Is Cambodia Ready for the AEC?

By: ASEANForum, Jessica Sander

Cambodia’s integration into the ASEAN Economic Community is fast approaching amid much speculation on whether the country is ready to reach regional expectations, standards and demands.

In a game of hide and seek, kids hide themselves in wardrobes, under beds and behind chairs while another one of them counts to 100. When that child has finished, she shouts, “ready or not, here I come”, before setting off in pursuit of her friends. This children’s party game has parallels with the current state of Cambodia as it gears up for the advent of the ASEAN Economic Community (AEC) at the end of the year.

“There’s a lot to do and not much time to do it, but I think that point is not lost on the government,” says Grant Knuckey, CEO of ANZ Royal Cambodia. “The court system, industrial policy, customs and educational systems are all experiencing clear positive change and reform.”

The question is whether these changes will be implemented in time for a smooth transition into a regional economic and trading bloc of 600 million people over the next few months with free movement of goods, services, investment, skilled labour and capital.

Proponents of the AEC say it will significantly boost investment, create more jobs and raise incomes across the region. While, in the short-term at least, Cambodian businesses will face increasing competition from its fellow ASEAN members, many anticipate that this competition will stimulate innovation, and improve both quality and productivity.

One person who is quite clear where Cambodia fits into this brave new economic world is His Excellency Sok Chenda, the Minister attached to the Prime Minister and Secretary General of the Council for the Development of Cambodia. He believes that the country has an important role to play in an integrated ASEAN production and supply chain. He cites rubber as a prime example of how this network might work.

“Cambodia has rubber plantations and sometimes exports under other brand names. I dream to have rubber processed into automotive parts and every day we send containers to the eastern seaboard of Thailand to be assembled into cars. In a car you have 20 to 30,000 parts, so why can’t Cambodia produce 10 of these? This is called value processing and production fragmentation.

“Production fragmentation means that there is not a single country that will wholly produce any one type of goods. So a car will be assembled in Thailand, and one part will come from Laos, another from Myanmar, then Cambodia and Vietnam and so on, based on each location’s competitive advantage. There are no borders, all the parts come from different places. AEC will provide this opportunity,” he says.

Currently, Cambodia benefits from its status as a least developed country, which allows it to incorporate inputs from other ASEAN member states – except Brunei and Singapore – into goods assembled in Cambodia and exported to the EU as duty-free and quota-free. Goods such as garments, footwear and bicycles manufactured in Cambodia are successful examples that should see little disruption when full integration is completed. Instead, regional trade will be enhanced and expanded, with the country gaining access to a potential export market of over 600 million – the population of ASEAN.

“The AEC will be a region where goods, services, investment, labour and capital have unfettered flow throughout the region. This … will affect and inform strategic decision making for years to come,” says Michael Lor, CEO of Canadia Bank.

Increased intra-regional trade should also have knock-on benefits across the economy, including financial institutions.

“Cambodia’s financial sector will be able to further develop having more direct access to new capital and technology,” says Her Excellency Chea Serey, director-general of the National Bank of Cambodia (NBC). “The development of this sector will also be supported by the expansion of regional trade and investment.”But while the advent of the AEC can provide long-term institutional benefits for Cambodia’s financial sector, the question remains whether the country is yet ready for December 31.

In a one-day seminar on Cambodia’s capacity to join the AEC held by the Asian Research Institute for ASEAN and East Asia in January this year, Dr Pich Rithi, the director-general for International Trade, Ministry of Commerce of Cambodia, outlined a number of challenges that the country will encounter with the advent of the AEC.

These include losing revenue as import tariffs are eliminated or reduced to a maximum 5 percent; improving the quality of goods in line with international standards; having sufficient financial resources to actively participate in all ASEAN economic activities; and implementing reforms to comply with ASEAN agreements.

Serey believes that Cambodia is facing a new financial landscape.

“The early stage of Cambodia’s financial sector remains the most challenging,” she says. “Deepening of financial integration is dependent on Cambodia’s readiness in terms of the quality of its financial markets, infrastructure, financial standards of practice and its institutional capacity to implement reform.”

Lor believes that this new landscape should see significant advances within the sector.

“As the banking industry in particular continues to grow and develop, I think we will see continued improvements in the regulatory regime, and more transparency between banking institutions, and the individuals and corporations with whom they conduct business,” he says. “I also expect to see more comprehensive industry-wide standardised practices for the banks to follow, bringing more coherent order throughout the system overall.”

Certainly many challenges lie ahead, and the ultimate rewards depend upon how quickly the country can adjust to the changing regional landscape and its demands. However, these rewards could be great.

“According to an ADB (Asian Development Bank) study, Cambodia is set to benefit the most from the AEC,” says His Excellency Vongsey Vissoth, the Secretary of State of the Ministry of Economy and Finance. “The potential growth will increase by 20 percent but with conditions. We need better institutions, better connectivity, better skills and a stronger business climate. I think we still have a long way to go around institutional capacity if we are to benefit more fully.”

The threat is that while Cambodia makes the necessary changes to its institutions, including education where the country lags the rest of the region, other more advanced ASEAN countries can better exploit the free market “If we compare to 10 countries in ASEAN, Cambodia is one of the least developed,” says Serey. “AEC means opening the door to more capital and product flow in the market, thus based on these conditions, I think that we will face some difficulties. It’s hard to compete with countries like Singapore, Thailand, Malaysia and Indonesia.”

At the end of a game of hide and seek, when everyone has been found, all the children sit down and enjoy some cake. At the moment the jury is still out on the benefits that AEC integration will bring to Cambodia. Three questions remain to be answered. Is the kingdom ready for the game? How long will it take to find all its friends? And, most important of all, how much of the cake will it get at the end of the game?

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