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Country Operational Strategy - Cambodia

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Executive Summary

"Cambodia would like to fully reclaim its destiny, to be a real partner in regional and global affairs and be well on its way to becoming a truly free nation-free from want and poverty above all."

Prime Minister Hun Sen
Asian Wall Street Journal, 31 July 1999

At the dawn of the new millennium, Cambodians cherish a new dream of lasting peace, security, and prosperity. The impoverished nation is emerging from a long period of conflict that devastated the physical and human capital of the country as well as destroyed its political, economic, and social institutions. The Royal Government of Cambodia is now striving to implement a comprehensive reform and development program to improve security and ensure stability, to rebuild civil society, and to reduce poverty.

A major contributor to the rehabilitation effort in Cambodia since 1992, the Asian Development Bank (ADB) will support poverty reduction to the extent possible, considering the country's absorptive capacity and the Government's performance in macroeconomic management and reform. The program presented in this Country Operational Strategy (COS) will be adjusted as needed to reflect the poverty-reduction-focused socioeconomic development plan being developed by the Government with ADB assistance in 2000. This plan will feed into a high-level forum on poverty reduction that will culminate in 2001 in a partnership agreement between ADB and the Government on poverty reduction goals and collaborative actions. The plan will also provide the basis of the Poverty Reduction Strategy Paper being prepared by Government in compliance with requirements of the International Monetary Fund and the World Bank.

ADB resources will be invested in the Government's attack on poverty in three priority areas over the period of the COS (pages v-vii). The first priority is to support broad-based labor-intensive economic development in populous rural areas where most of the poor live. The second priority is to assist human and social development to enhance equitable access to the benefits of economic growth. The third priority is to promote private sector participation in development by addressing key policy, institutional, and infrastructural weaknesses.

To ensure the prudent use of investment funds, ADB will provide a broad package of technical assistance that will strengthen the institutions of governance in the executive, judicial, and legislative branches. Crosscutting support will strengthen the role of women in development, promote regional cooperation, enhance environmental protection, and address postconflict issues. This support will include capacity building technical assistance (TA), economic sector work, and appropriate design of projects to mainstream crosscutting concerns.

To the extent possible, interventions will be concentrated in the populous rural areas of the Plains and Tonle Sap regions where most of the poor reside. ADB program over the COS period can be evaluated, in part, by measured changes in the incidence of absolute poverty and the country's score on the Human Development Index, its components, and other social indicators such as infant and maternal mortality rates. The focus of interventions is tailored to fit the country's needs, support the Government's development goals, complement the activities of other aid agencies, exploit cross-sectoral synergies in the program, and take advantage of ADB's strategic position as a regional multilateral financial institution in Cambodia.

Cambodia's most pressing need is relief from pervasive poverty that is crippling the population. Social indicators that rank Cambodia among the least advanced of ADB's developing member countries include a life expectancy at birth of 53 years, a literacy rate of 66 percent, and the highest infant and maternal mortality rates in Southeast Asia. About 36 percent of approximately 12 million Cambodians live below the absolute poverty line, but many Cambodians are clustered close to the line so that economic shocks or policy changes could quickly raise or lower measured poverty. Most of the poor who live in rural areas in the populous Plains and Tonle Sap regions have limited access to resources and services, and are engaged mainly in subsistence agriculture.

The root cause of poverty in Cambodia appears to be arrested economic development caused by the prolonged period of conflict that destroyed physical infrastructure, human capital, and the institutions necessary for good governance. With new political stability, however, Cambodia is beginning to focus in earnest on economic development. To reduce poverty, the Government is emphasizing rural economic development through (i) decentralization to encourage local participation in development, (ii) enhanced agricultural productivity to boost incomes, and (iii) expanded rural access to affordable social services.

An important government goal that will ensure balanced and sustained economic growth is to achieve good governance through fiscal, administrative, legal, and judicial reforms. The Government stresses the importance of employment generation through the promotion of labor-intensive manufacturing, tourism, and small-scale enterprises. In addition, the Government is determined to reintegrate politically and economically into the region and the world.

The Government's ambitious development goals are within reach if Cambodia can improve internal security and political stability through resolution of four important postconflict issues. First, the country must be demilitarized; this involves reforming and downsizing the military and police forces to achieve the behavioral norms and size appropriate to the peacetime security concerns of the country. Second, governance must be improved; this includes reestablishing the rule of law and reducing corruption. Third, the needs of the many vulnerable groups created in part by the long conflict must be addressed. Political stability will come from development that is as inclusive as possible. Fourth, a rapidly growing labor force-a result of the postwar baby boom and planned downsizing of security forces and the civil service-must be absorbed into productive economic activity.

Labor absorption and poverty reduction were disappointingly slow over the last several years because of low investment in agriculture and the political and economic crises that stunted economic growth in 1997-1998. Still at an early stage of development, Cambodia faces several major constraints to sustained poverty-reducing economic growth. First, human resources are underdeveloped because of poor public provision of social services-the net enrollment rate for upper secondary school is 6.4 percent. Second, gross capital formation, less than 14 percent in 1998, is among the lowest in Southeast Asia, in part because of weak resource mobilization. Third, inadequate public infrastructure, low labor force productivity, dysfunctional financial markets, ill-defined property rights, and corruption hamper private sector activities. Finally, mismanagement of the country's natural resources degrades the environment and reduces potential revenues. Deforestation, degradation of the Tonle Sap, and depletion of fisheries are of particular concern.

By addressing these constraints Cambodia has the potential to achieve growth in the Government's target range of 6.0-7.0 percent per year. With the population growing at 2.5 percent, per capita income would improve by 3.5-4.5 percent per year. With a well-balanced development agenda that places a priority on rural investments, particularly in agriculture and social services, the potential for poverty reduction is also great. If governance is strengthened and political stability is maintained, the private sector investment to develop the country's potential in industry and services should also materialize. There is potential for growth in tourism, light manufacturing, and agribusiness. Targeting selected potential growth centers for development of their natural advantage can achieve even growth across the country and strengthen the linkages between urban and rural areas.

Weak revenues and low private investment make Cambodia reliant on external assistance to finance its development program. Foreign aid financed about 75 percent of the $100 million of fiscal capital expenditures in 1998 as well as a large program of TA, budgetary support, and emergency relief. Several major aid agencies are involved in Cambodian development. ADB is a major financier in transportation, power, education, agriculture, and water supply. Japan, the largest source with projects primarily in the Plains region, mainly supports bridge, road and port construction, power, and health. The World Bank provides assistance in the Plains and Tonle Sap regions primarily in agriculture, roads, water supply and sanitation, natural resource management, social development, and health.

The United Nations agencies and the European Commission focus on activities in rural development, governance, health, and education. Sweden coordinates its activities closely with the United Nations. France sponsors projects in agricultural diversification and in development of Siem Reap. Australia's main interventions are in agricultural research and extension, mine clearance, education, and health. In addition, about 400 nongovernment organizations are working in Cambodia.

Because of the major role of aid in Cambodia, coordination for both policy consistency and efficiency of operations is essential. As conditions in the country normalize, emergency assistance and rehabilitation give way to support for sustainable development. Aid agencies increasingly call for policy and institutional reform to ensure the efficient use of aid. Coordinated policy advice and long-term capacity building to assist reform and enhance absorptive capacity are thus becoming critical. Aid agencies must also make greater efforts to ensure that, with improved security, geographic targeting of poverty is improved. At Government's request, ADB is contributing by facilitating aid coordination efforts in water resources, education, and roads.

A review of previous ADB operations in Cambodia reveals that project management capabilities are still generally inadequate due to the youth of the program and the resource limitations of the country. Because of low skill levels and salaries, counterpart staff do not always have the ability, incentives, or time to effectively manage projects-a task often left to consultants. Recognizing the severe resource limitations of the Government, ADB should take extra care to closely monitor operations, ensuring efficient and appropriate use of resources to achieve stated project goals. Complex projects with overly ambitious scope, multiple executing agencies, and tight implementation schedules should be avoided. ADB is in a unique position to strengthen the Government's absorptive capacity with TA (and possibly other tools such as long-term advisors and secondment programs) to address short-, medium-, and long-term training needs.

The COS capitalizes on ADB's position as a significant development partner to support a balanced government development program. ADB will extend policy advice across a broad spectrum of development issues supported by strategic investments to achieve priority area objectives. In each priority area, key elements of the strategy must be (i) policy dialogue to achieve efficiency and cost recovery, (ii) sustainable capacity building, and (iii) investments that contribute to equitable long-term economic growth. To maximize the impact of ADB's limited Asian Development Fund as well as enhance aid agency coordination, efforts will be made in each sector to identify potential cofinancing sources.

The first priority area is support for pro-poor, sustainable economic growth through interventions to relieve key constraints to broad-based agricultural growth. It will involve facilitation of government leadership in improving water resource management, as well as activities to encourage agriculture sector development, rural development, and improved management of critical wetlands. Key government assurances needed to trigger planned ADB activities will include continued progress in improving land rights, the development of a water resource management policy, an adequate rural road maintenance budget, strengthening of the Rural Development Bank as credit wholesaler, and commitment to improved resource management in the Tonle Sap area (particularly measures to curb deforestation in the area, reduce agrichemical pollution, and halt overexploitation of fisheries). Important considerations for projects in this priority area are employment generation through labor-intensive investments to the extent possible, and a focus on investments that provide support for labor-intensive activities.

The second priority area is a focus on human resource development. This includes facilitating government leadership of sector development in education (particularly basic education), and investments in basic health, water supply, and sanitation. In addition, ADB will provide key capacity-building assistance to government agencies involved in ensuring that the needs of women and vulnerable groups are addressed. The guiding theme is to improve the quality and efficiency of social services and facilitate equitable access to them. Key constraints the Government must address to improve delivery of these basic social services are (i) inadequate budget support for investment and recurrent expenditures, (ii) inefficient use of allocated funds, and (iii) the poor quality of the civil service.

The third priority area for ADB concessional loan and grant assistance will be development of an enabling environment for the private sector through selected interventions in transportation, finance, and energy. In addition, although the private sector is very weak, ADB will work towards developing the institutional framework to support public-private partnerships in public infrastructure and services. ADB will consider private sector catalyst investments as appropriate opportunities arise. Because Cambodia is at a very early stage of development and because the primary goal is to support poverty reduction, ADB's interventions will emphasize support for domestic small and medium enterprises in the rural areas, especially farming and other agricultural activities. However, to achieve balanced growth and ensure linkages between the rural and urban sectors, ADB will make selected investments to address the constraints to larger-scale direct foreign investment.

Governance is the primary crosscutting theme of the strategy and the determining factor in whether Cambodia can achieve sustainable development. ADB's program of assistance in governance will involve two modalities. First, in each sector of operations, ADB will focus on promoting transparency through frequent and thorough project and program reviews, training workshops in ADB procedures, and capacity-building TA. Second, ADB intends to support the Government's efforts to improve governance through a broad package of TA in the areas of macroeconomic management and law and development.