44. **Factors behind the lack of coordination are numerous** . Cambodia’s short history as an open, integrated economy and the destruction of its elites in the 1970s have led to a very low capital of market experience (knowledge, marketing contacts, etc.). This also translates into many _de jure_ legal reforms not leading to _de facto_ changes. Coordination issues are also evident in the lack of support services, such as packaging, standard certification, logistics, accounting (although in most domains a few firms are emerging). Conversely, the role of the Garment Manufacturers Association of Cambodia and the “hand-in-hand relationship” of firms with the RGC in the garment sector show the successes that good coordination can generate (Section III).

45. **Obviously, major uncertainties make coordination issues difficult** . Most of the top six factors that firms cite as severe problems for their operations could be interpreted as relating to uncertainties in the business environment (Figure 16): corruption (see below), macroeconomic uncertainty, anti-competitive and informal practices, economic and regulatory policy uncertainty, and crime, theft, disorder. This linkage between coordination issues and these uncertainties make the growth diagnostic more tentative (are the uncertainties the source of the coordination problems, or are coordination problems the core of the constraint?).

**Figure 16: Constraints on the business environment have changed between 2003 and 2007, with corruption remaining firms’ main concern**<sup>**16**</sup>

<!-- Start of picture text --> 60<br>Less severe constraint in 2007<br>51.8 More severe constraint in 2007<br>S i 1<br>50<br>38.2<br>40<br>31.8<br>30 26.7<br>20.9<br>18.1<br>20 16.0 15.6 15.5<br>12.8 12.0 11.5 11.5 10.8 10.6<br>9.1<br>10 7.2<br>3.3<br>-<br>Corruption Electricity Tax Rates<br>Instability<br>resolution Transportation Access to land regulations<br>Macro Economic Anti-competitive or informal practices Economic & Regulatory Policy Uncertainty Crime, theft and disorder Cost of Financing Skills & Education Tax Administration Licensing and Permits Legal system/conflict Telecommunications Access to Financing Customs and Trade Labor regulations<br><!-- End of picture text --> _<u>Note: Share of firms that respond “severe or very severe” to the question: “How problematic are the following issues to the operation and growth of your</u> business?” Source: 2003 and 2007 Cambodia Investment Climate Surveys._ 46. **There are a number of other market failures that weaken incentives for investment and productivity** . For instance, farmers, being perpetually cash-strapped, cannot negotiate prices and are forced to sell at depressed prices after the harvest: this undermines incentives to improve productivity (Box 3). Another important market failure that undermines these

> 16 While very revealing, two caveats must be noted for this type of data. First, the various potential constraints are not equally narrowly focused: “corruption”, for instance, can cover a wide range of issues, while “tax rates” are much narrower. Second, the data is based on a survey from _existing_ firms: the fact that lack of diversification is a key issue makes this data uninformative about what prevents _other_ firms from entering the market.

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