David Van
1. Overview of the Cambodian Economy
Cambodia has experienced robust economic growth over the past two decades, transitioning from a low-income to a lower-middle-income country. The economy has been driven by key sectors such as agriculture, manufacturing (particularly garments and textiles), tourism, and construction. However, the reliance on these sectors, especially on garment exports and tourism, has made Cambodia vulnerable to external shocks.
2. Current Economic Conditions
2.1 GDP Growth and Economic Performance
- Pre-pandemic Growth: Before the COVID-19 pandemic, Cambodia’s GDP growth averaged around 7% annually, one of the highest in Southeast Asia. The economy was characterized by strong performance in the garment sector, a booming construction industry, and increasing tourism inflows.
- Pandemic Impact: The pandemic led to a sharp economic contraction in 2020, with the tourism sector collapsing and the garment industry suffering due to reduced global demand. However, the economy started to recover in 2021-2022 as global conditions improved and domestic restrictions eased.
- Recent Trends: In 2023, Cambodia’s economy was projected officially to grow by 5.8%, with a further increase to 6.2% in 2024 but that remains much debatable numbers as computation of GDP Growth was done on a 2014 base instead of more recent 2000 base which lead to the question whether a proper rebasing methodology is necessary to reflect actual situation. This recovery is supported by a rebound in tourism, strong construction activities, and increasing agricultural output.
2.2 Inflation and Cost of Living
- Inflationary Pressures: Inflation has been a concern, driven by rising global commodity prices, especially for food and energy. The cost of living has increased, impacting household purchasing power, particularly in urban areas.
- Wage Stagnation: Despite rising costs, wages in many sectors and especially the large informal sector, particularly in the informal economy, have not kept pace, leading to increased economic pressures on lower-income households.
2.3 Employment and Labor Market
- Employment Structure: Cambodia’s labor market is dominated by the informal economy, with a significant portion of the population engaged in agriculture, small-scale trading, and other informal activities.
- Youth Unemployment: Youth unemployment remains a challenge, exacerbated by a mismatch between the skills produced by the education system and those required by the labor market.
- Migration and Remittances: A large number of Cambodians work abroad, particularly in Thailand and South Korea and send remittances back home. The economic conditions in neighboring countries, especially Thailand, directly impact these remittances, which are crucial for many Cambodian households.
3. Key Challenges Facing the Cambodian Economy
3.1 Vulnerability to External Shocks
Global Economic Uncertainties
- China’s Slower Growth: China, a major economic partner for Cambodia, has recently experienced slower growth, which poses risks for Cambodia’s export markets and FDI inflows. As China is a key source of infrastructure investments and tourism for Cambodia, any slowdown in Chinese economic activities could directly affect Cambodia’s economic performance.
- Thailand’s Political Instability: Thailand, one of Cambodia’s largest trading partners and a key destination for migrant workers, is facing political turmoil following the ousting of its Prime Minister by a court decision. This instability could disrupt trade, reduce remittances, and create economic uncertainty in the region, affecting Cambodia’s economic prospects.
- Japanese Economic Influence: Japan is a significant source of foreign direct investment (FDI) and development aid for Cambodia. The impending resignation of Japan’s Prime Minister could lead to policy shifts or a temporary slowdown in Japanese economic engagement, potentially affecting investment flows into Cambodia.
- Indonesian Turmoil: Indonesia, as a regional economic powerhouse, also plays a role in shaping ASEAN’s economic landscape. Political instability in Indonesia could disrupt regional cooperation, trade, and investment, creating additional uncertainties for Cambodia.
- Ongoing Regional Conflicts:
- Ukraine and Gaza: The ongoing conflicts in Ukraine and Gaza, along with the potential for a broader Middle East conflict, contribute to global economic instability. These conflicts have led to fluctuations in energy prices, disrupted global supply chains, and heightened geopolitical tensions, all of which could have knock-on effects on Cambodia’s economy.
- South China Sea and Taiwan Tensions: The potential for conflict in the South China Sea and Taiwan, driven by increasing tensions between the United States and China, poses a significant risk to regional stability. Given Cambodia’s strategic position in Southeast Asia and its close economic ties with China, any escalation in these areas could disrupt trade routes, impact regional cooperation, and create economic uncertainty in Cambodia.
Reliance on a Few Key Sectors
- Garment Industry: Cambodia’s garment industry is highly dependent on demand from the United States and Europe. Any economic downturn in these markets or shifts in trade policies could severely impact this sector.
- Tourism Dependency: The tourism sector, although recovering, remains fragile. Global travel restrictions or shifts in tourist preferences could lead to fluctuations in tourism revenues.
3.2 Informal Economy and Data Challenges
- Data Gaps: As highlighted in the earlier exercise, the Cambodian economy has a large informal sector that is difficult to quantify. This creates challenges in accurately assessing economic performance and developing effective policies.
- Informal Sector Vulnerabilities: Workers and businesses in the informal economy often lack social protection, making them particularly vulnerable to economic shocks. The informal nature of these activities also means they are less likely to benefit from government support programs.
3.3 Structural Issues and Long-Term Development
Infrastructure and Connectivity
- Infrastructure Gaps: While Cambodia has made strides in improving its infrastructure, significant gaps remain, particularly in rural areas. Poor infrastructure hampers economic development and limits access to markets for rural populations.
- Urban-Rural Divide: The economic divide between urban and rural areas is growing. While cities like Phnom Penh are experiencing rapid development, rural areas remain underdeveloped, with limited access to essential services.
Education and Skills Development
- Skills Mismatch: The education system in Cambodia has not kept pace with the demands of the modern economy. There is a significant mismatch between the skills taught in schools and universities and those required by employers, particularly in technology and high-value industries.
- Human Capital Development: Investing in human capital is critical for Cambodia’s long-term economic development. This includes improving access to quality education and vocational training, particularly in rural areas.
4. Strategic Recommendations for Moving Forward
4.1 Diversification of the Economy
- Promote New Sectors: The Cambodian government should focus on diversifying the economy by promoting sectors such as technology, renewable energy, and higher-value manufacturing. This will reduce reliance on the garment and tourism sectors and create new opportunities for growth.
- Support for SMEs: Small and medium-sized enterprises (SMEs), particularly those in the informal sector, should be supported through access to finance, business development services, and integration into the formal economy.
4.2 Enhancing Data Collection and Economic Planning
- Strengthen Data Collection: Implement comprehensive data collection strategies for the informal economy, as discussed earlier. This will provide a more accurate picture of the economy and inform better policy decisions.
- Rebase GDP Computation: Following the methodology outlined previously, rebasing the GDP computation will provide a more accurate representation of Cambodia’s economic performance and help in setting realistic growth targets.
4.3 Building Resilience Against External Shocks
- Regional Cooperation: Strengthen regional cooperation with ASEAN partners to mitigate the impact of political and economic instability in neighboring countries. This includes participating in regional trade agreements and economic forums.
- Social Protection Systems: Develop and expand social protection systems to cover workers in the informal sector. This will help cushion the impact of economic shocks on vulnerable populations.
4.4 Addressing Long-Term Structural Issues
- Infrastructure Investment: Continue to invest in infrastructure, particularly in rural areas, to improve connectivity and support economic development. Public-private partnerships could be an effective way to finance these investments.
- Education and Vocational Training: Reform the education system to align it with the needs of the modern economy. This includes improving the quality of education and expanding access to vocational training programs that equip workers with relevant skills.
4.5 Governance and Institutional Strengthening
- Enhance Transparency: Improving governance and transparency in economic management will build public trust and encourage investment. This includes transparent budgeting, anti-corruption measures, and accountability in public institutions.
- Public-Private Dialogue: Foster ongoing dialogue between the government, private sector, and civil society to ensure that economic policies are inclusive and address the needs of all stakeholders.
The Cambodian economy stands at a critical juncture, with significant opportunities for growth but also considerable challenges. The external environment, characterized by regional political instability and global economic uncertainties, poses risks to Cambodia’s economic prospects. However, by addressing structural issues, enhancing adequate data collection, and building resilience, Cambodia may navigate these challenges and achieve sustainable, inclusive growth in the coming years moving forward.
