WORLD TRADE ORGANIZATION
ORGANISATION MONDIALE DU COMMERCE
ORGANIZACIÓN MUNDIAL DEL COMERCIOWT/IFSC/W/12/Add.2
8 August 2002
(02-4271)
Integrated Framework Steering Committee Original:  English/
anglais/
inglés
DIAGNOSTIC TRADE INTEGRATION STUDY FOR CAMBODIA
A Pilot Study prepared under the Integrated Framework for Trade-Related
Technical Assistance to Least-Developed Countries
Part C
CAMBODIA
Addendum
The attached document contains Part C1 (Sector studies - rice, diversified agriculture, handicrafts, fisheries, garments,
tourism, labour services) which was prepared under the Integrated Framework Pilot Scheme.
Part A (Overview) is contained in WT/IFSC/W/12 and Part B (Component Reports - Macro Assessment, Trade Policy,
Trade Facilitation, Poverty Assessment) in WT/IFSC/W/12/Add.2.
Comité directeur du Cadre intégré
ETUDE DIAGNOSTIQUE SUR L'INTEGRATION DU COMMERCE
CONCERNANT LE CAMBODGE
Étude pilote établie au titre du Cadre intégré pour l'assistance technique
liée au commerce en faveur des pays les moins avancés
Partie C
CAMBODGE
Addendum
Le document ci-joint contient la partie C1 (études sectorielles portant sur le riz, l'agriculture diversifiée, l'artisanat, les
pêches, l'industrie du vêtement, le tourisme, les services de main-d'œuvre) de l'étude établie au titre du Programme pilote pou r le
Cadre intégré.
La partie A (Exposé général) de l'étude est reproduite dans le document WT/IFSC/W/12 et la partie B (qui présente une
évaluation macro-économique, traite de la politique commerciale et de la facilitation des échanges et contient une évaluation d e la
pauvreté) dans le document WT/IFSC/W/12/Add.1.
Comité Directivo del Marco Integrado
ESTUDIO DIAGNÓSTICO SOBRE LA INTEGRACIÓN DEL
COMERCIO EN RELACIÓN CON CAMBOYA
Estudio piloto elaborado de conformidad con el Marco Integrado para la Asistencia
Técnica relacionada con el Comercio en apoyo de los Países Menos Adelantados
Parte C
CAMBOYA
Addendum
El documento adjunto contiene la parte C1 (estudios sectoriales - arroz, agricultura diversificada, artesanía, pesca, vestido,
turismo, servicios laborales) elaborado en el marco del Programa Piloto del Marco Integrado.
La parte A (panorama general) figura en el documento WT/IFSC/W/12 y la parte B (evaluación macroeconómica,
política comercial, facilitación del comercio, evaluación de la pobreza) en el WT/IFSC/W/12/Add.2.
                                                     
1 In English only./En anglais seulement./En inglés solamente.WT/IFSC/W/12/Add.2
Page 2
TABLE OF CONTENTS
DIAGNOSTIC TRADE INTEGRAT ION STUDY FOR CAMBODI A ...........................................1
PREFACE........................................................................................................................ .......................4
I. I NTRODUCTION ............................................................................................................................6
A. Background ................................................................................................................... ............6
B. Household economic systems and poverty in Cambodia.......................................................9
C. Major economic sectors....................................................................................................... ...10
II. R ICE............................................................................................................................... ...........12
A. Background ................................................................................................................... ..........12
B. Overview of paddy production and rice trading system .....................................................12
C. Institutional issues and option s for developing rice trade...................................................13
III. D IVERSIFIED AGRICULTURE AND AGRO -PROCESSING ...............................................................18
A. Background ................................................................................................................... ..........18
B. Marketing and processing..................................................................................................... .21
C. Opportunities for market oriented production and processing..........................................23
D. Specific suggestion for action: An Incubator Project..........................................................26
E. Conclusion ................................................................................................................... ............28
IV. H ANDICRAFTS ...........................................................................................................................29
A. Background ................................................................................................................... ..........29
B. Initiatives from the Ministry of  Women’s and Veteran’s Affairs ......................................30
C. Strengths and weaknesses of producers................................................................................31
D. Obstacles.................................................................................................................... ..............31
E. Conclusion ................................................................................................................... ............33
V. F ISHERIES ............................................................................................................................... ...34
A. Background ................................................................................................................... ..........34
B. Role of fisheries in Cambodia ................................................................................................ 36
C. Industry structure, market participants, and trade issues..................................................36D. Promoting competitive market behaviou r and improving resource utilization in
the fisheries  sector........................................................................................................... ........40
VI. G
ARMENTS ............................................................................................................................... .44
A. Background ................................................................................................................... ..........44
B. Market access for Cambodian garments ..............................................................................45C. Returns from preference schemes and distribution of these returns.................................48
VII. T
OURISM ............................................................................................................................... ....58
A. Background ................................................................................................................... ..........58
B. Past, current, and project ed rates of  growth........................................................................61WT/IFSC/W/12/Add.2
Page 3
C. Developing institutional and social capacity to promote tourism.......................................62
D. Sector specific initiatives to enhance tourism trade.............................................................65
VIII. L ABOUR SERVICES ....................................................................................................................67
A. Background ................................................................................................................... ..........67
B. Opportunities and labour supply issues................................................................................67
C. Institutional and regulatory i ssues in labour exports..........................................................68
IX. L AND, MARKETS , PROPERTY RIGHTS AND REGULATORY PROCESSES ......................................71
A. Recent developments in  land use policies .............................................................................71
B. Current land policies ........................................................................................................ ......72
C. The 2001 La nd Law ............................................................................................................ ....73
D. Regulatory environment for business ...................................................................................74
E. Provision of public servic es and infrastructure ...................................................................75
F. Lessons from sector studies  for trade development.............................................................77
REFERE NCES..................................................................................................................... ................79WT/IFSC/W/12/Add.2
Page 4
PREFACE
In August 2001, a team of consultants worked with Ministry of Commerce (MOC) officials in
Cambodia conduct a diagnostic study of Cambodia’s trade policy issues and technical assistance
needs.  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 are H.E. Sok Siphana — Secretary of State, In Vothana — Bureau Chief, M Sovichea —
Deputy Bureau Chief, K Keomuny — Deputy Bureau Chief, S Sophann — Director and S Samrath —
Assistant Director. The team members were Kelly Bird, Consultant — Trade Policy, Sandy
Cuthbertson— Consultant, Team leader, Martin Desautels — Consultant 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 sector studies on
diversified agriculture, Sopanha SA — IMF macroeconomic assessment, Isidro Solango —
Consultant poverty assessment, Ieng Sovanarra — Consultant sector study on garments and Geoff
Wright — Consultant trade facilitation. The World Bank Task Manager is Ataman Aksoy.
Following this fieldwork, team members have  prepared drafts of the following reports.
• Part A: Overview.
• Part B: Component reports — macro assessment, trade policy, trade facilitation,
poverty analysis.
• Part C: Sector studies — rice, diversified agriculture, handicrafts, fisheries, garments,
tourism, labour services.
This work in progress will be discussed at a workshop to be held in Cambodia on 19 and
20 November 2001.WT/IFSC/W/12/Add.2
Page 5
GLOSSARY
AEN Artisanal Enterprise Network
ADB Asian Development Bank
ATC Agreement on Textiles and Clothing
CARDI Cambodia Agricultural Research InstituteDOF Department of Fisheries
EDC Enterprise Development Cambodia
FCRMA Federation of Cambodian Rice Miller Associations
FDI Foreign Direct Investment
GDP Gross domestic product
GMS Greater Mekong Subregion
GSP Generalized system of preferenceGTC Green Trade Company
ILO International Labour Organization
ISO International Standards Organization
ITC International Trade Centre
LDC Least developed countriesMAFF Ministry of Agriculture, Forestry and Fisheries
MEF Ministry of Economy and Finance
MFN Most favored nation
MOC Ministry of Commerce
MOT Ministry of TourismMSWLVA Ministry of Social Welfare, Labour and Veteran Affairs
MWVA Ministry of Women’s and Veterans’ Affairs
NGO Non government organizations
RGC Royal Government of Cambodia
RMA Rice Miller AssociationsROO Rules of Origin
SEDPII Second Socioeconomic Development Program
UNDP United Nations Development ProgramWT/IFSC/W/12/Add.2
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I. INTRODUCTION
A. BACKGROUND
1. Rationale for sector studies
1. The sector studies include practical examples of the policy, regulatory and institutional
constraints to trade development; reviews of the impact on poverty of increased trade in specific
sectors, and; examples of issues that need to be addressed to reduce barriers to increased trade andpoverty reduction. Given that Cambodia’s economic system is dominated by household units, the
sector studies focus on the constraints faced by households in increasing income generating activities,
including potential opportunities that could result from reducing trade barriers.  The basic approach
adopted in the sector studies is summarized in chart 1.1.  The approach, and the focus on poverty
reduction, is consistent with government development priorities as outlined below.
2. Government development strategy and priorities
2. The government’s development strategy focuses on reducing poverty, from an estimated
36 per cent of the population in 1999, to 31 per cent in 2005. This is a formidable challenge in a
country with an annual population growth rate of 2.5 per cent, and the workforce increasing by 3.2 per
cent per year (Royal Government of Cambodia (RGC) 2001).  The government aims to reduce
poverty through:  (i) broad based, sustainable and equitable economic growth of 6-7 per cent per year;
(ii) social and cultural development; (iii) sustainable management and use of natural resources and theenvironment; and (iv) improved governance. The strategy also recognizes the potential benefits from
developing regional and international trade and investment links.
3. With 90 per cent of the poor living in rural areas, the generation of increased agriculture
output and off farm employment are important to redu cing poverty.  However, it is also important to
recognize that industry and service sector output generally increase at a faster rate than agricultureoutput in rapidly developing economies.  The same trend can be expected in Cambodia.  Unless the
share of employment in non agriculture sectors increases, agriculture labour productivity (and thus
wages) will increase more slowly than in other sectors and income inequality, especially between
rural and urban areas, will increase.
4. Given that household units dominate economic activity, increased household and informal
business activity will be important in increasing em ployment, but there is also need to remove the
barriers to private investment in small and medium enterprises.  Increased formal private sector
employment has been pivotal in reducing poverty elsewhere in Asian economies by providing
alternative higher productivity employment opportunities.
3. Selection of sector case studies
5. Seven priority sectors have been identified.  These sectors are:
• rice
• diversified agriculture
• handicrafts
• fisheries
• garment
• tourism
• labour services.WT/IFSC/W/12/Add.2
Page 7
6. The analysis draws on established material and in some cases, considerable work has been
done.  In other cases such as labour services and handicrafts, the work is preliminary (RGC 2001).  In
addition to export development potential, the government selected these sectors because they met pro-
poor objectives by providing opportunities for labour intensive employment creation and income
generating activities in poor areas, and because of the potential to increase the value added of
Cambodian exports.  The government intends to prepare action plans for export development in eachof these sectors drawing on existing and planned sector analysis.  The preliminary sector analysis in
this report focuses on rice, fish, tourism, agriculture, handicrafts and garments where substantive prior
analysis already exists.WT/IFSC/W/12/Add.2
Page 81.1 Framework for trade policies for poverty alleviation
84% of the population
and 90% of the poor live
in rural households
Rice and fish are main
sources of food
This 84% of the
population produces
about 40% of GDPHouseholds
Opportunities
to incomealternativesuch asAgriculture
/g167Rice
/g167Other crops
/g167Tree
/g167Fishing
/g167Livestock
/g167Forestry
Household
/g167Handicraft
/g167SME
Paid private employment
/g167Domestic
/g167Export
Manufacturing
/g167Garment
/g167Agro
/g167Wood
Service
/g167Marketing
/g167Retail
/g167Tourism
/g167InformationConstrained
byLimited education
/g167Low literacy
/g167Poor development
Poor health
/g167High mortality/morbidity
/g167Many disabled
/g167Poor water supply sanitation
Poorly defined property rights
/g167Land registration disputes
/g167Non transparent allocation of
large parcels
/g167Landlessness
Poorly developed high cost
transport/communication
infrastructure
Weak regulatory institutions for
business
Undeveloped financial markets
especially in regions
Past social and political
instabilitySector
studies todevelop
optionsExpand economic
opportunities
/g167Reduce formal
barriers trade and
/g167Build institutions
/g167Improve
processes
/g167Achieve social
and political
stability
Enhance
/g167Education
/g167Health
/g167Land
/g167Labour
/g167Infrastructure
/g167CreditWT/IFSC/W/12/Add.2
Page 9
B. HOUSEHOLD ECONOMIC SYSTEMS AND POVERTY IN CAMBODIA
1. Structure of household economic activity
7. The foundations of the Cambodian economy are household economic units, which employ
and provide incomes for the majority of the population.  Cambodia is an agrarian economy with 80
per cent of the workforce employed in the agriculture sector.  The production of rice, for household
consumption and trade, is the major economic output for most of the 84 per cent of householdslocated in rural areas.  Households supplement rice production with other economic activities such as
fishing, production of vegetables, fruit and other cash crops, the gathering of forest products, and off
farm employment.  The landless depend on gathering activities, on communal or State land, and paid
employment.
8. Some household members also earn incomes from: i) domestic private enterprise sector
comprising mainly informal micro and small enterprises, but also a number of medium size
enterprises are beginning to emerge; ii) foreign invested private enterprises engaged primarily ingarments, other light industries, and tourism, and other services; and iii) the public sector, including a
(declining) State enterprise sector.  The domestic private sector is widely dispersed throughout the
country, but employment by the larger private enterprises, foreign invested enterprises, and State
enterprises is concentrated around Phnom Penh and other urban centres.
2. Summary profile of population and workforce
9. The most recent (1998) census estimated there were 11.4 million people (51.8 per cent
female) living in 2.2 million households in Cambodia.  Females head some 26 per cent of households.
The population is very young, with 42.9 per cent aged between 0-14 years of age.  Fertility rates are
high, with an estimated annual population growth rate of 2.5 per cent.
10. The level of human development is low by regional and international standards.
Internationally, Cambodia was ranked 121st out of 162 countries in 2001 using United Nations
Development Program’s (UNDP) Human Development Index.  In Southeast Asia, only Laos was
ranked lower.  Infant and maternal mortality rates have declined in recent years, but remain amongst
the highest in the region.  Life expectancy at birth is 54.4 years for males and 58.3 years for females.
Only 37 per cent of the population are functionally literate.  Only 31 per cent of urban, and 13 percent of rural, populations have completed school.  Less than 5 per cent of the population has
completed the equivalent of high school education.  Addressing this deficit in human capital
development is a major long-term challenge for the people, business investors and the government.  In
the interim, analysis of export options and the formulation of export development strategies need to
the reality of low levels of human development and include measures to address major bottlenecks.
11. The government estimates that the workforce is growing by 3.2 per cent per year, with
228,000 new entrants each year (RGC 2001). Open unemployment in urban areas was 9.2 per cent
(12.2 per cent of females) in 1998, and open rural unemployment was 4.7 per cent (5.0 per cent of
females).  On the other hand, more than 35 per cent of workers have more than one occupation.  Most
(85 per cent) of workers are self employed (87 per cent of females and 79 per cent of males), with the
remainder employed by the private sector (9 per cent of females and 10 per cent of males), and the
State (2 per cent of females and 9 per cent of males).  Only 11 per cent of the rural population earnswages, compared with 53 per cent in Phnom Penh.
3. Poverty profile
12. About 36 per cent of the population live in poverty.  Poverty incidence is highest (44 per cent)
in households where agriculture is the primary source of income.  Some 90 per cent of the poor live in
rural areas, and there is a strong correlation between poverty and remoteness from urban locations.WT/IFSC/W/12/Add.2
Page 10
About three quarters of the poor are self-employed.  Income inequality is high relative to other
Southeast Asian economies (Gini coefficient of 0.42), and is reported to be increasing.  Cambodia’s
per capita income was estimated at US$238 in 2000 (compared with US$286 in 1996) the lowest in
Southeast Asia.  Preliminary government studies suggest that economic growth has helped reduce
poverty, but that the proportional benefits to the rich have been greater than the benefits to the poor
(RGC 2000a).  Concern has also been expressed that  economic growth has yet to impact on many of
those living far below the poverty line.  In summary, growth has helped reduce poverty: the challenge
in this report is to attempt to analyze options th at may ensure that growth more directly assists in
reducing poverty.
4. Why people are poor
13. The Government’s Interim Poverty Reduction Strategy notes that people are poor because of
inadequate human and physical resources, or the opportunity, to generate income and/or accumulate
resources.  Cambodia’s recent violent history has resulted in many disadvantaged groups, includinginternally displaced people, returning refugees, di sabled people, widows, and orphans.  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 generally disadvantage
the poor.  Expanding higher productivity employment and other economic opportunities (paid and self
employment) is crucial in reducing poverty.  Increasing options will generally require progress inimproving the access of the poor to land, markets, information, capital and other inputs, as well as
improving the economic and regulatory environment to attract increased private investment.
C. M
AJOR ECONOMIC SECTORS
1. Agriculture
14. The agriculture sector (including fishing and forestry) accounts for about 36 per cent of the
gross domestic product (GDP) (1993 constant prices) compared with 46 per cent of GDP in 1995.
About 80 per cent of the workforce is engaged in crop production, livestock production, fishing,
hunting and forestry activities for subsistence and/or trade, mostly as part of household production
units.
15. Production of agricultural crops accounted for 50 per cent of agriculture sector value added
in 2000.  Rice is planted on 90 per cent of the area currently cultivated with annual crops, but the total
area planted to rice is only 80 per cent of the area planted in the early 1970s.  Despite recent
improvements, rice yields per hectare are amongst the lowest in the region.  Economic returns to
labour from rice production are as low as $0.64 per day, or less than half the rates generated from the
production of other agriculture products such as vegetables, soybeans, mung beans, cassava, sweetpotato, tobacco and cotton (NESDB, KURDI and TCJD S 2001).  The government aims to increase
the production of annual crops by utilizing some of the 1.2 million hectares of agriculture land that is
currently unused (RGC 2001).  It also envisages a major expansion of rubber plantations, and other
industrial crops such as coffee, cashews, palm oil, coconuts, sugar cane, and horticultural crops.
16. Freshwater fish production provides the major source of dietary protein and cash income for
many rural households, and accounts for about 27 per cent of measured value added in the agriculture
sector.  The Tonle Sap, the Mekong River and its flood plains are important fishery resources.  TheTonle Sap — which is of additional major significance as the major breeding ground for fishing stock
in the Mekong River and its tributaries — is under ecological threat from destructive fishing practices,
agrochemical pollution, and degradation of surrounding swamps.
17. Livestock and poultry production accounts for 17 per cent of value added in the agriculture
sector.  There is potential to increase livestock production (including eggs, poultry and pig meat) for
export and domestic markets, and increase household protein supply, by reducing the aboveWT/IFSC/W/12/Add.2
Page 11
mentioned barriers to production, and by developing village based systems to reduce disease and
improve animal health.  This would directly im prove rural incomes, food security, and provide a
growing domestic market for animal feeds produced from corn, cassava, fishmeal and other
agricultural products.  Given that many farm househol ds use livestock as a bank or form of insurance
(households sell animals when there is an unexpected need for cash), improved animal health could
also help reduce the risk of poverty.
18. Forestry and logging accounted for 7 per cent of measured value added in the agriculture
sector in 2000, compared with about 20 per cent in 1994.  Log exports were the major source of
export earnings during the 1990s, but forests were decimated by logging levels that the government
estimates were four times the sustainable level.  While there is now a temporary ban on log exports,
illegal log exports continue.  Improved forest management is considered a high priority.  The
government’s medium term strategy is to introduce and enforce sustainable forest management
practices to support wood products, wood proces sing industries, and tourism.  Local community
participation in forest management is seen as playing an important role in safeguarding forest
resources and national parks.  This, in turn, will be critical in maximizing potential returns from forest
areas, while protecting watersheds and tourism development opportunities.
19. Government priorities for agriculture sector development include:  (i) improve food security
through the expansion of rice production and other f ood crops;  (ii) add value to crop and livestock
production by developing agro-processing industries;  (iii) increase income opportunities for farm
households, particularly those headed by women, by diversifying crop production;  (iv) strengthen
participatory processes in rural communities;  (v) ensure sustainable agriculture production through
improved management of natural resources;  and (vi) increase the availability of rural financial
services.  The relevance of these priorities needs to be reviewed on an ongoing basis.  Given that foodself-sufficiency has been achieved and income-earning opportunities provide alternative options for
achieving food security, the need to focus specifically on expanding rice production could be
reviewed.
2. Industry
20. Cambodia’s limited industrial base was largely destroyed during the recent conflict.  Industry
has grown rapidly from a low base in recent years, with the share of industrial output (manufacturing,
mining, construction, and energy and water supply) increasing from 13.9 to 35.6 per cent of GDP
between 1995 and 2000.  Manufacturing output increased from 8.3 to 18.4 per cent of GDP due
largely to rapid growth in textiles and garmen ts (from 1.9 to 12.4 per cent of GDP between 1995
and 2000).  Garment manufacturing has been a major source of growth in paid employment in recentyears.  Following a decline during 1997 and 1998, the share of construction in GDP has increased
since 1999.
3. Services
21. The share of services in GDP declined from 39.9 to 35.0 per cent between 1995 and 2000,
mainly due to a decline in the share of trade from 13.4 per cent in 1995 to 10.2 per cent of GDP
in 2000, and a smaller decline in the share of transport and communications.  Given the rapid opening
up of the Cambodian economy since 1995, the reported decline in the share of trade, transport andcommunications in both GDP and value added in the service sector is somewhat surprising.  While the
decline in share of GDP may be partly due to the rapid expansion in garments, it may also reflect
relatively stronger growth in informal service sector activities because of economic distortions and
administrative weaknesses that contribute to considerable informal trade and widespread smuggling.
The shares of output contributed by hotels and restaurants, finance, and real estate remained largelyunchanged between 1995 and 2000.  Government development strategies emphasize service sector
development, especially tourism development, as an important source of growth in paid employment.WT/IFSC/W/12/Add.2
Page 12
II. RICE
A. BACKGROUND
22. Paddy production accounts for about 90 per cent of the area cultivated for annual crops each
year, and for 29 per cent of value added in the agriculture sector.  Most households are engaged in
paddy production, and rice represents the major staple in household consumption.  There have beengradual improvements in productivity and increases in cultivated areas over the last decade, and
Cambodia has moved from a net rice importer to a net rice exporter over the last decade (JICA 2001).
Most exports are unofficial.  Despite the net export status, food shortages persist in some areas
because of weaknesses in infrastructure, trading arrangements, rural finance, information and low
incomes.  The prospects for future increases in production are largely unknown.  This will depend on
factors such as relative prices of alternative crops and inputs, alternative employment opportunities,
technical developments, infrastructure, and technical limits resulting from the natural resource base.A recent JICA study presented a wide range of scenarios for future rice exports, from negligible
levels, to 750 000 tons of exports by 2010 (JICA 2001) .  Regardless of export levels, improved post
harvest practices, and more consistent quality, could help reduce product losses and increase farm
gate prices and incomes.
23. Past government agriculture development strategies and support services emphasized food
security, with support services focusing on increasing output (especially rice output) in recent years.
While quantities have increased, returns to household effort are constrained by poor quality and the
limited alternatives to paddy production.  Quality problems are apparent at all stages of the rice
production and marketing cycle.  This limits export opportunities, and means that higher quality rice
is imported to meet the demand of higher income consumers in urban areas.  Returns to labour and
land from paddy production are low, and future development of the sector will depend on improving
quality, reducing post harvest losses, and increasing yields.
24. There are very close environmental inter relationships between agriculture, fishing and
forestry in Cambodia, and this directly affects options for trade development.  In particular,
development strategies need to recognize that any poorly managed increase in the use of agricultureinputs could have major adverse impacts on the Tonle Sap, and the inland fishing industry.  Attempts
to increase farmer returns will need to focus on quality improvements and reducing post harvest
losses, while guarding against negative impacts of any increased use of chemical inputs.
B. O
VERVIEW OF PADDY PRODUCTION AND RICE TRADING SYSTEM
25. Most paddy is produced by rural household unit s, using low input technology, and with little
contact with the market and market requirements.  The main inputs for most paddy production
systems are land and labour, and the output per unit of land and labour are amongst the lowest in Asia.
Many farmers cannot read and have limited access to information and agriculture support services.
Rice seed is often self grown, or obtained from other farmers.  Thus, seed quality is variable and
adoption of new varieties slow.  Seed varieties are often mixed, making it difficult to obtain quality
consistency and difficult to achieve management practices suited to external markets.  Practices,
which may have been appropriate for subsistence production, are proving less appropriate whenproducing for higher income urban and export market s.  Post harvest losses are high, and there are
opportunities for reducing losses and improving quality at all stages, from husking, drying, transport,
storage, milling, and polishing to final marketing.  Resolving these weaknesses could provide
potentially substantial gains in terms of increased household incomes, poverty reduction, and
increased export opportunities.
26. Small family mills are found in most rice producing villages, and they generally mill paddy
for local farmers in return for the rice bran, or a ca sh fee.  They also sometimes act as paddy buyersWT/IFSC/W/12/Add.2
Page 13
for larger mills.  Medium and large size mills are located in the major rice surplus areas and in Phnom
Penh.  These mills usually purchase paddy, process the paddy to milled rice, and than sell to
wholesalers and retailers.  A few larger mills have their own wholesale and/or retail outlets.  A
Federation of Rice Millers was recently established to represent the interests of Cambodian millers,
and to increase valued added in domestic rice processing.  The Federation recognizes that rice millers
interests are best served by assisting farmers to produce quality rice to meet consumer needs, and hasbeen studying options to encourage farmers to supply more consistent quality rice.
27. Farm gate prices are squeezed by high transport costs due to poorly developed infrastructure,
weaknesses in transport services, informal tax collections along roads and other transaction points,
and high shipping costs.  Weaknesses in post harvest practices and rice milling results in substantial
quantities of (unmilled) paddy being exported to Vietnam and Thailand.  Limited domestic milling
capacity adds to marketing costs and further reduces prices paid to farmers.  These are deadweight
losses to the economy.  Given the relatively small economies of scale in rice milling, there should bestrong profit incentives to invest in improved post harvest processing to avoid these costs.  Past
instability and financing problems were cited as reasons for limited investments to date.
C. I
NSTITUTIONAL ISSUES AND OPTIONS FOR DEVELOPING RICE TRADE
1. Human resources and technology transfer
28. Low health and education indicators constrain labour productivity, the transfer of technology,
and access to market information.  Lack of education stifles innovation and partly explains the limited
progress towards producing export quality rice and alternative higher value agriculture crops.  On the
other hand, illiteracy should not be seen as a binding constraint to increased quality and trade.  One
investor noted that the rejection rate of corn grown under contract fell from 80 to less than 15 per cent
in just four years, by using appropriate farmer training and attractive incentives.  More broadly, thissuggests a need to look at non conventional mechanisms for transferring skills, technology and
information to farmers.
29. Adult literacy and skills training programs could help reduce the most immediate human
resource constraints to improving household production systems, including rice production.  In the
longer term, improved access to better quality, and more relevant, primary education is crucial toimproving agriculture productivity.  Plans to improve education access and quality should consider
options to include agriculture production and other life skills at all levels.  Increased current
expenditure outlays will be needed to facilitate improvements in education and adult training pro-
grams.  Donors could assist by taking a flexible approach to financing current expenditure.  Options
for encouraging non government financing of human resource development should continue to beencouraged, and lessons drawn from successful models.
2. Land markets
30. Efforts to improve security of land title can he lp encourage and facilitate investments in the
rice sector, and more generally help ensure that land is allocated more efficiently.  The new Land Law
provides an important opportunity to establish more efficient land markets and more cost effective
financial services.  Implementation of the government’s new land law and land titling systems, will
facilitate access to finance, reduce risks and thus provide greater incentives to invest in cropproduction, storage and post harvest technology.  Efforts to stop the illegal private appropriation of
State and community land and to develop land markets could help increase resource use efficiency
and promote increased production of rice and other agriculture products.  The need for more efficient
land markets is highlighted as an important concern at the end of this report.WT/IFSC/W/12/Add.2
Page 14
3. Agriculture support services and input supply
31. The Ministry of Agriculture, Forestry and Fisheries (MAFF) is responsible for providing
agriculture support services, including agriculture research and extension.  Past emphasis on food
security has resulted in government support services and subsidies focused on increasing rice
production, with little attention to improving quality and post harvest technology.  Extension activities
have been limited.  The government has recently increased the priority and resources give toextension activities, including the dissemination of information via the mass media.
32. Limited attention has been given to exploring options for diversification into non rice
alternatives that might provide opportunities to increase returns to labour and capital, and/or reduce
seasonality in production and labour demand.  The diverse needs of a market economy suggest a need
for a broader farm systems focus. A farm systems approach to improving agriculture support services
could also help provide the sort of information that will allow more direct targeting of poverty
reduction by increase returns to exiting farm systems, while also meeting household concerns aboutthe need to limit food security risks.
33. Fertilizers were provided on a subsidized basis through a State owned marketing agency, but
the subsidies and the agency have been abolished since 1999, and the private sector now supplies
most fertilizers.  The Agriculture Material Bureau of MAFF is responsible for agriculture input
quality standards.  In practice, many agriculture fertilizers and chemicals are smuggled into thecountry and there is little capacity to ensure quality standards.  While there are concerns that farmers
are sometimes sold fertilizers with diluted nutrient co ntent, the need to maintain reputations as reliable
suppliers will provide strong incentives to meet quality standards as private suppliers become
established and information systems improve.
34. A government research institute, Cambodia Ag ricultural Research Institute (CARDI), is
responsible for developing new rice varieties and seed multiplication.  Of 34 varieties released by
CARDI since 1990, only IR66 has widely spread to farmers.  However, it has been difficult to sustain
seed quality because of poor distribution systems, a nd lack of farmer information about the impact of
seed quality on productivity and quality.  The Agriculture Quality Improvement Project is supporting
efforts to improve seed supply, develop seed certification, and develop and train farmer seedproduction groups.
35. The government should regularly review instit utional arrangements for support services,
including analysis of any overlap in responsibilities between the separate ministries dealing with rural
development, water resources, the environment, and agriculture, forestry and fisheries.  There is need
to assess continuing central level resource needs in the context of decentralization efforts.
36. The government could also learn from privately financed agriculture support services such as
those implemented by an investor in animal feeds production using corn, and recent initiatives by
another investor to provide the support farm households to produce the high quality fragrant rice for
the export market.  Options for encouraging more widespread investment in such programs could be
examined.  In this regard, it is important that support being provided by external donors to develop the
public agriculture extension and seed supply services do not crowd out private initiatives.  In
particular, the government could explore options for contracting out extension and seed supplyservices to the private sector on a competitive basis.  More systematic evaluation of ongoing
initiatives, including efforts to decentralize and devolve government services, could assist in early
identification of bottlenecks and actions to address these bottlenecks.WT/IFSC/W/12/Add.2
Page 15
4. Rural infrastructure
37. Poor transport infrastructure, high fuel costs (due to high taxes) and poorly developed
transport services add to the costs of rice trade and to consumption costs, but reduce prices paid to
farmers.  Informal fees that are reportedly coll ected at checkpoints on the road network exacerbate
these costs.  While such fees are frequently reported, no concrete estimates of the costs of these fees
are available.  Total transport costs account for 5–10 per cent of retail prices in Phnom Penh(Sik 2001). Railway and port services are generally provided by State enterprises with low levels of
efficiency and informal fees (see section on the role of government in rice trade).  Increased private
sector participation in all transport sub sectors, combined with an appropriate regulatory framework,
is an option that could contribute to reducing transport costs.
38. Only about 10–15 per cent of farmland is irrigated.  Institutional and resource constraints
have resulted in poor operations and maintenance of irrigation facilities.  Government policy, since
1999, is to transfer responsibility for the operations and maintenance of irrigation facilities to capablewater users association.  The private sector is now encouraged to invest in the development of
irrigation infrastructure and services.  Given resource constraints, an immediate government priority
should be to improve the management of existing schemes.
39. There are plans to expand the Seila program.  This is a government program to decentralize
decision-making, improve governance and to achieve more sustainable and cost effectivedevelopment of community infrastructure projects.  The Ministry of Rural Development has
established Village Development Committees (VDCs) in up to half of all villages to encourage greater
community participation in identifying formulat ing and implementing village level infrastructure
development.  Administrative decentralization is expected to be extended following the election of
commune councils scheduled for February 2002.  These efforts are at an early stage and will requiresubstantive capacity building at the all levels to facilitate implementation.  Local level administrations
could be an important force in attempts to remove remaining informal barriers to trade.  Efforts to
facilitate information about the impacts of trade,  and the costs of informal barriers to local
communities, could facilitate that process.
5. Information constraints
40. Weaknesses in disseminating information on market prices and quality requirements, new
varieties, and improved production and post harvest techniques is hampered by low literacy,
weaknesses in internal communications, and limited access to mass media.  Information constraints
are further constrained by weaknesses in quality standards that leave farmers vulnerable to the
adulteration of agriculture inputs.  Similarly, there are limited opportunities for farmers to verifymeasures of weight or moisture content.  Farmer associations can help address such concerns, while
also providing farmers with low cost access to information.  In the longer term, increasing
competition, and the need to preserve reputations, provides powerful incentives for millers and traders
to deal honestly with farmers.  High international telecommunications costs limit access to
international markets.
6. Rural finance
41. Despite market determined interest rate policies, and government commitment to developing
market based financial services in rural areas, the reality is that few businesses (and very few farmers)
in rural areas have access to formal sources of finance, and lending spreads are very high.  The lack of
financing has been a major constraint to investment in improved post harvest processing and storage
of rice.  Banks cite high costs of monitoring and recovering debt in rural areas, and the time and high
cost of foreclosing on land mortgages, as important  factors contributing to high lending costs and a
reluctance to expand to rural areas.  Banks will inevitably develop in urban areas first where cost
structures are lower, and business opportunities more diverse.  Informal money lender, families andWT/IFSC/W/12/Add.2
Page 16
non government organizations (NGOs) are the major sources of rural finance, and will likely remain
the most major source for most farmers for some time.  Government efforts to encourage NGO
supported rural financial services to be established as formal micro finance institutions should be
closely monitored to identify opportunities to extend successful micro finance programs.
7. Rice marketing and processing services
42. Current rice processing arrangements raise some important questions.  Why is paddy
transported to Vietnam and Thailand for processing, and than re imported as milled rice for
consumption?  Why have Cambodian (or Thai or Vi etnamese) investors have been slow to invest in
improved rice milling and processing capacity when the levels of technology and investment required
to develop improved rice milling and polishing are not great?  Millers note a number of challenges
including:
• the large number of paddy varieties grown in each village and even on the same plots
makes quality control and consistency difficult;
• farmer awareness of improved post harvest technology remains weak.  Improved
husking, drying and storage techniques are needed to reduce the ratio of broken rice,
and moisture and pest damage and other losses;
• high financing costs and difficulties in securing medium term financing for new
equipment.  Bank financing for operating costs (for example to buy and store paddy
in the main harvest season (December to February) for subsequent milling) is
expensive and not readily available;  and
• past instability meant increased investment risks, and made it costly to enforce
contracts.
43. More recently, there is evidence of investment s in new and improved rice milling capacity.
At least one investor has combined major inve stments in a new mill with contract farming
approaches, private extension and input supply services with the aim of producing high quality
fragrant rice for export.  This investor had contracted 30 000 farmers to sow 20 000 hectares of paddyusing high quality seeds.  Harvesting is due to start November 2001.  Another (foreign) investor in a
Cambodian animal feed processing factory used a si milar approach to reduce the rejection rate of corn
offered for sale, from 80 per cent in the first year of operation, to 10–15 per cent four years later
in 2001.  In this example, higher prices paid for improved quality corn has proved to be a powerful
incentive for farmers to increase the supply of quality corn.
8. The role of government in rice trade
44. Extensive government interventions in rice pr ocurement, pricing and marketing were largely
disbanded during the 1980s.  Government fertilizer subsidies were abolished in 1997 and now most
inputs are supplied by the private sector.  Input and output prices are set by market forces.  However,
attempts to avoid taxes result in substantial smuggling of fuel, fertilizers and other agriculture inputs
45. The government remains involved in food aid distribution, and the army purchases domestic
and imported milled rice for soldiers and their families.  A state enterprise, Green Trade
Company (GTC), has responsibility for purchasing rice on behalf of the State, including the purchase
and storage of rice reserves required under the ASEAN Food Security Reserve Agreement.  GTC also
engages in profit seeking activities, including tradin g activities.  Transport and other operating costs
of GTC are reportedly much than private enterprises.  The World Food Program (WFP) and other
donors buy domestic rice, as well as importing rice, for food for work programs.  Politicians andWT/IFSC/W/12/Add.2
Page 17
better off families also purchase rice for distribution to the poor, especially during emergencies and
election campaigns.
46. There is need for better information on the effectiveness of current government involvement
in rice procurement and distribution, including a study on options for introducing transparent and
competitive bidding procedures for any government rice purchases.  Demobilization may provide
opportunities to monetize the part of soldiers’ salaries that is currently provided as rice and, thus,reduce government involvement in procurement decisions.
47. Officially, the government has lifted all quotas and tax barriers to exporting and importing
rice.  However, exporters are legally required to obtain a permit before exporting rice.  The stated aim
of this licensing is to ensure food security.  While there are no official charges for licenses, exporters
report that facilitation fees are required to secure licenses.  The Cambodian Rice Millers Association
has identified ‘irregularities’ as a major constraint to exporting rice from Cambodia.  Moreover, the
current licensing arrangements have limited impact on food security as large quantities of paddy aresmuggled informally.  Thus, existing regulatory arrangements reduces competitiveness but does not
achieve the stated regulatory objective.  On the contrary, existing arrangements encourage corruption
and discourage the export of rice through formal channels.  According to some estimates, unofficial
costs nearly double the cost of export procedures through official channels as shown in table 2.1.
2.1 Cost of milled rice export procedures
Expense item Amount
US$/20ft container
1 Expenses with proper receipts
Custom officer (tax free, but permit required) 0.00
Ministry of Commerce - licensing 0.00Camcontrol (@ 0.1% of licensing fee) 36.00Photo sanitary (if required @ US$0.5/ton) 10.00Handling (storing into a container) 55.00Subtotal 101.00
2 Expenses without ‘proper’ receipts
custom officers (me kouy) 30.00
customs officer (inspector) 30.00customs officer filling export documents 26.13
Camcontrol (inspector) 7.81
Photo sanitary (inspector) 10.00Economic police 5.22Border police 5.22Handling, workers 26.13Commission fees 40.00Subtotal 180.51
Source: EDC 2000,
48. The total cost of export procedures add about US$14/ton to the cost of exporting rice.  The
costs of unofficial exports of paddy have been estimated at US$10–15/ton of paddy. (Sik 2000, p.18)
estimated that the total cost of this ineffective regulation could be equivalent to 85–126 per cent of
total government expenditure on the agriculture sector in 1999.  Reductions in formal and informal
charges and barriers to rice exports would greatly increase incentives to invest in improved postharvest processing of paddy, could greatly increase value added in the rice industry, and reduce the
currently widespread smuggling of paddy across the Thai and Vietnamese borders.  A detailed review
of the costs and benefits realized from privatizing all export handling procedures could greatly assist
the government in identifying options to ensure mo re equitable distribution of the benefits of trade.WT/IFSC/W/12/Add.2
Page 18
9. Potential economic and poverty impacts of increased rice trade
49. The potential economic gains from reducing inefficiencies in agricultural production trade can
be substantial as was demonstrated in Vietnam during the late 1980s and 1990s.  Rapid expansion of
trade in rice and other agricultural commodities contributed to the substantive poverty reductions in
Vietnam during the 1990s.
50. In Cambodia, most efficiency gains are to be realized from reforming the domestic
production, processing and trade systems, rather than from reforms at the border.  Resulting
reductions in intermediation costs would benefit both producers and consumers.  While Cambodia is a
net exporter of rice, and domestic rice generally reflects export parity prices, there is some market
segmentation.  Higher quality paddy is exported, while high quality milled rice is imported.
Improving the quality of local rice could reduce the need to import high quality rice and, by reducing
transport costs, would result in lower prices of high quality rice in urban areas.  Increased domestic
production of higher quality rice, in the absence of other efficiency gains, could result in reducedsupplies and increased prices of lower quality rice.
51. In localized areas where there are currently no opportunities to access other domestic and
international markets, increased trade opportunities would result in an increase in local rice prices.
This would benefit those with adequate resources to produce surplus rice, but would increase costs of
purchasing rice for those who lack the resources to produce all household rice requirements.  On theother hand, improved access to trade and higher farm gate prices would provide improved incentives
for increased investment in production and this would generate increased employment.  Thus,
households with rice surpluses would benefit, but it is not possible to be sure about the net affect on
rice consumers.
52. While it is possible that some of the poor (for example. those that are net consumers of rice)
could suffer welfare losses from increased rice trade, proposed improvements are expected to have a
major positive net contribution to reducing poverty.
III. DIVERSIFIED AGRICULTURE AND AGRO-PROCESSING
A. B
ACKGROUND
53. The small holder and household enterprise character of agriculture in Cambodia, the
importance of rice, and the major constraints on agricultural production and agricultural marketing in
general, have been described in the introduction to these case studies, and in the sector studies on rice
and fish.  The majority of attention devoted to development of Cambodia’s agriculture in the past
decade has been focused on rice, as the primary food security concern.  Yet, the Cambodian landscapepresents a variety of additional and alternative options for increasing food production, and for gaining
access for Cambodian products into international markets.  This chapter describes some of the
opportunities and challenges for development of a diversified agriculture and agro-processing sector
in Cambodia, responding as much as possible to current reality on the ground, and to the policy of the
RGC that such a development should be affirmatively pro-poor.
54. It is suggested here that technical and marketing support (domestic and export), to existing
micro, small and medium scale agro-processing enterprises in the private sector, and the creation ofenabling trade mechanisms throughout the Cambodian economy, will help create a demand pull for
increased production of higher quality farm products.  Complimentary support to associations of
farmers and other forms of producer organizations will provide the basis for coordinated responses to
domestic and international market demand.  These efforts will contribute to employment generation,
especially in rural areas, both on and off farm.WT/IFSC/W/12/Add.2
Page 19
55. Some ideas are offered for initiatives to help make this happen.
Policy orientation
56. Among the government’s primary macro policy objectives is the reduction of poverty,
especially rural poverty.  As stated in the draft Five Year Plan (SEDP II):
‘Poverty in Cambodia is primarily a rural phenomenon.  The overwhelming majority
of the poor get their livelihood from agriculture, and the incidence of poverty is also
much higher among farmers than among other occupation groups.  Approximately
84 per cent of the population, and 90 per cent of the poor, live in rural areas, and
agricultural activities are their main source of income.  At the same time, agriculture
provides over 40 per cent of the GDP.  Th erefore, the Government's strategies for
developing the economy and for poverty reduction demand a much stronger focus on
agricultural development, which is the most effective way to create moreemployment.  But more crop, livestock, fisheries and forestry production will only lift
people out of poverty if specific measures are taken to protect and assist the poor and
if the country's natural resources are managed sustainably…  (emphasis added)
(Ministry of Planning 2000, page 99.)
57. As seen in the previous sections, for agriculture the issues of social and physical infrastructure
development are germane, but they are underlain by more basic issues of social justice, rational
planning, and long-term environmental stewardshi p.  An example is given in box 3.1.  The pro-poor
trade development strategy is intimately linked to the rest of Cambodia’s reform agenda in this way.
58. The RGC priorities for the development of the agriculture sector, as laid out in the SEDPII,
require or are at least consistent with a smallholder and micro-enterprise oriented development model.
• Improve food security through the expansion of rice production and other food crops .
As noted in the rice case study, there may be potential for expanded rice production.However, other food crops are also produced in a great diversity in Cambodia, mostly
on a household and micro scale, in kitchen gardens and for neighbourhood markets.
This is true both in rice growing areas, and on extensive upland areas where rice
production is less appropriate.  There are some small commercial market operationsclose to urban areas, and some export-oriented production, but most farming in
Cambodia is at the subsistence level.  Food security must be associated with people’s
participation in the market economy.  Market orientation, and market responsiveness
of farm production must somehow be greatly increased if production is to be
expanded.  Cambodian agriculture and most of its industry are presently smallholder
and micro enterprise based, and it is with that social and economic reality that a pro-
poor agricultural development program ought to begin.WT/IFSC/W/12/Add.2
Page 20
3.1 Agricultural development models
In addition to rice production at the household level, the approach of the RGC to agricultural development is
significantly concerned with the expansion of plantation agriculture, producing commodities for export in raw or
primary processed form.  Rubber has been an important export crop since colonial times, and the model of
granting large tracts of land for production purposes to individual management units (state-owned, quasi-private,
or private enterprises) remains very attractive to policy makers, in the current stage of transition from a
command economy to one which is market-driven.
Many large-scale agricultural concessions continue to be granted in Cambodia, for a variety of schemes (pulp-
wood, bamboo, palm-oil, cashew nut, maize, and soybeans), often to well connected individuals or firms and
without environmental impact assessment, public participation or open bidding.  The problem of ‘land grabbing’
by locally powerful interests has been well documented (Cambodian Development Resource Institute (CDRI)
2000).  The problem has been recognised by the government, as for example the recent Prime Ministerial order
that agricultural concessions may not be larger than 10 000 ha (Some up to 30 000 ha are in place).  These
practices will decline as the new Land Law (signed into law by the King in August 2001) and other legal
reforms take effect.
While land ownership amongst Cambodians is widespread, very few people have official land titles.  There is
active transfer of land but there are also issues of la nd encroachment and disputes over transactions.  Unclear
title and preferential allocation are major obstacles to poor people improving their incomes.  If they own land,
they are inhibited from using it to best advantage including activities, which might involve employment of
people who own either small parcels or no land.  If land subject to dispute, owners are reluctant to invest in it
and they cannot borrow anyway.  Land, which is granted to preferred people, is also unlikely to be used to best
advantage and it is reported that many plantation concessions are little more than spectacular schemes.  The
important thing for both income generation and poverty alleviation is that human and land resources not be
wasted.  The new land law is a good start and the next steps are to secure its widespread understanding and
acceptance.
• Add value to crop and livestock production  by developing agro-processing industries.
Value added processing in response to market demand is one of the keys to increasing
the level of economic activity in rural areas.  Both large and small enterprises can do
that.  This objective is of itself scale-neutral.
• Increase income opportunities for farm households, particularly those headed by
women, by diversifying crop production .  Increased income opportunities for farm
and other rural households require increased opportunities to sell products that can be
produced locally, from available resources.  In the Cambodian context, this means thecreation of local, natural resourced as enterprises, which maximize employment.  An
affirmative orientation toward the needs of female-headed households in particular
requires that enterprises be local (close to homes and community institutions like
schools and clinics).
• Strengthen participatory processes in rural communities .  The creation of agro-
processing industries, at any scale, will require social mechanisms to assist farmers to
improve the quality and quantity of their output.  They must acquire knowledge and
become more self-reliant.  The contract farming operations that are emerging in
Cambodia is one example of participatory processes.  The more they respond to and
balance the needs of all participants, the more likely they are to be viable in the long
term.  The delicate and democratic fostering of grassroots, producer and processororganizations, the application of the farmer field school techniques and related
approaches, all offer some hope of success.
• Ensure sustainable agriculture production through improved manag ement of natural
resources .  The move of the RGC toward decentralization and deconcentration of
government affects natural resources management, including agriculture, in a veryWT/IFSC/W/12/Add.2
Page 21
direct way.  The new law on commune admi nistration, and its sub decrees, will place
the responsibility for natural resources management at the commune and provincial
levels, with central institutions playing a supporting role.  Sustainable management of
natural resources therefore will require farmers’ associations and agribusiness
associations to play a strong role in management at the local (and indeed national)
political levels.  Sustainable agricult ural production systems also require
environmental responsibility.
• Increase the availability of rural financial services.  One of the impediments to the
development of rural financial institutions in the country is the low repayment rateexperienced by so many rural credit programs to date.  One not very successful
approach to solve this has been to force the creation of loan groups, so that members
guarantee each other.  Experience with the new rice millers’ associations is now
showing that the associations can themselves provide a mechanism for selectingcredit-worthy loan applicants, and for ensuring a high rate of repayment.
Associations of small farmers and small rural enterprises may turn out to be similarly
credit-worthy institutions.
59. The RGC’s development policies are thus seen to imply an attempt to build on the existing
structure of the rural economy wherever possible.  That is not to say that there is no place for larger
scale activity, but that may be expected to emerge as the institutional underpinnings of a market
economy become established.  Those underpinnings will include widespread understanding of the
new Land Law so that land title is recognize and accepted as collateral and land parcels can be bought
and sold and land holdings be consolidated or partitioned as marketing and production requirementschange.  It would also include institutional arrangements, which ensured allocation of public land to
private sector investors, which are transparent and open to all.
B. M
ARKETING AND PROCESSING
60. The structure and function of agricultural commodity marketing in Cambodia was reviewed
in 1997 by a team in the MAFF Agricultural Mark eting Office, supported by Food and Agricultural
Organization (FAO) (MAFF 1997).  A team from the International Labour Organization (ILO), with
support from UNDP, carried out in 1999 a review of ‘Micro and Small Enterprise Development for
Poverty Alleviation in Cambodia’ (ILO 2000).
61. Agricultural processing and marketing is largely informal, except for the larger rice millers
and the rubber and other plantation enterprises.  Agricultural products flow from small producers toconsumers quickly and through short channels, given that storage and processing infrastructure is
minimal.  Producers either bring commodities directly to local markets themselves, or sell to
collectors (middlemen) who deliver to retailers in larger market centres especially Phnom Penh.
Some wholesale enterprises exist, especially for commodities that may be transported to other
provinces or exported to Thailand and Vietnam, but even these are informal enterprises, often without
fixed operating locations or storage space.
62. Agricultural products are traded within and between provinces where local surpluses and
deficits of rice, fruit, fish or other staples exist.  Commodity supplies and requirements are often
seasonal, with many non rice crops being produced in the wet season. Net flows may reverse from
season to season, as for example the import of oranges to Phnom Penh in February and export of
oranges from Battambang to Thailand at other times of the year.  Many commodities will be in glut on
the markets for a short time, and then disappear to be replaced by others in season.
63. Border trade in rice and fish has already been described in the relevant sector studies.  The
pattern for other agricultural products is similar.  At Poipet for example, produce is offloaded from
trucks, subjected to formal and informal taxes and handling charges, and manhandled across theWT/IFSC/W/12/Add.2
Page 22
border, to where Cambodian traders are at the mercy of their Thai colleagues.  Here again it is the
high value and high value added goods, which flow into Cambodia, and unprocessed or dried smoked
and fermented products, which are exported.
64. Cambodian markets display a broad range of locally processed agricultural products, for
example milled rice, smoked dried fermented or salted fish, fermented cabbage and pickled
vegetables; noodles, baked goods, and dried fruit.  Much of this material is from household andmicro-enterprises, although a few larger processing operations do exist, in addition to the rice millers.
A recent study of larger manufacturing enterprises in Phnom Penh showed 20 per cent of the sample
to be food processors such as noodle manufacturers, small canneries, and bottling plants
(MPDF 2000).  Unfortunately, that study was essentially confined to Phnom Penh, and the analysis
did not provide a disaggregated description of these operations.  More detailed field study is required
to identify and describe household level and larger operations in other centres, and especially in rural
communities.
65. Data from the Ministry of Industry Mines and Energy show 24 895 registered industrial
establishments in 1998 of which 24 061 (96 per cent) employed less than 10 persons (micro
enterprises).  It is not known how many unregistered establishments there may be.  Earlier data
suggest that about 11 per cent of rural households operate some kind of business from their homes, a
figure that rises to about 20 per cent in Phnom Penh.  Of the 24 061 registered micro-enterprises, fully18 419 or 77 per cent were in the category ‘food, beverage and tobacco’.  Among these many
entrepreneurs there may be particularly fertile ground for business development support, aimed at
both domestic and export markets.
66. Cambodia has a well developed, largely informal and micro or small scale agro-processing
and trading system, peopled by economically rational participants who respond effectively toperceived constraints and opportunities.  The conclusion is that Cambodia already has some of the key
elements on which a modern production, processing, and marketing system could be built.  Initiatives
are needed both to remove the constraints, and to enlarge the perception of the opportunities.  An
active commitment is needed from Government, to enabling and supporting the leadership of the
private sector
1. Obstacles to expansion
67. In the domestic and international trade of non-rice agricultural commodities, the problems
facing Cambodia are very much the same as described for rice.  The ILO study cited above also
provided essentially the same list of constraints on small and medium enterprise development in
Cambodia.
68. Transportation. The poor state of Cambodia’s transportation infrastructure has been described
and acknowledged.  Considerable investment is now being made to improve critical road
transportation, both at a national strategic level, and at the tertiary level of access to individual
communities at some distance from main roads.  Emphasis on local and participatory transport
planning approaches (for example, Integrated Rural Access Planning) will help make transport
infrastructure investments more efficient in terms of strategic priorities for local enterprise
development especially agro-processing.
69. Telecommunications infrastructure has until recently been very poor in Cambodia.  However
the coverage of Internet capable cellular telephone technology is now near complete nationwide.  This
means that market, weather, pest outbreak, and other critical information can be made readily
available, through dial up and even broadcast text messaging systems.  Radio and television coverage
is everywhere and accessible.WT/IFSC/W/12/Add.2
Page 23
70. Energy costs in Cambodia are high, as electricity is almost entirely derived from diesel
generating equipment and there is no national grid.  Recent research funded by the World Bank has
begun the analysis of the existing informal electric generation industry in the country.  Clear
possibilities have been shown for rural electrification based on the already common relatively small
scale (10KVA) rural utilities (battery charging and neighborhood lines) operated by the local private
sector.  Some rural electric producers in Cambodia have already added ice plants to their investment,with obvious implications for the potential of a vegetable processing industry.
71. Information. Means are needed to get current market and technology information to producers
and processors, in a form they can use.  Most Cambodian farmers and small business people have
been living as if on a desert island for the past 30 years, cut off from an understanding of competitive
markets game.  They do not know, for example, that in some countries, producers routinely organize
themselves into associations of one kind or another, to share resources and indeed to influence prices
where possible.  They do not know where to get information about technologies and methods requiredto meet customers’ quality expectations in a cost effective way.  The MAFF Department of
Agricultural Marketing began planning for a market radio service in 1997, but this has not
materialized.
72. Trust and Risk. Like most farmers, but painfully more so, Cambodian farmers are self-reliant
survivors.  The Khmer Rouge social engineering experiment succeeded in severely damaging the
social contract in the country, and attempts by authorities to induce farmers to form associations or
cooperatives are greeted with suspicion.  People are reluctant to make the sorts of agreements
necessary to implement any kind of future contract between buyer and seller, in the absence of
effective means for dispute resolution.  Attempts to organize producers will need to proceed through
private sector support mechanisms.
73. Private Sector Capacity.  Private sector agencies capable of supporting business development
in agro-processing and other rural based enterprises are urgently needed.  The skills required for
successful business development are not widely pres ent in the population, to whom modern education
and exposure to scientific knowledge are only just reappearing.  At least one Cambodian NGO is
working in this particular field of human capital formation, but is itself only just beginning to develop.
74. Credit. There has been considerable growth in the capacity and coverage of microfinance
institutions in Cambodia over the past several years, but access to financial services remains limited.
There is an increasing focus on individual loans for small business activities, which needs to be
complimented with training in business development.
C. O
PPORTUNITIES FOR MARKET ORIENTED PRODUCTION AND PROCESSING
75. National agricultural statistics are presented in the SEDPII for a limited number of crops
entering larger markets, (rice, maize, cassava, sesame, sugar cane, soybean, mung beans, peanuts,
tobacco, rubber, jute, cattle, pigs, poultry, and fish).  The usual impression is that there are not many
non-rice options other than these few.  The Agriculture Market study referred to the above lists a
number of additional crops that enter domestic and international markets.  These crops include fruit
— mango, jackfruit, durian, pineapple, banana, oranges, limes, various melons, and coconut — and
leaf vegetables — especially cabbage, kale, and water convolvulus, and gourds.
76. However, an attentive walk through a few Cambodian farms reveals a wide diversity of crops
that are grown for subsistence or local markets in ‘kitchen gardens’ or which are protected and
utilized in common areas like roadsides and forest margins.  One finds an astonishing variety of
vegetables, including leafy greens, especially, but not only brassicas, roots and tubers like taro,
ginger, sweet potato and Irish potato, annual fruits like chilli, melons, ladyfinger, cucumber and other
cucurbits, tree-fruits in profusion (more than 10 local types), aromatic herbs and spices, traditional
medicinal plants, and a number of small animals especially in the aquatic environment of the riceWT/IFSC/W/12/Add.2
Page 24
fields.  These crops and gathered items are fundamental to the food security of Cambodian rural
households given the uncertainties and low yields of rice production.  Garden systems are usually
designed to ensure at least some productivity in the face of unpredictable weather and other sources of
crop loss.
77. Rice in Cambodia is largely a lowland crop.  Large areas of Kampong Cham, Kampong Thom
(high population provinces) and parts of the north-western provinces are poorly suited to riceproduction but will support so-called upland crops.  These systems present significant opportunities
for increasing and diversifying Cambodia’s agricultural and agro-industrial sector, a process, which
has already begun.  The kinds of products and services which can be derived from them are in
growing demand as ‘specialty foods’ among both ‘northern’ and ‘southern’ partners in the global
economy, particularly but not exclusively among more affluent consumers, who have effective
demand for increased variety, year-round availability and quality in their diets.  Moreover, the
improvements in transportation infrastructure currently planned or actually under construction willlink these areas to major urban markets in Thailand and Vietnam.  The challenge for Cambodia is to
capitalize on these opportunities in a structured way, to ensure the biological and economic
sustainability of the enterprises, and the equitable, indeed the affirmatively pro-poor distribution of
the benefits.
78. At least for the next decade, successful micro, small and medium agro-industrial enterprises
in the rural areas of Cambodia will in large part be based on such easily grown or familiar
commodities, to which value can be added in relatively low cost work-places, using simple
technologies (not primitive, but modern and appropriate in design to small and medium enterprises).
High value density products especially but not only frozen and dried fruits and vegetables, spices,
juice concentrates, fragrances, essential oils etc, will be initially favoured until transportationinfrastructure is improved.
79. Most of the commodity examples given in box 3.2 are conventional, in the sense that
technologies and approaches totally new to Cambodia are not required. No one item will provide a
magic bullet.  A program of support to a range of enterprises of this kind, which builds private sector
capacity to overcome the identified constraints, will over time assist the modernization of the
Cambodian rural economy and the off farm employment gains which that will bring.WT/IFSC/W/12/Add.2
Page 25
3.2 Some specialty crop export opportunities
Fresh, frozen and pres erved Asian vegetables:   Vegetable producers in Australia, Thailand, and Vietnam
provide high quality fresh, frozen and pickled vegetables to the Asian specialty food market worldwide.
Specialty products like baby corn, lady finger (okra), the Japanese bar-snack edomame  (boiled young soy
beans in pod, eaten with salt) and many others may represent significant opportunities for Cambodianenterprises.  The Australian government’s Rural Industries Research and Development Corporation (RIRDC)has carried out research and published guidelines for producers and processors wishing to access such markets(see www.rirdc.gov.au).
Spices and herbs:   Cambodia produces black pepper, chillies, cinnamon, cardamom, betel, star anise, and
other spices, plus a wide range of kitchen herbs including lemongrass, aloe vera, hibiscus, basil, and the manychi or salad herbs.  Dried chillies are a significant product for domestic and export markets.  Black pepper from
Kampot Province was once a world-renowned Cambodian specialty and is currently undergoing a resurgencein planted area, both by smallholders and as an estate crop.
Fruit and juices:   The ‘Pursat Orange’ (mostly grown in Battambang Province) is prized by Cambodians for
its fine flavour.  In the prewar time, there was a ju ice concentrate factory in Battambang town, the shell of
which still stands.  There is a seasonal diversity of fruits (for example, pineapple, watermelon, guava, durian,jackfruit, papaya, kaffir lime) which farmers are now bringing back into production
Vegetable seed production:   Cambodia’s upland biotopes, especially in the northeast region and in Pailin
(known here as Cambodia’s Chiang Mai) have the right climate and soils for the production of seeds for themany domestic vegetable crops which do not set seed well in the hotter lowlands.
Oil seeds:   Cambodia now produces maize, soya, groundnut, sesame, and castor seed, almost all of which are
exported unprocessed to Thailand and Vietnam.  Significant opportunities may exist for adding value through
production of export quality sesame and soy oil, with by-products entering the local food industry.  Sesame-based confections ( halewi ) may find niche markets in the Middle East.  Cambodia has an emerging production
of castor seed, partly in response to a large volume co ntract between a Thai castor oil processor and a private
Cambodian producers’ association.
Essential oils:  Cambodia already markets internationally a reasonably good quality of ‘tea tree’ oil, a home
remedy popular in Australia and elsewhere for muscle aches and skin infections and a source of turpenecompounds for industrial synthesis of vitamin A and other materials.  Many candidate species of essential oilproducing plants are already grown in Cambodia.  International markets are well developed and growing.
Varietal rice  – Specialty food shops in developed countries are now marketing many different varieties of rice,
recognizing the flavor and texture qualities that are among the reasons why farmers all over the tropics prefer
and preserve their indigenous varieties.  Rather than being limited to competing head-on with well-established
producers of high-yielding, standard varieties, Cam bodia could seek a position in this emerging specialty
market.
Sericulture: Silk weaving is considered in the sub-section on handicraft exports.  Cambodia produces very
little of the silk yarn which is used in traditional weaving, the majority being imported from Vietnam.
Cambodia has its own indigenous varieties of silkworms, which produce very high quality fibre of aparticularly beautiful natural golden color.  Attempts are underway to re-establish mulberry plantations and therelated sericulture technology, which were a feature of the Cambodian economy before the war.
2. Solutions
80. Capturing these opportunities, and turning them into development of an export oriented agro-
processing sector, will require coordinated support from the RGC, strongly oriented toward enabling
the private sector to develop and take the lead.  The systemic problems of governance and poorinfrastructure, treated in this and the other sections of this report, are not exclusive to the trade sector,
and will have to be dealt with over time and with significant political will.WT/IFSC/W/12/Add.2
Page 26
81. Meanwhile the pro-poor strategy identifies the Ministry of Commerce (MOC) as the focal
point in the trade sector.  Institutional capacity bui lding is required to enable the MOC to carry out
effectively its important role in promoting small-scale private sector initiatives.  Capacity is required
to provide a number of services:
• carry out a detailed overall market oriented agricultural and agro-industry sector
analysis and strategic planning effort, in cooperation with concerned ministries and
the private sector, using an integrated approach.
• From the analysis, identify groups of existing agro-processing operations (for
example, fish, soy and chilli sauce manufacturers), which might benefit from businessdevelopment services, and provide those services.  Link these entrepreneurs with
groups of producers.
• Identify high quality ‘green’, Asian specialty, and other niche markets for semi
processed and finished agricultural products and determine market requirements for
quality, price, and availability.
• In consultation with industry and other ministries, especially Agriculture and Health,
examine the potential benefits of a national Cambodian export quality brand identityscheme, with quality management programs for export commodities, taking into
account all of the food chain, from ‘farm gate to consumer plate’.  Enlist assistance
from organic, International Standards Organization (ISO), and other international
quality certification programs and service providers.
• Assess demand for an information service, for production and agro-processing
investors, on opportunities and constraints in specific areas of the country,disaggregated to the district or even commune level.
• Promote strategic partnerships between Cambodian and international private sector
agencies, through government to government  contacts and reaching down to industry
associations and individual firms.
• Develop trade facilitation services such as a trouble shooting help desk for sellers and
buyers, global market intelligence services, and investor support services.
D. S
PECIFIC SUGGESTION FOR ACTION : AN INCUBATOR PROJECT
82. Nothing succeeds like success.  For the diversification of Cambodia’s agriculture, and the
development of a vibrant rural agro-processing industry, some success models are urgently needed,
which identify and explore solutions to known constraints and demonstrate what can be done.  A pilot
project could provide both an opportunity for a more detailed opportunity analysis, and an ‘enterprise
incubator’ capability, in which private sector pro duction, processing and marketing enterprises would
be identified, nurtured and launched.  This is not a new approach, being very effectively used in the
high technology sector worldwide.  The effort should focus squarely on micro and small enterprises.
Program efforts to date to provide project development support to medium and large scale enterprises
have not had much impact, due to the lack of activity at that scale, and to the recognized constraints,
which discourage larger investment.  It will be important in the beginning to work with the situationas it is, among the existing participants.
83. Components of the Incubator Project might include the following.WT/IFSC/W/12/Add.2
Page 27
Identification and support of Interest Groups among sector participants
84. As noted, a comprehensive analysis of the existing agro-processing industry in Cambodia is
needed to identify interest groups of participants among household level micro, and small enterprises.
The industry study cited previously indicated that a number of the food industry participants in Phnom
Penh were in fact manufacturers of chilli sauce, surviving in the face of heavy competition from Thaiand Vietnamese imports.  This may be an example of an interest group that could respond effectively
to the kind of support which stimulated the formation of the Cambodian Rice Millers’ Associations
and National Federation.  Dried chillies are presently exported from Cambodia, probably to supply
processing operations in other countries, as is the case for Cambodian rice.  Other examples could be
given, and more information about the actual entrepreneurs and their operations is required.
Analysis of Cambodia’s comparative and potential competitive advantage in international
agricultural commodity markets
85. The International Trade Centre (ITC) has produced a powerful series of reports analyzing
developing country opportunities, constraints, and strategies in accessing developed country markets
for many products: coffee, bananas, pineapple, organic products, coconut, coir, cut flowers,
handicrafts, and more (see www.intracen.org).  The reports represent the output of some months ofintensive work by qualified professionals for each study, an intensity of effort not possible in the time
and resources allowed for the present report.  A series of several such analytical studies might focus
on items identified by the comprehensive survey, starting perhaps with chilli and other sauces, frozen
vegetables, herbs and spices, cashew nuts and essential oils.  ITC Staff or other suitable consultants
would work with teams of locally contracted personn el in carrying out the studies.  Results would be
used to target the enterprise incubator program to high potential products.
Basic production resource assessments in target areas
86. Agro-ecological, economic, and social assessments of particular locations are a primary asset
for targeting crop diversification and agro-processing enterprise development.  The Department ofExtension of MAFF, under the Cambodia Agricultur e Extension Phase II (CAEPII) project with
AusAID funding, has carried out preliminary studies in some places (for example, Kampong Cham
and Kampot provinces).  However, CAEPII has capacity building objectives in MAFF, which mean
that results will take several years to have an impact.  The Incubator Project could provide a means for
fast-tracking detailed assessments of resources and constraints in identified candidate areas, and formaking this information publicly accessible for use by all private sector participants at low cost.
Support to organisation of production
87. There are many social models for ensuring that processing facilities have a steady supply of
produce as inputs, at prices and of a quality responsive to the demands of target markets.  Examples of
cooperatives, contract farming, farmer producing and marketing associations, agricultural estates, and
the open market, are all present in Cambodia.  As noted, contract farming operations, some quitelarge, have emerged in Cambodia, around tobacco and fragrant rice, and in castor seed production.
Associations of primary producers and of processors, around specific product groups are another
model.  Whatever the form, these arrangements can be successful when there is a means for
information flow, and some kind of disciplined and democratic governance.  In general, these models
work best when there is a basis of mutual interest among all parties, and where there are satisfactorymeans of conflict resolution.  Imposition of social forms from above rarely works well, particularly in
Cambodia with its historical and continuing abuse of authority in public office.  The Incubator Project
could introduce members of identified producer/processor interest groups to the possibilities, through
training workshops and through study tours to succ essful examples in Cambodia and in neighboring
countries.  This approach has been a key element in the early success of the Rice Millers’WT/IFSC/W/12/Add.2
Page 28
Associations, and appears to be having some positive impact on Cambodia’s Rural Electric
Enterprises.
Setting standards and facilitating quality
88. A key component of the strategy will be niche marketing, with the niche defined primarily by
green quality criteria including: pure, natural, pesticide free, certified organic, biodiversity sustaining,environmentally friendly, and health/vigor/longevity promoting.  The global marketplace increasingly
demands such attributes, and this demand represents a significant opportunity.  Experience of other
countries has been well reviewed by ITC, and the specifics of Cambodia’s situation should be
analysed, including possibilities for organic and ISO certification.
2. National brand identity promotion
89. Related to niche marketing is the development of a Cambodian identity in the market.  As
Cambodian products begin to enter successfully into international markets, it may be possible to buildtheir reputation by promoting a ‘made in Cambodia’ label identified with the green quality criteria
mentioned.  The Incubator Project would assess such a strategy in Cambodian terms, and if warranted
prepare a plan for its implementation.
3. Private sector extension and business development services
90. Technical capacity to deliver many or most of the services required is present in Cambodia,
but it is not organized into an institutional capacity.  A fund for contracting in agribusiness
development services on behalf of producer associations, processors, and other players selected under
‘pro-poor’ criteria, would create effective demand for agribusiness ‘extension’ services and thereby
induce a supply response to that demand.  Contracts would be let under normal procurement
procedures.  The idea is to jump-start a profession al services industry serving Cambodian micro and
small agribusiness, contributing to the rapid development of both.
4. Access to investment capital
91. As suggested above, producer/processor organizations may provide a means for identifying
credit-worthy enterprises.  The Incubator Project could provide a financial leverage facility, offering
loan guarantees or other means of encouraging investment in promising ventures.
5. Export trade facilitation
92. The Incubator Project could provide the necessary support to the Export Promotion
Department in the Ministry of Commerce, to provide trouble shooting help desk services, government
to government liaison, and international promotion of Cambodian products.
E. C
ONCLUSION
93. The Cambodian rural economy is composed predominantly of semi-subsistence rice farms,
and household and small enterprises employing less than 10 people.  There is a wide range of
opportunities to build on this base, to diversify and expand agricultural production and value-added
processing activity, with an orientation toward domes tic and international markets.  Constraints are of
two classes:
• the systemic ones, including poor infrastructure, governance issues especially
informal taxes and transaction costs, access to information, and access to capital;  andWT/IFSC/W/12/Add.2
Page 29
• specific constraints most importantly the lack of effective support to the small scale
private producers and processors, in particular extension services for non-rice
production and business development services for agro-processing entrepreneurs.
94. This review highlights the need to address directly the RGC’s poverty alleviation objectives,
through employment generation especially in rural areas.  The suggested means is through
encouraging the existing small-scale private sector to diversify agricultural production and to expandand develop agro-processing enterprises.  A number of specific possibilities and approaches have
been described.  The proposed Incubator Project could provide a mechanism for a more in-depth
analysis of the sector, and the identification and nurturing of some initial successes.
IV. HANDICRAFTS
A. B
ACKGROUND
95. Handicrafts offer considerable potential in the context of a pro-poor trade strategy.
Handicraft production can be organised through household units to fit around the timing of seasonally
driven 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.  In addition, as these capacities are slowly reassembling linkages betweencraftspeople and markets are virtually non-existent.  Box 4.1 summarizes material from a recent report
on handicrafts in Cambodia.
96. 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 neighbouringcountries.
97. Local tourism is also expanding as Cambodians feel more secure travelling within their own
country.  Up until very recently, Cambodians have tended to stay close to home out of fear of security
risks in the countryside.
98. 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.  Japan and the U.S. however exporters cont inue to be confronted by numerous obstacles in
meeting the quantity, quality and cost demands of these markets.
99. In order for producers to be able to take advantage of new economic opportunities and capture
new markets the need assistance to expand their production capacity: upgrade the quality of theirproducts to the standards demanded by potential buyers: and, overcome the many obstacles noted
above.WT/IFSC/W/12/Add.2
Page 30
4.1 Handicraft production in Cambodia
Traditional handicrafts were once an integral part of Cambodian culture and entire families would be
engaged in the production and sale of handicrafts.  Two decades of civil strife and social dislocation
disrupted such cultural practices and values.  Production of high quality crafts ceased as the Cambodian
people focused on mere survival.  Most examples of Khmer fine arts and crafts were lost during this period ofdisruption.  Today, most Cambodians are unaware of the richness of their own cultural heritage and have noappreciation of its uniqueness and beauty.  The tradition of handing down skills from generation togeneration was also lost during the period of strife and now few young people have an interest in learning
these skills.  Master craft makers still ex ist however in rapidly diminishing numbers.
Handicraft production is generally viewed as a secondary source of livelihood in rural areas with priority
given to rice production.  Thus, craft production is often set aside during the planting or harvesting periods.Home or village-based craft production could, however, be a significant source of supplemental income.  Inaddition, in a country where a high percentage of households are unable to grow enough rice to feed their
families for the whole year, alternative sources of livelihood are essential.
The Cambodian handicraft sector as a whole is faced with numerous problems.  Access to the means of
production — raw materials, equipment, production skills and capital — is severely constrained.  In addition,awareness of potential markets and appreciation of the design and quality demands of these markets isextremely limited.  Most handicraft producers rely on traders or middle persons travelling through the
countryside to get their products to markets.  Poor transportation infrastructure, and until quite recently,
security concerns.  are obstacles to accessing markets. Women producers in rural areas in particular havelittle direct contact with markets and thus limited information about market preferences or prices.
As Cambodia opens up to increased tourism and interactions with the outside world there is a growing
interest in the unique designs found in traditional Kh mer arts and crafts.  Unfortunately, Cambodia’s capacity
to recapture its lost trad itions, much less respond to growing market opportunities, is extremely limited.
Source: Cheng 1998.
B. INITIATIVES FROM THE MINISTRY OF WOMEN ’S AND VETERAN ’S AFFAIRS
100. In 2001 the export possibilities for crafts and cultural items were reviewed by the Ministry of
Women’s and Veterans’ Affairs (MWVA) (Phavi and Urashima 2001).  Their review focused both onthe needs of women, and on those of vulnerable groups particularly demobilised veterans.  A
significant proportion of crafts people in Cambodia are women.  Most but not all of the issues in the
sector affect both genders.
Women tend to be engaged in the production of crafts such as weaving, baskets, mats and
clay pottery which are suited to home-based production, made mostly from locally availableraw materials, and requiring relatively small amounts of capital.  Products are most often sold
to intermediaries, primarily men, who travel through the countryside buying up goods from
small producers and take them to market centres.  This relative isolation of women from the
market makes it difficult for them to access the information and support needed to make their
businesses a more sustainable source of livelihood (Phavi and Urashima 2001).
101. The MWVA report discusses the possibilities and constraints in five craft disciplines: silk-
weaving, silver products, basketry, clay pottery, and traditional food products.  In all cases the
opportunities are generally the same: unique Cambodian traditional designs suitable for discerning
niche markets, some still living master crafts-people who can teach the skills, and some existingmostly informal market channels including domestic markets and exports to Thailand and Vietnam.
102. The identified constraints include:WT/IFSC/W/12/Add.2
Page 31
• access to technology, in this case both to traditional methods being lost as older
masters die off, and to modern refinements (for example, wood finishes, clothes
fasteners) for higher quality and productivity;
• high costs or scarcity of some raw materials;
• high transport costs;
• competition from imported goods, both in local markets for utilitarian items like
baskets, and in the tourist market in the form of non-indigenous handicrafts sold as
souvenirs to visitors;
• poor market intelligence and inability to appreciate and respond to market signals;
• lack of institutional means for establishment and control of standards;
• atomistic organisation of production, with  consequent poor bargaining power for
producers;
• part-time nature of craft work, especially for women heads of households; and
• limited access to capital.
C. STRENGTHS AND WEAKNESSES OF PRODUCERS
103. The survey team identified the following strengths and weaknesses of existing craft producers
and these are listed in table 4.2.
4.2 Strengths and weaknesses of producers
Strengths Weaknesses
Traditional Khmer designs Limited capacity to analyze the value of products
Capacity of producers to adapt Low leve l of creativity and commercial appeal
Basic market channels in place Shortage of techniquesAccess to some capital Poor workmanship and finishingMaster craftsmen and women Low quality accessoriesImprovements in product quality Poor durability and reliably
Poor or no packaging
Little understanding of price vs. qualityLack of cooperation between producers
D. OBSTACLES
104. In addition to the many weaknesses identified in the capacity of producers and product quality
noted above, handicraft producers also face a number obstacles related to:
• access to raw materials
• access to appropriate tools and equipment
• access to technical support and trainingWT/IFSC/W/12/Add.2
Page 32
• access to credit
• access to markets poor reputation
• poor transportation infrastructure
• complex export procedures
• lack of a supportive policy environment.
105. The strategy proposed by MWVA for development in the handicraft sector has as five
elements:
• regional specialization where traditional craft specialties, available raw materials or
other factors warrant;
• integrated enterprise development support through local centers, including business
development services, and vocational training;
• micro-credit facilities including risk-sharing and concessional terms for ramp-up;
• market identification and development support; and
• organized cooperation among ministries and agencies at the policy and program
levels, for vocational training, cultivation or extraction of raw materials, trade
facilitation, quality control, facilitation of producer organization, etc.
106. MWVA is currently negotiating with the German  Government for support in pursuing several
components of this strategy.  Key partner agenci es include the private sector and NGOs, and the
Ministries of Commerce; Culture and Fine Arts; Agriculture, Forestry, and Fisheries; Rural
Development, and Industry Mines and Energy.
107. As for other dimensions of trade promotion for least developed countries, the ITC has
published comprehensive analyses, guidelines and recommendations for development of the
handicraft sector (ITC 1998).
108. ITC also supports the Artisanal Enterprise Network (AEN) whose website at
www.craftscenter.org provides market and trend information, best artisanal product business
practices, training programs for artisanal business development, and answers to frequently askedquestions (FAQs).
109. AEN’s  training for artisan entrepreneurs is based on a modular curriculum, teaching small
business planning and management skills.  Written by entrepreneurs, the lessons and examples are
based on business owners’ actual experiences running micro — small and medium-scale businesses.
The curriculum covers over 50 specific topics, grouped in the following modules.
• Identifying the entrepreneurial traits  and specific talents needed for business success
and learning how to hire the right people to form a management team.
• Building the management team : How do micro- and small businesses get the support
they need without hiring full-time personnel to provide it?
• Product design and development : Making the case for, and teaching the principles of,
Market-Driven Product Development.WT/IFSC/W/12/Add.2
Page 33
• Marketing  as an integral part of product development and business growth strategy.
• The science of costing and the art of pricing : for local, national, regional and
international market opportunities;
• Production : How to plan for it; how to maintain quality control;
• Packaging and packing : the necessities to ensure safe shipment; value- added
labeling and packaging; customer requirements.
• Shipping : details of freight options; how to find a good freight forwarder; where to
learn about all documentation requirements;
• Preparing to enter (or making a better entry into) the international market :
brochures, catalogs, trade shows, websites, promotion, evaluations of market options;
• Managing financial and physical resources : budgeting, cash flow, capital, debt,
equity, traditional and alternative sources of money, tax compliance, facilities and
equipment;
• Technology : what low-level technologies are available to increase productivity or
profit margins; what new technologies need to be learned to communicate withforeign markets; the role of the Internet and the computer for small businesses;
• Maximizing human resources : defining job descriptions and competencies needed for
each job; salary and employee benefits; evaluating job performance and improving it;balancing teamwork and individual excellence; balancing work and family; shared
ownership options.
• Business relationships : between you and your vendors, wholesale and/or retail
customers, sales representatives, agents, etc.; the importance of timelycommunications; what honesty means across cultures; etc.
• Resources for continuing development : linking owners to institutions and sources of
information and financing for growth
110. Cambodian artisans face the same challenges as their colleagues elsewhere in the developing
world, with additional difficulties created by the destruction of the past few decades (although theyare not unique even in that respect).  Applying the kinds of techniques and resources offered by ITC’s
AEN to the Cambodian situation, may contribute significantly to advances in the sector.
E. C
ONCLUSION
111. The handicraft sector in Cambodia has much in common with the agro-processing sector, in
terms of its SME character and of its constraints and opportunities matrix.  Increased productionactivity and development of successful export oriented enterprises will require both improvements to
the policy environment and direct programmatic support, to enable Cambodian producers to compete
effectively with their counterparts in more advanced neighbouring countries.  Direct project
interventions cannot substitute over the long term for a vigorous private sector working in a
supportive and adaptive policy environment.  Still it is suggested that at this stage in Cambodiadevelopment support, by way of incubator projects to support capacity building, is necessary.WT/IFSC/W/12/Add.2
Page 34
4.3 Tabitha and certificates of origin
Tabitha Cambodia is a non-profit non-sectarian Christian organisation whose purpose is to enable the poorest
of the poor in Cambodia to recognise their inherent beauty as individuals and families.  With thisunderstanding, people are encouraged to acknowledge their own inherent skills and abilities and to utilize thesein ways that will enable them to recognise and change those areas of life that, they believe, keep them poor.
Tabitha’s focus is on community development, through increasing family incomes and savings.  Tabitha’s
tools are small personal savings programs based on quality of life ‘dream cycles’, support for micro-enterprisedevelopment, and cottage industry (handicrafts).  A more complete description of Tabitha, its programs, and itshandicraft products (silk weaving, children’s cloth toys, crocheting and embroidery, and silver ornaments andjewelry) may be found on the internet at www.tabitha.ca.
At present, Tabitha is working directly with about 5000 families, some 40 000 people in total, in five
Cambodian provinces.  Net annual program costs of Tabitha’s operations amount to about US$20 for eachfamily, or $100 000 in total, including local staff salaries, operational costs, and the 10 per cent interest whichTabitha pays to participants in its savings programs (an encouragement to families for faith in their ownabilities).  These program overhead funds come from donations from Tabitha’s international network of friends
and supporters, and from profits on the approximately $300 000 worth of annual sales of handicrafts produced
by Tabitha’s beneficiaries.
Tabitha has dealt successfully with many of the problems facing artisanal producers.  Raw materials are
sourced centrally at wholesale prices.  Product quality standards are maintained through ongoing supervisionand training by staff members, and by the growing self esteem of the producers. International export market
access is achieved through several channels, including i)  sales to tourists from shops in the capital Phnom
Penh, in Siem Reap town, the site of the Angkor Wat temple, and soon from a shop in the Phnom Penh airportdeparture lounge; ii) sales to hotels; iii) an international network of volunteer sales people in Singapore,Canada, USA, Europe, Australia, and Taiwan, composed of people who have seen the value of Tabitha’s workand want to contribute; iv) international wholesalers and retailers, especially adherents of the fair trade
movement; and v) direct sales through the internet.
With success and increasing visibility have come new challenges.  In the past, Tabitha’s shipments have been
carried in suitcases as excess baggage by returning friends, or in lots too small to attract the attention ofcustoms authorities in receiving countries.  At this time of writing, Tabitha has a larger US$40 000 shipment ofhandicrafts arrived in Canada and being assessed for import duties ranging from zero up to 100 per cent ofvalue, depending on type. These duties would be mostly waived if the shipment were accompanied by
appropriate Cambodian certificates of origin. However obtaining such documentation from the responsible
Cambodian authorities, who are used to dealing with much larger garment manufacturers and other clientele,appears to cost nearly $1000 in official and unofficial service charges. Tabitha has appealed to the responsibleMinister, and it is expected that a solution will soon be found.
This anecdote underlines the need for capacity building on both sides. Tabitha (and likely every other producer
in the handicraft sector) needs help to learn how to navigate the complex rules and procedures which governinternational trade. The RGC needs capacity building to enable it better to serve its whole range of clients
V. FISHERIES
A. BACKGROUND
112. For decades, the economic and ecological value of Cambodia’s fisheries resources has been
recognised by the Cambodian people and their government, regional governments, and development
agencies.  Because of this recognition, development and government agencies have financed dozens
of studies of the fisheries sector and supported th e Department of Fisheries (DOF) to build technical
capacity.  The studies consistently reaffirm the need to improve management of the fisheries sector soWT/IFSC/W/12/Add.2
Page 35
that the resources continue to serve as an important food source, generate foreign currency, and
provide enjoyable livelihoods for millions of Cambodians.
113. Nearly every research study has concluded that Cambodia’s primary fisheries stocks are being
depleted and that modern agricultural practices, increased forest logging, and a growing population
have combined to further degrade fisheries stocks.  Previous and current government and
development agency initiatives focus considerable attention on upgrading resource management.Among the several broadly based initiatives that were recently instituted, are the following.
• In early 2001, the Prime Minister ordered approximately 56 per cent of the fishing
areas under fishing lot management to be released for public use.
• The DOF was ordered to establish community management of these public areas.
• A sub decree on Establishment of Community Fisheries was drafted to encourage
communities to manage the fisheries resources through community-basedorganizations.
• The leasing of special ‘research fishing lots ’, which were controversial due to the non
transparent manner in which they were awarded, were cancelled.
• The fees for middle scale fishing gear were cancelled for inland waters.  This reform
was designed to eliminate unofficial taxation by local authorities.
• Several coordinated projects began on the Tonle Sap Lake including; a UNDP-GEF
project on sustainable resource management; a Capacity 21 project on awareness
training and participatory practices; and an Asian Development Bank project on
managing the resources for economic growth and development (UNDP-GEF 2001).
114. Thus, there is support and effort currently being expended to nurture Cambodia’s fisheries
sector and improve its economic value and financial return.  However, many problems remain.  The
scale of the fisheries resource, its importance in the lives of so many Cambodians, and the scope of
the economic and environmental problems mean ther e is a premium on identifying the pressing issues
and tackling them.
115. This report concentrates on how the various parties in the supply chain from the people
catching fish through to wholesalers and retailers, with support of government and development
agencies, can be encouraged to participate in establishing a competitive market for fish and fishproducts.  With proper incentives and a reduction in irrational market interventions by government
agencies, private sector participants can be encouraged to participate in the development of the sector,
help preserve fisheries resources, and improve opportunities to alleviate poverty and promote
international trade.
116. The report identifies existing production, processing, transportation, marketing, and exporting
participants and trade structures.  Some of these participants and related activities and trading
structures are no longer functional in the emerging competitive market economy and some may be
encouraging resource degradation.  The report then considers sector specific measures directed at
developing the necessary technical and management capacities, social relationships, and business
linkages to promote competition and improve resource utilization.WT/IFSC/W/12/Add.2
Page 36
B. ROLE OF FISHERIES IN CAMBODIA
1. As a source of food and livelihood
117. Cambodia is the world’s fourth largest producer of freshwater fish, producing about 400 000
tons of fish with a market value between US$150 and $200 million per year (Oxfam GB 2000).  More
than 80 per cent of fish production comes from the Tonle Sap Lake, the Mekong/Bassac River basin,
and other rivers and tributaries.  Marine fishing contributes about 10 per cent or 30 000 tons per yearto production, and the balance comes from aquaculture, with annual production of about 13 000 tons.
118. As a food staple, fish represents about 70 per cent of Cambodia’s animal protein intake, with
consumption estimated at about 30 kilograms per person annually or about 300 000 tons in total
(Infofish 2000).  Thirteen of the twenty one Cambodian provinces are considered fishing provinces
and more than three million Cambodians, about 25 per cent of the population, live in the six provinces
bordering the Tonle Sap Lake.  The fisheries industry seasonally employs an estimated 140 000
persons, not including the tens of thousands of families who subsist on fish and other aquaticresources.
2. As a source of export income
119. The value of live and processed fish exports was estimated to be at more than $10 million in
1998 with export of between 30 000 tons and 100 000 tons of freshwater and marine fish, which
represented about 25 per cent of the total fish catch.  It is estimated that one half of the total areexported illegally.  Unofficial or illegal export channels do serve to generate income for some people,
but as a rule, such channels are costly and inefficient.  One reason why exports happen through illegal
channels appears to be to avoid official taxes and charges.
120. It is estimated that 75 per cent of exports are delivered to Thailand as fresh, iced fish and
seafood, and another 15 to 20 per cent are exported to Vietnam.  Due to a number of factors, includinglimited export experience, relatively few fish processing and packaging facilities, and poorly deve-
loped marketing capability, Cambodia is not benefiting from value added exports.  Rather, it appears
that Thailand and Vietnam, which possess better market knowledge, trade experience, and modern
processing and packaging facilities, are reaping benefits by importing fresh, iced fish from Cambodia
at very competitive prices, then further processing and packaging them and marketing them to Asianmarkets located in Bangkok, Hong Kong, Malaysia, Singapore, Europe, and the United States.
121. Table 5.1 lists the imports of Cambodian fish products in the respective countries, by value, in
US dollars.  While the reported export quantities are imprecise, the values indicate the significant
revenues to be realized through high value exports, especially live fish exports.  Currently, most of the
exported fresh fish and seafood goes to Thailand, which is paying the lowest value per ton.
C. I
NDUSTRY STRUCTURE , MARKET PARTICIPANTS , AND TRADE ISSUES
122. A brief overview of the industry structure, participants involved, and various trade issues
follow.  The simplified diagram below depicts th e primary linkages between main participants (see
chart 5.2).
1. Department of Fisheries
123. The Department of Fisheries (DOF) has a staff of more than 1 500 and facilities located in
each province.  It is headquartered within the MAFF in Phnom Penh and has the regulatory authorityto promote and manage Cambodia’s fisheries reso urces.  In addition to establishing industry
regulations for the sector, DOF staff is responsible for enforcing regulations, collecting fees from
market participants, and controlling the smuggling of fish to neighboring countries.  The DOF obtainsWT/IFSC/W/12/Add.2
Page 37
revenues from the sale of fishing lots, collection of fines and penalties, and by implementing donor
and government funded fisheries resource management projects.
5.1 Fish imports from Cambodia, selected countries
Importing country Quantity Value Value
tU S $ U S $ / t
Hong Kong 648 6 137 820 9 472
Malaysia 173 2 632 849 15 218
Thailand 3 342 1 224 989 367
USA 280 1 063 464 3 798
Singapore 108 100 000 920
Source : Infofish 2000.
5.2 Supply chain for fish exports
Fisherman Trader Distributor Transporter Trader Exporter
DOF issues
licenses and
manages
resourcesSells to local
retailers orprocessorsPaysunofficial
road taxes
to transportExported
fish must be
sold through
KamfimexCollects 4 %
fee on all
fish
transportedin theprovince
RetailerProcessor
Data source:  EDC 2001.
2. Ministry of Economy and Finance
124. The Ministry of Economy and Finance (MEF) collects a 10 per cent export tax on all fish
exports.  As noted, the DOF is responsible for ensuri ng that the export tax is paid.  Cambodia is the
only country in the region to levy an export tax on fish products.
3. KAMFIMEX
125. KAMFIMEX is the Kampuchea Fish Import and Export Company, a State owned enterprise
managed by the MAFF.  KAMFIMEX is the sole licensed exporter of fish products.  It owns fourprocessing plants that it leases to private sector enterprises, and manages all live fish exports at
Pochentong airport, where it collects an export license fee of US$1 per kilogram, and Kompong Som
port.  The existing export market arrangements specify that fish for export must  be sold to or through
KAMFIMEX.  KAMFIMEX takes no physical possession, but instead resells the fish to licensed
export agents or processing plants.  KAMFIMEX also sells one distributorship in each provincethrough a competitive bidding process.  The distributorship entitles the holder to collect a 4 per cent
fee on the value all fish exported through the province.  The fact that considerable export activity is
reported to take place unofficially, and at low prices, indicates that the fees and taxes imposed yield
little in the way of marketing services.WT/IFSC/W/12/Add.2
Page 38
4. Fishermen
126. Fishermen and fish companies are classified as small, medium, and large scale, depending on
size of catch potential and type of equipment used.  There are three categories of fishermen and fish
companies for inland fisheries, and other classifications for marine fisheries.
127. Small scale fishers  are family scale fishermen (1–3 persons) who fish primarily for family
subsistence.  They pay no fees to the DOF and are permitted to catch fish throughout the year in areasoutside fishing reserves and fishing lots.  The numbers of small scale fishers is increasing annually as
the population grows and as alternative livelihoods become scarce.
128. Medium scale fishers are extended families and village level partnerships (3–6 persons) that
catch fish for income and processing using non-industrial fishing methods.  They pay an annual fee to
the DOF (no details on these fees were obtained) and are limited to 8 or 9 months of fishing per year.
There are few restrictions on the type or size of fish medium scale fishers can catch.  Due to the
annual fee structure, their incentive is to catch as many fish is possible during the fishing season.
129. Large scale fishers  are more sophisticated organizations (50–80 persons) that, in general,
have improved production and processing methods, and better access to marketing and trade
information.  Still, many use existing inefficient tr ansport and trade structures to export lower value
fish to Thailand and Vietnam.  Large scale fishers lease fishing lots (20 to 350 km
2), which are
awarded through a competitive bidding process every two years by the DOF.  At an average leaseprice of between $30 000 and $70 000, it is estimated that these fees represent an income of between
$2 and $4 million for the DOF.  There are few restrictions on the type or size of fish large scale
fishers can catch.  Due to the large fee structure, their incentive is to catch as many fish is possible
during the fishing season.
130. Marine fishers own boats to catch fish or raise fish and shrimp in Cambodia waters located in
the Gulf of Thailand.  More than 4 000 Cambodian owned boats are registered and licensed by the
DOF (no details of the fees were obtained).  Thai fishermen can also purchase fishing licenses for
Cambodia waters, but accurate information on these sales was not obtained.  Marine fish catches are
significantly under reported and nearly the entire catch is sold to Thai traders at sea.  It was reported
that some Cambodian marine fishers are required to  sell their catches at less than market prices to
licensed processing facilities in Kampong Som for the privilege of obtaining an operating license.
5. Traders
131. Traders are the middlemen and wholesalers that facilitate trade primarily by providing capital
and market access to fishermen at every level in the trading system, both for inland fisheries and
marine fisheries.  The services they sell to fishermen include access to price information and betterlinkages to transporters, processors, and markets.  Studies have concluded that profit margins for
traders are very high relative to other market participants.  Traders who export must follow export
market arrangements and sell all fish to KAMFIMEX.  Traders who distribute to the domestic market,
and who transport fish through a province, pay the provincial distributor a 4 per cent fee.  Traders
who purchase and sell fish within the same province in which they are purchased, pay only
transportation costs.  There do not appear to be official barriers to assuming a role as trader, but
unofficial barriers may exist.
6. Transporters
132. Transporters own the trucks and boats that transport fish from the fish landing sites located
alongside the lake or marine shorelines to processing facilities and markets in Cambodia and export
points in Thailand and Vietnam.  Most fish exported to Thailand are transported in pickup trucks piled
high with fish and ice.  Up to 50 per cent of the fish spoil before they reach their destination due toWT/IFSC/W/12/Add.2
Page 39
poor cold storage facilities, poor road infrastructure, and inefficiencies associated with unofficial road
taxes and license fees.  Transporters pay a registration fee to the DOF and pay a series of unofficial
road taxes from the landing site to final destination.
7. Distributors
133. Distributors are licensed by DOF to serve as middlemen. One license is sold in each province
for a term of five years through a competitive bidding process. The licenses are reported to cost up to$50 000 each.  They entitle the distributor to establish an office and collect a 4 per cent fee on all fish
exported through the province.  There are no services provided for this fee.  Between 20 and 50 per
cent of fish are smuggled across border areas to avoid distributor fees.
8. Processors
134. There are four major fish processing facilities in Cambodia.  All are owned and leased by
KAMFIMEX, the State owned fish export company.  One facility is leased to Cambodians and the
other three, located in Kampong Som, are leased to foreign investors who export high value shrimpand processed fish to Hong Kong.  The processors hold export permits issued by KAMFIMEX.
135. There are no fish processing facilities located near the production sources on the Tonle Sap or
other river areas.  Due to the huge fish spoilage factor, most domestic fish processing is performed in
local villages by small and medium scale fishing families and in the provincial cities and Phnom Penh
by small-scale enterprises.  About 50 per cent of the freshwater fish is processed into low value driedfish and salted fish or converted into low value fish paste or fish sauce.
136. Cambodia has robust retail markets located in all major provincial cities and throughout
Phnom Penh.  The specific supply chains for the mark ets were not examined in detail for this report,
but it is assumed that fish are supplied by traders to retailers on a wholesale basis.  Retailers,
consumers, and small-scale processors who live near fishing areas can also purchase fish directly fromfishermen at the landing site, but the scale and sc ope of direct purchases is not well documented.
9. Export markets
137. KAMFIMEX is granted sole authority by MAFF to control fish exports.  KAMFIMEX has no
direct competitors in Cambodia for fish exports.  Official export points are located in the northwest (to
Thailand), southeast (to Vietnam), Pochentong airport, and Kompong Som port.  KAMFIMEX hasoffices and distribution facilities at these locations or licenses others to perform the processing,
marketing, and export delivery functions.  Private sector exporters of live fish from Pochentong
airport, pay a US$1 export license fee plus a 10 per cent MEF imposed fisheries export tax.
138. A recently released research study by Enterprise Development Cambodia (EDC) concerning
the export process in the northwest was made available for this report (EDC 2001).  The exportlocation is the city of Poipet that connects to Arranyaphatet, Thailand.  On the road leading to Poipet,
a distributor who is licensed by the Governor of Banteay Meanchevy province, instead of DOF,
collects a fee of 4 per cent of value from each fish transport truck passing on the road to Poipet.  The
office of KAMFIMEX is a little further up the road.
139. All fish destined for export must be sold to KAMFIMEX.  KAMFIMEX does not take
physical delivery of the fish, but instead licenses five export traders to purchase all the fish and
transport them across the Thai border to the Arranyaphatet fish market.  In most cases, the fishtransported to the KAMFIMEX office are reloaded  onto other trucks with fresh ice.  The export
volumes are large.  Export traders and Thailand Department of Fisheries agents interviewed for the
recent study stated that 90–100 tons of exported fi sh are delivered every day during the fishing seasonWT/IFSC/W/12/Add.2
Page 40
(November through April).  There is no other legal method of exporting fish to Thailand than through
KAMFIMEX.
140. The Arranyaphatet fish market is located just inside the Thai border.  There seems no logical
reason why Cambodia’s freshwater fish market is located in Thailand.  Because Thailand does not
allow Cambodian transport trucks to deliver the fish to the market, the fish are unloaded from the
transport trucks, re-iced and placed in pushcarts that hold about 3 tons.  Fish are pushed across theborder to the fish market and sold to Thai fish traders.
141. According to reviewed reports, the average price for these exported fish is about 35 cents per
kilo, which is about one fifth the retail price for the same fish in Phnom Penh.  In addition to the
cumbersome procedures involved in crossing the border, export traders must also pay official and
unofficial fees totally about $75 for each push cart for fish to Cambodian and Thai authorities on
either side of the border.  Chart 5.3 provides an example of the export trade system used for exporting
fish to Thailand through Poipet.
5.3 Fish exports through 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 Thaiwholesalers who deliver to
Bangkok for export or the
Thai domestic marketExport trader transports fishacross Thai border - pays
fees of $25 per tonExport trader pays 10% export
tax to Cambodia MEF
Data source: EDC 2001.
142. No information about the export of fish at the Vietnam border was reviewed for this report.
In addition, little information is available concerning fish exported from the Kompong Som port,
except that the three KAMFIMEX leased processing firms export only about 1 200 tons of fish and
shrimp annually, primarily to Hong Kong.
D. PROMOTING COMPETITIVE MARKET BEHAVIOUR AND IMPROVING RESOURCE UTILIZATION IN
THE FISHERIES SECTOR
143. Promoting competitive market behaviour and improving fisheries resource utilization is a
national agenda. Any measures implemented to promote and improve the competitive market for the
fisheries sector are equally applicable in like form to other resource sensitive sectors.  Promoting
competitive behaviour and rationalization of scarce resources supports the government’s pro-poor
development policies and its stated intention of transforming the Cambodian economy from a
command economy evidenced by state owned enterprises and inefficient distribution systems, to a
competitive market economy where the role of government is to enable markets, not control them.
1. Significant inhibitor to competitive mark et performance in the fisheries sector
144. The most significant hindrance to developing a vibrant and competitive fisheries sector is the
depth of intervention by government agencies in near ly every aspect of every market transaction.  The
level of government intervention that permeates the fisheries sector proportionately diminishes the
attractiveness of the sector to private sector investment.  The rents charged by these manyWT/IFSC/W/12/Add.2
Page 41
interventions decrease the profit potential to such a degree that private sector participants are unlikely
to invest in the modern production, processing, transportation, and trade technologies necessary to
create a sustainable fisheries industry.  Examples a bound, from the auctioning of short term fishing lot
rights, to selling market functions such as distributorships, to operating a State owned fish export
monopoly such as KAMFIMEX to control all exports.
2. Strengthening the private sector
145. Development agencies have properly invested billions of dollars in Cambodia to rebuild the
infrastructure and instil technical capacity in government ministries.  Few of these funds have been
invested in developing a sustainable market ec onomy where government agencies promote, enable,
and encourage efficiently operated and managed private sector firms, business associations, and civic
organizations that are essential to a strong market economy.
146. Instead, government agencies, due to their rational need to finance their operations, are
encouraged to support themselves through direct  market interventions, invasive regulations, and
revenue seeking regulatory enforcement, all of which are highly evident in the fisheries sector.  These
practices will not only continue to inhibit development of a competitive and vibrant fisheries sector, it
will continue to encourage degradation of the fisheries resources.
3. Building a competitive fisheries industry
147. Private sector businesses, similar to government institutions, road and telecommunications
infrastructure, and the general landscape sustained significant damage during 30 years of civil war.
The social relationships and fabric necessary to transact business deals and the trust required between
market participants to promote expanded trade activities are broken and need financial and technical
support to be developed.  This will take considerable time and effort.
148. Examples of successful private sector initiatives exist.  They demonstrate that rebuilding the
social contracts in a relatively short time is possible in Cambodia.  The most notable example of how
quickly private sector transformation can take place is the development of the Federation of
Cambodian Rice Miller Associations (FCRMA).  In 1997, a UNDP initiative that ended in 1999 with
the formation of the EDC set out to support private sector development.  EDC encouraged rice millers
to meet together and discuss common problems and solutions.  Few rice millers had ever talked toeach other during the previous years and the distrust between these businesspersons was obvious even
to the casual observer.
149. By facilitating business level discussions, exposing rice millers to new milling technologies
and operating practices in neighbouring Thailand, and encouraging upgrading of the industry and
quality standards, more than 350 rice mills have now formed nine Rice Miller Associations (RMAs).In February 2001, the Associations formed the Federation.  One of the first orders of business for the
Federation was to promote the organization and facilitation of rice farmers, since without a linkage
and partnership with rice farmers, the rice millers realized they could never effectively obtain higher
quality products.  A next order of business was to develop quality standards for the industry,
marketing linkages and export channels.  The success of the RMAs and FCRMA speaks volumes
about how relatively quickly the level of working relationships can develop and effectively function
in Cambodia.
150. The facilitation techniques and organization efforts promoted by EDC do not follow the
traditional development project model; one of intentionally establishing working groups or
associations to serve some preconceived development objective.  To the contrary, participants are
simply encouraged to participate in a group discussion with other sector participants and determine
for themselves after the discussion if they perceive value in creating long-term business relationshipsand linkages.  Development agency support for these efforts must extend for at least three years, sinceWT/IFSC/W/12/Add.2
Page 42
experience has shown that participants take a longer-term view when they realize there is
sustainability of the organization.
151. Recently, various proposals have recommended that government agencies and government
staff promote the formation of private business associations, and in the case of the fisheries sector,
community fisheries councils.  Experience has s hown that, in general, government staffs of a
transitioning economy (command economy to competitive market economy) are unlikely to have thefinancial resources, technical knowledge, or required mindset to build private sector institutions.
Decreeing the development of a market economy is not possible, and the development community
should discourage these activities, at least in the short and medium term.  Instead, initiatives to
develop the private sector are best managed with the support and leadership of the private sector itself,
along with professional facilitation services from neutral, non-government agencies.
152. Resource management, production systems, processing techniques, transport methods,
marketing skills, and export market functions are linked in a variety of obvious and not so obviousways.  Therefore, initiatives proposed to assist one market function of the fisheries sector are likely to
affect other market functions.  Therefore, a holistic methodology in developing a competitive fisheries
industry is the recommended approach.
4. Sector specific initiatives
153. For the fisheries sector to become competitive and market responsive, and for the fisheries
resources to be managed more effectively and efficiently, a rapid transformation, rather than a gradual
transition may encourage results that are more tangible.  A new set of values and business operating
practices need to be integrated into the evolving Cambodian culture if a market economy is to develop
during the next decade.  Individual enterprise management skills as well as sector level business
capacities need to be developed.
154. Competitors in a market economy operate with common understandings, work from a
generally understood set of business ethics, rules, and structures and normally agree on self
governance and accountability for their industry, and accept responsibility for their collective
interests.  A transformation of this nature in Cambodia will require the commitment and partnership
of the public and private sectors as well as an equally significant commitment of long-term financialand technical support from development agencies.
155. The following specific initiatives are suggestions only and require further analysis and
discussion with market and resource management participants, development agencies, and the
government.
• Develop a long-term collective vision for the fisheries industry that promotes efficient
resource utilization and promotes export  trade.  This pro-poor vision should be
developed through a facilitated public and private sector partnership of interested
government ministries, such as DOF, MEF, and MOC, and private sector
organizations, such as local fisheries councils and fish transport and export
associations.
• Develop a comprehensive strategy for developing a profitable, private sector driven
fisheries export sector.  Strategy development will require participation and supportfrom fisheries resource management interests, fishers at all levels, government
ministries, and private sector participants at all market levels of the fisheries tradingsystem.  From a well-defined strategy, specific objectives can emerge that continually
place emphasis on private sector driven initiatives.WT/IFSC/W/12/Add.2
Page 43
• Decrease government intervention in the marketing channel and stop the selling of
market functions.  This critical and necessary step may need a short period of
transition, but should be accomplished as quickly as possible.  There will likely be
both public and private sector special interest lobbying to transition State owned
enterprises, such as KAMFIMEX, into privat e sector enterprises.  Selling the assets,
such as the warehouses, production facilities, and vehicles, in a transparent manner is
absolutely necessary.  But selling and maintaining functions, such as a monopoly forexports or distributorships that simply collect fees and offer no services will only
further inhibit competitive sector and industry development.
• Support the development of private sector institutional capacity.  From the
development of local community level organizations and working groups toenterprise and sector private business associations, private sector firms need to
receive sustained support to upgrade their organizational, technical, and managementcapacities.  Support can be provided individually through curriculum developed for
technical and management schools or even more effectively through the development
of sector specific organizations, private business associations, and working groups.
• Support the development of private-public sector partnerships to improve technical
and business management capacity.   To effectively develop an understanding of their
inter related roles in a market economy, one where government staffs enable and
support the private sector rather than compete with and eliminate it, training in
market economy principles and practices should be provided to a broader range ofgovernment staffs and private sector firms.  While partnerships cannot be forced,
there appears to be willingness for professionally facilitated forums where private
sector firms and fishermen have the opportunity to share their viewpoints with those
of the government representatives. Further research is needed to identify the best
forum in which to provide such information, but workshops, trade fairs, and localcommunity meetings would seem appropriate venues.  It is recommended that
development agencies fund selected demonstration projects to determine the long-
term viability of such an approach.
• Provide neutral facilitation to rebuild the relationships between private sector
participants and develop private-public sector partnerships and working groups .
There is a critical lack of experience for communities, private sector participants, and
government to collectively solve issues in a democratic and participatory manner.
Until this experience can be developed and demonstration projects can be
successfully presented as models, neutral facilitators should assist in accomplishing
these initiatives.  Development agencies can support these efforts first through
technical assistance and then advanced facilitation training for private sector basedbusiness development service providers.
• Develop an effective market demand and price information system for all participants
in the fisheries sector .  Market economies work best with an efficient and timely
source of market and price information.  As  a pro-poor strategy, the development of a
market and price information system will assist individual fishers to better negotiate
with traders and other market players.  Improved information systems will also assistparticipants to make better resource allocations.  A system of data collection and
dissemination is essential to the continued development of the industry.WT/IFSC/W/12/Add.2
Page 44
VI. GARMENTS
A. BACKGROUND
156. Cambodia’s export performance since 1997 has been remarkable.  Total exports rose from a
negligible $51.3 million in 1992 to $1.1 billion by 2000. Export of garments explains most of this
growth.  Table 5.1 charts the performance of the garment industry since 1994.  Up until 1995, garment
exports were almost non-existent.  With increased stability, relatively low wages and with noquantitative restrictions to the EU and US market s, and reflecting the fact that some neighbouring
countries were close to using all of their quota, foreign investors shifted their production to Cambodia.
Consequently, garment exports jumped from US$24.2 million in 1995 to US$79.4 million in 1996,
tripled to $227 million in 1997 and by 2000 garment exports were $965 million, accounting for 87 per
cent of total exports in that year.  While the rate of growth has been unusually rapid, this pattern of
manufacturing exports — dominated by labour intensive products such as garments — is typical of a
labour abundant economy such as Cambodia.  Indeed, this pattern of export composition characterizedthe very early stage of development of the manufacturing export sector of several neighbouring
countries including Malaysia and Indonesia.
157. In a developing country such as Cambodia where labour is abundant and concentrated in the
rural areas, expansion of labour-intensive modern sectors is critical to absorb unskilled workers at the
earlier stages of industrialization.  Going on experiences in other Asian countries, as incomes increasethe share of employment in agriculture is likely to drop.  The choice of technologies in traditional
industries will change as the rising cost of labour together with technological advances, encourages
new methods.  Typically, job opportunities expand in services and industry, as employment in
agriculture and the informal sectors declines and workers move to urban areas and the formal sector.
Given the large supply of unskilled workers in Cambodia this process will continue for many moreyears.
6.1 Cambodian garment industry, 1994–2000
YearNo. of
factoriesNo. of
employees Exports
US EU Total
TotalQuota
itemsNon-
quota
1994 7 8 024 - - - 4 4
1995 20 18 703 1 - 1 27 271996 24 24 015 2 - 2 75 79
1997 67 51 578 99 - 99 112 227
1998 129 79 231 360 - 360 76 3781999 152 96 574 585 434 83 58 553
2000 186 122 644 749 520 229 221 985
2001 na na 480a282 a 198 a na na
a Data refers to the first 7 or 8 months of 2001.
Source :  MOC 2001
158. The garment and footwear and tourism sectors have been the engine of growth in the
economy and largest generators of employment in the formal sector over the last four years.  In 2000,
there were about 200 garment factories in Phnom Penh employing more than 120 000 workers, of
which most are young women (table 6.1).  Some estimates put the number of workers in 2001 at
160 000 (CRDC 2001).  Earnings of garment workers are high relative to other job opportunities in
Cambodia and even compared to garment workers in competing countries such as Bangladesh andIndonesia.  While reliable data on wages or earnings of other workers are scarce, the data that does
exist suggests that workers in the garments sector ar e relatively highly paid compared to most other
workers in both the formal and informal sectors and the civil service.  To the extent that export
expansion of garments has created relatively high wa ge jobs for some workers, ‘wage inequality’ willWT/IFSC/W/12/Add.2
Page 45
emerge.  However, the process of shifting workers out of low paying jobs in the informal sector to
higher paid jobs in the formal sector will make more and more workers better off compared to the
opportunities they currently face.
B. MARKET ACCESS FOR CAMBODIAN GARMENTS
1. United States access
159. In the case of the US, exports from Cambodia are restricted in certain categories and by
import tariffs.  The surge in garment exports (espec ially of woven trousers and knitted shirts) to the
US market triggered the US government to impose volume restrictions on 12 categories of
Cambodian exports in 1999 on the grounds that this level of exports was disrupting the US garment
market (see table 6.2).  The quota agreement is initially for three years ending in December 2001.
Apparently, negotiations for a new agreement have not yet begun and a one-year extension of the
existing agreement may need to be considered until a new one is agreed.  Under the current
arrangement, quantitative restrictions applying to Cambodia are eased by 6 per cent per annum duringthe agreement period, 1999 to 2001.
160. Additional easing of quantitative restrictions on Cambodian exports is linked to progress on
labour standards.  According to this agreement, up to a maximum of 14 per cent quota increase is
possible if Cambodia ‘substantially complies with labour standards’ including those set out in
Cambodia’s labour laws and the four core ILO conventions.  The ILO defines ‘internationallyrecognized core labour standards’ as covering four elements:
• freedom of association and the effective recognition of the right to collective
bargaining;
• the elimination of all forms of forced or compulsory labour;
• the effective abolition of child labour; and
• the elimination of discrimination in respect of employment and occupation.
161. Following on from an assessment of Cambodia’s labour standards, the US government eased
restrictions by 9 per cent in 2001.  The US did not commit to the full increase on the basis that it did
not make substantial progress in respect to the core labour standard of freedom of association and theright to recognize and bargain collectively.  However, the basis for this decision is not well
documented.  The condition ‘substantial compliance’ with labour standards is vague and open to
non-transparent assessments.  Evidently, several US buyers had criticized the US government’s
assessment of Cambodia’s labour standards for the 2000 quota for its apparent lack of transparency.
In the opinion of one large US buyer, ’the level of secrecy in the assessment fuels the perception thatthe 1999 adverse decision was based more on politics and protectionism than on facts’.  The lack of
transparency in Committee for Implementation of Textiles Agreements (CITA) decisions is now
being partly addressed through an ILO Garment Monitoring Project in Cambodia.  In conjunction
with the Garment Manufacturer Association of Cambodia and the Cambodian Government, the ILO
monitors 185 factories for compliance with Cambodia’s labour laws and ILO core conventions.
162. This process began in June 2001 and the first report will be published on the ILO website in
October.  This report will be used as input into the US government’s assessment of labour conditions
in Garment factories and quota determination.  Sources of funding for the ILO project are the US
Government ($1 million), Cambodian Governme nt ($200 000) and the Cambodian Garments
Producers Association ($200 000).WT/IFSC/W/12/Add.2
Page 46
163. An argument often used to allay concerns about the lack of market access of least developed
countries (LDCs) to industrial country markets is that garment quota arrangements and preferential
schemes such as generalized system of preferences (GSP) are especially designed to help these
countries sell their products in industrial country markets.  There is evidence, however, that the US
garment quota arrangement has restricted Cambodia’s ex port growth to the US.  In this regard, there
are two important notes.  First, it is important to note that while the US made Cambodia a beneficiaryunder its GSP regime, this scheme specifically excludes textiles and garments from the list of goods
that are subject to low or zero tariff rates.  Thus, Cambodian garments (both quota and non-quota
garments) are therefore subject to the higher MFN tariff rates, averaging 17 per cent for Cambodian
export garments.  Second, the annual easing of the quota of up to 20 per cent during the agreement
period is less liberal that it first appears.  In fact, the largest annual relaxation in quota restrictions so
far has only been 15 per cent in 2001 — the guaranteed 6 per cent annual increase and a 9 per cent
increase for progress on labour standards.
164. The 15 per cent easing of quota restrictions in 2001 falls short of the annual increase in
Cambodia’s exports of these items to the US in the few years leading up to the quota restrictions
(table 6.2).  Further, quota utilization rates for some of the major categories are high indicating that
quotas on these items are binding.  Table 6.2 report s the quota and utilization rates for each category
from 1999 to 2001.  In 2000, four of the 12 categories had relatively high utilization rates of whichtwo of these categories (338/339 and 347/348 and 647/648) are by far the largest quota items.  In
response to ceilings on export expansion in these items, Cambodia’s garment producers increased
exports to non-quota items.  Evidently, total exports in non-quota items increased from
US$82.6 million (or 16 per cent of total garment exports to the US) in 1999 to $229 million (31 per
cent of total garment exports) in 2000.  For the first 7 to 8 months of 2001, exports of garments notcovered by quota amounted to $198 million or 41 per cent of Cambodia’s total garment exports to the
US.  Rapid growth in the non-quota items indicate that Cambodian firms remain competitive against
US production and other competing imports of these items, even though Cambodian exports are
subject to MFN tariff rates.
6.2 Cambodia’s exports to the US markets
Category Quota Utilization rate
             $              %
1999 2000 2001 1999 2000
331/631 (Dzs-Prs) 1 300 000 1 281 945 990 093 92 65
334/634 (Dzs) 180 200 197 030 208 852 96 73
335/635 (Dzs) 68 900 82 680 83 989 50 67
338/9   (Dzs) 2 900 000 2 956 000 3 071 350 99 99340/640 (Dzs) 795 000 1 001 700 969 105 63 75
345   (Dzs) 99 640 125 546 121 461 57 104
347/8 & (Dzs) 3 600 000 3 427 800 3 685 620 100 96647/8
352/652 (Dzs) 636 000 541 961 494 833 60 43
438   (Dzs) 96 300 108 703 100 127 96 69445/446 (Dzs) 116 600 133 320 129 043 52 48
638/639 (Dzs) 954 000 1 043 100 1 105 686 88 87
645/646 (Dzs) 171 952 301 507 260 743 14 43Total value of garment exports
covered by quota (US$million)434 520 282
 a
Total value of garment exports not
covered by quota (US$million)83 229 198 a
% share of total exports to US (16%) (31%) (41%)
Total exports 517 749 480a
a First 7 months of 2001.
Source :  MOC 2001.WT/IFSC/W/12/Add.2
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165. In response to domestic pressure, large international buyers now carry out their own
continuous assessments of labour conditions in their suppliers’ factories.  In addition, the international
accounting firm PriceWaterhouseCoopers carries out a regular Social Compliance Audit for several
large US and UK buyers.  This scrutiny has the effect of raising or consolidating worker returns and
conditions for those workers with jobs but there have also been some perverse effects on the most
vulnerable workers in Cambodia — young women.  In recent years, foreign media has accused anumber of Cambodian garment factories of using child labour.  A British documentary screened in
2000 accused a Cambodian garment factory of employing child under the age of 14 years.  As it
turned out, the girl was 18 years and there were counter-allegations that the journalist paid the young
women to make the claims (see Asia week, 22 December 2000).  The result of these accusations, and
pressure from their major buyers, has had the effect of encouraging factory managers to dismiss
workers and reject job applications from women who are believed to be under 18 years of age, even
though the legal working age in Cambodia is 15 years.  This means that a large segment of the labourforce is excluded from participating in the most productive and relatively high paying jobs in
Cambodia and to prevent them from escaping poverty.
2. European Union access
166. Cambodia’s second major destination for garments is the European Union.  In 1993, the EU
established trade relations with Cambodia on a MFN basis; that is tariffs applied to Cambodianexports were no less favorable than exports from other countries.  There were no additional
restrictions on Cambodian exports, because at the time Cambodian exports were negligible.
However, with exports to EU rising and especi ally concerns over third country garment exports
entering the EU under fake Cambodian rules of origin (ROOs) certificates, a new agreement came
into force in April 1999.  This agreement promised not to restrict market access for Cambodiangarment exports for three years; that is, Cambodian exports have access to the EU without duty or
quantitative restrictions.  Garments to the EU subsequently increased from $51 million in 1999 to
$221 million in 2000.
167. Special incentive arrangements covering labour and environmental protection also applied,
which provided for an additional preferential margin awarded based on compliance.  As of5 March 2001, the ‘Everything but Arms’ amendment to  the EU GSP scheme grants unrestricted duty
free access to all products originating in least developed countries excluding arms.  While the scope to
offer additional margins no longer applies comp liance, international labour and environmental
standards is a general requirement of GSP status.
168. However, unrestricted access to the EU re quires Cambodia to observe stringent ROO
requirements.  One of the conditions for GSP access to the EU market is that Cambodia has to observe
a ‘full makeup’ rule of origin when exporting to EU destinations.  This means that to qualify as being
of Cambodian origin, garments have to be processed in Cambodia from yarn in the case of knitted
items, or from uncut fabric in the case of all other items.  The Cambodian government implemented
this ROOs by requiring exporters to prove that locally generated value added was greater than the cost
of imported fabric or yarn.  In principle this restrictive ROOs was relaxed when Cambodia joined
ASEAN in 1999, which now permits garment producers to source fabric and other textile productsmade in other ASEAN member states under the EU  cumulative origin provisions of the EU-ASEAN
bilateral trade agreement and, thus, retain its G SP concessions.  However, the Cambodian government
continued to require exporters to prove that locally generated value added was larger than the cost of
fabrics.  This unnecessary strongest ROOs requirem ent mainly came out of the government’s concern
that third country exports using fake Cambodian labels could undermine Cambodia’s ‘preferences’ tothe EU.  The government has recently relaxed this requirement and now only requires exporters to
present the ASEAN fabric suppliers’ GSP certificate as proof that the fabric originates from another
ASEAN Member State (see box 6.3).WT/IFSC/W/12/Add.2
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169. Another constraint on exports to the EU comes from a policy of the Cambodian Development
Commission itself.  The CDC prohibits garment producers without its approval from participating in
the EUs outward processing trade.  Outward processing trade involves EU firms ship and cut parts to
low cost countries for assembly and subsequent re-e xport to the EU.  The CDC is of the view that this
trade will not develop the local industry.
6.3 Documentation procedures for garment exporters
As part of the licensing process the exporter must obtain a Certificate of Processing from the Ministry of
Industry, Mines and Energy as proof that the garments are made in Cambodia.  Ministry officials will visit thefactory to verify origin.  In the next step, exporters obtain a Certificate of Temporary Authorization to Export
from the GSP division at the MOC.  Officials do not carry out verification of origin at this stage.  The stated
purpose of this is to speed up export facilitation.  Both Camcontrol and Customs carry out a pre-shipmentverification of exports at the factory premises and issue a certificate of inspection.  Containers are then permittedto leave Cambodia before the Certificate of Invoice or Origin is issued.  All documents are sent to the GSPdivision at MOC for issuance of Certificate of Invoice if garments are exported to the US and Certificate of
Origin if exported to EU.  Exporters supply detailed cost and price data to GSP for calculating local content.
Based on these calculations, the GSP division issues the appropriate Certificate of Origin.  For exports to the EU,
Form A is issued if the shipment satisfies the EU ROO (and therefore entitled to GSP status in EU market) andForm N if garments do not satisfy required ROO (thus, subject to MFN rates from EU).  Under the EU bilateralagreement with ASEAN, fabrics sourced from other ASE AN member countries are treat ed as local content.  In
this case, the garment exporter is only required to produ ce a copy of the fabric supplier’s GSP certificate as proof
that the fabric originates from ASEAN.  If the fabric is sourced from non-ASEAN/EU suppliers, then the
garment producer must observe the ‘full makeup’ rule.  The MOC implements this rule by requiring garmentproducers to prove that locally generated value added exceed s the cost of imported fabric. If exporting to the EU,
the exporter must also obtain an export license form the Department of Foreign Trade at MOC.  The Minster of
Commerce must sign both the export license and the GSP from on the same day.  The Cambodian governmentcontinues to insist that garment producers meet EU ROOs  and have an export license even though they are not
required if the garment producer is not requesting GSP.
Overall, the documentation process is cumbersome comp ared to other exporting countries such as Indonesia.
There appears to be no reason why the Ministry of Industry, Mines and Energy participates in the approvalprocess.  Camcontrol’s functions essentially duplicate Cu stoms area of responsibility.  This process is costly and
time consuming. As it is heavily dependent upon the physical inspection of shipments by three agencies, and is
thus very much open to abuse by petty officials.  One reason for this elaborate licensing procedure was in
reaction to EU and US concerns about third-country garment exports arriving at their ports using forgedCambodian certificates.  Apparently, just after the US bilateral agreement with Cambodia came into force, about700 forged Cambodian certificates were submitted by US im porters to clear shipments at US ports, which had in
fact originated from China.  This problem has been largely addressed with the recent introduction of the
electronic visa identification system to the US (kno wn as ELVIS) and EU.  Under this system, the MOC
electronically transfers information on certified shipments of  garments to the US customs, which is then able to
identify fake Cambodian exports arriving at US ports. According to MOC officials, since this system wasimplemented early in 2001, US custom complaints about fake shipments have virtually ceased.  A similar systemhas been implemented for exports to the EU.
C. RETURNS FROM PREFERENCE SCHEMES AND DISTRIBUTION OF THESE RETURNS
1. Impact on export revenues of preferential access
170. Returns from exporting to restricted markets are attractive for current exporters because they
mean access (albeit restricted) to the US market where prices are much higher because of restrictions
which all exporters to the US face.  Thus, while US consumers lose and garment-producing countries
lose in general these losses are offset to some extent in those garment-producing countries that secure
some access.  The size of this offset is determined by the prices on the US and EU market, the duty
applied, the prices that would be received on other next best markets and quantities sold on thispreferred market.WT/IFSC/W/12/Add.2
Page 49
171. This value is sometimes called a rent.  Estimating the value of this rent is not easy, as it
requires comparison with the actual prices producers receive for their exports under the restricted
access arrangement with prices they face in other next best markets — that is, the prices they would
have received for products sold under quota.  However, with some strong assumptions and simple
manipulation of existing data from the quota auction it is possible to make illustrative estimates of
quota rent value.  According to data from MOC, total exports under quota were $520 million in 2000(or utilized quota).  Assume that the government auctioned 10 per cent of this amount, this would be
equivalent to $52 million of the utilized quota.  According to MOC, revenue received from quota
auctions in 2000 was $4.5 million or 8.7 per cent of export quota auctioned.  Assuming quota rent to
the US is approximately worth 8.7 per cent of quota exports to US of $520 then the imputed value of
the quota rent to the US would be $45.2 million
172. Does access to preferential, but not quota markets, have a rent value? For the EU market a an
estimate of the value of access at zero tariff would be the quantity sold at duty free prices multipliedby the MFN rate.  In 2000, exports to the EU were $221 million.  The average EU MFN rate is about
8.8 per cent.  Thus, the maximum ‘rent’ possible would be $19.9 million ($221 million times 8.8 per
cent).  The question then becomes: what proportion of exports to the EU was subject to zero tariff? It
appears that this could be a relatively small share around 10 per cent and that most exports to the EU
are subject to the MFN rate.  If this is the case, the ‘rent’ on the EU market would be around
$2 million.  Again, this exercise warrants further deve lopment.  The initial estimate of rent also raises
the question of treatment of garments sold on the US market out of quota and at MFN prices.  In this
case as other competitor countries still face quotas, Cambodia’s access at MFN rates would be of
extra value depending on the price raising effect of quotas inhibiting exports from other countries.
Taking these qualifications and unknowns together it appears that the value of rent is at least$45 million and more depending on the value of preferential access.
2. Other impacts of preferential access
173. While these returns, or rents, appear to be a valuable consideration, this apparent ‘good deal’
needs to be qualified as follows.
• Preferential access can encourage specialization in products where there is no
comparative advantage.
• The allocation of the benefits of preferential access can create inefficiencies, which
hurt competitiveness.
• Granting of preferences depends on the existence of continuing protection in
developed country markets.
Specialization in activities unsuited to the economy
174. An example where preferential access has encouraged continued production in inefficient
areas in the preferential access the EU accorded Caribbean banana production.  In this case, Caribbean
countries produced bananas, not because they were suited to doing that, but mainly because of the
preferential access (see box 6.5).  In Cambodia’s case, it appears clear that garment production is well
suited to the present stage of development.
175. The success of the garment industry in Cambodia is a barometer for attracting other Foreign
Direct Investment (FDI).  Typically, the garment industry is one of the first manufacturing export
sectors to develop in a low-income country.  In part, this is because much garment production relies
on low cost labour, but also because of the perceive d high risks of operating in developing countries
that often delay other types of investments, especially those that require significant outlays in capital
and or human resources.  In particular, one of the long-term benefits of the garment industry forWT/IFSC/W/12/Add.2
Page 50
Cambodia is that it acts as a platform for creating a pool of productive workers for new FDI.  There
are early indications of this already happening as demonstrated by the recent entry of footwear
producers in Cambodia.  For these reasons, foreign investors watch the success of the garment
industry before deciding to invest in that country.  In other words, success breeds success.  Investors
are particularly concerned about government regulations and ‘hidden’ taxes that increase the costs of
doing business in a country and uncertainty in the policy framework.WT/IFSC/W/12/Add.2
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6.4 The benefits and risks of preferential arrangements
The growth of Cambodia’s garment industry is remarkable and well known.  That an industry could grow from
virtually zero activity in 1996 to some 200 factories and 150 000 jobs in 2001 would be little short of spectacular in
any country let alone one which during the period in ques tion went through a period of political upheaval, and is
widely considered to have run down infrastructure, poor if not corrupt administration and a poorly educated labour
force.  People might draw several lessons from this experience.  One is that despite all the problems that go withbeing a developing country, the obstacles to rapid development in Cambodia are not overwhelming.  That would bea sensible lesson.  A second lesson might be that this rapid development only happened because of tradepreferences, and that in this case the trade preferences from the US and Europe were useful forms of aid.
This would be a surprising conclusion and not in acco rd with the general experience with preferential trade
arrangements, which generally shows them to have a range of effects.  Consider for example of preferential quotarestricted access accorded by the EU to imports of banana s from Caribbean countries.  The main effects of this
policy are as follows.  First, quota restrictions drive up the EU common price doubling the world price.  Second, the
EU imports many bananas (40 per cent of all internationally traded bananas) so it costs EU consumer a fortune —about $2 billion a year due to the higher prices.  Third, not much of this $2 billion reaches recipient countries —
about $150 million a year — so if you think of it as aid it is very expensive aid.  Fourth, one reason why so little aid
gets through is that it is appropriated along the way — in the first instance by large buyers and eventually by being
built into marketing and production cost structures.  Fifth, other banana producing countries — mainly developingcountries in South America – suffer (loses of $149 million per year) because their access to the EU market remainsrestricted.  The Mauritius sugar story is another example of trade preferences going wrong.  Mauritius sugar exports
have preferential access to the EU.  As a result Mauritian sugar producers receive prices that are on average double
the world price. But far from being a blessing for the Mauritian industry, these preferential arrangements havedirectly led to a high cost and ossified industry. In or der to allocate the ‘benefits’ of the preferential access Mauritius
has enacted laws which restrict the way land and labour is used. And the Mauritian sugar industry is returning at aloss. It also appears to be imposing costs on other industries.
Currently Cambodia is a poor country.  Wages are low.  This should be one basis for its capacity to attract
investment and ideas from abroad. While the minimum wa ges and other costs arising from ‘appropriate compliance’
with labour standards might be a way of redistributing some of the value of preferential access to some labour in theshort run, in the long run, there is a risk that Cambodia will become a high cost producer in one of the areas where itis most likely to have a comparative advantage at this stage of development. If the lessons from other developingcountries are a guide, this is a real risk.
One of the issues worrying policy makers in Cambodia is what will happen in 2005 when restrictions of major
developed countries on garment imports are phased out.  When this phase out was negotiated as part of the UruguayRound Agreement on Textiles and Clothing (ATC) it was expected that it would be a boom to developing countriessuch as Cambodia. No longer would the costs arising fr om the intricacies of quota allocation involving arcane
definitions of ROO and the like be borne.  Demand for garments would grow as prices in the US and Europe fell and
uncompetitive production in these countries ceased. And demand for other goods which might also be produced by
developing countries might also grow as consumers started to spend some of the money saved by having access tocheaper garments.
So 2005 and the loss of preferential access is not necessarily a matter of doom and gloom for Cambodian garment
producers (Van Sou Ieng 2001).  It will only be that if Cambodia has come to have a cost structure built around
preferential arrangements and so is unable to compete in unrestricted markets.  Given the relative youth of
Cambodia’s garment industry, flexible production and low cost structures ought to be within reach.  Perhaps abigger risk is that the relatively slow adoption of the ATC and the propensity of the major importers to adopt otherbarriers to trade, will mean that come 2005 restricted market access arrangements will still exist.
Sources: A. Stoeckel and B. Borrell, Preferential Trade and Developing Countries: bad aid, bad trade, Rural Industries Research
Development Corporation (RIRDC) 2001.Van Sou Ieng 2001, The Future of the Garment Industries Post 2005, Globalisation Conference Business and Law Perspectives,
Ministry of Commerce, Phnom Penh, 27 June 2001.
Effects on efficiency
176. There are concerns that inefficiencies in some existing institutional arrangements — such as
relatively high minimum wages, restrictions on work shifts, unofficial taxes — as well as regulatoryWT/IFSC/W/12/Add.2
Page 52
compliance costs are raising the cost structure of the garment sector.  While legal minimum wage
rules may benefit existing workers in the short-term, they can put expanded employment in the
industry at risk, if preferred markets cease to exist by creating a cost structure that is only viable with
preferences.  Further, by putting in place permanent institutional rigidities the development of other
potential export sectors is also at risk for the same reasons.
177. One way of looking at how these inefficiencies raise costs is to examine how the rents from
the preferences estimated above are allocated among different stakeholders.  In principle, distribution
of rents among different stakeholders is not undesirable if the allocation is done in a way that is low
cost whereby few or no inefficiencies are created. One common example of this low-cost way of
capturing rents is the competitive auctioning of quotas.  Indeed, governments in many countries
competitively auction rights to fisheries and log quot as.  This approach has the advantage of capturing
rents and discouraging inefficiencies.  However, if rent appropriation activities raise costs of doing
business in the economy then this would adversely affect competitiveness.
178. In Cambodia, both low cost and high cost ways of capturing garment quota rents exist.  In this
construction, three stakeholders are capturing the quota rent; government including government
officials; workers and garment producers.  The Government has implemented a flexible quota system
for these categories whereby about 80 per cent of the quota has been allocated to firms operating in
Cambodia in 1998 based on their past export performance and production capacity.  Up to ten per centcan be allocated to exporters as a reward for cu rrent export performance and compliance with the
country’s labour laws.  The remaining 10 per cent or more is auctioned to garment producers through
competitive bidding carried out under the auspices of the MOC.  The general view among garment
producers and industry analysts is that the auction is done in a transparent manner.
179. Three different taxes apply.  These taxes are in part fees for services but to some extent may
also capture rent.  They include:
• the visa fee amounting to $10 million on exports to the US;
• minimum turnover tax on quota exports to US amounting to $5.2 million;  and
• Camcontrol inspection fee of 0.1 per cent amounting to $.53 million on imports of
fabrics and exports of garments.
180. Based on this approach, the total rent captured by the government amounts to $20.23 million
or 44 per cent of our estimated rent value. The bureaucracy also captures rents in the form of
‘unofficial’ or ‘hidden’ taxes and facilitation payments.  According to recent reports, thesebureaucratic costs are around $70 million (CLDRC 2001). This would mean that bureaucratic costs
completely swamp quota rent.  Another estimate of bureaucratic costs is based on the Trade
Facilitation section, where it was estimated that informal costs of exporting garments amounted to
between $110 and $150 per container consisting of $30 000 (f.o.b.) worth of garment exports, plus
formal costs of $138 per container.  At say informal costs of $130 per container the estimate of totalinformal trade facilitation costs to the garment sector would be around $4 million. Clarification of
these widely different estimates requires further study.
181. A second group that benefits from the rent is garment workers.  The government increased the
minimum monthly wage from $38 to $50 (including the additional $5 monthly bonus for full
attendance).  Assuming 120 000 workers the additional cost of the increase in minimum wage wouldbe $17.3 million.  This could be considered as to a transfer from producers to workers.  However,
some of this transfer was gathered in by job brokers.  Evidently, to secure a job garment workers must
pay job brokers, usually security guards or shop stewards.  According to one survey of garment
workers, 50 per cent of all workers paid an averag e fee of $38 in 1999 to secure their jobs (CDRIWT/IFSC/W/12/Add.2
Page 53
2000).  The same survey found that 57 per cent of these workers had to take out a loan (from informal
lenders) to pay the fee (see box 6.6 sharing the benefits of market access).
182. While garment factory owners condemn such a practice, according to the survey, no workers
were willing to make a complaint to  the owner in fear of reprisals from brokers.  However, since the
regulation of minimum wages and bonus system has been increased, a young person seeking a job in
the garment factory in 2000 must find up to $120 as a payment to security staff or a shop steward.In 2000, more than 30 000 new jobs were created in the garment sector.  Assuming that 50 per cent of
these new workers had to pay a fee of $120 to brokers to secure their jobs, then the capture of rents by
these brokers could have been $1.8 million, and as much as $3.6 million if all 30 000 new workers
had to pay a fee.  In any case, the $120 brokerage fee is equivalent to 84 per cent of the increase in the
annual minimum wage of garment workers in 2000, indicating that brokers were capturing the bulk of
the additional rent designated for new workers in 2000.WT/IFSC/W/12/Add.2
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6.5 Sharing the benefits of market access
Bon San is a 20 year old Cambodian woman from Preah Vihear Province in the north of Cambodia. She is one of
120 000 young people who have come to Phnom Penh to work in Cambodia’s garment industry since garmentexporting took off in 1997.  At least 75 per cent of these young people are women.  Bon San’s life is difficult —
she has not been home to see her family since coming to Phnom Penh twelve months ago. She shares a small
room with two other women in a house not far from the factory.  She works six and sometimes seven days aweek.  The work is boring and repetitious.  And because Bon San works on a piece rate system, she is underconstant self applied pressure to perform.
Bon San is a hard worker, she has a good attendance reco rd and occasionally works overtime. When the factory
is busy she earns around $70 a month. Conditions in the factory are good, the lighting is adequate, there are fans
for cooling and there is a medical centre on site.  To secure the job Bon San’s family paid $30 to the factory shopsteward.  Since then her wages have risen following the regulation of minimum wages and a bonus system.  Nowa young person seeking a job in a garment factory must find $120 as a payment to security staff or a shopsteward.  This fee, plus transport and living for a month without salary, is way beyond the means of mostfamilies in Bon San’s village.  For them, the investment to get a family member into garment work is now as
forbidding as it would be for an American family  to send a child to an Ivy League school.
Bon San is sometimes confused about whether she owes her relative good fortune to the Singapore company that
owns the factory, or to its manager or to the various inspectors that regularly visit.  Some of these inspectors arefrom the Ministry of Social Affairs, Labour, Vocational Training and Youth Rehabilitation.  Others are from the
Project on Monitoring the Working Conditions in the Garment and Textile Factories and others again are
representatives of big name US buyers. These people seem very concerned about her welfare and from time totime ask if she is happy and whether she has any problems with management?
Bon San sometimes thinks what a pity it is that these caring people have not been to her home village to insist on
such good conditions for the young people there. It is in  villages like this where over a million young Cambodian
people live in real poverty. Their chances to get work are erratic and seasonal and might involve spending days
up to their knees in water bending over to plant paddy. One of Bon San’s brothers works on a fishing boat.  Thehours are long and the work is dangerous. Another brother stokes boilers in a brick works.  It is a long time sinceBon San has heard from him and she sometimes worries that he has been maimed or killed.  She also worriesabout her 17 year old younger sister Povi. Povi spends about half her time either planting or harvesting rice.  Therice is for family consumption and Povi barely knows what money is for. When she is not working in the fields,
Povi spends most of her time sitting and waiting on a cane bench in the open area under her family’s house. Povi
would gladly come to work with her elder sister and at 17 years she is legally entitled to do so. But since aforeign TV program claimed a leading garment producer was employing people younger than 16 years,producers have steered well clear of anybody under 18 years old.
What about Bon San’s puzzle as to why she, who is relatively well off, gets inspected so much when others
much worse off never get inspected at all?  One explanation for this puzzle is that Bon San’s wages and workingconditions are part of a deal.  Her employers gets restri cted access (for goods they produce out of Cambodia) to a
protected and therefore high priced market, provided that Bon San and her workmates enjoy good wages andworking conditions. Is that a good deal for Bon San?  The answer in the short run is probably yes.  But it is notsuch a good deal for Povi, who has no real job. If Bon San’s bosses had lower costs, that is, could pay lower
wages, and run night shifts without paying double time they might be able to better compete on non preferred
markets and so invest more, expand output and employ young people like Povi.  And in the long run, the goodwages and working conditions would not be so good for Bon San either if preferential markets were to go andproducers were to move out of Cambodia because costs of operating were higher than in other countries.
183. There are also regulatory compliance costs that reduce rents accruing to producers. Many of
these costs are difficult to quantify. For example,  garment producers incur costs (for example, staff
time) to obtain appropriate documentation to export including the complicated, cumbersome process
of obtaining certificates of ROO for exporting to the EU and US markets.  The cost of monitoring
labour standards in garment factories is another cost of regulatory compliance imposed on garment
factories, as garment producers are required to contribute funding to this project.  Under the US-Cambodian garment agreement, the ILO is responsible for monitoring labour standards in the
Cambodian garment industry.  To this end, the Cambodian Garment Monitoring Project in PhnomWT/IFSC/W/12/Add.2
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Penh was established jointly between the ILO, the Cambodian government and the Cambodian
Garment Producers Association.  The Cambodian government contributes $200 000, the Cambodian
Garments Producers’ Association contributes the same amount and the US government provides
funds up to $1 million for the project.  This can be seen as not so much transfer of rents but a
dissipation or waste of rent.  It is frequently the case that buyers or agents in importing countries
gather some rent.
184. This allocation of rents may be sustainable in the short-run while existing producers have
preferential access to the EU and US markets and sufficient rents exist.  However, the quota system is
due to be disbanded in 2005 and garment producers will have access to the US market on equal terms
with all other competitors, thus any current rent s will be dissipated through competition in the US
market.  The most efficient competitors will gain market share and employment at the expense of less
efficient producers.  The preferential trade arrangements, resulting labour policy outcomes, and other
inefficiencies may risk future growth in the ga rment industry as well as other potential labour-
intensive, export growth sectors by creating a rigid, high cost structure that is only viable with
preferential schemes.
185. Cambodia’s minimum wage of $45 per month (for garment worker) based on a 48 hour
working week is higher than those in most other competing countries in the region (for example,
Bangladesh, India, and Indonesia), but below rates prevailing in more developed neighbouringcountries such as Thailand (table 6.7).  There is tentative evidence that minimum wages are pushing
up market wages in the garment sector.  The minimum wage makes it difficult for managers to use
pay schemes as a means for promoting productivity.  For instance while piece rates are still common,
in some cases some workers elect to simply take the minimum wage.  Yet, piece rate systems provide
opportunities for efficient workers.  Consequently, managers need to supplement the minimumguaranteed wage with additional incentive schemes.  According to a recent survey, average monthly
wages are about $61, although evidently garment workers can earn up to $80 per month with over
time.
6.6 Working hours and wages in the garment industry in selected Asian countries
Country ration YearLegal hours
of workMinimum wa ge
set by lawAverage salary
per monthHourly wage
rateMinimum wage
to avera ge wage
%
Malaysia 1995 48 none 296 1.42 na
China 1997 40 12-39 191 1.14 6-20Philippines 1999 48 130 182 0.88 71Thailand 1999 48 93-109 106 0.51 88-103Sri Lanka 1998 45 29-37 63 0.31 46-59Cambodia 2000 48 50 a61 0.29 82
Vietnam 2000 48 45 60 0.29 75India 1999 48 6-54 57 0.27 11-95Indonesia 2000 40 43 
b46 0.25 94
Bangladesh 1996 48 12-76 40 0.19 30-90
a for purposes of this table, the $5 full attendance bonus is included in the minimum wage rate.  b Minimum wage
in Jakarta.
Sources : Cambodian Development Research Institute, US Department of Labour and Bureau of International Labour
Affairs and the Indonesian Department of Manpower 2001.
186. There are growing concerns in the private sector that relatively high minimum wages and
other labour market restrictions risk reducing long-term competitiveness of the Cambodian economywith potential negative effects on modern sector employment growth and therefore poverty reduction.
For example, firms are normally only permitted to operate two shifts per day.  If one shift happens to
fall between 10pm and 5am, then the wage rate is double the normal rate.  Excessive restrictions onWT/IFSC/W/12/Add.2
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operating night shifts could create inflexibility in the production and service sectors.  This is
particularly important in the garment sector where factories often have to meet short deadlines for
delivery, particularly during the peak season.  Night shifts are also an integral part of the service
sector, particularly the tourist and catering industries.  However, managers complain that these
restrictions make it costly to provide over time and employ additional workers for night shifts.
Labour laws in most other countries, including many developed nations, do not restrict firms fromoperating a night shift.
187. Experience of other countries that have implemented relatively high minimum wages show
that there are both short term and long term effe cts on employment growth and poverty.  In the short
term, one effect is to raise wages for people who have a job.  Another short-term effect is to create
opportunities for people allocating jobs to charge fees as discussed in section 4.  In the long term,
however, relatively high minimum wages risk reducing the competitiveness of the modern economy,
by making the country’s production high cost so that it is only profitable to operate in restrictedmarkets and thus vulnerable if those markets go.  In early stages of development, low cost labour is a
powerful source of comparative advantage.  Tamp ering with the price of this labour by way of
minimum prices has frequently spoiled this source of comparative advantage.  The experience of
several Latin American countries demonstrates that setting minimum wages above market clearing
wages leads to greater segmentation of the labour market into a protected high paying formal sectorcharacterized by relatively slow employment growth and increasing concentration of workers in the
low productive and paying informal sector (see box 6.7).WT/IFSC/W/12/Add.2
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6.7 Effects of minimum wages on employment: evidence from other developing economies
There are two clear and divergent views on the impact of minimum wages on labour markets in developing
economies.  One view is that minimum wages redistributes resources in a welfare enhancing way, and as suchhave the potential to reduce poverty, enhance productivity and foster growth.  The other view is that minimumwage intervention leads to depressed wages where most of the poor are found - in the informal urban sectorand in the rural sector.
If these are the divergent views, what is the evidence?  A number of developing countries have applied
minimum wage legislation.  These ‘experiments’ provide a growing body of evidence that setting minimumwages close to or above the market-clearing wage does have an adverse effect on employment growth in themodern sector and can undermine efforts to reduce poverty in the long term.  Recent research in LatinAmerica, for example, shows that setting relatively high minimum wages has created a protected high paying
formal sector characterized by relatively slow employ ment growth and increasing concentration of workers in
the lower paying informal sector.  Relatively high minimum wages increase the cost of structure of the labour-intensive industrial sector thereby making it internationally uncompetitive and, thus, reducing long-termeconomic growth.  In contrast to the Latin American experience, many Asian labour markets are relativelyflexible - particularly with respect to wages.  Malaysia and Singapore do not have minimum wage legislation.
Korea has a minimum wage rate for workers as a social safety net policy, but this is set well below market
wages.  Consequently, there are relatively small differentials in wages, labour costs and productivity betweenmodern and quasi-traditional sectors.  Much of the modern sector is internationally competitive because theyuse the country's most abundant resource, labour, more intensively.  Relative to per capita income, a high shareof labour is involved in the modern sector compared to many Latin American countries.
Mexico and Columbia are two countries that have cont rasting wage policies.  Columbia implements a high
minimum wage policy whereby minimum wages are around 50 per cent of unskilled workers' market wages.Mexico has adopted a more flexible approach, whereby minimum wages are set well below prevailing marketwages (about 30 per cent of average wages of blue collar workers).  A recent study found substantialunemployment effects of minimum wages in Columbia, where the impact is greatest on low skilledemployment.  A 10 per cent increase in minimum wages reduces employment by 3 per cent for unskilled
workers and 2 per cent for skilled workers.  In contrast, minimum wages had no impact on employment in
Mexico because minimum wages there are too low to have  any effect.  Recent evidence for Indonesia suggests
that minimum wages are beginning to adversely effect employment.  Indonesia has had a minimum wagepolicy since the early 1980s; however, it was not until the early 1990s that the government began to vigorouslyimplement the wage policy.  A recent study estimated the effect of rapid increases in minimum wages ondifferent types of workers and found substantial unemployment effects for women, young people, and
unskilled workers.  A 10 per cent increase in the minimum wage reduced employment of women and young
workers by 3 per cent; unskilled workers by 2 per cent and factory workers fell by 1.4 per cent.
These findings have important implications for poverty reduction strategies.  While in the short term, increases
in minimum wages benefit those workers who have jobs, in the long term, high minimum wages reduce
employment opportunities in the modern sector, crowding workers in low productive, low paying jobs in the
urban informal sector and the rural sector.  The workers most affected by high minimum wages are those thatare most vulnerable to poverty such as women, especially single women heads of households and youngwomen, and unskilled workers.
3. Positioning for unrestricted market access
188. The barriers to imports of garments and textiles  that confront all countries wishing to export
to the US and the EU are scheduled for dismantling by 2005.  One of the adjustment problems
looming as that happens will be the need for firms that have depended on those barriers to adjust.This obviously includes domestic firms attempting to operate labour intensive activities in wealthy
high wage countries.  Paradoxicall y adjustment might also be a problem for exporting countries which
have had cost blowouts because of the way preferential access has been allocated.
189. Cambodia faces a choice at this early stage of its economic development: Should it go the
East Asian or Latin American route in terms of  the structure of output, employment, wages andWT/IFSC/W/12/Add.2
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income.  The choice will be mainly determined by policies related to trade in goods and services.
However, policies towards labour can also be important, as in the case of Latin America illustrates.
International experience suggests that it can take d ecades to reverse the political processes that lead to
the creation of a small, elite and protected work force, which inhibits modern sector job expansion.
To some extent, Cambodia’s approach to labour policy is constrained by its exchange rate system.
Cambodia is a highly dollarized economy and is likely to remain so for some time yet.  With adollarized economy, Cambodia does not have the option to devalue its currency whenever there is an
external shock to the economy.  Adjustment in the economy will need to come through prices
including wages.  This is what happens in Hong Kong.  A vigorous implementation of minimum
wages would slow wage and price adjustment and as a consequence unemployment persist.  This
problem has characterized the Argentinean economy during the last three to four years.
190. While the government is concerned about providing basic protection of workers, raising
wages independently of output and productivity is not a proven recipe for investment and growth.The interests of all those workers outside the modern sector is threatened by attempting to push
increases in wages more quickly than productivity increases in the modern sector especially given
competition in highly competitive export markets.
191. The greatest improvement in the incomes and welfare of workers will come through
providing them with more productive jobs through the growth in both modern and informal sectors.Raising productivity in agriculture is important for employment and wage improvements.  However, it
is the transfer of workers out of these sectors into more productive activities, many of which are
associated with modern sector growth, which offers the prospect of greatest improvements in incomes
and poverty decline.  It is important to have policies for supporting a growing and internationally
competitive modern sector in an employment friendly development strategy.  Both domestic and FDIare important in this context.
VII. TOURISM
A. B
ACKGROUND
192. Cambodia is one of only four LDCs in the World with tourism income exceeding
US$100 million per year.  Located in the center of the fastest growing tourism region in the world,
Cambodia is positioned to gain from tourism through:
• long term employment opportunities for a young, growing population;
• constant demand for high quality handicrafts and locally produced goods;
• year round demand for Cambodian grown fresh fruits and vegetables to supply hotels
and restaurants; and
• permanent and growing tax base from which to support infrastructure development,
finance Ministry of Tourism (MOT) tourism promotions, and expand private-public
sector partnerships.
193. Tourism is a re-emerging industry rather than a new one for Cambodia.  During the 1950s and
1960s, along the southern shorelines near Kompong Som and Kompot, Cambodia was a popular year
round tourist destination.  Thirty years of civil war destroyed most of the infrastructure connecting
tourist destinations and all but eliminated the social capital and hospitality skills required by a fastgrowing tourism industry.  On a more positive note, the closed borders resulted in the preservation of
much of Cambodia’s natural beauty.  Dozens of Khmer temples remain hidden in the jungles,
untouched for centuries, and Cambodia’s vast forest s are considered the best in Southeast Asia.WT/IFSC/W/12/Add.2
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194. More recently, Cambodia has experienced tourist growth rates averaging nearly 30 per cent
for each of the past two years.  While most of th is sudden growth can be attributed to the release of
pent up tourism demand.  Cambodia’s innovative private-public sector partnerships have facilitated an
effective supply response.  Recent decisions by the government, with the support of airlines and
tourism related businesses, have created economic incentives for local and foreign investors to build
hotels, establish tour and travel agencies, open a variety of restaurants, and bring moderntransportation to Cambodia.  The open skies policy encouraged regional airlines to fly directly to
Siem Reap and allowed the magnificent temples of Angkor Wat to become available to a much
broader set of tourists.
195. The tourism business in Asia, especially the Greater Mekong Subregion (GMS) is highly
competitive, and strong and capable competitors surround Cambodia.  For example, in 2001
Cambodia expects about 500 000 tourists (MOT 2001).  Thailand, with 50 years of tourism
experience, a skilled work force, world famous beaches and entertainment, and internationallyrecognized tourism promotions, is expecting more than 5 million tourists and continued 10 to 15 per
cent annual growth rates.
1. Extent of economic leakage
196. Economic leakage is high in Cambodia, as it is in other LDCs that lack an industrial and
agricultural supply industry.  It is estimated that up to 75 cents of each tourist dollar is returned toThailand or Vietnam to import fresh vegetables, fruits, flowers, handicrafts, paper products, and
furniture (Jameison W. 2001).  National and local initiatives aimed at improving the production of
high quality agricultural and handicraft supplies would help retain the economic value of tourism.
The development of a smallholder agricultural industry to produce high quality vegetables, fruits, and
flowers supplied to hotels and restaurants, and the development of a high quality handicrafts industry
are two fundamental industries that would help reta in and spread the economic benefits of tourism to
a much broader constituency, provide cash incomes, long term rural based employment, and ensure
that the maximum portion of each tourist dollar remains in Cambodia, thus increasing the in country
multiplier effect and benefit to the economy. Already Cambodian entrepreneurs are exploring ways of
better marketing handicrafts involving such things as packaging handicrafts to a consistent standardand establishing of handicraft villages.
197. There is concern among tourism commentators that Cambodia’s growth rates are not
sustainable and may begin to stabilize or decline soon.  They say that Cambodia is one of the most
expensive package tour destinations in Asia and the price to service quality value is low relative to
other GMS countries.  Some observers are concerne d about having 570 000 tourists arrive in 2001
without promotion or coordinated efforts by the MOT and private sector firms.  The fear is that the
industry will become complacent and fail to improve service quality or expand destination choices.
Complacency could result in the loss of focus necessary to continuously encourage private sector
investment, build long term social capacity and service skills, improve service quality, and promote
tourism with a passion.
198. How appropriate such concerns are only time will tell.  Until now there has been a remarkably
effective supply response facilitated by good airport infrastructure, an open skies aviation policy andapparently few barriers to entry for tourism support services such as buses, hotels, restaurant and
internet services.
2. Focus of this report
199. The research for this report included a lengthy literature review and interviews with MOT
officials, private sector businesses, and tourism industry experts.  Volumes of preparatory analysisand planning materials have been produced for Cambodia’s tourism sector because of UNDP
technical assistance in 1996 and more recently, the Asian Development Bank’s (ADB) TA 3454WT/IFSC/W/12/Add.2
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Tourism Project focused on building institutional planning capacity at the Ministry of Tourism.
ADB’s current project is broad in scope.  Some of the key components of its approach are:
• poverty alleviation through the formation of pro-poor development strategies and
action plans;
• gender mainstreaming and social equality;
• revenue capture by local communities;
• shareholder involvement in planning; and
• systematic development of private-public sector partnerships.
200. The ADB project identifies critical links in the tourism value chain, along with the
institutional needs of the MOT, and defines the need for private-public and stakeholder partnerships.The objective of this report is to identify how international trade linkages and private sector
participation can enhance tourism development, enhance the economic benefits, and assist
development agencies, the Cambodian government , and private sector firms to promote pro-poor
trade policies and development practices.  The report presents sector specific initiatives to further
develop business linkages, build social capacity, and promote competition and cooperation.
3. Industry snapshot
201. Table 7.1 provides a snapshot of the value Cambodia receives from tourism.  If current
growth trends continue, the tourism sector, which is supported by many service industries, could
become Cambodia’s leading contributor to GDP growth.
7.1 Selected tourism statistics
Statistical Category Published data
Tourist arrivals expected in 2001 570 000
Growth rate from 2000 30%
Annual growth rate expected for years 2001-2005MOT ~ 30%
ADB < 15%
Estimated tourism related employment 30 000 jobsDirect tourism related wage income $115 millionEstimated economic impact $650 millionTourism related businesses 2,423Direct tourism related investments $900 millionDirect tourism related taxes paid $50 million
Source : MOT 2001.
202. The tourism products currently offered in Cambodia are:
• cultural heritage tourism
• handicrafts, and
• festivals and events.
203. Products, which are proposed to be developed, include:
• village tourismWT/IFSC/W/12/Add.2
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• eco and nature based tourism
• adventure tourism, and
• coastal zone tourism.
B. PAST, CURRENT , AND PROJECTED RATES OF GROWTH
204. Cambodia’s tourism industry experienced a relative ly high average annual growth of 10 to 15
per cent from 1995 to 1999.  For 2000 and 2001, tourist arrivals have grown by 30 per cent each year.
MOT officials project tourist arrivals will continue to grow at a 30 per cent annual rate, resulting in
1.2 million tourist arrivals by year 2005.  The ADB consultants interviewed for this report estimate
tourism growth of 8 to 15 per cent per year for each of the next five years, resulting in 745 000 touristarrivals by 2005.  To provide relevance, an eight per cent growth rate is about twice the average
tourism growth rate of Asia and about four tim es the average worldwide tourism growth rate.
1. Can growth at these rates continue?
205. The two fairly well developed tourist destinations in Cambodia are the capital of Phnom Penh
and the temples of Angkor Wat located in Siem Reap.  Phnom Penh is currently under utilized as atourist destination and already possesses the hotel, restaurant, and travel agency capacity to host about
one million visitors per year.  Service quality is low and continuous investments are required to
develop human resource capacity and tourism infrastructure; improving service standards will take
considerably more concerted efforts.
206. Hotel operators in Phnom Penh report that occupancy rates are lower now than they were
before the events of July 1997.  As a result, several medium quality hotels recently closed.
Restaurants in Phnom Penh complain of only moderate profitability, but tour and travel agenciesreport a profitable and lucrative tourist business.
207. Tourism commentators believe continued 15 to 30 per cent growth rates will soon begin to
stress the service capacity of the hospitality industry in Siem Reap, and the road and other
infrastructure capacity of Angkor Wat.  As of 2001, Siem Reap has or is currently completing
7 200 hotel or guestrooms, and will require only about 500 more rooms before 2005 to meet a 30 percent growth rate.  Occupancy rates at most hotels and guesthouses were reportedly 30 per cent or
lower, except during the four high season months fr om January to April.  The number of international
and domestic flights arriving in Siem Reap is already capable of supporting about one million tourists
208. While it may be structurally feasible (that is, hotel rooms and airline seats) for Cambodia to
support tourism growth of 30 per cent, a few industry commentators feel that institutional servicequality levels may already be beginning to deteriorate.  This is a primary concern because once
tourists begin to experience low service quality while paying premium prices they will not return and
will tell others not to visit.  Recent data, obtained from discussions with hotel operators and members
of the private-public sector working group, suggest that the average lengths of stay and expenditures
per day have already begun to decline in Siem Reap and that many tourists are choosing to skipPhnom Penh entirely.  Therefore, while the numbers of tourists are increasing at double-digit rates,
the time and money each tourist is spending in Cambodia appear to be decreasing.
209. If Cambodian tourism firms and supportive government agencies collaborate to address
service quality issues promptly, begin to build a tourism supply chain that incorporates supplies from
local cost efficient producers, and diversify and promote tourist destinations to such categories as ecovillage, and adventure tourism, then perhaps accelerated rates of growth may be manageable and
attainable.WT/IFSC/W/12/Add.2
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2. Priority issues for tourism trade development
210. The following list of priority issues was identi fied in literature searches, through interviews
with tourism commentators, and in papers prepared by the Private-Public Sector Tourism Working
Group.
• A dearth of tourism related data and analysis from which to plan and invest inhibits
the government from effectively planning initiatives that ensure continued industry
growth and inhibits investors and private sector businesses from increasing tourismsector investments and improving human resources.  An effective tourism
development strategy, defined through private-public sector collaboration and based
on accurate and timely analyzed data, will better ensure that government and private
sector investments are based on informed decisions.  In addition to a need for an
initial in depth tourism study, there is an equally important need to develop a
systematic process for continuous data collection through tourist arrival and customer
satisfaction surveys.
• A serious deficiency in capable, trained, and skilled local staff within the MOT and
the private sector indicate improvements to the sector will be slow and service qualitylevels will remain below those of compe ting countries.  In order to effectively
facilitate, encourage, and enable the private sector to grow the industry, staff at MOT
must be at least as skilled and knowledgeable as their private sector counterparts.
Without a pool of skilled hospitality employees, the private sector will find it difficultto improve service quality and expand the industry.
• Ineffective promotion of Cambodia in international and regional markets and lack of
coordinated promotions initiated through private-public sector partnerships risk
having the tourism market stagnate once the existing pent up demand is exhausted.
Whether the current double digit growth is an autonomy or not, continuous and
innovative development and marketing of tourism products to the world traveler isessential to improving Cambodia’s competitive position.
• Limited international and intra national air, land, and waterway routes into Cambodia
from neighbouring countries and between destinations within the country reduces the
diversity of tourists, inhibits cross regional tourism, and fails to encourage investment
in eco, village, and adventure tourism sites where local Cambodian’s can benefit most
from the expansion of specialized tourism products.
• Low level of locally produced food and handicrafts products to support the tourism
industry creates an economic leakage of tourist dollars that inhibit rural economicdevelopment and reduce economic benefits to a broader constituency of beneficiaries.
C. D
EVELOPING INSTITUTIONAL AND SOCIAL CAPACITY TO PROMOTE TOURISM
211. In reviewing the volumes of development plans, interviewing tourism specialists, and
discussing issues with tourism related firms, it appears obvious that there is a severe shortage of
institutional capacity and social capital from which to manage current levels of tourism, much less a
base from which to quickly expand.  Improved international and regional trade and resulting
economic benefit depend on well-developed business and social linkages.
212. Most of these linkages are created through the efforts of private sector organizations, such as
working groups and sector specific trade and business associations.  The government’s role is to
facilitate and support the development of these organizations, promote international and regional tradeWT/IFSC/W/12/Add.2
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relationships, and promote national interests.  Development agencies, the government, and private
sector firms can assist by facilitating the development of these institutions.
213. Rather than analyze and present specific capacity shortfalls of which there are many, it is
more helpful to first define the roles performed by participants in robust tourism industries of other
countries.  From that basis, one can identify initiatives to encourage tourism sector participants in
Cambodia develop the necessary institutional and social capacities from which a robust tourismindustry can emerge.  Although there is no one best  method for developing tourism, experience has
shown that a few fundamental institutions and social structures are required before an economic
activity, such as tourism, can become sustainable.  Development agencies should consider if the
initiatives they fund are complementing these roles of inhibiting their development Public Sector
Roles.
214. Tourism related government institutions usually serve as facilitators, coordinators,
stimulators, catalysts, and supporters of the tourism and hospitality industry.  These institutions createincentives for tourists to come to a destination and for private sector participants to invest in
businesses and products that satisfy customer demand.  Among the functions of the public sector are:
• promotion of tourism products to international and regional markets;
• management of a national tourism image, internationally and regionally;
• development of trade linkages nationally, internationally and regionally;
• facilitation to ensure economic and social benefit is equitably shared by all members
of the population;
• incentives for the private sector to broaden and diversify tourism products and satisfy
continuously emerging customer demand;
• encouragement for developing private-public sector partnerships and private sector
business associations;
• adoption of equitable license systems and enforcement methods with written receipts
for all fees paid and services rendered;
• development and promotion of education campaigns on the value of tourism, tourist
safety, proper disposal of litter, personal and food related hygiene, and improved
supply of health services;  and
• development of inter ministerial working groups that ensure that tourism issues are
addressed at a national level by the Ministries of Interior, Health, Public Works,Finance, and others.  These include safety and security, health, transport, taxation and
other key issues.
215. In Cambodia, the MOT is the government institution most responsible for guiding
developing, and managing development of the to urism sector.  The MOT employs about 900 persons,
of whom 300 are full time staff, and has offices in all 23 provinces.
1. Private sector roles
216. The role of tourism related private sector businesses, sector specific working groups, and
private business associations is to develop structures to self regulate the industry through codes of
conduct, quality standards, and grading systems.  The functions of private sector firms includes:WT/IFSC/W/12/Add.2
Page 64
• investment in tourism products, such as hotels, restaurants, and transportation systems
that ensure a positive tourism experience and repeat business;
• establishment of conflict resolution procedures to ensure customer satisfaction and
positive working relationships among participants;
• privatization of regulatory monitoring and enforcement through the development of
liability insurance and other risk sharing practices;
• promotion of tourism at the local level, business to business linkages at an
international and regional level, and diversified product development;
• development of private business associations and stakeholder working groups to
ensure businesses and stakeholders are collaborating to identify and solve problems;
• promoting and actively encouraging private-public sector partnerships to the benefit
of society, the industry, and individual businesses;  and
• development of human resource capacity and continuous improvement of service
quality that is based on customer expectations.
217. At least three sector specific private business associations have been formed in Cambodia.
The Tour Guide Association located in Siem Reap and the Hotel Owners Association and Cambodian
Association of Travel Agents located in P hnom Penh.  Associations offer a mechanism for
representing tourism related interests and concerns with local and national government agencies.
With proper facilitation and encouragement, private business associations have the capability to
establish quality standards and classification systems, as well as self regulating the industry, enforcing
codes of conduct, promoting training, coordinating services, and improving marketing and
information exchange.  These associations should be strengthened to achieve these objectives.
2. Private-public sector partnerships
218. Institutionalizing systematic consultations between private and public sector institutions can
have positive, long-term effects.  In addition to promoting a self-regulated private sector, these
partnerships can assist government institutions, which in Cambodia generally lack experience in
competitive markets, to understand the interconnections between good governance and economic
growth.  These partnerships assist in developing industry standards with the customer perspective and
long term customer satisfaction in mind, while relieving the government of the burden of
enforcement.
219. For example, by jointly developing with private associations a professional code of business
ethics and conduct, a template for fair trade practices, and quality standards, government institutions,
such as the MOT can focus on promotion that is more important and linkage activities.  They can beconfident that the tourism sector will develop efficiently and without the constant need for oversight
by government institutions.  Among the essential functions of the private-public sector partnerships
are:
• regularly scheduled and facilitated communication between government institutions
and private sector business interests;
• efficient dissemination and collection of customer satisfaction surveys and tourism
data;WT/IFSC/W/12/Add.2
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• methods for discussing issues of self regulation and enforcement;
• development of tourism boards, marketing boards, and other tourism institutions that
require coordinated private and public sector participation;  and
• development of a tourism industry ombudsman institution so that tourism customers,
tourism businesses, and government institutions have effective dispute resolutionmechanisms.
220. The tourism related private sector businesses in Cambodia have taken on an increased
presence through the formation of the Tourism Working Group.  This is a private-public partnershipthat meets monthly and is chaired by the MOT. Participants of the partnership who were interviewed
for this report felt that the partnership has been very successful at identifying and solving tourism
related problems.
D. S
ECTOR SPECIFIC INITIATIVES TO ENHANCE TOURISM TRADE
221. Tourism in Cambodia has experienced phenomenal growth in that past decade.  The rates
have exceeded all expectations and are several times the average annual growth for any Asian
competitor.  While there is a limit to how long double digit growth can continue without running up
against human resource, infrastructure, environment or institutional barriers, that is no reason to stop
promoting the wonders of Cambodia to an even broader international audience.
222. Tourism growth has risen so fast for so long that neither the government nor the private sector
have been able to build the required capacity to sustain the growth and keep quality high.  Rather than
identify the shortfalls that have resulted, this report has presented a template from which participantsand the development community can contribute to the industry.  The roles of the private and public
sectors are mutually exclusive in many components and interdependent in others.  The ability of the
participants to develop the proper mix of interests, create partnerships that are properly focused, and
continually develop new products and services will be the determining factor in how Cambodia’s
tourism trade benefits the country and helps to alleviate poverty.
223. The government should strive to become a facilitating, coordinating, dynamic agent for
change that promotes partnerships, understandings, and self-governance through a set of standards
developed by private sector firms with support of publi c sector institutions.  These skills will require a
change in mindset and actions, but will set in motion the confidence building necessary to encourage
continued tourism sector investments by the private sector in physical as well as human resources.The development community’s role is also essent ial.  The manner in which the community invests
scarce financial and technical resources will have a determining effect on how well all participants
can fulfil their roles.
1. Initiatives to enhance tourism trade
224. The following sector specific initiatives are recommendations that require further analysis and
discussion with tourism sector working groups, ADB tourism advisers, development agencies, and the
government.
• Perform a detailed market and tourism impact analysis for Cambodia.   To make
informed decisions, private sector participants need accurate data from which to
weigh alternative business choices, and government agencies need accurate data fromwhich to analyze the economic impacts of various tourism promotions and initiatives.
For example, with accurate data, one would have a rational basis upon which to
determine whether the current growth patterns can continue, whether or not it is costWT/IFSC/W/12/Add.2
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effective to improve and reopen the Sihanoukville airport, or if village and eco
tourism are the appropriate tourist draws for Cambodia.  Only after a broad survey is
conducted and data is gathered and analyzed can the private sector and government
begin to make informed decisions about how best to enhance tourism trade.
• Support private sector institutional development.   The private sector needs help to
develop its social capital, management skills, and technical capabilities (Working
group 2000).  From the development of local community level organizations andworking groups, such as those necessary for village and eco tourism plans, to
enterprise and private sector business associations, the private sector needs to receive
sustained support to upgrade their organizational, technical, and management
capacities.  Support is most effectively delivered through sector specific
organizations, private business associations, and working groups.
• Support the development of private-public sector tourism related partnerships.   I n
general, the experience of Cambodian go vernment agencies working with private
sector firm in an egalitarian manner is limited and requires professional and
independent facilitation.  To effectively gain an understanding of their role in a
market economy, a role where government staff enable and support the private sector
rather than control all economic activity, relationships need to be facilitated.  Once
relationships are developed, private-public sector partnerships can collaborate on the
priority issues of tourism promotion, human resource capacity development,economic leakage, and improved trade linkages and destination development.
• Improve and promote trade linkages with regional (GMS) countries.  Improved trade
in proportionately related to market access.   In conjunction with market and tourism
impact analysis, private-public sector partnerships should work to improve GMS
land, air, sea, and water access routes, encourage ever more direct flights into
Cambodia, and improve overall travel convenience and safety.  More overland andwater border crossing, visa capable entry points and a corridor across the region
should improve trade and draw more visitors to rural Cambodia.
• Promote the development of agricultural products and handicrafts supply chains for
the tourism industry.  Market and tourism impact analysis will include analysis of
trade flows and economic leakage.  This will  lead to the development of strategies to
promote smallholder development in delivery of high quality agro-industry andhandicrafts products to the tourism industry.  The development of locally grown fresh
fruit and vegetable suppliers and a high quality handicrafts sector will help to ensure
that more of the economic value from tourism is accessible to more Cambodians.
• Promote sustained improvemen t of human resource skills.  Human resource
development is a serious constraint to tourism trade development and to improving
service quality levels.  Few training courses for the hospitality industry are offered inprivate or public sector education institutions.  The solution is unlikely to be for the
MOT to develop tourism training instituti ons and train the private sector in how to
manage tourism attractions, operate hotels, and provide culture tours, as has been
proposed.
• Enhance the investment, land, and tourism laws to promote private sector pro-poor
investments.   The objective of this broad initiative is to involve the private sector in
the development of laws and regulations that promote investment in Cambodia’s
tourism industry in a manner that spreads more benefits to more Cambodians.  The
initiative would assist in removing barriers to foreign investment, openlyWT/IFSC/W/12/Add.2
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communicate laws and regulations to investors, provide a simple and general
licensing system for all tourism operators, and shift issuance, inspection, and
enforcement of licensing functions to a private-public organization.
VIII.  LABOUR SERVICES
A. BACKGROUND
225. The export of labour has been an important option for reducing poverty and improving
household livelihoods in many Asian economies, including the Philippines, Sri Lanka, Thailand and
Vietnam.  Remittances from export workers are an important source of foreign exchange earnings for
these countries.  While these remittances have come  at some considerable cost in terms of family
disruption, there have been long-term benefits in the form of developing skills, contacts, business
networks, and linkages to markets and information.
226. Cambodian government policy is to encourage increased official labour exports to (i) improve
the living conditions of the people;  (ii) enhance professional skills;  (iii) absorb unemployed and
underemployed labour, and;  (iv) raise State revenues (Article 1 of the Anukret on the Export of
Khmer Labour to Work Overseas, N. 57 29 July 1995).  Official labor exports from Cambodia have
been limited to less than 1000 people to work in manufacturing industry and plantations, and as
maids, in Malaysia. Another contract was recently signed to supply about 1200 construction workersto Greece.
227. There is also considerable unofficial migration of workers, mostly to Thailand, but also to
Malaysia. Estimates of unofficial migration to Thailand range from 50 000 to 100 000 workers.
Unofficial labour exports are the only option for some poor rural communities to earn income during
period of economic hardship.  On the other hand, the unofficial nature of these exports leave workersvulnerable, and they frequently have to pay a large portion of their wages to facilitate access to such
work.  There are also unofficial imports of Vietnamese into Cambodia who work in trading activities,
fishing, wood processing, machinery, construction, and the entertainment and commercial sex
industries.
228. A variation on labour export is for foreign based businesses to outsource the production of
goods and services by Cambodian workers. Many garment manufacturers effectively involve the
export of Cambodian labour, with most other inputs being provided, and the final product sold, by
foreign interests.  With new information technology, there are also emerging opportunities for labour
services such as data processing, technical support services, and computer animation and
programming to be subcontracted to workers in foreign countries.  This is an emerging source ofemployment growth in countries such as India, th e Philippines, and Vietnam.  Such employment in
Cambodia has been limited to minor cases of data entry, but with supportive training and information
technology policies, such employment could increase in the longer term.
B. O
PPORTUNITIES AND LABOUR SUPPLY ISSUES
229. The ratio of active workforce per/hectare of cultivatable land is relatively low in Cambodia
compared with other regional economies.  Population pressures are much greater in countries such as
the Philippines and Vietnam, which are major exporters of labour as shown in table 8.1.  Thissuggests that the pressure for exporting labour in Cambodia might be less than elsewhere in the
region, or at least, a greater potential to develop alternatives options.
230. However, with 36 per cent of the population living in poverty, the reality is that higher wage
rates in neighbouring countries provide strong incentives and potential economic benefits to look forWT/IFSC/W/12/Add.2
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employment outside of Cambodia.  A recent DAN survey identified major differences in casual daily
rates for unskilled labour on the Thai side of the Cambodian border as shown in table 8.2.
8.1 Population Densities in Southeast Asia
CountryActive population (million
people 15-64 years)Active population/km2
of total landActive population/ km2
of cultivatable land
Cambodia 6 32 105
Lao PDR 3 11 151
Vietnam 40 124 511
Indonesia 98 54 233
Philippines 30 102 270
Thailand 36 71 170
Source :  DAN 2001.
231. A major constraint to labour exports is high illiteracy rates, poor education levels, and health
indicators, which rank amongst the lowest in the region.  Many of the skills demanded by labour
importing countries (for example construction, maid, tourism services) are in short supply in
Cambodia.  Indeed, workers are frequently imported from Vietnam and elsewhere to make up for
skills shortages in Cambodia.
8.2 Wage comparisons, Cambodia and Thailand
In Cambodia April-May 1999 In Thailand April-May 2000
Type of Work Wages
(US$/day)Type of Work Wages
(US$/day)
Fishing 0.5 Construction 3.7
Hunting/gathering 0.5 Porter 6.1
Firewood collection 0.7 Agriculture 2.2
Agriculture 0.8 Food production 3.9
Construction 1.6 Garments 3.5
Small trade 1.5 Fishing 3.2
Motor bike taxi drivers 1.9 Shop worker 4.8
Handicrafts 0.8
Other 0.9 Other 4.0
Source : DAN 2001.
C. INSTITUTIONAL AND REGULATORY ISSUES IN LABOUR EXPORTS
1. Official exports
232. The Ministry of Social Welfare, Labour and Veteran Affairs (MSWLVA) is responsible for
the regulation of labour exports, and cooperates with the Ministry of Interior with regard to issuing
passports for export workers, and with the Ministry of Foreign Affairs an International Cooperation
for the management.
233. A company wishing to export labour must apply to MSWLVA for permission, and
MSWLVA is required to respond within 45 days (A rticle 2 of the Anukret on the Export of Khmer
Labour to Work Overseas, no. 57, 29 July 1995).  The regulations appear to be directed at labour
broking companies who enter contracts directly with workers on behalf of the enterprises that require
export labour.  The regulations specify that labour conditions for export workers are specified in
contracts agreed between workers and the exporting company (that is, the exporting companyemployees the workers) in line with government regulations (but contracts must be approved by the
MSWLVA).  Each laborer is required to provide copies of a security clearance, medical certificates,
qualifications (if any), passport, and labour license.  Export workers are subject to Cambodian taxWT/IFSC/W/12/Add.2
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laws.  Labour exporters are required to deposit with MSWLVA a surety fund of US$100 000 within
7 days of official authorization to export labour.  This surety may be reduced when an employer
directly hire workers to work rather than through an agent.  The surety is set aside to be used to
compensate workers in the event the exporting co mpany fails to implement any provisions of the
work contract.  Unused funds are returned to the labour export company at the expiry of the contract
and the return of the workers.  The labour exporter is required to cover MSWLVA expenses onofficial duty to inspect the working conditions and the living accommodations of the workers, and to
provide unspecified remuneration and service fees to MSWLVA for document preparation.  This later
condition could substantially increase labour export costs and if regularly enforced would act as a
major disincentive to the export of small groups of workers.
234. Only two companies have so far been licensed to  export labour.  Both companies are licensed
to export house cleaners to Malaysia.  One company, Human Resource Development, has also been
licensed to export plantation and industry workers to Malaysia.  Less than 1 000 workers have beenexported at this stage, well below initial expectations.  The other local company, Cambodian
Consulting Associates, has signed a contract with a foreign company to supply about 1 200 workers to
assist in construction associated with the 2004 Olympic Games in Greece with salaries ranging from
$400 per month for construction workers to $1 800 per month for an engineer.
235. Some reasons given as constraints to increased exports of workers include:
• poor levels of basic education and foreign language skills;
• declining demand for export labour — and increased supply from competing
economies — because of the Asian economic crisis;
• concern by foreign employees that Cambodian workers were receiving an inadequate
wage because of high margins between wages paid by foreign employers and salaries
received by workers because of high government regulatory compliance costs and the
lack of competition;
• initial difficulties and costs caused by complex regulatory and administrative
requirements resulting in high costs of securing passports and other official permits;
and
• poor pre-training (language and basic work skills) of initial groups of Cambodian
workers reduced their effectiveness.
236. Assessment of the relative impacts of these constraints warrants further analysis.  There is a
prima facie case for good regulations to protect workers rights and maximize long-term benefits, andan important role for government support in negotiating bilateral agreements to open up new
opportunities.  There is considerable regional experience in developing labour markets that should be
tapped in formulating government policy and regula tions to develop Cambodian labour exports, and
protect the interests of workers and labour exporting agents.
2. Unofficial labour exports
237. Despite the risks and fees, working in Thailand without proper documentation remains the
most attractive economic option for many of the poorest Cambodians.  In some cases labour
brokers/guides travel to Cambodia looking for workers for factories, plantations, fishing boats, and
construction companies.  In addition, many Cambodians regularly travel to Thailand to engage in
border trade, and some of these people end up finding employment in Thailand.  Cambodians accountfor a large proportion of sellers in many Thai border markets.  Most such workers young
(17-35 years) and are typically employed in plantations, factories, farms, households, and in theWT/IFSC/W/12/Add.2
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commercial sex industry.  Females are most likely to immigrate temporarily for seasonal work.  Males
are more likely to take longer-term work.  Day passes can be obtained at the Thai border without a
passport for at a cost of 10 Baht (about $0.23), but additional informal facilitation charges are also
often reported.  Higher wages can be obtained in Bangkok and other cities, but workers report paying
brokers/guides up to 3 000 Baht for such employment.  Wages and opportunities for Cambodians to
work are reported to have declined markedly since the Asian financial crisis.
238. There are reports that some Thai factories have withheld part of total wages owed to
Cambodian workers, threatening to report workers that complained to the authorities.  The incidence
of such actions is reported to have increased since the onset of the Asian financial crisis.  However,
many illegal immigrants are still willing to accept such risks, because of the limited alternatives in
Cambodia.  A recent DAN study found that most long term migrants reported long term positive
outcomes from their experience, including being able to meet short term food requirements, buy land,
open a small business, renovate housing, and purchase motor bikes (DAN 2001).  Migration was alsoseen as positive in developing construction, tailoring and other skills.
239. While their illegal status leave such immigrants vulnerable to exploitation, attempts to control
such migration would greatly reduce the options available to the poorest segments of society and
increase their vulnerability to poorly paid immigration officials.  An alternative option would be to
encourage increased information flows, and to provide mechanisms for illegal workers to raiseconcerns (for example. including through the pr ess and NGOs) and to disse minate information on
risks and safeguards to potential illegal workers in Cambodia.
240. In the longer run, the government might facilitate Thai and other investors to relocate labour-
intensive businesses to the Cambodian side of the border to take account of lower labour costs.  An
improved regulatory framework for business, reduc tions in ‘red tape’, improved infrastructure
(possibly concentrated in industrial zones), and improved health and education indicators are needed
to attract such investors.
3. Improving options for labour export
241. Further recovery from the regional economic demand could result in a recovery in demand for
unskilled and semi skilled export workers.  Areas for further action to increase national gains fromlabour exports include the following.
• Improved human resource development, including adult education that focuses on
literacy, basic work and life skills, and foreign languages.
• Improve the regulatory framework to ensure that export worker rights are protected,
while also ensuring that regulations do not stifle competition and the entry of newlabour export companies.  Donor support could help ensure that lessons from other
developing countries are reflected in the regulatory framework for Cambodianworkers.
• Reduce formal and informal costs paid for government labour inspections, passports,
labour licenses and other labour export permits.
• Provide mechanisms for export workers to air their concerns about administrative
procedures, and any failure to honor contract provisions.
• Continue efforts to reach bilateral agreements for temporary migration of Cambodian
workers.  Disseminate information to more developed countries on the impacts of
increased temporary migration of workers in reducing poverty, transferringtechnology, and developing the economy.WT/IFSC/W/12/Add.2
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• Facilitate the relocation of businesses to the Cambodian side of the border to take
account of lower labour costs in Cambodia, while also benefiting from the better
infrastructure in Thailand.
IX. LAND, MARKETS, PROPERTY RIGHTS AND REGULATORY PROCESSES
242. The development of an effective system of property rights and contract enforcement is crucial
to the development of a competitive market economy.  Clarity and certainty about the enforceabilityof property rights facilitates the use of land as collateral for investments in land and land related
businesses, and can facilitate financial sector development.  With land use rights being the major asset
for most domestic private investors, streamlining of administrative arrangements for protecting and
transferring land use rights should be a high priority area for reform.  There is also need to address the
broader issue of contract enforcement, and the constraints to the development of efficient factor
markets for capital and labour.
243. The development of efficient land markets has been constrained by the slow pace of land
titling, and increasing land disputes as land prices increase and community and State land are
appropriated for private purposes.  Official transfers of private land use rights are constrained by
cumbersome and time-consuming administrative arrangements.  The large number of disputes, and
the long time taken for courts to resolve disputes raises concerns about land tenure security.  There are
also concerns about the lack of transparency in awarding large areas of forest and other agriculturalland for commercial use, that were previously used by poor communities for subsistence foraging
activities.  The administrative allocation of land administrative, rather than market based, can have
negative consequences for resource use efficiency and equity.  Full ownership rights to land are
limited to a small proportion of residential land.
A. R
ECENT DEVELOPMENTS IN LAND USE POLICIES
244. The government reintroduced private property rights in 1989, and instructed that land rights
established before 1979, that all land belonged to the State, and any prior rights to land use were no
longer valid.  Private entities were able to use and sell the land provided by the State for residential
and productive purposes.  Residential and productive land was redistributed to people.  Other land
was retained by the State.  The 1992 Land Law created ownership rights for residential properties, andrecognized State public land and State private land.  State private land could be released as
concessions.  The 1993 Constitution recognized land ownership rights in a broader sense.  A recent
national Land Policy Workshop (17–18 July 2000) identified some key regulatory and administrative
problems arising from existing arrangements, including:
• Land use planning and enforcement mechanisms remaining weak, and this constraints
natural resource management and urban planning.
• There is frequent encroachment onto protected areas, illegal logging, ‘land grabbing’,
and loss of rights to subsistence uses of natural resources.  This constrains thesustainable exploitation of forests, fisheries and water.
• Land administration remains weak and inconsistent.  Land users and potential
concessionaires cannot be certain that no other claims will exist over land.  Landdisputes take a long time to resolve.
• There are no clear guidelines governing land acquisition and distribution.
Administrative discretion provides opportunities for corruption and inefficient land
allocation.  Capacity to enforce concession agreements is weak.WT/IFSC/W/12/Add.2
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• Land markets are constrained by overlapping and fake titles.  Systematic land
registration has only been piloted.  Cadastral mapping that shows the location of land
could help prevent duplication and overlapping land rights.
• There is ambiguity about the roles of different government agencies in land
administration with no appropriate mechanisms for coordination.
• The demarcation between 'private State' and 'public State' property remains unclear.
The awarding of concessions, leases or transfers of State private land is constrainedby current legislation.
• There are persistent claims that the disenfranchised are being disposed of land
because of the lack of legal safeguards.
• The process of issuing titles is slow and most private entities do not have formal title
to land.
• Most of the population has a poor understanding of their legal rights and
responsibilities.  Without such understanding, the legal framework provides little
protection.
• Many people do not obtain land titles in order to avoid land transfer taxes.
B. C
URRENT LAND POLICIES
245. The government issued a land policy statement in April 2001.  Stated policy objectives of
land policy are to (i) strengthen land tenure security and land markets, and prevent or resolve land
disputes;  (ii) manage land and natural resources in an equitable, sustainable and efficient manner,
and; (iii) promote land distribution with equity.  These policy objectives are to be achieved by
focusing on improvements to land administration; land management, and; land distribution.  The main
proposed initiatives in each of these areas is given below:
• land administration:
• enact the land law, complementary laws, and related legislation;
• the Council for Land Policy, guided by the Supreme Council for State
Reform, will promote and monitor land policy implementation;
• create an inventory of, and classification system for, State land;
• implement a nation wide land registration system;
• resolve land disputes through the local Administrative Commission, the
Provincial/Municipal Land Dispute Commission, and the courts;
• land management:
• develop land use plans for priority areas;
• coordinate land use planning with natural resource management;WT/IFSC/W/12/Add.2
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• decentralize land management and planning to local and provincial
authorities operating under national land use guidelines and supervision;
• land distribution:
• using consultative process implement pilot projects to create a land
distribution strategy for needy groups;
• prevent illegal land acquisition and land concentration.
246. Land issues are an important focus of the government’s reform program.  The Interim Poverty
Reduction Strategy states that land policy reform is one of the six key areas for promoting
opportunities in order to reduce poverty (RGC 2000a).  The SEDP II recognizes that land reform is a
crucial determinant of the prospects for ec onomic growth and poverty reduction (RGC 2001).
C. THE 2001 L AND LAW
247. The draft 2001 Land Law extends private ownership rights to non urban land, delegates land
administration from the central to provincial/ municipal level, provides for official certification of
land ownership, creates a single land registry authority, removes the need for administrative approvalof land transactions, requires all land transactions to be registered, protects private rights to transfer,
prohibits foreign ownership, recognizes communal management rights of indigenous and ethnic
communities, includes provisions for use of land as security, dispute resolution mechanisms, and
provides remedies for violations of the law. This provides a basis for substantive improvements in
land use efficiency.  Resulting improvements in land administration could also facilitate property-
based taxation to finance local public services and infrastructure.  However, much remains to be done
in terms of issuing implementing regulation, and in developing institutional capacity, in order togenerate tangible benefits.
248. Effective implementation of the Land Law also requires new, or revised, legislation on
forestry, water resources, and fisheries.  Drafts of these laws have been prepared and are being further
developed in consultation with civil society.  The Land Policy Council, established in
December 2000, is responsible for providing guidance to ensure consistency in legal concepts,administrative arrangements and enforcement mechanisms among these laws and other related
legislation.
249. Implementing regulations will need to address a broad range of issues, including land title
registration agency; land registration procedures; mortgages and procedures for foreclosure; the
transfer of State property; expropriation; leasing; resolution of disputed land claims; land transfertaxes; survey and mapping standards and pr ofessional conduct; recognition of indigenous
communities as legal entities, and; guidelines related to land concessions.
250. Support is being provided by a number of donors to facilitate Land Law implementation.
ADB is providing technical assistance in support of drafting implementing regulations dealing with
the issuance of concessions.  The governments of Finland and Germany are proving institutionalsupport to assist reforming land registration, including land surveying, mapping and planning.  The
World Bank is working with the government to formulate a Land Administration Project with
components for (i) land policy development;  (ii) legislative framework and policy dissemination;
(iii) institutional development, capacity building, and training;  (iv) implementation of accelerated
land titling;  (v) development of land registration system, and;  (vi) strengthening land disputesettlement mechanisms.
251. While informal enforcement arrangements, including reputations and sanctions, are important
at all stages of development, investors require more formal contracting institutions as economiesWT/IFSC/W/12/Add.2
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develop and the scale of business activity increases and contracting becomes more complex.  Such
arrangements are important in (i) encouraging longer term investments;  (ii) facilitating entry of new
participants;  (iii) providing access to formal financial institutions; and (iv) providing timely
information on failures.  The need to develop mechanisms that are more formal is particularly
important for Cambodia because the protracted period of violence and the relatively recent collapse of
most major institutions mean that ‘business networks’ and the informal ‘rules of the game’ thatfacilitate informal contracting are relatively less developed.  On the other hand, the scope to utilize the
judicial system is also constrained by institutional weaknesses.  This reinforces the need for regulatory
simplicity.  Given weaknesses in public institutions, opportunities for using non-judicial arbitration
arrangements could be explored.
D. R
EGULATORY ENVIRONMENT FOR BUSINESS
1. Need for improved regulation
252. Investors note that frequent institutional and regulatory changes leave businesses vulnerable
to ad hoc  interpretation of the changing (and sometimes inconsistent) legal and regulatory framework
by bureaucrats in administrative agencies.  Such difficulties are compounded by ambiguities in the
roles, responsibilities and accountability of government agencies.  In some sectors, attempts to
regulate in excessive detail result in unnecessary transaction costs, reduce competition, and increase
opportunities and incentives for corruption.  Moreover, ambiguous and inconsistent regulations oftenresult in outcomes counter to stated policy objectives.  Specific examples are discussed in the sector
studies.
253. Improvements in the regulatory framework could help promote increased investment and
trade, and thus increase employment.  Efforts to develop a regulatory environment conducive to
business development are constrained by (i) limited institutional capacity and/or commitment toanalyze and promote regulatory reform;  (ii) the influence of vested interests; and (iii) inadequate
involvement of those most affected by regulatory reform.  Inadequate stakeholder consultation also
means that the public support needed for efficient enforcement of laws has not adequately developed.
The net result is a regulatory framework for business that:
• imposes significant disincentives to business investment;
• changes frequently;
• is poorly and/or inconsistently enforced;
• does not provide the institutional basis needed to support an efficient, equitable and
competitive market economy;
• often appears to be adjusted to extract rents from profit making entities; and
• imposes unnecessary transaction costs that inhibit investment and trade, and limits
opportunities for disadvantaged groups to break out of poverty.
254. An improved regulatory environment will only generate benefits if it is enforceable, and will
only be enforceable if there is strong stakeholder support for regulations.  A key step to improving the
regulatory framework is to improve regulatory process to improve stakeholder participation, to reducethe costs of compliance, and to facilitate enforcement.WT/IFSC/W/12/Add.2
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2. Improved regulatory processes
255. Finding the appropriate balance between the risk of not regulating, and excessive regulatory
costs, is a critical challenge for policy makers.  Good regulations should:
• be necessary (to achieve clearly identified policy goals)
• be clear, simple and practical for all stakeholders
• be effective & equitable (benefits should justify costs)
• be enforceable and have a sound legal basis
• facilitate and encourage (rather than stifle) innovation
• have the support of the main stakeholders
• be compatible with international practices.
256. A trend in developed countries is to require regulatory impact assessments.  Australia requires
regulation impact statements for ‘ All reviews of existing regulations, proposed new or amending
regulation or proposed treaties which will directly or indirectly affect business, or restrict
competition .’ (Productivity Commission 1998-99). Some transition economies (for example.
Hungary) and some Asian economies (for example South Korea) include regulatory impact
assessments as elements of their reforms process (for example, see OECD reports on regulatory
reform in Hungary and Korea).  Some key principles for improving regulatory processes are describedin the following box.
E. P
ROVISION OF PUBLIC SERVICES AND INFRASTRUCTURE
1. National and regional linkages
257. While more than 50 per cent of total public investment during the period 1996–2000 was
directed to improving transport and communications infrastructure, poor transport infrastructureremains a major constraints to trade development.  Flooding caused major damage to infrastructure
during 2000, and maintenance of all roads is constrained by lack of operations and maintenance
resources.  Poor enforcement of axle load limits and other regulations add to these problems.  Further
improvements in infrastructure, through public and private investment, plus institutional strengthening
to improve sector regulation and planning remain important priorities if the benefits from increased
trade are to reach most rural populations.  The focus of past efforts has been on rehabilitation of
damaged infrastructure.  The government is now aiming to develop a longer-term strategic approachto sector development and is receiving support from ADB to formulate a transport development
strategy to identify options to accelerate transport development, and to promote private sector
participation and competition in providin g transport infrastructure and services.
258. Pro-poor trade development requires that rural producers be integrated with urban markets,
urban producers need to be able to trade with rural areas, and rural and urban populations need toaccess international markets.  This requires investments in infrastructure in urban centers and rural
towns, and in transport linking rural towns to domestic and international markets.  Rural
electrification and water supply improvements can facilitate commercial development via impacts on
new commercial opportunities, greater productivity, human development, and consumer demand.
With appropriate infrastructure, areas of concentrated populations in rural areas can provide the scaleeconomies needed for the competitive development of commercial business.  Coordinated efforts toWT/IFSC/W/12/Add.2
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reduce the informal barriers to integration of rural town economies with higher income domestic and
international markets are needed to maximize the returns from such investments.
9.1 Some principles for improving regulatory processes
1. Simplify regulatory and compliance systems
• use simple language and minimize provisions. Make it easy for users and the public to understand.
• aim for less regulatory agencies with broader responsibilities.
• consider options for self regulation.
• help business comply by making it easier and less costly. Analyze, document and publicize information on
regulatory objectives and systems.
• streamline regulatory agencies and systems (one stop shops, simple forms with clear instructions, use new
information technology where appropriate)..
• encourage a service provider mentality in regulators.
• procedures should be consistent and transparent, with no duplication of responsibilities
2. Consult with stakeholders during reforms
• consult to ensure that reform is needed, and to inform stakeholder on the goals and strategies of reform.
• encourage the formation of business and consumer groups to represent the interests of key stakeholders.
• encourage open and informed public discussion to explain the benefits of reform, and to counter interest
groups that may resist reform.
• learn from international experiences.
3. Make regulatory agencies accountable for regulations
• regulatory agencies must be accountable. If not, regulatory complexity will increase, reforms will not be
sustained, and further reform will be needed.
• establish clear and transparent performance indicators, appoint stakeholders to management boards of
regulatory agencies, build in formal consultative mechanisms, publish annual performance reports.
4. Closely monitor impact of regulatory reform
• regularly review existing and proposed regulations to ensure that they are consistent with good regulation
from the perspective of the user as well as the regulator.
• require regulatory impact assessment as part of the regulatory approval, reporting & review processes.
• introduce automatic review processes by setting time limits on business regulations (‘sunset provisions’).
Source:  Modified from OECD 1998, Report on Regulatory Reform, OECD, Paris.
2. Human resource development
259. Infrastructure development needs to be coordinated with efforts to develop vocational skills
that match market demands, and to improve basic education and health standards.  In the longer term,
sustainable improvements in labour productivity will require improvements in the delivery of
education and public health services, including improved water supply and sanitation.  Adult literacyand skills programs should include information on income generating opportunities.  Given resource
constraints, the private sector should be encouraged to invest in education, especially in vocational
and higher education.
3. Access to information, markets and technology
260. Given high illiteracy rates, telecommunications, radio and television have a relatively more
important role in the dissemination of business information. While the domestic mobile
telecommunications network is efficient and relatively inexpensive, international telecommunicationsWT/IFSC/W/12/Add.2
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costs are higher than in competing countries.  While access to Internet and Email communications is
presently limited, this is expected to become increasingly important.  Cumbersome procedures to
secure business visas to most developed countries constrain access to information, technology and
international business networks.  The government  should review telecommunications pricing and
competition policies, and work with external agencies to reduce barriers to travel by Cambodian
business people.
261. Major investments are now being made to improve physical transport infrastructure linking
Cambodia with Thailand and Vietnam, as well as to improve sea and air access to international
destinations.  These developments could greatly reduce transport costs and increase the competitive-
ness of Cambodian products on export markets.  However, the full benefits of such developments will
only be realized if people and goods can move across border at minimal cost.
262. While detailed discussion of trade facilitation is included in a separate section, it is important
to highlight the major potential impact of trade facilitation on options for sector development andpoverty reduction.  Many border areas have relatively high incidence of poverty.  Improved
facilitation of trade and the movement of people should result in an expansion of service activities
(hotels, restaurants, entertainment and transport), handicrafts and agro-processing at border crossings
and along major transport links.
263. Most regulatory constraints to cross border trade are already circumvented in practice, but the
informal arrangements that facilitate this impose deadweight costs to the economy and the Cambodian
people.  High costs stifle information flows, reduce networking opportunities, and constrain the
development of trade and export labour.  In addition to better regulations, efforts to streamline
procedures, to share inspection activities, and to introduce electronic processing of border controls are
potentially important in reducing such costs.
264. Past instability has been a major constraint to investment.  Instability increases risks.  Periods
of instability have been followed by declines in investment from the domestic private sector, foreign
investors, and by external donors.  Instability also greatly increases the risks and transaction costs of
trade.  Recent developments indicate considerable success in moving towards greater economic and
political stability.  Investors are also looking for greater stability and predictability in the regulatoryand institutional environment for business.  The earlier proposals regarding regulatory processes
should help in this regard.
F. L
ESSONS FROM SECTOR STUDIES FOR TRADE DEVELOPMENT
265. Cambodia has made solid progress in recent years to reduce the regulatory and institutional
barriers to business investment and economic integration.  The foundations are being laid for newmodels to for addressing business and trade constraints that involve major stakeholders in the reform
process.  Some of the major policy changes to promote increased trade are already in place.  Less
progress has been made in developing some of the key institutions needed to facilitate the
development of an efficient market economy that is  competitive in international markets.  Further
institutional development is needed to:
• protect land and other property rights and develop efficient factor markets;
• establish a regulatory environment that facilitates business investment;
• accelerate the provision of public services and infrastructure;
• facilitate domestic and international trade; and
• reduce instability, increase predictability and reduce corruption.WT/IFSC/W/12/Add.2
Page 78
266. Institutional weaknesses constrain economic growth and exacerbate inequalities in income
distribution.  Well-connected individuals and State enterprises can use their networks to facilitate
contract enforcement and to secure favorable administrative decisions.  Discretionary and opaque
decision-making generally favours larger or better-connected investors with had better access to
decision makers.  Institutional weaknesses limit their opportunities for informal enterprises to expandand/or move into the formal sector.  This constraint the emergence of a dynamic small and medium
enterprise that typically play an important role in processing industries, developing new labour
intensive export industries, and generating increased paid employment.  Institutional weaknesses are a
particular problem for groups with limited representation in government decision-making.WT/IFSC/W/12/Add.2
Page 79
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