discussed in Section III, sector-specific governance arrangements and various mitigating strategies have enabled firms to develop – and some sectors to prosper – but at a cost, in terms of sustainability and diversification.

54. **The impact of corruption is felt through direct and indirect channels** . The direct channel is evident from survey data such as Figure 19: high incidence of informal payments for various licenses and inspections (more than 80 percent of established firms are expected to make payments to “get things done”), weak reporting of income for tax purposes (only 59 percent of revenues is reported to the tax authority), etc (World Bank, 2008d). The indirect channel is through corruption’s effect in deterring firms from entering the market: hence, as noted in Section III, poor governance has a direct link with poor diversification.

55. To sum up:

- Regulatory complexity and uncertainty, lack of dispute resolution mechanisms, and corruption are important barriers to diversification, although ad-hoc mechanisms enable certain firms to operate in this environment.

- The uncertain macroeconomic environment could be becoming an important constraint on growth.

# **Box 3: The Case of Agriculture**<sup>**17**</sup>

Given the continued strong comparative advantage and potential for diversification and productivity gains in agriculture and agro-business, this box focuses on agriculture. It sets out five symptoms of the problem, before proposing a prioritization. The constraints are by and large consistent with the rest of the economy, with the exception of rural infrastructure.

**The first symptom is the inadequate fertilizer usage** . Poor soil fertility is identified as a major production constraint in most lowland areas, and could be addressed by suitable soil and fertilizer management technologies, such as siltation. Farmers do not use fertilizer at either the appropriate time or in the right amount. Adulteration is another problem that occurs leading to a mismatch between nutrient content and the label.  The presence of low quality fertilizer has made many farmers suspicious of the market. Fertilizer usage in Cambodia is significantly lower than in neighboring countries at about 5-6 kg/ha, compared to 100-300 kg/ha in neighboring countries. This is so despite significant positive rice yield responses to fertilizer usage: returns to fertilizer application are large, way above 1 (i.e. a 1,000-riel investment in fertilizer will have increase output by much more than 1,000 riels in a variety of price scenarios). This significant response suggests that there are deeper issues behind this symptom.

Box table: Rice Yields, Technology Usage, and Infrastructure in Cambodia and the Region

|**Year**|**Cambodia**|**China**|**Indonesia**|**Laos**|**Malaysia**|**Myanmar**|**Philippines**|**Thailand**|**Vietnam**|
|---|---|---|---|---|---|---|---|---|---|
|**Rice yields (ton / ha)**||||||||||
|in 2000|2.1|6.3|4.4|3.1|3.3|3.1|3.1|2.6|4.1|
|in 2008|2.6|6.3|4.7|3.5|3.5|2.5|3.8|2.8|4.9|
|Average|2.3|6.2|4.6|3.3|3.3|2.7|3.5|2.7|4.6|
|Growth rate %|3.6|0.2|0.7|1.9|0.8|-2.5|2.7|0.8|2.3|
|**Modern technology**||||||||||
|Tractor (per ha)|0.6|6.5|4.4|1.2|23.9|1.0|2.0|14.2|24.9|
|Fertilizer (kg/ha)|5|319|145||806|1|150|133|324|
|Irrigation(% of arable land)|7|39|23|19|20|20|27|31|45|
|**Infrastructure**||||||||||
|Roads paved (% total roads)|6.3|81.6|55.3|14.4|81.3|11.9|9.9|98.0|25.0|
|Telephone mainlines (per 100 people)|0.2|28.0|6.6|1.3|16.6|1.1|4.2|11.1|19.1|
|Electric power consumption (kWh per capita)|15|1781|509|179|3262|82|588|1988|573|
|Source<br>:Based on USDA Production|,Supply|and Distr|ibution on|line(20|08b)and|FAOSTA|T(2008),|WDI(2|008),see|

17 See references and detailed regression analysis in the background paper on the supply response to food price increases, prepared by the International Food Policy Research Institute (IFPRI). The objective of this box is to suggest a prioritization among the many constraints in agriculture.

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