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7. Cambodia's Accession to AFTA: Impact, Challenges, and Policy Implications
- ISEAS–Yusof Ishak Institute
- Chapter
- Additional Information
164 Toshiyasu Kato© 2001 Institute of Southeast Asian Studies, Singapore 164 7 Cambodia’s Accession to AFTA: Impact, Challenges, and Policy Implications TOSHIYASU KATO* Introduction The Association of Southeast Asian Nations (ASEAN) agreed to accept Cambodia as a full member at the Hanoi Summit in December 1998. After completing constitutional amendments needed to establish a new coalition government, Cambodia entered ASEAN on 30 April 1999. The process of Cambodia’s accession to ASEAN has been protracted and difficult. A decade earlier in 1989, Cambodia was still a mono-party socialist regime with a command economy; and it remained isolated from the regional economies, except for Vietnam and the Lao People’s Democratic Republic (PDR). The civil war between the government and resistance forces, including the Khmer Rouge, continued along the Thai–Cambodian border, and nearly 300,000 Cambodians were living in refugee camps in Thailand. The last decade witnessed a dramatic change in Cambodia’s political and economic systems. A new coalition government was formed in 1993 after national elections were held under the United Nations Transitional Authority in Cambodia (UNTAC), following the Paris Peace Accords in 1991. This marked a turning point in the emergence of a multi-party political system and the transition to a market-oriented economy. The new government viewed economic integration into the regional and world economies as a key national strategy for reconstruction and development. Accordingly, the new government submitted its formal application for full membership in ASEAN in April 1996, and it started to prepare for accession to the ASEAN Free Trade Area (AFTA). ISEAS DOCUMENT DELIVERY SERVICE. No reproduction without permission of the publisher: Institute of Southeast Asian Studies, 30 Heng Mui Keng Terrace, SINGAPORE 119614. FAX: (65)7756259; TEL: (65) 8702447; E-MAIL: publish@iseas.edu.sg Cambodia’s Accession to AFTA 165© 2001 Institute of Southeast Asian Studies, Singapore Economic integration into AFTA is expected to bring economic benefits to Cambodia. First, AFTA will enable enterprises located in Cambodia, both local and foreign, to have preferential access to ASEAN markets, which comprise a combined population of 480 million. Even with the economic slowdown precipitated by the Asian financial crisis in 1997–98, the ASEAN market is likely to return to one of the highest growth areas in the world. Secondly, Cambodia could become a platform for foreign investment from non-ASEAN countries aiming to penetrate the ASEAN markets. Low preferential tariffs on Cambodia’s exports to ASEAN, coupled with low labour costs and liberal investment laws, are expected to increase incentives to locate factories and firms in Cambodia. Finally, by joining AFTA, Cambodia will send a signal of its commitment to integrate itself into the global economy, thereby giving foreign investors greater confidence to invest in Cambodia. Although Cambodia’s accession to AFTA is expected to bring these economic benefits, it poses several problems and enormous challenges as well. The benefits from AFTA will not be fully achieved without identifying and examining the potential problems arising from regional economic integration and taking appropriate policy measures to meet those challenges. This chapter seeks to contribute to these objectives by examining Cambodia’s accession to AFTA, its potential impacts, challenges, and policy implications. It will attempt to answer the following questions. First, what economic impact will AFTA accession have on Cambodia’s trade, investment and growth? Secondly, what challenges will Cambodia face in translating the benefits of economic integration into long-term sustainable development? Thirdly, what policy implications can be drawn from these analyses? For this purpose, data, indicators and other information are compiled from official statistics and several recent studies in Cambodia on this topic. A comparative analysis approach is employed to understand Cambodia’s current conditions relative to the ASEAN economies. This chapter is organized as follows. The next section reviews the recent performance of foreign trade and investment in Cambodia. This provides important information to assess the potential impact of AFTA on Cambodia, as foreign trade and investment are two major factors that will impinge on Cambodia’s economy. The following section discusses the Cambodian Government’s preparation and strategies to integrate into AFTA, and gives an overall assessment on AFTA’s potential impact on trade, investment, and growth in Cambodia. Next, five major challenges to long-term sustainable development are examined: 1) maintaining sound macroeconomic fundamentals; 2) eradicating poverty; 3) achieving equitable growth; 4) maintaining the momentum of growth; and 5) regenerating the environment. Policy implications for meeting these five challenges are then drawn. The chapter concludes with...