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Cambodia and the

Washington Consensus
Revisited, Following the Twin
Crises
Sophal Ear
August 15, 2001
ADB, Manila
sophal@alumni.princeton.edu
Cambodia and the
Washington Consensus
First published in Crossroads: An
Interdisciplinary Journal of Southeast Asian
Studies, 11(2):73-97. Northern Illinois
University.
What has changed? What has stayed the
same? Which gets to, what did I know, and
when did I know it?
What is the so-called Washington
Consensus?
As a post-conflict country, Cambodia faces
special problemslow HD, landmines, a high
per capita rate of disabled persons.
The Washington Consensus
Developed after the Latin American Debt
Crisis of the early 1980s, the Washington
Consensus still offers many sound policy
prescriptions.
These include:
keeping budget deficits small and under control
focusing on health, education, and infrastructure
deregulation with appropriate supervision
protecting property rights
Protecting property rights holds at its core the
Rule of Law and good governance.
And As We Should All Know
According to the ADB Operations Manual,
Section 54, Issued on 13 January 1997,
governance is the manner in which power is
exercised in the management of a country's
economic and social resources for
development.
Good Governance is the normative version of
that definition, namely, the manner in which
power is exercised in the management of a
countrys economic and social resources for
sound development.
What Washington Means By
Policy Reform*
1. Fiscal Policy (Keep budget
deficits small and under
control)
2. Public Expenditure
Priorities (Focus on health,
education, and
infrastructure)
3. Tax Policy (Tax broadly,
but not too heavily)
4. Privatization of State -
Owned Enterprises (Self-
explanatory)
5. Interest Rate Policy (Keep
them market-determined)
6. Deregulation with Proper
Supervision (Get rid of
stifling regulation)
7. Foreign Direct Investment
(Encourage it)
8. Property Rights (Protect
them)
9. Exchange Rate Policy
(Float or currency board or
sustainable managed-peg)
10. Trade Liberalization
(Reduce tariffs and other
restrictions)
*JohnWilliamson(1990)
Cambodias Twin Crises
July 1997 Coup resulted in the suspension of
aid and the collapse of the aid-based
economya recession ensued.
Asian financial crisis was felt, but impact on
Cambodia was limited because of
dollarization.
Foreign direct investment and consumption of
Cambodian goods and services was curtailed
by neighbors who were hard -hit.
Separating the effects of the two crises is
almost impossible.
But One Clear Example of
the Asian Crisis Impact
ASEAN Free Trade Area (AFTA) will be
delayed by five years. The original ASEAN
member countries: Brunei, Indonesia,
Malaysia, Philippines, Singapore, and
Thailand, have until 2008 to reduce tariffs
among themselves to under 5%. They have
until 2010 to eliminate all tariffs.
Cambodia, Vietnam, Myanmar, and Laos
have until 2015.
1. Where Does Policy Reform
Stand Since the Crises?
Property rights situation has gotten worse,
with numerous land disputes clogging-up
courts since 1999.
Most Cambodians still cannot prove legal title
to property owned, although a new Land Law
was promulgated, and a Ministry established.
Fiscal discipline remains good, but allocation
and efficiency leave much to be desired. IMF
canceled a budgetary support loan in 1997.
Official reason: unaccounted forestry
revenues It has returned with a fresh loan,
and is providing technical assistance.
2. Where Does Policy Reform
Stand Since the Crises?
A 10% Value-Added Tax was implemented in
1999, after more than three years of planning.
Sokimex, a firm that acquired a monopoly on
the importation of petrol, in the privatization
frenzy that preceded the 1992 election, won a
five year contract to run ticket concessions for
Angkor Wat.
The sweetheart deal they got, giving the
government 15% of revenues and $1 million,
had to be changed after the Fund objected.
2
3. Where Does Policy Reform
Stand Since the Crises?
Foreign Direct Investment, which boomed,
came to an abrupt halt. FDI has since
restarted, with garments representing a $500
million sector. GAP and Nike are said to have
pulled back this year, perhaps because of
bad publicity.
Investment Law remains extremely generous,
with a 9% corporate tax rate, a tax holiday of
up to 8 years, and import duty exemptions on
start-up capital and raw materials.
This leaves room for private, side payments
to power brokers who know the powerful.
4. Where Does Policy Reform
Stand Since the Crises?
On the fiscal policy front, demobilization is
costing millions to donors/IFIs and is behind
schedule. No peace dividend yet in sight.
The Commune Election planned for next year
is being used as a rationale for more aid (and
already, the killings have begun), as is
demobilization. Last year, it was the KR
Tribunal.
The budget is still not transparent, but at least
is done with the help of IMF and ADB
consultants who sit in the Ministry of
Economy and Finance.
5. Where Does Policy Reform
Stand Since the Crises?
Little progress has been made on regulation,
as government capacity is low and resources
are few.
Illegal logging remains a club which donors
swing at every pre-Consultative Group
meeting. Januarys was no exceptionand
the NGO Global Witness bore the brunt of
that one.
The Government knows what donors want to
hear. It talks the talk, but does not walk the
walk.
Talking the Talk
"We have not taken steps [to combat illegal
logging] merely to please anyone outside of
Cambodia or to gain reprieve from criticism.
Our actions are based on the understanding
of the crucial need to preserve the forests for
our future generations and to maintain
ecological and bio-diversity balance."
--Prime Minister Hun Sen, at the Cambodia
Consultative Group Meeting in Tokyo, June
12, 2001.
Compare That To What The
Opposition Had To Say
The Hun Sen government has always been
inclined to follow the easiest way: avoid
reforms, preserve the status quo and the
political elites interest, continue corruption,
stick to power synonymous [si c] with
impunity, and beg for international assistance

--Member of Parliament and former Finance

Minister Sam Rainsy, at the Cambodia
Consultative Group Meeting in Tokyo, June
12, 2001.
Original 1997 Conclusion
Guarded optimism: The hoped for benefits [of
ASEAN membership] will follow if the government
grasps the opportunity now to make a concerted
effort at instituting Washington Consensus reform[s]
before the 1998 elections.
Reality:
1998 elections did happen. The twin crises gave
international donors more leverage in dictating the terms of
that election and the continued democratization of
Cambodia.
However, little progress was made and more problems have
arisen. Poverty was last measured at 36% nationwide. Per
capita income remains under $300 per year.
Conclusion: What Phnom
Penh Means By Policy Reform
Prior experience with Phnom Penh suggests that
some members of the government are quite good
at making promises they cannot keep. Talk is
cheap.
The Ministers speeches are done by people like
yours truly, but the reforms are not.
Continuing on a course of lending without strict
conditions will result in more money being
wasted.
Next Test: The Commune Election and
decentralization. Opportunity knocks?
Lesson Learned: Actions speak louder than
words.