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.