Cambodian Prime Minister Hun Sen announced in late March that the nation was on target to move from the status of a low-income to a lower-middle-income nation by the end of 2013, ranking it the 15th country that obtained high economic growth in the world in the last 10 years.

An owner of a small sundries shop in Kampong Chhnang in Central Cambodia. Small businesses like this one serve as the backbone of the country’s sustainable economy. Photo/Karl Grobl

However, the global economic crisis has had an adverse impact on the Cambodian economy since the end of 2008. In 2009, Cambodia’s growth hit the lowest level (2%) experienced in the last 15 years. The real GDP growth has started to pick up since 2010 and 2011, with 3.0 percent and 7.0 percent, respectively. According to the Ministry of Industry, Mine, and Energy, the industrial sector, which includes the agricultural, tourism, garment, and mineral industries, shared 30 percent of the GDP, up 6 percent from the past 18 years.

Historically, however, Cambodia has relied on the role of small- and medium-sized enterprises (SMEs) as the backbone of a sustainable economy. Generally in Cambodia when we talk about SME economic activities, we are in fact talking about micro-small and medium-sized enterprises (MSMEs), as out of the more than 500,000 economic establishments or enterprises counted in the 2011 Cambodia Economic Census, some 493,000 of them employ only one to 10 employees.

Prime Minister Hun Sen said in June 2010 when he announced the Rectangular Strategy Phase II, Cambodia’s main socio-economic policy agenda for the Fourth Legislature of the National Assembly (2008-2013), that SMEs are one of the angles of the strategy which government is committed to promoting.

Growth in the number of MSMEs could help expand the economy, create more jobs, facilitate Foreign Direct Investment, and enlarge the tax collection base. The 2011 census shows that more than 500,000 economic establishments were engaged in economic activities, employing more than 1.6 million laborers or approximately 20 percent of the total Cambodian labor force.

The best way to boost MSMEs is to encourage private sector development and support their expansion. Micro enterprises, mainly in the provinces, have the potential to grow to become small- medium-sized enterprise. However, this growth may not be realized if there are too many constraints.

For almost 10 years, The Asia Foundation has been working with MSMEs in Cambodia to help create a more productive, enabling environment at the provincial level; advocating for an improved business environment; improving the ability of Cambodia’s provincial MSMEs to compete in regional and world markets; and increasing the understanding of the benefits of MSME development in the local economy. Through different program activities such as subnational dialogues between public and private actors, surveys, and researches on impediments to growth, we found that constraints include lack of access to information, unclear and burdensome regulations, poor relationships with public authorities, lack of technological capacity in production, and most importantly, limited access to financing for business expansion. Despite these challenges, there have been a large number of new enterprises that opened their doors for business recently. Findings show that from 2009 to 2011, 34 percent of all total establishments had just started their business in those two years.

According to the National Institute of Statistics (NIS), around 72 percent of Cambodian enterprises are family-run businesses with one to three employees (2009). Out of 505,134 enterprises, only 3.5 percent were registered at the Ministry of Commerce in 2011. This means that the majority of enterprises are in the informal sector, effectively preventing them from accessing finance because banks and monetary financial institutions require SMEs to have legal status to be eligible to apply for a loan. As a result, SMEs rely on personal savings and informal sources for starting up or expanding their businesses. The primary reason for SMEs maintaining their informal status is the perception that standard accounting practices are complicated and unnecessary. Additionally, some SMEs prefer to keep informal financial records because it allows them to conceal their real profits and revenues from tax authorities.

Although there are policies in place, implementation still has a long way to go. Cambodia’s government should play an active role in connecting SMEs to the export sector by providing incentives to export firms to find local partners; benchmarking certain standards or priority areas for export growth; providing market, management and technical consultancy; and enhancing awareness of local SMEs to suppliers through tour organizing, workshops, or seminars. To reach its lower-middle income status and beyond, Cambodia’s small businesses must be given a fair environment to reach their full potential and grow.

The Asia Foundation’s work with SMEs in Cambodia is supported by the U.S. Agency for International Development, Australian Agency for International Development, New Zealand Aid Programme, and the Danish International Development Agency.

Khut Inserey is The Asia Foundation’s senior program officer in Cambodia. He can be reached at ikhut@asiafound.org. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.

Global economic recovery in 2012 remains tenuous, with the World Bank recently downgrading its forecast for this year’s global growth from 3.6 percent to 2.5 percent. This slide in expectations and persistently high unemployment rates in many countries has sparked a resurgence of protectionist tendencies toward trade. These tendencies are couched in the language of “bringing jobs back,” while tariffs are euphemistically coined as “flexibility” needed to protect domestic producers.

In addition to significant consumer gains from increased trade in South Asia, these countries would benefit from enhanced export opportunities, more jobs, and greater competition. Photo by Kristin Kelly Colombano.

South Asia has suffered for decades from a low level of intraregional cooperation, both politically and economically. Despite efforts at regional integration through the South Asia Association for Regional Cooperation (SAARC) and the South Asia Free Trade Agreement (SAFTA), trade in the region as a percentage of global trade volume has stagnated at an estimated 5 percent since the 1950s, lagging far behind other trading blocs, like the Association of Southeast Asian Nations (ASEAN) Free Trade Area or South America’s Southern Common Market (MERCOSUR). At the SAARC Business Summit held in New Delhi recently, India’s Minister for Commerce, Industry and Textiles, Anand Sharma said: “SAFTA had a vision of creating a common market where tariff and non-tariff barriers will be revised, and we had expected that the peak tariff rates should be no more than 5 percent for most of the tradable commodities between member countries in SAARC.” Sadly, this has not been the case.

While this low level of trade among South Asian nations is often presented as a constraint to the economic competitiveness of the region, its negative impact on consumers is rarely acknowledged. Consumers are often neglected in trade analyses and debates about the benefits to trade, as the focus is primarily on producer gains (or losses).

Against this backdrop, nearly 40 representatives from the government, civil society, media, regional consumer associations, and private sectors of SAARC nations (Bangladesh, India, Nepal, Pakistan, and Sri Lanka), as well as senior representatives from the SAARC and Commonwealth Secretariats, gathered in Kathmandu last week to discuss the findings of a study commissioned by The Asia Foundation on the “Cost of Economic Non-Cooperation to Consumers in South Asia.” Conducted by the Consumer Unity Trust Society, International (CUTS), India,* the study analyzes the benefits that citizens as consumers could gain through greater trade liberalization in South Asia.

The findings shed light on just how much consumers stand to gain by reducing tariff barriers (hence, reduced prices) on certain products that are on the sensitive lists (products that do not benefit from reduced tariffs and are thus excluded from the trade agreement) of the five countries. By focusing on consumer welfare, the findings also inject a new energy into circular discussions on how to enhance trade among South Asian neighbors.

The results point to the tremendous potential for intraregional trade in the region. The study identified 355 product categories currently included on the sensitive lists of the five countries that have high regional trade potential and promise high welfare gains to consumers. By reducing tariff barriers on these products, the study estimates that, at the minimum, there would be a consumer welfare gain of approximately $2 billion per year to the region.

These gains have an important potential for the economies of these developing nations, and for the region as a whole. For example, in India, the removal of 161 product lines from the sensitive list would bring consumer gains of almost $600 million. Interestingly, 90 percent of the gains would be from imports of plastic-based goods from Pakistan. While Sri Lanka stands to gain comparatively less than its neighbors, at $288.61 million, per capita gains would be the highest due its population and size. The removal of 27 product lines would save over 31 percent on current import expenditure.

In addition to significant consumer gains, these countries would also benefit from enhanced export opportunities, more jobs, and greater competition. Interviews conducted during the survey with 250 stakeholders in 12 cities across the five countries suggest a wide range of views on the potential for regional trade in South Asia. Respondents highlighted the importance of separating trade and non-trade issues from trade negotiations. At the national level, respondents felt that building consumer awareness about the potential benefits of regional integration is necessary to balance discussions on regional trade.

At the meeting in Kathmandu, participants discussed constraints to intraregional trade and agreed on several key points:

• While increased intraregional trade has overall welfare-improving outcomes, it remains highly politicized, and most agreed that the lack of SAFTA’s success has been due to political rather than economic reasons. (Ninety-six percent of study respondents said that political priorities influence trade talks far more than economic arguments.)
• An emphasis on consumer welfare gains is critical to any discussion on renewing trade liberalization the region. The definition of consumers has to be taken in its broader sense, including final consumers but also enterprises buying raw material, intermediary goods, or services. The media in South Asia have a key role to play in disseminating this message to improve public perceptions about intraregional trade.
• As Nepal’s Minister of Commerce and Supplies, Lekh Raj Bhatta, pointed out, consumer welfare gains to tariff liberalization must be weighed against losses of government direct revenue.
• While the study was limited to analyzing tariffs, non-tariff barriers (e.g., customs and port fees, connectivity, hard and soft infrastructure) are also major impediments to trade that need to be addressed.
• Many participants discussed the importance of considering the implications for the growth of Chinese exports to the region.

The workshop emphasized and reinforced the importance of better networking, continued research, and closer alignment of both consumer and producer interests. The next steps will be incremental, but participants insisted that bringing the right voices around the table, ones that includes consumer groups, as well as businesses, leaders, and authorities, is critical to getting closer to a regionally integrated South Asia.

*The CUTS study was conducted in partnership with the Institute for Policy, Advocacy and Governance (IPAG) Bangladesh; Sustainable Development Policy Institute of Pakistan (SDPI); Institute of Policy Studies (IPS) Sri Lanka; and South Asia Watch on Trade, Economics and Environment (SAWTEE).

Mandakini Devasher Surie is The Asia Foundation’s program officer in India, Katherine Loh is a program fellow for the Foundation’s Economic Development Programs, and Véronique Salze-Lozac’h is the director for Economic Development Programs. They can be reached at mdsurie@asiafound.org, kloh@asiafound.org, and VSalze-Lozach@asiafound.org, respectively. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation.

From January 25-29, the world’s most powerful leaders from the public and private sectors gather in the Swiss town of Davos to try to agree on measures that will eventually impact billions of people across the world. The event is being held against an unprecedentedly gloomy global economic picture.

While many Asian nations have shown great resilience to the global economic crisis, the European slowdown is threatening their heavily export-dependent economies. Photo by flickr user OlliL.

The World Bank recently reported that the world economy will grow by only 2.5 percent in 2012, far below initial estimates of 3.6 percent. In Europe, leaders have yet to come up with a comprehensive solution to the eurozone crisis. As a result, World Bank forecasts for eurozone growth are now predicted to be at -0.3 percent, down considerably from a low but slightly positive 1.8 percent. In order to deal with this situation, IMF Managing Director Christine Lagarde recently called for a “larger firewall” against default in Greece, Spain, and Italy through a European Stability Mechanism (ESM).

While the World Bank predicts a positive growth forecast of 2.2 percent for the United States, problems in the eurozone are having an impact on U.S. growth. The Department of Commerce estimated that U.S. exports to eurozone countries dropped 6 percent in November of last year. In addition, a contentious U.S. election season could give lawmakers an incentive to move slowly on economic issues – including taxes and the budget – which could further impair the U.S. economy.

Within this high-risk context, there is no doubt that one of the focuses of the Davos discussions will be the risk of recession and debt crisis involving the world’s developed countries. The role of Asian and other developing economies in buoying world growth will be at the center of these discussions. Large Asian economies like China will certainly have a major say in the types of measures that need to be taken to save the eurozone and other developed economies to avoid recession. For example, China’s capacity and willingness to invest more in the European economy and to sustain Western countries’ exports will be high on the agenda.

However, latest reports indicate that Asian and other emerging countries may not be in the position to become the engines of economic growth that developed countries envision. While Asia still appears to host the most dynamic economies in the world and seems to be better positioned to resist or even mitigate the impact of the crisis, many Asian nations are facing domestic crises of their own in addition to dealing with the global economy crisis.

The World Bank recently said it expected India’s economy to grow by just 6.8 percent, down from 7.75. It noted that India is suffering from lower domestic demand and a slowdown in investment. It also stated that South Asia as a region suffers from “domestic policy paralysis and uncertainty about regulatory reform” that has kept the region from making “second-generation” policy reforms to spur growth.

China’s economy expanded by 8.9 percent in the fourth quarter of 2011, but as high and healthy as this rate may appear, for China, it is the confirmation of a slowdown that began at the start of 2011 and is expected to continue into 2012. This is underscored by a slowdown in China’s domestic demand. In December, China saw a remarkable 40 percent plunge in the rate of property investment compared to November, even as consumer spending and overall consumption lagged far behind overall growth.

Other Asian emerging economies – including Indonesia, the Philippines, Malaysia, and Vietnam – have less domestic risk, but are also exposed to the global economic crisis. Such economies are, like China, heavily dependent on exports. The crisis in Western countries, if worsened, could result in difficult times for these economies as the World Bank predicts that commodity prices could decline as much as 24 percent and global trade volumes could fall by more than 7 percent.

In this context, Asia’s economies may not be in a position to buoy global growth in the way that many developed country analysts would hope.

Unfortunately, the risks of the global economic crisis to emerging countries are not just economic, but also have important social and political implications. Many emerging Asian countries still have weak political institutions and poor governance. In societies where economic growth has fueled social and political stability, an economic slowdown would trigger increased risks of a socio-political crisis. The 2012 World Economic Forum Global Risks report notes that in these emerging economies, “social contracts may not be forged quickly enough to rectify increasingly visible economic inequalities and social inequities.”  Such inequalities could be exacerbated by further global slowdown.

At Davos, world leaders have two titanic tasks. First, they must contemplate ways to mitigate the global crisis, with a particular focus on stabilizing the eurozone. This is not only a matter of pumping sufficient capital into the system, but building enduring financial and governance institutions that can ensure future stability. But equally important, at Davos, the world’s most powerful public and private leaders have the difficult task of restoring trust, trust in the economic and financial systems, trust in the political and economic leaders, and, above all, restoring trust in the social contract that bring societies together.

Véronique Salze-Lozac’h is The Asia Foundation’s director for Economic Development Programs and Nina Merchant-Vega is associate director. They can be reached at VSalze-Lozach@asiafound.org and nmerchant@asiafound.org, respectively. The views and opinions expressed here are those of the individual authors and not those of The Asia Foundation. 

Cannes, a medieval city on the French Riviera internationally renowned for its luxurious hotels, seafront “promenade,” and International Film Festival, is used to welcoming the rich and famous.

It is, however, another type of festival that will take place in Cannes this week. The city is gearing up for the sixth annual Group of Twenty (G-20) Summit where heads of state, finance ministers, and Central Bank governors from 20 industrialized and developing economies (19 countries plus the European Union) will converge to discuss financial markets and the world economy.

On November 3-4, international leaders will meet in France's seaside city of Cannes for the sixth annual G-20 Summit, where Asia, and particularly China, has the potential to play a more powerful role than ever. Photo by Guy Lebègue/Creative Commons.

The G-20, whose member countries account for over 80 percent of the global output and two-thirds of the world’s population, is the premier forum for industrialized and developing countries to discuss key issues in the global economy and monitor international economic cooperation. Represented by the high-income countries of Japan and Korea, but also by the middle-income emerging economies of India, China, and Indonesia, Asia has the potential to play a more influential, powerful role in this G-20 than ever before.

Asia has always been high on the agenda of the G-20, which was created in 1999 in the wake of the 1997 Asian financial crisis to respond to a growing recognition that key emerging-market countries were not adequately included in the core of global economic discussion and governance. But recently, the role of Asia, and more particularly of its most powerful representative, China, may have shifted from “the region to assist” to “the region that comes to the rescue.”

In the turmoil surrounding global economic, financial, and monetary uncertainty, expectations are high that the G-20 will propose concrete actions to stimulate economic growth and restore trust in the international financial system. Amid the frantic attempts by individual countries, especially developed ones, to contain the biggest economic and financial crisis since the Great Depression, the forecasted GDP growth of China (9.5 percent), India (7.8), Indonesia (6.4), and even Korea (4.5) make Asia look like an island of positive growth rates that many envy.

So, what is at stake for a growing Asia and what can it expect to gain from this summit?

First, Asian leaders and business communities expect to be reassured that they will continue to benefit from global trade and that developed countries will keep their markets open. The emergence of Asian economies as key players on the international scene has been triggered by the progressive dismantling of barriers against international trade and investment. The temptation that developed countries may have to solve their growth and employment crises by adopting protectionist measures that favor the consumption of local products, keep production onshore, and maintain investments within their borders, is a major threat for Asia and other developing countries.

Second, Asian members will expect the G-20 to come to a consensus regarding measures to stabilize the global financial market, to reform the international monetary system, and to better control the volatility of commodity prices.

In these areas, China will clearly emerge as a pivotal player in this week’s summit.

The current debt crisis of developed countries has highlighted the imbalance between the overspending economies of the West and the capacity of a country like China to use its enormous financial capacity to fuel developed countries’ economies. China’s position as a major economic and financial partner for the most developed countries has been reinforced by its recent massive investments in countries like Greece, and by its expressed interest and capacity to help the eurozone recover from its crisis. Earlier this week, speculation arose that China was weighing the options of investing in the European Financial Stability Facility (EFSF), described as the “eurozone’s bailout fund.” Such a move would surely mark a turning point in E.U.-China relations.

Asian members will also expect the G-20 to restore the capacity of international financial institutions such as the International Monetary Fund (IMF) and the World Bank to revive investments into Asia’s developing economies. Asian countries will be keen to make sure that the IMF is capitalized enough to continue to support medium-sized economies in Asia. It is to be expected that the new role of rising Asian contributors like China and Korea in recapitalizing such global financial institutions would be accompanied by a request for a greater say in the running of these institutions.

Lastly, leading Asian economies like China will expect to gain more political influence and recognition from this G-20 summit. In the context of an unstable global economy and low growth rates, the rising Asian powerhouses will try to assert more leverage. Indeed, this political aspect may be the most delicate to deal with for western countries.

Today’s key economic challenges require a collective and ambitious action that only the G-20 has the capacity to unleash. There is no doubt the discussions will be intense and that a consensus over such critical issues will be very difficult to reach. But it is clear that despite such challenges, the stakes have never been higher for Asia and for the rest of the world to work together.

Véronique Salze-Lozac’h is The Asia Foundation’s director for Economic Development Programs. She can be reached at VSalze-Lozach@asiafound.org. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation. 

Watching the debt-ceiling debate unfold in Washington, D.C., in recent weeks reminded me of another financial crisis, the one in Thailand, which started the Asian financial crisis of 1997-98. That crisis had a devastating impact on the Thai people. Economic growth fell from 6.5 percent to negative 10 percent, inflation rose, unemployment increased, the Thai baht depreciated precipitously, and the country lost much of its $37 billion in reserves in a futile attempt to defend its currency.

During the time of the crisis and its aftermath, the venerable Thai monk, Luangta Maha Bua, launched a charitable effort to save the Thai economy. He died earlier this year at the age of 97. Luangta Maha Bua raised more than 12 tonnes of gold bars valued at more than $500 million plus $10 million in cash which he then gave to the Bank of Thailand. He called his fundraising drive “Buddhist Robes Helping the Nation.” Shortly after Luangta Maha Bua’s death, a former Central Bank governor and current members of the Bank of Thailand submitted an application to the Guinness Book of World Records asking that the late abbot be recognized as the individual who has donated the largest number of gold bars to a government. The request is currently undergoing Guinness’ verification process.

Whether Luangta Maha Bua becomes a Guinness World Book record holder is unimportant. But what is important is that Luangta Maha Bua encouraged the Thai people to focus on the causes of the economic crisis and to change their own behavior to help prevent a similar event occurring in the future.

Like the United States, Thailand has its political cleavages; indeed, a strong argument can be made that cleavages in Thailand run more deeply. Nonetheless, Luangta Maha Bua’s example encouraged shared sacrifice and compromise, something as Americans we need to exhibit more of as we contend with precarious economic times.

John J. Brandon is the director of The Asia Foundation’s International Relations Programs in Washington, D.C. From 1978-1981, he taught English in Bangkok and Songkhla, Thailand, and visits the country regularly. Brandon can be reached at jbrandon@asiafound-dc.org. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation.