ECONOMIC MONITOR: CAMBODIA

A Narrow Base

Cambodia needs to diversify its economy away from its dependence on the garment industry and tourism

By Bertil Lintner

Entry into the World Trade Organization and the threat of a return of Severe Acute Respiratory Syndrome, or Sars, are the two biggest factors that may affect Cambodia in the upcoming year.

On September 11, Cambodia became one of the first least-developed countries to be admitted to the WTO. This should help Cambodia get some badly needed foreign investment and broaden its manufacturing base, which now is dominated by a shaky garment industry. At the same time it will prompt the country to lower tariffs, leading to increased imports of agricultural goods, which could affect the livelihood of its many already impoverished farmers.

The garment industry, which dominates the export sector, grew by 23% in 2002, up from 13% the year before. According to the Ministry of Commerce and the Cambodian Development Research Institute, a private think-tank, the output of the garment industry was $1.38 billion in 2002, of which 70% was directed to the United States market. But when the garment quota granted by the U.S. under the Multifibre Arrangement ends in 2005, forcing the industry to compete for market share, it could deal a fatal blow to Cambodia's economy.

The government hopes that WTO membership will attract investors in other sectors, but even that will be a hard sell. The country would have to come up with some good selling points in an environment of continuing political instability, a weak legal infrastructure and rampant corruption.

And not everyone thinks WTO membership is good for Cambodia. Opposition politician Sam Rainsy told Dow Jones Newswires in early September that membership would make Cambodia's economy "totally dependent on imports... like some banana republic in Africa." Almost 80% of Cambodia's 13 million people are subsistence farmers, and if the floodgates are opened to subsidized farm produce from more developed countries, the consequences could be disastrous, critics warn.

The economy is already at risk due to the impact of the Sars outbreak earlier this year. This affected the tourism industry and forced economists to lower their expectations for 5% GDP growth this year. Cambodia's tourism sector flourished in 2002 when it increased by 30% from a year earlier and generated $576 million, or about 20% of GDP. But then came the Sars virus, which did not hit Cambodia in terms of infections, but nevertheless scared many wealthy tourists away from the region. Already in May this year, the government estimated that the virus had cost the tourism industry at least $10 million in lost revenue.

There are some hopeful predictions for the upcoming dry season, the time when most foreign visitors arrive. Cambodia has eased visa rules, especially for tourists from other Asean countries, and security for tourists has been strengthened. But if the virus comes back--or if there is another terrorist attack anywhere in the region--the industry would drop back to square one.

It remains to be seen whether WTO membership will be able to create more stable fundamentals for the Cambodian economy than today's troubled garment and tourism sectors. If not, Cambodia will be even more dependent on foreign aid, which for the past decade has been running at 15%-20% of GDP.

This article first appeared in the Far Eastern Economic Review, September 25, 2003

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