LONG TERM CHALLENGES IN CAMBODIA'S BOOMING ECONOMY

UNCLAS SECTION 01 OF 03 PHNOM PENH 000312 SIPDIS SENSITIVE SIPDIS STATE PLEASE PASS TO USTR--BISBEE STATE PLEASE PASS TO USAID/ANE/TS--MARY MELNYK STATE FOR EAP/MLS, EEB/TPP/BTA/ANA, EAP/EP, AND OES BANGKOK FOR FCS--BACHER HANOI FOR FCS--NAY HO CHI MINH CITY FOR FCS--MARCHAK AND LE TREASURY FOR INTERNATIONAL AFFAIRS--CHUN E.O. 12958: N/A TAGS: ECON SENV EPET PGOV PHUM EAGR CB SUBJECT: LONG TERM CHALLENGES IN CAMBODIA'S BOOMING ECONOMY ¶1. (U) Summary. While Cambodia has displayed remarkable economic growth over the last four years, structural challenges in employment generation and natural resource management must be solved if this rapid growth is to continue and be shared equitably. At a recent economic conference, speakers ranging from the Prime Minister to NGO representatives agreed that Cambodia's economic growth has disproportionately benefited wealthier, urban populations. Speakers called for increased government spending in priority areas, better management of forests and fisheries, and improved alignment between existing workplace capability, vocational and higher education, and employment opportunities. End Summary. PM Hails Economic Growth, Bristles at Oil Worries -------------- -------------- ¶2. (U) The Prime Minister's prepared remarks to the Outlook Economic Conference, an annual event sponsored by ANZ Royal Bank and the Cambodian Development Research Institute (CDRI), were a tour d'horizon of the Cambodian economy's recent success and remaining challenges. Saying that political stability had "opened up opportunities for social and economic development," Hun Sen lauded Cambodia's 10% average economic growth over the past four years, doubling of per capita GDP over the last decade, and growing government revenues and garment sector exports. He highlighted progress made on social indicators such as child mortality and malnutrition, but warned that poverty and inequality remained high and that "the fruits of growth have not yet been distributed equally to all social strata in the rural areas." Cambodia's natural resources can be used to spur economic development, but the PM admitted that the government faced a challenge in ensuring that they were used correctly, citing land disputes, management of oil revenue, and the environmental impacts of mining as examples. Going forward, he called for private sector-driven growth, especially the promotion of small and micro-enterprises; continued economic reforms; and economic diversification. ¶3. (U) In typical Hun Sen fashion, the Prime Minister deviated seemingly extemporaneously from his prepared remarks to issue several pointed retorts to recent events. He told the international community not to pose any more "stupid questions" about how potential oil revenues will be used. He emphasized that the government already had a development plan in place and should not be pushed to make other, more specific plans to spend the revenue while Cambodia's oil potential was still unproven. Can Economic Growth Last and Be Shared Fairly? -------------- - ¶4. (U) Cambodia's 9.5% growth rate in 2007 was more than double the global average and marked the country's fourth year of double digit (or nearly double digit) growth. IMF Resident Representative John Nelmes predicted 7% growth in 2008--a strong level, but slower than previous years due to competition with Vietnam in the garment sector and a slowing U.S. economy. While Nelmes praised the RGC for their remarkable 40% annual increase in revenue collection, he also cautioned that spending has been overly constrained in light of this higher income and significant social needs, with government expenditures up only 4%. Nelmes called for more spending on infrastructure, health, and education; and stronger efforts to control inflation--both measures necessary to keep Cambodia's economic growth in the double digits. ¶5. (U) Both the IMF Resident Representative and an executive from a leading international bank hailed the extraordinary growth in the banking sector, with deposits growing by 72% and loans growing by 64% during 2007, albeit from a low base. ANZ Royal Bank executive Gary Runciman predicted continued rapid growth, but also cautioned that high degrees of risk--due largely to poor transparency, lack of financial documentation, and uncertainty surrounding the enforcement of bankruptcy and other laws--make it difficult for banks to lend and lead to lower than expected returns. ¶6. (U) Cambodian Development Research Institution (CDRI) Research Director Hossein Jalilian said that two factors explained why Cambodia's economic growth has not been shared equally among all segments of society. First, while the PHNOM PENH 00000312 002 OF 003 industry and service sectors have seen sustained growth, the agriculture sector has been unstable and even experienced negative growth rates at times. Secondly, there are few linkages between the successful service and industrial sectors and the rest of the economy--an experience borne out by Siem Reap province, which has one of the highest poverty rates in the country despite being home to the world famous Angkor Wat temples. Reversing this trend of growing disparity will require improving the business environment; channeling investment toward economic development rather than real estate speculation; and strengthening institutions, including efforts to provide land titles. Natural Resources Under Threat -------------- ¶7. (U) Cambodia's forests and fisheries, which represent a safety net for the poor and account for a considerable amount of their income, are under threat. Cambodia's fisheries generate jobs for more than 1 million people, account for more than 1/4 of the value of Cambodia's agricultural output, and contribute 75% of the protein in the Cambodian diet, according to government and UN Development Program speakers. According to a 2006 CDRI study, non-timber forest products account for 42% the income of Cambodia's rural poor and 30% of the income of non-poor living in rural communities. Yet despite their importance, these resources are poorly managed and often not available to the vulnerable groups who need them the most. Chan Tong Yves, Secretary of State from the Ministry of Agriculture, Forestry and Fisheries (MAFF) highlighted the government's "strict measures to prevent deforestation," the apprehension of 30 illegal loggers, and the 2001 cancellation of 56% of the country's fishing concessions. However, even this official admitted that the RGC lacks the capacity to enforce environmental laws or address land encroachment and illegal fishing. ¶8. (U) While illegal logging has been substantially reduced, equitably managing Cambodia's forests and other land remains a major challenge. The government owns a majority of Cambodian land, including a large percentage of forested land, but little of this public land serves the public good. Economic land concessions (ELCs) claim more than 1 million hectares, but only 2% of ELC land area is cultivated or otherwise developed, while the rest sits idle or is stripped of timber without being put to its intended use. In addition, purported developers often begin clearing forests before having their ELC applications approved, according to Chhith Sam Ath, Executive Director of the NGO Forum. World Bank Country Representative Nisha Agrawal summed up the situation, saying that ELCs were "all about stripping forests or holding on to land for speculation, something Cambodia can't afford when 20% of the population is landless." Agrawal emphasized that Cambodia already had the necessary laws in place to manage its natural resources well, the question now was actually implementing the laws; attracting high-quality investors who intend to live up to those laws; and building capacity and public discourse about these issues at the community level. Mismatch Between Jobs and Job Seekers Creates Unemployment, Illegal Migration, and Employer Woes -------------- -------------- ¶9. (U) Job seekers' skills and qualifications are poorly matched to the needs of Cambodia's economy, creating both high levels of unemployment and difficulty in recruiting qualified staff. Ministry of Labor Secretary of State Pich Sophoan told participants that there was a strong need for unskilled jobs in rural areas to match Cambodia's largely rural and poorly educated workforce. Siphoan highlighted the government's small but well-respected vocational training program, which meets workforce needs but suffers from the perception that university is the only route to good employment. One result of the lack of unskilled jobs in Cambodia is rising levels of economic migration. Government reports of 20,000 Cambodians working legally in Malaysia, South Korea, and Thailand over the last decade are dwarfed by estimates that 180,000 Cambodians are working illegally in Thailand alone. Chan Sophal, senior researcher at CDRI, called for the Cambodian government to facilitate safe economic migration, saying that something as simple as lowering passport fees to the regional average of USD 30 would result in a loss of USD 3 million but would generate PHNOM PENH 00000312 003 OF 003 USD 200 million in income for poor families who either fail to migrate due to cost or migrate illegally, facing harassment and underpayment as a result of their precarious status. ¶10. (U) At the skilled end of the job market, HR Inc. President Sandra D'Amico complained that low and uneven university standards mean that employers can't rely on degrees or certifications as a reliable measure of an applicant's skills and knowledge. Applicants frequently lack critical thinking skills, creativity, and initiative; and hop from one job to the next when a better paying position opens. Yet while employers have trouble finding qualified applicants, recent graduates have trouble finding jobs--spending an average of nine months to find their first position. ¶11. (SBU) Comment: Despite its impressive economic growth, Cambodia faces long term challenges due to poor alignment between the country's human and natural resources and the economy's needs. Young people anxious to advance pay relatively large sums for university educations that fail to qualify them for skilled jobs. Much of Cambodia's land sits idle in the hands of timber barons (posing as developers) or property speculators while a fifth of the population is landless and more than one-third are poor. Concerns and unrest surrounding inflation, which have come to the fore since this conference, underline the precariousness of many Cambodians' economic survival. If Cambodia's remarkable economic growth is to continue, and if that growth is going to benefit more than a few, Cambodia faces the difficult task of re-aligning its resources to address the needs of the majority of its population rather than the elite. MUSSOMELI