WORLD TRADE
ORGANIZATIONWT/IFSC/W/12
1 August 2002
(02-4248)
Integrated Framework Steering Committee Original:  English
DIAGNOSTIC TRADE INTEGRATION STUDY FOR CAMBODIA
A Pilot Study prepared under the Integrated Framework for
Trade-Related Technical Assistance to Least-Developed Countries
Part A
CAMBODIA
The attached document contains Part A (Overview)* which was prepared under the Integrated
Framework Pilot Scheme.  The study was discussed at IF Workshops and relevant events with
interested stakeholders.  Based on comments and discussions at the workshops, the study wassubsequently be improved and updated.  Parts B and C are contained in documents
WT/IFSC/W/12/Add.1 and WT/I FSC/W/12/Add.2, respectively.
Discussions on the Diagnostic Trade Integra tion Study for Cambodia, as with other
integration studies, help lead to an understanding, amongst development partners and the beneficiaryLDC, on a clear set of policy recommendations and technical cooperation and capacity-building
priorities for the beneficiary LDC.
                                                     
* Integration and Competitiveness Study – Part A (Overview), dated 30 October 2001, was not issued
due to technical reasons.WT/IFSC/W/12
Page 2
PREFACE ........................................................................................................................ .....................3
GLOSSA RY ....................................................................................................................... ....................4
MAIN POINTS.................................................................................................................... ...................5
TECHNICAL ASSISTANCE MATR IX FROM OV ERVIEW .............................................................9
I. BUILDING A PRO-POOR TRADE SECTOR STRATEGY ............................................17
II. MACROECONOMIC DEVELOPMENTS .........................................................................21
A. R EFORMS AND PERFORMANCE SINCE 1999...............................................................................21
B. CHALLENGES AHEAD .................................................................................................................22
III. DEVELOPMENTS IN TRADE POLICY ...........................................................................24
A. DOMESTICALLY IMPOSED TRADE BARRIERS ..............................................................................24
B. E XTERNAL TRADE BARRIERS ....................................................................................................26
C. A SEAN MEMBERSHIP .................................................................................................................27
D. P OVERTY IMPACTS OF THE TARIFF ............................................................................................28
E. F URTHER TARIFF REFORM .........................................................................................................28
F. WTO ACCESSION ......................................................................................................................28
IV. TRADE FACI LITATION.....................................................................................................31
A. T HE TRADE FACILITATION TASK ...............................................................................................31
B. C USTOMS CAPACITY BUILDING ................................................................................................32
C. I MPORT AND EXPORT PROCEDURES ..........................................................................................33
D. T RANSPORT AND BORDER MARKETS .........................................................................................34
E. I NDUSTRIAL ZONE POLICY .........................................................................................................35
V. SECTOR STUDI ES ............................................................................................................... 38
A. R ICE............................................................................................................................... ............38
B. MARKETING AND PRODUCTION .................................................................................................38
C. D IVERSIFIED AGRICULTURE AND AGRO -PROCESSING ...............................................................40
D. H ANDICRAFTS ...........................................................................................................................42
E. FRESHWATER FISHERIES ............................................................................................................43
F. G ARMENTS ............................................................................................................................... .45
G. S OURCES OF GARMENT SECTOR GROWTH .................................................................................46
H. B ENEFITS AND THEIR DISTRIBUTION .........................................................................................48
I. T OURISM ............................................................................................................................... ....51
J. L ABOUR SERVICES ....................................................................................................................53
APPENDIX:   WORKSHOP  IN PHNOM  PENH ................................................................................56
REFERE NCES ..................................................................................................................... ................60WT/IFSC/W/12
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PREFACE
In August 2001, a team of consultants worked with Ministry of Commerce (MOC) officials in
Cambodia to conduct a diagnostic study of Cambodia’s trade policy issues and technical assistanceneeds.  The terms of reference for this study were designed to support the Royal Government of
Cambodia (RGC) in developing its Pro-Poor Trade Policy Strategy.  Ministry of Commerce officials
involved were H.E.  Sok Siphana, Secretary of State; In Vothana, Bureau Chief; Ung Sovithiea,
Deputy Bureau Chief; Keomuny Kong, Deputy Bur eau Chief; Sophann Tauch, Deputy Bureau Chief;
and Oeur Samrith, Assistant Director.  The team  members were Kelly Bird, Consultant — Trade
Policy; Sandy Cuthbertson, Consultant, Centre for International Economics (CIE) —Team leader;
Martin Desautels, Consultant, Gide Loyrette Noel (GLN) — WTO Accession; Curtis Hundley,
Consultant — sector studies on tourism and fisheries; Hiau Looi Kee, World Bank — market access
survey and analysis; Ray Mallon, Consultant — sector studies on rice and labour services;
Philippe Marciniak, IMF — macroeconomic assessment; Andrew McNaughton, Consultant — sectorstudies on diversified agriculture and handicrafts; Maika Oshikawa, WTO — trade policy,
Sopanha SA, IMF — macroeconomic assessment; Isid ro Soloaga, Consultant — poverty assessment;
Ieng Sovanarra, Consultant — sector study on garments; and Geoff Wright, Consultant — trade
facilitation.  The review of investment regulati on was carried out by Ross Chapman and Lee Davis of
the CIE as a parallel study working directly to the Government.  The World Bank Task Manager was
Ataman Aksoy.
Following this fieldwork, team members pr epared drafts of the following reports.
(a) Part A:  Overview;
(b) Part B:  Component reports — macro assessment, trade policy, trade facilitation,
poverty analysis;
(c) Part C:  Sector studies — rice, diversified agriculture, handicrafts, fisheries,
garments, tourism, labour services;
(d) Part D:  Review of the Law on Investment.
These drafts were discussed at a workshop held in Cambodia on 19 and 20 November 2001.
Following that workshop, draft reports were finalized particularly taking into account participants’suggestions for technical assistance.WT/IFSC/W/12
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GLOSSARY
ADB Asian Development Bank
AFTA ASEAN Free Trade Area
ASEAN Association of South East Asian NationsCARDI Cambodia Agricultural Research and Development InstituteCDRI Cambodia Development Resource Institute
CED Customs and Excise Department
CEPT Common Effective Preferential TariffCSES Cambodia Socioeconomic SurveyEU European Union
FMV Fair market value
GDP Gross domestic productGSP Generalized System of Preference
GTC Green Trade Company
GTZ German Technical CooperationIF Integrated FrameworkIMF International Monetary Fund
IPRS Interim Poverty Reduction Strategy
IPRSP Interim Poverty Reduction Strategy PaperITC International Trade CentreJICA Japanese International Cooperation Agency
LDC Least developed country/ies
LOI Law on InvestmentMFN Most Favored NationMOC Ministry of Commerce
MSALVY Ministry of Social Affairs, Labour, Vocational Training and Youth Rehabilitation
PRSP Poverty Reduction Strategy PaperPSI Pre-shipment InspectionRGC Royal Government of Cambodia
SEDP II Socio-Economic Development Plan II
SMEs Small and Medium EnterprisesTA Technical AssistanceTOR Terms of Reference
UNDP United Nations Development Program
WB World BankWTO World Trade OrganizationWT/IFSC/W/12
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MAIN POINTS
Following presentation of its Pro-poor Trade Strategy at the July 2001 donor meeting in
Tokyo, the Royal Government of Cambodia (RGC) and donors agreed to conduct a Diagnostic Study
of Cambodia’s integration into the international trading system.  With support from the IntegratedFramework for Trade-Related Technical Assistance, and based on terms of reference developed under
the guidance of the RGC, international and local consultants worked with Ministry of Commerce
officials during August 2001 to prepare draft reports addressing the terms of reference.  These draft
reports were discussed at a two day workshop in Phnom Penh on 19 and 20 November 2001 and were
revised on the basis of feedback from the workshop.  This overview and accompanying reports
identify obstacles and institutional development needs to address the demands of increased
engagement in the international economy facing Cambodian households and firms.  A program of
technical assistance to address identified constraints and strengthen the capacity of government
agencies and private sector support mechanisms was proposed at the workshop and revised thereafter.
Over the last several years the RGC has embarked on a comprehensive program of economic
and trade policy reforms.  Key areas include fiscal reform, banking sector restructuring, civil servicereform and improved governance.  Much has been accomplished but much more remains to be done.
On the trade side, all quantitative restrictions on trade were eliminated in 1994.  More recently, the
tariff regime has been significantly simplified with  the number of rates falling from 12 to 4 in April
2001 and the top rate reduced to 35 per cent.  The currency is convertible with dollarization pervasive.
Thus in many respects the trade regime is relatively open.
The economy has responded well to this opening of trade.  Growth rates of 5 per cent are
good compared with those achieved in Cambodia’s recent past.  However they fall short of the
performance achieved by neighboring countries.  Vietnam for example has grown by 8-9 per cent per
annum over the past ten years.  Moreover, these growth rates are insufficient to make a dent in theincidence of poverty, estimates of which range between 36 to 61 per cent using the headcount
approach.
In setting out to build a Pro-poor Trade Strategy knowledge of the nature and incidence of
poverty is essential.  The following characteri stics of the poor are consistent across Cambodian
poverty surveys:
(a) Poverty is lowest in Phnom Penh;
(b) Poverty rises with household size and the number of children;
(c) Poverty is exponentially higher for households with older household heads;
(d) Poverty is lower in households where the family head has a secondary or advanced
education; and
(e) Poverty is highest for those whose household head is involved in agriculture.
These characteristics point to the importance of breaking down barriers to trade for rural
household production in areas such as diversified agriculture, handicrafts and labor services.  They
also point to the importance of human development which equips people to engage in trade and
exchange.  The government has prepared its Interim Poverty Reduction Strategy and the PovertyReduction Strategy Paper is due in mid 2002.WT/IFSC/W/12
Page 6
Notwithstanding the opening of trade many significant barriers remain, as identified in case
studies of key sectors.  The dispersion of tariff rates (standard deviation of 11.9 per cent) against a top
rate of 35 per cent has the potential to create pockets of high protection.  The tariff is a tax on
consumption and analysis of moving to a uniform 7 per cent duty implies an improvement of
4 percentage points in average household purchasin g power from reduced food and clothing prices.
Incomes of people in lower deciles improve by between 3.2 and 3.9 percentage points.  Income effects
would depend on industry structure — for example the income effects of tariff reductions for capital
intensive industries would be different from the effects for labour intensive industries.  Other non
tariff barriers to trade involve various bureaucratic costs (often unofficial) and the need to comply
with international labour standards as a condition of international market access.
Accession to the WTO is well advanced.  But complying with WTO requirements is very
demanding for a small developing country and technical assistance will be useful in several areas
(legislative framework, valuation procedures, trade policy evaluation and reporting, assessing the
impact of trade protection).  As part of the Diagnostic Study, a legal expert from the team worked
directly with Ministry of Commerce officials to develop a WTO-consistent legislation program.
Support for WTO accession or associated institutional capacity building is desirable but the fact that apolicy meets WTO requirements does not necessarily mean it is the highest priority for Cambodia.
Assistance on WTO accession needs to be complemented with technical assistance that builds
domestic capacity to assess and develop policy on its merits.
Customs administration has significantly improved in recent years but establishing a low cost
formal trade facilitation system faces many difficulties.  To begin with, the administrative task is
onerous given the porous borders with three neighbours and a long coastline with many rivers and
bays.  Second, various trade arrangements (rules of origin requirements, preferential trading
arrangements in ASEAN) complicate this task.  Third, the institutional framework for border control
is opaque, with unclear mandates among different agencies.  Fourth, limited resources constrain thecapacity of the customs department to carry out its functions.  Civil service salaries are low, physical
support facilities are inadequate, and management information systems are poor.  These difficulties
are reflected in high unofficial payments, widespread smuggling, unreliable clearance and processing
times, and tariff collection that is significantly lower than is implied by the official tariff.
Part from the difficulties associated with ‘external’ trade facilitation, ‘behind the border’
constraints (for example, transport, market intelligence) are also significant deterrents to exporting.Shipping charges in Cambodia are the highest in the region and four times the cost for shipments of
comparable size in Thailand.  Survey respondents overwhelmingly rated transport costs as a
significant barrier to trade – a reflection of the unofficial charges and the poor quality of many roads.
Carefully monitored user charges or toll operations to fund road maintenance and construction would
be ways of addressing this problem.  So would fuel  taxes.  TA is needed to examine the implications
of such options for fund raising and road fund sharing at local levels.
Rice is an important source of food for most rural households.  An evolution is occurring
from rice as a source of food security to rice as a source of trade and income.  Rice trade both within
the country and across the border is currently constrained by poor transport infrastructure —reflecting in part road funding policy, checkpoint charges and inadequate access to funds for road
building and repair.  In addition, export procedures pose a significant tax on rice exports.  ‘Facilitation
fees’ are required to obtain export licenses and are about $14/ton.  According to some estimates,
unofficial costs are nearly double the official costs.  Simulation of impacts on poverty indicate that
improving two major elements in rice production technology (paddy to rice yield and post harvestlosses) would reduce transaction costs and improve the livelihood of poor Cambodians.  A detailed
exposure of these unofficial charges is needed to reduce constraints on current and potential exporters
of rice.WT/IFSC/W/12
Page 7
Diversification of agriculture away from rice is increasingly common.  The key obstacles to
developing non-rice agriculture are similar to those for rice.  They include poor transport
infrastructure, high energy costs, weak information systems, inherited distrust among buyers and
sellers, inadequate access to credit and limited business development skills.  Cambodia could
potentially benefit from the increasing demand for niche agricultural products, such as spices, herbs,specialty tropical fruits, sesame seeds and essential oils.  To do so, action is needed on several fronts.
First, the institutional capacity of the Ministry of Commerce needs to be strengthened.  Second,
technical assistance is needed to help small farm ers and processors with their informational needs.
This could include the facilitation of establishing as sociations interested in marketing, technology and
purchasing inputs.  The authorities could build on the extensive ITC sector analytical studies in this
respect.
Handicraft production has been hampered by y ears of civil strife and war which broke the
chain of traditional transfer of skill and design.  Craftspeople lack critical information on market
demand, quality standards and trends.  As with diversified agriculture, technical assistance is needed
to identify barriers to and sources of market information and to support building associations of
people with similar interests in marketing, technology and the sourcing of inputs.
Fisheries sector development is hindered by intervention of government agencies in almost
every aspect of market transactions.  Fisheries marketing is dominated by the Kampuchea Fish Import
and Export Company (KAMFIMEX), a state-owned ente rprise which has the sole authority to control
fish exports.  According to the law, all fish destined for export should be sold through this agency,which in turn licenses five export traders to take physical delivery of the fish and transport them
across the Thai border to the Arranyaphatet fish market.  Building a competitive and market
responsive fisheries sector will require a change in the corporate culture in the sector to nurture
market-based transactions.  Regulation of management regimes to control overfishing is required.
Technical assistance is needed in two main areas: fisheries marketing and distribution and fisheriesmanagement.  In the former, the impact of the export tax and existing restrictions on who can export
fish identified in the study merit detailed investig ation.  In management, TA is needed to examine the
incentives for short-term exploitation, unregulated common property fisheries and establishing
transparency in the allocation of fisheries access.  In addition, TA can help with developing a
regulatory system for exports to the US and the EU and enabling the private and public sectors to
collectively develop a long-term strategic vision for the fisheries sector.
Garment sector export growth has been spectacular over the past several years.  Some
160 000 people are reported to work in the sector.  This growth reflects a combination of limited
access to the currently highly restricted US and EU markets (set to expire in 2005), a hospitable
policy environment and competitive production costs.  In the case of the US, preferential access
means that Cambodia has some access to a tightly restricted market.  While Cambodia has US marketaccess for a large number of duty items and quota under GSP, for the items it does export-garments,
MFN rates apply and for those garments where Cambodia has shown itself to be especially
competitive quotas now apply.  For the EU, preferential arrangements are such that Cambodia can
export without duty and quantitative limits so long as rules of origin requirements are met.  These
requirements are in most cases not met given the limited development of Cambodia’s textile sector.However substantial production from Cambodia is sufficiently competitive to be able to sell on the
UK market without the concession.
Because the US and EU markets are protected by tariff and quotas, prices on these markets
are high and those sales that can be made through access arrangements are typically very profitable.But this access to these restricted markets comes at a cost.  Satisfying rules of origin, requirements,
including the bureaucratic machinery to enforce them, is one such cost.  For investors another cost is
the need to purchase quota and about 10 per cent of quota is sold by auction.  But at least this cost has
a positive side in that revenue goes to the government.  Other quota is allocated on a historical
performance basis.  This too has a cost if it means that manufacturers engage in activities in order toWT/IFSC/W/12
Page 8
secure quota rather than to make profits.  Abov e market wages bought about by the need to comply
with labor standards in order to secure quota is al so a cost.  While employed labor benefits from the
higher wage, people who would be prepared to work for lower wages lose out.  Restrictions on double
shift benefit hardly anybody.  In the medium to long-term, reduction of trade barriers by the major
developed countries is more important than this limited access, which messes up cost structures.  Keyareas for technical assistance revolve around the following set of issues: the capacity of Cambodian
producers to compete after 2005 when preferential access expires, the impact of existing preferential
arrangements on Cambodia’s cost structure and how to achieve a more efficient and equitable
distribution of quota rents.
Tourism is growing at over 30 per cent annually.  The challenge for this industry is to find the
appropriate roles and tasks for government industry, private operators with respect to such things asindustry statistics, promotion, training, certification a nd charging for ‘unique’ attractions such as the
temples of Angkor Wat.  Core technical assistance needs are: TA to collect tourism related data and to
analyze it; a careful evaluation of the net benefits of tourism to Cambodia and its long-term potential;
developing a tourism development strategy, involving all major stakeholders, building on successful
private-public partnerships such as the Tourism Working Group; in conjunction with the tourismdevelopment strategy, identifying those investments necessary to encourage greater regional and
domestic tourism as well as eco-tourism – all of which would help the poor; and establishing the
appropriate role of the government in regulating, ‘charge’-setting, setting standards and collecting
industry statistics.
Labor export has been an important option for reducing poverty in several of Cambodia’s
Asian neighbours, such as the Philippines, Sri Lanka, Thailand and Vietnam.  RGC policy is to
encourage official labour exports to increase welfare, enhance skills, reduce unemployment and
increase state revenues.  Constraints to increased exports of workers include, low education and
limited foreign language skills, an increasingly competitive market for export labour, complexregulatory and administrative requirements, and training and of initial groups of Cambodian workers.
Developing appropriate government policies and regulations and bilateral arrangements, which do not
prohibitively raise costs yet adequately protects the interests of export workers poses a challenge.
Technical assistance is needed in these areas and should draw on the considerable regional experience
in developing labour markets and regulations.
Information Technology has much to offer in enabling all these sectors to move to more
productive systems.  Already some of Cambodia’ s many young people are embracing IT based
activities.  In some cases IT systems are being used to convey market information and expedite
transactions of handicrafts produced in villages far from urban centres.  In other cases Cambodians
are processing data from other countries and thereb y effectively exporting data processing services.
Technical assistance implied by these findings is foreshadowed in the following table.  This
table is a living document.  A preliminary version was discussed at the workshop in Phnom Penh on
19 and 20 November 2001.  The following revised version reflects contributions from breakout group
discussions at that workshop.WT/IFSC/W/12
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TECHNICAL ASSISTANCE MATRIX FROM OVERVIEW
Observations Type of actionAgencies responsible/external
support Time frame
Policy actions to enhance competitiveness
Macroeconomic policy
/g167 Improve budgetary performance
through revenue mobilization.
/g167 Increase access to credit and
lower its cost./g167 Strengthen macroeconomic
management capabilities.
/g167 Develop sound banking and
payments systems.
/g167 Establish a financial market
relying on government securitiesand other riel denominated
assets./g167 Ministry of Economy and
Finance
/g167 National Bank of Cambodia
/g167 World Bank
/g167 IMF
/g167 UNDP
/g167 ADB and several donorsLong-term
Trade policy
/g167 Support WTO accession. /g167 Continue ongoing assistance
with Cambodia’s legislative
reform under WTO accession.
/g167 Establish WTO consistent
valuation procedures.
/g167 Strengthen and
institutionalize trade protectionmeasurement and trade policyreview (see below)./g167 Ministry of Commerce
/g167 WTO
/g167 Japan, Canada, Singapore
/g167 ESCAP
/g167 German Technical
Cooperation (GTZ)Medium-term
/g167 Build institutional capacity. /g167 Advice on techniques for
measuring levels and impacts of
trade protection and taxation.
/g167 Advice and training for trade
policy evaluation and reporting.
/g167 Assist specific reviews  (for
example, the cascading tariff),export controls and taxes,implications of binding atdifferent levels.
/g167 Review export marketing
arrangements for relevant sector
studies.
/g167 Strengthen the IF Steering
Committee./g167 Ministry of Commerce
/g167 Ministry of Economy and
Finance
/g167 Affected sector Ministries
/g167 IF Steering Committee
/g167 Affected sector Ministries
/g167 Bilateral & Multilateral
Donors
/g167 WTO
/g167 International Trade CentreImmediateWT/IFSC/W/12
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Observations Type of actionAgencies responsible/external
support Time frame
Trade facilitation: customs
/g167 Reduce the degree of unofficial
interventions and increasetransparency, to enhance customsefficiency.
/g167 Reduce institutional
duplication.
/g167 Introduce equitable enforcement
of the law.
/g167 Strengthen capacity in customs
administration and improveincentives for staff./g167 Simplify the tariff and
associated arrangementsincluding trade preferences andduty exemptions.
/g167 Support computerization and
automation of procedures andinformation systems.
/g167 Clarify the roles and
responsibilities of the severaloverlapping agencies involved in
border inspection.
/g167 Support the establishment of
an independent appeals office oncustom matters.
/g167 Support professionalization
of officials with appropriaterewards, accountability andrecruitment of young computerliterate people.
/g167 Support computerisation in
related agencies./g167 Ministry of Commerce
/g167 Ministry of Finance
/g167 Council of Ministers
/g167 WTO
/g167 IMF
/g167 JICA
/g167 ADB
/g167 ESCAPImmediate
Medium-term
Long-term
Immediate
Trade facilitation: transport
/g167 Reduce the cost of transport by
improving quality and reducingunofficial fees and charges/g167 Examine options for road use
charges (i.e.  examine theimplications of fund raising andfund sharing at local levels ofroad funds raised by way of fueltaxes, property taxes andconcessions for toll roadoperations).
/g167 Review models of port
management.
/g167 Determine how unofficial
fees and charges are used.  Dothey go to private use or are theyused for semi public activities?What services, if any, flow fromthese charges?  Does theincidence vary across regions andprovinces? Do such facilitationfees support provincial
government activities?
/g167 Assess how customs services
should be designed and deliveredin a zone situation.
/g167 Identify the management
model to be followed, pricing forland and access to the zone, whoshould supply power,telecommunications etc andpricing for these services, andinvestment incentives./g167 JICA
/g167 ADB
/g167 World Bank
/g167 IMF
/g167 JICAImmediate
Immediate
Immediate
Immediate
ImmediateWT/IFSC/W/12
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Observations Type of actionAgencies responsible/external
support Time frame
Trade facilitation: transport
/g167 Make the trade support
network operational by, amongstother things building capacity oftrade support network stakeholders.
Sector studies - general
/g167 Limited information among
producers about methods ofproduction and market./g167 Complete the national and
provincial resources data bank asa support tool for promoting tradeand investment.
/g167 Disseminate information to
key stake holders./g167 Ministry of Commerce Immediate
/g167 Lack of institutional
arrangements for producers togather and share information about
technology and markets./g167 Foster the formation of and
capacity building in producerorganizations and federations at
the national and provincial level.
Diversified agriculture and agro-processing
/g167 Barriers to agriculture
diversification and  internationalmarket access include access tocapital and technology, poorinformation flow, inadequateinfrastructure (transport, energy,communications) ineffectiveregulatory institutions, lack ofmodern business skills, andrudimentary private sector
institutional base.
/g167 Cambodian agro-industry is
overwhelmingly micro to smallenterprise.  Production  itself ismostly small-holder based./g167 Establish ‘agro-enterprise
support program (incubatorProject)’ to nurture cooperationon production, markets,technology and information andthe development of internationalmarket oriented business skills.Identify and provide technicalassistance to private sectorgroups in the form of businessdevelopment services, to assessthe structure and opportunities ofexisting Cambodian agro-processing enterprises, developindustry associations, and pilotnew export-oriented ventures in
the private sector/g167 Ministry of Commerce
/g167 Ministry of Agriculture
/g167 Cambodia Agricultural
Research and DevelopmentInstitute (CARDI)
/g167 International Trade Centre
/g167 World Bank , IMF-MPDF
/g167 DFID, SIDA, Danida, GTZ,
CIDA, JICAImmediate
/g167 Private sector organisation in
the Agriculture and agribusinesssector is only just emerging (Rice
Millers’ Associations)/g167 Build social capital in form
of private sector organizationscapable of resource mobilisation,self regulation, and partneringwith Government as civil society
institutions/g167 Private Sector Associations
/g167 NGOs
/g167 DonorsMedium termWT/IFSC/W/12
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Observations Type of actionAgencies responsible/external
support Time frame
Diversified agriculture and agro-processing
/g167 Rice has been the focus of R&D
and extension .  Identifyopportunities to break into new‘niche’ products./g167 Assess comparative and
competitive advantage inexisting and new products suchas spices herbs, essential oils,oil-seeds, and processedvegetables/g167 Ministry of Commerce
/g167 Ministry of Agriculture
/g167 ITC, Bilateral Donors,
/g167 Private SectorImmediate
/g167 Strengthen infrastructure
/g167 Strengthen markets for key
assets: credit and land./g167 Identify high pay-off
infrastructural improvements intransport, energy andcommunications, and developproposals for targetedinfrastructure investment.Support alternative creditinstitution development eg creditunions/g167 Ministry of Commerce
/g167 Ministry of Posts &
Telecommunications
/g167 ADB, WB, ILO,
/g167 Ministry of FinanceImmediate
/g167 Improve information base and
information flow/g167 Explore other means of
building information bases andenabling information flow,especially through IT
approaches./g167 Ministry of Commerce
/g167 Ministry of Agriculture
/g167 ITCImmediate
/g167 Information is lacking on
market opportunities forCambodian goods./g167 Develop a series of senior
official trade missions to identifymarket opportunities and toenable working relations withcounterpart officials in potentialtrade partner countries/g167 Japan, IFC, ADB,
/g167 Bilaterals,
/g167 WTOMedium-term
/g167 Effective implementation of
new land law is crucial./g167 Identify ‘success’ models of
Cambodian agro-enterprises andbuild on them.
/g167 Clarify barriers to trade in
rice and other goods as a basis
for their eventual dismantling.
Handicraft s
/g167 Cambodian handicrafts are of
increasingly high quality based on
cottage industry skills.  They arenot well known in international
markets/g167 Conduct research into the
nation’s resources of skilledartisans and their products, andexplore the matching of theseassets to the demands of theexternal market, both regional
and world-wide.Immediate
/g167 Institutional infrastructure to
support handicrafts is very weak atthe production level, and as yet notcoordinated at the Governmentlevel/g167 Develop coordination
mechanisms among Ministries/g167 Ministries of : Women’s and
Veterans’ Affairs; Commerce;Industry Mines and Energy; SocialAffairs, Labour, and VocationalTraining; Planning; Tourism; andCulture.
/g167 Ministry of Commerce as
focal point
/g167 JICA, WTOMedium termWT/IFSC/W/12
Page 13
Observations Type of actionAgencies responsible/external
support Time frame
Handicraft s
/g167 Information about potential
markets and required standards fordesign and production quality is notavailable to handicraft producers
/g167 Access to working capital for
producers is very limited/g167 Establish a private sector
oriented National HandicraftTrading Facility, to supportdevelopment of independentproducer associations and aNational Handicraft Producers’Federation, develop informationbase  to match market demandwith Cambodian handicraftproduction capacity, promotequality assurance mechanismsfor Cambodian product identity,and broker commercialisation ofproducts/g167 Ministry of Commerce
/g167 Ministry of Women’s and
Veterans’ Affairs
/g167 Ministry of Foreign Affairs
/g167 Ministry of Tourism
/g167 MSALVY
/g167 Existing Cambodian
Handicraft organisations
/g167 Japan, UNESCO, ADB
/g167 ITC Artisanal Enterprise
Network
/g167 BilateralsImmediate
Freshwater fisheries
/g167 Sub-optimal fisheries marketing
and distribution due to currentsingle exporter arrangement.
/g167 Marine fisheries in Cambodia
lack management and focus.  Mostcatches are sold directly to Thaitraders on the high seas with nolong term value gained forCambodia.
/g167 Disconnect between fisheries
sector participants and theinternational fisheries markets –local and domestic.
/g167 Poor information base./g167 Encourage investment and
interest in the fisheries industrythrough provincial level businessdevelopment marketingworkshops.
/g167 Dismantle barriers to entry
into export marketing.
/g167 Encourage the formation of a
marine fisheries industry forCambodia through partnershipswith export and import privatesector firms and public sector
information sharing.
/g167 Assist in forming working
groups and encouraging fisheriesindustry participants to activelyshare problems and concerns.
/g167 Encourage market
development of Cambodia-basedmarkets, rather than havingmarkets located directly acrossthe borders.
/g167 Take fisheries participants to
visit regional market countrieswhere they can interact with
fisheries importers and exporters.
/g167 Assist industry working
groups to begin assembling dataon fish catches – varieties,quantities, and qualities – so thatdiscussions with regional tradersare informed./g167 Department of Fisheries
/g167 Ministry of Commerce
/g167 ADB
/g167 ESCAP
/g167 FACT
/g167 USAID Competitiveness
Initiative
/g167 Ministry of Commerce
/g167 ASEAN Working Groups and
regional chambers of commerceand industry associations
/g167 Denmark and Norway (MRC)WT/IFSC/W/12
Page 14
Observations Type of actionAgencies responsible/external
support Time frame
Freshwater fisheries
/g167 Various jurisdictions are
involved in determining thecollection and allocation of the
fisheries resource.
/g167 The Cambodian fisheries
market is recognized regionally andinternationally.  Reasons for lack ofinvestment include a lack ofinformation on available products,excessive export taxes, inefficientand expensive customs andshipping agencies, and too fewparticipants, which indicate an
immature market./g167 Build on emerging IT data
management capacity to developinformation systems intohouseholds on markets and
production.
/g167 Determine the value of an
inter-ministerial working groupor other legislation with MoCtaking a neutral role andbrokering agreements on taxationand enforcement.
/g167 Evaluate the 10 per cent
export tax, the 4 per centdistribution tax and the fishingexport licensing fee, productionand marketing decisions in fishexports and the impact of havinga sole exporter.  Assess effect onformal versus informal activitiesand implications for governmentrevenue and exporting.
/g167 Develop a program to
encourage processing technologyupgrades through demonstrationprojects, such as investment inpackaging machinery and
upgrading of hygiene standards.
/g167 Encourage a different form of
taxation based on reduced taxfees for value added productiveuses and processing technologyinvestments.
/g167 Assess the impact on
incentives for short-termexploitation of extending leaseperiods longer than  to four years.
/g167 Investigate the extent and
impacts of the allocation offisheries access by non-
transparent methods.
/g167 Build private sector capacity
for meeting health and quarantinestandards for fish exports intodeveloped country markets.
/g167 Facilitate development of
private sector organizations andsupport education anddevelopment of industrynetworks.WT/IFSC/W/12
Page 15
Type of actionAgencies responsible/external
support Time frame
Garments
/g167 Increase understanding of the
true competitive advantage ofgarments.
/g167 Overcome existing tariff and
quota restrictions (e.g.  on localcontent requirements and productstandards).
/g167 Achieve a more efficient and
equitable distribution of quota
rents.
/g167 Increase labor market
flexibility in garments sector./g167 Determine the capacity of
Cambodian producers to competepost 2005, compare costs andquotas facing main competitorsand assess prospects forproductivity gains.
/g167 Assess the impacts of existing
preferential arrangements onCambodia’s cost structure.
/g167 Increase capacity to analyze
impact of market accessrestrictions and to negotiate
better.
/g167 Determine the distribution of
benefits/rents arising from theexisting system and developalternative options.
/g167 Explore alternative profit-
sharing system such as flexibleyear-end bonuses instead ofminimum wage.
/g167 Examine role of small and
medium firms.
/g167 Examine options for
promotions of Cambodianproduct.
/g167 Conduct analysis of EBA
initiative and GSP access.
/g167 Provide assistance with
quality and standards.
/g167 Examine options for saving
on wastage in production./g167 Ministry of Commerce
/g167 Ministry of Social Welfare,
Labor and Veteran Affairs
/g167 Council for the Development
of Cambodia.
/g167 IMF Resident Customs
Adviser.
Tourism
/g167 Develop a strategic vision
based on empirical data andwhich takes into account the factthat many inputs into tourism are
sourced from foreign supplies/g167 Support the collection of
international industry statisticsand their analysis to determine,strategically where resources
should best  be focused.
/g167 Examine of the net benefits of
tourism to Cambodia to focusresources on the areas withgreatest long term potential
/g167 Assess tourism’s potential
and develop a tourism strategythrough a multi-ministerialworking group./g167 Ministry of Tourism
/g167 Ministry of Interior
/g167 Ministry of Health
/g167 
Environmental Planning
/g167 Ministry of Public Work
/g167 ADB
/g167 Ministry of Commerce
/g167 Bilateral donors
/g167 ASEANWT/IFSC/W/12
Page 16
Observations Type of actionAgencies responsible/external
support Time frame
Tourism
/g167 Evaluate of the appropriate
role of government in regulating,
setting charges and standards.
/g167 Develop inter-ministerial
working groups to raise theprofile of tourism and to ensurethat cross-sectoral constrainingissues (health, transport, safety)are addressed.
/g167 Encourage the opening of
more border entry points withRegional countries and help tocreate a seamless flow of tourists.Encourage Cambodians to investin the transport, handicrafts andlogistics services businessesthrough business developmentservice support.
/g167 Develop provincial working
groups of local merchants,agricultural producers, andtourism companies to encouragea sustainable, local source of
service and product inputs.
/g167 Connect local handicrafts and
agricultural producers with themarket and encourage, throughdemonstration projects,upgrading of products,packaging, and promotion ofhigh-quality Cambodian brandsto set Cambodia apart fromVietnamese and Thai products./g167 USAID competitiveness
initiative
Labor services
/g167 Improve the regulatory
framework for export of labourservices./g167 Examine the relative weight
of different factors in theexplaining the weak performanceof export of labour services.
/g167 Review how other countries
in the region have regulatedlabour exports.
/g167 Streamline passport
application procedures/g167 Ministry of Social Welfare,
Labor and Veteran Affairs(MSALVY)
/g167 Ministry of Interior
/g167 Ministry of Foreign Affairs
and International Cooperation./g167 Immediate
/g167 Medium-termWT/IFSC/W/12
Page 17
I. BUILDING A PRO-POOR TRADE SECTOR STRATEGY
1. This diagnostic study of Cambodia’s trade policy priorities and implied technical assistance
needs draws on analysis and surveys covering macroeconomic circumstances, trade policy, trade
facilitation and poverty impacts.  Seven sector case studies provide practical grounding, for ideas andactions.  The sector studies confirm that considerable international and domestic trade now occurs in
Cambodia.  The burgeoning trade in garment and tourism exports and the import of modern inputs to
support these activities are contemporary examples.  But there is also considerable and long standing
trade across borders in traditional products — fish is one example, labour is another.
2. All this trade happens at various levels of complexity.  In some cases, it is small scale and
based on barter.  Other trade is formal and passes through official channels, typically with the need to
pay official taxes and duties.  Various unofficial fees and charges are also levied on goods as theymove through the country and across borders.  Compared with circumstances where there was barely
any trade, most people are better off and the Royal Government of Cambodia (RGC) has proposed a
pro-poor trade strategy to make opportunities to trade accessible to all citizens.  The evidence from
experiences of other countries is that trade delivers growth and growth delivers poverty reduction
(Dollar and Kray 2000).
3. The RGC has taken the view that trade policy reform — including the building of institutions
to support open trade, which enables all Cambodians — urban and rural, poor and not so poor — to
enter into domestic and international trade with transaction costs that are not forbidding is an essential
ingredient of improved economic performance and poverty reduction.  In July 2001, the RGC
presented its Pro-poor Trade Sector Strategy at  Cambodia’s Third Consultative Group meeting in
Tokyo (The Tokyo Road Map).  This strategy set out a plan for identifying and overcoming the
obstacles and costs facing Cambodians as they engage in trade, whether that trade be simple local
transactions or sophisticated international trade.
4. An important feature of this strategy involves drawing on the technical support provided by
the Integrated Framework (IF) Program for assisting least developed countries to integrate into theglobal trading system (see box 1.1 for a description of the Integrated Framework Program and events
leading up to the design, initiation and conduct of this Diagnostic Study).  Following the July 2001
Tokyo meeting, the Ministry of Commerce (MOC), which was assigned responsibility for the IF,
worked with the World Bank (WB) as IF task manager to put together a team and terms of reference
to conduct the Diagnostic Study.
5. The approach taken is set out in chart 1.3.  It begins with Cambodia’s past economic and
export performance and its macroeconomic policies.  It recognizes that a pro-poor trade policy mustalso consider other measures being used to tackle poverty.  These include direct activities targeting
health and education and policies developed under the Interim Poverty Reduction Strategy (IPRS), the
Socioeconomic Development Plan (SEDPII) and the emerging Poverty Reduction Strategy Paper
(PRSP).
6. The next point involves analysis of Cambodia’s current trade and investment policies —
including institutional arrangements for developing and administering these policies and trade
facilitation procedures.  Moreover, while the policies of other countries, particularly with respect to
market access are not under control of Cambodia, they do matter.  Seven sector case studies were
conducted.  Based on this material the study draws implications for trade policy and supportive
technical assistance.  The study reports on tests of the impacts of relevant recommended policies onpoor people.  Box 1.2 canvasses follow up TA wo rk foreshadowed in the Pro-Poor Trade Sector
Strategy and started in the Diagnostic Study.WT/IFSC/W/12
Page 18
1.1 Events leading up to this Cambodian Policy Diagnostic Study
/g167 The Integrated Framework (IF) Program commenced in 1997 to promote the integration of
least developed countries into the global economy.  Participating agencies are the World Trade
Organization (WTO), the International Monetary F und (IMF), the International Trade Centre (ITC),
United Nations Development Program (UNDP), United Nations Conference for Trade and
Development (UNCTAD) and the WB.
/g167 In 2000, a Trust Fund was established to increase the benefits that least developed countries
derive from trade related Technical Assistance (TA).  As of September 2001 pledges to the Trust
Fund had been made by the following partners: Canada, United Kingdom, Japan, Switzerland,
Norway, Denmark, Sweden, Ireland, United States, the Netherlands, Finland, UNDP, the European
Commission, France and the World Bank.  Three pilot countries (Cambodia, Madagascar and
Mauritania) were identified for a program of work starting with a diagnostic trade integration study
covering competitiveness and the impact of increased integration in the world economy on poverty
and implied technical assistance needs flowing from these findings.
/g167 Cambodia provided its initial trade policy needs assessment to the IF program in September
1998.
/g167 An IF Interministerial Committee chaired by Ministry of Commerce (MOC), was appointed
in March 2001 to manage the process.  This Committee was subsequently expanded to include high
level policy makers and representatives from the private sector.  The State Secretary for MOC was
appointed as focal point.
/g167 With local UNDP support the MO C prepared its Pro-poor Trade Sector Strategy, which was
presented by the Minister for Commerce H.  E.  Cham Prasidh at the Cambodia’s Third Consultative
Group meeting in Tokyo, June 2001.
/g167 By end August, MOC working with the WB as  task manager had finalized IF terms of
reference (TOR), recruited consultants, established a MOC team and completed field work.
/g167 IF activities complement other poverty reduction strategy development activities including:
/g167 completed IPRS
/g167 completed second draft of Second Five Year Socioeconomic Development Plan (SEDPII)
(April 2000)
/g167 initiated work to complete SEDPII by end 2001
/g167 Poverty Reduction Strategy Paper (PRSP) due mid 2002.
/g167 In July the government appointed its senior economic advisor to the post of Ambassador to
the permanent mission of Cambodia to the WTO.
/g167 In August the Prime Minister appointed a large think tank comprising senior officials to assist
in matters related to Cambodia’s accession to the WTO.
/g167 On 20 October 2001, draft reports on the various components plus an overview were
circulated among government and the private sector in Cambodia and to donor groups.
/g167 On 19 and 20 November 2001, a workshop involving Government, private sector and donors
was held in Phnom Penh.
/g167 Based on feedback and contributions from this workshop the draft reports were revised and
finalized on 30 November.WT/IFSC/W/12
Page 19
1.2 Building a Pro-Poor Trade Sector Strategy: technical assistance activities and needs
/g167 The Government’s Pro-poor Trade Strategy as spelled out in the Tokyo Road Map
envisages detailed fact finding at the firm and household level.
/g167 This diagnostic study has done some detailed fieldwork with interviews of garment
workers, farmer associations, rice cooperatives and a survey of the obstacles confronting 100
exporting firms.  Time and resource precluded participatory trade policy assessment directly
involving poor communities.  The activities that were conducted have yielded valuable insightsinto the obstacles confronting households and firms as they produce and trade.
/g167 Further technical assistance is needed to support the design and conduct of fieldwork
aimed at identifying and measuring other unnecessary restrictions on trading activities as they
exist in various regions across the country.  These investigations should focus on particular
activities in regions and track the trading chain from producer to consumer in a ‘gate to plate’manner.  They should also involve participatory pro-poor trade policy assessment workingdirectly with poor communities.  Such work was foreshadowed in the Tokyo Road Map.
/g167 Donors such as DFID, JICA, ADB and UNDP are already engaged in household level
studies.  The survey and measurement should also test restrictions on entry to economic activityand security of ownership and exchange of goods.WT/IFSC/W/12
Page 20
1.3 Integrated framework approach
Changes in conditions of
market access by other
countries:
–U S–E U– ASEAN
Case studies:
/g167garments
/g167rice
/g167tourism
/g167fisheries
/g167handicrafts
/g167agriculture
/g167labour servicesCambodia’s:
/g167past economic and export
performance
/g167macroeconomic policies
Changes in Cambodia’s:
/g167trade policies
/g167trade facilitation
/g167regulatory environment for
investment
Impacts on economic growth,
incomes and povertyreduction.
Implications for policy and
supportive TA.usingAddTake
Assess
Draw/g167Opportunities facing
Cambodia’s households
/g167Resources available to
Cambodia’s households
/g167Policies for education,
health and social security
/g167Poverty reduction strategy
development:
– IPRS - SEDPII - PRSand
andWT/IFSC/W/12
Page 21
II. MACROECONOMIC DEVELOPMENTS
7. In the early 1990s, Cambodia attempted to reconstruct the economy, supported by a United
Nations sponsored peace agreement and large inflows of international assistance.  Reflecting a period
of macroeconomic instability in the late 1980s and the large inflow of foreign aid, the economy
became almost completely dollarized.  But after an initial period of growth, ongoing civil strife andpolitical instability interrupted reform efforts.  It was not until the late 1990s that reconstruction
efforts were renewed, when the country firmly unified under one admini stration.  The coalition
government formed in 1998 committed itself to pursuing increased transparency within an open
political and economic environment.  Important measures policy measures have been initiated,
notably revenue enhancing actions, improvements in forestry management, and banking reform.
Cambodia’s reform effort chiefly aims to ensure macroeconomic stability, accelerate economic
reconstruction, improve governance, and reduce poverty.
8. The establishment of peace and these reforms have seen a rebound of growth in the economy.
Tourism has bounced back with rising demand met by strong investment in the sector and supportive
policies.  Agriculture has responded well, supported  by efforts from government and from private
sector firms to improve quality, yield and processing.  Garments and footwear exports have surged
driven by a combination of improved market access, supportive policies and low inflation andcompetitive cost structures.  However, the ensuring growth rates of around 5 per cent, while good by
recent Cambodian standards, especially considering the floods of 1999, are not high relative to the
performance of some neighbors.  For example, Vi etnam has grown at around 8 and 9 per cent per
annum over the past 10 years.  Moreover, the ingredients of growth are fragile.  Tourism is
concentrated around Siam Reap and Phnom Penh and linkages with the rest of the economy are weak.The same applies to the garments sector which is also vulnerable to changes in market access
arrangements.
A. R
EFORMS AND PERFORMANCE SINCE 1999
9. Given an extremely low ratio of taxation revenue to gross domestic product (GDP) and a
pressing need to rebuild infrastructure and increase social outlays, measures are being taken tosubstantially improve revenue raising effort.  This increased effort in conjunction with other measures
such as demobilization of the military will enable greater expenditures on health, education, and rural
development.  Overall fiscal performance has improved since 1999, increasing revenue by about 3
percentage points of GDP, reflecting, in part, the introduction of a value added tax in 1999.  Military
expenditure has been reduced in tandem with incr eased social expenditure relative to GDP.  The
government has initiated fiscal restructuring while maintaining macroeconomic stability, as current
budget surpluses have remained at about 1.5 per cent of GDP and overall deficits, includingdevelopment expenditure, have been contained below 6 per cent of GDP (excluding grants).
Cambodia has avoided domestic financing of the budget since 1999, thus providing room for an
expansion in private credit.
10. The government has simultaneously pursued a prudent monetary policy aimed at low inflation
and a stable exchange rate.  The increase in broad money has been largely accounted for by anincrease in net foreign assets, while net domestic assets of the banking system declined, owing to the
improved fiscal position.  Mirroring the monetary policy stance, the riel has been relatively stable in
US dollar and real effective terms since late 1998; and official international reserves have increased to
about three months of imports of goods and services.  The external current account deficit has
remained broadly stable at around 10 per cent of GDP (excluding official transfers), due to the strongperformance of garment exports.  While there are significant barriers to both domestic and
international trade, compared with many developed countries, Cambodia’s trade regime is relatively
open following reforms in 2001.  The country’s exchange system is free from restrictions on
payments and transfers for current international transactions.WT/IFSC/W/12
Page 22
11. Reform efforts have also aimed at improving governance and combating corruption includes
the following:
(a) A new National Audit Committee was established and a governance action plan
approved in early 2001;
(b) Steps have been taken to improve governance in the forestry sector through the
initiation of measures to establish a Forest Crime Monitoring Unit;
(c) A new forestry law was sent to Parliament in mid 2001;
(d) The banking system is being restructured following passage of the Financial
Institutions Law in mid 1999;
(e) A pilot military demobilization program in 2001 led the WB and other donors to
endorse a $42 million comprehensive demobilization program in August 2001;
(f) Civil service reform is being tackled including a census of civil servants in mid 1999
and a subsequently computerized civil service reform strategy for 2000–06 aims to
provide better incentives and merit based classification.
B. CHALLENGES AHEAD
12. But much remains to be done.  Governance and transparency issues remain at the forefront of
the reform agenda.  A Governance Action Plan sets out actions and a timetable for tackling thesematters.  Central to improving governance will be the establishment of a modern legal and judiciary
system that can provide for a clear rule of law and modern commercial laws and regulations.  In
addition, effective operation of the National Audit Authority will need to be achieved.  Fiscal
transparency should benefit from the ongoing streng thening of budget management procedures.  The
establishment of a reliable, timely, and comprehensive statistical framework is still required.
13. The essential macroeconomic challenge is to further improve budgetary performance through
revenue mobilization and increased spending for the social sectors.  However, options for further
increasing tax revenue are constrained to a few economically challenging and politically difficult
measures, given the limited direct tax potential at Cambodia’s current level of development.  In this
context, efforts to increase tax revenue will need to focus on broadening the tax base and improvingtax administration, while strictly limiting exemptions.  The ability to raise government salaries in the
future, as the civil service reform strategy calls for,  is directly tied to achieving annual targets for
revenue performance and military demobilization.
14. Timely implementation of the bank restructuring process and payments system reform will be
crucial in broadening financial intermediation.  Challenges with bank restructuring include smooth
liquidation of nonviable banks, monitoring of bank asset quality, and modernization and privatization
of the Foreign Trade Bank.  With respect to external policies, Cambodia still needs to refrain fromcontracting non concessional foreign borrowing and to resolve outstanding debt rescheduling with
major bilateral creditors.
15. Cambodia’s medium term strategy is to support a rate and a pattern of economic growth
consistent with ambitious reductions in poverty as set out in its IPRSP and the forthcoming SEDPII
for 2001–05, developed in conjunction with the UNDP, the IMF, the WB, and the Asian DevelopmentBank (ADB).  A further elaboration of the strategy is expected in 2002, when Cambodia completes a
full PRSP exercise.WT/IFSC/W/12
Page 23
16. Cambodia’s per capita income was estimated at $238 in 2000, the lowest in Southeast Asia.
While changes in survey design and interview practices make it difficult to assess the evolution in the
incidence of poverty over time, the most recent data (1999 household survey rounds) suggest that the
poverty headcount rate lies between 35.9 to 64 per cent.  Earlier surveys in 1993–94 and 1997
identified key characteristics of the poor and these findings were largely supported by the most recentsurvey in 1999.  The poor were more likely to live in rural areas, to live in households headed by
farmers, or where the head was illiterate and had few years of schooling.  Poorer households also
tended to be larger, younger and have more children.
17. For the poor, expenditures on rice are the single most important item of all expenditures.  On
the income side, earnings from self employment account for over 67 per cent of total income of the
poorest decile, with two-thirds coming from activities related to cultivation.  Thus policies that affect
food prices, especially rice, have important implications for the welfare of households.  Thegovernment’s Interim Poverty Reduction Strategy notes that people are poor because of inadequate
human and physical resources, or the opportunity to generate income and accumulate resources.  The
poor are generally disadvantaged by a plethora of factors: inadequate food supplies, poor health,
physical disabilities, lack of access to land, insecure land titles, lack of skills, inadequate information,
and poor access to input and product markets.
18. In large parts of Cambodia the US dollar and the local currency — the riel — co-exist
smoothly.  In Phnom Penh either currency is widely accepted for everyday transactions.  Large
commercial transactions and asset building are invariably conducted in US dollars.  In the countryside
everyday transactions are more likely to be in riel.  In border areas the Thai baht is also widely used.
The dollarization of the economy is a direct result of the destruction of economic and financialinstitutions after 1975, economic mismanagement in the 1980s and large inflows of US dollars in the
1990s.  There is an active foreign exchange market managed by licensed money changers and there
are no restrictions on international transactions.
19. The readiness to accept the dollar as a currency has yielded many benefits.  It supported early
reconstruction, it helped Cambodia cope with the Asian crisis and it helps protect producers andtraders from exchange rate risk.  However relying on another currency means that the ability to use
monetary policy as an adjustment instrument is constrained, as is the capacity of the government to
earn revenue from seignorage, or the right to issue a foreign currency.  The continuation of
dollarization raises important issues of export competitiveness especially in the context of minimum
wage regulation.  See subsequent discussion of the garment section where minimum wages are well
above market clearing wages.
20. De-dollarization as an option would yield seignorage revenue.  But given the extent of
dollarization changing perceptions would be difficult.  Basic requirements for de-dollarization include
overall economic stability, an effectively restructured banking system including a nationwide network
and a government securities market.  A currency board arrangement involving pegging the riel to the
US dollar would be difficult to sustain with the banking system still unreformed and the fiscal
position still fragile.  Box 2.1 sets out TA activities and emerging TA needs.WT/IFSC/W/12
Page 24
2.1 Macroeconomic developments: TA activities and needs
Key issues for technical assistance include: strengthening macroeconomic management capabilities,
developing sound banking and payment systems and establishing a financial market relying on
government securities and other riel denominated assets.
Broad technical assistance support aimed at strengthening capacity-building within the Ministry of
Economy and Finance and the National Bank of Cambodia is already being provided by foreign
development partners.  The Ministry of Economy a nd Finance will soon work with resident advisors
on budget management and customs and tax administration jointly sponsored by IMF, UNDP, ADB
and several donors.  The World Bank is also supporting administrative reform through an Economic
Capacity Building Operation and a PHRD grant.  The IMF is assigning a resident statistical advisor to
the Ministry of Planning.  The ADB has been wo rking with the Government on statistical system
development.  Discussions are also underway with the ADB to develop the financial markets over the
medium term through a financial sector program loan.
III. DEVELOPMENTS IN TRADE POLICY
21. During the 1960s, Cambodia exported agricultura l products (mainly rice, rubber and corn).
As the regional conflict spilled over into the country in the 1970s, foreign trade virtually collapsed.
Under the trading system adopted in the early 1980s the level and composition of trade waseffectively controlled through quantitative restrictions and state owned trading bodies.  Tariffs and
trade taxes played little or no role other than as a means to collect revenue.  A process of market
oriented liberalization began in the late 1980s.  The state monopoly for foreign trade was abolished in
1987 and the foreign investment law was promulgated in 1989, enabling private companies to engage
in foreign trade.  From 1993, restrictions limiting the ability of firms and individuals to engage ininternational trade were largely removed.
A.
DOMESTICALLY IMPOSED TRADE BARRIERS
22. The tariff regime was again reformed in April 2001.  High rates were reduced from 120 per
cent to 35 per cent.  And the system was simplified with the number of bands being reduced from
12 down to 4.  At the same time excise taxes were raised on excisable products.  This meant that
revenues could be maintained without inadvertently providing high protection to these products.
Compared with the countries Cambodia exports to, it s trade regime is relatively open.  Moreover the
tariff regime has not evolved in response to protectionist demands from local industry.  Unlike many
countries the challenge is not primarily one of dismantling protection and managing industry
adjustment.
23. However there is still a cascading tariff structure, with the highest rates applying to processed
goods and lowest rates on raw materials.  Because producers are influenced by duties on inputs aswell as on outputs, this kind of tariff structure can provide high effective protection even with a tariff
ceiling of 35 per cent.  Importantly, it can also l ead to big variations between commodities in the
levels of effective protection that each enjoys.  Variation in effective protection across sectors can
lead to costly resource misallocation by inducing scarce resources away from productive activities to
less productive ones.
24. While tariffs are low compared with past levels and tariffs in some other countries they
nonetheless involve taxes on people and firms consuming and using these goods.  For firms producing
for the domestic market a duty of 35 per cent on output combined with a duty of say 10 per cent onWT/IFSC/W/12
Page 25
input can still leave a comfortable margin.  But for exporters there is no output protection on
international markets so even small input duties cannot be passed on.  This is especially a problem
where the export activity involves importing a lot of material for processing such as is the case for
garments.
25. Schemes involving duty rebate, duty drawback, duty deferral, bonded warehouse and so on
are to be found in many countries.  Just as these schemes are common so are problems with them.
Cambodia is no different in this regard.  The Law on Investment (LOI) provides for exporters to have
exemptions on the import of goods for export production.  Like most devices for getting duty free
access of materials to exporters, this system has deficiencies.  In order to constrain exempted imported
inputs to goods actually used in export production, exporters are required to complete a Master List of
planned imports.  The ensuring system is reported to be unwieldy and to involve high bureaucratic
costs for exporters.
26. There is no easy way around this problem so long as tariffs remain.  Given Cambodia’s still
evolving administrative system switching to other methods of delivering duty free access such as duty
rebating or duty referral would also incur difficulties.  Declaring a zero tariff on the goods most
frequently used would be an option in that at least the system would be transparent and administration
would be simpler.  Risk based audit systems are another option.  In the longer run moving to lowerduties on all goods would gradually diminish the problem.  Whatever the case ways need to be found
to give exporters access to inputs at world prices in a low cost way and evidence points to the
importance of this access in attracting export oriented investment.
27. The actual amount of duty paid by importers is also affected by valuation procedures.  For
many goods, the Pre-Shipment Inspection (PSI) company proposes a value for duty based on fairmarket value (FMV).  But in other cases the Ministry of Economy and Finance sets minimum or fixed
values for duties and other taxes.  Minimum prices  are a practical way of coping with under-invoicing
and a weak customs system but offer scope for very high protection.  This protection is not
transparent and can be determined by administrative decisions about the level of minimum price.
28. Most quantitative restrictions and licensing of imports were eliminated in 1994.  A few goods
remain under some form of control including pharmaceutical products, gold and silver, ornaments,
ammunition and various cultural and medical materials.  Imports of some goods are banned— for
example, pigmeat, used motorbikes tyres, right hand drive motor vehicles and used footwear.  A few
state trading companies continue to operate but they appear to compete with private companies in the
same markets.
29. Controls of various kinds apply to exports in the following circumstances:
(a) Controls in place for health and security reasons;
(b) Quotas and inspection procedures applied to meet requirements of trading partners to
satisfy quota limits or rules of origin;
(c) Controls apply to exports of processed wood products;
(d) Rice is a controlled export for food security objectives;
(e) Military, pharmaceutical and medical goods are also controlled for security purposes.WT/IFSC/W/12
Page 26
30. Export taxes apply to several classes of goods.  These include live animals and fish and raw
hides and skins.  Controls on fish and rice are discussed under sector study headings in chapter 5.
While there are sometimes perceptions that encouraging further processing in this way is a good way
to encourage value adding and employment generation, in practice this is seldom the case.
(a) Such taxes involve ‘hurting’ one activity and ‘helping’ another so that the basis for
presuming an output gain is weak;
(b) Illegal exports are encouraged;
(c) Reducing returns to animal producers from hides and skins discourages them from
delivering high class product; yet such product is needed by processors seeking to
compete in international company.
B. E XTERNAL TRADE BARRIERS
31. Taking Cambodia’s top 50 export commodities, the main products are apparel (74 per cent),
footwear (5 per cent), wood products (4 per cent) a nd rubber products (3 per cent).  The main markets
for apparel are the US and the EU.  In 2000 the US imported 76 per cent of garment exports and the
EU 23 per cent.  Most footwear is exported to the EU (60 per cent) and Japan (35 per cent).
32. The Diagnostic Study team designed and commissioned a survey of some 100 exporting
firms.  These firms covered garments, footwear, wholesale and retail trade, wood processing,fisheries, agro-processing and logging.  Garment firms identified quotas, tariffs and labour standard
requirements as the main obstacles to the US market.  Opinions about the EU market were similar
indicating that local content requirements mean a substantial amount of goods are not eligible for duty
free access and must enter at MFN rates.  Footwear firms have been established primarily through
Taiwanese investment.  Most footwear exports are to  the EU and Canada.  Hardly any goes to the US.
There are virtually no local inputs and the 40 per cent local content requirement bites hard on
producers.  Tariffs do not appear as a major obstacle for exporters and firms exporting to Japan rated
tariffs there as relatively unimportant.  Labour standards into the EU were cited as a problem.
Cambodian ownership and management of firms exporting in other product areas is much greater.
The survey results from these firms did not indicate the same degree of consensus about marketbarriers.
33. While Cambodia has duty free access for some 6 000 tariff items under the US GSP, the items
where Cambodia can compete effectively with respect to cost and quality, apparel products, are
regarded as ‘sensitive’ and are excluded from GSP access.  Most favoured nation (MFN) rates apply
and 12 categories of garments are subject to restrictive quotas.  Thus despite the fact that Cambodia is
a least developed country (LDC) the average duty in to the US is 17 per cent.  In the EU Cambodia
faces no quota restrictions and has duty free access subject to rules of origin requirements under theEverything-but-arms Initiative (EBA).  Cambodia does not have a well developed textile sector and
these rules of origin requirements are forbidding.  So  much so that the average rate of duty for exports
to the EU is 8.8 per cent.  The implications of th ese restrictions are developed in the garment sector
study - Part C and in chapter 5 of this overview.
34. Preferential access may seem to be a valuable consideration but it has costs:
(a) Some of the bureaucratic obstacles identified as domestic restrictions are caused by
access requirements.  For example, administration at the border is further complicated
by the need to enforce various rules of origin requirements;WT/IFSC/W/12
Page 27
(b) While labor market requirements are driven by the Cambodian Labor Law the
regulations for garment labor conditions are linked to requirements of the US and the
European Union (EU).  The US quota expansion is directly linked to substantial
compliance with labor standards and EU Generalized System of Preference (GSP)
status also has labor and environmental links;
(c) Minimum wages are a transfer to existing workers.  That is a positive for them but a
negative for people who would like to get work but cannot;
(d) Mandatory double time for night shift work appear to help nobody, raising costs of
producing in Cambodia and removing work opportunities for people who would like
to work.
35. Given the level of productivity in Cambodia costs are considered to be high relative to some
competitor countries.  Other competing countries such as Vietnam are also being granted MFN status.Quota restrictions on imports from other countries into the US and EU are scheduled for removal in
2005 under the Agreement on Textiles and Clothing.  When this happens Cambodia will need to
compete on costs and chasing preferences can put the capacity to do that at risk.
36. The African Growth and Opportunity Act (AGOA) grants GSP benefits to eligible countries
in sub-Saharan Africa.  It also allows selected eligible sub-Saharan African countries duty free andquota free access to US apparel markets subject to the origin of the fabric.  Whether competition from
these preferential sources will be appear to be significant is an important question.  While the
preferential conditions appear generous, the experience is that the administrative requirements to meet
them are costly — demonstrating rules of origin for example — and as Cambodia’s own experience
has shown, rapid increases in market share are likely to be met by tariff and quota.
C.A SEAN MEMBERSHIP
37. When Cambodia became a member of ASEAN in April 1999, it committed to a gradual
reduction in most tariff rates by 2010 for trade with other ASEAN members.  Currently the decision
making process with respect to AFTA mainly hinges on the timing at which different classes of goods
will hit the 0–5 per cent target.
38. However assuming that the Common Effective Preferential Tariff (CEPT) target of 0–5 per
cent is reached, the question arises as to whether rates applying to other countries should match this
rate.  Interestingly, some ASEAN member countries have done this.  Indonesia for example has
reduced MFN rates largely in tandem with CEPT.  The reasons for taking such an approach include
the following:
(a) Large differences in rates on the same goods from different sources feed
administrative problems including the scope for taking unofficial payments;
(b) If MFN and AFTA rates differ, firms might be encouraged to source from ASEAN
countries even if the pre duty value of goods from other sources was lower.  That is
trade would be ‘diverted’ rather than ‘created’;
(c) Low uniform duties would facilitate valuation and take some of the administrative
pressures off the exemption system.  Revenue is an issue but with official duties atlower levels, the opportunity to shift official revenues into unofficial charges would
be less;WT/IFSC/W/12
Page 28
(d) High duties on consumer goods means Cambodians pay above world prices for their
basic needs.  For example, the duty on flour is 35 per cent.  This duty protects the
local flour miller and means bakers, food processors and home based industries pay
more — and charge more.  In most countries food makes up a large proportion of
poor people’s expenditure and such duties hit them hardest.  But in Cambodiaimportable food products do not appear to be significant expenditure items for
poorest people.
D.P OVERTY IMPACTS OF THE TARIFF
39. Household survey data were used to model the impact of tariff reductions to a uniform 7 per
cent.  These results are reported in part B. Although the duty on rice is only 7 per cent, for different
kinds of meat, dairy products and for prepared and preserved vegetables duties are above 30 per cent.
The unweighted duty for clothing and footwear is 28 per cent. Household expenditure data was usedto assess the extent of poverty reduction arising from a tariff reduction to 7 per cent.  This calculation
took into account the shares of different items in consumption of each income class.  The lower prices
arising from this tariff reduction resulted in an improvement of 4 percentage points in average
household purchasing power and an improvement from 3.2 to 3.9 percentage points for poorer groups.
E. F
URTHER TARIFF REFORM
40. In some ways Cambodia is well placed to tackle further tariff reform.  Tariffs have already
been significantly reduced with no adverse adjustment consequences.  Revenue is a concern but even
there a low uniform rate would make for much more simplicity and deliver similar revenue.  Non-
etheless the issues are complex and review would need to be done with due process and involve
informed stakeholder participation.  The implications of these options would need to be assessed fromthe point of view of employment, poverty reduction, government revenue, regional income effects and
so forth.  An economy-wide model would be needed to assess the full effects of tariff changes on
consumption and in income.  An outcome of such a review might be advice regarding the pace and
nature of tariff reductions and the need for and kind of complementary policy measures.  The review
would need to be supported by the information and an alytical techniques need to evaluate the impacts
of the tariff change.  The Steering Committee established by the Government for purposes of
managing the Integrated Framework Program could oversee such a tariff review.
F. WTO 
ACCESSION
41. As Cambodia accedes to the WTO, one of the many obligations entailed by WTO
membership will be for Cambodia to participate in a regular trade policy review process through the
WTO Trade Policy Review mechanism.  A regular process of domestic review would facilitate this
process.
42. Another set of issues relating to WTO membership is appreciation of Cambodia’s program of
legislative reform.  As part of the Diagnostic Study, a legal expert from the team worked directly with
Ministry of Commerce officials to develop the legislation program in language that would address
WTO requirements.  The RCG and the National Assembly of the Kingdom of Cambodia have been
working in close collaboration in recent years to adopt and implement a coherent, complete andcomprehensive legal framework in Cambodia.  The Council of ministers has adopted a draft
Legislation Action Plan that sets the legislative agenda for 2000 through to 2004.  In preparing,
drafting, assessing and adopting these new laws and regulations the RGC has determined that all
ministries will see to it that there is compliance with WTO Agreements.  Various technical assistance
projects are either underway or are in preparation to  support government officials for the drafting and
preparation.  he assistance provided in the pilot st udy involved preparing for each law or regulation, aWT/IFSC/W/12
Page 29
description of its content and scope, planned approval dates and processes and the WTO Agreements
implicated.
43. Whether for domestic imperatives or WTO accession requirements, trade policy reform is as
much about building institutions and processes as it is about setting particular policies.  Much needs to
be done.  It cannot all be done at once so the order of doing things is crucial.  Some laws andinstitutions could be set further back in the queue of things to be done.  For example, a competition
law would require a separate agency with highly tr ained lawyers and technical experts.  Whether such
resources would be better devoted to developing contracts and secure transactions law is a question
that warrants addressing.  As the economy becomes more open to international trade, the need for a
competition law would be less.
44. As Cambodia makes ‘offers’ in the accession process, there is the question of the maximum
rates it should seek to negotiate.  These negotiated rates would bind Cambodia from makingsubsequent increases.  One view is that at this stage Cambodia should seek to negotiate the highest
permissible levels.  This would give Cambodia more freedom to make decisions about tariff levels.
However, setting binding rates relatively low, say equal to or very close to current applied rates also
has advantages.  Low binding tariff rates provide stability and credibility in the country’s trade policy
framework.  The important thing is for Cambodia to establish the processes and information to be ableto judge what is a good tariff structure for Cambodia.
45. Basic GATT principles may be varied in some respects for developing and least developed
member countries.  Thus, developed countries may not expect reciprocity for commitments to reduce
tariffs and under the ‘enabling clause’ may offer more favorable treatment than MFN rates.  Special
and different provisions for developed and developing countries allow member countries to maintainassistance measures over longer periods.  There is also an option of introducing quantitative controls
for balance of payment reasons.  The contributions  of such provisions to policies of LDCs is
problematic.  Rather than being guidelines for ‘g ood’ policy they are more realistically viewed as
escape clauses for bad policy.
46. While WTO accession and membership can be a way of ‘locking in’ desirable reform merely
conforming with WTO rules will not guarantee ‘best possible policy outcomes for Cambodia.  WTO
provisions for example allow antidumping and coun tervailing duty actions.  Such provisions have
frequently been ‘back doors’ to protection for many developed countries and an increasing number of
developing ones.  The assistance Cambodia is receiving with WTO accession needs to be
complemented with assistance for building capacity in the application of techniques and principles for
assessing policy on its merits.  Box 3.1 sets out ongoing technical assistance activities and needs.
3.1 Trade policy: technical assistance needs and activities
Proposals for trade policy technical assistance cover issues such as investigating and making
transparent those obstacles which inhibit households from building wealth, through to work on the
trading restrictions and regulatory procedures identified in the Sector Studies.  The trade policy issues
identified in this chapter fall under the following headings: i) WTO accession ii) trade policy
measurement and review iii) export marketing arrangements and iv) systems for providing imported
inputs to exporters free of duty.
WTO accession
Some of the core issues emerging in the next rounds of WTO accession activities include:WT/IFSC/W/12
Page 30
• ongoing assistance with Cambodia’s legislative reform program which addresses WTO technical
requirements and review priorities recognizing that the legislative reform program cannot all
happen at once;
• establishment of WTO consistent valuation procedures; and
• assessment of the implications of binding at ‘high’ or ‘low’ rates and policies for ‘special and
differential treatment’.
The government has an extensive program of WTO related assistance activities under way or in
process.  Thus donors such as Japan have committed to support work in the area of TBT, France in the
area of IPR protection, Canada has committed to support the WTO accession process and Singapore
will support in trade related capacity building.  Valuable work in Trade Facilitation has been
undertaken at the regional level by ESCAP and at the recent ASEAN Economic Minister’s Meeting
the Australian Trade Minister announced a A$3.5 million SPS capacity building program for ASEAN
countries intended to build the internal capacities of regional countries to manage animal and plant
pests and diseases within their own borders and to operate effective quarantine services at their own
borders to protect them against incursion.
Trade policy measurement and review
Important as WTO disciplines are, for good policy to be developed and accepted there also needs to
be a capacity and institutional processes which facilitate the development of trade policy in terms of
widespread understanding of the impacts of such policy on the Cambodian economy and not just in
terms of whether those policies are WTO consistent.  Such processes need to be independent,
transparent, technically sound, and be capable of explaining the benefits and costs of different policies
and the distribution of these benefits and costs on people in Cambodia.  Institutionalization of such a
mechanism would help deliver on many requirement s of the WTO and would in particular be the
basis for reporting to WTO Trade Policy Reviews that will be a requirement of WTO accession.
Technical assistance to support such institution and capacity building could involve:
• advice on techniques for measuring levels and impacts of trade protection and taxation;
• advice and training procedures for trade policy evaluation and reporting; and
• assistance with a specific reviews — for example, the cascading tariff — export controls and
taxes and the implications of binding at different levels.
Technical assistance to review export marketing arrangements is proposed for relevant sector studies.
The government is already managing technical assistance in these areas.  German Technical
Cooperation (GTZ) has an agricultural trade project, which has the objective of elaborating a national
foreign trade strategy for selected countries.  Projects include the promotion of bio-pesticides and
agricultural quality improvement.  JICA is providing support for human resource development for
advancing identification and formation of industries with comparative advantage.WT/IFSC/W/12
Page 31
IV. TRADE FACILITATION
A. T HE TRADE FACILITATION TASK
47. Reducing transaction costs by efficient trade facilitation is an increasingly important issue in
international trade.  The volume of trade is expanding.  The range of sophistication of goods is
increasing.  Consumer demands for safety, environmental standards and the like are rising.Expanding use of bilateral and preferential trade agreements has raised the need to enforce rules of
origin requirements.  Variations in streams of technological developments have given rise to
differences in technical specification and standards, which might warrant border control on safety and
consumer protection grounds.  These pressures and the costs of trade facilitation are sometimes
aggravated by domestic demands to use standards and other specification issues as protective barriers.
48. But there have also been developments that have contained the costs of ‘doing business’ both
within and between nations.  Information technology and statistical techniques have assisted with thedevelopment of customs risk assessment techniques so that inspection of each and every shipment is
no longer necessary.  Automation of data manageme nt and processing, which has helped with risk
management has also facilitated processing of consignments by traders and their agents and by
customs and other border control agencies.  Harmonisation of procedures and standards between
countries has reduced the pressure on border inspection.  Processes to encourage a service culture ofprofessionalism in facilitation are changing practices, which were once obstructionist, to processes
which are facilitative.
49. Most countries are grappling with these issues unilaterally and in a range of co-operative fora
including ASEAN and APEC.  While trade facilitation in Cambodia is in its early days much has been
done including the appointment of a PSI service provider, co-ordination of agencies at bordercheckpoints and the streamlining of procedures for certifying rules of origin.  That said, much remains
to be done to build a modern, low transaction cost, trade facilitation process.
(a) The physical task is large with sparsely populated border areas with three countries
and a long coastline with many rivers and bays;
(b) The administrative task is complicated by:
(i) Many exemptions and the need to allow exporters access to inputs at world
prices;
(ii) rules of origin requirements imposed by trading partners; and
(iii) preferential trading arrangements with ASEAN.
(c) The resources to tackle these tasks are limited and suffer from duplication:
(i) Civil service salaries are low;
(ii) the service is not automated and other physical support facilities are poor;
(iii) regulation and accountability is not well defined between PSI and
professional shipping agents or brokers;
(iv) CED works alongside a number of other agencies at the border where there is
overlap and confusion of responsibility; andWT/IFSC/W/12
Page 32
(v) the capacity to move to a risk management inspection system is hampered by
poor information and data management systems and the incentives to move to
risk management are muted by the opportunities to supplement very low
salaries afforded by inspection of each consignment.
50. These circumstances have given rise to concerns with trade facilitation.  Unofficial payments
are reported and the government’s revenue collection is hampered by smuggling and duty evasion.
51. Trade facilitation does not just happen at the border.  International trade also depends on free
movement of goods within a country.  Thus in Cambodia trade facilitation needs to address
impediments to the movement of goods in the form of poor infrastructure and barriers, which might
arise in the form of transit charges and local marketing monopolies.
52. Trade facilitation is also linked to the regulation of investment.  Over 50 per cent of
international trade is done by multinational corporations and a large part is between units ofmultinational corporations.  Thus trade facilitation and investment facilitation are two sides of the
same coin.  Cambodia has recognized this linkage.  However, regulation which treats foreign
investors differently from domestic investors will have implications for the treatment of goods as they
enter into trade.
53. Although the tariff has been simplified it still cascades from 0 to 35 per cent.  Such
differences raise issues of classification and valuation.  Rules of origin and exemption further
complicate the administrative task.
54. Border markets with Thailand local residents trade surplus household production for foreign
consumer goods.  One-day border passes and duty free entry of non commercial quantities facilitates
this trade.  There are more than thirty land and river crossing border checkpoints with Thailand,Vietnam and Laos.  Exports to neighbouring countries are a small share of total exports.  However,
Cambodia imports almost one third of its total reported imports from Thailand.
B. C
USTOMS CAPACITY BUILDING
55. With the existing low civil service salary structure customs clearance tends to happen on a
‘user pay’ basis with unofficial payments going directly to officials.  At least with this system goodsare cleared and charges are reported to be predictable and not unreasonable for large consignments.
However, they tend to be prohibitive for small traders.  Moreover, this kind of customs clearance has
relatively high costs.  Customs officials have an incentive to inspect, or threaten to inspect, each
consignment rather than apply risk assessment techniques.
56. As a means of covering for Cambodia’s currently limited customs resources PSI is being used
to monitor imports, conduct physical verification of goods, and provide value and customs
classification for revenue collection.  However some consignments of dutiable imports are reported tobe circumventing PSI, leading to substantial foregone revenue.  Traders are choosing to under-declare
the value and quantity of their imports to CED and pay a 7 per cent penalty.  CED and the PSI
contractor, SGS are building working arrangements in biweekly working group meetings.  The role of
SGS needs to be seen in the perspective of a capacity building program for customs administration
and the parties need to agree on a realistic time frame for the CED to take over the functions of SGS.
57. The system has limited computer support and greater use of computers would improve the
efficiency of customs clearance, revenue accounting and data collection and analysis.  It would also
facilitate the development of professionalism of cust oms officials.  Transactions could be processed in
a consistent manner promoting equity and reducing the opportunity for corruption.  Increased
computerisation would also assist more accurate systems of risk assessment, post clearance auditingWT/IFSC/W/12
Page 33
and provision of duty free inputs to exporters.  Nevertheless, greater computerization system alone
would not be sufficient.  There also needs to be in stitution building, clarification of responsibilities
and simplification of tasks.  The draft customs law does not meet the needs of a modern customs
administration in its current form.  There is a need to enact suitable legislation clarifying the functions
and powers of the CED.  A revision of the customs law is underway with completion expected by mid
2002.
58. Further computerization of procedures is unlikely to be successfully implemented if it is seen
just as a means of enforcing duty collection.  Instead, it needs to be understood that in combination
with training, regulation, salaries and clear lines of responsibility, as part of building a better and more
professional customs service.  Customs officials need  to be convinced of the advantages of a modern
customs service offering salaries that reflect training and responsibility, career structures reflecting
promotion by merit, and a rapidly growing econom y helped along by rapidly growing trade and
falling transaction costs.  Customs officers would benefit from such arrangements.  Part of the job of
bringing about change is to convince them of that.  Importers and exporters would be better off by
paying official charges and having their goods cleared quickly and having a government with
sufficient resources to deliver essential services.  And the government would be better off as a result
of having a broader tax base.
59. Customs officials’ salaries are tied to civil service conditions.  However, the civil service
reform strategy provides for a special status for cu stoms staff to address remuneration issues.  Another
approach would be to establish customs as a separate authority.  Transparent fees could be levied to
cover the costs of the authority with the shares of duty going to the state being made explicit.
Enhancing the capacity of CED to achieve trade facilitation objectives would require commitment atsenior levels of government to universal enforcement of customs laws.  There would need to be a
demonstrated belief in fairness and a common resp ect for the rule of law, which would encourage
voluntary compliance by traders and CED staff.  All regulatory regimes rely on voluntary compliance.
60. According to the Private Sector Working Group on Manufacturing and Distribution some $35
million is foregone per year from the smuggling of beverages, petroleum and milk products intoCambodia.  Smuggling of goods into Cambodia that are produced domestically and pay local taxes
discourages investment.  It is also suggested that as much as 80 per cent of the cigarettes imported
into Cambodia are smuggled into third countries.  The CED has established a mobile anti smuggling
task force, which collected CR 0.7 billion in the first quarter of 2001.  The fact that smuggling with its
risks and costs is so prevalent is a reflection of the high level of transaction costs applying in the
formal sector.  The challenge is to get these costs down so that it will not be worthwhile bothering
with smuggling.  With efficient trade facilitation and reasonable rates of duty people trading by wayof smuggling would be encouraged to move through efficient low cost channels.
61. Duplication and confusion at clearance adds to processing time and costs.  Thus the Ministry
of Agriculture administers SPS controls.  The Frontier Defence Department is responsible for
checkpoint security and prevention of smuggling.  The Economic Police assist with the suppression of
fraud.  Camcontrol, an agency established by the MOC is responsible for monitoring the quality ofimports and exports.  In addition at the 28 land and river border checkpoints, the ‘chief’ of border
operations is a representative of either the provincial governor or the administration of the nearest
provincial city.  Measures to rationalise the presence of government agencies at border checkpoints
were introduced in mid 2001 (sub-decree number 64).
C. I
MPORT AND EXPORT PROCEDURES
62. Simplified declaration forms and an exemption from registering for value added tax facilitates
trading low value and infrequent consignments by farmers and small and medium enterprises (SMEs).
However, licensing requirements for rice, fish and handicrafts significantly raise the costs ofWT/IFSC/W/12
Page 34
exporting these products.  There also appears to be uncertainty among officials as to the export
process for non-traditional exports, causing delays and additional costs to exporters.
63. Garment exporters incur significant trade facilitation costs.  Five different government
agencies are involved in the process undertaking at least three different inspections.  Although there
are informal costs for consignment, but they are modest compared to formal fees paid to RGC to
obtain certificates of origin.  Options for simplifying garment exporting procedures include the
following:
(a) Eliminating application letters and providing traders with forms to complete
themselves;
(b) Providing a system to accept applications on electronic media;
(c) Combining application forms and inspections; and
(d) Taking advantage of new communication protocols with US and EU authorities to
simplify the application process.
64. Camcontrol has a dual role — to verify both the quantity and quality of goods being exported
and imported.  This verification could be based on risk assessment and need not involve physical
inspection of every consignment.  Instead, officials stop and inspect 100 per cent of exports and
imports not subject to PSI charging a fee of 0.1 per cent of the value of the consignment for eachinspection.  Low salaries provide an incentive to undertake unnecessary inspection.
(a) The compulsory inspection of all imports and exports is unnecessary.  It is the role of
CED to check quantity.  CED staff could conduct any necessary visual inspections;
(b) Teams need to be trained to manage a risk based sample selection system for imports
affecting health and safety.  These teams could comprise Ministry of Health, Ministryof Agriculture, Fisheries and Forestry or Camcontrol officials.
65. One source of frustration for people dealing with trade facilitation procedures is the lack of
regularized and transparent process for appeal.  Some developing customs services have tackled this
issue by establishing an independent appeals unit.  In Cambodia the regular private sector forum has
provided a useful vehicle for complaints and suggestions to be aired in public.
D. T
RANSPORT AND BORDER MARKETS
66. Shipping operators contend that port charges at the government owned Sihanoukville port are
the highest in the region and four times higher than  a comparably sized feeder port such as Songkhla
in Thailand.  The port had a pre-tax profit equal to 50 per cent of its total revenue in 2000.  However,
port equipment is unutilised because of high charges.  High port charges could discourage shipping
operators opening new services to Cambodia and providing traders more flexibility and choice.
Experience in other countries with private investme nt and management in port facilities has shown
that with carefully specified contractual relationships private investment and management can deliver
an improved range of services at lower prices.
67. Another government owned organisation, the Kampuchea Shipping Agent and Broker, earns
substantial profits from its authority to handle shipping agent and customs brokerage functions within
Sihanoukville and Phnom Penh ports — CR 4 billion ($1 million) pre tax profit in 2000 —representing 68 per cent of its total revenue.WT/IFSC/W/12
Page 35
68. Inland road transportation has increased significantly and is now almost double the volume
carried by sea and rail.  The industry is characterised by a large number of registered and unregistered
operators providing competitively priced services.  Fuel costs are not high and diesel is on a par with
US prices and much cheaper than in Europe.  Road  freight rates vary considerably with the physical
condition of the road.  Fees collected by illegal police checkpoints are between 11 and 17 per cent ofthe formal freight rate for a container being trucked from Phnom Penh to Sihanoukville.
69. Despite the significant competition among operators and relatively low fuel prices,
respondents to the survey overwhelmingly rated transport costs as a significant barrier to domestic
and international trade (90 per cent).  Unofficial fees and charges are one reason for this.  Other
reasons might include the poor quality of roads and the lack of user charges — applied by way of
registration or fuel taxes — to fund road maintenance and construction.  Fuel pricing and taxation is
complicated by the need to consider policies of neighbouring countries where fuel taxes are also low.Another option for road charging would be to esta blish toll operations.  While this could provide
funding and incentives for road maintenance, careful specification of contractual arrangements and
transparent bidding processes would be required to ensure improvements in the quality and price of
road transport services found their way to users.
E. I
NDUSTRIAL ZONE POLICY
70. The RGC has been considering establishing one or more industrial zones in Cambodia and
attracting domestic and foreign investment into the zones.  Reasons for this approach include:
(a) Focusing scarce infrastructure development resources initially inside the zones to
bring them to an internationally competitive level;
(b) Lowering the costs of administering complete duty and tax free exemptions on
imports within the physically defined area of the zone;
(c) Attracting Thai manufacturers to relocate their production operations to zones in
Cambodia situated along the Thai border.  Benefits to Thai investors include:
(i) continuing GSP market access (Thailand has graduated from GSP);
(ii) access to Thai infrastructure, in particular, road and rail links to Thai ports;
and
(iii) access to labour costs that are approximately half of the level of Thai labour
costs in zone three.
71. Given Cambodia’s scarcity of experienced managers and limited financial resources the
government is likely to rely upon a private developer to create and manage one or more of the zones.
This already appears to be the case in Koh Kong .  Such developers would prefer themselves to
undertake many of the policy and management decision-making authorities that the law gives to theCouncil and Secretariat.
72. The draft law envisages a very senior policy making body (Council) that delegates executive
power to a mid level executive body, that further appears to delegate management activities to
representatives in each zone.  This structure has the risk of blurring policy and management functions.
The intended structure could function well if the Council were to act as a policy making board ofdirectors and the Secretariat as the executive management with line functions in each zone.  The zone
customs agency would need to demonstrate an ability to monitor imports and exports from the zoneWT/IFSC/W/12
Page 36
with minimum cost to the investor.  Ideally, an entirely new agency could be established that is
independent from the public sector or these functions could be contracted to the private sector.
73. Zone investment incentives should be aligned with the incentives offered by the LOI.
Consistent incentives will prevent investment loca tions within Cambodia competing with one another.
Apart from the possibility of disadvantaging some regions with respect to others another set ofincentives could raise administrative costs and hurt revenues.  The current review of investment
incentives should consider the tax treatment of Thai investors in the proposed zones.
74. A core issue is how the long term gains flowin g from the industrial zones can be shared.  This
will involve looking carefully at the method of transferring the control of public land to private
developers perhaps by leasing public land (with lease payments based on current improved value) to
private developers rather than selling it, or by imposing a property tax based in property value.
Box 4.1 sets out ongoing technical activities and needs.WT/IFSC/W/12
Page 37
4.1 Trade facilitation: technical assistance needs and activities
Achieving a modern customs clearance and goods inspection system with low transaction costs begins
with some of the TA activities specified for trade po licy.  A first step is to simplify the tariff and
associated arrangements including trade preferences and duty exemptions.
A second step is to clarify the roles and responsibilities of the several overlapping agencies involved
in border inspection.  Such technical assistance co uld draw on procedures followed in other countries
and lessons learned there.  It would require a detailed review of operations, overlap and unnecessary
duplication of agencies including Customs, Camcont rol, the Department of Agriculture, the Economic
Police and various local authorities.
This stream of technical assistance should complement and be designed in sympathy with support for
computerization and automation of procedures and information systems to support risk assessment.
Technical assistance should be designed to support professionalization of officials with appropriate
rewards and accountability.  The technical assistance could also cover the specification of an
independent appeal office on custom matters.
Survey results show road transport to be a major issu e.  In this regard, a study of options for road user
charges would be timely.  Such options might include fuel taxes, regulation fees and toll charging.
The movement towards economic cooperation between Cambodia and Thailand including industrial
zones at border areas raise a large number of technical questions.  One is about the provision of
customs services.  Technical assistance to assess how such customs services should be designed and
delivered in a zone situation would be useful.  Sh ould there be dedicated customs officials or should
zones draw on the Customs Department generally?
Other core issues warranting technical assistance in the context of technical cooperation and industrial
zones include:
• what management model should be followed?
• how should prices for land and access to the zone be struck?
• who should supply power, telecommunications etc and at what price and conditions?
• what investment incentives should be struck?
The RGC has already mobilized considerable technica l assistance in these areas.  The civil service
reform program is relevant from the point of view of building a professional customs service.  The
IMF is supporting a long term resident customs spec ialist who is working in the Customs Department.
JICA is supporting border controls aimed at drug and crime.  The ADB and ESCAP have been
extensively involved with the Greater Mekong Subregion on trade facilitation in the region.  A trade
facilitation working group has been established and is supported by ADB.  ESCAP has provided
assistance to the GMS countries covering such matters as: simplification, standardization and
harmonization of trade related documents and procedures and the development of national
institutional arrangements for trade facilitation.  Other relevant projects include the development of a
framework for customs cooperation.WT/IFSC/W/12
Page 38
V. SECTOR STUDIES
75. The Tokyo Road Map stressed the importance of encouraging and attracting investment and
entrepreneurship into rural based sectors.  That is where the people, especially the poor people are,
and it is also where vast and largely under-utilized resources are.  To this end, seven sector case
studies were conducted with a view to identifying opportunities available, or which might be madeavailable, to households, and constraints limiting their capacity to take advantage of these
opportunities.  The seven sector studies are rice, agriculture and agro-processing, fisheries, garments,
tourism, labour service and handicrafts.
76. Agricultural crops account for around 50 per cent of agricultural sector value added.  Rice
dominates agricultural crops though the total area planted to rice is only 80 per cent of that planted in
the 1970s.  Economic returns to labour from rice production are much lower (less than half) than rates
generated from production of vegetables, soy beans, mung beans, cassava, sweet potato, tobacco andcotton.  About 1.2 million hectares of agricultural land is currently unused.  Other agriculture options
include plantation or industrial crops such as coff ee, castor oil, palm oil, coconuts, sugar cane and
horticulture.  Livestock production accounts for around 17 per cent of value added with potential for
expansion in eggs, poor poultry and pig meat.  Many farm households use livestock as a form of
insurance.  Thus, programs covering animal nutrition, and disease control would help provide securityand improved livestock marketing and trading opportunities would enhance people’s wealth and
reduce the incidence of poverty.
A. R
ICE
77. Most rural households are engaged in some form of paddy production mainly for home use
with the balance for trade.  Cambodia has moved fr om being a net rice importer to a net rice exporter
over the last decade.  Food shortages are reported to exist in some areas.  As food security concerns
are becoming resolved, attention is shifting to seed selection and post harvest practices to increase
productivity and deliver more consistent quality for storage and processing.
B. MARKETING AND PRODUCTION
78. Marketing and processing is typically done by mills, which range from small family affairs to
larger mills with their own wholesale and retail outlets.  A Federation of Rice Millers has recently
been established with a view to building relatio nships with farmers to provide them with the
information, capacity and incentives to deliver more consistent quality rice.  Farmer training and
incentives are reported to have reduced the rejection rate for grain grown under contract from 80 per
cent to less than 15 per cent in just a year.  Farmer extension services provided by the state are
rudimentary and there is an important policy question regarding the best way of getting information to
farmers.  Many countries have subsidized extens ion services but leverage is relatively low and
advisory services are being increasingly privately sourced.  The balance of private/public extension is
a key question.
79. On the input side, land use is a key issue — for rice and for agriculture generally.  Land in
Cambodia can be classified in four classes:
(a) Large areas of unused land in the hands of the State;
(b) Land which though reasonably securely held is not amendable for use as collateral for
borrowing;
(c) Land which is unusable because of the existence of mines; andWT/IFSC/W/12
Page 39
(d) Land which is securely held and well enough titled for use as collateral.
80. A new land law was legislated in 2001 to clarify title, resolve disputes and build the
foundations for efficient land markets and for using land as collateral in financial transactions.  Much
needs to be done to bed this law into everyday prac tice.  It needs to be disseminated throughout the
country and understood and supported by individuals and local administrators.
81. One explanation why some areas are food exporters while others are reported to be in food
deficit could be transport costs.  Transport costs are high partly because of the nature of the terrain
and the quality of roads where the solutions lie in planning and building transport infrastructure.  The
informal fees and charges reported to be collected at checkpoints reflect policy with respect to
security salaries and arrangements between local and central government.  In addition as noted earlier
fuel pricing and taxation policies and the fact that many vehicles are not registered limits funds for
road building and maintenance.  A program is underway to decentralize decision making, improvegovernance and achieve more sustainable and cost effective development of community infrastructure
projects.
82. Few rural businesses including farmers have access to formal sources of finance.  Branch
banking is expensive, incomes are low and collateral is not well specified.  Farmer processor
contracting is emerging as a basis for credit security.
83. Extensive interventions in rice procurement, pricing and marketing were largely disbanded
during the 1980s.  Fertilizer subsidies were abolished in 1997 and now most inputs are supplied by the
private sector.  The government remains involved in food aid distribution and the army purchases
domestic and imported milled rice for soldiers.  A state enterprise, Green Trade Company (GTC) is
responsible for purchasing rice on behalf of the state including the purchase and storage of rice forfood security purposes.  GTC also competes with private traders.  While no formal quotas or taxes
apply to rice exports, exporters are required to obtain a permit.  No official charges apply to these
licenses but ‘facilitation fees’ are apparently required.  Such ‘irregularities’ are reported to be a major
constraint on exporting rice from Cambodia.  The total cost of export procedures, add about US$14
per ton to the cost of exporting rice.  The total cost of these unofficial charges is estimated to beequivalent to total government expenditures on agriculture.
84. There has been extensive research and development in rice through a government research
institute — Cambodia Agricultural Research and Development Institute (CARDI).  While many
varieties have been produced, dissemination throughout the country has been limited.  The research
emphasis is now switching from yield to quality and to post harvest management.
Impacts of rice market changes on poverty85. Efforts to estimate the extent of changes in poverty over time in Cambodia have faced
significant statistical and measurement problems.  These problems flow from efforts to refine the
Cambodia Socioeconomic Survey (CSES) to consider seasonality factors.  Nonetheless whatever
measure is used and at least 36 per cent of people are in poverty.  While comparisons over time will
remain difficult until measurement methods become consistent, several findings about the nature ofpoverty are robust across surveys and time.
(a) Poverty rates are highest in rural areas and amongst people living in households
headed by farmers;
(b) Poorer households tend to be larger and younger and have more children and are
more likely to be headed by a male;WT/IFSC/W/12
Page 40
(c) The poor are more likely to live in households where the head is illiterate or has few
years schooling;
(d) Poverty is lowest in Phnom Penh.
86. According to the CSES data, expenditure on food takes about 75 per cent of total
expenditures for the first five deciles in rural areas.  Only people in the top 20 per cent ofconsumption groups spend less than 70 per cent on food.  Rice is the biggest single item of
expenditure and is about 30 per cent for the poorest people.  In urban areas, food (and rice) do not
dominate expenditure to the same extent.  On the income side earnings from cultivation are important
and rice cultivation is most important in rural areas.  In Phnom Penh wage income is more important.
87. This information on the level distribution and composition of income and expenditure
provides the basis for calculating the impacts of va rious policy changes and consequent changes in the
price of rice.  One scenario tested involved reductions in post harvest losses, improvements in paddyto rice milling yields and a reduction in transport costs.  The average gain under this scenario is
equivalent to 4.5 per cent of total household expenditures, and although all households would gain,
the gains for households selling rice is about 8 per cent.  This is about five times the gains of those
households that need or which are not self sufficient in rice.
88. A second scenario involves decreasing transaction costs for rice in rural areas which raised
the net price received by producers and reduced the net price paid by consumers.  On average people
are better off by an equivalent of total household expenditures 1.6 per cent and net sellers are better
off by an equivalent of 2.4 per cent.  A third scenario involved an increase in the price of rice perhaps
because of increased export demand.  Although it is obvious that in this scenario net rice seller
households would benefit and net rice buyer households would lose out the simulation indicates thatonly very poor and very rich people would lose.  People benefit overall.
5.1 Rice sector study:  technical assistance needs and activities
Crosscutting issues which are relevant not just to rice but to most social and economic activities such
as cooperative activity through associations, regulatory processes and road fees are discussed under a
separate heading.
Core streams of work for rice include case studies of evolving marketing and production systems and
unofficial barriers to trade in rice.  While most legislated restrictions on marketing have apparently
been removed some restrictions — official and unofficial — remain.  Technical assistance to examine
the nature and extent of any such restrictions and their impacts is suggested.
There is also potential value in following up on the case study work reported here whereby rice
millers have cooperated to form long term contract s with farmers.  How effective are such contracts?
What other modalities might operate? In addition what barriers if any exist to the extension of such
activities?
On past and ongoing assistance activities, JICA has supported a major rice study and this work will be
expanded in the forthcoming ADB Agricultural Sector Technical Assistance Loan.
C. D IVERSIFIED AGRICULTURE AND AGRO -PROCESSING
89. The role of trade policy in making it feasible for people to overcome poverty is to expand
opportunities and enhance their resources.  Thus, it is necessary to identify opportunities realisticallyWT/IFSC/W/12
Page 41
confronting rural household and holders of small areas of land.  In the past harsh and immediate
concerns about food security have caused both private and official emphasis to center on rice
production.  While production of rice for subsistence might be a recipe for survival, it is not a recipe
for alleviating poverty and rice processors and rice growers are now increasingly focussing on
commercial opportunities for trade in rice as a means of raising incomes.
90. The broader these commercial opportunities are the better and there are good reasons for
pushing them beyond rice.  First, rice has been the focus of policy for many years.  Production levels
are still below those of 30 years ago but whether commercially driven rice output stays the same,
increases steadily or explodes along the lines of the Vietnamese rice export experience is yet to play
out.  It needs to do this in a policy environment that seeks neither to further promote rice nor to
discourage it.  Second, returns from growing rice ar e relatively low compared with returns from other
specialty crops.  Third, there are many such specialty crops well suited to Cambodia, which offer thepotential for high margin returns given appropriate physical and social infrastructure and trading
conditions.
91. Whether this diversification away from rice will involve a move towards larger plantation
style holdings, only time will tell.  In many Asian countries, large scale agriculture coexists
harmoniously beside smallholder agriculture without adverse environmental or social consequences.A core issue involves how the large amount of land that remains in government hands is allocated to
private users and the security of title once land is in private hands.  In Cambodia, large scale
concessions are reported to have been granted without ‘due process’ and consequently large scale
agriculture has come to be associated with favoritism and environmental irresponsibility.  Such
practices are both unfair and inefficient but this does not mean that large scale agriculture isnecessarily an inferior way of bringing about improvements in people’s lives.  The new land law,
which came into force in 2001, is expected to provide the basis for the secure land transactions which
might involve both the consolidation of small holdings and the breaking up of large ones.
92. However in the short run small holder agriculture is the starting point.  The RGC’s priorities
as laid out in SEDPII include: i) improving f ood security; ii) adding value to crop and livestock
production; iii) increasing income opportunities for rural households; iv) strengthening participatory
processes; v) ensuring sustainable production, and vi) increasing the availability of rural financial
services.
93. Cambodian markets display a broad range of lo cally processed agricultural products such as
milled rice; smoked, dried, fermented or salted fish; fermented cabbage and picked vegetables.  Much
of this processing currently happens at the household or micro enterprise level but a few larger
processing firms do exist.  The main obstacles to specialization and exchange as a way of overcomingpoverty are partly about infrastructure — transport, energy, telecommunications — partly about social
and institutional arrangements and partly about markets for credit and land.  Most market transactions
require a degree of trust.  When parties trust one another, transactions proceed at low cost with less
need to verify quantities, qualities, methods of delivery and so forth. Such trusting relationships and
the reputations which reinforce them, are an important if underrated institution underpinning mostmarket economies.  In rural Cambodia, these aspects of an efficient market took a terrible battering
for many years and are only slowly recovering.  Farmers operate in very competitive markets yet for
the most part they do not compete with each other for individual customers.  Thus, there is ample
scope for them to share information about technology and markets.  In many countries — developed
and developing — farmers do this by way of clubs, associations, breed societies and the like.  Suchactivities are not well developed in Cambodia.  The RGC is actively supporting activities to rebuild
them.
94. Just as Cambodian agriculture is evolving from a food security target, international markets
are increasingly calling for niche products which are ‘interesting’, ‘different’, tasty, clean and green.WT/IFSC/W/12
Page 42
While individual transactions might be small, the market is huge.  Cambodia has many such products
already in place.  They include spices, herbs, certain fine flavored fruits, sesame seeds essential oils
— tea tree and lemongrass for example — certain rice varieties.
95. These opportunities need to be tested and demonstrated.  This is happening already but at a
slow pace because of the physical and social barrie rs mentioned.  One way of supporting development
would be through enterprise incubator projects which worked with groups of producers, processors
and marketers to identify markets, analyze capabilities and costs developed options for commercial
and support relationships and put together proposals for raising finance.  These incentives would need
to be designed so that where they were not working they would be allowed to fail and where were
working well, they would be allowed to grow and become commercial entities.
5.2 Diversified agriculture sector study:  technical assistance needs and activities
The identified ‘blocks’ between the untapped resource of a varied diversified agriculture and a large
international market for new, ‘niche’, green products are largely to do with information.
Technical assistance is proposed which enables small farmers to efficiently tap into the needed
information at low cost.  This includes assistance with the development of modalities for setting
associations with a common interest in marketin g, technology and purchasing inputs.  One approach
to this would be by way of establishment of an ‘enterprise incubator program’, which would provide
access to information and other business development services to market oriented agricultural
production and processing ventures.
D. H ANDICRAFTS
96. Handicrafts offer considerable potential in the context of a pro-poor trade strategy.
Handicraft production can be organized through household units to fit around the timing of seasonallydriven activities such as rice planting and harvesting.  The rich tradition of handicraft production in
Cambodia has yet to be brought to the attention of international buyers.  However many obstacles
stand in the way of this happening.  Years of war and civil strife broke the chain of traditional transfer
of skill and design.  These capacities are slowly reassembling but linkages between craftspeople and
markets The capacity and keenness of Cambodia’s young people to tap into the opportunities offered
by information technology is being utilized in some  marketing of handicrafts.  This approach offers
considerable promise.
97. The demand for a greater variety of reasonably priced quality handicrafts for the burgeoning
tourist trade is one clear market for further development.  Many of the crafts being sold in the primary
tourist markets for foreigners in Siem Reap and Phnom Penh are imported from neighboring
countries.
98. Local tourism is also expanding as Cambodians feel more secure travelling within their own
country.  Until very recently Cambodians have tended to stay close to home out of fear of security
risks in the countryside.  Opportunities also exist in export markets as these markets are exposed to
the unique design characteristics of Khmer arts and crafts.  Small amounts of handicrafts are already
being exported to Europe, Taiwan, Japan and the US.  However exporters continue to be confronted
by obstacles in meeting the quantity quality and cost demands of these markets.  For producers to beable to take advantage of new economic opportunities and capture new markets they need assistance
to expand their production capacity, upgrade the quality of their products to the standards demanded
by buyers, and, overcome the many obstacles noted above.WT/IFSC/W/12
Page 43
5.3 Handicrafts sector study:  technical assistance needs and activities
As with diversified agriculture the missing ingredients for the development of handicraft trade is
information and the establishment of ‘critical masses’ capable of acquiring and using information at
low unit costs.
The challenge for technical assistance here is to facilitate the building of relationships and systems
which enable people to work out of small production units and households to produce products to a
specification and identified demand.
E. FRESHWATER FISHERIES
99. Fisheries provide around 70 per cent of the animal protein intake.  Cambodia’s abundant
capacity to produce freshwater fish arises from complex and delicate interactions involving vast
bodies of water (Ton Le Sap lake and the Mekong and Ton Le Sap rivers), topography and nature.
The wet and dry seasons bring about regular and significant changes in the area (from 3 000 km2 to75 000 km2), depth, flows and nutrient composition.  Traditionally, these interactions have
replenished fish food stocks and provided a hospitable environment for fish to breed and grow.  Now
this vast but delicate resource is under pressure from many sources.
100. Not all these pressures originate in Cambodia.  People in China, Laos, Thailand and Vietnam
all depend on the Mekong for multitude of needs — food, water for irrigation, power, recreation and
waste disposal to name a few.  The economic planning and regional cooperation needed to deliver
sustainable and harmonious use and care of this great system is a core challenge being addressed in
regional fora including ASEAN.  Cambodian fisheries stocks are also under pressure from the
unregulated use of fertilizers and chemicals in agriculture production, forest logging, populationgrowth and marketing and fisheries management arrangements.
101. The statistics on fisheries production, consumption and trade are rudimentary and
complicated by the large amount of informal trade.  That said, it seems to be widely accepted that
about 25 per cent of the total fish catch is exported.  About half that is exported through illegal
channels.  Seventy five per cent of exports are delivered to Thailand as fresh, sea fish and seafood.
The bulk of the balance goes to Vietnam.  On the production side the problem is one of resource stock
depletion.  On the marketing side, key issues are the large share of unofficial trade and the focus onborder markets where prices are low and losses through spoiling are high.
102. Management regimes involving research fishin g lots that were allocated to special groups
through non transparent processes have been disbanded.  Large scale fisheries with relatively
sophisticated production and processing methods now purchase fishing lots in competitive bidding
systems.  While these processes are open and the re venues substantial, the short-lived nature of the
access purchased encourages over fishing.  In early 2001 a large component of fishing areas under
fishing management were released for community use.  The establishment of incentives for
sustainable management of the fisheries resource is an urgent issue.  The establishment of community
based management regimes is a difficult task on technical and cultural grounds and there are risks of
continuing resource depletion through the treatment of fisheries as a common property resource.
103. On the marketing side, unofficial local trade with consequent low prices appears to reflect an
export tax of 10 per cent and allocation of a sole authority to control fish exports.  The state owned
enterprise, KAMFIMEX, does not take physical delivery of fish but instead, for a fee, licenses five
traders to purchase and transport fish across the Thai border.  These traders work through marketsWT/IFSC/W/12
Page 44
located across the border in Thailand.  The ‘fee’ is apparently prohibitively high at $1 per kilogram.
Prices in Thailand appear to be low and handling appears to be unnecessarily repetitious and returns
to resource poor.  While unofficial systems appear to work more efficiently, benefits appear to be
skimmed off by way of unofficial charges.
104. Just why Cambodia’s freshwater fish markets are often located in Thailand is not clear.
Because Thailand does not allow Cambodian transport trucks to deliver the fish to the market, fish are
unloaded from trucks, re-iced and placed in push carts that hold about 3 tons.  Fish are pushed across
the border to the fish market and sold to Thai fish traders.
5.4 Fish exports Poipet
Fisherman
delivers to
landing siteTrader
transports to
distributorDistributor
collects 4% fee
with no serviceTrader sells to
Kamfimex for
export without
physical deliveryKamfimex ‘sells’
fish and license
to export to
trader
Export trader sells to Thai
wholesalers who deliver to
Bangkok for export or the
Thai domestic marketExport trader transports fish
across Thai border - pays
fees of $25 per tonExport trader pays 10% export
tax to Cambodia MEF
Data source: Report of Preliminary Field Assessment and Observations of Commercial Freshwater Fishery Operations
Around Tonle Sap Lake, A Survey Conducted for UNESCAP, Enterprise Development Cambodia, July 2001.
105. Exports of fish to the EU have ceased pendin g the establishment of a regulatory structure to
ensure safe hygiene in production.  One exporter is reported to have US Federal Drug Administration
approval.
106. Thus on both the marketing and production side sustainable fisheries management can be
enhanced by appropriate regulatory regimes.  An abiding feature of Cambodia’s fisheries is the depth
of interventions.  Yet, many of these interventions appear to be counterproductive.  The fees, taxes
and other charges actually appear to discourage investment in modern sustainable management andmarketing systems and instead bring about management and production systems which are both
unsustainable and costly.  They also encourage a clandestine and unnecessarily circuitous system of
trade.  These outcomes appear to be a direct result of government agencies intent on survival and
supporting themselves through direct market interventions, invasive regulations designed and
enforced with a view to securing departmental revenue rather than sustainable fisheries operators.
Activities to turn this state of affairs around could include reviewing the need to have a sole marketing
agency enforcing, reviewing the export tax, supporting the development of private sector andcommunity organizations, supporting private–public sector partnerships to improve technical and
business management capacity and developing an effective demand and price information system.
107. These outcomes appear to be a direct result of government agencies intent on survival and
supporting themselves through direct market interventions, invasive regulations designed and
enforced with a view to securing departmental revenue rather than sustainable fisheries operators.Activities to turn this state of affairs around could include reviewing the need to have a sole marketing
agency enforcing, reviewing the export tax, supporting the development of private sector and
community organizations, supporting private–public sector partnerships to improve technical and
business management capacity and developing an effective demand and price information system.WT/IFSC/W/12
Page 45
5.5 Fisheries sector studies:  technical assistance needs and activities
The main identified technical assistance issues for fisheries relate to:
• fisheries marketing and distribution; and
• management regimes.
Overlaying both these streams of potential technical assistance activities are themes relating to the
poor information base, the various jurisdictions affecting the fisheries resource and the tendency for
government departments to place additional demands on the fisheries resource.
Marketing systems
The effects of the export tax and restrictions on who can export fish identified in the sector study
warrant further work.  Technical assistance in this context would need to address such questions as to:
• what is the extent of the export tax on fish exports?
• what are the effects of the export tax on production and marketing decisions?
• what are the impacts of the sole exporter requirement?
• do efforts to export fish out of the formal — taxed and sole trader — system lead to reduced
export values? How big are any such losses?
Technical assistance to establish regulatory systems to meet international market requirements would
also be timely.
Management regimes
The case for regulation of fisheries as a common property resource is well established.  Concerns
about management regimes in Cambodia arise on several fronts.  There include:
• the incentives for short term exploitation given by awarding of leases for short periods;
• the large number of unregulated common property fisheries;
• the allocation of fisheries access by non transparent methods.
Technical assistance is needed to address these three sets of issues.  Such technical assistance should
be participatory and support ongoing developments  of commercial management systems.  The ADB
and ESCAP have supported extensive research into the management and marketing of fisheries and
ESCAP is continuing to participate in the development of market information systems.
F.G ARMENTS
108. Garment sector growth over the past five years has been remarkable especially considering
that in two of those years there was significant political instability.  Almost all garment production is
exported.  From 35 factories in 1996 there are now around 220 factories employing some 160 000WT/IFSC/W/12
Page 46
people.  That such growth could take place in a count ry that is widely regarded as having weak if not
corrupt administration and poor infrastructure suggests that the sources of this growth must be rather
special.  What are those sources? What benefits flow from this growth and how are these benefits
distributed? What are the policy settings for continued sustainable, efficient and pro-poor growth?
G. S OURCES OF GARMENT SECTOR GROWTH
109. The typically proposed sources of the garment success story (so far) are as follows.
(a) Agreements with the US and the EU providing MFN status and access under the
GSP;
(b) Incentives made available through the LOI to foreign investors;
(c) Cambodia’s comparative advantage at this stage of its development in labour
intensive manufacturing.
110. There are also frequently mentioned obstacles — factors that inhibit even faster growth of the
garment sector.  Besides a weak bureaucracy, and poor infrastructure these obstacles include; location
off main shipping routes, a poorly educated labour force and institutions fractured by many years of
war.  How high these obstacles are is hard to judge.  One view is that given the spectacular growth in
garments and tourism, these weakness in the business environment are overstated and, with
democratization proceeding, these obstacles are on the way to removal.  Another view is that theattractiveness of investment in garment exports has been so high that it has been sufficient to
overwhelm these very large obstacles.
Access to the US and EU
111. Some commentators consider preferential access to be the sole explanation for the garment
sector growth story.
‘The development of the garment industry in Cambodia at the present time is the result of
trade concessions granted by developed nations’(CDRI 2001).
112. The US and Europe are the two most important destinations for Cambodian garments.  For
the US, ‘concessions’ meant that in 1997 Cambodia was ‘granted’ MFN status.  That is American
consumers could purchase imported garments after paying the relevant duty.  How is it that suchaccess is regarded as a ‘concession’? There seem to be two reasons.  First Cambodia, as a non
member of the WTO, is not ‘entitled’ to MFN status in the normal course of events and must be
accorded that status through a special ‘Normalized Trade Relationship’ agreement.  Second, when it
comes to the US garment market, access after paying MFN duty is a ‘concession’ in the sense that
other countries with well developed garment industries operating at large scale and low costs face
restrictive quotas when selling these ‘sensitive’ products to the US market.
113. Indeed so ‘sensitive’ is the market in these areas that even a relatively small newcomer like
Cambodia exported sufficient quantities in some product areas — mainly woven trousers and knitted
shorts — to trigger the US government to impose restrictions on 12 categories of Cambodian exports
in 1999 on the grounds that this level of exports was ‘disrupting’ the US garment market.  This quota
agreement was initially for three years and is due to end in December 2001.  The agreement provided
for an easing of the restrictions by at least 6 per cent per year with an additional 14 per cent easing tobe negotiated depending on the extent to which the US assessed Cambodia ‘substantially complies
with labour standards’.WT/IFSC/W/12
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114. The status of Cambodia’s current access to the US market is as follows:
(a) Over half of Cambodia’s garment exports are not restricted by quota but pay MFN
duty of an average rate of 17 per cent;
(b) Quota restrictions were expanded by the agreed 6 per cent plus an additional 9 per
cent in 2000 reflecting US assessment about the extent of ‘substantial compliance’with labour standards;
(c) The agreement expires in 2001 with potential options including:
(i) quota restrictions no longer apply;
(ii) the agreement is rolled over in current form;
(iii) a new agreement is reached involving no restrictions and preferential duties
along the lines embodied in the African Growth and Opportunity Act which
provides unrestricted duty free access to certain sub Saharan Africancountries.
115. The second largest market for Cambodian garments is the EU.  Under a three year agreement,
which came into force in April 1999, Cambodian garments enter the EU without duty and without
quantitative restrictions.  Special incentive arrangements covering labour and environmental
protection also applied.  In March 2001 the ‘Everything but Arms’ amendment provided forunrestricted duty free access to all products originating in least developed countries excluding arms,
subject to satisfying rules of origin requirements.  As noted these requirements mean that most of
Cambodia’s garment exports do not have GSP status.
116. In the US, the value of market access to Ca mbodia flows from the restrictions applied to
efficient large competitors.  But preferential access the only or main source of Cambodia’s garmentexport success? Most of Cambodia’s exports to the US and to the EU pay MFN duty.  Partly in
response to the imposition of quota restrictions on 12 major categories, producers have begun to
supply the US market with garments not yet covere d by quota but which incur MFN rates.  This may
indicate that Cambodian producers are still competitive for other reasons beyond preferences.
However some potential competitors do not have MFN access and others face quotas.  This is animportant question because the capacity of these major markets to discriminate among providers is
expected to diminish.  The longstanding restrictions  applying to garment trade are to be phased out in
2005 and the number of competitor countries with MFN access is increasing.  For example
normalized trade relations between the US and Vietnam came close to reality with US Senate
approval in October 2001.  Thus, to the extent that preferential access is a source of success, it is not a
reliable one and in the long term Cambodian garment exporters will need to be able to compete with
all suppliers.
Incentives to invest in Cambodia
117. Under the LOI, foreign investors in garment production have benefited from various kinds of
tax relief.  Tax holidays apply to a certain extent, and exporters do not pay duty on imported
production inputs.  To the extent that the LOI is a source of garment industry growth, it would reflect
the following considerations;
(a) Duty exemptions allow exporters to the oppo rtunity to source inputs at almost world
prices;WT/IFSC/W/12
Page 48
(b) The tax holidays provide foreign investors with an attractive environment;
(c) Proposed revisions to the LOI were the cause of strong protest by investors in 2001
suggesting investors do value the concessions.
118. The matter of greatest concern to existing garment exporters was the prospect of losing access
to imported inputs at world prices.  As noted exporters cannot easily pass on such charges and mostcountries seek to deliver duty free access to inputs.  However, other considerations point to these
provisions having only a modest im pact on new investment decisions.
(a) While the LOI allows for a maximum 8 year tax holiday in practice such long periods
are not granted.  Tax holidays of up to four years (the maximum to date) have been
granted to less than 50 firms;
(b) The LOI is subject to complex administrative processes that constrain the use of
potential incentives and the administration of these incentives is reported to involvedelays and ‘bureaucratic costs’;
(c) Other charges have been introduced to raise revenues and these affect investors
returns.
Comparative advantage119. Garment production is labour intensive.  Low wage countries are suited to garment
production and typically, garment exports have figured prominently in the early stages of
development of several neighboring countries.  Cambodia has a traditional garment and textile sector
supplying the local market which in 2000 is estimated to employ 40 000 people so that there is an
existing skill base (CDRI 2001).  As development proceeds, skills increase and wage levels rise,Cambodia’s comparative advantage in simple labour intensive garment production is likely to
diminish.  That would be a positive thing to ha ppen as it would mean Cambodians had found more
rewarding things to do in response to increased productivity and growth in demand for labour from
other sectors.  But there is also a concern among some manufacturers that despite large numbers of
unemployed people, Cambodia’s competitiveness vis a vis  other countries is diminishing.  Cambodia
wage rates are lower than Malaysia, China, Philippines and Thailand but higher than Indonesia,
Bangladesh, Vietnam and India (CDRI 2001).  In addition other restrictions apply which also raise
costs such as the requirement to pay double wages for a second shift.  A looming question is whether
the most viable long term source of export success — the capacity to be able to compete at a price —
is at risk because of requirements linked to market access and the investment law — the most
commonly regarded sources of garment industry success.
H. B
ENEFITS AND THEIR DISTRIBUTION
120. In the context of a pro-poor trade strategy, the following features of garment sector growth
warrant addressing:
(a) The size of the benefits of the garment sector to the economy; and
(b) The distribution of these benefits;
(c) The creation of ‘high cost’ methods for distributing rents that threaten future
competitiveness of the garment industry and other export sectors not yet exploited.WT/IFSC/W/12
Page 49
Size of benefits
121. On the matter of the size of the benefits, three concerns are raised in policy discussion.
(a) The import content is very high and this means that not all of the benefits flow to
Cambodia;
(b) Garment production is built on low wage activity and Cambodian policy should be
looking for activities that deliver higher wages;
(c) Garment production is fine as far as it goes as a source of industrial activity and
development but there needs to be diversification into other activities.
122. For every $100 of garments exported around $63 is spent on imported raw materials (CDRI
2001).  In comparison with other garment producing countries an import content of 63 per cent is
quite low and this probably reflects the rules of origin conditions major importing countries impose asa part of according concessional access.  The survey of exporting firms conducted in the course of the
Diagnostic Study indicated that 60 per cent of ma terial inputs are imported from Hong Kong and
China, 10 per cent from ASEAN countries and 25 per cent from various other countries mainly
Taiwan.  Thus the modified local content requir ement which allows Cambodia to cumulate origin
from ASEAN countries does not help ease content restrictions greatly.  Nearly 80 per cent of the firmssurveyed considered EU local content requirements  to be a significant market access barrier.  In
principle there is nothing special about the extent of import content in an export product.  What really
matters is whether that import content is subsidized in some way by other sectors.  In Cambodia’s
case, garment producers have a system of exemptions that enable them to access inputs at duty free
prices.  While there are concerns about what inputs can be accessed under these provisions and thecosts of administering them, provisions with this intent are necessary for successful export
performance and are common throughout the world.
123. In international terms garment production in Cambodia is a low wage activity although
compared with wages that garment workers might be  earning in other activities their wages are quite
high.  Should the government push for higher wage activities? One way that is attempted now isthrough minimum wage laws, which have raised the wages of existing garment workers.  Investors
contend that these minimum wages are discouraging further investment and further employment
expansion.  The evidence from other developing countries is that high minimum wages reduce
employment opportunities in modern manufacturing and service sectors and crowd workers into low
paying low productivity jobs in the urban and rural informal sectors.  These workers are those most
vulnerable to poverty — the young unskilled and single women heads of households.
124. What about concerns that there is a risk in having excessive dependence on garment
production? Whether there is a risk and one that the government should actively address depends on
several considerations.  Specialization does bring economies of size.  Such economies might flow
from the capacity to fill containers and ships, or the sharing of information about production methods.
Perhaps more importantly, it is the individual invest ors who have assessed the opportunities and risks
and who are currently bearing them.  For government to deliberately encourage activities that havenot yet emerged on the grounds of diversification would require that it knew better and was prepared
to bear the risk.  Encouragement of sectors by way of reduced impediments to all investors does not
entail such risks.
Distribution of benefits125. The benefits from garment sector activity may be classified as follows.WT/IFSC/W/12
Page 50
(a) The returns to labour and capital as wages and profits;
(b) Spillover benefits, such as training, demonstration of Cambodian capacity and the
like;
(c) ‘Rents’ or extra returns arising from the fact that Cambodia does not face as many
restrictions on access to the markets of developed countries as many other exporters.
126. Of these potential sources of benefits the last mentioned is the most interesting.  Positive
spillovers such as those mentioned apply in most activities and in any event need to be assessed
against negative spillovers.  Whether prevailing wages and profits are appropriate returns to capital
and labour is not easy to establish whereas it seems clear that the value of market access is both
substantial and affected by policy.
127. This value is sometimes called a rent.  For purposes of illustration this rent is calculated on
the basis of quota restricted goods and is the value of the prices received for goods sold under quotaless the value they would have received, multiplied by the size of the quota.  Two important questions
arise.  First, how is this rent shared? Second do rent sharing systems adversely affect costs of
production?
128. On the first question, the parties that share the rent are assumed to be the government,
manufacturers, workers and various others.  The government gets part of its share by sellingapproximately 10 per cent of the quota.  Three different taxes — a visa fee, a minimum turnover tax,
or pre paid profit tax and a Camcontrol inspection fee also apply but to some extent these taxes are
also fees for services rendered.  There are also bureaucratic costs.  Some estimates say bureaucratic
costs are around 7 per cent of total revenues or about $70 million (CDRI 2001).  A more conservative
estimate based on reported costs per container would have bureaucratic costs much lower and in theorder of $5.0 million.  Some ‘rent collection’ in the form of bureaucratic costs could also be a
‘sharing’ of benefits afforded under the LOI.
129. Workers also get some of the rent.  One way they do this is through wage increases obtained
by way of minimum wage laws.  Depending on the number of workers this transfer could be in the
order of $20 million.  However some of this transfer does not reach garment workers and is insteadpaid as a ‘fee’ to brokers such as security staff for finding them a job.  Other people sharing in the rent
would include people enforcing labour standards and people enforcing the rules of origin, which are
part of most concessional access requirements.
130. As noted the concessional access to developed country markets can be a ‘valuable
consideration’ and there are good arguments for the government insisting on a large share.  In some
countries, a large part of the quota allocation is sold at auction, which implies that the lion’s share of
available rent goes to government.  This approach has several advantages.  First, it is transparent.Second rent allocation by auction is relatively simple compared with coping with bureaucratic
demands from a range of sources.  Third, the revenue obtained enables governments to deliver better
standards of service.  Fourth, rent appropriatio n by way of auction need not become embedded in
industry costs as when the quota rents go the auctio n price would be zero.  In principle, there is no
reason why labour should not benefit from a share in the rent.  Where problems might arise howeveris when rent sharing methods or institutional arrangements become embedded into costs not only in
the garment sector, but other export sectors not given ‘preferential’ access to foreign markets.
Finally, firms might make long term commitments with a longer horizon of assured markets that is not
subsequently borne out.  This has happened in many countries that have relied on preferential
arrangements and it is an emerging issue for Cambodia.WT/IFSC/W/12
Page 51
5.6 Garments sector study:  technical assistance needs and activities
The core questions for technical assistance emerging from the diagnostic study of garments are:
• what is the capacity of Cambodian producers to compete post 2005?
- compare costs and quotas facing main competitors;
- access prospects for productivity gains;
• what are the impacts of existing preferential arrangements on Cambodia’s cost structure?
• what is the distribution of benefits/rents arising from the existing system?
• how might quota rents be more efficiently and fairly shared — perhaps by selling a greater share
by auction?
I. T OURISM
131. During the 1950s and 1960s, Cambodia was a popular year-round tourist destination.  In the
1990s, after 20 years of conflict, tourism quickly took off in an open and stable Cambodia.  After
being set back in 1997 and 1998 tourist numbers hit 400 000 by 2001 with growth rates of 30 per cent
per year.  While there is a tendency sometimes to conclude that Cambodia’s legal, regulatory and
infrastructure environment is relatively weak, in this case (and with garments also) it has been soundenough to facilitate an impressive supply response.  Hotels have been built, tour operators have
emerged and policies such as the ‘open skies’ airline policies have facilitated effective response to
demand growth.
132. Although the scale is still small in terms of ra tes of export growth, tourism matches garments
and similar issues are commonly raised.
(a) Many inputs into tourism are sourced from foreign supplies and there are questions as
to whether steps should be taken to reduce this ‘economic leakage’;
(b) The tourism growth story is also linked to a ‘scarce’ factor — in this case the
magnificent temples of Angkor Wat;
(c) As is the case with garments, there are concerns about sustainability and
concentration.
133. Although the scale is still small in terms of ra tes of export growth, tourism matches garments
and similar issues are commonly raised.
(a) Many inputs into tourism are sourced from foreign supplies and there are questions as
to whether steps should be taken to reduce this ‘economic leakage’;
(b) The tourism growth story is also linked to a ‘scarce’ factor — in this case the
magnificent temples of Angkor Wat;WT/IFSC/W/12
Page 52
(c) As is the case with garments, there are concerns about sustainability and
concentration.
134. It is estimated that up to 75 per cent of each tourist dollar is returned to Thailand or Vietnam
to import fresh vegetables, fruit, flowers, handicraf ts and furniture. This is both a problem and an
opportunity. Already local enterprises are looking for ways of establishing handicrafts villages andpackaging and presenting Cambodian handicrafts to consistent standards. Government involvement in
zoning and related property right issues is likely to be needed.
135. The focus of most tourist activity is the Angkor Wat temple complex and now four foreign
airlines fly directly to Siam Reap and only about 10 per cent of visitors going initially to Siam Reap
go on to Phnom Penh.  Compared to tourists going to other Asian countries visitors to Phnom Penh
spend relatively little and most of that is for accommodation.  Is it the case then that overseas service
providers are the ones that are making the money out of Cambodia’s unique an tiquities? And if it is,
are there policies which Cambodia should follow to ensure that more of the returns from having this
‘scarce’ factor — ‘magnificent temples’.  Just as garment quotas have a value or rent which belongs
to Cambodia so also do the temple complexes have a special value, which belongs to Cambodia.
136. Some countries endeavor to increase their take from tourists visiting their ‘unique’ venues by
operating a national airline.  But these ventures often turn out to be costly, inefficient and highlyinequitable ways of gathering in extra returns.  An other approach would be to insist that tour guides
be locally licensed and accredited.  On the one hand, accreditation can be a way of providing
information about service competence and quality, but on the other hand if accreditation is used to
restrict supply it can lead to higher costs and less service.
137. Charging for visitors at individual sites is also an option.  Setting charge levels is a matter of
trial and error.  Levels that are excessive would drive tourists away, low levels would probably not be
worth the administrative costs.  In determining any fe es to be levied on tourists, it is important to
remember that wonderful and ‘unique’ as Cambodia’s temples are, tourist destinations in other
countries also have their own wonderful and unique places.  International tourists do have a choice
and in the long run the opportunities to ‘charge for scarcity’ need to be carefully assessed.  This isespecially the case when, as appears to be the case with garments, appropriating rent runs the risk of
raising costs of production.
138. The Cambodian open skies policy and relatively lightly regulated tour operators have serviced
a growing market very well so far.  Important questions involve the extent to which charges could be
imposed at specific points, the role of government in zoning regulation and promotion of certain
marketing activities such as tourist villages and accreditation and licensing of tourism service
providers.
139. As is the case with garments, some people are concerned about whether past rates of growth
can be maintained.  Demand is reported to be falling sharply because of the terrorist bombings in the
US in September.  However in the past world tourism has grown steadily each year despite conflicts
and upheaval.  On the supply side while the airline seats and hotel rooms might be available, some
commentators consider that the supply of sufficiently well trained people is limited and there is a riskthat service levels might drop off.
140. Another issue is whether tourism activity could be expanded beyond Phnom Penh and Siam
Reap.  There are also beautiful temples in northern provinces that are currently inaccessible.
Improved access combined with handicraft production and performing arts could spread the benefits
of tourism more widely.WT/IFSC/W/12
Page 53
141. In this context industry level activities involving staff training, accreditation, industry data
and promotion are important issues.  How should training be delivered? What role should the
government play in delivery of training, accreditat ion of training providers and facilitation of joint
industry activities in these areas? In many countries, tourism is promoted at an industry or national
level on the grounds that no single operator has an incentive to promote national tourism where manysuppliers would stand to benefit.  At what level s hould tourism be promoted? Should it be promoted at
all? After all, it has grown very rapidly without much promotion.  Should the Ministry of Tourism
organize national promotion, or a specialist agency  or a tourism industry body perhaps assisted by a
compulsory levy? All these matters warrant further analysis.
5.7 Tourism sector study:  technical assistance needs and activities
The core areas for technical assistance for tourism are:
• given that many ‘tourism inputs’ are sourced from  other countries — planes, food guides etc —
what are the net benefits to Cambodia?
• how reliable is tourism as a source of economic activity?
• what is the appropriate role of government in:
- regulating the quality and reliability of supply;
- setting ‘charges’ for the right to see ‘unique’ attractions;
- setting standards for training and facilitation of promotion;
- collection of industry statistics.
J. L ABOUR SERVICES
142. Remittances from citizens working in other countries are an important source of export
income in many developing countries including for example, the Philippines, Sri Lanka, Thailand and
Vietnam.  There are costs in terms of family dislocation and risks in terms of limited sanctions for
poor treatment or deficient or non payment, but there are also potential long term non income benefitsin the form of developing skills, training and business networks and market information.  In some
countries for example, India developments in in formation technology have enabled the ‘export’ of
labour services without requiring the provider to leave the country.
143. While formal labour exports are not well developed, more than 100 000 Cambodian workers
are reported to work in Thailand on unofficial ba sis.  The RGC intends is now encouraging official
labour exports.  Small numbers of people have gone to Malaysia as construction workers and maids
and contracts have been signed so that 1 200 construction workers can work in Greece.
144. The Ministry of Social Affairs, Labour, Vocational Training and Youth Rehabilitation
(MSALVY) is responsible for the regulation of labour exports.  The regulations appear to presume
that workers will arrange their assignment with a labour export company and require conditions for
workers to be specified in the contract and to meet MSALVY specifications.  Workers need to
provide copies of a security clearance, medical certificates, qualifications and passport.  Each workeris required to hold a labour license.  A deposit of $100 000 is required and labour exporters areWT/IFSC/W/12
Page 54
required to cover the costs of MSALVY stuff to inspect working conditions in the country of work.
Only two companies have been licensed to operate so far and the number of workers involved is
small.
145. Possible reasons why the numbers are so small include the following.
(a) Compared with people from other Asian countries Cambodian foreign language and
workplace skills are not well developed;
(b) Demand for export labour in some Asian countries — for example, Malaysia is
falling and supply from other Asian countries is increasing because of the Asian
economic crisis;
(c) Regulatory compliance costs are high, reflecting the size of the deposit, the
mandatory testing requirements and the limited number of licensed firms.  These high
costs may have cooled the interest of foreign buyers on the one hand and Cambodianworkers on the other.
146. Understanding the relative significance of these possible reasons is a core issue for the
government.  Most other countries have decided that some regulation of this market is necessary to
provide an option in the event of ill treatment and non delivery by the employer and poor performance
by the laborers and the labour here company.  Nevertheless other countries seem to have establishedrelatively low cost regulatory arrangements.
147. While the unregulated export of labour services is reported to involve incidents of non
payment and other firms of poor treatment, studies report that on balance most people have positive
outcomes.  The main impact appears to be the levying of unofficial charges for border crossing.  The
policy imperative in this area appears to be to test regularity procedures and ensure that there isunrestricted entry into the business of providing services, which match Cambodians wishing to work
overseas with people wishing to hire.WT/IFSC/W/12
Page 55
5.8 Labour services sector studies:  technical assistance needs and activities
In many other developing countries remittances from the export of labour services has been an
important source of export income.  While over 100 000 Cambodians are reported to work in Thailand
through unofficial channels, efforts to promote labour exports through formal channels — involving
training, inspection and monitoring have had little impact.  Technical assistance is needed to tackle
questions identified but unresolved in the diagnostic study.  Why have the efforts to promote a
regulated delivery of labour services met with so little success?
• Falling demand after Asian crisis.
• Lack of language skills;
• Lack of interest by Cambodians;
• High costs of agency fees for inspection and training;
• Limited number of approved export agencies.
Cambodia faces a dilemma in regulating labour exports.  On the one hand a completely unregulated
market could bring about exploitation of workers and a damaged reputation for Cambodia if dishonest
or unreliable workers go abroad.  On the other hand, excessive regulation and lack of competition
among agencies could make Cambodian workers uncompetitive whereby the price to foreign
employers is too high and the returns to the Cam bodian worker is too low.  Technical assistance
which enabled policy makers to learn how other countries — say Philippines and Sri Lanka — have
managed this balance would be a way of tacking this problem.
5.9 Sector study, selected cross cutting issues:  technical assistance needs and activities
Three cross cutting issues which emerged in most of the sector studies were regulation, transport
infrastructure and unofficial charges and taxes
Regulation and regulatory processes
A cross cutting issue through the sector studies is the tendency for regulation to be impulsive not
transparent and often counterproductive.  This pr oblem of finding and keeping the ‘right’ level and
form of regulation is being tackled in many countries.
Technical assistance which supported a program of regulatory review and testing is suggested by
these findings.  Such technical assistance would involve advice on techniques for evaluation of
regulation and exposure to regulatory review systems followed by other countries.
Road user charges
An improved road system will require investment a nd maintenance.  To this end technical assistance
which supported examination of options for road use charges might be considered.  Such a study
could examine the implications of fund raising and f und sharing at local levels of road funds raised by
way of fuel taxes, property taxes and concessions for toll road operations.
Unofficial fees and charges
While the incidence of unofficial fees and charges is widely referred to little is known about how
those funds are used.  Do they go to private use or are they used for semi public activities? What
services, if any, flow from these charges? Does the incidence vary across regions and provinces? Do
such charges support provincial government activities?WT/IFSC/W/12
Page 56
APPENDIX
WORKSHOP IN PHNOM PENH
Opening remarks and program by H.E Cham Prasidh Minister of Commerce at the National
Workshop ‘Cambodia: Integration and Competitiveness Study’
Excellencies, Ladies and Gentlemen,
It is my great pleasure and honour to welcome all the participants to this National Workshop
‘Cambodia: Integration and Competitiveness Study ’.  I take this opportunity to extend my
appreciation to the whole IF studies team led by Mr.  Sandy Cuthbertson for the well researchedDiagnostic studies and Mr.  Ataman Aksoy for managing very well the time constrained IF project.
A special thanks to the entire IF agencies namely the WTO, the UNDP, the World Bank, the IMF,
UNCTAD, and the ITC for their engagement in making this exercise a success.  A special thanks also
go to key bilateral donors for their financial support of the IF and their encouragement for this joint
partnership initiative.
The Government’s effort in Trade Sector Strategy formulation is part of its ongoing work for
designing a National Poverty Reduction Strategy.  At the national level, the work started with the
formulation of our Second Five-Year Socio-Econom ic Development Plan – also known as SEDP -II –
and with the formulation of our Interim PRSP.  For the trade sector, our effort started with thepreparation of a ‘Preliminary Concept Paper for the Formulation of a Pro-Poor Trade Sector Strategy
for Cambodia’ followed by our ‘Tokyo Road Ma p: Mainstreaming Trade for Poverty Alleviation’
which was tabled at the last CG meeting in Tokyo.
Last April 2001, Cambodia was designated as one of the three pilot countries for pro-poor
trade sector strategy formulation under the Integrated Framework.  The IF was initiated and further
redefined to ensure better integration of trade with national development strategies and complemented
by a trust fund for IF activities.  A specific objective of the IF was to increase the benefits that Least
Developed Countries (LDCs) derive from trade-re lated Technical Assistance (TA) made available to
them by the international community.
To draw maximum benefits from the ever ch anging global market, Cambodia like other LDCs
countries needs to tackle inter-related action at three levels: significant improvements in market
access, linked to a coherent programme of technical assistance and capacity building, and based on
continuing domestic policy reforms and adjustment in LDCs.  The preparation of this diagnostic trade
integration study covering the competitiveness of Cambodia's economy and of the sectors that are
engaged or have the potential in international trade is timely.  Much has happened in recent monthsand days, the ratification of the US-Vietnam trade agreement, the recent accession of China to the
WTO, the African Growth Opportunity Act (AGOA), just to name a few.
If Cambodian firms are to invest, compete and grow in this environment they must not be
loaded with unnecessary burden.  They are the engines and they deserve top lubricants in the form ofsimple and clear policies and efficient administration of those policies.
The diagnostic study which is quite comprehensive in its scope involves taking a look at some
cross-cutting policy and institutional issues and suggesting ways how we can improve the overall
environment for a successful pro-poor trade sector strategy.  It also involves focusing on what must bedone to strengthen and develop a number of product-sectors for exports, especially product-sectors —
rice, diversified agriculture, fisheries, garments, tourism, labour services -- whose development will
have a strong positive impact on Cambodia’s poor a nd will help us decentralize our export base from
the two or three cities where it is concentrated at the moment.WT/IFSC/W/12
Page 57
This National Workshop is a good opportunity to further pursue this partnership dialogue and
I am very pleased to see gathered today key stake holders from the government, private sector, civil
society, academia, and donors to discuss the draft document.  The Government strongly believes in
building participation and ownership .  We want to make sure we have put in place all of the
mechanisms it will take to ensure true ownership of our pro-poor trade strategy by all the relevantstakeholders.  We know that participation and ownership do not happen by magic but must be built
deliberately.  We also know that strong ownership and participation are what we need to ensure a
reasonable chance of success and sustainability of our strategy.  We also believe that, down the line,
solid mechanisms for participation and ownership wi ll be important in helping us monitor the impact
of our trade strategy on poverty-reduction in Cambodia.
On that note I strongly encouraged everyone here to frankly express their views and their
suggestions on how to improve our country competitiveness.  The work so far involves diagnosis and
suggestions.  The tasks for this workshop are to make sure the diagnoses are sound and that the
suggested treatments (prescriptions) are on the right track.  Based on feedback from this public
workshop process the material will be revised and finalized and a Development Action Plan for TA
will be formulated and adopted.
From the extremely tight schedules of presentations and group discussions in the Workshop
agenda I count on all of you to reflect on these challenges and opportunities and to come out with
some recommendations to turn these potential success stories into real ones.
In closing allow me to share with you an item that was reflected 2 days ago in the recent
WTO Ministerial Declaration in Doha, Qatar ‘….The Ministerial Declaration stresses that technical
cooperation and capacity building are core elements of the development dimension of the multilateral
trading system.  It provides the mandate and the resources to assist countries to mainstream trade into
national plans for economic development and strategies for poverty reduction.  It provides for widercooperation between agencies, bilateral donors and beneficiaries to identify ways of enhancing and
rationalizing the IF and explore the extension of th e model to all LDCs, follow ing the review of the IF
and the appraisal of the ongoing Pilot Scheme in selected countries (Cambodia, Madagascar, and
Mauritania)…..’
With this statement Cambodia has a great opportunity to play a larger role in the global arena
by sharing Cambodia's success stories to the rest of the world.  The burden is quite heavy but indeedcommensurate with the honour.  On that note may I now declare the National Workshop ‘Cambodia:
Integration And Competitiveness Study’ open and I wish the Workshop a fruitful discussion.WT/IFSC/W/12
Page 58
National workshop
Cambodia: Integration and Competitiveness Study Ministry of Commerce Conference Hall,
Phnom Penh, 19–20 November 2001
Day 1, 19 November 2001
Time Activities Speakers
8.30 – 9.00 Registration and coffee
Designation of groupsAll
9.00 – 9.20 Welcome/Opening address H.E. Cham Prasidh, Minister of Commerce
9.20 – 10.20 Overview of the Study I Sandy Cuthbertson , Lead author/team leader
H.E. Sok Siphana, Secretary of State for Commerce
10.20 – 10.35 Coffee/Tea Break All
10.35 – 12:00 Presentation 1:
Trade Policy, Market Access, WTOMinistry of Commerce
Sandy Cuthbertson
All
12.00 – 14.00 Lunch All14.00 – 14.40 Presentation 2:
Trade FacilitationChair:
/g167 Mr Kun Nhem, Deputy Director, Customs and Excise Tax
Department, Ministry of Economy and Finance
14.40 – 15.20 Breakout Session:
/g167 Agriculture/agro-processing
/g167 Fisheries
/g167 Garments
/g167 TourismGroups:
/g167 H.E. Chan Tong Iv, State of Secretary for Agriculture, Forestry,
and Fisheries
/g167 H.E. Khek Ravy, Secretary of State for Commerce
/g167 H.E. Ruos Ren, Under Secretary of State for Tourism
/g167 H.E. Sok Chenda, Secretary General, Council for the
Development of Cambodia
15.20 – 15.30 Coffee/Tea Break All
15:30 – 16:10 Groups report back Groups spokespersons
/g167 Facilitator: Mr. Sok Sopheak, Director, ASEAN and IO
Department, Ministry of Commerce
16:10 – 16.40 Breakout Session:
/g167 Handicrafts
/g167 Manufacturing (incl. Garments)
/g167 Labor servicesGroups
/g167 H.E. Ing Kuntha Phavy, State of Secretary for Women and
Veteran Affairs
/g167 H.E. Hul Lim, Under Secretary of State for Industry, Mines and
Energy
/g167 Mr. Huot Chanthy, Deputy Director, Ministry of Social Affairs,
Labor, Vocational Training and Youth Rehabilitation
16.40 – 17.20 Groups report back Groups spokespersons
Facilitator: Mr. Sok Sopheak, Director, ASEAN and IO Department,
Ministry of Commerce
17.20 – 17.30 Summing up remarks Public/Private Spokespersons
H.E. Sok SiphanaMr. Van Sou Ieng, Chairman, Garment Manufacturer Association of
Cambodia (GMAC)WT/IFSC/W/12
Page 59
Day 2, 20 November 2001
Time Activities Speakers
8.00 – 8.15 Registration and Coffee
Designation of groupsAll
8.15 – 9.00 Feedback from Peer Review
Group/Steering Committee/PRSPCommittee/g167 H.E. Kim Saymalen, Under Secretary of State for Planning
9.00 – 9.30 Presentation:
Development Action Plan for TA/g167 H.E. Sok Siphana
/g167 Sandy Cuthbertson
9.30 – 10.30 Breakout Session on TA:
/g167 Trade policy and facilitation
/g167 Agriculture/Agro-processing
/g167 Handicrafts
/g167 Garments
/g167 Tourism
/g167 Labor servicesGroups
/g167 H.E. Khek Ravy, State Secretary of Commerce
/g167 H.E. Chan Tong Iv, State Secretary of Agriculture
/g167 H.E. Ing Kuntha Phavy, State Secretary of Women and
Veteran Affairs
/g167 H.E. Hul Lim, Under Secretary of State for Industry, Mines and
Energy
/g167 H.E. Ruos Ren, Under Secretary of State for Tourism
/g167 Mr. Huot Chanthy, Deputy Director, Ministry of Social Affairs,
Labor, Vocational Training and Youth Rehabilitation
10.30 – 10.45 Coffee/tea break All
10.45 – 11.15 Groups report back / Discussion Group spokespersons
Facilitator: Mr. Sok Sopheak, Director, ASEAN and IO Department,
Ministry of Commerce
11.15 – 11.45 Closing remarks Public / Private representatives
/g167 Mr. Bretton Sciaroni, Chairman, American Cambodian
Business Council
11.45 – 12.00 Closing remarks /g167 H.E. Sok Siphana, Secretary of State for Commerce
12.00 – 14.00 Lunch AllWT/IFSC/W/12
Page 60
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the William Davidson Institute, and the World Bank, 20–21 October 2000, Stockholm, Sweden.
Enterprise Development Cambodia (EDC), Report of Preliminary Field Assessment and Observations
of Commercial Freshwater Fishery Operations Around Tonle Sap Lake , a survey conducted for
UNESCAP, EDC, July 2001.
Rodrik D. 1999, Making openness work: the new global economy and the developing countries, The
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