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Diversifying Cambodia’s Economy, Easier Said than Done

September 15, 2010

With an average annual growth reaching nearly double digits in the decade leading up to the recent global financial and economic crisis, Cambodia’s economy has performed well. Many national and international economists and organizations, including the World Bank, predict that the country is on its way to a faster recovery than initially expected, and could even hope for a 4-percent growth rate in 2010.

Cambodia rice field

Rice remains by far Cambodia's leading crop. Some new industrial crops (like rubber and cassava) have emerged, but the vast majority of farmers still depend almost solely on rice production. Cambodia’s limited agricultural sector is one of the biggest obstacles it faces in addressing poverty alleviation and food security. Photo by Karl Grobl.

Are such statistics signs of a wealthy, sustainable economy? Yes and no. It’s true that some of Cambodia’s key sectors have been developing rapidly over the last decade, and have proven resilient, even after the crisis. However, Cambodia’s economy remains dangerously dependent on a narrow range of sectors, including rice-based agriculture, garments, tourism, and construction. The recent economic crisis has proven how vulnerable such a narrow economic base can be, and demonstrated, more acutely than ever, the necessity for diversification. It proved that the less diversified the economy, the more vulnerable it is in the context of an international slowdown.

In terms of agriculture, rice remains by far Cambodia’s leading crop. Some new industrial crops (like rubber and cassava) have emerged, and secondary crops (pepper, palm sugar, cashew nuts) offer interesting prospects, but the vast majority of farmers still depend almost solely on rice production. Cambodia’s limited agricultural sector is certainly one of the biggest obstacles it faces in addressing poverty alleviation and food security. Moreover, the lack of a developed agro-industry has been depriving the country from more added-valued activities and restricted the capacity of the country to fully benefit from the work of its farmers.

Cambodia’s garment sector has experienced steady growth, and now represents about 75 percent of the country’s exports. It is also a major industrial employer, especially for women. Yet, this sector is particularly sensitive to international demand – and thus economic downturn. Competition is fierce and prices are constantly driven down. The garment industry was hard hit by falling demand from the U.S. and the EU during the crisis and is still struggling to recover.

Much like its neighbors, Cambodia’s tourism sector was badly affected by a sizeable drop in visitor spending. In Cambodia, when the garment and tourism sectors suffer, many other areas are also put at risk, such as increased unemployment and reduced remittances to families.

In addition, investment that does exist in Cambodia is highly concentrated in a few geographic areas: the capital city of Phnom Penh, the world-famous temple city of Siem Reap, the harbor town of Sihanoukville, and a few small areas along the borders of Thailand and Vietnam.

For years, experts, researchers, government officials, and the business community have pointed to lack of diversification as the “Achilles heel” of Cambodia’s economy. There is no doubt that to sustain rapid economic growth, to provide jobs for its young population (700 young people enter the labor force everyday), and, above all, to alleviate poverty (nearly 70 percent of its population lives on less than $2 a day), Cambodia needs to diversify. Participants at this year’s annual Cambodia Outlook Conference, organized by the Cambodia Development Research Institute, declared diversification the major factor that will enable Cambodia to enjoy sustainable growth and reduce poverty.

But the road to diversification is not an easy one.

To ensure sectoral and geographical diversification, Cambodia needs to increase its competitiveness in the region, capture higher added-value, and acquire new know-how and technology. This implies important commitments not only in terms of infrastructure, human resources, natural resource management, investments, and financial services, but also for new structural reforms to improve Cambodia’s business environment. This would help boost the perception from national and international investors that Cambodia is competitive and reliable compared to its neighboring countries.

The search for diversification should also take into account the economic potential of micro, small, and medium-sized enterprises across the country. In fact, according to the recent Provincial Business Environment Scorecard (PBES) conducted by the International Finance Corporation and The Asia Foundation, which ranks all 24 provinces on the quality of economic governance, the most striking finding from the listing of almost 64,000 businesses across Cambodia is the small size of most firms. For 69 percent of businesses, the only employee is the owner, while 90.4 percent of enterprises in the listing have fewer than four employees, and 96 percent have fewer than 10. These enterprises, along with the farmers, are the true engines of economic growth, and should be included in any diversification strategy if Cambodia wants to enjoy sustainable and broad-based development, including better food security and decreased poverty.

Cambodia has the capacity, resources, and hard-working population needed to diversify and grow; but it now faces the challenge of creating a business environment that will support the private sector enough to make this quest for diversification a reality.

Véronique Salze-Lozac’h is The Asia Foundation’s regional director for Economic programs in Cambodia. She can be reached at VSalze-Lozach@asiafound.org.

View all posts by Véronique Salze-Lozac'h | Bio

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