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Cambodia’s economy must move beyond garments and tourism

Tourists
Tourists have their photo taken in front of Angkor Wat in Siem Reap earlier this year. Hong Menea

Cambodia’s economy must move beyond garments and tourism

Cambodia’s development in the past two decades has been remarkable. Economic growth has averaged 7.6 per cent a year since 1995. The national poverty rate has been cut in half. Led by supportive government policy, the country’s strengths – in arable land and natural resources, low-cost labour, and cultural heritage – have secured Cambodia a strong global presence in rice production, garments, and tourism.

The impact on people’s lives is visible, with impressive gains across a range of indicators including primary school enrollment and reduced infant mortality.

To maintain this momentum, Cambodia must deepen its reform efforts, diversify its economy, and upgrade its industrial base. These actions are critical to boosting growth potential – particularly in the more complex and sophisticated goods and services needed for the country to climb the global value chain towards middle-income status and beyond.

Cambodia’s industrial base and exports have evolved considerably in recent years. In 1990, rubber, scrap metals, logs and wood, and soya beans led the country’s exports. Today, it is garments, bicycles, rice, and light manufacturing assembly. The shift from raw materials to manufactured goods is nascent but gaining momentum.

Still, exports remain narrowly based and concentrated on a few markets. The dominance of garment exports leaves the economy particularly vulnerable to sector specific price and demand shocks. In the wake of the global financial crisis export demand plunged and growth dropped to near zero. The economy recovered quickly, but the experience is a strong reminder of the importance of economic diversification and developing a broader range of export destinations.

If the economy fails to diversify into higher value products and services, its export competitiveness could decrease and the economy could languish in low-wage, low-technology production. For now, the country benefits from tariff preferences with developed regions. The Everything But Arms arrangement gives it duty-free access to the EU, while other agreements offer low barriers to access to Canada and the US.

But these arrangements could change. The experiences of Fiji, Mauritius, and some Caribbean countries offer valuable lessons. When they lost preferential market access, they experienced precipitous falls in exports and struggled with the challenge of developing and expanding into other value-added economic activities, such as niche high-value products and high-end tourism.

A new Asian Development Bank report, Cambodia: Diversifying Beyond Garments and Tourism, examines the challenges and opportunities of industrial diversification and sophistication, and the role of government.

The study highlights the need to develop a focused industrial policy and programs for nontraditional production and exports. Public sector support will be critical in building a high-quality human capital base, addressing infrastructure bottlenecks, enhancing governance, and improving the business and investment climate. These measures will support strengthening of economic fundamentals and help Cambodia achieve economic diversification, upgrade its industrial base, and boost growth potential.

New sectors require new skills sets. Developing these requires dynamic and effective coordination between government and industry to upgrade the workforce and ensure it can provide businesses with the skills they need to make investments successful.

But much more is needed to build successful industry and generate jobs.

It is essential to develop capabilities across the full production cycle. Business needs reliable and reasonably priced power to run factories; improvements in logistics and transport networks to move supplies, components and finished goods; effective testing and certification facilities to verify product quality; professional marketing services; and further improvements in the business environment, including with respect to governance.

This means the development of specific products or sectors should be consistent with both the economy’s strengths and its potential. When this is done, the results can be impressive.

Since implementation of the Rice Policy of 2010, exports of milled rice have more than tripled to 378,900 tonnes in 2013. Finally, policy support for special economic zones, investment promotion programs, and improvements in trade facilitation can offer additional incentives for private sector investment.

In all of these efforts, the government should be wary of “picking winners” in its approach to developing and promoting specific industries. There is no guarantee the government has better information than the private sector about which products will be more competitive.

Ultimately, it is the private sector that will make investment decisions. So when designing industrial policy, it is best to ensure goals are realistic, decisions are based on sound information, and actions are designed and implemented in close consultation with the private sector.

It is also important to ensure private sector-led growth is more inclusive and results in improvements in the quality of life of all segments of the population, especially those who remain poor and vulnerable.

The recently approved Country Partnership Strategy, 2014-18 between ADB and Cambodia, with its focus on deeper rural-urban-regional linkages, targeted human and social development, and enhanced public sector management is designed to support these efforts.

Cyn-Young Park is assistant chief economist at the Asian Development Bank. Eric Sidgwick is ADB’s country director in Cambodia.

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