National Agenda : Seeds of Hope in the Killing Fields : An unusual regime is healing the economy and freeing Cambodia’s press.

Nearly a year after Cambodia held national elections under U.N. auspices, there is a war raging, the economy is limping and gunmen roam the roads. But the country is not a basket case.

The government, an odd-couple coalition of a failed Communist regime and a royalist guerrilla force, is still in place despite a decade of hatred and widespread predictions of imminent collapse.

Its combined army has captured the headquarters of the infamous Khmer Rouge near the Thai border and now has the Maoist guerrillas, who ruled Cambodia in a savage reign from 1975 to 1978, on the defensive, if not defeated.

And after years of runaway inflation that meant printing money to pay salaries, the government has taken steps to stabilize the economy. The result: The Cambodian currency has climbed in value against the U.S. dollar, and prices have dropped 30%.

Phnom Penh, for more than 15 years a capital of doctrinaire Communists, now has a robust free press, and tourists are flooding back to the country and its ancient temples.

“Cambodia is doing better than anybody could reasonably hope for,” said Valerie Cliff, an official of the U.N. Development Program in Phnom Penh.

One sign of international confidence came last month at a Tokyo conference of aid donors. They pledged $770 million in new assistance for this year and next, nearly double the figure the government expected.

The good news doesn’t mean Cambodia’s problems are over. For instance, the government remains beset by political bickering; crucial legislation has been stalled for months, and King Norodom Sihanouk’s fight against cancer has created a leadership crisis. A coalition army, bringing together the forces of the former Phnom Penh government and two guerrilla groups, has had only mixed success in its fight against the dreaded Khmer Rouge guerrillas whose excesses have haunted Cambodia for 20 years. Although the new army succeeded in capturing two key Khmer Rouge strongholds along the border with Thailand in March, the guerrillas recaptured both.

Nevertheless, Cambodia’s prospects look much brighter now than they did after last May’s elections, when a narrow election victory by Sihanouk’s FUNCINPEC party over the ruling, Vietnam-backed Cambodia People’s Party brought the country to the brink of civil war and threatened to unravel two years of painstaking work by the United Nations, which spent $2.5 billion to bring democracy to Cambodia.

Because neither FUNCINPEC nor Hun Sen’s government had the two-thirds majority needed to adopt a new constitution, they agreed on a unique power-sharing arrangement.

Sihanouk’s son Prince Norodom Ranariddh became first prime minister, while Hun Sen, who had headed the old regime in Phnom Penh, became second prime minister. All the ministries were given two ministers, one from each side, creating what was regarded as a recipe for certain gridlock. It hasn’t been smooth sailing, but the relationship has proved far more durable than expected.

An example is the work of You Hockry, a co-minister of the interior and public security ministries who until last year worked in the reservations department of a Marriott hotel outside Washington, D.C., where he lived in exile. Following last year’s elections, Phnom Penh was plagued by car thefts, especially of U.N. vehicles, carried out by men in government uniforms. Insiders suspected a gang organized by top officials in the old Hun Sen regime and doubted that the new coalition would have the clout to attack it.

But Hockry confounded the skeptics, arresting former Transportation Minister Ros Chhun, his two sons and two policemen. They were charged with car theft and gun running, and two other security men were shot dead in raids. The car theft problem in Phnom Penh, at least, vanished overnight.

While the roads outside Phnom Penh remain dangerous--a U.S. aid worker was shot recently and another is being held for ransom--the problem is largely one of unpaid soldiers seeking money and not of officially backed crime. Many Cambodians are amazed that an outsider like Hockry was allowed to take on the entrenched powers.

One of the most popular figures in the coalition government--and the most controversial among his colleagues--is Co-Finance Minister Sam Rainsy, who is also a FUNCINPEC official. When Rainsy took over last summer, the country was bankrupt. It was printing money at a feverish rate and was able to meet its payroll only by a cash advance from the departing U.N. forces. So the co-finance minister came up with a budget and persuaded the Parliament to adopt a law sending all government revenues to Phnom Penh, which redistributed a share back to the provinces. Previously the provinces just kept a large slice for themselves.

Rainsy also cracked down on smuggling, even chasing smugglers himself, to make his point that customs duties, the country’s primary source of income, had to be collected.

Government revenues have quadrupled in three years, and the economy is climbing between 7% and 8% a year.

Like Hockry, Rainsy has shown no reluctance to take on top officials, in this case attacking corruption in a country where virtually everyone in government was on the take. Even Ranariddh has admitted that he accepts contributions because he can’t live on his official salary of $70 a month.

But Rainsy has made a number of strategic enemies by introducing taxes on big business and the rich to help close the budget deficit, as well as by targeting Thai businessmen who had reached comfortable arrangements with the former government by paying bribes. One powerful Thai was so angered at Rainsy’s actions that he took out ads in the press calling him “the minister for destroying the economy.”

Rainsy appeared on the verge of being fired until help arrived in the form of a letter from King Sihanouk, who had been king once before in Cambodia’s tumultuous history and who is widely revered here. He spends most of his time these days in Beijing undergoing cancer treatment.

Sihanouk said Rainsy had served Cambodia “with loyalty, effectiveness and courage, for the higher interests of the Cambodian people.” The letter appears to have saved Rainsy’s job, for the moment at least.

But the delicate power balance holding the regime together has also produced what one diplomat calls a “period of drift,” because few people want to stick their necks out by taking initiatives.

As a result, a desperately needed investment law, which would provide a legal basis for foreign companies to come into the country, should have been written months ago but has not been presented to Parliament yet. In fact, there is no formal system of law in Cambodia, no penal code or judicial rules.

The absence of investment legislation has kept foreign investment in Cambodia extremely low, despite what business people regard as the country’s great potential. Foreign companies are understandably slow to send in money, since they’re unsure they can get it out safely.

Newcomers face a number of unhappy surprises. For instance, many of the FUNCINPEC officials who were elected last year, most of them middle-class expatriates, were aghast to find their co-ministers from the old Hun Sen regime to be “dollar millionaires” who drive $100,000 cars (Phnom Penh prices). Diplomats say many newcomers have been similarly seduced and now take their lead from the Hun Sen appointees.

The government surprised many observers by appointing new governors for all 21 provinces--posts of considerable clout. The total included 11 from FUNCINPEC, meaning that some powerful officials of the former Phnom Penh regime were out of a job.

A potential crisis for the government is what will happen when Sihanouk dies, and the king himself has already issued detailed arrangements for his funeral. Many diplomats regard his absence from the political scene as a blessing, because the 71-year-old king obsessively meddles in almost every government decision. Still, he represents a political glue holding together the country’s disparate parts and factions.

Sihanouk has been trying to arrange peace talks between the government and the Khmer Rouge guerrillas. But while the king wants to include the Khmer Rouge in the government, neither his son Ranariddh nor his old enemy Hun Sen has shown much enthusiasm for the idea, particularly since the Khmer Rouge decision to boycott last year’s elections.

In fact, their government launched a major offensive against the guerrillas despite a public plea from Sihanouk that it refrain from attacking--a sign, diplomats say, either that the government is no longer directly influenced by Sihanouk or that he tacitly supported the offensive.

The major benefit of the attack that drove the guerrillas from their redoubt in the western town of Pailin was that it denied them income derived from the sale to Thai businessmen of gems and timber found in the area. But now that the town has been recaptured, and the Cambodian army has suffered a humiliating defeat, the Thais, ever the pragmatists, will no doubt continue to deal with the Khmer Rouge.

Even if the fighting was to stop tomorrow, the problems left by the conflict will be around for years. Millions of land mines still blanket large areas of the country, crippling hundreds of civilians every month.

The economic benefits of the last few years have had relatively little trickle-down effect in the countryside, where 80% of Cambodia’s 9 million people live much as they have for hundreds of years. People are beginning to pack up and move to the cities.

“The coming of the U.N. and the elections hasn’t changed rural people’s lives one bit,” said Jaisankar Sarma of World Vision, a U.S. charity that works in Cambodia. “The disparity between urban and rural life has grown a lot. The disparity between rich and poor is growing larger.”

MAJOR EVENTS IN CAMBODIA: 1955-93

1955--King Norodom Sihanouk abdicates the throne but remains prime minister of the country’s civilian government.

1960s--Sihanouk, now titled a prince, tries to remain neutral during the Vietnam War but permits Vietnamese occupation of eastern provinces in exchange for Hanoi’s promise of Cambodian territorial integrity.

1965--Sihanouk breaks diplomatic relations with the United States under pressure from leftists.

1970--Right-wing coup overthrows the prince’s government. Vietnamese-backed Khmer Rouge guerrillas begin campaign against the U.S.-backed regime of Lon Nol.

1975--The Khmer Rouge under leader Pol Pot seize power, order all city dwellers to abandon their homes and move to the countryside. They begin a three-year reign of terror in which the death toll from executions, starvation, disease and overwork exceeds 1 million.

1979--Vietnamese troops, supported by Cambodian rebels, invade and occupy the country, setting up a regime under Hun Sen loyal to Hanoi. Guerrilla warfare continues in the countryside for the next 13 years. The Vietnamese and Hun Sen forces are opposed by the Khmer Rouge, a U.S.-backed guerrilla group and forces loyal to Sihanouk.

1991--The four warring Cambodian factions sign a U.N.-sponsored peace agreement.

1993--The first multi-party free elections are held. The royalist party, known by its French initials, FUNCINPEC, and headed by Prince Norodom Ranariddh, Sihanouk’s son, wins 45% of the popular vote. In second place, headed by Hun Sen, the Cambodian People’s Party gets 38% of the vote. The two leaders become the first and second prime ministers of the new government, and Sihanouk returns as king to the throne he abdicated in 1955.

Compiled by Times researcher ANN GRIFFITH