ASEAN Economic Community 2015

The Association of Southeast Asia was created in August 1967 by six nations Indonesia, the Philippines, Thailand, Singapore, Malaysia and Brunei for the matter of preventing the spread of communist ideology, promote peace and cooperation in the region. The ASEAN head quarter is based in Jakarta, Indonesia‟s capital city. In 1990s, when the Cold War completely collapsed, there were four other countries in the region including Cambodia, Lao, Myanmar, and Vietnam decided to join ASEAN. These four new members were the former communist states.1 As ten economies joining together, the regional economy is progressing forward step by step. Watching other region such as European Union, East Asia, and North America cooperate together and made up a very strong economy. The ASEAN nations then committed themselves with an objective to establish a single market economy for the region in 2015. The aimed is to create a highly competitive economic community that will play a significant role in the global economy. The ASEAN enquire all its members to participate and form together. However, as 2015

remain only a few years from now, questions are being raised about whether Cambodia is ready to fully take part in the ASEAN Economic Community. In terms of the development gap, Cambodia is far behind the others such as Singapore, Thailand, Malaysia, Indonesia and Philippines, etc. In such issues, the quality of the products, production capacity, labor productivity skill and public administration. Since, it is going to be such a very competitive community, so will Cambodia be ready to compete? Nonetheless, if we look at scorecard, what is on the paper such as policies, laws and regulations, Cambodia is likely ready. Thus, it means that Cambodia meets all of the policy and regulatory requirements. As it stated at the AEC list for the member countries readiness in the mean of legal and policy frameworks and ranked, Cambodia is in the third after only Singapore and Malaysia. This due to the fact of Cambodia‟s participation in the World Trade Organization in 2004 that helps pushed to improve economic and trade liberalization policy.

Although, Cambodia has already reach some of the preparations, there still a lot more related to the paper work to get done to fully become a member of the trading bloc. According to the points above, Cambodia seems likely ready to integrate in the regional economic, but not yet confidence enough to compete. Therefore, it occur some numerous issues that Cambodia will need to work on if it wants to have a successful integration into AEC in 2015.

The issue of integration has become an interesting topic for all news reporters, businessman, worker and especially youth to study about. It is important, because this will have a huge impact on Cambodia society through employment opportunities, labor force, production quality and quantity, tax, education, communication, immigration, etc. These are all the facts that Cambodians are forethought of. And since there is a limitation of gathering sources, especially, primary, the information in the papers will be covered by the secondary sources. To further understanding about Cambodia and AEC, the paper will be discussing about the challenges that Cambodia have to face.

Modern Politics and Economics History of Cambodia-ASEAN

2.1 Cambodia-ASEAN Diplomatic Relations

During the period of cold war, neutrality was seen as the best approach for Cambodia to stand for. However, neutrality makes this small nation became unstable; and in facts, it leads Cambodia to be an isolated state from the world. The isolation from the globe makes Cambodia shifted itself from practicing a traditional approach, neutrality, to an open door policy and committed itself to join ASEAN in 1994. Nevertheless, Cambodia membership into ASEAN has been delayed until 1999 because of the internal political instability and coup d‟état in 1997.

In 1999, Cambodia was accepted to be the last member of ASEAN in Hanoi and started a new chapter since then. As a member of ASEAN, Cambodia has faced a lot of challenges; however, it brings many possible opportunities for Cambodia to enhance in the areas such as politics, economics, security and diplomacy.2

2.2 Cambodia’s Achievements after Joining ASEAN

Cambodia has started a new chapter after the free and fair election assisted by United Nations Transition Authority for Cambodia (UNTAC) in 1993. After establishing a new government, they begin to adopt liberalization and open door policy for the benefits of the whole nations. Cambodia then focuses on stabilizing its economic growth and boosting the development of the country. First, by focusing on the policies, laws and regulations; in 1994, Cambodian government has implemented a new investment law which offers a generous package of incentive tax to all investors in the region. This new policy has attracted a significant number of foreign direct investors to flow into the country. The FDI has improved this country‟s economic rapidly due to comparative advantages such as natural resources, cheap labor and the geographical location. The adoption of the new policy is aim to promote sustainable development as well as to rise up people‟s living standard in Cambodia. By promoting a strong commitment and potential to the regional 2

Ibid, 74-80
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community, Cambodia has become a fully latest member of ASEAN in 1999 and as they have viewed the benefits possibilities higher than the costs. By being a member of this original bloc, Cambodia is progressing toward the road of sustainable development in order to have a successful integration. Over the last decade, it experiences a remarkable macroeconomic stability and significant improvement in standards of living. In terms of trade and international relations, Cambodia has entered into bilateral investment treaties to provide reciprocal national treatments to investors preclude expropriations and guarantee the repatriation of investments. Moreover, Cambodia is gradually adopting a policy of global market liberalization which help promote this petit nation from isolated to a well know one. In regional market economy, tariffs on most Cambodian exports to and import from ASEAN member countries have been reduced from zero to five percent by 2010 and will be abolished by 2018.

Besides from that, the strengthened of financial sector and system in the
banking sector have been generally remarkable, following the completion of back restructuring programs in 1999. This was proven by banking and financial stability, increase financial services promoted through the institutional and legal reforms under the financial sector blueprint. On the other hand, the Cambodian government has been successfully keeping the inflation in check. The tight fiscal policies and the growing influence of monetary policy in controlling money supply expansion have contributed to this stability. And if we take a look at the investment incentives in special economic zone, Cambodian government has implemented the investment law that offers up to nine years tax holiday by giving a zero percent rate on the value added tax and full import duty exemption on raw materials, machinery and equipment. In addition, it guarantees free repatriation of profit that investors earn. The government also ensures equal treatment to all investors and free remittance of foreign currencies abroad, that there is no requirement for investors to participate in the local equity. All in all, Cambodia has incredibly achieving a lot of its importance goals for their economic growth.3

2.3 Cambodia’s policies, strategies and commitments
The Royal Government of Cambodia has established a supreme council of state reform that holds overall responsibility for policy making, coordination and supervision of reforms that set forth on Political Security, Economic and Financial reform, Administrative reform, Decentralization of local governance, Judicial and Legal reform as well as reconstructing education system.

Cambodia is committed to strengthening of the rule of law, which is the cornerstone for the preservation of political stability and for long term and sustainable socio-economic development. To keep a long lasting peace in the country, the royal government of Cambodia has declared to its willingness to cooperate with the international community such as the United Nations in organizing an appropriate tribunal on case of Khmer Rouge to prosecute the top leader of this regime. Moreover, with the uncertain human right and political environment, the Royal Government of Cambodia is tended to cooperate with the civil society institution and foreign and local NGOs. The Government has established policies and given priority to poverty reduction programs, rural development, promotes quick income generating sectors such as tourism and diversification of light industry. They also join the world campaign of demobilization of its armed force, as well as the collection and destruction of illegal weapon to demonstrate their commitment to build peace. In terms of international affairs, Cambodia has given its priority to strengthen its role in international relations and the deepening if its commitment to cooperate fully with all partners, especially those partners within ASEAN, ASEAN Regional Forum and the ASEAN plus three, in the areas of economic, politics and security.

Cambodia places its strategic importance on participating in all regional endeavors aimed at establishing and ensuring a national and international environment of security, peace and stability, which constitutes the instrumental foundation for sustainable development and prosperity of the people.4 Throughout this last decade, the government has makes its efforts and issue policy that focus on public finance reforms by proposing first two target areas including enhancing revenues and improving expenditure management. The government expanding its revenues 4

Kao Kim Hourn, The Role of Think Tanks in Cambodia: Achievement s, Challenges and Prospects: The Achievements, (Phnom Penh, Kingdom of Cambodia, 2001), 20-23 [6]

by measuring the tax revenues, strengthening the discipline of tax official, cleaning up the department of taxation and avoid ad hoc tax exemptions outside the law on investment. Beside from tax revenues the government also launched on forcing strict measure on customs and nontax revenues. For a developing country like Cambodia, the financial resource for public expenditure is very limited. It must be very careful in use of financial resources. So in order to make a sustainable development, the government has demonstrated a long-term development plan strategies and public expenditure programs under the national budget that should be complement for a long-term development objective such as alleviation and sustained economic growth. The project must be adopting within the National Program to rehabilitate and Develop Cambodia that prepare with the framework and provides estimates of annual budget. The government of Cambodia has viewed three effective approaches including building human resources to carry out financial devolution, the need from political commitment to boost public revenues and need for initiative by government to coordinate external assistance, that would solve the public financial problems. The effort to make reform on administrative was concerned since Cambodia has not yet become a fully member of ASEAN.

It remains unchanged due to the internal political rivalries and distrust tension within the coalition government from 1993 until 1998. However, after the second election in 1999, the government presented it objectives of administrative reform plan by establishing a state administration that is neutral, responsible, transparent, closer to its citizen and responsive to the needs of people. The plan is aim for the good governance in Cambodia; good governance on the other hand refers to the strengthening the rule of law, human resources development and creation of the core group of civil servants to handle priority mission of the government. Decentralization is an issue that touches many of the reform initiatives being pushed by the government. The most significant initiative to decentralize governance in Cambodia is called the Social Economic Improvement Local Agency program. The program objectives are to build the capacity of local government structure capable of planning, financing and implementing decentralized development in rural area. SIELA has faced with many problems such as the low capacity of human resources and ability to generate budget. These are the issues that distracting the decentralize process.

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Judicial reform is another important for the government to focus on and to establish an inter-ministerial council on judicial reform by sub decree. Due to the fact, that judicial system in Cambodia is very low in performance.
Thus, it is necessary for the government to take charge in improving judicial independence as well as to make deficiency in the judiciary‟s financial resources. The Royal Government of Cambodia also cooperate with the Ministry of Justice to establish a new mandate that include in the key areas such as drafting new laws that is more efficient, developing and maintaining date on the criminal justice system, organizing a judicial training center, enforcing judgments, in collaboration with prosecutors, planning, building and maintaining court facilities as well as supervising court administrative personnel.5

III.

Advantages and Disadvantages for Cambodia to join AEC

Being a member of ASEAN for over the last decade, Cambodia is progressing toward a prosperous nation both in terms of politics and economics. However there are still many missing parts that Cambodian government needs to improve, especially in economic reform. As Cambodia is status as a country that imports a lot more products than it export, thus, it leads to the biggest problem that causing economic growth. The scale of the export is very low compare to its neighbors. According to Mr. ChheangVannarith, Executive Director at Cambodian Institute for Cooperation and Peace (CICP), „It is necessary for Cambodia to speed up its economic reforms by focusing on export and investment facilitation through the strengthening of the good governance, infrastructure development, human resources development plus its research and development capability.‟ He also stated that, „Knowledge based on economy needs to be introduce through improving the educational system with a focus on innovation, creativity and entrepreneurship.‟ So these are the key factors that would prepare Cambodia to have a successful integration.

3.1 Advantages
The Cambodia‟s agreement to participate in ASEAN Economic Community in 2015, is expected to brings a lots of benefits to itself in the form of the generation if economic 5

Toshiyasu Kato, Jeffrey A. Kaplan, Chan Sophal and Real Sopheap, Cambodia Enhancing Governance for Sustainable Development: Case Studies in Reform Lesson in Governance (Manila: Asian Development Bank, 2000), 51-99.

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activities. There will be many varieties goods at lower price for local consumers. As AEC is going to constitute a big market, Cambodia would be able to attract more Foreign Direct Investment to come in and invest and create more employments in the country. The anticipated of this big market may probably cause an increase in economic activity and productions in Cambodia. The ASEAN Economic Community is a window of opportunity for Cambodian entrepreneurs to explore more opportunities. Even though, we can‟t avoid competing with others in such a context of a regional integration process, but „what we can do now is to know what we have and how we can compete‟, Said Mr. ChheangVannarith. As this new form of market economy exists, it will help to increase competition in the region. A lot of local companies will benefits from this integration with a free flow of human resources, capital, goods and services.6

3.2 Disadvantages
The establishment of ASEAN‟s single market economy is expected to bring some disadvantages to Cambodia as well. As the flow of imported products from other countries flow in with low or no tariffs, which would hurt the small domestic and medium enterprises and leads to the reduction of revenues. Revenues from tariffs are expected to reduce revenue and an influx of imported products may threaten infant industries in Cambodia. Moreover, „laborers from other ASEAN countries may come and replace Cambodian laborers for some jobs‟, Said PochKongchheng, a researcher at the Economic Institute of Cambodia. Another concerning issue is that, Cambodia is also one of an ASEAN production chain. We have a lot of raw material such as rubber. So, there‟s no reasons why we needs to export our raw material to other countries in the region when we can attract foreign investment to do the process, or at least semi-process and add a higher value to the products. And this is possible since we are part of the larger regional value chain.7

3.3 Balancing Costs and Benefits
There always choices to choose. But whatever we choose, costs and benefits always come along. However, what matter is that we have to make balance between both sides. Dr. 6
7

Magazine: Sok Sithika, “ASEAN Economic Community”, Economics Today, January 9-15, 2012, 24. Ibid, 23-24.
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SokSiphana, advisor to the Cambodia Government and to the Supreme National Council (SNEC) sees more advantages than disadvantages. He also pointed out that, „Cambodia market is limited to its smaller population of 14 million with the current economic barrier in place. Cambodia is expected to be part of a much larger ASEAN Economic Community when that barrier is lifted.‟ He claimed this due to the fact that he has already seen a positive trend in that direction where some multi-national companies have begun setting up their subregional headquarters in Cambodia covering operations in Vietnam, Thailand, and Laos. Therefore, Cambodia is hoping for positive challenges in ASEAN Economic Community. 8 In my own point of view, I also agree that the advantages of the integration is overweight the disadvantages. One in many reasons to support, Cambodia does not have to adopt the policy of protectionism for the goods or domestic products. Since Cambodia has a very small market of exporting products. Instead, the local consumers will get to buy a good quality of import products with lower price. Another reason is that, Cambodia will be able to attract more foreign investment to come in and invest in many sectors to produce goods and create more employment opportunities. There are so many others visible reasons to prove this.

IV.

Cambodia’s Perspective for Economics Integration

Cambodia has gradually shifting from a close door economy to a free market
economy supported by a wide range of economic reforms and increasing involvement in regional and global integration. Stepping into regional economic integration, a small market economy like Cambodia will face with a competitive export market. However, for the interest of the long term development, Cambodia will have to suffer at the first stage of integration. Nonetheless, Cambodia has both positive and negative perspectives toward this economic integration. 4.1 Positive Perspectives

Cambodia has expected to gain much more benefits than the cost. At the early phase we expected the integration to bring a whole lot of benefits to the consumers. The consumers can buy the product at a lower price and good quality. The lower price of the product is result from the ASEAN policy of „Free Flow of Goods- ASEAN Trade in Goods Agreement‟

8

Ibid, 24-25
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which was implemented on May 17, 2010. According to H.E. Cham Prasith, Senior Minister of Commerce raised up at the ASEAN Awareness National Seminar on Mar 15, 2012, the tariff elimination is one of the important tasks for all the ASEAN governments to embrace. The elimination of the tariff will leads to more competitive in both quality and cost. Therefore, it will expand the consumer‟s choices, higher productivity growth, lower price markup, and the average consumer in our country will become better off with more trade and products. As the average and poor will also benefits from trade; the economist has found out that, the economic integration has played such important role in accelerating growth and reducing poverty. Hence, it also narrows down the overall global in equality in income distribution.

Another major benefit for Cambodia will be the reforming of good governance. The increasing of regional market place will leave a small room for corruption, which adds to transactions costs. The government has committed
itself on a high premium of good governance. Beside from this Cambodia is also expected for the modern technological gains that will shift geopolitics, expanding trade and financial flows plus cheaper communication that have created tremendous opportunities and lifted barriers to global knowledge and problem solving.9

4.2 Negative Perspectives
The economic integration will create new risk and challenges for the country and well such a financial instability, disease transmission plus cross border criminality. Job insecure for small skill labor is also going to be another problem. Since their jobs will be replace by the migrant skilled and well trained labor. In a developing country like Cambodia, it appears that unskilled and semi-skilled workers have benefited from integration by improving employment prospect and higher earning, as there is more foreign investment. There are evidences shows that trade liberalization most likely leads to the growing gaps between the educated and uneducated especially in the developing world like Cambodia.

Aun Porn Moniroth, “Economic Integration in East Asia: Cambodia‟s Experience,” Site Resources, available at
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The scare administrative resources of government would also be another problem that will be stress from the integration. Once we integrate, we will have to give up some of our sovereignty. Thus, the region will become borderless and the government might probably lose some of its control over many areas of public policy management. Besides, we will lost parts of the control to capital markets and speculators driven by the profit motive and not by considerations of public good.

Besides from above, the advance technology and the lowering of the boundary will increased a lot of problems including cross border crimes, commercial fraud, drug and human trafficking, money laundering, environmental pollution
and terrorism. This will higher up the demand from the government to guarantee social security. Last but not least, another distinguish problem that result from economic integration is that it will perceived to undermine traditional values and cultural identities due to the increasing intrusion of global, primarily western, norms, practices and values in societies and local communities. These practical matters will be falling wayside when people prioritize the economic progress.10 V.

Major Challenges
5.1 Building Human Resources

In order to have a successfully integration, one of the most significant resource that will push Cambodia to be a qualify competitor is building human resources. Investing on education sector should be the first priority for our government. This due to the fact, education system in Cambodia hasn‟t reached to the international standard yet. Strengthen education system from primary up to the university level and establishing research institution is needed to prepare young Cambodians to gain more skill, creativity and innovation to compete for the future of themselves as well as their nation. A lot of youth aren‟t aware of this change. However, for those who go to the university or working most likely understand about the future change; and they seem to have prepared themselves already. Even for those who have aware, they still need to increase their English language ability through learning, participate in social activities, volunteering, conducting research and seeking for social knowledge.

10

Ibid
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Based on my research, Cambodian youth today are showing more potential when it comes to being creative and innovative in their approach to employment. Some of them have created their own job already such as creating website for their online business. Taking advantage from the economic integration of the
ASEAN Economic Community is necessary for youth in Cambodia. Once they view the advantage of it, they will study hard and improve their learning capabilities.

Coming back to improving language skill in Cambodia; as we already know that in ASEAN, English is the global language and the only official language that has been use to communicate among all states. It‟s a very powerful tool as well. However, if look at Cambodia, there‟s still a very small percentage of Cambodians who are able to use English properly. Therefore, every individual needs to quickly learn and enhance their language proficiency in order to facilitate and push the trading economic more efficient. Technology is also another important aspect for a developing state to absorb. It is so obvious that Cambodian people have picked up the advantages of technology such us mobile phone and internet that help alleviate their lifestyle. It has changed rapidly within the last decade. Even though it has changed, majority of Cambodian especially those who live in the provinces aren‟t able to access to the modern life style at all due to the lower system of technology, electricity and facilities. The government therefore need offer enough accesses for those who residence in the provinces.

5.2 Reducing Development Gap
The development gap between ASEAN six and ASEAN four has seen to be a huge gap. To successfully establish ASEAN Economic Community in 2015, all the four such as Cambodia must work hard to modulate and accelerate in order to narrow down the gap. “The reduction of development gaps among ASEAN member states is a prerequisite condition which will ensure competitiveness and to achieve regional integration.”, Said Prime Minister Hun Sen at the AEC Conference on November 28, 2011. He also pointed out that, closing the gap will require a lot of resources. The resources that Cambodian needs for narrowing the gap include both financial and human capital. „Bridging the development divide is among the most pressing challenges facing the successful establishment of AEC by 2015. Many of the ASEAN countries do not even have a competition policy in place. Moreover, inadequate [13]

human resources and infrastructure, both physical and institutional,
threaten the timely materialization of AEC 2015.‟ addressed by K. Kesavapany, Director of the institute of Southeast Asian Studies at the November 28, 2011 Conference.11 One among other possible ways that Cambodia would be able to reduce the gap is to focus on agriculture sector. Agriculture is somehow still an important sector, providing employment and livelihoods to millions of people in rural areas. Without agricultural development, it will be very difficult to reduce rural poverty and release the resources needed for industrial development. Thus, the Cambodian government should pay close attention to the in the investment to this sector. The development of adequate rural infrastructure and communication networks and take steps to minimize transaction costs is needed from the government to promote the growth of agricultural productivity. In order to access for higher skills, information, and technology (machinery) should be afforded by the government. 12

VI.

Conclusion

The economic integration has been increasing globally with an irreversible process. As we already know that there is no choice for Cambodia to conclude a priori whether this integration is either good or bad. It most likely depends on how we can manage the process. In any case, economic integration will definitely bring both positive and negative impacts on Cambodia. The positive will have to be maximized the benefits, and the negative impacts will have to be well manage. Since there‟s no other options, to have a successful integration, Cambodian government therefore needs to maintain macroeconomic stability by creating a proper condition for investment and savings, push for outward-oriented policies to promote structural reform, to encourage domestic competitions both in terms of quality and quantity as well as to establish strong institutions to foster good governance. Even though, the economic integration will brings some negative impacts such as increasing unemployment for local people and threaten the domestic products, etc.; what we

11

Magazine: Sok Sithika, “ASEAN Economic Community”, Economics Today, January 9-15, 2012, 26 Aun Porn Moniroth, “Economic Integration in East Asia: Cambodia‟s Experience,” Site Resources, available at , 32-33

12

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all should understand is that we are in the process of investing for the long-term benefits. Nonetheless, the integration will shift Cambodia from a periphery country into a semiperiphery country through foreign direct investment. Moreover, Cambodia will take more roles in the global economy and gain more trusts to the investors as an ASEAN economic community member. In the means of long-term, through foreign investment Cambodia will gain a whole lot of benefits after joining the integration including knowledge transfer, technology, services and lower cost of productions with good quality. Thus, Cambodians then need to absorb all these gains to improve their skills and abilities. On the other hand, foreign investment will create more job opportunities for the people and the products that come from the industry will called for export products of Cambodia; for example, Garment factory.

Besides, since Cambodia economy is very much depends on agriculture; the economic integration will also help to improve the production quantity for export by transferring from traditional to more modern. The higher productivity of agriculture will ensure households food security and to sustain adequate real wages in agriculture. This will help reduce poverty in our country by lowering food prices, raising farmer income and creating employment opportunities.

Economic integration in another way will also push to more transparency and accountability in government expenditure and better targeted spending on the poor will definitely contribute to better services delivery.
Decentralization would also be encountered for improving the effectiveness of services delivery. Last but not least, the economic integration would seem to be more good than harm, as long as the government and the whole society committed to fulfill all the challenges being raised by the regional integration of markets is to open and honest in dealing with any kind of risks involved and solve these risks in a transparent and human way.