Cambodia: Rapid Growth with Weak Institutions

• DOI: http://doi.org/10.1111/aepr.12003
• Author: Hal Hill,Jayant Menon
• Published date: 01 June 2013
• Date: 01 June 2013

Cambodia: Rapid Growth with Weak

Institutions

Hal HILL1† and Jayant MENON2

1Australian National University and 2Asian Development Bank

This paper examines Cambodia’s socioeconomic development since the early 1990s peace settle-

ment. The country’s economic growth has arguably been the fastest among post-conflict societies,

driven by the credible restoration of peace and security, large public and private capital inflows,

economic openness, reasonably prudent macroeconomic management, and a dynamic,integrating

neighborhood. A legacy of history and small size is that the government has limited policy space,

although this has not necessarily retarded economic development. We also highlight some key

challenges, including rising inequality, uneven spatial development, weak institutions, and high

levels of corruption. Looking forward, we highlight the importance of strengthening supply side

capabilities, broadening the benefits of growth, and developing stronger institutions and property

rights.

Key words: Cambodia, conflict, economic growth, institution, transition economy

JEL codes: E02, F63, O53

1. Introduction

Cambodia is a small, poor, transition economy. It was once the center of the thriving

Khmer empire that spread well beyond the country’s current borders and for a period

centered on the world famous Angkor Wat temples. However, its last century and a half

have generally been a troubled period, with French colonization, an uneasy relationship

with its much larger neighbors, a reluctant but ultimately deep and tragic enmeshment

in the Indochina War over the decade to 1975, and then ruled by one of the world’s most

murderous regimes in recent history, followed by the Vietnamese invasion (or “libera-

tion,” depending on one’s historical perspective). The country has enjoyed periods of

comparative peace and prosperity only in the first decade after Independence in 1953,

and more recently since the 1993 Paris Peace Accords.

Two features of Cambodia’s development record are of particular interest, and they

constitute the major themes of this paper. First, with the return of peace, from 1991,and

We acknowledge with thanks the excellent research assistance of Anna Cassandra Melendez, the

support of the Asian Development Bank Cambodia resident mission, and very helpful discussions

with friends and officials during our various visits to Cambodia. For helpful comments on an

earlier draft, we thank the review editors, our discussants, Sothea Oum and Peter Warr, together

with Hang Chuon Naron, Chan Sophal, and Dyna Heng. The views expressed in this paper are

those of the authors and do not necessarily reflect the views and policies of the ADB or its Board of

Governors or the governments they represent.

†Correspondence: Hal Hill, Arndt-Corden Department of Economics, CAP, Australian National

University,Canberr a, ACT 0200, Australia. Email: hal.hill@anu.edu.au

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doi: 10.1111/aepr.12003 Asian Economic Policy Review (2013) 8, 46–65

© 2013 The Authors

Asian Economic Policy Review © 2013 Japan Center for Economic Research

46

particularly from 1998, its economy has grown very quickly, arguably faster than any

other post-conflict country in recent times. There are numerous caveatsto be attached to

this achievement, to be discussed shortly,but it is nonetheless a remarkable achievement.

Second, the country’s policy settings are unusual, owing to its history,size, location, and

also deliberate policy choices. In particular, it has little scope for monetary and exchange

rate policy, owing to the high level of dollarization. It is a very open economy, owing to

explicit policy decisions, its porous borders, its location between two large, export-

oriented economies, and its membership of Association of Southeast Asian Nations

(ASEAN) Free Trade Area (AFTA) and in the near future, the ASEAN Economic Com-

munity (AEC). Its fiscal policy levers are also limited. A major challenge for the country

is to manage constructively its location, and the attendant very large official and private

capital flows, with institutions and a political system still very much in their infancy.

Our organization is as follows. Section 2 outlines the development context, the

factors that have shaped the country’s economic development and its political economy.

These include its complex, bloody history, together with its size, geography, and natural

resource endowments. In turn, these contextual factors shape the policy parameters,

including weak property rights, limited policy space, and the struggle to establish effec-

tive governance and institutions. In section 3, we examine development outcomes,

including rapid but volatile economic growth since the 1990s, substantial improvements

in living standards, and the uneven distributional outcomes. Section 4 sums up.1

2. The Development Context

Cambodian economic development and its policies have been shaped profoundly by its

history. The major history of the country (Chandler, 2008) highlights several key features

of this history. The first has been the challenge of managing a neighborhood dominated

by larger powers. The second was the country’s immersion in the Indochina War, and its

consequences, including extensive aerial bombardments. Third, there was the awful

period of Khmer Rouge (KR) rule. When the Communist Party of Kampuchea (CPK)

took control in April 1975, many of the country’s institutions were destroyed or over-

turned. It is estimated that nearly two million Cambodians, or one in four, died of over-

work, malnutrition, and misdiagnosed diseases or were executed. When the People’s

Republic of Kampuchea was established in early 1979, it is difficult to imagine more dif-

ficult circumstances for a new administration (Naron, 2011). The security situation was

tenuous, the country was internationally isolated and subject to an embargo, and some

of the social indicators were among the very lowest in the world.

History and geography have shaped the country’s development trajectory and out-

comes in numerous ways. We draw attention here to six. First, Cambodia is a small

country, with a gross domestic product (GDP) of just $12 billion, surrounded by much

larger economies. Thus, national sovereignty has been a prime consideration of all its

leaders, from ancient times. Thailand’s economy is about 27 times larger than that of

Cambodia’s, while Vietnam’s is almost 10 times larger. The country’s most efficient port

for international shipping is Ho Chi Minh (HCM) City. Its international civil aviation

Hal Hill and Jayant Menon Cambodia’s Rapid Economic Growth

© 2013 The Authors

Asian Economic Policy Review © 2013 Japan Center for Economic Research 47