Key messages

• The COVID-19 pandemic exposes the precarity of the Cambodia economy given external shocks and uncertainties of the global economy.
• Social vulnerabilities have similarly been worsened by the impact of the pandemic as millions have lost their jobs and livelihoods.
• To address these challenges, and navigate the post-COVID environment, the new development strategy should not only aim at stabilizing the economy and delivering pre-COVID growth levels, but also needs to enhance institutional accountabilities and public services, and more importantly build local resilience for sustainable sources of livelihoods.
• The new strategy should seek to strengthen the connection between rural and urban economies, in part through investment in rural infrastructure development, digital connectivity, public services, and localized programs to support the growth of formal small and medium business. Cambodia’s young population and quick adoption of digital technology offers opportunities to support new source of jobs and industries for economic diversification. More investment in digital infrastructure development is needed, as well as further efforts to off-set emerging disparity between rural and urban areas, and other groups in society.

Cambodia’s economy has seen rapid growth and wholesale transformation over the past 30 years. This has brought benefits such as a dramatic decrease in income poverty, and transition to lower-middle-income country status. The gathering pace of change has brought not only great promise but also development challenges, in particular high levels of economic precarity and social vulnerability. These challenges were made worse by the COVID pandemic and recent global crisis. For the Royal Government of Cambodia to tackle these challenges and chart a new prosperous future, it is crucial that it harnesses Cambodia’s advantage in agriculture, youthful population and digital technology adoption, and foster inclusive rural-urban economies towards achieving its development goals. To that end, enhancing local resilience—through promotion of sustainable livelihoods and household coping strategies as well as capability-enhancing endowments in the context of a rapidly changing global economy—is paramount.

Two major challenges that Cambodia faces are persistent high levels of economic precarity and social vulnerability, and difficulties in mounting an effective, systemic response to these issues. Economic precarity is a problem in all key sectors of the economy. Agriculture has stagnated, particularly due to low productivity on small-scale family farms (Eliste and Zorya 2015). These remain heavily dependent on factors such as weather and flood patterns which determine water availability and soil fertility for millions of small farmers. Environmental degradation and increasingly idiosyncratic weather and flood patterns associated with climate change make this problem increasingly pressing (Nong 2021).

Manufacturing has provided a significant boost to rural household incomes through the migration of young people to cities to work in factories. However, Cambodia’s manufacturing base remains extraordinarily narrow, linked to a specific niche in a global supply chain that is dependent to a great extent on access to the EU and US markets on preferential trade terms. Impending LDC graduation may threaten this access over the medium and long term, while the COVID-9 crisis, although having a relatively small health impact in Cambodia, showed the vulnerability of the manufacturing sector to exogenous shocks. Furthermore, export competitiveness driven by low labour costs and preferential market access given to Cambodia has declined and is not sustainable for long-term growth (World Bank 2017).

The service sector, similarly, heavily reliant on the millions of international tourists that visit the Angkor Wat temples each year, has suffered severely from the impacts of COVID-19. It is estimated that around 3,000 tourism-related companies were put out of business with 51,000 jobs losses in 2020, and an additional 30,000 unemployed workers in supporting sectors (The Asia Foundation 2021). While businesses and factories in manufacturing and industry sector partially resumed operation in 2021, tourism and the related sectors continued to stay shut as international travels and other COVID-related requirements remained strictly imposed in most countries even after Cambodia has relaxed restrictions and opened the border for visitors. In many cases, temporary job losses become permanent and household incomes further declined.

Economic precarity is combined with social vulnerability as households and communities struggle to cope with the rapid economic changes of recent years, and this has further been escalated by COVID-19 impact, recent inflation and high food prices, and pressure from climate change. For example, to cope with unemployment and reduced income, most workers reduce remittances sent to rural families, and cut down own expenses for food intake (UNICEF 2020). The pandemic has also aggravated existing inequality in income and consumption between urban and rural households(Hansen and Gjonbalaj 2019). Concerns have been raised about the upbringing and education of young children cared for by grandparents in rural villages while their parents go abroad or to the city to work (Marchetta and Sim 2021). Similarly, rapid urbanisation and development has skewed land prices creating new inequalities and the emergence of landless households, some of whom are largely excluded from the benefits of recent growth. The pandemic exacerbated both economic precarity and social vulnerability.

The government of Cambodia is committed to addressing these problems through social security schemes including, for example, unemployment, sick and maternity pay for urban workers, social insurance for workers in informal enterprises, and social land allocations for landless rural families. It has also committed to a program of quality improvement for education, and further postsecondary technical and vocational training. However, implementation of this program has met with varying success, in part because of the slow pace of professionalisation programs and reforms in public services.

As the theme of this year’s Cambodia Annual Outlook Conference suggests, and the emerging agreement from the discussions in the panels, Cambodia’s development model needs to incorporate new strategies for stabilizing the economy while at the same time mitigating negative social and environmental impacts as the economy further changes, and more importantly strengthening the resilience of households and communities as they adapt to the ‘new normal’.

In particular, the relationship between rural and urban economies – specifically the small-scale agriculture sector, the informal business sector, and the formal urban manufacturing/service sector – may need to be reconfigured to expand options for the millions of households that combine livelihood strategies across these three sectors. The new strategy should seek to capitalise on Cambodia’s comparative advantage in agriculture and young population to take up the Cambodia’s upper middle-income country vision by 2030, and to promote a better balance between the three driving sectors: rural-based economy; export-oriented and low-skill manufacturing; and an emerging high-skill industry propelled by IR4.0. A renewed focus should be made to boost productivity and competitiveness of local businesses—including small and medium-sized enterprises, start-ups, and informal enterprises—to strengthen local resilience.

Digital technology associated with IR4.0, namely the development of ICT enabling infrastructure and investment, offers new opportunity to facilitate future diversification of the economy (CDRI-ODI 2020). Existing evidence of this is the growth of digital technology platforms adopted in the financial sector, logistics and transport, start-ups in the ICT sector, and telecommunication. The pandemic has sped up adoption of digital technology by companies and entrepreneurs to maintain operation and for some the digital acceleration enables companies to grow rapidly during the peak of the COVID crisis. Some e-commerce start-ups have seen an increase of more than 150 per cent in online grocery sales since the outbreak of COVID-19 (UNCTAD 2020). However, the potential of digital technology for industralisation requires more investment to be directed towards infrastructure and digital connectivity improvement to ensure nationwide broadband coverage. While the technology offers new opportunities for businesses and workers who have the necessary assets to adapt and thrive, it is critical that Cambodia’s small and medium business as well as the informal economies are equipped and supported in this digital journey.

The new post-COVID development points toward a drastic shift from the current political economy, which will have significant impact on a number of inter-connected policy reforms for infrastructure development, land use management, and industrialisation, with the traditional focus on growth supplemented by greater concern for local resilience. This shift may also require new relations and collaboration between Cambodia’s major stakeholders in the private sector, to combine public and private funding for social services, infrastructure development, and R&D in emerging new industries as part of a long-term public-private partnership, and to incorporate this with participatory, decentralised and livelihood-oriented programs.

References

• CDRI-ODI. 2020. “Fostering an Inclusive Digital Transformation in Cambodia.” Phnom Penh: CDRI.
• Eliste, Paavo, and Sergiy Zorya. 2015. “Cambodian Agriculture in Transition : Opportunities and Risks.” Washington, D.C.: World Bank Group.
• Hansen, Mr Niels-Jakob H., and Albe Gjonbalaj. 2019. Advancing Inclusive Growth in Cambodia. International Monetary Fund.
• Marchetta, Francesca, and Sokcheng Sim. 2021. “The Effect of Parental Migration on the Schooling of Children Left behind in Rural Cambodia.” World Development 146: 105593.
• Nong, Monin. 2021. “The Impacts of Climate Change on Agriculture and Water Resources in Cambodia: From Local Communities’ Perspectives.” Working Paper 125. Phnom Penh: CDRI.
• The Asia Foundation. 2021. “Revisiting the Pandemic: Rapid Survey on the Impact of Covid-19 on MSMEs in the Tourism Sector and Households in Cambodia.” TAF.
• UNCTAD. 2020. Impact of the COVID-19 Pandemic on Trade and Development: Transitioning to a New Normal. UN.
• UNICEF. 2020. “United Nations COVID-19 Socio-Economic Impact Assessment in Cambodia.” UNICEF.
• World Bank. 2017. Cambodia: Sustaining Strong Growth for the Benefit of All. Phnom Penh: World Bank.