Trade Policy

(1) Introduction

The Royal Government of Cambodia (RGC) is in the process of developing a trade sector strategy, and preparing for WTO accession, as a key component of the overall national socio-economic development and poverty reduction strategy. The roadmap being used to plan the trade strategy is “Pro-Poor Trade Development Strategy endorsed by the Council of Ministers and presented to the international community at the Tokyo CG meetings in June 2001. A consortium of 6 donors (UNDP, IBRD, IMF, UNCTAD, WTO, ITC) is providing funding under a program called “the Integrated Framework for Trade related Technical Assistance to Least Developed Countries (IF)”, under this program, a “Diagnostic Study” was completed in late 2001. The study provides a preliminary analysis of Cambodia’s competitive position with respect to trade, as an early contribution to the policy development process.

Trade policies under consideration by government and donors promote an export-led growth approach through rapid liberalization and further integration into the global economy. These trade policy development processes are intended to be pro-poor, but the supporting documentation has yet to clearly demonstrate a positive correlation between the type of trade strategy suggested and the actual reduction of poverty in the Cambodian context The NGO community strongly recommends that in order to effectively realize poverty reduction, the type of growth and trade strategy to pursue should be based on clearly demonstrable links between various trade policy alternatives and poverty reduction indicators. Such an assessment should be based both on careful examination of experience from other countries, as well as what can be predicted for Cambodia, agreed between the RGC, the donor community, and civil society organizations. To that end, NGOs have also called for clearer linkages between the trade policy development process and the “Poverty Reduction Strategy” process coordinated by the Ministry of Planning. However, trade liberalization should not be part of loan conditionality.

The current global trade system is biased against developing countries and in particular poor producers and net consumers or subsistence farmers and fishers within these countries. Studies have shown that unequal distribution of the benefits of international trade has exacerbated the inequalities between rich and poor countries, and in particular the benefits do not reach the poorest. Integration through trade is creating new opportunities but these are available only to economic actors (whether countries, enterprises, or individuals) with access to productive assets, infrastructure and education. However, given the appropriate international regulatory framework, trade can play an important role in poverty reduction. The RGC’s future trade policy should consider the pace, sequencing and distributional aspects of trade and economic policy reform.

Development strategies which put a premium on aggregate growth targets, emphasizing investment in specific “profitable” economic sectors, must be prefaced by comprehensive poverty impact analysis, to identify policy instruments and sector specific strategies which will most effectively target poverty reduction to ensure broad-based development with equity. The impact analysis must recognize that different socio-economic classes, ethnic groups, men and women, come to the market on different terms, based on a long standing as well as newly emerging patterns of economic, political and social exclusion and marginalisation which result in inequality. The appropriate policy response to these structural causes and consequences of these inequalities must be put in place in order to achieve long-term poverty reduction through trade and other economy-wide policies. Strengthening human capabilities and the domestic economy, through robust social and economic structures at the national and community levels, is a necessary prerequisite to a reduction in trade barriers as part of international integration. Increases in income gained by better-off sectors of society and foreign companies can only contribute to poverty reduction if part of this income returns to the government budget for redistribution into spending targeted at poorer segments of Cambodian society (through spending on improving access to services or increasing productivity). Thus there is a crucial link between trade policies and other macroeconomic and fiscal policies, and their implementation. Impact analysis of trade policy reforms must take place in the context of overall poverty reduction policy formulation and implementation.

Pro-poor trade strategy development requires sufficient time for participatory poverty impact analysis and stakeholder consultation. Small-scale producers, farmers, fishers, and factory workers are amongst those most heavily affected by trade strategy. They can contribute valuable insights into how changes in the economic environment can affect their livelihoods. The NGO community would like to collaborate with the RGC to pursue a filly participatory approach in the formulation of the strategies based on a continuous iterative analytical process, leading to an open policy dialogue and partnership.

(ii) Key Issues

Export-led growth
The IF diagnostic study refers to implementing a rapid export-led growth strategy, and the need to attract investment to the major ‘growth poles’ of Phnom Penh, Siem Reap and Sihanoukville, as well as investments in rural areas. Investments in rural and urban areas needs to be carefully balanced to ensure that the significant gap between rural and urban incomes is not further widened. An export-led growth strategy in isolation is not sufficient to reduce poverty overall, which will require also targeting rural areas, where the vast majority of the poor live, as well as prioritizing human development and strengthening the domestic economy. In addition, rapid export growth will not necessarily translate into accelerated poverty reduction. Trade policy must be placed in the context of overall sector and economy wide poverty reduction strategies. While this may slow down the pace of aggregate growth, it will contribute to ensuring higher quality growth with equity. There are many lessons to be learned from mistakes and successes in neighboring countries, where over-dependence on ‘growth poles’ has led to extremely fast increases in Gini coefficients.

Foreign Direct Investment (FDI) is a significant component of the current trade policy debate. Relying heavily on FDI for pro-poor development carries considerable risks. Countries that are dependent primarily on FDI and exports for economic growth are more susceptible to downturns in the global economy and related capital movements.

Additionally, incentives to attract FDI such as tax breaks eliminate opportunities to generate much needed revenues for national public expenditure and investment Properly managed and well-regulated FDI and export activity can provide opportunities for poverty reduction, but a number of concerns regarding investment ownership, labor standards and environmental regulations must be adequately addressed.

Export-Processing Zones (EPZs)

The IF diagnostic study proposes EPZs as lucrative opportunities to attract FDI, but this should be considered with caution. Examples of EPZs in the region have demonstrated the trend towards creating investment, production and profit extracting enclaves. There are minimal backward linkages or re-investment into the local host economy, and the profits are usually exported along with the products. Abundance of low cost labor is vulnerable to exploitation and there is increased threat to the environment due to the intensification of factories located in these zones, and the resulting energy requirements, calling for the need for a strict regulatory framework, the absence of which is often used as an investment incentive. EPZs have also been known to intensity income inequalities between rural and urban areas, and leading to increase rural to urban migration, and the creation of urban and peri-urban slums. 

Labour

A critical issue raised in the IF diagnostic study is related to the protection of workers’ rights. Profits from export related FDI have been known to be based on exploitative practices, and often at the expense of women workers, who comprise the majority of factory workers. In this regard, the following statement from the diagnostic study regarding minimum Wage stands out and merits further attention: "while employed labour benefits from the higher wage [by complying with labour standards] people who would be prepared to work for lower wages lose out. Restrictions on double shift benefit hardly anybody. “ Indeed, there is a danger that the need to be increasingly competitive in the international export market place will result in downward homogenization of labour standards. The transferability of production based on low cost labour makes it possible for TNCs/FDI to respond to higher wages by relocating to countries with lower labour standards. This perceived conflict between the pressures of international competitiveness based on low cost labour and the need to maintain labour standards and conditions is artificial: in fact empirical evidence suggests that lowering labour standards does not make a country more competitive, especially if that country does not improve productivity. Competitive advantage is not based on cheap labour but low per unit labour cost which relies on improving productivity of the labour force by strengthening human capital rather than lowering wages and other working conditions. In addition, demand for products requiring skilled labour is increasing more rapidly than demand for unskilled labour. Both trends lead to the conclusion that attracting high-quality FDI requires a commitment to improving human-capital levels.

The IF diagnostic study discusses the consideration of labour as an exportable commodity and thus as an important potential source of export income. The document states, "RGC policy is to encourage official labour exports to increase welfare, enhance skills, reduce unemployment and increase state revenues." There are a number of concerns regarding the vulnerability of exported labour to exploitation as well as physical and sexual abuse, as has been the experience of women working as overseas domestic workers, to give one example. As much of the violations are taking place outside of the workers’ native country, the away from any legal support or recourse, it is also a very difficult industry to regulate and control. Even the recruitment processes are open to corruption and abuse. With respect to the protection of workers rights, whether in-country or abroad, NGOs strongly urge the donor community to adopt a responsible leadership role and work with countries individually and as a regional grouping to prevent a ‘race to the bottom,’ not to promote it.

Agriculture and Fisheries

In an economy where 90% of the population is located in rural areas, rural development is essential for poverty reduction. The main impetus for rural growth is agriculture and related production activities. But poverty is a major barrier to participation in markets. Because the rural poor lack access to the necessary land, credit, education and skills, and market information, and they face higher transport costs to market their products and procure inputs, they are not equipped to compete on what is currently a very uneven playing field. Women producers face obstacles that are magnified by gender discrimination in land tenure, access to credit and other productive inputs, as well as their double workload of domestic as well as income generating responsibilities. Women producers may often face barriers to market entry and may have limited control over income earned. Gender linked inequalities within the household interact with wider inequalities in the market to determine the uneven distribution of benefits from trade.

Strengthening the poverty reduction impact of agricultural growth through trade will require effective targeting of remote rural areas to improve access to capital, technology, skills and other productive inputs as well as information on prices and markets. Public expenditure should priorities provision of services and infrastructure in rural areas. Small scale producers need to be involved in and benefiting from more steps in the marketing chain: moving from just being net commodity producers and sellers into processing and value added activities, which command higher returns. Production and processing techniques should conform to strict environmental standards in order to ensure sustainability.

Although increased exports could reduce rural poverty, export promotion should not be at the cost of national food security and self-sufficiency, this is particularly critical in the fisheries sector which is the source of approximately 80% of the nation’s protein intake, as well as a significant source of calcium. Over fishing, misuse of chemical inputs, and other examples of the unsustainable exploitation of natural resources for short term profit, will threaten not only the livelihoods but also the nutrition and health of the population.

The diagnostic study identifies the following sub-sectors as potential growth areas in the context of international trade: Freshwater fisheries, rice and diversified agriculture. Some tactics which were examined include, among others, large scale production and commercialization to increase efficiency, privatisation, deregulation, all of which have serious implications for poverty reduction.

Home | 6^th CG Meeting| Agenda | Contents| List of Participants | Position Paper | DCR | Partnership | Government | Donors | Download | Map | Photo