The political settlement and economic growth in Cambodia

Abstract

Since 1960 many countries have experienced growth accelerations, but few have maintained growth. An adequate theory of growth must explain both how some countries kick-start growth, and how some maintain it over decades. For us, the key is to be found in the relationship between what we call the political settlement and the environment for business. Some political settlements create the possibility of a transition from disorder to order in the deals environment, and this creates a potential for accelerated growth. Of these, a smaller subset manages to maintain order while also permitting an increased openness of the deals environment, so that new firms can enter, innovate, compete, and structurally transform the economy. Over the past 40 years, Cambodia has had one of the world’s most volatile growth experiences. A prolonged economic collapse between 1970 and 1982 was followed by a gradual but unstable recovery up until 1998, while post-1998 saw another growth acceleration and sustained high growth. While growth collapse can be traced to the failure of Prince Sihanouk’s post-independence political settlement, war and the disastrous Khmer Rouge regime, growth acceleration and maintenance has been based on a political settlement which has created a balance between technocrats and rent-seekers within Hun Sen’s dominant coalition. Technocrats are given just enough latitude to support growth industries, while rent-seekers are given the political backing to generate profits, a proportion of which are funnelled to the masses through ruling party patronage projects. Through interviews conducted in four economic sectors, we show that there has been a positive feedback loop between support for competitive export industries, state capacity, and structural transformation. However, there has also been a negative feedback loop from over-reliance on high-rent industries, to insufficiently inclusive growth and political instability. The political settlement that has underpinned growth and stability for the past 15 years is facing a severe challenge