Airlangga Summer Program 2015-Indonesia

Airlangga Summer Program 2015-Indonesia
Airlangga Summer Program 2015-Indonesia

Tuesday, September 11, 2012

Responses of Cambodian government to the global crisis (2008)



A lot of the countries around the world suffered from the impact of the global financial crisis which started to take place at the end of 2007 and in the early of 2008. Similarly, Cambodia is also among those countries which got severe impact from that crisis. For example, monthly exports from garment sector in Cambodia fell 50%, from US$250 million in 2008 on average to $100 million in January 2009 (Jalilian, Chan, Reyes, Saing , Phann & Pon, 2009). Additionally, the real GDP of this country also decline noticeably. In order to response to this phenomenon, Cambodian government has implemented three main effective policies to tackle the effect from the global financial crisis.
            The first policy that the Cambodian government did to counterattack with the global financial crisis is implementing the fiscal policy. The Cambodian government has increased its spending on infrastructure, agricultural, and social safety nets in order to increase the demand (Jalilian, Chan, Reyes, Saing , Phann & Pon, 2009). In this way, the increasing of government spending will leads to an increase in the amount of money in circulation which causes an increase in aggregate demand. Additionally, people have few assets left during the financial crisis and thus are income-constrained during such periods; government spending is a way to get income into their hands-income that they are likely to spend immediately (Miller, 2011). As the Cambodian government increased its spending, it will push the aggregate demand backs to its level and fulfilling the recessionary gap (Figure 1).. As a result, the fiscal policy has helped a lot to the Cambodia’s economy during the crisis times.
            As we have known, garment sector is one of the main distributors to the Cambodia’s economy. Cambodia’s garment industry represents 90 percent of the country’s exports and employs more than 300,000 workers by some estimates (Palatino, 2012). During the crisis time, the Cambodian government decided to suspend the 1 percent advance profit tax, and reduced 10 percent in export management fees and other fees. By doing that, the Cambodian government could foresee that that there will be more investments in Cambodia and evade the existing investments from bankruptcy or leave the country. In this respect, a lot of the company around the world was meeting trouble or bankrupt during the crisis time since the demand for most of the products declined markedly. Thus, the decreasing in taxation could induce firms to supply the products and services at the regular level as before. As represented in the figure 2, the decrease in garment’s taxation will help out to push the short-run aggregate supply curve backs to its equilibrium level.
Another policy that the Cambodian government established during the global crisis is strengthening the monetary policy and banking. There were some banks in other countries bankrupt because of the global financial crisis and as a result, those banks could not repay all of the liabilities that they owed to the depositors. There was a tendency that in the near future, some of the Cambodia’s bank would meet that problem too and a lot of depositors in Cambodia’s bank were likely to withdraw their money back in which the bank did not have all of those amounts of money. Hence, the Cambodian government has increased the reserve requirements from 8 percent to 16 percent for deposits and borrowings in order to insure the depositors and stay away from the huge amount of unexpected withdrawals from the depositors that the bank could not afford to repay immediately (Chea, 2009). In addition, the National Bank of Cambodia also limited bank exposure to high risk sectors, especially real estate, by introducing a 15% cap on real estate lending. In this aspect, the price of the real estate had bubbled before the crisis happened and a lot of people borrowed money from the bank to buy houses and lands. As the crisis happened, the price of the real estate had blown out and most of the bank’s loans for real estate could not repay.  Hence, the bank confiscated a lot of houses and lands and sold them at the low price which could not recover the loans that they gave away. As a consequence, many of Cambodia’s bank had lost a lot of their capital during the crisis, but thanks to the monetary policy and banking that helped them to reduced the serious impact. 
In conclusion, the global financial crisis had considerable impacts to many countries around the world and as well as Cambodia. I think that the Cambodian government had done very well to deal with the crisis by implementing some effective policies: fiscal policy, supporting garment sector policy, and strengthening the monetary policy and banking that could reduce the impact from the crisis and curb the GDP of this country from declining. In my opinion, many countries around the world also implemented the same kinds of policy like Cambodia too.  



References
-Chea , C. NATIONAL BANK OF CAMBODIA, (2009). On the occasion of opening the
seminar on cambodian's microfinance amid global financial crisis. Retrieved from
NATIONAL BANK OF CAMBODIA website:
 http://cma-network.org/forum/speeches/HE.Chea chanto-Speech-English.pdf
-Jalilian, H., Chan, S., Reyes, G., Saing , C. H., Phann, D., & Pon, D. (2009, May). Global
financial crisis discussion series. Retrieved from:
http://www.odi.org.uk/resources/docs/4323.pdf
-Miller, R. L. (2011). Economics today. (16 ed., p. 287). Boston: PEARSON.
-Palatino, M. (2012, Feb 21). Cambodia’s fainting workers. Retrieved from:
http://thediplomat.com/asean-beat/2012/02/21/cambodias-fainting-workers/