Cambodia Faces Turning Point on Foreign Aid

 Cambodia Daily | 13 November 2015

Despite failing to meet many of the expectations of its foreign donors over the past two decades, Cambodia’s government has never struggled to secure aid from abroad.

But as the country’s economy strides into middle-income status this year, policymakers will need to carefully navigate the transition from a legacy of aid-based support toward an economy driven by domestic revenue, experts say.

–News Analysis

Foreign diplomats attend a July workshop on the NGO law at the National Assembly in Phnom Penh. (Siv Channa/The Cambodia Daily)

The World Bank projects Cambodia’s gross national income per capita to reach $1,096 this year—for the first time surpassing the $1,045 threshold for classification as a lower-middle-income country.

Yet continued economic progress is expected to reduce Cambodia’s preferential access to foreign aid, and increase pressure on the government to find more sustainable sources of funding to support future growth.

“[The] past two decades of ODA [official development assistance] allowed war-torn Cambodia to rebuild from scratch,” said David Van, managing director in Cambodia of consultancy firm Bower Group Asia.

“But we cannot continue to grow sustainably without shedding off this mentality of high dependency on foreign aid,” Mr. Van said. “[Any] future ODA should be preciously and effectively channeled to strengthen institutional capacity.”

A report released by the Cooperation Committee for Cambodia (CCC) in September noted that while the country’s graduation from low-income status is already shifting its major source of development finance from grants to concessional loans, the absolute level of foreign support was unlikely to change immediately.

Some donors will avoid retrenching in order to support Cambodia’s transition, and ever-increasing cooperation with China—Cambodia’s single-largest provider of external assistance since 2010—along with the China-backed Asian Infrastructure Investment Bank, will likely provide new funding opportunities, according to the report.

For Sophal Ear, author of “Aid Dependence in Cambodia: How Foreign Assistance Undermines Democracy,” continuing foreign funding risks reducing the government’s accountability to Cambodian citizens, making it acquiescent to donors instead.

“The risk is a lack of ownership. It’s a lack of democracy, lack of participation,” he said in an email.

“When your hand is in another man’s pocket, you must walk where he walks,” added Mr. Ear, an associate professor at Occidental College in Los Angeles. “ODA isn’t the enemy. It’s ODA when there’s no political will, which is what we have in Cambodia.”

The first step toward economic independence is using existing aid more effectively, said Mi Nac, a manager at the CCC, an umbrella organization of civil society groups.

“The government have adapted well to international standards on structuring aid coordination, but those structures are not working well and actual engagement across all stakeholders remains an issue,” Mr. Nac said.

Rather than working with NGOs to expand the involvement of citizens in building the economy, the government has instead been working to restrict the space in which civil society is able to operate, he added, noting the passage of the controversial Law on Associations and Non-Governmental Organizations earlier this year.

In particular, capitalizing on the country’s “youth-dividend”— more than 65 percent of the population is under 30, according to the U.N.—can help build an independent economy if nurtured today, according to Mr. Nac.

“Civil society plays an important role,” he said, adding that the ruling CPP had placed its political interests ahead of effective long-term planning. “We must eliminate interference to create opportunity for younger generations to engage in society to ensure our own sustainable development.”

While questions remain about how effectively foreign assistance is being used, the government has recognized the pressing need to build the country’s internal funding capacity.

An International Monetary Fund consultation completed in July reported that the government’s Revenue Mobilization Strategy, adopted last year to augment its tax administration, had been effective in improving revenue collection.

And initiatives under the Public Financial Management Reform Program are also raising the effectiveness of state spending, according to a report released by the World Bank this year which said: “Budget appropriation, integration and transparency have markedly improved.”

In addition to boosting the country’s budgetary efficiency, Council of Ministers spokesman Phay Siphan said that the government was also focusing on attracting investment.

“We will try our best to look for foreign direct investment (FDI) instead of foreign development assistance,” he said. “So we are trying to empower the private sector.”

International development partners say these measures are a step in the right direction, but remain concerned about the pace of reforms.

According to World Bank data for 2014, FDI accounted for about 10 percent of Cambodia’s gross domestic product, while government spending was approximately 5 percent.

Given that the Council for the Development of Cambodia projected that aid disbursements amounted to roughly 8 percent of the economy last year, it’s clear that ODA remains a crucial source of finance.

As a result, international organizations have begun to adjust their own roles in the economy to help position the country for greater independence.

Direct financing to build roads, support basic health care and expand primary school education has been central to Cambodia’s development, but following rapid economic growth, development partners are shifting their strategy, said Jan Hansen, senior country economist for the Asian Development Bank (ADB).

“One traditional focus of development cooperation has been to help governments to improve the delivery of public goods,” Mr. Hansen said. “An upcoming area of development cooperation is public-private partnerships.”

“It is regarded as an opportunity to raise finance for public investments and improve public service delivery in Cambodia, and the ADB will continue to provide policy advice and build capacity in this important area,” he said.

The U.N. Development Program (UNDP), is now also looking at longer-term investment—in strategy, institutions, rule of law and social protection—to allow domestic resources and the private sector to finance Cambodia’s development, said Setsuko Yamazaki, the UNDP’s country director.

“It is not as simple as livelihood programs, or just scaling up projects any more,” Ms. Yamazaki said. “We need to help the country transform the economy to upgrade economic and social value chains by investing in longer-term systems including human capital.”

“Public spending must reach a threshold if [Cambodia] is to build resilience, accumulate human capital and crowd-in private sector investment,” she added.

“It will be challenging to raise this on an economy built on vulnerable employment, subsistence agriculture or low-value-added industries.”

With the government’s National Strategic Development Plan 2014-2018 outlining ambitions for the country to reach upper-middle income status by 2030, external assistance is still expected to play an integral role in helping Cambodia take ownership of its own development.

“ODA still has a role to play. [It] needs to play a constructive role,” said Mr. Ear, the author and academic.

“Its legacy should be to improve the side of the ledger that [the] government funds, and direct it towards areas that reduce inequality, fight poverty, and improve human capabilities.”