Opening Remarks

by H.E. Mr. CHAM Prasidh,

Minister of Commerce of Cambodia

and Co-Chairperson of the Interactive Thematic Session

on "Enhancing Productive Capacities: The role of Investment and Enterprise Development"

May 18, 2001

Excellency Dr. Rubens Ricupero, Secretary General of UNCTAD,

Excellency Mdm Heidemarie Wieczorek-Zeul, Federal Minister for Economic Cooperation and Development of Germany and Co-Chairperson,

Members of the Panel,

Ladies and Gentlemen,

Our Conference is going to address this morning a very important issue, which relates to "Enhancing productive capacities in LDCs through Foreign direct investment and national enterprise development". First and foremost, I would like to say that we have recently had the pleasure to welcome Her Excellency Mdm Heidemarie Wieczorek-Zeul to Cambodia and would like to commend her for her very thoughtful and dedicated activities in support to LDCs. Before we move to listen to the various panelists, allow me to also share with you a few thoughts.

By definition, the least developed countries (LDCs) are marked by underdevelopment: poor infrastructure, poor productive economic activities, poor job creation or skills generation and resulting poor social welfare standards. Prosperity can come to LDCs only if the cycle of no-development-therefore-no-investment, no-investment-therefore-no-development can be broken.

Traditionally, ODA has been the main source of capital inflows to LDCs. ODA is essential for improvement in infrastructure and other factors aiding development. While ODAs still dominate capital flows to LDCs, they are on the decline, in both absolute and relative terms. LDCs as a whole received only $ 11.6 billion in 1999, compared to $ 16.7 billion in 1990.

In contrast, FDI has assumed a more prominent role than before. For example, 29 LDCs experienced increases in FDI and decreases in bilateral ODA during the 1990s. In 6 LDCs (Angola, Lesotho, Liberia, Myanmar, Sudan and Yemen), FDI flows even exceeded bilateral ODA in 1999.

While the share of FDI flows to developing countries in general has been increasing, the share of LDCs among developing countries has not kept the pace. It has increased from 2.1 percent in 1998 to 2.4 in 1999. The share of LDCs is in the global FDI flows still remains under 0.5 percent.

While the numbers are small in themselves, FDI is nevertheless important to LDCs. Because of the small size of the economies of most LDCs, the share of FDI flows in the gross domestic capital formation is 8 percent on average, compared to 12 percent for all developing countries.

Currently, many LDCs economies are dominated by commodities or minerals. This puts these LDCs at mercy of market fluctuations. Ambitious development plans need often to be curtailed as a result of drop in price of these main exports. Diversification of productive economic agents holds the key to sustained development.

Information highway has barely touched LDCs because of poor infrastructure and connectivity. However, new developments in information technology offer big potentials as well for LDCs. For example, mass telecommunication in Bangladesh is made possible through cellular phone network. Immense, unexplored biodiversity-related wealth offers another potential in the twenty first century.

LDCs need to create a policy environment conducive to maximizing the net benefits from FDI. FDI in turn can mean improved infrastructure, transfer of technology, skills formation etc. Privatization programs and various schemes of build-operate-transfer may also provide a way out of this no-win cycle of no-infrastructure-no investment.

A better FDI performance would require considerable improvement in the general investment climate. Such factors do not generally come under direct government control and may require long time to improve. What governments can do is to improve what is under their control: create an enabling environment that encourages FDI, drawing to the extent possible on best practices in other countries.

For a LDC, securing a favorable environment or an enabling environment is the first prerequisite for attracting FDIs. An enabling environment has many aspects: supportive macroeconomic policies, transparent and equitable legal framework, and stable and productive institutional setup. It also involves policy coherence in trade investment and enterprise development. Good government, political and economic stability, adequate physical and social infrastructure all nourishes the development of a vibrant private sector.

An enabling environment is a necessary but not sufficient condition for attracting investment. There are other factors such as market access, infrastructure development, skills generation, access to raw materials, which influence FDI flows.

A better administered, targeted incentives program can help skills development and research and development and transfer, acquisition and adaptation of technology.

For the case of Cambodia for example, we have been able to secure more or less 4 key-factors:

1. Political stability

2. Macroeconomic stability

3. Sound, predictable and transparent but not yet complete legal framework

4. Market access through MFN and GSP treatment from 26 developed countries.

Despite these 4 key-factors, we are not yet in a position to attract a lot of FDIs into Cambodia. There are other determinants in the meso and micro economic sector involved but not yet being properly dealt with, one of them being enhancing our productive capacity.

Access to market and size of market are important determinants for attracting investment. For most LDCs, the major handicap is usually the small size of the local market. Through regional arrangements, they have the potential for creating effective large markets. Regional arrangements also contribute to reducing the transaction costs for doing business by reducing tariffs or facilitating the movement of goods by reducing inspections.

The traditional way of assessing a country’s wealth in terms of its natural resources is outmoded, according to Prof. Michael Porter. The competitive strength of firms to reduce goods determines the ability to generate wealth. In order this to happen, the Government should provide microeconomic foundations that encourage a competitive environment. Sound microeconomic policies help generate high quality inputs such as skilled manpower, information, resources and a competitive culture. Value addition is possible only if workers have high skills. Protectionism should not extend beyond infant industry stage. Unless firms compete domestically, they cannot compete internationally. Yet, the issue of protecting or not an infant industry is still a controversial issue for most LDCs.

Business, large and small, can benefit from deregulation, privatization, trade and investment liberalization, as can the countries that host them. Most LDCs are characterized by lack of entrepreneurial and management skills, inadequate technical facilities and poor market information. FDI should be looked upon as source to mitigate such inefficiencies.

In most LDCs, private sector involvement is minimal but growing. It requires government support. Support services, market information and credit facility, etc. are essential ingredients for the thriving small and medium enterprises. Also, an effective government-private sector dialogue is needed to underpin an enabling environment for increased investment. Such a dialogue will strengthen the policy environment and help bring the benefits of globalization to the people. In Cambodia, for example, we have institutionalized a mechanism of bi-annual consultations between the government and the private sector and the setting up of 7 government-private sector Working Groups to deal with specific areas of mutual interest. The role of UNCTAD to assist and guide those Working groups would certainly help them save a lot of time in research and training and foster the development of a strong and prosperous private sector which shall be the engine of economic growth in Cambodia.

After this introductory remark, I would like to pass the floor to Her Excellency Mdm Heidemarie Wieczorek-Zeul to make her introductory remarks.

Thank you