Stratfor
Summary
With business costs rising in China, East Asian investors are eager to find the next big thing. At first glance, Cambodia's stable pro-business government, cheap labor and numerous resources make it seem like the ideal location. But, despite progress in the trials of former Khmer Rouge leaders and significant increases in official development assistance, Cambodia's corrupt legal system will continue to hinder efforts to attract large-scale, high-value foreign direct investment and to solidify economic gains.
Analysis
With rising labor costs, increasingly saturated manufacturing markets and the gradual reduction of tax concessions in China, investors and manufacturers in East Asia are eager to find the next big destination for foreign direct investment (FDI). In many ways, Cambodia should provide such an ideal investment environment. It boasts an attractive pool of cheap labor; lucrative cash crops such as rubber, rice and tobacco; and large, though disputed, offshore oil reserves.
Since beginning to consolidate power, Prime Minister Hun Sen and the Cambodian People's Party have worked hard to create a stable, firmly pro-business environment with low taxes. Geographically, Cambodia is ideally positioned to absorb new investment and serve as a bridge between two of Asia's star economies, well-established Thailand and booming Vietnam. Cambodia's lesser-developed economy status also gives its exports less-restricted access to major economies, in contrast to trade restrictions levied against China by the United States and the European Union.
Following Cambodia's recent progress in the long-delayed Khmer Rouge genocide trials and the prime minister's promises to battle corruption, Cambodia has received a strong vote of confidence from international aid donors. Its top donors gathered at the Cambodian Development Cooperation Forum in Phnom Penh on June 19-20 to offer significant increases to Cambodia's official development assistance (ODA). At a meeting that included representatives from the United States, Japan, Europe, International Monetary Fund, World Bank and the United Nations, the annual forum offered a few well-worn critiques before pledging $690 million in ODA, a 15 percent increase since 2006.
ODA, which accounts for more than half the Cambodian government's budget, is a great boon for the Southeast Asian country's people and economy. Potential ODA increases will be limited in size, however, and in the long term it is FDI, not aid, that will allow Cambodia to solidify its economic gains. ODA can certainly help in terms of expanding infrastructure, but FDI is far more useful in developing a local economy, transferring skills and technology, generating sustainable government revenues and nurturing local business. Less liquid than loans or aid, FDI represents a strategic, long-term wager, banking on a region's potential, not its pitfalls. While FDI flows increased to $381 million in 2005, up 34 percent year-on-year, investment remains relatively small and isolated to a few key sectors. Industries such as garment products and tourism account for most foreign investment, benefiting as they do from low taxes and the ability to utilize urban infrastructure.
Despite its strong profile, critical hurdles remain for FDI in Cambodia. Cambodia's well-known, widespread corruption and weak legal and financial systems deter all but the most speculative investors. For any sound, significant investment to occur, companies must have some guarantee that their rights to ownership and profits will be protected in the long run. Despite other incentives, no such guarantee exists in Cambodia's system. Corrupt, inconsistent legal administration and lengthy, costly and unclear arbitration systems plague business activity nationwide. All this is no secret; Cambodia ranked 151st out of 163 countries in Transparency International's Corruption Perceptions Index for 2006, a worse showing than Tajikistan and Nigeria.
In addition, groups such as Human Rights Watch and Global Witness continue to direct heavy criticism toward Cambodia regarding political freedom, environmental and human rights issues. These groups will keep many Western investors sensitive to activist pressure and public image out of Cambodia.
Although the progress of the genocide tribunal has been lauded by the international community, likely leading to increased ODA and moderately better public relations for Cambodia, these gains are not enough to produce sound and sustainable investment in the domestic economy. Vietnam and the Philippines, which have more reliable laws, better infrastructure and fewer international hot-button issues, have proven more attractive for potential FDI. As long as the legal system remains unreliable and opaque, large investors interested in long-term profit will stay out, unwilling to gamble valuable investments on the whims of corrupt officials. For now, Cambodia will attract mostly highly speculative smaller investments from sources immune to social pressures and lacking in sound strategic investment techniques.
There are a few distant glimmers of hope. New arbitration and anti-corruption laws, as well as proposals to establish a legal framework to ensure the equitable distribution of potential oil and natural gas revenues, are reportedly in the works. Until pressure for reform builds significant momentum, however, Cambodia has an awfully long way to go before it can meet sound investor standards, top stiff regional competition and open the floodgates to large-scale mainstream FDI.
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About Stratfor
A Foundation of Intelligence — A History of Results
Founded in 1996, Stratfor has revolutionized the way businesses, trade associations, government agencies, and individuals get access to timely, accurate global intelligence, analysis, and forecasting for making their most important strategic decisions. Stratfor has been cited in the mainstream media for the “uncanny accuracy” of our forecasts and our “ability to uncover the globe's best-kept secrets and predict world-changing events in ways that no one else can” (ABC News).
For additional information, go to: http://www.stratfor.com
With business costs rising in China, East Asian investors are eager to find the next big thing. At first glance, Cambodia's stable pro-business government, cheap labor and numerous resources make it seem like the ideal location. But, despite progress in the trials of former Khmer Rouge leaders and significant increases in official development assistance, Cambodia's corrupt legal system will continue to hinder efforts to attract large-scale, high-value foreign direct investment and to solidify economic gains.
Analysis
With rising labor costs, increasingly saturated manufacturing markets and the gradual reduction of tax concessions in China, investors and manufacturers in East Asia are eager to find the next big destination for foreign direct investment (FDI). In many ways, Cambodia should provide such an ideal investment environment. It boasts an attractive pool of cheap labor; lucrative cash crops such as rubber, rice and tobacco; and large, though disputed, offshore oil reserves.
Since beginning to consolidate power, Prime Minister Hun Sen and the Cambodian People's Party have worked hard to create a stable, firmly pro-business environment with low taxes. Geographically, Cambodia is ideally positioned to absorb new investment and serve as a bridge between two of Asia's star economies, well-established Thailand and booming Vietnam. Cambodia's lesser-developed economy status also gives its exports less-restricted access to major economies, in contrast to trade restrictions levied against China by the United States and the European Union.
Following Cambodia's recent progress in the long-delayed Khmer Rouge genocide trials and the prime minister's promises to battle corruption, Cambodia has received a strong vote of confidence from international aid donors. Its top donors gathered at the Cambodian Development Cooperation Forum in Phnom Penh on June 19-20 to offer significant increases to Cambodia's official development assistance (ODA). At a meeting that included representatives from the United States, Japan, Europe, International Monetary Fund, World Bank and the United Nations, the annual forum offered a few well-worn critiques before pledging $690 million in ODA, a 15 percent increase since 2006.
ODA, which accounts for more than half the Cambodian government's budget, is a great boon for the Southeast Asian country's people and economy. Potential ODA increases will be limited in size, however, and in the long term it is FDI, not aid, that will allow Cambodia to solidify its economic gains. ODA can certainly help in terms of expanding infrastructure, but FDI is far more useful in developing a local economy, transferring skills and technology, generating sustainable government revenues and nurturing local business. Less liquid than loans or aid, FDI represents a strategic, long-term wager, banking on a region's potential, not its pitfalls. While FDI flows increased to $381 million in 2005, up 34 percent year-on-year, investment remains relatively small and isolated to a few key sectors. Industries such as garment products and tourism account for most foreign investment, benefiting as they do from low taxes and the ability to utilize urban infrastructure.
Despite its strong profile, critical hurdles remain for FDI in Cambodia. Cambodia's well-known, widespread corruption and weak legal and financial systems deter all but the most speculative investors. For any sound, significant investment to occur, companies must have some guarantee that their rights to ownership and profits will be protected in the long run. Despite other incentives, no such guarantee exists in Cambodia's system. Corrupt, inconsistent legal administration and lengthy, costly and unclear arbitration systems plague business activity nationwide. All this is no secret; Cambodia ranked 151st out of 163 countries in Transparency International's Corruption Perceptions Index for 2006, a worse showing than Tajikistan and Nigeria.
In addition, groups such as Human Rights Watch and Global Witness continue to direct heavy criticism toward Cambodia regarding political freedom, environmental and human rights issues. These groups will keep many Western investors sensitive to activist pressure and public image out of Cambodia.
Although the progress of the genocide tribunal has been lauded by the international community, likely leading to increased ODA and moderately better public relations for Cambodia, these gains are not enough to produce sound and sustainable investment in the domestic economy. Vietnam and the Philippines, which have more reliable laws, better infrastructure and fewer international hot-button issues, have proven more attractive for potential FDI. As long as the legal system remains unreliable and opaque, large investors interested in long-term profit will stay out, unwilling to gamble valuable investments on the whims of corrupt officials. For now, Cambodia will attract mostly highly speculative smaller investments from sources immune to social pressures and lacking in sound strategic investment techniques.
There are a few distant glimmers of hope. New arbitration and anti-corruption laws, as well as proposals to establish a legal framework to ensure the equitable distribution of potential oil and natural gas revenues, are reportedly in the works. Until pressure for reform builds significant momentum, however, Cambodia has an awfully long way to go before it can meet sound investor standards, top stiff regional competition and open the floodgates to large-scale mainstream FDI.
---------
About Stratfor
A Foundation of Intelligence — A History of Results
Founded in 1996, Stratfor has revolutionized the way businesses, trade associations, government agencies, and individuals get access to timely, accurate global intelligence, analysis, and forecasting for making their most important strategic decisions. Stratfor has been cited in the mainstream media for the “uncanny accuracy” of our forecasts and our “ability to uncover the globe's best-kept secrets and predict world-changing events in ways that no one else can” (ABC News).
For additional information, go to: http://www.stratfor.com
2 comments:
Hun Sen people should know this already.
It is so ironic to have more businesses and yet Cambodian people are falling deeper and deeper into poverty! How can this be?
Somebody is lying through the use of statistic!
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