Cambodia’s development paradox

29 January 2016

Author: Heidi Dahles, Griffith University

In 2015 Cambodia has been hailed for its accomplishments in meeting its Millennium Development Goal (MDG) targets. The recent UN report calls Cambodia an ‘early achiever’ performing particularly well on poverty alleviation. The Cambodian economy grew on average 7.8 per cent in 2004–2014, achieving one of the fastest growth rates in the world during this period.

Cambodian garment workers ride on the back of a truck heading for a factory on the outskirts of Phnom Penh, Cambodia, 23 January 2016. (Photo: AAP).

The robust economic growth has lifted five million people out of poverty during the past decade and Cambodia’s poverty rate had been reduced to 14 per cent, down from 53.2 per cent in 2004. At the same time, an increasing number of Cambodians are entering the middle class. In 2016, Cambodia’s economic status will be elevated to the level of a lower-middle income country and the nation will be leaving the league of developing countries.

Undeniably, improved governance and democratic reforms have significantly contributed to this achievement. In particular, the 2013 election results have prompted the government to address a number of problems such as the elite-spawned land-grabbing, underpayment of factory workers and teachers, tax evasion by the corporate sector and soaring electricity prices. It is the government’s ambition to transform Cambodia into a middle-income country by 2030 and a high-income country by 2050.

Cambodia’s economic achievements form a stark contrast to the country’s continued appeal to donor nations to provide aid and low interest loans. China, Cambodia’s most important donor and investor, again pledged to import 100,000 tons of rice from Cambodia annually beginning in 2016, construct a hospital in Tbong Khmum Province and give Cambodia a US$157 million grant.

Then, at the Cambodia–Japan bilateral summit in November 2015, Japanese Prime Minister Shinzo Abe committed to a 17 billion yen (about US$137 million) loan for the development of a national highway. Other bilateral agreements have been signed with Russia and India. While these agreements are framed in terms of cooperation, they also mark the diversification of Cambodia’s foreign-dominated development strategy.

Since 1990, Cambodia has been a major benefactor of global aid, with annual receipts increasing from US$300 million in 1993 to more than US$800 million dollars by 2012. While two decades of aid significantly contributed to the country’s development, the constant inflow of aid money also fuels Cambodia’s persistent problems, including corruption, weak institutions, poor governance, a donor-dependent aid industry absorbing a skilled workforce, and a mindset of aid entitlement.

This mindset is aptly illustrated by Prime Minister Hun Sen’s recent appeal to ‘stingy’ developed nations to provide more aid money to the developing world. His appeal came in response to the OECD reporting that most European nations failed to provide the 0.7 per cent of their GNP deemed necessary to assist developing counties to reach the MDG goals at the time that the scheme was launched.

This mindset is in urgent need of revision. There is a widely held view that aid is not an effective strategy to create a vibrant economy. As the global economy experiences a slowdown, Cambodia’s traditional donor countries, particularly EU member states, face their own development challenges. These challenges have been exacerbated by the severe refugee crisis unfolding in the wake of the escalating crisis in the Middle East. Similarly, China is struggling with economic stagnation and will be less forthcoming with aid and low-interest loans in the future.

Cambodia, on the other hand, is expected to sustain its growth into 2016 thanks to low oil prices and increased exports, in particular to the members of the ASEAN Economic Community (AEC). The AEC, with a combined GDP of US$2.6 trillion in 2013, is expected to become an economic powerhouse in the Asia Pacific region in the near future.

For Cambodia to benefit from opportunities offered by the AEC, sustained efforts are needed to put a halt to economic crime, government corruption and commercial tax evasion. Currently the country is losing billions to illicit financial outflows and money laundering across international borders.

According to a Washington-based Global Financial Integrity report, between 2004 and 2013 at least US$15 billion was secretly shifted offshore using a technique known as trade misinvoicing. Cambodia’s trade misinvoicing outflows have exponentially risen over the past decade from US$374 million in 2004 to nearly US$3.9 billion in 2013 — about a quarter of that year’s nominal GDP. If this money were to stay in the country, appeals to other nations’ charity would become unnecessary and Cambodia would be in the position to perform a leadership role in the AEC.

In February 2016 Prime Minister Hun Sen will join the ASEAN Leaders summit at Sunnylands in Rancho Mirage, California, an initiative of US President Barack Obama. The aim of this summit is to strengthen cooperation under the new US–ASEAN strategic partnership and push the Expanded Economic Engagement (E3) Agenda between the United States and ASEAN. The big question at this summit for Cambodia is will Prime Minister Hun Sen haggle for more donor money or will he claim the leadership position that matches Cambodia’s achievements and ambitions?

Professor Heidi Dahles is Head of the Department of International Business and Asian Studies at Griffith Business School, Griffith University.