Impact of the Global Economic Slowdown

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					         Cambodia: Impact of the Global Economic Slowdown on Poverty and Sustainable
                                  Development in Cambodia

1. Introduction

Cambodia has made an important strike in reducing the poverty over the last decade (until the
crisis erupted in 2008). Growth was key to poverty reduction, averaging 9.5 % per annum and
reaching double digit in some years, resulting in the decline of poverty rate from 47% in 1994 to
a third in 20071. Based on the World Bank international poverty line of 1.25 at 2205 PPP about
5.6 million people (40.2% of population) live in extreme poverty and 68.2% (9.5 million) under
$2. However, inequality has been notably increased from 0.35 to 0.43 as measured by Gini
Coefficient.

Few sectors have been driving the growth – agriculture, tourism, garment and construction. This
concentration of growth highly exposes the country to external shocks. Moreover, those sector
are key for poverty reduction. The highest incidence of poor is found in Agriculture,
Manufacturing and construction in 2004. Agriculture employed 70% of labor force and where
63% of poor live. The other 20 % of poor employed in manufacturing, construction and Tourism
related services.
 
The country has been vulnerable to the pervasive impact of the global economic downturn.
Certain sectors of the economy have been severely affected, very likely causing the economy to
contract in 2009 for the first time in the past two decades. The economic and social impacts have
been significant job losses in the garment and construction sectors, which is estimated around
120,000 jobs, less income amongst many households and a likely increase in food insecurity
amongst the 30 percent of the population already living in poverty in 2009. Please say something
about gender bias in those sectors, especially garment and construction.

Global Financial crisis created unstable external factors that hit severely foundation of growth,
except agriculture. However, rural Cambodia has a strong connection with the three impacted
sectors. Garment sector employed 350 thousand that mostly have rural background and connect
to rural economy. The same is true for tourism and construction. Most of labor forces in those
sectors are rural origin and remit money back to the rural areas. In this sense, the crisis led to
reducing employment not only in the cities where the export industries are, but also in increasing
poverty for their rural families. It also transfers to low investment in agriculture and low yield.

Unemployment could extend to social impact and creates social problems. Poverty reduction was
very recent, so family not yet creates fundamental assets supporting their living. Some workers
may not want to go back to rural areas, because finding alternative jobs there is easier than in the
villages. The decision to wander around urban areas looking or waiting for the next opportunity
                                                            
1
    Based on national poverty line which is around $0.50 in both 2004 and 2007.

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could create a social pressure, if social protection policies are weak. Because, the other sector of
economy did not growth big enough to absorb the unemployment, it could turn into social issues
such as human trafficking, drug usage, prostitutes, gangsters, gambling and the access to
education, health, clean water and other social services. unfortunately, there is no statistics
available to confirm this link.

In the light of crisis, Government of Cambodia has to fight in three fronts: (1) to mitigate the
impacts of crisis on the foundation of Cambodia economic development while diversifying its
economy towards a more job-inclusive growth process; (2) to strengthen saftety nets for those
affected by the crisis, and (3) reduce future risks/vulnerabilities, and to maintain social
achievements so far, in term of poverty reduction, universal access to education and heal service
deliveries.

The crisis has reminded policy markers that growth has to balance with social policy, even
though; growth may help to achieve some social objectives. However, it is not sufficient to
ensure a long-term social policy.

2. The crisis and its impacts on economy and poverty and vulnerability
2.1.  Impact on economy

After climbing to an all time record of 13.3 per cent in 2005, growth of real GDP slowed to 10.8
per cent in 2006, 10.2 per cent in 2007 and only 6.7 per cent in 2008. Real GDP growth averaged
10.3 per cent during 2004-2008. This performance is underpinned by the strong support extended
to agriculture and the garment sector by the Royal Government of Cambodia. Tourism and
construction have been important growth centers of the economy. Overall recent economic
performance has been characterized by balanced contributions from agriculture, manufacturing,
construction and services.

Economic performance in 2008 though somewhat diminished compared with 2004-2007 was
still impressive, at the rate of 6.7 per cent. Important contributions for the strong economic
performance in 2008 came from steady growth in agriculture (5.7 per cent), sustained growth of
tourism receipts (9.8 per cent), the continued growth in garment exports, albeit at much lower
pace (2.2 per cent) and the continued expansion of financial services (19.2 per cent) and
construction activities (5.8 per cent).

Although the direct exposure of Cambodia to the global financial crisis could be limited,
Cambodia’s economy is going through challenging times. The underdevelopment of the financial
sector is shielding the country from many of the risks faced by other countries both within and
outside the region. However, Cambodia had exhibited considerable vulnerabilities before the
crisis (inflation; financial sector; real estate prices; decelerating growth) and could be exposed to
further vulnerabilities from the continuing crisis (mostly through trade, tourism, and capital
flows).


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At the moment, Cambodia faces the following related risks that need a targeted policy response:

    •   First, a sudden stop or reversal of capital inflows, with a magnified impact in a dollarized
        economy already subject to inflationary pressures. This could also trigger difficulties in
        financing the current account deficit;
    •   Second, a major slowdown of growth, with an accelerator effect on investment (already
        weak and dependent on foreign inflows) and, possibly, through the banking sector. This
        could be caused by external (e.g. a deeper global recession) or domestic (e.g. an inability
        to respond to higher prices of rice) factors;
    •   Third, domestic financial sector vulnerability, from a simple loss of trust in the financial
        sector or from a rapid deterioration of asset quality (either because current risks were
        underestimated or misreported, or through a slow-down of the economy or a fall in
        property prices); and
    •   Fourth, the inflation risk, although somewhat decreasing, remains.

A deeper recession in the US or in Asian countries might amplify the risk of slow growth, hence
possibly increasing the financial sector risk (through a deterioration of asset quality), but
decreasing the inflation risk. A further worsening of the situation in Korea might trigger capital
outflows and quickly depreciate asset prices. The targeting and prioritization of policy
instruments will therefore require fine tuning.

Growth is estimated at 2.1% in 2009, reflecting the global economic slowdown. Important
contributions for the positive growth in 2009 came from steady growth in agriculture (4.3 per
cent), robust growth of the mining industry (10.1 per cent), food and beverage (8.6 per cent), the
continued expansion of financial services (13.1 per cent) and the increase in government sector
(4.4 per cent). However, the garment industry is projected to contract by -3.9 percent, tourism
receipts are estimated to decrease by -7.8 per cent, and construction activities would contract by -
2.6 per cent.

The Cambodian economy is projected to grow by 3 per cent in 2010 and 7 per cent in 2011.

Two important downside risks threatened Cambodia’s economic prospects:

    •   Uncertainty as to the impact on the economy of the GFC on garment exports and the flu
        on tourism; and

    •   The pace of economic recovery in developed countries.

Accelerating economic growth is of prime importance in the improvement of social indicators
and broadening the fiscal base to generate enough revenue to fund the social sectors. The
continuation of reforms is of crucial importance for achieving high levels of growth through the
diversification of production sources, promoting such things as investment in new manufacturing
activities, the agro-industry, and tourism sector development, which have very important
multiplier effects on the rest of the economy.


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The speeding up of growth of the rural economy will have a more tangible impact on poverty
reduction. All possibilities for the promotion of growth in the agriculture sector, where the
potentialities for development—through the increase of irrigated crops and agricultural
extension—are important, and must therefore be considered with the greatest attention.

The government is committed to maintaining a stable macroeconomic environment. The
medium-term goals of the RGC within the macroeconomic framework include the following:
achieve an annual economic growth rate of 6% to 7% over the medium term, maintain a rate of
inflation below 5%, limit foreign debt to a level compatible with flows of concessional financing
and direct foreign investment, and increase gross exchange reserves to a value equivalent to
approximately 3 months of imports.

2.2.          Impact on employment and poverty

If crisis prolong, poverty may be exacerbated given that family reported reduction of current
income. However, it may not at the same proportion to reduction of expenditure. If this is the
case, Cambodia may be on a backward path toward CMDGs. The concerns were that laid off
workers, especially from garment sector would turn to work in a risky service sector including
beer girls, Karaoke girls, night club girls, and masseuse. The lay-off from different industries and
return of migrate workers would create pressure on Cambodia labor market that could not be
able to absorb them. As the result, it would drag Cambodia into poverty.

    • Garment Workers
Cambodia’s exports are overwhelmingly dominated by garments accounting for some 70 percent
in the past 7 years. The market has been contracted on US and EU Market. However, Garment
products of Cambodia are not luxury goods and a tiny market share to garments industry in US
and EU, order from Cambodia dropped significantly2. A series of shock due to changes of trade
agreements and economic crisis created an environment of protection through various
preferential treatments. This crisis created a good condition for Garment industry to bargain for
more incentives that will maximize their benefits for a number of years in the future.

Cambodia’s garment exports totaled nearly US$2,977.82 million, growing at a much lower rate
from US$2,866.32 million in 2008, despite the hit by the early impact of the reducing global
demand in the last quarter of 2008. However, garment export dropped by more than 20 % in the
first half of 2009 compare to the same time last year. By market, US market is solely responsible
for such decline, which is unclear from economic point of views. Recently, new market such as
Japan is emerging and EU market remains promising.

According to the Ministry of Commerce, the total number of workers in the garment industry
was reduced from 352,955 working full time in September 2008 to 290,439 in April 2009. This
means as many as 63,000 workers, or 18 percent of the total workforce, have been laid off in the
                                                            
2
    A study may need to empirically estimate elasticity of income of Cambodia’s Garment export.

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past eight months and many are temporarily suspended or reduced to no more over time work.
Over the period, about 70 factories have been reported closed, although 20 have been opened,
resulting in net closure of 50 factories. The correspondent loss of salaries for the workforce is
estimated at US$6.2 million on a monthly basis. However, some are factories to evade for
purposes.

The most significant job loss has been in the garment sector, which laid off 63,000 workers or 18
percent of the peak workforce in September 2009. In terms of income or earning of foreign
exchange, it is a significant loss. The loss of these jobs means a loss of US$6.2 million each
month. This has alarmed policymakers and stakeholders concerned. Most of the garment workers
are young females from rural areas. They usually have a connection to their family at rural area,
their saving contribute to investment in agriculture, which yield increased during a last couple of
years.

   • Construction Worker
Construction is among a hardest hit sector for its strong relationship with foreign direction
investment, especially from Korea. The amount of investment stirred up price of real estate and
accelerates booming of the sector. Uneven and no plan for development of this sector created an
environment that is driven by economic benefit without properly address social dimension of
development. The concept of urban development was simplified to high right buildings. A
number of mega construction projects have been launched. Construction contributed more than
6% of GDP for last five years and employed 140,000 in 2008.

Global financial crisis have put construction projects on hold. Activities have been focused on
finishing and slowing some projects. However, since construction projects take months and
years, the sector did not collapse suddenly. Most construction projects were generally still
employed. New construction projects were taken up slowly due to bursting of property market.
If the prospects for construction and job creation are not improved, many seasonal labour surplus
will have a hard time making their income.

There is no clear statistics on the number of construction workers that have been laid off because
this industry generates a lot of informal employment although it was estimated the construction
industry generated about 2.04 percent of the total employment. Based on data of construction
material imports (steel and cement), they has been dropped respectively 28% and 32% for first
half year 2009. Moreover, construction permits also dropped significantly within the years. In the
first half of 2009, number of construct permitted dropped 49% compare to same period last year
or 69% to second half quarter of 2008. Because, construction employment is seasonal in nature,
it is hard to estimate the loss of employment as most workers would go back home for
cultivation.

Certainly, the absorbing capacity of next season will be low as well as in the future given the
prospection of construction permit. This will affect mostly to worker who work in construction

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as their second activities, which is estimated to have 58,000 employments. Among those, 90% of
them live in rural area. Therefore, slowing down of construction activities would make a great
impact to them. However, they may depend on their first job for living, their earning will
reduce, thus expenditure.

    • Tourism Industry Workers
The tourism has been developed quite well and focused very much on number of tourist arrival
and had been playing a vital role in supporting Cambodia’s economic growth and poverty
reduction. The tourism sector contributes around 13 percent of GDP, earning US$1,134 million
in 2007. Tourism industry workers include those working in the hotel and guesthouses, travel
agencies and tour operators, tour guides, restaurants, massage shops, souvenir sellers,
transporters (buses, taxi, tuk-tuk, moto-dup). Informal employments created by tourist related
activities are significant.

The tourism sector in Cambodia has developed quite rapidly due to the abundance of ancient
temples such as Angkor Wat. In 1992, the country received only 20,000 tourists, however, the
sector grew an average 20 percent the last 15 years. The number of foreign tourist topped the two
million mark for the first time in 2007, which is only 3% of tourists to ASEAN.

Cambodia has been associated itself to regional destination, especially Thailand. As a result, a
perfect storm, global financial crisis, political crisis in Thailand and outbreak of flue created a
significant impact on tourism sector at end of 2008 and early 2009. While Global financial crisis
did not make too much significant impact on tourism in Malaysia or Bali, the drop of tourist
arrival to Thailand is strongly associated with the drop to Cambodia.

The number of tourist arrivals continued to grow in 2008, albeit at slower pace of 5.19 percent.
The downward trend continues into 2009. Number of foreign tourist arrival dropped 2% for the
first half of 2009 and expect to recover at the end of year. Hotel occupancy was reported drop
around the country. Moreover, many more tourists have been from neighboring countries such as
Vietnam and Lao PDR. Domestic tourist also cushioned the downfall. In Siem Reap, more
domestic went there to enjoy tourist facilities.

As the result there is indication that employees in a number of hotels may be temporarily laid off.
However, self-employed supporting services, especially informal sector, make less income due
to reduction in tourism activities. The informal workers are usually in poor family and migrant
from different provinces. The shrink of tourism activities would greatly impact capacity of
income generation.

    • Farmers of Selected Cash Crops
Global crisis has made significant impact on agriculture commodities. Prices of cassava and
rubber, maize, rice and cashew nuts went down during harvesting season. The problem was
production costs were high during cultivated season due to food prices soaring. A nationally
representative survey of households to assess the impact of the high food prices found that labour
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cost increase by 47 percent and agricultural production increased by 30 to 50 percent, due partly
to the triple in the price of fertilizer (CDRI, 2008).

Agriculture contributed 30% to GDP and employed 70% of labor forces. Moreover, around 90%
of the poor were employed in this sector. Rice was cultivated by 90% of rural Cambodian.
Change in agriculture price, especially rice, would impact on majority of earning capacity of
farmers and their expenditure3. This is very likely that reducing in price of rice would turn
farmers into indebtedness and poverty, because farmers borrowed money to invest in their land
during high price. Performance of microcredit was slowing and increased non-performing loan.

The impact on global financial crisis on rice price is very limited. FAO outlook forecasted drop
of only 0.1 % for year 2009/10. However, for cereal, wheat and coarse grain, prices were
forecasted to drop 31%, 45% and 26% respectively4. Farmers who live in plateau areas who
depend on Cassava and Maize would face indebtedness and poverty, if prices are getting low.
The poverty index of people at plateau area was as high as 52% in 20045.

    • Cambodian Workers Abroad
Cambodian labour migrated both legally and illegally to Korea, Malaysia and Thailand for
works. Number is estimated at least 200,000, of which 93 % are working in Thailand and
without legal documents6. The remittances contributed some to saving of family at home, that
can be used to increase investment in land, start micro business, keep children at school and deal
with health risk. Because many of Cambodian workers were employed in a very low-end jobs—
risky and unhealthy—the global financial and economic crisis did not result mass lay-off and
send back Cambodian workers. This may be the case, if the crisis prolong longer.

2.3.   Impact on Vulnerable
Vulnerable persons who live depend on sources of income from garment, tourism, construction,
cash crop and working abroad would face a very difficult time. Among those people are children,
urban and near poor, landless family and remittance dependent family. However, it is not enough
evidences to conclude the impacts, since it needs a good and comprehensive study to collect
more evidences.

    • Children
The food price soaring created a pressure on a program that providing breakfast to Children to
keep them going to school. School dropout is one of concern of government with an objective to
increase literacy rate. It is tricky to see impact of school dropout and global financial crisis. The
dropout that is generated by lower return to school or high opportunity cost of being out of

                                                            
3
  A study is needed to assess the impact of agriculture price on poverty. A case study has done, but there was no
empirical work to quantify the impacts.
4
  http://www.fao.org/docrep/011/ai482e/ai482e01.htm (23 Sept 2009)
5
  Cambodia Poverty Profile 2004, MOP 2005
6
  Unfolding global financial Crisis, UNDP 2009

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school is a structural problem that needs to be addressed by education policy. The likely impacts
were that food prices soaring, in rural area, increase opportunity cost to send their children to
school, rather ask them for help on field. In the urban area, children may ask to earn because
expenditure is evaporated by increasing of food prices. However, during crisis opportunity for
children to get job is very low, so opportunity cost is lower for school. It is not clear that during
hard time it is expenditure for sending children to school is the first to cut, because schooling is
not totally free in term of money. In rural Cambodia, income from remittance also play important
role to keep children in school.

The school dropout rate and increase employment of child labor could be significant. Census
2008 estimated child labor from aged 5-18 … They are among a most active population. The
crisis may drive them out of school and look for job to support family. Also, they may face with
drug, unhealthy activities and illiteracy. At macro level, dropout school rate did not change
(number?) and there is no data available on the number of children workers.

    • Urban Poor & Near Poor
The informal businesses serving workers in garment industry, tourism and construction
contribute to the reduction of urban poor. For garment industry only, at least 30,000 household
earned income from business related to workers such as food sellers, grocery shop, house rental
and transportation. In tourism and construction could generate similar businesses that mostly
urban poor and near poor engages in those activities. The reduction of activities in the three
sectors will put more pressure on earning capacity to people. It is very likely that it will pull
those people back to poverty.

This is very like will increase urban poor, which observed to reduce faster from 2004 to 2007. If
the slowdown continues more than a year, living standard at urban area will be deteriorated.
Because, urban poor relied solely on micro businesses, without it other opportunity is very
limited and household expenditure need to reduce. The closing of more than 100 factories
translated into losing of earning opportunity of 10,000 households, who run related businesses
for workers.

    • Landless Families
The issue in rural area is landless family, which has been estimated around 20% of rural
household. Landless families either rent land for cultivation or sell their labor. During food price
soaring and boom of real estate, labor force at rural area could reach as high as $3 to $5 per day,
but it is highly seasonal. Labors are needed for cultivation due to high food price and for clearing
land for speculation especially in area of low population density. Without doubt, both activities
were hit by crisis, land market busted and agricultural price went down.

The most recent poverty assessment was done in 2007 when land market was in peak and found
a reduction of poverty throughout the country. The picture may change now because of changing
in earning opportunity of rural people, especially among the landless families. Nevertheless, not

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all landless families are poor, but they are vulnerable to shock, for example sickness or death of
household member.

    • Remittances dependent
Majority of rural families have their relative who are working either in urban area or migrate to
work abroad. Remittances could be sources for investment in agriculture, health spending and
education. Opportunity to earn extra income was smaller. Family who borrowed credit and
expected to use remittance to pay back would face indebtedness. For the family who parents go
to work, but leave their children and aged parent at home in rural area depend solely on
remittances. During this slowdown such family would meet a very difficult situation. There is
no statistics about number of such, but the impact is certain.

3. Response packages
Global financial crisis threatened macroeconomic stability in term of reduction of government
revenue, increasing risks in banking sector and micro finance and growth reduction. Policy
responses were designed to mitigate growth impacts, maintain stability of banking sector as well
as adjustment of fiscal policies.

3.1.   Revenue Mobilization

The country has now experienced a decline in revenue collection in the first half year of 2009,
achieving only 76% and 74% of planned revenue from domestic and custom taxes respectively.
The drop in revenue was caused by a number of factors such a decrease in consumption, the
decline in revenue from profit and value added taxes, and the decline in tourist arrivals, import of
vehicles and construction materials. Government also provided subsidies on petroleum imports
(to prevent 100% pass through of the increase in oil price at the international market into the
Cambodia economy) and temporary and short-term subsidies to EDC to maintain electricity
tariffs at the same level (subsidies to power generation were around $30 million);

However, Government aim to collect revenue as stated in the Budget Law 2009, through
strengthening good governance and administration capacity, improving tax-paying service,
expanding tax base, as well as implementing measures to prevent and curb smuggling etc.

The MEF, MIME and other relevant institutions were asked to put an adjustment measure
quickly to modify electricity prices and implement appropriate VAT on electricity in order to
reduce subsidies to Electricité Du Cambodge and its customers, and in order to strengthen the
government’s revenue base. The other tax base such as idle land could also be strengthen to
collect more revenue.

Cambodia also has potential room to strengthen and improve their non-tax revenue collection to
meet the planned targets or even better by strengthening the efficiency of budget implementation,
especially during the time of committing budget and implementing public procurements to make
some savings.bv

3.2.   Expenditure rationalization and management

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Moreover, there is an increasing pressure on government spending to meet the new priorities
such as additional payments for RCAF’s functional allowance, funding sub-national council
elections, additional spending for national defense, and the need for development of physical
infrastructure and social safety nets to deal with the impacts of the crisis.

In 2008 and 2009 expenditure policy, the Royal Government gave priority to: (i) increasing
public investment in physical infrastructure (including transportation, irrigation and energy
generation to reduce energy costs to the private sector and to the community); (ii) increasing
agriculture output; (iii) reducing manufacturing costs; and (iv) implementing social safety nets,
such as the 20% salary raise for civil servants and armed forces as well as the food emergency
program.

Government targeted on saving of fuel spending as the price of fuel is lower than last year level
when the budget was adopted. The public procurement procedures with bargained prices of fuel
supplies are introduced to bring down price to the current market value. Unnecessary or non-
priority spending or those spending, that is not urgent such as the establishment of new
embassies/counselor offices or the increase in the number of diplomats, were suspended.
Moreover, government make difficult for new spending priorities, which are required to have an
instruction from the Prime Minister and advanced consultation and approval from the Ministry of
Economy and Finance.


3.3.   Measures to mobilize and speed up the implementation of ODA financing

The Government is committed to mobilizing and using ODA efficiently for investment projects
and budget support purposes. Government have convened a meeting with the heads of
implementing agencies and relevant development partners such as WB, ADB, and IFAD at the
MEF at the end of February 2009 to seek policy resolution for any impediment to the project
implementation. All relevant ministries/institutions were asked for their closer cooperation to
meet the outstanding conditionalities/benchmarks agreed upon with development partners in
order to be qualified for the use of ODA money on hand to finance various development
programs.

3.4.   Monetary Policy and Financial Stability Measures

Monetary policy in 2008 was focused on mopping up excess liquidity from the economy, mainly
emanating from continuous foreign exchange inflows over the past years, so as to achieve
appropriate liquidity levels and dampen inflationary pressures in the economy. In response to
rising inflation and the need to strengthen the soundness of the banking sector, NBC introduced a
package of monetary policy and financial stability measures.

NBC introduce a prudential policy measures during inflationary pressure by limiting money
supply during inflationary pressure, put credit ceiling on a specific sector and introduction some
other administration measures such as improving classification of banks assets and provision,
valuation of collateral used for bank lending; implementation of on-site and off-site inspections
and supervision; strengthening credit information sharing system; introducing banks internal and


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external auditing; Strengthening bank liquidity management; and strengthening corporate
governance of banks and financial institutions.

While inflationary pressure was curbed, NBC has reduced monetary policy by reducing reserve
requirement. Moreover, it allow exchange rate to depreciate, but commit to managed floating
exchange rate system.

3.5.      Sector Supporting Policies

Government has paid attachment on three impacts sector to mitigate the impacts. Agriculture is
needed to maintain growth. Garment and tourism are important for maintaining employment,
while absorbing capacity of agriculture is limited.

In agriculture, the RGC has focused more on rice through maintaining stability of price and
encourage investment on agriculture input as well as post-harvest processing. Government
introduced $ 18 Millions fund to provide short-term credits for collecting paddy/rice from
farmers at appropriate price to maintain price stability and ensure food security and Medium-
term credit to rice millers to increase capacity in stockpiling, drying and processing. Government
also offered zero tariffs on importing agriculture materials such as seeds, fertilizers, pesticide and
agricultural equipments etc. Moreover, the RGC is also working on streamlining legal
procedures for agricultural investment projects and supporting businesses and enterprises in the
sector through incentives provided under the investment law.

In garment sector, the RGC has been engaging proactively in various measures through fiscal
and other facilitation measures such as tax incentive, special skill and training, trade
financing/credit, promotion of supporting industries (product clusters), as well as improvement
in labor standard, dispute resolution and better relation between employers and employees with
collaboration from trade unions. The Government will look at diversifying the markets for our
garments and other manufactured goods market to East Asia, the Middle East and Africa etc.;

In tourism, the RGC continues to pay greater attention to strengthening its strategy and policies
over the short, medium and long terms, by ensuring peace, security, political stability, social
order and tourist safety; building more tourism infrastructures; improving legal framework and
institutional capacity; developing human resources; and diversifying tourist market/destinations
and attractive tour packages.

       3.5.1.Agriculture

The growth in agriculture can be attributed to: (i) the increase in cultivated land responding to
the recent rise in the prices of agricultural products; and (ii) government investment in irrigation
and favorable weather condition. In 2008, agricutlure growth was 5.4%, which is sliglty higher
than 5% in 2007; the agruculture grew at 5.5% in 2006, and there was unpresidented growth
peak of 15.7% in 2005.

Cambodia faces a great challenge due to price drop, but famers bought input at high cost due to
food price soaring. This sector is an only one that less affected by global economic crisis, its
effects were on price and lack of market. Agriculture plays a significant role during crisis period

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for absorbing labour forces, pulling growth, maintaining pace of poverty reduction and being a
social safety net for majoirty of Cambodian. It is important to maintain incentive to farmers to
produce more.

The RGC has introduced the following polies as an intervention in the market:

    •   Establish Agriculture Fund of 18 million dollar: Provide short-term credit to collect
        rice and paddy to stabilize price and ensure food security and offer medium-term credit to
        rice-milling company to enhance capacity of storage, drier and processing.

    •   Trade response: Fertilizers, pesticides, other agricultural materials and equipments are
        subjected to zero tariff; simplify export procedures, while restrict unnecessary import of
        broken rice; and establish a single institution to certify rice quality for export

    •   Accelerate Agriculture and rural development project: Encourage commercial banks
        and MFIs to offer fund to the agriculture sectors; create special agriculture investment
        program to be a very priority sector with special incentives under the existing investment
        law; and implement agriculture related projects as quickly as possible, food emergency
        program is implementing and Tonle Sap Poverty Reduction program is going to
        implement immediately as soon as the approval from ADB.

    •   Other policies response: Raise awareness among farmers on their roles to stabilize price
        of rice by improving household and community storage, community selling etc.

    3.5.2. Garment Sector:

In garment sector, the following policy responses have been put in place:

    •   Fiscal Response
    ‐   Exempt of profit withholding tax for garment factories for further two years (2009 –
        2010)
    ‐   Temporary contribution of 0.3% towards NSSF on behalf of employers’ for further two
        years (2009 – 2010) which will result in a reduction of employers’ obligation from 0.8%
        down to 0.5% of total wages.
    ‐   The Ministry of Economy and Finance and the Ministry of Labor and Vocation Training
        will set up a safety net fund to finance trainings for the youths and laid-off workers.

    •   Trade facilitation
    ‐   Consider the full-fledged implementation of online application for imports and exports
        within the ASYCUDA framework.
    ‐   The Steering Committee for Private Sector Development, the 3 Sub Committees, and the
        8 Working Groups of the Government-Private Sector Forum will work to simplify trade
        and procedures, and reduce transaction costs.

    •   Credit and Export Guarantee for Garment Factories


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    ‐      Further assessment is needed to measure the magnitude of the problem and the ability of
           the Royal Government regarding the provision of credit to garment factories while the
           soundness of the banking system is also taken into account.

    •      Promoting Industrial Relations
    ‐      We should maintain all existing trilateral mechanisms (Royal Government-Employer-
           Worker). The Working Group on Industrial Relations of the Government-Private Sector
           Forum and the Committee for Dispute Settlement must work harder to enhance industrial
           relations.
    ‐      Ensure that all garment unions comply with law and regulation. Encourage the employers
           and workers to enter into a treaty to ensure appropriate workplace condition and reduce
           disputes.
    ‐      The Ministry of Labor and Vocational Training will prepare the draft Law on Unions as
           soon as possible.

    •      Other measures
    ‐      All competent and local authorities must take action to tackle thieveries
    ‐      All employers must improve the factory management and strengthen internal governance.

    3.5.3.Tourism

In area of tourism, the following policies were taken:

       •   Speeding tourism infrastructure project and policies: Diversify flights to Siem Reap
           in order to obtain price competition; Ministries and involvement sectors have to
           collaborate to facilitate on tourist transport and cross border process; Expanding tourism
           potential especially high promoting on Sihanouk Province by opening up an international
           airport.

    •      Facilitate and prolong tourism stay: The ticket admission to Angkor Wat was revised,
           three days pass (ticket) is eligible for visitors to visit Angkor Wat at any days within the
           week and seven days ticket is eligible at any days within a month; Ensure security to
           tourists especially in main tourism spot.

    •      Promote tourism activities : Cambodian Embassy officers were instructed to have
           programs to promote tourism with the help from Ministry of Tourism and tourism
           companies; Establish a specific expo (?), program and scheme that attract more tourism
           (business?); Private sector reduced cost of traveling package
 
3.6.    Other Policies Response
    3.6.1.Social Protection 

Global financial crisis took attend of Government and donors to review social protection policy.
During that time, government has paid attention on food/seeds transfers (conditional or
unconditional); in-kind transfers (e.g. school feeding programmes or mother/child
supplementation programmes); labour-intensive public works schemes (food or cash for work);

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or exemptions from fees for essential services (e.g. healthcare or schooling). Safety nets are an
important part of a broader poverty reduction and social protection strategy that includes policies
for health, education, social insurance and affordable credit and savings schemes.

Health Equity Funds. The 45 existing Health Equity Funds (HEF) schemes provide free
medical assistance to poor people in 40 operational districts in Cambodia. The HEF are financed
by a regular government budget of US$6 million, and receive an additional donor support of
US$7 million. The Funds are managed in cooperation by government, donors and local NGOs.
HEF work closely with the Identification of the Poor project (ID Poor; see below), as poor
individuals, whether identified through the ID poor process or through an in situ assessment by
medical staff, are covered for all costs of hospitalization and other medical services, as well as
expenses for transportation and food during their stay in the medical structure.

Food Emergency Program. The Ministry of Economy and Finance (MEF) and the Asian
Development Bank (ADB) implemented a Food Emergency program in October 2008 to mitigate
the effects of the increase in food prices on poor households. The emergency package consisted
of a US$17.5 million grant and an additional US$17.5 million loan at concessional rates from the
ADB, as well as of an additional US$5.08 million from the Government of Cambodia.
Approximately US$19 million will be allocated to social protection measures, with the
remaining amount being allocated to measures aimed at increasing food productivity, and
Government capacity. In the first phase, roughly 342,000 people in 200 communes received in-
kind assistance (35kg rice ratios) in the eight provinces surrounding the Tonle Sap lake, and the
Project Management Unit is now considering food-for-work assistance to poor households for
the next three years.

Food for work (World Food Program). The Royal Government of Cambodia provides
annually 2,000 mt of rice to WFP to be redistributed to vulnerable groups. In 2007 the WFP
Food for Work (FFW) program provided roughly 16,600mt to 252,300 vulnerable beneficiaries
in identified food insecure communes in exchange for work in public infrastructure projects. The
FFW program is implemented in the 12 most food insecure provinces in the country, as
identified by the WFP Integrated Food Security and Humanitarian Phase Classification. In 2007,
the FFW constructed/rehabilitated 333km of rural roads, 267km of irrigation canals, and
constructed 52km of dikes, 15 community ponds, and 7 rice banks.

Mother and Child Health program (World Food Program). Through the Mother and Child
Health (MCH) program, in 2007 the WFP distributed monthly food ratios to 20,200 pregnant and
lactating mothers and 41,800 children living in poor households in food vulnerable communities,
for a total value of US$1.6 million. The total MCH budget for 2005-2007 was of US$6 million,
and is planned to increase to US$10 million for 2008-2010. All funds come from WFP donor
contributions, to which the government of Cambodia participated with a US$0.5 million in kind
donation. The food ratios consist of fortified corn soy blend, rice, vitamin enriched vegetable oil,
and sugar. The WFP works in partnership with local NGOs, who handle the food distribution, as
well as health centers, which provide basic health education during the distribution.
School feeding programs: The programs currently reach about 500,000 students and
supplementary food and nutrition programmes for mothers and children.



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Targeted scholarship programmes for secondary education students (especially girls) from
poor households in selected provinces (reaching almost 29,000 students in 2008).

National Social Security Fund: The Royal Government of Cambodia established in mid-2008 a
Social Security Fund designed to provide protection to government employees. It currently
provides coverage to up to 250,000 employees in the formal private sector.


    3.6.2. Attracting Investment

The series of reform that the government has been doing is to improve doing-business climate
and good governance. Given the global environment, strong measures to attract FDI will be
critical to avoid a sudden stop. Bold measures – such as adoption of the anti-corruption law;
thorough improvement in transparency of legal and tax framework, etc. – could send a strong
signal to investors and mitigate the adverse impact of the overall decline in FDI. Accelerating
ongoing reforms (such as in trade facilitation) also has a strong potential. A specific plan could
be adopted to attract foreign investments in agri-business, to seize the opportunity of higher food
prices.

Legal and regulatory reforms will strengthen Cambodia’s business environment both to reduce
the cost of doing business and to remove the risk and uncertainty involved in investing. This is
critical for three reasons. First, the country has very few macroeconomic instruments to respond
to the crisis, since the economy is dollarized and the government has some but limited fiscal
space. Second, beyond the external environment, the slowdown in the economy can be traced to
some structural vulnerabilities in the economy (e.g. its lack of diversification): this calls for
measures to remove these vulnerabilities. Third, looking to the opportunities that will lie beyond
the crisis, it is critical for Cambodia to become more competitive and attractive to investors.]

4. Conclusion and lessons learned for long-term social policy

Cambodia’s economy remains in good shape, though the impacts due to global financial crisis
were serious. Growth remains positive and agriculture plays important role in growth
stabilization. However, impacts were significant due to the narrow based economy and relied too
much on external forces. At least 120,000 jobs were estimated lost during the crisis period, but
agriculture remains the place to absorb labor surplus due to strong connection between workers
and family at rural area. Diversifying economy across and within sector is necessary to sustain
economic growth and better distribution of income.

The rapid in the recent years resulted in poverty a rapid poverty reduction, but economic shock
happened which possibly reverses the effort. If crisis prolong, Cambodia certainly get back to
existing poverty path. This impacts highlighted the need to development can only be assured
with a proper design of social safety net to cushion poor and vulnerable not plunge again in
vicious cycle.


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To deal with social protection policy, it requires a leading role of government and planning. In
case of Cambodia more investments from government, donors, private sectors and household are
required to build and effective social safety net to cope with economic shock that may be turn
millions people into poverty again. Similarly, crisis pushes policy makers to reexamine existing
institution and introduce new institution that is necessary to implement the social safety net
policy. It is clear from experience that market play very minimal role in social protection policy.

Regional coordination could play role in setting a standard and reducing cost of social safety net,
especially when dealing migrant workers. Moreover, regional framework could be design to help
the country to address some issues in trade facilitations that would promote export across
country. Food price soaring provide a lesson that among the rice exporters, Vietnam, Thailand
and Cambodia, coordination is important to prevent rice price fluctuation and ensure regional
and global food security.




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