Cambodia s Agricultural Sector in the ASEAN Free Trade Area

Transcription

1 International Symposium Sustaining Food Security and Managing Natural Resources in Southeast Asia - Challenges for the 21st Century - January 8-11, 2002 at Chiang Mai, Thailand Cambodia s Agricultural Sector in the ASEAN Free Trade Area Chan Sophal Researcher Cambodia Development Resource Institute, Phnom Penh, Cambodia 1 Introduction As a latest member of the Association of South-East Asian Nations (ASEAN) 1, Cambodia will be implementing the Common Effective Preferential Tariffs (CEPT) scheme, which requires its tariffs to be gradually reduced to 0 5% within ten years. A number of studies have been carried out to project the impact of this on the Cambodian economy as a whole. However, little has been done to assess the possible impact on the agricultural sector, which is a backbone of the Cambodian economy. Cambodia s agricultural sector employs nearly 80% of the labour force and contributes almost 40% of gross domestic product (GDP). However, the sector is characterised by backward technology, high weather dependence, fragmented structure and low productivity. Hence, what will be the impact of ASEAN Free Trade Area accession on Cambodia s agriculture? How will Cambodian farmers do when exposed to full-fledged competition in the region? The purpose of this paper is to assess the prospects for Cambodia s agricultural sector in the medium and long term when Cambodia s obligation to implement the CEPT scheme comes into effect. In so doing, the report is based on literature review and analysis of data from different sources. 2 Cambodia s Agriculture in AFTA: A Cross-Country Comparison Similar to other new ASEAN members, Cambodia s 1998 GDP per capita of $250 was far lower than any old ASEAN countries. 2 During , Cambodia s GDP grew 1 ASEAN comprises of ten countries: Singapore, Malaysia, Thailand, Indonesia, Philippines, Brunei, Vietnam, Myanmar, Laos and Cambodia. For reasons of space and agricultural significance, Brunei and Singapore are most often excluded from the statistical tables. 2 New members of ASEAN are Vietnam (being a member in 1995), Laos (1997), Myanmar (1997) and Cambodia (1998). These four countries are sometimes referred to as South-East Asian Transitional Economies (SEATS).

2 2 Cambodia s Agricultural Sector in the ASEAN Free Trade Area on average 5.1% per annum, which was the lowest among all new ASEAN members that have been recovering during the transitional period from state to market economies. Similarly, Cambodia s agricultural sector grew at only 2%, while Vietnam, Laos and Myanmar all grew at 5% a year (see Table 1). In general, the better-off countries, which have passed their green revolution, experienced slower agricultural growth in the 1990s. Cambodia s employment share of 78% in agriculture is among the highest in the region. It can be summarised that the industrial and service sectors in the Cambodian economy are the smallest in the region apart from Laos and Myanmar (Table 1). Table 1 Economic structures of Cambodia and other ASEAN countries Camb. Viet. Thai. Mala. Sing. Indo. Phil. Laos Myan. Population 1998 (mil.) (US $ at current prices) GDP per capita (% average annual growth) GDP growth ( ) Growth by sector ( ) (% average annual growth) Agriculture Industry Services GDP by sector* (1998) (% share of GDP) Agriculture Industry Services Employment by sector* (1997) (% share of total labour force) Agriculture Industry Services * For Cambodia data are from CDRI, Source: World Development Indicators, World Bank, (2000). In terms of agricultural productivity, Cambodia is the least productive in major crops in the region. Cambodia had the lowest production per hectare of land in almost all the crops presented in Table 2 below. By contrast though, Cambodia had the highest yield in soybeans. Notably, paddy, to which 90% of Cambodia s cropland is devoted, yields far less production than any regional country.

3 Sophal, Chan 3 Table 2 Crop productivity in ASEAN Countries, 1998 Camb. Viet. Thai. Mala. Indo. Phil. Laos Myan. (Yield: 1,000kg/ha) Paddy Soybeans Maize Cassava Sweet potatoes Groundnuts in shell Cereals (Comparative Index: Highest number country = 100) Paddy Soybeans Maize Cassava Sweet potatoes Groundnuts in shell Cereals Source: FAO, The low yields in Cambodia can be partly explained by use of inputs as presented in table 3 below. 3 Cambodia s agriculture is characterised by small scale and high dependence on weather. Only 7% of Cambodia s total agricultural land is irrigated from controlled irrigation sources, compared with 25% in Thailand, 32% in Vietnam and 19% in Laos. Another major reason could be that Cambodia applies the least fertiliser among all the regional countries except Laos. Moreover, Cambodia cannot afford as much machinery as its neighbouring countries. In 1997, it had only 3 agricultural tractors per 10,000 ha of agricultural land, compared with 10 in Laos, 73 in Thailand and 160 in Vietnam. The low intensity of use of agricultural inputs in Cambodia, however, gives hope that Cambodia has the potential to increase production and productivity. Pingali (1997) documented the positive relationship between commercialisation of Asian 3 The reasons for Cambodia s low productivity are many, some of which are discussed in Part II of the current report.

4 4 Cambodia s Agricultural Sector in the ASEAN Free Trade Area agriculture and increased intensity of input use during the green revolution, which Cambodia has not yet undertaken. 4 Table 3 Intensity of agricultural input use in ASEAN countries, 1997 Camb. Viet. Thai. Mala. Indo. Phil. Laos Myan. Irrigated land* as % of agriculture land Kg of plant nutrients per ha of agriculture land Agric. tractors per 10,000 ha of agric. land 7% 32% 25% 4% 16% 16% 19% 15% (Comparative Index: Highest number country = 100) Irrigated land as % of agriculture land Kg of plant nutrients per ha of agriculture land Agric. tractors per 10,000 ha of agriculture land * Irrigation" refers to net irrigated land area Source: FAO, A Dynamic Comparative Analysis of Cambodia s Agriculture The analysis in part III is primarily concerned with the potential comparative advantage and revealed comparative advantage, which indicate the extent to which the economies of scale and specialisation can be exploited. It ignores a variety of important dynamic factors, such as relative changes in factors of production, the rate of investment, economic stability and structural transformation and income distribution effect. Thus, following the orthodox theory is inadequate for analysing a dynamic Cambodian economy. For instance, Cambodia s relative land abundance is likely to decrease in the long term because of its highest population growth (2.5%) in the region. On the other hand, productivity of Cambodia s agriculture is likely to increase because of greater intensity of input application, higher investment and improved environments surrounding the agricultural sector. 4 Pingali, Prabhu. L. (1997) From Subsistence to Commercial Production Systems: The Transformation of Asian Agriculture American Journal of Agricultural Economics, Volume 79, (May 1997).

5 Sophal, Chan 5 Accordingly, in order to make realistic assessments of the prospects for Cambodia s agriculture in AFTA, an analytical framework that is dynamic in nature is also needed. Such analyses need to take into account both direct and indirect effects on the agricultural sector as a result of dynamic changes in the Cambodian economy induced by investment, growth and the regional integration itself. As pointed out by El-Agraa (1982), the possible sources of economic gain from a free trade area can be attributed to:! enhanced efficiency in production made possible by increased specialisation in accordance with the law of comparative advantage;! increased production levels due to better exploitation of economies of scales made possible by the increased size of the market;! an improved international bargaining position made possible by the large size, leading to better terms of trade;! enforced changes in economic efficiency brought about by enhanced competition; and! changes affecting both the amount and quality of the factors of production due to technological advances. (El-Agraa, A. M. 1982, p. 10) Hence, the following analyses of prospects of Cambodia s agricultural sector are based on a combination of key factors underlying the historical development and dynamic performance of the Cambodian economy. 3.1 Cambodia s Potential Comparative Advantage A country having a potential comparative advantage in identified goods and services, will also have cost advantage. It has the potential to increase welfare by further exploiting its resource abundance to capture the benefits of trade liberalisation. The comparative advantage of a country can be partly determined by factor endowments. Factors are the productive ingredients available to an economy: land, labour, capital, natural resources, skills and so on (Ethier, 1998, p. 101). According to the Heckscher- Ohlin theory of international trade, the relative abundance of factor endowments determines comparative advantage and thus trade patterns of countries. Based on 1997 data, Cambodia was one of the least populated and relatively land abundant countries within the region, with 65 people living in one square kilometre. The share of agricultural land (20%) in Cambodia was only lower than Thailand and the Philippines (see Table 4).

6 6 Cambodia s Agricultural Sector in the ASEAN Free Trade Area Moreover, the number of agricultural population per hectare of agricultural land in Cambodia, which is more indicative of agricultural land endowments, is 2.3, only higher than Thailand (1.5) and Malaysia (0.5). This indicates the potential expansion of agricultural production per capita when productivity and the number of crops per year can be increased. Cambodia is also endowed with freshwater resources. Cambodia has the largest amount of freshwater resources in cubic metres per capita among the neighbouring countries, except for Laos. Overall, it can be argued that Cambodia is relatively well endowed with natural factors that can be utilised for agricultural development. In addition, Cambodia seems to have relatively large labour availability and low wage rates, which are important factors for agricultural expansion. 5 Table 4 Resource endowments in Cambodia and other ASEAN countries in 1997 Camb. Viet. Thai. Mala. Indo. Phil. Laos Myan. Total population (millions) Agricultural population (% of total population) Agricultural land (million ha) Agricultural land (% total land) Population density (people/sq km) Agric. population per ha of agricultural land 80% 69% 51% 20% 46% 41% 77% 71% % 20% 40% 19% 17% 30% 4% 15% Rural pop. density* 259 1, Freshwater resource ('000 cub m/capita) * Rural population density is the number of rural population per sq. km of arable land. Source: FAO (1999) and World Bank (2000). 5 A cross-country comparison of labour abundance and wage rates is not possible due to data unavailability.

7 Sophal, Chan Improvement in Inputs and Infrastructure Owing to the armed conflicts in the past three decades, Cambodia has been suffered tremendously from a severe lack of transport and market infrastructure, which may have led to attenuation of incentives to increase production. It is estimated that about half of the total length of national roads need huge improvement and several thousands of small bridges are in need of replacement (MAFF, 1999). The poor condition and inadequacy of roads and bridges have severely limited the movement of agricultural products and inputs. This may make farm gate prices too low and final prices in distant markets too high. Compared to the regional countries, Cambodia has the least paved roads. Only 8% of the total road length is paved in Cambodia. In bordering Laos, Vietnam, and Thailand the comparable figures are 14%, 25%, and 97%, respectively (World Bank, 2000). Apart from roads and bridges, essential support infrastructure such as transport facilities, power supply systems, processing facilities, quality control facilities and storage facilities all are far from developed and adequate. For instance, rice harvest and post-harvest losses are about 30% of total production, including a significant loss in the milling process (MAFF, 1999). Accordingly, there is a big room for improvement in productivity and production in Cambodia s agriculture. There are signs that farmers are employing more machinery and other inputs, and expansion of agricultural extension services is under way (MAFF, 1999). Credits are likely to be more available for farmers to meet demand for investment in their farming. Renovation of roads and bridges will also increase, enabling better marketing conditions for both agricultural products and inputs. These factors will contribute substantially to increasing productivity and thus production in the medium and long term. 3.3 Impact of Investment and Structural Transformation In fact the largest benefit Cambodia expects from AFTA accession is increased foreign direct investment (FDI), which is induced by the larger regional market. In AFTA, firms in Cambodia will have a market of more than 500 million people in ASEAN, not only 12 million in Cambodia. Since its adoption of a market economy in early 1990s, Cambodia has received considerable amounts of FDI. Among the three sectors of the economy, industry (mainly manufacturing) has received the largest share of FDI, and agriculture the smallest. During , investment in the industrial sector totalled

8 8 Cambodia s Agricultural Sector in the ASEAN Free Trade Area US $4,519 million, compared with services $4,266 million and agriculture $712 million. 6 With regards to estimated total investment (domestic and foreign investment), services and industry have each received a larger share than agriculture, which is the largest sector by employment and output (Figure 1). Figure 1 Investment by sectors ( ) US$ million Agriculture Industry Services Source: CDRI (2000). These different volumes of investment have resulted in different developments in the three sectors as illustrated in Figure 2 and 3 below. Both the employment and GDP shares of the agricultural sector have fallen between 1990 and By contrast, employment share in the industrial sector has risen from 3% to 7%, with a share of GDP climbing from 13% to 22%. In these 10 years, the relative figures for the service sector are 13% to 16% for employment shares, and 34% to 41% for GDP shares. This trend of structural transformation is likely to continue and is necessary. The disproportionate share of employment and output in agriculture reflects the least income received by farmers, mainly rice producers, which comprised 63% of Cambodia s labour force in Continued expansion of the modern sectors will absorb considerable amounts of labour force from the agricultural sector. This will allow a larger amount of agricultural land per agricultural household and therefore the opportunity for agricultural households to increase income. The income increase is a crucial prerequisite for farmers to invest in forming competitive bases for further development or commercialisation. Otherwise, without expansion of the industrial and service sectors, the majority of the Cambodian population will be forced to crowd in 6 The figures are the sum of registered capital and fixed assets of the projects on the approval basis, which has been proved to be largely higher than actual investment.

9 Sophal, Chan 9 the agricultural sector and will gradually face physical limitations such as land size and degradation of soil fertility (if soil is not used in a sustainable manner). Thus, taking account of investment and structural transformation, the prospects for Cambodia s agriculture will be favourable. Figure 2 Share of employment Figure 3 Share of GDP by by sector ( ) sector ( ) 100% 80% 60% 40% 20% 0% Services Industry Agriculture 100% 80% 60% 40% 20% 0% Services Industry Agriculture Source: CDRI (2000). 3.4 Market Expansion In addition to the physical constraints as mentioned above, the markets for Cambodia s agricultural products have been distorted by a number of institutional barriers. As Cambodia is a new transitional economy, the private sector is still very weak in taking care of the agricultural downstream sector. For instance, there are few competitive wholesalers and exporting firms. The skills and technology for preparing products for competitive exports are also very weak. In addition, the few traders have to pay high unofficial taxes in order to export their products (MAFF, 1999). These factors may have hindered the exports of agricultural products and prevented the revealed comparative advantage of exports in most products as found in Part III. Hence, prospects for agricultural exports should be analysed under the shadow conditions or in the absence of unnecessary distortions. Cambodian farmers have also suffered from the lack of institutional support. They have little access to trade information, due both to unavailability of the information and their inability to read. 7 Both the Ministry of Agriculture, Forestry and Fisheries (MAFF), and Ministry of Commerce do not have sufficient capable and experienced staff and budget for their export promotion departments to function. Currently, many of the external transactions of agricultural products and livestock are 7 About 35% of Cambodia s total population are illiterate. Most of these are farmers.

10 10 Cambodia s Agricultural Sector in the ASEAN Free Trade Area carried out illegally, which might not be efficient at all (MAFF, 1999). All of these factors substantially raise transaction costs, thus increasing export prices. It can be argued that Cambodia s exports could be remarkably larger if these problems were reduced. In fact there are a considerable number of potential markets for Cambodia to export its agricultural products. Trade data in 1998 show that the region is a net importer of maize, beans, groundnuts, cereals, bovine animals, milk, and tobacco, all of which production Cambodia has the potential to increase. This indicates market opportunities for Cambodia if it can produce more of such products. Moreover, Cambodia has the potential to export rice to Malaysia, Singapore, Indonesia, and the Philippines, which are net importers of the crop (see Table 5). However, Cambodia has to compete with the nearby net rice exporters, namely Vietnam, Thailand, and Myanmar. 3.5 Other Determinants of Competitiveness All countries in a free trade area enjoy the same market for exports. However, whether or not import-substituting or export-oriented production of a country will succeed depends in large part on its competitiveness in the commodity systems (production and marketing). In addition to the factors discussed above, there are at least two more important determinants of competitiveness that deserve consideration Fragmentation of Farms In Cambodia, the average farm size is one hectare, with most of the farms sizing around this average (Sik, 2000). There are very few farms that are larger than ten hectares. Most are small, family farms employing family labour and low inputs. While a relationship between farm size and productivity needs to be studied, it is hypothesised that Cambodia s very small farms are not as efficient as larger farms in the neighbouring countries. According to Hobbs, et al (1997), small family farms are inferior to large farms in several ways, although they can better managed and use family labour more efficiently. Due to the small size of business, small farms face relatively high transaction costs, limited access to credit, and limited support services. Moreover, mechanisation and exploitation of economies of size, which are crucially important for commercialisation, are not possible or profitable for such small farms.

11 Sophal, Chan 11 Table 5 Net exports 8 of agricultural products in 1998 (US $ million) Camb. Viet. Thai. Mala. Indo. Phil. Sing. Laos Myan. Balance Agric. Products, Total Cereal Crops Rice Maize Soybeans Sesame seed Groundnuts, shelled Cereals Animals, milk Bovine Animals, Pigs Meat Poultry, fresh Milk, cond.+ dry+fresh Vegetables and Fruits Onions Oranges, tangerines Lemons and Limes Bananas Coconuts Pineapples, fresh Pepper Other Crops Tobacco, unmanufactured Jute and bast fibres Coffee, green + roast Natural rubber Source: Own calculation from data in FAO (1999) Selected Indicators of Food and Agriculture Development in Asia-Pacific Region, When faced with competition in the region, Cambodian farmers will not simply have to increase production, but to increase profitability. The more cost advantage, the more competitive are the farms. Thus, the question lies in whether the highly fragmented Cambodian farms can compete with commercialised and mechanised Thai farms, for instance. The hypothesised answer is no. 8 (Net exports = Exports Imports)

12 12 Cambodia s Agricultural Sector in the ASEAN Free Trade Area A number of literature, however, document the inverse relationship between size and productivity. The argument in favour of small, family farms is mainly based on the reason that small, family farms have the cost advantage in labour markets. Given large labour abundance, labour-intensive farming is more socially efficient. For instance, Ellis (1993) recommends that developing countries should emphasise more on the development of small farms than large farms because small farms are more socially efficient. This is a part of static analysis, which assumes that the opportunity costs of family labour are cheap forever, which makes them stay poor forever. Such long-term development policies should not be based on static situation. In fact, as industry and services expand, the opportunity cost of family labour will increase and small farmers will soon lose their competitive advantage to larger farms, which employ more machinery than labour. 9 Pongali (1997) provides empirical evidence of the induced movement to larger farm size as agricultural commercialisation, triggered by rapid economic growth and structural transformation, took place in Asia. In order to compete in the region, Cambodia may not be able to avoid the same track and thus policies such as land reform should not obstruct this trend Land Tenure As part of the transition from a command to market economy, Cambodia re-allowed private ownership of land in 1989, fifteen years after the Khmer Rouge abolished the private property rights. Citizens were then invited to apply for land titles for the plots they had occupied or tilled for the past three consecutive years or longer. Ownership prior to 1975 was not recognised by the People s Public of Kampuchea ( ). A number of serious problems have arisen following this land reform. The issuing of certificates of possession rights has been very low. Only about 10% of the total 4.4 million applications have been processed since 1989 (Sik, 2000). Most Cambodian residents have, therefore, occupied, cultivated or transacted land without proper legal certificates. When land was redistributed in 1989, there was a significant part left unused and therefore not possessed by anyone. Later on this abundant land was inevitably fought for. The weak rule of law, ignorance of law and lack of legal claims all combined to cause numerous conflicts over land ownership in a recent Cambodia s time. This unfinished land reform has discouraged investors from making investment in agriculture, for which Cambodia is desperate. 9 Further, detailed argumentation over farm size and productivity is out of focus of the current report.

13 Sophal, Chan 13 4 Conclusion The current study found that Cambodia s agricultural sector, which is of vital importance to the Cambodian economy, is among the least developed in the region. The main reasons appear to be lack of inputs and poor environment external to the sector, such as infrastructure and institutional support, owing largely to Cambodia s previous three decades of arm conflicts. These problems mask Cambodia s potential comparative advantage, which is primarily relative land and labour abundance. A static comparative analysis shows negative prospects for Cambodia s agricultural sector as a whole. Cambodia had high revealed comparative advantage of exports in wood and rubber, which are naturally endowed but do not contribute substantially to the income of the mass population. Conversely, rice production, which provides livelihoods to 63% of the population, had no comparative advantage, apparently due to higher costs of production and marketing, making it less competitive than that in rice-exporting countries in the region. When dynamic factors are taken into account, prospects for Cambodia s agricultural sector are not dismal but conditional on many basic improvements. The agricultural productivity is likely to be increased by improvements both internal and external to the sector. Ongoing development in technological factors and upward investment trend in the agricultural sector and infrastructure are enabling Cambodia to catch up with neighbouring countries. In addition, Cambodia may realise its potential markets in the region when market institutions are developed over time. Prospects for commodities such as rubber, soybeans and cattle look promising. There is also a great potential market for rice, but this commodity system needs to be more efficient. High economic growth with expansion of industry and services will reduce the apparent labour surplus from the agricultural sector, thus allowing higher income per agricultural household. This will enable Cambodia s highly fragmented farming to transform to commercialisation so that it can catch up with its neighbours. Otherwise, the high fragmentation of Cambodian farms may obstruct innovation of technology, economies of size, and mechanisation of farms, all which are crucial factors of competitiveness, and the problem of inadequate income for farmers will persist. It is therefore imperative that greater non-agricultural employment be generated in order for farmers to have sufficient and competitive production bases and be out of poverty.

14 14 Cambodia s Agricultural Sector in the ASEAN Free Trade Area References CDRI (2001) Cambodian Macro-Economic Database, Cambodia Development Resource Institute Chan Sophal, Martin Godfrey, Toshiyasu Kato, Long Vou Piseth, Nina Orlova, Per Ronnas & Tia Savora (1999), Cambodia: The Challenge of Productive Employment Creation, Cambodia Development Resource Institute, (Phnom Penh: August 1999) El-Agraa, A. M., International Economic Integration, (London, 1982) Ellis, Frank (1993), Peasant Economics: Farms households and agrarian development, 2nd edition, Cambridge University Press (London: 1993) Ethier, W. J., Modern International Economics, Second Edition, (New York, 1988) FAO (1999) Selected Indicators of Food and Agriculture Development in Asia-Pacific Region, , Regional Office for Asia and the Pacific, (Bangkok: October 1999) FAO (1999) Trade, Yearbook 1998, Vol. 52, FAO Statistics Series No. 151 (Rome: 1999) Kydd, Jonathan (1997) Agricultural Policy Analysis Wye College s External Programme s course note, University of London (1997) MAFF (1999) Agriculture Development Plan: Long, Medium and Short Term Ministry of Agriculture, Forestry and Fisheries, (Phnom Penh: 1999) MAFF (1999) Cambodia: Agricultural Strategies and Policy Framework for Sustainable Food Security and Poverty Alleviation, Ministry of Agriculture, Forestry and Fisheries, FAO, UNDP (Phnom Penh: January 1999) Pingali, Prabhu. L. (1997) From Subsistence to Commercial Production Systems: The Transformation of Asian Agriulture American Journal of Agricultural Economics, Volume 79, (May 1997) MoC (1999) Cambodia Imports and Exports 1998, Ministry of Commerce, (Phnom Penh, 1999) MoP (1999), National Population Census of Cambodia 1998: Final Census Results, Ministry of Planning, (Phnom Penh: July 1999) Sik Boreak (2000) Land Ownership, Sales and Concentration in Cambodia: A Preliminary Review of Secondary Data and Primary Data from Four Recent Surveys Cambodia Development Resource Institute, (Phnom Penh: Forthcoming) Timmer, C. Peter (1997) Farmers and Market: The Political Economy of New Paradigm American Journal of Agricultural Economics, Volume 79, (May 1997) World Bank (2000), World Development Indicators 2000, (Washington D.C., March 2000)