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Diversification is critical for Cambodia’s economic growth

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An aerial view of clearer skies in Phnom Penh. KT/Pann Rachana

Since the first law on investment in Cambodia was promulgated in 1994, Cambodia’s moves towards the diversification of the sources of growth and trade partners have produced only limited outcomes.

Cambodia is still heavily reliant on the garment and footwear industry as well as the hospitality industry and these cannot withstand the shocks of trade privileges being lifted or revoked or a sudden drop in  tourist arrivals.

Cambodia’s economic development and rapid reduction in unemployment, especially among women from the rural and semi-rural areas, have been largely driven by the textile industry and tourism sector.

The successful economic stories are normally associated with the capacity to diversify the sources of growth and move from a labour-intensive industry to a manufacturing industry and knowledge-based economy. Now the benchmark is higher, involving the achievement of a fully fledged digital economy.

Although the Cambodian government has put forward several policies such as an industrial policy to promote industrialisation, diversification and economic growth, it is hampered by a myriad of obstacles which makes the “Made in Cambodia” mission an uphill struggle.

In addition, the unstable global trading and economic environment, which is stagnating, and uncertainty about its future, which is also rising, adds to the problems brought about by lack of diversification.  These trends weigh heavily on countries such as Cambodia, which  depends heavily  on the production and export of a small range of products that are sold in only a few overseas markets.

For Cambodia, economic diversification is inextricably linked with the structural transformation of its  economy and the achievement of higher levels of productivity as a result of the movement of economic resources, both within and between economic sectors.

Some of the main obstacles that need to be overcome to attain the set goals are to increase productivity through skills development and transformation, reduce red tape and unofficial fees, strengthen transparency and accountability of the public sector, promote public-private partnerships and reduce the politics of labour unions.

Cambodia is export-dependent on a narrow export basket. Therefore, the uncertainty over retention of trade privileges with major markets such as the European Union and the United States, casts a long shadow over the economy. Cambodia is on a path of export instability which arises from inelastic and unstable global demand.

The International Monetary Fund (IMF) has forecast that a complete suspension of the “Everything but Arms” trade preferences would see Cambodia’s gross domestic product (GDP) growth rate drop by 3 percentage points. It will also lead to “a permanent decline in garment sector output and employment in the long-run”.

This can consequently have a significantly adverse impact on the macroeconomy of the Kingdom, especially in terms of investment and employment. Hence, export diversification is a means to alleviate these constraints because the move from “traditional” to “nontraditional” exports can help them to overcome export instability.

Export diversification matters for several reasons. First, a diversified bundle of export products provides a hedge towards price variations and shocks in specific product markets. Modifying and diversifying the composition of export products can enable Cambodia to hedge against risks.

Cambodian exporters are very much vulnerable to commodity shocks, price fluctuations and declining terms of trade and or trade sanctions.

One of the key strategies to diversify its export products is to attract more export-oriented foreign direct investment (FDI). Domestic capital and technology are not sufficient nor competitive.

FDI can encourage exports of Cambodia by boosting domestic capital for them, serving to transfer technology and new products for exports, making access to new and large foreign markets easy and improving technical and management skills.

To attract FDI, Cambodia first and foremost must reduce corruption, provide a transparent and reliable protection mechanism to foreign investors, reduce production costs such as electricity and logistics and minimise labour strikes or protests.

Negotiating Free Trade Agreements (FTA) with key economic partners is another way towards diversification. Recently, Cambodia has started exploring the possibility of negotiating FTAs with China and South Korea. If these FTAs can be accomplished within this year or next year, Cambodia could export more to these markets.

Non-tariff barriers have been another constraint for Cambodian exporters, especially in the field of agricultural products. For instance, to meet the standards such as phytosanitary is a main challenge for Cambodian exporters of agricultural products.

Cambodia needs to inject impetus on trade diversification as well as the diversification of the sources of growth by expanding the export markets to Asian economies and other regions in addition to Europe and North America.  Moreover, it is compulsory to move the development ladder from a labour-intensive industry to a skill-based economy and fully fledged digital economy.

These reforms start with political will and commitment. To deliver results, it requires strong and clear leadership. State leaders should be held accountable if economic reforms do not produce results as expected. It will no longer be business as usual.

As the World Bank says, economic diversification is inextricably linked with economic development and poverty reduction and success will be crucial for Cambodia as it  seeks to increase the number and quality of jobs in the face of a rapidly rising and youthful working population.

The young work forces need jobs. No jobs means no political stability. Economics determines politics.

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