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Looking for a more accurate measure of economic progress

Gerald Flynn / Khmer Times Share:
The road to becoming a middle-income country by 2030 looks challenging for Cambodia

After several consecutive years of what many have dubbed astonishing growth, Cambodia’s economy is set to take a mild dip – dropping below 7 percent gross domestic product (GDP) growth for the first time in almost a decade.

Figures from the World Bank, the Asian Development Bank (ADB) and the International Monetary Fund (IMF) all look remarkably similar, predicting 7 percent growth for 2019, but dropping to 6.8 percent in 2020 and either 6.7 or 6.8 in 2021, depending on who you ask.

Official statistics from the Royal Government of Cambodia (RGC), however, paint a slightly different picture: 7.1 percent for 2019, 6.5 percent in 2020 and back up to 7 percent in 2021. Notes from a meeting on the 2020 national budget seen by Capital Cambodia suggest that the GDP figures set out by the government for this year have been manipulated. The note reads “IMF predicted 6.8 pct [percent] for 2020, but for us we, Cambodia, should say 6.5 pct [percent] instead because we will have better look if we can achieve to higher level after all. [sic]”

Deliberately altered figures aside, the differences are minimal, but not altogether inconsequential – the chief factor involved being the EU’s final decision on the infamous Everything But Arms (EBA) preferential trade status, which is expected to be announced on Feb 12, 2020. While the World Bank, the ADB and the IMF have confirmed they did not factor in the EU’s potential revocation of EBA, the Hun Sen administration claims to have done so when generating its own figures for growth.

 

Human welfare

 

While Cambodia’s GDP growth looks good on paper – daunting almost – there is much that goes unrecorded by the global standards of economics. Sure, the Kingdom has exceeded many expectations in terms of economic growth, but issues such as inequality, poverty, natural resource management and human welfare are not accounted for by GDP.

As 2019 drew to a close, Nobel Laureate in economics, Joseph Stiglitz, wrote in The Guardian newspaper: “It is clear that something is fundamentally wrong with the way we assess economic performance and social progress. Even worse, our metrics frequently give the misleading impression that there is a trade-off between the two; that, for instance, changes that enhance people’s economic security, whether through improved pensions or a better welfare state, come at the expense of national economic performance.”

This timely observation is not a new one – back in 1968, it was the late US Attorney-General Robert Kennedy who said that GDP “measures everything in short, except that which makes life worthwhile.”

While Kennedy may have been guilty of employing some emotive rhetoric, the numbers only serve to emphasise his point. Some 91 percent of the economic gains made following the 2008 financial crisis went directly to the world’s wealthiest 1 percent, yet the GDP figures made it look as though we were on the road to recovery.

Since the 1960s, the global GDP has increased more than 5,000 percent, yet inequality has advanced disproportionately as well. Senior members of the Hun Sen administration upload photos and videos of their luxury imported vehicles and decadent yachts, while tuktuk drivers sleep in homemade hammocks on any given street of the capital and fishermen bemoan the slow, sad death of the Mekong as their boats come back empty of catch.

The disparity is visible to the naked eye – from the glistening skyscrapers of Phnom Penh to the makeshift schools crafted from tarpaulin – so does the GDP take this into account? It can’t.

 

Visible disparity

 

Income inequality is often measured through the Gini Coefficient, which astutely points out the failing in typical economic measures of wealth as it aims to measure equality, whereas GDP is a measurement of prosperity.

The GDP of two countries may be similar, but if the wealth of each nation is distributed unevenly, then the Gini Coefficient will highlight this where the GDP figures won’t.

Cambodia’s Gini Coefficient scores have drastically improved – scoring 40.4/100 in 1997 to 29/100 in 2012. The closer to zero the score, the greater the equality in distribution of wealth. This being said, the average household income in rural areas is still just 60 percent of the average urban household income, with 80 percent of Cambodians living in rural areas.

“It’s absolutely fair to say that GDP can’t be the end all and be all – you have a measure of the economy that doesn’t account for distribution,” argues Sophal Ear, an associate professor in diplomacy and world affairs at the Occidental College in the US.

“If one person caused 6 percent GDP growth, there’d be no way of telling if it was that one person or the entire country. GDP is a 20th century measure. The real wealth of a nation is its people. How are they doing? Do they have freedom and democracy?” Ear asks.

 

Structural reform need

 

Similarly, the GDP measures that the RGC has staked its political future on is looking rocky for 2020.

With various sanctions flying in from the West over alleged democratic backsliding and a global deterioration in trade courtesy of the ongoing Trump-Xi standoff, many analysts point to a need for structural reform within Cambodia if it is to weather the economic storm that lies in wait.

2019 saw a 78 percent rise in construction investment from 2018 as it reached $9.3 billion. Much of this has become the preserve of China, with Chuenboran Chanborey of the Asian Vision Institute noting that Phnom Penh has become convinced that Asia will be China-centric in the future.

“This is mostly due to China’s size and Phnom Penh wants to place Cambodia on the right side of history,” he said earlier in 2019, addressing a crowd at the Royal University of Phnom Penh following the launch of a book he co-authored.

Chuenboran went on to say that China had become Cambodia’s largest benefactor, in terms of official development aid, foreign direct investment, tourism, the rice market and technical assistance.

In the book, The Belt and Road Initiative and Its Implications for Cambodia’s Development Chuenboran asks the question, “If not China, then who?” to which he answers himself by noting that no other foreign power has invested as much in the development of Cambodia as China.

It is this that Ear is concerned by.

 

Chinese investment

 

“I’m afraid what they [Cambodian workers] have these days is more Chinese competition than ever for their jobs, and not just from an offshoring perspective, but within their own country which raises all kinds of questions: if a Chinese worker from overseas causes economic growth, is that the same as if a Cambodian enjoyed that growth? Of course not,” argues Ear, who adds that even should you accept GDP as an adequate measure of economic growth, then the amount of money lent by China ought to have generated far more growth.

The Chinese have allegedly invested $12 billion in the Kingdom, according to Yan Meng Han – a secretary assistant in the Chinese Chamber of Commerce in Cambodia.

“Not only in Cambodia, but China has made a big change with the BRI [Belt and Road Initiative] in the world, within the past year. Companies from China decide to go abroad, to bring their technology and resources, however, we do realise it can be harmful to China’s image and that we should contribute by putting out more of our culture, not only money or technology,” Yan admits, and he estimates that private investments from China had increased by $2 billion from 2018 to 2019.

The line between private and government investments from China is murky, as Ear points out.

“China can rein things in by not permitting the projects to obtain funds. All these private projects have to move funds out of China and to Cambodia to finance the project. Well, money doesn’t move out of China in large quantities unless there’s a reason or a connection involved. They’re notorious for capital controls. Nobody but nobody gets to do multi-million dollar projects without backing from somebody in the Chinese state, i.e., the Communist Party.”

 

Debt trap

 

While the Belt and Road Initiative has garnered significant criticism, many analysts have warned that Cambodia may be falling into a debt trap by accepting such heavy investments from China.

“It takes a Mahathir to rein in BRI to make it work for Malaysia, not a Hun Sen. It takes a strong hand. Right now, he [Hun Sen] is struggling to just keep things from boiling over with an opposition leader in France who just has to say he’s coming home to cause deployment of troops. I think the reality distortion field is strong in the ruling party,” suggests Ear, who maintains that anti-Chinese sentiment in Cambodia is yet to have any tangible impact on the progress of Chinese investments. On this, Yan agrees.

“For Chinese investors there is a big element in making investments abroad. The government has a continuous policy, so the private investment will not stop. Because Cambodia is a good country to invest in, Chinese investors do believe that Cambodia will have a good GDP rise,” he says.

This in turn begs the question – if Cambodia’s illustrious GDP figures rest so heavily on Chinese investment that seemingly fails to bring much in the way of benefits to the average Cambodian, then how can GDP be a measure of the Kingdom’s economic health?

The Global Institute For Tomorrow (GIFT) is an independent pan-Asian think tank that recently published a study on current issues Cambodia faces for sustainable growth through the GIFT 2019 Asean Young Leaders Programme.

 

Reliance on FDI

 

The 78-page study outlines key challenges for Cambodia to address across multiple sectors.

“Cambodia’s position in the global economy can be unstable, due to its reliance on FDI [foreign direct investment]-driven manufacturing, which may leave if costs rise. Global expansion has also opened Cambodia’s environment to damage and exploitation and affected local culture” the report states.

It goes on to cite the potential for catastrophe presented by climate change, as well as listing the growth of Asean and the shift to digitalisation as key drivers of change that could further widen the gap between rich and poor, between urban and rural and exacerbate other issues not detected by GDP measures.

Cambodia’s aim to become a middle-income country in the short space of a decade will hinge on the ability of its leaders to see beyond mere numbers. If the Kingdom is to rise to the challenges of 2020, it must first acknowledge that a country’s wealth cannot be measured by GDP alone.

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