Little Cambodia looks to trade up in the world

Cambodia is set to join the World Trade Organization next week at its meeting in Mexico.

There will be cheering here next week when Cambodia, one of the world's poorest nations, joins the World Trade Organization (WTO) at its fifth ministerial conference in Cancún, Mexico.

But from the sidelines, both free traders and skeptics will be watching carefully to see if the WTO will unleash Cambodia's potential or bury it. When Cambodia drops trade duties with all 146 WTO members, it stands to gain trade and investment from foreign corporations that have overlooked the small Southeast Asian country. However, cutting tariffs could drain Cambodia's coffers and kill its infant industries.

"There are risks in doing this. But the risks of not doing this are even greater," says Sok Siphana, Cambodia's minister of commerce. Mr.Siphana says Cambodia's WTO accession will help attract foreign direct investment from multinationals eager to develop such industries as gems and tourism where Cambodia has competitive advantages.

At the World Bank's headquarters, Nisha Agrawal, country manager for Cambodia, remains cautiously optimistic about the benefits of joining the WTO.

"One big advantage is that Cambodia will have easier access to global markets," she says. But, she adds, the big question is: What does Cambodia have to sell?

The only industry Cambodia has built over the past decade is the export of garments. Though it's now a $2 billion business employing 200,000 people, its long-term potential is suspect. The industry is driven mostly by Hong Kong-based manufacturers seeking to sidestep US-imposed textile quotas. To protect local manufacturers, the US limits the amount of textiles that can be imported from individual countries. With Hong Kong's quota already used up, its manufacturers have set up in Cambodia. But under WTO rules the quota system will end in 2005, and then, Ms. Agrawal says, there is little reason for these firms to remain in Cambodia.

So far global business has virtually ignored this nation of 13 million. Security concerns, the absence of an effective legal system, and widespread corruption deters investors. A recent World Bank study revealed "under-the-table costs" add almost 50 percent to the cost of doing business in Cambodia.

Siphana says joining the WTO will bring outside pressure for change that Cambodia cannot generate from within.

"The WTO will force us to implement quality control, set standards. We have already started making hard decisions like reforming the judicial system and taking action against corruption by paying key officials more," he says.

However, the churn from Cambodia's rocky transition to a stable, democratic system has consistently undermined its attempts to rebuild. Even after 10 years of nation-building by the United Nations in the wake of a long guerrilla war, Cambodia's annual per capita income stands at $266. Seventy-five percent of the population is functionally illiterate and 90 percent work in rice paddies.

Meanwhile, a controversial move by the World Bank to fund the demobilization of the Army, which consumes more than 25 percent of government revenues, has run aground. Cambodia's budget will only get tighter the moment it cuts the WTO ribbon, since customs duties make up almost a quarter of the nation's income. How the country will compensate for this in the short run is uncertain. Foreign aid already funds half of Cambodia's budget.

Under WTO rules, members like Thailand and China will be able to export agricultural produce to Cambodia before local industry has any chance to improve its farming techniques or diversify into new crops. An influx of superior produce could further squeeze Cambodia's farmers, increasing poverty, argues Terry O'Sullivan, an adviser to Cambodia's Ministry of Agriculture.

George McLeod, an adviser to the Union of Free Trade Workers in Cambodia, also worries that manufacturing jobs could leave the country. Though Cambodia's labor is cheap, it is not skilled and efficient, denying the country overall labor competitiveness.

Cambodians seem delighted with all the attention their WTO accession is receiving. That neighboring Laos and Vietnam, a historical rival which occupied Cambodia from 1979 to 1989, are not WTO members and are looking to Cambodia for guidance is particularly pleasing. "We are happy to share with Vietnam all we have learned," says Siphana.

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