A combustible combination

By: Sophal Ear - Posted on: October 6, 2011 | Business

Cambodia needs quality, not quantity, when it comes to growth

In the 20th century, we learned the World Bank’s mantra of growth at any cost too often overlooks important quality-of-life issues, such as life expectancy at birth and schooling.

 

In the 21st century, as the global economy has grown ever more complex and interconnected, it has become increasingly important to focus on growth that is balanced, equitable and accountable. To illustrate the complexity of and need for sustainable growth, the case of Cambodia is particularly instructive.
Since 2000, the country has enjoyed nearly double-digit GDP growth, but this has been narrowly based on three sectors: agriculture, tourism and the garment industry.
Despite 80% of Cambodia’s workforce being involved in agriculture, the sector has only grown at 3% per year. This means the sector is unable to keep pace with overall growth and risks losing out on opportunities to increase revenue.
Tourism represents about 14% of Cambodia’s GDP.

Surprisingly, the tourist mecca of Siem Reap, where the fabled temples of Angkor Wat are located, still suffers from considerable poverty and vulnerability. The vagaries of pandemics and border conflicts have taken a toll on tourism as a service industry.

Quality growth, while possible, has been difficult to achieve. Furthermore, the drive to attract ever more tourists has caused a strain on Siem Reap’s aquifer and its temples.
The story of Cambodia’s garment industry, on the other hand, is particularly interesting. Born from an unprecedented 1999 agreement with the United States to link labour standards to trade, export quotas were increased based on third-party monitoring by a programme of the International Labour Organisation.

Incredibly, the agreement worked. It succeeded in improving Cambodia’s compliance with core labour standards, such as enforcing the country’s minimum wage law and creating a niche for Cambodia as a ‘sweatshop-free’ exporter of garments. This practice created at its peak 350,000 jobs, and nearly $3 billion in garments were exported, primarily to the US.
The problem is that while Cambodia showed remarkable growth over the past decade, the country consistently ranks near the bottom in terms of corruption (154 out of 178 in the 2010 Corruption Perception Index).

Corruption costs Cambodia an estimated $300-500m per year. Corruption is far more burdensome, as a share of income, on the poor than on the rich, leading to increasing income inequality despite growth: a combustible combination.

As a development expert once said, businessmen “only want rule of law when it suits them, when things have gone wrong for them”.
On the other hand, domestic revenues, driven primarily by taxes, matter as a credible commitment to nationally owned development. When revenues are too low (12% of GDP for example), the link between taxes and accountability is broken. Governments can ignore voters because they don’t really pay taxes (except bribe taxes, which are unofficial).

The real challenge is how countries can take ownership of their development when foreign aid disrupts this critical link. They can’t. For accountable growth to take hold, foreign aid has to be tied to improved domestic and tax revenue performance.
Until that happens, Cambodia’s growth, while impressive, is short of quality growth. What Cambodia and other developing countries need is complex (though not necessarily complicated), interconnected (though not dependent), and sustainable growth that, in John F. Kennedy’s words, “lifts all boats”.