LONG TERM CHALLENGES IN CAMBODIA'S BOOMING ECONOMY

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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
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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?
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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

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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
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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
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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

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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