China is Cambodia’s largest bilateral donor, lender, investor and trading partner. About a quarter of its total trade, a third of aid, and two-fifths of foreign direct investment or FDI and external debt involves China.
Although Sino-Cambodian diplomatic and economic relations date back centuries, they have grown sharply over recent decades.
Economic relations have been strengthened by Cambodia’s active participation in the Belt and Road Initiative or BRI. Phnom Penh has been a vocal and enthusiastic member since its inception in 2013.
The focus has mainly been on Beijing loans to develop infrastructure, including the transformation of the port city of Sihanoukville. There are also investments in agriculture, energy and light manufacturing.
Participation in the BRI has costs and benefits. As a Least Developed Country aspiring to achieve upper middle-income status by 2030, Cambodia has embraced the project for addressing infrastructure deficits and reducing trade and transport costs.
The BRI has also supported the development of the power sector and agricultural diversification. This has raised productivity and led to trade expansion and high economic growth without compromising debt sustainability.
In turn, this has increased wealth inequality but also raised overall living standards and produced sharp reductions in poverty. These achievements derive from multiple factors but the BRI’s contribution cannot be denied.
Still, there are risks associated with the increasing reliance on just one country. Chinese funding provided the infrastructure that transformed Sihanoukville from a sleepy, beachside resort town to a bustling entertainment center focused on gambling.
While the BRI was not directly involved in transforming Sihanoukville in this way, it did enable the conditions for its development. The real and perceived costs of this rapid transformation have caused dislocation and displacement among local communities.
Experts also have concerns about the environmental and resettlement effects of BRI projects. The second Belt and Road Forum in 2019 committed to mitigating problems through greater community consultation. It is still too early to tell if this consultation is really happening.
The forum also resolved to multilateralism the BRI by expanding the group of China-based institutions.
In Cambodia, there has been a gradual shift in the financing of projects from Chinese state-owned banks and corporations to the Asian Infrastructure Investment Bank or AIIB, a multilateral development institution.
The AIIB’s role is set to increase rapidly and raise overall transparency, including contractual obligations.
But the extent to which its involvement will also raise environmental standards and other safeguards remains unclear. This is because the AIIB adopts national environmental and other standards and policies, which may fall short of global benchmarks.
AIIB oversight also involves national authorities rather than an independent party, which could be problematic.
So, how can Cambodia ensure that future projects are net-positive?
The Committee for the Development of Cambodia reviews FDI proposals as part of the process of obtaining Qualified Investment Project status and securing fiscal incentives.
While some of the criteria used involve assessing potential benefits to the local economy, the analysis lacks a comprehensive cost-benefit framework.
This is also true of the new Law on Investment adopted in 2021, which is mainly designed to facilitate FDI.
To change this, Phnom Penh could set up a new Projects Review Board, which could operate as a non-statutory body with inter-ministerial and multi-stakeholder representation. It would then assess individual proposals in a purely advisory capacity to the government.
Technically competent staff who are capable of undertaking comprehensive cost-benefit analyses should support this project. A properly functioning Projects Review Board could help avoid the kinds of BRI projects that have left neighboring Laos in severe debt distress.
A transitional economy like Cambodia should be selective and strategic in its choice of projects if it is to grow in a sustainable and inclusive manner. It has done well so far but needs an independent assessment mechanism to ensure its success continues.
Jayant Menon is a Senior Fellow at the ISEAS-Yusof Ishak Institute in Singapore.
An earlier version was published here by ISEAS-Yusof Ishak Institute as a Fulcrum commentary.