Bungalow 10 Hotel le Royal Phnom Penh February 1, 1967
Mr. Noel is a 1965-66 Alicia Patterson Fund fellowship winner on leave from The Hartford Times. Permission to publish these articles may be had from the Managing Editor, The Hartford Times.
PHNOM PENH—This neutral nation is at war with the Chinese.
It is a war fought not with guns, but with money. The enemy are neither Nationalist nor Communist Chinese, but Cambodian: thousands of small commerçants, or middlemen. They have at their disposal most of the nation’s free private capital, generations of experience, and the debt-obligations of a majority of peasants.
The government is armed with about 500 producers’ co-operatives, inexperienced, with little capital and a hesitant clientele.
The prize is rice. In three years’ battling, the government has made slow, uphill progress. But its progress is impeded — more, perhaps, this year than ever before -by a nearby market which the government itself, for a variety of reasons, cannot touch.
Vietnam — both sides of the current struggle — is a rice-hungry land, ready to pay premium prices. Neither the volume of contraband trade, nor its impact on the co-operative movement, can be precisely measured; but both are considerable.
Cambodia’s rice is its major export. In a good year, about two-thirds of all overseas earnings are from rice sales and with prudent controls; the nation has a slight balance-of-trade surplus. In a bad rice year — like 1966 — Cambodia has an unfavorable trade balance, even with drastic import curbs.
With its rice earnings, the country can buy the imported goods on which it still depends: pharmaceuticals and chemicals, petroleum, cement, steel, textiles, cars, and some processed foods. Above all, it can buy the machinery ‘with which to produce many of these essential goods itself.
Rice not only pays for these imports; the rice farmer also subsidizes them through a complex system of currency control.
Cambodia’s rice earnings in world markets are converted to Cambodian riels at an artificial rate of 35 to the U.S. dollar, about half the free-market value. High-priority importers are allowed to buy “hard” currencies at this artificial rate, in effect buying twice as much machinery or raw materials as they could if they took their riels to, for instance, Hong Kong or some other free market.
(One grade of rice, for instance, is currently bringing $104 for 100 kilograms. This is converted at the official rate to 3, 700 riels, which then filters down to reward the farmer and the intermediaries.
(But if the farmer wanted to buy a $100 camera, he would have to buy his dollars for 7,000 riels.
(On the other hand, an industry — state or private — which needs $100 worth of high-priority machine tools may have the dollars for 3,500 riels. Middle-priority industries would pay a little more, but still less than the free rate.)
It is a complicated system, but it works — and Cambodia, in desperate need of hard currency, cannot afford to devalue the riel.
But the farmer’s return for his rice is very small, even to buy domestic goods, and far too small to allow him imported luxuries.
Yet at the same time, Cambodia wants to drastically increase its rice exports, one of the few ways to hasten the pace of industrialization. To accomplish this, two things are necessary: more investment in agriculture, and more incentive for the farmer.
Rice yields in Cambodia are terribly low. Money invested in fertilizer, better seed, better tools, improved irrigation, will pay handsome dividends, both to the farmer and to the state.
If the yield of rice per acre were doubled, the extra export earnings would more than equal the present earnings of all exports, including rice, rubber, corn, wood and various lesser products.
The farmer must not only have adequate profits (and easy credit) to invest; he must also have a profit margin high enough to offset the inevitable risks of farming, and to persuade him that the extra effort is worth it.
The problem is to put more money in the farmer’s pocket without altering the delicately balanced exchange rates.
The solution is to squeeze the profits out of the middlemen who market the rice and provide the credit: the Chinese commerçants. The tool: farm co-operatives.
Buying the Rice
For generations, the commerçants have bought and sold Cambodia’s rice. With the business astuteness, which has made them powerful and resented throughout Asia, these “overseas Chinese”, most of them Cambodian citizens, have grown rich.
Meanwhile, the Cambodian peasant remains poor. There is no real poverty: on six to twelve acres, a family can grow enough rice for its own needs, for next year’s seed, and for a cash crop of perhaps $200. But the cash will not last a year; by planting time, they must borrow.
Most commonly, the farmer sells his crop at planting time, fixing a price per kilogram far below true value. Sometimes, he must borrow at a set rate of interest. Either way, he pays in effect 6 to 10 per cent a month. Out of its $200 cash earnings, a typical farm family may pay $25 to $50 in usurious interest charges annually.
(An example given me by a Western technical expert was of a transaction he watched in an area specializing in palm sugar. A farmer came in to borrow 100 riels in November to buy shoes for his children. He agreed to repay the debt with a jar of raw sugar when the harvest was finished. That jar would be worth — if he sold it for cash in April — 160 to 200 riels. He was paying, in effect, 60 to 100 per cent interest for six months!)
Like moneylenders throughout Asia, the commerçant does not wring his debtors dry. Indeed, he is often almost a family friend, always ready to lend money, without collateral, when there is need — at a price. The farmer can always have enough to live, but never enough to save or invest.
A decade ago, Cambodia launched a system of rural co-operatives. Their initial aim was to market consumer goods, to break a rampant black market created by commerçant speculators. They played their part in this successful effort; but they grew far more quickly than competent management could be provided. The consumer co-ops reached their peak in 1958, and then began to disappear.
In 1959, the government began transforming the soundest of the co-ops into multi-purpose units. They included a scaled-down store (mostly for farm chemicals and implements), the beginnings of a credit union, and — most important — a crop marketing co-operative.
Three years ago, with 100 co-ops in existence, a campaign was launched to help them buy a larger share of the annual rice crop.
In the first three years, as the number of co-ops has quintupled, the program has already achieved a major goal: harvest-time rice prices, which used to fluctuate wildly because of commerçant speculation, have been largely stabilized. The farmer’s price during the current crop-buying season will vary from 140 riels a picul ($2.70 a hundredweight of unmilled grain) to 170 riels.
But the major share of this year’s rice crop, as in past years, is not being bought at harvest time. It was bought last summer, at planting time, by the commerçants. The price: 95 riels to 120, rarely higher.
(In Prey Veng province, with one of the most aggressive co-op systems, officials believe some farmers are breaking contracts with the commerçants, repaying only part or even none of their debts. There may indeed be a few such cases; but everything I have seen makes me skeptical that the number is significant.)
Credit remains one of the major problems.
(Last year, with only limited funds, co-ops bought rice on consignment. They loaned the farmer about 2/3 the value of his rice, at interest, and then sold the rice on his behalf later when the market was higher. For sophisticated farmers, it was a profitable system. For simple peasants, it was hopelessly complicated. In some instances, co-ops did not get enough rice to spend the modest funds advanced them by the national bank.)
This year the national bank has advanced the highest sums ever, and co-ops are buying rice at their warehouse doorsteps for a fixed price of 140 to 160 riels a picul, depending on quality. But that still will allow them to buy, at maximum, 10 per cent of this year’s crop, perhaps 20 per cent of that which is marketed rather than kept at home.
That would, in fact, be a very creditable performance, although — since it many cases it would represent 10 times as much rice as the co-ops collected last year — it seems optimistic. Even half that amount would have a further stabilizing effect on prices.
Next year, the co-ops plan to offer advances on the rice crop at planting time, in direct competition with the commerçants. They will push advances in -the form of fertilizer, but will also have cash loans available, both at low interest.
All this is indicative of growing success, and the main problem still to be overcome may be governmental impatience. The rice co-ops are growing too fast. They risk the same fate that overcame the consumer’s co-ops in 1959: bankruptcy due in part to mismanagement. The national bank is still hesitant to lend t1ne co-operative system all the money it wants; a rash of bankruptcies or unpaid debts would shatter the bank’s slowly growing confidence.
(The small number of co-ops specializing in other crops cotton, jute, palm sugar, fish — are an object lesson. They have grown rather slowly, often paralleling the growth of these crops as commercial industries. In many cases, they virtually dominate the crop, from seed, fertilizer and tools to purchase of the end product. In some, farmers have become prosperous enough that they now come in to buy fertilizer and equipment, rather than taking it on credit.)
Most importantly, according to the head of the French technical aid mission to the co-ops, they need to build up each co-op’s membership capital. So long as a co-op is run on money borrowed from the national bank, it won’t make much money — nor will the national bank be convinced that its members’ personal commitment to the operation is deep enough to warrant major credits.
(The average co-op starts with 40,000 riels, the minimum 100-riel share bought by each of the 400 members. It must usually borrow money to finish building its small office and warehouse, and lay in a modest stock of supplies. Farm credit, and purchase of crops, is done entirely with borrowed money. They borrow money from the national bank at 5 to 7 per cent, and lend it out at 9 to 12 per cent, depending on length of term. But their capital appears to be growing slowly indeed.)
Some observers, both Cambodian and Western, feel the co-op system has been successful enough that it could well take a few years to consolidate its gains.
But they are being pushed by both the elected government and Chief of State Sihanouk to garner, this year, an impossible proportion of the crop. The reason: a shortage.
Last year’s rice crop fell from 2.5 million tons to 2.3 million, largely because of unusual dryness. This year most of Indochina was hit by severe flooding, which in Cambodia wiped out a sixth of all rice fields and damaged others. The main crop this year will fall to 1.9 million tons, plus — with luck — another 0.2 million in late-season plantings behind the floods.
The government must control as much of the rice as possible, both to protect its narrow margin of profit in international sales, and to guard against a rise in consumer rice costs at home.
(The governor of each province has the power to fix retail-ceiling prices on rice, and most do. But they could probably not be held if the commerçants were to tie up stocks of rice and refuse to sell. Four years ago, the government tried setting a minimum price to farmers. The commerçants simply refused to buy, and the farmers came begging the government to let them sell their rice for less!)
Control of the rice is made more difficult by events across the border.
The Other Side of the Fence
Fifty miles west of the provincial capital of Prey Veng, the Cambodian state export firm is buying good quality polished rice at 4.8 riels a kilogram.
Sixty miles east, on the Vietnamese border, the going price is 6 riels, and they aren’t fussy about quality. Several hundred miles northeast, in the mountainous regions which lie near the Ho Chi Minh Trail, the current price is 17 to 18 riels a kilogram.
The “Sihanouk Trail” through Cambodia is a fiction. Western newsmen, diplomatic personnel and others have tramped all over looking for it in vain.
But there is a thriving traffic in rice, dried fish, and possibly small quantities of other goods.
Cambodian officials make no effort to hide the fact that rice crosses into South Vietnam, although they may understate the volume; and they are trying to block it.
(The government-owned distillery, in a semi-annual report in December, noted one reason its profits were down: difficulty in obtaining “raw materials” (grain) which was “accentuated further by the clandestine exit of rice toward South Vietnam.” And at a recent high-level government meeting on problems of contraband and smuggling, steps were planned “to put an end to certain illegal activities carried out by certain border cooperatives.”)
Not all the traffic is organized and large-scale, and not all in the areas held by the National Liberation Front. In southern Kandal province, bordering South Vietnam, most of the gasoline in service stations and kerosene in shops was for a time last year from South Vietnam. Vietnamese with access to U.S. petroleum supplies were able to make attractive barter deals with Cambodians.
Control efforts are particularly difficult in the rich rice areas of the Delta border. The government wants to be sure its farmers stay in these areas, for fear South Vietnamese –either government or Front — would take them over if abandoned. They are dangerous areas to live in, never out of earshot of battle (I heard cannon rumbling all one night from Prey Veng, 60 miles away) and subject to distressingly frequent border incursions by U.S. and South Vietnamese forces.
Winking at a little clandestine smuggling across the border by these farmers — or even farm cooperatives — is hardly too high a price to keep them contentedly at work.
The organized truck traffic to the northeast border is harder to stop, and harder to evaluate. The Cambodian army and police are notoriously badly paid, and a government would risk mutiny if it tried to stop completely the lucrative extra income from letting trucks pass unmolested.
(A trip to the border with a 10-ton truck load costs a commerçant about 5,600 riels, compared to about 1,800 riels to a legal depot at the port of Sihanoukville, nearer and over far better roads. In addition to this 3,800-riel transport premium, the commerçant or his driver must pay about 300 riels a trip in bribes to be allowed to pass with the 10-ton overload. I have been unable to learn what bribes are paid, and to whom, for clearance to pass to discharge points at the border. The figures so far add up to a 4,100-riel extra cost of delivery, against an extra profit on each 10 tons of 12,000 to 13,000 riels.)
How much rice passes to the borders is difficult to estimate. The highest guess current among informed observers here is than 50,000 tons were sold to the National liberation Front last year. The figure is hard to believe: it would mean at least 5,000 truckloads, or better than 50 truckloads a day during the dry-season selling period.
(The trucking is available: the four largest Chinese commerçant firms in Phnom Penh have fleets of 150 trucks each. They are, moreover, looking for work: one of the effects of co-operative growth this year has been to cut down the amount of trucking to and from rice mills which commerçants ordinarily handle.)
It is conceivable that Western military attaches here have failed to observe that many trucks: the roads to the border are many, and far from Phnom Penh.
Harder to believe is a current rumor than Communist China has provided North Vietnam and the Front $15 million worth of hard currencies with which to buy rice from Cambodia: enough for 200,000 tons, or at least 20,000 truckloads!
Whatever the volume, the traffic is real, and hard to stop. The newly-elected Cambodian government has taken several public moves to crack down on contraband, and is prodding the co-operatives to collect, themselves, 490,000 tons of rice, in addition to 540,000 tons to be bought by other state agencies, totaling more than half the anticipated crop.
The estimates are totally unrealistic, even were there no competition on the borders. The amount of bank credit available to the co-ops, for instance, will allow them to buy less than half the target assigned them — and many do not believe they are administratively able to use even the money allotted them.
Meanwhile, the commerçants — who have the option of selling either to the state export firm, or to the borders — have bid the price of unmilled rice paddy up to 2 ½ riels in some area, a quarter riel higher than the co-ops are paying.
Why doesn’t the government move in on the lucrative border traffic itself, capturing the extra profits it badly needs, avoiding an important loss of taxes in the current contraband, and eliminating an important factor in the uphill competition between the co-ops and the commerçants?
First, because border sales would represent a short-term market. When the war in Vietnam is over, Cambodia will again be competing with her neighbor for export markets — and Cambodia wants to take care of her regular, long-term customers, according to Son Sann, the nation’s top economic advisor to the Prince.
(This is only a partial argument. Unless the contraband is really stopped, Vietnam will get the Cambodian rice anyway, and the government will have to scratch around to find grain for its regular customers.)
Second, because border traffic is in riels, purchased on the black market, which always accompanies artificial exchange rates. Formal overseas sales (including some to North Vietnam, and some via transshipment in the Philippines to South Vietnam) are in hard currencies. In order to earn hard currency at the border, the government would probably have to grant the National liberation Front consular and commercial recognition.
Finally, Cambodia is anxious to preserve her neutrality. Neutrality implies the right to trade with all belligerents, as did Sweden and Switzerland in World War II. But Cambodia has so far failed to win formal, treaty recognition of her neutral position, and some — notably the U.S. press — have openly accused her of complicity in aiding the Front.
Cambodia apparently feels in no position to assert her full rights as a neutral — even though it might increase her foreign-currency earnings, reduce the profits of commerçants, and ease the heavy task facing the co-operative movement.
The problem will get worse this year. As U.S. forces move into the rice-bowl of the South Vietnamese Delta, destruction of fields there seems inevitable. The demand — and the inflated price — in Saigon-controlled areas could easily rise (1) sharply, adding to Phnom Penh’s woes as it tries to get control of its own rice.
A co-op grain warehouse near Prey Veng. The sign, in Khmer and French, reads “Warehouse of Our Cooperative.”
(1) At the end of January it was reported in Saigon that the price of the new domestic rice crop had risen 10 per cent in 10 days.
Received in New York February 2, 1967.
