# **Use of Natural Assets and Domestic Savings**

21. **The second dimension underlying Cambodia’s growth performance is that Cambodia’s rapid growth has been driven by the exploitation of its natural assets** .<sup>5</sup> The forestry sector, which generated significant income in the 1990s (and, by many accounts, fed into subsequent waves of investment in real estate), is a clear example. Concerns have also been raised about the depletion of the fish stock. Together the forestry and fishery sectors accounted for 19 percent of GDP growth in 1993-98, but only 2 percent in 2003-08. Forest products accounted for 43 percent of exports in 1994 and less than 1 percent in 2006. In fact, the Government, out of concerns for these issues, banned logging in 2000, reformed large commercial fishing lots in 2002, and has been promoting community approaches to forestry and fishery management since then. The historical site of Angkor has also driven a very rapid growth in tourism (with the number of tourists increasing from 200,000 in the early 1990s to 2 million now), amid concerns about its sustainability.

22. **Despite this rapid use of natural assets, savings (in financial assets) have been low** (13 percent of GDP in 2007, with investment at 21 percent). There could possibly be some dissavings, with a rapid depreciation of existing assets.<sup>6</sup> The low level of savings was also evident in the public sector, where public savings have been historically low, but this is offset by domestic assistance (from private donors) and external assistance. Public savings have improved since 2003, as the Government initiated a Public Financial Management Reform Program that enabled stronger fiscal control. This low level of savings would be consistent with the short time horizon frequently noted in Cambodia (in part the result of its level of development, limited financial sector, and post-conflict situation), although this might change as the proportion of working-age Cambodian increases (this age group has a higher propensity to save).

23. **The unsustainable use of assets is compounded by a questionable allocation of investment** . There are high returns on some classes of assets, with capital inflows in 2007-08 pushing asset prices up. Land speculation and a real estate boom have created significant returns: prices in Cambodia are at levels suggesting that investors plan to recoup their investment not only from using or renting their asset, but also through capital gains.<sup>7</sup> As a result of these high returns, banks are looking at rates of returns well above 40 percent, which the manufacturing sector is unlikely to generate. The weak quality of investment is also shown by low utilization rate (including in garments and tourism) and, in some sectors, low mark-ups (low profits over wages), possibly signaling a low opportunity cost of financing (World Bank, 2008d).

24. **This second dimension is also highly unsustainable** . There is first the obvious risk of exhausting assets. Second, the questionable allocation of investment constrains diversification (e.g. the financial sector and entrepreneurship are directed to further use of natural resources, as

> 5 See for instance Sloth, Sreng, and Bottra (2005).

> 6 It might be useful to undertake some analysis of a broader definition of savings, including natural assets, to guide policy-making, especially if mineral resources are present in Cambodia. Data on forestry (cover and quality) are scant and controversial. Data on fish stocks are largely inexistent. Data on underground resources are undisclosed or inexistent.

> 7 The ratio of house prices (per square meter) to income (GDP per capita) is above 4 in Cambodia, against 2.6 in Vietnam and less than 1 in almost all other Asian countries (even though the yield on the rental of properties is not particularly high).

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