Political Conflicts Stunt Cambodia’s Fiscal Growth

Three years ago, the village just across the Mekong River from Cambodia’s capital consisted of: three restaurants serving cheap Vietnamese pancakes; one small market; acres of flooded lotus-root and vegetable fields; and some thatch-and-wood houses on high stilts along the riverbank.

It was accessible only by ferry after Khmer Rouge guerrillas blew up the only bridge in 1973.

Then came the Japanese, who finished rebuilding the bridge in 1994. Now more than 75 restaurants have sprung up along a crowded strip that locals have dubbed “Vietnamese Pancake City,” a booming culinary mecca for Cambodia’s emerging middle class and an indicator of economic rebirth after more than two decades of civil war.

The thatched-roof houses remain, but many are festooned with Christmas lights and signs for imported beer. Giant pagoda-style restaurants, some seating more than 1,000, offer Thai, Chinese, Vietnamese, European and Khmer food to well-dressed customers who drive up in late-model imported cars. Performances of pop and traditional Khmer music are punctuated by the beeping of cellular telephones.

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Cambodia’s tiny economy swelled 6% last year, outpacing that of South Korea and equaling the growth rates of Hong Kong and Myanmar.

But progress has not been nearly fast enough to suit Va So Van, 38, a police officer who arrived for dinner this week in a 1985 Toyota Camry with his wife and two children in tow.

“Cambodia has developed, but not like neighboring countries,” Van said, blaming the political deadlock created by two rival prime ministers--Prince Norodom Ranariddh and Hun Sen--locked in an increasingly violent feud. “Without political conflict, the economy would be growing much faster.”

Despite nearly $3.5 billion in international aid that has been poured into this country since the U.N.-sponsored peace accord of 1991, Cambodia may still be a political disaster area.

But it is not an economic basket case.

Inflation has been tamed from 150% in 1991 to between 5% and 6% now. Growth, after inflation, is expected to continue at 6% to 7% a year.

The exchange rate is stable, foreign exchange reserves have soared, and, although defense still eats up more than half the nation’s budget, government spending is under control.

While massive foreign aid has certainly helped here, a World Bank report recently declared that Cambodia’s achievements “are remarkable when compared with the experiences of other post-conflict countries such as Angola or Mozambique.”

Economists point to a red-hot street economy, including the palatial new eateries in Pancake City--nicknamed for the ubiquitous stuffed rice-flour crepes served there--as one of the most positive portents for Cambodia’s future.

Mathew Varghese, a World Bank official working in the Cambodian Ministry of Planning, estimated that the informal economy may be growing at 15% or 20% a year.

According to the World Bank, Cambodia remains one of the poorest countries in Asia. Per capita income last year was $300, and 39% of Cambodia’s 10.7 million people live in poverty.

Certainly, it suffers from a full complement of familiar Third World problems, as well as some unusual ones: paralyzing factional strife, bloated bureaucracy, inability to collect taxes, endemic corruption, a growing gap between urban rich and rural poor, a high birthrate, a land mine problem that will endure for decades, forests that will be denuded within 35 years if logging continues at its current pace and the traumatic legacies of genocide.

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Still, progress has been enormous, and many Cambodians and Westerners agree that the economy is on the runway and ready for takeoff--if only the politicians would get out of the way.

“This country has no long-term economic problems if politics and governance can be solved,” said Scott Leiper, who heads the United Nations’ Cambodian Rehabilitation and Regeneration Project. “It has a small population in a very dynamic economic region. . . . It could easily develop small-scale enterprises.”

But Cambodians of all political stripes are now united in the fear that the deteriorating political climate will scare off the tourists and investors they so desperately need.

The two prime ministers have repeatedly promised to curb their conflicts and cooperate--but then immediately resume accusing each other of nefarious deeds, including plotting to kill the other.

On Wednesday, fighting between two military units said to be loyal to the rival prime ministers broke out again about 15 miles north of the capital, closing the main highway leading west from Phnom Penh to Battambang.

The incident reinforced fears that the general election scheduled for May 1998 could be bloody--if the dysfunctional coalition government can hold until the election.

It was symptomatic of the chaos and tension here that high-ranking officials in the two political camps put out at least three contradictory versions of the clashes.

Khieu Kannarith, a senior Hun Sen advisor, insisted Wednesday that the only casualties were “some coconut trees hit with bullets.”

“I can tell you, now all the generals are busy building their houses, they are not interested in fighting,” Kannarith said. “Don’t worry.”

But Phnom Penh residents have found cause for worry since a March 30 grenade attack during a peaceful opposition demonstration killed 17 people. Last month, a battle between bodyguards working for the opposing camps ended with two dead and a rocket in the American ambassador’s backyard.

Secretary of State Madeleine Albright canceled a visit to Cambodia scheduled for last weekend, citing security concerns.

Tourism is one of Cambodia’s big growth businesses, because this is one of the few exotic spots in Asia that few jet-setters have visited.

The number of visitors was up 21% in April compared with a year earlier. But the Ministry of Tourism is bracing for a slowdown this summer because of the bad publicity Cambodia has been getting in the international media, said Sok Chenda, a ministry undersecretary.

Cambodia does have an image problem. His name is Pol Pot.

Many Cambodians and expatriates here believe that the unconfirmed reports of capture of the aging Khmer Rouge leader have been overemphasized in the international media coverage of Cambodia, together with reports of political violence in a city that is generally acknowledged to be safer than, say, Los Angeles.

“When you come here, you see that it’s a fairly tranquil, charming city where life goes on,” said David Doran, a Phnom Penh attorney who represents foreign investors.

But any trouble “feeds into the Pol Pot mania,” he said.

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Doran said business has been booming since his DFDL law firm hung out its shingle in 1995. Land prices have skyrocketed, a few multinationals have moved in, and so have garment makers and light manufacturing and assembly firms from elsewhere in Asia that are attracted by Cambodia’s low wages, he said.

But the firm has seen a “noticeable slowdown” in inquiries from potential investors since the grenade attack, Doran said.

Moreover, existing investors are starting to complain more about the pervasiveness of corruption, Doran said.

Most have done business in other countries in the region, where corruption is rampant.

“But usually, elsewhere, if you pay someone, you get something, and you’re pretty sure of what you’ve got,” he said. “Here there’s too many factions. There’s too many people to buy.”

Meanwhile, another informed source said some of the “investors” appear to be money launderers attracted by democratic Cambodia’s lax-to-nonexistent banking regulations and its U.S. dollar-based cash economy.

The source said “huge amounts of money,” perhaps $1 billion a year, are being “washed” through this fledgling, somewhat anarchic economy.

Meanwhile, some Cambodians worry that the current economic growth is being achieved by a rich few who are stripping the nation of its natural resources and spending the proceeds on a lifestyle their nation can ill afford.

“We cannot afford satellite dishes, we cannot afford beautiful villas with high-quality bathroom fixtures,” said Lao Mong Hay, executive director of the Khmer Institute of Democracy. “We need roads, public utilities, factories, plantations.”

Most of all, Lao said, Cambodia needs its friends, the weary international donors and the members of the Assn. of South East Asian Nations, to keep up pressure on the rival factions to abhor violence and keep the fragile peace.

“So far we haven’t gone to civil war yet,” Lao said. “And regardless of the troubles at the top, people are going on with business.”