Cambodia Has to Cope With its Global Connection

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Once the poster child for the benefits of globalization, Cambodia is now being asked to cope with its darker side in the aftermath of the financial crisis. The four pillars of the country’s economy – tourism, garment-making, construction, and agriculture – are feeling the global pinch in their various ways, writes journalist Anne-Laure Porée. Tourism is down thanks to the global stay-at-home vacation trend. Garment-making has collapsed due to lower US demand and choosey shoppers. Construction, like the rest of the world, plummeted with knock-on effects in consumer banking as rising unemployment led to greater personal loan defaults. Even agriculture, which could still provide positive growth in 2009, faces the uncertainty of weather and the challenges of foreign investment choking off local farmers. Perhaps the only ray of light is the natural resource industry – a sector that has long promised to provide limited value-added components to the economy. The sad part of this story is that the government seems content to wait for a rebound in the global economy, hoping the rising tide abroad will lift Cambodia’s boat. But as Porée notes, to integrate fully into the world economy, Cambodia has to learn how to be more than a supplier of garments based on cheap labor. – YaleGlobal

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Waiting for a rebound, Cambodia needs to be more than dressmaker to the world

Anne-Laure Porée
YaleGlobal, 11 August 2009
http://yaleglobal.yale.edu/

Global misery: Cambodian women workers, who once benefited from foreign orders for garments, are now facing unemployment. (Photo: Anne-Laure Porée)

PHNOM PENH: Defying the gloom descending on the tourism sector brought about by the global crisis, the capital’s airport recently launched a hopeful initiative: a new airline. Cambodia Angkor Air was launched to boost tourism between the capital and Siem Reap near the famed ruins of Angkor Wat. With tourist arrivals falling sharply since late last year, this may signal a triumph of hope over reality. If anything, the hopes and fears surrounding Cambodia’s tourist revenue and garment trade underline how the fortune of the country has become intertwined with the larger world.

Since peace came to Cambodia in the last years of the last century, the country has emerged as a poster child of globalization in Southeast Asia. In the middle of this decade, Cambodia enjoyed double digit growth and even hoisted itself up to 6th place in the rank of the fastest growing economies for the 1998-2007 period.

And now the country is experiencing the downside of dependence on the world. The sectors most affected by the crisis – tourism and garment export – are the ones that have seen the most development thanks to the integration of Cambodia into the global economy a decade ago, after peace was restored in the country. At this time, the economy was opened to foreign investors, who poured money into the garment industry, taking advantage of supports granted to Cambodia such as the Most Favored Nation (MFN) and the Generalized System of Preferences (GSP). This status provided access to the American market and it enabled other Asian investors – Chinese in particular – to get round their own quotas or the Least Developed Country status conferred upon them by the United Nations.

But the happy days are now threatened by the shrinking world market. Of the four major pillars of Cambodian economy – the garment industry, tourism, construction and agriculture – three are seriously impaired by the global crisis. With 70 percent of Cambodia’s garment production going to the US, the declining American economy, choosey shoppers and stay-at-home tourists have led to job losses in Cambodia.

The figures released in late July by the Garment Manufacturers Association of Cambodia (GMAC) showed a worse than anticipated loss: exports dropped almost 30 percent and one garment worker in 6 lost her job in the first six months of 2009. Most of these workers are women who transfer a substantial part of their earnings to their family living in rural areas in order to supplement farming-based incomes. In some villages, every family has one or several members working in the garment factories based in the Phnom Penh suburbs. Some go for unpaid leaves or part time jobs, some enter prostitution, but most decide to go back to their village in order to work in the rice fields.

According to Van Sou Ieng, GMAC president, Cambodia is much more severely affected by the crisis than other Asian countries like Indonesia, Vietnam, Bangladesh or China because the industry sector in Cambodia is less competitive. “We need more time to produce than China or Vietnam,” he says. Though the government helps with profit tax exemptions or export charge reductions, there’s no miracle cure for Ieng.

Tourism – the second pillar of the economy – has suffered from the economic crisis, and the fallout from the swine flu. In Siem Reap, located next to the famed Angkor temples, a spot visited by more than 1 million tourists in 2008, the situation is described as “catastrophic” by hotel managers. The hotels’ occupancy rate has fallen 25 percent compared to the same period in 2008. Several three or four star hotels have definitely closed their doors, and the mid-range hotels have been multiplying promotional offers for months.

The drop in Western tourists’ arrivals (down 14 percent during the four first months of 2009 according to the Minister of Tourism) has a direct impact on tourism generated incomes – foreigners spent 1.6 billion dollars in 2008. The Ministry of Economy and Finance expects a drop in tourism growth of 7 to 8 percent this year.

The construction sector is also affected: many foreign investors have delayed, reduced or slowed their projects. The capital Phnom Penh started to change face in 2008 with the building of huge towers, business centers and shopping malls but activity slid in the second half of 2008, leaving workers without employment. Such trends have had significant consequences, particularly among the banking sector. The Acleda bank, which has the largest branch network in all provinces, reported a fall in profits in the second quarter of 2009 because of late payments and less lending. The Cambodians, who speculated on land as investment, are now facing difficulties because the prices of land and real estate have plunged and they can’t sell and get cash.

The hardest hit, of course, are the poorest of the poor who count each riel. For them, any drop in income, as well as any unexpected crisis, immediately results in cutting down the number of meals per day.

Agriculture, the fourth pillar of the Cambodian economy and the least exposed to global currents, could bolster the country’s 2009 growth, which is forecast at 2.1 percent. The agricultural sector (with 4.3 percent growth expected in 2009 depending on weather conditions) is essentially based on rice farming and fishing.

But the part of agriculture that has drawn foreign interest proves to be a mixed blessing.

In northeastern Mondolkiri province, plans by a French company to set up a rubber plantation have created a conflict that symbolizes the double edged sword of globalization. For several months, Bunong, a Montagnards ethnic group, has been fighting against the project – as their farmland gets swallowed up by the rubber company that has an agreement with the Cambodian government. The company is expected to make huge profits, a part of which could return to the community via the salaries of the plantation workers and the development of a new city.

The crisis has forced the government to pay attention to those left behind by globalization. “We thought that the private sector could solve every problem but we have to reconsider the role to be played by the State in order to palliate the deficiencies of the market,” says Hang Chuon Naron, Secretary General of the Ministry of Economy and Finance.

The crisis has also led the leader of political opposition Sam Rainsy, former Economy Minister, to call for injecting government funds into the economy and for pushing reforms, in particular against endemic corruption. But the government would rather let the storm blow over, waiting for growth to come back in developed countries, hopefully pulling the country out of its recession in the process.

In the meantime, some hopes turn to the mineral, oil and gas resources development. But the revenues from these productions will be mainly derived from exports of raw materials with no local added value, whereas imports of manufactured goods will increase. Even after growth returns, Cambodia will still have to figure out how to hitch its industry to the global economy profitably rather than be a supplier of garments produced by cheap labor. Cambodia is beginning to learn the challenge of being part of an integrated world.

Anne-Laure Porée is a journalist based in Phnom Penh. She can be reached at

alporee@hotmail.com.