Cambodia: Index of Economic Freedom

Cambodia’s economic freedom score is 57.4, making its economy the 108th freest in the 2014 Index. Its overall score is 1.1 points worse than last year due to declines in monetary freedom, business freedom, labor freedom, and freedom from corruption. Cambodia is ranked 23rd out of 42 countries in the Asia–Pacific region, and its overall score is lower than the regional average.

Since Cambodia’s economic freedom was first assessed in the 1997 Index, its progress in adopting policies that enhance economic freedom has been uneven and modest. The country’s overall economic freedom score has improved by only 4.5 points, with advancements in trade freedom, monetary freedom, and investment freedom largely offset by significant declines in business freedom and freedom from corruption.

Cambodia had advanced into the ranks of the “moderately free” during the early 2000s but has fallen back to the status of economically “mostly unfree” since 2006. Substantial challenges remain, particularly in implementing deeper institutional and systemic reforms that are critical to strengthening the foundations of economic freedom. Government interference continues to undermine dynamic flows of investment and overall economic efficiency.

Background:
Between 1975 and 1979, Pol Pot’s Khmer Rouge regime killed an estimated 3 million Cambodians. A tribunal established under an agreement with the United Nations to prosecute senior officials involved in the atrocities has been slow to deliver justice. Now nominally a democracy, Cambodia has been ruled by former Khmer Rouge member and Vietnamese puppet Prime Minister Hun Sen since independent Cambodia held national elections in 1993. Elections have often fallen short of international standards, with the outcome of the most recent, in 2013, hotly contested by the opposition. In 2012, Cambodia took its turn as chair of the Association of Southeast Asian Nations, drawing increased international attention to and criticism of its undemocratic policies and close ties to China. Cambodia’s economy depends heavily on tourism and apparel assembly.

Rule of Law:
A majority of Cambodians in a 2013 corruption survey said they had paid a bribe in the past year; nearly three-quarters said that personal contacts were needed when dealing with the government. A weak and inconsistent judiciary does not protect private property effectively. Investments in mining, forestry, agriculture, textiles, tourism, hydropower, and real estate frequently involve land grabs by powerful politicians, bureaucrats, and military.

Limited Government:
The top individual income tax rate has fallen to 20 percent. The top corporate tax rate remains at 20 percent for most businesses but 30 percent for the petroleum and gas sectors. Other taxes include a value-added tax (VAT) and an excise tax. The overall tax burden has remained steady at about 10.9 percent of GDP. Expenditures remain around 20 percent of the domestic economy, and public debt has stabilized at about 29 percent of GDP.

Regulatory Efficiency:
The overall freedom to establish and run a private enterprise is constrained significantly by the inefficient regulatory environment. Starting a business remains time-consuming, and completing licensing requirements takes more than 500 days. The formal labor market is not fully developed, and enforcement of many aspects of the labor codes is ineffective. Most prices are determined by the market, but the state has been increasing subsidies for fuel.

Open Market:
Cambodia has an average tariff rate of 9.5 percent. The country’s underdeveloped legal system is a deterrent to foreign investment. The financial system remains segmented and subject to government influence. There is only one company listed in the country’s first stock market, which opened in 2012 after years of delay.

(Source: heritage)