International Business Proposition: Cambodia

By: Jeffrey S. Hatfield, II International Business 3000 Professor Jing Feng November 2, 2011

I. Country Background Cambodia is a country located in the Indochina Peninsula within Southeast Asia. Cambodia is on the Gulf of Thailand with Vietnam to the east, Thailand to the northwest, and Laos to the northeast. The territorial size of this country is 69,898 square miles home to 14.8 million individuals. Known as the Kingdom of Cambodia, a constitutional monarchy is practiced with monarch Norodom Sihamoni ruling the land. The current party in power, also the major ruling party, is the Cambodians People Party. Common law is the derivation of the form of law exercised in Cambodia. Their economic system is shaped by the countrys agricultural heritage and orientation. Cambodias gross national income in 2010 was $28.883 billion and their gross national income per capita was $2,040 in the year 2010. Their major natural resources include metals and minerals, hydroelectric power, petroleum, forestry, and the most recent discovery of offshore oil deposits. The main exports leaving Cambodia are garments, rice, rubber, and timber. 55% of these products are exported to The United States, 8% to Germany, 6% to Canada, 6% to the United Kingdom, and 5% to Vietnam. The main imports coming into Cambodia are construction materials, machinery, motor vehicles, and pharmaceutical products. These imports. 27% of imports come from Thailand, 19% from Vietnam, 15% from China, 8% from Hong Kong, 7% from Singapore, and 6% from Taiwan. Cambodia is also member to the Association of Southeast Asian Nations (ASEAN) and the World Trade Organization (WTO). The currency used here is Riel and it is freely exchanged on open markets.

II. Business Proposition Cambodias country and economy was left in shambles subsequent to the Vietnam War in 1975. It was not until 1993 that Cambodia was ruled as a parliamentary representative democracy, or monarchy for short. Historically, this war torn country carried little to no successful economic achievement. In the past couple decades, however, Cambodias economy has grown rapidly averaging a 6% growth rate in the past decade alone. Much of Cambodians still live in poverty, thus this country is still not out of the dark. In addition, half of Cambodias national budget is made up of foreign aid, with the majority coming from the United States. In Cambodia in 2005 oil and natural gas deposits were discovered offshore which leads me to my proposition. Cambodia needs to adequately manage capital and resources towards the extraction and exportation of oil. In doing so, this country can slowly wean itself off foreign aid, increase its standard of living, and increase the overall health of its economy. III. Evidence Cambodia is still struggling to regain stability and prosperity from the effects of the Vietnam War. These repercussions left much of the country in poverty, many of which live on around 50 cents per day (Mydans 2). Cambodia is ripe with natural resources from gold and iron, vast natural forests, and the most promising new discovery of offshore oil (Winn 1). This country has more or less stumbled upon a potentially booming development that could transform their economy. The answer to Cambodias pain and poverty is the extraction and exportation of oil. With the first exploratory drilling in 2005, the Chevron Corporation located masses of oil deposits off Cambodias shore in the Gulf of Thailand. This may well be one of the last oil deposits to be

discovered on Earth and represent a world of change for the Kingdom of Cambodia. Hun Sen, the Cambodian Prime Minister, has boasted of future cash flows that will come from extracting this oil in years to come. Upon the discovery of offshore oil deposits in Cambodia, countless foreign entities have rushed to get in on the ground level of its extraction. Among these investors, China currently holds the biggest claim to the future operations off the coast, granting Cambodia the largest amount of aid. This is good for both countries in that Cambodia does not have to put forth much of their already miniscule national budget, and China would be the largest consumer of the oil. Cambodias current national budget has fluctuated around $1.2 billion per year in recent years. When Chevron underwent its experimental drilling in 2005, they estimated Cambodias offshore oil reserves around 400 million barrels that would bring in approximately $1.7 billion a year for many years to come (Winn 1). This discovery, if not planned and administered correctly, could have an adverse effect than as proposed by the optimistic Prime Minister. The oil curse or resource curse is a long standing economic theory observed in such third world countries as Chad and Nigeria. This theory holds that within a besieged economy, the discovery of precious resources such as oil and gold could pull said economies into further poverty and corruption. On the contrary, similar countries Azerbaijan and East Timor have effectively controlled oil revenues with a primary objective of using these cash inflows for the betterment of their countries. They have done so through using the revenue accountably and transparently. Many American experts believe the extraction and exportation of oil

from Cambodia will either excel their economy into greatness, or adversely plummet into social unrest, political instability, and violence. (Posarath 2) Cambodian Prime Minister Hun Sen understands the oil curse and is working hard to counteract these previously observed outcomes in similar economies. The wealth from oil could benefit Cambodia in many ways. These revenues, if used responsibly, could contribute to hospitals, education, roads, and electricity. Approximately 80% of Cambodians currently live without electricity in their homes. In addition to these national benefits, Cambodia could establish itself as an independent country free of foreign aid, nearly half of which is from US tax dollars. Many of these donors have been pushing anti-corruption legislation in Cambodian courts for nearly a decade. Sen promises to make the revenues from oil a blessing, rather than a curse, and aimed at projects that furthers the nation as a whole and lessens the poverty level. These promises must be backed up, for if they are not the country will suffer the grave consequences of mismanaging rapid wealth. (Mydans 3) Even with Cambodias impressive consistent economic growth in the past decade, the country still experiences corruption in the government, approximately 34% of citizens living in poverty, and a rather small economic presence worldwide (Winn 2). These conditions are not very well suited for a swift inflow of millions of dollars in revenue brought in by the exportation of oil. Despite these facts, this discovery was both a godsend and a chance for Cambodia to emerge as an international economic powerhouse. Cambodia needs clean and responsible leadership to manage revenues. The exportation of oil can become the most lucrative and successful contribution to Cambodias GDP ever,

far surpassing their previous dependence upon agricultural, garments, and construction yields (Tha 3). The Berlin based political monitoring institution, Transparency International, places Cambodia as the 18th most corrupt country. Along with Transparency International, the World Bank has constantly placed Cambodia in the bottom 10% rank in ability to control corruption (Phosarath 2). Many international organizations are striving to ensure that Cambodia has a smooth transition into its coming wealth. The United Nations Development Program worked with the Norwegian government to comprise a plan of action for the Cambodian government. This meeting concluded that the government needed to create an independent, transparent oil fund. The Cambodian government understands the urgency of planning for this not so distant future issue. Prime Minister Sen has agreed to follow the principles and rules of the Extractive Industries Transparency Initiative, who aim to achieve full publication and verification of company payments and government revenues from oil, gas and mining. (Tha 2) It is also important to educate future generations in the extractive industry, one utterly foreign to the country of Cambodia. On the national level, there are efforts being put forth to ready college level students to both effectively and efficiently take the reigns of this massive project and inform them of its importance. It is important for young Cambodians to understand the foreboding issue of the misusage of extraction and exportation revenues from oil. Sounsau Sathya, a senior assistant at the Extractive Industries Climate Change Program explains that Cambodian youth are limited in their knowledge of the extraction industry because they have no chance to attain the needed information and it is also not widely available. He also understands that without proper

management of oil revenues, the country will lose revenues from this resource hindering future generations. Mam Sambath, the executive director of the non-governmental organization Cambodians for Resource Revenue Transparency noted that the Cambodian government has heard its citizens unease and has drafted a law to allow them to share their extraction and exportation concerns and opinions. Better educating Cambodian youth now will pay off exponentially in the future. (Tha) There is no simpler solution to avoiding the consequences of mismanaging rapid wealth than the country as a whole making a drastic change in practices. This is such a rare opportunity that has been handed to the Cambodian government on a silver platter. Nearly 84% of the project has been funded from abroad and the annual oil revenues are estimated at $174 million in 2011 and $1.7 billion in 2021 (Winn 2). Those in positions of authority should join Prime Minister Hun Sen in his visionary journey to the betterment of Cambodias future.

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