human development.

4.  Bottlenecks and Limitations to the Development  
of Cambodia’s Export Sector

The shared view among development economists is that the ability of individual LDCs to participate more fully to the global economy typically is constrained by bottlenecks and limitations arising from two main areas: (1) conditions of market access and macro-policy reforms; and, (2) supply capacity of domestic firms.  This diagnosis broadly applies to Cambodia.

For Cambodia to consolidate, expand, and diversify its export sector will require opening up bottlenecks and loosening up limitations that, at present, are constraining its development.  The short review presented in the paragraphs that follow suggest that it is in the second area – supply capacity – that needs, perhaps, are the greatest as more work has already been done in the first area.

Market access and macro-policy environment for trade

Tariff Structure.  As part of its process of accession into ASEAN/AFTA, Cambodia has rationalized its import tariff structure into four major bands: 50 percent for a range of consumer goods; 35 percent for industries viewed as “infant industries”; 15 percent for capital goods; and, 7 percent for inputs into domestic production.  In addition virtually all imports are charged a 4 percent consumption tax.  Robertson and Pohoresky estimate that almost 80 percent of imports are subject to tariffs 15 percent or less; only 7 percent subject to the highest tariff of 50 percent.[10]  As part of AFTA, Cambodia is set to reduce gradually the import tariffs it applies to its ASEAN trading partners within the framework of the Common Effective Preferential Tariff Agreeement (CEPT).  Nearly all tariffs should be eliminated by AFTA members by 2003 (2008 in the case of Cambodia and Lao P.D.R.)

Cambodia maintains some export tariffs to encourage exports of finished products over exports of raw materials.  For the most part, those tariffs range between 5 percent and 10 percent.  They are applied to such exports as raw wood, unprocessed fish, natural rubber and like commodities.

Cambodia maintains some import licensing requirements primarily for security-related goods, precious metals, and pharmaceuticals.  Likewise, there is a system of export licences and quotas for wood (in addition, only companies benefiting from a government concession are allowed to cut) and export licences for rice for food security purposes.

MFN Status and WTO Accession.  ASEAN/AFTA provides for immediate MFN among its members.  In addition, Cambodia has secured MFN with the United States, the European Union and some twenty other trading partners througha series of bilateral agreeements.

The major piece of unfinished business in this area remains Cambodia’s accession to the WTO that will provide Cambodia with secure MFN access to the entire WTO community.  Cambodia completed its Memorandum of Foreign Trade Regime for the WTO in mid-1999 and filed its official reply to the 200 or so questions raised by WTO members in late 2000.  The next step should include the tabling of a draft offere of bound tariffs and service commitments followed by bilateral negotiations with individual WTO trading partners.  The Government expects these negotiations to begin sometime around April 2001. 

Based on the experience of other acceding countries, WTO members are likely to demand from Cambodia a number of legal and regulatory reforms in line with the WTO agreements before it can accede as well as sign onto a tight schedule of further reforms to be carried out immediately following accession.  The consensus is that there is a large amount of work ahead as Cambodia’s legal and regulatory framework in the areas covered by the WTO Agreements is rather rudimentary.

Other Elements of the Trade Legal and Regulatory Infrastructure.  At present, Cambodia does not have anti-dumping, countervailing duty, or safeguard regime as allowed under the WTO Agreements.

Cambodia is at the early stage of putting in place a regulatory infrastructure for SPS controls and technical standards.  Camcontrol, a body under the authority of the Ministry of Commerce is responsible for SPS but Cambodia lacks a body of regulations in this area.  With the assistance of FAO, Camcontrol has set up a testing facility for chemical analysis and is planning to set up one for microbiology testing.  Cambodia will need to set up Enquiry Points for SPS and TBT.

Customs valuation is based on a reference price method implemented by SGS, the Swiss pre-shipment inspection firm.  In effect, all goods with an f.o.b. value above US$4,000 must be pre-inspected (nearly 80 percent of all shipments) and customs value is estimated by SGS using reference prices for similar shipments.

GATT customs valuation is based on invoice value (instead of reference value) but require fairly extensive human resources and data capabilities at the customs of the importing country to eliminate fraud on both the importer and the customs side.  Implementation of GATT valuation will require a significant investment in training and systems in Cambodia’s customs.  Also, Cambodia is still in the process of implementing the ASEAN Harmonized Tariff Nomenclature (AHTN) which is fully consistent with the WTO classification.  At present, customs is receiving some assitance from an IMF expert and from Malaysia on various aspects of customs reform and upgrading.

Other related policy developments.  With the exception of natural monopolies (railways, electricity distribution, and public water supply) that are operated by the government, the private sector dominates the service sector and competition tends to be the rule. This should facilitate Cambodia’s accession into the WTO. Still, on the regulatory side, the legal framework for service sectors remains rudimentary.

The current investment law is under revision.  In general, the law is fairly liberal with respect to attracting foreign investment and attracting investments in the export sector.  Nevertheless, the view is that the current investment regime can be improved.

Other macro-measures conducive to the development of the trade sector include a relatively stable macro-environment (low inflation rate, stable exchange rate due to dollarization) as well as the introduction of VAT.  Mobilization of fiscal revenues remains low, however.  Current ratio is 9 percent of GDP, with a target of raising it to 13 percent by 2002.

Supply capacity constraints

(Section to be added)

5.  Three Concepts for a Pro-Poor Trade Strategy

The initial diagnosis presented her points to the formulation of a pro-poor trade sector strategy organized around three basic concepts:

·        shifting the balance of policy emphasis from issues of market access and macro-reforms for trade to micro- and meso-level issues of supply capacity;

·        focusing strongly on the delivery of capacity-building support at the export enterprise and export sector levels; and,

·        stressing the regionalization and geographical decentralization of export business within Cambodia

Shifting the balance of emphasis from macro- to micro- and meso-issues

A focus on market access issues and the macro-environment for trade stresses building up a country’s “comparative advantage.”  While comparative advantage is a necessary condition for successful integration into the global economy, it is not sufficient.  The experience of LDCs is replete with examples where, despite supportive market access and macro-conditions, a country’s ability to turn export potentials into true export business does not follow necessarily.  This is due to an  absence of supply capacity which may be the result of a variety of micro or meso factors affecting the formation or expansion of competitive business es and export products.  In sum, there is a need to shift from a focus on “comparative advantage” to one on “competitiveness.”

A number of such examples come to mind when looking at the current situation of Cambodia.  The environment for labor relations at the enterprise and sector level is one such example.  Cambodia has put in place an initial legal and regulatory environment for labor relations in export industries.  This framework now is linked closely to the country’s bilateral trade agreement with the United States through a labor clause.  This is good for a number of domestic and international reasons not the least of which is that the labor clause in the US-Cambodian bilateral agreement puts Cambodia at the vanguard of a trend that is sure to develop more broadly in year to come.  Consumers from developed countries (US and EU in particular) are putting growing pressure on their government and on multinationals to focus trade and investment on countries that offer a protective environment for labor.  Cambodia should be able to use its early positive record in this area to attract more export business. 

At present however, it seems the legal framework and culture for labor relations at the enterprise level remain rather blunt instruments.  Mechanisms for collective bargaining and labor-management dialogue are almost non-existent so “strikes” are used widely in enterprises even to address the most minor grievance.  This is unduly costly and disruptive of business.  Also, the existing labor relation framework does not seem to promote a wage structure incorporating direct linkages between wage increases and productivity increases.  Accordingly the current labor relation environment seems to lack strong mechanisms to encourage productivity growth.  This is a problem for most export sectors (including garment) where competition is intense and where there is a need for productivity to rise if enterprises are to remain cost competitive.

Another example might be access to know-how and technology.  Some savy observers of the Cambodian business community argue that lack of raw financial capital often is not as much of a problem as is the lack of know-how and technolgoy among Cambodian business people.  A good example of this might be in agriculture and agro-processing.  Cambodia is surrounded by countries such as Thailand or Malaysia that have risen to the top of global markets in various area of agro-processing exports.  And yet, little of that experience has trickled down to Cambodia thus far.  How best to develop mechanisms, such as joint-ventures or others, that promote this kind of know-how transfer into Cambodia is an area that requires close attention.

Cambodian export enterprises suffer from high trade facilitation costs (transport, customs, inspections, financing, etc.) that undermine their competitiveness in global markets. This area has received very limited attention heretofar but needs to be addressed.

Diversifying destination of export products and developing new export products are efforts that require the availabilty of a variety of support services to enterprises.  These may include trade information and intelligence services, promotion services, services to help enterprises meet technical standards and packaging requirements of export markets, and number of others.  Cambodia’s existing base of such trade support services remains extremely rudimentary.

These are only selected examples of issues.  Quite likely a more thorough examination will reveal other micro-and meso-areas in need of greater attention.

Also, this does not argue that all macro-issues have been resolved.  On the top of the list, there remains a significant amount of work to be done to secure Cambodia’s accession to the WTO.  Also, Cambodia is at an early stage of weaving a tapestry of bilateral agreements to expand its trading opportunities. Much remains to be done to increase the number of such agreements and to deepen their coverage (e.g. in such areas as investment protection, double taxation, conditions for labor exports, etc.)

Competitiveness is an enterprise and a sectoral issue

As the earlier analysis suggests, Cambodia needs to strengthen and diversify its current export base.  To a large extent this means building up supply capacity at the enterprise and sectoral level and requires the micro- and meso- focus advocated under the previous concept.

Equally importantly, special attention must be given to increasing domestic value added content of individual exports, if the export sector is to further contribute to poverty reduction in Cambodia.  Broadly speaking, this might be done in either one of two ways.

Efforts should be encouraged to increase the domestic value-added content of existing exports wherever possible.  Wood and tourism might two existing export sectors where there are significant opportunities to increase value-added content.

In addition, Cambodia needs to look at developing new export sectors including sectors characterized by a higher value-added content than exisiting ones.  Tree crops, specialty crops, agro-processing, fish farming and processing, skilled labor services (e.g. software development services) might be relevant opportunities for Cambodia along those lines.

Conditions required to consolidate current exports must also be looked at closely in order to ensure their sutainability as a base for income generation.

Regionalize and decentralize the export sector within Cambodia

In addition to increasing the value-added content of exports, Cambodia needs to regionalize and decentralize its export sector if the benefits of globalization are to be distributed more widely within the country.

Given the broad picture outlined in this paper, there might be at least two relevant ways to bring about such a positive development.  One might come about through the choice of sectors to receive special attention for the rapid development of exports: for example, agriculture, agro-processing, fish-farming, tourism (especially new tourism products in regions others than those already targeted.)  The other might come about through the choice of instruments: for example, the development of special economic zones or export processing zones to attract industrial and agro-processing exports to new regions (e.g. Thai or Vietnamese borders; new coastal regions, etc.)

All told these are only initial concepts.  The hard work of designing a full-fledged pro-poor trade sector strategy and formulating a workable plan of action to support it remain.  The next and last chapter proposes a short-term capacity-building strategy to be implemented between January 29, 2001 pre-CG meeting and the June 2001 Tokyo CG meeting to arrive at these outcomes.

6.  A Capacity-Building Strategy to Formulate

A Full-Fledged Pro-Poor Trade Strategy for Cambodia

The intent of the Royal Government of Cambodia over the next few months is to launch a series of punctual activities and to yield maximum return from activities already in the “pipeline” to arrive at the following outcomes:

·        Build ownership and partnership including among government, business, civil society and donors for a pro-poor trade strategy for Cambodia;

·        Identify clear, achievable priority objectives around which to organize that strategy; and,

·        Formulate a realistic action plan to be tabled together with the strategy in June 2001 at the Tokyo CG meeting.

Punctual activities identified by the Government to support this approach can be summarized under two headings:

Ownership-, partnership-, and dialogue-building activities:

1. Formation of a steering committee to oversee the implementation of the Integrated Framework in Cambodia.  This steering committee is to be chaired by the Ministry of Commerce and to include representatives from other ministries, business, civil society and donors;

2. Immediate initiation of a consultation with the business community  through the Business Forum to identify with it how best to bring the potential inputs of  the working groups into the export strategy formulation process;

3. Effective use of the donor consultation process through the proposed steering committee, local individual consultations, the LDC-III meeting to be held in May 2001 in Brussels, the Tokyo CG meeting to develop a consensus on priorities for trade and launch a process of resource mobilization to support capacity building efforts that will be required to implement Cambodia’s pro-poor export strategy;

4. Input trade sector strategy concepts into SEDP-II and PRSP;

Punctual activities geared at diagnosis and identification of priorities:

1.  Identify trade facilitation issues using the forthcoming UNESAP/MoC trade faciltitation seminar (late February 2001);

2. Carry out a preliminary assessment of trade promotion resources gaps and needs;

3. Prepare a series of sectoral issues paper using resources from ITC’s WorldTr@deNet and working with the Business Forum;

4. Coordinate with the FIAS/CDC team in charge of the ongoing review of Cambodia’s Investment legal and promotion framework;

5. Other punctual actions (to be added)  

6. Overview assessment of legislative and regulatory gaps in Cambodia likely to require attention to ensure WTO accession;