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Analysts: Cambodia Must Reform, Curb Corruption to Stave Off Economic Downturn - 2004-08-11

The International Monetary Fund estimates that Cambodia's economic growth will drop off dramatically next year and warns if the government does not accelerate reforms, prospects for future growth could remain bleak.

It is early in the day and Cambodian Prime Minister Hun Sen is out in the countryside wading through rice paddies with local farmers.

Afterward, the prime minister tells farmers his government is concerned about agriculture. And, he says, he has come to listen to their problems.

Mr. Hun Sen traveled to Sam Rong Tong district, 40 kilometers west of Phnom Penh, to inspect irrigation projects.

The International Monetary Fund warns the government should pay more attention to agriculture. Robert Hagemann, the IMF representative in Cambodia, notes that about 85 percent of the population lives in rural areas.

"Agriculture ought to be a comparative advantage for Cambodia and it's time we start thinking about the things that will help Cambodia to diversify," he said.

Mr. Hagemann says more donors should consider putting funds into rural and agricultural development and the Cambodian government also needs to step up its own efforts to help farmers.

Cambodia's economy has grown by six or seven percent annually in recent years due mainly to generous foreign aid, a healthy tourism industry and preferential access to American markets for Cambodia's manufactured clothing exports.

But, in its new annual review of Cambodia, the IMF's forecast is not good. While the economy grew at a healthy 5.2 percent last year, growth this year is expected to drop toward 4 percent. The biggest shock is yet to come, with IMF predictions that next year's growth rate will plummet to 1.9 percent.

The most immediate reason for the drop will be the end of an agreement that gave Cambodian ready-made clothing easy access to U.S. markets.

Commerce Minister Cham Prasat says he hopes Cambodia's entry into the World Trade Organization this year will help the economy. "Joining WTO is a plus," he said. "It would change maybe the scenario."

But, analysts warn, accession to the WTO should not be seen as a panacea. While it will give Cambodia greater access to global markets, it also means competing with other producers. Stiff competition is expected from China, whose manufactured clothing is 15 to 30 percent cheaper than Cambodia's.

The IMF report concludes that Cambodia's garment industry is not competitive and its investment climate is unattractive. Robert Hagemann says there are important impediments for doing business in Cambodia.

"You have high costs of energy, you have high costs of transportation, very high customs clearance costs - official - and then you have to add to all of that 'facilitation' payments below the table," he said.

The IMF report concludes that corruption is a major problem for businesses and investors. The organization is advising Cambodia to diversify, curb corruption, streamline business practices and implement legal reforms. That, analysts say, should encourage investment, stave off continued decline and lead to renewed growth within a few years.