Cambodia managed its historical transitions to end the three-decade long conflict and shift from a command-and-control economy to a market-oriented economy (Hughes, 2003). At the same time, Cambodia seized the opportunity presented by a rapid growth in global demand and by its location as a coastal country in a dynamic region. This first dimension highlights the key role of openness and macroeconomic stability (also two of the key ingredients highlighted by the Growth Commission, 2008).

17. **First, Cambodia has generated a growth peace dividend by establishing a track record of political and macroeconomic stability** . This stability was achieved in the late 1990s, at a historical period of rapid world growth, in particular in East Asia. Political stability has been a foundation of sustained growth. Another implication of history was the return of part of Cambodia’s Diaspora, bringing funds, knowhow, and ideas. Cambodia also achieved significant inflows of external assistance following the 1991 Paris Agreement. Macroeconomic stability is also noteworthy given (i) the limited instruments at the authorities’ disposal (the economy is dollarized and the revenue to GDP ratio very low) and (ii) the number of terms-of-trade shocks (including large swings in global prices of petroleum products and the end of the Multi-Fiber Arrangement (MFA) and its quota system).

**Figure 4: Macroeconomic policies have been conducive to stability**

<!-- Start of picture text --> a/Fiscal Policy (% GDP) b/ Monetary Framework (%, year-on-year)<br>8 120 Credit to private sector<br>100 Net foreign assets<br>6 Broad money<br>80<br>4 60<br>40<br>Overall deficit<br>2 (w/o grants), 2.2 20<br>-<br>0 Current deficit (20)<br>(w/o grants), -3.2 98 99 00 01 02 03 04 05 06 07 08<br>-2 Domestic<br>financing, -2.6<br>-4<br>1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007<br> Sources: MEF, NBC, NIS, Staff<br><!-- End of picture text --> 18. **Second, Cambodia seized this historical moment through opportunistic trade and investment policies** . First, with its nascent _garment_ sector growing very rapidly and concerns about such growth in the US, it agreed with the US extended quotas in exchange for strict enforcement of labor standards (Box 1). Second, this approach was complemented by a favorable _investment regime_ (equal treatment for domestic and foreign investors; tax holidays for a large range of “qualified investment projects”). FDI was above 6 percent of GDP between 2004 and 2008. Third, the _trade regime_ is also very open, with the applied tariff rate at 14.2 percent and import duties at only 2.7 percent of imports. Cambodia joined ASEAN in 1999 and the WTO in 2004. Although trade with regional partners is below potential, these international commitments were useful to create confidence among investors. Exports accounted for less than a third of GDP in 1998 and almost two thirds in 2008. Fourth, Cambodia managed well the policy reforms around 1990 to liberalize its economy and began to establish a track record of legal reforms. All of this enabled it to harness the historically high global demand and take advantage of its low cost structure. Cambodia’s level of exports per capita is higher than other SRG countries at 8