Thursday, 27 August 2009

An economic air bridge to Cambodia

By The New York Times Syndicate
Thursday, August 27, 2009

Defying the gloom descending on the tourism sector brought about by the global economic crisis, the airport in Cambodia's capital city recently launched a hopeful initiative: a new airline.

Cambodia Angkor Air was launched in Phnom Penh 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 past years of the 20th century, the country has emerged as a poster child of globalisation in Southeast Asia.

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-Favoured Nation and the Generalised System of Preferences. This status provided access to the American market and it enabled other Asian investors – Chinese investors in particular – to get around 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 the Cambodian economy – the garment industry, tourism, construction and agriculture – three are seriously impaired by the global crisis.

The figures released in late July by the Garment Manufacturers Association of Cambodia (GMAC) showed a worse-than-anticipated loss: Exports dropped almost 30 per cent and one garment worker in every six lost her job in the first six months of 2009.

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. Even if the government helps with profit tax exemptions or export charge reductions, there is no miracle cure for Sou 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 one million tourists in 2008, the situation is described as "catastrophic" by hotel managers. The hotels' occupancy rate has fallen 25 per cent compared to the same period in 2008. Several three- and four star hotels have definitely closed their doors, and the mid-range hotels have been multiplying promotional offers for months. The drop in Western tourist arrivals (down 14 per cent 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 (Dh5.87bn) in 2008. The Ministry of Economy and Finance expects a drop in tourism growth of seven to eight per cent this year.

The construction sector is also affected: Many foreign investors have delayed, reduced or slowed their projects. Phnom Penh started to change face in 2008 with the building of huge towers, business centres 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. Cambodians who speculated on land as investment are now facing difficulties because the prices of land and real estate have plunged and they cannot sell and get cash.

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 per cent. The agricultural sector (with 4.3 per cent 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 symbolises the double-edged sword of globalisation.

The crisis has forced the government to pay attention to those left behind by globalisation. "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.

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.

- With permission from YaleGlobal Online. Courtesy: The New York Times Syndicate's Global Business Perspectives

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