Volume 2, Number 3 March 2004 Cambodia'sPrivateSector:ItsEngineofGrowth A new World Bank study - Toward a the National Poverty Reduction Strategy tribute to growth; second, to broaden the Private Sector Development Strategy for and the evolvingWorld Bank CountryAs- base of economic opportunity, ie to in- Cambodia ­ is nearing completion. For sistance Strategy. So what we would like crease the range of sectors and activities this issue the World Bank newsletter had do is to help both the private sector and that are able to hire and pay good wages; the opportunity to interview Magdi M. Government identify ways first, to con- continued on page 2 Amin of the World Bank's headquarters in Washington DC, who is Task Team Leader for the study. Q ­ You are working on a study called "Toward a Private Sector Devel- opment Strategy for Cambodia: Invest- ment Climate Assessment. What is the main purpose of this study? What do you hope to achieve by doing this study? A: Thank you very much for focusing on private sector development.About two years ago, during a Consultative Group meeting co-chaired by theWorld Bank and the Government of Cambodia, there was a mutual recognition between donors and the Government of the need to shift the focus of our effort from rehabilitation to sustainable development and growth. It is well understood that the private sector is the engine of growth and employment PHOTO: CHHOY PISEI creation, and it is one of the main pillars of Garment workers sewing in one of Cambodia's many clothing factories. "ThisisCambodia",countryI'vereclaimedasmyhomeland Mittpheap You is a Junior Professional Associate, working in the External Affairs Unit in World Bank head- quarter in Washington DC. She recently returned to Cambodia after leaving in 1979 and contributes her account of her journey back. My eyes swelled with tears when the In the United States, to support a fam- plane touched the runway of Phnom Penh ily of six my father worked as a cab driver InternationalAirport. All I could see from and my mother as a housekeeper. the airplane window were the lazy palm Through these jobs they sent their four trees and the barren rice paddies. children to college, two to graduate It had been 25 years since I left Cam- school. bodia. My only previous memory of the At home, my parents taught me the country was a blur. I was only four years Khmer language and traditional Cambo- old when my family escaped the civil war dian values. As a girl I had to learn how to in1979. Icanstillrecallsittingonmydad's cook and clean, and was not allowed to shoulder and holding tight as he ran away have boyfriends, or attend after-school from bombs in the distance. activities. I had to come home each day My father and his friend named me after school and study, study, study. Edu- Mittpheap (Friendship) at a refugee camp cation was the most important aspect in on the Thai/Cambodia border while he ourfamily. prepared the necessary papers to live in During my visit to Cambodia my par- Mittpheap and her father at Angkor. United State ofAmerica. continued on page 4 2 The World Bank Newsletter March 2004 Cambodia's Private Sector: Its Engine of Growth continued from page 1 has been rapid in only two areas ­ gar- tative sample of the Cambodian economy and third, to enhance the private sector's mentandtourism.Intotal,theformalmanu- and the basis to compare with others. role in delivering public services like in- facturing sector employs less than 9% of Q ­ How important is the role that frastructure. So, it's important to under- the work force. Cambodia's successful the private sector does and can play in stand in great detail why the private sec- entry into the WTO creates opportunities Cambodia's development? tor isn't contributing as much as it could for growth and job creation by opening A: The private sector is absolutely in these three areas ­ to identify the spe- up new markets on favorable terms. The critical in development, because the pri- cific constraints, and how the enabling ASEAN-ChinaEarlyHarvestprogram,for vate sector can create jobs that pay high environment compares with other coun- example, provides an opportunity to sell enough wages to reduce poverty on a tries that compete with Cambodia. nearly 300 product categories tariff-free sustainable basis. We have observed that We are fortunate to have a strong team to China. But to convert these market those families headed by someone with a who have done innovative work on value opportunities into jobs, the private sector job in industry had a very low incidence chains and on trade facilitation. As a team, needs the confidence to invest and a busi- of poverty ­ only around 4%. For those we would like to achieve two things. First, ness environment that allows them to families still employed in the agriculture we would like to improve the quality of grow. This study, along with the Value sector the poverty rate is still very high, the dialogue around the private sector is- Chain analysis we supported last year, will around 80 percent. So we know that good sues by contributing to the fact base. Of- hopefully help point to a reform path that quality jobs in the private sector, and ten, in the past, little progress could be will allow the average Cambodian firm ­ manufacturing in particular, can play a made on removing constraints for private most of which are small and related to ag- huge role to move people out of poverty. sector development because people riculture ­ to participate. Over the past decade growth has been strong. The garment sector has grown from around $20 million in exports to over $1.4 billion. But other sectors have not done so well, and so the benefits are not yet broadly based. The other role is de- livery of services like electricity, water, health-care education. The private sector provides many of these services, but this role can be improved. We've found that in most cases the private sector has not been engaged through competitive pro- cesses, so the key benefit of the private sector ­ its efficiency ­ has been lost. So there are many positive things to point to about the private sector, but clearly the best days have yet to come. Q ­ What are some of the main mes- sages of the study? Do you think people in Cambodia will be receptive and open to these messages? PHOTO: TANG CHHIN SOTHY A: Among the key measures we look A worker busy at his machine in a small private enterprise in Phnom Penh. at for Cambodia are total factor produc- would disagree, deny or blame others. Investment climate assessments are an tivity and labor productivity. Labor pro- The Government blamed the private sec- increasingly useful tool for the World ductivity, or high value added per worker, tor and the private sector blamed the Gov- Bank. Our former Chief Economist, Nick is what allows wages to be high. In order ernment. Progress couldn't be made be- Stern, visited Cambodia last year, and to move as many people out of poverty as cause it wasn't a factual discussion. We raised the question of the investment cli- possible, we need to help the government need the fact base to contribute to the mate with the authorities. This year the identify ways to increase the value added. quality and honesty of the dialogue. Two, World Development Report will focus on We found that in Cambodia the value we would like to help the Government de- investment climate issues. Our methodol- added is very low, much lower than China, velop its reform program ­ to examine the ogy is based on a firm-level survey (the and also lower than countries like questions and help prioritize what are the Productivity and Investment Climate Sur- Bangladesh and Pakistan. The paper ex- most important reforms that can increase vey) that includes a core set of questions plores why labor productivity is low, and productivity, broaden opportunities, and thatarecommonineverycountry. InCam- some of the main issues are corruption; strengthen the role of the private sector bodia we asked an experienced firm to first crime, theft, disorder; anti-competitive or from a service delivery standpoint. survey 500 firms in the five largest cities, informal practices by other companies that Q ­ Why do you think this study on the then200ruralfirmsand100intheinformal may gain an unfair advantage by not pay- private sector is needed in Cambodia? sector. Industries covered under the sur- ing taxes. There are too many inspections, A: The Government requested this vey include garment, agro-industry, wa- licensing requirements, and steps re- work because of its focus on reducing ter providers, construction, retail and elec- continued on next page poverty, which requires growth. Growth tricity providers. So we have a represen- March 2004 The World Bank Newsletter 3 quired to trade products. The survey also resulted in estimates of the share of firms that pay bribes and The school found that the level of unofficial, register- construction ing businesses is a key implediment. workers, hired These unofficial costs are mostly associ- ated with exporting and importing, regis- by the private tration businesses, getting construction sector, are permits, registering land and inspections building a new of all types. Firms react to all of these costs school in the by staying in the informal sector. The in- remote areas at formal firms are less constrained by prob- Preah Vihear lems faced by formal firms like corruption and excessive inspections, licensing, and province. registration. But you can't raise the value added on the basis of the informal sector. There are two more messages I would nored because of lack of clarity in the en- they will be shared even more widely. The like to highlight. vironment of contracting in private sec- World Bank andAsian Development Bank The first is on broadening and diversi- tor. Instead of using the legal environ- co-chair a donor working group of donors fying the economy. From a cost stand- ment, the people tend to find the loop- with programs of support in private sec- point, it looks like Cambodia has a com- hole and work around it, or instead get a tor development and trade. During a re- parative advantage in agro-industry. But signature from high level authority to pro- cent informal meeting of those donors, agro-industry is constrained by a lack of vide them some comfort. Around the severalexpressedsupport for the directions market-supporting institutions to support world, when we see direct contracting outlined in the report and would like to trade ­ in addition to the high cost of do- without competition, we see high prices see the recommendations incorporated ing business. There are insufficient link- and low quality of services. Tax payers into a shared donor program of assistance. ages between buyers and sellers, and no and service users are losing. So we think Thiswouldallowmuchmoreefficientcoor- institutions that would enable a rural the government and the people can get dination of donor effort in support of the agribusiness to find trade partners, to more from private sector participation by implementation of the Government's re- prove the quality of their products, to price improving the legal and regulatory envi- formprogram. their products competitively, or to resolve ronment for private participation. Q ­ What will yo do next? disputes that may arise. Q ­ How has the government reacted A: Now we have two studies in our The second message to come out from to the study? contribution to the Government's Pri- this relates to the participation of private A: The Government's reaction has vate Sector Development Strategy: sector in infrastructure. Many large deals been productive. There is broad consen- Value Chain Analyses and Investment lack transparency and competition because sus among all concerned that the prob- ClimateAssessment. The third part will of the unclear legal environment, institu- lems exist at some level and need to be look at private sector participation in in- tional overlap and a large number of pro- addressed in a cross-ministerial forum. frastructure. Those three reports will cesses and approvals that often get ig- The Government is preparing to take ac- complete the analytical phase. Over the tion. First, the Government arranged a next six months, we would like to pull high-levelmeetingbetweentheBankteam together the recent studies on the pub- and nearly all Ministries to discuss the lic sector, private sector, rural sector, le- report. Second, the Prime Minister issued gal and judicial reform, education and a Decision of the Royal Cambodia Gov- health, in order to provide an ernment on March 22nd that establishes overarching Development Policy Review a Interministerial Working Group for Im- on the sources of future growth. But proving the Investment Climate and Trade more importantly now we are beginning Facilitation. This Working Group has the the implementation phase. We are pre- task of proposing immediate measures to pared to support implementation of a reduce trade facilitation costs, reduce credible program of reforms produced duplication and simplify the process, re- by the Interministerial Task Force on duce the time required, and increase offi- Investment Climate and Trade Facilita- cial Government revenue. We will meet tion. Other donors are also prepared to again in sixty days to listen to what this join us in a coordinated, integrated pro- Working Group has proposed, and hope- gram. But, the ball is in the Government's fully incorporate the measures into a re- court. vised chapter on reforms. Let me close by saying that I've en- Q ­ Are you planning on discussing joyed this process tremendously, and am it with others, such as the private sector, excited by the process of analysis and donors, etc? mutual learning with the Government and A boy offers his goods in Phnom Penh A: We have consulted extensively at private sector. But today, we believe it is after school hours. each stage with the private sector and do- time to focus on implementation and re- nors and once the reports are finalized, sults. March 2004 The World Bank Newsletter 4 LETTER FROM READER We Welcome Your DearSir: students, and other people who want to Opinions and Comments I am a student at National Institute of enlarge their knowledge. Management and at the Institute of Foregn Iwouldliketoexpressmyappreciation Languages, at the Royal University of for your kindness and all the activities of We welcome your opinions, comments Phnom Penh. the World Bank in sharing and providing and questions. Please send them to: Bou I have read most publications of the information that is most valuable to the Saroeun,CommunicationsSpecialist,at World Bank, especially its newsletters, in public. 113NorodomBlvd.,PhnomPenh,email: its library in Phnom Penh, and I am very Yours sincerely, sbou@worldbank.org. We very much interested in those publications.All those appreciate your valuable assistance. publications are very important for me, Yuk Sothirith "ThisisCambodia",countryI'vereclaimedasmyhomeland continued from page 1 ents were my tour guides. We would pass by monks in their vibrant orange robes, na- ked children swimming in the creek, 50 peoplepiledinanIsuzupickuptruck,houses made of straw and mud, the faded glory of Angkor Wat and its surrounding temples, the prevalence of more mopeds than cars, a woman digging a ditch in her sarong and flip-flops, landmine victims at the Central Market,aneight-year-oldchildsellingcrack- ers at the beach, the resplendent palm trees and skinny cows grazing on dirt, the glass cases of skulls and bones at the genocide museum, a young Cambodian boy posing under a waterfall just for laughs. I was getting to know the country through these moving images. As we passed these scenes my father would say "This is Cambodia". It was as if by say- People piled into a pickup truck on a new road financed by the World Bank. ing these three words would explain all of Cambodia's beauty, darkness, humor, His daughter is 14 years old. She helps is on the road to recovery. If we work glory, and sadness. her mom make the ice cream, and the together to fight against poverty and I could see that Cambodia's struggles daily chores at home. School is an have continued support from the inter- lie in its past. During almost four years of hour's walk; she only attends when she national community, I predict a positive KhmerRougeregime,alltheinstitutionsof has the time and energy. future for my country " society (schools, hospitals, religion, librar- Despite the problems, most Cambo- One of the greatest experiences in ies, museums, banks, newspapers) were dians remain optimistic. Touring its cit- Cambodia was visiting the famedAngkor destroyed. It is estimated that between 1 ies and countryside, speaking my Khmer Wat. We woke up at 5:00 in the morning to 3 million people were killed; most were with an American accent, the consensus to see the sun rise over the temple. It educated men and women: teachers, stu- was that things are better than they used was the most amazing sight I had ever dents, doctors, nurses, engineers, monks, to be. People are able to travel to places seen, so magnificent, gracious and se- artists, musicians, journalists, and bankers. that were once Khmer Rouge strongholds rene. It was like going back in time. See- Now, after 29 years of civil war, Cam- and there is a steady decrease of ing Cambodia today, and looking over at bodia is still wrestling with its violent landmine victims. Angkor's glory, I wondered if Cambodia history as it tries to confront a tumultu- While in Cambodia I visited the World could ever rise and be that great again. I ous present. Many Cambodians are liv- Bank Cambodia country office and met hope that it will. ing on less than $1.00 a day. I met my Ms. NilVanna, a Social Development Spe- Catching glimpses of the city, coun- uncle for the first time in Takeo Prov- cialist.Shesaidshebelievesthatafterthree tryside,AngkorWat, meeting my relatives ince (45 minutes' car ride from Phnom decades of civil war, Cambodia is finally for the first time, talking with people about Penh). He lives in a hut that does not at peace. She believes that with peace their daily struggles and triumphs, gave have electricity or running water. He comes stability and opportunities. me a sense of Cambodia's bittersweet has an outhouse for a bathroom. He "We are able to pave roads to reach beauty; the timelessness of its culture, the works from 5am to 6pm bicycling over remote villages and provide them access repercussions of war and destruction, and 100 kilometers to sell ice cream for less to health care," Ms. Vanna said. "Mer- the indestructible spirit of its people. Per- than $2.00 a day. Though he is my chants are able to use these roads to haps my father summed it up best when father's younger brother, the years of sell goods. Children are able to attend he said "This is Cambodia", the country work have aged him faster than his time. school. Yes, Cambodia is behind, but it I've reclaimed as my homeland.