Weekly Insights and Analysis

In Cambodia: When Warm and Cold Winds Blow on the Garment Sector

June 27, 2007

By Véronique Salze-Lozac'h

Cambodia’s growing garment sector has defied expectations in the two years since the end of the Multi-Fiber Arrangement (MFA), a decade-old international quota system for textiles and apparel.  Last year alone, the garment industry experienced 20% growth. This impressive resilience in a restive global market augurs well for the short term.  But in Cambodia”where apparel, the country’s major industry, accounts for about 80% of all exports”past successes are entwined with present challenges that the garment sector can ill afford to ignore. 

In late 2004, industry observers warned that Cambodia’s then fledgling garment sector could suffer a major blow with the end of the MFA, as the removal of quotas might prompt international buyers to source from more competitive countries like China or Vietnam.  Despite pessimistic expectations, there has not been an exodus of investors from Cambodia, and instead new investors continue to be attracted by Cambodia’s labor costs, labor conditions, and its overall decent level of competitiveness in the sector.  As a result, the apparel industry enjoyed impressive growth in 2005 and 2006, and today employs an estimated 350,000 people.

A first battle has been won, but much still needs to be done in this ongoing struggle to improve Cambodia’s long term competitiveness.  For instance, the private sector and other stakeholders all recognize that improvements to the domestic business environment are needed to encourage investment and preserve employment in the post-quota era.  The same policy reforms that will help improve economic governance will also aid in creating a business environment that is friendly to new investment.

Another area that Cambodia can be proud of is the high level of compliance of its garment sector to international standards for labor conditions.  Indeed, under the close monitoring of the International Labor Organization (ILO) and its widely praised “Better Factories” program, Cambodia’s apparel sector has gained international recognition for the quality of its labor conditions, especially when compared to other countries in the region.

But challenges persist in the shadow of Cambodia’s commendable improvements to labor conditions.   Whereas, on the bright side, ILO indicates that labor conditions continue to improve in Cambodia’s garment sector, the labor environment remains restive and more and more workers are going on strike. Though the right of workers to defend their interests is unquestioned, this situation could potentially discourage new investment in Cambodia.  Some labor unions feel threatened because of their activities while business owners complain about the increasing cost of labor unrest and decrease of productivity.  This has pitted labor unions against factory owners in an increasingly fractious dialogue.  It is imperative, then, that stakeholders in the garment industry join to prevent any further deterioration in the relationship between factory employees and management.

Vietnam’s recent entry to the World Trade Organization (WTO) and China’s dominance of the global apparel market have placed pressure on all other garment-producing Asian nations to increase productivity at the factory level, and improve their international competitiveness.  Cambodia has made commendable efforts to adapt to the changing situation, but in this highly volatile sector it can hardly afford to slow-down on its efforts to improve its overall business environment.

Véronique Salze-Lozac’h is based in Cambodia as The Asia Foundation’s Regional Director for Economic Programs.

Related locations: Cambodia
Related programs: Economic Opportunity


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