Karishma Banga (Research Fellow, ODI ) and Dirk Willem te Velde (Principal Research Fellow, ODI)
7 July 2020
Cambodia has one of the lowest numbers of coronavirus cases in the world but it is facing among the world’s highest economic losses in the wake of the COVID-19 crisis. The IMF expects incomes to contract by 1.6% in 2020 in the baseline scenario as a consequence of major disruptions in tourism, garments and construction. Some sectors are expected to fare better, such as information and communication technology (ICT) and e-commerce, but these industries need to be nurtured more actively and the opportunities need to be made more inclusive if they are to be a significant base for a prosperous and more inclusive recovery.
The Royal Government of Cambodia is preparing a long-term policy framework for the digital economy. Over the past year, ODI and CDRI have supported this process (supported by the Australian government) using analysis, case studies, a background report, interviews and a set of roundtables, including with the government’s digital economy task force. A new study aims to inform this process by providing a range of policy suggestions for the policy framework, which has taken on increased significance in the context of COVID-19.
COVID-19 has had a major impact on Cambodia, through the channels of manufacturing and services. Emerging evidence highlights the negative economic impact of the pandemic on tourism, construction and business services, with fewer impacts on insurance, financial, telecoms and computer-related services. Revenue at Angkor Wat (a major source of tourism revenues) fell by an astonishing 99.5% at the start of the crisis. Within manufacturing, garment exports have been particularly hit, owing to falling demand from retailers in Europe and the US coupled with reduced access to inputs from China. The Garment Manufacturing Association in Cambodia has reported the suspension of operations by many garment factories. More than 150,000 workers were suspended in May without any clear indication on whether or when work would resume. The withdrawal of Cambodia from the Everything But Arms initiative may further affect Cambodian exports to the EU.
However, a range of services industries could help mitigate the impact of the economic crisis:
- Communication and audio-visual services, including digital animation: Cambodia has a small number of interesting high-quality providers of animation services.
- IT-enabled business process outsourcing (BPO) services: Cambodia’s IT industry is located in the BPO segment, offering services to international clients, such as in data processing, data analysis, document processing and non-voice call centres (e.g. chat services or IT support).
- Post and telecoms for e-commerce: Cambodia has the highest internet connectivity growth in the Asia-Pacific region and a very young population, which allowed most e-commerce ventures to reach a clientele of 15,000 consumers in 2017. E-commerce has enabled Cambodia to diversify its export basket of manufacturing products. Given cargo delays and border closures during the pandemic, it is important for Cambodia to leverage domestic platforms, such as Tinh Tinh. This may enable greater micro, small and medium-size enterprise (MSME) participation in e-commerce platforms, which has otherwise been low as a result of the high cost of membership and the commission charged on third-party platforms.
The government’s long-term strategy for the digital economy for the decades ahead needs to harness the digital economy and also target closing the digital divide by boosting an inclusive digital transformation in the wake of economic losses from COVID-19. Currently, there exists a multi-faceted digital divide in Cambodia; firms’ adoption of digital technologies is lower than comparator companies; business and financial services are more digitalised than other industries; internet access is mainly dominated by the 15-25 age group; and there exist specific gaps in the availability of digital skills. To leverage digital industries in the COVID-19 recovery, a report by ODI and CDRI lays the foundation (see summary here) for a seven-point plan for inclusive digital transformation:
1. Radically transform innovation in the manufacturing sector. In response to the crisis, there is a need to leverage digital technology and innovation to adapt existing local manufacturing capabilities in Cambodia towards much-needed medical equipment and personal protective equipment manufacturing for domestic consumption and export. The government needs to support manufacturers in changing current production lines towards production of essential goods to deal with the pandemic. A new incentives package (offering an ecosystem that encourages digital technology) can help attract technologically more intensive investment, encourage upgrading technology in factories and promote relevant skills, for example through an enhanced Skills Development Fund and targeted technical and vocational education and training placements. It could also embrace the concept of digital small and medium enterprise clusters.
2. Provide appropriate and good quality skills for the future. The pandemic is fuelling e-commerce growth in Cambodia, with the potential to create new employment opportunities. For instance, Grocerdel – an online start-up that delivers fresh farm produce in Phnom Penh – has seen its sales go up by over 165%, and has had to increase its staff intake by 50% to meet the spike in demand. Establishing and bringing new dynamism into the sector skills councils to embrace a digital economy would be a helpful, targeted measure. Skills development in the digital age requires supply-side policies on education and skills and demand-side policies on innovation and research and development, along with the facilitation of linkages between the supply and demand of skills through institutional intermediaries and complementary policies on technology transfer. There will also need to be more emphasis on education through digital means.
3. Nurture the digital start-up economy for an inclusive economy. The start-up economy in Cambodia is very dynamic but a challenge lies in seeking a better link between this and how it delivers for the poorest. Several organisations already support or invest in tech start-ups. New incentives by the government for collective action by start-ups could redirect some efforts to develop apps with relevant applications for the poorest. According to the Ministry of Commerce, the government has reduced the cost of registration by 40% to ease the burden of formalisation for start-ups (UNCTAD, 2020). The digital start-up economy will be essential to advancing Cambodia’s recovery from the fall-out of COVID-19.
4. Facilitate digital infrastructure development to enable the most vulnerable groups to take part in the digital economy. In response to the pandemic, businesses are increasingly shifting online, people are being asked to work from home and there has been a rise in e-commerce activities and digital work – all of which is placing pressure on existing digital infrastructure. Targeted policies are required for digital infrastructure development during the crisis. For instance, Cambodia has very low fixed-broadband penetration and low mobile broadband penetration compared with other Asian economies, and its market is currently dominated by low-quality residential broadband services. Targeted support is also required to ensure that those who lose out from new technologies in industries can take part elsewhere in the economy. This could take the form of rolling out digital infrastructure to those who need it most or raising digital literacy in vulnerable groupings.
China is an important player in Cambodia’s digital development plans; in March 2019, Cambodia signed an agreement with Chinese Huawei to develop 5G mobile network technology in the country. This was followed by an announcement in July of collaboration between Smart Axiata, Cambodia’s leading mobile telecommunications company, and Chinese Huawei in building the 5G network in Cambodia. Wuhan – the worst hit city in China by COVID-19 – is the world’s largest supplier of fibre optic cables. Therefore, development of digital infrastructure in Cambodia may itself be affected by the pandemic.
5. Ensure a public sector that leads by example. Digital leadership will be very important in the next few years as Cambodia manages its economic recovery after the pandemic. Managing the process towards a new framework for a digital economy in a coordinated way is essential. Currently, for instance, the government is finalising an e-commerce strategy for Cambodia with the support of the Enhanced Integrated Framework, involving various key ministries. Institutional strengthening inside the government around the digital economy, and securing a lead role of the Ministry of Economy and Finance, working with others such as the recently upgraded Ministry of Industry, Science, Technology and Innovation (MISTI) will be vital. It is also important for the government to progress on e-governance and electronic services by accelerating efforts towards adopting its e-Government Master Plan 2017–2022. E-government services can make it easier for consumers to pay their bills online and reduce evasion, coupled with better monitoring of tax collection. This can ultimately lead to increased government revenue, which can be spent on support to the poor, particularly during the pandemic.
6. Digitalise trade facilitation and boost e-commerce. All trade-related agencies must adopt and deploy the ICT system to simplify and automate their trade-related procedures, which will contribute towards building Cambodia’s economic resilience against pandemics, climate change and other challenges. Currently, there is an absence of coordinating institutional mechanisms, though some efforts are being made to leverage the digital economy for trade facilitation. E-commerce can help mitigate some of the economic losses that Cambodia faces in traditional sectors owing to the pandemic but inclusive recovery from the crisis will require targeted efforts to increase participation of MSMEs in the digital economy. This can be done by increasing their access to domestic and international digital platforms, addressing challenges pertaining to information asymmetry between platforms and sellers, providing training in digital skills, facilitating digital payment uptake and addressing issues around transport, logistics and delivery.
7. Revise and extend social protection mechanisms to the most vulnerable, who are most at risk of losing their jobs owing to the pandemic. It is key to note that digital technologies can help improve the viability and efficacy of policy solutions, including those facilitating the extension of social protection. In the longer term, digital technologies can support an increasingly harmonised social protection system, which can facilitate better coordination across IDPoor, the National Social Security Fund and other cash transfer and social assistance programmes.
In conclusion, the Royal Government of Cambodia can facilitate to use the digital sector to recover from COVID-19. By following the sevens steps above, it can facilitate an inclusive digital transformation that can foster a more inclusive and resilient future.
Photo: Use of digital technology as key tool to facilitate an inclusive digital transformation to recover from COVID-19. Roxana Bravo / World Bank. CC BY-NC-ND 2.0.