Enhancing Sectoral Growth in Cambodia: Governance Perspectives

1. Presented by Kai Kaiser, Senior Economist, Public Sector Growth, World Bank (Stephane Guimbert, Sophal Ear, Verena Fritz) Applied Inclusive Growth Analysis Day 4, March 26, 2009 Cambodia: Good enough governance for sectoral growth?

2. Good enough governance for sectoral growth? Growth Paradox? • Rapid Growth • Garments Success Story • Growth Sustainability Concerns • International Competition • Challenge of Diversification • Weak Governance • Weak Aggregate Indicators • Self-reported by firms …consolidation of ruling party/stability after 1998 …first LDC to join WTO (2004)

3. Good enough governance for sectoral growth? 1 growing with four fragile engines Contribution to growth (%)‏ Tourism: rapid growth. Initially mainly to Siem Reap and Angkor – gradually to Phnom Penh and Sihanoukville, with further potential Real estate / construction: very rapid growth, especially in Phnom Penh; talks of a bubble Garments: main (only?) export; mainly to US market; slow growth in 2007 with competition from Vietnam; further competition (inc. China) in the future? Crops: rain-fed; mainly rice Legacies of “extractive” forestry “dis-saving” in 1990s

4. Good enough governance for sectoral growth? reaching new heights?

5. Good enough governance for sectoral growth? weak governance

6. Good enough governance for sectoral growth? 2 corruption & governance Major obstacles to business, as reported by firms established in Cambodia Sources: Investment climate surveys in Cambodia

7. Good enough governance for sectoral growth? Growth Analysis Approach • On-Going CEM • Range of background papers • Complementary governance & political-economy analysis • Unbundle paradox? • Government-donor roundtable 2009 • What were drivers to growth? • What are challenges to sustainability? • What are binding constraints and policy options?

8. Good enough governance for sectoral growth? what is really binding? 2 Large informal economy • Entry costs (in terms of regulations and corruption)‏ • Limited benefits of formalization (weak coordination; limited access to finance)‏ No sustained diversification • Coordination / information (on markets, technologies)‏ • Incentives for innovators (both formal incentives – e.g. standards, trademarks – as well as informal – scaling up means becoming a target of corruption)‏ • Access to finance for locally-generated projects (in agriculture; for SMEs)‏ No capital-intensive or processing industry • Governance (high informal taxation of higher rents created by capital investment; property rights)‏ • Poor complementary inputs (electricity and water; skills; coordination issues)‏

9. Good enough governance for sectoral growth? Governance & Political-Economy Analysis Approach • Focus on selection of promising sectors • National plans, development partner efforts… • Understand sectoral governance & growth • Nature of state-elite & business relationships • Drivers of growth? • Strategies to manage business environment across value chain • Drawn on country specialist (Sophal Ear) • Process of discovery?

10. Good enough governance for sectoral growth? Sectoral governance for growth? 2 Successful Garments Emerging? Rice Stunted? Livestock

11. Good enough governance for sectoral growth? Garments • International Drivers • Quotas for labor standards (US brokered, until 2004 for garments; ILO monitoring still ongoing)‏ • Strong international presence in 300+ establishments (95% +) • Domestic Collective Action • Garment Manufacturers Association (GMAC) • Relationship w/ Ministry of Commerce, Labor Intensive Profile of Sector • International Chambers of Commerce • Open Issues • Sustainability concerns w/ international competition • Squeezing the golden goose? • Value chain limited to assembly

12. Good enough governance for sectoral growth? Rice • International Drivers • Increase in food prices • Future Everything but Arms (EU Zero Tariffs for LDCs) • Only Sanitary & Phytosanitary • Domestic Collective Action • Fragmented, Limited Collective Voice • Green Trade (state body) & National Cambodian Rice Millers now have export waver (100 tons+) • Status • Mainly domestic padi production, processed reflows from neighboring countries • Very limited finance into rice processing • Concerns about ability of Cambodian supply chain to deliver quality

13. Good enough governance for sectoral growth? Livestock • International Drivers • Increase in food prices • Malaysian investment (failed) • Domestic Collective Action • Very Fragmented, Limited Collective Voice • Some entry attempt by okhna • Status • Failure of previous venture (Mong Retth, Malaysians) • Procdution localized, dominate by cattle rustling, high transactions costs across value chain to Vietnam/Thailnd

14. Good enough governance for sectoral growth? A Strategy for Policy Actions in the Cambodia Setting • Potential Sector Profits/Rents Insufficient • Sum of poor governance manifests itself on various links of the value chain • Export opportunities/prices • Promote Demand Side/Collective Action • Business Organizations (Mandatory/Sectoral “Monopoly”) • External Drivers • Internal National Regimes • Pressure for domestic “compliance”

15. Good enough governance for sectoral growth? Open issues… Integrity of governance & growth narrative Limited selection of sectors (successful & unsuccessful) Replicability of garments wrt to different sectoral value chains Multi-sectoral state growth champions? Focal point acts to enforce credible business environment (pending systematic change) Captured/Self-serving institutions Capacity/incentives for this type of institutions Potential discovery of oil & gas Impacts on drivers of growth Concentrated rents & incentives for state