November 4, 2008 1

Cambodia: Good enough governance for

sectoral growth?Presented by Kai Kaiser, Senior Economist,

Public Sector Group, World Bank(Stephane Guimbert, Sophal Ear, Verena Fritz)

Applied Inclusive Growth Analysis

Joint Vienna InstituteDay 4, July 2, 2009

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Growth Paradox?• Rapid Growth

– Garments Success Story• Growth Sustainability Concerns

– International Competition– Challenge of Diversification

• Weak Governance– Weak Aggregate Indicators– Self-reported by firms

…consolidation of ruling party/stability after 1998…first LDC to join WTO (2004)

3

growing with four fragile engines1

13

28

20

13

26

0

25

50

75

100

1998-2006

Other

Hotel /Transports

Construction /Real Estate

Garment

Crops

Contribution to growth (%)

Crops: rain-fed; mainly rice

Garments: main (only?) export; mainly to US market; slow growth in 2007 with competition from Vietnam; further competition (inc. China) in the future?

Real estate / construction: very rapid growth, especially in Phnom Penh; talks of a bubble

Tourism: rapid growth. Initially mainly to Siem Reap and Angkor – gradually to Phnom Penh and Sihanoukville, with further potential

Legacies of “extractive” forestry “dis-saving” in 1990s

Good enough governance for sectoral growth?

4

reaching new heights?

310

550

1,513

725

0

250

500

750

1000

1250

1500

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Income per capita (2007 $)

Good enough governance for sectoral growth?

5

weak governance

6

corruption & governance2

LicensesCost finance

TransportTax rates

Tax admin Legal systemCustomsAccess finance

Labor reg.

LandTelecom

Skills

Electricity

Macro instability

Crime, Theft

Regulatory uncertainty

Anti-competitive / informal pract.

Corruption

0

10

20

30

40

50

60

0 10 20 30 40 50 60

2003/04

20

07

/08

Sources: Investment climate surveys in Cambodia

Major obstacles to business, as reported by firms established in Cambodia

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Growth Analysis Approach• CEM

– Range of background papers – Complementary governance & political-economy analysis

• Unbundle paradox?– Government-donor roundtable 2/2009

• What were drivers to growth?• What are challenges to sustainability?• What are binding constraints and policy options?

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what is really binding?

–Governance (high informal taxation of higher rents created by capital investment; property rights)–Poor complementary inputs (electricity and water; skills; coordination issues)

No capital-intensive or processing

industry

–Coordination / information (on markets, technologies)–Incentives for innovators (both formal incentives – e.g. standards, trademarks – as well as informal – scaling up means becoming a target of corruption)–Access to finance for locally-generated projects (in agriculture; for SMEs)

No sustained diversification

–Entry costs (in terms of regulations and corruption)–Limited benefits of formalization (weak coordination; limited access to finance)

Large informal economy

2

9

Governance & Political-Economy Analysis Approach

• Focus on selection of promising sectors– National plans, development partner efforts…

• Understand sectoral governance & growth– Nature of state-elite & business relationships– Drivers of growth?– Strategies to manage business environment across value

chain– Drawn on country specialist (Sophal Ear)– Process of discovery?

10

Sectoral governance for growth?

Emerging?

Successful

2

Stunted?

Garments

Rice

Livestock

11

Garments• International Drivers

– Quotas for labor standards (US brokered, until 2004 for garments; ILO monitoring still ongoing)

– Strong international presence in 300+ establishments (95% +)• Domestic Collective Action

– Garment Manufacturers Association (GMAC)– Relationship w/ Ministry of Commerce, Labor Intensive Profile of Sector– International Chambers of Commerce

• Open Issues– Sustainability concerns w/ international competition– Squeezing the golden goose?– Value chain limited to assembly

12

Rice• International Drivers

– Increase in food prices– Future Everything but Arms (EU Zero Tariffs for LDCs)

• Only Sanitary & Phytosanitary• Domestic Collective Action

– Fragmented, Limited Collective Voice– Green Trade (state body) & National Cambodian Rice Millers now have

export waver (100 tons+)• Status

– Mainly domestic padi production, processed reflows from neighboring countries

– Very limited finance into rice processing– Concerns about ability of Cambodian supply chain to deliver quality

13

Livestock• International Drivers

– Increase in food prices– Malaysian investment (failed)

• Domestic Collective Action– Very Fragmented, Limited Collective Voice– Some entry attempt by okhna

• Status– Failure of previous venture (Mong Retth, Malaysians)– Procdution localized, dominate by cattle rustling, high

transactions costs across value chain to Vietnam/Thailnd

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A Strategy for Policy Actions in the Cambodia Setting

• Potential Sector Profits/Rents Insufficient– Sum of poor governance manifests itself on various links of

the value chain– Export opportunities/prices

• Promote Demand Side/Collective Action– Business Organizations (Mandatory/Sectoral “Monopoly”)

• External Drivers– Internal National Regimes– Pressure for domestic “compliance”

November 4, 2008 Good enough governance for sectoral growth?

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Open issues…• Integrity of governance & growth narrative

– Limited selection of sectors (successful & unsuccessful)– Replicability of garments wrt to different sectoral value

chains

• Multi-sectoral state growth champions?– Focal point acts to enforce credible business

environment (pending systematic change)• Captured/Self-serving institutions• Capacity/incentives for this type of institutions

• Potential discovery of oil & gas– Impacts on drivers of growth– Concentrated rents & incentives for state

Conclusions

• Binding constraints lens provides useful disciplining device in weak-institutional setting like Cambodia where everything can be perceived constraint

• Limited binding constraints may be politically counterintuitive…– Temporal, Need to be forward looking, Balance path,

perception of all eggs in one basket• Value of looking at sector constraints• Timing

– Impacts of Global Economic Crisis…

July 2, 2009 Cambodia Growth 16

Q & A

Selected References

World Bank, (2009), Sustaining Rapid Growth in a Challenging Environment”, www.worldbank.org/kh/growth

Ear, Sophal, (2009), Sowing and Sewing Growth: The Political Economy of Rice and Garments in Cambodia, Palo Alto, CA: Stanford Center for International Development Working Paper, No. 384

Guimbert, Stephane, 2009, Cambodia 1998-2008: An Episode of Rapid Growth, Working Paper (draft)

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