Policy Agenda For Cambodia in Growth, Finance, Industry and Trade (English)

Policy Agenda for Cambodia
in Growth, Finance, Industry

and Trade
2011
MINISTRY OF STRATEGY
AND FINANCE Korea Development Institute
Policy Agenda for Cambodia in Growth,
Finance, Industry and Trade
Policy Agenda for Cambodia in Growth, Finance, Industry and Trade
Project Title Policy Agenda for Cambodia in Growth, Finance, Industry and Trade
Prepared by Korea Development Institute (KDI)
Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea
Prepared for Royal Government of Cambodia (RGC)
In cooperation with Ministry of Economy and Finance of the RGC
Program Directors Kwang-Eon Sul, Former Managing Director, Center for International Development (CID), KDI
MoonJoong Tcha, Managing Director, CID, KDI
Wonhyuk Lim, Director, Policy Research Division, CID, KDI
Program Officer Seo-Young Kim, Research Associate, Policy Consultation Division, CID, KDI
Project Manager Moon-Soo Kang, Emeritus Fellow, KDI
Authors Overview of Cambodian Economy: Moon-Soo Kang, Emeritus Fellow, KDI

I. Macroeconomic Policy
Chapter 1. Chin Hee Hahn, Senior Research fellow, KDI
Chapter 2. Jong-il Kim, Professor, Dongguk University
II. Financial Policy
Chapter 1. Wook Sohn, Professor, KDI School of Public Policy and Management
Chapter 2. Yong-ju Chin, Team Manager & Hyo-Eui Kim, Manager, Korea Credit Guarantee Fund
Chapter 3. Kyeongwon Yoo, Professor, Sangmyung University/Korea Insurance Research Institute
III. Industrial Technology Development Policy
Chapter 1. Youngrak Choi, Professor, Korea University
Chapter 2. Gyung Ihm Rhyu, Director, Korean Agency for Technology and Standards
IV. Trade Policy
Chapter 1. MoonJoong Tcha, Senior Research fellow, KDI
Chapter 2. Younsoo Rah, Director General, Korea Trade-Investment Promotion Agency
English Editors Jaehyun Yoon, Editor, Policy Consultation Division, CID, KDI
Sena Lee, Editor, Policy Consultation Division, CID, KDI
Government Publications Registration Number 11-1051000-000157-01

ISBN 978-89-8063-534-4 93320
Copyright ⓒ 2008 by Ministry of Strategy and Finance, the Republic of Korea
Government Publications
Registration Number
11-1051000-000157-01
Knowledge Sharing Program
Policy Agenda for Cambodia in

Growth, Finance, Industry
and Trade
2011
MINISTRY OF Korea Development

STRATEGY Institute
AND FINANCE
Preface
In the 21st century, knowledge is one of the key determinants of a country’s
level of socio-economic development. Based on this recognition, Korea’s
Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of
Strategy and Finance (MOSF) and the Korea Development Institute (KDI).
KSP aims to share Korea’s development experience and knowledge
accumulated over the past decades to assist socio-economic development of the
partner countries. Former high-ranking government officials are directly
involved in policy consultations to share their intimate knowledge of
development challenges, and they complement the analytical work of policy
experts and specialists who have extensive experience in their fields. The
government officials and practitioners effectively pair up with their
counterparts in development partner countries to work jointly on pressing
policy challenges and share development knowledge in the process. The
Program includes policy research, consultation and capacity-building activities,
all in all to provide comprehensive, tailor-made assistance to the partner
country in building a stable foundation and fostering capabilities to pursue self-
sustainable growth.
Year 2010 is the first to conduct Knowledge Sharing Program with

Cambodia as a Strategic Development Partner Country (SDPC). Taking into
account the Cambodian authorities’ areas of request, as identified in a written
demand survey form submitted by the Royal Government of Cambodia, the
SDPC KSP with Cambodia was launched in March 2010 to focus on the
following four areas: Macro-economic Policy, Financial Policy, Industrial
Technology Development Policy, and Trade Policy.
I would like to take this opportunity to express my sincere gratitude to
Project Manager Dr. Moon-Soo Kang, Sector-Project Managers including Dr.
Chin Hee Hahn, Wook Sohn, Youngrak Choi and MoonJoong Tcha, as well as
all the project consultants including Dr. Jong-il Kim, Kyeongwon Yoo, Gyung
Ihm Rhyu, Mr. Hyo-Eui Kim and Youn-Soo Rah for their immense efforts in
successfully completing the 2010-2011 KSP with Cambodia. I am also grateful
to Former Managing Director Dr. Kwang-Eon Sul, Managing Director Dr.
MoonJoong Tcha, Program Directors Dr. Wonhyuk Lim, Mr. Taihee Lee, and
Program Officer Ms. Seo-Young Kim, all of whom are the members of the
Center for International Development at KDI, for their hard work and dedication
to this Program. Lastly, I extend my warmest thanks to the Ministry of Economy
and Finance of the Royal Government of Cambodia, Supreme National
Economic Council, related Cambodian government agencies, local project
consultants, a program coordinator and participants for showing active
cooperation and great support.
In your hands is the publication of the results of the 2010-2011 KSP with
Cambodia. I sincerely hope the final research results including policy
recommendations on the selected areas could be fully utilized to help Cambodia
in formulating industrial policy for sustainable long-term growth.
Oh-Seok Hyun
President
Korea Development Institute
Contents
Preface …………………………………………………………………………………………………………………… 4
2010 KSP with Cambodia …………………………………………………………………………………………… 18
Executive Summary …………………………………………………………………………………………………… 21
Overview of the Cambodian Economy …………………………………………………………………………… 26
1. Economic Growth and Development in Cambodia …………………………………………… 26
2. SME Financing: Microfinance and Micro-Insurance ………………………………………… 35
3. Export Industry in Cambodia ……………………………………………………………………… 43
4. Industrial Policies ……………………………………………………………………………………… 46
5. The Evolution of Korea’
s Industrial Policy ……………………………………………………… 53
6. Economic Growth and Technology Policy ………………………………………………………… 57
7. Summary of Research Findings …………………………………………………………………… 59
I. Macroeconomic Policy
Chapter 1. Search for Development Path and Evaluation of Growth Potential of Cambodia
Summary …………………………………………………………………………………………………… 68
1. Introduction ……………………………………………………………………………………………… 70
2. Overview and Assessment of the Cambodian Economic Development ………………… 71
3. Evaluation of Cambodia’
s Economic Growth from an International Perspective …… 114
4. Potential Opportunities and Threats of the Cambodian Economy ………………………… 129
5. Projection of GDP Growth: 2010-2020 …………………………………………………………… 132
6. Key Policy Challenges ………………………………………………………………………………… 136
Chapter 2. Structural Transformation and the Role of Government
Summary …………………………………………………………………………………………………… 140
1. Current Economic Situation and Structural Problems ……………………………………… 142
2. Economic Development and Structural Change ……………………………………………… 147
3. Role of Government in Structural Transformation in Korea ……………………………… 150
4. Cambodian Economic Structure and Policy Framework …………………………………… 160
5. The Role of Government for Future Growth of Cambodia …………………………………… 181
II. Financial Policy
Chapter 1. Promoting Low-cost Loans for Small and Medium-sized Enterprises and Rice Mills
Summary …………………………………………………………………………………………………… 192
1. Introduction ……………………………………………………………………………………………… 193
2. Overview of the Banking System …………………………………………………………………… 196
3. Recent Trend of Financing to SMEs and Rice Mills …………………………………………… 204
4. Obstacles to Financing for SMEs and Rice Mills ……………………………………………… 212
5. Policy Suggestions to Promote Financing for SMEs and Rice Mills ……………………… 219
6. Summary and Conclusion …………………………………………………………………………… 227
Appendix ……………………………………………………………………………………………………… 229
Chapter 2. Proposals for introduction of credit guarantee system in Cambodia
Summary ……………………………………………………………………………………………………… 236
1. Introduction ……………………………………………………………………………………………… 239
2. Meaning of Credit Guarantee System …………………………………………………………… 239
3. Current State of Cambodia …………………………………………………………………………… 243
4. Reasons for Introduction of Credit Guarantee System in Cambodia …………………… 250
5. Proposals for Introduction of Credit Guarantee System in Cambodia …………………… 254
Annex ………………………………………………………………………………………………………… 270
Chapter 3. Strategic Development for Microinsurance in Cambodia
Summary …………………………………………………………………………………………………… 298
1. Introduction ……………………………………………………………………………………………… 299
2. Environment of Microinsurance …………………………………………………………………… 301
3. General Lesson from Other Countries’
Experiences ………………………………………… 307
4. Overview of Microinsurance in Cambodia ……………………………………………………… 317
5. Suggestions for Development of Microinsurance in Cambodia …………………………… 335
Contents
III. Industrial Technology Development Policy
Chapter 1. Factory Establishment
Summary ……………………………………………………………………………………………………… 348
1. Introduction ……………………………………………………………………………………………… 350
2. Current System of Factory Establishment in Cambodia …………………………………… 354
3. Current System of Factory Establishment in Korea…………………………………………… 361
4. Policy Recommendations …………………………………………………………………………… 372
Chapter 2. Enhancement of Standardization and Conformity Assessment System in Cambodia
Summary ……………………………………………………………………………………………………… 381
1. Introduction ……………………………………………………………………………………………… 383
s Standardization and Conformity Assessment System ……… 384
2. Overview of Cambodia’
3. Overview of Korea's Standardization and Conformity Assessment System …………… 395
4. Recommendations for Enhancement of the Standardization and Conformity
Assessment System in Cambodia ………………………………………………………………… 409
5. Conclusion ……………………………………………………………………………………………… 416
IV. Trade Policy

Chapter 1. Promoting Exports of Cambodia
Summary ……………………………………………………………………………………………………… 420
1. Introduction ……………………………………………………………………………………………… 422
2. Trade Structure of Cambodia ……………………………………………………………………… 427
3. Analyses of Export Patterns ………………………………………………………………………… 436
4. Policy Measures and Bottlenecks of Exports ………………………………………………… 454
s Experience of Export Promotion and Implications for Cambodia ……………… 462
5. Korea’
6. Summary ………………………………………………………………………………………………… 485
Appendix ……………………………………………………………………………………………………… 490
Chapter 2. Capacity Building on Export Promotion Procedure in Cambodia
Summary ……………………………………………………………………………………………………… 510
1. Need for a State-run Trade Promotion Organization ………………………………………… 513
2. Cambodia’
s Trade Promotion Activities and Export Environment ………………………… 514
3. Korean Trade Promotion Organization - KOTRA ……………………………………………… 528
4. Proposals for Capacity Building of Trade Promotion Procedure in Cambodia ………… 538
5. Summary and Conclusion ……………………………………………………………………………545
LIST OF Tables | Contents
<Table 1-1> Real Growth Rate by Sector (2005-2010) …………………………………………………………… 27

<Table 1-2> Main Economic Indicators ……………………………………………………………………………… 28
<Table 1-3> Number of Financial Institutions 2007-2009 ……………………………………………………… 30
<Table 1-4> Number of Primary Health care Consultations, Services by SKY (2006-2007) ……………… 40
<Table 1-5> SKY Premium Rates by Family Size in Rural Areas ……………………………………………… 41
<Table 1-6> SKY Premium Rates by Family Size and Sector Type in Urban Areas ………………………… 41
<Table 1-7> Six Steps for Growth identification and facilitation ……………………………………………… 48
<Table 1-8> Eligibility Requirements for Incentives ……………………………………………………………… 51
<Table 1-9> 12-Point Action Plan to Improve the Investment Climate and Trade Facilitation ………… 52
<Part 1>
<Table I-1-1> Educational Key Goals and Targets ……………………………………………………………… 83
<Table I-1-2> Monetary Survey (Billion CR) ……………………………………………………………………… 96
<Table I-1-3> Labor Force and Employment in 2007 …………………………………………………………… 98
<Table I-1-4> Education of Labor Force in 2007 ………………………………………………………………… 100
<Table I-1-5> Budget Operation in 1993 and 2010 (Billion CR) ………………………………………………… 101
<Table I-1-6> Sectoral Performance in 2008-2009 ……………………………………………………………… 102
<Table I-1-7> Export Value by Destination (USD million) ……………………………………………………… 104
<Table I-1-8> Import Value by Source (USD million) …………………………………………………………… 105
<Table I-1-9> Investment Approvals (USD million) ……………………………………………………………… 107
<Table I-1-10> Education Sector Performance Indicators ……………………………………………………… 108
<Table I-1-11> Number of Schools, Pupil-Teacher Ratio, and Pupil-Classroom Ratio ………………… 109
<Table I-1-12> State Owned Enterprises …………………………………………………………………………… 111
<Table I-1-13> Estimated Gini Coefficients (standard errors in parentheses) …………………………… 113
<Table I-1-14> Sources of Growth in Cambodia ………………………………………………………………… 122
<Table I-1-15> Sources of Growth in Cambodia and Major Regions: 1961-2008 ………………………… 123
<Table I-1-16> Cambodia’
s TFPG Rank in 84 Country Samples ……………………………………………… 126
<Table I-1-17> Projection of GDP Growth of Cambodia: Bottom-Up Approach …………………………… 133
<Table I-1-18> Projection of GDP Growth of Cambodia: Simulation Based on Lucas (2009) …………… 136
<Table I-2-1> Major Economic Indicators of Cambodia (1) …………………………………………………… 142
<Table I-2-2> Major Economic Indicators of Cambodia (2) …………………………………………………… 143
<Table I-2-3> Balance of Payments of Cambodia ………………………………………………………………… 144
<Table I-2-4> Structure of Manufacturing Sector of Korea …………………………………………………… 151
Contents | LIST OF Tables
<Table I-2-5> Export Structure of Korea …………………………………………………………………………… 152

<Table I-2-6> Structure of the Cambodian Industry (at 2000 prices, billion riel) ………………………… 160
<Table I-2-7> Cambodian Garment Factories …………………………………………………………………… 166
<Table I-2-8> Hotels and Guest Houses …………………………………………………………………………… 170
<Table I-2-9> Industrial Policy Instruments ……………………………………………………………………… 173
<Table I-2-10> Incentives for SEZ Developers and Investors ………………………………………………… 174
<Table I-2-11> Evolution of the Trade Policy ……………………………………………………………………… 175
<Table I-2-12> Development Strategies for 4 Growth Sectors ………………………………………………… 176
<Part 2>
<Table II-1-1> Assets and Loans of Banks ………………………………………………………………………… 197
<Table II-1-2> Prudential Regulations for Financial Institutions ……………………………………………… 200
<Table II-1-3> Loans and NPLs (as of end-2009) ………………………………………………………………… 202
<Table II-1-4> Share of Paid-up Capital …………………………………………………………………………… 203
<Table II-1-5> Development Partners’Assistance ……………………………………………………………… 203
<Table II-1-6> Classification of SME ………………………………………………………………………………… 205
<Table II-1-7> Distribution of SMEs by Type and Sector ………………………………………………………… 206
<Table II-1-8> Cost of Starting a Business ………………………………………………………………………… 207
<Table II-1-9> Small Enterprises by Industries …………………………………………………………………… 208
<Table II-1-10> Rice Production ……………………………………………………………………………………… 209
<Table II-1-11> Outstanding Loans of Banks and MFIs ………………………………………………………… 210
<Table II-1-12> Enterprises by Type and Source of Start-up Capital ………………………………………… 210
<Table II-1-13> Rice Financing by Government …………………………………………………………………… 212
<Table II-1-14> Interest Rate on Loans in USD …………………………………………………………………… 214
<Table II-1-15> Total Loan Classified by Industry ………………………………………………………………… 216
<Table II-1-16> Roles of the IBK ……………………………………………………………………………………… 230
<Table II-1-17> The Portion of SME Loans in Each Bank ……………………………………………………… 232
<Table II-2-1> Characteristics by Type of Credit Guarantee System ………………………………………… 240
<Table II-2-2> Cambodia’
s Economic Growth Rates …………………………………………………………… 243
<Table II-2-3> Current State of Foreign Direct Investments in Cambodia (in terms of approved
investment amounts) ………………………………………………………………………………… 244
<Table II-2-4> Production by Industry in Cambodia ……………………………………………………………… 245
<Table II-2-5> Exports Amount and Exports Weight of Cambodia’
s Textile Industry ……………………… 246
<Table II-2-6> Major Tourism Indicators by Year ………………………………………………………………… 246

<Table II-2-7> Rice Production by Year ……………………………………………………………………………… 246
<Table II-2-8> Trend of Net Interest Margin ……………………………………………………………………… 249
<Table II-2-9> Economy of Korea, Vietnam and Cambodia at the Time of the Introduction of
Guarantee System …………………………………………………………………………………… 250
<Table II-2-10> Source of Start-up Capital in Cambodian SMEs ……………………………………………… 253
<Table II-2-11> Form of Guarantee by Country …………………………………………………………………… 255
<Table II-2-12> Proposals for Establishment of Credit Guarantee Institution in Stages ………………… 257
<Table II-2-13> Outstanding Balance of Credit Guarantees to GDP in Major Asian Countries in 2009 259
<Table II-2-14> Leverage Ratio of Credit Guarantee Institutions in Various Countries…………………… 262
<Table II-2-15> Guarantee Fee Rates in Japan …………………………………………………………………… 264
<Table II-2-16> Coverage Ratio of Credit Guarantee in Major Countries …………………………………… 265
<Table II-2-17> Credit Guarantee Graduation Program of KODIT …………………………………………… 268
<Table II-3-1> Coping Strategy by Risk ……………………………………………………………………………… 304
<Table II-3-2> Differences between Traditional Insurance and Microinsurance ………………………… 305
<Table II-3-3> Covered Lives by Microinsurer Type and Region ……………………………………………… 307
<Table II-3-4> Covered Lives by Products and Regions ………………………………………………………… 309
<Table II-3-5> Studies on the Demand for Microinsurance …………………………………………………… 313
<Table II-3-6> Microfinance Portfolio and Outreach in Cambodia …………………………………………… 318
<Table II-3-7> Insurance Market in Cambodia (Premium Revenue 2000-2008) …………………………… 321
<Table II-3-8> Insurance Claims in Cambodia (2000-2008) …………………………………………………… 321
<Table II-3-9> Organizational Profiles of CHC NGO and CHC Ltd. …………………………………………… 323
<Table II-3-10> Product Features of MEADA Program ………………………………………………………… 326
<Table II-3-11> MEADA Outreach as of June 2008 ……………………………………………………………… 327
<Table II-3-12> Organizational Profiles of WVC and VFC ……………………………………………………… 329
<Table II-3-13> Product Summary of Vision Insurance ………………………………………………………… 332
<Table II-3-14> Vision Insurance Outreach as of June 2008 …………………………………………………… 334
<Table II-3-15> Challenges and Lessons from Microinsurance Operation ………………………………… 339
<Part 3>
<Table III-1-1> Industrial Structure in Korea ……………………………………………………………………… 371
<Table III-1-2> Status of Industrial Complex (Planned Site) in Korea………………………………………… 372
<Table III-2-1> The Status of Cambodia’
s National Standards ………………………………………………… 390
Contents | LIST OF Tables
<Table III-2-2> Some Annual Figures of KS Certification ……………………………………………………… 405

<Table III-2-3> Operation of Korea’
s Conformity Assessment System ……………………………………… 406
<Table III-2-4> Accreditation data of Laboratories ……………………………………………………………… 406
<Table III-2-5> Status of Management System Certification in Korea ……………………………………… 407
<Part 4>
<Table IV-1-1> Cambodia’
s Economic Development and Trade ……………………………………………… 424
<Table IV-1-2> Cambodian Exchange Rate Over Past Ten Years and Inflation …………………………… 426
<Table IV-1-3> Export Values (2008) ………………………………………………………………………………… 428
<Table IV-1-4> Development of Export Products 2001-2008 (in thousand $US) …………………………… 429
<Table IV-1-5> Regional Export Markets (2008) …………………………………………………………………… 431
<Table IV-1-6> Import products (2008) ……………………………………………………………………………… 432
<Table IV-1-7> Development of Import products (values), 2001 - 2008 (in thousand US$) ……………… 434
<Table IV-1-8> Imports and iImport origins (2008) ……………………………………………………………… 436
<Table IV-1-9> Export Concentration of Country Groups & South East Asia ……………………………… 438
<Table IV-1-10> Extent of Export Dissimilarity by Country Groups & South Eastern Asia ……………… 439
<Table IV-1-11> Cambodia’
s CCIs with Major Exporting Markets for Top 10 Exporting
Sectors (2008) ……………………………………………………………………………………… 442
<Table IV-1-12> CCIs for SEA countries of Cambodia by Top 10 Exporting Sectors (2008) ……………… 443
<Table IV-1-13> Extent of Intra-Industry Trade by Countries (2008) ………………………………………… 446
<Table IV-1-14> Extent of Intra-Industry Trade by Countries (2000) ………………………………………… 447
<Table IV-1-15> Extensive vs. Intensive Margin of Cambodia’
s Exports by Countries (2008) …………… 449
<Table IV-1-16> RCA of Cambodia & Top 5 Countries for Top 10 Products (2008) ………………………… 453
<Table IV-1-17> Disbursement Volume (for the Year) …………………………………………………………… 468
<Table IV-1-18> ECA’
s Contribution to Trade ……………………………………………………………………… 473
<Table IV-1-19> OECD ECAs’Total Loan Commitment per Person ………………………………………… 473
<Table IV-1-20> Types of Special Economic Zones in Relation with Export Promotion ………………… 478
<Table IV-1-21> Economic Performance of the Masan EPZ …………………………………………………… 482
<Table IV-1-22> Share of Local Raw Materials Used for Production in EPZs ……………………………… 482
<Table IV-1-A-1> Export of Articles of Apparel, Accessories, Knit or Crochet (HS 61) (2008)…………… 491
<Table IV-1-A-2> Export of Articles of Apparel, Accessories, not Knit or Crochet (HS 62) (2008) ……… 491
<Table IV-1-A-3> Export of Footwear, Gaiter and the Like, Parts Thereof (HS 64) (2008) ……………… 492
<Table IV-1-A-4> Export of Rubber and Articles (2008) ………………………………………………………… 493
<Table IV-1-A-5> Export of Rice (HS 1006) (2008) ………………………………………………………………… 494

<Table IV-1-A-6> Exports of Corn (HS 1005) (2008) ……………………………………………………………… 495
<Table IV-1-A-7> Export of Cassava (HS 0714: Manioc, Arrowroot Salem/Yams, etc.) (2008) ………… 496
<Table IV-1-A-8> Edible Fruits, Nuts, Peel or Citrus Fruits, Melon (HS 08) (2008) ……………………… 496
<Table IV-1-A-9> Export of Fish, Crustaceans, Molluscs, Aquatic Invertebrates (HS 03) (2008) ……… 497
<Table IV-1-A-10> "Articles of Apparel, Accessories, Knit or Crochet" Product…………………………… 498
<Table IV-1-A-11> "Articles of Apparel, Accessories, not Knit or Crochet" Product ……………………… 499
<Table IV-1-A-12> "Footwear, Gaiters and the Like, Parts Thereof" Product ……………………………… 499
<Table IV-1-A-13> "Rubber and Articles Thereof" Product …………………………………………………… 500
<Table IV-1-A-14> "Wood and Articles of Wood, Wood Charcoal" Product ………………………………… 500
<Table IV-1-A-15> "Vehicles Other than Railway, Tramway" Product ……………………………………… 501
<Table IV-1-A-16> "Fish, Crustaceans, Molluscs, Aquatic Invertebrates" Product ……………………… 501
<Table IV-1-A-17> Imports of Mineral fuels, Oils, Distillation Products, etc. (HS 27) (2008) …………… 502
<Table IV-1-A-18> Imports of Knitted or Crocheted Fabric (HS 60) (2008) ………………………………… 502
<Table IV-1-A-19> Imports of Vehicles Other than Railway, Tramway (HS 87) (2008) …………………… 503
<Table IV-1-A-20> Imports of Electrical, Electronic Equipment (HS 85) (2008) …………………………… 503
<Table IV-1-A-21> Imports of Tobacco and Manufactured Tobacco Substitutes (HS 24) (2008) ……… 504
<Table IV-1-A-22> Imports of Beverages, Spirits, Vinegar (HS 22) (2008) …………………………………… 504
<Table IV-1-A-23> Cambodia's SEZ as of October 2009 ………………………………………………………… 505
<Table IV-2-1> Comparison of Works of Cambodia’
s TPD to Korean Public Organizations …………… 517
<Table IV-2-2> Local Exhibition 2009 ……………………………………………………………………………… 518
<Table IV-2-3> Overseas Exhibition 2009 …………………………………………………………………………… 519
<Table IV-2-4> Summary of the Survey on Korean Companies Invested in Cambodia …………………… 522
<Table IV-2-5> Difficulties Experienced by Korean-Invested Companies in Cambodia ………………… 523
<Table IV-2-6> Comparison of Production Costs for Companies Operating in Cambodia Versus Rival
Countries ……………………………………………………………………………………………… 525
<Table IV-2-7> KOTRA’
s Overseas Organizational Network …………………………………………………… 531
<Table IV-2-8> KOTRA’
s main websites …………………………………………………………………………… 534
<Table IV-2-9> The Preamble of KOTRA’
s Customer Service Charter ……………………………………… 537
<Table IV-2-10> TPOs of Asia ………………………………………………………………………………………… 541
<Table IV-2-11> Examples of‘Positive Thinking’………………………………………………………………… 544
Contents | LIST OF Figures
<Figure 1-1> Cambodia’

s Real GDP Growth by Sector…………………………………………………………… 27
<Figure 1-2> CPI All Items Excluding Food and Transportation (Year-on-Year) …………………………… 29
<Figure 1-3> Number of Depositors and Borrowers …………………………………………………………… 31
<Figure 1-4> Non-performing Loans in Banking Sector ………………………………………………………… 32
<Figure 1-5> Textile Exports 2008-2009 (In million USD) ……………………………………………………… 33
<Figure 1-6> Tourist Arrivals in Cambodia 2008-2009 (In thousands) ……………………………………… 34
<Figure 1-7> Percentages of Loans Classified by Type of Business ………………………………………… 38
<Figure 1-8> Vision Insurance (2007-2009) ………………………………………………………………………… 42
<Figure 1-9> Illustration of the Effect of a Government Guarantee …………………………………………… 43
<Figure 1-10> Garment Export Market Shares in 2008 ………………………………………………………… 45
<Figure 1-11> Volume of Garment Exports and Unit Price (2001-2010p) …………………………………… 46
<Figure 1-12> Changes in Industrial Policy (1) …………………………………………………………………… 56
<Figure 1-13> Changes in Industrial Policy (2) …………………………………………………………………… 56
<Part 1>
<Figure I-1-1> GDP Growth and Sectoral Contribution, 1994-2010 ………………………………………… 92
<Figure I-1-2> Inflation Rate, 1994-2010 …………………………………………………………………………… 93
<Figure I-1-3> Balance of Payment, 1994-2010 ………………………………………………………………… 94
<Figure I-1-4> Trade Balance ………………………………………………………………………………………… 95
<Figure I-1-5> Employment by Economic Sector (thousand) ………………………………………………… 97
<Figure I-1-6> GDP Growth of Cambodia (WDI data) …………………………………………………………… 114
<Figure I-1-7> Cambodia’
s Investment Rate Relative to Other Regions …………………………………… 115
<Figure I-1-8> Long-Run Trend in GDP per Capita in World’
s Major Regions …………………………… 117
<Figure I-1-9> Typical Patterns of Demographic Transition …………………………………………………… 118
<Figure I-1-10> Fertility Rate of Cambodia ………………………………………………………………………… 119
<Figure I-1-11> Death Rate of Cambodia ………………………………………………………………………… 119
<Figure I-1-12> Population Growth of Cambodia ………………………………………………………………… 120
<Figure I-1-13> Working Age Population Ratio of Cambodia ………………………………………………… 120
<Figure I-1-14> Sources of Per Worker GDP Growth in Cambodia and Major Regions ………………… 125
<Figure I-1-15> Cambodia’
s Economy Compared with Open Economies …………………………………… 127
<Figure I-1-16> Projected GDP Growth Rate of Cambodia …………………………………………………… 136
<Figure I-2-1> GDP and Employment Share by Industry of Korea …………………………………………… 150
<Figure I-2-2> Structure of the the Manufacturing Sector, 1993-2009 ……………………………………… 161
<Figure I-2-3> Percentage Distribution: Agriculture …………………………………………………………… 163
<Figure I-2-4> Shares of Agricultural Crops ……………………………………………………………………… 164
LIST OF Figures | Contents
<Figure I-2-5> Ownership of Garment Factories, by Country ………………………………………………… 166

<Figure I-2-6> Cambodian Commodity Exports (USD million) ………………………………………………… 167
<Figure I-2-7> Destinations of Cambodian Textile Exports …………………………………………………… 168
<Figure I-2-8> Number of Tourists, 1994-2009 (In thousands)………………………………………………… 169
<Figure I-2-9> Top Five Sources of International Arrivals in Cambodia (’
000)……………………………… 169
<Figure I-2-10> Rectangular Strategy ……………………………………………………………………………… 172
<Part 2>
<Figure II-1-1> The Cambodia’Banking System ………………………………………………………………… 197
<Figure II-1-2> Profitability of Banks………………………………………………………………………………… 201
<Figure II-1-3> Funding Structure …………………………………………………………………………………… 204
<Figure II-1-4> Number of SME ……………………………………………………………………………………… 205
<Figure II-1-5> Short-term Funding Sources ……………………………………………………………………… 211
<Figure II-1-6> Long-term Funding Sources ……………………………………………………………………… 211
<Figure II-1-7> Monthly Enterprise Registration ………………………………………………………………… 225
<Figure II-2-1> Ratio of KODIT’
s Outstanding Balance of Credit Guarantee to GDP ……………………… 242
<Figure II-2-2> Trend of GDP Growth Rates of Cambodia and Its Neighboring Countries ……………… 244
<Figure II-2-3> Total Assets and Number of Depositors and Borrowers of Financial Institutions in
Cambodia ……………………………………………………………………………………………… 247
<Figure II-2-4> Current State of Credit Provision and Deposit-taking by Financial Institutions ……… 248
<Figure II-2-5> Industrial Structure of Cambodia, Vietnam and Korea at the Time of the Introduction
of Guarantee System ……………………………………………………………………………… 251
<Figure II-2-6> Obstacles to Growth of SMEs ……………………………………………………………………… 252
<Figure II-2-7> Contributions from the Government and Financial Institutions to KODIT in Korea …… 261
<Figure II-2-8> Basic Framework of Credit Guarantee System ……………………………………………… 263
<Figure II-3-1> The Impact of Risks on Immediate Impact …………………………………………………… 302
<Part 3>
<Figure III-1-1> Administrative Procedures of Investment in Cambodia …………………………………… 355
<Figure III-1-2> Administrative Procedures of Factory Establishment in Cambodia……………………… 358
<Figure III-1-3> Type of Approval according to Factory Location in Korea ………………………………… 364
<Figure III-1-4> Review of Qualifications for Factory Establishment in Korea …………………………… 365
<Figure III-1-5> Basic Process of Factory Establishment in Korea …………………………………………… 366
<Figure III-2-1> Organizational Structure of the ISC …………………………………………………………… 386
<Figure III-2-2> Management Structure of the Technical Committee (Cambodia) ……………………… 388
Contents | LIST OF Figures
<Figure III-2-3> Korea’

s Legal System on Standardization …………………………………………………… 399
<Figure III-2-4> Development of Korean Industrial Standards ………………………………………………… 401
<Figure III-2-5> Categorization of Korean Industrial Standards ……………………………………………… 403
s Conformity Assessment System ……………………………………………………… 405
s Measurement System …………………………………………………………………… 409
<Part 4>
<Figure IV-1-1> Extent of Export Dissimilarity by Country Groups …………………………………………… 440
<Figure IV-1-2> CCIs for Major Countries - Total ………………………………………………………………… 444
<Figure IV-1-3> CCIs for South Eastern Asia Countries - Total ……………………………………………… 444
<Figure IV-1-4> Extensive Margin for World Major Markets …………………………………………………… 450
<Figure IV-1-5> Intensive Margin for World Major Markets …………………………………………………… 450
<Figure IV-1-6> Extensive Margin for Major Export Destinations in SEA …………………………………… 451
<Figure IV-1-7> Intensive Margin for Major Export Destinations in SEA …………………………………… 451
<Figure IV-1-8> Disbursement Volumes of Loans and Guarantees (for the year) ………………………… 468
<Figure IV-1-9> Short-term Finance ………………………………………………………………………………… 469
<Figure IV-1-10> Pre-Shipment Credit ……………………………………………………………………………… 470
<Figure IV-1-11> Forfaiting …………………………………………………………………………………………… 471
<Figure IV-1-12> Rediscount on Trade Bills ……………………………………………………………………… 472
<Figure IV-1-13> Export Growth in the Masan EPZ (US million Dollars) …………………………………… 481
<Figure IV-2-1> Organization of the TPD …………………………………………………………………………… 515
<Figure IV-2-2> Supply Chain of Korean Garment Manufacturers Operating in Cambodia …………… 523
<Figure IV-2-3> An Investment Case of a Korean Company …………………………………………………… 528
<Figure IV-2-4> Changes of KOTRA’
s Mission and Roles since Establishment …………………………… 530
<Figure IV-2-5> KOTRA’
s Domestic Organization ………………………………………………………………… 531
<Figure IV-2-6> Homepage of KOTRA’
s Intranet,‘WINK’……………………………………………………… 535
<Figure IV-2-7> Examples of rice products sold in Korea ……………………………………………………… 540
<Figure IV-2-8> Model for Separation of Policy-Making and Executive Functions …………………………543
2010 KSP with Cambodia
Cambodia experienced civil war for more than three decades, and it had to undergo the
economic embargo imposed in 1979. Today, however, Cambodia has made giant strides in
development owing to the adoption of democracy, market economy, and open economic system.
Though it is facing temporary hardship after the recent global financial crisis, Cambodia had
achieved a robust GDP growth of an annual average rate of 9% from 1999 to 2008. The world
cultural heritage, which is represented by Ankor Wat, fertile land and forest, varied natural resources
and abundant labor force of Cambodia are the factors that make us expect its striking development.
On this ground, the Korean government selected Cambodia as a Strategic Development

Partner Country (SDPC) in 2010 for the multi-year Knowledge Sharing Program. The
designation of Cambodia as a SDPC is quite attributable to the successful completion of 2009
KSP with Cambodia which was executed with a theme of the ‘Microfinance and Public-Private
Partnership (PPP) Development in Cambodia’ . Including a follow-up topic from 2009 project,
the Royal Government of Cambodia (RGC) applied proposals for the 2010 KSP with the
coordination of the Ministry of Economy and Finance (MEF) of RGC, the partner organization
for KSP with Cambodia, covering wide range of consultation areas. The Ministry of Strategy
and Finance (MOSF) of the Republic of Korea, together with the Korea Development Institute
(KDI), the implementing agency for the KSP, identified the topic for 2010 KSP: ‘Policy Agenda
for Cambodia in Growth, Finance, Industry and Trade’ .
As the first stage of the project, a group of Korean experts headed by Dr. Moon-Soo Kang,
an emeritus fellow of KDI and the project manager of 2010 KSP with Cambodia, conducted
High-Level Demand Survey and Pilot Study in Phnom Penh from April 25 to May 1, 2010.
018
They paid a courtesy visit to H.E. Dr. Keat Chhon, Deputy Prime Minister and Minister of MEF
and met with H.E. Dr. Hang Chuon Naron, Secretary of State (then Secretary General) of the
MEF in pursuit of a better understanding of the policy priorities and issues. In order to identify
specific research topics, the Korean experts had a series of meetings and interviews with
relevant government ministries and institutes. In addition, the Korean experts interviewed
candidates to recruit local consultants with whom they would collaborate on consultation topics.
For the additional Pilot Study, the delegation headed by Dr. Moon-Soo Kang paid the
second visit to Phnom Penh during July 4-10, 2010. The main purposes of the visit were to
conduct an in-depth survey by interviewing working-level officials and experts, to finalize the
contract with local consultants, and to engage in further dialogue for supplementation of
Memorandum of Understanding (MOU). As a result of study visits, the sub research themes and
the local consultants were determined as follows:
Consultation Topics Korean Researcher Cambodian Researcher
Search for Development Path and Evaluation Ms. Chandarany Ouch

Dr. Chin Hee Hahn (KDI)
of Growth Potential of Cambodia (CDRI)
Structural Transformation and the Role of Dr. Jong-il Kim

Dr. Kimsun Tong (CDRI)
Government (Dongguk Univ.)
Promoting Low-cost Loans for SMEs and Dr. Wook Sohn

Rice Mills (KDI School)
Mr. Vannak Chou (MEF)
Proposals for introduction of credit Mr. Hyo-Eui Kim
guarantee system in Cambodia (Korea Credit Guarantee Fund)
Dr. Kyeongwon Yoo

Strategic Development for Micro-Insurance (Sangmyung Univ./Korea
Ms. Linna Tan (MEF)
in Cambodia Insurance Research
Institute)
Dr. Youngrak Choi

Factory Establishment Mr. Phyra Sok (MIME)
(Korea Univ.)
Dr. Gyung Ihm Rhyu
Enhancement of Standardization and
(Korean Standards Mr. Uddara Chheng (ISC)
Conformity Assessment System in Cambodia
Association)
Mr. Pheara Kith,
Promoting Exports of Cambodia Dr. MoonJoong Tcha (KDI)
Dr. Ralf Mueller (MoC)
Mr. Youn-Soo Rah
Capacity Building on Export Promotion
(Korea Trade-Investment Mr. Mab You (MoC)
Procedure in Cambodia
Promotion Agency)
Role Name
Project Manager for 2010 KSP with

Dr. Moon-Soo Kang (KDI)
Cambodia
Program Director Dr. Wonhyuk Lim (KDI)
Program Officer Ms. Seo-Young Kim (KDI)
019
2010 KSP with Cambodia
From August 1 to 6, 2010, the Cambodian delegation headed by H.E. Dr. Hang Chuon
Naron, Secretary of State of the MEF, visited Korea to participate in Policy Seminar. The
delegation comprised of Cambodian officials and local consultants from the MEF, the Ministry
of Commerce (MoC), the Ministry of Industry, Mines and Energy (MIME), and Cambodia
Development Resource Institute (CDRI). Policy Seminar aimed to improve an understanding of
Cambodian delegation on Korea’ s development experience and of Korean researchers on the
current situation of the Cambodian economy in the nine sub-thematic areas, and to provide the
Cambodian officials and experts with field visits to industrial complexes such as SK Energy in
Ulsan and POSCO in Pohang.
The Cambodian delegation, headed by H.E. Mr. Ros Seilava, Deputy Secretary General of
the MEF, visited Korea from October 24 to 29, 2010 to participate in Interim Reporting &
Policy Practitioners’Workshop. In the workshop, the research team presented policy
recommendations as well as interim research findings and received feedbacks from Cambodian
practitioners and local consultants. In addition, upon a request of MEF, there was a special
session in which the research team gave comments on a draft note of industrial policy in
Cambodia, currently being prepared by the Cambodian government. Furthermore, the
Cambodian mission carried out field trips to relevant Korean organizations and sites in their
respective research sectors including Korea Credit Guarantee Fund, Industrial Bank of Korea,
Education Research Industry Cluster, Korea Industrial Complex Corporation, Korea
Standardization Association, Korea Trade-Investment Promotion Agency, Korea Exim Bank
and Dongdaemun Fashion Cluster, etc.
As the final stage of the 2010 KSP with Cambodia, Final Reporting Workshop and Senior
Policy Dialogue were held at Sokha Ankor Hotel in Cambodia on January 25, 2011. In
particular, H.E. Hang Chuon Naron, the Secretary of State of MEF, and H.E. Phork Sovanrith,
the Secretary of State of MIME, attended the events and chaired Macro-economy session and
Industrial Technology Development session, respectively. Each of the Korean delegates on four
consultation areas delivered final research findings to these senior policy-makers, relevant
working-level officials, local consultants for the 2010 KSP, and other stakeholders. In addition,
they provided the final comment on industrial development policy for diversification of the
Cambodian economy. The Cambodian side represented by H.E. Hang Chuon Naron and H.E.
Phork Sovanrith showed a deep interest in the policy recommendations and a strong will to
continue KSP project for 2011.
With successful completion of the events, KDI and the Cambodian authorities promised to
expand their mutual relationship with newly launched 2011 KSP and had discussions on follow-
up issues and new topics the following day.
Seo-Young Kim
Program Officer for 2010 KSP with Cambodia
020
Executive Summary
Moon-Soo Kang (KDI)
The Third Knowledge Sharing Program with

Cambodia in 2010
Upon the successful implementation of the second 2009 KSP, Cambodia has been selected as
the 2010 KSP strategic partner with Korea by the Ministry of Strategy and Finance of the Korean
government and KDI. The Cambodian government submitted a demand survey with topics on
“Policy Agenda for Cambodia in Growth, Finance, Industry and Trade”on December 2009.
In January 2010, experts from Korea met H.E. Deputy Prime Minister Keat Chhon and other
government officials. Experts from Korea and government officials from Cambodia agreed
upon nine sub-topics and they are as follows:
Nine Sub-topics:
Topic 1: Search for Development Path and Evaluation of Growth Potential of Cambodia
Topic 2: Structural Transformation and the Role of Government
Topic 3: Promoting Low-cost Loans for SMEs and Rice Mills
Topic 4: Proposals for introduction of credit guarantee system in Cambodia
Topic 5: Strategic Development for Micro-Insurance in Cambodia
Topic 6: Factory Establishment
Topic 7: Enhancement of Standardization and Conformity Assessment System in Cambodia
021
Executive Summary
Topic 8: Promoting Exports of Cambodia
Topic 9: Capacity Building on Export Promotion Procedure
From April 25th to May 1st of 2010, the Korean KSP team visited Cambodia for the Senior
Government Officials’Demand Survey. From 4th to 10th of July 2010, the Korean KSP team
visited Cambodia for the Second Demand Survey of the Cambodian government officials. From
August 1st to 6th 2010, Cambodia’
s Secretary of State of the Ministry of Economy and Finance,
H.E. Dr. Hang Chuon Naron and fifteen government officials and experts of Cambodia visited
Korea to hold a policy seminar for discussion and to coordinate contents of research and
consultation in progress. From 24th to 29th of October 2010, fifteen Cambodian government
officials and experts, headed by Mr. Ros Silva, the Secretary General of the Ministry of
Economy and Finance, visited Korea for an interim reporting and policy practitioners’
workshop.
From January 25th to 26th 2011, the Senior Policy Dialogue and Final Reporting Workshop
were held in Cambodia. At both events, final consultations papers and research results were
presented to high-ranking government officials and opinion leaders.
Overview of the Cambodian Economy

Cambodia has established a strong track record of achieving high economic growth and
maintaining stable macroeconomic conditions. Growth accelerated in 1999 as the domestic
political situation stabilized, and the external economic situation improved following the 1997
Asian crisis. At the same time, national strategic plans were prepared as a road map for the
country.
The National Strategic Development Plan (NSDP) for the period 2006-2010 had been
approved in 2006 to implement the Rectangular Strategy (RS). To continue with the remaining
task, an updated NSDP (2009-2013) was launched on July 7th , 2010 to implement phase II of
the RS. The strategic plan focuses on how to attain sustainable economic growth, especially on
achieving four objectives of the RS: Growth, Employment, Equity, and Efficiency. The Royal
Government of Cambodia (RGC) strives to stabilize its macroeconomic environment by
ensuring sustainable long-term economic growth rate at around 7 percent per annum.
From 1998 to 2008, Cambodia’ s economy was mainly driven by four sectors: garments,
tourism, construction and agriculture. In fact, the country experienced a period of rapid growth
during 2004-2007. However, the episodic growth had ended by 2008.
GDP per capita increased from USD 288 in 2000 to USD 703 in 2008. GDP per capita has
continued to increase at high levels though it showed signs of decline based on an estimate of
022
USD 693 for 2009 (Economics Today 2010). At the same time, net foreign reserves have
increased from USD 411 million to USD 2,354 million based on projections for 2010.
Cambodia is a small, open, dollar-based economy. The fluctuating foreign exchange market
and overt dependence on imported consumer goods and petroleum make Cambodia vulnerable
to external shocks. Fluctuations in the foreign exchange rate and world market prices would
immediately hurt the domestic economy (Hang 2009).
The soundness of the banking system has been shown through an increase in the number of
financial institutions such as commercial banks, specialized banks, Microfinance institutions
(MFI), and insurance companies. The banking sector continued to grow but at a slower pace in
2009 due to the slowdown in the real sector of Cambodia’ s economy. Despite this fact, the
number of customer deposits and customer credits improved substantially, by 32 percent and 14
percent, respectively. This reflects the strengthening of public confidence in the banking
system, even during stressful periods.
The global financial crisis gave only an indirect impact to the Cambodian economy;
commercial banks do not have direct exposure to subprime loans. However, there were indirect
impacts mostly in the real sector of the economy (Hang 2009). Cambodia’ s slowing economy
has weakened banks’balance sheets and stalled new lending. Although Cambodian banks were
not exposed to toxic assets abroad, the liquidity conditions were tightened at the onset of the
global financial crisis.
Several factors had been identified as obstacles to Small and Medium Enterprises’(SMEs)
access to finance, including (i) insufficient legal security for the use of collateral in secured
transactions and underdeveloped land titling system, (ii) limited availability of credit
information on prospective borrowers, and (iii) weak financial reporting capacity of SMEs. An
additional concern was the lack of an adequate legal and regulatory framework to enable leasing
as a new financial product to address the medium and long-term financing needs of enterprises
(ADB, 2008).
Microfinance has significantly contributed to Cambodia’ s economic development since it has

been primarily used to support SMEs as well as the agricultural sector. There are 20 licensed
MFIs, 26 registered rural credit operators, and around 60 NGOs, all of which provide informal
financial services throughout the country. Furthermore, the MFI targets people in rural areas who
need two primary products: loans and savings accounts1. NBC has allowed MFIs to collect public
savings within their operating areas. The trail of new product development - saving deposits and
inter-branch transfer - was introduced. As of December 2009, the number of borrowers from
1) National Bank of Cambodia, Annual Report 2009.
023
Executive Summary
microfinance institutions and rural credit operators were 904,298, which had increased by
approximately 6 percent compared to 2008. Most of the credits were directed to the agricultural
sector and small and medium-sized businesses which accounted, respectively, about 42 percent
and 35 percent of the total credit. At the same time, the number of depositors has increased
remarkably. In addtion, MFIs and rural credit operators had mobilized savings of KHR 44 billion
from 171,190 clients compared to 2008. The amounts of savings were KHR 26 billion from
155,291 depositors, which had increased by 72 percent and 10 percent, respectively.
Export-oriented garment manufacturing emerged in Cambodia after the restoration of peace and
the resumption of normalized political and economic relations with the global community in the
mid-1990s. The garment sector is a labor-intensive industrywhere workers are emplyed, mostly
female, who come from the countryside. The sector has provided employment to over 350,000
factory workers in September 2008. Garment industry is the main contributor to Cambodia’ s
earning through foreign currency. As of October 2009, there are over 243 garment factories that
employed over 278,000 workers in Cambodia. The garment export have increased from USD 20
million in 1995 to USD 2.89 billion in 2008. Remarkably, the garment industry which has been the
main contributor to the industrial sector during the last decade fell sharply in 2009.
The RGC’ s industrial policy has two goals: supporting the development of export oriented
industries and the development of import-substituting production of selected consumer goods.
These goals can be achieved by promoting2: i) labor-intensive industries, ii) natural resource-
based industries, iii) SMEs, iv) agro-industries, v) technology transfer and upgrading the quality
of industrial products, vi) establishment of industrial zones, and vii) development of import-
substituting production of selected consumer goods. The industrial sector experienced negative
growth in 2009, which impacted GDP growth due to the effects of the financial crisis. The main
reason the crisis had a serious effect on Cambodia was due to the lack of diversification and
upgrading of its industries. Reports by JICA in 2007 and Hang in 2009 clearly show that
Cambodia’ s industry sector needs to diversify its activities. But diversification needs to be in
line with its comparative advantages.
At the same time, Special Economic Zones (SEZs) have been recognized as an important
part of economic development. The SEZ refers to a special area designated for development of
the economic sectors which brings together all industrial and other related activities and may
include General Industrial Zones and/or Export Processing Zones. The RGC has since approved
a total of 21 SEZs located along the border with Thailand and Vietnam, at Sihanoukville and
Phnom Penh. Of the 21 SEZs, 6 have commenced operations.
Many countries promote inward FDI through providing tax holidays, tariff exemptions, and
subsidies. Developing country businesses could learn new technology through foreign direct
2) Hang, Chuon Naron (2009),“Cambodia Economy: Charting the Course of a Brighter Future.”
024
investment “FDI”
( ). To incentivize investors, the Investment Law was promulgated in August
1994 to offer investment incentives. In March 2003, in order to make licensing schemes
simpler, transparent, predictable, automatic and non-discretional, and its effort to modify tax
incentives allowed it for qualified investment projects (QIPs). Finally, the 1994 Investment Law
was amended substantially by the Law on the Amendment to the Law on Investment. However,
this law alone is not sufficient to attract investors to set up their business in Cambodia. Thus,
other relevant legal regulations are needed to be adopted.
About 60 years ago, it was generally believed that what was needed in order to transform
less developed countries into more developed countries was to transfer capital. But today it is
understood that what distinguishes developed countries from less developed countries is the
gaps both in knowledge and technology (Stiglitz 2003). Stiglitz points out that Korea has been
successful not only in promoting economic growth but also reducing poverty. He argues that a
key to Korea’ s success was its closing of the technology gap. The success in closing the
technolgy gap is a result of explicit efforts by the government3. Economic growth can occur as
the result of four distinct processes: increase in the capital-labor ratio, increase in trade, increase
in the stock of human capital, scale, and size effects. These four factors of economic growth
reinforce each other in many complex ways.
3) Stiglitz, Joseph E.,“Globalization, Technology, and Asian Development,”Asian Development Review Vol. 20
No.2, ADB, 2003
025
Executive Summary
Overview of the Cambodian Economy
Moon-Soo Kang (KDI)
1. Economic Growth and Development in Cambodia

1.1. Economic Growth
Cambodia has established a strong track record of achieving growth and maintaining stable
macroeconomic conditions. Growth accelerated in 1999 as the domestic political situation
stabilized, and external economic situation improved following the 1997 Asian crisis (Guimbert
2010). At the same time, national strategic plans were prepared as a road map for the country.
The National Strategic Development Plan (NSDP) for the period 2006-2010 had been
approved in 2006 to implement the Rectangular Strategy (RS), which was introduced in the
third legislation of the Royal Government of Cambodia (RGC). To continue with the remaining
task, an updated NSDP (2009-2013) was recently launched on July 7, 2010 to implement phase
II of the RS which was presented in the fourth legislation, and was published in September
2008. These strategic plans focus on how to attain sustainable economic growth, especially on
achieving the four objectives of the RS: growth, employment, equity, and efficiency. The RGC
endeavors to stabilize its macroeconomic environmentby ensuring a sustainable long term
economic growth rate at around 7 percent per annum.
The Cambodian economy-over the period of 1998-2008-was driven by four sectors:

garments, tourism, construction and agriculture (Guimbert 2010). The country experienced a
period of two-digit rapid growth during 2004-2007, growing 10.3, 13.3, 10.8, and 10.2 percent,
026
respectively. However, the episodic growth had ended by 2008. In 2008, the growth rate
declined to 6.7 percent. The negative growth rate in 2009 was mostly due to the decrease in
GDP share by the industry sector (Figure 1-1).
Figure 1-1 | Cambodia’

s Real GDP Growth by Sector
Note: Compiled from NIS for 2005-2008, EIC projection for 2009-2010
Source: Economics Today, “Cambodia Economic Watch” Special Issue January 2010 (Volume 2, Number 55)
Economics Today’ s analysis of Cambodia’ s real GDP growth by sector in January 2010
shows that growth in the agriculture sector has been undergoing a sharp decline, falling 5.1
percent in 2007 to approximately 4 percent in 2010. Industrial growth, which relies mainly on
the garment sector, has tumbled to a negative rate of -8.3 percent based on estimates of 2009.
Also growth in the service sector, tourism and hotel, has dropped from 10.2 percent in 2007 to 9
percent in 2008, and was increased by 1.2 percent in 2009 (Table 1-1).
Table 1-1 | Real Growth Rate by Sector (2005-2010)
Year 2005 2006 2007 2008 2009e 2010p

Agriculture 15.5% 5.5% 5.1% 5.7% 3.5% 4%
Paddy 43.7% 4.3% 7.5% 3.6% 3.4% 3.7%
Industry 12.9% 18.4% 8.4% 4% -8.3% 1.5%
Garments 9.2% 20.4% 10% 2.2% -14.7% 0.6%
Services 13.1% 10.1% 10.2% 9% 1.2% 2.9%
Tourism 22.3% 13.7% 10.3% 9.8% 0.6% 2.1%
Total GDP 13.3% 10.8% 10.2% 6.7% -1% 3%
027
Executive Summary
1.2. Macroeconomic Performance
Macroeconomic stability has further improved and strengthened, and all macroeconomic
data use year 2000 as the base year (Mid-Term Review 2008). Cambodia’ s macroeconomic
situation has been acknowledged as“stable”in terms of its sustained growth with an average of
9.8 per annum, GDP per capita, foreign reserve, and single-digit inflation rate below 5 percent
throughout the period.
GDP per capita increased from USD 288 in 2000 to USD 703 in 2008. GDP per capita has
continued to increase at high levels though it showed signs of decline based on an estimate of
USD 693 for 2009 (Economics Today 2010). At the same time, net foreign reserves have
increased from USD 411 million to USD 2,354 million based on projections for 2010 (Table 1-2).
Table 1-2 | Main Economic Indicators
2000 2006 2007 2008 2009 2010

Nominal GDP (million USD) 3,649 7,275 8,639 10,320 10,338 11,135
Real GDP (% increase) 8.80% 10.80% 10.20% 6.70% -1.00% 3.00%
GDP per Capita (USD) 288 514 598 703 693 735
GDP per Capita (% increase) 2.40% 12.90% 16.40% 17.60% -1.40% 6.00%
Riel/Dollar Parity (year average) 3,859 4,103 4,056 4,068 4,163 4,100
Inflation in Riel (year average) -0.70% 4.70% 5.90% 14.20% -0.70% 8.20%
Inflation in Dollar (year average) -1.80% 4.40% 7.10% 13.90% 0.80% 5.80%
Budget Revenue (% GDP) 10.20% 9.80% 11.50% 12.60% 11.60% 12.40%
Budget Expenditure (% GDP) 15.10% 13.80% 14.40% 15.10% 18.00% 18.60%
Current Public Deficit (% GDP) 1.30% 1.00% 2.60% 3.60% 0.50% 1.70%
Overall Public Deficit (% GDP) -4.80% -4.00% -2.90% -2.50% -6.40% -6.20%
Export of Goods (% GDP) 38.30% 50.80% 47.30% 45.60% 40.00% 39.80%
Import of Goods (% GDP) 53.00% 65.60% 63.30% 63.10% 58.10% 55.90%
Trade Balance (% GDP) -14.80% -14.80% -16.00% -17.40% -18.10% -16.20%
Current Account Balance (% GDP) -11.40% -7.90% -8.50% -12.20% -13.00% -11.20%
Net Foreign Reserves (million USD) 411 1,097 1,374 1,700 1,992 2,354
Money - M1 (% GDP) 3.50% 5.40% 5.70% 5.40% 6.50% 6.40%
Money - M2 (% GDP) 9.40% 17.90% 26.80% 22.60% 25.90% 26.20%
Population (million) 12.7 14.2 14.4 14.7 14.9 15.2
Labor Force (% Population) 52.80% 57.60% 58.20% 58.80% 59.30% 59.80%
Note: EIC, compiled from government and international organization primary data.
Cambodia is a small, open, dollar-based economy. The fluctuating foreign exchange market
and overt dependence on imported consumer goods and petroleum make Cambodia vulnerable
to external shocks. Fluctuations in the exchange rate and world market prices would
028
immediately hurt the domestic economy (Hang 2009). The 2009 annual report of the National Bank
of Cambodia (NBC) shows that by the end of December 2009, the year-on-year non-food inflation
rate declined to 5.2 percent, compared with the 6.7 percent posted over the same period in 2008,
which is against the annual overall inflation rate of 5.3 percent. This suggests that the prices of non-
food items were the major causes of the recent high-level inflation. At the same time, inflation
excluding transportation posted an annual rate of 6 percent, while non-food and non-transportation
related inflation was just 6.8 percent at the end of December 2009. This again implies that the
prices of fuel and transportation are also important sources of inflation (Figure 1-2).
Figure 1-2 | CPI All Items Excluding Food and Transportation (Year-on-Year)
Inflation X Food
Overall Inflation
Inflation X Transportation
Source: National Bank of Cambodia, Annual Report 2009.
1.3. Financial Sector Development

A number of the empirical literature on finance and development suggest that well-
developed financial systems contribute in promoting long-run economic growth4. From a
significant policy perspective, the government’ s role is crucial in building efficient and inclusive
financial systems. Government policies mold the structure and functioning of the financial
systems. Degree of the political and macroeconomic stability and operation of legal, regulatory,
and information systems affect the financial environment. Governments affect ownership of
financial institutions as well as the degree of contestability by foreign and domestic players in
financial markets, which influence the functioning of finanacial systems.
4) Demirguc-Kunt, Asli and Ross Levine, Finance, Financial Sector Policies, and Long-Run Growth, Working
Paper No. 11, Commission on Growth and Development, 2008.
029
Executive Summary
Preconditions for financial development and economic growth are comprised of four
elements which serve as the essential foundations for a market based economy5:
Effective governance;
Property rights and production;
Enforcement of contracts and resolution of commecial diputes; and
Human capital development
A sound financial sector in a country can build people’ s confidence in the financial system.
This is a crucial tool that could also accelerate the role of financial institutions in the market.
The financial sector in Cambodia has developed from banking and non-banking sectors, and it
consists of a capital market and an insurance industry. The stable banking system has been
shown through an increase in the number of financial institutions such as commercial banks,
specialized banks, Microfinance Institutions (MFI), and insurance companies.
Table 1-3 | Number of Financial Institutions 2007-2009
Institutions 2007 2008 2009

Commercial Banks 17 24 27
Foreign Branch Banks 3 3 5
Local Incoparated 14 21 22
Specialized Banks 7 6 6
Private Local Banks 6 5 5
State owned 1 1 1
Licened MFIs 17 18 20
Rigistered MFIs 26 26 26
Unregistered MFIs around 60 NGOs around 60 NGOs around 60 NGOs
Insurance Companies 6 6 7
Source: National Bank of Cambodia, Annual Report 2009, Banking Supervision Department
The banking sector continued to grow but at a slower pace in 2009 due to the slowdown in
the real sector of Cambodia’ s economy. Despite this fact, the number of customer deposits and
customer credits improved substantially by 32 percent and 14 percent respectively. This reflects
the strengthening of public confidence in the banking system, even during stressful periods.
Improvement in the number of deposit accounts has accelerated from demand for savings,
introduction of modern banking products, and countrywide expansion of convenient banking
services. On the other hand, number of credits improved rapidly in the last quarter where
businesses started to pick up after a cooling period followed by the economic slowdown in
2008. However, these new credit disbursements consist of small and medium size loans, while
credit for large investment projects improved modestly.
5) Financial Sector Development Strategy (FSDS) 2006-2015
030
Figure 1-3 | Number of Depositors and Borrowers
1.4. Impact of the Global Financial Crisis6

The overall impact of the global economic crisis on Cambodia was studied by the World
Bank (WB). According to the WB, the economy was indeed not directly exposed to the first
wave of the crisis (given the limited extent of development and relative conservatism of the
financial sector), but was exposed to the second wave because of its openness to trade and
dependency on foreign capital. By the second half of 2009, the impact of the global economic
crisis began to be felt in Cambodia, suggesting that this was merely a temporary boom
(Guimbert 2010).
The global financial crisis has only had an indirect impact on the Cambodian economy;
commercial banks did not have direct exposure to subprime loans. However, there were indirect
impacts mostly in the real sector of the economy (Hang 2009).
Indirect Impact on Banks
The NBC authorized sound commercial banks with excess liquidity to invest some of their
assets abroad. Foreign assets of the banking system are invested abroad only in secure financial
instruments under close supervision of the NBC. Therefore, the impact of the crisis would have
been felt on the foreign operation of some of the international commercial banks based in
Cambodia.
6) Hang Chuon Naron (2009),“Cambodia Economy: Charting the Course of a Brighter Future.”
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Executive Summary
Cambodia’ s slowing economy has weakened the banks’balance sheets and stalled new
lendings. Although Cambodian banks were not exposed to toxic assets abroad, liquidity
conditions were tightened at the onset of the global financial crisis. Although there were some
improvements in liquidity management, execution of the monetary policy was hampered by
lack of market-based instruments, weak interbank activities, and high level of dollarization,
which in turn, limited the establishment and operations on the intermediate targets.
As reported by the Banking Supervision Department of NBC, non-performing loans in the

banking sector increased gradually to almost 5 percent in 2009 from 3.68 percent in 2008. This
figure is partly of the result of two factors. The first and foremost reason is the impact of the
global crisis. Prominent sectors of the economy such as textiles, tourism, construction, and
agriculture were hit by the crisis. Related firms and businesses to these industries also showed a
decline in demand and consumption. Consequently, banks’credits experienced repayment
difficulty. Another explanation is the introduction of a new guideline on credit classification in
the beginning of 2009, which addressed more stringent criteria for recognizing problem assets.
This new guideline was fully adopted in 2009 and resulted in higher classified assets of
individual borrowers as well as the economic sector.
Figure 1-4 | Non-performing Loans in Banking Sector
However, NBC has taken measures to deal with problematic banks. Since early 2009, NBC has
conducted a set of prioritized onsite inspections and issued supervisory letters to non-compliant
banks. NBC has been also involved in the development of corrective action plans to address a
range of operational and financial deficiencies. Banks are also being urged to advance fulfillment
with new minimum capital requirements7 before the end of deadline in 2010. Strict enforcement of
newly-introduced loan classification methods, providing standards and recognition for loan losses,
032
implementation of corrective action plans and development of a comprehensive bank restructuring
framework are all critical in improvingthe solvency of the banking system.
Indirect Impact on Garment Export
In face of a crisis, consumers cut back on on consumption and saves more expecting difficult
times ahead. The drop in consumption would affect imports from third world countries and
consequently, it would lead to a decline in their GDP (Hang 2009). Cambodia exports around
70 percent of its garment products to the United States (U.S.) which is currently inrecession.
During the first nine months of 2009, garment exports under GSP/MFN8 scheme have declined
by 17.9 percent to USD 1.9 billion. This was mainly due to a drastic decline in the garment
exports to the U.S. by 26.1 percent. Garment exports to the EU have declined only 5.3 percent,
while exports to Japan have increased by 51.6 percent. Between January 2008 and October
2009, the number of factories was reduced from 293 to 243 and the number of garment workers
decreased from 351,340 to 278,398.
Figure 1-5 | Textile Exports 2008-2009 (In million USD)
Note: Direction General of Customs and Excises[Lee2], MEF

Source: Hang, Chuon Naron (2009), “Cambodia Economy: Charting the Course of a Brighter Future”
Indirect Impact on Tourism
People would prefer to put off their holidays during hard times. Job losses and a gloomy outlook
7)“Prakas on New Capital Requirement and Criteria for Licensing Approval of Banks”stipulates that:
- A minimum of KHR 50 billion for locally commercial banks incorporated as companies with an
“investment grade”rating from a reputable rating agency. For commercial banks with shareholders who
are individuals or companies, the minimum requirement is KHR 150 billion.
- A minimum of KHR 10 billion for locally special banks incorporated as companies with an“investment
grade”rating from a reputable rating agency. For special banks with shareholders who are individuals or
companies, the minimum requirement is KHR 30 billion.
8) Generalized System of Preferences/ Most Favoured Nation
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Executive Summary
are negatively correlated with the likelihood of people taking vacation (Hang 2009). However, from
2007 to 2008, the number of tourists arriving in Cambodia have increased by 5 percent. However,
tourist arrivals declined by 5 percent during the fourth quarter of 2008 compared to the same period
in 2007. The full impact of a downturn in toursim was realized in 2009.
Although the total number of tourist arrivals increased by 2 percent to 1.57 million
especially due to the increase in arrivals via land during the first nine months of 2009, compared
to the same period in 2008, the high end tourism industry dropped significantly. Indeed, arrivals
via air decreased 12.6 percent in the first nine months, reflecting deteriorating financial
conditions for high end hotels. Furthermore, revenues produced from Angkor Wat Temple fell
by about 30 percent compared to 2008.
Figure 1-6 | Tourist Arrivals in Cambodia 2008-2009 (In thousands)
Note: Ministry of Tourism

Source: Hang, Chuon Naron (2009), “Cambodia Economy: Charting the Course of a Brighter Future”
Indirect Impact on Construction
The real estate market in Cambodia has been stagnant since June 2008. The policy of the
central bank has been aiming to limit credit exposure to the real estate market in order to cool
down the market. Moreover, investors are cautious, as a real estate crisis is in full swing in the
U.S. and Vietnam. However, there is no indication that banks have lent imprudently in the real
estate market. Construction activity continues to be slow in 2009, reflecting a decline in foreign
investment and cautious bank lending.
New township, the construction of the Special Economic Zone, and tourism development
projects, such as Koh Puos Development Project, Camco City Project, Boeung Snor
Development Project, and the Sunway City Project have come to a standstill. However, real
estate developers continue to proceed with their projects, albeit at a slower pace and a reduced
scale. The slowdown in privately-funded projects was partly offset by public projects, such as
034
the road and bridge construction. In 2009, construction activities were estimated to have
contracted by 2.6 percent.
2. SME Financing: Microfinance and Micro-Insurance

2.1 Financial Development9
McKinnon (1973) studied the relationship between the financial system and the economic
development in Argentina, Brazil, Chile, Germany, Korea, Indonesia, and Taiwan during the
post World War II period. McKinnon’ s analyses suggest that better functioning financial
systems promote faster economic growth10.
A number of the empirical literature on finance and development suggest that better-
developed financial systems promote long-run economic growth. Specifically, both financial
institutions and markets are important factors in economic growth. Better-functioning financial
systems relieve external financing constraints that hinder business and industrial growth. From a
policy perspective, the government’ s role is important in building efficient and inclusive
financial systems. Government policies mold structure and functioning of the financial systems.
The degree of political and macroe-conomic stability and the operation of legal, regulatory, and
information systems affect the financial environment. Governments affect the ownership of
financial institutions as well as the degree of contestability by foreign and domestic players in
financial markets, which influence the functioning of finanacial systems11.
Empirical studies have reported that countries with lower and more stable inflation rates
experience more advanced levels of banking and stock market development. (Boyd, Levine, and
Smith 2001).
Timely availability of quality information is also important, since this contributes to

reducing information asymmetries between borrowers and lenders. Collection, processing, and
use of borrowing history and other information relevant to households and small business
lending-credit registries-have been growing fast in both public and private sectors (Miller,
2003). Empirical studies report that the volume of credit is remarkably higher in countries with
more information sharing. Businesses also testify that better credit information reduces
financing barriers. According to Levine(1996), it is stated that a growing literature reveals
differences in how well financial systems can lower information and transaction costs and
9) Demirguc-Kunt, Asli and Ross Levine, Finance, Financial Sector Policies, and Long-Run Growth, Working
Paper No. 11, Commission on Growth and Development, 2008.
10) McKinnon, Ronald I. Money and Capital in Economic Development, Brookings Institution, 1973.
11) Demirguc-Kunt, Asli and Ross Levine,, ibid.
035
Executive Summary
affect savings rates, technological innovation, and long-run growth rates12.
Access to financial services has recently been getting greater emphasis.13 One reason is that
modern development theory regards the lack of access to finance as a crucial cause for
persistent income inequality as well as slower economic growth. Another reason is from the
observation that small businesses and poor households confront much greater barriers in their
ability to access financial services, particularly in developing countries.
There are several reasons why poor households do not have access to financial services such
as loans, savings accounts and insurance services. Regarding access to credit services, there are
two main problems. First, poor households do not have collateral, and secondly, they cannot
borrow based on their future income because they tend to not have a positive credit history that
creditors can rely upon. Microfinance seeks to overcome these problems in an innovative
manner.
Governments can promote financial access by making and supporting infrastructure

improvements. Recent research suggests that in low-income countries improving information
infrastructures seem to produce more immediate access benefits than legal reforms14.
2.2. SMEs and Access to Finance

Several factors have been identified as obstacles to Small and Medium Enterprises’(SME)
access to finance including (i) insufficient legal security for the use of collateral in secured
transactions and underdeveloped land titling system, (ii) limited availability ofcredit
information on prospective borrowers, and (iii) weak financial reporting capacity of the SMEs.
An additional concern was the lack of adequate legal and regulatory framework to enable
leasing as a new financial product to address the medium and long-term financing needs of the
enterprises (ADB, 2008). In addition, the International Finance Corporation’ s 2010 Doing
Business Survey ranked Cambodia at 87 out of 173 countries in terms of easiness in
accumulating credit. This ranking was based on the strength of legal rights and the availability
of credit information15.
In response to the demand of SMEs for access to finance, the Financial Leasing Law was
adopted by the National Assembly on May 27, 2009. This regulation, with assistance from the
Asian Development Bank in 2006, was established to help SMEs fund certain equipment
12) Levine, Ross,“Financial Development and Economic Growth,”Policy Research Working Paper No. 1678,
World Bank, October 1996.
13) World Bank,“Access to Finance: Measurement, Impact and Policy,”Policy Research Report, 2007.
“Private Credit in 129 Countries,”Journal of Financial Economics,
14) Djankov, S., C. Mcleish, and A. Shleifer,
2007.
15) http://www.doingbusiness.org/ExploreEconomies/?economyid=33
036
through financing from banks and financial institutions.
2.3. Microfinance
The Cambodian Microfinance Association (CMA) was established in 2004 and the
responsibilities of the microfinance sector have been divided between NBC and CMA with
development support policy and funding coordination from the Ministry of Economy and
Finance (MEF). Regulation and supervision is the responsibility of NBC, and CMA is
responsible for the operational aspect. Since its establishment, the CMA has grown from a
membership association serving 7 members to 20 members by theend of 200916.
Microfinance has significantly contributed to Cambodia’ s economic development since it is

used primarily to support SMEs as well as the agricultural sector. The number of MFIs have
increased in 2009, as illustrated in the annual report of NBC published at the end of the year.
There are 20 licensed MFIs, 26 registered rural credit operators, and around 60 NGOs, all of
which provide informal financial services throughout the country. Furthermore, the MFIs target
people in rural areas who need the two primary products: loans and savings accounts17.
NBC has allowed MFIs to collect public savings within their operating areas. The trail of
new product development-saving deposit and inter-branch transfer-was introduced. The types of
deposit services are as follows18:
16) Cambodian Microfinance Association, Annual Report 2009

1. Angkor Mikroheranhvatho (Kampuchea) Co Ltd. (AMK)
2. AMRET Microfinance Institute (AMRET)
3. Cambodian Business Integrated in Rural Development Agency (CBIRD)
4. Cambodia Rural Economic Development Initiatives for Transformation (CREDIT)
5. Entean Akpevath Pracheachun (EAP)
6. Farmer Finance LTD (FF)
7. Farmer Union Development Fund ( FUDF)
8. First Finance PLC (First Finance)
9. Green Central Microfinance (GCMF)
10. Hattha Kaksekar Limited (HKL)
11. Intean Poalroath Rongroeurng (IRP)
12. Maxima Mikroheranhvatho Co. Ltd (MAXIMA)
13. PRASAC Microfinance Institute Co Ltd. (PRASAC)
14. SAMIC Limited (SAMIC)
15. SATHAPANA Limited (SATHAPANA)
16. SEILANITHIN Ltd. (SEILANITHIH)
17. Tong Fang LTD (TFMF)
18. Thaneakea Phum Cambodia (TPC)
19. Vision Fund (Cambodia) Ltd. (VisionFund)
20. YCP Microfinance Ltd (YCP)
17) National Bank of Cambodia, Annual Report 2009.
18) Economic Institute of Cambodia, Cambodia Economic Watch, April, 2008
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Executive Summary
1. Compulsory savingis a type of deposit service where some institutions require their
customers to make a small deposit when they receive a loan.
2. Voluntary deposit is considered as a cheaper and long term source of funding to support
sustainable growth of MFIs. This product consists of passbook deposit and term deposit.
3. Inter-branch transfer are offered by some institutions which allow their clients to make
payments at different branches that are used as means to promote public deposit.
4. Other services
Loan and deposit service via mobile phones allow clients to make payments, deposits, or
receive credit through mobile phones. This product is popular in some countries but has
not yet started in Cambodia.
Micro-insurance: some MFIs are trying to offer micro-insurance in their markets.
As of December 2009, the number of borrowers from microfinance institutions and rural
credit operators was 904,298, which increased approximately 6 percent compared to 2008. Most
of the credits were directed to the agricultural sector and small- and medium-sized businesses
which account, respectively, about 42 percent and 35 percent of the total credit. At the same
time, the number of depositors increased remarkably and MFIs and rural credit operators
mobilized savings of KHR 44 billion from 171,190 clients compared to 2008. The amounts of
savings were KHR 26 billion from 155,291 depositors, which had increased by 72 percent and
10 percent, respectively.
Figure 1-7 | Percentages of Loans Classified by Type of Business
038
However, CMA’ s Annual Report 2009 points out weaknesses of the sector including:
① Multiple Loans: Multiple Loans become a problem when clients take out as many as 4 to
5 loans which they are unable or unwilling to pay back. This problem leads loan -
providing MFIs to take sub-optimal measures, including writing off the outstanding
loans as non-performing or restructuring them. This problem stems from the following
reasons:
Lack of thorough preliminary credit history assessment of prospective clients
Weak credit reporting system
Issuance of multiple land titles by local authorities
② Mission Drift: Currently, much ambiguity exists concerning the actual socio-economic
impact Cambodian MFIs have on their clients due to the high costs of conducting impact
assessments.
③ Credit Only: Credit is the primary financial product offered by MFIs and is offered
mainly to small businesses and individuals, with fewer group lending options. Given
this saturated credit culture, the current number of saving accounts is relatively low as
illustrated by the number of active savers. Today, only four MFIs have been granted a
deposit collecting license due to legal and budgetary setbacks. Moreover, current credit
options are not tailored to cover the majority of clients’
needs and financial preferences.
2.4. Overview of Micro-Insurance

As acknowledged, a function of micro-insurance is to help poor families in rural areas. So it
was included in the FSDS 2006-2015. Micro-insurance is an important risk management tool
for poor households, and there are numerous coping strategies, worldwide, which low-income
households use to offset crises. Furthermore, the blueprint collected from MFIs based on the
experiences and needs of clients also showed some crucial problems. For MFIs operation in
Cambodia, like in other countries, the common issue is to determine insurance needs of policy
holders, albeit on a smaller scale. Death or illness of a borrower, loss of a valuable piece of
property such as an animal, or weather-related losses such as damage on crops, can all upset the
financial circumstances of participants in microfinance. From the viewpoint of a credit-granting
institution, it makes sense to provide a measurement for insuring the ability of the borrower to
repay the loan. For this reason, pilot projects of health insurance, at a micro level, have been
undertaken in Cambodia and came out to be a success.
Regardless of countries, insurance of this type is subjected to a different standard of

regulation and supervision. The less strict standards of oversight would usually involve lower
capital requirements, less detailed reporting requirements, and less exhaustive inspections by
supervisors. In Cambodia, the insurance industry is supervised by the Financial Industry
Department of the MEF. Fundamental regulations were enacted to supervise this sector as the
Insurance Law, which was adopted in July 2000. In spite of the regulations, there are no legal
documents to manage micro-insurance. There are a small number of pilot projects that are
039
Executive Summary
taking place in Cambodia by licensed MFIs to test limited insurance prospects.
According to the ILO Sub-regional Office for East Asia,19 although a social protection
system does not exist in Cambodia today, the government is strongly involved in the following
activities:
1. Launching of a Masterplan, approved by the Ministry of Health in March 2005, which
proposes the following structure for health protection:
Compulsory Social Health Insurance for formal sector economy;
Voluntary health insurance for informal sector;
Social assistance for the destitute by using health equity fund.
2. On March 2, 2007, the Prime Minister signed a Sub-Decree on Establishing a National
Social Security Fund (NSSF). The NSSF is a public self-financing establishment separate
from the government ministries and will be governed by the Board, with tri-partite
representation. The“health”component of this fund should be implemented by 2012.
In addition, French NGO GRET 20 has been active in Cambodia for 20 years and has
beenworking on several fields of economic development: agriculture, microfinance, and water
sanitation. In 1998, GRET launched an experimental rural health insurance project in two
Cambodian provinces, Kandal and Takeo. The project is known as SKY, which is an acronym
for“Insurance for our Families”in Khmer language. The program objectives can be
summarized as follows:
To secure incomes and assets of Cambodian households by limiting large health
expenditures and avoiding negative economic consequences;
To facilitate households’access to appropriate quality health care both at primary and
secondary levels;
Thus, effectively preventing severe health risks, particularly for the most vulnerable;
To increase awareness on health insurance and to contribute to the development of the nation.
With services covered by SKY, an increasing membership in parallel with the total
number of services delivered, the number of contracted health facilities increased between
2006 and 2007.
Table 1-4 | Number of Primary Health care Consultations, Services by SKY (2006-2007)
2006 2007
Total Primary health care consultation 23,520 33,619
Total Specialist consultation 2,556 4,152
Total hospitalization 508 791
19) ILO, Asian Decent work decade (2006-2015), Cambodia: Sky Health Insurance Scheme“Building a
Sustainable and Replicable Health Insurance Model”
20) Groupe de Recherches et d’ Echanges Technologiques
040
The premium rate of SKY is different as defined by family size and sector type. It also has
different rates for rural and urban areas (Table 2-2 & 2-3). However, the actual level of
premium includes a 31 percent margin, which is still not sufficient to cover the operation costs,
at the present level of membership. The scheme is currently being subsidized by GTZ and
AFD21 to fill the financial gap.
Table 1-5 | SKY Premium Rates by Family Size in Rural Areas
Family Size Old Zone New Zone

1 person 2,500 4,000
2-4 persons 5,500 7,500
5-7 persons 7,500 9,500
8+ persons 9,000 11,000
Note: Premium rates per month, in KHR ($1 = 4,000 KHR)
Table 1-6 | SKY Premium Rates by Family Size and Sector Type in Urban Areas
Family Size Informal Semi Formal Formal*

1 person 8,000 12,000 18,000
2-4 persons 12,000 16,000 24,000
5-7 persons 16,000 20,000 28,000
8+ persons 20,000 22,000 32,000
*50% minimum of the premium is paid by the employer
At the same time, VisionFund (VFC) is one of the Cambodian MFIs that has been providing
credit with micro-insurance as“additional benefits”to its clients. VFC buys micro-insurance
from a program initially implemented by World Vision Cambodia on October 1, 2007. The
Micro-Insurance Program provides additional financial benefits to clients through whom, for
instance, the lives of the client, his/her spouse and two eldest children are insured against
unexpected death22.
The additional benefits can be applied to reduce debts left unpaid and to reduce the funeral
expense in case of the death of the VFC’ s client. Funeral contributions will be made only if when
an insured client passes away. Funeral contributions range from USD 12 to USD 75, based on
one of the three loans the client has: community bank, solidarity group and individual lending.
21) - German technical Cooperation

- French Agency for Development
22) VisionFund (Cambodia), Annual Review 2007
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Executive Summary
Figure 1-8 | Vision Insurance (2007-2009)
Source : VisionFund (Cambodia), Annual Review 2009
2.5. Government Guarantees23

The government can socially allocate capital through a guarantee of a borrower’ s (SME)
obligation to private lenders or through insurance, where the government insures a loan against
default. With a government’ s guaranteed loan program, the default risk of the loan is reduced to
zero. With this risk reduction, the debt obligation is made more attractive to lenders. The
potential borrower may now be able to attract lenders where before there were none, or it may
simply pay a lower interest cost. In all cases, the debt instrument becomes a more desirable
substitute relative to other financial instruments in the market.
The situation is illustrated in Figure 1-9. In this case, the demand curve represents that of a
borrower. Without a guarantee, the demand curve DD and supply curve SS intersect at point X,
which results in a market clearing rate of interest of rc. With the guarantee, however, the supply
curve shifts to the right - to S′ S′. This occurs because the financial instrument now is more
attractive due to the reduction in risk. If the borrower is unrestricted by the government in the
amount it is able to borrow, it will seek d′in financing at an interest rate of r′
. Thus, the interest
rate will fall and the amount borrowed will increase. If, however, the government restricts the
amount that can be borrowed, the effective supply curve shortens. Suppose the restriction were set
at the amount borrowed before the guarantee, d*. Instead of a supply curve of S′ S′
, the supply
curve would be S′ d* in Figure 1-9. As a result, the interest rate would be r′ ′ . Thus, the entire
effect of the guarantee would be on interest cost and not on the amount of financing.
23) Van Horne, James C., Financial Market Rates and Flows, second edition, Prentice-Hall, Inc., 1984, pp.278-279.
042
Figure 1-9 | Illustration of the Effect of a Government Guarantee
Source : Van Horne (1984)
3. Export Industry in Cambodia24

3.1. Overview of the Garment Industry
Export-oriented garment manufacturing emerged in Cambodia after the restoration of peace
and the resumption of normalized political and economic relations with the global community
in the mid-1990s. Investors from Hong Kong, China, Taiwan, Korea, and other countries were
attracted to Cambodia by its low production costs as well as its access to garment quotas. As a
result, most garment factories today belong to foreign owners (USAID 2005).
However, development of the Cambodian garment industry had gone through three
challenges (Hang 2009):
First, the introduction of quotas was conditioned in the 1999 Bilateral Textile Agreement
between Cambodia and the U.S. This was followed by Cambodia’ s access to the EU market on
the basis of quota-free and duty-free under the EU’ s Everything But Arms initiative-Generalized
System of Preferences for least-developed countries. International Labor Organization (ILO) is
tasked to verify compliance with labor standards. Unions exist to organize and express the
needs of labor, and the voice of Garment Manufacturer’ s Association of Cambodia (GMAC) has
clearly influenced policies that support the needs of the sector, through the Government-Private
24) Hang Chuon Naron (2009),“Cambodia Economy: Charting the Course of a Brighter Future”
043
Executive Summary
Sector Forum. The agreement offered Cambodia a quota in a market segment, which could be
increased up to 14 percent a year based on adherence to a set of labor standards. The pursuit of a
policy protecting the rights of workers and adherence to labor standards allow the Cambodian
textile and garment sectors to pioneer in the practice of corporate social responsibility.
Cambodia has embedded these principles in the Labor law. Additional quotas of over 6 percent
are granted if inspections conducted by the ILO conclude that there was an improvement in
working conditions. The Ministry of Commerce is responsible for providing certificates of
origin to authenticate the country of origin, for managing the allocaiton of quotas, for verifying
fulfillment of quotas both within Cambodia and the export destination, for verifying compliance
with duty exemptions, and for managing quality assesments.
Another challenge was the removal of textile quotas in the U.S. on January 1st, 2005, under
the WTO Agreement on Textiles and Clothing. As an effect of the agreement, Cambodia’ s
textile industry had to compete openly with more competitive countries such as China and
India. Therefore the benefits of the U.S. protected market were effectively phased out. After
2005, Cambodia has accessed the U.S. market on most-favored-nation (MFN) basis, along with
other WTO members, unrestricted by quotas. However, the U.S. came to introduce a safeguard
provision against Chinese imports in an attempt to protect its domestic market. Moreover, the
RGC took measures to reduce administrative costs, streamline export and import procedures,
curb informal payments and improve the investment climate to ensure the survival of the
Cambodian textile and garment industry. Important trade facilitation reforms have been
implemented to improve competitiveness and build investor confidence by reducing production
and marketing costs. After the removal of textile quotas in 2005, large supply orders have been
increasing. In response to the placement of large orders, about 30 textile companies have begun
to expand while some companies were closed because of uneconomic facilities. The fear of a
free-all of Cambodian production and textile exports has turned out to be ill-founded.
Lastly, the global financial crisis has posed a challenge to the garment industry in Cambodia.
The garment industry will face greater challenge in the post-crisis environment, as production
costs for the Cambodian garment-textile industry are higher than those of its competitors such
as China and Vietnam. China’ s garment sector is much larger and also vertically integrated.
Cambodia has responded to move into niche markets of Japan and ASEAN. Therefore,
Cambodia will need to focus on cost competitiveness by further accelerating trade facilitation
reforms and increasing value-added. But the enterprises in Cambodia pay less tax since the
Cambodian fiscal administration is weaker than that of China and Vietnam.
3.2. Garment Export Industry

Instead of producing raw material, Cambodia has specialized in Cut-Market-Trim (CMT)
(Hang 2009). Garment factories perform only cutting, sewing, finishing, and packaging, while
fabrics are imported from overseas. While the majority of factories have left their overseas
044
partners to negotiate with buyers, about 25 percent of the garment factories have been involved
in full garment production, which includes purchasing fabric, CMT, packaging and shipping the
orders to their buyers. A number of factories are sub-contractors, covering only CMT. Over 60
percent of the cost of production in the garment sector consists of imported material and other
inputs. Therefore, the garment sector has not created other activities through backward linkages
and Cambodia’ s garment industry is characterized by the lack of vertical integration.
Nevertheless, there has been considerable capacity for an accessory and service industry
supporting garment production.
The garment sector is a labor-intensive industry employing workers, mostly female, who
come from the countryside. The sector has provided employment to over 350,000 factory
workers in September 2008, assuming a ratio of four dependents for each worker, income for
more than one million Cambodians. Garment is a larger contributor to foreign currency earning.
As of October 2009, there are over 243 garment factories that employ over 278,000 workers in
Cambodia. Currently, slightly over 8 percent of the companies operating in Cambodia, or 15
companies command over 50 percent of the total volume of garment exports.
The track record of growth has been tremendous. The garment exports have increased from
USD 20 million in 1995 to USD 2.89 billion in 2008. In 2008, about 66 percent of garment
export products are exported to the U.S., 22 percent to EU, 7 percent to Canada, and the
remaining 5 percent to Japan and other ASEAN countries.
Figure 1-10 | Garment Export Market Shares in 2008
Remarkably, the garment industry, the industrial sector’

s main contributor in the last decade,
fell sharply in 2009. According to the Customs Department of the MEF, the quantity of garment
exports declined by 13.8 percent in the first ten months of 2009; there was a 15.1 percent
increase during the same period of 2008. During this period, exports to the U.S., which accounts
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Executive Summary
for 67 percent of total exports, has declined by 20.7 percent, exports to EU markets dropped by
1.7 percent, and those to ASEAN declined by 48.6 percent. It is interesting to note that garment
exports to some other countries, especially Japan, have increased significantly. The overall
decline is mainly due to the decline in demand from the U.S. and EU, and the end of safeguard
measures imposed by the U.S. and EU to restrain Chinese exports.
Figure 1-11 | Volume of Garment Exports and Unit Price (2001-2010p)
4. Industrial Policies
4.1. Industrial Policy of Cambodia
During the last three decades, developing market economies have instituted a wide range of
policies to encourage exports, attract foreign direct investment (FDI), promote innovation, and
favor some industries. This set of government interventions is referred to as industrial policy
(Harrison and Rodriguez-Clare, 2009).
Industry is a key factor for developing countries to reach the stage of a developed country.
Likewise, in Cambodia, industry is also a part of the economy’ s growth, thus, strategies and
policies designed for the sector are very important.
s 2007 report,“The Study on Economic Policy Support in The Kingdom

In regard to JICA’
of Cambodia,”some of the policy papers 25 issued by the government and international
25) NSDP (2006-2010), Strategic Plan of the Ministry of Industry, Mining and Energy (MIME), and International
Trade Center’
s New Export Strategy
046
organizations stipulate several industrial sectors as strategic sectors. From this study, five
industrial sectors were identified as having future potential growth by the JICA Study Team.
Those sectors are: (i) garment, (ii) footwear sector, (iii) agro/aqua-processing, (iv) electronics
parts assembly, and (v) machinery assembly.
The RGC’ s industrial policy has two goals: supporting the development of export oriented
industries and development of import-substituting production of selected consumer goods.
These goals can be achieved by promoting26:
Labor-intensive industries,
Natural resource-based industries,
SMEs,
Agro-industries,
Technology transfer and upgrading the quality of industrial products,
Establishment of industrial zones, and
Development of import-substituting production of selected consumer goods.
Even though the policies and strategies were defined, the garment sector still accounts for
most of the activity in the industrial sector; in that it accounts for the largest share and has
contributed to the economy’ s growth. Activity in other sectors is still slow in progress.
Moreover, the industrial sector experienced negative growth in 2009, which impacted GDP
growth (see Figure 1-1), due to the effects of the crisis. The main reason the crisis had a serious
impact on Cambodia was due to lack of diversification and improvement on its industries27.
The reports by JICA 2007 and Hang 2009 clearly show that Cambodia’ s industry sector
needs to diversify its activities. But diversification needs to be in line with its comparative
advantages. The WB’ s statements:“agriculture will remain a very
s newsletter28 reported Justin’
important source of growth for Cambodia. The agriculture sector has the potential to diversify
from rice to cash crops, to horticulture, and to high-added-value areas. There is potential in
developing manufacturing sectors other than the garment industry, particularly more labor-
intensive sectors like footwear, and electronics. These will generate more investment and more
jobs.”
26) HANG Chuon Naron (2009),“Cambodia Economy: Charting the Course of a Brighter Future”
27) Statement provided by Justin Yifu Lin, the World Bank Senior Vice President and Chief Economist, gave a
lecture on“Growth Strategies for Cambodia: challenges and opportunities”at the National Institute of
Education in Phnom Penh.
28) The WB, Newsletter, Volume 8, Number 9, September 2010.
047
Executive Summary
Table 1-7 | Six Steps for Growth identification and facilitation
Step 1: Find dynamic growing countries with a similar endowment structure and with
about 100 percent higher per capita income. Identify tradable sectors that have
grown well in those countries for the last 20 years. References for Cambodia may
include Vietnam, Thailand, Indonesia, China, and Malaysia;
Step 2: See if some private domestic firms are already in those industries (which may be
existing or nascent). Identify constraints to quality upgrading or promoting new
firm entries. Take action to remove constraints, for example, as in the
government’ s recent rice policy;
Step 3: In industries where no domestic firms are currently present, seek Foreign Direct
Investment (FDI) from countries examined in step 1, or organize new firm
incubation programs;
Step 4: In addition to the industries identified in step 1, the government should also pay
attention to spontaneous self-discovery by private enterprises and give support to
scale up the successful private innovations in new sectors;
Step 5: In countries with poor infrastructure and bad business environment, special
economic zones or industrial parks may be used to overcome these barriers to firm
entry and FDI and encourage industrial clusters; and
Step 6: The government may compensate pioneer firms in the list identified above with
targeted and pro-actively managed support.
Source: The WB, Newsletter, Volume 8, Number 9, September 2010.
At the same time, Special Economic Zones (SEZ) have been recognized as an important part
of economic development. Furthermore, SEZ was defined in Article 2 of the Sub-Decree No
148 on the Establishment and Management of the SEZ29. SEZ refers to a special area designated
for the development of the economic sectors which brings together all industrial and other
related activities and may include General Industrial Zones and/or Export Processing Zones.
Each Special Economic Zone should have a Production Area which may have a Free Trade
Area, Service area, Residential area and Tourist area.
In addition, the sub-decree also contains incentives for attracting investors such as income
tax, customs, and value added tax benefits. Streamlined procedures have been offered to
qualified investors to invest in the SEZ. For instance, aiming to attract more investors, the SEZs
offer a“One-Stop Service”for imports and exports, with government officials stationed on-site
to provide administrative services30. As Cambodia’ s investment laws require at least 28 days to
29) Was adopted in December 2005

30) http://www.investincambodia.com/economic_zones/sezs.htm
048
Establishment of an Innovative National Development Framework and Orientation of a New Development Strategy for DRC
process proposals, the new one-stop service offers to cut that time down to three days, as stated
by Chea Vuthy31, the administration chairman of the zone and the deputy secretary-general of
the Cambodia SEZ Board.
The RGC has since approved a total of 21 SEZs32 located along the border with Thailand and
Vietnam33 (Koh Kong, Poipet, Pavet, Phnom Den), at Sihanoukville and Phnom Penh. Of the
21, 6 have commenced operations34.
4.2. Cambodia’s Foreign Direct Investment (FDI) Policy

Many countries promote inward FDI through providing tax holidays, tariff exemptions, and
subsidies. Developing country businesses could learn about new technology through FDI.
According to Harrison and Rodriguez-Clare (2009), the following consensus has emerged from
existing research on FDI:
1. Firms that receive FDI (joint ventures) are acquired by multinational corporations mostly
show higher productivity levels than equivalent domestic companies.
2. There is evidence of positive vertical spillovers from foreign companies to local suppliers
and buyers (backward and forward linkages, respectively).
3. Horizontal linkages between foreign companies and local firms in the same sector are
mostly small or even negative.
These stylized facts are consistent across countries. Research to date has evaluated many
countries in Asia, Africa, and Eastern Europe.
Studies have also revealed that foreign companies assist exporters to enter into new markets
(Aiken et al, 1997) and pay workers in host countries higher wages.
There are many studies presenting a strong correlation between increasing international trade
shares and country performances. The evidence might be interpreted in a way that international
trade and FDI policies are successful when they are associated with increasing exposure to
international trade. One implication is that interventions that expand exposure to international
31) The Phnom Penh Post September 02, 2008.

32) Neang Kok Koh Kong SEZ, Suoy Chheng SEZ, S.N.C SEZ, Stung Hav SEZ, N.L.C SEZ, Manhattan (Svay
Reing) SEZ, Poipet O’ Neang SEZ, Doung Chhiv Phnom Den SEZ, Phnom Penh SEZ, Kampot SEZ,
Sihanoukville SEZ 1, Tai Seng Bavet SEZ, Oknha Mong SEZ, Goldfame Pak Shun SEZ, Thary Kampong
Cham SEZ, Sihanoukville SEZ 2, D&M Bavet SEZ, Kiri Sakor Koh Kong SEZ, Sihanoukville Port SEZ,
Kampong Saom SEZ, Pacific SEZ
33) SEZs located at the border not only benefit from the cheaper cost of electricity, but also attract investors
from the other side of the border. Investors from Thailand and Vietnam operating within these SEZs are
able to manufacture in Cambodia at a lower price and export directly to Thailand and Vietnam, or further
afield within ASEAN and rest of the world.
34) http://www.investincambodia.com/economic_zones/sezs.htm
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Executive Summary
trade such as export promotion are likely to be more successful than other types of interventions
such as tariffs.
New evidence also implies that industrial policy through FDI promotion may be more
successful than intervention in international trade, partly because FDI promotion policies may
concentrate on new activities rather than protecting existing activities
FDI is very important for developing countries, since the inflow of FDI will bring
technology, utilize local labor and resources, etc. However, FDI has also advantages and
disadvantages for country’ s economy. Therefore, the government has to be cautious in
designing polices to promote FDI.
RGC has established regulations for investors to start their business in Cambodia. To
incentivize investors, the Investment Law was promulgated in August 1994 to offer investment
incentives. In March 2003, in order to make licensing schemes simpler, more transparent,
predictable, automatic and non-discretional, and also to modify tax incentives allowed for
qualified investment projects (QIP), the 1994 Investment Law was amended substantially by the
Law on the Amendment to the Law on Investment. But, this law alone has not been sufficient to
attract investors to set up their business in Cambodia. Thus, other relevant legal regulations are
needed to be adopted.
The 1994 Investment Law offered incentives to the significant sectors, while the amended
law targeted QIPs only (see details in Table 1-8). To view the variety of incentives that were
offered by the RGC, the amended law of 2003 and the sub-decree35 have been examined, and is
listed below (Chhun and Mak, 2007):
Profit tax exemption: An exemption is applied on profits from the first year or three years
after earning first profit + three years + priority period to be determined in the Financial
Management Law.
Special depreciation: Per the Tax Law, depreciation expenses are tax deductible in the first
year of purchase or after the first year if the tangible property is used by the QIPs. The
deductible amount is equal to 40 percent of the capital cost of new or used tangible property
used in processing and manufacturing. Customs duty exemption on production equipments,
construction materials, and production inputs.
QIPs which choose to exempt their profits from tax are not entitled to claim any special
depreciation under the taxation law. Domestically oriented QIPs, export QIPs, and support
35) Sub-decree NO 111 on the implementation of the amendment to the law on investment, 27 September 2005.
050
industry QIPs qualified for customs duty exemption. Those exemptions include exemptions on
imports of production equipment, raw materials, construction materials, intermediate products,
and production input accessories as specified in the implemented sub-decree. In addition, the
sub-decree includes some investment activities with specific characteristics that are eligible for
custom duties exemption, but not eligible for the profit tax exemption. The activities are:
Basic telecommunication services;
Exploration of gas, oil and all kinds of mining, including supply bases for gas and oil activities.
Table 1-8 | Eligibility Requirements for Incentives
Minimum
Investment Areas Investment
Capital
Supporting industry which 100% of its production supplies export industry US$ 100,000
Production of animal feed US$ 200,000
Production of ceramic products

Production of all kinds of metal products
Production of electrical and electronic appliances and office materials
US$ 300,000
Production of motor vehicles, parts and accessories
Production of toys and sporting goods
Production of leather products and related products
Production of garments, textiles, footwear and hats

Production of products for the textile industry
Production of furniture and fixtures that do not use natural wood
Production of paper and paper products
Production of rubber products and plastic products
US$ 500,000
Production of food products and beverages
Freezing and processing of aquatic products for export
Processing of any kind of cereals and crop products for export
Production of traditional medicines
Clean water supply
Production of chemicals, cement, agriculture fertilizers and petrochemicals

US$ 1,000,000
Production of modern medicines
Natural tourism and creation of natural tourism sites

US$ 1,000,000
(land size is equal or larger than 1000 hectares)
Polyclinic (patient beds is equal or larger than 50 with other requirements) US$ 1,000,000
Construction of modern market or trade center

US$ 2,000,000
(More than 10,000 square meters with adequate space for car park)
Training and educational institutes that provide training for skill development,
technology or poly technology that serves industries, agriculture, tourism, US$ 4,000,000
infrastructure, environment, engineering, sciences and other services
International trade exhibition center and convention halls US$ 8,000,000
Sub-decree NO 111 on the implementation of the amendment to the law on investment, 27 September 2005.
Source: EIC, Economic Review Vol.4, No.3, July-September
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Executive Summary
Besides the incentives, RGC established a 12 point action plan to improve the Investment
Climate and Trade Facilitation in order to attract the FDI. Furthermore, a Sub-Steering Committee
on Trade Development and Trade-Related Investment (SSC-TD&TRI) has been tasked with
reducing complex and lengthy institutional processes associated with imports and exports,
identifying and abolishing duplication of tasks among ministries/institutions, strengthening a
single-window mechanism at international gates, and reforming laws and regulations that
needlessly harm business (Neou and Chhun, 2008).
Table 1-9 | 12-Point Action Plan to Improve the Investment Climate and Trade Facilitation
1 Establish a Cross-Agency Trade Facilitation / Investment Climate Reform Team

Establish a System of Transparent Performance Measurement including Private Sector
2
Monitoring.
The trade facilitation process, including all licenses, procedures and documents, will be
reviewed to remove overlaps and unnecessary approvals. Following the reengineering, a
3
Single Administrative Document will be implemented and other documents progressively
eliminated.
Introduce an overall risk management strategy to consolidate and rationalize all examination
4
requirements of the different control agencies.
A strategic review of Camcontrol will be launched to productively deploy the organization’
s
5 unique knowledge of quality control processes and to make optimized use of inputs and
resources from other agencies, such as the CED.
A Single Window process to manage trade facilitation will be piloted in the Port of
6 Sihanoukville by December 2005. The Trade Facilitation process, once streamlined, will be
automated by December 2005.
The Government will introduce a WTO compatible flat fee for service, and the service will be
7
defined by a service-level agreement.
Streamline the process and reduce the cost of incorporating with the Commercial Register,
8 which is maintained at the Office of the Clerk of the Commercial Court, and costs an average
of $630 and 30 days.
Streamline the process notification of the Ministry of Labor to start hiring employees, which
9
costs $250 and 30 days to complete.
Harmonize registration for VAT, income tax, and company registration using the same form
10 and resulting in the same number. This would enable a unique identifier and facilitation
information sharing across agencies.
Implement a national award to promote good governance citizenship and governance in the
11
private sector.
12 Monitoring and Reporting
Source: Trade Facilitation and Competitiveness Project Restructuring Aide Memoire
052
4.3. Soft Industrial Policy
Harrison and Rodriguez-Clare (2009) argue that there is an important role for“soft”
industrial policy, whose objective is to develop a process whereby government, industry, and
cluster-level private organizations would work together on interventions that can increase
productivity. Their idea is to shift the attention from interventions that distort prices to those
that deal directly with the coordination problems that keep productivity low in existing sectors.
Instead of tariffs and export subsidies, they think of programs and grants to assist specific
clusters by augmenting the supply of skilled workers, encouraging technology adoption, and
improving regulation and infrastructure. They argue that in comparison with the traditional
approach to industrial policy, the soft industrial policy has two additional advantages:
1. Soft industrial policy reduces the scope for rent seeking related with hard industrial policy
such as protection or selective production subsidies
2. Soft industrial policy is much more compatible with the multilateral and bilateral trade
and investment agreements that LDCs have implemented over the last decades (see
Harrison and Rodriguez-Clare 2010)
5. The Evolution of Korea’

s Industrial Policy
5.1. Export-oriented Industrialization
The prospect of declining U.S. aid compelled the government to search for alternative
sources of foreign exchange. Starting in the early 1960s, the government took steps to promote
exports. One of incentives introduced was the unification of exchange rates, and the Korean
won was devalued twice to rectify overvaluation.
Tax exemptions were also used. From 1962 to 1973, profits attributed to exports were taxed
at only half regular corporate tax rates. Up to 1975, accelerated depreciation was allowed for
assets used in producing export. Imported inputs destined for export production were exempted
from tariffs (in 1974 this was changed to a tariff rebate scheme.)
Credit allocation favored exporters, reflecting higher social returns on export-oriented

investments than on import-substituting investments (Leipziger and Petri, 1993). Exporters had
automatic access to bank loans, usually at below-market interest rates (eliminated in early 1980s).
To provide exporters with information on overseas markets, the Korea Trade Promotion
Corporation (KOTRA) was established in 1964. 1960s was also a the new beginnings import
liberalization. Korea joined the GATT in 1967, and the import approval process shifted from a
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Executive Summary
positive list to a negative list, under which only listed goods required authorization. The
manufacturing sector’ s import-liberalization index, which was below 8 percent in 1966, reached
42 percent by 1970 (Yoo, 2002).
5.2. Heavy and Chemical Industry Drive

Despite interventions, there had been little sectoral bias in development strategy prior to the
early 1970s. The shift from general export promotion to the heavy and chemical industry drive
(HCI) was announced in 1973. Heavy and chemical industries (HCI) included iron and steel,
non-ferrous metal, shipbuilding, general machinery, chemical and electronics industries.
Economically, heavy and chemical industry drive was a logical response to a rapid rise in
domestic wages and increased global competition in the traditional export industry.
It required large-scale, risky investments that would not be easily undertaken by private-
sector firms without decisive government leadership. A broad range of policy instruments
supported the promotion of heavy and chemical industries. It was a shift from general export
promotion to sector-specific import substitution with a view toward securing international
competitiveness from the outset. In order to finance large-scale HCI investment projects, a
Natioanl Investment Fund (NIF) was set up in 1974 by mobilizing public employee pension
funds along with substantial share of banking funds. Bank credits and foreign loans were
allocated to HCIs at substantially subsidized rates. Banks provided loans to“strategic”
industries on a preferential basis. During the latter half of the 1970s, the share of policy loans in
domestic credit extended by deposit money banks rose steadily, from 40% to 50%(level). The
imports of HCI products were restricted.
Owing to the strong and concerted support given by the tax, trade and credit policies,
manufacturing investments during the late 1970s was predominantly directed to HCIs. By the
early 1980s, the export structure shifted from labor-intensive to capital- and skill-intensive
products. The share of HCIs in exports rose substantially. The dependence on imported
intermediate inputs in HCIs declined. The heavy industry surpassed the light industry in its
share of the total output.
Substantial distortions were created in the allocation of financial resources. Many of the
HCIs initially suffered from overcapacity. Investments exceeded levels consistent with the
existing market size, technological capability and financing capacity.
Monetary expansion to finance HCIs, combined with the Middle East construction boom and
fixed exchange rates, caused macroeconomic distortions. The competitiveness of other export
industries was weakened. The current account deficit relative to GDP increased from 1.1% in
1976 to 6.7% in 1979.
054
The HCI drive was distinct from inward-looking import substitution policy in that it aimed
for promoting export industries with higher capital- and skill-intensity. The HCIs were
promoted in such a way that they were highly integrated with the world’
s economy.
The strategy was effective in some industries, but ineffective in others. The variance in
outcomes was inevitable due to the inherent risks assumed by the HCI drive. The structural
transformation led by the heavy industry promotion policy was consistent with emerging
changes in comparative advantage, but might have occurred too rapidly at excessive costs.
There is an ongoing debate on this issue.
5.3. Liberalization
The policy shift toward greater industrial neutrality was introduced in the Fifth Five-Year
Plan (1982-86). The Korean government began to reduce its role in credit allocation and to
terminate policies that targeted the HCIs. Financial reform started by lifting restrictions on bank
management and divesting government equity shares in five commercial banks while
maintaining control. Interest rate subsidies were eliminated and the size of special funds
decreased. Further financial liberalization was hindered by the legacy of the heavy intervention
in resource allocation during the 1970s. The government would not let troubled firms go
bankrupt.
The government committed itself to increase the import liberalization ratio, from 69% in
1980 to 95% in 1988. The system of controls over foreign direct investment was also somewhat
liberalized.
The government continued to play an active role in the restructuring of distressed industries,
support for the development of technology, and promotion of competition. An active role in
these functional areas was regarded as consistent with the liberalization effort.
To streamline the industrial incentive system, the Industrial Development Law replaced
seven individual industry promotion laws in 1986. The government was supposed to intervene
for industrial rationalization in areas where market failure occurred. In industries whose
international competitiveness was vital to the economy but was not expected to be competitive
when left to the market, the government encouraged specialization through incentives designed
to promote technological advancement. In the declining industries, the government intervened
in the phasing-out process. Included in the rationalization programs are subsidized credit for
upgrading capital equipment, mergers, barring entries and long-term supply contracts.
The National Project for Research and Development (1982) was established to fund public
as well as public-private joint R&D projects in the high-technology fields such as fine
chemicals, electronics and engineering. With the help of these programs and new tax incentives
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Executive Summary
under the Technology Development Promotion Act, strengthened in 1981, private R&D
expenditures expanded rapidly. R&D expenditures increased from 0.8% of GNP in 1980 to
1.9% of GNP in 1990. The number of R&D personnel increased from 18,434 in 1980 to 70,503
in 1990.
Figure 1-12 | Changes in Industrial Policy (1)
1960s 1970s 1980s 1990s 2000s
Export incentives →→→→→→→→→
Establishment of Government
→→→→→→→
Research Institutes
Financial Support for

→→→→
Heavy and Chemical Industries
Import Liberalization →→→→→
National R&D Programs →→→→→→→→→→→→→
Industrial Rationalization →→→→ →→
Investment in Regional Technology

→→→→→→
Infrastructure
Attracting FDIs →→→→→
Cluster-Based Innovation policies →→→→→
Figure 1-13 | Changes in Industrial Policy (2)
A comprehensive incentive system was designed to channel resources into

export-oriented activities.
State-controlled banking system provided financial support for export; under
Export-oriented
high level of protection, exporters were given privileges to import machinery
Industrialization
and intermediate inputs at world prices.
Export as the criterion of resource allocation resolved the ambiguities that
create corruption and waste.
Promoted export industries with a higher capital- and skill-intensity at the

expense of traditional labor-intensive export industries.
Much of bank credits and foreign loans were allocated to HCIs at preferential
HCI
rates; a higher level of protection for HCIs and a lower level of protection for
Promotion
other industries.
Investments in HCIs, combined with macroeconomic mismanagement, resulted
in overcapacity, inflation, financial market distortions and external imbalances.
Promote industrial restructuring from capital-intensive to technology- and skill-

intensive industries.
Liberalization Trade liberalization, financial liberalization, and realignment of industrial
incentive system.
Increase in science and technology investment.
056
6. Economic Growth and Technology Policy
6.1. Economic Growth and Productivity gap
About 60 years ago, it was thought that what was needed to transform less developed
countries into more developed countries was to transfer capital. But today it is understood that
what distinguishes developed countries from less developed countries is also a gap both in
knowledge and in technology (Stiglitz 2003). Stiglitz points out that Korea has been successful
not only in promoting economic growth but also reducing poverty. He argues that a key to
Korea’ s success was reduction of technology gap. The success in closing the technolgy gap is a
result of explicit efforts by the government36.
Since the early 1970s, economic growth has slowed down in OECD member countries. The
average growth rates of GDP per capita for much of the OECD member countries were only
half of the preceding period. Since the 1980s, there has been a new wave of interest in economic
growth and catch-up. The divergence in income growth among OECD member countries in the
1990s has caused renewed interest in key factors that drive economic growth and policies that
might influence it.
Persistent differences in economic growth across countries may arise from uneven
technology level among the countries. Empirical studies on technology-gap suggest that
catching-up is difficult and only countries with appropriate economic and institutional
characteristics will succeed. Countries characterized by a big technological gap and a low social
capability might be faced with the risk of being caught in a low-growth trap.
Economic growth can occur as the result of four distinct processes: increase in the capital-
labor ratio, increase in trade, increase in stock of human capital, and scale and size effects.
These four factors of the economic growth reinforce each other in many complex ways.
6.2. Economic Growth and Export Specialization

Economic growth has been based on a wide spread of innovations across sectors and many
of the significant sectors are low- or medium-tech industries.
It is by no means the case that growth in Europe has been driven by a small number of high-
tech knowledge-based sectors; on the contrary, growth is widely spread across many sectors.
36) Stiglitz, Joseph E.,“Globalization, Technology, and Asian Development,”Asian Development Review Vol. 20
No.2, ADB, 2003 Review Vol. 20 No. 2, ADB, 2003
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Executive Summary
Many low- and medium-tech sectors were among the high growth sectors. Low- and
medium-tech sectors are among the highest in terms of employment and output and thus
significantly contribute to overall growth.
Low- tech sectors are often highly innovative, and this is because they are knowledge-
intensive from a systemic perspective. The knowledge bases of apparently low- and medium-
tech industries such as textiles, food-processing, chemicals, oil and gas are in fact complex,
science-based and above all systemic (in the sense of involving complex and sustained
institutional interactions). The policy implication of this is that policymakers should be aware of
the industrial structures and the related technological bases on which growth actually depends.
Structural change, i.e. change in specialization patterns is an integral part of the economic
development processes. Increase in market shares at a country level is related to the ability of
countries to transform their specialization patterns towards fast- growing sectors. The reaction
speed of specialization patterns, however, might be too low to allow for an active policy.
Countries must change their level of human capital as well as their production structures as they
catch up, in order to capture technology spillovers from the leading countries.
6.3. Innovation in Technology Followers

Low-tech sectors play an important role in the distribution of growth among sectors because
these sectors are highly innovative; It does not mean that innovation is not important.
Innovation involves learning and creation of new knowledge.Apparently, low-tech industries
can be intensive users of high-end scientific knowledge. Flows of knowledge among industries
or institutions take two forms: disembodied and embodied spillovers.
If companies, sectors and countries continue to specialize in highly competitive markets,

they will be subject to deterioration of their returns due to falling terms of trade. The decline of
terms of trade for developing country exports has been substantial, particularly since China’ s
entry into global markets in the mid-1980s. In many developing countries, there has been
increasing economic activity but at the same time declining economic returns.
Participating in global markets that permit sustained income growth requires capacity to
learn and upgrade. The value chain is an important construct for understanding distribution
returns arising from design, production, marketing, coordination and recycling.
6.4. Technology Policy in Catch-up Economies

In the catching-up process, R&D can play dual roles for firms: innovation and learning.
Efforts to imitate rely on internal capabilities. Initial stage of development and the catching-up
process rely on absorptive capability. Internal capabilities are prerequisites to imitate and absorb
knowledge from advanced countries.
058
Recently, the issue of human capital development has been receiving more attention.
However, development of human capital that lead to change in the industry requires two
fundamental changes in conventional aspects of the human resource development.
1. The issue should not be seen simply in terms of strengthening education and training
institutions like universities, technical colleges, and training institutions.
2. The importance of explicit investment in these human capital assets needs to be given
greater prominence.
The role of education and training institutions is important, but just as important is the role
of industrial companies. The issue is about human resource development by industry. For
example, industrial firms in the advanced countries are intensifying their investment in creating
new knowledge through R&D. They are also intensifying their training and learning efforts to
accumulate existing knowledge and expertise embodied in their managers, engineers and
operatives.
7. Summary of Research Findings

7.1. Search for Development Path and Evaluation of Growth
Potential of Cambodia
Research findings suggest that Cambodia’ s remarkable growth in the past decade or so might
not guarantee that it is securely on a self-sustaining catch-up growth path. It is still not based on
productivity improvement. It would be worth examining further the underlying causes of low
TFP growth relative to output growth. It is not likely that, in its current form, Cambodia can
sustain exceptionally rapid growth, as recorded during the 2000s, even after the global financial
crisis.
It is projected that the annual average GDP growth rate of Cambodia will be in the range
from 6.2 percent to 7.8 percent, depending on methodologies/scenarios.
Main policy challenges in order to strengthen Cambodia’s growth potential are as follows.
Strengthen the role of fiscal policy.
Diversify sources of growth.
Address possible skill mismatch issued in the labor market.
7.2. Structural Transformation and the Role of Government

Cambodia achieved high economic growth during the last 15 years. However, the growth
record since 2008 is disappointing. It reflects structural problems such as lack of domestic
industrial linkage, low position in the value chain in price-sensitive products, and high
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Executive Summary
dependence on FDI. More active role of government is needed to transform the economic
structure to sustain rapid economic growth. For future growth, Cambodia should shift elements
of comparative advantage from given endowments to industrial capability.
The main focus of industrial policy should be given to the creation of indigenous
entrepreneurs. It is inevitable to allocate more amount of budget for building industrial base. For
this kind of active role of the government, Cambodia needs to establish an equitable and
efficient tax system to secure revenues. In addition, it is very important to make budget
allocation consistent with policy goals to make the spendings effective.
7.3. Promoting Low-Cost Loans for SMEs and Rice Mills

We provide a number of policy suggestions. For short-term policies, we suggest a provision
of financial resources through the government and central bank, establishment of a SME-
specialized bank and credit guarantee funds, introduction of regulations such as mandatory ratio
of SME loans, and development of financial products and services.
For longer-term policies, we propose improvement of registration system, further

development of credit information system, enhancements for financial reporting and audit
system, and capacity development of bank staff and regulators.
7.4. Proposals for Introduction of Credit Guarantee System in

Cambodia
It is suggested that the Cambodian government adopt‘public guarantee system’and
establish an independent guarantee institution under control of the government.
It is also suggested that the legal basis for formation of financial resources be prepared for
stable operation of credit guarantee system and financial resources for guarantee services be
secured through contributions from the government, financial institutions and other interested
parties.
In the long run, Cambodia needs to develop its own credit rating system in the future based
on credit information accumulated through credit analysis and to utilize it in credit evaluation
and risk management.
7.5. Strategic Development for Micro-Insurance in Cambodia

Several suggestions for revitalizing micro-insurance in Cambodia are provided in two
aspects. First, on the side of micro-insurance operations, we suggest that it needs to 1) pursue
development agenda without sacrificing sound management; 2) design products suited for the
060
poor’
s needs in Cambodia; 3) determine prices and cost based on actuarial studies.
Secondly, we suggest, from the perspective of participants of micro-insurance, that it needs

to 1) intensify education activities towards making micro-insurance understood and accepted by
clients and ultimately, Cambodia’ s poor population;
It is also recommended that a well-designed regulatory framework is a major factor for the
effective and efficient provision of micro-insurance services. In promoting more professional
and expansive services, regulation can play an important role by encouraging micro-insurers to
become regulated.
7.6. Factory Establishment

The most urgent challenges that Cambodia is now facing related to factory establishment, is
that there is no sufficient incentives for factory establishment. In Korea, factory establishment
by local enterprises has been and is very active mainly due to powerful incentive schemes,
while in Cambodia, factory establishment by local enterprises is very inactive mainly due to
lack of sufficient supply of necessary resources.
Based on the comparison of two systems, some meaningful policy recommendations are
suggested for the Cambodian government. They are (1) Powerful incentives for factory
establishment as enforcement of financial incentives and expansion of tax incentives.
(2) Elaboration of laws and mandates such as coordination among ministries and laws and
mandates for newly emerged areas. (3) Upgrade of administrative procedures such as review on
efficiency and bottlenecks and aggressive reflection of enterprises’interests. (4) Expansion of
supporting system such as expansion of supporting organizations and cultivation of consulting
and service manpower.
7.7. Enhancement of Standardization and Conformity

Assessment System in Cambodia
Cambodia should secure standards for supporting government projects for industrial
development and trade expansion, and also for enhancing people’ s quality of life. In this regard,
Cambodia should identify needs for standardization and set priorities. Cambodia should
establish a national accreditation body operated in accordance with international standards and
foster competent conformity assessment bodies acceptable in the global market.
Cambodia should strengthen capacity of National Center of Measurement (NCM) and secure
calibration laboratories accredited in accordance with relevant international standards. A legal
metrology system should be established urgently to provide reliable measurement for
commercial transaction, health, safety and environmental protection.
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Executive Summary
Cambodia should actively engage in international cooperation activities to nurture human
resources for enhancing and maintaining standardization and conformity assessment system.
Cambodia needs to establish and implement multi-year plans for standardization which covers
strategies to achieve all of the elements recommended above efficiently and effectively in
alignment.
7.8. Promoting Exports of Cambodia

This report’s analyes on current export promotion policies of Cambodia indicates that the
nation is moving in the proper direction to encourage private and/or export sector without
seriously hurting or distorting the efficient allocation of resources.
This report concentrates on suggestions specific to export promotion. They include

enhancing:
(i) information sharing and marketing service,
(ii) financial support for exporters, and
(iii) stronger promotion of SEZs.
The comparison of the two nations’experience for the two issues produces implications for
Cambodia. The establishment of so-called Cambodia’ s Eximbank and amendment of
government policies for SEZs should be seriously and positively considered.
If they are regarded to be essential for further growth of Cambodia’

s exports, more concrete
and detailed approaches will be needed to practically implement suggested systems in
Cambodia. This may be conducted more easily through future collaboration between Cambodia
and Korea.
7.9. Capacity Building on Export Promotion Procedure

Spearheading Korea’ s economic growth through trade expansion, KOTRA took the lead in
expanding Korea’s markets. Likewise, KOTRA has continued to change by carrying out new
missions bestowed in tune with changes in the global economy and the growth of the Korean
economy. As a result, the agency is now considered one of the most exemplary TPOs in the
world.
If Korea provides Cambodia with official development assistance, Cambodia needs to

request Korea’ s help in expanding transport and logistics infrastructure, and improving the
Cambodian government’ s administrative functions including modernization of customs
clearance systems and product certification policy.
When establishing a state-run TPO, Cambodia needs to enact an act for establishment of
062
such an agency, and thus the government needs to invest capital, and provide operational costs
annually to subsidize its operating costs. Additionally, we anticipate that building on this study,
we will provide more in-depth, and practical consulting to help Cambodia expand its capacity to
increase trade and foreign investment.
063
Executive Summary
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Financial Economics, 2007.
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Pehn, 2007.
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5271, World Bank, April 2010.
Hang Chuon Naron,“Cambodia Economy: Charting the Course of a Brighter Future,”Phnom

Pehn, 2009.
Harrison, A, and Andres Rodriguez-Clare, Trade, Foreign Investment, and Industrial Policy for
Developing Countries, February 2009.
Harrison, Ann and Andres Rodriguez-Clare,“Trade, Foreign Investment, and Industrial

Policy,”Handbook of Development Economics, 2010.
ILO, Asian Decent Work Decade (2006-2015), Cambodia: Sky Health Insurance Scheme
064
“Building a Sustainable and Replicable Health Insurance Model”.
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Paper No. 197, 1993.
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No. 1678, World Bank, October 1996.
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Mid-Term Review on NSDP, November 2008.
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Executive Summary
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066
Finance, Industry and Trade Part 01
Macroeconomic Policy
1_ Search for Development Path and Evaluation of Growth

Potential of Cambodia
2_ Structural Transformation and the Role of Government

Chapter 01
Search for Development Path and Evaluation of

Growth Potential of Cambodia
Chin Hee Hahn (KDI)

Runsinarith Phim, Chandarany Ouch (Cambodia Development
Resource Institute)
Summary
This study has several objectives. The first is to evaluate Cambodia’s growth performance
since the early 1990s and identify key bottlenecks of growth. The second objective of this study
is to provide a projection of medium- to long-term GDP growth rate for 2010-2019. The final
objective is to make suggestions on policy priorities to strengthen Cambodia’
s long-term growth
potential.
1. Evaluation of Cambodia’s Economic Growth from an International Perspective
Over the past decade or so, Cambodia exhibited a remarkable track record of growth. The
annual average GDP growth rate was 8.5 percent for the period from 1993 to 2008, and it
recorded above 10 percent for 2004-2008.
We find, however, that the extraordinary and rapid growth of Cambodia in the 2000s was
mainly driven by accumulation of inputs, such as capital and labor, rather than TFP. Viewed
from an international perspective, TFP growth in the 2000s (1.0 percent per annum), though it is
higher than developed countries, is slightly lower than the world average and substantially
lower than many other East Asian countries. Comparison with other open economies shows that
Cambodia’ s economic growth in the 2000s was somewhat exceptional at its income level.
These findings suggest that Cambodia’ s remarkable growth in the past decade or so might
not guarantee that it is securely on a self-sustaining catch-up growth path; it is still not much
068
based on productivity improvement. It would be worth examining further the underlying causes
of low TFP growth relative to output growth. It is not likely that, in its current form, Cambodia
can sustain exceptionally rapid growth, as recorded during the 2000s, even after the global
financial crisis.
Sources of Growth in Cambodia
Time Period GDP growth Capital Labor TFP

1993-2000 3.2 9.3 2.1 -8.2
2001-2008 8.2 5.1 2.0 1.0
1993-2008 5.5 7.3 2.1 -3.9
2. Projection of GDP Growth: 2011-2020
We employ two methodologies to make projections of GDP growth for the period 2011-
2020: a bottom-up approach and a simulation approach based on the dual economy model of
Lucas (2009).
It is projected that the annual average GDP growth rate of Cambodia will be in the range
from 6.2 percent to 7.8 percent, depending on methodologies/scenarios.
● If Cambodia improves TFP at a pace similar to that estimated for the past decade (1.0
percent per annum), the annual average GDP growth rate for 2011-2020 is projected to be
6.2 percent.
● If Cambodia improves its TFP at a pace similar to that of Vietnam in the period 1991-
2008 (2.3 percent), the annual average GDP growth rate for 2011-2020 is projected to be
about 7.8 percent.
● The simulation result shows that Cambodia’ s potential growth rate in 2011-2020 period is
expected to be around 7.4 percent per annum, which is slightly higher than that in the past
decade (about 6.1 percent)
3. Key Policy Challenges
Main policy challenges in order to strengthen Cambodia’

s growth potential are as follows.
● Strengthen the role of fiscal policy.

- The fiscal revenue need to be increased by i) expanding the tax base including a property
tax and capital gains tax, ii) improving enforcement, and iii) utilizing recent discovery of
oil and gas .
- Direct the fiscal expenditure at investments that strengthen Cambodia’ s growth potential,
such as infrastructure, agriculture, education, etc.
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Part1_Macroeconomic Policy
● Diversify the sources of growth.
- Simplify regulatory processes and increase their transparency.
- Strengthen industrial policy by making existing instruments more transparent and
accountable, and by developing standards.
- Make further progresses in trade facilitation, particularly in order to deepen Cambodia’
s
integration in the East Asian region.
● Address the possible skill mismatch issue in the labor market.

- Post-secondary institutions are producing too many graduates with general skills and too
little with specific skill. Examine its causes and address them.
1. Introduction
This study has several objectives. The first is to evaluate Cambodia’ s growth performance
from the early 1990s and identify key bottlenecks of growth. The second objective of this study
is to provide a projection of medium to long-term GDP growth rate for 2010-2019. The final
objective is to make suggestions on policy priorities to strengthen Cambodia’ s long-term growth
potential.
This study is organized as follows. In the next section, we provide an overview and
assessment of the Cambodian economic development since 1993 up to the present. In section
2.1, we provide a historical overview and discuss the key characteristics of changes in policies
as well as institutional environments. In section 2-1, we provide a quantitative overview of the
macroeconomy as well as the changes in sectoral structure of the Cambodian economy. In
section 3, we evaluate Cambodia’ s economic growth from a broad international perspective,
utilizing two widely used methodologies: Growth accounting and Cross-country regressions.
Since growth accounting results are often sensitive to methodologies and data, international
comparison of growth accounting results, which are based on a common methodology and data,
are necessary to understand Cambodia’ s economic growth from an appropriate perspective.
Based on the assessments above, section 4 discusses main potentials and weaknesses of the
Cambodian economy. In section 5, we make a projection of the GDP growth rate as well as the
sectoral composition of GDP for the period 2010-2019. The final section suggests a set of
policy recommendations for strengthening and sustaining Cambodia’ s economic growth.
070
2. Overview and Assessment of the Cambodian
Economic Development
2.1. Historical Overview
2.1.1. Macroeconomic Policy
Cambodia embarked on a reform towards a free market economy in the mid-1980s. After the
first and historical general election in 1993, the Royal Government of the first National
Assembly prepared and implemented a comprehensive macroeconomic policy and structural
reform program with efforts to integrate Cambodia’ s economy into the region and the world
which led Cambodia to become a member of ASEAN and WTO.
Since the formation of the government and the First Legislature of the National Assembly,
economic development in Cambodia can be divided into three distinct phases (NSDP update,
2009-2013).
● Rehabilitation: 1993-1998
● Reconstruction: 1999-2003
● Economic take-off: 2004-2008
Rehabilitation phase, 1993-1998: In the mid-1980’ s Cambodia reformed its economy with
the introduction of private property, the privatization of state-owned companies, and the de-
collectivization of agriculture. These market reforms were, however, undermined by
macroeconomic imbalances caused by the following factors:
● Economic liberalization that had begun in the late 1980s hindered revenue mobilization as
economic rents formerly captured by public sector enterprises were slashed.
● On the expenditure side, removal of price controls considerably increased the unit cost of
goods and services procured for operations and investments. The government’ s policy to
protect wages and defense expenditure crowded out public investments and expenditures
on operations and maintenance.
● Cambodia’ s credit facility under the 1986-1990 trade and payments agreement with the
Soviet Union had been eliminated. Commodity aid received under this agreement
financed 15 percent of budgetary expenditure in 1989. Humanitarian assistance amounted
to only USD 20-30 million a year in 1991-92 (NSDP update).
● The government had to resort to monetary financing of the budget deficit. Monetary
financing covered more than half of the budgetary gap in 1991 and the budget went into
arrears for the remaining 20 percent of expenditure (NSDP update). Wage payments
became sporadic. Monetary financing resulted in high inflation. This in turn contributed to
lack of public confidence in the national currency and a high level of dollarization.
071
The formation of the Cambodian government in 1993 resulted in inflows of Foreign Direct
Investment (FDI) and Official Development Assistance (ODA) for economic rehabilitation.
During this period the government could not give full priority to economic development and
poverty reduction as it was required to combat the Khmer Rouge forces scattered across the
country. Defense and security spending amounted to 6.3 percent of GDP in 1994, while social
spending represented only 2.1 percent of GDP. However, the government began to implement
the first generation of reforms. The inflation decreased from 121 percent in 1991 to a negative
0.7 percent in 1993. A new French-based budgetary system was introduced and a legal
framework for public enterprises was established. With the implementation of the government’ s
“win-win”strategy, the military and political organization of the Khmer Rouge was dismantled
in 1998 and the foundation for peace, security and economic growth was put in place. Despite
many setbacks, the economic growth during 1993-1997 averaged 6.6 percent, financed mainly
by the overuse of natural resources and ODA and FDI inflows into the financial sector. From
1994 to 1998, much of the ODA was used to rehabilitate power generation capacity and water
supply (NSDP update).
Reconstruction phase, 1999-2003: In the Second Legislature, 1998-2003, the government

vigorously implemented its Triangular Strategy that focused on: (i) restoration of peace and
security; (ii) integration of Cambodia into the region and the world; and (iii) promotion of
socio-economic development. The successful implementation of this strategy enabled the
government to restore peace and security, political stability, and to begin rebuilding democratic
institutions. It was given a seat at the UN in December 1998 and formally admitted to ASEAN
in April 1999 which enabled Cambodia to further deepen and broaden the implementation of its
reform agenda.
During 1999-2003, the economy grew at an average annual rate of 8.8 percent. Although
ODA continued to finance growth, FDI investments, especially in garments and tourism, were
the key to promoting growth. During this period, the textile sub-sector grew by 35.1 percent a
year and the construction sub-sector became a pillar of growth, growing at an average annual
rate of 20.1 percent. Recently restored peace contributed to rapid development of tourism; the
sector grew at an average annual rate of 13.6 percent. Continued rehabilitation of power and
water sector resulted electricity, gas and water sub-sector to grow at an average annual rate of
10.2 percent. Although, the agriculture sector’ s share of total GDP declined slightly as other
sectors grew, it still accounted for 32.0 percent of total GDP in 2003 (NSDP update).
Economic take-off phase, 2004-2008: During this phase the government accelerated the
pace of implementation of the second generation reforms, in particular the implementation of
the Public Financial Management Reform Program (PFMRP). It also increased investments in
social sectors and infrastructure development to reduce poverty, in particular the rehabilitation
and building of rural irrigation systems and the provincial and rural road network. The
economic growth during 2004-2008 averaged 10.3 percent per year, with a record high annual
rate of growth at 13.3 percent in 2005. Despite the global economic downturn which started in
072
late 2007, the economy grew at an annual rate of 6.7 percent in 2008 (NSDP update).
2.1.1.1. Fiscal Policy
The deficit during 1990-1992 was financed through the central bank credit, generating
escalating rates of inflation and currency depreciation. In late 1992, a reform program was
instituted, designed to increase budget revenue, contain expenditure and reduce monetary
expansion (World Bank (WB), 1997).
During the government’ s first term, the Ministry of Economy and Finance (MEF) set out and
implemented numerous activities to strengthen economic and public financial management
while establishing good governance systems, including: (i) macroeconomic policy framework
management, (ii) improving the budget system, (iii) modernization of the tax system, (iv)
improving the public accounting system, (v) developing the audit system, (vi) privatizing public
enterprises, and (vii) strengthening state property management.
Remarkable achievements were made during the first term, including the implementation of
laws and regulations such as the Law on Financial System and its amendments; the Law on
Taxation in 1997; Sub-decree 60 on Public Procurement Management; Sub-decree 81 on
Establishing Financial Control on Budget Expenditure of ministries, provinces, and public
administration entities; Sub-decree 82 on Public Accounting; the Law on Investment of the
Kingdom of Cambodia; and other laws and sub-decrees on privatization. At the same time, a
two tier banking system was established, new riel notes were printed and circulated for de-
dollarization, and the gap between official and market exchange rates was significantly reduced.
Non-customs tax barriers were eliminated and the tax system was reviewed and modified in
accordance with a more liberal law on investment for boosting domestic investments (WB
1997).
As a result of this policy, the government’ s revenue situation significantly improved, its
expenditure contained, monetary expansion slowed markedly, inflation substantially reduced,
domestic currency stabilized and recourse to central bank credit virtually eliminated (WB
1997).
For public financial management, the Ministry of Economy and Finance has launched four
important reform programs including (i) customs administration and policy, (ii) tax
administration and policy, (iii) treasury operation reform, and (iv) budget formulation and
execution reform. Specific customs measures include: improvement and dissemination of
custom rules and regulations related to streamlining customs procedures; the preparation of a
new customs law; the automation of customs valuation; continued effort to strengthen pre-
shipment inspection capacity; implementing anti-smuggling measures and training for ASEAN
customs officials to strengthen institutional capacity. Specific tax measures include: expanding
VAT coverage; expanding the tax base (i.e., salary and profit taxes); tax arrears collection
enforcement; and strengthening the compliance capacity of the tax department through training
in auditing skills. Specific treasury operations measures include: centralization of government
accounts; establishment of the Cash Management Committee; and improving the chart of
073
accounts and accounting procedures (Triangle Strategy 1998).
Over the medium-term, the fiscal policy objectives were to enhance revenue performance
and re-orient expenditure to meet pro-poor priority spending. In order to meet these objectives,
the government adopted the Public Financial Management Reform Program (PFM), a
comprehensive multi-year reform program, in late 2004. The PFM is designed to upgrade public
finance in order to provide effective support for growth and poverty reduction through the
promotion of good governance (Hang 2009).
During 2009, a more strategic approach to resource management and internal auditing has
been designed and developed. Line ministries have formed their own reform cells and most
have already developed their plans for contributing to the overall reform strategy (NSDP
update). The updated National Strategic Development Plan (NSDP) for 2009-2013 of the Fourth
Legislature continues to focus on:
● Mobilizing domestic revenues: Ensure effective allocation of budget resources among
competing priorities and promote healthy public financial practices in general.

● Minimizing exchange rate fluctuations: Ensure orderly budget disbursements that would
not drastically increase the volume of riel-denominated money supply in the economy at
any given time. This fiscal policy instrument will continue to be used along with
appropriate monetary policy interventions to maintain a stable exchange rate.
● Counteracting inflationary pressures: Closely monitor factors that may cause inflationary
pressures in domestic markets, in particular agricultural products, and implement other

policy instruments such as increased investment in processing facilities, ensuring fair
competition among traders and middlemen by improving road conditions, and enhancing
trade facilitation to stabilize agricultural prices.
● Pursuing sound debt management: The financing of the measures to mitigate adverse
effects of the global financial crisis is likely to result in a significant increase in deficits in
the short-term. The government will pursue prudent policies to ensure a sound
macroeconomic and fiscal management of the economy.
● Supporting the Strategic Framework for Decentralisation and Deconcentration: Within the
framework of the PFMRP, concrete steps will be taken to support the implementation of
decentralization reform to devolve some revenue as well as expenditure responsibilities to
the provinces, districts and communes.
The government is to follow a prudent fiscal policy and will ensure that budget deficit
declines as the economy recuperates. It is to adopt various fiscal and adjustment measures to
maintain fiscal discipline and long-term fiscal stability. These include:
● Rationalizing less productive spending and protecting budget allocation to priority sectors:
While implementing its planned policy reform on base salary increase for civil servants,
the government will monitor the wage bill and be cautious against crowding out spending
on priority sectors such as health, education, and operations and maintenance.
● Increasing revenue collection through: (i) Broadening the tax base and increasing tax
rates; (ii) Strengthening the enforcement of property tax and unused land tax; (iii)
074
Introducing Value Added Tax (VAT) on electricity and water; and (iv) Replacing current
tax incentives with investment allowances, tax credits, and accelerated depreciation.
● Reallocating funds for direct support of growth or for specific government allocations for
social safety net as well as spending needed to mitigate unexpected impacts resulting from
the global financial and economic crisis.
● Adopting policies to foster investment in the oil and energy sectors.
● Implementing proactive policy to mobilize and increase disbursement of ODA for capital
and or development spending in order to meet development needs.
The Ministry of Economy and Finance is now implementing Platform II of the government’ s
Public Financial Management Reform Program (PFMRP) that focuses on“Building on
Improved Budget Credibility towards Achieving Financial Accountability” . The main theme of
Platform 2 is the increased accountability of those who are responsible for safe, efficient and
effective management of public resources. Both enhanced accountability and empowerment are
to be supported by measures to further improve information systems and transparency in how
financial management obligations are being exercised in practice by budget entities/managers.
The long run objectives of the fiscal policy are to ensure a level of spending consistent with
macroeconomic stability, to maintain a sustainable fiscal balance with gradual increase in
budget allocation for social and economic sectors through rationalizing public expenditure and
broadening the tax base, preventing leakages, and strengthening customs and tax administration
to collect additional revenue (Hang 2009).
2.1.1.2. Monetary Policy
Reestablished in 1980, the banking system in Cambodia followed central planning lines with
the National Bank operating both central and commercial banking functions through a network
of provincial branches and agencies. The National Bank simply issued currency to match the
government’ s liquidity needs (Social-Economic Development Plan (SEDP I).
By the late 1980s Cambodia had established a two-tier banking system and stimulated the
establishment of foreign and privately owned domestic commercial banks. However, with the
lack of confidence in the banking system at that time, currency in circulation came to form a
large proportion of the money supply with bank deposits being less important.
During 1990s, Cambodia’ s monetary system was still characterized by a high degree of
dollarization and cash transactions, significantly limiting the government’
s scope for running an
active and effective monetary policy (WB 1997). The use of riel was confined to small
transactions and wage payments by the government. US dollars had been used to finance an
important part of daily transactions, something which added to the riel-denominated money
supply but which could not be controlled by the domestic monetary policy (SEDP I).
The National Bank of Cambodia (NBC) was not using direct monetary instruments: Interest
rates were completely liberalized and there were no quantitative restrictions on bank lending.
Given the lack of instruments, the monetary authority used foreign exchange interventions to
075
regulate riel liquidity and to smooth out fluctuations in the exchange rate. Limitations on
monetary financing of budget deficit were used to control the creation of base money (WB
1997).
The lack of monetary discipline during 1992 led to a peak inflation rate of 340 percent in
March 1993, as measured by the year-on-year consumer price index. This led to a continuous
depreciation of the riel in the parallel exchange rate from 935 riels per dollar in March 1993 to
2,310 riels in December 1993 and 4,200 riels in March 1994. Corrective measures taken after
that led an appreciation in the riel to 2,470 per dollar in December 1994, with only a slight
depreciation to 2,575 riels by the end of 1994, and stabilizing at about 2,500 riels by the end of
1995 (SEDP I).
Thus, the period 1991-95 witnessed growing monetary discipline to accompany the
improved fiscal management of the economy. In addition, the new Central Bank Law,
promulgated in January 1996, represented an important step in establishing a modern legal
framework for the financial system by giving NBC the primary mandate of maintaining price
stability and providing a number of monetary policy instruments. An immediate priority of the
NBC is to strengthen its capacity especially in the supervision of commercial banks, as the
nature of operations of the commercial banks is not fully known. This became more urgent as
FDI inflows began to sharply increase.
As a result of those monetary reforms, monetary policy ceased to be a cause of inflation
though it remained a weak instrument for macroeconomic management. Strengthening this role,
while continuing to refrain from the use of central bank credit, was at the center of monetary
policy over 1996-2000. It was designed to complement fiscal policy as a means of consolidating
macroeconomic stabilization and generating growth in confidence of domestic currency as well
as in the capacity of authorities that manage the economy (SEDP I 1996-2000).
Following the prudent monetary and fiscal disciplines, the government has been able to
maintain low inflation and stable exchange rates, and substantially reduce the spread between
the official and parallel market exchange rates.
For the medium to long term, the National Bank of Cambodia (NBC), the monetary
authority, will continue to: (i) Maintain price stability with an inflation target of under 5
percent; (ii) Ensure the continued soundness of the financial sector by responding in a proactive
manner to emerging internal and external developments; (iii) Continue to manage a floating
exchange rate regime with a target of around CR 4,100 per US dollar; and (iv) Maintain foreign
reserves to finance at least three months of imports. The National Bank of Cambodia will
continue to aggressively pursue policies needed to mitigate the potential adverse effects of the
global financial crisis and the economic downturn on the Cambodian economy, the financial
sector, and the vulnerable and poor segments of the population (Hang 2009).
2.1.1.3. Exchange Rate Policy
Cambodia adopted a managed floating exchange rate regime in 1992 based on the US dollar.
According to Bonnang (2009), the current exchange rate regime in Cambodia may be
076
characterized as follows:
- An official exchange rate: Determined by the National Bank of Cambodia (NBC) for
transactions among the NBC, government and the public sector.
- A parallel exchange rate: Determined by the market it is a free floating exchange rate used
for all private sector transactions.
To maintain price stability, Cambodia has adopted a market-oriented exchange rate policy in
which the official exchange rate adjusts to movements in the parallel market rate. The
management of the floating rate is to maintain confidence in the national currency and reduce
currency substitution vis-a-vis the US dollar (Bonnang 2009).
To determine the dollar-riel market exchange rates, the rates are taken from three markets in
Phnom Penh every working day. Then based on these rates, the daily official rate is set. Since
1995, the official exchange rate has not differed by more than ±1 percent from the market rate
(Bonnang 2009).
Whenever there is a disorder and hence sharp fluctuation in the foreign exchange markets,
NBC intervenes through foreign exchange auctions and defenses against speculative attacks.
The system of Foreign Exchange Auction was introduced in September 1993. Thus US dollar
auctions have been the most frequently used instruments to maintain foreign exchange stability
and promote price stability (Bonnang 2009).
2.1.2. Trade FDI and Industrial Policy
2.1.2.1 Trade Policy
Since the mid-1990s, there has been a rapid revival in Cambodia’ s trade sector. Economic
growth and employment creation has been driven by export growth. To contribute more fully to
poverty reduction, the government prioritized the formulation and implementation of a pro-poor
trade sector strategy. The strategy is based on three key concepts: (1) Shifting the balance of
policy emphasis from issues of market access and macro-reforms for trade to micro-level issues
of the supply capacity; (2) Focusing strongly on the delivery of capacity-building support at
export-enterprise and export sector levels (private sector development for trade); and (3)
Stressing the rationalization and geographical decentralization of export business within
Cambodia (SEDP II, 2001-2005).
The base for developing the country’ s external trade sector was the continued pursuit of a
liberal trade and investment policy and the maintenance of a market-determined exchange rate
(SEDP I). The government’ s efforts during its Second Mandate, 1998-2003, to foster
development of a free market economy by opening access to its markets, providing incentives to
attract foreign investments, and securing access for its products in overseas markets through
special trading rights such as the Most Favoured Nation (MFN) and Generalised System of
Preferences (GSP) arrangements that have been extended to Cambodia by many industrialized
countries, have yielded significant results (SEDP II). Half of the GDP growth between 1999 and
2003 was contributed by one sector, the garment industry, which continues to be the major
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contributor in trade of Cambodia (CDC 2004). Between 1998 and 2003 the manufacturing
sector’s share in total GDP grew from 12.7 percent in 1998 to 19.5 percent in 2003 (SEDP II).
Economic reintegration has been an important objective of the government and it has been
fundamental to its growth vision for the country. The domestic market has been, and will
remain for the foreseeable future, too small to support the kind and rate of long-term growth
envisaged, and it needs to attract export-oriented investments. Cambodia has the potential to
capitalize on the intra-regional complementarity that stems from differences in labor costs and
availability, natural resource endowments and trading regulations (SEDP I).
Accession to the World Trade Organization (WTO) on 11 September 2004: Joining WTO
marked the final step in bringing Cambodia back into the major regional and international
organizations that govern international economic relations. For the garment industry the
accession presented not only a challenge to become more competitive in regional and global
markets but also opportunities for expansion because of the removal of the quotas for
Cambodian exports to 147 WTO members based on MFN principles and non-discriminatory
practices. Membership of both WTO and ASEAN enabled Cambodia to work towards bilateral
free trade with the United States of America under the so called Enterprises for ASEAN
Initiative (EAI) in the US.
Regional Integration: Cambodia became a Member of ASEAN in 1999. As a new member,

Cambodia has benefited from numerous new initiatives of the more advanced ASEAN countries
to assist the newer and less developed members, such as the ASEAN Integration System of
Preferences (AISP) (349 items). Also, other framework agreements with ASEAN dialogue
partners have also been beneficial for Cambodia, such as the Special and Preferential Tariff
(SPT) from China (297 items), General System of Preferences (GSP) from Japan (226 items)
and the Republic of Korea (78 items).
Cambodia has persevered in its efforts to pursue opportunities to expand South-South trade
within and outside the ASEAN community. The possibility of joining the Global System of
Tariff Preferences among developing countries which fosters trade is now being explored.
Ultimately increased in investment, production and consumption in ASEAN dialogue partner
countries will result increased demand for production inputs and finished goods from ASEAN
and Cambodia.
At the ASEAN Summit held on 8 October 2003 in Bali, Indonesia, ASEAN leaders adopted
a framework to establish an ASEAN Economic Community (AEC) by 2020. The aim is to
create a single market and production space of more than 500 million people, with a combined
gross domestic product (GDP) of over USD600 billion by 2020.
Sub-regional Economic Integration: Other sub-regional socio-economic development

initiatives worth noting include: The Greater Mekong Sub-region; the Thailand—Cambodia
joint development within the framework of Ayeyawady Chao Phraya Mekong Economic
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Cooperation (ACMECS); the Cambodia-Laos-Thailand Emerald Triangle; and the Vietnam -
Laos - Cambodia Development Triangle.
Bilateral Trade Cooperation: Bilateral trade relations between Thailand and Cambodia have
been growing steadily. Trade account mechanisms with Thailand are being explored as a way of
enhancing international trade and business transactions that will include government guarantees
for trade payment settlement; lessening the dependency on hard-currency transfers and banking
fees related to international trade and payment transactions. Thailand had also approved the
product list consisting of 310 items under the ASEAN Integration System of Preferences to
Cambodia. Under the ACMECS’ s One Way Free Trade Policy or Duty Free Import, Thailand
has reaffirmed its plans to purchase various agricultural products from Cambodia such as
soybean, maize, castor bean, potato, sweet corn, cashew nut, eucalyptus and groundnut. Other
ACMECS's initiatives include: A feasibility study on establishing a wholesale/export market in
Cambodia, and a feasibility study on establishing special economic zones at Koh Kong, Poipet,
and Pailin.
In 1996, Cambodia and the USA signed a trade agreement under which Cambodia was given
Most Favoured Nation (MFN) status for exports to the US. This agreement allowed Cambodia
to export its products to the US at the same tariff rates as other WTO members. In 1997, the US
granted GSP status to Cambodia. In 1999, Cambodia and the US signed an agreement for
Cambodia to export textiles to the US based on a quota for 11 types of textile products.
In 1999, Cambodia signed an agreement with the EU that allowed Cambodia to export
textile products to Europe without quota and duty. In 2001, the EU implemented a policy that
allowed all less developed countries (LDCs), including Cambodia, to export all goods, except
for arms, to the EU without duty and quota.
In 2002, Cambodia and Vietnam renewed an agreement on goods in transit to facilitate
exports from Cambodia to third countries via Vietnam. In 2001, both countries signed an
agreement on cross-border trade in order to facilitate the exchange of traditional goods among
the people living along the border of the two countries.
In 2003, Canada granted duty free and quota free market access to Cambodia’ s textile and
garment exports.
Bilateral trade with China has significantly increased, reaching a volume of USD 320
million in 2003. China has granted GSP treatment for 279 items, mostly agricultural products,
and is considering in expanding the list up to 439 items. In the area of textiles, China has signed
a MOU for the development of a 500,000 spindle textile plant in the proposed Sihanoukville
Textile Industrial Park. In addition, a MOU to promote economic and trade relations and
technology cooperation has also been signed between the Cambodia Chamber of Commerce
(CCC) and China Council for the Promotion of International Trade (CCPIT).
The ultimate aim of the government is to protect and preserve garment workers’ jobs and the
people whose livelihoods depend on them as well as to strengthen and diversify the sector’ s
current export base.
Special attention must be given to increasing domestic value added content of individual
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exports and to developing new export sectors (CDC 2004).
Further government strategies for trade should address such issues as improvements of the
market information system, market diversification of export and import products, better
consumer accessibility to imported staple goods, and increased contribution from the private
sector in the marketing of locally produced goods and services (Hang 2009).
2.1.2.2. FDI and Industrial Policies
The government of Cambodia regards the private sector as the main impetus for the
country’ s economic growth and has mainstreamed it in key strategic development plans
including the triangular and rectangular strategies (SEDPI, SEDPII and NSDP). For example,
the current NSDP 2006-2010 states that,“The RGC is fully committed to some basic principles
for taking the country forward, such as strict adherence to democracy in governance,...;
government to ensure political stability, rule of law, equity and social order; government to be
fully responsive, responsible,...; government to ensure macro-economic stability, create and
maintain key infrastructure, as well as a conducive climate for private sector to flourish, and
provide essential social services for human capital formation and enhancement”(Ministry of
Planning 2006).
In order to empower and allow the private sector to participate in planning and managing the
economy more effectively and efficiently, the government, initiated the Government-Private
Sector Forum in the mid-1990s. The Council for Development of Cambodia (CDC) also
established a one-stop-service mechanism to facilitate investment applications and decisions. In
addition, under the 2003 Law of Foreign Investment, the length of investment application
procedure was reduced to a maximum of 45 days. This law provides a clear and more liberal
investment regime with attractive incentives for foreign direct investment in Cambodia for
projects in high technology industries, export-oriented activities tourism, agro and processing
industries, physical infrastructure and energy, provincial and rural developments, environmental
protection, and investments in the special promotion zone (SPZ). The incentives include (1)
Corporate income tax rate of 9 percent, except for the exploration and exploitation of natural
resources, (2) Corporate tax exemption of up to eight years depending on the characteristics of
the project and the priorities of the government, (3) Ability to carry losses forward for up to five
years, (4) Non-taxation on the distribution of dividends, profits or proceeds of investments, (5)
Import duty exemption of 100 percent on construction materials, means of production,
equipment, intermediate goods, raw materials and spare parts used by an export project with a
minimum of 80 percent of the production for export or by projects located in the designated
Special Economic Zone (SEZ), and (6) Export tax exemption of 100 percent (Phim Nou and
Tout 2007).
Furthermore, the government aims to improve the investment climate and facilitate trade to
attract more foreign direct investment through its Twelve Point Plan policy. These plans are to
(i) Establish a cross-agency trade facilitation and investment climate reform team; (ii) Establish
a system of transparent performance measurement; (iii) Review trade facilitation process to
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remove overlaps and unnecessary approvals; and (iv) Introduce overall risk management (Phim
Nou and Tout 2007).
2.1.2.3. Industrial Policy
The government’ s Industrial Development Action Plan for 1998-2003 had two goals: the
development of export-oriented industries and the development of import-substituting
production of selected consumer goods. These goals were to be achieved by promoting the
development of: (i) Labor-intensive industries, (ii) Natural resource-based industries, (iii) Small
and medium enterprises, (iv) Agro-industries, (v) Technology transfer and upgrading the quality
of industrial products, (vi) Establishment of industrial zones, and (vii) The development of
import-substituting production of selected consumer goods.
During the last five years, the development of labor-intensive manufacturing was focused on
the textile and garment sub-sector. The government has continued to provide support for broad-
based industrial development by: (i) encouraging expansion of the small and medium
enterprises (SME) sector, (ii) improving the performance of state-owned enterprises through
corporatization and privatization, (iii) Stemming the flow of illegally imported products, (iv)
Reducing barriers to export such as export taxes, (v) Reducing barriers to import of business
inputs, (vi) Enhancing the linkage between SMEs and large industries, (vii) Promoting a
national productivity center to help small and medium size firms increase productivity and
reduce production costs, (viii) Establishing a national institute of standards to ensure quality of
products, (ix) Establishing a national laboratory with the technical capacity to undertake
physical, chemical, microbiological, and mechanical analyses of products, (x) Establishing an
industrial property rights bureau, (xi) promoting vocational training in Cambodia and overseas,
and (xii) Upgrading legal framework in the areas of factory law, industrial zone law, patent and
industrial design law, weights and measures, and industrial safety.
2.1.3. Education and Human Resource Development Policy
The long-term objective is to ensure that all Cambodian children and youth have equal
opportunity to access quality education regardless of social status, geography, ethnicity,
religion, language, gender or disability (NSDP 2006-10).
During the early and middle 1990s, the country and its major donors invested millions of
dollars in supply-side interventions such as textbooks, infrastructure, and teacher training, yet
the participation and flow rates at primary level continued to stagnate throughout this period.
This increase in public resources devoted to education, particularly recurrent expenditure in the
basic education sector, reflects a major shift in the government’ s education sector strategy. A
new wave of educational reforms at primary school level, known generically under the name
PAP (Priority Action Program), was launched in 2000. First implemented on a pilot basis, it was
launched in 10 provinces on a budget of CR 10 billion. PAP shifted the focus of education
policy towards demand-side factors. In particular, a specific purpose of this pilot was“to reduce
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the cost burden on the poorest families to increase participation of their children in grades 1-9”
(Ministry of Education, Youth and Sport (MoEYS) 2005).
The scheme was expanded to cover the whole country in 2001. In 2004, there were 12 PAPs
with a budget of CR 75 billion. PAPs that specifically refer to the basic education sector include
(WB 2005):
PAP 1: Education Service Efficiency. This program focused on improving the utilization of
MoEYS personnel by providing equitable access to an improved quality and more efficient
education service. Allowances were given through PAP 1 to teachers in hardship postings, such
as those where ethnic minorities reside, and to teachers responsible for multi-grade and double-
shift classes.
PAP 2: Primary Education Quality and Efficiency. The first component of this program
aimed to increase enrolment through the provision of school operational budgets. These grants
were meant to replace start-of-year fees. A second component of the program aimed to reduce
repetition in grade 1 through the provision of remedial classes in the summer months, for which
teachers received financial remuneration.
PAP 3: Secondary Education Quality and Efficiency. This program included the provision of
school operating budgets to over 550 lower secondary schools.
PAP 12: Scholarships and Incentives for Equitable Access. A major component of this
program is a scholarship scheme for lower secondary students in poor areas. Budget allocations
for this program began in 2003-04.
In addition, the government launched a systematic program to decentralize education
services. This was supported by capacity building efforts at provincial, district,
cluster/commune, and school levels. These efforts have been directed mainly at the effective
planning, management and monitoring of PAPs (WB 2005).
As stipulated in the NSDP 2006-2010, the Education Strategic Plan (ESP) 2006-2010 has
been prepared based on the experience gained in the implementation of ESP 2001-2005 and
through wide ranging of consultations with all stakeholders. It includes the goals for the
Education for All Plan 2003-2015 and provides an overarching policy and implementation
framework for improving the livelihoods of poor people through emphasis on education quality
improvement at all levels -pre-school, primary, secondary, and higher education.
The major priorities of ESP 2006-2010 and the main policy thrusts are:
● Ensuring easy and equitable access to education, especially for the poor, girls, ethnic
minorities and disadvantaged children, as well as those in high poverty areas.

● Universalizing nine-year basic education to enhance opportunities in life.
● Increasing quality and efficiency of the education services, including modernization and
effective reform.
● Linking education and training to the short and long-term labor market and society,
including life skill education and quality health and HIV/AIDS prevention education.
● Further developing the youth and sports sector, with increased attention to youth in
various walks of life.

● Developing institutions and building capacity for decentralization.
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During the past years, significant progress has been achieved in increasing enrolment rates
in primary and lower secondary schools (completion of basic education up to grade 9). There
are still severe gaps relating to the very poor and people in remote areas however, the
immediate major goals to address this include:
● Reducing the distance that children have to travel to schools by providing schools closer
to villages
● Facilitating attendance of girls at lower secondary and higher levels
● Reducing costs to parents to ensure enrolment and attendance of poor children
● Improving quality of education up to and beyond basic levels, including revised curricula
and a system for assessing student performance for grades 3, 6 and 9; teacher development
and posting; quality assurance; and an accreditation system (NSDP 2006-2010).
Table I-1-1 | Educational Key Goals and Targets
Targets and Indicators 2005 2010 2015
1 Primary School (1-6): Net Enrolment Total; Boys; Girls— % 91.9; 93.0; 90.7 100 (all)
2 Lower Sec. School(7-9): Net Enrolment: Total; Boys; Girls % 26.1; 27.1; 24.8 75 (all) 100 - all
4 Survival rate %:1-6: 53.1 100
5 Survival rate %:1-9: 30.18 50 100
6 Literacy rate - 15-24 years % 83.4 95 100
Source : National Stratgic Develpment Plan (NSPD) 2006.
Key strategies and actions in the education sector to achieve these and other goals are:
● Increase the coverage of pre-school children attending early childhood education program
organized in schools, communities and homes.
● Increase the number of primary and lower-secondary schools, especially those in remote
and underserved areas.

● Increase the number of teachers at these levels to improve teacher-student ratios and the
proportion of female teaching staff, especially by providing incentives to work in remote

areas.
● Upgrade teachers’ qualifications by professional development linked to performance
incentives.
● Pay special attention to increasing teachers’ salaries (already being undertaken) and
paying salaries on time.
● Ensure education quality through improved provision of educational materials, equipment,
libraries, and laboratories.

● Develop quality standards for all levels and a national assessment system for basic
education.
● On the basis of pilot projects already being taken up, increase the number of safe places
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(dormitories) for young girls coming from distant areas to attend the nearest lower
secondary schools.
● Reduce burden on poor students (especially girls) through targeted scholarships (at
primary, secondary and tertiary levels) and exemption from the rather widely prevalent
informal payments to teachers.
● Expand and better target the primary school feeding program and grades 7-9 incentives
program.
● Continue to assure adequate allocation and timely release of current budgets for education
especially targeted towards basic education.

● Increase and improve adult literacy programs, especially for women.
2.1.4. Competition, Regulation and State Owned Enterprise
2.1.4.1. Competition and Regulation
Cambodia does not have any competition legislation, though the concept of competition is
not new to the country. According to the 1993 Constitution of Cambodia, the country is to
pursue its economy based on market forces within the country and to take necessary
interventions to protect market competitiveness as well as consumer welfare. The Constitution
requires the state to respect market management, pay attention to and help solve production
matters, protect the price of farmer and artisan products and help find a proper market place for
them. For consumer protection, the State is mandated to ban and punish those who import,
manufacture or sell illicit drugs, or counterfeit and expired goods.
Thus far, it has been noted that the government has paid a fair amount of attention to the
promotion of competition in the market. The government acknowledges that the private sector is
an important force in gearing up the economic growth of the country and has therefore created a
conducive environment for private enterprises. The role of government has therefore been, inter
alia, to ensure fair competition, transparency and accountability among enterprises, including
public enterprises in the market.
An excerpt from Rectangular Strategy Rectangle III: Private Sector Development and
Employment Generation states three main policies to strengthen the private sector and attract
investments: (i) Implementation of policy of Cambodian economic integration into the regional
and world economy; (ii) Development of both software and hardware national infrastructure
networks; and (iii) Strengthening of the legal framework for enterprise.
The policy for strengthening legal framework takes into account various laws, regulations
and institutional capacity that facilitate business, trade and private investment, especially“fair
competition, transparency, accountability and fruitful partnership between private and public
sectors” .
The enactment of a competition law formed part of the Cambodian government’ s immediate
agenda to fulfill the commitments in the WTO accession deal. The law was scheduled for
approval by the National Assembly in March 2005 and by the Senate of Cambodia in January
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2006, though political deadlock after the July 2003 election delayed the whole schedule for
enacting laws in compliance with the WTO deal.
Industrial and Privatization Policy
The low level of industrialization and high dependence on imports for most products in
Cambodia places the country’ s small community of local enterprises under huge competitive
pressure from foreign players. An extensive number of impediments, including complicated
licensing procedures, lack of access to financial capital, poor access to social infrastructure such
as healthcare, limited access to vocational training, poor road and transportation conditions,
high cost of electricity, etc. also make it difficult for Cambodian enterprises to compete with
imported products. Smuggling and counterfeiting are also rampant in Cambodia and impose
more difficulties on honest producers and traders. The high level of informality in the market
and low economic administration and management capacity in Cambodia make the maintenance
of a database on the market shares of enterprises an impossible task at the current stage.
Therefore, at the core of Cambodia’ s industrial policy are: A policy to focus more resources
on and provide more incentives to attract investments into its industrial and agricultural sectors
where Cambodia has comparative advantages for export promotion, and a policy to focus on the
development of physical infrastructure and the production of basic necessities and utilities to
cater domestic needs instead of relying completely on imports.
Cambodia’ s industrial policy is built upon seven main points:
1. Developing labor-intensive industries, such as garments, toys and footwear
2. Promoting the development of agribusiness by strengthening the legal framework for
longer-term land management and providing incentives to establish agri-processing
factories
3. Developing industries which are based on the use of basic natural resources, mainly by
processing the existing natural resources in the country such as fish, meat, and cement
production
4. Promoting small and medium-sized enterprises (SMEs), micro-enterprises and handicrafts
by providing micro-finance, marketing services and training, and supplying information
on sectoral development
5. Encouraging technology transfer and export product diversification by promoting the
assembly of electrical appliances and electronics products and improving product quality
6. Establishing industrial and export processing zones (EPZ) by developing infrastructure,
improving service quality
7. Increasing the production of goods for import substitution, such as the production of
fertilizers, as well as daily consumption goods such as soap, paint, electrical appliances,
and agricultural inputs.
These policies, coupled with a cascading tariff structure could offer effective protection for
domestic industries against competition from imports and promote exports to compete with
goods produced and marketed internationally by other types of trading. In Cambodia, where
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corruption is a tremendous problem, the representatives of the State seem to be more interested
in collecting rents and snatching forest and land ownerships rather than building up their
business empires, shielded from the competitive threats of the domestic private sector or other
foreign players. This characteristic, together with a rigorous process of opening up the economy
and liberalization, has led to a full-fledged privatization policy for Cambodia’ s State assets.
Consequently, many state-owned enterprises (SOEs) have been sold and or leased to the private
sector. Some have received foreign investment and have been turned into joint ventures.
2.1.4.2. State Owned Enterprise
The Cambodian economy is made up of a handful of SOEs and a vast private sector, of
which the huge majority consists of small and informal enterprises. The agricultural sector
mostly comprises small-scale or household production units which operate on an informal basis
without any form of registration or taxation (Nuth 2005).
The non-farm sector operates both formally and informally, also with a big discrepancy in
proportion between the two segments. It was estimated that, in 2001, there were about 27,000
small enterprises in Cambodia which were not registered with the Ministry of Commerce
(MoC) and only half of this number were operating their business with a MoC license. Only
approximately 9,000 companies had officially registered their business. Small enterprises, while
often licensed to operate by the MoC and other relevant ministries at the provincial-municipal
level, normally did not pay profit taxes and are regulated informally by local level authorities.
Non-licensed enterprises were often subject to paying small-scale unofficial fees to local
authorities. Those commercial enterprises, which were registered with the MoC, were subject to
profit taxes based on the filing of financial statements with the tax authorities (Nuth 2005).
There is a grey area between informal and formal sectors where enterprises are locally
licensed, but are not formally registered and taxed. Once an enterprise grows to a certain size it
must register with the MoC and formalize its operations. At this point, the enterprise will pay
profit tax based on the real regime method and will be subject to regulation from several
ministries relevant to its business. Because of the increased administrative and tax burden
resulting from entering the formal sector, there is an incentive to stay small. Enterprises will
only register if their size is big enough to qualify for the incentives given in accordance with the
Investment Law, or to apply for import and import licenses as well as to improve their access to the
formal financial sector. For these reasons, the informal sector in Cambodia is vast (Nuth 2005).
The privatization of SOEs in Cambodia started in late 1989 was carried out in two phases,
the first from 1991 to mid-1993, and the second phase started in April 1995. By the end of
2000, 160 SOEs had been privatized, of which 139 were leased to the private sector, 12
transformed into joint ventures, eight sold outright and eight liquidated (WTO 2003).
Although some SOEs still exist, they do not seem to pose a big threat to other private traders
as they are required to compete fairly with private companies in the same markets and are not
entitled to special trading rights or privileges. Evidently, some SOEs have lost out to
competition from private traders and have thus collapsed due to their limited technologies and
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inability to compete with other imported products on the market. The collapse of SOEs may
prove that the government’ s industrial policy does not actually favor state enterprises (Hang
2009).
2.1.5. Infrastructure
The backbone to any sustainable development is physical infrastructure - roads, bridges,

railways, ports, electricity generation and grid network, irrigation, telecommunications, and so on.
With regard to roads and ports, the focus is given to improving the road network,
rehabilitating and expanding the deep-sea port at Sihanoukville, and improving international
airport facilities at Phnom Penh and Siem Reap. Priority attention has been paid to the
rehabilitation and upgrading of primary roads connecting neighboring countries (Laos, Thailand
and Vietnam), major arteries within the country and roads servicing remote rural areas,
including bridges and ferry crossings (RGC 2004).
Road: Between 1998 and 2004, of a total of 11,310 km of roads - 4,695 km of primary roads
(connecting neighboring countries, provincial capitals and ports) and 6,615 km of secondary
roads (connecting provincial headquarters to district headquarters), about 2,100 km were
upgraded (paved); the Kizuna Mekong Bridge at Kampong Cham (February 2002) and Koh
Kong bridge (2001) were completed and a number of important roads were reconstructed
including the rehabilitation of bridges. Many of the secondary roads connecting rural areas were
also repaired. With limited resources, road maintenance has been a major priority (RGC 2004).
Port: The deep-sea port at Sihanoukville, located 230 km south-west of Phnom Penh and
handling nearly 70 percent of Cambodia’ s imports, is being upgraded; the first stage was
completed in 2005. Not much progress has been made in rehabilitating railways or further
upgrading river transport facilities though river transport between Phnom Penh and Siem Reap
has improved considerably (RGC 2004).
The private sector is being increasingly involved under Build Operate Transfer (BOT) terms
in the construction and improvement of infrastructure. Notable examples are Koh Kong Bridge,
National Highway 4, improvements to Phnom Penh international airport and others (RGC
2004).
Information and Communications: Improvements in telecommunications had been

phenomenal. At the end of 1998 the average national tele-density was 0.74 per 100 people and
2.17 per 100 in Phnom Penh. This rose to 5.57 and 44.70, respectively, at the end of first half of
2005 (NSPD). Nearly 882,000 subscribers used services provided by Ministry of Posts and
Telecommunications (MPTC) and private telephone companies in 2005 but the number
increased to over 4,143,000 as of the end of 2008. During the same period the number of
internet subscribers rose from around 8,600 to 20,100 (NSPD update). However, the still high
cost of telecommunications burdens the entire population as well as businesses. Starting from a
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non-reliable level, the postal services have expanded and are gaining increasing public
confidence. In terms of keeping people updated about various developments and news, the
national television transmitter has been upgraded and the quality of programs continuously
improved. Local television stations also function in several provincial towns. In the Third
Legislature, the telecommunication sector made remarkable progress through expanding the
coverage of the post and telecommunication services and Internet, and increasing number of
users (NSPD update).
The government of the Fourth Legislature will continue to develop the postal and
telecommunication systems and promote the development of information and communication
technology (ICT) to ensure quality, low price and wide coverage. The priorities are to: (1)
Speed up adoption of the Law on Telecommunications and associated legal and regulatory
framework; (2) Build capacity in the sector; (3) Improve and modernize equipment and
technology; (4) Foster competition in the postal and telecommunication services; (5) Increase
the efficient use of information technology and promote e-government, and (6) Build and
enhance the efficiency of the backbone infrastructure for the information and communication
technology sector.
Transport: In the current context of Cambodia, the transport network is“a prime mover of
economic growth”. To date, the government has almost completed the rehabilitation and
reconstruction of important national roads (NSDP update). In its policy in the Fourth
Legislature, the government will continue to give high priority to the rehabilitation and
reconstruction of a multimodal transport network connecting all parts of the country, and
connecting Cambodia with neighboring countries aiming at trade facilitation, tourism
promotion, rural development, regional and global economic integration as well as national
defense (NSDP update).
The government will make every effort to privatize the Royal Cambodian Railway, and will
encourage private sector’ s participation in the rehabilitation of infrastructure and transportation
services through bidding processes, in routine and periodic maintenance. It will further
strengthen the management and technical supervision and audit the capacity of the Provincial
Departments of Public Works and Transport and the Provincial Departments of Rural
Development. The government will continue to pursue an open sky policy, strengthen flight
safety and enhance airport services (NSDP update).
In addition, the government will speed up the adoption of the Transport Policy, and Law on
Roads and will place emphasis on traffic safety and stricter measures against transportation
offences, including overloaded carriers (NSDP update).
Irrigation: So far, the government has made significant achievements in rehabilitating

existing and constructing more irrigation networks. It has also taken other measures to
maximize its full potential in order to solve the water needs of the agriculture sector by
expanding the capacity of water reservoirs. Water user communities have been established, with
increasing participation from farmers. There have also been improvements in the provisions of
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potable water supplies in both urban and rural areas.
In its policy commitment, the government of the Fourth Legislature (2008-2013) will continue
to give priority to the rehabilitation, construction, maintenance and efficient management of
irrigation infrastructure, water reservoirs, canals, pipes, drainage, flood and sea protection levees,
and water pumping stations to increase irrigated areas and boost agricultural production.
The government will pay more attention to improving access to clean water supplies to
ensure food safety and better livelihoods in accordance with the Cambodia Millennium
Development Goals (CMDGs) and will also commit to preserving a clean environment and
protecting the ecosystem from water pollution.
The government will enhance efficient management of the irrigation system by
strengthening the institutional capacity of the relevant ministries and agencies. It will further
increase people’ s participation in the decentralized management and use of irrigation systems.
The government will encourage private sector participation in the development and
management of irrigation systems and clean water supplies.
Energy: Availability of assured, abundant, low-cost electricity is the key to the country’ s
development. High cost electricity affects all productive sectors and hinders industrial
investments and competitiveness. Attracting private sector investments and participation in the
generation and distribution of electricity to key provincial and urban centers, rural areas, and
putting in place power transmission grids to link Cambodia with neighboring countries have
therefore been high priorities. Total electricity generation in Phnom Penh and provincial towns
increased from 163.4 GWh in 1993 to 759.7 GWh in 2004. New power plants have been
completed. Work is to be completed on several provincial towns’power rehabilitation works.
Agreements have been signed and implemented with neighboring countries to import power for
use in border areas. In many district towns, private operators provide local energy needs. The
government is also promoting development of cheaper, renewable, alternative energy sources,
viz., solar energy (already installed in some areas), wind energy, biogas, and mini-hydro
schemes. A very important new development is the discovery of oil and gas resources in some
off-shore trial wells already drilled, raising hopes of an abundant source of supply in a few
years to provide a boost to the economic growth, in turn raising income levels and rapidly
reducing poverty. The challenge is to plan well ahead to use these valuable resources, especially
natural gas which otherwise traditionally goes to waste (RGC 2004).
In the Third Legislature (2003-2008), the government succeeded in the rehabilitation of the
electricity supply system and extended supply to some strategic regions. Some concrete
achievements include: (1) Commencement of the construction of the hydro-electric generating
stations at Kamchay, Atai and some transmission lines; (2) Rehabilitation and expansion of
electricity supply system in Phnom Penh to meet actual demand; (3) Rehabilitation and
reconstruction of electricity supply system in a number of provinces to meet local demand; (4)
Construction of a receiving system in the border areas to enable import of low cost electricity
from neighboring countries; and (5) Provision of electricity in rural areas from privately
operated small-scale generating units in accordance with the licensing arrangements under the
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Law on Electricity.
In the Fourth Legislature, the government will attach priority to:

● Increasing electricity supply capacity and reducing tariffs to an appropriate level while
strengthening institutional mechanisms and management capability. To this end, the Royal
Government will encourage the construction of low cost electricity generating plants by
using local energy sources such as hydro power, natural gas and coal;
● Exploring possibilities of developing high-tech power plants including nuclear and non-
traditional energy, and will pursue the import of electricity from neighboring countries;
Encouraging construction of electricity transmission lines covering all parts of the country
to enable the supply of quality and low cost energy from all sources to meet the demand in
cities, provinces, urban and rural areas;
● Gradually integrating Cambodia's electricity energy system into the networks of the
Greater Mekong Sub-region (GMS) countries and ASEAN;

● Accelerating rural electrification, including the use of renewable energy;
● Encouraging the private sector to invest in energy infrastructure, including generation,
transmission and distribution;

● Making further efforts to mitigate adverse effects of the implementation of energy projects
on the environment and society while safeguarding the economic efficiency of each
project;
● Building capacity and promoting institutional reform in the Electricity Authority of
Cambodia (EAC), Electricity Du Cambodge (EDC) and other relevant ministries and
agencies to improve management efficiency and the quality of electricity supply;
● Developing policy, legal and regulatory framework for the sector to ensure efficient
management and resource utilization of its oil and gas resources for economic
development and livelihood improvement of the Cambodian people.
2.1.6. Safety Net
In the second phase of the Rectangular Strategy for Growth, Employment, Equity and
Efficiency, the government reiterated its commitment to alleviating poverty through social
protection. Announced in September 2008 by H.E. Hun Sen, Prime Minister of Cambodia, the
government sets out to:
● Give priority to improving working conditions for workers and employees
● Enforce Social Security Law
● Implement benefit and pension schemes for people with disabilities and their dependents
● Ensure protection of those covered by the Labor Law
● Make insurance coverage against workplace accidents available to all employees.
To continue to strengthen support to people with disabilities, families of veterans, as well as

retired civil servants and veterans, a comprehensive pension system is to be implemented under
the National Social Security Fund (see Section II). In this context, the government intends to
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promulgate a Law on the Comprehensive National Social Security Fund and a Law on the
Establishment of National Pension for Veterans (WB 2009).
The second phase of the Rectangular Strategy will continue to operate in the National
Strategic Development Plan (NSDP) which will be extended to 2013. In the NSDP 2006-2010
midterm review, the government explicitly recognizes the challenges ahead in the provision of
safety nets to the poor during times of inflationary stress. However, the government is still
committed and sees the urgent need to implement measures to ensure safety nets for the most
vulnerable through subsidies and targeted labor intensive work schemes such as food-for-work
programs, as means to reduce poverty (WB 2009).
The NSDP midterm review explicitly raises the issue of the increasing inequalities between
urban and rural areas and high and low income groups. The government aims to address this
with more and focused attention on rural areas, agricultural production and adequate safety nets
(WB 2009).
In addition, food security and nutrition is recognized in the NSDP as a cross-cutting issue:
Achieving progress here depends on the synergy of growth and output from many sectoral
activities as outlined in the Strategic Framework for Food Security and Nutrition. The NSDP
envisages that targeted efforts in various sectors will ensure that“Poor and food-insecure
Cambodians, by 2010, have substantially improved physical and economic access to sufficient,
safe and nutritious food at all times to meet their dietary needs and food preferences to an active
and healthy life”(NSDP 2006, p.47). Overall food security outcomes (improved nutritional
status) have been improving steadily since 2000, thanks to the fast growing economy,
agricultural growth, increasing availability and affordability of food, healthier food intake
supported by health and nutrition education, micronutrient supplementation and fortification
programs (iron, vitamin A), and continued enforcement of universal iodization and food safety
standards. It is important that this positive progress is sustained in the future. The government
needs to closely monitor the rapid increases in food prices which threaten food security and
nutrition for the very poor and vulnerable. Of particular importance is to track periodic progress
or changes in stunting and underweight status among children (as sub-indicators) (WB 2009).
2.2. Quantitative Overview of the Macroeconomy and Its

Structure
This sub-section provides a quantitative overview and assessment of the macroeconomic
performance as well as important structural characteristics in Cambodia’ s economy with a
particular focus on more recent years. It also provides background information for the
projection as well as for identifying main policy challenges or risk factors associated with the
projection. Assessment is made in relation to Section 2.1. The topics covered include
macroeconomic conditions, sectoral output structure, foreign trade and FDI, educational
achievement, role of SOE, infrastructure and income distribution.
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2.2.1 Macroeconomic Conditions
2.2.1.1. GDP Growth
After a period of healthy growth, Cambodia’ s economy was badly hit by the global financial
crisis (GFC) in 2009. The country’ s economic growth slowed to 0.1 percent in 2009 from 6.7
percent in 2008, much slower than the average of 11.1 percent during 2004-2007. The stagnation
of the economy mainly reflected the dramatic decline in the industrial sector, particularly the
manufacturing sub-sector which is dominated by garments and construction, and the slowdown
in the services sector which is mostly due to a slump in tourism and real estate sub-sectors.
Figure I-1-1 | GDP Growth and Sectoral Contribution, 1994-2010
Source: Author’
s calculation based on data from MEF 2010
2.2.1.2. Inflation
Figure I-1-2 depicts the movement of inflation from 1994 to 2010. The year on year inflation
was as high as 25 percent in 1994 then fell to 0 percent in 1995 due to tightening monetary
discipline and improved fiscal management. It peaked up to 10-15 percent when the political
stability was abrupt in 1997-1998 but then was well kept under control until the food price crisis
in 2008. In 2009, Cambodia could finally manage to keep inflation at bay by bringing it back to
the level before the global financial economic. Year-on-year inflation stood at 5.3 percent
easing off from 10.7 percent in 2008. The inflation decelerated faster than expected, owing to
lower international oil and food prices and weaker domestic demand as the economy contracted.
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Food price is the most significant factor which clawed down the overall price level in 2009.
According to the National Institute of Statistics, the year-on-year increase in prices for food,
beverages and tobacco decelerated to 5.4 percent in 2009, compared to 20.8 percent in 2008. It
is worth noting that inflation in recent years were also mostly caused by rising oil prices and the
government claimed to have provided silent fuel subsidies to prevent the full brunt of higher
fuel prices passing onto the economy by setting low administrative prices for import duties and
taxes (Hang 2009).
Figure I-1-2 | Inflation Rate, 1994-2010
Source: Author’
2.2.1.3. Balance of Payment
Cambodia’ s current account balance has never been positive and it continued to register a
large deficit in 2009 (Figure I-1-3). Though it slightly improved from 2008 but remained worse
than the average of the past four years. The current account balance might have been affected
by the global financial crisis which restrained the flow of goods and the movement of labor
between countries and resulted in the increased deficit of the country’ s trade balance and net
income balance. The current account deficit was mainly because the balance of trade and net
income deficit surpassed the net services surplus. The deficit of the trade balance was caused by
relatively faster growth of imports including petroleum and other retained import items over
exports including domestic export and re-export items, while that of the net income could be
attributed to larger payments which consist of compensation to employees including Technical
Advisers (TA) salaries, interest rate, and income on equity. During the same period, the balance
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of net services registered a surplus due to larger receipts from transportation, travel, and other
services but this surplus could only partly offset the deficit of the other two balances.
Figure I-1-3 | Balance of Payment, 1994-2010
Source: Author’
The deficit of current account is solely financed by the surplus of the capital account which
consists of medium and long term loans and foreign direct investments. However, the global
financial crisis seems to have also strongly affected Cambodia’ s capital account in 2009. The
capital account registered a narrower surplus compared to 2008. The reason behind this drop
can be attributed to the decline in medium and long term loans coupled with decrease in foreign
direct investment from a year earlier. The overall balance seems to be on the declining trend in
the recent years.
2.2.1.4. Terms of Trade
Cambodia’ s balance of trade has recorded a deficit since the early 1990s (Figure I-1-4). The
deficit enlarged when Cambodia became a member of ASEAN in 1999 and continued to widen
after the country joined WTO in the end of 2003. As of 2009, due to global financial crisis, it
registered a deficit of USD 1,541 million in 2009, narrowing from USD 1,801 the year earlier.
However, trade volumes also shrunk due to the global economic slowdown during the same
period. Exports declined by 17 percent to USD 3,907 million or 38 percent of GDP, of which
domestic exports were USD 3,619 million and re-exports USD 228 million. Meanwhile, total
imports also decreased by 16 percent to USD 5,448 million or 52 percent of GDP. Retained
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imports in 2009 were USD 5,208 million, while imports for re-export were USD 240 million.
Figure I-1-4 | Trade Balance
Source: Author’
2.2.1.5. Financial Market
After slowing down to 4.8 percent in 2008 due to the global financial crisis (GFC), broad
money bounced back in 2009 due to the prudent monetary policy adopted by the National Bank
of Cambodia (Table I-1-2). Total liquidity grew at a more or less similar rate to that before the
GFC, rising to CR 16,228 billion, a 36.9 increase from a year earlier. Net foreign assets and net
domestic assets, which accounted for 90.3 percent and 9.7 percent of the total liquidity, surged
by 41.7 percent and 4 percent, respectively in 2009. The improvement in total liquidity can also
be explained by the growth in narrow money and quasi money. This could signal renewed
confidence in the country’s financial system after being knocked by the GFC. Narrow money,
which is known as M1, amounted to CR 16,228 billion in 2009, expanded by 30 percent, of
which currency outside banks grew by 30.8 percent and demand deposits grew by 13.2 percent,
compared with the previous year. Meanwhile quasi-money expanded by 41.8 percent thanks to
the growth of foreign currency as well as time and saving deposits. It is worth noting that
Cambodia is a highly dollarized economy where US dollars dominated around 81 percent of the
total liquidity in 2009.
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Table I-1-2 | Monetary Survey (Billion CR)
1993 1995 2000 2005 2006 2007 2008 2009 2010

Net Foreign Assets 119 550 2589 5475 7224 10734 10346 14655 15410
Foreign assets 297 898 3047 6142 7650 11890 12886 16514 17338
Foreign liabilities -178 -347 -458 -667 -426 -1156 -2540 -1858 -1928
Net Domestic Assets 214 99 -758 -450 -280 576 1513 1573 3726
Domestic credit 345 446 905 1783 2679 4570 6907 8280 11112
Net claims on Government 188 148 3 -421 -953 -1809 -2987 -2252 -2065
Claims on Government 219 217 272 327 287 297 270 270 270
Deposits of Government -31 -69 -269 -748 -1240 -2106 -3257 -2522 -2336
State entreprises 6 5 3 0 2 1 1 0 0
Private sector 151 293 899 2204 3630 6385 9893 10532 13178
Other items (net) -130 -347 -1663 -2233 -2959 -3994 -5394 -6707 -7386
Total Liquidity 333 650 1831 5025 6942 11311 11858 16228 19137
Narrow Money 204 279 540 1323 1658 2052 2400 3120 3922
Currency outside Banks 190 251 495 1282 1600 1990 2295 3002 3784
Demand deposits 14 28 45 41 58 62 105 119 138
Quasi-Money 130 371 1291 3702 5285 9259 9459 13108 15215
Times and savings deposits 9 5 46 113 89 121 184 359 416
Foreign currency deposits 121 366 1245 3589 5196 9138 9274 12749 14798
Money M1 (%increase) 39.5% 1.5% 14.7% 25.3% 23.8% 16.9% 30.0% 25.7%
Money M1 (%GDP) 3.3% 3.8% 5.1% 5.6% 5.9% 5.7% 7.2% 8.3%
Total Liquidity (%increase) 44.3% 27.0% 16.1% 38.2% 62.9% 4.8% 36.9% 17.9%
Total Liquidity (%GDP) 7.7% 13.0% 19.5% 23.3% 32.3% 28.3% 37.7% 40.3%
Source: Ministry of Economy and Finance
2.2.1.6. Labor Market
Labor Supply
●
Cambodia has one of the fastest growing populations in the world. Between the population
census in 1998 and 2008, the population increased from 11.4 million to 13.4 million, an average
annual increase of 1.5 percent (NIS 2010). It is estimated that the labor force will increase by
213,000 per annum over 2010-2013. The economy will come under pressure to generate
productive employment opportunities for this very large number of young labor force entrants.
The labor participation rate was 75.1 percent in 2007. The total employment reached
approximately 8.4 million, about 3.7 percent increase from 2005. The growth in total
employment in 2007 largely reflected the increase of the number of people employed in the
industry and service sectors. During the same period, the employment growth in agriculture,
forestry and fisheries was relatively stagnant.
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Figure I-1-5 | Employment by Economic Sector (thousand)
Source: International Monetary Fund 2009
The most recent labor force survey of the National Institute of Statistics (NIS 2010) shows
that 10.4 million were of working age in 2007 (Table I-1-3). The labor force participation rate is
relatively lower for women and for those living in Phnom Penh. The reason for lower
participation rate for women is well understood. Many Cambodian women assume traditional
responsibilities of doing domestic work and raising children which prevent many of them from
participating in the labor force. The participation gap between Phnom Penh and other areas can
be attributed to the fact that the majority of rural youth need to work to help generate extra
income for their households while the opportunity cost of participating in the labor force is
higher for urban youth because they need to complete higher education to compete for better
paid jobs.
The NIS 2010 labor force survey also reveals that the majority of the population were
working in the traditional sector. Of the total employed population in 2007, 60 percent work in
agriculture, 14 percent in industry and 26 percent in services sectors. The difference between
urban and rural areas can also be explained by employment characteristics. For instance, in
Phnom Penh and other urban areas, the majority of the population are employed in services
while in rural areas, agriculture (which the majority of the rural population rely on) is still the
most significant sector; more or less the same percentage of urban and rural population are
employed in the industry.
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Table I-1-3 | Labor Force and Employment in 2007
Phnom
Cambodia Other urban Other rural
Penh
Total population 13,230,000 1,310,000 1,356,000 10,564,000
Total working age population 10,454,000 1,128,000 1,089,000 8,237,000
Labour force 7,844,000 687,000 728,000 6,429,000
Labour force participantion rate
Both Sexes 75 61 67 78
Women 70 55 60 74
Men 81 68 74 83
Employed population, number 7,775,000 67,400 711,000 6,390,000
Total, percent 100 100 100 100
Agriculture (Primary) 60 1 32 70
Industry (Second) 14 14 15 14
Service (Tertiary) 26 85 53 16
Total, percent 100 100 100 100
Paid employee 23 50 37 19
Employer 0 0 0 0
Own account worker/self-employed 36 27 36 37
Unpaid family worker 41 23 26 44
Other/Don't know 0 0 0 0
Source: National Institute of Statistics.
Breaking down the employed work force by employment status shows that a mere 23
percent was employed as wage labor, while the remaining 77 percent was self-employed in one
form or another in 2007. As expected, there were large differences between rural and urban
areas. While about half of the labor force in Phnom Penh was employed for wages, 37 percent
of those living in other towns and 19 percent of the rural labor force were wage-workers.
This pattern is supported by a similar analysis on the labor market conducted by SIDA in
2004, suggesting this structure of employment will continue for many years to come. It should
be noted that the share of self-employed workers is extremely high because the majority of the
active population cannot undertake any other jobs besides those in rural agriculture or the small-
scale informal service sectors in urban areas. The high share of self-employed in urban areas
also reflects the increasing trend of rural-urban migration to diversified sources of income. That
the vast majority of the labor force is self-employed suggests the availability of work and the
level of earnings depend on their ability to make profitable use of their own productive
resources, which in turn is highly dependent on the overall business environment, in particular
for small enterprises and entrepreneurs.
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● Labor Demand
Cambodia is facing the challenge of generating sufficient jobs for new entrants to the labor
force as the demand for labor from the growth of main drivers of the economy has started losing
momentum. The industrial sector is expected to grow by an average of 8.7 percent per annum
and service sector by 6.3 percent over 2010-2013, according to the updated Strategic
Development Plan for Cambodia (NSDP). This target, however, is considered ambitious given
the country’ s recent economic experience. However, the industrial and service sectors which are
underpinned by the garment and tourism sectors, respectively, will not generate enough
employment to absorb new labor market entrants. The updated NSDP forecasts that the two
main industries, namely garments and tourism, would be able to generate only 12,000-40,000
new jobs annually over 2011-2013 which is roughly about 1020 percent of the annual new
entrants. While diversification of the country’ s sources of growth is important to generate
employment for the new labor force, it is most likely that the vast majority will be unable to
find work in other sectors besides agriculture for many years to come.
The bottom line is that agriculture will have to generate substantial numbers of additional
employment in the medium term and, at the same time, labor productivity needs to be increased
considerably to reduce the widespread income poverty in agriculture. Against this backdrop, the
rather modest development forecasts for the agricultural sector, with a growth prognosis of less
than 4 percent per year on average for 2010-2013, is worrying. The trend of recent years where
the role of agriculture as a main generator of additional employment and income opportunities
has been virtually zero needs to be broken. In particular, incomes, but also employment
opportunities need to be substantially increased in agriculture, at least in a five to ten year
perspective, if the challenge to create sufficient jobs at increasing levels of productivity for the
rapidly expanding human resource base is to be met.
● Labor Quality
Disaggregating the labor force by age group and education level provides a good grasp of
the quality of the labor force in Cambodia. Generally speaking, the labor force suffers from
poor levels of education, both when seen against the requirements that are likely to follow from
an increasingly developed and sophisticated economy in years to come, and when seen in a
regional perspective, i.e., from the perspective of external competitiveness. Table I-1-4 indicates
that the number of those who have not completed primary education together with those who
have no formal education account for around 59 percent of the labor force, while a mere 16
percent have completed lower secondary education or higher. From an overall perspective, this
imposes a constraint on both the sustainability and structure of future economic development.
At the individual level, it implies that a very large share of the labor force has very limited
access to employment at the upper, more highly remunerated end of the labor market and to
wage employment more generally.
Gaps in the education system are hindering the smooth achievement of the country’ s
development objectives. Funding for technical and vocational education and training (TVET) in
Cambodia is insufficient, which follows from its lower ranking in the country’ s economic and
099
social system compared with college and university education. A large number of Cambodian
workers are not technically qualified, which compromises industrial productivity. On the other
hand, many candidates who hold a high school leaving certificate cannot find employment.
Such contrasts are indicative of distortions in the allocation of resources to education. The
educational system must be reviewed so that concerns related to vocational training could be
incorporated in the education policy.
Table I-1-4 | Education of Labor Force in 2007
No or Lower Upper Post

Age Primary not Primary
Only some secindary secondary secondary Other Total
Group completed completed
education completed completed education
Labour force 1,421,000 3,241,000 1,907,000 785,000 321,000 143,000 25,000 7,844,000
Total 10- 18 41 24 10 4 2 0 100
10-14 7 72 20 1 - - - 100
15-19 5 38 42 14 1 0 . 100
20-24 13 32 29 15 6 4 - 100
25-34 19 37 23 11 7 3 - 100
35-44 22 40 20 10 6 2 - 100
45-54 27 44 17 8 2 2 - 100
55-64 30 43 15 7 3 1 - 100
Source: National Institute of Statistics 2010.
Cambodia’ s economy is heavily dependent on a few narrow sectors which are fragile and
employ low or unskilled workers. The country needs to diversify its economic base for
enhanced growth with a particular focus on improving its labor force. Cambodian workers
mainly possess basic skills to work in light industries, mainly garment factories, while jobs
requiring higher skills are being given to expatriates since Cambodian nationals possessing such
skills are still scarce. Cambodia is a country with a large labor force. In numbers, there are more
than enough workers to supply emerging sectors within the economy but the low quality and
capacity of the labor force is a persistent issue causing a mismatch between demand and supply.
2.2.1.7. Fiscal Balance
The government of Cambodia operating fiscal imbalance has been observed since 1993.
Despite improvement in domestic revenue mobilization, the expenditure has surpassed it
dramatically during the same period. As of 2009, the overall deficit rose to CR 2,653 billion or
6.2 percent of GDP. This enlarged deficit was likely driven by a decline in government revenue
due to the global financial crisis and an increase in government expenditure due to larger
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spending on military and security, and increased salaries for public servants.
Table I-1-5 | Budget Operation in 1993 and 2010 (Billion CR)
1993 1995 2000 2005 2006 2007 2008 2009 2010

Domestic Revenue 290 643 1423 2719 3394 4223 5567 5081 5990
Current Revenue 290 635 1394 2568 3017 4214 5488 5051 5942
Tax Revenue 219 446 1040 1990 2392 3585 4689 4335 5070
Non Tax Revenue 71 190 353 578 625 629 799 716 872
Capital Revenue 0 8 29 152 377 9 79 29 48
Expenditures 608 1248 2040 3389 4203 5151 6681 7485 8500
Capital Expenditures 235 511 824 1357 1752 2172 2728 2888 3327
Direct Foreign financed 0 454 521 1013 1331 1682 1943 1813 2300
Provincial Capital Expenditures 29 40 49 73 55 56
Current Expenditures 373 737 1215 2032 2451 2979 3953 4597 5173
Defense and Security 219 431 451 451 520 616 814 1254 1151
Civil Administration 154 304 744 1461 1796 2188 2881 3099 3758
Interest 2 21 55 50 70 79 87 120
Provincial Expenditures (net subsidy) 64 84 105 179 157 144
Total Local Resources 600 683 1385 2108 2595 3057 4123 5100 5680
Adjustment -36 -170 -58 -84 -249 0
Current Deficit/Suplus -83 -102 188 436 312 1071 1272 48 625
Overall Deficit/Suplus -318 -563 -607 -705 -979 -987 -1198 -2653 -2510
Source: Ministry of Economy and Finance 2010
2.2.2. Sectoral Output Structure
Cambodia’ s agriculture sector, comprising crops, livestock, fisheries and forestry, accounted
for 27.9 percent of the country’s GDP in 2009 (Table I-1-6). The real value added of this sector
expanded by 5.4 percent and contributed 1.4 percentage points to overall GDP growth in 2009.
In general, agriculture sector growth mainly comes from the growth in crop and fishery
subsectors. However, it should be noted that crop production remained highly reliant on
adequate rainfall and susceptible to adverse weather, such as drought and flood.
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Table I-1-6 | Sectoral Performance in 2008-2009
1993 1995 2000 2005 2006 2007 2008 2009 2010

(Billion Riels)
Agriculture 3,900 4,421 5,058 6,476 6,830 7,174 7,584 7,995 8,248
Crops 1,571 1,782 2,264 3,295 3,470 3,753 4,000 4,233 4,373
Livestock 784 810 786 998 1,080 1,120 1,163 1,221 1,280
Fisheries 1,158 1,305 1,516 1,705 1,770 1,784 1,900 2,014 2,063
Forestry 387 525 493 477 511 516 521 526 532
Industry 1,101 1,495 3,078 5,900 6,977 7,564 7,870 7,123 7,944
Mining 18 28 34 87 101 109 126 151 161
Manufacturing 683 875 2,255 4,309 5,060 5,509 5,681 4,800 5,530
Electricity, Gas & Water 26 35 58 103 136 151 164 178 189
Construction 374 558 732 1,401 1,681 1,795 1,899 1,994 2,064
Services 3,262 3,554 5,231 8,484 9,341 10,289 11,217 11,478 11,861
Trade 1,233 1,232 1,512 1,913 2,049 2,244 2,455 2,558 2,644
Hotel & Restaurants 202 333 521 953 1,084 1,195 1,312 1,335 1,391
Transport & Communications 538 636 930 1,491 1,523 1,633 1,749 1,817 1,880
Finance 28 88 175 251 312 381 454 490 507
Public Administration 168 269 377 337 333 334 349 352 363
Real Estate & Business 717 574 855 1,673 1,856 2,055 2,158 2,104 2,176
Other services 377 423 861 1,864 2,185 2,448 2,742 2,821 2,899
Taxes on Products less Subsidies 277 509 870 1,367 1,470 2,143 2,338 2,480 2,506
Less: Subsidies 2 11 31 72 112 36 36 37 50
Less: Finance Service Charge 18 84 155 216 240 300 342 383 431
Total GDP 8,521 9,896 14,083 22,009 24,380 26,870 28,668 28,692 30,128
(Change over previous year)
Agriculture 3.3% -0.4% 15.7% 5.5% 5.0% 5.7% 5.4% 3.2%
Crops 10.9% 2.4% 27.6% 5.3% 8.2% 6.6% 5.8% 3.3%
Livestock 6.2% -8.8% 5.6% 8.2% 3.7% 3.8% 5.0% 4.8%
Fisheries 8.3% 5.0% 5.6% 3.8% 0.8% 6.5% 6.0% 2.5%
Forestry -25.5% -12.4% 5.1% 7.0% 1.1% 0.9% 1.1% 1.1%
Industry 18.9% 31.2% 12.7% 18.3% 8.4% 4.0% -9.5% 11.5%
Mining 19.6% 26.0% 26.3% 15.9% 7.7% 15.8% 20.0% 6.4%
Manufacturing 17.5% 30.3% 9.7% 17.4% 8.9% 3.1% -15.5% 15.2%
Electricity, Gas & Water 24.7% 6.9% 12.5% 31.7% 11.5% 8.5% 8.5% 6.4%
Construction 20.8% 36.8% 22.1% 20.0% 6.7% 5.8% 5.0% 3.5%
Services 8.3% 8.9% 13.1% 10.1% 10.1% 9.0% 2.3% 3.3%
Trade 5.6% 4.5% 8.5% 7.1% 9.5% 9.4% 4.2% 3.3%
Hotel & Restaurants 37.7% 19.0% 22.3% 13.7% 10.2% 9.8% 1.8% 4.2%
Transport & Communications 6.7% 6.1% 14.5% 2.1% 7.2% 7.1% 3.9% 3.5%
Finance 155.8% 36.3% 19.6% 24.0% 22.2% 19.2% 8.0% 3.3%
Public Administration -6.4% -0.8% 5.9% -1.2% 0.1% 4.5% 1.0% 3.2%
Real Estate & Business 4.1% 7.3% 7.8% 10.9% 10.7% 5.0% -2.5% 3.4%
Other services 4.3% 16.7% 18.3% 17.2% 12.1% 12.0% 2.9% 2.8%
Taxes on Products less Subsidies 1.8% 4.5% 6.1% 7.6% 45.7% 9.1% 6.1% 1.0%
Less: Subsidies 128.1% 171.7% 24.7% 55.7% -68.3% 1.5% 1.9% 36.2%
Less: Finance Service Charge 287.9% 36.5% 15.9% 10.9% 25.0% 14.0% 12.0% 12.5%
Total GDP 6.4% 8.8% 13.3% 10.8% 10.2% 6.7% 0.1% 5.0%
Source: Ministry of Economy and Finance 2010
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The industry sector, which made up 24.8 percent of GDP, was badly hit by the GFC in 2009
(Table I-1-6). This sector shrank by 9.5 percent which in turn contributed to the overall GDP
growth decline of 2.4 percent as the main drivers of the sector’ s growth, namely the
manufacturing subsector, which is led by the garment industry, and the construction subsector,
were suffered greatly from external shocks. The manufacturing subsector dramatically
decreased by 19.5 percent in 2009 after enjoying high growth since the mid-1990s as investors
started to take advantage of the country’s then favorable access to the US and EU markets. The
construction subsector growth slowed to 5 percent in 2009, decelerating from 5.6 percent in
2008 and from an average growth of 15.9 percent over 2004-2007. It is worth noting that
Cambodia has not yet been able to reap full benefit from the garment industry since inputs are
mostly imported from other countries and the industry’ s activities involve merely cutting and
making yarns and fabrics into finished products where value-added and profit margins are
relatively low. Domestic supply of such inputs would not only result in more jobs and value-
addition for the economy but may also help make Cambodian garment products more
competitive.
The services sector, which accounts for 40 percent of GDP, grew by 2.3 percent in 2009,
compared to 9 percent in 2008 (Table I-1-6). Except for real estate and business subsectors,
which fell by 2.5 percent, all other sub-sectors continued to expand marginally and
subsequently contributed to the growth of this sector. Real estate which had enjoyed high
growth in the recent past was adversely affected by the GFC as it was highly reliant on FDI. It is
worth noting that tourism, which also underpins the services sector, does not have strong
forward and backward linkages to other sub-sectors. For instance, despite strong growth in
tourism, the local agricultural produce is not being used very much in restaurants as the supply
is irregular and the quality is erratic.
A CDRI case study on the linkage between tourism and poverty reduction found that the
boom in the tourism industry in Siem Reap had little impact on poverty reduction in the villages
in the province, which surprisingly stood as the third poorest in the country (Ballard 2006).
Contributions to the villages came mainly from the construction boom in hotels and houses
rather than the services catering for tourists. There are opportunities and ongoing efforts by
NGOs ad donors to strengthen the linkages between tourism related industries and the
agriculture sector, for example, by encouraging regular local supply of high quality food. The
results remain to be seen. The beneficiaries of tourism expansion then will not be just the
transportation and communications and hotel and restaurant sub-sectors but will also include
retail trade and finance and the economy at large.
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2.2.3. Foreign Trade and FDI
2.2.3.1. Foreign Trade
Exports
●
According to data released by the Asian Development Bank (ADB) (Table I-1-7),
Cambodia’ s export increased significantly after joining ASEAN and WTO in 1999 and 2004,
respectively. Cambodia’ s export performance was strong despite the global financial crisis in
2009. The overall trade value declined only to USD 4,023 million, slightly down from USD
4,253 million in the previous year. Detailed breakdown of the data by export commodity for
2009 is not yet available but it is generally known that Cambodia’ s export base is very narrow.
It predominantly consists of textiles and clothing which account for more than 80 percent of
total export. Special attention must be given to developing new export sectors if the export
sector is to further contribute to poverty reduction in Cambodia.
By country of destination, the trading partners since 1993 include US, Germany, Hong
Kong, UK, Canada Singapore, Vietnam, Spain, Japan and France. The US has been and
remained the largest market for Cambodia’ s exports absorbing almost half of total exports (USD
1,822 million) in 2009. It is followed by Singapore (USD 380 million), Germany (USD302
million), UK (USD 284 million), and Canada (USD 254 million). It should be noted that exports
to the US and Germany’ s markets in 2009 dropped substantially compared to a year earlier;
however, this was partly offset by the surge in exports to UK, Singapore and Japan.
Diversification of export destination is not only crucial for promoting export per se, but it also
helps mitigate risks associated with each destination country.
Table I-1-7 | Export Value by Destination (USD million)
1993 1995 2000 2005 2006 2007 2008 2009

Exports, total 267 357 1123 3014 3562 4073 4253 4023
1. United States 0 5 740 1595 1899 2363 2314 1822
2. Germany 27 18 66 225 233 298 329 302
3. Hong Kong, China 1 11 7 541 543 17 9 12
4. United Kingdom 1 11 82 124 153 212 232 284
5. Canada 1 1 5 107 115 189 252 254
6. Singapore 19 38 18 70 139 77 105 380
7. Viet Nam 7 21 19 46 75 187 191 169
8. Spain 1 3 6 34 85 115 140 130
9. Japan 79 7 11 63 34 126 110 130
10. France 1 7 28 52 55 51 53 53
Source: Asian Development Bank 2010.
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● Imports
Cambodia import partners include countries in ASEAN and China, South Korea and the US.
(This and the next paragraphs are taken from Runsinarit Phim,“Special Event on Commodity
Dependence and the Impact of the Multiple Global Crises on LDCs: Mapping the exposure to
market volatility and building resilience to future criese - Case study on Cambodia,”UNCTAD/
ALDC/MISC/2011/10, United Nations Conference on Trade and Development, May 2011.)
Cambodia’ s imports decreased sharply to USD 6,987 million in 2009 from USD 8,213 in
2008 (Table I-1-8). As in the case of exports above, official import data breakdown by
commodity has not yet been made available. However, Cambodia’ s main import items include
petroleum products, cigarettes, steel, and cement. In the absence of domestic supply due to lack
of backward linkages, the imports of this product category which are mostly from China and
Hong Kong were used as inputs in garment production. This resulted in low local content in
garment production. Efforts have been made to encourage the development of import substitution
in a number of industries including the paper and chemical industries, such as the production of
fertilizers and acid, as well as daily consumption goods such as soap, paint, electrical appliances,
water pumps and agricultural inputs as reflected in Cambodia’ s industrial policy.
Countries in ASEAN plus three countries in East Asia namely China, South Korea and Hong
Kong (China) are the major sources of Cambodia’ s imports. Thailand is the largest exporter to
Cambodia taking 25 percent of Cambodia’ s total imports, followed by Vietnam (20 percent),
China (14 percent), Singapore (11 percent), Hong Kong (7 percent), and South Korea (4
percent). This import structure reflects the increasing scale and scope of trade with countries in
the region as a result of economic integration which holds promise for increasing the welfare of
each country. Nevertheless, as noted earlier, Cambodia’ s trade balance has persistently been
negative implying that the country requires more external financing in the form of grants, loans
or FDI to deal with the deficit.
Table I-1-8 | Import Value by Source (USD million)
1993 1995 2000 2005 2006 2007 2008 2009

Imports, total 981 1573 1425 2548 2985 6537 8213 6987
1. Thailand 197 367 222 291 415 1491 2221 1733
2. Vietnam 106 104 92 182 270 1145 1574 1390
3. China, People's Republic 22 57 113 424 524 969 1205 988
4. Hong Kong, China 34 43 254 450 539 673 669 517
5. Singapore 406 550 106 136 157 482 571 791
6. Korea, Republic of - - 77 151 146 310 324 286
7. Japan 55 84 58 100 130 123 204 124
8. Malaysia 14 85 65 92 89 148 181 168
9. Indonesia 44 88 68 83 85 134 191 125
10. United States 20 30 33 36 26 153 170 140
Source: Asian Development Bank 2010
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2.2.3.2. Foreign Direct Investment (FDI)
After accession into WTO in late 2003, Foreign Direct Investment (FDI) in Cambodia grew
dramatically (Table I-1-9). Most FDI was approved in industry and service sectors and flowed
from Korea, China and Russia. However, new business investment approvals, which hit the
highest record in 2008 dropped dramatically in 2009 due to the global financial crisis.
According to the Council for the Development of Cambodia (CDC), the value of total
investment project approvals in 2009 amounted to USD 5,612 million in fixed assets, a
significant fall from USD 10,859 million in 2008. While domestic investment slightly decreased
to USD 3,644 in 2009 from USD 3,887 in 2008, foreign direct investment which was badly hit
by GFC slumped by 72 percent to USD 1,945 million over the same period. China remained the
top foreign investor with USD 828 million, followed by Singapore with USD 272 million,
Russia with USD 235 million, Thailand with USD 177 million, and South Korea with USD 122
million (Table I-1-9). The CDC statistics also show that investments were mainly registered for
tourism, energy, agro-industry, and telecommunications. It is worth noting, however, that not all
approved investments have been implemented in the past.
Agriculture attracted only USD 446 million in 2009, the smallest investment commitment
among the three sectors. Although the majority of the Cambodian population lives in rural areas
and depends on rice cultivation for subsistence, the agricultural sector remains largely
underdeveloped, reflecting very low investment by both private and public sectors in the past
decade. Despite its decreasing share of GDP, this sector still employs the majority of
Cambodians, especially the poor. Growing investment approvals for this sector in recent years
should hopefully lead to agricultural productivity which would have a huge impact on food
security and poverty reduction.
Industry was the second largest investment sector with new projects accounting for USD
1,043 million in 2009, about 20 percent of the total. Of this, USD 665 million was allocated to
mining, followed by agro-industry with USD 270 million, and other industries with USD 208
million. However, the garment sub-sector, which is the pillar of sectoral growth, received only
USD 88 million approved investment in 2009, a sharp fall from USD 137 million in 2008 and
USD 171 million in 2007.
Services continued to be the largest investment sector in 2009. It accounted for about 73
percent of total approved investment. Investment approvals in this sector stood at USD 4,122
million, a substantial drop from USD 10,046 million in 2008. Within this sector, tourism
received the largest amount of proposed investment, followed by telecommunication and hotel
subsectors. It should be noted that while approved investment surged notably for the
telecommunication sector in 2009, investment in tourism and garment subsectors dropped
substantially.
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Table I-1-9 | Investment Approvals (USD million)
Approved Investment 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
By Country
Cambodia 36 61 83 184 62 347 994 1,428 3,887 3,644
China 28 4 33 34 83 469 741 132 4,415 828
Singapore 18 2 3 17 28 15 2 52 272
Russia 278 103 235
Thailand 31 17 10 1 21 116 212 7 177
Korea 13 2 80 1 7 55 2,038 110 1,253 122
Vietnam 24 34 129 25 116
France 4 6 5 19 74 81
India 75
Taiwan 20 58 9 1 16 12 43 32 17 24
Others 68 63 7 12 37 99 195 623 1,027 35
By Sector
Agriculture 1 0 3 20 142 368 65 446
Industry 114 87 81 92 146 663 1,301 994 748 1,043
Service 101 117 156 159 80 368 3,012 1,306 10,046 4,122
By Subsector
Tourism 9 12 2 42 72 795 1,100 8,284 3,863
Energy 47 50 2 24 35 172 3 490 665
Agro-industry 10 129 160 82 270
Telecommunication 64 471 87 235
Other industries 30 19 52 53 36 305 442 285 62 208
Agriculture 1 0 3 9 13 13 176
Garment 36 14 26 28 82 118 117 171 137 88
Food processing 2 208 4 32
Shoes 1 31 10 12 25
Hotel 71 62 45 83 24 31 22 3 519 17
Others 23 46 46 88 17 471 2,734 258 1,169 33
Total 217 205 237 252 229 1,051 4,455 2,669 10,859 5,612
Source: Data Compiled by CDRI from Coucil for the Development of Cambodia (CDC).
2.2.4. Educational Achievement
Strengthening the quality of education is still a top priority in Cambodia (RGC 2010).
Although some progress has been made during the past decade, the quality of education in
primary, secondary and tertiary levels remains unsatisfactory. Even though low supply of
skilled and educated workers is not a serious detriment to the country’
s current economic model,
it may restrict the development of new sources of economic growth in the future. Commitment
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to human development is reflected in many policy papers where the priority is focused on
ensuring equitable access to education and improving the quality and efficiency of education
services. This section reviews the education sector’ s performance during 1997-2008 and
discusses the challenges to be overcome.
Table I-1-10 | Education Sector Performance Indicators
1997-1998 2007-2008
Cambodia Urban Rural Remote Cambodia Urban Rural Remote
Gross Enrollment Ratio
Primary 88.3 95.8 92.9 48.4 121.9 117.6 122.6 125.6
Lower Secondary 23.7 46.4 18.6 0.7 63.6 92.4 59.3 29.4
Upper Secondary 8.1 22.4 3.0 0.0 25.7 70.3 17.6 2.7
Net Enrollment Ratio
Primary 77.8 83.0 82.4 43.1 93.3 92.7 93.6 88.4
Lower Secondary 16.3 31.6 12.9 0.4 34.8 55.9 31.5 11.1
Upper Secondary 6.8 18.9 2.5 0.0 14.8 41.3 10.0 1.2
Promotion
Primary - - - - 78.6 82.4 78.2 69.9
Lower Secondary - - - - 77.0 84.4 74.6 78.3
Upper Secondary - - - - 82.3 89.0 76.2 79.7
Repetition
Primary - - - - 10.6 8.0 10.9 16.4
Lower Secondary - - - - 2.0 3.3 1.6 0.7
Upper Secondary - - - - 3.4 2.7 4.0 2.2
Dropout
Primary - - - - 10.8 9.6 10.9 13.7
Lower Secondary - - - - 21.0 12.3 23.8 21.0
Upper Secondary - - - - 14.4 8.4 19.8 18.1
Successful Candidates
Grade 6 56,106 18,091 36,496 1,519 275,853 49,337 220,968 5,548
Grade 9 28,966 18,362 10,571 33 112,673 36,309 75,249 1,115
Grade 12 7,313 6,323 990 0 39,726 23,298 16,376 52
Source: Data Compiled by CDRI from Ministry of Education Youth and Sport.
The number of candidates who successfully completed primary, lower secondary and upper
secondary schooling has increased dramatically over 1997 to 2008. The number of pupils who
passed the exam in all of those levels for school year 2007-08 significantly increased three to
fourfold. Now that quantity seems to have been achieved, the quality and efficiency of
education are next to being improved. Table I-1-10 illustrates several indicators related to
quality and efficiency of education which suggest that progress has fallen far short even of the
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old target. For instance, grade promotion rates, especially in primary education, are much lower
than the target for 2005 which was set at about 90 percent. Similarly, repetition rates and
dropout rates continue to be high, again in primary education and particularly in remote areas
suggesting that there seems to be a positive relationship between distance to school and the
quality and efficiency of education.
Progress in ensuring equitable access to education has been made. Both gross enrolment and
net enrolment ratios have been improved over 1997-2008 (Table I-1-10). For the country as a
whole, gross enrolment rate for primary lower secondary and upper secondary stood at 121.9
percent, 63.6 percent, and 25.7 percent in 2007-2008, up from 88.3 percent, 23.7 percent and
8.1 percent in 1997-1998, respectively. Primary net enrolment ratio (NER) also suggests that
Cambodia nearly achieved its goal of equitable access to basic education service. This may be
due to the effort which has been made to promote access to education since the late 1990s
reflecting the Priority Action Program launched in 2000 with the specific purpose“to reduce the
cost burden on the poorest families to increase participation of their children in grades 1-9” .
However, NER for lower secondary education remains unevenly distributed across geographical
regions, which suggests that school distance could be one of the factors preventing children
from going to lower secondary school.
Table I-1-11 | Number of Schools, Pupil-Teacher Ratio and Pupil-Classroom Ratio
1997-1998 2007-2008
Particulars Pupil- Pupil- Pupil- Pupil-

Number of Number of
Teacher Classroom Teacher Classroom
Schools Schools
Ratio Ratio Ratio Ratio
Cambodia 6,294 38.1 55.8 9,431 41.2 57.8
By Strata
Urban Area 1,090 33.4 64.8 1,202 30.6 65.0
Rural Area 4,537 39.7 52.9 7,587 44.8 56.5
Remote Area 667 52.5 51.1 642 50.1 50.9
By Education Level
Pre-School 793 24.1 31.7 1,634 26.9 32.0
Primary School 5,026 46.5 59.9 6,476 49.3 57.2
Lower Secondary School 467 16.6 59.6 297 27.5 61.5
Lower Secondary School 125 24.5 21.5 1,303 38.5 71.0
Source: Data Compiled by CDRI from Ministry of Education Youth and Sport.
Another challenge is how to overcome the issue of rapid population growth which in turn
puts pressure on the education system. As of 2008, the number of public schools in the entire
Kingdom totaled 9,431, up from 6,294 schools a decade earlier (Table I-1-11). A breakdown of
statistics by geographical region shows that the number of public schools has been growing
faster in rural areas while by education level the number of primary schools has expanded the
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fastest. The expansion reflects the government’ s policy and commitment to improve access to
primary education under its“Education For All”(EFA) program. Despite such effort, the
growth of population corresponding to school ages continues to put pressure on the educational
system at all levels. As shown in Table I-1-11, the pupil to teacher and the pupil to classroom
ratios rose to 41.2 and 57.8 in 2007-08 school years, up from 38.1 and 55.8 in 1997-98 school
years, respectively.
Overall, it can be said that despite the impressive performance and reforms over the past
decade, primary and secondary education in Cambodia still fall short of e government targets
even though there seems to be a tradeoff between enhancing equitable access to education and
improving quality and efficiency of the education services. One possible solution to improving
both of these could be to address the issue of distance to school, especially for those who reside
in remote areas, through providing public transportation or improving road conditions.
The issue of education quality also persists at tertiary level. A number of studies reveal that
tertiary education does not seem to reflect future labor market demand (Lundstrom and Ronnas
2005; MEYS 2005; ADB 2009). Lundstrom and Ronnas (2005) and MEYS (2005) point out
that the labor market seems to be suffering from the poor level of education against likely skill
requirements in the near future by emphasizing the quantitative mismatch between supply and
demand of labor in terms of education. ADB’ s (2009) report also touches on the mismatch issue
and further explains the shortage of skilled labor in particular fields as the combination of
growing demand for skilled labor, the limited supply of technical and vocational education and
training (TVET), and the lack of close links with industry.
One of the key causes for this mismatch is that post-secondary institutions tend to produce
too many graduates with general skills such as business management and too few graduates
with specific skills such as information technology or engineering. In a study by ADB (2009),
business institutions in Cambodia cited the lack of skills and a poorly trained workforce among
their major constraints. This same study found that there is a lack of highly trained workers
across a range of technical vocational areas which include highly trained construction skills
such as architecture and engineering, and information technology. This has led employers to
hire skilled workers from neighboring countries.
The backbone to any country’ s strong growth is“a‘critical mass’of educated, skilled,
talented and capable in a variety of economic and social fields”(MOYS 2005). Higher level
educational institutions, especially private ones, currently focus on providing skills to respond
to short-term market needs, specifically the short-term boom in demand for low and middle-
level managerial staff. There has not yet been a trend to match educational attainment with more
long-term job needs. To enhance and sustain the country’ s growth, a whole range of skills is
needed among the workforce, including scientists, engineers, scholars, researchers, and
specialists in multifarious fields (MOYS 2005). The challenge to be overcome for the education
sector, hence, is to provide facilities for imparting high quality education in a variety of fields,
through vocational, technical and university level education and also to attract students to such
courses (MOYS 2005).
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2.2.5. State Owned Enterprise
According to the Law on the General Status (Royal Decree of 17 June 1996), State Owned
Enterprises (SOEs) can be classified into three categories:
- State-owned companies (with 100 percent public capital)
- Public institutions with an economic purpose
- Semi-public companies (joint ventures).
State-owned companies are those companies whose capital is held solely by the state. A
state-owned company is created under a sub-decree upon a joint proposal of the MEF and the
line ministry or authority. A public institution with an economic purpose is a legally constituted
public body with financial autonomy, and which carries out exclusively or principally an
activity of providing goods and services for sale. A semi-public company is a joint venture in
which the state or businesses with public capital hold separately or jointly with other public
institutions for more than half of the social capital or voting rights (Hang 2009).
Table I-1-12 | State Owned Enterprises
financial year 2006

No Name of enterprise Assets Own capital Total staff
Revenue Expenditure Profit
1 Agriculture Input Company 21,948 21,278 49 2,827 2,773 54

2 Sihanoukville Autonomous port 473,187 467,094 1,032 97,015 87,181 9,834
3 Phnom Penh Autonomous Port 108,473 105,017 465 18,469 12,772 5,697
4 Kampuchea Shipping Agency & Brokers 24,387 22,574 148 9,090 4,630 4,460
5 Green Trade Company 45,272 41,850 194 7,152 7,184 -32
6 Cambodian National Insurance Company 31,933 29,470 60 4,547 4,045 502
7 Printery 29,367 29,154 145 11,046 10,130 916
8 Telecom Cambodia 228,633 185,937 617 81,982 55,947 26,035
9 Royal Cambodian Railways Company 3,951,329 3,948,159 1,609 7,830 9,294 -1,464
10 Engineering and Public Work Lab 1,717 1,283 24 422 502 -80
11 Phnom Penh Water Supply Authority 555,218 434,609 568 78,512 58,650 19,862
12 Electricity of Cambodia 589,404 348,297 2,180 613,600 601,259 12,341
13 Rural Development Bank 65,057 30,416 49 4,043 2,708 1,335
Grand Total 6,635,566 6,145,020 19,149 1,129,930 1,008,764 121,166
Source: Hang Chuan Naron (2009).
In 2003, there were 24 state-owned enterprises, five public institutions, nine semipublic
companies under the supervision of nine line ministries, and one municipality: agriculture had 14
SOEs; telecommunications, 7; public works and transport, 6; finance, 4; industry, 1; commerce,
1; education, 2; health, 1; and the Office of the Council of Ministers, 1. At the municipal level,
there is only one State-owned enterprise, the Water Authority of Phnom Penh. In 2008, with the
privatization of rubber plantations, the number of SOEs was reduced to 13 (Table I-1-12).
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SOEs function in strategic sectors such as electricity, water, river and maritime ports, insurance,
reinsurance, rubber plantations, hospitals, telecommunications and trade in agricultural products.
2.2.6. Infrastructure
Physical infrastructure is vital to the sustainable development of a country. They include

roads and bridges, railways, ports, electricity, irrigation and telecommunications.
Roads and Ports: For roads and ports, attention has been given to the improvement and
rehabilitation of the road network, Sihanoukville’ s deep-sea port, and international airport
facilities at Phnom Penh and Siem Reap. Primary roads connecting neighboring countries (Laos,
Thailand and Vietnam), major roads within the country including those serving remote rural
areas, bridges and ferry crossings, have been given priority.
A number of achievements were made between 1998 and 2004. Of a total of 11,310 km of
primary (4,695 km connecting neighboring countries, provincial capitals and ports) and
secondary roads (6,615 km connecting provincial headquarters to district headquarters), about
2,100 km were upgraded. In addition, a number of important roads and bridges were
reconstructed and rehabilitated. The Kizuna Mekong bridge at Kampong Cham was completed
in February 2002 and the Koh Kong bridge in February 2001. Because of limited resources, the
major priority was given mainly to road maintenance.
Located 230 km south-west of Phnom Penh and handling nearly 70 percent of Cambodia’ s
imports, Sihanoukville deep-sea port is being upgraded. The first stage of its upgrade was
completed in 2005. Up until 2004, hardly any progress had been made in rehabilitating railways
and although river transport between Phnom Penh and Siem Reap had improved considerably,
little more could be done to upgrade the river transportation facilities.
Increased involvement from the private sector under BOT terms could be seen in the
construction and improvement of infrastructure.
Energy: Development of a country can also be attributed to the availability of assured,

abundant and low cost electricity. High electricity costs negatively affect productive sectors and
hinder investment and competitiveness of industries. The government has placed high priorities
on attracting private sector investment and participation in the generation and distribution of
electricity to key provincial and urban centers, to rural areas, and to putting power transmission
grids in place to link Cambodia with neighboring countries. In 2004, total electricity generation
in Phnom Penh and provincial towns had increased to 759.7 GWh, up from 163.4 GWh in 1993.
New power plants were completed while power rehabilitation works in a number of provincial
towns are yet to be completed. The government has also signed and implemented agreements
with neighboring countries to import power for use in border areas.
In many district towns, private operators are providing local energy needs. The government
is trying to promote the development of cheaper, renewable alternative energy sources such as
solar energy which is already installed in some areas, wind energy, biogas, and mini-hydro
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schemes. The discovery of oil and gas resources from off-shore trial drills is critical and has
raised hopes for an abundant supply of resources in a few years. This should help boost the
country’s economic growth which would in turn help raise the income levels of the people and
rapidly reduce poverty. The key to achieving such positive outcomes is to plan well ahead on
how to efficiently and effectively use these valuable resources.
Information and Communications: Improvements in telecommunications have been

phenomenal. At the end of 1998 the average national tele-density was 0.74 per 100 people and
2.17 per 100 in Phnom Penh. This rose to 5.57 and 44.70, respectively, at the end of first half of
2005 (NSPD). Nearly 882,000 subscribers use services provided by Ministry of Posts and
Telecommunications (MPTC) and private telephone companies in 2005 but the number
increased to over 4,143,000 as of the end of 2008. During the same period the number of
internet subscribers rose from around 8,600 to 20,100 (NSPD update)
Other channels of information and communication have also made significant progresses.
Postal services have expanded and are increasingly gaining confidence by the public. The
national television transmitter has been upgraded and the quality of programs to keep people
updated about various developments and news has continuously improved. Local television
stations are also operating in a number of provincial towns.
2.2.7. Income Distribution
Changes in poverty rates over time depend on both changes in average levels of real per
capita consumption and on changes in the size of distribution of per capital consumption.
Table I-1-13 presents estimates of the Gini coefficient by region in 2004 and 2007
(including the comparable 2004 sub-sample of villages included in the 2007 CSES sampling
frame). Estimated standard errors are reported in parentheses under each estimated Gini
coefficient.
Table I-1-13 | Estimated Gini Coefficients (standard errors in parentheses)
Region 2004 2004* 2007

0.367 0.367 0.356
Phnom Penh
(0.017) (0.016) (0.020)
0.433 0.433 0.470
Other urban
(0.016) (0.018) (0.040)
0.343 0.343 0.361
Other rural
(0.009) (0.010) (0.026)
0.393 0.392 0.409
Cambodia
(0.008) (0.007) (0.024)
Source: World Bank (2009).
* sample limited to villages in the 2007 CSES sampling frame
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The results in Table I-1-13 show that income inequality increased during 2004-2007. This
was expected, however. The overall Gini coefficient for the whole country increased from 0.39
in 2004 to 0.41 in 2007, but this estimated increase is not statistically significant. The estimated
income inequality during the same period in Phnom Penh decreased; however, this is also not
statistically significant. The Gini coefficients for other urban areas and other rural areas also
increased but are also not statistically significant. This means that the relatively small sample of
CSES 2007 does not provide enough or clear information about the changes in income
inequality during this relatively brief period.
3. Evaluation of Cambodia’ s Economic Growth from an

International Perspective
3.1. Background
Over the past decade or so, Cambodia exhibited a remarkable track record of growth (Figure
I-1-6). The annual average GDP growth rate was 8.5 percent for the period from 1993 to 2008,
and it recorded above 10 percent for 2004-2008. The average GDP growth rate for the period
1998-2007 was 6th among all countries. In 2009, Cambodia recorded a negative GDP growth
rate due to the impact of the global financial crisis. However, it is expected that it will record
about 5.0 percent in 2010. Cambodia’ s respectable growth performance was accompanied by
rising investment rate which, nevertheless, is relative low from an international perspective
(Figure I-1-7). Meanwhile, inflation has remained low since the late 1990s.
Figure I-1-6 | GDP Growth of Cambodia (WDI data)
114
Figure I-1-7 | Cambodia’
s Investment Rate Relative to Other Regions
Despite its rapid growth for the past decade or so, one important question that arises is“Can
Cambodia’ s rapid growth be considered as a‘take-off’to a self-sustaining catch-up growth
path, or was it just an episode of‘growth accelerations’that can easily be reversed?”Although
it is not easy to give a definitive answer to this question, it would help to evaluate Cambodia’ s
economic growth from an international perspective. Specifically, we discuss the following
issues in this section. Firstly, we briefly review main factors underlying rapid growth that are
identified by the World Bank (2009). Secondly, loosely guided by the so-called“unified growth
theory”framework, we examine the patterns of demographic transition and human capital
investment of Cambodia in comparison with other regions and countries of the world. Thirdly,
utilizing cross-country growth accounting methodology, we examine respective roles of
productivity improvement and input accumulation in Cambodia’ s growth. The issue here is
whether Cambodia’ s rapid growth was accompanied by comparable improvements in total
factor productivity (TFP). It is well understood that economic growth that are not supported by
TFP improvement are less likely to be sustained over time. Finally, we compare Cambodia’ s
economic growth with other“open”economies at similar income level.
Factors Underlying Rapid Growth
What are the main factors that enabled Cambodia’ s rapid growth? World Bank (2009) points
out several factors as follows: The first one is the recovery from conflict and favorable
geography. Cambodia managed its historical transition to end the three-decade long conflict and
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shift from a command-and-control economy to a market-oriented economy (Hughes 2003). This
triggered the return of diaspora as well as significant inflows of external assistance following
the 1991 Paris Peace Agreement. In addition, Cambodia is a coastal country located in a
dynamic region, allowing Cambodia to capture the opportunity from a rapid growth in global
demand (World Bank 2009). This factor allowed Cambodia an access to international markets
and dynamic neighbors. The second factor is the opportunistic trade and investment policies of
Cambodia. In the case of the garment sector, which has been a key driver of growth, the
extended quota exports to U.S. in exchange for strict enforcement of labor standards created
incentives for foreign garment producers to locate in Cambodia; more than 95% of garment
factories are foreign owned. Cambodia’ s investment regime was favorable to foreign investors,
which gave an equal treatment for domestic and foreign investors, as well as tax holidays for a
large range of“qualified investment projects” . In addition, Cambodia had open trade regime in
place. The applied tariff rate was at a relatively low level of 14.2 percent, with import duties at
only 2.7 percent of imports. Cambodia joined ASEAN in 1999 and WTO in 2004. These
international commitments created confidence among investors. The third factor is exploitation
of natural resources. The forestry and fishery sector played an initially large but diminishing
role in growth. This sector accounted for 19 percent of GDP growth in 1993-1998, but only 2
percent in 2003-2008. Forest products accounted for 43 percent of exports in 1994 but less than
one percent in 2006. The historical site of Angkor enabled the rapid growth in tourism. The
number of tourists was 200,000 in the early 1990s and it grew to 2 million now. However, it is
expected that there are limits in its growth. The fourth and final factor is sector-specific
governance. In general, governance conditions in Cambodia are considered to be poor.
Cambodia rates low on most international governance scores even when compared with
countries of similar levels of development, with corruption and poor quality of public services
as main contributing factors. Nevertheless, the garment industry, which is a key growth sector,
is an exception as a successful example of“hand-in-hand”governance. Initially, the increase in
quotas for exports to U.S. provided an opportunity for growth in the sector. It is argued that,
however, the government (in particular, MOC) and the firms (in particular, GMAC: Garment
Manufactures Association of Cambodia) worked together over time to create an environment
that generated growth. The Royal Government of Cambodia (RGC) developed a strategic vision
to develop the industry, and GMAC created the vehicle to solve collective action problems and
maintain the relationship with the RGC. However, many other sectors lack these arrangements.
Then what do the factors mentioned above imply for self-sustainability of Cambodia’ s
growth? Guimbert (2010) argues that a simple conclusion is possible. On one hand, the
identified drivers of growth suggest a sense of unsustainability of growth. Past growth was a
one-off event, based on historical opportunities, or based on running down pre-existing assets.
The nature of growth, through sector-specific arrangements, makes it difficult to scale up. On
the other hand, however, each factor suggests some elements of the growth strategy that are in
place. Connections to global markets have been made. Macroeconomic stability is adequately
acknowledged by policymakers. Stakeholders have established a track record of problem-
solving.
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Demographic Transition and Human Capital Investment
A class of recent growth theories, so-called the unified growth theories, suggests that the
growth process can be viewed as a process of diffusion of Western industrial revolution to rest
of the world. These theories posit two steady state equilibria: One Malthusian equilibrium with
high fertility, low human capital investment, and low growth, and the other modern growth
equilibrium with low fertility, high human capital investment, and high growth. According to
these theories, every country in the world is envisaged to be on either one of these two
equilibria or the transition from the Malthusian to the modern growth equilibrium. The countries
that are out of the Malthusian equilibrium and join the industrialization process receive the
benefits of backwardness and catch up with the frontier countries. Although this might be a too
simplistic view of the growth process, if we look at the long run trends of per capita GDP in
various regions, we do see some evidence that are consistent with this view. Figure I-1-8, from
Lucas (2002), shows that as the industrial revolution spread to other regions of the world, one
country after another joined the industrialization process. It also shows that, although not
without exceptions, there is certainly a tendency that countries/regions that joined this
industrialization process grow faster.
Figure I-1-8 | Long-Run Trend in GDP per Capita in World’

s Major Regions
According to these theories, a country which makes a transition out of the Malthusian
poverty trap is expected to experience a rise in the rate of return to human capital investment as
well as a drop in fertility rate. As the fertility rate falls, a demographic transition is expected to
117
accompany the growth take-off. A typical cycle of demographic transition is illustrated in
Figure I-1-9. A typical demographic transition is preceded by the fall in the death rate, later
followed by the fall in the birth rate. As a result, the population growth rate initially rises but
falls afterwards. The working-age population ratio rises, after a brief initial fall, and then falls
again at the later stage.
Figure I-1-9 | Typical Patterns of Demographic Transition
Figures I-1-10~I-1-13 show that the movements of various demographic indicators in

Cambodia are consistent with the view where the transition from the Malthusian to modern
growth equilibrium is already taking place in Cambodia. The fertility rate, as well as death rate,
has fallen at a rapid pace, reaching the level almost comparable to those of East Asia and other
industrial countries. The population growth rate has also been declining since mid-1980s. The
working-age population ratio of Cambodia has been rising gradually since mid-1990s. But as of
2000s, it is still below those of other East Asian countries or industrial countries. Furthermore,
one recent study shows that there is a tendency that countries with faster speed of demographic
transition also experiences faster human capital accumulation and faster growth.37 In this regard,
what is not able from these figures is the relatively fast speed at which the demographic
transition is taking place in Cambodia. In addition, Cambodia experienced rapid improvements
in educationa lachievements, although there are concerns about its quality dimension (Table I-1-
10). In this regard, Cambodia’ s rapid growth for the past decade or so is likely to reflect some
fundamental changes in the working mechanism of the economy. Next, we examine Cambodia’ s
sources of growth from an international perspective.
37) Hahn and Park (2008) shows that countries with faster speed of demographic transition experiences faster
human capital accumulation and faster growth.
118
Figure I-1-10 | Fertility Rate of Cambodia
Figure I-1-11 | Death Rate of Cambodia
119
Figure I-1-12 | Population Growth of Cambodia
Figure I-1-13 | Working Age Population Ratio of Cambodia
120
3.2. Sources of Cambodia’ s Economic Growth:
An International Perspective
3.2.1. Methodology and Data
Growth accounting is a methodology that decomposes growth of output into contributions

from input accumulation and residual (total factor productivity growth: TFPG), and gives us
proximate causes (or sources) of growth, not ultimate causes of growth. It is a convenient way
of summarizing key characteristics of growth. In this study, we follow the methodologies used
by Collins and Bosworth (2003). Specifically, we assume that the aggregate production function
is of the Cobb-Douglas form with constant returns to scale.
(1)
Here, Y, K, L denote output (real GDP), capital stock, labor input (economically active
population, or EAP), respectively. A is a parameter for the technology level, and is the output
elasticity of capital.
If we take log-differentiation of the above equation, we get the following growth accounting
formula.
(2)
Equation (2) decomposes output growth into contribution from TFPG and contributions
from accumulation of inputs, such as capital and labor.
The country sample in this study covers 84 countries for the period from 1960 to 2008. For
Cambodia, the period is covered from 1993 to 2008. The output is the real GDP from Penn
World Table 6.2 for the period 1960-2004, which was extended up to the end of the sample
period, using real GDP growth rate from World Development Indicator (WDI). Population,
working age population and economically active population were taken from the WDI dataset.
The capital stock data for countries other than Cambodia was taken from Nehru and
Dhareshwar (1993) and extended up to 2008, using real investment data from WDI. Cambodia,
however, is not included in the Nehru and Dhareshwar (1993) dataset. The capital stock series
for Cambodia were estimated in the following way. Firstly, we estimated the initial capital stock
for Cambodia that is comparable to other countries by running a simple regression of capital
output ratio on per capita GDP. Multiplying the estimated capital output ratio with the real GDP
gives us the initial capital stock estimate for the year 1993. Then, we used the real gross
domestic capital formation data from WDI to construct the capital stock series, following the
same perpetual inventory method used by Nehru and Dhareshwar (1993). Here, the depreciation
rate was common across countries at 0.04. Since the time period covered in this procedure is
121
fairly short, it should be considered that the growth accounting results might be sensitive to the
biases in the estimate of the initial capital stock.
3.2.2. Results
Table 1-14 shows the growth accounting results. During the period 1993-2008, the annual
average GDP growth rate was 5.5 percent. The growth of capital stock alone more than explains
away the GDP growth, while the growth of labor input accounts for about additional 2.1
percentage points. As a consequence, the contribution from TFP is estimated to be negative.
However, the large negative TFP growth for the fifteen year period seems too unrealistic to be
taken as it is. It is likely that main bias, among others, comes from the estimated initial capital
stock that is too small. This view is partly confirmed by the huge contribution from capital in
the 1990s. 38 Thus, the results in Table I-1-14 should be considered as very tentative. 39
Nevertheless, given the presumably low initial level of capital stock as of 1993, any bias arising
from the low initial capital stock estimate will go away very rapidly over time. So, the results for
2001-2008 might be more reliable than the results of the previous period, although bias is still
likely to exist. It turns out that most of the GDP growth during this period is still accounted from
the accumulation of inputs. The contribution from TFP is positive at 1.0 percent per annum.
Table I-1-14 | Sources of Growth in Cambodia
Time Period GDP Growth Raw Capital Raw Labor TFP(Raw Input)
1993-2000 3.2 9.3 2.1 -8.2
2001-2008 8.2 5.1 2.0 1.0
1993-2008 5.5 7.3 2.1 -3.9
Then, is TFP growth of 1.0 percent per annum high or low? Examining a single country’ s
growth experience based on growth accounting cannot give a satisfactory answer to this
question. Thus, there is a strong case for comparing the growth accounting results for Cambodia
with a broad set of countries, based on common methodology and data.
Table I-1-14 and Figure I-1-14 show the sources of growth of Cambodia in comparison with
other regions and countries in the world. For simplicity, we focus our discussion on the
estimated TFP growth rate in the 2000s. In this period, the TFPG of Cambodia, which is 1.0
percent per annum, is estimated to be lower than the world average, which is 1.3 percent per
38) If the destruction of human capital that happened in the late 1970s is the main reason for the low level of
per capita GDP in the early 1990s, then the estimated initial capital stock in this study could well be biased
downward and, hence, the subsequent growth rate of capital stock could be biased upward.
39) Unfortunately, we could not find any alternative sources of capital stock series for Cambodia.
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annum. It is higher than that recorded by industrial countries (0.3 percent), Latin America (0.8
percent), and Sub-Saharan Africa (0.9 percent). However, it is substantially lower than Vietnam
(2.8 percent), Korea (1.8 percent) and other East Asian countries (2.1 percent). In terms of TFPG
rank, Cambodia is ranked 36th among the sample of 84 countries in the 2000s (Table I-1-15).
Table I-1-15 | Sources of Growth in Cambodia and Major Regions: 1961-2008
Per Worker Contribution From

Region/Period GDP Growth
GDP Growth (K/L) TFP
World (84)
1961-70 5.2 3.5 1.5 2.1
1971-80 4.1 2.3 1.3 0.9
1981-90 3.8 2.1 0.8 1.2
1991-00 3.7 2.3 1.0 1.3
2001-08 3.4 2.2 1.1 1.2
1961-08 4.1 2.5 1.2 1.3
Industrial (22)
1961-70 5.3 3.9 1.7 2.3
1971-80 3.2 1.7 1.0 0.6
1981-90 2.9 1.8 0.7 1.1
1991-00 2.6 1.7 0.8 0.9
2001-08 1.8 1.0 0.8 0.3
1961-08 3.2 2.0 1.0 1.1
China
1961-70 3.5 1.6 0.1 1.5
1971-80 5.9 4.1 1.9 2.2
1981-90 9.5 7.0 2.3 4.7
1991-00 9.7 8.5 3.5 5.0
2001-08 9.4 8.5 3.4 5.1
1961-08 7.5 5.9 2.2 3.7
Korea
1961-70 7.7 4.7 3.0 1.6
1971-80 7.3 4.6 3.8 0.8
1981-90 8.6 6.2 2.8 3.4
1991-00 5.8 4.1 2.7 1.5
2001-08 4.2 3.2 1.4 1.8
1961-08 6.8 4.6 2.8 1.8
Cambodia
1993-00 3.2 0.0 8.1 -8.1
2001-07 8.0 5.1 4.1 1.0
1993-07 5.5 2.4 6.2 -3.9
Vietnam
1991-00 5.8 3.4 1.6 1.8
2001-08 7.4 5.2 2.5 2.8
1991-08 6.5 4.2 1.9 2.3
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Table I-1-15 | Sources of Growth in Cambodia and Major Regions: 1961-2008 (continued)
Per Worker Contribution From

Region/Period GDP Growth
GDP Growth (K/L) TFP
East Asia (5)
1961-70 5.6 2.6 1.5 1.1
1971-80 7.4 4.6 2.5 2.1
1981-90 5.6 2.1 1.8 0.3
1991-00 4.8 2.3 1.7 0.6
2001-08 4.5 2.8 0.6 2.1
1961-08 5.6 2.9 1.7 1.2
Latin America (22)
1961-70 5.8 3.2 1.1 2.1
1971-80 5.8 3.1 1.6 1.5
1981-90 1.5 -1.5 0.0 -1.5
1991-00 3.1 0.4 0.2 -0.1
2001-08 3.5 1.3 0.3 0.8
1961-08 4.0 1.3 0.7 0.6
South Asia (4)
1961-70 5.3 3.3 1.5 1.8
1971-80 3.9 2.2 0.9 1.3
1981-90 5.4 3.0 0.8 2.2
1991-00 4.7 2.7 1.0 1.7
2001-08 6.8 4.7 1.7 3.0
1961-08 5.1 3.1 1.2 1.9
Sub-Saharan Africa (19)
1961-70 4.5 2.1 1.1 0.9
1971-80 3.6 1.6 1.6 0.0
1981-90 3.0 -0.1 -0.1 0.1
1991-00 2.7 -0.6 -0.5 -0.4
2001-08 4.4 1.9 0.4 0.9
1961-08 3.6 0.9 0.6 0.3
Middle East and North Africa (9)
1961-70 6.3 4.4 1.8 2.7
1971-80 4.3 2.8 2.7 0.1
1981-90 3.9 0.9 0.6 0.3
1991-00 4.1 1.2 0.1 1.1
2001-08 4.2 1.8 0.6 1.4
1961-08 4.6 2.2 1.2 1.1
124
Figure I-1-14 | Sources of Per Worker GDP Growth in Cambodia and Major Regions
125
Table I-1-16 | Cambodia’
s TFPG Rank in 84 Country Samples
TFP w/o Human Capital
Cambodia Korea
25% 50% 75%
39 Finland Egypt New Zealand

1961-70
(1.6) (2.3) (1.5) (0.6)
Italy Cameroon Ethiopia

1971-80 47 (0.8)
(1.8) (1.1) (0.1)
4 Ireland Australia Colombia

1981-90
(3.4) (1.1) (0.3) (-1.2)
74 20 Cyprus Peru Japan

1991-00
(-6.8) (1.5) (1.4) (0.8) (-0.4)
36 21 Korea El Salvador Kenya

2001-08
(1.0) (1.8) (1.8) (0.7) (-0.2)
United
11 Italy Algeria
1961-08 Kingdom
(1.8) (1.3) (0.2)
(1.0)
3.3. Cambodia’s Growth in Comparison with“Open”

Economies.
We noted earlier that what makes a country sustain catch-up growth is a question that is
difficult to answer. Although various determinants of growth have been proposed in the
literature, unfortunately, the consensus has not emerged yet on what set of policies are sufficient
to ensure a country to sustain catch-up growth. 40 Nevertheless, there seems to be a wide
consensus that openness is one of the necessary conditions, though it may not be a sufficient
condition. One prime example is Lucas (2009). Lucas re-interprets the empirical evidence of
Sachs and Warner (1995) and suggests that open countries tend to converge. Sachs and Warner
(1995) look at post-war growth experiences of a broad set of countries and argue that open
countries grow faster. Here, they classify a country as open if none of the following conditions
are satisfied: 1) Average tariff rates higher than 40 percent, 2) Mon-tariff barriers cover on
average more than 40 percent of imports, 3) A socialist economic system, 4) State monopoly of
major exports, and 5) Black market premium exceeds 20 percent. Figure I-1-15 from Lucas
(2009) shows the relationship between initial income (X axis) and subsequent per capita GDP
growth rate (Y axis) for three periods in varying lengths, distinguishing between open and
40) See the“Growth Report”of the Commission on Growth by World Bank (2008) for a recent summary of the
discussion on this issue.
126
closed countries. We added Cambodia into the figures with a solid dot, so that we can see where
Cambodia is located in the figure. As argued by Lucas, we do see a tendency that, among the set
of open economies, those that are initially poor tend to grow faster. Thus, we observe, what may
be called, the convergence frontier of every period.
Figure I-1-15 | Cambodia’s Economy Compared with Open Economies
1960-2006
Open Closed Cambodia
1990-2006
2000-2006
127
For the whole period of 1960-2006, Cambodia is located well inside the convergence
frontier; Cambodia’ s per capita GDP was far below those countries that are as poor as
Cambodia but that are open. However, as we focus on more recent periods, we see a tendency
that Cambodia is moving to the so-called convergence frontier. During the period of 1990-2006,
Cambodia seems to be on or close to the frontier. During the period from 2000 to 2006, the
growth performance of Cambodia was somewhat exceptional, even compared with other open
economies. This suggests that, although Cambodia may well sustain rapid growth in the future,
sustaining high growth rate as recorded during the 2000s might be very difficult. This
interpretation has an important bearing on projecting Cambodia’ s GDP growth rate. That is,
even if Cambodia implements strategies that strengthen its growth potential, it might be
unrealistic to expect Cambodia’ s growth rate to increase substantially, at least in the medium
term, from the already high level of growth rates which were recorded during the 2000s.
3.4. Summary of Key Findings and Implications

We find that the extraordinary and rapid growth of Cambodia in the 2000s was mainly
driven by accumulation of inputs, such as capital and labor, rather than TFP. Viewed from an
international perspective, TFP growth in the 2000s (1.0 percent per annum), though it is higher
than developed countries, is slightly lower than the world average and substantially lower than
many other East Asian countries. The comparison with other open economies shows that
Cambodia’ s economic growth in the 2000s was somewhat exceptional at its income level. These
findings suggest that Cambodia’ s remarkable growth in the past decade or so might not
guarantee that it is on a secure self-sustaining catch-up growth path; it is still not enough based
on productivity improvement. It would be worth further examining the underlying causes of low
TFP growth relative to output growth. It is not likely that, in its current form, Cambodia can
sustain exceptionally rapid growth, as recorded during the 2000s, even after the global financial
crisis. In order to strengthen the current growth momentum, it is important not only to address
the constraints that restrict potentially productive investments to take place, but also to raise the
efficiency of allocation of investment resources.
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4. Potential Opportunities and Threats of the Cambodian
Economy
This section identifies the main risk factors (both upside and downside) in the projection of
Cambodian’ s economic growth for the coming decade. It distinguishes between short-term and
medium to long term risk factors.
4.1. Strengths, Weaknesses, Opportunities, and Threats

(SWOT): Analysis of Cambodia’ s Economy
Box 1 summarizes a SWOT analysis report of Cambodia’ s economy based on a study
supported by UNDP in collaboration with the Supreme National Economic Council (SNEC) and
Harvard’ s Kennedy School (UNDP 2006). This analysis provides a good basic understanding of
the upside and downside risk factors affecting GDP growth in Cambodia.
Box 1: SWOT Analysis
s Strengths, Weaknesses, Opportunities, and Threats

Cambodia’
The strengths of Cambodia include the following: The opportunities of Cambodia include the
1. Globalizing neighbors folloing:
2. An emerging democratic society. A vibrant 1. Future oil revenues are likely to be quite
non-governmrntal sector that provides large and these could be used build a
needed services, increasing decentralization modern state, a new social contract between
and participation at the commune level, and the government and the people, and
an active press have created a space for institutions capable of promoting global
discussion and voice integration.
3. Intemational acceptance and recognition. 2. Promising signs of the emergence of a
4. Strong national identity competitive private sector.
5. Macroeconomic stabillity has helped to 3. Potential to attract much higher levels of
create a sense of stabillity. foreign investment.
4. Achance to create a dynamic and stabillzing
The weaknesses of Cambodia include the rural economy.
following: 5. An insrease in effective observance of laws
1. An expensive and overstaffed state would reduce insecurity of farmers and
apparatus, which contributes to high costs investors by reducing unpredictable behavior
and is poorly suited to manage global by the state.
economic integration.
2. Measured poverty has been reduced, but The threats to Cambodia include the folloing:
poverty levels in Combodia remain high and 1.“Resource curse”
many are in danger of falling back into 2. Failure to develop a competitive economy. A
poverty. combination of slow financial development,
3. Energy is expensive and widely unavailable in poor public finance and education, and
rural areas. marginalization of laws would result in slow
4. Land ownership is becoming dangerously and unequal growth.
and rapidly concentrated.
5. A high-cost, uncompetitive economy.
Source: UNDP (2006).
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4.2. Short-Term (2010-2011)
The real growth is projected to bounce back to 4.5-5 percent in 2010 and to 6-7 percent in
2011, a significant turnaround from 2009 (MEF 2010; ADB 2010; IMF 2010). A strong
recovery in tourism and the key garment industry which rely heavily on the external
environment will help boost Cambodia’ s economic performance. Agriculture is another factor
behind the forecast for this expansion in outputs. The MEF (2010) projects sectoral growth of
3.2 percent for agriculture, 11.5 percent for industry and 3.3 percent for services in 2010, which
can be translated into overall GDP growth of 0.9 percent, 2.9 percent and 1.3 percent,
respectively. In 2011, projected sectoral growth for agriculture is 3.2 percent, industry, 7.9
percent, and services, 7.4 percent, corresponding to GDP growth of 0.9 percent, 2.1 percent and
2.9 percent, respectively.
The agriculture sector, which provides employment for the majority of the population, is
projected to grow moderately assuming the favorable weather conditions. The growth of this
sector in the near future is projected to stem from the crop sub-sector as a result of the expansion
of cultivated land and an increase in paddy rice production. The increase approved FDI flow into
this sector over recent years will play an important role in technological transfer and agricultural
yield improvement. In the near term the agricultural sector will benefit from an expansion of
cultivated land and a surge in demand for Cambodian rice from international markets.
The pace of the global economic recovery will largely affect Cambodia’ s garment and
tourism sub-sectors, which remain as the main pillars of GDP growth in the near term. There are
positive signs that the global economy is regaining strength as it recovers from the financial
recession. In ADB’ s Outlook Report released in 2010, the global economies led by the US have
been recovering faster than expected. However, the assumed lift in US consumer spending will
likely result in only a mild recovery in the demand for Cambodian garments as the industry
seems to have lost competitiveness against other suppliers. Forward bookings also suggest fairly
weak growth in arrivals of higher spending tourists, though arrivals of less free-spending
tourists are expected to continuously increase. That said, GDP growth will be moderate in the
near term because garment and tourism sub-sectoral growth will remain closely linked to the
uncertainties and pace of the global economic recovery.
4.3. Medium-Term (2015)

The prospects for economic growth over the medium term are unlikely to be far from the
moderate growth projected for the near term. Cambodia will not be able to enjoy high growth
rates as it did during the past decade. In 2015, the country’s GDP growth is projected to grow at
a stable rate of around 6.8 to 7 percent (MEF 2010; IMF 2010). Four sectors, namely
agriculture, garments, construction and tourism, are expected to continue to be the main pillars
of growth. The challenge in the medium term is how to diversify the sources of growth away
from these traditional sectors.
130
The oil and gas sector is a promising industry and would be another source of growth over
the medium and long term period. UNDP and the World Bank estimate that annual revenue
from oil and gas could be as much as USD 2 billion, while the Cambodian government
anticipates a much lower income of only USD 100-300 million a year (Sok 2007). Despite the
differences, revenues from the export of oil and gas will no doubt reduce Cambodia’ s reliance
on overseas development assistance. It will also enable more investment in both social and
economic infrastructure including national roads, public facilities, education, health, rural roads,
irrigation systems and services, which will in turn produce a growth-enhancing effect for the
medium and long term.
The second upside risk factor for the medium term is the potential for improving agricultural
productivity and diversifying crops for export. It should be noted that despite improvement in
recent years, Cambodia is still one of the lowest countries in terms of paddy yield in the region
reflecting low land productivity, which implies a need for further improvement in production
technology (Yu & Fan 2009 cited in Tong 2010, p. 7). This implies there is still more room to
improve agriculture productivity. In addition, Cambodia could also promote the growing of
other crops besides paddy. High demand for cassava from China and neighboring countries
during recent years provides a good opportunity to diversify crops for export. In the medium to
long term, crop productivity is expected to improve, crop diversification is expected to take
place and it is anticipated that crop export will become a stronger pillar for pro-poor growth.
The third upside risk factor stems from the challenge to strengthen backward and forward
linkages between the agriculture sector and other main industries such as garments and tourism.
So far, Cambodia has not yet been able to reap full benefits from its garment industry since
most inputs are imported and the industry largely involves cutting and sewing fabrics into
finished products, activities in which value added and profit margins are relatively low.
Domestic supply to substitute imported inputs would not only result in more jobs and value
added for the economy but would also improve the competitiveness of Cambodian garment
products. Likewise, the linkage between the tourism and agriculture sectors remains thin. In
short, it can be said that in the medium to long term, more growth could be generated through
strengthening inter-sectoral linkages.
Along with upside risks, Cambodia’ s economy also faces a set of downside risks. Over the
medium term, Cambodia will no longer be able to receive development assistance and the
government will have to rely on domestic sources of revenue. Enhancing tax mobilization
would create an adverse effect as many people simply could not afford to pay tax. It is worth
noting that many of the poor became better-off in recent years by selling land during the real
estate boom and the first thing they most likely did with the money was to use all or almost all
of it to construct a new house or purchase durable assets which then became a norm in the
Cambodian society. The issue is that such people do not have constant revenue besides the
windfall from selling land, and the newly introduced land and property tax will likely force
them to either resist payment or sell their new houses. For this reason, the government should
take household income into account when imposing property tax.
The second downside risk could stem from the inadequate pace and depth of the economic
131
reform that is not enough to place the economy on a sustainable growth path. The potential
scenario of increasing fiscal deficit combined with little structural reform could lead to
inflationary pressures resulting from domestic financing of the budget deficit, which would lead
to price rises and pressure to balance of payments as happened during the early 1990s.
Moreover, inadequate investments in human capital because of continued weak revenue
performance, and the unbalance of labor market which has excessive numbers of those educated
in the field social science and few of those with the field of natural science, could pose a threat
to future growth, once the gains from low skilled labor industries have been exhausted. Such
situation could jeopardize the sustainability of development and, in turn, result in lower inflows
of FDI into the country. Obviously, this would translate into lower growth over the long run.
5. Projection of GDP Growth: 2010-2020

In this study, we use two methodologies to make projections of GDP growth for the period
2010-2020. The first methodology is so-called the“bottom-up”approach, which makes
projections of component of production function and adds up the projected values of the
growth rate of inputs and TFP to produce a GDP growth rate projection. The second
methodology is a simulation approach based on the dual economy growth model of Lucas
(2009). Below, we discuss each methodology and the projection result.
5.1. Bottom-Up Approach

5.1.1. Methodology
In the first methodology, we use the production function, the equation (1) above, as the basis
for our projection of GDP growth.41 We use the so-called“bottom-up”approach for the
projection. That is, we make the projection of each component of the production function-
capital, labor, and TFP-and add up the projected values of the components to make a projection
of the aggregate GDP growth. Projections of each components of the production function are
carried out in the following way.
Firstly, in order to project an economically active population, we assume that the
participation ratio, which is defined as the ratio of economically active population and working
age population (population aged between 15 and 64 years), remains constant at its 2008 value
during the projection period 2010-2019.42 Given the forecasts of the working age population by
Global Insight, we can calculate the projected values of economically active population.
Secondly, in order to project the capital stock growth rate, we first need to run a cross-country
41) For more detailed explanation of this methodology, see Hahn et al. (2010).
42) Since the data for 2009 values are not available for most of the variables, the projection period effectively
starts from 2009.
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panel fixed-effect regression of the national saving rate on dependency ratio. The regression
result is as follows.
Saving Rate = 29.92 -0.14*Dependency Ratio + 1.47*Cambodia Dummy
The coefficient on dependency ratio is significant at one percent level, suggesting that lower
dependency ratio increases saving rate. We use this equation to predict real investment. In doing
so, we assume that current account deficit, which is about 6 percent of GDP in 2008, is
gradually reduced to 3 percent of GDP by 2020. Then, we predict capital stock using perpetual
inventory method.
Thirdly, the projection of TFPG is basically an assumption. We consider two scenarios.
Scenario I is the case where TFPG growth is at 1.0 percent per annum, which is equal to
Cambodia’ s own TFPG estimated in this study for the 2001-2007 period. Scenario II is a more
optimistic case where Cambodia’ s TFPG grows at 2.3 percent per annum, which is equal to the
estimated TFPG of Cambodia during the period 1991-2008.
5.1.2. Results
In Scenario I, the GDP growth rate of Cambodia for 2011-2020 is projected to be about 6.2
percent per annum while in Scenario II, it is projected to be 7.8 percent per annum. In both
scenarios, GDP growth rate is expected to be higher in the first half of the 2010s, which is
accounted for by the deceleration of inputs growth.43
Table I-1-17 | Projection of GDP Growth of Cambodia: Bottom-Up Approach

Scenario I
Aggregate GDP Capital Labor TFP
2011-2015 7.1 4.7 1.4 1.0
2016-2020 5.2 3.2 1.0 1.0
2011-2020 6.2 3.9 1.2 1.0
Scenario II
Aggregate GDP Capital Labor TFP
2011-2015 8.6 4.9 1.4 2.3
2016-2020 6.9 3.6 1.0 2.3
2011-2020 7.8 4.2 1.2 2.3
43) Although we cannot exclude the possibility of decelerating growth of the next decade, this is not our
favorite scenario.
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5.2. Simulations Based on the Dual Economy Growth Model
of Lucas (2009).
5.2.1. Key Features of the Model and Model Calibration
In our second methodology, we calibrate the dual economy-city and farm- growth model
of Lucas (2009) to Cambodia and simulate it to generate a predicted growth path. The key
features of the model are as follows. There is an exogenous growth of world knowledge stock
with international knowledge spillovers. This model is applicable to all open economies. There
are two sectors in the economy: Modern (city) sector and traditional (farm) sector. There are
agglomeration effects in the city sector; cities play the role as centers of intellectual interchange
and as the recipients of technological inflows. The growth of knowledge stock in a country
depends on knowledge gap as well as on share of labor allocated to the traditional (farm) sector.
The intuition behind the latter assumption is that economies dominated by traditional agriculture
are at a disadvantageous position to absorb and accumulate knowledge.
More formally, GDP per capita in this model is proportional to its stock of human or
knowledge capital. The stock of knowledge capital in the leading economy follows
(1)
The follower economy consists of two sectors: modern sector (city) and traditional sector
(farm). A fraction 1-χ of each unit of labor in the economy is allocated to the city sector,
where it produces
Here, h denotes the follower economy’

s knowledge stock. The farm sector produces
units of the same, single output good. The parameter Α captures agricultural endowment,
and ξis a parameter capturing a spillover effect of city knowledge on agricultural productivity.
The equilibrium output is given by
(2)
If then χ= 1. Otherwise, χis given by
(3)
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The stock of knowledge in any follower economy follows
(4)
That is, the growth of knowledge stock in the follower economy depends on exogenous
growth rate of knowledge stock in the leader economy, agricultural employment share,
knowledge gap between the follower and the leader economy. The parameter ζcaptures the
degree of agglomeration effect in the city sector or the degree of penalty from larger farm
sector. The parameter θcaptures the size of the international knowledge spillovers. Combining
(3) and (4) yields
(5)
The equations (1), (2), (3), and (5), given initial values of knowledge stocks, h0 and H0
describe the behavior of the model.
In this model, there are six parameters: five parameters that are common across countries (α ,
μ, θ , ζ , ξ), and one country specific parameter (A). Lucas (2009) calibrates this model using
evidence from Sachs and Warner on economies classified as open, from Parente and Prescott on
economies that have successfully begun to develop, and from Kuznets and the World Bank on
the employment share of agriculture in various times and places.
In the simulations in this note, the values of the parameters that are common across countries
are taken from Lucas (2009), so that α= 0.6, μ= 0.02, θ= 0.65, ξ= 0.75, and ζ= 1. H0 is set
at initial year per capita US GDP. For each low income country, A and h0 is obtained by using
the same calibration procedure as in Lucas (2009), but calibrated to the Cambodian economy.
5.2.2. Results
Table I-1-18 and Figure I-1-16 show the projected GDP growth rate of Cambodia. During
the period 2011-2020, it is projected that the annual average GDP growth rate of Cambodia will
be about 7.4 percent. During that period, the growth rate is projected to increase mildly over
time starting from about 6 percent.
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Figure I-1-16 | Projected GDP Growth Rate of Cambodia
Table I-1-18 | Projection of GDP Growth of Cambodia: Simulation Based on Lucas (2009)
Period Actual Projected
1994-2000 7.47
2001-2010 7.96 6.13
2011-2020 7.36
6. Key Policy Challenges

As discussed earlier, Cambodia’ s economy was performing considerably well until it was hit
by the global financial crisis which occurred in 2008. Much of the growth in the past can be
attributed to natural resource exploitation, official development assistance, export-led garment
industry, and the tourism sector. The agriculture sector’ s contribution to economic growth is
somewhat unstable due to unpredictable weather conditions. However, the country cannot rely
on these traditional sectors to sustain high economic growth as Cambodia’ s economy is likely to
encounter numerous challenges in the near future.
One of the main challenges is the government’ s effort to collect domestic revenue to finance
fiscal demand. Cambodia has been depending on ODA from development partners to support
government’ s spending and to construct and rehabilitate economic and social infrastructure.
Nevertheless, that will not continue in the long term for two reasons. First, Cambodia has
136
already been enjoying ODA for years. Second, development partners seem to have shifted their
focus and support towards alleviating poverty in the more poverty-stricken African continent.
The government’ s measure to mobilize tax has been observed in recent years but this measure
could undermine the effort to develop the private sector and reduce poverty which have long
been priorities on the government’ s development policy agenda.
The second challenge is strengthening the monetary role in macroeconomic policies. As can
be seen from the discussion in earlier sections, Cambodia’ s monetary system is characterized by
a high degree of dollarization and cash transactions, significantly limiting the government’ s
scope for running an active and effective monetary policy. Within the context of a dollarized
economy, NBC can only use interventions in the foreign exchange market as an indirect
instrument of monetary policy. Other instruments such as reserve requirements and rediscount
rates are notionally available but are not utilized. Effort has been made to de-dollarize but the
progress remains slow. As of 2009, the US dollar still dominated around 81 percent of the total
liquidity.
The third policy challenge is the diversification of sources of growth. The recent blow of the
global economic recession to Cambodia’ s economy indicates the need for the country to
accelerate the diversification of its sources of growth as well as to create access channels and
opportunities for rural areas to participate in such growth. To achieve these objectives, it is
important that some key challenges are addressed. These include improving the competitiveness
of garments and tourism, diversifying crops and increasing crop yields, and improving linkages
between farmers and markets. As discussed in Section 2.2 the linkages between the agriculture
sector and other sectors such as garments and tourism remain weak. To date, the inputs used in
garment manufacturing and the agricultural produce supplied to hotels and restaurants are
mostly imported. Policy to enhance domestic supply capacity of such inputs and to improve
linkages between and within sectors would not only result in more jobs and value-added for the
economy but would also help make Cambodian garment exports more competitive.
The fourth challenge is the creation of employment for the young generation. As noted
earlier Cambodia has one of the fastest growing populations in the world where the labor force
is estimated to increase by 213,000 annually over 2010-2013. According to the updated NSDP
2009-13 forecast, the two main drivers of the economy, namely, garments and tourism, would
be able to absorb only 12,000-40,000 new labor market entrants per annum over the same
period. While diversification of the country’ s sources of growth is important to generate
employment for the new labor force entrants, it is most likely that the vast majority will not be
able to find work in other sectors besides agriculture for many years to come. The economy will
come under pressure to generate productive employment opportunities for this very large
number of new labor force entrants.
The fifth challenge is the intervention to correct the mismatch between demand and supply
in the labor market. So far, there has been no attempt to match educational attainments with
more long-term job needs. One of the key causes for the mismatch is that post-secondary
institutions tend to produce too many graduates with general skills such as management skills
while business institutions in Cambodia cite the lack of skills and a poorly trained workforce
137
among their major constraints. There is an urgent need to address this issue through intervention
in post-secondary education, which presently is mainly focused on providing skills to respond to
short-term market needs. To enhance and sustain the country’ s growth, a whole range of skills is
needed among the workforce, including scientists, engineers, scholars, researchers, and
specialists in multifarious fields. The challenge to be overcome for the education sector is to
provide facilities for imparting appropriate high quality education in a variety of fields, through
vocational, technical and university level education and also to attract students to such courses.
The sixth challenge will be how to avoid the curse of oil which has afflicted some resource
rich countries and turn oil revenue into a blessing. The recent discovery of oil and gas has
spurred expectations that they will become a promising industry and another source of growth
over the medium and long term. Nevertheless, many studies show that countries and regions
with abundant natural resources tend to have relatively less economic growth and worse
development outcomes. Many different reasons could be attributed to this resource curse
including a decline in the competitiveness of other economic sectors caused by appreciation of
the real exchange rate as resource revenues enter an economy, volatility of revenues from the
natural resource sector due to exposure to global commodity market swings, government
mismanagement of resources, or weak, ineffectual, unstable or corrupt institutions. Despite such
grave concerns, revenue from the export of oil and gas is expected to be well managed and used
for more investment in both social and economic infrastructures including national roads, public
facilities, education, health, rural roads, irrigation systems and services, which will in turn have
a growth-enhancing effect in the medium and long term.
Last but not least, another challenge to be overcome is how to reduce poverty and inequality
more rapidly. Despite achieving high economic growth in the past decade, poverty and
inequality are still the major challenges that the country is faced with. There are debates as to
whether Cambodia could have done better in terms of poverty reduction. Related to the issue,
are the growing concerns that inequality in Cambodia has increased. A number of recent studies
by CDRI, published together with an equity report by the World Bank in 2007, support the view
that inequality in Cambodia has worsened in recent periods. CDRI’ s studies in particular also
provide evidence that the poor have not benefited much from the large growth in the economy.
Although not necessarily a worrying sign, it is important to look more carefully into the
underlying reasons for Cambodia’ s limited success in poverty reduction and increased
inequality
138
REFERENCES
Hahn Chin Hee,“Does Exporting Promote New Product Introduction?: Evidence from Plant-
Product Data on Korean Manufacturing,”FREIT Working Paper 100112, 2010.
Hahn Chin Hee, et al., The Rise of China and Structural Changes in Korea and Asia, Edward
Elgar, 2010.
Hahn Chin Hee and Park Chang-Gyun,“Learning by Exporting in Korean Manufacturing: A

Plant Level Analysis,”ERIA Discussion Paper Series, 2008.
IMF, International Monetary Fund, 2009.
Lucas, Robert E., Lectures on Economic Growth, Massachusetts, Harvard University Press,
2002.
Lucas, Robert E.,“Trade and the Diffusion of the Industrial Revolution,”American Economic
Journal: Macroeconomics, 1:1, 2009, pp. 1-25.
Ministry of Economy and Finance, MEF data, Cambodia, 2010.
Nehru, Vikram and Ashok Dhareshwar,“A New Database on Physical Capital Stock: Sources,
Methodology and Results,”Revista de Analisi Economico, 8, 1993.
National Institute of Statistics, NIS data, Cambodia, 2010.
National Strategic Development Plan, NSDP data, Cambodia, 2006.
Sachs, J., and A. Warner,“Economic Reform and the Process of Global Integration,”Brookings
Papers on Economic Activity, No.1, 1995, pp. 1-95.
World Bank, World Development Indicators, Washington: U.S, 2009.
139
Chapter 02
Structural Transformation and the Role of

Government
Jong-il Kim (Dongguk University)

Kimsun Tong (Cambodia Development Resource Institute)
Summary
Cambodia achieved high economic growth during the last 15 years. However, the growth
record since 2008 is disappointing. It reflects structural problems such as lack of domestic
industrial linkage, low position in the value chain in price-sensitive products, and high
dependence on FDI. More active role of the government is needed to transform the economic
structure to sustain rapid economic growth.
Up to now, Cambodia successfully made their economy open and more integrated to the
world economy. However openness may be a necessary condition but not a sufficient condition
for development. Although Korea is famous for its export-oriented and outward-looking
development, the Korean government has continuously pursued structural transformation from
the early period of the economic development. Following lessons could be learned from Korea’ s
experience.
The Korean government exploited the essence of the market system, the power of profit
motive of private enterprises. To induce private efforts, the Korean government initiated a
number of policies that gave incentives for exports from the early 1960s. The policy consisted
of a comprehensive and effective incentive system rather than a bunch of fragmented and
nominal measures. In the 1960s, the export promotion measures were market-friendly by
amplifying the market signals and correcting market failures in coordination. Also the
promotion of manufactured exports was consistent with comparative advantages of Korea at
that time. However, in the 1970s, the Korean government drastically changed the policy stance
140
and selectively promoted heavy and chemical industries. The interventionist policy incurred
many problems such as waste of resources, concentration of economic power, and financial
market distortion, although it laid a foundation for industrial upgrading. Factors that relieved
problems of the government intervention could be export-orientation of promoted industries,
which held a competitive environment, and careful exploitation of industrial linkages based on
market demand of the promoted industries. In addition, the policy was planned with relatively
concrete goals and budgetary considerations and was insulated from the influence of political
factors and interest groups.
It is doubtful that Cambodia can copy and follow the exact policy experiences of Korea
since Cambodia’ s economic conditions are quite different from those of Korea. Korea’ s
insistence on self-sufficiency by relying on indigenous entrepreneurs is applicable in the era of
global production sharing. However, it should be noted that the success of industrial policy
depends on how to induce private entrepreneurship. Up to now, Cambodia successfully invited
foreign enterprises which take the advantage of Cambodia’ s given endowments. For future
growth, Cambodia should shift elements of comparative advantage from given endowments into
industrial capability. The main focus of the industrial policy should be given to the creation of
indigenous entrepreneurs. To induce local entrepreneurship, policy measures should be more
focused after examining the effectiveness along with their costs and benefits. The policy should
provide a consistent signal with an explicit goal. The industrial promotion does not necessarily
mean traditional, selective, and winner-picking intervention. Instead, it could be relaxing
binding constraints and building networks so that private enterprises can discover new business
opportunities. It is inevitable to allocate more amount of budget for building industrial base. For
this kind of active role of the government, Cambodia needs to establish an equitable and
efficient tax system to secure revenues. In addition, it is very important to make budget
allocation consistent with policy goals to make the spending more effective. The policy
implementation should be pragmatic and flexible. For this, there should be continuous
communication among stakeholders including both public and private sectors. Finally, policy
measures should be improved in terms of accountability and transparency. For this, the
commitment of political leadership is required.
141
1. Current Economic Situation and Structural Problems
Cambodia achieved high economic growth during the last 15 years with an annual growth
rate of 7.6% per annum between 1993 and 2009. As table I-2-1 shows, per capita GDP almost
tripled from US$ 229 in 1993 to US$ 685 in 2009. The macroeconomic volatility in the early
1990s significantly reduced in the 2000s as the trend of inflation rate shows. This high growth
could be, in most part, attributable to active FDI inflow along with increasing exports.
However, the growth record since 2008 is disappointing. After 4 years of over 10% growth,
GDP growth rate plummeted to 6.7% in 2008 and 0.1% in 2009 due to the global financial
crisis. This steepest output retreat in recent years reveals the structural frailty of the Cambodian
economy.
Table I-2-1 | Major Economic Indicators of Cambodia (1)
GDP Per Capita Rural Gross Gross Public

GDP Population Population Saving Investment Investment
Year millions of Ratio Ratio Ratio /GDP
current current millions
US$ US$ % % % %
1993 2,480 229 10.8 86.4 20.1 21.8 17.1
1994 2,765 248 11.2 86.1 19.4 23.4 24.4
1995 3,419 297 11.5 85.8 20.6 23.0 29.4
1996 3,486 295 11.8 85.3 21.9 25.0 26.3
1997 3,392 281 12.1 84.7 20.8 20.2 21.5
1998 3,106 253 12.3 84.2 17.3 23.0 30.9
1999 3,507 281 12.5 83.6 16.5 21.9 32.9
2000 3,649 288 12.7 83.1 17.6 20.5 33.3
2001 3,984 309 12.9 82.5 20.1 21.2 35.0
2002 4,280 327 13.1 82.0 21.4 22.4 38.7
2003 4,663 350 13.3 81.4 16.2 19.2 39.5
2004 5,339 394 13.5 80.9 16.3 18.6 35.1
2005 6,293 455 13.8 80.3 17.2 21.4 29.9
2006 7,275 514 14.2 79.7 21.7 22.7 26.5
2007 8,614 594 14.5 79.1 24.7 26.5 24.5
2008 10,337 700 14.8 78.4 13.1 24.5 48.2
2009 10,308 685 15.1 17.7 23.5 35.2
Source: National Accounts of Cambodia except for rural population ratio which is obtained from WDI of the World
Bank.
Note: Inflation rate is the growth rate of the GDP deflator.
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Table I-2-2 | Major Economic Indicators of Cambodia (2)
Population
GDP Growth Inflation Exchange FDI Inflow
Growth Export/GDP
Year Rate Rate Rate millions of
Rate %
% % Riel/$ current US$
%
1993 2,747 124 11.4
1994 9.1 3.1 -4.4 2,570 162 16.7
1995 6.4 3.0 11.5 2,467 151 25.0
1996 5.4 2.7 3.5 2,640 294 18.5
1997 5.6 2.1 4.4 2,991 168 25.4
1998 5.0 1.7 10.0 3,774 223 25.8
1999 11.9 1.6 2.0 3,814 221 32.2
2000 8.8 1.6 -3.2 3,859 142 38.3
2001 8.2 1.6 2.6 3,924 142 39.4
2002 6.6 1.7 0.7 3,921 139 41.0
2003 8.5 1.7 1.8 3,975 74 43.5
2004 10.3 1.7 4.8 4,016 121 48.5
2005 13.3 2.0 6.1 4,092 375 46.2
2006 10.8 2.4 4.6 4,103 483 50.8
2007 10.2 2.4 6.5 4,068 867 47.5
2008 6.7 1.9 12.3 4,060 815 42.9
2009 0.1 1.9 1.8 4,148 593 37.8
Source: National Accounts of Cambodia

Note: Inflation rate is the growth rate of the GDP deflator.
Growing capital inflows which drove the growth of garment exports and construction boom
brought a record high growth during the last 15 years but made the Cambodian economy more
open and vulnerable to external shocks. Current shock from the recent recession seems to have
made a greater impact than that from the Asian crisis ten years ago. Recent stagnation shows
economic growth relying on exports of foreign invested enterprises, tourism, and construction
which cannot ensure a stable growth for Cambodia. The recent global financial crisis seems to
have contracted the 4 pillars of growth, particularly garment manufacturing, tourism, and
construction which rely on trade and capital flows affected by overseas economic -status.
Garment manufacturing depends on export to developed regions such as the US and EU,
which were seriously affected by the recent financial crisis. However, the shock ironically
shifted US consumers toward cheaper goods which more than buffered garment exports from
developing countries against the slump in retail sales. Garment imports from China and
Bangladesh increased by around 1.5 and 2.4% in 2009, respectively. However, Cambodian
garment export to the US decreased by 22%. Tourism also slowed down in 2009 with receipt
143
growth at 1.4% much smaller than 13.7% in 2008. The number of visitors to Cambodia dropped
much from Korea due to steep depreciation of the Korean Won and from Thailand due to
military face-off. Also Japanese visitors decreased due to N1H1 virus concerns. The construction
industry sharply declined due to the burst of domestic real estate bubble. The real estate industry
has shown high inflation due to rapid increase in foreign capital inflow since 2004 which infused
easy credits and triggered speculative investments. Real estate prices plummeted by 40% in
2009. Also agricultural exports, rubber and cassava suffered a cutback in demand along with
falling international prices. However, sustainment of rice export growth relieved the agricultural
exports against price shocks, which made agriculture less susceptible than other drivers.44
Due to the underperformance in garment and tourism which are the two major export
industries, current account and trade deficit hit a record high of USD 1,175 and 2,246 million in
2008, respectively. As the balance of payments in table I-2-3 shows, the current account deficit
has been covered by the capital inflows. However, capital account surplus decreased sharply in
2009 mostly due to drop in FDI since Cambodia did not have financial investments due to lack
of equity and bond markets. Thus, in 2009, the overall balance of payments turned to the red,
minus 25 in contrast to plus USD 514 million in the previous year.
Table I-2-3 | Balance of Payments of Cambodia
Current Transfers Capital and

Current Trade Balance of Balance of Overall
Year Financial
Account Balance Services Income Private Official Balance
Account
1993 -40 -203 10 0 4 149 -49 -89
1994 -112 -292 -75 0 20 235 -1 -113
1995 -81 -305 -74 -57 20 335 110 14
1996 -109 -428 -52 -86 20 437 259 72
1997 21 -231 -43 -53 60 288 164 33
1998 -175 -365 -43 -60 94 199 164 -7
1999 -188 -462 2 -99 94 276 164 -49
2000 -109 -543 101 -127 144 317 46 -63
2001 -45 -523 177 -140 137 303 90 45
2002 -47 -563 230 -175 149 312 107 60
2003 -137 -533 136 -216 163 313 170 33
2004 -122 -681 290 -225 176 318 153 31
2005 -265 -1,017 471 -254 209 326 330 65
2006 -77 -1,055 504 -290 315 449 270 193
2007 -150 -1,343 643 -381 377 554 567 417
2008 -1,175 -2,246 616 -468 365 558 1,689 514
2009 -600 -1,609 476 -309 292 550 575 -25
Source: National Accounts of Cambodia
Unit: Millions in US$
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The drastic slowdown in the recent economy, economic growth and deterioration of balance
of payments may be attributable to short-term cyclical effects from external shocks but reveals
structural problems of Cambodian’ s growth.
First, Cambodia’ s trade and finance openness successfully initiated growth so far but made
Cambodia excessively vulnerable to external shocks. The ratio of export to GDP was less than
30% in the early 1990s but reached to around 50% immediately before the recent financial
crisis. The ratio of FDI inflow to GDP was around 5% in the 1990s but reached 10.1% in 2007.
These figures explain why the current shock of 2008-09 is different from that of the Asian
economic crisis of 1997-98. In coming years, the world’ s economic situation is expected to
become more volatile both in trade and finance. It foretells the bumpy road for future growth of
Cambodia, which requires actions to mitigate the effect of external shocks in the economy. It
means Cambodia should expand domestic economic activity which could enforce its growth
potential.
Second, recent economic contraction reveals weakness in the engine of growth. The garment
sector drove export growth rapidly during 1998-2007, but contracted sharply since 2008.
Although it is affected by the volume of demand due to recent recession in the major export
market, its severity originates from the structure of the industry. The end of safeguards against
Chinese garments which triggered the preference of Cambodian products and relative
appreciation of riel against currencies of other garment exporting countries such as Bangladesh
made the Cambodian garment industry less competitive.45
The majority of Cambodian factories is characterized by low value-added cut-make-trim
with low skilled labor, which makes the industry very sensitive to price competition. Without
emphasizing diversification and sophistication to the Cambodian-made garments, future growth
of garment industry in Cambodia is limited and furthermore self-defeating in that the wage
increase from economic growth would directly curtail the profit margin in labor-intensive
manufacturing of garments. It will decelerate FDI inflow which accounts for most of the
investments in the garment industry. Furthermore, foreign invested enterprises which run 90%
of business will be intrinsically footloose
Tourism, another major foreign exchange-earning industry, slowed down due to the large
cutback of foreign visitors from Korea, Japan, and Thailand. Most of them are price-sensitive
group tourists who are attracted mainly to sites around Angkor Wat. Thus, without diversifying
the tourism industry and inventing new high value-adding tourist services, continuous growth
seems skeptical.
44) For recent performance of garment, tourism, construction industries, see Jalilian and Reyes(2010).
45) Due to heavy dollarization, the riel became more expensive against taka, Bangladesh currency, which
showed significant depreciation. The National Bank of Cambodia intervened to maintain stable exchange
rate of the riel against the dollar to pull down inflationary pressures but the limited exchange rate
fluctuation did not help much in facilitating current account adjustment. See Jalilian and Reyes(2010)
145
Third, the industrial structure of growth pillars could be partly blamed for chronic current
account deficit of Cambodia. The growth of garment and construction industries induces
imports and thus even tends to enlarge trade deficit since these sectors need equipments and
materials mostly from imports. The profit remittances of foreign invested enterprises which run
considerable parts of the garment and tourism industries increase the income balance deficit
with rising trend. In addition, Cambodia would have run larger current account deficit without
current transfers in terms of international remittances from workers abroad and foreign aid.
Naturally the role of these two as the sources of foreign exchange should be reduced as
Cambodia grows. As long as this pattern of economic growth stay intact, current account
deficits will increase as Cambodia grows, which makes capital inflows critical to balance the
payments of Cambodia. Openness to foreign capital, political stability, and dollarization
attracted increasing capital inflows so far, which contributed in filling up the savings and
foreign exchange gaps. However, increasing capital inflows mean more vulnerability to external
shocks and more volatility in macroeconomic fluctuation. The recent boom and bust of the
construction sector, another growth pillar, was in part attributable to flood and ebb of the
foreign capital.
Without solving these structural problems such as lack of domestic industrial linkage, low
position in the value chain in price-sensitive products, high dependence on FDI, further high
growth does not seem to be sustainable from increasing macroeconomic instability and payment
imbalance. Growth strategy based on liberalization allowing full currency convertibility and
free international capital mobility has been successful by inducing FDI inflows which expanded
4 pillars of growth. Openness could stimulate expansion of industries by attracting foreign
capital but could not ensure sustained expansion without improving productivity. Improving
productivity accompanies upgrading in the existing industries and diversification into new
industries which spurs another wave of investment. Despite high economic growth, the low
investment ratio during the past 15 years may prove lack of industrial development in
Cambodia46
The development procedure of current developed countries shows that industrial

diversification in both intra and inter industrial composition are prerequisites for the long-term
economic growth of Cambodia. Most of all, further development in export-oriented
manufacturing industries are critical to lessen the external sensitivity and thus enhance
macroeconomic stability. Export-oriented manufacturing industries have higher potential to
foster a learning mechanism for industrial expansion than other industries. Therefore, Cambodia
needs structural transformation to sustain higher growth. Although market economy has been
proven to be the best mechanism to allocate resources and transform economic structure in the
long run, the role of the government is broad and significant in the early stage of the
46) Despite the high growth (rate), the saving ratio has stayed unchanged over the periods and even fell to
13.1% and 17.7% in 2008 and 2009, respectively.
146
development.
In this respect, considerable efforts are needed to enhance the role of the Cambodian
government. Cambodia is a small open economy with relatively free capital mobility. Thus,
there is a limit for government policy maneuver in terms of exchange rate and monetary policy.
Relatively small fiscal revenues do not allow sizable public spending for industrial promotion
and capital investment. Therefore, it is more important to establish an effective and functioning
government. It should establish institutional framework for governance of the economic policy
and develop various policy measures to mobilize resources into productive areas. In addition, it
should induce additional resources to infrastructure building and human resource development.
In this chapter we investigate the possible role of the industrial policy in promoting
structural transformation in Cambodia. In the following section, we briefly review existing
studies on the role of the government in terms of industrial development. In section 3, we look
into success factors of the industrial policy by exploring the experiences in Korea. In section 4,
we review the current industrial structure and the policy framework of Cambodia. In the final
section, the role of government for future growth of Cambodia will be discussed.
2. Economic Development and Structural Change

It is well known that economic development is not possible without successful
transformation of the structure by the series of studies in Clark(1940), Kuznetz(1957), and
Chenery et al.(1989). The central feature of structural transformation is identified as the shift of
resources from agriculture to industry. The share of manufacturing rises in output and
employment as per capita income increases as the economy enters the phase of industrialization.
After per capita income reaches a relatively high level, the manufacturing share declines with
rising share in services, so called the deindustrialization phase.
Although the pace and composition of the structural changes are different across countries
depending on the characteristics of economy such as size, geography, history, and culture, there
is no exception to the central feature of a successful transformation. Along with
industrialization, people migrate from rural to urban areas in which accompany huge investment
in infrastructure and the housing system. Within the industry, labor-intensive production based
on simple technology yields its share to capital-intensive ones based on more sophisticated
technology. Thus, the initial stage of industrial accompanies rising investment which accelerates
the capital accumulation. With further increase in income, workers become more skillful and
investment becomes more research and development-oriented. Thus economy moves from
accumulation-based to efficiency-based growth.
Therefore, the structural transformation which is a synonym for industrialization is
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considered a prerequisite for the long-term economic growth. In the British economy, the first
case of industrial transformation followed a steady and self-generating path. For the next 200
years, the world experienced diffusion of industrial transformation across economies from
adjacent and now-developed European countries and their offshoots, then Japan, and now in
successful developing countries.
To introduce the wave of industrial transformation, an economy should satisfy two

conditions: openness and suitable institution. First, the country should be accessible to the rest
of the world. The successful transformation described above requires many inputs such as
physical and human capital investment, new technology and knowledge, and institutions, etc.
Openness makes the country accessible to these inputs from abroad which facilitate factor
accumulation and productivity growth. Under the era of globalization with a rapid fall in the
price of transportation and communication, openness becomes more important.
However, openness is just one part of the necessary conditions. In addition to openness, a
country should have right the institution which makes a country take advantage of openness for
long term growth. Lucas (2007) showed that openness leads countries to the convergence
groups. He used the Sachs-Warner measure of openness.47 This measure of openness was
criticized by Rodriguez and Rodrik (2000) who argued that the measure is biased to the extent
that it is correlated with alternative explanatory variables such as macroeconomic instability and
poor institutions. As the criterion of openness of Sachs-Warner shows, it could be interpreted as
the functionality of market economic system, particularly requiring the condition for non-
socialist. Thus, Lucas’ evidence shows that openness and well-functioning market system could
make a country catch up with high income countries.
The collapse of the communist system finally confirmed that establishment without a
functioning market system, long-term economic growth is remote. The reason is that only a
market system can breed creative and diligent entrepreneurs, which leads to long term
economic growth. Particularly, the existence of a value system favoring economic progress and
the availability of effective entrepreneurial groups receiving social approval has been regarded
as essential conditions for industrial growth.
However, in the initial stage of the industrial transformation, an economy is rampant with
information and coordination failure, which obstructs function of the market and even formation
of market. Thus, the government, the monopolistic provider of law and order, could substitute
and complement the market when a market is immature. Furthermore, well-set government
intervention in resource allocation could accelerate the industrial transformation. According to
47) Sachs-Warner’ s definition of openness is that the economy must (1) have effective protection rates less
than 40 percent, (2) have quotas on less than 40 percent of imports, (3) have no currency controls or black
markets in currency, (4) have no export marketing boards, and (5) not be socialist.
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Gerschenkron (1962), the history of modern economic growth confirms that the more a
country’ s economy depreciates, the more likely was it that industrialization starts to
discontinues as a sudden spurt occurs due to a relatively high rate of growth of manufacturing
output. The more backward a country’ s economy, the greater was the part played by special
institutional factors designed to increase supply of capital to nascent industries and to provide
them with less decentralized and better informed entrepreneurial guidance. Usually, the
institutional factors replacing missing markets are provided by the government.
In the field of developmental economics, there always have been controversies around the
industrial policy. Neo-classical economists such as Krueger (1974) criticize the industrial policy
for its nature of restrictive measure on market transaction, which distorts the market and makes
room for diversionary actions such as rent-seeking. Meanwhile, structuralists argue that in
developing countries when there are market distortions such as externalities, or when markets
are incomplete, appropriate government actions are needed to promote industrial development.
Particularly, industrial policy can correct market failures from coordination failure and
informational externalities and induce knowledge spillovers in dynamic scale economies.48 To
get the intended consequences of the industrial policy, the government should have to acquire
extraordinary knowledge to design the policy measures and successfully implement them.
After the debacle of the first generation of the industrial policy after World War II, the
attitude towards industrial policy has been negative and international rules such as WTO have
reduced the scope of the policy. However, recently, new industrial policy advocated by Rodrik
(2004), Lin (2010), and many more sheds new light on the role of government through an
industrial transformation. New industrial policy advocates acknowledge the problem of
traditional type of vertical industrial policy. The government cannot pick winners and industrial
interventions are prone to political captures and corruption. Instead, they focus on an interactive
process of strategic cooperation between the private and public sectors which, on the one hand,
serves to elicit information on business opportunities and constraints. Therefore, what matters is
not the specific policy measure but the policy process which could reveal areas for interventions
and design and implement them to be sensitive to circumstances. To achieve this, much of the
industrial policy should be considered with the provision of public goods for the productive
sector and government capability to provide these public goods effectively, that means good
institutions should be built.49
The case of Korea will be described in the following section and show the shade and light of
industrial policy and exemplify the argument of new industrial policy above.
48) Pack and Saggi(2006)

49) Rodrik(2004)
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3. Role of Government in Structural Transformation in
Korea
3.1. Path of Structural Transformation in Korea
The characteristic of structural transformation of Korea is in its speed and depth of
industrialization. In the early 1960s, the share of agricultural production was almost 50% of the
total GDP and that of manufacturing less than 10%. However, within ten years, the share of
manufacturing exceeded that of agriculture and the employment share of manufacturing sector
reached more than 20 % of total employment. (Figures II-2-1)
Figure I-2-1 | GDP and Employment Share by Industry of Korea
<GDP Share> < Employment Share>
Sources: Bank of Korea, National Accounts and National Statistical Office of Korea, Survey on Economic Active
Population
Manufacturing sector was the main driving force of the industrial transformation in Korea.
As Table I-2-4 shows, the initial industrialization started with traditional labor-intensive sectors
such as food and textile, which took the share of more than 70 percent of total the
manufacturing production. The expansion of labor-intensive industries absorbed large
underutilized labor in agriculture. Korea’ s rapid structural transformation is due to its
continuous efforts to upgrade industrial structure from the start of the development.
Immediately after the initial take-off, the intermediate good-supplying sectors such as chemical
products, machinery, and equipment began to grow, responding to the increase in domestic
demand. Since the early years of development in the 1960s, the government tried to thicken the
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domestic industrial linkage through public investment. In the 1970s, the Korean government
pursued a deeper industrialization into heavy and chemical industries and the structure of
manufacturing sector changed dramatically. In the 1980s, the share of light industries such as
textiles sharply declined, whereas the heavy and chemical industries grew fast. Now, the share
of heavy and chemical industries at about 80 percent of the total manufacturing sector is higher
than any other developed countries. In the 1990s, Korea entered into the phase of
deindustrialization as the share of manufacturing employment began to decline, which is a
common phenomenon observed in the last 30 years of post industrialized growth of developed
countries.
Table I-2-4 | Structure of Manufacturing Sector of Korea
Share in value-added(%)
1954 1961 1974 1980 1990 2000
Food, beverages, tobacco 44.6 34.9 21.5 11.7 8.2 6.9
Textiles 27.8 28.9 30.7 21.9 12.0 6.9
Wood 5.2 3.7 2.1 1.0 0.8 0.6
Pulp, paper, printing 5.7 6.6 3.4 4.5 5.0 4.3
Chemicals 5.1 8.3 15.5 19.8 16.6 18.1
Non-metal mineral products 2.2 3.5 4 6.4 6.4 3.9
Metal , machinery and equipment 7.6 12.5 44.3 31.9 48.0 57.3
Basic metals, metal products 10.3 14.3 12.8
Machine and equipment 16.3 22.5 33.3
Transportation equipment 5.2 11.2 11.3
Light industries 85 77 61.5 41.9 29.0 20.7

HC industries 15 23 38.5 58.1 71.0 79.3
Source: Kim and Roemer(1979) up to the 1970s, the rest on own estimations based on National Accounts.
Note: Heavy and chemical (HC) industries are chemicals, non-metal and metal products, machine and equipment
manufacturing.
A key factor that enabled Korea to transform industrial structure so fast is its openness,
particularly in export. Export helped Korea to overcome small size of domestic demands and
provided competitive pressure which stimulated incessant learning and adaptation. Within 10
years after the take-off, the share of manufacturing exports took up more than 80 percent of the
share in total exports. In the 1960s, the initial manufacturing export growth was driven by the
increase of labor intensive goods such as garment, wig, and plywood. The light industry was
replaced by high tech capital intensive industries as the major export engine in the 1990s just in
one generation after a crude materials-exporting country entered world export market of
manufacturing goods. It is worth mentioning that even though the shares of light industries
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declined, the absolute amount increased over time through adjustment in the way of business
towards rising wages. To maintain high economic growth, the industrial transformation should
take place with rising share of newly established industries thanks to their growth higher than
‘plus’growth of existing ones. During the period of high growth and industrialization, an
economy should expand the width of production by stretching into newly discovered sectors
with growing existing sectors intact.
Table I-2-5 | Export Structure of Korea
Category(SITC Code) 1954 1961 1972 1980 1990 2000
Food and beverages(0,1) 5.9 32.1 10.1 15.2 4.0 1.6

Crude materials(2,4) 86.9 44.0 4.3 0.8 0.6 1.2
Mineral fuels(3) 2.7 4.8 1.9 0.2 1.1 5.8
Chemicals(5) 0.6 1.5 1.7 10.9 7.8 11.1
Manufactures(6,8) 3.7 13.2 67.9 45.6 41.9 18.3
Machinery & transport equipment(7) 0.3 1.9 13.9 26.9 43.5 60.6
Food, fuel & raw materials(0-4) 95.3 80.9 16.3 16.1 5.7 8.6
Manufactures(5-8) 4.6 16.6 83.4 83.3 93.2 90.1
Source: Kim and Roemer(1979) up to the 1970s, the rest on own estimation based on the UN COMTRADE DB.
Another key factor that accelerated Korea’ s structural transformation is the Korean
government. From the initial period of industrialization, the Korean government invested
heavily in infrastructure such as power, transportation, communication, and water. The
government also invested in human resource development by expanding technical and
vocational training and by establishing organizations for science and technology. The Korean
government incentivized private sectors to find new export markets and enter new strategic
sectors by deeply involving in resource allocation. Next, we will briefly review the role of the
Korean government in terms of structural transformation and explain what made Korea so
successful.
3.2. The Role of Government

Although the Korean government maintained economic-growth-first-policy through export
promotion and continuous industrial upgradings, its policy stance changed significantly over
time. The high periods of industrialization from the 1960s to 1980s have three distinct phases.
In the 1960s, the major policy was to promote rapid growth of manufactured exports. In the
1970s the Korean government announced the Heavy and Chemical Industry Promotion Policy
in 1972 and then aggressively pursued the government-led selective industrial policy. In the
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1980s, the Korean government retreated from an active industrial policy and moved the policy
stance toward macroeconomic stability and liberalization of markets.
3.2.1 The Role of Government in the 1960s
Throughout the 1960s, the major policy of the Korean government was to promote exports
of manufactured goods. It actually started in 1964, more than two years after President Park
took power. The government devalued the Korean Won by 100% in 1964 and reformed the
exchange rate system by adopting unitary floating exchange rate system to align Korean Won to
market value. Along with exchange rate reform, the Korean government introduced a series of
comprehensive export promotion incentives. Exporters were given various incentives in tax,
tariffs, and finance with many promotional schemes. Among many measures to give incentives,
one of the important measures was the tariff exemptions on imported intermediate inputs and
raw materials for export as well as capital equipment for export production. Another was the
access to bank loans for working capital needed for export activity, often with preferential
interest rates. Other than these, export firms were given corporate income tax reductions for
export firms, wastage allowance, reduced rates for electricity and rail transport, and export
credit insurance, etc.50 The government also set up monthly export promotion meetings to
enhance the effectiveness of the export promotion. The meeting, chaired by the President and
attended by high officials of the government and business leaders, reviewed current issues and
accommodated necessary measures to reach the export targets made early in the year. It
facilitated the coordination among ministries and communications between political leadership
and private sectors. The Korean government tried to bring about social recognition to exporters
by commemorating Export Day and awarding export medals. The Korean government also
established the Korea Trade Promotion Corporation (KOTRA) to provide market information
and help problem-solving for exporters. The short-term export credit system was streamlined so
that exporters can get the automatic approval of loans without having to put up any collateral.
Due to these policy efforts and favorable external condition of the world economy, Korea’ s
export increased from US$ 87 million dollars in 1963 to US$ 3,225 million dollars in 1973,
growth of 36% per annum. Along with export growth of manufactured goods, the share of
manufacturing increased both in production and employment. Within 10 years after take-off, the
share of manufacturing exceeded that of agriculture and the employment share of manufacturing
sector reached more than 20 percent of total employment. We may summarize the success
factors of the Korean government during the 1960s as follows:
First of all, the Park government understood the essence of the market system, the power of
profit motive of private enterprises. Although the government actively invested in infrastructure
and big industrial projects through public spending, the whole export promotion policy was to
50) For detailed export incentives, see Hong(1977)
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motivate the private sectors to move toward production rather than rent-seeking activities. This
spirit of market-based policy framework continued throughout the history of Korean economic
growth. What this meant by market-based policy was that even though the government
intervened in resource allocation, the major economic activities of production and distribution
were carried out by private actors through competition.
Second, to induce private efforts, the Korean government provided a consistent policy signal
for export-orientation. To promote exports, it first removed anti-export bias in macroeconomic
environment by reforming the exchange rate system and devaluing the exchange rate to correct
the overvaluation of the Korean Won. Export Day and Export Award systems were set up to
remove the social hostility against businesses and made the social recognition of positive role of
business in nation-building.
Third, export promotion was not a bunch of fragmented and nominal measures but a
comprehensive and effective incentive system. The incentive system covered all available
measures such as tax, finance, tariffs, and administrative supports. The policy measures were
designed so that private sectors realize real benefits from the measures induced by their
performances.
Fourth, the export promotion measures did not distort the market allocation much but, in a
sense, amplified the market signal. Most measures helped export activity without discriminating
the firms and the amount of incentives tended to depend on export performance that of the
firms. For example, export credits were granted automatically based on export performance and
thus minimized the discretionary decision-making process by bankers and government officials.
Also, the tariff exemptions of imported goods for exports gave an immediate rebate when proof
of export was provided. These kinds of non-selective but general measures of export promotion
were both market-based and performance-based.
Fifth, the Korean government was active in correcting the market failure rampant in
developing countries, particularly failures in information and coordination. The monthly export
meeting not only coordinated government policies but also disseminated the information on new
export markets and new products. At the meeting, necessary supportive measures were
identified and appropriate actions facilitated without a red tape.
Sixth, the promotion of manufactured export was consistent with comparative advantage of
Korea in the 1960s. The major export products in the 1960s were labor-intensive manufactured
consumer goods such as textiles, plywood, and wig which needs not so much capital installment
with simple technology. The choice made by Korea resulted large underemployment faced
shortage of hard currency hit right on the opportunity of high return. Although it is obvious
from the current standpoint, it was not so obvious at that time. The Park government did not
adopt the policy stance of export-orientation for years immediately after coming to power but
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discovered potentiality of export in the economic growth through experience.
Finally, the Korean government not only promoted exports but also tried hard to strengthen
the industrial capacity of the country. In 1965, the government increased the interest rate which
raised real interest at a positive level and increased private savings and discouraged
unproductive use of bank credits. The saving ratio continued to increase from a low level of
14% in 1963 to as high as 40% in 1988. However, there have always been huge demands for
investment. It is due to both virtuous cycle of the economic growth and government’ s sharing
risk with private sectors through guaranteed private borrowing from abroad. Rodrik(1995)
argues that the investment growth synchronized with GDP growth might have played a much
significant role rather than export promotion by itself. Although there may be some lags and
leads between two variables, dynamically both variables are interrelated in the path of economic
growth. Export growth should accompany investment growth for expansion of the domestic
industrial capacity to be sustained. In this respect, priority of the Korean government’ s initial
action of giving industrial investment cannot be ignored. However, it could not have been
successful without its compatibility with the given economic situation and supporting
institutions.
To facilitate the resource mobilization and efficient allocation, important institutional

arrangement was made in the early 1960s. In 1961, the Economic Planning Board (EPB) was
created. The head of the board was made deputy prime minister by giving an official power
over other ministers. EPB became the center of policy coordination by undertaking the tasks of
the budget process, collection of statistics, formulation and implementation of development
plans. In 1965, the government established the National Tax Office to streamline tax
administration and increase tax revenues.
3.2.2 The Role of Government in the 1970s
Compared with market friendly policies in the 1960s, the policies in the 1970s were more
interventional and selective. The policy stance changed dramatically in the 1970s with
announcement of the Heavy and Chemical Industry (HCI) Drive. The HCI drive shifted the
policy’s focus from exports of light labor-intensive consumer goods to heavy and chemical
products. The policy was a response to the political urgency to improve national defense
capabilities against the reduction of US troops stationed in Korea and the economic need to
upgrade the industrial structure to lessen competitive pressure from emerging developing
countries with cheap labor. The HCI drive was quite selective in choosing industries and firms
to be promoted. It selected shipbuilding, automobiles, steel products, machinery, non-ferrous
metals, and electronics as leading industries by benchmarking Japanese experience of the
industrial transformation. The government also selected specific companies, which became
‘Chaebols’ , the Korean business conglomerates, to implement the plans of government. Then
the government provided these strategic sectors with bank loans at preferential interest rates,
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foreign loans under government guarantee, tax incentives including investment tax credits,
accelerated depreciation allowances, and tax holidays. Unlike light industries promoted during
the 1960s, the HC industries required huge amounts of capital and more sophisticated
technologies. In addition, the gestation periods were much longer. Thus, risk of investment in
HCI was so high that such a big scope of industrial upgrading would not have been possible
without the lead of the government. To urge the private sector’ s risky investment, the
government utilized the so-called policy credit through bank loans by government’ s special
banks for industrial development, allocation of the National Investment Fund (NIF) established
to direct financial resources to strategic sectors, and commanding commercial bank credit
allocations. It was the compulsory mobilization of financial resources to support strategically
selected sectors and firms. They mostly consist of long-term credits with favorable rates which
made the real interest rate negative in the years of high inflation.
The industrial policy in the 1970s is now evaluated as the typical state-led industrial
promotion. The government selected target industries and companies based on the strategic
plan, which restricted entry into the targeted sectors, provided general financial support,
guaranteed foreign exchange loans, and monitored performances. They did not rely on the
market mechanism and repressed the financial market which distorted allocation of resources.
Thus, the industrial policy in the 1970s was considered to cause severe macroeconomic
instability and structural imbalances and, consequently, brought financial crisis in the late
1970s. Affected by the second oil shock and setback in the world economic condition, HCI
projects were found to be excessive and unsustainable. Major HCI companies faced severe
financial losses due to idle capacities. The government called off the HCI drive in 1979 and
shifted the policy stance toward economic stability through market liberalization. The following
Chun government took a number of measures for industrial rationalization. Another point to be
noticed with the HCI drive is the establishment of‘Chaebols’helped by risk-sharing of
government in private investment. This kind of government and big business partnership in
venturing new projects installed a propensity to expand aggressively and excessively in Korean
big companies and resulted moral hazards. It became one of the major causes of economic crisis
in 1997. In addition, the economic concentration on big companies has been the economic and
social concern until now, although Korea enacted the Monopoly Regulation and Fair Trade Act
in 1980.
Despite the negative effects, the HCI drive helped Korea to upgrade industrial structure by
building foundations for major industries at this moment. It strengthened industrial linkages and
increased value-adding by export industries. The HCI share of total manufacturing value-added
increased from 38% in 1974 to 80% in 2000. It also helped Korea to usher in an efficiency-
based economic growth by expanding science and technology infrastructure and fostering
human resources. Chaebols, the major beneficiaries of the HCI drive, became focal centers of
innovation and market expansion in globally competitive electronics, automotive and
shipbuilding industries.
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Overall, the industrial policies in the 1970s are still controversial. The interventionists such
as Amsden (1989) argued that Korea could not have achieved current industrial prowess
without government intervention. According to Amsden, the side effects of macroeconomic
instability and economic concentration are the necessary evils arising from dynamic process of
industrial transformation. In contrast, many skeptical questions could be raised by many such as
Yoo (1989):“Is the success of industrial transformation mainly due to industrial policies? Then,
why do we see more failures than success from the cross-country observations? Does the key
success factor lie in other than government intervention?”Yoo, 1989. We cannot have the
definite answers to these questions but, judging retrospectively from the current situation, it is
without doubt that industrial promotion initiated by active government intervention in the 1970s
laid the foundation for major export industries at present. Korea could achieve a strong
industrial base without having interventionism interrupt the long run growth pattern. What
could be the reasons for Korea’ s success in industrial upgrading despite the burden of
interventionism and high chance of government failure?
First of all, as previously mentioned, industrial promotion, initiated with the purpose of
import substitution, targeted the world market at the beginning of the promotion, so that it may
be called export substitution. Thus, these HC industries were expected to meet the international
criteria. The export-orientation was the right response to the economic situation. Due to the
nature of HCI for which economies of scale are critical, the small domestic market of Korea
could not accommodate the capacity big enough to exploit the scale of economy.
Second, although the government took the initiative, the private sector managed the business
unlike many other developing countries which relied on state-owned enterprises. The private
enterprises accumulated the organizational and technological assets to manage the unfolding
dynamics of industry. These kinds of managerial knowledge could not be expected from the
government sector. Since the 1980s, with the policy stance shifting from the directive to the
indicative, the private sector took over the role in upgrading industries and faced competition as
the government steadily liberalized the domestic markets. Thus, the market competition was set
in to reduce the room for rent-seeking behavior that selective industrial promotion might fall
into.
Third, the HCI drive was pursued with careful consideration on the demand condition and
industrial linkages. The HCI projects were not so much different from the market process of the
industrial development through industrial linkages. The growth of labor-intensive industries
induced the increasing imports of intermediate inputs and equipment, which became the
purpose of promotion. That is, the Korean government tried to maximize the spillover effect of
backward industrial linkage. Therefore, critiques of the HCI drive argues that free market
system could have produced similar industrial transformation. The fact that Korea developed an
internationally competitive HCI sector might mean that Korea would have undertaken the task
of industrial transformation anyhow. That is, HCI drive puts the task forward just a few years.
157
In this regard, Korea was different from other unsuccessful countries that rushed to promote
upstream industries without considering industrial linkage and market conditions.
To maximize the effects of industrial linkage and facilitate the provision of infrastructure,
the HCI projects were based on a cluster approach. The industrial complexes such as Yeochon
(petrochemical), Changwon (machinery), and Gumi (electronics) were set up to provide not
only production sites but also resources for engineering and technical assistance. National
universities in the region were supported to specialize in the related industries. To supply high-
quality technicians, the government established a number of technical high schools and
expanded technical and vocational training.
Fourth, the HCI projects were planned with relatively concrete goals and budgetary
considerations. President Park himself showed continuous interest in the proceedings and
frequently visited sites such as plants and industrial parks. The government monitored the
financial sector and private businesses with full commitment. All foreign loans had to be
authorized by the government. Korean companies seeking foreign loans had to apply for
approval from the Economic Planning Board. The Ministry of Commerce and Industry provided
its opinion to the EPB regarding technical content of applied projects. The Ministry of Finance,
for its part, reviewed the financial status of borrowing firms. Through the Deliberation Council
for Foreign Capital Mobilization, EPB then determined the appropriate amount of foreign loans
for each application, based on policy priorities.51
Fifth, the HCI decisions were made mainly on technical grounds even if there were not
always the right technical grounds. Political considerations played little role in deciding which
sectors were to be emphasized. President Park insulated the economic technocrats from the
lobby by politicians and interest groups so that they can formulate national goals and implement
policies based on economic reasoning. In addition, the bureaucrats were given social respect
and were relatively well compensated. The government’ s adherence to merit-based
recruitments, promotions of bureaucrats and ensured job security attracted the best talents and
induced integrity for technocracy.
3.3. Lessons from the Korean Experience

It is doubtful that Cambodia can copy and follow the detailed policy experience of Korea
since the two nations have quite different economic conditions. There is no ready-made model
to be taken even though sometimes benchmarking helps. As Korea’ s experience shows, Korea’s
industrial policy cannot be typified just as export-promotion or just state-led development.
Korea underwent a drastic shift from market-friendly phase in the 1960s to a strong government
51) Quoted from Lim(2010).
158
intervention in the 1970s and finally a liberalizing phase towards the market.
However, the case in Korea can give some lessons on general directions for successful
economic policies.. First of all, the role of government is basically the catalyst to trigger
potential of the private sectors. To achieve successful long-term growth, enhancement of
industrial capability is indispensable. An economy should continuously adapt itself to the
changing environment through learning and innovation. The ability of adaptation and
diversification is the indicator of industrial strength. Although the government is able to pick
the winners and assign the private sector in various economic decision-makings, it has
intrinsical limitation in analyzing market forces and discovering business opportunities.
Therefore, the success of industrial policy depends on how to induce private entrepreneurship to
socially productive activities. The reason why manufactured export is important is because it
provides ample chance for private sectors to learn how to run the business and adopt new
technologies. Korea’ s insistence on self-sufficiency by relying on indigenous entrepreneurs
rather than foreign invested enterprises brought up current global companies which became one
of the essential elements of Korea’ s industrial competitiveness. Under the era of global
production sharing, it may not be right to insist on self-sufficiency. Instead, more conscious and
concerted efforts should be made to cultivate favorable industrial environment to invite higher
value-adding industries into the country in addition to increaseing local contents of products by
leveling up the local industrial capabilities. The government should make complementary
investments in human capital and infrastructure, streamline administration to make the country
business-friendly, and finally, stimulate self-discovery process of the private sector through
industrial policy measures.
In regards to industrial promotion, government intervention should carefully maintain

balance between risk of static inefficiency and benefit from the dynamic efficiency. Korea
aggressively pursued industrial transformation through deliberate efforts led by the government
in the 1970s. As the controversy on the HCI drive implies, excessive intervention accompanies
macroeconomic imbalance and economic distortion in various ways such as waste of resources,
idle capacity, rampant rent-seeking behaviors, corruption, exacerbated income disparity, etc. To
make positive changes, the policy should be congruent to the technological and social
capabilities of the country. The policy should avoid the superfluous bigness with little spillover.
The design of policy could be easier than the implementation, which requires capable
technocrats free from interest groups. In addition, the policy should reflect changing economic
conditions through pragmatic adjustments of policy measures and processes and continuous
communication with market players. To realize this kind of desired policy framework, the
policy goal should be shared by political and business leaders, bureaucrats, and citizens of the
country.
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4. Cambodian Economic Structure and Policy
Framework
4.1. Industrial Structure of Cambodia
4.1.1. Industrial Structure
Industries in Cambodia experienced strong growth in the early 1960s, driven by

manufacturing, for which new factories were built. However, during the Khmer Rouge regime
(1975-79), the whole sector became unproductive; most of the manufacturing activities were
destroyed, and people were evacuated from Phnom Penh and forced to work in rice fields in the
countryside. In the 1980s, some manufacturing activities were resumed with assistance from the
Soviet Union and Vietnam. All factories were owned by the state. Industrial products were
produced for local consumption or traded with the Communist bloc.
In the late 1980s, Cambodia began freeing its economy and opened their market to other
countries in the nearby region and the world, especially Thailand. Cambodia’
s reintegration into
the regional and international community was sealed when it joined the Association of
Southeast Asia Nations (ASEAN) in 1999, and the World Trade Organisation (WTO) in 2003.
Membership of the WTO is expected to provide accessibility the country with larger markets,
but it also has to compete at the global level, especially in manufacturing-a challenge for
Cambodia.
Table I-2-6 | Structure of the Cambodian Industry (at 2000 prices, billion riel)
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Mining 20.1 26.6 33.5 37.4 47.0 55.5 68.9 87.0 100.9 108.7 125.9 151.1
Manufacturing 1445.5 1730.5 2254.8 2597.5 2971.7 3337.4 3926.7 4308.6 5059.8 5509.3 5681.1 4799.9
Food, Beverages &
446.4 467.6 449.4 460.7 448.9 469.8 445.2 485.4 501.6 517.3 547.8 580.7
Tobacco
Textile,Wearing Apparel
547.5 771.2 1297.1 1665.7 2021.4 2360.3 2946.8 3216.8 3873.1 4260.8 4354.6 3962.7
& Footwear
Wood, Paper &

153.6 146.5 132.4 93.6 93.8 80.4 83.8 92.2 99.9 104.8 110.1 115.6
Publishing
Rubber Manufacturing 54.8 62.9 69.2 69.7 69.2 62.4 57.0 51.9 53.6 58.8 64.2 70.3
Other Manufacturing 243.2 282.4 306.7 307.8 338.4 364.4 393.9 462.3 531.6 567.6 604.5 651.4
Electricity, Gas & Water 50.8 54.4 58.1 69.5 75.5 82.3 91.5 103.0 135.5 151.2 164.1 178.0
Construction 419.6 534.6 731.6 718.3 912.8 1014.4 1147.9 1401.1 1681.2 1794.7 1898.8 1993.7
Industry 1936.1 2346.2 3078.0 3422.7 4006.9 4489.6 5235.1 5899.7 6977.5 7563.9 7869.8 7122.7
Source: MEF 2010
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Over the last decade, industrial growth has been faster than that of agriculture or services.
From 1998 to 2008 it grew about 14.2 percent per year, services 9.9 percent and agriculture 4.2
percent. Year-on-year, industry experienced large fluctuations in the 2000s and registered a
negative growth rate in 2009. Its share of GDP has doubled, from 13.5 percent in 1998 to 27.5
percent in 2008. It employed only 6.8 percent of the country’ s labour force in 1995 and 15.4
percent in 2007. The main industries are manufacturing, construction, electricity, gas and water
and mining. In 2008, manufacturing accounted for 72.8 percent of the industrial output,
followed by construction (23.7 percent), electricity, gas, water (2 percent) and mining (1.5
percent).
The garment sector accounted for the largest share of manufacturing-representing 66

percent for the period of 1998-2008 (an average of 10.5 percent of Cambodia’ s GDP). This
subsector has been the most robust in industry, in terms of the annual growth rate, and has
become a major source of employment and foreign exchange earnings. Its share of total exports
ranged from 70-80 percent in the years prior to the onset of the global financial crisis in the
United States-Cambodia’ s top destination for its garments-in 2008. The sector employed more
than 352,000 mostly rural women, or about 4 percent of the total workforce and 38 percent of
the total employed in manufacturing in 2007. In total, an estimated 1.7 million people depend
on the garment industry directly or indirectly (Tong 2010c).
Figure I-2-2 | Structure of the the Manufacturing Sector, 1993-2009
Source: Ministry of Economy and Finance
161
The development of Cambodia’ s garment sector is mainly due to preferential access to
certain markets, such as the most favoured nation tariff (5-30 percent) provided by the European
Union and generalised system of preference rates of around 12 percent granted by the United
States. Such preferential treatments have attracted foreign investors (Tong, 2010). Despite the
expiry of the preferential quota under the Multi-Fibre Agreement in January 2005, Cambodia’ s
garment industry experienced robust growth for the following four years, reaching USD2.8
billion in 2008. This implies that Cambodia has a strong comparative advantage in the garment
industry (Cuyver et al., 2006).
The global financial crisis hit Cambodia’ s garment sector severely. Since the fourth quarter
of 2008, there has been a significant reduction in the number of factories and their production,
as well as their subcontracting with local small and medium textile establishments (Siang,
2009). The number of operating factories fell to 262 in May 2009 from a peak of 310 in
September 2008. Cambodia’ s total garment exports declined continuously between November
2008 and May 2009. Approximately 62,000 workers (about 18 percent of the total) were laid off
between September 2008 and May 2009. Total wages dropped from USD 29.28 million in
September 2008 to USD 22.64 million in May 2009.
The construction sector, the second largest subsector, is one of the four pillars of Cambodia’
s
economy. Its share of GDP averaged 5.6 percent during 1998-2008. During the same period, its
growth fluctuated sharply; negatively in 1998 (-15.7 percent) due to the political instability in
1997 and the Asian financial crisis in 1997-98 and, again, in 2001 (-1.8 percent). Thereafter, it
recorded an annual growth of 18.7 percent for the period of 2002-06 before decelerating to 6.7
percent in 2007 and 5.8 percent in 2008. Construction is closely related to real estate. Most
construction projects have been in commercial and residential real estate, which is
predominantly foreign-financed-implying that the sector is vulnerable to external shocks. The
significant decline in 2007 and 2008 is a sign of overheating (rising prices of labour and
construction materials) and concerns about a real estate bubble (World Bank, 2009). The global
financial crisis burst the bubble in the real estate market, which directly reduced construction
and demand in general. With the global tightening in liquidity, foreign investors have suspended
or cancelled their investments in Cambodia. For example, a great number of large construction
projects financed by South Korean companies have been cancelled or scaled down due to the
depreciation of the won and a liquidity crunch were shown in parent companies. Consequently,
construction was expected to decline by 5.7 percent by the end of 2009 (Jalilian et al., 2009).
162
4.1.2. Current Situation of the Main Four Sectors
4.1.2.1. Agriculture52
Agriculture in Cambodia is characterised by the coexistence of traditional, non-mechanised

peasant farming on small plots of land and large technology-based farms producing for export.
However, the sector is fundamental in raising rural incomes, especially among the poor. It
contributed 32 percent of the country’ s GDP in 2008 (MEF, 2010), employing about 72.3
percent of the labour force. Therefore, this sector is crucial for sustained economic growth,
poverty reduction and development; the sector has potential for growth through intensification
and expansion of cultivated land.
Agricultural growth is lower than that of industry and services. Between 1998 and 2008, it
grew 4.2 percent per year, while services grew 9.9 percent and industry 14.2 percent.
Agriculture experienced large fluctuations in the 2000s and sometimes registered negative
growth in the first half of the decade. However, the sector has been consistently positive since
2005. In 2009, agricultural growth was around 5 percent, while GDP growth was estimated
between -2.2 and +0.1 percent.
Figure I-2-3 | Percentage Distribution: Agriculture
Source: NIS(2008)
52) This section is heavily dependent on Tong (2010).
163
Figure I-2-4 | Shares of Agricultural Crops
Source: NIS(2008)
Because of its tropical climate, ample unused arable land and large unskilled labour force,
Cambodia has comparative advantages in agriculture. Promoting agriculture and agro-industry
is widely recognised as the best strategy for broadening the economic base to offset
macroeconomic shocks, ensure food security, improve the livelihoods of rural people and
reduce poverty.
In Cambodia, crop farming contributes to the largest share of its agricultural output,
followed by fishing, livestock and forestry. In 2008, crops accounted for 53 percent of
agricultural output-12 points more compared to that in 1998, partly due to the decline in fishing
and forestry. The main agricultural products are paddy, maize, cassava, soybeans, tobacco and
rubber. Of these, rice is the most important staple food in Cambodia, averaging 55 percent of
total agricultural production, or 9 percent of GDP, from 1994-2006. Paddy production doubled
between 1994 and 2008, due to increases in both productivity and cultivation. However, the
annual growth rate of paddy production has fluctuated sharply since 2002, and then grew at a
slower rate, averaging 1 percent, in the late 1990s. Paddy production is heavily reliant on
weather. For example, total paddy production amounted to 4.1 million tons in 2004, a drop of
11 percent from 2003 due to severe drought in many provinces (NIS 2006, 2007). In 2005,
paddy production hit a record 5.9 million tons, a jump of 44 percent from the previous year
because of favourable weather conditions and unusually low yields in 2004.
On average, paddy yields per hectare grew at 4.8 percent per year (for the period of 1994-
164
2008)-the highest rate among Cambodia’ s neighbouring countries. Yield increased from 1.49
tonnes/ha in 1994 to 2.75 tonnes/ha in 2008. This largely reflected improved access to fertilisers
and other inputs, rather than diversification of seeds (Agrifood Consulting International 2006,
cited in Yu and Fan 2009). Despite this improvement, Cambodia is among the lowest in terms
of paddy productivity in the East, South-East and South Asia. The low yield is partially
explained by low land productivity, implying a need for further improvement in production
technology (Yu & Fan, 2009). On the other hand, the current low yield suggests that the
potential for productivity growth is high. Therefore, improvement in paddy yield should be
defined as a key source of agricultural growth.
Paddy production reached the level of national self-sufficiency in 1995, and the surplus has
expanded significantly in the last four years i.e. 2005-2008, topping 2.8 million tonnes in 2008,
equivalent to 1.6 million tonnes of milled rice. Following a 20-year break caused by war and
political isolation, Cambodia resumed its rice export in 1995 (Hing et al., 2007). However, the
official rice export data for 2000-08 from the Customs and Excise Department show that only a
small amount of rice is exported, which does not reflect the surplus. Official data state that
Cambodia exported 450 tonnes of milled rice in 2000, about 15,000 tonnes per year in 2001-02,
and 4950 tonnes per year in 2003-08. Thus, only 1 percent of surplus paddy was exported as
milled rice between 2000 and 2008. A few studies note that a large proportion of surplus paddy
was transported informally to Thailand and Vietnam for milling and re-export (Hing et al.,
2007; Sin, 2009). On the other hand, the World Bank (2003) reported that Cambodia exported
approximately 60,000 tonnes of rice in 2001-four times higher than the official figure. During
the same year, about 450,000 tonnes of paddy, worth USD 69.7 million (if traded through
formal channels) were unofficially transported to Thailand and Vietnam. The combined rice and
paddy export figures represent 67 percent of the surplus paddy (812,000 tonnes) in that year-
implying that the remaining 33 percent remained somewhere within the country. Taking into
account potential rice production, increasing rice value-added is crucial to agricultural growth
and poverty reduction.
The government has prioritised increasing agricultural productivity and diversification and
promoting agro-industry. However, it has shifted its emphasis from extending the cultivated
area to intensive farming. The share of agriculture in the national budget was an average of 2
percent for 2008-2013, 0.2 percentage points lower than that in 1999-2007 (Royal Government
of Cambodia, 2009). The allocation for agriculture has not changed substantially during the last
decade. Government policies for 2009-2013 aim to achieve a high and sustainable paddy growth
through continuing to issue land titles, particularly to farmers, increasing irrigation and
improving agricultural water management systems, encouraging farmers to adopt new
technology, enhancing cooperation of the government and non-government organisations, using
paddy land effectively and accelerating land concessions to smallholders.
165
4.1.2.2. Garments and Textiles
The number of garment factories increased from only seven in 1994 to 310 in September
2008. Firms employed an average of more than 1000 workers during 2004-2009 (Table I-2-7).
A large number of poorly educated workers, especially rural women, have entered the labour
market as migrants whose employment and remittances to home areas have helped to reduce
poverty.
Table I-2-7 | Cambodian Garment Factories
1994 2004 2005 2006 2007 2008
Number of active factories 7 206 230 290 288 285
Number of Cambodian Employed ('000) 246 258 326 348 327
Average employee per factories 1194 1122 1124 1208 1147
Source: GMAC-ILO (2010)
Over 90 percent of the garment sector was established by foreign investors from Taiwan,
Hong Kong, China, Korea, Malaysia and Singapore (Figure I-2-5). Natsuda et al. (2009) argue
that foreign-owned garment factories can enter and leave a country very rapidly; for example,
almost all East Asian companies left Mauritius-one of sub-Saharan Africa’ s most important
garment producers-after the end of the Multi-Fibre Agreement. The garment sector is likely to
remain vulnerable because production, export and management decisions are made in distant
offices (ADB, 2004). Nonetheless, Cambodia has continued to increase its exports of textile and
garments.
Figure I-2-5 | Ownership of Garment Factories, by Country
166
According to the Ministry of Commerce, the value of garment and textile exports has tripled,
from USD 962 million in 2000 to USD 2,938 million in 2008 (Figure I-2-6). However,
Cambodia’ s garment and textile exports dropped 14 percent to USD 2,565 million in 2009,
largely due to the global financial crisis. Until the end of Multi-Fibre Agreement quotas on
January 1st, 2005, the rapid expansion of garments and textiles was mainly due to the
generalised system of preferences and most favoured nation treatment. After removal of the
quota, the sector depends on a strong comparative advantage, i.e. cheap and abundant labour
and tax incentives (import tax exemption and a holiday from profits tax).
Figure I-2-6 | Cambodian Commodity Exports (USD million)
Source: Ministry of Commerce
Figure II-4-6 shows the destinations of Cambodia garment and textile exports for 2000-09. The
top destination is the US, accounting for more than 60 percent over 2000-08 and 59 percent in
2009, compared to approximately 25 percent for the European Union. The concentration on the
US market reflects the industry’
s serious vulnerability to external shocks (Jalilian et al., 2009).
Although the Cambodian garment industry has developed rapidly since the late 1990s, it has
also faced both domestic challenges and external competitors such as China, India, Bangladesh,
Vietnam and Indonesia. Poor governance has been a major obstacle in further development. The
study by EIC (2007) noted that unofficial costs in the garment industry were about 4 percent of
total production costs. Second, the complicated bureaucracy is highly likely to reduce industrial
competitiveness. To export, companies operating in Cambodia require an average of eight
documents, 10 signatures and 43 days-the longest among its competitors (World Bank, 2006).
167
Third, garment factories in Cambodia mainly focus on“cut, make and trim” -the lowest end of
the garment value chain-while most of the raw materials and accessories are imported from
China, Hong Kong and Taiwan. Thus, the lack of support from the government and investment in
textiles is another challenge (EIC, 2007). Fourth, the garment sector has long been plagued by
the high cost of utilities, especially electricity, which is produced by fuel-consuming generators
with very limited capacity (Saing, 2009). Werner International (cited in USAID 2007) reveals
that the average cost of electricity in Cambodia is twice as higher than in China, India, Pakistan and
Indonesia. Fifth, Cambodian industry’ s labour productivity is lower than that of all ASEAN
countries (APO, 2009). Improving manufacturing labour productivity by training the current low-
skilled workforce and/or using modern sewing equipment is needed to keep the sector competitive.
Figure I-2-7 | Destinations of Cambodian Textile Exports
Source: Ministry of Commerce
4.1.2.3. Tourism
The tourism sector in Cambodia has been growing at a steady and exponential rate in the last
decade (Figure I-2-8) and has become the second largest income source for the Cambodian
economy, after the garment sector. The development of this sector is mainly driven by political
stability, World Heritage monuments, especially Angkor Wat, improved tourism infrastructure
and the government’ s policies on tourism. As a result, the number of tourist arrivals reached 2.2
million in 2009-up from 0.17 million in 1994 and 0.46 million in 2000 (Figure I-2-9)-with
two-thirds of visitors coming from East Asia. The number of tourist arrivals declined in 1997
and 2003-mainly due to political instability in 1997 and a combination of events including the sever
168
acute respiratory syndrome (SARS) epidemic and anti-Thai riot in 2003. The study of the World
Travel and Tourism Council (2007) revealed that tourism generated USD 718.3 million, equivalent
to 9.3 percent of GDP, in 2007. During the same period, the sector provided 1,108,000 jobs.
Figure I-2-8 | Number of Tourists, 1994-2009 (In thousands)
Source: Ministry of Tourism
Figure I-2-9 | Top Five Sources of International Arrivals in Cambodia (’

000)
169
In 2007, South Korea was the top source of tourist arrivals in Cambodia (16.4 percent of total
international arrivals), followed by Japan (8.0 percent) and the United States (6.8 percent). Hing
and Tuot (2007) emphasise that an agreement on direct flights from South Korea to Cambodia
and the strengthening of economic and cultural cooperation between the two countries lie behind
the rapid growth of tourists from South Korea.53 Nonetheless, the number of tourists from South
Korea declined by 19 percent in 2008 and 26 percent in 2009, while the number of tourists from
Vietnam jumped by 67 percent in 2008 and 51 percent in 2009. As a result, Vietnam became the
top source of international tourist arrivals in Cambodia in 2009 and is expected to remain so in
2010. The change of the origin of international tourist arrivals will probably affect revenue in the
sector due to income differences. According to the IMF (2010), Vietnamese GDP per capita was
USD 1068 in 2009, compared with USD 17,071 for South Korea.
Hotels and guest houses have also grown rapidly. In 2001, there were 247 hotels with 10,804
rooms and 370 guest houses with 3,899 rooms, compared with 451 hotels with 23,010 rooms
and 1,018 guest houses with 14,512 rooms in 2009.
Table I-2-8 | Hotels and Guest Houses
2001 2002 2003 2004 2005 2006 2007 2008 2009
Number 247 267 292 299 351 351 395 398 451
Hotel
Room 10804 11426 13201 14271 15465 17914 20470 20678 23010
Guest Number 370 509 549 615 684 742 891 925 1018
house Room 3899 6109 6497 7684 9000 9166 11563 12180 14512
Although the number of tourist arrivals, hotels, and guest houses has expanded rapidly over the last
10 years, the distribution of tourism benefits are highly skewed because the majority of tourists visit
only major cities, i.e. Siem Reap, Phnom Penh and Sihanoukville (Ballard, 2005). For this reason, the
impact on local economy, particularly on poverty, is extremely limited. In this regard, the government
has continued to improve physical infrastructure in order to expand tourism to other destinations (RGC,
2009). In addition, it plans to establish a Cambodia Tourism Marketing and Promotion Board to enable
public-private partnerships and cooperation for tourism development, and tourism information offices
or counters at international borders to facilitate and attract more visitors (RGC, 2009). Tourist stays are
relatively short, averaging 6.5 days, compared with 8.6 days in Thailand. Hence, increasing the number
of days tourists stay and the amount of money they spend is another challenge.
According to RGC (2009), further development of the tourism sector faces a number of
53) Korean Air opened a route to Phnom Penh and Siem Reap in November 2006. The first cultural exchange between Cambodia
and South Korea, the Angkor-Gyeongju World Culture Expo, was held from 21, November 2006 to 9, January 2007.
170
challenges: further development of aviation infrastructure, including improvement of flight
safety; the high cost of tour packages to Cambodian destinations; lack of competition in tourism
services (e.g. accommodation, transportation and communications); ratings of hotels, resorts
and guest houses not following international standards; improvement of physical infrastructure
connecting to historical-cultural and eco-tourism destinations; establishment of strong backward
linkages with local suppliers and between tourism and agriculture; mitigating the risks and
adverse effects of tourism on the environment, especially in Siem Reap and Sihanoukville.
4.1.2.4. Construction and Mining
Construction materials, such as simple bricks, are manufactured locally. As the expansion of
urban areas and industrial estates continues, the demand for construction materials will increase.
In order to translate this into domestic income and employment, production capabilities need to
be boosted for construction materials including secondary products, such as concrete pipes,
slabs and panels and galvanised iron sheets and more sophisticated bricks and tiles.
Construction materials are bulky and heavy and therefore suitable for import substitution.
Highly bureaucratic licensing in construction may also reduce competitiveness of the sector.
It is estimated that it takes approximately 710 days to get all the construction permits required to
complete a project compared with 200 days in Vietnam and 150 in Thailand (UNDP, 2009).
Construction companies in Cambodia claim they often need to pay unofficial charges to shorten
time for regulatory approval. Building standards seem relatively lax. Foreign construction firms
claim they often employ construction standards from their own countries, and projects are not
perceived to be monitored effectively by authorities. This lack of regulation could lead to poor
quality and dangerous construction.
Cambodia’ s mineral resources remain largely unexplored. To attract domestic and foreign
mining companies, the Law of Minerals Management and Mining was promulgated on 13 July
2001. Under the country’ s mineral exploration policy, investors are granted an exploration
licence by the Council for the Development of Cambodia (CDC) for a period of two to six years
and then prepare a feasibility study in a designated area; the Ministry of Industry, Mines and Energy
provides assistance with technical recommendations. Following a successful exploration, investors
and companies are required to submit a master project plan for mine development. If it is successful,
the CDC grants a mining licence. Royalties and surface rentals are levied on mined minerals.
Over the past few years, foreign companies from Australia, China, South Korea, Thailand and the
US have participated in Cambodian mineral exploration-both land-based minerals and offshore oil
and gas. More recently, the government has promoted and facilitated investment in mining due to the
discovery of important minerals including chromium, bauxite, copper, gold, iron ore, nickel,
gemstones, limestone, tungsten, oil and gas. As a result, mining has shifted from small-scale digging
by local communities to full-scale extraction by large companies. The government has awarded
171
exploration licences for more than 100 different sites, and the process seems to be accelerating.
Mining contributed just 0.41 percent to the country’s GDP in 2006 (the latest year for which
data are available), 0.02 percentage points more than in 2005. It employed an estimated 19,000
workers in 2005 and 20,000 in 2006, accounting for only 0.2 percent and 0.3 percent of total
employment respectively (IMF, 2008).
4.2. Industrial Policy Framework

4.2.1. General Industrial Policies
The government has produced many development plans: the Socio-Economic Development
Plan 1996-2000, Socio-Economic Development Plan 2001-05, Public Investment Programme
1996-98, National Poverty Reduction Strategy 2003-05, Cambodia Millennium Development
Goals, National Strategic Development Plan (NSPD) 2006-10. The NSPD (2006-10) elaborates
on the goals and policy priorities laid out in the Rectangular Strategy, which covers many
aspects of the economic growth including governance, enhancement of agriculture, private
sector growth and employment, rehabilitation and construction of physical infrastructure and
capacity building and human resource development. The NSDP (2006-10) incorporates various
policy documents in order to provide the framework for growth, employment, equity and
efficiency in reducing poverty and achieving sustainable development.
Figure I-2-10 | Rectangular Strategy
Source: Royal Government of Cambodia (2009)
172
The government’ s industrial development action plan (1998-2003; cited in RGC 2002) had two
goals: supporting the development of export-oriented industries and the development of import-
substitution of selected consumer goods. These goals were to be achieved by promoting: (1)
labour-intensive industries such as garments, toys and footwear, (2) natural resource-based
industries such as fish and meat processing, cement and tiles and bricks, (3) small and medium
enterprises, (4) agro-industries by strengthening the legal framework for longer term land
management, providing tax incentives for facilities to process agricultural products, (5)
technology transfer and upgrading the quality of industrial products, (6) establishment of
industrial zones by developing infrastructure, improving service quality and encouraging
investments, and (7) culture- and nature-based tourism.
World Bank (2009) report reveals that Cambodia has many types of industrial policy
instruments, which are summarised in Table I-2-9. The report also highlights that most
instruments lack accountability and coordination in addition to poorly targeted incentives.
Hence, a priority is to make existing instruments more transparent and accountable.
Table I-2-9 | Industrial Policy Instruments
Instruments Objects / Notes E C/S A

Export quotas for labor Trade preferences granted by US in exchange
■■■ ■■■ ■■■
standards for higher labor standards (monitored by BFC)
Source: World Bank (2009)
Tax holidays Generous tax holidays for a range of sectors ■ ■
Exemprion of inport duties and
VAT for imported inputs used Ditto, but targeted at exporters ■■■ ■■ ■■
for manufactured exports
Unit in Council for the Development of Cambodia
in charge of investment servicing“one
( stop
Investment promotion ■ ■ ■
shop” ) and investment promotion. Investment
promotion activities are almost inexistent
Trade promotion department in Ministry of
Export promotion ■ ■ ■
Commerce, in charge of promoting new exports
Provide a bundle of infrastructers , land, and
Special Economic Zones ■■ ■■ ■
tax exemptions in special zones
Export Market Access Fund Provide matching grants to exports
■■■ ■■ ■■■
(EMAF) undertaking a market access study
Government-Private Sector Identify and address constraints through
■■■ ■ ■■■
Forum public-private dialog
Interventions financed by donors to support
various parts of (usually) agribusinesses’value
Value Chain interventions ■ ■
chains (the assessment would vary with the
specific interventions
Economic Land Concessions Provide state land to investors ■ ■

Source : Ministry of Strategy and Finance
Note : (E) refers to embeddedness; (C/S) to carrots and sticks: and (A) to accountability. See para. 87 and Rodrik
(2008) for a definition. These dimensions are summarily assessed on a 0-to-3 scale (with ■). The
assessment reflects their surrent status, not their potential. Source: Staff assessment.
173
4.2.1.1 Special Economic Zones
The special economic zone (SEZ) scheme was introduced in 2005 by Sub-Decree No. 148
on the Establishment and Management of Special Economic Zones (including export processing
zones and free trade zones) to attract industries that are no longer viable in Thailand, Malaysia,
Taiwan or Japan. SEZ provides a one-stop service via the SEZ administration office, whose
members are representatives from the Cambodian SEZ Board, Customs and Excise Department,
CamControl, the Ministry of Commerce and the Ministry of Labour and Vocational
Training. So far, the government has approved a total of 21 SEZs located along the borders with
Thailand and Vietnam (Koh Kong, Poipet, Savet, Phnom Den) and at Sihanoukville and Phnom
Penh. Of these, six zones have begun operations. All zone developers and zone investors are
provided incentives as summarised in the table I-2-10.
Table I-2-10 | Incentives for SEZ Developers and Investors
Beneficiary Incentives
● Exemption from the profit tax for a maximum of nine years.

● Imports of equipment and construction materials for infrastructure
construction in the zone are exempted from import duties and other
taxes.
● Customs duty exemption on the import of machinery, equipment for
Zone Developer constructing the road connecting the town to the zone, and other public
services infrastructure.
● Temporary import of means of transport and machinery for the
construction of infrastructure.
● Land concession from the state for establishing the SEZ along the
border or in isolated regions.
● The same incentives on customs duty and tax as other qualified

investment projects.
● The zone investor entitled to the incentive on value added tax (VAT) at the
rate of 0 percent shall record the amount of tax exemption for its every
Zone Investors
import. The said record shall be disregarded if the Production Outputs
are re-exported. In case the production outputs are imported into the
domestic market, the zone investor shall refund the amount of VAT as
recorded in comparison with the quantity of export.
● The right to transfer all the income, investments and salaries received in
the zone to banks located in other countries after payment of tax.
● Investment guarantees as stated in Article 8, Article 9 and Article 10 of
Common
the Law on Investment and other relevant regulations.
● Non-discriminatory treatment of foreigners, no nationalisation and no
price fixing.
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4.2.1.2 Trade Policy
In the late 1980s, Cambodia began market liberalisation. The state monopoly of foreign
trade was abolished in 1987, and the foreign investment law was promulgated in 1989, enabling
private companies to engage in foreign trade. In the early 1990s, trade policies were greatly
liberalised, largely removing restrictions on firms and individuals engaging in international
trade, and most quantitative restrictions and licensing of imports were eliminated. In the late
1990s, there was a more deliberate phase of positive steps towards a highly liberal trade regime.
As a member of the Association of South-East Asian Nations (ASEAN), Cambodia is a member
of the ASEAN Free Trade Area and committed to reducing most tariffs on trade with other
ASEAN members. A further tariff reduction and structural reform were implemented after
Cambodia became a full member of the WTO in 2003. Table I-2-11 summarises the main policy
changes in foreign trade policy.
Table I-2-11 | Evolution of the Trade Policy
Year Policy
1960s Exported agricultural products, largely rice, rubber and corn
1970s Virtual collapse of forieng trade
New trading system control the level and composition of trade through quantitative
restriction and state owned trading bodies. Tariffs and trade taxes apply merely for
revenue purposes.
1980s Market-oriented liberalization in the late 1980s, abolishing state monopoly of foreign
trade.
Foreign Investment law was promulgated in 1989 enabling private companies to engage
in forieng trade
From 1993 restrictions limiting the ability of firms and individuals to engage in
1990
international trade were largely remove
1994 All quantitative restriction on trade were eliminated in 1994
1996 Cambodia gains MFN status from the US
Cambodia gains GPS status

1997 IF program commenced to ppromote the integration of least developing countries into
the global economy
April, Cambodia become member of ASEAN. Committed to gradual reduction in most

1999
tariff rate by 2010 for trade with ASEAN members
2000 The application for membership of WTO has led to the rationalization of the tariff structure
2003 Cambodia’
s accession to WTO
2005 US and EU export market quota are set to expire
Quantitative restriction on imports of textiles and apparel products originating in China

2008
expire end of year
Source: Royal Government of Cambodia (2002) cited in UNDP (2004).
175
4.2.1.3 Foreign Direct Investment Policy
As part of trade liberalisation, the government also opened the investment regime to attract
foreign investment. The National Assembly passed the Law on Investment in 1994 and
amended it in 2003. The main objectives of the amendment were to limit discretion, improve
transparency and reduce administrative burdens. It provided more incentives to foreign
investors, as follows. The tax exemption period is composed of a trigger period + three years +
priority period (specified in the Financial Management Law). 100 percent duty exemption on
imported inputs and capital goods if exporting 80 percent of production or located in special
promotion economic zone. 100 percent exemption from export tax. Renewable land leases of up
to 99 years.
4.2.2. Sectoral Policies
We may summarize our study on 4 major growth sectors as shown in Table I-2-12. Even
though these 4 sectors contributed a lot to growth so far, current situations of the 4 sectors are,
compared with other countries, still underdeveloped with low productivity. Even though the
sector specific strategies would be different to remove the sector specific obstacles for further
growth, productivity enhancement through product diversification and more investment in
human resources and infrastructure are generally required.
Table I-2-12 | Development Strategies for 4 Growth Sectors
Garments and Construction and

Agriculture Tourism
Textiles Mining
Ample unused arable

Low-end products; Concentration on Bubble burst in
land and large
Operated by mostly major tourist spots; construction;
Current unskilled labour force;
FIEs; Concentration Short tourist stay Largely
Situation mostly paddy
of export and small amount of unexplored
production; low
destinations; spending mineral resources
productivity
Productivity Diversification of Diversification of

enhancement; Product products and attractions;
Import substitution
diversification through destinations; Expansion of tourist
Strategy of construction
Promotion of agro- Upgrading into high infrastructure;
materials;
industry; Expansion of ends; Inducing more More domestic
cultivation areas FDIs linkages
Supporting Improved access to Preferential market Foreign capital

Historical heritage
Factors fertilizers access inflow
Slow progress in Underinvested

diversification of Infrastructure;
High unofficial costs Highly
Rooms for seeds; Low Unfavorable
of doing business; bureaucratic
Improvement agricultural regulatory and
High utility costs licensing
Technology; Lack of business
irrigation environment
176
4.2.2.1 Agriculture
The government has identified four major areas in which to enhance agriculture: (1)
improving productivity and diversification (including nutrition and rural development); (2) land
reform and demining; (3) fisheries reform; and (4) forestry reform (Rectangular Strategy). The
NSPD (2006-10) elaborates on the goals and policy priorities in the Rectangular Strategy. But
the NSPD (2006-10) is primarily based on a“sector approach”, while in practice various
ministries have been involved. To meet one of the specific targets of the NSDP during 2006-10,
a comprehensive Strategy for Agriculture and Water (2006-10) was developed during 2006. The
Agriculture and Water Strategy can be summarised as follows:
● Ensure favourable preconditions and building on strengths and opportunities by improving

governance, strengthening law and order, strengthening partnership and ownership,
integrating Cambodia into international trade, and promoting private sector investment.
● Strengthen the enabling environment by developing mechanisms for management of land,
water, forest and other resources, draft and enact laws on water resources management
and develop Ministry of Agriculture, Forestry and Fisheries and Ministry of Water
Resources and Meteorology capacities to enforce the laws.
● Mobilise water, land and soil by promoting farm water management through water
harvesting and storage, gravity-fed irrigation systems and technology such as drip
irrigation of crops, soil fertility management and protecting water resources from pollution
and degradation.
● Mobilise human and financial resources by using skilled people effectively and promoting
education, training and extension services.

● Empower people and communities by establishing and supporting farmer water user
communities, assist farmers to establish cooperatives to market agricultural products and

purchase inputs, promote the availability of micro-credit and other funding sources to
allow people to invest in agricultural production and agri-business and encourage
community organisations to participate in the planning and operation of community water
supply, water management infrastructure and communal rice drying facilities.
● Apply a river basin approach to water and land.
● Increase the productivity of agriculture by improving the quality of inputs such as seeds
and fertilisers, reducing harvesting and post-harvest losses and introducing innovative
agricultural and water management practices.
● Provide information and forecasts regarding market demand, promote new product
opportunities, establish value-added processing facilities, administer arrangements for

product quality assurance and food safety, facilitate entry into profitable markets,
particularly via improved transport and storage facilities, and create marketing
infrastructure.
177
4.2.2.2 Tourism
The policies for tourism are based on three basic principles: (a) development of tourism
should be sustainable, anchored in Cambodia’ s rich cultural heritage, history and exquisite
terrain, but more importantly it should contribute to poverty reduction; (b) active and creative
promotion of tourism to make Cambodia a preferred culture and nature tourist destination; and
(c) increasing the number of days tourists can stay and the amount of momey they spend in the
country and diversifying their destinations (RGC 2009).
Tourism development policy was first mentioned in the Socio-Economic Development Plan
I 1996-2000, which provided a framework for the controlled development of tourism in the
medium and long term. With financial support from the Asian Development Bank, the
Cambodia National Tourism Development Plan (2001-05) was developed in 2001 to strengthen
tourism management, service and the planning capacity of the government and to revise the
tourism development plan.
In line with the policy, the government launched several promotional measures in 2006-
2010:
● Improved aviation infrastructure, including improvement of flight safety.
● Establishments of tourism information offices or counters at international borders, the
Cambodia Tourism Marketing and Promotion Board and the Marketing Research Council
for Tourism Promotion.
● Encouragement for service providers such as hotels and guest houses, tour guides,
aviation and related services, restaurants and transport.

● Improved tourism products focusing upon four prioritised areas (Siem Reap Angkor,
Phnom Penh and surrounds, coastal zone and north-east) and expansion to other
destinations.
● The Open Sky Policy and promotion of“Cambodia-Kingdom of Wonder” . Major
airports have been upgraded, and the Sihanoukville airport is now operational. In 2009, a
new national airline, Cambodia Angkor Air, was launched to operate flights between
Phnom Penh, Siem Reap and Sihanoukville as well as flights from Phnom Penh and Siem
Reap to Ho Chi Minh City.
● Simplified visa requirements for tourists from within the region. In the ASEAN
framework, the government has signed agreements with Singapore, Malaysia, Philippines,
Laos and Vietnam that waive visa requirements. Within the ACMECS (Ayeyawady-Chao
Phraya-Mekong Economic Cooperation Strategy) framework, a single visa is issued by
either Cambodia or Thailand for travel to Cambodia and Thailand. For travellers from
around the world, a visa is issued at the point of entry. The Ministry of Transport has also
signed or is in the process of bilateral negotiations with Kuwait and Russia to promote
tourism.
● Development of human resources in civil aviation.
178
For the next five years (2009-13), the government of Cambodia has prioritised:
● Completing the following plans:
- National Strategic Development of Tourism 2009-2020

- National Development Plan of Tourism 2000-2013
- National Eco-Tourism Strategic Policy
- Tourism Development Plan of Phnom Penh and Surrounding Areas
- Tourism Development Plan of Siem Reap and Surrounding Areas
- Tourism Development Plan of Coastal Areas (South-West)
- Tourism Development Plan of the North-East
● Marketing study and tourism campaign, especially“Cambodia-Kingdom of Wonder” , to
raise regional and international awareness of Cambodia’ s potential tour programmes, to
attract more visitors by holding several tourism events and developing high quality
facilities.
● Strengthening of tourism industry activities.
● Strengthening international cooperation.
● Human resource development.
● Management and development of tourism products.
● Developing statistics and tourist information.
● Gender mainstreaming in the work of the ministry and tourism sector.
4.2.3. Institutions for Policy Implementation54
4.2.3.1 Ministries in Charge of Industrial Policy
To implement and promote industrialisation, the government has assigned responsibilities

and tasks to organisations and ministries which are directly and indirectly connected to
industrial development:
● The Council for the Development of Cambodia was created to define the framework for
investment strategies and to accept or reject specific investment proposals. It allows
investors to deal with just one government body and to obtain information and application
documents. The organisation also plays a role in evaluating whether customs duties and
tax exemption should be granted and registers companies, issuing visas and work permits
and facilitating other downstream administrative procedures. Upon registration at the
CDC, qualified investment projects receive licences, tax exemptions and a partial or full
package of incentives.
● The Ministry of Industry, Mines and Energy focuses on: (1) increasing electricity supply
54) This section is mainly cited from the Law on Investment and the NSDP.
179
capacity and reducing the tariff to an appropriate level while strengthening institutional
mechanisms and management capability and (2) ensuring the reliability of electricity
supply in order to facilitate and attract investment in this sector and to foster economic
development. In addition, to foster and facilitate especially small and medium enterprises,
the ministry is to: (1) enable SMEs and micro-enterprises to function in a beneficial
business environment and gain better access to medium and long-term finance; (2)
establish specific systems to support women in business and facilitate their access to SME
development initiatives and services; (3) reduce registration procedures and help in start-
ups; (4) establish national standards and productivity institutions to help ensure the quality
of domestic products and productivity improvements; (5) promote consultancy support to
SMEs to assist development of modern production technology, product quality,
management and access to markets.
● The Ministry of Commerce is responsible for: (1) implementing the Trade Sector
Programme based on a sector-wide approach, focusing on trade facilitation and private
sector development; (2) promoting exports of agricultural products, garments and other
products; (3) strengthening integration into regional and international export markets and
improving competitiveness; (4) organising national and international trade fairs; (5) delivering
trade services support to potential exporters and providing trade information services.
● The Ministry of Public Works and Transportation is responsible for managing the
implementation of national policy concerning construction of all public works by
constructing and maintaining transport infrastructure.
● The Ministry of Labour and Vocational Training is charged with setting the minimum
levels of monthly wages and holidays, reducing wage inequality between men and women and
resolving disputes peacefully without causing any disruption to production or wage losses.
4.2.3.2 Organisations to Support Industries
The government created the Steering Subcommittee on the Investment Climate and Private
Participation in Infrastructure to develop the legal framework for private sector development
and strengthened the Government-Private Sector Forum for dialogue and dispute settlement.
The Ministry of Economy and Finance has chaired this subcommittee, which deals with
investment climate issues, in particular, legal and tax reforms, and with the regulation of public-
private partnerships. Its main responsibility is to implement the Law on Customs and to design
and implement the National Single Window system.
The government also created the Steering Subcommittee on Trade Development and Trade-
Related Investment, which is chaired by the Ministry of Commerce. It is responsible for
facilitating and streamlining trade, company registration and resolution of trade-related
180
bottlenecks.
To promote small and medium enterprises, the government also created the Steering
Subcommittee on Small and Medium Enterprises, which is chaired by the Ministry of Industry,
Mines and Energy to meet with the private sector to address issues of business registration and
adoption of a handbook on business registration and to prepare a licensing review.
The private sector also created its own agencies to dialogue with government and give
support to members. The Phnom Penh Chamber of Commerce (PPCC) was established in 1995.
It is responsible for providing support for commercial enterprises, advice to government and
local authorities on economic and commercial regulations and professional training and
business education. The PPCC has 2100 members and a staff of 17 well placed to provide
information and advice to export enterprises in Phnom Penh, but seems unable to reach out to
smaller enterprises, whether in the capital or in provincial towns.
Provincial chambers of commerce were created by government decree, and the election of their
governance structures has just been completed. Provincial chambers are a response to the demands
of provincial businesses which felt that their interests were not well represented by the PPCC.
A number of private sector representative bodies (e.g. the Garment Manufacturers

Association in Cambodia, International Business Club, and Federation of Rice Millers
Associations) are able to prepare and present the position of their members to government, but
mainly represent big businesses and are fragmented. There does not appear to be any overall
coordinated private sector position on critical trade issues.
5. The Role of Government for Future Growth of

Cambodia
5.1. Challenges Ahead
Cambodia’ s economic growth over the last decades has been driven by the modest
development of agriculture, tourism and construction industry. Industrial development has been
mainly led by the garment industry, which is mainly owned by foreign capital. This growth was
not only attributed to tariff incentives, but also to the peculiarity of the global garment trade
system. Construction and mining have recently been noted for their potential to contribute to the
industrial development. Agriculture became important in generating economic growth and
alleviating poverty in the midst of the global economic crisis.
The up-to-now economic growth is the natural outcome of the initial natural endowments of
Cambodia. Cambodia has a relatively abundant young labour force. According to Statistical
181
Yearbook 2008, the working population aged 10 years and above was 7.5 million or 74.8
percent of total population in 2004 and 7.8 million or 75.1 percent in 2007. It is the base of the
comparative advantage in garment exporting. In addition, Cambodia has a favourable
geographic location and rich endowment of natural resources. Both its natural resources and
heritage have strong potential to attract domestic and foreign tourists.
In coming years, the natural endowments will continue to contribute to economic growth in
Cambodia. Rebalancing growth in Asia, especially in China, South Korea, India, Vietnam, and
Thailand, may offer opportunity for Cambodia. Changes in the industrial structure resulting
from rising wages, high worker turnover and labour power shortages in China, Vietnam and
Thailand may shift their production base to Cambodia. Investment in Cambodia is now driven
by China. Dynamic neighbours such as Vietnam and Thailand are another opportunity for
Cambodia. Investment inflow is expected from neighbouring countries. According to a report of
JICA (2007), there is a possibility of shifting production from Thailand. Processing of
agricultural and fishery products and production of garments and footwear may be realistic
scenarios for relocation in the short term.
However, with very rapid integration into the regional and global economy through ASEAN
and the WTO, Cambodia will become more open to global competition. Cambodia’ s garment
and textile exports will experience tougher direct competition from other countries within the
region, especially China and Vietnam, which have higher labour productivity and cheaper
inputs. In addition to price, preferential treatment at export destinations has an impact on the
competitiveness of the Cambodian garment industry. It implies that Cambodia’ s economy
became vulnerable to external economic developments because its high economic growth over
the last decade is narrowly based on textiles, tourism, agriculture and construction. It also
implies that current 4 pillars of growth cannot sustain high growth in the future without
upgrading the industrial structure through importing modern technology and institutions
developed by advanced countries (Lin 2010).
In achieving the needed structural transformation, Cambodia is hampered by many

bottlenecks. There are weaknesses in the regulatory and legal framework and enforcement,
difficulty in access to finance, lack of support activities for industrial development, lower
productivity, and poor infrastructure.
First, Cambodia’ s regulation and legal framework is relatively weak. ADB (2004) reported
that uncertainty and lack of transparency in business registration, business operating licences
and various other licences were a major constraint on development of the private sector,
especially in SMEs. The cost of registration was about USD 1000 in 2004, four times per capita
GDP and the highest in the Mekong region.
Next, access to capital remains challenging and expensive. According to a report by the
182
ADB in 2008, only 10 percent of the Cambodia population has access to finance. Bank loans to
the private sector represented roughly 18 percent of GDP, increasing from 6.80 percent of GDP
in 2002 (MPDF, 2008). The ratio of total lending to GDP was far below that of neighbouring
countries, which means that the private sector still faces difficulties in accessing credit. Access
to finance seems to be a stronger constraint for medium-size investments and agriculture. Loans
of USD 5 million or more are reported extremely difficult to obtain (World Bank, 2009). Only 5
percent of the loan portfolio is for agriculture (NBC, 2008). This constraint has prevented
medium-size enterprises from expanding and diversifying. Rice millers, for instance, lack credit
to expand and upgrade their business operations and technology.
Third, another weakness is the lack of supportive activities for industrial development. This
is evident in the garment sector, where Cambodia remains focused on“cut, make and trim” , i.e.
the part of the value chain that is easiest to coordinate. Even tourism in Cambodia involves very
simple value chains. Most farm products are exported as raw commodities (e.g. rice paddy and
unshelled cashew nuts). The survival rate of new exports-the proportion of new exports that are
still exported after one or five years-is also low, reflecting either that Cambodian exporters
might be able to innovate but are unable to sustain innovation, or that foreign importers are
willing to source from Cambodia, but are discouraged after one or a few attempts.
Fourth, despite recent significant investment in infrastructure from the government,

development partners and private sector, infrastructure remains a challenge for business.
According to SMEs (2005) report, electricity and telecommunication services are expensive
compared with Cambodia’ s neighbours. According to the Garment Manufacturers Association
in Cambodia, total manufacturing costs are about 20 percent higher than in Vietnam and costs
associated with less developed infrastructure such as ports and roads are about five times higher
than those of Vietnam (IMF, 2009).
Finally, Cambodia also has significantly lower rates of productivity than China, Pakistan,
India and Bangladesh. SMEs (2005) report shows that total factor productivity was 18 percent
lower in Cambodia than in India and 24 percent below China. This was primarily due to low
labour productivity, which was 65 percent below India and 62 percent behind China. It may be
due to many factors mentioned above and low human capital resources. The CSES 2007 shows
that 77.5 percent of employed persons in rural areas worked in agriculture, compared to 1.7
percent of employed persons in Phnom Penh and 37.4 percent in other urban areas (NIS, 2008).
The majority of them are unskilled and have a low level of productivity compared with
neighbouring countries.
Therefore, to sustain a high economic growth, these bottlenecks should be removed to shift
Cambodia’ s elements of comparative advantage from natural endowments to industrial
capability. To do this, further expansion of the current four growth sectors need to include more
diversified and higher valued activities and venturing into new potential sectors with
183
comparative advantages should be sought also. It could be sought by the government but
ultimately by the domestic and foreign entrepreneurs who invest in future potential of
Cambodia.
5.2. The Role of Government in Cambodia Up to Now

The Cambodian government has played an important role in economic growth. The
government has been successful in fostering the fundamentals of economic growth. First, it
successfully introduced a stable political system and free market mechanism in Cambodia. The
political and free market mechanisms so far adopted by the government have favoured private
investment and development, which may attract foreign direct investment. There has been
growth in the non-government organisation sector, leading to a vibrant development in the voice
of many elements of society. The business association created a vehicle to solve collective
problems and maintain a close relationship with the government. Cambodia has strong
relationships with other nations, evidenced by a number of international trade agreements.
Cambodia joined the ASEAN Free Trade Area in 1999 and the World Trade Organisation in
2003. These agreements are intended to reduce barriers to investment and improve Cambodia’ s
attractiveness for the FDI.
Second, relative stability of prices and exchange rates in Cambodia has helped to create a
fairly good macroeconomic environment, leading to strong GDP growth (UNDP, 2006).
Economic growth accelerated over the past five years, reaching an impressive 13.3 percent in
2005 and 10.2 percent in 2007. GDP per capita has grown at a constant rate, averaging 8 percent
a year between 1993 and 2007. Sustained economic growth enhances human development by
creating better job opportunities and enabling businesses to be in an environment where they
can grow, supporting greater accountability at all levels of decision making and improving
workers’knowledge and skills. Greater human capital, an improved business environment and
an equitable society, in turn, generate more growth and business expansion.
Third, strategic programmes and policies were designed to promote the garment industry and
tourism since the early 1990s. They included legislation to allow incentives for foreign direct
investment, building of physical infrastructure and cooperation with other countries to network
for manufacturing, distribution and human transport. The government has also negotiated with
developed countries to gain export markets and deployed measures to promote exports. In
addition, employment and labour conditions have been adjusted to meet conditions of the
International Labour Organisation.
184
5.3. The Role of Government in Cambodia for the Future
However, for future growth, the Cambodian government should play more active role in
providing favourable environment for structural transformation than before. In addition to
keeping the political and macroeconomic fundamentals favourable to economic growth, the
bottlenecks mentioned above should be removed to shift Cambodia’ s elements of comparative
advantage from naturally given endowments to made ones based on industrial capability. The
regulatory and legal framework and enforcement should be reformed continuously. More efforts
should be made for further investments in infrastructure and education. Difficulty in financial
accessibility cannot be undone in a short period of time, which could be relieved along with
economic growth. Finally, government can assist the private sector to bring up more diversified
and higher productive activities for industrial development. The success of government action
will be revealed as the expansion of the current four growth sectors and the birth of new growth
sectors in Cambodia.
From the Korean experience presented in section 3, some comments could be made for
enhancement of industrial policy as follows:
First of all, the main focus of industrial policy should be given to the creation of indigenous
entrepreneurs. These are the people who do best in searching potential industries and new
profitable activities. The government should give a continuous and explicit signal that is
productive rather than putting in rent-seeking efforts that would pay off. For this, regulatory and
legal framework should be further streamlined toward a pro-business manner and more
systematic policy programs should be established.
Among four pillars of growth, the construction industry cannot carry the long term growth
by itself. Rather its growth benefits from the economic growth. Therefore more attention should
be given to expansion and diversification for the three remaining pillars. For garment industry,
policy efforts should be given to shift the production from current low end of the value chain to
higher ones by diversifying into more value-added products or increasing local contents of
exports through import substitution of raw materials and accessories. Particularly, the growth of
local supporting companies to foreign invested enterprises would be critical for building
manufacturing base. The formation of considerable local firms will become a stepping stone to
more diversified manufacturing. It will also reduce the current dependence on a small number
of developed countries mainly due to preferential access to certain markets.
Agriculture is also important both for economic growth due to its current considerable
contribution to the GDP and reduction of poverty. The government has prioritised increasing
agricultural productivity and diversification and promoting agro-industry. However, it has
shifted its emphasis from extending the cultivated area to intensive farming. The share of
185
agriculture in the national budget was an average of 2 percent for 2008-13, 0.2 percentage
points lower than in 1999-2007 (Royal Government of Cambodia, 2009). The allocation for
agriculture has not changed substantially during the last decade. In addition, transformation of
agriculture by developing processing industries should be pursued aggressively since the
demand for processing industries are already in the market. It is also true of tourism which
needs more diversified products and development of domestic linkages.
To induce local entrepreneurship, policy measures should be more focused after examining
the effectiveness along with their costs and benefits. Some tax incentives may not be effective
and could waste the valuable fiscal resources. Suspension of the advance profit tax and
reduction of employer contributions to social security provided in recent years is a short term
and unfocused measure. Investment tax credits or training expenditure tax credits could be
better in incentivizing continuous private sector’s effort. Furthermore, the policy should provide
a consistent signal with explicit intention of promotion.
The industrial promotion does not necessarily mean traditional selective, prescriptive, and
winner-picking intervention. Instead, it could relax the binding constraints and build networks
so that private enterprises can discover new business opportunities. For this, financial incentives
and public investments could be needed. While industrial policies up to now relied mostly on
providing fiscal incentives and extending market access to attract FDI, industrial policies for the
future should give more efforts to raise the capability of local industries by intensifying the
domestic industrial linkage.
Thus, it is inevitable to allocate more amount of budget for building industrial base. Most
high performing developing countries maintained a considerable proportion of the economic
expenditure although they had a small government in terms of public spending-GDP ratio.
(Moreno-Dodson (2008)). As long as the fiscal balance is under control not to destabilize the
economy and the spending is well designed and implemented, public spending could exert a
positive impact on economic growth.
For this kind of active role of the government, Cambodia needs to establish an equitable and
efficient tax system to secure revenues. It is noticeable that Korea established a National Tax
Office in 1965 and modernized the tax administration at the early period of economic growth.
The ratio of government spending to GDP was around 15-20% in Korea since the early 1960s
and the government spending on economic affairs stayed 4-6% of GDP. Compared with this,
revenue of the Cambodian government is very small at 11.5% of GDP in 2009.55
To make the spending effective, it is very important to make budget allocation consistent
55) It is 15.5% in Indonesia and 16.6% in Thailand in 2009.
186
with policy goals. Therefore, budget process should be aligned with the development of national
strategy on the industrial promotion aspect. In Korea, the Economic Planning Board (EPB) was
the center of development plan and budget allocation. The head of EPB was entitled to the level
of deputy prime minister and played an active role in coordinating sectoral policies to be
consistent with macro goals of national strategy. The EPB also ran the office of monitoring and
evaluation of ministry level programs. In Cambodia, the Council for Development of Cambodia
seems to define the framework for investment strategies and to accept or reject specific
investment proposals. It should be reviewed whether the council has power and organization to
do the role similar to that of EPB in Korea.
Finally, the most important success factor lies in implementation of policy. Selection of a
specific development strategy or policy measure does not guarantee success. There is no perfect
policy which could be taken from the textbook. Success instrategy is determined by its wellness
in its environment. Therefore, the policy implementation should be pragmatic and flexible. For
this, there should be continual process of deliberation of the policy inviting all of the
stakeholders involved in the public and private sectors. More active role of subcommittees such
as the Investment Climate and Private Participation on Investment (Ministry of Economy and
Finance), Trade Development and Trade-Related Investment (Ministry of Commerce), and
Small and Medium Enterprises (Ministry of Industry, Mines and Energy) are needed to
communicate with private sectors such as the Phnom Penh Chamber of Commerce, Provincial
chambers of commerce, and a number of private sector representative bodies (e.g. the Garment
Manufacturers Association in Cambodia, International Business Club, Federation of Rice
Millers Associations).
As mentioned above, policy measures should be improved in terms of accountability and

transparency. For this, more efforts should be made to structure the policy framework as
performance-based incentive system with the monitoring and evaluation process. It helps to
include monitoring and evaluation framework as essential elements of the policy program. To
facilitate monitoring and evaluation, the policy should have concrete goals with specific action
plans. In conclusion, more active role of the government in industrial transformation should be
accompanied by improvement in design and implementation of policies.
187
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Production,”published under title“Promoting Export of Cambodia’s White Gold”,
Cambodia Development Review, April-June 2010, Volume 14, Issue 2, Phnom Penh:
CDRI, 2010b, pp. 6-10.
Tong Kimsun,“The Social Impact of the Global Recession on Cambodia: How the Crisis
Impacts on Poverty,”in Armin Bauer and Myo Thant (ed.), Poverty and Sustainable
Development in Asia: Impact and Responses to the Global Economic Crisis, Manila: ADB
2010c, pp. 141-148.
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Cambodia, Phnom Penh: UNDP, 2004.
United Nations Development Program, Cambodia Country Competitiveness: Driving Economic
Growth and Poverty Reduction, Phnom Penh: UNDP. 2009.
USAID, Factory-Level Value Chain Analysis of Cambodia’
s Apparel Industry, Phnom Penh:
USAID, 2007.
World Bank, World Development Indicators, CD file, 2009.
World Bank, Sustaining Rapid Growth in a Challenging Environment: Cambodia Country
Economic Memorandum, East Asia and Pacific Region: Poverty Reduction and Economic
Management Sector Unit, World Bank, 2009.
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World Bank, Towards A Private Sector-Led Growth Strategy for Cambodia Volume 1: Value
Chain Analysis, East Asia and Pacific Region: Private Sector Development, World Bank,
2003.
World Travel and Tourism Council, Cambodia: The 2007 Travel & Tourism Economic
Research, London: WTTC, 2007.
Yu Bingxin & Fan Shenggen Fan, Rice Production Responses in Cambodia, IFPRI Discussion
Paper, Washington, D.C., International Food Policy Research Institute, 2009.
190
Financial Policy
1_ Promoting Low-cost Loans for Small and Medium-sized

Enterprises and Rice Mills
2_ Proposals for introduction of credit guarantee system in
Cambodia
3_ Strategic Development for Microinsurance in Cambodia
Chapter 01
Promoting Low-cost Loans for Small and

Medium-sized Enterprises and Rice Mills
Wook Sohn (KDI School)56
Summary
The Cambodian economy, through international support and the introduction of market
principles, has experienced high growth at an annual rate of 9.3 percent on average from 1999
to 2008. The country has achieved macroeconomic stability and attracted a substantial amount
of FDIs during the period. The FDIs have contributed primarily to the explosion of exports in
textiles and garments, which together with the tourism and construction sectors have been
significant sources of growth and no-farm employment. However, these sources of growth make
the Cambodian economy susceptible to the global economic and financial crises.
The private sector, which is comprised primarily of small and medium-sized enterprises
(SMEs), provides 92 percent of all Cambodian jobs. Ninety-nine percent of enterprises that
operate in Cambodia are SMEs. The domination of SMEs in the Cambodian economy shows
that they play a vital role in economic development and poverty reduction. The number of rice
milling enterprises accounts for 74.2 percent of all small manufacturing enterprises. Also, rice
processing is considered a target industry to lead growth in the Cambodian economy for the
next decades. Therefore, a sufficient and adequate supply of funding to SMEs and rice mills is a
key policy direction that the RGC should pursue for sustainable growth.
56) I am grateful to Vannak Chou at the Ministry of Economy and Finance of Royal Government of Cambodia for
his excellent assisistance and an anonymous referee for insightful comments.
192
The Cambodian government has made a continuous effort to develop the financial sector. In
order to promote financial intermediation and to strengthen the financial sector, with the aim of
supporting economic growth, there have been some financial restructuring programs and
improved financial supervision. However, more works need to be done by the government and
the central bank to develop a sound financial system, which leads to win public confidence and
contribute to sustainable economic growth. In fact, the financial development of Cambodia is
now in the take-off period. Types of financial institutions are very limited and most financial
institutions are located only in major cities, leaving many people and industries without an
opportunity to access financial services. The direct financial market does not exist at all in
Cambodia. Registration and financial statements are not transparent, and financial institutions
do not have the ability to evaluate credit. Thus, financial institutions require collateral when
they lend money to SMEs and focus on short-term loans to avoid risk. These problems should
be overcome in order to achieve sustainable economic growth. Actually, in the development
plan of the government, many prescriptions to cure these problems have been introduced.
In most development models, special support for some sectors is largely emphasized, taking
into consideration an efficient allocation of funds. However, the relatively short period of
experiencing capitalism and constructing financial system makes it desirable to take a gradual
approach in supporting SMEs and rice mills. We provide a number of policy suggestions. For
short-term policies, we suggest the provision of financial resources through the government, the
establishment of a SME-specialized bank and credit guarantee funds, the introduction of some
regulations such as a mandatory ratio of SME loans, and the development of financial products
and services such as leasing and syndicated loan. For longer-term policies, we propose the
improvement of the registration system, further development of CIS, enhancements to the
financial statement and audit system, and the capacity development of bank staff and regulators.
1. Introduction
The Cambodian economy, through international support and the introduction of market
principles, has experienced high growth at an annual rate of 9.3 percent on average from 1999
to 2008. This period is considered the take-off of the Cambodian economy. The country
achieved macroeconomic stability and attracted a substantial amount of FDIs during this period.
The FDIs have contributed primarily to the explosion of exports in textiles and garments, which
together with tourism, construction, and no-farm employment have grown significantly.
However, these sources of growth make the Cambodian economy susceptible to the global
economic and financial crises.57
57) FDI started to grow rapidly: 210% in 2005, 26.6% in 2006, and 82.4% in 2007. However, FDI fell following the
global financial crisis: -8.2% in 2008 and -35.2% in 2009. Overall, FDI has increased approximately 3.6
times from USD 142 million in 2001 to USD 514.7 million in 2009.
193
Part 2_Financial Policy
The private sector, which comprises primarily small and medium-sized enterprises (SMEs),
provides 92 percent of all Cambodian jobs. Ninety-nine percent of enterprises operate in
Cambodia are SMEs (Royal Government of Cambodia, 2005). The domination of SMEs in the
Cambodian economy means that they play a vital role for economic development and poverty
reduction. SMEs are also internationally recognized as the backbone of many successful
developed nations such as Japan, Chinese Taipei, Germany, and South Korea. Many economists
have shown the positive impact of the development of SMEs on the economy and society. Due
to lower technological thresholds and capital, SMEs give low-income people a chance to carry
out business with financial support. The development of SMEs not only raises revenue for the
poor, but also intensifies competition, increasing innovation and accelerating economic
diversification. All these efforts generate favorable conditions for sustainable economic growth.
Furthermore, SMEs are more labor intensive than large firms and, therefore, generate more job
opportunities. SMEs also help ameliorate access to markets by rural people. Better access to
markets has a positive impact on the value added by farm products, enhances rural income, and
reduces poverty. SMEs drive industrial progress and improve an economy’ s ability to deal with
external shocks (Altenburg and Eckhardt, 2006). Thus, the development of SMEs will foster
local economic growth and social stability.
Following the country’ s liberation in 1979, agro-industry food processing activities,

predominantly rice millings, started taking place in the cooperative sector. However, the
development of SMEs was slow due to at least two main reasons. First, between 1979 and 1989,
all enterprises in the country were under the direct control of the government. Second, the
Cambodian banking system was characterized by a mono-tier system under a centrally planned
economy. The central bank had played an active role in providing credits to both individuals
and enterprises. Under such circumstance, SMEs had little chance to grow. Seeing the
importance of the private sector in economic development, the government introduced a full-
scale privatization program; in 1993, the Cambodian economy was then officially transformed
into a market-oriented economy. Private ownership was then encouraged by the government.
The development of SMEs in Cambodia gained momentum. At the same time, the investment in
the financial sector began substantially with the arrival of foreign commercial banks.
Experiencing a long civil war, the Cambodian public had little confidence in banking system,
which limited its role to financial intermediation.
In this regard, the Royal Government of Cambodia (RGC) has announced that it will support
SMEs by assuring financial resources and developing financial schemes for the long-term loan.
According to the Ministry of Industry, Mines and Energy (MIME), the number of rice milling
enterprises accounts for 74.2 percent of all small manufacturing enterprises. Also, rice
processing is considered a target industry to lead the growth of the Cambodian economy for the
next decades. Therefore, a sufficient and adequate supply funding to SMEs and rice mills is one
of the key policy directions that the RGC should pursue for sustainable growth.
194
The Cambodian government has made a continuous effort to develop the financial sector. In
2001, the government adopted the Financial Sector Development Plan for 2001-2010 (FSDP
2001-2010) under the Financial Sector Blueprint (FSB). In implementing the plan, the
government has made major achievements in strengthening the banking sector and developing
the non-banking financial sector. The Blueprint has aimed to: (1) set out a long-term vision and
development strategy for the financial sector over the next few years; (2) develop a sound,
market-based financial system to support resource mobilization and broad-based sustainable
economic growth; (3) align the financial sector in anticipation that it will at least double in
terms of the ratio of financial assets to gross domestic product (GDP) in 10 years, and that the
spread between loan and deposit rates will narrow as intermediation becomes more efficient;
and (4) materialize the vision for the financial sector. The Blueprint includes long-term
development strategies and sector development plans for several critical areas. Since its
establishment, the Blueprint has served to guide policy and programs to support the
development of a sound and market-based financial system in Cambodia.
Another plan called the FSDP 2006-2015 was developed and adopted by the government.
The plan is intended to provide a framework to support coordination and cooperation among the
parties concerned. The plan establishes key priorities for financial sector development in the
following areas: (1) improving the enforcement of contracts and mechanisms for the resolution
of commercial disputes; (2) improving fiscal, macro-economic, and monetary policy
implementation; (3) developing safe and efficient payment and settlement systems; (4)
improving the financial sector supervision to appropriately address risks while providing
incentives for financial development; and (5) supporting human capital development and
financial education across the full spectrum of Cambodia’ s population. The overall objective
was laid down to build confidence in Cambodia’ s financial system, thereby encouraging the
formalization of finance and support of more effective financial resource allocations, which in
turn will support economic growth and poverty reduction in Cambodia.58
However, the financial support for SMEs as part of the Blueprint was lacking a concrete
action plan, and some of the financial reforms were delayed. Therefore, in this chapter, we
propose some policy measures to support SMEs and the rice mills as a growth momentum for
the Cambodian economy. This chapter is organized as follows. The next section provides an
overview of the banking system of Cambodia. In Section 3, we examine the current state of
SMEs and rice mills and how the banking system supports them efficiently. Section 4 identifies
obstacles to financing for SMEs and rice mills. In Section 5, we suggest several short-term and
longer-term policy measures to promote financing SMEs. Section 6 summarizes and concludes.
58) Currently, the FSDP 2010-2020 in under developing by the Ministry of Economy and Finance.
195
2. Overview of the Banking System59
In 1975, the banking system was completely destroyed, and there were no financial services
from 1975 to early 1979. In 1979, a mono-banking system was established. The National Bank
of Cambodia (NBC) was the only bank operating and performing central and commercial
banking functions through a network of provincial branches at that time. In 1989, the
government initiated economic reform that resulted in the establishment of a two-tier banking
system in 1993. During the years of the mono-banking system, the NBC financed state-owned
enterprises through twenty provincial branches and provided small loans to thousands of
farmers based on mutual guarantees. In 1990, with the privatization of the banking sector and
the cessation of the NBC as a commercial bank, farmers and entrepreneurs with small and
medium-sized businesses were deprived of access to financial services.
The efforts of the NBC and RGC strengthened the banking system by commencing the
banking reform in 1999. The NBC drastically improved the safety of financial institutions.
Confidence in the banking system has been restored and gradually improved. The banking
system has served the private sector and has played a crucial role in economic development and
poverty reduction.
Acting not only as a monetary authority, but also as a banking supervisory authority, the
NBC controls Cambodia’ s banking system. As of the end of 2009, this includes 27 commercial
banks, six specialized banks, 20 licensed microfinance institutions (MFIs), and money changers
(see Figure II-1-1).
The banking system is concentrated in Phnom Penh, with only six banks having branches
outside the city. The banking sector contains many small banks. The activities of commercial
banks remain concentrated on big transactions, particularly of multinational corporations. Small
businesses in rural areas do not have access to loans or savings with commercial banks.
Commercial banks have neither the resources nor the capability to extend their services to rural
areas because microfinance businesses require high cost and are barely profitable.60
59) I appreciate Thai Sapear at the National Bank of Cambodia for his providing with insightful comments and
necessary data for this report.
60) Recently, commercial banks, notably ACLEDA Bank, have been establishing their branches in various
provinces and towns.
196
Figure Ⅱ-1-1 | The Cambodia’Banking System
National Bank of Cambodia
27 Commercial 6 Specialized 20 Microfinance 21 NBC Provincial Exchange

Banks Banks Institutions Branches Bureau
The existing financial institutions are all in the indirect finance, whereas the capital markets
are still in its early stages of development. Banks are largely funded by deposits, and exposed to
a high level of dollarization in terms of banking, billing and payment.61 Dollarization remains
an obstacle for monetary policy implementation, and on the other hand, plays a potentially
important role in the stability of the banking system in the form of credit and liquidity risk.
Commercial banks are operated under the regime of universal banking and permitted to
conduct a wide range of banking services, including financial leasing, in addition to the
conventional ones of deposit taking and loan lending. The laws and regulations treat all
institutions equally, irrespective of the nationality of investors. As of 2009, commercial banks
occupy the dominant share for 99% of total assets, 99% of loan balance, and 100% of deposits
out of the aggregate total of the banking system, which includes specialized banks (see Table II-
1-1). Since 2005, major banks have introduced electronic banking services through the
installation of automated teller machines (ATMs).
Table Ⅱ-1-1 | Assets and Loans of Banks
2009 2008 Growth rate

Asset Share Loan Asset Share (%)
Commercial banks 20,549,440 98.7% 10,278,533 16,796,989 98.8% 22.3%
Speciallized banks 280,939 1.3% 188,712 199,471 1.2% 40.8%
Total 20,830,379 100% 10,466,705 16,996,459 100% 22.6%
Source: National Bank of Cambodia

Note: Exchange rate is 4,169 riel for 1 USD as of end-2009.
Amidst the expansion of the banking system as a whole, an oligopoly is developing in which
a few of the large banks are expanding their market share. Four largest banks (Cambodia Public
Bank, ACLEDA Bank, Canadia Bank and ANZ Royal Bank) account for 65 percent of the total
assets of commercial banks. With respect to the total balance of loans, specialized banks have as
61) Bank accounts are in Khmer riel and USD, but daily business activities the payment transactions are
mostly done in USD. In order to increase the use of local currency, the government makes salary payment
and collects tax and payments of electricity and water provided by the state-owned enterprises in riel.
197
small as 1 percent of the total. The Rural Development Bank (RDB) is the state-owned bank.
The remaining five privately owned banks appear to have their businesses targeted for small
sized lending, as those banks are all small in size, operating from a single office in Phnom Penh,
with a relatively small number of employees and a single product for conventional lending. Out
of the six banks, three banks (Anco Specialized Bank, Peng Heng SME Banks Ltd. and First
Investment Specialized Bank) specify their target as lending to either SMEs or rural borrowers,
whereas one bank (Cambodia Development Specialized Bank) specifies its business target as
industry and infrastructure development. They are restricted from taking deposits of non-
borrower clients under the license. The majority of them were established by individual owners
who lack a background in banking business, which implies an inadequacy of institutional
capability. They tend to restrict their funding source for lending to the paid-up capital, which
confines their growth. In 2008, the total assets of commercial banks grew 28 percent from the
previous year, whereas those of specialized banks grew 15% percent.
As of December 2009, there were 20 licensed MFIs and 26 registered rural credit operators.
The development of MFIs was continuously supported by the Asia Development Bank (ADB)
in the 1990s through the early 2000s, including through Rural Credit and Saving Project. MFIs
maintain an extensive branch network within the country, in particular, rural areas, having 1,105
branch offices in total, which favorably compares with 342 commercial and specialized
branches combined. MFIs are making steady growth in terms of their total assets, which
increased by 87 percent in 2008 but only 12 percent in 2009. MFIs mobilize funds coming from
their own paid-up capital, borrowed funds, and to a lesser extent, deposits taken from
borrowers. MFIs tend to rely on borrowing from abroad (accounting for almost 80 percent),
which makes MFIs’funding structure vulnerable to the external shocks that were experienced
during the latter half of 2008 and early 2009. In order to accept deposits from the public, they
have to obtain a license as a deposit taking institution.62
In theory, there should be little direct competition for customers between the informal credit
market and banks; they should be serving distinctly different clientele. In rural areas of
Cambodia, informal finance is frequently said to be ubiquitous. Not much literature and data are
available that accurately describe the structure, magnitude of such finance, or the inter-linkages
with formal finance. According to one bank officer whose relatives borrow in the“street
market,”lenders in this informal credit market are liquid and have begun offering rates
comparable to the highest rates offered by banks. The competitive pressure felt by banks from
the informal credit market is a new phenomenon. By offering“no documentation”loans, the
informal market is taking higher risks.
62) Prior to 2008, no MFI has been granted a license to take deposit. The NBC has made efforts to improve
access to financing of SMEs and rice mills by granting license for taking deposit from the public to
qualified MFIs. Currently five MFIs hold the license.
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Leasing refers to making regular payments for the use of equipment, such as vehicles or
machinery, without owning it. Leasing enables a business to improve its operations without
having to borrow money for large capital expenditures. Instead, a bank or leasing company
owns the equipment and leases it to the user. This is particularly helpful to businesses that lack
the necessary collateral to get bank lending. Leasing is defined as a part of the banking business,
and those starting a leasing business have to obtain a license under the Banking Law. As of the
end of 2008, a leasing company, Devco Capital, and one bank, ANZ Royal Bank, have offered
financial leasing.63 In 2009, the Financial Lease Law was enacted; financing for SMEs is
expected to become easier. Currently, the commercial banks and specialized banks are allowed
to use leasing products to assist the development of the SME sector.
Life insurance does not yet operate in Cambodia. Insurance companies operate only in the
casualty insurance and re-insurance business. The Insurance Law was enacted in 2001 and the
insurance business was placed under the supervisory control of the Ministry of Economy and
Finance (MEF). There are seven insurance companies out of which one company (Cambodia
Re) engages in re-insurance. It is state owned, whereas others are privately owned.64
Cambodia has no securities market. The Law on Government Securities was promulgated in
January 2007, and the Law on Issuance and Trading of Non-government Securities was
subsequently adopted by the King in October 2007. The government has established a capital
market unit in the MEF. In April 2007, it signed a memorandum of understanding with the stock
exchange of the Korea International Cooperation Agency (KOICA) for US$1.8 million worth of
technical assistance to help the initial trading and preparation of the establishment of a securities
market in the near future. In July 2008, the government established the Securities and Exchange
Commission of Cambodia (SECC), which has tasks and duties in preparing regulation, and
licensing and supervising the securities market in Cambodia.
2.1. Regulatory System

The Law on Banking and Financial Institutions was enacted in November 1999. Under this
law, the regulatory framework and supervisory functions over commercial banks, specialized
banks, and MFIs rests upon the NBC. The NBC establishes the rules, regulations, and
guidelines for the financial institutions, directs the financial institutions to make periodical
63) The Law on Financial Leases was promulgated by the Senate in June 2009. In order to implement this law,
the NBC released a Prakas on Financial Lease to authorize commercial and specialized banks to conduct
financial leasing business under the Law on Financial Institutions. Therefore, any institution with a banking
license may also engage in leasing.
64) Life insurance and micro insurance need to be introduced to the insurance sector to develop the industry
in Cambodia, but the legal framework is not yet developed for licensing, and supervising. At present, the
MEF is preparing amendments to the Law on Insurance in order to prepare regulations on life and micro-
insurance.provinces and towns.
199
reports in respect of their operation, and ensures such rules and regulations are appropriately
adhered to and complied with through its on-site and off-site supervision.
To promote financial intermediation and to strengthen banking operations with the aim of
supporting economic growth, the NBC undertook a bank restructuring program and improved
bank supervision. These tasks have been largely successful. The liquidation of commercial
banks went smoothly and the relicensing of banks that met the regulatory requirements was
successfully completed. The performance of relicensed banks has improved gradually and
progress has been made. For example, while the number of operating banks declined, the total
amount of bank deposits and loans increased. At the beginning of 2003, the NBC introduced a
new chart of accounts for banks, which was prepared based on international standards. The
implementation of this new chart of accounts further facilitated bank supervisory activities. The
commercial bank restructuring program has been successfully completed, but more works
remain to be done to further strengthen the banking system, including specialized banks and
MFIs.
The financial sector is divided into commercial banks and specialized banks. Minimum
capital and reserve requirements are regulated differently for commercial and specialized banks,
but the liquidity ratio, solvency ratio, and loan loss provisions are regulated. Details of
prudential regulations are summarized in Table II-1-2.
Table Ⅱ-1-2 | Prudential Regulations for Financial Institutions
Commercial bank Specialized bank

Governing law Law on Banking and Financial Institutions (Nov 18, 1999)
Minimum paid-up capital is set at KHR 150 Minimum paid-up capital is set at KHR 30
billion (equivalent of USD 37.5 million) with billion (equivalent of USD 7.5 million) with
an exception of the bank that is closely held an exception of the bank that is closely held
and whose leading shareholder is one of and whose leading shareholder is one of
Minimum capital
the international financial institutions with the international financial institutions with
the rating of investment grade. Ten percent the rating of investment grade. Five percent
of the paid-up capital is to be deposited at of the paid-up capital is to be deposited at
the NBC. the NBC.
Banks to maintain deposits at the NBC’ s

Banks to maintain deposits at the NBC’s
settlement account for the amount equal to
Reserve settlement account for the amount equal to
8% of the average balance of KHR deposits
requirement 8% of the average balance of deposits
and 12% of foreign currency deposits taken
taken and borrowings.
and borrowings
Solvency ratio Net worth shall be no less than 15% of total loan balance.
Liquidity ratio Liquidity ratio as defined by the NBC shall be no less than 50%.
Fixed asset /
Fixed assets acquired for business purpose shall be less than 30% of the net worth.
equity capital
200
Table Ⅱ-1-2 | Prudential Regulations for Financial Institutions (continued)
Banks to maintain deposits at the NBC′ s settlement account for the amount equal to 8%
Large exposure
of the average balance of deposits taken and borrowings.
Standard: 1% of the loan balance.

Special mention: 3% of the loan balance.
Loan loss
Substandard: 20% of the loan balance.
provision
Doubtful: 50% of the loan balance.
Loss: 100% of the loan balance less collateral value.
2.2. Profitability and Asset Soundness

Banks’profitability has seen a significant reduction since the onset of the global crisis.
Return on equity declined significantly from the peak of 16.58 percent in 2007 to only 5.63
percent in 2009. Similarly, return on assets dropped by more than half, from 2.9 percent in 2008
to 1.3 percent in 2009 (see Figure II-1-2). Some factors were attributed as the main causes of
this reduction, namely the slowdown of credit expansion, the slight growth of non-performing
loans, the additional cost of accumulating customers’deposits, and the rapid expansion in
branch networks. In 2009, 22 branches were opened. Most banks shifted toward fee-based
income in order to reduce credit risk exposures and to minimize funding costs.
Figure Ⅱ-1-2 | Profitability of Banks
Non-performing loans (NPLs) in the banking sector increased gradually to 4.4% in 2009
from 3.7% in 2008. The first and foremost explanation is the impact of the global crisis.
Prominent sectors of the economy, such as textile, tourism, construction, and agriculture, were
hit by the crisis. Related firms and businesses in these industries also saw declines in demand
and consumption. Consequently, banks’customers experienced payment difficulties. Another
explanation is the introduction of new guidelines on credit classification at the beginning of
201
2009, which addressed more stringent criteria for recognizing problem assets. This new
guidelines were fully adopted in 2009 and resulted in higher classified assets. However, an
International Monetary Fund (IMF, 2010) report states that the actual level of NPLs is likely
much higher and that, in particular, a number of banks continue to report few or no NPLs,
suggesting incomplete adherence with the new loan classification and provisioning regulations
(see Table II-1-3). The report argues that the ever-greening of loans and capitalization of
interest is still undertaken by financial institutions to avoid loan loss recognition, provisioning,
and possible capital write-downs. These practices appear particularly acute for overdraft loans
used to finance land purchases during the recent property boom.
Table Ⅱ-1-3 | Loans and NPLs (as of end-2009)

(Million riel)
Loans’ NPLs NPL/Loans
Commercial Banks 10,278,533 447,706 4.4%
Specialized Banks 188,172 9,743 5.2%
Total 10,466,705 457,449 4.4%
2.3. Foreign Ownership

Among the 27 banks licensed, 21 banks were established domestically. With respect to the
nationality of the capital, four banks are 100% invested by Cambodian capital, whereas 3 banks
are majority owned by Cambodians, 3 banks are majority owned by foreign capital, and 11
banks are 100% owned by foreign capital. The foreign investors own 100% of the shares of 17
commercial banks, and the total paid-up capital of foreign shares was about 74%. The foreign
ownership ratio in Cambodian financial institutions clearly shows that foreign banks have been
making a pivotal role in financial industry in Cambodia. Meanwhile, most specialized banks are
invested by Cambodian government or Cambodian investors. In the microfinance sector, the
foreign share of paid-up capital is 77%, equal to USD 27 million, as local investors own 23% of
the share of MFIs. There are 5 MFIs owned wholly foreign owned. Table II-1-4 below shows
the share of paid-up capital.
202
Table Ⅱ-1-4 | Share of Paid-up Capital
(Million riel)
Foreign share Cambodian share
Total Market
Share Amount Share Amount paid-up share
(%) paid (%) paid capital (%)
Commercial banks 74.2 2,206,337 25.8 768,223 2,974,560 94.6

Specialized banks 21.3 35,955 78.7 132,819 168,773 5.4
Total 71.3 2,242,292 28.7 901,042 3,143,334 100.0
Microfinance institutions 77.0 114,410 23.0 33,664 148,074 100.0
Note: Minimum paid-up capital of a commercial bank and specialized bank is 50,000 and 10,000 million riel,
respectively.
Cambodia has received loans from development partners (donors), namely KfW,
International Financial Cooperation (IFC), and the ADB. The KfW and the ADB have extended
their financial assistance to the Cambodian government in the form of long-term loans to
channel them to participating financial institutions (PFIs). The IFC has extended its loans
directly to banks. Furthermore, the ADB provided loans to RDB, which would on-lend to MFIs
for re-lending its proceeds to micro and small enterprises exclusively in the agricultural sector.
Table II-1-5 shows the outline of these donors’financial assistance. The revolving fund
operation of KFW’ s SME promotions 1 and 2 will be successfully terminated in 2014. Canadia
Bank prepaid before the maturity comes because the IFC loan interest rate was too high. The
ADB loan was terminated, when approximately US$5 million was disbursed, by request of the
Cambodian government to use its proceeds for other purposes.
Table Ⅱ-1-5 | Development Partners’Assistance
Donor Year Executive

Project name Modality Amount PFI
Agencies approved agency
SME Pilot
KfW Grant 1997 DM 5 Mill MEF ACLEDA
project
SME Pilot
KfW Grant 1999 DM 7 Mill MEF ACLEDA
project
SME ACLEDA
KfW Grant 2003 Euro 2.5 Mi MEF
promotion I Canadia
SME ACLEDA
KfW Grant 2005 Euro 4,6 Mil MEF
promotion II Canadia
Mortgage US$ 6 Mill ACLEDA
IFC Loan 2004
loan US$ 2.5 Mill Canadia
2 Mortgage
IFC Loan 2006 US$ 5 Mill ACLEDA
loan
Licensed
Rural credit
ADB Loan 2000 US$ 20 Mill RDB financial
saving project
institutions
203
Cambodia is yet to develop its capital market and interbank money market and hence
financial institutions are limited in raising the funds for operation. The principal sources of
funding are equity, customer’ s deposits, borrowed funds, etc. This funding from principal
sources is complemented by sporadic deposits from other financial institutions to fill up the
liquidity gap. Figure II-1-3 illustrates the funding structure of the financial institutions as of the
end of December 2009.
Figure Ⅱ-1-3 | Funding Structure
Source: National Bank of Cambodia.
3. Recent Trend of Financing to SMEs and Rice Mills

3.1. Current State of SMEs
A definition of an SME is essential to collecting statistics and implementing SME policy.
However, there was no official or legal definition of an SME before the approval of the SME
Development Framework (SMEDF) in 2005. Table II-1-6 indicates the definition of SMEs
proposed by the SMEDF. Small enterprises including micro enterprises are defined as those
with up to 50 employees or assets of USD 250,000, and medium enterprises as those with either
51-100 employees or assets of USD 250,000-500,000. Large enterprises are those with either
over 100 employees or assets greater than USD 500,000. It is pointed out, however, that a
definition based on the size of asset has the problem that the cut-off point needs to be revised
over time in order to allow for inflation. Additionally, the revaluation of asset is not done in a
uniform manner by enterprises. The definition based on the size of employment has the problem
of classifying part-time workers and family workers. For these reasons, the SMEDF suggests
using the two types of definitions flexibly according to the purpose of use.
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Table Ⅱ-1-6 | Classification of SME
Number of employees Size of asset

Micro less than 10 employees less than USD 50,000
Small between 11-50 employees between USD 50,000-250,000
Medium between 51-100 employees between USD 250,000-500,000
Large over 100 employees over USD 500,000
The SMEDF was formulated by the SME Sub-Committee consisting of representatives from
related ministries, such as the MOC, MEF, and Ministry of Agriculture, Forestry and Fisheries
(MAFF). Therefore, these two definitions are considered to be accepted definitions among
related ministries. However, these definitions are not commonly shared by the private sector.
Most of SMEs and financial institutions visited during the first field survey do not recognize the
definitions proposed by the SMEDF. This would be partly caused by the lack of publicity of the
government, mostly caused by the fact that when enterprises are classified as small or micro
enterprises there is no specific benefit for the enterprises.
In addition to the problems of the classification itself, each statistic has missing parts
because a lot of businesses are not licensed formally. To analyze the effectiveness of the SME
policy, we have to have data on the causality between SME policy and its impact on SMEs.
However in Cambodia, it is hard to verify this effect statistically.
With so many unlicensed SMEs in Cambodia, it is difficult to estimate both number of

SMEs and trends in SME development. However, it is clear that the number of officially and
unofficially registered SMEs has increased in the last twelve years. The SMEs in industry sector
that registered with the MIME has increased from 25,049 in 1999 to 35,560 in 2009. This
number represents growth of 40%. The report of the MIME on SMEs statistic in 2007 shows
that according to data from the MEF, there are 55,466 SMEs in 2006. The composition of
micro, small and medium sized enterprises in each industry is described in Table II-1-7.
Figure Ⅱ-1-4 | Number of SME
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Table Ⅱ-1-7 | Distribution of SMEs by Type and Sector
Micro Small Medium

Sector
No. % No. % No. %
Agriculture 20 11.2 60 35.1 43 52.4
Retail 12 6.7 18 10.5 6 7.3
Wholesale 5 2.8 17 9.9 9 11.0
Hospitality 27 15.5 23 13.5 10 12.2
Manufacturing 45 25.5 30 17.5 9 11.0
Services 69 38.8 23 13.5 5 6.1
Total 178 138 171 100 82 100
Source: International Finance Corporation (2010)
According to some studies on features of the SMEs sector in Cambodia, SMEs sector has the
following features.65 First, majority of SMEs in the manufacturing sector are microenterprises
which operate with less than ten employees. They are involved in the basic processing of
primary produce for the domestic market. Second, very few Cambodian manufacturing SMEs
are involved in exporting unless the country has enjoyed favorable conditions for exports from
some developed countries such as the United States, Europe and Japan, as well as from the
region. Third, most SMEs operate with no license. Finally, the predominant of SMEs remains at
low level of productivity arising from less capacity of both capital equipment and human
capital.
All merchants engaging in commercial activities are required to register with the Ministry of
Commerce (MOC), its provincial or municipal office, or other places determined by the
Ministry. In addition, a company must also secure patent tax and value added tax (VAT)
identification numbers from the MEF and approval for its internal rules from the Ministry of
Labor before it is considered legally registered.
The low number of formally-registered businesses in Cambodia is at least partially the result
of the costs involved in company registration. Ambiguities in the process allow room for
bureaucratic discretion and corruption by the agencies involved in registration, thus making the
costs of registration unpredictable. This gives rise to facilitators who see opportunities to make
money by providing services to those who are reluctant to register by themselves. Hence, the
actual cost of company registration becomes even higher and further discourages firms from
registering their businesses. An even greater deterrent to registering, however, may be the costs
65) Please refer to Baily (2005).
206
companies incur after registration. Paying at least 5.5 percent of annual revenues in unofficial
fees after they register their business could be too high for many companies. The costs that
result from legally registering a business may outweigh any potential benefits to be derived.
According to a survey conducted by the World Bank, the total cost (including informal cost)
of the process if carried out by an entrepreneur on his/her own, is up to USD 1,550, and the
average total time spent is 94 days. Only some of these costs are official fees; others are
informal. Costs in both time and money (calculated as percentage of gross national income per
capita) are among the highest of ASEAN countries. The registration costs in Cambodia are 76
times higher than in Thailand and 18 times more than in Vietnam. In terms of amount of time
spent, it takes Cambodian firms 52 days longer to start their businesses than it does for
counterparts in Thailand, and 30 days longer than counterparts in Vietnam; these countries are
Cambodia’ s closest competitors for FDI. Such high fees and long delays in registering a
business are unfavorable signals to investors that they may face serious bureaucratic difficulties
if they invest in Cambodia (see Table II-1-8).
Table Ⅱ-1-8 | Cost of Starting a Business
Numbers of Cost in USD value

Country Duration (days)
Procedures (% of GNI per capita)
Cambodia 11 94 USD 1,550 (553.8%)
Malaysia 8 31 USD 960.51 (27.1%)
Singapore 7 8 USD 248.50 (1.2%)
Philippines 11 59 USD 243.38 (24.4%)
Thailand 9 42 USD 143.59 (7.3%)
Vietnam 11 63 USD 128.66 (29.9%)
Indonesia 11 168 USD 103 (14.5%)
Lao PDR 9 198 USD 68 (19.5%)
Source: World Bank (2007)
At present, the government has a great effort review all the steps, fees, and time periods
involved in registering a business to see it can be reduced to become more competitive with
other countries in the region. To achieve this work, the MOC should issue a clear guideline for
registration and information on cost and requirements, which should be published and widely
distributed so that they are well-understood by entrepreneurs. To speed up the registration
process, creating a time bound“one-stop service”decentralized office is considered to establish
with line ministries.
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3.2. Current State of Rice Mills
According to the small enterprises statistics produced by the MINE in 2006, the number of
food processing enterprises was 25,455 in 2006, but half of this number (12,350) did not have a
business license at the end of 2006. Similarly, it was estimated that 10,922 rice milling
enterprises out of 23,103, or 47%, had no business license (see Table II-1-9).
Table Ⅱ-1-9 | Small Enterprises by Industries
Number of
ISIC Sector Licensed enterprises
enterprises
31 Manufacture of food, beverage and tobacco 25,455 12,350 (49%)
311601 Rice milling 23,103 10,922 (47%)

Textile and wearing apparel and
32 1,689 167 (10%)
leather industries
33 Woods & wood product - - -
34 Paper product, printing and publishing 33 25 (76%)
35 Chemicals 159 155 (97%)

Non-metallic mineral products except
36 797 652 (82%)
product of petroleum and coal
37 Basic metal industries - - -
Fabricated metal product, machinery and
38 2,380 1,613 (68%)
equipment
39 Other manufacturing industries 636 435 (68%)
Total 31,149 15,397 (49%)
Cambodia has a big potential in paddy production in order to increase its rice export in the
future. To guide the its vision for the preparation of economic development policy, the RGC has
an ambition to turn Cambodia into a major“rice-white gold”exporting country in the
international market. Paddy production could reach 7.3 million tons in 2010-201166, after a
remarkable rebound over the past decade. With an estimate domestic consumption of
approximately 3.14 million tons of paddy, a provision for seeds and harvest loss, statistical data
shows a surplus of 3.32 million tons which can be processed into rice for export. However, the
statistic in 2009 recorded so far only 13,000 tons of rice or 20,000 tons of paddy export,
although has actually export much morerice (see Table II-1-10). This fact reflects Cambodia’ s
66) The projection of paddy production in Cambodia 2010-2015 is from a policy paper on the promotion of
paddy production and rice export (RGC, 2010).
208
potential to increase the official export of rice, instead of informal export of unprocessed paddy,
which results in the loss of considerable value added for the national economy.
The rice sector could have a big potential comparable to that of the garment sector in term of
gross export value and value added generated throughout the supply chain including
employment. If rice export reaches 3 million tons, the total export value would amount to USD
2.1 billion (under an assumption of rice price of USD 700/ton) or equivalent to about USD 600
million in value-added contributions to the national economy (approximately 5 percent of
GDP). The RGC will be able to retain substantial values added in the country, and the gain
generated from the process could directly contribute to economic growth, i.e. in the form of
employment of more than 70 percent of rural people, an income increase, and particularly a
reduction of poverty and an improved living standards for farmers and most Cambodian people
engaging in rural economic activities.
Table Ⅱ-1-10 | Rice Production
Description 2005 2006 2007 2008 2009 Average
Total cultivated area (ha) 2,443,530 2,541,433 2,585,905 2,615,741 2,719,080 2,581,138
Total harvested area (ha) 2,414,455 2,516,415 2,566,952 2,613,363 2,674,603 2,557,158
Total Production (ton) 5,986,179 6,264,123 6,727,127 7,175,473 7,585,870 6,747,754
Average Yield (ton/ha) 2.479 2.489 2.621 2.746 2.836 2.63
Food requirement per year (ton) 2,013,533 2,053,983 2,096,025 1,970,270 1,979,214 2,112,605
Surplus/deficit of mill rice (ton) 1,319,571 1,433,880 1,649,640 2,025,033 2,244,598 1,734,544
Surplus/deficit of paddy (ton) 2,061,830 2,240,438 2,577,562 3,164,114 3,507,185 2,710,226
3.3. Recent Trend of Financing to SMEs and Rice Mills

Along with the development of the banking sector in Cambodia and strong economic
growth, loans to private sector have been gradually increased, in particular before the global
financial crisis. The outstanding loans grew from 2,438,304 million riels in 2005 to 9,832,685
million riels in 2008. At the same time, the MFIs have actively promoted to provide financial
services to the economy.67 MFIs increased its loans around 5 times during the period of 2005-
2009.
67) The RGC has announced that 2006 is a year of Microfinance in Cambodia due to its success and
contribution to the poverty reduction and the economic growth.
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Table Ⅱ-1-11 | Outstanding Loans of Banks and MFIs
(Million riel)
2005 2006 2007 2008 2009
Banks
Outstanding loan 2,438,304 3,472,130 6,259,697 9,832,685 10,262,786
Total deposit 3,927,221 5,687,035 9,922,472 10,287,018 13,841,565
Loan/deposit 62.09% 61.05% 63.09% 95.58% 74.14%
MFIs
204,572 357,045 617,907 1,130,585 1,244,970
Outstanding loans
The main sources of financing of start-up SMEs in Cambodia are drawn from internal
saving, retained earnings and borrowing from family, friends, and money lenders (collectively
known as“informal sector” ). An IFC survey (2010) shows that more than 90 percent of SMEs
are started up with their personal money: 92.7 percent of 178 interviewed micro enterprises,
95.9 percent of 171 interviewed small enterprises, and 95.1 percent of the 82 interviewed
medium enterprises. Without their own money, SMEs have almost no chance to start up their
business. The second source of fund relies on borrowing from family and friends. It represents
15-23 percent of micro, small and medium enterprises. The third source of start-up capital come
from banks (between 7.9-17.1 percent of SMEs). Generally, this type of fund would be
increasing only if business of SMEs grows. Surprisingly, only about one percent of the 504
interviewed SMEs borrow from MFIs (see Table II-1-12).
Table Ⅱ-1-12 | Enterprises by Type and Source of Start-up Capital
Starting capital Micro Small Medium Large Total

sources No. % No. % No. % No. % No. %
Personal money of own
165 92.70 164 95.90 78 95.10 68 93.20 475 94.20
or from partners
An asset sold to get
2 1.10 5 2.90 0 0 2 2.70 9 1.80
cash
Borrowed from family
40 22.50 35 20.50 13 15.90 10 13.70 98 19.40
and friends
Borrowed from banks 14 7.90 22 12.90 14 17.10 15 20.50 65 12.90
Borrowed from MFIs 5 2.80 0 0.00 0 0 1 1.40 6 1.20
Borrowed from money
1 0.60 2 1.20 1 1.20 1 1.40 5 1.00
lender
Donors 1 0.60 2 1.20 0 0 0 0.00 3 0.60
Government grant 1 0.60 0 0.00 0 0 1 1.40 2 0.40
Others 1 0.60 1 0.60 3 3.70 0 0.00 5 1.00
Number of respondents 178 100 171 100 82 100 73 100 504 100
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An increase in the number of SMEs along with the development of the banking system in
Cambodia has increased the financing to SMEs by banks and MFIs. According to IFC recent
survey, important part of short-term funding source came from bank loans in 2009. For small
enterprises, 24 percent of its total funding is bank loans compared to 32 percent of own
saving/equity. The Largest part of short-term funding of medium enterprises is from bank loans,
it is 31 percent compared to own saving/equity 18 percent (see Figure II-1-5). However, most of
these financing are still in short-term. As far as long term funding of SMEs is concerned, the
dominant part of funding are from own saving/equity. It represents around 65 percent. Twenty
percent and fourteen percent of long-term funding sources come from bank loans for SMEs
respectively. This figure also reveals that bank loans to SMEs have been very improved
compared to the past (see Figure II-1-6).
Figure Ⅱ-1-5 | Short-term Funding Sources
Figure Ⅱ-1-6 | Long-term Funding Sources
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Furthermore, the lack of support for the mill industry can be counted. The proportion of the
mill industry is overwhelmingly large in SMEs. However, the level of support for the mill
industry has remained rudimentary (see Table II-1-13). Since 2005, Cambodia has allocated a
part of its budget to support the Rice Mill Associations. However, the financial support is only
for one year, as the money is meant to be used as circulating capital. The budget includes the
government’ s allocation and counterpart money from the RDB.68
Table Ⅱ-1-13 | Rice Financing by Government

(USD)
2005 2006 2007 2008 2009 2010
MEF 2,000,000 3,000,000 4,000,000 13,000,000 18,000,000 18,000,000
RDB 1,000,000 - 1,000,000 3,000,000 5,000,000 7,000,000
Green Trade - - - 4,000,000 - 1,500,000
Total 3,000,000 3,000,000 5,000,000 20,000,000 23,000,000 26,500,000
Note: Green Trade is a state-owned enterprise that collects rice product from farmers.
4. Obstacles to Financing for SMEs and Rice Mills

Even though the private sector has enjoyed increasing loans to their growth and excess
liquidity in the banking system, the SMEs in Cambodia has, however, a limit access to loans
from the banking sector. The prevalent problem of financial industry in Cambodia is due to the
ill-functioning of overall banking mediation. Especially, SMEs are suffering severely from the
lack of credit rating service, registration system, collaterals, and so forth. According to recent
IFC survey (2010), about 90 percent of agribusiness SMEs and two-thirds of manufacturing and
service sector SMEs in Cambodia have identified a lack of access to finance as their major
constraint for growth. The constraints of access to finance are numerous. Cambodian Sub-
Committee identified four main factors as major constraints of SMEs’assess to finance (RGC,
2005). They include a lack of collateral, an inadequate legal framework and poor contract
enforcement, a limited number of financial products, and an inability of SMEs to prepare basic
financial statements. Furthermore, the constraints of access of SMEs to financing also came
from other factors.
68) Interest rates on the funds of the government support for rice millers, which was implemented by the
RDB, range from 5% to 6%. This level is much lower than a general loan.
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4.1. Poor Financial Structure
Cambodia is currently almost non-existent in direct financial markets, and the number and
types of financial institutions are very limited. Banks and MFIs have very few financial
products and services to provide to SMEs. Most of the financial activities are concentrated on
the main cities, making it impossible for rural people to have access to financial services.
4.1.1. Instability to Secure Financial Resources for Long-term Loan
The Mekong Program Development Facility (MPDF) investigated why banks and other
financial institutions are reluctant to make long-term loans at affordable rates. SMEs in
Cambodia consider the lack of affordable long-term financing one of the greatest obstacles to
their growth. SMEs only have access to financing their working capital (short-term loans).
Harner (2003) reveals that there is an almost total absence of medium- and long-term lending to
SMEs. In 2001 only one percent of the total loans to SMEs were for two-year terms, 29 percent
had 1-2 year terms, and 70 percent had terms of less than one year; very rarely are loans
extended for long terms on a case-by-case basis.
Bank deposits are more than 66 percent of the financial sources for loans, but most deposits
are for not more than one year. This is an obstacle for banks to provide medium- and long-term
loans to SMEs. As a result, a serious mismatch in funding takes place. One can see that for
short-term funds, banks are over-funded by a large margin as short-term deposits stand at 180
percent of the short-term loans provided. For medium and long-term maturity, funds from
deposits cover only 3.5 percent of the total medium and long-term loans. The financial
institutions take a risk of maturity transformation, which is understood as a risk that should be
averted by sound banking practices. It is particularly the case when the economy and the
financial system shifts toward an open economy and would become susceptible to the global
risk exposure and fluctuation.
There are several views on this serious mismatch in funding. One of views mainly focuses
on seasonal supply and demand in agricultural businesses. The agro-industry is represented by
rice, fruit, tea, coffee, and other crops that are significantly influenced by seasonality in the
supply of raw materials. Accordingly, their operation rate through a year is very low and cash
needs are concentrated on working capital for procurement of raw materials during specific
months. The operation rate of production facilities itself can partly be adjusted through
inventory of raw materials, but access to financing for working capital is a severe constraint.
Financial institutions are much more sensitive to short-term financing needs than to long-term
needs because of lack of the ability of credit assessment. Another view can be found for
historical reasons. The measurement to stop using the riel under Pol Pot, the communist regime,
and the withdrawal of banks that did not meet the minimum capital requirements set by the
amendment to the Banking Act in the late 1990s without the protection of the depositors caused
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widespread distrust of bank deposits. Therefore, this creates a shortage of bank deposits, in
particular for short-term deposits. The Banks’business strategy is another reason for the
shortage of long-term funds. Long-term funds are less available to SMEs when banks use
deposits in a fixed investment, such as real estate.
Whatever the views may be, the lack of long-term funding for SMEs is a critical factor that
hinders the growth of SMEs. Much of the SME funding has been provided by foreign aid funds.
However, the amount of foreign aid money would be lessened as the economy grows and its
role in the economy would be diminished. Therefore, institutional support, such as securing
financial resources and long-term funding is far more important.
4.1.2. High Interest Rates
In Cambodia, banking generally provides US dollars to borrowers on their own terms and
conditions based on the market rate and their own assessment of borrowers and the project.
Interest rate of most banks is from 15 percent to 17 percent, but entrepreneurs think that a rate
lower than 10% is vital. This SME entrepreneurs’general view on interest rates might deter
them from the challenges of speedy growth of their business by making good use of bank loans.
Due to the risks concerning lending to SMEs, banks charge high interest rates to SMEs. Few
SMEs can then afford the high cost of borrowing, which creates a vicious cycle. Annual interest
rates of bank loans in foreign currency during 2005-2009 fluctuated within a range between
15.65% and 16.37% while the inflation rate was between 6.1% and 7.7%, with the exception of
25% in 2008. The average interest rate has slightly decreased compared to last four years. At the
same time, the MFIs still charge a high interest rate but it was reduced gradually from 31.75%
in 2005 to 27.39% in 2009 (see Table II-1-14). However, the high level of interest rate of banks
and MFIs remain the big concerns for SMEs to get access to financing.
Table Ⅱ-1-14 | Interest Rate on Loans in USD
2005 2006 2007 2008 2009
Banks 16.20% 16.37% 15.83% 16.08% 15.65%
MFIs 31.75% 30.70% 28.10% 29.18% 27.39%
The main reason for high interest rate seems to arise from the credit risk of borrowers as
well as the pursuit of profits of financial institutions. Since most banks in Cambodia are owned
by foreign investors, their profitability measures such as ROA and ROE are bigger than those of
other countries. For instance, ROE in Cambodia is 1.3% in 2009 declining significantly from
the 2.9% in 2008 after the global financial crisis. But averaged ROEs of banks in Korea and in
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Southeast Asian Economies (Thailand, Indonesia, Malaysia, Philippines) are 0.48 and 0.77 in
2008 respectively. Moreover, the banks charges high interest rate to SMEs because credit rating
system which enables banks to measure proper risk to impose adequate interest rate does not
exist in Cambodia. Therefore, high interest rate is inevitable in the current situation.
4.1.3. Lack of Monetary Policy Tools
Due to the heavy dollarization of the Cambodian economy, about 95 percent of transactions
are carried out in US dollars and on a cash basis because of the absence of an effective payment
and settlement system and the lack of financial service providers. For this reason, the
effectiveness of the monetary policy of the central bank is very low. Originally, the central bank
implemented a monetary policy, affecting some macroeconomic variables such as inflation.
However, the excessive use of the dollar makes it difficult to perform a policy that absorbs
external shocks. In fact, except for the reserve requirement ratio, there are few tools for
controlling liquidity, which potentially limits the use of liquidity provision by central bank to
SMES and other target sectors that the government believes to be a leading industry for another
take-off of the economy.
4.2. Lending Practices Based on Collateral

Lack of collateral value of limited assets is a common problem for the majority of SMEs.
Only land and buildings can be used as collateral for obtaining credit, as there is no secondary
market for machinery and equipment. Also, according to a survey of practitioners in financial
institutions, the majority does not consider company equipment as collateral.69 Banks also
require very high collateral in extending credit, as banks tends to require a substantially higher
collateral value than the nomina lvalue of loan.
To solve this problem, we can consider credit loans. However, a credit loan has to be based
on historical data, such as repayment of loans, credit rating, and accurate loan underwriting. It is
impossible to increase credit loans right now in Cambodia due to the lack of a well developed
credit information system (CIS). The credit guarantee scheme would serve to correct this
constraint. However, the credit guarantee service has not yet been institutionalized in
Cambodia.
69) It has almost become a tradition that banks prefer immovable assets over movable assets as collateral.
This is due to the weak confidence in legal system in Cambodia. Without an exception, SMEs need to have
immovable assets to have access to loans. Furthermore, immovable assets are usually registered in the
individual’
s name rather than in the corporation’ s name, thus banks prefer to lend to individual borrowers
rather corporations.
215
Table Ⅱ-1-15 | Total Loan Classified by Industry
(Million riel)
Growth
2009 2008
rate (%)
1 Retail trade 1,922,057 18.2% 1,245,153 12.7% 54.4%
2 Wholesale trade 1,352,730 12.8% 1,617,970 16.5% -16.4%
3 Hotels and restaurants 1,261,591 12.0% 1,276,564 13.0% -1.2%
4 Manufacturing 920,384 8.7% 983,664 10.0% -6.4%
5 Construction 904,479 8.6% 773,808 7.9% 16.9%
6 Other non-financial services 878,571 8.3% 658,710 6.7% 33.4%
7 Personal consumption 748,871 7.1% 583,937 5.9% 28.2%

8 Agriculture, forestry and
708,874 6.7% 516,297 5.3% 37.3%
fishing
9 Real estate 662,790 6.3% 737,442 7.5% -10.1%
10 Mortgages, owner-occupied
376,375 3.6% 716,216 7.3% -47.4%
housing only
11 Information media and telecom 308,034 2.9% 244,449 2.5% 26.0%

1.4%
12 Transport and storage 175,828 1.7% 137,410 28.0%
13 Financial institutions 144,700 1.4% 135,382 1.4% 6.9%
14 Utilities 55,756 0.5% 76,598 0.8% -27.2%
15 Rental and operational leasing

45,940 0.4% 24,301 0.2% 89.1%
activities
16 Other 45,620 0.4% 81,313 0.8% -43.9%
17 Credit cards 16,924 0.2% 15,991 0.2% 5.8%
18 Mining and quarrying 10,855 0.1% 7,481 0.1% 45.1%

10,540,38
Total 100.0% 9,832,685 100.0% 7.2%
1
4.3. Concentration of Loan to Services Sectors

Table II-1-15 shows that as of the end of 2009, bank loan recorded the largest concentration
in retail trade activities (18% of the total portfolio), followed by wholesale trade (13%) and the
hotel and restaurant industry (12%). The manufacturing industry was the fourth (8.7%) largest
and agricultural sector accounts for 6.7% of the total loan. These ratios are far lower than the
216
ratios of the values added of manufacturing and agricultural sector respectively over that of the
whole economy.70 Retail, wholesale, and hotels and restaurants industries are relatively stable in
the loan repayment and thus the funds are concentrated on these sectors. However, as the
economy has grown, loans to these sectors need to be transferred to the manufacturing sector,
which has a wide impact on the economy and creation of employment.
4.4. Shortage of Financial Infrastructure

4.4.1. Lack of Infrastructure for Credit Information
The provision of financing for the private sector, especially for individuals and small
businesses, is constrained by the lack of credit information available to lenders. Lack of
information greatly increases risk and uncertainty for lenders, which leads to a fact that unless
borrowers have land and buildings worth far more than the value of loan, banks are unwilling to
lend. The ADB identified the lack of credit information as a serious deficiency in Cambodia and
one of the chief reasons why both SMEs and individuals find it so difficult to get the financing
they need.
Currently, there is an institution for gathering credit information in Cambodia. With the
support of the ADB, the NBC, the Association of Banks in Cambodia (ABC) and participating
banks, a pilot web-based CIS database has been developed. This CIS helps reduce asymmetric
information and transaction costs of lending by providing credit information on borrowers.71
However, after a few years of operation at the NBC, the use of the CIS is limited because
financial institutions need more than just negative information in order to comprehensively
assess would-be borrowers. It would be more useful if the system also provided positive
information. Thus, some improvements are necessary to the CIS, so that it can effectively
respond to the needs of clients. Another factor that contributes to the reduced effectiveness of
the current system is its voluntary rather than compulsory membership system.
70) The agriculture sector in the total of GDP estimated at about 33.5% in 2009, increasing from 28.5% in 2007,
while the industry sector contributed only 21.7%. The increase of the share of agricultural sector in GDP
resulted from the decrease of such sectors as constructions, industry and services sectors were sluggish.
71) The NBC took the lead in developing the necessary legal framework to enable and implement the CIS. In
May 2006, NBC released Prakas No. B006-073 BK on the utilization and protection of credit information.
This Prakas was aimed at promoting sound credit activities and risk management by all entities
participating in the financial system by authorizing the establishment of a centralized credit information
collection agency that collects and shares negative credit information relating to bank borrowers among
member banks and by protecting the secrecy of borrower information from abuse.
217
4.4.2. Lack of Accounting Standard
The inadequacy of the Cambodian accounting and supervision system is another cause of the
less developed financial structure. Only half of SMEs prepare financial statements every year
because SME management teams generally consider accounting to be cost-burdened and follow
traditional cash-basis recording. On the one hand, SMEs were not equipped with skill to prepare
the financial statements. On the other hand, the financial reporting required by legislation is
complex. Thus, it is costly for SMEs to prepare the financial statements. Many SMEs try to
avoid paying taxes and take advantage of the Minimum Tax System, which is subject to the
self-assessment regime and imposed at the rate of one percent of annual income.
The NBC urges the financial institutions to educate the borrowers and to have them prepare
the financial statements for the years to come. Financial institutions that fail to comply are
penalized and urged to classify such loans in each year’ s financial closing. An accounting
standard was introduced to Cambodia in 2002. The National Accounting Council (NAC) is
committed to ensuring that the accounting standards for SMEs are completed in 2010. For the
promotion of the accounting practice, the MEF and the NAC have worked together to create a
template for compact accounting and have had the template publicly distributed. While the
accounting system is promoted, there appears to be a shortage of Certified Public Accountants
(CPAs). Investment in an SME accounting system is limited due to technical difficulties and
cost. Therefore, the transition of general perceptions and a simple financial reporting standard
are the most important factors for financing for firms.
4.4.3. Lack of professionals
The human resources of the banking sector and financial institutions are limited. Because
borrowers almost always secure loans with collateral, bank staff has little experience analyzing
financial records and assessing risk. So the banks are reluctant to lend to SMEs or, if they do
lend, banks would charge high interest rate. Therefore, building up human resources of
regulators and bank staff, particularly loan examiners and credit analysts, is necessary to
improve the services and products of financial institutions. In particular, the regulators need to
improve and strengthen skills as well as knowledge of the legal framework to strengthen the
supervision and monitoring of banks. The NBC has developed skill in performing the regulation
and supervisory roles and has concentrated on these, but it still needs to build up additional
capacity to carry its expanding tasks. There are additional skills that would further assist in its
performance; for example a greater understanding of international reporting standard and the
ability to review the financial situation of banks including the progressive improvement of
disclosure of financial information required by international reporting standards.
The Chamber of Commerce and various industrial associations currently have training and
consultation services for enterprises on management skills, marketing, and financial
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management in collaboration with the RGC. Nevertheless, the majority of SMEs feels isolated
and finds it difficult to access consultation services, as illustrated by the fact that less than 8
percent of SMEs in a sampling survey indicated that they participate in business associations.
Many SMEs consider associations unbeneficial considering the membership fee. Also, they do
not want to pay any fees for training. In view of the poor management level, SMEs need
business consultants who give them direct advice on business improvement.
5. Policy Suggestions to Promote Financing for SMEs

and Rice Mills
5.1. Basic Principles

Recognizing that the development of SMEs is a key for sustainable economic growth,
employment, and poverty reduction, the RGC has made a lot of efforts in developing this sector.
In this respect, in its“Rectangular Strategy” , the RGC has designed the policy measures to
promote the SMEs sector.72 The policy measures are delineated as thirteen policies. Among
them, the first is to encourage the development of SMEs through the provision of medium and
long-term finance. More specifically, this measure includes establishing effective collateral
system and land titling, developing leasing as a financial product and developing credit
information sharing for banks to reduce risk, and developing a simplified accounting and
taxation system for SMEs to improve financial information.
Specific to the SME sector development, Small and Medium Enterprises Development
Framework developed by RGC sub-committee stated that the ADB would help create an
enabling environment by: (1) establishing a development framework and appropriate
institutional structures, so that policy towards SMEs can be effectively coordinated and
implemented across various ministries; (2) enhancing governance and business regulations by
improving the company registration processes and developing a transparent business licensing
system; (3) improving SME access to finance by developing a CIS, assisting enterprises in
accounting and taxation systems, and developing a legal framework for leasing; and (4)
assisting the development of business service and private partnerships.
To do this, active roles of the government and the central bank are both critical. In most
development models, special support for some sectors is largely emphasized. Historically rapid
growth countries have used some policies, taking into consideration an efficient allocation of
funds. However, the fifteen years of the actual introduction of capitalism and the construction of
a financial system is too little time to achieve sudden policy implementation. Therefore, it is
72) There are four core components of Rectangular Strategy: growth, employment, equity, and efficiency.
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desirable to use a gradual policy in supporting SMEs. First, the lack of statistics makes it
difficult to analyze policy effectiveness, and this leads to the passive implementation of policy
by the government and central bank officials. Second, the accurate diagnosis of other countries
in a development model should come first.
In many countries, including South Korea, the government and central bank have played a
positive role in supporting SMEs and economic growth. In early financial developing stage, It is
general as well as necessary that government intervenes the financial market directly to help
development of SMEs. However, when financial market becomes mature, market principle
should be prior to government intervention. Banks should be key players to distribute the funds
for SMEs fairly to them. To do this, banks should have their own ability to find sound SMEs.
On the other hand, Government should try to help SMEs through indirect ways such as
resolving asymmetric information problem between banks and SMEs, introducing policies and
instruments to reduce transaction cost and making rule for SMEs to compete fairly. In taking
advantage of these examples, we should always be careful in applying these to the case of
Cambodia because each country has a different stage of economic development, a different
cultural, historical and economic background, and different resources. Now we identify policy
priorities and differentiate short-term and long-term policies.
5.2. Short-term Policies

5.2.1. Provision of Financial Resources through the Government
Cambodian banks are reluctant to lend to SMEs and focus more on direct investment, such
as real estate. This structure makes it difficult to implement policies that provide low-interest
funds based on market principles. To overcome this problem at the time of shortage of funds,
many countries provide low-cost funds directly to certain sectors that need to be taken care of.
APEC (2008) summarizes two types of government support programs: (1) a direct loan
program with favorable interest rates or often with long-term fixed rates; and (2) governmental
special-purpose funds for innovative SMEs or venture firms. In general, debt financing
programs are centered on special banks or guarantee institutions. Japan, Korea and Chinese
Taipei have the longest histories of governmental loan programs, while Malaysia and the
73) Some examples of debt financing are as follows. Japan provides direct loans through: 1) the Japan Finance
Corporation for Small Business; 2) National Life Finance Corporation; and 3) the Shoko Chukin bank:
Japan’s Credit Guarantee Corporations and JASME. Korea provides policy loans to SMEs and established
Korea’s Credit Guarantee Fund in 1976 and Technology Credit Guarantee Fund in 1989. Malaysia created
an SME bank in 2005 for financing and credit guarantee. China provides direct loans from its Innovation
Fund (1999) and from the Funds for SME Development (2004). The Philippines established its Small
Business Corporation (1991). Mexico operates the National SME Guarantee Program (2001) and Seed
Capital Program (2005)
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Philippines have relatively newly established public loan systems after the Asian crisis.73
Countries with equity-focused policies provide only a small proportion of systematic direct loan
facilities. Thus, these economies do not have special banks or credit guarantee institutions;
instead, they directly involve creating venture capital funds or actively participating in the
network formation of venture capitalists.
Kang (2007) assesses the government financial assistance toward SMEs in Korea. Kang
finds that the effects of policy loans have been dubious: effects on profitability are most
insignificant, while the effects on sales and economic value-added increases are significantly
positive. Thus, these loans seem to have achieved their policy objectives since they target
mediocre SMEs to create values in the economy, although they are not so profitable.
Therefore, there is a need for the application of government loans executed by other
countries to the Cambodian economy.74 In doing so, the Cambodian government should consider
designing an incentive mechanism in such a way as improving loan availability and
accessibility of SMEs and rice mills. A bank and MFI that provides SMEs and rice mills with
more loans of longer maturity, less collateral and lower interest rate should be entitled to obtain
more support from the government.
In general, financial institutions are inclined to expand their loans and investments toward
SMEs when the economic indicators are showing better off, but they tend to reduce them
excessively when the situations are turning around. Considering that this aspect of financial
institutions’comovement with economic cycle could emerge in the financial crisis, financial
support program on SMEs by the government needs to be implemented to counteract the
economic situation. To do this, first of all, it needs to reinforce deferred debt repayment
program to prevent sound SMEs which are suffering from the temporary lack of liquidity from
going bankrupt. On top of that, with the introduction of counter cyclical financial regulations
such as dynamic allowance system, they also lessen the negative impact on financial support
toward SMEs in the economic crisis.
Moreover, given that financial industry in Cambodia is in early stage, the indicators which
can find visible progress of the policy need to be cultivated and suggested. For example, the rate
of SMEs over total loan or industrial load share can be good indicators since the policy results
are able to be found easily and promptly through banks. However, focusing on its original goal
of promoting sound and promising SMEs, it is necessary in mature stage to develop indicators
which can show growth, profitability and contributions to GDP of supported SMEs.
74) In addition, the central bank could supply low-cost loans to SMEs through commercial banks so that they
can channel the funds to SMEs. However, this is not easy in Cambodia as the NBC acts mostly as a
regulator and supervisor, rather than as a liquidity provider.
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5.2.2. Establishment of a SME-Specialized Bank and Credit Guarantee
Funds
Cambodia’ s financial sector is comprised of commercial banks, specialized banks, and MFIs.
Commercial and specialized banks are in principle more appropriate for providing funds to
SMEs. In reality, however, they impose too high interest rates and provide only small loans.
Therefore, to provide SMEs with financial services more smoothly, there is a need to establish a
dedicated SME financing bank that is positioned locally to increase the intimacy between the
bank and local market.
As for the agricultural sector, the RDB and Farmers’Union are both part of the system that
provides funds to the agricultural industry. However, SMEs in the agricultural sector have no
access to these institutions. Moreover, there is no institution to mainly support agricultural
SMEs that are likely to develop rapidly in the future. To overcome these problems, it is good for
Cambodia’ s economy to establish a dedicated SME financing bank that mainly deals with
unsecured loans to SMEs. Also, it may be an urgent task to establish a system to provide low
interest rate loans to each SME through an SME Association.
The Industrial Bank of Korea was established in 1961 as the Korea’ s first special bank
exclusive for SME banking. It has played a leading role in fulfilling the financial demands of
SMEs to grow into the backbone of the national economy. The Bank’ s financing has been through
the continuous expansion in deposits and the introduction of the foreign capital, which has been
expanded and supplied to the long-term facility funds by prioritizing on the sectors most resilient
to the national economic support, thus modernizing the facilities in SMEs and driving the growth
of the SME sector. In other words, the Bank has fulfilled its leading role in supplying the SME
banking. The details of history and its major achievements are illustrated in Appendix.
In Cambodia, SMEs have difficulty getting loans without collateral. Thus, the introduction
of a credit guarantee system is one of the prescriptions to cure this problem. But, it is inevitable
for government to support a loan guarantee fund in the form of grants until this fund gains
critical mass in maintaining it self. Additionally, the cross guarantee system through
associations comprised of partners in the early stage is reasonably realistic. Considering that
Cambodian government is pursuing their policies based on the free-market mechanism and isn’ t
fully affordable to direct support through the government finance, it is more desirable to support
the establishment of credit guarantee institutions rather than subsidy types of the Germany.
The MEF, NBC, and RDB should consider introducing innovative financial mechanisms,
such as the credit risk sharing facility (RSF) that would facilitate the smooth flow of funds from
commercial banks to potential borrowers, including SMEs and rice mills. The RSF aims to
increase accessibility of funds by way of a partial credit guarantee instrument that enables
commercial banks to begin to take risks in certain sectors. Further, more than a half of countries
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all over the world have some sort of credit guarantee scheme to support their SMEs.
5.2.3. Introduction of Some Regulations When Necessary
It should be considered whether the regulations that were used in the beginning stage of
industrial development. For example, a mandatory ratio of SME loans, as well as guidance of
deposits and loans as a way to lower the cost of funding, could be applicable to the Cambodian
economy. When applying the mandatory ratio of SME loans and to a certain sector such as the
rice mill industry, which is essential for development, we can achieve the objectives of policies
that give a high priority to the target sectors. Also, the maximum interest rate on loans to SMEs
and target industries should be examined carefully. Blocking excessive interest rates on SMEs
can increase the SMEs’access to financial services.
However, considering the role and function of regulating authorities and the implementation
of policy based on the basic principle of financial liberalization, the banks’resistance and
criticism might be raised as to the necessity of introducing regulations. In fact, Cambodia
experienced the resistance of banks to the regulations enacted by the central bank. Thus,
preparation and a strong belief in enforcing the policy are extremely important.
5.2.4. Financial Products and Service Development
To develop financial products and services, such as financial leasing and loans against
movables assets is another way to increase lending to SMEs.75 According to a recent survey of
IFC (2010), 56 percent of interviewed enterprises need to finance machinery and equipment.
The financial leasing is suitable for SMEs that cannot meet the collateral requirements of the
banks. Financial leasing would provide an alternative form of finance where a bank (lessor)
relies on its ownership of the leased asset and the lessee’ s cash flow to service the lease
payments. Fewer requirements would be needed for obtaining financial leasing, especially
concerning historical financial information. Furthermore, financial leasing is a long-term
contract that allows SMEs to finance its fixed capital such as equipments and machinery.
Leasing would be particularly helpful to micro-, small-, and medium-sized businesses and
individual farmers who cannot access bank lending. With their greater understanding of the
nature of micro, small and medium businesses, MFIs are in a better position than banks to
provide micro-leasing services to their markets, but the regulations do not allow it.
As discussed earlier, almost all loans are made against immovable assets such as buildings,
houses, or land. This would be an unfavorable condition for SMEs to grow, in particular, those
75) Financial leasing has not yet developed even though a law on financial leasing has existed since June 20,
2009.
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that potentially have a certain number of movable assets and needs for finance to develop their
business. The government as well as the central bank should encourage lenders to lend against
movables assets. In order to promote leasing for movable and immovable assets, regulations on
commercial leasing should be introduced in a way of supporting SMEs and rice mills.
The introduction of syndicate loans is needed to increase the amount of lending and to
diversify risk. A syndicated loan is a large loan made to one borrower by a group of banks
headed by one lead bank in order to increase the size of loan to SMEs while reducing the risk to
the banks. In addition, the rice millers association has to endeavor to adopt new technology and
seek loans because a lack of mill production can be caused by infrastructure failures, such as a
lack of skilled technicians, lack of funding, and logistics costs.
5.3. Mid- and Long-term Policies

5.3.1. Improvement of Registration System
The improvement of the registration system, such as decreasing cost and easing registration,
is one of the main factors to increase loans to SMEs. With the assistance of the World Bank and
the governments of Finland and Germany, the Cambodian government introduced systematic
land registration.76 The decentralization process should be expanded to more provincial urban
centers as permitted and guided by regulation from the MOC allowing decentralized registration
across Cambodia. The MIME, which is responsible for micro, small, and medium enterprises,
and the MOC should work together to develop an online business registration system by
establishing the necessary legal and regulatory framework and the detailed operating
procedures. Online registration should speed up the process of registration, reduce the
administrative costs for both the government and businesses, and ensure transparency in the
process by significantly reducing human intervention. After adopting the necessary procedures,
the MOC should develop information and communication technologies to facilitate online
registration. Issues for the government’ s future consideration may include expanding
registration to a wider segment of the economy. The MOC and the MIME should establisha
one-stop service for registration and expand from center to provincial or district levels.
76) The Law on Commercial Enterprises was enacted in 2005 in order to provide a clear legal framework for
the operations of companies and partnerships. It obliges companies operating within Cambodia to register,
thus strengthening corporate governance. This law has a significant impact on the registration process,
which is a major barrier to do business, and on access to financing (see Figure II-1-7).
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Figure Ⅱ-1-7 | Monthly Enterprise Registration
5.3.2. Further Development of Credit Information System (CIS)
The NBC should issue a review of the operations of the pilot CIS, examine options to
expand it, and assess the feasibility of establishing a fully-fledged private credit bureau that
operates on a sustainable basis. The CIS should include“positive”as well as“negative”
information regarding borrowers, cover more financial institutions, and make it compulsory for
banks to participate in the CIS. A credit scoring system could be developed as a starting point
for risk management systems. Finally, during this phase, consideration should be given to
establishing a joint venture with one of the international firms that operates credit registries and
is known to support the strengthening of credit registries in developing countries.
In order to increase the information on SMEs in Cambodia, financial records are needed.
The lack of such information is a significant barrier to initiatives to improve SME financing.
For instance, the ability of banks to develop good credit models for the SME segment is
impaired by the lack of data. In this respect, the availability of such data would greatly assist
studies, model calibration, and research by financial institutions and others in developing a
better understanding and risk profile of the SME sector.
5.3.3. Financial Statement and Audit System
One of the prerequisite conditions for the promotion of SMEs is found in the preparation of
accurate financial statements by the borrowing SMEs and the appropriate disclosure of financial
information. The Company Law requires a public or limited company to keep accounting
records, prepare a financial statement, and have accounting records audited by an auditor. For
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an overwhelming majority of SMEs, it is not easy to comply with these rules because they
cannot afford to employ an accounting specialist; the enterprises are normally family-based and
small. The Cambodian Economy, at its current stage of economic development, hosts a large
number of SMEs that are not required to prepare financial statements in accordance with
Cambodian Accounting Standards (CAS). However, these same SMEs often find it difficult to
obtain access to finance, due to their inability to provide lending institutions with appropriate
financial statements. Therefore, the preparation of financial statements can help SMEs to access
loans from banks without collateral, and this leads to the construction of reliable credit
information.77
5.3.4. Human Capacity Development
Human resources are limited in the financial sector. To overcome this difficulty, the
supervisor and operator in the financial sector coherently try to improve the quality of service
and product through the additional development of human resources. Specifically, supervisors
should increase their understanding of the law framework and constantly improve the
institutions. Although the NBC has endeavored to develop capabilities to perform its role of
supervision, it still needs to develop its abilities, such as understanding international reporting
standards and analyzing the current financial situation of the borrowers. The Center for Banking
Studies was established in 2002. It plays a crucial role in providing professional skill in banking
for the staff of the NBC and students. The center provides an associate degree for students who
successfully complete the two-year training program. In the insurance sector, there is no
specialized educational agency. To develop the insurance sector, a specialized educational
agency is needed. Overall, in the financial sector, extensive investments in workforce
development are also needed because specialized knowledge is essential.78
Due to the opaque information on SMEs and a lack understanding of SMEs, bank officers do
not have the requisite skills to evaluate SMEs. Many banking institutions apply the same
techniques of evaluating large companies to smaller ones without any adjustment for the
inherent differences. Moreover, banks are more stringent with SMEs on documentation
requirements. For a start, credit officers or analysts should realize that SMEs have unique
characteristics that differentiate them from large established corporations. In this regard, the
techniques and appraisal methods appropriate to evaluate large corporations are not relevant for
small enterprises. This means that banks must adjust their evaluation techniques accordingly
77) The MEF approved and issued for public use the Financial Report Template (FRT) for SMEs through an
MEF Prakas on June 16, 2006. The FRT is a simplified financial statement that is easier to prepare than
financial statements that comply with the complicated CAS, which do not offer a practical approach for
smaller enterprises.
78) A training program was also submitted to the MEF by the NAC and SME Accounting Task Force in July
2006, which was carried out over the second half of 2007. The training program disseminated the FRT and
provided training to microfinance institutions, banks, and business associations in order to give these
professionals the ability to build capacity among their SME clients on the use of the FRT because the SMEs
are largely unaware of the need to and benefit of preparing financial statements.
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and apply relevant ones to suit each group of borrowers. A good reason for applying
relationship banking to SMEs is that they are not as well structured and are more opaque than
larger firms. To improve the skills of banking staff, banks could provide their credit officers
with more training on SMEs. Banks should tap internal personnel or consultants who have
extensive experience dealing with retail and small scale lending, especially at the branch level.
6. Summary and Conclusion

The Cambodian economy has experienced relatively high growth at an annual rate of 9.3
percent on average over the past ten years. However, the financial sector is underdeveloped
compared with other major industries. The Cambodian economy has been directly affected by
the financial crisis that began in the U.S. Moreover, the main function of financial sector, such
as being the intermediary of funds for the real estate sector, seems to be restricted and shows
limitations. Moreover, although SMEs and the rice mill industry have been a great contribution
to the Cambodian economy, the flow of funds to these sectors has been somewhat limited.
To promote financial intermediation and to strengthen the financial sector with the aim of
supporting economic growth, there have been some financial restructuring programs and
improved financial supervision. However, more work needs to be done by the government and
the central bank with the aim of developing a sound financial system to win the public
confidence and to contribute to sustainable economic growth. In fact, the financial development
stage of Cambodia is now in the take-off period. Types of financial institutions are very limited
and most financial institutions are located only in major cities, leaving many people and
industries without opportunities to access financial services. The direct financial market does
not exist at all in Cambodia. Registration and financial statements are not transparent, and
financial institutions do not have the ability to evaluate credit. Thus, financial institutions
require collateral when they lend money to SMEs and focus on short-term loans to avoid risk.
These problems should be overcome in order to achieve sustainable economic growth. Actually,
in the development plan of the government, many prescriptions to cure these problems have
been introduced.
In most development models, special support for some sectors is largely emphasized,
including the efficient allocation of funds. However, the relatively short period to introduce
capitalism and construct the financial system makes it desirable to take a gradual approach in
supporting SMEs and rice mills. We provide a number of policy suggestions. For short-term
policies, we suggest the provision of financial resources through the government, the
establishment of a SME-specialized bank and credit guarantee funds, and the introduction of
some regulations. These include a mandatory ratio of SME loans and the development of
financial products and services. For longer-term policies, we propose improving registration
system, further developing the CIS, enhancing the financial statement and audit system, and
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developing the capacity of bank staff and regulators.
To achieve economic development, we should keep in mind that every country has its own
special character and development model. This means that a development plan must fit with
each country’s economic condition. A prescription for one country is not necessarily applicable
to other countries. Therefore, it is desirable to use a gradual policy in supporting SMEs.
Moreover, a thorough review of the policy options should precede their implementations.
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Appendix
Roles and Major Achievements of the Industrial

Bank of Korea79
1. Roles of the Industrial Bank of Korea

The Bank, since its establishment, has actively responded to the demand for funds in the
SME sector, which has dramatically increased in the economic development phase, thus
spearheading efforts for the quantitative expansion of the SME banking. Moreover, its new
financial mechanisms to complement interest rates and credit risks, and the formation and
improvement of the lending system complemented SME banking at commercial financial
institutions. As such, active funding support for SME policies drove the efficient management
of the government’ s SME policies.
Moreover, in the allocation of fund support along with its quantitative expansion, the Bank
controlled unnecessary loans in tandem with the government’ s SME policies and intensively
supported the priority sectors that would have had huge implications following the national
economic support. The Bank’ s funding supply played a central role that triggered the growth of
SMEs, fostering SMEs through selective financing.
The Bank’ s funding supply activities as such were unique in that it was in the direction of
the support in alignment with SME fostering policies. One classic example is the management
of the SME special funds support system. The Bank has devised and implemented the fund
supply plans for each sector in tandem with the government’ s SME fostering policies in order to
efficiently administer the fund supply to SMEs, based on its functions and features as a policy
banking institution. This is significant in that the Bank not only suggested selective financing
means, but also set directions for SME loans.
Meanwhile, the Bank established a comprehensive support system to respond to the

diversified funding demands of SMEs. It raised the efficiency in funding support while
effectively responding to the stronger demand in the non-financial service sector. Besides the
direct funding supply, the Bank complemented the structural weaknesses that are difficult to
resolve through the fund support alone through the management and technological guidance to
79) I appreciate the IBK Research Institute for providing its draft on the history of the IBK.
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SMEs. In addition, examples of the Bank’ s multifaceted support for SMEs are abounding. The
Bank played a spokesperson role for SMEs that proposed to the policy authority ideas gathered
from SME management research, feasibility studies, and SME statistics, etc; and the Bank
established various information and service provision systems for SMEs.
The Industrial Bank of Korea went under the spotlight when the Korean economy was in
turmoil. The 1997 financial crisis that gave the greatest blow to SMEs and the global financial
crisis that swept the world in 2008 put Korea into a severe downturn. Upon each crisis, the Bank
strived to tighten management and recover SMEs, bringing about the stability in the SME banking
market in weathering the storm. The various roles of IBK are summarized in Table II-1-16.
Table Ⅱ-1-16 | Roles of the IBK
Areas Contents
To finance through the continuous expansion of deposits and adoption of foreign capital
Supply Functions To modernize the facilities of SMEs through the expansion of supply of long-term facility funds
of SME Banking To raise the efficiency of the government’s SME policies through the qualitative and
quantitative expansion of SME banking
To select the aid priority sectors and optimize the fund allocation considering the economic
situation and the government’ s SME fostering policies
Fostering SMEs To extend financial support for job creation, small enterprises, and local SMEs to expand the
through Selective horizons of SMEs
Financing To secure the growth basis, and explore and foster high-performing SMEs
To expend restructuring support for SMEs
To induce credit covering and management stability for SMEs
To complement the structural weaknesses that are difficult to address with the funding
Establishing a
support alone, by means of management and technical guidance for SMEs
Comprehensive
To serve as a spokesperson for SMEs and make multifaceted efforts to support SMEs by
Support System
establishing various information and service systems for them
To strive for strong tightening policies amid the economic crisis and for the rebound of SMEs
To bring about the management stability for SMEs backed by the government’ s massive
Stabilizing the
capital investment and acquisition of non-performing loans
SME Banking
To expand credit loans for the setup and growth/development of SMEs, joint venture
Market in
companies with growth potentials and promising SMEs that are competent in business
Overcoming the
feasibility but weak in security solvency
Crisis
To devise the“System to Support Household Stability Funds”for employees of SMEs, thus
bringing about employment and management stability through the stability in their households
2. An Example of Major Achievements: Leading the SME

Banking through Expanded Support for Funds
For the last 40 years, the Bank poured in all-out efforts for the quantitative expansion of the
SME banking so that a greater amount of funds could be supplied to the SME sector, and also
for securing of the resources for the fund supply for SMEs.
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SME banking in Korea originated with the execution of the loan limit system in a bid to
systematically discharge the financial funds for SMEs in 1952. Following the UNKRA’ s fund
discharge in 1953, government funds generated from the special account reserves from the
vested property funds and counterpart funds started to be supplied from 1957, which vitalized
the SME banking sector. However, the measures were not that effective due to a lack of the
required institution and the fund supply system. Worse, in the 1950s, fund allocation was
concentrated on the backbone industries and the formation of consumer goods production
companies of a large scale and the overall tightening initiative continued to stabilize the prices
in the economic reconstruction period of the 1950s. As a result, SMEs were on the verge of
losing ground and suffered from budgetary turmoil, triggering socio-economic issues involving
SMEs.
Against this backdrop, the Bank on August 1, 1961 took its first ambitious step as a financial
institution specialized for SMEs by integrating and systematizing SME banking, which used to
be dispersed in commercial banks, the Agricultural Bank, and the Korea Development Bank. It
also discharged the contingency fund worth KRW 297 million to ease the financial difficulties
of SMEs in the latter half of its founding year.
Up until 1964, which was still the infancy period, the Bank had depended on the financial
counterpart loans from the government. However, amid the growth of the SME sector as well as
the government’ s SME policies in full swing from the mid-1960s, it turned difficult for the
Bank to handle the fund demand of SMEs with the limited existing resources alone. As a result,
it was urgently raised to expand the loan resources by increasing the deposits. The Bank
strengthened its self-sufficient resources formation system by focusing on the expansion of
deposits.
Furthermore, as the SMEs’demand for long-term funds skyrocketed amid the quantitative
expansion of the real economy under the economic development plans, the Bank actively
initiated the increases in capital stock and financing of foreign capital, thus striving to expand
the supply of facility funds necessary to expand and refurbish the facilities of the SMEs.
In the 1970s, in particular, the fund allocation was intensively focused on the heavy and
chemical industry under the realignment of the industrial structure. As a result, the counterpart
loans from government funds have either decreased or stopped since 1974. However, the Bank
converted the financial funds it had procured into government funds, first extending them as
policy-related funds, and then being covered by the government for the differences with the
general financial funds, thus continuously increasing the fund supply capacity towards SMEs.
In the 1980s, meanwhile, the direction of the economic policies shifted from a government-
oriented scheme to a private-oriented one. In addition, as the portion of funds towards the SME
sector increased amid the shrinkage in policy financing, financial support for SMEs skyrocketed
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quantitatively. In supplying the SME special funds, which used to be dispersed in each financial
institution, the Bank has been solely handling its internally secured funds since 1982. Since
then, the Bank has dramatically expanded the scale of deposits by securing resources.
Moreover, the Bank has spearheaded loans with various funds, such as recently expanding the
Small and Medium Enterprise Promotion Fund and Industrial Development Fund in the 1980s.
In the 1990s, the management environment surrounding SMEs rapidly changed: changes in the
global economic order, global movements towards market opening, and accelerated industrial
restructuring following the launch of the WTO regime. Accordingly, the Bank significantly
expanded the fund supply to the SME sector to strengthen the competitiveness of SMEs and to
stabilize management amid the economic situations at home and abroad.
As such, as the rapid expansion of the SME fund supply was driven by the establishment of
the Industrial Bank of Korea. The scale of SME fund loans in all deposit banks skyrocketed
from KRW 5.9 billion in 1961 to KRW 117.6 trillion at the end of 2000. Accordingly, the
portion of SME loans among total loans in deposit banks was 11.1 percent in 1961 and 44.6
percent in 2000. Moreover, the portion of loans to SMEs in the Bank out of total SME loans in
deposit banks took up 21.7% in 1970, 21.1% in 1990, and 15.4% in 2000, continuing with a
high percentage. 160,300 SMEs transacted deposits with the Bank as of the end of 2000, of
which there were 75,000 manufacturing companies. As such, the Bank has played a leading role
in the quantitative expansion of SME banking in Korea, unparallel to other banks not only in
terms of the scale of the fund support, but also in the number of companies transacting with the
Bank.
The balance of SME loans in deposit-taking financial institutions was KRW 430.7 trillion at
the end of 2009. The Bank’ s market share 19.46% and the SME loans amount to KRW 83.7
trillion.
Table Ⅱ-1-17 | The Portion of SME Loans in Each Bank
Bank IBK Shinhan Kookmin Woori Hana Others
Percentage (%) 19.5 12.3 14.5 14.2 7.2 32.3
The Bank has depended on government funds mostly for loans resources in the initial period.
However, the scale was far too short to fulfill the demand of SMEs for funds - one of the major
initiatives of the Bank. Moreover, the Bank has strived to expand and diversify in financing:
increases in the capital stock, actively financing the foreign capital and issuance of SME
financial bonds, etc.
This served as a momentum for the Bank to greatly secure the loan supply capacity every
232
year. In the 1980s, the policy financing oriented towards large companies has been put in place,
and the social consensus to foster SMEs spread out. Against this backdrop, the Bank has solely
handled SME special funds to further facilitate SME banking, while strengthening the lending
functions with various funds as resources, playing a leading role in SME banking.
As a result, the volume of the Bank’

s SME fund support (as of the balance at the year-end)
achieved an outstanding annual growth rate of 31.7% between 1961 and 2000 (the volume
skyrocketed from KRW 2.4 billion in 1961 to KRW 976.2 billion in 1980 to KRW 6.7 trillion
in 1990 to KRW 22.7 trillion in 2000).
In particular, the scale of SME fund loans surpassed KRW 1 trillion in 1981. In 2000, it
exceeded KRW 22 trillion, and well over KRW 20 trillion, growing 16-fold for the past 20
years (i.e. KRW 5 trillion in 1989, KRW 10 trillion in 1993 and KRW 15 trillion in 1996). This
has been attributable to the Bank’ s leadership in securing the fund support capacity and in
supplying funds to help better restructure SMEs for years; SMEs are preferentially treated in
discounts in commercial notes, trade financing, and support for export industry facility funds.
233
References
Altenburg, Tilman and Ute Eckhardt,“Productivity Enhancement and Equitable Development:

Challenges for SMEs Development,”United Nations Industrial Development Organization,
2006.
Asian Development Bank, Complete Report on Cambodia Small and Medium Enterprise
Development Program, December 2009.
Asian Development Bank, Proposed Loan and Technical Assistance Grant for Kingdom of
Cambodia: Second Financial Sector Program, September 2008.
Asia-Pacific Economic Cooperation,“Access to Financing for SME Innovation in APEC,”

SME Innovation Center INSME Annual Meeting, Guangzhou China, 2008.
Baily, P., SME Development Framework, 2005.
Harner, M. Stephen,“Financing SMEs in Cambodia: Why do Banks Find It So Difficult?,”

MPDF’ s Private Sector Discussion Paper No. 14, May 2003.
International Finance Corporation, Understanding the SMEs Sector in Cambodia and Their
Need for Financing Services and Products, 2010.
International Finance Corporation and Mekong Project Development Facility, Bulletin No. 16,
October 2008.
International Monetary Fund,“Cambodia: 2009 Article IV Consultation,”Staff Report ,2009
International Monetary Fund, “Financial Sector Assessment Program of Cambodia,” Stress

Testing the Banking Sector, June 2010.
Japan International Cooperation Agency, Project Formulation Study on Two-Step Loan Project
for SMEs and Rural Infrastructure in the Kingdom of Cambodia, October 2008.
KRI International Corporation and OPMAC Corporation, Final Report on the Preparatory
Survey on the SME Two Step Loan Project in the Kingdom of Cambodia, March 2010.
Kang, Dongsoo,“Empirical Evaluations on the Government Financial Assistances toward

SMEs in Korea,”In D. Kang (ed.) Financing Innovation-oriented Businesses to Promote
234
Entrepreneurship: Experiences of Advanced Countries and Lessons to Korea. 2007.
Mekong Project Development Facility, Financing SMEs in Cambodia: Why Do Bank Find It So
Difficult?, May 2009.
Naron, Hang Chuon, L ’

Economy du Cambodge, Nouvelles Frontieres du Development
Economique, 2010.
National Bank of Cambodia, Bank Supervision Department, Annual Report, 2009.
Royal Government of Cambodia, Financial Sector Blueprint for 2001-2010, 2000.
Royal Government of Cambodia, Ministry of Agriculture, Forestry and Fisheries, Annual

Report, 2000-2010.
Royal Government of Cambodia, Financial Sector Development Strategy 2006-2015, 2005.
Royal Government of Cambodia, Sub-committee on SMEs, Small and Medium Enterprises

Development Framework, July 2005.
Royal Government of Cambodia, Sub-committee on SMEs, Technical Report: SME Statistics in

Cambodia, November 2007.
Royal Government of Cambodia, Ministry of Economy and Finance, Cambodian Accounting

Standards and Cambodian Financial Reporting Standards, 2nd edition, September 2007.
Royal Government of Cambodia, Ministry of Economy and Finance, Annual Insurance Report,
2008.
Royal Government of Cambodia,“The Amendment Law on Financial Law for Management,”

June 2009.
Royal Government of Cambodia, Policy Paper on the Promotion of Paddy Production and Rice
Export, July 2010.
World Bank, Doing Business Report, December 2007.
235
Chapter 02
Proposals for introduction of credit guarantee

system in Cambodia
Yong-ju Chin, Hyo-eui Kim (Korea Credit Guarantee Fund)
Summary
Credit guarantee is a system designed to provide supports for enterprises which cannot
normally receive loans from financial institutions due to lack of collateral so that they may
access funds smoothly. Parties interested in credit guarantee system can be classified into
guarantee institutions which operate guarantees, financial institutions and SMEs which are
objects of guarantees, and guarantee systems can be classified into‘mutual guarantee system’ ,
‘public guarantee system’and‘loan guarantee system’ , depending on the mechanism under
which interested parties operate the guarantee system.
Under a mutual guarantee system, member enterprises establish a mutual guarantee union as
the operating body. The union raises the funds for guarantee through contributions or
investments by member enterprises and provide credit guarantee for the members. Under a
public guarantee system, building of financial resources of guarantee institutions mainly
depends on contributions or investments by the government, and independent guarantee
institutions operate the system and provide guarantee support for unspecified enterprises. In
case of the loan guarantee system, there is no independent guarantee institution, and the system
is operated in the form of a government program, with contributions or investments by the
government as financial resources.
Cambodia’ s economic growth rate was only 1% in 1998, but it jumped to double digits in
2004 through 2007 on the back of international aids and booming apparel exports and tourism.
236
However, the global financial crisis and the recessions in its wake have led to a modest drop in
Cambodia’ s recent growth rate. Cambodia’ s economy and industries have kept growing
recently. However, the pace of growth has slowed in the aftermath of the global financial crisis
and recessions and also due to the industrial structure which relies heavily on low-wage labor.
Cambodia now needs economic policies which can help drive its economic growth.
Financial markets in Cambodia are still in immature state to the extent that less than 10
percent of the population are using banks, but they are making progress in line with Cambodia’ s
economic growth and the opening of markets. The ratios of loans and deposits relative to GDP
in Cambodia were 12.1% and 19.2 %, respectively, in 2007, but they rose to 26.8% and 31.7%,
respectively, in 2009 and are showing a continued trend of increase. The characteristics of the
financial markets in Cambodia are as follows: 1) Cambodian banks have been reluctant to
extend loans to enterprises because of shortage of medium and long-term funds, shortage of
professionals well versed in lending business and so forth. 2) It is almost impossible for
financial institutions to extend unsecured loans because of the lack of credit information and the
reluctance to share available information among them, and firmly established financial practices
centered on secured loans.
Government’ s market intervention through credit guarantee system can be justified in that it
helps the growth and balanced development of the national economy. In underdeveloped
countries where the economic and industrial structures are extremely vulnerable to external
impacts and the financial markets are still immature, government’ s role and active intervention
is necessary for rapid economic growth, and the credit guarantee system can be properly utilized
as an economic and financial policy. Cambodia which is the subject of the policy consultation in
this study has a strong will to nurture SMEs. SMEs’demand for capital is growing rapidly in
line with Cambodia’ s economic growth, but they face difficulties in raising funds because of the
financial practices of financial institutions centered on secured loans. Thus, it is necessary to
introduce a credit guarantee system in Cambodia to supplement the shortcomings of the current
lending practices. At present, Cambodia’ s economic scale is a bit different from that of the
Asian developing countries at the time of their introduction of credit guarantee system.
However, given the economic growth rates of Cambodia and the time required for preparation
for the introduction of the system, the timing of the Cambodian government’ s discussion about
the introduction of guarantee system seems appropriate.
Major countries of the world have introduced credit guarantee systems and the systems are
in operation, but the extent to which the guarantee system has been vitalized varies from
country to country. Some developing countries have adopted the system and operations of
advanced countries without careful study of their own level of economic development and the
state of their financial markets, resulting in poor performances falling short of their
expectations. Therefore, Cambodia needs to benchmark successful examples of the introduction
and establishment of guarantee systems and to minimize trial and error through such efforts. In
this study, policy proposals regarding the introduction of a guarantee systemand the
establishment of guarantee institutions in Cambodia are presented, with the aim of making a
237
contribution to the early settlement of the guarantee system in Cambodia.
It is suggested that the Cambodian government adopt a‘public guarantee system’and
establish an independent guarantee institution under the control of the government. Developing
countries which do not have advanced financial markets prefer the public guarantee system to
other forms of guarantee system because this system has the merits that the financial resources
for guarantee system can be formed at the early stage of the introduction of the system through
government’ s contributions and government’ s policy can be carried out through an independent
guarantee institution. Therefore, it is necessary for the Cambodian government to enhance the
credibility of the guarantee system through its direct participation in the system, such as making
contributions to the guarantee institution for formation of its financial resources and taking the
final liability to perform guarantee obligations. It is also necessary to introduce and implement
a credit guarantee system in stages to ensure the stable settlement of the system. It may be
effective to first select management institutions for a credit guarantee system and build the
infrastructure needed for starting a credit guarantee business, and then to establish an
independent guarantee institution specializing in credit guarantee services and expand
management institutions when demand for guarantee has grown.
It is suggested that the legal basis for formation of financial resources be prepared for the
stable operation of credit guarantee system and the financial resources for guarantee services be
secured through contributions from the government, financial institutions and other interested
parties. Success or failure of a credit guarantee system depends on the credibility of the
guarantee institution, and it is very important to secure the financial resources for guarantee
services in order to maintain high credibility.
In the long term, Cambodia needs to develop its own credit rating system in the future based
on credit information accumulated through credit analysis and to utilize it in credit evaluation
and risk management. Financial information, non-financial information, default information and
other various information on SMEs collected through credit guarantee processes and
concentrated on a database can be utilized as basic data for the rating system in selecting
prospective prime SMEs. Credit information infrastructure of good quality built over a long
period of time can provide a foundation not only for building a credit rating system but also for
establishing rational financial policies and achieving an advanced financial system.
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1. Introduction
The purpose of this study is to provide Cambodia, which is one of the cooperative
partnership countries under the Knowledge Sharing Program (KSP), with policy consultations
regarding the introduction of guarantee system and establishment of guarantee institutions. To
this end, a survey of reference literature on the definition and role of the credit guarantee system
has been conducted, and various conditions for introducing a guarantee system in Cambodia
have been checked in light of the state and trend of the economy and financial industry in
Cambodia. Based on such efforts, this study looks into the necessity for introduction of
guarantee system and presents proposals regarding effective operation of such system.
2. Meaning of Credit Guarantee System

2.1. Outline of Credit Guarantee System
2.1.1. Definition of Credit Guarantee System
Credit guarantee is a system designed to provide supports for enterprises which cannot
normally receive loans from financial institutions due to lack of collaterals so that they may
access funds smoothly, and it functions as a means of economic and financial policies. In
particular, it helps SMEs which have only limited access to financial markets compared to large
enterprises raise funds more smoothly and mitigates the financing gap between large enterprises
and SMEs existing inherently in the financial markets. This makes it possible for them to grow
together, and contributes to the sustained growth and advancement of the national economy.
2.1.2. Application of Credit Guarantee System
Parties interested in the credit guarantee system can be classified into guarantee institutions
which operate guarantee, financial institutions and SMEs which are objects of guarantee. In
addition, the guarantee system can be classified into‘mutual guarantee system’ ,‘public
guarantee system’and‘loan guarantee system’ , depending on how interested parties operate the
guarantee system.
Under mutual guarantee system, member enterprises establish a mutual guarantee union as
the operating body. The union raises the funds for guarantee through contributions or
investments by member enterprises and provide credit guarantee for the members. Under the
public guarantee system, building of financial resources of guarantee institutions mainly
depends on contributions or investments by the government, and independent guarantee
institutions operate the system and provide guarantee support for unspecified enterprises. In
239
case of the loan guarantee system, there is no independent guarantee institution, and the system
operates in the form of a government program, with the contributions or investments by the
government as financial resources.
Table Ⅱ-2-1 | Characteristics by Type of Credit Guarantee System
Loan guarantee
Classification Mutual guarantee system Public guarantee system
system
Independent guarantee
Operating body Association of enterprises Bank
institution
Guarantee by institution and

Guarantee by
Form of guarantee counter-guarantee by Guarantee by institution
government
governmen
Subject to guarantee Member enterprises Unspecified enterprises Unspecified enterprise
Credibility Low High Medium
Guarantee amount Small Large Medium
Guarantee utilization Medium High Low
Operating countries Europe Asia America
2.2. Functions of Credit Guarantee System

2.2.1. Fixing Market Failures in SME Financing
In general, financial institutions show a passive attitude toward SME financing due to its
intrinsic problems. This can cause McMillan Gap80 which implies that SMEs are marginalized in
loan despite increase in the supply of loans in the financial market. The major causes for such
discriminatory phenomenon in financing are as follows:
80) 80 In a report published in 1931 in the United Kingdom by the McMillan Commission in which J.M. Keynes
and others participated, it was argued that there existed a discriminatory financial gap because SMEs
faced difficulties relative to large enterprises in financing start-up and long-term funds and also had
limitations in accessing direct-financing markets.
240
Factors Limiting the Access of SMEs to Financing
① High transaction costs for small loans

Loan administration costs (such as information collection costs and follow-up
management costs) are fixed regardless of loan size, and this makes the loan
administration costs per unit higher in case of SME loans. In SME lending, financial
institutions do not have much experience and costs for management of loans
increases, which makes the institutions less inclined to extend SME loans.
② Asymmetry of information
This refers to the phenomenon that creditors face the uncertainty on repayments of
loans because debtors have more information than creditors concerning the success
potential of business, the ability to repay loans, etc. Because of this, it is difficult for
financial institutions to grasp credit positions of SMEs correctly, and they impose
higher risk premium on SMEs.
③ Risks of SME loans

SMEs are of small scale, do not have much experience in doing business and using
financing, lack abilities to manage risks and respond to changes in external
environment, and their default rates are relatively high. Financial institutions take
into consideration of the risks of SME loans and tend to avoid extending loans to
SMEs.
④ SMEs’
lack of collateral
Financial institutions demand collateral from SMEs to supplement their low
creditworthiness and reduce lending risks. But this practice limits the accessibility of
SMEs to loans even if they have excellent business plans.
It is recognized that the credit guarantee can resolve the problem of distortion of SME
financing markets by removing the uncertainty which financial institutions have about SME
loans, improving their lending practices and mitigating the problem of SMEs’lack of collateral.
2.2.2. Contribution to the Stabilization of Macro Economy
Credit guarantees play a role in mitigating economic fluctuation. Generally, SME lending
shows pro-cyclicality in that its scale expands at the time of an economic boom and contracts at
the time of recession. Given that the economy is excessively overheated or stagnant when the
241
mechanism of corporate loan market shows pro-cyclicality as it is the government needs to
mitigate economic fluctuation by controlling the scale of credit guarantees properly: expanding
the supply of credit guarantee in an economic slowdown phase and reducing the scale of credit
guarantee in an economic boom. In practice, it is widely recognized that the Korean government
overcame Asian currency crisis in 1997 and global financial crisis in 2008 by extending a large
amount of liquidity through Korea Credit Guarantee Fund (KODIT).
Figure Ⅱ-2-1 | Ratio of KODIT’

s Outstanding Balance of Credit Guarantee to GDP
Source: Korea Association of Small Business Studies,“Analysis of Credit Guarantee Performance and
Computation of the Proper Leverage Ratio in 2009”(2009)
2.2.3. Contribution to Growth of National Economy
Credit guarantee system is significant in a sense that it is a policy measure for national
economic growth. The system can maximize the utilization of financial resources by providing
credit guarantees to industries and enterprises with growth potentials particularly in developing
countries where available resources, especially financial resources, need to be allocated
effectively. Plus, the credit guarantee system promotes balanced growth between SMEs and
large enterprises(LEs) by eliminating loan market’ s tendency to avoid SME loans. Credit
guarantees are recognized to enhance productivity of enterprises by making SME financing
easier and to uplift economic indicators by promoting investments and employments in
economy.
2.2.4. Contribution to Advancement of SMEs and Financial Industry
From the micro perspective, the function of credit guarantee system can be interpreted in the
view of the main users of guarantee, namely SMEs and financial institutions. As for SMEs, the
242
credit guarantee system enhances accessibility to formal financing and makes it possible to raise
additional capital. This leads to inducement of active investments by enterprises, production and
creation of added value and plays a role of enhancing profitability and productivity. A study81
shows that enterprises taking advantage of credit guarantee can strengthen their competitiveness
in terms of profitability and growth by making good use of leverage. In addition, if it is true
that, as the economy grows, the operating guarantee system will give its first consideration to
enterprises with good creditworthiness, the credit guarantee system can contribute to the
transition into credit-oriented society by encouraging credit-based economic acts and enhancing
the ability to manage credit.
For financial institutions, the function of credit guarantee is to provide learning effect, i.e.,
accumulation of experiences in SME financing. Financial institutions can foster their abilities to
deal with SME loans and to manage them through the credit guarantee system and can make
improvements on collateral-centered financing practices, so that they may, in the future, handle
unsecured loans without involvement of guarantees.
3. Current State of Cambodia

3.1. Current State of the Cambodian Economy and Industry
3.1.1. Current State of the Cambodian Economy
Cambodia’ s economic growth rate was only 1 percent in 1998, but it jumped to double digits
in 2004 through 2007 on the back of international aids and booming apparel exports and
tourism. However, apparel exports have seen a downturn due to the decline of imports by
advanced countries in the wake of the global financial crisis, and the suspension of large
construction projects by foreign-invested enterprises and contraction of the tourism industry
have led to a modest drop in the recent growth rate.
Table Ⅱ-2-2 | Cambodia’

s Economic Growth Rates
(unit: %)
Classification 2004 2005 2006 2007 2008 2009
Economic growth rate 10.3 13.3 10.8 10.2 6.7 -1.5
Source: World Bank (WB)
81) Noh Yong-hwan, Lee Jong-uk and four others, 2010,“Analysis of Credit Guarantee Performance and
Computation of the Proper Operating Multiple in 2009”, the Korean Association of Small Business Studies.
243
Figure Ⅱ-2-2 | Trend of GDP Growth Rates of Cambodia and Its Neighboring Countries
Cambodia, admitted to WTO in 2004, is aggressively attracting foreign investments as part

of its policy for open-market economy to induce capital and technology and to create jobs, and
most of its industrial sectors are open to foreigners. In the textile sector, companies are getting
larger on the back of government’ s market-friendly policies and low level of wages, and foreign
investments are also very brisk. Investment areas have also been diversified of late, including
production of bio-fuel and construction materials.
Table Ⅱ-2-3 | Current State of Foreign Direct Investments in Cambodia (in terms of approved
investment amounts)
(unit: million USD)
Classification 2004 2005 2006 2007 2008
Foreign investments 230 1,048 4,415 2,667 10,889
Source: Council for the Development of Cambodia (CDC)
The Cambodian government has established‘Rectangular Strategy’in pursuit of the four

goals: advancement of agricultural sector, creation of economic infrastructure, job creation
through promotion of private investments and fostering of manpower, and is pushing for
strategic agenda to achieve these goals82.
82) Korea Exim bank, March 2010,“Assessment Report on Cambodia′s Sovereign Credit Rating.”
244
3.1.2. Current State of the Cambodian Industry
Until early 1990s Cambodia had few industries other than agriculture due to the prolonged
civil war. Since 1995 when Cambodia posted a growth rate of 7.4 percent thanks to grants and
loans from advanced countries, industries other than agriculture have started to build foundations.
Cambodia’ s industrial structure is gradually changing in line with the industrialization strategy of
the government and continued economic growth, and, as foreign investments focused on light
industry become brisk, textile industry-centered manufacturers are growing fast.
Table Ⅱ-2-4 | Production by Industry in Cambodia

(unit: billion riel)
2006 2007
Classification
Production Production
Portion (%) Portion (%)
amount amount
Agriculture 7,370 27.9 7,849 27.9
Manufacturing 5,212 19.8 5,785 20.0
Construction 1,830 6.9 2,095 7.3
Trade 2,447 9.3 2,655 9.2
Hotel & Foods 1,236 4.7 1,343 4.7
Others 8,295 31.4 8,940 30.9
Total 26,390 100 28,667 100
Source: Ministry of Economy and Finance (MEF)
The main industries in Cambodia are textile industry, tourism and agriculture. The textile
industry is recently increasing its exports thanks to the expansion of import restrictions against
Chinese textile products by the United States and the EU, although the competition in the world
market is intensifying after the expiration of Multi-Fiber Textile Arrangement in 2005.
Cambodia has advantages over its neighboring countries such as Vietnam and Thailand in
operating labor-intensive textile industry because of its abundant labor force and low level of
labor costs. However, most of Cambodia’ s manufacturers are concentrated in textile industry,
and this is one of the structural weaknesses in the aspect of Cambodia’ s economic growth. In
particular, clothing products account for more than 70 percent of recent exports of goods and
most of the exports are concentrated in the United States and European region, which makes it
necessary for Cambodia to diversify its export routes83.
83) Korea Exim bank, March 2010,“Assessment Report on Cambodia′s Sovereign Credit Rating.”
245
Table Ⅱ-2-5 | Exports Amount and Exports Weight of Cambodia’
s Textile Industry
(unit: million USD)
Classification 2004 2005 2006 2007 2008
Exports of clothing products 1,986 2,206 2,727 2,942 3,006
Exports portion (%) 76.7 75.8 73.8 71.9 62.8
Source: Ministry of Economy and Finance (MEF)
Cambodia has strong points in attracting tourists in that it has historic relics and unpolluted
natural scenery and adjoins Thailand which is a tourism giant in Asia. The number of incoming
tourists was over one million in 2004 for the first time and continuously increased to more than
two million in 2007, thus making tourism the main driving engine for Cambodia’ s economic
growth. However, Cambodia has not diversified its tourism resources other than Angkor Wat,
and many of the tourists leave the country for Thailand or Vietnam after making a visit to
Angkor Wat.
Table Ⅱ-2-6 | Major Tourism Indicators by Year

(unit: million USD)
Classification 2004 2005 2006 2007 2008
Number of tourists
106 142 170 202 213
(ten thousand)
Tourism revenue 347 578 832 1,049 1,595
Source: Ministry of Tourism (MOT)
Agriculture in Cambodia is a major industry, accounting for around 28% of GDP and 59.1%
of the entire employed population. Rice is the major crop, occupying 90% of Cambodia’ s total
cultivation area. Siem Reap and Batdambang are major production areas. However, irrigation
facilities, port facilities for export and distribution facilities are insufficient and mechanization
of agriculture has not progressed well. This shows that the level of investments in agriculture is
low, and the Cambodian government is encouraging agricultural investments through various
incentives84.
Table Ⅱ-2-7 | Rice Production by Year

(unit: thousand ton)
Year 2001 2002 2003 2004 2005 2006 2007 2008
Production 4,099 3,823 4,711 4,170 5,986 6,264 6,727 7,175
Source: Council for the Development of Cambodia (CDC)
84) Korea Exim bank, March 2010,“Assessment Report on Cambodia’

s Sovereign Credit Rating.”
246
3.2. Current State of Financial Industry in Cambodia
3.2.1. Current State of Financial Institutions in Cambodia
Financial markets in Cambodia are still in its immature state to the extent that less than 10
percent of the population are using banks, but they are making progress in line with the rapid
economic growth coming from the opening of markets. Although the growth of financial sector
has been affected a little by the global financial crisis of 2009 and worldwide recession, the
continued trend of increase in the number of depositors and bank borrowers shows that the base
of financial markets is expanding rapidly.
Figure Ⅱ-2-3 | Total Assets and Number of Depositors and Borrowers of Financial Institutions in
Cambodia
Source: National Bank of Cambodia (NBC)
247
Credits extended by financial institutions and deposits with financial institutions also
continue to grow, but, in the wake of the recent financial crisis, financial institutions show a
sign to avoid extending new loans and there is a trend that floating capital is flowing into
deposits at financial institutions because of contracting investment sentiment.
Figure Ⅱ-2-4 | Current State of Credit Provision and Deposit-taking by Financial Institutions
As of end of December 2009, 27 commercial banks85, 6 special banks86 and 20 micro-finance

institutions87 (MFI) are operating in Cambodia. The businesses handled by financial institutions
in Cambodia are classified into three types: provision of credits, taking deposits from the
general public and provision of settlement means in domestic or foreign currencies for
248
customers. Conducting only one type of these businesses is considered as handling bank
business, and a bank handling only the business of provision of credits is called a special bank.
At present, of the Cambodian commercial banks, 5 large banks, i.e., Canadia, Acleda,
Campu (Cambodian Public Bank), FTB (Foreign Trade Bank of Cambodia) and ANZ Royal
Bank, account for 70 percent of total bank assets88.
3.2.2. Characteristics of Cambodian Financial Markets
Cambodian banks have been reluctant to extend loans to enterprises because of shortage of
medium and long-term funds, excessively high medium and long-term interest rates, absence of
professional credit rating agencies, lending activities focused on individuals rather than
enterprises, shortage of professionals well versed in lending business and so forth. Foreign
enterprises in Cambodia whose number is continuously on the rise are raising their required
capital in their home countries or third countries rather than in Cambodia. So, it is urgently
needed to establish advanced financial institutions and build financial systems in order to satisfy
increasing funding demand of SMEs in step with the continued economic growth.
Also, because of lack of financial institutions’ability to collect credit information, it is

almost impossible to extend unsecured loans and financial practices centered on secured loans
are firmly established. In Cambodia, 99 percent of total loans are secured ones, and most of
them are for short-term of one year or less89.
For bank accounts, either riel or dollar is used, and most deposits are made in US dollar.
Like in other developing countries, lending interest rates are higher than deposit interest rates,
and the net interest margin is considerably high.
Table Ⅱ-2-8 | Trend of Net Interest Margin

(unit: %)
Classification 2005 2006 2007 2008
Deposit 5.83 5.40 6.0 6.46
Riel
Loan 21.0 23.04 19.01 18.72
Deposit 3.20 4.13 4.23 5.48
USD
Loan 16.75 17.03 16.77 16.30
85) Minimum capital : 15 million riel (37.5 million USD).

86) Minimum capital : 3 million riel (7.5 million USD).
87) Lending companies which provide micro-finance for ordinary people.
88) National Bank of Cambodia, 2010,“Annual Report 2009.”
89) Harner, M. Stephen(2003)“Financing SMEs in Cambodia: Why Do Banks Find it So Difficult?”, Mekong
Private Sector Development Facility, p.15.
249
4. Reasons for Introduction of Credit Guarantee System
in Cambodia
4.1. Upgrade of the National Economy
Cambodia for which this study has been conducted to offer policy consultations has made
continued economic growth since its opening of markets. However, given the weak economic
infrastructure and the fact that manufacturing base is concentrated on textile industry, it seems
necessary for the government to intervene in the markets to resolve the structural problems of
its economy and industries and secure the momentum of high growth. Most governments
intervene in the markets directly or indirectly for continued economic growth. As for Cambodia
whose economic and industrial structures are very vulnerable to outside shock and whose
financial markets are also immature, aggressive government intervention is necessary for
economic growth, and credit guarantee system can be utilized properly as a tool of economic
and financial policies.
Cambodia which is preparing for the introduction of credit guarantee system should
carefully study examples of other Asian developing countries such as Korea which managed to
overcome its low level of economic development in a short span of time through the
introduction of the credit guarantee system. It is also necessary to discuss the appropriateness of
timing of the introduction of the guarantee system in Cambodia by comparing its economic
scale and industrial structure with those of Korea and Vietnam which has recently introduced a
guarantee system. At present, Cambodia’ s economic scale is a bit different from that of Korea
and Vietnam at the time of their introduction of credit guarantee system, but, given the
economic growth rates of Cambodia and the time required for preparation for the introduction
of the system, the timing of the Cambodian government’ s discussion about the introduction of
guarantee system seems to be appropriate.
Table Ⅱ-2-9 | Economy of Korea, Vietnam and Cambodia at the Time of the Introduction of
Guarantee System
Economic scale at the time of introduction

Classification Introduction Remarks
GDP GNI per capita
Korea 1976 29.6 billion USD 770 USD Establishment of KODIT
Start of VDB’
s credit
Vietnam Mar. 2009 90.1 billion USD 930 USD
guarantee business
Discussion on
introduction of credit
Cambodia 2009 9.9 billion USD 610 USD
guarantee system
initiated
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Looking at Cambodia’ s industrial structure, manufacturing, agriculture and construction
account for 20 percent, 27.9 percent and 7.3 percent, respectively. Looking at Korea’ s industrial
structure in 1976 when a credit guarantee system was implemented together with the
establishment of KODIT, manufacturing, agriculture and construction accounted for 21.6
percent, 25.5 percent and 4.4 percent, respectively. Looking at Vietnam’ s industrial structure in
2009 when Vietnam Development Bank (VDB) started its credit guarantee business in earnest,
manufacturing, agriculture and construction accounted for 20.9 percent, 20.6 percent and 6.7
percent, respectively. This shows that Vietnam’ s industrial structure was not quite different
from that of Cambodia and Korea. Therefore, as Asian developing countries like Korea and
Vietnam overcame the limitations of their industrial structure where dependence on primary
industry was high by introducing a credit guarantee system as a‘policy measure for economic
growth’ , Cambodia should induce enhancement of industrial structure and economic growth
through immediate introduction of credit guarantee system.
Figure Ⅱ-2-5 | Industrial Structure of Cambodia, Vietnam and Korea at the Time of the Introduction of
Guarantee System
Sources: World Bank (WB), Ministry of Economy and Finance of Cambodia (MEF), Statistics Korea
251
4.2. Support for SME Financing
In developing countries which lack effective financial systems, SMEs experience great
difficulties in raising capital through financial markets and there are also limitations to their
growth. According to a survey of enterprises in more than 80 developing countries conducted
by World Bank in 2006, one of the greatest obstacles to growth of enterprises was problems in
their financial systems such as accessibility to financing and financing costs.
Figure Ⅱ-2-6 | Obstacles to Growth of SMEs
Source: Enterprise Surveys (2006), World Bank
According to a report90 published in 2006, in case of developing countries, smooth financing

of capital was most directly associated with growth of enterprises and other factors only
affected indirectly. So, although enterprises’demand for capital and the scale of the demand
differ according to the route of their growth taken after foundation, it is very important for them
to secure diversified sources of capitals through financing. But, as mentioned in Section 2.1.
90) Beck, Thorsten, Asli Demirguc-Kunt, Luc Laeven, Vojislav Maksimovic (2006), ″The Determinants of
Financing Obstacles″, Journal of International Money and Finance 25, pp. 932-952.
252
above, SMEs face greater difficulties than large enterprises in raising capital through the
financial markets, and this is the biggest obstacle for SMEs as they grow toward middle-standing
or large enterprises. Therefore, the government’ s market intervention through credit guarantee
system can be justified because it helps to vitalize SME financing and facilitate growth of SMEs.
According to the Statistics Office of Cambodia, as of the end of 2009, more than three
hundred and seventy thousand enterprises are operating, of them about 97 percent are
unregistered ones, and, among the forty-seven thousand registered enterprises, SMEs are
estimated to account for around 75 percent. Although it is very important for SMEs to raise
capital through financing in order to keep growing, more than 90 percent of SMEs start up with
their personal money, and only 11.6 percent of SMEs interviewed raise their start-up capital from
banks according to a survey91. That means funding support for SMEs in Cambodia is meager.
As start-up enterprises use policy funds frequently and SMEs in growth stage usually raise
capital through indirect financing such as loans from financial institutions, the Cambodian
government might well focus its policies on creating policy funds and vitalizing indirect
financing. In conclusion, it is necessary to foster enterprises through support of SME financing
and discuss the introduction of credit guarantee system as a policy measure for SME financing.
Table Ⅱ-2-10 | Source of Start-up Capital in Cambodian SMEs
SMEs Large Enterprises Total

Starting Capital Sources
No. of No. of No. of
Portion Portion Portion
respondents respondents respondents
Personal money
407 94.4% 68 93.2% 475 94.2%
from me & my partners
Borrowed
88 20.4% 10 13.7% 98 19.4%
from family & friends
Borrowed from banks 50 11.6% 15 20.5% 65 12.9%
Sold an asset to get cash 7 1.6% 2 2.7% 9 1.8%
Borrowed from money lender 4 0.9% 1 1.4% 5 1.0%
Others 10 2.3% 1 1.4% 11 2.2%
Donors 3 0.7% 0 0.0% 3 0.6%
Government grant 1 0.2% 1 1.4% 2 0.4%
No of respondents
431 73 504
(without double counting)
Source: IFC Surveys (2010), International Finance Corporation.
91) International Finance Corporation(IFC) (2010), ″Understanding the SMEs Sector in Cambodia and Their
Need for Financing Services and Products.″
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5. Proposals for Introduction of Credit Guarantee System
in Cambodia
Major countries of the world have introduced their own credit guarantee system and the
systems are in operation. The extent to which a guarantee system has been established and
vitalized varies from country to country. Some developing countries have, however, adopted a
guarantee system and operation methods of advanced countries without careful study of their
own level of economic development and the state of their financial markets, and this resulted in
poor performances falling short of their expectations. A developing country which wants to
introduce and implement a guarantee system needs to benchmark successful examples
beforehand to minimize trial and error.
At present, the number of Cambodian SMEs is increasing rapidly in step with the economic
growth. It is thus expected that SMEs’capital requirement for expansion of factories,
technology development, business expansion, development of human resources and the like will
gradually grow, but most SMEs find it quite difficult to borrow working capital from financial
institutions. The practices of financial institutions to extend SME loans against collateral are
widespread, and management of credit information is almost non-existent due to lack of
financial infrastructure. This makes financial institutions avoid lending loans for enterprise. In
order to resolve such problems of financial markets, to foster SMEs and to vitalize financing,
the government is preparing for introduction of a guarantee system and establishment of
guarantee institutions. However, there are many prerequisites for the introduction of a guarantee
system, such as financial infrastructure, legal system, and credit information infrastructure, and
it seems that it will take some time before the guarantee system is firmly settled. In this section,
policy consultations for the introduction of a guarantee system and the establishment of
guarantee institutions in Cambodia are presented to contribute to the early settlement of the
guarantee system in Cambodia.
5.1. Proposals Regarding Operation Methods and Operating Body

It is suggested that the Cambodian government adopt a public guarantee system and
establish a credit guarantee institution under the control of the government to implement a credit
guarantee system. The industrial structure of Cambodia is quite different from that of European
countries where mutual guarantee unions were formed around SMEs of same business or SMEs
in same area and the mutual guarantee system is advanced. And, as the mutual guarantee system
restricts the enterprises which can take advantage of the system for its members, it is not easy
for the Cambodian government to achieve its policy goals of nurturing SMEs and facilitating
economic growth through the introduction of a mutual guarantee system early. Under a loan
guarantee system, the operating body is not an independent institution but a financial institution
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which is entrusted to deal with the guarantee business, which makes it difficult to provide credit
guarantees systematically. And, in a country where financial markets are immature, the level of
awareness of guarantee system tends to be low. These factors do not make it easy for the
Cambodian government to adopt the loan guarantee system.
Therefore, it seems that the most suitable system for Cambodia which is preparing for the
introduction of a credit guarantee system is a public guarantee system, under which the financial
resources for the guarantee system can be formed at the early stage of the introduction of the
system through government’ s contributions and government’ s policy can be effectively carried
out by an independent guarantee institution.
Table Ⅱ-2-11 | Form of Guarantee by Country
Classification Country
Korea, Japan, Taiwan, Malaysia, Thailand, Philippines,

Indonesia, India, Nepal, Papua New Guinea, Jordan, Egypt, Morocco
Public guarantee system
Hungary, Austria, Finland, Rumania, Turkey
Venezuela, Peru, Columbia
Mutual guarantee system Germany, Italy, Switzerland
Sri Lanka, Hong Kong

Loan guarantee system the United Kingdom, Netherlands, the Czech Republic, Slovakia
the United States, Canada, Chile
Public guarantee system

France, Belgium
+
Argentina
Mutual guarantee system
Source: KODIT, ″Credit Guarantee System of the World″, 2005.
If the Cambodian government adopts a public guarantee system, it will be necessary to

establish a credit guarantee institution under the initiative of provincial governments or the
central government in order to ensure the independency in making guarantee policies and
operating guarantees. The credit guarantee institutions established under the provincial
governments have the following merits: They can respond well to the guarantee demand of local
SMEs, can be established with relatively small capital and can reflect policies of provincial
governments effectively. A credit guarantee institution established under the central
government, on the other hand, has the merits that it can promote the effectiveness of costs and
management, support government’ s policies at the early stage of economic development and
respond quickly to the changes in economic environment.
Given the merits of credit guarantee institutions established by the provincial governments
and the central government, it seems most effective that the Cambodian government first
establishes a credit guarantee institution under its initiative and then introduces and implements
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its guarantee system for the early settlement and vitalization of the credit guarantee system.
Meanwhile, the central government can indirectly support the credit guarantee institutions
established by provincial governments through counter-guarantee or reinsurance when they face
difficulties in raising financial resources. Even if provincial governments in Cambodia establish
credit guarantee institutions suitable for their provinces, there may be possibilities that the credit
guarantee system is not vitalized due to lack of financial resources of credit guarantee
institutions. So, it may be suggested as an alternative that the central government or central
organization take responsibilities of losses of credit guarantee institutions established by
provincial governments indirectly through counter-guarantee or reinsurance. In Japan where
local credit guarantee institutions are well-developed, reinsurance services provided by the
Japan Finance Corporation (JFC) and loss compensation services provided by the Japan
National Federation of Credit Guarantee Corporations (NFCGC) support the finance of local
credit guarantee corporations indirectly. In Korea, the Korean Federation of Credit Guarantee
Foundations (KOREG) which represents local credit guarantee foundations has been established
to help ensure effective operation of guarantee system of local credit guarantee foundations.
KOREG provides indirect support for loss compensation for local credit guarantee foundations
through counter-guarantees.
It is also necessary to introduce and implement credit guarantee system in stages to ensure
the stable settlement of the system. It may be effective to first select management institutions
for the credit guarantee system and build the infrastructure needed for starting the credit
guarantee business. Afterward, it is needed to establish an independent guarantee institution
specialized in credit guarantee services and expand management institutions when the demand
for guarantee has grown. The first step should be to select management institutions for the credit
guarantee system, achieve standardization of business processes and expand the scope of
operation of the guarantee system through expansion of management organization.
Establishment of an independent guarantee institution should be the next step. To give an actual
example of Korea, the ground for implementation of a guarantee system was laid in 1961
through the introduction of a credit guarantee reserves system, and the Industrial Bank of Korea
was entrusted with the operation of the credit guarantee system until the independent guarantee
institution, KODIT, was established in 1976. In case of Vietnam, the Vietnam Development
Bank92 (VDB), a policy-oriented financial institution, deals with guarantee services.
92) The only policy-oriented financial institution in Vietnam, which carries out domestic development
financing, export financing, and credit guarantee services, etc.
256
Table Ⅱ-2-12 | Proposals for Establishment of Credit Guarantee Institution in Stages
Classification Implementation Detailed Implementation

To establish the organization in the central bank or
a policy-oriented financial institution and organize
personnel
Selection of institutions for
To operate guarantees using organization and
1st Stage management of credit
personnel of financial institutions (operation
guarantee services
methods of entrusted guarantees possible)
To implement standardized processes for business
and evaluation
To expand the scope of operation of the guarantee
Expansion of management system through co-operating banks
2nd Stage
organization To absorb personnel from financial institutions and
foster professional personnel
Establishment of
To secure capital funds, organization and personnel
3rd Stage independent guarantee
To switch to direct guarantee method
institution
5.2. Proposals Regarding Raising Financial Resources

It is suggested that the legal basis for formation of financial resources be prepared for the
stable operation of the credit guarantee system and the financial resources for credit guarantee
services be secured through contributions from the government, financial institutions, SMEs
and other interested parties. Success or failure of the credit guarantee system depends on the
credibility of guarantee institutions, and it is very important to secure financial resources for
guarantee services and the capital fund in order to maintain credibility. Financial resources for
credit guarantee services which can be formed by a Cambodian credit guarantee institution are
as follows:
① Paid-in capital at the time of establishment

Contributions from governments (central/municipal)
Contributions from financial institutions
Contributions from enterprises
Contributions from associations and entities related to SMEs
② Lawful aid capital provided by domestic and overseas organizations for the purpose of
advancement of SMEs
③ Operating income of the credit guarantee fund
④ Membership fees from SMEs, etc.
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5.2.1. Government’
s Role
The most important prerequisite for introduction and implementation of credit guarantee
system is the formation of financial resources because shortage of financial resources can act as
the main cause for the fall in credibility of the guarantee system. Therefore, the Cambodian
government should prepare the legal basis for formation of financial resources, make
contributions to credit guarantee fund through budget allocation and play the role of inducing
active participation of financial institutions and other interested parties in the formation of
financial resources. In implementing the guarantee system, it is useful to determine the
contribution rate of the central government higher than that of financial institutions or SMEs at
the early stage of the establishment of a guarantee institution. When financial markets expand
and financial institutions are able to operate independently, it will become possible to supplement
financial requirements through contributions from financial institutions and guarantee fees from
enterprises while the contribution rate of the central government gradually declines.
5.2.2. Contributions from Financial Institutions
In order to ensure the stable operation of the credit guarantee system and mitigate the
difficulty in formation of financial resources, contributions from financial institutions are as
indispensable as the financial support from the Cambodian government. Through the guarantee
system, financial institutions can save expenses to be spent for determining credit standing of
SMEs and collecting bad debts, receive guarantees for debt repayment, expect increase in
interest income through enlargement of their lending scale and obtain opportunities to secure
potential prime customers. Therefore, it is necessary to aggressively induce financial institutions
to participate in formation of the financial resources from the viewpoint of promoting common
benefits of financial institutions.
■ Financial institutions required to make contributions: All financial institutions,

which are registered under the Banking Act and operate business, are eligible to use the
credit guarantee system
☞ Foreign banks which have been established under the Banking Act of Cambodia and operate
business are to bear the same legal and social responsibilities as domestic banks.
■ Method of contributions: It is necessary to institutionalize a mandatory contribution

system for the stable formation of financial resources.
☞ In case of Korea, financial institutions’ contributions to the credit guarantee fund are mandatory
under the law.
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☞ In case of Japan, financial institutions’ contributions to the credit guarantee fund are not
required by law.
■ Timing of contributions: It should be stipulated by law that financial institutions also

make contributions periodically as the government does.
■ Contributions rate: The contributions rate applicable to financial institutions should be

determined flexibly in consideration of the government’ s policy goals, economic state of
the nation, financial conditions of the credit guarantee fund and the like.
☞ In case of Korea, a financial institution is required to make periodical contributions at a certain ratio
of total enterprise loans (average outstanding balance) subject to calculation of contributions.
5.2.3. Scale of Capital as Financial Resources
The scale of credit guarantees supply should be determined taking into account
comprehensively the scale of the national economy, the policy goal of the government, the
degree of expansion of financial infrastructure, etc. and should be operated flexibly in step with
economic fluctuations. Looking at the trend of the outstanding credit guarantees to GDP in
Korea, it was 1.1 percent at the time of the establishment of KODIT and remained at the level of
around 2~4 percent until 1997 before the Asian currency crisis, which shows that the scale of
credit guarantee supply was adjusted according to economic fluctuations. After the Asian
currency crisis, the outstanding credit guarantees to GDP increased rapidly to 7.6 percent in
2001 due to the expansion of credit guarantee supply to cope with the economic crisis, but, as
the economy became stabilized, the ratio gradually declined to 4.6 percent in 2007. However,
the ratio again rose to 6.3 percent in 2009 due to the expansion of credit guarantee supply to
cope with the global financial crisis of 2008. The scale of the guarantee supply in Cambodia
may be determined with a certain ratio relative to GDP as a target using the example of Korea
as a reference, but it would be more appropriate for the Cambodian government to determine
the suitable level in consideration of the economic conditions of Cambodia, rather than simply
comparing the numbers with other countries.
Table Ⅱ-2-13 | Outstanding Balance of Credit Guarantees to GDP in Major Asian Countries in 2009
Classification Korea Vietnam Japan Taiwan

Outstanding credit
6.65% 0.34% 6.66% 3.04%
guarantees / GDP
Source: KODIT Focus 2010-7,“Macro-analysis of Effects of Credit Guarantee Support in 2009.”
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According to a report93 of the ILO (International Labor Organization), the scale of the capital
fund should be determined in consideration of SMEs’demand for credit guarantees, operating
methods of credit guarantee system, scale of financial resources which can be raised and the
leverage ratio. Although it is a very difficult problem to determine the proper scale of the capital
fund at the early stage of establishment of a credit guarantee institution, it should be determined
within the limit of the financial resources which can be raised and in consideration of the
government’ s policy regarding scale of credit guarantee supply and the target leverage ratio.
※ Scale of Capital as Financial Resources

= Target of Credit Guarantee Supply÷ Leverage Ratio
[Reference]
Calculation of the scale of capital as financial resources of an independent credit
guarantee institution at the time of establishment under initiative of the government
(in case of calculating the scale of credit guarantee on the basis of GDP)
Under the assumption, with reference to the example of Korea, that Cambodia’
s credit
guarantee institution supplies guarantees amounting to around 0.1%-0.2% of GDP, the
scale of credit guarantee supply would be around USD 10.5 million-21 million.
▶ Cambodia’ s GDP in 2009: USD 10.5 billion (estimated)

▶ The outstanding credit guarantees in Korea at the end of 1976 during which
KODIT was established was 157.9 billion won, amounting to 1.1% of GDP. Of
this, 101.6 billion was brought forward from the previous credit guarantees before
KODIT’ s establishment, and the actual supply of guarantees during the year was
56.3 billion won (amounting to 0.4% of GDP).
▶ In case of Cambodia, the scale of credit guarantee supply at the early stage after the
establishment was assumed to be 0.1%-0.2% relative to GDP since the scale of
credit guarantee supply would be smaller at the early stage compared to Korea
because Cambodia has less experience in market economy and its economic
structure is mainly focused state-run enterprises.
The leverage ratio for a Cambodian credit guarantee institution at the early stage after
establishment is assumed to be 3 times.
▶ The ILO report suggests that the proper leverage ratio after the establishment of a
credit guarantee institution be 2-3 times within 3 years after the establishment and
5 times within 5 years after the establishment.
▶ The leverage ratio for KODIT at the early stage after establishment:
3.7 times (1976) 4.4 times (1977) 4.9 times (1978) 6.3 times (1979)
93) Linda Deelen, Klaas Molenaar, ″Guarantee Funds for Small Enterprises: A Manual for Guarantee Fund
Managers″, ILO, 2004.
260
The scale of capital as financial resources of a Cambodian credit guarantee institution
at the early stage after the establishment calculated under the above assumption would be
USD 3.5 million at the minimum and USD 7 million at the maximum.
▶ The scale of the capital under the assumption of the leverage ratio of 3 times
= (USD 10.5 million ÷ 3 times) ~ (USD 21 million ÷ 3 times)
= USD 3.5 million ~ USD 7 million
It is suggested that the capital fund of a Cambodian credit guarantee institution at the
early stage after the establishment be formed with contributions from the central
government, provincial governments and financial institutions.
This means that the central government shows its policy intention for vitalization of
credit guarantee through its active participation and induces provincial governments,
financial institutions and other interested parties to participate as well.
▶ In case of Korea, the credit guarantee system was vitalized in earnest in the latter
half of 1990s through the expansion of the government’s contributions.
Figure Ⅱ-2-7 | Contributions from the Government and Financial Institutions to KODIT in Korea
It is necessary to vitalize the credit guarantee system at an early stage by heightening

the government’ s initial share in formation of the financial resources, to induce the
change of financial institutions’perception on the contributions to the credit guarantee
fund and to gradually increase their share.
261
Although the proper leverage ratio depends on the operational capability of individual credit
guarantee institution, it appears that the effective leverage ratio of credit guarantee is around 5-
10 times. Anke Green94 (2003) suggested a level of 5-10 times as the proper leverage ratio for a
credit guarantee system in developing countries. In addition, the International Labor
Organization95 (ILO) also explained that the level of proper leverage ratio in case of an
effectively operating credit guarantee system is 5-10 times and that the default ratio on
guaranteed loans should also be taken into account to find out the ideal leverage ratio. It seems
appropriate that a Cambodian credit guarantee institution sets the leverage ratio at 2-3 times at
the early stage of implementation of the system and operates it at below 5 times until 5 years
after its establishment. In the long term, it would be necessary to adjust the proper leverage ratio
upward to around 10 times in step with the degree of maturity of the Cambodian credit
guarantee system.
Table Ⅱ-2-14 | Leverage Ratio of Credit Guarantee Institutions in Various Countries
Leverage Ratio
Classification Credit Guarantee Institution Establishment
(as of Dec. 2009)
Korea Korea Credit Guarantee Fund (KODIT) 1976 8.0
Korea Korea Technology Corporation (KOTEC) 1989 6.3
Japan Credit Guarantee Corporation of Tokyo 1937 25.9

Small and Medium Enterprise Credit
Taiwan 1974 12.9
Guarantee Fund (SMEG)
Germany Kreditanstalt für Wiederaufbau (KfW) 1970 15.5
France OSEO 1982 24.2
5.3. Suggestions Regarding Practical Operations

5.3.1. Basic Structure of Credit Guarantees and Operation Method
When the Cambodian government adopts an Asian style‘public guarantee system’ , the basic
structure of the system is operated by 3 parties: A guarantee institution, financial institution, and
an enterprise. When an enterprise applies for credit guarantee, a credit guarantee institution
provides credit guarantee as collateral to banks. This can facilitate SME financing by enabling
an enterprise to obtain loans from banks.
94) Anke Green, ″Credit Guarantee Schemes for Small Enterprises: An Effective Instrument to Promote
Private Sector-Led Growth?″, UNIDO, 2003.
95) Linda Deelen & Klaas Molenaar, ″Guarantee Funds for Small Enterprises - A Manual for Guarantee
Managers″, ILO, 2004.
262
Figure Ⅱ-2-8 | Basic Framework of Credit Guarantee System
The direct credit guarantee method needs a nationwide branch network for an independent
institution to handle a series of credit guarantee procedures such as credit analysis and approval
on credit guarantee. The credit guarantee institution is likely to be huge in size and well-
organized under the direct credit guarantee method. Thus, the direct credit guarantee method is
also well-known among SMEs, and credibility of credit guarantee institutions is relatively high.
Yet, the weak point is that it costs a lot to build a nationwide branch network and to maintain
the organization.
The entrusted credit guarantee method, on the other hand, uses the branch network of banks
and thus costs little to maintain. However, it has a possibility of moral hazard of banks and
leaves room for passive attitude towards credit guarantee.
It seems most effective for the Cambodian government to establish a guarantee institution
and apply the direct guarantee method when adopting an Asian style‘public guarantee system’
for the early settlement and vitalization of its credit guarantee system. Under the direct credit
guarantee method, the Cambodian government can achieve the purpose of its policy measures
effectively and raise the awareness about credit guarantee as soon as possible. However, in case
that the credit guarantee system is not vitalized, it may be effective to first expand its
infrastructure for credit guarantees under the entrusted credit guarantee method and then switch
to the direct credit guarantee method.
5.3.2. Guarantee Fee
Credit guarantee fee is one of the main financial resources for credit guarantees, and
enterprises need to pay a certain amount of credit guarantee fee in order to share the
responsibility of raising financial resources. Looking at examples of operation of credit
263
guarantee systems in various countries, guarantee fee is one of the main financial resources and
the fee rate applied by credit guarantee institutions is generally around 1~2 percent depending
on the type of guarantee, amount of guarantee, credit standing of enterprises and so on. The
guarantee fee rates are ideally determined taking into account guarantee risks and operating
expenses of the guarantee system. Excessively high rate of credit guarantee fee probably
increases burdens of enterprises. On the other hand, extremely low rate of credit guarantee fee
can trigger moral hazards of credit guarantee institutions as a result of credit rationing.
If guarantee fee is regarded as having not only the nature of interest for using a guarantee
service but also the nature of fee for guarantee processes, it is necessary to apply different rates
depending on credit rating of enterprise, term of guarantee, size of enterprise, source of fund to
be used for lending, nature of obligation, type of guarantee, etc. Credit rating and term of
guarantee are factors affecting guarantee risks, and size of enterprise, source of fund to be used
for lending, nature of obligation and type of guarantee are variables related to the utilization of
guarantee. So, they should be reflected in determining an appropriate guarantee fee.
In case of Korea, KODIT applied fixed guarantee fee rates of 1 percent for SMEs and 1.5
percent for large enterprises until 1998, but introduced a method of applying differentiated fee
rates according to credit rating of enterprise ‘design
( of guarantee fee rates based on the risks’)
and presently applies guarantee fee rates ranging from 0.5 to 3.0 percent taking into account of
credit rating of enterprise, guarantee amount, period of guarantee utilization, preference under
government policy, etc. In case of NFCGC of Japan, as a part of the reform of the credit
guarantee system, differentiated guarantee fee rates (0.5 percent-2.2 percent) have been applied
since 2006 depending on the credit ratings of enterprises which have been divided into 9 grades.
Table Ⅱ-2-15 | Guarantee Fee Rates in Japan
Classification Guarantee Fee Rate Classification Guarantee Fee Rate
1st group 2.20% 6th group 1.10%
2nd group 2.00% 7th group 0.90%
3rd group 1.80% 8th group 0.70%
4th group 1.60% 9th group 0.50%
5th group 1.35% Average 1.35%
5.3.3. Partial Credit Guarantee System
The purposes of a partial guarantee system are to prevent moral hazards of financial
institutions by proper diversification of risks from guaranteed loans between guarantee
institutions and financial institutions through setting up of certain guarantee ratios and to help
264
foster the evaluation capability of financial institutions for SME loans. If a credit guarantee
institution provides a financial institution with a credit guarantee for the full amount of a loan,
the letter of credit guarantee will be likely to be accepted in the financial market, making it easy
for financial institutions to participate in the credit guarantee system. It might, however, weaken
the function of banks to review loans, hinder the advancement of financial industry, and cause
moral hazard of financial institutions by allowing them to recklessly deal with high-risk loans.
Under the partial credit guarantee system, financial institutions bear the losses arising from
guaranteed loans partially, which will prevent them from extending guaranteed loans recklessly
and have the effect of enhancing their evaluation capability.
Coverage ratio, which is defined as the portion of losses that a credit guarantee institution
will bear, shall be determined so that lending banks may share the risk of guaranteed loans
properly and willingly participate in the credit guarantee system. Levitsky opined that proper
guarantee ratios in liberalized markets would be 60 percent to 80 percent, and Anke Green
suggested 60 percent to 70 percent as the experientially proper coverage ratio. Most of the
countries in which credit guarantee systems are operated have adopted partial guarantee systems
and apply differentiated coverage ratio depending on government policies, character of loans,
purpose of funds, term of guarantees, credit rating of enterprises and so on. It is, however,
impossible to determine uniformly what would be the proper coverage ratio since the economic
environment of each country varies.
Table Ⅱ-2-16 | Coverage Ratio of Credit Guarantee in Major Countries
Classification Coverage Ratio Classification Coverage Ratio
Korea 50~85% United States 75~85%
Japan 80% Germany 50~80%
Taiwan 50~80% France 40~70%
It would be necessary for Cambodia to encourage financial institutions to actively participate

in the credit guarantee system at the early stage of its implementation by enhancing the
marketability of a letter of guarantee through applying coverage ratio of 80 percent or above. It
would also be necessary to implement the coverage ratio flexibly so that a total amount of loans
can be guaranteed for enterprises, which need special supports under government policies, such
as export-oriented enterprises, enterprises hit by a natural disaster and the likes.
5.3.4. Building Credit Information Infrastructure
At the time of KODIT’ s establishment, financial institutions in Korea were extending loans
relying mainly on collateral owned by enterprises rather than thorough credit analysis and
evaluation of enterprises. The government allowed KODIT to collect, accumulate and manage
265
credit information on enterprises in an effort to improve such financial industry’ s loan
evaluation practices mainly based on collateral. KODIT thereby played the role of Credit
Bureau (CB) through utilizing the credit information accumulated through credit analysis. In
2001, KODIT developed and used, for the purpose of efficient risk management, a credit
evaluation model which was based on credit information accumulated since its establishment.
Cambodia needs to develop its own credit rating system in the future based on credit
information accumulated through credit analysis and to utilize it in credit evaluation and risk
management. But it seems particularly difficult for Cambodia which is now at the stage of
considering the introduction of a guarantee system to develop a credit rating system in a short
period of time. Therefore, it is necessary for Cambodia to accumulate credit information data
based on IT technology from the stage of introducing guarantee system. For the development of
an exquisite credit rating system, accumulation of SME credit information and creation of a
database are essential. Meanwhile, financial information, non-financial information, default
information, and other various information on SMEs collected through credit guarantee
processes and concentrated in a database can be utilized as basic data for the rating system in
selecting prospective prime SMEs. Credit information infrastructure of good quality built over a
long period of time can provide a foundation not only for building a credit rating system but
also for establishing rational financial policies and achieving an advanced financial system.
5.4. Considerations Regarding Operation of Credit Guarantee

System
5.4.1. Public Sector’
s Intervention in Private Financial Markets
A credit guarantee system serves the purpose of complementing the failure of financial
markets by enhancing the accessibility to financing of relatively ill-positioned SMEs compared
to that of large enterprises. It also plays the role of government’
s policy measures in achieving
balanced growth of the national economy. For these reasons, not only developing countries
focusing on economic development but also developed countries with long experience of
market economy such as the United States, France, Germany and Japan who are utilizing a
credit guarantee system as a useful policy instrument.
There is an argument that, if the government intervenes excessively through its credit
guarantee system, the system may cause various side effects in spite of its right functions. If
financial institutions rely too much on credit guarantees, they might neglect to develop their
capabilities for credit analysis and evaluation, resulting in the delay of advancement of private
financial markets. Therefore, the government must take precautions against its intervening in
the private financial markets.
Under the environment where the government intervenes and distorts financial markets
using a credit guarantee system, private financial markets lose opportunities for growth. In
266
1970s and 1980s, many developing countries had actually maintained interest rates on SME
loans lower than market rates through public financial supports. This led to abnormally
excessive demand for SME financing and also to credit rationing. Such financial market
environment could bring about side effects that financial institutions might suffer from great
amounts of losses as they could not secure proper loan-deposit margin and private financial
markets might lose their functions. This shows that a credit guarantee system is not a panacea
for resolving problems of SME financing and that it is necessary for the government to play its
policy-making role to reduce the scale of credit guarantee when the national economy gets on
the right track or when various means to mitigate problems of SME financing are prepared
under the invigoration of financial markets.
5.4.2. Diversification of Risks and Moral Hazard
In a credit guarantee system, it is necessary to diversify the risks from losses in connection
with SME lending among the three parties: A guarantee institution, financial institution and an
enterprise. If each party involved in the credit guarantee system does not share the risks of
losses properly, it may cause moral hazards. If risks of losses from SME loans are removed 100
percent for financial institutions through credit guarantees and guarantee institutions bear all
risks from such loans, financial institutions may handle high-risk loans, thereby causing high
ratio of subrogation payments. In most countries which operate credit guarantee systems,
financial institutions are made to share risks of losses at an appropriate level to prevent moral
hazard. In order to prevent moral hazard from the side of enterprises, it would be most effective
for credit guarantee institutions to obtain collateral, but such collateral requirement could
tarnish the raison d’ etre of credit guarantee system. However, at the early stage of
implementation of credit guarantee system, requiring collateral may be considered for the sake
of maintaining financial resources. Ultimately, credit guarantee institutions and financial
institutions should remind enterprises that intentional defaults will make them lose opportunities
for their future economic activities and should prevent their moral hazard through continued
follow-up managements. It is also very important to control moral hazards of credit guarantee
institutions as well as that of financial institutions and enterprises. When demand for guarantees
in financial markets exceeds supply, approval decisions on guarantee support have much impact
on enterprises. So, credit guarantee institutions can be easily exposed to moral hazards. Moral
hazards of credit guarantee institutions can undermine the credibility of credit guarantee system
and weaken the solvency of credit guarantee institutions. Therefore, credit guarantee institutions
should prevent possible moral hazards through strict risk-management and audit system.
5.4.3. Allocation of Financial Resources for Credit Guarantees
In operating a credit guarantee system attention should be paid to rational allocation of

financial resources for credit guarantees. If one enterprise uses credit guarantees for excessively
long periods or for a large amount, it could result in limiting the use of credit guarantee system
267
for other enterprises. Long-term and large-amount use of credit guarantees should be managed
properly in order to operate the credit guarantee system in a stable manner over a long period of
time.
For rational allocation of financial resources for credit guarantees, credit guarantee
institutions should prevent large-amount use of credit guarantees from being concentrated
toward small number of enterprises by setting up the credit limit and provide credit guarantee
supports to as many SMEs as possible in a balanced manner. In addition, it is also necessary to
prevent bank loans from becoming long-term ones by credit guarantee institution’ s presenting
various maturity-structures in consideration of demand for capital, creditworthiness, business
prospect and so on. It might be a good idea to adjust price variables such as guarantee fee and
coverage ratio in order to encourage enterprises which use credit guarantees for a long time or
in a large amount to reduce the use of credit guarantees voluntarily and to eventually graduate
from credit guarantee system. If, for instance, the credit guarantee institution can impose
additional guarantee fees and adjust the coverage ratio downward, this can prevent enterprises
from using credit guarantees in the long-term or on a large scale in advance.
Table Ⅱ-2-17 | Credit Guarantee Graduation Program of KODIT
Classification Details
Outstanding Restricts new guarantees

enterprises Conversion to unsecured loans from financial institutions
Potential
Long-term Charges additional guarantee fees, but new guarantees for growth allowed
enterprises
guarantee
enterprise Stagnant Restricts new guarantees and charges additional guarantee fees
enterprises Leads to guarantee graduation within five years
Marginal Restricts new guarantees and charges additional guarantee fees

enterprise Leads guarantee graduation within three years
Large-amount guarantee Leads to partial repayment at maturity (10 percent recommended).

enterprise Charges additional guarantee fees
5.4.4. Performance Evaluation for Credit Guarantee System
A credit guarantee system advances differently depending on social environment, economic

development process, size of national economy, and so on and reflects national particularities.
Therefore, performance evaluation for a credit guarantee system to judge its effectiveness varies
widely among countries, and there is no uniform definition or standard. Nevertheless, most
countries which operate a credit guarantee system integrally manage key indicators related to
credit guarantees through performance evaluation in order to provide credit guarantees in a
stable manner and maintain financial resources for credit guarantees in a sound manner. By
268
managing indicators, the credit guarantee institutions can enhance the efficiency of its system
and present policy direction for credit guarantees.
Credit guarantee institutions manage the indicators such as total new guarantee supply,
outstanding credit guarantees, the number of guaranteed enterprises, and so on. By doing so,
they can actively participate in the government’ s policy decision on guarantee scale from the
standpoint of guarantee supplier. Indicators such as outstanding balance of credit guarantee to
GDP and the guaranteed loans to SMEs loans are useful ones utilized in deciding on aggregate
credit guarantee supply.
Credit guarantee institutions should manage the barometers of soundness to prevent the
depletion of financial resources for credit guarantees attributable to increase in distressed credit
guarantees and subrogation payments. They should keep monitoring such indicators as the
default rate and the rate of subrogation, and maintain the soundness of financial resources for
credit guarantee and maximize the utilization of credit guarantee system through management
of the leverage ratio defined as the total outstanding balance of credit guarantees to the financial
resources as equity capital. By so doing, they can build the risk-management system and
enhance their capability to efficiently manage the financial resources for credit guarantees.
In addition, since credit guarantees contribute to the creation of value-added for SMEs and
economic growth, it can also be considered to measure the performance of credit guarantees
from the standpoint of SMEs as users of credit guarantee service. The effectiveness of credit
guarantees may be judged by measuring the value added, production and profitability of those
guaranteed SMEs or by comparing and analyzing the individual financial performances of
guaranteed SMEs and those of non-guaranteed SMEs.
269
Annex 01
Brief information on Cambodia and the current

state of its economy
| Brief information on the nation
Area 181 thousand km2 (4/5 of South Korea)

Population 14.8 million
Capital Pnom Penh (population: 1.2 million)
General
Races Khmer (90%), Chinese (5%), Others
Languages Khmer (95%), French, English
Religion Buddhism (95%), Others
Independence day November 9, 1953 (from France)

Form of government constitutional monarchy
Polity
Head of state Prime Minister Hun Sen
Ruling parties Cambodia People’ s Party, National Liberation Front
G D P 11.1 billion USD (2008)

Currency Riel (CR)
Economy Industrial structure services 41%, manufacturing 30%, agriculture 29%
Exports textile products, natural rubber, rice, etc.
Natural resources rubber, lumber, phosphate ores, etc.
| Brief information on the nation (continued)
Classification 2005 2006 2007 2008 2009e
GDP (hundred million USD) 63 73 86 111 105
GDP per capita (USD) 450 514 593 750 709
GDP growth rate (%) 13.2 10.8 10.2 5.0 -1.5
Export (million USD) 2,910 3,692 4,089 4,708 3,696
Import (million USD) 3,928 4,771 5,439 6,509 5,525
Average exchange rate (USD/Riel) 4,092.5 4,103.3 4,056.2 4,054.2 4,139.3
Unemployment (%) 5.7 6.1 7.7 25.0 -0.7
Foreign exchange reserves

953 1,157 1,616 2,164 2,851
(hundred million USD)
Source: A handbook of World Countries 2010, Korea Eximbank
270
Annex 02
Evolution of credit guarantee system
When today’ s credit guarantee system is defined as a system where credible institutions
provide guarantees for enterprises which lack collateral so that they may smoothly raise funds,
its origin may be found in the guarantee systems of France, Switzerland and Germany. In these
countries, credit unions by locality and trade were formed in 19th century based on local
communities and guilds and specialized mutual guarantee institutions were established in early
20th century.
In France, mutual credit organizations based on the principles of cooperatives were

established around the same trade in late 19th century, dealing with financing and guarantee
business. In early 20th century, social consensus regarding the usefulness of these organizations
spread and SCM (Societe de Caution Mutuelle) got into the legal system in 1917. This provided
a momentum to promote mutual guarantee system96.
Credit guarantee system was introduced in Switzerland a little later compared to France, but
it is recognized as the prototype of modern credit guarantee system. In contrast to France where
credit unions by trade evolved in line with the principles of cooperatives in latter half of 19th
century, the form of credit union by locality based on communities prevailed in Switzerland.
State governments and the Swiss federation of small and medium enterprises jointly established
the Industrial Credit Guarantee Union (RGB: Regionale Gewerbliche
Bürgerschaftsgenossenschaft) in Basel in 1923 as an advanced form of a credit union based on
locality. And thereafter, the Central Federation of Industrial Credit Guarantee Unions
established in Bern in 1935 evolved into Swiss Industrial Credit Guarantee Association (SVGB:
Schweizerischer Verband der Gewerbliche Bürgschaftsgenossenschaft) under the support of the
federal government. These two institutions form the central axis of the Swiss SME financing
system97.
In Germany where cooperatives remained powerful around the turn of the 20th century,
guarantee associations (Garantieverband) with the nature of limited company were established
96) KODIT, ″Credit Guarantee Systems of the World″2005, p.13

97) KODIT, ″Credit Guarantee Systems of the World″2005, p.13
271
for small- and medium- merchants and handicrafts under the influence from Switzerland. The
first of this kind was Berlin Guarantee Association formed in 1933, and starting in 1954 in
Hamburg, credit guarantee unions were established nationwide98.
In Japan, under the influence from the German trend, guarantee associations based on
locality were established, starting with the establishment of Credit Guarantee Corporation of
Tokyo in 1937, and the National Federation of Credit Guarantee Associations was formed in
1955. The Small Business Insurance Corporation (Currently JFC : Japan Finance Corporation)
which is a re-insurance institution wholly invested by the government was incorporated in 1958.
JFC and local credit guarantee associations advanced in parallel into a two-tier credit
supplementation system.
Korea put in place a credit guarantee reserves system from 1961 on, which transformed into
SME credit guarantee system with reference to Japanese model in 1967. KODIT was
established in 1976 as an institution specializing in guarantee business, creating Korean style
credit guarantee system combining the functions of credit analysis and credit guarantee.
Taiwan government had credit guarantee systems of various countries studied, and, with the
approval of the Executive Yuan, established Small and Medium Business Credit Guarantee
Fund (SMEG) in 1974. Asian countries, including Indonesia (in 1971), Malaysia (in 1972) and
Nepal (in 1974), recognized the usefulness of credit guarantee system and introduced guarantee
systems suitable for their respective reality.
In the United States of America which has kept the tradition of market economy, a credit
guarantee system with its own characteristics evolved. The United States used to have a view
that a guarantee system runs counter to the market economy, but after 1950 recognized the
importance of SMEs in economic growth and deeply felt the necessity of a financial system to
support SMEs. Thus, the Small Business Administration (SBA) was established as a federal
agency in 1953, and guarantee programs were put in place under Article 7 of the SME Act 1970
which provided the ground for introduction of loan guarantee system. A loan guarantee system
was introduced in the United Kingdom and Canada which had economic management methods
similar to those of the United States, and made great impacts on introduction of guarantee
system by the countries in Central and South America which were within the sphere of
influence of the United States99.
98) National Federation of Credit Guarantee Association ″History of Credit Guarantee″1992, pp. 1-7
99) Levisky, Jacob. ″SME Guarantee Scheme: A Summary.″The Financier, Vol.4, No. 1&2, May 1997. pp. 5-11
272
| Routes of spread of credit guarantee system
Mutual guarantee
Switzerland Germany Europe
system
Japan
Public guarantee
Korea Asia
system
Taiwan
United States
of America
Loan guarantee
North America
system
Canada
Source: A handbook of World Countries 2010, Korea Eximbank
273
Annex 03
Application of credit guarantee system
Parties interested in credit guarantee system can be classified into guarantee institutions
which operate guarantee, financial institutions and SMEs which are objects of guarantee, and
guarantee system can be classified into‘mutual guarantee system’ ,‘public guarantee system’
and‘loan guarantee system’ , depending on how interested parties operate the guarantee system.
1. Mutual guarantee system

In case of mutual guarantee system, member enterprises establish a mutual guarantee union
as the operating body. The union raises the funds for guarantee through contributions or
investments by member enterprises and provides credit guarantee for the members. Originating
from the mutual assistance system of medieval guilds, this system is mainly operated in
European countries such as Italy, Spain and Switzerland, and is the oldest form of modern credit
guarantee systems.
Under the structure of mutual guarantee system, SMEs engaging in the same trade or doing
business in the same locality establish an entity to represent their common interests, and the
entity provides credit guarantee for individual member enterprises, thereby helping them resolve
the problems in financing. In the relationship between the SMEs and the guarantee institutions,
the problem of‘asymmetry of information’can be mitigated because the guarantee institutions
know the objects of guarantee well as their members.
274
| Outline of mutual guarantee system
2. Public guarantee system

Under public guarantee system, building financial resources of guarantee institutions mainly
depends on contributions or investments by government, and independent guarantee institutions
operate the system and provide guarantee support for unspecified enterprises. This system is
used in Asian countries such as Korea, Japan and Taiwan. Under this system, the relationship
among guarantee institutions, financial institutions and SMEs is clearly established, and
guarantee institutions make their own policies and operate credit guarantees as independent
institutions.
Under the structure of public guarantee system, guarantee institutions depend on the
contributions or investments by government for building their financial resources, and the final
liability of performing guarantee obligations is also borne by government. Accordingly, this
system has a more credible and powerful guarantee function compared to other types of
guarantee system, and is mainly utilized as part of economic and financial policies because of
the high degree of government intervention. Guarantee institutions need relatively large
organization in order to perform the functions of their own analysis and evaluation, and have the
characteristic that their guarantee operation is of large scale.
275
| Outline of public guarantee system
3. Loan guarantee system

In case of loan guarantee system, unlike mutual guarantee system or public guarantee
system, there is no independent credit guarantee institution. This system is operated in the form
of a government program, with the contributions or investments by government as its financial
resources. Eligibility to credit guarantee services, limits on guarantee and other guarantee
conditions are predetermined, and entrusted financial institutions provide guarantees for loans
meeting the requirements and are compensated for their losses arising from such guarantees.
This system is used in countries like the United States of America, the United Kingdom and
Canada which have a strong tradition of market economy and mature financial markets, and in
Central and South American countries which introduced the system through support from these
advanced countries.
Under the loan guarantee system, the government focuses on indirect management such as
management of the government budget, selection of financial institutions and management of
guarantee limits. But, the practical guarantee operations are entrusted to financial institutions
under this system. As the system is operated not by independent institutions but by as part of
government program, it is difficult to operate the system systematically and SMEs’awareness
of the system is low, but the costs for operating the system are relatively low.
276
| Outline of loan guarantee system
277
Annex 04
Process of introducing credit guarantee system

in Korea
In 1960s, the late Park Chung-hee government made a political pledge to treat enterprises
favorably for the purpose of economic development. In August 1961, a government established
the SME Bank (currently the Industrial Bank of Korea: IBK) in order to nurture SMEs and
facilitate SME financing. SME Bank started to reserve fund for credit guarantees. Credit
Guarantee Reserve system was not intended to provide credit guarantee to SMEs but to cover
the loss of SME Bank. It was a transitional form of the credit guarantee system.
The government enacted the SME Credit Guarantee Act on March 3, 1967 in order to
strengthen the function of credit guarantee by supplementing the shortcomings of the Credit
Guarantee Reserves system. Under this Act, SME Bank was entrusted to manage SME credit
guarantee fund until the establishment of an independent institution for credit guarantee
services. The credit guarantee system under this Act was essentially different from the previous
Credit Guarantee Reserves system. While the purpose of the Credit Guarantee Reserves system
was to facilitate lending to SMEs by covering the losses of financial institutions arising from
SME loans, the purpose of the credit guarantee system under the SME Credit Guarantee Act
was to encourage financial institutions’lending to SMEs by granting the creditworthiness of
SMEs.
In 1970s, rapid drop in real interest rates made it difficult for banks to mobilize sufficient
financial resources to satisfy increasing demand for corporate loans. SMEs facing more
difficulties than large enterprises in raising capital had to rely on unauthorized private money
lenders. It then became necessary to introduce credit guarantee system to resolve SMEs’
management obstacles arising from use of usurious private loans. In August 1972, government
established the Presidential Emergency Order and strengthened credit guarantee system by
expanding the scope of eligible industries and raising the financial resources from the bank
contributions.
Although the credit guarantee system in Korea made much progress up until mid- 1970s,
arguments on moral hazard that might arise from non-separation of lending institution and
credit guarantee institution and the passive guarantee operations did not abate. Opinions that the
guarantee operations can be more efficient when an independent credit guarantee institution is
278
established came to the fore. To vitalize credit guarantee system, Korean government enacted
Korea Credit Guarantee Fund Act in December 1974 and established Korea Credit Guarantee
Fund (currently KODIT) as an independent credit guarantee institution.
279
Annex 05
Current state of credit guarantee system in Korea
1. Structure of credit guarantee system and

guarantee institutions in Korea
The credit guarantee system in Korea is operated as a tripartite system where the two big
credit guarantee institutions, i.e. KODIT and KOTEC (Korea Technology Finance Corporation),
and 16 Local Credit Guarantee Foundations (KOREGs) participate. These credit guarantee
institutions were established under different laws and for different purposes. The government,
municipal governments, financial institutions, etc. make contributions to the capital funds of
these institutions, and their credit guarantee operations are conducted under certain leverage
ratio and credit limits.
| Framework of credit guarantee system in Korea
Ministry of Financial Small & Medium

Strategy and Services Business
Finance Commission Administration
Budgeting Supervision Supervision of
of operation contributions
Debor Creditor
▼ ▼ ▼
Application Letter of Credit

for guarantee KODIT, KOTEC guarantee
▶ ▶ Financial
SME
◀ ◀ Institution
Credit analysis KOREG contribution
▲ ▲
¡ª Supervision of operation
contributions contribution
Small & Medium

Business Municipality
Administration
Loans
280
Business areas for credit guarantee institutions in Korea are divided as shown below, and
each institution offers specialized credit guarantee services. KODIT provides credit guarantees
mainly for start-ups, export-oriented enterprises, green growth enterprises and management-
innovative enterprises, and KOTEC mainly supports technology-intensive enterprises and
venture enterprises and conducts technology assessment guarantees. 16 Local Credit Guarantee
Foundations mainly provide micro-credit guarantees for micro-firms located in provinces.
| Structure of credit guarantee system in Korea (as of December, 2009)
Classification KODIT KOTEC KOREG
Establishment 1976 1989 1996
Korea Technology
Legal Korea Credit Guarantee Local Credit Guarantee
Credit Guarantee Fund
foundation Fund Act Foundations Act
Act
Small & Medium
Financial Services Financial Services
Supervision Business
Commission Commission
Administration
Start-ups
Export-oriented
Small businesses in
enterprises Technology-intensive
the locality
Target Green growth enterprises
Small merchants
enterprises enterprises Venture enterprises
and industrialists
Management-innova- etc.
Micro-business
tive enterprises
etc.
Credit guarantee
P-CBO
Technology guarantee
Infrastructure credit
Technology assessment
Major guarantee
Technology/ Credit guarantee
businesses Credit insurance
management
Management
consultation
consultation
etc.
Government,
Government, Financial Government, Financial
Municipality, Financial
institutions institutionsinstitutions
Source of fund institutions
(0.225% of outstanding (0.135% of outstanding
(0.02% of outstanding
balance of loans) balance of loans)
balance of loans)
Maximum
Leverage 20 times 15 times
ratio
Employees 2,282 1,137 694
apital fund 4,895 billion won* 2,695 billion won 2,096 billion won
Outstanding balance
39,249 billion won* 17,145 billion won 11,196 billion won
of guarantees
based on general credit guarantees
281
2. Recent Trend of Guarantee Markets in Korea
Korea experienced extraordinary changes in economy after Asian currency crisis. Korean
economy overcame Asian currency crisis earlier and faster than expected but confronted new
economic conditions after the currency crisis. Korean SME policy and credit guarantee system
were no exceptions to these post-crisis changes. Against this backdrop, the government
announced the SME Financing Policy (the 6.23 Measure) in 2005 that reads SME policy should
be kept in line with market principles. The 6.23 Measure pursued qualitative change of
supporting SMEs with growth potential under the strategy of selection and concentration instead
of quantitative credit guarantees centered on expansion of guarantee supply. Under these
circumstances, the supply of credit guarantees gradually decreased. Outstanding balance of
credit guarantee against GDP was 4.6 percent in 2007 less than 7.5 percent in 2001.
However, when the global financial crisis hit the economy in the second half of 2008, it
became difficult for SMEs to access financing. And the government had no option but to
expand the supply of credit guarantees to overcome the crisis. As the Korean economy is
maintaining its upward trend with the continuing recovery, the supply of credit guarantees is
expected to slightly decrease.
| Change of outstanding balance of credit guarantees to GDP in Korea
Source: KODIT, Focus 2010-7, ″Macro-analysis of effects of credit guarantee in 2009″
282
Annex 06
Key aspects of KODIT
1. Purpose and meaning of establishment of KODIT
Article 1 of the Korea Credit Guarantee Fund Act and Article 2 of the Articles of
Incorporation of KODIT clearly provide that the purpose of establishing KODIT is to contribute
to balanced development of the national economy by facilitating SME financing through
extending credit guarantee to enterprises which lack tangible collateral and by establishing
sound credit order through building credit information.
2. Legal status of KODIT

KODIT can be viewed as a special non-profit legal entity which was established under the
Korea Credit Guarantee Fund Act and has a character similar to a foundation. As for KODIT,
there is no concept of share, as is the case for a foundation. The capital fund of KODIT is
mainly formed of contributions from the government and financial institutions, which are
similar to donations to a foundation. Therefore, contributors can neither demand dividends nor
claim their portion of residuary assets when KODIT is dissolved or liquidated.
3. Organization of KODIT
The organization of KODIT has advanced in order to achieve the management goals in
response to the changes in its environment. The provisions related to this can be found in the
Korea Credit Guarantee Fund Act, the Articles of Incorporation of KODIT, the Instruction of
Business Methods of KODIT, etc.
■ Board of Policy
A Board of Policy is the top decision-making body setting up the fundamental policies
concerning the operation of business of KODIT and relevant rules and regulations to enforce the
283
policies according to the Korea Credit Guarantee Fund Act, the Enforcement Decree of the
Korea Credit Guarantee Fund Act, and the Articles of Incorporation of KODIT. It consists of 12
members: the chairman of KODIT, one nominated by the Financial Services Commission from
among the public officials belonging to the Commission, one nominated by the Minister of
Strategy and Finance from among the public officials belonging to the Ministry, one nominated
by the Administrator of Small and Medium Business Administration from among the public
officials belonging to the Administration, one nominated by the Governor of the Bank of Korea
from among the executives belonging to the Bank of Korea, one nominated by the president of
the Industrial Bank of Korea from among the officers belonging to the Industrial Bank of Korea,
one executive officer nominated by the head of a financial institution designated by the
Financial Services Commission, three persons from among the officers or the executives of
financial institutions, and two persons from among the representatives of associations of
enterprises. The CEO of KODIT automatically becomes the chairperson of the Board of Policy
and assumes the chairmanship of both the board of policy and the meetings. The meetings are
divided into two types: two regular sessions held in February and November and extraordinary
sessions. The meetings can be held only when more than half of the members are present; and
over half of the present members shall agree to make a decision or pass a bill.
At the time of KODIT’ s establishment, the Board of Policy was the organization which
makes resolutions on important matters concerning KODIT’ s businesses. But, in order to
respond quickly to the increasing businesses of KODIT, the first amendment of the Korea
Credit Guarantee Fund Act was made on December 28, 1979, so that the Board of Policy took
the role of deciding on the framework for operation of KODIT. And the newly established the
Board of Directors took the role of making decisions on and enforcing important matters
concerning businesses.
■ Board of Directors
A Board of Directors is KODIT’ s decision making body that was established by the first
amendment of the Korea Credit Guarantee Fund Act to resolve important details pertaining to
the business of KODIT. The Board of directors is composed of the chairman, the executive vice
president and the executive directors, and the auditor is not included in the Board, but may
attend meetings of the Board of Directors and state his opinion. The Chairman of KODIT shall
convene the Board of Directors and shall be the chairperson of the Board of Directors. The
Board meeting is held when over one third of the members demand to hold a meeting, and over
half members should agree to make a decision or pass a bill.
■ Officers
KODIT may have, as its officers, one chairman, one executive vice president, seven
executive directors or less, and one auditor, according to the Korea Credit Guarantee Fund Act
284
and the Article of Incorporation. At the time of KODIT’ s establishment, KODIT had five
officers; the chairman, the executive vice president, two executive directors, and an auditor.
However, as of the end of 2010, KODIT has seven officers, including the chairman, the
executive vice president, the auditor and four executive directors. The chairman representing
KODIT shall be a chairperson of the Board of Policy and the Board of Directors and oversee
overall business as the CEO of KODIT. The chairman shall be appointed by the Financial
Services Commissions, and the term of officers shall be three years.
The executive vice president shall assist the chairman and be an acting chairman in a case
where the chairman is unable to perform his duties. The executive directors shall assist the
chairman and the executive vice president and share the business of KODIT. In a case where
both the chairman and the executive vice president are unable to perform their duties, the
executive director in the order as designated in advance by the chairman shall perform the
duties of chairman. The term of the executive vice president and the executive directors shall be
three years and be appointed by the Financial Services Commission upon the recommendation
of the chairman of KODIT. The auditor of KODIT shall audit the business and accounting of
KODIT. The auditor shall be appointed by the Financial Services Commission, and the term
shall be three years.
■ Employees
The number of officers and employees of KODIT at the time of its establishment was 65,
most of them came from financial institutions, Korea Appraisal Board and ministries relevant to
KODIT’ s businesses. Thereafter, the number increased continuously in step with the increase of
works and expansion of business boundary to about 2,050 at the end of June 2010, 31 times the
number at the time of establishment.
285
| Change in number of employees
■ Organization
KODIT started with four departments, one office and fourteen sections at the headquarters.
Thereafter, KODIT’ s organization has continuously changed through organizational
transformation in response to the increase of works and changes in management environment.
| Changes in organization
Description 1976 1986 1996 2006 2010
Headquarters Headquarters
Headquarters Headquarters Headquarters
4 Divisions 4 Divisions
4 Departments, 11 Departments, 9 Departments
Organization 11 Departments 12 Departments
1 Office, 4 Offices 3 Offices
12 Offices 3 Offices
14 Sections 41 Branches 81 Branches
85 Branches 99 Branches
286
Annex 07
Major businesses of KODIT
1. Credit guarantee service
There were four types of guarantee at the time of KODIT’ s establishment: guarantee for
bank loan, guarantee for payment warrant of banks, guarantee for a corporate bond, and
guarantee for tax and duty. In response to the appearance of new financial products, changes in
ways of commercial transaction among enterprises and the needs of the national economy, the
types of guarantee expanded continuously to reach 11 at present. It is now possible for KODIT
to provide guarantees for all kinds of financial transactions, including guarantees for indirect
financing, direct financing, commercial transactions between enterprises, and tax. A guarantee
for bank loans here means a credit guarantee for monetary obligations which an enterprise bears
toward a financial institution by borrowing money and is the most common form of guarantee
in credit guarantee system and plays the most important role in the aspect of credit guarantee
support. Guarantees for bank loans account for more than 80 percent of total guarantee supports
since borrowings from financial institutions are the most common way of raising external funds
required for working capital or facility investments.
| Framework of credit guarantee
287
□ Eligible Enterprises: Individuals and legal entities conducting business for profit and
their bodies (e.g. the Korea Federation of Small and Medium Business)
Gambling or similar types of entertainment, property-speculation encouraging business and

the likes are unqualified for guarantee services.
| Types of guarantee
Type Details
Guarantee for loan for working capital or facility investment from financial institutions
Guarantee for
Working capital, facility investment, export financing, purchaser financing, bill discounts,
Bank Loans
various technology development funds, etc.
Guarantee for Guarantee for loan for working capital or facility investment from second-tier financial
Loans from Non- institutions
Banking National Agricultural Cooperative Federations, National Federation of Fisheries Cooperatives,
Financial Small & Medium Business Corporation, Merchant Banks, Insurance companies, Venture
Institutions Capital, Korea Agro-Fisheries Trade Corporation, etc.
Guarantee for bills issued by enterprises for collateral or as a means of settlement in

Guarantee for commercial transactions
Commercial Bill Guarantee for bills as a collateral and bills as payment belonging to accounts payable or
accounts receivable
| Types of guarantee (continued)
Type Details
Guarantee used as collateral when enterprises compete for biddings or making contracts for
construction works and supply of goods or services.
Guarantee for
Bidding bond, contract deposit, gap deposit, payment guarantee, warranty deposit
Execution of
Guarantee to be issued to: government, municipal governments, public agencies, financial
Contract
institutions, original contractors with the afore-mentioned, project planner under the Act on
Private Investments for SOC, and others determined by the Financial Services Commission
Guarantee for Guarantee for payment warrant of financial institutions to help enterprises receive guarantee
Payment Warrant from financial institutions
of Banks Guarantee for L/C payment, etc.
Guarantee for payments of principal and interests of corporate bonds for utilizing direct
Guarantee for a financing through capital market
Corporate Bond Eligible: corporate bonds issued under Article 119 of the Act on Capital Markets and Financial
Investment Services
Guarantee for Guarantee used by enterprises as collateral in connection with their obligations to pay national
Tax and Duty or local taxes when they want to pay the taxes in installments or obtain collection deferment.
Guarantee for
Guarantee for obligations of SMEs to pay with regard to E-commercial business transactions
E-commerce
288
| Flow of guarantee service
Stage Process
On-line application on KODIT home page or application through a visit to branch

Application and
Prospective customers are asked to make a visit to a branch; interview over the
Interview
phone is available for existing customers
Documents and Filing documents necessary for credit review and evaluation
Credit analysis Credit analysis through documents and visit applicant
Credit rating
Reviewing of maximum guarantee limit for working capital
Evaluation and Approval
Review as to if requirements are met for approval
Approval
Issuance of letter Credit guarantee agreement

of credit guarantee Guarantee fees (Credit cards available)
| Outstanding balance of credit guarantee*

(unit : in billion KRW)
*excluding P-CBO guarantee
289
2. Credit insurance services
The payment practices for Korean SMEs rely on corporate bills, and, when a buyer goes
bankrupt, the seller is also likely to go bankrupt. In particular, since Korea’ s Asian currency
crisis in late 1990s, there had been an increasing concern that considerable number of domestic
enterprises faced the risk of chain bankruptcies due to defaults of bill issuers. So corporate bill
insurance service was introduced in order to prevent bankruptcy of SMEs and facilitate
commercial transactions through invigorating transactions on credit. The government enacted
the Act on Special Measures for Support of Small Enterprises on April 10, 1997 in order to
facilitate production activities of small enterprises and to help improve their structure and
management stability. This act gave the ground for corporate bill insurance service. KODIT
received contributions of 10 billion won from the government and started the services from
September 1, 1997. The introduction of the service had the effects of reducing the risk from
non-payment arising from sales on credit and expanding transactions on credit which once
contracted during the Asian currency crisis.
As enterprises which had experienced the risks of chain bankruptcies arising from corporate
bill during Asian currency crisis began to reduce reliance on payments with bills, the use of bill
insurances gradually declined. So KODIT introduced sales receivables insurance service in
order to induce changes in payment practices among enterprises and prevent sales receivables
from becoming toxic assets. The government laid the legal ground for introduction of sales
receivables insurance by amending the Act on Special Measures for Supporting Small
Enterprises and Small Merchants/Industrialists on July 29, 2003, and KODIT started a sales
receivables insurance service from March 2, 2004.
290
□ Corporate bill insurance: A supplier who provides goods or services purchases a
corporate bill insurance to cover non-payment risk of a buyer. The supplier receives
insurance money when the buyer defaults on the bills.
| Framework of corporate bill insurance
| Underwriting of corporate bill insurance

(unit : in billion KRW)
291
□ Sales receivables insurance: A supplier who provides goods or services purchases a
sales receivables insurance to cover non-payment risk of the sales receivables. The
supplier receives compensation when losses arise due to a buyer’
s inability to pay.
| Framework of sales receivables insurance
| Underwriting of sales receivables insurance

(Unit : in billion KRW)
3. Infrastructure credit guarantee services

The government enacted the Act on Promoting Private Investments for Infrastructure on
August 3, 1994 in order to help expansion of infrastructure through inspiring private
investments to facilitate funds from private investment firms. Under the Act, contributions of 20
292
billion won (5 billion won to KODIT, 5 billion won to KOTEC and 10 billion won to Korea
Development Bank) were made to the Infrastructure Credit Guarantee Fund in May 1995 for the
purpose of providing credit guarantees for initiators of private investment projects, and the Fund
was managed and operated by KODIT, KOTEC and KDB. The fund operated in three
institutions respectively was combined and run only by KODIT from January 1, 1999. This
Fund plays the role in enhancing the efficiency of government policy by leading private
investors into infrastructure projects and supporting those projects of the central government
and municipal governments.
| Framework of infrastructure credit guarantee
| Outstanding approved infrastructure credit guarantee

(unit: in billion KRW)
293
4. P-CBO guarantee services
During the restructuring of financial institutions after the“Asian currency crisis,”banks
focused their efforts on underwriting risk-free bonds to enhance their BIS capital adequacy
ratio, and investment trust companies which had then played important roles in corporate bond
markets turned conservative. Under these circumstances, most enterprises except for a few blue-
chip companies faced difficulties not only in issuing new bonds but also in issuing refunding
bonds. To ease the situation, the government released the Guidelines on Operation of Special
Guarantees for Vitalizing Issuance of Corporate Bonds. As KODIT introduced P-CBO
guarantees and P-CLO guarantees on July 1, 2000, enterprises which had faced difficulties due
to the contraction of primary bond markets began to recover management stability and capital
markets also stabilized.
In 2003, KODIT stopped providing new P-CBO/CLO guarantees, instead providing roll-
over P-CBO guarantees to those enterprises which were not able to repay their debts at maturity.
However, in order to resolve the stagnating capital market problem caused by the global
financial crisis in the second half of 2008 and economic downturn, KODIT resumed providing
new P-CBO guarantees.
A special purpose company (SPC) buys corporate bonds, which are pooled as the underlying
assets of CBOs (collateralized bond obligations). CBOs are classified into senior securities and
subordinated securities. KODIT provides guarantees for senior securities. Senior securities
upgraded into the best rating (AAA) are sold in the capital markets, and subordinated securities
are purchased by the issuing enterprise. SPC pays all the costs, including guarantee fees, related
to issuing CBOs with the cash surplus earned through the excess spread between the underlying
assets and CBOs.
| Structure of P-CBO guarantee
Purchase by enterprise SMEs

▶ Enterprise
Middle-standing Enterprises
▲
Bonds
▼ Sale proceeds
Asset Holder Underlying Asset: Bonds

▲
Asset transfer Sale proceeds
▼
SPC Credit guarantee
KODIT
Issuance of CBOs ▼
◀ Banks
Extending credit
▼ ▼
Subordinated Sell
Senior CDO ▶ Intitutional investors
CDO
294
| Flow of P-CBO guarantee
Initial Analysis/Review for Final Evaliation

Description Application Approval
individual enterprises for Pooling
SMEs Branch KODIT’s rating

Head Office Guarantee
(Guarantee Review
middle-level Coordinating Enternal credit rating Review Dep’t) Committee
enterprises company agency’s evaluation
The application process for those with valid corporate bond rating by external credit rating agencies and
listed companies on stock market is handled by the coordinating company.
| Outstanding balance of P-CBO guarantee

(unit: in billion KRW)
295
| Summary of KODIT’
s major businesses and services
Classification Details Introduction
General guarantee helps companies finance from banks and

1976
Credit financial institutions
① guarantee
Business P-CBO guarantee guarantees SPC’
s Collateralized Bond
2001
Obligation(CBO)
1997
(Corporate Bill
Credit Protecting SMEs from chain bankruptcies arising from
Insurance)
② insurance dishonored commercial bills or non-payment of sales
2004
Business receivables by covering their loss with compensation
(Sales receivable
insurance)
1995
Infrastructure
Guarantee for loans or bonds when private investors or private (Start of business)
Credit
③ project planners get to finance for government planned 1999
Guarantee
infrastructure projects (KODIT become sole
Business
provider)
Guarantee- Directly invest in SMEs that use the credit guarantee in order to
④ aligned equity enable them to utilize the funds in a stable manner for the long 2005
investment term
Customized one-stop services, from preliminary

Support for consulting to post-establishment consulting
⑤ 2008
startups (Preliminary Consulting → Entrepreneurial Training → Credit
Guarantee → Post-establishment Consulting)
296
References
Choi, Ghil-Hyun, Gwak, Sung-Cheol, Jung, Hyun-Ho, Shin, Ji-Cheol, and Yoon, Hyun-Il
Credit Guarantee System for SMEs, KODIT, 2004. (in Korean)
Hong, Soon-Young, Lee, Jong-Wook, and Woo, Jae-Hyun, Analysis on Computation of the
Proper Supply of Credit Guarantee, 2005. (in Korean)
Jung, Yeon-Seung, Lee, Jong-Wook, Noh, Yong-Hwan, Ahn Byung Reap, Choi, Seung Jin
Analysis on Performance of Credit Guarantees and Improvement Plan, Korea Small
Business Institute, 2007. (in Korean)
Kim, Sae-Jong, Lee, Jong-Wook, Noh, Yong-Hwan, Baek, Hoon, and Ahn, Hyun-Sook
Analysis on Roles of Credit Guarantee for SMEs in Economic Recession, Korean
Association of Small Business Studies, 2009. (in Korean)
KODIT, Credit Guarantee System of the World, 1986.
Korean Association of Small Business Studies, Analysis of Credit Guarantee Performance and
Computation of the Proper Leverage Ratio in 2009, 2009.(in Korean)
Levisky, Jacob. SME Guarantee Scheme: A Summary. The Financier, Vol.4,?No. 1&2, May
1997. pp. 5-11.
Noh, Yong-Hwan “Performance and Role of Credit Guarantee for SMEs in Economic
Recession”, KODIT Research Vol. 315, KODIT, 2009. (in Korean)
Song, Eul-Ho and Yang, Dong-Shik, “Current Trend of Credit Guarantee Market and its
Implications”, KODIT Report 2009-4, KODIT (in Korean)
Wang, Sung-Chul, Jung, Nak-Won, and Lim, Hae-Jin, Analysis on Conclusive Factors of Credit
Guarantee Supply and Estimate, KODIT, 2008. (in Korean)
Wang, Sung-Chul, Lim, Hae-Jin, and Hwang, In-Kook, Analysis on Macroscopic and
Microscopic Performance of Credit Guarantee, KODIT, 2008.
297
Chapter 03
Strategic Development for Microinsurance in

Cambodia
Kyeongwon Yoo (Sangmyung University / KIRI)

Linna Tan (Ministry of Economy and Finance, RGC)
Summary
To understand how to develop appropriate models for microinsurance in Cambodia, it is
necessary to assess why the current insurance business models do not reach the poor. Although
the insurance industry is beginning to notice the vast under-served market of low-income
households, insurers and policymakers have encountered numerous obstacles that need to be
overcome if they are to offer microinsurance on a large scale in Cambodia.
Besides the problems associated with the high transaction costs and inappropriate
distribution systems, the products that are generally available from insurers are not designed to
meet specific characteristics of the low income market in Cambodia. Also, one of the major
challenges in extending insurance to the poor in Cambodia is educating the market and
overcoming its bias against insurance. Many seem to be skeptical about paying premiums for an
intangible product with future benefits that may never be claimed and they often do not trust
insurance companies. Furthermore, the lack of regulatory framework presents threats to
microinsurance providers in Cambodia.
However, this low-income market has massive potential if insurers and policymakers can
address these issues with efficient and effective innovations. While these obstacles are
significant and daunting, they can be overcome if we learn and appropriately adopt lessons
learnt from other countries experience. In this chapter we explore the models for reaching a vast
298
underserved market in Cambodia.
Several suggestions for revitalizing microinsurance in Cambodia are provided in two
aspects. First, on the side of microinsurance operations, we suggest that it needs to 1) pursue a
development agenda without sacrificing sound management; 2) design products suited for the
poor’ s needs in Cambodia; 3) determine prices and cost based on actuarial studies, and 4)
advocate for a favorable policy environment. Secondly, we suggest that microinsurance
providers need to 1) intensify education activities towards making microinsurance understood
and accepted by clients and ultimately to Cambodia’ s poor population; 2) the education
activities require improved institutional efficiencies facilitated through capability-building
efforts and increased participation ratio and improved retention rates; 3) the microinsurance
providers also need to continue the advocacy with the Cambodian government in order to
sustain the microinsurance projects and legalize their ultimate structure in a progressive manner;
4) Cambodia needs to recognize that there is a need and a demand for microinsurance from the
poor segment of Cambodia’ s population and informal sector. 5) Finally, Cambodia needs to
pursue a participatory approach for policy development. We also argue that a well-designed
regulatory framework is a major factor for an effective and efficient provision of
microinsurance services. In promoting more professional and expansive services, regulation can
play an important role by encouraging microinsurers to become regulated.
1. Introduction
It is usually said that the poor are more vulnerable to many risks such as those of illness,
accidental death and disability, loss of property due to theft or fire, agricultural losses and
disasters of both the natural and man-made varieties, and they are least able to cope with when
it occurs. 100 Exposure to these risks result in substantial financial losses, and vulnerable
households also suffer from the ongoing uncertainty about whether and when a loss might
occur. Because of this perpetual apprehension, the poor are less likely to take the advantage of
income-generating opportunities that may reduce poverty.
Although poor households often have informal means to manage these risks, informal
coping strategies generally provide insufficient protection. Many risk-management strategies,
such as spreading financial and human resources across several income-generating activities,
result in low returns.
As we mentioned, risks are ever present in the lives of the poor. Faced with these shocks,
poor people draw on their financial, physical, social and human assets to meet the resulting
expenses. In the absence of precautionary or ex-ante risk-management instruments, most are
100) Refer to Churchill eds.(2006)
299
forced to rely on a range of options after the fact or ex-post. When a crisis occurs, a common
coping strategy is to borrow capital from lenders or microfinance institutions; others might ask
friends and relatives for help. Few have access to formal insurance services. Understanding the
concept of risk-management strategies is a starting point for strategic development for
microinsurance in Cambodia. Improved understanding of demand enhances the design of
appropriate insurance products and identifies steps that should be taken to ensure the adoption
of these products by the poor in Cambodia.
Microinsurance is the protection for low income households against specific perils in
exchange for regular premium payments proportionate to the likelihood and cost of the risks
involved. Those in the risk pool who do not suffer a loss during a particular period essentially
pay for the losses experienced by others. Insurance reduces vulnerability as households replace
uncertain prospective losses with certain small and regular premium payments. Yet this risk-
pooling aspect of insurance function means that insurance is a much more complicated financial
service than savings or credit.
Generally, microinsurance is for those ignored by the mainstream commercial and social
insurance schemes and those who do not have access to appropriate products. Of particular
interest is the provision of cover to those working in the informal economy who do not have
access to commercial insurance nor social protection benefits provided by employers directly or
by the government through employers.
Microinsurance must be designed to help poor people manage risks. With that overreaching
objective in mindset, microinsurance clearly emerges as quite distinct from mainstream
insurance and social protection schemes.
To understand how to develop new business models for microinsurance in Cambodia, it is

necessary to assess why the current insurance business models do not reach the poor. Although
the insurance industry is beginning to notice the vast under-served market of low-income
households, insurers and policymakers have encountered numerous obstacles that need to be
overcome if they are to offer microinsurance on a large scale.
Besides the problems associated with high transaction costs and inappropriate distribution
systems, the products that are generally available from insurers are not designed to meet the
specific characteristics of the low income market, particularly for the irregular cash flows of
households with breadwinners in the formal economy. Other key product design issues include
appropriate insured amounts, complex exclusions and indecipherable legal policy language; all
of which prevent effective insurance systems from providing effective services for the poor.
A major challenge in extending insurance to the poor in Cambodia is educating the market
and overcoming its bias against insurance. Many are skeptical about paying premiums for an
intangible product with future benefits that may never be claimed and they often do not trust
300
insurance companies. In fact, the bias goes in both directions. The people who work for
insurance companies are usually unfamiliar with the needs and concerns of the poor. Similarly,
the culture and incentives in insurance companies reward salespersons for focusing on larger
policies and more profitable clients and portray the idea of selling insurance to the poor as
ridiculous.
The low-income market has massive potential if insurers can address these issues with
efficient and effective innovations. While these obstacles are significant and daunting, they can
be overcome. In this chapter, we would like to explore the appropriate models and suggestions
for reaching this vast underserved market in Cambodia based on the previous works on this
issue around the world.
2. Environment of Microinsurance
2.1. Managing Risks
2.1.1. Impact of Shocks on the Poor
Risk is ever present in the lives of the poor. Faced with shocks, poor people draw on their
financial, physical, social and human assets to meet the resulting expenses. In the absence of
precautionary or ex-ante risk-management instruments, most are forced to rely on a range of
options after the fact or ex-post. When a crisis occurs, a common coping strategy is to borrow
from moneylenders or microfinance institutions; others might ask friends and relatives for help.
Few have access to formal insurance services.
Poor people struggle endlessly to improve their lives. It is a slow and gradual process
marked by tentative advances. Continually bombarded with financial pressures, low-income
households often find that shocks can easily deplete their hard-earned gains. The result is that
their trajectory out of poverty follows a zigzag route; advances reflect times of asset building
and income growth whereas declines are the result of shocks and economic stresses that often
push expenditure beyond their current income.
301
Figure Ⅱ-3-1 | The Impact of Risks on Immediate Impact
Immediate impact Response Long-term impact
● Low stress
Modify consumption
Reallocate household resources
Improve family budgeting
Reduce unnecessary expenditures
Call in small debts
Temporary change in lifestyle
Draw on informal group based
insurance
● Medium stress
Use savings
Depleted financial reserves
Risk event Borrow from formal or informal
Indebtedness-claim on future
Income loss sources
income flow
Asset loss Diversify income sources
Long working hours/Business loss
Need for lump sum Mobilize labor
Interference with family life
of cash Mitigate to work
Get help from friends Increased social obligation
Shift business to residence
● High stress
Sell household assets
Loss of productive capacity
Sell productive assets
Loss of income
Let employees go
Depleted assets
Run down business stock
Loss of access to financial markets
Default on loans
Untreated health problems
Drastically reduce consumption
Social isolation
Divest of family ties
Take children out of school to work
Source: McCord (2005)
The role of microinsurance, like any other effective risk-management instrument, is to

mediate these downturns, which are major impediments to escapingpoverty. When confronted
with a shock, poor people usually combine a variety of resources, including formal and informal
credit and savings, and seek out for additional work or income-generating opportunities to meet
the expenses. Understanding these risk-management strategies is a starting point for
understanding the demand for insurance by the poor. This chapter explores the risks to which
low-income people are vulnerable, analyses their primary means of coping with or managing
these risks, and provides insights into how insurance could enhance the ability of the poor to
deal with risks.
Vulnerability is closely associated with poverty and can be described as the ability of
individuals and households to deal with risk. The demand for microinsurance is directly related
to vulnerability; it grows out of the risks and risk-management strategies of low-income
households. Research on the impact of risk events and on how poor people cope with shocks
helps illuminate the demand for insurance.
302
Risk comes in many forms, for example illness, death of a loved one, fire or theft. These
shocks occur frequently and create pressures on household cash flow that exacerbate the ever-
present stress of meeting regular expenses, such as food, rent and school fees. When financial
pressures exceed the cash flow capacity of the household, people must seek finance from
outside sources. In some circumstances, microinsurance could be an option for filling this gap.
2.1.2. Prioritizing Risks
While across countries and in different markets within countriespeople prioritize risks
differently, low-income households consistently identify the loss of a household income earner
or sickness of a family member as their greatest concerns. Disability is also important but often
subsumed under health problems. These shocks include both those that can be anticipated and
those that cannot. Fortunately, many of the prevalent risks could be protected through insurance.
While the dominance of illness is not surprising, it is easy to lose sight of its double impact
in terms of the loss of income and added expenses. For families with sick children, small
expenses can quickly mount up and have huge financial impacts. Accidents, as well as chronic
illness such as malaria and HIV/AIDS, require extremely large sums of money. These
overwhelming financial pressures frequently fall on women, many of whom assume primary
responsibility for the welfare of their families.
2.2. Coping Strategies for the Poor

2.2.1. Types of Supporting Systems for the Poor
In coping with shocks and stress events, precautionary measures are desirable but not always
possible, especially for low-income households. Options for protection against risks ahead of
time may include:
Diversifying income sources,

Building assets by saving money, stocking food and investing in housing and healthcare,
Strengthening social networks,
Participating in reciprocal borrowing and lending systems, welfare associations and other
informal group-based insurance systems,
Enrolling in formal insurance or pension schemes or other formal social security systems,
Managing money strategically by controlling consumption and maintaining access to
multiple sources of credit.
All of these options are widely used,however, when cash flow is limited, poor households
often manage shocks and stress events ex-post. The options for coping with losses ex-post are
both extensive and creative. Some long-standing, informal and self-insurance risk-management
303
tools have been adpated over the years to respond to new diseases such as HIV/AIDS, new
pressures such as the privatization of the health system and changes in the financial services
market. Aspects of each can work for low-income households although the levels of coverage
and effectiveness will vary depending on the option. Few low-income households limit
themselves to a singular risk-management instrument. They mix and match various options
depending on the risk, loss and amount of cash flow.
As illustrated in the table below, both ex-ante strategies (precautionary) and ex-post
strategies (managing a loss) for dealing with risk generally involve a mix of intra-household
measures (self-insurance) and inter-household, group-based measures (informal and formal
insurance). The types and mix of strategies an individual or household uses at any given time
will reflect its level of vulnerability.
Table Ⅱ-3-1 | Coping Strategy by Risk
Coping Risk
strategies
Death Health Property
Financial services
Current income Financial services
Self- Financial services
Family/friends Current income
insurance Sell/pledge assets Sell assets
Money lender
Money lender Precautionary measures
Reduced consumption
Welfare associations
Informal Welfare associations Borrow from church Welfare associations
group-based (funeral societies) groups Vigilante groups
mechanisms ROSCAs Fund raisers Hiring of guard
ROSCAs
Partnerships between Partnerships between

Formal Partnerships between insurers and MFIs insurers and MFIs
insurance insurers and MFIs Purchase health Purchase health
insurance insurance
Social Health services
Police
protection Disability compensation
2.2.2. Microinsurance Schemes
The International Association of Insurance Supervisors (IAIS) defines microinsurance as

“protection of low income people against specific perils in exchange for regular premium
payments proportionate to the likelihood and cost of the risk involved.”However, the concept
of microinsurance has different meanings to different people.
304
Commercial insurers see its potential as a way of reaching large under-served markets.
Development institutions, such as the World Bank and the United Nations, focus on its potential
to secure poverty reduction. Financial journalists and analysts highlight the size of markets at
the“bottom of the pyramid” . Academics argue that financial sector development is as essential
as industrialization for sustainable economic growth.
Table Ⅱ-3-2 | Differences between Traditional Insurance and Microinsurance
Traditional insurance Microinsurance
Higher risk exposure / high

Low risk environment
Clients vulnerability
Established insurance culture
Weak insurance culture
Sold by licensed
intermediaries or by insurance Sold by non-traditional
Distribution models companies directly to wealthy intermediaries to clients with little
clients or companies that experience of insurance
understand insurance
Simple language
Complex policy documents
Policies Few, if any, exclusions
with many exclusions
Group policies
Little historical data

Good statistical data
Group pricing
Premium calculation Pricing based on individual risk
Often higher premium to cover ratios
(age and other characteristics)
Very price sensitive market
Frequent and irregular payments

Monthly to yearly payments, adapted to volatile cash flows of
Premium collection often-paid by mail-based on clients
an invoice, or by debit orders Often linked with other transactions
(e.g., loan repayment)
Control of insurance risk Control of insurance risk

Control of insurance risk (adverse
(adverse selection, (adverse selection, moral
moral hazard, fraud) selection, moral hazard, fraud)
hazard, fraud)
Complicated processes Simple and fast procedures for small

Claims handling Extensive verification sums
documentation Efficient fraud control
Source: MICRO INSURANCE CENTER (2008), Insurance in Developing Countries: Exploring Opportunities in
Microinsurance
In essence, microinsurance has the same purpose as traditional insurance to allow

consumers, whether they are individuals or businesses, to transfer their risks and purchase the
security they need to insure their lives or grow their businesses. Microinsurance, with the
305
promise of profits and welfare gains in markets of billions of clients, therefore, deserves a place
in both business strategies and development agendas.
For our purposes, we can define microinsurance simply as an insurance that is designed
specifically for the low income market. Microinsurance draws on the same generally accepted
practices as traditional insurance, such as actuarial pricing, reinsurance and claims handling.
However, microinsurance products are not simply downsized off-the-shelf traditional products.
Experience of microinsurance in low income markets has shown that there are fundamental
differences.
Low income people in developing countries are exposed to a variety of significant risks to
their wealth and life. To manage these risks, they resort to a number of strategies such as:
Informal risk sharing arrangements

Conservatism (i.e., avoiding risky activities)
Self-insurance through savings, reduced expenditure (including withdrawing children
from school) and acquiring additional work
Emergency credit from family or money-lenders
Liquidation of assets
In some countries, selling children into bonded labor
Several of these common risk management strategies bring with them severe secondary
costs to the families significantly increasing the cost of the loss. When funds are borrowed from
money lenders, interest rates are often excessive. In emergency situations, assets such as
livestock or land - both critical for continued income generation - are usually sold at a fraction
of their full value and then families are left without a source of income. This leaves families in
desperate financial situations. Insurance may not rank high on their list of risk management
strategies, but that is usually because an insurance culture is underdeveloped. In fact, their
initial perception of insurance may be negative rather than neutral.
Supplying an insurance culture, which is both new and not trusted, requires investment in
market education, sensitivity and realism about whether the product is necessary. In some
circumstances, existing risk management practices may work. Others, for example avoiding risk
or maintaining high levels of savings, may hamper development.
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3. General Lesson from Other Countries’Experiences
3.1. Microinsurance Market in the World
3.1.1. Market Size
Evidence of formal microinsurance was identified in 77 of the 100 countries, indicating

much effort worldwidein providing insurance access to low-income markets. However, what is
equally clear is that there is actually very little coverage by microinsurance when measured by
number of people covered.
In 23 countries, no evidence of active microinsurance was identified among a total

population of almost 370 million people. In some cases there was some evidence of
microinsurance but the information was insufficient to include them in the 77 listed countries.
Table Ⅱ-3-3 | Covered Lives by Microinsurer Type and Region
Insurer Type Asia Americas Africa Total
Commercial 28,517,903 7,704,622 1,726,602 37,949,127
Community based 186,418 - 136,861 323,279
Informal 2998,100 - 34,000 332,100
Mutual 1,380,369 91,035 1,002,702 2,474,106
NGO 36,827,202 4,581 577,413 37,409,196
Parastatal 11,177 - - 11,177
Takaful - - - -
Other - - 518 518
Total 67,221,169 7,800,238 3,478,096 78,499,503
Source: Microinsurance Center (2008), The Landscape of Microinsurance in the World’

s 100 Poorest Countries
It is clear that for the entire Africa region microinsurance cover is very limited. As a region,
Africa has the lowest number of identified microinsurance lives covered - only 3.5 million, or
just over 4% of the total number of people covered by microinsurance in the 100 poorest
countries. Furthermore, the team estimated that only about 1.6 million of these policyholders are
living on less than USD 2 per day. As with the Americas, a single insurer is dominant, covering
over 1.6 million total lives, close to half of all the microinsurance accessed on the continent.
Notwithstanding this low volume of covered lives, Africa may be the region with the largest
number of microinsurance programs (possibly excluding India). The discrepancy between the
low number of covered lives and the relatively high numbers of insurers and products is related
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to the proliferation of community-based microinsurers throughout Africa, especially in West
Africa. These community-based organizations (CBOs) typically show low member per product
ratios for reasons to be discussed below in the section on CBOs.
Microinsurance in Asia covers over 67.2 million people, 57.9 million of whom are estimated
to be living on less than USD 2 per day. Microinsurance in the region is dominated by India and
China. In China, a single federation of trade unions with group policies covers over 28 million
people, more than a third of all microinsurance policyholders identified. This figure will have to
be separated in some of the analysis that follows because of its distorting effects. In India
(which is also a special case as will be seen) over 30 million people are covered by
microinsurance. Even taking into account the volumes in India and China, more than 90% of
poor people in the Asia region do not receive any microinsurance cover. The average coverage
for the region is a mere 2.7% of poor people, meaning that 97.3% of low-income people in this
region have no microinsurance cover at all.
3.1.2. Microinsurance Products
TableⅡ-3-4 summarizes covered lives by product category within each of the three regions of
the study. It will be noted that the total exceeds the 78.5 million total mentioned earlier as the
covered lives in total - this is due to the existence of numerous compound products. The Indian
insurer VimoSEWA, for example, sells one microinsurance product which covers life,
hospitalization, property and disability. Their total number of covered lives would be reflected in
all four columns even though, in an overall total, each policyholder would appear only once.
Health microinsurance, the least represented of the covered lives identified in the study, also
tends to be the product that is most demanded by the poor, as was mentioned earlier in the
section on demand.
It is interesting to note that a major component of the total number of life insurance lives
covered is directly and only related to the potential loss of life of a borrower - credit life
insurance. This shows at the bottom of the importance hierarchy. In satisfaction surveys, low-
income people almost always explain credit life insurance as something that benefits the lender
and not the policyholder.
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Table Ⅱ-3-4 | Covered Lives by Products and Regions
Region Life Health Accident & Disability Property & Index
Asia 54,158,332 31,697,038 39,180,508 34,557,434
Americas 7,545,057 445,876 105,000 600
Africa 2,036,141 3,053,778 1,603,000 1,600,000
Total 63,739,530 35,196,692 40,888,508 36,158,034

3.1.2.1. Health Microinsurance
Health insurance emerges consistently as the most demanded microinsurance service. Aside
from people’ s obvious desire not to suffer from pain and disease, the illness or injury of a
breadwinner has serious implications for household livelihood security. Health problems cause
loss of income in two ways, first through the cost of treatment and then, more importantly,
through the loss of household labor. The labor loss implications may go beyond losing the labor
of the sick person since many sick people need a full-time or part-time caregiver. Such a loss is
particularly felt in poor households in developing countries. These households are mostly labor-
rich and capital-poor, so when they lose labor, they lose their main factor of production.
Health microinsurance is a good example of how microinsurance benefits can be

coordinated with social security systems. Most health microinsurers cover some level of
primary health care through CBOs and NGOs in countries where the government provides
secondary care.
Restrictive hospitalization benefits are also relatively common as a means of helping people
in situations where hospitalization is not effectively covered by the government. The cover is
normally restricted to a limited range of treatments or procedures in order to retain low
premiums.
Health activities in the world appear to be dominated by donor-driven CBO insurers in West
and Central Africa. Few have reached sustainability although some large federations of mutual
may have overcome this first hurdle. There is some evidence of defined benefit insurance like
critical illness or‘dread disease’benefits in Haiti, and hospital cash plans in Georgia and Sri
Lanka that do not provide indemnity benefits but are easily managed.
More than any other insurance product, health insurance is intrinsically linked to a third
party - the healthcare delivery system, whether public or private. A strong state healthcare
system would obviate the need for health microinsurance. Though significant health initiatives
may be possible without developing the entire infrastructure effective health insurance can
never be readily separated from the healthcare infrastructure.
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Conventional insurance wisdom says that‘insurable events’are those that are rare,
uncontrollable and have a high impact. Thus, hospitalization for heart failure is an insurable
event whereas a high-frequency low-impact event such as visiting the doctor for a common cold
is not. It is possible to use genuine insurance to cover the insurable events, coupled with
facilitated savings or guided budgeting to cover the low-risk events. By effectively splitting the
risk management strategies into insurable and uninsurable components of healthcare,
appropriate tools could be devised for low-income people to better manage these risks.
3.1.2.2. Life Products
Of all insurance types, life cover is, relatively speaking, the easiest to provide due to the
following reasons:
It is one of the most demanded forms of cover.

It is relatively easy to price compared to other types of insurance.
It is highly resistant to problems of fraud and moral hazard.
It is not dependent, unlike many other types of health insurance, on the existence and
efficient functioning of other infrastructure like clinics or hospitals.
It can easily be linked (at least with short-term life insurance) to other microfinance
savings and loan products.
The insured event is a clear-cut fact.
Considering the dramatic growth of microfinance institutions in developing countries in the

last two decades and the fact that life insurance is easy to distribute, it is not surprising that, by
far, the largest portion of people holding microinsurance - almost 64 million out of the total 78.5
million - are holding life insurance. The figure would be even larger if informal funeral and
other related products were included, but data for these informal schemes were hard to obtain.
Life insurance appeared to be, by far, the most widely provided of all microinsurance, with
credit life the most popular variant.
3.1.2.3. Credit Life
Many of the credit-linked schemes require life insurance from borrowers as a condition of
joining. This inflates the number of lives covered, and often reflects poor quality products from
insurers or the MFIs themselves that benefit from the lack of competition. Credit life is popular
with MFIs because it is cheap, simple, short termed, often invisible, and entails minimal
underwriting and risk management. Credit life insurance can be sold even by non-life insurers
because of its short duration and its link to other short-term products. From a realistic point of
view, it is insurance for the insurer rather than the client against a particular type of default - the
death of a borrower.
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While credit life insurance mitigates some risk to the lender, its value to the dependants of
the client is minimal. Mortality rates are very small compared to default rates, so, from the
institution’s perspective, insurance is only marginally better than provisioning. Writing off loans
unpaid due to death is not likely to significantly affect the costs of doing business. At worst,
credit life is just a public relations enabler, allowing the MFI to avoid the bad publicity of
extracting money from widows and orphans.
Many MFIs actually abuse credit life insurance as a means of improving the fee income
portion of their operating statements. They charge a fee as high as 3% of the loan principle as
‘insurance’ , this amount accounts directly to fee income, and simply write off losses through
their Reserve for Possible Loan Losses accounts. Significant overcharging of this nature makes
potential policyholders even more skeptical and damages the credibility of more appropriate
insurance products.
3.1.2.4. Accidental Death and Disability Insurance
Accidental death and disablement are serious concerns for the very poor. With long-term
illness, the household may have an opportunity to make plans for the death of a breadwinner
whereas accidental death and disability have a sudden impact on the livelihoods of families.
Micro-disability products tend to focus on easily verifiable dismemberments such as loss of

an arm or a leg. Less easily definable occupational disability products are more costly and
difficult to manage as well as being vulnerable to fraud and other problems. These issues push
the premiums of all products except for the simplest products that are out of reach of the low-
income market.
There are several microinsurance products that address disability, typically limited to an once-
off payment for permanent disability. Products covering temporary disability are often tied to life
products that are sold with microcredit so that if the borrower/policyholder is disabled, the creditor
suffers no loss. These products appear to be aimed at providing benefits only to the lender.
Accidental death and disability products are popular with insurers as an entree into
microinsurance because there are limited risks - anecdotally in many of the poor countries, only
about one in five or six deaths is by accident. Thus, the policy can be very cheap for the
policyholder and at the same time often very profitable to the insurer. Only three new accidental
death and disability products were launched in the last three years.
3.1.2.5. Property Insurance
Poor people usually live in cheaply constructed housing, without title deeds, often located in
flood plains or other risk-prone sites which may be exposed to fire and other hazards. The
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survey found that 99.3% of low-income people in poor countries were without property
insurance. This is no surprise, as demand for property cover is significantly less than the
demand for health and life insurance. Non-profit insurers tend to specialize in health and life
insurance to ignore property covers. Again, this is not surprising because, compared to the
relatively easy underwriting and claims validation of life insurance, property cover may require
more complicated procedures. With small sums assured and small premiums received, the cost
of necessary controls, including loss adjustment, often renders property insurance business
unviable.
Crop insurance is expensive to administer and claims are difficult to validate. Much of the
same applies to equipment insurance. Microinsurance coverage of livestock loss is very limited.
These programs tend to suffer from moral hazards and frauds; in addition, management
activities for livestock cover - purchase reviews, veterinary assessment costs, and loss
adjustment - cost too much for livestock cover to remain viable. Low-income people seem no
different than others when it comes to trying to obtain insurance compensation where none is
legitimately due.
3.1.3. The Demand for Microinsurance
Regarding the demand for microinsurance, one should remember that insurance is not the
only way of dealing with financial risks. There are two broad categories of risk management
strategies- ex-ante and ex-post. Ex-ante risk mitigation strategies involve taking actions that
reduce the probability of the risk occurring. An example would be buying a lock to prevent
one°Øs valuables from being stolen or boiling water to avoid illnesses associated with
contaminated drinking water. Ex-post risk coping strategies are concerned with reducing the
impact of the risk after it has occurred. An emergency loan to pay for the unexpected funeral of
a family member would be an instance of an ex-post risk coping strategy. Any assessment of
demand should be taken into account on how these strategies function in each context.
It is very difficult to estimate the demand for microinsurance. The main reason is that the
field is very new. Globally, not many people have microinsurance, and most of those who have
it have not had it for long. Demand studies draw inferences from historical trends. If, for
example, one wanted to introduce a new model of television and wanted to know how well it
would sell, the starting point would be to obtain the historical trends of television sales. With
microinsurance being a new field, this is not possible. To make matters more difficult, many of
the potential buyers of microinsurance have never even come across the concept of insurance
before. Not only is the product hypothetical for them but, unlike television that can be turned on
and demonstrated, its benefits are not immediately visible for them. The benefits of insurance
only become visible when a policyholder claims and the insurer pays the claim.
Some research showed that by far the greatest single hindrance to microinsurance in the
majority of countries was consumer ignorance in insurance as a whole. In markets where
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penetration is just a fraction of 1%, there can be little doubt in the need for this type of
awareness building. While education of clients (and dependants) is helpful, something much
broader is necessary to create awareness in people’s minds for the possibility of insurance,
which prepares them when microinsurance is available for them.
The following table provides a flavor of some of the key studies on the demand for
microinsurance and what they show.
Table Ⅱ-3-5 | Studies on the Demand for Microinsurance
Percentage or number
Key Insurable
Countries willing to purchase Comments
Risks
microinsurance
Much of the property risk could be mitigated through
better electricity provision. The health risk is the related to
not having money to pay the necessary bribe to state
Property,
Albania No estimate hospitals to obtain treatment. There is very limited
health, life
knowledge or experience of private insurance in Albania.
The experience of car insurance has created negative
attitudes towards private insurance.
No estimate, 55-60% of
Health, Insurance little understood among urban and rural poor,
individuals interviewed
unemployment, often confused with saving. Focus group indicated a high
Georgia expressed an interest in
theft of receptive towards the idea of insurance and willingness
buying a specified group
property, life to pay for it.
health insurance product.
Strong demand for products to cover no insurable risks

Health,
like education and old age. These can be covered through
Indonesia property No estimate
long term contractual savings products such as
(crops), life
endowment policies often sold by insurance companies.
Macroeconomic instability was presented as a key

Health, life,
Kenya No estimate concern. In theory such a risk could be covered by
property (theft)
innovative index insurance.
School teachers, policemen and soldiers as well as office

workers are covered by life and medical insurance. The
Health,
unmet demand in Laos is principally among informal
Laos property No estimate
sector workers. A big risk faced is the cost of children
(livestock), life
education, which could be met by long term contractual
savings products sold by insurers.
The biggest risk concern was macro-economic inflation,

followed by unemployment, health, life and disability. Other
risks include education and marriage expenses which
Health, life
Pakistan 7m could be catered by a long term contractual savings policy
(accidental)
sold by insurers. 60% of target market was aware of what
insurance was although only 12% had actually bought
insurance.

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3.2. Regulatory Frameworks for Microinsurance
There is no uniform view on what the appropriate policy objectives for the regulation of the
insurance sector should be. The following are, however, generally accepted as the most relevant
objectives for insurance regulation (in the typical order of priority):
Safeguarding the solvency of firms involved in the provision of insurance policies (which
can also be described as ensuring the stability of the sector);
Protecting consumers or policy holders;
Increasing competitiveness of the market and its efficiency (including the adoption of new
technologies and innovation generally);
Developing the market, including formalizing financial services to low-income clients;
and
Supporting other strategic (non-insurance) objectives such as compliance with
international standards or law enforcement.
Traditionally, the focus has mostly been on ensuring solvency and consumer protection and
to some extent on market efficiency (although this has always been placed secondary to stability
and solvency). More recently, however, the focus has expanded to also include market
development objectives and to take account of other strategic objectives of governments such as
financial inclusion by making insurance available and accessible to the informal sector. These
two objectives carry particular weight in emerging market jurisdictions which are faced with the
challenges of market development as well as multiple development goals (some contradictory)
which have to be managed, aligned and prioritized within limited resources.
To fulfill this objective, how can supervisors contribute to the creation of regulatory
frameworks, including their supervisory systems, which will enable large parts of the
development of microinsurance by aligning regulatory and supervisory practices to its specific
characteristics? Such interventions might include:
Adjusting rules and regulations as well as supervisory practices to the particular situation
of microinsurance;
Requiring disclosure regarding involvement in microinsurance from regulated risk
carriers;
Providing greater market analysis on market needs, which may motivate insurers to go
down-market;
Regulating new distribution channels that are familiar with and gaining the trust of, low-
income households;
Incentivizing or even mandating risk carriers which are unregulated or under other
authorities to become licensed;
Creating grievance channels and resolution systems appropriate for low-income
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policyholders;
Increasing policymakers’ awareness of microinsurance;
Ensuring that products and procedures are tailored to the needs of low-income
households;
Facilitating dialogue with policymakers (especially on tax issues or social security
schemes) in case these services have features which are counterproductive to private-led
microinsurance;
Promoting customer awareness and understanding of insurance; and
Improving product development to meet the needs of low-income groups (which in some
cases has led to product regulation).
The development of the microinsurance market presents a number of inherent challenges for
the supervisor. Unlicensed insurance schemes can do harm, especially for low-income
households. Therefore, supervisors can define a threshold beyond which informal schemes have
to have an insurance license. The criteria used in drawing the line between regulated and
unregulated entities depends on the country situation number of customers, premium volumes,
or even supervisor’ s capacity. For example, while a scheme of 50,000 members may be
considered small in one jurisdiction, it may be quite significant in another.
Supervisors are also challenged to strike the balance between extending insurance to the
low-income segments and protecting the investments and confidence of these households. The
capacity of the supervisor is a critical element here, especially since supervisors may have
priorities that are more pressing.
To prevent regulatory arbitrage, it would be useful if one agency was responsible for
supervising insurance activities, instead of having multiple ministries or government
departments involved. It can also help to develop an activity-based approach, rules and
regulation which are valid for any type of supervised insurance provider.
The supervisor has a number of regulatory options for structuring a regulatory framework
for microinsurance. As laid down in point, the array of options include introducing a new type
of agent like in India; creating a new institutional type like in the Philippines (Microinsurance
Mutual Benefit Associations) or in South Africa (Funeral Microinsurance License); regulating
microinsurance as a business line for commercial insurers and an array of agents like in Peru,
and facilitating dialogue and product specific type of microinsurance provider (health care
mutual) like in West Africa is another option.
In terms of the overall approach to microinsurance regulation, two main strategic lines can
be distinguished: the activity-based approach versus the institutional approach of regulating
microinsurance. A combination of both approaches is possible.
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From the analysis of regulatory approaches for microinsurance activities, a number of
lessons can be drawn. The most important one is the development of a regulatory framework for
microinsurance using a principle-based approach which is consistent with the IAIS principles,
and also takes into account both the activity-based and institutional aspects.
Microinsurance regulation involves a range of issues depending on the type of peril that is
insured, the profile of the insurer and the distribution channel that is used. These differences
have ramifications while choosing the type of regulation and supervision that will be most
appropriate. Therefore,“regulation of microinsurance”is a complex task, with many different
issues and actors involved at various levels of the industry (macro, meso and micro).
Creating a new institutional type may be wise in some situations; however, this approach
requires a thorough analysis of challenges and options, and significant capacity at the level of
the supervisory authority.
Regulation of microinsurance aims foremost at consumer protection in addition to protecting

the stability of the financial system, which was the argument in microfinance regulation dealing
with savings and credit. It may be helpful to look at the lessons from microfinance regulation
where a number of generally accepted“practical principles”were developed such as:
Do not regulate what you cannot supervise.

Where possible, base specific rules/principles on activities rather than institutional types.
When setting minimum capital requirements, balance the promotion of the sector with
limitation of the number of providers that need to be supervised.
Experimentation in product offerings is one factor that allowed microcredit to grow into a
sustainable industry.
Microfinance refers to different types of providers and is therefore not tied to one
institutional type.
New institutional types (also called categories or tiers) bring the risk of regulatory
arbitrage.
Careful design of a regulatory framework takes time and considerable resources.
At a minimum, supervisors should increase their awareness about microinsurance,

recognizing that low-income households and other excluded groups are insurable and are not
necessarily more complicated clients. Often, the providers and the policyholders are new to
each other and appropriate products and systems are not yet developed. Regulatory activism is
not necessarily required, but open minds are suggested.
To summarize, the following questions are of concern to supervisors:
How adequate are the regulations in terms of safeguarding the interests of microinsurance
clients as well as ensuring the growth of the industry?
Do they hinder microinsurance development? If yes, in what ways? What can the
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regulatory framework contribute to encourage informal insurers to formalize their
provision of microinsurance services? Which types of institutions are favored or hindered
by the present regulatory framework?
How can the cost of regulation and supervision be minimized, while at the same time
ensuring quality services and not overburdening the industry?
Are there minor adaptations to the regulations which could bring along significant
improvements? Or, how could a tiered system of regulation and supervision for
microinsurance be developed?
These questions highlight some of the most pressing issues in the regulation and supervision
of microinsurance.
4. Overview of Microinsurance in Cambodia

4.1. Financial Services for Cambodia’s Poor
No large scale study has been conducted to determine the scope of demand for financial
services in the country. Cambodia has a population of 14.2 million or about 2.9 million families,
85% of them living in rural areas. An estimated 36% of the population lives below the poverty
line. About 286,000 clients are serviced by commercial banks and 500,000 families receive
credit from microfinance institutions. Most (70%) credit is short term or less than one year.
Long term finance for investments in capital goods is virtually non-existent.
It is estimated that the total demand for credit by micro and small business entrepreneurs
could amount to US$ 100-125 million. Only 45% to 55% of this is provided by existing
financial service providers. The financial sector is still underdeveloped, lacking banks and
limited by a weak rural finance network. Seventeen commercial and specialized banks operate
only in Phnom Penh and major provincial towns. Majority of the rural population has almost no
access to formal forms of financial services.
Microfinance started in the early 1990s, through microcredit program provided by non-
government organizations (NGOs) to fill the gaps left by the banking sector and encourage
business activities in post-conflict Cambodia. Development initiatives that began as
unsustainable donor-financed credit projects in the 1990s were collectively transformed by
donors, international partners, and local stakeholders into a sector led by profitable, regulated
financial institutions. After a decade, microfinance is arguably the most sophisticated part of the
financial sector in Cambodia.
MFIs in Cambodia are involved in both credit provision and limited deposit-taking. As of
June 2004, the pro-poor financial sector in Cambodia was led by the ACLEDA Bank, followed
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by nine licensed MFIs (10 since December 2004), and 28 NGOs registered with the NBC. The
registered NGOs vary in terms of outreach, capacity, and commitment to sustainability, and
only a few currently posses the resources to become licensed MFIs. In addition, a plethora of
smaller NGOs and other community-based organizations currently provide microfinance
services, including an estimated 60 NGOs that are not registered, and a few incipient mutual
and savings associations.
Table Ⅱ-3-6 | Microfinance Portfolio and Outreach in Cambodia
ITEM 1995 1997 2002 2003 2004 (June)
Lending Portfolio
ACLEDA 1,157,093 5,860,578 27,461,933 40,572,670 49,711,078
Licensed MFIs n.a. n.a. 5,637,792 12,552,666 19,019,744
Registered NGOs n.a. n.a. 12,791,441 10,633,628 8,144,821
Total Loan Portfolio 3,000,000 15,000,000 45,891,166 63,758,964 76,875,640
Total Borrowers 50,000 225,030 327,935 374,056 392,892
Savings Portfolio
ACLEDA n.a. n.a. 5,678,728 13,160,685 21,630,048
Licensed MFIs n.a. n.a. 143,433 795,065 1,124,129
Registered NGOs n.a. n.a. 730,076 811,475 138,074
Total Savings Portfolio n.a. n.a. 6,552,238 14,767,225 22,865,251
Total Depositors n.a. n.a. 107,120 133,628 155,137
The RGC has established a supportive regulatory framework for the development of
microfinance in Cambodia. In November 1999, the“Law on Banking and Financial
Institutions”(Royal Kram NS/RKM/1199/13) was enacted. It established a stricter regulatory
regime for the operation and supervision of financial institutions in order to increase public
confidence in the banking sector. The success of NGOs in providing credit to the poor and
largely rural population encouraged the RGC, through the National Bank of Cambodia (NBC),
to issue regulations establishing a special license for MFIs and a registry for NGOs. The
issuance of new prakas (regulations) in 2000 and 2002 marked a move towards the
commercialization of microfinance and its integration into the formal financial system.
Since 2004, microfinance has become an industry in Cambodia with different players
(commercial banks, microfinance institutions, NGOs, credit union) as an increasing outreach on
diverse products and services. There are now 17 MFIs licensed by the NBC, with total loans
outstanding of US$ 90 million and 500,000 borrowers. Microfinance lending dramatically
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increased at a rate of 71% in 2006 and portfolio quality is generally good, with non-performing
loans (NPL) at less than 1%. In contrast, deposits have not grown, resulting in an extremely
high loan/deposit ratio of 3,460% in 2006.
Microfinance institutions are in a unique position to provide microinsurance as they have

extensive networks and are already offering financial services to poor clients. They have
grassroots information about their clients that is crucial in developing appropriate products and
delivery mechanisms. They have also built an infrastructure and acquired skills and capabilities
that will make it less costly to deliver microinsurance products. In addition, the problems of
adverse selection and moral hazard may be reduced with the screening mechanisms and social
networks that MFIs have already set in place. It is, thus, not surprising that many pioneering
attempts to provide microinsurance have been closely linked to microfinance programs and
MFIs.
MFIs operating in Cambodia, as in other countries, have determined that their clients have
insurance need, albeit on a small scale. From a developmental perspective, extending protection
to the poor to help them cope with catastrophic events is a logical progression towards their
empowerment. From the viewpoint of the credit-granting institution, it also makes sense to
provide a measure for insuring the ability of poor borrowers to repay their loans. Thus, pilot
projects of health insurance, at a micro level, have been undertaken in Cambodia and met with
success. Foremost of these is the GRET-SKY Health Insurance Project, a community-based
health insurance (CBHI) program supported by the French NGO Groupe de Recherche et d’
Echanges Technologiques (GRET) since 1998. GRET-SKY started as an experimental health
insurance scheme to complement the micro-credit activities of AMRET, the microfinance
program begun by GRET in 1991. Today, AMRET has grown into one of the largest MFIs in
Cambodia with over 100,000 clients, while GRET-SKY has covered 4,392 individuals or 917
households as of 2005.
Several NGOs and MFIs have also developed their in-house CBHI programs, prompting the
Ministry of Health to regulate CBHIs. The Department of Planning and Health Information
(DPHI) of the MOH reports that nine CBHIs exist in Cambodia as of May 2008 although most
have small-scale operations and are still in the pilot-stage.
Two licensed MFIs in Cambodia have also ventured into microinsurance in recent years.
These are the CHC Limited Microfinance Institution (CHC Ltd.) and Vision Fund Cambodia
(VFC). Other MFIs in Cambodia have expressed an interest in developing their own
microinsurance programs. However, as there is currently no regulatory framework for
microinsurance in Cambodia, a number of institutions with initial plans to offer microinsurance
products have opted to wait for the regulations to be issued by the MEF.
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4.2. Insurance Industry in Cambodia
4.2.1. History of the Insurance Market
The history of the Cambodia insurance market goes back to 1950’ s which at that time a
number of French insurance companies maintained operation in the colonial period and for a
time after Independence. Until 1975 a state owned insurance company, Societe National d’
Assurance et Reassurance (SNAR) carried on business but ceased to operate when the Khmer
Rouge seized control of the country.
For seventeen years, no insurance business conducted in Cambodia. In 1992, the Cambodian
National Insurance Company (CAMINCO) was created to carry out the first insurance business
in Cambodia.
However, with the passing of the insurance law in June, 2000 and the subsequent Royal
decree, and sub-decree, companies wanting to transact insurance businesses in Cambodia are
required to register with the Ministry of Economy and Finance, and be authorized with capital
of US$ 7 Million. Since then development have been gradually made.
In early 2002, the Cambodian Reinsurance Company (Cambodia Re) was established to
support local insurance companies. This establishment has even made contribution in order to
freeze the outflow of premium to the over-sea market.
Initially, Cambodia Re was operating as a state owned company the capital of which wholly
owned by the Royal Government of Cambodia. As from the start, Cambodia Re had conducted
business on its own until the company turns to be a joint venture from January 2004.
This establishment was aimed at providing local reinsurance capacity to all direct insurers in
the Kingdom of Cambodia, based on the insurance law which specifies that all reinsurance
transactions has to be subjected to the 20% of compulsory cession.
In the meantime, there are 6 insurance companies which are playing in Cambodia and all are
subjected to cede at least 20% as compulsory to Cambodia Re. The 6 are companies as follow:
Cambodia National Insurance Company (CAMINCO), Forte Insurance Company, Asia
Insurance Company, Campubank Lonpac Insurance, Infinity Insurance Company, Cambodia-
Vietnam Insurance (CVI).
4.2.2. Current Situation of the Market in Cambodia
Cambodia insurance and reinsurance market has grown at a rapid rate since the
implementation of the insurance law and regulation in 2001. The business which in the past has
been written off-shore is now being placed in the local market. However, it is recognized that
not all business is yet arranged in Cambodia, and some big and special risks which need wider
terms and conditions than existing treaty still fronting with the oversea markets.
Insurance industry keeps growing from year to year forming the premium of USD 2.3
million in year 2000 to 20.6 millions in the year of 2008. It is almost 10 times of the premium in
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2000. So far, this growth goes along the economics growth as the result of the growth of various
sectors such as tourism, construction, banking and textile industry. However, claims also keep
increasing from 367,154 in 2000 to USD 5.2 millions in 2008.
Table Ⅱ-3-7 | Insurance Market in Cambodia (Premium Revenue 2000-2008)

(Unit: USD thousand)
Line of Business 2000 2001 2002 2003 2004 2005 2006 2007 2008
Auto 892 969 1308 1617 2032 1970 2304 3025 4252
Fire 509 1008 2188 2910 2728 2441 3326 4132 5495
Marine 145 171 243 243 243 322 504 426 331
Engineering 44 116 162 455 275 1957 1305 1830 3936
Miscellaneous 448 970 1270 3161 4314 3360 2313 3295 4339
Medical & Health 302 410 378 435 561 797 834 1222 2250
Oil & Gas 0 0 0 0 0 0 1557 3565 0
Total 2341 3664 5550 8822 10154 10848 12143 17494 20603
Growth Rate(%) 55.7 52.3 58.9 15.1 6.8 11.9 44.1 17.8
Source: General Insurance Association of Cambodia (GIAC), 2009
Table Ⅱ-3-8 | Insurance Claims in Cambodia (2000-2008)

(Unit: USD thousand)
Line of Business 2000 2001 2002 2003 2004 2005 2006 2007 2008
Auto 168 171 244 296 283 483 787 908 1371
Fire 95 78 849 3100 522 1570 2268 737 2154
Marine 6 36 40 9 5 13 57 13 -9
Engineering 0 3 0 11 25 20 20 60 428
Miscellaneous 79 114 167 139 159 1179 476 307 701
Medical & Health 20 52 49 101 64 134 203 206 571
Total 367 454 1349 3655 1057 3398 3810 2231 5217
Growth Rate(%) 23.6 197.2 171 -71.1 221.6 12.1 -41.4 133.8
Source: General Insurance Association of Cambodia (GIAC), 2009
The global financial crisis did have an impact on Cambodia economy as a whole, and, as a
consequence, the insurance industry also was impacted by this crisis. The major impact was on
the engineering business which was down around 70% year on year due to the delay in various
projects and premium cancellations. Even worse was that, in the year of 2009, the insurance
industry was hit hardest by a claim with the loss for property damage by natural fire at a
garment factory.
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Even though the whole industry experienced a little downturn in the year of 2009, it was still
expected to recover from 2010 onward where the world economy and the Cambodia economy
were expected to recover.
The key issues currently facing Cambodia’ s insurance and reinsurance industry are:
Insurance awareness among the people is still low
Insurance per capita income is low
Law and regulations enforcement still need to be improved
Regulatory prudential frameworks are not fully implemented
Human resources in this area are limited
There is an urgent need to address the issues facing the industry, but change will be made by
the availability of resources both financial and human resources from NGOs such as ADB and
the Word Bank.
4.2.3. Insurance and Microinsurance Regulation in Cambodia
Insurance regulators in Cambodia play a vital role in their supervision of the industry; the
primary concern of the regulators is consumer protection. Regulators ensure that each insurance
company complies with the country’ s insurance laws and regulations, and that each insurer
maintains adequate reserves and reinsurance to satisfy any claim.
Microinsurance is subjected to a different standard of regulation and supervision. Less strict
standards of oversight would usually involve lower capital requirements, less detailed reporting
requirement, and less exhaustive inspections by supervisors.
There is an insurance law in Cambodia, but while the general framework of the regulatory
system is taking place, the type of business that can or cannot engage is not clear. The law
leaves many areas to be fleshed out to give transparent guidance to insurance providers and
clients, as well as to provide clear references for various insurance intermediaries such as
brokers and sales agents.
Therefore it is one of the immediate priorities identified in the Royal Government of
Cambodia (RGC)’ s Financial Sector Development Strategy (FSDS) 2006-2015. The process of
developing the regulations regarding microinsurance is ongoing.
In order to govern microinsurance business, recently, the Ministry of Economy and Finance
(MEF) has drafted the sub-decree on microinsurance under technical support from the
International Financial Corporation (IFC) that will be enacted after the law amendment. MEF
decided to issue circular on issuing a temporary license to microinsurance operator and the
following main criterias are required:
In order to start and register a microinsurance company/operator the regulator requires that
the insurer holds a certain minimum amount of paid up capital to help ensure that the
organization is stable. The minimum paid up capital is KHR 800,000,000.00 (approx.200,000
USD). In order to mitigate the risk, each microinsurer is required to reinsure their risk to local
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the reinsurance company by 20%.
4.3. Case Study on Microinsurance Programs in Cambodia

To test the limited insurance prospects, there are a small number of microinsurance pilot
projects taking place with licensed MFIs in Cambodia, but conclusions on the results and future
potentialities are not yet available. Below are the tentative results of the case study on the pilot
programs in Cambodia.
4.3.1. MEADA Program
The Cambodia Health Insurance Committee (CHC) is a local NGO that provides health care
services to the poor in Cambodia, particularly those suffering from tuberculosis (TB) and
HIV/AIDS. It started a microcredit program in 1994, after recognizing the link between poverty
and disease, and the necessity of monetary support for the health care of those afflicted. The
credit and saving program was later transformed into a separate organization, the CHC Limited
Microfinance Institution (CHC Ltd.) in July 2005, as mandated by Cambodian laws. CHC Ltd.
received its license as a microfinance institution in September 2005. Their institutional profiles
are presented below.
Table Ⅱ-3-9 | Organizational Profiles of CHC NGO and CHC Ltd.
CAMBODIA HEALTH CAMBODIA HEALTH

Issues
COMMITTEE NGO COMMITTEE MFI
Non-profit, non-partisan and non- Formerly, a savings & credit program

sectarian Cambodian local organization began by CHC NGO in 1994; Incorporated
Background / History
which seeks to promote the health status & registered with the Min. of Commerce in
and well being of rural poor Cambodians. July 2005
Legal Structure Non-Government Organization Microfinance Institution
Legal Status Registered with the Min. of Commerce Licensed by the NBC in Sep. 2005
Start of Corporate Operations 1994 2005

Areas of Focus /
Provision of health services Provision of credit & savings services
Core Business
Village Bank Loan; Individual Loan;
Microfinance Products n/a
Emergency Loan
Poor people who are suffering from
Poor & low income households; small
Target Clients / Market Tuberculosis (TB) HIV / AIDS and STDs
entrepreneurs
and other dreaded diseases
ampot, Kep, Sihanoukville, Phnom Penh,
Areas of Operation Phnom Penh, Svay Rieng, Kampot
Kandal
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Table Ⅱ-3-9 | Organizational Profiles of CHC NGO and CHC Ltd. (continued)
CAMBODIA HEALTH CAMBODIA HEALTH

Issues
COMMITTEE NGO COMMITTEE MFI
CHC programs are now reaching a

million people in Cambodia, and CHC’ s
approaches serve as international As of Sept. 2007: Outreach - 5,949 clients;
Scale of Operations
models of health care delivery and the Loan Outstanding - US$ 1,638,097
way to link basic scientific discovery to
fight TB and AIDS globally.
Microinsurance Operations Started pilot implementation of the MEADA microinsurance program in Jan. 2007
Microinsurance Institutional
CHC NGO, CHC Ltd, RIMANSI
Partners
Microinsurance Products Credit life insurance
Target Market for
Poor households within areas of operations of CHC Ltd.
Microinsurance
Areas of Microinsurance
Kampong Trach, Kampong Bay, Kep
Operation
Scale of Microinsurance
Enrolled 1,622 clients, as well as 1,345 spouses and 3,567 children and clients
Operations
4.3.1.1. Product Development Process
In 2005, CHC Ltd. began coordinating with RIMANSI, a Philippine-based resource center
on microinsurance. CHC Ltd. followed a systematic process of developing a new financial
product, which is microinsurance.
The process began with an assessment of whether or not the provision of insurance products
to low income populations is feasible in Cambodia. This country assessment involved a series
of meetings and FGDs with various stakeholders - regulators, particularly the MEF and the
NBC, a number of MFIs and NGOs, as well as their clients. The results were favorable; the
clients were interested in risk protection services and a number of MFIs and NGOs expressed
interest in diversifying their products through microinsurance. While microinsurance is
currently not covered by existing microinsurance regulations, the government representatives
nonetheless verbally expressed their agreement to microinsurance pilot projects, a tacit
recognition of the poor’s unmet need for such services.
A deliberate research and development (R&D) process then followed: market research,
business planning with actuarial analysis and financial projection, operations training, and
systems development.
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In January 2007, implementation began for the pilot phase of the microinsurance program
called MEADA or“Measure for Economic and Accelerated Development for All” , for the
clients of CHC Ltd.
< Product Conceptualization >
Product concept interviews were conducted with CHC Ltd. clients in 2005. The involved
discussion of the basic concept of insurance, getting information on the risk client faces and their
coping mechanisms as well as their impression on possible insurance products that may be offered.
The results showed that the clients of CHC Ltd. experience much difficulty when faced with
unpredictable catastrophic events related to death and disability in the family. The loss of the
family member inflicts not just emotional, but usually, financial, trauma on the household. The
poor lose not just a loved one, but an income earner for the family. Worse, the death of the
family member could leave the remaining members of the family with debts to repay further
depleting whatever resources are available. They cope by using family savings, selling assets
such as land, orrowing emergency loans from neighbors, relatives and other formal and
informal moneylenders. However, the usually high interest rates for emergency loans and
programmed contingency loans increase the household’ s liabilities. In addition, the unplanned
sale of assets during emergencies results in lower than expected yields for the families. These
were all considered in the conceptualization process for MEADA.
< Product Pricing >
The premium level for MEADA was based on the quantitative information regarding the
clients’willingness and capacity to pay as established in market research. Actuarial studies
were also undertaken using 90% of the World Health Organization (WHO) Cambodian Life
Tables, grossed up for expenses and commissions. An additional 15% margin of error was
added due to lack of insurance experience in Cambodia. Thus, appropriate technical, actuarial,
and financial procedures and assumptions underlie the product design and benefit package of
the MEADA microinsurance program.
< Product Pilot >
MEADA microinsurance was piloted by two branches of CHC Ltd. - Kampong Trach and
Kampong Bay - beginning in January 2007. In 2008, pilot implementation in Kep province was
also started.
4.3.1.2. Product Features and Policies
In Khmer, the word“MEADA”means“mother.”This name was deliberately chosen for the
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credit life insurance program to capture its objective of nurturing and protecting Cambodian
poor families in the event of unexpected losses resulting from death in the family. The table
below outlines the major elements and product features of the MEADA Program:
Table Ⅱ-3-10 | Product Features of MEADA Program
Product Features and Policies
Microinsurance Type Credit Life Insurance
Group or Individual Product Group product
Coverage is co-terminus with each loan. It begins on the effective date of the
loan and ends when the loan is repaid in full or on the scheduled maturity
Term
date, whichever is earlier. Coverage also ends at the time of the borrower’ s
death, or when the borrower reaches the age of 56.
Borrowers: must be aged 18-55 (existing CHC age limits)

Spouse: must be aged 16-55, the 1st recognized legal spouse and living
Eligibility Requirements with the client
Children: must be aged 5-20 and living with the client (single or widowed
parents may cover their children)
Voluntary or Compulsory Voluntary for CHC Ltd. clients
Death of client: 100% of original loan amount(remaining balance is written

off and the amounts paid by the client will be returned to the beneficiaries)
Coverage / Benefits
Death of Spouse: 25% of the original loan amount
Death of children: 15% of the original loan amount
For new clients or those that have not renewed their loans for 6 months or
Limitations longer, only accidental deaths are covered during the first 3 months of the
loan. This is to reduce the risk of adverse selection.
Provoked murder, suicide, participation in a criminal activity, war, natural
Key Exclusions
calamities and epidemics
Single premium rate equivalent to 6% of the initial loan amount per annum
Pricing /Premium
(half of this is client savings)
Savings will be returned with accrued interest if the client dies, or after 5
Savings
years if the client survives
4.3.1.3. Target Market
The social marketing objective of the MEADA Program is to provide poor Cambodian
households within the areas of operation of CHC Ltd. with the kind of risk protection that
protects their net worth. Membership in MEADA is voluntary for CHC Ltd. clients at this time.
However, during the roll-out and full implementation phase, it shall be compulsory for those
who want to have access to the MFI’s credit facilities.
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In terms of geographical area, the target market for the ongoing pilot phase is spread across
three of CHC Ltd.’ s six branches, namely, Kampong Trach, Kampong Bay, and Kep. No further
expansion in terms of area coverage is planned for MEADA for the following two reasons:
Additional capital requirements would be required for expansion. The MEADA pilot
phase is currently being supported by CHC Ltd., RIMANSI and the Canadian Cooperative
Association (CCA), but further expansion would require a concomitant increase in
capitalization as required by Cambodian laws on microfinance.
There is a hiatus brought about by uncertainties relative to the draft of the sub decree on
microinsurance, which the RGC is developing under the auspices of the MEF. While
engaged in policy advocacy to support the growth of microinsurance in Cambodia, both
CHC NGO and CHC Ltd. have opted to anticipate the regulatory requirements rather than
expand pilot operations. Once the Sub-Decree is issued, it is expected that expansion to all
branches of CHC Ltd. will be pursued.
4.3.1.4. Accomplishments
< Financial and Operational Results >
After one and a half years of pilot implementation, the MEADA microinsurance program
has enrolled 1,622 clients, including 1,345 spouses and 3,567 children of clients.
Table Ⅱ-3-11 | MEADA Outreach as of June 2008
ITEMS 1Q . 07 2Q. 07 3Q. 07 4Q . 07 1Q. 08 APR 08 MAY 08 JUN 08 TOTAL
MFI’
s Clients 1,537 1,130 1,414 1,556 1,787 464 490 335 8,763
MEADAI’
s Clients 276 300 601 217 82 50 36 60 1,622
Participation Ratio 17.4% 26.5% 42.5% 13.9% 13.9% 10.8% 7.3% 17.9% 18.5%
Number of Spouse 230 294 466 175 63 41 31 45 1,345
Number of Children 629 681 1,319 452 161 114 92 119 3,567
In terms of participation rate, the trend is more or less flat, with only 18% of total CHC Ltd.
clients enrolling in the MEADA Program. This low participation rate is due to the fact that
enrollment in MEADA is presently non-compulsory for CHC Ltd. clients. It also reflects the
low level of awareness and understanding of microinsurance among clients.
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< Feedback from Clients and Beneficiaries >
In May 2008, a series of surveys with clients and non-clients were conducted in Kampong
Trach and Kamppong Bay, to measure their level of awareness and satisfaction with the
program. From a total of 23 participants who had varying lengths of membership with CHC
Ltd., the level of awareness of the MEADA program was very high (100%). The majority of the
participants showed understanding of the program, with 15 (65%) mentioning that MEADA
gives credit or loan protection in case of death within the family. Three (13%) of the
participants exhibited understanding of the savings component of the program, mentioning that
50% of the premium that they are paying will be returned to them after 5 years. However, eight
(35%) of the participants also admitted that they“do not understand”how the program works.
All of the participants characterized their experience with CHC Ltd. as“very good,”and
when asked to enumerate three things they liked most about CHC Ltd., eleven out of the 23
participants mentioned the additional benefit or the protection they get through MEADA.
When asked if they would join or re-join the microinsurance program, a majority (16 or
70%) of the participants answered in the affirmative, with 4 (17%) saying“yes”and 12 (52%)
saying“definitely yes.”However, 7 (30%) of the participants expressed disinterest in joining
the program either because they do not understand how microinsurance works, or due to the
popular belief that if they enroll in the program, they will be deemed to have accepted or invited
death into their family.
A very high level of satisfaction is revealed by the 100% positive response to the question of
whether or not the clients will favorably recommend MEADA to their relatives or community
members. The features of MEADA that clients like best is its 100% guarantee of loan
redemption in case of a client’ s death and the extension of coverage and benefits to a client’ s
family members. Understandable from the clients’perspective, the product features least liked
are related to the limitations on coverage and the long-term savings component. The clients
proposed the following measures to improve the program:
Reduce the term of the savings component, from 5 years to the actual term or duration of
the loan;
Increase coverage of family members to include grandparents, grandchildren, and children
of ages 5 and below
Offer other insurance products like property and fire insurance; and
Increase the level of benefits for spouses from 25% to 40% and for clients’children from
15% to 25%
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4.3.2. Vision Insurance
Vision Insurance Program, a project of World Vision Cambodia but sub-contracted to Vision
Fund Cambodia for implementation. It was established to deliver affordable insurance services
to low-income clients to protect against specific financial perils in case of death.
Vision Insurance aims to provide affordable, sustainable, convenient, accessible risk

protection services that will support the development of resilient Area Development Program
(ADP) communities for the purpose of strengthening their sense of security, fostering
entrepreneurship and facilitating the emergence of hope in communities the VFC serves. It is
the first microinsurance initiative within the worldwide network of World Vision International
(WVI).
The program falls within the framework of WVI’ s and WVC’ s Micro Enterprise
Development (MED) strategy, in its intention to mitigate the impact of unforeseen death,
sickness, or asset loss on poor families. Further, in the VFC’s Five-Year Business Plan (2006-
2010), microinsurance was identified as one of the strategies to bring a lasting and significant
change in the communities that works. The importance of microinsurance is also highlighted in
the MED program’ s economic development continuum framework.
Table Ⅱ-3-12 | Organizational Profiles of WVC and VFC
ISSUES WORLD VISION CAMBODIA VISION FUND CAMBODIA
An affiliate of World Vision Intl. a world-

wide network of Christian organizations Transformed from a small credit program
Background / History
engaged in humanitarian relief and of WVC into a separate institution in 2003
development work
Legal Structure Non-government organization Microfinance institution

Licensed by the NBC in 2004; Received
Legal Status Registered with the Min. of Commerce
permanent license as MFI in 2007
Start of Corporate Operations 1979 2003
Areas of Focus /
Relief and development work Provision of loans and savings services
Core Business
Community Bank(CB) Loan, Solidarity
Microfinance Products n/a Group(SG) Loan, Individual Loan,
Voluntary Savings
Poorest children and their families in WV Poor & low income households; small
Target Clients / Market
target DP communities entrepreneurs
27 ADP districts in 7 provinces and 4 Kampot, Kep, Sihanoukville, Phnom Penh,

Areas of Operation
municipalities of Phnom Penh Kandal
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Table Ⅱ-3-12 | Organizational Profiles of WVC and VFC (continued)
ISSUES WORLD VISION CAMBODIA VISION FUND CAMBODIA
About 50,000 Cambodian children are As of Dec. 2007, served 54,000 families,
Scale of Operations
sponsored in WVC’s project areas with total portfolio nearing $US 11 million
Microinsurance Operations Started Vision Insurance Program in Oct. 2007

Microinsurance Institutional
World Vision Intl., World Vision Cambodia, Vision Fund Cambodia, RIMANSI
Partners
Microinsurance Products Microlife insurance, packaged as additional benefits to VFC clients
Target Market for
VFC clients
Microinsurance
Areas of Microinsurance Banteay Meanchey, Battambang Kampong Cham, Kampomg Chhnang, Kompong
Operation Speu, Kompong Thom,Phnom Penh, Kandal, Prech Vihear, Takeo
Scale of Microinsurance As of June 2008, enrolled 126,812 clients (31,703 VFC borrowers & 195,109 spouses
Operations and children of the borrowers)
4.3.2.1. Product Development Process
The R&D processes pursued in developing the MEADA program were followed for Vision
Insurance. This included the conduct of country assessment on the feasibility of microinsurance,
market research, business planning with actuarial analysis and financial projections as well as
capability-building training.
< Product Conceptualization >
Both WVC and VFC were aware of the general risks that their clients are facing as well as
the lack of insurance services for the poor in Cambodia, and both institutions wanted to find a
practical and simple way to assist them. At the same time, VFC has recognized the adverse
effects in its loan portfolio whenever death occurs in its clients’families. The impetus for WVC
and VFC to venture into microinsurance is brought about by their willingness to transform
economic structures to benefit the poor.
< Product Pricing >
Appropriate technical, actuarial, and financial procedures and assumptions underlie the
Vision Insurance product design and benefit package. The premium level for Vision Insurance
was based on quantitative information regarding the client’s willingness and capacity to pay, as
established in the market research. Actuarial studies were undertaken using 90% of the World
330
Health Organization (WHO) Cambodian Life Tables, grossed up for expenses and
commissions. An additional 15% margin of error was added due to lack of insurance experience
in Cambodia.
< Product Pilot >
The pilot implementation of Vision Insurance started in October 2007 when it was built into
the loan features of VFC’
s credit programs.
4.3.2.2. Product Features and Policies
The Vision Insurance Program currently covers micro-life insurance, which is built into the
loan features of the VFC’ s credit programs. It is offered as additional financial benefits for
clients, to insure their lives as well as their spouses and two oldest children against unexpected
death. The insurance is designed to provide a buffer for the loan repayments of a client against
any death of their insured family members. It also protects VFC from the loss of its performing
asset and operational quality as a result of death of its client or his/her family member. A
funeral benefit has been added to increase protection as well as improve the visibility and
acceptability of the program.
4.3.2.3. Target Market
In terms of geographical area, Vision Insurance’

s target market is spread across Battambang,
Prech Vihear, Kompong Thom, Kampong Cham, Kampomg Chhnang, Kompong Speau,
Kandal and Takeo, with further expansion planned for Banteay Meanchey and Pursat.
In order to avoid the risk of adverse selection, the insurance is offered to all VFC clients and
packaged with their loans. For the first year, only 54,505 out of 57,465 VFC clients were
targeted due to the different branch launching periods. This market was expected to expand to
84,212 clients by the end of 2008, 114,303 clients by 2009 and 139,792 by 2010. In the next
two years, the provision of additional insurance coverage and the feasibility of opening up
membership to the community at large will also be explored.
331
Table Ⅱ-3-13 | Product Summary of Vision Insurance
Product Features and Policies
Microinsurance Type Micro-life insurance
Group or Individual Product Group product
Coverage is co-terminus with each loan. It begins on the effective date of the
Term loan and ends when the loan is repaid in full for as long as the monthly
premium rates are paid
Client: must be aged 18-66 (existing VFC age limits)

Spouse: must be aged 18-66 legally married and living with the client
Eligibility Requirements
Children: only the two eldest children, aged 2-20 and living with the
client(single or widowed parents may cover their children)
Voluntary or Compulsory Compulsory participation for clients aged 18-66
- Community Bank Loan

Creditor Life Benefit: 100% of ending balance of portfolio
Client Funeral Benefit: KR 120,000(US$ 30)
Spouse Funeral Benefit: KR 72,000(US$ 18)
Children Funeral Benefit: KR 48,000(US$ 12)
- Solidarity Group Loan
Coverage / Benefits Client Funeral Benefit: KR 180,000(US$ 30)
- Individual Loan
Client Funeral Benefit: KR 300,000(US$ 30)
For new clients, only accidental deaths of the client and family are covered
Limitations during the first 3 months of the loan. Coverage continues for 30 days beyond
the date that a delinquent premium payment was due.
Murder, suicide, participation in criminal activity, acts of war or terrorism,
Key Exclusions
natural calamities, pandemic, and epidemics
Community Bank Loan: 0.2125% of the current outstanding loan balance
Monthly Premium Solidarity Group Loan: 0.153% of the current outstanding loan balance
Individual Loan: 0.08% of the current outstanding loan balance
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4.3.2.4. Implementing Systems
Vision Insurance informs VFC clients of its additional benefits. The program’ s operational
processes are aligned with the loan procedures of VFC. Therefore, all prescribed requirements
outlined in VFC’ s loan operation policies with regard to program promotion, client orientation
and application, and premium collection are followed for Vision Insurance:
Upon registration in VFC’ s loan programs, clients are simultaneously provided with
microinsurance service and a consolidated Loan-Insurance Application Forms.
Premiums are collected together with loans on a monthly basis and cashed in with the
cashier without any required division between collection of loan and insurance.
At the end of each month, the VFC branches compute the monthly premiums based on the
outstanding loan portfolio and accordingly credit the separate accounting database of the
Vision Insurance Program.
In the case of death of eligible clients or spouse or children, the claimant or the
Community Bank Management Committee (CBMC) shall notify and submit a death
verification document to the VFC Branch Office. The credit service officer shall pay the
benefit within 48 hours, during the funeral ceremony for the deceased.
The payments shall be made using petty cash for Vision Insurance, which is administered
by the cashier at each branch. Monthly consolidated claim payments are then submitted to
the VFC’ s head office for posting in the accounting system.
To ensure an effective and efficient implementation, separate operations and financial

manual had been developed for Vision Insurance. These two manuals describe in detail the
insurance service delivery process and the accounting structures, inclusive of the chart of
account, cash management policies, financial reports, and levels of authority.
4.3.2.5. Accomplishments
< Financial and Operating Results >
After nine months of pilot implementation, the Vision Insurance Program has enrolled
31,703 clients as well as 95,109 spouses and children. The total number of enrolled
beneficiaries reached 126,812 as of June 2008.
There is a steady growth in the number of beneficiaries, from 27,312 in November 2007 to
126,612 in June 2008. VFC clients account for 25% of those enrolled in the program while
clients’spouses and children account for 75% of total enrollees.
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Table Ⅱ-3-14 | Vision Insurance Outreach as of June 2008
As of Nov As of Dec As of Jan As of Feb As of Mar As of Apr As of May As of Jun

ITEMS
2007 2007 2007 2007 2007 2007 2007 2007
Clients 6,828 14,130 18,183 23,488 24,988 25,988 30,857 31,703
Community Bank 6,120 13,149 16,724 21,050 22,265 23,180 26,602 27,286
Solidarity Group 553 859 1,254 2,214 2,482 2,647 3,193 3,316
Individual Loan 155 122 205 224 241 161 1,1062 1,101
Spouses and Children 20,484 42,390 54,549 70,464 74,964 77,964 92,571 95,109
Community Bank 18,360 39,447 50,172 63,150 66,795 69,540 79,806 81,858
Solidarity Group 1,659 2,577 3,762 6,642 7,446 7,941 9,579 9,948
Individual Loan 465 366 615 672 723 483 3186 3,303
Total Number of
27,312 56,520 72,732 93,952 99,952 103,952 123,428 126,812
Beneficiaries
Number of Claims 2 2 5 7 14 11 16 11
< Feedback from Clients and Beneficiaries >
In July 2008, a clients’satisfaction survey was conducted in Kampong Speu, Kampong

Cham and Takeo Branches. Many surveys were conducted to measure the clients’level of
awareness and satisfaction with Vision Insurance. A total of 88 clients participated, all of whom
were married and 75 (85%) were women who had varying lengths of membership with VFC.
Most of the respondents were satisfied with their experience with VFC, 68% of them
responding that they are“very much satisfied,”22% said they are“very satisfied,”and 5% said
that they are“satisfied.”
The respondents’level of awareness of the additional benefits provided by VFC through

Vision Insurance was high (84%). In terms of understanding, however, only 41.7% of the
respondents knew that they were actually covered by the microinsurance product. The
remaining 58.3% have been paying the premiums as required by VFC, but they were not aware
that there were additional benefits, i.e., microlife insurance. Not surprisingly, a majority (86%)
of respondents expressed interest to know more about the so-called“additional benefit”from
their VFC loans, 58% preferring to get information during their monthly CBMC meetings and
29% preferring to get information directly from the CSOs.
Despite the need for deeper understanding of the micro life insurance product majority
(83%) of the clients still responded positively when asked if they would be encouraged to take a
loan from VFC because of the additional benefits.
The clients exhibited a high level of satisfaction with the product; 17% of them responded
334
“Definitely yes”and 75% responded“Yes”to the question“Are you satisfied with the
additional benefits service that Vision Fund provides to its clients?”About 37% of respondents
proposed additional coverage while 32% proposed the inclusion of hospitalization benefits to
improve the program.
Vision Insurance Program is still at its early pilot stage. It is not a full-pledged
microinsurance product yet, in the sense that it is presently packaged as financial support or
“additional benefits”rather than a structured financial product aimed at mitigating risks faced
by low-income households.
This approach has both positive and negative effects. On the positive side, marketing Vision
Insurance as additional benefits make it easily acceptable to VFC clients and easier for VFC
staff to accept and implement. Given the current lack of understanding of the concept of
insurance in Cambodia, especially among the low income population, this approach seems both
practical and appropriate. However, there is a downside in that the approach confuses rather
than educates the clients on the necessity of risk mitigation measures. This may limit
sustainability in the long run, and would affect both the microinsurance program and
microfinance operations of VFC.
5. Suggestions for Development of Microinsurance in

Cambodia
5.1. Limitations of Microinsurance in Cambodia
5.1.1. Lack of Regulatory Framework
There is an insurance law in Cambodia and the general framework of the regulatory system is
in place, however, specific business criterions are not clearly set. The law leaves many areas to
be covered in order to give transparent guidance to insurance providers and clients as well as to
provide clear references for various insurance intermediaries such as brokers and sales agents.
There is no regulatory framework for microinsurance. However, this is one of the immediate
priorities identified in the RGC’
s Financial Sector Development Strategy (FSDS) 2006-2015. The
process of developing the regulations is ongoing, with the International Finance Corporation
(IFC) providing technical assistance to the Ministry of Economy and Finance (MEF).
The most recent draft of the Sub-Decree on Microinsurance is more comprehensive than the
earlier versions. It defines microinsurance as the provision of insurance contract to low-income
population, and covers both micro-property insurance and micro-life and personal insurance. It
proposes prudential regulations and defines the scope of operations of microinsurers, including
335
county-based insurance implementers (CBIs). However, the CBI provisions in the sub-decree
are incomplete and do not sufficiently provide guidelines for the set up, operation, monitoring
and evaluation of the CBI schemes. Appropriate performance standards must be provided.
Otherwise, many NGOs could get into microinsurance as CBIs without the right knowledge or
without access to technical assistance, and fail. It is hoped that further refinements will be made
on the draft in order to provide useful guidelines to prospective community based organizations
and other interested parties.
The proposed regulations are currently being reviewed in consultation with the stake
holders. The government hopes that the Sub-Decree would be approved by the Council of
Ministers sooner or later, but in the interim, the MEF has taken a tolerant stance and allowed
pilot projects of MFIs that wish to provide microinsurance services to their members.
The lack of regulatory framework presents both opportunities and threats to the
microinsurance providers. While the absence of guidelines causes uncertainty (both for the
provider and its clients), the vacuum also allows for experimentation and innovation in terms of
product development and service delivery. Still, the government’ s issuance of the sub-decree
will give the legal imprimatur to microinsurance operations, ushering in the development of a
new industry that will complement both commercial insurance and microfinance sectors. More
importantly, this will raise the public’ s awareness and understanding of microinsurance and the
important role that it plays in the socio-economic advancement of the poor.
5.1.2. Limited Capacity to Supervise and Regulate Microinsurance
The mainstream insurance industry in Cambodia is regulated and supervised by the

Insurance Division of the MEF’ s Financial Industry Department. Under the proposed sub-decree
on microinsurance, it is also the MEF which will have the authority to grant licenses to operate
a microinsurance business as well as to approve microinsurance products. However, the
regulatory and supervisory capacity of the staff of the Financial Industry Department and the
Insurance Division seem to be limited. For microinsurance - which is an emerging field where
the benefit of regulation is little understood - the challenge is doubly difficult.
Ideally, the government’ s role is to create an appropriately regulated environment and

promote a formal sector entry into the low-income market. To achieve this, MEF needs to, first,
understand the concept of microinsurance, second, look at viable models and examine legal
frameworks which assumed an enabling role for microinsurance in other countries, and third,
adopt policies and implement regulations appropriate to the Cambodian context that will ensure
the growth of local microinsurance organizations.
There is very limited literature on microinsurance regulations as microinsurance is still an
emerging field of study. Among those that have been mentioned is the case of India where the
government has required all insurers to hold a percentage of their sales volumes within the
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social sector to the benefit of low-income groups. In South Africa, a law outside the realm of
formal insurance allows registered Friendly Societies to render insurance-like benefits to their
members provided when they are not in excess of R 5,000 (US$ 667) per member. In the
Philippines, a very comprehensive Insurance Code encompasses microinsurance and greatly
facilitates its growth through government recognition and regulation of Mutual Benefit
Associations (MBAs), which are non-stock, non-profit organizations allowed to pay sickness
benefits to members, furnish financial support while members are out of employment, or
provide financial support to relatives of deceased members. In short, MBAs provide some form
of insurance services to members and are allowed to operate under lower capital requirements
than commercial insurance companies.
5.2. Suggestions for Revitalizing Microinsurance

5.2.1. Microinsurance Operations
5.2.1.1. Pursue Development Agenda without Sacrificing Sound Management Principles
Unlike the mainstream insurance business where profit is the main incentive, some NGO
programs in Cambodia such as MEADA and Vision Insurance strive for a social development
objective; the MFIs, assisted by their mother NGOs, strives to diversify their financial services
through microinsurance products that would help their clients cope with emergencies. At the
same time, MFIs also aims to protect their portfolio quality since death or illness in their
clients’families adversely affects loan repayment rates. Thus, both institutions endeavor to link
the microinsurance products to their credit services.
While there are a few CBHIs offering micro health insurance in Cambodia, with the
exception of GRET-SKY, not much lesson can be drawn from their experiences to date.
Recognizing that insurance is a business with financial and operational risks distinct from
microfinance, the two MFIs decided to tap the expertise of a network of professionally managed
microinsurers such as RIMANSI. Its business development process and microinsurance model
have allowed the MFIs to deal better with risk management barriers such as premium collection,
management of covariant risks, moral hazard and adverse selection. The collaboration among
these institutions, forged out of a common desire to help the poor gain access to risk protection
services, has resulted in the development of a microinsurance program.
5.2.1.2. Design Products Suited to Client Needs
In 2005, among the first steps undertaken were market research activities to explore the
feasibility of selling insurance products to the MFIs’clients. Product concept interviews
revealed that the basic concept of microinsurance practice, i.e., monthly contributions in
exchange for life and loan protection benefits, can be explained, understood and accepted by the
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clients of MFIs. More importantly, the role of the officers and staff in understanding, accepting
and promoting microinsurance was found crucial to the feasibility of winning client
participation in the program.
The follow-up market research showed that the clients were willing and able to participate in
a microinsurance program provided when it was affordable and aligned with their coverage
preferences. There was a high demand for loan protection and life insurance as the clients
expressed dissatisfaction with their usual risk coping mechanisms: neighbors’contributions,
selling of livestock, availing of home savings; borrowing from relatives and money lenders, and
selling of agricultural land.
Some programs in Cambodia recognize that the social engineering aspect is very important,
especially, since membership is non-compulsory at this pilot stage of implementation. Few
Cambodians, especially the poor, understand the concept of insurance and there is a deep distrust
in banking and other formal financial institutions. Moreover, some religious/superstitious beliefs
needed to be overcome. To convince clients to pay for microinsurance, MEADA invests in
educating its staff, especially the field agents, and its markets, as a major marketing strategy. To
demonstrate insurance practices and illustrate the program’ s benefits, the insured members’
claims are also paid out as soon as possible during meetings attended by the village chief. This
raised household and community awareness on microinsurance.
To help convince clients of the benefits from microinsurance, some marketing strategies
appeal to the clients’sense of security and place deliberate emphasis on“added benefits”rather
than preparation for death. To demonstrate insurance practices and illustrate the program’ s
benefits, the insured members’claims are processed as soon as possible and paid out during the
funeral ceremony attended by insurance officers and staff. This raises household and
community awareness on microinsurance in general.
5.2.1.3. Determine Prices and Cost Based on Actuarial Studies
Premium calculation depends on the incidence and average cost of the events covered. These
data are often little known, hence, it is important to develop and maintain actuarial databases for
the microinsurance programs.
5.2.1.4. Others
The major part of insurer’ s work concerns are the modalities of managing insurance.
Microinsurance presents a separate set of challenges from those posed by microfinance. Thus,
we need to manage the program in accordance with sound business principles.
Secondly, policy advocacy in support of the emerging microinsurance sector in Cambodia is
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needed. The purpose of policy advocacy is to mobilize key stakeholder’ s support for the
development of a supportive regulatory environment for the emerging microinsurance sector in
Cambodia. It covers the analysis of policy issues and the conduct of policy dialogues with
government agencies, the microfinance community and donors.
The pursuant to this advocacy needs to initiate dialogues and consultations with the related
authorities such as NBC and the Ministry of Economy and Finance. While the lack of policy
framework for the development of the nascent microinsurance industry is recognized, the RGC,
as represented by the MEF, seems open to private sector initiatives in this area. Of course, while
pilot testing may be done using different models, it is expected that appropriate adjustments will
be made on ongoing initiatives once the Sub-Decree is issued.
Table Ⅱ-3-15 | Challenges and Lessons from Microinsurance Operation
Challenges Lessons
■Pursue development agenda without sacrificing sound management principles

Balancing the
Anchor the program on social development goals but implement based on a sound business
microinsurance
plan
programs’ development
Link the microinsurance product to the microcredit program
and business objectives
Tap technical expertise and network with insurance professionals
Balancing client and ■ Design products suited to client needs

institutional needs in Conduct market research
designing icroinsurance Make products affordable and aligned to client’s coverage preferences
products Consider social engineering and cultural stakes
■Determine prices and cost based on actuarial studies

Take into account clients’insurance needs, the cost of covering claims and their frequency,
Ensuring financially
and the households’ ability to pay
sound pricings yet still
Make premiums affordable even for large and poor families
affordable to low-income
Streamline collection and claim procedures
clients
Develop actuarial databases and conduct regular review to ensure that premiums reflect real
costs
■ Manage the program in accordance with sound business principles

Deepen understanding of microinsurance operations and management
Effectively managing the
Design, implement, review and update business and operational plans
microinsurance
Invest in capability building programs to institutionalize financial and risk management skills
program
Develop separate accounting and MIS systems for microinsurance operations
Outsource key aspects to experts, including pricing to actuaries
■Advocate for a favorable policy environment

Engage all stakeholders - policymakers, donors, practitioners, NGOs, microfinance
Addressing regulatory institutions, potential commercial partners (such as insurance companies and reinsurers),
uncertainties clients - in policy dialogues
Document experiences in microinsurance implementation and exchange lessons learned
from the field
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5.2.2. Participants of Microinsurance
5.2.2.1. For the Microinsurance Providers: MFIs and NGOs
The microinsurance providers need to do more efforts on making microinsurance understood

and accepted by their clients and, ultimately, Cambodia’ s poor population. Also, they need to
try to make their programs more cost effectivee. This would require their own capacity building
efforts on improving their insititutional efficiencies.101
They also need to continue the advocacy with the Cambodian government in order to sustain
the microinsurance projects and legalize their ultimate structure in a progressive manner. They
need to examine the microinsurance experiences of MFIs and other development agencies
worldwide. As we have seen in previous chapters, several programs have proven the viability of
microinsurance schemes provided that the following basic features are observed: (a) level
contributions and benefits; (b) affordable premium payments; (c) simple product design; (d)
uniform benefit packages; and (e) low overhead expenses.
5.2.2.2. For Regulators / Government Agencies
The regulatory issues related to microinsurance in Cambodia need to be clarified and the
RGC should strive to promote a regulatory environment that is supportive of microinsurance
operations. Strengthening the regulatory and supervisory capacity of the MEF is crucial for this
process. Indeed, there is a need to channel resources to deepen the regulators’understanding of
microinsurance - its concept that differentiate it from commercial insurance, and its capacity to
reach low income populations.
Most of all, Cambodia needs to recognize that there is a need and a demand for
microinsurance from the poor segment of the Cambodian population and the informal sector.
This provides the impetus for the nascent microinsurance initiatives that currently operates in
legal loopholes given the current regulatory framework in Cambodia. Secondly, it needs to be
understood that microinsurance regulation can either promote or restrict insurance provision for
those who need it most: the lower income groups. With the absence of commercial insurers
ready to enter this little-profitable market, the interest of some MFIs to provide microinsurance
products to their clientele must not be stymied.
Based on the other countries’experiences we need to pursue a participatory approach to

policy development. A well-designed regulatory framework is a major factor for the effective
101) For the more detailed idea, please refer to Alip and David-Casis(2008).
340
and efficient provision of microinsurance services. In promoting more professional and
expansive services, regulation can play an important role by encouraging microinsurers to
become regulated. Also, the government needs to continue the permissive policy on financial
innovation and pilot implementation of microinsurance products within the framework of the
RGC’ s Financial Sector Development Strategy 2006-2015. While not a sustainable solution for
the provision of microinsurance on a massive scale, such experimentation offers learning from
the field and responds to the microinsurance needs of the poor.
Finally it should be emphasized that it needs to deepen the regulators’understanding of

microinsurance - its concept, the factors that differentiate it from commercial insurance, and its
capacity to reach low income populations. The MEF’ s willingness to participate in conferences,
study tours, and other avenues for learning about successful microinsurance initiatives is a step
towards the right direction. Certainly, government-to-government exchange programs will go a
long way towards enriching both countries’ perspectives in insurance regulation.
5.2.3. Time Table for Microinsurance Development
The following are previous suggestions for microinsurance development aiming to improve
the provision of microinsurance services to low income households, and we re-organized them
into a tentative time schedule of development strategies.
Short-term suggestions:
■ Need a well-designed regulatory framework for the effective and efficient provision of
microinsurance services
■ Intensify information-education-communication activities towards making

microinsurance understood and accepted by clients
■ Pursue development agenda without sacrificing sound management principles

Link microinsurance product to the microcredit program
Tap technical expertise and network with insurance professionals
Outsource key aspects to experts, including pricing to actuaries
■ Design products suited to client needs

Conduct market research
Make products affordable and aligned to client’ s coverage preferences
Consider social engineering and cultural stakes
■ Advocate for a favorable policy environment

Engage all stakeholders in policy dialogues
Document experiences in microinsurance implementation and exchange lessons
341
Recognize that there is a need and a demand for microinsurance
Mid-term suggestions:
■ Pursue development agenda without sacrificing sound management principles
Anchor the program on social development goals but implement based on a sound
business plan
■ Determine prices and cost based on actuarial studies

Take into account clients’insurance needs, the cost of covering claims and their
frequency, and the households’ability to pay
Make premiums affordable even for large and poor families
Streamline collection and claim procedures

Deepen understanding of microinsurance operations and management
Design, implement, review and update business and operational plans
Invest in capability building programs to institutionalize financial and risk management skills
Long-term suggestions:
■ Determine prices and cost based on actuarial studies
Develop actuarial databases and conduct regular review to ensure that premiums reflect
real costs

Develop separate accounting and MIS systems for the microinsurance operations
342
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Industrial Technology Development Policy
1_ Factory Establishment
2_ Enhancement of Standardization and Conformity Assessment
System in Cambodia
Chapter 01
Factory Establishment
Youngrak Choi (Korea University)

Phyra Sok (Ministry of Industry, Mines and Energy, RGC)
Summary
Cambodia’ s economic development can be divided into three distinct phases: Rehabilitation
phase during 1989-1998, reconstruction phase during 1999-2003, and the economic take-off
phase during 2004-2008. Throughout the periods, Cambodia has achieved a marvelous
economic growth which coins Cambodia into the 15 fastest growing economies in the world.
However, Cambodia needs to create new growth engines for sustainable growth. Cambodia’ s
growth potential is estimated to be around 6 to 7 percent over the medium term. To achieve
sustained growth, Cambodia should transform its economy into a high value-added
manufacturing-based economy.
The concept of factory establishment encompasses new establishment, expansion, transfer,

change of business types of factory, and installation of manufacturing facilities. Cambodia
needs to cultivate new growth engines for sustainable economic growth and the factory
establishment is assumed to be a very critical factor for a new growth engine. Cambodia should
expand its economic domains much more and the factory establishment of local enterprises is
regarded as a powerful measure to enlarge local economic activities through increasing new
entrants of local enterprises.
Unfortunately, however, factory establishment has relatively been neglected in policy arena,
compared with strong emphasis on promotion of investment through FDI. In fact, factory
establishment is a very complex system which demands concrete solutions of various related
348
factors and a long period of administrative procedures. For example, in Korea, extremely
complicated 70 related laws and 50 approval activities are required to establish a factory. But
there have been in sufficient incentives for factory establishment in Cambodia and Cambodia
should improve the efficiency of administrative system of factory establishment. In addition, for
efficient management of factory establishment, Cambodia needs to adopt new technologies.
In recognition of factory establishment as an important agenda, we conducted a comparative

study on the related issues that compares Cambodia with Korea. The study starts with a brief
analysis on difference between Cambodia’ s and Korea’s industrial structure. Then an overall
review on the factory establishment system in Cambodia is presented such as the types of
factory establishment, approval procedures of factory establishment, required documents,
critical elements for approval, incentive schemes, and so on. In addition, the analyses on Korea
are provided as reference. In particular a search on incentive system in Korea is dealt with
emphasis on tax benefits in factory establishment. Finally, some policy recommendations for
the Cambodian Government are suggested, based on the comparative analyses of the
Cambodian and Korean system.
The most urgent challenge Cambodia faces now is that there is no sufficient incentives for
factory establishment. Factory establishment is an extremely complicated process and is hard to
be promoted without powerful incentive schemes. For example, there seems to be no significant
difference between Cambodia and Korea in terms of factory establishment. However, in Korea,
due to the powerful insentive schemes, the local enterprises actively establish factories whereas,
in Cambodia, such business activities are inactive mainly due to lack of efficient incentive
schemes. In fact, Cambodia has several weaknesses in the factory establishment system as
follows: Lack of knowledge and experience in the field of work safety and environment
protection; lack of knowledge and experience in detecting harm to national economy and
society; lack of documents and materials to analyze related systems; lack of law and regulation
to upgrade the supporting system.
Based on the comparison between the two systems, some meaningful policy recommendations
are suggested for the government of Cambodia. The recommendations are: (1) Powerful
incentives for factory establishment such as enforcement of financial incentives and expansion
of tax incentives (2) Coordination among entities such as coordination among ministries and
elaboration of laws and mandates for newly emerged areas (3) Concrete framework for
industrial policy such as sectoral promotion policy, role of government, capability
accumulation, clear vision settings and concrete action programs, policy instruments, and firm
dynamics (4) Active promotion of FDI for factory establishment of foreign enterprises through
powerful incentive schemes to diversify the industrial structure toward other strategic industries
(5) Upgrade of administrative procedures such as review on efficiency and bottlenecks that
accommodate enterprises’interests, expansion of supporting organizations, and cultivation of
consulting and service manpower (6) Enhancement of administrative capacity such as
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Part 3_Industrial Technology Development Policy
monitoring capacity for enterprises, administration ability after establishment, enforcement of
technical capability, and management of administrative personnel.
1. Introduction
1.1. Growth of the Cambodian Economy
The history of Cambodia’ s economic development can be divided into three distinct phases:
The rehabilitation phase during 1989-1998, the reconstruction phase during 1999-2003, and the
economic take-off phase during 2004-2008.102 Throughout the entire period, Cambodia has
achieved a marvelous economic growth which allowed Cambodia to be one of the 15 fastest
growing economies in the world. Economic growth during 1994-1998 averaged 6.3%, 8.8%
during 1999-2003, and 10.3% during 2004-2008.
Especially the external financing in Official Development Assistance (ODA) has played a
crucial role in creating the foundation for economic growth in Cambodia. ODA which includes
grants, loans and technical assistance has grown from US$500 million in 1993 to US$700
million in 2008. Foreign Direct Investment (FDI) has played a critical role in Cambodia’ s
economic development. It amounted to be US$ 867 million in 2007.
However, Cambodia needs to create new growth engines for sustainable growth. Cambodia’ s
growth potential is estimated to be around 6 to 7 percent over the medium term, based on the
analysis of past performance and Cambodia’ s comparative advantages, namely its abundant
land, large workforce, biodiversity, cultural heritage, and strategic location in a dynamic
region.103 To achieve a continuous growth, Cambodia should transform its economy into a high
value-added manufacturing-based economy.
The export-oriented garment and textile sector has been mainly responsible for the high level
of industrial growth, but Cambodia has been seriously affected by the decline in garment
exports. Together with the tourism industry, the garment industry has been the key pillar of the
Cambodian economy. In addition, Cambodia suffers from poor infrastructure, high cost of
utilities, and steady increase in labor cost without the matching increase in productivity.
Therefore, creating new industries through industrial diversification is the most urgent national
agenda for Cambodia.
The contribution of the industrial sector in GDP has rapidly increased from 6% in 1993 to
around 27% in 2008. Moreover, the industrial sector is a critical element for economic growth
102) Naron Hang, Cambodian Economy: Charting the course of a Bright Future, 2009
103) Luyna Ung, Industrial Development: An Option for Diversifying Cambodian Economy (mimeo), 2011
350
for job creation, flow of foreign and local capital investment, technology transfer and
improvement in people’ s living standards. Until now, the Cambodian economy has enjoyed a
rapid economic growth, driven largely by expansion in the garment, construction, agriculture,
tourism and other sectors. And garment and textile industry has played a critical role for poverty
reduction by providing employment and producing export products with comparative
advantages into the international market.
1.2. Importance of the Industrial Policy

In 2009, the total number of large-scale enterprises registered in the Ministry of Industry,
Mines and Energy (MIME) included 556 establishments, of which 422 establishments were
from garments. The garment industry currently employs around 320,000 people and contributes
more than 70% of Cambodia’ s exports. Majority of these workers are poor women living in
rural areas who support their families. Other industrial sectors are interlinked with many
rectangular strategies and play major roles in sustainable growth, employment creation and
improvement on people’ s living standards.
A key feature of the export-oriented garment industry of Cambodia is that majority of

companies do not produce fabrics, but instead being specialized in producing garments by using
imported fabrics from China. Most garment manufacturers operate on cutting, sewing and
tailoring businesses. They import fabric and accessories (e.g., zippers, buttons, and thread) and
put them into local services such as transportation, freight clearing, construction, and utility-
type services to run factories. The Cambodian garment industry faces a big challenge to
increase the market share in the global market, therefore, it is fiercely forced to upgrade the
quality of the product and to increase the productivity through using new technologies and
enhancing management capacity.
Today, managers of the garment industry do not require high level education to factory floor
workers. Female workers in Cambodia can get high-paying jobs in a garment factory even
without a high level education. All workers in garment/textile or other industries are lacking
technical training as well as management training. It is quite commonly seen in senior
managers, middle managers, technicians, supervisors, sewing operators, cutting-room
personnel, pressing, folding, packing operators and so on.
The food, beverage and tobacco items doubled up from 3% in 2007 to 6% in 2008. Agro-
product industry will remain strong at the international market in the coming years. Rubber
exports increased about 25% in 2009 due to the rising global demand. Mining sector is also
attracting proactively to investors, particularly in the northern parts of the country. The Royal
Government of Cambodia (RGC) mentioned that opportunities exist in the mining sector for
bauxite, gold, iron and other kinds of gems. Besides, Rectangular Strategy Phase II has clearly
defined social-economic policies for growth, employment, equity, and efficiency in Cambodia.
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The promotions of large-scale enterprises and small and medium enterprises are considered
poverty reduction strategies by the RGC. The Ministry of Industry, Mines and Energy (MIME)
plays an important role to create a lively market for industry sectors in Cambodia.
Small and medium enterprises (SME) are the integral parts of Cambodia’s economy, thus it
is imperative for MIME to have concrete plans to promote SMEs in Cambodia. In this
framework, the priority will be given for human resource development, technology inflow, and
improvement on technical capacity of local staff in order to create a better business
environment.
Plans for industrial development shall go into removing obstacles in the basic infrastructure
such as water, electricity, road, and other utilities. Another essential point is to build close
relationships between small-scale handicrafts and large-scale factories and allow them to
complement each other to achieve economy of scale.
Promotion of technology transfer and the upgrade of product quality are so important that it
will require MIME to design and implement a quality control system for export products with
internationally acceptable level. In addition, technology transfer must be encouraged by
establishing an appropriate legal and regulatory framework covering industrial intellectual
property rights and food safety standards.
In sum, the RGC’ s industrial policy has two main goals; to support the development of
export-oriented industries as well as the development of import-substituting industries.
Regarding the policy, RGC has set up a series of plans to promote strategic sectors such as the
labor-intensive industry, agribusiness and agro-processing industry, resource-based industry,
small enterprises and handicrafts, electronic appliances and industrial uses, culture and nature-
based tourism, and infrastructure building.104 More specifically, those industrial areas are
highlighted as proceeded food/drink, rice, vegetable/fruit, silk products, animal feed, renewable
energy, artistic-cultural products, tourist-related products, beer, fertilizers, construction
materials, metal tools, fishery, garment, footwear, rubber, furniture and wooden products.
However, Cambodia faces severe difficulties and bottlenecks in promoting new strategic
industries. The first issue is the lack of sufficient financial resources to foster local enterprises.
Until now, ODA and the FDI are major instruments for cultivating industries. They will be the
most important tools for investment in the future, but the demand for investment capital to
foster local enterprises is much higher than the amount supplied by the ODA and FDI. But, the
system and mechanisms to mobilize further investment capital are not fully developed in
Cambodia. Secondly, even though there exists numerous lists of strategic industries, the actual
development plans and programs are not well-established. To promote strategic industries
104) The Royal Government of Cambodia, National Strategic Development Plan Update: 2009-2013, 2009
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effectively, industry specific, detailed programs such as clear vision settings, target goals,
implementation strategies, plans for resource mobilization, and designing of governance system
and organizations are necessary. But those programs have not shown much progress up until
now in Cambodia. The third issue is that Cambodia needs to acquire quite a few pre-requisites
that are required for successful promotion of strategic industries. To promote strategic industries
efficiently, a number of prior factors need to be set up before launching the plans such as human
resources, technological man power, and sufficient experience in production activities,
knowledge and insight on marketing, etc. The fourth difficulty is that the cultivation of local
enterprises takes a long period of time in accumulating know-hows, knowledge, and experience
to achieve a certain level of global standards. In addition, Cambodia needs to fully utilize FDI
in promoting Cambodia’ s strategic industries which will lead to the expansion of industries
beyond textile industry with FDI. Finally, it is required to establish powerful incentive schemes
to foster local enterprises which will be discussed in the next session.
1.3. Necessity of Factory Permit and Operation License

Industrial diversification for cultivating new industries is considered the most urgent agenda
in Cambodia. In the past, the top priority of government policy has been in the FDI. However,
for the future, the most important national agenda is about how to cultivate local enterprises to
diversify industrial structure into a high-value-added one.
The most crucial industry in Cambodia has been the garment industry which produces and
exports clothes, footwear, socks, gloves, hats and caps, pillow cases, cushions, towels, bed
sheets, curtains, hand towels, tents, bags, and carpets. Cambodia’ s garment products are
classified into three categories: Outer garments (uniforms, training wear, jackets, blouses,
trousers, and skirts), middle garments (pajamas, T-shirts, dress shirts, and sweaters), and
undergarments (underwear).
Manufacturing industries in Cambodia also covers food, beverage and tobacco; textile,
wearing apparel and leather product; paper product; chemical, rubber and plastic product; non-
metallic mineral based product; basic metal; fabricated metal, machinery and equipment;
jewelry, decoration material, music instrument, sport equipment, and toy and office equipment.
All the factories above and handicrafts must register or have to be permitted under the Law
on Administration of Factory and Handicraft in Cambodia. Any factory or handicraft can get an
operation license after submitting an application with written statements. In order to construct a
factory it needs to follow the technical standards set by the MIME and has to fulfill the permit
requirements and needs to request MIME to issue an operation license.
An operation license is a written acknowledgement from the General Department of

Industry of MIME that verifies that a factory and handicraft has registered as new factory or
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handicraft in accordance with its establishment permit or MIME’ s technical standards, and thus,
the owner can start manufacturing. The operation license is valid for three years from the date
of issuance and shall be automatically renewed by the MIME by submission of an annual report.
However, currently there are no powerful incentive schemes to stimulate establishments of

factories in Cambodia. The entire process of factory establishments is extremely complicated
and requires a series of long procedures. In other words, without sufficient incentive schemes, it
is not an easy job to motivate the local enterprises to establish a factory. Unfortunately, the
Cambodian government has not put much priority onto this crucial issue. Thus, those policy
measures to provide enough incentive mechanisms to encourage local enterprises’factory
establishments are urgent, which will be a key driving force for sustainable growth in
Cambodia.
In addition, Cambodia has several weaknesses in administrating the factory establishment

system as follows: Necessity of improving the efficiency of administration system; lack of
knowledge and experience for a system that ensures work safety and environment protection; lack
of knowledge and experience in measuring the effect on the national economy and society; lack of
sources to analyze related systems; lack of law and regulation to upgrade the supporting system.
2. Current System of Factory Establishment in Cambodia105

2.1. Administrative Procedures in Investment
The Council for the Development of Cambodia (CDC) processes an investment application
in less than 45 days. CDC also has control over the exemption of customs duties, tax exemption,
registration of the company, issuance of visas and work permits, and administrative procedures
of downstream.
CDC runs an one-stop service to facilitate and attract FDI and makes all the decisions for
the investment projects that are between US$2 million and US$50 million. Projects with a
capital investment over $50 million are referred to the Cabinet for final approval. The
Cambodia Investment Board (CIB) reviews the investment proposal based on the investment
project application form, financial feasibility study of project, latest annual report of the
company, and application fee.
The administrative procedures for the investors are outlined as follows:

An investment project must be registered to CDC before commencing operations if an
investor wants to benefit from incentives and a large volume of documentation is required
105) This section is submitted by Pyra Sok
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to be translated in the Khmer language.
All types of businesses in Cambodia must register to the Ministry of Commerce.
The business will receive a registration certificate with an identification number.
CDC obtains all the required licenses from relevant ministries or other entities listed in the
conditional registration certificate on behalf of the applicant. All government entities are
responsible for issuing authorizations, clearances, licenses, permits or registrations listed on the
conditional registration certificates no later than the 28th working day from the date of the
conditional registration certificate.
Figure Ⅲ-1-1 | Administrative Procedures of Investment in Cambodia
Inverstment Proposal
CDC issues a conditional registration certificate to the applicant
Company registration at the Ministry of Commerce

Relevant licenses, appropriate for Ministry of Industry, Mines and Enery or Ministry of Tourism or Ministry of Health
or other ministries according to the investment activity
Review and approval of the construction plan, etc. by local authorities / Ministry of Land
Management, Urban Planning and Construction.
Initial environmental impact assessment by the Ministry of Environment.
Tax Department registration at the Ministry of Economy and Finance.
Notes: Projects will not be in areas in which investment is prohibited and CDC will accept investment
proposals and proceed as above. Projects with certain attributes need to be submitted to the Council
of Minister for approval.
2.2. Government Policies for Investment

In order to facilitate investors in preparing their applications for an investment approval, the
government has established an institution to oversee investment policies and strategies, known
as the CDC. The Cambodian Investment Board (CIB) and Cambodian Rehabilitation and
Development Board (CRDB) is chaired by the Prime Minister and are composed of senior
Ministers from relevant government ministries. CIB is an operational arm of the CDC,
responsible for the evaluation of investment proposals and projects such as agriculture,
commerce, industry, tourism from all investors. Besides, Special Economic Zones (SEZ) were
set up by the government which are the most important part of production site.
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The government provides investors with a guarantee neither to nationalize foreign-owned
assets, nor to establish price controls on goods produced and services rendered by the investors,
and to grant them the right to freely repatriate capital, interest and other financial obligations.
Investors can set up a hundred percent foreign owned investment projects and employ skilled
workers from overseas, in cases where workers cannot be found locally.
2.3. Incentive Schemes for Investment

The Royal Government of Cambodia welcomes foreign investments of all kinds of business
activities in Cambodia, except for some activities which are prohibited under the provision of
law, regulations, notifications or sub-decrees.
A completed registration application form shall be signed and submitted by the applicant or
by an authorized representative of the applicant to CDC for its review and decision.
One incentive for investment is the exemption of profit tax or special depreciation. The
exemption of profit tax is during the period of tax holidays which is calculated by the following
fomula:“Trigger Period”+ Three Years + Priority Period. Once exemption of profit tax is
approved, the Qualified Investment Project (QIP) must obtain an annual Certificate of
Obligation Satisfaction.
Duty-exempt imports are available. QIPs under the Amended Law on Investment grants the
privilege to import production equipment, construction materials, raw materials, intermediate
goods and/or production input accessories free of duty, depending on the category under which
the project is classified.
However, local enterprises do not have sufficient financial resources or managerial expertise
to fully utilize its natural and human resources. Cambodia has commercial banks including
insurance companies, currency exchange shops but still lacks a credit bureau or arrangements for
sharing information among financial institutions that can be accessed by all banks. Local
commercial banks do not easily give access to loans due to the weak financial information, which
makes loan agreements and liquidating collateral uncertainty. In addition, the local entrepreneurs
need assistance from supervisory institutes to prepare business plans and then they can get loans
from commercial bank/institute as micro-bank, SME bank, and agro-industry bank.
2.4. Factory Permit and Operation License

The application for Factory and Handicraft Permit shall be filed and accepted for processing
with one-stop service assistants at MIME, or through the Provincial Department of MIME
where the facility will be located additional to the one-stop service for facility located in Phnom
Penh.
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According to the Law on Administration of Factory and Handicraft, factories and handicrafts
mean buildings, places or vehicles for producing and transforming raw materials or semi-final
products to new products and/or somewhere for performing activities such as assembling,
repairing, testing, packing, filling, maintenance, storage or improvement to satisfy market
demand.106
Manufacturing Facility: Any factory or handicraft that is registered or permitted under the
law is deemed to be a manufacturing facility, subject to the requirements of Prakas
(declaration). For purposes of law and Prakas, the terms“factory”or“handicraft”are
understood in their customary, normal usage.
Factory: A factory is a manufacturing facility, which contains, or is expected to contain,

tools, machines, equipment and furniture to be used in the facility to produce manufactured
products, which have a total value of equal to or more than US$ 50,000.
Establishment Permit: An establishment permit is a permanent, written permission from the

MIME to establish a new factory or new permitted handicrafts facility, including detailed terms
of the permission granted. When a factory or facility is completed, an operation license is
required to begin the initial operation.
The operation license should be placed at an open place in the manufacturing facility. The
application for an operation license is the written statement by the applicant of the facility with
permission stating that it is ready to manufacture according to the technical standards
determined by the MIME. With that it is ready to submit a request to MIME for an operation
license.
An operation license is a written acknowledgement from the General Department of Industry

of MIME which indicates that the related handicrafts facility has been registered properly, or
that a new factory or permitted handicrafts facility has been completed in accordance with its
establishment permit or MIME’ s technical standards which allows the owner to start
manufacturing. The operation license is valid for three years from the date of issuance, and shall
be automatically renewed by the MIME office.
MIME should inform the applicant of its decision for the factory establishment within seven
working days upon the receipt of a completed application. Regarding the operation of the
factory, the factory owner should inform MIME within 15 days in advance. For a new factory
or expansion or the establishment of branch or the relocation of the factory, a permit shall be
obtained from the MIME.
106) The Royal Government of Cambodia, Law on Administration of Factory and Handicraft, 2007
357
The expansion of factory means a 20% increase of the original capacity in term of
investment size.
Increase of number in machineries or change of machineries.
Modification for preparation or expansion or construction of building.
Change of product item or the addition of a product item.
Expansion of factory space.
Figure Ⅲ-1-2 | Administrative Procedures of Factory Establishment in Cambodia
Apply for factory license by factory owner

If document is
not completed
Office for application form checking
If documnent is completed
Factory and Handicraft Application form separating by

to be licensed type of license Handicraft to be registered
Evaluation process by Registering process by provincial department

General Department of lndustry of Industry, Mines and Energy
Handicraft to be
licensed
Evaluation on legal,
Evaluation on Reply for additional
Economic, Registered certificate
industry technical requirement
Environment issuing
and safety aspect document
and Social aspect
Factory Refuse factory &

Factor Reply for additional
establishment and handicraft
establishment requirement
Operation License establishment
license issuing condition
issuing license
The establishment of branch, change of factory owner, and relocation of factory is to be

permitted by the MIME.
The establishment of new production base which produces product to support the other
factory.
Relocation is the change of the factory location.
In case of replacement of the factory owner, the new owner should apply for recognition
as the factory owner to MIME within 10 working days from the date he/she is granted the
right of being the new factory owner. MIME shall reply to the factory owner within a
maximum period of 4 working days upon the receipt of application.
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2.5. Required Documents
Application form including the declaration of total investment capital
Copy of passport or ID card of the factory owner
Company memorandum (if the factory owner is the legal owner)
Approval letter on the location from local authority
Plant layout and scheme of production chain
Primary EIA (Environment Impact Assessment) (if necessary)
Common application form of CDC (if any)
Approval letter from CDC (if any)
Application form for establishing factory or registering factory
Copied ID card or passport of company’ s shareholders
4×6 photographs of shareholders
Company business plan
Letter of permission to build factory
Contract of building rental (if any)
Estate title (if any)
Power of attorney
Other (if necessary)
2.6. Capital Requirements

Large: Capital Investments more than US$ 500,000 (excluding land & building)
Medium: between US$ 250,000 - 500,000
Small: between US$ 50,000 - 250,000
Handicraft to be registered or Handicraft to be licensed:
between US$ 3,000 - 50,000
Exceptional handicraft: less than US$ 3,000
2.7. Entities Involved in the Procedure

There are three departments in MIME, which involve in factory and handicraft permit and
operation license. They are under the leading department as the General Department of
Industry; Department of Industrial Affairs; Department of Small and Medium Handicraft; and
Provincial Department of Industry.
The Department of Industrial Affairs plays critical roles such as encouraging, orienting and
supporting industry and implementing development policies of the industry and agro-industry;
enforcing law and regulations in accordance with industry management and draft laws,
regulations on the industry management including financial and taxation incentives; raising and
implementing the national and international cooperation project for industry development;
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monitoring factory licensing permit and operation permit; finding key issues for promoting the
Cambodian industry and agro-industry; classifying the industry according to national and
international code; and collecting industrial statistics and analyzing them to evaluate the
industry status and to set up policies.
2.8. Harmonization among Related Laws

In August 4th, 1994, the Law on Investment of the Kingdom of Cambodia was passed with the
aim of streamlining the foreign investment regime and to provide generous and competitive
concessions for direct private sector investments. The Law on Investment contains a number of
important guarantees for investors: Equal treatment of all investors which means no nationalization
that would adversely affect the property of investors and no price controls on products or services
produced by licensed investors, and remittance of the foreign currencies abroad.
Based on the Law the on Administration of Factory and Handicraft, in 2006 MIME
established the Prakas (declaration) 556 which supports the transparency, consistency, and
accountability of factory establishment, and enhances a sound regulatory system that can be
harmonized with regional and international practices. It contains the rules and procedures for
Factory-Handicraft Inspection which aims at protecting public health; encouraging the
establishment of world-class manufacturing facilities by providing a voluntary process for
facilities to be certified as premium; providing clear, standards. In addition, Prakas 607 provides
a comprehensive guideline on how to register new handicrafts and permits for new factories
under the law; providing clear standards to coordinate and expedite action by other agencies
involved in permitting to be accountable and transparent; and harmonizing the requirements of
this Prakas with the requirements of other ministries and institutes to avoid conflicting or
needlessly duplicative requirements. Recently, General Department of Industry is drafting the
Prakas on the Procedure for Implementing Regulations on Factory/Handicraft’ s Operation
which is guides on how the factories apply and access to the operation permit. The major
contents of it are technical elements that are to be applied to factories on safety, environment,
work condition, etc.
2.9. Administration System after Factory Establishment

In accordance with the Law on Administration of Factory and Handicraft, the factory should
provide an accurate monthly report and a yearly report for its raw materials used, production
value, or its temporary ceasing activity or its closure. These data and report should not be
publicly released unless the owner of the factory permits the release.
In addition, MIME are eligible to enter the factory anytime during working hours to inspect
quality, machinery, raw material, accuracy on safety to the technical standard, sanitation for
goods, and satisfaction on security. It is to check whether to follow the principle and other
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processes on safety regarding product consumption, waste disposal, and poison substance or
health care. For the food processing industry, MIME scrutinizes the conformity of products to
the Goods Health Products (GHP) and Goods Manufacturing Products (GMP). MIME should
also review and evaluate applications for handicraft facility establishments, based on the
comments and approval documents.
2.10. Current Status of Industrial Structure

The industrial structure in Cambodia consists of mainly small and medium-sized enterprises.
By 2009, the share of SMEs was 98.5% of all enterprises, while the weight of large enterprises
was 1.5%. The number of enterprises in Cambodia has continuously increased. The number was
25,696 in 2000, but 36,116 in 2009. Among the 36,116, the number of large enterprises was
only 556, while SMEs was 35, 560.
Large enterprises consist of mostly foreign investments and mainly produce goods for export
markets. The SMEs mainly consist of local investments and mainly produce goods for domestic
consumption.
The structure of large enterprises is very unique. By 2009, the largest industry was in textile,
wearing apparel, and leather of which share was 75.9%. The second largest industry was food,
beverages, and tobacco and it accounted 8.27%. The third largest industry was chemicals,
petroleum, coal, rubber, and plastic and its portion is 6.0%.
The structure of SMEs is also meaningful. By 2009, the largest industry of SMEs was food,
beverages, and tobacco of which share was 84.3%. The second largest industry was fabricated
metal products and its portion was 5.34%. The third industry was textile, wearing apparel, and
leather and its portion was 4.05%.
3. Current System of Factory Establishment in Korea107

3.1. Definition of Factory
The term“factory”means a business place for conducting the manufacturing industry with
manufacturing facilities such as structures, installations, machinery or equipments as well as
facilities incidental. (Subparagraph 1 of Article 2 of“Industrial Cluster Development and
Factory Establishment Act” )
107) This session is summarized from Korea Industrial Complex Corporation, Guide to Factory Establishment
(in Korean), 2009
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However, the followings are not defined as factory. First of all, business that screens and
sells reusable aggregates for process of collecting and treating wastes is classified as waste
disposal business, thus it does not apply to a factory. Secondly, producing organic fertilizers
while treating livestock execution is classified as waste disposal, thus it does not apply to a
factory. Thirdly, an automobile repair shop is classified as a“Maintenance and Repair Services
of Motor Vehicles”business according to Korea Standard Industry Classification (KSIC), thus
it does not apply to a factory.
Furthermore, the scope of a factory can be clarified as follows: Manufacturing facilities

necessary for operation including facilities for processing, assembling and repair, and pilot
manufacturing facilities; annex facilities installed within the factory site for management and
support of the manufacturing facilities, and for the welfare of employees in operating the
manufacturing industry; facilities where installation is compelled by the related acts and
subordinate of the operation status in the manufacturing industry; factory sites where facilities
mentioned above are installed.
3.2. Definition of Manufacturing

“Manufacturing”means the industrial activities that convert raw material inputs into new
products with different nature by applying physical and chemical actions to raw materials.
Therefore manufacturing activities do not include such processing activities that do not change
the essential nature of goods i.e., those that merely sort, order, divide, pack or repack goods.
And the scope of manufacturing business indicates“Manufacturing (Sector: C, Divisions: 10-
33)”under the KSIC definition publicly notified by the National Statistics Office Commissioner,
including coal processing business under the Coal Industry Act.
Examples of manufacturing are: Industrial activities that fundamentally reconstruct,

improve, and recycle a product; industrial activities that assemble purchased mechanical
components; publishing, printing, and printing-related service work; manufacturing of machine
and equipment that are assembled from exclusive components; manufacturing of components
that comprise general parts of machine or equipment; general and partial repair services for
construction equipments are regarded as manufacturing.
However, there are also examples of non-manufacturing. They are; assembling structure and
its components on construction site is classified as“Construction”; assembly or installation of
additional equipments for wholesale/retail business is classified as“Wholesale and Retail
Trade” ; professional repair of construction equipment (motor and hydraulics) is classified as
“Maintenance and Repair Services.”
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3.3. Factory Establishment
Factory establishment encompasses the approval of new establishment, expansion, transfer,
change of business type, and installation of manufacturing facilities. It also includes new
registration of factory, application for alteration of registration, contracts for occupancy in the
industrial complex, permission of occupancy in the free trade zones, approval of start-up
business plan in accordance with the“Support for Small and Medium Enterprise Establishment
Act” , and approval of execution plan in accordance with the“Industrial Sites and Development
Act” .
“New Establishment”means a new constructing structure or installation of manufacturing

facilities after converting the use of existing structures into that of a factory.“Expansion”is to
expand the construction area or the site area of a registered factory.“Transfer”is a closing
down of a registered factory in a restricted population zone and moving into a promotional zone
or other regions, and constructing or enlarging a factory for a same business type.“Change of
Business Type”is to change business type of an either approved or registered factory, or adding
new business type to the factory.
“Installation of Manufacturing Facilities”is an approval for operating manufacturing

business by installing facilities in whole or part of the approved factory building without
specifying the business type in advance, or in whole or part of a factory structure of which the
registration is made but revoked.“New Registration”means that owner or occupant of a factory
with less than 500m2 construction area may register the factory upon request.“Registration
Alteration”means that any person who has altered any matter prescribed by the guidance of the
Ministry of Knowledge and Economy among those entered in the factory registration who shall
apply for such alteration within two months from the date of alteration.
3.4. Types of Factory Establishment

Types of approval for factory establishment are basically classified by the factory location
i.e.,“Individual Site”and“Planned Site” . In an Individual Site, the establishment of a factory is
performed through procedures of“Establishment Approval”or“Establishment Registration” .
And there are two types of Individual Site: One location is based on the“Factory Establishment
Approval” . The other location is based on the“Start-up Business Plan Approval” .
In the Planned Site, there are four types of factory establishments all of which are carried out
by the“Occupancy Contract” . They are“National Industrial Complex” ,“Local Industrial
Complex (General Local Industrial Complex or Urban High-tech Industrial Complex)” ,
“Agricultural & Industrial Complex” , and the“Foreign Investment Zone” .
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Figure Ⅲ-1-3 | Type of Approval according to Factory Location in Korea
Location based on the Factory

Establishment approval
Individual Site
Location based on the Start-up
Business Plan approval
Type of
Factory Foreign Investment Zone
Location
Agricultural & Industrial Complex
Planned Site
Local Industrial Complex
National Industrial Complex
On the other hand, there are also different types of approval for factory establishment by
application. The first approval is the“Approval of Factory Establishment & Installation of
Manufacturing Facilities” . According to Article 13 of“Industrial Cluster Act”is the most
general process for establishing a factory with construction area over 500m2. If a person wishes
to obtain approval due to legal fiction of authorization and permission concerning the factory
construction, he/she may apply even if the area of factory construction area is less than 500m2.
In case of operating manufacturing business by installing facilities in an approved factory
building without specification of the business type or a building of which the registration was
revoked,“Approval of Installing Manufacturing Facility”is required.
The second one is the“Application for Factory Registration” , according to Paragraph 2 of

Article 16 of“Industrial Cluster Act”
. Owner or occupant with a factory that has construction
area below 500m2 may apply for Factory Registration without an approval.
The third one is the“Approval of Start-up Business Plan” , according to Article 33 of“Support
for Small and Medium Enterprise Establishment Act” . This approval is only applicable to start-up
SMEs that meet certain requirements provided in the Act.
The fourth one is“Application for Occupancy Contract” , according to Article 38 of

“Industrial Cluster Act”. Persons who manage or wish to manage a manufacturing business
within an industrial complex (national, local, agricultural & industrial, etc.) shall conclude a
contract regarding occupancy with the administrative agency. Conclusion of Occupancy
Contract shall be deemed to have the approval of Factory Establishment.
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3.5. Qualifications for Factory Establishment
Following is a brief diagram of approval procedures for factory establishment.
Figure Ⅲ-1-4 | Review of Qualifications for Factory Establishment in Korea
Does it comply with

Individual Yes No
▶ INDUSTRIAL CLUTER ▶ Disapproval
Site?
ACT?
No
▶
Yes
▶
Planned Site: Does it comply with Yes Approval
Conclusion of ▶ Yes
NATIONAL LAND of Start-up
Occupancy PLANNING AND Is it start-up SME? ▶
Business
Contract in UTILIZATION ACT? ▶ Plan
industrial
Complex
No No
Yes
▶
▶
Is it possible to alter Is the factory No Application
the ‘specific use construction area ▶ for Factory
district(area, zone)’? over 500m2? Registration
No Yes
▶
▶
Approval of
Disapproval Factory
Establishment
3.6. Approval Procedures of Factory Establishment

The process of factory establishment consists of the following three steps as“Approval of
Factory Establishment” ,“Factory Construction” , and“Factory Registration” . And the“Approval
of Factory Establishment is divided into two steps. The first step is“Factory Site Selection” . If
the location of the factory is within an industrial complex, he/she can visit the authorized
management institution, and conclude an occupancy contract. However, if it is outside the
industrial complex, he/she has to start the site survey and analysis. The second step is
“Application for Approval of Factory Establishment” . Once the site is selected, an approval is
required. For this, a business plan for factory establishment should be accompanied by the
application. In addition, specification of authorization and permissions for legal fiction that is
on the discussion agenda and its attached documents are needed to be submitted. The next step
is“the Factory Construction and Completion Report.”
The approval usually takes about 20 days, but could take longer according to the conditions
of fulfilling legal fiction. It needs 14 days in case the whole content of application falls under
the power of authorization and 7 days in case the application doesn’ t need legal fiction of
authorization and permission. The handling period of the application for Occupancy Contract in
the industrial complex needs 5 days and 20 days for approval of Start-up Business Plan.
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After the approval, he/she may acquire a building permission and so on. And after the
completion on construction, a completion report is to be submitted within two months from the
date of completing the installation of machineries and equipments. And notice of Factory
Registration should be submitted within 3 days.
Figure Ⅲ-1-5 | Basic Process of Factory Establishment in Korea
1 Approval of
Factory establishment
(Conclusion of Occupancy Contract)
2
Factory Construction
3
Factory Registration
Followings are the summary of the processes for factory establishment. The first step is
“Site Selection”. It follows the Selection of a Factory Site → Site Survey and Analysis →
Selection of Location
The second step is the“Approval of Factory Establishment.”It follows the Business Plan →
Preparation of Documents → Engineering Design → Approval of Factory Establishment.
The third step is the“Factory Construction & Completion Report.”It follows the Building
Permission, Engineering and Construction → Inspection of Construction Completion and
Architecture Use → Confirmation of Land Cadastre and Building Register → Report of Factory
Establishment Completion → Factory Registration.
In addition, during the whole process of approval of the factory establishment, there need
lots of documents and other materials to fulfill legal obligations and permissions and needs to
provide sufficient evidences for proof.
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3.7. Tax Benefits
There are a variety of tax benefits in factory establishment which can be applicable to many
enterprises.
3.7.1. Tax Reduction or Exemption for Start-up SME
a. 50% reduction of the income tax or corporate tax on incomes from business concerned for
the taxable year in which the first income is derived from such business and also for the
subsequent taxable years that will end within three years after the beginning of the
following year;
b. Exemption of acquisition tax and registration tax for business properties to operate the
business concerned which is acquired within 2 years from the date of the starting of business;
c. Exemption of registration tax for registration of the incorporation of start-up SME and any
job-creating start-up enterprises;
d. Exemption of special rural development tax for SMEs if they are exempted from
acquisition tax and registration tax;
e. Exemption of farmland preservation fund for factories built by SMEs outside the
agriculture promotion area within 3 years from the date of the starting of business with
approval of the business plan;
f. Exemption of alternative forest creation fund for factories built within 3 years from the
starting of business with approval of business plan;
g. Exemption of infrastructure facility charge for factories of start-up businesses in
accordance with the“Support for Small and Medium enterprise Establishment Act” .
3.7.2. Tax Benefit for Business within Industrial Complex
a. Exemption of acquisition tax and registration tax;

b. 50% reduction of the property tax and aggregate land tax for 5 years from the date that tax
obligation was incurred (exemption for industrial complexes outside Seoul Metropolitan area).
3.7.3. Tax Reduction for Companies in Agricultural & Industrial Complex
a. 50% reduction of either property tax or corporate tax for the taxable year in which the first
income is derived from such business and also for the subsequent taxable years that will
end within 3 years after the beginning of the following taxable years.
3.7.4. Tax Reduction for Foreign Investment Companies
a. Reduction of national tax (corporation tax and income tax) and local tax (acquisition tax,
registration tax, and property tax) for 7 years (100% for 5 years and 50% for 2 years) for a
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business accompanying a high-tech and business of industrial services and also an
individual-type for foreign investment zones;
b. Reduction of national tax and local tax for 5 years (100% for 3 years and 50% for 2 years) for
a business in complex-type foreign investment zone, free economic zone, and free trade area.
3.7.5. Tax Reduction for Companies that Relocate to Provincial Regions
a. 100% reduction of corporate tax or income tax for 5 years and 50% reduction for the next
2 years for a SME which has continued to do business having its factory and facilities in
the restricted population zone of the Seoul Metropolitan area for not less than 2 years that
relocated the entire factory to an area outside the restricted population zone of the Seoul
Metropolitan area and started its business there not later than Dec. 31, 2008;
b. 100% reduction includes corporate tax reduction of 50% and the other half of the
reduction for the next 2 years for a corporation which has continued to do business with
its factory and facilities installed, or has continued to maintain its headquarters for three
years or more within the restricted population zone of the Seoul Metropolitan area is
required to relocate its entire factory and facilities or its head office to an area outside the
Seoul Metropolitan area and start business there not later than Dec. 31, 2008 or that it
should build a new factory or head office outside the Seoul Metropolitan area and start
business not later than Dec. 31, 2011.
3.8. Required Documents

3.8.1. Approval of Factory Establishment
This is an application for factory establishment approval, business plan, specifications of

authorization and permission for legal fiction and related documents, and documents verifying
user’
s right for land and buildings.
3.8.2. Application for Factory Registration
This is an application for factory registration, business plan, documents required by the
relevant law in legal fiction.
3.8.3. Approval of Start-up Business Plan
This is an application for approval of start-up business plan, business plan, written consent
for use from the property owner, documents prescribed in Article 33 (4) of“Support for Small
and Medium Enterprise Establishment Act” .
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3.8.4. Application for Occupancy Contract
This is an application for occupancy contract in the industrial complex and business plan.
3.9. Critical Elements for Approval of Factory Establishment

Application for Approval
Permission for Land Use
Business Plan
Factory Establishment
- Authorization for legal fiction
- Building permission
- Factory construction
- Installation of machinery and facilities
Analysis of Environmental Impact
- Noise & vibration
- Water
- Air pollution
- Wastes
- Welfare facilities, etc.
Analysis of Disaster Impact
- Safety
- Fire, etc.
Preservation of Cultural Assets
3.10. Useful Regulations

3.10.1. National Land Planning and Utilization Act
The Act stipulates provisions regarding establishments and executions of plan to use,
develop, and preserve national land. It also determines whether a factory may be established on
a selected site in accordance with specific use of land. In addition, it verifies whether a site is
designed as a certain district or zone:“Land Use Planning Verification”is provided in the
Paragraph 1 of Article 10 of“Framework Act on Land Use Regulation” .
3.10.2. Industrial Cluster Development and Factory Establishment Act
The Act confirms processes for factory establishment (individual/planned sites) and
occupancy contract in industrial complexes and also confirms required documents for each
process.
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3.10.3. Support for Small and Medium Enterprise Establishment Act
The Act defines who is a start-up business founder. A person is a founder who starts up a
SME and a person for whom 7 years have not yet elapsed from the date on which he/she
commences his/her SME. It also clarifies commence date. Juristic person is registered at the
date of establishment, but natural person is registered at the date of business commencement
according to the“Value-added tax Act” .
3.10.4. Framework Act on Small and Medium Enterprises
The scope of SMEs is manufacturing business either less than 300 constant workers or
capital in amount of less than KRW 8 billion. The Small Enterprise has less than 50 constant
workers in mining, manufacturing, construction, and transportation. It also requires less than 10
constant workers in its other sectors. The Medium Enterprise has 50 - 299 constant workers.
3.10.5. Act on Special Measures for Support to Small Enterprises and

Small Commercial and Industrial Businessmen
Business Registration Certificate for a small company with construction area of less than
500㎡ is regarded to be effective of factory registration (Paragraph 1 of Article 4). If a small
company with construction area of less than 1,000㎡ builds or expands a factory or relocates a
factory outside of the Seoul Metropolitan area, farmland preservation fund, alternative forest
creation fund, and development charges are exempted (Paragraph 2 of Article 4).
3.11. Support for Factory Establishment

KICOX (Korea Industrial Complex Corporation), a public agency under the Ministry of
Knowledge and Economy, established the Factory Establishment Support Center (FESC) to
perform a comprehensive support to assist SMEs for establishing a factory, and thus save time
and resources and enhance the competitiveness of SMEs. In 1964, the Korea Export Industrial
Complex was established to provide industrial complexes for export promotion and 4 sites were
soon established followed by the first one. And in 1997, KICOX was established to manage the
industrial complexes and to provide services for enterprises.
Main tasks of FESC are to consult and provide useful information for factory establishment
process and site selection to provide free-of-charge service for administrative processes related
to permission or approval, and to provide general services related to factory establishment as
funding, tax reduction, etc.
The process of agency service for factory establishment is as follows. Site consultation and
Acceptance of Civil Application (FESC); 2-3 days Application process for Factory Establishment
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Approval (FESC); 7 days → Deliberate and Grant Approval / Permission / Authorization
(Authorized Government as Si/Gun/Gu); 10-45 days → Preparation for Factory Construction
(Applicant); period varies → Building Permission (Authorized Government); 7 days →
Construction of Factory (Applicant); period varies → Report on Completion of Factory
Establishment (Authorized Government) within 2 months after installing facility → Factory
Registration (Authorized Government); 3 days.
At the moment, the FESC covers services for a wide-range of regions all over Korea. It
operates 14 branches in Seoul, Incheon, Seobu, Wonju, Suwon, Cheonan, Cheongju, Daegu,
Gumi, Busan, Changwon, Ulsan, Gwangju, and Jeonbuk. And its headquarter is located in
Seoul. FESC had provided the service of 14, 992 cases in total during 1997-2008.
3.12. Current Status of Industrial Structure

Large enterprise (LE) is the main body of the Korean economy. Even though the portion of
LE was only 0.5% of all enterprises in number, the large enterprise consumed 23.7% of total
employees and also covered 53.6% of revenue of all enterprises by 2008.
From another aspect, Korea has managed many industrial complexes which are the main
force of her industrial activities. There were 831 industrial complexes in 2010 and the number
of enterprises which were located in the Complex were 62, 377. And the export amount from
the complex was US$ 17.6 billion in 2008 which accounted for 41% of total export in Korea,
and the major player was the National Industrial Complex of which took up 98% of export
amount in the industrial complex.
Table Ⅲ-1-1 | Industrial Structure in Korea

(Manufacturing by 2008)
Large Enterprises SMEs
Number 619(0.5%) 111, 957 (99.5%)
Employee 661, 339 (23.7%) 2,134,699 (76.3%)
Revenue 53.6% 46.4%
*SMEs (employee): 5-299[persons]
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Table Ⅲ-1-2 | Status of Industrial Complex (Planned Site) in Korea
Urban High-
National General Local Agricultural&
tech
Total Industrial Industrial Industrial
Industrial
Complex Complex Complex
Complex
No. of Complex
831 40 382 6 403
(2010)
No. of
Enterprise
62,377 38,878 17,688 108 5,703
(Occupancy
Contract, 2010)
1,566
Export (Foreign
175,974 172,249 (98%) 1,871 (1%) 288
(USM, 2008) Investment
Zone)
4. Policy Recommendations
4.1. Challenges Ahead
Cambodia faces an urgent national agenda which is to create new growth engines for
sustainable economic growth. Cambodia should expand her economic domains much aggressive
than before and work on industrial diversification toward a high value-added structure. The
most powerful policy measure for it is to cultivate local enterprises in which the factory
establishment is regarded as a critical factor. Fostering local enterprises could contribute to
expand the Cambodia’ s economic activities by increasing the number of new local enterprises.
In addition, the expansion of FDI for factory establishment to other strategic industries is crucial
for Cambodia as well.
Unfortunately, factory establishment has been neglected in the policy arena, despite the
strong emphasis on the inducement of investment capitals through the FDI. In fact, factory
establishment is a very complex system which demands concrete solutions of many related
factors and consist long periods of administrative procedures. For example, in Korea, an
establishment of a factory requires extremely complicated 70 complicated laws and 50 approval
activities but there have been no sufficient incentive schemes for factory establishment in
Cambodia.
The most urgent challenge to be solved in Cambodia related to the factory establishment is
to establish a powerful incentive scheme for mobilizing investment capital. Factory
establishment is a complicated matter, and is very difficult to be promoted without powerful
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incentive schemes. As it can be seen above, there seems to be no big difference in factory
establishment systems between Cambodia and Korea. But the factory establishment in Korea by
local enterprises has been very active mainly due to powerful incentive schemes, while factory
establishment in Cambodia by local enterprises is inactive mainly due to the lack of sufficient
supply of financial resources.
In addition, Cambodia should improve efficiency of administration system for factory

establishment. Cambodia has several weaknesses in the factory establishment system as
follows: Lack of a system that ensures work safety and environment protection; lack of
knowledge and experience in measuring the effect on the national economy; lack of documents
and materials to analyze related systems; lack of law and regulation to upgrade the supporting
system. It is necessary to introduce new dimensions as well as new technologies for effective
management in factory establishment.
Other challenge remains in the improvement of the Cambodian education system.108 The
primary enrollment has risen up to 99% in 2005 from only 69% in 1991, but the secondary rate
stood at just 24% in 2005. Educational opportunities at tertiary level are inadequate, resulting
shortages of skilled labor, which is a problem for both investors and government to improve its
public administration.
We can also find some differences in administration systems between the two countries. One
is the difference in concept and terminology. Cambodia prefers terminologies such as Factory
Permit and Operation License, while Korea uses terminologies such as Approval of Factory
Establishment and Factory Registration. Cambodia seems to focus more on the government-led
aspect, but Korea focuses more on enterprise-driven side. Another difference is in the
administration body of the government. In Cambodia the central government plays a crucial role
in administrating factory establishment, while in Korea all the administrative works have been
completely shifted into the lower level of the local government. Another point is that Korea has
a well established industrial complex system which performs overall management of the
enterprises within the industrial complex.
Based on the comparison of factory establishment systems between Cambodia and Korea,
some meaningful policy recommendations are suggested for the Cambodian government as
follows.
4.2. Powerful Incentive Schemes for Factory Establishment

Financial incentive schemes are most critical in stimulating factory establishment in
108) Economic Intelligent Unit, Country Profile 2008: Cambodia, 2008
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Cambodia, but the financial incentive scheme for local enterprise has been less focused than
necessary. Until now, the invitation of FDI in Cambodia has very much been highlighted. It is
clear that FDI is very crucial for Cambodia’ s economic growth in the future. But factory
establishment of local owners is as important as FDI further on. Even though Cambodia has
maintained a well developed system of factory establishment, without sufficient financial
resources the system will not function effectively. Factory establishment system of well
structured is meaningless unless there is no high possibility of mobilizing sufficient financial
resources for investment capital. Local owners have very limited opportunities to use loans for
their businesses from commercial banks and financing institutions such as micro-bank, SME
bank, and agro-industry bank. Therefore a variety of policy measures to provide financial
resources for local enterprises should be established.109
On the contrary, the case of Korea clearly provides robust evidences showing that local
enterprises have been able to mobilize enough financial resources for their businesses. The
Korean government has been very aggressive in supporting mobilization of local enterprises’
investment capital. For example, in the early stage of industrialization, the major sources of
financial resources came from foreign aids. However, from the 1960s, the Korean government
tried to fulfill increased demands for investment capital of local enterprises by increasing
government budget, tax reform, and reform of interest rate. The Korean government in
particular had made efforts to increase the amount of domestic savings. As a consequence, the
ratio of self-sufficiency in financial resources in Korea had continuously increased such by
26.3% during 1954-1961, 51.6% during 1962-1966, 61.5% during 1967-1971, 76.8% during
1972-1976, and 84.9% in 1978.110
In addition, the Korean government has been proactive in cultivating local SMEs. The
current category of government policies to support SMEs is as follows: Subsidy/loans,
technique/technology, marketing/export, human resource development, start-ups/ventures,
consulting/computerization, micro-enterprises, knowledge service, and reform of regulations.
Particularly there are many supporting instruments for the SMEs. The total number of
supporting programs for SMEs in Korea was 1,761 programs by 2010 July, including 213
programs for financing and 24 programs for taxation, which are operated by many public and
private organizations.111 They can be reclassified as the core 118 programs which contain 40
financial supporting programs. And the category of financial supporting programs can be
categorized as loans, subsidies, government R&D programs, and bond issues.
109) For the incentive schemes for investment in Cambodia, see, The Council for the Development of
Cambodia, Cambodia Investment Guidebook, 2006; Mekong Law Group & DFDL Mekong, Cambodia legal
& Investment Guide, 2007 Edition
110) Korea Chamber of Commerce & Industry, Korea’ s Industrialization for 100 Years (in Korean), 1984
111) The Federation of Korean Industries, Introduction to Supporting Programs for SMEs by 2010 in Korea (in
Korean), 2010
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Another powerful incentive scheme would be tax benefits. The Cambodian government
should expand tax incentives to local enterprises in their factory establishment. For example, the
Korean government provides various types of tax incentives to stimulate factory establishment
of local enterprises as noted above. In the early stage of industrialization, tax incentives may
have limited impacts on the creation of new businesses. However, step by step, tax benefits can
be very attractive for local enterprises in creating their new businesses. In this regard, the
Cambodian government must review existing scheme of tax incentives and introduce a variety
of new tax incentives to increase local enterprises’investment capacity. Especially, tax benefits
should be focused on helping those local enterprises in rural areas. Most advanced countries
have very powerful tax incentives in promoting their strategic industries and in particular they
try to enforce tax incentive schemes to promote local enterprises’ human resource development
and R&D activities.
4.3. Coordination among Entities

For effective administration of factory establishment, a close cooperation among involved
ministries and entities is indispensible. Especially closer collaboration among core bodies in
factory establishment such as Ministry of Industry, Mines and Energy (MIME), Ministry of
Economy and Finance (MEF), and Ministry of Commerce (MOC) is required. Factory
establishment is a very complex system and a complicated matter in which the involvement of
many entities are due course in establishing a factory. Thus, concerted efforts among core
ministries to cultivate local enterprises are very critical in increasing the number of local
enterprises. For that purpose, it is necessary that a consensus is built upon the importance of
factory establishment for the same level as the FDI, among core bodies. Furthermore, close
cooperation with other entities is also crucial.
In particular, close cooperation between CDC and MIME is critical. Unfortunately, the
provision of incentives for establishing local enterprises and the administration of factory
establishment of local enterprises are separated between the two ministries. They should be
combined together. In Cambodia, local enterprises and foreign enterprises can benefit the same
incentive schemes according to the Law on Investment. In order to benefit from existing
incentive schemes, local enterprises must apply to the CDC and the project should be approved
by the CDC. However, majority of local enterprises are SMEs and they do not have enough
investment capacity to be approved by CDC due to the minimum requirement for capital
investment by the Law of Investment which requires investment capacity of at least US$
300,000 or US$ 50,000 according to sectoral specifications.
Elaboration of existing laws and mandates as well as introduction of new laws and
regulations for newly emerged areas is urgent. In this regard, the overall review on the existing
laws and mandates are to be performed and the improvement of them are to be proceeded. In
particular, work safety, environment protection, and health care area is increasingly important
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issue for factory establishment in Cambodia, for which well prepared methods are to be
elaborated. However, due to limited interests in factory establishment in Cambodia, it seems not
easy to launch action programs for those new areas in a short period of time.
4.4. Concrete Framework in Industrial Policy

It is desirable to establish a well structured industrial policy in Cambodia. It seems that
industrial policy has not been so much highlighted as a critical policy arena in Cambodia. First
of all, the basic framework of industrial policy is to be clarified among laissez-faire policy,
sectoral promotion policy, and functional industrial policy. At the moment, the adoption of
sectoral promotion policy seems to be most relevant to cultivate effectively strategic industries
in Cambodia. Secondly, the Cambodian way of public-private partnerships (PPP) ought to be
elaborated in-detail. The principle of market failure cannot explain the whole story of new
industrial development in many countries. Thus, the Cambodian perspective on the role of
government in industrial development is to be set up. Strategic willingness of a country is a very
important asset in regards of industrial policy. The cases in Korea and Japan clearly indicate the
importance of a country’ s willingness as a key driving force for rapid industrial development.
Thirdly, those strategies for the capability building side need to be clear. There are two
dimensions in implementing strategies: One is institutional settings and reforms; the other is
capability of accumulation especially in the field of human resource development and
technology. And the accumulation of capability takes a long period of time to achieve the level
of global competitiveness.
Fourthly, clear vision setting and concrete action programs are necessary in selected
strategic industries. In Cambodia, those lists of strategic industrial areas are quite prevailing
without any concrete action plans and programs. Industrial policy implies in reality the strategic
concentration of resources. For example, the terminology“backwardness” , quite commonly
noted in Cambodia, does not automatically guarantee Cambodia’ s future prosperity. Without
intensive efforts of local entities to promote those strategic industries under concrete action
programs, it is not easy to cultivate healthy strategic industries. Fifthly, those policy instruments
in industrial policy seem not to be well developed as Cambodia-specific measures. Cambodia
should elaborate those major policy tools of industrial policy into its own way, which can be
useful in fostering local enterprises. Sixthly, the managerial perspectives of local enterprises are
to be fully reflected in the policy-making processes. There seems to be a strong tendency of
supply side policy particularly from the government. Macroeconomic views are very useful, but
insider’s perspectives at enterprise are quite different and are much more effective. Firm
dynamics need to be counted on as a very critical element for the industrial policy.
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4.5. Extension of FDI for Factory Establishment to Other
Strategic Industries
Until now FDI in Cambodia has mainly focused on the textile industry. However, the active
promotion of FDI for factory establishment of foreign enterprises to diversify the Cambodian
industrial structure is very useful instrument. In other word, it is an attempt to extend FDI to
other strategic industries beyond textile industry. To achieve such goal, powerful incentive
schemes for FDI in other industries should be reviewed and enforced.
RGC has set up a series of plans to promote strategic sectors, as mentioned above, as labor-
intensive industry, agribusiness and agro-processing industry, resources-based industry, small
enterprises and handicraft, electronic appliances and industrial uses, culture and nature-based
tourism, and infrastructure building. More specifically, those industrial areas are to be
encouraged for factory establishment through FDI such as proceeded food/drink, renewable
energy, fertilizers, paper products, chemical, rubber and plastic products, metal tools, non-
metallic mineral based products, fabricated metal, machinery and equipments, construction
materials, and others
4.6. Upgrade of Administrative Procedures

Review on the efficiency and bottleneck in the administration system of factory
establishment is required. The administration system of factory establishment needs many steps
and involves lot’ s of factors in the procedure. Therefore it requires adequate amount of
knowledge and experience to handle all the procedures accordingly i. e., specialties in
administrating factory establishment. An efficient system for factory establishment can induce
active participation of local businessman. Particularly, bureaucracy and red tape in
administration procedures should be avoided.
Another element is an active reflection of enterprises’interests to improve the factory

establishment system. In Cambodia, factory establishment seems to be mainly initiated by the
bureaucrats. Thus, regular survey on the interests and opinions of local enterprises might be
very useful in suggesting better policy instruments and administrative procedures.
Expansion of support organizations is to be considered. It is not easy for ordinary

businessmen to know all kinds of information and details related to factory establishment. For
example, Korea operates a special public agency to help SMEs’factory establishment as noted
above. KICOX as a public agency under the Ministry of Knowledge and Economy, established
the Factory Establishment Support Center (FESC) to perform a comprehensive support to assist
SMEs for establishing a factory, thus it saves time and resources of them and enhances the
competitiveness of SMEs. The main tasks of the FESC are to provide useful information for
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factory establishment processes and site selection, to provide free-of-charge service for
administrative processes related to approval or permission, and to provide general service
related to factory establishment as funding, tax reduction, etc. At the moment, the FESC covers
services for a wide-range of regions all over Korea. It operates 14 branches.
Cultivation of consulting and service for manpower in the field of factory establishment is
also important in Cambodia. The administration of factory establishment is a kind of public
service in which a public agency is more suitable instead of government organization. Thus, the
establishment of organizations for public service to local businessmen would be very valuable
which mainly helps the factory establishment of local enterprises. In consideration of the
increasing demand for factory establishment in Cambodia, the cultivation of consulting and
service manpower to help enterprises’factory establishment is to be provided. In addition,
those experts and professionals in universities and research institutions in the field of factory
establishment ought to be cultivated as well. However, even though there is a necessity of such
a public agency, the authorization power for factory establishment must be assumed by the
Government as a sole power of government mainly because the factory establishment has so
many elements of public interests.
4.7. Enhancement of Administrative Capacity

Administrative ability after factory establishment is a hot issue to the Cambodian
government. But the government has limited capacity to collect and analyze the real situation of
local enterprises. Data and statistics on local enterprises have not been fully available, thus the
inside information of local enterprises is less known to the government. Even though the
government operates regular report system as accordingly, some monthly reports and annual
reports are operated mainly as formal channels without much legitimate value.
In addition, technological elements in administrating the factory establishment will be

increasingly important in Cambodia. Therefore, the government should provide enough
opportunities to enhance government official’ s technological knowledge and insight for
administrating factory establishment. Especially, those government officials in the local
government must be given enough opportunities for technical education and training.
Government officials also have limited knowledge and experience in newly emerging areas
such as work safety, environment protection, and health care in particular. Therefore, the
cultivation of government officials’ability in newly emerging areas is necessary.
Managerial capability of administrative personnel for factory establishment in the

government should also be leveled up. Those bureaucrats in the central government and local
government who are dealing with factory establishment need to improve their managerial
knowledge and experience. In other words, short-term and long-term management education
and training for them is required. For them, knowledge and insight on firm dynamics and inside
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information of the firm is a critical element in administrating factories efficiently.
Finally, we must take into account the required period of time in reforming the new
administrative system of factory establishment in Cambodia. There are many interrelated
factors to be solved and demonstrated. In addition, many new elements ought to be introduced
for a better system including many new policy measures. Thus, we are eager to see the
successful completion of introducing the new system in factory establishment in Cambodia as
early as possible.
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References
Council for the Development of Cambodia, Cambodia Investment Guidebook, 2006
Economic Intelligent Unit, Country Profile 2008: Cambodia, 2008.
Federation of Korean Industries, Introduction to Supporting Programs for SMEs by 2010 in

Korea, 2010. (in Korean)
Korea Chamber of Commerce & Industry, Korea’

s Industrialization for 100 Years, 1984. (in Korean)
Korea Industrial Complex Corporation, Guide to Factory Establishment, 2009. (in Korean)
Luyna Ung, Industrial Development: An Option for Diversifying Cambodian Economy

(MIMEO), 2011.
Mekong Law Group & DFDL Mekong, Cambodia legal & Investment Guide, 2007 Edition.
Naron Hang Chuon, Cambodian Economy: Charting the course of a Bright Future, Phnom
Pehn, 2009.
Royal Government of Cambodia, Law on Administration of Factory and Handicraft, 2007.
Royal Government of Cambodia, National Strategic Development Plan Update: 2009-2013, 2009.
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Chapter 02
Enhancement of Standardization and Conformity

Assessment System in Cambodia
Gyung Ihm Rhyu (Korean Agency for Technology and Standards)

Uddara Chheng (The Institute of Standards of Cambodia)
Summary
Cambodia should secure the standards for supporting government projects for industrial
development and trade expansion, and also for enhancing the people’ s quality of life. In this
regard, Cambodia should identify the needs for standardization and set priorities considering
factors such as the nation’ s core industries, export-led industries, import substitution industries
and industries that should be regulated to protect public health and safety, and the environment.
In particular, standards that are related to public health and safety, and environmental protection
should be adopted and enforced as mandatory. Moreover, in addition to industrial product
standards, Cambodia should develop standard test methods to assess a product’ s conformity to
the relevant standard.
Cambodia should establish the national accreditation body operated in accordance with the
international standards and foster competent conformity assessment bodies acceptable in the
global market. By Cambodian law, the Institute of Standards of Cambodia (ISC) is designated
not only as the national accreditation body but also certification body for products and
management system, which can raise impartiality issues and is not accepted globally. Therefore,
it is recommended to establish an accreditation body under the ISC with the accreditation scope
limited to laboratories. The accreditation scope may be expanded to cover other conformity
assessment areas after the corresponding conformity assessment activity is separated from the
ISC and delegated as an independent from the ISC.
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Government policies to establish the conformity assessment system should include
supporting plans for capacity building of laboratories to adequately assist standard development,
quality promotion and technical innovation.
Cambodia should strengthen the capacity of National Center of Measurement (NCM) and
secure calibration laboratories accredited in accordance with relevant international standards. In
order to achieve this, NCM should secure necessary measurement standards, and establish and
operate a quality management system that satisfies the international requirements for national
measurement institutes. Also, Cambodia needs to increase calibration capacities so that the
scope of calibration will include all ranges of measurements required in the country.
A legal metrology system should be established urgently to provide reliable measurements

for commercial transaction, health, safety and environmental protection. In this regard, the
scope of measurement instruments are subject to type approval and verification should be
designated to guarantee the quality.
Appropriate institutional measures such as the quality assurance program and quality
promotion program should be implemented in Cambodia to expand the use of standards and
diffuse quality management in order to promote the quality of Cambodian products. As part of
the quality assurance programs, mandatory quality certification system, export inspection and
voluntary quality certification system can be implemented. A mandatory certification system
should be introduced for the product sector closely related with health, safety and environment.
Also, export inspections should be applied to exports to secure the sustainable credibility of
Cambodian products in the global market. On the other hand, a voluntary‘national standard
certification system’can be applied to encourage companies to use the national standards and to
adopt quality management in their production process. In order to promote participation in the
voluntary certification system by companies, an incentive system such as public procurement
policies giving priorities to certified products should be introduced.
Also, various quality promotion initiatives such as the national quality award and technical
trainings should be offered to encourage companies to make voluntary quality control efforts.
The national quality award will be awarded to companies that significantly contributed to the
nation’s industrial competitiveness through quality management activities. As for technical
training, formal courses or workshops and seminars on quality management techniques and past
outcomes of quality management can be provided.
Cambodia should actively engage in international cooperation activities to nurture human

resources for enhancing and maintaining the standardization and conformity assessment system.
International body such as the WTO/TBT committee offers workshops and training programs to
help developing countries adopt international practices and monitor of international trends. To
focus training on the prioritized areas, it will be particularly useful to utilize bilateral
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cooperation with national standardization and accreditation bodies of other countries that
operate a well-established standardization and conformity assessment system. Mutual
cooperation in this area could cover programs to share experience in standardization, on-site
training, invitation of technical staff, and the dispatch of experts to provide training.
However, the development and operation of systematic national programs for nurturing
competent human resources is most important. The program should include training programs
for assessors and auditors, and technical staff of laboratories as well as training programs on
quality control and management systems for quality managers in conformity assessment bodies
and organizations which are seeking or have received management system certification and
product certification.
Cambodia needs to establish and implement multi-year national standards plan which covers
strategies to achieve all of the elements recommended above efficiently and effectively in
alignment. Also, the national standards plan should be practical and effective, taking
Cambodia’ s technology and industrial development level into account. The plan should also be
flexible enough to be modified in accordance with changes in domestic industrial structure and
the international trade environment, when necessary.
In order for the ISC to pursue effective standardization strategies, Cambodia needs to
consider strengthening of the authority and role of the ISC along with the allocation of sound
financial budget and supporting manpower.
1. Introduction
Standards play a very important role in supporting many government policies involving
competitiveness, innovation, reduction of barriers to trade, protection of fair trade and consumer
rights, environmental protection and public procurement. The importance of standards is
growing further with globalization of commerce and the convergence of technologies. In
addition, standards can contribute to facilitating good practice regulations as it can be applied to
laws of public health and safety, and environmental protection.
The importance of standards is rising especially in the area of international trade. Standards
eliminate barriers to trade, but they can also act as a trade barrier in some cases. The WTO
Agreement on the Technical Barriers to Trade (TBT) requires members to ensure that technical
regulations, standards, and conformity assessment procedures do not create unnecessary
obstacles to trade. On the other hand, the TBT Agreement also recognize that members could
take measures necessary to ensure the quality of their exports, or for the protection of human
health and safety and the environment, at levels they consider to be appropriate. However,
where technical regulations or standards are required and relevant international standards exist
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or their completion is imminent, members are required to use them or their relevant parts as a
basis for technical regulations or standards as appropriate. Members are also required to use
relevant guide or recommendations issued by international standardizing bodies as a basis for
their national conformity assessment procedure.
Standards significantly affect technology development as it is an important part of a

knowledge-based economy. In order to support government policies, the standardization system
should facilitate productivity and technology development, and encourage the adoption of good
practices in economic activities. However, inappropriate standard may act as an impediment to
technology innovation instead of facilitating technology innovation or its knowledge transfer.
Therefore, standardization should be pursued in an effective and appropriate manner to nurture
industries and effectively support facilitation in trade and technology development. In
particular, for developing nations, it is important to monitor recent trends in international
standardization and it is important to establish standardization policies after careful evaluation
of their nation’s technology level and available resources.
In this chapter, Korea’ s practices in establishing and implementing a standardization and

conformity assessment system will be introduced. Also, while keeping global practices in mind,
Cambodia’ s current standard and conformity assessment system will be analyzed to suggest the
standardization policies that Cambodia may adopt to successfully nurture their industries and
facilitate trade.
2. Overview of Cambodia’
s Standardization and Conformity
Assessment System
2.1. Cambodia’
s Standardization System
2.1.1 Overview of the History of Standardization in Cambodia
After the national election in 1993, Cambodia reformed its central planned economy to a
market-oriented economy. In 1997, Cambodia’ s Ministry of Industry, Mines and Energy
(MIME) established the Industrial Standards Office under the Department of Technology in
order to research and review the activities of foreign standardization bodies and establish
Cambodia’ s own standardization system. In 2002, the government upgraded the Industrial
Standards Office to the Department of Industrial Standards to support its role as the national
standards body of Cambodia. In addition, MIME also established enforcement regulations
providing the Department of Industrial Standards with authorities that will guarantee the
department to effectively carry out activities in the areas of standardization and conformity
assessment.
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The Department of Industrial Standards was comprised of seven offices - the administration
office, the information office, the standard development office, the product certification office,
the system certification office, the training and consultancy service office, and the standard
regulatory office.
With the objective of standards development, a technical committee participated by various

government bodies, research institutes and associations was established. The committee was in
charge of technical and policy related matters regarding standard development, and also
reviewed and approved draft standards prepared and submitted by the Department of Industrial
Standards. A draft of standard was circulated for 45 days for public comment prior to approval.
Afterwards, the draft standard was submitted to MIME for approval as a national standard. A
total of 13 food related standards, 41 IEC (International Electro-technical Commission)
standards, six management system standards, and nine standards in other areas have been
adopted by the committee.
The committee’ s standard development process did not follow best international practices
such as the ISO (International Organization for Standardization) standard development process,
and lacked credibility due to the lack of private sector participation. To be more specific, the
committee lacked a system that allowed engineers, scientists, and stakeholders to participate as
a committee member to share their knowledge and experience in their development of the
national standard. Also, the committee did not develop a clear set of standardization policies or
a national master plan on standardization. The Cambodian government had set an official goal
for promoting national standardization activities, but its failure to establish a policy framework
and a program to secure human and financial resources acted as obstacles to the establishment
of a national standard.
Although the Department of Industrial Standards was delegated with official authority on
standardization matters, its activities were limited by the restrictions imposed by other
government agencies. This problem was caused by the lack of clear distinction between
authorities, roles and functions of the concerned government agencies, and the fact that the
Cambodian law at the time was unfit for the implementation of WTO/TBT Agreement.
Due to such reasons and recognizing the need to acquire qualifications required to become a
WTO member, the Cambodian government legislated the‘Law on Standards of Cambodia’in
June 2007. The new law stipulated the establishment of a national standardizing body under
MIME that will be delegated with duties such as the development of a national standard, the
operation of a conformity assessment system, training and education for the promotion of
standards and quality improvement, and international cooperation activities.
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2.1.2 The Institute of Standards of Cambodia (ISC)
The Institute of Standards of Cambodia (ISC) is a government body established under the
MIME for the objective of national standardization and the facilitation of trade in accordance
with Law on Standards. The ISC, comprised of 50 staff members, is in charge of national
standards development, product testing and certification, education and advisory services, and
information resources. Also, the ISC is designated as the WTO/TBT enquiry point and
notification authority. The organizational structure of the ISC is provided in Figure III-2-1.
Figure Ⅲ-2-1 | Organizational Structure of the ISC
President
Vice President
Department of Standards Department of

Department of Department of
Development, Training Regulatory and
information Certification
and Consultancy Accreditation
ISC-Administration Standards Office 1 Administration Unit Administration Unit

and personnel
Information and Standards Office 2 Product certification Regulatory

TBT Enquiry piont
Standards Office 3 System Certification 1 Inspection
Library
Standards Promotion System Certification 2 Chemical substance
Management
Training and Consultancy
Accreditation and
registration
Although the ISC is the national body that is in charge of standardization and conformity
assessments, the ISC has performed poorly due to lack of efficient operating system and
supporting technical infrastructure such as reference data. In the field of conformity assessment,
ISC still lacks a quality system for carrying out the mandates of the ISC outlined in the Law on
Standards, which are: to carry out accreditation of conformity assessment bodies; and to
conduct system certification.
2.1.3 National Standardization Strategy
With a view of establishment for quality-based standardization policies, Cambodia has

adopted the following standardization strategies:
Develop national standards in various fields that match regional and international
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standards;
Ensure the participation of stakeholders in the standard development process and facilitate
the development of quality standards;
Raise awareness on the importance of standardization and quality management among
small and medium sized enterprises and enhance their capacity;
Promote voluntary standards to replace or complement technical regulations;
Facilitate implementation of standards to enhance quality of life;
Strengthen ISC’ s involvement in national, regional and international standardization
activities in the field of conformity assessment.
In addition, the ISC launched product quality and safety management schemes to ensure
Cambodian products’ conformance to standards as part of its policy to enhance the accessibility
of Cambodian products in the overseas markets.
2.1.4 The Development of National Standards
2.1.4.1 National Standard Development Principles
With the objective of effectively implementing the national standardization strategy,

Cambodia established the following principles for developing national standards:
Satisfy industries and consumers’ needs for higher product quality and safety.
Satisfy the general demands of manufacturers and consumers, reduce waste of resources
and eliminate unnecessary variety to benefit the national economy;
Guarantee the level of quality demanded by the market;
Establish standards based on principle of consensus and harmonize them with
international standards to the maximum extent feasible;
Meet the requirements of WTO/TBT Agreement.
2.1.4.2 The National Standards Council (NSC)
The Law on Standards of Cambodia states that Cambodian standards should be developed
under the authority of the National Standard Council (NSC). The NSC consists of the Chair - a
position held by the Minister of MIME - and four Vice Chairs - the Director General of ISC, the
Representative of the Ministry of Commerce, the Representative of the Ministry of Agriculture,
Forest and Fishery, the Representative of the Ministry of Health - and other 15 members
including the representatives of seven government agencies, the representative of the Institute of
Technology, Cambodia Chamber of Commerce, the Producer Association and the Consumer
Association, and the representatives of four universities.
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Figure Ⅲ-2-2 | Management Structure of the Technical Committee (Cambodia)
MIME
National Standards
Council
ISC
TC 1 TC 2 TC 3 TC 4 TC 5
Building & Chemical Food and Food Fruits, vegetable Management
Construction substance and processed and cereal system
materials products products products
WGs WGs WGs WGs WGs
The NSC has the authority to establish technical committees to support the council’ s
activities in various products and services. Currently, the council has established technical
committees in the following five areas: building and construction materials; chemical substance
and products; food and processed foods; cereals, vegetables and fruit products; and management
system. The technical committees are comprised of members representing government agencies,
private research institutes, universities, and industries and consumers.
2.1.4.3 Standard Development Process
Cambodia’ s Standards Development, Training and Consultancy Department (STCD) is the

main department in charge of the nation’ s standard development. Technical works for
developing Cambodian standards and related normative documents shall be carried out by the
respective technical committees and working groups approved by the NSC. Cambodia’ s
standard development process is as follows:
① After receiving a request from external and internal stakeholders who have determined
the need for a particular standard, a new work item proposal (NWIP) is submitted to the
NSC for approval;
② When the NSC approves the request for an NWIP, the project is assigned to a relevant
technical committee (TC) or working group (WG). Otherwise, a new TC or WG can be
established for the project;
③ The draft Cambodian standard prepared by the TC or WG is circulated for public
comment for 60 days;
④ The TC reviews public comments and reflects them to a final draft standard, which will
be reviewed by the Editing Committee of the STCD;
⑤ The final draft standard will be deliberated by the NSC, and then it will be sent to MIME
for approval;
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⑥ After acquiring the Ministry’
s approval, the standard is published in the National Gazette.
2.1.4.4 Revision and Maintenance of Standards
In Cambodia, standards are reviewed at least every five years to ensure that they are up to
date. When there are changes in technical needs or when there are valid requests for revision of
a standard, the standard can be reviewed earlier than the five year review cycle. For example, an
early review of standards can take place when a standard conflicts with an enforced regulation,
or when a foreign national standard that was referenced or adopted has been revised.
Before a standard undergoes review, a notification is put up in the National Gazette for
public comment for 60 days. Aside from this, the revision process is identical to the standard
development process, and the NSC determines whether to conform, revise or abolish a standard.
2.1.4.5 Resources for Standardization
Cambodia lacks human and financial resources for developing standards, and nor does it
have any institutional framework in place for disseminating the use of standards. A total of 43
staff members from the private sector and the ISC and other government bodies have
participated in overseas training programs on standardization and conformity assessment, but
they have not had the chance to have field experience or take part in international
standardization activities in international bodies such as the ISO technical committee. In
addition, Cambodia has not accumulated reference data and supporting data that are needed to
set the product specifications and system requirements in the standard development process, and
it also lacks a system for acquiring such data.
Although Cambodia established the NSC and technical committees, it still lacks the tools for
support as well as cooperation programs for encouraging expert participation in the standard
development process. And while most stakeholders have a low awareness on standards,
Cambodia does not have a program for raising awareness on the importance of standards
development.
2.1.5 Cambodia’
s National Standards
Cambodia has approved 70 standards: 52 standards in the field of electric and electronic
products including one test method; 12 standards in the fields of food and chemical; five
standards on systems; and one standard on protective helmet. Most of these standards have been
approved before the establishment of the NSC. The NSC has held two meetings since its
establishment, and has only approved one standard - Standard for Protective Helmets for
Motorcyclist - so far. Cambodia’s national standards and their adoption as a mandatory standard
are presented in TableⅢ-2-1.
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Table Ⅲ-2-1 | The Status of Cambodia’
Number of Standards
Sector Total
Voluntary Mandatory
Electrical and electronics 1 (test method) 51 52
Food 7 4 11
Chemical 1 0 1
System 5 0 5
Helmet 0 1 1
Total 14 56 70
Source: ISC
2.1.6 International Cooperation Activities
The ISC has been working to improve the nation’ s standardization and conformity
assessment system in order to enhance the competitiveness of Cambodian products and services
in the domestic and export markets.
In order to establish a partnership with regional and international bodies in the area of trade
and industries, the ISC has been participating in the ISO as a subscribing member since January
1995, and has been taking part in the IEC’ s Affiliate Country Program since the mid-2000s.
Currently, the ISC is preparing for upgrade of its ISO membership to correspondent member.
Since the year 1999, Cambodia’s MIME has participated in various regional standardization
activities, especially in the ASEAN Consultative Committee for Standards and Quality
(ACCSQ) and its working groups. Since Cambodia became a WTO member in October 2004,
the ISC has been acting as the WTO/TBT Enquiry Point and Notification Authority.
2.2. Conformity Assessment System

2.2.1 Accreditation of Conformity Assessment Bodies
Cambodia’ s conformity assessment system is very weak. The newly legislated Law on
Standards of Cambodia designates the ISC as the only accreditation body of Cambodia, and
states that the ISC alone can act as a certification body. However, it is the international practice
that to maintain impartiality, an accreditation body should not provide corresponding
conformity assessment service. In this regard Cambodia has not commenced any accreditation
activity yet. Due to such circumstances, Cambodia’ s conformity assessment bodies are seeking
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accreditation from foreign accreditation bodies, and only a few of conformity assessment bodies
in Cambodia are operated based on relevant international standards and guides.
2.2.2 Product Certification
Cambodia’ s product certification system started out as the product registration program
which was launched in 2001. However, under the product registration system, products were
registered based on the safety requirements that corresponding ministries set forth based on
overseas standards or related international standards. In 2004, the product registration system
was upgraded to a third party certification system based on the guidelines of ISO/IEC Guide 65
(General Requirements for Bodies Operating Product Certification System). The product
certification system uses Cambodian standards as basic documents for certification. In 2008,
under the support of UNIDO, the ISC obtained accreditation from the Norwegian Accreditation
Board (NAB) for bottled drinking water. Afterwards, the ISC issued 49 licenses to use the ISC
certification mark. The manufacturer who has received a license is permitted to use the ISC
certification mark on its products.
2.2.3 System Certification
The ISC has yet to conduct system certification and there are no other independent system
certification bodies in Cambodia. A total of eight ISC staff members have been acquired
qualification as provisional auditor for ISO/IEC 9001 (Quality management systems -
Requirements) and two members for ISO/IEC 14001 (Environmental management systems -
Requirements with guidance for use), respectively. However, these staff members have not had
any field audit experience under the supervision of a certified lead auditor. In accordance with
international rules, the provisional auditor needs to participate in at least four audits to become a
certified auditor. The ISC is preparing its own set of quality documents based on ISO/IEC
17021 (Conformity assessment - Requirements for bodies providing audit and certification of
management systems) in order to acquire an accreditation for management system certification
from a recognized foreign accreditation body.
2.2.4 Laboratories
There are many laboratories in Cambodia, but their testing capacities are limited and most
are government bodies. Currently, the Industrial Laboratory Center of Cambodia (ILCC) is the
only place that offers product testing services for product certification under the supervision of
MIME and other governmental agencies. Also, the Rubber Research Institute of Cambodia
(RRIC) is the only laboratory in Cambodia that received ISO/IEC 17025 (General requirements
for the competence of testing and calibration laboratories) accreditation (from the Vietnamese
accreditation body). The ILCC is currently undergoing accreditation assessment for the testing
of nonpathogenic microorganisms, and is planning to expand accreditation to pathogenic
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microorganisms.
Cambodia’ s major government-operated laboratories and their responsibilities are as follow:
Industrial Laboratory Center of Cambodia: this laboratory is based under the Ministry
of Industry, Mineral and Energy and provides testing services in the field of food,
chemicals and microbiology. The microbiological laboratory is presently in the process of
getting accredited for ISO/IEC 17025
Camcontrol Laboratory: this laboratory is based under the Ministry of Commerce and
operated mainly in the field of food, chemicals and microbiology like ILCC, but has
limited capacity for certain tests. The laboratory supports the inspection process by
providing a testing service to the inspection staff.
Pasteur Institute of Cambodia: this laboratory and the associated medical facilities is a
major resource in public health. The laboratories are extensive and encompass classical
pathology, virology, microbiology - both clinical and covering food and water, virology,
serology and general pathology.
Laboratory of the Department of Environment and Pollution Control: this laboratory
is based under the Ministry of Environment and the capabilities of the laboratory are
mainly in inorganic analysis of solids and liquids for pollution monitoring.
National Laboratory for Drug Quality Control: this laboratory is under Ministry of
Health. The National Laboratory for Drug Quality Control is responsible for approving
imported and domestically produced pharmaceuticals and is also involved, as part of its
licensing function, in the auditing and approval of quality control laboratories in the
domestic pharmaceutical industry including state enterprises.
National Animal Health and Products Investigation Center: this center is a part of the
Ministry of Agriculture, Forestry and Fisheries. It provides full technical support for the
Department of Animal Health and Production. The Department of Animal Health and
Production is responsible for inspection to ensure good husbandry of farm animals and
also licenses and inspects slaughterhouses and carcasses through a network of seventy
inspectors operating at the provincial level. The center is functioning in bacteriology,
hematology, pathology, parasitology, serology and virology.
Rubber Research Institute of Cambodia: this has issued a regulation (Prakas)
specifying the requirements of technically specified rubber, known as Cambodia Specified
Rubber (CSR). The institute has a reasonable laboratory capable of carrying out the main
chemical and physical tests. Recently, the laboratory had participated successfully in a
round robin inter-comparison organized by the Malaysian Rubber Board. Consequently,
the International Rubber Association (IRA) had agreed to recognize RRIC as an IRA
regional laboratory. The RRIC is accredited for ISO/IEC 17025.
Roads and Public Works Laboratory: the Roads and Public Works laboratory
belonging to the Ministry of Transport and Public Works. This laboratory mainly
undertakes testing of aggregates, cement and similar materials for government projects.
Fisheries laboratory: the laboratory is under the Ministry of Agriculture, Forestry and
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Fisheries. The laboratory is a member of Southeast Asian Fisheries Development Center
(SEAFDEC). The laboratory is presently engaged in identification of fish species. Only a
few laboratory equipments, mainly microscopes, are available in the laboratory. The
laboratory is in need of analytical instruments to determine heavy metals (mercury, lead,
cadmium etc.) and histamine in fish.
2.3. Metrology System

MIME’ s Department of Metrology (DoM) acts as the National Metrology Institute of
Cambodia (NMIC). The DoM was established in 1999, and is comprised of 19 staff members
including 16 technical staffs. In accordance with the newly legislated Law on Metrology, the
NMIC will be divided into Metrology Laboratory, Legal Metrology Department, Development
and Cooperation Metrology Department and Legislation Department. NMIC keeps only primary
standard on mass and does not have a quality system according to the ISO/IEC 17025.
There are provincial offices of MIME in all 24 provinces in Cambodia that carry out
verification of measurement instruments under the supervision of the NMIC.
There is currently no legal metrology regulation established in Cambodia. Cambodia plans

to legislate a sub-law to the Law on Metrology that covers the definition of international system
of units, pre-packaged goods, weights, scales, standard containers, fuel dispensers and gauges,
and water gauges.
Cambodia joined the International Organization of Legal Metrology (OIML) in 2000 as a

corresponding member, and joined the Asia Pacific Legal Metrology Forum (APLMF) as a full
member in 2001.
Cambodia was admitted to ASEAN in 1999. The ASEAN member nations are cooperating
in the area of legal metrology for the purpose of facilitating the elimination of technical barriers
to trade caused by legal metrology, thereby contributing in enforcing the ASEAN Free Trade
Area. For the last several years, the ASEAN ACCSQ - Working Group on Legal Metrology has
pursued harmonization of legal metrology requirements among ASEAN nations, and NMIC is
participating in the working group.
2.4. Technical Regulations

2.4.1 Technical Regulations
In accordance with the newly legislated Law on Standards of Cambodia, the NSC may
approve a standard as a mandatory standard for such reasons as the enhancement of public
health and safety and environmental protection on the request of a regulatory body. So far, the
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NSC has only approved one standard - standard for Protective Helmet for Motorcyclist - as a
mandatory standard.
Cambodia’ s MIME has applied safety or quality regulations on some Cambodian products
based on Cambodia’ s national standards. Among Cambodia’ s 70 national standards, 56 are
designated as mandatory standards, of which 51 are on electrical appliances and the others are
on vinegar, fish sauce, bottled drinking water and food labeling (see Table III-2-1). Currently,
MIME is the only government body in Cambodia that uses standards as the basis for technical
regulations.
2.4.2 Conformity Assessment Procedures on Regulated Products
Products subject to regulation should be attached with a certification mark that indicates the
product’ s conformity with Cambodian standards to be eligible for sales in the Cambodian
market. A certified manufacturer undergoes a periodic follow-up inspection at least every six
months. The certification procedure as well as periodic surveillance inspection includes a
factory inspection and tests on product samples collected from the market or the factory. The
license for the product certification mark is valid for three years and can be extended for another
three years after a successful renewal inspection. If the renewal inspection finds that the product
does not conform to Cambodian standards, the license for the certification mark is suspended or
revoked.
In accordance with the Law on Standards of Cambodia, foreign manufacturers of regulated

products should also acquire a license to use the product certification mark before placing their
products in the Cambodian market. To acquire a license for the product certification mark,
Cambodian and foreign manufacturers should prepare a conformity certificate issued by an
accredited certification body attached with test report(s) and factory inspection report(s)
recognized by the ISC/MIME. After all required documents are successfully submitted to the
ISC/MIME and reviewed for validity, a license to use the product certification mark is issued to
manufacturers.
If a manufacturer has only prepared product test report and factory inspection report issued
by an agency recognized by ISC/MIME, the manufacturer should make an application for
product certification to the ISC before receiving a license for the product certification mark.
In addition to the conformity assessment results issued by a Cambodian government agency,

the ISC/MIME also recognizes the conformity assessment results of domestic and overseas,
laboratories and product certification bodies accredited based on the ISO/IEC 17025 and the
ISO/IEC Guide 65, respectively.
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2.4.3 Imported Products
In the case of foreign manufacturers seeking to market a regulated product in Cambodia,

they should acquire a license to use the product certification mark, sign a form of agreement on
the use of the license, and then designate a local representative that is responsible for selling or
using the licensed products in Cambodia.
As for importers, they should apply for a product release permit by submitting import
documents and the license to use the certification mark to the ISC/MIME. After reviewing the
submitted documents and gaining the MIME’ s approval, the ISC issues a product release permit.
If an importer does not have a license to use the certification mark, it should acquire a
license in accordance with the conformity assessment procedure on regulated products.
Imported products can be released from customs and be stored in a designated place until a
license is acquired. In this case, the license will be applied only to products that are already
imported (i.e., under storage).
3. Overview of Korea’
s Standardization and Conformity
Assessment System
Korea’ s standardization and conformity assessment system conforms to the WTO/TBT
Agreement. Since Korea operates its standardization and conformity assessment system based
on international standards and good practices, it does not seem necessary to provide a detailed
account of the procedures of Korea’ s standardization and conformity assessment system. In this
regard, Korea’ s current system and results of its operation will be reviewed, in addition to the
standardization policies that Korea implemented to support economic development in the early
days. It is expected that Cambodia will be able to draw a lot of good examples from Korea’ s
experience and find it helpful in setting a direction for its standardization policy.
3.1. Korea’
s Standardization System
3.1.1 Korea’
s Standardization Body
On August 13, 1949, the Korean government legislated the Inspection of Agricultural
Products Act which stipulated test methods and standards for government purchase of
agricultural products. Shortly after, the government pursued the establishment of standards for
military supplies. With progress in government industrialization policies and planning for
modernization of military equipments, standardization became a government-led project so that
the Industrial Standardization Act was legislated and promulgated on September 30, 1961 for
the purposes of: enhancing the quality and manufacturing capacity of mining and industrial
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products; simplifying the trade process; and increasing fairness of the trade process. In
November of 1961, the Department of Standards was set up in the Ministry of Trade and
Industry, and in February 1962 the Industrial Standard Council was established as an advisory
to the Minister of Trade and Industry, and the Korean Standards Association (KSA) was
launched for the dissemination of standards. With the establishment of such bodies,
standardization became an official government scheme.
The Industrial Standard Council is now comprised of experts from various sectors including
manufacturers, consumers, academia, and research institutes. The Council is divided into
standard council and industry committees (division councils). The standard council deliberates
policy related matter for the implementation of the industrial standardization act. The division
councils determine technical policies and programs of standardization for their own sector of
industry. The division councils deliberate on matters such as establishment, revision,
confirmation and withdrawal of the Korean Industrial Standards, and the designation of
products subject to KS marking. The division councils appoint technical committees to
undertake the actual preparation of standards in specific fields. Knowledge and experience of
interest groups such as manufacturers, users, government departments and universities are
pooled in these committees. The technical committees set up working groups, when necessary.
Government-led standardization increased in terms of both quantity and quality. However, in

order to integrate administrative bodies governing industrial matters to increase efficiency of
industrial policies, nurture heavy and chemical industries (HCI) and to better support product
quality management, the Industrial Advancement Administration (IAA, Jan.16, 1973~Feb.9,
1996) - a government body combining the Ministry of Trade and Industry’ s Department of
Standards, the Central Metrology Department and the Mining Registration Department - was
launched on January 16, 1973. In addition, the National Industrial Research Institute - an
agency for industrial technology research and development, and test and analysis - was renamed
as the National Industrial Standard and Testing Institute and supported IAA in the
implementation of industrial standard related projects. Until its abolishment in 1996, the IAA
was in charge of industrial technology development, industrial standardization, international
certification, legal metrology, and product quality and safety management.
The IAA successfully supported standardization and other industrial development projects
launched as part of government-led industrial policies. In the 1990s, Korea’
s industries grew to
match that of advanced nations in certain industrial sectors, and the private sectors’
standardization competencies also increased. Also, R&D capacities in the private sector also
improved and awareness on the importance of private sector standards (de facto standards)
increased in areas where technology development progressed rapidly. In addition to this, Korean
industries’quality management capacity and product quality also improved.
As the Small & Medium Business Administration was established in 1996 to strengthen
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support for the relatively weak small and medium sized businesses, the IAA was abolished and
the Administration’ s duties involving industrial standardization, legal metrology, and product
quality and safety management were given to the National Industrial Technology Institute
(NITI, formerly the National Industrial Standard and Testing Institute). NITI was later renamed
as the Korean Agency for Technology and Standards (KATS) in 1998.
The KATS, a governmental body within the Ministry of Knowledge Economy, comprised of
221 staff members was given the following missions: to build a foundation for a strong
knowledge-base society with competitive national standards system harmonized with
international standards; to secure the safety of consumer products, electrical appliances, etc. and
to enhance the quality of life for the people. To carry out the missions, KATS has been involved
in various activities such as: establishing Korean Industrial Standards (KS) and participating in
the international standardization activities for enhancement of national competitiveness;
building up infrastructure for technology development such as the national conformity
assessment system and metrology system, and managing new technology promotion programs
for reinforcement of industrial competitiveness; safety management of consumer products,
electrical appliances, etc. for consumer protection and public benefits; and operating central
WTO/TBT enquiry point to provide foreign and domestic standards-related information, and
assisting Korean companies in resolving any TBT issues encountered in the export markets. As
for new technology promotion programs, KATS is operating the NEP (New Excellent Product)
program among others to recognize outstanding products which have been developed through
the use of state-of-the-art technologies uniquely developed for the first time in Korea or to
innovative new technologies improved from already existing technologies, and to become
successfully commercialized.
On the other hand, the Korean Standards Association (KSA) - currently a government
affiliated organization operated under KATS - implements various activities to facilitate
dissemination of industrial standards and improvement of quality management in Korea. KSA is
the designated training and education institute on standardization and quality management in
Korea, and has responsibility for the administration of the Korean National Quality
Management Award. Awards are granted to companies that have accomplished considerable
performances in quality improvement, cost-cutting and productivity improvement through
company-wide quality management activities.
3.1.2 Legal Basis for Standardization
The National Standards Act promulgated in February, 1999 is the most supreme law on
standardization in Korea. The Act provides basic requirements for establishing the national
standards system, and its objective is to innovate technology, upgrade the industrial structure,
and promote the information system through standardization, and therefore contribute to
strengthen national competitiveness and public welfare. The Act is to be applied to all economic
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and social areas on which national standards based on technology should be applied. In
accordance with the Act, the Korean government is drawing up policies and taking appropriate
measures to establish and upgrade the national standards system and also tries to ensure the
system to be operated and managed in a manner that is consistent with international good
practices.
In accordance with the National Standards Act, the government has been establishing a five-
year plan on national standards covering overall national standardization activities and
conformity assessment procedures since 2000. The plan is deliberated and finalized by the
National Standard Council, which is chaired by the Minister of Knowledge Economy and
participated by the representatives of competent ministries and government agencies. The
Administrator of KATS also takes part of the Council as the Secretary.
The Industrial Standardization Act has been amended several times since its promulgation
on September 30, 1961. The objective of the Industrial Standardization Act is: to enhance the
quality of industrial products and services related to mining and industrial activities, and
increase manufacturing efficiency and manufacturing technology by establishing and
disseminating adequate and reasonable industrial standards; and to enhance industrial
competitiveness and develop nation’s economy by simplifying the trade of mining and industrial
products and encouraging reasonable consumption of the products.
Industrial standards established in accordance with the Industrial Standardization Act are
referred to the Korean Industrial Standards, or KS. The Industrial Standardization Act stipulates
matters related to industrial standards such as: organization of the Industrial Standard Council;
the process for establishing the KS; the permit to use the KS mark; and unification and
simplification of mining and industrial products and parts.
The Framework Act on Telecommunications was established in 1991 for the purpose of
enhancing public welfare and interest. The Act states the basic requirements on
telecommunication to efficiently manage telecommunication industries and encourage its
development. In accordance with the Act, the Korea Communications Commission has
established and disseminated standards related to telecommunications, the Korea Information
Communication Standard (KICS). However, as for standards subject to the KS in accordance
with the Industrial Standardization Act, the relevant KS shall apply.
In addition to regulations on national standards stated above, competent governmental

bodies operate technical regulations for the protection of public safety, health, national security
and the environment.
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Figure Ⅲ-2-3 | Korea’
s Legal System on Standardization
National Standards Act
Industrial Framework Act on Ministerial

Standardization Act Telecommunications Laws/Regulations
KS (23,372) KICS (492) Technical Criteria
National Standard Technical Regulation
3.1.3. A Historical Overview for Korean Industrial Standards

Development
Starting from 1961, Korea pursued industrialization based on the 5-year plan for economic
development, and also encouraged standardization as a means to achieve its long-term
economic development plan. As time passed, national standards were established to efficiently
support the economic development under the objective of developing manufacturing
technology, narrowing the technology gap among industrial sectors, protecting consumers,
establishing order in distribution, and encouraging the growth of the domestic market. At that
time, standardization was focused on areas such as commodities, measurement units, materials
and components, and common test methods.
In 1963, Korea adopted the KS-marking system to encourage companies to use national
standards and, start internal standardization efforts and quality management to increase
manufacturing competitiveness. In 1965, the government stipulated that when government
bodies and public organizations procure, they should give considerations to purchase KS
marked product preferably, which successfully made the Korean industrial standard system
better known to the public and the corporate community, and helped the system take root. In
other words, it can be said that the KS-marking system offered a major boost to Korea’ s
industrial development.
Thanks to the success of the 5-year economic development plan and continued economic
development policies, growth in all industries was witnessed in Korea during the 1970s. Also,
the nation’s industrial structure was upgraded along with continued expansion of key industries.
As a result, a shift from labor-intensive industries to technology-intensive industries took place.
In terms of industrial standardization, the need to increase the number of national standards and
the need to establish standards for high-quality materials, parts, and, heavy and chemical
products emerged with the expansion of the country’ s economy.
In response to such trends, the Ministry of Trade and Industry established a 10-year
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industrial standardization plan effective from 1971 through 1980. With the aim of supporting
the government’ s plan to modify the industrial structure to focus more on the heavy and
chemical industry (HCI), the 10-year plan covered issues such as the establishment of standards
in the field of HCI, shifting the focus from standards on consumer goods to standards on
producer’ s goods, and the adoption of international standards to encourage export.
In order to increase the quality and quantity of national standards to match that of advanced
industrial economies, the Industrial Advancement Administration was launched in 1973, and
every year around 500 new national standards were adopted. As a result, Korea possessed
around 6,700 national standards by the late 1970s. The standards introduced during this period
were developed based on foreign standards such as the Japanese Industrial Standards (JIS) or
the American Society for Testing and Materials (ASTM).
In the 1980s, the economy continued to grow and industrial development steadily progressed
thanks to the government’ s focused investment in HCIs and the government’ s priority on
technology development since the mid-1970s. Also, during the 1980s, demand for a more open
market increased and barriers to trade also increased as Korea’ s export expanded and trade
surplus grew. Moreover, as the GATT Standards Code came into effect in 1980, the
international harmonization of industrial standards became an imperative to reduce trade
barriers and facilitate export.
Starting from 1984, Korea pursued harmonization of national standards with international
standards and the standards of advanced economies, in an effort to upgrade Korean standards to
an internationally acceptable level to enhance the quality of Korean products and ensure that
Korean products will be more competitive in the international market. In 1987, the government
focused on encouraging the participation of the private sector to achieve industrial upgrading.
Under this goal, the government launched projects to encourage the establishment of standards
of private sectors and to ensure that company standards satisfy KS requirements.
From 1988 to 1992, the government made a transition from simply copying the standards of
developed nations to developing its own set of standards based on private sector standards. In
1993 through 1997, the 5-year plan on upgrading industrial standards was established to support
the government’s new 5-year economic development plan.
With the end of the Cold War and the advancement of IT technology, the world formed a
single global market, making each country’ s national standard meaningless and giving rise to
the need for a single global standard. Under such circumstances, the international
standardization organization’s role and function increased, creating an environment in which the
country or company to secure an international standard ahead of others takes all and the others
who failed to do so bears heavy economic burden.
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To adapt to such changes, Korea established the National Standards Act in 1999, and also
established the 5-year plan on internationalizing the Korean Industrial Standards for the years
2000 - 2004. As part of the 5-year plan, KATS focused its efforts on departing from the old
system of referencing JIS and harmonizing the existing national standards with international
standards (ISO, IEC, etc.) or adopting international standards. As a result, by the end of 2009,
99.8% of all KS standards having corresponding international standards was harmonized with
international standards or referenced the relevant international standards, and the number of
national standards increased to 23,372.
In terms of international cooperation, Korea could expand exchanges with the overseas
standardization bodies after joining the ISO and IEC - the two major international
standardization bodies - in 1963. However, it was only since the 1990s Korea became actively
involved in international standardization activities and bolstered the nation’ s status in the
international standardization community. In 1991, Korea was elected to the ISO Council, and
consequently, Korea dispatched an officer to the ISO headquarters for closer cooperation with
the ISO, and also began to host international standardization meetings. Recently, the number of
Koreans taking the post of technical chair and secretary in the ISO and IEC is on the rise, and
more Korean standards on technology and products are being adopted as an international
standard. In 1980, Korea signed an agreement with Japan on cooperation in the area of
standards, and since then, Korea has continued to strengthen cooperation with overseas
standardization bodies. Currently, Korea has established collaborative relations with
standardization bodies in 30 countries around the world, and has also launched projects to share
Korea’ s experience in standardization with developing countries.
Figure Ⅲ-2-4 | Development of Korean Industrial Standards
< The Industrial Advancement Administration >
The Industrial Advancement Administration (IAA, Jan.16, 1973~Feb.9, 1996) was in charge
of government policies on modernization and industrialization and oversaw projects for
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enhancing product quality, supporting industrial technology, and disseminating the metric
system in addition to industrial standardization. In particular, with the objective of strengthening
export in the HCI and enhancing the competitiveness of Korean products in the international
market, the IAA raised awareness on the importance of quality management and actively
promoted the importance of cost cutting efforts through streamlining of management and
enhancing production efficiency. To be more specific, the Administration offered support to
companies conducting quality management not only on certification and approval procedures,
but also on finance and taxation as well. By doing so, the IAA could pursue both industrial
policies and quality management at the same time.
In order to strengthen the competitiveness of domestically manufactured products, the IAA

implemented quality assurance and quality promotion programs to enhance product quality.
As part of the quality assurance program, the IAA strengthened the quality inspection
system to raise the quality of domestically manufactured products to meet international
standards. Quality inspection included inspection of exported goods to promote export, and
inspection of domestic products (KS-marking system) to guarantee and enhance product quality
in order to protect consumer rights. For the purpose of quality inspection, the IAA designated
five government-operated inspection bodies and nine private inspection bodies.
The IAA pursued diversification of the quality management project against companies
seeking quality inspection, which included efforts such as: internal company standardization;
securing quality management staff by making it mandatory for companies to hire a quality
control engineer; and extending quality management training to the management.
Also, in 1974, the government made it mandatory for manufacturers to display the quality
labeling regarding the composition, performance, usage, and storage method for 11 categories
of products to better inform consumers. For electrical appliances and high-pressure gas
containers, the government applied mandatory safety management regulations.
In addition to quality assurance programs, the IAA also initiated quality promotion projects.
The IAA hosted a quality control competition and awarded best products and good practice
companies. For products that received a quality award, the IAA launched promotional activities,
offered privileges such as exemption from tests and testing fees needed for quality assurance
procedures, and gave priorities to products in public procurements in order to expand quality
management practices across industries. The IAA also provided formal training and education
programs on quality management and quality control techniques as well as workshops and
seminars on field experience and the outcomes of quality management.
To establish a firm metrology system, the IAA tested meters and promoted the use of the
meter unit. The IAA also supported export of measurement instruments. At first, IAA support
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was focused on the export of labor-intensive glass thermometers, but later expanded to density
meters, pressure gauges, weighing scales and watt hour meters. The IAA also worked to replace
imported measurement instruments with domestically manufactured measurement instruments, and,
as a result, the manufacturing business of measurement instruments went from a small-scale manual
industry to a mass production industry covering products such as gas meters, taxi meters, gasoline
meters, watt hour meters, pressure gauges, thermo-humidity meters and electric thermometers.
3.1.4 Korea’
As of latter 2009, Korea possesses 23,372 industrial standards, among which chemical, ceramic
and textile related standards account for 24%, machinery standards 18%, electric and electronic
standards 14%, general areas such as terminology and symbols 5%, construction, minerals and
metals 13%, information technology 8%, transportation, shipbuilding and aviation 11%.
Also, 45% of the 23,372 standards are harmonized with the ISO standards, and 17% are
harmonized with the IEC standards. This represents more than 99% of all KS standards that
have corresponding ISO and IEC standards. The remaining 38% of the standards are either
unique to Korea or standards that are established based on other countries’standards. The KS
standards that were established based on foreign standards are undergoing a process of review
and modification. In addition to this, Korea has replaced its KS numbering system with the
system used in advanced nations. Consequently, KS standards harmonized with the ISO or IEC
standards currently use the following numbering format: KS ISO/IEC XXXXX.
In addition to the KS standards, Korea also possesses 492 KICS standards managed by the
Korea Communications Commission.
Figure Ⅲ-2-5 | Categorization of Korean Industrial Standards
Source: KATS
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-Part 3_Factory Establishment
3.1.5 The KS-Marking System
The KS-marking system was introduced in 1963 with the objective of: encouraging
manufacturers to adopt internal standardization and quality management to enhance product quality
and manufacturing efficiency; and facilitating the production and distribution of good quality
products and services (services were added in 2003) to protect consumers.
The KS-marking system is a third-party product certification system for assessing whether a
manufacturing process can produce and supply products that conform to the Korean Industrial
Standards (KS). To receive the KS certification, manufacturers should undergo factory inspection
and product testing. A supplier that has received a KS certificate (hereinafter ‘KS certified’suppliers)
is eligible to use the KS mark (㉿) on its products, packages and delivery notes. Moreover, they are
exempt from all or part of the mandatory testing or approval procedures stated in 15 technical
regulations applied to electrical appliances and other products.
The mining and manufactured products subject to KS certification are designated based on the
following criteria: ① an item’ s conformance to KS standards should be indicated to protect
consumers as its quality cannot be easily identified by consumers ② an item is a raw material that
has a significant effect on other industries ③ an item’s quality may deteriorate significantly due to
monopoly and oligopoly, or price fluctuations. The Administrator of KATS will determine whether a
KS certification is necessary, and the Industrial Standards Council will grant the KS certification
after deliberations. In the case of services, the following criteria will apply: ④ a service’ s
conformance to KS standards should be indicated to protect consumers and prevent from any harms
to consumers ⑤ a service supports the manufacturing industry and has a significant influence on
other industries ⑥ a service needs quality improvement to support government policies or to better
serve the public.
1,376 items in 23,372 KS standards are eligible for KS certification (as of December 2009), and
some annual figures of KS certification is presented in Table III-2-2.
The KS certification system not only contributed in enhancing the quality of domestically
produced products by strengthening product quality and increasing productivity, but also made great
contributions to the nation’
s economic development and consumer protection. So far, the government
has made diversified efforts to expand the use of the KS certification and encourage the public to
choose KS-marked products. Such efforts included placing priority on KS certified products in
government procurement plans, exempting KS-marked products from product tests in other quality
assurance schemes, hosting exhibitions on KS-marked products, discouraging the distribution of
non-conformant products, and giving priority to KS certified companies in government-led
technology innovation projects.
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Table Ⅲ-2-2 | Some Annual Figures of KS Certification
Year 1970 1980 1990 2000 2009
Item 145 395 951 1,013 849
No. of Factory 269 665 2,951 5,498 6,063
Source: KATS
The KS certification system had been directly operated by the government, but in July 1998, the
government designated the KSA as the official KS certification body. Since the KS certification
system was established in 1963, which is before the establishment of international conformity
assessment procedures (i.e. according to ISO/IEC guide 65) , some of the certification procedures do
not match international good practices. In this regard, the government is planning to revise related
regulations to upgrade the KS certification system.

In Korea, three government-designated accreditation bodies are operated in accordance with the
international standards (i.e., ISO/IEC 17011): the Korea Accreditation System (KAS) and the Korea
Laboratory Accreditation Scheme (KOLAS) run by the government body KATS, while accreditation
of management systems is managed by the non-profit private body, Korea Accreditation Board
(KAB).

s Conformity Assessment System
Goverment
Designation
▼ ▼ ▼
▶ Accreditation KAS KOLAS KAB
Body ISO/IEC 17011 ISO/IEC 17011 ISO/IEC 17011
▶ Accreditation ISO/IEC ISO/IEC ISO/IEC 17025 ISO/IEC

Criteria Guide 65 Guide 34 ISO/IEC 17020 17021
▼ ▼ ▼ ▼
▶ Conformity Product Test, Calibration, Management
RM Production System Cerficaion
Assessment Certification Inspection (QMS, EMS)
▶ Conformity Assessment Calibration, ISO Guide 31, 35 Test, Calibration, ISO/IEC 9001
Criteria Requirement Inspection Methods ISO/IEC 14001
▼ ▼ ▼ ▼
Customers
Source: KATS.
All three accreditation bodies stated above - KAS, KOLAS and KAB - are members of the
corresponding regional and international accreditation cooperation, and have joined multi-lateral
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arrangements (MLA) in the area of testing, calibration, product certification, and, quality and
environmental management systems to secure credibility of conformity assessment results. In regard
to the accreditation of inspection bodies and reference material producers (RMPs), Korea is
preparing to join the Asia Pacific Laboratory Accreditation Cooperation (APLAC) MLA.
Table Ⅲ-2-3 | Operation of Korea’

s Conformity Assessment System
(As of Dec. 31, 2009)
Membership to No. of Joining Regional International MLA
AB Field
Regional Body CABs MLA (No. economy)
KOLAS 1995 (APLAC) Testing 349 1998 ILAC-MLA (55)
Calibration 187 2001 ILAC-MLA (55)
Inspection 85 -
RM Producer 9 -
KAS 2001 (PAC) Product Cert. 11 1999 IAF-MLA (30)
KAB 1995 (PAC) QMS 34 2004 IAF-MLA (40)
EMS 30 IAF-MLA (36)
Source: KATS
APLAC: Asia Pacific Laboratory Accreditation Cooperation
ILAC: International Laboratory Accreditation Cooperation
PAC: Pacific Accreditation Cooperation
IAF: International Accreditation Forum
In order to effectively support Korean industries, KATS has worked to strengthen the capacity of
laboratories, which includes efforts such as securing testing facilities and equipments, enhancing the
competency of testing personnel, securing the reference materials needed to acquire accurate testing
results, and developing proficiency testing programs. Thanks to such efforts, KATS was able to
expand the scope of accreditation and increase the number of accredited laboratories, as presented in
TableⅢ-2-3,Ⅲ-2-4. Currently, the accreditation system became firmly established and it is becoming
more widely used in government and public domains.
Table Ⅲ-2-4 | Accreditation data of Laboratories

(As of Dec. 31, 2009)
Testing Field No. of Laboratory Testing Field No. of Laboratory
Mechanical 140 Sound & Vibration 18
Chemical 191 Optics & Optometry 8
Electrical 3 Medical 3
Heat & Temperature 16 Biology 38
Non-destructive 6 Forensic 8
Source: KATS
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In order to increase the credibility of conformity assessment results, KATS is strengthening the
training and education for assessors, quality managers, and technical staffs of the conformity
assessment bodies. To maintain the quality of such education and training programs, KATS has
designated four training facilities, and has also accredited five proficiency test providers in various
fields. As of year 2009, the number of registered assessors stands at 589.
The accreditation system is operated on a voluntary basis, and is also used in the conformity
assessment procedures for implementing technical regulations. The KOLAS accreditation system is
recognized in 25 technical regulations. Among them, 17 technical regulations only accept the reports
of KOLAS-accredited laboratories. In the case of regulations on the safety of electrical appliances,
certification bodies have acquired KAS accreditation since they are required to establish a quality
system that satisfies the ISO/IEC Guide 65.
Korea’ s ISO 9001/14001 certification market stands at around 157 billion Won (as of 2009), and
34 certification bodies operated under KAB occupy 37% (58 billion Won) of the market, while 52
foreign certification bodies take up the remaining 63% (99 billion Won) of the market. A total of
58,758 ISO 9001/14001 certifications have been issued by the end of 2009, of which domestic
certification bodies issued 21,497 certifications while foreign certification bodies issued 37,261
certifications (63%).
Table Ⅲ-2-5 | Status of Management System Certification in Korea

(As of Dec. 31, 2009)
AB ISO/IEC 9001 ISO/IEC 14001 Sum
KAB 15,616 5,881 21,497
Foreign AB 28,078 9,183 37,261
Total 43,694 15,064 58,758
Source: KATS
By the end of 2009, there was a total of 4,381 management system auditors registered with the
Korea Auditor Registration, or KAR (assessors only registered with foreign auditor registration
bodies such as the IRCA were excluded).
3.3. Technical Regulations

In Korea, there are around 20 laws that lay out 86 technical regulations on public safety and
health, and environmental protection. Some of the technical regulations are based on the KS
standards, but most of them have been developed by regulators based on their needs. Also, there are
17 technical regulations that use accredited laboratories, and the other technical regulations use
laboratories designated by regulators rather than to limit laboratories to those that satisfy
international standards.
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A total of 39 technical regulations demand mandatory certification and 13 out of the 39
regulations had their own mandatory certification mark. In order to resolve corporate burdens
coming from overlapping conformity assessment procedures among different technical regulations,
the Korean government recently revised the relevant provisions in the National Standards Act and
introduced a modularized conformity assessment procedure. In addition, 13 mandatory certification
marks were integrated into the KC mark - a new national unified mark which stands for“Korea
Certification”
.
3.4. Measurement System

For the purpose of conducting research in the area of measurement science and establishing and
disseminating standard measures, the Korea Research Institute of Standards and Science (KRISS)
was established in 1975 as the national measurement institute (NMI) of Korea. Among the 385 staff
members working for KRISS, 244 are R&D personnel. KRISS has registered 934 critical
measurement capabilities (CMC) with the International Bureau of Weights and Measures (BIPM)
and their calibration/measurement certificates are recognized by other NMIs. KRISS has developed
660 certified reference materials, and offers precision measurement training in 29 fields.
Laboratory accreditation is conducted by KOLAS, an organization operated under KATS.

KOLAS is also in charge of accreditation of reference material producers in accordance with the ISO
Guide 34 (General requirements for the competence of reference material producers). Through
KRISS, the measurement results of KOLAS-accredited laboratories maintain traceability to
international standards. Currently, nine reference material producers producing 92 kinds of reference
materials are accredited by the KOLAS.
KATS oversees some legal metrology related matters as well. Also, the Weights and Measures
Act which deals with the nation’ s legal metrology system covers overall metrology activities
including: measurement methods and management of measuring instruments for the objective of
upgrading the nation’
s industries and building a fair commercial order by maintaining the accuracy
of measuring instruments and using legal metrology units.
Measuring instruments whose accuracy needs to be guaranteed for commercial or certification

purposes are designated as instruments subject to the type approval. There are 18 kinds of measuring
instruments subject to the type of approval, and for these instruments, mandatory regular inspections
or validity periods apply.
Those who manufacture, import, process or sell pre-packaged products should conduct voluntary
quantity checks in the product manufacture and packaging stage, and should establish a verification
system for the permissible error range and seek approval from the designated conformity assessment
body. When a pre-packaged product satisfies the requirements for the Declaration of Conformity, the
manufacturer may declare that the product contains the quantity stated on the product label, and also
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use the“ ”mark on the product container or package. In accordance with the Weights and
Measures Act, the Korea Association of Standards & Testing Organization (KASTO) is designated
as the conformity assessment body.

s Measurement System
Measurement Legal Standardi- Laboratory

Standards Metrology zation Accreditation
▶ International CGPM/CIPM OIML ISO/IEC ILAC
▶ Regional APMP APLMF PASC APLAC
▶ National KRISS KATS
RM Calibration Testing
Producer Laboratory Laboratory
CGPM: General Conference on Weights and Measures

CIPM: International Committee for Weights and Measures
APMP: Asia Pacific Weights and Measures
OIML: International Organization for Legal Metrology
APLMF: International Organization for Legal Metrology
PASC: Pacific Area Standards Congress
4. Recommendations for Enhancement of the

Standardization and Conformity Assessment System
in Cambodia
4.1. Standardization System

The development and maintenance of standards plays an important role in enhancing the
manufacturing efficiency, increasing corporate competitiveness by enhancing product quality,
expanding export, and supporting government policies for public health, safety, and environmental
protection. When we look at the number of standards in major countries, Korea has 23,372 standards
while U.K. has 32,980, U.S. has 9,500, and Japan has 10,173. Looking at the international
standardization status as latter 2009, the ISO owns 17,041 standards, the IEC 5,213, and the ITU
3,100. In contrast, Cambodia only owns 70 standards, lacking many essential standards required to
ensure public safety and fair commercial activities. In this regard, Cambodia should focus its
capacity on securing the standards for supporting government projects for industrial development
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and trade expansion, and also on establishing standards for enhancing the people’
s quality of life.
In order to secure such standards, Cambodia should identify the needs for standardization through
active survey among stakeholders and make effective plans for standardization. When establishing
standardization plans, Cambodia should set priorities considering factors such as the nation’ s core
industries, export-led industries, import substitute industries, and industries that should be regulated
to protect public health and safety, and the environment. In particular, standards regarding public
health and safety, and environmental protection should be adopted and enforced as mandatory
standards. Moreover, in addition to industrial product standards, Cambodia should develop standard
test methods to assess a product’ s conformity to the relevant standards.
Cambodia’ s core industry is the food industry, and its core export product is textiles and
garments, which accounts for 46% of the nation’ s overall industries (as of 2008). In order to nurture
the agriculture and processed food industry and the garment industry and to facilitate export,
Cambodia should secure and disseminate standards for enhancing the quality of foods and garments,
and for reaching the technical standards required by their importing counterparts. Cambodia does not
have any standards in the field of construction - an industry that accounts for 27% of the Cambodian
industries. Therefore, Cambodia needs to secure construction related standards to ensure public
safety and to nurture the construction materials industry. Also in other industries, Cambodia needs to
establish and implement standardization support plans to successfully achieve the government’ s
industrial development goals.
For a country to develop its own set of standards, it should have a relevant technical infrastructure
and a developed industry. Also, a lot of time and manpower should be invested to develop reliable
standards. Considering these facts, Cambodia should consider adopting the WTO member states’
standards or international standards as national standards in order to efficiently secure standards
required to nurture Cambodian industries and boost the nation’ s export within a short timeframe.
Developing national standards based on international standards will help Cambodia better abide by
the WTO/TBT Agreement and facilitate the export of Cambodian products. When adopting
international or foreign standards as a national standard, Cambodia should make any necessary
modification to the standards after the technical committee conducts a review focusing on such as the
nation’s technology level and fundamental climatic or geographical factors.

In order to effectively support national industrial development plans and other government
policies, Cambodia should secure conformity assessment capacities that will guarantee that product
quality will conform to standards. Cambodia should also possess conformity assessment capacities
needed to ensure importing counterparts that exported Cambodian goods conform to the importing
country’ s technical regulations and standards. Furthermore, conformity assessment bodies should be
accredited in accordance with internationally recognized procedures so that they can secure
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credibility in the domestic and global markets. In order for laboratories to offer reliable product
testing services, they should secure laboratory facilities, testing equipments, reference materials, and
qualified technical staff.
Unfortunately, Cambodia relies on foreign bodies rather than to make efforts to secure basic
infrastructure for standards and conformity assessments, which is becoming an impediment to
development in the field of standard and conformity assessment. In particular, Cambodia has relied
on its importing counterparts for conformity assessments, which has led to excessive expenditure and
caused concerns over weaker export competitiveness. Although this may help facilitate trade since
Cambodia accepts the conformity assessment results of foreign bodies when importing goods,
Cambodia needs to strengthen its conformity assessment capacity to conduct periodic market
surveillance on imported goods to protect domestic consumers, as well. What causes more concern is
that Cambodia will eventually lose its testing and certification market - which will be expanded with
the development of Cambodia’ s industries - to multi-national conformity assessment bodies. Should
this happen, Cambodia will be completely reliant on foreign laboratories not only for testing and
certification of exporting products but also in testing and certification for domestic technology and
standard development, or policy implementation, which will inevitably lead to the decline in the
nation’ s competitiveness.
Cambodia is seeking to increase export of its agricultural products and processed food products,
but is experiencing difficulties due to the lack of testing abilities on food hygiene and quality. For the
past few decades, Cambodia’ s economic development has been driven by the export-led garment
industry. Cambodia’ s garment industry uses imported fabrics and accessories to manufacture and
export garments, and imported materials and other inputs account for more than 60% of the
production cost. Cambodia does not have any laboratories for testing the quality of fabrics and
garments, and is therefore dependent on the laboratories of its importing counterparts. Also, this
problem has hindered the growth of the textile industry. In order to expand garment export and foster
the growth of related industries supporting garment, it is important for Cambodia to secure the
conformity assessment capacities on the relevant international standards or the technical regulations
of importing nations, as well as quality control to meet the quality standards of various foreign
markets. In particular, in order for Cambodian products to secure credibility in the foreign and
domestic markets, Cambodia should secure testing capacity for analyzing residual pesticides and
chemical fertilizers in agricultural products and hazardous materials in garments and textiles.
To enhance product quality and to promote technology development it is also important to

diffuse quality management in addition to securing testing capacities. Also, to deal with
environmental issues, basic environmental management should be diffused. In order to achieve these
goals, a certification system for quality management systems and environmental management
systems should be established as well. Cambodian companies and organizations currently receive
certification for quality or environmental management systems from overseas certification bodies.
To receive certification on quality management and environmental management systems from
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overseas certification bodies, manufacturers should prepare quality documents in English, and
receive surveillance visits and periodic renewal audits. This means that Cambodia’
s manufacturers
should invest extra time, money and manpower, which will place some extra burden on them.
The Cambodian law recognizes the need for an accreditation system, but the country currently
does not have an established accreditation system. Therefore, some conformity assessment bodies
are acquiring accreditation from overseas accreditation bodies, but the scope of accreditation is very
limited. Establishing an accreditation body requires considerable time and expense, in addition to
qualified manpower. Considering the fact that the Cambodian market is still small in size, conformity
assessment bodies can acquire accreditation from overseas accreditation bodies to support
government efforts on industrial development and export support. However, to acquire accreditation
from a foreign accreditation body, a conformity assessment body needs to prepare quality documents
in English for the initial assessment, and should invest a lot of time and resources to maintain the
accredited body status. In this respect, Cambodia should establish a national accreditation body
operated in accordance with the international standards and foster competent conformity assessment
bodies that are accepted in the global market.
The Cambodian law regulates that the ISC should be in charge of accreditation. However, since
the ISC is also in charge of certification and inspection, establishing an accreditation body under the
ISC could raise concerns over the independence of accreditation services. In the global market, test
reports produced by laboratories accredited by ILAC signatory are generally accepted in most
nations, but a separate agreement between trading partner governments is often required for product
certificates to be accepted in another country. Therefore, a good solution would be to establish an
accreditation body under the ISC with the scope of accreditation limited to laboratories that can be
used for multiple purposes.
For the long term, Cambodia should maintain the independence of conformity assessment bodies,
and set up accreditation bodies whose scope of accreditation covers laboratories, product certifiers,
and management system certifiers. Several options can be considered for this purpose. For example,
an accreditation body that oversees laboratories, product certification, and management systems can
be established under the ISC, and at the same time, certification and other conformity assessment
duties can be delegated to a separate independent body or to other laboratories. As Cambodia’ s
industries develop and grow while domestic and international trade increases, the demand for
certification will also increase. Consequently, the ISC will not be able to take care of all certification
demands, which will give rise to the need to delegate certification work to other public bodies
through designation or to private sector bodies through accreditation. Also, when a Cambodian
conformity assessment body receives accreditation from an overseas body, the ISC staff members or
technical staff should actively participate in the process to accumulate experience.
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4.3. The Measurement System
A national measurement system plays a crucial role in guaranteeing accurate measurement to
enhance fair trade and public health and safety, and ensuring that the measuring instruments used in
industry, production and testing function properly. In this regard, a national measurement system that
is traceable to international standards should be established to make sure that there are no significant
differences among measurements made in different countries. An NMI is responsible for ensuring
that national measurement standards are maintained at a certain accuracy level and for diffusing
these standards to the industries. However, Cambodia’ s NMI has only established primary standards
on mass, and does not have an operation system that fits the international standards. Since Cambodia
does not even have an accredited calibration laboratory accredited in accordance with the relevant
international standard, it is difficult to maintain measurement traceability, and therefore the
measurements taken in Cambodia lack credibility in the global market. On top of this, Cambodia
lacks a legal metrology system to protect consumers by enhancing public health and safety and
facilitating fair commercial trades.
Cambodia needs to secure the credibility of Cambodian products in the global market by
strengthening the capacity of NMIC and securing calibration laboratories accredited to the
requirements of ISO/IEC 17025. In order to achieve this, NMIC should secure necessary
measurement standards, establish and operate a quality system that satisfies the ISO/IEC 17025.
Also, to secure credibility on its testing and analysis results, a national calibration system should be
established as well. In other words, Cambodia needs to secure calibration laboratories providing
calibration services based on the ISO/IEC 17025, and increase calibration capacities so that the scope
of calibration will include all ranges of measurements required in the country.
To facilitate trade, it is important to use reference materials to ensure that testing and analysis
results will be compatible around the world. The importance of reference materials is increasing for
the purpose of fair regulations in the areas of food, pharmaceuticals, and environmental protection.
As international trade is expanding, incomparable measurements may not only cause problems
within the domestic market, but also cause trade frictions with neighboring countries demanding
accurate testing and analysis.
There are a wide variety of reference materials, and the development of reference materials
requires a lot of time and money in addition to advanced technology. In this regard, many
laboratories around the world use reference materials developed in advanced nations. In developed
countries, reference materials are produced in the R&D centers and companies in addition to the
NMIs. Currently, more than 42,000 reference materials are developed and distributed around the
world. From a long-term point of view, Cambodia should also become committed to the
development of reference materials.
To guarantee the reliability of measurement instruments and measurement results, the
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establishment of a legal metrology system is an urgent matter. Reliable legal metrology enables
reliable measurement for the enhancement of fair trade, public health and safety, environmental
protection, and legal implementation, thereby enhancing economic and social benefits. In this regard,
the scope of measurement instruments subject to the type of approval and verification should be
designated to guarantee the quality. Also, as for pre-packaged goods, adequate regulations should be
introduced to guarantee voluntary quantity management from the packaging stage, so that consumers
can be protected.
4.4. Quality System

The objective of establishing standard and conformity assessment system is to enhance product
quality to facilitate export and protect consumers, and to encourage standardization for strengthening
the nation’ s industrial competitiveness. In this regard, strong institutional measures should be
implemented to expand the use of standards and pursue quality management across industries. In the
case of developing nations, there is a pressing need to enhance product quality to increase export and
strengthen manufacturing capacity, but a strong government intervention is necessary to facilitate
quality enhancement since manufacturers’awareness on quality control and fair commercial
practices are very poor.
There are two types of measures to expand the use of standards and enhance product quality,
which are the Quality assurance system and the Quality promotion system.
The quality assurance system can be divided into mandatory and voluntary system. It is a
common practice to implement a mandatory certification system to enhance public safety and health
and to protect the environment. In addition, export inspections can be applied to Cambodian products
that are to be exported to secure the credibility of Cambodian products in the global market. Also, a
voluntary‘national standard certification system’can be considered to expand the use of standards
and encourage the participation of the private sectors in the standardization process. Such
certification systems will encourage companies to adopt a quality management system and contribute
to higher product quality and the development of technology.
In order to encourage manufactures to participate in the voluntary certification system, demand

for certified products should be guaranteed, so that manufacturers will be able to accept additional
expenses and time for acquiring and maintaining the certification. In this regard, an incentive system
such as public procurement policies giving priorities to certified products should be introduced. Also,
the government should make the following efforts: promote that the quality of certified products are
guaranteed by the government; host exhibitions on certified products; and circulate information on
the follow-up inspection results on distributors to reduce the distribution of non-conforming
products. Especially, the government could make it mandatory for management and technical staffs
to complete an education course on quality control in order for companies to receive certification.
This will raise awareness on quality control, which will eventually contribute to protecting consumer
414
rights and facilitating export. If such policies are adopted, the establishment and revision of standards
will directly affect the manufacturing and distribution of products. Consequently, it will help raise
the private sector’ s awareness on the importance of standardization, and encourage them to take part
in the standardization processes.
Also, various quality promotion initiatives such as the national quality awards and technical
training can be offered to encourage companies to make voluntary quality management efforts. To
encourage quality management, the national quality award will be awarded to companies that
significantly contributed to the nation’ s industrial competitiveness through quality management
activities. As for technical training, formal training courses as well as workshops and seminars on
quality management techniques and the outcome of quality management can be provided. By
operating such quality promotion programs, the quality competitiveness of small and medium sized
companies will also be improved.
4.5. Human Resource Development

Standardization and conformity assessment is a project that requires expertise and professional
knowledge, and a lot of time and resources need to be invested to nurture such expertise and skills. In
this regard, Cambodia should actively engage in international cooperation activities to nurture human
resources for enhancing and maintaining the standardization and conformity assessment system. It is
recommended for Cambodia to especially focus on technical cooperation in the area of conformity
assessment. Activities to enhance technical infrastructure and capacity should be conducted in an
urgent and consistent manner, and the nation’
s current technical infrastructure should be considered.
Cambodia should make it a priority to actively participate in the activities of international and
regional bodies in the area of standard and conformity assessment and legal metrology. International
organizations such as the WTO/TBT committee, APEC-SCSC, OIML, APLAMF, ISO, ILAC and
APLAC offer workshops and training programs for developing nations. In particular, the WTO/TBT
committee is pursuing diverse activities to strengthen the capacity of developing countries with a
priority on technical support. Therefore, Cambodia should use such programs to their advantage to
monitor international trends and adopt international good practices.
To focus training on the prioritized areas, it will be useful to utilize mutual cooperation with
national standard bodies and accreditation bodies of other countries that operate a well-established
standardization and conformity assessment system. Through mutual cooperation, Cambodia will be
able to benchmark standardization or conformity assessment system operation procedures. Mutual
cooperation in this area could cover programs to share experience in standardization, on-site training,
invitation of technical staff, and the dispatch of experts to provide training, and Cambodia may select
programs that they perceive as most beneficial. Such mutual cooperation activities are very useful
since they can provide opportunities for continued consultations and customized training programs
through cooperative channels established.
415
However, the development and operation of the systematic national programs for nurturing
competent human resources is considered most important. The programs should include training
programs for assessors and auditors, and technical staff of laboratories, as well as training programs on
quality control and management systems for quality managers in conformity assessment bodies and
organizations that are seeking or have obtained management system certification and product
certification. Furthermore, over the period, Cambodia could consider offering education programs at
higher education institutes to foster competent human resources for developing national standards. As
for such education and training programs, benchmarking the programs of other leading nations will
enable Cambodia to design a competitive human resource program within a relatively short timeframe.
5. Conclusion
Cambodia is currently making multi-faceted efforts for economic growth. As part of such efforts,
Cambodia established the Law on Standards after joining the WTO in 2004 to lay the legal
foundation for establishing a standardization and conformity assessment system that matches global
standards. However, Cambodia’ s plan to establish a standardization and conformity assessment
system has not made much progress due to lack of demand from industries and necessary resources.
In order to enhance and strengthen the nation’ s standardization and conformity assessment
system to facilitate industrial development and trade, Cambodia needs to establish national standards
plan that is in line with its industrial policies. National standards plan should cover strategies to
achieve the following goals: secure and disseminate the standards needed; establish and upgrade the
conformity assessment system; establish a legal metrology system to encourage fair trade; secure
measurement standards to enhance the reliability of measurement results; and diffuse quality
management across Cambodian industries. To make sure that all of these goals can be achieved in
alignment, Cambodia needs to establish mid-to-long term standards plan and implement the plan in a
consistent and systemized manner. Also, a mid-to-long term standards plan should be established
effectively, taking into account Cambodia’ s technology and industrial development level. The plan
should also be flexible enough to be modified in accordance with changes in domestic industrial
structure and the international trade environment, when necessary.
In accordance with the newly legislated Law on Standards, Cambodia operates the ISC as an
independent body, but the ISC is having difficulties establishing an effective standardization policy
due to limited manpower, budget constraints, poor support in technical infrastructure, and lack of
participation from industries. Because Cambodia’ s domestic and export markets are still small,
standardization and conformity assessment plans should be led by the government. In order for the
ISC to pursue effective standardization strategies, it should secure an organizational structure that
can implement policies on standards, conformity assessment, and product quality in a consistent and
integrated manner. To achieve this objective, Cambodia needs to consider strengthening the
authority and role of the ISC with the allocation of sound financial budget and supporting manpower.
416
References
Hang Chuon Naron,“Cambodian Economy: Charting the Course of a Brighter Future, A

Survey of Progress, Problems and Prospects,”2009.
Korean Agency for Technology and Standards, 40 Years of Korean Industrial Standardization,
2001.
Korean Agency for Technology and Standards, White Paper on Technology and Standards,
2010.
Korean Industrial Advancement Administration, White paper on Quality, 1974.
Korean Industrial Advancement Administration, White paper on Quality, 1987.
Royal Government of Cambodia, Cambodia’

s 2007 Trade Integration Strategy: DTIS 2007,
September 2007.
Royal Government of Cambodia, Law on Standards, 2007.
UN ESCAP,“Designing and implementing Trade Facilitation in Asia and the Pacific,”

November 2009.
WTO, TBT Agreement, 1994.
417
Trade Policy
1_ Promoting Exports of Cambodia
2_ Capacity Building on Export Promotion Procedure in Cambodia

Chapter 01
Promoting Exports of Cambodia
MoonJoong Tcha (KDI)

Pheara Kith (Ministry of Commerce, RGC)
Ralf Mueller (Ministry of Commerce, RGC)
Summary
This report has four aims:
(i) to overview the trade of Cambodia,

(ii) to analyze the patterns of exports of Cambodia,
(iii) to review the current export policy and bottlenecks to exports of Cambodia, and
(iv) to suggest future policy agenda for export promotion and growth.
Investigating and analyzing the nation’s trade data, this report concludes that Cambodia
utilizes its comparative advantage successfully, which might be one of the reasons why the
nation’ s exports have grown so rapidly in the recent period. Development is a process of
continuous invention and innovation based on comparative advantage, utilizing the global
market. In this regard, it can be concluded that Cambodia ignited its economic development
successfully by concentrating on exports where it had comparative advantage.
However, it should be pointed out that after a nation reaches a certain level of development,
comparative advantage should move into more high value-added sectors and more actively
integrate with‘differentiation’based on advanced technology and capital investment for
further growth of exports and economy. So far, the nation’ s trade pattern which is strictly
consistent with its current comparative advantage is correlated with a very low level of intra-
420
industry trade (IIT), where IIT is based on‘differentiation’of products.
This implies that the nation may have lost great potential to expand its trade if it can climb
up the quality ladder and reach the stage of differentiating its products. Differentiation of
products requires technology and capital, and results in higher level of value-added, which is
consistent with creating comparative advantage in high value-added sectors. Consequently, the
Cambodian government has to have deep thought on how to help the economy develop more
sophisticated production processes, resulting in production of better elaborated and
differentiated products.
It was also pointed out that Cambodia’ s exports have been biased towards a few countries.
This may be helpful for the expansion of exports when the destination countries grow rapidly.
However, it simultaneously implies the possibility of a large swing in export performance and
rapid saturation of the foreign market, which leads to instability of the economy. Therefore, the
effort to increase its extensive margin, or to increase the number of export destinations is
necessary.
Reviewing the current export promotion policy of Cambodia indicates that the nation is
moving in the proper direction to encourage the private and/or export sector without seriously
hurting or distorting the efficiency in allocation of the resources. Efforts shown by the
government to respect market principle and to abide by the global economic norms and
standards are impressive. The government also firmly understands the kinds of bottlenecks the
exporting sector is facing, and how they should be resolved. In this regard, the Cambodian
government has most of the important information, and wisely recognizes what it should do.
Nevertheless, a few suggestions can be derived from this analysis. There may be more
suggestions to enhance global competitiveness of the industry through so-called industry policy
complying to the global standard, however, additional discussion on that issue is beyond the
scope of this report. This report concentrates on suggestions specific to export promotion. They
include enhancing:

As Topic (i) is dealt in another chapter of this volume, Topics (ii) and (iii) will be discussed
in this report, based on the current status in Cambodia and the experience of Korea. All of the
three policies virtually encouraged Korea’ s export performance, and helped its export to grow
more than 30% p.a. for three decades.
The comparison on the two nations’experience for the two issues mentioned above produces
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Part 4_Trade Policy
implications for Cambodia. The establishment of so-called Cambodia’ s Eximbank and the
amendment of government policies for SEZs should be seriously and positively considered. If
they are regarded to be essential for further growth of Cambodia’ s exports, the more concrete
and detailed approaches will be needed to practically introduce the system into the nation. This
may be conducted more easily through the future collaboration between Cambodia and Korea.
Similar to Cambodia, Korea has extensively utilized SEZs to attract FDI and to increase
exports throughout the process of development since 1970. While the two nations’ SEZ systems
share commonalities, a few key points for success are found from the experience of Korea,
which may be useful to form future policies inCambodia. As well as some incentives for
potential investors in the zones including tariff exemptions and one-stop-service, the Korean
government exerted its efforts to enhance linkages between the zone firms and local companies,
thereby helping to transfer technology and boost domestic industries through linkage effects.
Also, very effective central administration coordinated each SEZ’ s policies from the social
planner’s point of view. Additional detailed information about the SEZ could be shared through
future collaborative research.
1. Introduction
1.1. Brief History of Trade and Economic Development of
Cambodia
Cambodia is a comparatively small and open economy, located in a region that has been one
of the most dynamic places in the world over the past decade if not the most dynamic. Besides
the immediate neighbors such as Vietnam and Thailand, this region includes other ASEAN
countries as well as China and Korea. This favorable setting has provided excellent
opportunities for stimulating economic development through regional trade.
Furthermore, Cambodia undertook an early initiative to get preferential access to major

markets not only in the Southeast and East Asian region but also to other overseas countries.
This includes many bilateral trade agreements as well as the membership in ASEAN, AFTA
and WTO. The nation joined WTO as just the second least developed country (after Nepal).
This increasingly favorable institutional setting had a strong impact on Cambodia’ s trade
integration and economic development.
A long-term analysis of Cambodia’ s economic growth made it obvious that Cambodia’

s
dynamic economic development in the past decade can be attributed to a large extent in
international trade, even though the export basis is still very narrow both in terms of
products/sectors and regional markets (as demonstrated in the subsequent paragraphs).
422
In 1993, when the first general elections took place after two decades of Civil War, exports
of this once important food exporter in Southeast Asia accounted for only 16% of the GDP.
However, Cambodia actively worked to reintegrate into the world economy. These efforts
triggered a major boost in the late 1990s with the formation of an export-oriented garment
industry. Table Ⅳ-1-1 indicates a strong relation between increases in exports as a share of
GDP and economic growth rates. Especially since 1999, Cambodia was close in continuously
experiencing high growth rates while exports as a share of GDP constantly grew. During the
years 2004-2008, Cambodia became one of the fastest growing economies in the world with
double-digit growth rates comparable to those in China, partly even higher.
There is no question that Cambodia is a labor abundant country, however, only some
products directed to certain markets prominently grew to be the locomotive of its economic
growth. This was mainly due to the trade policy of selected advanced economies. Under the
protection of the Multi-Fiber Agreement (MFA) and special arrangements (quotas) provided by
the US, Canada and the EC, Cambodia experienced a dramatic inflow of foreign investments
since the mid 1990s (mostly by Chinese and ethnic Chinese investors: Hong Kong SAR,
mainland China, Taiwan, Malaysia, etc.) particularly in Cambodia’ s domestically oriented
garment industry. About 400,000 direct jobs had been created through the garment industry but
if indirect income impacts are also considered, it can be said that around a million people in
Cambodia are believed to live from this sector.
Even after the MFA had expired at the end of 2004 (and was replaced by more moderate
quotas that restrict access of Chinese garment to the US and EU), Cambodian exports continued
their expansion moderately. A decline came only with the outbreak of the world financial crisis
in 2008 when it became obvious that Cambodian garment is more vulnerable to economic
downturns than most of its competitors due to Cambodia’ s focus on labor-friendly production
with comparatively high product costs. A similar process is observed for footwear exports, which
became in the shadow of garment, another major export item of Cambodia over the past decade.
Other economic sectors that had been the engines of economic growth in the past include
tourism, agriculture and construction. While construction growth is clearly fuelled by domestic
demand, it can also be said that without the overall export-driven dynamics of the Cambodian
economy, the boom in the construction industry would not have been possible.
With regard to tourism, Cambodia benefits from the impressive temple city of Angkor, a
very unique place that attracts tourists from all over the world, especially from the countries of
dynamic Asia (Korea, China and Japan). Long-term growth rates of visitors are estimated at 20-
25% p.a. The tourism sector includes exchange of services (by domestic and foreign tourist
operators) and products. The latter includes mostly the sale of a myriad of clothes and
handicraft products (especially silk products, stone carvings and wooden handicrafts).
Constraint in higher growth is the reason that many tourist services and products are imported
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from neighboring countries, especially for handicraft products that are sold to the tourists. Here,
it shows that Cambodia has not yet effectively taken advantage from the value added created
through this expanding industry.
Table Ⅳ-1-1 | Cambodia’

s Economic Development and Trade
GDP growth (%) Import goods and Trade

Export goods and
Year (in constant services balance/GDP
services/GDP (%)
prices) /GDP (%) (%)
1990 1.1 - - -
1991 7.6 - - -
1992 7.1 - - -
1993 4.0 16.1 32.7 -16.6
1994 8.2 25.8 38.7 -9.9
1995 6.4 31.2 46.6 -15.4
1996 5.4 25.4 43.8 -18.4
1997 5.6 33.6 45.3 -11.7
1998 5.0 31.2 44.4 -13.2
1999 11.9 40.5 53.6 -13.1
2000 8.8 49.8 61.8 -12.0
2001 8.1 52.6 61.3 -8.7
2002 6.6 55.4 64.3 -8.9
2003 8.5 56.5 66. -9.5
2004 10.3 63.6 70.9 -7.3
2005 13.3 64.1 72.7 -8.7
2006 10.8 68.6 76.0 -7.4
2007 10.2 65.3 72.9 -7.6
2008 6.7 - - -
2009* -2.5 - - -
2010* 4.8 - - -
* Estimated
Source: International Monetary Fund, World Bank (World Economic Indicators).
The fourth growth engine, besides garment/footwear, construction and tourism, is the
agricultural sector where about 80% of Cambodians earned their living on so far. However, the
strong dynamics in this sector is rather based on yield improvements than on access to new
markets. Over the past two decades, Cambodia has made remarkable progress in improving yields
(through improved cultivation techniques, irrigation, new seeds, fertilizer, etc.) which boosted
production and provided many crops with considerable production surplus available for export.
Little progress is made so far in providing more value-added to these food products. Crops
424
such as rice, cassava, corn, cashew nuts or soy bean, and rubber are still mostly exported as
unprocessed raw materials. Most of these export items are informally traded with neighboring
Vietnam and Thailand where processing and worldwide exportation (including re-exports to
Cambodia) is arranged. Only for a very few products such as rice, Cambodia developed a basic
processing industry that is now entering the non-regional export markets. After substantial
investments in the latest processing technologies, Cambodia is presently accessing the EU rice
markets where its rice enjoys tariff-free market access (since September 2009) under the
Everything-but-Arms agreement (replacing Thai and Vietnamese rice).
1.2. Changes in Exchange Rates

All large economic transactions in Cambodia and any international trades are conducted in
foreign currency. While the Thai Baht is commonly used near the western border and for
bilateral trade with Thailand, the US dollar is still the main currency for Cambodians which
prevents Cambodia from using their own currency as a strategic instrument in international
trade (such as some countries did in the past or still do today). There are ambitions to terminate
or at least reduce the dollarization of the domestic economy. However, insufficient credit in the
Cambodian Riel - despite a quite remarkable record of stability of this currency - has so far
discouraged any effort in giving the Riel a more dominant role.
The dollarization began with the massive inflow of donors and donor fundings followed by
the peace agreement in the early 1990s. Initially, Cambodia definitely benefited from the usage
of US-dollar since it gave people an immediate trust and brought macroeconomic stability in the
country that just started to transform from a socialist into a free market economy. In the course
of time, the National Bank of Cambodia became increasingly strong enough to ensure a stable
money supply in line with the growth of economic activity, however, the dollarization remains
until today. Also, since Cambodia practiced increasing amounts of liberal approach on
economic policy by rejecting controls of foreign exchange inflows and outflows, it can be
concluded that the exchange rate policies have been more or less excluded from the
government’ s choice of economic policy instruments so far.
For export-oriented activities, it is basically only the farmers who get paid in Riel
(depending on the volume produced and marketed; even here the actual payment is often done
in US-dollar). Cross-border sales for agro-exports are normally calculated in advance and
nominated in US-dollar (or Baht for some exports to Thailand). Also wages for labor in
Cambodia’ s main export industry, garment industry, are normally fixed in US-dollar. Therefore,
the possibilities for the Cambodian government to influence exports and imports through
exchange rates in the short-run are minimal.
The dollarization seems to have diverse and partly conflicting impacts on Cambodia’ s trade
performances. While dollarization still helps to ensure investor confidence (especially foreign
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Part 4_Trade Policy
investors), it denies the opportunity to utilize the national currency as a strategic tool to promote
exports, for instance, through currency depreciation to alleviate the impact of decline in demand
of garment worldwide. Also, Cambodian agro-processed products that are presently not
competing internationally due to a number of factors could be promoted by keeping the value
of national currency purposely low.
It is still controversial whether the use of exchange rate as a policy tool is appropriate;
however, such kind of policy might make sense if this gives specific sectors time to become
more competitive in order to survive without any currency protection, once the exchange rate is
allowed to flow freely. Especially in the context of the inflow of donor funds (which can cause a
crowding-out of domestic export production), it might have been favorable if Cambodia was
able to provide temporary encouragement for its exports. In fact, despite strong increases in
exports over the past decade, Cambodia’ s trade balance continued to be in deficit due to a
similar strong inflow of imports.
However, it should be also recognized that the exchange rate cannot be solely used for
boosting exports, as it can affect many other sectors in the economy such as inflow and outflow
of capital, and pressure to domestic interest rates and price level. It should be remembered by
policy makers that while some countries frequently manipulate exchange rates, it is not a main
policy tool that one can control without side effects.
Exchange rate is in nature an outcome of economic activities particularly those in the foreign
exchange market. Also, it is not certain whether exporting firms could get competitiveness
under protective exchange rate, and manage to survive under the free exchange rate regime.
Cambodian exchange rates and inflation rates for the last decade are reported in Table Ⅳ-1-2.
Table Ⅳ-1-2 | Cambodian Exchange Rate Over Past Ten Years and Inflation
Year Exchange rate (Riel/US$) Inflation rate (%)

1999 3,820 4.0
2000 3,850 -0.8
2001 3,930 -17.4
2002 3,910 0.1
2003 4,000 1.0
2004 4,030 3.9
2005 4,100 6.3
2006 4,120 6.1
2007 4,100 7.7
2008 4,078 25.0*
2009 4,141 -0.7*
2010 - 5.2*
* Estimated
Source: National Institute of Statistics (NIS), Ministry of Commerce, International Monetary Fund.
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2. Trade Structure of Cambodia
2.1. Export Structure of Cambodia
2.1.1. Major Export Items
Any in-depth analysis of Cambodia’ s trade is hampered by the lack of reliable data. While
overseas and non-regional trade is covered adequately by trade statistics of the respective
countries, the cross-border trade with neighboring Vietnam and Thailand is mostly conducted
informally. None of the Cambodian, Vietnamese, and Thai statistics sufficiently document these
trade activities, as the trade itself is“informal.”This is especially a problem for Cambodia’ s
agricultural products that are intensively traded with the two countries. Only estimations can be
made for the export of agro-products (including long-term trends) while Cambodia’ s industrial
exports (garment and footwear exports) mostly delivered to overseas countries can be measured
accurately. While the overview of the export structure of individual products, particularly agro-
products, is important to understand the trade patterns of Cambodia, it is provided in Appendix I
in detail for maintaining the convenience of reading the main text.
Principally, Cambodia’ s major export products include agro-products and garment/footwear.

Other products are so far of only marginal importance for Cambodian exports. Table Ⅳ-1-3
shows Cambodia’ s formally conducted exports (according to mirror data) in 2008 while Table -
Ⅳ-1-4 documents the development of exports over the past decade. A very high level of
fluctuation in export values of HS 87 and agro-products (HS 44, 25, 10, 08, 71) in Table Ⅳ-1-4
indicates that the reliability of data is substantially low, and the figures should be interpreted
with caution.112 Nevertheless, no better way to analyze the nation’s trade is available at present.
About 82% of these exports include garment products (HS 61, 62 and 63) while footwear
explains 6.2%. The third largest export sector, defined by the Harmonized System (HS), is
rubber which accounts for only 1.9% of total official exports. It is noteworthy that while
vehicles other than railway and tramway explain only 1.5% of total exports, its annual growth
rate is as high as 303% during 2004-08.
112) A local export pointed out that the export figures would not fluctuate significantly once informal trade
figure is included. This argument shows the plausibility that the problem is rather in the missing informal
export data especially for agro-products. This supports why we should be careful in interpreting formal
export figures.
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Part 4_Trade Policy
Table Ⅳ-1-3 | Export Values (2008)
Annual export
Exported Share of total
HS- growth in
value, USD Cambodian
code value (2005-
thousand exports
2008), %
TOTAL All products 4,954,624 100.0 15

Articles of apparel, accessories, knit or
61 2,912,249 58.8 23
crochet
Articles of apparel, accessories, not knit or
62 1,128,097 22.8 1
crochet
Footwear, gaiters and the like, parts
64 305,067 6.2 17
thereof
40 Rubber and articles thereof 91,970 1.9 9
87 Vehicles other than railway, tramway 72,173 1.5 303
44 Wood and articles of wood, wood charcoal 66,991 1.4 5

Salt, sulphur, earth, stone, plaster, lime
25 62,006 1.3 500
and cement
10 Cereals 36,752 0.7 53
Edible fruit, nuts, peel of citrus fruit,
08 34,280 0.7 18
melons
Other made textile articles, sets, worn
63 23,755 0.5 7
clothing etc
71 Pearls, precious stones, metals, coins, etc 22,437 0.5 47
Edible vegetables and certain roots and

07 22,101 0.5 99
tubers
Source: International Trade Center (mirror data).
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Table Ⅳ-1-4 | Development of Export Products 2001-2008 (in thousand $US)
Exported
Code Product label 2001 2002 2003 2004 2005 2006 2007 value in
2008
All products 1,499,274 1,922,991 2,118,224 2,797,507 3,258,731 4,018,952 4,607,145 4,954,630
Articles of
apparel,
61 1,089,198 1,222,510 1,511,211 1,865,387 1,591,394 2,196,955 2,612,279 2,912,891
accessories,
knit or crochet
Articles of
apparel,
62 41,291 80,499 81,910 108,018 1,106,942 1,128,778 1,156,239 1,128,335
accessories, not
knit or crochet
Footwear,
gaiters and the
64 28,798 32,649 34,054 40,747 160,463 211,640 291,896 305,174
like, parts
thereof
Rubber and
40 25,883 29,795 34,794 38,329 72,880 94,372 105,999 91,971
articles thereof
Vehicles other
87 than railway, 4,566 11,513 7,106 4,544 631 47,578 57,515 72,174
tramway
Wood and
44 articles of wood, 23,150 16,184 9,461 9,428 73,804 74,425 106,396 67,008
wood charcoal
Salt, sulphur,
earth, stone,
25 1 3 32 5 151 85 3,805 62,006
plaster, lime
and cement
10 Cereals 2,398 4,465 705 5,783 4,092 5,938 10,654 36,753
Edible fruit,
nuts, peel of
08 40 690 1,072 256 21,797 18,997 21,732 34,280
citrus fruit,
melons
Other made
textile articles,
63 13,397 10,651 6,444 8,005 24,370 25,240 23,862 23,762
sets, worn
clothing etc
Pearls, precious
71 stones, metals, 12,862 16,899 23,816 200 40,022 47,274 35,500 22,445
coins, etc
Edible
vegetables and
07 292 262 694 806 819 1,303 11,288 22,101
certain roots
and tubers
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Part 4_Trade Policy
The determinants of the success of these two kinds of exports vary significantly. For
instance, while garment and footwear exports are processed products that are produced in
Cambodia by foreign companies and exported mostly overseas (USA, EU and Japan), the agro-
exports include mostly unprocessed products, cultivated by the Cambodian farmers and
marketed informally to neighboring countries (Vietnam and Thailand). Furthermore, for
Cambodian garment and footwear, the major disadvantage that threats the long-term survival of
these sectors is the total lack of a domestic industry supplying inputs (virtually all material
inputs for Cambodian garment and footwear need to be imported). Major constraints to
Cambodian agro-exports include a mix of various issues such as weak transport and export
infrastructure, quality and certification problems, but, most of all, the lack of a processing
industry.
Exports of major items including garment, footwear products and various agricultural
products are described in Appendix I in detail, including the regional markets of these products.
2.1.2. Export Concentration in Specific Regions
It is also important for the regional markets of these major exports to differentiate between
the formal and informal trade. With regard to formal trade (which has been mentioned earlierto
be dominated by garment and footwear products), the main regional markets are located
overseas: the North America accounts for 56.5% of Cambodia’ s total (formal) trade and the EU
for about 22 % (see Table Ⅳ-1-5).
It is thus interesting to note that for the officially registered trade (covered in mirror
statistics), Asian markets are of only minor importance for Cambodia’ s export. The largest
Asian market in Cambodia is Vietnam (accounting for mere 4.3%) followed by Japan and
Singapore (2.4% respectively) and Thailand (1.8%). While it can be argued that substantial
informal trades are made for Thailand and Vietnam, it becomes obvious that other ASEAN
nations are not yet relevant target markets for Cambodian products (neither garment/footwear
nor agro-products). Also the major economic powerhouses in Asia such as China, India, Korea
and Japan are marginally important for Cambodia currently (except Japan for footwear). It is
more than obvious that the nation faces a huge potential for future exports to these markets.
The benefits that Cambodia gets from being located in dynamic Southeast Asia mentioned
earlier are mostly from informal trades. Here,the trades are focused on countries to which a
land border exists. Since Laos is a small, land-locked economy, it is neither an important end
market for Cambodian products nor an appropriate location for processing and further exporting
agro-raw materials. It is therefore Thailand and Vietnam which becomes the suitable
destinations for the mass of Cambodian agro-raw materials that cannot be processed and
exported to other ASEAN or overseas markets.
430
With regard to relative importance of Thailand and Vietnam as the destinations for these
informal exports, it has to be kept in mind that it is the nature of informal trade that adequate
measurement does not exist. However, it can be clearly stated that Vietnam has increased its
weight on the market and can be considered as the main market for Cambodian agro-raw
materials for the following reasons:
- the Vietnamese economy has developed over the past decade much more dynamically than
the Thai economy, especially in recent years as internal conflicts impeded a faster growth
in Thailand;
- the agricultural production capacity, in particular for internationally traded products, of

Cambodia’ s eastern provinces (with provinces such as Kampong Cham, Prey Veng, Takeo,
Svey Rieng) is considerably higher than those in the western provinces;
- while Cambodia enjoys a very favorable relationship with Vietnam, the situation with
Thailand has been comparatively tense which has caused repeated border closures
prohibiting trade;even in strong western provinces such as Battambang, many
businessmen believe that they find a more reliable market for their products in Vietnam.
Table Ⅳ-1-5 | Regional Export Markets (2008)
Export value, USD Share in Cambodia's Annual export growth in

Importers
thousand exports, % value (2004-2008), %
Total 4,954,624 100 15
USA 2,545,829 51.4 14
Germany 410,588 8.3 5
UK 275,290 5.6 9
Canada 252,864 5.1 25
Vietnam 214,284 4.3 13
Spain 177,157 3.6 41
France 121,013 2.4 8
Japan 121,012 2.4 7
Singapore 116,582 2.4 17
Thailand 90,125 1.8 32
Belgium 62,047 1.3 35
Poland 52,082 1.1 77
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2.2. Import Structure of Cambodia
2.2.1 .Major Import Items
In contrast to Cambodia’ s rather narrow export basis, the spectrum of imported products is
very diverse. This reflects Cambodia’ s insufficient capacity to produce many consumer products
as well as many inputs for industrial production. The latter especially refers to the inability to
produce domestic inputs required for Cambodia’ s main export industry garment.
As Table Ⅳ-1-6 indicates, the main imported products include mineral fuels (17% of total
imported products). The second most important import item is the inputs for Cambodia’s
garment industry (knitted or crocheted fabric with 11.7%), other garment inputs include cotton
(4.3%) or apparels and accessories (1.2%). While the nation’ s exports of vehicles other than
railway and tramway have increased rapidly, its imports also increased substantially, indicating
active trade of these goods. Currently important import items that could be substituted in the
long-run by domestic production include vehicles, electronic equipment, tobacco products,
beverages, etc.
Table Ⅳ-1-6 | Import Products (2008)
Annual import
Imported value Share in
growth in
Code Product label 2008, USD Cambodia
value(2004-
thousand imports
2008), %
Total All products 7,555,885 100 23
27 Mineral fuels, oils, distillation products, etc 1,288,279 17.1 35
60 Knitted or crocheted fabric 884,576 11.7 27
87 Vehicles other than railway, tramway 568,510 7.5 34
84 Nuclear reactors, boilers, machinery, etc 505,181 6.7 28
85 Electrical, electronic equipment 407,946 5.4 29
72 Iron and steel 381,901 5.1 34
52 Cotton 324,430 4.3 -1
39 Plastics and articles thereof 192,019 2.5 21

Tobacco and manufactured tobacco
24 172,526 2.3 18
substitutes
22 Beverages, spirits and vinegar 164,847 2.2 25
73 Articles of iron or steel 146,795 1.9 32
17 Sugars and sugar confectionery 118,549 1.6 23
30 Pharmaceutical products 118,499 1.6 12
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Table Ⅳ-1-6 | Import Products (2008) (Continued)
Annual import
Imported value Share in
growth in
Code Product label 2008, USD Cambodia
value(2004-
thousand imports
2008), %
Paper & paperboard, articles of pulp,
48 118,170 1.6 22
paper and board
99 Commodities not elsewhere specified 117,983 1.6 38
55 Manmade staple fibres 106,857 1.4 4

Salt, sulphur, earth, stone, plaster, lime
25 97,058 1.3 20
and cement
Special woven or tufted fabric, lace,
58 90,717 1.2 10
tapestry etc
Articles of apparel, accessories, knit or
61 89,973 1.2 11
crochet
54 Manmade filaments 89,216 1.2 -1
40 Rubber and articles thereof 86,056 1.1 27

Cereal, flour, starch, milk preparations and
19 78,388 1.0 19
products
31 Fertilizers 78,148 1.0 22
Due to the growing demand of domestic consumers forexpanding exports of garment, most
of the import items which are used as inputs for this industry or used as fuels for transport and
electricity have grown consistently over the past decade (see Table Ⅳ-1-7). Some import items
experienced annual growth rates exceeding 30% (see also Table Ⅳ-1-6).
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Part 4_Trade Policy
Table Ⅳ-1-7 | Development of Export Products (values), 2001-2008 (in thousand US$)
Code Product label 2001 2002 2003 2004 2005 2006 2007 2008
All products 1,506,908 1,667,232 1,774,692 2,062,693 3,894,249 5,094,840 5,928,564 7,555,885
Mineral fuels, oils,
27 distillation 208,212 182,754 196,322 202,877 481,182 708,327 837,247 1,288,279
products, etc
Knitted or
60 164,195 202,908 233,378 304,004 505,440 729,911 867,908 884,578
crocheted fabric
Vehicles other than
87 67,350 93,110 95,809 123,231 193,178 301,232 381,186 568,509
railway, tramway
Nuclear eactors,
84 boilers, machinery, 71,676 78,815 82,544 92,314 225,795 286,028 367,018 502,878
etc
Electrical,
85 lectronic 53,444 51,290 64,378 67,846 204,716 244,581 316,787 410,378
equipment
72 Iron and steel 20,517 19,454 23,398 25,710 149,624 167,349 221,582 381,903
52 Cotton 9,373 27,809 62,711 65,649 333,572 314,109 317,076 324,433

Plastics and
39 28,994 30,206 29,606 36,322 114,879 134,530 172,931 191,766
articles thereof
Tobacco and
manufactured
24 78,916 76,488 73,760 85,326 96,884 103,980 123,053 172,720
tobacco
substitutes
Beverages, spirits
22 4,558 3,485 3,677 3,257 77,059 102,367 121,065 164,853
and vinegar
Articles of iron or
73 20,091 27,997 11,425 20,363 49,402 68,643 97,784 147,261
steel
Paper &
paperboard,
48 41,733 40,445 44,388 43,984 65,272 85,309 106,269 118,733
articles of pulp,
paper and board
Pharmaceutical
30 47,410 42,052 49,657 54,153 86,794 92,853 102,737 118,723
products
Sugars and sugar
17 28,343 28,232 5,519 7,547 73,419 103,683 75,874 118,554
confectionery
Commodities not
99 elsewhere 1,219 1,389 1,233 1,568 53,278 61,900 93,268 115,656
specified
Manmade staple
55 279,939 354,640 349,146 420,151 97,294 116,817 111,727 107,522
fibers
Salt, sulphur,
earth, stone,
25 35,238 45,792 42,835 45,402 59,031 76,370 89,310 97,065
plaster, lime and
cement
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Table Ⅳ-1-7 | Development of Export Products (values), 2001-2008 (in thousand US$) (Continued)
Code Product label 2001 2002 2003 2004 2005 2006 2007 2008
Special woven or
58 tufted fabric, lace, 19,921 23,212 26,035 32,635 77,992 83,749 94,536 90,717
tapestry etc
Articles of apparel,
61 accessories, knit 2,691 821 963 1,152 71,084 77,818 80,919 89,973
or crochet
Manmade
54 14,574 15,361 20,997 27,546 92,787 95,374 93,197 89,218
filaments
Rubber and
40 10,565 12,456 14,023 14,483 38,398 50,384 68,276 86,062
articles thereof
Cereal, flour,
starch, milk
19 7,287 7,263 8,768 10,278 46,123 42,305 57,657 78,391
preparations and
products
31 Fertilizers 4,751 8,284 7,727 8,833 39,737 43,488 55,513 78,148
2.2.2. Import Concentration in specific Regions
Mirror data for the origin of Cambodia’ s imports indicate that there is a stark contrast
between export and import flows. While exports are mostly sold to overseas markets such as the
USA and Europe, which is quite unusual for a Least Developed Country, imports of Cambodia
rely on the more common pattern originated from the Asian neighborhoods (see Table Ⅳ-1-8).
Thailand and Vietnam appear to be main import sources, where a picture would become
even stronger if informal trade is included. Other important import sources are the economic
powerhouses in Asia that are missed in Cambodia when it comes to exportation: China, Korea
and Japan as well as other Asian countries such as Hong Kong, Singapore and Taiwan. The US
and Europe, the two main markets for Cambodian export products, are not yet significant
suppliers of imported items for the Cambodian economy. Significant origins of major importing
goods for Cambodia are reported and discussed in Appendix III.
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Table Ⅳ-1-8 | Imports and Import Origins (2008)
Annual import growth

Imported value, USD Share in Cambodia’
s
Exporters in value (2005-2008),
thousand imports, %
%
Total 7,555,885 100 23
Thailand 2,014,029 26.7 28
Vietnam 1,531,600 20.3 40
China 1,095,543 14.5 26
Hong Kong 608,675 8.1 8
Singapore 520,455 6.9 12
Taiwan 413,879 5.5 12
Rep. of Korea 294,383 3.9 27
Japan 184,042 2.4 22
Indonesia 174,027 2.3 23
Malaysia 165,129 2.2 17
USA 154,134 2 30
France 81,415 1.1 14
3. Analyses of Export Patterns113

The trade patterns of Cambodia were introduced in the previous sections. While the broad
picture of the nation’
s trade was provided, it is necessary to understand more fundamental and
deeper features of the nation’s export patterns to draw out policy suggestions. In particular, in
addition to analyses for the nation’ s own figures, international comparison should be also
conducted to find its international stance more accurately. In this section, more rigorous
analyses on export patterns will be carried out using various tools developed in the field of
international economics.
While there is no such thing as an‘one-size-fit-all’sort of measure explaining the whole

structure and features of trade in Cambodia, each index applied in this part investigates the
nation’ s trade from different angles, and represents different aspects or characteristics.
Therefore, one has to choose a proper index depending on which aspect of the nation’ s export
113) The methodology adopted in this section is heavily drawn from KDI (2010). Most indices computed in this
section are also widely accepted in the field of international economics.
436
performance one would like to investigate. Incorporating various indices or numbers from
different perspectives will provide useful information about the entire feature of Cambodia’s
exports. The measures used in this section include export concentration, export dissimilarity
index, intra-industry trade index, commodity complementarity index, intensive and extensive
margins and revealed comparative advantages.
3.1. Export Concentration

Concentration or diversification in exports has its own merits and demerits. While
concentration can be advocated due to its contribution to fast growth and easier market
penetration, diversification is recommended for sustainable and stable export performance.
Various variables can affect the degree of concentration. For example, the scale of the
economy may affect the degree of concentration: the smaller the economy, the higher the degree
of concentration. Also, it is natural that a resource-abundant country has more concentration.
Usually, the degree of concentration shows an inverted-U shape with the stage of development.
At the initial stage of economic development, with limited amount of resources, countries are
likely to specialize where they have comparative advantage and explore foreign markets. As the
size of the economy grows and more production technologies are available, the economy tends
to produce more diversified products and concentration ratio starts to decrease.
It is worthwhile to investigate the current extent of export concentration of Cambodia,

although we understand that it would be substantially high as observed earlier from export share
of clothes and footwear. The degree of export concentration is calculated using the share of each
product (3-digit SITC, Revision 2 level) in a country’
s exports according the following formula:
Within the formula, n is the number of products, x i is the export value of product i and X the
total value of exports for country j. The index zero means that the nation’ s n products have the
equal export shares. As one product takes most of the export share, the index approaches to one.
Table Ⅳ-1-9 indicates that developed countries have very low levels of export
concentration. The extent of concentration is generally higher for developing economies and
transition economies. The export concentration of Cambodia has increased rapidly, the fastest
except for in Myanmar, and reached a very high level (=0.45) in 2008, that is far higher than the
average of South East Asian countries. This figure implies that it could be easy for Cambodia to
penetrate into foreign markets rapidly in a short period of time but its export is overly exposed
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Part 4_Trade Policy
to external shocks and possibly unstable.114
Table Ⅳ-1-9 | Export Concentration of Country Groups1) & South East Asia
1996 2000 2004 2008

Developed countries 0.06 0.07 0.07 0.06
Developing countries 0.11 0.13 0.12 0.14
Transition countries 0.18 0.22 0.25 0.33
South East Asia 0.14 0.18 0.16 0.13
Brunei 0.60 0.60 0.60 0.67
Indonesia - - 0.12 0.15
Laos 0.29 0.31 0.31 0.37
Malaysia 0.18 0.22 0.19 0.15
Myanmar 0.28 0.27 0.36 0.51
The Philippines 0.28 0.43 0.38 0.32
Singapore 0.23 0.27 0.25 0.26
Thailand 0.10 0.11 0.08 0.09
Vietnam 0.20 0.25 0.22 0.21
Cambodia 0.29 0.38 0.42 0.45
Note: 1) The designations "developed", "transition" and "developing" are intended for statistical convenience and
do not necessarily express a judgment about the stage reached by a particular country or area in the
development process.
Number of products exported at the three-digit SITC, Rev. 2 level; this figure includes only those
products that are greater than $100,000 or more than 0.3 percent of the country’ s total exports. Data for
the country groupings are calculated as weighted averages of individual countries, including those that
are estimated and not shown separately.
Source: UNCTAD Handbook of statistics 2009
3.2. Export Dissimilarity

The previous analysis shows how much Cambodia’ s export concentrates on specific
products. Another method to look at the nation’s viability in the world export market is to look
at how similar or dissimilar its export pattern is from its counterparts. The extent of export
dissimilarity for country j is calculated as:
114) As a nation has more diversified export goods, it needs more market information and marketing
knowledge for each product, at least, in its initial stage, which makes the nation to pay more cost and
time to penetrate into the destination countries. However, at the same time, a high level of concentration
indicates that the sudden changes in the demand for the nation’s exports in the foreign markets would
adversely affect the export performance of the nation.
438
where hij is the share of commodity i in the total exports of country j and hi is the share of
the commodity in world exports. n stands for the total number of goods exported. This index
ranges from 0 to 1, and reveals the correlation between structure of trade of the country and the
world average. The index value closer to one indicates a bigger difference from the world
average, and that closer to zero means that the nation’
s export pattern is almost the same as the
world average.
Table Ⅳ-1-10 | Extent of Export Dissimilarity by Country Groups1) & South East Asia
1996 2000 2004 2008
Developed countries 0.12 0.13 0.15 0.17
Developing countries 0.28 0.26 0.26 0.22
Transition countries 0.57 0.58 0.57 0.56
South East Asia 0.41 0.38 0.37 0.33
Brunei 0.80 0.81 0.82 0.81
Indonesia - - 0.50 0.51
Laos 0.74 0.75 0.81 0.77
Malaysia 0.51 0.51 0.47 0.43
Myanmar 0.79 0.80 0.81 0.80
Philippines 0.60 0.62 0.62 0.61
Singapore 0.49 0.45 0.49 0.48
Thailand 0.47 0.40 0.39 0.41
Vietnam 0.67 0.57 0.66 0.61
Cambodia 0.76 0.77 0.81 0.81
Note: 1) The designations "developed", "transition" and "developing" are intended for statistical convenience and
do not necessarily express a judgment about the stage reached by a particular country or area in the
development process.
Number of products exported at the three-digit SITC, Rev. 2 level; this figure includes only those
products that are greater than $100,000 or more than 0.3 per cent of the country’s total exports.
Data for the country groupings are calculated as weighted averages of individual countries data,
including those that are estimated and not shown separately.
Source: UNCTAD Handbook of statistics 2009
Table Ⅳ-1-10 and Figure Ⅳ-1-1 report the extent of export dissimilarity between Cambodia
and major economies. For developed countries these indices are low, indicating that their export
pattern is very similar to the world average export pattern. For developing countries, these
figures have decreased, meaning that their export pattern has become similar to the world
average. In fact, this figure tends to decrease for most South East Asian countries. This can be
explained by the expansion of global production network, and the increase in intra-industry
trade due to differentiation.
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Part 4_Trade Policy
The analysis for Cambodia shows quite different results for Cambodia. Its dissimilarity was
very high in 1996, and has increased even higher until 2008. In fact the nation stood with the
highest degree of dissimilarity in South East Asia, or its export pattern was opposite from the
world average. This trend has close relationship with the nation’ s export pattern concentrated
more on light and labor intensive industries and agro-goods, while more manufacturing goods
with higher level of differentiation and elaboration have been traded globally.
As discussed, the trend of concentration on these specific goods has been successful in this
country, and will be strong for the time being, as there still are more overseas markets to be
explored. However, this high level of dissimilarity also indicates that the nation’ s industry
structure should transform into a better elaborated and high value-added manufacturing in order
to fully utilize the evolution of the world economy and make its rapid export growth
sustainable.
Figure Ⅳ-1-1 | Extent of Export Dissimilarity by Country Groups
Source: UNCTAD Handbook of Statistics 2009.
3.3. Commodity Complementarity115

Export dissimilarity index shows how a nation’s export pattern is dissimilar from the world
average. In this regard, it shows whether a nation acts in line with the general trend of the
world’s production and consumption. The previous part using this index indicates that
115) The key reference for this content is Vollrath and Johnston (2001).
440
Cambodia’ s export pattern has been substantially different from the major trend, and the
difference has widened recently. In order to judge whether Cambodia’
s trade pattern goes along
with its major trade partners, it would be helpful to look into Cambodia’ s trade
complementarity.
Commodity Complementarity Index (CCI hereafter) correlates economy i’ s export

specialization pattern with economy j’s import specialization pattern across the spectrum of all
trade products. CCI is a trade-weighted measure for sector s of the degree to which the relative
export share structure of economy i’s export corresponds with the relative import share
structure of economy j’s import across all k commodities within the sector s.
In share of product k in sector s is for global exports,
share of k in sector s for country i ’

s exports, relative to share of k in sector s for global exports,
share of k in sector s for j ’

imports, relative to share of k in sector s for global
imports, k is for an individual commodity level at HS-6 digit, and s is for a sector level at HS-2 digit.
It should be noted that is the Balassa’ s revealed comparative advantage index of

country i in commodity k that CER (2004) used in their analysis. By the same logic, is
revealed comparative disadvantage of country j in commodity k. CCI equal to one represents a
threshold, with a value greater (less) than one showing a greater (lesser) level of
complementarity in the composition of what exporter i exports and importer j imports than the
average pair of countries.
Tables Ⅳ-1-11 and Ⅳ-1-12 report the CCI of Cambodia with major trade partners for top 10
exporting sectors in 2008. CCI greater than one means that Cambodia has comparative
advantage for a certain product and/or its trade partner has comparative disadvantage for the
same product. CCI less than one indicates that, although the product is Cambodia’ s major
export, the nation does not have comparative advantage and/or its trade partner does not have
comparative disadvantage. In consequence, it can be drawn that Cambodia faces potentially
promising markets for the products in specific trade partners where CCI is greater than one.
Tables Ⅳ-1-11 indicates that the product that Cambodia has complementarity with all large
trade partners is HS 40 (Rubber and articles thereof), where CCI is greater than one. For HS 25,
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Part 4_Trade Policy
61, 62 and 64, the US shows a high level of complementarity with Cambodia. For HS 8 and 63,
Cambodia and China have a very high level of complementarity. While such trade partners as
the US, EU and China show a relatively high level of complementarity with Cambodia for
various goods, Japan and Korea show a high level of complementarity for only three products,
HS 40, 87, 10.
It should be pointed out that Cambodia’ s CCI for HS 87 is surprisingly high with the EU,
Japan and Korea. This is possibly due to the data problem, which was implicitly detected
already with large fluctuation in export figures of HS 87 from Cambodia. The other possible
explanation is more theoretical. This index is the product of Cambodia’ s RXS in exports (to the
world) and the trade partner’ s RMS in imports (from the world), and then the share of the
product. Therefore, even when Japan’ s export of automobiles is far larger than its imports, only
the RMS index of Japan is taken into account in this equation. By the same token, for
Cambodia, it really doesn’ t matter whether its import of automobile is higher than export. Only
RXS of Cambodia, not RMS, is considered here. Further, if the product share θk, a kind of
scale, is large for the product with a large magnitude of or/and , the CCI for the
product that are larger.
Table Ⅳ-1-11 | Cambodia’

s CCIs with Major Exporting Markets for Top 10 Exporting Sectors (2008)
HS CCI
Industry
code US EU China Japan Korea
Articles of apparel, accessories,
61 1.23 0.95 0.99 0.99 0.80
knit or crochet
Articles of apparel, accessories,
62 1.17 1.02 0.90 0.84 0.93
not knit or crochet
Footwear, gaiters and the like,
64 1.05 0.97 1.08 0.77 0.83
parts thereof
40 Rubber and articles thereof 1.25 1.17 1.90 2.20 2.49
Vehicles other than railway,
87 0.98 1.66 0.66 2.27 1.41
tramway
Wood and articles of wood, wood
44 0.41 1.38 2.61 0.37 0.76
charcoal
Salt, sulphur, earth, stone, plaster,
25 1.11 0.34 0.03 0.15 0.44
lime and cement
10 Cereals 0.56 1.13 0.25 1.45 1.66
Edible fruit, nuts, peel of citrus
8 0.42 0.41 4.21 0.13 0.40
fruit, melons
Other made textile articles, sets,
63 0.60 0.57 1.93 0.45 0.94
worn clothing etc
Source : Author’
s calculation based on UN comtrade database
442
Tables Ⅳ-1-12 shows Cambodia’ s CCI with South East Asian countries for its top ten major
export items. It is noteworthy that HS 87 is virtually the only product that Cambodia has strong
complementarity with both larger (and mostly advanced) countries and SEA countries.
Cambodia has a high level of complementarity with most SEA countries for HS 87, 44 and
8. In contrast, the nation’
s CCIs with SEA countries for HS 61 and 62, which are the two largest
export commodities of Cambodia, were substantially low. This indicates that while the two
goods are major export goods from Cambodia, SEA countries with cheap and abundant labor
also specialize in these products, and accordingly Cambodia and the SEA countries do not have
complementarity in trading these goods.
Table Ⅳ-1-12 | CCIs for SEA countries of Cambodia by Top 10 Exporting Sectors (20081))
HS CCI
Industry
code Vietnam Singapore Thailand Malaysia Indonesia Philippines Brunei Myanmar Laos
61 accessories, knit or 0.85 0.99 0.80 0.53 0.77 0.69 0.72 0.84 3.33
crochet
62 accessories, not knit or 0.66 0.78 0.61 0.62 0.88 0.67 1.06 0.46 0.54
crochet
Footwear, gaiters and the
64 1.17 0.56 0.57 0.67 0.59 0.52 0.36 0.71 2.10
like, parts thereof
Rubber and articles
40 1.05 1.62 0.43 0.95 0.41 0.64 0.74 2.17 3.52
thereof
Vehicles other than
87 3.33 1.46 1.24 2.13 2.51 2.87 0.93 10.63 21.06
railway, tramway
Wood and articles of wood,
44 6.82 2.05 9.05 4.57 2.43 5.80 0.40 0.21 0.35
wood charcoal
Salt, sulphur, earth, stone,

25 0.33 7.11 0.45 0.73 0.70 0.33 1.98 3.81 3.31
plaster, lime and cement
10 Cereals 0.95 0.69 0.51 1.40 0.44 0.53 0.95 0.49 1.59
Edible fruit, nuts, peel of
8 26.66 1.69 1.49 1.16 3.15 0.71 3.04 2.52 5.94
citrus fruit, melons
Other made textile articles,

63 0.97 1.71 3.49 4.70 1.00 3.50 1.55 2.41 0.33
sets, worn clothing etc
Note: 1) All indicators of Brunei, Myanmar and Laos are derived from mirror data (partner countries’
trade data)
Source: Author’ s calculation based on UN comtrade database
Periodic CCIs for Cambodia with major economic players in the worldare reported in Figure
Ⅳ-1-2, and that with SEA countries in Figure Ⅳ-1-3. China is the only country among the
major economic players with which Cambodia has strong complementarity for its overall export
products of. Korea’
s CCI with Cambodia became greater than one in 2008, while those with the
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Part 4_Trade Policy
US, EU and Japan have been declining and became less than one. For SEA countries, Vietnam
consistently has had the highest level of CCI with Cambodia. All SEA countries’CCIs’with
Cambodia are greater than one with a certain level of fluctuation.
Figure Ⅳ-1-2 | CCIs1) for Major Countries-Total
Note: 1) Average of Commodity Complementarity Index by sector

Source: Author’s calculation based on UN comtrade database
Figure Ⅳ-1-3 | CCIs1) for South Eastern Asia Countries-Total2)
Note: 1) Average of Commodity Complementarity Index by sector

Note: 2) Except for Indonesia, CCIs of countries are derived from mirror data (partner countries’trade data) in
1996
444
3.4. Intra-Industry Trade
Traditional international trade theories explain that trade between two countries is based on
the difference between two nations’relative factor endowment or productivity. In consequence
both countries should trade‘different’goods (inter-industry trade). However, particularly after
World War II, trade of similar goods has been widely observed. This trade of similar or
differentiated goods, classified as the same category (in upper level classification), is labeled
“intra-industry trade (IIT)” .
While there are many reasons that we observe IIT, there is a consensus that trade of more
advanced countries generally consists of more IIT. This consensus is based on the fact that more
advanced countries have capacity of differentiation, and consumers also have sufficient level of
income to support their diverse taste. The Grubel-Lloyd index is the most widely used and
accepted measure in a country’ s level of IIT. This index is a standard indicator measuring the
extent of intra-industry trade in terms of its share in total trade. The G-L IIT index is defined as
where Xci and Mci refer to country c’

s exports and imports for an industry i respectively. The
index equals to zero in the absence of intra-industry trade, where there exists only export or
import of certain product i. When the values of export and import of product i are exactly the
same, the index becomes one. In other words, higher level of IIT index indicates higher level of
intra-industry trade.
Table Ⅳ-1-13 shows G-L indices for Cambodia and its major trade partners and neighboring
economies116. As aforementioned, the level of G-L index is higher in general for countries with
higher in come. Brunei is an exception as it is a distinctively natural resource affluent country,
and the pattern of trade is extremely biased towards inter-industry trade accordingly.
For 5-digit SITC, Cambodia’ s G-L index is 0.054, which is the lowest except Brunei and
Myanmar. This result strongly indicates that Cambodia’ s trade is based on‘difference’rather
than‘differentiation’ , and the nation does not catch the opportunity to enjoy the benefits from
product differentiation and consuming diversified goods.
When the IIT index for 2008 is compared with that of 2000, a significant evolution in
116) While the EU is an important trade partner of Cambodia, it is not included in this analysis since IIT for the
EU as a group of countries does not provide implicative information.
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Part 4_Trade Policy
Cambodia’ s trade is observed. Tables Ⅳ-1-13 and Ⅳ-1-14 report that Cambodia’ s IIT index
substantially increased although the absolute level is still low. This applies regardless whether
the index is measured either by 5-digit or 3-digit SITC data. It implies that goods with higher
extent of similarities are traded or differentiation of products are continued in the country
although the level itself is still substantially low.
Table Ⅳ-1-13 | Extent of Intra-Industry Trade by Countries (20081))
% of World % of 5-digit 5-digit 3-digit

Income Group4)
trade2) sectors traded3) GL Index GL Index
US 10.71% 93.72% 0.504 0.572 High
China 7.91% 93.11% 0.326 0.408 Lower middle
Japan 4.79% 93.18% 0.312 0.364 High
Korea 2.65% 92.92% 0.380 0.463 High
Singapore 2.03% 90.00% 0.715 0.757 High
Malaysia 1.16% 95.83% 0.491 0.596 Upper middle
Thailand 1.09% 92.79% 0.362 0.485 Lower middle
Indonesia 0.86% 95.03% 0.276 0.375 Lower middle
Vietnam 0.44% 90.13% 0.183 0.260 Low
Philippines 0.34% 92.09% 0.208 0.508 Lower middle
Brunei* 0.04% 73.95% 0.016 0.019 High
Myanmar* 0.03% 79.97% 0.024 0.042 Low
Laos* 0.01% 70.94% 0.070 0.105 Low
Cambodia 0.03% 69.50% 0.054 0.082 Low
Note: * All indicators of country are derived from mirror data (partner countries trade data)
Note: 1) Calculated by SITC, revision 3 level
Note: 2) Total trade value of world & countries refer to UNCTAD Handbook of Statistics 2009
Note: 3) Number of commodity at 5-digit SITC, revision 3 level is 3,121
Note: 4) Refer to‘Economy Region Income Group List’ of World Bank
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Table Ⅳ-1-14 | Extent of Intra-Industry Trade by Countries (20001))
% of World % of 5-digit 5-digit 3-digit

Income Group4)
trade2) sectors traded3) GL Index GL Index
US 15.57% 97.79% 0.538 0.624 High
China 3.62% 97.21% 0.337 0.446 Lower middle
Japan 6.55% 97.56% 0.339 0.401 High
Korea 2.54% 96.60% 0.397 0.517 High
Singapore 2.08% 95.42% 0.715 0.774 High
Malaysia 1.37% 95.77% 0.439 0.584 Upper middle
Thailand 1.00% 95.67% 0.360 0.522 Lower middle
Indonesia 0.73% 97.28% 0.204 0.317 Lower middle
Vietnam 0.23% 67.86% 0.118 0.202 Low
Philippines 0.59% 92.21% 0.250 0.531 Lower middle
Brunei* 0.04% 75.33% 0.041 0.070 High
Myanmar* 0.03% 81.19% 0.038 0.065 Low
Laos* 0.01% 60.59% 0.099 0.180 Low
Cambodia 0.03% 70.49% 0.031 0.057 Low
Note: * All indicators of country are derived from mirror data (partner countries trade data)
Note: 1) Calculated by SITC, revision 3 level
Note: 2) Total trade value of world & countries refer to UNCTAD Handbook of Statistics 2009
Note: 3) Number of commodity at 5-digit SITC, revision 3 level is 3,121
Note: 4) Refer to‘Economy Region Income Group List’ of World Bank
Source : Author’ s calculation based on UN comtrade database
3.5. Intensive Margins and Extensive Margins

As discussed, the extent of export product differentiation generally depends on the stage of
economic development. Countries at the initial stage of the economic development usually
expand their trade by either specializing in a few goods or adding up new commodities, which
were previously seen by developed countries. In contrast, exports and imports of developed
countries consist of similar goods utilizing higher levels of product differentiation.
To view this kind of pattern from a slightly different perspective one must investigate
extensive and intensive margins. Extensive margin refers to the growth of exports by adding
new commodities, where intensive margin refers to the growth of exports in goods that are
already exported. Carrere et al. (2007) argues that the typical pattern of export starts from
extensive margin and then transforms into intensive margin. This is consistent with the models
of comparative advantage and intra-industry trade. The turning point is estimated to be around
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US$ 20,000-22,000 per capita at purchasing power parity.
Hummels and Klenow (2005) decomposed growth of trade flows into extensive and
intensive margins, and examine cross-country differences in trade patterns. Let’ s first define the
market share of country k relative to a set of other exporting countries r in a specific importing
market. That is,
where Mkt (Mrt) refers to the value of exports of country k (a set of the other exporting
countries in the world) destined to a reference market at period t. Nkt ( Nrt ) is the set of
observable categories in which country k (a set of the other exporting countries in the world) has
positive export value at destination. We can re-write this formula as;
where EMt and IMt refers to extensive margin and intensive margin, respectively.
Therefore, EMt is defined as a weighted count of observable export categories in which

country k (a set of the exporting countries in the world) has a positive export value, relative to
the rest of the world’ s export categories. If export quantity of all products is assumed to be
equal, then EMt is simplified into Nkt / Nrt . Hence, if EMt is increasing, other things being equal,
it implies that the set of export categories for country k is larger.
On the other hand, IMt is defined as the country k’ s total exports relative to other exporting
countries’ exports in those categories in which country k has a positive export value. If IMt rises,
that implies that country k’ s competitiveness increases in the categories in which country k
actually exports.
Table Ⅳ-1-15 reports extensive and intensive margins of Cambodia’ s exports for major
export markets in 2008. Reflecting the size of the Cambodian economy, its market shares in
major destinations are quite low, where it takes the largest market share in Vietnam with only
0.27%. Nevertheless, the decomposition of the market share in the two margins provides very
important results.
The largest extensive margin is found in the EU with 24.45%, which is followed by Hong
Kong (24.39%) and Singapore (20.01%). The extensive margins in the US (17.47%), China
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(18.35%) and Malaysia (17.81%) are also relatively high, indicating that the products that
Cambodia exports to these destinations takes up substantially large markets. In contrast, the
margins in Japan (5.49%) and Indonesia (0.99%) are found very low.
Cambodia’ s intensive margins in major destinations appear significantly low in most cases.
The highest one is found in Vietnam, indicating that among the products that Cambodia exports
to the destinations, its performance (market share) is the largest in Vietnam. The nation’ s
intensive margins in the US (0.67%), Canada (0.48%) and Thailand (0.38%) are also relatively
high, which implies that Cambodia performs reasonably well within products it exports to these
destinations.
Table Ⅳ-1-15 | Extensive vs. Intensive Margin of Cambodia’

s Exports by Countries (20081))
Export destination Extensive Margin Intensive Margin Market Share
US 17.47% 0.67% 0.12%
EU 24.45% 0.19% 0.05%
Hong Kong 24.39% 0.01% 0.00%
Canada 12.89% 0.48% 0.06%
Vietnam 12.59% 2.11% 0.27%
Singapore 20.01% 0.18% 0.04%
Thailand 13.26% 0.38% 0.05%
Japan 5.49% 0.29% 0.02%
China 18.35% 0.02% 0.00%
Korea 11.52% 0.03% 0.00%
Malaysia 17.81% 0.05% 0.01%
Indonesia 0.99% 0.16% 0.00%
The Philippines 10.07% 0.02% 0.00%
Note: 1) Calculated by 6-digit HS96 code

Nevertheless, Figure Ⅳ-1-4 and Figure Ⅳ-1-5 cast certain concerns for Cambodia’ s exports
when they are decomposed into extensive margins and intensive margins over time. While
Cambodia’ s extensive margin in the US, the world’
s largest market, has not increased fast, its
intensive margin has also been stagnated since 2004. For EU, Cambodia’ s extensive margin has
decreased since 2000, where its intensive margin has also decreased since 2004. For the rising
Chinese market, extensive margin has increased significantly, however, its intensive margin
drastically decreased since 2000.
All of these patterns indicate that Cambodia’

s export performance in the three largest
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markets of the world has not been as successful as expected. Virtually Canada is the only
country where Cambodia’ s extensive and intensive margins grew altogether. However, Canada
is not a sufficient and ideal market for a sustainable export growth in Cambodia.
Figure Ⅳ-1-4 | Extensive Margin for World Major Markets
Source: Author’
Figure Ⅳ-1-5 | Intensive Margin for World Major Markets
Source: Author’
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Similar concerns are raised for Cambodia’ s exports to major destinations in SEA as shown in
Figure Ⅳ-1-6 and Figure Ⅳ-1-7. Cambodia’ s extensive margin significantly increased in
Singapore and the Philippines only recently, which means that the nation could successfully
increase the range of exported products in these economies. For Vietnam, Thailand and
Malaysia, Cambodia failed to increase the variation of products it exports. For intensive margins,
Thailand is the only country that Cambodia managed to increase its share for export products,
while Vietnam is the only destination where Cambodia’ s intensive margin is relatively eminent.
Figure Ⅳ-1-6 | Extensive Margin for Major Export Destinations in SEA
※ Prior to the year 2000, no data is available for Vietnam

Figure Ⅳ-1-7 | Intensive Margin for Major Export Destinations in SEA
※ Prior to the year 2000, no data is available for Vietnam

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Analyses of Cambodia’ s exports using its extensive and intensive margins for major trade
partners strongly imply that the nation could not vitalize its exports to either advanced or large
markets or adjacent SEA countries. The nation could neither diversify its export products mix
nor deepen the market share for export products.
3.6. Revealed Comparative Advantage

Finally, Cambodia’ s export performance can be analyzed by looking at its revealed
comparative advantage. This index may be the most inclusive and comprehensive figure
featuring the nation’ s export performance relative to the world average, and provides
meaningful indicators for its future export performances.
Table Ⅳ-1-16 summarizes revealed comparative advantage (RCA) indices for Cambodia
and Top 5 economies for its Top 10 products. As expected, the Cambodia’ s RCA for HS 61
(Articles of apparel, accessories, knit or crochet) and HS 62 (Articles of apparel, accessories,
not knit or crochet) are considerably high, and put the nation as one of the top exporters in the
world. The RCA index for the former is as high as 56.73, while that for the latter is 20.43. As
the third largest export product, HS 64 (Footwear, gaiters and the like, parts thereof), the index
is still very high as 10.22, and the nation is just below the top 5.
The RCA indices for export products start to decrease rapidly after HS 64117. It is noteworthy
that the RCA index for HS 87 (Vehicles other than railway, tramway), which is the fifth largest
export product, is only 0.19. This figure indicates that while it is ranked as one of the most
important export product, in fact, Cambodia does not acquire comparative advantage in this
product and consequently does not export this product more than the world average. It may be
interpreted that this sector to be promising and will lead to exports if the nation’s comparative
advantage will be built up in this sector.
117) It should be noted again that some data are missing or informal.
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Table Ⅳ-1-16 | RCA of Cambodia1) & Top 5 Countries for Top 10 Products (2008)
HS Top 1 Top 2 Top 3 Top 4 Top 5

Industry Cambodia
code country country country country country
Articles of
apparel, Haiti Cambodia Bangladesh Macao Honduras
61 56.73
accessories, knit (58.46) (56.73) (43.02) (38.98) (35.12)
or crochet
Articles of
apparel, Bangladesh Macao Cambodia Sri Lanka Madagascar
62 20.43
accessories, not (32.22) (25.58) (20.43) (19.97) (19.16)
knit or crochet
Footwear, Fr. South
Bosnia
gaiters and the Antarctic Vietnam Albania Cape Verde
64 10.22 Herzegovina
like, parts Terr. (19.39) (15.50) (15.41)
(13.04)
thereof (32.43)
Vatican City Côe
Rubber and Liberia Sri Lanka Thailand
40 1.83 State d’Ivoire
articles thereof (23.51) (9.19) (6.15)
(10.68) (6.65)
South
Vehicles other Saint
Niue Eritrea Antarctica Georgia &
87 than railway, 0.19 Helena
(4.31) (3.68) (3.68) Sandwich
tramway (6.49)
Islands(3.18)
Wood and Solomon Central
Antarctica Laos Cameroon
44 articles of wood, 1.78 Isds African Rep.
(26.07) (23.71) (20.38)
wood charcoal (91.84) (67.01)
Salt, sulphur,
Christmas Western
earth, stone, Nauru Togo Jordan
25 3.24 Isds Sahara
plaster, lime and (248.85) (45.82) (39.01)
(180.58) (56.33)
cement
Br. Indian
Guyana Belize Argentina Paraguay
10 Cereals 1.13 Ocean
(20.48) (16.06) (15.03) (13.75)
Terr.(63.60)
Edible fruit, nuts, Guinea-

Gambia Afghanistan Saint Lucia Kyrgyzstan
8 peel of citrus 1.39 Bissau
(102.47) (59.34) (56.23) (47.51)
fruit, melons (188.05)
Other made
Turks and
textile articles, Pakistan Tokelau Bangladesh Niue
63 1.83 Caicos
sets, worn (61.65) (18.83) (14.75) (14.74)
Isds(19.78)
clothing etc
1) : All indicators are derived from mirror data (partner countries trade data)
2) : Revealed Comparative Advantage Index is that share of industry for Cambodia(or country)’ s total exports value,
relative to share of industry for world’
s total exports value (Balassa’
s Revealed Comparative Advantage Index)
Source : Author’ s calculation based on UN comtrade database
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4. Policy Measures and Bottlenecks of Exports
4.1. Major Policy Measures
Cambodia has formulated various strategies that either explicitly or implicitly address trade
as a measure to boost economic growth. First of all, these include,, the Rectangular Strategy
(announced in 2004) that formulates the overall strategy of growth and development for
Cambodia. In the Rectangular Strategy, the government commits itself to“broaden the base of
economic growth by strengthening governance to attract investment and ensuring
competitiveness”.
The agricultural sector is given a prominent role in the Rectangular Strategy for future
economic growth and trade, job creations and poverty reduction. On this general strategic
foundation, Cambodia follows a free-market approach in the economic development that gives
free trade a high priority. The National Strategic Development Plan (NSDP) of Cambodia
defines concrete objectives and indicators for many aspects of the economic development
including international trade.
A strategy that focuses entirely on international trade as a means to strengthen economic

growth is the Diagnostic Trade Integration Study (DTIS). In this strategy, 19 products and
services sectors have been defined as the country’s basis for an intensified integration into world
trade. Besides the export items described in prior paragraphs, it includes wooden products, light
manufacturing, livestock, beer, tourism services, labor services, web-based services and
transportation services.
Principally, since the 1990s Cambodia follows a quite conservative approach of market
economy such as rejecting government’ s influence on exchange rates or direct subsidies.
Among the most important activities or arrangements undertaken by the government are the
following:
1. Free trade approach: As explained previously, the Cambodian government practiced a

policy of open markets and free trade. Therefore, the government actively negotiated with
other countries to receive favorable market access. Cambodia is an active member in
ASEAN (1999) and WTO (2004) and has signed various bilateral trade agreements with
other nations around the world including major markets such as the US and EU. Most
Favored Nation (MFN) and General System of Preference (GSP) market access is also
provided by Australia, Canada, China, Korea, Japan, New Zeeland, Russia, etc. Currently,
Cambodia is negotiating with the US for tariff-free market access for its garment
products.
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2. One-stop service for investments: Within the Council for the Development of Cambodia
(CDC), the Cambodian Investment Board (CIB) was established, which serves as the
central partner for domestic and foreign investors who intend to undertake large-scale
investment projects, especially export-related ones. CDC/CIB provides a One-Stop
Service for investors such as supplying information, evaluating and approving investment
projects as well as providing customs duty and tax exemption, issuing visa and work
permits, company registration and offering follow-up supports for investments.
3. Investment promotion: Investment promotion is conducted to support the implementation

of Amendment Law of Investment of RGC through the adoption of strategies that
streamline and make process of the FDI more predictable and transparent, and thereby
enhance the attractiveness of Cambodia as an investment destination.
4. Special Economic Zone (SEZ) or Export Processing Zones: In order to motivate

domestic investors to start export operations and especially to attract foreign investors
with export ambitions, the government decided to establish SEZs at various strategic
locations within Cambodia. These SEZs provide infrastructure (including Single Window
Office for import/export procedures) and other support in trade. Besides a location near
Phnom Penh, the SEZs are mostly located near the border and seaport. Four SEZs are
currently in operation, and various others are planned for the future.
5. Infrastructure: The Cambodian government heavily invests in infrastructure, especially

in transport facilities such as roads, airports (Phnom Penh, Sihanoukville, and Siem
Reap), seaports (Sihanoukville, Phnom Penh) as well as investments in the energy sector.
6. Favorable business climate: The government has created a business-friendly environment

particularly (but not exclusively) for export-oriented projects through, for instance, low
corporate taxes (20%), tax holidays up to nine years, special depreciation arrangements,
import and export duty exemptions, no restrictions on capital repatriation (profits, interest,
loans, and dividends), no price controls, long term land lease, no foreign exchange
controls, etc. Furthermore, international investors can hold 100% of their investment (no
local repatriation requirement) and are free from any forms of nationalization or
discrimination.
7. Dialogue forum for government and private sector: The government has established a
government-private sector forum twice a year where business people can present their
problems and constraints to the Prime Minister, who will search for solutions.
8. Export Market Access program:“Export Market Access”program is an ongoing

initiative of the Ministry of Commerce’ s National Export Strategy 2005. It focuses on the
provision of technical assistance to companies, organizations and/or business associations
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Part 4_Trade Policy
who are doing business in Cambodia and need to fulfill the requirements of specific target
markets. This includes, quality standards, core labor standards, organic product standards,
safety or environmental standards, etc. The main duty of the Ministry of Commerce is to
assist these applicants to access the program and receive assistance in, e.g., preparing
export business plans, conducting market research or improving their production system
(such as packaging, design, etc.).
9. Participation in international trade exhibitions: The Ministry of Commerce of Cambodia

regularly conducts trade exhibitions where domestic producers and traders can present
their products to potential buyers from around the world. Cambodia also actively
participates in major international trade events abroad.
In the context of the WTO accession and the formulation of the Rectangular Strategy, the
government dedicated special attention to trade facilitation in order to reduce transaction costs
that are associated with trade and trade-related investments. This includes more transparency in
investment process and facilitation of enterprises’access to export markets.
In order to implement this policy, the international ASYCUDA system has been introduced
to streamline operations and to improve the level of transparency and accountability.
ASYCUDA is an IT-based system (Electronic Single Window) that is used in customs
administration including risk management and post clearance audit. Furthermore, this IT-based
technology is used for customs functions in order to:
- enhance the control over imports, exports and transit goods;

- reduce cargo clearance time;
- achieve a close cooperation and rationalization of activities between key border control
agencies;
- increase transparency and predictability and reduce transaction costs for business sectors;
- increase efficiency in revenue collection and accounting;
- provide more accurate information for risk management and post clearance audit purposes.
With regard to imports, Cambodia does not apply restrictive controls. This can be explained
partly by the government’ s free-trade philosophy, and partly by the simple fact that Cambodia
does not hold an effective border control. As mentioned eariler, Cambodia has an intensive
informal trade with its neighboring countries. Due to this informal trade, even those products
that are not in line with the product requirements (for instance, many low quality or poison
containing fertilizer products are imported and sold in Cambodia that are normally banned in
other countries) can enter the Cambodian market..
For better protection of both consumers and local producers, it is essential to replace many
of these low-quality products (replacing them by domestic import substitutions or formal
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imports). Also, systematic analysis of the effectiveness of government measures to strengthen
international trade and integration is currently lacking.
4.2. Major Bottlenecks of Exports

In order to increase Cambodia’ s integration into the global order, various constraints need to
be addressed that are partly cross-cutting and partly sector-specific (very often no clear line can
be drawn between these two kinds of constraints). With regard to the cross-cutting export
constraints, the following issues require on-going attention by the government:118
1. Export infrastructure: Despite considerable improvements in recent years, the export

facilities (incl. Cambodia’ s seaports) are still relatively expensive. Some of the higher
exportation costs are related to the constraint mentioned below on the“Economies of
Scale” ,\.For instance, shipping rates from Cambodia are principally higher than those
from Vietnam due to less frequent shipping schedules and smaller ships connecting
Cambodia the overseas markets.
2. Domestic transportation: Due to high fuel costs and other cost items, domestic
transportation costs are high compared to neighboring countries (on the positive side,
however, in recent years the government undertook enormous efforts to improve roads
which have contributed to good domestic road network nowadays).
3. Energy infrastructure: Due to continued weakness in energy infrastructure, the energy

costs in Cambodia are very high. Regular power-cuts are still frequent. This poses a high
risk of being uncompetitive for any product that requires non-manual processing.
4. Trade information: Most potential exporters have very few information on international
markets and methods on how to access these markets (potential buyers, product qualities
and standards, prices, procedures, etc.). The government has started various initiatives
(such as the Export Market Access Program) to address this problem which needs to be
continued and further intensified in the years to come.
5. Standards and product certification: Even where knowledge on required product

qualities and standards is available, the ability to meet these requirements and, especially,
the ability to get product certification is insufficient.
6. Skilled labor/labor productivity: The lack of skilled labor and low level of labor
productivity are caused by deficiencies in the education system and from the lack of
118) The following constraints are faced by almost every export sector in Cambodia.
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Part 4_Trade Policy
sufficient vocational training. This discourages large-scale investments that require
sophisticated technologies since the staff is not available locally (or not at competitive
costs) to run and supervise these production processes.
7. Economies of scale: Due to the small scale of most production processes (both with
regard to farming and processing), opportunities to apply technology are limited and, in
consequence, production cost can be high.
8. High capital costs: The financial sector has dramatically improved in recent years,
however, capital and credit costs are still high (besides high interest rates, also
bureaucratic credit procedures and inadequate credit volumes and durations discourage
producers and traders from taking credit). This is a major constraint for any kind of long-
term investment (e.g. investments in new technologies) which partly explains the low
level of mechanization in Cambodia. Furthermore, it restricts Cambodian processing
companies’ ability to buy sufficient agro-raw materials or other inputs for their production
process.
Most of the above described cross-cutting issues to be so common and general that no
further mentioning is needed for the export potentials listed below. However, some of the
described constraints above have specific impacts for some sectors. Below is a description of
major sector-specific constraints in Cambodia’
s most important export sectors.119
a) Garment/Footwear120
- Lack of input supplying industry: Due to a great absence of the (material) input supplying
industry, inputs need to be imported from other countries. This causes a serious cost
disadvantage in the international trade. Moreover, the small content of local value added
prevents these products from accessing international markets as“Cambodian products”
(e.g. currently in the EU, Cambodian garment products cannot benefit from tariff-free
market access).
- Low labor productivity: A low productivity in most labor (compared to major competitors
such as China, Vietnam and Bangladesh) that is not neutralized because of low wages
makes Cambodian garment and footwear products comparatively expensive until now.
- Tensions between factories and labor unions: Frequent tensions between factories and a
119) In order to avoid an over-exhausting description only two to three main sector-specific constraints are
described for the respective sectors. The focus is exclusively set on export-related issues and less on
production-related problems with limited export impacts.
120) The constraints of these two export sectors are very similar and can be described as a single complex.
458
myriad of labor unions cause strikes and constitute threats to an industry that heavily
depends on good labor standards in order to succeed in the chosen market niche.
b) Rubber
- Productivity and quality: Many rubber trees in Cambodia are already old and have low
usage. This age structure of Cambodian rubber plantations has improved in recent years as
many new rubber plantations have been built and old trees are replaced but many farms
still lack international competitiveness. Furthermore, quality issues limit the accession to
international markets (SPS issues and other technical barriers). Processing is still mostly
done in other countries.
- Product certification: Internationally accredited product certification for Cambodian

rubber is being processed very slowly which prevents access to many markets. It is vital
for the years to come to have more internationally recognized laboratories.
c) Rice
- Seasonality of supply: Due to lack of irrigation, most rice farmers only have one harvest
per year (normally November-December). In connection to the major (cross-cutting)
constraint and high capital costs, this kind of distinctive rice seasonality means that many
Cambodian rice millers are not able to run their mill and export throughout the entire
year.121
- High processing losses and costs: As most rice mills use old and out-dated technology,
recovery rates (milled rice/paddy) are low and percentages of broken rice are high. Both
create high production losses. Furthermore, energy costs (most rice mills are fuelled with
diesel) are very high compared to neighboring countries.
- Quality consistency/quality management: Due to mix of varieties (either on farming and/or

collecting and trading level), rice millers often fail to supply international markets with a
consistent variety. Additional weakness in their quality management (incl. SPS problems)
further increases the occurrence of low and inconsistent quality.
d) Corn
- Distribution channels: Cambodia depends mostly on Thailand for exporting their corn
121) Due to high capital costs rice millers only have limited funds available to buy paddy at harvest times and
often run out of stock a few months after harvest without enough opportunities to buy additional paddy
from the farmers until the next major harvest occurs.
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Part 4_Trade Policy
harvest as processing facilities are lacking and most production is located near the Thai
border (similar to rice or cassava, transportation costs are comparatively high for corn
which makes longer transport for processing). This situation makes corn farming and
export vulnerable to the economic and political situation in Thailand (including possible
tensions between the two countries).
- Low productivity: Corn yields are very low due to limited cultivation skills of farmers and
lack of quality inputs (as for marketing, also for input supply, Cambodian corn export
mostly depends on Thailand).
e) Cassava
- Limited processing facilities: Due to high energy costs and other infrastructure issues, little
investment has been undertaken so far in cassava processing which forces Cambodia, for
the time being, to be mostly a raw product supplier.
- Preferential market access and SPS requirements: Cambodia lacks access to most relevant
international cassava markets and the preferential market access (that compensates for
competitive disadvantages in domestic transportation and export costs) is prevented by SPS
issues from entering these markets.
f) Cashew
- Lack of processing facilities: Since Cambodia lacks processing facilities, it is restricted to

export raw cashew nuts which provide very limited value added and income from this
sector.
- Labor productivity and product quality: The record of low labor productivity and weak
quality issues (incl. SPS problems) in former export-related cashew processing
investments in Cambodia discourages potential investors from entering this sector.
- Capital costs: As capital costs are high in Cambodia (compared to the main competitors
such as India and Vietnam) and all cashews (to run a factory for a full year) need to be
bought during the few harvest months, cashew processing in Cambodia can be conducted
competitively only by investors with access to international capital markets (this has also
been a major reason for former failures of cashew processing investments in Cambodia).
g) Soybean
- Low productivity: Cambodian soybean farms have a relatively low yield compared with
producers in other countries. This is caused by a number of reasons including lack of
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quality inputs (seeds, fertilizer, pesticides, insecticides, etc.), limited knowledge and skills
of farmers, lack of irrigation, etc.
- No processing facilities: As larger export facilities are still lacking, Cambodian soy bean
exports mainly depend on those to neighboring Thailand and Vietnam. High domestic
transportation costs further increase the problem as little value added is left for the farmers.
h) Fruit
- Seasonality: Due to the widespread lack of irrigation, most fruits are cultivated and
available only for a short period of the year which prevents Cambodia from starting large-
scale and long-term export transactions with international markets.
- Small and fragmented production: Most fruit farming is small and basic and production
sites are regionally spread. This makes the coordination of export transactions difficult and
prevents utilizing economies of scale.
- Low and inconsistent quality: The problem of small and fragmented production is often
seen through low and inconsistent quality of fruit products. SPS and other technical
barriers to trade further worsen the problem of conducting exports. Theoretically, there is a
large potential for exporting fruits since many Cambodian fruit varieties have excellent,
and often unique taste. Most fruits are also grown organically. However, without
improvements in quality management, it would be difficult to compete in the international
markets.
i) Fishery
- SPS requirements: Compliance with international quality requirements and particularly

SPS requirements pose a serious, partly (for the EU) prohibitive barrier for the Cambodian
fishery exports (hygiene and sanitary problems).
- Resource management and over-fishing: Over-fishing and weak resource management

threaten the future of Cambodian fishery supply and reduce stocks available for export.
- Lack of processing facilities: As Cambodia lacks adequate processing facilities, relatively

small value added is earned from fishery exports.
j) Silk
- Input supply: Many inputs (especially quality inputs) need to be imported and make
Cambodian silk products comparatively expensive.
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- Scattered industry: Silk industry in Cambodia is mostly scattered throughout many families
but coordination is unorganized and production processes are often inefficient.
- Inconsistent quality: Weakness in quality management causes problems with quality

consistency This creates serious problems for building long-term export partnerships.
5. Korea’s Experience of Export Promotion and

Implications for Cambodia
5.1. Overview of Cambodia’
s Export Patterns and Policies
Before discussing what are needed for Cambodia to promote its exports, it is worthwhile to
summarize the characteristics of Cambodia’ s exports, together with the nation’
s approach in
current export policies and its bottlenecks.
The analysis of Cambodia’ s exports using diverse methods indicates the following
characteristics of the nation’
s exports:
1. Cambodia’ s export has followed its comparative advantage.

- It may be assumed without any irrationality that Cambodia has CA in labor intensive and
natural resource intensive sectors. The analysis of its trade patterns shows that its
revealed comparative advantage (RCA) is consistent with their true CA. This implies
that the nation efficiently utilizes its endowment to make the best of its integration into
the global economy and to achieve growth.
2. It has a high level of complementarity with developed countries.

- This is to some extent similar to the CA discussion. The nation’ s trade pattern is
substantially different from those of developed countries. This indicates that it can aim
developed countries as major markets and experience benefits from large, stable and
advanced markets, and, at the same time, its trade will be more likely based on
‘difference’rather than‘differentiation.’
3. Also, it has both complementary and competing relationship with China.

- China has grown up to be the factory of the world, and also the market of the world.
While its production spectrum is very wide reflecting the large scale of the economy, it
still has strong CA in labor intensive sectors. The patterns of trade of Cambodia are
similar or different from those of China depending on products. It seems this kind of
‘mixed’relationship is inevitable for some developing countries whose CA is in labor
intensive industries.
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4. Export/GDP ratio is relatively high, its export items are concentrated in a few products,
and a few destination countries take a large share of its exports.
- While its manufacturing has not matured, its export share to GDP is relatively high,
which is to the least partly due to ambitious export drive of the government. This is
positive for a country like Cambodia that pursues rapid economic growth. However,
excessive concentration on a few specific products and on certain markets is not
desirable, as it increases the volatility of exports and the vulnerability of the economy.
Nevertheless, it also implies the possibility that the nation’
s exports may increase rapidly
as it successfully penetrates into other destinations.
5. Differentiation has not substantially occurred yet.

- The nation’s IIT degree is substantially low, even after considering the level of its
economic development. This implies that its exports mostly rely on difference in factor
endowments or technology, and, in contrast, differentiation has not been brought about
yet. As more differentiation is introduced, the nation’s trade will expand rapidly and
enjoy more trade in fruit,.
The nation’ s approach to export policy is substantially oriented towards‘free trade’

philosophy. It can be summarized as the following:
■Free trade approach

■One-stop service for investment
■Establishing special economic zones
■Investment in infrastructure
■Providing favorable business environment
■Hosting dialogue sessions between Public-Private
■Exploring export market access
■Participating in international trade fairs
Considering these policies, it can be concluded that the Cambodian government took the
appropriate policy direction to promote exports.
It also seems like that the government recognizes the bottlenecks clearly. To promote export,
UNDP and the Ministry of Commerce have conducted Diagnostic Trade Integration Study
(DTIS) in 2002 and updated this document again in 2007. This study aims to:
■Identify and assess export potentials,

■Develop sustainable human resources,
■Strengthen legal and institutional environment for competitiveness,
■Remove constraints for development; and
■Propose tools for implementation.
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The study finds 19 sectors as potential exports, which are agricultural goods including
cashew nuts, cassava, corn, fishery, livestock, rice, rubber, soybean, and fruits and vegetables.
The others are light manufacturing, assembly, tourism, labor services, transport and transport
related services, and business process.
The Rectangular Strategy which indicates the political platform of the Royal Government of
Cambodia also contributes to the promotion of exports through:
■Enhancement of the agriculture sector to diversify export base,

■Rehabilitation and construction of physical infrastructure to provide support for trade
development and export,
■Private sector development and employment generation, and
■Capacity building and human resource development.
Taking into account all of these documents and current policy approaches, most policies
beneficial for promoting exports have been either adopted already or will be adopted by the
Cambodian government. Briefly speaking, the current policy direction of Cambodia is
appropriate to promote exports and encourage future economic growth. As most crucial policies
for exports and growth are already in the planning horizon, consequently, this report will
concentrate on three measures to further Cambodia’s exports. They are:
■Information sharing and marketing service,

■Financial support for exporters, and
■Stronger promotion for SEZs.
These three policies do not violate the current global free trade norm, and are, at the same
time, known to provide positive effects for exports. When cross-cutting and sector-specific
bottlenecksare discussed, the lack of information for markets other than neighboring countries
and the shortage of capital are frequently mentioned.. Also, although SEZs have been planned
and implemented currently only four are in operation and their performances have not been
impressive. Therefore, it will be helpful to look into these topics closely and seek for visible
plans to implement them in the near future.
Such efforts to improve tangible infrastructure including railway, roads and seaports, and
enhancement of human resources through proper education are also important, however, they
are not directly related with‘export promotion’ , and the rationale to be included in this report
is relatively weaker than the former three.
Among these three policies, the first policy measure is to be discussed in another volume of
KSP report . In this report, the second and the third policies will be discussed in the context of
Korea’
s experiences. The growth in international trade has greatly increased both the demand
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for trade finance quantitatively and the degree of the finance sophistication qualitatively.
Organizing finance is a crucial part of any important strategy and a key contributor to success in
international trade. Indeed, the availability of finance can be a major factor in securing new
businesses as well as expanding ongoing trades as it provides the flexibility to offer competitive
terms to overseas trading partners.
Special Economic Zones (SEZs) are widely used in many developing countries as a crucial
means to attract foreign investment and encourage exports. As it refers, SEZs are distinctively
different from the rest of the economy in terms of the provision of infrastructure and application
of policies. However, it is judged that SEZs are not very successful in Cambodia. In contrast,
some Export Promotion Zones that are considered as a special type of SEZ in Korea have
performed exceptionally well and opened the door to receiving foreign investment and
technology, and producing export products. In this regard, it is worthwhile to review the two
policies based on the Korea’ s experience.
5.2. Export Finance

5.2.1. Cambodia’
s Export Finance
Cambodia is a developing country that currently does not have sufficient capital resources
and infrastructure to support its small and medium size enterprises as a back bone of the
economic development in export with other countries. Cambodia trade development strategy
indicates that many of the high-priority 19 products and service identified with an export
potential, are mainly produced by small and medium size plants. They are absolutely lack of
access to the various types of finance, production management and business plan that enable
them to scale up existing activities to overcome production constraints, improve productivity,
undertake export activities and enhance their competitiveness. In many sectors such as rice,
cassava, cashew nuts, maize and beverage etc., the major obstacle for export growth is lack of
export finance.
For example, in the Rectangular Strategy -Phase II, the RGC is committed to promoting the
development of the agriculture sector. In the current context, agricultural commercialization has
become more dynamic in lights of global economic changes due to increasing food demand and
prices. Cambodia has a big potential in paddy rice production which may be related to the
increase of milled rice exports in the future.
In the rice export strategy that was announced recently, Cambodia government intends to
produce paddy rice surplus of about 4 millions ton in the year 2015 and achieve milled rice
export of at least 1 million ton. To achieve the goal, the short and immediate term strategy will
be implemented in the years to come such as to tackle the issue of credit shortage for purchase
and processing paddy rice, trade finance through the recapitalization of state-owned financial
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Part 4_Trade Policy
institutions, and the provision of incentives to commercial banks to increase agriculture loan
portfolio including the development of credit guarantee schemes and risk-sharing facility. The
initiative includes creation of state-owned financial institutions for export finance and an
Export-Import Bank (called EXIM Bank) that has been debated since 2009 without any clear
conclusion.
The Law on Banking and Financial Institution for banks and other financial institutions
operating in Cambodia was enacted in 1999 aiming to improve financial facilities, strengthen
the base of financial institutions, and to make it easier for the investors to get business in
financing in the Kingdom of Cambodia. By law, the minimum of capital of banks at is about
US$ 12.5 million. A 5% of this capital has to be maintained with the National Bank of
Cambodia (NBC) as a guarantee deposit.
Currently, there are 24 Commercial Banks, 6 Specialized Banks, 18 Micro-Finance

Institution, and 60 Micro-Finance NGOs operating in Cambodia together with branch offices of
some foreign banks. Oversea capital transfer, issuance of letter of credit and foreign exchange
services are available in Cambodia. All of this financial infrastructure will be a bridge to
facilitate and make it easier for traders or investors in Cambodia. However, it should be
seriously considered whether the nation can continue to accelerate its exports with current
financial environments for exporters.
s Experience of Export Finance122

5.2.2. Korea’
The Korea Eximbank’ s mission is to promote sound development of the national economy
and economic cooperation with foreign countries. To achieve its goals, especially as an export
credit agency, it supports Korean companies to gain a competitive edge in the global market.
After providing medium and long-term credit for HCIs (Heavy and Chemical Industries), the
Korea Eximbank continued to introduce new financing programs and increased customer
orientation of existing programs.
Before the 1990s
Since its establishment in 1976, the Korea Eximbank has contributed to Korea’ s export
growth by concentrating its support on strategic industries such as shipbuilding and industrial
equipment. It has helped to improve Korea’ s export structure and current account, accelerating
the nation’s economic advancement and globalization.
As a government institution, it responded to various government policies to support Korean
122) This part of the report concerning Korea’s EXIM Bank is from KDI(2008), particularly from p.140~151, and
modified to fit into the context of this report.
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exporters. Before the 1990s, the Korea Eximbank’ s main policy objective was to improve the
trade balance by fostering domestic industries. During this period, the bank’
s services focused
on heavy and chemical industry exports by providing deferred payment-based supplier credit,
overseas investment, and overseas resource development.
From 1990 to the Financial Crisis in 1997
In the 1990s prior to the financial crisis, the Korea Eximbank went through a period of
maturation by diversifying its services to support Korean exporters to compete in the global
market. It began to provide short-term trade financing and support new industries, such as
electronics. During this period, the overall business volume increased at an unprecedented
rate.123
After the Financial Crisis in 1997
After the financial crisis in the late 1990s, the Korea Eximbank made efforts to assist
recovery of the Korean economy from the economic turmoil. First, it extended its business line
further to provide SMEs with easy access to export financing and expanded project-related
guarantee services. In order to help increase the liquidity for commercial banks engaged in trade
financing, the Korea Eximbank introduced the rediscounting of trade bills. In addition, many
efforts were made to facilitate foreign buyer access to the bank financial services, including
project financing, framework agreements (i.e., co-financing arrangements with other export
credit agencies), interest rate support and various types of credit lines.
As a result, the volume of disbursement sharply increased during this period as shown in
Figure Ⅳ-1-8. It more than tripled from KRW 13 trillion in 2000 to KRW 40 trillion in 2007.
The increase is mainly due to the expansion of short-term loans; the increase of guarantees is
largely related to the expansion of advance payment bonds for ships after the Asian financial
crisis in 1997.
123) A future Eximbank in Cambodia should also provide short-term trade finance for export transactions (as
described in the example of Korea Eximbank) instead of trying to be smarter than the market (the private
commercial banking system) in selecting special companies and sectors who might or might not be
future export industries (see Korea’s Eximbank in the 70s and 80s).
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Part 4_Trade Policy
Figure Ⅳ-1-8 | Disbursement Volumes of Loans and Guarantees (for the year)
Unit: KRW billion
In 2007, the Korea Eximbank provided a total credit amount of KRW 39,984 billion (KRW
19,464 billion in loans and KRW 20,520 billion in guarantees), equivalent to USD 42,617
million, a 30 percent increase from the previous year. This was the highest amount recorded
s establishment. See Table Ⅳ-1-17 for these figures.
since the bank’
Export Credit took the largest share with KRW 13,679 billion, or 70.3 percent of total loan
disbursements. Overseas Investment Credit and Import Credit, the other two major financing
programs, accounted for 15.3 percent and 14.4 percent, amounting to KRW 2,976 billion and
KRW 2,808 billion, respectively
Table Ⅳ-1-17 | Disbursement Volume (for the Year)

Unit: KRW billion
1976 1980 1985 1990 1995 2000 2005 2007
Disbursement 53 300 1,080 737 4,497 12,996 27,847 39,984
Loans 53 300 861 731 4,049 8,096 15,071 19,464
Guarantees - - 220 7 448 4,901 12,776 20,520
Source: Korea Eximbank
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5.2.3. Export Credit of Korea EXIM Bank
Short-Term Loans
■Comprehensive Export Credit

A Small Business Export Credit is extended to SMEs that manufacture export products or
supply materials to primary exporters. This small business export credit is provided based on
past performances.
It covers up to 90 percent of the company’ s 6-month export performance (100 percent for
venture companies), with a repayment term of 6 months, or 50 percent of the company’
s 2-year
export performance, with a repayment term of 1 year.
■Special Credit Loan

A Special Credit Loan is extended to SMEs that do not have high credit ratings or collateral
after a simplified test evaluating less than 10 factors such as company performance, exporting
ability, and security of the export contract.
It covers up to 90 percent of the contract value less previously received amounts, with a
repayment term of 15 days after the last payment date of the export contract (within 6 months).
It has a limit on the loan amount of $US 20 million and does not require collateral unless the
loan amount exceeds this limit.
■Short-term Trade Finance

Short-term Trade Finance is provided to Korean exporters manufacturing export goods
under short-term export contracts (production and repayment period of less than 2 years).
It covers up to 100 percent of the export contract value less amounts received by the
borrower, with a repayment term of 30 days after the final payment date specified in the export
contract.
Figure Ⅳ-1-9 | Short-term Finance
Loan Export
Korea Korean Foreign
Eximbank Exporter Importer
Repayment Payment for the
export products
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Part 4_Trade Policy
Medium & Long-term Loans
■Pre-shipment Credit
Pre-shipment Credit is a type of export loan extended to exporters or manufacturers of
export products prior to delivery. To be eligible for this loan, the contract must have a minimum
foreign exchange earnings ratio (foreign exchange earnings/contract value) of 25 percent and a
cash payment of no less than 15 percent of the contract value (20 percent for ships).
It covers up to 90 percent of the export contract value less the received cash payment, with a
repayment term of 30 days after the actual delivery date of the export contract.
Figure Ⅳ-1-10 | Pre-Shipment Credit
Loan Sub-loan
Repayment Deferred
Payments
■Direct Loans
A Direct Loan is an export credit service allowing foreign buyers to purchase Korean goods
and services with a repayment term of 12 years more. It is provided on a project-by-project
basis or line of credit, which is established between the Korea Eximbank and foreign buyers.
■Project Financing
Project Finance covers large-scale projects and is extended to foreign project companies
importing plants, facilities, and technical services from Korea, or in which a Korean company
has an equity share. Repayment of financing mainly depends on cash flows of the project
company with limited recourse to the sponsors.
■Structured Financing for Ships

Structured Finance for ships is extended to foreign shipping companies, mainly special
purpose companies (SPCs), which intend to buy shipping vessels from Korean shipyards.
Repayment of financing usually depends on cash flows generated by the respective shipping
vessels during the loan period, often with limited recourse to the parent companies of SPCs.
■Inter-Bank Export Loans

An Inter-bank Export Loan (IEL) is a form of Inter-bank Export Credit (IEC) in which a line of
credit is extended to a creditworthy bank in a foreign country. IEL consists of letter of credit (L/C)
confirmations, guarantees, and direct loans to the importer with the guarantee of a foreign bank.
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Structured Trade Finance
■Export Factoring
Export factoring is a form of trade financing provided by purchasing trade bills which occur
from open-account export transactions on credit (including transactions on D/A basis), on a
non-recourse basis. Open-account export transactions are transactions in which the exporter
dispatches shipping documents after sending the export items, and the foreign buyer remits the
payment for the items directly to the exporter’ s account after a certain period of time.“Non-
recourse basis”means the exporter is not responsible for the payment even when the foreign
buyer fails to fulfill its debt obligation for its financial difficulties.
Advance payment for the Purchase of Trade Receivables is 80 to 100 percent of the export
amount with a discount fee of“Libor + 0.50% to 1.00%”and a factoring fee of 0.40% to 0.80%
of the trade bill amount.
■Forfaiting
Forfaiting is a form of trade financing offered to Korean exporters in which the Korea
Eximbank discounts trade bills from export transactions on a non-recourse basis.
It covers the face value of trade bills (US$ 10,000 to US$ 20,000,000) with a repayment
term of 2 years maximum and discount rate of Libor + margin.
Figure Ⅳ-1-11 | Forfaiting
Loan Repayment
▲
Issuing L/C
■Rediscount on Trade Bills

Rediscount on trade bills offers financing to domestic commercial banks in the form of
discounts on promissory notes issued by the respective commercial banks. The rediscount on
trade bills is based on performance of eligible instruments for Korean exporters.
It covers the face value of trade bills with a repayment term of 6 months maximum. The
rediscount rate is calculated as the base rate + margin for KRW and Libor + margin for foreign
currency.
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Part 4_Trade Policy
Figure Ⅳ-1-12 | Rediscount on Trade Bills
Rediscount Korean Discount

Korea Foreign
Commercial
Eximbank Importer
Bank
Other Functions
As well as aforementioned export credit, the Korea Eximbank has also provided various
types of credit and guarantees to enhance the country’ s trade performance. These include
import credit, overseas investment credit, natural resources development credit, and financial
and project-related guarantees.
5.2.4. Key Features of the Korea Eximbank
High Impact and Efficiency
In comparison with other export credit agencies in the OECD countries, the Korea
Eximbank receives a low level of financial support from the government. However, it has
outperformed in many areas including total loan commitment, operational efficiency, and
product variety. The bank came in second out of 11 ECAs (Export Credit Agencies) for
providing the greatest amount of financing relative to the country’ s trade volume. Since its
establishment in 1976, the Korea Eximbank has been making a strong contribution to Korea’ s
exports. ECA’ s contribution is relatively low except for such countries as Canada, Korea,
Austria, Slovakia and Japan. This may be due to the development of private banking in such
nations and the USA, Sweden and Australia, or insufficient functioning of the organization after
establishment in some other countries.
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Table Ⅳ-1-18 | ECA’
s Contribution to Trade
Unit: US$ billion
Total Loan
Trade Volume Contribution
Rank Country ECA Commitment
(A) (B/A)
(B)
1 Canada EDC 8,346 793 9.50%
2 Korea Korea Eximbank 7,265 545 7.50%
3 Austria OeKB 3,270 181 5.54%
4 Slovakia Eximbank SR 1,187 41 3.45%
5 Japan JBIC 13,361 147 1.10%
6 Mexico Bancomext 5,236 39 0.74%
7 Czech Republic CEB 2,408 13 0.54%
8 Hungary Hungarian Eximbank 1,899 8 0.42%
9 USA US EXIM 31,800 126 0.40%
10 Sweden SEK 3,208 9 0.28%
11 Australia EFIC 3,121 5 0.16%
Source: IMF Trade Statistics by Countries (Trade Volume), Annual Reports (Total loan commitment).
The Korea Eximbank took the lead among 11 ECAs in operational efficiency, recording
US$ 78 million for total loan commitment per person. Canada’
s EDC came in second with US$
74 million, and Mexico Bancomext was the lowest with US$ 5 million per person.
Table Ⅳ-1-19 | OECD ECAs’

Total Loan Commitment per Person
Unit: US$ billion
Total Loan
Total Loan No. of
Rank Country ECA Commitment
Commitment Employees
per person
1 Korea Korea Eximbank 54,499 703 78
2 Canada EDC 79,257 1,073 74
3 Austria OeKB 18,132 365 50
4 Slovakia Eximbank SR 4,089 91 45
5 USA US EXIM 12,570 365 34
6 Japan JBIC 14,680 869 17
7 Czech Republic CEB 1,322 116 11
8 Hungary Hungarian Eximbank 789 100 8
9 Australia EFIC 486 70 7
10 Sweden SEK 888 150 6
11 Mexico Bancomext 3,890 779 5
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Concentrated Support of Key Industries
The Korea Eximbank’ s contribution to exports (as measured by the total loan commitment
divided by the export volume) increased from 3 percent in 1995 to 15.6 percent in 2006. Its
contribution to exports in the shipbuilding sector was as high as 63.4 percent, and played a
crucial role in Korea’
s global leadership within the shipbuilding industry since 1999.
The Bank’ s contribution to industrial equipment exports exceeds 40 percent as end of 2006.
The bank played a significant role in upgrading Korea’ s export profile by supporting the export
of large-scale industrial equipments such as the petrochemical and power plants. At the same
time, SME support accounts for 26 percent of the total financing provided by the Korea
Eximbank. The bank contributes significantly to the development of industries and economy
overall.
The Korea Eximbank is trying to develop various types of financing to support the
government policy of promoting new engines of growth, which include green energy, nuclear
power, cultural and knowledge services and defense-related services.
Consultation with Developing Countries
The Korea Eximbank has been active in sharing Korea’ s economic development experience
with developing countries such as Vietnam. In 2005, Korea Eximbank has carried out a
Knowledge Sharing Program (KSP) project on establishment of an export-import bank at the
request of the Vietnamese government. The bank trained local officers from the Ministry of
Finance (MOF), the Ministry of Planning and Investment (MPI) and the Development
Assistance Fund (DAF) on establishing the export-import bank.
In 2006, the Vietnamese government has expanded and modified its DAF and established
the Vietnam Development Bank (VDB) as a result of this policy consultation that covered legal
and regulatory issues as well as operational and administrative matters. Through successive
KSP assignments, continuous consultation has been provided on the application of credit
assessment system and the development of financing products. This program has also played a
great role in expanding the bilateral economic cooperation between Korea and Vietnam.
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5.3. Encouraging Special Economic Zones
5.3.1. The Experience of Cambodia
Brief History
To prepare for an increase in free regional trades, Cambodia must diversify its export
commodities and export markets. Cambodia needs to diversify the export industry primarily by
Foreign Direct Investment (FDI) with necessary technology and capital, and enhance domestic
industries that could provide interactions. Better utilization of local resources other than labor
will have to be improved to increase the value of the resources. Nonetheless, the climate of
investment environment of Cambodia is not amiable, with unstable domestic conditions during
the transition of the economy and severe international competitions, particularly after the
accession of China to World Trade Organization (WTO). Cambodia needed strong and effective
measures to attract FDI by establishing legal base such as amendments of the existing
investment law 1994/1998 and established a pilot area such as Special Promotion Zone with
good infrastructure and competitive prices.
The basic objective of the SEZ is to promote investment, primarily by foreign direct
investment (FDI), for export-oriented manufacturing and service industries, to introduce new
technologies, and consequently to create new jobs.
The Royal Government of Cambodia initially decided to establish Special Economic Zones
(SEZ)124 with a first pilot project in growth corridor between Phnom Penh municipality -
Sihanouk province deep seaport comprising with 7 provinces such as Kandal, Takeo, Kampong
Speu, Koh Kong, Kampot, Kep, Preah Sihanouk province since 2002. Afterwards the number of
Special Economic Zones increased as new zones were appointed along the borders of Thailand
and Vietnam operated by local and international private operators and investors.
The SEZ refers to the special area for the development of economic sectors which brings
together all industrial and other related activities and may include a general Industrial Zone or
Export Processing Zone. Each SEZ shall have a Production Area which may have a Free Trade
Area, Service Area, Residential Area and Tourist Area.
So far the Cambodian government has officially approved 13 SEZs by the Sub-Degree (sub-
degree 148 ANKr.BK-2005) and 8 other SEZs were already licensed by the Cambodia Special
Economic Zone Board of the Cambodia Development Council. Among the approved SEZs, 20
124) Sub-Degree No.148 ANKr.BK: Sub-Degree on the establishment and management of the Special
Economic Zone of the Royal Government of Cambodia.
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Part 4_Trade Policy
are privately owned and operated and the remaining one is owned by a state company. The
current authorized SEZs together with the investment projects in each SEZ are shown in
Appendix IV. There are 36 companies invested in the SEZ as of October 2009.
Policy favor to attract Investors to the Special Economic ones
In order to implement and manage SEZs with transparency and accountability, the initial
sub-degree needs to be further amended. Sub-Degree No. 148 on the establishment and
management of Special Economic Zone which is called the“SEZ sub-degree”was issued in
2005. The law on the Special Economic Zone has been drafted by the CDC in 2008 and is now
under examination of the RGC. In addition, the Cambodian government has been improving
their investment in facilities and services. For example, the government decided in 2005 to
establish the Cambodian Special Economic Zone Board (CSEZB) under the authority of the
Cambodian Development Council (CDC) in order to promote the SEZ scheme in Cambodia.
The board is expected to provide one-stop-service to zone investors starting from the
registration of investment projects to routine of export-import approvals.
Even though the law of SEZ is in progress,“SEZ Sub-Degree”is in effect. The Sub-Degree
is intended to establish and manage the Special Economic Zone and improve the investment
climate conductive to the enhancement of productivity, competitiveness, national economic
growth, export promotion, and employment generation. It further defines the procedures and
regulations related to the establishment, management, coordination of all investment activities,
and promotion of investment of Zone Developers and Zone Investors in the SEZ.
While the Sub-Degree of SEZ was adopted similar to the law of investment, the difference is
that one-stop-service has been created within the zone that provides the most desirable support
for zone developers and investors in processing export documents at one place with cost and
time efficienty.
Another important advantage is with duty exemption for inputsand outputs ofproduction
(more detail see SEZ sub-degree in Annex-2). Based on the Sub-Degree, SEZ developers as
well as SEZ investors within the zone will get duty exemption incentives on import of
production equipments, construction materials and production inputs according to their proposal
request to the Cambodia SEZ Board at CDC.
Tax on profit: The exemption period of tax on profit shall be provided for a maximum of 9
years in compliance to Act 14.1 of Law of Investment in Cambodia.
Import duty and other taxes: Imported equipments and other construction materials to for
infrastructure construction in the zone shall be allowed and exempted of import duty and other
taxes. The zone investor is also entitled to VAT at 0% as tax exemption for every import.
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Detailed information is described in the Investment Law and Sub-Degree of SEZ.
Strategic Industry to Attract to Each Zone
In principle, Cambodia does not have any critical strategic industries to attract each zone.
The rule, regulations and incentive schemes shall be treated in a non-discriminatory manner to
all firms in SEZs or zone investors in the Kingdom of Cambodia. This means that the Law of
Investment ensures that Qualified Investment Projects in SEZs shall benefit the same privileges
as other QIPs (Article 14).
5.3.2. The Experience of Korea125
Due to the unfortunate history of the previous regime, Cambodia is laden with a number of
issues and shortfalls hindering export promotion and industrial development. In order to
enhance the competitiveness of Cambodia with regard to export capacity, the SEZ must be
positioned properly within the national development goal. It will be imperative to promote the
development of SEZ under strong policy coherence within RGC encompassing various sectors,
highlighting on essential issues such as human resource development, proper land use planning,
environmental management, contribution to social development in rural areas, and reliable and
economical provision of necessary infrastructure. The experience of Korea may be helpful for
Cambodia to consider future development direction of the SEZs.
Types of Special Economic Zones
Special Economic Zones (SEZ) are treated differently from rest of the economy. Also, there
are diversified forms of SEZs, depending on basic laws, purposes, governance, favorable
policies implemented and qualification of firms to invest. The most representative ones related
with trade promotion are Free Trade Zones (FTZ), Economic Free Zones (EFZ) and Foreign
Investment Zones (FIZ) for the case of Korea. Their characteristics and differences are
summarized in Table 21.
125) Some parts of this section concerning the special economic zones in Korea is from KDI (2010),
particularly from pp.9-12, and moderated to fit into the current report. While EPZ is one kind of SEZ, EPZ
has been most intensively and successfully used in Korea. Therefore, our discussion mainly concentrates
on EPZ.
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Table Ⅳ-1-20 | Types of Special Economic Zones in Relation with Export Promotion
Free Trade Zone Economic Free Zone Foreign Investment Zone
Its own law on appointment Its own law on appointment Its own law on appointment
Law
and management of FTZ and management of EFZ and management of FIZ
-Attracting FDI
-Attracting FDI
-Trade promotion
-Enhancing national
Purpose -International logistics -Attracting FDI
competitiveness
promotion
-Regional development
-Regional development
Appointment
Relevant Minister (Minister Province Governor or City Province Governor or City
and
of Industry or equivalent) Mayor Mayor
management
Industrial clusters,
International airports,
Location seaports, airports, logistic Inside of industrial cluster
international seaports
hubs, freight terminals
-Industrial cluster type:
Masan, Iksan, Gunsan, Chunahn, Ochang, Injoo,
Locations in Daebul, Donghae, Yulchon Inchon, Busan-Jinhae, Gumi, Pyongdong, Daebul,
Korea -Ports type: Busan, Gwangyang Jinsa, Keumei, Dangdong,
Gwangyang, Inchon, Jisa, etc. (Total 31 zones)
Inchon Airport
-Foreign-invested firms
-Foreign-invested firms, -Foreign-invested firms
(Foreigners’share > 30%)
domestic firms -Manufacturing (exports),
-Manufacturing (exports),
Qualification -Manufacturing (exports), logistics, trading, services
logistics, trading, services
logistics, trading, (medical services,
(medical services,
supporting services education, finance, etc.)
education, finance, etc.)
Corporate tax, income tax: Corporate tax, income tax: Corporate tax, income tax:
100% exemption for first 3 100% exemption for first 3 100% exemption for first 3
years, 50% exemption for years, 50% exemption for years, 50% exemption for
Tax exemption next 2 years next 2 years next 2 years
Local tax: 100% exemption Local tax: 100% exemption Local tax: 100% exemption
for first 8-15 years for first 8-15 years for first 8-15 years
(conditions applied) (conditions applied) (conditions applied)
Waived for imported goods Waived for capital goods for Waived for capital goods for
Import tariffs
and capital goods 3 years 3 years
Rent 10/1000 of land price 10/1000 of land price 10/1000 of land price
100% exemption for

Rent exemption Negotiable 75-100% exemption
Foreign-invested firms
Source: Tcha (2008).
As shown above, the Korean government (or local governments) provided various incentives
for firms to invest in SEZs, particularly for industries with export potential through high techs
and capital. While the Cambodian government provides three major incentives - one stop
service, tariff exemption, and profit tax exemption - the incentives provided by the Korean
government were extensive, including low rent rate (or exemption) and exemption of corporate
478
and income tax as well.126
Among these SEZs, the most popular one used by the government was EPZ. We will review
the brief history of EPZ in Korea in the following.
Historical Overview
Korea had actively pursued an export-oriented strategy since the 1960s. At the early stage of
the economic development, exports were recognized as a main conduit of foreign exchange
receipts, which in turn could be used for purchasing intermediate goods for domestic production
and exports. EPZ (Export Promotion Zone) policy was introduced in Korea in the early 1970s as
part of such export-oriented economic development strategy.
The idea of establishing EPZs in Korea was initially inspired by the Kaoshung EPZ in the
late 1960s (Lee, 2008c). After having visited the Kaoshung EPZ in Taiwan, the members of the
Federation of Korean Industries (FKI), an association of Korean large conglomerates, suggested
to construct EPZs at the monthly‘Export situation room’meeting.127
After a review process, the Korean government established its first EPZ at Masan (a seaport
city) in 1970, shortly followed by the second EPZ in Iksan (an inland city) in 1973. The
government enacted the Free Export Zone Establishment Act, which enabled designations of
these two EPZs. The government provided favorable incentives and business environments to
foreign investors within the EPZs. The Masan EPZ was quite successful, contributed not only to
the development and employment creation of the region but also to those of the rest of the
economy through backward linkages. The Masan EPZ reached its peak in the early 1980s and
then remained stagnant, due to space saturation and rising labor costs (Engman et al., 2007).
Lee (2008c) summarizes the history of the Korean EPZs into three stages of development.
At the first stage, the firms in the EPZ areas specialized in labor-intensive industries without
much linkage with rest of the economy. The majority of EPZ workers were female. The major
motivations for foreign firms to locate in the EPZs were favorable incentives offered by the
government and low labor costs.
Growing linkage between EPZs and rest of the economy characterizes the second stage of
126) It is worthwhile to point out that some previous studies show that some incentive schemes such as tax
incentives are not as important as overall business environments including infra, transport cost and
regulations.
127) Since 1965 the Korean President presided over this meeting with high-ranking government officials and
leaders of the private sector. The basic purpose of this meeting was to regularly review export
performance and remove any of the bottlenecks based on suggestions from the private sector at the
meetings.
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EPZ development in Korea. From the mid-1970s, the productive space in the Masan site was
getting saturated, which resulted in an increasing need for outsourcing of semi-processed
products outside the EPZs. The EPZ administrative authority dealt with this situation, by
amending the EPZ Law, allowing foreign firms to purchase some processed intermediate
goods from the domestic economy.128 This created a close connection between EPZs and the
domestic economy and led the firms in EPZ to specialize in more technology-intensive
processes.
At the third stage of development, the investment share of Korean firms in the EPZs
increased and processes themselves became more technology-intensive. While exports kept on
growing, the employment in the zones significantly declined at this stage. In the mid-1980s,
monthly wage in the Korean manufacturing sectors reached a level of over three times higher
than other countries with EPZs, such as Malaysia and Thailand. Therefore, labor-intensive
industries were no longer suitable as the target of production in EPZs.
In the early 2000s, the existing Free Export Zone Establishment Act was replaced by the
Free Trade Zone Designation Act, as special duty free zones began to incorporate logistic as
well as manufacturing functions. Accordingly, the focus of activity in free trade zones shifted
from manufacturing to areas such as trading, information processing and logistics, which in
turn entails various operations such as storage, transportation, cargo-handling packaging and
marketing. In accordance with this shift, the titles of the zones were changed from“free export
zones”to“free trade zones.”Gunsan and Daebul in Jeolla Province were designated as free
trade zones and the existing zone at Masan underwent a massive expansion.
Success Story of the Masan EPZ
Following its designation as a Free Export Zone in 1970, Masan experienced phenomenal
success. Masan accounts for only 0.2 percent of the total area dedicated to all Korean industrial
complexes, but it successfully positioned itself as a center of processing trade.
As depicted in Figure Ⅳ-1-13, exports generated in the Masan EPZ has been ever growing
from $US 0.9 million in 1971 to $US 4.5 billion in 2001. Exports in 2001 from this area
amounted to 3 percent of Korea’s total exports in the same year. In the 1970s, the export growth
rate from the zone exceeded that of national exports. Electronics and electrical industries
accounted for the majority of total exports at around 70%, and then precision tools and
instruments followed. Major export destinations were Japan and the United States.
128) The partial processing outside the EPZs was required not to exceed 60% of the total manufacturing
process, calculated in terms of production costs. The goods processed or produced by the outzone activity
were components or intermediate products for production processes finalized in the EPZs (Healey and
Lutkenhorst, 1989).
480
Figure Ⅳ-1-13 | Export Growth in the Masan EPZ (US million Dollars)
Source: Administration Agency of Masan Free Trade Zone (http://www.ftz.go.kr).
In terms of employment, the Masan EPZ had steadily expanded until reaching its peak of
36,411 workers in 1987. Furthermore, employment composition changed in a way that the
proportion of women in the area decreased from over 90 percent in 1971 to 70 percent in 1990.
This change reflects the fact that production in the EPZ gradually shifted from unskilled labor-
intensive industries into skilled labor-intensive ones. The number of firms increased
substantially in the years immediately after its establishment, which implies that the Masan EPZ
was consecutively and fully utilized.
Foreign investments in the Masan EPZ had been ever increasing from $US 5 million in 1971
to $US 258 million in 2001. Meanwhile, there had been a significant ownership change since
the establishment of the EPZ. In early 1970s, foreign investment accounted for over 70% of
total investment in the zone. But the share of foreign investment declined since then and
reached at the level of less than 80% in 2000s.
Table Ⅳ-1-22 compares economic effects anticipated at the planning stage and those
realized in 10 and 30 years later from its establishment. As shown in the table below, the Masan
EPZ over-performed in terms of FDI inflows and export growth, while employment creation
was somewhat lower than expected.
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Table Ⅳ-1-21 | Economic Performance of the Masan EPZ
Expected effect
at planning stage Ex post effect (B)
(A)
1970 1980 (B/A) 2000 (B/A)
Foreign Investment (mil. $) 25.0 93.1 3.7 193.7 7.7
Exports (mil. $) 132.5 628.1 4.7 4,442.1 33.5
Employment Creation (1000) 32.3 28.5 0.9 14.4 0.4
Source: Administration Agency of Masan Free Trade Zone (http://www.ftz.go.kr).
As aforementioned, one distinct feature of the Masan EPZ was growing interdependence
between the EPZ and the rest of the economy. When the zone started operations in 1971,
domestic firms supplied only 3 percent of materials and intermediate goods to firms in the zone.
Four years later, that percentage had increased to 25 percent and eventually reached 44 percent.
Consequently, the domestic value added steadily increased from 28 percent in 1971 to 52
percent in 1979 (Engman et al., 2007). In 1988, a total of 56 of the 73 zone firms had engaged
with 525 domestic firms for outsourcing process. This is quite different from EPZs in other
countries.
Table Ⅳ-1-22 | Share of Local Raw Materials Used for Production in EPZs
Local Sourcing of Inputs

Country EPZ Subcontracting
Year Share Year Share
Malaysia Penang 1976 0.2% 1987 17.7% Limited
Korea Masan 1971 3.3% 1985 32.3% Active
Taiwan Total 1967 2.1% 1979 28.3%
Sri Lanka Total 1979 0.0% 1991 3.8% Non-existent
Source: Kusago and Tzannatos (1998).
More importantly, the close liaison between EPZ and the rest of the economy created
favorable environment for technological transfer into the domestic economy. Technology
transfer may occur when there is transfer of personnel between a foreign company and a
domestic company. Efforts by local authorities to promote personnel exchanges, supporting
training efforts and providing technical assistance to potential suppliers have been important
(Jenkins et al., 1998).
About 3,000 to 4,000 persons received specialized training in the zone and abroad
482
(especially Japan), half of which eventually left the zone to work in local electronic Korean
firms. For the periods of 1973~1995, a total of ten thousand workers received trainings from
abroad and more than five thousand foreign engineers were invited into the Masan EPZ.
In addition, the EPZ in Masan contributed to the regional development. Between 1969-when
the EPZ was constructed and in 1974 the population of the city of Masan increased from
179,000 to more than 360,000. Prior to 1969 the population of the city had been growing at a
low average annual rate of 2.2 percent. In the following five years, the opening of the EPZ,
population grew by nearly 16 percent a year.
At its early stage of development in the periods of 1970-80s, last but not the least, the Masan
EPZ has been a crucial factor to nurture the Korean electronics industry, especially in the
semiconductor sector. Korea had started to assemble transistors in the mide-1960s through the
sub-contracting relationship with multinational corporations that intended to take advantage of
cheap labor in Korea. After that many Japanese electronics firms established their subsidiaries
in the Masan EPZ.
These multinational firms introduced the technology of wafer processing and IC production
to Korea. In this process, the Masan EPZs emerged as the early-stage industrial cluster for
electronics sector. Within the Masan EPZs, electric and electronics accounted for about a half of
investment in the late 1970s, and more than 70 percent in 2000s. Likewise, the Masan EPZ case
indicates the significant role of the EPZs in nurturing infant industries for further industrial
development.
Implications
Then, how did the Masan EPZ reach success and become a significant contributor to the
nation’s exports and growth? As far as policy concerns, there are a number of reasons why the
Masan EPZ was highly successful. Comparing these with Cambodia’ s policy towards SEZ will
assist to derive implications for formulating SEZ policies of Cambodia to enhance its
effectiveness of SEZs.
First, the Korean government recognized that the most important contributions of EPZs
include (i) to transfer advanced technology and production know-how to the rest of the
economy, and (ii) to help forward and backward industries ’development through linkage
effects. The EPZ administration actively promoted inter-linkage between local industries and
sub-contractors in the EPZ. EPZ firms in Korea have linked with the local economy through
subcontracting and domestic purchases and have performed positively in generating net exports
and spillover effects.
In doing so, the zone authority allowed preferential access to intermediate goods and raw
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materials to local companies supplying to EPZ firms. In addition, the zone administration
provided technical assistance to sub-contracting firms. Foreign Direct Investment in an EPZ
also had a“demonstration effect”by serving as a role model for replication by local
entrepreneurs (Engman et al. 2007).
Engman et al. (2007) convincingly argue that granting‘equal footing’to local suppliers of
capital and intermediate goods and the usage of subcontracting mechanisms from zone
enterprises to local producers were among the most effective measures. These methods,
combined with overall trade and investment reforms, fostered successful export oriented zones
and backward/forward linkages from the EPZ and the local economy.
Second, a feature of the EPZ of great importance is the existence of a centralized

administrative office with various autonomous decision powers. At the same time, the local
authority kept a close relationship with the central government in implementing the EPZ policy.
In some other countries, a right to issue licenses and permissions to business entities within the
EPZs is often granted to the regional government. In this case, there may be a great possibility
that the regional interest may be involved in the process of EPZ implementation. Things might
be get worse if multiple EPZs co-exist within an economy and if each one is managed by the
regional government, because that may result redundant FDI promotion and unnecessary
competition among these EPZs.
Third, geographic factors as well as infrastructure played important roles for successful
implementation of the EPZ policy. For example, proximity to Japanese ports, a major export
destination, substantially reduced transport costs. Furthermore, the existence of highway
directly to Busan and harbor facilities prior to the establishment of EPZ also reduced initial
investments for the EPZ.
Last but not the least, policy consistency toward export-oriented strategy maintained by the
Korean government also contributed to the success of the Masan EPZ. For example, in order to
ensure cost competitiveness of exporters, the government underwent periodic devaluation
thereafter. And export bureaucracy functioned efficiently enough to ensure that the incentives
and systems ensuring access to them could be adjusted thorough continuing evaluation of the
government in response to the changing environment locally and abroad (Ahn and Kim, 1997).
484
6. Summary
This report has four aims:
(i) to overview the trade of Cambodia,

(ii) to analyze the patterns of exports of Cambodia,
(iii) to review the current export policy and bottlenecks for exports of Cambodia, and
(iv) to suggest future policy agendas for export promotion and growth.
By investigating and analyzing the nation’

s trade data, this report concludes that Cambodia
utilizes its comparative advantage successfully, which might be one of the reasons why the
nation’ s exports have grown so rapidly in the recent period. Development is a process of
continuous inventions and innovations based on comparative advantage, utilizing the global
market. In this regard, it can be concluded that Cambodia ignited its economic development
successfully by concentrating on exports where it had comparative advantage.
However, it should be pointed out that after a nation reaches a certain level of development,
comparative advantage should move into higher value-added sectors. The nation should actively
integrate with‘differentiation’based on advanced technology and capital investment for
further growth of exports and economy. So far, the nation’ s trade pattern which is strictly
consistent with its current comparative advantage is correlated with a very low level of intra-
industry trade (IIT), where IIT is based on‘differentiation’of products.
In fact, this low level of IIT is also found in other SEA economies with low levels of
income. Low level of capital and technology combined with immature consumption patterns in
these economies, where Cambodia is one of them, prohibits them from climbing up the quality
ladder and producing differentiated goods.
While it is reasonable to argue that Cambodia’ s development stage is not sufficiently high to
demonstrate capacity for IIT, it is implied that the nation may have lost great potential to
expand its trade if it can climb up the quality ladder and reach the stage of differentiating its
products. Differentiation of products requires technology and capital, and results in higher level
of value-added, which is consistent with creating comparative advantage in high value-added
sectors. Consequently, the Cambodian government has to have deep consideration on how to
help the economy develop more sophisticated production processes, resulting in production of
more elaborated and differentiated products.
It was also pointed out that Cambodia’ s exports have been directed towards only a few
countries. This may be helpful for the expansion of exports when the destination countries grow
rapidly. However, it simultaneously implies the possibility of large swing of export performance
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and rapid saturation of the foreign market, which results instability of the economy. Therefore,
the effort to increase its extensive margin, or to increase the number of export destination is
necessary.
Reviewing the current export promotion policy of Cambodia indicates that the nation is
moving in the proper direction to encourage the private and/or export sector without seriously
hurting or distorting the efficient allocation of resources. The efforts of the government to
respect the market principle and abide by the global economic norms and standards are
impressive. It also firmly understands the kinds of bottlenecks the exporting sector is facing,
and how they should be resolved. In this regard, the Cambodian government has all the
important information, and wisely recognizes what it is supposed to do.
Nevertheless, a few suggestions can be derived from this analysis. There may be more
suggestions to enhance global competitiveness of the industry through so-called industry policy
complying with the global standard, however, more discussion on that issue is beyond the scope
of this report. This report concentrates on suggestions specific to export promotion. They
include enhancing:

As Topic (i) is dealt in another chapter of this volume, Topics (ii) and (iii) are discussed in
this report, based on the current status in Cambodia and the experience of Korea. All of the
three policies virtually encouraged Korea’ s export performance, and helped its export to grow
more than 30 percent p.a. for more than three decades since the 1960s.
The comparison of the two nations’experience for the two issues produces implications for
Cambodia. The establishment of so-called Cambodia’ s Eximbank and amendment of
government policies for SEZs should be seriously and positively considered. If they are
regarded to be essential for further growth of Cambodia’ s exports, more concrete and detail
approaches will be needed to practically introduce the system into the nation. This may be
conducted more easily through future collaboration between Cambodia and Korea.
Alike Cambodia, Korea has extensively utilized SEZs to attract FDI and to increase exports
throughout the process of development since 1970. While the two nations’SEZ systems share
commonalities, a few key points for success are found from the experience of Korea, which
may be useful for Cambodia to form future policies. As well as some incentives for potential
investors into the zones including tariff exemptions and one-stop-service, the Korean
government exerted its efforts to enhance the linkages between the zone firms and local
companies, thereby help transfer technology and boosting domestic industries through linkage
486
effects. Also, very effective central administration coordinated each SEZs’policies from the
social planner’ s point of view. More detailed information about the SEZ could be shared
through future collaborative research.
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REFERENCES
Administration Agency of Masan Free Trade Zone, Main Statistics (at http://www.ftz.go.kr)
Ahn, Choong Yong and Joo Hoon Kim, “The Outward-Looking Trade Policy and the Industrial
Development of South Korea,” (ed) Cha, Dong Se et al., The Korean economy 1945-1995:
Performance and Vision for the 21st Century, Korea Development Institute, 1997.
Carrere, C. et al.“Export Diversification: What’s Behind the Hump?,”CEPR Discussion Paper

No. DP6590, 2008.
Engman, M. et al.“Export Processing Zones: Past and Future Role in Trade and Development,”
OECD Trade Policy Working Paper No. 53, 2007.
Healey, D. and W. Lutkenhorst,“Export Processing Zones: The Case of the Republic of

Korea,”Industry and Development 26, 1989.
Hummels, D. and P.J. Klenow,“The Variety and Quality of a Nation’

s Exports,”American
Economic Review, Vol. 95 No. 3, 2005.
Jenkins, Mauricio Gerardo Esquivel and Felipe Larrain B, “Export processing zones in Central
America”, Harvard Institute for International Development Working Paper, No. 646, 1998.
Kusago, T. and Z. Tzannatos,“Export Processing Zones: A Review in Need of Update,”Social

Protection Discussion Paper No. 9802, World Bank, 1998.
KDI,“Analysis of Azerbaijan’s Export Structure and its Implications for Diversification

Strategy,”in Follow-up Issues in Accession and Implementation of the WTO Systems for
Azerbaijan, Korea Knowledge Sharing Program, Korea Development Institute, 2010.
KDI,“The Strategies for Industrial Diversification through Export Promotion,”in WTO

Accession Strategies for Azerbaijan, Korea Knowledge Sharing Program, Korea
Development Institute, 2008a.
KDI,“Change in Trade pattern with China and its Macroeconomic Implications,”Policy Issue
Series 2008-15, Korea Development Institute, 2008b. (in Korean)
KDI,“Korea’ s Experience on Special Economic Zones (SEZs) and its Implications for
Uzbekistan,”in Jeng, Y. (ed), Feasibility Study on Establishing Special Economic Zones,
488
Korea Institute for International Economic Policy, 2008c.
Tcha, M, Feasibility Study for Woolsan Free Trade Zone, Korea Development Institute, 2008.
UNCTAD, Handbook of Statistics, 2009.(at http://www.unctad.org/statistics/handbooks).
UNCTAD, United Nations Commodity Trade Statistics Database, UN Statistics Division, (at
http://comtrade.un.org/db/default.aspx).
Vollrath, T.L. and Johnston, P.V., The Changing Structure of Agricultural Trade in North
America Pre-and Post-CUSTA/NAFTA: what does it mean?, Economic Research Service,
USDA, Washington, DC, 2001.
WTO, World Trade Report, World Trade Organization: Geneva, 2008.
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Appendix 1
Major Export Items and Destinations
The major export items of Cambodia and its significant destinations are described as follows:
a) Garment
As described previously, garment has introduced Cambodia to a new age of international

trade integration. Since the mid-1990s when garment exports started in Cambodia from virtually
zero (until the mid-1990s only a small-scale production for domestic market existed), this sector
has steadily grown up. Despite frequent warnings that Cambodia’ s garment success will
collapse once the MFA expires (at the end of 2004) due to lack of domestic input suppliers, it
turned out that the garment industry is much sustainable than expected.
Obviously, Cambodia is successfully identified and occupies under the MFA protection as a
considerable niche market by exporting products that are produced under comparatively labor-
friendly working conditions (wages, working time, regular breaks, health conditions, etc.). This
enables Cambodia to export despite higher production costs (compared to major competitors
such as China, Bangladesh or Vietnam) to buyers who are concerned of labor standards (often
fearing human right campaigns in their respective markets) and agree to order at least some of
their supply from labor-friendly production sources.
A decline in Cambodia’ s garment export occurred only with the outbreak of the world
financial crisis especially when the demand declined in the US. Here the decline in demand for
Cambodian products was even stronger than for the garment industry in general as in times of
crisis labor-friendly working conditions are much less an issue than declining incomes of
consumers abroad. However, recently, the Cambodian garments export begins to stabilize.
The main categories are articles of Cambodia’ s garment industry include apparel and
accessories either“knit or crochet”(HS 61) or“not knit or crochet”(HS 62). Table 5 and 6
document the country markets for these products. For both categories the US market is clearly
the strongest one accounting for 58% and 73% of total Cambodian exports respectively for
these products. The remainder is exported to various member states of the European Union (led
by Germany) and Canada.
490
Table Ⅳ-1-A-1 | Export of Articles of Apparel, Accessories, Knit or Crochet (HS 61) (2008)
Exported growth in
Export value, USD Share in Cambodia’
s Tariff faced by
Importers value (2004-2008),
thousand exports, % Cambodia
%, p.a.
Total 2,912,249 100 23
USA 1,676,865 57.6 27 14.4
Germany 264,703 9.1 3 0
Canada 170,658 5.9 41 0
Spain 158,726 5.5 47 0
UK 147,964 5.1 -1 0
France 83,702 2.9 16 0
Belgium 58,737 2 60 0
Poland 43,648 1.5 105 0
Italy 29,982 1 70 0
Austria 28,597 1 14 0
Source: International Trade Center (mirror data)
Table Ⅳ-1-A-2 | Export of Articles of Apparel, Accessories, not Knit or Crochet (HS 62) (2008)
Share in Exported growth in

Export value, Tariff (estimated)
Importers Cambodia’ s value (2004-2008),
USD thousand faced by Cambodia
exports, % %, p.a.
Total 1,128,097 100 1
USA 825,877 73.2 0 10.7
Canada 74,946 6.6 8 0
Germany 43,990 3.9 -8 0
UK 43,426 3.8 1 0
France 19,482 1.7 -16 0
Luxembourg 11,012 1 17 0
Mexico 10,751 1 55 30
With the decline in garment exports after the outbreak of the world financial crisis and
demand setbacks especially in the US, other products such as agro-products have won
importance in Cambodian export. However, even without this decline in world demand for
Cambodian garment which is expected to be rather a temporary problem, the government is
well aware that the export structure needs to be set on a broader basis in order to continue to
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move on the path of export-fuelled economic growth.
b) Footwear
In the shadow of garment, the footwear industry developed as an export sector in Cambodia.
Similar to garment, the footwear industry has been established mostly through foreign investors
(especially from Taiwan) who built factories in the mid-1990s in order to benefit from favorable
market access provided by key overseas markets of Cambodia. The factories normally work as
sub-contractors to their foreign owners. As Table 6 indicates the main regional market of
Cambodian footwear in 2008 was, the European Union where tariff-free market access was
granted due to Cambodia’ s status as a Least Developed Country (LDC). Germany and the UK
account for about 44% of the Cambodian footwear exports. The largest individual market,
however, is Japan (33%) where Cambodia enjoys a very moderate tariff (2.7%). Originally,
Japan had a much higher share in Cambodia’ s footwear exports but lost importance due to the
increase of Cambodian exports to the EU market.
Table Ⅳ-1-A-3 | Export of Footwear, Gaiter and the Like, Parts Thereof (HS 64) (2008)

Exported value, Tariff faced by
Cambodia’ s value (2004-2008), %,
USD thousand Cambodia
exports, % p.a.
Total 305,067 100 17
Japan 99,723 32.7 5 2.7
Germany 74,047 24.3 14 0
UK 58,712 19.2 93 0
France 13,454 4.4 40 0
Italy 10,219 3.3 93 0
Austria 7,308 2.4 15 0
Poland 3,834 1.3 40 0
Source: International Trade Center.
c) Rubber
Cambodia has a long history of rubber cultivation that began in the French colonial times.
This production was mostly abandoned during the 1970s under the Civil War and rule of the
Khmer Rouge. Especially in the 1990s rubber plantation received more attention and was
revitalized. With increasing international market orientation, again, rubber became an important
crop in Cambodia. Due to the lack of domestic processing facilities these plantations provide
substantial raw-material supply for export.
492
Estimations on the size of these exports are difficult to make due to the fact that considerable
volumes of rubber are exported informally and also production statistics are not sufficiently
reliable. It can be clearly stated that rubber is a particularly dynamic sector in Cambodia that
attracts an increasing number of domestic farmers as well as foreign investors who use land-
concession to build large-scale rubber plantations. As mentioned earlier, according to mirror-
data total rubber exports account, about 2% of total exports by Cambodia, however, due to
informal trade the real number is substantially higher and increasing as many farmers change
from their former crops to rubber due to a favorable rubber price development in recent years.
The mirror data for official exports indicate that most rubber is exported to Vietnam (71% in
2008) followed by China (12.5%) (see Table Ⅳ-1-A-4). However, substantial amount of rubber
is traded informally, where most of them are grown in the Eastern provinces of Cambodia near
Vietnam. Therefore, the real importance of the Vietnamese market, where Cambodian rubber is
processed and then exported worldwide, is expected to be even higher. It is therefore one of the
main challenges for the Cambodian rubber industry for the years to come to diversify the export
markets for this product, especially through active domestic processing and higher value-added
within Cambodia. As China has a strong industrial demand for rubber and Cambodia’ s exports
to this market have already grown significantly in recent years, this market provides enormous
opportunities for future exports.
Table Ⅳ-1-A-4 | Export of Rubber and Articles (2008)

Importers Cambodia’ s value (2004-2008), %,
exports, % p.a.
Total 91,970 100 9
Vietnam 70,954 77.1 5 2.8
China 11,495 12.5 53 11.3
Malaysia 6,445 7 38 1.9
Rep. of Korea 1,598 1.7 -9 2.7
d) Rice
While rice is only of marginal importance, according to mirror data (see Table 8), it is a
major export sector for the Cambodian economy and is expected to further grow in the years to
come. Like rubber, Cambodia has a long tradition as an exporter of rice both in colonial times
and after independence. However, with the outbreak of civil war in the early 1970s and
especially under the rule of Khmer Rouge, exports stopped and this once rice rich nation
experienced years of starvation. It took until the mid-1990s for Cambodia to produce enough
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rice to feed its ownpopulation. Since then, steady increases in the cultivated areas and yields
have provided Cambodia with a large production surplus available for export. While some
sources even believe that about 2 to 3 million tons are available for export, more conservative
estimates indicate that about 1.6 million tons are exported (informally) as paddy to neighboring
countries (with a market value of about $US 400 million) and show only symbolic exports of
20,000 tons milled rice (and a market value of about $US 14 million).
The small share of rice that is exported in milled form (white rice) demonstrates Cambodia’
s
weakness in processing its rich agricultural resources. However, considerable improvements are
made over the past 2-3 years as many rice millers (including some new foreign investors)
introduced new processing technologies and have set up rice mills that are able to meet
international quality standards. Recent exports (in 2010) of white rice to various member
countries in the European Union (where Cambodia enjoys tariff-free market access since
September 2009) indicate the large potential of exports provided in Cambodia.129
According to the mirror data, which reflects the formal exports of milled rice, France, Italy
and a few Asian countries had been the main markets during the past (see Table Ⅳ-1-A-5).
Latest information on milled rice exports in 2010 indicates that Eastern European countries
(Poland, Lithuania) are gaining importance as trade partners.
Table Ⅳ-1-A-5 | Export of Rice (HS 1006) (2008)

Exported value,
Importers Cambodia’ s value (2004-2008), Tariff faced by Cambodia
USD thousand
exports, % %, p.a.
Total 4,104 100 4
France 1,849 45.1 19 4.8
Malaysia 991 24.1 40
Vietnam 466 11.4 7.1
Singapore 354 8.6 0
Italy 234 5.7 4.8
Germany 185 4.5 4.8
Poland 17 0.4 4.8
Belarus 8 0.2 0
129) Cambodia’ s main Asian competitors in the EU such as Thailand, Vietnam, India and Pakistan do not
benefit from this tariff-free market access since these countries are not considered as Least Developed
Countries (and therefore excluded from the Everything-but-Arms initiative).
494
e) Corn
Corn cultivation exists especially in the western provinces of Cambodia near the Thai
border. It has been particularly one of the dynamic crops in Cambodia over the past decade due
to the strong demand for corn in Asia which can be processed into many kinds of products,
especially animal feed (bio-fuel is another increasingly important use, however, the size of this
production is still comparatively small). Corn exports (as unprocessed raw material) are also
estimated to have increased significantly over the past decade, however, due to informal trade of
this crop, it is difficult to give an estimate. According to mirror-data, the main regional market
for Cambodian corn is Thailand (see Table Ⅳ-1-A-6). The second most important regional
market (Taiwan) is already of rather marginal importance at the moment. Especially with more
and improved processing facilities in Cambodia, it is expected that China will become the main
market for Cambodian corn.
Table Ⅳ-1-A-6 | Exports of Corn (HS 1005) (2008)

Exported value, USD Tariff faced by
Importer Cambodia’ s value (2004-2008), %,
thousand Cambodia
exports, % p.a.
Total 32,636 100 82
Thailand 31,835 97.5 93 18.3
Taiwan 612 1.9 7 0
Hong Kong 189 0.6 0
f) Cassava
The cassava production has increased dramatically in recent years in Cambodia, especially
near the borders to Thailand and Vietnam. Due to the lack of a domestic processing industry
(despite some first factories established in recent years), harvested cassavas are exported to
these two neighboring countries. As tariffs are high, most of the cassavas are traded informally
with Thailand and not covered by the mirror data. The mirror data that reflect export of the few
processed productsindicate extremely high growth rates for cassava exports to Vietnam,
however, the growth rates are derived from a low level at the outset (see Table Ⅳ-1-A-7). In
Vietnam and Thailand, normally processing is arranged for the Cambodian raw cassava in order
to be exported worldwide afterwards (cassava’ s myriad of uses is for industrial purpose, bio-fuel
and food products). Mainland China, the main market for cassava,has been so far not accessed
by the Cambodian cassava exporters.
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Table Ⅳ-1-A-7 | Export of Cassava (HS 0714: Manioc, Arrowroot Salem/Yams, etc.) (2008)

Importers Cambodia’ s value (2004-2008), %,
exports, % p.a.
Total 22,045 100 203
Vietnam 18,553 84.2 190 0
Thailand 3,492 15.8 35
g) Other export products
Other current export items of Cambodia include mainly unprocessed agro-products such as
cashew, soybean or fruits, fishery and silk products; silk is one of the few processed products.
However, the quantities for most of these exports had been relatively low over the past decade
compared to the items described in prior paragraphs.
With regard to cashew, soybean and fruits, the direction of trades are very similar to other mass
agro-crops (rice, cassava, corn) since most of these items are forwarded immediately after harvest
to neighboring Vietnam and Thailand where processing and/or further export (to worldwide
markets) is conducted. Again, most of these trades are conducted informally and are considered
seasonal business because few agro-products are stored in Cambodia after its harvest time. In the
past, Cambodian cashews were mostly exported to Vietnam. Exceptions had been minimal and
were absorbed by local processing factories which later closed. Currently, India emerges as a
potential buyer of the Cambodian cashew. It is important to note that fruits are actually imported
to Cambodia in contrast to most agro-exports. Only at the end of the rainy season, a large supply
of fruits enables Cambodia to conduct considerable exports, while during the rest of the year, lack
of irrigation requires Cambodia to import most fruit products from neighboring Thailand and
Vietnam. Table 11 covers both mirror data for exports of cashew nuts and fruits.
Table Ⅳ-1-A-8 | Edible Fruits, Nuts, Peel or Citrus Fruits, Melon (HS 08) (2008)
Exported growth in
Exported value, Share in Cambodia’
s Tariff faced by
Importers value (2004-2008),
USD thousand exports, % Cambodia
%, p.a.
Total 34,280 100 18
Vietnam 34,221 99.8 19 6.2
Thailand 43 0.1 -41 78.2
Canada 13 0 -19 0
UK 3 0 0
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Fishery products had been a more important export item in the past than they are today. With
the huge Tonle Sap Lake, Cambodia owns one of the world’ s most diverse fishery reserves
which is an important source of nutrition for the Cambodian people. Still considerable quantities
of fishery products are exported from the lake, and marine fishing and fish ponds have become
additional sources for the Cambodian fishery export. However, weakness in management of the
fishery resources (especially in the Tonle Sap Lake) has reduced domestic supply while the
increasing domestic demand also reduced opportunities for exports. Consequently, fishery is
one of the few export items for which a constant decline has been observed over the past decade
(see also table Ⅳ-1-A-9).
However, with more effective resource management that the government intends,the
Cambodian fishery could recover and gain back its place in the international trade. Currently,
most Cambodian fishery products are exported to neighboring Thailand, Vietnam (not reflected
by mirror data as most of this export is not sufficiently registered), the US (the main market for
official exports) and a few other Asian countries. Factually, the European Union is currently
closed as an export destination for Cambodian fishery products due to SPS issues.
Table Ⅳ-1-A-9 | Export of Fish, Crustaceans, Molluscs, Aquatic Invertebrates (HS 03) (2008)

Importers Cambodia’ s value (2004-2008),
exports, % %, p.a.
Total 7,818 100 -22
USA 3,607 46.1 -30 0
Hong Kong 1,538 19.7 -13 0
Thailand 1,070 13.7 -6 10.1
China 852 10.9 -3 0
Singapore 428 5.5 5 0
Japan 100 1.3 -19 1.5
Rep. of Korea 86 1.1 11.4
Macao 55 0.7 167 0
Vietnam 50 0.6 20 4.9
Malaysia 32 0.4 -14 0.3
Cambodian silk is a very popular product both with local and international consumers. Most
Cambodian silk (incl. the famous Cambodian Golden Silk) is currently sold to domestic consumers
and foreign tourists who bring it to their home country (indirect exports). Direct exports to markets
around the world (Europe, USA, Asia, Australia) are still comparatively small but are growing.
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Appendix 2
Cambodia’ s Standings in Major Export
Destinations
Cambodia’ s relative standings in major export destinations are summarized in following

tables for selected important items:
Table Ⅳ-1-A-10 |“Articles of Apparel, Accessories, Knit or Crochet”Product
Exports destination Exports country Rank Share in total exports1)

China 1 25.01%
Honduras 2 5.48%
US
Mexico 3 5.36%
Cambodia 6 3.76%
China 1 32.03%
Turkey 2 19.16%
EU
Bangladesh 3 10.71%
Cambodia 11 1.66%
China 1 49.60%
Bangladesh 2 7.22%
Canada
US 3 6.94%
Cambodia 5 3.34%
China 1 25.59%
Malaysia 2 25.05%
Singapore
Indonesia 3 13.62%
Cambodia 10 1.61%
1) : Average value in 2005 ~ 2008
Source : Author’ s calculation based on UN comtrade database.
498
Table Ⅳ-1-A-11 |“Articles of Apparel, Accessories, not Knit or Crochet”Product

China 1 33.04%
Mexico 2 8.05%
US
Indonesia 3 5.77%
Cambodia 11 2.23%
China 1 42.59%
Turkey 2 10.96%
EU
India 3 6.55%
Cambodia 24 0.31%
China 1 51.46%
Bangladesh 2 6.41%
Canada
US 3 5.78%
Cambodia 9 1.85%
China 1 36.48%
Hong Kong 2 14.19%
Singapore
Indonesia 3 10.18%
Cambodia 12 1.24%
Table Ⅳ-1-A-12 |“Footwear, Gaiters and the Like, Parts Thereof”Product

China 1 45.47%
Vietnam 2 17.62%
EU
India 3 7.21%
Cambodia 16 0.70%
China 1 70.96%
Italy 2 8.43%
Japan
Vietnam 3 4.15%
Cambodia 5 2.64%
China 1 36.94%
Vietnam 2 13.73%
Singapore
Malaysia 3 11.00%
Cambodia 19 0.32%
China 1 64.73%
Vietnam 2 7.26%
Canada
Italy 3 6.32%
Cambodia 37 0.06%
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Table Ⅳ-1-A-13 |“Rubber and Articles Thereof”Product

Thailand 1 20.37%
Japan 2 13.14%
Vietnam
China 3 10.24%
Cambodia 4 10.22%
Thailand 1 44.87%
Japan 2 12.42%
Malaysia
Indonesia 3 6.51%
Cambodia 21 0.55%
Thailand 1 20.84%
Malaysia 2 14.41%
China
Japan 3 12.13%
Cambodia 32 0.10%
Malaysia 1 15.21%
Indonesia 2 14.38%
Singapore
Japan 3 14.12%
Cambodia 74 0.00%
Table Ⅳ-1-A-14 |“Wood and Articles of Wood, Wood Charcoal”Product

Malaysia 1 16.54%
Laos 2 10.92%
Vietnam
China 3 10.27%
Cambodia 5 7.00%
Russia 1 35.19%
US 2 7.73%
China
Malaysia 3 6.23%
Cambodia 36 0.21%
Malaysia 1 42.06%
Myanmar 2 15.45%
Thailand
Laos 3 10.74%
Cambodia 24 0.20%
China 1 47.32%
US 2 10.70%
Hong Kong
Malaysia 3 8.81%
Cambodia 28 0.24%
500
Table Ⅳ-1-A-15 |“Vehicles Other than Railway, Tramway”Product

Japan 1 31.95%
US 2 15.44%
EU
Turkey 3 14.96%
Cambodia 34 0.05%
Japan 1 29.94%
Germany 2 28.56%
Hong Kong
China 3 10.46%
Cambodia 44 0.00%
Japan 1 62.25%
Philippines 2 7.14%
Thailand
Germany 3 5.26%
Cambodia 39 0.01%
Japan 1 33.73%
Germany 2 28.71%
China
Korea 3 10.59%
Cambodia 95 0.00%
Table Ⅳ-1-A-16 |“Fish, Crustaceans, Molluscs, Aquatic Invertebrates”Product

Canada 1 17.44%
China 2 14.00%
US
Chile 3 9.37%
Cambodia 56 0.06%
Japan 1 15.28%
China 2 11.57%
Hong Kong
Australia 3 10.57%
Cambodia 56 0.11%
Russia 1 37.04%
US 2 13.15%
China
Japan 3 5.97%
Cambodia 60 0.03%
Indonesia 1 17.92%
Malaysia 2 14.31%
Singapore
Vietnam 3 6.77%
Cambodia 57 0.05%
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Appendix 3
Cambodia’
s Import Origins for Major Importing
Goods
Tables Ⅳ-1-A-15 to Ⅳ-1-A-16 show major import items by origin. Even though these
mirror data do not cover the informal cross-border trades, neighboring countries such as
Thailand and Vietnam, are, the main import suppliers for most products (e.g. mineral fuels,
vehicles, electronic equipment, and beverages). With regard to knitted or crotched fabrics (the
main inputs for the garment industry), Chinese suppliers are the dominant import source. With
regard to tobacco products, Indonesia is the major supplier for the Cambodian market.
Table Ⅳ-1-A-17 | Imports of Mineral Fuels, Oils, Distillation Products, etc. (HS 27) (2008)
Imported value Share in Imported growth in

Tariff applied by
Exporters 2008, USD Cambodia's value between 2004-
Cambodia
thousand imports, % 2008, %, p.a.
Total 1,288,279 100 35
Vietnam 631,687 49 46 4.7
Thailand 451,687 35.1 39 4.7
Singapore 171,825 13.3 8 4.7
China 15,673 1.2 50 6.2
Table Ⅳ-1-A-18 | Imports of Knitted or Crocheted Fabric (HS 60) (2008)

Tariff applied by
Exporters 2008, USD Cambodia's value between
Cambodia
thousand imports, % 2004-2008, %, p.a.
Total 884,576 100 27
China 287,723 32.5 37 7
Hong Kong 223,605 25.3 25 7
Taiwan 159,721 18.1 14 7
Rep.of Korea 89,132 10.1 48 7
Malaysia 66,663 7.5 25 5.7
Vietnam 26,820 3 51 5.7
Thailand 23,630 2.7 9 5.7
502
Table Ⅳ-1-A-19 | Imports of Vehicles Other than Railway, Tramway (HS 87) (2008)

Tariff applied by
Exports 2008, USD Cambodia's value between
Cambodia
Total 568,510 100 34
Thailand 244,358 43 33 12.8
USA 117,987 20.8 42 23.5
Rep. of Korea 60,566 10.7 29 23.5
Japan 39,954 7 15 23.5
Vietnam 27,933 4.9 119 12.8
China 27,853 4.9 48 22.6
Hong Kong 13,090 2.3 139 23.5
Taiwan 11,262 2 101 23.5
Singapore 8,843 1.6 6 12.8
Table Ⅳ-1-A-20 | Imports of Electrical, Electronic Equipment (HS 85) (2008)

Tariff applied by
Cambodia
Total 407,946 100 29
China 113,126 27.7 71 16.8
Thailand 68,594 16.8 13 6.1
Singapore 62,460 15.3 31 6.1
Hong Kong 60,697 14.9 33 17.7
Vietnam 35,803 8.8 68 6.1
Japan 15,028 3.7 14 17.7
Republic of Korea 14,916 3.7 70 17.7
Sweden 5,836 1.4 69 17.7
France 4,887 1.2 -14 17.7
Taiwan 4,653 1.1 16 17.7
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Part 4_Trade Policy
Table Ⅳ-1-A-21 | Imports of Tobacco and Manufactured Tobacco Substitutes (HS 24) (2008)

Tariff applied by
Cambodia
Total 172,526 100 18
Indonesia 122,757 71.2 28 7.7
France 19,250 11.2 1222 8.2
Singapore 7,212 4.2 -27 7.7
China 4,538 2.6 5 8.1
Hong Kong 4,318 2.5 25 8.2
Vietnam 3,780 2.2 36 7.7
India 2,734 1.6 150 8.2
Brazil 2,456 1.4 43 8.2
Republic of Korea 2,235 1.3 35 8.2
Table Ⅳ-1-A-22 | Imports of Beverages, Spirits, Vinegar (HS 22) (2008)

Tariff applied by
Cambodia
Total 164,847 100 25
Thailand 91,739 55.7 19 32.1
Singapore 27,265 16.5 17 32.1
Vietnam 21,309 12.9 84 32.1
China 12,016 7.3 175 30.9
France 5,035 3.1 46 35
Malaysia 3,631 2.2 33 32.1
504
Appendix 4
List of SEZs in Cambodia
At present, there are 21 SEZs in Cambodia. In general, they are, being developed recently,
and many zones are still developing infrastructure, or just finished building. Only a few zones
have a few firms in operation but most of the zones do not have operating firms yet.
Table Ⅳ-1-A-23 | Cambodia’

s SEZ as of October 2009
1. Neang Kok Koh Kong SEZ
1) Location Neang Kok Village, Pakklong Commune, Mundul Seyma Destrict, Koh KOng
Province
2) Land area 335.43 h.a
3) Project Implementation Infrastructure Development: Fencing
4) Zone Investor CAMKO Motor Company Ltd. (Vehicle Assembly of Hyundai car and Spare
part).
2. Suoy Chheng SEZ
1) Location Neang Kok Village, Pakkhlong Commune, Muldul Seyma District, Koh Kong
Province.
2) Land area 100 h.a
3) Project Implementation Infrastructure Development
4) Zone Developer None
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Part 4_Trade Policy
s SEZ as of October 2009 (continued)
3. S.N.C SEZ
1) Location Sankat Bet Trang, Khan Prey Nob, Preah Sihanouk Province.
4. Stung Hav SEZ
1) Location Sangkat Oh Tres, Stung Hav District, Preah Sihanouk Province
5. N.L.C SEZ
1) Location Phum Prey Phdao and Phum Thlok, Khum Chrok Mtes. Srok Svay Teab, Svay
Rieng Province.

6. Manhattan SEZ
1) Location Bavet Commune, Chatrea District, Svay Rieng Province.
3) Project Implementation The company already built infrastructure, connecting power grid from
Vietnam and Fencing of the first phase of 70 h.a.
4) Zone Developer a. Best Way Industry Co., Ltd. (Bicycle manufacturing)

b. S.Y.G. Steel International Co., Ltd (Bolt-Nut manufacturing)
c. Kingmaker Footwear Co., Ltd (Footwear manufacturing)
d. Galaxy Textile Co., Ltd (Garment manufacturing)
e. ARC Cambodia Corp. (Hi-tech equipment recycling)
f. MSEZ Comfort Hospital Co., Ltd (Hospital)
g. Sheico (Cambodia) Co., Ltd (Neoprene wetsuits manufacturers)
h. Forest Packing (Cambodia) Co., Ltd (Packing Bag Factory)
i. Pique Garment Co., Ltd (Garment manufacturing)
j. Leegrow Plastic Packaging Co., Ltd (Packaging bag manufacturing)
k. Ampac Packaging (Cambodia) Ltd. (Manufacturing packaging products for
export).
7. Poi Pet O'Neang SEZ
1) Location Poi Pet Commune and Nimit Commune, O'Chrove District, Banteay
Meanchey Province
506
2) Land area 467 h.a.
3) Project Implementation Infrastructure Development, Fencing, Entrance gate, Electric Pole.
4) Zone Developer Campack Co., Ltd. (Jewelry Packing Manufacturing)

8. Doung Chhiv Phnom Den SEZ
1) Location Kiri Vong District, Takeo Province
3) Project Implementation Infractructure Development: Landfill and fencing.
4) Zone Developer None.

9. Phnom Penh SEZ
1) Location Khan Dongkor, Phnom Penh and Srok Angsnoul of Kandal Province.
3) Project Implementation Infrastructure Development: build fence, roads, the administrative building,
entrance, electricity, water and telecommunication system.
4) Zone Developer a. Navy Water Production Co., Ltd ( Pure drinking water factory)
b. Bok Seng PPSEZ Dry Port Co., Ltd (Dry Port)
c. Redial Industrial Co., Ltd (Textile and Printing Factory)
d. Civil (CP) Construction Products Co., Ltd (Electric Pole Factory)
e. Tiger Wing Co., Ltd (Shoe Manufacturing Factory)
f. Evergreen Industrial Co., Ltd (Garment)
g. Yamaha Motor (Cambodia) Company Limited (Motor Assembly,
accessories and spare parts)
h. Cambodian Success Industrial Co., Ltd (Steel Processing Factory: Material
for construction)
i. Agricom (Cambodia) Co., Ltd (Sugar Packaging)
j. Cambox Private Limited (Plastic Box Manufacturing)
k. JI-XIANG Co., Ltd (Processing Cartons and Papers Production)
l. COLBEN ENERGY (Cambodia) PPSEZ Limited (Power Plant)
m. YI XIANG Co., Ltd (Plastic Factory)
n. Ajinomoto (Cambodia) Co., Ltd (Manufacturing Seasoning and Processing
Food)
10. Kampot SEZ
1) Location Koh Toch Commune, Kampor District, Kampot Province.
3) Project Implementation Infrastructure Development, landfill, and building Kampot Seaport.
11. Sihanoukvill SEZ 1
1) Location Stung Hav District, Sihanouk City.
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Part 4_Trade Policy

12. Tai Seng Bavet SEZ
1) Location Bavet Ditrict, Svey Rieng Province
3) Project Implementation Infrastructure Development, Fencing, landfill, connecting electricity into the
zone.
a. Atlantic Cycle Co., Ltd (Bicycle manufacturing)
4) Zone Investor b. La More (Cambodia) Ltd. (Footwear manufacturing)
c. DK Inc. (Garment manufacturing)
13. Oknha Mong SEZ
1) Location Srea Ambel District, Koh Kong Province.
4) Zone Investor None
14. Goldfarm Pak Shun SEZ
1) Location Sa Ang District, Kandal Province
3) Project Implementation Infrastructure Development, Fencing
4) Zone Investor Gold Dragon Printing & Carton Boxes Factory Co., Ltd ( Carton, Printing
Plastic)
15. Thay Kampong Cham SEZ
1) Location Da Commune, Memut District, Kampong Cham province
2) Land area 142.14 h.a.
4) Zone Investor Kobe Busan Co., Ltd (Vegetable Processing Factory)
16. Sihanoukville SEZ 2
1) Location Pou Thoung Village, Betrang Commune, and Smach Deang Village, Ream
Commune, Prey Nob District, Preah Sihanouk Province
2) Land area 1, 688 h.a.
4) Zone Investor a. Nag Guo Garment Co., Ltd (Garment Manufacturing Factory)
b. Hong Dou International Garment (Garment)
508
c. Qialima Vehicle Co., Ltd (Motor Bicycle Assembly)

d. Taihua Plastic Products Co., Ltd (Plastic Production)
17. D&M SEZ
1) Location Bavet Commune, Chantrea District, Svay Rieng Province
3) Project Implementation Infrastructure Developing
18. Sihanoukville Port SEZ
1) Location Tomnob Rolok Area, Sangkat Number 1, Khan Meatapheap, Preah Sihanouk
Province
3) Project Implementation Infrastructure Developing, Landfill.
19. Kirisakor Koh Kong SEZ
1) Location Khum Prek Kasach, Srok Kirisakor, Koh Kong Province
2) Land area 1,750 h.a.
20. Kampong Som SEZ
1) Location Village No. 4, Sangkat O'Tres, Khan Stung Hav, Preah Sihanouk Province
21. Pacific SEZ
1) Location Salatean nad Preytob Village, Chhrokmates Commune, Svay Teab District,
Svay Rieng Province
Source: Cambodian Investment Guidebook 2010.
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Part 4_Trade Policy
Chapter 02
Capacity Building on Export Promotion

Youn-Soo Rah (KOTRA)

Mab You (Ministry of Commerce, RGC)
Summary
This study has been prepared to make suggestions on the Cambodian government’ s trade
promotion policy by analyzing Cambodia’ s trade promotion activities and trade environments,
and introducing the operation cases of Korea’s trade promotion organization (TPO), namely, the
Korea Trade-Investment Promotion Agency (KOTRA).
Section 1 will discuss the establishment of a state-run TPO and the importance of its role in
promoting a nation’ s trade. The TPO is a national agency established to contribute to the
development of the national economy by assisting the overseas marketing of a country’ s
products and by fostering foreign investments and industrial technology cooperation between
domestic and foreign companies.
Most of the countries around the world established a state-run TPO to support sales of their
products in overseas markets, ascertain trends in overseas markets and publicize them to
domestic companies, and form partnerships with similar organizations in foreign countries,
among other diverse roles. The activities of the TPO help domestic companies reduce the initial
cost and marketing expenses which they have to spend to develop their overseas markets.
Section 2 will analyze Cambodia’ s trade promotion activities and its export environments,
while addressing the contingent limitations and challenges.
510
The Trade Promotion Department (TPD), under the Cambodian Ministry of Commerce, was
established in 2007 to expedite access to overseas markets in the wake of the country’ s
accession to the World Trade Organization. The TPD consists of 67 staff members, including a
director, four deputy directors, and rank and file staffers working in six offices. This department
is tasked with participation in domestic and overseas fairs and exhibitions, world expositions,
operation of exhibitions, development of products, inventory control of strategic items,
regulation of electronic commerce, and trade promotion services. Notably, despite the
challenging environment, the TPD conducts far-reaching operations, including annual
participation in the overseas exhibitions. However, the TPD is faced with barriers in the
successful execution of trade promotion activities, including the difficulty of multitasking with
only a few staffs available as well as no offices overseas.
In order to analyze the trade infrastructure and environment, this study conducted through
written surveys and interviews with the Korean companies invested in Cambodia. Cambodia
offers specific advantages in terms of low labor costs and liberation of foreign exchange inflow
and outflow, when compared with its rival countries. However, once Korean companies invest
in Cambodia, they have little chance of receiving assistance from the Cambodian government,
including the TPD.
Section 3 will explain in detail and by chronological order the roles of KOTRA of Korea.
KOTRA is one of the TPOs for Cambodia that benchmarks the improvement of Cambodia’ s
trade promotion procedure.
KOTRA was established in 1962, when Korea was one of the world’ s least developed
countries, by benchmarking Japan’ s JETRO. Spearheading Korea’ s economic growth through
trade expansion, KOTRA took the lead in expanding Korea’ s markets to former socialist nations
which made the transformation to capitalist societies in the late 1980s. The agency expanded its
roles to include foreign investment inducement in 1997, when the Korean economy experienced
the Asian financial crisis. Likewise, KOTRA has continued to change by carrying out new
missions that reflect changes in the global economy and the growth of the Korean economy. As
a result, KOTRA is now considered one of the most exemplary TPOs in the world.
As of 2010, KOTRA has a total of around 1,400 staff members working at 99 overseas
offices in 72 countries as well as its head office in Korea. This section introduces the tasks
which KOTRA carries out along with its networks, information systems and organizational
management systems. Additionally, in emphasizing that the staff members of a state-run TPO
constitutes a key factor for the successful execution of its activities, this section presents the
major qualities with which its members need to equip themselves with foreign language skills
and professional knowledge on the global economy.
Section 4 presents the practical measures which Cambodia’

s TPD needs to implement in
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Part 4_Trade Policy
order to expand the trade volume. As pointed out by Korean companies operating in Cambodia,
Cambodia urgently needs to upgrade its transport and logistics system such as roads and ports.
The country also needs to improve those factors that hinder foreign direct investments and trade
expansions and reduce the causes of its inferior cost competitiveness such as complicated
administrative procedures and export management fees (EMF) paid by garment manufacturers.
As Korea provides Cambodia with Official Development Assistance (ODA), the Cambodian
government will need to call on Korea to support its expansion on transport and logistics
infrastructure, and improve the administrative functions including certification procedures.
We also suggest the need for the TPD to open overseas offices, which would be expected to
gather and disseminate information on overseas markets, and play a major role in providing
assistance for the development of exportable products. Furthermore, Cambodia needs to
establish a state-run TPO as an independent agency in the near future. We suggest that
Cambodia’ s Ministry of Commerce focuses on the function of policy making and hands over the
function of implementing trade promotion activities to the TPO to increase efficiency and
professionalism.
When establishing a state-run TPO, Cambodia needs to enact an Act on the establishment of
such an agency, and thus Cambodian government should invest capital and subsidize its
operating costs from the government budget.
This way, the government can ensure that the TPO is in a position to equally benefit all
companies with a neutral position. However, in order for a country to promote trade, all
interested parties need to take part and the public needs to cooperate for such an initiative. As
such, the government needs to promote its trade expansion policy to ensure that people can
understand the policy, think positively and gain confidence.
Section 5 will provide a forum for the discussion of ways for the Cambodian government to
promate international trade in the coming years and emphasize the need for the establishment of
a state-run TPO. It reemphasizes that the tasks to be addressed should include improvement in
the trade promotion procedure, enhancement in the trade infrastructure, expansion of the TPD’ s
roles, efficient use of ODA, development of strategic export products and interlinking of foreign
investment inducement and trade promotion.
Additionally, we anticipate to provide more in-depth practical consulting to help Cambodia

expand its capacity to increase trade and foreign direct investment.
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1. Need for a State-run Trade Promotion Organization
As the objective of KOTRA’ s establishment suggests, a state-run Trade Promotion
Organization (TPO) is intended to contribute to the development of the national economy by
promoting the nation’ s trade and by“assisting”investments and industrial technology
cooperation among companies. In other words, the TPO is defined as an agency under the
government that is tasked with conducting professional marketing of the country’s products and
services in the overseas markets in order to boost the external competitiveness of the national
economy.
In a global economy, where economies of different countries are integrated and move in
tandem, one nation cannot operate its economy without engaging in trade with other countries.
After all, creating an environment in which its own companies can seamlessly engage in
transactions with foreign companies is a major part of the country’ s economic policy as
international transactions should also be conducted between companies.
Korea’ s global enterprises, including Hyundai Motor, Samsung Electronics, and LG

Electronics, have the capacity to conduct transactions with foreign countries on their own. But
small and medium-sized Korean companies are developing overseas markets by developing
new products with assistance from trade promotion agencies.
Likewise, companies need to develop overseas markets with administrative support from the
government before they launch any global operations. Government officials, who are generally
focused on economic policy settings, face certain limitations in conducting such activities by
themselves. This is because developing overseas markets is an inherently professional arena
wherein private companies conduct related activities, and such companies need to respond to
changes that occur in the overseas markets and react promptly. Hence, such tasks constitute an
area that differs markedly from the administration of government affairs.
The basic function of a state-run TPO is to assist the sales of the country’s products in
overseas markets. To do so, a TPO is tasked with establishing offices in important locations,
deploying staff members, gathering local information in overseas markets, and discovering
buyers.
The TPO should also conduct surveys in order to determine which products will sell well,
what current market trends are, and the extent of preference for and awareness of its country’ s
products, and then disseminate such data to domestic companies. It should also discover buyers
who are interested in buying the country’ s products and persuade them to buy its products. To
that end, it should enable companies to assemble and display those products at overseas
exhibitions, and host trade fairs for trade delegations.
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It is advisable and desirable to entrust the promotion of trade and the attraction of foreign
investments to a single agency rather than to divide those activities among several agencies. By
doing so, the professionalism of the TPO can be increased because trade and direct investments
are closely related. In addition, overseas offices operating under a single agency can serve their
duties more efficiently.
For the TPO, forming partnerships with similar organizations overseas is extremely
important. By concluding MOUs, exchanging information, and assessing the economic policies
of a partner country, the TPO should be able to have those policies reflected on its own
country’s policy. Another important function of a developing country’s TPO is to track the ODA
plans of more advanced countries and to ensure that those plans are reflected in efforts to boost
the competitiveness of the developing nation’s export industries.
In the accounting aspect, it is believed that a state-run TPO’

s role is to reduce initial costs
which domestic companies need to spend to develop in the overseas markets. As the TPO
comprehensively conducts (with government budget) activities to explore overseas markets, a
task that individual companies have to conduct on their own, many companies can benefit
through saved marketing costs.
2. Cambodia’s Trade Promotion Activities and Export

Environment
2.1. Trade Promotion Department (TPD) of the Ministry of
Commerce of the Cambodian Government
2.1.1 Organization and Staff
The TPD of the Cambodian Ministry of Commerce, which was newly established through
the merger of the Export Promotion Division and Domestic Trade Division, was created in late
2007 to boost the function of domestic trade promotion, and to expedite access to overseas
markets following the country’ s accession to the World Trade Organization. The department
comprises 67 staff members, including a director-general, four deputy director-generals, and
staffers working in six offices.
The TPD is currently carrying out diverse trade promotion activities with very few staff to
deal with such extensive tasks. Also, the department is part of the central government agency,
and no independent TPO has been established thus far.
514
Figure Ⅳ-2-1 | Organization of the TPD
Director
Deputy Deputy Deputy Deputy

Director Director Director Director
Exhibition Trad
Product Management Trade Trade
& Information
Development & Market Partner Development
Trade Fair & Admin
Office Development Office Office
Office Office
The Cambodian Ministry of Commerce has dispatched eleven commercial attaches to

embassies in ten countries, including Korea, US, Japan and Switzerland, but it has not yet
established separate offices of its own. Generally, commercial attaches in foreign countries
should handle work concerning international organizations, including the WTO and MDB, and
on pending political and diplomatic issues. As such, they have little time to directly engage in
trade promotion activities. Without any overseas office for trade promotion it is difficult for the
Cambodian government to successfully conduct promotion activities.
However, if TPD establishes overseas offices, the Cambodian government has to expense
more budget. In order to reduce the budget burden, it is considered that operation expenses for
the offices could be funded from the ODA.
2.1.2. Current Tasks and Activities of the TPD
The major tasks of the TPD include participation in domestic and international exhibitions
and expositions, operation of exhibition halls, development of products and inventory control of
strategic items, regulation of electronic commerce, and trade promotion services.
1) The Exhibition and Trade Fair Office participates in domestic and overseas exhibitions,
encourages domestic companies to participate in overseas exhibitions, and approves the hosting
of domestic and overseas exhibitions and expositions. It also serves as a liaison office for the
Bureau International des Expositions (BIE).
2) The Product Development Office carries out activities for product development by
domestic companies, and the office is believed to be very dynamically engaged in such
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activities in collaboration with city and provincial governments. The office selects the ten most
promising products from various regions to single out three to four of them, which can be
exportable or suitable as substitutes for imports, and promotes those items accordingly.
Additionally, the office manages exhibition centers in various regions, recruits companies that
will display exhibits in standing exhibition halls, and arranges displays of promising items in
famous stores prior to the convening of exhibitions and fairs. It also deploys staff members
needed at exhibition halls and introduces situations at exhibition centers via trade promotion
agencies’websites. In order to expedite efficient commercial transactions, the office facilitates
the formation of related organizations, including producers and exporter associations. It also
provides assistance on guidelines and manuals for the establishment of such associations.
Additionally, the office supports exports through the development of production bases for
agricultural products, quality improvement efforts and the provision of overseas market
information. It conducts research on demand in importing nations, and executes programs
designed to boost capacities in design, packaging, and brand awareness in collaboration with
diverse domestic and overseas organizations. Also, the office supports the One Province One
Product (OPOP) Program in conjunction with related organizations.
3) The Management and Market Development Office promotes market development

through strategic planning on markets into which Cambodian companies are seeking to make
inroads. It also monitors product circulation trends in the domestic market, and holds business
forums and trade fairs in cooperation with trade promotion agencies in Korea and overseas.
4) The Trade Partner Office is in charge of cooperation projects with domestic and
overseas trade partners, supports chambers of commerce, and provides legal and practical
information on the economy and trade policies. It also oversees provincial chambers of
commerce that are responsible for registering manufacturing and trade businesses.
5) The Trade Development Office establishes domestic and international trade strategy,
and is involved in policy design to assist small and medium-sized enterprises. Moreover, it
defines trade-related procedures and regulations to boost the capacity for fair trade.
6) The Trade Information and Administration Office is in charge of general

administrative affairs and cooperation with other government agencies. Also, it is responsible
for publishing and disseminating information materials on trade promotion and managing
websites. Additionally, it supports seminars on trade promotion.
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Table Ⅳ-2-1 | Comparison of Works of Cambodia’
s TPD to Korean Public Organizations
Tasks of TPD Korean government Korea’

s public agencies
Hosting of and participation in KOTRA(focusing on overseas

Ministry of Knowledge Economy
domestic and overseas exhibitions and exhibitions) and
Local governments
trade fairs Public & Private agencies
Management of state exhibition Exhibition centers as corporate
centers entity
Coordination and regulation of Ministry of Knowledge Economy
domestic and overseas exhibitions Local governments
BIE contact, World Expo Ministry of Knowledge Economy KOTRA
Ministry of Strategy and

Market management: Control of
Finance Ministry of Knowledge
inventory of strategic items
Economy
Market development: Analysis of

market information, and drafting and Various government agencies KOTRA gathers information
submission of policy
KOTRA, Small and Medium

Product development: domestic sale Business Corps., local
Ministry of Food, Agriculture
and export of domestic products governments, and research
and Fisheries
organizations
Provision of assistance for

Local governments Small and Medium Business Corps.
development of one item per province
KOTRA, state-run and private
Provision of trade information Various government agencies research institutes, private
enterprises
Management of web pages on trade KOTRA, organizations and
information companies
Development of strategies for Ministry of Knowledge Economy
KOTRA, Small and Medium
supporting small and medium Small and Medium Business
Business Corps.
businesses Administration
Development of trade strategy and

Various government agencies KOTRA, various private sector
cooperative ties with trade partner
and local governments channels
nations
Regulation of trade competition and Ministry of Strategy and
Korea Fair Trade Commission
advertising Finance
KOTRA, various organizations and
Provision of trade promotion service
groups
Provision of support to Chambers of
Chamber of Commerce, and state-
Commerce and other business service Ministry of Knowledge Economy
run research institutes
organizations to boost capacity
Registration of small companies Local governments
Provision of trade program and KOTRA, various organizations

Various government agencies
assistance of activities /groups
Source: Independent analysis by KOTRA.
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2.1.3. Participation in Domestic and Overseas Exhibitions
Cambodia displays exhibits at annual exhibitions held overseas. In 2009, Cambodia

participated in 31 exhibitions. Most of them were held in Vietnam, and the rest were held in
Thailand, China, Korea and Japan. Most of the exhibitions in which Cambodia participated
were by nature events on jewelry and accessories. It reflects the situation of Cambodia on lack
of suitable items for exhibitions.
Cambodia only holds about ten domestic exhibitions at its exhibition centers of restricted
size. Most exhibitions are focused on consumer goods such as gift items.
Table Ⅳ-2-2 | Local Exhibition 2009
No. Name of Exhibition Date (DD/MM/YEAR) Place

Banteay Meanchey
1 Thailand Exhibition 2009 06-08/01/2009
Province
2 Thailand Exhibition 2009 10-11/02/2009 Siem Reap Province
3 Thailand Exhibition 2009 14-15/01/2009 Siem Reap

Kampong Cham
4 Thailand Exhibition 2009 18-19/01/2009
Province
5 Thailand Exhibition 2009 14-15/02/2009 Sihanoukville Province
6 Thailand Exhibition 2009 18-19/03/2009 Takeo Province
7 Thailand Exhibition 2009 22-26/03/2009 Phnom Penh
The High Quality Vietnamese Goods Trade Fair

8 01-05/04/2009 Phnom Penh
2009
9 The 1st Cambodia Gems & Jewelry Fair 18-21/06/2009 Phnom Penh
10 The Vietnam Trade Fair 2009 02-06/11/2009 Phnom Penh

The High Quality Vietnamese Goods Trade Fair
11 25-29/11/2009 Battanbang Province
2009
The 4th Cambodia Import-Export and One
12 15-18/12/2009 Phnom Penh
Province One Product 2009
13 The Kep Trade Fair 2009 27-28/12/2009 Kep Province
Source: The TPD of the Cambodian Ministry of Commerce.
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Table Ⅳ-2-3 | Overseas Exhibition 2009
1 Bangkok Gems & Jewelry Fair 2009 25/02-01/03/2009 Thailand

Thailand International Furniture Fair/interior design
2 11-15 /03/2009 Thailand
Asia 2009
The 19th Vietnam International Trade Fair-VIETNAM
3 08-11/04/2009 Vietnam
EXPO 2009
The 105th Session of China Import & Export Trade
4 15/04-07/05/2009 China
Fair (also Called Canton Fair
5 Bangkok International Gift & House ware Fair 2009 21-26/04/2009 Thailand
6 The 4th Session of Expo Central China 26-28/04/2009 China
7 THAIFEX-World of Food Asia 2009 13-17/05/2009 Thailand
8 Interior lifestyle 01-08/06/2009 Japan

The 17th Session of China Import & Export Fair
9 06-10/06/2009 China
(Kunming Fair) 2009
ASEAN Health & Wellness Trade Missions with
10 12-18/07/2009 Malaysia
Business Meetings 2009
11 The 10th Singapore Gifts & Premiums Fair 2009 22-24/07/2009 Singapore
Bangkok International Fashion Fair & Bangkok
12 13-16/08/2009 Thailand
International Leather Fair 2009
13 ASEAN Fashion Plus Fair 2009 13-16/08/2009 Thailand
14 G-Trade GBC 2009 19-21/08/2009 Korea
15 Global Fair & Festival 2009 27/08-25/10/2009 Korea
16 Bangkok Gems and Jewelry Fair 2009 15-19/09/2009 Thailand

The 5th Session Kunming International Agriculture
17 19-23/09/2009 China
Exhibition 2009
The 6th China International SME Fair (The 6th
18 22-25/09/2009 China
CISMEF)
19 Hanoi International Fair-Hanoi Expo 2009 08-13/09/2009 Vietnam
"Bangkok International Gift Fair 2009 & Bangkok
20 13-18/10/2009 Thailand
International House ware Fair 2009
The 10th Western China International Economy and
21 16-18/10/2009 China
Trade Fair 2009
22 5th AUTOTECH 2009 16-19/10/2009 Vietnam
ASEAN Food & Beverage Trade Missions with
23 17-24/10/2009 Japan
Business Meetings 2009
24 The 6th China-ASEAN Expo 2009 20-24/10/2009 China
25 INTRADE Malaysia 2009 10-12/11/2009 Malaysia
26 The 18th Vietnam International Jewelry Fair 2009 12-16/11/2009 Vietnam
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Part 4_Trade Policy
Table Ⅳ-2-3 | Overseas Exhibition 2009(continue)

ASEAN Gifts & Fashion Accessories Trade Missions
27 16-21/11/2009 Japan
with Business Meetings
28 ASEAN Food & Beverage Exhibition 2009 19-22/11/2009 Korea
29 Vietnam Motor Show 2009 20-25/11/2009 Vietnam
30 The Mekong Trade & Investment Forum & Fair 2009 09/12/2009 Vietnam
31 The International Trade Fair 31/12/2009-06/01/2010 Vietnam
Source: The TPD of the Cambodian Ministry of Commerce.
Presented products at the One Province One Product Exhibition in Phnom Penh during 15th
- 18th December 2010 reflected a very positive development for the Cambodian companies’
advance into the overseas markets. The event also provided an opportunity to compare
Cambodia products to ones of Korea, Japan, China and Taiwan.130
However, most of Cambodian products that were showcased at the exhibition were
handmade products. In order for those items to be exported to the overseas markets, it seemed
that they need improvements in quality and design and have to be produces with mass-
production system.
2.1.4. The TPD’

s Barriers to Successful Conduct of Works
The TPD has made major strides in expanding trade by staging far-reaching projects despite
its difficult conditions. The TPD conducts policy-making functions of the government and
business assistance activities at the same time. In Korea, those roles are carried out by
economy-related ministries, local governments, dozens of agencies and organizations and
private companies. As carrying out trade promotion activities both domestically and overseas,
the department appears to experience difficulties in conducting its trade promotion activities for
the development of the Cambodian companies’overseas markets in places where there are no
overseas offices.
In particular, researchers of this study visited the following three websites, which are the
only available channels for outsiders to access the TPD and the Council for the Development of
Cambodia (CDC), only to find that their websites provide insufficient information for foreign
buyers and investors.
- Ministry of Commerce: www.moc.gov.kh
130) During this period, the author personally visited the exhibition in Phnom Penh.
520
- Buy Cambodia: www.tpd.gov.kh/buycambodia
- Cambodia CDC: www.cdc-crdb.gov.kh
2.2. Field Survey to Korean-Invested Companies

In order to assess activities of Cambodia’
s trade promotion agencies and figure out trade
environments of Cambodia, the study conducted a written survey of Korean-invested companies
with operation in Cambodia and received replies from 21 companies. Additionally, the
researcher visited companies invested by Korean firms in Phnom Penh to interview top
managers. He also visited Korean companies in Indonesia to compare the situation in
Cambodia.
2.2.1. Current Situation of Support for Foreign-Invested Companies in

Cambodia
Korean companies gave relatively positive responses to the foreign investment environment
in Cambodia. First of all, the low labor cost is thus far considered a main reason of investment
in Cambodia. The relatively free inflow and outflow of foreign currencies and the low degree of
government control over business activities are Cambodia’ s advantages in attracting foreign
companies.
Additionally, another important factor is that foreign companies are satisfied with the CDC’ s
proactive foreign company assistance activities. However, almost no companies have received
support from the Ministry of Commerce’ s TPD, and most companies replied that they were not
even aware of TPD’ s existence. This illustrates that TPD’s responsibility is mostly restricted to
assisting domestic companies, and is not related with export and import by foreign-invested
companies.
However, most respondents agreed on the need to establish trade promotion agencies,
singling out a TPO such as KOTRA. They also expressed their wishes for the establishment of a
Small and Medium Business Corp. and a Trade Insurance Corp.
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Table Ⅳ-2-4 | Summary of the Survey on Korean Companies Invested in Cambodia
A) Have you ever received assistance

Most replied that they had not contacted the TPD.
from the TPD?
B) Which assisting organization 1) KOTRA
should be established for 2) Small and Medium Business Corporation.
Cambodia to expand trade? 3) Trade Insurance Corporation.
1) Transportation and logistics system, including road networks,
ports, and airports
2) Government administration functions, including modernization
C) What are the factors that need
of customs clearance, and product certification system
improvement among Cambodia’ s
3) Establishment of TPO, such as KOTRA
infrastructure for export
4) Cultivation of parts manufacturers for production of export
industries?
products
5) Cultivation of professionals in trade and technicians and
engineers
1) Reduction of logistics costs

2) Improvement of labor-related laws, regulations and institutions
3) Cultivation of technicians and engineers
D) What are the things that need
4) Creation of working environment, including reduction of
improvement to enhance
number of public holidays
productivity of manufacturers in
5) Reduction of time required in customs clearance of export and
Cambodia?
import freight
6) Reduction of time required for government approval and
permission
1) Transport and logistics systems, including road networks, ports

and airports
2) Government administration functions, including modernization
of customs clearance, and product certification system
E) If Korea provides grant-type aid or
3) Cultivation of local parts manufacturers for production of export
credit assistance to Cambodia,
products
what are the things that urgently
4) Creation of industrial complexes, including free economic
need to be improved to enhance
zones
Cambodia’ s export industries?
5) Assistance for productivity expansion of primary industry
products for raw materials
6) Establishment of trade promotion agencies, such as KOTRA
7) Cultivation of trade and technicians and engineers
F) What are the advantages of Low labor costs, preferential treatment of foreign investments,
investment in Cambodia? transmission of foreign currencies, and growth potential
Lack of basic infrastructure including electricity/ports/
G) What are the disadvantages of
communications; complicated customs clearance process,
investment in Cambodia?
rampant corruption
Source: KOTRA’
s own survey.
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Table Ⅳ-2-5 | Difficulties Experienced by Korean-Invested Companies in Cambodia131
- Due to lack of Cambodian government policy to protect manufacturers, Korean companies experience
difficulties in making new investments.
- There are no vocational training facilities, and it is difficult to secure qualified local staff.
<Example of necessary manpower: Technicians, high-quality college graduates, staff who majored in QC
(Quality Control), etc.>
- Transporting export goods is not easy due to poor road conditions, and profitability is low due to high
logistics costs when acquiring raw materials from Cambodia.
- There are no suppliers of chemical products for purifying industrial water.
- Diesel fuel cost is very high, although most factories use a diesel generator to supply electricity.
- Overall lack of electricity supply results in higher production cost.
- Chronic and rampant corruption results in lack of transparency in management of policy and
institutions.
- Logistics costs such as transport, forwarding, customs clearance and shipment account for 40 percent
of production cost.
- Due to lack of loading and lifting equipment, use of cargo cranes in seaport adds higher cost.
- It takes excessive time for duty-free raw materials that are imported for production of exports goods to
pass the customs clearance process.
Source: KOTRA’
s own survey.
2.2.2. Supply Chain of Korean Garment Companies in Cambodia
A key factor behind the Korean garment companies’investment in Cambodia is believed to

be the relatively high quality labor force at low cost. This is evidenced by the fact that the
garment industry is playing an important role in creating jobs and providing goods to export for
Cambodia, which does not have strong a manufacturing sector.
Figure Ⅳ-2-2 | Supply Chain of Korean Garment Manufacturers Operating in Cambodia
Fabrics Related
▲
Manufacturer industry
▲▲
(Korea, 3rd) Fabrics

Placing order
& acc.
Payment
▲
Korean Work instruction Korean

▲▲
Companies Paying Cost

Companies
in Korea in Cambodia
▲
▲
▲
Placing
order Shipment
Fees C/O, Doc.
▲
Payment
▲
Buyer Min. of Commerce,

Custom Office
of Cambodia
Source: KOTRA’
s own survey.
131) The author interviewed Korean business people in Cambodia.
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Part 4_Trade Policy
However, in the chain for the Korean-invested garments companies, only the needlework
process is executed in Cambodia, whereas all marketing activities and financial transactions are
conducted overseas.
Since the raw fabrics and accessories required for garment manufacturing should be
imported from foreign countries, Cambodia’ s foreign currency earnings ratio, which is a
difference between the cost of imported raw materials and the value of exported finished
products, is seen to be low. As a result, the pre- and post-trade ripple effects that generally occur
due to trade transactions have not been observed in Cambodia.
In order to expand the export industry’ s trickle-down effect to other industries,

manufacturing processes will need to be established in Cambodia to the greatest possible extent.
For example, Cambodia will need to make efforts to attract plants for weaving and dyeing raw
fabrics.
In recent years, Korean garment companies have been relocating their plants from China,
where labor costs are rising, to Southeast Asia, where the cost of labor remains low. If
Cambodia can take advantage of this aspect, it will be able to attract many Korean companies.
2.2.3. Competitiveness of Korean-Invested Companies in Cambodia
Korean-invested companies in Cambodia have pointed out transport and logistics system,
including road networks and ports as areas that need immediate improvement among
Cambodia’ s export infrastructure. It takes six hours to transport export containers from Phnom
Penh to Sihanoukville port, which is only 240km away. When compared with garment
companies that are located within the special economic zone adjacent to Jakarta Port in
Indonesia, companies in Phnom Penh are in a disadvantageous position in many respects.
In addition, since the companies cannot obtain a stable supply of quality electricity to
operate their plants, they use diesel-powered electricity generators on their own. Plants that are
located far away from urban areas have no access to the main power supply, and thus they use
power generators of their own. Because of high diesel costs, energy costs take a significant
proportion of the total production cost.
More than anything, there are virtually no“Related Industry”that can support export
industries in Cambodia. Therefore foreign invested companies are entirely dependent on
imports to fulfill their needs in raw material. It is also difficult to receive raw material supplies
within Cambodia due to the poor road system.
524
Table Ⅳ-2-6 | Comparison of Production Costs for Companies Operating in Cambodia Versus Rival
Countries
Cost item Key elements Comparison
Supply of raw materials Local sourcing in Cambodia Disadvantageous
Labor cost Average monthly wage Advantageous
Energy supply Power and fuel Disadvantageous

Cost for issuance of administrative
Certificate of Origin, etc Disadvantageous
documents
Transportation costs Between ports and plants Disadvantageous
Customs clearance Waiting hours Disadvantageous
Pseudo-tax Export Management Fee (EMF) Disadvantageous
Foreigners’living environment Shopping, entertainment, etc Similar
Source: KOTRA’
s own survey.
In order for Korean garment companies to ship out their finished products, they must
promptly obtain Certificates of Origin (C/O) from the Cambodian Ministry of Commerce and
undergo the customs clearance process. For this process, the issuance of C/O takes significant
time, and those companies have to pay excessive amounts of EMF, which adds to the burden
on foreign invested companies. EMF is considered a pseudo tax which does not exist in rival
countries such as Indonesia, and the added production costs resulting from payment of EMF
works as a barrier to new apparel companies’entry into Cambodia and to the business
expansion of the already established firms.
Rather than responding negatively to demands for the revocation of EMF requested by the
countries including Korea, and by citing interference with its internal affairs, Cambodia’ s
government authority needs to positively consider the revocation of EMF in light of the
expected hike in cost competitiveness of foreign-invested companies operating in Cambodia. In
addition, the issuance of C/O could be taken over to the Cambodian Chamber of Commerce so
that exporters can save cost and time.
Moreover, the time-consuming customs clearance procedure including authorities’demand

for complicated documents in the import of raw materials adds the burden on garment
companies striving to export their goods on time. In particular, free trade agreements between
Korea and ASEAN have been in effect, but the tax authorities appear to be unaware of this, and,
in some cases, impose ordinary tariffs. As such, the Cambodian government needs to guide
related authorities to provide possible convenience for customs clearance of imports and
exports.
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Another difficulty faced by the Korean entrepreneurs that researchers learned about during
their interview with a Korean entrepreneur in Cambodia is the difficulty in giving accurate
work instructions to local factory workers due to poor communication skills. This issue stems
from the Khmer alphabet132, which is difficult to learn in a short period of time. Above all, since
it is difficult for foreigners to learn how to read the words in Khmer, foreigners naturally say it
is very challenging to learn the language. This is in stark contrast with Korean entrepreneurs
living in Indonesia who speak fluent Indonesian only after one or two years of living in
Indonesia, where the Roman alphabet is used. It seems that the language barrier is yet another
factor that makes it difficult for Korean companies to expand their advance into Cambodia.
Further research should be conducted in this area in order to investigate the current situation and
to take the appropriate measures accordingly.
Korean entrepreneurs also pointed out that there are too many national holidays in
Cambodia resulting lower productivity, which poses another disadvantage compared to its rival
country, Vietnam. Regarding this issue, Cambodia should note that the Philippines recently
announced a plan to reduce the number of national holidays.
Korean-invested companies operating in Cambodia possess considerable cost

competitiveness due to low wage costs. However, it is understood that, because other auxiliary
costs in Cambodia are less competitive vis-a-vis rival countries, it offsets the advantages in
labor costs Cambodia has to offer. Therefore it is difficult for Cambodia to expand foreign
investments and increase trading volume.
2.2.4. Improvement of Export Industry Infrastructure through ODA
Korean entrepreneurs who participated in the survey said that if Korea provides grant-type
aids and credit assistance to Cambodia, Korea should provide the aid in such a way to improve
transport and logistics system, including road networks, seaports, airports, and government
administration functions, including the modernization of customs clearance, and product
certification systems with priority.
Cambodia’ s road networks are estimated to be 4,000 km in total, but most roads, except
major thoroughfares, are unpaved to make it difficult to transport exports or raw materials. If
Cambodia receives assistance from foreign countries, it should make the expansion of its road
networks a top priority. National Roads 4 and 5, which handle a large volume of traffic as paved
thoroughfares, are the general two-way roads with one lane running in each direction, so the
vehicles cannot travel at high speeds. In order to accelerate the modernization of Cambodia’ s
road networks, it will be necessary to construct expressways linking the major cities.
132) The Khmer alphabet has 69 characters. (www.khemararangsi.org/khmeralphabet.html)
526
The Korean government is considering so-called‘Agro-Industry Complex’, which
integrates agricultural production and processing plants with its ODA. Cambodia for its part
also needs to attract such projects to upgrade its infrastructure for export industries. The agro-
industrial complex should also be designed to have self-sustaining functions by generating
electricity on their own.
2.2.5. A Case Analysis of the Operation of the Korean-Invested

Companies
The researcher visited a plant owned by one of the Korean companies that produces ethanol
for fuel in Cambodia.
The company is a foreign-invested firm that produces ethanol based on cassava, which is
produced in Cambodia as the main material, and exports its entire production to Europe.
Excluding some materials and equipments required for production, all added values are created
within Cambodia, and thus the company is regarded as an exemplary case of foreign
investment. Notably, the plant generates energy on its own by utilizing methane gas created as a
byproduct of ethanol production. The fact that the company is energy independent and does not
need any external supply of electricity makes it a typical green, high-tech company.
However, the ethanol plant suspended its production in March 2010 due to a hike in
international prices of cassava, which is the main material, along with the weakening Euro
currency in the product’ s export market. As a result, new investment project133 led by another
Korean company, which sought to generate profit from fertilizers generated by sludge at the
plant during the production of ethanol, inevitably came to a halt as well.
The Cambodian government’ s assistance is imperative in preventing the exporters from

halting its production. To ensure stable supply of raw materials produced in Cambodia, the
government should encourage cassava production and help expand foreign investment in the
primary industry sector.
Furthermore, the government needs to implement a financial assistance policy in order to

help ease the deteriorating profitability of its export companies.
This suggests that, while it is important to attract foreign-invested companies, it is also

important for Cambodia to provide aftercare services through trade promoting organizations to
ensure such companies to continue their operation after investment.
133) The project to transform the sludge into fertilizer is one of the CDM projects supported by KOTRA
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Figure Ⅳ-2-3 | An Investment Case of a Korean Company
Investor MH Ethanol Group of Korea
- In Dec. 1999, signed a contract for farmland lease amounting to

3,000 ha to cultivate cassava with the Cambodian Ministry of
Agriculture
- In July, 2008, completed a bio ethanol production plant (with
annual output goal of 150,000 kl)
- Collected biogas from the byproduct, and generated electricity
on its own through autonomous power generation
- Exported the entire ethanol produced to Europe
Source: 2009 Survey by the Korea Institute of Energy Technology.
3. Korean Trade Promotion Organization - KOTRA

3.1. Changes in Korea with the Establishment of KOTRA in
1962
A founder member of KOTRA brings the image of Korea in 1960’
s in his reminiscence as
below;
In 1962, Korea recorded exports of just US$ 54.81 million. The number accounts for
the following items: foodstuffs including pork worth $1.47 million, fish worth $3.45
million, dried fish worth $2.49 million, shell fish worth $1.81 million, live animals worth
$2.85 million, and raw silk worth $3.96 million; natural resources worth $19.37 million,
including china clay and graphite deposits worth $2.69 million, iron ore worth $3.85
million, and coal worth $2.74 million. As such, primary industry produce accounted for
75 percent of Korea’ s total exports at the time KOTRA was established.
Source: Chronicle of KOTRA’

s 40 Years, 2002.
In his book, Korea’ s Challenge, Swedish journalist Haken Hedberg writes on Korea’
s
situation in the early 1960s as follows:
In the summer of 1963, I closed my own private door to South Korea behind me with
a bang. I would not visit the place again. This country had no future. In the countryside
people ate bark from the trees, and new university graduates went straight into the
unemployment queues.
Source: The New Challenge; South Korea, 1978, by Haken Hedberg
528
The U.S. State Department’
s Website gives the following account of Korea’
s economic
development.
Since the 1960s, South Korea has achieved an incredible record of growth and global
integration to become a high-tech industrialized economy. Four decades ago, GDP per
capita was comparable with levels in the poorer countries of Africa and Asia.
Source: Website of the U.S. Central Intelligence Agency (www.cia.gov).
3.2. Establishment and Growth of KOTRA

KOTRA came into being in 1962, when Korea was one of the world’ s least developed
countries, posting total exports of less than USD 55 million and with a per capita GNP of less
than USD 100. Korea was faced with a dire situation where imports surpassed exports by
tenfold. Confronted with the pressing task of acquiring foreign exchange through exports,
KOTRA assumed the leadership role in transforming the structure of Korea’ s exports - which
were focused on primary industry items - into one centered on manufactured goods, and in
selling those goods to overseas markets.
The Korean government benchmarked JETRO (Japan External Trade Organization), when it
first nurtured the idea of establishing its own TPO. On June 21st, 1962, KOTRA was officially
inaugurated to assist Korean companies’exports in foreign markets, and it opened overseas
offices in New York, Los Angeles, and Bangkok in fall of that year. From the outset, KOTRA’ s
main mission included the surveying and development of overseas markets, introducing Korean
industries and products overseas, brokering of trade transactions, and participating and hosting
overseas exhibitions.
With the help of KOTRA, Korean enterprises were able to spearhead the growth of the
Korean economy through the expansion of its export sector. In fact, the Korean enterprises
expanded Korea’ s export markets even to the East European bloc and former socialist nations,
which switched from socialist regimes to capitalism in the late 1980s. When the Korean
economy experienced the Asian financial crisis in 1997, the agency added overseas investment
inducement to its functions. In 2000, KOTRA gained an additional function, namely that of
supporting Korean companies’advance into foreign countries. Now, KOTRA is conducting
comprehensive functions for the promotion of international trade and foreign direct investment
that would facilitate business activities of Korean enterprises in the overseas markets and lead
Korea to achieve sustainable economic growth.
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Figure Ⅳ-2-4 | Changes of KOTRA’
s Mission and Roles since Establishment
Source: KOTRA’
s internal documents
In late 2009, Korea became a member of the DAC (Development Assistance Committee) of
OECD (Organization for Economic Cooperation and Development), and KOTRA came to gain
further function in supporting Korea’
s foreign aid.
KOTRA, which implements the government’ s external economic policy at frontiers of

foreign countries, is carrying out newly granted missions that take into account changes in the
global economy in order to further promote business expansion of Korean enterprises into
overseas markets.
3.3. KOTRA’
s Capacity and Activities in 2010
3.3.1. Organization and Staff
In 1962 KOTRA came into being with just 181 staff members; as of 2010, the numbers
increased to about 1,400 staff members, including 650 local employees hired by KOTRA’
s
overseas offices.
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Figure Ⅳ-2-5 | KOTRA’
s Domestic Organization
President Office of the

Foreign
Office of the Investment Comptroller
President Ombudsman
Public
Relations Team
Korean Defence
Industry Trade
Support Centre
Senior Executive Executive Vice

Executive Vice Executive Vice
Vice President President for Head of Invest
President for President for
For Management Overseas Business Korea
Marketing Strategic Business
Support Information
Invest
Administration
Team
Investment Aftercare Team

Planning & SME Business
Administration
Investment
Strategic Business
Promotion
Investment
Coordination Support
Promotion
Information
Dep. Dep. Develpment Dep.
Dep.
Dep.
Research Dep.
General Major
Services Industry &
Department Component Dep. Project Overseas
Support Dep. Research Dep.
Auditors’ Office
Human Growth China Business
Resources Industry Foreign
Team Department Dep. Investor
Global Business Japan Business Support
Customer Exhibition & Support Dep. Dep. Dep.
Convention
Center Dep. Overseas Investment
Support Center
Emergency Contact Korea
Planning Expo Dep. KOTRA Academy
Team
Source: KOTRA’
s internal regulations
Table Ⅳ-2-7 | KOTRA’

s Overseas Organizational Network
Middle Central
North Asia,
Country Europe China East, Japan and South CIS
America Oceania
Africa America
KBC134 22 10 10 17 18 4 11 7
As of end of year 2010, KOTRA has 99 overseas offices in 72 countries and has plans to
open 30 new KBCs in the coming 3 years.
134) KBC is an abbreviation for Korea Business Center, which refers to KOTRA’
s overseas office.
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3.3.2. Business Activities
As the Korean economy is set to grow to an estimated 1 trillion plus dollars by 2011 in terms
of trade, KOTRA has expanded the scope of its activities and provides comprehensive support
in the realm of general economic affairs, in addition to trade and investment promotion.
KOTRA dispatches trade delegations to more than 200 cities every year to enable small and
medium-sized Korean enterprises (SME) to develop overseas markets. KOTRA has opened
Korean pavilions and participated in more than 100 overseas exhibitions, as well as inviting a
large number of foreign buyers to Korea and hosting export fairs for Korea’ s SMEs through the
program called‘Buy Korea.’In addition, KOTRA pursues a wide range of export marketing
activities for the respective industries, including trade fairs such as Korea Auto Parts Plaza,
which is designed to assist the export of auto parts, and Global Power Tech, which assists the
supply of electrical materials and equipment, while actively executing‘partnering’programs to
link overseas global enterprises with Korean companies.
KOTRA’ s KBCs are operating as infrastructure for Korean SMEs’overseas marketing. Of

such activities, KOTRA is running a program to serve as branch offices, which constitute an
important initiative designed to provide direct assistance for export marketing to Korean SMEs,
and is operating communal logistics centers in order to provide logistics assistance for export
products.
KOTRA’ s overseas marketing assistance function is expanding to include intangible service

sectors, including games and software on top of general goods and products, and the agency is
carrying out far-reaching activities to assist Korean companies bid to win construction and plant
engineering projects.
Since its formation, KOTRA has gathered information through the public domain on
products, industries and changes of institutions in the overseas markets, and provided them to
government organizations and private companies. In addition to producing market trend reports,
KOTRA often convenes seminars by region and by sector, and directly provides customers with
information.“The World Market Seminar” , which is held on early part of every year, involves
events to explain economic outlook and market situations in different regions of the world to
more than 1,000 Korean entrepreneurs.
Currently, KOTRA is tasked with the functions of attracting foreign companies to Korea,
assisting Korean companies’foreign direct investments. The foreign investor assistance center,
which is known as“Invest Korea,”is staffed with officials from central governments, local
governments, investment-related public organizations as well as KOTRA. The invest Korea
provides one-stop service to ensure that foreign investors can conduct business activities
seamlessly and conveniently. KOTRA is also operating“Invest Korea Plaza,”an incubator
532
center, tasked with helping new foreign investors stay in Korea without having any
inconvenience during the initial phase when they tap the possibility for investment.
In order to support Korean companies that have invested overseas, KOTRA gathers and
disseminates information on investment environments. Also, KOTRA established the“Korean
Company Investment Assistance Center”at KBCs, and provides assistance in business activities
for Korean companies in foreign countries.“Korean Company Investment Assistance Centers”
have been established in 13 cities worldwide, including Phnom Penh, Beijing and Shanghai.
Since 2009, KOTRA has been conducting a new function of‘Contact Korea,’a program
designed to assist Korean companies in finding professional human resources from foreign
countries and has been newly tasked with the function of country promotion aimed to enhance
Korea’s national brand.
Since 2011, KOTRA is gearing up to carry out a new mission of providing assistance in
ODA projects. At the time when Korea is drastically expanding its overseas development
assistance, KOTRA will carry out roles to assist developing countries with industrial
development in collaboration with the Korea International Cooperation Agency (KOICA) and
the Economic Development Cooperation Fund (EDCF).
3.3.3. Network
KOTRA’ s core competence derives from its extensive network built on both domestically
and abroad. Information and data on domestic and foreign companies and other relevant
institutions are input on the database. The Customer Relationship Management (CRM) system
updates and downloads the data simultaneously at all of KOTRA’ s overseas offices. This
database contains profiles of hundreds of thousands of Korean exporting companies and foreign
buyer companies.
KOTRA is closely cooperating with not only its supervising agency, the Ministry of
Knowledge Economy, but also other government ministries. Additionally, it has built up
networks with all local governments and conducts joint projects, while engaging in cooperation
projects jointly with state-run public organizations that are concerned with trade and
investment.
KOTRA cooperates with economy-related ministries, investment promotion organizations,

chambers of commerce, financial institutions research institutes and universities in foreign
countries. KOTRA also cooperates and conducts joint projects with the UN, UN’ s subsidiary
agencies and international financial organizations.
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KOTRA has signed MOUs with many public organizations in Korea, and also signed or
seeking to seal cooperative agreements with some trade promotion organizations and chambers
of commerce overseas.
3.3.4. Information Systems
The work and operation of KOTRA, which holds massive networks that cover the entire
world, cannot be made possible without assistance by its information systems.
KOTRA is providing nine portal sites to provide customers with information in a timely
fashion, while overseas KBCs also operate individual sites of their own. Overseas market
information that KOTRA produces around the world is presented in real time and cited and
posted on tens of thousands of websites runned by private compaines.
Table Ⅳ-2-8 | KOTRA’

s main websites
Digital KOTRA KOTRA’

s home page www.kotra.or.kr
Buy KOREA Cyber electronic-trade portal www.buykorea.or.kr

Trade, investment information
Global Window www.globalwindow.org
portal
Portal specializing in exhibition
GEPl www.gep.or.kr
information
OIS Overseas investment portal www.ois.go.kr
Portal for assisting investment by
Invest KOREA www.investkorea.org
foreign investors
Invest Korea Plaza Investment incubation center www.ikp.or.kr
Ombudsman Foreign investment ombudsman www.i-ombudsman.or.kr

Cultivation of trade investment
KOTRA Academy www.kotraacademy.com
professionals
Portal for attracting professional
Contact KOREA www.contactkorea.go.kr
human resources from overseas
Assistance of medical industry
KOBIO www.kobio.org
marketing
Settlement of export costs by
KOPS kops.buykorea.org
credit card
Source: KOTRA’
s websites
KOTRA people working at overseas offices as well as the head office in Korea
communicate in real time through the Intranet called“WINK.”The WINK system plays the key
role to provide a variety of internal service including document composition and sanctioning,
email transmission and reception, customer relations management, document management,
534
accounting management, personnel management, education and training, knowledge sharing
and IT assistance.
The WINK System, launched in 1999, achieved“Paperless KOTRA”and made KOTRA the
first public organization using fully automated accounting and banking process in Korea.
Figure Ⅳ-2-6 | Homepage of KOTRA’

s Intranet,‘WINK’
Source: Capture of KOTRA’

s webpage
3.4. KOTRA’
s Management System
3.4.1. Independence of Organizational Management and
Professionalism of Staff Members
KOTRA has been successfully carrying out its mission, thanks to its strong operational
independence. Candidates of KOTRA’ s CEO/president are selected from among professionals
who have profound knowledges and insights on trade and investment sectors, and the CEO is
appointed by the President from among a few strong candidates. The CEO can manage KOTRA
in a creative fashion based on his or her professionalism for a three-year term by law.
KOTRA is an independent organization that is established in compliance with relevant laws.

KOTRA consults with its supervising agency, the Ministry of Knowledge Economy, to conduct
economic policy. But, in principle, it is guaranteed that KOTRA’s Board of Directors make the
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key decisions and execute accordingly. KOTRA’
s annual budget exceeds over $200 million,
and most of this fund is subsidized by the central government and autonomous local
governments.
KOTRA recruits talented young people through open recruitment programs to meet its own
demand of manpower each year. All KOTRA staff member are obliged to speak at least one
more foreign language as well as English. They undergo various education and training
programs even after their joining KOTRA, and are thus developed as professionals of trade and
investment. Since KOTRA staff members work in Korea and overseas alternatively, they come
to gain outstanding professional knowledge on the overseas markets.
The following are the required qualities of KOTRA staff members:

1) Proficiency in English and an additional foreign language
2) Knowledge on international economy and business management
3) Professional knowledge on trade transactions and overseas investment
4) Professional knowledge on practical work on trade promotion, including exhibitions
5) Capacity to utilize information systems
6) Patriotism and service mindset for the public
3.4.2. Customer Satisfaction (CS)
KOTRA’ s customers are widely comprised of private companies in Korea and elsewhere, the
central government, local governments, and public organizations. KOTRA undergoes customer
satisfaction survey to users of KOTRA’ s service. The CS survey is conducted by a professional
agency designated by the Korean government.
Diverse programs and activities are conducted to assure customer satisfaction through
evaluating several measures such as from observing the Customer Service Charter to answering
phone calls in a friendly manner.
The Customer Service Charter includes the Preamble which declares the principle of service
for customers and itemized promises.
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Table Ⅳ-2-9 | The Preamble of KOTRA’
s Customer Service Charter
KOTRA will provide the highest quality service on trade and investment in the world to customers, thus
attain sustainable growth, and contribute to the development of national economy in order to ensure that
the Republic of Korea will become a“top-rated advanced nation through advancement.”
One, we will do our best to provide service customers want.

One, we will provide services within the deadline which we promise with customers.
One, we will ensure that our customers receive the latest information.
One, we will consider customers’ success as our upmost value.
One, we will put into practice enterprise-wise corporate social responsibility.
One, when we cause inconvenience or discontent due to improperly provided service, we will correct
promptly and compensate.
In order to deliver on KOTRA’ s promises with our customers, we will define specific implementation
standards for service that are appropriate for respective items, put them into practice, and disclose the
results on a regular basis.
Source: KOTRA’
s internal regulations
3.4.3. Evaluation System
All public organizations in Korea must undergo an annual management assessment, which is
conducted by assessment groups that comprise professionals for respective sectors, including
professors and accountants. Such an evaluation group reviews performance through assessment
reports submitted by KOTRA and interview, compare data with public organizations, and
announce the rankings of evaluation results to the public. KOTRA’ s top managers and staff
members work hard to receive high scores in management assessment conducted by the external
evaluation group, and to gain more incentives.
Apart from the external assessment, KOTRA’ s staff members receive performance
evaluation through an internal evaluation system of its own. The internal evaluation system
encourages staff members carry out mission successfully, while competing with each other. The
most important indicator for this evaluation is a customer satisfaction assessment system. The
system requires companies, civil servants and individuals, who receive KOTRA’ s service, to
give grades by assessing whether the service provided by KOTRA is satisfactory or not. The
result of customer satisfaction survey is reflected as a key part in the evaluation of KOTRA’ s
staff members and teams.
3.4.4. Rewards and Incentives
KOTRA is one of the most popular organizations among young jobseekers at present, just as
it was in 1962 when KOTRA was established.135 Once hired by KOTRA, new workers receive
on-the-job training (OJT) while working in one of the departments at the headquarters. After
three to four years of joining the organization, staff members are required to work overseas,
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Part 4_Trade Policy
accompanied by their family members. While stationed in a foreign country, different amounts
of pay are given according to price levels of his or her duty station, and the staff member is
granted fringe benefits, including housing, medical insurance and allowance for education of
children. KOTRA is improving its professionalism by assisting its members to acquire master’ s
and doctor’s degree in Korea or overseas.
KOTRA’ s staff members are committed to assure customer satisfaction as they take pride in
their mission of spearheading the globalization of the Korean economy.
4. Proposals for Capacity Building of Trade Promotion

4.1. Capacity Strengthening of the TPD of the Ministry of
Commerce
4.1.1. Collection and Dissemination of Information on Overseas
Markets
The most basic role of a TPO is to collect information on trends of the overseas markets and
situations of exportable products and disseminate them to government agencies and companies.
During an era when communication was not globalized, market information gathered by a TPO
was of critical importance to companies.
Overseas market information includes all business issues including product information and
trends of all industries. Additionally, a TPO can survey information on free trade agreements
between countries as well as the impact of trends at international organizations on the country’
s
trade.
Gathering trade information remains very important even today, an era where the Internet is
widely available. If one searches on the Internet, an unlimited volume of information is
retrieved. However, information that is directly useful for export companies is largely gathered
by the overseas offices. Real time market information must be provided to the government and
companies after undergoing data processing by desks at the TPO headquarters.
Overseas market information includes information of potential buyers who will import
products and potential companies that are interested in future investments. In reality, it is not
easy to gather information of porential buyers that will import, and porential companies that
135) At the time of KOTRA’s establishment, the average annual salary of its new workers was 3-4 times higher
than that of the average Korean office worker.
538
may be interested in investments. Staff members of the TPO can gather and report highly
credible information only when they contact buyers in person and visit investing companies to
check likeliness of future imports and investments.
A TPO can proactively conduct information gathering activities through surveys of foreign
companies operating in the country and contacts of foreign buyers importing products of the
country. The information is recognized as highly useful and reliable for its customers.
The information is also gathered at seminars and conferences on overseas markets,

exhibitions and other events in order to be disseminated to customers via websites. A TPO can
organize seminars to deliver the information for domestic exporters.
In the course of gathering and delivering the information, staff members of the TPO are
developed as exports on international business and overseas markets. The experts will lead the
business community and academic society of the country.
4.1.2. Assistance to Development of Exportable Products
The most important task in Cambodia’ s trade promotion activities is to develop new
products that can be exported. A TPO should trace the latest trends in overseas markets,
discover information and ideas on exportable products and give advice to export companies.
Information on products include price trends of the relevant products in the importing
countries, required certification and packaging, preferred design, problems of products pointed
out by buyers and logistics and distribution channels. Advanced country markets, where
countless products are sold, provide ideas on new products, which cannot be gathered in the
exporting country. For instance, TPO can suggest policies on production of diverse processed
foods with rice, which is produced in large quantities in Cambodia.
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Part 4_Trade Policy
Figure Ⅳ-2-7 | Examples of rice products sold in Korea
Rice bran oil Rice bran soap
Rice cookies Rice noodles
Source: Internet portal site; www.naver.com.
4.1.3. Proposals for Improvement of Export Infrastructure
Through domestic and overseas networks of the TPO, various opinions and concerns of
customers are gathered. This constitutes very important information in improving trade policy
of the country and business environment for companies.
A TPO can compile issues on the improvement of infrastructure for export expansion, report
them to concerned government agencies, and suggest policies to solve those problems. When
requesting ODA projects, the country should place priority on improving its investment
environment for foreign companies and infrastructure for its export industries with the TPO’s
suggestions.
Korean-invested companies in Cambodia have experienced the problems mentioned on the

table IV-2-5. Such concerns and problems may not be resolved at once, but proper improvement
measures should be taken in order.
4.1.4. Establishment of Overseas Offices
In order for a TPO to possess core competence, it should operate overseas offices. Overseas
offices should be opened in countries which are Cambodia’ s main trade partners and investors.
Initially, one or two staff members from the head office are dispatched to each overseas office.
540
Staff members staying in foreign countries carry out activities under the instruction of the head
office with the assistance of local staff.
Operating overseas offices requires a large amount of budget. In the initial phase, the staff
may be permitted to their Embassies in host countries. For those offices to conduct tasks in
independent fashion, however, it is recommendable to open separate offices.136
Dispatching young staff to overseas offices, a TPO can export that more proactive tasks can
be performed even with lower expenses. In case of establishing the offices in ODA donor
countries, it would be an idea to request the host countries to cover the operating expenses.
Table Ⅳ-2-10 | TPOs of Asia
Country Year of establishment Total staff (people) Overseas offices
Malaysia MATRADE 1993 570 40
China CCPIT 1952 3881 18
Australia AUSTRADE 1986 1040 119
Taiwan TAITRA 1970 832 58
Hong Kong HKTDC 1966 900 40
Source: KOTRA’
s own survey
4.1.5. Reinforcement of Collaboration with Other Government

Agencies, including CDC
A short-term measure for Cambodia to expand the trade volume at present would try to
attract more foreign direct investments. Hence, on top of activities designed to expedite export
by Cambodia’ s domestic companies, Cambodian government should make an effort to attract
more foreign-invested companies, which account for a lion’ s share of its export and import and
secure additional investments by existing investors.
With the advent of the information era, the government’ s administrative work is conducted
through extensive integration and collaboration among various government agencies. For
instance, policies for attracting direct investments by foreign companies, and trade promotion
are not separated but are related with each other.
Accordingly, export companies should be assisted by constructing an integrated cooperative
136) Civilians of host country cannot freely access foreign diplomatic missions such as embassies or
Consulate General as they are restricted areas.
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Part 4_Trade Policy
system among other offices within the Ministry of Commerce, as well as among export-related
government agencies such as the Ministry of Economy and Finance, the CDC, the Ministry of
Agriculture, and the Customs Service.
4.2. To Establish a‘Cambodian Trade Promotion Agency’

It would be difficult to spin off a TPO in Cambodia, which has only a handful of export
items that are externally competitive. Nevertheless, the country needs to consider the
establishment of a TPO over the mid- to long-term. The Ministry of Commerce will need to
perform policy-making functions and entrust executive functions to the TPO in order to increase
its efficiency and professionalism.
It is desirable to spin off trade promotion activities from the government’

s policy-making
functions which are closer in nature to activities by private companies, and entrust such
functions to an independent agency. If it cannot afford to develop a TPO in the short-term, it
can split executive functions and transfer them in phases, and thus seek the establishment of
diverse supporting institutions under the umbrella of the government.
It is desirable that a TPO is established and operated in a way that the government provides
paid-in capital and pays annual subsidies for its operational expenses. The TPO should be
established as a non-profit organization to ensure that all companies equally benefit from its
services.
Depending on the situation of various countries that have state-run TPOs, some of TPOs
conduct profit-making business, such as operating exhibition centers. But, in principle, a TPO
should primarily carry out non-profit activities.
What is more important than establishing a TPO itself is how successfully the TPO conducts
its activities. It should be legally assured that a state-run TPO conducts activities independently
without any outside interference. By adopting a post-evaluation system, in which the agency
conducts activities independently and is evaluated later on, Cambodia should ensure that the
TPO can increase its contributions to the national economy.
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Figure Ⅳ-2-8 | Model for Separation of Policy-Making and Executive Functions
Central & Local Policy Making, Conrol, Coordination,

Government Licensing
▲
R & D Institutes,
- Product Development Programs
Associtions,
Trade - One Province One Product
▲
CCI
Promotion
Department of
Ministry of
▲ State-run - Exporting Agricultural Produces
Commerce Corporations - Operating Exhibition Centers
Development & Support Function only

- Exhibitions and World Expo
▲ Cambodian
- Business Meetings for Trade Mission
Trade
- Collecting Matket Information
Promotion
- Proposing new Products
Agency
- Handling Trade Inquiries
- Cooperation with Foreign Institutions
A TPO is different from other state-run companies that provide national infrastructure such
as the supply of electricity, oil and gas. Rather, a TPO constitutes a software-type organization
that only possesses high quality human resources and domestic and overseas operational
networks, and holds no hardware-type assets. As such, if all the TPO’ s members from the top
management to staff are not well organized nor professionalized, it will hardly be able to make
achievements.
The success of a TPO can be assured only under keen interest and ample support by head of
the state. The head of state’ s interest and attention is critical in ensuring the situations in
changes of trends in overseas markets and information that cannot be gained domestically are
promptly reflected in the country’s economic policy when such information is reported.
After KOTRA was established in 1962, President Park Chung-Hee visited KOTRA several
times. The Korean government held the“Special Council on Export Promotion”which was
presided over by the President every month. The President personally checked to ensure that
Korea’ s export promotion policy was efficiently implemented and economy-related government
ministries shared common understandings on various assistance policies.
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Part 4_Trade Policy
4.3. Enlightenment Campaign Initiative
The government’ s policy to expand trade cannot be attained through single-handed efforts
made by the government and trade promotion organizations. The expansion of trade requires
participation by many people involved in trade and extensive cooperation by the public as a
whole. To this end, the government must publicize the need to expand trade to the public, and
thus encourage the public to participate in the campaign with positive thinking and confidence.
Table Ⅳ-2-11 | Examples of‘Positive Thinking’
■Cambodia has little products that can be exported to foreign countries, except for some agro
products.
= In the early 1960s, when KOTRA was established, the situation in Korea was not much different from
Cambodia today. However, if the public of Cambodia as a whole makes concerted efforts, they will be
able to find items for export and they must also create new products.
■Cambodia seems to have little hope due to lack of capital, technology or know-hows.
= The situation of Cambodia at present is far more favorable than that of Korea in the 1960s. Cambodia
produces a large quantity of rice in the climate that allows up to three harvests per year. Also, there
are many foreign companies that seek to invest in Cambodia.
■It is difficult to work in Cambodia because of the hot weather condition.

= Weather is very hot in Hong Kong and Singapore, as well as Malaysia and Thailand, but those
countries are much developed than Cambodia. Cambodia can attain growth if the public holds strong
passion to overcome poverty and work towards constructing a powerful and rich nation.
■Cambodia has a small population, lacks technical manpower, and thus cannot produce export
products.
= No country in the world had technicians and engineers from the beginning. Thus, Cambodia must
also strive to cultivate the necessary human resources starting now. Most European countries have a
population of around 5 million or less so Cambodia’s population of 14 million could not be considred
small at all.
■Even with the new policy, Cambodia may have some barriers to success due to massive corruption.
= Each and every citizen should promise to oneself that he or she will be the first to be not corrupted.
The world can be changed starting from only a handful of enlightened people. In order to reduce
corruption, Cambodia must build a economically strong nation. When income levels rise, corruption
will naturally decline.
544
5. Summary and Conclusion
The study sought to analyze the current situation of TPOs that implement the policy for
supporting expansion of trade and trade-related infrastructure and to find ways to improve trade
promotion procedures in Cambodia.
To this end, the study examined the current situation of work conducted by the TPD of the
Cambodian Ministry of Commerce. It also explained in detail the functions and activities of
Korea’s state-run TPO, KOTRA, which effectively assisted in business expansion of Korean
companies into overseas markets and accelerated Korea’ s economic growth.
In order to present ways to improve trade promotion procedures, the study conducted a
survey of Korean companies that have operations in Cambodia. The researcher also visited in
person manufacturing factories producing various apparels which constitute the biggest export
items in Cambodia and interviewed top managers. Then, the researcher visited Indonesia to
interview Korean-invest companies. He compared business environments and cost structures of
exports between the two countries.
Improvement of trade promotion procedures and trade infrastructure is one of the reform
processes that must be conducted as top priority in pursuing the policy for economic growth
through trade expansion. Currently, foreign invested companies including Korean contribute
over 80 percent of Cambodia’ s export industries. But in order for Cambodia to expand trade, the
country should further inject efforts to attract foreign direct investment (FDI), as well as trade
promotion activities by the government.
Cambodia’ s FDI inducement organization, the CDC, and the TPD of the Ministry of
Commerce are believed to be fairly successful in playing their roles in the effort to attract the
FDI and expand export. However, in order for the Cambodian economy to secure modernized
industries and increase trade volume, the country apparently needs to improve and reform many
areas.
The short-term task in trade promotion activities is more important than anything to improve
environment to enable foreign-invested companies in Cambodia to expand export. The CDC
and the TPD must figure out difficulties in business management faced by foreign invested
companies, and proactively seek ways to resolve them.
In order for Cambodia to enhance the external competiveness of its export industries, it
urgently needs to upgrade transport and logistics infrastructure and exert efforts to remove
factors that increase production costs. By utilizing ODA provided by advanced countries,
Cambodia needs to expand road networks and electricity facilities with top priority. It should
545
Part 4_Trade Policy
also address tasks that can be resolved on its own, including simplification of the process for
issuing the government’ s administrative documents and acceleration of the customs clearance
process.
The TPD has to figure out what factors make exporters the cost burden, and reduce such
costs. Notably, Export Management Fees (EMF) are weakening competitiveness of Cambodia’ s
garment manufacturing companies, and they should ultimately be revoked.
In order to expand export volume, the Cambodian government should proactively encourage
local enterprises to be exporters. To do that, priority should be given to developing exportable
products to foreign countries. The government needs to continue to adopt incentive policy for
export companies and place supporting policy to spur the establishment of new export
companies that generate new products through creative ideas.
Currently, main export items are mostly comprised of apparel and footwear products which
are exported by foreign-invested companies and of primary industry products including rice.
The One Province One Product policy, supported by the TPD to develop export products, seems
to be very encouraging in this regard. To ensure that more exportable items are developed in the
provinces, the government must extend its support. Together with the development of finished
products, the Cambodian government should encourage and support the establishment of the
country’s own companies that will produce parts and raw materials to be supplied to foreign
invested plants that manufacture export items.
Considering its current scale of trade, Cambodia may judge that it would not need a TPO.
However, we recommend Cambodia to establish a TPO sooner than later. A TPO should be an
agency that executes policies of all economy-related ministries rather than just conducts
activities defined by its supervising ministry.
If establishing a TPO in the short term is difficult, the Cambodian government could
establish a subsidiary organization and transfer it later to the agency that is conducted by the
TPD, including executive functions such as development of products, management of exhibition
halls, export of agricultural products, and gathering of overseas market information. By doing
so, the Cambodian government can separate policy-making and executive functions, and thus
increase administrative efficiency of the government.
A TPO should have overseas offices to play the function of supplying dynamically changing
foreign market information and disseminate them to the government and domestic companies.
Staff members who are dispatched to overseas offices should be proficient in foreign language
and possess professional knowledge about the economy and business management. They must
carry out the mission of introducing Cambodia’s products to foreign buyers and attract excellent
foreign companies to Cambodia. To this end, it is necessary to ultimately unify the channels for
546
trade promotion work and FDI inducement activities and to ensure that a single state-run trade
and investment promotion agency will carry out both functions altogether.
The key to success of the trade promotion policy to expand trade depends on the interest and
attention of the Head of State. The Head of State needs to review situations of external trade
every month, encourage concerned parties to redouble efforts, and promptly address issues that
need innovation.
Government policy meant for expanding trade cannot be only attained through single-
handed efforts made by the government and the TPO, but requires cooperation by many parties
involved in trade. Furthermore, the government should make efforts to promote such policy to
ensure that the entire public can confidently participate in the campaign to promote trade, while
overcoming economic difficulties.
As future research projects, Cambodia will need in-depth consulting on ways to boost
capacity to attract foreign direct investment, an area where this study could not afford to address
in earnest. Moreover, it will need to receive consulting that can practically guide and advise the
country on the establishment of an independent TPO over the long-term. Lastly and most
importantly, Cambodia needs to conduct further extensive research on how to stimulate
Cambodia’ s domestic private companies to effectively utilize the services provided by the
TPOs, since the companies are the ones that would lead Cambodia’ s future economic growth.
547
Part 4_Trade Policy
REFERENCES
Cambodia’s Ministry of Commerce and UNDP-Cambodia, Cambodia’

s 2007 Trade Integration
Strategy; DTIS 2007, 2007.
Haken Hedberg, The New Challenge: South Korea, Chongno Book Center, 1978.
Hang Choun Naron, Cambodian Economy, Phnom Penh, 2009.
International Finance Corporation, and Trade Promotion Department, Ministry of Commerce,

Kingdom of Cambodia, Handbook on Export Procedures, January 2009.
JICA & CDC, “Investment Environment of Cambodia (translated version)”, 2010 and more
Korean references
KOTRA, Function and Role of TPO, 1993. (in Korean)
KOTRA, Investment Guide to Cambodia, 2010. (in Korean)
KOTRA, KOTRA Strategic Management Plan, 2010. (in Korean)
National Strategic Development Plan 2009-2013, Phnom Penh, 2009.
Royal Government of Cambodia, Rectangular Strategy Phase II, Phnom Penh, 2008.
UN ESCAP, Trade Facilitation in Asia and the Pacific, November 2009.
548
www.ksp.go.kr
Ministry of Strategy and Finance, Republic of Korea

Government Complex 2, Gwacheon, 427-725, Korea Tel. 82-2-2150-7732 www.mosf.go.kr
Korea Development Institute
130-740, P.O.Box 113 Hoegiro 49 Dongdaemun-gu Seoul Tel. 82-2-958-4114 www.kdi.re.kr
Knowledge Sharing Program
Center for International Development, KDI
● P.O. Box 113 Hoegiro 49 Dongdaemun-gu Seoul, 130-740
● Tel. 02-958-4224
● www.ksp.go.kr

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Policy Agenda for Cambodia

in Growth, Finance, Industry

Prepared by Korea Development Institute (KDI)

Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea

Prepared for Royal Government of Cambodia (RGC)

In cooperation with Ministry of Economy and Finance of the RGC

Project Manager Moon-Soo Kang, Emeritus Fellow, KDI

Authors Overview of Cambodian Economy: Moon-Soo Kang, Emeritus Fellow, KDI

Government Publications Registration Number 11-1051000-000157-01

Knowledge Sharing Program

Policy Agenda for Cambodia in

MINISTRY OF Korea Development

Year 2010 is the first to conduct Knowledge Sharing Program with

IV. Trade Policy

<Table 1-1> Real Growth Rate by Sector (2005-2010) …………………………………………………………… 27

<Table I-2-5> Export Structure of Korea …………………………………………………………………………… 152

<Table II-2-6> Major Tourism Indicators by Year ………………………………………………………………… 246

<Table III-2-2> Some Annual Figures of KS Certification ……………………………………………………… 405

<Table IV-1-A-5> Export of Rice (HS 1006) (2008) ………………………………………………………………… 494

<Figure 1-1> Cambodia’

<Figure I-2-5> Ownership of Garment Factories, by Country ………………………………………………… 166

<Figure III-2-3> Korea’

On this ground, the Korean government selected Cambodia as a Strategic Development

Consultation Topics Korean Researcher Cambodian Researcher

Search for Development Path and Evaluation Ms. Chandarany Ouch

Structural Transformation and the Role of Dr. Jong-il Kim

Promoting Low-cost Loans for SMEs and Dr. Wook Sohn

Dr. Kyeongwon Yoo

Dr. Youngrak Choi

Project Manager for 2010 KSP with

Program Director Dr. Wonhyuk Lim (KDI)

Program Officer Ms. Seo-Young Kim (KDI)

Moon-Soo Kang (KDI)

The Third Knowledge Sharing Program with

Overview of the Cambodian Economy

Microfinance has significantly contributed to Cambodia’ s economic development since it has

1) National Bank of Cambodia, Annual Report 2009.

Moon-Soo Kang (KDI)

1. Economic Growth and Development in Cambodia

The Cambodian economy-over the period of 1998-2008-was driven by four sectors:

Figure 1-1 | Cambodia’

Table 1-1 | Real Growth Rate by Sector (2005-2010)

Year 2005 2006 2007 2008 2009e 2010p

Table 1-2 | Main Economic Indicators

2000 2006 2007 2008 2009 2010

Source: National Bank of Cambodia, Annual Report 2009.

1.3. Financial Sector Development

Table 1-3 | Number of Financial Institutions 2007-2009

Institutions 2007 2008 2009

5) Financial Sector Development Strategy (FSDS) 2006-2015

1.4. Impact of the Global Financial Crisis6

Indirect Impact on Banks

As reported by the Banking Supervision Department of NBC, non-performing loans in the

Figure 1-4 | Non-performing Loans in Banking Sector

Indirect Impact on Garment Export

Figure 1-5 | Textile Exports 2008-2009 (In million USD)

Note: Direction General of Customs and Excises[Lee2], MEF

Indirect Impact on Tourism

Figure 1-6 | Tourist Arrivals in Cambodia 2008-2009 (In thousands)

Note: Ministry of Tourism

Indirect Impact on Construction

2. SME Financing: Microfinance and Micro-Insurance

Timely availability of quality information is also important, since this contributes to