PME Resources

#KYR: Cambodia - Economy

By The Cove January 13, 2022


The ‘Know Your Region’ series is designed to support unit and individual professional military education on the South East Asian region. It’s important for all serving members of our military to have a foundational knowledge of the countries and issues in the Indo-Pacific.

If you want to learn about other facets of Cambodia, here are the other KYR: Cambodia pages: Diplomacy, Information, Military, Special Issue.

CAMBODIA – ECONOMY

On this page:

  • Overview
  • Economy and GDP
  • Trade Policies and Foreign Aid

Overview

The Cambodian economy is growing rapidly, driven by garment manufacturing, tourism, and construction. Natural resource sectors such as mining and hydropower have bolstered economic growth over the last decade, but current government policies are focused on diversification, including tourism and other service sectors. Following its independence from France in 1953, the Cambodian state has undergone five periods of political, social, and economic transformation, the latest being under the re-instated Kingdom of Cambodia from 1993 to the present. Tourism to Cambodia has more than doubled since 2007, topping six million visitors in 2018 (the latest statistics available by Tourism of Cambodia). Investment laws and regulations, revised in 2016, allow foreigners to invest freely in many areas. The Kingdom has been one of the ten fastest-growing economies in the world over the past 20 years.

In 1989, the State of Cambodia implemented reform policies that transformed the Cambodian economic system from a command economy to an open market one. In line with the economic reformation, private property rights were introduced, and state-owned enterprises were privatised. Cambodia also focused on integrating itself into regional and international economic blocs, such as the Association of Southeast Asian Nations and the World Trade Organisation respectively. These policies triggered a growth in the economy, with its national global domestic product (GDP) growing at an average of 6.1% before a period of domestic unrest and regional economic instability in 1997 due to the Asian Financial Crisis. Severe damage impacted the country's main economic sector, the garment industry, which suffered a 23% drop in exports to the United States and Europe. As a result, approximately 60,000 workers were laid off. The economy is heavily dollarised: the U.S. dollar and Cambodian riel can be used interchangeably.

 

Conditions began improved shortly after and since 1999 the Kingdom has become one of the world’s leaders in poverty reduction and shared prosperity. Another factor underscoring the potential of the Cambodian economy is the recent halving of its poverty rate. In 2014, the poverty rate was 13.5%, meaning that approximately 2.1 million people live below the poverty line defined as less than US$1.90 a day. In 2015, Cambodia became a lower middle-income economy and set the goal to attain upper middle-income status by 2030.

As a result of the civil war and grave food shortages in the late 1970s, many farmers were forced to eat their rice seed and traditional varieties were lost. In the 1980s, the International Rice Research Institute (IRRI) re-introduced 766 traditional Cambodian rice varieties to Cambodia from its seed bank in the Philippines. In 2016, Cambodia and IRRI mark their 30th year of partnership. An example of the extreme impact the civil war had on Cambodia's economy and agricultural production is seen in the country's links to the IRRI. However, IRRI and Cambodia’s partnership started long before the inking of formal ties in 1986. Six Cambodian scientists were trained at IRRI between 1960 and 1973. One studied plant breeding and the others studied rice production. Yet, only two of the six survived the civil war that occurred in the late 1960s and early 1970s. This loss of specialist knowledge continues to impact the Kingdom's development and is explored in the video below.

 

Since establishing peace and political stability in the 1990s, Cambodia has undergone significant change in its social, economic and political development. Over the years, many economic drivers have become essential pillars for the country like garment and textiles, tourism, agriculture, construction, and manufacturing. The expanding pool of workers in various sectors have made the working group a valuable social group.

After the establishment of garment and textile factories in the Kingdom of Cambodia, trade unions immediately took root. By the end of the first quarter of 2019, the total number of registered labour organisations in the country reported that stood at around 5,000. Yet the Kingdom ranks among the worst places in the world for organised labour in the International Trade Union Confederation's annual Global Rights Index 2020, consistently landing in the rating category of 'no guarantee of rights'. This despite Cambodia's National Assembly adopting a Law on Trade Unions in May 2016, setting out new rules for the establishing, operating, and shutting down a trade union and industry associations. The Government has said that the law was intended to facilitate cooperation between employer associations and unions by using legal means to solve disputes rather than protests. Independent unions and employers remain divided with critics pointing out key concerns and gaps in protections. To learn more about unions in Cambodia, check out the following video.

 

Driven by garment exports and tourism, Cambodia’s economy has sustained an average annual growth rate of 7.7% between 1998 and 2019, making it one of the fastest-growing economies in the world. Over the past two decades, Cambodia has undergone a significant transition. Yet, the United Nations (UN) designates Cambodia as a least developed country. Most rural households depend on agriculture and its related sub-sectors. Rice, fish, timber, garments, and rubber are Cambodia's major exports. Cambodia has made excellent progress in poverty reduction and human development on the back of its strong growth in agriculture, garment manufacturing, and tourism. However, these recent gains have been threatened by the COVID-19 pandemic, leaving many vulnerable to poverty and gender related disparities. The country is also highly exposed to the impacts of climate change and faces significant challenges in sustaining growth and maintaining progress in health and education.

Key reforms are needed for Cambodia to sustain pro-poor growth, foster competitiveness, sustainably manage natural resource wealth, and improve access to and quality of public services. Cambodia continues to have a serious infrastructure gap and would benefit from greater connectivity and investments in rural and urban infrastructure. Further diversification of the economy will require fostering entrepreneurship, expanding the use of technology, and building new skills to address emerging labour market needs. Accountable and responsive public institutions will also be critical. The quality of human capital will be of utmost importance to achieve Cambodia’s ambitious goal of reaching middle-income status by 2030.

See the World Bank Group's Country Partnership Framework for Cambodia for Financial Year 2019 to 2023 for more details about Cambodia's current economic outlook and vision for a more diversified economy. You can also check out Prime Minister Sen's Rectangular Strategy and the Industrial Development Strategy 2015-2025 which sets out the official new growth strategy to become an upper-middle-income country by 2030 and a high-income country by 2050.

 

Then access the following resources for more information.

Economy and GDP

Cambodia’s GDP grew at an average annual rate of over 8% between 2000 and 2010 and about 7% since 2011. The tourism, garment, construction and real estate, and agriculture sectors accounted for the bulk of growth. Around 700,000 people, the majority of whom are women, are employed in the garment and footwear sector. An additional 500,000 Cambodians are employed in the tourism sector, and a further 200,000 people in construction. Tourism has continued to grow rapidly with foreign arrivals exceeding 2 million per year in 2007 and reaching 5.6 million visitors in 2017. Mining is also attracting some investor interest and the government has touted opportunities for mining bauxite, gold, iron and gems.

Still, Cambodia remains one of the poorest countries in Asia and long-term economic development remains a daunting challenge inhibited by corruption, limited human resources, high income inequality, and poor job prospects. According to the Asian Development Bank (ADB), the percentage of the population living in poverty decreased to 13.5% in 2016. More than 50% of the population is less than 25 years old. The population lacks education and productive skills, particularly in the impoverished countryside, which also lacks basic infrastructure.

Additionally, Cambodia’s graduation from a low-income country has reduced its eligibility for foreign assistance and will challenge the Government to seek new sources of financing. The Cambodian Government has been working with bilateral and multilateral donors – including the ADB, the World Bank and International Monetary Fund – to address the country's many pressing needs; more than 20% of the budget will come from donor assistance in 2018. A major challenge for Cambodia over the next decade will be fashioning an economic environment in which the private sector can create enough jobs to handle Cambodia's demographic imbalance. Additionally, the Al Jazeera report below explores the economic costs of COVID-19.

 

Textile exports, which accounted for 68% of total exports in 2017, have driven much of Cambodia’s growth over the past several years. The textile sector relies on exports to the United States and European Union, and Cambodia’s dependence on its comparative advantage in textile production is a key vulnerability for the economy, especially because Cambodia has continued to run a current account deficit above 9% of GDP since 2014.

The manufacturing sector sharply contracted last year, but appears to have gradually recovered since, as it has adapted to changing external conditions. The easing of the traditional manufacturing industries of garments, footwear, and travel goods has been partly offset by the expansion of the newly emerging manufacturing (electrical, electronic and vehicle parts including bicycles) and agro-processing industries. Parts of the services sector such as accommodation, restaurants and transport continue to be hit hard by slowdown in domestic and international tourism, while wholesale and retail trade has managed to slowly recover, supported by a gradual revival in domestic economic activity.

However, the reconstruction has been slow because the country lacks any form of wealth. In fact, Cambodia is recklessly dependent on foreign aid and its economy mostly revolves around low-cost manufacturing. Despite the high economic growth, as seen in the report below, Cambodia remains one of the poorest nations in the region.

 

Access the following resources for more information on the Kingdom’s economy.

Trade Policies and Foreign Aid

Cambodia is a member of the World Trade Organisation (WTO) and has a relatively open trading system. Cambodia's location at the heart of the Mekong creates opportunities as a niche investment location linking into Vietnam or Thai-based supply chains. Exports in 2020 totalled US$19.4 billion with major partners being: United States (21%), Singapore (8%), Thailand (8%), Germany (7%), Japan (6%), China (5%), Canada (5%), and the United Kingdom (5%). The main commodities were clothing, precious metal scraps, trunks/cases, gold, leather, and footwear. Imports into the Kingdom came to US$23.12 billion coming from key partners: China (27%), Thailand (25%), Vietnam (15%), and Singapore (8%). The main items were refined petroleum, clothing, gold, cars, and flavoured water. To learn more, watch the next video by the World Bank.

 

Cambodia's economy continues to shift from agriculture towards industry but is still concentrated in tourism, garments and construction. The economy has been hard hit by the pandemic (GDP contracted 2.8% in 2020), with the impact felt most strongly by many of the most vulnerable in society. Australia's development cooperation –targeted at social protection, economic recovery and vaccine support – has provided critical support to Cambodia during the pandemic and for its recovery. See the Department of Foreign Affairs and Trade's development cooperation factsheet for more detail.

As a least developed country, Cambodia's products are granted tariff-free access to Australia. Cambodia and Australia have a bilateral market access agreement, concluded as part of Cambodia's accession to the WTO in October 2004. Our trade relationship is modest but growing quickly (two-way trade was $752 million in 2019). Total two-way goods trade with Cambodia in 2020 was valued at $432.4 million, up 21.6% on 2019. Australian total goods exports to Cambodia in 2020 was valued at $121.4 million, up 43.5% on 2019. Australia's existing commercial interests are focused in education services, food and beverage, financial services, mining and resources, hospitality and garment sourcing. The Australian Chamber of Commerce in Phnom Penh was established in 1995 to promote the interests of the Australian business community in Cambodia. See the Market Insights report prepared by DFAT for more information.

Cambodia's emerging democracy has received strong international support. Under the mandate of the United Nations Transitional Authority in Cambodia (UNTAC), US$3 billion was spent in an effort to bring basic security, stability, and democratic rule to the country. Global attention on the Kingdom was supplemented with significant aid programs and foreign investments. For example from 1993 to 2017, the World Bank projects in Cambodia have focused on economic rehabilitation, agriculture, disease control, health, and child welfare. Yet, the Cambodian Government still heavily relies on foreign aid. It was through this channel the international community maintained leverage over Phnom Penh's policy concerning human rights, corruption, and good governance. However, the Kingdom's shifting alignment from the United States to the Republic of China is alleviating Phnom Penh of Western pressures.

Cambodia is part of the contingent of countries in Asia that are moving toward China and away from the traditional American-led order. Unlike some of its neighbours, such as the Philippines, Cambodia is not bothering to hedge between the great powers either. Beijing is now Phnom Penh's largest financial backer by a wide margin, pumping in US$12.6 billion in 2017 alone. Cambodia's choice is not strange if looked at from a practically standpoint. Not only does the country have cultural ties with China; it is also obviously in closer proximity compared to the United States. With Chinese aid, roads, bridges, and dams among other things are being built in Cambodia, which is undeniably positive for the country. From 1994 to 2012, China invested a total of US$9.17 billion into Cambodia.

That number is now an annual occurrence. There have been broader concerns about transparency in the economic relationship and how key decision makers may be benefiting from the investment. Yet the Kingdom's economy has been boosted by increased investment from Beijing, thanks to the new Cambodia-China Free Trade Agreement signed in October 2020. This was a major milestone for Phnom Penh, being its first bilateral free trade agreement. Watch the following video for an overview of the client-patron relationship.

 

Thus, Cambodia is a testing ground for Beijing's expanding influence in the region. Phnom Penh can benefit enormously from the highly ambitious Chinese Belt and Road Initiatives (BRIs) in such areas as physical infrastructure development, foreign direct investment, economic development and integration, and national and international connectivity. However, there are several challenges which need to be addressed if the country wishes to reap as many benefits as it can from the BRI. Key challenges for Cambodia include, but are not limited to, the possibility of falling into the Chinese debt trap and Beijing’s sphere of influence, environmental degradation, lack of independent foreign policy decisions, and the follow-on of having strained relations with the U.S. and ASEAN fellow countries.

Moreover, the BRI expansion into Cambodia has prompted rising anti-Chinese sentiment among locals. Few Cambodians appear to have benefited from this economic boom. Local residents are relegated to the lower rung of the city’s service economy, employed as tuk-tuk drivers and hotel staff. Large construction projects associated with Beijing investments will import Chinese labour. China’s past support of the Khmer Rouge could further diminish its poor public standing. Prime Minister Sen’s historical revisionism is an attempt to improve Cambodians’ opinions of China but will struggle without jobs or improvements to living standards.

 

Discussion Questions:

  1. Over the past 20 years and on the back end of the civil war, Cambodia’s economy has seen some world leading growth yet remains one of the poorest countries in Asia. What industry should Cambodia look to focus on in order to continue its economic growth? What influence will China have in this, and how might this influence regional stability?
  2. Based on the readings, what industry has been the success story with regards to Australian and Cambodian economic cooperation? What opportunities are available that haven’t been fully exploited with regard to this relationship? How will China’s relationship with Cambodia influence this?
  3. Cambodia's economy continues to shift from agriculture towards industry but is still concentrated in tourism, garments and construction. The economy has been hard hit by the pandemic (GDP contracted 2.8% in 2020), with the impact felt most strongly by many of the most vulnerable in society. Australia has continued to provide economic aid in the form of various development programs. Should Australia increase its level of aid, especially in light of Chinese influence, or are other regional partners better suited to step up and support Cambodian development?

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The Cove

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The views expressed in this article are those of the author and do not necessarily reflect the position of the Australian Army, the Department of Defence or the Australian Government.



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