Cambodia: Rapid Growth with Weak Institutions

Abstract

This paper examines Cambodia's socioeconomic development since the early 1990s peace settlement. The country's economic growth has arguably been the fastest among post-conflict societies, driven by the credible restoration of peace and security, large public and private capital inflows, economic openness, reasonably prudent macroeconomic management, and a dynamic, integrating neighborhood. A legacy of history and small size is that the government has limited policy space, although this has not necessarily retarded economic development. We also highlight some key challenges, including rising inequality, uneven spatial development, weak institutions, and high levels of corruption. Looking forward, we highlight the importance of strengthening supply side capabilities, broadening the benefits of growth, and developing stronger institutions and property rights. 46particularly from 1998, its economy has grown very quickly, arguably faster than any other post-conflict country in recent times. There are numerous caveats to be attached to this achievement, to be discussed shortly, but it is nonetheless a remarkable achievement. Second, the country's policy settings are unusual, owing to its history, size, location, and also deliberate policy choices. In particular, it has little scope for monetary and exchange rate policy, owing to the high level of dollarization. It is a very open economy, owing to explicit policy decisions, its porous borders, its location between two large, exportoriented economies, and its membership of Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA) and in the near future, the ASEAN Economic Community (AEC). Its fiscal policy levers are also limited. A major challenge for the country is to manage constructively its location, and the attendant very large official and private capital flows, with institutions and a political system still very much in their infancy.Our organization is as follows. Section 2 outlines the development context, the factors that have shaped the country's economic development and its political economy. These include its complex, bloody history, together with its size, geography, and natural resource endowments. In turn, these contextual factors shape the policy parameters, including weak property rights, limited policy space, and the struggle to establish effective governance and institutions. In section 3, we examine development outcomes, including rapid but volatile economic growth since the 1990s, substantial improvements in living standards, and the uneven distributional outcomes. Section 4 sums up. 1

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