• E02;
  • F63;
  • O53

Cambodia is marching toward a new era after closing her darkest page of history and is soon graduating from the development status as a post-conflict economy. A timely and thought-provoking paper by Hill and Menon (2013) certainly enriches a rare and scholarly discussion on how to unleash the country's full potential, to maintain the momentum and enjoy the “peace dividend,” and to sustain not only high growth but also to build strong institutions. Hill and Menon provide a fresh and comprehensive review of the context of Cambodia's development and raise some potential threats that may derail the brighter prospects of the country. There are many important points highlighted by the paper.

First, it is quite unusual to observe that Cambodia could enjoy high-growth and noteworthy social outcomes despite poor institutions and rampant corruption. Except for some deliberate policy choices such as open trade and investment regimes, there can be many other factors accounting for this puzzle: utilizing plentiful resources; young, cheap, and abundant labor; having a geographical advantage (dynamic Association of Southeast Asian Nations [ASEAN] and East Asia); preferential market access (USA, European Union [EU], and others); a vibrant private sector; and receiving generous foreign assistance for most public investment in infrastructure.

There is no secret in being a passive beneficiary from some of these factors is unsustainable. As highlighted by Hill and Menon, when tourists stopped coming en mass coupled with the lower demand for key garment exports to the USA and EU in the aftermath of the global economic recession in 2008–2009, economic growth stalled. In the long run, growth is not dependent on resources and static factor endowments but improvements in efficiency, technological innovation, and productivity, which are largely a function of good institutions and human capital.

Second, Hill and Menon convincingly point out that the economy is handicapped by the limited macroeconomic policy options at the government's disposal, in response to any external shocks or deliberate expansionary objectives. Monetary and exchange rate policy are paralyzed by dollarization. The interbank and capital markets are still in their infancy. Fiscal policy is categorized by low collection of revenue. Spending is inadequate resulting in the poor delivery of public services such as health and education. Public procurement is very often plagued by irregularities. Most investment on infrastructures and budget deficits are financed by official development assistance and development banks.

Third, Hill and Menon also note that the growth of the economy is still narrowly based and volatile. Income inequality has widened. Poor infrastructure, the high cost of energy, and the lack of skilled labor continue to hinder Cambodia's future prospects.

No doubt, Cambodia's high growth is a result of progress made in rebuilding basic infrastructures, making incremental reforms and institutional buildings. However, the prospects look bleak if the challenges raised by Hill and Menon are not properly and promptly addressed. It is fundamental for Cambodia to defeat the hypothesis posed by Acemoglu and Robinson (2012) that “… poor countries are poor because those who have power make choices that create poverty. They get it wrong not by mistake or ignorance but on purpose.”

In the wake of weak public institutions where their existence is a hindrance rather than being enabling facilitators to enhance public welfare, building independent and self-organized institutions may arguably be more efficient, at least in the short run, than addressing the blanket governance issues per se. The presence of influential business associations (with both domestic and international representation) has been successful at protecting their own interests. The same could be expected for ensuring fair pricing and the quality of goods and services, if the consumer protection body is visible.

In the long run, it is untenable that Cambodia continues to prosper uninterruptedly by being overly dependent on foreign assistance and a favorable external environment. Cambodia must duly collect taxes and spend wisely, so that she can provide quality health and education services and incentives for public servants to perform their basic duties. The effectiveness of monetary policy must be gradually strengthened.

Overall, Hill and Menon's paper is rich in content and provokes serious debate, and it provides an insightful read for those who have Cambodia's interests at heart. It concludes with more questions than answers. It may have been more prescriptive if elaboration is made on how Cambodia can tackle the constraints or weak institutions. Hill and Menon could have further explored the problems of weak institutions from the angle of political economy and how to build “inclusive economic institutions” (Acemoglu & Robinson, 2012). If Cambodia can grow fast despite weak institutions, she can grow faster, if not more equitably and sustainably, with strong institutions.


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