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Thursday, July 31, 2008

Asia's Next Tiger?

Asia's Next Tiger?

Cambodia’s ruling party won re-election in an imperfectly democratic ballot July 27. Corrupt, impoverished, with high population growth and poor infrastructure, the country might seem a basket-case. Yet with Vietnamese backing and nearly 10 per cent annual economic growth since 2000, it may be turning into another Asian Tiger.

Cambodia is neither very democratic nor very well run. Its leader Hun Sen was backed by Vietnam when it overthrew the Khmer Rouge in 1979, and he has been prime minister since 1985. Cambodia ranks at number 162 on Transparency International’s 2007 Corruption Perceptions Index, well below the threshold at which normal business becomes difficult. For example, a sale of land to foreign investors in 2007 seems to have benefited mostly the ruling elite.

Like its neighbour Vietnam, Cambodia is suffering an imported inflation problem due to rising food and fuel costs. The government’s solution has been to cease reporting the country’s consumer price index “to avert the possibility of disorder and turmoil".

Nevertheless, there are signs of progress. Cambodia has enjoyed economic growth of more than 10 per cent a year since 2000, led by its main export industry, garments. Its annual population growth has declined from 2.3 per cent in 2000 to 1.8 per cent, facilitating rapid economic growth by reducing the strains that high population growth places on education and infrastructure.

Cambodia’s public sector absorbs only 12 per cent of gross domestic product, its budget and payments are close to balance, and it expects to open a stock exchange in 2009.

Foreign investment is the key, as it has been in Vietnam, where it totalled 65 per cent of GDP in the first half of 2008. Cambodia permits 100 per cent foreign ownership in most sectors, and foreign investment is expected to double in 2008 from $US2.7 billion in 2007 (30 per cent of GDP), with China and South Korea the leading investors. Corruption and a lack of public sector transparency stand in the way. But with rapid growth in Vietnam, greater prosperity in Thailand, its other neighbour, and the US market open to its exports, Cambodia could be set to become an 'Asian tiger' in its own right.

For further commentary visit www.breakingviews.com

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