via CAAIJanuary 04, 2011
Severe output shocks are traumatic events. Not only do they generate immediate economic and social distress, sharp increases in unemployment, capital flight and postponement of carefully negotiated investment plans, they also reduce policy confidence and lead to loss of faith in what were regarded as winning economic formulas for growth and industrial expansion.
It is to Cambodia’s enormous credit that despite a recent history of internecine conflict, loss of human capital, political instability and social conflict — events that might have pushed other countries into a prolonged state of institutional decay and economic ruin — it has managed to consolidate a new political system of electoral democracy to usher in a period of record growth and to sharply raise its human development performance.
While a low economic base is certainly part of the explanation, as is a one-off peace dividend with the demise of the Khmer Rouge, this is not the whole story.
First, the history of conflict and civil wars tends to confirm the view that countries and regions with outbreaks of conflict are prone to repeat it. The idea of a “conflict trap” in many countries in Africa and in regions within countries in Asia by now has serious currency in the analysis of social conflict throughout the world. Degenerating into a “failed state,” a la Somalia or Zimbabwe, is another possibility. So is the possibility, much analyzed in the literature on the Russian transition following the breakup of the former USSR, of state capture and the emergence of despotism and interfusion of business and political interests.
The idea of a low economic base making growth less impressive also fails to give enough credit to Cambodia. True, post-conflict recovery, especially in agrarian societies, can be rapid. But this can be the result of the recultivation of areas that were untended due to conflict. It might also be the consequence of returning combatants, who replenish the more dynamic parts of the labor force lost during the years of the conflict.
Such factors by themselves, however, do not explain why some countries can embark on massive structural change while others merely go back to historical rates of agricultural growth.
Cambodia has not only recovered from social conflict and massive loss of life, it has undertaken wholesale institutional transformation, establishing completely new sources of growth and employment. It has brought enormous numbers of female workers into the labor force, moved away from central planning, reached out to international and regional organizations (such as Asean) and initiated a formal and organized system of regular dialogue with the private sector.
But this is not all. It has also had to battle with the fallout from two massive economic shocks, the first in the form of the Asian financial crisis, and the second triggered by the US mortgage crisis. It is also to Cambodia’s credit that it joined Asean not during the best of times, but during some of the worst faced by the regional bloc. It is equally to its credit that the partial collapse of its principal export industry did not tempt it toward a path of protection or policy paralysis.
In fact, during times of great economic stress Cambodia has stuck to its Rectangular Strategy, emphasizing the inherent linkages between economic growth, governance, human capital and social welfare. Its major policy agency, the Supreme National Economic Council, is constantly engaged with the question of future production and economic growth, the necessary physical and human capital resources and the options in international assistance and bilateral credit that can help boost domestic savings-to-GDP ratios.
These questions are highly relevant, since Cambodia is increasingly being integrated into the regional Asian economy by shifting patterns of trade and investment and as a tourist destination. It has kept governance reform high on the policy agenda, including the eradication of corruption. Moreover, the spectacular success of many of the economies in the neighborhood — China, India, Vietnam and Indonesia — provides a large menu of good practices and caveats that allow Cambodia to leapfrog over other developing economies in search of a more diversified and technologically advanced knowledge-oriented economy.
One persistent dilemma is whether to fashion an industrial policy at all, or to focus instead on improving the investment climate and to reduce the cost of doing business so as to become a favored destination for future FDI and complementary domestic investment.
The role of the state in economic management is still a matter of great debate. The fact is, almost every developed country, as well as successful Asian economy, has used state direction of the economy to set out development visions and target particular industries for economic and fiscal support. The South Korean example particularly illustrates the spectacular results of the state and private sector working together to create new patterns of comparative advantage quite different from that which had been historically inherited.
In a very real sense, however, the development debate has moved on from the large state/small state argument, or from the desirability of picking industrial winners or promoting inward FDI through an improved investment climate. Over the last 15 years, a new development consensus has taken root, a consensus based on the critical importance of the knowledge economy in which investment in human capital is likely to yield higher growth returns than those in physical capital.
While watertight econometric evidence is still absent, there is overall agreement that human capital and knowledge are becoming increasingly important to future economic growth. Most developed countries and many developing ones have already embarked on a program of technological upgrading and higher education reform, often in partnership with business. This is itself raising the stakes for those economies that fail to follow in their footsteps.
The broad message of all this is clear. One cannot afford to wait for a completely convincing econometric result on impact of educational investment or more broadly the impact of investment in constructing the pillars of a knowledge economy before preparing for this new economic world.
International competitiveness and comparative advantage is being rewritten in the global arena right in front of our very eyes. Developed countries are themselves leading this structural and technological remake.
Economic theories taught at university campuses are being negated by the powerful combination of global business and national governments. It is time to rethink the theory.
In its search for a sustainable growth model for the future, Cambodia would do well to follow the well-trodden path to the global knowledge economy. After all, late starters can often turn out to be surprisingly high achievers.
Satish Mishra is CEO of Strategic Asia Indonesia, a Jakarta-based consultancy providing advisory and facilitation services throughout Asia. He can be contacted at satish.mishra@strategic-asia.com .
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