Cambodia's economic development after the Khmer Rouge

Royaume Du Cambodge

Cambodia is one of the poorest countries in the world, and certainly in Asia. After emerging from the rule of the Khmer Rouge, Cambodia had nothing as was forced to start over. From that starting point, the country's economic development was never going to be easy, and even its low levels today represents healthy progress. Yet, by objective measures and without taking history into account, Cambodia has a lot of issues that it needs to remedy going forward.

This paper takes a look at several major issues. The first sections introduce the company -- its history and the current state of the economy, including trade measures, a discussion of key industries and the key issue of energy. From there, a number of issues are examined individually, beginning with poverty, something that remains a critical issue in Cambodia. The political environment, infrastructure, corruption, health performance, the tourism industry and child labor are all given attention, to highlight the different aspects of Cambodia's economic development situation. The paper concludes with an analysis of Cambodia's current situation, placed in context, and looks forward to a day when the current positive trends manifest themselves into a growing, more prosperous Cambodia.

Introduction

Cambodia is a constitutional monarchy located in Southeast Asia, south of Laos, west of Vietnam, east of Thailand and north of the Gulf of Thailand. Prominent physical features of the country are its situation on the Mekong River and the large Tonle Sap Lake, both of which have provided a living for the Khmer people for centuries. The peak of civilization in the region was during the Angkor civilization in the middle ages, a large Hindu empire whose capital city, Angkor Thom, is now a major tourist draw and key source of foreign exchange. In its day, it had a population over 1 million and was the largest city to have existed prior to the Industrial Revolution (Jarus, 2014).

Ethnically, Cambodia has a relatively homogenous population, especially for Southeast Asia, with 90% of people being Khmer. The Khmer language is an Australoasiatic language related to Vietnamese. The population of around 16 million are primarily Buddhist.

The economic development of Cambodia was stunted in the 1970s by political event of the era. While Vietnam and Laos suffered significantly from war, in Cambodia it was internal strife caused by the rise of the Khmer Rouge, a nominally Communist regime that modeled policy after China's Great Leap Forward and was backed by Beijing. The Khmer Rouge depopulated the cities, and they not only executed their political opponents, but anybody with an education. As a result, Cambodia began the 1980s, after liberation by Vietnamese forces, with a largely rural and uneducated population, and almost no leadership capability. The Khmer Rouge lingered on in parts of the country for a long time thereafter, and the economic impact of their brief reign of terror is still felt today, and reflected in Cambodia's path of economic development (CTM, 2014).

Key Issues -- Poverty

An estimated 20% of Cambodians live below the poverty line (CIA World Factbook, 2014). The prevalence of agriculture as a source of employment and the lack other industries besides tourism means that a large amount of the country's population is dependent on agriculture for survival. Tourism has been a boon to the Siem Reap area, and to a lesser extent the beach town of Sihanoukville, and the capital Phnom Penh has received some investment as well, but most of Cambodia is characterized by poverty, subsistence fishing and agriculture, and minimal economic opportunity.

At the end of the Khmer Rouge era, Cambodia had a poverty rate of 100%. The main export was rice, and production levels were poor. There was no economy to speak of, no money, and no industrial capacity. Cambodia literally started from the beginning at that point. The political environment was in a volatile, negative state for much of the following 20 years, with the Khmer Rouge lingering on in parts of the country, creating tremendous instability. Worse, their massacres left Cambodia with almost no leadership, as very few educated people had been able to survive that era. The ongoing instability discouraged talented expats from returning to help rebuild the country. Thus, while Cambodia has a high level of poverty and a generally poor level of economic development, its progress is actually not bad considering it had the worst starting point of any nation in the world just thirty-five years ago.

The country still faces the challenge of rebuilding its education system, which is the foundation of any economic development (Shridhare, 2011). The nation has had to rebuild educational facilities, and has a chronic shortage of trained educators. It may take another generation still to get the education system up to the standards of Cambodia's neighbors, which is a precursor to sustained economic development. Much of the redevelopment funding for Cambodia has focused on developing an educated class in the country, in order that these individuals can become the teachers and entrepreneurs that Cambodia needs for its future. The good news for the country is that today almost all Cambodian children are entering school, the gender gap in early education has been closed, both of which represent improvement over the previous decades. There are still barriers to building the education system, however, including the fact that there are still capacity issues, and high levels of corruption that divert funds away from educational programs (ODI, 2014). Education expenditures remain at low levels (CIA World Factbook, 2014), exacerbated by the fact that Cambodia is a very young country -- median age 24.1 -- which means that children growing up in Cambodia today, who will be needed to be leaders immediately upon entering the workforce, are receiving inadequate educations.

Key Issues -- Political Environment

The years after the Khmer Rouge were officially defeated by the Vietnamese were characterized by political instability that hampered the rebuilding process. The Khmer Rouge remained as an insurgent group, terrorizing many areas of the country and threatening to destabilize the political situation. The return of King Norodom Sihanouk from exile in 1993, this re-established stability in Cambodia. The king was a popular figure in the country, having led its independence from France (Head, 2012). When he abdicated in favor of his son in 2004, the monarchy also devolved more of its powers. Today, the king has minimal power in terms of running Cambodia, but remains a powerful figurehead and a source of much-needed political stability. The final defeat of the Khmer Rouge and the death of their leader Pol Pot brought closure to that chapter of political history and allowed Cambodia to begin looking forward.

The current government is a multiparty democracy. The government has taken a generally pro-business stance, though it tends to focus more on social development issues than economic ones. As a result of this openness, Cambodia has seen a few landmarks of economic development recently, including the country's first IPO and first stock exchange (Koh, 2012). While these steps are not going to transform Cambodia overnight, they represent critical steps to mobilizing capital in the country -- remember that gold is a major import, so there is a need for Cambodia to put such idle capital to use in fostering economic development and a stock market plays a critical role in that process. The political environment at present is considered to be as stable as it has ever been, with the result being that Cambodia's economic growth rates are sustained, an encouraging fact -- further stability at the political level will encourage more companies to invest in the country. Cambodia could, with more political attention to attracting investment, start to see an FDI boom of the type that has lifted per capita GDP in Vietnam so quickly.

Key Issues -- Infrastructure

A key barrier to economic development is the lack of infrastructure. Cambodia has poor transportation infrastructure. There are 3 international airports, mainly to serve tourists. The country inherited a railway from Mama France, but it is in poor condition and in desperate need of an upgrade -- cars are still made of bamboo, which is cute but useless for developing industry. There are only two ports, neither of international container standard (CIA World Factbook, 2014). This means that goods for export must be shipped via road to either Bangkok or Saigon, presenting a barrier to exploiting export markets. Most of Cambodia's roads are unpaved, and the ones that are paved often need maintenance. Connections with Saigon are ok, and the road between Phnom Penh and Siem Reap is decent, but road access to Bangkok is not sufficient for trade.

Development of infrastructure is challenged by a few factors. While the country is small, it is fairly mountainous. Most of the major waterways are on the Mekong, which is also a significant source of fish for many people in the country. There are political challenges as well to creating stronger links with Vietnam and Thailand, and limited options for expanded port development.

Communications infrastructure is equally poor. Cell service has developed reasonably well, but beyond that there is a mixed of media and telecommunications infrastructure. Much of the ownership is public, which constraints the available funds for development. Internet penetration is low, at just 78,500 users, just 0.5% of the population (CIA World Factbook, 2014). This last statistic is of significant concern, given how important being online is to economic development and to learning in general. But issues with poverty and electricity are constraining the ability of Cambodia to get online. Given that its neighbors (and competitors) have much higher rates of Internet penetration, this reality puts Cambodia at strategic disadvantage.

Key Issues -- Corruption

Cambodia is already challenged with respect to attracting foreign capital, given its lack of industry and nascent capital markets. One drag on foreign direct investment is corruption, which discourages investors from an economy, unless they can earn a premium. Cambodia has a very high level of corruption, ranking the country 160th out of 177 nations on the global corruption perceptions index (Transparency International, 2013). Among Asian countries, only North Korea and a few of the 'Stans rank lower. Thus, without the promise of superior returns, there remains little to encourage investment in Cambodia, until the corruption issue is resolved.

Key Issues -- Health

Health is tied to economic development, because countries with higher rates of economic development tend to have better health outcomes. The World Health Organization has worked with a variety of NGOs to improve health outcomes in Cambodia, with an eye towards the Millennium Development Goals. The WHO (2007) notes that in general health outcomes in Cambodia are improving. Financing, it notes, is not the primary impediment to the improving the health of Cambodians. There is a shortage of key personnel as the most critical issue, and financial barriers for most of the population to accessing health services, about 80% of which are provided by the private sector (WHO, 2007).

Cambodia is on track for improvements in infant mortality, lowering the fertility rate, reducing AIDS/HIV rates and reducing dengue fever rates. However, malaria remains an issue in the country. Cambodia has made strides with life expectancy, however, but its levels are lower than other countries in the region except for Laos (WHO, 2007). There remains risk for many other infectious diseases and at this point rates of access to clean water and modern sanitation are improving. Thus, there are still significant health issues that trouble Cambodia, and will continue to be an impediment to economic progress.

Key Issues -- Tourism

The only truly strong sector of the Cambodian economy is tourism. There is a reason why the country's major export partners are the U.S., UK, Germany and Canada, and it is not because those countries have insatiable appetites for fish sauce. An estimated two million tourists visit Cambodia every year, spending around $1.7 billion, or one-third of total exports. Tourism supplies jobs for 1.1 million Cambodians, or 1 in every 6.5 jobs (Chheang, 2010). Angkor is the main draw, attracting half of all visitors to Cambodia (Lee, 2014). There are other ruins of the Khmer Empire that form secondary attractions. Most of the tourism infrastructure is near Angkor in Siem Reap, and those hotels are the major source of foreign direct investment into the country.

Recognizing that it has a captive market, Cambodia has sought investment into other tourism opportunities, but as yet development is minimal. There are only two beaches of international standard at the "beach resort" town of Sihanoukville, for example. Only Phnom Penh has any reasonable hotel infrastructure. Siem Reap has good air connections to the rest of Asia, but this is both a blessing and a curse for Cambodia. The advantages are that it brings more people into the country by providing better access, but the downside is that it makes it easier for people to exit the country as soon as they are finished with the temples. The lack of domestic airports means that only Phnom Penh and Sihanoukville are connected, limiting the ability of the country to leverage Angkor's popularity to establish a more comprehensive, diversified tourism industry. That there is not a single direct flight to Cambodia from Europe or Australia has to be considered a hindrance to further development of the tourism industry.

Key Issues -- Child Labor

Cambodia's weak central government has resulted in an economy where it is relatively easy to perpetrate abuses. The country is a haven for sex tourism, including with children. But exploitation of children for labor is also a significant concern in Cambodia. The U.S. Department of Labor conducted a study on child labor in Cambodia. While it noted some advancement, it also noted that this was from a rather terrible starting point. Children in Cambodia, the report noted, "continue to engage in the worst forms of child labor as victims of human trafficking and in child labor in agriculture." The lack of credible legal framework makes prosecution of such abuse easy, as does the lack of compulsory education. Most working children are engaged in agriculture. While this is traditional practice in the country, it also is a constraint on their ability to receive a good education and have opportunity to escape the poverty cycle that affects much of the country.

Children in Cambodia not only work with a high level of frequency, but often do dangerous work such as in the timber industry, deep sea and night fishing, crabbing, making bricks, construction, slaughterhouse work, production of chemicals, begging and sexual exploitation (DoL, 2013). Unfortunately for Cambodia, these children are effectively seeing their career potentials capped by such activities that take them away from the school system. Even where such activities constitute traditional practice, they reduce the ability of Cambodia to escape from subsistence activities.

Key Issues -- Income Equality

The most common measure of income inequality is the GINI Index, which measures the wealth of the richest people in the country compared with the wealth of the poorest. Cambodia's GINI level is 31.8, which is actually a fairly low level, more in line with Canada and Estonia that other developing nations (World Bank, 2014). There are some logical explanations for this. First, all Cambodians basically started from the same place in 1980 -- there was no established upper class aside from a handful of exiles. Second, the country is very poor, and has little in the way of resources. Much of the investment in hotels and other tourism infrastructure relating to Angkor is foreign, so that wealth trickles down to Cambodians in the form of wages -- there are few moguls in the country. As such, the gap between rich and poor is minimal at present, mostly because there are so few people who are rich. With high corruption levels and an economy that is starting to show signs of life, the key challenge for Cambodia will be to maintain its healthy GINI level going forward.

Key Issues -- Geography

One of the most important sources of wealth for a nation lies in its physical geography. Cambodia is not blessed with material wealth. As noted above, it has no energy resources. Moreover, it has mountainous, jungle terrain where life is based on rivers. This provides relatively poor access to markets. For example if trade is focus on the Mekong, that means shipping has to go through the Mekong Delta, in Vietnam, to reach the ocean. Cambodia's shoreline is short, and as yet undeveloped. Cambodia also lacks mineral wealth, such that there is only a small timber industry, and the country is not generally seen as an opportunity place to explore for mineral wealth. Whatever Cambodia generates economically, it will need to do it on the basis of human resources, not physical.

Key Issues -- Threats

Corruption was already noted as a key threat, as was a view of child labor that unfortunately keeps many members of Cambodia's future generation trapped in poverty through lack of education. But another threat comes from upstream. Cambodia and its people are dependent on the Mekong River. The river provides fish, and when tides push back from the Delta into Tonle Sap Lake, this provides an exception freshwater fishery. These fisheries are the lifeblood of millions of Cambodians. Yet the country does not control the Mekong either upstream or downstream. China controls the upstream, and has taken to damming the river as a means of powering its own industrial ambitions. This, however significantly affects water flows downriver, which in turn affect fishing and other water-based economy in the downstream nations. China is even building a damn on the river in Cambodia, perhaps as a source of electricity exports. It is expected that Cambodian fisheries could well be decimated by these changes in water flows, and force many communities to move (Zaffos, 2014). Cambodia's food security and its economic future are at stake with these projects, and the Cambodian people seemingly have little say in the matter -- and let's not forget this is the same China that bankrolled Pol Pot so they have established how little they care about Cambodian lives.

Conclusions

Cambodia, 1980, emerged from Khmer Rouge rule with the worst economic development level in the world. The country literally had no economy. There were no educated people left alive, and all economic and political institutions had been abolished. The country was forced to start over, and with very limited resources and ongoing civil conflict. Beginning in the 1990s, the political situation began to stabilize, and that allowed Cambodia to begin to focus on the rebuilding process.

If the current state of economic development in Cambodia seems poor, that is because it is. The country faces considerable challenges, including a lack of infrastructure at all levels, a lack of education, corruption and a poor resource base. Most people still engage in subsistence activities. That said, there are signs that the long run of political stability and influx of aid money has made a difference in terms of development. Cambodia still ranks among the bottom countries in the world in terms of human and economic development measures. It is almost wholly dependent on its agricultural capabilities, with tourism as its major source of foreign exchange, and one major tourist site to draw visitors. If there is one priority for Cambodia, it is everything. There is no aspect of development that does not need improvement in Cambodia.

However, recent outcome measures have been positive. It is clear that Cambodia is heading in the right direction. The metrics are showing positive trends, which should be a source of encouragement. The major issue is that there is a long ways to go for Cambodia, and it is still in the habit of undermining its youth with low education capacity and high rates of youth employment at the expense of investing in developing the next generation of Khmer leaders. Still, if the trends continue, Cambodia will be able to slowly rebuild itself, a process that was never going to be either fast or easy. Going forward, the country will need to focus on education and leadership development, reduce corruption and improve its economic and transportation infrastructure to build on the progress it has made thus far.