Cambodia becoming the sick man of Southeast Asia

Lack of transparency, accountability and judicial independence as well as widespread corruption seem to be unalterable elements of Cambodia’s development process. Could the reform bottleneck harm the country’s economic prospects and how far will the regime go to stay in power? 

Sometimes odds and ends are enough to reveal the whole picture. In April 2016, The Phnom Penh Post reported that in 2015 the Cambodian government received just $5 million in lease payments from 173 concessionaires, who lease a total of 1.4 million hectares. Despite a moratorium on issuing new concessions, which was announced in 2012, the widespread approval of economic land concessions has become notorious for consequences that threaten the survival of farmers due to the loss of their land.

As this is just the tip of the iceberg of corruption in Cambodia, one could assume Cambodia’s Anti-Corruption Unit (ACU) has got its hands full. According to Transparency International, in 2015 the Kingdom of Cambodia remained the most corrupt country in Southeast Asia. Surprisingly, instead of tackling at least a few of those systematic manifestations of petty and grand corruption, in March 2016 the ACU started an investigation against deputy opposition leader Kem Sokha due to his assumed relationship with an alleged mistress.

This bizarre interpretation of political priorities was yet another low of the government’s crackdown on the opposition since mid-2015. By the end of April 2016, two lawmakers had been imprisoned irrespective of their constitutionally guaranteed immunity. Opposition leader Sam Rainsy only managed to avoid a similar punishment by going into a third self-imposed exile.

Despite an increase in repression, the opposition still looks forward to winning the parliamentary elections in 2018. There are countless reasons why most people are fed up with the autocratic government of Prime Minister Hun Sen, one of the longest serving political leaders in the world. Corruption, nepotism, malpractice, red tape and despotism have become deeply entrenched in Cambodian politics and society.

Similar to other countries with gerontocratic leadership, the regime’s reactions to a potential loss of power not only appear helpless, superficial and overstrained; they also reveal a complete ignorance of Cambodia’s substantial reform needs. The latest edition of the Bertelsmann Stiftung’s Transformation Index finds that management performance in Cambodia is today indeed considerable poorer than it was 10 years ago.

Cambodia’s competitiveness in the region is likely to shrink
Despite average annual GDP growth of 7 per cent in recent years, Cambodia appears to stand on the threshold of enormous economic challenges.

In March 2016, the Cambodia Rice Federation (CRF), an alliance of local millers and exporters, predicted the collapse of Cambodia’s rice sector within two years due to underfunding and credit shortages. In addition, there are numerous challenges regarding infrastructure, especially due to insufficient transport facilities and a lack of irrigation systems, storage and warehousing facilities.

In sum, rice production is more cost-intensive in Cambodia than in neighbouring countries, especially compared to Vietnam. According to the CRF, roughly one million tones of rice is brought to Cambodia illegally from Vietnam every year.

However, Cambodia’s competitiveness compared to Vietnam is likely to shrink on various fronts. Since the ASEAN Economic Community came into being on 31 December 2015, protectionist policies have become almost impossible. Due to greater industrialisation and productivity, it is a realistic to expect that Vietnamese goods will flood Cambodian markets, threatening local producers in general.

Much more importantly, with the upcoming EU-Vietnam free trade agreement and the Trans-Pacific Partnership (TPP), Vietnam will become significantly more attractive for foreign direct investment, which Cambodia desperately needs too. According to the World Bank’s latest Doing Business Report and the Global Competitiveness Report 2015-2016, Cambodia can scarcely compete with Vietnam in almost all areas that are essential for entrepreneurs and corporations.

And while hundreds of thousands of Burmese workers will enter the Thai labour market in the near future, it will likely be much more difficult for Cambodia’s 700,000 migrant workers to make use of this important loophole given that labourers from Myanmar (Burma) are perceived as being more productive.

More pressure on Cambodia’s apparel industry
With these changing conditions, Cambodia’s main asset in the global economy could also come under pressure. Currently, the apparel industry highly benefits from the EU’s Everything But Arms initiative. It allows Cambodia and other Least Developed Countries (LDC) to export goods to Europe duty-free and quota-free. Because of this scheme, the EU has become Cambodia’s main buyer, with the United States in second place.

Yet this competitive advantage over its direct neighbour Vietnam will disappear in a few years. In addition, the TPP will create a considerable disadvantage for Cambodia in the US market and a similar fate in Europe if the country loses its status as an LDC, which is likely to happen within the next fifteen years.

There are limited options for reducing costs. Understandably, for years workers in the textile and shoe industry have been demanding their portion of export earnings worth roughly $6 billion. While the monthly minimum wage was $61 in 2012, it increased to $140 by 2016. To avoid dissatisfaction among more than 700,000 workers (90 per cent are women), further pay increases are on the horizon.

It will only be possible to keep up with workers’ demands if Cambodia diversifies its mass manufacturing, in particular by increasing its production of high-tech goods such as computer components, electric devices, and vehicles. However, high energy costs and a tremendous lack of skilled workers still prevent the next step in Cambodia’s industrialisation.

How far is Cambodia’s Prime Minister willing to go to stay in power?
Considering its political priorities, the autocratic government does not appear to have noticed that these huge reform bottlenecks could really harm the country’s prospects. It seems Hun Sen is stuck between a rock and a hard place, as he is only able to keep his followers happy through systematic corruption.

Loyalty, discipline and cohesion are likely to erode when the government finally has to provide what the economy needs: legal certainty and a professional state administration. On the political level, transparency, accountability, rule of law, and independent jurisdiction are necessary pre-conditions – principles that stand in diametrical opposition to the way Hun Sen preserves his reign.

As a result, many believe that the prime minister would not be able to reform his power machine even if he wanted to. In recent months, Hun Sen proved that he is able to use all kinds of dirty tricks to maintain his hegemony in Cambodia, but at what cost? Will he really dare to deploy troops in Phnom Penh after a possible defeat in the elections?

Unfortunately, Cambodia could face a much gloomier future than just becoming Southeast Asia’s sick man.

Dr Markus Karbaum is a political scientist and managing director at Dr. Karbaum Consulting. He focuses on Cambodia’s political and socio-economic development as well as regional integration in Southeast Asia. Karbaum is one of 246 country experts who worked on the latest edition of the Bertelsmann Stiftung’s Transformation Index, BTI 2016.