After almost three decades of unrest and violence, Cambodia has found an unprecedented sense of political stability under Hun Sen's government. The prime minister's Cambodian People's Party has gradually solidified its grip on power since its victory in the country's 1998 National Assembly elections, and Hun Sen has deftly managed both international pressures and domestic opposition.
But the previous instability severely set back Cambodia's economic development. Today the country still lacks the human capital and the physical infrastructure to make Cambodia a high value-added export economy. Thus, Hun Sen's government has set out to attract foreign investment through economic reforms, with the aim of exploiting Cambodia's location and cheap labor to gradually build up its competitiveness and profit from an export-oriented model that caters to global markets.
Cambodia's strategy of economic liberalization over the past 10 years seems to draw from the model established by China: selective reforms that allow the country to integrate into international financial and logistical networks without relinquishing central control. Cambodia has enacted several measures, such as reforming the financial sector, to allow for more international commercial links. It is also experimenting with the creation of special economic zones that it hopes can mirror the success of the Chinese city of Shenzhen. Though severe issues such as rampant corruption remain, investors expect that Cambodia may be poised to become yet another highly developed economy.
Cambodia's Advantages
Cambodia has two strengths in its efforts to attract foreign investment: its cheap labor and its strategic location.
Low-cost labor is an integral part of the export-oriented model of development. Cambodia is well positioned to host low value-added manufacturing, especially now that some manufacturers are moving away from markets that are seeing increasing labor costs, such as China.
This has helped Cambodia become a destination for investment. Foreign direct investment's share of Cambodia's gross domestic product (GDP) averaged 5.3 percent over the last decade — a figure that reached as high as 10 percent in 2007. Though Cambodia still struggles with low productivity resulting from deficient infrastructure, foreign investment pouring into that sector is helping by lowering transportation costs, further boosting Cambodia's ability to attractive investors.
Cambodia's second advantage is its location. Positioned on the Gulf of Thailand, north of the Strait of Malacca and next to the manufacturing economies of Thailand and Vietnam, Cambodia is it at the center of a potentially vibrant economic space. To the north, China and its significant economic weight add to Cambodia's lure as a potential node in East Asia's logistics network.
Cambodia is doubly valuable to China as an element in the economy of the Greater Mekong subregion (comprising China's Yunnan province, Myanmar, Laos, Thailand, Vietnam and Cambodia). China hopes an integrated economy will arise — with a highway transportation network and the Mekong River system at its core. Such a region would add to the development of China's southwestern provinces by providing both a source of inputs for China's growing industrial economy and a market for its industrial goods.
There are also disadvantages to Cambodia's location. The country is nested between Thailand and Vietnam, both of which in the past have dominated the territory of modern Cambodia. As a result, Cambodia is forced to seek good relations with outside powers to help counter these potential threats. Meanwhile, the United States looks to Cambodia to balance the region against China, while South Korea and Japan seek to profit off business deals in the country.
Thus, despite its size, Cambodia finds itself serving as a geopolitical battleground. Because of previous Vietnamese intervention in Cambodia, its government still leans toward Vietnam. This has led China to step up its advances on Cambodia to ensure its compliance and to secure for itself a foothold in the Gulf of Thailand.
Foreign Interests
Cambodia's labor-intensive economy has grown partly on the back of important Western investments in its textile industry, which has become a supplier of garments to the West. This has allowed the country to gain foreign currency and accumulate capital. Rural areas of Cambodia also have attracted foreign investment, as South Korean and Japanese interests — among those of other Asian states — have sought to export rice and other foods back home from Cambodia. Furthermore, economic reforms have attracted investment in the financial sector, bringing services such as microfinance for local entrepreneurs and trade settlement and insurance for foreign enterprises.
However, one of the most crucial sectors has been infrastructure, which has attracted significant investment from China. As in other parts of the world, China has used its strategy of no-strings-attached investment and gifts to great effect in Cambodia. It has developed 1,500 kilometers (930 miles) of Cambodian road and bridge infrastructure (especially where it connects to the pan-Asian road network being developed under China's auspices), electricity infrastructure and dams. Since 1994, China has invested $8.8 billion in Cambodia, making it Phnom Penh's main foreign donor and investor. During the same period, the United States has invested only $282 million, making it Cambodia's 10th-largest investor.
The United States approaches Cambodia as part of its broader strategy to strengthen ties with the Association of Southeast Asian Nations (ASEAN), drawing it away from China's orbit. Washington has granted Cambodia Permanent Normal Trade Relations status, which ended U.S. trade sanctions on the country. Though U.S. trade with Cambodia lags China's, the United States has taken other measures, engaging in military cooperation with the Royal Cambodian Armed Forces through its Global Peace Operations Initiatives and through donations of surplus military equipment. The United States and Cambodia have so far conducted three multilateral exercises on Cambodian territory called "Angkor Sentinel."
Nevertheless, China has managed to upend almost all of the U.S. moves regarding Cambodia, thus ensuring Cambodia's acquiescence to China's demands. For instance, in 2009, Cambodia deported to China Uighurs who were fleeing Chinese authorities after taking part in ethnic unrest. After the United States threatened to withhold a donation of military hardware in response, China unilaterally announced that it would make up for the lost equipment (200 patrol boats). China has already reaped important diplomatic benefits from the move; Cambodia has stood by China's position regarding the South China Sea dispute, thus preventing ASEAN from taking a unified approach to the matter.
Cambodia's View
The United States seems to be losing the initiative to China, and China has so far been able to fasten Cambodia to its orbit, but the Cambodian leadership has good reasons to want to use Namhong's visit to Washington to increase the U.S. presence in the country. Cambodia sees the Unites States as an added protector against Vietnam and Thailand, one with substantial military and economic assets that can be used to Cambodia's advantage. Contact with (and supplies from) U.S. armed forces boosts the Cambodian military's capabilities and the country's image abroad. Cambodia finds China a convenient ally against Vietnam and Thailand as well as a generous source of much-needed capital.
Meanwhile, third parties such as Japan and South Korea are seeking to participate in Cambodia's economic development. Japan has built next to the port city of Sihanoukville a special economic zone that is intended to become a regional logistical hub and is to be run by the government. Japanese companies have started to set up operations in the zone, which will probably prove to be a boon to Cambodia's coffers, which still depend greatly on donor money.
The Korea Stock Exchange is helping to develop the Cambodia Securities Exchange. This aims to increase liquidity for Cambodian enterprises and give a boost to economic development. Though very few Cambodian companies have thus far been listed, the move is arguably forward-looking.
As China seeks to secure ASEAN as a pliable ally and an extension of the Chinese economy and the United States seeks to build it into a bulwark against China's expansion, Cambodia stands to gain.
