A Brief for the pre-CG Meeting
September 10, Phnom Penh

 Overview on Governance
World Bank

Prime Minister Hun Sen, Excellencies, Ladies and Gentlemen,

This pre-CG meeting of the Cambodian Government and its development partners is taking place at a critical juncture in the nation’s history. Donors welcome the formation of a new government after the prolonged hiatus since the July 2003 elections. The delay has been costly in terms of the lost momentum to much needed reforms. But the process has nevertheless resulted in the emergence of a Rectangular Strategy reflecting “unanimous agreement” between the coalition partners and intended to “guide the implementation of the agenda of the Royal Government during its current term in office”. The Rectangular Strategy commits the new government to a program of reforms set out in a unique “integrated structure of interlocking rectangles”, with good governance at the core of the Strategy.

Cambodia has made impressive gains since 1998

          The Rectangular Strategy lays out a vision for Cambodia for the next five years that builds on the considerable progress that Cambodia has made in many key areas during the last five years. Two peaceful and reasonably free and fair elections have been held. Peace and stability and a precious sense of normality have been restored to much of the country. The security situation, while still fragile, has improved. The institutions of government have started to resume their normal functioning. Democratic institutions are emerging. The web of civil society is rapidly spreading across the country. And a still relatively underdeveloped media is beginning to exercise its newly won freedoms. With the recent commune-sangkat elections, a tentative but impressive effort to spread democracy to local governments has begun.

          On the economic side, the country has enjoyed strong if rather imbalanced growth during the last decade. A sharp reduction in the US tariff on garments exports from Cambodia resulted in a dramatic increase in such exports to that market. The boom in garment exports and the recovery of the economy following the end of conflict from its total collapse in the 1970s and 1980s, have contributed to an impressive 6.6% average growth rate for over a decade. Macro-economic stability has been maintained largely through fiscal discipline, and a modest but improving revenue effort made possible through tax reforms, including introduction of a VAT. Inflation has been stabilized after the high inflation rates of the early 1990s. On the external front, Cambodia is reemerging on the global scene after a prolonged absence, as a member of ASEAN and now the WTO—for which we would like to congratulate the Government. Cambodia’s development partners have also been providing significant amounts of development assistance, amounting to roughly half of total public spending during the last five years.

But poverty is high and stagnant...

          Even though Cambodia’s economic growth during the last decade has been impressive, it appears not to be reaching the nation’s poor. Moreover, the growth rate is expected to slow down in the coming years. Poverty levels are high and stagnant. 40-50% of Cambodians live on less than $1 a day. Poverty in its non-income dimensions is an even sadder story. Child mortality rates are high, almost three times the average level for East Asia and higher even than the average for low income countries. Maternal mortality rates are also three times higher than the East Asia regional average, (but somewhat better than the average for low income countries). Cambodia also lags behind the East Asia region in terms of primary school enrollment. While its ratio of female to male enrolment is above the average for low income countries and the region as a whole, at 84 it is still significantly behind its neighbors, Vietnam (93) and Thailand (95). Based on current trend rates, Cambodia will have to make a strong effort in delivering better health and education services for its poor if it is not to fail to meet its targets for the Millennium Development Goals.

...and governance is weak

          The Rectangular Strategy must be welcomed as an early sign that the new government is committed to a process of reforms. It is also reassuring to see the Royal Government’s clear recognition of the main constraints facing Cambodia in its quest to accelerate development and reduce poverty. The Rectangular Strategy is entirely right in describing governance as the “most important pre-condition to economic development” and it is indeed welcome that the government sees this as the core of its strategy.

Cambodia is now at a critical juncture in its history

      Cambodia is now at a critical juncture in its history, as is clearly recognized in the statement made by Prime Minister Hun Sen at the recent Private Sector Forum. As you said, Prime Minister — “Cambodia has no other choice other than to move forward steadfastly with reforms. With commitment to continued reforms, our chance to survive would be 90%; with surrendering the reforms, the chance would drop to only 10%.” Much has been achieved over the past decade, but much remains to be done if Cambodia is to break the stranglehold of poverty that grips the bulk of its population. Failure now to accelerate reforms will prove very costly for Cambodia’s poor and for its future as a country. That the Prime Minister and his new government recognize this with such clarity is itself a good beginning. But the task ahead is formidable and needs to be addressed urgently.

     Areas that need urgent attention have all been identified in the Rectangular Strategy and now need to be acted upon. Growth needs to be reinvigorated by improving the investment climate and reducing the costs to the private sector of doing business in Cambodia. There are several constraints to doing business, but those that top the list are all governance constraints—the costs of corruption, of an uncertain policy and regulatory environment, of the legal system and conflict resolution, of customs and trade regulations, and of tax administration. We are pleased that the Government feels the same sense of urgency on these issues as the private sector and has responded by beginning to tackle some of these constraints immediately. Infrastructure costs are also prohibitive and to reduce these costs and improve infrastructure services, the Government needs to adopt a policy of public-private partnerships that is based on transparent and competitive bids which maximize the benefits of infrastructure deals for Cambodia.

The Rectangular Strategy recognizes that the core principles of good governance also need to be applied to the management of natural resources, if Cambodia is to make any progress in poverty reduction. Cambodia’s rich natural resources need to be managed better and distributed more equitably and transparently to ensure that all Cambodians benefit from these rich resources. The formation of the Council for Land Policy in 2000 and the Adoption of the Land Law in 2001, combined with the sub-decree on Social Land Concessions in 2003 provide an important starting point. Improved governance of natural resources can be advanced by taking several key actions in the coming months to both increase the security of property rights as well as improve the management of state lands, forestry and fisheries.

The Rectangular Strategy also acknowledges that improving public financial management is one of the keys to achieving Cambodia’s Millennium Development Goals. Donors would like to commend the Government for the substantial achievement in recently formulating a comprehensive reform strategy for public finances and for demonstrating its firm commitment to reform by taking full ownership of the PFM reform agenda. It is now time for implementation and Cambodia’s development partners will be looking to see real and meaningful measures implemented during the next several months leading up to Consultative Group Meeting in December.

On legal and judicial reform—which also lies at the heart of the Rectangular Strategy—donors would like to acknowledge the efforts of the Council of Legal and Judicial Reform in preparing the draft Action Plan for reform. We remain, however, deeply concerned about continuing impunity, corruption and the failure to enforce existing laws, all of which effectively undermine attempts at reform. As the Government moves to finalize and implement its Action Plan, we look forward to continuing to support the Government in advancing legal and judicial reform and in securing visible improvements in the justice sector so that equality before the law and before all courts and tribunals becomes a reality in Cambodia; corruption and interference in the affairs of the judiciary is ended; and a legal system is built that is fair and capable of providing effective remedies to all Cambodians who seek to enforce their legal rights.

Donors are also pleased to see that public administration reform is rightly placed at the very center of the Rectangular Strategy. Indeed, as highlighted in the Government’s draft National Program for Administrative Reform of August 2004, a competent, meritocratic and transparent public administration that is able to deliver high quality services to the average Cambodian citizen is a pre-requisite for growth and poverty reduction. In order to address the challenges of low pay, weak administrative capacity and the need for rationalization of the civil service structure and employment levels, the new Government is now challenged to push itself farther and faster than currently envisioned. Given the serious constraints on civil service capacity, a comprehensive pay and employment reform program—which is long overdue—is urgently needed.

How can Cambodia’s development partners be more effective?

          The upcoming Consultative Group meeting marks an opportunity for the Cambodian government to reverse the momentum on reforms that have been stalled for too long. For donors also, the upcoming Consultative Group meeting in December marks an opportunity to make a fresh start in providing more effective support to Cambodia. The intensified donor coordination effort that has preceded this meeting provides an opportunity to align donor positions in support of a renewed Royal Government effort to inject energy and political will into its reforms. The meeting also provides an opportunity to demonstrate the willingness of donors to convey a clear and shared message. Donor support needs to be clearly conditioned on the adequacy of Cambodia’s reform effort. The nature and volume of assistance must be clearly linked to progress on reforms. If such a reform effort is not forthcoming, donors need to find ways of helping the poor of Cambodia directly.

         Donor support to Cambodia for an agreed reform effort should not only include adequate financial resources to underwrite the reform process, but also extend to improved access for Cambodia’s goods in donors’ markets. In addition donors need to reduce the current huge costs to Cambodia from failures in aid coordination. This would include focusing donor efforts on areas where particular donors enjoy comparative advantage, ensuring that all donor assistance is recorded in the budget (whether or not it actually funds budgetary expenditures), more joint analytical work, greater reliance on sector-wide assistance programs (SWAPs), and harmonization of donor initiatives in order to reduce the burden of the current wide variety of donor policies and practices that government must follow to qualify for assistance. The new Technical Working Group structure that is being endorsed and launched at this meeting would begin the process of reform on the donor side, helping us to help Cambodia better. We hope that during the next three months, the technical working groups will be able to translate the vision presented in the Rectangular Strategy into concrete plans of action that external partners can support and that will be implemented during the next year, with specific benchmarks to monitor their implementation. We hope that Government and donors will work in true partnership on these action plans and will hold themselves jointly accountable for their implementation. We also hope that in the coming year, with the merging of the SEDPIII and the NPRSII, and with greater linkages between these plans and the budget, Cambodia will embark on a long term path of pro-poor planning and resource allocation that will help it attain its MDGs by 2015.

          The Royal Government of Cambodia and its international development partners today face a unique opportunity to work together to significantly accelerate the reform process at what appears a propitious time in the country’s history. The leadership for this must come from Cambodia. We hope that Cambodia’s leaders will seize the moment and we stand ready to support their reform efforts.

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