Cambodia: Progress and Challenges since 1991

18. The Cambodian Economy: Charting the Course of a Brighter Future

246 Hang Chuon Naron 246 18 THE CAMBODIAN ECONOMY Charting the Course of a Brighter Future Hang Chuon Naron INTRODUCTION Since 1993, the Cambodian economy has undergone a dramatic and rapid transformation. The traditional economy, based on agriculture, is now driven increasingly by the industrial and the tertiary sectors. With the return of peace in the early 1990s, a sense of confidence and pride pervades the country. All Cambodians now share a common vision of sustained economic growth with employment and a secure future for all. The government strategy is to help realize this vision by reinforcing Cambodia’s comparative advantages both regionally and internationally. In the era of globalization the fortunes of all countries in the world are intertwined; autarky is not an option for sustained high economic growth for a small sized economy as Cambodia. Hence Cambodia’s continued economic success will depend on the availability of full market access for its products and the cooperation of its development partners. Cambodia had to virtually start from the scratch to rebuild the country after the defeat of the Khmer Rouge regime. At the very outset, the country had to face the harmful consequences of the economic embargo imposed in 18 Cambodia_Progress 3/6/12, 10:38 AM 246 The Cambodian Economy 247 1979. The annual rate of economic growth did not exceed 3.4 per cent during 1988–91, even though average annual growth in the manufacturing sector reached 6.3 per cent. Growth has been particularly strong since the early 1990s, with the implementation of macroeconomic reforms and normalization of economic and trade relations with the countries of the region. An annual average rate of growth of 6.3% was achieved during 1994– 98, despite the upheaval caused by the Asian financial crisis of 1997–98. It was only after the successful implementation of the “win-win” policy put forward by Samdech Hun Sen in 1998 that the RGC was able to finally dismantle the politico-military organization of the Khmer Rouge, thus reestablishing peace throughout the Kingdom, and achieving the physical and political unification of the country. The government could then take steps to strengthen the spirit of national reconciliation. The elections of 1998 created the conditions for political stability in the country and allowed the government to focus on macroeconomic management. Following the July 1998 elections, the RGC adopted the Triangular Strategy with the objective of promoting sustainable development in Cambodia. The strategy aimed at restoration of peace and stability, as well as maintenance of security for the country and its people. The strategy was by and large successfully implemented and the process of robust economic recovery initiated. At the opening meeting of the Council of Ministers on 16 July 2004, Prime Minister Hun Sen launched the “Rectangular Strategy for Growth, Employment, Fairness and Effectiveness in Cambodia.” The core of the strategy is good governance. The successful implementation of the strategy depends on establishing a conducive environment in four critical areas: (i) peace, political stability, and social order; (ii) partnership for development, particularly partnership with the private sector, donor community, and civil society; (iii) economic and financial stability; and (iv) integration of Cambodia in the region and in the world. The strategy was reviewed and reinforced after the elections of 2009 and is currently under implementation. During the 1990s, the Cambodian economy was transformed from a centrally planned to a market economy. Reforms and policies intended to encourage development of the private sector were adopted in 1989–90. RGC liberalized the economy by dismantling price controls and encouraged private sector development including foreign investment. During this period, growth was achieved mainly from the production and service sectors. Agricultural production, on average, remained lower than population growth. Since 1999, Cambodia has been working towards accelerating development based on market principles and private sector development. Growth was 18 Cambodia_Progress 3/6/12, 10:38 AM 247 248 Hang Chuon Naron 11.9 per cent in 1999 and recorded annual average rate of 8.8 per cent during 1999–2003. Growth performance was consolidated further during 2004–2008. In the decade ending 2010 Cambodia’s GDP rose at an average annual rate of 9.3 per cent. Growth in the last decade was based on the strong performance of garments and tourism. From the policy side, sound macroeconomic management, in particular a prudent fiscal policy and tight monetary management supported by structural reforms contributed to this performance...