It is a great honor and pleasure for me to address this very important meeting. It is organized at the time when many institutions of the Royal Government of Cambodia (RGC) has been actively implementing various reform programs with a view to making a transition to sustainable economic growth, and through this, gradually upgrading the living standards and wellbeing of the Cambodian people.

In this presentation attention will be given to one of the most important aspects and, as I understand, the key to a sound management of the RGC's economic and structural reforms, i.e. good governance. The Asian financial cataclysm is a testimony to the fact that fundamental public-sector and corporate governance weaknesses were among the structural causes of the crisis. The link between good governance and economic development has long been established. Therefore, today I wish to discuss the governance issues from the Comprehensive Development Framework (CDF) perspective. Our ultimate objectives are to alleviate poverty and share the fruits of economic growth equitably among all segments of the society.

The Ministry of Economy and Finance (MEF) has taken serious actions to improve governance by establishing a sound legal framework to improve governance. Governmental decrees, such as the decrees No 60 on Public Procurement, No 81 on Financial Control on the Expenditures of the Line Ministries and No 82 on the General Rules of Public Accounting were adopted in 1995 to ensure fiscal governance. Moreover, the Prime Minister issued an Order in 1997 to improve the management of state assets. A governmental circular No 6 dated 11 June 1999 on the Measures to Improve the Efficiency and Management of Economic and Fiscal Reforms was adopted with a view to clean up the tax and customs administration. The MEF has proposed the Draft Law on Budgetary Discipline, the Law on Audit and the Law on a new Customs Code to tackle corruption.

i. Governance: "reform-foreign aid-growth"

A very important factor, which obliges a developing country like Cambodia to pay particular attention to good governance, is the dire need for foreign assistance. Since the budgetary resources of the majority of donor countries are under great pressure, each donor has to scrutinize the utilization of their aid. Before disbursing any aid, they should be confident and be clear in mind that their money will be used properly and efficiently to increase economic productivity. The whole process must be checked and monitored on a regular basis. Therefore, good governance has become one of the most important conditions for donors to evaluate and determine the size and type of assistance to a recipient country like Cambodia.

In short, without good governance there will be less World Bank loans for budget support and for other projects, there will be no Enhanced Structural Adjustment Facility (ESAF) from the IMF or loan from the ADB and there will be less grants from other bilateral donors.

Another inter-related aspect is that before making a decision to provide assistance, donors always check our demeanor and our ability to mobilize and use our own domestic resources. If we are corrupt, squander our own resources, negligent in mobilizing and utilizing our domestic resources, or if we have a bad conduct, they will not provide us with their grants or extend to us their loans. For example, we are loosing US$2 million per month in revenue, due to smuggling. Therefore, the Samdech Hun Sen gave instructions to launch a campaign to suppress contraband.

ii. Governance: the Role of the Government

In terms of economic management, "good governance" is a manner or a way of implementing and using power to manage and distribute social and economic resources for the purpose of development. In this regard, good governance, first and foremost, is concerned about the manner of government institutions' activities in economic management.

The government plays a vital role in development. Since the late 1980s Cambodia was transformed from a centralized state to a multi-polar government, reflecting the shift form a centrally planned to a free-market economy. This also entails a radical change in its role toward a government that represents the public authority, promotes development and facilitates entrepreneurs.

As a public authority, the government is called to the task of managing domestic and foreign policy process, providing defense, maintaining public order and ensuring the guarantee of fundamental rights and liberties of the citizen. Moreover, the government plays a leading and important role in the economy. The government makes decisions on macroeconomic and social policies, which have direct impacts on the health and long-term competitiveness of the economy. The government makes decision to reallocate resources through monetary, fiscal and budget policy. The government is an important economic player, who delivers to the society the main public goods, such as large-scaled, physical infrastructure, health and education services etc. Moreover, the government sets the rules of the game for the market by adopting laws and regulations for private sector development. All of this attest to the undeniable fact that the quality of the policy and overall environment created by the government is of great importance. However, the manner and the way of how the government policy and laws are implemented are even more important. In short, one needs good policy, which will be properly implemented.

iii. Governance and Economic Growth

A number of studies show that there is a close correlation between good governance and economic growth. In the age of globalization and of free movement of private capital, there are many cases that attest to the fact that corruption and the lack of transparency in economic management have direct impact on capital flows, especially the stock and the quality of investment. We have many concrete examples both in neighboring countries in the region and in Cambodia, where problems of governance are regarded as major impediments to directing investment into productive sectors and attracting long-term investment to ensure sustainable economic growth. The current financial turmoil is also the clear manifestation of great economic and financial tragedy caused by the lack of good governance.

The experiences of development landscape at the end of this century reveal that good governance has a real positive impact on the economy. In many cases, bad governance resulted in the loss of budgetary revenue, degraded the quality of investment and public services and eroded the public confidence in the government and reducing investment flows into a country. At present, many leaders therefore are unanimous to recognize the importance of good governance in ensuring successful implementation of economic reform.

Globalization requires good governance. Free movement of capital and economic and trade liberalization requires a sound legal framework and a rigorous and responsible government, which conducts operations with transparency, accountability and predictability. These factors instill investors' confidence in the government and foster economic activities, thus allowing a country to grab the benefits and advantages of globalization.

iv. Governance: Strong Institutional Capacity and Competent Civil Service

The RGC clearly understand these challenges. In order to meet the challenges, it not enough to require full implementation of the principles of democracy, through public participation in decision making. It will also be required to establish a sound legal framework, regulations and a code of conduct to ensure smooth and rigorous implementation of the reform measures and, in particular, to develop human resources. To successfully implement the reform measures, we need well-trained, highly qualified and experienced staff members with professional honesty and good moral conduct. Therefore, attention is given by the government to providing an appropriate level of salary to the civil servants and the members of the judiciary. This also requires a change in the attitude of each individual and the morality of the whole society. This is a daunting task, which cannot be achieved within one or two years. On the contrary, it could take a few decades or generations of people to change this attitude. By so speaking, it does not mean that we can be relieved from our responsibilities at this crucial moment. We must now jointly make strides to achieve our long-term objectives. In this endeavor to meet the above challenges, more importantly we are required to expediently tackle the problem step by step, aim our target and accomplish this daunting task as appropriate in every direction of reforms.

v. The Four Pillars of Governance

There is a general consensus that good governance rests on four pillars: accountability, transparency, predictability and participation. Accountability means the capacity to call public officials to task for their actions. Transparency entails the low-cost access to relevant information. Predictability results primarily form law and regulations that are clear, known in advance, and uniformly and effectively enforced, and participation is needed to supply reliable information and to provide check for government action.

As part of this task, the MEF has endeavored to play a leading role and achieved remarkable results. It is true that we could not eradicate, once and for all, corruption in economic and public finance management. However, we did make considerable efforts to gradually improve the management of public resources by establishing a sound legal framework, promoting transparency, accountability and predictability with the view to reducing the scale of corruption and enhancing the efficiency of economic and financial management. This also is aimed to facilitate and support private sector development. Emphasis is put by the MEF on the following directions of reforms:

First, Introduce transparency in economic decision making and the financial operations of the RGC. To this end, we have taken steps to re-organize and improve the tax, budget and public property management system and the legal framework and regulations governing the private sector. These laws and regulations were compiled and disseminated to raise the people's awareness. Major reform measures in public finance management have been introduced and incorporated in the annual Finance Acts, regulations and procedures for the control of the public finance and public procurement, and the Prime Ministerial Order on the management of public property etc. The RGC recently announced that it had taken a tough stance in avoiding ad hoc tax and duty exemptions and launched a public campaign against smuggling. Important data regarding government financial operations and economic statistics are published and disseminated on a regular basis.

Second, Enhance the efficiency and improve the accountability in economic and public finance management. In this area, the RGC has put forth many concrete measures aimed at increasing budgetary revenue and rationalizing public expenditure. Many laws were drafted and submitted to the National Assembly for adoption, including the Law on Budgetary Discipline, the Law on Audit and the Law on a new Customs Code. There is no need for me to get into details of the hot measures aimed at cleaning up the tax and budget administration, especially among the officials of the Customs Office and the Taxation Department. This is just the beginning. I wish to take this opportunity to solemnly announce that the MEF will not recognize any contract on the sale or lease of state property, which was reached without transparency in contravention with the existing procedures. The MEF maintains an inventory of state property. So long as these assets are listed in the inventory as state-owned, they will still be regarded as state property.

Third, Ensure a stable environment, based on which one can predict the economic climate, policy, attitude and the activities of the RGC. This is the result of the implementation of the policy of building peace and stability and the RGC's efforts in establishing the rule of law. Peace, political and macroeconomic stability, a sound legal framework and responsible government institutions are key prerequisites for promoting business, ensuring sustainable economic growth and instilling confidence in Cambodia. In this regard, the government's long-term development vision, commitment and political will to carry out these reforms, as stated in the Prime Minister's address to the National Bank of Cambodia's conference on 24 March 1999, are the manifestation by the RGC of its responsibility for the future of Cambodia. This has contributed to instilling the confidence of foreign investors and the international community in Cambodia. The RGC has launched and implemented many reforms measures aimed at building up and strengthening good governance. To this end, attention is given by the RGC to the reforms of the legal system and the judiciary, the armed forces and the public service. The ultimate objectives of these reforms are to further strengthen democracy, promote the respect for human rights, improve and increase the efficiency of the public services and enhance the rule of law.

Fourth, Effective development requires participation from different level of governments, the private sector, donor groups, civil society and the local communities. Their efforts should be well coordinated to remove impediments to development. It is therefore, critically important that rules and regulations governing the actions of individual players and organizations are in place to create desired outcomes.

vi. Government: Partnership with the Private Sector

Another important aspect of good governance is also worth of our attention. That is the good health of the private sector in the country. The government's philosophy is that the private sector is the moving force of development and the engine of growth, while the government is the strategist and the manager of development. Playing this role, the government's responsibility is to give direction and establish a social environment conducive to private sector development. A strong private sector is vital to development. A weak and corrupt private sector will set in motion a domino, contributing to the fall of the public sector. Therefore, the RGC should endeavor to establish a sound legal framework for private businesses to conduct their operations, ensuring a fair competition and transparency and accountability of both the private and public sector.

In my view, the most dangerous time bomb on the road of Cambodia's economic reform is governance. The lack of good governance will become a serious obstacle to the development of a robust private sector, because it weakens the institutions and encourages corruption. This will inevitably contribute to the lack of the rule of law--a complex system of laws, arbitrary interpretation and selective implementation of the laws and regulations. As a result, the bulk of budgetary revenue will be leaked, the expenditure will be squandered and the efficiency and quality of government services will be degraded. The ultimate result is that investors, business people and the international community will loose their confidence in the government institutions and Cambodia.

The RGC is thus required to put in place many laws and regulations in order to set proper rules for the market. In his address to the National Bank of Cambodia's conference on 24 March 1999, the Prime Minister stressed Cambodia's need for a commercial code. This involves the legislation of the Company Act, the Contract Law, the Law on Arbitration, Intellectual Property Laws, the Product Liability Law, and in particular the Bankruptcy Law. In this regard, the MEF should finalize and introduce by the end of 1999 a new accounting system, which responds to the needs of economic management. This accounting system should be in line with the international standards and regional practices. I gave instructions to MEF's senior officials and experts to make serious preparations for the introduction of the new accounting system.

In concluding, I wish to appeal to all officials to become the owners of the reform programs and to be proactive in this endeavor. Managing the government's reform program is very important.

I would like to thank you, Excellencies, Ladies and Gentlemen, for your attention.

Thank you.

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