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.