THE DRASTIC TURNABOUT

The global financial and economic meltdown is by far the worst shock that has struck post–conflict Cambodia. Against the backdrop of the most stable political scene in the country in almost three decades, the Asian financial crisis hit Cambodia in 1997–98 followed by the food and energy shocks ten years later. These shocks caused damage but not enough to elicit a turnabout in the country's macroeconomic growth and progress in poverty reduction. In contrast, the global financial and economic downturn, which became evident in Cambodia by 2008–09, put a stop to the country's nearly two–decade long positive growth and poverty reduction.

This chapter discusses the macroeconomic and sectoral impacts of the global crisis based on the crisis transmission framework described in the first chapter, that the impact of the shock was shaped by country–specific circumstances. The economic turmoil that erupted in the developed world spilled over to developing countries chiefly through its impact on trade and capital flows. The degree of a country's exposure to the external shock was hence influenced by its trade and financial openness and composition.

Following a brief account of the global recession's impact on aggregate output in Section 2, Section 3 tackles the overall impact of the global recession on Cambodia's trade and capital inflows. Sectoral exposure to the crisis ultimately depends on the bias in such flows and the country's overall economic growth pattern. Cambodia's double–digit growth in the decade before the crisis relied on a narrow economic base. As examined in Chapter 1, four sectors — garments, tourism, construction and agriculture — were primarily responsible for the country's growing trade and investment inflow. The first three sectors ushered in the country's economic structural transformation. Section 4 recounts how the growth sectors fared in the face of the external shock. It is interesting to note that the contractions in at least three of the growth drivers can be partly ascribed to the effects of other covariant crises.

INTRODUCTION

The preceding chapters have provided detailed analysis of the impact of global financial and economic crisis (GFEC) on Cambodia's economy and the poor there. However almost a year before the GFEC, the world witnessed an unprecedented increase in prices of food and most agriculture products which was as devastating for the poor as the GFEC was. Although the two crises differ in their origins and breadth of impact, they have endangered food security and therefore setback poverty alleviation efforts, especially among marginalized groups in both rural and urban areas. In this chapter we focus on analysing the impact of the twin crises – GFEC and food price increases that preceded it –on the poor in Cambodia.

The rest of the chapter is structured as follows. Section 2 provides detailed analysis of the impact of food price increases on food security. Given that food security is also affected by the state and pace of change within the agriculture sector, the impact of food prices on agriculture is looked at as well. Section 3 explores the impact of GFEC on food security and agriculture. Finally section 4 offers some recommendations and concludes the chapter.

IMPACT OF THE FOOD CRISIS ON FOD SECURITY AND AGRICULTURE

Food price Trends and Determinants of Impact

What was unique about the food price trends witnessed in 2007–08 was not the price escalation itself. Steep price increases also occurred in 1973–74, chiefly because of the oil crisis. What set the food price movements in 2007–08 apart was that the prices of almost all major food and non–food commodities soared at the same time (FAO 2008) and more importantly, that the confluence of old and new drivers may have started a long trend of higher than average food prices.

The full-blown crisis entailed food price record highs. For each of the first six months of 2008, the international food price index registered a year-on-year increase of more than 50 per cent on average.

EXOGENOUS TRIGGERS, ENDOGENOUS INFLUENCES

The global financial and economic shock of 2007–09 is the third major economic crisis to have buffeted Cambodia in its post–conflict period, coming in the wake of the food crisis of 2007–08 and just a decade after the Asian financial crisis of 1997–98 (the “triple crises”). Cambodia's post–conflict history can be divided into two periods: 1991–98, referred to as the early phase of transition during which the first of the triple crises, the Asian financial crisis, occurred; and 1998 to the present, the late phase of transition during which the food and economic shocks transpired. A stocktake of the developments in Cambodia's post–conflict history suggests that the country has come a long way in reinstituting the foundations of a capitalist economic and procedural democracy but has yet to make significant headway in economic sophistication and substantive democracy.

The triple crises were different, yet had similar characteristics. They were all exogenously–driven shocks with their own specific causes but their effects were shaped by the country's situation at the time. In terms of magnitude of impact, the global financial and economic downturn was the worst of the three crises. That it caused the first ever growth contractions in the post–conflict period was sufficient rationale for the series of studies that substantiate this book. Like the two shocks that preceded it however, the way it impacted on Cambodia cannot be understood in isolation from the overall post– conflict milieu. The thesis here is not that endogenous factors caused the crisis. Country circumstances would hardly be able to account for that which is international in origin (Rose and Spiegel 2009). It is simply that endogenous factors shaped the impact of the crisis and a historical, as opposed to a static, analysis better illuminates the nature of the impact. For instance, the growth contractions cannot be explained outside of Cambodia's post-conflict growth pattern while any poverty effect was most likely due to the cumulative impacts of the global economic slump and the hike in food prices. By the same token, sustainable recovery from the downturn rests on deeper reforms affecting major economic and political aspects of the country's post- conflict milieu.

WAKING UP FROM THE DARK SPELL

All over the world, revival from the long spell of economic slump had begun by the second half of 2009. East Asia was at the forefront of global recovery, with some of the hard–hit industrialized countries finally managing positive quarterly output growth and the Chinese economy regaining its pre–crisis robustness. The road to recovery certainly did not come easily. Countries recognized that go-it-alone strategies would have been ineffective in battling the recession given its nature. Thus, they needed to synchronize remedial action as far as possible. Countries were also confronted with serious policy dilemmas. Aggressive policy interventions came with a high price that needed to be settled afterwards. This settlement would be painful but failure to stem the tide of the crisis with Keynesian–type strategies would have depressed economies further. Everywhere, it was recognized that while economic rebound rested on quick fixes, a more sustainable recovery depended on re-orientation of development strategies and structural reforms. Economic risks remain aplenty, heightening the pressure to act on such imperative decisively.

Cambodia started to emerge from the crisis along with the rest of the world. The global upturn served as a beneficial push factor that stimulated trade and capital inflows, while government actions served as a pull factor that helped rein in investor flight and keep the growth sectors afloat. Recovery for the country was also a struggle, not least because its crisis response was undermined by the fact that it is one of the poorest nations in the world. Some quick fixes facilitated economic rebound but there was also the recognition that deeper reforms were needed to ensure a recovery that could better address existing and imminent risks, better exploit growth opportunities and better withstand another crisis that might not be far away. Such thrust rests on the thesis broached in Chapter 1 and is reflected in the discussions in the other chapters. The nature of Cambodia's post-conflict economic development shaped the impact of the global crisis.

Following a decade of strong economic growth, socio–economic development, and poverty reduction, the Global Financial Crisis (GFC) and associated regional economic downturn in 2008–09 had a severe impact on Cambodia's economy, exposing its vulnerability due to the narrowness of its economic base and its reliance on European and North American export markets. While annual GDP growth has now recovered to levels of 6–7 per cent, the vulnerability remains, with a shared imperative by the Cambodian government, the private sector, investors and development partners to work together for the diversification of the economy. The experiences of 2008–09, despite their severity, also provided useful lessons for policy–makers. I am pleased to introduce this volume which provides an independent analysis of the impact of the crisis on Cambodia and a deeper understanding of the Cambodian economy, its strengths and weaknesses, and policy challenges for the future.

Since 1993, the Cambodian economy has undergone a dramatic and rapid transformation. The traditional economy, based on agriculture, is now driven increasingly by the industrial and the tertiary sectors. With the return of peace and stability in the late 1990s, a sense of confidence and pride pervades the country. All Cambodians now share a common vision of sustained economic growth with employment and a secure future for all. The government's strategy is to help realize this vision by reinforcing Cambodia's comparative advantages both regionally and internationally. In the era of globalization the fortunes of all countries in the world are intertwined; autarchy is not an option for sustained high economic growth for a small sized economy as Cambodia. Hence Cambodia's continued economic success will depend on full market access for its products and the cooperation of its development partners.

Cambodia had to rebuild itself virtually from scratch after the defeat of the Khmer Rouge regime. At the very outset, the country had to face the harmful consequences of the international economic embargo imposed in 1979.