A lead economist working with the Asia Development Bank (ADB) has said that Cambodia needs to rethink its economic model, which is heavily based on export-driven growth, as it prepares to shed least developed country (LDC) status, a transition that is expected to take place by 2030.
Jayant Menon, a lead economist within the ADB’s Economic Research and Regional Cooperation Department, said yesterday that Cambodia’s recent ascension to a lower middle-income economy, according to the World Bank, was undoubtedly good news, but presents a number of challenges the kingdom needs to start considering.
“This is the good news, but it poses a question: Does Cambodia need to rethink its model of export-driven economic growth, as preferential access for its exports to developed countries is gradually reduced or as aid flows diminish? Not necessarily, at least for now. But it should start preparing immediately,” Mr Menon wrote.
Ken Loo, the Secretary General of the Garment Manufacturers Association of Cambodia (GMAC), told Khmer Times in August that the country’s new economic status will only have an effect on the level of development aid that the country enjoys, not on any preferential status when it comes to trade.
“The World Bank has their own classification for countries. But this only pertains to the level of development aid or money the World Bank allocates to poor countries,” he said.
“Graduation to a lower middle-income economy means less money will come in the form of development aid. However, recent news reports that this might also affect the country’s preferential status regarding duty-free exports to different markets are not true.”
Mr Loo said preferential status is based on the Generalized System of Preferences (GSP), a preferential tariff system which provides for a formal system of exemption, and that is unrelated to any ranking given by the World Bank.
“The United Nations classifies nations into least developed countries (LDC), developing countries and developed economies every three years, with the next round of classifications set to happen in 2018,” Mr Loo said.
“Personally, I feel that Cambodia will remain an LDC for this round of classification.”
In July last year, the World Bank revised Cambodia’s gross national income (GNI) per capita, and raised the country from a low-income to a lower-middle income economy.
The United Nations’ Committee for Development Policy separately reviews the list of LDCs every three years and makes recommendations on the inclusion and graduation of eligible countries based on income, human assets and economic vulnerability.
Mr Menon said Cambodia still holds LDC status as defined by the United Nations and will likely retain its trade privileges for a while longer. The country will, however, likely transition out of LDC status by about 2030 if it maintains current growth rates.
With adequate advance planning, Mr Menon says, Cambodia can avoid being a victim of its own success when the transition occurs.
“That means stronger efforts to improve the tax collection mechanism, and curbing tax avoidance and evasion,” Mr Menon said.
“Strengthening institutions to improve tax collection, and creating a culture where businesses and citizenry feel an obligation to contribute towards the provision of public goods and services, can take years, so it needs to start now,” he added.
Mr Menon said Cambodia also needs to expand the tax base and hasten the move from direct to indirect sources of tax collection, while reducing its reliance on trade taxes. These initiatives are essential to mobilise domestic resources to fund development, given that overseas development aid and concessional financing will wane as the country gets more prosperous.
He said that Cambodia also has several domestic obstacles to overcome, not only to prepare for a transition to middle-income status, but to speed up that journey.
“The most important challenges are the weak human capital, as well as a skills mismatch, and the cost and unreliability of the power supply. These areas are top challenges for Cambodia to reach middle-income status,” Mr Menon said.
According to data from the Ministry of Economy and Finance, the country’s GDP will grow by seven percent in 2017 and 2018. Meanwhile, GDP per capita will reach $1,422 by the end of the year, up from $1,302 last year.
See Opinion, page 9