Cambodia: Sustaining high economic growth

January 1, 2017

Cambodia: Sustaining  high economic growth 

by  Heng Pheakdey, Enrich Institute

Here Comes Cambodia: Asia’s New Tiger Economy

After decades of conflict and poverty that captured the world’s attention, Cambodia has enjoyed five years of high economic growth that is moving it toward becoming one of the new tiger economies of Asia, according to forecasts in the Asian Development Bank’s Asian Development Outlook 2016.

For the last two decades Cambodia has been one of the fastest growing countries in Asia with an average annual GDP growth rate of 8.1 per cent.

Image result for tourism in cambodia 2016

Cambodia has been highly successful in embracing the ‘factory Asia’ model of growth, supplying its low-cost labour to export-oriented industries. Economic progress in recent years has allowed Cambodia to invest in physical and social infrastructure, attract foreign direct investment, create jobs and lift millions of its people out of poverty. The Asian Development Bank called Cambodia Asia’s new ‘tiger economy’.

Cambodia’s economic performance in 2016 remained robust, with growth continuing at 7 per cent. Strong garment sector exports and foreign investment in construction drove this economic performance. Exports in the garment and footwear industries rose by 9.4 per cent in the first half of the year, almost double the pace in the same period of 2015 thanks to improved production processes and high demand from the European market. As of September 2016, the value of approved commercial projects in the construction sector more than doubled to US$7.2 billion. Imports of construction equipment and materials also increased to support the construction boom.

But solid growth in the industrial sector has been offset by a slowdown in agriculture and tourism. Unfavourable weather conditions and falling commodity prices have resulted in agriculture’s sluggish performance, which grew at a rate of only 0.2 per cent in 2014–2016. Tourism also underperformed in early 2016 due to a decline in tourist arrivals from Vietnam, Laos and South Korea. 1.3 million tourists visited Cambodia in the first quarter of the year, a mere 2.6 per cent increase compared to the same period in 2015.

Image result for Cambodia Today

The World Bank reclassified Cambodia in July 2016 as a lower middle-income country after its gross national income per capita reached US$1070 in 2015, surpassing the minimum threshold of a lower middle-income nation of US$1026. While this sign of progress should be welcomed, it comes with its own set of challenges. Analysts fear that this new classification will reduce Cambodia’s benefits from international foreign aid and preferential trade agreements that the country enjoyed while still a ‘least developed country’.

To prepare for the anticipated reduction in international assistance and trade privileges, Cambodia needs to strengthen its competitiveness, diversify its economy and upgrade its industries.

Image result for garment industry in cambodia

Although garment exports have held up well so far, the sector remains narrowly based and concentrated on a few markets, making it vulnerable to external shocks. To preserve Cambodia’s attractiveness relative to its regional competitors such as Vietnam and Bangladesh, it must diversify into higher value products and services and strengthen labour productivity to reflect the rise of the minimum wage.

The modernisation of agriculture would also help to sustain productivity in the long run. Employing more than half of Cambodia’s labour force, agriculture has contributed significantly to poverty reduction. But high reliance on rain-dependent rice production, slow adoption of quality seeds and inadequate agricultural extension services and irrigation facilities remain key constraints in the sector. Diversifying to less water intensive crops, developing the agribusiness and agro-processing industry, promoting a modernised value chain and cost effective logistics are crucial to put agriculture back on a higher growth path.

Image result for agriculture in cambodia

Efforts have been made so far to support economic diversification. The Cambodia Industrial Development Policy was launched in March 2015 to transform and modernise Cambodia’s industrial structure from a labour-intensive industry to a skill-driven industry by 2025. This implies increasing the GDP share of the industrial sector, diversifying goods exports including non-textiles and processed agricultural products and modernising the registration of enterprises. The policy also supports stronger regulations and enforcement and helps create a more favourable business environment.

Domestic investors also have an important role to play in the diversification process. Experts believe that the success of Cambodia’s economy will be driven by local entrepreneurs and the private sector, not by international donor assistance. Providing support to domestic investors in trade facilitation, logistics, infrastructure and human capital is just as important.

Cambodia faces many challenges to stay competitive. To realise its vision of becoming an upper middle-income country by 2030 requires strong commitments to address infrastructure bottlenecks, build a high-quality human capital base, strengthen natural resource management, enhance governance and improve financial services and the business environment.

Heng Pheakdey is the founder and chairman of Enrich Institute.


4 thoughts on “Cambodia: Sustaining high economic growth

  1. The future of Cambodia is tied to governance issues. Leadership must have term limits at all levels.
    Let the Cambodians decide on this for themselves.–Din Merican

  2. Do citizens need to be “given a chance” by any government to decide on good governance and public issues?

    The real question deals with how in practical terms citizens could play a more dynamic role in the issue of governance. I believe the prerequisite for active participation by the citizens lies and hinges largely on the general sense of the rights and the liberty of the population to forcefully participate in the governance matters. I must say that matters of governance must flow both ways, for government and the private citizens.

    As a keen observer of the developments in the Asian scene for so many years, it is clear that there was a strong “culture of silence” by the population regarding governance matters or government programs due to perceived fear of the various regimes. Today, thanks to the internet of world wide information system and increasing human rights, their participation in matters of governance has increased tremendously. There is a growing desire all over Asia for transparency in government operations. Cambodia is no different.

  3. I understand Cambodia is going to build the world’s tallest twin towers, 560 meters tall and 133 stories, 108 meters taller than the Malaysian Petronas Twin Towers. Does Cambodia need this world’s tallest twin towers? The current tallest edifice, the Vattanac Capital tower (188 meter, 39 stories), has a very low occupancy rate. Most inhabitants of Phnom Penh earn less than $10 a day and the rent of the average high-rise flat starts around $400 per month and many are in excess of $1000 per month. (All these figures I heard from a Hong Kong college mate last year and may not be accurate. Din can correct me if I were wrong.)

    In my opinion, Phnom Penh does not need a 133-storey skyscraper. What Cambodia needs is low-cost housing for the city’s poor, the formation of public spaces for the swelling urbanites to enjoy and a long-term plan for urban growth. But Phnom Penh is selling off of the city’s most important land to the highest bidder for a showoff world’s tallest twin towers. Am I too cynical to suspect corruption is involved?

    Affordable public housing programme along Singapore HDB lines is very much in the works here. The project you mentioned is a private sector initiative. The issue of public transport is also being studied by the Municipality of Phnom Penh and the Hun Sen government. Come over and I will show you around. –Din Merican

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