By Kaitlin Shung

Aug. 29 – Tourists to Cambodia
often take similar routes, discovering the wide and stately streets of
Phnomn Penh before taking a dusty six hour bus ride to Siem Reap, home
of the beautiful Angkor Wat. Among the ruins of the ancient Khmer
Kingdom at Angkor Wat, local Cambodian children can often be seen
calling out flattering phrases, usually in Chinese and English, looking
for a crisp American dollar or a few pieces of candy.

Cambodia boasts a rich and more
recently, bloody, history. An underdeveloped country of roughly 14.7
million, Cambodia was set back significantly in the 1970s under the
extremist rule of the Khmer Rouge. It was estimated that nearly 20
percent of the population died under the leadership of Pol Pot due to
starvation, torture, and executions, and the economy was completely
dismantled.

As a result of its short time
under French rule, the official languages spoken are Khmer, French and
English, although French appears to be scarce except among the older
generations. The majority of the population is within the 15-64 age
range and the country has a respectable 73.6 percent literacy rate.

Cambodia operates as a multi-party democracy under a constitutional democracy, and the long-serving prime minister has a considerable amount of power. The head of State is King Norodom Sihamoni, who was sworn in on October 29, 2004 while the prime minister is Hun Sen.

The Cambodian currency is the
riel (KHR), which traded, on average, at KHR4,145 to US$1 in 2010. In
addition to the riel, U.S. dollars are also commonly accepted and
according to the New York Times, almost 90 percent of deposits and
credits in the banking system are denominated in U.S. dollars. With a
large portion of capital and savings in the greenback, the Cambodian government ultimately has less ability to influence the economy and thus less control.

Before
the global financial slowdown, Cambodia was one of the strongest
economic performers in Southeast Asia, posting annual growth of around
10 percent over the previous decade. Cambodia’s economy is focused in
four key industries: tourism, clothing, construction and agriculture.
The lack of diversification in the economy impacted on the country hard
when the Global Financial Crisis hit and since then, the government has
begun efforts at initiating reforms to encourage the development of
emerging industries.

Within its labor force of 8.8
million, roughly 70 percent work in agriculture which constitutes
roughly one-third of Cambodia’s GDP. The country’s GDP grew 6 percent
year on year in 2010 to US$11.63 billion, which is comparatively about
one-fiftieth the size of China’s economy. After agriculture, services
account for 45.2 percent of GDP while industry contributes 21.4 percent.

Exports totaled US$3.687 billion
in 2010, with primary export partners being Hong Kong, the United
States and Singapore. Comparatively, imports were US$6.005 billion and
primary import partners were China, Vietnam and Hong Kong. Key exports
were clothing, timber, rubber, rice and fish while key imports were
petroleum, cigarettes, gold and construction materials.

FDI inflows totaled US$532.5
million in 2010, with the majority of capital coming from China. Chinese
investment is often preferred because it is generally unconditional, as
opposed to Western investment which is usually tied to political and
economic reform. In the first half of 2011 alone, Chinese investors had
already put in place plans for 360 projects worth US$8 billion in
Cambodia, which is nominally the equivalent of all Chinese investment in
Southeast Asia in the previous year.

As previously mentioned,
Cambodia has access to a number of natural resources, but the country
often does not have the infrastructure in place to take advantage of
those resources. For example, nearly 70 percent of the country is
covered with trees, but the lumber industry falters under illegal
logging, costing vast amounts of missed revenue.

Oil and natural gas were found
in Cambodia in 2005, the exact amount of which has not been released,
but commercial extraction is expected to begin in 2012.

“We
welcome investments in all sectors, including banking, insurance, and
telecommunications. Investors can own 100 percent of their business
here, in most countries 100 percent foreign ownership is not allowed,”
Cambodia’s Prime Minister Hun Sen has been quoted as saying.

Key industries for investment
include agriculture (an industry which has an ample labor supply in
Cambodia but lacks investment in physical infrastructure), technology to
increase yields, and the country has a gaping hole where a processing
and packaging industry should be. Furthermore, light industry and
manufacturing are relatively underdeveloped, despite the low labor costs
in the country. More information on investing in Cambodia can be found
through the web site – www.investincambodia.com.

Taking the lead from China’s
successful Special Economic Zones (SEZs), Cambodia has also begun to
build SEZs, primarily along the country’s borders with Thailand and
Vietnam. There are a total of 21 approved SEZs – of which five have
already commenced operations and two are under construction. Cambodia’s
SEZs offer tax and VAT benefits and strong government support has
simplified importing and exporting into these areas.

Administratively, the government
has set up two boards responsible for managing the country’s SEZs: the
Cambodian Special Economic Zone Board and a separate trouble shooting
committee. Both are headed by Prime Minister Hun Sen and if managed
properly, will help bring foreign investment into the country through
these economic zones.

Investing in Cambodia has
certainly been helped by the country’s entry into the World Trade
Organization in 2004 (Cambodia was the second least developed country to
join the WTO through the full working party negotiation process). As a
member of the WTO, Cambodia has taken steps to meet international trade
and regulatory standards, including the implementation of a number of
new legal reforms. Examples include: the Law on Commercial Enterprises
(2005), the Law on Commercial Arbitration (2006) and the Law on Secured
Transactions (2007).

In addition, Cambodia is also a member of ASEAN and the World Intellectual Property Organization.

The 2011 Index of Economic
Freedom, a joint effort by The Heritage Foundation and The Wall Street
Journal, ranked Cambodia 102 out of 179 countries or 17 out of 41 in the
Asia-Pacific region. This is an improvement over the previous year’s
ranking, attributed to improvements in monetary control, labor freedom
and a reduction in corruption. Cambodia’s ranking suffers largely
because of weak property rights and cumbersome bureaucracy.

Comparatively, the 2011 World
Bank Doing Business Rankings ranked Cambodia as 147 out of 183 countries
surveyed. A slight decrease from the 2010 rankings, Cambodia still has
significant barriers in starting and closing a business as well as
enforcing contracts.

Cambodia
is an attractive investment opportunity for a few key reasons. First,
the country has an income tax rate of 20 percent and because of its
desire to attract foreign investment, also offers additional tax
incentives. For example, eligible projects can receive tax holidays of
between six and nine years from initial investment.

Unlike ownership requirements in
neighboring countries like China, Cambodia allows for 100 percent
foreign owned businesses. The lack of price controls on goods and
services and no restrictions on repatriation of funds, free up investors
in terms of downgrading investment risk.

Its status as an undeveloped
country also works to the benefits of investors through tariff-free
exports, which Cambodia has when trading with partners like the United
States, Canada and Europe. Entrance into Cambodia is a gateway to the
rest of the ASEAN market and domestically, the signs of an emerging
middle class are appearing. With that comes the increased local
consumption of goods and services.

Furthermore, as a part of the
Greater Mekong Sub-region (GMS), Cambodia is strategically located in a
hotspot for both economic and political influence. The GMS includes
Yunan Province and the Guangxi Zhuang Autonomous Region in China, as
well as Cambodia, Laos, Myanmar, Thailand and Vietnam. Currently, over
US$10 billion has been pledged for infrastructure projects which will
build economic corridors between countries in the region.

The positives aside, Cambodia’s
business environment is not without problems and areas of concern. The
most prevalent problem for foreign investors is corruption, which is
reinforced by weak governance and a lacking legal framework.

In 2010, Transparency
International ranked Cambodia 154th out of the 178 countries surveyed.
Lack of transparency and abuse of power by government officials have
drawn scrutiny to this Southeast Asian country. For example, a story
came out this year about government action against two NGOs who were
highlighting the negative effects of a US$84 million railroad
investment, funded in part by the Asia Development Bank, on displaced
families. Pressure on these groups opened the government to criticism
and highlighted problems related to free speech in Cambodia.

High reliance on imported goods and services also do not speak well to the sustainability and strength of Cambodia’s economy.

Poor infrastructure in the
country has impeded the development of local and global linkages between
Cambodia and the world economy. The government has prioritized building
roads, airports, telecommunication networks and has received support
from foreign sources like the Asia Development Bank and the governments
of Australia and China.

In 2010, the government passed
the National Strategic Development Plan which focused on the country’s
development from 2009 to 2013. A highlight of the plan was an estimated
US$1.1 billion in development assistance, which was expected to be spent
in 2010.

On a final positive note,
Cambodia opened its own stock market earlier this year. At the time of
its opening, there were no companies prepared to go public and this was
largely indicative of Cambodia’s weak financial sector and a lack of
confidence in regulatory bodies’ ability to enact and enforce corporate
governance and accounting laws. However, three state-owned companies are
in the process of preparing to list later this year and hopefully the
establishment of its own stock market will bring stability to the
Cambodian economy.

Cambodia’s
close ties with neighboring China have proven to be unnerving for
American leaders, as China attempts to expand its dominance in the area.
In 2010, U.S. Secretary of State Hilary Clinton visited Cambodia and
warned of an overly intense dependence on China.

“I
think it is smart for Cambodia to be friends with many countries… It’s
like our relationship with other countries. You look for balance. You
don’t want to get too dependent on any one country,” Clinton said.

U.S. concerns aside, friendly
relations between China and Cambodia are evidenced by high level
meetings between government officials. Last year, powerful CCP member Wu
Banguo attended the signing of a contract between Cambodia’s largest
mobile phone company, CamGSM, and the Bank of China in the largest
financing project to ever take place in Cambodia. Wu Banguo was quoted
as referring to Cambodia as a “reliable neighbor, friend and brother.”

In 2011, Zhou Yongkang, a member
of the CCP’s Standing Committee Politiburo, traveled to Cambodia to
talk economic and political cooperation.

Complicated relations with
neighboring Thailand have proven to be dire enough to come to arms and
it is worth continuing to observe how relations improve or deteriorate
in the future. The conflict stems from a border dispute which has come
to repeated fighting between both sides’ armies at a contested site.
Furthermore, Cambodia’s appointment of Thailand’s former prime minister
(who was charged with corruption-related crimes) as an economic advisor
has accelerated tensions between the two countries.

“In
the next 20 years, I expect Cambodia will be one of the world’s best
performers in terms of improved income and living standards, better
infrastructure and a lifestyle on par with middle income countries,”
Cambodia’s Prime Minister Hun Sen has said in an optimistic forecast.

At the 4th Cambodia Economic
Forum held in February of this year, Prime Minister Hun Sen highlighted
key areas the government hoped would expedite the modernization of
Cambodia’s economy. The government’s strategies focused on figuring out
ways to diversify the economy, reforming the nation’s SEZs, increasing
investment in human capital, establishing the state’s place in
industrial development and establishing the industrial sector’s position
in the local and global economy.

Rising costs in China are
turning eyes southward for new, inexpensive manufacturing hubs and less
developed countries like Cambodia are stepping up to the plate. Cambodia
is a particularly interesting investment opportunity, given benefits
extended to it as a result of its development status and its
simultaneous membership in the WTO. If the government can continue to
effectively battle corruption and diversify its economic pillars,
Cambodia could potentially rise from poverty and development aid to
become a powerhouse in emerging Asia.