THE DRASTIC TURNABOUT

The global financial and economic meltdown is by far the worst shock that has struck post–conflict Cambodia. Against the backdrop of the most stable political scene in the country in almost three decades, the Asian financial crisis hit Cambodia in 1997–98 followed by the food and energy shocks ten years later. These shocks caused damage but not enough to elicit a turnabout in the country's macroeconomic growth and progress in poverty reduction. In contrast, the global financial and economic downturn, which became evident in Cambodia by 2008–09, put a stop to the country's nearly two–decade long positive growth and poverty reduction.

This chapter discusses the macroeconomic and sectoral impacts of the global crisis based on the crisis transmission framework described in the first chapter, that the impact of the shock was shaped by country–specific circumstances. The economic turmoil that erupted in the developed world spilled over to developing countries chiefly through its impact on trade and capital flows. The degree of a country's exposure to the external shock was hence influenced by its trade and financial openness and composition.

Following a brief account of the global recession's impact on aggregate output in Section 2, Section 3 tackles the overall impact of the global recession on Cambodia's trade and capital inflows. Sectoral exposure to the crisis ultimately depends on the bias in such flows and the country's overall economic growth pattern. Cambodia's double–digit growth in the decade before the crisis relied on a narrow economic base. As examined in Chapter 1, four sectors — garments, tourism, construction and agriculture — were primarily responsible for the country's growing trade and investment inflow. The first three sectors ushered in the country's economic structural transformation. Section 4 recounts how the growth sectors fared in the face of the external shock. It is interesting to note that the contractions in at least three of the growth drivers can be partly ascribed to the effects of other covariant crises.

INTRODUCTION

The preceding chapters have provided detailed analysis of the impact of global financial and economic crisis (GFEC) on Cambodia's economy and the poor there. However almost a year before the GFEC, the world witnessed an unprecedented increase in prices of food and most agriculture products which was as devastating for the poor as the GFEC was. Although the two crises differ in their origins and breadth of impact, they have endangered food security and therefore setback poverty alleviation efforts, especially among marginalized groups in both rural and urban areas. In this chapter we focus on analysing the impact of the twin crises – GFEC and food price increases that preceded it –on the poor in Cambodia.

The rest of the chapter is structured as follows. Section 2 provides detailed analysis of the impact of food price increases on food security. Given that food security is also affected by the state and pace of change within the agriculture sector, the impact of food prices on agriculture is looked at as well. Section 3 explores the impact of GFEC on food security and agriculture. Finally section 4 offers some recommendations and concludes the chapter.

IMPACT OF THE FOOD CRISIS ON FOD SECURITY AND AGRICULTURE

Food price Trends and Determinants of Impact

What was unique about the food price trends witnessed in 2007–08 was not the price escalation itself. Steep price increases also occurred in 1973–74, chiefly because of the oil crisis. What set the food price movements in 2007–08 apart was that the prices of almost all major food and non–food commodities soared at the same time (FAO 2008) and more importantly, that the confluence of old and new drivers may have started a long trend of higher than average food prices.

The full-blown crisis entailed food price record highs. For each of the first six months of 2008, the international food price index registered a year-on-year increase of more than 50 per cent on average.

EXOGENOUS TRIGGERS, ENDOGENOUS INFLUENCES

The global financial and economic shock of 2007–09 is the third major economic crisis to have buffeted Cambodia in its post–conflict period, coming in the wake of the food crisis of 2007–08 and just a decade after the Asian financial crisis of 1997–98 (the “triple crises”). Cambodia's post–conflict history can be divided into two periods: 1991–98, referred to as the early phase of transition during which the first of the triple crises, the Asian financial crisis, occurred; and 1998 to the present, the late phase of transition during which the food and economic shocks transpired. A stocktake of the developments in Cambodia's post–conflict history suggests that the country has come a long way in reinstituting the foundations of a capitalist economic and procedural democracy but has yet to make significant headway in economic sophistication and substantive democracy.

The triple crises were different, yet had similar characteristics. They were all exogenously–driven shocks with their own specific causes but their effects were shaped by the country's situation at the time. In terms of magnitude of impact, the global financial and economic downturn was the worst of the three crises. That it caused the first ever growth contractions in the post–conflict period was sufficient rationale for the series of studies that substantiate this book. Like the two shocks that preceded it however, the way it impacted on Cambodia cannot be understood in isolation from the overall post– conflict milieu. The thesis here is not that endogenous factors caused the crisis. Country circumstances would hardly be able to account for that which is international in origin (Rose and Spiegel 2009). It is simply that endogenous factors shaped the impact of the crisis and a historical, as opposed to a static, analysis better illuminates the nature of the impact. For instance, the growth contractions cannot be explained outside of Cambodia's post-conflict growth pattern while any poverty effect was most likely due to the cumulative impacts of the global economic slump and the hike in food prices. By the same token, sustainable recovery from the downturn rests on deeper reforms affecting major economic and political aspects of the country's post- conflict milieu.

WAKING UP FROM THE DARK SPELL

All over the world, revival from the long spell of economic slump had begun by the second half of 2009. East Asia was at the forefront of global recovery, with some of the hard–hit industrialized countries finally managing positive quarterly output growth and the Chinese economy regaining its pre–crisis robustness. The road to recovery certainly did not come easily. Countries recognized that go-it-alone strategies would have been ineffective in battling the recession given its nature. Thus, they needed to synchronize remedial action as far as possible. Countries were also confronted with serious policy dilemmas. Aggressive policy interventions came with a high price that needed to be settled afterwards. This settlement would be painful but failure to stem the tide of the crisis with Keynesian–type strategies would have depressed economies further. Everywhere, it was recognized that while economic rebound rested on quick fixes, a more sustainable recovery depended on re-orientation of development strategies and structural reforms. Economic risks remain aplenty, heightening the pressure to act on such imperative decisively.

Cambodia started to emerge from the crisis along with the rest of the world. The global upturn served as a beneficial push factor that stimulated trade and capital inflows, while government actions served as a pull factor that helped rein in investor flight and keep the growth sectors afloat. Recovery for the country was also a struggle, not least because its crisis response was undermined by the fact that it is one of the poorest nations in the world. Some quick fixes facilitated economic rebound but there was also the recognition that deeper reforms were needed to ensure a recovery that could better address existing and imminent risks, better exploit growth opportunities and better withstand another crisis that might not be far away. Such thrust rests on the thesis broached in Chapter 1 and is reflected in the discussions in the other chapters. The nature of Cambodia's post-conflict economic development shaped the impact of the global crisis.

Following a decade of strong economic growth, socio–economic development, and poverty reduction, the Global Financial Crisis (GFC) and associated regional economic downturn in 2008–09 had a severe impact on Cambodia's economy, exposing its vulnerability due to the narrowness of its economic base and its reliance on European and North American export markets. While annual GDP growth has now recovered to levels of 6–7 per cent, the vulnerability remains, with a shared imperative by the Cambodian government, the private sector, investors and development partners to work together for the diversification of the economy. The experiences of 2008–09, despite their severity, also provided useful lessons for policy–makers. I am pleased to introduce this volume which provides an independent analysis of the impact of the crisis on Cambodia and a deeper understanding of the Cambodian economy, its strengths and weaknesses, and policy challenges for the future.

Since 1993, the Cambodian economy has undergone a dramatic and rapid transformation. The traditional economy, based on agriculture, is now driven increasingly by the industrial and the tertiary sectors. With the return of peace and stability in the late 1990s, a sense of confidence and pride pervades the country. All Cambodians now share a common vision of sustained economic growth with employment and a secure future for all. The government's strategy is to help realize this vision by reinforcing Cambodia's comparative advantages both regionally and internationally. In the era of globalization the fortunes of all countries in the world are intertwined; autarchy is not an option for sustained high economic growth for a small sized economy as Cambodia. Hence Cambodia's continued economic success will depend on full market access for its products and the cooperation of its development partners.

Cambodia had to rebuild itself virtually from scratch after the defeat of the Khmer Rouge regime. At the very outset, the country had to face the harmful consequences of the international economic embargo imposed in 1979.

COPING WITH THE GLOBAL CRISIS AND MORE

The human face of the global financial and economic meltdown vividly demonstrates the shock's catastrophic effects. The poor and the vulnerable are most at risk in the event of economic shock because, already living from hand to mouth, every penny counts to ensure their meagre income, minimum consumption, and the already fragile state of their overall human development. The range of coping mechanisms available to them is much more limited. Given that least developed countries such as Cambodia constantly suffer from insufficient funds, the availability and sustainability of social protection for the poor cannot always be guaranteed. The near–poor likewise are highly exposed to crises as they can easily fall under the poverty line given a loss of employment or greater underemployment. There is a lot to celebrate from the end of the global recession and movement towards economic recovery, albeit weak. However, the world cannot be comfortable as yet. It is not only that the threat of a double dip can become real anytime. It is also because even though the crisis has ended, some of its effects on the poor linger.

Cambodia's poverty headcount stood at 30 per cent in 2007. This could have increased by 1 to 4 percentage points due largely to the global crisis (World Bank 2009a). As outlined in Chapter 2, the poverty impact of the shock was the end result of the contraction in trade and capital inflows which in turn severely hurt Cambodia's garment, construction and tourism sectors. Although agricultural growth was not upset by the shock, the sudden deflation over the period of the crisis proved devastating especially for farmers who had made production investments against the expectation that the previous commodity price spikes would continue. The role of agriculture as crisis buffer was also undermined by its low absorptive capacity.

This chapter substantiates the estimated poverty increase in Cambodia during the crisis by overviewing the results of the FGDs and SSIs conducted by CDRI with vulnerable worker groups and rural households.

Seeking to become a high income, developed and united country by 2020, Malaysia seems trapped. It is still viewed as a state searching for a nation — a country deeply divided into ethnic or racial blocs which do not share a national vision. Malaysia's challenge is enormous, as this volume explains. But it is also a challenge of ideas rather than straightforward social fact. The racial structure of Malaysia is in a critical way ideologically created — a paradigm — and the task of building a united nation state and national economy is one that cannot be left entirely to specialists in economics and political institutions.

As can be seen in the run up to, and the aftermath of the 13th general election held on 5 May 2013, the race paradigm has been raised sharply to the fore again as a weapon of mobilization, including by the right wing elements in the ruling UMNO and their supporters. The relevance of the debate on the race paradigm — which is the central theme in this volume — is immediately apparent in these developments. This volume examines the manner in which Malaysia's race paradigm was formulated and promulgated, and achieved dominance. It notes as well the presence and competition — and failure — of other societal paradigms, and then goes on to test whether or not the dominant paradigm is losing influence in specific practical areas of Malaysian life.

The volume focuses on ideas, but recognizes too that paradigms are formulated and contested in a political and economic context. The history of ideas has been neglected in Malaysian studies — and yet, in certain ways, it can help open up new possibilities. The mere reminder that the current Malaysian configuration is a construct — and has been challenged in the past — can be liberating. Examining the race paradigm in process, and in practice — also helps to identify ways in which it might be qualified or modified in the future, when economic and political imperatives seem to demand structural challenge.

INTRODUCTION

When analysing the issue of poverty and income distribution in the development literature, it is common for analysts to be guided by several paradigms as a framework for their analysis. These paradigms include the overall or total poverty incidence and income distribution in a country, followed by the strata (urban and rural) and the income class paradigms. In countries where there are state or provincial as well as regional differences, then it is also common for the problem of poverty and income distribution to employ the state/provincial and regional paradigms. However, the latter paradigms are not relevant for city-states like Hong Kong and Singapore, which are totally urban. The race1 paradigm, which is widely used in Malaysia, is not such a common framework of analysis. A few examples of countries in Asia that employ the race paradigm and publish some statistics based on ethnic groups are Sri Lanka and Vietnam. Most of the past studies have employed the vertical inequality (inequality between individuals or households) approach to analyse inequality. In recent times, where there are group differences between race, class, religion, etc., then the horizontal inequality (inequality between groups) concept, made known by Frances Stewart (2001, 2004) and Stewart et al. (2005), has also been employed, especially in utilizing it as a framework for affirmative action. This paradigm has also been introduced to Malaysia in the last decade.

Most of the current generation of Malaysians associate the idea of poverty eradication and income distribution analysis with the introduction of the New Economic Policy (NEP) in 1971. However, available evidence shows that this approach had been employed since the beginning of the colonial period. It was the British policy of “divide-and-rule” as well as the failure of integration of a large immigrant population with the local population that led to the continuation of the race paradigm. Other countries in Southeast Asia such as Indonesia, Philippines and Thailand that also received immigrants from China and to a lesser extent from India, do not incorporate ethnic aspects into their poverty eradication and income distribution strategies as their immigrants are well integrated with the local population. In these countries, integration was facilitated by speaking the same language, using local names, as well as practising similar religion as the locals by many immigrants, and through widespread intermarriage.

INTRODUCTION

In Malaysia, usage of the term “race” is widespread, and is mixed with some form of uncritical, stereotypical cultural explanation of racial differences. In this sense, as argued in the Introduction, it is apt to describe the functioning of the Malaysian society as dominated by the paradigm of race. In scholarly works, the term “ethnicity” is often preferred, due to the awareness of the inherent conceptual fallacy of the biological basis of “racial differences”. In addition, the concept of ethnic identity could easily integrate the religious dimension, while it would be a misnomer to speak about the religious dimensions of a “race”. Nonetheless, simply replacing the word “race” with “ethnicity” does not necessarily mean that the user of the term “ethnicity” may view ethnic phenomenon with a more critical, theoretically informed perspective, as what many so-called “plural society theorists” are accused of. It is equally easy to fall into the trap of “essentialising” ethnicity, to regard it as immutable or given. For instance, referring to the emergence of “ethnic paradigm”, Shamsul (1998) was critical of academic knowledge and discourse which is “trapped in the ethnic-oriented plural society frame” (p. 41).

Is the prevalence of race paradigm in a society necessarily a hindrance to nation building? Eriksen (1998) who examined the multiethnic Mauritius society did not think so. Perspective on Malaysia, on the other hand, is mitigated. On the one hand, Malaysia is perceived internationally as a country which has successfully maintained political stability and peace. The government highlighted the fact that among Asian countries, Malaysia ranks only second to Japan in 2011 in terms of the Global Peace Index which assesses the degree of peacefulness, security and presence/absence of internal violent conflicts among nation-states (“National unity: ‘M'sia ranks second after Japan”, Malaysiakini, 18 June 2011). At a constitution-drafting conference in Khartoum, Sudan in May 2011, Malaysia was reportedly highlighted as a model, a moderate, progressive and ethnically harmonious Muslim-majority country (Shad Saleem Faruqi, “Spirit of Moderation Animated”, The Star, 1 June 2011). On the other hand, there is a general recognition among many scholars that ethnic division constitutes a formidable force in shaping national policies and was disruptive of forging national consensus.

INTRODUCTION

Trade policy can be used by governments as a means for intervening in an economy to promote certain sectors. But such interventions can be costly. Protection, for example, affects allocative efficiency due to the misallocation of resources between protected and non-protected sectors. It can also create rents and rent-seeking behaviour. At the same time, in developing countries, tariff revenues can contribute to the coffers of a country. The demand and supply for protection therefore exerts an influence in the formulation of the trade policies of a country (Rajapatirana 2000, p. 12). Two main factors shape the supply of protection, namely the preferences of trade policymakers, which may be influenced by the prevailing ideology globally as well as locally, and the institutional structure of the government (democratic, authoritarian, multiparty or bi-party). Demand for protection is influenced by individuals, domestic groups and organizations.

The literature on trade policy formulation, especially in developed countries, tends to focus on bottom-up approaches whereby the economic interests of domestic groups as well as foreign lobbying can exert a major influence on the design of trade policies (Ladewig 2006; Gawande et al. 2004). However, the distribution of the costs and benefits of protection are asymmetrical; while the costs of protection in terms of its inefficiency in resource allocation is distributed over the whole society, the gains accrue to the beneficiaries of protection, namely the producer or producers of the protected industry. Hence the outcome of the bottom-up approach depends on the relative strengths of the different interest groups in the demand for protection. For example, producers’ interests rule when they are more powerful than consumers’ interests groups.

In the top-down approach that determines the supply of protection, economic ideology may affect the adoption of protectionist policies. For example, in the 1960s and 1970s, the prevailing economic ideology as well as protectionist lobbies contributed to the use of protection in most countries. However, subsequently, the role of infant industry protection in industrial development is hotly debated with two different schools of thought dominating the literature. In the first school, protection is abhorred based on the 1980s Washington Consensus framework while in the second school of thought, or the 1980s developmental school of thought, government support in the form of protection for infant industries, is deemed to be a key contributory factor to the successful industrialization process observed in South Korea and Taiwan (Woo 2011).