Resurrecting Capitalism in the Killing Fields

05/01/2012
By Evelyn Chea
MarketMinder (Fisher Investments)

History has numerous examples of the benefits of capitalism and free markets—and Cambodia, which had its first IPO April 18, is a good example.

A single IPO in a nation soon to have a grand total of three stocks may not seem like a big deal. Particularly in an emerging Asia—a region that has experienced fast growth and big liberalization gains in the past few decades. But in Cambodia, to those who experienced directly the Khmer Rouge’s reign of terror (like my parents), it’s another milestone on the long road from devastation at the hands of Pol Pot to opportunity.

Decades of war, political strife and a poor economy set the stage for Maoist revolutionary Pol Pot and his Khmer Rouge party to seize power. Pol Pot sought to turn Cambodia into an egalitarian and self-reliant agrarian society—and to create that society, he and the Khmer Rouge believed eradicating “evil” capitalism was necessary. They closed down businesses; shut down banking, phone lines and post offices; banned property ownership and religion; and eliminated currency—and in the end, perpetrated a genocide and massive socioeconomic destruction.

Initially, the Khmer Rouge told urban residents American planes were going to bomb cities and towns, and they ordered everyone to leave behind all belongings and immediately evacuate. Phnom Penh, the capital city home to two million, emptied in a day, including my parents and their two young children. They didn’t have much choice when faced with gun-toting soldiers. Besides, they were told the evacuation was temporary and they’d be allowed to return home shortly.

Most never returned.

Everyone was marched into the countryside and forced into agricultural labor. With no currency and no trade, the Khmer Rouge paid workers only with meager food rations—often no more than two bowls of watery rice per day. People were starving, but anyone caught hunting or foraging for food was executed. Those considered willing participants of a capitalist society—businesspeople, foreigners, ethnic minorities and employees of the former government—were rounded up and killed. Families were separated, and children were taken from their parents and brainwashed into becoming child soldiers. Many others died from disease, exhaustion or starvation, including my parents’ children.

In 1979, the Vietnamese invaded Phnom Penh and deposed the Khmer Rouge. By that time, 1.7 million to 3 million (or 23% to 41% of the total population) had perished—capitalism and Cambodia’s entire financial system were also dealt severe blows, with devastating and long-lasting effects. The economy, already struggling in the early 1970s due to the Indochina war, was shattered. By UN estimates, GDP fell over 25% from 1975 through 1979.

The new government tried to undo some of the damage wrought by the Khmer Rouge—it resurrected banking in November 1979 and reintroduced the riel, Cambodia’s currency, in March 1980. But fixing the economy wasn’t as easy as bringing back banking and currency. As in many frontier economies, taming inflation was a challenge. Ten years after the war, Cambodia’s real GDP was still a mere $346 million,* and the government still relied heavily on foreign aid to rebuild roads and re-establish water supplies and other infrastructure.

But the country has since taken several steps to rebuild its financial system. In 1994, it enacted the Law on Investment, which opened all sectors of the economy to foreign investment—a key and crucial development. Five years later, it joined ASEAN, and in 2004, it became a member of the World Trade Organization. It has signed bilateral investments agreements with 22 countries (including China, France and Germany) and plans to sign more, which should promote increased trade and cross-border investments. As a result, foreign direct investment (FDI) has increased 12-fold since 2004, and imports and exports totaled $6.8 billion and $5.1 billion, respectively, in 2010. GDP grew an average of 8% annually from 2000-2010, and output totaled $11.6 billion in 2010.*

And now, yes, Cambodia has its own stock exchange—the first IPO, state-owned Phnom Penh Water Supply Authority, hit Cambodia’s stock exchange April 18, with two more to follow soon. And it may signal to entrepreneurs there’s yet another way for Cambodian businesses to raise capital. However, simply having a financial infrastructure doesn’t beget economic development. Cambodia has far to go in liberalizing the economy. Currently, approximately 65%-70% of the labor force works in subsistence agriculture. Relatively few work in manufacturing or commerce. Why?

One reason is because Cambodia is awash in red tape. The World Bank ranks Cambodia 138 out of 183 economies when it comes to ease of doing business, and it takes, on average, 85 days to start a business versus 37 days for East Asia and the Pacific region overall. And while FDI has increased, the nation could do more to foster investment from foreign multinationals—tariffs, subsidies, rampant corruption and questionable private property and intellectual property rights are just some examples of the barriers facing potential investors. Fixing all this would make Cambodia much more attractive to both domestic entrepreneurs and foreign firms—and that should lead to future fuel for growth, more and higher-paying jobs for Cambodians and more prosperity.

It’ll be interesting to watch whether Cambodia does adopt more open markets and, if so, how this improves the local economy and the lives of the Cambodian people. Capitalism and free markets, in my view, is one way the country can finally heal from the horrors and pain of its past—simply by embracing what Pol Pot and the Khmer Rouge so harshly banned with their misguided beliefs. Moreover, free markets and free societies helped former Soviet states like Estonia and former Czechoslovakia grow and thrive in the two-plus decades since the Iron Curtain fell, and I believe they can do the same for Cambodia today.

*Fisher Investments Research, International Monetary Fund, World Economic Outlook Database, September 2011.