Comment on “Cambodia: Rapid Growth with Weak Institutions”

Authors


Correspondence: Peter Warr, ANU College of Asia and the Pacific, Australian National University, Canberra, ACT 0200, Australia. Email: peter.warr@anu.edu.au

Considering its recent history of genocidal conflict, its weak institutional base, its poorly developed infrastructure, and its heavy dependence on international assistance, all combined with a rich natural resource base, Cambodia today is more reminiscent of an African country than an East Asian one. In reading Hill and Menon's (2013) account of Cambodia's economy, I found it helpful to think of the country within a sub-Saharan African perspective. Viewed in that light, Cambodia has done very well over the last two decades. I think there are two dominant reasons for that outcome. First, unlike most African countries, Cambodia is surrounded by rapidly growing neighbors. The neighborhood effect has to some extent meant growing demand for Cambodian output and inflow of investment capital from these same neighbors. Second, Cambodia has responded to the opportunities created by its location with a strategy of economic openness. That enabled Cambodia's exporters to take advantage of the concessionary treatment the country has received from importing countries. But the good performance, including garments, did not end with the expiry of the Multi-Fiber Agreement. Openness has worked. The Cambodian people have only recently tasted the consequences of xenophobic economic policies and have had more than enough of them.

Hill and Menon nicely describe the way that Cambodia's history over the last half century constrains its development options today. A point mentioned in the discussion is the poor state of rural infrastructure. A few years ago, I had the opportunity of working on a project in the far west of Cambodia, next to the Thai border. This required me to travel across the country, by so-called “road,” from Phnom Penh to Koh Kong and back several times. I learned the meaning of poor rural infrastructure, and I learned it the hard way. Along that route, I also saw the full meaning of rural poverty. I was grateful that I did not have to learn that lesson the hard way.

Poor roads and rural poverty are closely linked. Poor roads mean high transport costs, and this harms rural people in three critical ways. It raises the cost of delivering any product to market, reducing the net return the producer receives. It similarly raises the cost of obtaining any purchased input, often necessary for expanding agricultural productivity. Finally, poor roads restrict greatly the capacity of villagers to take advantage of whatever limited educational, health, and agricultural extension facilities that the government is able to provide. In a country like Cambodia, road improvement is critical for reducing rural poverty. Everyone knows that. What is less widely appreciated is the importance of maintaining these assets once they are constructed. In a monsoonal climate, roads deteriorate quickly. But foreign donors are more interested in construction than in maintenance, and the latter is usually left to under-resourced provincial governments. This often means that roads are not maintained properly, if at all, and in a tropical environment their potential for promoting sustained development can degrade very quickly.

Hill and Menon describe large current account deficits, associated with corresponding capital inflows of foreign assistance and private investment. I would have predicted a sizeable “Dutch Disease” real appreciation to result from that, with the domestic prices of non-traded goods and services rising relative to those of internationally traded goods. If, as I suspect, a real appreciation is actually happening, this is a threat to the competitiveness of the traded goods sector. That includes the garments sector, which is a major employer, and possibly also the export-oriented components of agriculture.

The discussion rightly points out that dollarization limits the capacity of Cambodia's government to use exchange rate policy as an instrument of adjustment to external shocks. My guess is that given Cambodia's turbulent recent past, this may be an advantage, because it eliminates (or at least reduces) one source of concern on the part of investors about possible policy mismanagement. Nevertheless, it leaves Cambodia at the mercy of the effects of movements in the value of the US dollar.

Because the US dollar is Cambodia's de facto currency, a depreciation of the US dollar would improve Cambodia's competitiveness. A depreciation of the US dollar against the currencies of other garment exporters to that same market (Thailand, for example) will leave the US dollar prices of these goods roughly unaffected. It will reduce the prices in baht that Thai exporters receive from these exports, but leave Cambodia's returns in dollars unchanged. Because Thai costs in baht are sticky downward, Cambodia's exports become more competitive. Of course, Cambodians will now be able to buy fewer non-US goods with those dollars, but that is a different point. The danger to Cambodia's exports would arise from an appreciation of the US dollar, given that dollarization prevents Cambodia from then depreciating its currency to maintain its own competitiveness.

Important issues not fully discussed in Hill and Menon's paper include Cambodia's poor physical infrastructure, especially in rural areas, as mentioned above. The legal system is also an area of concern. It is said to be corrupt and to provide poor protection of property rights. This is important throughout the economy, not least in agriculture, where the protection of the land rights of small farmers against “land-grabbing” by politically well-connected individuals has been a source of social conflict.

Enough quibbles. I learned a lot from this thoughtful paper.

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