Abstract/Summary

The financial crisis in Asia erupted in Thailand and spilled over to other Asian countries such as Malaysia, the Philippines, Indonesia and South Korea. Although the so-called contagion of the Asian crisis to the rest of the world seemed to have gone into remission by the end of 1998, it is by no means clear that the crisis and its contagion have really ceased. Some crisis countries, such as Thailand and South Korea, appear to have shown signs of economic recovery, whereas Indonesia continues to face not only an economic slump but also social tension and political uncertainty that were precipitated by the financial crisis.

Cambodia is surrounded by countries which have been adversely affected by the crisis. Cambodia’s neighbours, particularly Thailand, Malaysia and Singapore, have also been its largest trading and investment partners in the past five years. The Asian crisis has thus dramatically changed the external economic environment surrounding Cambodia.

The economic boom in the countries around Cambodia from the late 1980s to mid-1997 was one of the major external factors fostering Cambodia’s transition to a market economy, reconstruction and development. Thailand and Singapore have absorbed a large proportion of Cambodia’s exports since the establishment of a coalition government in 1993. Foreign direct investment (FDI) from Malaysia, Singapore and other Asian countries also helped supplement the shortage of domestic savings, investment and human resources in Cambodia. However, this favourable external environment changed after the Asian crisis erupted. Concerns have been expressed about whether and to what extent the crisis affected Cambodia’s economy, and to what extent it had an adverse impact on the livelihood of the Cambodian people, 36 percent of whom live below the poverty line. Social development, particularly health and education, is recognised as a priority issue in Cambodia. How and to what extent has social development been affected by the crisis?

The crisis also raises interesting policy issues in terms of how the government should best respond to external shocks to the economy. What policies has the Cambodian government planned and implemented to contain the contagion of the crisis? What policy lessons can the government learn from the experience of other crisis-hit countries?

The current paper aims to answer these questions. It first analyses the impact of the Asian financial crisis on Cambodia’s economy and society. Official data published by the government are used to analyse the impact at the macro level, while field surveys and interviews were conducted to assess the impact at the micro level. Second, the paper discusses various policies of the government to contain the adverse impact of the crisis. Official documents and records, as well as interviews with key government officials, were used to gather information. Finally, some key issues are discussed to draw lessons for policy-making. Special emphasis is given to examining the extent to which those issues are relevant in the context of Cambodia.

The structure of the paper is as follows: Section 1 provides our framework and methodology, within which we analyse the impact of the Asian financial crisis. Sections 2, 3 and 4 investigate the impact of the crisis on Cambodia in three areas—the financial sector of the economy, the real sector of the economy, and social development. Section 5 discusses the response of the government to contain the adverse impact of the crisis. Section 6 discusses policy lessons that Cambodia could learn from the experience of other crisis countries. The final section concludes the paper with a summary of findings.