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Deals and DevelopmentThe Political Dynamics of Growth Episodes$

Lant Pritchett, Kunal Sen, and Eric Werker

Print publication date: 2017

Print ISBN-13: 9780198801641

Published to Oxford Scholarship Online: December 2017

DOI: 10.1093/oso/9780198801641.001.0001

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PRINTED FROM OXFORD SCHOLARSHIP ONLINE (oxford.universitypressscholarship.com). (c) Copyright Oxford University Press, 2021. All Rights Reserved. An individual user may print out a PDF of a single chapter of a monograph in OSO for personal use. date: 23 January 2022

Not Minding the Gap

Not Minding the Gap

Unbalanced Growth and the Hybrid Political Settlement in Cambodia

(p.129) 5 Not Minding the Gap
Deals and Development

Tim Kelsall

Heng Seiha

Oxford University Press

Abstract and Keywords

This chapter analyses patterns of growth in Cambodia. Over the past forty years, Cambodia has had one of the world’s most volatile growth experiences. A prolonged economic collapse between 1970 and 1982 was followed by a gradual but unstable recovery up until 1998, while post-1998 saw another growth acceleration and sustained high growth. While growth collapse can be traced to the failure of Prince Sihanouk’s post-independence political settlement, war, and the disastrous Khmer Rouge regime, growth acceleration and maintenance has been based on a political settlement which has created a balance between technocrats and rent-seekers within Hun Sen’s dominant coalition. Technocrats are given just enough latitude to support growth industries, while rent-seekers are given the political backing to generate profits, a proportion of which are funnelled to the masses through ruling party patronage projects.

Keywords:   economic growth, political settlements, deals environment, Cambodia, rent space

5.1 Introduction

Since 1960, many countries have experienced growth accelerations, but only a few have maintained growth. An adequate theory of growth must thus explain both how some countries kick-start growth, and how some maintain it over decades. For us, the key is to be found in the relationship between what we call the ‘political settlement’ (ongoing, formal and informal bargains between elites about how power should be organized and exercised) and the environment for business (the ‘deals environment’). Put simply, some political settlements create the possibility of a transition from disorder to order in the deals environment, and this creates a potential for accelerated growth. Of these, a smaller subset manages to maintain order while also permitting an increased openness of the deals environment, so that new firms can enter, innovate, compete, and structurally transform the economy (Pritchett and Werker, 2012; Sen, 2012).

Over the past forty years, Cambodia has had one of the world’s most volatile growth experiences. A prolonged economic collapse between 1970 and 1982 was followed by a gradual but unstable recovery up until 1998, while post-1998 saw another period of growth acceleration and sustained high growth. Policy observers such as the World Bank attribute Cambodia’s success to a combination of good geographical fortune, early demographic transition, a peace dividend spurred by opportune policy, and ‘hand-in-hand’ government–investor relations in key sectors, notably garments (Guimbert, 2010b). This (p.130) chapter subsumes these insights within a broader theory of political settlements, economic deals, and feedback loops, providing additional analytical leverage over the prospects for sustained growth.

We argue that while growth collapse can be traced to the failure of Prince Sihanouk’s post-independence political settlement, war, and the disastrous Khmer Rouge regime, growth acceleration and maintenance have been based on a political settlement which has created a balance between technocrats and rent-seekers within Hun Sen’s dominant coalition. Technocrats are given just enough latitude to support growth industries like garments, tourism, electronics, and rice, while rent-seekers are given the political backing to generate profits, a proportion of which are funnelled to the masses through ruling party patronage projects.

Through interviews conducted with government officials, industry experts, and firms in four economic sectors, we show that there has been a positive feedback loop between support for competitive export industries, state capacity, and structural transformation. However, there has also been a negative feedback loop from overreliance on high-rent industries, to insufficiently inclusive growth and political instability. At the time of writing, the political settlement that has underpinned growth and stability for the past fifteen years is facing a severe challenge.

5.2 Growth and Structural Transformation

Between 1970 and 2010, Cambodia averaged growth of 2.3 per cent per year (a figure which is almost exactly the same as for the United Kingdom) (see Figure 5.1). But while the UK’s growth has been steady and virtually uninterrupted, Cambodia’s has had a high degree of volatility. GDP per capita shrank at 6.2 per cent per year in the 1970s, falling from US$1,041 in 1970 to US$504 in 1982. In 1982, there was a period of growth acceleration, with per capita income growing at 3.8 per cent a year for the next sixteen years. Then in 1998 there was another acceleration, with per capita income growing at 6.5 per cent a year, taking it to US$1,892 in 2010 (Kar et al., 2013).

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.1. Growth episodes in Cambodia

Growth has been accompanied by structural change. Between 1995 and 2010 there was a shift from agriculture to the industrial sector (NIS, 2011) (see Figure 5.2). In 1995, agriculture accounted for 44.7 per cent of total GDP and 81.4 per cent of the labour force, while in 2010 its share had fallen to 27.4 per cent of GDP and 57.5 per cent of the labour force. Industry meanwhile had risen from 15.1 per cent of GDP and 16.3 per cent of the labour force, to 26.4 per cent and 27.4 per cent, respectively.

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.2. GDP by sectors (% of total GDP), Cambodia, 1995–2010

Source: National Institute of Statistics (2011).

Within industry, manufacturing has led the way, rising from 8.9 per cent to 20.5 per cent of GDP during 1995–2010, with construction the next most (p.131) important sector (see Figure 5.3). Textiles, wearing apparel, and footwear have been the most important categories, rising from 15 per cent of manufacturing in 1995 to 76 per cent in 2010. Services have also increased in importance, rising from 35.9 per cent of GDP and 2.3 per cent of the labour force in 1995, to 39.4 per cent of GDP and 15.1 per cent of the labour force in 2010 (NIS, 2011; and Figure 5.4). Much of this service sector growth has been driven (p.132) by tourism. Tourist arrivals were just 0.22 million in 1995, but by 2010 they were 2.5 million, with gross receipts totalling almost US$1.8 billion (Ministry of Tourism, 2012). There has been growth in telecommunications and banking too.

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.3. Share of industry in GDP in Cambodia, 1995–2010 (% of GDP)

Source: Asian Development Bank (2012a).

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.4. Employment shares by sectors in Cambodia, 1995–2010 (%)

Source: Asian Development Bank (2012a).

Despite the decline in its share in GDP, Cambodia’s agricultural output has also grown substantially. As Table 5.1 shows, paddy is by far the largest crop sub-sector, but cassava has also grown dramatically. Rubber is expected to increase more significantly in coming years as new investments reach maturity. There is also a growing amount of palm oil and sugar production.

Table 5.1. Crop production in Cambodia, 1995–2010 (1,000 tonnes)

Kind of crop





Food crops




















Sweet potato










Mung bean















Source: Asian Development Bank (2012a); Ministry of Agriculture (2011).

Note: Food crops consist of paddy, maize, cassava, and sweet potato.

Structural continuity and change is also reflected in the composition of Cambodia’s exports. In 1968, tropical agricultural products (mainly rubber), cereal, vegetable oils, cotton, rice, soy, and other products, accounted for around 75 per cent of exports. Twenty years later, these three categories still (p.133) accounted for 80 per cent of exports, although their absolute value had plummeted—from US$71 million, or 0.03 per cent of world trade in 1968, to just US$8.46 million, or 0.0003 per cent of world trade in 1988 (Figures 5.5 and 5.6; Hausmann et al., n.d.: 129).1 By 1995, however, the first signs of transformation were visible, with a shift to forestry products and manufactures. By this stage, more than a third of Cambodia’s exports were accounted for by wood in the rough, another 20 per cent by sawn wood or wood chips, and another 14 per cent by natural rubber, but now with garments, a new category, comprising around 20 per cent of total exports. Since 1995 the garment sector has continued to grow. The value of all exports, meanwhile, increased from US$8.46 million in 1988 to US$4.38 billion in 2008 (Hausmann et al., n.d.: 129).

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.5. Cambodia’s exports in 1974

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.6. Cambodia’s exports in 1989

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

As of 2008, Cambodia was the ninety-eighth most complex economy in the world, thirty places from the bottom (Hausmann et al., n.d.: 66). Overall, it showed the forty-seventh biggest increase in economic complexity of the ninety-nine countries for which (1964–2008) data are available. The increase in complexity between 1998 and 2008 was particularly impressive, however, besting 80 per cent of the field (Hausmann et al., n.d.: 83).

At the time of writing, Cambodia is experiencing another wave of structural transformation, with the arrival in the country of electronics and light engineering firms, transferring the most labour-intensive aspects of their production from higher-wage China and Thailand (Figure 5.7). Table 5.2 summarizes the main economic trends, in addition to anticipating the main points of the political discussion below.

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.7. Cambodia’s exports in 2013

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Table 5.2. Growth episodes and regime features in Cambodia: main characteristics


Regime and political settlement

Rents and product space

Deals environment

Growth episode

Political regime

Political settlement type

Main economic actors

Main exports

Nature of deals

Collapse (1970–82)

Lon Nol Republic

Competitive clientelism

State firms, concessionaires, importers

Rubber, logs

Semi-open, disordered

Khmer Rouge

Weak dominant party

State industry and agriculture

Cement, rubber

Centrally planned economy

Acceleration (1982–98)

Kampuchean People’s Revolutionary Party

Vulnerable authoritarian coalition

Agricultural cooperatives, small farmers, foresters, smugglers

Soy, rubber, logs

Closed, semi-ordered


Competitive clientelism

Timber producers, garment manufacturers

Logs, garments, rubber

Semi-open, disordered

Miracle growth (1998–2013)

CPP dominated

Dominant party with moderately strong internal and external factions

Timber producers, garment manufacturers, tourist operators, agribusiness, infrastructure

Garments, misc. printed matter, bicycles

Dependent on sector, but tending towards semi-open, semi-ordered

(p.134) (p.135) (p.136) (p.137) (p.138)

5.3 Politics of Economic Growth in Cambodia

To understand this pattern of bust and boom, we need to understand Cambodia’s politics. Cambodia has experienced five political settlements since 1970. The first two were characterized by economic collapse, the third by economic recovery, the fourth by continued but uneven recovery, and the fifth by exceptionally strong levels of growth. Each of these political settlements involved distinctive ways of doing business, or developments in the deals environment.

Our story starts in 1970, when Cambodia’s independence leader, Prince Norodom Sihanouk, was overthrown in a coup and replaced by General Lon Nol. For the previous five years Cambodia had been rocked by insurgency and economic decline, as Sihanouk’s political settlement unravelled under the pressure of the war in neighbouring Vietnam and a local insurgency, spearheaded by the Maoist Khmer Rouge. The coup was supported by Cambodia’s business community and the USA, and paved the way for a resumption of American aid, which Sihanouk had voluntarily renounced in 1963. The environment for business deals did not improve, however. The political settlement took the form of a game of musical chairs, in which Lon Nol presided over a rapid succession of governments in which politicians and their military allies took turns to feed at the trough of aid money. Meanwhile, insurgents occupied much of the countryside and productive assets were destroyed by bombing. Many investors left the country (Chandler, 1991; Slocomb, 2010).

Lon Nol’s regime surrendered in 1975, overrun by the Khmer Rouge. The political settlement in what was now called ‘Democratic Kampuchea’ took the form of a clique of intellectuals who used a mixture of ideology, coercion, and terror to maintain control over their party cadres and the wider population. This clique set about implementing an extreme leftist ideology inspired in part by China’s ‘Cultural Revolution’, the aim being to rid Cambodia of capitalist and imperialist influences and return it to ‘Year Zero’. They planned a structural revolution in agriculture, evacuating the capital, Phnom Penh, and sending its inhabitants to toil night and day on communal irrigation works and collective farms in the countryside. The market economy and even money were banned, replaced by central planning. To all intents and purposes, the deals environment ceased to exist. The effect was disastrous: although the irrigated acreage expanded considerably, rice yields, rather than tripling, halved (Chandler, 1991; Slocomb, 2010). Industry apparently fared slightly better, as after the initial evacuation, a limited number of workers and technicians were sent back to Phnom Penh to man basic industries (Slocomb, 2010). Indeed, figures show the Khmer Rouge period to be the apogee of Cambodia’s structural transformation (Figure 5.8). Given the generalized economic breakdown, however, these statistics are grossly misleading.

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.8. Economic complexity, Cambodia

Source: Atlas of Economic Complexity <http://atlas.cid.harvard.edu/>.

Note: The values are from Hausmann et al.’s (n.d.). Measure of Economic Complexity averaged over the period 1964–82, 1983–98, and 1999–2007, respectively.

(p.139) The Khmer Rouge was overthrown in January 1979 by the Kampuchean People’s Revolutionary Party (KPRP), a group of Khmer Rouge defectors and old-school socialists backed by Vietnamese troops. Heavily dependent on Vietnamese support, and opposed by the Khmer Rouge and certain former royalists, the first months were chaotic (Slocomb, 2010). Our data show the nadir of the economic crisis to be 1982. Thereafter, as the regime tightened its grip on power, the country entered a new economic phase, growing slightly for the first few years and then strongly for the next sixteen.

Characterizing the political settlement during this period is not straightforward. Evidence points, however, to the grafting of Vietnamese-inspired democratic centralism on to local power-sharing arrangements, often by means of force, at other times by means of turning a blind eye to local rent-generating practices.

Although officially a planned economy, this was never strong enough to extinguish the market, and would have perished were it not for the operations of private smugglers and the Chinese business community. At an early stage, certain members of the regime, young Foreign Minister Hun Sen included, recognized that by granting protection and privileges to such businessmen, (p.140) vital economic functions could be fulfilled and political advantage gained. Under this closed, semi-ordered deals environment, a modicum of political stability and economic growth was attained. By the late 1980s, Hun Sen was prime minister, the market economy had been legitimized, and key businessmen had become influential allies of the regime (Gottesman, 2004: 90; Slocomb, 2010).

Insurgency continued in pockets of the country, however, and the regime continued to feel vulnerable. After the fall of the Berlin Wall, an international solution became available. In 1990, Vietnamese troops withdrew and the warring factions in Cambodia signed a peace agreement, which, although short-lived, led to a ceasefire, a United Nations peacekeeping force, and a resumption of Western aid. The People’s Republic of Kampuchea (PRK) was renamed the State of Cambodia and then, after a return to constitutional monarchy in 1993, the Kingdom of Cambodia (Slocomb, 2010); the KPRP was renamed the Cambodian People’s Party (CPP).

Elections were held in 1993, pitting Hun Sen’s ruling CPP against FUNCINPEC (Front Uni National pour un Cambodge Indépendant, Neutre, Pacifique et Coopératif), a royalist party led by Norodom Ranariddh, Sihanouk’s son. FUNCINPEC won a majority in the election, but the CPP refused to relinquish power. The solution was a power-sharing government, with Ranariddh and Hun Sen first and second prime ministers, respectively. This structure was replicated throughout the government, with a FUNCINPEC minister and CPP deputy-minister, or vice versa, in every ministry. A party-centric competition for spoils was thus brought into the heart of the regime, a battle in which the CPP progressively gained the upper hand (Roberts, 2001).2

The environment for business changed post-1990, with renewed international recognition, foreign aid, and openness to the outside world. For the first time, the government made serious attempts to attract international capital and some foreign investment followed. Growth was patchy, however, not least because investors were confronted by a deals environment that had become unpredictable and disordered, thanks to a political settlement in which two political parties competed for ascendancy under the UN-brokered power-sharing deal.

The case of Ariston provides a good example. In what could have been Cambodia’s biggest investment deal of the 1990s, Ariston, a Malaysian (p.141) company, was scheduled to spend US$1.3 billion developing the Sihanoukville port, airport, and a power station. In return, it was to receive a monopoly over the casino sector, which it would use to help repay its investment. However, even after the company had begun making contractual payments to the government, the Casino Control Law failed to materialize. Apparently, the reason was that although the company had the strong backing of the first prime minister (FUNCINPEC’s Norodom Ranariddh), the CPP already controlled several existing casinos and so opposed the law. Ariston complained about ‘bureaucratic chaos’, the government failing ‘to honour its commitments’, and a ‘disorganized environment’ (Fitzgerald, 1996; Vittachi, 1996). Its criticisms echoed those of Finance Minister Sam Rainsy, who in 1993 had complained that economic administration was ‘confusing and irrational’. Cambodia was a ‘jungle economy’, in which foreign investors were subjected to ‘endless arbitrary contributions to people and institutions not legally entitled’ to collect (Burslem, 1993; Dodd, 1994; Hayes, 1993).

Further evidence comes from the forestry sector. As Slocomb notes: ‘From very early on its history, the PRK recognized the development of export industries as a life and death matter for the regime’ (Slocomb, 2010: 219), and by the late 1980s Cambodia’s forests were being heavily exploited (Gottesman, 2004; Le Billon, 2000; Slocomb, 2010). Powerful informal networks linking politicians, businessmen, and the armed forces grew up around timber exports to Thailand. This continued under the post-1993 power-sharing system, with both prime ministers linked to informal forestry networks. A plethora of other actors also struggled to get its cut, employing ‘red-taping, illegal logging, intimidation, kidnapping, and murder’. Foreign loggers paid bribes, bought illegal logs, or created ‘joint ventures’ with local leaders and businessmen (Le Billon 2000: 800).

Power sharing came to an end in 1997, when, following an attempt by Ranariddh to mount a Khmer Rouge-backed coup, the CPP won an armed confrontation with FUNCINPEC on the streets of Phnom Penh (Gottesman, 2004; Roberts, 2001). A year later the Khmer Rouge disintegrated and the CPP consolidated its power by winning the 1998 general election. Foreign investors appear to have welcomed this. Although the government lacked an overall majority and still governed in a coalition with FUNCINPEC, the latter was indisputably the junior partner. One investor expressed high hopes that Hun Sen would bring security, ‘the number one factor for foreign investment’, to the country, while for another, ‘In terms of business, not of politics, one prime minister is better than two’ (Eckardt, 1998).

Power consolidation paved the way for the increased foreign investment that Sam Rainsy had called for back in 1993. Rainsy himself had been sacked as finance minister in 1994; however, with the technical assistance of international donors, in particular the World Bank, at least some of the (p.142) strengthening in state capacity he advocated was continued. The principal effect was the 1994 Law on Investment, which created the Council for the Development of Cambodia, a sole and one-stop service organization ‘responsible for the rehabilitation, development, and the oversight of investment activity’. Foreign investors were provided guarantees against nationalization and price regulation, and permitted to own 100 per cent of their businesses. They were also provided with a variety of incentives, including a corporate tax rate of 9 per cent, tax exemption for up to eight years, non-taxation of remitted profits, import duty exemption for several types of industry, and permission to bring in foreign management, technical personnel, skilled workers, and spouses (Slocomb, 2010).

In the forestry sector, the centre imposed an increased degree of order over local anarchy (Slocomb, 2010). This involved granting timber concessions to large foreign investors and conducting a violent crackdown on illegal operators, including many thousands of rural poor who had eked out a living in the interstices of the previously anarchic system. The legalization process, which saw an increased proportion of forestry revenues flowing through the Treasury, ‘enabled Phnom Penh not only to further its own personal interests but also to consolidate its power at the local level by undermining “unruly clients”’ (Le Billon, 2000: 801).

In sum, 1998 marks the inauguration of a new political settlement, dominated by a CPP-centred coalition that has changed little over the subsequent fifteen years (see Figure 5.9). The settlement involves a balance between rent-seekers and technocrats within the inner circle of power. As we shall see, technocrats are given just enough latitude to support growth industries such as garments, tourism, electronics, and rice, leveraging a system of formal and informal investor channels that provide a positive feedback loop between growth and investments in state capacity. Rent-seekers (oknha) are given the political backing to generate profits, a proportion of which are funnelled back to the political elite, and thence to the masses in the form of CPP-backed patronage projects.3

Not Minding the GapUnbalanced Growth and the Hybrid Political Settlement in Cambodia

Figure 5.9. CPP’s growth and legitimation strategy, 1998–2013

Source: Author’s illustration.

The main beneficiaries of this patronage are CPP leaders, village development committees, pagoda committees, policemen, and, arguably, the Vietnamese community. Some also reaches farmers, workers, lower-level civil servants, monks, students, and soldiers. These latter groups are swing constituencies, (p.143) however. In 1998, 2003, and 2008, enough of them supported the ruling party to deliver CPP election victories—although not without a tough challenge on the first two occasions (Cock, 2011; Heder, 2005). In the 2013 general election, the opposition, led by the newly created Cambodia National Rescue Party (CNRP), was much stronger. CNRP was part of a larger challenger coalition comprising pro-opposition trades unions, media, the Teachers’ Association, and diaspora groups, with growing links to formerly excluded groups, such as the jobless and landless, some of whom had lost land to government-sponsored Economic Land Concessions (discussed in Section 5.4.2).4 CNRP even claimed that in the absence of widespread irregularities it would have won the poll, and subsequently organized a string of mass demonstrations, refused to join the parliament, and threatened economic strikes and boycotts (Ponniah and Chanrasmey, 2013). At the time of writing (early 2014), the standoff, which has potentially damaging consequences for Cambodia’s continued growth, had not been resolved. (p.144)

5.4 Evolution of the Deals Environment in Cambodia

We have seen, then, that Cambodia’s economic collapse in the 1970s was associated with a disordered or non-existent deals environment, first under Lon Nol and then the Khmer Rouge. In the 1980s, a degree of order returned under the PRK, and the economy began to recover. After 1990, however, UN-brokered power-sharing disrupted that order, so that even though the economy became increasingly open, economic growth was unstable. After 1998, with the consolidation of CPP power, the deals environment became both more open and ordered, and strong growth has been sustained. Important social groups have been excluded from that growth, however, and the political settlement of the past fifteen years is facing a stiff challenge.

This section draws on interviews with government officials, industry experts, and firms in four economic sectors, to provide more insight into these processes. We show that there has been a positive feedback loop between support for competitive export industries, state capacity, and structural transformation. However, there has also been a negative feedback loop from overreliance on high-rent industries, to insufficiently inclusive growth and political instability.

5.4.1 Magicians

The main driver of Cambodia’s growth and structural transformation in the post-1990 period has been the garment industry. Investors have been lured to Cambodia by the combination of political stability, cheap labour, an open investment regime, and preferential trade agreements with purchaser nations. A mixture of formal and informal institutions, meanwhile, has helped to resolve industry problems and injected increasing amounts of order into the deals environment.

For example, soon after the first investors arrived in Cambodia in 1994, they created the Garment Manufacturers’ Association of Cambodia (GMAC), which the government later instructed every firm in the industry to join. Then, in 1999, apparently at the initiative of the prime minister and with the assistance of the International Finance Corporation, the government established the Government-Private Sector Forum (G-PSF). This has been supported by a system of industry-specific and cross-cutting working groups, bringing together private-sector representatives and ministerial officials to solve industry problems.

Working together, this growth coalition has progressively simplified, streamlined, and made export procedures more transparent. The garment industry now has its own single-window export processing facility, where firms know the informal fees that need to be paid, and how much to pay to (p.145) expedite processing. The level of informal fees has also been reduced. As one informant said to us: ‘What we have in the garment industry currently is extremely efficient, transparent, predictable corruption’, a sentiment that was agreed to by all of our informants.5 At customs, previously under-the-table fees have even been formalized and publicized.

In addition to formal lobbying through the G-PSF, GMAC’s secretary-general will often intercede with government officials at different levels of the administration to resolve problems facing individual firms. GMAC also curries favour with the government in other ways, for example contributing rice or cash to provincial government ceremonies. Firms themselves also do quite a bit of this, as well as conducting other forms of informal lobbying, such as entertaining or playing golf with relevant ministers, especially when a political decision that might affect the industry is looming.

Not all is perfect, however. The main problem currently facing the garment industry is industrial relations. Cambodia has over 2,000 unions, and in most garment factories multiple unions are operating. As one informant said to us, ‘The government can’t control the unions’, while others complained that the government tended to pressure employers, but not unions, to comply with the Labour Law. This was particularly evident in 2013, an election year, when unions saw an opportunity to press home their advantage, and there was a large number of strikes (Aun and Dene-Hern, 2013). Nevertheless, foreign investment has continued to flow into Cambodia’s garmenting sector. It seems the level of industrial action is not sufficient to upset the country’s relative cost advantages, when wages in nearby Thailand and China are spiking.

State capacity-building around garments has had positive feedback effects for other export industries. According to one well-placed source:

We opened the road for many other exporting industries, we cleared the path really, clarifying certain issues…[the government] look[s] to us and says, ‘ok, this is being done for [the garment] industry and it should apply to other industries’. So we are really spearheading a lot of the trade facilitation that is being seen.

(p.146) For example, in the past few years, electronics firms such as Minebea, Sumitomo, and Hana have begun transferring the most labour-intensive aspects of their South East Asian operations to Cambodia. The pioneers have received strong encouragement from the Council for the Development of Cambodia (CDC), and benefit from a government-Japanese investor forum held at the CDC several times a year. The prime minister has also taken a personal interest in the industry, opening at least one electronics plant. The manufacturer we spoke to claimed to have good personal relations with ministers, with whom he could meet face to face, informally, to discuss industry problems. For example, he was lobbying on all fronts to try and secure a reduction in the electricity tariff for large users, to accelerate processing times for importing components through customs, and to reduce the number of signatures required to process exports.

Another industry in the garmenting slipstream is milled rice. With the release of the prime minister’s ‘Policy Paper on the Promotion of Paddy Production and Rice Exports’ in 2010, expanding exports of processed rice has been identified as a major goal in Cambodia’s ongoing structural transformation (Guimbert, 2010a; Royal Government of Cambodia, 2010).6 The policy aims to put Cambodia among the world’s top rice exporters, setting a target of one million tonnes by 2015. In 2011, the first Cambodian Rice Forum was staged and, following the G-PSF that year, a new technical working group for rice was created. Spurred on by the policy, many existing rice millers have upgraded their plants and some new investors have entered the industry (Rann, 2013). Since then, a number of measures have been taken to assist rice exports, for example, concessions on the importation of machinery, new certificate of origin and phytosanitary documents, and a single window for export facilitation at the CDC. The government has also had some success in concluding deals for Cambodian rice with foreign governments.

Exports have risen exponentially as a result, but further dramatic expansions will be required to meet the 2015 target. This will involve overcoming additional challenges of quality, marketing, costs, and finance. Focusing only on the last two, Cambodian millers currently lack sufficient finance to purchase what rice there is available, meaning that much still flows out of the country in unprocessed form. Costs are another issue. Currently, Cambodian rice is competitive in price when it leaves the farm gate, but high transport and electricity prices mean that by the time it leaves the country it is more expensive than rice from neighbouring Vietnam.

The combination of formal and informal lobbying that is characteristic of the garment sector also applies to rice, but the government has arguably been (p.147) slower in responding to industry demands than it has in the case of garments. There are a number of factors behind this. To begin with, the coordination problems affecting rice are arguably more challenging than for garments. Personalities are also important. As one rice industry representative said: ‘Some ministries are good, some are not. Much depends on the minister. If the minister is pushing, it is ok; if not, nothing happens. It is not always easy to get a ministry to reform or streamline its procedures.’7 Third, while the garment sector is dominated by expatriates, the majority of rice millers are Cambodian. As a result, their entwinement in local politics is probably greater. Recently, the prime minister has encouraged some of the country’s biggest tycoons to enter the sector. Indeed, there have recently been moves to integrate Cambodia’s various rice industry associations into a single body, chaired by the son of a deputy prime minister. Whether the increasing closeness of the CPP and the rice industry will enhance the growth coalition behind it, or make it more prone to predation, remains to be seen.

5.4.2 Rentiers

As we saw in Section 5.2, one of the first industries promoted by the regime after the fall of the Khmer Rouge was forestry, and today the large-scale exploitation of forest resources and tropical agricultural products continues. Most large-scale agro-forestry takes place on what are called Economic Land Concessions (ELCs). According to some non-governmental organizations (NGOs), since 2000 Cambodia has granted more than two million hectares in ELCs to more than 200 firms. Around 28 per cent of that area is held by CPP senators Lao Meng Khin, Mong Reththy, and Ly Yong Phat, together with An Marady, another tycoon (Vrieze and Kuch, 2012).8

The deals environment in which this takes place is best described as semi-open and semi-ordered, but without a level playing field. To grasp this, one needs to understand that ELCs are granted by the Ministry of Agriculture, Forestry, and Fisheries (MAFF), and must also be approved by the Ministry of the Environment. Although the ministry is supposed to allocate ELCs according to the principle of spatial planning—identifying suitable blocs of land for development, advertising them, and then awarding the concession to the best or highest bidder—in practice, it responds to requests from investors who have already identified blocs of land. There appear to be two main routes to acquiring land from MAFF. One is to approach the ministry directly or (p.148) through an agent, following its procedures, and paying its informal fees, so as to acquire the land desired. Another is to induce political connections in the Council of Ministers (Cambodia’s cabinet), to put pressure on MAFF. Investors who pursue the first route are at some risk of having their concession grabbed by someone pursuing the other. We spoke to one investor who had lost money because ultimately his agent could not deliver, a fact he attributed to insufficiently strong political connections. Another investor, however, claimed that as long as one was careful and exercised due diligence, political connections were not necessary.

Once acquired, investments appear to be semi-secure. Cambodia’s land law currently lacks clarity, and much land has multiple claimants. Investors often find themselves embroiled in conflicts with local communities, NGOs, or other investors, and have to be able to play the game of local politics: ‘You have to work both ends simultaneously and you have to be on the land, developing it, otherwise someone else will occupy it. You can’t be an absentee landlord here.’ The same source had suffered encroachments by a powerful local tycoon, whom he claimed had falsified land documents.9

Perhaps the biggest constraints on success are operational, rather than political. Given prevailing human resource constraints in Cambodia, managing a large agribusiness venture is risky. Agriculture and agro-industry has its own technical working group in the G-PSF, chaired by land magnate Mong Reththy, and one of our sources credited the latter with doing a great deal to smooth the way for agribusiness in Cambodia. Yet, aside from making land available and opening up the countryside with road-building projects, it is not clear that the government is actually providing much support.

Although the government claims that the agro-export sector will create employment and reduce poverty, currently the reverse appears to be true, with claims that over 400,000 people have been displaced or involved in land conflicts since 2000 (Vrieze and Kuch, 2012). In fact, it is possible to identify a negative feedback loop between agro-exports and the entire possibility of growth maintenance. Not only does the land sector provide a source of easy rents for the political class, obviating the need to focus on more dynamic growth industries, it has created a political backlash that endangers political stability. The government has belatedly recognized this fact, and in May 2012, shortly before commune council elections, the prime minister announced a moratorium on ELCs (Zsombor and Aun, 2012).10 Consequently, the deals (p.149) environment in the large-scale agro-export sector is now closed. Whether it will open again, and whether when it does so it will be any more ordered or open to all-comers than hitherto, is difficult to know at this stage.

5.4.3 Workhorses

Competitive domestic industry in Cambodia is dominated by small and medium enterprises (SMEs).11 The deals environment here is best described as semi-ordered and relatively open. We spoke to a number of successful SME operators in the retail, tourism, construction, and Internet businesses. Most of our informants were quite young, and had been given a start in business by their parents, especially through education. The main constraints on their businesses included taxes, the high cost of credit, electricity, and human resources. Some also complained of unfair competition, either from foreign or unlicensed businesses, but political interference was not regarded as a major problem. The regulatory environment and the corruption that accompanied it was described as ‘a bit confusing’, with most SMEs facing a less transparent and predictable set of arrangements than, for example, the garment industry. However, this was regarded as a nuisance, rather than unmanageable.

Currently SMEs are registered with a variety of government ministries, with no overall body coordinating them. At the Ministry of Industry, Minerals, and Energy, there has been for several years a Small Industry Department, with about thirty employees, but we were told that it lacked political clout. It had had some success setting boundaries and coordinating inspection regimes between ministries, but more ambitious attempts to reduce small business registration costs by introducing a single window have lacked buy-in from other ministries. One informant argued that the problem is that SMEs lack connections to the top political leadership, who prefer to push for large-scale agro-industrial development. Although some small businesses are represented by bodies such as the Young Entrepreneurs’ Association, or the Federation of Small and Medium Enterprises (FASMEC), which co-chairs the SME subcommittee of the manufacturing and SME working group at the G-PSF, vast swathes of the sector are unrepresented. Partly in consequence, SMEs face serious problems accessing finance, building capacity, and upgrading production.

(p.150) We also conducted interviews with small-scale rubber planters, of which there are around 20,000 in Cambodia. The planters receive some technical support from the government’s General Directorate of Rubber, and the Agence Française de Développement is supporting farmers’ associations. Nevertheless, the farmers complained about their relations with processors and traders, some of the technical advice they received, and the difficulties they experienced upgrading their production. Although small rubber remains profitable and a potential source of poverty alleviation, the growth coalition behind it appears weak.

5.4.4 Powerbrokers

Monopolistic or semi-monopolistic areas of the domestic economy include: electricity and water supply; concessions to manage and operate heritage sites, tourist attractions, and casinos; and rail transport and domestic air transport. In addition, government sometimes awards contracts to private companies for major infrastructure projects, such as power, roads, airports, ports, and special economic zones. There are also a number of large urban development projects either recently completed or underway in Phnom Penh. Other large domestic industries include banking, telecoms, brewing, and petrol supply, all of which are dominated by a few large players, with a smattering of smaller operators. Prominent in most are the biggest Cambodian tycoons or oknha, large East Asian foreign companies, or both. The business environment in this sector appears to be semi-ordered and semi-open, although there are some interesting sub-trends.

Probably the most important sector is urban real estate, with Phnom Penh in particular home to several developments worth many hundreds of millions of dollars. Although most of these lack transparency, NGOs claim that land has been acquired at a fraction of its market value, providing an opportunity for large rents to be made. The kinds of legal ambiguity we saw for the ELC sector also apply in urban areas, but, as is the case there, this has done little to deter investment projects. For those with political connections, land and project approval appears relatively easy to obtain. It is also probably the case that those without political connections can easily acquire them as long as they have money (Sahmakum Teang Tnaut, 2012).

Because most land in the city is already occupied, projects have sometimes been delayed by conflicts, but developers do seem to enjoy the consistent support of state authorities. The most obvious case is Boeung Kak Lake, where more than 4,000 families have lost their homes to the Chinese-backed Shukaku company. Shukaku is associated with the wife of the CPP senator, Lao Meng Khin, said to be personally close to the prime minister’s family, as well as being one of the biggest financial contributors to the CPP (So, 2010). (p.151) Boeung Kak, however, is just the tip of the iceberg. NGOs estimate that more than 10 per cent of the capital’s population has been evicted over the past two decades, with most moved to woefully inadequate relocation sites on the outskirts of the city (Sahmakum Teang Tnaut, 2012).

Another important area of the domestic high-rent economy is infrastructure projects, many of which suffer from a lack of regulatory oversight and transparency. A case in point are public–private partnerships, of which a great number, some quite large, are being implemented. According to the Asian Development Bank, public–private partnerships ‘are not standardized, and they tend to be issued on a reactive, unsolicited, and negotiated basis, rather than through proactive government preparation and competitive tendering’ (Asian Development Bank and Agence Française de Développement, 2012: xi). In this context, there are fears that some of the larger hydropower projects, undertaken by partnerships between Chinese companies and local tycoons, have saddled the government with excessive contingent liabilities. Specialists suspect that procurement practices generally suffer from rigged specifications, limited publicity, collusion, kickbacks, and falsification of key information (Asian Development Bank, 2012b).

The sector we looked at most closely, telecommunications, appears by contrast to have transitioned from a fairly ordered but closed environment, to a much more open but disordered environment. The mobile industry dates from the early 1990s, with Mfone starting in 1993, Hello in 1996, and Mobitel in 1997 (Kierans, 2010). These three players, described by a rival operator as ‘a kind of cartel, with poor service and high charges’, dominated the market until 2006. After Cambodia’s accession to the World Trade Organization (WTO), however, the Ministry of Posts and Telecommunications came under pressure to open the industry, and responded by issuing at least eight new licences. By 2009, there were nine mobile operators, making Cambodia one of the most crowded markets in the world (Kierans, 2010).12 A price war ensued, accompanied by suspicions of price dumping, threats of legal action, and blocking of interconnects (Finch and Nguon, 2009).13

Shortly thereafter, the government decided to intervene by setting a floor price. However, new entrants argued that price-floor regulation was contrary to Cambodia’s Investment Law and Constitution, as well as regional norms, and the regulation was not enforced.14 Fierce competition continued and market consolidation ensued (Renzenbrink, 2013). The government again (p.152) attempted to impose a price floor in April 2013, but again backed down (Kunmakara, 2013; Reuy and Renzenbrink, 2013). Since the biggest operators are said to have links to the inner circle of power, allegations of improper political influence were traded back and forth, with the truth of the matter somewhat difficult to discern. What is clear is that all operators dislike the uncertainty surrounding the rules of the game, and are investing less than they otherwise would. According to one operator, ‘You can’t invest if it’s impossible to make money’, while for another the price-floor decision led to ‘an immediate revision of our investment strategy’.

Despite what one investor described as the ‘Wild West’ environment for business, the bigger operators have continued to make investments in infrastructure and innovative products, and the industry has grown.15 However, the disordered nature of competition has doubtless constrained the nature and level of investment, meaning that the expansion of an industry with many positive externalities has been far from ideal. All our informants consequently expressed a desire for better and more transparent regulation, claiming that the current regulator—the Telecommunication Regulator of Cambodia—lacked technical capacity and was neither neutral nor independent.

The telecommunications industry thus provides a curious twist to our deals environment tale. Closed and relatively ordered in the 1990s, as we would expect such a sector to be, WTO accession had thrown the sector open. The precise form of this openness, however, has been conditioned by a mixture of rent-seeking in the Ministry of Telecommunications, personal links between industry owners and the inner circle of power, and the desire of CEOs for a more predictable and transparent deals environment.

5.5 Political Dynamics of Growth Maintenance

We have seen that the consolidation of Hun Sen’s political settlement post-1998 has helped maintain high growth for the past fifteen years. But can this growth be sustained? The deals and development framework hypothesizes that maintaining growth requires that the deals environment, as well as remaining relatively ordered, must become progressively more open, and be buttressed by increasingly sophisticated state capabilities. It also predicts that growth in competitive sectors creates positive feedback loops for the deals environment generally, while growth in less competitive sectors can create negative feedback loops.

(p.153) We have found some evidence of positive feedback loops from growth in garments, to increased state capacity, to investment in new industries such as electronics. Hun Sen has long been a champion of the free market, and this fact, combined with WTO membership, means that just about every economic sector in Cambodia remains at least semi-open. Although well-connected rent-seekers tend to be given the first and best pieces of the economic pie, it is relatively easy for newcomers with money to acquire political connections, and in some cases it is not always necessary to have political connections at all. New entrants create competition and in some cases fuel growth, meaning that, from a purely technical point of view, the prospects for sustained growth appear good.

Negative feedback loops do exist, however. First is a negative loop from unsolicited tendering and inadequate regulation, to inefficient energy and infrastructure, which acts as a constraint on other industries. Second, there is also arguably a negative loop caused by the steady flow of easy rents to the political class in areas such as land and urban real estate, which generates a certain amount of complacency when it comes to building capacity in more dynamic industries. As we have seen, the coalition behind garments has been quite effective, but even it suffers from inadequate regulation of industrial relations.16 The coalition behind milled rice has also achieved some success, but is not strong enough to loosen all the binding constraints on growth. SMEs, meanwhile, receive little support from government and are more or less left to fend for themselves in a confusing, if not completely hostile, business environment.

Third, there is a negative feedback loop from the character of Cambodia’s growth to its political stability. As we have seen, ELCs and large-scale urban developments have generated large economic rents for the political class and connected businessmen, a significant proportion of which have been ploughed back into rural communities in the form of patronage spending.

For a long time, it could have been argued that this less palatable side of Cambodia’s growth was actually a key pillar of the political settlement and hence the whole system’s stability. But this is no longer the case. Land acquisitions have hurt the livelihoods of a significant number, and also appear to have damaged the image of the government in the eyes of an increasingly youthful and politically motivated electorate. In the 2013 election, the opposition ran on a populist platform that included a US$150 per month minimum wage, pay increases for teachers and civil servants, a review of economic land concessions, and pensions for the elderly. The election outcome suggests that (p.154) a significant proportion of the population prefer this to the government’s patronage policies. Indeed, a high-ranking technocrat confided in us that: ‘We knew there was a gap developing, but we didn’t think we would need to address it until 2018—we thought we could get another five years of growth first.’17

If Cambodian growth were entirely determined by domestic political forces, then, we would say at this point that it hangs in the balance, and is possibly even tipping towards deceleration. In reality, however, Cambodian growth is also shaped by powerful neighbourhood effects. Despite continuing frailties of state capacity, industrial relations problems, and political unrest in 2013, investors continued to flock to the country, driven by price changes in Thailand and China. In 2014 and 2015, GDP growth remained at 7 per cent or more. There is no room for complacency, however. So long as the conditions that led to political crisis remain unresolved, the re-emergence of unrest seems likely at some point. Were that to coincide with a less favourable set of external conditions, Cambodia’s growth could rapidly come off the rails.

5.6 Conclusion

Cambodia’s growth experience is somewhat remarkable internationally, being characterized by an extreme collapse, followed by a lengthy and accelerating recovery. The details of this recovery provide general support for our hypothesis that growth accelerations are facilitated by political settlements that can oversee a shift from disorder to order in the deals environment, and are maintained via a progressive opening of the deals environment, with a positive feedback loop between competitive export industry, ideology, and state capacity.

However, Cambodia’s growth experience has had two faces, and its less progressive side also provides support for the idea that a political elite which depends for its survival on high-rent industries is likely to prove complacent when it comes to building state capacity in more dynamic areas, bringing us to the crossroads at which we presently find ourselves.

The Cambodia case also points to a number of refinements of our theory. To begin with, as a small country, Cambodia’s growth has been heavily influenced by external factors. For example, despite continuing frailties of state capacity and recent industrial relations problems in the garment industry, investors continue to flock to the country, driven by price changes in Thailand (p.155) and China. Were Cambodia located in landlocked Africa rather than coastal South East Asia, the story would be rather different, we suspect. Consequently, the external environment or ‘neighbourhood effects’ should probably acquire the status of a variable in our model.

Second, Cambodia highlights the importance of electoral feedback loops. While the state is arguably doing just enough in terms of state–business relations to keep high growth on track, inattention to the character of growth, in particular perceptions of a widening gap between rich and poor, together with an increasingly youthful and educated electorate, has sparked a political backlash. This has come even in the face of quite impressive progress, according to official statistics, on poverty reduction and the Millennium Development Goals.

This electoral feedback could have either positive or negative implications for growth. On the one hand, it creates pressure for reforms, for example a more transparent and competent bureaucracy and a more open regulatory environment, which our model predicts will be necessary to keep growth on track in the medium and long term. On the other hand, very serious political instability would probably deter investment and growth. In mid-2016, the strikes and mass demonstrations of late 2013 and early 2014 have cooled, with the CPP engaged in a game of cat and mouse with the opposition. Investment remains fairly robust. Nevertheless, there is a sense that the threat of major political instability has merely been deferred rather than satisfactorily addressed. Whatever the eventual outcome, it seems that electoral feedback and popular action should play an elevated role in our model.

Another potential refinement stems from the fact that our model is currently based on there being a clear difference between rent-seekers in the natural resource sector and magicians in competitive export sectors such as garments. However, it is not obvious to us that a garment manufacturer relocating their operation from China to Cambodia in search of cheap labour and preferential trade arrangements (which function somewhat like rents) is doing anything more miraculous than an investor trying to make an honest buck in the sustainable teak or palm oil industry (in fact the latter may be more difficult to make profits in and thus require greater experimentation and innovation in the production process). Thus the model may benefit from a rather more nuanced appreciation of the relationship between economic sectors and the nature of investors therein.

Fine-grained analysis of sectors also suggests that making generalizations about the deals environment for the entire country is difficult. It is different for different sectors, and for different subgroups of investors within sectors, at any point in time. Without clear metrics for identifying and measuring the nature of the deals environment, assessing the overall direction of change is challenging.

(p.156) Finally, it is worth noting some of the anomalies generated by the way in which economic complexity is calculated. As we saw in Section 5.2, our analysis currently depicts Democratic Kampuchea as the acme of economic complexity in Cambodia, when any sensible reading of the data suggests the opposite is in fact the case.



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(1) The Atlas of Economic Complexity records trade in goods, but not services.

(2) Citing Ashley, ‘rather than depoliticizing a one-party state (controlled by the CPP), power sharing…created two separate and competing party states operating within every ministry, province, military command and police commissariat. Instead of working with their counterparts from the other party, officials from the prime ministers’ level down conducted business with their party clients and colleagues. [This has] served to weaken the state by building and reinforcing parallel structures of personal and party authority, operating both within and outside the state’ Roberts (2001: 129).

(3) According to Ear (2011), ‘The title of “oknha” comes from Cambodia’s peerage system and is bestowed by His Majesty the King. It is designated for individuals whose “Contributions [to national reconstruction] values in excess of $100,000”. The title of oknha is the preserve of businessmen interested in formalizing their relationship with the state (and by extension the CPP). As of April 2008 there were officially 220 oknha of whom less than ten were women.’ See also Hughes and Conway (2003); Pak (2007); Un (2005: 203–30); and Hughes and Un (2011: 1–26).

(4) See among others Roberts (2001: 32–4, 116–17) for the significance of patronage in Cambodian socio-political relations.

(5) To quote an industry representative at length: ‘for businesses we are in a very good position…we’ve moved from real corruption per se [in 2002], where you don’t know how much to pay, you don’t know who to pay to, or what service you’re going to get in return, it’s murky…and over the years we’ve worked on clarifying that, and lowering the amount of money to the extent that today we have a very highly transparent but corrupt system in that the payments are informal…they don’t go through the government…but it’s highly transparent. To the private sector we don’t really care if it’s formal, well, we would like it to be formal because then we get receipts for it, but what we really want is service…as long as we get the service we were promised.…[Now] we can always pay for express, whereas in a really rigid system that might not be available…we are undergoing the process of having the system formalized, and it’s a natural, painful process, and we may go backwards before we go forwards, but I think it’s necessary, it will take two, three, four, five years.’

(6) For an earlier account of the rice industry, see Ear (2011).

(7) Another senior technocrat explained to us that he was battling vested interests in the government every day to try and push through reforms.

(8) The government, meanwhile, puts the figure at 1.2 million hectares granted to 118 agro-industrial firms, including twenty-eight Chinese and twenty-seven Vietnamese companies.

(9) Hughes and Un (2011: 9) note that both productive and speculative investment in land ‘reflect a certain level of confidence in Cambodian institutions, either formal or neo-patrimonial’.

(10) The government has also granted numerous concessions for mineral exploration and is developing a small oil industry. Although data on these industries are scarce, analysts have predicted that they are likely to cement inequality, elite self-enrichment, and truncated democracy (Un and So, 2009).

(11) According to the preliminary results of the 2011 economic census, there are about 505,000 firms employing between one and one hundred workers each (NIS, 2011). SMEs involved in ‘wholesale and retail trade, repair of motor vehicles, and motorcycles sector’ comprised the largest proportion of establishments (58 per cent), followed by those dealing in the ‘manufacturing sector’ (14 per cent), and ‘accommodation and food service activities sector’ (14 per cent) (NIS, 2011). There are also estimated to be around nine million peasant farmers (Ear, 2011).

(12) Our informants presumed that greed and corruption were at least partly responsible for the issuing of so many licences.

(13) There were disputes among our informants about whether or not these prices were regionally out of line.

(14) The truth of the matter is complex, since a couple of months after issuing Prakas 232 the Royal Government issued Notice 145, which permitted ministries to set a floor price.

(15) Interviews, October 2013.

(16) Ear (2011) argues persuasively that international actors, in particular the International Labour Office, have been instrumental in solving collective action problems and cementing the growth coalition behind garments, with no equivalent body playing that role in rice.

(17) Another senior technocrat, however, rejected the idea that economic performance was responsible for the election result, claiming that the living standards of ‘98 per cent’ of the population had improved under the last government. (Interview, August 2013.)