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p. 3 of 8 BACK | NEXT Executive Summary I. Current Development Trends and Issues II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation Appendixes

Country Strategy and Program 2005-2009: Cambodia

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II. The Government's Development Strategy

A. Development Goals and Strategy

35. The Government’s development strategy, as reflected in the Rectangular Strategy, draws on the SEDP II and the NPRS and is a synthesis of the priorities of these documents.¹⁴ The SEDP II is a comprehensive development program focusing on growth promotion, regional integration, and poverty reduction. It serves as the Government's principal planning document. The NPRS is closely based on the SEDP II and elaborates the poverty reduction agenda, providing a framework for support by international development partners and a comprehensive set of indicators to monitor progress towards achieving Cambodia’s MDGs. The NPRS identifies eight priority poverty reduction outcomes, each of which has detailed actions:

1. maintaining macroeconomic stability
2. improving rural livelihoods
3. expanding job opportunities
4. improving capabilities
5. strengthening institutions and improving governance
6. reducing vulnerability and strengthening social inclusion
7. promoting gender equality
8. focusing on population through maternal health, increased access to education, and rural opportunities

36. Following the formation of the new Government in July 2004, the Prime Minister launched the Rectangular Strategy, which is intended to guide the implementation of the economic policy agenda of the Government during its remaining term in office. The Rectangular Strategy, which can be visualized as a series of interlocking rectangles, has good governance at its core. The other rectangles focus on the desired environment to implement the strategy, and on promoting economic growth through agriculture development, rehabilitation and construction of physical infrastructure, private sector development, and capacity building and human resource development (see Box 1). While conceptually sound, the Rectangular Strategy currently lacks an action plan, and needs prioritization and costing. To implement the development vision set out in the Rectangular Strategy, the Government and its development partners have agreed to prepare a single planning document, the National Strategic Development Plan during the next planning cycle covering 2006–2010.

B. Resource Mobilization and Investment

37. The NPRS and the Rectangular Strategy are predicated on an average annual real GDP growth rate of 6–7%. This would require a substantial increase in the volume and productivity of investment, from a projected 20% of GDP in 2004. Moreover, the actions and investments enumerated in the NPRS call for financing in excess of $1.5 billion over 2003–2005. In the face of increased competition for concessionary aid, there is therefore a need to redouble efforts to mobilize domestic revenues to finance growth and poverty reduction. As indicated in the Rectangular Strategy, this would require a significant effort to improve the collection of tax and non-tax revenues, by reducing corruption and tax evasion, dismantling the structure of tax exemptions, broadening the tax base, and strengthening tax and customs administration. A complementary priority is improving the effectiveness of spending, by linking expenditures more tightly to priority outcomes. There is also a related need to improve the investment climate and reduce the cost of doing business for the private sector.

C. Role of External Assistance

38. External assistance has contributed to the implementation of all major public sector development projects in Cambodia. From 1992 to 2003, official development assistance (ODA) disbursements to the country reached $5.2 billion, with 28% from multilateral sources, 64% from bilateral sources, and 8% from NGOs. Grants account for 80% of ODA. In 2003, about $546 million in ODA was disbursed, equivalent to nearly 8% of GDP. Pledges made during the annual consultative group meetings have increased from $471 million in 1999 to $548 million in 2000 and $635 million in 2002. Based on a revised definition of ODA, donors pledged $504 million in 2004.¹⁵ On a per capita basis, Cambodia has received significantly more ODA than other lowincome countries during the past decade. Aid inflows were mainly used to improve health and education, rebuild physical infrastructure, and build institutional capacity. Given Cambodia's substantial financial needs, its limited capacity to mobilize domestic revenues, and the narrow private sector base, it will continue to depend heavily on ODA in the medium term. However, measures to boost external resources need to be matched by improvements in the efficiency, integrity and effectiveness with which these resources are used.

39. A key priority is to strengthen the capacity and effectiveness of the Government’s aid management linked to the MDGs, in order to achieve greater Government ownership and development impact. While aid coordination is the mandate of the Council for the Development of Cambodia, there is a need to strengthen links and harmonize procedures with other key agencies concerned with ODA, such as the Ministry of Economy and Finance (MEF), and the Ministry of Planning. Given existing weaknesses, significant portions of ODA are handled off-budget and are therefore difficult to account for. There is also a need to improve donor aid coordination to enhance development effectiveness-over 50% of all development assistance has gone towards capacity building, and ad hoc project-based salary supplementation schemes are common. The large number of development partners providing assistance, coupled with the lack of an effective strategic or coordinating framework, has fragmented assistance and limited its impact. The multiplicity of implementation and financing structures has undermined the development of government systems and increased the costs of providing assistance to Cambodia. Furthermore, differing policy prescriptions by development partners have sometimes undermined the achievement of sustainable and unified development policies.

40. A number of initiatives are, however, currently underway to promote better development partnerships. These include measures to implement the Rome Declaration on Harmonization; the restructuring of the existing Government–donor technical working groups (TWGs) at sector and thematic levels; the harmonization of country strategies by ADB, Department for International Development of the United Kingdom (DFID) and the World Bank and the coordination of their programs based on comparative advantage; and a greater reliance on sectorwide development programs. The Government has also collaborated with ADB and the World Bank in preparing a report on standard operating procedures for improved implementation of donor projects. The preparation of a single planning document for 2006–2010 also provides an opportunity to ensure greater development impact by increasing Government and donor harmonization around a unified development framework.

D. ADB's Assessment of the Government's Development Strategy

41. The SEDP II and NPRS processes introduced new approaches and themes to development planning in Cambodia, including

1. open and extensive participation by stakeholders
2. engagement of virtually all line agencies in the process
3. greater focus on key crosscutting themes, including governance, public sector performance, and private sector development
4. use of agreed indicators linked to the MDGs to monitor progress in poverty reduction

42. During the first quarter of 2004, an assessment of the first year of NPRS implementation by the Government and key donors noted a need to

1. address weaknesses in costing and prioritization
2. improve links between strategies and budgets and introduce a medium-term expenditure framework
3. broaden government responsibility, ownership, and coordination
4. build national capacity for poverty monitoring as well to evaluate key programs and policies
5. further elaborate pro-poor rural and infrastructure development strategies. Development partners often took the lead in developing the strategies, reducing Government input and prioritization

43. The Rectangular Strategy represents a serious attempt by Government to demonstrate ownership of the development process. It builds on a sound diagnosis of the causes of poverty and identifies governance as the most important precondition for economic development. However, the Rectangular Strategy’s growth targets appear ambitious, given the likely significant negative impact of the phasing out of the MFA on growth, which is projected to slow down to 2.3% in 2005, and the lack of any immediate alternative to garments as a driver of growth. Moreover, its coverage in terms of reforms and changes needed is ambitious. Effective implementation would require development of a focused and costed agenda.

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