Oil, Corruption And The Resource Curse

2008-08-20
The Straits Times/ ANN

"Thailand is currently one of the largest foreign investors in the country."

Late last month, Cambodian Prime Minister Hun Sen's party won a resounding victory in national polls, winning more than two-thirds of the seats in Parliament. Clearly, the days of unstable coalition government are over. But have the elections also put the country on track to become Asean's next success story, as some analysts have suggested?

Optimists can point to a number of factors in the country's favour. Two stem from the elections themselves. The first is that political leaders will now have more time to formulate and implement economic policy rather than political infighting. After the 2003 elections, talks between the Cambodian People's Party (CPP) and the royalist Funcinpec party dragged on for almost a year before a coalition government could be formed.

The second factor is that the election, though widely denounced by opposition groups as unfair, was one of the most peaceful since the 1991 Paris Peace Agreement. Such an improvement in the security situation is unlikely to go unnoticed by potential foreign investors.

But there are more reasons than these for suggesting that the impoverished country may finally be about to achieve sustainable economic development.

An improved security situation, for example, suggests that the tourism industry will continue to grow strongly. The sector, which earned the country US$1.4 billion last year, is already expected to expand by at least 20 per cent this year. Then, there is the current construction boom, suggesting that both local elites and foreign investors have confidence in the country's growth potential.

An economic take-off, however, is far from inevitable. One problem facing the country is that the highly successful garment industry is now experiencing stiffer global competition and slowing demand. Last year, the industry earned 80 per cent of Cambodia's foreign exchange and employed an estimated 350,000 people. But according to the Commerce Ministry, apparel exports have been declining since last October. This is largely due to the economic slowdown in the United States, which imports about 70 per cent of Cambodia's textile production.

Then, there are the country's persistent feuds with neighbouring Thailand. Last month's dispute over the Preah Vihear temple, for example, prompted the Thai Embassy in Phnom Penh to issue travel warnings to its citizens in the country.

The incident evoked memories of attacks on Thai-owned businesses in Phnom Penh in January 2003, when rioters rampaged for hours while the security forces apparently did little to restrain them. The crisis was triggered when false reports circulated in Phnom Penh that a popular Thai soap opera actress had questioned Cambodia's claim to the famed Angkor Wat temple complex and demanded that it be returned to Thailand. Thailand is currently one of the largest foreign investors in the country.

But the most significant drag on economic development could, ironically, be what is currently regarded as its brightest hope: oil.

In the wake of the discovery of oil off the coast in 2005, the World Bank estimated Cambodia's total offshore production potential at up to two billion barrels.

But massive oil revenues could also produce a phenomenon known as the 'resource curse'--corrupt elites siphoning off the wealth, making the nation even poorer and less democratic. Nigeria is often cited as an example. As the World Bank has noted, Nigeria had enjoyed more than $280 billion in oil revenue in the last three decades--more than the total of official development assistance for all of Africa. But Nigeria's real per capita income actually declined over the period.

Corruption is already a drag on Cambodia's economic growth. Prime Minister Hun Sen admitted as much earlier this year when he said that corruption was "a dangerous cancer".

Since about 50 per cent of the government's budget is currently funded by foreign donors, the government faces substantial pressure to keep malfeasance in check, particularly when it comes to foreign investors. But with a projected massive injection of funds into government coffers around 2010 as a result of oil, such influence will soon decline.

The July election has certainly helped provide Cambodia with some of the preconditions for continued growth. But the real test will come when the oil starts flowing.