Cambodia needs to diversify

By Pheakdey Heng
Published in Khmer Times on February 28, 2018

Photo: KT/Ven Rathavong

The Kingdom can no longer depend on the same old growth drivers to sustain its economy if it wants to move into higher value-added production and climb up the global value chain, writes Pheakdey Heng.

After it graduated from Least Developed Country status in July 2016, Cambodia’s economy has remained healthy with a GDP growth rate of 6.9 per cent in 2017. This was driven by the recovering tourism sector, the ongoing construction boom and the gradual emergence of non-textile exports.

During the first 10 months of 2017, Cambodia received 4.3 million international tourists, which is up 10.4 per cent compared with the same period in 2016. This was partly due to newly-established direct regional flights as well as government initiatives to boost arrivals.

The construction sector continues to grow robustly: investment into the sector during the first 10 months of the year reached US$6.26 billion, which is a 27 per cent increase over the same period in 2016. Exports of machinery and auto parts picked up. The number of factories dedicated to electrical machinery and auto parts increased from 46 in 2012 (5.1 per cent of manufacturing) to 121 in 2017 (7.1 per cent of manufacturing).

Growth in clothing and other textile exports decelerated to 5.4 per cent in the first half of 2017, compared with the 8.4 per cent growth rate in 2016. Textile exports have also eased in volume terms to a growth rate of 3.6 per cent in 2017, which is down from 2016’s figure of 12.3 per cent.

The slowdown in textile exports reflects a decrease in productivity, an increasingly competitive global market, the high cost of transportation and energy as well as rising labour costs. The minimum wage for the garment and footwear sector is $153 a month and will increase to $170 a month in 2018. This will make the minimum wage in Cambodia higher than that of other countries with large garment industries – such as Bangladesh and Myanmar.

The 2017 Global Competitiveness Report ranks Cambodia as one of the least competitive countries in Asean. Hampered by a poorly educated workforce, inefficient institutions, a lack of infrastructure and low levels of business sophistication and innovation, Cambodia ranked 94 out of 137 economies – falling from 89 in the previous year’s report.

It is clear that Cambodia can no longer depend on the same old growth drivers. For the last two decades, Cambodia has relied on garments, rice, tourism and construction as its growth-supporting industries. This provides limited sectoral diversity and exposes the economy to demand disruptions and price shocks.

Cambodia’s export base is currently narrow. Garments account for almost 70 per cent of total exports and are primarily destined for US and European markets, which exposes Cambodia’s economy to sector- and country-specific shocks. Siem Reap (the home of Angkor Wat) and the capital Phnom Penh are the country’s biggest tourist draws by far, which highlights the tourism sector’s lack of diversification.

To sustain long-term healthy growth, Cambodia needs to diversify and upgrade its economy. In addition to garments, Cambodia also produces other goods with great export potential: these include pulp paper, machinery, bicycles, plywood, maize, vegetables, sands, sugar and palm oil. These emerging products are currently exported in small quantities but will soon become more competitive and provide opportunities for future growth and diversification. Similarly, Cambodia can channel investment into developing additional potential tourism destinations such as the coastal areas of the southwest and the mountainous northeast provinces. There is also the potential to develop the surrounds of Tonle Saps and other eco-tourism sites across the country.

Moving into higher value-added production and climbing the global value chain will require sustained improvements in infrastructure, human capital and governance. While Cambodia has made progress in improving its infrastructure network, it remains one of the least developed in the region. Additional investment is greatly needed to improve the quality of road, air and sea transport infrastructure and to cut the cost of electricity – which is among the highest in Asean.

Stronger human capital is vital for facilitating economic diversification and job creation. Cambodia’s education system is weak and government expenditure in this sector is comparatively low. Skills mismatches and gaps in the labour market are also evident. Cambodia has opportunities to enhance the quality of learning and increase the educational attainment of its workforce. Education reforms should focus on improving accreditation and quality assurance mechanisms, introducing incentives to prioritise science- and mathematics-based subjects and research, providing market-relevant technical and vocational training and encouraging the teaching of workplace soft skills – such as communication, problem solving and teamwork.

There are also opportunities to improve the regulatory framework for doing business in Cambodia.

Some progress has already been made: the government made starting a business easier by simplifying company name checks, streamlining tax registration and eliminating the requirement to publish the new company’s incorporation in the official gazette.

Cambodia must do more in order to reduce corruption, strengthen policy stability and cut logistical costs — all of which complicate business in the Kingdom.

Pheakdey Heng is the founder and chairman of Enrich Institute. This article is part of an East Asia Forum special feature series on 2017 in review and the year ahead.