2009 Index of Economic Freedom

Quick Facts

Population:

• 14.2 million

GDP (PPP):

• $23.0 billion
• 10.8% growth
• 9.9% 5-year compound annual growth
• $1619 per capita

Unemployment:

• 2.5%

Inflation (CPI):

• 5.9%

FDI Inflow:

• $483.2 million

Cambodia's economic freedom score is 56.6, making its economy the 106th freest in the 2009 Index. Its overall score is 0.8 point better than last year, primarily as a result of a much improved trade freedom score. Cambodia is ranked 21st out of 41 countries in the Asia–Pacific region, and its overall score is slightly lower than the regional average.

Cambodia has gradually moved toward a market-based economic system, experiencing solid economic growth in recent years. The country scores noticeably well in fiscal freedom and government size, and moderately well in monetary freedom. Low income and corporate tax rates contribute to a low overall tax burden, giving the country a high fiscal freedom score. Government spending is low, and with improved budget management, authorities aim to increase efficiency in the system and better allocate revenues.

Other institutional weaknesses still hold down Cambodia's overall economic freedom score, however. Business freedom, trade freedom, property rights, and freedom from corruption all receive notably low scores. The formal labor market is not fully developed, and its rigidity is partly responsible for the existence of an underground dual labor market. Pervasive corruption contributes to the high costs of entrepreneurial activity, and the weak rule of law in many areas makes it difficult to resolve commercial disputes.

Background Back to the top

Cambodia, nominally a democracy, has been ruled either formally or de facto by Prime Minister Hun Sen since 1993. The former Khmer Rouge leader's Cambodian People's Party won a renewed mandate in mid-2008, taking a large majority of the seats in elections for the National Assembly, and Hun Sen was re-elected prime minister in September. Cambodia's economy is heavily dependent on tourism and garment exports.

Business Freedom 42.7 Back to the top

The overall freedom to start, operate, and close a business is constrained significantly by Cambodia's national regulatory environment. Starting a business takes about twice the world average of 38 days. The process for obtaining a business license requires more than the world average of 18 procedures and 225 days.

Trade Freedom 63.4 Back to the top

Cambodia's weighted average tariff rate was 10.8 percent in 2005. Cambodia continues to improve its trade regulations, but import bans and restrictions, discretionary tax levies, non-automatic import licensing, non-transparent government procurement, export subsidies, and inconsistent, corrupt, and cumbersome customs administration still add to the cost of trade. Ten points were deducted from Cambodia's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 91.4 Back to the top

Cambodia has low tax rates. Both the top income tax rate and the top corporate tax rate are 20 percent. Other taxes include a value-added tax (VAT) and a tax on interest. In the most recent year, overall tax revenue was 8.0 percent of GDP.

Government Size 94.5 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, govern-ment spending equaled 13.5 percent of GDP.

Monetary Freedom80.0 Back to the top

Inflation is moderate, averaging 5.6 percent between 2005 and 2007. The market determines most prices, but the government attempts to maintain stable retail prices for fuel through subsidies. Five points were deducted from Cambodia's monetary freedom score to adjust for measures that distort domestic prices.

Investment Freedom50.0 Back to the top

Foreign capital and domestic capital are treated equally in most sectors. There are a few sectors in which foreign investment is subject to conditions, local equity participation, or prior authorization from relevant authorities. These sectors include cigarette manufacturing, movie production, rice milling, gemstones, publishing and printing, radio and television, the manufacturing of wood and stone carvings, and silk weaving. Numerous issues of transparency in the regulatory regime arise, however, from the lack of legislation and the weakness of key institutions. Investment can be limited by regulatory inconsistencies and corruption. There are no restrictions or controls on the holding of foreign exchange accounts by residents or non-residents. Non-residents may not own land.

Financial Freedom50.0 Back to the top

Cambodia's financial system is segmented, not fully developed, and subject to government influence. The system has gradually improved its efficiency as a result of some privatization and consolidation since 2000. All 12 commercial banks are privately owned following the 46 percent sale of the Foreign Trade Bank of Cambodia to foreign investors, though the government still has a stake in specialized banking. The banking sector is market-oriented, and banks are well capitalized. Foreign presence in the sector has been growing and there are now three foreign bank branches and two foreign representative offices in Cambodia. Credit is allocated on market terms, but the government exercises influence over lending decisions. There is no stock market, but the government has announced plans to launch a stock exchange by 2009. The National Bank of Cambodia, which used to operate as a commercial bank as well as the central bank, is now solely a regulatory and supervisory agency.

Property Rights30.0 Back to the top

Cambodia's legal system does not protect private property effectively, and there are many gaps in company law, bankruptcy procedures, and arbitration. The executive branch usually dominates the legislature and the judiciary. Inconsistent judicial rulings and outright corruption are frequently encountered. The land titling system is not fully functional, and most property owners do not have documentation to prove their ownership.

Freedom From Corruption20.0 Back to the top

Corruption is perceived as pervasive. Cambodia ranks 162nd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption hampers economic opportunity and competitiveness, and demands for petty bribes are common. Pervasive corruption makes Cambodia highly vulnerable to penetration by drug traffickers and foreign crime syndicates.

Labor Freedom44.5 Back to the top

The labor market operates under inflexible employment regulations that impede job creation and productivity growth. The non-salary cost of employing a worker is low, but work hours are regulated rigidly.