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The political settlement and economic growth in Cambodia

25 September 2014
By Kate Pruce.
This ESID working paper, authored by Tim Kelsall and Seiha Heng, examines Cambodia’s growth experience, analysing four economic sectors and the environment for business across these sectors. The deals environment has been semi-ordered and fairly open, with the resulting  state-business relations creating both positive and negative growth feedback loops.
The currently unstable political settlement could lead either to a shift away from rent-seeking to inclusive growth and social provisioning or to further entrenchment of the inner circle with increased political repression. Therefore the challenge for the regime is to oversee a transformation of Cambodia’s political settlement and its growth strategy, without bringing the whole thing crashing down.
Here are some excerpts:

In our view, disordered deals environments, in which no-one is confident that officials will deliver on their commitments, discourage investment. However, as soon as a deals environment becomes ordered, investment and growth begin. Sophisticated state capacity, a level playing field for business, and the rule of law are unnecessary at this stage. As long as a few investors can be reasonably confident they can make profits, investment will follow. An ordered, even if closed and cronyistic, deals environment may be able to sustain growth for a considerable period. But we believe that for growth to be sustained over the long run, the deals environment must, while maintaining order, also become more open. This is because openness drives economic diversity and competition, which fuels innovation, which leads to countries moving through the product space…
Corruption was not regarded as an insuperable problem by most of our informants, and while most agreed that the playing field for business in Cambodia is not level, they found the deals environment to be at least semi-ordered, and also quite open. Moreover, there is a general trend towards greater order and openness, suggesting that the prospects for sustained growth are good. However, this situation does vary by industry, and election pressures have the potential to reverse the positive direction of change…
Cambodia’s growth experience has had two faces, and its less progressive side provides evidence for the idea that a political elite which depends for its survival on high-rent industries is likely to prove complacent when it comes to building state capacity in more dynamic areas, bringing us to crossroads at which we find ourselves today.

 
Read the full paper: ESID Working Paper 37, Tim Kelsall and Seiha Heng, ‘The political settlement and economic growth in Cambodia’.