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Presented by Kai Kaiser, Senior Economist, Public Sector Group, World Bank (Stephane Guimbert, Sophal Ear, Verena Fritz) Applied Inclusive Growth Analysis Joint Vienna Institute Day 4, July 2, 2009. Cambodia: Good enough governance for sectoral growth?. Growth Paradox?. Rapid Growth
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Presented by Kai Kaiser, Senior Economist, Public Sector Group, World Bank (Stephane Guimbert, Sophal Ear, Verena Fritz) Applied Inclusive Growth AnalysisJoint Vienna Institute Day 4, July 2, 2009 Cambodia: 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)
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
Good enough governance for sectoral growth? reaching new heights?
Good enough governance for sectoral growth? weak governance
2 corruption & governance Major obstacles to business, as reported by firms established in Cambodia Sources: Investment climate surveys in Cambodia
Growth Analysis Approach • CEM • Range of background papers • Complementary governance & political-economy analysis • Unbundle paradox? • Government-donor roundtable 2/2009 • What were drivers to growth? • What are challenges to sustainability? • What are binding constraints and policy options?
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)
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?
Sectoral governance for growth? 2 Successful Garments Emerging? Rice Stunted? Livestock
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
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
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
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”
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
Cambodia Growth Conclusions • Binding constraints lens provides useful disciplining device in weak-institutional setting like Cambodia where everything can be perceived constraint • Limited binding constraints may be politically counterintuitive… • Temporal, Need to be forward looking, Balance path, perception of all eggs in one basket • Value of looking at sector constraints • Timing • Impacts of Global Economic Crisis…
Q & A Selected References World Bank, (2009), Sustaining Rapid Growth in a Challenging Environment”, www.worldbank.org/kh/growth Ear, Sophal, (2009), Sowing and Sewing Growth: The Political Economy of Rice and Garments in Cambodia, Palo Alto, CA: Stanford Center for International Development Working Paper, No. 384 Guimbert, Stephane, 2009, Cambodia 1998-2008: An Episode of Rapid Growth, Working Paper (draft)