Cambodia Investment Review

Three key areas of economic development for Cambodia: World Bank

Three key areas of economic development for Cambodia: World Bank

Harrison White

Urgent action is needed to support Cambodia’s economic recovery from COVID-19 according to the World Bank – stating an ambitious reform is needed – one that focuses on improving capabilities, strengthening regulations, and investing in infrastructure.

The World Bank report: Resilient development a strategy to diversify Cambodia’s growth model released this week said it was “not surprising”, that when the pandemic disrupted the cross-border flow of goods, services, and capital, Cambodia was ill-positioned to absorb the shock without alternate products, markets, and financing sources.

It stated Cambodia’s growth generating process has been insufficiently diversified. In 2018, five products—garments, footwear, rice, cassava, and tourism—accounted for 80 percent of its total exports.

Together the European Union (EU) and the United States accounted for 69 percent of merchandise exports. And foreign capital, through FDI and official development assistance, accounted for 72% of gross fixed capital formation.

Cambodia’s growth slowdown in 2020 due to the Covid-19 pandemic was among the most pronounced in the East Asia region. Growth fell by an estimated 10.1 percentage points from its pre-pandemic average growth rate.

Compared to Cambodia, countries like Indonesia, Malaysia, and Vietnam faced equally or more severe external shocks, however, they have shown greater economic resilience due to their diversified export baskets, varied trade destinations, or deeper domestic financial markets.

Low labor productivity a persistent issue for Cambodia

The report found Cambodia’s inability to grow the product basket is explained by low labor productivity, or output per worker, which lags behind most countries globally when at Cambodia’s development level. Low labor productivity, at least in part, reflects low human capital. But the largest contributor is low and declining total factor productivity.

Low labor productivity in Cambodia reflects, at least in part, low human capital, the World Bank said.

According to the World Bank Human Capital Index, which measures how much human capital a child born today can expect to achieve in adulthood, Cambodia ranks 118th of 174 countries for which data are available—on par with India and Myanmar but far behind most other comparators.

Cambodia’s low World Bank HCI score demonstrates deficiencies in early childhood nutrition and education—reflected by high rates of stunting particularly in poor households, and by high incidence of late school entry, grade repetition, and dropping-out. Income shocks due to Covid-19 further threaten educational outcomes and nutrition in poor and newly poor households.

Key challenges facing the health and education systems are: lack of administrative and financial autonomy, outdated services, low professional qualification standards, and incipient social protection programs.

These systemic problems ultimately result in low labor quality, which drags down labor productivity and inhibits future growth.

In short, weak health and education systems result in weak human capital. Cambodia’s labor force is growing rapidly, but the growth dividends of an expanding labor force will be lower without improvements in human capital.

Three key areas of transformation for Cambodia

The report highlighted three transformations can strengthen the recovery and help the country return to sustained economic growth.

First: A focus on firms and their workers is key to unleashing productivity. Policy reform in target areas can help the country meet its potential, including investing in human capital through health and education; supporting more efficient resource allocation through improved market institutions and PIM; easing the regulatory burden for firms thereby reducing informality and its negative impact; and improving the performance of key services inputs to strengthen domestic linkages.

Second: Diversification of exports can continue driving growth during the recovery from COVID-19. A cross-cutting and medium-term policy agenda to diversify Cambodia’s trade is structured on upgrading in manufacturing GVCs, creating value addition in agriculture, and increasing competitiveness to export modern services.

Third: Harnessing domestic investment can help finance the next phase of growth. Policy areas include promoting FDI into productive and export sectors; promoting higher domestic savings rates; improving financial inclusion through greater access to savings institutions; supporting digital access through digital technologies; lowering the costs of savings accounts; and supporting financial sector stability and development more broadly.

Cambodia Investment Review has previously reported on the ‘game-changing’ i4.0 SME Cluster site development located in Kandal province with the project aiming to facilitate Cambodia to leapfrog into modern and responsible manufacturing practices.

World Bank Country Manager for Cambodia Maryam Salim

World Bank Country Manager for Cambodia Maryam Salim said in a press release: “Getting back to a sustainable growth path will require an ambitious reform agenda that focuses on improving the capabilities of Cambodia’s firms, workers, and households; strengthening regulations to address market distortions and improve the enabling environment for business; and investing in infrastructure that supports higher-quality growth.”

“A number of short- and medium-term policy actions can support an economic recovery strategy that will allow Cambodia to build back better after the COVID-19 crisis, she added.

Prior to the pandemic, Cambodia was a world leader in economic growth and poverty reduction. It sustained an average growth rate of 7.7 percent between 1995 and 2019, raising its per capita income from $323 in 1995 to $1,621 in 2019, and graduated to a lower-middle-income economy in 2015. The poverty rate fell from 47.8 percent in 2007 to 13.5 percent in 2014.

World Bank Cambodia operates day-to-day business with the government and development partners, including a $1.1 billion portfolio of projects implemented by government agencies with funding and technical support.

The World Bank’s Country Partnership Framework for Cambodia for 2019-2023 focuses on mainly improving the efficiency of the public sector and promoting private sector development.

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