Dirk Willem te Velde (Principal Research Fellow, ODI)
24 April 2019
Unless Cambodia addresses a number of short- and long-term challenges related to the impact of trade, technology and China, future pathways for inclusive economic transformation are at risk. As we discuss at greater length in a new SET scoping note in co-ordination with CDRI and support by Australia’s Department of Foreign Affairs and Trade, Cambodia has been the sixth-fastest growing country in the world over the past two decades. It has reduced poverty and inequality significantly and it graduated to lower-middle-income country status in 2015. It has achieved remarkable growth in exports of garments, attracted record numbers of tourists, expanded agricultural land leading to significant exports of rice, benefited from high commodity prices and recently witnessed a construction boom. It has also shown signs of diversification into bicycles, footwear and, to some extent, maize, vegetables, sugar and palm oil. Special economic zones (SEZs) have played a crucial role in kickstarting manufacturing. However, Cambodia currently also faces major challenges to its hitherto successful growth model and these need a response. The challenges can be summarised as trade, technology and China. In the coming months, ODI and CDRI will examine the implications of digital technology for Cambodia’s future transformation in greater detail, building on our recent consultations.
Cambodia faces the removal of trade preferences in the coming year, if the EU decides to withdraw Everything But Arms preferences as a result of human rights considerations. Cambodia’s exports to the EU make up two fifths of total goods exports. Most-favoured nation tariffs in the EU are 12% on garments and between 8% and 17% for footwear, but so far Cambodia faces zero tariffs. Garments support 700,000–800,000 mostly female low-skilled jobs. Anything that affects the garment sector has direct implications for inclusive economic transformation.
Our interviews in Cambodia for the scoping paper suggest that preferences are perhaps not as important as previously considered, at least in the short run. If firms can absorb a change in minimum wages from $60 in 2010 to $182 per month currently, they may also be able to absorb the (smaller) changes in preferences. However, it is likely that a loss in preferences would lead to lower sectoral growth than would otherwise have been the case. Hence, Cambodia needs urgently to improve competitiveness by enhancing skills, improving infrastructure and streamlining regulation and licences (and in addition to improving its human rights record).
The digital economy is advancing rapidly globally, and low- and lower-middle-income countries will not be excluded. Cambodia aims to become a digital economy, although this may take some time. Rather than fearing the labour impact of digitalisation on labour-intensive SEZs and garment activity, Cambodia needs to harness the digital economy for its competitiveness. One core element in this is the importance of ensuring the appropriate skills are available (especially cognitive skills to undertake non-routine tasks).
Our discussions in Cambodia suggested there is no agreed policy framework within which to consider how Cambodia can prepare for a digital economy in a comprehensive way. Cambodia needs to consider the future of specific sectors and activities; who would be the main gainers and losers from this; how skills can be developed to prepare for a digital economy; and especially how the poorest can also benefit from digitalisation. Interviews with manufacturing firms suggest there is still little awareness of the changes that may come sooner rather than later.
Prime Minister Hun Sen recently held a speech at a Cambodia Development Resource Institute conference on digital transformation. He argued that actions to date include the development of the Cambodia Information and Communication Technology Masterplan 2020, the drafting of the Cambodia e-Government Master Plan, the establishment of a Data Management Centre and the promotion of a legal framework for the digital ecosystem. But there are also challenges, such as building infrastructure to support the digital sector; developing an e-payment system and logistics network; creating a digital platform and developing an ecosystem; and promoting government digitalisation, entrepreneurship, digital literacy and open data. The Supreme National Economic Council has established a working group to formulate a digital economy policy framework. Cambodia needs to act urgently to become more engaged in the digital economy.
Cambodia has turned to China in recent years for economic support. On the one hand, this can lead to significant benefits. China brings billions of dollars of investment to Cambodia (responsible for much more than half of foreign direct investment in recent years), catering to 2 million Chinese tourists in Cambodia; investing in hotels and casinos; investing in SEZs whose firms utilise low-cost labour and trade access in the EU and US; and offering a large market for Cambodia’s exports.
But such engagement increases dependencies and may fail to bring significant benefits for Cambodia’s economic transformation. For example, the firms in the Sihanoukville SEZ have few incentives to upgrade, and have few linkages with the local economy, posting questions related to transformation in the future. The casino economy may cater to Chinese tourists, but it is not clear how this helps transform Cambodia’s economy. Complementary policies (e.g. innovation policies, skills development, casino taxes) are crucial to ensure engagement with China supports economic transformation.
The SET programme will in the near future engage around Cambodia’s economic transformation, especially with respect to the opportunities and threats of the digital economy and the implications for policies.
Photo: The Special Economic Zone in Khan Posenchey, Phnom Penh. Chhor Sokunthea/World Bank. License: CC BY-NC-ND 2.0.