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Cambodia: Selected Issues

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International Monetary Fund
Published Date:
October 2004
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Chapter 7. Foreign Aid Flows to Cambodia49

81. This chapter reviews trends of foreign aid flows to Cambodia since the restoration of peace in the early 1990s. Section A examines the sectoral distribution of aid and, in Section B, its contributions are reviewed. In Section C the macroeconomic impact of such flows are assessed. The chapter concludes that there have been no obvious side effects from foreign aid flows.

A. Recent Developments of Foreign Aid Flows

82. Foreign aid flows in Cambodia have averaged 12 percent of GDP, reaching US$0.5 billion in 2003 (Table 1). About 70 percent of aid flows are in the form of official grants and the rest are concessional loan from bilateral and multilateral donors. Grants are largely provided by bilateral donors, while the bulk of concessional loans come from the World Bank and the Asian Development Bank.

Table 1.Aid Flows (In percent of GDP)
19931994199519961997199819992000200120022003
Loans0.63.23.41.22.81.71.92.83.24.74.1
Official Grant10.09.911.511.88.99.88.18.98.28.17.8
Total10.613.114.913.011.811.59.911.711.412.811.9
(in million US$)257355502443391354342418423512502
Sources: Development Cooperation Report; Council for the Development of Cambodia; and Ministry of Economy and Finance.
Sources: Development Cooperation Report; Council for the Development of Cambodia; and Ministry of Economy and Finance.

83. Cambodia is one of the largest recipients of aid flows among the neighborin Asian countries, along with Lao P.D.R., Bhutan, and Mongolia (Figure 1). In terms concessionality of loans, Cambodia has received the lowest average interest charges among the countries (Table 2). In part reflecting the large share of technical corporation, Cambodia has a very large share of official grants.

Figure 1.Comparison of Aid Flows


(In US$ per capita)

Source: Global Development Finance, The World Bank.

Table 2.Aid Flows in Low Income Countries 1/(In percent of GDP)
GrantLoanTotalAverage interest rate 2/
Bangladesh1.91.73.71.6
Bhutan14.23.117.32.4
Cambodia9.62.412.01.0
Lao PDR12.16.618.71.8
Mongolia11.99.121.02.1
Myanmar1.90.72.71.1
Nepal5.63.38.82.1
Sri Lanka1.42.84.23.0
Vietnam1.82.74.51.8
Source: Global Development Finance (The World Bank)

Average of 1995–2001.

In percent

Source: Global Development Finance (The World Bank)

Average of 1995–2001.

In percent

84. It is instructive to consider the uses and sectoral distribution of official development assistance. Looked at from a functional perspective, most of the aid flows were tied to specific projects, initially as food aid and emergency relief assistance, and then investment projects and technical assistance (Table 3). By 2003, technical cooperation accounted for about 40-50 percent of the total aid flows, most of which was spent on personnel expenses of technical assistance advisors. Investment projects accounted for about 35-40 percent of the total aid flows.

Table 3.Share of Aid Flows by Type(In percent of total)
19931994199519961997199819992000200120022003
Technical Assistance24.229.733.736.148.054.849.844.937.343.850.3
Investment Project23.238.740.740.540.844.033.435.445.844.137.9
Budget Support22.819.315.212.80.70.09.08.29.77.46.1
Food Aid29.712.310.510.610.61.37.711.67.14.75.4
Total100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Source: Development Cooperation Report (Council of the Development of Cambodia)
Source: Development Cooperation Report (Council of the Development of Cambodia)

85. Viewed sectorally, the distribution of aid was highly skewed away from agriculture. In effect, education and health, and infrastructure together accounted for about 50 percent of total aid flows. By contrast, the agriculture sector received less than 10 percent (Table 4). The share of education and health has increased with greater financing from the World Bank and the AsDB, while the share of institutional building has gradually declined as the country emerged from a post-conflict situation.

Table 4.Share of Aid Flows by Sectors(In percent of total)
199319941995199619971998199920002001200220031/
Education and health17.813.913.115.121.028.027.923.223.524.720.4
Infrastructure28.024.729.731.031.828.024.424.726.023.515.2
Agriculture and forestry8.97.27.313.16.23.77.19.97.79.97.7
Institutional building21.328.328.731.125.422.015.215.517.917.110.0
Others 2/24.025.921.19.615.618.325.526.724.824.946.8
Total100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0100.0
Source: Development Cooperation Report (Council of the Development of Cambodia)

Preliminary

The “other” category in 2003 is large because data are preliminary and have not yet been properly classified.

Source: Development Cooperation Report (Council of the Development of Cambodia)

Preliminary

The “other” category in 2003 is large because data are preliminary and have not yet been properly classified.

B. Contribution of Aid Flows

86. Aid flows have played not only a critical role in helping Cambodia rebuild the basic economic system, but also, to some extent, helping the government run the country. The genocide under Khmer Rouge rule substantially depleted the country’s human capital. While returning Cambodians from abroad have partially filled the gap, a large amount of foreign experts were needed to fill the remaining gap. Moreover, the near absence of institutions, including a legal structure, required a large amount of foreign technical assistance in drafting laws, especially for WTO accession, and establishing basic procedures of modus operandi. Such needs are reflected in the large share of technical cooperation of total aid flows.

87. The remaining aid flows were used largely to enhance the country’s long-term growth prospects. Aid flows were critical in supplementing investment in education and health, and basic infrastructure, which lagged substantially behind even relative to other low income countries (Table 5). With attention paid much to these urgent issues, the amount of resources allocated to a more direct alleviation of poverty has been small. This is partly reflected in the lesser aid flows to agriculture and rural development, (average of 19 percent a year in the recent past) on which the poor are so dependent.

Table 5.Education Indicators
Cambodia 1Average 1
Literacy ratio6974
Secondary school enrollment ratio22257
Source: World Development Indicators (The World Bank).

2002.

Average of low-income Asian countries excluding Cambodia, Nepal, Vietnam, Sri Lanka, Lao PDR.

Source: World Development Indicators (The World Bank).

2002.

Average of low-income Asian countries excluding Cambodia, Nepal, Vietnam, Sri Lanka, Lao PDR.

C. Dutch Disease

88. Aid flows appear not to have led to a “Dutch disease” situation in Cambodia. Much of the country’s human resource is still under-utilized and aid flows were largely re-channeled abroad through payments of imported goods and services. Little was spent on locally produced goods, reflecting the limited capacity of the domestic manufacturing and services sectors. Even construction activities mostly used imported materials.

Figure 2.Sector Contribution to GDP

(In percent)

89. Providing a quantitative assessment of the contribution of aid inflows is marred by weak data and other parallel developments. The bilateral trade agreement with the U.S, which led to a sharp increase in garment exports, and the pick up in tourism following political stability in the late 1990s, helped Cambodia develop its trade and tourism sectors. The contribution to growth from these two sectors was large, such that it is difficult to separate the net impact of aid flows on the relative growth of the tradable and non-tradable sectors, which is one measure of assessing the Dutch Disease phenomenon.50

90. Price developments indicate that the real exchange rate might have appreciated, even though data weakness bars drawing a definite conclusion51 (Figure 3). Prices of tradable goods as measured by prices of clothing and footwear have risen by less than the prices of non-tradable services such as housing and utility prices. However, utility prices are affected by world oil prices, and housing prices might have been driven up not only by aid inflows, but also by the recent increase in wealth of the urban areas that led to a sharp increase in demand for housing, faster than housing supply.

Figure 3.CPI


(December 2000 = 100)

D. Aid Flows and Corruption

91. There is an ongoing debate whether or not aid flows induce corruption in the recipient countries. Aid flows are said to induce corruption where resources are transferred with substantial discretion without the accompanying strengthened accountability of the decision maker. An alternative view is that aid flows are associated with improved rules and conditions that limit the discretion of the recipient country’s officials, thus decreasing corruption. The result of recent empirical studies are mixed. While Alesina and Weder (2002) suggest that aid flows are positively correlated with corruption, results presented by Tavares (2003) suggest the opposite.

92. There is little evidence to suggest that aid flows in Cambodia has, or has not, induced corruption. About half of the total aid flows are executed outside the government budget, and even those that are channeled through the budget are closely monitored by the respective donors. There is some ambiguity, however, to what extent donor’s budgetary financing weakens the authorities’ resolve to raise fiscal revenue.

E. Conclusion

93. Cambodia has received large amounts of aid flows. These have been biased toward technical cooperation and thereby helped strengthen government capacity. There is no clear evidence to indicate that aid flows to Cambodia has given rise to any adverse side effects. However, poverty remains widespread, especially in rural areas. Thus, a case could be made for reorienting some of the aid flows to sectors that may have a more direct impact in alleviating poverty.

References

    AlesinaA.WederB.2002“Do Corrupt Governments Receive Less Foreign Aid?”American Economic ReviewSeptember 92.

    NkusuMwanza2004“Aid and the Dutch Disease in Low-Income Countries: Informed Diagnoses for Prudent Prognoses,”IMF Working Paper WP/04/49.

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    TaveresJosé2003“Does Foreign Aid Corrupt?,”Economic Letters 79pp. 99-106.

49Prepared by Koji Nakamura (PDR).
50Nkusu (2004) summarizes the recent studies of aid flows and Dutch disease, and provides a theoretical model for investigating the Dutch disease. A Dutch phenomenon disease in the context of aid flows is suspected if (i) the real exchange rate appreciates and (ii) the tradable sector shrinks relative to the non-traded sector.
51The CPI is compiled from data from the main urban areas only.

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