Cambodia: 20 Years of ASEAN Connection

Cambodian trader

Since the country’s return to a market-oriented economy in 1989, Cambodia has pursued policies and reforms to integrate itself into the world economy with the objective of boosting economic growth through investment and trade. Now, Cambodia is celebrating the 20th anniversary of its accession to the Association of Southeast Asian Nations (ASEAN) after years of pushing for membership. The country could have joined ASEAN at the same time as Laos and Myanmar, but admission was delayed twice due to the country’s internal political conflict in 1997 and Singapore’s objection in 1998. On 30 April 1999, the country officially became the youngest ASEAN member state.

Broadly speaking, Cambodia sees the strategic and economic benefits of ASEAN membership, a view widely shared by the country’s chief executives and citizens alike. This article aims to showcase the three major economic benefits from Cambodia’s 20 years of ASEAN membership: (1) catalysing a series of reforms on investment and trade, which in themselves have been key growth drivers; (2) attracting foreign investment through greater and more secure market access abroad following the conclusion of various trade and investment pacts among ASEAN member states as well as between ASEAN and its dialogue partners; and (3) stimulating development of both hard and soft infrastructure, effective trade and investment, human capital development, and expansion of regional production bases and networks through a large number of ASEAN-driven cooperation and integration initiatives.

A Catalyst of Reforms on Investment and Trade

With regard to investment mandates, the 1994 Law on Investment and 2003 Law on the Amendment to the Investment Law have established an open and liberal investment regime, allowing 100% foreign ownership in all sectors except land ownership and with certain restrictions on the employment of foreigners. In this regard, Cambodia meets or exceeds most requirements laid out in the ASEAN Comprehensive Investment Agreement (ACIA). ACIA is an ASEAN instrument to create a free and open investment regime in the context of an integrated economic community. ACIA embodies ASEAN’s aims to increase global competitiveness and promote ASEAN as a single investment destination.

Trade facilitation has also seen a noticeable improvement in Cambodia. This is a good sign and one that represents the government’s commitment to trade liberalisation under ASEAN agreements. For example, pre-shipment inspections were eliminated in 2010, reducing the time and number of documents required for importing and exporting. Reforms to automate certain trade-related processes kicked off one after another, including the introduction of online business registration and online Certificate of Origin (CO) applications as well as the implementation of ASYCUDA (Automated System for Customs Data) at all ports and checkpoints. Work to establish Cambodia’s National Single Window (CNSW) is underway, pursuant to the Agreement to Establish and Implement the ASEAN Single Window (ASW). CNSW is a trade facilitation automation platform for customs clearance procedures that consolidates all documentation processes into a single, ICT-based submission for importers and exporters. In line with the ASEAN Trade Repository (ATR) requirements, Cambodia launched its National Trade Repository (NTR) portal in late 2015, which provides public access to all necessary trade information including customs permits and duties, trade regulatory procedures, and documentation requirements, among others.

Promotion of Foreign Investment

Many trade and investment pacts among ASEAN member states, as well as between ASEAN and its many dialogue partners, have expanded Cambodia’s trading opportunities with the rest of the world and promoted foreign investment through greater and more secure overseas market access. While the initial focus of foreign investment was on garment and textile production, the inflow has spread to other growing sectors in recent years, leading to noticeable progress in economic diversification, as evidenced by manufacturing and export base growth into new sectors such as electronics, bicycles, automotive parts, and agri-business products. Statistics show that the country exported 1,215 product categories to 149 international markets in 2016 compared to the 680 product categories it exported to 94 international markets in 2001. Manufacturing diversification has picked up momentum with the arrival of large Japanese corporations such as Minebea (motor manufacturing), Denso (automotive and motorcycle component manufacturing), and Yazaki (automobile wire harnesses), among others who have undertaken the ‘China+1’ and ‘Thailand+1’ approach to open factories in Cambodia.

When concluded, the Regional Comprehensive Economic Partnership (RCEP) will also facilitate trade and investment and engage all ASEAN member states and ASEAN’s six free trade agreement partners—Australia, China, India, Japan, South Korea, and New Zealand—in global and regional supply chains. As part of the evolving ASEAN Economic Community (AEC) and its growing trading bloc, Cambodia stands to benefit from a greater influx of foreign investment through greater and more secure market access abroad as well as improvement of Cambodia’s business environment and image abroad. Alternative market access has become especially important given the potential removal of duty- and quota-preferential access treatments, such as the Everything But Arms (EBA) and the Generalised System of Preferences (GSP), following the government’s strained relationships with the U.S. and the E.U. over conflicting perceptions of recent political developments in Cambodia.

Opportunities Arising From ASEAN-Driven Cooperation and Integration Initiatives

With ASEAN as the cornerstone of the country’s foreign policy, Cambodia has capitalised on the opportunities presented by many intra- and extra-ASEAN cooperative and integration initiatives, including the Initiative for ASEAN Integration (IAI), the Master Plan for ASEAN Connectivity (MPAC), ASEAN-Japan Cooperation, and ASEAN-Republic of Korea Cooperation, among others.

The IAI, launched in 2000, has served as ASEAN’s wish list for support projects in Cambodia and other less-developed members including Laos, Myanmar, and Vietnam (CLMV)—for infrastructure, human resource development, ICT, and regional economic integration—with funding mainly coming from donor countries. The initiative has reduced various disparities between CLMV and the better-developed ASEAN members while at the same time accelerating the ASEAN integration process as a whole.

ASEAN adopted the MPAC in 2010 to promote connectivity in all dimensions, including basic infrastructure, rules and regulations, people-to-people connectivity, and a Seamless ASEAN. As a result of the 28th ASEAN Summit in 2016, the Vientiane Declaration further concretised commitments to enhance ASEAN Connectivity by adopting the MPAC’s successor document—the MPAC 2025. The MPAC 2025 focuses on infrastructure, digital technology, logistics, regulatory frameworks, and people-to-people connectivity.

Historically an indispensable development partner in the region, we have witnessed the important role of Japan in helping Cambodia boost its competitiveness through both the hard and soft connectivity aspects of development, with a strong focus on industrial human resource development. Indeed, Japan and the Republic of Korea are among the best-positioned partners to assist Cambodia in preparing for opportunities arising from the Fourth Industrial Revolution. The recent Japanese initiative that seeks to drive investment in smart city development in the country is one such example.

Broadly speaking, the most prominent sectoral overlap among these initiatives is in infrastructure and connectivity development. They have contributed to reducing transport and logistics costs while creating a multimodal transport system that better embeds the Cambodian economy within ASEAN and beyond, which will further attract foreign investment, stimulate private sector development, and create more jobs.

Going Forward

Growth and development concerns still linger, including the challenge of diversification, infrastructure and connectivity constraints, and human resource capacity.

Historically a narrow-based economy with growth highly dependent on a few fragile engines, Cambodia’s trade has continuously faced significant deficits with most of its trading partners. The country’s most recent and important ‘economic growth strategy’—the Industrial Development Policy 2015–2025 (IDP)—continues to call for further economic diversification by laying out ‘key concrete measures’ ranging from a reduction in electricity cost, enhancement of connectivity in transport and logistics, and improvement of the labour market and skills. These constraints are not new. Past attempts to address these challenges have seen significant success, owing partly to ASEAN’s support and Cambodia’s commitments in the region. However, reform momentum has not always been as strong as it could. Looking forward, the IDP continues to present an opportunity to re-energise the reform process. Hopefully, the Prime Minister’s “sharp” new package of reform measures with his five approaches of “looking into the mirror, taking a shower, scrubbing away the dirt, treating wounds and conducting surgery” will galvanise reform momentum to specifically address the long-standing governance and public capacity issues regarding coordination, accountability, government effectiveness, rule of law enforcement, and corruption. At the same time, the government needs to continuously deepen engagement with the private sector and civil society in a consistent, transparent, and fair manner to ensure tangible reform outcomes. ASEAN has a strong interest in promoting and realising a more inclusive integration process that will narrow the development gap between countries in the region. On their part, they can continue to assist Cambodia in the implementation of elements of the IDP that address the constraints and issues discussed above, as well as suggesting other areas of action that can unlock the potential of Cambodia’s private sector.

This article first appeared in the Asian Vision Institute (AVI)’s Policy Brief Issue: 2019, No. 7. AVI is an independent think tank based in Cambodia.

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