Has Cambodia’s Economic Boom Imploded?

By Heidi Dahles*

East Asia Forum 

16 Jan 2018

Cranes building Phnom Penh’s rapidly rising skyline give testimony to Cambodia’s enduring economic success as well as to China’s commitment to investing in the Kingdom’s infrastructure. Cambodia has been highly successful in attracting foreign direct investment, creating employment and alleviating poverty for millions. The outstanding performance of its economy has been widely acknowledged: the Asian Development Bank calls Cambodia the ‘new tiger economy’ and the World Bank announced Cambodia’s transition from a low-income to a lower middle-income country. The widely held expectation is that Cambodia will achieve upper middle-income status by 2030 if recent growth rates are sustained.

That said, Cambodia also still holds least developed country status. For this reason, Cambodia is likely to retain the preferential trade agreements and donor payments that the country has enjoyed for decades. Economic prosperity is set to advance — unless politics gets in the way.

Cambodia’s economic rise starkly contrasts the political chaos that reached a climax in November 2017 with the dissolution of the Cambodia National Rescue Party — the country’s only major opposition party — and the detention of its leader, Kem Sokha. Prime Minister Hun Sen has also threatened to close the Cambodian Centre for Human Rights, which was founded by the detained opposition leader.

The moves have been widely condemned as marking Cambodia’s shift to a one-party dictatorship, and many Western countries have threatened action. Member states of the European Union announced restrictions on rice imports from Cambodia, while Canada and Australia encouraged Cambodia to reinstate proper democratic processes. Perhaps the strongest response came from the United States, which Hun Sen has accused of supporting the arrested opposition leader’s efforts to conspire against the Cambodian government. In response, the United States immediately cancelled the US$1.8 million in funding it had pledged for the 2018 Cambodian general elections and it announced visa sanctions against Cambodian officials who were ‘undermining democracy’.

Since the 1991 Paris Accords, the United States has spent billions supporting the democratic process in Cambodia in order to restore and preserve peace after two decades of civil war and Khmer Rouge atrocities. Unfortunately, the recent political developments are widely viewed as a collapse of the democratization process — a view that is shared by international rights organizations such as Global Witness and Human Rights Watch. Further recommended sanctions include asset freezes, travel bans on senior officials, trade restrictions and the suspension of all technical assistance for elections.

The Cambodian government and the ruling party have been rather bemused by Western criticism. The Prime Minister welcomed the cutting of US aid for the elections, pointing out that this would make an end to NGO meddling in Cambodian affairs. After all, Western aid has always been conditional on the government maintaining proper democratic processes and institutions. Alluding to the robust performance of the Cambodian economy, a spokesman of the ruling party dismissed concerns saying: ‘everything is better now than before’.

Will Cambodia’s political fiascos put an end to its economic rise? Cambodian unions fear foreign sanctions will involve a cancellation of preferential tax rates. In a joint statement, the four major unions in the country appealed to foreign embassies and buyers to treat their industries as separate from politics.

Economic analysts expect the current political instability will have only limited, short-term effects. The West will tighten sanctions if Cambodia continues its crackdowns on democratic institutions such as civil society organizations and independent media outlets. These crackdowns are most likely to intensify in the run up to the 2018 general elections. Foreign investment in Cambodia overall will hardly be affected either way as the overwhelming majority comes from other Asian countries.

As one of China’s most favored nations, Cambodia not only receives economic investment and aid with ‘no strings attached’ but also receives Beijing’s political approval. China has explicitly expressed its support for the Cambodian government and Hun Sen, who is one of Beijing’s most important allies in Southeast Asia (and in the South China Sea dispute in particular).

Similarly, the Cambodian business community is championing close ties to the government. It views an election victory for the ruling Cambodian People’s Party as the most desirable scenario since any other outcome would be detrimental to established business interests.

While the political drama is unfolding, Cambodian people go about business as usual and politics does not seem to be the first thing on their minds. The current ‘crisis of democracy’ has been a long time coming and is not alien to the region at large. Authoritarian rule is enduring across Southeast Asia. Arguably, as the United States rapidly loses its role as protector of democracy, the ensuing ‘politics of disorder’ is swiftly becoming the new regional order.

*Heidi Dahles is adjunct professor at the Griffith Business School, Griffith University. This article is part of an EAF special feature series on 2017 in review and the year ahead.

(Accessible at: http://www.eastasiaforum.org/2018/01/16/has-cambodias-economic-boom-imploded/)