Searching for economic hope in Cambodia

August 2, 2013: 10:53 AM ET

With voters protesting this week's election results, the nation's leaders and global multinationals can no longer ignore the nation's economic hardship and systemic corruption.

By Amy Kaslow

Cambodian Prime Minister Hun Sen

Cambodian Prime Minister Hun Sen

FORTUNE (Phnom Penh, Cambodia) -- Cambodia's promoters fanning out to money centers and markets worldwide pitch the Southeast Asian nation's economy as practically booming, a regional pivot point, and wide open for global business. Labor is cheap, land available, and natural resources ready for exploitation.

But the same country courting corporations ranks tenth as the most corrupt country on earth and scores just as high among human rights abusers, adding to the deep scars of its brutal past.

With Cambodian voters protesting this week's national election results -- the most controlled and corroded in the country's history -- the nation's leaders cannot evade the rampant scandals, economic hardship, and systemic corruption the campaign thrust into the spotlight. It's a laundry list that includes inhumane working and housing conditions for low-skilled workers in local and foreign-owned factories; violent "land grabs," forced evictions and unbridled transfers of Cambodian land to local and foreign investors; and the delayed prosecution of former Khmer Rouge leaders charged with enslaving, starving, and slaughtering some 2 million Cambodians during the 1970s Communist revolution.

Should those eyeing Cambodia's market simply factor these realities as costs of doing business in an emerging market?

American enterprises are poised to enter the country. Chevron (CVX), Ford (F), and General Electric (GE) are already there. But even advocates of moving into Cambodia equivocate on whether now is the right time to make a move. A recent communiqué from the US-ASEAN Business Council, a blue chip group chaired by ConocoPhillips (COP), updates members on commercial opportunities in Cambodia, along with reports about throngs of protestors pushing for free and fair elections, tragic worker fatalities due to unsafe factory conditions, and stymied regulatory reforms.

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For American prospectors, considerations over whether to enter Cambodia may extend beyond the usual risk assessments. There's been a long lull in American involvement in the nation. From 1969 to 1972, Washington policymakers entrenched in the Vietnam War decided to broaden their targets. American B-52s dropped 540,000 tons of bombs on Cambodia; death toll estimates range from 150,000 to 500,000 civilians. The decision was highly contested, deeply regretted, and still a prickly point.

Currently, U.S. presence in Cambodia is largely aid-based, with investments in technical assistance, or "institution building." Last year, Washington extended $121.3 million in 2012 bilateral assistance for health, governance, education, and economic growth projects.

Some are calling for deeper engagement with Cambodia. U.S. influence is crucial now, as Cambodia bucks the democratic reform trend in the region, argues Ernest Bower, the Sumitro Chair for Southeast Asia Studies at the Center for Strategic and International Studies. He says the region is on the cusp of an "ASEAN Spring" with autocracies already giving way to "new and rising expectations for empowerment, governance, and the rule of law." Cambodia, he says, is the outlier, mired "in political instability that should concern its neighbors and ASEAN partners, including the United States."

Disappointing leadership, extensive poverty

A "strong arm" leader and an early, avid member of the dreaded Khmer Rouge, Cambodia's Prime Minister Hun Sen has sidelined, muzzled, and expelled his opposition during nearly 30 years of rule. International monitors routinely condemn Cambodia for unfair elections; this year, British monitors refused to return, saying the Cambodian government had yet to implement their recommendations after the last compromised election.

Hun Sen's powerful Deputy Prime Minister Sok An, says the Tribunal "demonstrate[s] Cambodia's commitment to the rule of law," and a new, novel approach to justice. Yet, by its own admission, Cambodia's judiciary is rife with extortion, bribery, and political influence peddling.

A staggering 65% of Cambodians reported paying a bribe to the judiciary over the last 12 months, according to Transparency International's Global corruption barometer, which just issued its 2013 report on Cambodia. An equal number of Cambodians surveyed said they paid a bribe to the police, 62% to a utility, 62% to registry and permit services, 57% to the Land Services, 30% to education institutions, and 38% to medical services.

Though Sok An disabuses those hoping for dramatic change, claiming "the judicial system is not something you can change overnight," he has direct control over the organization. Nicknamed "the King of Patronage," he heads the Council of Ministers and oversees permits, contracts, and investments in the nation's oil, rubber, and logging enterprises; he arbitrates land disputes; and he leads the tourism authority. Critics say the favored few are on the take, while economic wherewithal escapes much of the country.

Sixty-one year old Prak Sakhorn lives in a small village, where her family earns a meager living, and, like so many Cambodians, they barter food for clothing and other essentials. She shares a discouraging statistic with Cambodian women: The United Nations World Health Organization (WHO) puts their average life span at 66 years, among the lowest in the world. Her granddaughter's outlook is equally sobering: WHO says Cambodian children's nutritional status is among the world's poorest, and near bottom since the 1980s.

Ninety percent of Cambodia's poverty is rooted in rural areas, where locals survive as subsistence farmers. Polluted water and minimal sanitation translate into widespread water-born diseases. Countrywide, fewer than half of Cambodian households have access to clean water, and only a third have toilets. Yet even in remote reaches, the smallest villages are punctuated with an outpost of Hun Sen's ruling Cambodian Peoples' Party (CPP). The CPP constructions are lavish, compared to the neighboring mud floor lean-tos and simple stilted huts.

In the congested cities, decaying vestiges of French Colonialism abut communist-style housing blocks favored by the Cold War era's eastern architects. To ensure 24-hour production, many factories have workers' quarters, over-crowded board structures with thatched roofs. An ongoing building boom has made luxury housing available to rich Cambodians at million-dollar prices, affordable to those with CPP ties.

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Government land sales have displaced thousands of people at a time -- approaching half a million, to date -- as investors level homes and break ground for new construction, resource prospecting, and rubber plantations. The World Bank's International Finance Corporation and Germany's Deutsche Bank are among the top investors in those deals.

Proponents want to tap into Cambodia's lower cost alternative to producing in China, to counter China's major capital outlays in Cambodia and in ASEAN. Despite corporate pressure for the U.S. Export-Import Bank and the Overseas Private Investment Corporation to stake a sizable claim, the State Department response has been measured.

In U.S. involvement, hope for good jobs

After a year into the job, U.S. ambassador to Cambodia William Todd only raised the profile of American finance and export possibilities in Cambodia with a webinar and trade mission to the U.S. earlier this month. "We need to redefine Cambodia's business and commercial image," he declared in a recent Ask the Ambassador online posting.

Todd says more American dollars will lead to higher-wage jobs for Cambodia's youth and reduce its "vulnerability to labor trafficking." With 70% of the population under the age of 30, the demographics are promising to Daniel Henderson, Cambodia Country Manager for the US-ASEAN Business Council. "If you engage with youth in Phnom Penh and at the university level, many are more worldly, more aware than a lot of adults ... they use the Internet, they're inclined to read international news, and they're hungry for opportunity and to catch up with the rest of Asia."

For the vast majority of youth hanging from the lower rung of the workforce, falling into human trafficking is a real risk. "When people are able to earn a living wage in their home country, they do not need the help of unscrupulous brokers," Todd says, adding that a larger U.S. presence can lead to greater stability.

Cambodia's countryside is littered with bomb ponds, water-filled craters formed when American B-52's dropped massive explosives in the region.

Cambodia's countryside is littered with bomb ponds, water-filled craters formed when American B-52's dropped massive explosives in the region.

Lenders caution that Cambodia's economic growth could come at too high a price. The World Bank raised its GDP growth estimate from 6.7% to 7.0% this year, given robust garment, tourism, and agriculture sectors, and forecasts inflation at 3%. But the Bank is still closed to Cambodia; it cut off loans in 2011, reacting to the violent forced evictions. Bank officials say they'll wait until after the election results settle before discussing any new loan programs.

Cambodia needs "basic infrastructure, adequate health care, and education" to be a safer bet, says Henderson. "And they need to develop a consumer base," he adds. Compared to more transparent and economically stronger ASEAN partners, Cambodia has not cultivated a middle class with purchasing power. And roughly a third of the population falls below the poverty line.

Hun Sen claims that he has moved the nation from abject poverty to within striking distance of middle-income status. But, like much government-sanctioned information, official data on hunger, jobs, and wages hardly reflect reality. Global monitors say a third of the population is malnourished and more have stunted growth. The best prospects for most high school graduates: work in a factory where repetitive tasks require low skills and the pay is roughly $70 to $90 a month. "If you're a rock star," says one diplomatic economic attaché, "you might work in an office" and earn 10% more.

Farm workers can expect $40 in monthly wages. The sex industry's dramatically higher pay draws boys, girls, men, and women, with some earning as much as $500 a month. Cambodia's constitution regulates the trade, "but the laws are not being enforced," says the diplomatic attaché, "so there's no way to know how many people are enslaved as sex workers." Traffickers target poor families, offering to unburden parents by taking their children, or simply stealing them.

Staring down a brutal past

Layered underneath hardships in villages and cities is a genocidal past that Cambodians are only starting to come to terms with; an entire generation and its unborn children were affected. "The level of criminality here is larger than anything I've ever dealt with," says one of the many highly skilled international Tribunal jurists recruited for his experience in Bosnia, Rwanda, and other trouble spots. "Every single family is affected. The social problems derived from the enormous amount of damage [pales] compared to any other court that I've worked in."

Today, Khmer Rouge perpetrators live next door to victims. The Khmer Rouge enlisted pre-adolescents, peasants, and ideologues to attack women and children, commit categorical murders of professionals, students, educators, business owners, people who wore eyeglasses, the infirm, the list is long.

Recent election campaign rhetoric was rife with denial, but the most stinging may have been Hun Sen's threat that any pursuit of justice against him threatens civil war.

Celebrated war correspondent and author Elizabeth Becker is on the Tribunal witness list; the Court has postponed her appearance four times. "This is what happens when you're forced to wait 25 years. This trial should have been held in 1980. When it's not a political issue, then it's who has the most money to pay off the judge," Becker says.

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Yet, she says, "Wounded as this Court is, weak as it sometimes appears, the ECCC is an example of independent justice ... and has opened up a lot of avenues." If Becker's hunch is right, the rule of law has gained a foothold in Cambodia through pressure, exposure, or public expectation.

Perhaps not in time for this year's election, but "a critical mass of Cambodians will, like their Southeast Asian neighbors, demand more," says CSIS's Bower. "Entrepreneurs will call for the rule of law and the economic freedom necessary to create valuable, productive businesses ... An increasingly connected and educated citizenry will become less tolerant of government crackdowns and control of opposing opinions."

Meanwhile, there are deals to be made. Cambodia today "already meets ... requirements" that foreign investors seek, asserts Ministry of Commerce Secretary of State Mao Thora, including political and macroeconomic stability, protective investment laws, and strong incentives. He ticks off a list of industries in which the nation's capital Phnom Penh entices both international sovereign and corporate finance, topping $1 billion. The door, he says, is wide open for more.

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