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Macro - Poverty and Inequality in Cambodia
Macro - Poverty and Inequality in Cambodia
. This publication presents some of the principal findings from the UNDP's Asia-Pacific Regional Programme on The Macroeconomics of Poverty Reduction. DISCLAIMER The responsibility for opinions in this publication rests solely with its authors. Publication does not constitute an endorsement by the United Nations Development Programme or the institutions of the United Nations system.
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IN CAMBODIA
Melanie Beresford Nguon Sokha Rathin Roy Sau Sisovanna Ceema Namazie
MARCH 2004
Contents
Contents.............................................................................................................................................................................4 List of tables......................................................................................................................................................................7 List of figures....................................................................................................................................................................8 Abbreviations...................................................................................................................................................................9 Special Message............................................................................................................................................................11 Preface..............................................................................................................................................................................12 Summary of the report...............................................................................................................................................14
4. Rates and changes in inequality......................................................................................................................38 4.1 The distribution of consumption..........................................................................................................38 4.2 Functional distribution.............................................................................................................................40 5. Levels and changes in the distribution of productive assets.................................................................44 5.1 5.2 5.3 5.4 Land.................................................................................................................................................................45 Other Assets..................................................................................................................................................46 Asset Markets...............................................................................................................................................46 The credit market........................................................................................................................................47
6. The Demographic Challenge............................................................................................................................48 6.1 The impact of the baby boom................................................................................................................48 6.2 Internal Migration.......................................................................................................................................49 7. Poverty and the rural economy........................................................................................................................50 8. Conclusion...............................................................................................................................................................52
2.1 Sectoral pattern of growth......................................................................................................................62 2.2 Financing of growth...................................................................................................................................65 3. Recent focus of macroeconomic policies.....................................................................................................67 3.1 The donor perspective..............................................................................................................................67 3.2 Implementation in Cambodia................................................................................................................68 3.3 An alternative perspective.......................................................................................................................69 4. Conclusion...............................................................................................................................................................75
4. Costs and Benefits of Dollarization for Economic Development and Poverty Reduction.............95 4.1 Advantages of dollarization....................................................................................................................95 4.2 Disadvantages of dollarization..............................................................................................................96 5. Dollarization and Cambodia's Foreign Trade ...........................................................................................100 5.1 Implications for exports.........................................................................................................................101 5.2 Implications for imports.........................................................................................................................103 5.3 Policy implications...................................................................................................................................105 6. The Choice of Monetary System....................................................................................................................106 6.1 Dollarization as an interim measure..................................................................................................106 6.2 Steps toward de-dollarization.............................................................................................................107 6.3 Policy implications...................................................................................................................................109 7. Conclusion............................................................................................................................................................110
4. FISCAL POLICY......................................................................................114
1. Introduction.........................................................................................................................................................114
2. The macro-fiscal situation: an overview.....................................................................................................115 2.1 Institutional and macroeconomic strategic initiatives: fiscal components.........................117 3. Analysis of Cambodia's Fiscal Stance...........................................................................................................124 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Domestic resource mobilization.........................................................................................................124 Dependence on donor finance............................................................................................................127 Costs associated with the chosen strategy......................................................................................128 A form of Dutch disease.........................................................................................................................132 Fiscal benefits from civil service reform............................................................................................133 Additional payments to civil servants by donors..........................................................................135 Disbursement of resources...................................................................................................................135
5. TRADE LIBERALIZATION......................................................................144
1. Introduction.........................................................................................................................................................144 2. Review of policy to date...................................................................................................................................145 3. Impacts of trade liberalization.......................................................................................................................147 3.1 3.2 3.3 3.4 3.5 Structure of exports.................................................................................................................................149 Employment impact................................................................................................................................156 Enclave development.............................................................................................................................159 Value added................................................................................................................................................159 Impacts of liberalization on import growth....................................................................................160
4. Developing Cambodia's Exports Further...................................................................................................163 4.1 Potential for future growth of exports..............................................................................................163 4.2 Where are the major constraints?.......................................................................................................168 5. Conclusion: policies for growth and redistribution under trade liberalization.............................171
6. FINANCIAL LIBERALIZATION...............................................................172
1. Introduction.........................................................................................................................................................172 2. Financial Sector Reform in Cambodia.........................................................................................................173 2.1 Transformation of structure and function.......................................................................................173 2.2 Legal infrastructure..................................................................................................................................175 3. Banking Sector Development........................................................................................................................176 3.1 Structural reform of the sector.............................................................................................................176 3.2 Liberalization of interest rates..............................................................................................................178 3.3 Present structure and performance of Cambodia's banks.........................................................181
4. The Structure and Performance of Rural Finance....................................................................................182 4.1 4.2 4.3 4.4 Regulation and supervision..................................................................................................................183 Sources of rural financial services.......................................................................................................184 Demand for rural financial services....................................................................................................188 Savings mobilization...............................................................................................................................189
5. Conclusion............................................................................................................................................................190
7. PRIVATIZATION....................................................................................192
1. 2. 3. 4. 5. Introduction.........................................................................................................................................................192 The Foreign Trade Bank....................................................................................................................................193 Rubber plantations............................................................................................................................................194 Privatization of land and common resources...........................................................................................195 Conclusion............................................................................................................................................................197
List of Tables
1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 2.1 2.2 2.3 2.4 2.5 2.6 3.1 3.2 3.3 Cambodian head-count indices...............................................................................................................29 Early childhood mortality rates.................................................................................................................31 Population aged 25 or more by educational level..............................................................................33 School enrolment by consumption quintile and region, 1997......................................................34 Male and Female enrolment rates, 1997................................................................................................35 Consumption inequality profile...............................................................................................................39 Contributions of income from different sources, 1999.....................................................................40 Main source of income of household heads in previous year by size of landholdings (%)........................................................................................................................41 Composition of employment (%) by sector of primary employment and sex, 1993/4 and 1999...........................................................................................................................42 Distribution within households by labour-force category and sex 1999...................................43 Distribution of employees by type of employer and sex, 1997 and 1999..................................44 Rural Distribution of Assets and Income................................................................................................46 Migrants from rural areas 1996 and 1998..............................................................................................49 Rice production trends................................................................................................................................51 Employment by sex.......................................................................................................................................59 Annual average growth rates and shares of real GDP by sector 1999-2001..............................62 Sectoral contributions to growth 1993-2001.......................................................................................63 Employed persons 10 years and over, 2000..........................................................................................64 Investment share of GDP 1993-2001 (%)...............................................................................................65 Balance of payments 1994-2001..............................................................................................................66 Evolution of Foreign Currency Deposits, 1990-June 2002...............................................................82 Interest Rates on Riel and USD Deposits................................................................................................86 Bank Reserves, 1993-2001..........................................................................................................................88
3.4 3A.1 3A.2 3A.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 6.1 6.2 6.3 6.4
Estimated Seigniorage Loss for the Year 2001.....................................................................................98 Cambodia - Monetary Survey, 1993 - 2001.........................................................................................112 Cambodia - Exchange Rates, 1990 - 2001...........................................................................................113 Cambodia - Inflation, 1994 - 2001..........................................................................................................113 Macro-fiscal statistics 1993-2002...........................................................................................................115 Cambodia Revenue GDP ratios 1991-2002 (%).................................................................................116 Key macro-fiscal forecasts 2003-2005..................................................................................................121 Baseline and allocable ceilings 2003-2005.........................................................................................122 GDP expenditure shares (current and domestically financed capital expenditure as per cent of GDP) and sector shares in current expenditure...........................122 Functional classification of government current expenditure 1994-2002..............................129 Monthly figures for key fiscal heads, Financial year 2001..............................................................137 Evolution of Trade Policy...........................................................................................................................146 Merchandise Trade, 1994-2002..............................................................................................................148 Merchandise Trade of Exports, 1994-2001, % distribution...........................................................149 Exports by commodity, 1993-2001.......................................................................................................152 Exports and Imports of Milled Rice, 1995-1999................................................................................154 Tourism, 1995-2002....................................................................................................................................155 Key Indicators for the tourism industry, 1995 & 2000.....................................................................158 Merchandise import trade, 1994-2001, % distribution..................................................................161 Import and Export Cost Comparisons, July 2002.............................................................................169 Selected indicators of financial development...................................................................................177 Cambodian interest rates, 1996-2001..................................................................................................178 Distribution of interest rates....................................................................................................................187 Use of loans...................................................................................................................................................188
List of Figures
2.1 2.2 2.3 2.4 2.5 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 5.1 6.1 Per capita monthly household expenditure 1993-94 and 1999....................................................64 Investment by source 1993-2001.............................................................................................................65 Harvested area and yields of wet and dry season rice 1993-2001................................................73 Changes in paddy output and prices 1993-2001................................................................................74 Public and private investment 1993-2001............................................................................................75 Composition of Money Supply, 1993-June 2002..........................................................................82 Money Supply, Net Claims on Government and Inflation, 1989 - 2000......................................84 Government Budget Deficits and Exchange Rates, 1990-2001.....................................................85 Income Velocity of Money,1995-2001....................................................................................................93 Consumer Price Index and Inflation Rates, 1995-2001.....................................................................99 Domestic Exports, Retained Imports and Trade Balance, 1993-2001.......................................101 Domestic Exports, Retained Imports and Exchange rates, 1992-2001.....................................102 Exchange Rate Movements of the US dollar against the riel, Singapore dollar, and Thai baht, 1995-2001......................................................................................104 Foreign Visitors by Age Group, Ministry of Tourism November 1999........................................155 The banking system in Cambodia.........................................................................................................180
Abbreviations
ACLEDA ADB AFTA ASEAN CAR CDC CDRI CEPT cif CPP CSES D-MTEF EMT ESAF EU FDI fob FTB GDP GEM GMAC GRET GSP GTZ HCI HDI IAS IF IFAD ILO IMF I-PRSP ISA KFW KHR M2 MEF MFI Association of Cambodian Local Economic Development Agencies Asian Development Bank ASEAN Free Trade Area Association of South-East Asian Nations Council on Administrative Reform Cambodia Development Council Cambodia Development Resource Institute Common Effective Preferential Tariff customs, insurance and freight Cambodian People's Party Cambodia Socio-Economic Survey Draft Medium Term Expenditure Framework Ennatien Moulethan Tchonnebat (Rural Credit Project) Enhanced Structural Adjustment Facility European Union Foreign direct investment free on board Foreign Trade Bank Gross Domestic Product Gender Empowerment Measure Garment Manufacturers' Association of Cambodia Group de Recherche et d'Echanges Technologiques Generalized System of Preferences Gesellschaft fur Technische Zusammenarbeit Head Count Index Human Development Index International Accounting Standards Integrated Framework International Fund for Agricultural Development International Labour Organization International Monetary Fund Interim Poverty Reduction Strategy Paper International Standards of Auditing Kredittanstalt fur Wiederaufbau Khmer Riel Aggregate Money Supply Ministry of Economy and Finance Micro-Finance Institution
MFN MOP MRD MTEF MWVA NBC NCG NCP NDADMBs NDANBC NFADMBs NFANBC NGO NIS ODA OIN PAP PER PGI PIP PNBC PRGF PRSP RDB RGC SEDP II SME UNDP UNICEF UNTAC USAID VAT WB WFP WTO
Most favoured nation Ministry of Planning Ministry of Rural Development Medium Term Expenditure Framework Ministry of Women's and Veterans' Affairs National Bank of Cambodia Net Claims on Government Net Claims on the Private Sector Net Domestic Assets of Deposit Money Banks Net Domestic Assets of the NBC Net Foreign Assets of Deposit Money Banks Net Foreign Assets of the NBC Non-government organization National Institute for Statistics Official Development Assistance Other Items Net Priority Action Program Public Expenditure Review Poverty Gap Index Public Investment Program People's National Bank of Cambodia Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Rural Development Bank Royal Government Of Cambodia Socio-Economic Development Plan II - 2001-2005 Small and Medium Enterprise United Nations Development Programme United Nations Children's Fund United Nations Temporary Administration of Cambodia United States Agency for International Development Value-added Tax World Bank World Food Program World Trade Organization
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Special Message
Macroeconomic policies affect both the rate of growth of the economy and the distribution of the benefits of growth across economic sectors and social groups. The process of structural change that is currently underway in many Asian countries adds new dimensions to the linkage between macroeconomic policies and poverty reduction. With these considerations in view as well as in the context of supporting the achievement of the Millennium Development Goals, UNDP's Regional Bureau for Asia and the Pacific launched in early 2002 the Asia-Pacific Regional Programme on the Macroeconomics of Poverty Reduction. The objective is to identify and promote more pro-poor macroeconomic policies in the region. With two-thirds of the world's poor living in the region such pro-poor approaches are critical to the process of poverty reduction. Fostering greater consistency between country's macroeconomic framework and its national poverty reduction strategy and broadening the policy options and dialogue on poverty reduction issues have been the pillars of the programme. As part of the programme, policy-oriented research in Bangladesh, Cambodia, China, Indonesia, Mongolia, Nepal and Vietnam have been carried out by teams of international and national consultants together with policy advisors from the UNDP's Bureau for Development Policy. These reports help to identify practical policy options to foster more pro-poor stabilization, economic restructuring and growth. These draft reports were presented and discussed in the first regional workshop on the Macroeconomics of Poverty Reduction in January 2003 in Kathmandu, Nepal. The representatives from governments and other relevant stakeholders gave various comments and suggestions in the context of increasing the usefulness of the reports for policy formulation. After incorporating these comments and suggestions into the country reports, a series of national workshops were organised during March-November 2003 in partnership with respective governments to discuss these reports with wider audiences. After refining these reports in line with the comments and suggestions received in these national workshops, six thematic case studies have now been completed on Fiscal, Monetary & Exchange rate Policies, Trade & Financial Liberalisation and Privatisation / De-regulation. I would like to convey my appreciation to the authors, to the focal points of the programme from UNDP country offices and Bureaus as well as the UNOPS-Asia office for their hard work and diligence. I would also like to record my special appreciation to the Programme Coordinator and staff of the Regional Programme based in Kathmandu, Nepal for their support and substantive contributions to the case studies. I hope that the independence of views and the professional competence of the authors ensure that the conclusions and recommendations will have the greatest possible audience and that the thematic case studies will be read with great interest. Hafiz A. Pasha
UN Assistant Secretary General & UNDP Assistant Administrator and Regional Director of the Bureau for Asia and the Pacific
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Preface
This study focuses on how macroeconomic policy tools have impacted poverty. The set of macroeconomic issues that are the focus of this study are; monetary policy, fiscal policy, trade liberalization, financial liberalization and privatization. Most poverty alleviation theory and practice focuses on micro-level and sectoral interventions without regard to the ways in which the macroeconomy influences the outcomes of such interventions. Since much economic theory teaches that the macroeconomy is no more than an aggregation of its micro-components, this approach is hardly surprising. However, the numerous interdependencies between individual economic agents make simple aggregation impossible and this means that micro-level actions can have outcomes which are quite different from those intended. This study therefore approaches the subject from a different viewpoint - that in which the whole is not the sum of its parts. We start from the premise that macroeconomic policy settings, even if they produce respectable economic growth and stability, often have distributional impacts that can constrain the best efforts of individuals to climb out of poverty. As we shall show, there is evidence that this has happened during the last decade in Cambodia. Some elements of the study which were not part of our direct concern need to be mentioned here as they provide important context to the study. First, we note that poverty itself encompasses a much wider concept of deprivation than the purely material. However in this study the main focus is on how macroeconomic policies can affect income poverty. The most direct route, in the absence of a social safety net, is through increasing sustainable employment opportunities. The labour market is thus the main link between macroeconomic policy and poverty reduction. Wider dimensions of deprivation that are often incorporated in a capabilities approach to poverty (Sen 1999) are addressed through the supply constraints that inhibit agents at the microeconomic level. Although the final objective focuses on alleviating income poverty, the study also addresses non-monetary constraints that inhibit agents from participating in a economic and social
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development and thus indirectly incorporates a wider concept of deprivation. Second, governance or, more accurately, political economy plays an important role within the Cambodian context, and influences economic and social policies and their implementation. It is important to appreciate that Cambodia has only recently emerged from a civil war that destroyed much of the human and physical infrastructure in the economy. The peace agreement of 1991, the 1993 election, renewed instability in 1996-97, and the election of 1998 mark the process of re-establishing central control over the entire country and have heralded an as yet short-lived period of relative stability. Many aspects of the economy are shaped by this legacy. The current structure of the government incorporates an expanded civil service to include members from all sides of the political divisions in the decision-making process of the country, as part of the 'peace dividend'. This has contributed to institutional flaws (from an economic viewpoint), which often render policy outcomes ineffective. However, most would claim that the benefits of political and social stability far out-weigh any negative implications of such a structure. Reform of the civil service and other key institutions is currently underway, but the full impact is unlikely to appear for several years. However, the third national election in 2003, which should have consolidated the growing confidence in the present system and the considerable progress towards reform, resulted in political paralysis. At the time of writing this final version of our report, no government had been formed. Ministers were in caretaker positions, indeed some were boycotting meetings of the Council of Ministers, with the result that crucial decisions for poverty alleviation could not be taken.
The consequences of these recent events should be borne in mind when understanding the policies in place. Addressing widespread poverty, such as is experienced in Cambodia, requires long-term coherent strategies that coordinate and mobilize all appropriate resources. Long-term strategies are emerging but are not yet in-place. The establishment of UNTAC marked the beginning of a large presence of external assistance to Cambodia. While it brought much needed financial assistance, the shaping of policy has been influenced to a large extent by outside guidance. Although donors have, in recent years, focused much of their effort on poverty reduction and encouraged the Cambodian government to develop strategic programs, we argue that the link between the macro strategy and the micro or sectoral strategies has yet to be made. The result is that, despite the government's identification of priority areas for development, the approach remains partial: some sectors suffer from neglect while those that have received extensive attention seem unlikely to be fully effective. In carrying out our research for this report we received considerable assistance from the UNDP country office, especially from Ingrid Cyimana and Richard Schiere. Their logistical support as well as their intellectual input to the project are much appreciated. However, we would like to emphasise that the views expressed in this report do not necessarily reflect those of the Cambodia country office. We would particularly like to thank Dr Hang Chuon Naron, Deputy Secretary General of the Ministry of Economy and Finance, our partner organization in Cambodia, for his support and guidance. Others, too numerous to name individually, we also thank for providing us with documents and various other forms of assistance.
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on increasing the dynamism of agriculture and, second, on generating non-farm employment, particularly in the rural areas if excessive stress on urban infrastructure is to be avoided. Both supply-side and demand-side measures will be needed. On the one hand, there is a clear need for demand expansion to promote rural prosperity and to integrate more of the rural population into the market economy. On the other hand, there is a need for great improvements in the supply of human and physical assets (both public and private) in order to improve the capacity of the vast majority of Cambodians to take advantage of opportunities which may arise. Specific actions on the supply side, in education, health, provision of infrastructure and finance, etc., properly belong to the realm of sectoral interventions and largely fall outside the scope of this study. Here, we are concerned with the impact that macroeconomic policy can have on the ability to achieve such sectoral (and more micro-level) changes.
In the last decade, while it has succeeded in producing fairly consistent economic growth, the macroeconomic framework established under guidance from the IMF has not successfully tackled the key elements of poverty in Cambodia. To be sure, it is difficult to disentangle the impacts of macroeconomic policy from those of the political instability that affected the economy before 1999. The sharp fall in investment and output in the mid-1990s, for example, is more likely attributable to political events than to macro policy as such. However, even during high growth periods, poverty reduction either did not occur or was minimal. The question that we wish to pose in this report, therefore, is what changes could be made to the macropolicy settings that would be conducive to a more rapid reduction in poverty and improved opportunities for the vast majority of Cambodians to participate in the benefits of this growth? Growth in recent years has been very strongly influenced by expansion of the export-oriented garment industry. There are reasons to suppose that the rapid expansion of this sector is unlikely to continue. It is imperative, particularly in the context of the current uncertainty in the global environment to find ways of diversifying the sources of economic growth (including export growth) in order to absorb more of the excess capacity which presently exists. Land, labour and finance can all be used more effectively than they are now. Up to now, the policy framework has served the country well, in the sense that the focus on tight monetary and fiscal policy has
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helped to eliminate excessive rates of inflation and generate some confidence in the authorities. Dollarization has also assisted in this process. In more recent years, however, there has been deflation and in the context of global recession, the stabilization package would appear to have outlived its usefulness. Even with global recovery in 2002, inflation has remained too low. At the meso-level, sectoral policies implemented under donor guidance have largely addressed the problem of human capital, particularly the health and education sectors. These policies do go some way towards addressing poverty reduction, in the sense that they are generally gender sensitive although the education policy is unlikely to assist the large proportion of older women in the workforce - and will be helpful in overcoming the extremely damaging legacy from the years of war and genocide. They will, however, have a very limited impact on income poverty unless there is a concurrent expansion of investment and employment opportunities for the newly trained and healthy workforce to take up. A policy of selective and carefully targeted demand expansion seems to us to be a good solution to this problem. We note especially that there is considerable underutilized capacity in Cambodia's rural areas. There are no simple solutions, however. In particular, there are legal and institutional obstacles to a demand expansion policy, partly due to the historical legacy and partly due to the policy framework established under the IMF structural adjustment program. Many of these policy-driven obstacles are well founded, especially as confidence in the authorities and in the financial sector is
only gradually improving. They should not be undone in haste, but they should be undone over time.
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Dollarization has provided both benefits and drawbacks for economic development and poverty reduction. The benefits of dollarization include switching public practice from gold to banknotes denominated in US dollars thereby promoting monetization of the economy, preventing capital flight, promoting financial deepening, lowering the risk of currency devaluation, and facilitating Cambodia's international integration process. All those issues facilitate and foster economic growth and have thus an indirect impact on poverty. On the negative side, dollarization means undermining the effective conduct of monetary and fiscal policy, damaging the pride of the nation, reducing the opportunity to earn income from seigniorage, and widening the gap between the urban dollar-based economy and poor rural areas where riel are normally used. The recent increase in circulation of riel, without pressuring macroeconomic stability, seems to reflect efforts of the government and NBC in encouraging the use of the riel and indicates that there is no compelling reason to go to full dollarization. Although the recent low or negative inflation represents a remarkable achievement of the existing policy settings, such settings no longer seem appropriate to address the issue of poverty reduction. To be more pro-poor, monetary and exchange rate policy and also fiscal policy need to be more pro-active and there is a strong case to review them in order to move faster to achieving the government's ultimate goal. In other words, stimulating more broad-
based growth, ensuring more efficient and development-oriented resource mobilization, and restoring monetary sovereignty to form a broader basis for poverty reduction should now be the focus of monetary and fiscal arrangements. In this context, some policy options have been suggested, including in particular the following: i. Depart from tight policy stance and allow some inflation to 'grease' the economy; ii. Establish an appropriate balance between accumulation of international reserves and the level of net domestic assets, which should stimulate domestic demand. iii. Address distortions to financial intermediation by undertaking a systematic and properly sequenced banking and financial reform; iv. Adopt some immediate mechanism to bring banks and potential savers more closely together, especially the introduction of a public education campaign to provide the general public with knowledge on banking services and to reduce uncertainty. v. Undertake a stepwise approach to de-dollarizing the economy by avoiding a forced conversion, promoting the money function of the riel and providing rieldenominated assets, especially treasury bills. In sum, from the point of view of poverty reduction, monetary and exchange rate policies need to support increasing economic integration of the rural areas
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into the national market, in particular, by supporting higher growth that is more equitably distributed - which means more employment opportunities, increased banking intermediation, and a reduced gap between rich and poor.
the private sector in terms of contributing to GDP growth, the tighter will be the fiscal constraint and the lower the chances of redressing low private sector growth through fiscal stimulation or, indeed, direct public investment. ii. Given the resource envelope constraint, Cambodia's pro-poor macro-fiscal strategy seeks to secure growth through a highly specific expenditure switching policy from general services to social services, i.e. health and education. On the face of it, these sectoral expenditures have been designed to optimise their pro-poor impact, and most official documents highlight these benefits. They do not, however, highlight the implicit and explicit costs which need to be taken into account when assessing the net pro-poor benefits of the chosen strategy. It is imperative to recognise that increased investment in social services in Cambodia has come at the expense of low investments in agriculture and rural development. While the precise opportunity cost of this trade-off can and should be debated, there is no doubt that lack of investment in agriculture and rural development in a country like Cambodia with significant rural poverty cannot be held to be optimal from the point of view of alleviating income poverty. Again, this strategic choice is based on the assumption that private sector growth will be the engine of overall economic growth. If private sector growth is lower than anticipated then there is no cushion left for boosting growth and alleviating income poverty through investment in economic services.
4. Fiscal Policy
In relation to fiscal policy we make four major points: i. Cambodia's resource envelope is limited in the medium term. Only modest increases in public resources can be expected through growth in the tax base and efficiency improvements in the medium term. Domestic resource mobilization through domestic borrowing is also not feasible in the medium term due to IMF restrictions, but more importantly due to low confidence in the authorities. Cambodia is heavily dependent on concessional donor finance for its development investments. This raises concerns regarding future debt service ratios. The present and projected grant: loan portfolio make it imprudent for government to significantly seek additional development assistance without reckoning on a concomitant rise in its future debt service obligations. Any future adverse change in the grant: loan ratio would exacerbate this fiscal constraint. This limitation on Cambodia's resource envelope means that Cambodia runs the risk of falling into a severe low level equilibrium trap with negative consequences for poverty reduction, if the chief growth engine in Cambodia's future economy private sector development - fails. The greater the shortfall in expectations from
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iii. Downsizing the civil service will provide little payback from a fiscal perspective, either by releasing resources to pay civil servants better to reduce corruption and increase efficiency or to reallocate these resources away from general services to social and economic services. Further, a large sum of donor assistance in fact serves as indirect budget support by significantly increasing the average remuneration of skilled Cambodian civil servants This indicates that the principal incentive to work in public employment is the prospect of access to external salary supplements. Any analysis that relies on civil service downsizing either to improve the efficiency of public service delivery or to release resources for pro-poor expenditures would therefore be misplaced. From a fiscal perspective much of the emphasis on civil service reform is therefore not relevant. What needs to be tackled urgently is the incentive and capacity distortions caused by donor supplementary remuneration to skilled civil servants. iv. The crowding out effect of aid on government's revenue efforts appears to be limited in Cambodia. However, generous concessional terms for investment resources from donors can act as a disincentive when RGC considers measures to generate domestic resources. The existence of excess liquidity in the domestic banking system negates the possibility of crowding out and offers RGC potentially attractive finance for development. The incentive for RGC to access such finance is, however, limited given the potential availability of easy
concessional money from donors who accept RGC's bounded fiscal sovereignty (albeit with conditionalities) unlike domestic economic agents who, without recourse to conditionalities, are reluctant to do the same. In such a situation there is little incentive for either RGC or the donors to speed up the financial reform process that would enhance RGC's credibility and remove the bounds on its financial sovereignty. It is this sense that there exists a Dutch disease in Cambodia's fisc. The major policy implication here is that while donors can live with RGCs bounded fiscal sovereignty since they exercise countervailing power through conditionality-based safeguards, private economic agents cannot since they have no countervailing safeguards. This leads to sub-optimal utilisation of investible resources in Cambodia and makes the monotonic emphasis on private sector growth as the engine of Cambodia's development less credible. This problem has political, institutional and technical dimensions all of which need to be researched in depth and urgent policy measures taken v. The key to unlocking the constraint to pro-poor fiscal policy in Cambodia is not directly macroeconomic in nature. It has to do with the poor disbursement of resources allocated for pro-poor expenditures that result in weak budget implementation. There are political, institutional and economic reasons for this phenomenon. Donor designed technical assistance to resolve this issue (even in their chosen priority sectors) has been piecemeal in approach and conditionality driven. There is as yet no comprehensive appraisal of the problem.
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There is need for a comprehensive and frank policy assessment of the reasons underlying poor disbursement, followed by the design of a comprehensive, sustainable and practical disbursement mechanism that would overcome this problem. If such a mechanism were made operational successfully, then this would increase the efficacy of pro-poor expenditures, improve confidence in RGC's fiscal sovereignty and, therefore, alleviate several fiscal constraints. There are currently five major policy documents outlining a pro-poor strategy for growth: the RGC's National Poverty Reduction Strategy (NPRS 2002), the World Bank Integrated Fiduciary Assessment and Public Expenditure Review (IFAPER 2003), the IMF's 2002 PRGF and RGC's SocioEconomic Development Plan II (SEDP-ii 2002) and MEF's Draft Medium Term Expenditure Framework (D-MTEF 2002, 2003). None of these documents contains either a clear enunciation of macro-fiscal policy instruments that explicitly relate fiscal spending to poverty reduction, or an assessment of the impact of macro-fiscal policy changes on poverty alleviation. Most of these strategic macroeconomic documents in Cambodia, seek to enhance fiscal performance by enhancing the efficiency of revenue and expenditure policy implementation and the macro-fiscal strategy deals almost exclusively with this issue. They address the issue of weak governance and improvement in the efficiency, governance and effectiveness of public revenue and expenditure performance. The SEDP-ii document, apart from presenting projections, contains no further macrofiscal analysis of strategic information.
Thus, the major pro-poor content of the existing macro-fiscal strategy lies in its emphasis on the 'priority sectors'. Between them, they present cogent, costed arguments outlining the pro-poor benefits of spending on the social service priority sectors, namely, education and health. These arguments are backed by detailed health and education medium-term sector spending strategies in the D-MTEFs. With agriculture and rural development however, they are much weaker on quantifiable argument. There is no costed quantitative strategy that provides a link between outcome indicators in the rural sector and poverty alleviation targets. Rural development receives short shrift, with a statement of three pious intentions: (a) to promote decentralization, (b) to facilitate an integrated participatory rural development approach and (c) to develop a rural infrastructure strategy. There is no detailed medium-term expenditure plan for these sectors in the D-MTEFs. It may appear from the above discussion that RGC is more serious about prioritising government spending on social services and the mention of agriculture and rural development is gestural. This would be disastrous in an economy where the bulk of the poor live in rural areas and work in agriculture and agriculture related activities. Fortunately this is not the case. Our investigations revealed ample evidence that political authorities recognise the critical importance of development of agriculture and rural development as a priority goal for Cambodia and the political payback from providing such services particularly rural roads, rural employment, enhanced agricultural productivity and access to common and private agricultural
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inputs (water, fertilizer, seeds, etc.) - is acknowledged to be significant in government circles. Why, then, this Cinderella treatment at the strategic level? The answer lies not in an examination of government priorities but rather donor priorities. It is in the nature of advanced public finance processes, such as that sought to be instituted by the D-MTEFs, that resource allocations to particular sectors depend significantly on the effectiveness with which the ministries and agencies responsible for formulating sector strategies make their case to government. In Cambodia, the four priority sectors compete intensively for the extremely limited recurrent and capital funds available. A major determinant of access to these resources is the effectiveness with which the case for using the funds is made. The Cinderella treatment that agriculture and rural development (not to mention other economic services) have received in this respect is an outcome of the fact that technical assistance for strategic preparation of sector priorities in these areas has been much less than that received by the health and education sectors. Thus the choice of social sector spending as the spearhead of pro-poor development can be viewed as a consequence of asymmetry in access to donor technical assistance rather than strategic selection. Urgent attention therefore needs to be paid to ways in which this asymmetry can be addressed. As a consequence Cambodia lacks policy capacity to assess the pro-poor impact of fiscal policy changes. This reduces national ownership of macroeconomic strategy, discourages participation, and inhibits the acknowledgement and redressing of political
issues that retard fiscal performance, with negative attendant macroeconomic implications. Donors and multilateral organisations that claim to have poverty reduction as their paramount objective therefore need to pay more attention to this issue when providing technical assistance. While it requires more attention to political economy issues, the payback in terms of effectiveness would be sizeable. Well designed technical assistance for policy building can enhance gender equity, and compensate for the lack of attention to income poverty.
5. Trade Liberalization
Trade liberalization, combined with dollarization, since 1993 has resulted in significant expansion of exports and narrowing of the current account deficit. Currently, however, the benefits derived from export growth are too narrowly based to produce any major impact on poverty reduction. The main beneficiaries of trade liberalization have been those directly involved in the activities, which are largely in the urban areas, and the limited auxiliary service activities that have developed around these activities. Even in the provinces, due to the lack of infrastructure there has been limited redistribution from urban to rural areas. By far the most important export commodities have come from the garment industry, although tourism has also shown recent rapid growth. However, these have remained restricted to urban enclaves and, due to high import content, they have contributed relatively little value added. The absence of backward and forward linkages has also
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meant that employment generation as a result of rapid export expansion has been minimal. To enable equitable distribution of the benefits of trade, there need to be opportunities for the rural population to participate in trade-oriented activities. There are currently many obstacles preventing such participation. Although current policy statements emphasize pro-poor trade, actual implementation does not appear to address these intentions. The delay in addressing these constraints will further increase the already existing inequities in access to resources and work against poverty reduction. Trade liberalization in Cambodia will not contribute to poverty reduction if other macroeconomic policies are not supportive. In reality, the impact so far has been rather narrow, in terms of its impact on employment, income distribution and contribution to GDP (in Keynesian accounting terms, X-M). As well as the narrow range of products being exported, the high import content needs to be addressed since it restricts the benefits to the local economy that come with trade liberalization. Trade liberalization will benefit the poor if policy is structured to develop local markets that will then eventually have the capacity to compete in international markets. The division of labour, domestically as well as internationally, should benefit from increasing the extent of the domestic market. Addressing the immediate constraints in the country in the areas of; governance, infrastructure and poor human capital, will go further in addressing pro-poor trade growth since it will expand the number of products that can be exported and widen the proportion
of the population that can benefit from trade liberalization, and thus establish a conduit for the re-distribution of growth.
6. Financial Liberalization
Following financial liberalization, market determination of interest rates should result in modestly positive real interest rates which should, in theory, increase the resources available to the financial system. However, this effect has only applied in Cambodia to the dollarized urban economy. The perceived high cost and high risk of lending to the rural areas has resulted in most banks refusing to accept riel deposits, with the effect that formal financial intermediation is simply not available to the poor. Re-regulation of the sector, after the initial chaos in the wake of dismantling the monobank system, has succeeded in improving the performance and to some extent confidence of the public in the banking sector. Again, however, the impact has been restricted to the urban economy. Despite the high growth of GDP and the reduced number of banks after restructuring, this market fragmentation has resulted in inability to achieve financial deepening and in excess liquidity of the banking system. The financial system that does exist in rural areas is therefore based on NGOs, with limited coverage, and the informal sector. Micro-finance is based on the recognition that small business and employment generation, not least engaging women in more profitable economic activities, would be encouraged by the availability of credit.
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Despite substantial efforts and the best of intentions, the results, however, have been below expectations. It seems likely that the introduction of dedicated financial institutions in the rural areas would help promote a more efficient and stable rural financial market than the current system, based as it is on NGOs whose primary efforts are in projects with different objectives. However, expanded formal intermediation is unlikely to happen in the absence of a more conducive macro and sectoral environment which improves the profitability of rural activities, reduces risk for clients, improves information flows and reduces legal impediments. An improved economic environment is also likely to promote the forging of better links between formal and informal financial institutions and the diffusion of other financial instruments such as deposit accounts in riel or crop insurance. Financial liberalization in the absence of a good legal and institutional framework is indeed dangerous, as the recent history of Indonesia demonstrates (although banking crises have also occurred in Cambodia itself in the past decade). However, reforms aimed at upgrading institutions alone are unlikely to be very successful, particularly in terms of poverty reduction. A case in point is the question of land titling, the absence of which is, for many commentators, a major obstacle to provision of medium and long-term credit. At present, only 10 percent of rural families hold legal land titles. Nevertheless, titling is not a sufficient condition to improve access to credit: factors such as larger farm size, higher levels of human capital, and proximity to
major consumer markets appear to be more important in determining access to formal credit. Other reforms, for example, in the legal environment of the financial system including prudential supervision, registration, licensing, standardised accounting practices, transparency, a secured transaction framework and enforcement provisions - can reduce the risk and cost of rural financial intermediation and are essential to the process or restoring confidence in the banking system. But they are more likely to benefit the non-poor, who already participate in the formal credit system, in the short to medium term. The vast majority of the poor will continue to rely heavily on informal sector loans because of their greater flexibility. As noted in this chapter, the vulnerability of the poor to exogenous shocks is itself a major obstacle to the extension of formal financial services to them. Institutional reforms need to be accompanied by policies directly aimed at generating higher growth and employment in the rural economy. These include expenditure on education and health, which are already receiving priority from donors, and on rural infrastructure, intensification of agricultural production and extension of economic services more generally to the countryside. Increasing rural incomes and productivity will both lower the marketing risk of financial institutions and their intermediation costs. It will provide an enabling environment in which the current fragmentation of rural markets, which in many ways contributes to the fragmentation, petty scale and high costs of financial markets, can be eliminated.
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7. Privatization
On the whole it would seem that privatization has tended to encourage economic growth in Cambodia, but it has not served the objective of poverty alleviation. Privatization in the banking sector has, if anything, reduced the access of the rural population to the formal financial sector while it has enhanced growth in the urban areas. For other sectors there is less information available, but the record of a lagging rural economy would suggest much the same pattern. Rubber plantations, which have yet to be privatized, offer an opportunity for increased investment and employment in the rural economy as well as a means of improving export diversification, but the private sector, with good reason, has shown a reluctance to take on the task. In other areas, the privatization of forest and water resources has proved controversial due to competing claims and has largely failed to provide the intended sources of commercial development and government revenue. At the same time, it has restricted access of the poor to resources upon which they have previously relied. Privatization of remaining public assets does not appear to be high on the government's
agenda at the present time and there would seem to be good reasons to reconsider the policy with regard to these assets. Public ownership of some assets creates opportunities to pursue developmental objectives, provided that, in the absence of market discipline, government is also able to impose discipline on the firms. The enterprises might eventually be privatized, but their long-term profitability must also be assured by complementary macro-fiscal policies which are aimed at growing the rural economy as a whole. Finally, the case of forestry, agricultural and fishery concessions involves political economy issues which have no simple technical solution (such as land titling). The recent resumption of some concession areas by the state is a positive step forward in this regard, as it increases the access of the poor to resources. While the granting of concessions could indeed be a positive step towards development of commercial activities in the countryside, policy needs to proceed with far greater caution in future. Particularly if political stability is to be preserved, it needs to take into account local land tenure systems, which may conflict with conceptions of private property being promoted by a number of donor agencies.
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1
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1 This chapter comprises a cut down and revised version of a more detailed paper prepared by Dr Sau Sisovanna. Persons interested in reading the full version may obtain it from him at sssovanna@hotmail.com. The macroeconomic of poverty reduction in Cambodia The dimension of the problem: an overview of poverty and inequality
2. The level and trends of key human poverty indicators. 3. Levels and changes in inequality based on expenditure, functional distribution and spatial distribution 4. Level and changes in the distribution of productive assets. 5. The challenge posed by Cambodia's special demographic characteristics. 6. The centrality of agricultural and rural development. The chapter is thus intended as a poverty mapping exercise, which attempts to identify some of the patterns and trends in poverty and inequality over the past decade. It may be read in conjunction with the main part of the report, but we do not attempt at this stage to draw any conclusions about which policies or other factors may be responsible for these patterns and trends.
Unlike most of its neighbouring countries, Cambodia has not yet established an official poverty line. However, a baseline poverty profile has been compiled to provide estimates of poverty in Cambodia, which are comparable to those developed recently by the World Bank for a number of other Southeast Asian countries (Prescott & Pradhan 1997). Per capita consumption was calculated, on the somewhat unrealistic assumption that each household member receives an equal share of the household's total consumption, and these estimates were compared to two alternative poverty lines - a food poverty line and an overall poverty line - to determine an individual's poverty status. The food poverty line was calculated using data from the CSES 1993-94 and updated with data from the subsequent surveys. Some key points to bear in mind are as follows: 1. Food poverty is measured in terms of calories. The benchmark adopted is a 2,100 calories minimum energy requirement per person per day (MOP/UNDP 2002). 2. A reference food basket was constructed by taking average values of the reported quantities consumed of each food item by the 3rd quintile of the population, in which 69% of the calories obtained are from cereals, especially rice. The reference food basket derived in this way actually corresponds to a calorie content of 2,298. Thus, in order to identify the proper composition of the minimum food basket, quantities of all items are is proportionally scaled down (MOP/UNDP 2002).
The macroeconomic of poverty reduction in Cambodia The dimension of the problem: an overview of poverty and inequality
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3. The reference basket was valued using market prices in Phnom Penh, other urban areas, and rural areas. Separate price estimates were obtained for each of the three strata, leading to three different food poverty lines. A non-food minimum allowance was then calculated and added to the food poverty line to provide the total poverty line. The minimal allowance for non-food goods was based on the typical non-food spending of those who can just afford the reference food requirement. In practice, it is not easy to calculate the cost of this minimum non-food allowance, and consequently the overall poverty line, because no unit value for non-food items were recorded in any of the CSES surveys. Further, CSES 1997 used a different method for calculating the cost of this allowance from that employed in the 1993-94 and 1999 surveys and there were also differences in territorial coverage in the three surveys and there were substantial unexplained differences in the level of per capita household consumption between the 1999 survey's two rounds (NPRS 2002: 32). Estimates of poverty for Cambodia over the three CSES periods are therefore difficult to interpret in any meaningful comparative way. The most basic measure, the head-count index (HCI) provides an initial view of the prevalence of poverty. The proportion of the Cambodian population which is defined as poor according to this analysis is shown in Table 1.1. In 1999 two rounds of the survey were undertaken because the first round results were so dramatically different from
those in preceding years. The table thus highlights the unreliability of the data. As a result, any changes over time in the level of absolute poverty could be seen as a statistical error2. Nevertheless, the data suggest that there has probably been zero or minimal reduction in absolute poverty between surveys. Broadly speaking, probably between 40 and 45 percent of the Cambodian population subsist below the poverty line and there is no evidence that this situation is improving (MOP/UNDP 2002). Moreover, in real terms, average per capita consumption by all strata of the population fell between the 1993-94 and 1999 surveys, from 2,260 riels per day to 1,800 (if calculated in dollar terms this represents a much more substantial fall). This is a striking result, which should form the starting point for reflection on the macroeconomics of poverty reduction. (MOP/UNDP 2002: 29) The poverty gap index, expressing distance below the poverty line, indicates that the consumption by poor people is concentrated at about 15% below the poverty line (NPRS 2002: 33). However, the gap is significantly higher in rural areas and provincial urban centres than in Phnom Penh.
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The macroeconomic of poverty reduction in Cambodia The dimension of the problem: an overview of poverty and inequality
Table 1.1: Cambodian head-count indices (per cent of population) CSES 1993-94 National Phnom Penh Other Urban Rural % under food poverty line
Source: MOP/UNDP 2002.
CSES 1997 (adjusted) 36.1 (47.8 unadjusted) 11.1 29.9 40.1 17.9
Indeed, in the rural areas poverty is almost four times higher than in Phnom Penh, and significantly higher than in other urban areas The headcount poverty rate is highest for those engaged in agriculture and they comprise the overwhelming majority of the headcount poor. (MOP 1999: 51). The use of the food poverty line yields considerably lower levels of poverty, but it does not alter the conclusion that poverty is the highest in rural areas and the lowest in Phnom Penh. Life cycle factors are clearly associated with poverty in Cambodia, especially given the baby boom that followed the Khmer Rouge period. In the poorest per capita consumption quintile the average household size is 5.8 people compared to 4.2 people in the richest quintile. Poor households tend to have more children, elderly and disabled persons as well as younger heads than do richer households. They are, however, less likely to be headed by a woman, which may be explained by the fact that the average age of women household heads is over 39 and such households are also smaller. It seems probable that this factor is also related to life-cycle factors - the older women
are more likely to head households with childless adult labour and few dependants (MOP 1999). In the case of extreme poverty, there is definite evidence of the effect of landmines and war. Just over 30% of people living in households headed by a person with a war- or mine-related disability are food poor, three times the rate for households whose head is not disabled. While this group represents a small proportion of those below the poverty line, their average distance below the food poverty line is 27%. They are therefore a particularly vulnerable group. (MOP 1999). Although the available analyses of CSES data do not distinguish ethnicity as a variable, we should also note here that poverty is a major problem for upland ethnic minority groups such as the Tumpuon, Phnong, etc. Ethnicity becomes a critical issue given the possibilities for social tensions and the fact that there are likely to be significant agricultural development prospects in the upland areas. Most ethnic minorities lack access to all-weather roads, assistance in controlling flash flooding, means for dry season management of scarce water resources, electricity supply and public health facilities.
The macroeconomic of poverty reduction in Cambodia The dimension of the problem: an overview of poverty and inequality
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Besides the fact that certain groups are particularly vulnerable to poverty on account of location (in the rural/upland areas), life-cycle factors, war-related disability and ethnicity, it is important to note that the distribution above and below the poverty line is highly sensitive to changes in the poverty line itself. In reality, most of the population is clustered around the poverty line. This result has two important implications. First, a small change in the poverty line will produce large changes in the HCI. Given that this poverty line is rather low, the meaning is that most Cambodians, especially those outside Phnom Penh, are poor. Second, the shallowness of the PGI plus the fact that most 'non-poor' are close to the poverty line, indicates that broad-based strategies aimed at the rural sector are likely to have significant impacts on poverty reduction3.
Cambodia's HDI, as a technical change occurred in the computation algorithm of UNDP in 1999, making the time series too short to draw meaningful conclusions.
3 Nevertheless, many components of the HDI, such as life expectancy and literacy, do not change much from year to year. As such, the HDI is a relatively stable indicator that changes rather slowly over time.
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The macroeconomic of poverty reduction in Cambodia The dimension of the problem: an overview of poverty and inequality
Neonatal mortality in the most recent period is 37 per 1,000 live births. However, the risk of dying for any Cambodian child who survived the first month of life increases during the next 11 months. Thus, almost one in every ten babies born in Cambodia does not survive to his or her first birthday. These figures earn Cambodia the unenviable position as the country with the highest infant mortality in East and Southeast Asia. Extremely high mortality was registered for the Khmer Rouge years. It seems inevitable that afterwards, there would be a decrease in mortality, as is the case in the period 10-19 years before the survey4. However, for most recent decade the survey registers an increase in mortality, both for infants and under-fives. This is another indication that poverty may not have decreased over the past decade.
Table 1.2: Early childhood mortality rates Years preceding the survey 0-4 5-9 10-14 15-19 20-24
Note:
Childhood mortality rates are expressed as numbers per thousand and are defined as follows: Neonatal mortality: the probability of dying within the first month of life. Post-neonatal mortality: the probability of dying between the first month of life and first birthday. Infant mortality: the probability of dying between birth and the first birthday. Child mortality: the probability of dying between ages one and five. Under-five mortality: the probability of dying between birth and the fifth birthday. Source: NIS 2001.