Cambodia Outlook Conference (COC)

Should Small Developing Countries Prioritize Climate Change?

The world has experienced an exceptional couple of years. Aside from the millions of casualties, the COVID-19 pandemic pushed much of the world in recession, disrupted supply chains, and dried up tourism, an important source of revenues. The pandemic and the differential policy response also increased inequalities between north and south, and aggravated tensions within countries between the haves and have nots. Russia’s invasion of Ukraine added to the misery by causing a spike in energy prices and food prices, the latter of which hit developing countries disproportionally as food constitute a much higher share of household spending at low income levels compared to high income. Several developing countries are now faced with insurmountable debt problems, and despite the G-20 debt service relief initiative, may face disruptive debt default such as Sri Lanka recently experienced.

In this environment it is easy to lose track the most pressing problem of our times: climate change. The science has been settled for some time that human-made climate change poses a considerable threat to the environment, living standards and livelihoods across the globe. It is also clear what needs to be done: a massive investment in mitigation to prevent temperatures to increase beyond 1.5-2 degrees above pre-industrial levels and massive investment in adaptation to adjust to the effects of even minor climate change—heatwaves, sea level rise, storm intensity rise, and more.

But who should do this? Or better, who should finance this? Should countries such as Cambodia, a lower middle income country with only 16 million people, divert resources to fight climate change, or should it focus on other priorities, such as education, building infrastructure, and improving government administration?

Clearly most developing countries have been bystanders in the causing climate change. The vast majority of emission that cause climate change come from the developed world, and from large developing countries such as India and China, the largest emitter of greenhouse gases (Figure 1). Cambodia only emits some 0.04 percent of total global emissions.

High income and middle income countries together make up some 51 percent of the population, but emit 86 percent of greenhouse gases. Low income countries, in contrast, have 9 percent of the population, but only emit 0.5 percent of total emissions. The average person in high income countries emits some 40 times the amount of CO2 that people in low income countries do.

Moreover, history matters with greenhouse gases, as they stay around in the atmosphere for hundreds of years. If one were to consider historical emissions, the US and EU top the charts (Figure 2), but China is already number 3 on that scale, and is increasing its emissions and the share in the global accumulated emission because these are now falling in the EU and the US.

Cambodia’s share in the cumulative total is, again, negligible, at 0.014 percent of total emissions since the onset of the industrial revolution. Note that this excludes other sources of emission, including agriculture and land use change (e.g. deforestation) which in Cambodia (and other lower income countries) make up the bulk of greenhouse gas emissions.

While most of greenhouse gas emissions come from higher income countries, it is lower income countries that are most vulnerable to their effects—including sea level rise and extreme weather events. Moreover, these countries are on average least prepared (Figure 3). Most will remember the recent floods in Pakistan, which put almost half of the country under water, or Tuvalu’s Simon Kofe speech at COP 26 standing in a suit and tie at a lectern set up in the sea draws attention to Tuvalu’s struggle against rising sea levels. The United Nations High Commissioner for Refugees (UNHCR) released data showing that the number of people displaced by climate change-related disasters since 2010 has risen to 21.5 million. The Institute for Economy and Peace guestimates that this number could increase to 1.2 billion people by 2050, most of it in the developing world.

So who should take responsibility for reducing greenhouse gases?

One way to think about this is that rich countries need to massively decarbonize quickly – given their wealth and growth caused most of the problems, while developing countries can focus on development and take on board the innovations from development countries, and get paid for decarbonisation. The challenge is that much of the attention is focused on rich countries leveraging financing to offset emissions, or turn to “nature based solutions” largely in developing countries, which has been criticized for kind of incrementally undermines the direct behavioural change in rich countries. In addition, the EU is considering a carbon border adjustment mechanism. Many would consider this as injustice or some form of carbon colonialism.

But what is justice? In an ideal world, one could apply principles of justice such as the ones developed by philosopher John Rawls. In his seminal “A Theory of Justice” he imagined how an economic system would be designed if people were to decide on this without knowing their place in that world, but in which trade-offs between income equality and efficiency exist. Applying that principle to CO2 emissions, one could design a system of “rights” allocations for greenhouse gas emissions to individuals. The total rights would be based on what scientists tell us the earth could still absorb, either in current terms, or including historical emissions. People should get credit for innovations that reduce emissions, much like under the Kyoto protocol. Such an “equal rights” allocation would probably lead to massive transfers from (rich) pollution countries to (poor) clean countries.

In the real world, matters have taken a different turn. In the Kyoto protocol, the “equal but differential” responsibility for developing countries was recognized as a principle. The protocol established a “cap and trade” system of emissions in developed countries, with a mechanism to “buy” emission reductions in the developing world, the Clean Development Mechanism. However, since that did not restrict emissions from the largest developing countries, the scheme resulted into a transfer from the rich world to large, polluting developing countries. The largest polluter at the time, the United States, opted out. Total global emissions hardly changed trend during the lifetime of the protocol, but what it (and local policy innovations such as feed-in tariffs) did achieve was to catalyse innovations in renewable energy, which become increasingly competitive.

The 2015 Paris Agreement is more ambitious than the Kyoto protocol in that it requires all countries to make a contribution. The brilliance of the agreement is that it is up to the countries themselves to determine what they can do. This principle got every country in the world on board (again, except the US under the Trump administration), but the problem was that the Nationally Determined Contributions did not add up to what was needed to prevent catastrophic climate change. Since then, under the purview of the Agreement, many countries have gone further than what was pledged in Paris, and many now have a “zero net carbon” goal by 2050, or even 2040. China has a zero net carbon goal by 2060. The envisioned global carbon trading market, though, has not yet emerged, even though individual economies such as the EU and China have used this as a tool to achieve their goals. These goals also become more feasible as time—and technological innovation—progresses.

The Paris Agreement also paid attention to mitigation action, and established principles for finance. Developed countries committed to mobilise $100 billion a year in climate finance by 2020, and agreed to continue mobilising finance at this level until 2025. The funds were to be used for adaptation and mitigation, and were pledged in addition to the prevailing development assistance. The newly established Green Climate Fund was to be a key mechanism for achieving this.

The picture on finance is a mixed one. Total Official Development Assistance (ODA) has grown since Paris, but only by some $29 billion—and spread out over multiple development goals, not just climate ones. The Green Climate Fund is still very modest in size, with total disbursements thus far of only $2.3 bn. in part due to the challenges the fund has had in establishing an effective governance mechanism. The picture of overall climate finance is more positive, though. The Climate Policy Initiative (Figure 4) estimates that total climate finance amounted to some USD632 in 2019/20 on average—a considerable amount, but still far from the USD 6 trillion the Initiative believes is needed annually. The vast majority of the funds went to mitigation, notably energy, and only 7 percent was allocated for adaptation. Most of the money went to projects in the developed world, and in East Asia and Pacific (China being the largest investor). Sub-saharan Africa only received USD19 bn. About half of the money came from private funding, again the majority of which was for funding renewable energy.

The drop in the costs of renewables has perhaps been the single most important effect of the focus on climate change in the past decades. Solar energy and wind are now cost competitive even without subsidies, and beat traditional sources such as coal, gas and nuclear (Figure 5). Electric vehicles are following a similar path, and clean hydrogen, which will remain needed for some applications, is on a learning curve that will make it competitive in the foreseeable future. The revolution in the costs of renewables has unleashed a large amount of private finance that is now available for it, and traditional fossil fuel power generation is rapidly becoming un-investable. China, which until recently was a large financier of coal fired power plants has pledged to phase out financing for fossil fuel power generation, following the path that multilateral development banks have already followed for the last decade. Today’s investment in fossil fuel risks becoming a stranded asset within the next decade.

Cambodia as a signatory of the Paris Agreement has expressed its commitment to climate change mitigation and adaptation in its NDC. The UN’s Sustainable Development Goals (SDG 13) reconfirm this commitment. To match this commitment with development and poverty reduction, Cambodia can draw on private finance to develop a renewable energy sector that can provide the bulk of its need for the foreseeable future. Beyond price, renewables also have the advantage that they are more flexible, quicker to deploy, and more labour intensive than fossil fuels. Reliance on renewables also reduces the country’s vulnerability to price fluctuations on the international commodities market. Coal and gas are also a considerable source of local pollution—a major cause of death—and thus minimizing its use will have other benefits than energy costs. To attract more resources to renewable energy, rather than using domestic resources that could be used elsewhere, Cambodia’s broader investment climate is of critical importance.

For adaptation, as a low-middle income country, it should be able to draw on ODA sources of finance, and the key for that is to develop the clean and transparent administrative systems that allow donors to use these for aid money. Developing a strong pipeline of viable projects is also key, and investing in such a pipeline will pay off handsomely. In international fora, it can also continue to argue for more resources for adaptation, but even failing that, for a country that relies to a considerable extent on agriculture and tourism, investing in a resilient environment will have high economic, if not financial, returns. So even without aid, Cambodia can consider spending more.

Figure 1
Cambodia’s share in global emissions is miniscule

Source: Our World in Data

Figure 2
Historically, rich countries have contributed most

Source: Our World in Data

Figure 3
Poorer countries are most vulnerable and least prepared for climate change

Source: Notre Dame Global Adaptation Initiative

Figure 4
Climate finance is growing but is not nearly enough

Source: Climate Policy Initiative

Figure 5
Renewables are now more competitive than fossil fuels

Source: Lazard (2021) Lazard’s Levelised costs of energy version 15.0

Achieving Long-term Development Aspirations in Cambodia: A Focus on Building Local Resilience

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.

  • 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.

Cambodia’s Development Challenges

Key messages:

  • Cambodia is a great development success story, building on the return of peace, a dynamic neighbourhood, its economic openness, and its unorthodox but pragmatically successful macroeconomic management.
  • The major short-term challenge is to navigate the ‘perfect storm’ of a series of turbulent economic and geostrategic shocks in 2022.
  • So far, Cambodia appears to be managing these shocks quite well, thanks in part to its minor economic relationships with Russia and its relatively low public debt. But if China’s economic slowdown persists, this will pose a major challenge for Cambodia.
  • The medium-longer term challenges will be to forge a development strategy that achieves rapid, durable, inclusive and environmentally sustainable growth.
  • I see five sets of factors that are likely to be central to achieving this overarching objective:
  • First, allowing the unorthodox monetary policy settings to continue to evolve, while intensifying resource mobilization efforts as the country graduates from ODA.
  • Second, maintaining economic openness, as before emphasizing unilateral and multilateral initiatives, with regional initiatives that are primarily ASEAN-centred, and supplemented by measures to enhance supply-side competitiveness, a phasing out of the ‘dual’ commercial incentives regime, and reform of the fiscal incentives framework.
  • Third, greater attention to equity goals, including a stronger focus on the provision of high-quality primary and secondary education and public health to all socio-economic classes, progressivity in the tax and transfer systems, and the construction of at least a rudimentary social welfare net.
  • Fourth, institutional reform consistent with the aspiration to be an upper-middle income country within a decade, including responsive governance catering to the needs of all strata of society, a commercial environment where competitiveness rather than political patronage is the primary arbiter of business success, and the development of arms-length, transparent checks on public sector malfeasance.
  • Fifth, particular attention to Cambodia’s environmental fragilities, including equitable access to the Mekong, the management of the Tonle Sap ecosystem, and improved urban amenities.

Cambodia is undoubtedly one of the world’s great development success stories. After decades of debilitating conflict it has now recorded the better part of 30 years of rapid economic development and improved living standards. While researching its economy some years ago with Jay Menon, I came to the conclusion that this rapid economic development could be broadly explained by the peace accords, Cambodia’s economic openness, its unorthodox but pragmatically successful macroeconomic policy regime, and a very supportive global and regional environment. The latter included the original multilateral economic/strategic interventions, very large amounts of international development assistance, and an open, dynamic regional economic environment.

The development challenges that today’s middle-income Cambodia faces, aspiring to reach upper-middle income status within a decade, are altogether different from those at the time the 1991 Paris Peace Accords were signed. To think through these issues, I find it helpful to distinguish between short term and medium-longer term challenges.

The short-term challenge is to navigate the perfect economic storm that the world is currently experiencing, and which many poorer countries are feeling acutely. At the beginning of 2022 the world was anticipating a vigorous recovery from the Covid pandemic and a return to normal civic, social and economic life. However, a series of adverse, largely unanticipated, but interrelated global shocks has tempered the earlier optimism:

  • the Ukraine War, and the attendant spike in energy and food prices;
  • rapidly rising inflation, triggering aggressive tightening of monetary policy, especially in the advanced economies; \
  • in turn having at least two negative consequences – sharply slowing global economic growth and the rising probability of a global recession in 2023, and increasing debt distress, potential or actual, in many developing countries (at least 50 according to the IMF);
  • a sharp deceleration in China’s growth with its pursuit of a zero-Covid strategy, thus removing the world’s principal economic locomotive in recent years;
  • ongoing disruptions to global supply chains from multiple sources – catchup from the Covid era, inflamed geostrategic conflicts (especially superpower rivalries), and high energy prices.

These are in addition to the escalating risks posed by climate change, and the global community’s continued ambivalence on how to rapidly achieve a coordinated, effective and equitable response to it.

How does Cambodia look in this very worrying outlook? The priors suggest a mixed picture: Russia is a very minor trading partner, but China is huge. Cambodia is a very open economy (trade of goods and services is the equivalent of more than 120% of GDP), and one that is highly dependent on tourism, suggesting a mixed outlook – increased international travel is good for its tourism sector, but any disruptions to international trade (policy or logistics) will be harmful. Cambodia is net energy importer but a net food (rice) exporter, so the recent trends in its terms of trade effects may be ambiguous. In fact, they are likely negative because, unlike wheat, international rice prices have remained fairly stable in 2022, thanks to good harvests in most of the major rice producing countries. Cambodia is a net external debtor, and so rising interest rates may be of some concern; in fact, its public debt is comparatively modest (although private debt is worryingly high).

In fact, these priors explain a good deal of Cambodia’s recent economic developments and immediate outlook. Pre-Covid the economy was growing very strongly, averaging 7.1% 2015-19. It suffered a relatively mild decline in 2020, of 3.1%, and recovered to 3% in 2021, both thanks in part to the country’s effective management of Covid and the vaccine rollout. Owing to its low public debt, the government was able run sizeable fiscal deficits (7.1% of GDP in 2021). Its public debt is still equivalent to less than 40% of GDP, though it will have to watch this ratio as it continues to graduate from sources of concessional finance. Tourism will likely recover strongly in 2023, assuming that China loosens its outward travel restrictions. Merchandise exports have been recovering quite strongly, a trend that should continue, although Cambodia will need to address the challenge of losing preferential EU market access for its garments and footwear industry. (The country’s dependence on these two sectors has been declining over time, but they still account for almost half of total merchandise exports.)

For all these reasons, and bearing in mind my imperfect knowledge of the country, there is every prospect that, barring some catastrophic event, the country’s economic recovery should continue apace.

What of the medium and longer-term outlook? The principal challenge will be to return to the earlier high growth, while ensuring that the benefits of this growth are distributed more broadly and in an environmentally sustainable manner, again assuming an open and supportive international environment. The fact that Cambodia has achieved very rapid growth in most years since the early 1990s must be grounds for cautious optimism. I suggest that the following five factors are likely to be key determinants of the country’s development trajectory. It’s obviously not an exhaustive list.

1. The macroeconomic policy framework

Cambodia’s quasi-dollarized economy is unorthodox but it has served the country well for three decades. It might be – in fact is in certain quarters – an affront to nationalist sensitivities. It does involve some (minor) loss of seigniorage. And it has the consequence that the government has one less economic policy tool at its disposal. But in a world where misguided macroeconomic policy has severe developmental consequences, the system is functional. It should therefore be allowed to evolve at its own pace. That will likely involve the increased adoption of the Riel, though it needs to be noted that it is not uncommon for smaller economies surrounded by much larger ones to be dollarized, formally or defacto.

The principal fiscal policy challenge will be domestic resource mobilization as the country graduates from international development assistance. A particular challenge will be government-guaranteed mega infrastructure projects, which call for high-quality, arms-length project evaluation. There are political economy implications here too, for in small open economies infrastructure projects (and land) are very often the major sources of political patronage. Also, as Cambodia progresses towards upper-middle income status, social policy objectives are likely to be elevated, beyond the immediate provision of basic education and health services. Cambodia’s tax and transfer system lacks progressivity and the public social welfare net is minimal.

2. Staying open

Cambodia’s open economy is fundamental to its post-conflict economic success. The economic openness has transformed the labour market and been a major driver of declining poverty. The signal that Cambodia is ‘open for business’ has registered in regional and global production and service networks. Initially heavily reliant on just garments and tourism, the export base has progressively broadened, to footwear, electronics and other manufactures. In addition there has been upgrading within these industries, for example in garments from simple sewing operations to manufacture of various accessories. Cambodia’s openness has also created opportunities when investors and buyers seek market diversification, including ‘China + 1’ strategies, and also ‘Thailand +1’ after that country’s crippling 2010 floods.

This industrial evolution can be expected to continue, providing attention is paid to key demand and supply-side variables. Cambodia has the great fortune of being able to closely observe, and learn from, neighbouring Vietnam, the stellar manufacturing export success story of ASEAN in the 21st century.

A ‘staying open’ strategy has several dimensions. First, the main policy game will always be unilateral and multilateral reform. Non-ASEAN bilateral and regional trade agreements are unlikely to deliver much, and can be hugely distracting of bureaucratic resources, unless they are open and large-scale agreements. (Arguably, with reservations, RCEP and the CPTTP, meet the latter criteria; Cambodia is a member of the former but not (yet) the latter.) The danger with most other PTA’s (preferential trading agreements), especially for a still-poor country like Cambodia, is that the concessions they deliver are invariably less than anticipated and they distract policy makers from the more important unilateral reforms.

Other elements of the trade architecture are also important. Global production networks are driving much of intra-ASEAN and intra-East Asian trade, and to participate in these membership of the WTO-ITA (World Trade Organisation Information Technology Agreement) II agreement is essential. As noted also, EU market access for garments and other exports is a key challenge. And perhaps most important of all, Cambodia needs to do everything it can to avoid being dragged into China-US trade and geostrategic conflict. Here, too, ASEAN membership is central (and especially Vietnam’s record of adroit diplomatic management).

The domestic commercial incentives framework will also need to evolve. In the early stages, it made sense for Cambodia to introduce special economic zones, as a signal to investors, and to ensure the smooth movement of goods and the efficient provision of infrastructure. Cambodia reportedly now has 54 SEZ’s. But this arrangement should be best seen as a transitional strategy on the way to economy-wide liberalization. In this respect, Cambodia can do no better than look to Singapore on how to manage this transition. The evolution needs to proceed to avoid the country becoming an unintegrated dual economy. The very generous fiscal incentives will also need to be reformed, as they undermine the government’s fiscal effort and are no longer as important as they once were.

3. Ensuring broad-based improvements in living standards

Forty years ago Cambodia probably had the highest poverty incidence in the world. The dramatic reduction in poverty incidence since the early 1990s is surely one of the most remarkable achievements in recent human history. Rapid economic growth was the primary determinant of this success, facilitated by rising education and health facilities, the labour market transformation and investments in rural infrastructure. In this respect, Cambodia’s growth-poverty elasticities appear to be similar to those of other high-growth East Asian economies, although Vietnam’s may be somewhat higher (that is poverty is even more responsive to growth).

As Cambodia graduates to higher income status it can afford to place more emphasis on the ‘growth plus’ factors that ensure broad-based improvements in living standards. As I read the inequality literature on Cambodia (see for example the recent IMF working paper, WP/19/187), the evidence on inequality is ambiguous. Cambodia commenced its rapid growth phase with very low levels of inequality, as a predominantly smallholder rice economy. Some increase in inequality was therefore inevitable and, with high economic growth, it did not significantly detract from the rapid poverty reduction. Now that the historical legacies of low levels of education and health provision have been largely overcome, the challenge will be to develop more egalitarian systems that equip all children for life in an upper-middle income economy. For example, Cambodia’s infant mortality rates are still relatively high compared to its richer ASEAN neighbours, as are its school dropout rates. There are very large inter-regional differences in living standards for a geographically compact nation, especially the gap between Phnom Penh and rural areas. Gender differences in educational achievements appear to be relatively moderate, more so than is reportedly the case in the labour market and the political system. As noted also, the tax and transfer system is not yet pro-poor.

4. Institutional development

Among all of Cambodia’s future challenges, this is probably the most complex, overlaid as it is with the ongoing transition from a post-conflict society presided over by one of the most long-lived regimes in the world. Here at least Cambodia can learn from its successful neighbours. Several of the successful developmental states of East and Southeast Asia have developed models where limited direct political accountability can co-exist with responsive and representative governance.

The key is to develop institutions that are independent of political pressures and interference. Several examples are evident in the field of economic governance: professional and well managed central banks, and in some cases competition commissions that ensure a reasonably level playing field. Anti-corruption commissions are another example, although maintaining genuine political independence for these institutions is more problematic. Cambodia will be able to prosper the more that business efficiency rather than political connections is the primary arbiter of commercial success. The country’s high international orientation is a positive factor in this regard, since export success requires business to be internationally competitive. International governance indicators are arbitrary, subjective and contentious, but Cambodia’s ranking in Transparency International’s Corruption Perceptions Index (157 out of 180 countries) is sending an unwanted message to international investors and traders. Justice with respect to land titling and access is reportedly still a major issue, another illustration of post-conflict legacies (as it is, for similar reasons, in nearby Timor Leste).

5. Managing the environment

Cambodia is a net food exporter, and its agricultural resilience (not to mention its tourism industry) will continue to be challenged by climate change. It also faces two major water issues which are significantly beyond its control and therefore require high-level international cooperation. One is the state of the Tonle Sap Lake system, which is a huge source of livelihood and nutrition for so many rural Cambodians. For various reasons, the health of this vital eco system is reportedly under threat. The other challenge is the state of the Mekong River, and Cambodia’s imperilled access to it as a result of climatic factors and irrigation/hydro activities upstream. Clearly Cambodia does not have the luxury of waiting for the ‘environmental Kuznets curve’ to take effect.

Three Key Challenges Facing Cambodia’s Post-Pandemic Recovery and Future Growth

Key Messages

  • Two years after the pandemic, Cambodia lead ASEAN in moving rapidly to re-open its economy. An impressive vaccination campaign and pragmatic economic policies have helped position the country for economic recovery.
  • However, risks remain and three key challenges must be addressed to support recovery and long-term growth.
  • The first challenge relates to maintaining health security and the need to strengthen the healthcare system. Had there been more healthcare capacity, a more targeted approach in managing the outbreak would have been feasible, reducing the toll on the economy and livelihoods.
  • Second is supporting new sources of growth. With the construction and real estate boom ending, future growth must come from diversification within agriculture and manufacturing, with a move towards higher value-added activities. A revival in tourism will aid recovery but will need to cater to higher-spending tourists.
  • The last challenge relates to managing financial sector risks. The forbearance measures related to the pandemic and growth slowdown has increased indebtedness of banks and households. While a gradual winding back may avert a financial meltdown, increased regulation and supervision is required for long term financial sustainability.


Cambodia was one of the first countries in Asia to record a case of COVID-19 and was also heavily impacted by the pandemic. Two years later, it was the first country in ASEAN to move ahead with re-opening unilaterally. An impressive vaccination campaign and pragmatic economic policies have helped position the country for economic recovery. However, risks remain. This blog summarizes developments in 2020-2021 and highlights three key issues in support of recovery and long-term growth.

Strict border controls helped Cambodia avoid widespread transmission of COVID-19 during 2020, but this changed in February 2021 with a major outbreak in Phnom Penh. The disease quickly spread to all provinces of the country, triggering school closures, lockdowns, and other measures to slow transmission of the virus. For most of 2021, Cambodia was in a race between the vaccine and the virus. Vaccination began in January 2021 with donations of Sinopharm vaccines from China, and accelerated through the year as the government leveraged bilateral ties to secure additional vaccine supplies. Clear public communication, a rapid expansion of vaccination to include younger children, and a pragmatic area-based approach to vaccine rollout all contributed to an exceptionally quick vaccine rollout.

Cambodia recorded its first case of the Omicron variant in December 2021. This new variant spread rapidly with the 7-day moving average reached 550 cases in late February 2022 before a change in testing protocols brought reported case numbers down. Despite this threat, economic activity continued to recover. Mobility, which is a good short-term proxy for economic activity, had largely returned to pre-pandemic levels by the end of 2021 and has not been severely impacted by the spread of Omicron. Flight connectivity and international visitor arrivals also started to improve, albeit from a low base. All remaining protocols affecting international visitors were removed in October 2022.

These developments have positioned the economy for recovery in 2022, with the IMF forecasting growth of 5.1 per cent for the year in its World Economic Outlook (IMF, 2021a) and keeping this forecast relatively unchanged at 5 per cent following its Article IV Consultation concluded in September 2022 (IMF 2022). This is promising given a gloomy global outlook and following a contraction of 3.1 per cent in 2020 and modest growth of 2.1 per cent in 2021 (IMF, 2021a). This return to growth is encouraging, but the recovery remains fragile beyond just the uncertain global inflation and growth outlook. In 2022 and beyond, policy makers will need to address three key challenges to safeguard the recovery: (i) maintaining health security; (ii) supporting new sources of growth; and (iii) managing financial sector risks.

Challenge No. 1 – Improving health surveillance and healthcare capacity

Although the COVID-19 pandemic is not yet over, it is clear that poor countries in particular need to be better prepared for future health and related crises, which are likely to become more frequent.

Cambodia recorded its sharpest daily decline of COVID-19 cases when they fell from 978 on 30 September to 232 on 1 October 2021 (Figure 1). The overnight reduction of 76 per cent was due to a change in the approach taken on testing. By eliminating random testing of asymptomatic individuals, the reported numbers now only reflected cases presented for testing following the onset of symptoms.

With the sharp drop in testing, case numbers remained predictably low for some time, leading to the easing of lockdowns and the opening of borders in November 2021. At the time, there were concerns that this approach to ending the pandemic would prove to be illusionary rather than visionary. It is now clear that this was indeed the right approach, and reduced the burden on the economy, and especially the poor, by facilitating an earlier and stronger recovery.

Figure 1

As noted, Cambodia’s record on vaccinations has been remarkable. The vaccination rate in February 2022 at above 80 per cent of its population is one of the world’s highest with the WHO reporting that 99.0% of all adults have received two vaccine doses (WHO, 2022a). The government has also been proactive in expanding vaccine coverage to children and offering booster doses from different manufacturers to increase immune response. As a result, over 80 per cent of the population were fully vaccinated by March 2022, and population-level immunity continues to improve.

Although adequate supplies of vaccines from China and other partners were important in the vaccination outcome, Cambodia deserves credit for managing the logistics efficiently, enabling a rapid rollout under challenging circumstances. Work to strengthen vaccine supply chains has continued and the government has expanded its cold-chain infrastructure to enable nationwide rollout of mRNA vaccines for booster doses and vaccination of young children.

Despite these ongoing investments, Cambodia’s health system capacity remains among the lowest in Asia. For instance, there are currently only 0.7 hospital beds per 1,000 people, compared to 2.6 in Vietnam and an average 4.7 amongst the OECD countries. This suggests that a future surge in cases of a new COVID-19 variant requiring hospitalisation could quickly overwhelm the healthcare system.

The key lesson from the pandemic is the need to increase both the quality and availability of health services. Cambodia had been falling behind on many of its Sustainable Development Goals (SGDs) before the pandemic (see Sachs et al, 2021), leaving it vulnerable and exacerbating the negative social impacts of the pandemic. The universal health coverage indicator of SDG 3 on Health and Wellbeing measures the average coverage of essential services for prevention and treatment of infectious and non-communicable diseases for the general and the most disadvantaged population. The score of 60 out of 100 in 2017 (see Sachs et. al., 2021) means that Cambodia was not on-track to achieve its 2030 goals. The pandemic is a further setback in meeting the 2030 goals but the greater awareness of the importance of health system strengthening and the experience mobilizing additional resources for healthcare and social protection during the pandemic may help create momentum for Cambodia to catch up.

Challenge No. 2 – Sustaining future growth

While the economy returned to positive growth in 2021 and is expected to pick up further in 2022, long-term growth will depend on public policy choices. To achieve the high rates of growth seen before the pandemic, Cambodia will need to implement a well-targeted programme of investments and reforms.

During 2010-2019, Cambodia’s economy grew by more than 7 per cent per annum on average, making it one of the fastest growing countries in the world. This growth was initially fueled by large inflows of foreign direct investment (FDI), strong growth in garment manufacturing and tourism, and rural-urban migration of workers from agriculture into manufacturing and services. However, over time the sources of growth shifted to become increasingly reliant on construction and real estate, which was unsustainable. Property development boomed as investors sought to capitalize on rising urbanization, strong demand from foreign buyers, and the development of Sihanoukville as a hub for gambling and coastal tourism (see Menon, 2022).

The construction and real estate sectors accounted for 19.0 per cent of all growth in 2010-2019 and accounted for 22.5 per cent of total GDP in 2019 (Figure 2). Having accounted for only 4.8 per cent of FDI inflows in 2011, FDI into construction increased steadily to reach 18.8 per cent in 2019. While prices for residential and commercial property remained below regional comparators, the investment boom led to a growing problem of over-supply that has been exacerbated by reduced demand due to COVID-19.

The construction and real-estate sectors cooled significantly in 2020-2021. The close linkages between construction, real-estate, and the financial sector mean that further corrections in the property market could spill over to the rest of the economy. Even if the property and real-estate sector can achieve a soft landing, it is unlikely to be a major source of growth in the medium term. Cambodia will therefore need to rely on productivity improvement and upgrading of agriculture, manufacturing, and other services as the main drivers of growth going forward. Achieving this will require continued investments in infrastructure and human resources as well as reforms to reduce transaction costs and facilitate private investment.

Figure 2.
FDI inflows to construction, real estate, and accommodation ($ million), and as a share of total FDI (%)

Source: Author’s estimates using data from Royal Government of Cambodia.

Significant investments are already underway to improve competitiveness. The Phnom Penh-Sihanoukville expressway, which will halve travel time between the two cities, is due to be completed in 2022, while construction of new airports to serve Phnom Penh and Siem Reap is progressing well. The government has also implemented reforms to reduce the cost of doing business. An online business registration service was launched in 2020, followed by an online licensing platform and a new investment law in 2021. The new investment law includes enhanced incentives to stimulate skills development and investment in high-tech industries, but it will not become fully effective until implementing regulations have been approved.

In addition to economy-wide interventions, the government should also consider sector-specific initiatives to boost growth. Cross-country comparisons suggest that much of the potential benefit of moving workers from agriculture into other sectors have already been realized. While the inter-sectoral transfer is usually associated with a one-off increase in the level of productivity, future growth will require adoption of improved technologies and an intra-sectoral reallocation of factors towards production of higher-value differentiated products or higher value-added activities.

Exports of agricultural products have been growing steadily and the Cambodia-China Free Trade Agreement (CCFTA) and a forthcoming agreement with South Korea offer additional opportunities to expand agricultural exports. To realize this potential, Cambodia will need to strengthen the infrastructure and institutions for trade in agricultural products. This includes development of laboratory and food safety capacity as well as specific sanitary and phyto-sanitary protocols for food exports (See Roeun and Hiev, 2022). There is also scope for well-targeted public policy to support innovation in agricultural production and food processing. This includes greater use of digital technologies, as well as introduction and dissemination of more advanced production technologies.

In the manufacturing sector, strong growth in exports of garments, travel goods and footwear (GTF) and approval of new GTF FDI projects in 2021 and Q1 2022 suggest that Cambodia retains a competitive advantage in this sector. However, this is likely to be gradually eroded by rising labour costs and the eventual loss of trade preferences following LDC graduation. While the GTF sector accounted for 57.6 per cent of merchandise exports during Q1-Q3 2021, non-GTF manufacturing exports have been growing rapidly (Figure 3).

Figure 3.
Non-garment manufacturing exports, $ million

Source: Author’s estimates using data from Royal Government of Cambodia.

To sustain this growth, Cambodia should implement measures to strengthen the efficiency and competitiveness of its special economic zones (SEZs) and industrial parks (see Warr and Menon, 2016). Potential measures include adoption of voluntary frameworks to enhance SEZ’s environmental sustainability, improved regulation and facilitation of firms operating in SEZs, and promotion of industry clusters to encourage agglomeration effects. Developing industry-relevant skills will also be crucial, and so the government should collaborate with business associations and manufacturers to develop industry skills transformation maps that can be implemented through public-private partnerships.

Tourism recovery and the shift to higher-value tourism can also contribute to growth but Cambodia will need to improve its competitiveness to achieve this. The government is currently implementing a phased tourism sector recovery plan spanning 2020-2025. Visitor arrivals have increased following the re-opening of borders but remain below 10% of pre-COVID levels. The pandemic is expected to lead to long-lasting changes in tourism demand including increased emphasis on social and environmental sustainability (ADB, 2022). Cross-country comparisons suggest that Cambodia lags on key dimensions of tourism competitiveness needed to capitalize on the shifts in demand. For example, Cambodia ranked 98th in the world Economic Forum’s 2019 Travel and Tourism Competitiveness Report and was the lowest ranked country in Southeast Asia, with notable gaps and weaknesses on environmental sustainability, human resources, and tourism service infrastructure.

Challenge No. 3 – Rebalancing the financial sector

An open and facilitating approach to regulation has supported rapid financial sector growth. By 2020, Cambodia had 59 licensed banks and 79 licensed microfinance institutions. It is notable that some of the largest institutions have either full or majority local ownership (Figure 4). Private sector lending has also increased, very rapidly growing at an average rate of 26 per cent per annum during 2010-2019. This growth saw the ratio of private sector credit to GDP almost quadruple from 28.1 per cent in 2010 to 97.8 per cent in 2019 (Figure 5). Despite efforts to promote local currency usage, Cambodia’s financial system has remained highly dollarized and has significant reliance on overseas funding.

While rates of non-performing loans remained low, there was a moderate decline in the profitability of financial institutions during 2015-2018 (Figure 6). Such declines in profitability can be a leading indicator of increased risk of financial sector distress (Thegeya and Navajes, 2013). In the banking sector, the rapid growth in lending coincided with an even faster growth in lending for construction and real-estate activities linked to the property boom.

Figure 4.
Total assets of selected Cambodian financial institutions in 2019 (KHR million)

Source: Author’s estimates using data from Royal Government of Cambodia.

Figure 5.
Ratio of private sector credit to GDP (%) 2019

Source: Author’s estimates using data from Royal Government of Cambodia.

Figure 6.
Average return on assets and equity of licensed banks in Cambodia (%)

Source: Author’s estimates using data from Royal Government of Cambodia.

Meanwhile in the micro-finance sector, growth in total lending was accompanied by increased loan sizes and growing concern about over-indebtedness of individuals and households (Cambodian Microfinance Association, 2021).

Recognizing the scale of the economic impacts arising from COVID-19, the National Bank of Cambodia (NBC) moved quickly to introduce a package of regulatory forbearance measures. This included a deferral of the planned increase in the bank’s capital conservation buffer and a loan restructuring programme. The restructuring programme was initially targeted at sectors directly impacted by COVID-19 but was quickly expanded to cover all private lending. Under the programme, banks and MFIs could suspend loan interest and principal repayments and adjust the schedule of repayments without reclassifying a loan as non-performing. This enabled banks and MFIs to accommodate borrowers’ needs for flexibility without large-scale provisioning that would have constrained new lending.

Uptake of the loan restructuring programme has been significant. By end 2021, $5.2 billion in loans had been restructured, equivalent to 12.9 per cent of total private sector lending, and 19.9 per cent of GDP. At the same time, new lending continued to grow. As a result, the total stock of private sector lending increased by 52.9 per cent during 2020-2022, with loans to businesses rising 47.6 per cent while personal loans rose by 73.6 per cent. The restructuring programme was extended several times and is now due to end in June 2022. While reported NPLs have remained low to date, the proportion of loans that are non-performing is likely to increase as the restructuring programme is phased out. No data on the distribution of restructured loans by bank or sector have been published but NBC carried out on-site supervision and stress tests in Q4 2021 to get a better understanding of possible risks. It has also instructed banks to postpone dividend payments in order to retain capital and has encouraged some banks to increase their capital base.

A related concern is that some banks, including large locally owned banks have quite high exposure to the construction and real estate sectors. The growth of the property sector has also been associated with increased shadow banking by real-estate developers. A new Non-Bank Financial Services Authority has been established to strengthen regulation and supervision but will need time to become fully operational. Cambodia’s authorities have also been encouraged to accelerate work on the establishment of a deposit protection scheme, implement measures to prevent money laundering, and clarify the framework for bank resolution (IMF, 2021b).

The recent pace of credit growth cannot be sustained indefinitely, however, and has led to growing concerns about over-indebtedness. The rise in imported inflation through supply chain disruption and increase in energy prices raises concerns over domestic inflationary pressures. However, a sudden tightening in the availability of credit would have a significant impact on economic growth.

Cambodia’s authorities will therefore need to carefully monitor the health of banks and MFIs as the forbearance measures are phased out and be ready to intervene as needed to maintain financial sector stability. Systemically important banks with concentrated exposure to construction and real-estate should be closely monitored. A staged increase in minimum capital requirements could also be used to promote consolidation in the banking and microfinance sectors but would need to be managed carefully.

Summary and Conclusions

Cambodia has been heavily impacted by both the direct effects on health from the COVID-19 virus and from measures designed to curtail its spread. Two years after the pandemic, however, Cambodia lead ASEAN in moving ahead with re-opening unilaterally. An impressive vaccination campaign and pragmatic economic policies have helped position the country for economic recovery. However, risks remain, and three key challenges must be addressed to support post-pandemic recovery and long-term growth in an increasingly uncertain global economic environment.

The first relates to maintaining health security and the need to strengthen the healthcare system. The capacity of the healthcare system remains one of the lowest in Asia. Had there been more healthcare capacity to work with, the government could have employed a more targeted approach in managing the outbreak and reduced the toll on the economy and livelihoods.

The second challenge is to identify and support new sources of growth. While the construction and real estate sectors accounted for about a fifth of growth in the decade leading up to the pandemic, this is unsustainable and will not continue. Future growth will need to come from diversification within agriculture and manufacturing, with a move towards higher value-added activities supported by greater investment. Foreign investment is likely to play a key role in enabling this transformation and improving domestic infrastructure, and upgrading local skills will help ensure that Cambodia is well positioned to attract high quality investment. A revival in tourism will also aid recovery but will also need more investment for upgrading to cater to higher-spending tourists.

The third and last challenge relates to managing financial sector risks. The forbearance measures related to the pandemic, cooling of the property sector and slowdown in growth have increased the indebtedness of households and firms. The winding back of the support measures needs to be carefully managed to avoid a financial meltdown, while increased regulation and supervision is required for long-term financial sustainability.


Cold War 2.0 Comes Knocking at Cambodia’s Door: Development Choices for Cambodia and other ASEAN Members

Key messages

  • With the outbreak of war in the Ukraine, Cold War 2.0 becomes a reality for Cambodia and its ASEAN neighbours as well.
  • The global reach of big powers exerts pressure on small countries everywhere. Small countries have to learn how to deal smartly with the superpowers, if they are to enjoy peace with a high degree of national autonomy.
  • Studying the thinking of key personnel in US foreign policy about China, and the weaknesses in their perceptions, this paper suggests (1) five lessons for China to manage its desired peaceful rise, as well as for the US to improve its international standing; and (2) closer coordination and integration within ASEAN to ensure that the Southeast Asian front of Cold War 2.0 would not turn hot as in Ukraine.
  • The gold standard for regional economic integration in the 21st Century should be the region-specific policy package that would maximize members’ progress on the 17 Sustainable Development Goals (SDGs) and not the package of selective free market policies pushed by the United States and Western Europe governments at the behest of their large corporations (e.g. Nestle and Goldman Sachs).
  • There will be no more global hegemons. The world of multipolar powers requires modernization and strengthening of the United Nations system to keep global peace, ensure harmony between humans and nature, and enhance socio-economic progress.
  • Cambodia and its Southeast Asian neighbours must undertake deep EU-style regional integration in order to not only to avoid becoming pawns in proxy wars but also have the collective heft to persuade US and China to increase the supply of global public goods through the United Nations agencies and through regional organizations to achieve the 17 Sustainable Development Goals and to meet the 1.5oC target of the Paris Climate Treaty.

The World Order is Changing Again

A proxy war broke out in Ukraine in February 2022 between US-NATO and Russia, with China usually branded as a Russian ally. With that, and although Ukraine is geographically far away, Cold War 2.0 is knocking at the door of all ASEAN members, and of every country adjoining Southeast Asia.

On April 22, 2022, U.S. National Security Council Coordinator for the Indo-Pacific, Kurt Campbell, arrived helter-skelter in Honiara, the capital of the Solomon Islands, in the immediate wake of the signing of a security pact between Solomon Islands and China. Honiara is 6,120 miles (or 16 flying hours) away from Los Angeles, and yet the increased presence of China there is seen as an immediate threat to the national security of the United States, in the same way that the potential NATO membership of Ukraine has been seen as a grave threat to the national security of Russia.

It is indeed abhorrent that just because Russia has the means to bully Ukraine, it is now therefore doing so. A lesson to be learned here is that dealing smartly with bullies – both far and near — is what small countries must be able to do well if they are to enjoy peace with a high degree of national autonomy.

I will use the convenient device of a position paper by the US side to organize my discussion about ASEAN options in the widening of Cold War 2.0. Kurt Campbell and Rush Doshi had written the article, “How America Can Shore Up Asian Order: A Strategy for Restoring Balance and Legitimacy” in early 2021 before they joined the Biden administration to lead the US confrontation with China as the “Asia Tsar” at the White House and the Director for China in the National Security Council, respectively.

My choice of the Campbell-Doshi paper as the starting point instead of a position paper written by China officials is not meant to criticize US participation in Cold War 2.0 and ignore China’s role in it. I examine the Campbell-Doshi paper in order to highlight common key elements in the mindsets of superpowers that had led to harmful actions on other nations (and to the superpowers themselves eventually as well, most of the time).

I will also draw five lessons which ASEAN should convey to:

  • China on how to avoid committing the same hubristic mistakes as the U.S. did, and
  • the US on how it should handle its international engagements as the rise of China and India transforms the global strategic balance.

The basic insight for Southeast Asia from my analysis is the observation in the satire by Jonathan Swift that the collective efforts of the 6-inch Lilliputians were able to pin the towering Gulliver to the ground.

The Crux of the Campbell-Doshi Paper

The Campbell-Doshi position is based on the following six claims:

  • The United States is “the original architect and longtime sponsor of the present [operating] system” of the Indo-Pacific region;
  • This Indo-Pacific operating system is based on the principles of “freedom of navigation, sovereign equality, transparency, peaceful dispute resolution, the sanctity of contracts, cross-border trade, and cooperation on transnational challenges”;
  • The Indo-Pacific operating system has endured so long for two reasons: it had “balance and legitimacy”, and it enjoyed “United States’ long-standing commitment to forward-deployed military forces” which deterred nations that do not abide by these principles from undermining them;
  • With 40 years of “long peace” underwritten by the balanced and legitimate nature of the Indo-Pacific operating system and by US military might, this regional order has “liberated hundreds of millions from poverty, promoted countless commercial advances, and led to a remarkable accumulation of wealth”;
  • Newly-risen China, which does not accept the underlying principles of the operating, system will seek to undermine “the order’s balance and legitimacy”; and
  • China has a proclivity toward military violence (e.g. island-building in the South China Sea, and internal repression in Xinjiang) and toward economic coercion (e.g. discrimination against Australian exports).

Campbell and Doshi concluded that “[l]eft unchecked, Chinese behavior could end the region’s long peace”, and they recommended that “the United States needs to make a conscious effort to deter Chinese adventurism” in order “to preserve the regional operating system that has generated peace and unprecedented prosperity”. Their proposed US strategy is to “modernize and strengthen… the existing regional operating system” by mobilizing East Asian countries to link their military capabilities to those of the Quad and AUKUS to prevent China from changing the status quo. This US approach would (presumedly) “ensure that the Indo-Pacific’s future is characterized by balance and twenty-first-century openness rather than hegemony and nineteenth-century spheres of influence”.

Lessons from the flaws in the Campbell-Doshi paper that ASEAN should convey to China and the US

Despite Campbell and Doshi’s repeated use of the word “balance” to depict the Indo-Pacific system, balance of power only ever existed in the military confrontation between US allies and communist states in East Asia (like the standoff on the Korean peninsula). There was never a balance of power within the East Asian capitalist world, and order there took the form of hegemonic stability where the overwhelming force of the US economy and its military had entitled the US to design the global institutional architecture, and then to amend it selectively and unilaterally. For example, the US Dollar instead of John Maynard Keynes’s Bancor was designated the linchpin of the Bretton Woods Monetary System, and Nixon closed the gold window in 1971 without consulting any of the closest allies of the US.

The first lesson that I draw for China to manage its rise and for the US to strengthen its international status is that it is very easy for a superpower to be blind to its own self-serving actions, and to behave as if it were not reaping significant benefits from the global public goods that it provides e.g. obtaining seigniorage by allowing the US dollar to serve as the international vehicle currency.  The outcome from a superpower having this sense of entitlement is that it is susceptible to being blinded by belief in its own propaganda, and hence would often act in entirely self-serving ways that undermine its moral authority.

Campbell and Doshi’s plea for the maintenance of the existing regional operating system rests on the proposition that because the current software had generated immense benefits for all in the past, it would continue to do so in the future.  However, even non-Marxists can see that this linear projection of the past is valid only if the optimum institutional infrastructure is independent of the economic structure. While it is nostalgically comfortable to instinctively cling to the status quo, it is logically unjustified to do so as a general way for maximizing global and regional welfare, especially given the tremendous expansion and transformation of China’s economy and its continued dynamism. In addition, one has to consider the expected technological innovations to come and their certain disruptions of present supply chains, plus accelerating climate change and loss of biodiversity.

Campbell and Doshi are correct in describing China as seeking to reconfigure the regional order to its advantage.  The authors are also correct that the reconfiguration will reduce what General de Gaulle has called the “exorbitant privilege” of the US in the US-designed and US-dominated global capitalist system.  They may not be correct, however, about the software reconfiguration being inevitably harmful to the welfare of other Asian countries either in absolute or relative terms. In short, defense of the status quo is defense of US interests and not necessarily defense of the interests of East Asian countries.

For example, the present operating system is biased towards protecting and enhancing the profitability of large US and European corporations. A recent egregious example of using free trade principles selectively to benefit western corporations would be the US support for infant formula manufacturers by suppressing public health information campaigns by the World Health Organization (WHO) and its member countries to promote breast feeding.

[At a WHO meeting in 2018,] American officials sought to water down the resolution by removing language that called on governments to ‘protect, promote and support breast-feeding’ and another passage that called on policymakers to restrict the promotion of food products that many experts say can have deleterious effects on young children.

[When the Ecuador moved to implement the WHO resolution, the US Ambassador to Ecuador, Todd Chapman, told Ecuador that if it] refused to drop the resolution, Washington would unleash punishing trade measures and withdraw crucial military aid. [The Ecuadorean government reversed its decision.]

The efforts by US and Western Europe governments to exempt the products of their firms from regulation in foreign markets and to extend their monopoly status to foreign markets is why they are claiming that the gold standard in trade agreements are extreme free market policies (e.g. no government subsidies and no government regulations but stringent patent laws). This selective use of free market policies in trade agreements really constitute economic bullying because these policies are optimum only in a technologically-stationary world with no market failures and no human-induced climate change.

The second lesson that I draw for China in managing its desired peaceful rise is that it would undermine itself in the competition for global leadership if it were to configure its international trade and investment relationships with US-style selective use of free market principles to benefit itself disproportionally. China should propose, and so should the US, that the gold standard of trade agreements in the 21st Century be the group-specific policy package that would maximize members’ progress on the 17 Sustainable Development Goals (SDGs) .

The fundamental flaw in the Campbell-Doshi proposal is that it ignores the fact that the current regional operating system was designed for the Age of the Hegemon and not for the emerging Age of Multipolar Powers. The growing incompatibility between the present US-dominated global institutional superstructure and the facts (and boots) on the ground is ratcheting up steadily the level of resentment in China. China should, however, realise that the Age of the Hegemon would never appear again even if its total GDP were to be four times that of the United States when its standard of living reaches that of the United States. This is because India is also rising, and its population would at least equal that of China within the next 60 years.

The Age of the Hegemon is truly over, and this is the third lesson for China and the US. China should reconcile itself to the fact that it would not be able to dominate the world the way that the United Kingdom did in the 19th Century and the way that the United States did in the 20th Century.

The lesson for the US political class from the inevitable end of global hegemony, now and future, is to stop using populist America-first foreign policies in order to generate political support for domestic elections. As in any normal relationship between two equals, US-China relationship will always be characterized by both competition and cooperation. The following excerpts by Robert Blackwill and associates characterize this populist America-first posture:

Because the American effort to ‘integrate’ China into the liberal international order has now generated new threats to U.S. primacy in Asia—and could result in a consequential challenge to American power globally—Washington needs a new grand strategy toward China that centers on balancing the rise of Chinese power rather than continuing to assist its ascendancy …  [There must be] the clear recognition that preserving U.S. primacy in the global system ought to remain the central objective of U.S. grand strategy in the twenty-first century. (Robert D. Blackwill and Ashley Tellis, Revising U.S. Grand Strategy Toward China, Council for Foreign Relations, International Institutions and Global Governance Program, Council Special Report No. 72. March 2015.)

[While the US should} avoid a U.S.-China confrontation[, it must work to] maintain U.S. primacy in Asia …. [And an] energized American pivot to Asia is the indispensable ingredient in a successful U.S. policy to participate and project strength more consequentially in the region and to deal with Chinese power and influence under Xi Jinping. (Robert D. Blackwill and Kurt M. Campbell, Xi Jinping on the Global Stage: Chinese Foreign Policy Under a Powerful but Exposed Leader, Council on Foreign Relations, International Institutions and Global Governance Program, Council Special Report No. 74, February 2016.)

The ideal US-China relationship would limit competition to the economic and technology spheres, and promote cooperation in the supply of regional and global public goods (e.g. fight climate change, prevent nuclear proliferation, and stop pandemics). To ensure that the competition in the economic and technology spheres would not create so much antagonism that it would overwhelm the goodwill generated by the cooperation, the regulations on economic and technology competition must be set, updated, and supervised by global organizations (e.g. UN agencies) with enforcement power.

The fourth lesson for China and US is to prevent the Age of the Hegemon from becoming the Age of Polar Disorders. It would be highly dangerous for the medium-run outcome to be bipolar disorder between China and US, and the long run outcome to be multipolar disorder involving China, USA, EU, and India.

Specifically, the new fast-emerging superpowers (notably China in the medium term) should not adopt the present US as its role model for a superpower. To do so would lead China to establish almost 800 military bases in over 70 countries , an outcome that would maximize the probability of an accidental war with the Quad in the medium run, and with India in the long run.

The fifth lesson for China and US is that the switch from a hegemonic order to a multipolar order is more likely to benefit Southeast Asia than not, and so it would be difficult for the United States to motivate Southeast Asia to stick with the current regional operating system. And Southeast Asia would certainly abandon the present Indo-Pacific order earlier if China stops enlarging its military footprint in the South China Sea and uses its Belt-Road Initiative to actively support Sustainable Development in Southeast Asia.

One important implication from the fifth lesson is that it would be maximization of enlightened self-interests for both China and US in a multipolar world order if they would adopt the fulfillment of the 17 SDGs their common overarching position in international diplomacy.

What is good for Cambodia and other ASEAN members?

Southeast Asia (SEA) separates the Indian Ocean from the Pacific Ocean, and being the area of contestation in the geo-strategic competition between the Quad-AUKUS and China, it naturally prefers that the new software of the Indo-Pacific order be diplomatically-biased rather than militarily-biased in its orientation toward problem-solving. Southeast Asia definitely does not want the expansion of the military pacts between USA and Northeast Asia (NEA) into the region because it would be just as provocative to China as the expansion of NATO into Eastern Europe was to Russia, which helped to precipitate the Ukrainian civil war and the forced return of Crimea to the Motherland by Russia.

Campbell and Doshi claim that their proposed architecture is good for Southeast Asia, but they would have produced an even better proposal had they worked with ASEAN, the regional organization, in designing the regional architecture. The Campbell-Doshi proposal is a supply-pushed widget and not a demand-pulled one. ASEAN would have demanded that the regional arrangements address the national security concerns of both China and the Quad without disadvantaging either. Freedom of navigation for their carrier groups in the South China Sea is fine but none should linger in the area. The US has military bases in the islands of Northeast Asia, and China has them in the islands of Southeast Asia, and East Asia demands the suspension of building more of them (or of expanding them) in these two locations. Only two Southeast Asian countries were members of SEATO in the Cold War, and none would join a revived version of it today.

Southeast Asian nations want the software of the new Indo-Pacific order to incorporate circuit-breakers for dispute resolution in the form of compulsory dispute arbitration managed by neutral regional/global bodies like the World Court and UN agencies. They would want a regional order based on international laws and not on rules unilaterally set by either world power.

The sad assessment is that the Southeast Asian region is unlikely to get the regional institutional software that is best for its sustainable development because an elephant does not take the best interests of grass into account when moving to a more advantageous location in its confrontation or dalliance with another elephant. Many in Southeast Asia have therefore been watching events in the European Union closely to learn how obstacles to closer regional integration are overcome, and whether agency can thus be produced. The first signs are optimistic; both US and China have followed EU in accelerating the decarbonization of their societies.

This last observation allows me to end on an optimistic note about regional partnerships (SDG #17). If enlightened self-interests succeed in creating a cohesive ASEAN Union , then Southeast Asia will in the near future be able to return Campbell and Doshi the favour of their advice, first, by formulating a better regional operating system for the Americas based on consulting its entire membership about what it wants, and then, by setting an example for US-China engagement about how to reap mutual economic benefits and address national security concerns.

Fundamentally, effective global partnerships are the prerequisite for a safe and prosperous multipolar world. A world economy of a single unified market will be much richer and more dynamic than one with semi-segmented regional markets. The health of the Earth’s physical systems and biological diversity requires a holistic approach to environmental stewardship. And there must be a freeze on the arms race, or better yet, a general disarmament of the superpowers.

If is therefore self-evident that what needs modernization and strengthening is not the Indo-Pacific operating system as proposed by Campbell and Doshi but the United Nations system. This is the historically responsible task which China and the US must undertake, each doing so out of its own long run self-interest. And Cambodia and its fellow Southeast Asian countries must work closely together to help formulate a creative UN-strengthening agenda that US and China can support.

Public Private Innovation Partnerships for Sustainable Transformations

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.

  • Donald, B., & Gray, M. (2019). The double crisis: in what sense a regional problem? Regional Studies, 53(2), 297-308.
  • 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.
  • Grillitsch, M., & Sotarauta, M. (2020). Trinity of change agency, regional development paths and opportunity spaces. Progress in Human Geography, 44(4), 704-723.
  • 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.
  • 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.
  • Kirchherr, J., Reike, D., & Hekkert, M. (2017). Conceptualizing the circular economy: An analysis of 114 definitions. Resources, Conservation and Recycling, 127, 221-232.
  • 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.
  • 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

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.

The Outlook Post COVID-19: Implications for Cambodia’s Development Strategy

Key Messages

  • The Fourth Industrial Revolution holds some risks for Cambodia, since automation of basic manufacturing is expected to reduce the need for labor.
  • Regional protectionism also presents risks if it leads to significant reshoring of manufacturing to higher income countries, closer to key markets for goods.
  • However, some opportunities also present themselves, particularly since China is likely to continue to be a key manufacturing center. Cambodia can leverage its strong relationship with China for assistance into linking into Chinese manufacturing processes.
  • Cambodia currently faces both challenges and opportunities with respect to the digital economy. Internet access is high and costs low in Cambodia, but firms are not investing in digitization.
  • The platform economy offers labor opportunities, but government regulation is necessary to protect consumers and prevent the emergence of monopolies.
  • Efforts to promote education and sustainable infrastructure across the country to promote digital opportunities in rural areas and reverse rapid urbanization could offer opportunities to green the economy, and promote economic resilience by strengthening communities, rebuilding small scale farming, and reversing some of the effects of rapid urbanization.


The COVID-19 crisis, war in Ukraine and ongoing problems such as disrupted supply chains, rising protectionism and falling commodity prices place pressure on economies across the world, and Cambodia is no exception. Although Cambodia was more successful than many other countries in containing the health impacts of the pandemic, it suffered severely from the shocks to the global economy, including the collapse of demand for manufactured goods and the near cessation of tourism in the depths of the crisis. Although recovery has occurred, long term trends were intensified by the crisis: the trend towards digitization of the economy, as part of the so-called “Fourth Industrial Revolution” and the trend towards regional protectionism. These intersect with a third trend that has been longer in the making: the impacts of climate change, to which Cambodia is considered highly vulnerable due to the nature of its geography and ecosystem.

The Fourth Industrial Revolution is of particular concern to Cambodia since it is projected to heavily impact Cambodia’s manufacturing and tourist industries. There are a number of potential impacts associated with IR4.0. One is the use of automation to replace low skilled workers. Sewing machining is an area that is becoming increasingly highly automated. An ADB report on the impact on Cambodia suggests that automation could displace 150,000 Cambodian jobs from the garment industry in the next ten years. New jobs may also be created, but it is not clear if Cambodian workers will have the skills to qualify for these jobs. According to a recent Malaysian study, three crucial competencies are necessary for successful employment in the new world of smart factories and automated production: the ability to interpret and document data, to understand and optimise processes, and to execute, troubleshoot and maintain devices. If Cambodian workers lack these skills, investors may relocate to other market where this kind of labor is available.

Another potential impact of IR4.0 on Cambodia is that of “reshoring” of manufacturing to high-wage economies, a process that could accelerate in a context of regional or national protectionism, as exemplified by the trade war between China and the US in 2018-19. The free trade consensus that has broadly prevailed since the end of the Cold War is unravelling. In part this is due to political pressures in high income countries, and in part to heightened awareness of the fragility of global supply chains in the face of natural disasters and economic shocks.

In the context of IR4.0, reshoring may make business sense also. Automation reduces the wage bill as a percentage of firms’ costs. This means that firms in high-wage economies, that previously offshored manufacturing to lower wage economies like Cambodia in order to save money, could bring their manufacturing plants back home again, closer to where their buyers are located. Some regional economies are doing this – the Taiwanese government, for example, is conducting a reshoring program – but so far there is little evidence of this happening in countries such as the US. The ADB cites this as a concern for Cambodia.

However, other analysts argue that a more likely future is the further clustering of manufacturing in China, which is a world leader in digital and other IR4.0 technologies, and is pouring government money into retaining its advantage. This could be a helpful trend for Cambodia, given the recently signed free trade agreement with China, and given Cambodia’s status as a close ally of China and recipient of significant Chinese aid and investment. Commitments from China over technology transfers, training and skills upgrading opportunities, and supply chain integration with Cambodian firms could significantly reduce Cambodia’s risks.

A further important aspect of IR 4.0 for developing countries is the rise of jobs based on access to digital platforms such as Pass App, Muuve and Foodpanda. The platform economy is increasing rapidly in South East Asia, posing challenges to governments who must pass legislation relating to consumer protection, data privacy, taxation and competition policies. There is a unique opportunity for the Cambodian government to learn from the experience of other countries and avoid the emergence of exploitative private monopolies in this area. Platform work also raises issues relevant to labor markets. To the extent that platforms tend to work on a subcontractor model, the rise of platform work must be leveraged to promote government goals with regard to formalization, income tax, and provision of social security.

Cambodia has some advantages in the field of information technology and digitization. Cambodia has a very high level of internet access: a survey in 2021 by the United Nations’ International Telecommunications Union survey found in Cambodia’s data usage was six times the average for least developed countries, and its data charges were third lowest. However, an ADB survey found that Cambodian firms are by and large not ready to adopt new technologies, and are spending very little on innovation in this area.This could reflect the relative lack in Cambodia of medium sized firms who might have the scope to invest in R&D and to experiment in new ways of working. The RGC should consider ways to assist firms to prepare for the new industrial landscape, while avoiding heavy-handed interference with internet transactions that could discourage digital-based firms from investing in Cambodia.

As with any economic transformation, the benefits and losses of structural change are unevenly shared. In particular, automation is likely to affect women’s jobs more than men’s, and promoting digitization requires investing in infrastructure, including electricity and broadband, evenly across the country. Perhaps the single most important issue for taking advantage of the Fourth Industrial Revolution is education. Cambodia has made great strides in education over the past two decades, but problems remain. Cambodian teenagers lag behind their counterparts across ASEAN and in other lower-middle income countries; rural schools lag behind urban schools in Cambodia; and disadvantaged children lag behind better-off children in Cambodian schools. There are many reasons for this, including the recent nature of educational investment: the parents of current school children did not enjoy the same standard of education and their ability to help their children may consequently be limited. But there are also ongoing problems with the quality of teaching and school administration. Corruption remains a problem and is linked, through the practice of charging for “private lessons”, to high levels of grade repetition for poor children, identified as a major cause of school drop-out. Furthermore, according to the World Bank, overall funding for education, although increasing, is considerably lower than in other countries in the region and varies considerably between schools, with significant impact on the quality of education offered. Prioritizing efforts to further improve teacher quality, school administration and school facilities so that ICT and STEM subjects can be taught across the country would boost the opportunity to engage with the digital economy.

If the human resources and the infrastructure necessary for the digital revolution can be rolled out across the country, this could help significantly with the other key concern of this conference: greening the economy. Digitization allows increased opportunities for remote work. If internet connections can be powered through renewable energy, such as local solar panels or windfarms, then there is great potential to relieve the pressure on Cambodia’s overcrowded cities while rebuilding rural communities through the return of young workers. This could have the benefit of increasing resilience by restoring family support networks, and diversifying livelihood strategies of young workers, who could supplement online, household-based work with traditional strategies such as vegetable gardening and orchard cultivation, with surpluses sold through online platforms.

This kind of de-centering of the economy could also help to revitalize local governance. Well-designed schemes to assist small firms could encourage building of trust between government at local level and micro- and small enterprises, boosting progress towards reducing informality. In the context of ongoing deconcentration of functions from central government, this offers an opportunity to combine principles of subsidiarity with a commitment on the part of central government to ensure provision of quality education across the country, to prevent destabilizing infrastructure projects that undercut livelihoods, and to consistently administer central taxation and social service systems so as to prevent the emergence of inequalities between different parts of the country.

FDI Trends and Policies in Cambodia: A Preliminary Note

Key messages

  • The generation of benefits, externalities and sustainable linkages from inward FDI (IFDI) does not happen automatically, but requires the involvement and collaboration of all interested stakeholders (e.g. Chaminade & Vang, 2008; De Marchi et al., 2018).
  • The impact of IFDI depends on the local embeddedness of multinational enterprises (MNEs), their linkages with local small and medium firms (SMEs), and the latter’s access to global vale chains (GVCs) that may allow for upgrading capabilities of domestic exporters (Comotti et al., 2020).
  • The integration of IFDI into the local economy and industry structure needs be implemented with attention to sectoral and functional features of FDI and those of the (subnational) region/industry targeted (e.g. Crescenzi & Iammarino, 2017; Iammarino & McCann, 2013).
  • The quality of FDI matters more than quantity in terms of overall impact on development and growth (e.g. Alfaro & Charlton, 2007), suggesting that FDI promotion policies should particularly target industries likely to supply inputs to domestic firms (Bajgar & Javorcik, 2020).
  • Trade in GVCs and FDI are complementary phenomena that need be taken simultaneously into account when trying to capture the potential of internationalisation processes – and integration in global and macroregional GVCs – for local economic development (Rabellotti, 2003; Crescenzi et al., 2014; Iammarino, 2018; Gereffi et al., 2021).
  • The interaction between global production networks and technological change is likely to produce unequal regional development, income polarization, low quality job, limited knowledge spillovers, infringement of environmental, human and social rights, etc.. Regulatory frameworks and clear governance of public intervention at supranational, national and local levels are key for sustainable development goals (e.g. Iammarino and McCann, 2013; Giuliani, 2016).

Structural change, diversification and IFDI trends in Cambodia

The case of Cambodia, as that of Vietnam in Southeast Asia, highlights relatively recent attempts to use IFDI attraction as a platform for export sophistication and sectoral diversification. As Yang (2019: 5) notes, over the last two decades Cambodia has undergone a process of rapid industrialisation and diversification, shifting from a contribution of the agriculture sector equal to 44% of GDP in 1998, to around 22% in 2019. The role of the garment sector increased from 17% to 22% of GDP over the same period, alongside other industries including food and beverage and light manufacturing; meanwhile the service sector with tourism maintaining its share of around 40% of GDP (Ministry of Economy and Finance, 2019).

As Seila (2011: 31) notes, with a much less developed industrial base than neighbouring Thailand and Vietnam which initiated earlier their transitions, in Cambodia FDI policy support – without local content requirements or compulsory joint ventures – spurred a ‘crowding in’ effect for the garment and textiles industry. Both tourism and the export-oriented garment sector have been critical to the country’s economic transformation (Slocomb, 2010; Philippsen, 2021). Yang (2019) also highlights the role that FDI played as Cambodia’s export structure also gradually upgraded and diversified – with the top 10 products exported from 2001 to 2018 improving in both sophistication and quality, shifting partially from low-tech to medium-tech and strengthening integration in regional and global GVCs (Obashi, 2022; Observatory of Economic Complexity). Further, the service sector grew on average 8.3% over the last 15 years, with tourism, financial services, real estate, ICT, postal services, transport, and logistics collectively being the biggest contributors to the economy; among them some (e.g. real estate and finance) are also the largest FDI attractors.

IFDI in Cambodia rose from USD 381.18 million in 2005 to USD 3,624.64 million in 2020, with FDI outflows over the same period also rising from USD 6.28 million to USD 126.80 million (UNCTAD, 2021). UNCTAD data suggests a general upward trend in IFDI, with substantial rises in the level of inflows between 2004 and 2012, and again between 2015 and 2019.

Figure 1. FDI trends in Cambodia (Source: UNCTAD, 2021)

fDiMarket database (see Appendix at the end of this document) consistently show that between 2003 and 2017 Cambodia greenfield IFDI grew significantly, with a sharp increase particularly in 2007-2008. Sectors such as Real estate, Coal, Oil and Natural Gas, and Financial Services attracted the highest value of FDI, while others with low investment values – especially Textiles, Consumer Goods and Food & Tobacco – generated large numbers of jobs (Chart A.1). FDI inflows are also highly concentrated in specific sub-sectors: for example, Retail banking in Financial Services, Fossil fuel electric power in Coal, Oil and Natural Gas, Biomass power in Alternative/Renewable Energy, and Freight/Distribution Services in Transportation. IFDI in the largest sector, Real Estate, is distributed relatively evenly across sub-sectors. Looking at function or GVC stage of IFDI, there was no significant change during 2003-2017: investments in production accounts for over 75% of the total, whilst IFDI in R&D functions represents still a tiny share (Chart A.3).

Turning to the geography of origin of IFDI in Cambodia during the period considered, 75 % came from the Asia & Pacific area, within which Malaysia, China, Japan and Thailand accounted for the highest shares. This is a confirmation of the strong integration of Cambodia into macroregional GVCs. On the other hand, some IFDI also originated from economic hotspots in both the European Union and the US (Chart A.4). In terms of subnational distribution within Cambodia, as expected the capital region Phnom Penh received the largest greenfield FDI inflows, both in terms of amount invested and jobs creation (Chart A.5).

FDI Policies: Tax Incentives, Key Actors and Regulations

Cambodia’s tax regime and trade policies have been evolving since the mid-1990s. The current tax regime was finalised as part of Investment Law of Cambodia of 2003, entitling investors to incentives including: “[…] profit tax exemption or use of special depreciation and duty-free import of production equipment, construction materials, raw materials, intermediate goods, and accessories for export-oriented investment projects. The tax exemption period is composed of a trigger period plus additional 3 years and a priority period (determined by the Financial Management Law)” (Chheang, 2017: 3). Although there is a variety of sectors that do not qualify for tax incentives – e.g., commercial retail and wholesale, transport (except in railways), restaurants, financial service, media, forestry, tourism, real estate – Cambodian Special Economic Zones (SEZs) operate under different rules where FDI tax incentives may be provided.

Tjia et al.’s (2021: 25-27) Report – part of the ‘Economic and Trade Cooperation Zones Along Belt and Road Workshop Series’ – summarises the current tax regime for FDI in Cambodia. It highlights three main types of incentives available to foreign investors: a minimum tax exception, corporate income tax exemption, and special tax rate, alongside exceptions on import duties. Specific rules on taxes and their application for foreign investors are also highlighted in the document, as are rules and exemptions applicable to the case of SEZs which have a separate operational and tax status to that of other types of FDI.

In terms of actors, the OECD’s (2018) Investment Policy Reviews: Cambodia summarises some of the significant features of the Cambodian FDI model. First, the crucial role of Cambodia investment promotion agency – the Council for Development of Cambodia (CDC) – created when the country’s first Investment Law was promulgated in 1994 and tasked with managing FDI inflows. Though its core mandate has remained constant over time, its governance has radically shifted over the last twenty years, and now is directly accountable the Council of Ministers and acts both by shaping investment strategies as well as by accepting/rejecting investment proposals. Currently framed by Cambodia’s Industrial Development Policy 2015-25 (CDC, 2015), this highlights the various roles of the CDC in setting direction, monitoring progress, and working closely with the Committee for Economic and Financial Policy and the Steering Committee for Private Sector Development to implement the policy as a high level and strategic body within the Cambodian government.

Tjia et al.’s (2021) review also adds specific details on the CDC and other governance elements. First, it recognises that the CDC is the ‘highest decision-making body for private and public investment’ in Cambodia (CDC, 2017). At the same time, it also highlights the role of other two institutions: the Cambodia Investment Board (CIB) and the Cambodian Special Economic Zone Board (CSEZB). While the CDC deals with FDI related matters, it is the Ministry of Commerce that exercises general policy oversight over all other business activities.

Within the Cambodia’s investment framework there are three types of FDI projects allowed in the country: either general business, concessions business, or business related to SEZ. While the first simply requires general approval, the second and third require specific permissions to use state property and to allow for construction of infrastructure, etc. All sectors of the Cambodian economy are open to FDI, though there are regulations banning activities deemed harmful to the environment, health, or health culture, as well as land ownership (Chheang, 2017; OECD, 2018).

Main Messages for Policy Discussion

  • Cambodia represents an interesting case of a relatively successful economic transformation with evident economic gains linked to FDI attraction strategies and integration in regional GVCs, following neighbouring examples.
  • Despite its still ongoing development challenges – and considering the difficulties in the aftermath of the Covid-19 shock and recent commercial and military wars – Cambodia has so far been able to use FDI to partially upgrade, diversify and increase sophistication of its exports, catching up in the process with neighbours, even though it started international integration much later.
  • Tourism and export-oriented garment industries were critical to the country’s economic transformation away from agriculture. From the 2000s, a process of diversification from garment to light manufacturing and, particularly, services, has unfolded.
  • A fundamental role was played by the regional ‘big player’ China since the early 2000s, with later Chinese OFDI and participation in the ‘Belt and Road’ scheme.
  • Cambodia shows strong integration in the macro-regional trade and GVC networks, joining ASEAN in 1999 as the 10th member, and subsequently establishing numerous multilateral and bilateral trade agreements.
  • Carefully designed incentives for FDI have been put in place over time, e.g. tax exemptions fixed periods, sectoral exclusions to promote the local ecosystem and industrial base, SEZs operating under different rules, bans to activities deemed harmful, etc.; they helped overcoming some needed protectionist measures (e.g. MFN higher than in the area). However, more ad hoc measures of FDI support, particularly sector specific regulations, could be learnt by screening international experiences: e.g. Eco-tourism, Extraction Codes, special support to attract FDI projects with significant socio-economic impact.
  • Beyond tax and incentives policies, Cambodia is distinguished by its clear governance and framework for FDI decision-making, led by the CDC which was able to transform and update gradually over time to the changes in the global competitive environment.
  • However, ongoing risk assessment is necessary as IFDI may be associated to limited knowledge spillovers on domestic firms, tax loopholes, increasing gaps in tax incentives and public support between foreign and domestic firms (curbing the development of local production systems), and predatory attitudes and violation of workers and environmental rights by MNEs.
  • As it emerges clearly from the Appendix, and alike trade, IFDI is concentrated in relatively low value-added sectors, mostly in the production stages of GVCs (IFDI in R&D is almost null), and at the subnational level, as the bulk of investment is directed to the Phnom Penh. Thus, articulating internationalization policies at both sectoral and provincial level to avert FDI concentration is paramount.
  • While diversity of industry and exports have increased as a result of FDI attraction, concerns remain over development traps preventing the shift to higher productivity and value-added activities. In addition, globalization through trade, FDI, participation in GVCs, etc. brings about income polarization and increasing inequality at both individual and geographical level. Thus, support to internationalization needs to consider synergies with areas such as STI policy and skill upgrading, social policies and governance for public investment, and regulations for clear sustainable standards at national and local level.
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Appendix – Inward FDI in Cambodia, 2003-2017 (fDimarkets Data)

A more nuanced picture of greenfield IFDI trends in Cambodia, with focus on sector, function, geography of origin and of subnational destination can be extracted from fDiMarkets, a database created and maintained by the Financial Times, covering cross-border greenfield investments for all countries and sectors worldwide between 2003 and 2017. The accuracy of fDiMarkets and its coherence with official statistical sources has been tested and confirmed by a consolidated literature (see Crescenzi et al., 2014 and Comotti et al., 2020).

Chart A.1. IFDI value, % shares top 20 sectors, 2003-2017

Chart A.2. IFDI value, sub-sectors of the top 10 sectors, 2003-2017

Chart A.3. Share of IFDI value by function/GVC stage, 2003-2017

Chart A.4. Share of IFDI value by macro-region and country of origin, 2003-2017

Chart A.5. IFDI subnational distribution, value and job created by province, 2003-2017

Note: the destination of ‘other investments’ (31368.28 million USD, 26.59% of total) could not be located at provincial level, thus it is excluded from the above.