Can agriculture bridge the rural-urban divide ?

In the second part of a two part special report, Allister Hayman asks if a revolution in agriculture is the answer to Cambodia's ongoing poverty.

It's less sexy than oil. It'll never be as hot as Angkor Wat. But agriculture and its intrinsic links to land and livelihood- has failed to elevate the living standards of rural Cambodians, and development experts, economists and the government are now calling it the biggest dilemma facing Cambodia today.

Held May 9, the second Cambodian Economic Forum (CEF) evaluated the centuries-old sector that still employs 70 percent of all Cambodians-the millions who toil each day in fields, forests, rivers and lakes.

Cambodia has enjoyed a decade of robust economic growth. But a rocketing income gap, poverty reduction failure and a widening gulf between vibrant urban centers and stagnanting rural villages has sparked concern about "equity"- most especially for those who continue to work the land.

In the calm that followed decades of war a natural resurgence in agriculture emerged-but that "peace dividend" has since waned. Experts are now saying that rural development policies have failed to be aptly implemented, failed to be implemented at all - or have simply failed.

For Cambodia- a country that once proudly exported boutique pepper to Parisian cafes, was renowned for its citrus and cashews, and was once the largest rice exporter in Southeast Asia-the face of today's farming sector is woeful.

Growth in agriculture has been slow and erratic. Averaging about 5 percent each year since 1993, the industry will need comprehensive policy implementation if the Kingdom is to meet its Millenium Development goal of halving 1993's poverty levels by 2015.

"Government of Irrigation"

The enhancement of the agricultural sector is an integral part of the government's Rectangular Strategy for development, with irrigation in particular a top priority.

Prime Minister Hun Sen has declared his mandate "The Government of Irrigation." In his opening address at the CEF, he stressed that development of the rural sector remained a "daunting" challenge, with water control integral.

"Effective water control could substantially reduce production risk, which could induce Cambodian farmers to invest more in good seeds, machines, fertilizers and management techniques," Hun Sen said. "During the last several years the Royal Government has channeled its limited budget into investment in irrigation."

Despite the formation of the Ministry of Water Resource and Meteorology, progress has been sluggish. Much of the ministry's work is limited to the maintenance of existing systems: Only 7 percent of arable land in Cambodia benefits from irrigation. This compares to 45 percent in Vietnam and 20 to 30 percent in regional neighbors.

Paddy rice remains central to the food security and livelihoods of rural households and accounted for 88 percent of the total area of crops harvested in 2004. Although improving, Cambodia's rice yields remain the lowest in the region. Between 2002 and 2004 yields of paddy rice were 2 tons per hectare on average - only 40 percent of the yield in Vietnam.

In 2005, rice farmers produced a bumper crop: a massive 43 percent increase in production. But according to a former government researcher, who spoke on condition of anonymity, an internal government analysis in 2006 found that 80 percent of the rise was solely attributable to increased rainfall.

"Surely this demonstrates the absolute importance of irrigation for the rural economy," the researcher told the Post. "This is a government that calls itself the government of irrigation. Yet very little has been done to improve either agriculture or irrigation. They talk a lot about it - the policies are there - but they have not been implemented, and they haven't come up with the money."

According to the Cambodian Development Resource Institute (CDRI), the proportion of the annual national budget that supports agriculture - including both government and donor funds - has averaged about 0.55 percent of GDP. Over the last decade only 8 percent of foreign aid has been allocated to the sector.

In 2005, government expenditure on agriculture was $13 million out of some $800 million. Donor spending was $35 million out of some $500 million. Expenditure by both government and donors on irrigation was about $13 million.

Chan Sophal, senior researcher at CDRI, said that despite the government's promises, agricultural growth had been constrained by limited investment, adverse climatic conditions and "a general policy neglect because of an assumption that agriculture belongs in the realm of the private sector."

Limited Investment

To date, investment from the private sector has been minimal. According to the Economic Institute of Cambodia (EIC), in 2005 only 4 percent of Foreign Direct Investment (FDI) was concentrated on agriculture.

In the last decade, the majority of FDI has focused on the garment and services sectors, with domestic investment following the same pattern. According to EIC, there have been only 12 agro-processing investment projects since 2000-compared to 256 projects in the garment industry.

"Most investment has focused on the industry and services sectors because it's a safer bet," said Neou Seiha, the author of the EIC's latest Economic Watch report. "Compared to the garment industry, agro-processing needs to be considered over the long term, and because of worries about stability investors are more hesitant to make such commitments."

The vast majority of agricultural exports - only 4 percent of total exports in 2006 - remain unprocessed raw materials: rubber, cashews, and rice bought by Vietnamese traders who carry the products to agro-processing manufacturers across the border.

Arjun Goswami, country director of the Asian Development Bank (ADB), said the lack of development in the agro-processing industry was a major problem.

"The production of value-added products is not happening the way that the government and everybody else would like," Goswami told the Post. "We are still getting a lot of raw products bought, and as everyone knows, if you're just doing raw products you're never going to get the same kind of export benefits you would get with value-added products."

Goswami said ADB was now placing more emphasis on agriculture and rural development to ensure Cambodia benefited from the growth of the sub-regional market.

"It's not enough simply to create the sub-regional market. We have to improve the infrastructure and other supporting systems to enable Cambodia to take the benefit of that market."

At present, Cambodian farmers are not benefiting - and the government is doing little to protect them.

As part of Cambodia's process of economic integration and accession to the WTO, the government introduced tariff reforms, with most agricultural imports falling in the lowest rate of 7 percent. This low-tariff rate, combined with smuggling and loose inspections on imports has led to an influx of imported fruit and vegetables.

According to the Food and Agriculture Organization, Cambodia imports about $3 million worth of fruit and vegetables each year. But given the significance of "informal" trade, this figure is likely to be much higher.

According to a 2006 EIC report, a rough estimate of fruit arriving through Okhna Mong Port - owned by tycoon Okhna Mong Rethy - amounted to $50,000 to $100,000 each day.

The EIC report also found that most hotels in Phnom Penh and Siem Reap used imported fruit and vegetables. A concurrent survey at Phsar Deum Kor in Phnom Penh found that 95 percent of customers purchased imported vegetables and fruit, with seasonality and availability the main factors affecting choice.

"We have hotels that cater to the growing tourist sector almost entirely relying on imported fruit and vegetables because Cambodian farmers cannot guarantee production," Seiha said.

Boua Chanthou, the director of local NGO Padek, said the lack of homegrown supply was a result of policy neglect and stressed the need for government subsidies to encourage agricultural diversification.

"We have tried to help farmers produce lemongrass and lettuce and other produce for hotels," Chanthou said. "But it's difficult to get the farmers to commit because they worry the buyers will not come. Then, if they're offered construction work in Siem Reap, off they go and we have no products for the buyers."

Binding Constraints

The EIC report found that 84 percent of farmers considered irrigation the most binding constraint on production. Other major factors included lack of tools, fertilizers, pesticides, "know how," and poor roads and access to markets. Many said limited access to affordable credit was also a significant obstacle.

"Raising Rural Incomes" (RRI), a UNDP report presented at the CEF, noted a debilitating information shortfall for farmers, even the at the most basic level.

"Farmers -even rice millers - do not know what the price of rice is in Vietnam or Thailand," the report stated. "Even when they sell regularly to Vietnamese and Thai traders. Giving such information to farmers would allow them to get better prices."

A 2006 UNDP report noted a similar information disparity. Farmers were growing eggplant in the dry season for their own consumption, while their local market sold eggplant from Vietnam.

"No connection had been made between those poor families, who had all of the needed knowledge of growing and the markets," the report stated. According to EIC, instruction offered to farmers by the MAFF has only reached a small proportion of the agricultural sector. Outreach services are marked mainly by their absence, with about 500 extension officers serving roughly 2 million rural households.

The high cost of transportation and energy are also crippling.

CDRI reports that the cost of transporting one ton of a given crop over 100 km was about $12 in Cambodia, as opposed to $5 in Vietnam and $2.50 in Thailand. Electricity and diesel prices are also some of the highest in the region. Rural households pay up to $1 per kWh for locally produced diesel-generated power, up to ten times that charged elsewhere. At such prices electricity is seldom used for machinery and rarely used for pumping water for irrigation - a technique commonly used in neighboring countries. In rural areas the price of diesel is about
twice as high as world market levels. Because diesel fuel is used for industry and transport, it has the same impact as over-priced electricity.

The high cost of energy has major impacts: processing companies are unable to compete with Vietnam or Thailand, and the majority of exports remain unprocessed agricultural products or labor-intensive garments.

"If the leadership is interested in promoting off-farm employment and industrial development, it will move to reduce these high fuel prices and bring them into line with its neighbors," the RRI report stated. "It is not an exaggeration to call the high-cost policy a death blow to the future success of Cambodian development."

Landlessness and Migration

With 70 percent of the population engaged in agricultural production - and 60 percent of that subsistence farming- it's obvious that ownership of, or at least access to, land is crucial for the welfare of the rural poor and the future of the agricultural sector.

The government's policy of granting Economic Land Concessions (ELC) has caused a rise in landlessness in the provinces.

ELC's are supported by the argument that large-scale commercial use of land will generate larger returns than small-scale farming, while simultaneously creating employment for local communities. But to date there has been little return from such policies. The RRI report states that only about 72,000 hectares of the 800,000 hectares granted as concessions are actually in production.

In most cases investors have simply cut down the forests then left the land idle, the report stated. Other investors have held on to the concessions, expecting the land to increase in value. Without a land tax there is no cost to the investors to leave land undeveloped.

Robert Glofcheski, chief economist for UNDP in Cambodia, Laos and Vietnam, said Cambodia was unique in its emphasis on large-scale plantations. Citing the examples of neighboring countries, Glofcheski said small-to-medium farms had been the backbone of vibrant rural economies - particularly in paddy production.

"There is the argument that states that just because you give land to rural landless doesn't guarantee production," Glofcheski said. "But equally, that applies to large land concessions. There is no guarantee of production there either. But the experience in neighboring countries is that small plots of 3 to 10 hectares are producing the highest yields."

Glofcheski said family farms functioned as "bedrocks of rural stability." By keeping the rural population on the land, the inevitable urban drift that comes with development is slowed, and the industrial sector has time to develop to the extent that it can gradually absorb migratory labor. He said concessions, combined with "land grabbing," and the purchase of large tracts by the nation's wealthy elite, have created an alarming level of land concentration in Cambodia and a "dangerous" situation of inequality and urban migration.

"Land is becoming so concentrated, so rapidly that vast numbers of the rural poor are beginning to seek life in the cities. But the economy has not had the chance to develop the capacity to host them," Glofcheski said.

In 2003, the World Bank estimated that 70 percent of the Kingdom's land was owned by the richest 20 percent of the population - with the richest 10 percent owning a massive 64 percent. In a 2006 report, the UNDP stated that this trend was "a major shift towards inequality, and one seldom observed in peace time anywhere in the world."

According to Steven Schonberger, operations officer at the World Bank in Phnom Penh, in 1989 land was distributed "relatively equitably." Schonberger, speaking at the launch of the World Bank's 2007 Equity Report on June 12, said such concentration could inhibit growth.

"Very rapidly this equitable distribution has become extremely unequal. Now, Cambodia has the least equitable distribution of land in the region," Schonberger said. "There's no question. Countries with lower inequality and more equitable land distribution have had much stronger growth."

To a certain extent, land concentration is an expected outgrowth of development, experts say. Rural dwellers leave the countryside to pursue opportunities in off-farm employment, while larger companies move in, and the most productive farmers increase the size of their holdings.

But when the concentration is fuelled by speculation rather than healthy market forces the outcome is debilitating: Under Cambodia's land law, fencing is an obligatory stipulation of ownership. As a result, across the countryside large swathes of staked-out land are visible, lying uncultivated and inaccessible to the rising number of landless rural poor. Weak legal protection for land ownership makes "land grabbing" possible. It simultaneously stymies the rental market, as absentee land owners are reluctant to lease their holdings for fear the lessees will later claim ownership.

Speculation also inflates prices. The RRI report stated that in provinces across the country the price of agricultural land is increasing rapidly. When infrastructure such as roads and irrigation are constructed, the price of adjacent plots increase from about $1,000 per hectare to $10,000.

"In these cases land was purchased by individuals from outside the commune, from either the provincial capital or from Phnom Penh," the report stated.

In 2007, the World Bank estimated 46 percent of rural households were landless or owned less than 0.5 hectares of land. UNDP predicts it's increasing at rate of at least 2 percent per year, and stated that it has become the central cause of rural poverty.

Now is the time

Land concentration and landlessness are major constraints on agricultural production, but according to experts at the CEF, policies now exist to rectify the problem. Glofcheski described the draft policy by the government's think tank- the Supreme National Economic Council- presented at the forum as so comprehensive it was "almost utopian." The issue now is not about a lack of policy, experts say, but policy implementation. Nisha Agrawal, the World Bank's country head, said that the focus was right, but questioned if the political will was present.

"I've been in Cambodia long enough to know that when there is political will the government can move very quickly," she said at the CEF.

Glofcheski said that with the onset of political stability and sustained growth "the time was ripe to accelerate long overdue reforms."

"It's integral that we redress Cambodia's high cost economy, broaden and diversify growth in agriculture and manufacturing, and generate more abundant opportunities and choices for the less fortunate half of the Cambodian population," he said. "Urban areas can now easily absorb such reforms, and rural areas desperately need them."

According to the UNDP's "Land and Human Development" (LHD) report, the process of systematic land titling under the Land Management and Administration Project must be accelerated, while ELCs must be better enforced to ensure they are being used for production and job creation, rather than speculation.

At the same time Social Land Concessions (SLC) should be implemented to improve access for landless households.

The LHD report estimates that 15 percent of Cambodia's land could be targeted for land reform - 6 percent from under-utilized ELCs and 9 percent from degraded forests. The report recommends that this land - equivalent to 2.7 million hectares - be redistributed as SLCs for landless rural households.

The report projected that a full complement of reforms, including access and title to land, and the additional development of infrastructure such as roads, irrigation and electricity, could reduce poverty by up to 29 percentage points. "There is a possibility to substantially improve human development outcomes for agricultural landless households through a broad land reform program," the report concluded.

Meanwhile, according to the International Monetary Fund (IMF), the write-off of Cambodia's entire debt of $82 million in January 2006 has greatly enlarged funding for irrigation. "The government is using the savings from no longer having to pay those debts to the IMF and will be investing them in rural irrigation schemes," John Nelmes, IMF's Cambodia resident representative, said.

Goswami said the ADB was confident that efforts to improve infrastructure, such as roads and electricity, as well as irrigation would make an impact, but noted that there were no "quick fixes" for the agricultural sector.

"In every developing country I know of agriculture is a long term development issue," he said. "But the kind of policies they're chalking out now are good. It's not an issue of not recognizing what the problem is - the issue is how we move from where we are to where we want to be."

Goswami believes the government is beginning to take the issues affecting the rural economy seriously and said the CEF was "hugely significant."

"It was given a very high profile and it showed that the government does not simply want to rest on its laurels of double-digit economic growth," Goswami said. "But can I predict that implementation will work the way we would all wish for? No. The proof will lie over the next few years. Everyone wants to gaze into the crystal ball darkly, but there's the recognition there now and when it reaches serious attention levels then you maybe have a realistic chance of effective implementation."

This article first appeared in the Phnom Penh Post