Cambodia's boom depends on USA

PHNOM PENH, Cambodia — The streets of this riverside capital are thick with traffic, sport-utility vehicles favored by foreign aid workers as well as the more modest cars piloted by locals. Scaffolded construction sites dot the dusty downtown and locals spy Western investment bankers with the enthusiasm reserved elsewhere for celebrity sightings.

"It seems like a frontier town, with all of the excitement, all of the energy," says Nisha Agrawal, the World Bank's country manager.

The notion of a Cambodian boom may seem incongruous, if not slightly absurd. This remote corner of Southeast Asia, after all, remains best known for its "killing fields," where the genocidal Khmer Rouge slaughtered or starved at least 1.5 million of their countrymen.

But after a generation spent slumbering in the shadows of its fast-rising neighbors, Cambodia is on the move. The economy this year is expected to expand at a robust annual rate of 9.5% after three consecutive years of double-digit growth, the World Bank says.

U.S. brands fuel boom

Americans have fueled the boom with their purchases of Levi jeans, Gap (GPS) clothes and Nike (NKE) athletic shoes, all bearing made-in-Cambodia labels. Whether consumers will continue doing so, however, now depends on the complexities of U.S. trade law.

Cambodia's thriving garments industry has been protected since 2005 by U.S. restrictions on imports of clothing from China. But those limits expire by the end of 2008, potentially opening the door for China to seize market share at the expense of Cambodian producers.

China could grab 68% of the world apparel market, up from 50% today, says Roland Eng, the country's leading diplomat and a former Cambodian ambassador to the United States. "They will kill everybody," he says.

The government here is pinning its hopes on proposed U.S. legislation that would eliminate tariffs on products from the world's poorest countries, including Cambodia. This year, Cambodian clothing shipments to the USA are running at an annualized value of $2.6 billion, about twice the 2003 level, according to Commerce Department data. Without preferential access to the U.S. market, orders for Cambodian goods will plunge 35% as Chinese shipments soar, says Van Sou Ieng, chairman of the Garment Manufacturers' Association in Cambodia.

Factories here supply clothing to some of the USA's best-known brands, including Disney, (DIS) Sears (SHLD) and Wal-Mart. (WMT) They've been drawn to Cambodia, despite sky-high electricity costs, inadequate roads and pervasive corruption, because of an innovative program promoting good labor standards that began nine years ago with U.S. help.

The United States guaranteed Cambodia a specified amount of sales every year, encouraging the country's push to position itself as the sweatshop-free producer in a fiercely competitive global clothing market. "Cambodia is a special country," says Michael Kobori, vice president for global code of conduct at Levi Strauss, which buys its Signature model jeans from a Cambodian producer.

The San Francisco-based clothing company, which plans to continue relying on local suppliers after the limits on Chinese products are lifted, supports the tariff-elimination bill.

Prospects for approval of the measure, introduced by Rep. Jim McDermott, D-Wash., are cloudy. Rep. Charles Rangel, D-N.Y., the chairman of the House Ways and Means Committee, has endorsed the proposal, aimed at helping the world's poorest countries develop. But with public support for trade ebbing, and the economy weakening, lawmakers may shy in an election year from being seen as helping foreign workers.

The stakes for Cambodia's 14 million people in the coming U.S. debate are enormous. Even after the current boom, what the typical Cambodian earns in a year wouldn't buy a decent TV in the USA. (Per-capita income is just $550.) There are only 1,000 miles of paved roads in the entire country, which is roughly the size of Missouri, and only 10% of the population has access to electricity.

Scars remain from turmoil

Scars from the 1975-79 Khmer Rouge era remain vivid. Under radical leader Pol Pot, black-clad guerillas systematically murdered lawyers, doctors, teachers — sometimes even those wearing eyeglasses — in a demented bid to return Cambodia to a pristine, agricultural existence. The Khmer Rouge ultimately were ousted by a Vietnamese invasion.

Only in 1999 did the country enjoy its first entirely peaceful year in three decades. Today, a surge in tourism is clear evidence of the turnaround. For the first 10 months of this year, Cambodia recorded 1.6 million foreign visitors vs. 286,524 in 1998.

The stunning temples of Angkor Wat are the country's principal draw. On typical days, the extraordinary 12th-century monuments are packed shoulder to shoulder with hordes of South Korean, Japanese and American tourists.

Heart and soul of economy

While the country harbors long-term hopes of developing possible offshore oil deposits, the garments industry is the heart and soul of its economy. From virtually nothing in 1994, the industry has grown to an estimated $3 billion in exports and directly employs 355,000 workers. They in turn support an estimated 1.7 million people with regular payments to family members, who often live in poor rural villages with little economic activity, according to the International Finance Corp.

Sokla Sem, 29, came to the capital to find factory work 11 years ago after the death of her father. Working for a Chinese-owned shirt factory, she and her sister made a combined monthly salary of $150. Of that amount, they sent two-thirds to their mother to pay for the education of an older brother. Sem, like many young women here, has only a fourth-grade education.

After being fired in a dispute over pay, she became a labor activist. But she hasn't forgotten the economic imperative that drives the country's leading industry.

"It was very difficult for me when I started working in the factory," she says. "But I didn't care about the difficulty; I cared about making money that I could send home."