Cambodia: From Battlefield to Global Marketplace

Phnom-Penh

It’s 6:30 a.m. and the trucks are already rolling in. Each of the open-roof vehicles is packed — standing room only — with young women in their late teens and early twenties, their faces covered against the dust and exhaust fumes. One by one, the trucks pull up by the side of the road and the women wend their way past the food stalls and through the gates of their factory for their morning shift.

This scene on the outskirts of Phnom Penh, Cambodia’s capital, can be seen across the country. The women, mostly from the countryside, account for around 90% of the nation’s 650,000 garment workers who are at the vanguard of what has been described as an economic transformation — one that has gone by almost unheralded. In just 20 years, Cambodia has transformed from a post-conflict, aid-dependent, least-developed country to a dynamic economy with the fastest pace of GDP growth in East Asia.

“Hun Sen’s Cambodia,” writes Sebastian Strangio in his eponymously titled book, “has come full circle, from battlefield to marketplace: Today it is one of the most open economies in Asia, where starting a business is relatively easy and foreign-owned firms can operate without a local partner. Cheap labor, untapped markets and open economic policies have attracted huge inflows of foreign investment from China, Taiwan, South Korea, Malaysia, Vietnam and Thailand.” 

According to a report from the Cambodian Development Resource Institute, between 1995 and 2012 economic growth averaged 7.9% and per capita income increased from $248 to $878. GDP growth for this year — on the back of strong performance in garment manufacturing, tourism, construction and agriculture — is expected to reach 7.3%. This puts Cambodia ahead of its neighbors in Southeast Asia. The latest ANZ Asia Pacific Economics report describes Cambodia as “the only country that has been able to grow its exports at a faster pace in the post-crisis period [2007-2008].” 

Economic prosperity is showing up in socio-economic indicators such as the poverty rate, which has been halved, improvements in primary school enrollment, and reduced infant mortality. Corruption, clientelism, social inequality and poor infrastructure remain, but the overall picture is brighter than it has been for four decades.

“All these high-rise buildings, the modern stores, these parks you see outside — none of this was here 20 years ago.”–Brett Sciaroni

Eric Sidgwick, country director for the Asian Development Bank (ADB), says: “In a nutshell, it’s been quite remarkable. If you measure growth rates and headcount poverty reduction, and if you add to that the maintenance of macro stability through the crisis of 2008-2009, these are all pretty good achievements.”

Looking ahead, Cambodia is forecast to move from a low-income to lower-middle income country within a decade. The ANZ Royal Bank business confidence index survey reports “unwavering confidence” in Cambodia’s economic growth and business climate. While Standard & Poor’s most recent assessment continues to rank Cambodia as high risk, it also notes: “We expect Cambodia’s exports to grow in the next two years on the back of the recovery in its major trading partners, including the European Union and the U.S.”

From Battlefield to Marketplace

To appreciate the magnitude of Cambodia’s turn-around, it’s important to go back to “year zero,” to 1975, when Cambodia was ruled by Maoist fanatics known as the Khmer Rouge. By the time the Vietnamese army overthrew the Khmer Rouge in January 1979, between 1.5 and two million people — a quarter of the population at the time — had perished. The country was reduced to destitution. For a decade, Vietnam ruled Cambodia by proxy, through local rulers loyal to the communist party. In September 1989, impoverished by Western economic embargo and isolated after the breakup of the Soviet Union, its ideological ally and patron, Vietnam withdrew. 

Given the chance to govern on their own and with the help of the international community through billions of aid and a UN-supervised election, the Cambodian political class, through trials and errors, managed to cast off the trappings of a planned economy and adopt a free and open market. 

Brett Sciaroni, head of a legal and investment advisory firm and chair of the American Chamber of Commerce of Cambodia, was there when the transformation took place. “They’ve come a long way in a short period of time, and only someone who was here at the start of the journey can appreciate how far they have come. All these high-rise buildings, the modern stores, these parks you see outside — none of this was here 20 years ago, Twitter ” says Sciaroni.

Before he came to Phnom Penh in 1993, Sciaroni was a lawyer working in the Reagan administration. The Cambodian government, he says, was looking for an American lawyer to shake things up. “When I arrived here, this was really the Wild West. Every cop on the street corner had an AK-47. There were pillboxes on the main boulevard, tanks on the street. It was a different country.”

According to Sciaroni, who continues to work as an adviser to the government, from the very beginning it created a legal and regulatory framework, which encouraged free enterprise. “They had to do something to attract foreigners and foreign investment. They didn’t have the capital, they didn’t have the know-how. The Khmer Rouge either drove out or killed all the educated class, so human resources were totally lacking.”

In October 2004, Cambodia was admitted into the World Trade Organization (WTO). This event, many contend, was a pivotal moment for the country. “WTO was really critical because it gave the Cambodian government a checklist to go through; to implement the laws, the sub decrees, etc. It was a step forward because it gave Cambodia an agenda to work towards,” says Sciaroni.

But the ultimate force behind Cambodia’s remarkable rise resides with its controversial leader, Prime Minister Hun Sen, who has been in power for three decades. Says Sok Siphana, former secretary of state and currently an adviser to the Council for the Development of Cambodia and the Supreme National Economic Council: “The prime minister himself is probably the person who has enabled that freedom to take place. I cannot think of anybody else. He’s a fervent believer in market freedom.”

“Cambodia has done well [with its] labor-intensive model but it needs to shift into a more skilled-labor model.”–Eric Sidgwick

Siphana, a practicing lawyer who studied in the United States, witnessed Cambodia’s transition firsthand. He was a teenager when Phnom Penh fell to the Khmer Rouge on April 17, 1975. He tells a tragic but familiar tale of families torn apart, adults and children sent to hard labor, starvation, post-war reunion and rebuilding life from scratch. Siphana likens his country to a person who has been released from prison. “Can you imagine the joy, the desire to catch up, the willingness to work hard, to catch up on what we missed out on? We had nothing: zero-base, infrastructure destroyed, social fabric destroyed.”

Apart from the psychological incentive to catch up, Siphana credits Hun Sen for providing the environment for free enterprise to take hold. “If it wasn’t for the entrepreneurial spirit he unleashed, we could not break out of that vicious circle of poverty and dependency.”

Even critics like journalist and author Strangio concede the role played by Hun Sen and his ruling Cambodian People’s Party. “It’s important to recognize that in Cambodian history, periods of peace, stability and development have tended to be correlated with periods with strong, decisive leadership, when the concentration of power rests with one individual,” says Strangio. “And so in that sense, this is the main achievement that the [Cambodian People’s Party] can claim over the last 20 years — that they brought significant, sustained periods of economic growth to Cambodia.”

The Next Big Leap

It’s Saturday night in Aeon Mall and Phnom Penh’s shopaholics are out in force. In the atrium of this Japanese-owned shopping center, young couples and modern nuclear families move between gleaming new Range Rovers and Jaguars on display. The prices range from $105,000 to $237,000. A ‘sold’ sign is stuck on one of the car windows. In a country where the monthly salary for garment workers is $120, this kind of money seems incredible, if not surreal. Yet, on the streets outside the shopping center, high-end luxury cars are everywhere to be seen.

“The signs of prosperity can be seen from the number of cars on the road. Traffic has become a very big part of everyday living,” says David Sok Dara Marshall, an executive from the ANZ Royal Bank (a subsidiary of the Australian and New Zealand Banking Group). “A middle-class lifestyle is emerging; people are taking more care [about what] they wear, they are buying kitchen appliances, durable goods, refrigeration, electronic devices.”

Marshall, who is head of his bank’s multinational corporates and financial institutions group, notes that the changes have been pronounced even in the banking sector. “When I first started working in the industry 10 years ago, there were no ATMs, no Internet banking. Cambodia was a cash society. Today, there’s an ATM almost on every corner in Phnom Penh.”

He believes this trend is set to continue. “Cambodia still has a young population — more than 50% of the population is under 30. Youth brings innovation, energy, the desire to learn and consume. It’s a very entrepreneurial society. Cambodians often

leave a formal institution and set up their own business.”

Siphana notes that at times of global economic uncertainty “many countries withdraw into a form of smokescreen protectionism.” To sustain economic growth, he says, “Cambodia needs to maintain openness and economic freedom [and] provide a space for new young entrepreneurs, new young bureaucrats, new young businessmen to grow. I believe the role of the state is important if they just facilitate the environment for doing business.”

ADB’s Sidgwick, who has worked at the International Monetary Fund (IMF) and World Bank in the region for a decade, expresses cautious optimism. “Cambodia has done well [with its] labor intensive model, but it needs to shift into a more skilled-labor model.

“We are a gateway as much as Vietnam or Thailand is a gateway to ASEAN.”–Sok Siphana

The government has recognized the problem and is working to address it,” Sidgwick continues. “It has just come out with something it calls the Industrial Development Policy, which sounds very state-driven but is state-lite. They want to encourage certain sectors, to improve the regulatory environment and the conditions for those sectors to grow, and those areas that will help diversify the products and the markets and help improve productivity.”

Cambodia, Sidgwick adds, remains vulnerable to external shocks because its sources of growth — tourism and garments — depend on foreign markets. On top of that, the new-found prosperity rests on a precarious margin. “The poverty line is on a low level. Even a small shock — a sickness in the family, adverse weather, a wedding — can easily bring people back below the poverty line.”

Even though the figure used on poverty head count is under 20% — from 50% in the mid-2000s — that’s still $1.25 a day. “If you increased the amount to $2 a day, about half the population is poor,” Sidgwick notes. “If you increased it to $3 a day, over 70% of the population is poor.”

The government is also placing its hopes in the ASEAN Economic Community, which is slated to come into effect at the end of the year. “To me, the prospect of the ASEAN integration is a major, major event for us,” says Siphana, who led the Cambodian WTO negotiation team before joining the organization as its trade specialist, and is currently in the running to head the U.N. Industrial Development Organization. “We are a gateway as much as Vietnam or Thailand is a gateway to ASEAN. A truck leaving Ho Chi Minh City in the morning could have lunch on the outskirts of Phnom Penh and go on to Thailand.”

Siphana believes that the ASEAN Economic Community will be a major watershed event for Cambodia. ”After 10 years since entering the WTO, the effects of global integration are starting to fade a bit. ASEAN economic integration is probably something that will give us another stimulus. We are too small to have our own manufacturing facilities, so if we can take 5% to 10% of the supply chain, then we’d be happy. If we can assemble the electronic harness for cars that will be supplied for Thailand, if we can process our rubber – of which we have more than 300,000 hectares — to make windshield wipers. We are not a big country, we don’t need much.”

Some of this is already happening, says Sidgwick. “There are shoots of new activities. Cambodia is starting to produce things they have never produced before, like components for phones, electronic components, wiring for cars, packaging — even toys.”

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