With both countries growing so fast, it's tempting to view Cambodia as just a few rungs down the economic development ladder from Vietnam. One's heart longs to say, in fifteen years they'll be Vietnam; in 25, China; in 40, Japan. But this is one of the great fallacies of development economics.
The development in Vietnam is palpably organic. There are a huge number of bottlenecks, particularly ports, electricity, and human capital; but it seems clear that all these things are just a matter of time.
Cambodia's economic development, on the other hand, still feels distressingly fragile. It basically has one industry, the garment trade, which employs about 300,000 people (almost all of them young women), and probably supports about 10% of the population directly and indirectly. Almost everyone else makes their living in agriculture, with a small government elite, a smaller tourism community, and a tiny small business sector.
Most developing countries start with textiles, just as England did 200 years ago. But Cambodia's garment trade is incredibly dependent on special treatment from America, where it sells almost all its wares. Since the expiration of the Multi-Fiber Agreement in 2004, which imposed quotas on textiles in the developing world, countries like China and Vietnam have been subject to special, stopgap measures to dampen down the flood of textiles they can pour into Western markets. In exchange for enacting higher labor standards (and also for being really small and poor), Cambodia has been exempted from this treatment.
In theory, this is a bad thing; trade should go where the market dictates. In practice, it's hard to criticize something which is pulling a lot of very poor people into decent-paying jobs. And Cambodia's 14 million population can hardly be said to be doing serious damage to China, or even Vietnam.
No, the real problem is that those protectionist measures won't be in place forever. They're due to expire in 2008, though they may be extended, or something similar put in their place, by Congress (especially since we'll be in the runup to a presidential election). If they do expire, it's really not clear what happens to the Cambodian garment industry. Cambodia's infrastructure is in dire shape; its roads are poor, its ports are inadequate, and its power grid is direly underbuilt. Some factories here are setting up in special development zones near the Vietnamese border, so that they can bypass these problems by purchasing Vietnamese electricity and using the port in Ho Chi Minh City. If the quotas go away, it's not hard to believe that some of them will simply choose to eliminate the middleman and set up in Vietnam.
Of course, Vietnam, too, could use the industry; for all of Cambodia's need, it's hard to root against the needy of Vietnam. But Vietnam has an economy that is clearly (if slowly) building multi-sector organic capacity. Cambodia is just taking baby steps towards development. Hopefully, another ten years or so of US textile purchases will help them build some of that up.
So it sounds like your closing sentence advocates leaving special treatment of Cambodian textiles in place?
Have you abandoned free market thinking entirely?
Maybe U.S. textile policy is preventing the Cambodian people from moving into areas of production where they have true lasting competitive advantage.
It isn't up to the U.S. government or any government to be "assigning" production of certain items to certain countries by our trade restrictions.
Tom Kelly -
I agree with you that any kind of market interference is a slippery slope, but in this case one could make a good argument for this being an infant industry that deserves some protection. It may jumpstart the rest of the economy by demanding that the government provide services such as power and transportation, which will help other industries (and the people).
Part of how China built out its power, roads and other infrastructure was through build-operate-transfer agreements (beginning with Gordon Wu's Hopewell Holdings building power plant Shajiao B, completed in 1987). For a promised return of, say, 20%, established companies around the world will beg to be allowed to build and operate all sorts of infrastructure.
The government puts up zero funds up front, and gets the infrastructure handed over free of charge in 20 years or so, only half way into the life of the asset. The company gets paid by operating the plant (or road, or whatever) in the meantime and charging pre-agreed prices for the output. They have an incentive to build well, since they'll also be doing the operating for many years.
The catch is that the companies want to get paid eventually. They won't build infrastructure if it's likely to get confiscated on completion, or if the government may demand that the output be sold below cost, 'for the good of the people'. All they need is a credible government that keeps its commitments, and the infrastructure can be rapidly built out. But that credible government is less common than it should be.
Ann:
I'm not suggesting that Cambodia is on a slippery slope, I'm saying it has already slipped.
In relying on an industry where demand has been artificially created, Cambodia's garment industry exists at the whim of U.S. policy.
Instead of investing resources, particularly human ones, in an industry that could be wiped out overnight by forces beyond their control, Cambodians need to develop industries that take advantage of particular Cambodian strengths.
Lots of very bright Cambodians are no doubt focusing their energies on garment production right now instead of focusing on other areas where they could become world leaders and maintain that position regardless of U.S. policy.
Even a little government intervention can have enormously destructive long term results. The people of Cambodia need to find their own unique place in the world economy where they can excel.
"Even a little government intervention can have enormously destructive long term results. The people of Cambodia need to find their own unique place in the world economy where they can excel."
This is a lovely dogmatic point that, as Megan observes, tends to fall by the wayside when people are starving.
If you were in charge of Cambodia, and had to choose between a protectionist measure like the garment industry that offers the possibility of elevating the whole economy within a generation by developing infrastructure and human capital, versus rejecting it in favour of organic development that takes a century or more, if it isn't interrupted by war or natural disaster... well, the choice seems obvious. And while this may not be an accurate represention of the dilemma, it's a very understandable one from the perspective of local decision makers.
Besides, what unique place do the Cambodians have that's exploitable in ways other than (hopefully short term) economic dependence?
This is interesting and relevant to my interests, and I would like to subscribe to your newsletter.
To those who favor continued protection of Cambodians: I don't see any incentive to find an alternative to garments. How long should this protection continue?
If it is a choice between a Cambodian garment, and one made in China or Bangladesh, I will always buy the Cambodian one, due to the unusually strong anti-sweatshop provisions enforced in Cambodia. I am surprised that Cambodia does not make more of its progressive labor law, which provides heavy protections for union activity and creates a very effective mechanism (though one supported by donor money)for resolving labor disputes. The garment manufacturers reportedly hate the law, because the have to deal with pesky and unsophisticated unionists, but it is always my preference to buy goods from a country that observes fundamental labor rights for its workers.
Somewhat along the lines of Louise's comment, note that China's very strong labor protection rules go into effect Jan. 1, and go beyond mere anti-sweatshop to giving employees enforceable rights to employment contracts, etc. In response to this potential for a higher cost of business in China, camera maker Olympus is moving half its China business to Vietnam; WalMart has reportedly started firing and, in some cases, rehiring their employees to try to avoid the ten-year cut-off on temporary contracts. As China prefers high-tech, better-paying jobs over low-paying, low-skilled ones, the latter kind of work will naturally flow toward Southeast Asia as long as Vietnam and Cambodia don't make the cost of business too high. Cambodia's progressiveness on labor law, unfortunately, may make it look like a bad option for foreign companies who fear domestic courts' bias against them.
In theory, Vietnam has many similar protections to those in the new Chinese labor law. But enforcement is sporadic. Still, most of the big foreign garment employers, like Nike, have corporate codes of conduct that should rule out the worse excesses anyway. Much of the reason why businesses are moving from China to Vietnam is simply lower wages.
Justin JJ,
I understand that switching from garments to other industries cannot happen instantly or painlessly. There is cost associated with the transition, though Tom doesn't seem very concerned about. I suppose one way to deal with this would be for the US to lower the remaining quotas gradually or to commit to ending them a year or two from now (so that Cambodian firms and individuals can anticipate the disruption).
But you seem to have misunderstood Tom's point, which is that it's risky for Cambodia to rely on the continued favoritism of the US. Although I wonder if there is any particular reason why the people wouldn't already be anticipating that US policy could change in the near future and adjusting their plans accordingly.
"Besides, what unique place do the Cambodians have that's exploitable in ways other than (hopefully short term) economic dependence?"
Who's depending on whom? I suppose the Cambodians would depend on our consumer demand. But then would be not depend on their low wages? Why is depending on other people a bad thing? Isn't that what trade is all about?
It sounds like Megan is acknowledging the overall loss created by the existence of US trade barriers but arguing that Cambodia, which gets a transfer in this arrangement, is needy enough that we should neglect the Chinese producers and US consumers (to oversimplify a bit) who lose out.
Tom Kelly put his finger on the problem- it is the original trade preference enacted by the US and the Cambodian government's plan to exploit that preference specifically that has left Cambodia hostage to a bad US trade policy. In absence of such a trade preference, the Cambodian people and their government could have instituted better property rights and enforcement- and both governments could have simply allowed real free trade; this would have allowed Cambodia to find it's niches (and this is the key, it is plural rather than singular, as Megan describes it now) in the world economy.
In considering the dangers of relying on the U.S. for help, consider what happened to the Vietnamese catfish farmers.
It is entirely possible for a country to have no natural advantages over its neighbors in any sphere of production at all. In such a case, the country's special niche in the global economy is to be poor.
brooksfoe,
The last word of your post should read "poorer" in place of poor. It is certainly true that if a country is less productive in all industries than another that it will be poorer than that country. Trade will not reverse the order of productivity and wealth. But countries still have a relative (or "comparable") advantage in some industries where the gap is less. They will naturally shift to those industries. When two countries trade, even when one has an absolute advantage in all industries, BOTH become wealthier. That is the miracle of trade. I didn't believe this myself until I modeled this with a simple two product model myself. Now I see why economists are such believers in this principle.
Brooksfoe, a poor country will have one comparative advantage - low wages.
To follow up on larrydj's point, one should think about it this way:
Even a country with advantages in all forms of production can't perform all forms of production at all times- and within that country, there will be forms of production that are more valuable to perform than others. This trade off between more valuable and less valuable products opens the door for people, regions, and countries to produce and trade the less valuable products, even if they do so less efficiently than the first.
Yes, but Cambodia is not competing with just one country, it is competing with all of them. And it has many disadvantages and someone has to be last. And maybe it is another Guatemalan garment industry in waiting, but...
My sentiments are not typical for this blog. I think supporting Cambodia's efforts at improving their lot is completely a good thing. I am of the opinion that the invisible hand fails a lot and the result is human misery. Intervention works, often. I am perfectly willing to pay a pittance more, or search for a label indicating country of origin for someone else' benefit. I think it is a good thing that this sort of thinking is part of our trade policy. It is merely recognition of community that is missing from many of these discussions.
I am a bit surprised at Megan. I would have expected something akin to means testing and welfare, you know, fill out some paperwork and make them beg a little. But I think this is one of her better posts.
Nat,
At the individual level, that sentiment is perfectly OK, but I will point out that by picking an item made in one country, you are also not picking an item made in another, perhaps equally deserving country. A specific trade policy favoring a small poor country is welfare of a kind, those countries do beg a bit to get and keep these policies, and because we are not treating all small poor countries equally, it is means testing without the testing for the means.
It is much, much better to simply allow true free trade rather than create these distorted markets by micromanaging which items get preferential treatment and which countries get such individualized care.
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