Within the context of looming economic pressures from the European Union and possibly also from the United States, some news analysts and observers have drawn a quick conclusion that Cambodia’s economy is bound to collapse. Looking at the country’s overall economic health, Cambodia could still thrive even without preferential treatments from the EU.
As a least developed country, Cambodia was granted the Everything But Arms (EBA) scheme in 2001 to export its products to the EU market duty free and also quota free. Last week, the EU decided to officially launch the procedure to temporarily suspend trade preferences to Cambodia under EBA. If there is no positive outcome from the bilateral negotiation, EBA will finally be revoked. Cambodia has 18 months to adjust and adapt to the economic fallouts and impacts in the post-EBA era.
Cambodia has adopted a free and open market economy since the early 1990s. After about three decades of reforms and international integration, the Kingdom has enjoyed high economic performance, with an annual growth rate of more than 7 percent. The poverty rate has been reduced to less than 10 percent.
Within the circle of policy-makers, there is a firm belief that reforms and opening-up are necessary factors for economic development and poverty reduction. And as a least developed economy, Cambodia has been granted preferential tariff schemes that have enabled it to export its products, mainly textile and footwear products, to the markets in the EU and the US.
Cambodia is on the path to graduate from its LDC status in the next few years and the removal of trade preferences is expected sooner or later. Therefore, the threat to remove EBA from Cambodia is not a shocker rather it is a pressure for Cambodia to accelerate its reforms to increase productivity and competitiveness. In order to achieve this, the climate for business and investment must significantly be improved.
Recently, to mitigate the risks of the evocation of EBA, the Cambodian government has taken some concrete measures to reduce trade barriers such as the reduction of red tape. Customs reforms are regarded as top priority in the whole ambit of government reforms. Improving the environment for business and investment, increasing productivity, and reducing barriers and cost associated with trade would need urgent attention and intervention from the state.
As Cambodian economist, Kong Ratha, wrote, “Cambodia should not be too much reliant or dependent on ODA or concessions, but strive to be more competitive and be on par with others in the region”. He added, “It is a golden opportunity for rigorous international structural and regulatory reforms”.
The government should take its cue from Mr Ratha as it develops roadmaps to implement the Industrial Policy and Rectangular Development Strategy 2018-2023 so that it can diversify its sources of growth and expand its export markets. Currently Cambodia’s main export markets are just centered on the EU and the US, which make Cambodia vulnerable to external pressures and shocks.
It is high time that Cambodia effectively hedges against the potential risks and vulnerabilities deriving from unilateral coercive economic measures by the EU and the US. Due to this, a hedging strategy must be central to Cambodia’s foreign policy. Economic autonomy defines strategic autonomy and economic independence determines political independence.
Cambodia’s economy has been gradually moving from a labour-intensive one to an economy that is knowledge-based. The service sector now accounts for about 50 percent of GDP. The annual growth rate of the service sector is more than 7 percent from 2014 to 2018.
As it is, Cambodia’s fundamentals are good and must be built upon. The economic pressures from the EU should be looked upon as an opportunity for Cambodia to accelerate its economic restructuring towards a knowledge-based economy and skill-driven industrialisation.
The advantages and strengths of Cambodia rely on its dynamic and entrepreneurial young workforce. As education reforms and skill development programmes get on the right track, Cambodia will be able to produce a new generation of young, skilled workers in the coming years.
Regional integration remains one of the key pillars of Cambodia’s foreign economic diplomacy.
As Cambodia’s economic lifeline is increasingly connected with Asean and Asia, the most dynamic region in the world, Cambodia’s future will largely be defined by the Asian economic powerhouses. Currently, Asean is the sixth largest economy in the world and by 2030 it is expected to be the fourth largest after China, US and the EU.
The consolation is that economic pressures from the EU on Cambodia would not greatly affect investors’ confidence as Cambodia will be able to adjust itself to changes. Foreign investors should be confident of the future economic trend and dynamics of Cambodia.
Light manufacturing, high-tech and the service industries are key areas that foreign investors should be looking at as the Cambodian government in cooperation with development partners put more resources in building hard and soft infrastructure to support the Kingdom’s industrialisation and modernisation processes.
To build economic resilience, Cambodia needs to diversify its sources of growth and economic partners, develop an effective hedging strategy against future risks and uncertainties, strengthen good governance, develop clear pathways to deliver reform results, build infrastructure, and invest in human capital and skills development. At the political and social level, the government needs to revive its philosophy on self-reliance and patriotism.