The key to integrating Cambodia into global value chains

Sok Kha / No Comments Share:
(Xinhua/Sovannara)

Since its return to a market-oriented economy in 1989, Cambodia has pursued policies and reforms to integrate itself into regional and global value chains by modernising its industrial structure. The latest and most important ‘economic growth strategy’ — the Industrial Development Policy 2015–2025 (IDP) — aims to reinforce this pursuit, but greater efforts are still needed.

The IDP lays out ‘key concrete measures’ ranging from reductions in electricity costs, enhancement of connectivity in transport and logistics, and improvement to the labour market and skills.

Past attempts to address these challenges have seen some success, leading to a significant economic transition over the last two decades and the diversification of Cambodia’s export outputs and destinations. The country exported 1215 product categories to 149 international markets in 2016 compared to the 680 product categories it exported to 94 international markets in 2001.

But reform momentum has not always been as strong as it could. While the IDP provides a broad policy framework, detailed implementation strategies are lacking. The IDP delegates actions to various line ministries, but these actions are described in broad statements with few details. For many IDP actions, delegation to multiple ministries — as many as six — leads to accountability and coordination issues.

It is no longer ‘business as usual’. Relying on vast arable lands, the relative abundance of natural resources, inexpensive labour and preferential trade treatments will become a thing of the past. A shift in the regional and global landscape and dramatic developments in digital technology present new opportunities and challenges. They will have significant implications for Cambodia’s path toward integration into regional and global value chains.

While the menu of new priorities is long and daunting, the government should consider galvanising reform momentum to developing private sector capacity.

Cambodia benefits from membership of the increasingly integrated ASEAN and Mekong sub-region through geographical location, greater and more secure overseas market access and a relatively liberalised trade and investment regime. Yet the supply chain linkages between domestic and foreign firms remain insignificant.

Cambodia’s ranking of 185 out of 190 economies for ease of starting a business is worrisome. The nine procedures involved in starting a business take almost four months. This has led to significant rates of informality in the economy — over 98 per cent of businesses with less than 10 employees are unregistered. The high rates of informality make any effort to connect domestic businesses to regional and global firms challenging, and masks the severity of business regulation constraints. This includes business licensing and operating permits, customs and trade regulations, tax rates and tax administration, regulatory policy uncertainty, corruption, and anti-competitive and informal practices.

The Anti-Corruption Law adopted in 2011 and the creation of the Government’s Anti-Corruption Unit are yet to produce significant reductions in corruption. Businesses are concerned that the government wants more information about them to tax and regulate instead of assist. The government must engage and build more trust with small business communities in a consistent, transparent and supportive manner.

The growth in bank credit to the private sector has risen, but much has been directed to construction and real estate-related activities at a combined 35 per cent in 2018. The share for agriculture and manufacturing is much lower, at 0.6 and 0.4 per cent respectively. The credit constraints hinder export diversification by constraining growth in sectors where access to finance is particularly challenging. It is preventing businesses’ ability to expand, invest in new equipment and technology, gain access to foreign markets and manage their liquidity efficiently.

Cambodia requires better credit management and legislation that allows more financial flows for investment in manufacturing. Trade financing must be encouraged further to help small and medium-sized enterprises (SMEs). Further donor technical assistance must be mobilised to help SMEs develop products that are more competitive for exports.

Increasing the supply of educated entrepreneurs is equally important. It will help the private sector be more efficient and dynamic, and such entrepreneurs are more likely to create modern and registered businesses rather than inefficient and informal ones. The country can then mobilise foreign technical assistance to complement investment in business incubators.

Strengthening industrial human resources and reducing trade costs are also important remedies. With economic growth pulling up labour costs, the official minimum wage level has risen commensurately over the years, eroding the country’s competitiveness with other low-wage countries. Labour productivity must improve to catch up with wage inflation.

It is crucial to bolster investment in specialised education and advanced technical and vocational training and develop curricula in collaboration with industry experts. The public-private partnership investment model must also be encouraged, such as using public funds to contract out the management of public schools, with subsidies tied to student performance. Information should also be provided for parents and students to help them make informed decisions and reduce the information asymmetry that currently exists. Information on returns to education, training and educational quality can be a low-cost method to overcome mismatches and lead to a better allocation of students and ultimately improved skills. Targeted information must be credible, clear and concise.

The vast regional transport network already in place compels Cambodia to improve and develop its transport infrastructure and operations and strengthen the capacity of all institutions engaged with it. An upgraded logistics sector will provide new value-add to the manufacturing base by lowering costs, stabilising the times of cross-border transport and providing more modes of transport.

Going forward, these private sector development measures must build up momentum to embed Cambodia’s ‘factory’ economy deeper in the regional and global value chains.

Sok Kha is research fellow at the Asian Vision Institute (AVI). This commentary first appeared in East Asia Forum.

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