Cambodia - Economic development

Until 1975, Cambodian governments sought aid from public and private foreign sources and attempted to improve the climate for private foreign capital investment, although the volume of investment was small. Both Sihanouk and Lon Nol also increased local control of economic activities within the country. Aliens were prohibited from engaging in 18 professions or occupations, including those of rice merchant and shipping agent. The Sihanouk government promoted economic development through two five-year plans designed to improve the nation's light industrial sector and its educational and technological infrastructure. Progress was mixed. Strained economic conditions were a factor leading to the overthrow of Sihanouk in 1970. The outbreak of war following his fall brought almost all major production to a halt. The economic objectives of the 1975–79 Pol Pot regime were centered almost entirely on agriculture and the improvement of the irrigation network. Self-sufficiency was stressed, and foreign aid was almost nil except for an estimated $1 billion from China. When the PRK government took over, it inherited a shattered economy and a depleted population. The 1986–90 five-year plan stressed growth in the agricultural sector, the restoration of light industry (which faces shortages of raw materials and electrical supply), gradual socialist transformation of ownership, dependence upon the former USSR and its allies for foreign assistance, and an increase of economic cooperation with its Indochinese neighbors. The PRK signed a number of aid, trade, and cooperation agreements with the former USSR and other Eastern European countries and was receiving substantial technological aid from neighboring Vietnam. Development assistance from the CMEA bloc totaled an estimated $700 million between 1980 and 1984.

The PRK moved slowly on its plan to transform the Cambodian economy to full socialist ownership, in recognition of the relatively low socialist awareness of the population. A small private manufacturing and commercial sector was recognized by the constitution in 1981, and farmers were being introduced to collectivization through the formation of low-level "solidarity groups" which combined socialist and private ownership. PRK plans were to advance more rapidly toward socialist transformation during the 1990s. However, since the mid-1980s the emphasis has been placed on private sector economic activities. Newly introduced market-oriented reforms dismantled the old central planning regime. However, the structural underpinnings of a capitalist system—legal, financial, and institutional—exist only in rudimentary form. Many of Cambodia's nationalized industries were allowed to operate with limited autonomy from the state planning system, but the lack of capital and management expertise, as well as institutionalized corruption and bureaucratic red tape have mired this recovery process. In 1991 at the Tokyo Conference on the Rehabilitation and Reconstruction of Cambodia, $880 million in assistance was pledged to Cambodia by donor countries and multilateral institutions. An additional $80 million in aid was pledged by the Asian Development Bank, and the World Bank planned a $75-million assistance program. Under Sam Rainsy, Minister of Finance and Economy, the national assembly passed a budget and new Financial Structure Laws effective 1 January 1994. The government's aim was to establish central control of the economy and at the same time strike out at corrupt practices. About 48% of the budget was made up of international assistance; there was no land or income taxes with tax revenues providing only 6% of GDP, and customs duties provided 54% of total revenue. In October 1999, after the disruptions caused by civil unrest and the Asian financial crisis, the government entered into a three-year arrangement with the IMF under its Poverty Reduction and Growth Facility (PRGF). The program focused on bank restructuring; reform of the Foreign Trade Bank; reform of forestry policy; and strengthening the public sector accounting and expenditure management. Concurrently, a Structural Adjustment Credit (SAC) loan program under the World Bank was approved in February 2000. The SAC program included conditionals related to the pilot military demobilization program, public expenditure management, forestry policy and revisions to the 1994 Law on Investment (LOI). Development in Cambodia is inextricably linked to the government's ability to maintain peace.