Stéphane Guimbert's blog

To a tourist visiting Cambodia, or to a French consumer living in Cambodia (whose food habits require a complement of pasta and potatoes), rice will mainly mean the stunning landscapes of rice fields, yellow at harvest time, bright and liquid during the rainy season, with shades of green meanwhile. But to a Cambodian consumer and to a Cambodian farmer, as well as to their Government (and to the French economist), rice is the staple crop, a possible “white gold” as the Prime Minister once put it, and a major part of a poverty reduction strategy.

On August 17, 2010, the Prime Minister launched a “policy paper on the promotion of paddy production and rice exports” (see announcement). This is a good and promising example of a cluster approach to Cambodia's growth strategy.

Cambodia is an important but still small rice exporter. Cambodia has been an exporter of rice since 2004, but a large part of the exports was unprocessed (paddy) or even smuggled through the border. Yet Cambodia has abundant land and sits in a region that is both fertile for and in high demand of rice (see Chapter 1 of our report on growth).

So far the potential comparative advantage for rice was diluted by various costs, official (e.g. electricity) or unofficial (e.g. illegal check points). Poor coordination of public and private actors was also undermining the potential. For instance weak land titling systems and weak sanitary controls were a constraint that led to limited access to finance, itself contributing to limited value addition. However the significant increase in price in 2008 - and again a rebound in the past few weeks - has drastically changed the economics of the sector.

When I was asked to look back at Cambodia's economy in 2009 and ahead to 2010, I began to wish I had some magic tools such as this ox (although in that case, the ox was not that magical, since the 2009 harvest turned out to be quite good).

Cambodia’s year of 2009 was an unusual one. The sustained period of rapid growth – almost 10 percent for 10 years – came to an end. The 2009 growth forecasts are still being debated, between the International Monetary Fund (-2.75 percent), the World Bank (-2.2 percent), the ADB (-1.5 percent), and the Government (+2.0 percent). But the core issue is somewhere else: it is the fact that most citizens and investors were planning on continued rapid growth, and this did not happen in 2009. Those planning to send remittances to their villages could not do so. Those planning to sell their land for capital gains could not do so. We have seen imports of cars and motorbikes decrease, and some signs of debt distress for a few.

It's been a very enriching experience to listen to the reactions of these 1200 or so college students.

Over the past couple of weeks, thanks to my colleagues Saroeun and Sophinith, I have traveled to various universities in Cambodia to present the findings of the World Bank’s growth report for the country. It's been a very enriching experience to listen to the reactions of these 1200 or so students. It was also nice to see the dynamism of these universities and these students.

Most interesting was the focus of their questions. Although the report is focused on medium- and long-term trends, many questions were about the impact of the global economic crisis. My answer: Cambodia is very exposed to the crisis given its openness and reliance on foreign investment, and despite the strong resilience of its rural economy.

There were also many questions about extractive industries. The answer is in Chapter 5 of the report: there remain considerable uncertainties about the potential in oil and gas and in mining, with in fact practically no major proven commercially viable reserve so far.

Royal oxen, cousins to the more common variety in the photo, offered their take on Cambodia's agricultural prospects. (Photo courtesy of dee under a Creative Commons license)

An important new development for economic forecasters happened yesterday. Like every year, a royal oxen predicted the country’s agriculture fortunes (a bit like Groundhog Day  for American readers, this is essentially based on what the oxen does and does not eat): by refusing to eat any of the grain, it raised concerns of a low rice harvest for this year… This would obviously be a bad omen given the many hopes placed on agriculture for weathering the global economic crisis. Other than that, tourist arrivals continue to slow down (and the low season will now start as the rain comes) and garment exports remain way below last year’s level.

So any good news since my last post on this and the release of the Cambodia Economic Watch? Yes, a few.

Declining revenue of tuk-tuk drivers in Cambodia shows even the informal sector isn't insulated.

Growth forecasts in Cambodia are generating a fair bit of confusion. Many simply question whether it is possible for GDP growth to be lower in 2009 than in the past 15 years.

The World Bank today launches its projection of a 1 percent contraction of the Cambodian economy. This is based on an analysis of available statistics and feedback from a range of economic actors. Yet, to most of my Cambodian friends, it remains hard to conceive.

It is true that "seeing" such a contraction will be difficult. Basically, what it means is that economic activity in 2009 will be pretty much the same as in 2008. So the fact that we continue to have traffic jams in Phnom Penh, see tourists at the Royal Palace, and hear construction machines in many residential areas is consistent with such a projection. What will change, though, is that incomes will not increase this year as fast as past years and it will also become more difficult for the 250,000 young people leaving school each year to find their first job. What also will be different is that with no growth in aggregate, there will be a proportion of those with a livelihood at the end of the year worse than at the beginning.

Emerging from such a difficult history and sustaining double-digit growth continues to drive Cambodia quickly past many crossroads.

Three weeks ago I presented our analysis on growth to a business roundtable with the government of Cambodia, organized by The Economist. Its title, "On the verge of a breakthrough?", reminded me of a 2004 report prepared by the World Bank called "Cambodia at the Crossroads".

It should be of little surprise that a country emerging from such a difficult history and sustaining double-digit growth would drive quickly past many crossroads. The country's key crossroad might have been in the late 1990s when peace was solidified. Or in 2005, when the multi-fiber quotas were dismantled, ending Cambodia's higher quotas to the United States. Or at the time of the adhesion to ASEAN or to the World Trade Organization. Each general election has also marked a crossroad. Most recently, the Khmer Rouge Tribunal is also a major crossroad.

The global slowdown is hurting Cambodia's tourism industry, with fewer visitors in late 2008 than in the same period of 2007. Image credit: flydime at Flickr under a Creative Commons license.

Cambodia was one of the few Asian countries saved from the December 2004 devastating tsunami. But, a few days ago, at the Cambodia Economic Forum, panelists suggested that the economic tsunami – or various synonyms – would not spare Cambodia.

It's been a couple of months since the World Bank prepared the "perfect storm" report on the recent economic developments in East Asia. Our view at the time was that the crisis would reveal some of Cambodia's economic vulnerabilities – i.e. its lack of export diversification and its extreme reliance on foreign investment for growth. I think that this is an important lesson from our recent analysis on growth in Cambodia (more on this later).

Our projections for 2009 at the time were just below 5 percent GDP growth. This is consistent with the projections of the Government, the IMF, the Asian Development Bank, and an International Labor Organization (ILO) report on the impact of the crisis released yesterday. The Economist Intelligence Unit has a more pessimistic projection of 1 percent.

So who is right?

Cambodia developed an interesting model that enabled it to develop its garments industry in the mid-1990s through a deal with the US.

Recently my colleague Ryan Hahn of the PSD blog wrote about an interesting story on sweatshops. This refers to an op-ed of Nicholas Kristof, a columnist for the New York Times, titled "Where Sweatshops Are a Dream". On his own blog, he clarifies: "My point is that bad as sweatshops are, the alternatives are worse. They are more dangerous, lower-paying and more degrading."

This is indeed part of a more general point about the so-called informal economy. Creating strict standards for the formal economy – to improve working conditions and living standards – often acts as a disincentive to become formal. These standards create a barrier that prevents many workers from having a job in the formal sector and leaves them without protection in the informal sector (or even worse, without job). This is something all countries, including developed countries, are struggling with: How to encourage the upgrading of standards without being counterproductive?

At the pace of development of Cambodia's economy, the pressure on these indigenous communities has grown quickly.

Last week, I joined a government team traveling to Mondulkiri, a little known province located some 500 km northeast of Phnom Penh, Cambodia. This was a long trip not only because of the distance, but also because of the quality of the road during the last couple of hours of the journey (although that will change quickly, as the road is being rehabilitated).

The province is really beautiful, with the road traveling first through a dense jungle and then arriving on more open hilly plateaus. The province has some very nice landscapes, as well as powerful waterfalls such as Boo Sra (see picture). We stayed in the provincial capital, Sen Monorum (which in Khmer means very enjoyable!), at one of the few hotels in the city. The whole province is very sparsely populated, with about two habitants per square kilometer.

Mondulkiri is one of the provinces with the highest proportion of minority groups (in fact "minority groups" are a majority of the population).

In my Christmas reading package was a book by French journalist and writer Jean-Claude Guillebaud. This pointed me to the following quote from Goethe, which translates from French to, “The pessimist punishes himself to be an observer.”

In these gloomy times, many people have every incentive to be too dismal. Who in the World Bank or elsewhere would want to underestimate the implications of the global financial turmoil on poverty? Who in the IMF would want to underestimate the further complications to come? Who in governments would advise his or her minister to ignore the impact of the crisis?

For this New Year, let’s wish to policy makers in our home and host countries that they are optimistic … and not just observers.