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Author: Panha Vath

Public Private Innovation Partnerships for Sustainable Transformations

Posted on by Panha Vath

Key messages

  • Sustainable transformations are about eliminating carbon emissions in value chains and reducing inequalities.
  • Sustainable transformations call for wide-reaching change of economic systems, with a tendency for shorter value chains and regulations penalizing low social and environmental standards
  • Sustainable transformations suggest a broader perspective on development delivering not only on economic but also on social and environmental objectives.
  • Public private innovation partnerships aim at identifying the most important challenges for societal wellbeing locally, and at finding adequate solutions in the given (potentially low resource) context.
  • Public private innovation partnerships build on the engagement of local actors who can affect or are affected by societal challenges.
  • Public private innovation partnerships require building capabilities of local actors, and a trust-based collaborative culture, but not necessarily high initial investments.

 

This contribution aims to provide a window into recent policy developments in the European Union and the Nordic states of Europe, and in particular the ongoing experiments to reorient innovation policy to contribute not only to economic growth but to deliver also on social and environmental objectives. The background for such a call is both the threat of climate change and extinction of species and the intolerable inequalities between regions, which pose a risk for social cohesion and democracy in Europe. Being embedded in global value chains where the European Union accounts for approximately one quarter of Cambodia’s merchandise exports according to WTO in 2019, these policies may have important consequences for Cambodia’s economy. Moreover, some insights into the changing policy rationales in Europe may also constitute an opportunity to reflect if and in what ways these novel policy rationales are of relevance in Cambodia.

In essence the new innovation policy rationales imply a shift in desired outcomes from competitiveness and economic growth to a transition towards more sustainable production and consumption patterns (Laatsit et al., 2022). Most importantly, this relates to the reduction of greenhouse gas emissions, which has a direct impact on global value chains because emission free technologies for long distant transport such as deep-sea shipping or air transport are far from ready. Consequently, new ways to organize the economy are sought after and are becoming increasingly popular such as the circular economy (Kirchherr et al., 2017). A circular economy where material and energy shall not go to waste but enter new cycles of production and consumptions typically require shorter value chains too. Moreover, the efforts to create more sustainable consumption and production patterns coincides with other challenges like decreasing the dependency on gas imports from Russia because of the Ukrainian war, to make value chains more robust and resilient in the wake of Covid-19 or increase social accountability in global value chains. Enhancing efficiency, incremental innovation and upgrading along existing economic and industrial trajectories are considered insufficient to address these challenges (Schot & Steinmueller, 2018). A system change is called for.

There are, however, many contrasting and conflicting views about how (and even if) systems need to change, and how the benefits and costs of such a system change are to be distributed. Indeed, the colossal task of system change arises against the background of striking inequalities between groups in society, between wealthy urban centers and deprived non-urban peripheries, and between the rich and poor countries of the world (Iammarino et al., 2018). This means that system change needs to address not only climate impact, but also social and economic goals (Donald & Gray, 2019). Even though it is difficult not to overlook a certain hypocrisy, system change appears to be a viable political option only if it does not imply welfare losses as evident for instance in the yellow west movement in France, which started as protest movement against high petrol prices. The recent Swedish elections are also a good example for this. Sweden has progressed more (but still insufficiently) than other countries on sustainability goals and is characterized both by relatively high innovativeness and low inequality because of the welfare state. Still, hardly any party would dare to recognize that achieving climate objectives requires besides technological innovation also behavioral change from the side of consumers. While political parties hardly dare to articulate the need for even minor changes to consumption, which are required to achieve environmental targets, Swedish consumers increasingly shame flying and meat eating, and some companies have started to invest heavily in circular business models. This illustrates that system change is highly contested in society.

As system change is needed but highly contested, the new policy experiments in Europe have two important features: first, they tend to be problem or challenge oriented and, second, they aim at the formation of new partnerships for innovation. In other words, the policy experiments try to encourage the collaboration of the actors that can affect and are affected by a particular societal challenge or need, which could range from the provision of fossil free public transport to healthcare services in peripheral regions. This implies a move away from sectoral initiatives, such as promoting innovation in the automotive industry, to such that cross sectoral boundaries. It requires a new thinking about who the relevant actors in such a change process are. Traditionally, it has been the “triple helix” of business, university, and government actors. In the new perspective, other public sector actors and civil society actors play an important role too. It constitutes a revival of public-private partnerships – however not in the traditional control and management relationships but in experimental forms of governance (Morgan, 2018) where learning about how to address problems in collaboration is foregrounded.

An example for policy experiments to address system change is the recent “Partnership for Regional Innovation” initiative in Europe. The intended policy outcome is not competitiveness and growth, or industrial diversification as in previous regional development and regional innovation policies but long-term societal wellbeing. The responsibility for long-term societal wellbeing, and thus also for this type of policy, is not limited to civil servants dealing with regional development but is considered a whole of government approach. The partnerships are to define the desired policy outcomes, this is to say what is meant with long-term societal wellbeing. The partnerships are furthermore required to meaningfully include citizens, firms, universities and other knowledge institutions, as well as local and regional authorities. In collaboration, the partnerships are thought to frame the societal challenge they want to take on and experiment their way towards solutions, which address multiple and often conflictual goals of the various stakeholders involved. The design of this policy initiative also deviates from the practice to provide clear and prescriptive guidelines of how to design and implement the policy. Instead, it suggests a variety of possible approaches how such innovation partnerships could work (EC, 2022). This experimental form of governance aims to combine directionality with subsidiarity. Directionality comes in the form of non-negotiable objectives related to societal challenges such as the reduction of greenhouse gas emissions or reducing disparities between regions and groups in society. Subsidiarity is about facilitating experimentation at the local and regional level, making use of local knowledge, creativity and energy in order to find adequate solutions to the problems that matter most in the local contexts.

These new policy experiments, which encourage challenge-oriented partnerships, foreground the engagement of local actors in collaboration with global actors (Grillitsch & Sotarauta, 2020; Grillitsch, Sotarauta, et al., 2022). Local actors include citizens, companies, civil society organizations, educational and research facilities, the local and regional administration, as well as potentially locally embedded global firms. Which local actors to include depends on the challenge in focus. For instance, sustainable and healthy food as challenge might include schools, hospitals, and other public authorities creating a local demand in combination with companies in the whole food supply chain, education, training, and research organizations, as well as residents. The engagement of local actors is, however, only possible if they are sufficiently empowered. The conditions that empower or disempower local actors are many such as individual skills and organizational capabilities, local and global networks providing access to knowledge and resources, and a set of informal and formal institutions that promote such engagement, for instance an entrepreneurial culture or good governance constituted by transparency, accountability, and low corruption. As change processes typically involve many actors, not only individual capabilities matter but also the ability to act together, which is often underpinned by trust, an open and collaborative culture, and a sense of responsibility for the common good.

Empowerment of local actors stands in an ambivalent relationship to the investments of non-local/foreign actors. Even in the Nordic countries, which have a tradition of promoting regional development outside the urban cores, where the labor force is well educated and trained, and where high levels of trust encourage collaboration between citizens, government, business, and universities, we find that the dominance of single externally owned companies tends to subpress local agency and innovative entrepreneurship and tends to create dependency relationships. In resource scarce environments like Cambodia, where the preconditions for economic development and innovation are worse than in the Nordics, this tendency of external investments to create dependencies and disincentivize local agency is likely to be even more pronounced. It is often a crisis, this is a downscaling or closure of the dominant firm, which stimulates local actors to identify alternative development trajectories. However, building local agency – the ability to make a difference – takes time, which means that long structural adjustment processes are rather the norm than the exception after such a crisis (Grillitsch, Asheim, et al., 2022). This also implies that a development policy, which is oriented toward societal challenges and builds on innovation partnerships with strong local engagement, also needs to be a policy that has a long-term perspective enhancing the capabilities of locally embedded actors and widening and deepening the opportunities for locally embedded actors to engage in social and economic change processes. In short, policy experiments for sustainable transformation build on a broader understanding of development where economic, social and environmental goals are combined. Finding solutions in innovative partnerships aim at resolving underlying goal conflicts, which requires a rethinking of production processes in global value chains and consumption patterns. It tends to favor shorter supply chains and to increasingly account for environmental and social costs occurred in the whole value chain. This change in the economic landscape as well as the societal challenges of the world make strategic long-term policy action to enhance the capabilities and opportunities to partake in a greener and inclusive society necessary.

What does this mean for Cambodia? The World Bank (2021) indicates that Cambodia was relatively successful in attracting foreign capital but that this was not matched with enhanced human capital and upgrading towards higher value activities. In order to address the needs of Cambodian citizens regardless of whether they reside in the capital or more rural regions and to upgrade the economy, a focus on building capabilities and local engagement should be a valuable strategy. This needs a long-term perspective but not necessarily large initial investments. It requires place-based leadership aiming to connect local actors, to identify common interests, opportunities and challenges, to coordinate in formulating the societal challenge to tackle, and to mobilize and pool resources in the pursuit of solving the challenge. Place-based leaders may have formal positions as mayors or business leaders but can also engage informally using their social networks. Importantly, this role may also be empowered by giving an explicit mandate for it to adequate local (private public) development organizations. It often involves a change in the mindset about what development entails, that it is not only about attracting foreign direct investment but also about local collaboration and trust, building capabilities and engagement. The innovative nature of such partnership then is about finding solutions to the targeted challenges in the given context of resource scarcity. This may be local solutions, but often will also draw on non-local networks providing access to complementary knowledge or resources. Importantly, public private innovation partnerships need to be seen dynamically. Local engagement makes it possible to over time transform knowledge, networks, institutions, opportunities and challenges.

References
  • Donald, B., & Gray, M. (2019). The double crisis: in what sense a regional problem? Regional Studies, 53(2), 297-308. https://doi.org/10.1080/00343404.2018.1490014
  • EC(2022). Partnerships for Regional Innovation Playbook. J. R. C. European Commission.
  • Grillitsch, M., Asheim, B., & Nielsen, H. (2022). Temporality of agency in regional development. 29(1), 107-125. https://doi.org/10.1177/09697764211028884
  • Grillitsch, M., & Sotarauta, M. (2020). Trinity of change agency, regional development paths and opportunity spaces. Progress in Human Geography, 44(4), 704-723. https://doi.org/10.1177/0309132519853870
  • Grillitsch, M., Sotarauta, M., Asheim, B., Fitjar, R. D., Haus-Reve, S., Kolehmainen, J., Kurikka, H., Lundquist, K.-J., Martynovich, M., Monteilhet, S., Nielsen, H., Nilsson, M., Rekers, J.,
  • Sopanen, S., & Stihl, L. (2022). Agency and economic change in regions: identifying routes to new path development using qualitative comparative analysis. Regional Studies, 1-16. https://doi.org/10.1080/00343404.2022.2053095
  • Iammarino, S., Rodriguez-Pose, A., & Storper, M. (2018). Regional inequality in Europe: evidence, theory and policy implications. Journal of Economic Geography, 19(2), 273-298. https://doi.org/10.1093/jeg/lby021
  • Kirchherr, J., Reike, D., & Hekkert, M. (2017). Conceptualizing the circular economy: An analysis of 114 definitions. Resources, Conservation and Recycling, 127, 221-232. https://doi.org/https://doi.org/10.1016/j.resconrec.2017.09.005
  • Laatsit, M., Grillitsch, M., & Fünfschilling, L. (2022). Great expectations: the promises and limits of innovation policy in addressing societal challenges. Papers in Innovation Studies, 2022/09, CIRCLE Working Papers, Lund University: Lund.
  • Morgan, K. (2018). Experimental governance and territorial development. OECD Report, OECD: Paris.
  • Schot, J., & Steinmueller, W. E. (2018). Three frames for innovation policy: R&D, systems of innovation and transformative change. Research Policy, 47(9), 1554-1567. https://doi.org/https://doi.org/10.1016/j.respol.2018.08.011
  • World Bank. (2021). Resilient Development – A Strategy to Diversify Cambodia’s Growth Model: Cambodia Country Economic Memorandum. World Bank: Phnom Penh

Upgrading Cambodia’s Economic Model for a Post-COVID-19 World

Posted on by Panha Vath

The tumultuous and ongoing events of recent years is prompting countries around the world to rethink their development strategies for a post-Covid world. The Covid-19 pandemic has been followed by a series of further destabilising shocks including the Ukraine war, renewed downturns in China and Europe, disrupted supply chains, high food and energy prices, rising inflation, rapidly tightening global monetary conditions, a sharply rising US dollar, and mounting financial turmoil in many developing economies. Several longer-term trends have also intensified including geopolitical tensions between the US and China, rising protectionist sentiment in many countries, as well as escalating negative impacts associated with climate change and environmental degradation. The pandemic-induced shift away from contact-intensive ways of living and working has also accelerated the digitalisation of economic and social life, presenting both opportunities and challenges. 

What about Cambodia? This article offers a few thoughts based on my own observations and analysis as an outside observer. 

Prior to the pandemic, Cambodia’s overall development strategy was very successful. In the decades since the end of civil conflict in the early 1990s Cambodia achieved economic growth of around 7—8% a year. Cambodia was therefore one of the fastest growing economies in the world. Extreme poverty fell precipitously, from about a third of the population in the early 2000s to less than 3% by late last decade according to World Bank estimates. Gains in human development were also substantial – average life expectancy is now 70 years, maternal and child mortality rates have declined dramatically, and most children receive at least a primary school education. None of these are small achievements given Cambodia’s troubled past and undeniably difficult starting conditions.

On the surface, Cambodia has emulated the stylized export-driven rapid modernisation path followed by other dynamic Asian economies, including the original East Asian ‘miracles’ (Japan, South Korea, Taiwan, Hong Kong, and Singapore), other parts of Southeast Asia, and mainland China more recently. Cambodia’s economic performance of 7—8% average growth prior to the pandemic places it around the middle of this esteemed group of Asian success stories. The basic strategy of which is to take advantage of an abundant supply of young low-cost workers from the countryside to fuel export-driven growth and structural transformation towards a more industrial and urban economy while over time transitioning towards progressively more advanced economic activities as a basis for sustained productivity growth. 

Cambodia is however still at an early stage of the economic modernisation process, as its gains have come from an unusually low base. In the early 1990s, GDP per capita was less than 3% of that in the US by purchasing power parity (PPP) – a very low starting point compared to other fast-growing Asian economies at the start of their own growth take-offs. Hence, despite decades of rapid growth, Cambodia’s GDP per capita remains low at US$4,300 (constant 2017 PPP) and still less than 7% of the level in the US. To truly emulate the achievements of other successful Asian economies – something the country should aspire to – Cambodia needs to target sustaining rapid economic growth for decades more to come. 

A critical question therefore is whether Cambodia will be able to continue along the stylized Asian rapid modernisation path in the aftermath of the pandemic.

Although the picture is still very much in flux, it seems clear that the emerging post-Covid world presents a myriad of challenges. Economic recovery is being repeatedly setback by negative international shocks. By the latest forecasts, Cambodia’s economic growth is expected to remain below trend for several more years, leaving the economy well below its pre-Covid trajectory, potentially on a permanent basis. Cambodia’s ability to rely on export-driven growth is also increasingly uncertain. First, due to rising protectionism and economic nationalism in many major economies, including linked to geopolitical tensions. And second, potentially due to rising automation, which threatens to dislodge existing manufacturing jobs and/or cut-off new opportunities. The impact of climate change is also becoming increasingly apparent, especially in the agriculture sector, which remains important as a driver of pro-poor growth. 

Cambodia must also however overcome key deficiencies in its pre-Covid growth model. In particular, compared to other Asian success stories, Cambodia’s economic modernisation looks notably unbalanced – being overly reliant on shifting workers out of low productivity agriculture and into basic manufacturing and tourism jobs while achieving minimal improvements in productivity and economic sophistication within the manufacturing and services sectors themselves. 

A few key numbers tell the story. Agricultural employment in Cambodia has plummeted from almost 80% of total employment in the early 1990s to just 35% in 2019 – lower than in Vietnam currently and similar to China, Indonesia, and Philippines around 10—15 years ago. The shift out of agriculture and into other areas has delivered important productivity gains. Yet, growth in output per worker within the manufacturing and services sectors themselves has been low at just 1—2% a year. As a result, overall output per worker in Cambodia is still only about $7,800 (constant 2017 PPP). By comparison, worker productivity levels in China, Indonesia, and Philippines were 2—3 times higher at comparable points in their own transitions out of agricultural employment. In Vietnam, output per worker is currently about $18,800. 

A key implication is that Cambodia’s ‘unbalanced modernisation’ has delivered very rapid but ultimately unsustainable economic progress. First, simply shifting workers out of low-value added agriculture into higher valued-added activities in basic manufacturing and services is naturally running into limits as the pool of available agricultural workers dries up and productivity levels between sectors converge. Second, as this has occurred, Cambodia seems to have quickly reached what economists call the ‘Lewis turning point’, where low-skilled wages across the economy begin to increase rapidly. Real wages for garment workers doubled over the decade preceding the pandemic. While this also reflects sharp increases in the legal minimum wage, wage pressures amongst other types of low-skill workers are also evident, with wages for rice field workers, vegetable sellers, and unskilled construction workers also doubling in real terms. Because these wage increases have outpaced gains in productivity, this has eroded Cambodia’s external competitiveness. For instance, manufacturing wages in Cambodia are now comparable to those in Bangladesh and Vietnam – despite Cambodia’s much lower manufacturing labour productivity. 

Essentially, Cambodia’s pre-Covid growth model was highly successful in capitalising on its existing competitive advantage in low-cost workers (and world class tourism assets) but much less successful in finding new sources of competitiveness that can be sustained as wages rise – notably by lifting productivity and shifting into higher value-added activities. So far Cambodia has made only minor gains in industrial upgrading. Despite tentative progress moving into electronics, machinery and automobile manufacturing, these subsectors still account for less than 5% of Cambodia’s total exports. By contrast, Vietnam over the previous decade has seen a dramatic shift out of low value-added garment manufacturing and into higher value-added electronics and machinery exports – which now account for over half of Vietnam’s total exports. Cambodia will need to broadly replicate this kind of success, if it is to stay on the high growth path followed by other Asian success stories. 

The key implication is that, to continue its success, Cambodia will need to move well beyond its pre-Covid growth model which essentially relied on the combination of abundant low-cost workers, economic openness, preferential access to key markets, and ‘good enough’ governance. It must also do so in what is likely to be a far more difficult post-Covid environment. Simply restoring the status quo ante and returning to business as usual will not be enough. At best this would likely see future rates of economic growth and progress much below Cambodia’s historical experience, let alone that required to meet aspirations for reaching upper-middle-income status by 2030 and high-income status by 2050. Sustaining Cambodia’s success after Covid will therefore necessitate unleashing a new wave of next-generation reforms, aimed especially at delivering better governance, enhancing the business environment, deepening regional integration, improving infrastructure, investing in climate resilience, and, most importantly, greatly strengthening the skills and education of the workforce so that Cambodians can compete and succeed in a fast-changing and more difficult global economic landscape.