require complex value chains). More generally, most productive activities in Cambodia are focused on value chains with very few steps (see Section II).

## **Box 1: A Tale of Three Sectors**

Garments, rice, and livestock are three sectors that have considerable promise in Cambodia. Yet, one is vibrant (garments); one might be emerging (rice); and one is stunted (livestock). Comparing these three sectors highlights the importance of governance for growth and illustrates how governance can improve and support growth in some sectors but not others. This helps explain the paradox of double-digit growth with relatively poor governance.

Evidence suggests that two factors may help explain garment’s success: (a) the presence of a private sector organization - the Garment Manufacturers Association of Cambodia (GMAC) - which produced collective action to lobby authorities for negotiated industry-wide rent-seeking rates and (b) international drivers/incentives such as an overwhelmingly foreign presence in garments (more than 95 percent of garment factories are foreign owned) along with quota exports to the United States linked with minimum labor standards that produced enough rents for all parties involved. The GMAC - Ministry of Commerce relationship is exceptional. Establishing a garment sector in Cambodia proved a win-win proposition both for foreign investors and local stakeholders.

By contrast, the rice and livestock sectors compare unfavorably to garments, even if not encumbered by price or trade restrictions. No credible private sector organization for collective action exists in either sector, although rice has competing rice milling associations whose membership is diffuse both geographically and politically. Livestock does not enjoy even that modicum of organization, in part because of a lack of social capital, which was destroyed during the Khmer Rouge period. Indeed, even the word cooperative/collective is frowned upon for its socialist roots. Moreover, in both rice and livestock, foreign involvement is minimal compared to garments. Livestock had foreign involvement in the export of cattle through a joint venture with a Malaysian partner, but that partnership ended in 2005, allegedly because of onerous unofficial payments. Rice may have an opening in exports to the European Union through its zero tariff for Least Developed Countries initiative “Everything But Arms”. However, this will require stringent Sanitary and Phytosanitary Standards to be met.

In summary, differences across these sectors include the involvement of international players, the creation of new opportunities (as opposed to the division or displacement of pre-existing rents), and the generation of social capital to fight long ingrained patron-client networks. Some of these differences were driven by the nature of the markets (in terms of profit margins for instance).

“Good enough governance” itself is not a permanent condition; it can go either way, and the key to policy is tipping it in the right direction. Potential factors for promoting growth include tackling the constraints observed in each of the sectors that reach far beyond those sectors alone. Of course, there are too many constraints for each to be binding per se. Garments, rice, and livestock all require transportation and electricity and face similar unofficial payments. However, garments clearly has achieved good enough governance through collective action and negotiation, while livestock has hardly developed beyond smuggling activities. Rice could enjoy good enough governance in the future, as higher prices create higher rents. _<u>Source: based on research by Ear (2009).</u>_ 30. **This approach is not without risk** . There is first the risk of the Government or the private sector seeking to extract too much out of this hand-in-hand relationship, squeezing the golden goose. In the case of garments, this could mean the Government imposing too high informal taxes on exports, or the private sector receiving unreasonably high tax exemptions. There is also the risk of this relationship disserving public interests – as opposed to generating growth (e.g. crony capitalism, non-competitive allocation of public contracts, abuse of land rights, or restriction of competition).

# **Summing Up**

31. Although they have mainly to do with how to _ignite_ – as opposed to sustain – growth, there are important lessons from these three dimensions: 13