REVIEW OF CAMBODIAN INFLATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900010119-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 32
• Document Creation Date: December 20, 2016
• Document Release Date: July 18, 2006
• Sequence Number: 119
• Publication Date: January 16, 1974
• Content Type: MF

25X1
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CIINTr AL IN`rI_L.L.IGENCE AGENCY
WAr111NG70N, D.C. 2O OU
CTA J(9E/ S- Qti 5s54 'i7 q
3.6 January 1974
National Security Council
Program Analysis
Room 365 OEOB 20506
SUBJECT
Review of Cambodian Inflation
1. Per your instructions of 28 December, we have put
together key aspects of recent Cambodian economic developments
from available reporting to assist in defining aid
requirements. As we agreed on the phone last Friday,
the data gaps yet to be filled by the Mission in Phnom
Penh preclude extensive or detailed analysis of reported
needs at this point, but the notes we have assembled
(see attachment) should give you a clear idea how
far we have gone in our own thinking. We understand that
there will be further need for policy-support research as
requested data begins to flow in from the field.
2. There is no question in our minds that the principal
engine of inflation in Cambodia i:5 commodity shortages
rather than fiscal. or monetary policies. Because of the
nature of refugee movements, the problem is not restricted
to rice, an,a. even the scant available indices make it clear
that a wide range of goods shipments is needed to make any
significant impact on inflation. At the same time,
additional detail will be necessary on market availabilities
and import flows before we can specify with any measure
of certainty what commodities oilier than rice and POL 25X1
should enjoy priorities.
CC N1=1 D ENN!TIAL
State Dept. review
completed
USAID review completed
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3. One gap in the 'daL?a base is the absence
of usable :information on recent import arrivals. Prices
have soared to record levels in Phnom Penh since this past
spring, and the short period in question tends to make the
available import data radically obsolete. Jerry Kamens (AID)
was able to provide us with only a small, increment in this
area, but he assures us that the Mission is being solicited
for additional support. I strongly hope this wil] be forth-
coming.
CON IDEN 1 IAL
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OER/S/1:C
Addressee
D/OER
Ch/D/.
S 1 /P
St/CS
SA/ER
s/Ec
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It-view of cambodi.an Inflation
Summary
During 1973 Phnom Penh* passed from relatively modest
wartime price increases into hyperflation. This transition
may have been spurred somewhat by :inflation on world commodity
markets and -- to an even lesser extent -- by expansionary
monetary and fiscal policies; but the available Gdata make
it strikingly clear that most of the new surge is the impact
of cumulating losses in real domestic output.
From the scant available data, we cannot tell if
our aid program and current free-market imports are
significantly relieving commodity shortagep other than rice
that most af`ect the Phnom Penh working class and refugees.
There are signs that preoccupation with rice supplies may
have meant a less effective attack on inflation in some other
goods. Before any large-scale efforts with respect to non-rice
foods, however, we ought to know miire than we do right now
about the price incentives for merchants coerating across
battle lines; for the flow of goods into Phnom Penh from
outlying areas would appear to be greater than reports
of security conditions alone would suggest.
* It is difficult at best to specify the current economic
hinterland of the capital. The reader should, therefore;
bear in mind that: 1.) this piece is written from the
perspective of supplying Phnom Pen'i; 2) the economic base
of the GKR is constantly changing and does not correspond
with the Cambodia of 1969; and 3) we -- and others -- are
still trying to develop data on markets and goods flows
in the provinces.
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Other than the sharp reduction in measurable real
output, the most striking fca'L-uro of the Cambodian situation
today is the potential. for political uphe,)val in the sorts
of income redistribution taking place. Even allowing
the phlegmatic n;,ture of the Cambodians, the growing pool
of poor and underemployed in the city poses an increasingly
serious threat to the stability of the Lon Nol government.
Shortages of foods are apparent and soaring prices have
already put many of them beyond easy reach of the poor.
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I. Prices, Production, and Government Rosuonse
Inflation -- Livinc; costs in Phnom Penh surged upward
during 1973 after 2-3 years of relatively tame inflation under
difficult wartime conditions. The principal engine of the new
inflationary burst was commodity shortages; and, by yearend,
these had resulted in price gains on the order of ,~75-300%,
based on available indicators for the Phnom Penh working class.*
Defects in the available data notwithstanding, it is clear that
rapidly rising food prices were responsible for most of this
sharp increase.
Throughout 1973 commodity supply by the US was focused on
meeting real requirements for rice and petroleum products?
Although stabilization goals were not the only criteria, rice
supply seemed a particularly appropriate focal point for countering
inflation because changes in the price of rice on both the
official and free markets influence other price adjustments.
The IMF has found that significant movements in the cost-of-
'living index have followed increases in rice prices. In Cambodia's
unse::tled economic and political climate, rice is a surrogate
indicator of overall commodity availability. Rice price
increases trigger not only an ircrease in demand for rice but
al o for most foodstuffs and other commodities as consumers
attempt both to guard and speculate against future shortages.
* Price index data for Phnom Penh are woefully inadequate for
making reasoned economic
CONF11)ENTI A L
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C r' t~ r`' t.. . r ?', 1 Ire {+
Mice prices have also been used as the basis for salary
adjustments, a role which tends to accentuate an inflationary
spiral.
Though the key element of US food supply operations, rice --
accounting for an unrealistic 10% of the working class index --
is not solely responsible for Cambodia's rampant inflation.
Available cortiponents of the price index, though ';parse, suggest
that since March 1973, pork, lard, fresh fish, and rice wine
prices, with a combined index weight of 18%, have risen almost
as rapidly as those of rice. Moreover, these commodities plus
duck eggs and dried fish, with a cumulative Weight of 31%, have
risen groater than the rate of growth in the total index during
the same period. In addition to commenting on these commodities,
Khmer press reports during 1973 noted that prices of legumes
and some fruits had increased faster than the cost of living as
a whole.* i
Some of the price increases in Cambodia ;;ould have been
expected simply from th3 need to import substantial quantities
of basic goods from a rapidly inflating world market, but many
of the items in which Phnom Penh experienced the most diffi-
culty were the ones that are normally supplied from domestic
sources and were probably not in as short supply within its
In the non-food category, the press also cites clothing,
soap, and medicine, with a weight of 13%, as driving up the
cost of living.
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borders as the Phnom Penh price inclox would suggest. Avail-
able information, however, does not yet give us the evidence
we require to judge to the precise extent to which the pickup
in price increases was a function of internal supply disruptions.
CMO IEL(`!T AL
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I'il..t_Iti 1f _
Production Declines and Marko ling Di.si-nations -- while
accounts of speculation and general hoarding always claim
front page coverage in such situations, there can be no doubt
that current inflationary trends in Cambodia spring primarily
from wartime disruption of domestic production and marketing
facilities. Available statistics on agricultural and
industrial production show pronounced declines of activity
in both sectors. Production losses were only moderate in
1970 and 1971, but the rising level of hostilities from
1972 onward and the destruction and disruption of farms,
markets, and transportation facilities have combined with
the dislocation of large elements of the labor force to
accentuate the decline of activity.
The most disruptive impact of the war has been on
agriculture, which may be operating at only 25% of the
prewar level. The war has caused considerable damage/
destruction to fields and draft animals. Transport and
marketing problems as well as the difficulty in furnishing
imported goods cut the supply of fertilizers, chemicals,
span parts, and other material inputs, while military
manpower requirements led to labor shortages. These combined
with the threat of ever-increasing hostilities led farmers
to grow little more than subsistence needs and, in the extreme
to abandon fields and migrate to urban areas.
CON rIDEN' TIAL
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The loss of agricultural producLion is best demonstrated
by the decline in paddy output: from 3.8 million tons in
1969/70 to less than one million tons in 1972/73 and
1973/74. Maize production declined from 140 thousand
tons in 1969/70 to only 20 thousand tons in 1973/74. Rubber
production dropped from 52 thousand tons in 1969 to less
than 1,000 tons in 1971, but has since recovered to some
20 thousand tons. These three products along with cattle
constituted the bulk of agricultural production and generally
accounted for 60-70% of total exports ($46 million out
of $66 million in 1969). Cambodia must now rely heavily on
imports of over 200,000 tons of rice and other foodstuffs,
while exports -- almost exclusively rubber -- will be
only some $10 million.
The war has also been responsible for a serious decline
in industrial production. The IMF has estimated that the
level of manufacturing activity during th%.- first half of 1973
is probably about half peacetime production capacity.*
A large portion of pre-war capacity -- in paper, fertilizer,
and petroleum plants, for example -- has been destroyed or
damaged, and about 70% of the rice mills in the countryside
are reportedly not operating.
* The Cambodian Ministry of Industry compiles an industrial
production index which suggests that total output has dropped
only some 20% since the war began. The index is not compre-
hensive, however, and is heavily weighted in favor of industries
located in Phnom Penh area, which have been less adversely
affected by the war.
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Besides physical damage, inclun trial ouLpuL? has been
widely affected by disruptions in the supply of ancillary
inputs and by a shrinking demand for manufactured goods.
Domestic supply of raw materials such as cotton, jute,
tobacco, wood, rubber, and construction maLerial~ has
dwindled; raw material imports have arrived irregularly
and are increasingly costly. Disruptions to transportation
and energy systems -- most recently with electrical failures
in August and September -- have frequently slowed or shut
down production lines. A drastic reduction in the real
Incomes of large sections of the population. and the loss
of countryside markets has shrunk the demand for many
manufactured products.
Manpower shortages have further hampered industrial
production. A shortage of skilled labor has forced the
closing of many factories, most of which were small-
to-medium sized installations. The shortage abated somewhat
in 1972 as the military authorities tried to avoid enlisting
skilled labor into the army, but was exacerbated by a general
mobilization beginning in early October 1973. Despite the
seeming existence of a large refugee-populated manpower
pool in urban areas,* the majority of refugees were farmers
* Some 750,000 refugees were on government rolls as of mid-
l'73. This number is probably now near 1 million, and there
is a substantial number of'unregistered refugees.
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before the war and have few sk1,1i's and almost no training.
Little in"-stment in industries that could employ them
has taken ,:Lace; hence, most are either unemployed or
underemployed as, for example, clay laborers or cyclo-
drivers.
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Government Policy Muru;urey.; nnd Prohlcmr; -- Increasing
military, political and economic problems all seemed to converge
at the same time, and economic issues took a back seat as a
preoccupied and inexperienced government was hesitant to
implement firm economic measures. Moreover, policy dilemmas
abounded; most proposals seemed to be double-edged, with negative
effects at least partially offsetting what little positive
impact could be achieved. Major fiscal and monetary reforms,
for example, were necessary as a result of severe inflation and
the growing government budget deficit. A significant expansion
of revenues, however, was extremely difficult both because of
the security situation and the government's unwillingness to
provoke a potentially adverse public reaction. Cutting expen-
ditures presented the risk of reducing needed resources for the
military. Price controls or subsidies were of little use both
because of primitive control mechanisms and the problems they
created for budgeting. Similarly, the government's precarious
foreign exchange position called for reducing imports, but
imports were soaking up excess liquidity and thus were playing
at least a small role in curbing inflationary pressures. Coping
with severe wartime economic dislocations thus became largely
a matter of episodic reaction -- doing the minimum necessary to
stave off immediate unrest or collapse. Most of the policy
measures implemented over the last three years were in response
CONFl~~'i'd"o
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t-o rlperific dislocations, muclium-term planning was virtually
noncxistont, and political conniderations often took precedence
over the economic efficacy of the policy action. In those
circumstances, perhaps little more could have been realistically
expected.
There has been little success in either controlling govern-
ment expenditures or Increasing revenues. Government budgets,
financed largely by deficit spending, have grown at an annual
rate of over 50% from 1969 to 1973. Better administration and
control of military expenditures could yield some savings, but
the government will not want to do this under present conditions.
Moreover, military expenditures are such a large share of the
budget (60%) that savings from austerity measures on the
civilian side are small. The government did reluctantly raise
its artificially low, controlled prices on several important
consumer items, an appropriate policy to eliminate subsidies
required to maintain the ceiling prices; but the measurable
inflationary effects of any expenditure saving were at least
partially offset by the resulting increase in prices as well
as the higher wages that had to be paid to cushion the effect
on civil servants. Increased consumption taxes on cigarettes
and alcoholic beverages, higher taxes on imports, and selective
taxation on certain luxuries, have increased revenues slightly.
Import taxes, however, are still not being used effectively;
some 40Z of goods imported during the first half of 1973 arrived
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U1JI
tax free. 'here is, moreover, the clue sl:ion of whether
increased import tax(!,, are a proper policy in Cambodia's
present inflationary situation. Although adding to govern-
ment revenues, import taxes may discourage import of goods
the consumption of which withdraws considerable liquidity from
the economy and -- in the case of US CIP-financ(,,d',goods also
generates counterpart revenues to offset the government's
deficit spending.
Monetary policy, too, has had only a minor effect on
controlling inflation. In particular, policies have failed
to curb the growth of credit to the private sector. Monetary
policy has been subject to several limitations: 1) the economy
is only partially monetized; 2) the public sector has been
incurring rising deficits which are largely financed by the
banking sector; and 3) Cambodia's instruments of monetary
control are not adequate and are poorly coordinated. The
stabilization program introduced in 1971 reduced the growth of
the money supply somewhat. Several interest rate adjustments
ha.e increased savings in institutions slightly, but interest
rates are still negative in real terms and the higher rates had
little effect on bank loans. Sales of treasury bonds to the
public are insignificant because the channels for such sales
are primitive. Reserve requirements have been generally followed
by the banks but have been used more as a means to provide bank
financing to the government, rather than as a tool to restrict
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monetary expansion. Finally, advance dopos9.L:-, on imporL?s
have been adjusted in various stage.,to absorb liquidiLy but
have had an adversc -- and at least partially offsetting --
impact on ini ort demand.
Government budget deficits and the lack of effective
monetary controls thus have contributed to inflation in the
1970s, but there were few realistic alternatives and the impact
this past year was relatively insignificant. In the earlier
stages of the war, prices increased at rates roughly equal to
that of money supply, as shown in the following table.
Rate of Increase in Consumer Price Index
and money Supply
Percent
Year
Price Index
All Items
Price Index
Food Only-
Money_ia2plL
1970
50
85
72
1971
58
60
50
1972
32
40
41
1973 (Partial)
201 (Oct.)
235 (Oct.)
26 (Aug)
1973 (Projected)
275
325
42
More recently, however, the acceleration in paces has been
largely unrelated to monetary expansion. By late 1972, commodity
shortages began to force the rate of price increase slightly
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above that of money supply. And in 1973, severe conunodity
shortages and official price increases pushed the cost of
living up at a rate far outpacing monetary expansion.
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, . I t s 4 ~~.,
II. Ilea]. Income and its Distribution
One of the most important' facets of Cambodia's evolving
economic problems is that of income distribution. With large
numbers of people still arriving daily in a capital city that
already has a small army of unemployed and underemployed, the
prospects for riots or revolution become progressively stronger.
The income distribution problem is perhaps the most tangled
skein in the Cambodian e'onomy, and for this very reason it
deserves considerably more attention than it has received thus
far. Its basic elements include the loss of income to displaced
farmers and unemployed factory workers, disparities in income
adjustment, and the interaction between typical consumer market
baskets and particular wage scales.
Phnom Penh may contain upwards of 1.5 million unemployed
or underemployed refugees. Accurate statistics are not available,
but the capital's population is presently estimated at above
2 million, compared with 1.6 million in July 1973 and 600,000
just before the war. The bulk of this increase is comprised of
farmers and their families who have fled their homes. Most
refugees initially found shelter with friends and relatives;
but it appears that this traditional, extended family system
has reached the saturation point, and refugees must take to the
streets and government camps. Thus, as the inflow continues,
successive refugee waves become more of a drain on available
resources.
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Since the great majority of the refugees in the Khmer.
Republic wore farmer., before the war, most have few skills
and little training. For the most part, in both Phnom Penh
and in the provinces, male refugees work as day laborers or
as cyclo-drivers. There are exceptions, however, and in
Kompong Som many work as stevedores at the harbor. In Pailin,
many dig for precious stones. In Kompong Cham, some
still are able to harvest bamboo from the nearby forests.
The refugee wives and small children usually sell things in the
market, or work as domestics. In Kampot, they also work as
field hands in both the rice fields and the salt beds. In
general, there is very little outright unemployment; most
refugees can find some work if they look hard enough. What
unemployment there is, is usually limited to families
without able-bodied males in the camps or to provinces like
Svay Rieng, which are completely isolated by the enemy.
But there is widespread underemployment. With so many refugees
looking for work, the job market in most of the Khmer Republic
is glutted. The average refugee, who before lived well on his
one-two hectares of land, now finds himself making only 100
to 150 riels a day. For some, the average daily wage drops
as low as 60 to 70 riels a day. The female refugees have an
even harder time, and some spend the whole day in the market
and make only 30 or 40 riels. At today's prices and exchange
rates a daily wage of 100 riels is equivalent to only about 25
cents, and will purchase little more than 750 grams of rice.
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For most of the working class in Phnom Penh, wages and
salaries have failed to keep pace with the rising cost of
living. The only available statistics, a so-called minimum
monthly wage schedule, indicate that between 1969 and mid-
1973 real wages fell by 20%, as shown below.
Minimum Wage
1969
Dec.
1970
Dec.
1971
Dec.
1972
Sept.
1972
Dec.
1973
July
Minimum wage (in
riels per month
780
780
1,200
1,820
1,820
3,500
Cost of living
index 1/
1949 = 100
348
523
823
1,008
1,131
1,917
Real minimum wage Z/
1969 = 100
100
67
65
81
72
81
I/ For the working class in Phnom Penh.
2/ Deflated by the cost of living index for the working class.
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Adjustments in the wage have been infrequent, usually
coming only under pressure of mounting social unrest, and
have general]y been less than the increases in prices. Mor'over,
there is a considerable disparity in the adjustment procedure.
The minimum wage, for example, was not universally applied
and didn't become official until 1971. In order to offset
the fall in the cost of living, the government has several
times increased wages and salaries of civilian and military
personnel; increases for non-government workers, however,
have probably not been equivalent. Incomes of middle- and
upper-echelon workers have no doubt more nearly kept pace
with the cost of living. Skilled workers in Phnom Penh's
expanded pharmaceutical and rubber industries have probably
been able to take advantage of production gains in those
sectors. Lucrative incomes have probably been made by those
in and outside the government who have been able to exploit
commodity shortages through speculation or favored access to
goods. Upgrading of the military personnel system has made
manageable the formerly high levels of "nh antom" troops
but many military officers still reap some benefit from manipulat-
ing payrolls.
Declining real incomes and the widening disparity between
the haves and the have-nots have distorted normal consumption
patterns and increased the chances for social unrest. Working
classes have been forced to increase the share of incomes
spent on foodstuffs merely to survive.*
The lm.' recently estimated that from 60% to 80% o working-
class incomes are spent on rice alone.' CON-1r~El;IT1f!
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Moreover, many people are forced to pay dearly for necessitie's
such as drinking grater that were previously available at minimal
cost. In contrast, the upper echelons have been a51e to take
advantage of the glutted market for menial labor to increase
their consumption of services.
In an effort to reduce tensions by limiting'the more
conspicuous aspects of consumption, the government has used
its tax and regulatory power to restrict the import
of luxuries such as cars, motorcycles, wines, and liquors.
For a time in early 1.973, many luxury imports were banned
in a political move to assuage teacher-student reformist
groups who had brought considerable pressure to bear on
government leaders for their high lying. The level of total
imports dropped dramatically after the ban, however, and
with it, import revenues. The government then replaced
the ban with higher taxes.
i
While restrictions on luxury imports can be rationalized
on political and moral grounds, they do little to curb
Cambodia's inflation. Given the existing income disparity,
scarcity of domestic goods, and poor investment climate,
those consumers with the greatest liquidity need an outlet
for their funds. Imports serve to absorb this liquidity
and, in the process, limit capita.: flight and speculation
on domestic markets that could drive up prices of those local
goods purchased by the lower classes.
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Little consist.c'nt thought has boon given Lo the security
implications of conLinuod and increasing income disparities
within Phnom Penh. Although excellent arguments could be
made for such disparities having been a natural. part of growth
in many less developed countries, what is at st,:i):c hers has
very little to do with growth. If we are only considering
maintenance of a garrison state through its present travails,
the key issue is whether pressures generated by goods shortages
could lead to overthrow of the GKR. The more people feel that
they are being given an ,infair share of whatever short supply
of goods exists, the more likely it is that they will conclude
that the only way out of their dilemma is accommodation with the
Communists through return to KC-administered areas or an overhaul
of thq present leadership. From what we have seen so far, there
would appear to be an excellent political argument for greater
efforts toward income leveling and austerity on the part of
upper classes. I
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ITT. Foruicn and mo';tic 'I'rud]o
Imports -- With the severe decline in agricultural and
industrial production and disruptions to transport and
marketing systems brought on by the war, Cambodia must: rely
upon foreign goods for the dual role of maintain.ng essential
stocks and stemming inflation. Unfortunately, available data
do not provide details on what goods are currently reaching
Phnom Penh. Moreover, it is not even clear if importers'
incentives are adequate to supply increasing amounts of the
sorts of goods most useful in Cambodia's predicament.
Given Cambodia's current precarious conditions, a slackening
in total import demand is not unexpected. Declining real
output ha:; meant decreased requirements for producers' goods;
and falling incomes have combined with import restrictio;Is on
luxuries to cut into the flow of consumer goods. Accordingly',
examination of import arrivals and licensing of non-rice
commodities for the period 1971 - September 1973 reveals a
gradual weakening in import demand, particularly during 1973.
Foreign exchange sales, for example, dropped in November 1973
to $1.5 million, compared with a monthly average of $3 million
during the previous ten months. The decline stemmed primarily
from, a v akening in demand for cash imports, * as importers
*-With several exceptions, the US Commodity Import Program is tied
to specific categories of foods supplied :largely from US sources.
Cash imports, with relatively fewer restrictions as to type or
source country, are those made through importers purchase of
Cambodian and donor-supplied foreign exchange from the National
Bank.
N NTI AL
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~. i.I t i_. , i;
were faced with very high advance import deposits, limited
sources of funds, and a rapidly depreciating riel. A certain
amount of import demand may have been diverted from cash
transactions to the commodity aid market, where preferential
treatment -- especially low advance deposit requirements --
apparently offset administrative complexities an long
delivery times that had been associated with such imports.
1 sharp drop in non-rice aid imports in 1973 reflects the
priority allocation of aid funds to fiance needed rice
imports, thus limiting the funds available for other imports.
It is unclear whether Cambodia's import mix has been
the most efficient possible to strike at the kind of inflation
reflected in the working class'index. Most of Cambodia's
current commodity aid imports consists of rice, petroleum,
and machinery, while cash imports are largely foodstuffs,
pharmaceuticals, raw industrial materials, and vehicles and
spare parts. A large share bf these imported commodities
are eventually placed on the open market, but there is
insufficient data to provide a definite link between the
decline in 1973 imports and the hyperinflation of the past
several months. For example, the import data do not
break out foodstuffs by commodity to permit comparing their
deliveries with their price increases in relation to the
working class price index. Similarly, there is insufficient
detail in the capital imports account -- which constitutes a
significant portion of non-rice imports -- to determine if
Ci)I,FTDLt TlAL
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these are good::-i nccc:ic.-mry for maintaining domestic production
or might better be shifted to consumur.?-goods import having
a more pronounced deflationary effect.
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Traditional. Ilomesti.c Commer.cu -- Although there' has long
been a substanL?ial flow of imports into Phnom Penh to cover
demand for key producer and consumer goods, most of the
consumption in the city was supported by goods delivered
from outlying areas or other regions. Besides rice from
Battambang and several nearby surplus provinces, almost
all of Phnom Penh's fish, vegetables, meats, and fruits
came from the relatively fertile areas in the surrounding
provinces along the Mekong, Bassac, and Tonle Sap Rivers.
Large amounts of textiles came from factories in Kompong
Chaco and Battambang.
Much of this trade still takes place because the battle
lines drawn around the city do not exclude small-time merchants
and self-styled civilian and military entrepreneurs.
Also it is the: KC's stated policy to restrict sales of
commodities they need but to let surplus goods be sold
in GKR areas while benefitting from heavy taxation of the trade.
Nothing is known of actual flows, but data indicate that
price increases for locally supplied, non-rice foods are
not greatly out of line with those of free-market rice.
Because free-market rice prices have been indirectly damped
by large US imports, it follows that -- in rough terms the domestic supply of non-rice foods has tightened no
worse than that of rice. Some of this supporting production
has undoubtedly come from intensive cultivation of available
riverbanks, dikes ,y a r d s, and vacant lands within the
P. C ItNi,~~L
C;I
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capital.. This, however., in by no means sufficient to
explain the rice/non-rice price increase ratio.
The biggest constraint to the supply of Phnom Penh
is steady transport and marketing. Since the war began,
all major roads to the capital have been more o less
continuously interdicted. Rail traffic has ceased, and
river traffic is subject to either friendly or enemy
military action. in addition, the KC and GKR authorities
raise commercial costs through road taxes. Clearly, if
the transport and marketing systems were better organized
and producers given some guarantee of market access, the
supply situation would improve dramatically despite
heavily damaged and abandoned production facilities.
Unfortunately, the security situation precludes this.
In sum, the flow of goods between outlying areas and
Phnom Penh has been sufficient to keep some lid on non-
rice food prices. This trade will probably continue at
the same level unless the KC undertake a concerted effort
to isolate the city; even so, some goods would pass through.
The lack of direct or indirect evidence on this commerce
is crucial, for it precludes reliable estimation of the
deflationary effect of increased imports of domestic-type
goods. Should it prove that prices must remain at least
as high as they are to attract merchants to run the risk
of crossing the lines, a program to pour large amounts of US
foods into Phnom Penh might disrupt the delicate balance of
domestic supply.
CONHDEN1 TI/IL
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. ? , , t.i .. t
Cross-border Trade -- Cambodia has cla..sically undertaken
cross-border trade with South Vietnam which, though not
significant on a national scale, has played an important
role in the economies of the border areas. Traditionally,
goods entering from South Vietnam have included items such
as plastic manufactures, clothing, blankets, soap, flour,
sugar, milk, cigarettes, and spirits. More recently, trade
has been comprised of rice, flour, salt, cloth, and POL.
A large portion of the cross-border trade has been condu.ted
on a barter basis by myriad small merchants and has
generally been confined to a small geographic zone, with
few goods ending up in Phnom Penh. Indeed, recent analysis of
price differentials between Saigon and Phnom Penh suggests
that few non-rice goods could be profitably shipped to the
Cambodian capital. Moreover, the increasing tendency of the
KC forces in Cambodia and the VC and RVN forces in South Vietnam
to seal off thair areas and'lock in needed commodities works
against continuation of earlier trading patterns.
Of more consequence is the substantial trade that takes
place between Thailand and the border provincr;s of Battambang
and Pailin. Based on recent but spotty data, Battambang receives
monthly almost 1 million gallons of POL, i. thousand tons of
cement, and 500 tons of salt from Thailand through official
border crossing points. Consumer goads, including foodstuffs,
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cosmetics, and manufactures, also constitute major imports.
The major export to Thailand is gems, but other exports
probably include jute bags, liquor, cigarettes, and
perhaps textiles. The precise extent of unofficial. trade is
not known but it is significant; for example, virtually
all of the production of precious stones in the Pailin area,
estimated at about $10 million, is sold illegally to Thailand.
Battambang's surplus rice crop may also be finding its way
into Thailand, but no hard data is currently available to
support this thesis. Rice prices are not a major factor,
as paddy prices are similar and milled prices slightly
higher in Battambang; but with the riel falling in value,
there is an incentive to covert rice into bah t -- one of
the stronger currencies in the region -- at almost any price.
Several recent reports from Battambang also suggest
substantial surpluses from this season's rice crop. As
i
long as rice transport between Battambang and Phnom Penh
is interdicted, trade with Thailand would be prudent to
dispose of surplus rice and prevent it from getting into
KC hands.
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