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Manufacturing TransformationComparative Studies of Industrial Development in Africa and Emerging Asia$

Carol Newman, John Page, John Rand, Abebe Shimeles, Måns Söderbom, and Finn Tarp

Print publication date: 2016

Print ISBN-13: 9780198776987

Published to Oxford Scholarship Online: August 2016

DOI: 10.1093/acprof:oso/9780198776987.001.0001

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Cambodia’s Path to Industrial Development

Cambodia’s Path to Industrial Development

Policies, Lessons, and Opportunities

Chapter:
(p.213) 11 Cambodia’s Path to Industrial Development
Source:
Manufacturing Transformation
Author(s):

Sokty Chhair

Luyna Ung

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780198776987.003.0011

Abstract and Keywords

Cambodia emerged a newly independent nation in 1953 with ambitions for growth and development through the expansion of industry. Sixty years on, following decades of war and destruction, these ambitions are beginning to be realized with double-digit growth rates. On the surface, Cambodia appears to be an emerging economic success story. Digging deeper, however, reveals that this is not without uncertainties and challenges. Cambodia has one of the fastest growing populations in the world. Between 1998 and 2008 the population increased from 11.4 million to 13.4 million, an average annual increase of 1.5 per cent. With the labour force projected to increase by 213,000 per annum between 2010 and 2013, the economy will come under increasing pressure to generate productive employment opportunities. It is against this backdrop that this chapter explores the evolution of the economy and industrial development.

Keywords:   Cambodia, development, war, population growth, employment opportunities, industrial development

(p.232) 11.1 Introduction

Cambodia emerged a newly independent nation in 1953 with ambitions for growth and development through the expansion of industry. Sixty years on, following decades of war and destruction, these ambitions are beginning to be realized with double-digit growth rates. On the surface, Cambodia appears to be an emerging economic success story. Digging deeper, however, reveals that this is not without uncertainties and challenges.

Cambodia has one of the fastest growing populations in the world. Between 1998 and 2008 the population increased from 11.4 million to 13.4 million, an average annual increase of 1.5 per cent. With the labour force projected to increase by 213,000 per annum between 2010 and 2013, the economy will come under increasing pressure to generate productive employment opportunities. It is against this backdrop that we explore the evolution of the economy.

Over the last sixty years Cambodia has experienced a number of very different political ideologies, each of which has had a strong influence on the evolution of industry. Section 11.2 describes each of these regimes. Since the 1993 election, overseen by the United Nations (UN), Cambodia has been in transition to a full market economy, following decades of war and isolation from international markets. Section 11.3 documents subsequent growth and development. Section 11.4 provides an overview of the policy environment. Section 11.5 documents the key sunrise and sunset sectors in Cambodia. The chapter concludes with a discussion of the opportunities and challenges facing Cambodia.

(p.214) 11.2 Evolution of Industry: Historical Perspective

Limited documented evidence exits on the Cambodian economy prior to the civil war in 1970 and so we rely on three leftist scholarly works by Hou (1955), Khieu (1959), and Hu (1965). Among them, only Khieu (1959) focuses on industry. Most historians tend to focus on political rather than economic history due to the incidence of chronic civil war, genocide, and other issues during the last four decades. Exceptions include Vickery (1986), Ear (1995), and Slocomb (2010). We draw heavily from these works in our review of the industrial sector and economy in general in the period up to 1993. After 1993, many additional sources are available.

11.2.1 Sihanouk Regime, 1953–70

Cambodia gained full independence from France in 1953. During the colonial era emphasis was placed on agriculture, with household-based rice cultivation, the development of large rubber plantations, and integration into the French economy.1 Some factories were established to supply the domestic market, but most depended on imports for raw materials and were foreign owned or owned by the elite Chinese ethnic group.

The focus of the new Cambodian state that emerged in 1953 was on building Cambodia’s industrial base through a policy of modernization—the trend in the newly independent states in Asia and Africa at that time. The Two-year Plan (1956–7) and the first Five-year Plan (1960–4) were introduced. The former concentrated on developing infrastructure and the latter on building factories (Delvert 1963). Slocomb (2010) documents how the Sihanouk regime largely accepted economic coexistence with foreign interests and investment. The economy could best be described as a mixed economy, merging individual capital and enterprise with state capital and supervision. There was a significant increase in the number of factories between 1955 and 1968, from 0 to 57 state/joint-owned factories, while small and medium private factories increased dramatically from 650 in 1965 to 3700 in 1968 (Ear 1995: 49).

During the cold war, Cambodia experienced significant investment in infrastructure, largely financed by donor interests. It was a strategically important location from a military perspective, particularly given the neutral foreign policy adopted by Prince Sihanouk. With the resulting foreign assistance from both sides, several mega-projects were built: the highway linking the (p.215) capital city Phnom Penh and the port city of Sihnoukville was built with American aid, and the port itself with French funding; France and Germany jointly funded railway construction connecting Phnom Penh to Sihnoukville; while a plywood factory was built with Chinese aid (Slocomb 2010).2 In all, only 2 per cent of the budget for the Five-year Plan was contributed by Cambodia, while 57 per cent of the contribution was from the USA, 23 per cent from China, and 17 per cent from France. Despite these developments, there is little by way of structural change evident during this period (Slocomb 2010). Manufacturing accounted for 8.6 per cent of GDP in 1962, increasing to 10.5 per cent in 1966. Meanwhile, agriculture remained at around 41 per cent of GDP. Cambodia’s exports overwhelmingly depended on primary products.

The removal of protective tariffs at the end of 1969 heavily hit small enterprises, which accounted for 90 per cent of firms. A handful of large investors benefited from the policy change, but they too were affected by inflation and rising labour costs. Efforts were made to industrialize further through a policy of import substitution, but this had little success. By the end of this era the economic structure of Cambodia was similar to that of the newly independent economy in 1953.

11.2.2 Khmer Republic, 1970–5

In 1970 a civil war began in Cambodia, with each side supported by either China or the USA. Even before the regime change in 1970, the leaders of the coup, General Non Nol and Sisowath Sirik Matak, led the national salvation government from August 1969.

The new laissez-faire policy involved devaluing the currency, removing controls on foreign trade and banking, and reducing state involvement in enterprise. The most significant change to industrial policy was the disengagement of the public sector as the mechanism for development (Slocomb 2010). Rice and maize production was liberalized, but the state remained the monopoly power in some sectors. These policies were short-lived, and their implementation was interrupted by the civil war. The wartime economy depended solely on foreign assistance, mostly from the USA, for survival. The civil war had a significant negative impact on the production of rice, rubber, and corn. The manufacturing index, which had been 100 in 1960, fell to 73 in 1972 (Ear 1995).

(p.216) 11.2.3 Closed Economy, 1975–89

The period spanning 1975–89 consisted of two rival regimes, both of which followed a Marxist ideology. Slocomb (2010) describes Cambodia during this period as a revolutionary economy. The extent to which the two regimes adopted Marxism was their main distinction. The former was much harsher and dogmatic while the latter was more pragmatic and responsive to local conditions.

11.2.3.1 Democratic Kampuchea, 1975–9

The Khmer Rouge came to power influenced heavily by Maoist ideology. The ambition was to make the transition to communism. The economic policy was to demolish capitalists, enslave the labour force, and focus on the rapid development of agriculture. To this end, the regime completely collectivized agriculture, nationalized all sectors of the economy, and adopted a policy of self-reliance. Phnom Penh and other provincial cities were emptied and the urbanites were forced to work as collective farmers in the countryside. Private ownership was completely banned and money was eliminated. From 1975 to 1979, the bourgeoisie class was considered an enemy of the state and entrepreneurship disappeared. The regime also banned all international trade bar limited dealings with a few allied communist countries.

11.2.3.2 People’s Republic of Kampuchea, 1979–89

After the liberation of Cambodia from the Khmer Rouge regime, the new People’s Republic of Kampuchea (PRK) regime was left with little with which to restore an economy dominated by subsistence agriculture with little or no industry.3 The first priority was self-sufficiency and a guerrilla war with the Khmer Rouge, who were still at large along Cambodia’s border with Thailand. Engineers, skilled workers, and other human resources had either fled to other countries as war refugees or fell victims of genocide. From 1979–89, economic policy focused on the eradication of hunger. State-owned enterprises were re-established with the aim of providing basic consumer goods and public utilities.4

According to Vickery (1986: 128–9), there were three economic organizations in the system adopted by the PRK. First, there was the state, which controlled large industry, finance, transport, and official foreign commerce. (p.217) Second, there were the collectives, called solidarity groups, which controlled agricultural production. Third, there was the family, which involved small trade, handicraft, and home gardens. In 1986, 97 per cent of the rural population was in the collective sector, composed of more than 100,000 solidarity groups, each of which consisted of seven to fifteen families. This was not enough to feed the population of Cambodia, and immediate food relief was provided by Vietnam, the Soviet-bloc countries, and international humanitarian aid organizations.

In 1988, the total value of industrial production including handicraft was only US$20 million, and it was dominated by state-owned enterprises (Slocomb 2010: 215). The share of industry in GDP was only 5 per cent in 1985 compared to 19 per cent in 1969 (Cosslet 1990). By 1985 only half of the pre-war plants had reopened and the ones that did produced far below full capacity (Cosslet 1990).

11.2.4 State of Cambodia and the UN Period, 1989–93

With the fall of the Soviet Union and the Eastern Bloc and Vietnam’s Doi Moi policy beginning in 1986, Cambodia began the gradual process of economic reform, compounded by the signing of the Paris Peace Accords in October 1991. As part of the peace agreement the government relinquished the role of rehabilitation and reconstruction to the UN.

The International Committee on the Reconstruction of Cambodia, a consultative body which included the government and donors, monitored the process of transition from a command to a laissez-faire capitalist economy, and from domestic to export-oriented production (Slocomb 2010: 289). In the mid-1980s Cambodia introduced private property, leading to the gradual privatization of state-owned companies and the de-collectivization of agriculture. GDP experienced strong growth during this period. In 1988, the real GDP growth rate was 9.8 per cent. The rate of growth slowed in 1989 and 1990 to 3.5 and 1.2 per cent respectively, recovering thereafter to around 7 per cent in 1991 and 1992, largely driven by the build-up of the UN operation (Irvin 1993). Industry contributed to 15 per cent of GDP during this time.

These successes and market reforms were undermined by macroeconomic imbalances caused by declining state revenue, the removal of humanitarian aid from the Soviet Union, and high inflation caused by monetary financing of the budget deficit (RGC 2009). As a result, the inflation rate accelerated from 70 per cent in 1989 to 200 per cent in 1992. Inflation was stabilized in 1993 through reductions in the government deficit (Irvin 1993) but the high inflation rate of the previous years led to a decline in public confidence in the national currency and the permanent dollarization of the economy.

(p.218) 11.2.5 Kingdom of Cambodia, 1993–

After the first general election in 1993 the government prepared and implemented a comprehensive macroeconomic policy and structural reform programme. The state monopoly of foreign trade was abolished in 1987, and the foreign investment law was brought into force in 1989, enabling private companies to engage in foreign trade. In the early 1990s trade policies were further liberalized—most quantitative restrictions and the licensing of imports were eliminated.

To promote industrial development, the government provided generous incentives to attract foreign direct investment (FDI). Tax exemptions were provided on imported intermediate goods and on the exporting of finished goods. Cambodia became a member of the ASEAN (Association of Southeast Asian Nations) Free Trade Area in 1999 and eventually the World Trade Organization (WTO) in 2003. Membership of these organizations placed further requirements on Cambodia to liberalize trade in goods and services and foreign capital ownership. The inflow of FDI increased from just US$124 million in 1993 to US$520 million in 2009 and to more than US$1,500 million in 2012.5

Many state-owned activities have been terminated, and only economically viable enterprises are allowed to continue. Public enterprises compete with the private sector in most areas, and generally only survive due to geographical constraints on competition. According to the Economic Census conducted by the National Institute of Statistics (NIS 2011a) in 2011 (EC2011), private establishments accounted for 96 per cent of the total number of organizations, while state-owned establishments accounted for fewer than 3 per cent.

Over the last two decades, the Cambodian economy has grown at an average rate of 7.7 per cent per annum (RGC 2015), and 10.3 per cent during 2004–8 (Hang 2009). It is expected that it will sustain a growth rate of 7 per cent per annum in the years to come. Cambodia’s growth performance ranked sixth across all countries, and the country had higher exports per capita than others at a similar level of economic development (World Bank 2009a).

11.3 The Structure of Industry

11.3.1 Sectoral Composition

As highlighted in Section 11.2, it was not until the early 1990s that industrial development was given prominence in economic policy in Cambodia. The growth of industry can be categorized into four different phases. The first (p.219) phase, 1993–8, saw an increase in the share of manufacturing to GDP from 12 to 16 per cent. The second phase was from 1999–2003, when Cambodia had achieved full peace in 1998 and successfully integrated into ASEAN in 1999. At the end of 2004, growth in the garment sector, the driver of the manufacturing sector, faced uncertainty due to the expiration of the multi-fibre arrangement (MFA). The third phase of manufacturing development during 2004–7 began when Cambodia became a member of the WTO. During this phase, the share of the manufacturing sector in the economy reached its peak of more than 25 per cent of GDP. During the fourth and most recent phase, from 2008 to present, the growth rate of the manufacturing sector has subsided in the aftermath of the global financial crisis.

Cambodia’s industrial sector is dominated by manufacturing and construction, which accounted for 70 and 20 per cent of establishments, respectively, in 2011. Food, beverages, and tobacco (FBT) and textile, wearing apparel, and footwear (TWF) together account for 80 per cent of value added of the manufacturing sector. In 2011, the number of industrial establishments was 77,048, of which the share of manufacturing was 93 per cent.6

11.3.2 Size of Firms

The number of enterprises in Cambodia has been increasing gradually, especially during the period of two-digit growth rates from 1999–2008. In 1999, the number of small and medium enterprises (SMEs) was estimated at about 25,000, reaching 36,000 in 2009.7

Chhair and Ung (2013: Table 9) show that in 2011 almost 91 per cent of industrial enterprises were micro-establishments. The 2009 Establishment Listing of Cambodia (EL2009), also produced by NIS, reveals that the overall number of establishments in the industrial sector declined between 2009 and 2011 but the number of large establishments grew by over 20 per cent.8

Table 11.1 Share of employment and value added of industrial establishments by firm size (%)

Employment

Annual revenue

ICS2003

EC2011

ICS2003

EC2011

Small

2.34

10.43

2.14

7.18

Medium

2.28

3.62

2.94

6.78

Large

95.37

85.95

94.76

86.05

Total

137

7040

137

7040

Source: Authors’ calculations based on ICS2003 from World Bank (WB 2003) and EC2011 (excluding firms with fewer than five employees) from National Institute of Statistics (NIS 2011a).

Table 11.1 compares the proportion of industrial establishments by firm size in 2003 (based on the Investment Climate Survey (ICS2003) conducted by the World Bank) with figures from the EC2011. We exclude establishments with fewer than five employees from the ICS2003 and EC2011 data. The figures suggest that the share of small and medium industrial establishments and value added increased between 2003 and 2011.

(p.220) 11.3.3 Ownership Structure

Cambodia’s Path to Industrial DevelopmentPolicies, Lessons, and Opportunities

Figure 11.1 Sectoral composition of foreign owned firms

Source: Authors’ calculations based on EC2011 (NIS 2011a).

Cambodians own almost all micro and small industrial establishments, but only 37 per cent of large industrial establishments. Of the foreign-owned large establishments, 47 per cent are owned by Chinese and 12.5 per cent by Koreans and other Asian nationalities. As revealed in Figure 11.1, the majority of foreign owned firms are in the TWF sector and most of these are Chinese owned. Most foreign firms (over 62 per cent) were established in the last five years. There are only twenty-one foreign firms that have been established for more than twenty years.

(p.221) 11.3.4 Employment

Estimates of employment in Cambodia are complicated by high levels of migration, both within Cambodia and internationally. To measure sectoral share of employment, we use data from Cambodia’s Socio-Economic Surveys (CSES) conducted by NIS (NIS various years), which asks household members for their main occupation over the last twelve months. This is illustrated in Figure 11.2.

According to this estimation, the share of employment in agriculture declined from almost 71.9 per cent in 1993 to 51 per cent in 2012. Industry and services accounted for 18.6 per cent and 30.4 per cent of employment respectively in 2012. These changes highlight the transformation of the economy from an agriculture base to an industrial and service base.

Cambodia’s Path to Industrial DevelopmentPolicies, Lessons, and Opportunities

Figure 11.2 Share of employment by three main sectors

Source: Authors’ calculations based on NIS 1993; CSES (NIS various years).

A disaggregation of employment by sub-sector is illustrated in Chhair and Ung (2013: Table 14). It reveals that there were 77,048 establishments in the industrial sector, which employed 554,058 people in 2011. TWF accounted for 67.6 per cent of industrial employment and FBT for 15.2 per cent.

It is possible that the EC2011 under-reports the number of workers employed by enterprises, probably by omitting informal companies. According to the CSES, and as revealed in Figure 11.3, the share of employment in TWF reached a peak of 57.7 per cent in 2011. The share dropped in 1997 due to an internal conflict, as well as to the world financial crisis in 2007. The FBT sector maintained a relatively stable share of employment of around 20 per cent from 1993–2001, increasing to 8.8 per cent in 2012.

Cambodia’s Path to Industrial DevelopmentPolicies, Lessons, and Opportunities

Figure 11.3 Share of the manufacturing sector

Note: The Labour Force Survey estimate of employment is based on short-term employment by asking respondents about the type of employment they were engaged in within the last week.

Source: Authors’ calculations based on CSES (NIS various years) and Labour Force Surveys in 2000 (NIS 2000) and 2001 (NIS 2001).

(p.222) The share of employment in construction was around 20 per cent in 1993 and reached 25.1 per cent in 2012. It should be noted that employment in construction is seasonal in nature, which is one possible reason why EC2011 under-reports the number of construction workers.

11.3.5 Age of Firms

Table 11.2 Number of establishments by sub-sector and age group, 2011

All

0–5 years

6–10 years

11–20 years

20+ years

Mining and quarrying

177

97

26

33

21

Food, beverage, and tobacco

31,891

17,384

6,667

5,613

2,227

Textile, wearing apparel, and footwear

24,872

14,207

3,826

3,881

2,958

Wood, paper, and printing

2,250

944

313

465

528

Chemical and medicines

155

82

30

33

10

Rubber, plastic, cement, metals, and casting

2,867

1,411

555

581

320

Machinery components assemblies

4,684

2,673

797

787

427

Vehicle assemblies

101

51

23

19

8

Furniture and handicraft

2,993

1,590

588

648

167

Repairs

924

560

152

159

53

Electricity, water and waste collection

5,049

3,063

943

841

202

Construction

187

101

36

41

9

Total

76,150

42,163

13,956

13,101

6,930

% of firms EC2011 (n = 76,156)

55.37

18.33

17.20

9.10

% of firms ICS2003 (n = 208) (firm size=>5)

47.12

34.13

17.7

0.96

% of firms EC2011 (n = 6,943) (firm size=>5)

52.4

18.7

20.2

8.6

Source: Authors’ calculations based on EC2011 from NIS (NIS 2011a) and ICS2003 (WB 2003).

The oldest possible establishments in Cambodia are those that started in 1979 after the Khmer Rouge regime. About 55 per cent have operated for five years or under. The proportion by sub-sector is illustrated in Table 11.2 along with a comparison with 2003 (based on ICS2003). The age of industrial firms represented in ICS2003 is similar to that of EC2011 (from which we exclude micro-establishments, employing fewer than five workers).

11.3.6 Spatial Distribution

Phnom Penh, Takeo, and Kampong Cham have the most industrial establishments of all provinces, a figure that correlates with the provincial population density. Kampong Cham Province (located 156 kilometres northeast of Phnom Penh) has a medium level of industrial development. The spatial distribution by firm size is presented in Table 11.3 and shows (p.223) that larger firms tend to locate in Phnom Penh and Kandal (which circles Phnom Penh). This is probably due to the availability of good infrastructure and public services.

Table 11.3 Provincial spatial distribution of firms in industrial sector by firm size (%)

Provinces

Micro

Small

Medium

Large

Total

Battambang

4.08

6.61

4.34

0.65

4.25

Kampong Cham

10.8

10

11.89

5.88

10.71

Kandal

7.54

6.65

18.11

16.34

7.62

Koh Kong

0.33

0.61

0.57

0.16

0.35

Phnom Penh

9.65

28.33

33.96

59.8

11.64

Preah Sihanouk

0.96

1.63

1.89

3.27

1.03

Takeo

14.13

4.87

1.32

1.80

13.24

Other provinces

48.98

37.81

27.17

9.64

47.66

Total (%)

100

100

100

100

100

70,008

5,898

530

612

77,048

Source: Authors’ calculations based on EC2011 from NIS (NIS 2011a).

Table 11.4 Provincial spatial distribution of medium and large firms in FBT and TWF (%)

Provinces

FBT

TWF

Other industries

Total

Battambang

10.08

0.57

2.42

2.36

Kampong Cham

14.29

2.28

14.11

8.67

Kandal

9.24

19.54

16.53

17.16

Koh Kong

0.84

0.00

0.60

0.35

Phnom Penh

40.34

61.1

35.48

47.81

Preah Sihanouk

5.88

1.52

3.02

2.63

Svay Rieng

2.02

0.84

1.52

1.66

Takeo

0.84

2.66

0.60

1.58

Others

17.65

10.82

25.20

17.78

Total (%)

100

100

100

100

119

527

496

1,142

Source: Authors’ calculations based on EC2011 from NIS (NIS 2011a).

Table 11.4 reveals that 40 per cent of medium and large FBT establishments are in Phnom Penh. The next three provinces of importance are Kampong Cham, Battambang, and Kandal. Kampong Cham is rich with tobacco and rice millers while Battambang is a rice basket of Cambodia. Kandal benefits from its proximity to the capital. Svay Rieng, Sihanoukville, and Koh Kong are new production bases for medium and large enterprises due to the establishment of special economic zones in these provinces.

(p.224) 11.4 Industrial Policy

Cambodia’s industrial policy is built upon seven main points:

  1. 1 developing labour-intensive industries;

  2. 2 promoting the development of agribusiness;

  3. 3 developing industries which are based on the use of basic natural resources;

  4. 4 promoting SMEs, micro-enterprises, and handicrafts;

  5. 5 encouraging technology transfer and export product diversification;

  6. 6 establishing industrial and export processing zones;

  7. 7 increasing production of goods for import substitution.

At the core of this industrial policy is the focus on attracting investment into sectors where Cambodia has comparative advantages for export promotion. As such, a key component of industrial policy has involved reductions in barriers to exports and the import of business inputs. This is one of the main aspects of policy that is considered to have been effective.9

The Cambodia Industrial Development Policy (2015–2025) has a clear vision to maintain sustainable and inclusive high growth and transform and modernize Cambodia’s industrial structure from labour-intensive industry to skill-driven industry by 2015 (RGC 2015). Targets for 2013–25 include: (1) economic diversification by increasing the share of industry in GDP from 24.1 per cent to 30 per cent and GDP’s share of manufacturing from 15.5 per cent to 20 per cent; (2) export diversification by increasing exports of non-garment (p.225) and footwear from 1 per cent to 15 per cent, processed agricultural products from 7.9 per cent to 12 per cent, and decreasing exporting of garment and footwear from 77 per cent to 50 per cent; (3) promotion of SMEs by registering SMEs and ensuring that 50 per cent of small enterprises and 70 per cent of medium enterprises have proper financial records and balance sheets.

11.4.1 Macroeconomic Policy

Cambodia’s macroeconomic policy stance is largely consistent with its key objectives of attracting foreign investment and export promotion. As a largely dollarized economy, Cambodia relies mainly on a conservative fiscal policy to prevent inflationary pressures. Monetary policy has allowed a deepening of the financial sector. Current and capital accounts are open and there is no restriction on the exchange rate.

The main medium- to long-term goals of the National Bank of Cambodia (NBC), as set out in the National Strategic Development Plan (NSDP) (2009–2013) (RGC 2009, 2013) are to: (1) maintain price stability with an inflation target of under 5 per cent; (2) ensure the continued soundness of the financial sector; (3) continue to manage a floating exchange rate regime with a target of around KHR4100 per US$; (4) maintain foreign reserves to finance at least three months of imports. International reserves increased from US$500 million in 2000 (Hang 2010) to US$6,027 million in 2015, excluding gold and special drawing rights (SDR) (NBC 2015).

In order to strengthen macroeconomic stability, the government sets out the following priorities: implementing a flexible fiscal policy to be consistent with monetary policy; diversifying the export base; keeping public debt at a manageable level; strengthening institutional coordination; enhancing private sector development; promoting labour market development; encouraging investment in key sectors and ensuring an increase in international reserves; continuing to implement a managed floating exchange rate regime to maintain stability of the Riel; strengthening public and investor confidence in the local currency to promote its greater use; and strengthening the supervision and management of liquidity, credit, and market risks in compliance with international standards (RGC 2013).

11.4.2 Trade Policy

A key feature of industrial policy in Cambodia is its emphasis on trade. The domestic market has been too small to support long-term growth, and so export-oriented investment is crucial. Cambodia has capitalized on the intra-regional (p.226) complementarity that stems from differences in labour costs, the availability of natural resource endowments, and trading regulations.

Cambodia joined ASEAN in 1999 and the WTO in 2003. This marked the final step into the major regional and international organizations that govern international economic relations. For the garment industry the accession presented not only a challenge to become more competitive, but also opportunities for expansion because of the removal of the quotas for Cambodian exports to the 147 WTO members.

11.4.3 Labour Market Policies

Cambodia’s labour market remains free and open in practice, though labour laws have been in place since 1992. The emergence of the garment sector led to new labour laws in 1997, which focused on freedom, the establishment of unions, and rights for demonstration. The 1997 law applies only to the garment sector and its related sectors. There were a total of 989 strikes between 2003 and 2014, averaging 1.6 per week (GMAC 2015b).

Minimum wages are a key feature. The legal minimum wage in Cambodian factories was US$40 per month in 1997 for regular employees and it took thirteen years to increase to US$61 in 2010 (GMAC 2015b). However, recently, it has increased steadily from US$80 in 2013 to US$117 in 2014 and US$145 in 2015.10 Negotiations are now ongoing between factories, unions, and the government for further wage increases in 2016. To compare with competitors, in 2015, the minimum wage in Cambodia is equal to that of Vietnam; but average working hours per month and working days per year are fewer for Cambodia; while in Bangladesh and Myanmar the minimum wage is much lower at US$70 and US$78, respectively.

The better factory programme was introduced in 2010. The basic objective of the programme is to improve working conditions in Cambodia’s textile and apparel sector, particularly through an independent monitoring system of working conditions in garment factories. This programme resulted from USA–Cambodia trade negotiations in exchange for market access to the USA.

11.4.4 The Institutional and Regulatory Framework

The government of Cambodia regards the private sector as the main impetus for the country’s economic growth, and initiated the Government–Private Sector Forum (G–PSF).11 The Council for the Development of Cambodia (CDC) also (p.227) facilitates investment applications and decisions. The length of investment application procedures was reduced to a maximum of forty-five days. This law provides a clear and more liberal investment regime, with attractive incentives for FDI. According to CDC (2012: III1–2), to improve the business and investment climate and to comply with WTO regulations, the Royal Government of Cambodia has recently placed emphasis on updating and adopting new laws and regulations on investment, trade, and business.

11.4.5 Sector Specific Policies

11.4.5.1 GARMENT SECTOR

The garment sector is now one of Cambodia’s fastest-growing for private investment. This is mainly the result of normalized trade relationship (NTR) agreements, first signed with the European Union in 1996 and then with the USA in 1997. The agreements were the result of Cambodia being granted most favoured nation (MFN) status and status under the generalized system preference (GSP) agreement. Between 1994 and 1999, Cambodia’s garment exports grew by more than 100 per cent, from US$495 million to US$1,102 million, with about 90 per cent of garment shipments going to the USA. This strong performance prompted the USA to introduce quotas on twelve categories of Cambodian garment exports in 1999, but this measure did not significantly affect the expansion of the industry, whose exports continued to rise to almost US$3,000 million in 2008 (Chan and Oum 2010). In 2014, exports rose to US$5,785 million and were more diversified; 42.31 per cent were to the EU, 33.44 per cent to the USA, 8.96 per cent to Canada, and 5.29 per cent to Japan (GMAC 2015a).

Rapid development in the garment industry, combined with the country’s democratization process, has resulted in the accelerated growth of unions. In 1998, the Clinton administration developed the US–Cambodian Trade Agreement on Textiles and Apparel (1999–2004) which linked market access to labour standards. The International Labour Organization (ILO)’s Better Factories Cambodia was instituted in 2010 for independent monitoring.

11.4.5.2 Tourism

The policies for tourism are based on three basic principles of sustainability and poverty reduction, active promotion, and lengthening the average stay (RGC 2009). From 2009 to 2013, the government prioritized completing (p.228) tourism plans, marketing studies, and tourism campaigns to raise regional and international awareness of Cambodia’s tour programmes (Hahn et al. 2011). The Tourism Strategic Development Plan (2012–2020) and Cambodia Tourism Marketing Strategy (2015–2020) have a target of attracting 7 million foreign tourists in 2020.

11.5 Sunset and Sunrise Industries

According to the World Bank (2009a: 18), the forestry and fisheries sectors accounted for 19 per cent of GDP growth in 1993–8 but only 2 per cent in 2003–8. Forest production accounted for 43 per cent of exports in 1994 and fewer than 1 per cent of exports in 2006. Out of concern for the rapid degradation of forest resources and fish stocks, the government banned logging in 2000 and reformed large commercial fishing lots in 2002. These two sectors which thrived in the 1990s became sunset industries in the 2000s. As these sectors have declined in importance, there are many sectors that are expected to grow in the coming years. Of these, the most significant are expected to be tourism, garments, banking, rice processing, and rubber processing.

The tourism sector in Cambodia has been growing at an exponential rate in the last decade, and has become the second largest income source for the Cambodian economy after the garment sector (Hahn et al. 2011). The development of this sector is mainly driven by political stability, World Heritage monuments, especially Angkor Wat, improved infrastructure, close proximity to tourism hubs, and government policies, most notably the Open Sky Policy. The number of international tourists has gradually increased from fewer than 120,000 in 1993 to 4.50 million in 2014 (MoT 2015b).

The garment sector has also experienced significant growth. The number of garment and footwear factories increased from just seven in 1994 to about 737 in 2015 employing about 600,000 workers (GMAC 2015a). According to the EIC (2009) most new materials and accessories are imported from China, Hong Kong, and Taiwan. Domestic supply of inputs would not only result in more jobs and value addition for the economy, but would also help make Cambodian garment products more competitive.

The garment sector has, nonetheless, contributed to employment generation, particularly for young female workers from rural areas. Based on examples from small sample surveys of garment workers, more than 90 per cent send remittances home, with the average annual amount ranging from US$246 in 2007, amounting to 29 per cent of salaries earned, to US$508 in 2009, amounting to 40 per cent of salaries earned (CDRI 2007; Luch 2010; Yagura 2011).

(p.229) Up until 2005, Cambodia’s financial system was very underdeveloped, but the commercial banking sector (which remains small in absolute terms) has since caught up. Lending by commercial banks and micro-finance institutes (MFIs) has risen at a fast pace. Development has been disrupted by the world financial crisis but commercial loans have gradually begun to grow again.12 While the role of the banking sector in promoting growth remains small, and most of the growth achieved to date has been without bank finance (growth in credit has been largely directed to consumption, working capital, and real estate, see World Bank (2009a: 14)); there are signs that this sector is growing. For example, total deposits from and loans to customers grew by 36 per cent and 33.7 per cent respectively between 2013 and 2014 with 3.3 million depositors and 2.2 million creditors in 2014 (NBC 2014).

Rice exporting has benefited from trade preferences granted by the EU. The government further supports these exports through the introduction of the policy paper on ‘Promotion of Paddy Rice Production and Export of Milled Rice’ in 2010, with the target of paddy surplus of four million tons and milled rice export of one million tons by 2015. The official rice export figure in 2009 was only 15,500 tons with paddy production of 7,586,000 tons (CEFP 2011). It only exported 387,061 tons in 2014 and 283,825 tons in the first semester of 2015 (MAFF 2015). It is estimated that in total half a million tons of rice will be exported in 2015, half of the target (MAFF 2015).

Land use for rubber has increased because of rises in world demand, and has the potential to rise further. The total land area cultivated for rubber was 181,400 ha in 2010 and increased to 357,800 ha in 2014. Exports of rubber reached 42,000 tons in 2010 compared to 100,150 tons in 2014 (MAFF 2015). These developments suggest that rubber processing will also be one of the sunrise industries.

Table 11.5 Comparison of growth in exports and value added across sectors

Exports

2000–4

2005–7

2008–11

Sunrise (average share growth rate >+0.05%)

Textiles (HS50–63)

Textiles

Wood and wood products

(HS44–49)

Vegetable products (HS06–15)

Transportation (HS86–89)

Footwear/headgear

Machinery/electrical (HS84–85)

Stone/glass

Metals

(HS72–83)

Footwear/headgear

Transportation

vegetable products (HS06–15)

Plastics/rubbers

Foodstuffs

(HS16–24)

Sunset (average share growth rate <−0.05%)

Plastics/rubbers

(HS39–49)

Wood and wood products

Animal and animal products

Textiles

Stone/glass

Footwear/headgear (HS64–67)

Metals

Stone/glass

(HS68–71)

Wood and wood products

(HS44–49)

Value added

1993–7

1998–2004

2005–7

2008–12

Sunrise (average share growth rate >+0.05%)

Textile, wearing apparel, and footwear

Textile, wearing apparel, and footwear

Construction

Textile, wearing apparel, and footwear

Electricity, gas, and water

Wood, paper, and publishing

Mining

Non-metallic manufacturing

Non-metallic manufacturing

Electricity, gas, and water

Sunset (average share

Food, beverages, and tobacco

Food, beverages, and tobacco

Food, beverages, and tobacco

Construction

growth rate <−0.05%)

Construction

Rubber manufacturing

Non-metallic manufacturing

Wood, paper, and publishing Construction

Wood, paper, and publishing

Rubber manufacturing

Mining

Electricity, gas, and water

Basic metal and metal products

Rubber manufacturing

Non-metallic manufacturing

Note: Export data are based on the yearly Export Statistics produced by the General Department of Customs and Excise of Cambodia, Ministry of Economy and Finance (GDCEC 2014). Value added data are based on the National Accounts produced by NIS (NIS 2012).

Source: Authors’ calculations.

Table 11.5 highlights the sectors where the share of exports and value added are increasing and decreasing in relation to the sunset and sunrise industries. In the latest period, vegetable products, rubber, and foodstuffs are rising in importance, primarily due to the Everything but Arms (EBA) scheme that allows Cambodia to export agricultural goods to Europe tariff-free. Notably, wood and wood products have gained export share for 2008–12 as a result of forest clearance for the hydroelectricity project. The export of machinery/electrical and plastic/rubber increased during the same period.

During the 1998–2004 period, when full peace was achieved, TWF gained a larger share of value added. Construction continued to boom between 2005 and 2007, before the world financial crisis hit in 2008. Rubber processing declined (p.230) (p.231) in share since 1993, but increased again between 2008 and 2012. FTB was in decline between 1993 and 2007, but gained momentum in 2008 after global food prices soared. The mining sector gained share in the 2008–12 period. Since 2007, licences on exploration of oil and gas in the Gulf of Thailand have been issued. This sector could continue to grow in future. Non-metallic manufacturing gained share for the periods 2005–7 and 2008–12.

11.6 Conclusion

Cambodia has experienced record growth rates during the last two decades and private enterprise is expanding at a rapid pace. The country emerged from the global recession quite strongly and is now on the road to recovery: economic growth is accelerating, inflation is under control, the exchange rate remains broadly stable, and international reserves continue to accumulate. More than a decade of structural reform, a sound and stable financial system, and well-timed and well-targeted policy stimuli have provided crucial support for the Cambodian economy.

Challenges remain, however, such as in issues surrounding corruption13 and accountability, infrastructural deficits, labour standards, and corporate social responsibility practices. A key risk factor for Cambodia’s economic development is its dependence on a few key sectors such as garments, agro-processing, tourism, and construction, all of which are vulnerable to foreign markets and investment fluctuations. While the policy of export-oriented FDI has played a very important role in modern job creation, the economy of Cambodia lacks diversification. There is also little evidence to suggest that export-oriented FDI firms have yielded technological spillover or other economic linkages with the domestic economy. Cambodia’s Industrial Development Policy (2015–2025) aims to address these challenges.

The government during the last decade has focused attention on local SMEs by promoting productivity and finding markets for their products—for example, the rice policy introduced by the government in 2010. The aim is to boost the local rice processing industry, generate employment, and increase value added. This policy will be the model for the government to promote other agro-processing industries, most notably rubber processing. As the first policy to be independently adopted by the government of Cambodia, its introduction also signals a desire to overcome past problems of weak governance and co-ordination difficulties, which bodes well for future economic development.

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Notes:

(1) The first railway was built by France in 1922, connecting the northeastern part of the country to Phnom Penh. The purpose of the railway was to integrate Cambodia’s economy to the world, rather than to promote development within Cambodia. In 1939, according to Khieu (1959), 80 per cent of products transported by the railway were destined for export markets.

(2) A number of other factories were also built at this time. They included a 5,000-ton paper mill, a textile factory and a large cement factory built by the Chinese, and a palm sugar refinery, a tyre factory, and a tractor assembly plant by the Czech Republic.

(3) During the period of the PRK regime, only 63 out of 85 enterprises in Cambodia were potentially operational but only twelve factories were functioning producing textiles, tyres, plastics, and iron tools with raw materials supplied by international non-governmental aid agencies (Slocomb 2010: 215).

(4) These included tobacco, cotton, and electricity companies, a mechanical workshop, spare parts, beverage and glassware factory, and a tyre factory.

(5) Authors’ calculations based on Ministry of Economy and Finance database (GDCEC 2014).

(6) The percentage of establishments by sub-sector of industry is shown in Chhair and Ung (2013: Table 7).

(7) Firms with fewer than five employees are defined as micro-establishments; from 5–20 employees as small establishments; from 21–50 employees as medium establishments; and over 50 employees as large establishments.

(8) A detailed sectoral composition by firm size is provided in Chhair and Ung (2013: Table 12).

(9) A recent review of existing policy instruments by the World Bank (2009a: 88) found that most instruments lacked accountability, with the only exceptions being those focused on promoting exports.

(10) The minimum wage for 2014 and 2015 also includes mandatory allowances of US$17.

(11) G-PSF meets twice a year under the chairmanship of the prime minister and has eight working groups meeting regularly. It provides a vehicle for the private sector to raise its concerns and for the government to be held accountable for its decisions. In 2012, G-PSF added another working group to promote the export of agro-processing products. This forum is viewed by investors as an important device for creating a sense of security for their investments (World Bank 2009a). Since this forum has the status of cabinet meetings, decisions made by the prime ministers are binding (ibid.).

(12) According to the National Bank of Cambodia (NBC 2015: 21), there are thirty-six commercial banks, eleven specialized banks, eight foreign-subsidiary offices and forty-nine MFIs (of which seven take deposits) and forty-two rural credit operators in Cambodia.

(13) In 2008, corruption was still the largest concern for businesses in Cambodia (World Bank 2009b). In 2011 Cambodia ranked 164 among 182 countries in the Corruption Perceptions Index by Transparency International.